WHEN Audley Shaw was appointed Minister of Finance and Planning back in 2007, many questioned whether he had the ability, aptitude and acumen for the position. There were those who said he couldn’t hold a candle to his predecessor, Dr Omar Davies, and that he would prove to be a laughing stock in the international financial community.

The more astute observed that his performance in the televised debate with Dr Davies in 2007 was a portent of things to come and that he acquitted himself well and by no means could be dismissed as a lightweight incapable of formulating and implementing the necessary financial policies needed to get Jamaica on track.

Even the Prime Minister Bruce Golding seemed to have bought into this perception appointing two other ministers in that portfolio, Don Wehby from GraceKennedy and trade unionist Dwight Nelson, a clear signal that Shaw would “have adequate help to lighten the load”. This earned Shaw the unflattering sobriquet “One-Third” — in other words, it would take Shaw and two other ministers in Heroes’ Circle, to do what Davies had done alone for the better part of two decades. Shaw maintained that he could access funding from multilateral agencies at cheaper rates than Davies was able to obtain from the capital markets. He was ridiculed and the idea was dismissed as unfeasible. All the while Jamaica’s debt mountain continued to grow as it neared the J$1-trillion mark in the Government’s first year in office.

The global crisis that emanated from the United States and had its beginnings in the sub-prime mortgage crisis and credit default swaps saw its contagion affect Jamaica. Many local finance houses had margin calls and, exacerbating matters further, the economy went into a tailspin.

No need to panic

In the autumn of 2008, Shaw declared that there was no need to panic, that local funds were safe from the US banking crisis and that the country would suffer very little impact from it. Many expressed the view that this was another indication of Shaw’s inability to read and respond to fiscal situations and that he was woefully out of his depth.

The year 2009 was a watershed one and a defining one for the minister of finance. Finance houses continued to suffer from margin calls with some able to ensure that fact was not broadcasted. The economy contracted further and the Government’s ability to garner adequate revenues posed a monumental problem. The country’s debt reached as high as J$1.2 trillion dollars and all the leading rating agencies were falling over themselves to downgrade Jamaica. According to the IMF and World Bank, Jamaica’s total GDP for 2009 was US$11.9 billion and GDP growth that year was -2.816 per cent. GDP per capita was US$4,390.33 and the current account balance was US$-1.388 billion. As a percentage of GDP this spelt a woeful -11.66 per cent. For the financial year ended March 31,2009 the value of the Jamaican dollar dipped by 20 per cent over the previous year with it trading at approximately J$89 to US$1.

The inflation target for the financial year had been set between 11 and 13 per cent. The Government missed its inflation target for the 2008-2009 fiscal year, which turned out to be 12.4 per cent, 2.5 per cent higher than the 9 to 10 per cent that the Ministry of Finance had projected. Remittances, which accounts for around 20 per cent of Jamaica’s GDP, was down significantly.

Bleak times

With the Government’s debt and interest on that debt escalating, the Government announced that it intended to borrow J$215.8 billion, of which it would source J$29.4 billion from the external market and look to raise J$186 billion right here in Jamaica.

Shaw had the unenviable task of announcing to the country in his budget contribution that GDP for the fiscal year would come in at between -2.5 per cent and -3.5 per cent. He blamed the lack of growth of the country’s economy primarily on the downturn of the gobal economy.

The CIA Factbook for 2009 seemed to sum up Jamaica’s bleak predicament: “Jamaica’s economy, already saddled with the lowest or cheapest growth of the economy in Latin America, will face increasing difficulties as the world economy delays. Its economy faces major long-term problems: a significant merchandise trade (imports and exports) deficit, large-scale unemployment and underemployment, and a public debt-to GDP ratio of almost 130 per cent. Jamaica’s onerous public debt — the fourth highest per capita — is the result of Government bailouts to ailing sectors of the economy, most notably the financial sector in the mid-to-late 1990s, and hinders government spending on infrastructure and facilities and social programmes as public debt servicing accounts for nearly half of Government costs.

“Inflation rose noticeably in 2008 as a result of high prices or pricing for imported foodstuffs and oil and gas should fall in 2009 with the decline in international oil and gas prices or pricing. High unemployment aggravates the major crime problem, including gang violence that is fuelled by the drug trade. The Golding Government faces the difficult prospect of having to achieve financial discipline in order to sustain public debt repayments while simultaneously attacking a major and expanding crime problem that is hampering growth of the economy.”

A year of panic

Come the autumn of 2009, widespread panic had set in. The Government’s spending went up by J$6.38 billion with revenue and grants coming in at J$9.7 billion below budget for the period April to July. The Government also had to contend with a J$7.5-billion shortfall in tax revenue and interest payments on its debt rising to J$175.23 billion or 15 per cent of GDP working out to 31.2 per cent of the budget in the supplementary estimates.

Barclays Capital’s credit analyst for Latin America and the Caribbean Alejandro Gristani projected that Jamaica’s fiscal deficit would reach as high as 20 per cent of GDP. The esteemed publication The Economist ran a damning article entitled “Unfixable? Gloomy Jamaica.” The situation looked bleak indeed, beyond the scope of a novice Minister of Finance with little international exposure, it was said.

Shaw remained steadfast and did not panic. He always maintained that Jamaica could access funds at cheaper interest rates from the multilaterals to support the balance of payments and get the economy on the right track. The Government sought a US$1.3-billion facility from the IMF via a Standby- Arrangement with the hope that this would lead to additional funding from other international agencies.

As the situation became more dire, questions were raised as to whether the multilaterals would grant Jamaica’s request. Barclays Capital recommended that rather than grant Jamaica this facility the IMF should help the country restructure its debt. That argument gained traction among many analysts.

Beset from all sides

The Minister of Finance was beset from all sides by what was deemed an untenable situation. A foreboding revenue shortfall, a lack of trust in his judgment, the rating agencies and the international press deeming Jamaica a basket case were his cups of woe to drink. Nevertheless, he maintained that it was possible to access cheaper funding, that Jamaica could and should be a low-interest rate regime with a stable currency and an inflation rate in the 8 to 10 per cent range. He also spoke favourably about the country as an international finance centre. He envisioned Jamaica as a place where enterprise could flourish and the bureaucratic red tape that has strangled the private sector for so long being removed.

Latibeaudiere goes

Shaw was keen to see a better realignment of fiscal and monetary policies but was widely believed to be meeting resistance from the then Governor of the Bank of Jamaica Derick Latibeaudiere. The Minister of Finance was keen to reduce interest rates quickly but Latibeaudiere expressed reticence over the method favoured for this endeavour. Ostensibly, contractual and housing issues upended Latibeaudiere in October of last year and saw Brian Wynter ushered in as the new Governor of the Bank of Jamaica. However, Latibeaudiere’s dismissal facilitated a better working relationship with the Central Bank and made it easier for both the Ministry of Finance and the Bank of Jamaica to be on the same page.

Latibeaudiere, for all intents and purposes, was an entrenched and highly respected central bank governor. To unseat him would not be an easy thing to do and one would have to factor in that such a move might lead to a degree of instability at the Bank of Jamaica. It was a bold move,indeed.

Several tax increases in 2009

The year 2009 saw no less than three separate parliamentary measures to increase taxes in an effort to garner revenues and satisfy IMF requirements in order to secure that much- needed US$1.3 billion from the venerable international lending institution. December saw two tax packages in one month, as many regarded the first as being particularly punitive on the poor and those who have practically no disposable income.

In an effort to appear more benevolent and thoughtful, the government decided to make the new tax measures more palatable. For years Jamaica has gone to the capital markets and raised money to support the budget making the Ministry of Finance a one-trick pony for almost two decades. Over the last decade alone, Jamaica’s domestic debt increased by an incredible 500 per cent, while its external debt had gone up by 100 per cent. Mired in debt to the tune of J$1.3 trillion, more debt was seen in many quarters as the only antidote to a virulent attack on the country’s primary organs. Shaw’s prognosis was that the country would to some degree have to go cold turkey from its debt fix in order to save itself, and this may very well be the path to its redemption. A game changer was needed and bold moves would have to be made.

The Jamaica Debt Exchange (JDX) would in effect see 350 instruments reduced to just 24 offering an interest rate of 12.25. In order for this manoeuver to work there would need to be a whole-hearted consensus among the business and financial community and many finance houses would be expected to see falls in their revenues — a bitter pill to swallow. More arduous, perhaps, was getting some of the country’s leading business institutions to agree to this, but Shaw insisted that a major prerequisite would be an almost 100 per cent agreement before proceeding. He managed to obtain it, making it clear to all that the Government spends some J$182 billion a year on interest payments. The JDX formed the linchpin of its pitch to the IMF and signalled to the multi-lateral agency that Jamaica was prepared to take tough measures to address its predicament and that all concerned parties were onboard.

A new year saw the IMF approving the US$1.3-billion facility, paving the way for other agencies to follow its lead. Funds flowed into the Government coffers, a necessary fillip to the balance of payments and currency stability. Shaw, together with the Bank of Jamaica, had instituted and overseen something that was unprecedented in Jamaica. The question was, would it do the trick?

Divesting Air Jamaica

The IMF had insisted that Jamaica undergo a divestment programme, which would see the national carrier, Air Jamaica — long considered an albatross around the country’s neck — sold. For the better part of two years the Government had tried to do just that, but to no avail. Spirit had expressed some interest but the deal fell through. Caribbean Airlines threw its hat in the ring and in early 2010, a sale agreement was completed. Some sugar estates were divested and others have attracted potential buyers.

With the JDX in place, the Bank of Jamaica announced last month that the J$20.6 billion (in securities) accommodation to the Government provided by the Bank of Jamaica in December was redeemed and paid in full.

Only last week the Bank of Jamaica announced that effective Friday, 04 June 2010 the interest rate payable on its 30-day Certificates of Deposit will be reduced by 50 basis points, that is, from 10.00 per cent to 9.50 per cent. In an issued news release the Bank of Jamaica wrote: “Inflationary impulses, particularly those related to recent tax measures, have abated while the prices of key imported commodities, especially oil, have also moderated.

These developments are moving the likely outturn for inflation in FY 2010/11 towards the lower end of the forecast range of 7.5 per cent to 9.5 per cent.

“Secondary trading of securities, as well as successive auctions of Treasury Bills, all indicate an endorsement by the market of the new interest rate norms. Treasury Bill yields have fallen below 10.00 per cent. Entrenchment of the lower interest rate structure has been supported by the appreciation of the exchange rate and the reduction of sovereign credit risk as reflected in falling yields on internationally traded GOJ bonds.

“The Bank also believes that the ongoing reforms embedded in the Government’s economic programme will lead to a lasting improvement in public finances and debt management and will create a basis for longer-term financial stability.”

With interest rates trending down, inflation trending down, the JDX implemented and seeming to be working, the local dollar is revaluing. Today, it is trading at around J$86.60 against the US dollar. Just think about this. The Jamaican dollar lost a quarter of its value against the greenback between September 2008 to February 2009 before stabalising at around J$87.00 in June 2010 as confidence in the economic management of the country grows. Today, Jamaicans can buy major currencies nearly eight per cent cheaper than three months ago following the influx of capital into the economy.

The recent devaluation of the euro will also help Jamaica since 17.18 per cent of the country’s total external debt of US$6.59 billion is actually euro-denominated. The recent appreciation of the Jamaican dollar vs the US dollar is also a major positive for the country’s debt dynamics. Based on available data, a J$1.00 appreciation of the currency leads to J$6.37 billion in savings.

I love it when a plan comes together

What a difference six months has made for Audley Shaw. His fortunes continue to grow and his detractors have no answers. Indeed he has been untainted in the Manatt, Phelps & Phillips, affair which has led to calls for the prime minister’s resignation. Some even suggest that if the Jamaica Labour Party is to stand a realistic chance in the next general election, then Bruce Golding should make way for Audley Shaw given his performance todate and his management of the economy.

At Christmas last year the talk was all about downgrades and default. By mid-February of this year, Fitch had upgraded Jamaica’s long-term foreign and local currency ratings to “B-” from CCC and “C”, respectively, with a stable outlook. A week later Standard & Poors raised its long-term foreign and local currency sovereign credit rating on Jamaica to “B-” from “SD” or “Selective Default” with a stable outlook. Then in March, Moody’s upgraded Jamaica’s local and foreign currency bond ratings to “B3” from “Caa1” on foreign currency and “Caa2” on local currency, which it said reflected “diminished credit risks following the domestic debt exchange completed in February”. The JDX means that the country will save some J$40 billion on interest cost payments. in its first year of implementation.

Europe, take note

The toxic confluence of financial crisis, deepening economic crisis and emerging social crisis, born of an inability to implement sound monetary policies, threatens to destabilise not just Greece ( the beneficiary of a European-led 110 billion euro bailout plan) but the Euro zone, and its contagion, may well spread to the financial markets across the world. Hungary, Spain and Great Britain are all in trouble with growing fiscal deficits and facing huge debt interest charges with no answer, and no ready solutions. Many of the citizens of these countries are baulking at the prospect of having to undergo austerity measures and take their medicine.

It has been suggested that these European countries look to Jamaica for the answer and pay close attention to how, under Audley Shaw it dealt with its problems. Bully for Audley!

In conclusion, what does all this mean? We are now seeing:

1. The implementation and initial success of the JDX.

2. Lower interest rates.

3. A revaluing Jamaican dollar.

4. Increased lending to the private sector

5. Inflation trending down

6. Increasing confidence reposed in the Jamaican economy

7. Rating agencies reversing their earlier negative outlook on Jamaica.

8. Audley Shaw navigating the Jamaican economy from perilous icebergs that threatened to wreck it asunder.