The Economy

Macro-economic environment

The global crisis pushed Jamaica into recession during the financial year (December 2008 to November 2009), resulting in severe challenges in the local economy.   The ripple effects of this crisis and the subsequent economic downturn took a toll on the country’s main hard currency generators including bauxite/alumina, tourism and remittances. The virtual closure of international credit markets forced the Government to seek assistance from multilateral agencies, and raise expensive capital on the local market.

The signing of a Standby Agreement with The International Monetary Fund (IMF) will not only provide Balance of Payments support at a time of reduced hard currency inflows, but also allow the government to secure additional funding from other multi-national organizations.

As the economic contraction gathered momentum and the fiscal accounts deteriorated, the Government’s ability to implement any broad based economic stimulus was stymied.  The collapse of the country’s major exports and the contraction in global credit led to accelerated depreciation of the local currency. This prompted the Bank of Jamaica to hike interest rates. During this period, stock markets continued to reflect weaker earnings prospects given the pace of contraction in the local economy, rising unemployment and falling incomes.

Inflation

Inflation pressures eased significantly throughout the year, aided by the reduction in global commodity prices. Point to point inflation stood at 10.2% at the end of the year.

Economic Growth

For the first time since 1998, the Jamaican economy recorded real negative growth as it contracted by 1% in the calendar year 2008. Since then, the economy contracted by around 4% in the first three quarters of 2009.

Goods Producing Sector

The major shock to the Goods Producing Sector occurred in the first quarter of 2009, when the country was hit by the temporary closure of three of its four alumina processing plants. The closure occurred mainly as a result of weak demand and falling prices.

The Manufacturing and Construction Industries were adversely affected by weak external and domestic demand.

The Agricultural Sector was the only goods producing segment that reported increases in recent quarters, as well as targeted efforts by the government to boost productivity.

Services Sector

The Services sector has weathered the global economic turmoil relatively well. The tourism industry performed well, compared with its regional peers.

The Finance and Insurance services industry expanded during the review period. This performance was influenced by growth in interest-related income of financial institutions.

Fiscal performance

Central Government operations generated a fiscal deficit during the 2008-9 year of $75.3 billion, or 7.3% of GDP. This was due largely to a shortfall in budgeted revenues from GCT, and the bauxite companies. Consequently, the government borrowed $28.6 billion more than planned, mostly on the domestic market, at interest rates significantly higher than expected.

In the first half of the year, the Government started dialogue with the International Fund (IMF) regarding the execution of a comprehensive stabilization and growth programme, which would focus on improving the country’s fiscal and debt profiles. An application to borrow up to US$1.2 billion was made to help meet the country’s large external needs.  Notwithstanding this development, Jamaica suffered multiple ratings downgrades during 2009. Standard & Poors downgraded Jamaica from B- to CCC due to the “Jamaica’s vulnerable fiscal profile, combined with difficult financing conditions (which) may compel the Government to undertake a debt exchange.” This rating downgrade was subsequently mirrored by both Moody’s and Fitch, both of whom cited the delay in finalizing the agreement with the IMF as an important factor behind their downgrades.

Monetary Policy

The Jamaican dollar declined by 20% versus the US$ in the past year, despite relative stability in the first half of the year. To stabilize the situation, the Bank of Jamaica intervened heavily and supplied US$ to the market. As a result, the Net International Reserves declined to US$1.6 billion.

Outlook

While the global economy is recovering, Jamaica’s short and medium- term growth prospects remain weak, due to domestic challenges and the external lag in increased demand for its exports by the global economy. Current global demand will therefore continue to have an impact on the Jamaican economy through the period to March 2011. Weakened consumer disposable income and reduced Government capital expenditure to meet fiscal targets will continue to dampen the construction sector while low consumer confidence and subdued remittances will affect the wholesale and retail trade.

The financial services industry will not be immune to the challenging environment. The Central bank will likely continue to ease monetary conditions as a result of weaker inflationary pressures. Meanwhile, lower interest rates may not bring about an offsetting stimulatory demand effect, as business confidence remains low, and expansion plans remain postponed.

The expected IMF funding will bring some measure of stability to the economy and the exchange rate through improved investor confidence. The IMF-supervised programme will likely include such conditional factors as reduction in the fiscal deficit through policies aimed at sustained lowering of interest payments, tax reform implementation, increased taxation, reduction of the public sector, wage bill and divestment of unprofitable state entities. However, Government’s ability to meet key fiscal targets will be further challenged by possible adverse weather conditions, but would be boosted by a stronger than estimated global economic recovery.

Acknowledgement

The management is fully cognizant of the challenges it will continue to face in the year ahead. Nonetheless, we remain confident that with the support of our customers, staff and directors, improved results can be achieved in the year ahead.

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Henry J. Rainford

Chairman

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Byron Thompson

Director

    Report on the Financial Statements - November 2010