Brian Wynter: Economic issues and short-term trends for Jamaica
Speech by Mr Brian Wynter, Governor of the Bank of Jamaica, at the Quarterly Press
Briefing, Kingston, 15 February 2011.
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Ladies and Gentlemen:
Welcome to this the release of the first Quarterly Monetary Policy Report for 2011. My
presentation will follow the usual format. There will be a brief review of macroeconomic
developments in the December 2010 quarter, followed by the Bank's view of the near-term
prospects for the economy. In this report we have also included an article on inflation
targeting, an alternative monetary policy framework that has become increasingly popular in
recent years because of the success achieved in reducing inflation. This article comes in light
of the success the Government has had to date in its effort at fiscal consolidation and the
commitment to a fiscal responsibility framework, which are important pillars of an inflation
targeting framework. We encourage you to read the article and let us have your feedback.
Recent developments
When we last met on 10 November 2010, I indicated that the process of transformation was
continuing in line with the objective of lower volatility in domestic prices, lower interest rates
and stable financial markets. The objectives set out in the financial programme continue to
be met. To date, the Government and the BOJ have met all the quantitative targets under
Stand-by Arrangement ("SBA") with the International Monetary Fund ("IMF") and are set to
meet those for end-December 2010. The reviews that the country has received from the IMF
have been encouraging and we continue to make progress on the structural benchmarks
which are aimed at increasing efficiency in fiscal management and the financial system. In
the context of these developments, the outlook for inflation remains favourable, interest rates
continue to trend down, the foreign exchange market remain relatively stable and net
international reserves continue to be robust . However, although there are signs of
improvement in domestic output, the economy remains weak.
Money and financial markets
On 15 November 2010, the Bank reduced the interest rate on its 30-day open market
instrument by half of one per cent to 7.5 per cent. On 01 February 2011 we reduced this rate
by a further quarter of one per cent. These rate reductions were done in the context of
continued weakness in the domestic economy and the favourable prospects for inflation. In
addition, investors have continued to show a preference for Jamaica Dollar instruments,
signifying their confidence in the positive near-term prospects for continuing stability in the
economy.
Market-determined interest rates also continued to decline in the quarter. The weighted
average yield on the 1-month, 3-month and 6-month Treasury bills declined by 78 basis
points, 35 basis points and 51 basis points, respectively to 7.48 per cent, 7.40 per cent and
7.48 per cent at the auctions in the December 2010. Yields have continued to decline falling
by an average of 2 basis points at the auctions in January, with all tenors significantly
oversubscribed.
The external community has also continued to demonstrate its confidence in Jamaica's
creditworthiness. Average yields on Jamaican sovereign bonds have fallen from about
10.50 per cent at the end of January last year - just before the implementation of the
Jamaica Voluntary Debt Exchange (JDX) - to 7.57 per cent at the end of January this year.
This occurred in the context of a fall of about 2 percentage points in the average spread
between Jamaican sovereign bonds and US Treasury bonds - an indication that investors
perceive a meaningful reduction in the risks associated with investing in Jamaican securities.
When compared with other emerging markets, Jamaica's bonds have also performed well.
The spread between Jamaican sovereign bonds and the benchmark emerging market bond
index (known as the EMBI) fell by more than 3 percentage points over the course of 2010.
Also reflective of the increasing confidence about the near-term prospects for the economy,
the foreign exchange market was relatively stable for the December quarter. In this context,
there was a marginal appreciation of 0.45 per cent in the weighted average selling rate of the
Jamaica Dollar for the review period. This was in comparison to average depreciation of
3.0 per cent for the last five December quarters. For the calendar year 2010, the value of the
Jamaica Dollar appreciated by 4.4 per cent against the US dollar. This was in contrast to the
depreciation of 10.2 per cent in 2009.
The appreciation in the value of the domestic currency in the quarter was associated with
increased net private capital inflows which were more than sufficient to offset the impact of
increased demand to satisfy payments for current account transactions. In the context of this
excess supply of foreign currency in the market, the Bank made net purchases of
US$51.9 million during the quarter. These purchases along with the purchase from
Government of the proceeds of a US$200.0 million loan from the Inter-American
Development Bank, contributed to an increase of US$197.7 million in the NIR during the
quarter. At end-December 2010 the NIR amounted to US$2 171.4 million, which was
US$351.4 million above target under the IMF-SBA programme. Gross reserves amounted to
US$2 982.8 million, representing 23.0 weeks of projected goods and services imports,
comparing favourably with the international benchmark of 12 weeks.
Inflation
The out-turn for inflation for the December quarter was somewhat higher than the forecast
range I had shared with you at the last briefing. Headline inflation was 3.3 per cent for the
December quarter, compared to 1.3 per cent in the September 2010 quarter and the
projected range of 2.0 per cent - 3.0 per cent. As a result of the out-turn for the quarter,
there was an uptick in the annual point-to-point inflation to 11.7 per cent relative to the
10.2 per cent in 2009, the original forecast made in December 2009 for CY2010 was
11.4 per cent. However, all the annual measures of core inflation recorded declines, with the
exception of the trimmed mean which remained flat.
The temporary acceleration in inflation in the review quarter was largely due to the passage
of Tropical Storm Nicole at the end of September, the impact of which was more prolonged
than we had Quarterly Press Briefing 15 February 2011 anticipated. This led to temporary
shortages in the supply of some agriculture produce and consequently higher prices for
these items, particularly vegetables.
In addition to the impact of adverse weather conditions, domestic inflation was also
negatively affected by the pass-through of increases in international commodity prices during
the review period. The higher inflation in the December quarter also reflected increased costs
for energy and transportation as a result of a rise in international oil prices. The upward
movement in oil prices largely resulted from a weakening in the US dollar against all major
currencies as well as the impact of improvements in the outlook for global growth.
Accordingly, Food & Non-alcoholic Beverages; Housing, Water, Electricity, Gas & Other
Fuels; Transportation
and were the major contributors to inflation in the quarter. Of note,
Food and Non-alcoholic Beverages contributed 59.8 per cent of the inflation out-turn in the
review quarter. The impact of the above factors was moderated by the appreciation in the
exchange rate and continued weakness in the domestic economy.
As was indicated previously, the up-tick in inflation in the December quarter was temporary.
In this regard, the Bank is projecting that there will be a moderation in inflation in the March
2011 quarter, within the range of 1.0 per cent to 2.0 per cent. The projected deceleration in
inflation in the March quarter is largely predicated on the expected price reversals for
agriculture crops which occurred in the December quarter. In addition, we are expecting
continued stable domestic capacity and declining inflation expectations to have a moderating
impact on inflation. However, the Bank is projecting continued increases in international
commodity prices, which should be the major influence on inflation in the quarter.
Real sector
The Bank estimates indicate that real GDP contracted in the range of 0.0 per cent to 1.0 per
cent for the December quarter, similar to the contraction in the September quarter. Similar to
our forecast in November 2010, all industries are estimated to have contracted with the
exception of Mining & Quarrying and Hotels & Restaurants. Underlying aggregate
demand is estimated to have remained weak due mainly to continued declines in
Consumption and Investment.
For the March 2011 quarter, the Bank is projecting that there will be marginal growth in
economic activity. This will be largely driven by continued expansion in Mining & Quarrying
and as well as growth in The strength of
Hotels & Restaurants Electricity & Water Supply.
the expansion in these sectors is expected to offset the slower rate of decline in the other
sectors.
Outlook
The consensus is that the global economy grew at a faster rate in 2010 than was previously
expected, led by emerging economies such as China and India. Although the prospects for
global growth in 2011 have also improved, this is expected to be at a slower rate than in
2010. This expectation of slower growth is in the context of monetary tightening being
undertaken by some emerging economies. Nonetheless, the forecast for continued growth in
the world economy, particularly the USA, bodes well for remittance inflows and tourist
arrivals to Jamaica.
In spite of the improvements in the global economy and the expected marginal growth in the
March quarter, the Jamaican economy is projected to contract in the range of 0.0 per cent to
1.0 per cent for FY 2010/11. The projected contraction is a direct result of the declines that
were experienced in the first three quarters. However, we are expecting that growth in the
March quarter will continue into the next fiscal year with all sectors being projected to register
expansion.
Given the forecast for the March quarter, the Bank is expecting inflation for FY 2010/11 to fall
within our original target range of 7.5 per cent - 9.5 per cent. The forecast for single-digit
inflation is predicated on the continued weak consumer demand, relative stability in the
foreign exchange market and continued moderation in inflation expectations. The risks to the
inflation projection are still balanced. Higher than anticipated increases in international
commodity prices continues to be the main upside risk, while on the downside a greater than
anticipated contraction in domestic demand could contain inflation pressures.
For the medium-term the Bank is forecasting that inflation will fall in the range of 5.5 per cent
to 7.5 per cent. Most of the inflation in FY 2011/12 should occur in the first half of the fiscal
year due to the forecast for increased prices for international commodities. Thereafter, we
expect the prices of international commodities to normalise. The Central Bank's goal is to
achieve low and stable Inflation in line with that of our major trading partners in the long-term.
While the achievements to date of high single-digit inflation may be satisfactory from a
historical perspective, it is not too soon for us to consider how we will reach the lower single-
digits of our trading partners which for 2010 was 5.1 per cent. Accordingly, the Bank's
monetary policy stance will continue to be consistent with the objective of achieving low
stable prices and maintaining stability in the financial markets.
Conclusion
Ladies and Gentlemen, the Jamaican economy has continued to benefit from the on-going
transformation which commenced in 2010. Consolidation in the fiscal accounts and the
demonstrated commitment to fiscal responsibility have reassured investors about the
favourable prospects for stability in the economy. This has been reflected in the continued
decline in interest rates in the money and bond markets as well as the stable to appreciating
trend in the exchange rate. By now, you would have heard of the offer made to investors
amounting to US$400 million by way of a re-opening of the 2019 Global Bond at a yield to
maturity of 7.95 per cent. That offer which was floated in anticipation of the maturity in May of
the 2011 Global Bond and was heavily over subscribed.
The quarterly observance of the targets under the IMF-SBA and the associated programme
of reform have affirmed perceptions about the progressive improvements in Jamaica's
macroeconomic management. These continuing improvements must now form the
foundation for a more robust participation by the private sector in the creation of sustainable
economic growth and development.
Thank you.