Helpful side effects of US downgrade
Published:Friday | August 19, 2011 | 12:00 AM
In last week's column, I had argued that along with the bad news of the downturn in the US economy there were some mitigating effects for Jamaican consumers and businesses from the accompanying reduction in oil prices.
This reduction has come about as oil traders have acted on the assumption that in a weak economy demand for oil will fall.
Already, Jamaican motorists got a $4.10 per litre relief in gasolene prices last week, and although prices have gone back up by a dollar this week, we can expect some ease in the short term.
Jamaica Public Service Company customers should also see some moderation in the energy charge in their August electricity bills. This is not to say that light bills are not going to be a continuing source of cost-of-living pressure.
There is every indication that the volatility we have seen in oil markets is not going away and Jamaica's almost total dependence on oil makes us particularly vulnerable. Further, we are profligate in our use of energy and, despite the various oil price shocks, have refused to take energy conservation seriously.
Another helpful side effect of the setback for the US economy is that it has prompted the Federal Reserve to take the unprecedented step of promising to hold short-term interest rates near to zero until mid-2013. This move is meant to spur investment by reducing the cost of borrowing. Global interest rates will remain low in the period ahead, given that interest rates internationally are benchmarked against US rates and because US monetary policy is a major influence on financial markets around the world. London's financial market, where rates are also at historic lows, acts as benchmark as well.
The possible benefit to countries such as Jamaica is that investment projects can become more attractive as investors reduce their target rates of return or hurdle rates.
But we have to be aggressive in seeking out local and foreign investors, and more efficient in facilitating development approvals in order to meet the competition from other countries.
This is unlikely to happen if the private/public sector is not coordinated in terms of identifying and packaging project proposals and maintaining a pipeline of such proposals.
One obvious area is energy. Jamaica's electricity-generation system needs major capital investment to replace power plants that in some cases are over 40 years old and, therefore, highly inefficient and costly. We must also diversify our fuel source.
The investment will be geared to meeting existing demand in a relatively stable, domestic market. With record low interest rates and moderate construction costs, this should be doable.
New investment in energy must also include the bauxite industry, which will have to switch from oil to more competitive fuel sources if it is to rebound. Separately, our banks should be stepping up with attractive financing arrangements for businesses seeking to retrofit their energy systems.
Other examples include port development; and information communication technology where we are hardly scratching the surface because of limited office space among other constraints.
Also important is the stabilising influence that relaxed US monetary policies are having on Jamaica's interest rate environment and, in turn, on the foreign-exchange market as, other things being equal, there is currently no incentive for investors to move money overseas.
The fact that the US Federal Reserve has telegraphed its commitment to keep rates at rock bottom for at least another two years provides ample time for policymakers, financiers and businesses to get investment going.
Should we miss this opportunity, we would have suffered all the downsides of the weak global economy without taking advantage of the opportunities, such as low interest rates, that it has brought.