Identifier
Created
Classification
Origin
10KINGSTON48
2010-01-14 14:11:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kingston
Cable title:  

JAMAICA: FISCAL CRISIS THREATENS MONETARY STABILITY

Tags:  ECON ETRD ENRG EFIN EINV PREL PINR SOCI TRSY OPIC 
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VZCZCXYZ0029
OO RUEHWEB

DE RUEHKG #0048/01 0141417
ZNR UUUUU ZZH
O 141411Z JAN 10
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0538
INFO EC CARICOM COLLECTIVE IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUEHLO/AMEMBASSY LONDON IMMEDIATE 0139
RUEHOT/AMEMBASSY OTTAWA IMMEDIATE
UNCLAS KINGSTON 000048 

SENSITIVE
SIPDIS
STATE FOR WHA/CAR (VDEPIRRO) (WSMITH) (JMACK-WILSON)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/IFD/ODF (MSIEMER)
EEB/ESC/IEC (GGRIFFIN)
EEB/ESC/IEC/EPC (MMCMANUS)
EEB/TRA (VLIMAYE-DAVIS)
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: N/A
TAGS: ECON ETRD ENRG EFIN EINV PREL PINR SOCI TRSY OPIC
IBRD, IMF, XL, JM
SUBJECT: JAMAICA: FISCAL CRISIS THREATENS MONETARY STABILITY

REF: KINGSTON 735; KINGSTON 914; KINGSTON 956; KINGSTON 737

Summary and Analysis

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

UNCLAS KINGSTON 000048

SENSITIVE
SIPDIS
STATE FOR WHA/CAR (VDEPIRRO) (WSMITH) (JMACK-WILSON)
WHA/EPSC (MROONEY) (FCORNEILLE)
EEB/IFD/ODF (MSIEMER)
EEB/ESC/IEC (GGRIFFIN)
EEB/ESC/IEC/EPC (MMCMANUS)
EEB/TRA (VLIMAYE-DAVIS)
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: N/A
TAGS: ECON ETRD ENRG EFIN EINV PREL PINR SOCI TRSY OPIC
IBRD, IMF, XL, JM
SUBJECT: JAMAICA: FISCAL CRISIS THREATENS MONETARY STABILITY

REF: KINGSTON 735; KINGSTON 914; KINGSTON 956; KINGSTON 737

Summary and Analysis

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


1. (SBU) Jamaica's fiscal crisis is beginning to threaten monetary
stability, with the Bank of Jamaica (BOJ) (central bank) forced to
extend direct credit to the Government of Jamaica (GOJ) as well as
purchase debt instruments shunned by the market. The BOJ
accommodation has become necessary because of the significant
decline in revenues as well as the uncertainty associated with the
drawn out International Monetary Fund (IMF) negotiations for a
Standby-by Agreement and the likely impact of a liability
management program (Reftel A). Declining confidence combined with
recent rate cuts also have prompted investors to hold funds at the
BOJ on short-term deposits at low rates of interest. But the BOJ
action has serious implications for price stability, as it could
fuel inflation and inflationary expectations. With investors
relatively liquid and losing confidence by the day, there also
could be a run on the currency, which has its own monetary
implications. Against this background, the urgency of an IMF
Stand-by Agreement cannot be overstated. End Summary and Analysis.

Fiscal Crisis Deepens - New BOJ Leadership

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


2. (SBU) The fiscal crunch facing Jamaica since the closure of the

international capital markets continues unabated. The fiscal
deficit for the eight month period to November was USD 980 million,
USD 167 million more than targeted. At this level, the fiscal
deficit was just below the USD 1.1 billion projected for the entire
fiscal year and was twice the amount generated during the same
period last year. This highlights the worsening fiscal dynamics
facing the cash strapped economy, particularly since the beginning
of 2009. The stagnation in revenue collections remains the
underlying reason for the deterioration in the fiscal position.
Revenues and grants were USD 250 million lower than projected,
largely because of the falloff in consumption taxes. This
underperformance in revenues is not surprising, given the sluggish
economic conditions. The almost USD 2 billion in new taxes over the
last five years has led to increased tax evasion, thus diminishing
expected returns. The falloff in revenues and higher than expected
interest costs forced the GOJ to slash programs and capital
spending by USD 130 million. These challenges also will test the
BOJ's new leadership: Brian Wynter assumed the position of BOJ
Governor on December 1, 2009, replacing Derick Latibeaudiere
(Reftel B).

Investor Confidence Wanes

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


3. (SBU) As revenues continued to underperform, the GOJ was forced
to tap the domestic capital market funds to finance its spending.
However, this occurred at the same time the central bank reduced
benchmark rates by 200 basis points. The BOJ predicated its
decision on: the positive trends in inflation; balance of payments;
the exchange rate; and the economic program being negotiated with
the IMF. The government has said this program was underpinned by a
package of policy measures geared towards fiscal and debt
sustainability which is expected to lay the foundation for
stability and growth. The rate reduction, combined with the
imposition of a USD 250 million tax-package as well as the
uncertainty associated with the timing of an IMF Stand-by Agreement
contributed to a further decline in confidence; investors shunned
two securities on offer from the government.






Central Bank Turns on Printing Press

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


4. (SBU) This forced the GOJ to tap the BOJ, which turned on the
printing press to satisfy the credit appetite of its largest
client. During November, the bank extended credit in the amount of
USD 57 Million to the GOJ, of which only USD 28 million was repaid
in December. With the GOJ strapped for cash, the remaining USD 29
million had to be converted to securities. But things took a turn
for the worse in December; with revenues declining at an increasing
rate, the GOJ was forced to seek even more loans from the domestic
capital markets. The GOJ offered two instruments amounting to USD
212 million, of which only USD 12 million was taken up by the
public. With the market shunning the offers, the bank was forced to
prop up the government by purchasing the remaining USD 200 million.



5. (SBU) In a bid to stave off criticisms, the BOJ argued that the
extension of the credit coincided with a period of heightened
uncertainty among investors surrounding the terms of an IMF
agreement and the potential impact of the anticipated debt
management initiatives. The GOJ also held special meetings with
major bankers on January 10 and January 11, seeking a voluntary
agreement on lowering interest rates on government paper. Thus far,
there is no indication of significant capital flight. In fact,
investors have been holding their funds at the BOJ as overnight and
short-term deposits, suggesting they were uncomfortable with the
prevailing rates of interest on offer, given the increasing levels
of risk. The moving target for an IMF agreement is continuing to
erode the little confidence remaining in the market. (NOTE: In a
televised address on January 13, Prime Minister Bruce Golding
presented the GOJ's proposal, negotiated with the IMF, for a debt
swap arrangement with domestic creditors. The Bank of Jamaica was
expected to explain the program in more detail in a press
conference on January 14. End Note).


Comment

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


6. (SBU) The BOJ has been quick to point out that the practice of
providing credit to the GOJ is a normal part of its operations.
However, this new money, which influences demand, is bound to drive
core inflation the longer it remains in circulation. The fact that
increasingly skittish investors are holding significant amounts of
funds at the BOJ at relatively low rates of interest also risks a
run on the currency the longer current conditions prevail. In
addition to the inflation risk, a run on the currency would also
have serious implications for the government's interest rate
reduction policy. But the BOJ action points to the even larger
unsustainable fiscal and debt problems which are now threatening
monetary stability. As debt and wage related expenditures are
mounting, the country is running out of the cash needed to finance
its day-to-day operations, thus further highlighting the urgency of
an IMF Stand-by Agreement. End Comment.
Parnell