Jamaica Economic Intelligence | Annual Review 2007 | January–December 2007
Key Findings
- GDP growth approximately 1.4%, dampened by Hurricane Dean and election uncertainty
- Tourism reaches 1.51 million stopover arrivals: third consecutive annual record
- Bruce Golding’s JLP wins September election; ends 18 years of PNP rule
- Oil averages approximately US$72 for the year; inflation reaches 16.8% by December
- Homicides fall to approximately 1,574 from 2006’s record 1,731 — first decline in four years
- Global credit crisis begins in earnest; US Federal Reserve cuts emergency rates in September
The years of cautious optimism — 2004’s reconstruction, 2005’s rebuilding, 2006’s quiet hurricane season and record-breaking tourism — ran up against harder realities in 2007. Hurricane Dean exposed the persistent fragility of Jamaica’s agricultural sector and demonstrated, once again, that the Caribbean’s geography makes sustained economic progress a hostage to the Atlantic hurricane season. The JLP’s September election victory ended eighteen years of PNP governance and installed Bruce Golding as Prime Minister with a mandate for reform that was real but constrained by the structural arithmetic of a 130% debt-to-GDP ratio. And in the background, barely noticed in Kingston but increasingly alarming in New York and London, a global credit boom that had financed a decade of cheap capital for emerging markets was entering its terminal phase. Jamaica’s economy in 2007 grew modestly, broke one more tourism record, began to recover from Dean, and stepped into 2008 with a new government and an unfamiliar kind of external risk: not a commodity price shock or a hurricane, but the unravelling of the global financial system itself.
Growth: Modest but Maintained
The Planning Institute of Jamaica estimated full-year GDP growth for 2007 at approximately 1.4%, below the 2.5% recorded in 2006 and below the 2–3% range that had been projected at the year’s outset. The primary drag came from two sources: Hurricane Dean’s severe impact on agricultural output, which contracted sharply in the second half of the year as banana and produce crops were destroyed and replanting timelines extended into 2008; and the election-year investment pause that muted capital expenditure across both the public and private sectors through much of Q1–Q3. The broader economy — services, financial intermediation, construction, transport — remained resilient, and the tourism sector’s record performance provided a meaningful offset to agricultural contraction.
The construction sector, which had expanded for three consecutive years following Ivan’s reconstruction impulse, showed signs of levelling in 2007. Hotel construction completions in Montego Bay and Negril delivered new room inventory as planned, but the pipeline of new project starts thinned as developers awaited the post-election clarity that would signal which infrastructure programmes the new government would prioritise. Residential construction held firm, driven by the National Housing Trust’s continued record mortgage disbursements — full-year NHT lending reached approximately J$10.2 billion, a new annual record despite the disruptions of Q3. Commercial construction in New Kingston was the one sub-sector that accelerated, as financial services firms that had been expanding their operations committed to office fit-outs and technology investment that had been deferred during the election campaign period.
Tourism: A Third Consecutive Annual Record
Against the disruption of Dean’s passage in August and the election-month uncertainty in September, Jamaica’s tourism industry delivered a performance that would have seemed extraordinary a decade earlier: 1.51 million stopover arrivals for the full year — the third consecutive annual record and the first time the island had crossed the 1.5 million mark in its history. The achievement reflected the accumulated investment in hotel capacity, air access and destination marketing that had been building since the post-Ivan recovery began in 2005, as well as the fundamental resilience of demand from the North American and European markets that drove Jamaica’s visitor mix.
The Jamaica Tourist Board’s rapid-response communications programme after Dean proved its value. Within days of the storm’s passage, the JTB had deployed its full media relations capacity to assure prospective visitors that the major resort areas — Montego Bay, Negril, Ocho Rios, Runaway Bay — had sustained limited structural damage and were open for business. The campaign succeeded in containing the cancellation spike to a period of approximately three weeks, after which forward bookings recovered to near-normal levels. The winter season that followed — November 2007 through April 2008 — showed no lasting damage to Jamaica’s reputation as a safe destination, and occupancy rates through November and December tracked at or above 2006 levels.
Total visitor expenditure for 2007 was estimated at approximately US$1.91 billion — a modest increase over 2006’s US$1.87 billion, reflecting the higher arrivals offset by the temporary Q3 disruption. The cruise sector also reached a new record, with approximately 1.43 million cruise passenger calls through Jamaican ports. Falmouth’s pier facility handled its second full year of Royal Caribbean operations, and the investment in destination experiences — heritage attractions, culinary tourism, adventure tourism in the Blue Mountains — continued to generate positive differentiation in a Caribbean market where product quality was the primary competitive variable.
The Golding Government’s Economic Programme
The Jamaica Labour Party’s election victory on 3 September 2007 brought to power a government that had campaigned on economic reform, anti-corruption measures and a charter of rights. Prime Minister Bruce Golding’s cabinet — particularly Finance Minister Audley Shaw — moved quickly to establish the new administration’s economic credibility. The first signals were clear: continuity on macroeconomic framework, maintenance of the primary surplus target, continued engagement with the IMF, and an explicit commitment to accelerating the debt reduction that the PNP had begun but not completed.
The government’s first budget, presented by Shaw in November 2007 for the fiscal year 2007–08 (which had begun in April under the outgoing PNP administration), confirmed these priorities. Revenue projections assumed continued growth in GCT and income tax collections from the expanding formal economy. Expenditure allocations maintained the interest bill at its historically elevated level while protecting core social spending on health and education that the JLP’s campaign had emphasised. The primary surplus target of approximately 12% of GDP was reaffirmed — a signal that the new government understood that any loosening of fiscal discipline would immediately show up in higher bond yields and a weaker exchange rate, negating whatever social benefit a more expansive approach might generate.
The Ministry of Finance’s medium-term debt management strategy, published in late 2007, outlined the government’s approach to managing the substantial domestic and external debt maturities falling due through 2008–2010. The strategy relied on continued access to international capital markets at spreads that reflected Jamaica’s improving fiscal fundamentals. The timing of this reliance was, however, deeply uncomfortable: the global credit environment was deteriorating rapidly, and the spreads at which Jamaica might be able to issue new external bonds in 2008 were increasingly uncertain.
Oil, Inflation and the Bank of Jamaica
Oil prices were the dominant macro variable of 2007 and the primary driver of Jamaica’s year-end inflation outcome — which reached an estimated 16.8% year-on-year by December, the highest reading since the early 2000s and a sharp reversal of the progress toward single digits that had characterised 2006. Brent crude averaged approximately US$72 per barrel for the full year, compared to approximately US$65 in 2006 — a roughly ten percent increase that, compounded by rising global food commodity prices, fed through into every component of Jamaica’s consumer price basket. Electricity tariffs rose materially as JPS adjusted its indexed pricing formula to reflect the higher fuel cost. Transport and food costs followed.
The Bank of Jamaica held its benchmark overnight rate at 9.5% for the entire year after the February 2007 cut to that level. The hold was appropriate: with inflation running above ten percent and heading toward seventeen percent by year-end, a further rate cut would have been indefensible on price stability grounds and potentially destabilising for the exchange rate. The Jamaica dollar depreciated moderately through the year, ending December 2007 near J$71 to the US dollar — a depreciation of approximately six percent from the J$67 level at year-end 2006. The depreciation was managed rather than disorderly, reflecting the BOJ’s continued use of its reserve buffer and its credible commitment to avoiding the kind of exchange rate collapse that had accompanied Jamaica’s banking crisis in the late 1990s.
The PetroCaribe arrangement with Venezuela continued to provide a meaningful structural cushion. The deferred forty percent of Venezuela’s crude invoice — now representing a larger absolute sum as oil prices rose — reduced the immediate foreign exchange outflow from petroleum imports by approximately US$280 million for the year. The PetroCaribe Fund had accumulated approximately US$85 million in investable resources by December 2007, and the government was deploying these funds through a series of social and infrastructure programmes that represented the most significant new fiscal capacity the Golding government had outside the heavily constrained recurrent budget.
Crime: A Rare Piece of Good News
Against the backdrop of Dean, election transition, rising oil prices and global credit stress, 2007 offered one genuinely positive development that economists and policymakers noted with relief: Jamaica’s homicide count fell. After three consecutive years of record-breaking violence — 2004, 2005 and 2006 each setting new highs — the Jamaica Constabulary Force recorded approximately 1,574 homicides in 2007, a decline of approximately nine percent from 2006’s record of 1,731. The murder rate fell from approximately 64 per 100,000 to approximately 58 per 100,000 — still catastrophically high by any international standard, but the first meaningful improvement in years.
The causes of the decline were debated. The PNP government’s Community Renewal Programme had deployed resources into several of the highest-violence communities in the years prior. The incoming JLP administration credited its campaign’s emphasis on security to shifting the political environment. Security analysts noted that the decline was concentrated in specific garrison communities where internal conflict had temporarily moderated — a dynamic that could reverse rapidly if factional dynamics shifted. Whatever its causes, the reduction in homicides was welcomed by the tourism industry, the business community, and the diaspora, all of whom had flagged crime as the primary impediment to deeper engagement with Jamaica’s economy.
The Global Credit Crisis: From Background to Foreground
The sequence of events through the second half of 2007 — Bear Stearns hedge fund collapses in June, BNP Paribas fund freeze in August, Northern Rock bank run in September, Federal Reserve emergency cuts in September and October — represented the acceleration of a credit crisis that would ultimately prove to be the most severe global financial disruption since the 1930s. By December 2007 it was increasingly clear to Jamaica’s economic policymakers that the accommodating global capital environment of 2003–2006 was ending. The question was not whether the credit cycle was turning but how severely it would turn and how quickly the constriction would reach Kingston.
The direct transmission to Jamaica’s sovereign spread was not yet dramatic — Jamaica’s external bonds ended 2007 with spreads elevated but not at crisis levels. The indirect transmission, however, was already apparent in two channels. First, remittances from the United States — Jamaica’s largest single foreign exchange source at approximately US$1.2 billion annually — began showing signs of moderation in Q4 2007 as US employment in construction and related sectors, where diaspora Jamaicans were disproportionately concentrated, started to soften. Second, the appetite of international investors for new Jamaican sovereign issuance was clearly more cautious than it had been a year earlier, implying that any market access in 2008 would come at higher spreads.
Debt-to-GDP fell to approximately 130% by December 2007, continuing the gradual improvement from the 135% level at year-end 2006. The improvement reflected primary surplus maintenance and the nominal GDP growth from inflation — paradoxically, the year’s high inflation reduced the real value of domestic-currency debt even as it imposed hardship on consumers and businesses. External debt, denominated in US dollars, grew in local-currency terms as the exchange rate depreciated, partially offsetting the improvement in domestic debt dynamics. The net result was a third consecutive year of debt ratio improvement — real progress, but at a pace that left the ratio at levels far above any reasonable threshold of sustainability.
What This Means
Homeowners ended 2007 in a more challenging position than they entered it. Inflation at 16.8% has eroded real purchasing power even for those who received wage increases. Electricity bills and transport costs are measurably higher. The BOJ’s rate hold means that commercial lending rates are unlikely to fall further in the near term, and those on variable-rate mortgages face the possibility of upward adjustments if the BOJ is forced to raise rates in 2008 to contain inflation and defend the exchange rate. NHT contributors remain in the most protected position: the seven percent fixed rate on NHT mortgages provides genuine shelter from the inflationary storm, and the record J$10.2 billion in 2007 disbursements means more Jamaicans than ever are accessing that shelter.
Renters face the most direct exposure to 2007’s inflation: rent increases, higher utility bills, more expensive food, and the additional costs associated with Dean recovery in affected communities. Without the asset appreciation that provides homeowners a partial hedge, renters’ real net worth declined through the year. The tight labour market in tourism and construction provides some wage offset, but not for workers in sectors where formal wage increases lag the CPI by several quarters.
Developers and contractors enter 2008 with the new government’s infrastructure priorities still being formulated but with a construction market that has maintained activity above its pre-2005 baseline. The Dean reconstruction in the southern parishes will generate some incremental demand. The critical question for 2008 is whether the tightening global credit environment will affect the foreign-financed hotel and real estate investments that have been driving high-value construction projects since 2005. If international developers find their financing more expensive or less available, the pipeline of new resort projects could thin materially.
Businesses face a 2008 in which the domestic inflationary environment, rising oil costs and a moderating global economy will all simultaneously pressure margins. The new government’s pro-business signals are real — Audley Shaw’s Finance Ministry has been responsive to private sector concerns in its early months — but the structural constraints have not changed. The interest bill still consumes the fiscal space that might otherwise fund infrastructure, the crime rate remains elevated even after 2007’s modest improvement, and the exchange rate is depreciating at a rate that increases the local-currency cost of any import-intensive production or distribution.
The diaspora sent approximately US$2.0 billion home in 2007 — a new record — but the moderation in Q4 flows from US construction-sector softening is a signal worth watching. Diaspora members holding US dollar assets and considering Jamaican property investment face an exchange rate that is depreciating, making the Jamaican side of the transaction cheaper in US dollar terms but also raising the question of future depreciation risk. The JLP government’s diaspora engagement initiative — announced as a priority by Prime Minister Golding — aims to make the return investment process more straightforward, but its practical implementation is months away from being operational.
Outlook for 2008
The outlook for 2008 is the most genuinely uncertain that Jamaica has faced since the immediate aftermath of FINSAC. The sources of uncertainty are multiple and interacting: global credit conditions that are deteriorating in ways whose full implications no policymaker has yet modelled accurately; oil prices that are entering 2008 above US$90 per barrel and showing no reliable sign of retreat; an inflation rate at 16.8% that may require a BOJ rate increase rather than merely a hold; and a new government still assembling the institutional knowledge and policy capacity to respond to all of these simultaneously.
Set against these risks, Jamaica’s genuine strengths remain. Tourism entering 2008 with three consecutive annual records behind it and strong forward bookings. A banking system that is capitalised adequately and has no direct exposure to the US subprime securities at the centre of the global credit disruption. A remittance base that, even if it moderates from record levels, will still provide close to US$2 billion in annual foreign exchange inflows. A new government with a credible macroeconomic team and a clear mandate to maintain fiscal discipline.
The risk that should dominate 2008 planning, however, is debt refinancing. Jamaica faces substantial sovereign debt maturities through 2008 and 2009 that require either market rollover at acceptable spreads or proactive restructuring. In a benign global credit environment — as has prevailed for most of the past five years — rolling over Jamaican sovereign debt is an achievable, if expensive, task. In the environment that is developing as 2007 closes, it may prove considerably harder and more costly. The Golding government’s economic agenda for 2008 will ultimately be judged on how effectively it navigates that refinancing challenge. Everything else — tourism, housing, crime — is secondary to the question of whether Jamaica can continue to service its debt at terms that do not require a crisis-driven restructuring that would reverse a decade of hard-won economic stability.
Jamaica Economic Intelligence is an independent data-driven journalism series published by Jamaica Homes News. Every article is grounded in official publications from the Bank of Jamaica, the Planning Institute of Jamaica, the Statistical Institute of Jamaica, the Ministry of Finance, and multilateral sources including the IMF, World Bank and IDB. No article constitutes financial, legal or investment advice.
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