Russia Defaults, Clinton Confesses, Embassies Bombed: A Month That Shook the World and Jamaica’s Property Market — September 1998

Publication Date: 3 September 1998 | Coverage Period: 3 August–2 September 1998 | Category: Monthly Review

Month in Brief

• Russia devalued the rouble and declared a moratorium on sovereign debt repayments on 17 August, triggering the most severe emerging-market panic since the onset of the Asian crisis eleven months prior.
• The United States embassies in Nairobi, Kenya, and Dar es Salaam, Tanzania, were destroyed by near-simultaneous bomb blasts on 7 August, killing more than 220 people and injuring thousands; Washington attributed responsibility to Osama bin Laden’s al-Qaeda network.
• President Clinton testified before a grand jury on 17 August and hours later delivered a nationally televised address admitting to an inappropriate relationship with Monica Lewinsky, producing a constitutional crisis that transfixed domestic and international observers alike.
• Global equity markets sold off sharply following the Russian default, with emerging-market bond spreads widening to post-Brady-restructuring records; commodity prices, already depressed by the Asian slowdown, fell further.
• Jamaica’s Financial Sector Adjustment Company (FINSAC) continued its receivership and asset-disposition programme, with the combined distressed real-estate portfolio under management estimated at several billion Jamaican dollars.
• The Bank of Jamaica held its policy stance broadly unchanged, with Treasury bill yields remaining in the vicinity of 22–26 per cent, sustaining the credit freeze that has effectively suspended the secondary residential mortgage market since late 1997.

Housing Market Overview

The residential property market in Jamaica entered September in a condition that observers have taken to calling structured immobility: prices are nominally quoted, agents remain active, and the NHT continues to process applications, yet the volume of arm’s-length commercial transactions has shrunk to a fraction of levels that obtained before the banking sector’s sequential collapse began in earnest in 1995. The immediate cause is not difficult to identify. Commercial mortgage rates — where lenders are willing to advance funds at all — continue to be quoted in the range of 28 to 35 per cent per annum in nominal Jamaican dollar terms. At those rates, the carrying cost of even a modestly priced suburban property is prohibitive for all but the most equity-rich purchaser.

The Russia shock of mid-August is unlikely to improve matters in the near term. Emerging-market risk premia have widened dramatically across asset classes, and Jamaica — a small, open economy with a floating exchange rate and significant external debt — is acutely sensitive to shifts in global investor sentiment. The Jamaican dollar, already under steady pressure throughout the year, faces renewed depreciation risk as portfolio flows seek the safety of US Treasury obligations. A weaker exchange rate feeds directly into construction costs (imported cement, steel, fixtures and fittings are all priced in foreign currency), compounding the affordability problem at the development end of the market.

In the upper segment of the residential market — properties priced above J$10 million — anecdotal evidence from agents in New Kingston, Cherry Gardens, and Norbrook suggests that vendors who had been holding firm on asking prices through the first half of 1998 are beginning to shade their expectations downward. Buyers, where they exist, are almost exclusively cash purchasers, often drawing on remittance income or offshore savings. This has compressed the effective market to a narrow band of transactions that bear little resemblance to the broad-based activity that characterised the early 1990s.

Government Policy and FINSAC

Prime Minister P.J. Patterson’s administration continues to navigate the twin imperatives of macro-economic stabilisation and social protection in conditions of severe fiscal constraint. The government’s commitment to the FINSAC resolution — backstopped, ultimately, by public funds — represents the dominant fiscal pressure on the 1998/99 budget. The scale of the intervention is without precedent in Jamaican economic history: the combined liabilities absorbed by FINSAC from collapsed institutions including Century National Bank, Eagle Merchant Bank, Workers Savings and Loan Bank, and a clutch of insurance companies and building societies run to the equivalent of several percentage points of GDP.

The disposition of the real-estate portfolios that came with these failed institutions is proceeding, but slowly. FINSAC’s mandate requires it to maximise recoveries on behalf of creditors and ultimately the Jamaican taxpayer, which creates an institutional disinclination to accept the sort of deeply discounted bids that a distressed-asset auction would generate in current market conditions. The result is a shadow inventory of commercial, industrial, and residential properties that is depressing the market’s price-discovery mechanism without itself clearing.

The Patterson government is also grappling with the implications of the global shock transmitted by the Russian default for Jamaica’s external accounts. Bauxite and alumina remain Jamaica’s primary merchandise export earners, and aluminium prices — already weakened by the Asian demand slowdown — have fallen further in August as global industrial confidence deteriorated. Lower export revenues reduce the government’s already-constrained foreign exchange position and increase the pressure on the Bank of Jamaica to defend the Jamaican dollar through interest rate policy.

Construction Sector

The private construction sector has recorded its fourth consecutive quarter of contraction. Starts data compiled by the Statistical Institute of Jamaica confirm that new residential units entering the pipeline in the six months to June 1998 fell to levels not seen since the mid-1980s. The pattern is consistent across all price segments, though the contraction is sharpest in the speculative townhouse and apartment market in Greater Kingston, where developers who built on the assumption of continued credit availability from the now-collapsed merchant banking sector find themselves with partially completed schemes and no refinancing options.

Government-sponsored construction, principally through the National Housing Trust and the Housing Agency of Jamaica, continues to provide the primary counterweight to the private-sector contraction. NHT schemes under construction or in advanced planning at Portmore, Naggo Head, and various rural parish centres represent the most significant housing investment activity in the economy. The NHT’s ability to lend at rates between zero and five per cent — funded by the mandatory payroll contribution — places it in an entirely different competitive position from commercial lenders and ensures that it will account for an ever-larger share of new completions through the remainder of this decade.

Investment Perspective

For investors with liquidity and a tolerance for illiquid assets, the current environment presents a paradox. On the one hand, FINSAC-related distressed properties and the shadow inventory of stalled developments offer potential acquisition opportunities at prices that are likely to prove attractive in a normalised interest-rate environment. On the other hand, the Russian crisis has demonstrated with uncomfortable vividness how quickly emerging-market conditions can deteriorate, and Jamaica’s macro fundamentals — high debt, falling export receipts, a vulnerable exchange rate — leave little margin for error.

Diaspora investors, who have historically been a significant force in the Jamaican residential market, are watching developments carefully. The Jamaican communities of the United Kingdom, Canada, and the United States collectively remit sums that are material to the country’s balance of payments, and individual members of those communities are the principal source of cash purchase activity in the upper-middle residential segment. The turbulence in global financial markets during August is likely to make diaspora investors more cautious, even if their personal financial circumstances remain sound, simply because the macro backdrop generates uncertainty about exchange-rate outcomes.

Diaspora and Remittance Dynamics

Remittance flows to Jamaica have held up better than most economic indicators during the crisis period, reflecting the resilience of the Jamaican diaspora communities in the United States, United Kingdom, and Canada. For the housing market, diaspora remittances are performing a critical stabilising function: in many communities, particularly in rural parishes and the inner-city areas of Kingston and St. Andrew, remittance income represents the primary — sometimes the sole — source of funds available for home improvement, land purchase, and informal construction.

The structural shift in the Jamaican housing market toward remittance-funded, owner-managed construction — as opposed to developer-built, mortgage-financed housing — has been accelerating throughout the FINSAC period. This shift carries implications for quality, building standards enforcement, and the formal registration of property titles that will take years to fully assess. In the immediate term, however, it represents a genuine and significant demand channel that is operating largely outside the formal financial system and is therefore invisible in conventional mortgage statistics.

Affordability Analysis

The affordability picture for Jamaican households considering home purchase in September 1998 is as stark as it has been at any point in the post-Independence era. A household earning the median formal-sector wage — approximately J$8,000 to J$10,000 per month — cannot service the mortgage on even the most modestly priced formal-sector new-build at commercial lending rates. The arithmetic is unambiguous: a J$2.5 million mortgage at 30 per cent per annum over 20 years requires a monthly payment of roughly J$62,500, or more than six times the median household income. Affordability, by any conventional measure, is essentially absent from the commercial market.

The NHT remains the only institution capable of providing genuine affordability to qualifying borrowers. NHT’s tiered lending programme — offering rates from zero per cent for the lowest income tier to five per cent for higher earners, on loans up to specified limits — compresses the monthly payment on a comparable mortgage to somewhere between J$9,000 and J$14,000, which is within reach of a dual-income household at median wages. The political and economic importance of the NHT in this environment cannot be overstated: it is functioning as the market’s primary affordability mechanism and demographic pressure valve simultaneously.

Looking Ahead

The outlook for Jamaica’s property market as the fourth quarter of 1998 approaches is cautious at best. The external environment, already difficult before the Russian shock, has deteriorated further. Global investors are reassessing emerging-market exposures across the board, and Jamaica — despite its differentiated position as a dollarised, tourism-dependent economy rather than an Asian-style export manufacturer — is unlikely to escape the general contagion entirely.

Domestically, the pace of FINSAC resolution will be the single most important variable for the property market. A faster, more transparent disposition of the distressed real-estate portfolio — even at deeply discounted prices — would establish a clearing price for the market and allow the price-discovery mechanism to resume functioning. Continued delay perpetuates the uncertainty that is as damaging to market confidence as the high interest rates themselves.

The Bank of Jamaica’s ability to lower its policy rate meaningfully is constrained by exchange-rate considerations and the ongoing fiscal demands of the FINSAC resolution. Readers should expect BOJ Treasury bill yields to remain above 20 per cent through the end of 1998, barring a significant improvement in the external environment. In that scenario, the commercial mortgage market will remain effectively closed for new lending, and the NHT will continue to bear a disproportionate share of the burden of housing Jamaica’s growing population.