JAMAICAN THINK TANK ANALYZES INVESTMENT SCHEMES

UNCLAS KINGSTON 000098

SIPDIS

SIPDIS, SENSITIVE

STATE FOR WHA/CAR (JTILGHMAN)
WHA/EPSC (VDEPIRRO)
TREASURY FOR SARA GRAY


E.O. 12958: N/A
TAGS: ECON ECPS ETRD EFIN PREL JM XL
SUBJECT: JAMAICAN THINK TANK ANALYZES INVESTMENT SCHEMES

REF: KINGSTON 005

07 KINGSTON 1749
07 KINGSTON 1712
07 KINGSTON 1641


Summary
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1. (U) The Jamaican think tank Caribbean Policy Research Institute
(CaPRI) based at the University of the West Indies has released the
first independent analysis on alternative investment schemes which
have proliferated on the island. A range of schemes promising
annual returns of up to 180 percent have flourished on the island in
recent years (see reftels). The study is drawn from surveys of 400
investors involved in the schemes and from discussions with local
financial institutions. The study concludes that at least 14,300
people participate in the schemes with millions of dollars at risk.
A majority of respondents said they do not expect a government bail
out or widespread social unrest if the funds collapse. The report
was welcomed by the GOJ, which already was taking steps to regulate
the schemes. End Summary

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Money Does Not Seem To Add Up
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2. (SBU) CaPRI estimates that at least 14,300 Jamaicans have
invested in these schemes, forty-seven percent of which have
invested for less than a year. Despite the low number of estimated
investors, CaPRI concludes, that based on estimates from various
financial institutions, the amount already invested in these schemes
could be between JAD 100-200 billion (USD 1.4 billion to USD 2.8
billion). COMMENT: This figure appears very high in light of the
size of the Jamaican economy and is also higher than other sums
reported in the press. If these figures are accepted, it would mean
the schemes have funds equal to between 15 to 30 percent of
Jamaican's annual GDP of about USD 9 billion. If we use the figure
of 14,300 Jamaicans provided by CaPRI it would also indicate
participants have an average of USD 98,000 to USD 196,000 invested.
It would appear either that there are significantly more people
investing in these schemes than 14,300 or that the amount being held
is vastly overestimated. The figures proposed by CaPRI would
indicate that even if the entire 2.7 million population of Jamaica,
which has a per capita income of about USD 3,400, were invested,
each Jamaican would have between USD 518 to USD 1,036 in a scheme.
END COMMENT.

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Violence Anticipated, But Not Widespread
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3. (SBU) CaPRI also estimates that a majority of participants are
middle class and would be able to absorb the losses should schemes
collapse. Among those surveyed, most do not anticipate a GOJ
bail-out in the event of collapse. The evidence indicates that many
of the schemes, which have opaque investment strategies and resemble
pyramid schemes, are unsustainable and their collapse is inevitable.
Seventy percent of respondents said smaller social disturbances,
including protests and/or riots, violent outbreaks at business
offices, and the killing of the owners of these schemes were
probable. However, most believe that the likelihood of wide-spread
social unrest is low.

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Collapse is Inevitable
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4. (SBU) A few of the schemes on the island already appear to have
collapsed, including Higgins Warner Investments which closed its
offices in Montego Bay. The most well-known scheme, Cash Plus,
currently is under a cease and desist order from the Jamaican Courts
until it is registered with the Financial Services Commission (FSC).
In a public statement, it has asked investors to forgo their
interest payments while it takes 90 days to restructure its
operations (reftel C). Attorney for Cash Plus, Bert Samuels, told
Radio Jamaica reporters on January 24 that the scheme has more than
11,000 clients who have invested nearly USD 57 million.

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Type of Investor Involved
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5. (SBU) CaPRI suggests that, despite popular perceptions, the
schemes are not the domain of poorer Jamaicans but rather are used
by middle-class investors who recognize the risks involved.
COMMENT: CaPRI's findings comport with anecdotal evidence collected
at Post regarding currency trading firms like Olint, but seems
inconsistent with the lower-economic class of individuals that have
turned up to demonstrate in support of Cash Plus. Until these
schemes come under more scrutiny by the GOJ, and the names and
numbers of investors are released, it will be difficult to determine
what type of investors are participating in these schemes and how
that will affect social stability. END COMMENT.

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Macroeconomic Impact of Collapse
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6. (SBU) CaPRI claims the collapse of the funds will only have a
short term impact on the economy and that there should be a quick
recovery of key macroeconomic indicators. COMMENT: Given Jamaica's
exorbitant debt challenges, inflation of 16.8 percent for 2007 (well
above the 6-7 percent target),and the possibility of recession in
the U.S. economy, the country may have more difficulty absorbing a
widespread collapse of these schemes than the CaPRI report
indicates. If post-collapse violence does emerge, it could
discourage tourism visits, which would likely cause negative ripple
effects in the economy. Tourism remains the number one foreign
exchange earner for the country. Jamaica, which relies heavily on
the local bond market, also depends on stable credit rating; any
additional shocks to the economy could result in a downgrade of its
rating by international credit agencies. END COMMENT.

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GOJ Policy, Bailout Not Likely
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7. (SBU) The study recommends that the GOJ not offer any kind of
bail-out or rescue package to investors or firms which lose money as
a result of a collapse. CaPRI suggests the GOJ regulatory authority
should take measures to bring these schemes into the formal
regulated securities structure. The FSC has already taken these
steps, it issued cease and desist orders against two currency
trading groups (Olint and LewFam Investments) in December 2007,
after the Jamaican Supreme Court ruled that they were operating
illegally. This judicial decision encouraged the FSC to issue the
cease and desist orders against Cash Plus on January 17. IMF experts
who reviewed the Jamaican economy in November 2007 also endorsed
aggressive scrutiny of these unregulated financial schemes.


8. (SBU) Prime Minister Bruce Golding has told the press (see
reftels) that the GOJ will not offer a bailout. Widespread press
reporting of the schemes has also resulted in political finger
pointing by the ruling Jamaican Labor Party (JLP) and the opposition
Peoples National Party (PNP). JLP Finance Minister Audley Shaw
claims GOJ attorneys advised the former Finance Minister, Dr. Omar
Davies, to take action in regulating the scheme, which Shaw claims
Davies failed to do.