JAMAICAN ECONOMY SHOWING SIGNS OF RECOVERY

UNCLAS SECTION 01 OF 03 KINGSTON 000231

SIPDIS

STATE FOR WHA/CAR (WBENT),WHA/EPSC (JSLATTERY),
EB/IFD/OMA (JUNCKER)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

SENSITIVE

SIPDIS

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: JAMAICAN ECONOMY SHOWING SIGNS OF RECOVERY

Ref: 05 KINGSTON 02797


1. (SBU) Summary: Signs of recovery have started to
emerge in the Jamaican economy following the devastation
caused by Hurricane Ivan in 2004. Real GDP rose by 2.9
percent during the period from July to September 2005,
reflecting robust growth in the productive sectors.
Declining oil prices and a recovery in agricultural
production also tempered inflation during this quarter of

2005. On January 18, Standard and Poor's Rating Services
(S&P) affirmed its 'B' long and short-term sovereign
credit ratings for Jamaica in response to the general
economic improvement. Nevertheless, fiscal challenges
remain, with the Ministry of Finance formally abandoning
its balanced budget target (reftel) for 2006. While macro-
economic performance is expected to continue to improve in
2006, difficulties could emerge on the fiscal front when
the public sector wage freeze ends in March. End summary.

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Hard Data Heartening, Considering Externalities
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2. (U) Data released by the Statistical Institute of
Jamaica on January 17 showed that the Jamaican economy
grew by 2.9 percent during July to September 2005,
bringing GDP growth for the nine-month period to 1.1
percent. The improved third quarter result was largely
due to a 5.7 percent jump in goods production, signaling a
normalization of output following the impact of Hurricane
Ivan in 2004. Mining activity rebounded by 15.8 percent
following the battering from Ivan. Construction (up 8.2
percent) and water and electricity (up 10.2 percent)
surged forward due to continued rehabilitation efforts as
well as increased road construction. Agriculture recorded
growth of 1.3 percent despite the subsequent onslaught of
Hurricanes Dennis and Emily in 2005 and prolonged rain,
while manufacturing (up 1.9 percent) improved following
the resumption of normal production at the national oil
refinery.


3. (U) Stability in international oil prices and the
partial recovery in agriculture combined to temper
inflation during the last quarter of 2005. Inflation for
the period rose by one percent, well below the 4.3 percent
recorded in the September quarter and brought inflation
for 2005 to 12.9 percent or 0.8 percentage points below
the previous year. While this result was well above the
GOJ's revised target of 9.0 percent, it represents the
first slowing in annual inflation since the country
reverted to double-digit inflation in 2003. Inflation for
the fiscal year to December 2005 stood at 11.3 percent.

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International Markets Still Optimistic.
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4. (SBU) On January 18, Standard and Poor's Rating
Services affirmed its 'B' long and short-term sovereign
credit ratings on Jamaica. The ratings agency attributed
its stable outlook to the GOJ's ongoing commitment to
fiscal discipline and debt reduction amid external shocks
and higher growth prospects. According to S&P credit
analyst Olga Kalinina, "the confidence level of domestic
businesses and international investors remains strong,
reflecting the government's timely and appropriate policy
response to adverse external developments." However, the
agency highlighted the difficulties government faces in
generating its programmed fiscal surpluses in 2006 and
beyond. S&P said GOJ operations are now expected to
generate a fiscal deficit of 1.6 and 1.5 percent of GDP in
2006 and 2007, respectively. The ratings agency said that
despite the worse-than-expected deficit, the debt to GDP
ratio is expected to decline from 133 to 127 percent. S&P
said "the stable outlook balances the expectation of
prudent fiscal policies and promising growth prospects
with significant risk stemming from the high interest and
foreign exchange rate-sensitive government debt and rising
fiscal pressures." The agency also insinuated that if the
GOJ misses its 2007 fiscal target, S&P would be forced to
lower the country's credit rating.


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.Despite Missed Targets
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5. (SBU) The GOJ formally announced the abandonment of its
balanced budget target at a Bear Stearns investment
conference on January 16, in Miami. At the conference,
new Financial Secretary Colin Bullock advised that the
Ministry of Finance had revised its fiscal deficit
projection to two percent of GDP for 2005/06 and one
percent for 2006/07 (reftel). Bullock also suggested that
the achievement of a balanced budget target would be
delayed until 2007/08. The postponement is not surprising
given that the public sector wage restraint comes to an
end in March 2006 and public sector workers who have been
under a wage freeze for the last two years will make every
effort to recover their lost purchasing power. Some trade
unions have already suggested that their wage increase
demand could be as high as 50 percent. The decision to
delay the balanced budget target could also have been
influenced by the fact that the next fiscal year could be
an election year and the GOJ is allowing some flexibility
for additional spending on capital projects during the
year.


6. (SBU) GOJ plans to increase expenditures in line with
the pre-2002 election level could be moderated by the
presence of Bullock, who has established himself as a
hardnosed technocrat at the Bank of Jamaica. On the other
hand, Bullock has never had to report directly to a
political master, and this may temper his rigidity on
fiscal issues. In fact, a Ministry of Finance source told
emboff that the postponement of the balanced budget until
after the election was a clear indication that room was
being made for some amount of fiscal imprudence. If true,
such indiscipline could be moderated by increasing
surveillance from the capital market, with any major
deviation from target expected to result in a loss of
confidence.

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Comment
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7. (SBU) Barring unforeseen shocks, the Jamaican economy
should achieve growth of 2.5 percent in 2006, up from the
estimated 1.5 percent in 2005. This output expansion is
predicated on continued growth in construction, tourism,
electricity and mining. Data from the Jamaica Tourist
Board shows that stopover arrivals jumped by 14.3 percent
between September and November 2005 and preliminary
information suggest that the momentum has continued into
the winter tourist season, with most hoteliers reporting
full occupancy. The increased stopover arrivals have
allowed hoteliers to revert to market prices for the first
time since the September 2001 terrorist attacks in the
United States. With agriculture expected to recover fully
in 2006 and with oil prices stabilizing, inflation is
predicted to moderate in 2006.


8. (SBU) Comment (cont'd): The impending end of the wage
restraint with public sector workers is threatening to
unravel all the gains made during the last year and a
half, with trade unions agitating for a sizeable wage
correction. However, while public sector workers will
require an adjustment to recover lost purchasing power,
trade union leaders are cognizant of the fiscal
imperatives. Additionally, apart from being a good
negotiator, Finance Minister Omar Davies is also well
respected by the trade unions. This, combined with the
need for public sector downsizing (which Davies can use as
a bargaining chip),could lead to reasonable wage
agreements. However, even if this outcome materializes,
the sluggishness in revenues combined with the anticipated
surge in capital spending for the next election will put
severe pressure on fiscal policy. The actual extent of
fiscal indiscipline will depend on how desperate the
incumbent wants the next election. (Note: The governing
People's National Party (PNP) will hold an internal
election on February 25 to choose the successor to Prime
Minister P.J. Patterson, who has announced his intention
to step down by the end of March. Patterson's successor

KINGSTON 00000231 003 OF 003


will then contest the next General Election with the
Opposition Jamaica Labor Party no later than October 2007.
End note.) This could have serious implications, as the
capital market will be paying close attention to the
fiscal numbers and will punish the country if the GOJ
fails to pursue fiscal discipline. End comment.

JOHNSON