Aug 2008 Financial News

BOJ governor says Jamaica weathering global shocks, but lowers growth forecast - Recasts inflation at 15-17%

Aug 22, 2008

The central bank has lowered its forecast for growth and raised expectations for inflation as government economic analysts coalesce around the position that the global credit crisis and higher commodity prices have hurt, though not devastate, the Jamaican economy.

"For the fiscal year 2008/09, the bank is now forecasting that the domestic economy will grow in the range of 1.2 per cent to 2.2 per cent," Derick Latibeaudiere, the governor of the Bank of Jamaica (BOJ) told journalists this week. "That is a downward trend from our previous forecast."

At the same time, Latibeaudiere set his new inflation target at between 15 and 17 per cent, up from the 11.5 per cent to 14.5 at the end of the March quarter.

He warned of continued BOJ vigilance against inflation, defended the bank's half-point rise of signal rates in June and was confident that the central bank was getting its policy mix right to achieve twin challenge of keeping inflation at bay and maintaining a stable but competitive currency.

Right balance

"The balance is right for the moment," Latibeaudiere said, adding that the central bank was operating in the context of a volatile global environment and therefore needed "to keep things under watch".

"The real problem is that the global economy has not been kind to us," he said.

Even after the first quarter, when there was already growing evidence of the fall-out from the sub-prime crisis and well as the spiral in the price of oil and other commodities, the central bank still held out expectations of growth in the range of three per cent.

But this week, though, Latibeaudiere said: "The downward revision from our previous forecast is due to the slowdown in global growth."

No growth projection

The central bank's latest analyses of the effect of global conditions on Jamaica is largely congruent with that of the Planning Institute of Jamaica (PIOJ), which issued its own second quarter review this week, but without a projection for growth for the period going forward.

In his review on Tuesday, PIOJ head, Dr Wesley Hughes said his agency had estimated a 0.2 per cent decline in the economy in the April to June period, compared to same period last year, a figure yet to be confirmed by Statin, the agency that measures economic output. Hughes, like Latibeaudiere, however expects the economy to grow in the current quarter, ending September 30.

More robust

For Hughes, GDP growth in the current quarter should be as high as 1.3 per cent, compared to the corresponding period in 2007. Latibeaudiere didn't give a figure, although the central bank governor said a "more robust" performance, was predicated largely on recovery in the mining, manufacturing and electricity and water sectors, which performed sluggishly in the second quarter.

But the expected muted recovery is on the assumption that commodities, including oil, do not head into another upward price spiral that earlier caused, according to Latibeaudiere, terms of trade "to move against us".

The upshot of rising commodity prices was inflation pressures in Jamaica, reflected in the rise in the consumer price index, and a current account deficit that is now running at around 15 per cent of GDP - a rate at which the central bank feels it can be held.

"But a lot of things are outside of our control ..." Latibeaudiere stressed.

Above target

Nonetheless, the BOJ at the end of July was able to maintain net reserves of over US$2.24 billion, more than US$200 million above target, even after interventions in the foreign exchange market in June to meet demand pressures, when there was a 1.1 per cent in the weighted average selling rate of the Jamaican currency against the greenback. The market was eased to some degree in July/August by inflows from payments to Jamaicans who held stocks in Lascelles deMercado that was acquired by Angostura Ltd.

"The bank is anticipating that later in the quarter there will be increased demand for foreign exchange arising from payments for merchandising imports," said Latibeaudiere. The need to meet dividend and coupon payments could also increase demand for foreign exchange.

The central bank, however, does not expect that this will create any disequilibrium in the market, given the expected flow from hard currency earnings and remittances.

Indeed, remittance, with inflows of US$457 million to March, competes with tourism as Jamaica's major earner of foreign exchange. But there have been fears that with soft economies in the United States and Britain inflows would slow down. That, apparently, has not been happening.

"Remittances have been doing very well, at about 10 to 11 per cent above last year," said Latibeaudiere.

He expects the trend to hold for the rest of the year.


Source:
business@gleanerjm.com
Jamaica Gleaner
Friday August 22, 2008

http://www.jamaica-gleaner.com/gleaner/20080822/business/business4.html