Jamaica Economic Intelligence | Q1 2008 | January–March 2008
Key Findings
- Brent crude crosses US$100 in February; first time in history, import bill surges
- Bear Stearns collapses in March; Fed-arranged JPMorgan rescue marks deepening of US credit crisis
- Jamaica CPI inflation reaches approximately 20.5% year-on-year by March; highest since 2000
- Bank of Jamaica raises benchmark to 10.25% as rate hold becomes untenable
- Tourism winter season holds firm; Q1 arrivals broadly flat versus record Q1 2007
- Exchange rate reaches J$72–73; controlled depreciation continuing under BOJ management
Jamaica entered 2008 watching two simultaneous crises unfold on its economic periphery — one in global commodity markets, one in global credit markets — both of which had been building through 2007 and both of which entered a more acute phase in the first quarter of the new year. Oil’s breach of the US$100 per barrel threshold in February was a psychological as well as economic milestone: it confirmed that the commodity price cycle that had begun climbing from US$25 in 2003 had not found its ceiling. Bear Stearns’ collapse in March — and the Federal Reserve’s unprecedented intervention to arrange an emergency sale to JPMorgan Chase — confirmed that what had begun in the US subprime mortgage market in 2007 was not a contained credit event but a systemic crisis. From Kingston, both developments were alarming. Jamaica depended on cheap oil for electricity and transport, and on accessible global capital markets to roll over its enormous debt. In Q1 2008, both preconditions were deteriorating simultaneously.
Oil Through the Century Mark
Brent crude oil crossed US$100 per barrel for the first time in history on 2 January 2008, pulled above that level by a combination of OPEC supply restraint, geopolitical risk premiums from Iran and Nigeria, and the continued strength of Asian demand that had been the structural driver of the commodity supercycle since the early 2000s. The milestone was brief on that first occasion — prices pulled back quickly — but the psychological barrier, once broken, proved not to hold. By late February, Brent had re-crossed US$100 and was consolidating above that level, establishing what would prove to be a platform for the extraordinary run toward US$147 that lay ahead in Q2.
For Jamaica, the impact was direct and compound. The Jamaica Public Service Company’s indexed tariff formula translated higher crude into higher electricity bills with a two-to-three month lag: bills reflecting Q4 2007’s elevated oil arrived in Q1 2008, and those reflecting Q1’s even-higher prices would follow in Q2. Transport costs — particularly the JUTC bus fares that served working-class Kingston and the route taxis that served the rest of the island — came under pressure that operators could not fully absorb. The Planning Institute of Jamaica estimated that Jamaica’s petroleum import bill for Q1 2008 reached approximately US$340 million, compared to approximately US$270 million in Q1 2007 — an increase of roughly US$70 million, or twenty-six percent, that consumed foreign exchange that might otherwise have flowed toward productive investment or debt service.
The PetroCaribe arrangement continued to provide structural relief. The deferred forty percent of Venezuela’s crude invoice — now representing approximately US$140 million per quarter at current oil prices, compared to approximately US$100 million a year earlier — reduced the immediate cash outflow materially. But the growing balance of deferred PetroCaribe obligations was itself a fiscal consideration: the Ministry of Finance estimated that Jamaica’s total PetroCaribe liability had reached approximately US$320 million by March 2008, a figure that, while favourable in its financing terms, represented a genuine long-term obligation that would need to be managed alongside the already-heavy sovereign debt burden.
Inflation and the BOJ’s Response
Consumer price inflation in Jamaica reached approximately 20.5% year-on-year by March 2008, the highest reading since the early 2000s in the aftermath of the original FINSAC stabilisation. The primary drivers were oil (through electricity and transport), food (reflecting a global commodity cycle that had pushed wheat, rice and cooking oil prices to multi-decade highs), and the building momentum of a depreciation cycle in the Jamaica dollar that was adding to the local-currency cost of all imports. Inflation of this magnitude was not merely an economic inconvenience — it represented a direct assault on the purchasing power of working Jamaicans, eroding wages in real terms and compressing the household budgets of the majority who spent more than half their income on food, utilities and transport.
The Bank of Jamaica’s Monetary Policy Committee responded in Q1 2008 by raising the benchmark overnight rate from 9.5% to 10.25% — the first rate increase since the easing cycle had begun in late 2005. The reversal was psychologically as well as economically significant: it marked the end of the most sustained period of monetary easing that Jamaica had experienced since independence, and it signalled that the central bank’s primary concern had shifted from supporting growth to containing an inflation that, if allowed to run unchecked, could trigger the kind of exchange rate flight that had characterised Jamaica’s worst economic moments. Governor Latibeaudière was explicit that the rate increase was a response to external price shocks rather than evidence of domestic overheating, and that the Bank would return to easing as soon as the inflationary environment permitted.
The rate increase had an immediate effect on borrowing costs. Commercial lending rates, which had declined to approximately 17% at the trough of the easing cycle, began to firm. The National Housing Trust maintained its seven percent contributor mortgage rate — administratively set rather than market-determined, and therefore insulated from the BOJ cycle — providing continued access to affordable housing finance for qualifying formal sector workers. NHT first-quarter disbursements fell slightly below the record Q1 2007 pace, reflecting the general slowing in economic activity, but remained above J$2.3 billion — the programme continued to function as the most effective affordable housing finance instrument in the economy.
Bear Stearns and What It Meant for Jamaica
On 14 March 2008, Bear Stearns — the fifth-largest US investment bank — informed the Federal Reserve that it had exhausted its liquidity reserves and faced imminent bankruptcy. The Fed, in a move with no modern precedent, invoked emergency authority to extend credit to a non-bank financial institution, providing US$29 billion in financing to facilitate the sale of Bear Stearns to JPMorgan Chase at a price of US$2 per share — later revised to US$10 following shareholder pressure. The episode confirmed that the credit crisis that had begun with Bear’s hedge fund collapses the previous June had progressed to the point where a major financial institution, unable to roll its short-term funding, could fail within days of appearing solvent by conventional accounting measures.
For Jamaica, the Bear Stearns collapse accelerated a development that had been building since late 2007: the tightening of access to international capital markets for sovereign borrowers with elevated debt ratios. Jamaica’s sovereign spread — the premium over US Treasury yields that investors demanded to hold Jamaican external bonds — widened materially in the wake of Bear Stearns’ rescue, reflecting a broad repricing of emerging market credit risk as global investors reduced exposure to anything other than the highest-quality sovereign obligations. The Ministry of Finance, which had been planning to access international markets in early 2008 to refinance domestic debt maturities, found that the window for such access was becoming significantly more expensive and, in some weeks, effectively closed.
Finance Minister Audley Shaw convened meetings with his team and with the Bank of Jamaica’s research staff through March and April to assess the implications of the evolving global credit environment for Jamaica’s debt management calendar. The preliminary conclusion was uncomfortable: the debt refinancing strategy that had been assumed in the medium-term fiscal framework — rolling over maturing bonds in international markets at spreads that reflected Jamaica’s improving fundamentals — was increasingly unlikely to be executable at the assumed cost. Alternatives, including deepening the domestic government securities market and approaching multilateral lenders for programme support, began to receive more serious consideration than they had at the start of the year.
Tourism: Still Holding
Against the external turbulence, Jamaica’s tourism sector held its position through Q1 2008 with more resilience than many analysts had expected. The Jamaica Tourist Board reported Q1 stopover arrivals of approximately 425,000 — broadly flat with Q1 2007’s record 430,000, representing the first quarter in four years that year-on-year tourism growth had stalled. The slowdown reflected early signs of pressure on US leisure travel budgets as the American economy — technically in recession from December 2007, though the NBER would not confirm this until much later — began to moderate consumer discretionary spending. Airlines were adjusting capacity in response to fuel cost pressure: with jet fuel exceeding US$3 per gallon, transatlantic and Caribbean routes were being reviewed for profitability, and some carriers were signalling intentions to reduce winter season frequency to Jamaica in 2008–09.
The hotel sector maintained occupancy through mechanisms that reduced margins: promotional rates, extended-stay discounts and bundled packages that kept rooms filled while compressing revenue per available room. The all-inclusive model — which had been the dominant Jamaican hotel format since Sandals pioneered it in the 1980s — provided a degree of pricing resilience, as guests who had pre-committed to all-inclusive packages tended to honour their reservations even when economic conditions at home deteriorated. The threat that concerned Jamaica’s tourism planners was not Q1’s stable numbers but the forward booking pipeline for the crucial summer and winter seasons, where the signal from North American travel intermediaries was beginning to soften.
Fiscal Position and the Exchange Rate
The Jamaica dollar ended March 2008 near J$72.50 to the US dollar, representing a depreciation of approximately four percent from the J$71 level at year-end 2007. The depreciation was managed rather than disorderly — the BOJ’s reserve position, at approximately US$2.2 billion, remained adequate to defend against a speculative attack — but the direction of travel was clear and the pace was likely to accelerate as oil pressures on the current account compounded the tightening of external capital market access.
The central government’s fiscal position was being squeezed from multiple directions simultaneously. On the revenue side, the combination of oil-driven inflation and slowing economic activity was producing a mixed outcome: GCT collections benefited from higher nominal prices but income tax and corporate tax collections lagged as real activity softened. On the expenditure side, the interest bill continued its dominance of the fiscal accounts — consuming above fifty percent of revenue before any public service was funded — and the government faced rising fuel subsidy costs as politically sensitive transport operators sought relief from market prices that exceeded their revenue assumptions. Debt-to-GDP, which had been declining for three consecutive years, was under upward pressure from the combination of primary surplus slippage and exchange rate depreciation that raised the local-currency value of US-dollar obligations.
What This Means
Homeowners are feeling the inflation in their daily expenditure before they see it in their mortgage statements. Electricity bills, food costs and transport are all rising faster than wages across most of the economy, reducing the real disposable income available for mortgage service and household savings. Those on fixed NHT mortgages at seven percent retain their shelter from the rate cycle — though even NHT contributors face the general cost-of-living squeeze. Those on commercial variable-rate mortgages face the prospect of upward rate adjustments as the BOJ’s Q1 increase filters through to commercial lending benchmarks.
Renters face the full force of cost-of-living inflation with no asset appreciation to offset it. Rent increases in Kingston and the resort towns are tracking broadly with CPI, compounding the pressure from utility and food cost increases. The path from renting to ownership — already long — has lengthened as the real value of savings is eroded by inflation and as commercial lending rates firm.
Developers and contractors face rising input costs across every category — steel, cement, fuel and labour — compounding the general inflation. The tourism construction pipeline that has been filling since 2005 is beginning to thin as developers from North America and Europe reassess projects against a tighter financing environment and a more uncertain demand outlook. Domestic residential and NHT construction provides a degree of buffer, but the most ambitious hotel expansion projects are being reviewed.
Businesses face a Q2 in which every input cost is rising, the competitive environment is tightening as consumer discretionary spending weakens, and the financing costs for working capital and expansion are moving higher. The BOJ’s rate increase makes borrowing more expensive; the inflation makes the real return on investment harder to project. Businesses with foreign exchange revenue — in tourism, remittance processing, and bauxite — have a natural hedge against the depreciation. Those selling domestically in Jamaica dollars face the full margin compression of rising costs against a consumer base whose real purchasing power is declining.
Diaspora investors in the United States are living through the Bear Stearns collapse and the emerging American recession from within. The US housing market is deteriorating rapidly, and diaspora members employed in construction, mortgage-related services and financial industries are facing their own employment uncertainty. The capacity to remit — which had set records through 2006 and 2007 — is beginning to be affected by US labour market weakening. The exchange rate at J$72-73 makes Jamaican property cheaper in US dollar terms than it was two years ago, but the financing for that property — typically through US mortgage equity withdrawal or US-side savings — is less available and less affordable than it was in the peak years of the US credit expansion.
Outlook
Q2 2008 will be defined by oil, whose trajectory entering April gives no indication of a ceiling. If crude continues toward US$120 or beyond — a scenario that seemed unthinkable twelve months ago but is now actively discussed among commodity analysts — Jamaica’s inflation will remain well above twenty percent through the summer, and the BOJ will face a choice between further rate increases that damage growth and a hold that risks exchange rate pressure. The fiscal position will continue to deteriorate as oil import costs consume foreign exchange reserves that would otherwise support debt service.
The global credit environment is the deeper concern. Bear Stearns’ collapse has been arrested by Federal Reserve intervention, but the underlying causes — the scale of US mortgage losses, the opacity of structured credit exposures across the global banking system, and the unwinding of decades of leverage — have not been resolved. Jamaica’s ability to access international capital markets at affordable spreads — a precondition of the debt management strategy that has been sustaining fiscal discipline since 2003 — is now genuinely uncertain in a way it has not been since the worst of the post-FINSAC years. The Golding government’s economic team has the analytical capacity to understand what is happening. Whether it has the political room to respond with the speed and decisiveness that the situation may require is the central question entering the year’s second quarter.
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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