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Nov 2012 Financial News

Major devaluation unlikely requirement as IMF deal nears

Nov 14, 2012

AFTER months of waiting, it now appears that an IMF agreement is likely soon, and that this will not include a restructuring of the external debt or a major devaluation.

The rise in business and consumer confidence recorded in yesterday's Jamaica Chamber of Commerce (JCC) business and consumer confidence surveys is explained not by current conditions -- which remain abysmal -- but according to noted pollster Don Anderson, a combination of "people expecting the economy to get better because things had got so bad", and their expectation that the IMF agreement will soon be completed, and "it can't be so bad because it is taking so long".

This particular time around, both businesses and consumers have similar views that may turn out to be fairly accurate.

The slight uptick in the critical variable of confidence was potentially threatened last Thursday when international news organisation Bloomberg wrote a piece named "Jamaica Bond yields jump to nine-month high after Belize default". The piece attracted some attention in the local and international press, particularly local radio shows. The article was a faint echo of the much more damaging article earlier this year comparing Jamaica to Greece, based on a misinterpretation of some comments by our Prime Minister Portia Simpson Miller.

The article correctly referred to a recent softening of Jamaica's international bond prices, linking Jamaica to the defaults of Belize and Grenada. The latter two cases are however not relevant to Jamaica (neither is Greece for different reasons), as the Belize default reflects an unwillingness to pay, whilst Grenada's non-diversified economy has a true inability to repay.

Jamaica has a very strong willingness to pay, and a far greater ability to repay than Grenada. Most importantly, Jamaica is a totally different case than Belize, where the only bank that invested in external bonds did so on the basis of a side deal with a former government to make them whole. In Jamaica's case, it makes no sense to restructure the overseas debt when almost all of it is owned by Jamaican's, either as institutions or individuals.

This truth has been revealed once again as the new round of debt sustainability analysis required by the IMF draws to a close. Unlike in Europe, Jamaica does not appear to have any international institution or major country willing to put its balance sheet behind Jamaica at this time, so we are left with completing a conventional IMF agreement, progress on which now appears to be finally accelerating.

The first thing to note is that for all practical purposes, Jamaica is simply extending the previous agreement that ended in May, albeit under slightly worse economic conditions. The most likely scenario is that the IMF simply lends us the rest of the money originally approved, say US$400 million, over a much longer time period, say another four years. Indeed, in view of Jamaica's obvious economic problems, it was a mystery why the last Government chose such a short time period of 27 months for its US$1.2-billion IMF agreement. The truth is that even the expected new four-year agreement may be too short.

Last week, in a move that did not seem to get much media attention, the long-awaited white paper on public sector pension reform was tabled in Parliament, the net effect of which is to cap the amount of money in dollar terms that public sector pensions cost the government, thus meeting one of the main IMF requirements. Wage negotiations continue, but the best guess is that a relatively small pool of money has been identified for public sector wage increases over the next few years, in the range of one to two per cent per annum, the cost of which would have to be offset to some degree by increases in public sector wage productivity, however achieved. The announcement of progress on these protracted negotiations should be expected very soon.

There has been much concern over the last few months about whether the IMF would require as a condition of an agreement a large devaluation of the Jamaican dollar, either actively or passively, but this now appears unlikely for a number of reasons.

The first reason is that the IMF must recognise that a new public sector wage deal will require single-digit inflation, which happily coincides with the Bank of Jamaica's governor's new forecast of inflation for the fiscal year of between 7.5 and 9.5 per cent.

The concern has also been that the continuing sharp drop in net international reserves, to US$1.13 billion at the end of October, would mean that the Bank of Jamaica would run out of usable reserves before the signing of an IMF agreement, leading to a major devaluation and higher inflation.

This is actually extremely unlikely, as gross international reserves, which include almost all of the nearly US$835 million we still owe the IMF, are just under US$2 billion. Even though the IMF programme ended in May, Jamaica still has several years to pay back the money (the IMF liability is treated as current due to international convention, even though it is actually a much longer-term liability).

Whilst it is disappointing that the white paper on the final key IMF requirement, tax reform, has not yet been placed in Parliament for discussion (and particularly that there has been no further engagement of key stakeholders since well before the budget), it is expected to be released within the next two weeks. In any case, tax reform is a long-term process, and the IMF will fully understand that it requires the creation of a proper consensus to be fully effective.

The IMF letter of intent is now almost ready, and even if IMF "prior actions" were to delay the final board approval and signing of the agreement into next year, this should not disrupt confidence further once it is understood to be a technicality.

Jamaica Observer
Wednesday November 14, 2012