Nov 2010 Financial News

BOJ downgrades growth prospects

Nov 12, 2010

The Jamaican economy has been thrown into a tail-spin by several days of bad weather that affected the island in late September, with the country's central bank this week unveiling a litany of negative economic prognostications, which have replaced its previous, more optimistic fore-cast for fiscal indicators such as GDP growth and shrinking inflation.

The Bank of Jamaica (BOJ), in its latest quarterly monetary report presented Wednesday, confirmed expectations that Tropical Storm Nicole had slammed right into the country's economic programme, but not badly enough to cause the Government to fail its third quarterly review under the existing International Monetary Fund (IMF) standby loan agreement.

The test will be passed, central bank Governor Brian Wynter said.

Insofar as the economic dis-location is concerned, not only is the much-heralded 0.6 per cent growth projection for the current fiscal year now out the window and replaced, the BOJ said, by the forecast of zero growth or a 0.1 per cent contraction, but headline inflation for the quarter to end in December is now expected to jump by between 2 and 3 per cent.

The BOJ, however, expects inflation for the fiscal year to remain stable.

For the December quarter, the BOJ governor said, real GDP will either marginally contract or expand within the range of -0.5 to 0.5 per cent.

TS Nicole brought torrential rains for four days in late September causing several deaths as well as damage to the island's road network, buildings, as well as crops and livestock, which the Government has so far estimated at J$11.7 billion.

Following the storm, seeking fiscal room to find the recon-struction money, the Treasury, led by Finance Minister Audley Shaw, had rushed to lobby multilaterals, including the IMF. But from all indications, the Government will, in the short term, have to further choke off spending to cough up the required funds, which includes diverting funds from a Chinese-funded road project.

"The domestic economy is currently being forecast to contract marginally in the range of 0 to -1 per cent for the fiscal year 2010/11," Wynter said Wednesday. That forecast, if it holds, means Jamaica will remain recession bound for a third year.

In the December quarter, most industries are projected to contract, with the exceptions being mining and quarrying, and hotels and restaurants.

More needed for economy

The fiscal authorities know it will take more than those two sectors growing to right the economy.

"The growth of the economy, as in the past, is going to be multisectoral in the short to medium term if the economy starts to recover in a broad-based way," a then upbeat top finance ministry technocrat, Dr Wesley Hughes, had told the Financial Gleaner in early September.

At that time, too, the senior director of the debt-management unit of the finance ministry had proclaimed that the financial authorities would reach their 120 per cent debt-to-GDP target programmed for the fiscal year.

While no information has yet emerged on the likely implications for the debt outlook, the monetary authority has reported that there will be an acceleration in the pace of inflation, with price increases expected for select agricultural commodities. In addition, the recent increases in the price of oil, corn and wheat on the international market are expected to continue into the next quarter.

But the resulting domestic inflationary pressure, the central bank governor noted, attempting to put a positive spin on a dreary economic picture, could be partly offset by food-import plans.

"The Government has announced plans to import certain food items, which could partly mitigate some of the increase," said Wynter.

He also took comfort from the fact that the projected price-index increase notwithstanding, the inflation out-turn for the September quarter of 1.3 per cent was below the forecasted range of 1.5 per cent and 2.5 per cent.

Other worrying concerns

This performance, the central bank said, is well below the 2.6 per cent recorded for the June 2010 quarter and the 3.8 per cent average for the previous five September quarters.

While the bad weather has already dampened the Govern-ment's enthusiasm for a quick turnaround in the economy, other worrying concerns still linger, according to the central bank.

These include a greater-than-anticipated economic decline on the back of a sharper-than-expected drop in real income, the possibility of more adverse weather con-ditions and still more increases in international commodity prices.

"The bank will continue to be cautious in easing its monetary policy stance," Wynter said, in the face of the lingering risks.

But the BOJ chief also reported some positive developments for the September quarter, including lower interest rates and a relatively stable foreign exchange market with marginal depreciation in the currency of 0.27 per cent.

He said, however, that the market experienced some demand pressures, resulting in the bank selling a net of US$20 million into the market during the quarter.

At the end of September, the net international reserves stood at US$1.77 billion, with gross reserves at US$2.79 billion, representing 20.5 weeks of imported goods and services.

Continued decline in market-determined interest rates was also reflected during the quarter.

For the September quarter, real sector activity remained weak, the BOJ said, with GDP contracting in the range of 0-1 per cent, with sharper-than-expected declines in areas such as agriculture, forestry and fishing, manufacture, as well as financing and insurance services.

The BOJ Quarterly Monetary Report places the half-year fiscal deficit at 3.6 per cent at September. The fiscal-year target is 6.5 per cent.


Source:
Sabrina Gordon, Business Reporter
sabrina.gordon@gleanerjm.com
Jamaica Gleaner
Friday November 12, 2010

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