INVESTMENTS
Economic overview
The economy of Jamaica greatly relies on services that accounts for over 70 percent of its GDP. The Nation continues to earn most of the foreign exchange from remittances, tourism and alumina/bauxite. Both tourism and remittances accounts for 30 percent each, whereas alumina/bauxite exports contribute roughly 5 percent of the GDP. The alumina/bauxite sector was the greatly affected by global downturn whereas the remittance flow and tourism industry remained resilient.
The economy encounters several challenges to its growth including soaring corruption and crimes, huge-scale underemployment and unemployment as well as a debt-to-the-GDP ratio that is about 130 percent. The significant debt servicing expenses consumes a great portion of its government budget, thus limiting its ability to fund the most critical social programs and infrastructure required to enhance growth. The economy growth rate has also been just stagnant, averaging below 1 percent annually for more than 20 years now. The heavy Jamaica`s public debt is mostly as a result of the government bailouts regarding the ailing economic sectors, most notably the financial segment (CIA, 2016).
Macro environment
Interest rate
The Jamaica`s interest rates bench mark was lastly recorded as been 5.25 %. The interest rates averaged at 13.27 percent from the year 1996 to the year 2016, touching the highest point of 33 percent in 1996 in October as well as a lowest record of 5.25 percent in 2015 the month of August. The rate is has always been reported by Bank of Jamaica (Trading Economics, 2016a).
Inflation
The rate of inflation in Jamaica was indicated to be at 3.66 percent for 2016 on the month of February. It was 10.20 percent since the year 2002, touching the highest level mark of 26.49 percent in 2008 the month of August while recording the lowest level mark of 1.80 percent about the September of the year 2015 (Trading Economics, 2016b).
Balance of payment
The last measurement of Jamaica’s Income Payment (Bop; the US dollars) was at $694,079,948.50 back in 2004, as per the measurements of World Bank. The income payment is the employees’ compensation that is paid out to the nonresident workers as well as investment income (the payment on portfolio investment, direct investment, in addition to other investments). The income that is derived from use of the intangible assets normally is excluded from the income and then recorded under the business service (Trading Economics, 2016c).
Currency
There was a decrease of USDJMD by 0.02 percent on March 29th from 121.68 compared to the preceding trading season. On the other hand, there was a gain of 5.98 percent to 121.66 for the last one year from 114.80 on 2015 in March. Historically, Jamaican Dollar touched its highest peak on 2016 in March with a rate of 121.76 and the lowest exchange in 2004 around the month of April at 59.80 (Trading Economics, 2016d).
Taxation & Tariff
Jamaica`s greatly favored country; the weighted mean; the manufactured products (percentage) was lastly measured in 2011 at 10.44, as per the measures of World Bank. The weighted mean of the most favored country tariff refers to the average for the most favored country rates as weighted by commodity import shares in correspondent to every partner nation (Trading Economics, 2016e).
Foreign Direct Investment (FDI
The direct foreign investment; the net inflow (as percent of GDP) was lastly measured in Jamaica in 2013 at 3.72 percent, as per the measures of World Bank. The foreign direct investment refers to net investment inflows to earn a management interest that is lasting (10% or even more of the voting stock) within an enterprise that is operational in the economy besides that of an investor. This is the total sum of the equity capital, earnings reinvestments, other short-term and long-term capital (Trading Economics, 2016f).
Industry overview
Agricultural import constitutes a significant part of the Jamaica’s GDP, in the year 2013, it was 6.5%. The main exports are bananas, sugar, coffee, spices pimentos, citrus, coconuts and cocoa. Traditional commodities for export are mainly bananas and sugar and continue dominating this sector through earnings in foreign exchange, with contribution of about 65% of the total earnings from the export in 2000. Preferential agreement on trade preservation for these types of products is important to Jamaica in both medium- and short-term strategies of WTO (FAO, 2016).
The agriculture ministry aim at being the catalyst in developments that are sustainable of natural resources as well as agriculture sector in Jamaica by 2020 (MOA, 2014). To advance development of modern, internationally competitive and efficient sector of agriculture as well as fishery resources sustainable management in order to enhance food security, it has taken the mantle. This is in addition to the effort of contributing to well-being and development of Jamaican people (Grant, 2015).
Micro environment
Market structure
Commodity Boards are assisted by liberalization to adapt to an approach that is more oriented to business generally and many private individuals can participate in their general operation and management improvement. As result of competition in the domestic market, farmers have become more conscious of standards and the need for improving their products’ presentation particularly in supermarkets.
In regard to the Framework of the Agricultural Policy, the government has reaffirmed its commitment towards the achievement of the following goals:
Productivity and production enhancing in various subsectors which include banana, coffee, sugar, citrus and cocoa markets.
Export level expansion in both non-traditional and traditional commodities.
Support provision through extent ion and development as well as through research services emphasizing on crop care services.
Value-added production increase through improvement of the agro-processing.
Training on business development delivery for farmers.
Increase of policy analysis and planning capacity in the ministry of agriculture as well as increase in trade agreements, financing and negotiation partnership within different forums (FAO, 2016).
Taxation & Tariff
Corporate tax
The country has a corporate tax rate of 25%.
Tariffs
Jamaica opted to wave all the agricultural tariffs to 100 percent in the UR period. The rest of charges and duties were reduced to 15%; except for 56 products in which the rate were set at 80% while three sugar products were set at a rate of 200%. It applied tariffs including CARICOM CET, which ranges from 0% to 40%. The applied simple average was that of MFN tariff for the agriculture products which was about 20.2% by the year 1997.
Import licensing
For products made from milk the licensing is automatic.
Tariff rate quotas
Rate quotas for tariff are not applied in the country.
Legislation regarding trade remedies
The country has not been able to apply special safeguarding mechanism for agricultural products which are provided by AoA. Agricultural products binding ceiling are only policy area flexible. That is available to the Jamaica and has rarely been used since WTO inception. Further, it’s the only instrument that is effective and which can be used for defending the domestic industries from subsidized or dumped imports. However, the, classic remedy instruments for the trade by WTO for small and developing countries are not friendly, but arrangements have been made to apply them if necessary.
In 200, the Safeguard Act was enacted in Jamaica. Under the Act, Government is in a position of pursuing the safeguarding action for protecting the domestic industries against surges in import, which could cause injury or threaten those industries. The legislation have provided for establishment of Subsidies and Anti-dumping Commission as well as countervailing and anti-dumping duties imposition against subsidized or dumped goods.
Customs valuation
The implementation of the WTO customs agreement valuation is currently in progress. New system of custom valuation is anticipated to soon commence and be functional (FAO, 2016).
Incorporation regulation
There are two options which investors can choose for businesses:
A Company: Incorporated or registered commercial enterprise under Companies Act
A Business: Partnership or sole trader registered under Business Name Act
Companies that are operating in the country should register their entity with Companies Registrar Office, which then produces official documents such as Incorporation Certificate for the company (JAMPRO, 2016)
Risks posed to businesses
High interest rate that means that the business could have to pay high interest expense for any debt financing.
Increasing competition from increased entry by foreign firms given the market’s increased liberalization.
Opportunities for businesses
Ease of market entry considering the less regulation and requirements for foreign firms registration
Better agribusiness systems supporting the agricultural based businesses with the ministry of agriculture playing a key role.
A suitable market for the agricultural product given that the country is both a great consumer and exporter of the products
In view of the above identified opportunities, a UK company can easily enter the Jamaica market in pursuit of growth (Baghai and While, 2000).
Market entry feasibility: Tate & Lyle Jamaica
Company overview
Tate and Lyle Jamaica is a proposed subsidiary of the UK Company Tate and Tyle that has operations in production of sugar and sugar products (Mulligan, 2010). The company is established in Jamaica given the country’s suitability for the product growth and marketing.
Financial Forecasts
As a means of identifying the feasibility of the Company’s operations in Jamaica, there is need for a comprehensive financial analysis of the venture in terms of the projected cash flows as well as the company valuation. That is useful in determining whether the funds being invested will have suitable returns and whether the expected new company’s value is worth the investment (Paramasivan & Subramanian, 2012).
Considering that the business will be established as a new subsidiary of Tate & Lyle in Jamaica, the following is an estimation of the capital budget.
In view of the above capital budget estimate, the business will require 21, 800,000 to begin with $15,000,000 being financed from loans at the prevailing market rate of 13.27%. The balance of 6,000, 000 will be raised inform of the Tate Plc accumulated profit investments investment in the region.
Regarding the financial performance forecasts, the following is an estimation of the company’s market share and revenues for the first year that is then used as the basis of the other years’ estimations. The market share and revenue estimation is done using the A*T*A*R model where the expected availability of the company products, trial rate, accessibility and the Repeat purchase rates are applied.
Source: (FAO, 2016)
In view of the above estimation, it is forecasted that the business will earn 18% of the market share for the first year. In that respect and considering the average market value of the sugar products in the Jamaican product to be $97, 2590,000, the revenue for the first year is estimates as $1,770,113.80.
With the above revenue estimates the company’s income statement is shown as follows forecasting five years beginning the year 2017 to 2021.
Source: (FAO, 2016).
In view of the above income statement, the business will begin with loss making for the first three years but will turn profitable in the third year. Regarding the forecasted balance sheet, the following summarizes the company’s position as at the end of the years 2016-2021.
In view of the above balance sheet, the company is shown as growing the shareholders wealth with the increase of the shareholders equity from the year 2020 when it makes profits.
Given the above two forecasted statements; the following is an estimate of the net cash-flows for the Company over the period.
In view of the above statements and the market data, the Company’s CAPM, WACC and the discounted cash-flows are calculated as follows
The CAPM is calculated for the Tate and Tyle as a US company whose subsidiary seeks entry into the market. In that respect, the CAPM formula used is
CAPM = rest = rf+β (rm-rf)
Where:
Rf is the risk free rate that is in this case considered as the 1 year Treasury bill rate in the new market Jamaica.
Rm is the market return rate in this case taken as the FTSE 100 index returns for one year.
β id the beta for the Tate & Tyle UK company.
Using the calculated CAPM and the other information, the company’s WACC is calculated as above. With that, the WACC is then used as the rate used to discount the free cash-flows providing the above discounted cash-flows for the company. In view, of the cash-flows, the business would be viable given that it generates positive cash-flows hence capable of sustaining its operations in the market (Damodaran, 2010).
Reference list
Baghai, S. and While, D. 2000. The Alchemy of Growth. Knutsford, Cheshire: Texere Publishers:
BChart, 2016. Jamaica Treasury Rates. [Online] Available at <http://www.barchart.com/economy/treasuries.php > [Accessed 29 March 2016].
Bank of Jamaica, 2016. Economic Statistics. [Online] Available at <http://boj.org.jm/statistics/econdata/stats_list.php?type=5> [Accessed 29 March 2016].
CIA. 2016. Jamaica: World Fact book. [Online] Available at <https://www.cia.gov/library/publications/the-world-factbook/geos/jm.html> [Accessed 29 March 2016].
Damodaran, A. 2010. Applied Corporate Finance. 3rd ed. Colorado: Wiley.
Eugene, F. and Kenneth, French, R., 2004. The Capital Asset Pricing Model: Theory and Evidence. Journal of Economic Perspectives. 18(3), pp. 25–46.
FAO, 2016. WTO Agreement on Agriculture: The Jamaica Implementation Experience. [Online] Available at <http://www.fao.org/docrep/005/y4632e/y4632e0m.htm> [Accessed 29 March 2016].
FTSE. 2016. FTSE 100 Index. FTSE Factsheet.
Grant, S., 2015. Jamaica Sugar Annual Report 2015. [Online] Available at <http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Sugar%20Annual_Kingston_Jamaica_5-8-2015.pdf> [Accessed 29 March 2016].
JAMPRO, 2016. Doing Business in Jamaica. [Online] Available at <http://www.jamaicatradeandinvest.org/about-ja/doing-business> [Accessed 29 March 2016].
MOA. 2014. Ministry of Agriculture and Fisheries 2014-2015. [Online] Available at <http://www.moa.gov.jm/AboutUs/MoAF-2014-2015-Operational-Plan.pdf> [Accessed 29 March 2016].
Mulligan, J. 2010. London-listed exposure to the agricultural sector. http://www.iii.co.uk/12046/london-listed-exposure-agricultural-sector
Paramasivan, C. & Subramanian, T. 2012. Finance Management. New Delhi: New age International Publishers.
Property Ads Jamaica, 2016. Property Prices. [Online] Available at <http://www.propertyadsja.com/index.asp?SearchListingType=1&SearchPropertyType=5> [Accessed 29 March 2016].
Reuters, 2016. Rate & Lyle Stock Overview. [Online] Available at <http://www.reuters.com/finance/stocks/overview?symbol=TATE.L> [Accessed 29 March 2016].
Trading Economics, 2016a. Jamaica Interest Rates. [Online] Available at <http://www.tradingeconomics.com/jamaica/interest-rate> [Accessed 29 March 2016].
Trading Economics, 2016b. Jamaica Inflation. [Online] Available at <http://www.tradingeconomics.com/jamaica/inflation-cpi> [Accessed 29 March 2016].
Trading Economics, 2016c. Jamaica Balance of Payments. Available at <http://www.tradingeconomics.com/jamaica/income-payments-bop-us-dollar-wb-data.html> [Accessed 29 March 2016].
Trading Economics, 2016d. Jamaica Currency. Available at <http://www.tradingeconomics.com/jamaica/currency> [Accessed 29 March 2016].
Trading Economics, 2016e. Jamaica Tariff Rates. Available at <http://www.tradingeconomics.com/jamaica/tariff-rate-most-favored-nation-weighted-mean-manufactured-products-percent-wb-data.html> [Accessed 29 March 2016].
Trading Economics, 2016f. Jamaica Foreign Direct Investments. Available at <http://www.tradingeconomics.com/jamaica/foreign-direct-investment-net-inflows-percent-of-gdp-wb-data.html > [Accessed 29 March 2016].
