VZCZCXRO1166
RR RUEHGR
DE RUEHKG #0569/01 1091923
ZNR UUUUU ZZH
R 191923Z APR 07
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 4630
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1896
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 KINGSTON 000569 
 
SIPDIS 
 
STATE FOR WHA/CAR (RBUDDEN), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR A FAIBISHENKO 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN JM
SUBJECT: JAMAICA: BUSINESS AND CONSUMER CONFIDENCE SURGE, BUT WILL 
HISTORY REPEAT ITSELF? 
 
 
------- 
SUMMARY 
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¶1. Business and consumer confidence surged in the first quarter of 
2007, reflecting declining prices and interest rates and the 
euphoria surrounding the Cricket World Cup (CWC).  Consumers were 
more confident about their economic prospects at the start of 2007 
than at any other time since 2001, while businesses liked their 
financial prospects.  These findings mirror the survey results from 
the period immediately prior to the 2002 general elections, when 
confidence peaked before plunging as the real state of the economy 
emerged.  As in 2002, consumers and businesses are bullish about the 
short-term prospects of the economy.  But while consumer optimism 
might be explained by CWC and the spending binge generally 
associated with elections, it is difficult to justify business 
confidence, given the emerging fiscal difficulties.  While no tax 
package is expected before the elections, the GoJ will only be 
postponing the inevitable, as regardless of which party wins 
upcoming general elections, taxpayers can expect to face higher 
taxes to narrow the financing gap and or expect a steep reduction in 
public goods and services.  Even these austerity measures might not 
be sufficient to calm the capital market, which has seen this 
scenario all too often, and could result in massive adjustments in 
the economy. End summary. 
 
----------------------------------- 
Consumer Confidence at Record Level 
----------------------------------- 
 
¶2. Jamaican consumers expressed the greatest level of confidence 
about their future economic prospects at the beginning of 2007 than 
at any other time since the survey started in 2001.  According to 
the Jamaica Chamber of Commerce's Survey, the Index of Consumer 
Confidence rose to a record 138.1 at the end of March 2007, up from 
128 in the previous quarter.  However, unlike the last quarter of 
2006 when confidence was driven by Kingston residents, the current 
gains stem from residents in resort areas.  Consumers are pinning 
their hopes on further improvements in the economy, with 65 percent 
anticipating the gains to at least remain constant.  In particular, 
consumers were buoyed by the: (a) up tick in economic growth; (b) 
moderation in inflation to 5.8 percent; (c) declining interest 
rates; (d) euphoria surrounding the staging of Cricket World Cup 
2007; and, (e) expectations of record tourist arrivals in 2007. 
 
 
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More Jobs Finally? 
------------------ 
 
¶3.  The improved economic performance is expected to bring increased 
job opportunities, so when asked about future job prospects, 
Jamaican consumers expressed the highest level of optimism since the 
survey started.  An adequate supply of jobs was reported by 30 
percent of residents in resort areas, 20 percent of Kingston 
residents and 25 percent of residents in other areas.  The response 
from residents in tourist areas suggests anticipation of another 
year of record tourist arrivals, especially given the boom in hotel 
construction.  But consumers were even more excited about gains in 
their incomes, with almost 60 percent of households anticipating 
increases.  This finding might not be surprising given that the GoJ 
has already spent close to USD 15 million on a clean-up campaign, 
commonly referred to as a "crash program." (Note: a crash program is 
the spending of large amounts of public money in 
politically-sensitive and/or contentious areas, seen as an attempt 
to buy votes.  Endnote)   With general elections approaching, 
consumers would expect this spending to intensify.  Strangely, 
increased spending plans are not expected to accompany the higher 
incomes, with home, vehicle and vacation plans cut in half.  The 
cautious spending plans suggest that consumers are aware that the 
hype will be temporary. 
 
---------------------- 
Businesses Follow Suit 
---------------------- 
 
¶4. The Index of Business Confidence jumped to 126.7, just below the 
all time high of 127.3.  So positive were firms about the economic 
prospects that only 21 percent expected the economy to worsen during 
the year, down from 45 percent in the last quarter.  But even as 
confidence in the economy surged, firms remained concerned about the 
high costs of crime, with two-thirds of all firms citing the 
associated costs as the main obstacles to a more sustained period of 
positive economic growth in Jamaica.  Businesses were also upbeat 
 
KINGSTON 00000569  002 OF 003 
 
 
about their profits: two-thirds of all firms expected increased 
profits during the year ahead, the highest proportion recorded since 
¶2001.  This expectation is not surprising and could also be 
attributed to the anticipated spike in spending leading up to the 
elections.  A record number of firms also anticipated a general 
improvement in their financial situation, and with the general 
business climate improving a record number of firms are planning new 
investments.  Investments were planned by 48 percent of all firms, 
while only 33 percent of firms thought it was a bad time to invest, 
the lowest level registered since 2001.  This particular finding is 
curious, given the emerging fiscal difficulties, the correction of 
which could impact the very factors determining investment 
decisions. 
 
---------------- 
More of the Same 
---------------- 
 
¶5. The current findings of consumer and business confidence almost 
mirror the survey results leading up to the 2002 elections.  In 
fact, Minister of Finance and Planning Omar Davies, in delivering 
his 2002/03 budget, boasted about another business survey showing 
that 40 percent of business leaders expected the economy to grow by 
up to four percent.  But more importantly, the overwhelming majority 
expected lower inflation, exchange rate stability, and a continued 
lowering of interest rates.  Davies went on to stress that he was 
not presenting an election budget in the old-time sense where there 
were numerous "goodies" in an attempt to influence the electorate. 
Davies also presented a relatively tight macroeconomic program, with 
an inflation target of 5-6 percent, GDP of 2-4 percent and a fiscal 
deficit-to-GDP target of 2.5 percent. 
 
¶6. By the end of December 2002, however, Davies - in his now 
infamous "run wid it" speech - admitted that he had intentionally 
increased expenditures to gain a political advantage for his 
administration.  Davies later acknowledged the gravity of the fiscal 
and debt situations, fuelling instability in the foreign exchange 
market.  To address this instability the central bank embarked on a 
number of corrective measures, including a hike in benchmark 
interest rates from 17 to 36 percent.  By the end of the 2002/03 
fiscal year the GoJ had missed all of its economic targets, with the 
fiscal deficit above target by 5.2 percent of GDP.  This led to a 
loss of credibility in the international capital market, forcing the 
GoJ to impose one of the largest tax packages in the country's 
history.  The evidence therefore suggests that confidence is at best 
tenuous and is largely driven by short term prospects.  This period 
is not only devoid of taxes, but is generally characterized by 
increased spending, especially on "crash programs" for the poor. 
 
 
----------------------------- 
So is Another Crisis Looming? 
----------------------------- 
 
¶7. Despite improvements in the current economic fundamentals, a 
number of challenges remain which, if unattended, could set the 
stage for a reversal of those recent gains. Data for the fiscal year 
shows that the fiscal deficit-to-GDP is running at about five 
percent, well above the original target of 2.5 percent of GDP.  And 
while the GoJ has tabled a tight expenditure budget for the 2007/08 
fiscal year, this is widely viewed as an underestimation of the 
"real" budget, which will include election spending, and will only 
emerge when the GoJ has to table its revised projections at the end 
of the fiscal year.  This anticipated spending will not be 
accompanied by increased revenue, which could lead to further fiscal 
deterioration.  This will force the GoJ to postpone its balanced 
budget target from 2007/08 to sometime in the medium term, 
particularly as Prime Minister Portia Simpson-Miller pursues her 
campaign slogan to "balance lives."  While this might find favor 
with the electorate, it might not be so well received by the 
international capital market.  Already Bear Stearns has downgraded 
Jamaica's bonds to "market under-perform" based on these fiscal 
concerns.  The investment bank does not expect any positive 
surprises from the budget and has expressed disappointment in the 
fiscal accounts given the absence of shocks in 2006. 
 
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COMMENT 
------- 
 
¶8. While confidence in the international capital market is beginning 
to wane, local optimism could remain high until after the elections. 
 As the true fiscal picture begins to emerge, however, there could 
be a concurrent decline in confidence.  In fact, a number of 
 
KINGSTON 00000569  003 OF 003 
 
 
additional factors could combine to lead to a plunge in confidence 
as observed after the last general elections.  The 2007 Cricket 
World Cup is turning out to be a disappointment from a financial 
standpoint.  The fact that the home team is not doing well has only 
added to several negatives plaguing the event, dampening the 
euphoria which helped to boost confidence in the first place. 
Additionally, the bumper tourism season forecast by the Tourism 
Ministry and anticipated by residents in resort areas is not 
materializing, and this will have a negative impact on foreign 
exchange earnings and economic growth.  If history repeats itself, 
there could be heavy tax measures in the near future to front-load 
the adjustments necessary to stabilize the economy.  This would be 
disconcerting, as Jamaican taxpayers would again be expected to 
absorb a decline in their standard of living to compensate for 
another bout of election year fiscal imprudence.  End comment. 
 
 
HEG