VZCZCXRO7560
PP RUEHGR
DE RUEHKG #0223/01 0822006
ZNR UUUUU ZZH
P 232006Z MAR 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 7424
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNCOM/EC CARICOM COLLECTIVE

UNCLAS SECTION 01 OF 04 KINGSTON 000223 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CAR (ACADIEUX)(VDEPIRRO)(WSMITH) 
WHA/EPSC (MROONEY) (FCORNEILLE) 
EEB/ESC/IFD/EPC (McMANUS) 
 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR ERIN NEPHEW 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD TRYS ENRG SOCI EFIN EINV EAIR IADB IBRD
IMF, KCOR, XL, JM 
SUBJECT: JAMAICA: BUSINESS LEADERS DISCUSS WEAKENED STATE OF 
JAMAICAN ECONOMY 
 
SUMMARY 
------- 
 
¶1. (SBU) On March 18, Charge James Heg hosted a group of Jamaican 
business leaders at a lunch to discuss the state of the local 
economy.  The discussions also covered the political dynamics 
following the decision by the Jamaican Supreme Court on the dual 
citizenship case.  The business leaders were unanimous in their view 
that the country was in trouble and the Government of Jamaica (GOJ) 
was basically riding out the crisis.  However, they thought the 
current crisis presented an excellent opportunity for the GOJ to 
make some of the hard decisions that have been postponed for the 
past three decades.  End summary. 
 
Business Leaders Discuss Jamaica's Economic Crisis 
--------------------------------------------- ----- 
 
¶2. (SBU) The March 18 lunch at the CDA's residence included CEO and 
Chairman of Grace Kennedy Douglas Orane; Deputy Chairman of the 
Sandals Group of Companies and President of the Private Sector 
Organization of Jamaica Christopher Zacca; CEO of National 
Commercial Bank (NCB) Patrick Hylton; and CEO of PayMaster and 
President of AMCHAM Audrey Marks.  Visiting OIG Ambassador Franklin 
Huddle, Econoff and Econ Specialist attended from the Embassy. 
 
¶3. (SBU) The Charge started the discussion by soliciting views on 
the state of the Jamaica economy.  Zacca was very direct in his 
response, stating that the country was in big trouble.  He said the 
cash crunch facing the GOJ, falling consumption, high crime and 
bureaucracy were major problems facing the country.  Declining tax 
revenues were making it almost impossible for the government to 
provide any form of fiscal stimulus.  He added that things were so 
dicey that a return to the IMF was a real possibility, despite the 
attendant political risk of any such eventuality.  Zacca said the 
only bright spark was the continued increase in tourist arrivals, 
albeit due to heavy discounting and increased marketing particularly 
in the US market.  Orane was of the impression that the economy 
could get a boost if the government was willing to make it easier to 
do business.  "We are not looking for special incentives, we just 
want no disincentives" Orane continued. 
 
Interest Rate Policy Divisive 
----------------------------- 
 
¶4. (SBU) But it was the vexing issue of Jamaica's high interest rate 
policy which engendered the most passion among the business leaders. 
 Banker Hylton dissected the central bank's decision to hike rates 
when other countries were moving them in the other direction. 
Hylton's starting point was that the hike in rates was a direct 
response to market forces.  However, he said from his discussions 
with the central bank there was a willingness to bring rates down. 
He went on to explain that the disjuncture in the economic framework 
was largely responsible for the predicament the country faces.  He 
argued that the tenuous debt and fiscal dynamics have led to 
instability at the macro level.  "This instability has filtered to 
the micro level impacting the already high trade deficit," Hylton 
continued. 
 
¶5. (SBU) Hylton said the foreign exchange position worsened when the 
global crisis intensified affecting Foreign Direct Investment (FDI) 
and shutting access to the capital market.  He said the combination 
of these factors led to a depletion of foreign exchange inflows, 
amidst stable demand.  Hylton said with local liquidity rising, the 
economic fundamentals worsening and by extension confidence waning, 
investors started to switch assets, thus putting pressure on the 
local currency.  He said the central bank initially used a mix of 
interest rates and reserves to shore up the currency.  He said when 
this intervention failed the bank resorted to moral suasion, but 
this had little effect on speculators.  Hylton said that under the 
circumstances the central bank was left with little choice but to 
hike interest rates. 
 
¶6. (SBU) However, this did not satisfy Zacca, who in conjunction 
with several other sector leaders have been waging an all out war 
against the bank's high interest rate policy.  Zacca remained 
adamant that the policy was a disincentive to the very investment 
required to help the situation.  He also maintained that the central 
bank should allow commercial banks to loan a portion of the reserves 
it held at the central bank to the productive sector at 
concessionary rates.  Hylton argued that this was not feasible, as 
commercial banks had to conform to accounting standards and would be 
punished by their auditors and ratings agencies.  (NOTE: 
 
KINGSTON 00000223  002 OF 004 
 
 
International Financial Reporting Standards (IFRS) rules dictate 
that financial instruments be valued on a mark-to-market basis.  The 
concessionary instruments could therefore become impaired if less 
than the market rate.  END NOTE.)  He also stated this policy was a 
sure recipe for risky behavior widely referred to as moral hazard. 
 
 
Time To Take Hard Decisions 
--------------------------- 
 
¶7. (SBU) Orane opined that the harsh reality was that the time had 
come for the GOJ to make the tough decisions postponed for the past 
three decades.  Using Barbados and Trinidad as a point of reference, 
Orane, who has business interest, across the Caribbean, explained 
how these countries were able to make the hard choices and although 
the decisions paid off in economic terms, in both cases the ruling 
party lost the subsequent election.  Orane said the realization of 
political costs and the lack of social consensus have influenced 
successive Jamaican governments to postpone the hard decisions. 
However, Orane argued that gravity of the existing situation 
suggested that not even this political dynamic was sufficient to 
allow the decision to be postponed. 
 
¶8. (SBU) The business leaders said that while successive governments 
have had an affinity for crisis management, they expected some major 
changes during 2009.  Zacca suggested that with remittances flat and 
the bauxite sector collapsing (NOTE: two bauxite plants owned by 
Russian United Company (UC) RUSAL are closing down at least 
temporarily, West Indies Alumina Company-WINDALCO-- will close March 
31 and Alumina Partners of Jamaica-ALPART--will close on May 15 END 
NOTE), the GOJ will be forced to take a look at the public sector 
wage bill, with the best case scenario being a wage freeze.  (NOTE: 
Minister Without Portfolio in the Ministry of Finance and the Public 
Service, Dwight Nelson told emboffs on March 19 that a wage freeze 
was almost a done deal. END NOTE).  Orane quoting President Barak 
Obama's Chief of Staff Rahm Emanuel said "Never let a crisis to 
waste" it would be a shame for Jamaica to let this crisis go to 
waste as it presented the perfect opportunity to make the hard 
decisions and then blame it on the crisis. 
 
Bauxite Crisis Concerns Leaders 
------------------------------- 
 
¶9. (SBU) The leaders also expressed much concern about the pending 
collapse of the bauxite sector, which is expected to affect entire 
communities as well as GOJ revenues, which generally runs up to USD 
100 million.  The leaders were particularly worried about the two 
plants owned by UC RUSAL, which has its own set of problems.  The 
leaders expressed fear that even if the decision was to close the 
plants temporarily, they may not reopen.  Let us keep in mind that 
unlike the Canadians and the Americans, the Russians are not known 
to have a social conscience, Zacca quipped.  (NOTE: The following 
day news broke that UC Rusal plants had taken a decision to close 
ALPART for up to a year, affecting almost 900 employees.  The 
WINDALCO plant will cease production at the end of March, but no 
decision ha been made on the workforce. END NOTE.) 
 
¶10. (SBU) The bauxite sector meltdown is a serious blow to the GOJ 
for other reasons.  The GOJ is the minority owner (45 percent) of 
another bauxite plant, Jamaica Alumina Company (JAMALCO) and its 
equity position in the plant fall has declined from a high of USD 
500 million in the 1990s to less than USD 50 million currently.  The 
plant has been bleeding money from a bad deal negotiated by the 
previous government.  The Jamaica Labour Party-led government has 
moved to divest the minority stake.  The global economic decline 
suggestions are that the GOJ's decision is purely based on its 
desire to cut its losses and a deal to sell could see the GOJ 
assuming contingent liabilities of up to USD 250 million.  The 
bauxite crisis could also stall Jamaica's efforts to adopt coal as a 
viable alternative energy source, a decision made by the GOJ in an 
effort to diversify power generation away from thermal generators. 
 
 
Bauxite Job Losses 
------------------ 
 
¶11. (SBU) The GOJ is also expected to suffer a major setback on wage 
related tax revenues, as the bauxite sector is by far the highest 
paying sector in the country.  Senior Human Resource Executive at 
West Indies Alumina Company, Dayton Robinson, told emboff that 
workers at the company command basic salaries (excluding benefits) 
ranging from USD 25,000 for supervisors to USD 55,000 for managers. 
 
KINGSTON 00000223  003 OF 004 
 
 
But Robinson also explained that the greater portion of remuneration 
was negotiated in benefits, which ranged from interest free car and 
furniture loans to annual education grants of almost USD 10,000. 
Robinson said he was worried about the impact the pending closure 
could have on workers and surrounding communities, given they had 
become accustomed to rather affluent lifestyles.  He appeared even 
more concerned about the exposure of local banks, which were already 
calling for regular updates on the pending closure. 
 
Paradigm Shift Required 
----------------------- 
 
¶12. (SBU) Echoing sentiments raised by Minister of Finance and the 
Public Service Audley Shaw in a meeting with emboffs on March 11, 
Orane opined that the national conversation had to shift from crisis 
management to an exploration of new opportunities.  Orane said the 
country had to think seriously about non-traditional areas like call 
centers, renewable energy (ethanol), sports and music related 
investments.  Zacca argued that a paradigm shift would require a 
sensible set of policies, as in the current environment most 
investors were hesitant to try anything new.  He said the GOJ could 
start by addressing the three areas of consensus: (1) crime; (2) 
taxation; and (3) bureaucracy.  The Sandals executive said the aim 
was to produce things that generate foreign exchange or replace 
imports.  For his part Zacca suggested the GOJ concentrate on 
providing incentives through targeted tax policy to sectors like 
manufacture, agriculture and international services.  On the issue 
of crime, Orane said the most cost effective way to arrest the 
problem was to get convictions and then separate criminals from 
their assets.  In this regard, the leaders thought there was an 
important role for the USG to play.  Charge Heg then pointed out 
that the USG had already helped put the requisite legal framework in 
place and it was up to the GOJ to apply the laws on the books. 
 
Immigration Policy 
------------------ 
 
¶13. (SBU) With Jamaica having a high number of workers in the health 
and education sectors in the US and with demand in these sectors 
still strong, the leaders suggested that the US immigration policy 
will be critical.  Zacca argued that the US should follow the path 
Canada to make its immigration policy more of a point system that 
benefits skilled labor, which would provide a continued outlet for 
the migration of skilled Jamaican workers who cannot find employment 
opportunities at home.  The benefits derived from Jamaicans in the 
United States, were not lost on Orane, who runs the biggest 
remittances business--in partnership with Western Union--in the 
Caribbean.  He said an open immigration policy for skilled workers 
would keep the last remaining pillar of the Jamaican economy, 
remittances (now a USD 2 billion industry) afloat. 
 
Politics Takes Center Stage 
--------------------------- 
 
¶14. (SBU) The discussion shifted to the pending by-elections on 
March 23 sanctioned by the Supreme Court following its ruling on the 
first of four dual citizenship cases brought by the opposition 
People's  National Party (PNP) against the ruling JLP (Reftels). 
The consensus was that the incumbent candidate Daryl Vaz should win 
comfortably, as the JLP has framed the election as a referendum on 
the performance of the incumbent, who has a good track record. 
Zacca also suggested that a win by Vaz should boost the confidence 
of the JLP, which is in short supply of positive news.  However, the 
leaders were quick to point out that a win by the PNP candidate 
Kenneth Rowe, who ironically is also a Canadian citizen, could well 
trigger a general election, as the PNP has framed their campaign as 
mandate on the performance of the JLP.  Zacca therefore opined that 
a JLP loss would suggest its party has no moral authority to govern. 
(NOTE: Under the Jamaican Constitution a Commonwealth citizen living 
in Jamaica for a year can serve in an election.  END NOTE). 
 
Concern for JLP Loss 
-------------------- 
 
¶15. (SBU) A loss for the JLP would be a disaster for the country 
right now, Zacca continued.  However, he was also quick to point out 
that given the challenges facing the country half the members of the 
PNP would not relish the idea of being in government at this time. 
The leaders also argue that while a JLP win would make it a third 
consecutive loss for the charismatic PNP President Portia 
Simpson-Miller, given her popularity it would take a brave 
individual to challenge her position anytime soon.  Zacca was not 
 
KINGSTON 00000223  004 OF 004 
 
 
shy about highlighting his discomfort with the PNP, which he branded 
as a "socialist movement".  Zacca, who represents the largest 
grouping of businesses in Jamaica, was particularly concerned by 
recent comments make by elements in the PNP, who suggested that the 
JLP was too close to big business. 
 
COMMENT 
------- 
 
¶16. (SBU) The Jamaican economy faces increasing economic challenges 
as the bauxite sectors shrinks and job losses rise.  A prolonged 
economic downturn in the US resulting in decreased tourist arrivals 
and lower remittances could be result in the perfect storm for 
pushing the economy to the brink.  Rising crime is a concern among 
the Jamaican private sector and any noticeable increase in incidents 
of crime against tourists could lead to a decline in this key sector 
as well as future foreign direct investment.