Claude Robinson

Lest we read too much into the Fitch upgrade and the success of the Jamaica Debt Exchange (JDX) programme, there was a sobering reminder from the Planning Institute of Jamaica (PIOJ) last week that the economy remains weak and the growth prospects are, at best, uncertain.

According to the PIOJ, “The Jamaican economy showed no sign of recovery during the October to December 2009 period, encumbered by the global recession with a fall-off in external demand for Jamaican goods and services, and a deterioration of the fiscal deficit. Real GDP declined by 2.5 per cent relative to the corresponding period last year.”

For the period under review, the goods-producing and services industries recorded declines of 7.6 per cent and 0.7 per cent, respectively, the agency said in its quarterly review.

The bad news came as Finance Minister Audley Shaw would have been buoyed by the rating agency Fitch upgrading Jamaica’s long-term and local currency debt to B- following the agreement with the International Monetary Fund (IMF) that will generate loan funds of some US$2.4 billion to Jamaica over the next two years.

Jamaican authorities have also been celebrating the debt swap under which holders of Jamaican local bonds have been forced to accept about 12 per cent interest, less than half what was contracted by the sovereign guarantee of the Jamaican government. The maturity dates have also been extended in what is a default by another name.

Government officials say bondholders representing some 97 per cent of the $700-billion local debt have bought into the scheme. The swap has saved the Government some $40 billion in interest payment this year alone.

The Fitch upgrade, likely to be followed by the other rating agencies, and the JDX are positive and encouraging indicators of an economy beginning to stabilise, but as the PIOJ report reminds, what is really required is substantial economic growth with good jobs in the real sectors. That’s what will really impress the thousands who have lost their jobs since the recession started to bite in 2008 and others whose job prospects are dim.

And, as the PIOJ stated, sustained economic recovery and jobs will depend on successful implementation of the reforms promised under the IMF agreement as well as on sustained global economic recovery.

With respect to reforms, specifics of the Government’s public-sector reform project are yet to emerge and the much-talked-about but overdue fiscal responsibility legislation has not begun to take shape.

Neither of these are easy fixes as the public sector reform will place the Government squarely against public sector unions who will, of necessity, seek to retain jobs in the sector as well as a thaw in the wage freeze that Prime Minister Bruce Golding has vowed to retain in place for the next two years.

And for the fiscal responsibility legislation to be really meaningful, it will have to take away some of the power and flexibility in taxing and spending from the political executive, a power which is always handy when governments focus on re-election.

These will be brutal tests of Mr Golding’s resolve to follow through on the politically risky road he has embarked on and finally free the country from the cycle of unsustainable borrowing and anaemic economic growth over most of the past 35-40 years.

One thing that will be watched very closely is whether the financial system stability, occasioned by the JDX, will hold for long.

It is noteworthy that under the agreement with the IMF, banks and insurance companies have been comforted by a US$1-billion cushion (from the US$2.4 billion) in the Financial Sector Support Fund (FSSF) established “to avoid jeopardising the stability of the domestic financial system”. They expect trouble. What else would explain such a large provision?

Some other bondholders, especially pensioners, who had acceded to their government’s invitation to bail them out of its own financial fire when there was no IMF, have not been so fortunate.

The IMF country representative in Jamaica Trevor Alleyne, in an interview with TVJ’s Milton Walker, acknowledged that the potential fallout to pensioners was simply not considered. Surely, this oversight must be corrected by Mr Shaw.

The provision of the FSSF cushion for a soft landing for the major financial institutions is similar to the responses of the United States and Europe that have ploughed huge sums into saving banks from their own excesses while jobs in the real economy lag behind.

As the director general of the International Labour Organisation, Juan Somavia, commented in a BBC interview at the recent World Economic Forum, what’s required is “for the same political impetus that was given to saving the banks to be applied to jobs”.

Going forward, the real test of the success of the JDX will be the extent to which the Government will be able to meet part of its financing needs “through domestic financial sector borrowing” as stated in the macro-economic programme. What impact will the ‘default’ have on lenders in the future when the Government comes seeking money again? Will lenders try to recover, in one way or other, what has been ‘voluntarily lost’ under the JDX?

As far as external factors are concerned, the acting director of the PIOJ, Dr Pauline Knight, characterised the potential for recovery as ‘mixed’ given the risk of ‘double dip’ recession in the developed countries. This is when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth.

With President Barack Obama unable to get anything done as the US political system is either incapable or unwilling to break out of a destructive deadlock and work with him, and with Greece threatening the stability of the European currency, the future is clearly uncertain. Unemployment figures from the United Kingdom last week suggested that Britain was a prime candidate to slip back into recession.

Wobbly growth or ‘double dip’ is especially bad news for Jamaica’s bauxite/alumina sector, which registered its fourth consecutive quarter of decline, reflecting the downturn in the global demand for aluminium and alumina. Alumina production fell by 65.0 per cent and crude bauxite production was down by 1.1 per cent.

Clearly, Mr Golding has invested his and his party’s immediate political future that the breathing space will be used not just to stabilise the economy, but to lay a basis for strong growth in the medium to long term. He would remember only too well that the previous PNP administration stabilised the financial system in the 1990s but never achieved the required turnaround.

kcr@cwjamaica.com

SHAW… would have been buoyed by Fitch upgrading Jamaica’s long-term and local currency debt to B-