As the financial meltdown in the US ripples through the world's financial markets, Jamaican business leaders are optimistically cautious about the effects the fallout could have on vulnerable local sectors such as remittances and tourism.

Remittances last year topped US$1.9 billion, according to Inter-American Development Bank figures, and is the highest source of foreign exchange inflow into the island, surpassing tourism.

But both sectors have, however, come under threat from the crisis that could see US residents facing an increase in unemployment and reduction in disposable income after a collapse of financial institutions on Wall Street.

On Friday, a jittery Jamaica Tourist Board announced that it will conduct a review of the fall and winter seasons 2008/2009 before the end of October, because of uncertainties in the
US economy.

Notwithstanding the developments in the US market, Jamaica's performance in other markets such as Canada and the UK is expected to remain buoyant, said the release.

Jamaica receives more than 70 per cent of its tourists from the US.

In mid-September, the 150-odd year old investment bank Lehman Brothers announced that it would file for liquidation after massive losses in the US mortgage market and a decrease in investor confidence that left it unable to find a buyer.

Lehman Bros is but one of the many US financial companies that saw steady decline after the mortgage market crisis unfolded in 2007, with investment bank Bear Stearns being the first prominent casualty.

The domino effect has since seen insurance giant AIG being bailed out with a US$80-m US Government injection.

This was followed closely by the demise of mortgage companies Fannie Mae and Freddie Mac, then Washington Mutual (WaMu) which collapsed Thursday under the weight of hefty losses from bad mortgage bets. The Federal Deposit Insurance Corp was forced to seize and sell its banking assets to JPMorgan Chase & Co for US$1.9 billion in an emergency sale. WaMu, America's largest thrift, became the US's largest-ever bank failure.

On Friday, investor concerns heightened in the US after news that Wachovia Corp had begun preliminary talks with potential suitors, including Citigroup Inc, Wells Fargo & Co and Banco Santander. Citigroup, Wells Fargo and Wachovia all declined to comment on the speculation, an Associated Press report said, adding that a representative of Banco Santander was not immediately reached.

Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp in 2006 for roughly US$25 billion at the height of America's housing boom. With that purchase, Wachovia inherited a deteriorating US$122 billion portfolio of Pick-A-Payment loans, Golden West's speciality, which lets borrowers skip some payments.

The extensive reach of the financial crisis was demonstrated yesterday when Britain's Treasury confirmed that troubled mortgage lender Bradford & Bingley is talking to regulators and financial institutions over its future.

The mortgage bank specialises in providing buy-to-let mortgages for rental properties, now considered one of the most volatile parts of the housing market. Investors who took out loans to buy apartments and rent them out now find that the value of their property has fallen and that rental yields do not cover their mortgage payments.

Yesterday, wire services reported that US congressional Democrats and Republican senators were pushing for an agreement on a US$700-billion bailout for the US financial sector. House Republicans, however, said they would not be stampeded into accepting an unwise rescue.

But while the American legislators haggle over the bailout, the crisis, which threatens to derail the US economy and plunge that country into a long depression, is causing anxiety in Jamaica.

Remittances are considered the life*lo** of many Jamaicans, routinely funding basics like, rent, school fees and medicine.
However, Douglas Orane, CEO of GraceKennedy, said that while any change in the US economy would have an effect on Jamaica, remittances have not, so far, been affected.

GraceKennedy holds the local franchise for world-wide money-transfer giants, Western Union, and commands the largest chunk of the Jamaican remittance business.

"In our experience, the Caribbean Diaspora tends to be very loyal, and even in hard times remittance continues," said Orane. He added that even while there has been a downturn in remittances to Latin America since the US crisis began, that has not been the case in Jamaica.

Other money transfer companies, such as Quick Cash, are also reporting business as usual.

KenArthur Mitchell, Quick Cash CEO, told the Sunday Observer that he has not seen any difference in remittances since the start of the financial upheavals in the US.

"The business we are seeing is what we always see," Mitchell said. "You wouldn't see the effect right now." However, he added that if the proposed bailout of the troubled companies by the US Government is delayed, then the impact on remittances could be felt here.

An optimistic Aubyn Hill, financial service sector consultant and former National Commercial Bank head, argued that although tourism and remittances were vulnerable, the effects might not be as devastating as projected or believed.

"It might not affect Jamaica that badly," he said.

According to Hill, while Jamaica will definitely be affected by the US crisis, there are opportunities that should be pursued in the tourism sector to offset any shortfall.

"US citizens will be less inclined to take long trips to preferred destinations like Asia," argued Hill, who added that with a recession people will travel less, but Jamaica could still benefit from its close proximity to the US.

"The impact might not be as much as we might think at first," he said.

But Hill contended that the greatest opportunity rested with the opening up of the Jamaican tourism product to non-traditional markets.

"With the exposure the country received after the recent Olympics, it is advisable to step up our marketing in Europe, Asia and Middle-Eastern countries," Hill said.

Milton Brady, managing director of FirstCaribbean International Bank, believes that the meltdown will eventually affect our tourism.

"The newly unemployed is at a seven-year high in the US," he said. "With that spreading into the general economy, it is bound to impact on tourism. I think the ripple effect on tourism will be a little further down the road."

Jamaica Tourist Board chairman John Lynch agreed, saying that there is a definite slowdown in the market as people had adopted a wait-and-see approach to the crisis.

"When there's uncertainty people won't rush out and buy a vacation," Lynch told the Sunday Observer yesterday. "Inevitably you're going to have some fallout."

He said that from the limited information he had now, bookings were down between 15 and 20 per cent. However, he said that Jamaica is faring better than most other destinations because of the island's access to airlift.

Amidst the adversity, though, Hill saw opportunities which he advised Jamaicans to recognise and capture. "Every obstacle brings 15 to 20 opportunities," he said. "Deal with the obstacles, but recognise the opportunities."

One of the major obstacles from the US financial meltdown is a contraction in available loan funds and a subsequent increase in lending rates.

Larger local companies could now find it hard, or near impossible, to get overseas funding, Hill surmised.

"The US banks are not lending to each other so they won't lend cross border," he said. "Loans will be curtailed, put on hold or simply become more costly."

However, Hill said he expected the Jamaican Government to find the balance of its borrowing requirement, some US$250 million, because of the island's positive payment record, but they, too, would have to contend with higher interest costs.
"What will happen is that the price (of money) will be higher," said Hill. "That is a cost that the Government will have to contemplate."

He also argued that skills exported from Jamaica to the US, such as teachers and nurses, would be the last to suffer cuts in a US employment squeeze. However, as liquidity dries up people will become more cautious with funds.

"Employment will be tougher to get and keep in the coming months, and any effect on remittances will probably not be immediate but down the road," he said.

Brady agreed that it was too early to gauge the effect on remittances, but said that he expects a cut back.

"It hasn't started yet, but that's what I expect to see happen," said Brady. "I think that the most immediate impact is being felt by wealthy Jamaicans and local businesses that have invested overseas in these investment banks. But of greater impact is likely to be Jamaicans relying on remittances."

The Government's borrowing potential fared no better for Brady who said that the state's ability to acquire additional funds could be severely tested, despite the buffer that Jamaica's good repayment record may give.

"Theoretically, that's how it is," Brady contended. "Our good record will be to our advantage, but availability of funds will be the issue, not just the cost."

"People with cash are king. If they see excellent deals purchasing failing companies they will take them," Brady said in reference to larger US investment banks buying smaller failing companies. "They would rather purchase than lend to emerging markets where the risk is higher"

In the meantime, local realtors, although saying that they are experiencing a slight fall-off in real estate queries from the US, do not envisage a damaging contraction in business.

Andrew Issa, holder of the US-based Coldwell Banker real estate franchise in Jamaica, said that business, especially at the high end, has dropped somewhat, but this has been bolstered by more queries out of Europe and Canada.