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Private sector and banks need to step up to the plate

BRUCE GOLDING

Sunday, September 02, 2018

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Address given to MoneyMasters launch of its Multiple Portfolio Funds at Spanish Court Hotel on Monday, August 27, 2018.

There can be no doubt that the macroeconomic environment is in better shape today than it has been in a long time. The fundamentals are all pointing in the right direction and the economy is displaying a level of stability and predictability that generations behind mine have never known.

We have, indeed, come a long way, having endured major disruptions — especially over the last two decades — with the local financial meltdown of the 1990s and the global financial crisis of the last decade. But we are not yet where we want to be. Robust growth continues to elude us. It does take time, but it won't happen unless we make it happen. We need to ensure that the kind of growth we need — substantial, sustained, job-creating growth — is not only within our reach but also within our grasp.

The issues are multifaceted and I worry that some of the impediments have become embedded in our culture. One of these is our aversion to risk that has afflicted not only our financial institutions but potential investors as well. Understandably, this is borne of bitter past experiences and our acclimatisation to a constant flood of government paper that shaped the financial landscape in a particular way. Even though the underpinnings are changing, the shift that must be made will take time, for there is still an enormous amount of government paper being traded in the market.

Unfortunately, the mindset might take even longer to change. Commercial banks have not yet reacquired the appetite and comfort level for risks. The wounds of past crises may have healed but the agony and trauma are still fresh in their memory.

We have in our financial institutions some of the brightest young minds that would acquit themselves well on Wall Street where, in fact, many of them cut their teeth. How many of them have ever had to do an evaluation, feasibility analysis, stress-testing of a serious business proposal where risks and the potential for success have to be carefully balanced? Their day to day activities primarily involves packaging existing, low-risk securities — local and foreign — and offering them to investors. They report huge profits each quarter from these “strenuous” activities.

The private sector, too, remains risk-averse. Some of that has to do with globalisation, the implications of which have not been fully understood. There is an inherent fear of globalisation. There was a time when our main concern was our ability to compete in the foreign market. Today, we have to compete on our own supermarket shelves, and our response has largely been to hoist the white flag of surrender and depend on tourism and remittances to pay for our timidity.

If “Going for Growth” is to be our mantra there is much that needs to be done. It requires leadership and that leadership cannot be expected to come only from the Government. For decades, we have argued that the obstacles to growth were our high levels of fiscal deficits, inflation, interest rates, Government borrowing, and the crowding out of the private sector. Those indices are all trending down. The Government is doing its part in terms of macroeconomic management, and both the current and previous Administrations deserve credit for this.

The level of crime and violence is an impediment to investment but it must not be proffered as an excuse or explanation. Guatemala has a serious crime problem but that has not prevented its economy from growing at an average annual rate of 3.5 per cent over the last five years.

The leadership that is required must also come from the private sector, including the financial institutions. The legacy of Carlton Alexander needs to be re-energised.

The private sector must exert itself to identify and embrace the opportunities of globalisation. We have in place trade agreements with Colombia, Costa Rica, Dominican Republic and Cuba, but over the last 10 years our exports to those markets have declined by 50 per cent.

Ten years ago we became a party to the Economic Partnership Agreement (EPA) with the European Union, the largest market in the world with a population of over 500 million and a per capita income of US$43,000. It imports annually close to US$3 trillion from the rest of the world. Under EPA, Jamaican goods are allowed duty-free, quota-free entry into the EU market. Yet, over the last 10 years our exports to the EU have declined by 67 per cent. I doubt that many of our private sector players have even bothered to explore the opportunities of that vast market.

Our utilisation of our preferential trade arrangements with the USA and Canada to which our goods enjoy duty-free or reduced tariff entry has also been pathetic. In the last 10 years, our exports to these markets have declined by 30 per cent and 62 per cent, respectively. In the last 10 years, our total exports, excluding bauxite and alumina — the fallout for which is largely beyond our control — have declined by 50 per cent.

The private sector must give account for the fact that US$600 million is all that we can find (excluding bauxite and alumina) to export to the rest of the world. The progressive depreciation of the Jamaican dollar, which is supposed to be of benefit primarily to exporters, does not seem to have made any impact.

The leadership of our commercial banks must become concerned that 10 years ago, one-third of their loans were made to the productive sector. Today that figure has dropped to 25 per cent, despite the high level of liquidity. I know that some recent investments have been financed by public offerings but these should be incremental — not in substitution, for it is likely that some of these investments would never have been approved for bank lending.

Over the last 10 years personal loans have risen from 37 per cent to 49 per cent, and while personal loans are not to be disparaged because they support consumer demand and, hence, investments, they put a strain on the economy if, by and large, they support imports and are not counterbalanced by expansion in domestic production.

It is easy to write up a car loan and register a bill of sale on a motor vehicle with a value that is covered by comprehensive insurance. I know of many persons who, in submitting an application for a business loan, have been required by the banks to provide collateral the value of more than twice the amount of the loan being sought. For the banks, that is a risk-free arrangement. Going for growth will require a completely different mindset.

I close with an anecdote. In the early 1970s when I had just embarked on a political career, my neighbour was the manager of what was then the local Barclay's Bank. One day he said he wanted me to take him through the constituency. I replied that I never knew he had any interest in politics. He said his interest was not in politics but he wanted me to introduce him to farmers who wanted to plant more crops, shopkeepers who wanted to expand their businesses, truckers who needed new trucks, fishermen who needed a boat and engine, and block makers who needed additional equipment. He explained that he had a quota of new loans that he had to write each month and if he didn't meet that quota he would be unlikely to get a promotion. We need to return to those days.

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