Painting a rosy picture - Finance's mantra for management of the Jamaican economy

Published: Friday October 10, 2008

One of the most amazing statements made by a Government minister this week has received very little attention.

Yet, it says a great deal about the Bruce Golding administration's assessment of the current Jamaican macroeconomic environment, and its views on providing accurate, detailed financial information to the financial markets on Government expenditure.

Senator Don Wehby, minister without portfolio in the Ministry of Finance, believes that it will not be necessary to provide a supplementary budget.

This statement is made against a background of galloping inflation in Jamaica - 26.5 per cent point to point August, and 10.3 per cent fiscal year to August - the massive unbudgeted bill to repair the damage caused by the passage of Tropical Storm Gustav, a high food import bill that should increase in the short run, and greater than budgeted for oil prices.

Senator Wehby has been trumpeting the Government's excellent fiscal performance during the first half of the current financial year. He points out that the fiscal deficit was significantly better than what was budgeted for.

And although the second half of the year will be "challenging", he believes that the establishment of another government agency that will manage its treasury functions will lead to increased efficiencies at the Ministry of Finance.

This tightening of the treasury management function and management of inflation by our technocrats should ensure that the Government will be able to meet its fiscal targets.

Financial meltdown

All of this comes against the background of a deepening global financial meltdown. The severity of the current worldwide situation is such that the traditional private capital markets will be closed to the Jamaican Government.

Despite the recent announcements about increased multilateral assistance for Jamaica, much of this funding will not be available for use in the current financial year.

Transport Minister Mike Henry has already hinted that much of the repairs to our physical infrastructure will be delayed.

The Government has already turned its attention to increased borrowing from the domestic market.

Last week, Finance floated a two-year eight per cent USD-denominated bond, as well as a variable rate bond on the local markets. Major players have quietly indicated their disagreement with this bond issue that will take liquidity out of the market.

But the reality is that they can expect to see more of this type of move by the Government in the near future.

The Government will need to match its increased borrowing from the local markets with data on private sector obligations.

Also, as the World Bank pointed out in its June 2008 Article IV Consultation, reserve losses can not be sustained indefinitely and it urged caution "in determining the appropriate level of reserves to target and adds urgency to [the need to] reduce the current account deficit and stem capital outflows."

The World Bank also points out that "interest rate hikes will weaken financial institutions; in particular, securities dealers holding fixed-rate debt. Monetary tightening also imposes greater debt-service costs on the budget, especially given the shift in debt management practices in recent years toward favouring variable rate instruments. On the other hand currency depreciation can fuel inflation and increase the debt-to-GDP ratio."

Blind spots

In this scenario, the bank cautions that it will be important to address "potential blind spots in financial sector monitoring and supervision."

This is as a result of the current segmented supervisory structure between the Bank of Jamaica and the Financial Services Commis-sion, which has led to gaps in the regulatory system, as well as limited analytical information on market risks for securities dealers.

The importance of this statement cannot be overlooked when one considers that the Inter-American Development Bank estimates that Jamaican residents hold around 75-80 per cent of Jamaica's total public debt.

The IDB also points out that around 10 per cent of domestic debt is US dollar linked, so that overall around 49 per cent of total debt carries foreign currency risk.

The prevalence of variable-rate bonds in the debt mix means that roughly 37 per cent of the debt carries floating interest rates.

According to the IDB, each one per cent decrease of the exchange rate will likely raise the debt stock by 0.5 per cent of GDP and interest costs by 0.1 per cent.

Increase interest payments

Each one per cent increase in average interest rates would increase interest payments and the fiscal deficit by around 0.5 per cent of GDP.

The concentration of the portfolios of our local financial institutions in GOJ obligations means that any restructuring of public debt could have a devastating impact on the Jamaican financial sector.

Given the significant shift in the assumptions underlying the preparation of the current fiscal budget, it is imperative that the Govern-ment comes to the country with a supplementary budget in the next few weeks. Statements and sound bites are not enough.


Source:
R. Anne Shirley
Jamaica Gleaner
http://www.jamaica-gleaner.com/gleaner/20081010/business/business7.html
rashir0@hotmail.com