The Editor, Sir:The criticism of the Government coming from some members of the Opposition and some financial analysts regarding the Jamaican government's response to the global financial crisis is premature and unwarranted.
Nobody in Jamaica knows or can predict the full extent to which this crisis will impact the country. That there will be fallout there should be no doubt. But the extent of that fallout is anybody's guess. What then is the Government supposed to do? Guess, speculate, act as scaremongers and alarm the people of Jamaica?
Nature of the Crisis
The global financial crisis is twofold. First, there is the problem caused by the toxic mortgage-backed-securities (MBS) which emanated from Wall Street. These so-called 'high-yielding investments' are now not worth the paper they are written on.
Banks that got themselves overexposed to these paper have had their capital base impaired - some to the point of insolvency. This has led to the second problem. Banks, which usually lend freely to each other, are now reluctant to do so since they do not know which will stand or fall.
Because banks cannot borrow from each other they have become misers with the money they have. This is what has caused the credit freeze. Any economy deprived of credit will contract.
The Impact on Jamaica
The first thing Jamaicans need to know is: to what extent, if any, are Jamaican banks and financial institutions exposed to these toxic MBS? I think the Governor of the Bank of Jamaica has answered this question quickly and with clarity. Our exposure is minimal! The next problem is: how will the credit freeze affect the Government's ability to raise the funds required to finance the budget? I believe that this situation will enhance the Government's ability to raise those funds!
Banks are still lending. They lend to people with good credit and Jamaica has good credit. In addition, the paper securities that was shuffled out of Wall Street and which was sucking up a lot of the available cash is now looked on with scorn by banks. This will make more funds available for real economic development. With the global reduction in interest rates these funds just might be cheaper.
There will be negative fallout. There might be a reduction in remittances originating from abroad. With the global economy heading into a recession tourism will be negatively impacted. The Government's promise of jobs, jobs, jobs will be further delayed as our ability to move forward is being affected by one shock after another.
The positives from all this is the dramatic reduction in the price of oil. Oil was US$147.27 per barrel in July, it is now US$88. All things being equal, this alone should off-set any fallout in remittances. Furthermore, the price of food should fall.
There is less demand globally and there will be global price deflation as a result of the credit crunch. But, more significantly, as a result of the financial crisis and the Wall Street backlash, the speculators who were pushing up the price of oil and commodities have been chastened.
Greed is no longer good and they are less emboldened. Jamaica is a net importer of goods. That is why our balance of payment was negative. In such a situation global deflation will help us more than it will hurt us. If our exports, such as bauxite, can maintain its price or not fall too much then we should definitely gain.
There will be pluses and minuses as a result of this financial crisis. On balance, it is my belief that there will be more pluses than minuses. The Government no doubt is engaged in its contingency planning as it analyses and prepares for the various 'what if' scenarios. There is no need for the Government to be an alarmist. At this time, the best course of action for the Government is to continue to analyse, prepare as it waits and sees what results from this global financial crisis.
I am, etc.,
DORLAN H. FRANCIS CLU,
CFP, CSC
dhfken@hotmail.com
Toronto, Ontario, Canada
Dorlan is a chartered life underwriter, a certified financial planner and holds the Canadian Securities Course certificate.
