Mar 2007 Financial News

A good period for the Jamaican economy

Mar 16, 2007

The latest release from the Statistical Institute of Jamaica shows that inflation for the month of January was 0.3%, the highest value for this month since January 2004. This increase is a result of a 0.4% increase in the 'Food and Drink' group, which is heavily weighted in the Consumer Price Index. The month's outcome was also affected by a 0.6% increase in the group 'Healthcare and Personal expenses'.

However, the inflation rate for the last 12 months continues to be low at 6.0%, 6.9 percentage points lower than that recorded in the previous year.

The central bank, Bank of Jamaica (BOJ), anticipates a slight increase in inflation in the first quarter of 2007. This estimation could be based on the continued rise in grain prices that has been seen worldwide, return of volatility to global oil prices, and prolonged droughts that plague certain sections of the island.

Relative instability in the foreign exchange market should end shortly.

During February 2007, the Jamaican dollar opened and closed trading at J$67.16 and J$67.55, respectively, while reaching a max of J$67.68 on the 13th and a minimum of J$67.52 on the 5th. The instability in the foreign exchange market during this time forced the BOJ to intervene frequently. The BOJ has blamed this instability on demand pressures, which were reduced by selling foreign currency to the market and by offering Jamaican dollar denominated instruments to "mop up" excess liquidity.

However, the BOJ's attempts to reduce liquidity in the past few months has caused the Net International Reserves for January 2007 to fall to US$2,288.3m, a decrease of US$29.2m when compared to December 2006, which represents 17.86 weeks of goods and services imports reserves.

For the current quarter, the BOJ is anticipating a return of relative stability to the FX markets as a result of increases in foreign currency inflows from tourism, the private sector and other exports and a decline in FX outflows due to reduced import payments and outward remittances.

Cricket World Cup, tourism's only hope?
During January 2007, Jamaica saw 129,756 stopover arrivals and 143,728 cruise passenger arrivals. In total, the number of visitors to the island increased by 3.21%. While Minister of Tourism and Entertainment Aloun Assamba does not seem perturbed by this marginal increase, Opposition Spokesman on Tourism Edmund Bartlett described this winter tourism season as "weak and off-target".

With the return of Cancun to the Caribbean and Central American resort destination market, a warmer than normal winter in the US and the Western Hemisphere Travel Initiative which requires US citizens to have a passport in order to travel, US arrivals to the island decreased by 9.6% when compared to January 2006.

In addition, a 50% decline in the island's spring break market has also been realised. Although there has been growth in the number of local hotel rooms, significant foreign direct investment from Spain and increased tourist arrivals to the island due to the Cricket World Cup, one has to wonder: what can be done to preserve the interest of visitors and foreign investors?

Significant growth in many sectors points to continued improvements in productivity.
Between October and December 2006, real GDP growth was estimated to be 2.7 per cent when compared to the corresponding period in 2005. This growth was mainly attributable to:

The Agricultural sector, which experienced favourable weather conditions and increases in banana, cocoa and coffee production.

The Mining and Quarrying sector, which saw growth in bauxite production as a result of increased production capacity.

The Construction and Installation Industry, which has benefited from the upsurge in hotel construction, preparations for the Cricket World Cup and expansions at the Port of Kingston and the two international airports.
The Services sector, which saw large increases in visitor arrivals during that period.

The Planning Institute of Jamaica has predicted that GDP growth will be 2.9 per cent during the first three months of 2007 (when compared to the same period in 2006) due to continued growth in the Services, Construction, Mining and Agricultural sectors.

Euro Bonds continue to outperform.
The performance of Jamaican bonds for the month of February was favourable. Credit spreads continue to decline due to the rally in the USD Treasuries. The Jamaican 2036 have been directly linked to 30-year treasuries in terms of price movements over the past few months. Credit spreads on the 30-year bonds have been reduced to 3.10% versus 3.50% last year. The high volatility of the 2036 bond is largely attributable to the fact that mainly overseas brokers hold it. Conversely, the 2022's remained stable; held mainly by local brokers due to its relatively good tax-adjusted yield, consequently, it is not heavily traded.

The Jamaican bond overall performance may be described as outperform. This is primarily attributed to its underlying commitment to fiscal discipline and market-friendly policies towards debt servicing. Jamaican bond yields continue to be high relative to other single B sovereigns. The first quarter of this year is expected to be strong due to anticipated strong performance of the tourism sector for 2007. Nonetheless, activities by local brokers in February curtailed towards the end of the month, this was due to rapid increase in prices over a short time span.

Central Government stays out of local bond market.
The liquidity levels within the J$ market were extremely high in February, which was attributed to the maturities of a number of instruments. The Ministry of Finance (MOF) had three redemptions totaling J$6.9b, with outflows from the central bank (OMO maturities) totaling J$35.4b. With no new offers from the MOF for February, the J$ exchange rate was affected, consequently, we saw several interventions by BOJ within the FX market. In addition, BOJ offered several primary and secondary market instruments to the market to take care of the excess liquidity. MOF has stated its intention not to issue any new bonds for the remainder of the quarter as they have raised sufficient amounts from its fund-raising activities during the previous quarter to finance its budgetary needs for the period.

With most variable rate bonds having a yield of 1.5% above the three or six month weighted average T-Bill yield, brokers had less of a preference for fixed rate bonds given the flattening of the yield curve in recent months. Furthermore, trading in these fixed rate bonds was dampened with BOJ selling fixed rate instruments at yields above market rates. In February's T-bill auction, the three and six-month instruments yielded 11.78% and 11.94%, respectively, a fall of one to five bps when compared to the previous month. Yields on the fixed rate instruments ranged from 12.25% for two-year instruments to 13.50% for 20-year bonds.

Strong performance expected from underdogs.
In February 2007, the JSE Market Index declined by 8.62% to close at 92,949.43 points. The JSE Select Index declined by 4.63% to close at 2,722.33 points and the JSE All Jamaican Composite declined by 4.81% to close at 99,258.32 points. Market volume totalled approximately 161.70 million units valued at about J$2.05 billion.

The volume leaders for the month of February were: Cable and Wireless Jamaica Limited at 33.79%, followed by National Commercial Bank of Jamaica Limited and Supreme Ventures Limited at 10.02% and 8.25%, respectively.

Market activity resulted from thirty-nine stocks trading. Nine stocks advanced, with Ciboney Group (50.00%), Salada Foods (12.68%) and Montego Freeport (11.11%) as the top performers. Twenty-seven stocks declined, with Guardian Holdings Limited (-23.79%), Mayberry Investments Limited (-19.71%) and Jamaica Money Market Brokers Limited (-19.20%) as the biggest losers. While three stocks traded firm: Caribbean Metal Products Limited, Kingston Wharves Limited and Trinidad Cement Limited.


Source:
The Jamaica Observer
Friday 16th March, 2007

http://www.jamaicaobserver.com/magazines/Business/html/20070315T210000-0500_120386_OBS_A_GOOD_PERIOD_FOR_THE_JAMAICAN_ECONOMY.asp