Identifier
Created
Classification
Origin
08KINGSTON883
2008-10-09 16:24:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kingston
Cable title:  

WILL FINANCIAL CRISIS ROCK JAMAICA?

Tags:  ECON TRYS ENRG EFIN EINV ETRD XL JM 
pdf how-to read a cable
VZCZCXRO2432
RR RUEHGR
DE RUEHKG #0883/01 2831624
ZNR UUUUU ZZH
R 091624Z OCT 08
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 6845
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS SECTION 01 OF 02 KINGSTON 000883 

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW

E.O. 12958: N/A
TAGS: ECON TRYS ENRG EFIN EINV ETRD XL JM
SUBJECT: WILL FINANCIAL CRISIS ROCK JAMAICA?

REF: A. KINGSTON 867

B. KINGSTON 770

C. KINGSTON 726

D. KINGSTON 542

SUMMARY
-------

UNCLAS SECTION 01 OF 02 KINGSTON 000883

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW

E.O. 12958: N/A
TAGS: ECON TRYS ENRG EFIN EINV ETRD XL JM
SUBJECT: WILL FINANCIAL CRISIS ROCK JAMAICA?

REF: A. KINGSTON 867

B. KINGSTON 770

C. KINGSTON 726

D. KINGSTON 542

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


1. (SBU) Jamaica's heavy dependence on global economic fortunes
exposes the country to the ongoing financial meltdown, a serious
concern for the year-old Golding administration. Finance Minister
Audley Shaw, in an apparent move to avoid a crisis of confidence,
has been reassuring Jamaicans that the local financial system is not
endangered by the unfolding crisis in the U.S financial markets.
Similar sentiments have been expressed by Prime Minister Bruce
Golding. Although there is no apparent systemic financial risk, the
country will likely see some fallout in the macro-economy and
particularly in GDP growth. Jamaica is still recovering from the
collapse of several alternative investment schemes and damage caused
by Tropical Storm Gustav. Those financial losses coupled with a
potential slowdown in tourism and remittances to the island could
exacerbate the crime situation and further weaken moribund economic
performance. End summary.

Shaw On Defensive
--------------


2. (SBU) Finance Minister Audley Shaw has sought to downplay the
potential fallout from the current global financial meltdown in
Jamaica's economy. In order to avoid a crisis of confidence, Shaw
has been reassuring Jamaicans that the country's financial system is
not in danger. Shaw told Parliament that depositors, policyholders
and pensioners can rest assured that the domestic financial system
remains well capitalized, well supervised and has the strong backing
of the Central bank and the government. Shaw also indicated that
government's external capital requirements were being supplemented
by policy-based loans from multilaterals at interest rates as low as
five percent. Similar sentiments have been echoed by Prime Minister
Bruce Golding during his recent visit to Washington D.C. On
September 30, Golding said the country had secured between USD 100
million and USD 200 million in loans per year over the next three

years from the Inter-American Development Bank (IADB).


3. (SBU) But the year-old administration has come in for much
criticism. Member of Parliament Ronnie Thwaites (PNP) has publicly
bashed the GOJ for what he calls a misconception of the likely
impact of the global financial crisis. Thwaites, who is less
concerned about the systemic risks being addressed by Shaw, has
gone to the extent of warning Jamaicans that they will have to make
radical lifestyle changes due to the negative effects of the global
economic crisis. His position appears to be resonating with the
populace, including government financial advisor Dennis Chung, who
is predicting that the crisis will have a devastating impact on
Jamaica. Chung thinks the fallout is likely to result in economic
stagnation for at least two years.

GDP and External Sector at Risk
--------------


4. (SBU) Chung's argument is not difficult to accept given that
Jamaica was already on the brink of economic malaise. Even before
the passage of Tropical Storm Gustav in August, real GDP was
declining on the back of weak agriculture, manufacturing and mining
performance. This fallout is expected to intensify in upcoming
quarters as agriculture and in particular export agriculture sectors
were decimated by Gustav (reftels). So bad was the shock to banana
exports that the sole exporter, Jamaica Producers Group, decided to

;Q(YtYmeexit the banana export business. Add to this the likely impact of
the slowdown in consumption precipitated by the collapse of the
alternative investment schemes (reftels) and the economic forecast
look bleaker.


5. (SBU) Most of the effects from the crisis are expected to take
place in the external sector with the export of goods and services
most at risk. Commodities prices are likely to decline and the
country could see a fall off in earnings from traditional exports
like bauxite, alumina and sugar, while banana earnings will totally
disappear. Although declining world oil prices will lead to reduced
import costs and moderating inflation, it might not be steep enough
to offset falling export earnings, leading to a worsening current
account position. Tourism, Jamaica's number one foreign exchange
earner, might not go into freefall, but the sector will face serious
challenges going forward. Emboffs visiting hotels on the north
coast are finding far fewer guests than normal for this time of
year. At best, growth rates should wane as potential visitors
postpone vacations amidst job losses and declining wealth. That

KINGSTON 00000883 002 OF 002


said, those willing to travel will choose cheaper and closer
destinations making a diversion of visitors from Europe and Asia
more likely. The GOJ in a bid to mitigate any fallout has also
embarked on an aggressive advertising program while shoring up
airlift to the island (reftels).


6. (SBU) Even more important is the likely effect of the financial
crisis on the flow of remittances from the Jamaican diaspora,
particularly the United States. Remittances of USD 1.4 billion up
to August 2008 have been growing by double digits and now account
for almost 20 percent of GDP. The private transfer has become the
core income for a number of Jamaicans and has also been credited
with moving large numbers out of poverty. There has been a slight
slowing in the overall rate of growth in remittances. Noel
Greenland of Grace Kennedy Remittance Services (partly owned by
Western Union),told emboffs on October 8 that they recorded the
first decline in September (2 percent). A steep decline is not
expected, unless the financial situation becomes more severe.
However, anecdotal information in the Jamaican press suggests that
Jamaicans in the U.S. diaspora who are facing home foreclosures may
be forced to curtail remittance flows. This view is predicated on
the fact that the flow has remained resilient during past recessions
and shocks due largely to the obligatory nature of the transfer.
Additionally, most Jamaicans are concentrated in the services sector
(healthcare and education) which has not been affected yet by the
current economic downturn in the U.S. economy.

Credit Crunch Could Affect Confidence
--------------


7. (SBU) The most significant effect of the global crisis, in the
short term, is expected to emanate from the attendant credit crunch.
Although there is apparently no systemic financial risk given
the low level of exposure to U.S. investment banks, a number of
financial institutions are set to record losses associated with the
fallout (Note: Financial institutions can invest a maximum of five
percent of their capital in foreign assets. End note.) A number of
entities are also feeling the effects of the financial storm as
their lines of credit have been withdrawn or drastically reduced.
Financial players and importers appear to be hardest hit with some
investment houses already subject to margin calls from overseas
lenders. This has led to a corresponding tightening in credit from
local financial institutions which are also holding a significant
bad debt portfolio following the collapse of alternative investment
schemes. This could precipitate a rise in domestic rates with all
its attendant ramifications for investment and fiscal policy. These
entities, in addition to having to stave off rumors about their
level of exposure to the crisis, have also seen a steep decline in
their stock prices as confidence wanes.


8. (SBU) Although the GOJ will be able to close part of its USD 250
million budget financing gap with a loan from the IADB, it will have
to raise the remainder on the capital market. Given the
international capital market tightening, the GOJ will, at best, be
forced to pay a premium on the eight percent it paid on USD 350
million raised earlier this year. As tax revenues slow on the back
of declining consumption, the GOJ will be forced to adjust its
spending plans downward to meet its fiscal deficit target. Capital
expenditures required to rehabilitate infrastructure destroyed by
Gustav is likely to suffer the brunt of the adjustment. The GOJ
could also find that its plan to divest the loss-making national
airline, Air Jamaica, by March 2009 might falter as the sale becomes
increasingly unattractive in the current global environment where
more attractive assets are going at a discount (reftels). The GOJ's
vision to establish an offshore financial center will also be
challenged, particularly given the competition from energy rich
Trinidad and Tobago currently embarking on a similar project.

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


9. (SBU) It is highly unlikely that Jamaica will escape the ravages
of the current global financial meltdown given its heavy dependence
on the external economy. But most of the economic difficulties that
will arise in the near term would have arisen even without the
onslaught of the external crisis given other underlying domestic
weaknesses. GDP was already stagnating on the back of an
agriculture sector prone to natural shocks and low productivity.
Exports were also heading south and if oil prices had not moderated
in response to the global crisis the country would have faced a
balance of payments crisis, which might yet well materialize. As
the economy is already near the bottom, the GOJ might well be
advised to use the current opportunity to affect the institutional
reforms required to prepare the country for the next global rebound.
End comment.
JOHNSON