Editorial

When the intention is to calm the financial markets...

Wednesday, August 29, 2012    

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One of the judgements which ministers and economic policy technicians have to make every time they speak publicly is how the financial markets will interpret and react to their pronouncements about the past, present or future. This is a valid concern because financial markets do not always behave rationally even when they have all the pertinent information.

When there is incomplete information or contradictory competing information, markets are prone to react in ways which go beyond their capacity to restore equilibrium by itself and require government intervention.

These pronouncements can be factual, dealing with events past and current, or can be predictions about the future. Statements about the past can excite or depress the market if they are viewed as part of a trend that will continue. If the facts portend future economic difficulties, then the minister or technocrat must decide whether to tell the whole truth and nothing but the whole truth or a part of the truth. If the speaker believes that the reaction to the facts could set off actions that would compound the economic difficulties, they may withhold some information in order to calm the financial markets.

The most risky situation is when the minister or technocrat is bold enough or foolish enough to predict the future or forecast trends. They must try to avoid talking about the future unless the news is good, and if they are forced to, such as at a press conference, they should ensure that whatever is said will calm the financial markets.

At this time, the local and international financial markets are justifiably concerned about the state of and future of the macroeconomic fundamentals of the Jamaican economy and the effectiveness of the policy regime.

Rightly so, in our view, there have been three statements recently aimed at calming the financial markets with regard to Jamaica.

First, Minister of Finance Dr Phillips sought to reassure us all that the Government was on track with the International Monetary Fund (IMF) negotiations. This is a statement of intent and the confidence in its probability of realisation rests solely on the reputation of Dr Phillips. One cannot challenge a statement of intent, unless there is doubt about commitment or capacity. We do not doubt Dr Phillips on either count, but Government's record since the 1970s is not reassuring.

Second, Governor of the Bank of Jamaica Brian Wynter sought to calm the markets by professing confidence in the exchange rate and the adequacy of international reserves. This forecast is not a projection of recent trends and time will tell if he was a soldier sacrificing himself in the line of duty.

Third, Dr Wesley Hughes, the financial secretary who is known for qualifying his statements sometimes to the point of obfuscation, told us not to worry about the termination of PetroCaribe. Not even the Venezuelans know this.

The intention to calm the markets must in some way be connected to reality.

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