Publication Date: 3 January 2002 | Coverage Period: 3 December–2 January 2002 | Category: Monthly Review
Month in Brief
- Enron Corporation files for Chapter 11 bankruptcy protection on 2 December 2001, the largest corporate bankruptcy in US history: the reverberations reach global capital markets immediately and will shape investor sentiment for months.
- Jamaica closes 2001 as the most damaging year for its tourism sector in recent history: stopover arrivals for the full year are expected to show declines of 20–25 per cent against 2000, with the catastrophic post-September quarter making recovery in the year a statistical impossibility.
- The Bank of Jamaica holds its policy rate above 17 per cent through December, seeing no basis in the external environment to relax the monetary tightening that has defined its stance through the crisis period.
- The North Coast hotel corridor ends the year with occupancy rates for November estimated at under 35 per cent — the worst monthly figure in at least a decade for Jamaica’s primary tourism zone.
- The Patterson government concludes 2001 having delivered considerably fewer housing units through the NHT than its 2001 programme had targeted, a shortfall attributed to the economic dislocations of the second half of the year.
- Afghanistan War continues: US and coalition forces are engaged in the most intensive phase of the conflict, with Taliban resistance collapsing across major cities, but the geopolitical uncertainty this represents is another headwind for Caribbean tourism recovery.
Housing Market Overview
Jamaica enters January 2002 conducting, through gritted teeth, a reckoning with what 2001 has done to its economy and its property market. The ledger is not flattering. In the period from September through December, the residential property market effectively suspended normal operation. Transaction volumes fell sharply, mortgage applications declined, and the investment confidence that had been building through 2000 and into the first half of 2001 evaporated with stunning speed in the aftermath of the September attacks.
The picture is not one of structural collapse. Jamaica’s property market did not experience the kind of forced-selling cascade that characterises a true market breakdown: banks did not call loans en masse, and the NHT’s contribution-based model insulated the lower end of the market from the worst of the credit contraction. But the market did freeze. Buyers withdrew. Sellers held. The mechanisms of price discovery — competitive offers, negotiated transactions, the bidding for sought-after properties — largely ceased to operate for three to four months.
In Kingston, the premium residential market — properties above J$12 million in Cherry Gardens, Norbrook, Beverley Hills and the cooler hill communities — has been most acutely affected in terms of liquidity, though not in terms of forced price concessions. Sellers are patient and do not need to sell; buyers are watchful and do not feel compelled to buy. The result is a market that registers essentially no transactional activity at the top end while the underlying value questions remain unresolved.
The lower and mid-market segments have been somewhat more resilient. NHT-backed activity in Portmore, Spanish Town, Greater Kingston and parts of St Mary has continued throughout the difficult period, a reminder that the drivers of demand in this segment — family formation, workforce growth, the aspiration to home ownership among the working population — do not stop because of external macro events. They slow, they pause, they wait for better conditions, but they do not cease.
Government Policy
Prime Minister Patterson’s government faces an unenviable set of policy trade-offs as it looks toward 2002. The fiscal position has deteriorated significantly from 2001’s already difficult baseline. Tourism, which directly and indirectly contributes a substantial portion of government revenue through hotel taxes, airport fees, and the income and consumption taxes generated by a thriving hospitality sector, has collapsed. The US recession has added further pressure via remittance slowdowns and reduced demand for Jamaica’s bauxite-alumina exports. The government’s debt service burden — elevated by the financial sector bailout costs of the late 1990s — has not diminished.
Against this fiscal backdrop, the housing programme faces real resource constraints. The government had, through the Patterson years, positioned the NHT as the flagship of its social investment strategy. The Trust’s ability to deliver affordable mortgages at subsidised rates was a genuine, tangible benefit to the working population, and the government’s political identity was substantially wrapped up in its expansion and defence. In 2002, with fiscal pressure intense and an election approaching, the government must find ways to maintain that delivery record without the buoyant economic conditions that had made it easier to sustain in the late 1990s.
The NHT’s own investment portfolio — substantially held in government paper — continues to generate the interest income that allows it to cross-subsidise its mortgage rates. This model, which had long attracted scrutiny from critics who questioned whether the Trust was being adequately deployed for its housing mandate rather than as a vehicle for government financing, remains intact. But the pressures on it are not decreasing, and the decisions made about NHT investment allocation in the coming budget cycle will be closely watched.
Construction Sector
Jamaica’s construction sector closes 2001 having shed a significant portion of the activity that characterised the late-1990s building boom. The hotel expansion and refurbishment cycle that drove much of the north coast construction activity through 1999 and 2000 is definitively over, at least for the foreseeable future. Contractors who built their capacity around that demand have had to make painful adjustments, laying off skilled tradespeople and scaling back equipment and materials inventories.
The residential construction sector has fared somewhat better, insofar as the NHT pipeline has provided a baseload of activity that has not entirely vanished. Several schemes that were in design and permitting stages in mid-2001 have progressed through those processes, and some site preparation work was undertaken in December. This is not enough to describe the sector as healthy, but it represents a floor beneath which activity has not fallen.
The self-build sector — Jamaica’s most reliable but least visible source of housing production — has continued throughout. December typically sees a spike in self-build activity as diaspora members visiting for Christmas bring cash, provide direction to family members on ongoing construction, and make decisions about next steps. The December 2001 return was smaller than usual — travel is still suppressed by post-September aviation disruption and the continuing anxiety about US-Caribbean routes — but did not represent a complete absence of the holiday construction boost that the sector typically enjoys.
Investment Climate
Enron’s collapse is the last and, in some respects, most globally consequential economic event of 2001 from Jamaica’s perspective. The energy company’s bankruptcy on 2 December — the largest in US corporate history to that point — is not directly connected to Jamaica’s economy in any operational sense. Enron had no significant Jamaican operations. But the indirect effects are likely to be significant and lasting: the revelation that a company of Enron’s stature and supposed sophistication was built on fraudulent accounts has shaken institutional investors’ confidence in corporate governance standards globally, and this generalised risk-aversion extends to emerging market real estate and hospitality assets of exactly the kind that Jamaica has been trying to attract.
For foreign direct investment in Jamaica’s tourism infrastructure, the timing could hardly be worse. In a year when hotel operators were already questioning the viability of Caribbean expansion programmes given the collapse of US tourist arrivals, the Enron affair has provided additional grounds for capital to stay home. The pipeline of resort development that had been building in the late 1990s — projects in Negril, in the Montego Bay western strip, in Ocho Rios — has effectively been frozen, with no realistic expectation of restart in the near term.
There is, however, a note of cautious macroeconomic optimism: the Afghanistan campaign appears to be going militarily well for the US-led coalition, with Taliban strongholds falling and the immediate threat of further large-scale attacks in the United States not having materialised in the three months since September. If this relative stability holds, it may lay the groundwork for a gradual return of American consumer confidence and, with it, a recovery in travel demand. Jamaica’s tourism board has been working intensively on promotional campaigns for the spring 2002 season; whether these will bear fruit depends heavily on what happens in the United States over the coming months.
Diaspora Activity
The Christmas 2001 diaspora return was muted by the standards of recent years. Jamaicans abroad, many in communities directly affected by the September attacks and the subsequent economic disruption in cities like New York, were travelling less, spending more carefully, and carrying the anxiety that has characterised American life in the months since September. Travel volumes from the United States to Jamaica through December, while somewhat improved from October and November’s depths, remained well below the December 2000 comparable.
The diaspora community’s view of the Jamaican property market is complex at this moment. On one hand, those with capital and a long-term perspective are beginning to notice that the market softening of recent months may represent a buying opportunity — the kind of window that rarely opens in Jamaica’s normally resilient property market. On the other hand, the uncertainty about Jamaica’s economic trajectory, and particularly about the tourism-dependent north coast, is giving even well-capitalised diaspora buyers pause.
Remittance flows for the full year 2001, when data are eventually compiled, are expected to show a modest decline from 2000 but a broadly maintained level overall. The diaspora has absorbed the year’s shocks and has not abandoned its commitment to supporting families and investing in Jamaica, but the scale of that commitment has been constrained by the economic environment that Jamaicans abroad are navigating in their host countries.
Affordability
The affordability calculus at the start of 2002 is bleaker than it was twelve months ago. Commercial interest rates are unchanged at 22–26 per cent, and there is no prospect of meaningful reduction in the near term. The BOJ’s rate structure, which has kept the Jamaica dollar broadly stable through an extremely turbulent year, is not about to be relaxed without evidence of a sustained improvement in the external environment that has not yet arrived.
What has changed on the affordability front is the income side of the equation, and not for the better. Households in the tourism sector have experienced income shocks that, for those who lost employment entirely, have set back homeownership plans by years. Wage growth has stalled in an economy that contracted through the second half of 2001. The combination of unchanged borrowing costs and reduced or stagnant incomes represents a genuine deterioration in the affordability position for a significant portion of the population that was already stretched before the crisis.
The NHT remains the bright spot in this picture. Its rates are unchanged; its eligibility criteria have not been tightened; and its pipeline, while smaller than planned, continues to operate. For contributing workers who have maintained their employment and their contributions through the crisis year, the path to NHT-assisted homeownership remains open. It is narrower than it was, and the queue may be longer, but it is not closed.
Looking Ahead
Jamaica enters 2002 carrying the accumulated damage of a year that was, by almost any measure, the most economically disruptive since the financial sector crisis of the mid-1990s. The property market, which had been recovering with some confidence through 2000 and the first half of 2001, has had that recovery interrupted and in some segments reversed. The work of rebuilding confidence, restarting transactions, and restoring the investment pipeline that was so promising eighteen months ago will take time and will depend on factors — primarily the pace of American tourism recovery and the trajectory of global investment confidence post-Enron — that are largely beyond Jamaica’s control.
What Jamaica can control — the NHT’s delivery pipeline, the planning approvals process, the promotional campaigns being assembled for the spring tourism season — it must press with urgency. The election that must be called by October 2002 provides a political deadline that the government will not want to meet with an economy that is still visibly struggling. For those tracking the property market, the first quarter of 2002 will be the critical test: if confidence begins to return, and if early tourism data provides encouragement, the year could yet trace a recovery arc. If not, the reckoning may be harder and longer than anyone currently wants to contemplate.
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