Morrison

According to the latest survey, business confidence levels among Jamaican firms have rebounded on their expectation of a stronger recovery of the US economy than most forecasters are predicting. A surprising 48 per cent of local firms interviewed are expecting to recoup much of the losses of the recent past, which has led the survey team to suggest that the outlook of Jamaican entrepreneurs might be overly optimistic.

Still, a substantial 40 per cent are anticipating further deterioration in economic conditions in the coming year, and the majority of them, 51 per cent, have no plans to make investments in the short term.

That business confidence in Jamaica has only been moderately affected by the current economic crisis is due, of course, to the fact that the local financial system was not engulfed in the meltdown that gripped international financial markets, and especially in the USA and Europe. Consequently, local businesses were not hit by the credit crunch that has had a crippling effect on the US and European economies.

We were also spared the massive loss of wealth suffered by US investors in housing, stocks and other financial instruments, except for those people who were involved in the various informal investment schemes.

The differential initial impact of the global financial and economic crisis on developed countries where the crisis originated, and developing countries whose financial systems were less intricately wired to the US and European banking systems, is reflected not only in the wide variation in growth rates, but in the divergence in investment flows for 2008. The extent of the differences is revealed in the recently released World Investment Report published by the United Nations.

The report shows that while global foreign-direct investment (FDI) inflows fell by 14 per cent to US$1.7 trillion in 2008, inflows to developing countries actually increased by 17 per cent to US$621 billion. Thus, their share of FDI inflows surged to 43 per cent, the highest in many years.

inflows decline

On the other hand, inflows to the developed countries declined by 29 per cent to US$962 billion, dragged down by the combined effect of the financial crisis and the accelerating economic downturn in the last quarter of the year. In the process, their share of global FDI inflows dropped to 57 per cent. These countries were badly hurt by the collapse in cross-border mergers and acquisitions, which was brought about by the worst financial crisis since the 1930s. Such transactions reached a historic peak in 2007.

The Latin American and Caribbean (LAC) region saw its FDI inflows grow by 13 per cent to US$144 billion. In Jamaica's case, there was a 65.8 per cent increase to US$1.44 billion due to a single transaction, the buyout of Lascelles by Angostura Holdings of Trinidad and Tobago. Inflows to Africa grew by 27 per cent, the fastest rate for any region, and reached a record level of US$88 billion.

But the South, East and Southeast Asia region of developing countries remained the largest recipient of FDI inflows, pulling in US$298 billion in 2008, more than three times Africa's level and twice the LAC's figure. Not surprising, China was the highest recipient of FDI inflows among developing countries and it ranked third overall after the USA and France. India, the other fast-rising Asian economic force, also attracted large inflows.

cutback in spending

Of particular importance to Jamaica's future economic prospects was the fact that while FDI inflows for greenfield investments (new investments and expansion of existing facilities) in developing countries increased in 2008 such investments to the island declined by 10.8 per cent, moving from US$807.6 million in 2007 to US$722.2 million. This slippage was entirely the result of a cutback in spending by the bauxite industry, which very early, felt the shockwaves from the economic recession as aluminium prices raced to an all-time low (in real terms) during the last four months of 2008. The downturn accelerated in the early months of 2009 as investment activity in tourism and other sectors slowed.

Given that the global FDI flows are projected to decline by as much as 30 per cent this year, are expected to remain soft in 2010, and that all regions and most industries are being affected, the Jamaican economy will feel the squeeze over the next 18 months. The construction, tourism, information communication technology and distribution sectors will bear the brunt of the contraction of FDI inflows.

boom in demand

Over the six-year period up to 2008, these sectors experienced a boom in demand for goods and services. Employment in the construction sector went up by more than 30 per cent between 2003 and 2008, as more than 30,000 net new jobs were created and cement sales skyrocketed. The impact of this increased construction activity was felt particularly at the lower levels of the economic ladder.

The tourism sector also saw significant increase in employment levels estimated at close to 30,000 direct and indirect jobs as new hotels were opened and the demand for various support services expanded.

The towns and communities on the north coast of the island and inland population in Hanover, St James, Trelawny, St Ann and St Mary are most directly affected by the slump in investment, but the effects will also be felt even in the Corporate Area. Where the bauxite industry is concerned, it is the southern and central parishes that are hurting, as well as the Corporate Area.

It may well be that local firms are anticipating an early return of buoyancy in investment activity, but according to the confidence survey, Jamaican consumers seem more realistic in their expectations.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com