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InterviewsMay 1 2013

Opportunities abound in the rebuilding of Jamaica's economy

Jamaica has turned a corner since its recession in 2010, say finance minister Peter Phillips and central bank governor Brian Wynter, thanks in no small part to its plans to restructure the country’s public debt and attract more cross-border investment.
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Opportunities abound in the rebuilding of Jamaica's economy

The Caribbean region is undergoing its worse economic cycle in decades, with falling gross domestic products (GDPs), weak fiscal positions, mounting public debt and growing unemployment. For Jamaica, this meant a recession in 2010 and growth levels estimated at about 1% in the two subsequent years. It also meant that the country could no longer service its public debt and was forced to restructure it, first in 2010 and again in 2013 – a deal that would reduce the debt-to-GDP ratio to 95% by 2020 and secure credit from international lenders.

That credit has now been secured on the condition the restructuring goes ahead – $958m from the International Monetary Fund, as well as $510m each from the World Bank and the Inter-American Development Bank (IADB).

In an interview during the IADB’s annual meeting in Panama City in March, Jamaica’s finance minister Peter Phillips – part of the government that came into power early last year and which is led by Portia Simpson-Miller, who had previously served as prime minister in 2006 and 2007 – and central bank governor Brian Wynter are adamant that this represents a turning point for the country. 

Growth strategy

“The plan is to lower debt [as a proportion of] GDP to 95% by 2020,” says Mr Phillips. "We believe that if we are able to become very focused on the growth component, we can exceed the conservative growth targets in the programme and bring that debt-to-GDP level down further."

The restructuring, which affects domestic bond-holders only, reduces the interest payments but does not affect capital owed. Reaching that 95% ratio by 2020 involves reducing the total debt by $17bn per year until then. Going beyond that figure seems overly ambitious, particularly given the failure of the 2010 restructuring, when debt-to-GDP was 120% – less than the current ratio of 140%.

Mr Phillips, however, believes in the success of this second restructuring and justifies those debt reduction ambitions with the desired outcome of a number of reforms and privatisations aimed at making Jamaica more appealing to foreign investors. “It is not just a matter of arithmetic, but one of transforming the environment, [making Jamaica more] investor friendly and generally more modern in terms of [taxation], tax compliance and public sector efficiencies.”

On the back of international interest in some past privatisation projects, Mr Phillips is hopeful that the new projects will find good buyers. He singles out deals in the sugar sector, where Jamaica sold land and a number of factories to Chinese state-owned company Complant. Its subsidiary Pan Caribbean Sugar Company is now a key player in this sector in the country.

Mr Phillips admits there are not many state-owned assets but highlights the government’s determination in privatising what is available. In infrastructure, projects include the second airport terminal in the capital city of Kingston, which is not yet in private hands, according to the government. In addition, port facilities in the capital and railway services to the bauxite and aluminium sectors – two of Jamaica’s important exports – have potential.

Sugar rush

As for the sugar sector, Jamaica is hoping Asia will continue to bring cash to the island. “Investors coming from Asia, particularly China, [make] significant investments,” says Mr Phillips. “In sugar, we have a major privatisation involving a Chinese operator, which has the majority share in our domestic sugar industry and which is expanding production. In infrastructure, other Chinese [investors have] committed $600m in infrastructure development [in projects such as] toll road construction and have earmarked other commercial types of infrastructure in tourism and residential construction.”

If China is a key partner, Jamaica’s government hopes that future interests will come from closer countries too. “We should remember that we are less than 200 miles from the US,” says Mr Phillips. “We expect that as our [reforms] programme picks up, we will be able to increase the level of US investment in Jamaica, particularly in the areas of health tourism, information and communications technology, agriculture and tourism.”

Mr Phillips’ list of possibilities continues with efforts to diversify the country's energy sector to liquefied natural gas and projects to expand alternative sources of energy, increasing electricity production and, ultimately, reducing prices. “The energy sector is very much alive,” he says.

Hopes for economic reform go hand in hand with a push for a solid and inclusive financial sector. On the banking side, the central bank is keen to spur lending, particularly to small businesses.

Ailing bank profits during an economic downturn are to be expected. Jamaica’s largest banks, however, showed impressive profitability indicators during the country's troubles, according to The Banker Database’s latest regional ranking. Return-on-capital ratios for National Commercial Bank Jamaica and Scotiabank Jamaica were 78.16% and 77.18%, respectively, for the 2011 financial year. The two banks also had the highest return-on-assets ratios – in the country and the region – with 4.67% and 4.29%, respectively. The banks also score well in terms of efficiency, with healthy cost-to-income ratios of 42.2% for National Commercial and 47.8% for Scotiabank. In 2012, Scotiabank saw a similar return on capital ratio while National Commercial seemed to have halved its return on capital ratio, to a still very healthy 35%.

Widespread reforms

In a market undergoing so much change, it is natural to wonder if the banking system would benefit from widespread reforms too. The central bank believes so. Alongside economic reforms related to the restructuring programme, changes are also coming for the banking sector, says central bank governor Mr Wynter. These changes will specifically involve credit reporting as well as looking at the types of collateral accepted in transactions businesses, in particular with small and medium-sized enterprises. Corporate loans have been averaging about 19%, according to the central bank – a figure that Mr Wynter says ought to be reduced.

“Right now, the average interest rate for the private sector from banks is 19%. Inflation is running at approximately 7.5% to 8%, so you can see there could be lots of scope to reduce [that interest rate, while] the banking system can maintain its standards and capital strengths,” says Mr Wynter.

“[This will] create scope for more credit to the private sector. In that context, there are various reforms in Jamaica in progress. The credit reporting act has led to two institutions being licensed to be credit bureaus, which will begin full operations during this year; another [reform] will allow to broaden the kind of assets that may be used to secure borrowing, in particular for smaller businesses. These, among other measures, should help develop good quality credit by the banking sector to the benefit of productive sectors in Jamaica,” he says.

Mr Wynter is determined to use the state of Jamaica’s economy as an opportunity, creating a lighter public sector as well as an appropriately financed private sector. “The [restructuring] programme involves a significant structural adjustment, which adjusts the trajectory of the debt [thanks to] a strong fiscal consolidation. Rather than a challenge, from a central bank point of view, this could be a tremendous opportunity,” says Mr Wynter. “[It would create] an environment in which inflation impulses can be tempered and it will allow us to continue and maintain a path of further reducing the cost of funds to the productive sectors.”

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Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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