The Jamaica & IMF Equation

The Equation:

The following outline what I believe to be the most likely economic outcome if an agreement is not reached (soon), between Jamaica and the International Monetary Fund (IMF):

Further exchange rate depreciation

If the Government of Jamaica is unable to secure a deal – in short order – continued domestic concerns, weakening markets and lower investor confidence could result in increased volatility in the foreign exchange market and further slide (depreciation) in the Jamaican dollar. Note that a slide in the Jamaican dollar would make it more expensive for Jamaicans to transact businesses with U.S exporters – put another way, it would be more costly to buy the new Iphone 5.

The recent fall in the in the Net International Reserves (NIR) by more than US$ 236 million during the June 2012 quarter, could indicate that the movement to safer more stable currencies (US$ and CAN$) might be slowly underway.

Further delays in reaching an IMF agreement will undoubtedly cause an erosion in the value of the Jamaican dollar against the currencies of its main trading partners (US$, CAN$ and GBP). Immediately after, the previous IMF deal was signed in February 2010, the foreign exchange market stabilize and the JMD$ strengthened. Currently, the exchange rate is hovering at and around the $90 JMD : $1 US mark (As Seen in above chart).

Increase Interest Rates / Higher Cost of borrowing

The slide of the local currency coupled with the Government’s high level of indebtedness would likely trigger increases in the domestic interest rates. Higher interest rates would be the only incentive for investors to lend the Government money.

Jamaica’s high debt to GDP ratio (seen in chart above), limits the Government’s ability to pay its bills without having to borrow. Additionally, our economy is not growing fast enough to generate sufficient spending for the GOJ to collect tax revenues and earn money to repay its debt. Without a new IMF deal, the Government would have to find alternative money to pay bills, in order not to default on its obligations. Recently it was made public that the Government borrowed money from both NCB and Scotia bank in order to repay foreign debt owing and had matured – not a good sign.

 Further downgrade of Jamaican bonds by Rating agencies

If Jamaica is unable to sign a new deal with the IMF, a downgrade of domestically issued bonds/debt as well as international debt instruments such as the GOJ Global Bonds (GOJGB) would be inevitable.

These Euro-denominated bonds, if downgraded, would signal to investors that these are risky debt instruments with high likelihood of default by the issuing government (Jamaica). In this context, the GOJ would find it hard to generate well needed capital on the international market as its debt instruments would be undesirable to international investors.

Any downgrade would further make a case for higher interest rates when the government attempts to borrow internationally/ locally given the high propensity for defaulting (low credit worthiness) on these debt repayments – as indicated by the rating downgrade.

Even slower economic growth/ no growth

The global economy is still precariously positioned, with uncertainty surrounding the Euro-zone and China’s economic growth rate slowing. This all equates to even slower growth forecast for developing countries like Jamaica, who rely heavily on consumer welfare in the developed countries to keep their economy vibrant – tourism, bauxite and cultural exports.

Higher inflation rates

The direct outcome of a declining Jamaican dollar, compounded by higher cost for foreign goods – wheat/ flour price being the most recent to increase.

Further losses on the Jamaica Stock Exchange (JSE)

During the June 2012 quarter there was a decline across all four JSE indices ranging from 1.1 per cent to 7.9 percent. This fall in equity prices across the indices reflects the weakness in the domestic economy and growing concerns about the impact of the noted slowdown in the global economy.

Steven Jackson recently wrote an article in the Gleaner, which stated that “investors have lost close to J$73 billion of their wealth” on the JSE – Year to Date. This “bear” market will likely continue once an agreement is not reached.

The above arguments only highlight some of the economic possibilities/ scenarios that might occur in the event of further delays in signing a new IMF agreement. Note that the social and cultural impact was not examined, due primarily to the plethora of possibilities that can arise – one thing for sure though, we are a resilient people who have proven time and time again that we can rise above adversities.

Please add a comment and share your opinion on any of the points which were highlighted.

About the author:

Luwayne Thomas Bsc., Msc.

Co-founder  @balcostics

Follow on twitter: @LuwayneThomas

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