The third quarter of 1997 was not the quarter in which Jamaica turned a corner. Corners require fiscal space, investor confidence and the kind of economic momentum that generates visible activity at the parish road level, on the construction site and in the new housing scheme. None of those conditions obtained in July, August or September of this year. What the quarter offered instead was something more modest and in some ways more important: continuity. The FINSAC process continued its work without producing a new crisis. The road network survived another wet season without collapsing. The port handled its containers. The power plants generated their megawatts. The National Housing Trust disbursed its mortgages. None of this constituted progress in the expansive sense. All of it constituted the maintenance of the physical foundations that will be required when progress eventually resumes.
Key Highlights
- FINSAC intervention process deepens through Q3; asset management programme taking shape as intervention phase matures
- Above-normal 1997 Atlantic hurricane season brings rains and flooding to Jamaica; no direct major hurricane strikes
- GDP contraction continues: third consecutive quarter of negative growth; -1.6% expected for full year
- Road maintenance: wet season damage assessment begun; October dry season cycle will face familiar budget constraints
- KCT transshipment volumes growing; Caribbean hub position consolidating as regional rivals continue to develop
- Interest rates beginning gradual decline as inflation stabilises below 10%; first signals of a mortgage market thaw
FINSAC in its third quarter of operation was evolving from a crisis management instrument into something with a longer-term institutional logic. The intervention phase — the rapid assumption of control over distressed institutions, the appointment of temporary managers, the stabilisation of depositor confidence through the implied guarantee of government backing — was not complete. But it was sufficiently advanced that the organisation’s attention was beginning to shift, at least in part, toward the next phase: the management of the assets it had inherited and the design of the disposal process through which those assets would eventually return to private hands. The hotels, the office buildings, the development land, the mortgage portfolios and the corporate equity stakes that had accumulated in FINSAC’s hands represented a significant portion of the Jamaican commercial and real estate landscape. How they were disposed of would shape the property market, the development sector and the overall investment climate for years after the financial crisis itself had been resolved.
The fiscal position was not improving. The FINSAC costs that had been expected to be large were proving to be larger than expected, as the examination of each intervened institution’s balance sheet revealed losses that the pre-intervention assessments had, in some cases, understated. The government was financing those costs through a combination of domestic debt issuance, which was pushing up the public debt stock at a rate that would have been alarming in a more comfortable economic environment, and through mechanisms that involved the Bank of Jamaica’s balance sheet in ways that the monetary orthodoxy of the preceding years had been designed to avoid. The macroeconomic stabilisation that the financial sector rescue was supposed to eventually produce was real in some dimensions — inflation was falling, the exchange rate had stabilised in relative terms — and deferred in others, particularly the interest rate reduction that would allow mortgage lending to resume at scales that the housing market actually needed.
The Annual Wet Season Account
The 1997 Atlantic hurricane season was more active than average — eight hurricanes, five of them reaching major intensity — but Jamaica’s geography provided protection through the third quarter. Tropical systems that might, at different tracks, have produced significant damage on the island instead passed to the north or south. What Jamaica received was not a hurricane but something that is, in the aggregate, equally damaging to infrastructure over time: heavy rainfall distributed across multiple weather systems through July, August and September, producing localised flooding, landslides and road damage in the steep terrain of the Blue Mountains, the John Crow Mountains and the hillside communities of St. Andrew, Portland and St. Thomas.
The damage pattern was not exceptional by Jamaican standards — it was the standard wet season account that the Ministry of Works assessed every September in preparation for the October dry season programme. What distinguished 1997’s assessment from those of the mid-1990s was the fiscal context in which the repair work would have to be funded. In 1995 and 1996, the road maintenance programme had operated with meaningful resources and had produced visible results in several parishes. In 1997, the programme would operate with whatever the budget provided after FINSAC, debt service and recurrent expenditures had taken their share. The engineers assessing the wet season damage were doing so in the knowledge that the repair budget would be, at best, sufficient to address the most acute failures and little more.
The Port Keeps Growing
Against the backdrop of economic contraction, the Kingston Container Terminal continued to present Jamaica’s most consistent positive infrastructure story. Operating at the 1.2 million TEU capacity that the Gordon Cay expansion had delivered, the terminal was handling growing transshipment volumes as Caribbean trade lanes continued to expand and as Kingston’s position as the closest deep-water port to the Panama Canal continued to attract shipping lines looking for efficient transshipment options for Caribbean-bound cargo.
The competitive landscape was, as always, challenging. Freeport in The Bahamas and Caucedo in the Dominican Republic were each investing in their own capacity expansions. The Latin American ports that served regional feeders were improving their own handling capabilities. But Kingston had geographic advantages that its competitors could not replicate: its position on the main east-west shipping lane, its natural deep harbour that required less dredging maintenance than some alternatives, and the accumulated institutional knowledge of a terminal that had been operating as a transshipment hub since 1975. The port’s expansion was not merely adding capacity; it was deepening the operational competence and commercial relationships that would sustain that capacity against competitors who were still developing theirs.
Power and Regulation: The OUR’s First Year
The Office of Utilities Regulation completed its first three quarters of formal operation through Q3 1997. The organisation was building its regulatory capacity: developing the tariff methodology for electricity, working through the licence renewal process for the Jamaica Public Service Company, establishing the consumer complaint procedures that its enabling legislation had mandated. The work was technical and necessarily slow — regulatory frameworks require careful development if they are to be robust enough to govern the relationship between a natural monopoly utility and its captive customers without being captured by either.
The two independent power producers continued their reliable generation through the quarter. Doctor Bird and Rockfort had now been operating together for two full years, and the performance data that was accumulating was consistent with the contractual commitments they had made at the time of their commissioning. Load-shedding, which had been the dominant quality-of-service issue for Jamaican businesses through the late 1980s and early 1990s, remained at the reduced level that the IPP additions had produced. The grid was not perfect — distribution network failures, transformer outages and the other symptoms of an ageing transmission infrastructure continued to cause interruptions that were not related to generation capacity — but the generation side of the equation was performing.
Tourism Infrastructure: A Sector Apart
The third quarter brought the beginning of the slow tourist season, and with it the opportunity to assess how the tourism infrastructure — which operated in Jamaica on a significantly different economic logic from the rest of the infrastructure account — was managing the FINSAC environment. The answer was: better than the domestic sectors, worse than the hoteliers would have preferred. The Sandals resorts, the Iberostar properties and the other all-inclusive operators that dominated the north coast were not primarily dependent on the domestic financial system for their capital or their customers. Their guests arrived with US dollars from North American and European markets. Their renovation and expansion programmes were financed through the operating cash flows of global hospitality groups or through external financing that was not routed through Jamaican domestic banks.
The tourism sector’s relative insulation from FINSAC was, in this sense, a demonstration of the same principle that had protected the independent power producers: economic activities that are contractually structured, externally financed and export-oriented are more resilient to domestic financial crises than those that depend on domestic credit and domestic demand. The lesson was not subtle, and it was already beginning to inform the thinking of the planners and economists who were considering what kind of economic strategy would follow the FINSAC recovery. The attraction of private foreign capital, structured through contracts that were resistant to domestic fiscal instability, was increasingly the preferred model for any new infrastructure investment that required capital Jamaica’s public sector could not currently provide.
What This Means
For homeowners, the third quarter of 1997 offers a tentative signal on interest rates: the dramatic decline in inflation to below 10 percent annually is beginning to create the conditions for lower borrowing costs, with a lag. Commercial lending rates, while still elevated by international standards, have begun to move from their historic highs. The move is gradual and the reduction in real borrowing costs is still limited, but the direction has changed. Homeowners who have been servicing commercial mortgages at the rates of the early-to-mid 1990s will begin to see some relief, in some institutions, as commercial rates edge lower over the coming months.
For buyers, the gradual decline in commercial interest rates is the most significant potential change in the buying environment since the FINSAC crisis began. NHT finance remains the primary and practically only accessible route for most buyers. But as commercial rates decline, the upper segment of the market that has been effectively frozen for eighteen months will begin to thaw. The thaw will be slow. But buyers who have been waiting for any positive signal before committing can, cautiously, begin to see one on the horizon.
For sellers, the signal is the same but the timeline is uncertain. The improvement in commercial lending conditions that will eventually produce more active buyers is not a Q3 1997 event. It is, at best, a 1998 or 1999 development, and only if the interest rate trajectory continues in the direction that falling inflation suggests it should. Sellers of premium property should not interpret falling inflation as the beginning of a recovery in their specific market segment. It is a necessary precondition for recovery. It is not recovery itself.
For developers, Q3 1997 is the quarter to map the FINSAC property portfolio as carefully as possible. The asset disposal programme that will eventually emerge from the rescue will be one of the most significant events in the Jamaican property market in a decade. Understanding which assets are in the FINSAC portfolio, in what condition, at what location, and with what development potential will position developers to respond intelligently when the disposal programme opens.
For investors, the third quarter confirms the thesis that has been visible since Q1 1997: the physical infrastructure of Jamaica is more resilient than the financial superstructure that was supposed to support it. Private infrastructure with contractual protection — power plants, port capacity — is performing. The institutional framework for utility regulation is maturing. The recovery, when it comes, will have a physical foundation to build on. Investors who can take a three-to-five year view should be positioning now, at the bottom of the cycle, rather than waiting for the macroeconomic indicators to confirm what the physical evidence is already suggesting.
For businesses, the third quarter brings the same combination that has characterised the year: reliable power, a functioning port, falling input costs from lower inflation, and very limited access to working capital from the commercial banking system. The last item remains the binding constraint for most Jamaican businesses. The former items are real advantages that will be increasingly visible as the recovery eventually arrives.
For commuters, the wet season has produced its annual round of road damage in the hillside communities and in the low-lying areas that drain poorly. The October dry season cycle will address the most urgent repairs with whatever budget the fiscal residual permits. The Portmore causeway situation is unchanged. A public transport solution that could meaningfully reduce the causeway’s traffic burden remains entirely absent from any visible government planning horizon.
For the diaspora, Q3 1997 marks the beginning of the period in which the exchange rate that prevails when diaspora remittances are converted into Jamaican dollars is becoming more favourable for purchasing property. The Jamaican dollar has weakened progressively against major currencies through the FINSAC period. For diaspora buyers sending US dollars to purchase property in Jamaica, that weakening translates into more Jamaican dollars per US dollar sent — which means more purchasing power in the local market than was available two or three years ago. The strategic case for diaspora property investment in Jamaica is strengthening even as the domestic market remains depressed.
The Outlook: October 1997 to March 1999
The eighteen months ahead will be characterised by the continuation of FINSAC’s intervention and asset management work, a gradual reduction in domestic interest rates as inflation stabilises at lower levels, and a road programme that will operate at the minimum necessary to prevent the most critical failures in the network. GDP growth will remain negative through 1997 and is expected to continue contracting modestly into 1998 before stabilising. The property market will begin its recovery process during this period, but slowly and unevenly — the segments that depend on commercial finance will recover last, as the commercial banking sector will be among the final beneficiaries of the normalisation that the FINSAC process will eventually deliver.
The event that may prove most consequential for Jamaica’s infrastructure trajectory in the next eighteen months is the first serious public discussion of what large-scale infrastructure investment will look like in the post-FINSAC period. The highway programme that has been in periodic discussion since the early 1990s — a concept for a toll road connecting Kingston to the north and west of the island, bypassing the tortuous routes through the mountains that currently carry commercial traffic between the capital and the tourism and agricultural regions — has not been advanced during the crisis years. The fiscal environment that prevented its advancement is gradually changing. The discussion, when it resumes in earnest, will reflect a very different understanding of what private capital can do for Jamaican infrastructure than the one that prevailed before FINSAC. The lesson has been expensive. It may yet prove instructive.
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