VZCZCXRO1500
RR RUEHGR
DE RUEHKG #0903/01 1621354
ZNR UUUUU ZZH
R 111354Z JUN 07
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 4897
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1900
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 KINGSTON 000903 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR (RBUDDEN), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR A FAIBISHENKO 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EIND CPAS JM XL
SUBJECT: JAMAICAN ECONOMY SLUGGISH IN FIRST QUARTER 
 
REF: A. 06 KINGSTON 1286 
 
 ¶B. KINGSTON 705 
 
------- 
SUMMARY 
------- 
 
¶1. The Jamaican economy expanded by two percent during January to 
March 2007.  Growth was driven by agriculture and construction, as 
tourism output declined for the first time in four years, following 
the return of Cancun after hurricane damage.  Inflation of one 
percent was the major success story of the Jamaican economy during 
the first quarter.  The foreign exchange market suffered bouts of 
instability because of increased liquidity and lower capital 
inflows, but strategic intervention by the central bank minimized 
the level of depreciation.  Fiscal policy remained the biggest 
challenge facing the country, with the GoJ missing all of its fiscal 
targets and having to defer some expenditure items to minimize the 
fallout.  Going forward, growth will remain sluggish as tourism 
wanes, but the productive sector should post reasonable growth. 
With commodity prices on the rise, inflation could accelerate, while 
the foreign exchange market could face demand pressure as investors 
switch to foreign assets in the face of uncertainty.  But it is 
fiscal policy which will pose the greatest threat, and any deviation 
in the fiscal target could lead to a downgrading of the country's 
credit ratings.  End summary. 
 
--------------- 
Growth Stagnant 
--------------- 
 
¶2. The Jamaican economy started 2007 on a low, with output growth 
for the first quarter lagging behind its three percent target.  Real 
GDP for the March quarter is estimated to have grown by only two 
percent, due to flat services and more specifically tourism output. 
However, the productive sector jumped by 2.8 percent, reflecting 
renewed buoyancy in construction activity following the 
regularization of cement supplies.  The robust growth in 
construction is a normalization of the growth rates observed prior 
to the 2005 cement shortage (ref. A) and continues to be driven by 
massive hotel and infrastructural projects.  Agriculture expanded by 
four percent, by far the lowest rate of growth in five quarters, 
suggesting the sector has returned to pre-hurricane growth levels. 
Manufacturing, which continued its downward trajectory (0.2 
percent), has established itself as the chronically weak sector of 
the Jamaican economy.  Unlike agriculture, which benefits from high 
levels of protection and has well-established links (especially with 
tourism), the manufacturing sector has been unable to forge the 
linkages necessary for survival.  This is largely attributable to 
declining competitiveness following trade liberalization in the 
1990s. 
 
-------------------- 
Star Performer Wanes 
-------------------- 
 
¶3. After enjoying four years of uninterrupted growth, tourism 
services declined by almost one percent during January to March 
¶2007.  This is significant as the tourism sector had become the 
mainstay of the Jamaican economy, growing by as much as 20 percent 
in the second quarter of 2006.  For the first quarter total visitor 
arrivals fell by 0.5 percent to 838,874, while total earnings 
declined by 0.2 percent to USD 475.7 million.  Stop-over arrivals 
(overnight) for the same period were 436,562, a decline of 2.1 
percent relative to the similar period of 2006.  Lower arrivals from 
the United States, down 12.1 percent, were largely responsible for 
the fall off in the sector.  Increased arrivals from Canada and 
Europe mitigated the overall statistics. 
 
¶4. The break in the growth trajectory is disturbing to tourism 
officials, who have blamed the Western Hemisphere Travel Initiative 
and the introduction of a temporary CARICOM Visa for Cricket World 
Cup (CWC) 2007.  However, the current performance must also be 
analyzed within the context of exceptional arrivals in 2006; in 
particular, there was a diversion of visitors to Jamaica as a result 
of hurricane damage to Cancun.  But with that destination back to 
normal and engaging in an aggressive promotional campaign, the 
positive shock has dissipated.  In fact, arrivals for the first 
quarter of 2007 are still ahead of arrivals for the similar period 
of 2005 and if the country had not benefited from Cancun's 
misfortune in 2006, the growth momentum would have continued into 
¶2007.  GoJ officials also posit that the anticipated crowds for CWC 
(which did not materialize) and a CWC-related public announcement 
issued by the USG also may have scared some visitors away from the 
island. 
 
KINGSTON 00000903  002 OF 003 
 
 
 
---------------------------------- 
Fiscal Operations a Drag on Growth 
---------------------------------- 
 
¶5. Fiscal operations continued to be the Achilles heel of the 
Jamaican economy and could well be the underlying cause of the 
country's economic malaise.  During January to March 2007 GoJ 
operations generated a surplus of USD 13.2 million, well below the 
targeted surplus of USD 181 million.  The deviation from target was 
due to a combination of lower-than-expected revenues and higher 
spending.  But this result is not surprising, given that the revenue 
target was overly ambitious in the context of sluggish economic 
growth and moderate price increases.  It was also going to be 
difficult to contain spending in general - and salaries in 
particular - in the period leading up to an election.  In fact, 
members of the essential services (e.g., police, nurses, teachers, 
and firemen), who make up the bulk of the public sector, were able 
to bargain for much more than the amount offered to the rest of the 
public sector. 
 
¶6. Against this background, GoJ operations for the full fiscal year 
generated a deficit of 5.3 percent of GDP, more than twice the 
projected deficit of 2.5 percent of GDP.  In addition to reversing 
the downward trend observed since the 2003/04 fiscal year, the 
fiscal result also forced the GoJ to again postpone its balanced 
budget target to 2009/2010.  But the fiscal position would have been 
worse if the GoJ had not deferred spending of 2.5 percent of GDP to 
the current fiscal year, confirming that the practice of deferred 
financing, exposed by the Opposition and disparaged by the IMF, 
remains intact.  Senior Director at the Ministry of Finance and 
Planning Courtney Williams told emboff that, in the absence of 
shocks to explain the significant deviation, he was surprised that 
the country's credit ratings had not been downgraded.  But, credit 
ratings aside, a rising deficit only adds to the burgeoning debt, 
putting a further drag on growth, while forcing the central bank to 
defer the interest rate reduction strategy necessary to stimulate 
output growth.  Therefore, any continuation of fiscal looseness will 
only cement the country's place among the economic laggards of the 
developing world. 
 
------------------------------------------ 
Prices Stable, But Demand Pressures Emerge 
------------------------------------------ 
 
¶7. The moderation in prices was the major success story for the 
first quarter.  Inflation for the period was one percent, bringing 
the rate for the fiscal year to 6.6 percent, the lowest rate since 
2002/2003.  First quarter inflation reflected increases in 
healthcare and personal expenses, fuels, housing and housing 
expenses, and food and drink.  Amidst the moderation in prices, 
there were renewed bouts of instability in the foreign exchange 
market.  Demand pressure was largely influenced by high levels of 
Jamaican dollar liquidity and declining net capital inflows, as 
tourism earnings moderated and the trade balance deteriorated.  The 
central bank also confirmed that there was no evidence of the much 
anticipated inflows from CWC 2007.  Despite the instability, the 
exchange rate depreciated by less than one percent as the central 
bank intervened in the market by selling foreign exchange from the 
Net International Reserves (NIR) to smooth supplies. 
Notwithstanding, the stock of NIR remained robust at USD 2.33 
billion. 
 
------- 
Comment 
------- 
 
¶8. The Planning Institute of Jamaica is projecting growth of 2.1 
percent for the second quarter of 2007, led by continued expansion 
in the productive sector. Agriculture, construction, and mining are 
expected to lead the way.  Tourism arrivals will continue to lag 
behind 2006 levels, as Cancun regains lost ground.  With the rate of 
economic expansion expected to remain constant, the economy will 
have to grow faster in the second half of 2007 to meet the three 
percent target.  But with the hurricane season and general elections 
approaching and with international commodity prices rising, it is 
unlikely that growth will pick up.  In fact, prices increased in 
April 2007 by 0.7 percent, the highest monthly increase since 
September.  Despite the surge in oil and grain prices, barring 
shocks, inflation for 2007 should fall within the 7-8 percent range. 
 
 
¶9. The local currency could face increasing pressure once elections 
are announced, as Jamaicans switch to foreign assets during the 
period of uncertainty.  This could force the central bank to use an 
 
KINGSTON 00000903  003 OF 003 
 
 
increasing portion of its NIR to protect the currency against a 
steep depreciation.  But it is fiscal policy which will pose the 
greatest threat going forward.   The GoJ was originally targeting a 
fiscal deficit of 4.5 percent of GDP for fiscal year 2007/08, but 
unbudgeted spending, like the removal of health fees for children 
under 18 (ref. B), could push this figure over five percent.  Apart 
from increasing the country's massive debt level, the increased 
borrowing could also stall the central bank's interest rate 
reduction program.  This is disconcerting, as any major deviation in 
the fiscal target could erode credibility, leading to a downgrade in 
the country's credit ratings.  The party forming the next government 
will therefore have the monumental task of making the hard decisions 
necessary to stabilize the country, and the attendant risk of being 
a one-term government.  End comment. 
 
JOHNSON