The importance of that IMF money - JamaicaObserver.com

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The importance of that IMF money

By Al Edwards

Friday, November 06, 2009

With the Government coming under increasing pressure with both its fiscal accounts and balance of payments out of line, consumer confidence down and the country facing a winter of discontent, it is paramount that the US$1.2 billion standby arrangement with the IMF be agreed before the year is ended.

If that scenario were to play out it would give the Government some room to plan the year ahead, it would assist in stabilising the local currency, prevent further downgrades by the rating agencies and restore much-needed confidence in the economy. Of late the debate has turned from restructuring the debt to refinancing, but it is clear that the country is at an impasse and a panacea of sorts is desperately needed at this juncture. The minister of finance, Audley Shaw has said that he expects the IMF to come through in a matter of weeks and one hopes that that will be the case.

Latibeaudiere dismissed

The dismissal of the Governor of the Bank of Jamaica, Derick Latibeaudiere, is an unfortunate distraction. It is now clearly established that the Government dismissed Latibeaudiere because of an 'absurd contractual salary arrangement which grew from $11.2 million in 2006 to $38 million in 2009'.

Speaking in Parliament on Tuesday, Prime Minister Bruce Golding said the Government last Friday took the decision to terminate Latibeaudiere's services as it found "unacceptable, embarrassing and repugnant the interpretation and application of certain provisions of the governor's contract of employment".

It was originally thought that Latibeaudiere resigned due to policy differences with the minister of finance. The governor of the Central Bank has always maintained that he is responsible for monetary policy, whereas the Ministry of Finance dictates fiscal policy.

Speaking with Caribbean Business Report earlier this year, Latibeaudiere said: "For more than a decade my primary concern has been to ensure that the local currency does not experience drastic fluctuations and that inflation remains stable. I do not determine interest rates, the market does. I am aware of members of the private sector calling for a reduction in rates but one cannot just reduce rates at the drop of a hat if the market conditions are not right."

Shaw has made it no secret that he would like to see interest rates come down further and quicker in an effort to help stimulate the economy. There are those who share that view, citing the major economies of the world going that route in order to mitigate the ravages of the global recession, whereas Jamaica appears to be going in the opposite direction.

Perhaps the Bank of Jamaica decided to acquiesce earlier this year when on July 24 and again on the 30th it reduced rates by 100 basis points and 150 basis points respectively across the entire spectrum of its open market operations instruments.

At this point in time when the economy is in the doldrums, the fiscal accounts are awry and earners of foreign exchange are all showing diminishing returns, shouldn't there be a degree of consensus for the betterment of the country? Traditionally the Ministry of Finance and the Central Bank have been known to have their disagreements and this is not peculiar to Jamaica alone. But at a time when it is imperative that the country be granted US$1.2 billion (almost a tenth of total GDP) from an IMF standby agreement, maybe there should be some convergence of approaches, a united front to ensure the country gets into some kind of economic equilibrium.

Was the Government right in sacking the Governor at this time?
There is a view that the dismissal was ill-timed, coming when the IMF team is here on the island to thrash out a deal with the Government, albeit with Latibeaudiere leading the negotiations. Perhaps it sent the wrong message that the Government was not totally focused on this singular mission and that there was no consensus on this most important endeavour.

Then again, there are those who feel that there is no time like the present and that the governor was obstructionist, unyielding and inflexible, which led to his demise. Better to jettison him now and allow a new governor to preside over a new era which sees the Bank of Jamaica and the Ministry of Finance singing from the same hymn book page.

Latibeaudiere is well respected on the international scene and his dismissal would have been regarded with some concern for the management of the economy. His technical expertise has been cited as a positive in the stewardship of the Bank of Jamaica.

So when the leading ratings agency, Standard Poor's, again downgraded Jamaica on Monday, there were those who attributed it to the dismissal of the governor. That may be going a tad too far, but there is the possibility that it was a contributory factor.
S&P downgrades Jamaica again

A release by Standard & Poor's on Monday read: "Standard & Poor's Rating Services lowered its long-term foreign and domestic currency ratings on Jamaica to 'CCC' from 'CCC+'. The outlook on the ratings is negative. We kept the recovery rating on the senior unsecured debt at '4' and the country transfer and convertibility assessment at 'B'. The downgrade on Jamaica follows the resignation of Central Bank governor Derick Latibeaudiere, who was lead negotiator within the framework of a possible standby facility from the IMF.

"On August 5, 2009, we downgraded Jamaica's domestic and foreign currency long-term ratings to 'CCC+' with a negative outlook. At that time we highlighted the fact that Jamaica's severe fiscal situation as well as the vulnerabilities in the Government's debt profile may give it incentives to renegotiate with its creditors, particularly its resident creditors that hold the larger bulk of Jamaican debt.

"Since then, the Government's room to manoeuvre continues to narrow as it becomes increasingly difficult to further cut public expenditures - as reflected, in part, in the recently amended budget - in order to sustain an interest burden of about 60 per cent of general Government revenue.

"The negative outlook on the ratings signals the growing risk of a debt exchange operation that could be an event of selective default under our distress debt exchange criteria. While the Government's engagement with the IMF is a positive effort to address the long-standing structural issues in Jamaica, recent events highlight the complexity of the negotiation process and create more uncertainty about the timeframe for reaching an agreement with the IMF," said Standard & Poor's' credit analyst Roberto Sifon Arevalo.

This is the second time Standard & Poor's has downgraded Jamaica in three months and on both occasions the minister of finance has dismissed the assessments as unwarranted, hasty and groundless. The minister of finance said the rating agency did not seek to get details from him as to the dismissal of the governor nor the fiscal performance of the country.

However, it is not customary for Standard & Poor's to seek 'consultation with connected parties'. It prefers to do a dispassionate and analytical assessment of the data before making a pronouncement. Shaw may well have been emboldened to dismiss the S&P assessment as it was woefully wrong in its assessment of many of the United States' leading financial institutions which ran into serious problems thus precipitating the global crisis.

Deteriorating fiscal and monetary situation

There can be no question that the fiscal and monetary situation has deteriorated since August and that the Supplementary Budget presented a few weeks ago paints a daunting picture for the country.

What has remained unclear has been the timetable established for the IMF to release funds to the Government of Jamaica. Initially it was September, then put back to October and now a November date has been cited. With the lead negotiator summarily dismissed and the fiscal situation worsening, Standard & Poor's may well have felt that a further downgrade was warranted. Only last month Barclays Capital surmised that "Jamaica may already have passed the point of no return". It was of the view that rather than rely totally on the IMF's standby agreement Jamaica should look to restructure its $1.2 trillion debt.

"Of particular concern is that Jamaica's fiscal deficit could reach around 20 per cent of GDP. We think it is extremely unlikely that any reform programme will be able to put the country on a sustainable medium-to-long-term fiscal path and believe that the IMF is weighing whether it would be costlier to allow the country to restructure its debt or to give the Jamaican Government the US$1.2 billion that it is soliciting in order to postpone the agony.
"Unfortunately, we believe that Jamaica may have already passed the point of no return and that for the IMF, as well as the country in the long term, it would be more convenient to assist in a restructuring of debt," read the report.

Latibeaudiere is reported as not favouring a restructuring of the debt. However, this latest approach to the country's financial problems is beginning to win a lot of support.

Of particular concern is that the Government has failed to meet its revenue target by $13 billion, and its inability to garner receipts from the divestment of assets which was expected to net it some $13 billion makes the situation even more daunting. Compounding matters is a further $16 billion being added to the budget to address a rise in interest payments. The fiscal deficit for the year to March 31, 2010 was revised upwards from 5.5 per cent of GDP to 8.7 per cent of GDP. The Government may well be facing a debt to GDP ratio of 120 per cent.

Revenue collection behind target by $16 billion

On the very day that Standard & Poor's downgraded Jamaica, figures from the Ministry of Finance revealed that revenue collection was behind target by $16 billion. For the period April to September 2009, the Government collected $134.9 billion in revenues and grants. However, this was $15.7 billion less than the $150.7 billion which it had projected for the six-month period. Tax revenue was down by an alarming $12.8 billion while inflows from grants were more than $2 billion behind target. Due to the continuing falloff in inflows, the Bruce Golding administration cut spending by just under $8 billion.

Also disconcerting is that on the day Latibeaudiere left office, the Bank of Jamaica intervened in the market to prop up the local currency. The likelihood of the local dollar depreciating in the run-up to Christmas is a real cause for concern and underscores the pressing need for the IMF funds to come through quickly.
The need for the IMF funds

How does the financial community view the importance of funds coming through quickly from the IMF?

Financial analyst Dennis Chung:

"It is important that the IMF deal is concluded not because there will be a need for BOP support immediately, as the reserves are adequate, but to allow for access to funds from other multilateral agencies. The fiscal accounts will no doubt need support going forward, and my own view is that the only real short-term solution available to the Government right now is to borrow money to support the fiscal accounts, as reducing expenditure cannot provide much more benefit. These additional funds should be surgically implanted to deliver growth in economic activity but at the same time the Government must continue its efforts to reform the public bureaucracy and reduce crime and improve the justice system, which are very critical to any growth strategy."

President of the Jamaica Bankers Association (JBA) Minna Israel:

"The Jamaica Bankers Association wishes for the earliest finalisation of an IMF agreement which would not only help the Government to fill the gap in the budget but would bring rigour to fiscal discipline while increasing consumer and investor confidence. This support will place the country on a clear path to achieving sustainable growth and development and a balanced budget in the medium term."

President and CEO of Pan Caribbean Financial Services, Donovan Perkins:

"The market is sitting on the sidelines watching events and awaiting news of an IMF agreement. I am confident that an agreement will be concluded fairly quickly. It is my understanding that the IMF board will meet for the last time this year in December and I should expect a decision on Jamaica to be made at that meeting.

"Once we get those funds it will create favourable conditions for lower interest rates and I anticipate that the Bank of Jamaica will assist in driving rates down."

President of the Jamaica Securities Dealers Association (JSDA) Anya Schnoor:

"Jamaica has found itself at an interesting turning point. We no longer can ignore the stark realities in front of us. The challenge requires tough decisions and the steadfastness to see them through. It also requires alignment between all stakeholders and an understanding that we must get this right. We are on the right track with inflation, the exchange rate and interest rates. To deal with the big elephant in the room, however, we still must tackle the fiscal. Only then can we truly have sustainable lower interest rates and the fiscal room to allow growth in the economy."

CEO of Mayberry Investments, Gary Peart:

"In spite of our many challenges, we have an enviable track record of paying our obligations. Whilst the environment might not be ideal, Jamaica has been able to reverse the downward trajectory of the NIR and maintain a relatively stable exchange rate since March of 2009.

"A successful conclusion of IMF negotiations will allow Jamaica to approach other multilaterals to borrow up to US$500 million to provide fiscal support for 2009/10. This will give a significant confidence boost to local and international investors. The true test comes after the agreement, because the Government and the people of the country are going to have to work very hard to create an environment of growth which would allow for significant job creation and reduction of crime, ultimately creating more than sufficient revenues to repay the country's debt obligations."

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