JAMAICA'S CURRENT ACCOUNT WORSENS

UNCLAS SECTION 01 OF 02 KINGSTON 000770 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'S CURRENT ACCOUNT WORSENS REF: KINGSTON 555 ¶1. Summary: Influenced by the surge in the prices of oil and food imports, Jamaica's current account deficit almost doubled during 2005. The current account deficit increased by USD 465.1 million to USD 974.5 million, just under ten percent of the country's GDP. The 20 percent jump in imports also fueled deterioration (USD 642.6 million) in the trade deficit to USD 2.6 billion, as exports remained stagnant. The current account woes, however, were tempered by a jump in receipts from remittances and tourism. While the country has been able to safely finance the current account through external capital, any falloff in this financing source, without a corresponding increase in exports, could precipitate a decline in the Net International Reserves (NIR),and by extension depreciation of the local currency. End summary. -------------- Import Bill Soars -------------- ¶2. Jamaica's current account deficit widened by USD 465.1 million to USD 974.5 million at the end of December 2005. At this level the current account deficit was just under 10 percent. The expansion was largely due to a 20 percent jump in imports to USD 4.2 billion, reflecting soaring oil prices and, to a lesser extent, food imports. Jamaica's oil bill climbed by almost 50 percent to USD 1.4 billion reflecting a 36 percent increase in the price of crude oil as well as a temporary closure of the local refinery, which led to the import of expensive refined products. Food imports jumped by 15 percent, as demand increased to fill the void left by the devastation of the agriculture sector following a series of natural disasters. -------------- Exports Remain Stagnant -------------- ¶3. Exports, amounting to USD 1.6 billion, continued to lag. Exports were stymied by the sluggishness of traditional products (e.g. sugar, bananas),which suffered from a combination of dwindling production, industrial unrest and adverse weather conditions. However, bauxite/ alumina continued to benefit from increased demand from China. Non-traditional exports also recorded growth of 20.6 percent reflecting higher beverage and mineral fuel exports. Exports of mineral fuels (largely ethanol, which enjoys duty-free access to the U.S.) amounted to USD 110.1 million due to expanded output and increased demand and price for the environmentally-friendly product. Conversely, the once dynamic apparel sector, which peaked at around USD 288 million in 1995, declined by a further 10 percent to USD 9.4 million. Stagnant exports combined with soaring imports fueled a deterioration in the trade deficit to USD 2.6 billion or USD 643 million more than in ¶2004. The current account deficit was moderated by a robust growth in receipts from tourism and remittances, which rose by USD 171 million to USD 1.5 billion. -------------- Who Pays? -------------- ¶4. The current account deficit of USD 974.5 million was financed by a combination of external loans and foreign direct investment (FDI) of USD 1.2 billion. This suggests that the country is depending heavily on the rest of the world to finance its current consumption. The residual external financing of USD 229 million was used to build up the stock of NIR, which ended the year at USD 2.1 billion or just over 27 weeks of goods imports. External borrowing and official investment during the year amounted to USD 351.5 million and represents loans raised on the international capital market during the year. Private investment (portfolio and foreign direct investment) of USD 863 million was actually USD 141 million above the amount recorded in 2004, reflecting massive FDI in the tourism and to a lesser extent bauxite/alumina sectors. ¶5. Comment: With oil prices remaining relatively high, Jamaica could register increased imports and by extension a further widening in its trade and current account KINGSTON 00000770 002 OF 002 deficits during 2006. Ongoing and new FDI, while positive in the long term, could also have a short-term impact on the trade and current accounts given the expected surge in machinery and equipment imports. The ongoing cement crisis (reftel),necessitating increased imports of the product, will only magnify this problem. The rising trade and current account deficits require the country to either find creative ways to grow exports or hope for continued buoyancy in remittances. Even a combination of these effects will only slow the deterioration and the GOJ will have to continue sourcing external loans to supplement the current wave of FDI. However, if financing from the rest of the world (official or private investment) should decline, it could force the GOJ to draw down on its stock of NIR or risk a massive depreciation in the local currency to correct the trade and current account imbalances. End comment. TIGHE