JAMAICA: DECEMBER ECONOMIC REVIEW - SEVERE HARDSHIP

UNCLAS SECTION 01 OF 03 KINGSTON 001094

SIPDIS
SENSITIVE

STATE FOR WHA/CAR (ACADIEUX) (VDEPIRRO) (WSMITH)
WHA/EPSC (MROONEY)(FCORNEILLE)
EEB/ESC/IEC/EPC (MMcMANUS)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW

E.O. 12958: N/A
TAGS: ENRG EAIR EINV ECON ETRD KCOR KIPR IADB IBRD IMF
TRSY, XL, JM
SUBJECT: JAMAICA: DECEMBER ECONOMIC REVIEW - SEVERE HARDSHIP

REF: A) KINGSTON 1086
B) KINGSTI 1058
C) KINGSTON 1016
D) KINGSTON 703


1. (SBU) SUMMARY:

-- Billionaire Jamaican born investor Michael Lee Chin says GOJ must
get rid of Air Jamaica and create a new vision for economic growth.

-- Jamaica Public Service company is seeing an increase in
electricity pilfering, as thieves thwart its anti-theft measures.

-- The Bank of Jamaica (BOJ) announced that non-performing loans are
nearing USD 112.5 million, growing 47.7 percent over last year for
the September quarter.

-- The Jamaican dollar (JMD) has slid 10 percent against the U.S.
Dollar in the last 8 weeks.


-- Finance Minister says the Government of Jamaica (GOJ) must
exercise strict fiscal controls given the limitation of global
financing, but he expects total inflows of approximately USD 950
million, mostly from multilateral institutions, by the end the
fiscal year.

-- Prime Minister (PM) Bruce Golding's announced fiscal stimulus
could deny the country USD 108 million in lost tax revenue.

-- Since the start of the year, 11 employees from GOJ agencies have
been charged with corruption-related crimes.

-- The global economic downturn is threatening Jamaica's bauxite
industry, as world prices for aluminum have declined nearly 47
percent, causing the economic situation to look bleak.

Aviation - Air Jamaica
--------------


1. (SBU) Michael Lee Chin, Jamaican-born billionaire and head of
Canadian mutual fund company AIC, said Jamaica needs a new economic
vision, one that embarks on a transformational approach instead of a
its current linear incremental approach, to bolster the economy
(reftel A). Speaking with Caribbean Business Report on December 11,
he said the GOJ must get rid of Air Jamaica, which lost over USD
170 million in 2007 and is expected to surpass that figure in 2008.
He called the national carrier an "unnecessary burden on the public
purse and suggested that the government should either divest or
dismantle it." He added, "As a businessman I would never invest in
it because you don't control your biggest expense variable, which is
the price of oil. Also, during a recession people stop traveling so
the airplanes are parked. It is the worst possible business for a
private investor let alone a government which doesn't have the
capabilities to manage an airline." He went on to say, "We
shouldn't be in that business because it is costing us too much. We
have two choices as far as Air Jamaica is concerned: we sell it or
dismantle it. Now by selling it, I don't see anyone paying us
handsomely for it because no one wants to take on its debts."

Energy - Theft on the Rise
--------------


2. (SBU) The Jamaica Public Service Company (JPS) is reporting
electricity theft is on the rise. JPS established a new system of
running metal casing covers over the wires to make it more difficult
to illegally tap into electricity lines. The firm said thieves have
discovered a way to tap into the lines by melting the exterior
casing. Under the current tariff, the Office of Utilities
Regulation (OUR) permits JPS to recover 15.8 percent of total
electricity losses through customer charges.


3. (SBU) JPS is losing 22.7 percent of the electricity it produces
-- 10 percent from technical losses and 12.7 percent from theft. The
6.9 percent balance converts to losses of USD 17.25 million per
year. COMMENT: JPS has come under public fire in recent months for
sharply raising electricity rates without adequately explaining the
justifications for the increase. Its major anti-stealing public
relations campaign entitled "How Come?" meant to send the message to
the public that "if stealing is always wrong, how come you steal
electricity," has backfired as protesters showed up outside JPS
offices with placards reading "How Come?" in response to JPS failing
to justify the price hike. END COMMENT.


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Finance - Non Performing Loans Rise
--------------


4. (SBU) The BOJ announced that non-performing loans are nearing USD
112.5 million, growing 47.7 percent over last year for the September
quarter. Commercial banks were hit hardest with about USD 72
million, mortgages accounted for 33.5 million and smaller merchant
banks and credit union type entities had USD 7 million. The rise in
non-performing loans is likely linked to the collapse of several
alternative investment schemes earlier in the year (reftels).
Participants in the schemes used anticipated profits to take out
loans on houses and expensive cars; now that payments from the
schemes have ceased and deposits have been lost, individuals are
finding it difficult to make loan payments. Reduced spending as
result of the global economic crisis and demise of the schemes is
likely to exacerbate worsening economic conditions on the island.

Finance - JMD Slides 10 percent
--------------


5. (U) On December 16, the spot rate for the JMD reached 80.15
against the USD, and might have declined further if the BOJ had
begun selling currency to its primary dealers for resale to end
users at that price. The GOJ intervened again on December 18 after
the JMD slipped to 80.18 against the dollar. The JMD has
depreciated by more than 10 percent since mid-October due to the
global economic crisis and worsening economic conditions in
Jamaica.

Fiscal Prudence...No...I Mean Stimulus
--------------


6. (SBU) Finance Minister Audley Shaw said in a public forum on
December 4 that the GOJ must maintain strict fiscal prudence, given
the global economic crisis that has led to a credit crunch in the
international markets. He added, "given the limitation on global
financing, it is important for us to strive to maintain our deficit
target, and despite the pressures for additional expenditure to meet
hurricane damage and public sector wage adjustments, we will
continue to exercise strict fiscal controls." In a reversal on
December 14, PM Golding announced a tax reduction stimulus package
(reftel B) that could cost the GOJ approximately USD 108 million in
lost revenue. COMMENT: although the country probably needed some
form of stimulus, given the worsening economic conditions the lost
revenue will have a negative impact on the country's fiscal
accounts. END COMMENT.

Anti-Corruption
--------------


7. (SBU) Since the start of the year, 11 employees from Inland
Revenue, Customs, and the Stamp Duty and Transfer Tax Division of
the Taxpayer Audit and Assessment Departments have faced criminal
charges. The employees were caught in an internal dragnet designed
to root out corruption within the Tax Administration Department.
They are facing a range of charges including falsification of an
account; conspiracy to deceive; breach of the corruption prevention
act and cheating the public revenue. COMMENT: The true test of
anti-corruption measures will be if cases go to trial and
convictions are secured. There also has been a general reluctance
to target higher level GOJ officials who are suspected of
corruption. END COMMENT.

Mining/Bauxite
--------------


8. (U) The global economic downturn is threatening the short-term
survival of Jamaica's bauxite industry. The decline in manufacturing
has weakened world demand for aluminum as prices on the London Metal
Exchange fell from a high earlier this year of USD 3,200 per ton to
just over USD 1,700 per ton. Bauxite is still one of Jamaica's
major earners of foreign exchange, and the sector fears additional
price declines could possibly lead to plant closures. Chairman of
the Jamaica Bauxite Institute Dr. Carlton Davis told the press on
December 2 that, "One cannot rule out the possibility of closure."
Andrew Currie, Acting Manager of West Indies Alumina Company
announced on December 16 that his firm will lay off 150 employees.


9. (SBU) Weakening demand from the construction and automobile
industries is pushing prices lower. A second challenge to the sector
has emerged as the price of caustic soda, a key material used in the
processing of alumina, has tripled in recent months, driving up
production costs. COMMENT: With the tourism sector already taking
a hit from the global economic downturn, a decline in the Bauxite

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sector is worrying. Jamaica relies on tourism (20 percent of GDP),
bauxite (7 percent of GDP) and remittances (20 percent of GDP) for
close to half its GDP; with all three sectors trending downward, the
country faces severe economic hardships. END COMMENT
HEG