JP Morgan halves growth outlook for Jamaica
IN their most recent research note on Jamaica, dated yesterday, leading US investment bank JP Morgan said that they "recently lowered our real GDP growth forecast for 2012 to 0.5 per cent from one per cent previously".
The main body of the note was reporting on the Statistical Institute of Jamaica (STATIN) release of the first quarter GDP figures, which saw a marginal decline of 0.1 per cent, compared with a 1.5 per cent expansion one year earlier in the first quarter of 2012, which was itself in line with the final full-year growth figure of 1.5 per cent for 2011.
Anecdotal evidence of business conditions confirm STATIN's negative GDP calculation.
After what appeared to be a short upturn in business activity after the General Election (supported by a 50 per cent rise in consumer confidence in the Jamaica Chamber of Commerce (JCC) Consumer Confidence Survey for the first quarter, on the back of consumer expectations of improved employment prospects under a new Government), an admittedly ad hoc survey of businesses suggest activity has now either stagnated or declined absolutely over the last few months.
Since the Budget, many businesses have suggested that they have seen even further declines in sales activity, partially as a result of the impact of the tax measures on an already weak economy.
The original Budget estimated the value of the additional tax measures at $19.4 billion, or an annualised $25 billion, although informal calculations by some industry players suggest the actual impact (assuming everything remains equal) would be closer to $30 billion on an annualised basis.
However, the issue is now one of whether all things are in fact equal in a highly depressed economy. It seems unlikely that the programmed taxation can be collected in full in our very weak economy, even if the Government had deliberately underestimated the impact of the measures assuming unchanged conditions.
In their economic update dated June 26, Scotia Investments advised that the $19.4-billion tax package, if realised, "will become the largest tax squeeze in Jamaica's history". They calculate the combined impact of the additional tax measures, organic growth in tax revenues (calculated to increase by 8.2 per cent or $23.9 billion to $313.8 billion), and the $4 billion from NHT (minus the reduction in other revenues by $8.3 billion from $32.3 billion to $24 billion) as increasing revenue by $38.8 billion — "the second highest in the last 17 years".
Scotia's look at various scenarios where organic growth in tax revenue is less than the 8.2 per cent projected, and the additional tax measures are less than 100 per cent effective, due mainly to lower than projected economic growth.
Its extreme scenario, which may turn out to be conservative, assumes only a five per cent organic growth in tax revenues (well below the revised inflation target of 10 to 12 per cent) and that only 70 per cent of the additional taxes are collected. This produces a significant combined revenue shortfall of $15.2 billion.
Scotia noted however that the government has a number of options to address any potential revenue slippage of this magnitude.
These alternative revenue measures include the suggestion of financial analyst Colin Steele to give employers an NHT contribution holiday (simultaneously increasing Education Tax by an equal amount) thereby netting the Government $12 billion.
In addition, they could update the values on the property tax valuation registry (or go after the arrears in a determined fashion), to bring in between another 5 to $8 billion. Finally, they mention the idea of imposing taxes on Caricom imports, floated late in the budget process, which in the unlikely event that it was able to be implemented, was estimated to raise $9 billion.
The bottom line is that although the recent spike in inflation projections will likely prevent organic tax revenues going negative this fiscal year, and the Government will collect the majority of the additional taxes imposed, there is now a strong possibility of negative economic growth for both the current calendar and fiscal year.
The first quarter was negative, even without the impact of the new taxes, and the second quarter looked weaker than the first even before the impact of the increased taxation in the Budget. The full impact of the tax package is now being felt with what appears to be a very weak July in terms of business activity.
All of this has been compounded by the recent weakness in the exchange rate. In their most recent release, the BOJ revealed that the net international reserves had fallen to US$1.54 billion (some of this may be due to some unusually large corporate dividend payments), with a 200 million Euro (approximately US$245 million) Eurobond repayment due on July 27. Informed sources suggest that the Government will meet this payment through funds held in their Petrocaribe financed fund (that are not currently part of the net international reserves) supplemented by a local bond issue. This would apparently replace the idea of tapping the international capital market, at least in the short run, which would now require significantly higher interest rates, probably at least 10 per cent, than current Jamaican US$ Eurobond yields.
Global economic prospects are also likely to be much weaker in the last quarter starting in September than even the recently cut global growth forecasts by the IMF, and the possibility of another Lehman-type event, probably involving one or more of the European megabanks, is increasing.
All of this suggests that the Government has no time to waste in putting in place the strongest possible economic team (not confined to Jamaicans either here or abroad) to navigate what will be an increasingly challenging economic environment. In the short run, the IMF negotiations and the status of the mega projects, particularly the latter's related inflow of foreign direct investment, will be critical to maintaining investor confidence even at its current low level. It is therefore appropriate that the theme of the JCC's post-budget forum, to be held on July 25, is "Building Tax policies to Encourage Foreign Investment and Growth". In the longer run, the prospect of a continuing world economic crisis requires a social contract that includes tax reform, better governance and a massive improvement in the World Bank's Doing Business Survey from our current 88 to the low 20's or better. The sooner we start, the better off we will be.