Jamaica poster story recovery has growth forecast raised above 4 per cent as new UK Prime Minister enters office amidst International Monetary Fund (IMF) global growth gloom

As Private Sector Organisation of Jamaica (PSOJ) President Keith Duncan noted in his Economic Programme Oversight Committee (EPOC) presentation last week Thursday, the interim fiscal policy paper for fiscal year 22/23 tabled in Parliament on September 27 projected higher growth for the current fiscal year of 4.1 per cent, above the original budgeted projection of 3.5 per cent. This improvement is the exact opposite of the International Monetary Fund’s (IMF) just-released forecast of reduced global growth, with very few countries worldwide raising their growth forecasts, a vast number reducing their growth forecasts, and up to a third already projected to be in recession by the IMF both this year and next. This upgrade appears to be driven by a better-than-expected tourism performance, with visitor arrivals for the September 2022 quarter of 622,940 at 106.1 per cent of the comparable 2019 period. As Duncan noted, to be above pre-pandemic 2019 tourism performance is an “incredible” achievement, demonstrating the success of our early opening of the locally developed “resilient corridor”, and combined with the very marginal 0.4 per cent decline in remittances to US$1,391.2 million for the April to August 2022 period supports the Bank of Jamaica’s (BOJ) view that smoothing the volatility of the exchange rate is not that big a competitiveness issue so far.

This is also supported by the recent decline in Jamaica’s September inflation rate to 9.3 per cent (although core inflation is still high at 8.9 per cent), which, while now below UK inflation of 10.1 per cent (their core is lower at 6.4 per cent), is still just above US inflation at 8.3 per cent (also with 6.4 per cent core inflation). However, the small gap both reduces the loss of competitiveness inherent in exchange rate stability against the US dollar to very manageable levels, and in Duncan’s view (in response to a question), even if the Fed continued to raise interest rates, the BOJ was in a position “to take decisions based on our own inflation situation”. It could, for example, take the decision to hold our policy signal rate even if the Fed increased again, although Duncan “stressed that the Bank of Jamaica has more data than anyone”, and as an independent central bank, it was their role to avoid an inflationary spiral in wages and prices.

Duncan was keen to note, however, that our over two-year “impressive” recovery is a “poster story” globally, due largely in his view to our pre-pandemic fiscal buffers and space, an independent central bank, and a concentrated effort to achieve macroeconomic stability by a “competent and committed minister of finance”. He observed that we were on a debt path to get an improved credit rating through reduced macroeconomic risk leading ultimately to lower interest rates and more fiscal space, and that a fiscal commissioner for the new Fiscal Commission (to provide an independent review of fiscal policy) had already been recommended.

In sharp contrast, the UK (which may already be in a recession) presented a hugely expanded unfunded “mini” budget without having first obtained the stamp of approval of their own equivalent of the Fiscal Commission, the Office of Budget Responsibility (OBR). As we have detailed in previous articles, this error cost them first their equivalent of our finance minister Kwasi Kwarteng’s job, and latterly former Prime Minister Truss, leading directly to her replacement as prime minister by Rishi Sunak yesterday, the former chancellor of the exchequer before Kwarteng.

Nobody should, however, fool themselves that the UK’s problems were somehow created overnight, in three years never mind the 45 days of the Truss Government. And as the new Prime Minister Sunak noted, Truss was right that low growth in the UK is a key problem, a problem with which Jamaica is very familiar. Nevertheless, the UK’s regulatory regime had somehow allowed the creation of an exposure of US$1.79 trillion for its pension funds (a bit more than half their total size), through a strategy combining leverage and derivatives, apparently partly to “juice up” the returns of years of very low gilt yields for defined benefit plans to meet what had become an overly high return target. One of the interesting lessons here is that the combination of their regulatory regime, the salesmanship of the global investment players, and the actuarial consultant “gods” of the UK had somehow made pension plan trustees believe that the safest thing was to invest in government bonds even at the remarkably low yields on offer, which a wider view of what was happening in the world or even a knowledge of history would have revealed as deep kind of foolishness. However, there is no room for schadenfreude (particularly in Europe which has had even lower interest rates) as these kind of non-bank exposures exploiting a regulatory gap undoubtedly exist elsewhere in the world, perhaps in a different form (although the US apparently has also seen this type of arbitrage emerge), encouraged everywhere by the 14 year global regime of extreme quantitative easing which has apparently now ended. As this tide of liquidity inevitably goes out, we will soon see who is in fact swimming naked, to quote Warren Buffet.

In Jamaica, the focus on macroeconomic stability (now likely shared by the UK under Sunak), particularly balanced budgets, has not wavered despite the costs of COVID. In response to a question as to whether Jamaica should spend more on the poor, Duncan said he thought Jamaica should seek to reach its legislated fiscal targets for 2027/2028 (noting we had been at 94 per cent debt to GDP pre-COVID), but that as tax revenues outperform there should be more allocations for the vulnerable as had just occurred on July 5. He said he agreed with the minister’s gradual approach (this could be described as a quarter by quarter review), targeted rather than one size fits all.

In response to a question on mortgage rates, Duncan invited the participation of new Scotia CEO (and EPOC member) Audrey Tugwell Henry, who observed mortgage growth has continued (affordable housing is the real need), but that some lending had been affected by the uncertainty of inflation and higher costs, which had also tempered consumer and business confidence.

Nevertheless, in the Jamaica Chamber of Commerce Survey of Business and Consumer Confidence index released yesterday, consumer confidence was actually up 4.2 per cent (the highest in two years), with business confidence up sharply at 18.2 per cent, driven by tourism and its knock on effects, which is very encouraging. For our next piece, we will explore whether the positive impact of greater exchange rate stability is outweighing the negative impact of higher interest rates on businesses so far, and whether this can continue.