Budget FY2022/23: Some key takeaways and implications | Barita Insights | March 14, 2022

Main picture: No New taxes and Back on track
Starting with the big picture. One of the main highlights from the FY2022/23 budget presentation was that there would be no new taxes on a net basis. The government’s expenditure would therefore be covered by existing revenue sources, bolstered for the new year by an improving economy (i.e., more economic activity means greater tax collection). Additionally, despite the significant hardships that have been presented by global events over the last 2 years, it was highlighted that this is the seventh consecutive year of no tax increases. It is known that tax increases tend to have a negative multiplier effect on economies, which means a reduction in real output which is a magnitude of the initial tax increase (the multiplier effect is negative for Jamaica, particularly in the short term as noted by previous studies). Consequently, another year of no increases can generally be seen as a positive move for the local economy. This is further bolstered by the government suggesting that future policy measures are leaning more towards tax cuts as opposed to tax increases. A key tax in sight is the asset tax which could potentially be adjusted in the future. The other point which proclaims no new taxes important is that this decision occurs while the government has simultaneously shown a commitment to continued fiscal responsibility with the debt to GDP ratio projected to be back below pre-pandemic levels during this fiscal year.

Implications
This macro development paints a picture of continued stability for the country and to the extent that fiscal policy isn’t excessively contractionary this year (i.e., no widespread tax increases or sharp spending cuts) suggests positive implications for growth, all else being equal. This point also flows from the suggestion of the International Monetary Fund (IMF) in the country’s latest article four consultation that a more gradual re-adjustment to fiscal consolidation would be beneficial to the recovery efforts. We believe this is a positive for risk assets, particularly as a conducive fiscal environment is a positive for corporate revenues (as stated prior, this is without considering possible external factors such as continued global inflation which would also impact the domestic investment landscape). This approach, which still sees the government reaffirming its commitment to long-run debt reduction, also bodes well for the credit standing of the country and by extension its sovereign debt and domestic debt issuances; the rations of which are typically capped to that of the credit standing of the sovereign. Hence, this budget and the medium-term debt plan that was presented can be seen as positive for the typical investor in domestic fixed income securities.

Renewables and Private Equity
Beyond the “no new taxes”, there are several initiatives that have been planned by the government for this fiscal year that also suggest positive changes. This includes the incentivization of electric vehicle imports (although capped at 1000 units) and the government committing to create a hospitable business environment for small and medium-sized enterprises, particularly as it relates to their ability to source equity funding. Concerning renewables and the electric vehicle tariff reduction, we don’t believe this policy will have a major, initial impact on domestic investment opportunities. This is primarily due to the relatively small cap of just 1,000 units which would greatly reduce the ability of meaningful large-scale investment opportunities for domestic players. However, what stood out was the government’s increased posture towards the support of renewables which are likely to play a greater role in the future. Specifically, the minister stated in his opening budget speech, “Eventually in a decade, motor vehicles in Jamaica need to be 100% electrically powered…”. When coupled with the global push towards placing Environmental, Social, and Governance (ESG) considerations at the forefront of investment decisions, this means that companies with operations within the renewable space could reasonably expect to be on the right side of future regulation. This list might include companies such as Tropical Battery, CAC2000, and Wigton to name a few.

On the point of making equity financing more widely available, the government has announced that several equity and venture funds will come to fruition this year. These will focus specifically on SMEs and early-stage businesses. Under the different programs highlighted, the government plans to make over $10 billion available for startups and small businesses. This comes at a time when it is expected that financing costs will continue to rise as the central bank maintains its position that fighting current inflation requires hiking interest rates and removing liquidity from the market. Hence, debt financing costs are on an upward trajectory. As it relates to its impact on the typical investor, we believe the availability of equity funding could potentially aid to bring further public offerings to the market in the future and the positive performance of these companies would be beneficial to investors. The government also highlighted its intention to invest alongside private capital in these funds. While the final arrangement hasn’t been disclosed, a joint venture approach that can disperse some amount of risk might present potential opportunities to domestic firms with a venture capital/private equity business model to underwrite larger deals with a strategic partner. A typical avenue for these firms to monetize (sell/liquidate) their investments in businesses is through stock exchanges which again, has positive implications for equity investors.

Conclusion
The main positive takeaways from the budget presentation are that there are no new taxes, and the country is currently back on track towards fiscal prudence. This commitment will likely continue to bode well for economic stability and hence create an enabling environment for financial assets. The government also touched on several key initiatives including its commitment to reducing oil dependence and making more equity funding available for small businesses which may provide an enabling environment for many businesses. This includes strategically positioned domestic firms. As equity is increasingly used to fund new ventures, equity investors stand to benefit.