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Saturday, January 31 2015 @ 10:34 AM AST


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Trinidad & Tobago's external account to weaken thanks to low oil prices, production

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Constructive politics support credit in the near term in Jamaica

Policy Making. We came back from a brief trip to Jamaica impressed by the governmentís candid approach to policy making. It was refreshing to listen to the Minister of Finance bluntly describing how politically challenging the undergoing fiscal adjustment is. Particularly, he acknowledged that reform fatigue could become a problem given the fragile growth dividends seen so far.

Growth. Jamaica is well positioned to benefit from the unique situation of a recovering US growth (via remittances and tourism receipts) and lower oil prices, in our view.

IMF Program. Jamaica signed in 2013 an Extended Fund Facility (EEF) with the IMF. The programís ambitious adjustment aims, among other things, to reach the following targets:

1. Primary fiscal surplus of 7.5% of GDP and of 7% starting in FY 2017/18

2. Public sector wages of 9% of GDP by FY 2015/16 from current of 10+%

3. Public debt to GDP of 100.6% in FY 2019/20 from current of 140%.

Public Sector Wages. Of importance, public sector wages have been frozen for the last 3 years and in March the new accord should be signed (the fiscal year (FY) in Jamaica runs from 1 April to 31 March). Both public sector unions and the government have expressed their willingness to reach an agreement that satisfies all parties without endangering the IMF program.

Supportive Opposition. We also met with an opposition leader who reassured his partyís constructive attitude towards the IMF program and went even further saying that the government should be more aggressive in cutting red tape.

Financing. Financing needs in Jamaica are covered for 2015, met by the July 2014 US$ 800 million global bond.

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Will China be the new IMF for Latin America and the Caribbean?

Chinese Financing in Latam Growing. Chinese loans to the region have become key for many countries without market access or limited multilateral support. The Inter-American Dialogue estimates that the loans to the region accumulated near US$100 billion from 2009 and 2013.

Multilateral versus Chinese Loans. IMF loans are designed to support financial and economic stability. They have policy conditionality and transparent terms. Chinese loans respond to the countryís mission to develop sectors such as energy, industry and commerce in China. They are mostly concentrated in infrastructure and their terms tend to be more obscure.

The Needs and the Wants. In essence, IMF and Western multilateral organizations seem to cater to what countries in the region need: governance and financial stability. Chinese loans cater to what governments want, buttressing growth through infrastructure investment.

Chinese Financing: An Opportunity or a Curse? We believe that Chinese financing per se is not bad. More scrutiny is needed due to the lack of information, but the onus is on the recipient country in the way it uses the loan.

Financing and Policy. Traditionally, when EM countries had financing pressures, a program with the IMF would have been seen as a seal of approval of its economic policies, leading to improving market sentiment.

Markets reward countries with stronger institutions. A case in point is Jamaica, which by signing an Extended Fund Facility with the IMF in May 2013 gained market support. Ecuador, Venezuela and Argentina have used Chinese funds as an alternative to market and multilateral financing and have the highest spreads in the region.