Mon | Jul 16, 2018

Brexit impact on Jamaica likely to be modest, says IMF

Published:Friday | September 23, 2016 | 12:00 AMMcPherse Thompson
The International Monetary Fund building in Washington DC.

Depreciation of the British pound sterling following the vote to leave the European Union (EU) could reduce the inflows of tourists and remittances from the United Kingdom (UK) to Jamaica, but the impact is likely to be modest, according to the International Monetary Fund (IMF).

The immediate economic fallout from Brexit is likely to be limited, although the indirect impact may be felt over the medium term, the Washington, DC-based organisation said in its September 2016 report on Jamaica, released on Monday.

The IMF said the indirect impact may operate through trade in goods and services, remittances and aid, as well as financial and debt markets.

It explained that deceleration of growth in the UK and the EU and weakening of the pound and the euro may reduce the demand for Jamaica's exports to the region.

Moreover, trade may be negatively impacted by having to renegotiate the existing trade deals, the IMF said.

The Bank of Jamaica is of the view, however, that duty-free access to the EU is expected to remain, given that the Economic Partnership Agreement was signed between Caricom and the Atlantic regional movement.

According to the IMF report, as the share of British tourists in total arrivals is rather small, Brexit is unlikely to have a major impact on Jamaica's tourism and growth. Furthermore, unlike some of its Caribbean peers with pegged currency regimes, Jamaica could use the exchange rate flexibility to absorb part of the shock, it said.

In examining the potential spillovers of Brexit, the IMF said that while Jamaica relies on remittances more than any of its Caribbean neighbours, the share from the UK is relatively small.

"Moreover, remittances generally tend to be more stable than other external inflows, making a substantial decline unlikely even if UK's growth prospects deteriorate," the fund said.

However, to the extent that remittances and other non-debt generating inflows, such as grants, fall, Jamaica will be pressed to potentially borrow more to close the financing gap, it said.

Isolated, illiquid markets

As to the impact on financial and debt markets, the IMF report noted that Jamaica's financial markets are relatively isolated and illiquid. "This protects them from global shocks as investors first rush to sell most liquid assets in times of stress," it said.

In recent sell-offs - linked to Brexit and May-June 2013 'taper tantrum' - the report said Jamaican global bonds have shown greater resilience than other emerging markets and frontier-market countries.

Taper tantrum is the term used to refer to the 2013 surge in United States Treasury yields, which resulted from the Federal Reserve's use of tapering to gradually reduce the amount of money it was feeding into the economy. The taper tantrum ensued when investors panicked in reaction to news of this tapering and drew their money rapidly out of the bond market, which drastically increased bond yields.

According to the IMF report, if the anticipated global risks from Brexit materialise, then the resulting low growth will likely keep international interest rates relatively low.

"This may actually help marginally lower Jamaica's borrowing and debt service costs of the existing debt stock, as about a third of its external debt is linked to the Libor rate," the fund said.

News out of the UK this week is that the pound is facing increasing pressure as the impact of the country's upcoming exit from the EU is unsettling financial markets.

Sterling exchange rates dropped substantially as soon as it was announced that the UK electorate had voted, on June 23, to leave the EU, dropping to a 31-year low against the US dollar.

The UK has to invoke Article 50 of the Lisbon Treaty to officially leave the EU. That is not expected before December 2016.