Jamaica’s Twisting Spiral Bounds

Jamaican stocks were down slightly on the MSCI Frontier index as the IMF cited progress in reversing the “negative spiral” of recession, unemployment and debt one year after a new standby was inked preceded by a second domestic bond exchange with partial haircuts. The government with a two-thirds parliamentary majority has invited civil society and private sector participation for an economic advisory body to implement reforms as Q1 growth was 1.5 percent with tourism and commodity improvement on 7.5 percent inflation due to local dollar depreciation. In the last fiscal year the primary surplus was over 7 percent of GDP on reduced spending, as the current account gap shrank to 10 percent and international reserves neared $2 billion including inflows into central bank certificates of deposit. Monetary policy has tightened following the official debt swap lengthening maturities and cutting coupons with secondary trading essentially frozen, and private credit up just 5 percent annually and concentrated on short-term retail loans. NPLs are 5 percent of the total and capital adequacy is high at 15 percent of assets, although both banks and securities dealers retain large government exposures posing balance sheet and solvency risks. External funding from Venezuela’s discount oil import program could also be constrained and pressure could spread to other Caribbean islands with a Jamaican financial sector presence. Crime and natural disasters are persistent threats which can dent business and consumer confidence regardless of headline adjustments, the Fund commented. Supply-side bottlenecks to be overcome include high electricity costs, labor rigidities and tax compliance burdens, and infrastructure modernization and privatization will revamp the airport and roads. Agriculture has begun to respond to currency depreciation and additional flexibility is recommended over the medium term at the same time worker skills and training are upgraded. A long-range fiscal rule will confine public debt to 60 percent of GDP by 2025 with a cap on contingent liabilities.  Civil servant wage hikes are under a multi-year accord and pension change could raise the retirement age 5 years to enable current debt/GDP at 140 percent to fall 50 percent by end-decade. Inflation-targeting could soon be considered as the central bank attains greater independence and technical capacity and a new banking law aids conglomerate supervision and resolution.

The retail repo securities broker model is slowly being phased out and replaced by collective investment schemes as a first step. Maturity mismatch and poor management practice haunt the industry but collapse has not occurred as with CL Group in neighboring Trinidad and Tobago, where stocks are up this year with hydrocarbon prices. Distressed buyers have focused more recently on Barbados, which was expected to follow the IMF rescue route after sovereign ratings downgrade but instead instituted mass public sector layoffs to keep debt/GDP below 100 percent. Its thinly-traded foreign bond has since rallied but labor and popular opposition to the cutbacks may resume the lethal spiral.