VZCZCXRO5730
RR RUEHGR
DE RUEHKG #0231/01 0341916
ZNR UUUUU ZZH
R 031916Z FEB 06
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 2153
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1797
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 KINGSTON 000231 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY), 
EB/IFD/OMA (JUNCKER) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  NA 
TAGS: ECON EFIN JM
SUBJECT:  JAMAICAN ECONOMY SHOWING SIGNS OF RECOVERY 
 
Ref: 05 KINGSTON 02797 
 
¶1. (SBU) Summary:  Signs of recovery have started to 
emerge in the Jamaican economy following the devastation 
caused by Hurricane Ivan in 2004.  Real GDP rose by 2.9 
percent during the period from July to September 2005, 
reflecting robust growth in the productive sectors. 
Declining oil prices and a recovery in agricultural 
production also tempered inflation during this quarter of 
¶2005.  On January 18, Standard and Poor's Rating Services 
(S&P) affirmed its 'B' long and short-term sovereign 
credit ratings for Jamaica in response to the general 
economic improvement.  Nevertheless, fiscal challenges 
remain, with the Ministry of Finance formally abandoning 
its balanced budget target (reftel) for 2006.  While macro- 
economic performance is expected to continue to improve in 
2006, difficulties could emerge on the fiscal front when 
the public sector wage freeze ends in March.  End summary. 
 
--------------------------------------------- -- 
Hard Data Heartening, Considering Externalities 
--------------------------------------------- -- 
 
¶2. (U) Data released by the Statistical Institute of 
Jamaica on January 17 showed that the Jamaican economy 
grew by 2.9 percent during July to September 2005, 
bringing GDP growth for the nine-month period to 1.1 
percent.  The improved third quarter result was largely 
due to a 5.7 percent jump in goods production, signaling a 
normalization of output following the impact of Hurricane 
Ivan in 2004.  Mining activity rebounded by 15.8 percent 
following the battering from Ivan.  Construction (up 8.2 
percent) and water and electricity (up 10.2 percent) 
surged forward due to continued rehabilitation efforts as 
well as increased road construction.  Agriculture recorded 
growth of 1.3 percent despite the subsequent onslaught of 
Hurricanes Dennis and Emily in 2005 and prolonged rain, 
while manufacturing (up 1.9 percent) improved following 
the resumption of normal production at the national oil 
refinery. 
 
¶3. (U) Stability in international oil prices and the 
partial recovery in agriculture combined to temper 
inflation during the last quarter of 2005.  Inflation for 
the period rose by one percent, well below the 4.3 percent 
recorded in the September quarter and brought inflation 
for 2005 to 12.9 percent or 0.8 percentage points below 
the previous year.  While this result was well above the 
GOJ's revised target of 9.0 percent, it represents the 
first slowing in annual inflation since the country 
reverted to double-digit inflation in 2003.  Inflation for 
the fiscal year to December 2005 stood at 11.3 percent. 
 
--------------------------------------- 
International Markets Still Optimistic. 
--------------------------------------- 
 
¶4. (SBU) On January 18, Standard and Poor's Rating 
Services affirmed its 'B' long and short-term sovereign 
credit ratings on Jamaica.  The ratings agency attributed 
its stable outlook to the GOJ's ongoing commitment to 
fiscal discipline and debt reduction amid external shocks 
and higher growth prospects. According to S&P credit 
analyst Olga Kalinina, "the confidence level of domestic 
businesses and international investors remains strong, 
reflecting the government's timely and appropriate policy 
response to adverse external developments."  However, the 
agency highlighted the difficulties government faces in 
generating its programmed fiscal surpluses in 2006 and 
beyond.  S&P said GOJ operations are now expected to 
generate a fiscal deficit of 1.6 and 1.5 percent of GDP in 
2006 and 2007, respectively.  The ratings agency said that 
despite the worse-than-expected deficit, the debt to GDP 
ratio is expected to decline from 133 to 127 percent.  S&P 
said "the stable outlook balances the expectation of 
prudent fiscal policies and promising growth prospects 
with significant risk stemming from the high interest and 
foreign exchange rate-sensitive government debt and rising 
fiscal pressures."  The agency also insinuated that if the 
GOJ misses its 2007 fiscal target, S&P would be forced to 
lower the country's credit rating. 
 
 
KINGSTON 00000231  002 OF 003 
 
 
----------------------- 
.Despite Missed Targets 
----------------------- 
 
¶5. (SBU) The GOJ formally announced the abandonment of its 
balanced budget target at a Bear Stearns investment 
conference on January 16, in Miami.  At the conference, 
new Financial Secretary Colin Bullock advised that the 
Ministry of Finance had revised its fiscal deficit 
projection to two percent of GDP for 2005/06 and one 
percent for 2006/07 (reftel).  Bullock also suggested that 
the achievement of a balanced budget target would be 
delayed until 2007/08.  The postponement is not surprising 
given that the public sector wage restraint comes to an 
end in March 2006 and public sector workers who have been 
under a wage freeze for the last two years will make every 
effort to recover their lost purchasing power.  Some trade 
unions have already suggested that their wage increase 
demand could be as high as 50 percent.  The decision to 
delay the balanced budget target could also have been 
influenced by the fact that the next fiscal year could be 
an election year and the GOJ is allowing some flexibility 
for additional spending on capital projects during the 
year. 
 
¶6. (SBU) GOJ plans to increase expenditures in line with 
the pre-2002 election level could be moderated by the 
presence of Bullock, who has established himself as a 
hardnosed technocrat at the Bank of Jamaica.  On the other 
hand, Bullock has never had to report directly to a 
political master, and this may temper his rigidity on 
fiscal issues.  In fact, a Ministry of Finance source told 
emboff that the postponement of the balanced budget until 
after the election was a clear indication that room was 
being made for some amount of fiscal imprudence.  If true, 
such indiscipline could be moderated by increasing 
surveillance from the capital market, with any major 
deviation from target expected to result in a loss of 
confidence. 
 
------- 
Comment 
------- 
 
¶7. (SBU) Barring unforeseen shocks, the Jamaican economy 
should achieve growth of 2.5 percent in 2006, up from the 
estimated 1.5 percent in 2005.  This output expansion is 
predicated on continued growth in construction, tourism, 
electricity and mining.  Data from the Jamaica Tourist 
Board shows that stopover arrivals jumped by 14.3 percent 
between September and November 2005 and preliminary 
information suggest that the momentum has continued into 
the winter tourist season, with most hoteliers reporting 
full occupancy.  The increased stopover arrivals have 
allowed hoteliers to revert to market prices for the first 
time since the September 2001 terrorist attacks in the 
United States.  With agriculture expected to recover fully 
in 2006 and with oil prices stabilizing, inflation is 
predicted to moderate in 2006. 
 
¶8. (SBU) Comment (cont'd): The impending end of the wage 
restraint with public sector workers is threatening to 
unravel all the gains made during the last year and a 
half, with trade unions agitating for a sizeable wage 
correction.  However, while public sector workers will 
require an adjustment to recover lost purchasing power, 
trade union leaders are cognizant of the fiscal 
imperatives.  Additionally, apart from being a good 
negotiator, Finance Minister Omar Davies is also well 
respected by the trade unions.  This, combined with the 
need for public sector downsizing (which Davies can use as 
a bargaining chip), could lead to reasonable wage 
agreements.  However, even if this outcome materializes, 
the sluggishness in revenues combined with the anticipated 
surge in capital spending for the next election will put 
severe pressure on fiscal policy.  The actual extent of 
fiscal indiscipline will depend on how desperate the 
incumbent wants the next election. (Note: The governing 
People's National Party (PNP) will hold an internal 
election on February 25 to choose the successor to Prime 
Minister P.J. Patterson, who has announced his intention 
to step down by the end of March.  Patterson's successor 
 
KINGSTON 00000231  003 OF 003 
 
 
will then contest the next General Election with the 
Opposition Jamaica Labor Party no later than October 2007. 
End note.)  This could have serious implications, as the 
capital market will be paying close attention to the 
fiscal numbers and will punish the country if the GOJ 
fails to pursue fiscal discipline.  End comment. 
 
JOHNSON