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Address To Montego Bay Chamber of Comerce - February 24, 2009

ADDRESS BYPRIME MINISTER HON. BRUCE GOLDING TO MONTEGO BAY CHAMBER OF COMMERCE
Tuesday February 24, 2009  
I want to use this opportunity to try to advance the discussion on what is happening in the global market and the impact it is having on us in Jamaica. There are some harsh realities that we must recognize, understand and confront. The world is facing its most severe economic crisis since the Great Depression more than 80 years ago. Most people, by and large, are aware of this or, to be more accurate, have heard of it.
It is on the news virtually every day. Most persons, however, do not fully appreciate the gravity or magnitude of the crisis and how it affects Jamaica. The first thing we need to recognize is that, unlike other financial crises we have seen over the last few decades, such as the Asian crisis, Scandinavian crisis and the US Savings & Loan crisis of the 1980s and 1990s, this one is not confined to particular sectors, markets or regions.
It is worldwide.  Over the last 30 years, the world has created an interlinked, intertwined and interdependent global financial system. Money circles the globe through interconnected capital markets almost at the speed of light. A housewife who puts her savings in a bank in Bangladesh or Romania or Peru or Jamaica is totally unaware that her money may be invested in a European bond market or on the US stock market or in a sub-prime mortgage portfolio. Because of this interconnectedness, the toxicity that erupted in the United States has spread right across the globe. 
Twenty five (25) banks collapsed in the US last year and a further fourteen (14) so far this year, the most recent occurring last Friday. Similar bank failures have occurred in Europe and Asia, the other two dominant regions in the global financial market. The IMF declared last month that bank losses worldwide would exceed $2.2 trillion. Nobody can be absolutely sure because in the current turmoil the value of these assets cannot be determined as it changes so rapidly. Some analysts put the total figure at more than $3 trillion. It is not just the failed banks that have suffered. Stocks and assets held by financial institutions across the world have lost more than $30 trillion in market value in a matter of a few months. This is not money belonging to corporate conglomerates. This is money which represents the savings, investments and pension funds of millions, indeed billions, of people including ordinary working people throughout the world who are now $31 trillion poorer, many of them completely wiped out.
The IMF estimates the total GDP of the world to be $65 trillion. The losses, therefore, represent almost one-half of the world’s yearly output of goods and services. In this tempestuous climate, consumers are unable or reluctant to spend. Banks are unable or reluctant to lend. Investors are unable or reluctant to invest. The demand for goods and services is curtailed, factories have to be closed, millions of people are thrown of work. In the US alone, 3.2 million people have lost their jobs since the beginning of last year – 600,000 in last month alone. In 2007, the global economy recorded growth of 5.2%. Last year it was down to 3.4%.
In November, the IMF predicted that for 2009, growth in the global economy would slow to 2.2%.  Last week, it revised that projection downwards.  It now projects growth of only 0.5% fuelled by expected growth in China of 6.7% and India of 5.1% which, significant though it is, is still a far cry from the 13% which China recorded and 9.3% which India recorded in 2007. For the developed countries of the world the picture is dismal: 


USA            -   1.6%
Canada       -   1.2%
Britain        -   2.8%
Euro Zone   -   2.0%
Japan         -   2.6%
Russia         -   0.7%


When all of these harsh statistics are considered, we can begin to appreciate the magnitude of the crisis and the misery which is spreading across the world. Another harsh reality is that it has not yet reached its climax. There is worse to come.  

Analysts suggest that we won’t bottom out until the second half of this year and after that the recovery will be slow. The last global recession we experienced was much milder and lasted 16 months. This recession is already in its 14th month.  How soon the recovery will begin depends on several things that are not yet clear. The stimulus packages presented in the US, China, Europe and other countries will temper the impact of the recession but they won’t fix the problem.  

The crisis won’t be fixed until we fix the banks and, by extension, restore confidence in the banking system and the markets which they service. Bank losses globally are too large for them to be bailed out even for powerful economies like the US and Europe, too large for their taxpayers to bear.  Savers and investors will have to absorb a substantial portion of the losses. The banking system will have to be rebuilt and new domestic and global regulatory systems put in place. Only then will confidence be restored. Only then will people start saving, investing, borrowing and spending again. Only then will the demand for goods and services start to grow again. Only then will factories start reopening and employers start rehiring. Only then will the recovery begin. How long will that take? No one can be sure. Some analysts suggest that it won’t be until the second half of next year.

No one can be sure because the world’s leaders, preoccupied as they are with the domestic consequences of the crisis and their own stimulus packages, have not yet fully turned their attention to the repair work that must be effected at the global level. The G20 meeting in New York in November only looked at the problem. European leaders who met in Berlin last weekend went somewhat further. The G20 is to meet again in London on April 2nd.  President Sarkozy of France said on Sunday that it will be their last chance.  We wait to see what chance they will make of their last chance.

There are major issues to be confronted not the least of which is the resistance of countries like the US, China and Japan to the concept of a global financial policeman. It is in this context that Jamaica’s fate must be considered. Part of our reality is that even before the onset of the crisis the Jamaican economy was not in good shape.

We have lived for almost a generation with prolonged periods of low growth, huge debts, large fiscal deficits, high unemployment and weak export performance. 

Another part of our reality is that our fortunes are inextricably tied to those of the US which is at the centre of the global meltdown and which accounts for 37% of our total exports, 65% of our stopover arrivals and 54% of our remittance flows.  Taken together, the US accounts for more than two-thirds of our foreign currency inflows. That is why it is said that whenever the US catches a cold we develop pneumonia. You can therefore imagine what happens to us when the US develops pneumonia! We are already feeling the effects of the global meltdown.

For this January remittances declined by 10%, exports by 13% and tourism earnings by 5% when compared with January last year. The bauxite/alumina sector is perhaps the worst affected. 50% of the aluminium produced worldwide is used in automobile manufacturing and housing construction. Another significant portion is used in the packaging industry. All three are down considerably, resulting in a drastic cut in the demand for and price of aluminium.

Since July the price of aluminium has plummeted from $3,400 to $1,300 per tonne. Aluminium smelters have been shut down and alumina stockpiles are filled to capacity. Windalco has announced that it will have to suspend production at Kirkvine and Ewarton at the end of March.  Production at Alpart has already been cut back by 50%, St. Ann Bauxite Company by approximately 35%.  Jamalco continues full production because it is our most cost-competitive plant - but how long it will do so is uncertain. Current projections are for a 37% decline in the mining sector this year. 

We are feeling the effects in terms of our foreign exchange market. Reduced exports, tourism earnings and remittances mean less foreign currency inflows to meet demand.  

The situation is exacerbated by the fact that the international capital market on which, in recent years, we have come to depend for budget financing is virtually shut down.  The situation is further aggravated by the fact that suppliers’ credit and commercial Lines of Credit to which the private sector has been accustomed, have dried up, resulting in a bunching up of demand in the local foreign exchange market. It is not difficult, therefore, to understand why there has been pressure on the foreign exchange market in recent times resulting in a depreciation of the Jamaican dollar.

If demand exceeds supply for any prolonged period, the price will go up. So it is with tomatoes or yellow yam, so it is with the US dollar. 

In January last year the foreign exchange market recorded average daily inflows of US$25.2 million. The average daily demand was US$26.2 million, reflecting an overhang of US$1.0 million which the BOJ, through timely interventions, was able to manage.  

For January this year, average daily inflows have fallen by US$4.1 million from US$25.2 million to US$21.1 million while average daily demand has fallen by only US$2.0 million from US$26.2 million to US$24.2 million, resulting in an overhang of US$3.1 million. 

Our strategic re-engagement of the multilateral institutions such as the IDB and the World Bank has been fortuitous.  We had signalled this intention long before the elections motivated then by our desire to secure lower interest rates for our borrowing programme. We did not then foresee that the capital market would have been shut down but we would have been in dire straits if we had not taken those initiatives.  Thank God we did! These funds will replace the funds that would otherwise have been sought from the capital market but, importantly, we have secured US$300 million for private sector lending to replace the suppliers’ and commercial Lines of Credit to which they no longer have access.

Much of the pressure that has built up in the foreign exchange market is due to the fact that these inflows come in tranches which have not perfectly synchronized with the demand but as more inflows come in we expect this pressure to abate.  

We are already seeing this with the stabilization of the dollar over the past two weeks. We expect this to be sustained as more disbursements are made. But let me say a word to the market and, especially, to the major users of foreign currency. 

The government has worked hard to maximize the flow of foreign currency despite the downturn in foreign currency earnings caused by the global financial crisis. We have secured commitments for almost US$1 billion from multilateral sources through to the end of March. We have worked hard to sustain foreign currency earnings from tourism.

We recorded a 4% increase in stopover arrivals last year – well below the 13% we had projected before the global crisis but surpassing most of the Caribbean destinations with which we compete.  

Tribute must be paid to the energetic efforts of Ed Bartlett and his team, swimming against the current but keeping our tourism industry among the frontrunners.  But our foreign exchange market is a free market which is influenced by the behaviour of the players in the market.

If those who earn foreign currency withhold it from the market in the hope that the rate will go up, the rate will go up. If those who need $100 demand $200 because they fear that the rate might go up, the rate will go up.

If foreign conglomerates seek to purchase foreign currency in the local market to meet obligations they have in other markets, the rate will go up. 

In times of uncertainty – and we are in a time of uncertainty – persons instinctively seek to protect themselves, secure the value of their assets. With all the turmoil occurring in the US, the US dollar is still the safest currency in the world. But we can hurt ourselves in seeking to protect ourselves. We all have choices and how we exercise those choices will affect the market and the foreign exchange rate.

The choices open to the monetary authorities are well known: Do we allow the rate to find its own level or do we use interest rates to increase the cost of money to discourage unnecessary purchases of foreign currency? Brazil, for example, has chosen to maintain low interest rates and let the exchange rate find its own level. Their currency has devalued by 43% since September. They made a choice. Everything in life is about the choices we make, choices we must be prepared to make. Some of the conversation about the exchange rate is tantamount to wanting to ride the horse in opposite directions. In the face of declining inflows and relatively higher demand, we demand lower interest rates and a stable exchange rate. It is possible but it depends not only on the actions of the monetary authorities but on the actions of those in the market who make their foreign exchange earnings available to the market, who limit their demand to what they need and who are prepared to accept moderate interest rates when they invest in order to enjoy moderate interest rates when they borrow. No one is hurt more that the government by high interest rates because the government is the biggest borrower.  The Governor of the Bank of Jamaica has been in discussions with the major players in the foreign exchange market. They have agreed on certain parameters. 

The government will do its part.  Other stakeholders must do their part.  We are all in this boat together and we must navigate our way out of this crisis together. If this collaboration between the monetary authorities and the market players is sustained, we will see interest rates coming down and the exchange rate remaining stable. We are feeling the effects of the global fallout in our fiscal performance. The downturn in economic activity is expected to result in a shortfall in revenue of $27 billion.  That has forced us to curtail expenditure by $9 billion and accept a higher than programmed deficit. 

The prospects for the Jamaican economy are challenging. The economy declined by 0.4% last year. With the continuing fallout from the global crisis, it is expected to decline by 2.2% this year. That is in line with what is expected of the major economies of the world. We will do better or worse depending on the actions we take, the courage we display and the choices we are prepared to make. Last Friday, the Cabinet commenced a three-day retreat to review the current situation and examine these choices.  We have asked our policy technicians to do some further work on these options and we will resume the retreat this weekend.  

There are tough decisions that will have to be made.  These involve our expenditure programme and the relative allocations for debt servicing, public sector wages, social programmes and capital expenditure.  They involve a detailed assessment of our revenue structure and sources and how that must be strengthened.  They involve decisions that must be made to help businesses stay in business and encourage new businesses to get started. They involve relieving the government and, by extension, the taxpayer of burdens which they should never have been required and can no longer afford to bear. They involve measures that must be taken to protect the weak and vulnerable in our society and to enable those who do not have to be among the weak and vulnerable to become strong. And, most importantly, they involve taking the decisions and doing the things that will ensure that when this tsunami has passed, the Jamaican economy will be equipped and configured to rebound and grow more stridently than it has done in the past. 

I will not pre-empt the decisions that the Cabinet will take and I cannot discuss publicly the details of the options that are before us.  But I will say this.  The sacrifices that must be made are not voluntary; they are imposed on us by the circumstances in which the global crisis has placed us.  There are things which should have been done in the past but were shunned because we lacked the courage and had the luxury of avoiding.  It is now crunch time.  But if we are to make sacrifices, let them be an investment to secure a brighter future. 

I have every confidence that Jamaica will survive, recover and advance on the basis of the choices we make and the direction we take.

Over the next several weeks leading up to the budget debate in April, we will engage the critical stakeholders in discussing those choices and the Jamaican people in confronting the challenges that face us. 

We will not flinch. We will not be daunted. We will not be governed by the crisis; we will govern the crisis!

We cannot afford to sit and wait for things to happen to us; we must make things happen! To that purpose and that mission I recommit myself and the government I have the honour to lead.