Jun 2006 Financial News

Jamaica's Economy performed well in the March quarter but there may be trouble ahead

Jun 02, 2006

With inflation declining and continued growth being registered, Jamaica's economic prospects look promising but the Governor of the Bank of Jamaica Derick Latibeaudiere is still calling for monetary prudence and is proceeding cautiously.

Reviewing the economy's performance in the March quarter at a press briefing held at the Bank of Jamaica's Nethersole Place headquarters earlier this week, the Governor declared that core inflation was 0.8 for the quarter under review. This is below the seasonal average of 1.1 per cent.

Falling inflation

"Pushed largely by reversals in the prices of several domestic agricultural products, headline inflation for the March quarter of this year fell much faster than the Central Bank had anticipated and at 0.1 per cent was the lowest quarterly results in three years," said Latibeaudiere.
He pointed to improvements in foreign currency inflows mainly from tourism and remittances as well as a rebound in net private capital inflows and the stability of the foreign exchange market for the quarter under review.

NIR of US$2 billion

Net International Reserves (NIR) stood at US$2.078 billion at the end of March, a decline of some US$9 million for the quarter. Reserves came to US$2.37 billion representing 20.2 weeks of goods and services.

Shorter tenors

"In April we removed the longer term instruments namely the 270 and 365 day tenors. What we are trying to do is return to a more conventional central banking position where the instruments that we operate are shorter termed. This allows us to create monetary policy as we see fit to deal with circumstances and then get out of the market," explained the Governor of the central bank.

And lurking in the shadows..

Although there is some improvement in the macroeconomic fundamentals, events may conspire to undermine this progress. This week saw oil prices rising to US$72 a barrel. Last year Jamaica spent US$1 billion for its oil bill. If prices continue to escalate it will pay considerably more than last year for its fuel, which means that inflation, contained in the March quarter will begin to escalate.

Then there is the prospect of yet another damaging hurricane season which could cost the country somewhere in the region of J$40 billion thereby sending expenditure targets out of whack and further setting back the progress made in the March quarter.

The Devil's trident

The third prong on this devil's trident is a fall-out in the United States economy which sees interest rates continually rising and the dollar further weakening against other currencies.
"The impact of the US economy on the Jamaican economy can never be underestimated. As interest rates go up abroad, the scope for our own reduction in interest rates diminishes because it causes some hesitation among local investors but let us not forget that the United States still expects to have strong growth this year."

Doomsday scenario

"We have contemplated this doomsday scenario where all these circumstances come at us at the same time but one can never underestimate the resilience of the Jamaican economy and its capacity to deal with adversity.
Even if we had oil prices going to US$80 a barrel and a particularly damaging hurricane season, our reserve cushion could service the country's debt. One of the benefits of having a comfortable reserve cushion of over US$2 billion is that we are able to service the economy's debt.

Surviving the maelstrom

"People talk about the cost of accumulating these reserves but you pay a far higher price when you don't accumulate them because when you don't have such reserves you pay more to borrow and you can't assure people that you can service your debt. So at the end of the year we would have had higher inflation and less reserves but we would have survived. That is why I have stressed a conservative monetary stance at this point in time to ensure that when adversity comes we can survive," explained the governor.

A look ahead

Derick Latibeaudiere was upbeat about the economy's prospects for the June quarter. He is expecting to see relatively strong growth in real GDP together with lower inflation and stable financial markets all backed up by adequate reserves.

"Looking ahead, growth in the economy will be driven by expansion in agriculture, mining services and tourism. The domestic economy is expected to benefit from continued world growth, which should boost demand for Jamaica's exports, particularly alumina production and tourism service," forecasted the Governor of the Bank of Jamaica.

Al Edwards
The Jamaica Observer
Friday, 2nd June, 2006.
http://www.jamaicaobserver.com/magazines/Business/html/20060602T010000-0500_105932_OBS_JA_S_ECONOMY_PERFORMED_WELL_IN_THE_MARCH_QUARTER_BUT_THERE_MAY_BE_TROUBLE_AHEAD.asp