Barita Insights: Weekly Newsletter August 17, 2020

Analyst Insights

We take creative liberty with Claude McKay’s epic poem, ‘If We Must Die’, to colour Jamaica’s efforts at fighting COVID-19, an ‘invisible enemy’ that has wounded our economy and, have seemingly driven a paralyzing fear into many investors. As we all know, until a vaccine is found, COVID-19 will continue to cast a shadow of uncertainty over the economy, and that is likely to result in many investors choosing to not re-enter risky-asset markets, or even businesses deciding against capital expansion plans. Our view is that Jamaica’s macroeconomic conditions entering the crisis, provide an important buffer, which is likely to enable the country to recover reasonably rapidly when compared to other periods of economic shock.

COVID-19 is set to cost Jamaica approximately 5.1% of GDP in 2020, which is substantially lower than the cost of the local financial crisis in 1996- 1997 that saw approximately 35%-40% of GDP being wiped out, according to IMF data. Importantly, and not many people know that after the crisis, the Jamaican equities market almost quadrupled in the ensuing period with a multiple expansion moving from approximately 6x-9x to approximately 15x. While the nature of the financial crisis is not yet fully comparable to that of COVID-19 shock, since the latter continues to unravel, the expectation is that Jamaica is likely to bounce back quicker given the initial set of macroeconomic conditions at the onset of virus-crisis. Some of those essential shock-absorbing-macro conditions include:

• Low single-digit current account deficit
• Historic levels of net international reserves (in excess of US$3 billion)
• Record low unemployment and poverty levels
• Debt/GDP ratio substantially below 100%
• The entrenchment of economic governance (Fiscal Rule 2014; substantially independent Central Bank)

Jamaica’s macroeconomic transformation has merely slowed, it has not stalled, neither has it changed course. And, this is a critical point, as I recall the former Local IMF Resident Representative’s explanation for Jamaica’s economic transformation and how that has positioned Jamaica favourably in the eyes of international investors: Dr Ngouana noted that during turbulent times investors are pickier and are likely to choose investment destinations with ‘their house in order’. In that vein, he believes Jamaica’s macroeconomic transformation has three essential elements that endear investors to the sovereign:

1. Ownership
2. Commitment
3. Strength of the policy framework

Perhaps in another installment, we could discuss those elements. But our view is that the international investment community continues to believe this narrative that Jamaica is committed to building and maintaining a predictable macroeconomic environment; that is if the JAMAN bond yields are an index of those sentiments. Importantly too, the Government has introduced a few social spend initiatives to assist Jamaicans, including, back to school support through the PATH program.

Our thesis is that Jamaica does face a challenging path to recovery and rebound, but the initial set of macroeconomic conditions, coupled with the extraordinary level of fiscal and monetary policy initiatives in crucial developed economies such as the USA and the European Union, suggest Jamaica will rebound much quicker from this sharp contraction relative to the experience coming out the 2008-2009 Global Financial Crisis. Against this background, investors who can buy and hold (that is not necessarily marked to market) should be picking good assets, including local equities at the prevailing depressed prices; overtime these assets are likely to grow into their valuations as economies begin their rebound.

Written by Richardo Williams, Head of Investment Research and Strategy