LatinFinance / April 2007
By Larry Luxner
Jamaica may have missed its fiscal target because of spending on the cricket World Cup, but its government is upbeat about the economy. Finance Minister Omar Davies bats off criticism that a poor island like Jamaica can't afford the luxury of hosting a world class sporting event.
"True, these resources could have been spent elsewhere, but we have already made the commitment to host the games," Davies told LatinFinance. "If all these questions had been raised before we made that commitment, I'd have seen them as being more sincere."
Davies said that hosting the games, which run Mar. 13-Apr. 28, will cost Jamaica around $150 million, of which $33 million is a "very soft concessionary loan" from China for the building of the Trelawny stadium near Montego Bay.
"Apart from that, you're dealing with assets which have been acquired for public transport, so although this money was expended because of the games, they'll serve us beyond that," he said.
In any event, says the finance minister, Jamaica is doing well, with foreign direct investment coming to $600 million and tourism — the island's key foreign-exchange earner — clearly booming.
"A year ago, totally unsolicited, we raised 30-year money at 8% interest. Very few people would have anticipated that development five years ago," he said. "We have brought inflation down much more rapidly than we thought possible, to 5.8%. Foreign-exchange reserves remain healthy, the market remained stable, oil prices stabilized and the weather was good. And we brought unemployment down below 9% for the first time in 30 years."
Peter Bunting, chairman of state-run investment promotion agency Jamaica Trade and Invest (formerly known as Jampro), said the government has finally turned the corner following a financial-sector crisis in the mid-1990s that forced the country to privatize many companies and deregulate the economy.
"In the short term, inflation went over 100% per annum, and the Central Bank attempted to get things back under control by instituting really harsh monetary policies which lasted for most of the next decade," he said. "That brought down inflation quickly, but real interest rates remained so high that it precipitated a lot of loan defaults — combined with the fact that banks during this period of hyperinflation were investing heavily in real-estate. Suddenly, these illiquid assets became problem investments. Because of all the defaults, banks couldn't even unload the real-estate. This led to bad balance sheets."
Things started turning around in 2000, when the government's monetary policies began taking effect, said Bunting. He noted that liberalization of the telecom sector in 2001-03 attracted tremendous interest in Jamaica, spurring investment not only in wireless telephony but in broadband Internet services as well.
"From about 2000 until now, we've had very high FDI, averaging $500-600 million a year. And that's been sustained over the last six or seven years," he said. "In 2003, total debt was about 144% of GDP. Now it's down to 120%. Of that, roughly half is external debt. It's high but manageable and trending down. We have a fairly business-friendly environment. We're completely liberalized in terms of trade and capital flows, and employment policies."
The Dominican Republic is considered Jamaica's biggest Caribbean competitor in attracting FDI, though the country has managed to lure several large IT firms, and has done particularly well in attracting offshore call centers, thanks to its English-speaking work force and relatively low wages.
Last year, the economy grew by around 3%, said Bunting, pushing GDP to around $8 billion, though actual growth is higher since "the World Bank did a study showing that we consistently underestimate our economy by 1-3% per annum."
In 2005, services accounted for 67% of the Jamaican economy, with manufacturing (mainly apparel, food processing and rum distilling) adding another 12.5%, construction 10%, mining 5.5% and agriculture the remaining 5%.
Jamaica's telecom sector was opened to competition in 2001, in a process that caused Cable & Wireless Ltd. to lose its century-old monopoly.
Electricity production is already in private hands, with Atlanta-based Mirant Corp. owning 80% of Jamaica Public Service Ltd., the island's dominant power generator. The Jamaican government owns 19%, and the remaining 1% is held by individual investors.
But Mirant and the government both want out of JPS, for different reasons, said Damian Obiglio, president and CEO of JPS, which has installed capacity of 850 megawatts.
"Mirant's preference is to sell the entire package to one single company," said Obiglio, noting that half a dozen interested parties have been shortlisted. "It's a change of strategy by Mirant, which has decided to concentrate on the domestic market."
Obiglio said that Mirant has invested $300 million over the last four years to keep up with growing power demand, which is expected to rise by 59 megawatts by 2009 and 250 megawatts by 2012.
"The increased load is coming from the hotel and mining sectors," he said. "The expansion of bauxite mining by Jamalco and Windalco, and the expansion in the hotel industry, is driving this growth in demand. Every new hotel adds a demand of six megawatts to the system, and these are huge hotels, about 1,000 rooms each."
According to Obiglio, "Jamaica's economic growth looks steady at 2.5% to 3% a year. It's based on fundamentals related to tourism and leisure activities, and some mining, but it's not going to be an explosion of growth. The government tried to balance the deficit during 2006 and there's a commitment for the future. That has created a good base for investment in the country."
Meanwhile, prices for Jamaica's two most important commodities — bauxite and sugar — are higher than they've been in years, though Davies said "most of the [bauxite] we sell are long-term contracts which have fixed prices, so although bauxite prices have skyrocketed, we are not going to immediately reap the benefits in the short term."
Jamaica is also known for specific, high-end products like Blue Mountain coffee. But most is exported as green beans, which lets much of the value go.
The Caribbean must add value to agricultural production, and also retrain the work force. The cricket World Cup will lure an estimated 20,000 visitors, over and above the 1.5 million expected this year.
Hotels are building in anticipation of an influx of visitors. But Jamaica still has a long way to develop, while keeping hold of the culture, art, food and music that make it unique.