Dec 2007 Financial News

IMF cautiously optimistic about growth for Jamaica, region - US slowdown could truncate GDP gains

Dec 12, 2007

The International Monetary Fund (IMF) is now projecting that Jamaica's economy will grow only by slight 1.4 per cent in 2007, making it the worst performer in the hemisphere - outdone even by poor Haiti whose baseline growth is estimated at 3.2 per cent.

Trinidad, the Caribbean's most robust economy, also takes a big plunge from 12 per cent to an estimated 6 per cent.

Hurricane fallout

Jamaica's misfortunes have been linked to fallout from Hurricane Dean, impaired infrastructure from several weeks of rain post-summer, as well as high commodity and oil prices.

Still, the Fund expects the island and its 2.7 million population to regain some ground in 2008, and has projected a small uptick to 2 per cent growth in GDP - placing Jamaica among seven Caribbean economies that are expected to better their performance in the year ahead.

Some of the Fund's optimism appears linked to the pro-growth focus of the Bruce Golding administration.

As a region, the Caribbean is expected to experience moderate economic decline in the coming year below 5 per cent - down from 2007's projected 5.5 per cent - while the broader Latin American region will likely dip from five per cent to 4.3 per cent in 2008, according to newly released projections in the World Economic Report 2007.

The IMF has linked the hemispheric downturn in part to loosened fiscal controls.

"It is worrisome that strong fiscal consolidation seems to be waning," said Sanjaya Panth, chief of the Caribbean Division, IMF Western Hempishere Department at an economic seminar at the Bank of Jamaica in Kingston, Friday. "We see primary surpluses weakening."


But the IMF technocrats also signalled continuing worry about the likelihood of a United States recession, broadly defined as two consecutive quarters of negative growth resulting from extended declines in business activity, saying if it were to happen, there was a downside risk that regional economies would be even less robust than projected for the year ahead.

"If the U.S. suffers recession, growth in Latin America would be about 2.5 per cent," said Marcus Rodlauer, deputy director of the IMF Western Hemisphere Department.

That outcome was estimated at 25 per cent probability, but there is also a 10 per cent chance of growth edging even closer to zero, Rodlauer said.

The gloom surrounding the U.S. is all linked to expectations of continued fallout from the subprime crisis.

The problematic subprime mortgages now account for 12 per cent of all outstanding US mortgages and, by IMF estimates, are valued at US$2.2 trillion or 13 per cent of US GDP.

Part of the loans' expected future danger is the reset component.

Subprime mortgages were quoted initially at cheap rates, at or around 4 per cent, but priced to adjust upwards. Another half a billion of those mortgages are expected to undergo their first adjustment in the coming year.

But loan recipients have not been able to service home loans at the higher rates, and their problems eventual became that of the mortgages institutions, big banks and financial houses, which acquired or traded in the securitised mortgages.

The asset backed securities which once boosted balance sheets are being written off in institutions across the U.S., Asia and Europe, with impairments to date topping US$60 billion. At least five mortgage and other financial companies have filed for bankruptcy.

The IMF in its assessment said the financial markets have not been calmed by the corrective actions by the federal government and central bank, and while the U.S. third quarter GDP growth of about 4.9 per cent surprised the Fund, it still sees a continuation of subprime woes into the new year.

The US fourth quarter is also off to a slow start and the housing downturn is expected to roll into 2008 - sales having already fallen off by 40 per cent from peak, Rodlauer indicated.

Expectations remain that the Federal Reserve, which has already adjusted interest rates by 75 basis points to ease the credit crunch, will clip discount rates to banks again this week.

"The markets are already pricing in further rate cuts," said the IMF director. Bets are on a quarter point cut December 11.

But the credit squeeze also carries implication for U.S. balance of payments.

Financing of the super trader's current account deficit, said Rodlauer, is dependent on daily capital inflows from investors buying up U.S. paper securities.

If investors eschew America's debt for higher yields emerging market bonds, the end result could be further depreciation of the U.S. currency.

And while Rodlauer said Friday that nothing identifies that as an immediate threat he also noted that it was the Fund's duty to point to potential dangers for policy corrections to be effected.

Panth meantime suggests that the Caribbean would be more resistant to external shocks if debt servicing costs were lower, saying commitment to further debt reduction was required.

"High debt," said Panth, results in "low fiscal space." Caribbean countries rank among the most indebted in the world, he said at the seminar. Jamaica's debt to GDP ratio is hovering at about 133 per cent, while the Caribbean's is in the 80 per cent range.

The IMF team also returned to an issue the multilateral agency has raised before - warning governments not to use tax incentives as a pull for foreign direct investment, saying such subsidies carry an opportunity cost in forgone programmes, lead to higher debt servicing costs, and are paid for with larger deficits that result from the lower tax revenues.

Instead, the region should look to advancing financial sector reforms, developing infrastructure, lowering the debt, and reforming public spending, Panth suggested.

As for the likelihood of debt forgiveness for Jamaica, Rodlauer skilfully said no without mouthing the word.

"Countries tend to shake off the debt trap using growth" in addition to fiscal policy adjustments and debt management, he said.


Source:
The Jamaica Gleaner
Wednesday 12th December, 2007

http://www.jamaica-gleaner.com/gleaner/20071212/business/business9.html