Identifier
Created
Classification
Origin
09KINGSTON614
2009-08-18 19:01:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kingston
Cable title:  

JAMAICA: MONETARY GAINS, FISCAL PAIN, AND DOWNGRADES

Tags:  ECON ENRG EFIN EINV ETRD PGOV PREL IADB IBRD IMF 
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VZCZCXRO5532
PP RUEHGR
DE RUEHKG #0614/01 2301901
ZNR UUUUU ZZH
P 181901Z AUG 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 7946
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHOT/AMEMBASSY OTTAWA 2410
RUEHLO/AMEMBASSY LONDON 0601
UNCLAS SECTION 01 OF 03 KINGSTON 000614 

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (JMACK-WILSON)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE) (AWONG)
EEB/IFD/OMA
WHA/PPC (JGONZALEZ)
INR/RES (RWARNER)
INR/I (SMCCORMICK)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW
EXPORT IMPORT BANK FOR ANNETTE MARESH

E.O. 12958: N/A
TAGS: ECON ENRG EFIN EINV ETRD PGOV PREL IADB IBRD IMF
TRYS, JM, XL
SUBJECT: JAMAICA: MONETARY GAINS, FISCAL PAIN, AND DOWNGRADES

REF: A. KINGSTON 581

B. KINGSTON 551

C. KINGSTON 601

D. KINGSTON 245

E. KINGSTON 422

UNCLAS SECTION 01 OF 03 KINGSTON 000614

SENSITIVE
SIPDIS

STATE FOR WHA/CAR (JMACK-WILSON)(VDEPIRRO)(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE) (AWONG)
EEB/IFD/OMA
WHA/PPC (JGONZALEZ)
INR/RES (RWARNER)
INR/I (SMCCORMICK)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW
EXPORT IMPORT BANK FOR ANNETTE MARESH

E.O. 12958: N/A
TAGS: ECON ENRG EFIN EINV ETRD PGOV PREL IADB IBRD IMF
TRYS, JM, XL
SUBJECT: JAMAICA: MONETARY GAINS, FISCAL PAIN, AND DOWNGRADES

REF: A. KINGSTON 581

B. KINGSTON 551

C. KINGSTON 601

D. KINGSTON 245

E. KINGSTON 422


1. (SBU) SUMMARY: After a series of austere monetary measures, led
by record high interest rates, the foreign exchange market has been
showing signs of stability, reflected in the marginal depreciation
of the Jamaican dollar during the June quarter. The stock of Net
International Reserves (NIR) also has stabilized at USD 1.6 billion
as demand pressures for foreign currency appear subdued and
inflation moderates to four percent for the first half of 2009.
These gains come at a significant cost to the fiscal accounts. The
fiscal deficit was USD 403 million, USD 46 million more than
budgeted, because of falling revenue collection. Government of
Jamaica (GOJ) spending had to be slashed by USD 87 million. This
fiscal situation triggered a second downgrade in Jamaica's credit
rating to CCC+ by Standard and Poor's on August 5, drawing the ire
of the GOJ. The economy has not been in such dire straits since the
economic stagnation referred to as the "lost decade" of the 1970s.
End summary.

Central Bank Updates Nation
--------------


2. (SBU) On August 12, Bank of Jamaica (BOJ-Central bank) Governor
Derick Latibeaudiere hosted a press briefing, attended by Emboffs,
to update the country on recent financial and economic developments.
He noted the concern many Jamaicans felt about returning to the
International Monetary Fund (IMF),but said it was necessary to
address structural reforms in a sustainable manner (Reftels A and

B). He assured the press that the BOJ continues to keep monetary
policy focused on maintaining macro-economic stability. He stated
that most economic indicators were pointing in the right direction,
with inflation moderating, the exchange rate stable, and the current
account deficit improving.


3. (SBU) Inflation for the June quarter was 2.7 percent, well below
the GOJ's target of 5.5 percent. Inflation for the first half of
2009 was four percent, well below the 11.5 percent recorded during
the similar period of 2008. Latibeaudiere attributed the moderation
to the bank's tight monetary policy stance.

BOJ Defends Policy Actions
--------------


4. (SBU) The BOJ has come under significant public criticism,
particularly from the business community, for its high interest rate
policy (Reftel C). Latibeaudiere defended his policy actions
saying, "Whatever interest rate path the bank pursued was absolutely
correct." When one journalist at the briefing remarked that the
country now had to "suffer under the impact of overly aggressive
measures" by Latibeaudiere, he responded, "you mean we are now
reaping the benefits of my actions."


5. (SBU) Latibeaudiere noted that the IMF commended the bank for its
monetary policy stance, saying it was a miracle the BOJ was able to
maintain stability amidst the resource constraints. He argued that
making policy decisions in an extraordinarily difficult environment
involved tough choices. He told the audience that he was committed
to never taking actions that could compromise sound monetary policy
or actions that might undermine the bank's mandate of price and
financial stability.


6. (SBU) He noted that the bank's policy actions had yielded some
positive results, noting that the Jamaican currency had depreciated
by only 0.3 percent during the June quarter. Although this might
appear impressive, given that the currency had lost 22 percent of
its value between September and February, it came against the
background of a 24 percent hike in interest rates. This was
augmented by frequent injections from the Net International Reserves
(NIR) to augment supplies. These measures resulted in a contraction
in the need for foreign currency to purchase imported goods. This
in turn, led to a marked improvement in the current account deficit,
which is projected to move from 21 percent of GDP in 2008/09 to 12
percent of GDP in 2009/10, despite the fall out in bauxite, tourism,
and remittances (Reftel D). At the end of June, the stock of NIR

KINGSTON 00000614 002 OF 003


had stabilized at USD 1.6 billion or about 13 weeks of goods and
services imports-- up from USD 1.5 billion a few months ago, but
still well down from 2.2 billion when the global recession began.


Stablization Gains Cause Fiscal Pain
--------------


7. (SBU) The BOJ's measures have not been without cost to the fiscal
accounts; the high interest rate policy has increased debt serving
costs in the June quarter by USD 25 million. For the June quarter,
central government operations also generated a deficit of USD 403
million; USD 46 million more than budgeted. The continued
deterioration was due to declining revenue collection, as spending
was slashed by USD 87 million to bring expenditure closer in line
with falling revenues. The BOJ's demand management program
(depreciation and interest rate hike) has reduced consumption and
thus reduced import taxes. The GOJ is not able to cut all spending,
notably obligatory expenditures (interest payments and wages),and
thus its goal of a fiscal deficit of 5.5 percent of GDP has been
shattered.

Economic Contraction, Fears of Another Lost Decade
--------------


8. (SBU) The BOJ's measures have also impacted the already moribund
Jamaican economy, which is estimated to have declined by a further
3.5 to 4.5 percent during the June quarter. This was the sixth
consecutive quarter of decline and is the sharpest contraction in
ten years. The fall off continues to be led by the Mining and
Quarrying sector, as lost output from the closure of three of the
country's four bauxite plants continue to take its toll (reftel D).
The stagnation in the construction industry also impacted output
growth. The contraction in GDP continues against the background of
weak external and domestic demand from the lingering global economic
downturn. Jamaica is facing its worst economic situation since the
1970s--referred to as a "lost decade" of growth marked by economic
setbacks and job losses.

Hard Decisions Must Be Taken
--------------


9. (SBU) Deteriorating economic conditions, led by the weakening
fiscal dynamics, have forced an abandonment of the medium term
economic framework. Prime Minister (PM) Bruce Golding has already
announced the tabling of a revised budget (Supplementary Estimate)
when Parliament resumes in September. This revised budget could
increase the deficit to over seven percent of GDP, unless the GOJ is
successful in negotiating an interest rate concession this year
(Reftel E). The economic contraction is expected intensify, meaing
the projected three to four pecent contraction of GDP could rise to
five or six percent. On a brighter note, the 2009 inflation target
has been reduced to between 11 and 12 percent, while interest rates
have begun to decline, albeit slowly.

To Consider Terms For IMF Return
--------------


10. (SBU) PM Golding also announced that his Cabinet had considered
the terms on which his government will return to the IMF when it met
on August 17. He said once the terms are decided by Cabinet it will
be open for public discussion, and constructive concerns will be
taken on board. However, Golding was quick to point out that some
of the terms of the agreement will not be pleasant. "When you are
sick, you have to take medicine", said Golding. The country could
be in for some immediate relief, as the BOJ is set to pick up USD
328 million in Special Drawing Rights (SDR) from the IMF in
September. This should strengthen the bank's stock of NIR, thus
furthering stability in the foreign exchange market.

Standard and Poor's Delivers Body Blow
--------------


11. (SBU) As Jamaica contemplates a return to the IMF, ratings
agency Standard and Poor's has announced a downgrade of the
country's credit ratings from B- to CCC+. This second downgrade in
less than a year was based on what S and P considers Jamaica's
vulnerable fiscal profile, combined with difficult financing

KINGSTON 00000614 003 OF 003


conditions, amidst a weak debt profile. The ratings agency said
this could well compel the GOJ to undertake a debt exchange that
could be regarded as a distressed debt exchange (default). With 25
percent of debt maturing within a year and with 50 percent of the
debt foreign-exchange indexed, S and P suggests that debt servicing
costs will rise to 60 percent of the budget in 2009, up from 48
percent in 2008. The agency also is forecasting that debt-to-GDP
will jump to 120 percent by the end of 2009.

GOJ Hits Back - Dispels Default Rumor
--------------


12. (SBU) Responding to the downgrade, Audley Shaw, Minister of
Finance and the Public Service(MFPS),stated that the ratings agency
ignored the positive economic developments led by foreign exchange
market stability and declining interest rates. He also emphasized
that the GOJ does not intend to pursue any transaction with its
creditors that could be viewed as a distressed transaction.
Latibeaudiere called the downgrade "pre-mature" and in echoing
Shaw's comments said the GOJ "continues to maintain its resolve to
honor all obligations, as contracted, and therefore the rating
action was unwarranted." PM Golding also maintained that there was
absolutely no chance of Jamaica defaulting on its debt, as Jamaica
was one of the few countries where the prior claim on budgetary
expenditure of debt repayment were guaranteed by a provision in the
Constitution.

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


13. (SBU) The S and P downgrade has dealt a major psychological blow
to the already beleaguered Jamaican Labor Party (JLP)-led
administration, but it might not have any material impact in the
short-term, given that Jamaica has been frozen out of the private
capital market. In fact, it is the investors who already hold
Jamaican bonds who will most likely be affected, which could explain
the outrage coming from this sector. Even if the ratings action was
premature, as a starting point, the GOJ must acknowledge the
fundamentals of the S and P findings--that the country has a
vulnerable and precarious fiscal situation. Consequently, the
downgrade, coupled with the imminent return to the IMF, should be
viewed as another perfect opportunity for the PM Golding and his
party to finally address the structural impediments to growth and
development. Although this move will be riddled with political
risks due to difficult choices, any further postponement of the
pain, in order to maintain political capital, could well result in
another lost decade. END COMMENT.
MOSS