Identifier
Created
Classification
Origin
09KINGSTON634
2009-08-25 18:51:00
CONFIDENTIAL
Embassy Kingston
Cable title:  

JAMAICA: A SERIOUS LAG EFFECT FOR POST RECESSION

Tags:  ECON ETRAD EFIN ENRG EIND PREL PGOV PIND TRYS 
pdf how-to read a cable
VZCZCXYZ0003
PP RUEHWEB

DE RUEHKG #0634/01 2371851
ZNY CCCCC ZZH
P 251851Z AUG 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 7981
INFO RUCNCOM/EC CARICOM COLLECTIVE PRIORITY
RUEHCV/AMEMBASSY CARACAS PRIORITY 0575
RUEHLO/AMEMBASSY LONDON PRIORITY 0607
RUEHOT/AMEMBASSY OTTAWA PRIORITY 2416
C O N F I D E N T I A L KINGSTON 000634 

SIPDIS

STATE FOR WHA/CAR (JMACK-WILSON) (RALVARADO) (VDEPIRRO)
(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE) (AWONG)
INR/RES (RWARNER)
INR/I (SMCCORMICK)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW
EXPORT IMPORT BANK FOR ANNETTE MARESH
USTDA FOR NATHAN YOUNG AND PATRICIA ARRIAGADA
OPIC FOR ALISON GERMAK

E.O. 12958: DECL: 08/25/2039
TAGS: ECON ETRAD EFIN ENRG EIND PREL PGOV PIND TRYS
IADB, IBRD, IMF, SOCI, ASEC, KCRM, XL, JM
SUBJECT: JAMAICA: A SERIOUS LAG EFFECT FOR POST RECESSION
GREEN SHOOTS

REF: A. KINGSTON 614

B. KINGSTON 581

C. KINGSTON 422

D. KINGSTON 223

E. KINGSTON 427

F. KINGSTON 626

G. KINGSTON 622

H. KINGSTON 531

Classified By: Isiah L. Parnell Charge d'Affaires, a.i. for reasons 1.4
(b and d)

SUMMARY AND ANALYSIS
---------------------

C O N F I D E N T I A L KINGSTON 000634

SIPDIS

STATE FOR WHA/CAR (JMACK-WILSON) (RALVARADO) (VDEPIRRO)
(WSMITH)
WHA/EPSC (MROONEY) (FCORNEILLE) (AWONG)
INR/RES (RWARNER)
INR/I (SMCCORMICK)
SANTO DOMINGO FOR FCS AND FAS
TREASURY FOR ERIN NEPHEW
EXPORT IMPORT BANK FOR ANNETTE MARESH
USTDA FOR NATHAN YOUNG AND PATRICIA ARRIAGADA
OPIC FOR ALISON GERMAK

E.O. 12958: DECL: 08/25/2039
TAGS: ECON ETRAD EFIN ENRG EIND PREL PGOV PIND TRYS
IADB, IBRD, IMF, SOCI, ASEC, KCRM, XL, JM
SUBJECT: JAMAICA: A SERIOUS LAG EFFECT FOR POST RECESSION
GREEN SHOOTS

REF: A. KINGSTON 614

B. KINGSTON 581

C. KINGSTON 422

D. KINGSTON 223

E. KINGSTON 427

F. KINGSTON 626

G. KINGSTON 622

H. KINGSTON 531

Classified By: Isiah L. Parnell Charge d'Affaires, a.i. for reasons 1.4
(b and d)

SUMMARY AND ANALYSIS
--------------


1. (C) Despite signs of stability in the Jamaican dollar and
moderating inflation, the island nation is still far from
seeing post-recession green shoots. Even when an economic
recovery takes hold in the United States, it will do little
to pull Jamaica out of its ongoing economic malaise. Major
changes are needed in the market orientation of the island
and, to date, the Government of Jamaica (GOJ) seems unwilling
to make the difficult choices needed to address its triple
intrinsic challenges of high energy costs, high security
costs, and a lack of business diversification. Furthermore,
two of the three main pillars of the economy, bauxite and
remittances, have suffered serious declines. Only the third
pillar, tourism, has remained robust. There is cause for
concern as the Jamaica Labour Party (JLP)-led GOJ continues
to muddle along and undergo changes of key personnel in the

face of daunting challenges. The island appears to be one or
two events away from a potentially steep and precipitous
economic downward spiral. A devestating hurricane, a high
profile violent incident against tourists, or the loss of
PetroCaribe benefits could well be the tipping point.
END SUMMARY AND ANALYSIS.

Breaking Track Record of Moribund Growth
--------------


2. (SBU) After a series of measures by the Central Bank
(BOJ),the Jamaican dollar has stabilized, skyrocketing
interest rates are declining slightly, and inflation is
moderating (Reftel A). The BOJ reduced interest rates
another 100 basis points on August 20. The GOJ also is on
the verge of a standby agreement with the IMF which should
provide USD 320 million in special drawing rights by early
September, in addition to a possible USD 1.2 billion,
affording the GOJ some much needed breathing room in the near
term (Reftel B). Although these are noteworthy improvements
given the extraordinary global economic crisis, there are
still fundamental weaknesses in the economy that need to be
addressed in a long-term strategic manner if Jamaica is to
ever break with its two-decade history of moribund economic
growth averaging just over one percent a year. Even when the
U.S. benefited from a major economic boom in the 1990s, there
were no spillover benefits for Jamaica, which still endured
years of anemic growth.

Addiction to Debt
--------------


3. (SBU) The Jamaican economy has been supported by
increasing reliance on debt since the 1970s, which has led
the country to become the fourth most indebted in the world.
The debt-to-GDP ratio is 114 percent, and is expected to
climb to 120 percent before year's end. (NOTE: The rate was
once as high as 212 percent in the 1980s, but declined during
a brief period of economic growth. END NOTE). Until the GOJ
can begin to better collect tax revenues already owed or grow
the business community to create a wider tax base, it will
continue to face budget shortfalls. (NOTE: the GOJ only
collects about 40 percent of the tax revenue it is owed, but
there are some signs of improvement in collections, in part
as a result of assistance provided by the U.S. Mission and
the U.S. Treasury,s Office of Overseas Technical Assistance.
END NOTE).



Debt Spending, Party Is Over
--------------


4. (SBU) The onset of the global economic downturn and an end
to loose credit conditions dried up Jamaica,s supply of debt
financing. The eventual downgrade of the island by
international ratings agencies has further frozen Jamaica,s
access to credit markets. Standard and Poor,s lowered the
country to CCC in August (Reftel A),and Fitch Ratings
warned on August 20 that it will downgrade Jamaica,s rating,
which currently stands as B, with a negative outlook, if the
country cannot secure a borrowing deal with the International
Monetary Fund (IMF). The inability to continue borrowing at
the same pace has forced the GOJ to reluctantly work with
existing revenues and acknowledge its budget shortfalls.

A Good Debtor Gets Tested
--------------


5. (SBU) GOJ has a long history of paying its debt, an
obligation specified as the highest priority in its
Constitution. However, its ability to continue to service
this debt is being tested. The GOJ is seeking an interest
rate reduction from bondholders in exchange for longer term
notes (Reftel C.) Prime Minister Bruce Golding has been
adamant that any move not be perceived as a default or
blemish on Jamaica,s history of paying its debts. Golding's
concern may have restrained him in negotiating aggressively
with bondholders for a concession. The GOJ has no choice but
to quickly secure a deal with the IMF, which will restore
confidence in Jamaica and provide an avenue for the country
to address some of the structural reforms that are long
overdue.

Remittances Down 16 Percent Since January
--------------


6. (SBU) Jamaica is heavily dependant on remittances sent
from the Jamaican Diaspora in the United States (53 percent)
and United Kingston (19 percent). Total remittances for 2008
were USD 2.02 billion and equal to nearly 20 percent of GDP;
it is these funds that help a significant number of Jamaicans
to survive day to day. The money is used to pay for basics
such as food and rent. Since January, remittance inflows to
Jamaica have fallen 16 percent, and the slide is likely to
continue as unemployment remains high in the U.S. and U.K.
markets. The Bank of Jamaica (Central Bank) reported that
inflows fell to USD 854 million from January to June of 2009.
This is down from USD 1 billion for the same period in 2008.
If the trend continues for the year at the same pace,
Jamaica would expect USD 300 million less in revenues. The
likelihood of a jobless recovery in the U.S. remains high,
indicating further declines in remittance inflows are likely,
at least in the near term.

Energy: The Noose That Strangled Bauxite
--------------


7. (SBU) At a price of 31 cents per kilowatt hour, Jamaica
has some of the highest energy rates in the region and has
severely hindered the bauxite sector. Three of the four
plants on the island have closed down and the country has
faced significant job losses in the bauxite sector (Reftel
D). The GOJ appears to have suffered from a culture of risk
aversion; the Energy Ministry was unwilling to choose between
coal and liquefied natural gas (LNG) and therefore did not
make any choice at all to improve energy diversification.
This approach left them completely reliant on petroleum
products for electricity generation, and thus has made energy
costs a binding constraint on economic growth (Reftel E).
Jamaica will have a significant challenge trying to compete
in manufacturing against its more energy rich neighbors. In
2005, JAMALCO bauxite (joint venture between the GOJ and U.S.
firm Alcoa) postponed indefinitely a plan to double capacity
until the GOJ could demonstrate the ability to provide more
affordable energy. In 2008, Bauxite export earnings were USD


1.3 billion. For 2009, bauxite export earnings are expected
to decline to USD 650 million, and the situation would have
been even more dire had world bauxite prices not begun to
recover recently as a result of slightly improved world
demand.

Where Jamaica Should Focus
--------------


8. (SBU) In the energy sector, Jamaica needs to focus on
reducing power consumption, which is far less expensive than
generating new power. There are opportunities to expand wind
and solar energy, but most of these efforts have been very
small-scale. The GOJ needs to implement legislation for more
energy efficient building codes and net billing (or net
metering) to encourage conservation and reduce demand (Reftel
F). Unfortunately, there has been a fair amount of talk on
the subject but little tangible progress. Jamaica enjoys the
benefits of reduced costs for petroleum under the PetroCaribe
agreement with Venezuela, but it has not prepared for the
eventual day when those benefits might be curtailed or lost
completely (Reftel G).

Subjected to the Whims of Oil and Chavez
--------------


9. (SBU) Until the GOJ is able to bring a mix of fuel sources
to the island, whether coal, LNG, or increased use of
renewable energy, it will not be able to break the binding
constraint of high energy costs, and thus will remain subject
to the volatile rise and fall of world oil prices or the
whims of Venezuelan President Hugo Chavez. Oil prices are up
60 percent for the year as of August 3, and Chavez has hinted
at, and then backed away from, making revisions in the terms
of the PetroCaribe agreement (Reftel G). Both of these
trends should raise alarms within the GOJ.

Crime Trending Higher, May Bleed Into Tourism?
-------------- -


10. (SBU) Major crimes are up 20 percent for the first seven
months of the year, with a spike in robbery (up 18 percent),
break-ins (up 79 percent),and larceny (up 127 percent)
(Reftel H). As economic conditions deteriorate, it is
difficult not to attribute this spike in crime to the
economy. Minister of National Security Dwight Nelson claimed
murder is down 10 percent and rape is down 24 percent (Reftel
H),but crime reports in the press would seem to suggest
otherwise. The trend appears to indicate that as economic
conditions worsen, there is the potential for rising violent
crime related to robberies or break-ins. If this sudden
upward trend in crime becomes directed toward tourists,
Jamaica could see a decline in the last pillar of its economy
that has remained robust during the global downturn. Jamaica
also faces exposure to natural disaster risks, particularly
as it enters this year,s hurricane season. Any significant
storm damage could discourage visitors, deprive the island of
much needed hard currency revenues, and result in job losses
in a sector that has, to date, done well.

No Clear Handle on Crime
--------------


11. (C) Despite admitting that crime is a priority in nearly
every public venue, the GOJ still appears to lack a clear and
convincing plan for how it will tackle the island,s violent
crime problem. Minister of National Security Dwight Nelson
has spoken of &crushing the criminal gangs8 within a few
years, but in reality the GOJ has been slow to use some of
the legislative tools at its disposal (Reftel H). For
example, the GOJ has promised aggressive implementation of
the Proceeds of Crime Act, but the Jamaica Constabulary Force
(JCF) continues to rely on an older and less robust
legislative instrument to seize criminal assets. The
Financial Investigative Division (FID) Act awaits passage and
key Anti-Crime bills continue to languish in Parliament.
Meanwhile, concerns about crime and its associated costs on

business operations creates an impediment to investment on
the island. Guard services average USD 7,000 per year and
the cost for installation of electronic access and camera
surveillance averages USD 4,500. Both of these types of
security are present at an overwhelming majority of business
locations, and thus drive up the cost of doing business.

COMMENT AND ANALYSIS
--------------


12. (SBU) Jamaica is seeing some positive signs, in that it
appears to have stabilized the currency and reduced
inflationary fears. However, the island is far from
improving its long-term economic prospects, even if the U.S.
economy begins to see positive growth. Until the JLP-led GOJ
begins to make difficult decisions that will address the
triple intrinsic challenges of high energy costs, high
security costs, and a lack of business diversification,
little economic growth should be expected. The island
appears susceptible to a potentially steep and precipitous
economic downward spiral brought on by issues of crime and
exposure in its energy sector. END COMMENT AND ANALYSIS.
PARNELL