Global financial markets are off to a rocky start this year, with the Chinese stock market being halted as it hit its circuit breaker down limit of seven per cent twice in less than a week, with the second halt happening in only 29 minutes. Virtually all major global markets have taken their cue from China, including the mighty US, with substantial falls in the first four days of trading this year. 

Hedge fund guru investor George Soros, “the man who broke the Bank of England”, has also said that China had a “major adjustment problem” on its hands. “I would say it amounts to a crisis,” he told an economic forum in Sri Lanka, according to Bloomberg News. “When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008.”

Despite all this global turbulence, the Jamaican stock market, which doubled last year, has continued to rise in the first four days of trading, maintaining its performance as the world’s leading stock market. The key questions are will this continue, and how will the Jamaican economy perform generally this year in what appears to be an even riskier global environment.

A useful starting point is to review what I said last year, and whether it came to pass. At the beginning of last year, in the article “Projections for the Jamaican economy in 2015”, I noted that the most important positive development for Jamaica was low oil prices, arguing that “low oil prices are likely to be sustained in 2015, and could even fall further”. They were then around US$55 per barrel.

Following from this, I argued that the fall in oil prices “should allow the current account deficit to convincingly fall below five per cent as a percentage of GDP in 2015, perhaps to as low as three to four per cent”. I argued that this fall would allow a “multiple point reduction in the average rate of inflation”, which “should ensure that both the year end and fiscal year inflation targets are met — even undershot”, and would be extremely timely, “falling just as the critical public sector wage negotiation are occurring”.

I also argued that the minister should reverse the cut in the tax on gas, that a nominal increase in the wage bill could occur without busting the budget, and that if the latter occurred (implicit in this argument was that we would stay on track with the IMF programme), we should see a reasonably stable dollar, with a devaluation of about four per cent (I had in mind an actual year-end target of roughly $120 to 1).

I also argued that two per cent economic growth was possible, although noting elsewhere that this required at least one of the megaprojects to actually start during the calendar year.

Finally, at Mayberry’s investment seminar early in the year, recorded in both major newspapers, I stated that local stocks would double — my exact quote being that “they would at least double, even treble, over the next one to two years”.

Fortunately, virtually all of my

Jamaica Observer article projections came to pass, and indeed many were exceeded (in the right direction).

While we don’t yet know the current account deficit for this calendar year, it may even go below three per cent of GDP, while inflation will certainly undershoot the calendar year target, and may still undershoot the fiscal year target too.

The minister of finance negotiated a wage bill that didn’t bust the budget (now accepted by 97 per cent of bargaining units) and correctly imposed a tax on gas. My main quibble here is that more of the gas tax should have gone to support the budget, thereby avoiding some silly taxes and less to the hedge, reflecting my expressed view on oil prices.

The main possible miss — growth — is likely to be more in the one per cent than two per cent range for the fiscal year, although of course, this was contingent on the start of a megaproject and acceptable weather.

Another reason for noting all these projections, however, is that to a remarkable degree, this year looks very similar to last year for Jamaica. The key, once again, is oil prices.

Saudi Arabia, “the Central Bank of Oil”, and Iran are at daggers drawn, with the other major producer, Iraq, in the latter’s orbit. The OPEC cartel therefore remains fractured, perhaps permanently. Absent a shooting war, this means that low oil prices will continue for most, if not all, of 2016 as Iran increases its exports when sanctions are lifted. In addition, the economics of the oil industry have changed permanently, in that low-cost US “frackers” appear able to start up again very quickly once the price of oil rises, their main apparent constraint being access to finance.

As a consequence, inflation should remain subdued, the dollar should again be relatively stable, the current account deficit could even fall below three per cent (absent a megaproject driven rise in imports), and we should stay on track with the IMF, at least for the first half of the year. The main risk here is the combination of the election and meeting the target of wages at nine per cent of GDP target (perhaps the IMF will push this back again). Growth should finally reach two per cent or more (even without megaprojects), and could even reach three per cent if one of the projects finally starts; although I no longer think it worthwhile even to guess — the main risk being the world economy and the usual weather.

The situation also looks very similar internationally. Every year since the global financial crisis I have argued that US interest rates “will be lower for longer”. Last year, however, I finally agreed with the consensus that we would have higher US rates in the second half of the year, and that as a consequence the US dollar would rise, particularly against emerging market currencies “the return of king dollar”. In particular, I noted that emerging markets highly reliant on global investment capital flows, driven by the global tide of US Fed-driven liquidity, would be at risk.

Despite already experiencing large devaluations, weak stock markets, and falling growth last year (Brazil is the poster child here), many emerging countries will have another very tough year in 2016.

Commodity producers will remain under intense pressure, as China finally faces the consequences of its long credit boom, which includes massive industrial overcapacity, huge excess investment in real estate and infrastructure generally, and continuing massive “insider” capital flight.

Indeed, I believe this is what Soros meant, in that, similar to the US in 2008, China will now have its day of reckoning as its own seven-year credit bubble ends, which began immediately following the US collapse. Ironically, their unsustainable loan growth bubble period was itself a policy response to the US crisis. Their foreign exchange reserves fell US$513 billion last year to US$3.33 trillion, central bank data showed yesterday, with a sharp drop of more than US$100 billion last month alone.

The economy will nevertheless continue its transition to services and the Government has the resources and power to avert a US-style “financial panic” (it is their banks and not their stock market that is important here), but it will not be pretty and will require very good management.

Contrary to its projection to raise rates four times by one per cent (one quarter point each time) in 2016, it is likely that the US Federal Reserve will only be able to raise rates by one or two times at the most, due to a weaker than expected economy, driven in turn by a weaker world economy.

When this is combined with flat to falling corporate profitability, we are likely to see another year of volatility in the US stock market, which may again end the year flat or slightly down.

In any case, Jamaican investors will once again be better off in Jamaica, as the influx of liquidity drives substantial price appreciation further in local equities, although below that of last year. We will have more to say on these issues in subsequent articles.