Increase capital investment to spur growth – World Bank
The World Bank has suggested that a small programmed increase in capital investment should help to facilitate economic growth in Jamaica as falling debt-service payments expand the available fiscal space.
It said Jamaica's current level of capital investment is well below the average for high-growth comparator countries worldwide, referencing states such as Guyana, Panama, Seychelles, Belize, Peru, Honduras, Mexico, Suriname, Nicaragua, Chile and the Dominican Republic.
"While the Government has made important progress on
the structural-reform agenda, Jamaica will need to accelerate its growth in order to achieve lasting debt sustainability," the World Bank said in its Fall 2015 economic update on Jamaica, 'Laying the Foundations for Growth and Debt Sustainability'.
To date, the report said, fiscal-consolidation efforts under Jamaica's programme with the International Monetary Fund have relied primarily on expenditure cuts, "but as these reach their limit, revenue-generating reforms will become critical to future fiscal sustainability. An increase in high-return public investments could also support growth and enhance debt sustainability."
According to the World Bank, Jamaica's medium-term outlook depends, in large part, on the continued implementation of its debt-deleveraging strategy, as well as further progress on structural reforms and greater infrastructure investment.
It noted that the PetroCaribe debt buyback helped Jamaica reduce its total public debt by
approximately 10 per cent of gross domestic product (GDP).
However, large bond payments are due in fiscal years 2018/19, 2019/20 and 2020/21, with payments averaging US$1.5 billion equivalent each year.
"This debt, which is partly domestic and the product of past debt restructuring, will need to be rolled over, as insufficient fiscal space will be available to pay it off in full," the bank said in its medium-term outlook.
Maintaining long-term debt sustainability will require a forward-looking debt strategy that spreads maturities evenly and avoids large concurrent debt repayments, the report said.
The World Bank said the Jamaican Government's 2015 bond issues were well designed in that sense, as they will come due after 2025/26, during a relative lull in the repayment schedule, noting that the revitalisation of the domestic bond market will be important to the success of this strategy.
While GDP growth is expected to recover over the near term, it said, a number of factors, both domestic and global, could threaten Jamaica's macroeconomic outlook. It added that the external environment presents upside as well as downside risks to the Jamaican economy.
In the short term, low international oil prices will continue to shrink Jamaica's current account deficit, though the bilateral PetroCaribe agreement will play a more limited role in budget financing as its terms are directly tied to oil prices, the report said.
The bank said that in the medium term, the continuing economic recovery in the United States will boost demand for Jamaican exports.
"The potential opening of the US-Cuba tourism market could have mixed effects on Jamaica's tourism industry," said the economic update.
"While it may divert some US tourists from Jamaica to Cuba, it is also likely to divert European tourists from Cuba to Jamaica and other Caribbean markets," it added.
The World Bank also noted that a rising United States Federal Reserve policy rate could divert capital from emerging-market paper, increasing Jamaica's premium on international debt markets.
However, higher international interest rates would primarily increase financing costs in the short run, with little impact on Jamaica's long-term financing costs, it said.
On the downside, said the World Bank, the ongoing appreciation of the dollar would increase both the real cost of servicing outstanding Jamaican debt and the debt-to-GDP ratio.
Domestic risks include both policy challenges and exogenous factors. Though crucial to debt sustainability, the fiscal adjustment may have a more negative impact on growth than is currently anticipated, it said.
"Steadily expanding capital spending, while focusing on projects with high economic returns and clear opportunities for complementary private investment, would help mitigate this risk," the report said.
"The potential continuation of the drought presents an important exogenous threat to short-term growth," it added. "Finally, political pressures related to the upcoming Parliamentary elections could slow reform momentum."