IMF Deal Done: Jamaica’s EFF and What It Means for the Housing Sector — June 2013

Publication Date: 3 June 2013 | Coverage Period: 3 May – 2 June 2013 | Category: Monthly Review

Month in Brief

• IMF Executive Board approves US$932 million EFF for Jamaica on May 1 (effective May 9); initial disbursement of US$207 million.
• Programme formalises four-year fiscal adjustment path; wage freeze, primary surplus targets, and NHT transfer embedded.
• Credit rating agencies react positively; sovereign risk premiums compress further.
• Building societies announce first mortgage rate reductions of the cycle; commercial banks follow suit.
• NHT loan disbursements on pace; Trust confirms loan limits under review for potential upward adjustment.
• Developer confidence at multi-year high; formal construction pipeline expands for first time since 2010.

The IMF EFF: Jamaica’s New Anchor

On 1 May 2013, the International Monetary Fund’s Executive Board approved an Extended Fund Facility for Jamaica amounting to SDR 615.38 million, approximately US$932.3 million — equivalent to 225% of Jamaica’s quota in the Fund. The arrangement, effective from 9 May, enables an initial disbursement of US$207.2 million and commits the Jamaican authorities to a four-year economic programme running through fiscal year 2016/17.

The programme’s architecture is familiar to observers of Jamaica’s engagement with the Fund: upfront fiscal adjustment, structural reforms to boost growth and competitiveness, a primary surplus path aimed at putting public debt on a declining trajectory toward a debt-to-GDP ratio of approximately 95% by 2020, and a strengthened social safety net to protect the most vulnerable households from the consequences of adjustment. The wage freeze — covering the public sector, which employs a significant proportion of Jamaica’s formal workforce — is among the most politically sensitive elements.

For Jamaica’s economic managers, the EFF is the formal capstone of the stabilisation architecture constructed since early 2012: the revenue measures of the 2012/13 budget, the NDX of February 2013, and the 2013/14 budget together form the fiscal foundation on which the IMF programme is built. The external validation of this architecture — and the balance of payments support that comes with it — materially improves Jamaica’s macro stability and reduces the sovereign risk premium that has been suppressing investment and consuming an outsized share of government revenue.

Housing Sector Implications of the EFF

The IMF EFF’s implications for Jamaica’s housing sector are both direct and indirect, operating through multiple channels over different time horizons.

The most direct channel is interest rates. The EFF, combined with the NDX savings, reduces the government’s demand for domestic capital and validates the fiscal path that makes monetary easing possible. The Bank of Jamaica, which has already begun a cautious rate-reduction cycle, can now proceed with greater confidence that the macro stabilisation is durable. Commercial mortgage lenders — who had been waiting for exactly this external validation before committing to repricing their loan books — have begun announcing rate reductions. Building societies have cut their standard mortgage rates by a modest but symbolically important margin; commercial banks are following. The long-expected pivot in the mortgage rate cycle is, at last, underway.

The indirect channels are multiple. A more stable fiscal environment reduces uncertainty for property investors, developers, and lenders alike. Improved sovereign creditworthiness reduces the cost of external financing for Jamaican banks, which in turn reduces their cost of funds and creates further space for mortgage rate reductions. And the improvement in Jamaica’s external accounts — supported by the IMF programme’s balance of payments component — reduces downward pressure on the Jamaican dollar, which in turn reduces the cost of imported construction materials denominated in US dollars.

The NHT transfer remains embedded in the programme as a fiscal commitment. This is the most significant direct constraint that the EFF places on housing policy: the government has committed to the international community to maintain this transfer, which limits the scope for redirecting NHT resources towards expanded housing supply. Housing advocates have noted this with concern; the government’s response is that the macro stabilisation enabled by the programme will, in the medium term, do more for housing affordability than any increase in NHT loan supply could achieve in isolation.

Housing Market Conditions

Jamaica’s property market in May 2013 is at its most active point since 2010. The combination of improved macro sentiment, the first mortgage rate reductions, and an accumulation of deferred demand from households that have been waiting for the environment to stabilise is producing a noticeable increase in market activity. Transaction volumes in Kingston, St. Andrew, St. Catherine, and St. James are up on a year-on-year basis, and the gap between listing price and sale price — which had widened as market confidence deteriorated — is narrowing.

The NHT-financed segment continues to provide the most reliable transaction flow. The Trust’s balloting and loan disbursement programmes proceed normally, and the new financial year has brought a fresh cycle of contributor applications. The queue of eligible contributors awaiting solutions remains long, but the Trust’s project pipeline has expanded with the Catherine Estates and Whitehall Phase 3 completions advancing on schedule and new schemes in planning across several parishes.

The rental market has moderated slightly as some households that had deferred homeownership decisions begin to re-enter the purchase market. Rental vacancy rates in Kingston and New Kingston, which were very low through the period of peak uncertainty, have edged up marginally, providing a small but welcome increase in supply for those who remain in the rental market.

Government Policy

The Simpson Miller government has moved quickly to claim the IMF programme’s approval as a validation of its economic management. Finance Minister Dr Peter Phillips has emphasised the programme’s social protection components — including a floor on social spending and an expanded PATH conditional cash transfer programme — as evidence that the fiscal adjustment has been designed with distributional considerations in mind.

For housing policy specifically, the government faces the political challenge of demonstrating visible progress within a tight fiscal envelope. The NHT’s construction programme, HAJ’s project pipeline, and the National Land Titling Programme are the primary delivery vehicles; all three are maintained within the constraints of the programme. There is no scope, under the IMF framework, for a significant expansion of public housing expenditure beyond what is currently budgeted.

Construction Activity

The construction sector is showing the most positive momentum in three years. Formal permit applications in Kingston, St. Andrew, and St. James have increased from the depressed levels of 2012. HAJ’s Catherine Estates project is progressing well in St. Catherine. The Whitehall Phase 3 development in Negril continues on schedule toward its 590-unit completion. Private sector schemes in upper Kingston and the St. Catherine corridor are advancing through financing stages.

Cement imports have increased in April and May, providing the first sustained confirmation from a leading indicator that formal construction activity is genuinely recovering rather than merely reversing a transitory dip. Input costs remain high in absolute terms — the Jamaican dollar’s stabilisation has not yet reversed the accumulated depreciation of the past several years — but the rate of increase has moderated, providing developers with somewhat better visibility on project economics.

Infrastructure

Road infrastructure investment continues under various government programmes, with ongoing rehabilitation of parish roads in housing catchment areas improving connectivity and property values in transitional zones. The Highway 2000 programme’s expansion of the Kingston–St. Catherine corridor continues to create new residential development opportunities. Water and sewerage infrastructure, a persistent constraint on development in several growth areas, is being addressed incrementally by the National Water Commission, though progress remains uneven across parishes.

Investment Climate

The investment climate for Jamaican real estate has improved materially since the IMF programme’s approval. International investors who had been monitoring Jamaica from the sidelines are beginning to re-engage, particularly in the tourism-adjacent segment. Domestic institutional investors — insurance companies, pension funds — which had been overweight in government bonds relative to real assets, are beginning to assess real estate exposure as part of portfolio rebalancing in the lower-yield post-NDX environment.

Credit rating agencies have reacted positively to the IMF programme’s approval. Moody’s and Standard and Poor’s are reviewing their Jamaica ratings, and the consensus expectation is for either an upgrade or a positive outlook change. This improvement, if it materialises, would reduce the cost of external borrowing for Jamaican financial institutions, with downstream benefits for mortgage lending rates.

Diaspora and Remittances

The IMF programme’s approval has been welcomed by the Jamaican diaspora, which has long viewed macro instability as the primary obstacle to more substantial investment in Jamaican property. Inquiries from diaspora members in the United States, United Kingdom, and Canada about Jamaican real estate have increased since the programme’s announcement, with interest concentrated in retirement-oriented properties in Manchester and St. Elizabeth and investment properties in the Kingston metropolitan area.

Remittance flows remain robust. The first-half 2013 annualised rate, based on April and May data from the Bank of Jamaica, is consistent with the approximately US$2 billion annual level. The improvement in Jamaica’s macro outlook is expected to sustain and potentially increase diaspora remittances, as confidence in the Jamaican dollar’s stability reduces the risk of sending money home and holding it in Jamaican accounts.

Affordability Analysis

The first genuine improvements in housing affordability in three years are now arriving. Building society mortgage rates have been cut from their recent peaks, with the leading institutions now offering rates in the 10–11% range on standard mortgage products — down from 12–13% earlier in the year. For a J$10 million mortgage over 20 years, this represents a monthly payment reduction of J$10,000–15,000 — not transformational, but meaningful for households operating at the margin of affordability.

The NHT’s loan limits are under active review. The Trust’s board is considering an upward adjustment to reflect construction cost inflation, which would expand the pool of affordable solutions accessible to contributors at the programme’s lower limit levels. An announcement in this regard is expected during the financial year. In the meantime, joint contributor applications — which allow couples or family members to pool their NHT entitlements — remain the primary mechanism by which contributors bridge the gap between individual loan limits and actual acquisition costs.

Regional Context

Jamaica’s IMF programme is the most significant economic policy development in the English-speaking Caribbean in 2013. Other CARICOM members facing fiscal challenges are watching the programme’s implementation closely, both for lessons applicable to their own situations and for the signal it sends to international investors about the Caribbean region’s creditworthiness more broadly. The Caribbean Development Bank has expressed support for Jamaica’s programme and is aligned with the IMF on the need for sustained fiscal adjustment as the foundation for long-term growth.

For the regional housing sector, Jamaica’s experience over the past 18 months — from the JDX of 2010 through the NDX of 2013 and now the IMF EFF — illustrates the dependency of housing market health on macro fiscal conditions. A government that cannot manage its debt cannot provide the stable interest rate environment that affordable mortgage finance requires. The lesson is regional in its applicability even if Jamaica is the immediate subject.

Looking Ahead

With the IMF programme in place, the NDX’s fiscal savings flowing through, and the Bank of Jamaica in the early stages of a rate-easing cycle, Jamaica’s housing sector enters the second half of 2013 with the best macro backdrop it has seen since 2009. The structural challenges — a housing deficit of 100,000 to 120,000 units, NHT loan limits constrained relative to construction costs, a large population of would-be homeowners priced out of the formal market — have not been resolved. They are deep-rooted and will take years of sustained policy effort and economic growth to address.

But the direction has changed. Mortgage rates are declining for the first time in several years. Construction activity is recovering. Developer confidence is at a multi-year high. The government’s fiscal adjustment, painful as it has been, has created the macro conditions under which a genuine housing market recovery can unfold. That recovery will be gradual and uneven — weighted towards the NHT and building society segments, and towards the urbanised parishes where economic activity is concentrated — but it is now underway.

For Jamaican families waiting for an affordable home — the hundreds of thousands who have been on NHT waiting lists, living in substandard conditions, or absorbing the cost of expensive rental accommodation while saving for a deposit — the IMF programme’s approval is not an event that changes their situation overnight. But it is a foundational step without which the medium-term improvement in their housing prospects cannot happen. That is the significance of May 2013 for Jamaica’s housing sector, and it is considerable.