Samuda dismisses PNP statement as 'abject foolishness'

[Dr.Dudd]

Samuda dismisses PNP statement as 'abject foolishness'



Tuesday, February 17, 2009

Industry Minister Karl Samuda last night castigated the Opposition People's National Party (PNP), describing the party's criticism of his capital control statement in London as "abject foolishness".

Recalling his strong stance in favour of removing foreign exchange controls in the 1990s, Samuda questioned how the PNP could interpret as exchange control his call in an interview with a wire service reporter for controls on the outflow of capital.

<span style="font-weight: bold">&quot;What I was obviously saying is that we need to control the flow of capital where it is putting pressure on the dollar. I made it clear that there is need for the commercial banks and the investment community which repatriates funds, to have dialogue with the Bank of Jamaica and the Ministry of Finance on how to control that flow,&quot; Samuda insisted.</span>

In a news release yesterday, the PNP called on the Government to &quot;state whether or not it was considering reintroducing capital controls, meaning restrictions on transfers of foreign exchange from Jamaica to overseas, as a measure to reduce demand for foreign currency in Jamaica&quot;.

The party cited a Reuters report out of London where Samuda was interviewed at the Jamaica-United Kingdom Investment forum earlier this month. The report said:
&quot;Jamaica may introduce capital controls to curb further sharp falls in its currency as the central bank lacks sufficient reserves to support it, Jamaica's industry and investment minister said.&quot;

In its release, the PNP said it &quot;regards this statement by the minister as most ill-advised and reckless, and potentially very damaging to both trade credit arrangements for Jamaican businesses, and also to the liquidity position of the local financial sector&quot;.

&quot;Having successfully liberalised the foreign exchange market and eliminated the black market in the 1990s, the Opposition regards any consideration of reintroducing capital controls an extremely retrograde step, and an act of bad faith towards Jamaican investors who have retained their capital in Jamaica.&quot;

But hitting back in an interview with the Observer, Samuda asked: &quot;How on earth could anyone interpret my statement to mean foreign exchange or legislative controls? That is abject foolishness.&quot;

He said one way to control the flow of capital was for users to whom credit facilities were available, to utilise them, instead of going to the market for foreign exchange.

&quot;We are talking about controls by means of monitoring and encouraging the use of these credit facilities. We are talking about a dialogue that is needed between the investment community and the commercial banks and the central bank and the Ministry of Finance to control the flow of foreign exchange, not to stop it,&quot; said Samuda.

&quot;In any event, a call for foreign exchange controls, could not be mine. That would rightly be the prerogative of the minister of finance or the prime minister,&quot; Samuda said. &quot;I think someone was looking for a story

[Dr.Dudd]

Re: Samuda dismisses PNP statement as 'abject foolishness'

Don't panic!

The Jamaican Government is not planning to impose exchange control

by Keith Collister

Wednesday, February 18, 2009

In a research reported dated February 10, JP Morgan research analyst Neeraj Arora reported that &quot;The Government is now reportedly mulling the possibility of imposing capital controls to check the Jamaican dollars slide&quot;.

When asked as to his source of information, he advised that he had read it in a Reuters's article on February 5 that quoted Minister Karl Samuda. The timing of JP Morgan's report was unfortunate as it came just as Jamaica's Eurobond was being repaid, and inflows from new US dollar loans were entering the local foreign exchange market.

Minister Samuda has now confirmed that what he meant was that it might be necessary &quot;to hold discussions to deal with the demand situation&quot;, so that buyers of foreign exchange &quot;don't come in all at once to put pressure on the dollar.&quot; In short, Minister Samuda was merely talking about &quot;moral suasion&quot;, which is very far from being a new tactic, having been extensively employed by former Finance Minister Omar Davies and the Bank of Jamaica. Finance Minister Audley Shaw has also supported Minister Samuda's clarification, advising that there are no plans to impose exchange control.

Perhaps the most experienced overseas analyst of Jamaica's economy, Oppenheimer's Dr Carl Ross, advised that a number of his overseas investor clients had recently been asking him the same question about the imposition of exchange control in Jamaica.

&quot;I've told everyone the extent of foreign exchange controls in Jamaica is strong moral suasion. No formal controls would ever be adopted.&quot;

Dr Ross's strong view that there is no chance of the Government imposing exchange control is supported by unimpeachable economic logic. In 1991, economic consultants London Economics wrote a comprehensive study entitled &quot;Exchange Control Liberalisation in Jamaica&quot;. The study concluded that Jamaica's exchange controls were &quot;leaky&quot; and therefore ineffective in reversing a weak balance of payments. At the same time, they noted that these controls &quot;discouraged foreign and local investment respectively&quot;.

In short, the study suggested that in the Jamaican context exchange controls are a device for keeping money out and not keeping money in. Moreover, imposing exchange control to try to control the dollar would be a case of treating the symptom and not the cause with medicine that has previously been proven not to work and to which the disease is now resistant.

The best example of this is the huge growth of cash remittances to over US$2 billion as a direct consequence of the abolition of exchange control. Much of these flows would either vanish or seek alternative methods (creating an instant black market in the process) making it completely ludicrous to believe that Jamaica can turn the clock back.

Loss of confidence

One of the reasons for the dollars decline (although by no means the biggest) is that since the fall of Lehman Brothers on September 15, the Jamaican Government has appeared to be behind the curve in reacting to the vastly increased pace of the international financial crisis. It should be noted, however, that they are in no way unique (every government on the planet still seems to be behind the curve, including the new Obama administration), and Jamaica's very limited resources and extremely fragile economy make the situation particularly difficult to manage.

In search of a deeper analysis beyond mere sound bites, we should note that Jamaica's current macroeconomic policies and team of technocrats remain essentially the same (with the addition of a welcome and timely shift to multilateral borrowing by Minister Shaw) as before the election, and that Opposition recommendations so far appear to boil down to recommending tighter fiscal policy to reduce the use of the interest rate weapon, an interesting recommendation in view of the fiscal overrun the new government faced when entering office.

One of the best ways to tackle this loss of confidence is, however, a true social partnership. My third speech to the Jamaica Confederation of Trade Unions (JCTU) on the international financial crisis and the outlook for the Jamaica economy just over two weeks ago on January 31 noted that Jamaica needed an approach similar to that outlined in President Obama's excellent book, the Audacity of Hope - namely a message of hope and change - including concrete measures designed to reduce economic uncertainty.

US economy under pressure

In thinking realistically about social partnership however, we should note that President Obama himself will now have &quot;to wheel and come again&quot;, as events have overtaken the virtual manifesto outlined in his book, and the election promises on which he won the historic American election in November.

In fact, America now needs a plan to deal with what is likely to be the worst economic crisis since the 2nd world war - a modern-day depression. The severity of the crisis means that from day one, like the prime minister of much poorer Jamaica, President Obama has been in fire fighting mode, forced to react to events rather than shape them.

Unfortunately, Obama's first two key initiatives, the fiscal stimulus plan of $789 billion agreed by Congress, and the more important &quot;non-plan&quot; announced by his Treasury Secretary Geithner, were not successful in boosting confidence. This is unsurprising as the vast majority of the stimulus package (apparently fashioned not by President Obama but by House democrats) seems to be a giant transfer payment, apparently based on the assumption that America still has the world's biggest credit card, whilst Treasury Secretary Geithner provided no specifics on how the US planned to fix its financial system, essentially telling markets that the administration were working on it. Over the course of the next year, the new administration will need to do a much better job if it is to successfully manage the world economic crisis.

The problem with the US Congress' approach of trying to restart the consumption bubble is that the current financial crisis is far more than the consequences of the bursting of a housing bubble, and never was merely a &quot;sub-prime mortgage problem&quot;, but represents a much bigger collapse of a &quot;sub-prime financial system.&quot; It was not merely a question of making housing loans to people with poor credit, but a bubble of consumption (financed through credit cards and automobile loans) and a massive growth in corporate debt.

The shadow banking system which financed much of this consumption through the issuance of securities, which included investment banks such as Bear Stearns and Lehman Brothers, has now virtually collapsed.

The balance sheets of most of the worlds major financial institutions, including the large international banks, have been damaged to the point that last September interbank lending dried up, channels for underwriting commercial paper and short municipal paper vanished, and even the international payments system needed to be rescued by unprecedented Central Bank intervention.

Professor Nouriel Roubini and his team at RGE Monitor estimate that losses from the financial world could be as high as US$3.6 trillion composed of US$1.6 trillion in loan losses and another US$2 trillion in mark-to-market losses of securitised assets. &quot;US banks and broker dealers are estimated to incur about half of these losses, or US$1.8 trillion (US$1-1.1 trillion loan losses and US$600-700 billion in securities writedowns) as 40% of securitizations are assumed to be held abroad. The US$1.8 trillion figure compares to banks and broker dealers capital of US$1.4 trillion as of Q3 of 2008, leaving the banking system borderline insolvent even if writedowns on securitizations are excluded.&quot;

Roubini argues that banks will need an additional $1-1.4 trillion dollars in private- and public-sector investments. Then he and colleague Elisa Parisi-Capone lay out in detail how they come up with their numbers. They argue:

&quot;Thus, even the release of TARP 2 (another US$350 billion) and its use to recapitalise banks only would not be sufficient to restore the capital of banks and broker dealers to internationally accepted capital ratios. A TARP 3 and 4 of up to $1.05 trillion (assuming generously that all of TARP 2 goes to banks and broker dealers) may be needed to restore capital ratios to adequate levels.&quot;

Even with all the government money added to the banking system, net capitalisation of US financial institutions may fall to as low as US$30 billion, from around US$1.4 trillion before the credit crisis. The UK is estimated to be in even worse shape with losses of perhaps 2 trillion pounds, much larger relatively than the US losses.

Even though these loss estimates are far higher than the current mainstream, in my view they probably substantially underestimate the size of the problem. In brief, many of the large US and UK banks are already basically insolvent, or will be as new losses emerge over the course of the current calendar year, so there is no absolute safety overseas for Jamaican investors, and even less transparency.

[Dr.Dudd]

Re: Samuda dismisses PNP statement as 'abject foolishness'

<div class="ubbcode-block"><div class="ubbcode-header">Quote:</div><div class="ubbcode-body"> <span style="font-style: italic">In brief, many of the large US and UK banks are already basically insolvent, or will be as new losses emerge over the course of the current calendar year, so there is no absolute safety overseas for Jamaican investors, and even less transparency.</span> </div></div> <span style="font-size: 11pt">
There certainly is security .More than is available in Jamaica. you forgot the deposit insurance,now set at US$250,000.

That certainly is more than the US$3'000 guaranteed by Jamaica. Remember that at this time wealth preservation takes precedent over earnings maximization.

since there is no guarantee that the institution will be around to pay the promised rates.

It is a different ball game at this time and we can't use the usual strategy to analyse it. </span>