Trust, fear and private-sector investment

Aubyn Hill, financial gleaner COLUMNIST

The completion of a deal between the Government of Jamaica (GOJ) and the International Monetary Fund (IMF) was, apparently in many people's minds, supposed to stabilise the Jamaican dollar, return trust, remove fear from the hearts and heads of investors, and usher in increased investments in the economy.

Those expectations have not yet materialised.

It is my view that it will take much longer than many, especially in Government, have pencilled into their economic performance timetable for investors to return in substantial numbers - both as persons and size of investments - to the Jamaican market.

Investors are an unusual and often finicky breed of persons. They like a return on their investment and they have a sixth and seventh sense geared to the identification and avoidance of risk.

Therefore, in the 1990s and the first decade of the current century when the Government fostered a climate in which they paid - and the rest of the economy was forced to follow - interest rates in the 40 per cent to 70 per cent range for government borrowings, investors gobbled up the government debt.

The reasons for the gorging by investors were simple and straight forward. The high interest rates 'guaranteed' very high returns on their investments, the tax-free nature of some of those GOJ paper further increased investors' returns, and, at the time, the regular GOJ mantra was 'we have never defaulted on government debt'.

That was a running truism until JDX arrived in January 2010.

While the high, real interest rate giveaway was in vogue, investors who were happy to take the high returns for little or no work or risk were reluctance to take risks in productive economic activities.

Think of it. Why take the risks of building an agro-processing business, a big farm or similar other non-financial business, and lose money in all likelihood, when there is 'money for jam' in lucrative GOJ securities?

CRIME, JDX AND NDX

Most any business person or government official who travels to meet persons living overseas, especially those in the Jamaican diaspora, has to answer awkward questions about gruesome crimes in Jamaica.

A few days ago, a Jamaican who resides in the United States came home for a school reunion. He met an old friend of his family. Two days after meeting that friend, who resides in Jamaica, the friend was gunned down in the daytime in one of our cities in the west.

The Jamaican who resides in the US vowed to his brother, who is a very senior executive in one of our bigger local firms, that he will never come back to Jamaica. He is gripped by fear and disgust.

He won't come back, others will not come and still others are leaving for the sole reason that the crime incidents have become too close to home and are too gruesome for comfort, or to ignore.

Somehow, the leaders of our Government simply refuse to make the strong connection between crime, slow economic growth (or none) and very reduced inward investments.

Some bright spark may point to Iraq and Russia as areas of high security risks. The other balancing truth is that returns on investments in Iraq and Russia are high and, of equal importance, both countries have natural resources - oil in both and minerals in Russia - which the world wants and is willing to pay hard currency to get.

If the GOJ's mantra in the last decade of the last century and the first in the current millennium was that we never defaulted on our debt, Jamaica Debt Exchange (JDX), National Debt Exchange (NDX) and NDX private killed that tune.

These debt exchanges also buried trust in the Government. That sounds like a hard statement, but I look at what people do and not what they say, especially not in public when they hold high positions in the Government or the private sector.

Banks and pension funds are not only avoiding GOJ securities above the amounts they are obliged to hold by statute, but they are actively seeking to unload whatever amount they can.

The problem is there are mainly sellers and few if any buyers, and buyers want deep discounts to entice them to buy what they now see as risky paper.

So, just as they filled their investment stomachs with GOJ securities, paper that was perceived as high-reward and near riskless in the past, so now they want to vomit out the GOJ securities they hold because NDX and its relatives have put the severe risk of these securities in sharp focus.

In this climate, investor fear of the next possible GOJ haircut, and the effect that will have on the broader economy, keeps them from investing locally. It may take a few un-fudged passes of IMF targets to restore some level of confidence and reduce that fear.

NO GOJ PLAN TO TRUST

Investors are looking for an economic plan from the Government that has a clear growth focus.

In large part, that plan must present a quite radical approach and changes in economic and general governance arrangements which the Government will undertake, or facilitate to fruition.

The plan has to be radical because the record of growth in the past many decades is so paltry that continuing, as we have in the past, will ensure that investors disregard Jamaica as a viable investment destination.

Without that kind of radical plan with built-in urgency and empowered performance leaders, with sufficient indepen-dence from political interference, prospective investors will continue to have little trust in the Government to rescue economic growth from its long sleep.

Investors also want to see a unity of purpose in government policies. A prime minister who appears to be at variance with her education minister, who wants to bring teachers' perfor-mance and costs in line and to a more manageable place, will not engender investor confidence.

Investors may extend confidence if the prime minister were to be much more out front in selling a clear economic growth programme to which she subscribes and supports. Investor confidence is a funny, fickle thing.

Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years. Email: writerhill@gmail.comTwitter: @HillAubynFacebook: facebook.com/Corporate.Strategies