KINGSTON — The country, led by the Finance Ministry, the Planning Institute of Jamaica (PIOJ) and the Bank of Jamaica (BOJ), is fortifying itself to face any negative fall-out from the recent United States (US) rating downgrade and the lingering challenges in the Eurozone economies.
The BOJ is considering “an extreme scenario of the possible near-term impact on the Jamaican economy, if the downgrade of the US federal government bond rating and the factors which led to it were to result in markedly slower growth for the US economy in the short-term, leading in turn to a slowdown in the global economy,” Governor of the BOJ, Brian Wynter, said recently.
In a new report issued at the end of August, US rating agency, Standard and Poors (S&P) suggests that Jamaica and other regional countries heavily tied to the United States could face a downgrade and declines in foreign exchange inflows, based on the negative outlook in the United States.
The report: ‘What the US Downgrade Means for Latin American and Caribbean Sovereign Ratings’, noted that countries with a low sovereign rating and high deficits were exceedingly vulnerable.
Standards and Poors, which downgraded US sovereign rating from AAA to AA+ with a negative outlook in August, citing politics and the contentious debt-ceiling debate in Congress, cautioned that the combination of higher risk aversion and slower global Gross Domestic Product (GDP) growth, could pose risks to Latin America and the Caribbean, both directly and indirectly.
“Prolonged economic problems in the US and Europe would have a bigger direct impact on GDP growth in the Caribbean, Central America, and Mexico than on South America. The impact would be felt through lower exports of manufactured products, especially from Mexico; agricultural products, especially from Central America; and depressed tourism inflows, especially in the Caribbean," stated the S&P report.
The Jamaican authorities have indicated that they are carefully monitoring the international developments.
In his focus on 'Recent Global Developments and Implications for the Jamaican Economy', the BOJ Governor, during his recent presentation of the latest Quarterly Monetary Policy Report, observed that in the context of the downgrade and the on-going debt crisis in the Euro area, there has been increased uncertainty in global financial markets.
“There have been wild fluctuations in global stock indices, particularly those of the developed countries. The market’s response was exacerbated by the worse-than-expected US GDP outturn for the June 2011 quarter and downward revisions to GDP estimates for the past two years,” he said.
Mr. Wynter further noted that the negative economic developments have also resulted in a “flight to safe-haven assets, such as US Treasuries. As a result, the yields on 5-year, 10-year and 30-year US Treasuries have fallen to all-time lows."
He also drew attention to the simultaneous decline of US consumer confidence to the lowest levels in three decades, compounded by the fluctuation of prices in the commodities market.
The negative prospect of the global developments on the domestic economy was also underscored by the Director General of the PIOJ, Dr. Gladstone Hutchinson, during his recent economic update.
Reviewing the lingering international economic challenges, Dr. Hutchinson said “the loss of wealth along with the slowdown in economic activities in the USA and the Eurozone are expected to have both direct and indirect effects on Jamaica, given the high dependence on the affected economies, particularly with respect to trade and remittance flows."
The impact, he said, is expected to be manifested in balance of payments performance, “based on a combination of a fall in the value of exports of goods and services, possibly due to both declines in volume and value; a fall in the value of imports, and in particular, a fall in the value of oil imports, reflecting lower oil prices; a decline in remittances; reduced foreign direct investment; and reduced access to external borrowing."
Dr. Hutchinson explained that these external sector developments, in turn, may be reflected in local economic conditions, including: slower than expected growth in key tradable sectors, such as agriculture, mining, manufacturing and tourism; slower growth in employment or an increase in unemployment; and further deterioration in fiscal balances as tax revenue growth is dampened and financing costs are increased.
Despite the challenges, the Central Bank's assessment indicates that the Jamaican economy could still record growth in the range 1.0 per cent to 2.0 per cent for the 2011/12 financial year. However, the BOJ Governor cautioned that growth would likely be at the lower end of the forecast range.
Mr. Wynter said that the recent international developments emphasise Jamaica’s vulnerability to external shocks. "The economic programme that we are pursuing with the support of the Stand-by Arrangement with the International Monetary Fund is designed to reduce these vulnerabilities over the medium-term. In particular, the primary objective of the economic programme is to create the fiscal space to allow the country to respond to such shocks when they occur,” he explained.
He said that a close re-examination of the prospects and the policies to enable the Government of Jamaica to achieve long-term debt sustainability and macro-economic soundness for the country is now taking place, but that the gains that have been achieved to date were real and could not be denied.
The Governor assured that within that context, the Central Bank was committed to building a framework that “embeds low inflation as a permanent feature of our environment, because stable low inflation is a necessary companion in our quest for sustainable growth and development."
By Allan Brooks, JIS Senior Reporter