JAMAICA RECORDS STRONG GROWTH DURING OCTOBER TO

UNCLAS SECTION 01 OF 03 KINGSTON 000420

SIPDIS

SIPDIS

STATE FOR WHA/CAR (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: JAMAICA RECORDS STRONG GROWTH DURING OCTOBER TO
DECEMBER 2005

REF: 05 KINGSTON 2797


1. (U) Summary: The Jamaican economy weathered the
storms of 2005 to record growth of 1.8 percent during the
year. The expansion in output was largely due to robust
growth of 4.1 percent during the final quarter,
reflecting a recovery in agriculture and tourism.
Declining oil and food prices also tamed inflation to 0.9
percent between October and December. However, fiscal
challenges continued, with central government operations
generating a deficit of USD 163 million (JMD 10.6
billion) due to lackluster revenue performance. The
foreign exchange market also remained restless, with the
exchange rate depreciating by 3.4 percent, despite a
healthy stock of Net International Reserves (NIR). These
difficulties aside, macroeconomic performance, led by
economic growth, is expected to pick up in the first
quarter of calendar year 2006. Real GDP is projected to
grow by 3.1 percent, inflation is expected to moderate
further, and relative stability should return to the
foreign exchange market. The conclusion of the Peoples
National Partys (PNP) internal elections and Standard
and Poor's affirmation of Jamaicas 'B' long and short-
term sovereign ratings should also help to sustain
investor confidence in upcoming year. End summary.

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Solid - Rather Than Spectacular - Growth
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2. (U) Driven by strong recovery in the agriculture and
tourism sectors, real GDP for the December quarter jumped
by 4.1 percent, the highest rate since the country
ry
started estimating quarterly GDP in 1996. The result
also brought growth for calendar year 2005 to 1.8 percent
and while this was below the original target of 2-3
percent, it was still encouraging given the number of
external shocks in 2005. Economic performance in the
final quarter was largely due to a rebound in
agricultural production (28.3 percent),which had
suffered the most from adverse weather conditions.
Construction (up 2.5 percent) continued to be buoyed by
rehabilitation activities and hotel and highway projects.
Manufacturing sector growth of 1.5 percent was largely
due to the resumption of normal operations at the oil
refinery (some analysts worried that disruptions in
cement production caused by the hurricane season would
hurt the sector). Miscellaneous services (up 13.2
percent) rallied, aided by a surge in tourist arrivals,
which reflected increased marketing and a diversion of
visitors from hurricane-ravaged Cancun. The robust final
quarter performance carried the tourism sector to a 4.5
percent growth in arrivals for 2005, the third
consecutive year of increase. Transportation &
Communication (up 6.4 percent) and Electricity & Water
(up 4.5 percent) were other major contributors to growth.

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Inflation Trending Downwards
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3. (U) Declining oil prices and the recovery in
agriculture led to reductions in the price of fuel and
agricultural products, which tamed inflation during the
December quarter of 2005. Headline inflation was 0.9
percent or 1.7 percentage points below the average of the
last five years and was also the lowest for the December
quarter since 2000. The moderation during the quarter
influenced a slowdown in the annual rate of inflation to
12.9 percent, compared to the annualized rate of 19
percent in September. Despite this dramatic slowdown,
inflation was still above the nine percent target set at
the beginning of the year and fuelled instability in the
foreign exchange market, as investors realigned their
portfolios to address the inflation concerns and the
rates effect on the real rates of return for Jamaican
dollar assets. Continued tightening of monetary policy
in the United States also narrowed the interest rate
differential between Jamaican and U.S. assets, making the
latter more attractive. These factors combined with the
uncertainty associated with the ongoing leadership race
for the ruling People's National Party and the
deterioration in the fiscal accounts placed increased

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demand pressure on the foreign exchange market. As a
consequence, the local currency depreciated by 3.4
percent during the quarter. To satisfy the demand, the
Bank of Jamaica sold US dollars to the market resulting
in a USD 31.6 million decline in stock of NIR to USD 2.1
billion.

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Fiscal Difficulties Remain
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4. (U) Influenced by lower-than-programmed revenue
collections, GOJ'S operations continued to deteriorate,
generating a fiscal deficit of USD 163 million (JMD 10.6
billion) during the review quarter. This was USD 152.3
million or JMD 9.9 billion more than budgeted and was due
to revenues being USD 146.2 million below target.
Expenditures were USD 7.7 million above target. As
expected, the worsening fiscal position prompted the GOJ
to push back its balanced budget objective to fiscal year
2007/08 (reftel). This could suggest that the
administration is giving itself room to increase
expenditure on social and capital projects during the
next fiscal year, which is expected to be a general
election year. (Note: The governing Peoples National
Party (PNP) held 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. The winner, Portia Simpson-Miller, will
contest a General Election with the Opposition Jamaica
Labor Party no later than October 2007. End note.)


5. (U) Despite the fiscal strains, Standard and Poor's
Rating Agency, in a report on February 17, maintained
Jamaica's 'B' (stable) rating, noting that, "the ratings
on Jamaica are supported by the government's ongoing
commitment to fiscal discipline and debt reduction amid
external shocks." The agency pointed to Jamaica's
positive growth prospects, underpinned by robust foreign
investments in the tourism and mining sectors. It also
cited the expected decline in the country's debt to GDP
ratio to 127 percent as well as the reduction in interest
costs due to declining domestic interest rates. Standard
and Poor's also noted the close liaison Jamaica maintains
with the IMF and the attendant policy transparency, which
helps to preserve investors' confidence in the economy.
Encouraged by the positive news, the GOJ was able to
successfully float a USD 250 million global bond on the
international market to pre-fund the borrowing program
for 2006/07. The 30-year instrument is the longest ever
floated by Jamaica and with a coupon rate of 8.5 percent,
the lowest coupon offered on any GOJ instrument.
Minister of Finance Omar Davies said that the reaction of
the market demonstrated continued investor confidence in
the management of the economy. Rating agency Moodie was
also bullish on the issue suggesting that the success of
the instrument will open up emerging market funds and
more hedge funds would gravitate toward Jamaican debt as
the capital market has a preference for longer-term
securities.

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Comment
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6. (U) The positive developments observed in the final
quarter of 2005 are expected to continue during

2006. Real GDP is expected to rise by 3.1 percent during
the first quarter, dominated by growth in the tourism,
manufacturing and construction sectors. Strong tourism
figures have carried into 2006, with arrivals in January
jumping by 11 percent, one of the best monthly
performances on record. Manufacturing GDP should
accelerate with increased sugar output as well as a
return to normal cement production levels. Influenced by
increased infrastructure and hotel projects, the
construction sector should continue to record strong
growth. Inflation for the January to March quarter is
expected to moderate to well under one percent, following
the 0.2 percent outturn for the first two months of 2006.
However, inflationary impulses could return, following a
recent up-tick in oil prices, rental rates, insurance
premiums and baked goods. The lagged effects of the

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depreciation in the exchange rate could also feed into
inflation. Nevertheless, with inflation slowing and with
the GOJ'S recent success in raising USD 250 million,
relative stability should return to the foreign exchange
market. GOJ operations are also expected to generate a
fiscal surplus during the March quarter, as revenues
typically soar to meet end-of-year tax deadlines. A
confluence of the foregoing factors and Standard and
Poor's rating affirmation could set the stage for
relatively strong economic performance in 2006. However,
these gains are dependent on a calm hurricane season and
the maintenance of fiscal prudence leading up to the next
general elections. End comment.

TIGHE