Jamaica Economic Intelligence | Q3 2014 | July–September 2014
Key Findings
- Brent crude falls from US$115 to US$93 in Q3; Saudi Arabia holds production, US shale booms
- MH17 shot down over Ukraine July 17; oil briefly spikes before resuming its decline
- Fed tapers to US$15B in September; QE formally ending October 29
- Summer tourism delivers strong results; stopover arrivals tracking 5%+ year-on-year
- BOJ extends rate-cutting cycle; NHT mortgage affordability improves further
- Jamaica dollar at J$113–116 by end September; depreciation pace beginning to moderate
Something significant happened to the global oil price in the third quarter of 2014, and Jamaica — an economy that spends roughly US$1.4 billion per year on petroleum imports — was watching. Brent crude, which had touched US$115 per barrel in June on the back of the ISIS-driven Iraq panic, began a slide in July that would accelerate through September and turn into a historic rout by year-end. By the close of Q3, Brent was trading around US$93 — US$22 per barrel below its Q2 peak. The drivers were structural: Saudi Arabia and its Gulf allies chose to maintain production rather than cut output to defend prices, and the US shale revolution was adding supply at a pace the market had underestimated. For Jamaica, the direction of travel was unambiguously positive — lower oil prices mean a smaller import bill, lower inflation, a stronger current account and more fiscal room — though the full impact would only be felt as the decline deepened through Q4 and into 2015.
The Oil Price Turns: Supply and the Saudi Decision
The reversal of the oil price that began in Q3 2014 had multiple causes, but the structural root was a fundamental shift in global supply dynamics. The United States shale revolution — the combination of horizontal drilling and hydraulic fracturing that had unlocked vast tight-oil formations across Texas, North Dakota, and other states — had added more than three million barrels per day to US production since 2010, a volume comparable to the entire output of a medium-sized OPEC member. By mid-2014, US crude production was approaching nine million barrels per day, a level not seen since the early 1980s, and the US was importing less oil from traditional suppliers who now had to find alternative markets.
OPEC, led by Saudi Arabia, faced a choice: cut production to defend the US$100-per-barrel price level, or maintain market share by letting prices fall to levels that would make US shale production uneconomic. Saudi Arabia’s decision — not formally announced until the OPEC meeting of November 27, 2014, but visible in its production behaviour through Q3 — was to defend market share. This was a strategic calculation with far-reaching consequences: at below US$80 per barrel, many US shale producers operating in higher-cost formations would face margin pressure; at below US$60, some would cease production entirely. The Saudis were willing to absorb a period of lower prices to reassert market discipline and slow the pace of non-OPEC supply growth.
The fall in Q3 was orderly rather than panicked. Brent moved from around US$113 in early July to approximately US$93 by end September, a decline that unfolded over weeks rather than days. The one interruption to the downward trajectory came on July 17, when Malaysia Airlines flight MH17 was shot down over eastern Ukraine, killing all 298 people aboard and triggering an immediate escalation in Western-Russia tensions and a brief oil price spike. Within days, however, the market concluded that the MH17 tragedy, while devastating, would not interrupt global oil supply, and prices resumed their decline.
What Falling Oil Means for Jamaica’s Economy
For an economy as oil-import-dependent as Jamaica’s, the direction of global oil prices is one of the most powerful external variables in the macroeconomic equation. The Bank of Jamaica’s data consistently shows petroleum and petroleum products as the largest single category of Jamaica’s import bill — representing roughly 35–40 percent of total merchandise imports in years when prices are above US$100 per barrel. A sustained fall to US$70–80 per barrel would reduce the annual import bill by US$400–500 million, a saving equivalent to roughly 4–5 percent of GDP.
The transmission channels from lower oil to the broader economy are multiple. Lower import costs reduce the current-account deficit, putting less downward pressure on the Jamaica dollar and reducing the need for BOJ foreign-exchange intervention. Lower fuel costs reduce the operating costs of the electricity grid, putting downward pressure on the electricity tariffs that are one of the most significant cost burdens for Jamaican households and businesses. Lower transport fuel costs reduce the cost of freight and logistics across the entire economy. And lower inflation — a consequence of cheaper fuel — reduces the real cost of the Jamaica dollar’s continued depreciation, making the adjustment less painful for consumers.
By end-Q3, these benefits were visible in the trajectory of inflation. The Statistical Institute of Jamaica was tracking a moderation in the headline CPI rate as fuel components rolled over from the high-oil era of 2013–2014 into a period of falling prices. This was meaningful for the IMF programme: lower inflation supported the BOJ’s easing cycle, reduced the real burden on households and provided political breathing room for an adjustment programme whose social costs had been generating public frustration. Not all the benefits of lower oil had yet arrived in Q3 — the full impact would come as Q4 prices fell further — but the trajectory was clear and the direction was positive.
Tourism Summer: Strong Arrivals, Record Quarter in Sight
Jamaica’s summer tourism peak — July and August, the core of the family leisure travel season from North America — delivered strong results in Q3 2014. Preliminary data from the Jamaica Tourist Board indicated that stopover arrivals were tracking approximately 5 percent ahead of the comparable Q3 2013 period, a growth rate that reflected both the sustained recovery of the US consumer and the continued competitive positioning of Jamaica’s resort product. Sangster International Airport in Montego Bay processed record passenger volumes for the July–August period, a leading indicator of tourism sector health that corroborated the hotel occupancy data showing strong performance across the resort corridor.
The summer 2014 season benefited from several supportive factors. US consumer confidence was at multi-year highs, driven by the improving US labour market and the wealth effect of rising equity prices and home values. The US dollar’s strengthening — the dollar index was rising sharply through Q3 2014 as the US economy diverged from a stagnant Europe and a slowing China — made international travel more expensive in dollar terms but simultaneously gave American consumers more purchasing power relative to other Caribbean destinations whose prices were in weaker local currencies. For Jamaica, with its resort prices denominated in US dollars, the effect was neutral to slightly positive.
The cruise sector also delivered a strong Q3. The Port of Falmouth — the Pier built jointly by the Port Authority of Jamaica and Royal Caribbean International, opened in 2011 and capable of handling the world’s largest cruise ships — was processing multiple large-ship calls per week through the summer season. Cruise passenger counts at Ocho Rios and Montego Bay ports were similarly elevated. While cruise passengers generate less per-person economic impact than stopover visitors, the sheer volumes involved — and the associated port fees, excursion revenue and retail spending — contributed meaningfully to the tourism sector’s overall Q3 performance.
QE’s Final Chapter: The Fed Tapers to Zero
The Federal Open Market Committee reduced its asset purchases at the July 30 meeting (from US$35 billion to US$25 billion per month) and the September 17 meeting (from US$25 billion to US$15 billion per month), keeping QE on its predetermined wind-down path with a final taper expected at the October 29 meeting. By the close of Q3, the end of the most accommodative monetary policy experiment in Federal Reserve history was days away. Chair Yellen’s September press conference maintained the message that QE’s end would not be followed immediately by rate hikes — that a “considerable time” would elapse before the first fed funds rate increase — providing a degree of forward guidance comfort to EM borrowers bracing for eventual normalisation.
The US dollar’s strengthening through Q3 — a function of both the approaching end of QE and the stark divergence between the US economic trajectory and those of Europe, Japan and major EMs — was the external variable with the most direct short-term relevance for Jamaica. A stronger dollar means that dollar-denominated commodity prices — oil above all — are lower in dollar terms for the same supply-demand balance, reinforcing the downward oil price pressure that was already visible from supply-side factors. It also means that Jamaica’s dollar-denominated external debt requires more local-currency servicing as the J$ depreciates, a counterbalancing cost. And it means that US tourists’ spending power abroad was slightly reduced, though this effect on Jamaica was marginal.
The Dollar and the BOJ: Managing the Transition
The Jamaica dollar continued its controlled depreciation through Q3 2014, moving from approximately J$111–114 at end-Q2 to around J$113–116 by end September. The pace of depreciation — which had been approximately 12–14 percent in the full year of 2013 — was beginning to moderate as the falling oil import bill reduced the structural current-account pressure that had driven the depreciation trend. If the oil price decline was sustained through Q4 and into 2015, the annual depreciation rate would likely fall significantly, providing a meaningful benefit to the inflationary pass-through that was squeezing household budgets.
The BOJ continued its rate-cutting cycle through Q3, reducing the benchmark overnight rate in steps that reinforced the declining yield environment. The combined effect of the NDX’s restructuring of domestic bond yields, the BOJ’s policy rate cuts, and the lower inflation environment being created by falling oil prices was beginning to deliver a materially different domestic credit environment than Jamaica had experienced for much of the previous decade. The cost of new Jamaica-dollar mortgages through the National Housing Trust, commercial banks and building societies was declining, incrementally but consistently, in ways that the residential property market was beginning to register.
What This Means
Homeowners are in the most favourable position they have occupied in several years. Lower oil prices are reducing electricity bills and transport costs, freeing household cash flow for mortgage servicing or savings. BOJ rate cuts are gradually reducing the cost of new and refinanced mortgage facilities. The Jamaica dollar’s depreciation pace is beginning to slow, reducing the rate at which US-dollar mortgage obligations grow in local-currency terms. Those who have been deferring a property purchase waiting for conditions to improve may find Q4 2014 or early 2015 is an opportune moment to act.
Renters are also benefiting at the margin from lower energy costs, as falling oil prices feed into lower electricity tariffs that reduce both landlord operating costs and tenant utility bills. The overall cost-of-living pressure, while not eliminated, is easing as the inflation rate moderates. Wage growth remains subdued under the public-sector wage restraint component of the EFF programme, but the real-wage squeeze is lessening as inflation falls. The prospect of an improving economy — not yet visible in GDP numbers but beginning to emerge in sectoral indicators — offers a medium-term improvement in the rental market’s affordability picture.
Developers are experiencing the summer tourism season’s strength as validation of continued capital deployment in the resort corridor. Lower construction input costs — as fuel costs feed through to reduced freight and transport expenses — are a modest positive for development economics. Residential developers are watching the mortgage market closely: each quarter of rate cuts and inflation moderation expands the viable buyer pool for new middle-market residential supply. The current period may represent the trough of the cycle for residential development, with improving conditions ahead.
Businesses with significant energy cost exposure are seeing the first tangible relief in three years. Transport operators, food processors, manufacturers and electricity-intensive businesses are all registering lower operating costs as fuel prices fall. The benefits are not yet fully reflected in final consumer prices — the pass-through of lower input costs to retail prices is always slower than the pass-through of increases — but the compression of cost-price spreads that businesses had been managing is beginning to ease. Export-sector businesses continue to benefit from the competitive Jamaica dollar.
Diaspora Jamaicans who chose to invest in Jamaica during the 2013–2014 period of peak exchange-rate advantage are beginning to see the improved economic environment validate that decision. For those still considering property investment or business entry, the window of favourable exchange rates may be shortening: if Jamaica’s macro-fiscal improvement continues and the current-account deficit narrows on lower oil prices, the structural pressure for J$ depreciation will ease. That is good news for the economy but implies that the exchange-rate advantage for dollar-income buyers may be less extreme in 2015 and beyond.
Outlook
The defining question for Q4 2014 is how far oil will fall. At US$93 per barrel, Jamaica is already benefiting. At US$80 per barrel, the savings would be transformative for the current account. At US$60 per barrel — which the more aggressive market scenarios are beginning to consider — Jamaica’s import bill would fall by an amount equivalent to several percentage points of GDP, dramatically improving the external position and creating room for the BOJ to ease further and the government to reduce the primary surplus pressure on household incomes. These are still hypothetical scenarios at end-September, but they are scenarios that the data increasingly supports.
The October 29 FOMC meeting will end QE and mark the beginning of the post-QE period — a phase in which the conversation shifts entirely to when and how fast the Fed will raise rates. Jamaica’s programme has been built to withstand a normalisation environment; the fiscal consolidation and debt restructuring that have been the core of the EFF are explicitly designed to reduce the debt-service cost vulnerability that rising global rates would otherwise create. Whether the programme delivers that resilience will be tested as 2015 approaches and the Fed’s rate-hike cycle edges closer.
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 July–September 2014.
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