America Loses Its AAA Rating, Global Markets Tremble, and Bruce Golding Steps Aside: Q3 2011

Jamaica Economic Intelligence | Q3 2011 | July–September 2011

Key Findings

• Standard & Poor’s strips the United States of its AAA sovereign rating on 5 August
• Global equity markets fall sharply; Jamaica’s financial markets absorb the turbulence
• Prime Minister Bruce Golding announces resignation; Andrew Holness named JLP leader and PM
• Tourism season ends with full-year arrivals on track to set a new record above 1.95 million
• Oil retreats toward US$100–105, providing some inflation relief
• Public sector wage settlement reached; IMF EFF programme integrity maintained

The third quarter of 2011 delivered a political shock in Washington that sent tremors through global financial markets — and a political transition in Kingston whose implications for Jamaica’s economic programme would only become clear in the months that followed. On 5 August, Standard & Poor’s downgraded the United States government’s long-term sovereign credit rating from AAA to AA+, citing political dysfunction around the debt ceiling and a fiscal trajectory that it judged unsustainable. Three weeks later, on 26 September, Prime Minister Bruce Golding announced his intention to resign as leader of the Jamaica Labour Party, ending a tenure that had defined the country’s response to the 2008 global crisis and the painful construction of the JDX-EFF framework.

The US Downgrade: A Historic First

The Standard & Poor’s decision to strip the United States of its AAA sovereign rating on 5 August 2011 was unprecedented in the modern era. The United States had held the highest possible credit rating since S&P’s rating system was established; the downgrade to AA+ — citing congressional brinkmanship over the debt ceiling that had taken the country within days of default, and an assessment that the political system was unlikely to deliver the fiscal consolidation required to stabilise the debt trajectory — shook financial markets globally in ways that the announcement itself might not have predicted.

The week of 8–12 August saw global equity markets sell off sharply. The S&P 500 fell approximately 15% from its late-July peak. European markets fell further, as the sovereign downgrade compounded existing anxiety about the eurozone crisis. Emerging market assets, which had been performing relatively well through the year, sold off as investors reduced risk exposures globally. The paradoxical result was that US Treasury yields — the price of the very securities whose issuer had been downgraded — fell as investors fled to the safety of dollar-denominated sovereign debt, reinforcing the reserve currency’s unique status even in the moment of its rating humiliation.

For Jamaica, the downgrade’s most immediate channel was through sentiment rather than direct financial linkage. Jamaica’s Bank of Jamaica monitored foreign exchange market developments closely in the weeks following the downgrade, but did not report significant capital outflows or exchange rate pressure. The Jamaican dollar remained stable. The tourism sector, which drives the dominant share of Jamaica’s foreign exchange earnings, showed no immediate demand disruption — travel bookings from the US, while made in an environment of heightened financial anxiety, were not reversed in significant volumes. The IMF EFF programme, whose external disbursements provided a reserve backstop, reduced the vulnerability to the kind of sudden-stop dynamics that a financial panic can trigger in highly indebted small open economies.

The longer-term implication of the US downgrade was its signal about the trajectory of US fiscal policy. The debt ceiling crisis had demonstrated that political polarisation was making it increasingly difficult to address the United States’ medium-term fiscal challenge through normal legislative processes. For Jamaica — whose recovery depended heavily on US consumer confidence, tourism spending, and diaspora remittances — the prospect of a US economy constrained by fiscal austerity and political dysfunction was a genuine medium-term risk, even if the immediate post-downgrade turbulence proved manageable.

Bruce Golding Steps Down: The End of a Crisis Stewardship

Prime Minister Bruce Golding’s announcement on 26 September 2011 that he would resign as leader of the Jamaica Labour Party — and consequently as Prime Minister — brought to an end a political tenure that had been defined entirely by crisis management. Golding had led the JLP to victory in the September 2007 general election, inheriting an economy that was already showing signs of stress before the global financial crisis struck. His government’s response — securing the February 2009 IMF Stand-By Arrangement, executing the January 2010 Jamaica Debt Exchange, and transitioning to the May 2010 Extended Fund Facility — had been the central work of his premiership.

Golding’s resignation was shaped in part by the political and reputational fallout from the 2010 Tivoli Gardens incursion — the massive security operation to apprehend Christopher Coke, an alleged drug lord whose US extradition request had placed the government in an acutely difficult position given Coke’s political associations in West Kingston. The security operation in May 2010, while ultimately successful in producing Coke for US extradition, had resulted in significant civilian casualties and intense international criticism. The political damage proved cumulative and eventually insurmountable for Golding’s continuation as party leader.

The JLP’s internal election to choose Golding’s successor moved rapidly. Andrew Holness, the Minister of Education and one of the JLP’s younger generation of leaders, was elected JLP president on 20 October 2011 and was sworn in as Prime Minister on 23 October — Jamaica’s youngest Prime Minister in history at 39 years of age. Holness immediately faced the question of whether to seek an electoral mandate: the general election was due by October 2012, but calling it earlier would give Holness the opportunity to win his own mandate rather than leading into an election in the final year of the term, when programme fatigue and accumulated hardships might make a JLP renewal more difficult.

Tourism Season: A New Record in Sight

Jamaica’s summer tourism season — the July–August peak — delivered another strong performance in Q3 2011, with stopover arrivals continuing the double-digit year-on-year growth trajectory of the first half of the year. The Jamaica Tourist Board confirmed that full-year 2011 arrivals were on track to establish a new record, surpassing the pre-crisis 2007 peak. The achievement was remarkable in context: the global environment in Q3 2011 included a US credit downgrade, equity market volatility, European recession fears, and elevated oil prices — precisely the combination that might have been expected to deter discretionary travel spending.

That it did not reflected the depth of Jamaica’s recovery in the US source market. The US unemployment rate, while still elevated, had fallen from the 2009 peak and household confidence — while shaken by the August market turbulence — remained positive enough to sustain forward travel commitments that had been made earlier in the year. The all-inclusive booking model — under which most Jamaica visitors pre-pay their holidays — meant that the market turbulence in August largely affected future bookings rather than arrived visitors, and the evidence from Q4 advance bookings suggested that cancellation rates were modest.

The Wage Settlement: Programme Integrity Preserved

The public sector wage negotiations that had been deadlocked through Q2 2011 reached resolution in Q3. The Ministry of Finance and the major public sector unions agreed to a settlement that provided nominal wage increases of approximately 7–8% over the agreement period — below the inflation rate experienced by workers, but sufficient to be accepted by union leadership as a reasonable outcome given the IMF programme constraints. The key achievement from the government’s perspective was that the settlement was structured within the 9% of GDP wage bill ceiling required by the EFF, preserving programme integrity while providing workers with some nominal relief.

The settlement’s resolution removed a significant uncertainty from Jamaica’s domestic economic landscape. Industrial action in health and education had been a real risk if negotiations had broken down, and any disruption to those services would have imposed costs that extended well beyond the public sector workers themselves. The IMF, notified of the settlement’s terms, confirmed that the EFF’s structural benchmarks on the wage bill were met. The fifth quarterly EFF review, completed in August, passed without waiver, maintaining the programme’s disbursement schedule and signalling to markets that Jamaica’s fiscal discipline was intact despite the political transition.

Oil and Inflation: Gradual Relief

Global oil prices retreated further in Q3 2011, with Brent trading in the US$100–115 range through the quarter — still elevated but well below the April peak of US$126. The retreat reflected a combination of weaker global demand signals (particularly from Europe), IEA strategic reserve releases that had increased available supply in Q2, and the general risk-off sentiment following the US downgrade. For Jamaica, the oil retreat was providing gradual but genuine inflation relief: the Statistical Institute of Jamaica reported that annual inflation was beginning to ease from the Q1 2011 peak, moving back toward the 7–8% range by September.

The moderation in inflation allowed the Bank of Jamaica to maintain its rate hold at 7.25% without the urgency of a tightening that would have been required had price pressures continued to accelerate. The exchange rate remained stable, reflecting the combination of strong tourism inflows, recovering remittances, and IMF reserve buffers. The BOJ’s Q3 report expressed cautious optimism that the inflation trajectory had peaked and would continue to moderate into year-end, barring another external commodity shock.

What This Means

Homeowners see some electricity cost relief as oil prices retreat from their April peak, though JPS tariff adjustments lag the commodity price movement by several months. The political transition from Golding to Holness introduces a degree of policy uncertainty for the remainder of 2011, but the IMF EFF programme provides a structural continuity that limits the discretion of any incoming administration to deviate from the agreed fiscal path. Mortgage costs remain stable at decade lows.

Renters in Q3 2011 benefit modestly from the inflation easing as cost-of-living pressures moderate. The public sector wage settlement provides some nominal income relief for government-employed renters, though the below-inflation increase means purchasing power has not been fully restored. The rental market remains tight, with demand continuing to exceed available supply in Kingston and major north-coast towns.

Developers welcome the oil retreat’s impact on construction costs, which had been the primary margin pressure through H1 2011. The political transition does not significantly alter the development environment in the near term — the NHT continues operating, mortgage approvals continue flowing, and the planning system continues at its pace. The new Holness administration’s economic priorities will become clearer over the coming months; developers are watching for any signals about housing policy or infrastructure investment.

Businesses absorb the US downgrade’s psychological impact without direct financial disruption. The tourism sector’s strong Q3 performance confirms that the sector’s resilience is real. Non-tourism businesses watch the global environment with concern: European recession would reduce demand for Jamaican exports and potentially tighten the global credit conditions that underpin Jamaica’s external financing. The energy cost problem, while easing with oil prices, has not been structurally resolved.

Diaspora Jamaicans feel the August financial turbulence directly in their investment portfolios and retirement accounts, but most are not reverting from remittances: the commitment to supporting family in Jamaica is a social obligation that persists through short-term market volatility. Diaspora investors watching the political transition see Holness as a younger, reform-oriented figure whose economic inclinations appear broadly consistent with the IMF programme framework; uncertainty is limited, confidence is maintained.

Outlook

Jamaica closes Q3 2011 with a new Prime Minister, an IMF programme that is passing its reviews, a record tourism year in sight, and a global environment that — while more turbulent than hoped — has not derailed the domestic recovery. Andrew Holness’s immediate challenge is to determine whether to call an early general election or to govern toward the October 2012 scheduled date.

For Jamaica’s economy, the political transition is manageable. The IMF EFF’s conditionality constrains fiscal policy regardless of which party holds power; the JDX’s structural impact on interest rates is permanent regardless of political colour; and tourism’s performance — driven by international brand and competitive fundamentals — does not depend on domestic politics. The greater risk is the global environment: a deepening European recession or another US financial shock would reduce the tourism and remittance inflows on which Jamaica’s recovery depends, at a moment when the political system is in transition and programme vigilance is most needed.

Jamaica Economic Intelligence is an independent data-driven journalism series tracking Jamaica’s economic performance across every quarter since 2000. Sources include the Bank of Jamaica, the Planning Institute of Jamaica, the Statistical Institute of Jamaica, the Ministry of Finance, the Jamaica Tourist Board, and multilateral institutions including the IMF and World Bank. All figures are contemporaneous estimates based on data available at the time of reporting.

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