Identifier
Created
Classification
Origin
09KINGSTON45
2009-01-20 16:48:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kingston
Cable title:  

JAMAICA: UPDATE AND ADDITIONAL REPORTING ON

Tags:  ECON TRYS ENRG EFIN EINV ETRD EAIR SOCI IBRD IMF 
pdf how-to read a cable
VZCZCXRO0823
PP RUEHGR
DE RUEHKG #0045/01 0201648
ZNR UUUUU ZZH
P 201648Z JAN 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 7199
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNCOM/EC CARICOM COLLECTIVE
UNCLAS SECTION 01 OF 04 KINGSTON 000045 

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY)
EEB/IFD/OMA
EEB/EPPD

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR ERIN NEPHEW

E.O. 12958: N/A
TAGS: ECON TRYS ENRG EFIN EINV ETRD EAIR SOCI IBRD IMF
CDB, IBD, CH, SP, XL, JM
SUBJECT: JAMAICA: UPDATE AND ADDITIONAL REPORTING ON
RESPONSE TO FINANCIAL CRISIS

REF: A) 08 STATE 134459
B) 08 KINGSTON 1058 (151615Z DEC 08)
C) 08 KINGSTON 1094 (221925z DEC 08)

SUMMARY
-------

UNCLAS SECTION 01 OF 04 KINGSTON 000045

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY)
EEB/IFD/OMA
EEB/EPPD

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR ERIN NEPHEW

E.O. 12958: N/A
TAGS: ECON TRYS ENRG EFIN EINV ETRD EAIR SOCI IBRD IMF
CDB, IBD, CH, SP, XL, JM
SUBJECT: JAMAICA: UPDATE AND ADDITIONAL REPORTING ON
RESPONSE TO FINANCIAL CRISIS

REF: A) 08 STATE 134459
B) 08 KINGSTON 1058 (151615Z DEC 08)
C) 08 KINGSTON 1094 (221925z DEC 08)

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


1. (SBU) The global financial crisis has begun to impact Jamaica,
with economic growth for July to September 2008 falling by 0.2
percent -- the second consecutive quarter of decline. Continued
stagnation in the real sectors was again responsible for the
downturn. The economy is bound to fall deeper into recession
following the shock emanating from the recent hike in interest rates
to protect the value of the local currency. This reality has
spurred the government into action; both Finance Minister Audley
Shaw and Prime Minister Bruce Golding have been forced to address
the nation, with the latter outlining a sleuth of measures intended
to offset the downturn. But these policy actions have not been
sufficient to calm the markets or slow down the plans by companies
to cut staff as demand slows and credit dries up. However, the
early decision of the Golding-led administration to re-engage the
multilaterals could well turn out to be Jamaica's silver lining.
End summary.

Economic Stagnation Intensifies
--------------


2. (SBU) Jamaica's economy declined by a further 0.3 percent in the
September quarter of 2008, the second consecutive quarter of
contraction. The stagnation in the real sector (down 2.2 percent)
was the underlying reason for the economic downturn, with the 9.1
percent drop in the construction sector influencing the fallout.
The slowdown in road construction and housing starts and completions

were the primary reasons for the downturn. This development is
expected to deliver a serious blow to the buoyant real estate
market. The apparent meltdown in the construction industry is also
disconcerting given that it had been growing by double digits until
the end of 2007 and had employed up to 118,000 persons, many of them
unskilled. Agriculture, down 1.0 percent, also contributed to the
decline recorded in the real economy. Growth in services, up 0.5
percent, remained anemic as the previously buoyant tourism and
retail sectors went into decline.


Dollar under Sustained Pressure
--------------


3. (SBU) While most countries around the world have been reducing
interest rates, Jamaica has been forced to increase rates five times
in a bid to stabilize the local currency, which has slipped by over
13 percent since September 2008. In December, the Bank of Jamaica
(BOJ) hiked indicative interest rates on its one-year instrument by
seven percentage points to 24 percent. This pre-emptive move was
aimed at absorbing maturing instruments to reduce liquidity and by
extension calm demand pressures in the foreign exchange market. The
BOJ also enacted a second increase in the cash reserve requirement,
from nine percent to 11 percent. But these measures are bound to
impact the fiscal accounts, investment decisions, and economic
growth. They also have impacted consumer credit, as financial
houses have already increased rates by up to four percentage points
to 30 percent. The Private Sector Organization of Jamaica has
questioned the bank's wisdom, saying the aggressive measures would
likely put more pressure on an already weak economy at a time when
the global crisis is placing severe pressure on Jamaica. However,
the BOJ faces a real dilemma, as the currency continues to lose
value against its US counterpart amidst a USD 400 million injection
in the market from the Net International Reserves (NIR),which now
stand at USD 1.8 billion.

Leading Foreign Exchange Sectors under Siege
--------------


4. (SBU) With over 70 percent of visitors to Jamaica originating
from the US, the tourism sector appears to be most vulnerable to the
global financial crisis. However, the performance for 2008 was four
percent better than in 2007. Predictions are that arrivals could
decline by up to 20 percent in 2009 unless the fast growing Canadian
market offsets the anticipated decline from the U.S. The
bauxite/alumina sector is also being affected by the fallout in the
automobile and housing industries in the U.S. The price of aluminum

KINGSTON 00000045 002 OF 004


has decreased by over 50 percent during the last six months, leading
to inventory reaching its highest level in the last 14 years.
Remittances from the U.S. also fell by double digits in November,
the first monthly decline registered in recent times, suggesting
that even this most resilient flow could be affected by the
deepening recession in the U.S.; however, remittances to Jamaica are
expected to remain relatively robust given the historically steady
nature of the flow.

Projects Postponed
--------------


5. (SBU) The global financial crisis also has begun to take its toll
on investment decisions in Jamaica. Already, one major Spanish
investor has postponed a major hotel development due to difficulties
associated with sourcing funding on the international capital
market. The Port Authority of Jamaica also was forced to postpone
its USD 122 million port expansion project slated to start in 2009,
as it cannot find financing. The divestment of the local sugar
industry to Infiniti Bio-energy of Brazil also has hit a snag
because of uncertainty surrounding the companies' ability to raise
the USD 125 million required to seal the deal. However, Ministry of
Finance officials tell emboffs that a similar fate should not beset
Air Jamaica, as the company already has short listed two prospective
buyers with deep pockets, while two other similar entities are
showing interest.

Shaw Forced to Address Crisis
--------------


6. (SBU) After months of suggesting that the global financial
turmoil would not affect the local economy, Minister of Finance and
the Public Sector (MOF) Audley Shaw was forced to backtrack in an
address to the nation in November. Shaw stated that, as with most
developing countries, credit to Jamaica had dried up as investors
had become increasingly risk averse. He said the local foreign
exchange market also had experienced pressures arising from the
temporary constraint on international credit markets and the
consequent price declines in financial assets internationally.
However, Shaw has remained optimistic, particularly because an
assessment of local financial institutions showed that the level of
exposure was manageable, and in the event of contagion, the central
bank was in a position to provide liquidity support. He also noted
that the GOJ had established a Monitoring Unit comprising
technocrats from the MOF, the BOJ, the Financial Services
Commission, and the Planning Institute of Jamaica to analyze
developments in the global markets with a view to determining the
impact on Jamaica.

Policy Responses
--------------


7. (SBU) Shaw told emboffs that long before the crisis, the
Golding-led administration had indicated its intention to re-engage
and significantly expand its relationship with the multilateral
lending agencies. This early intention has paid huge dividends, as
Shaw expects these agencies to provide over USD 1 billion by the end
of March. He said these projected inflows will help cushion any
fall-out faced by the island from the global credit crisis. The sum
includes USD 200 million from the IDB for on-lending to the private
sector; USD 300 million already secured from the IDB; two loans for
USD 401 million being negotiated with the IDB; USD 100 million being
negotiated with the World Bank; and, USD 50 million for which
negotiations are being finalized with the CDB. These are mostly
policy-based loans (PBL),in exchange for which the government will
have to undertake agreed policy changes primarily geared at lowering
the country's gargantuan debt burden. For the next fiscal year the
GOJ also expects to secure a further combined USD 650 million in PBL
from the World Bank, the IDB and the CDB.


8. (SBU) Despite the crisis, the GOJ also has intensified its reform
program aimed at achieving fiscal sustainability and debt reduction.
The program entails, among other things, fiscal sustainability
through greater control of public sector balances and debt;
increasing the efficiency of government's financial management and
budget process; improvement in tax policy and administration geared
toward a more simplified, equitable and efficient tax system; and,
improvement in public sector productivity, efficiency and
responsiveness. The GOJ also has been engaged in intense discussions
with bauxite/alumina companies and unions to avoid the closure of

KINGSTON 00000045 003 OF 004


any plants, which would result in layoffs. The GOJ is still in
discussions with US Rusal regarding its three plants in Jamaica,
while the other two companies are not critical at this moment. The
government also has offered concessions to these companies, but has
warned that they might not be able to avoid a cutback in production.
Regarding tourism, the Jamaica Tourist Board has ramped up its
advertising and marketing program in the US. To address the labor
market challenges, the GOJ announced the revival of social
partnership discussions among the government, the private sector,
trade unions, and the opposition. The GOJ also is planning to
appoint a group of union leaders and employers to track the effects
of the global financial crisis in a bid to report to the GOJ on ways
to prevent layoffs.

Golding Announces Stimulus Package
--------------


9. (SBU) With the effects of the global crisis intensifying, Prime
Minister Bruce Golding also has been forced to yield to those who
had been calling for a more targeted fiscal stimulus package. In an
address to the nation in December, Golding in outlined a sleuth of
measures intended to boost the economy in general and some critical
sectors in particular. As such, the tourism sector had its sales
tax (already half that paid by the remainder of the economy) reduced
by half to 4.125 %. Sector players facing cash flow problems also
were offered a USD 6 million loan facility for working capital. The
moribund manufacturing sector also came in for special treatment, as
Golding announced that government procurement policy would be
adjusted to provide a 10 percent cost margin to Jamaican owned
companies. Small businesses were also allocated over USD 4 million
in soft loans, while the procurement procedures were adjusted to
allow 15 percent of total procurement to be reserved for small and
micro suppliers. And despite the revenue crunch, the GOJ abolished
the tax on dividends paid by private locally owned companies, while
reducing the transfer tax on property transactions from 6.5 percent
to five percent. To help with job losses, Golding also proposed a
special program to retrain workers who were laid off.

Projects to Provide Boost
--------------


10. (SBU) Golding was also quick to point out that a number of
projects were in the pipeline, which could boost job creation and
economic growth. Chief among these is the construction of a cruise
ship pier in the historic town of Falmouth on the North Coast to
accommodate the next generation of cruise ships. The project, which
is being carried out in conjunction with Caribbean Cruise Lines,
will cost over USD 224 million. The long awaited construction of a
Convention Centre in the tourist resort of Montego-Bay will also
begin this quarter. The project is being financed by the Chinese
government to the tune of USD 52 million. A group of Chinese
investors are also far advanced in their plans to construct a new
alumina plant in St. Ann. And while some hotel developers have had
to postpone their investments, one major Spanish hotel has commenced
construction, while two others are about to start work. Golding
also alluded to the ongoing and planned construction of major
highways and the development of almost 500 acres of land for an
enterprise zone.

But Recession Bug Hits Companies
--------------


11. (SBU) But despite Golding's optimism, there have been a number
of announced job cuts. In December Sandals Resorts International
announced it was reducing staff complement by 285 employees.
However, most were re-employed and transferred to join another 300
Jamaican workers in the Turks and Caicos. Russian-owned (RUSAL)
Alumina Partners of Jamaica also has laid off 250 temporary workers
and suggested a delay of a 12 percent pay increase, but the latter
was rejected by unions. While news reports suggest that Air Jamaica
is planning to shed positions, it is unrelated to the global
recession, as new Air Jamaica President Bruce Nobles already had
told emboffs that the airline was planning to cut loss making routes
in its bid to restructure the airline for divestment. However, the
telecoms firm, Digicel, apparently smarting from the drying up of
the credit it depends on to fund its aggressive expansion program,
has announced its intention to offer an attractive voluntary
redundancy package to 10 percent of its workforce.

Comment

KINGSTON 00000045 004 OF 004


--------------


12. (SBU) Like most developing countries, Jamaica has not escaped
the contagion effects of the global financial meltdown. Nowhere has
the impact been more severe than in the country's foreign exchange
market, with the local currency continuing on its downward spiral.
And with the central bank and the government aware of the
deleterious effect on the socio-economic landscape, the central bank
has been forced to implement draconian measures. But these
corrective measures come with their own set of problems, especially
for the fiscal accounts, which could deteriorate for the remainder
of the fiscal year. The extent of this fiscal slippage could well
set the stage for a downgrade by the international ratings agencies
later this year. However, this might not be devastating, as the
government has already been shut out of the private capital market.
In this regard, the Golding-led administration must be commended for
its decision to re-engage the multilaterals before the crisis
unfolded. End comment.

HEG