Doyl Smith, Contributor
Pundits across the globe, from the International Mone-tary Fund (IMF) to Goldman Sachs, the investment bank that foresaw the credit crisis, have all started using the 'T' word: trillion.
Financial markets worldwide are expected to lose US$1 trillion, and counting, from the subprime credit crisis impacting currencies and economies of several of the world's developed nations.
It is the financial equivalent of a Category Five hurricane, except on a global scale. How-ever, there are possible opportunities within this crisis for Jamaica.
HOW MUCH IS US$1T REALLY?
The word trillion is often used by children to describe an impossible number. Let us put this number in context:
Up-coming world power China's total export volume in 2007 was estimated at US$1.2 trillion. Total GDP for all the countries in Latin America and the Caribbean, US$2.9 trillion. The upcoming US Federal bud-get is projected to come in at US$3 trillion. A trillion-dollar loss would hit hard.HOW DID THE WORLD END UP HERE?
Wikipedia website defines a sub-prime loan as "one that does not meet the lending requirement of the US Federal National Mortgage Association (FNMA or Fannie Mae)".
Borrowers who meet the criteria are called prime borrowers and are usually safer loans.
Those do not meet the criteria are, therefore, 'subprime' borrowers who, to get a loan, must pay higher interest rates.
These loans are then packaged and sold as a security to other financial institutions.
What resulted:
1. An entire global financial market got into the business of buying the riskier, higher-yielding, sub-prime loans.
2. Many lenders started offering low initial 'teaser' rates - rates which readjusted to higher interest rates later - to attract borrowers, and relaxed the lending standards.
The worst of these were loans which re-quired no documents to prove credit worthiness (fittingly named 'No Doc' loans) and had the highest rates of interest.
3. Speculators entered the market purchasing multiple homes with the goal of selling before the higher interest rates kicked in.
4. Eventually, the first wave of borrowers who could not afford the higher payments defaulted.
Banks and other lenders could not find new home buyers and a 'safe asset' became an overvalued 'dead asset'.
Estimates are that mortgage lenders' losses around the globe will exceed the trillion-dollar mark, resulting in a recession for the US, along with other economies that are highly exposed to subprime assets.
THE GOOD NEWS
Awareness of the problem is at an extremely high level. The IMF, the Group of Seven policymakers, and key figures from 185 countries, will be meeting in Washington over the next few weeks, with discussions to include potential solutions. Banks have already written off US$232 billion in subprime losses, so at least some of the pain has already been absorbed. US Federal Reserve chief Ben Bernanke has indicated the Fed's willingness to do whatever it takes to ensure that the financial system has enough liquidity to stay in business - a view he has previously expressed in several published essays stating that a liquidity crisis was the reason for the 1930 US Great Depression.WHAT DOES IT MEAN FOR JAMAICA?
There are two main concerns: tourism and remittances.
Our tourist arrivals may see lower numbers from the US. However, it may not be a drastic decline since the 1990 US recession saw a 2.0 per cent increase while the 2001 recession saw a marginal 1.0 per cent decline. (See chart).
This can be a huge opportunity to introduce Jamaica to new countries and markets and widen our target visitor audience.
Remittances make up in excess of 18 per cent of Jamaica's GDP. The last two US recessions, 1990 and 2001 (see chart), did not result in a major remittance decline for the country.
It is still early days to asses the true impact of these events on Jamaica, however, there may be opportunities in:
Financial innovation: Countries that have built up large savings, including oil wealth, have created funds to invest this wealth called sovereign wealth funds (SWFs).
Estimates from Morgan Stanley are, within the next five years, SWFs will have US$15 trillion to invest.
These funds have expressed an interest in higher-yielding emerging markets and with the right kind of financial innovation/positioning, Jamaica can look to tap into this incredible new wealth source.
Foreign direct investment (FDI): Jamaica has been named by the Foreign direct investment section of the British Financial Times as one of the 2007-2008 'Caribbean Countries of the Future'.
With FDI investments of US$850 million (2006 estimate), it is the third highest in the region.
There are several opportunities to increase the current level of FDI and to find ways to translate this into economic growth.
Agricultural products and innovation: With world food demand exceeding supply, Jamaica may be able to find willing buyers, even at high 'niche' prices for agricultural products.
Several countries have recently suspended exports of certain crops.
Agricultural innovation also presents great opportunity since the country is blessed with 300 days of sunshine and 280,000 hectares of cultivatable land.
The Chinese say that risk and opportunity are intertwined. This is true now more than ever.
Doyl Smith is a corporate relationship manager with JMMB.
