Identifier
Created
Classification
Origin
07KINGSTON903
2007-06-11 13:54:00
UNCLASSIFIED
Embassy Kingston
Cable title:  

JAMAICAN ECONOMY SLUGGISH IN FIRST QUARTER

Tags:  ECON EFIN EIND CPAS JM XL 
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VZCZCXRO1500
RR RUEHGR
DE RUEHKG #0903/01 1621354
ZNR UUUUU ZZH
R 111354Z JUN 07
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 4897
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1900
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 03 KINGSTON 000903 

SIPDIS

SIPDIS

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

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR A FAIBISHENKO

E.O. 12958: N/A
TAGS: ECON EFIN EIND CPAS JM XL
SUBJECT: JAMAICAN ECONOMY SLUGGISH IN FIRST QUARTER

REF: A. 06 KINGSTON 1286


B. KINGSTON 705

-------
SUMMARY
-------

UNCLAS SECTION 01 OF 03 KINGSTON 000903

SIPDIS

SIPDIS

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

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR A FAIBISHENKO

E.O. 12958: N/A
TAGS: ECON EFIN EIND CPAS JM XL
SUBJECT: JAMAICAN ECONOMY SLUGGISH IN FIRST QUARTER

REF: A. 06 KINGSTON 1286


B. KINGSTON 705

--------------
SUMMARY
--------------


1. The Jamaican economy expanded by two percent during January to
March 2007. Growth was driven by agriculture and construction, as
tourism output declined for the first time in four years, following
the return of Cancun after hurricane damage. Inflation of one
percent was the major success story of the Jamaican economy during
the first quarter. The foreign exchange market suffered bouts of
instability because of increased liquidity and lower capital
inflows, but strategic intervention by the central bank minimized
the level of depreciation. Fiscal policy remained the biggest
challenge facing the country, with the GoJ missing all of its fiscal
targets and having to defer some expenditure items to minimize the
fallout. Going forward, growth will remain sluggish as tourism
wanes, but the productive sector should post reasonable growth.
With commodity prices on the rise, inflation could accelerate, while
the foreign exchange market could face demand pressure as investors
switch to foreign assets in the face of uncertainty. But it is
fiscal policy which will pose the greatest threat, and any deviation
in the fiscal target could lead to a downgrading of the country's
credit ratings. End summary.

--------------
Growth Stagnant
--------------


2. The Jamaican economy started 2007 on a low, with output growth
for the first quarter lagging behind its three percent target. Real
GDP for the March quarter is estimated to have grown by only two
percent, due to flat services and more specifically tourism output.
However, the productive sector jumped by 2.8 percent, reflecting
renewed buoyancy in construction activity following the
regularization of cement supplies. The robust growth in
construction is a normalization of the growth rates observed prior
to the 2005 cement shortage (ref. A) and continues to be driven by
massive hotel and infrastructural projects. Agriculture expanded by

four percent, by far the lowest rate of growth in five quarters,
suggesting the sector has returned to pre-hurricane growth levels.
Manufacturing, which continued its downward trajectory (0.2
percent),has established itself as the chronically weak sector of
the Jamaican economy. Unlike agriculture, which benefits from high
levels of protection and has well-established links (especially with
tourism),the manufacturing sector has been unable to forge the
linkages necessary for survival. This is largely attributable to
declining competitiveness following trade liberalization in the
1990s.

--------------
Star Performer Wanes
--------------


3. After enjoying four years of uninterrupted growth, tourism
services declined by almost one percent during January to March

2007. This is significant as the tourism sector had become the
mainstay of the Jamaican economy, growing by as much as 20 percent
in the second quarter of 2006. For the first quarter total visitor
arrivals fell by 0.5 percent to 838,874, while total earnings
declined by 0.2 percent to USD 475.7 million. Stop-over arrivals
(overnight) for the same period were 436,562, a decline of 2.1
percent relative to the similar period of 2006. Lower arrivals from
the United States, down 12.1 percent, were largely responsible for
the fall off in the sector. Increased arrivals from Canada and
Europe mitigated the overall statistics.


4. The break in the growth trajectory is disturbing to tourism
officials, who have blamed the Western Hemisphere Travel Initiative
and the introduction of a temporary CARICOM Visa for Cricket World
Cup (CWC) 2007. However, the current performance must also be
analyzed within the context of exceptional arrivals in 2006; in
particular, there was a diversion of visitors to Jamaica as a result
of hurricane damage to Cancun. But with that destination back to
normal and engaging in an aggressive promotional campaign, the
positive shock has dissipated. In fact, arrivals for the first
quarter of 2007 are still ahead of arrivals for the similar period
of 2005 and if the country had not benefited from Cancun's
misfortune in 2006, the growth momentum would have continued into

2007. GoJ officials also posit that the anticipated crowds for CWC
(which did not materialize) and a CWC-related public announcement
issued by the USG also may have scared some visitors away from the
island.

KINGSTON 00000903 002 OF 003



--------------
Fiscal Operations a Drag on Growth
--------------


5. Fiscal operations continued to be the Achilles heel of the
Jamaican economy and could well be the underlying cause of the
country's economic malaise. During January to March 2007 GoJ
operations generated a surplus of USD 13.2 million, well below the
targeted surplus of USD 181 million. The deviation from target was
due to a combination of lower-than-expected revenues and higher
spending. But this result is not surprising, given that the revenue
target was overly ambitious in the context of sluggish economic
growth and moderate price increases. It was also going to be
difficult to contain spending in general - and salaries in
particular - in the period leading up to an election. In fact,
members of the essential services (e.g., police, nurses, teachers,
and firemen),who make up the bulk of the public sector, were able
to bargain for much more than the amount offered to the rest of the
public sector.


6. Against this background, GoJ operations for the full fiscal year
generated a deficit of 5.3 percent of GDP, more than twice the
projected deficit of 2.5 percent of GDP. In addition to reversing
the downward trend observed since the 2003/04 fiscal year, the
fiscal result also forced the GoJ to again postpone its balanced
budget target to 2009/2010. But the fiscal position would have been
worse if the GoJ had not deferred spending of 2.5 percent of GDP to
the current fiscal year, confirming that the practice of deferred
financing, exposed by the Opposition and disparaged by the IMF,
remains intact. Senior Director at the Ministry of Finance and
Planning Courtney Williams told emboff that, in the absence of
shocks to explain the significant deviation, he was surprised that
the country's credit ratings had not been downgraded. But, credit
ratings aside, a rising deficit only adds to the burgeoning debt,
putting a further drag on growth, while forcing the central bank to
defer the interest rate reduction strategy necessary to stimulate
output growth. Therefore, any continuation of fiscal looseness will
only cement the country's place among the economic laggards of the
developing world.

--------------
Prices Stable, But Demand Pressures Emerge
--------------


7. The moderation in prices was the major success story for the
first quarter. Inflation for the period was one percent, bringing
the rate for the fiscal year to 6.6 percent, the lowest rate since
2002/2003. First quarter inflation reflected increases in
healthcare and personal expenses, fuels, housing and housing
expenses, and food and drink. Amidst the moderation in prices,
there were renewed bouts of instability in the foreign exchange
market. Demand pressure was largely influenced by high levels of
Jamaican dollar liquidity and declining net capital inflows, as
tourism earnings moderated and the trade balance deteriorated. The
central bank also confirmed that there was no evidence of the much
anticipated inflows from CWC 2007. Despite the instability, the
exchange rate depreciated by less than one percent as the central
bank intervened in the market by selling foreign exchange from the
Net International Reserves (NIR) to smooth supplies.
Notwithstanding, the stock of NIR remained robust at USD 2.33
billion.

--------------
Comment
--------------


8. The Planning Institute of Jamaica is projecting growth of 2.1
percent for the second quarter of 2007, led by continued expansion
in the productive sector. Agriculture, construction, and mining are
expected to lead the way. Tourism arrivals will continue to lag
behind 2006 levels, as Cancun regains lost ground. With the rate of
economic expansion expected to remain constant, the economy will
have to grow faster in the second half of 2007 to meet the three
percent target. But with the hurricane season and general elections
approaching and with international commodity prices rising, it is
unlikely that growth will pick up. In fact, prices increased in
April 2007 by 0.7 percent, the highest monthly increase since
September. Despite the surge in oil and grain prices, barring
shocks, inflation for 2007 should fall within the 7-8 percent range.



9. The local currency could face increasing pressure once elections
are announced, as Jamaicans switch to foreign assets during the
period of uncertainty. This could force the central bank to use an

KINGSTON 00000903 003 OF 003


increasing portion of its NIR to protect the currency against a
steep depreciation. But it is fiscal policy which will pose the
greatest threat going forward. The GoJ was originally targeting a
fiscal deficit of 4.5 percent of GDP for fiscal year 2007/08, but
unbudgeted spending, like the removal of health fees for children
under 18 (ref. B),could push this figure over five percent. Apart
from increasing the country's massive debt level, the increased
borrowing could also stall the central bank's interest rate
reduction program. This is disconcerting, as any major deviation in
the fiscal target could erode credibility, leading to a downgrade in
the country's credit ratings. The party forming the next government
will therefore have the monumental task of making the hard decisions
necessary to stabilize the country, and the attendant risk of being
a one-term government. End comment.

JOHNSON