Jamaica Economic Intelligence | Q1 2014 | January–March 2014
Key Findings
- Argentina devalues peso on January 23; fresh contagion sweeps EM currency markets
- Fed tapers at January and March FOMC meetings; QE on track to end by October
- BOJ continues gradual rate-cutting cycle; domestic borrowing costs trending lower
- Jamaica dollar trades J$108–111 by end March in controlled managed decline
- IMF completes second EFF quarterly review; Jamaica meets all key targets
- Winter peak season delivers solid tourism arrivals; January–March strong
January 2014 opened with a sharp reminder that the emerging-market stress of 2013 had not been fully exorcised. When Argentina devalued its peso on January 23, triggering a wave of contagion that swept from Buenos Aires through Istanbul to Johannesburg, the question for Jamaica was whether the taper panic of May 2013 was about to replay at higher intensity. It did not. The Federal Reserve tapered methodically at its January and March meetings, EM currencies absorbed the volatility with more resilience than in the previous year, and Jamaica’s controlled depreciation continued its measured path without a crisis episode. The IMF programme’s second review was completed, the Bank of Jamaica’s easing cycle gathered gradual pace, and the winter tourism season — Jamaica’s most important quarter for high-spending arrivals — delivered the numbers on which the fiscal plan depended. Q1 2014 was a quarter in which the noise was loud and the underlying data was calm.
The Argentina Shock and EM Contagion: January’s Stress Test
On January 23, 2014, Argentina’s central bank sharply reduced its intervention in foreign-exchange markets, effectively devaluing the Argentine peso by approximately 15 percent in a single day — the most dramatic single-day move since the 2002 crisis. The decision, driven by a rapid erosion of Argentina’s foreign-exchange reserves, sent contagion across emerging-market assets with a speed that recalled the May–2013 taper tantrum. Turkey’s lira, which had already been under pressure from domestic political turmoil and a current-account deficit, fell sharply. South Africa’s rand, Brazil’s real and Indonesia’s rupiah all weakened materially in the days that followed. The MSCI Emerging Markets equity index fell approximately 7 percent through the first weeks of February.
The trigger this time was not the Federal Reserve but Argentina’s idiosyncratic reserve crisis, yet the channel of contagion was the same as in 2013: international investors, already in the process of repositioning away from EM assets as US yields normalised, used Argentina’s devaluation as a prompt to accelerate outflows from the broader EM universe. Countries with current-account deficits, limited reserves, or political uncertainty were most exposed. Jamaica fitted several of these criteria, but the scale of the J$ move in January and February was limited relative to the more vulnerable EMs: the Bank of Jamaica’s managed float, combined with IMF programme credibility, contained the depreciation episode to a continuation of the existing trend rather than a disorderly break.
By late February the contagion had largely subsided. Turkey had raised its policy rate dramatically in an emergency meeting — from 7.75 percent to 12 percent — which stabilised the lira and signalled to markets that the most vulnerable EM central banks would defend their currencies. The Fed’s continued tapering, executed calmly and on schedule at the January 29 FOMC meeting (reducing purchases from US$75 billion to US$65 billion per month), was absorbed without triggering a second wave. The broader lesson — reinforced by the contrast with the May 2013 panic — was that the taper itself was less dangerous than the uncertainty about the taper. With the path now clear, EM markets were adjusting rather than panicking.
The Fed Tapers On: Methodical Normalisation Replaces Anxiety
The Federal Open Market Committee reduced its asset purchase programme at both the January 29 and March 19 meetings of 2014, each time by US$10 billion, bringing the monthly purchase pace from US$85 billion in December 2013 to US$55 billion by the end of March. The March meeting also saw the debut of new Fed Chair Janet Yellen, who succeeded Ben Bernanke on February 3. Yellen’s first press conference conveyed continuity with Bernanke’s approach — tapering on a predetermined path, with rate hikes contingent on further labour market improvement and inflation returning toward the 2 percent target.
For Jamaica, the methodical pace of tapering and the relative calm of EM currency markets through February and March provided a more benign external backdrop than Q1 had initially threatened to deliver. The US ten-year Treasury yield, which had risen sharply from May through December 2013, was actually lower at end-March 2014 than at end-December 2013 — a surprising development that reflected safe-haven demand generated by the EM stress episode and the Ukraine-Russia crisis. This counterintuitive dynamic — US yields falling even as the Fed tapered — provided some relief to EM borrowing costs and was a useful reminder that the relationship between tapering and long-term yields was not mechanically one-to-one.
The Ukraine crisis — Russia’s annexation of Crimea on March 18–21, following weeks of political upheaval in Kiev — added a geopolitical dimension to Q1’s external environment that had not been anticipated at the start of the year. For Jamaica, the direct economic impact was limited: Russia is not a major trading partner, Jamaican exports were not significantly affected, and the primary transmission channel was through global risk sentiment and commodity markets. Oil prices, which might have been expected to spike on a Russia-Ukraine confrontation, remained broadly stable in the US$100–110 per barrel range for Brent crude — high enough to maintain the pressure on Jamaica’s import bill, but not escalating into a new shock.
BOJ’s Easing Cycle: Lower Rates and the Road to Affordable Credit
The Bank of Jamaica’s monetary policy committee continued its gradual rate-cutting cycle in Q1 2014, reducing the overnight benchmark rate in steps that reflected the improving fiscal position — created by the NDX and the EFF programme — and the moderating inflation trajectory. The NDX had lowered the coupon rates on government domestic bonds substantially from pre-restructuring levels, and as these lower-rate bonds became the reference for the domestic yield curve, the BOJ’s policy rate cuts were reinforcing and extending a decline in domestic interest rates that the debt restructuring had initiated.
The commercial banking sector was beginning to transmit these lower rates into lending products, though the pass-through was gradual and incomplete. The spread between policy rates and actual commercial lending rates remained wide by regional standards, reflecting the structural costs embedded in Jamaican banking — crime-related security expenditure, physical branch infrastructure in a dispersed island geography, provisioning requirements for legacy non-performing loans — and the limited competitive pressure on the retail lending market. For the average Jamaican small business seeking a working capital loan, or a first-time homebuyer pricing a mortgage, the rate reductions being implemented by the BOJ were real but modest in their immediate practical effect.
The trajectory was nonetheless significant. Each quarter of programme compliance and each BOJ rate cut built the foundation for a more meaningful reduction in the cost of credit over the EFF’s remaining duration. The IMF’s programme design had explicitly anticipated that fiscal consolidation and monetary easing would work together to reduce real interest rates and gradually crowd in private-sector investment that the government’s historically high borrowing requirement had crowded out. Q1 2014 was early in that process, but the direction was right.
The Jamaica Dollar: Controlled Decline Continues
The Jamaica dollar continued its managed depreciation through Q1 2014, moving from the J$104–106 range at end-2013 to approximately J$108–111 by the end of March. The January EM contagion episode produced a brief acceleration in the depreciation pace before BOJ intervention and the broader EM stabilisation brought the rate back onto its trend path. The Bank of Jamaica’s foreign-exchange intervention capacity — supported by IMF programme disbursements, the steady flow of remittance inflows, and tourism foreign-exchange earnings from the peak winter season — was sufficient to smooth the volatility without any need for a dramatic policy response.
The economic effects of the continued depreciation were by now becoming well-understood by Jamaican households and businesses. Import-intensive sectors — food retail, fuel distribution, manufacturing dependent on imported inputs — faced ongoing cost pressure. The Statistical Institute of Jamaica tracked inflation in the high single digits, with food and energy as the primary drivers. On the positive side, the tourism sector’s dollar revenues were converting to more local-currency receipts per visitor, supporting resort operators’ local-cost competitiveness. Remittance-receiving households continued to benefit from the higher Jamaica-dollar equivalent of each US dollar transfer. And the real value of the domestic component of the public debt — denominated in Jamaica dollars — was being gradually eroded, providing a marginal debt-sustainability dividend that complemented the NDX’s direct interest-cost savings.
IMF Second Review: Programme Credibility Confirmed
The IMF completed its second quarterly review of Jamaica’s Extended Fund Facility in Q1 2014, approving disbursement of the associated Special Drawing Rights tranche and confirming that Jamaica had met its quantitative performance criteria for the review period. The primary fiscal surplus was tracking at or above the 7.5 percent of GDP target — a remarkable achievement for a government simultaneously managing the political demands of public-sector wage restraint, pension reform implementation and the general cost-of-living pressures that were generating social tension.
The structural reform agenda was advancing, if imperfectly. Pension reform legislation had made significant parliamentary progress. The public-sector wage negotiations, while contentious, were producing multi-year agreements in several sectors that held wage growth within programme parameters. The business environment reform metrics — Companies Office turnaround times, land titling efficiency, tax administration improvements — showed incremental progress. The IMF’s staff assessment noted areas of concern alongside areas of progress but concluded that the programme remained on track and that Jamaica’s performance represented a credible commitment to the reform agenda.
Two consecutive completed reviews — August 2013 and now Q1 2014 — were already a stronger track record than Jamaica had managed under the 2010 Standby Arrangement. Rating agencies and international bond market participants were taking note: Jamaica’s spreads on its global bonds, while still reflecting the country’s heavy debt burden, had narrowed modestly from their 2013 peaks as the programme’s credibility accumulated. The cost of Jamaica’s external borrowing, while still elevated, was on a trajectory that a sustained reform programme could reduce over time.
Tourism Peak Season: Winter Delivers, Sector on Strong Footing
Jamaica’s peak winter tourism season — spanning January, February and March, when the island draws the highest proportion of its annual stopover visitors — delivered solid results in Q1 2014. The Jamaica Tourist Board’s preliminary data pointed to year-on-year growth in stopover arrivals in the low-to-mid single digits, with the US market — by far the largest source of visitors — continuing its sustained recovery from the post-2009 contraction. The combination of a strengthening US consumer, competitive airlift from major gateway cities, and the continued investment in Jamaica’s all-inclusive product was sustaining the sector’s long-run growth trajectory.
Montego Bay’s Sangster International Airport and Kingston’s Norman Manley International Airport both processed higher passenger volumes than in the comparable Q1 2013 period. The resort corridor from Negril through Montego Bay to Ocho Rios maintained high occupancy through the January–March peak, with major operators reporting solid advance bookings. Cruise ship calls at the ports of Falmouth, Ocho Rios and Montego Bay were also running ahead of 2013, generating port fee revenue and retail and excursion spending that provided a secondary economic contribution to the tourism corridor communities.
The tourism sector’s fiscal importance — already well understood — was sharpening in the context of the EFF programme. Each dollar of US-dollar tourism earnings that flowed into the Jamaican economy through hotel payrolls, local food procurement and government tax receipts was a dollar that reduced the pressure on BOJ reserves and contributed to the primary surplus through tax collection. A strong winter season was not merely a sectoral success story in Q1 2014; it was a direct contributor to programme compliance.
What This Means
Homeowners are experiencing a gradual but real improvement in the interest rate environment as the BOJ’s easing cycle extends into 2014. New Jamaica-dollar mortgage facilities are becoming marginally cheaper, though the pass-through from policy rates to commercial lending rates is slow. The more immediate challenge remains affordability in a cost-of-living environment where imported goods — food, fuel, building materials — continue to rise with the depreciating dollar. US-dollar mortgage holders face the most direct pressure as their local-currency obligations grow with each percent of Jamaica-dollar depreciation.
Renters continue to absorb cost-of-living pressures without the inflation-hedge that property ownership provides. Urban rental markets, particularly in Kingston’s middle and lower segments, are seeing upward pressure on rents as landlords pass through higher utility and maintenance costs. The social housing pipeline remains constrained by capital budget restrictions under the fiscal consolidation programme, and the supply of affordable formal rental accommodation is not growing to meet demand in Kingston’s expanding urban periphery.
Developers in the resort sector are benefiting from the peak-season strength, with construction activity continuing at Sandals, Iberostar and several boutique properties. Residential developers remain constrained by a domestic buyer pool that has not yet seen the wage growth or credit cost reduction that would unlock demand in the middle-market housing segment. The gradual BOJ easing offers a forward-looking positive: each rate cut that transmits into lower mortgage rates expands the buyer pool incrementally.
Businesses operating in Jamaica face a familiar dual challenge: the import cost inflation associated with the depreciating dollar on one side, and the restrained domestic consumer demand associated with the fiscal adjustment on the other. The BOJ’s rate cuts offer a medium-term prospect of cheaper working capital, but the pass-through to commercial lending rates remains incomplete. Businesses with significant tourism-sector exposure are best positioned, given the sector’s continued growth and the exchange-rate advantage of dollar revenues in a local-currency cost environment.
Diaspora Jamaicans continue to benefit from favourable exchange rates when sending remittances or making property purchases. At J$108–111 to the US dollar, the purchasing power of diaspora income in Jamaica has never been greater in nominal terms. The winter tourism season also generates indirect diaspora economic activity: many diaspora Jamaicans visit family during the Christmas and New Year period, contributing to hotel and guesthouse occupancy, retail spending and the informal economy in ways that formal tourism statistics do not fully capture.
Outlook
The external environment entering Q2 2014 is more settled than it was at the start of January. The Argentina-triggered EM contagion has subsided, the Fed’s taper is proceeding on a clear and predictable path, and the Ukraine crisis — while unresolved — has not produced the commodity price spike that a more escalatory military confrontation might have triggered. Oil prices at US$100–110 per barrel remain a significant fiscal burden for Jamaica, and any escalation that pushed energy costs materially higher would stress both the import bill and the primary surplus target through higher fuel subsidies and electricity costs.
Domestically, the budget presentation for 2014/15 — due in April — will provide the next major test of the government’s commitment to the programme’s fiscal parameters. Maintaining a 7.5 percent of GDP primary surplus in a second consecutive year, while managing the political demands of wage negotiations and social programme pressures, will require the same discipline that delivered the first two review completions. The BOJ’s rate-cutting path, if sustained through Q2 and Q3, will progressively reduce the cost of domestic borrowing and begin to create the credit conditions that a private-sector-led growth recovery will eventually require.
The J$100 threshold is now a memory: at J$108–111, the question is not whether the dollar will weaken further — it almost certainly will, given the structural current-account dynamics — but whether the pace remains managed and whether the fiscal reform delivers the debt sustainability that will eventually allow the depreciation trend to slow. Q1 2014 provided tentative evidence that the answer to both questions, for now, is yes.
Jamaica Economic Intelligence is an independent data-driven journalism series tracking Jamaica’s economic performance across the housing, tourism, fiscal and monetary sectors. Historical data drawn from Bank of Jamaica, Statistical Institute of Jamaica, International Monetary Fund and Jamaica Tourist Board publications. This report covers the period January–March 2014.
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