Bruce Golding’s Jamaica Labour Party government had been in office for barely six weeks when the global financial system delivered its clearest signal yet that something structurally dangerous was happening. Through October and November 2007, the largest American financial institutions — Citigroup, Merrill Lynch, Morgan Stanley — announced write-downs on subprime-related assets that collectively exceeded US$40 billion, revealing that the credit market stress that had been building since 2006 had penetrated to the core of the Western financial system. By December, the United States had entered recession. By the end of the quarter, oil was approaching US$100 per barrel. Jamaica’s new government had inherited both the Dean repair bill and the opening act of the worst financial crisis in living memory.
- Golding sworn in September 11; Audley Shaw takes Finance portfolio in new JLP government
- Hurricane Dean reconstruction programme begins its peak expenditure phase
- Oil approaches US$100 per barrel by December — all-time nominal high; PetroCaribe terms critical
- Citigroup and Merrill Lynch announce multi-billion write-downs; US enters recession December 2007
- Winter tourism season opens under a US consumer confidence cloud — bookings watched anxiously
- Shaw signals 2008-09 budget will require difficult choices; deficit forecast revised upward
Bruce Golding’s first weeks as Prime Minister were spent simultaneously forming his cabinet, confronting the Hurricane Dean reconstruction programme’s operational demands, and absorbing the implications of a global financial environment that was deteriorating with a speed that no transition-period briefing could fully prepare a new government to manage. Audley Shaw, appointed Finance Minister in the new JLP cabinet, took over a fiscal framework from Omar Davies that had maintained primary surplus targets through years of external shocks but that had accumulated, in the process, a deficit overhang and a debt service burden that left the new government with limited room to respond to the combination of Dean reconstruction expenditure and the economic slowdown that the global financial crisis was beginning to transmit to Jamaica’s tourism-dependent revenue base.
The Dean reconstruction programme was the first major operational challenge of the new government’s tenure. The agricultural damage — extensive across the south coast banana and sugar cane sectors, severe across Manchester and Clarendon’s small-farmer economy — required both emergency assistance for affected farming families and longer-term rehabilitation investment for the agricultural infrastructure. The road and drainage damage in the storm’s path required capital expenditure that competed with the government’s other infrastructure commitments. Shaw’s team found that the emergency fund reserves that the incoming government had hoped to find were smaller than required, and the first weeks of the new fiscal year — which had only recently begun at the time of the election — were already producing supplementary estimates that had not been in the budget that Davies had presented in April.
Oil’s march toward US$100 per barrel was the most consequential macroeconomic development of the fourth quarter for Jamaica’s balance of payments. The crude oil price, which had been US$60 when the year began and US$80 when the election was called, crossed $90 in November and was trading in the high $90s by December as strong Chinese and Indian demand, OPEC supply discipline, and a weakening US dollar combined with the geopolitical risk premium that the Middle East’s ongoing instability continuously refreshed. The Petrojam refinery’s import costs were rising every month, and the PetroCaribe arrangement’s deferred payment terms — which provided the most material fiscal buffer Jamaica had against the oil price trend — were the arrangement that both Shaw and the Bank of Jamaica were most grateful to have inherited from the Patterson and Simpson Miller years.
The financial sector write-downs announced by Citigroup and Merrill Lynch through October and November represented a scale of loss that the market had not anticipated. Citigroup’s write-downs on subprime-related structured credit products exceeded US$20 billion across a series of announcements that sent its share price to levels not seen since the late 1990s. Merrill Lynch’s disclosures followed a similar pattern. The revelation that the losses were concentrated in the largest and most systemically important US financial institutions — the same institutions that were the backbone of the US economy’s credit provision — transformed the credit market crisis from a contained financial sector problem into a systemic risk to the US economy. The Federal Reserve cut interest rates aggressively through the quarter, signalling that the US economy was deteriorating faster than previous forecasts had suggested.
The winter tourism season, whose first bookings had been made in the October-December window when North American and European consumers typically locked in their Caribbean holiday plans, was opening under conditions that the Jamaica Tourist Board was watching with the anxious attention of an institution that understood how much of the island’s fiscal stability depended on a strong first quarter of 2008. The early booking data from the US market was not signalling catastrophe, but it was showing a softening in the forward pattern that the 2006-07 record season had established. US consumers whose home equity values were falling and whose confidence in the financial system had been shaken by the Citigroup and Merrill Lynch headlines were not the same consumers who had booked the Caribbean holidays that had carried 2006 to its record total. The European market, where Northern Rock’s nationalisation in early 2008 would be the next institutional marker, was also showing the early effects of financial sector anxiety on leisure spending confidence.
Audley Shaw’s fiscal review of the fourth quarter was producing a picture that required revisions to the 2007-08 budget’s revenue and expenditure projections. The combination of Dean-related emergency expenditure, rising oil import costs that put pressure on the trade balance, and the early signs of tourism revenue softening from the US consumer confidence deterioration were all moving in the same unfavourable direction simultaneously. Shaw signalled to Parliament that the 2008-09 budget — his first full year’s fiscal plan as Finance Minister — would require difficult choices that the tight primary surplus target had always made difficult but that the global environment was making more so.
What This Means
The fourth quarter of 2007 established the terms under which Bruce Golding’s government would govern through the rest of the decade. A narrow parliamentary majority, a Dean repair bill, oil at US$100, and the opening phase of the most serious global financial crisis in seventy years: the JLP had won power at precisely the moment when the external environment that had sustained the tourism-driven growth of 2003-2006 was beginning to reverse. The security agenda that had driven the election campaign — the promise of a safer Jamaica that had resonated with a crime-weary electorate — would have to be pursued in a fiscal environment where the resources to invest in the social and policing interventions that security required were being compressed by debt service, hurricane repair, and oil prices simultaneously.
The Road Ahead
The first quarter of 2008 would determine whether the winter tourism season could hold its volumes against the headwind of US consumer anxiety, and whether the global financial crisis would deepen further toward the institutional collapse that the Citigroup and Merrill Lynch write-downs had suggested was possible. Bear Stearns, which had survived the June 2007 hedge fund collapse, was about to face a more existential challenge in March 2008. And Jamaica’s Finance Minister was preparing a budget for an economy whose external supports were simultaneously weakening in ways that no single policy instrument could address.
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