Jamaica Economic Intelligence | Q1 2009 | January–March 2009
Key Findings
- Jamaica and the IMF sign a US$1.27 billion Stand-By Arrangement on February 4 — the island’s first IMF programme in over a decade
- GDP contracts at its fastest pace since the FINSAC era as tourism, remittances and domestic demand fall simultaneously
- Inflation retreats toward 12% as oil holds below US$50 — relief after 2008’s crisis peak, but driven by a global recession
- Tourism arrivals post another year-on-year decline as U.S. and U.K. consumer confidence remains near historic lows
- Barack Obama’s inauguration on January 20 marks a historic moment felt profoundly across the Jamaican diaspora
- The Bank of Jamaica begins a cautious easing cycle as inflation retreats from its crisis peak
Jamaica enters 2009 under the shelter of an IMF umbrella it spent two years hoping to avoid. The programme, signed in February, provides external financing support and a fiscal framework at a moment when the global economy is contracting at its fastest pace in seventy years. The recession is severe, but inflation is retreating, interest rates are beginning to ease and the commitment to structural adjustment — if it can be maintained — offers the prospect of a more resilient economy on the other side.
The IMF Agreement: Terms and Significance
On February 4, 2009, Jamaica and the International Monetary Fund formalised a Stand-By Arrangement providing approximately US$1.27 billion in balance-of-payments support over 27 months. The agreement — Jamaica’s first with the Fund since the mid-1990s, when the aftershocks of the FINSAC financial sector collapse required external support — was the culmination of negotiations that began in earnest after Lehman Brothers’ September 2008 bankruptcy transformed a difficult external environment into a critical one.
The programme carries conditions that are consequential and politically demanding. The government is committed to maintaining a primary fiscal surplus — revenues minus non-interest expenditure — sufficient to stabilise and then reduce the debt-to-GDP ratio. This requires holding public-sector wage growth below inflation, restraining discretionary spending, implementing tax administration reforms to reduce evasion and broadening the revenue base. The Bank of Jamaica is expected to maintain foreign exchange reserves above a floor consistent with three months of import cover and to keep its monetary policy anchored to inflation objectives.
The significance of the IMF agreement extends beyond its financing contribution. Jamaica’s external creditors — both multilateral and commercial — use the IMF programme as a signal of policy credibility. In its absence, the spread on Jamaica’s external bonds had widened sharply in late 2008 as investors questioned whether the fiscal trajectory was sustainable; with the programme in place, spreads have narrowed somewhat, reducing the cost of Jamaica’s market access. The Inter-American Development Bank and the World Bank have indicated their readiness to provide additional budget support alongside the Fund’s arrangement, providing a multilateral financing package that meaningfully reduces the immediate balance-of-payments pressure.
GDP: The Recession Bites Deep
The Planning Institute of Jamaica’s preliminary Q1 data confirm that the economy contracted sharply — estimates suggest a year-on-year decline of approximately 3 to 4 per cent in the quarter, a pace of contraction not seen since the worst years of the FINSAC crisis in the late 1990s. The decline is broad-based, reflecting the simultaneous withdrawal of the three external demand pillars that had sustained growth through the mid-2000s: tourism revenue is falling, remittance inflows are declining and the commodity export sector — bauxite and alumina — has been hit by the collapse in aluminium prices that accompanied the global industrial contraction.
The bauxite and alumina sector, which had provided steady export revenues through the boom years, has been particularly severely affected. The global price of aluminium, of which alumina is an intermediate input, fell by more than 40 per cent between its 2008 peak and early 2009 as manufacturing demand collapsed worldwide. Several Jamaican alumina operations reduced output or suspended production during the quarter, with direct employment consequences in the communities — particularly in St. Elizabeth, St. Ann and Manchester parishes — that have historically depended on the industry.
The domestic economy has amplified the external shock rather than cushioned it. Consumer credit growth has slowed sharply as commercial banks tighten lending standards in response to a rising non-performing loan ratio and their own higher funding costs. Retail sales data indicate a marked reduction in consumer spending, particularly on durable goods and discretionary items. Construction activity, which had been declining since late 2007, continues to contract as new development approvals dry up and financing conditions remain tight.
Inflation’s Silver Lining
In a quarter dominated by grim economic news, the trajectory of inflation provides genuine, if partial, relief. Consumer price inflation, which had peaked above 25 per cent year-on-year in mid-2008, has continued its descent in the months since oil’s freefall began. By March 2009, the Statistical Institute of Jamaica’s CPI data show the year-on-year rate approaching 12 per cent — still above the BOJ’s long-run target range but dramatically improved from the crisis peak and moving in a direction that permits monetary easing.
The fall in inflation is almost entirely attributable to lower global energy and food prices rather than to improvements in Jamaica’s structural cost competitiveness, a distinction that matters for policy. Oil, which averaged approximately US$100 per barrel in 2008, is trading below US$50 in the first quarter of 2009. Electricity tariffs, which had been raised sharply during the 2008 price surge, are being adjusted downward as the fuel cost component falls. Retail food prices, which had risen sharply as international agricultural commodity prices spiked in 2007–2008, are beginning to ease as those commodity prices normalize.
The Bank of Jamaica has responded to the improving inflation outlook by beginning a cautious easing of its benchmark overnight rate. The rate, which had been pushed into the mid-teens during 2008 to defend the currency and contain inflation, has begun to move lower as the central bank balances the need to stimulate a contracting economy against the continuing need to maintain adequate returns on Jamaica-dollar assets to limit further currency depreciation. The exchange rate has moved from approximately J$89 at year-end 2008 to around J$87–90 during Q1, somewhat steadied by the IMF programme’s confidence effect but still susceptible to global risk sentiment.
Tourism: The Second Winter of Decline
Q1 — the winter season — is the most critical trading quarter for Jamaica’s tourism sector, accounting for a disproportionate share of annual arrivals and revenue. Preliminary data from the Jamaica Tourist Board indicate that stopover arrivals in Q1 2009 were approximately 8 to 10 per cent below Q1 2008 levels, a steeper decline than in the equivalent period a year ago and a continuation of the deterioration that began in Q2 2008.
The U.S. consumer confidence picture at the start of 2009 was about as bleak as it has been at any point in the post-war era. The U.S. economy lost 2.6 million jobs in 2008 alone; in the first three months of 2009, a further 2 million jobs were lost. Households that had planned Caribbean vacations were cancelling them. Tour operators reported a sharp increase in last-minute bookings at heavily discounted rates as properties sought to move inventory, compressing revenue per available room even for those hotels that maintained occupancy. Several north coast properties instituted significant price reductions — effectively transferring value to the visitor rather than the operator — in order to preserve some level of activity through the season.
A Diaspora Moment: Obama and Jamaica
The economic narrative of Q1 2009 cannot be told without acknowledging the extraordinary moment that occurred on January 20, when Barack Obama was inaugurated as the 44th President of the United States — the first African-American to hold the office. For the Jamaican diaspora in the United States — which numbers more than 700,000 foreign-born Jamaicans, concentrated in New York, South Florida, New Jersey, Connecticut and Maryland — the inauguration carried a significance that transcended ordinary political events.
Tens of thousands of Jamaican-Americans travelled to Washington for the inauguration festivities, representing one of the largest mobilisations of the community for a civic event in living memory. Caribbean cultural organisations held celebrations across major U.S. cities. In Jamaica itself, watch parties in Kingston, Montego Bay and other urban centres drew large crowds. The emotional investment is not merely sentimental; many in the diaspora perceive Obama’s election as a signal about the trajectory of racial opportunity in the country that is the primary destination for Jamaican emigrants, and therefore a signal about the future economic prospects of the community whose remittances sustain so many households at home.
The Fiscal Adjustment: Early Implementation
The IMF programme’s first quarterly review will assess whether the Golding government has met the initial performance criteria. Early signs are cautiously positive: the government has restrained discretionary spending in the February and March months, public-sector hiring has been frozen, and the Auditor General’s department has been engaged to assist with revenue administration improvements. The 2009–10 budget, to be presented to Parliament in April, will be the first comprehensive fiscal statement prepared under the constraints and commitments of the IMF programme and will be closely scrutinised by international creditors and the Fund itself.
The political challenge is real. The JLP government, in opposition for eighteen years before its 2007 election victory, had come to office promising economic reform and greater efficiency in public service delivery. The IMF programme provides a framework and an external mandate for the kind of structural adjustment that might otherwise be politically impossible to sustain — but it also constrains the government’s ability to respond to constituency pressures with spending. The coming months will test whether the political coalition that supports the programme in Parliament can be maintained as the recession’s human cost becomes more visible.
The Property Market: Waiting
The residential property market entered Q1 2009 in a holding pattern. Sellers who do not need to transact have withdrawn from a market where buyers have the leverage; those who must sell are finding that realistic pricing requires accepting values materially below the 2006–2007 peak. The National Land Agency reports that the volume of transfer applications continues to run below 2007 and 2008 levels. New mortgage applications at the National Housing Trust, while still supported by mandatory contribution flows from the formal employed workforce, are running well below the peaks of the boom years.
The beginning of a BOJ easing cycle, if sustained and transmitted into commercial lending rates, will eventually provide the mortgage market’s most important input: more affordable finance. But the transmission from policy rate cuts to retail mortgage rates is slow in Jamaica’s banking system, and commercial banks facing rising non-performing loans are not in a position to ease lending standards materially even as their cost of funds declines. A market recovery is unlikely before 2010 at the earliest, and probably contingent on evidence that the broader recession is ending.
What This Means
Homeowners can take some comfort from the beginning of the interest rate easing cycle. Those on variable-rate mortgages will see payment reductions with a lag as commercial banks pass through the BOJ’s benchmark cuts. The key message for this group remains: maintain your payments, communicate proactively with your lender if under stress, and recognise that the property you own retains fundamental value even if its liquid market price has declined.
Renters will find that lower fuel prices are beginning to feed through to utility bills, providing modest household budget relief. Wage growth in the formal sector has slowed or halted in real terms, but the deceleration of inflation from 25 per cent to 12 per cent means that the real wage erosion of 2008 is at least not worsening at the same rate. Conditions remain difficult but the direction of travel is less adverse than it was six months ago.
Developers face a market in which activity is minimal and financing scarce. The IMF programme, if implemented successfully, should eventually reduce interest rates and restore investor confidence; but “eventually” is likely to mean 2010 or beyond rather than the coming months. Maintaining cash liquidity and servicing existing financing obligations should be the absolute priority for this quarter.
Businesses should not expect the recession to end before the second half of 2009 at the earliest, and the recovery when it comes is likely to be gradual rather than the sharp rebound that followed the 2001 and 2004 shocks. The IMF programme, by providing external credibility, helps prevent a worst-case scenario of disorderly currency depreciation; but it cannot conjure growth in an environment of weak global demand.
Diaspora members should note that Obama’s stimulus package — the American Recovery and Reinvestment Act, signed February 17, 2009, committing US$787 billion to infrastructure, tax cuts and social spending — is specifically designed to arrest the U.S. employment decline. Its effects will take months to filter through, but a stabilisation of U.S. job losses in the second half of 2009 would provide a foundation for the remittance recovery that Jamaica needs.
Outlook
The IMF programme gives Jamaica something it has lacked since the Lehman shock: a credible macroeconomic framework backed by external financing. It does not make the recession shorter or less painful, but it reduces the risk that the fiscal and monetary responses to the recession amplify rather than absorb the shock. The primary task for Q2 2009 is demonstrating programme compliance to the Fund’s first quarterly review — a successful outcome will maintain access to programme disbursements and signal to commercial creditors that Jamaica’s adjustment is on track.
The global economic outlook remains deeply uncertain. The IMF’s January 2009 World Economic Outlook Update projected global growth of minus 0.5 per cent for 2009 — the worst global performance since the 1930s. For Jamaica, the critical variables are the trajectory of U.S. unemployment (which determines both tourism demand and remittance flows), the path of oil prices (which determines the inflation and import-bill outlook) and the capacity of the Golding government to maintain fiscal discipline through a politically difficult adjustment period. All three remain highly uncertain, but the direction of travel — inflation falling, rates easing, an IMF anchor in place — is better than it was six months ago.
Jamaica Economic Intelligence is an independent data-driven journalism series publishing quarterly and annual reviews of Jamaica’s economy. Sources include the Bank of Jamaica, the Planning Institute of Jamaica, the Statistical Institute of Jamaica, the Jamaica Tourist Board, the National Land Agency and multilateral institutions including the IMF and World Bank. All figures are the best available estimates at the time of reporting.
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