There is an air of renewal in downtown Kingston these days. Colorfully painted frontages house businesses lured back to the capital by generous tax incentives, improved policing, litter-free streets and a new transportation system. “Jamaica is in a state of transformation,” says Patricia Francis, president of Jamaica Promotions Corporation, Jamaica’s export and investment promotion agency.
The economy grew last year for the first time in five years. Jamaica is pressing ahead with economic liberalization and structural reforms to prepare for deepening regional integration. In December, Standard&Poor’s put Jamaica’s B rating on creditwatch with a positive outlook.
The nineties were difficult years for the island nation. A falling out in 1996 with the International Monetary Fund over fiscal policy, a slump in manufacturing following the 1994 implementation of the North American Free Trade Agreement and a banking crisis in 1997 battered Jamaica’s already weakened economy.
In 1999, Jamaica made up with the IMF and embarked on a voluntary program to restore long-term economic growth through fiscal consolidation and structural reforms. The government has eliminated exchange controls, deregulated the telecommunications and electricity industries, consolidated the financial sector and is reforming the judicial system. Jamaica continues to wrestle with a public sector debt mountain, expected to consume 63% of this year’s budget in service payments.
The government is determined to assert itself as a major player in an economically integrated Caribbean. Prime Minister P.J. Patterson says, “Economic integration is an objective, which we have been steadily pursuing and the imminent advent of the Caribbean single market and economy suggests that we are managing to overcome the main obstacles of insularity and size.”
Peter Moses, country corporate officer for Citibank, says integration is taking place in the region, as businesses position themselves to become regional players. Jamaica stands a better chance of attracting investment if it aligns itself with neighboring economies in the region, says Richard Downer, partner at Pricewaterhouse Coopers.
Cross-border acquisitions are taking place all over the Caribbean as companies move into new markets and list on multiple stock exchanges. Trinidad Cement, Guardian Holdings of Trinidad and CIBC West Indies are listed on the Jamaican, Trinidadian and Barbadian stock exchanges. Grace Kennedy of Jamaica, Life of Barbados, and Barbados Shipping and Trading are listed on the Trinidad stock exchange. Jamaica’s successful hospitality companies are also joining in cross-border integration with resort companies Sandals and Superclubs leading the way.
“Jamaican tourism companies are marketing themselves as Caribbean companies,” says Citibank’s Moses. Serious crime has blighted Jamaica’s image and this, combined with what Moses describes as the “mystique” of Cuba have threatened the Jamaican share of the Caribbean tourism market. Sandals and Superclubs are responding by marketing themselves as Caribbean companies, adding Cuba to their list of destinations.
Meanwhile, Jamaica’s sell-off of insolvent financial institutions is accelerating regional integration as companies from Barbados and Trinidad&Tobago snap up Jamaican assets. Royal Bank of Trinidad&Tobago bought Union Bank for J$1.7 billion. Last year, Guardian Life of Trinidad&Tobago purchased four merged life insurance companies and Trinidad Cement Company acquired Caribbean Cement Company for J$1.1 billion.
The lower cost of capital in Trinidad – an investment-grade country – of around 12% compared to 19% in Jamaica, and the higher valuation of Trinidadian companies make it easier for them to raise acquisition financing, says Donovan Perkins, managing director of Pan Caribbean Merchant Bank. “The price-to-earnings ratio for Jamaican companies is around four to six times whereas Trinidadian companies are around 10 to 12 times earnings,” he says. High operating costs in Jamaica, caused by expensive telecommunication and energy, do not seem to have deterred regional companies looking for acquisition opportunities.
“Macroeconomic conditions in Jamaica are improving and should continue to do so,” says Amrit Sinanan, managing director of Union Bank.
Derick Latibaudière, governor of the Bank of Jamaica, the central bank, says the return to growth is a result of “pursuing a policy of stabilization and continuing to maintain a tight fiscal stance.” Jamaica pulled out of a five-year recession to grow by 0.8% in 2000 and should grow 3% this year, says Latibaudière.
Confidence in the banking sector is returning and deposits rose 15% last year. Jamaica reported over $400 million in private capital inflows from the sale of Union Bank and state-owned electricity utility Jamaica Public Services Company. This led to a $519 million rise in net international reserves to a record $969.5 million. Inflation dropped to 6.1% in 2000 from 6.8% in 1999.
But rising oil prices are threatening this progress. Jamaica, unlike Trinidad&Tobago, imports all its oil. Last year, the government buttressed the economy against future oil price rises by signing a $14 million energy accord with Venezuela. Under the one-year agreement, Jamaica purchases Venezuelan oil at $15 to $30 per barrel, paying 75% of the price up front and the remaining 25% over a 15-year period at an interest rate of 2%.
A 23% collapse in demand last year for bauxite, Jamaica’s second most important export, hit the country hard. However Ray Gendron, manager of Aluminum Partners of Jamaica, says an export tax on bauxite is holding the industry back. He wants the government to lift the tax, allowing the funds to be re-invested in upgrading the bauxite industry and to produce refined products.
Jamaica could eventually refine bauxite transported from Brazil and export it to the US and Europe, says Gendron.
The sale of state assets also helped the economy. The March auction of cellular licenses to Digicell of Ireland and US-based Centennial Communications raised $330 million. But Downer, of Pricewaterhouse Coopers, warns the government “should be careful not to trade a state monopoly for a private sector monopoly or oligopoly.” Neither should it treat asset sales as a quick way of raising cash to retire expensive domestic debt. Instead, the government should create a more competitive business environment in Jamaica by lowering operating costs.
Philip Paulwell, minister of industry, commerce and investment, says he expects the March sale of 80% of Jamaica Public Services Company to US-based Mirant, a subsidiary of Southern Company for $201 million, and the end of a fixed-line monopoly held by Cable&Wireless in 2002, to increase competition and lower costs.
High interest rates are a significant burden for Jamaican companies. The Bank of Jamaica set its benchmark interest rate at 15.5% in 2000, above its target of 14%. “An increase in the demand for foreign currency in the latter part of the year disturbed the relatively stable monetary conditions and delayed further reduction,” says Latibaudière. “High interest rates are curtailing the commercial banks’ ability to lend at competitive rates to the private sector and further boost growth,” says William Clarke, managing director of Scotiabank. They are also impairing Jamaica’s ability to reduce its huge public sector debt, which at 125% of GDP is high even by the standards of developed countries.
“Reducing the debt burden depends critically on reducing interest rates and the stock of debt through fiscal discipline and asset sales,” says Carl Ross, chief economist for Latin America and the Caribbean at Bear Stearns. The government’s debt burden prevents it from addressing social problems, and this worries investors. Unemployment of 15% and Jamaica’s position as a drug transshipment center is probably the main cause of Jamaica’s rising crime rate, says Jampro’s Francis.
Jamaica has 2.6 million people and over 200 were murdered in the first four months of this year. She acknowledges that tackling crime should be a priority to attract investment, but says cutting crime costs money: “With the large part of the budget going to pay off foreign debt there is little left over to assign to security.”