Economic Overview - June 2016

EXECUTIVE SUMMARY

Summary Economic Indicators 12M PTP Inflation (%) Interest Rates (%) 180D T-Bill (%) 30D BOJ Repo (%) J$/US$ (EOM)

2016 Mar 2.96

Actual (A) Apr 2.38

May 2.14

Projections (P) Jun Dec 2.03 1.21

5.83 5.82 5.91 6.01 (A) 5.60 The Bank of Jamaica 5.25 5.25 5.00 5.00 (A) 5.00 (BOJ) lowered its 1 122.04 123.15 125.41 125.07 (A ) 127.91 benchmark 30-day CD NIR (US$B) 2,415.53 2,335.90 2,304.72 2,384.72 2,700.00 rate by 25 bps from Net Remittances (US$M) 180.00 (P) 170.00 (P) 178.00 (P) 170.00 195.00 5.25% to 5.00%, with effect from May 31, 2016. The last time the central bank lowered its benchmark rate was in August 2015.

Performance in other key economic variables for the past month included: • Inflation in May was positive for the first time this calendar year. Significantly, the Producer Price Index for Manufacturing was 0.7% in each of the months March & April, as a result of a 3.5% & 4.5% increase respectively for the major group ‘Refined Petroleum Products.’ • Yields on Treasury Bills increased in June, with the 91-day & 182-day tenors being oversubscribed, while the 28-day tenor was undersubscribed • The fiscal accounts were ahead of budget for the 1st month of the fiscal year 2016/17. • Net International Reserves (NIR) declined slightly in May to US$2.3B although gross reserves remained at just shy of 22 weeks of goods & services imports. • The local currency depreciated 1.8% in May, well ahead of trend. The Central Bank attributed this to specific financial transactions in the market during that time. Overseas, the World Bank has downgraded its outlook for global economic growth this year to 2.4% (from 2.9%). The wealthiest countries account for about half of the reduction. Its growth forecast for the US was lowered from 2.7% to 1.9%. Germany’s 10-year sovereign bond yield has fallen below zero, for the 1st time ever, as investors search for a safe haven for their capital. Bond buyers are worried about the consequences of the ECB’s stimulus policies & Brexit. The UK will vote on June 23 on a referendum on whether to remain in or leave the European Union (EU) (Brexit).

1

As at June 17, 2016

1

PREPARED BY: VMWM Research Department; June 20, 2016

Economic Report (Jun-16) DOMESTIC ECONOMIC INDICATORS Inflation Year 2015

Month Dec Jan Feb Mar Apr May

2016

CPI Index 232.3 231.3 229.6 229.3 228.4 229.0

Monthly Change 0.2 -0.4 -0.7 -0.1 -0.4 0.3

% Calendar YTD % Fiscal YTD % 12-Month PointChange Change To-Point (%) 3.6 4.3 3.6 -0.4 3.9 3.7 -1.1 3.6 3.1 -1.2 3.0 3.0 -1.6 -0.4 2.4 -1.4 -0.1 2.1

The Consumer Price Index (CPI) experienced its 1st increase for the calendar year in May. As at April, the 12-month point-to-point movements in the Producer Price Indices were 5.7% for Mining & Quarrying and -4.3% for Manufacturing. The decline in Manufacturing was heavily influenced by the 32.5% decline for the major group ‘Refined Petroleum Products,’ although the group experienced a monthly increase of 4.5% in April itself, following a 3.5% increase in March. DIVISION Food and Non-Alcoholic Beverages Alcoholic Beverages and Tobacco Clothing and Footwear Housing, Water, Electricity, Gas and Other Fuels Furnishings, Household Equipment and Routine Household Maintenance Health Transport Communication Recreation and Culture Education Restaurants and Accommodation Services Miscellaneous Goods and Services All Divisions – All Items The regional indices showed month over month changes for all 3 regions as: ‘Greater Kingston Metropolitan Area’ up 0.2%, ‘Other Urban Centres’ up 0.3%, and ‘Rural Areas,’ up 0.3%.

2

PREPARED BY: VMWM Research Department; June 20, 2016

% Change 0.1 0.1 0.3 0.6 0.3 0.1 0.8 0.0 0.1 0.0 0.0 0.2 0.2

Economic Report (Jun-16) 12-Month Point-To-Point Consumer Inflation 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% J M M J

S N J M M J

2012

S N J M M J

2013

S N J M M J

2014

S N J M M

2015

2016

Interest Rates TENOR

28-Day Instrument

2016

3

Month Jan Feb Mar Apr May Jun

91-Day

182 Day

273 Day T-Bill (%)

T-Bill (%)

BOJ CD (%)

T-Bill (%)

T-Bill (%)

6.04 5.54 5.38 5.37 5.37 5.47

5.25 5.25 5.25 5.25 5.00 5.00

5.94 6.00 5.75 5.65 5.80 5.86

5.94 5.73 5.83 5.82 5.91 6.01

PREPARED BY: VMWM Research Department; June 20, 2016

N/A

6.41 N/A

Economic Report (Jun-16) T-Bill Yields 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00 5.50

Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May

5.00

2012

2013 28-Day

2014 91-Day

2015

2016

182-Day

GDP Growth Annual Growth Rates (%) Total Value Added at Basic Prices Goods Producing Agriculture, Forestry & Fishing Mining & Quarrying Manufacture Construction Services Industry Electricity & Water Supply Wholesale & Retail Trade, etc Hotels and Restaurants Transport, Storage & Communication Finance & Insurance Services Real Estate, Renting & Business Activities Producers of Government Services 2

2013 2014 2015 2016 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12 1.8 1.8 2.1 -1.4 -0.3 0.4 0.7 1.5 0.7 0.9 5.0 6.2 6.8 -8.1 -3.9 -0.4 0.9 3.9 1.2 1.0 13.6 19.6 17.2 -22.3 -13.3 -0.6 0.3 4.3 -3.3 2.0 11.5 8.4 -0.3 -2.0 -1.9 0.7 5.3 -1.2 -2.2 -1.0 -1.3 -0.3 5.2 -6.7 -1.4 -2.0 0.4 8.0 6.2 1.1 2.8 1.6 1.5 2.0 1.5 1.4 1.0 0.7 0.6 0.4 0.8 0.4 0.6 0.8 0.8 0.6 0.6 0.7 0.6 0.8 1.1 0.3 -1.6 -0.9 -2.4 -2.8 0.7 3.1 4.5 5.4 0.2 0.2 0.2 0.5 0.4 0.3 0.5 0.6 0.3 0.5 5.2 0.6 2.1 4.1 5.6 4.1 1.4 1.3 1.0 2.7 0.7 0.6 0.8 0.7 1.3 1.1 1.4 1.5 0.4 0.4 0.7 0.6 0.4 0.5 0.8 0.2 0.3 0.3 0.6 0.6 0.3 0.4 0.6 0.4 0.4 0.4 0.5 0.5 0.5 0.5 -0.1 -0.1 -0.2 -0.2 -0.1 -0.1 -0.2 -0.1 -0.1 -0.2

Planning Institute of Jamaica (PIOJ) Estimates

4

PREPARED BY: VMWM Research Department; June 20, 2016

Economic Report (Jun-16) Annual Growth Rates (%) Other Services

2013 2014 2015 2016 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q12 1.3 1.0 1.1 1.9 1.6 1.5 0.5 0.5 0.7 1.5

The Q1 2016 growth largely reflected the impact of an improved global economic environment, an improvement in domestic demand resulting from strengthening confidence levels and increased industrial production. The growth in the Goods Producing industries reflected the dual impact of increased demand and improved weather conditions. 2016 was the first in a number of years where a drought has not manifest in the first half of the year. Despite the favourable conditions, traditional export crops declined vis Sugarcane (due to illicit fires) (-36.9%), Bananas (-2.8%), Cocoa (-15.3%). Outlook: For Q2, the prospects for growth are improving in a number of areas including: • Agriculture – improved weather conditions & increased usage of Agro Parks/Agro Economic Zones • Electricity & Water Supply – Improved rainfall levels • Construction – Anticipated increase in housing starts, facilitated by NHT, increased hotel construction & office space to facilitate the expansion of the BPO sector • Hotels & Restaurants – Increased room stock For the fiscal year 2016/17, the PIOJ is projecting growth in the range of 1%-2%. This is predicated on: • An increase in global growth • Strengthened investor confidence • Favourable weather conditions • Impact of business environment reforms & the implementation of strategic investment projects Factors that could result in even faster growth are implementation of infrastructural projects in: • Tourism • KCT expansion • Business Process Outsourcing • Agro Economic Zones/Parks As a caution, the World Bank, earlier in June, cut its forecast for global growth to 2.4% from 2.9%. 2.4% is characterized as “insipid.” According to a June 7 report by Bloomberg, approx half of the reduction is accounted for by the wealthiest countries, with the forecast for US economic growth being lowered from 2.7% to 1.9%. This could have repercussions for domestic growth, particularly, if a significant portion of domestic activity is dependent on this economic partner.

GOJ Fiscal Operations JMD Million Revenue & Grants

5

Fiscal Year-to-Date Apr 2016 Provisional Budget % Deviation 34,079.9 33,837.3 0.7

PREPARED BY: VMWM Research Department; June 20, 2016

Economic Report (Jun-16) JMD Million PAYE Companies (ex Bauxite/Alumina) GCT (Local) GCT (Imports) Custom Duty Expenditure Interest Capital Expenditure Fiscal Surplus Primary Surplus

Fiscal Year-to-Date Apr 2016 Provisional Budget % Deviation 6,170.4 6,105.6 1.1 936.3 914.7 2.4 6,351.4 6,401.1 -0.8 5,424.3 5,470.0 -0.8 2,790.8 2,797.3 -0.2 43,249.9 46,019.8 -1.5 15,213.8 15,793.2 -3.7 1,185.2 1,685.2 -29.7 -9.170.0 -12,182.5 24.7 6,043.8 3,610.7 67.4

All quantitative performance criteria under the Extended Fund Facility (EFF) with the IMF up to March 2016 were met. Significantly, tax revenues reached the budgeted target for the 1st time since the global financial crisis in 2007. The primary surplus for FY 2015/16 slightly exceeded the programme target of 7.25% of GDP and capital expenditure accelerated during December-March. The government’s stated intention to drastically increase the income tax threshold had caused some concern related to whether this would impact the fiscal targets under the EFF. However, the government has successfully articulated a phased implementation of its plan and made other adjustments which should result in the targets remaining on track. The IMF has also praised the move from direct to indirect taxation, while cautioning that attention needs to be directed to strengthening conditional cash transfers and improving protection of the poor/vulnerable from this shift. It has encouraged, and the government has stated its intention to further reduce distortive taxes, such as asset taxes, stamp duties & transfer taxes, which should augur well for economic growth. Proper implementation would need to ensure that the fiscal programme is not negatively impacted.

Net International Reserves

Year 2015

2016

Month Dec Jan Feb Mar Apr May

6

Stock (USD M) 2,437.27 2,200.12 2,269.76 2,415.53 2,335.90 2,304.72

NET INTERNATIONAL RESERVES Gross Reserves in Monthly ∆ (USD M) Weeks of Goods Imports 93.93 34.61 -237.15 31.71 69.64 32.54 145.77 34.38 -79.63 33.47 -31.18 32.47

PREPARED BY: VMWM Research Department; June 20, 2016

Gross Reserves in Weeks of Goods & Services Imports 23.45 21.49 22.05 23.30 22.68 21.76

Economic Report (Jun-16) 25.00 23.00 2,500.00

21.00 19.00

US$M

2,000.00

17.00 1,500.00

15.00 13.00

1,000.00

11.00 9.00

500.00

7.00 5.00 Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May

-

Weeks of Goods & Services Imports

3,000.00

2012

2013

2014

2015

2016

NIR Exchange Rates EOM SELLING EXCHANGE RATES – May 2016 Change (%) Rate per unit of FX 1-Month 12-Month YTD -1.80 -7.41 -3.98 125.4111

JMD/USD JMD/GBP

180.3578 94.8709

JMD/CAD

-1.85

-1.54

-1.80

2.80

-1.80

-10.50

The Bank of Jamaica (BOJ) & the International Monetary Fund (IMF) have both stated that they believe the JMD is fairly valued and, as such, the exchange rate can be expected to move in line with the difference between Jamaica’s inflation rate & that of its main trading partners. The inflation differential between Jamaica and the US stood at 125.1bps in April 2016, as Jamaica’s inflation rate had come down to 2.4%. The BOJ’s inflation expectation survey, conducted in February 2016, indicated a slight fall in expected inflation 12 months ahead to 4.3%. This would mean a projected inflation gap of approx. 3% & a commensurate rate of depreciation of the local currency. However, Jamaica’s currency depreciated 4.3% so far year-to-date3, ahead of the anticipated pace, given accelerated movement in April and, especially, in May, when the JMD depreciated 1.8%. The

3

As at June 10, 2016

7

PREPARED BY: VMWM Research Department; June 20, 2016

Economic Report (Jun-16) Central Bank attributed this to specific financial transactions in the market during that time, although, the parties in question deny this to be the case.

Jan 2012- May 2016 130

200 190 180

110

170

100

160 150

90

JMD/GBP

JMD/USD,JMD/CAD

120

140 80

130

70

120 Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar 2012

2013 JMD/USD

2014 JMD/CAD

2015

2016

JMD/GBP

Stock Market

Index JSE Market Index JSE Select Index JSE All Jamaican Composite JSE Junior Market Index JSE USD Equities Index

8

Stock Market Summary – June 20, 2016 % Change Value Daily WTD MTD YTD 160,840.70 0.69 0.69 2.73 6.73 5,625.79 0.93 0.93 2.82 12.97 178,710.47 0.70 0.70 2.75 6.78 2,250.31 -0.21 -0.21 5.36 25.64 147.07 0.01 0.01 2.09 -8.69

PREPARED BY: VMWM Research Department; June 20, 2016

1 YR 65.16 92.98 65.80 145.06 -5.70

Avg Annual % Change 5 YR 10 YR 15.91 8.32 24.15 14.90 19.13 11.91 N/A N/A N/A N/A

Economic Report (Jun-16) OVERSEAS ECONOMIC NEWS BITES Global The World Bank has downgraded its outlook for global economic growth this year to 2.4% (from 2.9%). The wealthiest countries account for about half of the reduction. Its growth forecast for the US was lowered from 2.7% to 1.9%. Commodities With global crude oil production on the decline, crude futures have made four straight monthly gains. The US Energy Department expects North America’s oil production & inventories to keep falling into 2017. Saudi Arabia’s state-run oil company has indicated it will scale back its price for light sweet crude oil by 35 cents per barrel in NW Europe & by 10 cents per barrel in the Mediterranean, starting in July. Latin America & the Caribbean Brazil’s economy contracted 5.4% in Q1, extending its longest recession since the 1930s. The downturn has been fueled by falling global commodity prices. The unemployment rate has surged to 11.2%. Argentina has released its first publication of inflation date since December, revealing an increase in the CPI for May of 4.2%. All statistical reports were blocked at the end of 2015 after the government had declared that its system for producing reports was in a “state of emergency.” North America The Federal Reserve FOMC has voted unanimously against raising interest rates and has indicated that it will raise rates more slowly than previously planned. Europe The Eurozone economy grew by 0.6% in Q1, a bit better than previously reported, with investment & consumer spending both contributing to the improvement. Economists have forecast some slowing for Q2. Markets are pricing an 80% chance of an additional drop in the European Central Bank’s (ECB) interest rates this year and a 30% chance of reduced rates at the July meeting of the ECB. Germany’s 10-year sovereign bond yield has fallen below zero, for the 1st time ever, as investors search for a safe haven for their capital. Bond buyers are worried about the consequences of the ECB’s stimulus policies & Brexit. The UK’s Financial Conduct Authority (FCA) has been charged with investigating the risks associated with peerto-peer lending platforms and the need for lending regulation in that sector. Asian Pacific Autonomous Research partner Charlene Chu has warned that a multitrillion dollar bailout may be needed to overcome China’s bad debts, comparing the situation to that of Western banks before the 2008 financial crisis. The economies close to China are starting to feel the effects of its slowdown and analysts expect the effect to spread farther.

9

PREPARED BY: VMWM Research Department; June 20, 2016

Economic Report (Jun-16) According to Japan’s Cabinet Office, Japan’s economic expansion in Q1 was stronger than originally estimated, with GDP growth revised from an annual rate of 1.7% to 1.9%. Sources: Statistical Institute of Jamaica (STATIN), Ministry of Finance and Planning (MOF), Bank of Jamaica (BOJ), Planning Institute of Jamaica (PIOJ), International Monetary Fund (IMF), Jamaica Stock Exchange (JSE), Bloomberg, Market Watch, CNN Money, Reuters, The Wall Street Journal, The New York Times, Buenos Aires Herald Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any investment decision, please consult a VM Wealth Management Advisor.

10

PREPARED BY: VMWM Research Department; June 20, 2016