Article IV IMF Report on Jamaica – Key Takeaways | Barita Insights | February 13, 2023

Introduction
One of the most significant news articles recently has been the international reporting on the conclusion of Jamaica’s latest article 4 consultation with the IMF. An article 4 consultation is essentially a part of the IMF’s Country-level oversight function where they monitor the economic health of member states. During this process, an IMF team of economists visits the member state to assess the economic and financial developments while discussing the overall economic outlook. Note that these consultations are typically done yearly. Given that these consultations are done yearly, what made the latest report so important? This was partially due to the latest article 4 summary being reported on by the Financial Times, a British daily financial newspaper with a fairly international reader base. It is important once again to contextualize the reach of the financial times, which, based on the Global Capital Markets Survey is the most-read publication among senior financial decision-makers globally. Secondly, the review and outlook presented by the IMF were favorable and essentially serves as a “post-pandemic” review of the Jamaican economy (considering 2020 and 2021 to be years where the impact of the pandemic was relatively more pronounced).

The Gist of the Article 4 Repo
In summarizing the latest report, we highlight 3 themes, we also essentially serve as a summary of the current state and trajectory of the Jamaican economy. These are the pandemic recovery, institutional and policy resilience, and then finally key considerations and outlook. Firstly, the fund notes that the recovery of the Jamaican economy is strong, with growth projected to be above its long-run trend both this year and the next (This, therefore, implies that a recession currently isn’t the base case expectation within the short to medium-term). Secondly, the fund continues to praise the efforts the Country has made regarding fiscal prudence and the institutionalization of such. This includes a reversal of pandemic-related spending and a return to a fairly large primary surplus of 5.5% of GDP which has set the path for debt to GDP to reach 60% by 2027/28. Additionally, the IMF praised the passing of legislation that entrenches fiscal discipline, i.e., fiscal council legislation, as well as continued efforts to strengthen tax and customs administration.

The article then stated several key considerations to look out for going forward. This included risk factors that we are familiar with by now, including, inflation and growth risks due to the war in Ukraine and the possibility of further business disruptions due to covid (albeit unlikely in our view). Key recommendations included a need for structural reforms to boost economic growth. These reforms are targeted at reducing crime which greatly increases the cost of doing business. The fund also recommends addressing these structural shortfalls limiting total factor productivity by improving investment in education and financial access for SMEs. Lastly, the IMF also highlighted the need to reduce long-term vulnerabilities posed by climate change. The recommendations for achieving such is inclusive of creating incentives for renewable energy sources and developing markets for green bonds.

The point of showing these statistics is to reveal that there are periods in time when markets decline, and the majority of investors are (panic) selling. This is a period where investors should consider daring to be different and buy when others are selling, or at least not sell and hold while others are selling. By doing this, the investor may forego the realization of losses unnecessarily and be better positioned to fully participate in the eventual rebound. It is difficult to time the bottom, hence staying invested is likely the best route for many investors. Importantly, it is not enough to just be buying when others are selling just for the sake of being different, investors need to have a reason for doing it, backed by research and analysis. This approach will help to avoid the psychological pressures that could lead to panic selling.

Implications
While the article itself and the reporting by the financial times won’t directly boost your investments, the overall sentiment expressed, and the actual underlying state and trajectory of the economy as presented have positive ramifications (assuming we stay the course). However, it is notable that the underlying implications are broad, but we will focus purely on investment implications. The main underlying theme and what has gotten international attention was also the adherence to fiscal prudence and so we focus on implications spanning from this.

Firstly, the building of a resilient fiscal framework reduces the level of risk inherent in investing in Jamaica. A large implication of this reduction in Country risk is a reduction in the difference between domestic and foreign interest rates. Given the downward trend in global interest rates, this essentially reduces the level of domestic interest rates as this risk premium which acts as a wedge between domestic and global interest rate is eroded. This has far-reaching implications including access to cheaper financing for businesses and greater foreign investment. Both can contribute positively to productivity and hence earnings growth assuming effective capital allocation.

Another factor in this is that macroeconomic factors undoubtedly affect the microeconomic factors that domestic businesses face daily. It is for this reason that when people judge the value of a business, the risks inherent in operating within the Country and the regulatory environment under which it is governed are usually factored into the equation. Hence in layman’s terms, the decreased riskiness of the Country reduces the risk of investing in a Company operating in that Country, which often leads to higher valuations. This when further compounded with the “crowding in” effect of greater fiscal prudence, therefore, acts as a springboard for equity markets. It is therefore not surprising that the best JSE yearly performances came on the back of fiscal consolidation and lower interest rates (i.e., think post-2012/13).

Conclusion
The IMF report further outlined the progress being made in Jamaica. This report was then subsequently reported on by a major news outlet with international reach and notoriety further exposing the global investment community to Jamaica’s progress. The indirect benefits for the domestic investment landscape are far-reaching in the long term if the Country stays its course. These include lower Country risk and hence lower interest rates, which boosts domestic and foreign investment and improves the relative attractiveness of Jamaican investments from a risk/valuation standpoint. While these benefits won’t be seen overnight, the current trajectory remains positive for the domestic financial landscape. While we celebrate these accomplishments, we look forward to even more improvements, particularly as it relates to unlocking the productive capacity of the economy.