February 2019 Volume 19 Number 3

Transcription

1 February 2019 Volume 19 Number 3

2 c 2019 Nethersole Place Kingston Jamaica Telephone: (876) Fax: (876) Website: ISSN Printed in Jamaica

3 Monetary Policy at the s monetary policy objective is to achieve an inflation target of 4-6 per cent per annum. This low, stable and predictable inflation rate, measured as the change in the consumer price index that is published by the Statistical Institute of Jamaica, will facilitate sustained growth and development in Jamaica. The inflation target was established by the Minister of Finance and the Public Service in consultation with Bank of Jamaica in September The Bank uses a variety of tools to achieve its inflation target, the main one being the interest rate on the overnight deposit facility that it offers to commercial banks. Changes in the Bank s policy rate signals the Bank s policy stance towards achieving its inflation objective, which is transmitted to prices through the financial markets and then through spending and investment decisions. Monetary policy decisions affect inflation with a lag of between 4 to 8 quarters. For this reason, monetary policy in Jamaica is forward looking and the Bank puts much effort into establishing its view of the economy in the future, and bases its decision on this view. It is also important that the Bank clearly and transparently communicates this view of the future to the Jamaican public. The Bank undertakes an assessment of the economy eight times during each calendar year and publishes its decisions in accordance with a pre-announced schedule. On four of these occasions, when most data on the key macro-economic variables are available, the Bank prepares a comprehensive macroeconomic forecast covering the international economy, the fiscal accounts, balance of payments, money, credit, interest rates, GDP and prices. This Monetary Policy Report describes the Bank s most recent policy decision by the Bank and outlines the Bank s projections for inflation in Jamaica and the main macroeconomic variables that affect it. The Monetary Policy Report is prepared and published once every three months at the time of four of the Bank s monetary policy announcements.

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5 Overview The reduced its policy interest rate, the rate offered on overnight placements with Bank of Jamaica, by 25 basis points to 1.75 per cent on 20 December 2018, after holding the policy rate at 2.00 per cent for two quarters. Lowering the policy rate to another historic low was aimed at stimulating a pick-up in the rate of expansion in private sector credit, which should lead to higher economic activity, that will support inflation returning to the target range of 4.0 per cent to 6.0 per cent in the medium-term. Annual inflation for December 2018 decelerated to 2.4 per cent from 4.3 per cent at September 2018, falling below the lower limit of the target band of 4.0 per cent to 6.0 per cent. This deceleration largely reflected lower prices for agricultural food crops, transport and energy. Over the next eight quarters, inflation is projected to average 4.3 per cent, falling below the lower limit of the target band at various points during the year, then gradually approach the Bank s 5.0 per cent target. This forecast is mainly predicated on moderate growth in domestic demand and a slight uptick in imported inflation, driven by a steady increase in crude oil prices over the medium-term. (see 1.0 Inflation and Box 4: Recent Developments and Prospects for the International Oil Market) The Jamaican economy is estimated to have grown in the range of 1.5 per cent to 2.5 per cent for the December 2018 quarter, above the 1.2 per cent recorded for the December 2017 quarter. While fiscal consolidation is expected to continue to restrain domestic demand, the Bank projects that labour market conditions will improve further over the next eight quarters with unemployment gradually declining to 8.0 per cent. With regard to aggregate supply, there was estimated growth in all industries for the December quarter. In particular, growth was buoyed by increased production in Mining & Quarrying, Construction and Tourism. Over the forecast horizon ending September 2020, the projected growth largely reflects continued expansion in net external demand, supported by marginal increases in consumption spending. There is a risk that consumption spending will falter, given early signs of weakness in consumer goods imports. (see 3.0 Real Sector) Global economic growth for the December 2018 quarter is estimated to have decelerated relative to the September 2018 quarter. Global growth projections for the next eight quarters have been revised downwards by 0.1 percentage point to an average of 3.4 per cent and is projected to average 3.4 per cent over the mediumterm. In particular, US output growth for the next eight quarters is project to average 1.7 per cent over the medium-term. Given the path for Jamaica s balance of payments, the current account deficit is assessed to be broadly sustainable, supported by more than adequate foreign reserves with non-borrowed reserves projected to be above the programmed floor through to September (see 2.0 International Economy) Accommodative monetary conditions as well as increased competition in the market for loanable funds continued to support growth in overall financing in Jamaica. The monetary aggregates (monetary base and broad money) in the December 2018 quarter grew faster than anticipated. However, the growth in private sector credit fell below previous projections. Growth in private sector credit over the next eight quarters is projected to trend lower than the previous projection, consistent with the revised forecast for nominal GDP growth. In this context, the monetary aggregates are not expected to pose a threat to the attainment of the inflation target. (see 8.0 Monetary Aggregates and 9.0 Monetary Conditions) The Bank will maintain an accommodative policy stance aimed at returning inflation to the target range over the medium-term. The Bank will act promptly to address any undesirable risk to inflation that may emerge and will continue to use its policy tools to maximise the benefits of low and stable inflation expectations in Jamaica. Brian Wynter Governor

6 Contents 1.0 Inflation 1 Recent Developments 1 Inflation Outlook & Forecast 2 Inflation Risks 3 Box 1: Why Inflation was Lower than Target 4 Box 2: Businesses Inflation Expectations Survey International Economy 7 Trends in the Global Economy 7 Trading Partners Inflation 12 Trends in Trading Partners Exchange Rates 12 Terms of Trade 12 Commodity Prices 13 External Financial Markets 14 Global Stock Market 15 Box 3: Global Economic Growth in Selected Economies 10 Box 4: Recent Developments and Prospects for the International Oil Market Real Sector 19 GDP Growth and Output Gap 19 Aggregate Supply 19 Aggregate Demand 21 Labour Market Developments 21 Real Sector Outlook Fiscal Accounts 23 Recent Developments 23 Near-term Outlook Balance of Payments 25 Recent Developments Monetary Policy & Market Operations 27 Recent Developments 27 Liquidity Conditions Financial Markets 29 Market Interest Rates 29 Exchange Rate Developments 29 Equities Market Monetary Aggregates 32 Money 32 Private Sector Credit 33 Monetary Projections & Inflation 37 Box 5: Quarterly Credit Conditions Survey 34

7 9.0 Monetary Conditions 38 Recent Developments Conclusion 39 Additional Tables 40 Glossary 54 List of Boxes 58 Appendix 1: Current Account Sustainability Measures

8 ABBREVIATIONS & ACRONYMS B-FXITT BOJ BOP Brexit bps CAD CDs CDI CIF CPI CPI-AF CPI-F CPI-FF CSI CY DIJA DTIs EFR EGOF EMBI+ e.o.p EPI EFR Fed FNB FTSE FY GDP GOJ GOJGBs HWEG IES IMF IPI IRC JMD JSE s Foreign Exchange Intervention & Trading Tool Balance of Payments British Exit Basis points Current Account Deficit Certificates of Deposit Credit Demand Index Cost, Insurance and Freight Consumer Price Index Consumer Price Index without Agriculture and Fuel Consumer Price Index without Fuel Consumer Price Index without Food and Fuel Credit Supply Index Calendar Year The Dow Jones Industrial Average Deposit-taking Institutions Excess funds rate Electricity, Gas & Other Fuels JP Morgan Emerging Market Bond Index End of Period Export Price Index Excess Funds Rate US Federal Reserve System Food & Non-Alcoholic Beverages Financial Times Stock Exchange Fiscal Year Gross Domestic Product Government of Jamaica Government of Jamaica Global Bonds Housing, Water, Electricity Gas & Other Fuels Inflation Expectations Survey International Monetary Fund Import Price Index Interest Rate Corridor Jamaica Dollar Jamaica Stock Exchange

9 LHS LME Left Hand Side London Metal Exchange M2J Broad money supply M2+ Broad money supply that includes foreign currency deposits MCI Monetary Conditions Index NDA NIR NOP o/w O/N OMO Net Domestic Assets Net International Reserve Net Opening Position Of which Overnight Open Market Operations PMMR QoQ QPC Private Money Market Rates Quarter over Quarter Quantitative Performance Criteria RADA REER S&P SBA SCT SLF T-Bill TP UR US USD WASR WTI Rural Agriculture Development Agency Real Effective Exchange Rate Standard & Poor s Stand-by Agreement Special Consumption Tax Standing Liquidity Facility Treasury Bill Trading Partners Unemployment Rate United States US dollar Weighted Average Selling Rate West Texas Intermediate

10 1.0 Inflation Annual inflation decelerated to 2.4 per cent at December 2018 from 4.3 per cent at September 2018, largely reflecting lower prices for agricultural food crops, transport and energy. The inflation outturn at December was below the lower limit of the BOJ target band of 4.0 per cent to 6.0 per cent. Inflation is projected to average 4.3 per cent over the next eight quarters before gradually approaching the Bank s 5.0 per cent target in the medium term. The forecast indicates that inflation will fall below the lower limit of the Bank s 4.0 per cent to 6.0 per cent target at various points over the period January 2019 to December This forecast is mainly predicated on moderate growth in domestic demand and a slight uptick in imported inflation, driven by a steady increase in crude oil prices. International oil prices are projected to trend upwards over the next eight quarters, a different path from that envisaged in the November 2018 forecast. Recent Developments and Nearterm Outlook The annual point to point inflation rate at December 2018 was 2.4 per cent, a significant and unexpected deceleration relative to the 4.3 per cent recorded at September 2018 and the 5.2 per cent recorded at December The inflation rate at December 2018, which was lower than the Bank s November 2018 projection of 4.0 per cent, also fell below the Bank s target of 4.0 per cent to 6.0 per cent (see Box1: Why Inflation was Lower than Target). The deceleration in inflation relative to the preceding quarter mainly reflected the impact of unexpected reductions in the prices of agricultural food items, due to a strong improvement in supplies and a steep drop in international oil prices during the December 2018 quarter (see Commodity Prices in the International Economy section). Given the strong increase in agricultural supplies, the year-on-year increase in the vegetables and starchy foods subdivision of the CPI slowed down considerably to 0.1 per cent at December 2018 from 7.4 per cent at September 2018 (see Figure 1). The fall in oil prices over the December 2018 quarter precipitated a deceleration in the rate of increase in the Electricity, Gas & Other Fuels (EGOF) sub-division of the CPI to 5.6 per cent at December 2018 from 15.9 per cent at September Electricity rates in this context declined by 3.1 per cent for the December 2018 quarter, compared to an increase of 5.4 per cent for the September 2018 quarter. The effect of lower crude oil prices was also evident in a moderation in the annual rate of increase in the Transport division to 1.1 per cent at December 2018 from 3.6 per cent at September 2018, reflecting lower automotive fuel prices. Figure 1: Vegetables and Starchy Foods Supply The Bank s main measure of core inflation (inflation that excludes the immediate influence of agriculture and energy prices - referred to as CPIAF) remained low during the quarter. CPIAF at December 2018 was 2.5 per cent, a slight increase relative to 2.4 per cent at September 2018 (see Figure 2). Relatively low underlying inflation is symptomatic of a limited pass through to prices of improved demand conditions over the past four quarters, consistent with the existence of some shock in the economy. (Tonnes) Source: MOA & BOJ Calculations The graph represents quarterly supply (in tonnes) for vegetables and selected starches provided by Ministry of Agriculture. 1

11 Box 1: Why Inflation was Lower than Target Introduction Inflation at December 2018 fell to 2.4 per cent, lower than the 5.2 per cent recorded at December 2017 and also below the Bank s inflation target of 4.0 per cent to 6.0 per cent. Inflation at December 2018 was lower than s target because of the following reasons: i. A significant reduction in international oil prices during the December 2018 quarter. Crude oil prices, as measured by the West Texas Intermediate index, fell by 15.4 percent over the quarter, relative to a rise of 0.1 per cent anticipated by the Bank. This unexpected decline in oil prices influenced a reduction of 6.7 per cent in the Electricity Gas & Other Fuels sub-division of the CPI in December Against this background, the annual change in the Housing Water Electricity Gas & Other Fuels division of the CPI moderated to 4.7 per cent at December 2018 from 10.6 per cent at September The effect of lower crude oil prices was also evident in a moderation in the annual rate of increase in the Transport division to 1.1 per cent at December 2018 from 3.6 per cent at September 2018, reflecting lower automotive fuel prices. ii. A fall in agricultural prices during the December 2018 quarter, which had not been anticipated by the Bank. The vegetables and starchy foods sub-division of the CPI declined by 0.9 per cent for the December 2018 quarter in contrast to a projected increase of 3.8 per cent. This led to a dramatic slowdown in the annual rate of increase in the vegetables and starchy foods sub-division to 0.1 per cent at December 2018 from 7.4 per cent at September This fall occurred in the context of higher than normal supplies during the quarter. iii. Limited pass through of improved domestic demand conditions to prices. The Bank s estimate of underlying inflation, one indicator of the state of domestic demand, remained low at December 2018, relative to the Bank s forecast. Inflation that excludes the immediate influence of agriculture and energy prices (referred to as CPIAF) was 2.5 per cent at December 2018, below the 2.7 per cent estimated at December 2017 and less than had been projected. Underlying inflation has remained below 3.0 per cent since April All the other measures of underlying inflation also remained low and stable, despite a strengthening in real output growth over the period. Inflation Outlook & Forecasts Figure 2: Core Inflation and CPI (Annual per cent change) Source: STATIN & BOJ s current projection continues to indicate that inflation will fall below the lower limit of the 4.0 per cent to 6.0 per cent target at various points over the period January 2019 to December Inflation is projected to gradually increase thereafter towards the centre of the target, a path which continues to carry some risk of a breach of the lower limit of the target in the context of heightened volatility in agricultural prices. The projected trajectory for inflation over the next year is driven primarily by (1) a normalization in domestic agricultural prices (2) an increase in imported inflation and (3) the effect of higher economic activity, given the accommodative monetary conditions induced by the central bank over the past year. The outlook is supported by the lagged passthrough of exchange rate depreciation, albeit small. Over the medium term, imported inflation is, 2

12 however, expected to decelerate due to the outlook for international oil prices. demand, as well as a weaker outlook for crude oil prices. In this context, inflation is projected to accelerate to 3.6 per cent at March 2019 and then to 5.1 per cent at June 2019 (see Figure 3). Higher inflation for the March 2019 quarter is expected to reflect accelerations in the FNB and HWEG divisions. With regard to FNB, agricultural prices are expected to normalise over the quarter following the significant declines in December The acceleration in HWEG primarily reflects the impact of an anticipated increase in water rates. 1 For the June 2019 quarter, the projected acceleration in inflation is mainly related to increases in processed foods as well as energy and transport services, supported by an anticipated uptick in oil prices. The acceleration also reflects base effects - the CPI had fallen in the June 2018 quarter due to significant reductions in agriculture prices and electricity rates. Figure 3: Component Contribution to Inflation Figure 4: Comparative Core Inflation Forecasts Source: The Bank s Survey of Businesses Inflation Expectations (IES) at December 2018 indicated that one-year-ahead inflation expectations were above the mid-point of the Bank s inflation target of 5.0 per cent. As was the case in the previous survey, respondents expect the cost of utilities to reflect the highest increases among input factors over the next twelve months ( see Box 2: Businesses Inflation Expectations Survey). Source: STATIN & BOJ Inflation is projected to rise gradually to around 5.0 per cent by the June 2022 quarter. This trajectory is lower relative to the previous forecast which anticipated a faster convergence to the midpoint of the target range. The lower inflation path reflects a moderated pace of expansion in domestic demand due to a less positive outlook for external demand, a revised assumption that underlying inflation will rise gradually in response to improvements in Inflation Risks The risks to inflation over the next eight quarters are balanced. The risks to international commodity prices are assessed to be skewed to the upside. Furthermore, production disruptions in the agriculture sector associated with adverse weather conditions remain an upside risk. On the downside, there is a possibility that domestic demand conditions could weaken thus providing a moderating effect on prices. 1 The forecast for the water rate incorporates the expected impact of the National Water Commission s (NWC) submission to the Office of Utilities Regulation (OUR) for a tariff increase over the period January 2019 to December If approved, the tariff adjustment will result in an average increase of approximately 34.8 per cent in the bill for customers with access to water and sewerage services. This is expected to have a direct effect of 0.4 percentage points on inflation in the March 2019 quarter. 3

13 Figure 5: Annual Inflation Fan Chart (%) Source: STATIN & BOJ Box 2: Businesses Inflation Expectations Survey December 2018 Overview The Bank s Survey of Businesses Inflation Expectations (IES) at December 2018 indicated that one-year-ahead inflation expectations were above the mid-point of the Bank s inflation target of 5.0 per cent. As was the case in the previous survey, respondents expect the cost of utilities to reflect the highest increases among input factors over the next twelve months. The proportion of respondents who held this view, however, was lower relative to the November 2018 survey. There was a corresponding increase in the proportion of respondents anticipating higher costs for Fuel/Transport and Stock Replacement during the year. Wages and salaries was least expected to increase over the next twelve months. Despite this, approximately fortyseven (47) per cent of the respondents anticipated an increase in wages over the next twelve months, similar to that in the November 2018 survey. The expected average increase in wages fell to 5.9 per cent, relative to the 6.9 per cent in the previous survey. Perceptions about present and future business conditions worsened for the month but improved on a quarterly basis. Inflation Expectations In the December 2018 survey, respondents expectation of inflation 12 months ahead increased to 5.4 per cent, relative to 5.1 per cent in the November 2018 survey. Furthermore, businesses expected an inflation rate for CY2018 of 5.0 per cent, which is above the CY2018 outturn of 2.4 per cent (see Figure 1). Perception of Inflation Control The index of inflation control remained unchanged when compared to the November 2018 survey (see Figure 2). This outturn resulted from a marginal decrease in the share of respondents who were very satisfied, offset by a decline in the share of respondents who were very dissatisfied. There was an increase in the proportion of neutral respondents who were neither satisfied nor dissatisfied. 4

14 Table 1: Exchange Rate Expectations Question: In July 2018 the exchange rate for the Jamaican Dollar (JA$) in respect of the United States Dollar (US$) was $ What do you think the rate will be for the following periods? Expected Depreciation (%) Periods Ahead Aug-18 Sep-18 Nov-18 Dec-18 3-Month Month Exchange Rate Expectations Relative to the November 2018 survey, respondents expected the exchange rate to appreciate over the next 3-month, 6-month and 12-month horizons (see Table 1). However, relative to the November 2018, respondents moderated their views on the pace of appreciation. 12- Month Source: Businesses Inflation Expectations Survey. Note: The responses have been converted to percentage change. Figure 1: Expected 12-Month Ahead Inflation Question: Based on the average monthly inflation for the last 12 months, what do you think the average monthly rate will be for the next 12 months? Interest Rate Expectations The majority of respondents expected the Bank s policy rate, three months ahead, to remain unchanged. However, the proportion of respondents of this view fell relative to the previous survey while there was an increase in the proportion who believe it will be significantly higher. The 90-day Treasury bill (T-Bill) yield, three months ahead, was expected to increase to 1.9 per cent from the expected 1.6 per cent recorded in the November 2018 survey. Source: Businesses Inflation Expectations Survey Figure 2: Perception of Inflation Control Question: How satisfied are you with the way inflation is being controlled by the Government? Perception of Present and Future Business Conditions In the December 2018 survey, businesses were less optimistic about present business conditions as the proportion of respondents of the view that conditions are better declined. Relative to November, businesses were also less optimistic about the future as the proportion of respondents who believe that conditions will be worse increased. Expected Increase in Operating Expenses Respondents indicated that they expected the largest increase in production costs over the next 12 months to emanate from utilities. This was followed by stock replacement and costs for fuel/transport. The least was wages and salaries costs (see Table 2). Source: Businesses Inflation Expectations Survey Notes: The Index of Inflation Control is calculated as the number of satisfied respondents minus the number of dissatisfied respondents plus 100 5

15 Figure 3: Perception of Present Business Conditions Question: In general, do you think business conditions are better, about the same or worse than they were a year ago in Jamaica? Table 2: Expectations about Operating Expenses Question: Which input do you think will have the highest price increase over the following time periods? 2 Sep-18 Nov-18 Dec-18 Utilities Wages/Salaries Fuel/Transport Stock Replacement Raw Materials Other Source: Businesses Inflation Expectations Survey Notes: The Index is calculated using the balance score method (Better Worse +100) Not Stated Source: Survey of Businesses Inflation Expectations (IES) Figure 4: Perception of Future Business Conditions Question: Do you think that a year from now business conditions will get better, about the same as present or get worse? Source: Businesses Inflation Expectations Survey Notes: The Index is calculated using the balance score method (Better Worse +100) 2 The 3-month, 6-month and 12-month horizons. 6

16 2.0 International Economy Global economic growth for the December 2018 quarter is estimated to have decelerated relative to the September 2018 quarter. Global growth projections for the next eight quarters have been revised downwards by 0.1 percentage point to an average of 3.4 per cent and is projected to average 3.4 per cent over the medium-term. In particular, US output growth for the next eight quarters has been revised downwards by 0.1 percentage point to an average of 1.8 per cent and is projected to average 1.7 per cent over the medium-term. The US Federal Reserve raised interest rates in December 2018 in the context of sustained expansion of US economic activity, strong labour market conditions and inflation being near the Committee s symmetric 2.0 per cent objective. In light of the increase in the US Federal Funds target rate and a rise in Jamaica s sovereign risk premium, yields on GOJ global bonds increased over the quarter. BOJ projects that there will be one increase in the Fed Funds rate in the June 2019 quarter, which will support an upward drift in money market interest rates. However, the upward pressure on GOJ s sovereign bond yields is expected to be partly offset by the country s continued positive performance under the SBA programme with the IMF. In this context, the spreads on GOJ sovereign bonds are expected to remain relatively stable over the next eight quarters. Jamaica s Terms of Trade (TOT) Index for FY2018/19 is projected to improve relative to the previous projection. This revision mainly reflects the impact of lower crude oil prices. Trends in the Global Economy Global economic growth for the December 2018 quarter is estimated at 3.5 per cent, a decline of 0.1 percentage point relative to growth in the September 2018 quarter. This estimate reflects weaker growth in a number of economies including the US, Canada and Europe, the impact of which was partly offset by stronger growth in the UK and Japan (see Box 3: Global Economic Growth in Selected Economies). Global growth is projected to expand at an average pace of 3.4 per cent over the next eight quarters to December 2020 and is projected to average 3.4 per cent over the medium-term (see Figure 6). 1 The downward revision to medium term growth mainly reflects: (i) the ongoing negative effects of the import tariffs enacted in mid-september 2018 by the US and China; (ii) weaker performance in some economies; in particular, the slowdown of economic activity in China; (iii) the weaker outlook for some key emerging market and developing economies arising from country-specific factors; and (iv) weaker global domestic demand given weakening financial market sentiment. An escalation of trade tensions and a worsening of financial conditions are key sources of risk to the outlook. 1 The IMF in the January 2019 World Economic Outlook (WEO) indicated that the global expansion has weakened. Global output is projected at 3.5 per cent in 2019 and 3.6 per cent in 2020, 0.2 and 0.1 percentage point lower than the forecast of the October 2018 WEO, respectively. The global growth forecast for 2019 and 2020 had already been revised downward in the October 2018 WEO, partly because of the negative effects of tariff increases enacted in the US and China earlier that year. The further downward revision since October in part reflects carry over from softer momentum in the second half of 2018 including in Germany following the introduction of new automobile fuel emission standards and in Italy where concerns about sovereign and financial risks have weighed on domestic demand but also weakening financial market sentiment as well as a contraction in Turkey, now projected to be deeper than anticipated. The balance of risks remains skewed to the downside. 7

17 Figure 6: Global Growth Projection (Per cent) Figure 7: US Output Gap (Per cent of Potential GDP) Source: Bloomberg Source: BOJ, CBO Output growth for the US for the December 2018 quarter is estimated to have decelerated to 2.5 per cent, following an expansion of 3.4 per cent in the September 2018 quarter. 2 The US output gap is estimated to have been positive since the March 2018 quarter. 3 Figure 8: Comparative US GDP Growth Forecast (Per cent ) It is projected that US GDP will grow at a slower pace than potential GDP over the next eight quarters (see Figure 3.2). Between the March 2019 and the December 2020 quarters, real output growth in the US is projected in the range of 1.7 per cent to 2.0 per cent (see Figure 7). 4 This is a less optimistic forecast relative to the previous projection. Source: BOJ, CBO Output growth for the US is projected to decelerate to 1.7 per cent in the March 2019 quarter before accelerating to 2.0 per cent in the June 2019 quarter. The deceleration in output growth over the 2 Real consumer spending appears to have expanded at a modest pace in December 2018 quarter. This is supported by the recent decline in gasoline prices, which has given households more money to spend on other goods and services. However, Investment indicators point to further weakness in business and residential investment. The recent plunge in oil prices points to a sharp fall in drilling activity. Existing home sales declined to a three-year low in December 2018 and weak demand has contributed to a sharp decline in homebuilder confidence over the past couple of months which points to a fall in housing starts. Additionally, external indicators show that the trade deficit with China has widened further. 3 The output gap equals the difference between historical or projected GDP and the US Congressional Budget Office s (CBO) estimate of potential GDP and is expressed as a percentage of potential GDP. The US output gap is estimated at 0.7 per cent and 0.8 per cent for the September and December 2018 quarters, respectively. 4 The Federal Reserve revised downward its projection for real GDP growth in the US to 3.0 per cent for 2018 from 3.1 per cent and 2.3 per cent in 2019 from 2.5 per cent. However, the committee s median forecast for long-run expansion was revised upward to 1.9 per cent from 1.8 per cent. The staff also saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, household spending and business investment could expand faster than the staff projected, supported in part by the tax cuts enacted last year. On the downside, trade policies and foreign economic developments could move in directions that have significant negative effects on US economic growth. Risks to the inflation projection also were seen as balanced. The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longerterm inflation expectations may be lower than was assumed in the staff forecast. 8

18 near term reflects: (i) the continued influence of the trade dispute on the US economy; (ii) weaker global growth and a stronger US dollar which will likely result in a slowdown in US export growth 5 ; (iii) the lagged effect of the Federal Reserve s monetary tightening; and (iv) the fading boost from fiscal stimulus. The recent shutdown of the government, which raises the likelihood of a disruptive stand-off over the Federal debt ceiling in July 2019, represents an additional downside risk to this short term outlook. 6 All these factors are likely to weigh on business investment and household spending over the coming months. The unemployment rate in the US at January 2019 was 4.0 per cent, 0.3 percentage point above the Bank s projection but below the US Federal Reserve s estimate of the natural longer-term rate of 4.4 per cent. 7 The US unemployment rate is projected to decline over the next eight quarters. 8 The Federal Reserve appears to be close to the end of their tightening cycle. On 19 December 2018, the Federal Open Market Committee (FOMC) increased the US Fed Funds target range by 25 basis points to 2.25 per cent 2.50 per cent from 2.0 per cent 2.25 per cent. Table 1: Unemployment Rate for Selected Economies (Quarterly Average Per Cent) USA Canada Euro Mar Jun Sep Dec Mar-18 Jun-18 Sept-18 Dec Source: Official statistics offices The Federal Reserve emphasized then that some further gradual increases in the target range for the federal funds rate will be consistent with strong growth outlook and inflation remaining near the symmetric 2.0 per cent objective over the medium term.9 Subsequently, on 30 January 2019, the FOMC announced its decision to maintain the US Fed Funds target range of 2.25 per cent 2.50 per cent, in line with the Bank s projection. The tone of the accompanying policy statement, which indicated that the Committee will be patient as it determines the future adjustments to the target range for the federal funds rate, can be viewed as signalling a rate pause Slower GDP growth in China, Canada and the Euro-zone, three of the four largest export markets for the US, points to a slowdown in US export growth over the coming years. Additionally, an appreciation of the US Dollar support a slowdown in export growth over the coming months. The forward-looking business surveys softened in December, with both the ISM manufacturing and nonmanufacturing surveys falling sharply. 6 The sharp fall in the University of Michigan consumer confidence index to a more than two-year low of 90.7 in January, from 98.3, illustrates that the continued government shutdown is starting to weigh on the broader economy. The fall was mostly driven by the expectations index, which plunged to 78.3 from 87.0, although the current conditions index also fell quite sharply. This could have been partly driven by the earlier volatility in financial markets and fears over the health of the economy. 7 The US economy added 304, 000 jobs in January 2019, compared with an average monthly gain of 223,000 in Job gains occurred in several industries, including leisure and hospitality, construction, health care, and transportation and warehousing. The Bureau of Labor Statistics reported that the impact of the partial federal government shutdown contributed to rebound in the unemployment rate to 4.0 per cent, from 3.9 per cent. Among the unemployed, the number who reported being on temporary layoff increased by 175,000. This figure includes furloughed federal employees who were classified as unemployed on temporary layoff under the definitions used in the household survey. Over the year, average hourly earnings have increased by 85 cents, or 3.2 per cent. 8 The unemployment rate is projected to end FY2018/19 and FY2019/20 at 3.7 per cent and 3.6 per cent, respectively, 0.3 percentage points and 0.4 percentage points below end- FY2017/18. 9 The dot plot suggested that the Federal Open Market Committee anticipated two quarter-point rate increases in 2019, a slower pace of increase relative to the previous forecast round in September The FOMC s median forecast for the US Fed Funds rate at end-2019 was consequently revised downward to 2.9 per cent from 3.1 per cent. The median forecast for the neutral longer-term rate declined to 2.8 per cent, relative to the previous projection of 3.0 per cent. Additionally, market participants have reportedly been focusing on the potential implications of downside risks to the US economic outlook for the financial condition of companies. The deterioration in market sentiment has been accompanied by a significant downward revision in the expected path of the federal funds rate based on federal funds futures quotes. In addition, futures-based measures of policy expectations moved lower in response to speeches by Federal Reserve officials. 10 The Fed Chairman indicated in his press conference that he still thought the economic outlook was favourable, but that cross currents including the deteriorating international backdrop, policy risks and the sustained tightening of financial conditions over the past few months had increased downside risks to the outlook. 9

19 The Bank anticipates that the Fed will raise interest rates one more time in the June 2019 quarter and maintain interest rates at that level for the forecast horizon. This is two rate increases less for 2019 relative to the previous forecast round in November The downward revision reflects: (i) mounting downside risks to global economic growth which will impact the demand for US exports and tighter financial conditions; (ii) the effects of the partial government shutdown which raises the risk of a damaging debt-ceiling stand-off; and (iii) the stability of inflation, even as labour market conditions tighten further. Box 3: Global Economic Growth in Selected Economies For the December 2018 quarter, global growth is estimated at 3.5 per cent, a slowdown of 0.1 percentage point relative to the September 2018 quarter. projects that the global economy will continue to grow over the next eight quarters, albeit at a slower pace than earlier anticipated. Global growth for 2018 is estimated to have decelerated to 3.7 per cent, from 3.8 per cent in Going forward, global growth is projected to weaken at a rate that is somewhat faster than expected. Global growth is estimated to decelerate in 2019, mainly reflecting declines in trade because of import tariffs enacted between the US and China and a weaker outlook for advanced economies and some key emerging market and developing economies. 11 The near term outlook for the global economy remains clouded by trade tensions. At the same time, the economic arrangements between the United Kingdom and the rest of the European Union are at risk for a disorderly disengagement. An escalation of these trade tensions could undermine business and financial market sentiment, adversely affecting investment and trade. United Kingdom (UK) The UK economy is estimated to have expanded by 1.4 per cent in the December 2018 quarter, a weaker pace of growth when compared to the expansion of 1.5 per cent in the previous quarter. Prolonged economic uncertainties surrounding BREXIT continue to weigh on economic growth. However, this is partly offset by the impact of fiscal stimulus announced in the 2019 budget According to the January 2019 WEO update, overall, the cyclical forces that propelled broad-based global growth since the second half of 2017 may be weakening somewhat faster than expected in October Trade and investment have slowed, industrial production outside the US has decelerated and purchasing managers indices have weakened, flagging softening momentum. A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a no-deal withdrawal of the United Kingdom from the European Union and a greater-thanenvisaged slowdown in China. 12 The Chancellor of the Exchequer presented his Budget to Parliament on 29 October Upgraded forecasts for government borrowing and growth enabled the Chancellor to increase public spending, which included extra funds for the National Health Service (NHS). He also brought forward increases to income tax thresholds, while announcing a reduction in public debt as a proportion of national income. 10

20 Growth in the UK economy over the next eight quarters is projected in the range of 1.5 per cent to 1.7 per cent. Euro Area Economic growth for the Euro Area in the December 2018 quarter was estimated at 1.3 per cent, following the expansion of 1.6 per cent in the previous quarter. For the next eight quarters, GDP growth in the Euro Area is projected in the range of 1.3 per cent to 1.6 per cent. Canada Economic growth in Canada for the December 2018 quarter is estimated to have expanded by 1.9 per cent, a deceleration of 0.1 percentage points compared to the September 2018 quarter. For the next eight quarters, GDP growth in Canada is projected in the range of 1.4 per cent to 2.2 per cent. China The Chinese economy is estimated to have expanded by 6.4 per cent in the December 2018 quarter, slowing from the growth in the previous quarter of 6.5 per cent. Consequently, GDP growth slowed to 6.6 per cent in 2018, the slowest pace since Going forward, with the impact of trade tensions, slowing global growth, slower growth in income among middle income households and the lagged impact of slower credit growth set to intensify in the coming months, economic growth in China is projected to decelerate further, despite fiscal policy stimulus efforts announced by the government. 13 For the next eight quarters, the GDP growth in China is projected to be in the range of 6.1 per cent to 6.3 per cent 13 In January 2019, the Chinese finance ministry announced that the country will boost fiscal expenditure and implement larger tax and fee cuts in The cuts will focus on reducing burdens for small firms and manufacturers. 11

21 Trading Partners Inflation The weighted average of 12-month inflation rates for Jamaica s trading partners (TP) at December 2018 is estimated at 2.0 per cent. This estimate is below the previous forecast and the September 2018 outturn of 2.5 per cent and 2.3 per cent, respectively, primarily due to weaker domestic demand and lower commodity prices, particularly for crude oil. For the US, annual inflation at December 2018 decelerated to 1.9 per cent, from 2.3 per cent at end-september 2018, the first time the 12-month change has been under 2.0 per cent since August ,15 Over the ensuing eight quarters, the Bank projects the inflation rate of Jamaica s main trading partners (TP inflation) in the range of 2.0 per cent to 2.4 per cent, which is lower than the previous forecast (see Figure 9). 16 The lower TP inflation largely reflects a revised outlook for some commodity prices and weaker demand in some economies. Following the deceleration in December 2018, US monthly inflation is projected to rebound in 2019 given the revised upward trajectory for crude oil prices. 17 Trends in Trading Partners Exchange Rates During the review quarter, TP currencies generally depreciated against the US dollar. 18 The stronger US dollar primarily reflected the impact of: (i) the US Federal Reserve's policy of tightening monetary conditions and; (ii) an increase in investors appetite for safe haven assets given speculations about the impact of an intensification of trade tensions between the US and China and the associated rise in policy uncertainty, which could adversely impact global growth. projects that, over the next eight quarters, the currencies of Jamaica's major trading partners will, on average, appreciate against the US dollar as domestic growth in the USA slows and the Fed tightening cycle peaks (see Figure 10). Figure 10: Trade Weighted Trading Partners Exchange Rate vis-à-vis USD, May 2013 =100 Figure 9: Trade Weighted Trading Partners Inflation (Per cent change) Source: Bloomberg Source: Bloomberg Terms of Trade Jamaica s terms of trade (TOT) index increased at an annual pace of 4.1 per cent at December 2018, 14 The energy index, a sub-index of the US CPI, declined by 0.3 per cent over the last year - this represented the first 12-month decline in the energy index since the period ended September The index for all items less food and energy rose 2.2 per cent over the past 12 months, the same increase for the period ended November US CPI inflation decelerated to a 19-month low of 1.6 per cent in January 2019, from 1.9 per cent in December 2018, due primarily to a sharp decline in energy prices. Excluding food and energy, core CPI inflation remained unchanged at 2.2 per cent where it has been broadly at for almost a year. Core PCE inflation decelerated to 1.9 per cent in December from 2.0 per cent at September The inflation rate of Jamaica s main trading partners (TP inflation) for FY2018/19 is projected at 2.0 per cent, below the previous forecast of 2.4 per cent. 17 US inflation is projected to average 1.9 per cent in the March 2019 quarter and 2.0 per cent in the June 2019 quarter. 18 For the December 2018 quarter, the exchange rate of Jamaica s trading partners vis-à-vis the USD depreciated on average by 0.4 per cent and 1.5 per cent relative to the September 2018 quarter and December 2017 quarter, respectively, which compares to the Bank s previous forecast for a depreciation of 0.1 per cent and 1.2 per cent. 12

22 following a decline of 6.7 per cent at September This increase compares to the previous projection for a decline. The increase in the index for the period reflected a decline of 4.2 per cent in the import price index (IPI), partly offset by a decline of 0.3 per cent in the export price index (EPI). The reduction in the IPI emanated mainly from lower prices for fuel, while the decline in the EPI was primarily driven by lower prices for alumina and sugar exports. 19 producing countries 21 ; (ii) reports of rising US inventories; (iii) the US government s decision to allow some of Iran s top crude oil customers to continue buying oil from the country; (iv) downward revisions to the global growth outlook released by the IMF and OPEC; (v) heightened concerns about slowing global economic growth stemming from the US-China trade dispute; and (vi) an appreciation of the US dollar, which tempered investors appetite for US dollar denominated commodities. It is projected that Jamaica s TOT will improve over the near term to reflect larger declines in import prices relative to declines in export prices. The IPI is estimated to decline, on average, by 6.3 per cent and 8.7 per cent in the March- and June 2019 quarters, respectively, while export prices are projected to decline, on average by 1.4 per cent and 3.4 per cent over the same period. The Bank projects that Jamaica s TOT will, on average, continue to improve up to the December 2019 quarter, then deteriorate marginally afterwards (up to the December 2020 quarter). The improvement is primarily due to lower import prices, driven by fuel. Commodity Prices International commodity prices reflected a general decline during the review quarter. The daily average of crude oil prices (West Texas Intermediate) for the December 2018 quarter declined by 15.4 per cent, relative to the same measure for the September 2018 quarter, and by 6.2 per cent relative to the December 2017 quarter. 20 The decline in crude oil prices emanated from the market s reaction to: (i) reports of rising crude production from the major oil Average grains prices for the review quarter declined by 1.9 per cent relative to the September 2018 quarter (an increase of 2.0 per cent on an annual basis). This decline was associated with lower prices for soybean (3.8 per cent decline for the quarter, 7.9 per cent decline on an annual basis) and wheat (2.1 per cent decline for the quarter, 18.9 per cent increase on an annual basis), which was partially offset by higher prices for corn (3.1 per cent increase for the quarter, 9.4 per cent increase on an annual basis). The general decline in grain prices for the quarter reflected the impact of abundant supplies, particularly of soybeans, concerns about trade tensions which weighed on global commerce and an appreciation of the US dollar against third currencies which reduced the demand for dollar denominated commodities. 22 With regards to corn, the US President directed the Environmental Protection Agency (EPA) to begin the process of allowing the year-round sale of E15 gasoline with a higher percentage of corn-based ethanol, which will stimulate higher demand for corn. 23 The projected path for crude oil prices has been revised downward for the ensuing eight quarters ending December 2020, relative to the last forecast. 19 Aluminium is used as a proxy for alumina. Production and export of alumina are part of a larger process involved in the production and sale of aluminium. The price for metal grade alumina is derived from demand for aluminium, and therefore metal prices (mainly the 3-month London Metal Exchange (LME) price). 20 At end-december 2018, the price of crude oil on the international market was US$45.41 per barrel. The monthly average of West Texas Intermediate crude oil prices for the month of December 2018 declined by 13.6 per cent to US$48.98 per barrel relative to November the second consecutive monthly decline and the lowest level since August US, Saudi Arabia and Russia reached some of the highest levels in history in both October and November. Following reinstated sanctions on Iran and decreasing production in Venezuela, Saudi Arabia significantly increased production in the latter half of The US is the world s leading producer and exporter of corn and soybeans, and a significant exporter of wheat to areas all over the world. As with corn and soybeans, the stronger dollar has made US exports less competitive in global markets which weighed on prices. While tariffs and trade issues weighed on US wheat production, drought conditions in the European Union and Russia supported the price of the grain. 23 Most gas sold in the US is mixed with 10 per cent ethanol; E15 is mixed with 15 per cent ethanol. 13

23 In particular, oil prices are anticipated to average US$55.57 per barrel over the period, compared to an average of US$65.27 per barrel in the previous projection (see Figure 11). 24 Prices are expected to gradually trend upwards over the near to mediumterm (See Box 4: Recent Developments and Prospects for the International Oil Market below). 25 For the March 2019 and June 2019 quarters, the price of crude oil is anticipated to gradually increase given the implementation of production cuts by OPEC and its allies. 26 is a major downside risk. The view remains that any rebound in prices could encourage US oil drillers to re-enter the market. The average price of grains over the ensuing eight quarters ending December 2020 is projected to increase at an average rate of 0.4 per cent. This projection implies that the path for grains prices will remain marginally in-line with the previous forecast over the near term (see Figure 12). Figure 12: Trend in Average Grains Prices Figure 11: Trend in Average WTI Crude Oil Prices Sources: Bloomberg The risk to the near term forecast for oil prices is skewed to the upside. The market s reaction to an easing of trade restrictions among major economies could support the recovery in global trade, boost confidence and investment worldwide, hence increasing the demand for commodities. 27 Additionally OPEC and non-opec oil producers could reduce crude supplies further to support prices. However, higher than expected oil supplies from US shale production to global crude markets Sources: Bloomberg External Financial Markets The performance of GOJ sovereign bonds on the international market over the December 2018 quarter was weaker than anticipated. The spread between the indicative yields on GOJGBs and the yield on US Treasury Bills as well as the spread between the indicative yields on GOJGBs and the yield on the EMBI+ increased during the December 2018 quarter by 63 basis points (bps) and 2 bps, 24 Oil prices are anticipated to increase by 15.5 per cent for FY2018/19 to average US$62.01 per barrel, compared to an increase of 31.5 per cent in the previous projection. The downward revision of oil prices mainly reflects the growing oversupply risk in global crude markets underpinned by waivers to US sanctions on Iran which were granted to some of Iran s key markets; the US becoming the number one crude global crude producer due to significant growth of US shale plays; and both Saudi Arabia and Russia achieving record levels of production. 25 This projection is consistent with those for other major forecasters such as the EIA. Given the expectation of relatively balanced markets in 2019 and 2020, with modest inventory builds, the EIA forecasts WTI crude oil prices will average US$54.19 per barrel in 2019 and US$60.76 per barrel in On 07 December 2018, OPEC and non-opec major oil producers, including Russia, reached an agreement to reduce crude oil output by 1.2 million barrels per day (bpd) for the first six months of 2019, which is larger than the minimum 1 million bpd that the market expected. The 15-member OPEC cartel has agreed to reduce its output by 800,000 bpd, while Russia and the allied producers will contribute a 400,000 bpd reduction. Recent trade data show that OPEC crude oil exports declined by about 10.0 per cent from November to December, suggesting OPEC crude oil producers began reducing oil production ahead of the scheduled reductions in These supply reductions have contributed to the oil price increase at the beginning of January On 01 December 2018, US President Donald Trump and Chinese President Xi Jinping declared a temporary truce in their trade war for 90 days which ends 01 March Since then, there have been reports of progress made in trade relations between the US and China. In particular, there are reports that US Treasury Secretary Steven Mnuchin is discussing lifting some or all of the tariffs imposed on Chinese imports and China has put forward a plan to eliminate its trade surplus with the US. 14

24 respectively, when compared to September At December 2018, these yield spreads were 321 basis points (bps) and negative 125 bps, respectively (see Figure 13). The deterioration in the yield spreads reflected investors reduced appetite for riskier assets such as emerging market bonds given concerns about global growth and the appreciation of the US dollar. impact of the projected increase in the US Federal Funds rate and continued negative sentiments towards risky assets. Consequently, GOJ sovereign bond yield spreads are projected to remain relatively stable. Figure 14: Average International Bond Yields (Per cent) Figure 13: Average International Bond Spreads Sources: Bloomberg, Sources: Bloomberg, The deteriorating yield spreads over the quarter were reflected in respective increases of 31 bps and 29 bps in the average yields on the GOJGBs and EMBI+ and a decline of 32 bps in the average yield on US Treasuries over the period (see Figure 14). The decline in the yields on US Treasuries mainly reflected an increase in investors appetite for safe haven assets given the risk of increased trade tensions as well as concerns that emerging market economies may not have sufficient reserves to protect them from private capital outflows. 28 Jamaica s sovereign bond yields are projected to remain broadly constant over the near-term. There remains continued confidence in the Jamaican economy in the context of the country s positive performance under the SBA programme with the IMF which should put downward pressures on GOJ bond yields. In particular, there is increased investor confidence in Jamaican risk, associated with the rating upgrade by Fitch Ratings Agency. 29 However, over the near term, this effect will be offset by the Global Stock Market The performances of selected global stock market indices were weak during the December 2018 quarter. Relative to the September 2018 quarter, the Dow Jones Industrial Average (DJIA), S&P 500, the Eurofirst 300 and the FTSE 100 declined by 11.8 per cent, 14.0 per cent, 11.5 per cent and 10.4 per cent, respectively. On a yearly basis, the DJIA, S&P 500, Eurofirst 300 and FTSE 100 declined by 5.6 per cent, 6.2 per cent, 13.0 per cent and 12.5 per cent, respectively (see Figure 15). This was the worst yearly performance since the 2008 financial crisis amid persistent concerns over global trade and slowing economic growth. For the US, mounting concerns about economic growth and slower corporate earnings growth tempered equities for the review quarter. Warnings from several high profile firms particularly in information technology (IT) and most notably from Apple - also ignited fears that earnings growth may slow. The IT industry was amongst the quarter s weakest sectors, while the energy sector was 28 The concern about emerging market economies has been fueled by the continued appreciation of the US dollar against third party currencies and worries that many of these emerging market countries have accumulated significant amounts of US dollardenominated debt. 29 On 31 January, 2019 Fitch Ratings Agency upgraded the Government of Jamaica's Long-Term Foreign-Currency Issuer and Local Currency Issuer Default Rating (IDR) to 'B+' from 'B', and revised the outlook to "Stable" from "Positive". The Agency also upgraded the country ceiling to 'BB-' from 'B'. This is Jamaica's highest rating in over ten years. 15

25 negatively affected by expectations of weaker China demand which weighed on oil prices. The US-China trade dispute also continued to weigh on investor optimism. Additionally, the decline in US equities emanated from the market s reaction to the Federal Reserve s December 2018 policy statement which was perceived as slightly more dovish than the central bank s previous stance with modified language suggesting a less aggressive path of rates increases in Concerns over a US government shutdown further weighed on financial market sentiment toward the year-end. 30 Box 4: Recent Developments and Prospects for the International Oil Market On 03 October 2018, WTI crude oil prices reached a four-year high of US$76.41 per barrel as traders believed that US sanctions against Iran and outages in Venezuela would lead to supply shortages. However, the sanctions were implemented with exceptions for some of the largest buyers of Iranian oil. In this context, WTI prices declined by more than 40.0 per cent from the four-year highs set on 03 October 2018 to US$45.41 per barrel at end- December 2018 (see Figure 1). 31 European equities were negatively impacted by signs of slowing momentum in the Euro economy, continued uncertainty surrounding Britain s plan to exit the European Union as well as concerns about political turmoil in Italy over 2019 budget proposals, rising US interest rates, US-China trade tensions and slower Chinese growth. The European Central Bank confirmed the end of its bond-buying programme in December 2018 and reiterated that interest rates would remain on hold at least through the summer of Figure 15: Selected Stock Market Indices (Quarter over-quarter Per cent) Figure 1: Monthly average WTI Oil Price (US dollar per barrel) Source: Bloomberg The sharp decline in oil prices over the December 2018 quarter was due to concerns surrounding global oversupply and weakening oil demand, amid uncertainty about global economic growth. Of note, towards end-2018, the US, Russia and Saudi Arabia were producing crude at record levels, causing global supply to significantly outpace demand (see Figure 2 and 3). Figure 2: Crude Oil Production for Select Economies (MMbl/d) Source: Bloomberg Source: Bloomberg 30 The Fed s promise to take a patient approach to raising interest rates has helped to ease fears about the impact of further tightening on the economy, contributing to a rebound in the stock market. 31 Relative to October 2018, crude oil prices declined, on average, by 19.9 per cent and 30.8 per cent in November and December 2018, respectively. 16

26 Figure 3: World Liquid Fuels Production and Consumption Balance (MMbl/d) on average from 2014 to 2018, significantly below current WTI prices (see Figure 4). 33 Figure 4: WTI breakeven prices for selected US shale plays (US dollar per barrel) Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019 In response to increasing evidence that oil markets could become oversupplied in 2019, on 07 December 2018 OPEC and several non-opec countries, including Russia, announced a reduction in production of 1.2 million barrels per day (b/d) from their October 2018 production levels for six months, beginning January Against this background, this Box outlines some of the factors and risks that are likely to have an impact on future oil prices. Demand and Supply Conditions Notwithstanding the coordinated attempts to curb supplies to the market, the US Energy Information Administration s (EIA) January 2019 Short-Term Energy Outlook (STEO) estimates that excess supplies will persist for 2019 and 2020 as production declines will not be sufficient to offset increased production in the US, even while demand weakens in the context of slower output growth (see Figure 3). 32 These factors are likely to keep prices suppressed for some time. A major contributor to the projected buoyancy in global oil supplies is the response of shale gas production to oil prices. US crude production has trended higher and US exports have also increased with no significant draw down on inventories. Additionally, there is further room for shale producers to increase production without making a loss. According to Bloomberg, breakeven prices for major US shale plays have declined by 38.0 per cent Source: Bloomberg On the demand side, there are concerns about the health of the global economy due to the risks of the impact of trade tensions between US and China, political problems as well as other country-specific factors in Europe and instability in some emerging markets, including Turkey and Argentina. Outlook for Prices s assessment is that prices will gradually trend upwards and average US$54.92 per barrel in FY2019/20 and US$57.81 per barrel in FY2020/21. Prices are projected to average US$62.01 per barrel in FY2018/19 (see Figure 5). 34 Figure 5: WTI Crude Oil Price and NYMEX confidence intervals (dollars per barrel) Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January EIA assumes that US sanctions on Iranian oil exports will remain in place through the end of the forecast period. Furthermore, the current forecast reflects an expectation that reduction exemption waivers issued to eight countries to continue buying Iranian oil will not be extended past May A number of factors have been key to the successful reduction in breakeven prices, including improvements in well performance, enhanced drilling efficiencies and high grading of drilling locations. 34 This forecast is consistent with the EIA s projections that prices will average US$54.19 per barrel in 2019 and US$60.76 per barrel in

27 The futures prices at the New York Mercantile Exchange (NYMEX) suggest that market participants do not expect a significant rebound any time soon. 35 Risks There are several upside and downside risks to future oil prices. On the upside (the likelihood that oil prices will be higher than forecast), the risks include: i. Continued reiteration by OPEC and confirmation with customers that they will reduce oil deliveries in the coming months could provide more credibility to the stated production targets, supporting higher oil prices; ii. iii. iv. The non-renewal of waivers for Iranian oil customers when the current waivers expire in early May 2019; A further cut in target production levels by OPEC and non-opec members; and An easing of trade restrictions among major economies which could support the recovery in global trade, boost confidence and investment worldwide. Downside risks (the likelihood that oil prices will be lower than forecast) include: i. Higher than expected oil supplies from US shale production to global crude markets and OPEC members failure to meet production cuts; and ii. Slower economic growth in China and other large economies which could lead to reduced demand for fuel. will continue to monitor developments in the oil market and adjust its projections as these risks materialize. 35 Figure 5 shows the prices of WTI crude oil at which buyers and sellers on the New York Mercantile Exchange have agreed to buy/sell oil at a future date. These are futures contracts and reflect the expectations of market participants. The buyers and sellers have agreed now at what price to trade oil in the future. The wide confidence intervals indicate the volatility of the oil market. 18

28 3.0 Real Sector Real economic activity is estimated to have expanded in the December 2018 quarter. This growth mainly reflected an improvement in investment and net external demand, augmented by a small increase in private consumption. With regard to aggregate supply, there was estimated growth in all industries for the quarter. In particular, growth was buoyed by increased production in Mining & Quarrying, Construction and Tourism. GDP Growth and Output Gap The Jamaican economy is estimated to have grown in the range of 1.5 per cent to 2.5 per cent for the December 2018 quarter, above the 1.2 per cent recorded for the December 2017 quarter. The estimated expansion for the quarter is marginally above the Bank s previous forecast. The Bank now anticipates higher than previously projected growth in Mining, reflecting higher capacity utilization at two plants. There is, however, likely to be a decline in the production of beverages, tempering growth in the manufacturing sector as well as a lower increase in electricity production. In the context of the deceleration in the growth for the December 2018 quarter, estimates that the negative output gap for the quarter was wider than the gaps of September 2018 and December 2017 quarters, respectively. 1 Aggregate Supply All industries are estimated to have grown for the December 2018 quarter. The growth for the quarter chiefly reflected expansions in Mining & Quarrying, Agriculture, Forestry & Fishing, Construction and Transport, Storage & Communication (see Table 2). Following strong growth in the September 2018 quarter, the expansion in value added in Mining & Quarrying is estimated to have decelerated for the December 2018 quarter. Growth for the review quarter reflected increases in alumina and bauxite production (see Figure 16). The expansion in alumina production largely reflected the effect on output levels of continued strong performance by one plant. This was partly offset by lower production at the remaining plants due to operational and financial challenges. The lower growth in bauxite production and exports was due to a reduction in demand. Table 2: Industry Contribution to Growth (December 2018 Quarter) Contribution Estimated Impact on Growth GOODS to 4.5 Agriculture, Forestry & Fishing to 4.5 Mining & Quarrying to 24.5 Manufacturing to 1.5 Construction to 3.0 SERVICES to 1.5 Electricity & Water Supply to 0.5 Wholesale & Retail Trade, Repairs & Installation to 1.0 Hotels & Restaurants to 3.0 Transport Storage & Communication to 2.0 Financing & Insurance Services to 2.0 Real Estate, Renting & Business Activities to 1.5 Producers of Government Services to 0.5 Other Services to 1.5 Financial Intermediation Services Indirectly Measured to 2.0 TOTAL GDP to 2.5 Source: 1 The output gap is the difference between real GDP and potential output. 19

29 Construction is estimated to have expanded for the review quarter. This performance was largely driven by the continued expansion and upgrade of road infrastructure. Growth in the sector was also supported by an increase in residential construction, attributed to a rise in housing starts by the National Housing Trust (see Figure 18). Figure 17: Growth in Visitor Days (12-Month Per cent change) The estimated increase in Transport, Storage & Communication for the December 2018 quarter is mainly attributed to an expansion in the number of air and cruise passenger arrivals into Jamaica. Additionally, there was an expansion in domestic cargo movement at the ports. Figure 16: Trends in Crude Bauxite, Alumina & Total Bauxite Production (12-Month Per cent Change) Source: The Jamiaca Tourist Board The estimated expansion in value added for Agriculture, Forestry & Fishing largely reflected growth in domestic crop production while traditional export crops remained unchanged. In addition, animal farming is estimated to have grown given reported increases in poultry meat and egg production. The estimate for traditional export crops largely reflects a fall in overseas demand for coffee and the lingering effects of the cocoa frosty pod disease. The impact of these declines was partly offset by increased production of plantains and bananas. Source: Jamaica Bauxite Institute Manufacturing is estimated to have grown for the review quarter. This expansion largely reflected growth in Food, Beverages & Tobacco which was mainly associated with an increase in food processing (excluding sugar). The effect of this was partly offset by a decline in the production of beverages. Anecdotal information suggests that the decline in beverages reflects lower external demand as well as a reduction in production to facilitate an upgrade to a beverage plant. For Other Manufacturing, an increase is estimated consequent on improved production at the domestic oil refinery for the quarter. Electricity & Water Supply is estimated to have increased marginally in the review quarter. This growth reflected weak increases in both electricity consumption (proxied by total electricity sales) and water production during the period. Growth in water production was tempered by frequent lock-offs to deal with the discovery of leaks as well as the adverse impact of road rehabilitation works. Both tradable and non-tradable industries are estimated to have expanded with the tradable sector estimated to have registered a faster pace of growth when compared with the non-tradable sector. Growth in the tradable sector was mainly attributed to Agriculture, Forestry & Fishing, Hotels & Restaurants and Mining & Quarrying while growth in the non-tradable sector was associated with Construction, Finance & Insurance Services and Real Estate, Renting & Business Activities. 20

30 Figure 18: National Housing Trust Housing Starts & Completion (12-Month Per cent change) Source: The National Housing Trust Aggregate Demand From the perspective of aggregate demand, there were also indications of a deceleration in growth in the December 2018 quarter, relative to the previous quarter. This deceleration mainly reflected a moderation in the growth in net external demand due largely to slower growth in exports, partly offset by a smaller increase in imports, relative to the previous quarter (see Balance of Payments). In contrast, investment is estimated to increase relative to the decline in the previous quarter. Additionally, a larger expansion in private consumption is anticipated. Growth in investment spending improved during the December 2018 quarter. This improvement largely reflected the continuation of the government s programme of road rehabilitation. In this context, GOJ s capital expenditure increased by 21.2 per cent for the quarter relative to 16.3 per cent for the preceding quarter. In addition, private domestic investment increased during the quarter given a stream of private sector projects which materialized. 2 In contrast, there was an estimated decline of 25.4 per cent in real FDI, following a reduction of 26.9 per cent in the previous quarter. 3 Labour Market Developments Jamaica s unemployment rate (UR) at October 2018 fell to 8.7 per cent, 1.7 percentage points (pps) below the rate at October The fall in the UR reflected growth of 1.2 per cent (12, 900) in the employed labour force, combined with a decline of 0.8 per cent (10,700) in the labour force. In this context, the number of unemployed persons declined by 17.8 per cent, while the labour force participation rate fell by 0.6 pps to 63.8 per cent. projects that labour market conditions will improve further over the next eight quarters. In this regard, the average unemployment rate is expected to decline to 8.0 per cent over the March 2019 to December 2020 quarters, relative to the 9.1 per cent over the past year. The total labour force and the employed labour force are projected to increase (year over year) by averages of 0.5 per cent and 1.5 per cent per quarter. The growth in employment is expected to provide a fillip for wage increases, which may lay the basis for higher inflation in the future. The anticipated continued moderation in the unemployment rate over the medium term remains broadly in line with the previous projection. The expected improvement reflects employment growth in Mining & Quarrying, Manufacturing, Finance & Insurance and business process outsourcing. Outlook In the context of the forecast, GDP is projected to track upwards towards potential output over the forecast horizon. The path for the output gap is well below the previous forecast. The output gap is expected to narrow but excess capacity conditions are anticipated over the next eight quarters. This suggests that, inflationary pressures are expected to remain contained over the period. 2 It is anticipated that construction of houses at Phoenix Park, St. Catherine and in Montego Bay by a major developer continued in the quarter as well as the building of two LNG plants by Seprod. 3 The decline in FDI largely reflected the reduction in spending on Tourism projects which is partly offset by increased expenditure on mining/energy and infrastructure activities. 21

31 The projected growth in the economy is largely reflective of moderate foreign demand (see International Economy). However, fiscal consolidation is expected to continue to restrain domestic demand, while the outlook for monetary conditions is judged to be generally accommodative over the forecast horizon (see Monetary Conditions). Over the forecast horizon ending September 2020, the forecast of aggregate expenditure suggests that GDP may be lower than that projected by aggregate supply and as such the risks are skewed to the downside. The projected growth largely reflects continued expansion in net external demand, supported by marginal increases in consumption spending. There is a risk that consumption spending will falter, given early signs of weakness in consumer goods imports. In addition, investment is projected to decline, particularly in FY2019/20 as there are no clear signs of a vibrant investment pipeline and the public bodies are, over time, projected to scale back their capital expenditure. The projected closure of the output gap in 2020 suggests that, although underlying inflation in Jamaica remains relatively contained in the near term, moderate inflationary pressures from demand conditions are anticipated in the medium term. 22

32 4.0 Fiscal Accounts For the December 2018 quarter, Central Government s operations recorded a fiscal surplus of $9.8 billion (0.5 per cent of GDP), relative to a fiscal surplus of $7.8 billion (0.4 per cent of GDP) for the December 2017 quarter. Accordingly, for the fiscal year-to-december 2018, Central Government s operations resulted in a fiscal surplus of $19.2 billion (0.9 per cent of GDP) which was above the surplus of $1.3 billion (0.1 per cent of GDP) for the same period of the previous fiscal year. The primary surplus for the FY-to-December 2018 was $107.7 billion (5.3 per cent of GDP), $11.1 billion (0.5 per cent of GDP) above the outturn for the previous fiscal year. The GOJ continues to be committed to maintaining its primary surplus and public sector overall balance targets under the SBA. In this context, any slippages in the fiscal accounts will be offset by expenditure containment and/or improved revenues. Recent Developments For the December 2018 quarter, Central Government s operations recorded a surplus of $9.8 billion (0.5 per cent of GDP), relative to a surplus of $7.8 billion (0.4 per cent of GDP) for the December 2017 quarter. Similarly, for the fiscal year-to- December 2018, Central Government s operations recorded a surplus of $19.2 billion (0.9 per cent of GDP), compared to the surplus of $1.3 billion (0.1 per cent of GDP) for the same period in the previous fiscal year. The primary surplus for the fiscal year to December was $107.7 billion (5.3 per cent of GDP), which was $11.1 billion (0.5 per cent of GDP) above that for the previous fiscal year. The fiscal outturn for the quarter reflected a faster pace of growth in revenues & grants, which outweighed the increase in expenditure, relative to the December 2017 quarter. The performance of Revenues & Grants for the December 2018 quarter was attributed to higher tax and non-tax receipts, relative to the December 2017 quarter. Grants were relatively consistent with the flows in the similar period of The growth in tax revenues was mainly attributable to greater receipts from income & profit, production & consumption and international trade. 1 Higher spending during the December 2018 quarter was evident in all areas of expenditure, with the exception of interest payment. Additional spending on programmes for the review quarter emanated, in part, from payment of pension, back pay and allowances as well as spending on road maintenance. Higher compensation of employees was attributable to the settlement of some public sector wage agreement for FY2017/18 FY2020/21. The increase outlay on capital was due to additional allocation for the road construction projects under the Major Infrastructure Development Programme. For the December 2018 quarter, the financing requirement for Central Government was $7.0 billion (0.3 per cent of GDP) reflecting the fiscal surplus 1 Income & profits benefited from greater revenue from PAYE, corporate income tax (CIT) and tax on interest. Greater revenue from PAYE was associated with higher employment levels, while the performance of CIT was attributable to improvements in tax compliance. Higher tax on interest was related to lower refunds during the period. Production & consumption receipts were facilitated, in part, by GCT (local), education tax and betting gaming and lottery. The improvement in GCT (local) and betting gaming and lottery was due to greater tax compliance while education tax benefited from greater employment levels. International trade receipts were supported by greater revenue from GCT (imports), customs duty and travel tax. The improvement was driven, in part, by greater imports of motor vehicles, cellular phones, and building cement as well as more visitor arrivals to the Island. 23

33 noted above and amortization of $16.8 billion (0.8 per cent of GDP). In addition, Central Government made a payment of $4.7 billion (0.2 per cent of GDP) to BOJ for operating losses incurred in previous years. The Government also extended a loan of $0.3 billion (0.01 per cent of GDP) to the Port Authority of Jamaica. These expenses were financed, in part, by domestic and external loan receipts of $16.0 billion (0.8 per cent of GDP) and $13.3 billion (0.7 per cent of GDP), respectively. For domestic loans, two benchmark investment notes (BINs) amounting to $5.7 billion (0.3 per cent of GDP) were issued during the quarter while $4.7 billion (0.2 per cent of GDP) was issued directly to BOJ. Treasury bills issuances amounted to $5.6 billion (0.3 per cent of GDP). External loan receipts included US$30.5 million (0.5 per cent of GDP) and US$9.6 million (0.1 per cent of GDP) from bi-lateral and multi-lateral agencies for investment projects, respectively. Against this background, Central Government build-up $17.4 billion (0.9 per cent of GDP) in bank balances. Domestic amortization during the review period included Treasury bills payments of $5.3 billion (0.3 per cent of GDP). External amortization included payments of US$49.1 million (0.3 per cent of GDP), US$16.4 million (0.1 per cent of GDP) and US$11.6 million (0.1 per cent of GDP) to multi-lateral lending agencies, commercial banks and bi-lateral lending agencies, respectively. Table 3: Summary of Fiscal Operations (per cent of GDP) Quarters Dec-18 Dec-17 Diff Revenue & Grants o/w Tax Revenue Non- Tax Revenue Grants (0.0) Expenditure Programmes Compensation of Employees Interest Payment (0.2) Capital Expenditure Fiscal Surplus/Deficit Primary Balance (0.1) Current Balance Total Financing External Loans Domestic Loans Other Inflows Other Outflows Amortisation (0.2) External (0.0) Domestic (0.2) Overall Balance Source: Ministry of Finance & the Public Service Near-term Outlook Central Government is expected to continue its policy of fiscal consolidation over the near-term as well as maintain its commitment to a primary surplus and public sector overall balance targets as indicated under the SBA. 24

34 5.0 Balance of Payments The most recent data (September 2018 quarter) indicate that the current account deficit (CAD) recorded an improvement, in contrast to the projected deterioration. The CAD is now projected to improve, relative to the previous forecast, by an average of US$71.9 million per quarter between the December 2018 and September 2020 quarters. This improvement is underpinned by an upward revision to the Goods and Services balance, partially offset by a slight decline in Income and Current Transfers. Given the path for the balance of payments, the CAD is assessed to be broadly sustainable. Recent Developments The current account deficit (CAD) of Jamaica s balance of payments for the September 2018 quarter amounted to US$199.1 million (1.3 per cent of GDP), US$143.0 million lower than projected. 1 The variance in the CAD was underpinned by a better than expected outturn for all sub-accounts, mainly the goods balance (US$58.9 million) and income account (US$42.9 million). Imports (c.i.f.) were US$64.7 million below projections due to lower than expected fuel (US$63.7 million) and raw materials (US$41.6 million). Capital and consumer goods imports were, however, US$33.0 million and US$2.1 million higher than projected, respectively. Imports (f.o.b.) increased by 7.6 per cent for the September 2018 quarter relative to the corresponding period of 2017, reflecting growth in all categories of imports. Strong growth of 23.4 per cent was recorded for capital goods imports. Tourism inflows continued to improve as average daily expenditure was higher than expected, partly offset by shorter average length of stay of visitors. Within the Financial Account, Foreign Direct Investment (FDI) inflows were US$8.0 million lower than projected. compares favourably to respective norms of 4.5 per cent of GDP and 4.8 per cent of GDP for the macroeconomic balance and external sustainability approaches (see Figure 19 and Appendix 1). 1 Importantly, the CA, after accounting for FDIrelated imports, reflects surpluses of 1.6 and 1.5 per cent for FY2019/20 and FY2020/21, respectively (see Figure 20). Figure 19: Current Account Sustainability Measures Due to the expected improvement in the current account balance, the projected deficit for FY2020/21 is assessed to be broadly sustainable. The projected CAD of 2.2 per cent of GDP 1 For FY2016/17 and FY2017/18 Jamaica s current account of the Balance of Payments (BOP) recorded deficits of 1.2 and 3.0 per cent of GDP. These were 1.4 and 2.0 percentage points lower than the previous estimates in November The revised estimates were primarily underpinned by a downward adjustment to imports reflecting revised STATIN data for CYs2016 and The external sustainability measure, which is at the top of the range, is highly volatile. 25

35 Figure 20: Current Account less FDI (% of GDP) The CAD (as a per cent of GDP) is projected to improve significantly over the medium-term, relative to the previous forecast. The CAD is projected to average 2.5 per cent of GDP between FY2019/20 and FY2020/21, relative to the previous forecast of 4.1 per cent of GDP (see Figure 21) primarily due to imports being revised down. Figure 21: Medium-Term CAD Forecast (% GDP) 26

36 6.0 Monetary Policy & Market Operations BOJ reduced its signal rate to 1.75 per cent during the December 2018 quarter. This reduction reflected the Bank s assessment that inflation could fall below the lower limit of the 4.0 per cent to 6.0 per cent target in the first half of FY2019/20. In order to ensure the orderly functioning of the foreign exchange market during the December 2018 quarter, BOJ sold approximately US$30.00 million and bought US$10.9 via the B-FXITT standard intervention tool (SIT). Continued strong fiscal performance contributed to liquidity absorption during the December 2018 quarter, the effects of which was partly offset by BOJ s accommodative policy stance. This was evidenced by greater use of the Bank s SLF and lower interest in BOJ 30-day CD auctions. Going forward, liquidity conditions in the financial markets are expected to ease, which represents a downside risk to either interest rates in the money market or, if conditions allow, the exchange rate. BOJ reduced its signal rate by 25 bps to 1.75 per cent on 20 December Notwithstanding the fall in the signal rate, tight liquidity conditions prompted market-based rates to rise for the December 2018 quarter. Also indicative of the tightened liquidity conditions, the average placement on BOJ Overnight (O/N) deposits fell to $48.2 billion over the December 2018 quarter, compared to $76.0 billion for the preceding quarter conducted 13 auctions of 30-day CDs during the review quarter. The average offer size during the December quarter was $7.9 billion, slightly below the average of $8.0 billion during the September 2018 quarter. On average, the auctions were oversubscribed by 96.4 per cent, relative to oversubscriptions of per cent in the September 2018 quarter. The average yield on the 30-day CDs for the review quarter was 1.96 per cent, 22 bps above the average for the September quarter. BOJ continued to offer its weekly 14-day repo via competitive auctions during the review quarter. During the December 2018 quarter, liquidity provided via this facility totalled $28.5 billion relative to none in the September 2018 quarter. A total of 13 auctions were held during the review period of which 7 receive bids and reflected an average rate of 3.5 per cent. Additionally, the generally tight liquidity conditions in the money market resulted in selected institutions accessing liquidity via the Bank s standing liquidity facility (SLF). Strong foreign currency demand during the December 2018 quarter necessitated BOJ s foreign currency sales of US$30.0 million via its B-FXITT standard intervention tool (SIT) in order to maintain orderly functioning of the foreign exchange market and to moderate the volatility in the exchange rate. The BOJ also bought US$10.9 million during the quarter. This occurred in the context of maturing USD CDs of US$54.0 million and swap of USD CDs of US$30.0 million for USD Indexed Note. The Bank also opted not to issue new US dollar CDs during the December 2018 quarter (see Table 4). In an initiative to widen the choice of liquid instruments available to the market, the BOJ between 29 November 2018 and 05 December 2018, offered to the market US$10.0 million of BOJ 9-month fixed rate USD Indexed Note in exchange for an equivalent amount of BOJ USD CDs. Subsequent demand for the instrument resulted in a total of US$30.0mn being accepted. This 9-month instrument, which immediately qualified as a liquid asset, simultaneously reduced the Bank s USD CD liabilities by US$30.0 million. 27

37 Table 4: Placements & Maturities of BOJ USD Instruments July September 2018 October December 2018 Placements Maturities Average Placements Maturities Average (US$MN) (US$MN) Rate (%) (US$MN) (US$MN) Rate (%) 2-year year year year year TOTAL Source: Liquidity Conditions There was net liquidity absorption of $4.8 billion from the financial system for the December 2018 quarter, stronger than the forecasted absorption of $1.7 billion in the November 2018 MPA forecast. In the December 2018 quarter, GOJ operations net absorbed $31.6 billion ($12.6 billion above projections), mainly due to higher than expected tax receipts. Also, seasonal currency issue and other operations contributed to net absorption of $29.3 billion ($10.8 billion stronger than anticipated). Furthermore, liquidity injection of $8.6 billion from BOJ s FX operations was $7.8 billion weaker than anticipated during the December 2018 quarter. In this context, there was net unwinding of OMO liabilities of $38.2 billion ($19.2 billion above projection), supported by an unanticipated injection of $9.2 billion from REPO issues. Table 5: BOJ Liquidity Facility (J$ Billions) Jun-18 Sep-18 Dec-18 Qtr. Qtr. Qtr. BOJ Repo Day OTROs Other OMOs (Other) O/N CDs * FR CDs VR CDs USD Indexed Notes BOJ FX (incl. PSE) Foreign Currency Purchases Foreign Currency Sales BOJ (Other) Net BOJ Operations (Inject/Absorb) GOJ Operations Net Total Operations (Inject/Absorb) Notes: (+) = Inject; (-) = Absorb Notes: (+) = Inject; (-) = Absorb Source: 28

38 7.0 Financial Markets There was a general increase in money market rates during the December 2018 quarter, which occurred in the context of liquidity tightening, notwithstanding the Bank s decision to reduce its policy rate. The estimated yield curve on GOJ domestic JMD bonds in December 2018 was generally unchanged relative to the yield curve at end September Sovereign risk increased while exchange rate risk premiums fell over the review period. Market Interest Rates There was a general increase in money market rates during the December 2018 quarter relative to the preceding quarter, which occurred in the context of tight liquidity conditions. With the exception of the overnight (O/N) interbank rate, which declined by 3 bps, the (O/N) private money market rates (PMMR) and 30-day PMMR increased by 77 bps and 96 bps, respectively. When compared to the September 2018 Treasury Bill auction, yields at end-december 2018 on the 90-day and 180-day T-Bills increased by 34 bps and 20 bps, respectively, while the yield on the 270-day T-Bill declined by 12 bps (see Figure 22). Exchange Rate Developments The exchange rate appreciated during the review quarter, relative to the previous quarter. The weighted average selling rate of the Jamaica Dollar vis-á-vis the US dollar (WASR) closed the December 2018 quarter at J$ = US$1.00, reflecting an appreciation of 5.2 per cent relative to the depreciation of 3.3 per cent for the previous quarter and appreciation of 3.8 per cent end- December Figure 23: Movements in WASR Figure 22: Money Market Rates (Nominal) BOJ SLF Rate BOJ 30- day CD BOJ O/N CD O/N PMMR + O/N Int. Bank day PMMR day T-Bill 180- day T-Bill 270- day T-Bill Dec Mar Jun Aug Sep Dec Source: Notes: (i) PMMR is the private money market rate (ii) O/N is the overnight rate in the market accessible by all financial institutions while the interbank rate (I/B) is the overnight rate accessible only by banks. + Reflects average rate for the month. * Rates represent month-to-date The appreciation during the December 2018 quarter was mainly related to increased USD supply from earners. In addition, USD supplies were augmented through B-FXITT intervention which amounted to US$30 million for the quarter, the majority of which was brokered in the first month. Equities Market For the December 2018 quarter, three of the five Jamaica Stock Exchange (JSE) indices recorded increases ranging from 4.9 per cent to 6.0 per cent. Specifically, the JSE Main Index increased by 6.0 per cent compared to the 17.2 per cent the previous 29

39 quarter. 1 In contrast, the Junior Market Index recorded a decline of 4.4 per cent relative to growth of11.8 per cent for the September 2018 quarter (see Figure 23). 2 This outturn compares to three consecutive quarters of growth of all five indices. The annual performance of the stock market for the calendar year 2018, reflected positive growth for all five indices. In particular the JSE Main Market and Junior Market Indices, recorded growth of 31.7 and 18.8 per cent, respectively. Figure 23: Quarterly Growth of the JSE Indices (Per cent Change) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec JSE Main Index Junior Market All JA JSE Combined Index Select Per cent recorded an average quarterly return of 14.3 per cent, while the foreign currency investments recorded a negative quarterly average return of 4.4 per cent for the review period. This negative return was due to a 5.8 per cent appreciation in the Jamaica dollar for the December 2018 quarter. Of note, the average quarterly return on the 30-day private money market repo remained at 0.5 per cent during the review period, relative to the previous quarter (see Figure 24). There was a general improvement in market activity indicators for the review quarter. Notably, there was a 6.8 per cent increase in the volume of stocks traded for the December 2018 quarter, relative to an increase of 4.4 per cent at the end of the September 2018 quarter. The value of stocks traded and the number of transactions recorded for the December 2018 quarter increased by 70.4 per cent and 22.7 per cent, respectively, relative to the previous quarter (see Figure 25). December Figure 24: Returns from Private Money Market, GOJ Global Bonds and Capital Gains/ (Losses) from JSE Main Index (Per cent) Source: Jamaica Stock Exchange The performance of the equities market partly reflected sustained positive macroeconomic developments. These developments include low and stable inflation, accommodative monetary policy as well as improved consumer confidence. Furthermore, the oversubscription of several initial public offers (IPOs) indicated that investor confidence in the equities market remained positive throughout the review quarter. 3 Average quarterly returns on equities continued to be higher than those on foreign currency and domestic money market.4 Specifically, equities Source: Jamaica Stock Exchange and Bloomberg 1 Market capitalization of the JSE Main Index as at end-december 2018 was $1, billion, a 6.7 per cent increase over the previous quarter. 2 Market capitalization of the Junior Market Index as at end- December 2018 was $1, billion, a 5.5 per cent increase relative to the previous quarter. 3 Throughout the review period there were four IPOs and one SPO. Fontana Ltd and Eppley Ltd offered ordinary and preference shares respectively, on the junior market. Meanwhile, Equityline Mortgage Inv. Corp and MPC Caribbean Clean Energy Ltd listed preference and ordinary shares respectively, on the main market. Facey Group Limited engaged in a SPO of ordinary Seprod shares, 4 The return on equities is computed as the change in in the quarterly average value of the JSE Main Index. The return on foreign currency investments is computed as the sum of quarterly foreign currency gains (losses) and the average quarterly returns on GOJ global bonds. 30

40 Figure 25: Quarterly Change in the Monthly Volumes, Values Traded & Number of Transactions (Main JSE Index) (Per cent) Source: Jamaica Stock Exchange Table 6: Stock Price Appreciation Advancing Per cent Financial Barita Investments Limited Jamaica Stock Exchange 25.9 National Commercial Bank Jamaica 19.8 Mayberry Investments Limited Investments Limited 5.5 Manufacturing Salada Foods Jamaica 84.2 Wisynco Group Ltd 19.6 Conglomerates Pan Jamaican Investment Trust 24.9 GraceKennedy Limited 6.7 Other Pulse Investments 8.7 The advance to decline ratio was 16:13 for the December 2018 quarter relative to 20:11 for the previous quarter. During the review period, the number of stocks that traded firm increased to three relative to a single stock in the preceding quarter. As it relates to stock price appreciation, the Financial and Manufacturing categories dominated the list of top ten advancing stocks, accounting for average price appreciation of 12.6 per cent and 9.8 per cent, respectively, for the review quarter (see Tables 6 and 7). Table 7: Stock Price Depreciation Declining Per cent Financial Sterling Investments Limited Sygnus Credit Investments Limited Scotia Group Jamaica -7.4 Manufacturing Seprod Limited Caribbean Cement Company Berger Paints (Jamaica) -1.3 Conglomerates Jamaica Producers Group Sagicor Group Jamaica -3.5 Other 138 Student Living Jamaica Limited -7.9 Communication Radio Jamaica The SIL price depreciation is largely due to a 5:1 stock split initiated on November 27,

41 8.0 Monetary Aggregates The monetary aggregates (monetary base and broad money) in the December 2018 quarter grew faster than anticipated. However, the growth in private sector credit fell below previous projections. Over the ensuing eight quarters, the projected growth in the monetary aggregates was revised downwards, consistent with the revised forecast for nominal GDP growth. Monetary conditions are projected to remain accommodative over the next eight quarters. Money There was growth of 17.6 per cent in the monetary base at end-december 2018, above the 14.6 per cent at end-september 2018 but below the 22.5 per cent recorded at end-december The outturn for December 2018 was also slightly higher than the previously projected growth of 17.1 per cent. Broad money supply (M2J) expanded by 14.5 per cent at end-december 2018, below the 16.7 per cent and 29.1 per cent recorded at end-september 2018 and December 2017, respectively. The outturn for December 2018 was, however, broadly in line with the previous projection of 14.6 per cent, given the estimated deceleration in economic activity over the period. Growth in private sector credit of 13.7 per cent at end-december 2018 was below the 16.2 per cent and 38.0 per cent recorded at end-september 2018 and December 2017, respectively. The outturn for December 2018 was below the previously projected expansion of 16.2 per cent. Regarding the sources of change in the monetary base as at December 2018, there was a decline of 6.3 per cent in s net international reserves (NIR), the impact of which was partly offset by an increase of 23.7 per cent in net domestic assets (NDA) (see Table 10). The reduction in the NIR was associated with Government of Jamaica debt payments and other GOJ payments. These outflows were slightly offset by purchases from authorized dealers and B-FXITT purchases amounting to U$10.85 million for December An unwinding of the stock of OMO liabilities contributed to the increase in the NDA. The expansion in M2J was underpinned by growth of 14.7 per cent in local currency deposits, a moderation relative to the 35.5 per cent recorded at end-december 2017 which was reflected in all categories of deposits. Relative to GDP, broad money supply is estimated at 26.1 per cent at December 2018, compared with 24.1 per cent at December The measure of broad money supply that includes foreign currency deposits (M2*) recorded annual growth at December 2018 of 13.9 per cent, a moderation relative to 22.9 per cent in the previous year. This deceleration primarily reflected the aforementioned decline in the rate of increase in local currency deposits as foreign currency moderated slightly to 13.0 per cent from 13.3 per cent a year earlier. Resulting from the slower growth in foreign currency deposits, coupled with a faster pace of deceleration in total deposits, the private sector deposit dollarization ratio for commercial banks trended slightly downwards to 41.4 per cent as at December 2018 from 41.8 per cent as at December The private sector deposit dollarization ratio for commercial banks trended downwards to 41.4 per cent as at December 2018 from 41.8 per cent as at December

42 Table 8: Balance Sheet Stock (J$MN) Flow (%) Qtr. o- Dec-17 Sep-18 Dec-18 Y-o-Y Qtr. NIR (US$MN) 3, , , NIR(J$MN) 409, , , Assets 482, , , Liabilities (73,082.5) (69,158.4) (67,182.5) Net Domestic Assets (236,990.1) (208,752.4) (180,852.6) - Net Claims on , , ,082.6 Public Sector (65,665.8) (63,233.2) Net Credit to Banks (63,635.0) - Open Market (93,493.0) (117,584.7) (73,962.1) Operations (205,252.7) (192,657.9) (180,740.0) Other o/w USD FR CDs (85,871.5) (70,255.3) (67,549.5) 172, , , Monetary Base - Currency Issue 110, , , Cash Reserve 60, , , Current Account , Source: Table 9: Components of Money Supply (M2*) Percentage Change (%) Sep-17 Dec-17 Jun-18 Sep-18 Sep-18 Dec-18 Total Money Supply (M2*) Money Supply (M2J) Money Supply (M1J) Currency with the public Demand Deposits Quasi Money Savings Deposits Time Deposits Foreign Currency Deposits Source: Private Sector Credit Accommodative monetary conditions as well as increased competition in the market for loanable funds continued to support growth in overall financing in Jamaica. Financing of the non-financial private sector (including domestic and foreign currency denominated loans) by deposit taking institutions (DTIs) and corporate bond issues expanded by 20.6 per cent at September This represented an acceleration when compared to the growth of 14.0 per cent at September Relative to GDP, the stock of private sector financing at September 2018 was 43.6 per cent compared with 38.6 per cent a year earlier. Private sector financing by DTIs increased by 16.2 per cent at September 2018, an acceleration when compared to the growth of 12.5 per cent at September Relative to GDP, the total stock of DTIs sector credit to the private sector at September 2018 was 35.0 per cent compared with 32.2 per cent a year earlier. Growth in corporate bond issues by businesses (CS-B) accelerated to 42.5 per cent as at September 2018, from 22.3 per cent at September New local currency denominated issues to Non-Financial businesses expanded by per cent ($13.6 billion) at the September This growth follows decline of 88.7 percent ($3.4 billion) September New foreign currency denominated issues by businesses declined by 86.5 per cent (US$2.5 million) at September Table 10: Select Private Sector Financing Indicators 12-month % Change in Stock Sep-17 Jun-18 Sep-18 Total DTI + CS-B Total DTI o.w. to Businesses o.w. to Consumers CS-B Stock as a % of Annual GDP Total DTI + CS-B Total DTI o.w. to Businesses o.w. to Consumers CS-B Source: More updated data for the DTIs indicate that credit extended by deposit-taking institutions to private sector businesses and individuals grew at an annual rate of 13.2 per cent at December 2018, compared to 14.0 per cent at December 2017 and 16.2 per cent at September This deceleration in credit growth relative to September 2018 reflected a slowdown in growth in business loans to 10.2 per cent from 17.1 per cent in the previous quarter. Annual growth in personal loans was relatively flat at 15.5 per cent at end-december relative to 15.6 per cent at September Relative to GDP, the stock of private sector financing by DTIs at December 2018 was 35.2 per cent compared with 33.0 per cent a year earlier. 33

43 Box 5: Quarterly Credit Conditions Survey Overview Overall credit conditions eased during the September 2018 quarter, relative to the previous quarter. Easing was evident in both secured and unsecured lending (see Figure 1a and 1b). Figure 1a: Index of Credit Market Conditions decline in credit supply to individuals relative to the previous quarter, the effect of which was dampened by an increase in the growth in credit supply to businesses. The growth in the supply of local currency credit made available moderated marginally. The growth mainly reflected an increase in credit made available by lenders to the Tourism and Distribution sectors. In relation to foreign currency loans, there was marginal growth in credit supply, mainly reflected in the Entertainment, Tourism and Distribution sectors. Figure 2: Components of Credit Supply Figure 1b: Index of Credit Market Conditions for Secured and Unsecured Loans 1. *Expectations for the upcoming quarter from the current survey. 2. Indices greater than 100 indicate an increase while indices less than 100 indicate a decline. Lenders reported that they expected credit conditions to tighten in the December 2018 quarter. This outlook primarily reflected the expectation for tighter terms for secured loans, stemming from more collateral requirements and declines in size of credit lines. Credit Supply Growth in credit availability, as measured by the Credit Supply Index (CSI), moderated when compared to the previous quarter (see Figure 2). The CSI moderated to from and reflected a The allocation of credit between businesses and personal loans remained largely unchanged relative to the previous quarter, with businesses accounting for the majority. Regarding credit distribution to businesses, credit to medium-sized businesses continued to account for the lion s share of lenders business portfolio, with the proportion being slightly more than that which was obtained in the previous quarter. In this context, the proportion of credit allocated to micro firms declined to 5.2 per cent from 5.4 per cent during the previous period. There was also a decline in the proportion of credit made available to large firms to 34.4 per cent from 36.7 per cent. The proportion of credit allocated to largesized businesses declined while credit allocated to small businesses increased to 8.3 per cent from 7.7 per cent in the previous quarter (see Figure 3a and 34

44 3b). These changes for the September 2018 survey are in part due to ongoing adjustments being made by credit providers to be in line with the national definition for business sizes Figure 3a: Distribution of Private Sector Credit 2 contraction stemmed from reduced demand for both personal and business loans. For personal loans, lenders reported that the decline was evident in the demand for credit cards, debt consolidation loans and other secured loans. The decline in demand in the review quarter was reflected in declined demand for both local and foreign currency loans. The fall in demand for local currency loans was mostly evident in the Tourism, Manufacturing, Construction & Land Development and Distribution sectors. The fall in foreign currency loan demand stemmed from the Distribution sector. The overall fall in local and foreign currency credit demand reflected a decline in the demand for credit by micro and small businesses. Figure 4: Components of Credit Demand Figure 3b: Distribution of Private Sector Credit by Business Size 3 For the December 2018 quarter, lenders reported that they plan to increase the amount of credit made available to both businesses and individuals Credit Demand Credit demand, as measured by the Credit Demand Index (CDI) for the September 2018 quarter, declined relative to the June 2018 quarter (see Figure 4). As such, the CDI for the quarter was 95.2 down from in the previous quarter. This 1. Indices greater than 100 indicate an increase while indices less than 100 indicate a decline. 2. The asterisk (*) represents expectations provided by the respondents. For the December 2018 quarter, lenders indicated that they are anticipating growth in the demand for credit from both individuals and businesses, particularly individuals. Changes in business activities and loan promotion activities were cited as the main drivers. 2 Figure 3 shows the distribution of credit between households and businesses. Credit to businesses is further disaggregated to show total business loans distributed to firms of various sizes. 3 Figure 3 shows the distribution of credit between households and businesses. Credit to businesses is further disaggregated to show total business loans distributed to firms of various sizes. 35