VZCZCXRO5532
PP RUEHGR
DE RUEHKG #0614/01 2301901
ZNR UUUUU ZZH
P 181901Z AUG 09
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC PRIORITY 7946
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHOT/AMEMBASSY OTTAWA 2410
RUEHLO/AMEMBASSY LONDON 0601

UNCLAS SECTION 01 OF 03 KINGSTON 000614 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CAR (JMACK-WILSON)(VDEPIRRO)(WSMITH) 
WHA/EPSC (MROONEY) (FCORNEILLE) (AWONG) 
EEB/IFD/OMA 
WHA/PPC (JGONZALEZ) 
INR/RES (RWARNER) 
INR/I (SMCCORMICK) 
SANTO DOMINGO FOR FCS AND FAS 
TREASURY FOR ERIN NEPHEW 
EXPORT IMPORT BANK FOR ANNETTE MARESH 
 
E.O. 12958:  N/A 
TAGS: ECON ENRG EFIN EINV ETRD PGOV PREL IADB IBRD IMF
TRYS, JM, XL 
SUBJECT: JAMAICA: MONETARY GAINS, FISCAL PAIN, AND DOWNGRADES 
 
REF: A. KINGSTON 581 
¶B. KINGSTON 551 
¶C. KINGSTON 601 
¶D. KINGSTON 245 
¶E. KINGSTON 422 
 
¶1. (SBU) SUMMARY: After a series of austere monetary measures, led 
by record high interest rates, the foreign exchange market has been 
showing signs of stability, reflected in the marginal depreciation 
of the Jamaican dollar during the June quarter.  The stock of Net 
International Reserves (NIR) also has stabilized at USD 1.6 billion 
as demand pressures for foreign currency appear subdued and 
inflation moderates to four percent for the first half of 2009. 
These gains come at a significant cost to the fiscal accounts.  The 
fiscal deficit was USD 403 million, USD 46 million more than 
budgeted, because of falling revenue collection.  Government of 
Jamaica (GOJ) spending had to be slashed by USD 87 million.  This 
fiscal situation triggered a second downgrade in Jamaica's credit 
rating to CCC+ by Standard and Poor's on August 5, drawing the ire 
of the GOJ.  The economy has not been in such dire straits since the 
economic stagnation referred to as the "lost decade" of the 1970s. 
End summary. 
 
Central Bank Updates Nation 
--------------------------- 
 
¶2. (SBU) On August 12, Bank of Jamaica (BOJ-Central bank) Governor 
Derick Latibeaudiere hosted a press briefing, attended by Emboffs, 
to update the country on recent financial and economic developments. 
 He noted the concern many Jamaicans felt about returning to the 
International Monetary Fund (IMF), but said it was necessary to 
address structural reforms in a sustainable manner (Reftels A and 
B).  He assured the press that the BOJ continues to keep monetary 
policy focused on maintaining macro-economic stability.  He stated 
that most economic indicators were pointing in the right direction, 
with inflation moderating, the exchange rate stable, and the current 
account deficit improving. 
 
¶3. (SBU) Inflation for the June quarter was 2.7 percent, well below 
the GOJ's target of 5.5 percent.  Inflation for the first half of 
2009 was four percent, well below the 11.5 percent recorded during 
the similar period of 2008. Latibeaudiere attributed the moderation 
to the bank's tight monetary policy stance. 
 
BOJ Defends Policy Actions 
-------------------------- 
 
¶4. (SBU) The BOJ has come under significant public criticism, 
particularly from the business community, for its high interest rate 
policy (Reftel C).  Latibeaudiere defended his policy actions 
saying, "Whatever interest rate path the bank pursued was absolutely 
correct."  When one journalist at the briefing remarked that the 
country now had to "suffer under the impact of overly aggressive 
measures" by Latibeaudiere, he responded, "you mean we are now 
reaping the benefits of my actions." 
 
¶5. (SBU) Latibeaudiere noted that the IMF commended the bank for its 
monetary policy stance, saying it was a miracle the BOJ was able to 
maintain stability amidst the resource constraints.  He argued that 
making policy decisions in an extraordinarily difficult environment 
involved tough choices.  He told the audience that he was committed 
to never taking actions that could compromise sound monetary policy 
or actions that might undermine the bank's mandate of price and 
financial stability. 
 
¶6. (SBU) He noted that the bank's policy actions had yielded some 
positive results, noting that the Jamaican currency had depreciated 
by only 0.3 percent during the June quarter.  Although this might 
appear impressive, given that the currency had lost 22 percent of 
its value between September and February, it came against the 
background of a 24 percent hike in interest rates.  This was 
augmented by frequent injections from the Net International Reserves 
(NIR) to augment supplies.  These measures resulted in a contraction 
in the need for foreign currency to purchase imported goods.  This 
in turn, led to a marked improvement in the current account deficit, 
which is projected to move from 21 percent of GDP in 2008/09 to 12 
percent of GDP in 2009/10, despite the fall out in bauxite, tourism, 
and remittances (Reftel D).  At the end of June, the stock of NIR 
 
KINGSTON 00000614  002 OF 003 
 
 
had stabilized at USD 1.6 billion or about 13 weeks of goods and 
services imports-- up from USD 1.5 billion a few months ago, but 
still well down from 2.2 billion when the global recession began. 
 
 
Stablization Gains Cause Fiscal Pain 
------------------------------- 
 
¶7. (SBU) The BOJ's measures have not been without cost to the fiscal 
accounts; the high interest rate policy has increased debt serving 
costs in the June quarter by USD 25 million.  For the June quarter, 
central government operations also generated a deficit of USD 403 
million; USD 46 million more than budgeted.  The continued 
deterioration was due to declining revenue collection, as spending 
was slashed by USD 87 million to bring expenditure closer in line 
with falling revenues.  The BOJ's demand management program 
(depreciation and interest rate hike) has reduced consumption and 
thus reduced import taxes. The GOJ is not able to cut all spending, 
notably obligatory expenditures (interest payments and wages), and 
thus its goal of a fiscal deficit of 5.5 percent of GDP has been 
shattered. 
 
Economic Contraction, Fears of Another Lost Decade 
-------------------------------------- 
 
¶8. (SBU) The BOJ's measures have also impacted the already moribund 
Jamaican economy, which is estimated to have declined by a further 
3.5 to 4.5 percent during the June quarter.  This was the sixth 
consecutive quarter of decline and is the sharpest contraction in 
ten years.  The fall off continues to be led by the Mining and 
Quarrying sector, as lost output from the closure of three of the 
country's four bauxite plants continue to take its toll (reftel D). 
The stagnation in the construction industry also impacted output 
growth.  The contraction in GDP continues against the background of 
weak external and domestic demand from the lingering global economic 
downturn.  Jamaica is facing its worst economic situation since the 
1970s--referred to as a "lost decade" of growth marked by economic 
setbacks and job losses. 
 
Hard Decisions Must Be Taken 
---------------------------- 
 
¶9. (SBU) Deteriorating economic conditions, led by the weakening 
fiscal dynamics, have forced an abandonment of the medium term 
economic framework.  Prime Minister (PM) Bruce Golding has already 
announced the tabling of a revised budget (Supplementary Estimate) 
when Parliament resumes in September.  This revised budget could 
increase the deficit to over seven percent of GDP, unless the GOJ is 
successful in negotiating an interest rate concession this year 
(Reftel E).  The economic contraction is expected intensify, meaing 
the projected three to four pecent contraction of GDP could rise to 
five or six percent.  On a brighter note, the 2009 inflation target 
has been reduced to between 11 and 12 percent, while interest rates 
have begun to decline, albeit slowly. 
 
To Consider Terms For IMF Return 
-------------------------------- 
 
¶10. (SBU) PM Golding also announced that his Cabinet had considered 
the terms on which his government will return to the IMF when it met 
on August 17.  He said once the terms are decided by Cabinet it will 
be open for public discussion, and constructive concerns will be 
taken on board.  However, Golding was quick to point out that some 
of the terms of the agreement will not be pleasant.  "When you are 
sick, you have to take medicine", said Golding.   The country could 
be in for some immediate relief, as the BOJ is set to pick up USD 
328 million in Special Drawing Rights (SDR) from the IMF in 
September.  This should strengthen the bank's stock of NIR, thus 
furthering stability in the foreign exchange market. 
 
Standard and Poor's Delivers Body Blow 
-------------------------------------- 
 
¶11. (SBU) As Jamaica contemplates a return to the IMF, ratings 
agency Standard and Poor's has announced a downgrade of the 
country's credit ratings from B- to CCC+. This second downgrade in 
less than a year was based on what S and P considers Jamaica's 
vulnerable fiscal profile, combined with difficult financing 
 
KINGSTON 00000614  003 OF 003 
 
 
conditions, amidst a weak debt profile.  The ratings agency said 
this could well compel the GOJ to undertake a debt exchange that 
could be regarded as a distressed debt exchange (default).  With 25 
percent of debt maturing within a year and with 50 percent of the 
debt foreign-exchange indexed, S and P suggests that debt servicing 
costs will rise to 60 percent of the budget in 2009, up from 48 
percent in 2008.  The agency also is forecasting that debt-to-GDP 
will jump to 120 percent by the end of 2009. 
 
GOJ Hits Back - Dispels Default Rumor 
------------------------------------- 
 
¶12. (SBU) Responding to the downgrade, Audley Shaw, Minister of 
Finance and the Public Service(MFPS), stated that the ratings agency 
ignored the positive economic developments led by foreign exchange 
market stability and declining interest rates.  He also emphasized 
that the GOJ does not intend to pursue any transaction with its 
creditors that could be viewed as a distressed transaction. 
Latibeaudiere called the downgrade "pre-mature" and in echoing 
Shaw's comments said the GOJ "continues to maintain its resolve to 
honor all obligations, as contracted, and therefore the rating 
action was unwarranted."  PM Golding also maintained that there was 
absolutely no chance of Jamaica defaulting on its debt, as Jamaica 
was one of the few countries where the prior claim on budgetary 
expenditure of debt repayment were guaranteed by a provision in the 
Constitution. 
 
COMMENT 
------- 
 
¶13. (SBU) The S and P downgrade has dealt a major psychological blow 
to the already beleaguered Jamaican Labor Party (JLP)-led 
administration, but it might not have any material impact in the 
short-term, given that Jamaica has been frozen out of the private 
capital market.  In fact, it is the investors who already hold 
Jamaican bonds who will most likely be affected, which could explain 
the outrage coming from this sector.  Even if the ratings action was 
premature, as a starting point, the GOJ must acknowledge the 
fundamentals of the S and P findings--that the country has a 
vulnerable and precarious fiscal situation.  Consequently, the 
downgrade, coupled with the imminent return to the IMF, should be 
viewed as another perfect opportunity for the PM Golding and his 
party to finally address the structural impediments to growth and 
development.  Although this move will be riddled with political 
risks due to difficult choices, any further postponement of the 
pain, in order to maintain political capital, could well result in 
another lost decade.  END COMMENT. 
MOSS