Aug 2009 Financial News

Recent events signal positive outlook for medium-term

Aug 03, 2009

It need not be said that economies worldwide face a challenging year. The International Monetary Fund (IMF) in the most recent update to its World Economic Outlook predicted a 1.4 per cent contraction in the global economy for 2009 compared with 2008.

Large, developed economies like the UK and US are slated to decline by 3.8 per cent in 2009, and it is obvious that Jamaica will not be spared from some degree of pain as our biggest trading partners suffer.

At the moment, the most talked about victims of the crisis in Jamaica are probably Aluminum Partners of Jamaica (ALPART) and West Indies Aluminum Company (Windalco), which were forced to shut down production as the global recession caused demand to weaken and world metals prices to fall accordingly. Jamaica's total bauxite production slowed to 510,000 tonnes in April following on 1,224,000 tonnes produced in April 2008.

Other major sources of income for the country like tourism and remittances have also fallen. Tourist arrivals decreased 13.6 per cent year-over-year in February, and remittance inflows, which accounted for a staggering 13.8 per cent of GDP in 2008, fell 16.7 per cent for the five-month period through May compared with inflows for the corresponding period in 2008.

However, while this series of events doesn't paint a pretty outlook, we have to view it in the context that all economies are struggling right now. That said, we cannot allow the gloom to cloud the potential for a more prosperous 2009-2010 and longer-term future. In fact, there is much to be optimistic about following the events of recent weeks.

Firstly, Jamaica's largest commercial bank in terms of assets, National Commercial Bank of Jamaica (NCBJ) kicked off another earnings season, posting strong results for the nine-month period which ended June 30, (9M 2008/2009). For 9M 2008/2009, NCBJ saw earnings per share (EPS) rise 8.76 per cent to $2.98, compared with EPS of $2.74 for the corresponding period last year. The results were propelled by a sharp increase in the company's core income as the growth in its loan portfolio (along with the high interest rate environment) allowed it to secure a 32.63 per cent rise in interest income from loans. For the quarter ending June 30, EPS rose 20.88 per cent to $1.10 year-over-year.

Then, the Bank of Jamaica (BOJ) gave promising news last week, and again yesterday when it issued press releases stating it would reduce interest rates applicable to its open market instruments. The combined reductions amount to a total of 250 basis points (2.5 per cent). The BOJ cited its intention to secure a stand-by arrangement with the IMF, as well as "positive trends in key monetary policy indicators" as the reasons behind the decision.

One such indicator is the rate of inflation. The BOJ's inflation data show that the 12-month point-to-point inflation rate as of June 2009 had fallen 27.42 per cent since the end of the 2008/2009 fiscal year. The BOJ also said it expects inflation for the 2009/2010 fiscal year to fall below the current target of 11 - 14 per cent. The chief factor influencing this positive movement is the apparent stability of the Jamaican dollar. Following a 21 per cent devaluation of our local currency against the US dollar between October 2008 and March 2009, the dollar has traded between $88.78 and $89.12 over the past four months. This has allowed the central bank to loosen its grip on the money supply slightly. Hopefully, continued easing will help stimulate growth among small businesses and the economy as a whole.

Without question, the downward trend in interest rates will have a positive effect on Jamaica's economy, with a significant portion of government debt held locally. It will also provide a much-needed boost to the local stock market, which has been depressed since world markets slid with the collapse of Lehman Brothers last year. The value of the JSE Main Index has fallen 27.84 per cent to 79,304.49 points (Friday's close) over the past 52 weeks. However, as interest rates fall, investors are expected to return to stocks after previously shifting to fixed income investments which were more attractive because of the high interest rate environment, as well as their lower level of risk.

It is also important to take into account that while the IMF predicted a global contraction for the current year, its outlook for 2009/2010 actually improved compared with the forecast it released in April. In April, the IMF predicted global growth for 2009-2010 that was half a percentage point lower than the July forecast. The IMF said financial conditions improved more than it anticipated owing to stimulus efforts, and it now expects to see global growth of 2.5 per cent in 2010. The US, which accounts for approximately 69 per cent of tourist arrivals, is expected to see its economy grow marginally, by 0.6 per cent, which should have a positive impact on Jamaica's tourism industry. The mining sector will also reap benefits as a result of the eventual rebound of the automobile and construction industries.

While a lot has happened to discourage confidence, we cannot allow morose attitudes to become the hurdle to our success. The IMF has become more optimistic, maybe it is in our best interest to follow its lead.

Shari DaCosta is a Research Analyst at Stocks & Securities Ltd. You can contact her at sdacosta@sslinvest.com.


Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20090801T210000-0500_156538_OBS_RECENT_EVENTS_SIGNAL_POSITIVE_OUTLOOK_FOR_MEDIUM_TERM_.asp
Article by: Shari DaCosta
Date published: Sunday, August 02, 2009