VZCZCXRO2184
RR RUEHGR
DE RUEHKG #0420/01 0592054
ZNR UUUUU ZZH
R 282054Z FEB 06
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 2354
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1800
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 KINGSTON 000420 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
E.O. 12958:  NA 
TAGS: ECON EFIN JM
SUBJECT:  JAMAICA RECORDS STRONG GROWTH DURING OCTOBER TO 
DECEMBER 2005 
 
REF: 05 KINGSTON 2797 
 
¶1. (U) Summary:  The Jamaican economy weathered the 
storms of 2005 to record growth of 1.8 percent during the 
year.  The expansion in output was largely due to robust 
growth of 4.1 percent during the final quarter, 
reflecting a recovery in agriculture and tourism. 
Declining oil and food prices also tamed inflation to 0.9 
percent between October and December.  However, fiscal 
challenges continued, with central government operations 
generating a deficit of USD 163 million (JMD 10.6 
billion) due to lackluster revenue performance.  The 
foreign exchange market also remained restless, with the 
exchange rate depreciating by 3.4 percent, despite a 
healthy stock of Net International Reserves (NIR).  These 
difficulties aside, macroeconomic performance, led by 
economic growth, is expected to pick up in the first 
quarter of calendar year 2006.  Real GDP is projected to 
grow by 3.1 percent, inflation is expected to moderate 
further, and relative stability should return to the 
foreign exchange market.  The conclusion of the Peoples 
National Partys (PNP) internal elections and Standard 
and Poor's affirmation of Jamaicas 'B' long and short- 
term sovereign ratings should also help to sustain 
investor confidence in upcoming year.  End summary. 
 
---------------------------------------- 
Solid - Rather Than Spectacular - Growth 
---------------------------------------- 
 
¶2.  (U) Driven by strong recovery in the agriculture and 
tourism sectors, real GDP for the December quarter jumped 
by 4.1 percent, the highest rate since the country 
ry 
started estimating quarterly GDP in 1996.  The result 
also brought growth for calendar year 2005 to 1.8 percent 
and while this was below the original target of 2-3 
percent, it was still encouraging given the number of 
external shocks in 2005.  Economic performance in the 
final quarter was largely due to a rebound in 
agricultural production (28.3 percent), which had 
suffered the most from adverse weather conditions. 
Construction (up 2.5 percent) continued to be buoyed by 
rehabilitation activities and hotel and highway projects. 
Manufacturing sector growth of 1.5 percent was largely 
due to the resumption of normal operations at the oil 
refinery (some analysts worried that disruptions in 
cement production caused by the hurricane season would 
hurt the sector).  Miscellaneous services (up 13.2 
percent) rallied, aided by a surge in tourist arrivals, 
which reflected increased marketing and a diversion of 
visitors from hurricane-ravaged Cancun.  The robust final 
quarter performance carried the tourism sector to a 4.5 
percent growth in arrivals for 2005, the third 
consecutive year of increase.  Transportation & 
Communication (up 6.4 percent) and Electricity & Water 
(up 4.5 percent) were other major contributors to growth. 
 
---------------------------- 
Inflation Trending Downwards 
---------------------------- 
 
¶3.  (U) Declining oil prices and the recovery in 
agriculture led to reductions in the price of fuel and 
agricultural products, which tamed inflation during the 
December quarter of 2005.  Headline inflation was 0.9 
percent or 1.7 percentage points below the average of the 
last five years and was also the lowest for the December 
quarter since 2000.  The moderation during the quarter 
influenced a slowdown in the annual rate of inflation to 
12.9 percent, compared to the annualized rate of 19 
percent in September.  Despite this dramatic slowdown, 
inflation was still above the nine percent target set at 
the beginning of the year and fuelled instability in the 
foreign exchange market, as investors realigned their 
portfolios to address the inflation concerns and the 
rates effect on the real rates of return for Jamaican 
dollar assets.  Continued tightening of monetary policy 
in the United States also narrowed the interest rate 
differential between Jamaican and U.S. assets, making the 
latter more attractive.  These factors combined with the 
uncertainty associated with the ongoing leadership race 
for the ruling People's National Party and the 
deterioration in the fiscal accounts placed increased 
 
KINGSTON 00000420  002 OF 003 
 
 
demand pressure on the foreign exchange market.  As a 
consequence, the local currency depreciated by 3.4 
percent during the quarter.  To satisfy the demand, the 
Bank of Jamaica sold US dollars to the market resulting 
in a USD 31.6 million decline in stock of NIR to USD 2.1 
billion. 
 
-------------------------- 
Fiscal Difficulties Remain 
-------------------------- 
 
 
¶4.  (U) Influenced by lower-than-programmed revenue 
collections, GOJ'S operations continued to deteriorate, 
generating a fiscal deficit of USD 163 million (JMD 10.6 
billion) during the review quarter.  This was USD 152.3 
million or JMD 9.9 billion more than budgeted and was due 
to revenues being USD 146.2 million below target. 
Expenditures were USD 7.7 million above target.  As 
expected, the worsening fiscal position prompted the GOJ 
to push back its balanced budget objective to fiscal year 
2007/08 (reftel). This could suggest that the 
administration is giving itself room to increase 
expenditure on social and capital projects during the 
next fiscal year, which is expected to be a general 
election year.  (Note: The governing Peoples National 
Party (PNP) held 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.  The winner, Portia Simpson-Miller, will 
contest a General Election with the Opposition Jamaica 
Labor Party no later than October 2007.  End note.) 
 
¶5.  (U) Despite the fiscal strains, Standard and Poor's 
Rating Agency, in a report on February 17, maintained 
Jamaica's 'B' (stable) rating, noting that, "the ratings 
on Jamaica are supported by the government's ongoing 
commitment to fiscal discipline and debt reduction amid 
external shocks."  The agency pointed to Jamaica's 
positive growth prospects, underpinned by robust foreign 
investments in the tourism and mining sectors.  It also 
cited the expected decline in the country's debt to GDP 
ratio to 127 percent as well as the reduction in interest 
costs due to declining domestic interest rates.  Standard 
and Poor's also noted the close liaison Jamaica maintains 
with the IMF and the attendant policy transparency, which 
helps to preserve investors' confidence in the economy. 
Encouraged by the positive news, the GOJ was able to 
successfully float a USD 250 million global bond on the 
international market to pre-fund the borrowing program 
for 2006/07.  The 30-year instrument is the longest ever 
floated by Jamaica and with a coupon rate of 8.5 percent, 
the lowest coupon offered on any GOJ instrument. 
Minister of Finance Omar Davies said that the reaction of 
the market demonstrated continued investor confidence in 
the management of the economy.  Rating agency Moodie was 
also bullish on the issue suggesting that the success of 
the instrument will open up emerging market funds and 
more hedge funds would gravitate toward Jamaican debt as 
the capital market has a preference for longer-term 
securities. 
 
------- 
Comment 
------- 
 
¶6.  (U) The positive developments observed in the final 
quarter of 2005 are expected to continue during 
¶2006.  Real GDP is expected to rise by 3.1 percent during 
the first quarter, dominated by growth in the tourism, 
manufacturing and construction sectors.  Strong tourism 
figures have carried into 2006, with arrivals in January 
jumping by 11 percent, one of the best monthly 
performances on record.  Manufacturing GDP should 
accelerate with increased sugar output as well as a 
return to normal cement production levels.  Influenced by 
increased infrastructure and hotel projects, the 
construction sector should continue to record strong 
growth.  Inflation for the January to March quarter is 
expected to moderate to well under one percent, following 
the 0.2 percent outturn for the first two months of 2006. 
However, inflationary impulses could return, following a 
recent up-tick in oil prices, rental rates, insurance 
premiums and baked goods.  The lagged effects of the 
 
KINGSTON 00000420  003 OF 003 
 
 
depreciation in the exchange rate could also feed into 
inflation.  Nevertheless, with inflation slowing and with 
the GOJ'S recent success in raising USD 250 million, 
relative stability should return to the foreign exchange 
market.  GOJ operations are also expected to generate a 
fiscal surplus during the March quarter, as revenues 
typically soar to meet end-of-year tax deadlines.  A 
confluence of the foregoing factors and Standard and 
Poor's rating affirmation could set the stage for 
relatively strong economic performance in 2006.  However, 
these gains are dependent on a calm hurricane season and 
the maintenance of fiscal prudence leading up to the next 
general elections.  End comment. 
 
TIGHE