Economic Analysis - Widening Current Account Deficit Will Not Threaten External Stability - DEC 2017


BMI View: Import growth , driven by rising fuel costs , will push Jamaica's current account deficit wider in the coming years. Despite this, capital inflows and robust international reserves wi ll support external stability.

  • Jamaica's current account deficit will gradually widen over the coming years, driven by a recovery in imports. We forecast the deficit to widen to 2.0% of GDP in 2017 and 2.5% and 2018, from 0.9% in 2016.

  • Rising global fuel prices will be the key driver as rising fuel import costs outpace service exports, driven by tourist arrivals, and remittance growth.

  • International reserves and import cover have improved dramatically in recent years, supporting external stability.

Import Growth To Drive Gradual Widening
Jamaica - Current Account Balance
f = BMI forecast. Source: BoJ, BMI

Rising Fuel Costs Will Underpin Import Growth

Our view that rising fuel prices would drive import growth and widen Jamaica's current account deficit is beginning to play out ( see ' Deficit To Widen On Higher Energy Imports ' February 17). Imports grew 24.3% y-o-y in Q117, largely driven by a spike in fuel imports. Given our Oil & Gas Team's forecast for Brent crude prices to rise 18.5% y-o-y in 2017 and 6.5% in 2018, we expect import growth will continue in the months ahead ( see 'Brent: Shifting From Bear To Bull', October 5).

Further, import demand will be supported by low levels of unemployment and remittance growth. Unemployment reached 12.2% in July, from 14.2% in January 2015, which will support wage growth and demand for consumer goods on the island. Remittances also continue to increase, supporting household purchasing power, as Jamaica's emigrant community benefits from higher employment and wages in the US ( see 'Investment Set To Pick Up ' , September 25).

Import Growth Will Drive Trade Deficit Wider
Jamaica - Trade In Goods And Services
Source: BoJ, BMI

While we also expect modest increases in goods exports, these will be well outpaced of goods import growth. Export growth will be supported by a recovery in the agricultural sector as Jamaica recovers from flooding that damaged crops in May. We also see some scope for gains in alumina exports, Jamaica's largest export good.

Tourism Will Support Service Exports

Increasing service exports, driven by rising tourism arrivals, will help keep the current account deficit narrow. Upgrades in the country's tourism infrastructure and strong economic activity and wage growth in the key source markets, particularly the US and Canada, drive our expectations for arrivals growth in the coming years.

External Stability Supported By Robust International Reserves

We do not perceive any major risks to external stability, despite the persistence of current account deficits. Over the past five years, the government of Jamaica has significantly increased its international reserves with assistance from the IMF, from a low of USD836mn in November 2013 to USD4.3bn in August 2017. This has seen Jamaica's import cover ratio increase to 8.6 months, as of February, the most recent data available. The government also has a stand-by agreement in place with the IMF, providing access to USD1.7bn to finance any shortfalls. Finally, pro-business reforms, improving security, and infrastructure concession programmes should keep capital inflows high, providing ample financing for the country's modest current account deficit in the coming years ( see ' Bipartisan Crim Reduction Effort To Improve Business Environment', August 1).

Import Cover Drastically Improved
Jamaica - International Reserves & Import Cover
Source: BoJ, BMI