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Today, you are honouring Mr. Charles Henderson-Davis, one of the pioneers of the manufacturing sector. It is a most fitting and deserved recognition.
Charles Henderson-Davis is part of a generation of industrialists who, more than 40 years ago, with other greats like Robert Lightbourne, shared a vision that Jamaica could become a world-class manufacturing centre, that transforming Jamaica from a plantation economy to an industrial economy was the surest way to secure a prosperous future for our country.
The anecdote is related so often of Lee Kuan Yew’s visit to Jamaica in the early 1970s, of how impressed he was with Jamaica’s industrialization programme, how he gathered as much information as he could and went back to Singapore inspired and invigorated. The rest, as they say, is history.
While this is your 40th Annual Awards Banquet, it marks the 61st anniversary of the founding of the JMA. The challenges you face today are perhaps greater than any of those you have had to face in these 61 years.
We have found ourselves in the throes of a financial crisis widely regarded as the worst since the Great Depression more than 75 years ago. The immediate concern for us is what impact this will have on Jamaica.
When the crisis erupted on Wall Street three weeks ago with the collapse of Lehman Brothers, the authorities at the BOJ and FSC did an immediate assessment of local financial institutions to determine the extent of their exposure to the risk of contagion. We are part of the global market and Jamaica’s increasing participation in the US capital market would have included some US securities in the portfolios of local institutions.
The authorities were satisfied that the level of exposure was limited and in the event of margin calls on the few financial entities affected, the Central Bank was in a position to provide liquidity support. The Minister of Finance assured the country that there was no cause for alarm and that there was no significant threat to our local financial institutions.
It is to be noted that following the financial meltdown in the 1990s, the regulatory system governing the operation of local financial institutions has been significantly strengthened and has ensured that critical ratios are maintained and sound practices observed.
That assurance, however, speaks to the integrity and soundness of local banks and other licensed financial entities. It does not mean that the Jamaican economy will not be affected by the global financial crisis.
On Monday, I met with the monetary and fiscal authorities to review the developments in the global markets and assess the immediate and longer-term implications for the Jamaican economy.
It is clear that the crisis is still unfurling. Since that meeting on Monday, the contagion has spread to European, Asian and Latin American markets, prompting an unprecedented joint action by the world’s major Central Banks to cut interest rates and for some governments to inject cash to rescue failing banks. The government of Iceland was forced to take control of its three largest banks. Stock markets have nose-dived, causing Russia to suspend trading on its largest stock exchange for two days. Stock value losses amount to trillions of dollars and are climbing.
No one can determine whether the worst has passed or the worst is yet to come. Nor can anyone be sure how long it will last and how long it will take before recovery begins.
The various interventions by governments and monetary authorities have not cauterized the hemorrhaging. These measures will take time to work. The crisis is now being fueled more by the loss of confidence than by market fundamentals.
But it reveals a telling truth that even the most ardent free marketers must now confront – that markets cannot be left to regulate themselves, that there needs to be a mechanism to maintain order in the global financial system.
At the UN General Assembly a fortnight ago, I made the point that the Bretton Woods arrangements forged after the 2nd World War were appropriate for those times and, perhaps, for many decades that followed. But times have changed and the global economy has changed. The IMF which was the watchdog for global financial management has been made irrelevant by the rating agencies that have no defined responsibility. The world leadership which was evidenced in the days of Ronald Reagan, Margaret Thatcher, Helmut Khol and Francois Mitterand has been conspicuously absent. There is a global vacuum that has produced a global disaster.
But, as I was at pains to point out, it is not enough to simply expand the exclusive club to include the new grown-ups like China, Mexico and Brazil. The crisis threatens to deal a telling blow to developing countries like Jamaica and reverse whatever gains they have made in stimulating economic growth and reducing poverty. Developing countries which account for 75% of the world’s population constitute a huge part of the market for the industrial countries and must be part of the new multilateral architecture.
I called for a re-engineering of the multilateral infrastructure. Similar calls have been made by British Prime Minister Gordon Brown, French President Nicolas Sarkozy and, only this week, by World Bank President Robert Zoellick. It is a compelling call and if any good can come out of the current crisis it is a call to action by world leaders to ensure that the global financial system is never again allowed to run amok.
What will this crisis mean for Jamaica and the manufacturing sector, in particular?
1. Financing the budget
Our financing programme for 2008/09 is predicated on securing a further US$250 million from the external market. That market is not now in good shape. We would not have needed to source those funds until early next year. The forecast for market conditions at this stage is uncertain, given the liquidity crisis in the capital markets. But our reputation is strong. The government is currently in discussions with external sources and I have reason to be confident that those funds will be secured. 2. The market and Jamaican bonds
The crisis of confidence in the global market and the need for liquidity will impact on the appetite for emerging market debt and this could affect Jamaican bonds. Given the limitation on global financing it is important for us to maintain our deficit target and despite the pressures for additional expenditure to meet hurricane damage and public sector wage adjustments, we continue to exercise stringent fiscal controls. Up to the end of September, our fiscal deficit was less than what had been programmed.
3. Impact of global recession
The downturn in the global economy with unmistakable signs that it is headed into a recession will affect Jamaica in a number of ways:
(a) RemittancesRemittances which amount to some $2 billion annually will come under stress as Jamaicans abroad are affected by the economic situation especially in the US from which 65% of our remittances are derived. Up to the end of August, remittances were recording a 9% increase over last year. Remittances by Jamaicans have in the past demonstrated resilience even in times of economic slowdown. Therefore, while we anticipate some tapering off, we still expect remittance flows to be above last year’s.
(b) TourismWe expect tourist arrivals to be affected as would-be travelers, especially from the US, will be inclined to cut back on discretionary expenditure. We are not anticipating a net decline because of the strength of our brand, the intensity of our promotional activities and the fact that the cost of air travel should begin to reflect reduced fuel prices which increased 70% over the past year. However, the increase in stopover arrivals will not be as robust as we had originally forecast.
(c) ExportsGlobal demand is expected to decline and, as consumer spending contracts, this will affect local exporters. In the US alone, 760,000 people have lost their jobs since the start of the year. It is difficult to measure the extent of this impact since the level of demand will vary from one market to another and from one product to another.
(d) Balance of PaymentsOur Balance of Payments could be adversely affected. I say “could” because while the impact will be negative if there is a fall-off in exports and reduced prices for our exports because of the decline in global demand (e.g. alumina prices fell from US$3,400 per ton in July to US$2,300 last Friday), it could have a positive impact on the import side (e.g. reduced prices for imported oil).
(e) InvestmentsIt is too early to determine the precise impact on foreign investment projects. To the extent that these are dependent on financing from the international capital markets, they will perhaps be affected by the liquidity crunch in the banking system. We have been working on a number of large investment projects especially in the tourism, mining and energy sectors and, with the exception of one investor, we have been assured that the commitment and implementation timeframe have not been disturbed.
For local investments, we don’t expect to experience any shortage of investment funds as the banking system is enjoying ample liquidity. The concern would have to do with forecasts of consumption and demand levels which will be affected by the global slowdown.
(f) InflationWe have experienced unusually high inflation since the last quarter of last year, driven largely by steep increases in oil and commodity prices. We expect that this will taper off as reduced global demand drives down prices. We are already seeing this in falling prices for oil, corn, wheat and other critical imports.
That’s the diagnosis. What is the prescription?
Arising out of the meeting I held with the authorities on Monday, a team drawn from the BOJ, MFPS, FSC and PIOJ, has been set up to monitor and analyze on a day-to-day basis developments in the global financial market to determine the likely impact on Jamaica and to allow for timely and pro-active policy intervention.
The heavy reliance on the international capital markets for budgetary financing which we have built up over the past decade, will be an immediate casualty as those markets have become sour. Long before the current crisis, we had indicated our intention to re-engage the multilateral lending agencies such as the IDB and World Bank on which we have been placing decreasing emphasis in recent years. Indeed, while we have been building up commercial debt, our repayments to the IDB have been exceeding new disbursements.
Shifting to the multilaterals makes eminent sense since their lending rates are considerable lower and more stable than the commercial market’s. The challenge, since loans from these agencies are largely policy-based loans, is to harmonize our domestic policies especially dealing with fiscal and administrative reform, with the lending policies of these agencies.
Last week I met separately with the Presidents of the IDB and World Bank in Washington and I am pleased with the commitments they have given to support Jamaica’s development efforts in this new framework of cooperation and engagement and especially in the face of the global challenges. The IDB has already committed itself to providing US$100-200 million per year over the next three years. I expect the World Bank to do likewise.
We have been in discussions with stakeholders in the tourism industry and we are devising a number of strategies to minimize the fallout including ramping up marketing activities especially in regions less severely affected by the downturn. Similar discussions have been held with the mining sector to minimize any falloff in production. Reduced oil prices are already being reflected in reduced pump prices. I expect to see similar reductions in electricity charges in forthcoming billing cycles. Increased domestic food production, despite setbacks caused by Gustav, is in train and the expected arrival of cheaper fertilizer will be a significant boost to that effort.
We need to analyze with as much specificity as possible, the likely impact of the global crisis on the manufacturing sector. The JMA President has been somber in his own assessment but has recognized that even in the midst of the crisis there are possibilities that can be exploited. I want to explore these with you.
The government that I lead is strongly committed to private-sector-led growth. But we are a pragmatic government and we realize that when markets fair or become distracted, government’s timely and measured intervention is necessary. We recently resuscitated the Jamaica Commodity Trading Company to import fertilizer to support our farmers and strengthen domestic food security. While we did not make the September deadline for delivery, I am able to say that the first shipment is on its way.
Cabinet is expected to sign off shortly on a proposal by the JMA for special and differential treatment in government procurement practices for local manufacturers and service providers.
We have made available through the DBJ $2 billion in 10% loan financing for small and medium size enterprises. There are processing and disbursement challenges bedeviling the programme and we must find a way to resolve them.
On Wednesday of next week, the Deputy Prime Minister will travel to Barbados to sign on Jamaica’s behalf, the Economic Partnership Agreement with Europe. It is an agreement that offers duty-free, quota-free access to the vast European market of 450 million people. It includes financial provisions to assist local companies in improving their competitiveness and marketing. It creates opportunities for you to partner with overseas investors to use Jamaica as a manufacturing point from which goods can be exported to Europe duty-free once the rules of origin are met. I don’t think that you have taken these opportunities seriously enough.
These are just some of a range of issues on which we need to focus to see how, despite the threat of the global tsunami, we can help local manufacturers to survive where they are in danger and to be prosperous where they are not.
Mr. President, we need to talk and, provided you and your team are available, I would like to meet with you next week along with Minister Samuda to see how we can face these challenges together.
When the going gets tough, the tough must get going. Let’s get tough! Let’s get going!
I thank you.