VZCZCXRO2432
RR RUEHGR
DE RUEHKG #0883/01 2831624
ZNR UUUUU ZZH
R 091624Z OCT 08
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 6845
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 KINGSTON 000883 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH) 
WHA/EPSC (MROONEY) 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR ERIN NEPHEW 
 
E.O. 12958:  N/A 
TAGS: ECON TRYS ENRG EFIN EINV ETRD XL JM
SUBJECT: WILL FINANCIAL CRISIS ROCK JAMAICA? 
 
REF:  A. KINGSTON 867 
¶B. KINGSTON 770 
¶C. KINGSTON 726 
¶D. KINGSTON 542 
 
SUMMARY 
------- 
 
¶1. (SBU) Jamaica's heavy dependence on global economic fortunes 
exposes the country to the ongoing financial meltdown, a serious 
concern for the year-old Golding administration.  Finance Minister 
Audley Shaw, in an apparent move to avoid a crisis of confidence, 
has been reassuring Jamaicans that the local financial system is not 
endangered by the unfolding crisis in the U.S financial markets. 
Similar sentiments have been expressed by Prime Minister Bruce 
Golding.  Although there is no apparent systemic financial risk, the 
country will likely see some fallout in the macro-economy and 
particularly in GDP growth.  Jamaica is still recovering from the 
collapse of several alternative investment schemes and damage caused 
by Tropical Storm Gustav.  Those financial losses coupled with a 
potential slowdown in tourism and remittances to the island could 
exacerbate the crime situation and further weaken moribund economic 
performance. End summary. 
 
Shaw On Defensive 
----------------- 
 
¶2. (SBU) Finance Minister Audley Shaw has sought to downplay the 
potential fallout from the current global financial meltdown in 
Jamaica's economy.  In order to avoid a crisis of confidence, Shaw 
has been reassuring Jamaicans that the country's financial system is 
not in danger.  Shaw told Parliament that depositors, policyholders 
and pensioners can rest assured that the domestic financial system 
remains well capitalized, well supervised and has the strong backing 
of the Central bank and the government.  Shaw also indicated that 
government's external capital requirements were being supplemented 
by policy-based loans from multilaterals at interest rates as low as 
five percent.  Similar sentiments have been echoed by Prime Minister 
Bruce Golding during his recent visit to Washington D.C.  On 
September 30, Golding said the country had secured between USD 100 
million and USD 200 million in loans per year over the next three 
years from the Inter-American Development Bank (IADB). 
 
¶3. (SBU) But the year-old administration has come in for much 
criticism.  Member of Parliament Ronnie Thwaites (PNP) has publicly 
bashed the GOJ for what he calls a misconception of the likely 
impact of the global financial crisis.  Thwaites, who is less 
concerned about the  systemic risks being addressed by Shaw, has 
gone to the extent of warning Jamaicans that they will have to make 
radical lifestyle changes due to the negative effects of the global 
economic crisis.  His position appears to be resonating with the 
populace, including government financial advisor Dennis Chung, who 
is predicting that the crisis will have a devastating impact on 
Jamaica.  Chung thinks the fallout is likely to result in economic 
stagnation for at least two years. 
 
GDP and External Sector at Risk 
------------------------------- 
 
¶4. (SBU) Chung's argument is not difficult to accept given that 
Jamaica was already on the brink of economic malaise.  Even before 
the passage of Tropical Storm Gustav in August, real GDP was 
declining on the back of weak agriculture, manufacturing and mining 
performance.  This fallout is expected to intensify in upcoming 
quarters as agriculture and in particular export agriculture sectors 
were decimated by Gustav (reftels).  So bad was the shock to banana 
exports that the sole exporter, Jamaica Producers Group, decided to 
 
;Q(YtYmeexit the banana export business.  Add to this the likely impact of 
the slowdown in consumption precipitated by the collapse of the 
alternative investment schemes (reftels) and the economic forecast 
look bleaker. 
 
¶5. (SBU) Most of the effects from the crisis are expected to take 
place in the external sector with the export of goods and services 
most at risk.  Commodities prices are likely to decline and the 
country could see a fall off in earnings from traditional exports 
like bauxite, alumina and sugar, while banana earnings will totally 
disappear.  Although declining world oil prices will lead to reduced 
import costs and moderating inflation, it might not be steep enough 
to offset falling export earnings, leading to a worsening current 
account position.  Tourism, Jamaica's number one foreign exchange 
earner, might not go into freefall, but the sector will face serious 
challenges going forward.  Emboffs visiting hotels on the north 
coast are finding far fewer guests than normal for this time of 
year.  At best, growth rates should wane as potential visitors 
postpone vacations amidst job losses and declining wealth.  That 
 
KINGSTON 00000883  002 OF 002 
 
 
said, those willing to travel will choose cheaper and closer 
destinations making a diversion of visitors from Europe and Asia 
more likely.  The GOJ in a bid to mitigate any fallout has also 
embarked on an aggressive advertising program while shoring up 
airlift to the island (reftels). 
 
¶6. (SBU) Even more important is the likely effect of the financial 
crisis on the flow of remittances from the Jamaican diaspora, 
particularly the United States.  Remittances of USD 1.4 billion up 
to August 2008 have been growing by double digits and now account 
for almost 20 percent of GDP.  The private transfer has become the 
core income for a number of Jamaicans and has also been credited 
with moving large numbers out of poverty.  There has been a slight 
slowing in the overall rate of growth in remittances.  Noel 
Greenland of Grace Kennedy Remittance Services (partly owned by 
Western Union), told emboffs on October 8 that they recorded the 
first decline in September (2 percent).  A steep decline is not 
expected, unless the financial situation becomes more severe. 
However, anecdotal information in the Jamaican press suggests that 
Jamaicans in the U.S. diaspora who are facing home foreclosures may 
be forced to curtail remittance flows. This view is predicated on 
the fact that the flow has remained resilient during past recessions 
and shocks due largely to the obligatory nature of the transfer. 
Additionally, most Jamaicans are concentrated in the services sector 
(healthcare and education) which has not been affected yet by the 
current economic downturn in the U.S. economy. 
 
Credit Crunch Could Affect Confidence 
------------------------------------- 
 
¶7. (SBU) The most significant effect of the global crisis, in the 
short term, is expected to emanate from the attendant credit crunch. 
 Although there is apparently    no systemic financial risk given 
the low level of exposure to U.S. investment banks, a number of 
financial institutions are set to record losses associated with the 
fallout (Note: Financial institutions can invest a maximum of five 
percent of their capital in foreign assets. End note.)  A number of 
entities are also feeling the effects of the financial storm as 
their lines of credit have been withdrawn or drastically reduced. 
Financial players and importers appear to be hardest hit with some 
investment houses already subject to margin calls from overseas 
lenders.  This has led to a corresponding tightening in credit from 
local financial institutions which are also holding a significant 
bad debt portfolio following the collapse of alternative investment 
schemes.  This could precipitate a rise in domestic rates with all 
its attendant ramifications for investment and fiscal policy.  These 
entities, in addition to having to stave off rumors about their 
level of exposure to the crisis, have also seen a steep decline in 
their stock prices as confidence wanes. 
 
¶8. (SBU) Although the GOJ will be able to close part of its USD 250 
million budget financing gap with a loan from the IADB, it will have 
to raise the remainder on the capital market.  Given the 
international capital market tightening, the GOJ will, at best, be 
forced to pay a premium on the eight percent it paid on USD 350 
million raised earlier this year.  As tax revenues slow on the back 
of declining consumption, the GOJ will be forced to adjust its 
spending plans downward to meet its fiscal deficit target.  Capital 
expenditures required to rehabilitate infrastructure destroyed by 
Gustav is likely to suffer the brunt of the adjustment.  The GOJ 
could also find that its plan to divest the loss-making national 
airline, Air Jamaica, by March 2009 might falter as the sale becomes 
increasingly unattractive in the current global environment where 
more attractive assets are going at a discount (reftels).  The GOJ's 
vision to establish an offshore financial center will also be 
challenged, particularly given the competition from energy rich 
Trinidad and Tobago currently embarking on a similar project. 
 
Comment 
------- 
 
¶9. (SBU) It is highly unlikely that Jamaica will escape the ravages 
of the current global financial meltdown given its heavy dependence 
on the external economy.  But most of the economic difficulties that 
will arise in the near term would have arisen even without the 
onslaught of the external crisis given other underlying domestic 
weaknesses.  GDP was already stagnating on the back of an 
agriculture sector prone to natural shocks and low productivity. 
Exports were also heading south and if oil prices had not moderated 
in response to the global crisis the country would have faced a 
balance of payments crisis, which might yet well materialize.  As 
the economy is already near the bottom, the GOJ might well be 
advised to use the current opportunity to affect the institutional 
reforms required to prepare the country for the next global rebound. 
 End comment. 
JOHNSON