VZCZCXRO3347
PP RUEHGR
DE RUEHKG #1445/01 2631732
ZNR UUUUU ZZH
P 201732Z SEP 07
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 5378
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNCOM/EC CARICOM COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0379
RUMIAAA/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 03 KINGSTON 001445 
 
SIPDIS 
 
SIPDIS, SENSITIVE 
 
STATE FOR WHA/CAR (JOE TILGHMAN) 
 
TREASURY FOR INTERNATIONAL AFFAIRS (SARA GRAY) 
 
PASS TO USAID - FOR DIRECTOR HENRIETTA FORE 
 
E.O. 12958:  N/A 
TAGS: PREL PGOV ECON EFIN ETRD EAID JM XL
SUBJECT: JAMAICA: ECONOMIC CHALLENGES FACING THE NEW GOVERNMENT OF 
PRIME MINISTER BRUCE GOLDING 
 
REF: KINGSTON 1419 (172048Z SEP 07) 
 
-------- 
Overview 
-------- 
 
1.(SBU) This first of several cables outlining challenges facing the 
new Government of Prime Minister (PM) Bruce Golding's Jamaica Labour 
Party (JLP) focuses on pressing domestic and international economic 
problems, including: 
 
-- a reemergence of fiscal difficulties; 
 
-- a debt-to-GDP ratio approaching 140 percent; 
 
-- high unemployment and anemic growth; 
 
-- the global credit squeeze; 
 
-- the slow-down in the U.S. economy; 
 
-- and rising international oil prices. 
 
These difficulties-- recently compounded by nearly USD 300 million 
in damages to Jamaica from Hurricane Dean-- would be disconcerting 
to any new government-but particularly so to Golding's JLP, which 
during the election campaign promised free health care and 
education, faster growth, and job creation.  End Overview. 
 
----------------------------- 
Fiscal Difficulties Resurface 
----------------------------- 
 
2.(SBU)  The reemergence of fiscal difficulties will be the first 
major challenge facing the incoming government.  While figures for 
the first four months of the fiscal year showed some amount of 
consolidation, the Ministry of Finance now has revealed that over 
USD 220 million, or almost two percent of GDP, worth of expenditures 
are yet to be included in the budget.  This is not surprising, as 
Senior Director of the Fiscal Policy Management Unit Courtney 
Williams had confirmed EmbOff's view that expenditures could spike 
after the elections, given the (now well-established) practice of 
deferred financing.  This revelation also bears out the contention 
of then-Opposition finance spokesman (now Finance Minister) Audley 
Shaw made during the 2007 budget debate that the Government was 
presenting an "election budget," and that additional expenditures 
would emerge thereafter.  When the cost associated with the JLP's 
free tuition promise is added, the fiscal deficit could jump to 
almost 7 percent of GDP, up from 4.5 percent.  (Comment: Given that 
the country has been overshooting its fiscal deficit target in 
recent years, and given the emerging international credit crunch, it 
thus should come as no surprise if Jamaica's credit rating is 
downgraded in the upcoming year.  End Comment.) 
 
-------------------------------------- 
Hurricane Dean Blows Targets Off Track 
-------------------------------------- 
 
3.(SBU)  The new administration is faced not only with the 
unenviable job of reshaping the fiscal budget, but also with 
revising the entire macroeconomic program, given the damage meted 
out by Hurricane Dean (reftel).  Total hurricane damages are 
estimated at almost USD 300 million, and will have serious 
implications for economic growth and fiscal consolidation.  The 
economy is projected to slow to only 1.1 percent, down from an 
already anemic 2.1 percent; this will have negative consequences for 
tax revenues, which recently have been outperforming programmed 
levels.  Inflation, which recently has slowed to single digits, now 
is expected to jump to low double digits given the shock of Dean, 
especially to domestic agriculture.  Soaring oil prices also should 
contribute to a further spike in inflation.  (Note: Septel will 
provide more details on the impact of Hurricane Dean. End note). 
 
------------------------------- 
Credit Crunch To Affect Funding 
------------------------------- 
 
4.(SBU)  With tax revenues expected to slow, the government will be 
forced to look to the domestic and external markets for funding. 
But either approach could have consequences for the economy. 
Increased domestic borrowing could stymie the central bank's efforts 
to further reduce interest rates.  Domestic borrowing requirements 
could also crowd out the local private sector, which is expected to 
 
KINGSTON 00001445  002 OF 003 
 
 
be one of the engines of growth.  Sourcing funds on the external 
market will be no different, particularly given the country's 
worsening fiscal dynamics and the tightening international capital 
market, given the credit crunch.  But even if funds are available on 
the external market it will come at a much higher cost and will 
influence local investors to shift from local to foreign denominated 
assets.  This would place even more pressure on the local currency, 
forcing the central bank to use more of its reserves to shore up 
supplies.  Demand pressures also will emanate from soaring oil 
prices now hovering around USD 80 a barrel, well above the USD 71-72 
predicated in the economic program.  This is sure to put additional 
pressure on the current account and by extension the local currency 
as more resources will be required to pay the oil bill.  On the 
supply side, declining tourist arrivals are expected to slow tourism 
receipts. 
 
5.(SBU)  That said, the greatest threat of any increase in rates 
will be to the fiscal dynamics, as any increase in interest cost 
will only serve to exacerbate an already tenuous situation.  When 
this is added to the issues of sluggish revenue growth and the JLP's 
promise to cap both the fiscal deficit and the debt, the challenges 
facing the new government appear almost insurmountable in the short 
term.  The fiscal dynamic could also be affected if the JLP acts on 
its promise to make the central bank fully independent-and thus not 
obliged to make the monetary adjustments necessary to accommodate 
fiscal profligacy.  But fiscal efficacy aside, an independent 
central bank is important from a rules-based approach.  And this 
policy position should be simple to implement, as the current 
governor always has supported greater independence for the bank. 
 
 
6.(SBU)  The JLP also has identified funding from multilaterals as a 
substitute for high cost debt.  But while funding from this source 
has its advantages, it cannot be used for recurrent spending; it 
also takes time to negotiate and is therefore not a short term 
solution.  Similarly, resources could be garnered by selling state 
assets but time will also be required to identify the assets to be 
sold, making this at best a medium term solution.  And while 
loss-making assets like Air Jamaica and the Sugar Company of Jamaica 
may merit consideration for sale, any decision actually to do so 
could turn out to be political dynamite. 
 
--------------------- 
Debt to Remain a Drag 
--------------------- 
 
7.(SBU)  At the end of July 2007, the total stock of debt amounted 
to USD 14.1 billion or almost 140 percent of GDP, thus maintaining 
Jamaica's unenviable record as one of the most indebted countries in 
the world.  And this does not even include the stock of publicly 
guaranteed debt, considered a contingent liability to government, 
which could push the debt up by another four percent of GDP.  Given 
that debt has the first call on the budget, after the Governor 
General's remuneration, the cost of financing this gargantuan debt 
and its attendant effect on the rest of the economy must rank as one 
of the major challenges facing the new administration.  This could 
explain why the JLP has wooed Grace Kennedy Executive Don Webhy to 
support Finance Minister Audley Shaw.  (Webhy will serve as Minister 
without Portfolio, but has been explicitly attached to the Finance 
Ministry.)  With debt servicing cost accounting for almost sixty 
percent of the budget and climbing, the JLP's social spending 
promises will be challenged.  While Shaw had enumerated a number of 
strategies to address the debt overhang while in opposition, and 
while the JLP has outlined an ambitious plan to bring down the debt 
to 100 percent of GDP in its Manifesto, it will realize that the 
emerging international credit dynamic could make some proposals 
moot.  That said, if the administration is able to make good on its 
promise to grow the economy and create new jobs, then it could begin 
to generate the revenues required to pay down the debt.  In fact, 
aside from debt forgiveness (which is unlikely), the only credible 
way to reduce the debt burden is to grow out of it.  As such, Shaw's 
proposal to use the savings from the PETROCARIBE Agreement, while 
plausible, can only serve to complement the solution of increased 
economic growth and by extension revenue growth. 
 
--------------------- 
Investment and Growth 
--------------------- 
 
8.(SBU)  Investment and growth are key planks of the JLP's 
manifesto.  The administration has decided to concentrate on 
job-creating "greenfield" investment as well as the creation of an 
offshore financial sector.  To enable the rapid private sector 
 
KINGSTON 00001445  003 OF 003 
 
 
growth needed to create jobs and reduce the fiscal imbalance, the 
new government is planning to reduce the bureaucracy and corruption 
that have been Jamaica's major bugbears.  But while there is little 
doubt that growth is manifestly required, the new administration 
will discover that it will first have to overcome a number of 
structural bottlenecks that currently limit competitiveness of the 
Jamaican private sector.  Jamaica may lack the capacity to grow by 
the 5-6 percent enunciated by the JLP due to its chronic shortage of 
skilled labor.  Crime, which is considered the number one problem 
facing Jamaicans (to be the subject of septel), also magnifies the 
cost of doing business and will figure prominently in the minds of 
prospective investors.  A 2005 World Bank report, drawing on a 
survey of 159 firms operating in the region, argued that to improve 
the investment climate, Caribbean countries must improve their 
infrastructure (including information and communication technology), 
policy and legal environment, and taxation and customs; these 
factors continue to limit investment in Jamaica today.  Regarding 
the offshore financial sector, while Jamaica has natural advantages 
and a relatively sound regulatory framework, it will have to compete 
with both existing and emerging players.  And while cutting 
bureaucracy does not require much financial outlay, it might still 
be difficult to achieve given that bureaucracy benefits stakeholders 
who will resist losing the associated economic rent.  The damage 
caused by Hurricane Dean, the slow down in global growth, and the 
prospect of a possible recession in the U.S. also could militate 
against the growth and investment platform. 
 
------- 
Comment 
------- 
 
9.(SBU)  Given the reemergence of fiscal indiscipline, the new 
administration might be advised to use the remainder of the fiscal 
year (which ends March 31, 2008) to concentrate on the 
implementation of those manifesto items that do not require funding. 
 In this regard, it is expected that the new government will spend 
the time addressing the legislative framework necessary to improve 
governance, which has been in need of redress and is actually a 
prerequisite for some of the investment and growth policies outlined 
in the manifesto.  This may be one reason that the widely respected 
former opposition spokesman on justice, Delroy Chuck, who has a 
legal background, now has been named Speaker of the House.  But the 
administration nevertheless will face a number of challenges going 
forward.  Chief among these are the rehabilitation efforts following 
Hurricane Dean and the attendant effect on the fiscal accounts.  The 
revelation of fiscal indiscipline at the Ministry of Finance can 
only serve to erode the consolidation which had characterized the 
last seven months.  The new administration's desire to grow the 
economy by between six and seven percent also will be stymied by the 
slow-down in global economic activity and in the U.S. economy in 
particular.  This is particularly disconcerting because of the 
Jamaican economy's heavy dependence on the U.S. economy, 
particularly in the areas of bauxite, remittances, and tourism. 
While remittances have proven a most resilient flow of income, 
during a possible recession tourists tend to stay at home and demand 
for commodities declines.  Jamaica already has seen a fall off in 
tourist arrivals and an attendant decline in tourism receipts.  End 
comment. 
 
JOHNSON