As the year draws to a close, it is instructive to examine the country’s economic indicators to assess whether the country is poised for growth. Below, Jamaica Money Market Broker’s (JMMB) research department evaluates the performance of the economy.

Jamaica’s Macroeconomic Indicators

INFLATION

The Statistical Institute of Jamaica’s (STATIN) estimate of local prices reveal that, while Jamaican consumers would not have experienced lower prices since the beginning of 2010, the pace at which prices have increased has tempered. Since peaking at 14.34 per cent in April-2010, the 12-month change in prices (the inflation rate) has gradually declined. As at October-2010, the inflation rate stands at approximately 11.19 per cent (FIGURE 1).

Current and expected macro-economic conditions should facilitate a continuation of the down trend in inflation rates, albeit there might be short-term sluggishness. Weak domestic demand could persist for some time to come in the face of continued weak consumer sentiments. A relatively stable current account outlook and continued private and official capital inflows could facilitate, further strengthening or continued stability in the Jamaican dollar. The recovery process for the world economy could be slow and as such international oil price pressures could remain weak.

There has been a growing concern however, as recent increases in corn and wheat prices have led local manufacturers to increase the price of end products. Local manufactures have increased the price of bread, flour and chicken, which are products that use corn and wheat as raw materials. Shortages resulting from the impact of tropical storm Nicole could exacerbate the food inflation effect. Initiatives to import agricultural produce to make up the shortfall could have some offsetting influences; however it is likely that there will be a recognisable amount of pass-through to inflation.

INTEREST RATE

Recent data from the Bank of Jamaica (BOJ) show that benchmark interest rates slid to another unprecedented low. The yield on 6-month treasury bill rates hit 7.61 per cent in November-2010 (FIGURE 2), coming from a previous historical low of 7.99 per cent in October-2010. The yield on 3-month treasury bills is now at 7.44 per cent. The decline in interest rates occurred within a context of, continued improvements in central government fiscal operations, a relatively stronger Jamaican dollar, successive passing of IMF tests, improved GOJ credit spreads, and reductions in BOJ key monetary policy rate by 50 basis points.

The nation’s economy is poised for further declines in interest rates in view of the expected path of inflation, fiscal accounts and the exchange rate. Though the pace of decline in the inflation rate might slow, it is expected to head south nonetheless, which could facilitate further easing of monetary policy. The recently released supplementary budget reveals that the deviation from original fiscal targets might not be great, and in the light of the 0.7 percentage point (as % of GDP) room granted by the IMF, the impact on confidence might not be substantial. A relatively stable current account outlook and continued private and official capital inflows could facilitate, further strengthening or continued stability in the Jamaican dollar.

FISCAL ACCOUNTS

Fiscal data for the first seven months of fiscal year (FY) 2010/11 reveal that the nation has been over-performing relative to budget (TABLE 1). The fiscal deficit, over the seven month period, amounts to approximately J$45.8Bn, which is J$9.7Bn better than budgeted. The primary balance (an IMF quantitative Benchmark) also out-performed over the seven month period, registering J$23.6Bn relative to budget of J$5.5Bn.

Although fiscal authorities have some amount of ‘wiggle room’ due to a sizable amount of fiscal savings, recent supplementary estimates reveal that there are headwinds. Preliminary estimates of the damage to infrastructure from tropical storm Nicole reveal that a hit of around J$20.5Bn is likely. Further tightening is also needed for the approximate J$4.5Bn in liabilities from an alumina forward sale agreement with Glencore. The wage bill overhang could lead to more challenges, in view of the approximately J$41.4Bn (J$13.4Bn for inflation adjustments & allowances and J$28Bn for health sector reclassification) owed.

BALANCE OF PAYMENTS

Data for the six month period January to June-2010 show that the current account deficit improved by approximately US$63.3Mn relative to a similar period last year. The current account recorded a deficit of US$300.2Mn for the period. All the sub-accounts contributed to the improvement in the current account deficit, except the merchandise trade. There was a US$92.8 million increase in the surplus on the current transfers sub-account, largely reflecting an 8.7 per cent increase in gross remittance inflows. There was also a US$49.0 million reduction in the deficit on the income sub-account owing to lower profit remittances and interest payments by the foreign direct investment companies and the government, respectively. The surplus on the services sub-account increased by US$32.2 million as foreign national stopover tourist arrivals for the period remained resilient. On the negative side, the merchandise trade deficit worsened by approximately US$110.7Mn, due primarily to the expansion of the oil bill.

Net inflows from official sources, which included multilateral loans from the IDB, World Bank and CDB totalling US$432.8Mn, were more than sufficient to finance net private capital outflows as well as the deficits on the current and capital accounts. Consequently, the NIR increased by US$66.4Mn during the period. The gross reserves at end-June 2010 amounted to US$2.5Bn representing 19.5 weeks of projected goods and services imports.

ECONOMIC GROWTH

Data stretching back to 1998 reveal that, for the 9 year period before 2007, the nation has never experienced more than 4 consecutive quarters of decline. The nation registered 11 consecutive quarters of decline since the global recession began in late 2008. Yet recent estimates from the PIOJ indicate that the number of declines may extend to 12, on account of an estimated 0.5 per cent decline for the quarter ending September-2010.

JMMB Leading Economic Indicators (LEI)

JMMB’s composite index of leading economic indicators (LEI), as at October 2010, shows that it is probable that the recession may last for another 6 to 8 months. The 6-month growth rate of the index (the evaluator of turning points) has declined, for the last 4 months, at an average rate of 2 per cent. The declines however, are substantially lower than that of mid 2008 and early 2009, probably indicating that the decline in economic activity may slow.

IMF PROGRAMME

With much credit to fiscal and monetary authorities, the nation passed three consecutive rounds of quantitative and structural performance tests.

STRUCTURAL BENCHMARKS

There have been significant structural changes since the nation embarked on the most recent IMF borrowing arrangement. While these structural changes might not yield immediate benefits, these changes could help to create a hospitable environment for endogenous growth and development. The structural reforms stretch from institutional reform to financial sector reform.

Fiscal Responsibility Framework

Of particular importance is the fiscal responsibility framework, which is currently at its infant stage. However, consistent with the IMF programme, a couple of the major pillars of the framework have been embedded into law (BOX 1). While these by no means guarantee fiscal prudence, it is certainly a legal framework that could facilitate accountability on the part of central government and public bodies.