Enron Falls as Jamaica Fights to Salvage Its Winter Season — December 2001

Publication Date: 3 December 2001 | Coverage Period: 3 November–2 December 2001 | Category: Monthly Review

Month in Brief

• Enron Corporation files for Chapter 11 bankruptcy on 2 December 2001 — the final day of this review’s coverage period — in what is immediately recognised as the largest corporate collapse in United States history: the consequences for global capital markets will be profound.
• The US-led coalition’s military campaign in Afghanistan, begun 7 October, has intensified through November: the Taliban is losing control of major cities, but the conflict’s course remains deeply uncertain and American public anxiety about further attacks has not abated.
• Jamaica’s tourism board reports that November forward bookings for the December–January peak season are running at approximately 55–60 per cent of the comparable 2000 levels, a deeply troubling figure as the island enters its most critical revenue quarter.
• Anthrax letter attacks in the United States, concentrated in October, have added a layer of bio-terrorism anxiety to the already-stressed American public — a further deterrent to the air travel on which Jamaica’s tourism depends.
• The Bank of Jamaica holds its policy rate steady in the 17–19 per cent band, its monetary stance unrelaxed by the external shocks of the autumn.
• Jamaica’s property market records its third consecutive month of severely depressed transaction volumes; practitioners in Kingston and on the north coast report the quietest November in a decade.

Housing Market Overview

November 2001 has been, by any measure, another month of near-suspension for Jamaica’s residential property market. The acute shock phase that began with the September 11 attacks has given way to a more chronic stagnation: the panic has passed, but the confidence has not returned. Buyers who withdrew from the market in September and October have not yet returned; sellers who pulled their listings have not yet re-entered; the mechanisms of the market — valuations, negotiations, mortgage approvals, conveyancing — are operating at perhaps 40 per cent of their normal throughput.

The fundamental problem facing Jamaica’s property market is not domestic. The island’s housing fundamentals — population growth, urbanisation, the aspiration to homeownership among the working and professional classes — have not changed. The NHT pipeline, however reduced in volume, continues to function. The banks have not collapsed; property values have not gone into freefall. What has changed is the external environment that surrounds Jamaica: the United States, the source of nearly two-thirds of Jamaica’s tourist arrivals and a large share of its investment flows, is at war and has experienced the worst terrorist attack in its history within the past three months.

In Kingston, the upper residential market remains essentially frozen. The professional and managerial class households that drive demand for properties above J$8 million are watching events with the same anxiety that characterises consumer behaviour across the Caribbean and indeed across the world. Their willingness to make large, illiquid capital commitments has not recovered, and there is no reliable indicator that it will recover quickly. The sub-J$5 million market, driven by NHT eligibility and the fundamental housing needs of the working population, is somewhat more active but still materially below normal seasonal levels for November.

The north coast is in the most difficult position. St James, Trelawny and St Ann — Jamaica’s primary tourism parishes — are experiencing a compound shock. The hospitality industry that sustains so much economic activity in these areas is operating at occupancy rates that do not cover costs. Workers have been laid off or had hours reduced. The community of small businesses that services hotel guests — craft vendors, taxi operators, restaurant owners, tour guides — has seen income evaporate. In this environment, any discretionary housing activity has entirely ceased.

Government Policy

The Patterson government’s policy response to the tourism crisis has been active if not transformative. The government has convened working groups with hotel operators, the Jamaica Tourist Board and relevant ministries to develop a recovery strategy for the winter season. The strategy centres on intensive promotional activity in the United States and Canada, with the government contributing to advertising campaigns designed to signal that Jamaica is open, safe, and welcoming.

On the housing front, the government’s options are constrained by the fiscal pressures that the tourism collapse has amplified. Capital expenditure on new NHT schemes is difficult to accelerate in the current environment without increasing public debt or diverting resources from other essential services. The government’s stated intention is to maintain the NHT’s existing delivery schedule and to explore public-private partnership models that might allow private developers to shoulder more of the upfront costs of scheme development in exchange for guaranteed NHT purchase commitments.

The Ministry of Finance is simultaneously preparing the 2002 budget against a backdrop of sharply reduced revenue projections. Hotel and related taxes, which had been budgeted on 2000-equivalent assumptions before the September crisis, are now expected to come in well below those projections. The resulting fiscal gap will require a combination of reduced expenditure and additional borrowing that will put further pressure on the domestic bond market and, by extension, on the BOJ’s rate management challenge.

Construction Sector

Jamaica’s construction sector is navigating its third consecutive quiet month. The hotel refurbishment and expansion pipeline has been entirely suspended; no north coast operator of any scale is commissioning new work. Infrastructure projects sponsored by the government continue, providing a residual base of activity, but they cannot substitute for the commercial and residential construction demand that has evaporated since September.

The residential sector is the one area where some activity persists. NHT-funded scheme construction continues at reduced pace, and the self-build segment — funded by remittances and household savings — has not stopped, though December’s diaspora return, which typically provides a significant injection of both cash and decision-making into the self-build pipeline, is expected to be substantially reduced this year given the suppressed travel environment.

Building materials prices have been relatively stable through November, which is one positive note for self-builders and small contractors who remain active. Cement and steel costs have not spiked in the way that some had feared following the September disruptions to US supply chains. Labour availability in the construction trades has, if anything, increased as the broader economic slowdown has put more skilled workers onto the market.

Investment Climate

The Enron bankruptcy filed on 2 December — the closing day of this edition’s coverage period — arrives as an additional body blow to a global investment environment that was already profoundly shaken. The collapse of one of America’s most celebrated and apparently sophisticated corporations, built on what is emerging as systematic accounting fraud of extraordinary scale, has not merely destroyed the wealth of Enron’s shareholders and employees. It has raised fundamental questions about the reliability of financial disclosure, the competence of external auditors, and the governance of major corporations that will preoccupy regulators, investors and analysts for years.

For Jamaica, the Enron collapse is the punctuation mark at the end of a sentence that 2001 has been writing since March. The US recession, the September attacks, the Afghanistan war, the anthrax letters, and now the largest corporate bankruptcy in history — the accumulation of destabilising events in the world’s largest economy has been relentless, and its effects on Jamaica’s tourism, investment and property market have been severe.

Against this backdrop, Jamaica’s institutional investors and commercial property owners are maintaining defensive positions. Government paper, with its yields reflecting the BOJ’s elevated rate policy, remains the preferred asset class for those with capital to deploy. Real estate, particularly commercial and hospitality property, is viewed as a hold-and-wait asset until the external environment clarifies.

Diaspora Activity

The diaspora’s situation in late 2001 is one of the most painful aspects of Jamaica’s current predicament. New York’s Jamaican community, one of the island’s largest and most economically significant diaspora concentrations, has been living through the most traumatic period in the city’s modern history. The September attacks struck New York as the epicentre, and the months since have been characterised by a grief and anxiety that has not yet fully lifted. Many Jamaicans in New York experienced the attacks directly — some lost family members or colleagues, others worked as first responders in the immediate aftermath.

Economically, the city’s downturn has fallen hardest on the service and hospitality sectors where Jamaican-Americans are concentrated. Hotel occupancy in New York itself has plummeted; the restaurant and entertainment industries have contracted sharply; and the broader economic anxiety has reduced discretionary spending in ways that affect the service sector disproportionately. Some diaspora members who had been remitting regularly have seen their own incomes reduced and have had to scale back their Jamaican commitments temporarily.

Diaspora property intentions — the long-term plans for retirement homes, investment properties, or family compound upgrades in Jamaica — have not been abandoned, but they have been deferred. The planning horizon has lengthened; the willingness to commit large sums has reduced. This is entirely rational given the circumstances, but its consequences for Jamaica’s property market and its self-build sector will be felt through 2002.

Affordability

The affordability situation at year-end 2001 represents a deterioration from even the difficult baseline that existed before September. Commercial mortgage rates — 22–26 per cent — remain unchanged and unreachable for the vast majority of working Jamaicans. The BOJ’s high-rate policy is not about to be relaxed in an environment of external uncertainty. And the income side of the affordability equation has, for many households in the tourism and related sectors, deteriorated through job loss or reduced hours.

The NHT remains the structural answer to this problem. Its 0–5 per cent mortgage rates represent the only viable path to formal homeownership for the majority of Jamaica’s aspiring property owners, and the Trust’s continued operation through the crisis period is a genuine achievement. The question for 2002 is whether the NHT’s pipeline can be expanded at a moment when fiscal constraints, reduced land availability and a suppressed construction sector are all working against it.

Looking Ahead

December brings Jamaica’s peak tourism season — or what should be its peak tourism season. The government, the hotel operators and the tourism board are all running intensive promotional campaigns aimed at salvaging what they can of the winter calendar. Forward bookings suggest that the season will be deeply below normal but not entirely absent: a reduced, anxious winter season is not the catastrophe of an entirely empty one.

For the property market, December’s diaspora return is the key variable. If Jamaicans from North America and the UK make the journey home in meaningful numbers, they will bring with them not just spending power but something equally important: the conversations, decisions and renewed commitments that drive Jamaica’s extraordinary self-build housing sector. Every Christmas visit in which a diaspora Jamaican walks the land purchased for a future retirement home, or reviews the progress of a family member’s construction, or agrees to send the money for the next phase of building — each of these interactions is a link in a housing supply chain that official statistics consistently undervalue. In a year as traumatic as 2001 has been, these quiet conversations may prove to be among the most durable things in Jamaica’s housing economy.