Read My Lips – No New Taxes. US$ IPO Clampdown & Snap Slides

Here is the latest weekly digest (Mar 6th – Mar 12th, 2017). A quick easy read of this week’s top and most relevant business news. No fluff, just the highlights.

After warning for weeks, that a new budget was at hand, it is finally here. By now you would have heard some of the general comments, increases all around, but I wanted to present some of the public commentary on the topic.

Gleaner columnist Gordon Robinson starts out by taking a slightly light-hearted but accurate look at the plight of the PAYE tax-payer, definitely a must read. He writes;

Sometimes I wonder if we appreciate how much tax we actually pay and for what collective or personal benefit.

PAYE workers pay 25% (30% on earnings over $6m/annum) of taxable salary. What we can sometimes overlook – unless we carefully review our payslips – are the additional deductions (2.5% of total emoluments to NIS; 2.25% as Education tax; and 3% to NHT). So our intrepid PAYE worker finds at least 32.75% of his/her taxable salary separated at birth. Then he/she goes out into the world and pays another 11% of gross (16.5% of 67.5% left in the pay packet) as GCT.

Ian Boyne also highlights a few of our general initial reactions to tax increases… and new budgets. Immediately we think that;

The gas tax will send inflation through the roof; transportation costs will severely punish the poor; that tax on group health insurance will be passed on to consumers; increased electricity costs will somehow trickle down to the poor, though more than 60 per cent won’t be directly affected. More ‘pressure and slide’ for the poor. This is the narrative, and Opposition Spokesman on Finance Peter Phillips will go to town on Tuesday in attacking this ‘taxperity’ Budget, recklessly designed to suit political imperatives and to save face after promising a 1.5 but giving the people a six for a nine.

However he counters this view later on…

We must stop demonising our politicians and they must stop demonising one another! When Phillips applied taxes to gas, many predicted catastrophe. It didn’t happen. Last year, the same catastrophe, or worse, was predicted when Shaw raised taxes on fuel. It didn’t happen. We were told how inflation would rise, busting up the IMF programme.

Instead, we ended up with the consumer price index being at a level not seen since 1964! Things are bad enough as they are without our Jeremiads. They might bring political ‘forwards’ and make for exciting column writing, but they are just populist nonsense. We need a balanced, rational approach to these issues.

Let’s keep abreast and follow the budget debate this week. If you want the specifics you can read here and here. In other headlines…

Other Headlines

• The Government is to introduce a new financial services consumer protection agency to protect commercial bank customers from exorbitant bank fees. Minister of Finance and Public Service Audley Shaw told the House of Representatives that the banks currently hold $45 billion in dormant accounts, which are subject to regular bank charges.
• US$ Market Clampdown – The Jamaican regulators are cautiously restricting access to new US securities on the market in order to control the effects on the foreign exchange – “Opening the market to such companies (US$ Depository Receipts) might result in a heavy increase in demand for the US dollar. Whoever is doing the deal would have to convert to foreign currency in order to buy the equities abroad”. There is also a restriction on companies floating an IPO in US dollars because of the need to protect the Jamaican dollar. Approval for such initiatives is required from the BOJ. The consequence has been that some companies have sought to be listed by introduction, instead of via an IPO where new funds are raised.
• US consumer sales growth slows down – US Consumer borrowing rose at the slowest pace in more than five years in January, suggesting the economy’s growth engine may be running closer to empty than previously believed. The growth rate (of 2.8%) is the slowest monthly growth rate since August 2011. The data may reflect renewed consumer uncertainty. That could hit the economy, as consumer spending makes up about 70% of gross domestic product.
• S&P downgrades Barbados to CCC+ – The Barbados Government says it regrets the decision by the US-based rating agency, Standard and Poor’s (S&P) to downgrade the island to ‘CCC+/C’, based on the Government’s limited financing alternatives and low international reserves. The government says “The downgrade was expected and largely driven by the decline in our international reserves reported in the recent Central Bank Economic Report,” and further added that “the decline in the reserves was largely due to legal and administrative delays in public inflows linked to various projects”… as previously explained.

Companies and The Markets

• JN Fund Managers Limited (JNFM), which operates a securities dealership, has got a licence from the Jamaica Stock Exchange and can now include brokerage services in its product line-up, the company confirmed this week. It means that 13 brokerage houses now hold licences to buy and sell shares on the JSE on behalf of clients. Most of the brokerages are subsidiaries of larger financial groups.
• The Courtyard by Marriott hotel in New Kingston racked up nearly $1 billion in revenues, in its first year of operation, and provided a small boost to PanJam Investment’s bottom line. PanJam, which is in the business of real estate and investments, built the hotel as a joint-venture project with Costa Rican partners, through Caribe Hospitality Jamaica Limited. That associated company earned $83 million in net profit at year end December 2016, which wiped out a $25.8 million loss a year earlier. Revenues generated by the hotel totalled $997 million.  PanJam holds a 32 per cent stake in the venture. The 129-room hotel opened its doors officially on December 1, 2015.
• Jamaica’s rum exports are projected to grow in the medium term, in contrast to the global picture where a downturn is expected, according to a new report. The global rum market will decline over the next five years, according to joint research from Just-Drinks and The IWSR, laid out in Global Rum Insights. Jamaica’s producers exported US$37.3 million worth of rum between January and November 2016 compared with US$35.5 million in the same period in 2015, according to Statistical Institute of Jamaica data.The global rum report forecasts a compounded annual decline of 0.5 per cent between 2016 and 2021, representing a decline of almost 3.7 million cases of rum.
• Scotia Group reported net profit of $2.2 billion for the quarter ending January 2017 in its financial results released Wednesday. Profit was up 12 per cent year on year, as loans and transaction volumes grew across the group. Within the quarter, the bank netted $2.25 billion in fees and commissions, up 28 per cent from the prior year. Currently four-fifths of SGJ transactions occur outside of the traditional branch queues.
• Regional producer Trinidad Cement Limited (TCL) made TT$52.4 million in net profit in 2016, which was a substantially worse performance than the previous years. Profits fell 87 per cent from TT$428.8 million. It was due in part to reduced revenues at TT$1.8 billion, down from TT$2.1 billion a year earlier, but was the result of one-off refinancing gains of TT$200 million, which had boosted the 2015 results.
• Sterling, with earnings of $78.6 million in 2016 relative to $71.19 million in 2015, said its strategy of investing mainly in $US fixed-income assets on behalf of its shareholders — which include large pension funds, retirees and individual investors — paid off. Gross revenue was $141.4 million for the fiscal year 2016 compared to $119.3 in the prior year, an increase of 18.6 per cent.
• A top ratings agency is saying Digicel Group needs to improve its free cash flow by next March in order to offset debt maturities. Digicel needs material recovery in free cash flow generation to avoid any potential refinancing risk of escalating debt maturities, said US-based Fitch, which maintained a B/Stable rating for the telecom. Some of the areas that Fitch views as key drivers for the growth of free cash flow in the short to medium term include stable foreign exchange rates, cable operation turnaround, and meaningful cost savings under Project Swan. Fitch estimates that Digicel requires at least US$1.1 billion of earnings before interest tax, depreciation and amortisation (EBITDA) to achieve breakeven free cash flow, backed by reduced capex of US$400 million in FY 2018 and FY 2019.
• JAMT purchases Gov’t stake in KIW – On Monday, March 6, JAMT advised through the Jamaica Stock Exchange that the agreement for the purchase of Government of Jamaica’s (GOJ) 42.59 per cent interest in KIW was signed on Friday, March 3. The purchase price is $57 million. An initial deposit of $10 million has been paid, with the balance payable in approximately 30 days. In early 2016, the company made a bid to acquire the GOJ’s interest in the property, which comprises factory and warehouse space located at 138 Spanish Town Road in Kingston 11.

And internationally…

• Airbnb raises more funds. 2nd Largest Startup – Airbnb has closed on a more than US$1 billion round of funding, a source close to the company told CNBC. The round was confirmed in an SEC filing that dropped on Thursday. The company is now worth approximately US$31 billion. The company also turned profitable in the second quarter of 2016, a person close to the company confirmed with CNBC. The home-sharing giant further expects to be profitable this year, the source said, and has no plans to go public soon. Airbnb was last reported to be raising cash at a $30 billion valuation, making it the second-most valuable start-up in the U.S., trailing only Uber.
• Volkswagen has a new partner in India: Tata Motors – The two automakers announced the formation of a new “strategic alliance” on Friday aimed at developing components, and possibly new vehicles. Volkswagen CEO Matthias Mueller said the partnership would help it “achieve sustainable and profitable growth in very different parts of the world.” Tata Motors, the owner of Jaguar Land Rover, has been under pressure at home. It has a reputation for making cheap cars, but wants to move upmarket to capitalize on the growing spending power of India’s middle class. Toyota – VW’s big global rival – is also looking for new opportunities in India. It’s in talks to form a partnership with Japan’s Suzuki, which has decades of experience building small cars in the country.
• BMW sees first decline in Sales in 7 years – The self-proclaimed ultimate driving machine has hit a pothole in the world’s most important luxury market. BMW AG’s U.S. operation helped fuel the German auto maker’s rise, but it is now struggling to keep pace in the cutthroat American market. The company reported its first decline in US sales in 7 years
• Snap Slides – Not A Single Analyst Rates As BUY – After an IPO that had financial reporters scoffing about how much money Snap left on the table by pricing “too low” the company’s shares spent the next few days tumbling to new lows. Snap’s first week of trading has not been the smoothest. After rising 44 percent and 10.6 percent in its first two days of trading, respectively, the stock dropped 12.3 percent and 9.8 percent in its next two days. Snap’s shares closed down in four out of five days. The lowest close came on Friday, at $22.07 per share. Several Wall Street analysts initiated coverage of the stock with a sell rating, while only a few initiated the stock with a neutral rating, citing valuation and growth concerns (including the company’s fundamentals, widening losses, slowing user growth and fierce competition from larger rivals).

Here are some key market and economic figures

• Stock Market Movement: -2.49% Week-to-date (0.68% Last week) | MTD – 1.58% (Mar), 9.26% (Feb), 10.09% (Jan) | Year To Date – 18.09%, 21.11% YTD Last Week (27.6% YTD 2016)
• Inflation: 0.4% – Jan, 0.3% – Dec (Month) | 1.7% Jan 16 – Dec 16 (YTD)

• Unemployment: 12.9% – Oct 2016 (12.9% as at Jul 2016)
• GDP: 2% – Jul – Sep 2016  (1.4% – Apr – Jun 2016) (Rate of Growth of Value Added at Constant (2007) Prices Seasonally Unadjusted)

Thanks for reading Vol. 2017 Issue No. 10 of our weekly digest. (Mar 6th – Mar 12th, 2017). All Weekly reviews can be viewed here.