Hong Kong Handover and the Baht’s Fall: Global Shifts Arrive as Jamaica’s FINSAC Crisis Deepens — July 1997

Publication Date: July 3, 1997 | Coverage Period: June 3–July 2, 1997 | Category: Monthly Review

Month in Brief

• On July 1, 1997 — within our coverage window — the United Kingdom formally handed sovereignty over Hong Kong to the People’s Republic of China after 156 years of colonial rule, in one of the most watched political events of the decade.
• On July 2, 1997 — the final day of this review period — Thailand’s central bank abandoned its defence of the baht’s dollar peg, allowing the currency to float freely; it immediately fell some 15–20 per cent. The full implications remain to be seen.
• Jamaica’s FINSAC-driven financial crisis continues to grip the domestic economy; the Bank of Jamaica is maintaining extraordinary interest rate levels — approaching 30–35 per cent — to defend the Jamaican dollar and contain capital flight.
• Commercial mortgage lending has effectively seized up in Jamaica; the National Housing Trust remains the only institution offering loans at rates accessible to ordinary working households.
• The construction sector reports continued suppression of new private-sector starts; NHT-backed schemes account for virtually all meaningful activity in residential development.
• The Jamaican diaspora in the United Kingdom, watching events in Hong Kong with considerable interest, confronts a domestic housing market at home that offers little near-term relief from the FINSAC inheritance.

Housing Market

Jamaica’s residential property market enters the mid-year mark in a state of near-paralysis that would have seemed extraordinary to observers even three years ago. With the Bank of Jamaica holding its benchmark rates in the 30–35 per cent range as the centrepiece of its FINSAC stabilisation strategy, commercial lenders have effectively withdrawn from new mortgage origination at any price that a borrower of ordinary means can service. What remains is a market sustained almost entirely by equity purchasers — a category restricted, in the Jamaican context, to a narrow stratum of the population — and by the National Housing Trust, whose concessionary rate structure stands in stark and almost surreal contrast to the commercial environment surrounding it.

Transaction volumes across the June 3–July 2, 1997 period remained deeply depressed. Kingston’s established residential neighbourhoods — Cherry Gardens, Norbrook, Barbican — saw only modest resale activity, with sellers unwilling to discount to the levels that cash buyers now demand. The expectation, increasingly common in developer conversations, is that the market will not meaningfully recover until the Bank of Jamaica can credibly reduce rates toward single figures; and that prospect, given the severity of the FINSAC workout, remains a matter for the medium term at the earliest.

Government Policy and the NHT

The National Housing Trust’s position as the effective last standing provider of accessible mortgage finance is no accident of circumstance — it reflects a deliberate policy architecture that predates the current crisis, but which the crisis has now rendered uniquely important. The NHT’s loan limits of approximately J$1.2 to J$1.5 million, with rates between zero and five per cent depending on contributor band, represent the only financing mechanism through which a Jamaican household on median earnings can contemplate a property purchase of any kind. That those limits do not stretch to cover the full cost of even modest new construction — given what land, block, cement and skilled labour now cost — is a structural constraint that the NHT has thus far been unable to resolve.

Government housing policy as signalled through the June period has focused primarily on NHT scheme delivery: the completion of units already under construction, the management of the waiting list, and modest expansion of employer contribution incentives. There is no credible private-sector complement to these efforts so long as the FINSAC workout continues to crowd out commercial lending capacity.

Construction Sector

Building material costs have remained elevated relative to the Jamaican dollar’s purchasing capacity, with the J$35–37 per US dollar exchange rate continuing to feed through into the price of imported inputs — roofing materials, electrical fittings, plumbing components — that cannot be sourced domestically. Contractors who took on fixed-price contracts before the full weight of FINSAC rate rises became apparent are navigating cash flow difficulties that, in some cases, have brought work to a halt on partially completed sites.

Skilled tradespeople — electricians, plumbers, carpenters, masons — report uncertain pipelines of work. The emigration of skilled construction workers, a perennial feature of Jamaica’s labour market dynamics, is reportedly intensifying as opportunities in the domestic sector narrow. This represents a structural deterioration that will complicate any eventual recovery: the workforce skills that a resumed construction sector will require are, in part, currently departing the island.

Investment Climate

Against this domestic backdrop, the events of the final two days of our coverage period demand careful attention from any investor with regional or international exposure.

The Hong Kong handover, completed in the early hours of July 1, was by any measure a geopolitical event of the first order. The territory’s return to Chinese sovereignty after 156 years of British colonial administration marks a fundamental shift in the governance of one of Asia’s principal financial centres. For the moment, the markets have absorbed the event with relative equanimity — Hong Kong’s Hang Seng Index has not signalled any immediate crisis of confidence — and Beijing’s commitment to the ‘one country, two systems’ framework has been reiterated at the highest levels. Nevertheless, the longer-run question of how Hong Kong’s status as a global capital market will evolve under Chinese sovereignty is one that regional investors will be watching with sustained attention.

Far more immediately alarming is the development on the last day of this review. On July 2, Thailand’s central bank, the Bank of Thailand, effectively conceded defeat in its defence of the baht’s peg to the US dollar, allowing the currency to float. The baht fell sharply — by some estimates 15 to 20 per cent against the dollar in the first hours of trading. The Bank of Thailand had been burning through foreign exchange reserves at an unsustainable rate for weeks, defending a peg that currency markets had concluded was untenable given Thailand’s current account deficits and the build-up of short-term external debt in its financial sector. This is a very fresh development and its full consequences are not yet clear. We will monitor closely.

For Jamaican investors and policymakers, the Thai episode carries an uncomfortable resonance. Jamaica is itself in the midst of defending its own exchange rate — the J$ against the US dollar at roughly J$35–37 — under conditions of severe stress in its domestic financial system. The parallels are not exact: Jamaica’s structural situation differs in important respects from Thailand’s. But the mechanics of a currency crisis — reserve depletion, capital flight, forced devaluation — are not unfamiliar to the Bank of Jamaica, and the sight of a central bank losing control of its peg in Southeast Asia will not go unnoticed at Nethersole Place.

Diaspora

For Jamaicans resident in the United Kingdom, the Hong Kong handover has been a topic of considerable discussion. Britain’s relationship with its former colonies — and the ceremonies, dignified and melancholic by turns, that marked the lowering of the Union flag in Hong Kong — have prompted reflection on postcolonial identity and Britain’s diminishing imperial footprint that resonates in communities whose own parents or grandparents made the journey from Jamaica in the 1950s and 1960s under British subjects’ passports.

On the practical matter of property investment in Jamaica, the diaspora continues to face the same set of obstacles that have characterised the FINSAC period: difficulty remitting funds efficiently at favourable exchange rates, limited availability of suitable properties at prices that reflect the depressed domestic market rather than a vendor’s aspiration, and uncertainty about rental yield management in their absence. The J$ weakness, were it to accelerate, would nominally improve the purchasing power of sterling or US dollar remittances — but only at the cost of further erosion of the Jamaican economy that makes those properties worth owning.

Affordability

The affordability crisis in Jamaica’s housing market is, at this juncture, essentially absolute for the majority of the workforce. A household earning the equivalent of J$8,000–12,000 per month — a reasonable approximation of median formal-sector income — cannot service any commercial mortgage at current rates for any property of any description in the established residential market. The arithmetic is not close: it is categorical. Only NHT contributors with sufficient qualifying periods and contribution histories have access to finance, and even then the loan quantum available does not cover the full cost of construction.

This is not a temporary dislocation awaiting a policy adjustment at the margin. It is a structural consequence of a financial sector crisis that has destroyed the balance sheets of the institutions that would normally intermediate between savings and property investment. The resolution of this affordability crisis is inseparable from the resolution of FINSAC itself — and FINSAC, on present trajectories, has years yet to run.

Looking Ahead

The months ahead will be dominated by two sets of dynamics, one domestic and one international, whose interaction will determine the conditions facing Jamaica’s property sector.

Domestically, the FINSAC workout continues. The government and Bank of Jamaica must balance the imperative of financial system stabilisation against the economic cost of interest rates that are strangling productive activity and property investment alike. There is no easy exit from this bind; the question is the pace of normalisation, not its direction.

Internationally, the Thai baht’s collapse on July 2 — which we are reporting here as an event of the very last day of our coverage — may prove to be a localised adjustment or the opening move in something considerably larger. Currency and asset market contagion in Asia, should it materialise, could affect global capital flows, commodity prices (including bauxite and alumina, of direct relevance to Jamaica’s foreign exchange earnings), and the appetite of international investors for emerging market assets of all kinds. We will watch the baht’s aftermath with the closest possible attention in our August edition.