Jamaica’s woeful economic plight has been the subject of much discussion as the country waits with bated breath for the IMF to throw it a lifeline that will serve at best as a temporary panacea. During the course of this month, the three leading rating agencies, Standard&Poor’s, Moody’s and Fitch have downgraded Jamaica and recommended that it restructures. However, the Chief Economist of Scotia Capital Dr Warren Jestin does not see doom and gloom and believes that Jamaica can get out of its present predicament as the world economy recovers.

Speaking with Caribbean Business Report on a visit to Jamaica last week, Dr Warren Jestin said: “Jamaica, like many other countries, has been sideswiped by a very vicious global recession. I think the economic circumstances will get better and we can look forward to some positive growth down the road. As the external environment gets better that will spell good news for tourism and bauxite. Let me make it clear that we at Scotia do not believe it will be a great recovery. the US economy will not be on the fast track, but places like China will be growing rapidly, which will be good for commodities. I think the global economy will become more constructive in 2010/11 and that will provide economic support for Jamaica.”

Dr Jestin said that the discussion with the IMF with a view to obtaining US$1.2 billion from a Standby Agreement will at best provide breathing room for Jamaica to make leeway for some difficult adjustments to be made. The way he sees it, on a longer- term basis the fundamentals of the economy, based around tourism and bauxite, are changing. The global landscape is changing in favour of India and China, which is good news for commodity prices but also suggests that oil prices will be on the rise again. He envisages bauxite prices increasing at the same time that oil and natural gas prices do, driven by global expansion.

Tourism

On the tourism side he suggests the recovery in both the US and the UK will see improved flows to Jamaica.

Dr Jestin envisages major changes in the world’s major tourism markets. He expects growth to come from countries like China, India, Russia and Brazil with traditional markets like the US, UK, Canada and Germany still being very important, but in terms of incremental growth and new market niches it may well come from countries that Jamaica is unfamiliar with.

“You will find the average age of tourists will go up and they will be looking for a different experience. The sun, sand and sea concept may still be with us but older visitors may well opt to stay longer because as you get older you tend to take longer vacations.

Ecotourism will become more commonplace as a global shift takes place into a greener way of thinking about things. This affects not only how one builds a resort now but what experience one offers in order to attract visitors. The road to recovery is taking us to a different world than we were in 2005. Whether it is in Jamaica, Canada or any of the other 50 markets we operate in, this will lead to a new strategic focus on how to take advantage of the growth areas whilst still maintaining market space where the traditional tourism traffic resides,” he notes.

Getting out of the quagmire

Despite utterings of hollow optimism, Jamaica is in a terrible state and the facts make that patently obvious. The debt has increased by 30 per cent over the last two years and now stands at J$1.3 trillion. The debt-to-GDP ratio is well above 120 per cent. The fiscal deficit is at over 8 per cent. The fiscal accounts and balance of payments are out of whack with the budget proving more fiction than residing in the realms of reality. Interest rates are still far too high. The public sector wage bill is untenable. Crime is endemic and is costing the country over 5 per cent of GDP. Revenue receipts are way down and are seriously out of line with expenditure. Corruption is rampant and foreign direct investment is drying up. So what can be done and how can Jamaica climb out of the quagmire?

“This picture you have painted is telling. Whether the IMF deal comes to fruition or not means that there needs

to be some significant adjustments on the fiscal side and it should start there. Interest rates are a big issue and bringing them down on a sustained basis requires a very cautious monetary policy and fiscal adjustments. A decade ago Canada went through IT, but it was in a different dimension from Jamaica’s; nevertheless it was gut- wrenching at the time. You have to remember we had government deficits that were 8 per cent of the economy, but the adjustments we made then ultimately put us on a different growth trajectory and opened up options we didn’t have in the past.

“One way or another, the recovery in the global economy helps but many of these adjustments have to occur internally and it starts with government policy. You have to get deficits down and sustain a solid monetary policy. One of the biggest pluses we have had in Canada is having a Central Bank that has adhered in an unwavering way to keeping inflation down and telling the population, this is what we are doing and this is what we want to accomplish. If interest rates increase as a result of achieving that accomplishment, then so be it.

“Jamaica and many other countries have gone through a roller coaster with interest rates but it remains true that if interest rates go down, so too do interest rates in the long run. When countries do not go through this turbulent roller coaster ride invariably it is because they have a rock-solid monetary policy that tends to focus on longer-term issues rather than short-term issues and the exchange rate is a big part of this. Why? Because investor confidence is based on issues like solid fiscal

policy, solid monetary policy, transparency and things like that which, once in place, investors say to themselves, things are changing here. Then one sees a stable exchange rate, interest rates coming down, investment going up and the economy getting on a more firm footing. It is that complex mixture of getting those things going that turns things from a vicious cycle into something that is more virtuous and supportive of growth longer term.”

Focus on inflation

In a nutshell, Dr Jestin believes that the number one thing Jamaica should focus on is the domestic reality of inflation. Jamaica has seen that the currency can be extraordinarily volatile, and trying to fight against that can be a very difficult strategy but adopting a longer-term focus on stable monetary policy, particularly inflation, has tended to be the winning strategy for a number of countries. Administrations should seek to achieve fiscal surpluses, not fiscal deficits, thus ensuring support for the economy even though the currency is going all over the place.

“Looking at Jamaica today, the central bank’s focus on internal conditions, particularly inflation and currency stability, is very difficult because of the huge debt servicing that currently exists. The public sector wage bill is extremely large, making it difficult to create a cumulative positive story.

“Investor confidence is a very fickle thing and so talk of debt restructuring has to be carefully thought out. In my opinion it would be better to concentrate on more fundamental issues like fiscal imbalances. Once you go down the road of more draconian adjustments you tend to add a level of uncertainty for investors that can linger. Investor confidence is absolutely key.

“If you have it, whether in respect to portfolio investments or direct investments, then the situation becomes a lot easier. If you get inflation down and the fiscal situation remedied, that’s how you reduce interest rates and become more competitive. They pay big dividends in the longer term. Fiscal imbalances become a strategic Achilles heel, fiscal strength becomes a competitive advantage,” said the Scotia Capital economist.

He also preached the importance of a skilled labour force. The ability to provide skilled labour, whether direct or indirect, is probably the most important competitive advantage a country can have. In an uncertain world dominated by technology, the one thing a country brings to the table is its labour force, and here skills are absolutely essential. It can already be seen that countries that have developed the skill sets tend to do better, while those who have not languish.

Dr Jestin has worked for Scotia for 31 years but suspects that his children will have probably three or four careers in their lifetime requiring different skill sets. “I look at two things that government policy can do: One is getting fiscal balance therefore allowing for strategic advantage and two, improving the education and skill sets of the population, and both should become part of the national agenda.”

Financial markets will calm down

The eminent economist can see the financial market realities are changing with the global economy getting on a better footing and growth picking up. He thinks that global investors need to calm down a little bit but notes there is less of a ‘run for the hills mentality’ that was seen last year, and that should provide some respite.

“I see Jamaica’s agreement with the IMF as an important one, in that it allows for a longer period for adjustments to be made. If the agreement does not come through, those adjustments will still have to be made. Jamaica will have to show that it is following a path to both economic and financial stability. Financial markets look for signs that things are moving in the right direction and Jamaica will have to now start showing those signs, whether it’s fiscal policy or economic activity.”

It is believed that the IMF is insisting that Jamaica reduces its public sector wage bill but the government perhaps fears that this may lead to civil unrest. Dr Jestin is of the view that it is a bitter pill the present administration will have to swallow. “When you make big fiscal adjustments it hits all areas. There are certain things in this situation which you have very little control of – interest payments, debt service costs, but there are ways of adjusting them in a strategic way.

“At the end of the day, that basket of everything that is left over in an environment where the deficit is a big chunk of the economy as a percentage of GDP, then everything has to be re-evaluated. That’s not only the spending side of the equation but also the revenue side as well. In short, all options have to be on the table.

“In fact, in the period between 1996 to 1998 in Canada when we went from big deficits back to balance, the Government did not cut the growth of spending, it cut public spending dramatically over that two-year period. Nothing was off the table, and that has to be the approach.”