US embassy cable - 05KINGSTON2475

UNCLAS SECTION 01 OF 02 KINGSTON 002475 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
E.O. 12958:  NA 
TAGS: ECON, EFIN, JM 
SUBJECT: JAMAICAN BUSINESS CONFIDENCE PLUNGES 
 
1.  Summary:  Data published by the Jamaica Conference 
Board on October 12 revealed that business confidence for 
the September quarter plunged to its lowest level since 
the second quarter of 2003.  High levels of pessimism 
about the country's economic prospects underlined the 
significant decline in business confidence.  This was in 
contrast to consumer confidence, which improved over the 
previous quarter, reflecting the relatively buoyant mood 
of residents in tourist areas.  Most consumers rated 
current economic conditions as average or better than 
average during the third quarter and expected conditions 
to remain largely unchanged during upcoming periods. 
While price instability has begun to impact on business 
confidence, international investors remain bullish about 
the country's economic fundamentals and ability to repay 
debt.  This was evidenced by the GOJ'S ability to raise 
USD 250 million on the external capital market on October 
10. However, confidence could be tested during 2006 if the 
GOJ is unable to arrest the price instability.  End 
summary. 
2.  According to data released by the Jamaica Conference 
Board (JCB) on October 12, Jamaican business confidence 
sunk during the September quarter, posting its largest 
decline during the four-year period of the survey.  The 
index of business confidence was 97.2 in the September 
quarter, down from 122.8 in the June quarter.  This 21 
percent decline in business confidence obliterated all the 
gains recorded since 2004.  The significant decline in 
confidence was underpinned by pessimism about economic 
prospects by firms in all industries and of all sizes. 
Almost 90 percent of all firms thought that the Jamaican 
economy had declined in the review quarter, while about 70 
percent of all firms expected the economy to worsen due to 
oil prices, economic and crime concerns.  The anticipated 
slowdown in the US economy is also expected to have a 
dampening impact on tourism.  According to Professor 
Richard Curtin of the University of Michigan, who analyses 
the data for the JCB, this was the least favorable 
Jamaican economic outlook recorded since the September 11 
terrorist attacks in the United States.  During the 
September quarter, one-in-three firms reported that 
profits were lower than projected, while fewer firms 
expected improved profitability in upcoming quarters due 
to the inability to pass on the higher cost of energy to 
consumers.  Influenced by concerns about oil prices, 
taxes, economic policies, interest costs and crime, fewer 
firms were willing to invest in expanding productive 
capacity. 
 
3.  In contrast, the index of consumer confidence rose by 
nine percent to 108.9, reflecting the relatively buoyant 
mood of residents in tourist areas. This mood contradicts 
the constant reports from hoteliers that the sector is in 
crisis.  Almost sixty percent of consumers rated current 
economic conditions as average or better than average 
during the third quarter and expected conditions to remain 
largely unchanged during upcoming periods.  Jamaicans were 
also more upbeat about the current availability of jobs, 
although apprehensions about job prospects have increased. 
Like businesses, consumers are anticipating increased 
prices.  The surge in oil prices has begun to feed 
inflationary expectations, with over 90 percent of all 
Jamaicans expecting higher inflation during the year 
ahead.  As a consequence, most Jamaicans are anticipating 
increased income to compensate for the higher inflation. 
 
4.  Higher than anticipated inflation has begun to drive 
uncertainty among Jamaicans.  Inflation of 10.1 percent 
for April to September has already surpassed the GOJ'S 
full fiscal-year target of nine percent.  Rising oil 
prices (gas prices have doubled since January 2005) have 
fueled most of the inflationary impulses.  Higher domestic 
food prices due to the impact of two hurricanes and an 
increase in consumption taxes, bus fares and utilities 
have also fed inflation.  The higher inflation, which has 
outpaced wage increases, has led to a falloff in 
consumption and by extension sales.  With businesses 
finding it difficult to pass on the full impact of 
especially the oil price increase, profits, investment 
activity and overall economic expansion have remained 
sluggish.  The slow depreciation in the exchange rate, the 
expansion in the fiscal deficit relative to target and the 
sluggish economic performance have also provided 
additional impetus for the reduction in business 
confidence. 
 
5.  Amidst the drop in confidence, the GOJ was able to 
raise USD 250 million by way of a Global Eurobond with a 
25-year maturity and a 9.25 percent interest coupon on 
October 10.  The instrument was well received by external 
investors amidst rising US interest rates and at a time 
when the external capital market has been wary of emerging 
market debt.  This is the third time the GOJ has been able 
to raise external funds during 2005, suggesting that 
international investors still maintain a high level of 
confidence in the country's economic fundamentals and 
ability to repay debt.  However, unless the GOJ is able to 
arrest inflation, the country could face some 
macroeconomic challenges in 2006 when most wage contracts 
come up for negotiation.  Workers in general and public 
sector employees, who have been reluctantly engaged in a 
wage restraint agreement with the GOJ, will seek 
substantial increases in wages to compensate for the loss 
in purchasing power.  However, generous wage increases 
could provide further impetus for inflation and 
inflationary expectations and could impact the exchange 
rate, further eroding confidence. 
 
ROBINSON