JAMAICA: BUSINESS LEADERS DISCUSS WEAKENED STATE OF

UNCLAS SECTION 01 OF 04 KINGSTON 000223

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/ESC/IFD/EPC (McMANUS)

SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW

E.O. 12958: N/A
TAGS: ECON ETRD TRYS ENRG SOCI EFIN EINV EAIR IADB IBRD
IMF, KCOR, XL, JM
SUBJECT: JAMAICA: BUSINESS LEADERS DISCUSS WEAKENED STATE OF
JAMAICAN ECONOMY

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


1. (SBU) On March 18, Charge James Heg hosted a group of Jamaican
business leaders at a lunch to discuss the state of the local
economy. The discussions also covered the political dynamics
following the decision by the Jamaican Supreme Court on the dual
citizenship case. The business leaders were unanimous in their view
that the country was in trouble and the Government of Jamaica (GOJ)
was basically riding out the crisis. However, they thought the
current crisis presented an excellent opportunity for the GOJ to
make some of the hard decisions that have been postponed for the
past three decades. End summary.

Business Leaders Discuss Jamaica's Economic Crisis
-------------- --------------


2. (SBU) The March 18 lunch at the CDA's residence included CEO and
Chairman of Grace Kennedy Douglas Orane; Deputy Chairman of the
Sandals Group of Companies and President of the Private Sector
Organization of Jamaica Christopher Zacca; CEO of National
Commercial Bank (NCB) Patrick Hylton; and CEO of PayMaster and
President of AMCHAM Audrey Marks. Visiting OIG Ambassador Franklin
Huddle, Econoff and Econ Specialist attended from the Embassy.


3. (SBU) The Charge started the discussion by soliciting views on
the state of the Jamaica economy. Zacca was very direct in his
response, stating that the country was in big trouble. He said the
cash crunch facing the GOJ, falling consumption, high crime and
bureaucracy were major problems facing the country. Declining tax
revenues were making it almost impossible for the government to
provide any form of fiscal stimulus. He added that things were so
dicey that a return to the IMF was a real possibility, despite the
attendant political risk of any such eventuality. Zacca said the
only bright spark was the continued increase in tourist arrivals,
albeit due to heavy discounting and increased marketing particularly
in the US market. Orane was of the impression that the economy
could get a boost if the government was willing to make it easier to
do business. "We are not looking for special incentives, we just
want no disincentives" Orane continued.

Interest Rate Policy Divisive
--------------


4. (SBU) But it was the vexing issue of Jamaica's high interest rate
policy which engendered the most passion among the business leaders.
Banker Hylton dissected the central bank's decision to hike rates
when other countries were moving them in the other direction.
Hylton's starting point was that the hike in rates was a direct
response to market forces. However, he said from his discussions
with the central bank there was a willingness to bring rates down.
He went on to explain that the disjuncture in the economic framework
was largely responsible for the predicament the country faces. He
argued that the tenuous debt and fiscal dynamics have led to
instability at the macro level. "This instability has filtered to
the micro level impacting the already high trade deficit," Hylton
continued.


5. (SBU) Hylton said the foreign exchange position worsened when the
global crisis intensified affecting Foreign Direct Investment (FDI)
and shutting access to the capital market. He said the combination
of these factors led to a depletion of foreign exchange inflows,
amidst stable demand. Hylton said with local liquidity rising, the
economic fundamentals worsening and by extension confidence waning,
investors started to switch assets, thus putting pressure on the
local currency. He said the central bank initially used a mix of
interest rates and reserves to shore up the currency. He said when
this intervention failed the bank resorted to moral suasion, but
this had little effect on speculators. Hylton said that under the
circumstances the central bank was left with little choice but to
hike interest rates.


6. (SBU) However, this did not satisfy Zacca, who in conjunction
with several other sector leaders have been waging an all out war
against the bank's high interest rate policy. Zacca remained
adamant that the policy was a disincentive to the very investment
required to help the situation. He also maintained that the central
bank should allow commercial banks to loan a portion of the reserves
it held at the central bank to the productive sector at
concessionary rates. Hylton argued that this was not feasible, as
commercial banks had to conform to accounting standards and would be
punished by their auditors and ratings agencies. (NOTE:

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International Financial Reporting Standards (IFRS) rules dictate
that financial instruments be valued on a mark-to-market basis. The
concessionary instruments could therefore become impaired if less
than the market rate. END NOTE.) He also stated this policy was a
sure recipe for risky behavior widely referred to as moral hazard.


Time To Take Hard Decisions
--------------


7. (SBU) Orane opined that the harsh reality was that the time had
come for the GOJ to make the tough decisions postponed for the past
three decades. Using Barbados and Trinidad as a point of reference,
Orane, who has business interest, across the Caribbean, explained
how these countries were able to make the hard choices and although
the decisions paid off in economic terms, in both cases the ruling
party lost the subsequent election. Orane said the realization of
political costs and the lack of social consensus have influenced
successive Jamaican governments to postpone the hard decisions.
However, Orane argued that gravity of the existing situation
suggested that not even this political dynamic was sufficient to
allow the decision to be postponed.


8. (SBU) The business leaders said that while successive governments
have had an affinity for crisis management, they expected some major
changes during 2009. Zacca suggested that with remittances flat and
the bauxite sector collapsing (NOTE: two bauxite plants owned by
Russian United Company (UC) RUSAL are closing down at least
temporarily, West Indies Alumina Company-WINDALCO-- will close March
31 and Alumina Partners of Jamaica-ALPART--will close on May 15 END
NOTE),the GOJ will be forced to take a look at the public sector
wage bill, with the best case scenario being a wage freeze. (NOTE:
Minister Without Portfolio in the Ministry of Finance and the Public
Service, Dwight Nelson told emboffs on March 19 that a wage freeze
was almost a done deal. END NOTE). Orane quoting President Barak
Obama's Chief of Staff Rahm Emanuel said "Never let a crisis to
waste" it would be a shame for Jamaica to let this crisis go to
waste as it presented the perfect opportunity to make the hard
decisions and then blame it on the crisis.

Bauxite Crisis Concerns Leaders
--------------


9. (SBU) The leaders also expressed much concern about the pending
collapse of the bauxite sector, which is expected to affect entire
communities as well as GOJ revenues, which generally runs up to USD
100 million. The leaders were particularly worried about the two
plants owned by UC RUSAL, which has its own set of problems. The
leaders expressed fear that even if the decision was to close the
plants temporarily, they may not reopen. Let us keep in mind that
unlike the Canadians and the Americans, the Russians are not known
to have a social conscience, Zacca quipped. (NOTE: The following
day news broke that UC Rusal plants had taken a decision to close
ALPART for up to a year, affecting almost 900 employees. The
WINDALCO plant will cease production at the end of March, but no
decision ha been made on the workforce. END NOTE.)


10. (SBU) The bauxite sector meltdown is a serious blow to the GOJ
for other reasons. The GOJ is the minority owner (45 percent) of
another bauxite plant, Jamaica Alumina Company (JAMALCO) and its
equity position in the plant fall has declined from a high of USD
500 million in the 1990s to less than USD 50 million currently. The
plant has been bleeding money from a bad deal negotiated by the
previous government. The Jamaica Labour Party-led government has
moved to divest the minority stake. The global economic decline
suggestions are that the GOJ's decision is purely based on its
desire to cut its losses and a deal to sell could see the GOJ
assuming contingent liabilities of up to USD 250 million. The
bauxite crisis could also stall Jamaica's efforts to adopt coal as a
viable alternative energy source, a decision made by the GOJ in an
effort to diversify power generation away from thermal generators.


Bauxite Job Losses
--------------


11. (SBU) The GOJ is also expected to suffer a major setback on wage
related tax revenues, as the bauxite sector is by far the highest
paying sector in the country. Senior Human Resource Executive at
West Indies Alumina Company, Dayton Robinson, told emboff that
workers at the company command basic salaries (excluding benefits)
ranging from USD 25,000 for supervisors to USD 55,000 for managers.

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But Robinson also explained that the greater portion of remuneration
was negotiated in benefits, which ranged from interest free car and
furniture loans to annual education grants of almost USD 10,000.
Robinson said he was worried about the impact the pending closure
could have on workers and surrounding communities, given they had
become accustomed to rather affluent lifestyles. He appeared even
more concerned about the exposure of local banks, which were already
calling for regular updates on the pending closure.

Paradigm Shift Required
--------------


12. (SBU) Echoing sentiments raised by Minister of Finance and the
Public Service Audley Shaw in a meeting with emboffs on March 11,
Orane opined that the national conversation had to shift from crisis
management to an exploration of new opportunities. Orane said the
country had to think seriously about non-traditional areas like call
centers, renewable energy (ethanol),sports and music related
investments. Zacca argued that a paradigm shift would require a
sensible set of policies, as in the current environment most
investors were hesitant to try anything new. He said the GOJ could
start by addressing the three areas of consensus: (1) crime; (2)
taxation; and (3) bureaucracy. The Sandals executive said the aim
was to produce things that generate foreign exchange or replace
imports. For his part Zacca suggested the GOJ concentrate on
providing incentives through targeted tax policy to sectors like
manufacture, agriculture and international services. On the issue
of crime, Orane said the most cost effective way to arrest the
problem was to get convictions and then separate criminals from
their assets. In this regard, the leaders thought there was an
important role for the USG to play. Charge Heg then pointed out
that the USG had already helped put the requisite legal framework in
place and it was up to the GOJ to apply the laws on the books.

Immigration Policy
--------------


13. (SBU) With Jamaica having a high number of workers in the health
and education sectors in the US and with demand in these sectors
still strong, the leaders suggested that the US immigration policy
will be critical. Zacca argued that the US should follow the path
Canada to make its immigration policy more of a point system that
benefits skilled labor, which would provide a continued outlet for
the migration of skilled Jamaican workers who cannot find employment
opportunities at home. The benefits derived from Jamaicans in the
United States, were not lost on Orane, who runs the biggest
remittances business--in partnership with Western Union--in the
Caribbean. He said an open immigration policy for skilled workers
would keep the last remaining pillar of the Jamaican economy,
remittances (now a USD 2 billion industry) afloat.

Politics Takes Center Stage
--------------


14. (SBU) The discussion shifted to the pending by-elections on
March 23 sanctioned by the Supreme Court following its ruling on the
first of four dual citizenship cases brought by the opposition
People's National Party (PNP) against the ruling JLP (Reftels).
The consensus was that the incumbent candidate Daryl Vaz should win
comfortably, as the JLP has framed the election as a referendum on
the performance of the incumbent, who has a good track record.
Zacca also suggested that a win by Vaz should boost the confidence
of the JLP, which is in short supply of positive news. However, the
leaders were quick to point out that a win by the PNP candidate
Kenneth Rowe, who ironically is also a Canadian citizen, could well
trigger a general election, as the PNP has framed their campaign as
mandate on the performance of the JLP. Zacca therefore opined that
a JLP loss would suggest its party has no moral authority to govern.
(NOTE: Under the Jamaican Constitution a Commonwealth citizen living
in Jamaica for a year can serve in an election. END NOTE).

Concern for JLP Loss
--------------


15. (SBU) A loss for the JLP would be a disaster for the country
right now, Zacca continued. However, he was also quick to point out
that given the challenges facing the country half the members of the
PNP would not relish the idea of being in government at this time.
The leaders also argue that while a JLP win would make it a third
consecutive loss for the charismatic PNP President Portia
Simpson-Miller, given her popularity it would take a brave
individual to challenge her position anytime soon. Zacca was not

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shy about highlighting his discomfort with the PNP, which he branded
as a "socialist movement". Zacca, who represents the largest
grouping of businesses in Jamaica, was particularly concerned by
recent comments make by elements in the PNP, who suggested that the
JLP was too close to big business.

COMMENT
--------------


16. (SBU) The Jamaican economy faces increasing economic challenges
as the bauxite sectors shrinks and job losses rise. A prolonged
economic downturn in the US resulting in decreased tourist arrivals
and lower remittances could be result in the perfect storm for
pushing the economy to the brink. Rising crime is a concern among
the Jamaican private sector and any noticeable increase in incidents
of crime against tourists could lead to a decline in this key sector
as well as future foreign direct investment.