Jamaica Economic Intelligence | Q3 2012 | July–September 2012
Key Findings
- Draghi’s ‘whatever it takes’ pledge on July 26 ends eurozone acute crisis
- US Federal Reserve launches open-ended QE3 on September 13
- Jamaica passes sixth IMF EFF review; programme momentum holds
- Summer tourism arrivals confirm another record-pace year
- Brent crude rebounds from US$96 to US$115 on QE3 and geopolitics
- NDX discussions intensify as debt-to-GDP remains above 130 per cent
Three words from a central banker in London change the course of the global financial crisis’s European chapter, while an open-ended bond-buying programme from Washington floods emerging markets with liquidity and lifts asset prices worldwide. For Jamaica, Q3 2012 arrives as a gift from the international financial calendar: the acute eurozone crisis recedes, global risk appetite recovers, and the island’s summer tourism season posts arrival numbers that point unmistakably toward a second successive annual record. The challenge is that the structural debt arithmetic — a debt-to-GDP ratio still above 130 per cent — has not moved fast enough, and quiet conversations in Kingston’s financial community are beginning to crystallise around a question that was unthinkable two years ago: does Jamaica need a second debt exchange?
‘Whatever It Takes’: Draghi’s Three-Word Rescue
On July 26, 2012, European Central Bank President Mario Draghi stood before the Global Investment Conference in London and delivered what would become the most consequential six-word sentence in modern central banking history: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The effect was immediate and seismic. Spanish 10-year bond yields, which had been approaching the 7.5 per cent level that market participants regarded as the point of no return, fell by nearly a full percentage point within hours. Italian yields retreated similarly. The euro rallied sharply against the dollar. European equity markets surged.
The mechanics of the pledge were formalised in September, when the ECB announced its Outright Monetary Transactions programme — a conditional framework under which the ECB would purchase, without pre-announced limits, the sovereign bonds of eurozone member states that had formally requested assistance and were subject to conditionality. The mere existence of the backstop, rather than any actual bond purchases, was sufficient to restore market confidence. Spain and Italy did not request OMT assistance; knowing it was available was enough. The acute phase of the eurozone crisis — the two-year period in which the euro’s survival was genuinely in question — was effectively over.
For Jamaica, the implications cascaded through several channels. European investors’ risk appetite, which had been severely depressed by sovereign debt fears, began to recover. Emerging market sovereign bonds — including Jamaica’s external debt — benefited from the global risk-on turn. Spreads on Jamaican bonds, while still elevated relative to investment-grade credits, narrowed modestly through August and September, reducing the theoretical cost of any future external financing. And European tourism demand, which had been restrained by recession and uncertainty, showed early signs of stabilising, though any full recovery in European stopover arrivals remained a future-quarter story.
QE3: The Fed Goes Open-Ended
If Draghi’s pledge settled the European question, the US Federal Reserve’s September 13 announcement addressed the American one. Chairman Ben Bernanke announced a third round of quantitative easing — QE3 — involving open-ended monthly purchases of US$40 billion in agency mortgage-backed securities. Unlike the previous two rounds, QE3 had no fixed end date: the Fed would continue purchases until the labour market showed “substantial improvement.” The announcement drove US equity markets to multi-year highs, pushed the dollar lower, and sent capital flooding into higher-yielding assets across emerging markets.
For small open economies like Jamaica, QE3 was a double-edged instrument. On the positive side, the global liquidity injection lowered risk premiums, improved market access for sovereign borrowers, and supported commodity prices in ways that benefited Jamaica’s trading partners. On the negative side, the oil price — which had retreated to US$96 in late June — rebounded sharply through July, August, and September, reaching approximately US$115–116 per barrel by mid-September as the QE3 announcement, combined with continued Middle East tension and unplanned outages in the North Sea, pushed energy markets higher. Jamaica’s electricity tariff, which had enjoyed two months of relief, began climbing again as the fuel component readjusted upward.
Jamaica’s Sixth IMF Review: Another Clean Pass
Against this improving global backdrop, Jamaica completed its sixth quarterly review under the Extended Fund Facility without a waiver — the longest unbroken streak of clean IMF reviews in Jamaica’s modern history. The review confirmed that Jamaica had maintained fiscal discipline through the Q1 oil price shock, the budget’s tight parameters, and the always-demanding quarterly performance criteria. International reserves were within target. The primary surplus — that most critical of fiscal metrics, measuring whether the government spends less than it earns before debt service — was on track.
The IMF staff report accompanying the sixth review acknowledged the growth challenge more explicitly than earlier reports had. Jamaica’s GDP was growing, but slowly — estimates for 2012 ranged from flat to 0.5 per cent. In a country where the debt-to-GDP ratio remains above 130 per cent and where nominal GDP growth is the denominator in that critical ratio, even a year of modest positive growth makes the debt dynamics marginally better. But the pace of improvement was inadequate to achieve debt sustainability over any foreseeable horizon without either further fiscal adjustment — which was already at the limit of political and social feasibility — or a structural reduction in the debt stock itself. That conclusion, left implicit in the IMF’s careful language, was being heard clearly by Jamaica’s financial planners.
The NDX Question: Speaking the Unspeakable
The Jamaica Debt Exchange of January 2010 had restructured the domestic, Jamaica-dollar portion of the government’s debt — resetting coupons on J$700 billion of bonds to lower rates, generating annual debt service savings of J$40–45 billion. But it had left the external, foreign-currency debt essentially untouched. By Q3 2012, that external debt — denominated in US dollars, with higher coupons and international creditor protections — represented a growing share of total debt service, and a growing source of concern for Jamaica’s IMF interlocutors.
Private conversations in Kingston’s financial community, in the Ministry of Finance’s policy circles, and among Jamaica’s major domestic institutional investors were increasingly focused on whether a second debt exchange — one that would restructure both the post-JDX domestic debt and a portion of the external obligations — was becoming necessary. The working name being discussed was the National Debt Exchange, or NDX. Nothing had been announced publicly. But the analytical groundwork was being laid, and international advisers were in early consultations with Jamaican authorities.
The sensitivity of these discussions was considerable. Any public signal that Jamaica was contemplating another debt exchange could trigger a market reaction — domestic bond yields rising, the exchange rate weakening, capital flight from the banking system — that would make the restructuring more expensive or more disruptive. The government had every incentive to manage the disclosure timeline carefully. As Q3 ended, no announcement had been made. But those close to the process knew the question was no longer if, but when and how.
Tourism: A Second Successive Record in Prospect
Jamaica’s peak summer tourism season — July, August, and the first half of September — delivered arrivals data that pointed clearly toward a second consecutive annual stopover record. Jamaica Tourist Board figures showed the Montego Bay and Negril resort corridors operating at high occupancy throughout the summer, with strong North American demand offsetting some softness in European arrivals that the eurozone recession had depressed.
The Falmouth cruise pier continued to generate significant economic impact for Trelawny, with Royal Caribbean’s Oasis- and Freedom-class ships calling regularly. Industry estimates suggested cruise passenger numbers for the full year 2012 would exceed 1.2 million — a figure that, while contributing less per head to the economy than stopover visitors, represented a substantial volume of excursion spending, craft sales, and transportation revenue. Combined stopover and cruise visitor expenditure was tracking toward an annual record that would provide meaningful support to GDP in the accommodation, food service, and entertainment sectors.
Hurricane Isaac, which struck Cuba and the Gulf Coast of the United States in late August as a Category 1 storm, caused some disruption to cruise schedules in the western Caribbean during the final days of August and early September. Jamaica was not directly affected, but the regional weather system that accompanied Isaac reduced arrivals modestly in the final weeks of the summer high season. The net impact on the quarter’s aggregate arrivals was small.
Property Market: Steady Amid Macro Uncertainty
Jamaica’s residential property market continued its measured recovery through Q3 2012. Transaction activity in the Kingston metropolitan area and the north coast resort communities remained above the 2009 crisis trough, supported by NHT mortgage rates at decade lows and by the improved co-financing arrangements announced in the April budget. New residential completions, primarily in the mid-market segment targeting NHT borrowers, contributed to a modest but visible uptick in market supply in Kingston’s eastern and north-western growth corridors.
The luxury and upper-middle residential segment — concentrated in the hills above Kingston (Cherry Gardens, Norbrook, Jacks Hill) and in Montego Bay’s coastal and hillside communities — remained active, driven in part by diaspora investment and in part by the limited supply of quality properties in these established neighbourhoods. The exchange rate’s relative stability through 2012 meant that US dollar-denominated diaspora remittances retained their purchasing power in the Jamaican property market, sustaining demand at the premium end.
What This Means
Homeowners in Q3 experienced a frustrating return of JPS electricity cost pressure as oil rebounded from its Q2 lows, reversing some of the bill relief that June had delivered. The broader message for Jamaican homeowners is one of persistent energy vulnerability: until Jamaica diversifies its electricity generation away from oil — a transition discussed in policy documents but not yet materialising at scale — household energy costs will remain hostage to global crude price swings. The government’s early interest in LNG conversion projects offers long-term hope, but no near-term tariff relief.
Renters face a similar energy cost dynamic, with the additional uncertainty introduced by the NDX speculation now circulating in financial circles. A second debt exchange — if and when it comes — would not directly affect rental contracts, but any financial market disruption in the transition period could affect landlords’ financing costs and, in time, rental pricing. For now, the rental market is stable, with Kingston’s middle-income rental sector seeing steady demand from the same professional class that forms the core of Jamaica’s service economy.
Developers are watching the NDX question with close attention. A debt exchange that restructures domestic Jamaica-dollar bonds would, as the JDX did in 2010, potentially lower yields on alternative investments and push institutional investors toward real estate and equity. The JDX had been part of the catalyst for the 2010–11 property market recovery; a well-managed NDX could have a similar effect. The risk is the disruption in the transition: construction financing from commercial banks could tighten if the banks themselves are large holders of the bonds being restructured.
Businesses in the tourism and hospitality sector are the clear winners of this quarter, with summer occupancy delivering revenues that will support investment in plant and staff through the slower autumn shoulder season. The global QE3 environment is providing a macroeconomic tailwind by keeping US consumer confidence and spending relatively resilient heading into the autumn. For businesses in other sectors — manufacturing, logistics, professional services — the picture is more mixed: energy costs have rebounded, growth remains slow, and the NDX uncertainty, if it intensifies, could weigh on capital expenditure decisions.
Diaspora investors benefit from the QE3 environment in an indirect but real way: lower US interest rates mean that capital sitting in US savings accounts earns negligible returns, increasing the relative attractiveness of Jamaican property and Jamaican financial assets that offer higher yields. Those with family connections and long-term investment horizons will find that the combination of NHT-rate mortgages, tourism-driven property demand in the resort corridor, and a stabilised macroeconomic framework makes this a more attractive entry point than the crisis trough of 2009– but less obviously undervalued than it was then.
Outlook
The third quarter of 2012 has delivered more global tailwinds than any quarter since Jamaica signed the EFF in May 2010. Draghi’s commitment, the Fed’s open-ended easing, and the resulting recovery in risk appetite have created a more supportive international financing environment than Jamaica has enjoyed at any point in its post-crisis adjustment. Tourism is performing. The IMF reviews are clean. The fiscal programme is intact.
What the quarter has also made clear is that these favourable conditions cannot substitute for the structural debt reduction that Jamaica’s long-term sustainability requires. The NDX question — whether a second debt exchange targeting both domestic and external obligations is needed to bring the debt-to-GDP ratio onto a credible downward path — will not go away. The fourth quarter will be dominated, in Jamaica’s financial policy circles, by the preparations for whatever answer emerges. And the US presidential election in November will determine whether the QE3 tailwind strengthens or evolves into the next phase of American monetary policy.
Jamaica ends its third quarter in the best macroeconomic shape it has occupied since the 2008 financial crisis. The question is whether the improvement is sufficient — or whether the next structural challenge is already forming beneath the surface.
Jamaica Economic Intelligence is an independent data-driven journalism series tracking the Jamaican economy across successive quarters. Sources include the Bank of Jamaica, Statistical Institute of Jamaica, International Monetary Fund, Ministry of Finance, and the Jamaica Tourist Board. All figures are reported as understood at the time of publication.
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