GREECE and the Global Economic Challenges

eurochainedWhat is the state of the Global Economy?

The Global economy remains fragile 7 years after the Global Financial Crisis in 2008. On Monday, crude oil futures fell to a three week low as Greece’s economic crisis prolongs into July 2015. Notwithstanding this, the Euro has remained relatively firm against other bench mark currency while the exchange rate of smaller lesser developed economies including those from the Caribbean and Latin America continue to gradually weaken against the benchmarks. Iran has opened new negotiations to export more oil to the west. Increasing the supply in an already oversupplied market, should have further price reduction implications. Highly indebted nations for example Jamaica and Greece continue to find it difficult to maintain their debt on a sustainable path while growing their economies at the same time. Accumulated debt is associated with high debt servicing requirements which has placed Greece at the forefront of international economic discussions presently.

What is the current situation in Greece?

Tension continues in negotiations between Greek officials and the EU in several aspects. Similar to Jamaica, Greece accumulated high volumes of debt and has been having difficulties servicing it. They have constantly relied on sympathy from the EU and discretion from the IMF. Now there is international speculation that Greece might default on $1.6 billion in debt servicing to be paid to the IMF. Last week talks between the Greek Prime Minister and EU officials broke down as he rejected the austerity measures tied to the disbursement of the bailout funds. Greek’s Prime Minister also urges his citizens to support a referendum to leave the EU zone and revert to using their original currency. Although the polls are saying he might lose as majority of Greeks favour the Euro zone rather that operating independently.

What is the situation on the ground?

On Monday, several Banks and ATM machine were closed due to severe liquidity problem in the country. Greece’s financial crisis is deepening and there is speculation that banks might remain shut until July 7th, 2015. Quantitative restrictions have been place on withdrawals as ATM’s are only dispersing $60 to each citizen per day. Tourists vacationing in Greece have been told that the ATM limit does not apply to them, but some ATM machines might not be able to tell the difference between and local and foreign credit cards. Local Business owners claim that their business are benefiting from tourist coming in with extra cash; over the last month they have been spending more and have been tipping higher for services received; tips have increased by more than 40%.

What is the implication of this?

The Global economic landscape remains fragile as investors, consumers, producers and governments worldwide desperately try to find the right balance of actions/policies that will restore economic stability and increase economic performance in each country. The situation with Greece will not be over any time soon as the pros and cons associated with staying in or leaving the Euro Zone must be critically analyse and presented to the citizens before the referendum is finalised. Greece must come to an understanding with the IMF and the EU in negotiations regarding servicing their debt. They have already received several bail outs and debt relief because it was perceived that their failure would threaten the strength of the Euro zone and the value of the Euro. However difficulties with debt servicing and liquidity problems might see them leaving the euro to stand alone once more.

What is the difference between them and Jamaica?

Even though, Jamaica is a part of CARICOM, a very disjointed economic union, with no common currency and the lowest intra regional trade among all the economic blocks in the world. Jamaica has been somewhat successful in accessing funds from the IMF and other international lenders due to the discipline it has demonstrated in implemented reforms and maintaining certain fiscal targets. However, wage negations is a constant dilemma between public sector workers and the government as austerity measure have strangled the spending power of the populace weakening consumer demand and impacted output negatively. The threat of foreign currency shortages after the end of IMF agreement in 2017 lingers, since Jamaica has not seriously found an intrinsically generated source of foreign currency flows. Greece has received much support from the strength of the Euro zone which is one of the largest trading blocks in the world.

10 Financial Management Tips For the new year

MANY PEOPLE encounter extra spending during the Christmas holidays, whether through pampering oneself, general home improvement, buying gifts and providing cash for others, plus various additional spending.

Some people receive Christmas bonuses to cope with the additional spending, while some borrow and or use their savings. In either case, the extra spending will put a dent in pockets, which makes it important to understand how to manage your finances to cope and restore your financial position. Here are 10 tips to help you manage your finances properly for this New Year.
1. Track your monthly spending.
Many people have no idea how much money they spend on food, bills, clothing, entertainment, etc. per month. In order to have a healthy financial position, it is important to first make record of how much you spend on a monthly basis. This will provide an idea of you household’s or business’ cost structure.
2. Develop a budget and stick to it as closely as possible.
After recording your average monthly expenditure, develop a realistic budget based on your important expenses and track to see that you are sticking to your budget closely. Only making allowances for very important unforeseen events, record these unforeseen events (hospital emergency visits, lawsuits etc) to see how they impact you budget throughout the year.
3. Develop a marginal propensity to save.
Your marginal propensity to save is the portion of your income that you save on a monthly basis. For example, if you receive $100,000 per month and you budget to spend $80,000 and save $20,000, your marginal propensity to save is 20 per cent. Try to improve on this margin if your budgeted expenditure allows you to do so as time progresses. Your savings are very important, it provides the cushion of cash for rainy days or in the event that you lose your job or someone in your family becomes very ill; always budget for savings.
4. Avoid late fees and charges.
Most companies charge late fees when bills are not paid on time. It is important to avoid these late fees and charges by paying bills on time to the best of your ability. Record your monthly bills and due dates and keep reminders on your phone or elsewhere to make sure you pay bills on time. Late fees encountered every month for the year can add up and prove to be very costly unknowingly.
5. Analyse you debt and credit position.
Always keep check of how much you owe and budget debt repayment in your monthly plans. Remember, if you borrow money from someone, it is not yours. Budget to repay this and try not to borrow from one person to pay another, especially if you are paying large interest on these debts. You will end up paying much more for the same debt over a longer period of time.
6. Monitor credit card debt.
Credit cards can be very useful, especially for shopping online and engaging in cashless spending for security reasons. People increase debt very easy via credit cards. It is important to keep track of your credit card spending and monitor your repayments on a monthly basis. Credit cards are some of the most expensive debts as they charge interest rates per day plus a fee for late payment, try as best as possible to service your credit card bill on a monthly basis to avoid interest rates and late fees.
7. Take advantage of free money.
Some employers offer contribution to match your savings for retirement, if you work for one of these institutions; be sure to pay the maximum amount so that you can receive the maximum contribution from your employers. Also be sure to use any coupons, stubs etc that you receive. This will help to minimise you total expenditure on a monthly basis.
8. Analyse your insurance policy.
Life and health insurance policies may take up a portion of your monthly expenditures for which you might not have the appropriate coverage. Be sure to analyse your insurance policy to reduce payments to a minimum while getting maximum coverage over time.
9. Seek sound financial advice.
With sound financial advice, people and their businesses can improve their financial position and become gradually self-sustainable and profitable. Never be afraid to get professional financial advice and consulting; it will be worth it in the long run.
10. Make rational spending decisions.
Finally, always make sure your choice to spend is rational. A rational choice weighs up the cost and benefit associated with a particular spending. If the benefit associated with a particular spending is greater than the cost, then and only then is the spending rational.

Oil Prices and the Jamaica Economy a Global Outlook

Crude_oil_prices_in_dollar_and_euro

How have oil prices been trending?

Oil prices began the year at $115 USD per barrel, subsequently falling to approximately $98 USD per barrel by the end of July. According to the OPEC reference basket which is used to measure changes in monthly oil price fell by 11 percent in November. Prices have fallen further to $55 per barrel currently. Historically, oil prices sky rocketed to over $140 USD per barrel during the asset bubble of mid 2008. When the bubble burst prices fell to a low of little over $30 per barrel by mid 2009. Subsequently the prices have been volatile but have now taken a gradual downward trend since the beginning of 2014. This has been having a positive impact on the economies of oil importing countries.

How is the Jamaican economy responding?

Consumer prices fell by 0.5 percent for the month of November, due mainly to reduction in the price of vegetables and electricity on the consumer price index (CPI). JPS reduced fuel prices on electricity bills in November after eight months of consecutive increases in response to falling global oil prices. According to the Fair Trading Commission, oil prices at the pump have fallen by 17% recently compared to 20 percent in the US. Although motorist claim they have only received marginal price decreases. It appears the market is characterized by price asymmetry. Where increases in oil prices are passed on to consumers quicker than decreases. Here retailers pass on the costs associated with oil price increase quicker to consumers than benefits they receive from oil prices decreases. The Jamaican dollar exchange rate depreciated further against the bench mark US, falling approximately 7.5 percent since the start of the year closing at $114.29 to $1 at the end of the trading day on Monday.

How is oil traded globally?

Oil futures are contract signed today for the delivery of a specific amount of oil from seller to the buyer at specific time in the future at a price determined today. For example an oil futures purchaser can enter into a futures contract to purchase 100 barrels of oil at a current price of $55 dollars per barrel which will be delivered in the next three months. In this case purchasers pay for the oil in advance before the oil is received. Even if prices fall you are already contracted to pay $55 per barrel originally which cannot change. To take advantage of further fall in prices, purchasers will have to enter new oil futures contract. Crude oil futures are traded on the New York Mercantile Exchange NYMEX in dollars per barrel and on the Tokyo Commodity Exchange in yens per kilolitre. Crude oil futures can also be the underlying asset traded in crude oil options. Holders of crude oil option have the right but not necessarily the obligation to trade their options at strike price before the end of trading day on the maturity date. Trading of oil future and options are critical to global economic activity.

What are the projections for the future?

According to OPEC, the world economy is expected to grow by 260 percent by 2040. Energy demand will increase by 60 percent and fossil fuel will remain the main source. The world supply of primary energy will gradually increase over the next 40 years; oil supply will increase the lowest by 0.7 percent per annum, coal will increase at a steady rate of 1.4 percent per annum, bio mass 1.5 percent per annum, nuclear 1.6 percent per annum, hydro energy 1.8 percent, gas 2.4 and other renewable 7.7 percent. Commercial vehicle usage is also expected to grow significantly by 2040. These are necessary for transport and commerce in economic growth, there are expected to be more than 500 million commercial vehicles on the roads globally, 300 million more than that of 2011. Growth in commercial vehicle usage in developing countries is expected to increase beyond that of developed countries. Currently there are more commercial vehicles in the OECD. Notwithstanding this, average oil use per vehicle is expected to decrease by 2.2 percent per annum. Any deviations from the global economy from forecast will disrupt oil price projections as well.

The Impact Of Falling Oil Prices

CRUDE OIL prices have fallen to a record five-year low. Prices have dropped more than 40 per cent since the beginning of the year, moving from a little more than US$115 per barrel, in January, to approximately US$64 per barrel on Tuesday.

This drop in crude oil prices is as a result of increased production and supply of oil, relative to demand, because of less-than-expected global economic performance.
It has been predicted that prices may fall even further, to as low as US$40 per barrel, in 2015, similar to the conditions of the 2008-2009 global financial crisis.
Of the $2 billion of oil Jamaica imports, approximately 36 per cent goes to the Jamaica Public Service, 36 per cent to the transport sector and the rest to aviation and bauxite. One billion dollars of this is from the Petro Caribe Fund, of which, 40 per cent is paid upfront.
What is the impact of this?

Lower oil prices are good for countries that import oil and bad for countries that export. The fall in oil prices will result in a decline in overall prices for Jamaica and other developing/emerging market oil-importing economies.
Lower crude oil prices signify a fall in import prices and a decline in the price of energy, which is a necessary input in most production processes.
The fall will also be reflected in falling gas and electricity prices. For Jamaica, it should represent a fall in overall import bill, which is a significant positive, given the current account goals the country wants to achieve.
The current account deficit to gross domestic product (GDP) ratio of five per cent of GDP is the standard in small-island developing states. Jamaica’s is now a little more than 8.4 per cent. The trade deficit is improving marginally, only because the decrease in imports is greater than the decrease in exports, not because of an increase in production.
Even though tourism arrivals is up 3.2 per cent and cruise ship arrivals up by 10 per cent, GDP growth was -0.8 per cent for the quarter ending September, caused by the severe negative impact of drought conditions on agriculture.
What is the implication?

Lower crude oil prices mean a lower cost of production, and lower prices of goods and services that depend on oil to be produced.
Lower prices mean households should have more of their disposable incomes to spend on other products. A higher disposable income means increase in aggregate demand, which should be offset by an increase in production, thereby increasing GDP.
What is important here is the rate of pass-through from thee decrease in crude oil prices to consumer and retailer prices. If pass-through is high, consumers will benefit a great deal, and it will contribute more to GDP growth.
However, if pass-through is low, consumers will not receive much of the benefit from the fall in global oil prices and the economy will grow less. The occurrence of the latter is more plausible, giving that prices are normally sticky on the downside.
Retail markets may not relay the fall in input cost to consumers and retail prices. Furthermore, the fall in oil prices have been offset by an increase in agricultural prices due to drought, such that inflation occurs nonetheless in Jamaica. The inflation rate for November was one per cent, the lowest it has been since summer.
What are the disadvantages?

Some commentators have been speculating that, along with the benefits, there are some disadvantages of falling oil prices on the global economy. Speculators have posited that there is a strong correlation between falling oil prices and appreciation of the US dollar, relative to other currencies. Countries like Trinidad and Tobago, Venezuela, Russia and Organization of the Petroleum Exporting Countries, where oil represents a significant portion of their exports, may be affected negatively by falling prices.
Falling oil prices are also expected to contribute to deflation in Europe and Japan. These economies have been registering low growth in recent times, despite efforts by their central bank to inject growth via quantitative easing.
A fall in oil prices will contribute more to deflation and quantities easing may artificially inflate asset prices, contributing to possible asset bubbles in these countries in the future.
Oil companies stocks may fall, banks will register a fall in oil-based asset prices, which will have a contagious negative impact on the rest of the global financial sectors. Fall in asset prices tied to oil prices may increase global financial instability.

Strengthening Ja’s Fiscal Performance

Where are we now?

A KEY element of the International Monetary Fund (IMF) agreement is that Jamaica manipulates fiscal policy (government spending and tax receipts) to maintain a primary balance of 7.5 per cent of gross domestic product (GDP).
This year, Government’s revenue targets for the first three quarters are $7.4 billion less than projected. This shortfall is problematic since within the IMF agreement, there is a clause that Jamaica can cut spending to meet this primary surplus if revenues fall off target.
With a reduction in revenues receipts, Jamaica will be forced to cut spending to achieve such a huge primary surplus. This will reduce the amount of spending on capital and infrastructure necessary to improve the platform to facilitate a better business environment in the island. Jamaica’s primary surplus is one of the highest in the world for highly indebted developing countries, and it is becoming more and more difficult to maintain given less-than-expected global economic growth projections. Drought conditions in the summer contributed to less-than-expected farming output in the island, which has had a negative impact on aggregate economic output and lower-than-expected tax-revenue receipts. Furthermore, the tax rates in Jamaica are too high. Currently, Jamaicans pay more than 50 per cent of their income in total taxes and, based on the ‘Laffer Curve’, government tax revenue will reach a maximum point and begin to fall if the tax rate is too high. In this case, the Government must reduce the tax rate to increase tax revenue if that is their objective.
How are the other economic indicators?

Growth in GDP has remained the average one per cent with slight increase to 1.5 per cent expected in 2015 while poverty levels are increasing. The level of credit offered to the public sector has been consistently more than five times the level of credit offered to the private sector. As a result, private investment spending in the island is relatively low. Drought conditions contributed to inflation, although inflation estimates are projected to be below 10 per cent this year. The debt-to-GDP ratio has been falling gradually, but Jamaica’s external debt servicing as a percentage of GDP has been increasing. The multilateral share of external debt has increased from 21.1 per cent in 2006 to more than 36 per cent currently. The exchange rate has depreciated by 6.4 per cent thus far in 2014, moving from J$106.15 to US$1 at the beginning of January to an average of J$113 to US$1 currently. The current account deficit moved from 19 per cent of GDP in 2010 to just over 12 per cent in 2014 and is projected to be approximately eight per cent by 2015. This has been achieved by a fall in imports greater than the fall in exports, not an increase in exports as a result of a depreciating currency. Within the IMF agreement should be the flexibility to change quantitative targets if they become incongruent with other critical objectives.
What targets have already been met?

Jamaica agreed with the IMF and has designed and implemented the fiscal rule in the 2014-2015 fiscal year. From now onwards, the annual Budget will be guided by this fiscal rule as well as a more long-term budget plan over a number of years – the aim of which is to strengthen the nature of a country’s fiscal performance. These will help to establish a more transparent system upon which tax waivers are granted, and abolish ministerial power to grant or validate any tax relief.
The fiscal rule has put a limit on how much the country is allowed to borrow, as well as what the country can borrow to do now and in the future. This will help to ensure a sustainable fiscal balance. Under these circumstances, Jamaica should maintain a steady pace of debt reduction.
Jamaica tabled a charities bill and the Omnibus Incentive Act in the House of Representatives guided by the Inter-American Development Bank in consultation with the IMF. A review of public-sector employment and remuneration that serves to advise policy reform was finalised. The Government also tabled in parliament a comprehensive public-sector investment programme.
What targets are yet to be met?

Other targets, including ensuring that the public-service e-census database is up to date and covers all ministries, departments and agencies, and the implementation of a new system to track approval of construction permits across all parishes, have not yet been met. Plans to enact an electricity act have not yet been implemented also. They have not yet developed an action plan for public-sector transformation to cover shared corporate services; and have not yet reallocated, merged, abolished or divested/privatised some departments and agencies.

Global Growth Projections Predominantly Positive

What is the global outlook for the second half of 2014?

ACCORDING TO the International Monetary Funds’s (IMF) World Economic Outlook (WEO) October 2014, the world economy is expected to grow at an average rate of 3.7 per cent this year.

Improvements in growth projections are endorsed by a slightly better global economic performance in the second half of the year relative to the first half. This increase in economic growth globally in the latter part of the year can be attributed to adjustments to government policy to facilitate growth in the more advanced economies, which will increase world demand as a result of increased income.

What are the projections?

The WEO October 2014 explains that growth in the more developed countries, including the US and China, will pick up towards the end of the year. Growth is expected to be restored as temporary disadvantages to demand and production arising from geopolitical and other issues gradually disappear. The revised global output projection for US and China are projected to improve. Growth for other countries, however, are expected to be slightly less than that which was predicted earlier this year, with a minor decline in growth projections for Japan, the Middle East, the euro area, Latin America and emerging markets.

What will drive growth in the US and China?

Growth in the US is expected to average roughly three per cent in the second half of 2014. Improvements in economic growth in the US will arise from the implementation of the correct monetary policy stance and good conditions in financial markets balanced by a more favourable fiscal policy, stronger household income and restored strength in the housing market. The increase in output and demand should result in lower unemployment rate, which might not appear so if the labour force participation rate increases.

Growth projections in China are expected to be less than predicted earlier this year due to weak first-quarter performance in 2014. The government has subsequently altered fiscal policy providing tax breaks and incentives to business to improve performance.

Subsequently, growth in output will continue to increase and the country’s economic performance is expected to be better towards the end of the year.

What about growth for other advanced economies?

Growth projections for other advanced economies are expected to improve towards the latter part of this year. Growth in the euro area is expected to average 0.8 per cent, a slightly weaker projection made earlier this year. Growth in the second half of the year is expected to be better than growth in the first half of the year arising from an improved fiscal and monetary policy stance.

Growth projections are positive for the other advanced countries, including the UK, Canada and Sweden. Growth for the UK, in particular, is expected to be approximately 3.2 per cent this year, slightly better than the original predictions. This will arise from marginal improvements in consumption patterns and business investments, along with improved credit and financial market conditions.

What about emerging markets and developing economies?

Increases in demand in the more developed countries will help to drive growth in emerging market and developing countries. Growth in deve-loping countries, including Jamaica, is expected to improve towards the latter part of this year due to increased domestic demand, global demand and better overall market conditions arising from faster growth in the more advanced economies. Global growth will be driven by growth in the more developed countries and emerging markets, with less growth occurring in the developing world.

Growth projections, although positive, are slightly less than that predicted earlier this year due to weaker-than-expected performance in the first quarter of 2014.

What about Jamaica?

Economic projections for Jamaica remain positive towards the end of the year. Growth is expected to be little over one per cent, the usual. Based on the IMF agreement, a primary surplus of 7.5 per cent of GDP must be maintained, which limits fiscal policy as a tool to propel growth further. Doing business requirements have improved on the index. However, tax rates remain high and small businesses still face problems when trying to access credit. Overall, unless there is a permanent positive productivity shock, do not expect any astronomical increase in economic growth this year or any years to come.