JAMAICA: DEBT AND ANEMIC GROWTH ENCUMBER

UNCLAS SECTION 01 OF 02 KINGSTON 001805

SIPDIS

SENSITIVE

SIPDIS

STATE FOR WHA/CAR (RANDALL BUDDEN)
WHA/EPSC (JSLATTERY)

TREASURY FOR A FAIBISHENKO

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV PINR SOCI IDB IMF JM XL
SUBJECT: JAMAICA: DEBT AND ANEMIC GROWTH ENCUMBER
BOTH A STABLE ECONOMY AND A POPULIST PRIME MINISTER

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Summary and Comment
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1.(U) JamaicaQs foreign currency bond rating and economic outlook
remain stable, but the countryQs finances are among the worldQs weakest
with a debt-to-GDP ratio of 136 percent, while growth remains anemic.
Fiscal consolidations, and more specifically debt consolidation, remain
major hurdle for improvement of the credit rating. The Inter-American
Development Bank (IDB) has announced a hold on most new capital loans
for the next three years, saying the Government has not invested the
resources promised in projects already underway.

2.(SBU) In protest over populist Prime Minister Portia Simpson-MillerQs
plans to use money from the National Housing Trust and National
Insurance Scheme to provide low interest loans to small businesses,
respected Finance Minister Omar Davies recently threatened to resign.
The Prime Minister may not yet have full control of her Cabinet: to
confirm her own clear mandate, and then make the personnel changes
necessary to pursue populist policies to satisfy an expectant populatio
she might prefer to call elections-- which must be held by October,
2007Q
sooner rather than later.
End Summary and Comment.

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Fitch, MoodyQs, and IDB Issue Reports on Jamaica
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3.(U) MoodyQs has reaffirmed JamaicaQs B1 foreign currency bond rating
and stable outlook, but warned that the countryQs finances were among t
weakest in the world in terms of debt-to-GDP ratio. The rating remains
several notches below the investment grade of Baaa3, reflecting the GOJ
limited options to respond to shocks without impacting the fiscal accou
and the debt dynamics. In fact, MoodyQs said that if its ratings were
on purely quantitative issues, the ratings would have been downgraded a
the countryQs debt ratio (136 percent) is not consistent with its B1 ra
even the entire B1 to C rating category. However, in assigning its lat
ratings, MoodyQs took into consideration the countryQs commitment to
fiscal discipline and strong willingness to service its debt. Accordin
MoodyQs, "ratings remain supported by the government's commitment to
return to a balanced budget position, by a constitutional provision
mandating debt service payments as the first expenditure priority, by a
proven ability to face severe shocks and a strong willingness to pay."
is consistent with a previous report from Standard and PoorQs.
4.(U) Fitch Rating Agency also has assigned a B+ rating to the country
suggesting that the outlook is stable and the prospects for debt repaym
are average. Like those of MoodyQs and S&P, this rating was underpinne
by JamaicaQs long unblemished tradition of timely repayments. In its
August 30th report, Shelly Shetty, a Senior Director in Fitch's soverei
group, said "Jamaica's ratings are supported by an impressive commitmen
of authorities to maintain fiscal consolidation to reduce public debt d
the various external shocks the island has faced in recent years." She
also pointed to the societyQs willingness to shoulder the burden of fis
adjustment as well as the countryQs focus on tax collection through
improved tax administration. Fitch noted that the high public debt at
percent of GDP, which is twice the QBQ median, and the attendant heavy
financing needs, are the major problems preventing Jamaica from getting
higher debt rating which would correspond to the lower cost of its debt
5.(U) Fitch pointed out that one way out of the debt trap is economic
growth, but the agency does not foresee the country growing at more tha
an anemic rate. "Jamaica's growth performance is among the worst in th
'B' category, with its 2001-2005 average growth of 1.4 per cent compari
poorly with the 4.6 per cent 'B' median. Jamaica's growth performance
hampered by crowding out from the large fiscal deficits, a heavy public
debt burden, a significant vulnerability to external and weather relate
shocks, volatility in the exchange and interest rates, and a wide range
other structural constraints, such as low labor productivity, and a hig
crime rate." On the positive side, Fitch suggested that growth rates c
improve in 2006-2008 because of the expected foreign direct investment
in the country. That said, fiscal consolidations, and more specifically
consolidation, remain the major hurdle for Jamaica to improve its credi
rating. According to Fitch, a significant reduction in the public deb
burden may be required before Jamaica could move up the rating scale.
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IDB Puts New Capital Lending on Hold
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6.(U) Following closely on the heels of the above reports, on August 3
IDB announced a hold on most new capital loans for the next three years
saying the country has not invested the resources promised in projects
already underway. Private sector, disaster recovery, and policy
development programs will not be affected. Of the USD 77 million the
GOJ should have invested in 2004/05 on IDB-financed jobs, only USD
19.2 million was provided. The IDB noted the GOJQs increased reliance
on commercially sourced domestic and external debt instead of its cheap

KINGSTON 00001805 002 OF 002


development funds, a point constantly raised by the Opposition JLP. Th
bank has not totally shut the door on loans to Jamaica, saying that "sh
the fiscal situation improve sufficiently to allow for further investme
borrowing during this Strategy period", it would "leave open the
possibility of preparing new investment loans, if requested by
Government." (Comment: Jamaica could be slow in sourcing funds from
the IDB because of the increased scrutiny and, to a lesser extent,
conditionalities involved in comparison to commercial borrowing. Recal
that the Patterson administration pulled out of the IMF for similar rea
Also, because of the debt trap, the country has had real difficulty fin
the matching capital for counterpart funding. End Comment.)
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Reduction in Interest Rates
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7.(U) After months of being muted by jitters in the foreign exchange
market, the BOJ has announced a 0.3 percentage point reduction in
interest rates. The BOJ has attributed the reduction to the positive t
economic news and the prospects for improved performance. The bank is
particularly upbeat about the moderation in inflation and the return to
stability in the foreign exchange market on the back of increased inflo
from remittances and tourism. The increased inflows have pushed the
stock of NIR to USD 2.2 billion, well above program.

8.(SBU) The GOJ owes pension fund managers billions of dollars due to
the practice of withholding taxes which should have been refunded. In
fact, the significant performance in tax revenues relative to program f
the fiscal year to date is largely due to this practice. However, Mana
the Fiscal Policy Unit at the Ministry of Finance told emboffs that it
well known that the GOJ would be settling the backlog this fiscal year.
is being suggested that the issue was blown out of proportion by a majo
stakeholder who was paid a visit by the tax authorities to settle a tax

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Disagreement Between Prime Minister & Finance Minister
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9.(SBU) Apparently there is truth to the rumor that Finance and Planni
Minister Omar Davies had threatened to resign from the post during the
Cabinet meeting of August 28. Davies is said to have had a disagreemen
with Prime Minister Simpson-Miller over the use of money from the
National Housing Trust and the National Insurance Scheme. Simpson-
Miller, who has signaled her intention to use the funds to provide low
interest rate loans to small businesses, wants significant changes to t
current economic model. The populist Prime Minister has been alluding
to the need to not only balance the budget, but also to Qbalance livesQ
However, Davies, who has developed quite a reputation internationally f
smooth handling of the countryQs finances, is unwilling to undertake
changes which could have serious economic and financial ramifications;
he is said to have stood firm in his disagreement, even as Simpson-Mill
reminded him of who was Prime Minister. Davies apparently got his way,
if only temporarily, when other cabinet members, fearing the likely fal
(economic and political) from his resignation, persuaded the Prime
Minister to keep him on. It thus would appear that Davies, after hesit
accepting Simpson-MillerQs demands not to introduce a tax package
during the April budget presentations, has bounced back in the power
struggle.

10.(SBU) Comment: Simpson-Miller may not yet have full control of her
Cabinet. She, Davies, and Security Minister Peter Phillips were all st
contenders for leadership of the ruling PeoplesQ National Party when
former Prime Minister P.J. Patterson stepped down; all three still wiel
significant power. In order to confirm her own clear mandate and then
make the personnel changes necessary to pursue populist policies to
satisfy an expectant population, Simpson-Miller might prefer to call
elections (which must be held by October 2007) earlier rather than late
Dr. Rosalee Hamilton appears to be the preferred replacement for Davies
while she would prefer the job of Central Bank Governor, indications ar
she might end up at Finance. The name of former Member of Parliament,
State Minister, and financier Peter Bunting also has been floated; howe
his chances could be diminished by close association with Davies. End
Comment. HEG