US embassy cable - 05KINGSTON2651

UNCLAS SECTION 01 OF 02 KINGSTON 002651 
 
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 ECONOMY STAGES MILD RECOVERY BETWEEN 
JULY AND SEPTEMBER 
 
 
1.  Summary:  Data released by the Planning Institute of 
Jamaica on November 15 showed that the Jamaican economy 
staged a mild recovery during July to September 2005. 
Output expanded by an estimated 2.7 percent due to the 
gradual normalization of some sectors of the economy 
following the impact of hurricanes Dennis and Emily in 
July 2005.  The damage from both hurricanes amounted to 
almost USD 100 million, or over one percent of GDP. 
Inflation of 4.7 percent remained high due to policy- 
induced and supply shocks.  High inflation and 
inflationary expectations and declining foreign exchange 
inflows fuelled instability in the foreign exchange market 
during the quarter.  GOJ'S fiscal operations generated a 
deficit of USD 110 million due to lagging revenues, as 
spending was below target.  GDP is expected to grow by 2.9 
percent during the fourth calendar quarter due to improved 
performance in the productive sectors (Note: The fiscal 
year in Jamaica runs from April 1 to March 31.  To avoid 
confusion between U.S. and Jamaican fiscal years, however, 
all quarters referenced in this cable are calendar 
quarters.  End note).  Inflation should moderate due to 
declining oil prices.  This, combined with increased 
inflows of foreign exchange, should temper demand 
pressures in the foreign exchange market.  However, while 
most areas of macroeconomic management should show signs 
of improvement, the GOJ will be hard pressed to rein in 
the fiscal deficit.  End summary. 
 
2.  The Jamaican economy is estimated to have grown by 2.7 
percent during July to September 2005, according to data 
published by the Planning Institute of Jamaica (PIOJ) on 
November 15.  This performance brought GDP growth for the 
first nine months of 2005 to 1.4 percent.  The improved 
third calendar quarter performance was largely due to a 
6.1 percent jump in goods production, signaling a 
normalization of some sectors following the impact of 
hurricanes Dennis and Emily in July (Note: The fiscal year 
in Jamaica runs from April 1 to March 31.  To avoid 
confusion between U.S. and Jamaican fiscal years, however, 
all quarters referenced in this cable are calendar 
quarters.  End note).  In particular, the agriculture 
sector registered growth of 2.5 percent, the first 
expansion in over a year.  Construction, which benefited 
from hurricane-related rehabilitation work as well as from 
burgeoning residential and infrastructure projects, 
increased by 6.7 percent.  Mining output soared by an 
impressive 16.2 percent, as demand for aluminum remained 
high.  The services sector grew by only 0.8 percent, as 
the usually buoyant tourism sector suffered from the 
unusually active hurricane season.  PIOJ estimates showed 
that the cost of the damage and losses to infrastructure 
and productive assets associated with the hurricanes was 
about USD 100 million or about 1.5 percent of GDP. 
Infrastructure with damage amounting to USD 78 million 
suffered the greatest impact followed by the productive 
sectors (USD 14 million), the social sectors (USD 5 
million) and incidentals (USD 3 million). 
 
3.  Influenced by both policy-induced and supply shocks, 
inflation jumped by 4.7 percent during the review quarter. 
This brought inflation for the first nine months of 
calendar year 2005 to 11.8 percent or five percentage 
points above the result in the corresponding period of 
2004.  Rising oil prices, with benchmark West Texas 
Intermediate peaking at USD 69.82 per barrel, drove 
inflationary pressures during the quarter.  Higher oil 
prices had a direct effect on utility rates, which are 
adjusted automatically for fuel charges.  Higher utility 
rates were also driven by a 5.8 percent annual inflation 
adjustment to electricity prices.  The oil price hike also 
provided the impetus for the significant jump in 
transportation costs, with bus fares increasing by almost 
50 percent.  Other underlying reasons for the relatively 
robust inflation figure were higher school fees and costs 
of back-to-school supplies and increased domestic food 
prices following the adverse weather conditions. 
 
4.  Rising inflation combined with declining supplies of 
foreign exchange, due largely to the slump in tourism, 
fuelled frequent bouts of instability in the foreign 
exchange market during the quarter.  By the end of the 
quarter the local currency had depreciated by 1.7 percent. 
This compares with an appreciation of 0.02 percent in the 
previous three quarters.  The inflationary expectations 
prompted investors to realign their portfolios, resulting 
in a strong demand for U.S. dollar denominated 
instruments.  To ease the demand pressures, the Bank of 
Jamaica sold a large amount of foreign currency to the 
market.  Despite these frequent interventions, the stock 
of Net International Reserves was only depleted by USD 
37.8 million to USD 2.1 billion. 
 
5.  GOJ operations generated a fiscal deficit of USD 110 
million during the review quarter USD 67.2 million more 
than budgeted.  The deviation in the deficit was due to 
the USD 110 million fall-off in revenue collections, as 
expenditures were USD 42 million less than programmed. 
Poor revenue performance was attributable to the slump in 
consumption taxes and could be the result of the 10 
percent increase in sales taxes.  Lagging revenue 
collections forced the GOJ to chop spending on social 
programs and capital projects, in particular, to contain 
the fiscal deficit. 
 
6.  Outlook:  According to some reports, hurricane Wilma 
in October did more damage island-wide than did hurricanes 
Dennis or Emily, and significantly hurt Southern Florida. 
While this may be reflected in the next quarterly data, it 
is not expected to affect remittances from Florida, which 
have historically been very resilient.  With hurricane 
season ending in November without any further disruptions, 
real GDP is expected to grow by a further 2.9 percent 
during the last quarter.  Most of this expansion in output 
should come from electricity, construction, tourism and 
mining.  However, construction performance could be 
stalled by a shortage of cement from the country's sole 
cement plant, Carib Cement.  Tourism should rebound on the 
back of an increased marketing campaign as well as the 
anticipated diversion of tourists from Mexico to the 
Caribbean following the devastation caused by hurricane 
Wilma.  Inflation for October 2005 was 0.6 percent and 
prices should continue to moderate as policy-induced 
shocks dissipate and oil prices stabilize.  However, 
seasonal (Christmas) influences from domestic food prices 
could continue to buoy inflation.  The foreign exchange 
market continues to face increased demand pressures, 
prompting the Bank of Jamaica to intensify its 
intervention program.  However, with the NIR remaining 
high and with tourism and FDI inflows expected to pick up 
in December the market could stabilize.  Fiscal policy 
will remain the most challenging area of macro-economic 
management going forward.  Data released by the Ministry 
of Finance at the end of November show that the fiscal 
deficit continued to widen on the back of lagging 
revenues.  With little or no adjustment possible on the 
expenditure side, the GOJ will be hard pressed to meet its 
fiscal target for the quarter.  End outlook. 
 
TIGHE