JAMAICA: JUNE ECONOMIC REVIEW

UNCLAS SECTION 01 OF 04 KINGSTON 000570 SIPDIS SENSITIVE STATE FOR WHA/CAR (JTILGHMAN) (VDEPIRRO) WHA/EPSC (MROONEY) EEB/ESC/IEC (GGRIFFIN) EEB/TPP/IPE (JHALLOCK) SANTO DOMINGO FOR FCS AND FAS TREASURY FOR ERIN NEPHEW E.O. 12958: N/A TAGS: ENRG EAIR EINV ECON ETRD EIND IADB IBRD IMF TRSY XL, JM SUBJECT: JAMAICA: JUNE ECONOMIC REVIEW REF: A) KINGSTON 542 B) KINGSTON 365 C) KINGSTON 263 D) KINGSTON 490 E) KINGSTON 539 F) KINGSTON 1659 ¶1. SUMMARY: -- Senator Don Wehby is being criticized by the Tourism and Hotel sector for its management of Air Jamaica in the face of reduced flights to the Caribbean by other airlines. The government also has asked the airline's board to resign; a new board will be named soon. -- Jamaica's rail service will be back on track in three years, as a result of a deal with the Chinese Government, according to the Minister of Transport. -- The country spent an additional USD 200 million during the first quarter for imported oil; total oil costs for the year could be above USD 2 billion, according to the Statistical Institute of Jamaica (STATIN). -- Adoption of a net metering system will allow customers that generate power from renewable energy to be paid the same price that they are charged for drawing power from the national grid, according to the Ministry of Energy. -- Minister of Commerce and Industry has again stopped the trade in scrap metal due to high volume of stolen metal being exported from the island. The Minister also announced plans for a 500 acre industrial park during the recent Diaspora Conference. -- Winter tourist figures for the 2008 show an 8.4 percent increase in stopover arrivals compared to the same period last year. -- Jamaica raised USD 350 million from international capital markets from a 10-year bond; aftermarket trading of the bond was lower, indicating reduced demand. The GOJ revenues increased 30 percent for the month of April over the same month last year; further indication that increased tax collection efforts by the Finance Minister are starting to yield results. -- RBTT bank in Jamaica won a court decision authorizing it to close the accounts of local foreign exchange trader World Wise Limited, one of Jamaica's many alternative investment schemes. Real estate professionals expect the collapse of several schemes on the island to reduce demand for real estate this year. -- Inter-American Development Bank (IADB) President Luis Alberto �00A;Moreno made a two-day visit to discuss economic issues and to provide a USD 1.6 million grant. -------------- Aviation/ Air Jamaica -------------- ¶2. (SBU) Wayne Cummings, the President of the Jamaica Hotel and Tourist Association (JHTA),criticized Senator Don Wehby, Minister without Portfolio in the Ministry of Finance and Public Service, who is responsible for the management and privatization of the beleaguered airline Air Jamaica. In a June 15 article in The Observer newspaper, Cummings was quoted as saying "It is now clear to us that Mr. Wehby has no interest in helping to strengthen the airline and is not prepared to support Air Jamaica, despite its vital importance to the tourist industry and Jamaica." ¶3. (SBU) Cummings said the JHTA is concerned that other airlines are reducing service to the Caribbean because of rising fuel costs, fearing this could hurt the tourism sector in Jamaica. Cummings said the JHTA has urged stronger marketing of Air Jamaica to enable it to "out-fly the crisis." COMMENT: Many in the tourism and hotel sector appear unwilling to acknowledge the dire situation facing Air Jamaica (reftel A). According to Prime Minister Golding, Air Jamaica has over USD 1 billion in debt. The airline has never made a profit in its 40 years of operation, and is facing more than USD 170 million in losses this year. Meanwhile, labor unions have been pressuring the GOJ for a wage increase. One June 11, the unions tentatively accepted a 14 percent wage increase offer, which KINGSTON 00000570 002 OF 004 includes a 6 percent increase in the first year and an 8 percent increase in the second year. On June 25 the Observer newspaper revealed that the GOJ had asked the Air Jamaica board to resign. During his speech the day before at the launch of the National Export week (see ASDAR),PM Golding had alluded to a decision made in Cabinet on June 23 to help prepare Air Jamaica for privatization. A number of the Embassy's contacts at Air Jamaica have left the airline to find work elsewhere. END COMMENT. ¶4. (U) American Airlines (AA) will provide more seats to Jamaica as part of a guaranteed revenue agreement with the GOJ; AA will provide 2,000 additional seats at a cost of USD 150,000 for each of the three routes (Miami, Chicago and Dallas) according to a report in the Herald newspaper reported on Sunday June 22. The plan will take effect in November. Air Jamaica was reportedly unable to provide the extra seats. -------------- Transportation -------------- ¶5. (U) Transport Minister Mike Henry said during his Parliamentary sector debate that the GOJ had talked with the Chinese government for eight months about reviving the island's railways. Henry said a deal had been reached in which 18 new railway stations and new tracks allowing for faster trains with heavier loads will be built. Henry said the Government of China will provide loans to finance 85 percent of the project, which will cost close to USD 354 million. He said Jamaica would secure five new engines, 45 passenger cars, and 68 freight cars. Henry said the freight services would lower transportation costs in light of higher fuel prices, and the new passenger service would link Kingston and Montego Bay. -------------- Environment/ Renewable Energy/ Energy -------------- ¶6. (U) The GOJ plans to allow Jamaica Public Service Company (JPS) customers to sell electricity generated from renewable energy back to the national grid through full net metering. The system will allow a customer's utility meter to run backwards as he/she generates and supplies power to the national grid, and then run forward when he/she draws power. Those customers that supply power from wind energy or solar panels would essentially be paid the same rate by JPS for the energy in the form of a direct credit, as the rate they would pay for energy that they draw from JPS. Under the current net billing system a customer who generates power and supplies it to the grid is paid a reduced rate for the power and must buy back the energy at the market rate. Director of Energy at the Ministry of Energy, Conroy Watson, said the GOJ is working assiduously to get this program operational as soon as possible, but was not specific on whether it would go into effect in 2008 or 2009. The new system will require changing the existing license with JPS and redrafting the Electricity Licensing Act. The plan faces opposition within JPS, as some prefer a "net billing" system, which was approved by the Office of Utilities Regulation in 2006. Mullings will give a National Energy policy speech in Parliament on July 1. ¶7. (U) Trade figures released on June 18 by the Statistical Institute of Jamaica (STATIN) show in the first quarter that the country spent USD 200 million for imported oil over last year. Jamaica relies on imported oil for about 93 percent of its power generation. STATIN reports that between January and March the cost of imported oil was USD 644 million, a 58 percent increase over the USD 407 million in the corresponding period last year. Jamaica's imported oil bill could be well above USD 2 billion for the year if world oil prices continue to remain high. -------------- Foreign and U.S. Investment -------------- ¶8. (U) Jamaica held its third biannual Diaspora Conference on June 16-17 in Kingston. Karl Samuda, Minister of Industry and Commerce, announced plans to rezone 500 acres of land for a future industrial park. Samuda said the GOJ would complete infrastructure improvements such as water, sewers and roads, and then offer the land for 99-year lease to interested private sector groups. He wants to transform the area near Caymanas just outside Kingston into KINGSTON 00000570 003 OF 004 a free trade zone facility with the hope of attracting small manufacturing, information technology and agro-processing operations. ¶9. (SBU) Samuda added that he has tasked Jamaica Trade and Invest (JTI),the trade and investment entity of the GOJ formerly known as JAMPRO, to begin marketing a full range of investment opportunities to entice members of the Diaspora to consider investing in Jamaica. COMMENT: JTI faces some internal weaknesses in targeting foreign investors. Emboffs attended a session for potential investors at JTI on the morning of June 17; only three members of the Diaspora attended and the session included running through the same PowerPoint presentation given at the conference the day before. In prior meetings with JTI, the entity has announced 10 areas of focus including medical tourism, entertainment and information technology services, but has not articulated how it will go about marketing to these sectors or what incentives they will use to encourage investment in Jamaica. END COMMENT. ¶10. (U) The Boston Diaspora Ventures (BDV),an entity founded by Jamaican expatriates living in Boston, initiated a joint venture with the All Island Bee Farmers Association to begin buying honey from local farmers and marketing it for export. The partnership, praised by JTI during the Diaspora Conference, will begin with a modest investment of USD 50,000 by BDV. -------------- Trade -------------- ¶11. (U) For the second time in eight months, Karl Samuda Minister of Industry and Commerce, has prohibited the export of scrap metal until further notice. Rising scrap metal prices brought theft to near epidemic levels in November 2007, as thieves were stealing copper telecommunications cables, city water pipes, manhole covers, and even burglar bars (reftel F). Samuda says the problem goes beyond mere petty theft, saying that operational planning and the use of heavy equipment are sometimes needed to pull off the crimes. Samuda has also blamed unethical traders who deal in stolen scrap. The ministry has revoked the trading licenses of businesses that are receiving stolen scrap metal. ¶12. (U) Samuda said the illegal activities pose a major threat to the economic development of Jamaica, disrupting essential services. The National Water Ministry has had more than USD 50,000 in water pipes stolen in the past four months. Telecom firm Cable and Wireless has had more than USD 30,000 in copper cables stolen. Samuda received public praise for acting swiftly to fix the problem last year. He has said he will resume exports once he has increased inspections of shipping containers and on site inspections of licensed metal traders to certify that exports are not from stolen items. -------------- Tourism Sector -------------- ¶13. (U) Preliminary figures for the 2008 winter tourist season in Jamaica show an 8.4 percent increase in stopover arrivals compared to the same period last year. From January to March, stopover arrivals were 483,959, up from 427,252 in 2007. Basil Smith, Director of Tourism, said he expects an even greater increase later this year, adding that the overall performance of the sector was due to "a sustained marketing effort on the part of the Jamaica Tourist Board". The U.S. continued to dominate the stopover arrivals with some 300,609 visitors. Canada and Europe followed with 92,671 and 68,599 visitors, respectively. Spain is a growing market due to marketing being done for recent Spanish-owned hotels. By the end of the year, Jamaica should have an additional 3,000 new hotel rooms bringing the total to about 30,000. -------------- Budget / Tax Revenue / Debt -------------- ¶14. (SBU) Jamaica raised USD 350 million on international capital markets with a ten-year government bond paying 8 percent. The GOJ hopes to raise another 250 USD million from international capital markets to finance government expenditures. Although the full USD 350 million was raised for the bonds, they were trading lower in the KINGSTON 00000570 004 OF 004 aftermarket, indicating that demand was not as high for them. The poor aftermarket result would make it less likely that the Jamaicans will come to the market again soon for the other USD 250 million. Jamaica retains a single credit rating of "B". ¶15. (U) GOJ revenues increased 30 percent for the month of April over the same month last year. The collection of USD 301.7 million exceeded the target set in March by USD 35.25 million. The GOJ still faces a deficit, as expenditures rose 32 percent (relative to previous period),reflecting a 52 percent increase in interest payments and capital expenditures more than doubled; however, the deficit was below what was targeted, as total expenditures were kept within budget. Overall expenditures were USD 353.9 million, resulting in a negative fiscal balance of USD 52.2 million. ¶16. (U) Tax collected from pay-as-you-earn (PAYE) income tax increased by seven percent to USD 56.4 million, USD 5.64 million more than anticipated. (COMMENT: This is an early indication that Minister of Finance Audley Shaw's aggressive efforts to increase compliance with tax collection are starting to yield results, reftel E). The growth in overall revenue partly reflected an increase in tax on interest, which moved from USD 14 million in April 2007 to USD 33.84 million in April 2008. The majority of the increase in earnings was attained from tax on international trade, up 62 percent to USD 97.4 million or USD 10 million better than targeted. Special consumption tax (SCT) on imports increased six fold to USD 19.7 million, about USD 4.5 million better than expected. General consumption tax (GCT) on imports grew 30 per cent to USD 35.9 million; about USD 1.96 million better than projected. -------------- Alternative Investment Schemes -------------- ¶17. (U) The Royal Bank of Trinidad and Tobago (RBTT) Jamaica was authorized to close the accounts of local foreign exchange trader World Wise Limited. The judicial decision brings an end to a court battle between the bank and the specious alternative investment scheme. Justice Bryan Sykes ruled in favor of the RBTT and lifted an injunction blocking the closure of World Wise accounts. RBTT was also purchased in June by the Royal Bank of Canada (RBC) Canada's largest financial institution. The merged operations will be based in Port-of-Spain, Trinidad. ¶18. (U) The collapse of several alternative investment schemes and higher fuel prices are staring to reduce the demand for real estate. Realtors expect slower growth in the housing market in 2008. Participants in various alternative investment schemes have lost their investments as well as income streams from interest payments. Valerie Levy, who heads Levy and Associates, told the Observer newspaper on June 15 that she expects demand to decrease by about 10 percent. -------------- Multilateral Donors -------------- ¶19. (U) IADB President Moreno visited Jamaica on June 4-5 at the invitation of Audley Shaw, Minister of Finance and Public Service. Moreno met with GOJ ministers, private sector leaders, and members of the diplomatic corps. Ambassador Johnson joined Moreno at a lunch hosted by the Private Sector Organization of Jamaica (PSOJ) and Citibank. Moreno spoke at the PSOJ's Annual Economic Seminar held at the Bank of Jamaica with the theme "Going for Growth." The Ministry of Finance also received a USD 1.6 million grant from the IADB, which was signed during the visit. The funds will be used to cover expenses relating to the implementation of the Government's Medium Term Action Plans. HEG