Jamaica Economic Intelligence | Q2 2013 | April–June 2013
Key Findings
- New US$932 million IMF EFF signed in May; four-year structural reform agenda
- Bernanke’s May 22 taper hint triggers global emerging market sell-off
- Jamaica dollar depreciates to J$97–100; BOJ intervenes to moderate pace
- Tax reform package introduced: GCT exemptions reduced, income threshold raised
- Tourism spring season solid; full-year bookings tracking near-record
- BOJ holds at 7.25% despite NDX rate relief; taper tantrum delays easing
The second quarter of 2013 opens with Jamaica’s most consequential policy achievement in years — a new four-year IMF Extended Fund Facility, approved by the Fund’s Board in May with a structural reform agenda that goes well beyond the 2010 programme’s fiscal consolidation focus. The celebratory mood lasts precisely nine days. On May 22, Federal Reserve Chairman Ben Bernanke testifies before Congress and uses the word “taper” — and global capital markets enter a weeks-long convulsion that pushes Jamaica’s exchange rate toward J$100 and briefly threatens to undo the confidence gains that the NDX and new EFF had just established.
The New EFF: A Programme With Teeth
On May 1, 2013, the International Monetary Fund’s Executive Board approved Jamaica’s new Extended Fund Facility — a four-year, US$932 million arrangement that replaced the expiring 2010 programme and set a far more comprehensive reform agenda. Finance Minister Peter Phillips, in his statement to Parliament, described the new programme as “the most important agreement Jamaica has entered into with the IMF” — a claim that, given the country’s history with the Fund spanning decades, carried considerable weight.
The new EFF’s fiscal targets were demanding but not dramatically different from those of its predecessor: maintain the primary surplus above the requisite percentage of GDP, hold the public sector wage bill within ceiling, and continue reducing the debt-to-GDP ratio. What distinguished the new programme was its structural reform conditionality. The Ministry of Finance committed to a package of measures that included: a comprehensive tax reform reducing General Consumption Tax exemptions while simultaneously raising the income tax threshold (to broaden the tax base while protecting lower-income workers); a pension reform for public sector employees that would reduce the long-term actuarial deficit of the scheme; a divestment programme for non-core government assets; and targeted improvements to the business environment — including faster property registration and contract enforcement — intended to improve Jamaica’s World Bank Doing Business ranking and attract private investment.
The IMF’s accompanying Article IV consultation assessment noted, with notable directness, that Jamaica’s growth challenge was not primarily a fiscal one. The debt, while still high at above 130 per cent of GDP, was on a downward trajectory. The more urgent problem was that Jamaica’s potential growth rate — the rate at which the economy could grow without generating inflation, in the absence of structural bottlenecks — had been suppressed by decades of high debt service crowding out investment, by energy costs that were among the highest in the Americas, by crime-related costs that reduced business productivity, and by a regulatory environment that imposed unnecessary friction on private sector activity. Fixing these was the new EFF’s growth ambition.
The Taper Tantrum: Nine Days of Euphoria, Then Reality
Nine days after the IMF Board approved Jamaica’s new programme, Federal Reserve Chairman Ben Bernanke testified before the Joint Economic Committee of Congress and delivered the words that would define the quarter’s global financial narrative. Asked about the outlook for quantitative easing, Bernanke said that the Federal Open Market Committee “could in the next few meetings” begin “stepping down” the pace of its asset purchases — if the economic outlook continued to improve. The markets heard one thing: tapering was coming.
The reaction was immediate and global. US Treasury yields, which had been suppressed by QE3’s bond purchases, rose sharply — the 10-year yield jumping from approximately 1.9 per cent in early May to 2.5 per cent by the end of June. Capital that had flooded into higher-yielding emerging market assets under the QE3 regime began to reverse, seeking the higher risk-adjusted returns now available in US Treasuries. Emerging market currencies sold off broadly — the Indian rupee, Brazilian real, Indonesian rupiah, South African rand, and Turkish lira among the most affected. Emerging market sovereign bond spreads widened.
Jamaica was not immune. The Bank of Jamaica reported increased pressure on the Jamaica dollar through May and June, as investors re-evaluated their exposure to small emerging and frontier market economies. The exchange rate, which had stabilised around J$95–96 in the weeks following the NDX, slipped toward J$97–100 per US dollar by the end of June — approaching parity that, psychologically if not economically, carried outsized significance. The BOJ intervened to moderate the pace of depreciation, maintaining a relatively orderly market without attempting to reverse the trend entirely.
The taper tantrum created a specific policy dilemma for the BOJ. The NDX’s reduction of domestic bond coupon rates had created space for monetary easing — the BOJ’s benchmark rate, still at 7.25 per cent, could theoretically be cut without triggering the yield compression on government bonds that rate cuts typically generate (since the NDX had already done that compression). But cutting rates while the Jamaica dollar was under depreciation pressure from the taper tantrum risked accelerating the currency’s slide. The BOJ held at 7.25 per cent through the quarter, signalling that easing would wait for market conditions to stabilise.
Tax Reform: The GCT Rationalisation
Finance Minister Phillips’ 2013–14 Budget, presented in April, introduced the first significant reform of Jamaica’s tax structure in years. The centrepiece was a reduction in General Consumption Tax exemptions — a long-overdue rationalisation of a system that had accumulated decades of carve-outs for politically favoured sectors, reducing the GCT’s revenue yield well below what a clean broad-based consumption tax should generate. The removal of exemptions was paired with an increase in the income tax threshold — the level below which personal income is not taxed — to soften the distributional impact and maintain the political coalition for reform.
The reform was contentious. Businesses that had structured operations around GCT exemptions — some in the agricultural, educational, and healthcare sectors — faced higher input costs. The Ministry of Finance estimated that the package was broadly revenue-neutral in year one, with the GCT broadening offset by the threshold increase, but expected a net positive fiscal impact over subsequent years as formality increased. For the IMF, the tax reform represented delivery on one of the new EFF’s key structural benchmarks — evidence that the Phillips administration was prepared to take the politically difficult steps that programme compliance required.
Tourism and the Exchange Rate’s Hidden Benefit
The tourism sector’s Q2 performance was broadly positive, aided by an effect that the exchange rate’s depreciation was generating almost as a by-product of its otherwise disruptive trajectory. A Jamaica dollar trading at J$97–100 rather than J$88–90 made the island’s resort offerings meaningfully cheaper for North American and European visitors pricing holidays in US dollars or British pounds. The Montego Bay resort corridor’s rack rates, already among the Caribbean’s most competitive at the luxury tier, became more so in foreign currency terms.
Jamaica Tourist Board data through June indicated that advance bookings for the summer season were holding up well, with North American arrivals tracking slightly ahead of 2012. The spring shoulder season — April through June — had benefited from the opening of several new hotel rooms in the Negril corridor, as developers who had restarted projects in 2011–12 began delivering completed inventory. The cruise segment maintained its Falmouth pier momentum, with Royal Caribbean’s Oasis-class vessels continuing to make regular calls and generating excursion and craft revenue for Trelawny.
Property Market: Digesting the NDX
Jamaica’s residential property market in Q2 2013 was in a digestion phase. The NDX’s effect on domestic bond yields — the mechanism by which the JDX had helped stimulate the 2010–11 property recovery — was beginning to work through the system, but the taper tantrum’s disruption to financial markets and the exchange rate’s depreciation introduced competing currents that moderated the effect.
The National Housing Trust continued to lend at its historically low rates, and the expanded drawdown limits introduced in the 2012 budget remained in effect. Transaction volumes in the Kingston metropolitan area showed modest improvement compared to the same period in 2012, suggesting that the market’s underlying demand — driven by household formation, upgrading, and diaspora investment — was intact even as the macro uncertainty gave some buyers pause. The north coast market, buoyed by tourism’s strong performance, was the more active segment, with vacation rental investment beginning to attract attention from both local and overseas buyers.
What This Means
Homeowners face the taper tantrum’s primary residential impact through the exchange rate: a weaker Jamaica dollar pushes up the cost of imported goods — fuel, appliances, construction materials — that feed directly into household budgets and home maintenance costs. Those with NHT mortgages are insulated from interest rate risk but not from the inflationary pass-through of currency depreciation. The new EFF’s income tax threshold increase — raising the level at which personal income becomes taxable — provided modest offsetting relief for middle-income earners.
Renters are the segment most vulnerable to the depreciation-inflation dynamic. Fixed nominal incomes do not adjust automatically to price level increases, and the GCT reform’s expansion of the taxable base — even with compensating income threshold adjustments — introduced higher costs for some consumption categories. The rental market itself remained tight, with Kingston’s housing supply shortage persisting. Renters who aspire to NHT ownership face a somewhat changed calculation as the exchange rate’s depreciation pushes up construction costs and therefore new unit prices.
Developers are navigating a complex environment. The NDX’s long-term effect on institutional capital allocation is positive for real estate development — the reallocation from lower-yielding bonds toward real assets is underway. The exchange rate’s depreciation, however, has increased the Jamaica-dollar cost of imported construction materials (steel, lumber, fixtures) in ways that squeeze project economics. Developers who locked in construction contracts before the Q1–13 depreciation phase are better positioned than those pricing projects in the current environment. The medium-term outlook — structural reform under the new EFF, NDX interest savings, gradually improving macro conditions — supports continued development investment, but the transition period requires patience.
Businesses across the economy are recalibrating to the new EFF’s structural reform agenda. The GCT rationalisation is the most immediately visible change, requiring businesses to review their supply chain and pricing models in light of altered tax treatment. Export-oriented businesses — tourism, BPO, rum, coffee — benefit from the weaker Jamaica dollar increasing their competitiveness. Import-dependent businesses face margin compression. The taper tantrum’s effect on global risk appetite has been contained for now, but the eventual withdrawal of QE3 will likely produce further capital flow adjustments that affect Jamaica’s financing conditions.
Diaspora investors will have noticed the exchange rate’s movement toward J$100 — a level that, in US dollar terms, significantly improves the purchasing power of remitted funds for Jamaican property. The new EFF’s signing provides the most credible macro anchor Jamaica has offered since the first EFF, reassuring diaspora investors that the reform framework is real and the fiscal direction is sustainable. Those who have been waiting for the NDX uncertainty to clear before committing capital to property purchases now have a cleaner signal: the programme is in place, the exchange rate has adjusted, and the NHT lending conditions remain favourable.
Outlook
Q2 2013 delivered the best and the worst of the global financial environment in rapid succession. The best: a new IMF programme that is more ambitious than anything Jamaica has previously negotiated, built on the NDX’s debt service relief and anchored to structural reforms that address the growth bottlenecks the first EFF never reached. The worst: a Federal Reserve communication that reminded every small emerging economy how dependent their stability had become on the continuation of extraordinary US monetary policy — and how quickly that dependency could become a vulnerability.
The taper tantrum’s immediate intensity has faded as the Fed sought to clarify that tapering, when it came, would be gradual and data-dependent. But the fundamental message — that the QE3 era would eventually end, and that end would generate capital outflows from emerging markets — remained. Jamaica’s resilience in that transition will depend on the speed with which the new EFF’s structural reforms begin to deliver the growth and investor confidence that reduce Jamaica’s dependence on external liquidity conditions. The first review under the new programme is approaching. The answer will come quarter by quarter.
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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