VZCZCXRO0930
RR RUEHGR
DE RUEHKG #1798/01 2551918
ZNR UUUUU ZZH
R 121918Z SEP 06 ZDK
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 3571
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1837
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 KINGSTON 001798 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR (RANDALL BUDDEN) 
WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR A FAIBISHENKO 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EIND PREL SOCI JM
SUBJECT:  JAMAICA: ECONOMIC GROWTH EXCEEDS EXPECTATIONS, 
            BUT FUNDAMENTALS REMAIN WEAK 
 
REF: A.) KINGSTON 1286 
 
 B.) KINGSTON 1559 
 
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Summary 
--------- 
 
¶1. Jamaica's economy is estimated to have grown by 2.8 percent 
between April and June 2006 -- twice the rate projected by the 
Planning Institute of Jamaica (PIOJ), and this despite a shock to 
the construction sector from a recent cement crisis (ref. A). 
Growth has been largely the result of tourism and, to a lesser 
extent, recovery in agricultural production.  Other areas of the 
macro-economy also registered improved performance during the review 
quarter, with inflation slowing to 2.8 percent amidst declining 
interest rates and relative stability in the foreign exchange 
market.  Because of improved revenues, the country's fiscal position 
also exceeded expectations.  GDP growth is expected to continue on 
the back of robust tourism, agriculture, and mining.  Despite 
continuing increases in the costs of energy, housing, food, and 
drink, the rate of inflation should remain below last year's.  This, 
combined with expected foreign exchange market stability because of 
record foreign exchange inflows, should allow the central bank to 
reduce interest rates in the second half of 2006.  However, this is 
not necessarily an indication that the economy is on the upswing: 
formidable challenges loom, particularly in the form of debt.  End 
summary. 
 
------------------ 
GDP Exceeds Target 
------------------ 
 
¶2. Data released by the Planning Institute of Jamaica (PIOJ) on 
August 17 show that economic growth is estimated to have increased 
by 2.8 percent during the June quarter, surpassing the 1.4 percent 
target.  Services went up by 3.4 percent, reflecting robust tourism 
performance, while goods production increased by 1.1 percent as a 
result of strong recovery in agriculture.  Tourism continues to be 
the mainstay of the Jamaican economy, contributing half of the GDP 
growth (1.4 percent) registered during the review period.  Stopover 
arrivals, influenced by increased advertising, record flights, 
expanded room capacity and the re-introduction of "Reggae 
Sunsplash", surged by 24.1 percent during the quarter.  Cruise 
arrivals, aided by the introduction of bigger ships, also climbed by 
13.8 percent.  Agriculture, which has been battered by both 
excessive rain and prolonged drought in previous quarters, grew by 
17 percent during the quarter.  This recovery was the result of 
favorable weather conditions during the period. 
 
 
¶3. GDP could have grown by almost four percent were it not for the 
supply side constraints presented by the cement crisis (ref. A), 
which slowed the fast-growing construction sector (and to a lesser 
extent the manufacturing sector).  Construction, which had been 
growing by up to 10 percent before the crisis, dropped by 3.5 
percent, while manufacturing declined by 1.4 percent.  (Comment: 
This brings into focus one of the underlying problems facing the 
Jamaican economy: the inability to achieve a confluence of factors 
required to propel growth.  Therefore, while growth exceeded 
expectations it was still: (1) outpaced by the growth in the stock 
of debt; (2) below the level required to improve the debt dynamics; 
and, (3) lower than the average for countries at Jamaica's level of 
development.  End comment.) 
 
------------------------------------------- 
Other Macroeconomic Indicators Also Improve 
------------------------------------------- 
 
¶4. Government finances for 2006 improved because of strong revenues 
and lower-than-projected capital spending.  For the first quarter of 
the Jamaican fiscal year (April-June 2006), central government 
operations generated a deficit of USD 115 million, USD 49 million 
better than projected (ref. B).  There was also a moderation in 
inflation to 2.8 percent, lower than the 5.6 percent recorded during 
the corresponding period of 2005.  Inflation, during the review 
period, was fuelled by rising energy and food prices.  The central 
bank was able to respond to demand pressure in the foreign exchange 
market by periodically selling funds from its stock of NIR.  As a 
consequence, the currency depreciated by only 0.6 percent, while the 
stock of NIR ended the quarter at a healthy USD 2.1 billion. 
 
 
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KINGSTON 00001798  002 OF 002 
 
 
...But Challenges Remain 
---------------------- 
 
¶5. In upcoming quarters, however, the GOJ will have a difficult time 
meeting revenue targets, given the anticipated normalization in tax 
revenues.   Expenditures are also expected to gain momentum, as 
capital projects pick up pace and general elections approach.  Even 
more disconcerting, however, is the rising stock of debt required to 
finance expenditures.  Most of this debt will have to be raised on 
the domestic market due to rising international interest rates.  In 
addition to affecting the timing and magnitude of expected domestic 
interest rate declines, the growing debt also will continue to cause 
a drag on the very economic growth required to generate the revenues 
needed to improve the debt dynamics (reducing the debt stock and the 
debt-to-GDP ratio).  Inflation, while moderating relative to 2005, 
has been inching up each month due to rising oil, food and drink, 
and utility prices.  The relative foreign exchange market stability 
has also been underpinned more by intervention from the stock of 
NIR, which is costly, rather than from robust inflows of foreign 
exchange. 
 
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Outlook 
------- 
 
¶6. GDP could expand in July to September, as cement supplies return 
to normal.  In fact, the PIOJ is projecting GDP growth of 2.7 
percent.  This target is not over-optimistic, since tourism and 
mining are already up 19 percent and 10.4 percent, respectively, in 
July.  Construction and manufacturing have also bottomed out and are 
poised to rebound in the July-September quarter.  However, the 
disputatious industrial climate and the cooling U.S. economy, which 
will affect tourism, could impact growth in upcoming quarters. 
Fiscal performance is also expected to wane in upcoming quarters 
unless the GOJ can broaden the tax base or divest assets. 
Nevertheless, there could be some positives in the financial markets 
with interest rates expected to decline given the continued 
liquidity in the domestic market.  The extent of the rate decline 
will depend on the GOJ's appetite for debt, foreign exchange inflows 
and the movement in domestic inflation and international interest 
rates. 
HEG