Macro-economic Review The Macroeconomic Review constitutes the initial stage in the Economic Analysis formulation process.

To this end, the review addresses leading, coincidental and lagging indicators of economic activity. Firstly, we review past trends and recent economic developments at the global and domestic level, given the increasing importance of global developments to the Jamaican economy. At the domestic level, information is analyzed and discussed on developments relating to; the stage of the Business Cycle, GDP, Inflation, Unemployment, Monetary Policy, Fiscal Policy, and Exchange Rates. We also assess the global environment and other indicators impacting the Jamaican economic performance (such the Global Competitiveness Index), poverty (such as the Human Development Index) and credit rating (such as Standard and Poor, Moodys and Fitch index). This diagnostic will help us to ascertain projections necessary for the economic outlook of the Jamaican economy and identify those factors which will impact the industry and company analysis section of the top down approach to fundamental analysis. The Business Cycle Based on the recent updates and projections of economic growth for FY2010/2011 and FY2011/2012 reported in the BOJs Q1/2012 Monetary Report and the IMFs Consultation Article, Jamaica is currently moving out of the trough of the business cycle up to a slowed state of fragile recovery (Bank of Jamaica, 2012) (International Monetary Fund, April 2012). This position is supported by data related to movements in Real GDP which was on an average of -1.4% and 1.5% in FY2010/2011 and FY2011/2012 respectively. The figures for Unemployment rates however challenge the GDP growth reports and as such recovery will be

anemic based on the projected time taken to recoup the output lost in the recession and move out of the recovery stage of the business cycle up to possible expansion. Inflation Up to the ending of quarter one of fiscal year 2012-2013, the BOJ reported an headline inflation rate figure of 1.7% which was within the monthly targeted range of 1% - 2%. The average inflation rate for year ending 2011/2012 stood at 7.3%, also within the targeted range of 6%-8%. Subsequent to the figures table in the finance ministers budget debate, the Governor of the Bank of Jamaica highlighted that stated figures and projections made for inflation at the end of the first quarter of the 2012/2013 fiscal year, were conditional and heavily dependent on the provisions made in the fiscal budget. Therefore modifications to the tax policy will result in both direct and indirect changes to the rate of inflation over the 2012/2013 fiscal year and even up to the period 2013/2014. The average price level of food & non alcoholic beverages, recreation and culture, restaurant and accommodation services will realize short-lived increases which will in turn create a 3.4 percentage point change effect on the level of inflation in the June and July months of the 2012/2013 fiscal year. Hence, the governor stated new targets for the financial year and near term where inflation rates in comparison to the 2011/2012 fiscal year will realize at most a 64% change moving from 7.3 FY2011/2012 to a at most 12% FY2012/2013. INFLATION Monthly Rate - % Fiscal Year to Date % March 2011 1.1 7.8 February 2012 0.8 6.8 March 2012 0.5 7.3

Figure 1.0 Table depicting a comparison between two measured rates of inflation

ACTUAL VS EXPECTED INFLATION (TREND)

30 25

20

15

Actual (Headline) Exp(all)

10

0 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Q2-2011 Q3-2011 Q4-2011 Q1-2012 ytd

Figure 1.2 Line graph depicting actual inflation trend over two year period up to Q1 2012 Inflation has maintained a moderate downward trend since 2010, this according to the BOJs annual report for year ended 2011, was as a result of excess supply on agriculture prices as well as the rate of price increases in 2011 relative to spikes experienced in 2010 (Bank of Jamaica, 2011). In addition, contributions to the rate of inflation included international oil and grain prices, which impacted Jamaicas energy bill, along with transportation and processed food. Up to the first quarter of year 2012/13, the inflation situation on average, as described by the IMF, BOJ and the Center for Economic and Policy Research is stable/moderate.

Outlook An increase in the rate of inflation Weak corporate profits weak econ environ high rates of inflation negative rate of return The outlook on the Jamaica economy as it relates the exchange rate and providing a forecast for 2013-2015 which will be speculative base on recent tends from the period 2010 to June 2012. Exchange Rate The average exchange rate for the period 2010/2011 stood at J$87.38 = US$1.00, the first signs of appreciation against the US dollar and also an indicator of Jamaicas move out of the trough of the business cycle. The currency strengthened even further over the FY2011 closing the year at USD$1.00 to J$86.08. The appreciation over the period 2010 and 2011 fell against the improved conditions relating to US dollar inflows versus outflows, supported by increases in earnings from the tourism sector. However, to the close of the year 2011, the JMD depreciated by 0.34 per cent comparative to the US dollar, this being relative to the first two quarters of the year. The currency in general had a stable outlook over the calendar year 2011, with an average of J$86.08 = US$1.00. However, up to the ending of quarter one FY2012/13, the BOJ reported that the Jamaican dollar depreciated some .80 per cent down to J$87.30 = US$1.00. Further inspection of movements between April and July revealed an average rate of J$87.99 = US$1.00, peaking at J$89.17 = US$1.00. Graphs below depict the trend of average daily selling exchange rates and quarterly comparisons over the period 2010-2012 Q2 as published in the BOJs Historical Rates Spreadsheet. From our assessment the upward trend in exchange rates reveals a depreciating Jamaican dollar

Average Exchange Rate Per Quarter (20102012Q2)

90.00 89.00 88.00 87.00 86.00 86.00 85.00 84.00 83.00 Q12010 Q22010 Q32010 Q42010 Q12011 Q22011 Q32011 Q42011 Q12012 Q22012 85.84 85.81 85.80 86.60 86.09 86.98 89.69 88.10

87.86

Average Exchange Rate

Linear (Average Exchange Rate)

BOJ Daily Selling Rates 2010-2012 (July 12)

91.00 90.00 89.00 88.00 87.00 86.00 85.00 84.00 83.00 82.00

Rate

2 per. Mov. Avg. (Rate)

Outlook Given the relationship between the Balance of Payment and the Exchange Rate, the outlook for the Jamaican currency is projected on the backdrop of the countrys ability to reduce the current account deficit. Based on inspection of the trend in the current account and data reflecting exchange rates from 2006 2011, we observe a negative correlation where as the current account deficit gets larger exchange rates are

Years 2006 2007 2008 2009 2010 2011

Exchange Rate J$65.88 J$69.06 J$72.92 J$88.49 J$87.38 J$86.08

Current Account 1182.9 2038.2 2793.3 1127.5 934.0 2068.9