Macro Economic Overview

The 1999/00 macroeconomic programme targeted a fiscal deficit of 4.6% of GDP as compared to 7.5% of GDP recorded for 1998/99, lower inflation, a reduction in interest rates and stability in the foreign currency market.

Preliminary data on Central Government operations indicate a fiscal deficit of 4.5% of GDP, 0.1% better than the targeted 4.6%. This was achieved despite shortfalls in tax revenue and above budget expenditures for domestic interest payments. Contributing to the achievement of the deficit target was the identification of alternative revenue sources and reductions to capital expenditure.

Efforts to achieve the fiscal balance target also involved implementation of a debt strategy announced at the start of the fiscal year. The strategy focussed on minimizing the cost of debt servicing by introducing new instruments and new techniques that deepened the domestic capital market, lengthened the markets maturity structure and broadened the country's international investor base.

Interest rates on Government benchmark 6-month treasury bills trended down over the year with the exception of a spike in rates in December. The decline in rates as well as the delay in accessing the international capital market led to some pressure in the foreign currency market during the latter part of the year. Intervention by the BOJ, however, facilitated an orderly depreciation and pressure on the currency was relieved with the inflow of Euro 200 million raised on the international capital market as well as US$100 million from the forward sale of bauxite.

Despite the decline in interest rates and supply side shocks from the increase in the price of crude oil internationally, single digit inflation has been maintained with 8% being estimated for the fiscal year.

The current account of the Balance of Payments, recorded a larger deficit outturn over the April to December period than was the case in the corresponding period of the previous year. The outturn was due to a decline in earnings from services resulting from the decline in travel receipts over the fiscal year, worsening of the trade deficit and an increase in repatriation of profits. Increased private investment inflows were not enough to offset the amortization expenses of government and the current account deficit and led to a drawdown of reserves.

Fiscal operations during 1999/00 generated a fiscal deficit of 4.5% of GDP in line with the medium term fiscal programme to achieve a sustainable fiscal balance. Revenue flows were below projections in the first half of the fiscal year but recovered over the last two quarters as alternative sources of revenue were identified and accessed. Among the alternative revenue sources was the forward sale of bauxite, which generated US$100 million.

Revenues: Revenues were $2.5 billion above budget for the fiscal year. This is a 22.2% increase over 1998/99 and is attributable to the new tax measures, the receipts from the forward sale of bauxite and efficiencies resulting from the new tax administrative structure.

Expenditure: Expenditures were $4.1 billion (4.1%) above Budget mainly due to additional domestic interest payments which resulted from the slower than programmed decline in interest rates as well as the higher than programmed domestic loan receipts.

Government’s effort to minimize debt costs included the introduction of new instruments and methods to alter the structure and lengthen the maturity of domestic debt and broaden the international investor base. Government was successful in meeting these objectives as:

• an auction system was introduced for local registered stocks in October 1999;
• US$ indexed linked bonds were successfully issued on the domestic market;
• a number of issues of Local Registered Stocks were marketed with maturities in excess of five years; and
• Government was also successful in broadening its investor base with the recent Euro market issue that saw smaller investors -including asset managers and retail intermediaries from various countries- participating in the issue.

Despite these innovations, domestic debt servicing costs increased to 72% of total expenditure, up 14 percentage points over the ratio in FY 1998/99. The increase was primarily attributable to a slower than programmed reduction in interest rates and heavier than programmed domestic debt raising following the delay in accessing external financing associated with the uncertainty and instability in the international capital markets. External debt servicing costs showed greater success, recording a decline of US$10 million or 1.7% relative to FY 1998/99.

During FY 1999/00 the Financial Sector Adjustment Company (FINSAC) Limited, intensified efforts to divest the assets of the various entities under its control. The asset portfolio is primarily comprised of real estate, non-performing loans and shareholdings in various companies. Disposals of hotels, commercial and residential real estate and other assets amounted to approximately $7.0 billion during FY 1999/00. As at February 18, 2000, loan accounts valued at $8.9 billion had been restructured and/or rescheduled and cumulative collections stood at $3.2 billion. Of this amount $1.4 billion was collected during calendar year 1999.

Monetary policy for FY 1999/00 balanced the desire to maintain low inflation rates with the need to facilitate a reduction in interest rates while maintaining stability in the foreign currency market. In light of this the orderly adjustment of the foreign exchange market was accomplished by greater reliance on the sale of reserves than by the manipulation of reserve repo rates.

Interest rates on treasury bills declined consistently for much of the fiscal year but spiked in November before again beginning a downward trend into the latter part of the fiscal year. The spike resulted from the Government's domestic borrowing to compensate for the fallout in programmed external funding. The 6-month Treasury Bill fell to 17.96% in March as compared to a rate of 22.72% in February 1999 (There were no 6 month issue in March 1999).

Keeping with the downward trend of interest rates the BOJ gradually reduced the Reverse Repurchase Rates (reverse repos) over the course of the fiscal year. The rate on 30-day repos declined from 20.75% at the end of FY 1998/99 to 17.3% at the end of FY 1999/00. The rates on 90 and 180 day stood at 18.1% and 18.6% respectively compared to rates of 21.5% and 22.0% at end March 1999.

Commercial bank loans rates declined from 39% at the beginning of the fiscal year to approximately 34% at March. The spread between commercial bank savings and loan rates narrowed by 4 percentage points over the period.

In keeping with the downward path of interest rates, cash reserve requirements were reduced in the fourth quarter of 1999/00 to 15% down from 16% at the beginning of the third quarter.

Additionally, Scotia Bank utilized the buffer allowed for by the reduction in cash reserve requirements to implement a productivity loan scheme with $450 million to be loaned at 10.25% for a duration of five years.

Despite the reduction in interest rates and the impact of increased oil prices, inflation is again on track for a single digit outturn. The inflation rate for the FY to February, however, was higher than the corresponding period of the previous fiscal year. Though not achieving the targeted inflation rate band, Government has instead chosen to focus on the lowering of interest rates, which is thought integral to resuming growth.

Preliminary indications suggest that the inflation outturn for FY 1999/00 will be the region of 8%-9%. For the FY to February the outturn was 7.7% as compared to 5.5% for the corresponding period of 1998/99. The outturn for he fiscal year partly reflected higher rates for electricity due to the imposition of a special tariff as well as higher oil prices on the international market which have seen oil prices per barrel reaching record highs, selling for as much as US$34 per barrel. An increase in the minimum wage as well as tax measures introduced during the FY also affected the outturn for the FY.

For the period January to December 1999, the inflation outturn was 6.8%, the third consecutive calendar year of single digit inflation after the 9.2% recorded in 1997 and the 7.9% recorded in 1998.

Jamaica's external accounts deteriorated over the FY to December 1999/00. A increase of S$241.8 million in official investment outflows - in the form of amortization of external debt - and a US$69.5 million increase in the current account deficit contributed to an increase in the overall BOP deficit to US$131.3 million for the FY to December. The deficit recorded over the comparable period in FY 1998/99 was US$13.1 million.

The current account recorded a deficit of US$312 million for the FY to December 1999/00, a deterioration relative to the deficit of US$243 million recorded for the corresponding period of FY 1998/99. The main contributing factors to the deterioration were a US$34 million decline in the performance of the services balance due to a reduction in the receipts from travel, a US$29 million increase in the trade deficit and a US$19 million increase in outflows of net income due to profit repatriation.

The capital and financial accounts recorded net inflows of US$9 million and US$303 million respectively over the April to November period. There was a US$1,981 million increase in net private investment inflows. The private flows were however, not enough to compensate for official investment outflows in the form of debt repayment and the current account deficit and as a result there was a US$131 million drawdown of the NIR. This was significantly higher than the drawdown in the corresponding FY 1998/99 period.

Total exports of US$932 million for the FY to December period was lower than that of the corresponding period in the previous fiscal year by US$45 million or 5% due to a decline in non-traditional exports. Traditional exports remained flat. The lower earnings recorded for non -traditional exports was due primarily to a reduction in the value of wearing apparel exports which accounts for approximately 48% of non-traditional exports. Reduced earnings from tobacco exports also influenced the outturn. Exports of traditional commodities recorded increased earnings from agricultural and mining exports but these were offset by the decline in the value of manufactured goods exports.

For the period January to December 1999, exports declined by US$79 million to US$ 1,236 million.

Imports

Imports at US$2,214 million for the April to December period reflected a contraction of US$71 million relative to the corresponding period of FY 1998/99. This was due to the reduced value of raw materials and capital goods imports that outweighed the increased import value of consumer goods.

The rise in the value of consumer goods was driven by increases in all the categories except motor cars. The reduced value of raw material imports was caused by the decline in value of non-fuel raw materials that outweighed the increase in fuel imports that resulted from increased oil prices. Marked decline in machinery and equipment and other industrial transport equipment were the main factors contributing to the decline in the value of capital goods imports.

For the January to December period imports stood at US$2,862 million, 4% less than 1998.

Growth in tourism arrivals increased over the FY to February relative to growth recorded during the corresponding period in 1998/99. The increase occurred despite the negative impact on arrivals caused by fears of the effects of the millennium bug on travel safety. It is expected that the industry will see strong growth in the upcoming fiscal year as the major tourism markets continue to see strong growth in the case of North America and European markets and with recovery underway in Japan and other Asian economies.

Over the April to February period of FY 1999/00 visitor arrivals increased by 4.1% to 1.8 million. The increase in total arrivals was attributable to a 10% increase in cruise passenger arrivals as stop over visitor arrivals were flat relative to the previous year.

For calendar year 1999, tourist arrivals stood at 2 million, a 6% increase over 1998. Estimated gross earnings are approximately the same as previous year.

Over the course of the Fiscal Year, the exchange rate depreciated by 12.5% moving from an average of 36.87 to US$1 in the previous fiscal year to 42.14 to US$1. The decline in the rate resulted from uncertainty caused by Government’s delay in accessing external funding as programmed. In addition, further uncertainty was caused by speculation regarding Government’s borrowing relations with the IMF.

There was a US$122 million build up in the NIR over the fiscal year to US$703.5 million at the end of FY 1999/00. The build up was primarily due to foreign currency inflows that materialized in the final quarter of the FY. These inflows also served to relieve the pressure in the foreign exchange market.

The ratio of NIR to foreign currency account holdings declined over the three months to February 2000 as the Bank of Jamaica (BOJ) intervened in the market to facilitate orderly adjustment.

The index of agricultural production is estimated to have increased by 0.6% for the period April to December 1999/00. This compared to 1.4% growth in 1998/99.

The export agriculture index declined relative to the corresponding period of FY 1998/99. The index showed a contraction of 6.6%, this was approximately four percentage points greater than the decline recorded in 1998/99. The outturn was primarily attributable to a decline in the amount of sugar cane milled.

Domestic agriculture recorded growth of 1.6% for the first nine months of FY 1999/00 and was half a percentage point below the growth rate recorded in 1998/99. Heavy rainfall in the third quarter of FY 1999/00 affected agricultural yields and led to a slow down in the growth rate.

Meat and Poultry production grew 4.1% for the first nine months of FY 1999/00 relative to the corresponding period of the previous year. Growth for FY 1999/00 was a full percentage point above the growth recorded in FY 1998/99. The improved performance was primarily due to increases poultry that resulted from the ban on the importation of meat including poultry parts and efficiency gains within the industry.

For the FY to February 1999/00, the mining sector recorded mixed results. The production and export of alumina increased while the production and export of crude bauxite fell.

Alumina production grew by 5% while exports grew by 6%. This was directly related to the recovery of international demand due partially to the recovery of Asian economies.

Crude bauxite production is estimated to have decreased by 43% to approximately 2.2 million tons as compared to the same period FY 1998/99. Exports of bauxite declined by 43%. The decline in crude bauxite production and exports is unsurprising in the face of the falloff in demand for the product following the explosion at the Gramercy refinery in Louisiana.

Earnings from alumina for FY to December 1999/00 is estimated at US$484.8 million compared with US$454.8 for the corresponding period in the previous FY.

The manufacturing sector declined relative to the corresponding period of FY 1998/99. The decline was attributable to declines in the some categories of the Food Processing sub sector as well as declines in the Petroleum Products sub- sector. The industry still faces the challenges of the competitive environment due to an increasingly open domestic market and tight demand conditions. Despite these factors, the Beverages, Tobacco, Chemicals and Chemical Products sub-sectors and some industries in Food Processing registered increases.

Exports of traditional manufactured goods recorded a 7.1% decline in FY 1999/00 relative to the corresponding period of the previous year. The outturn primarily reflected a falloff in the export value of sugar that outweighed increases recorded in the value of rum and to a lesser extent cocoa exports.

Government has successfully reduced inflation and is now focussing on providing the impetus for economic growth in the form of lower interest rates and improved infrastructure. Critical to achieving these goals are prudent expenditure policies and effective revenue collection, which are expected to result in the achievement of a sustainable fiscal surplus.

Tight fiscal policy will complement the low inflation, stable foreign exchange market framework which facilitated the breaking of the inflation-exchange rate-wage spiral. The recent signing of a MOU between government and the private sector is testament to this and should result in more harmonious industrial relations and wage negotiations.

Tourism, Jamaica's major foreign exchange earner, is expected to see accelerated growth in the next fiscal year as the United States, Canada and Europe continue to see economic growth and Mexico and Japan continue to consolidate their recovery. The current focus on student vacationers - Spring Break - is also expected to have a positive long term impact although their per capita expenditure is lower than other market segments. Over the long term it is expected that the spring break visitors will become repeat visitors.

The mining sector is set for recovery with the proposed reopening of the Gramercy plant in FY 2000/01. The plant is to undergo modifications/modernization that will allow it to better process Jamaica's bauxite. This is in addition to the new market that was successfully tapped in the Ukraine during the crisis. Improved earnings from Bauxite coupled with continued strong price performance of alumina on the international market should bode well for earnings from the sector in the upcoming fiscal year.

Critical to the continued downward trend of interest rates will be access to international financing. On a macro level, there has been increased weighting being placed on interest rate increases in the United States and Europe. This is inclined to increase the cost of borrowing on the international capital market. On a micro scale, however, the improved economic performance of several Latin American countries such as Brazil and Mexico should reduce the risk associated with emerging market debt. Additionally, the upgrading of Mexico to investment grade should result in a transfer of Mexican holdings to investment grade investors creating greater liquidity for emerging market issues over the short to medium term.

FINSAC entities are being transferred to private ownership under the divestment phase of the operation and it is anticipated that FINSAC will be able to discharge its responsibilities over a shorter period than envisaged at its inception.

Activity on the stock market should increase in light of the expected fall in interest rates and the perception that there are solid undervalued stocks currently being traded. The index has been showing consistent increases over the period.

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