Sep 2016 Financial News

Brexit narrows Jamaica’s path to growth

Sep 16, 2016

Jamaica's economic growth could be lower than projected this year because of increased uncertainty before and after the British voted on June 23 to leave the European Union, referred to as Brexit.

The Bank of Jamaica (BOJ) said in light of the developments during the June quarter and their global implications, its outlook over the next four quarters "is less optimistic than the previous forecast, with the risks to domestic inflation and GDP skewed to the downside".

Against that background, the BOJ has cut its growth projection to 1.5 per cent from 1.9 per cent.

The United Kingdom joined the European Union in 1973 and is the second largest of the 28 members. Germany is the largest.

In its assessment of the implications of Brexit on the Jamaican economy, the BOJ, in its latest monetary policy report, said in 2015 the UK accounted for 14.9 per cent of remittance inflows and 9.3 per cent of visitor arrivals, the second- and third-largest shares, respectively.

Concurrently, goods exports to the UK accounted for 5.2 per cent of total exports, but in general, foreign direct investments from that country to Jamaica have been negligible.

According to the central bank, based on the United Kingdom's trade data as at 2015, the European Union is the country's largest trading partner, accounting for 66.7 per cent of total trade, with exports to and imports from the region estimated at 54.8 per cent and 63.2 per cent, respectively.

"It is expected that, with the Brexit, these shares are likely to fall in a context where the UK is expected to lose the favourable trade relationships from which EU members benefit," it said.

The BOJ's assessment is that the vote for Brexit has several potential implications for the Jamaican economy, given the shares of tourism, remittances and trade with Britain.

Among those it enumerated was that growth could be lower given the expected weakening in global growth, that visitor arrivals may be lower than previously projected, and that oil prices could be lower than anticipated in the context of a possible downward revision to global growth and the expected stronger appreciation of the US dollar.

Remittance fall-off

The central bank said there could also be a fall-off in remittance flows given the likely weakening of the UK labour market, and that imports from that country could increase given the depreciation of the pound sterling against the Jamaica dollar.

However, the BOJ said duty-free access to the European Union is expected to remain, given that the Economic Partnership Agreement was signed between CARICOM and the European Union.

"However, the impact on future trade deals is uncertain since the UK was a key partner in trade negotiations with the EU," the central bank said.

The British vote to register their frustration with the regional integration movement, which had become increasingly uncomfortable given the impact of the global financial crisis, economic challenges with member countries and mass migration, was only a signal of its intentions since the UK has to invoke Article 50 of the Lisbon Treaty to officially leave the European Union.

The BOJ said it is expected that Britain will not invoke Article 50 before December 2016, based on reports from new Prime Minister Theresa May, but there is uncertainty about what will materialise thereafter.

"Protracted uncertainty in financial markets could result in heightened risk aversion in bond markets as well as a possibility that the Federal Reserve could delay a rate increase in the near term," said the Jamaican central bank.

The delay in a United States rate rise would, however, bode well for interest rates in emerging markets such as Jamaica. In addition, it is expected that central banks will take a coordinated approach to calm financial markets in the event of a significant deterioration in market sentiments, the BOJ said.

 

Source:
McPherse Thompson
mcpherse.thompson@gleanerjm.com
Jamaica Gleaner
Friday September 16, 2016

http://jamaica-gleaner.com/article/business/20160916/brexit-narrows-jamaicas-path-growth