September 07, 2006

REGIONAL ECONOMIC SUMMARY

Preparations around the Caribbean for the Cricket World Cup 2007 (CWC) are in high gear as the grand event draws closer. Most upgrades on the stadia and infrastructure are likely to be completed on time despite shortages in cement. Regional tourism is also expected to remain strong for the rest of the year. However, there are concerns that a busy hurricane season can dampen such forecasts. With the strength of the construction and tourism industries, regional economic growth of 5.3% is expected.

Jamaica’s economy expanded 1.8% year-over-year in the first quarter of 2006, driven by the services sector which increased by 2.6%. There were signs of recovery from Hurricane Ivan of 2004 as Agriculture, Forestry and Fishing increased by 20.5% after decreasing last year. The budget was also released for the 2006-2007 fiscal year beginning April 1. Agriculture and Tourism, Industry and Commerce and Justice are benefiting from increases in their allocations, while the Ministry of Finance and Planning remains with the highest funding. Construction and infrastructure work press on for the CWC; however a shortage in cement is posing a challenge to have the work completed on time. While high public debt and low levels of economic growth are causes for concern, it is still expected that Jamaica will experience growth of approximately 2.7% for the year, on the strength of the construction and tourism industries.

Guyana held general elections on August 28th where Bharrat Jagdeo was re-elected as the President. The contribution of sugar to the economy is decreasing as the EU started phasing out the preferential treatment for ACP countries in June 2006 with its initial decrease in the purchase price. Guyana is also expected to benefit economically from the CWC despite concerns that it may be unable to provide sufficient accommodation for all visitors who are coming to look at games.

In July, Venezuela entered into Mercosur, the South American trading bloc, as an associate member. This bloc includes Argentina, Brazil, Paraguay and Uruguay as permanent members with five (5) other associate countries. With the inclusion of Venezuela, the bloc will now be able to produce a combined GDP of US$1 trillion for 2006, which is approximately 3/4 of South America’s total economic activity. Venezuela is also strengthening its ties with China with an oil exploration deal and also with Cuba on other oil-related deals.

Forecasts for GDP growth for 2006 for Trinidad and Tobago have increased from 10.5% to 12% based on the strength of world oil prices. However, inflation has increased to 8.65% in June 2006 with core inflation at 3.35% and food prices going up by 25.7%. The ‘repo’ rate was increased to 7.75% in August 2006 in continued attempts to further curb spending. Access to consumer credit facilities have decreased since the start of the year, which is an indication that consumer spending is further slowing down.

The Central Bank has withdrawn TT$500 million from the financial system through special interest bearing deposit which is to be lodged at the Central Bank for one year. Short term rates have also increased and the anticipated effect is to draw excess liquidity out of the economy. With the Federal Reserve increasing their interest rate as well, there has been an increase in the differential between TT and US rates to 126 in August from 61 in March, thus making US short term investments less attractive.

The International Monetary Fund (IMF) has signaled a warning to the government about its public spending policy, which can lead to the overheating of the economy as the economy is near full employment, especially in the labour market. There is also increased concern that not enough is being done to expand the non-energy sectors, which has run into an increased deficit with the current economic environment. However, the government should be lauded for creating the Heritage and Stabilization Fund (formerly the Revenue Stabilization Fund), which currently stands at US$900 million.

The Budget for fiscal year 2006-2007 is due soon and there is much anticipation as to what the government is going to do to reinvigorate the non-energy sector, as well as what stance will be taken to combat inflation and the increasing criminal activity that continues to plague the country. To date, the number of homicides has increased compared to last year, although there has been a significant reduction in the number of kidnappings.