Jamaica gets some future insurance with new IMF Standby Arrangement 

The IMF Executive Board approved an SDR 1.7billion arrangement for Jamaica to continue its support of economic policies. The documents were published yesterday and can be read, at leisure 😊

Apart from outlining the main policy objectives, the report gives useful pointers about financial markets that explain some of the reasons why my knees don’t tremble with every blip of the exchange rate–thin markets, and no real interbank operations–and about weak monetary transmission. 

Anyway, bravo, Jamaica, for getting an early Christmas present…of a sort. 

Economic Growth Council Signing Ceremony and Call to Action: Some thoughts on the illusion of optics

I did not attend the Economic Growth Council’s (EGC) ‘Signing Ceremony and Call to Action’, held at the Courtleigh Auditorium on November 7, but I was able to watch the Livestream video of the event, which you can watch here https://www.facebook.com/EGCJamaica/posts/275339559528471. There’s lots to applaud in how the EGC packages what it’s doing, and its slickness is one of the positives that can be taken from what they are doing. As I’ve noted before, I’m interested in aspect of the process of getting Jamaica onto a much faster growth path. Achieving that should be important in getting more Jamaicans contributing to the well-being of the island. Traditionally, high growth rates would be translated into faster and broader jobs growth, but many things have changed in the local and world economy, so that the prospect of ‘jobless’ growth is a real risk. That’s an outcome that Jamaica needs to avoid.

One thing that struck me in the presentations was how much of Jamaica seemed to matter. Now, I might not have been looking or listening with as much care as I could, but if so, please correct me. I saw only a few representatives of many of Jamaica’s important people. Who do I mean?

I mean farmers, vendors, schoolchildren, young single mothers with many children, the sick, the unemployed, the young men whom we often talk about as being disaffected or alienated.

Now, as is the way with many events, the process of ‘reaching out’ is often done hastily or incompletely. But, to me, this series of omissions is telling. When I watched the video ‘testimonials’ of young people telling me what they were expecting and hoping I heard what seemed like a narrow cross-section of those who are also yearning. Again, these ‘sound bites’ cannot be comprehensive, but they should give the impression of being broadly spread. I did not get that impression. Why do I think that matters?

One of my big concerns is that amongst the mistakes that we have made in the past and are in danger of repeating is somehow acting as if the change we want to see will be organic. Time was, when economies grew, people knew work would be created across a wide area of the country, so that no or few special measures were needed to see that flow occur. My belief is that those days are long gone, partly due to technology, but also due to the fact that the structure of the country has changed, both geographically and culturally. What that suggests, to me, is that some careful funneling needs to happen. That cannot be like in a planned economy, where you direct resources very specifically to areas and people, but it may need to be something similar.

I think the notion of inclusion is important, but do not see it happening spontaneously. My belief is that a large swathe of the country has actively excluded itself, or felt it was excluded, and so needs to be actively included

Some of those who need to be included live in the ‘shadows’ of our society, but that does not make they trivial; on the contrary. They have significant influence on many people’s lives. If crime is seen as the biggest challenge to getting Jamaica’s economy onto a much firmer footing, that cannot happen without addressing the flow of young people into crime. The motives for following that sort of life are complex, but talking about ‘opportunities’ in some glib, or amorphous way will miss the target massively. 

I do not have the answers to this problem, but I see what is happening in many areas as a sign that all cannot be well if the process does not reach deep down into daily lives. I just cite a simple set of experiences.

I drove across the middle of Jamaica on Sunday, from the tourist hub in Montego Bay, through our Trelawny agricultural heartland that grows sugar cane and yam, into the capital. I saw many men and women doing what they do almost daily: 

  • Sitting playing dominoes, or drinking and eating; 
  • Standing at water pipes or walking with drums on their heads to and from water tanks;
  • Living in homes that are barely fit for purpose;
  • Putting piles of produces onto roadsides, hoping for sales;
  • Getting into overcrowded taxis to head to their activities;
  • Begging on the road, at traffic lights;
  • Walking along potholed roads, long distances, to their activities;
  • Making phone calls to people on a list, plying them for money.

I just cite those snippets because they are representative of what many people are doing.

The idea of moving from ‘third world to first’ is attractive, but what does it mean, and is it something that means that people’s lives will be transformed dramatically AWAY from some of these daily activities within the next four years?

If the answer to those questions is to mean anything, those people need to know what will change in their lives and what they need to do to make it happen faster and look likely to be a permanent feature of their lives. 

Ambassadorial duties: A visit to Jamaica’s west

I’m lucky that I get to sample occasionally some of Jamaica’s offerings to tourists. I’m having a few days around Montego Bay, chilling and thinking. I wrote about the exchange rate the other day, and tourism is one part of the other side of the coin that many Jamaicans may not see, but matters. Simply, our declining J$ means that foreign visitors should find it cheaper to come to spend their money on our shores. Whether they spend more in local terms will always be a matter of debate, but the falling exchange rate offers them more chance of thinking they are getting ‘value for money’. Anyway, most of the foreign visitors I meet are so happy to be in Jamaica that I think they don’t factor in the exchange rate much. 

But, meeting them opens doors. I was trying to grab a very the makings of an early breakfast yesterday–a few sandwiches and fruit–ahead of a dawn round of golf, and met a family from Canada, with two lovely girls, who were too shy to speak to a stranger. Anyway, I complimented them on their straw-style hats, which I told them looked very Jamaican. As luck had it, the family sat adjacent to me this morning, when I was having my breakfast, so I renewed my conversation. The girls were still shy but I pointed out some things that I thought would make their visit a bit more interesting. 

I’d been joined by a small lizard while waiting to hit a shot yesterday, and as is my wont, I grabbed its picture, which I showed to the girls: nature is less intimidating in this way, and they looked fascinated.

“I’d stick with the driver, down the left side…” (Thanks to my new caddy.)
I talked to them about Jamaican fruit, which I hoped they’d tried: guavas (both pink and white) were on offer.
My lovely fruit plate for breakfast and ‘teaching moment’
Their mother knew guavas from a restaurant in their home in Toronto. I then got talking about golf courses, because the parents were interested, and I outlined what was nearby and worth trying out. They didn’t take much persuading. They planned to visit Dunn’s River Falls during their week-long stay. They asked about buying coffee: the mother said she needed to get for 70 people in her office. Buy, buy, buy! I pointed out that the Shoppes at Rose Hall had Blue Mountain coffee on sale, or the airport shops should also have. They were set for the day, and maybe the rest of their vacation.

Before that, I had been talking to a man, originally from Honduras, now living in Chicago, having migrated in his early teens, who’d asked me where I was from, and after that asked me about the language people spoke in Jamaica. I explained as best I could how Patois has an English base, but that wouldn’t really help understanding locals. He agreed, after overhearing conversations yesterday. I asked some of the waiting staff to give some examples of how Jamaicans would say “Good morning.” One young man said “Wha’ pree?” His female colleague said “Mawnin’!” I gave the Honduran a little insight to some other phrases that are not so hard to connect to English, but he understood that he needed to hang with a few Jamaicans for a while before getting very far. 

Both chance meetings settled on one point of agreement: this is a lovely island. That’s our selling point. 

But, contrast that to the surroundings, not far from the rarified world of the major hotels.

Last night, I went to visit a relative who lives in Montego Bay. I don’t know the city well, but never have much desire to get to know it, for all it’s constant mayhem, choked streets, and constant candidacy for ‘grimiest place on the island’.

The wildness of the west
Frankly, Montego Bay is an utter disgrace, given that it sits as a possible showcase for visitors to Jamaica. But, it’s a classic case of bad things Jamaican–unplanned, unruly, unkept, unloved.

As we drove through the city to do a school pick-up, a group of armed JDF soldiers was crossing the street, machine guns in hands.

Trying to control the uncontrallable?
This is part of the ‘boots on the ground’ approach to some of the escalating crime that has afflicted the area. Everyone was going about their own business: taxis loading and unloading, at will; pedestrians striding through traffic to make their way to wherever; hustlers with handcarts and just armed with cell phones jostling for space in and on the streets. Eventually, I got to my destination, one of the hills overlooking the harbour. I sat and chatted with my aunt, whom I’d not seen for too many years. She’s in her mid-80s and still in great health. We looked out at their neighbourhood. She spoke about the many small things that made life harder than it need be:

  • The scammers living adjacent, who could be heard making their ‘calls’ all day long, their being raided and taken by police, being bailed, resuming ‘business’, moving away. 
  • The commercial activities going on in plain sight in the middle of a residential area: sand and gravel works as your daily view is inexcusable. (But, the parish council friends of the sandman, sandbag the citizens.)
  • The potholed streets: taxis came and went, and people walked to their homes, dodging the craters that were all over the place.
  • The JPS light that works intermittently: we watched it go on and off at will. 

But, we tried to enjoy the setting sun as we looked west. It’s a beautiful island, sadly run by some less-than beautiful people who dont care enough to make life as nice as possible for citizens as they do for visitors. 

What’s the exchange rate telling Jamaica?

What determines the level of a country’s exchange rate? Traditional economic theory focuses on a set of financial variables, plus some ‘contextual’ characteristics of a country, all of which go into setting the relative advantage of one currency over another. These variables are well set out as follows: 

1. Inflation differentials: Generally, a country with a consistently lower inflation rate has a rising currency value, as its purchasing power increases relative to other currencies. Countries with relatively higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. This is also usually accompanied by higher interest rates.

2. Interest rate differentials: Interest rates, inflation and exchange rates are all highly correlated. By adjusting interest rates, central banks or monetary authorities can influence over both inflation and exchange rates; changing interest rates affects inflation and nominal currency values. Lenders in an economy with higher interest rates get a higher return relative to other countries. So, higher interest rates attract foreign capital inflows and pur pressure on the exchange rate to rise. However, the effect of higher interest rates is mitigated, if inflation in the country is much higher than in others, or if additional lower interest rates–i.e., lower interest rates tend to decrease exchange rates.

3. Current account deficits: The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest and dividends. A current deficit shows the country is spending more on foreign goods and services than it is earning, and that it is borrowing capital from foreign sources to cover that deficit. Hence, the country needs more foreign currency than it receives through sales of exports, and it supplies more of its own currency than foreigners demand for its products. The excess demand for foreign currency lowers the country’s exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.

4. Public debt: Countries use deficit financing to pay for public sector projects and governmental funding. The borrowing stimulates the domestic economy, but nations with large public deficits and debts are generally less attractive to foreign investors. Why? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real foreign exchange in the future. In the worst case scenario, a government may print money to pay part of a large debt, but increasing the money supply inevitably causes inflation. Moreover, if a government is not able to service its deficit through domestic means (selling domestic bonds, increasing the money supply), then it must increase the supply of securities for sale to foreigners, thereby lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country risks defaulting on its obligations. Foreigners will be less willing to own securities denominated in that currency if the risk of default is great. For this reason, the country’s debt rating (as determined by Moody’s or Standard & Poor’s, for example) is a crucial determinant of its exchange rate.

5. Terms of trade: This ratio compares export prices to import prices, and is related to current accounts and the balance of payments. If the price of a country’s exports rises by a faster rate than that of its imports, its terms of trade have improved. Increasing terms of trade shows greater demand for the country’s exports. Consequently, this results in higher export revenues, which provide increased demand for the country’s currency (and an increase in the currency’s value). If the price of exports rises by a lower rate than that of its imports, the currency’s value will decrease in relation to its trading partners.

6. Political stability and economic performance: Foreign investors prefer stable countries with strong economic performance in which to invest. A country with these positive attributes will draw investment funds away from other countries perceived to have more political and economic risk. Political turmoil may cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries.

The exchange rate of the currency in which a portfolio holds the bulk of its investments determines that portfolio’s real return. A declining exchange rate obviously decreases the purchasing power of income and capital gains derived from any returns. Moreover, the exchange rate influences other income factors such as interest rates, inflation and even capital gains from domestic securities. Exchange rates are determined by numerous complex factors that often leave even the most experienced economists baffled.

The modern popular portrayal of the Jamaican dollar is of an ailing body:

While that may appeal to the fancy of the media, it needs to be put into context.

In recent years, Jamaica’s government has done much to repair decades of damage to its finances. With support from the IMF, the so-called ‘economic fundamentals’ are on a sounder footing. That should help the exchange rate avoiding being dumped at a rapid rate. However, while inflation is down, debt stock is down, and debt payments are being made on time, the economy is far from fixed. For example, the debt-to-GDP ratio is falling, but still well over 100 percent. No right-thinking person, especially one thinking of investing in Jamaican assets would regard the Jamaican economy as fixed. 

The economy remains ‘misaligned’, as economists would say, on several other fronts. An indicator of that is the continued negotiations that have to take place over the size of the public service, which is deemed to be a drag on economic performance. Things that drag the economy, like a bloated public service, have a negative effect on sentiment towards the exchange rate.

For all that Jamaica is seeing increasing tax revenues and a streamlining of tax affairs, plus a shift to try to broaden the base of tax payers by moving away from direct to indirect taxation, Jamaica remains severely burdened by too many people avoiding their share of the tax burden. Put that differently: our informal way of doing many things, though full of convenience at a personal level, leaves the country poorly placed to pay for its many services and obligations. Though it may be impossible to write an equation that measures that aspect, it is the sort of thing that weighs negatively on the mind of people thinking of holding Jamaican dollars.

We have seen that Jamaica is divided politically, as demonstrated by a tight national election and the winning party having the slimmest of margins–one seat. For some, that demonstration of sound democracy also opens the door to a unknown world of political fragility. Such uncertainty has a negative effect on the exchange rate.

Many signs suggest that Jamaica has serious problems with corruption, despite hardly any cases going to court or people being imprisoned. The smell of corruption lingers. Investors wont come flocking to countries with such a smell. So, while some capital may flow in to be risked on projects in Jamaica, most ‘well-thinking’ investors are avoiding the country. That has a negative effect on the exchange rate.

These elements are part of what I would call a ‘risk premium’ that plays on the exchange rate, despite the good economic policy. How much? Good question. But, that premium is being demanded, and the declining exchange rate is a flashing warning light. I would say it’s amber, not red, which is better than it was or could be. But, it’s there, whatever politicians may want to tell you. It’s the same kind of warning light that the pound sterling has had blipping over its head since the referendum vote to leave the European Union. The UK did not suddenly become a basket case, but its prospects seemed to worsen and the heightened uncertainty has seen sterling take a pounding–sorry for the obvious pun. 

But, the exchange rate is only one indicator of what people think about Jamaica. If I were a Jamaican politician, I’d think about what some other composite indicators are telling me about my country. 

The Jamaican stock market outperformed the world in 2015 (read Bloomberg report) and continues to perform strongly.  That feature, and the results of various surveys, national and international, suggest improving confidence in Jamaica and improvement in many economic areas. Now, the stock market is more limited in its picture than the foreign exchange market, but its array of companies are generally the stronger and larger ones in the economy, whose performance drive many economic indicators. What the stock market tells me is that betting on Jamaican companies is seen as smart. In other words, the sky is not falling. 

But, what the exchange rate tells me, in its vague and hard to measure way is that ‘contextual’ problems that afflict Jamaica continue to exact a price of all of us, via the declining value of ur money. Those problems are well-known: corruption (stop pretending it’s not there and widespread); violent crimes (if you thought you might need to flee in a hurry, would you prefer to have your assets in Jamaican dollars or in US dollars?); slow implementation and a still-too-prevalent ‘no problem’ approach to that. Odd though it may seem, one of the worse examples of that last point is how politicians and public agencies go about what they do:

  • Look at how Parliament runs itself. Do you think that politicians who seem to slack off on their work sends a positive image to the world? Do you think that people rush to hold currencies of countries whose politicians routinely do everything late, including attending Parliament?
  • Look at how some public agencies seem to constantly find themselves in financial hot water. They may not understand that in the mind of traders, these are signs of a sick country and must be negative for the exchange rate. People don’t generally like to hold currencies where lots of it keep disappearing into black holes. 

The last IMF staff report (see box 4) informed us that Jamaica is becoming more dollarized (my stress): ‘June 2016, with more than 45 percent of deposits denominated in US$, Jamaica’s deposit dollarization is one of the highest in the region, accompanied by dollarization of investment portfolios too. Likewise, the three-year-long freeze of the domestic bond market, which resulted in greater reliance on external capital markets resulted in higher dollarization of public debt.’ So, government action forced portfolio managers to hold more foreign assets (buy more foreign exchange). So, understand who is forcing this process and putting pressure on the exchange rate: it’s the financial sector and government. So, when Finance Minister Audley Shaw sits down with the working group he’s established to ‘deal with the devaluation’ of the Jamaican dollar against the US dollar, I hope he understands at whom fingers need to point. The Jamaican government made the J$ a one-way bet! Traders love to make easy money 🙂

Ordinary Jamaicans don’t seem to be running towards the US dollar. I base that on a few anecdotal experiences that all point to general indifference to holding greenbacks: I’ve sometimes no J$ to hand and have asked if the person I need to pay would like US$, and they often say ‘No thanks!’ Whatever the US$ attraction, maybe the transaction costs outweigh other features. Then again, ‘ordinary Jamaicans’ are consumers, rather than savers and investors, so the currency of preference for consumption remains the J$. We still do not see US$ pricing as a standard feature in Jamaica–aside from in parts of the tourist business. I take that as a positive.

It’s a sad reality for highly-indebted countries that they are their own worst enemies, from start to finish. Getting out of the debt bind forces things to happen to seem to make matters worse before they get better. The declining exchange rate is one such effect, and it’s as much arithmetic as anything else. 

Finally, what the exchange rate is also telling me is that the promise of better economic prospects has not yet materialized and that must be reflected in the tendency of the J$. Simply put, countries that do not appear to be growing tend to have weaker exchange rates, so decades of anemic growth has built up lots of antipathy towards the J$. However,if  the latest data on quarterly GDP growth showing the best results for 14 years is the start of a trend in that direction, I would expect the exchange rate to stop suffering as much. 

Can Jamaica stop being a ‘pothole’ (patch over problems) society?–‘As I See It’ Facebook Live chat

I spoke more fully on this topic and was able to expand some more on the basic ideas and examples. Watch and listen, at your leisure: https://www.facebook.com/dennisjonesasiseeit/posts/1155926584500234