Jamaica Economic Intelligence | Annual Review 2014 | January–December 2014
Key Findings
- Brent crude collapses from US$115 to US$57 by December; oil import bill savings transform Jamaica’s external position
- OPEC votes November 27 to hold production; oil decline accelerates into year-end
- QE ends October 29; Fed holds rates as post-taper normalisation takes shape
- Jamaica passes all four IMF EFF quarterly reviews; programme track record unbroken
- Tourism posts approximately two million stopover arrivals, a historic milestone
- Jamaica dollar depreciates just 7–8% in 2014 vs 12–14% in 2013; inflation falls to low single digits
For the first time in years, 2014 ended with Jamaica’s external position improving rather than deteriorating. The cause was one of the most dramatic commodity price movements in modern history: Brent crude, which had been above US$100 per barrel for virtually the entire period since 2011, fell from US$115 in June to US$57 by December — a decline of more than 50 percent in six months. For an economy that had been paying US$1.4 billion per year for oil imports at the old price, the fall was a windfall of extraordinary magnitude. It arrived at precisely the moment Jamaica needed it most: at the midpoint of a four-year IMF reform programme whose primary surplus targets were delivering results but whose social costs were generating real political pressure. Lower oil prices meant lower inflation, a stronger current account, a more stable Jamaica dollar, more room for the Bank of Jamaica to cut rates and — eventually — faster economic growth. The fiscal arithmetic was sound before the crash. With it, it became genuinely encouraging for the first time in a decade.
The Great Oil Crash: From US$115 to US$57 in Six Months
The oil price decline that began modestly in July 2014 accelerated dramatically through the autumn and winter. Brent crude closed the third quarter at approximately US$93 per barrel, then continued falling through October and November as Saudi Arabia’s production policy became clear. On November 27, the OPEC ministerial meeting in Vienna formally confirmed what the market had suspected for months: the cartel would not cut production to defend prices. The announcement removed the last major potential brake on the decline, and Brent fell through US$80, US$70 and US$60 in rapid succession, ending 2014 around US$57 per barrel — a level not seen since 2009.
The drivers of the crash were well understood. American shale production had added millions of barrels per day to global supply, and OPEC — led by Saudi Arabia’s calculation that lower prices would ultimately discipline high-cost non-OPEC producers — chose market share over price defence. On the demand side, slower Chinese growth, a contracting European economy and improved energy efficiency in major consuming nations were reducing the pace of global oil demand growth below what the market had expected. The combination of rising supply and moderating demand, with no OPEC cut to offset it, produced the largest six-month price decline since the 2008 financial crisis.
For Jamaica, the quantitative implications were straightforward and large. The country’s annual petroleum import bill at 2013— peak prices of roughly US$110 per barrel was approximately US$1.3–1.4 billion. At US$57 per barrel — assuming relatively stable import volumes — the same bill would fall to approximately US$700–800 million. The saving of US$500–600 million per year would represent roughly 5–6 percent of GDP — a supply-side stimulus far larger than anything the domestic reform programme could have generated in a comparable timeframe. The full benefit would not be felt in 2014, since the price only fell below US$80 in the final weeks of the year. But 2015 would feel its full force.
PetroCaribe: The Other Energy Story
The oil price crash intersected with another significant energy finance story in 2014: the deteriorating condition of Venezuela’s economy and the implications for PetroCaribe. The PetroCaribe arrangement — under which Venezuela supplied Jamaica and other Caribbean nations with crude oil at market prices but with 40–60 percent of payment deferred over extended terms at low interest rates — had effectively been providing Jamaica with US$300–400 million per year in balance-of-payments financing. That financing was reflected on Jamaica’s balance sheet as a growing liability to PDVSA, the Venezuelan state oil company.
With the collapse of oil prices slashing Venezuela’s export revenues and accelerating its already serious economic difficulties, the long-term viability of PetroCaribe as a financing mechanism came into sharper question. A nation that was struggling to fund its own budget could not indefinitely subsidise energy financing for Caribbean neighbours. The possibility that Jamaica might be able to retire its PetroCaribe obligations at a significant discount — by making an upfront payment to Venezuela that was less than the nominal face value of the outstanding balance — was beginning to be discussed in financial circles. The arithmetic was potentially attractive: if Jamaica could access international capital markets at rates that were competitive with the implicit cost of the PetroCaribe facility, an early buyout could reduce the gross debt stock materially. This would become a defining financial transaction of 2015.
The IMF Programme: All Four Reviews Passed
Jamaica’s Extended Fund Facility delivered its most consequential metric in 2014: all four quarterly reviews of the year were completed successfully, with each approving disbursement of the associated SDR tranche and confirming that Jamaica had met its quantitative performance criteria. No previous Jamaican IMF programme had achieved a comparable track record of consecutive completed reviews extending to a second full year, and the achievement was noted by rating agencies, regional financial institutions and international investors as evidence of a genuine shift in Jamaica’s reform culture.
The primary fiscal surplus — at or above 7.5 percent of GDP — was the programme’s headline number, and it was being delivered quarter after quarter by a combination of revenue performance and expenditure restraint that reflected both improved tax administration and the political discipline of the Simpson-Miller administration in holding the wage bill within programme parameters. The structural reform agenda continued to advance: pension reform legislation was in place, public-sector wage agreements were being concluded in most sectors, business environment metrics were improving incrementally, and the Companies Office, Tax Administration Jamaica and land titling processes were all showing measurable improvements in efficiency and compliance.
The IMF’s staff reports for 2014 reviews consistently noted the social costs of adjustment — stagnant real wages, a still-elevated cost of living, constrained public investment in social services — alongside the fiscal achievements, and called for efforts to strengthen the social safety net within programme parameters. The Programme of Advancement Through Health and Education — the PATH conditional cash transfer programme — was the primary social protection vehicle for the poorest Jamaican households, and efforts to expand its coverage and adequacy were ongoing within the fiscal constraints. The tension between programme compliance and social equity was real and would remain a political pressure point through the remaining years of the EFF.
Tourism Crosses Two Million: A Sector That Never Stopped Growing
Jamaica’s tourism sector delivered what was widely regarded as its strongest performance on record in 2014, with stopover arrivals reaching approximately two million for the year — a milestone that, measured against the 1.3 million visitors of 2001 and the 1.8 million of 2009, represented a remarkable trajectory of sustained expansion through global financial crisis, taper tantrum and domestic fiscal adjustment. The Jamaica Tourist Board reported that both the winter peak season and the summer family travel season delivered year-on-year growth, with the US market — accounting for roughly two-thirds of stopover arrivals — driving the bulk of the increase.
The two-million threshold was not merely symbolic. It reflected the sustained competitiveness of Jamaica’s all-inclusive resort product at a time when the Caribbean market was becoming more crowded and other destinations — Mexico’s Riviera Maya above all — were expanding capacity aggressively. Jamaica’s competitive advantages — the breadth and quality of its resort portfolio, the strength of its Sandals and Iberostar anchors, the natural beauty of its coastlines, the global resonance of its cultural output in music, food and sport — were holding their own in a competitive market. Average daily rates and hotel occupancy for the year were among the strongest since the pre-2009 peak, suggesting that volume growth was not coming at the expense of yield.
The cruise sector reinforced the positive picture. The Port of Falmouth continued to handle some of the world’s largest vessels, and cruise passenger volumes at Jamaica’s three main cruise ports — Falmouth, Ocho Rios and Montego Bay — were at or near records for the year. The tourism sector’s contribution to Jamaica’s GDP, its employment and its foreign-exchange generation was larger than at any point in the island’s history, and the sector’s performance was the single most important positive variable in an economic picture that still showed only marginal overall GDP growth.
The Dollar Stabilises; Inflation Falls
The Jamaica dollar depreciated by approximately 7–8 percent in 2014 — roughly half the rate of 2013’s 12–14 percent depreciation. The moderation reflected the combined effect of the falling oil import bill (reducing the current-account deficit), the IMF programme’s improved external credibility, and the tourism sector’s strong foreign-exchange generation. The dollar closed the year in the J$114–117 range, a level that represented genuine purchasing-power erosion for Jamaicans but a significantly slower pace of deterioration than the previous year had imposed.
The decline in the rate of depreciation flowed directly into lower inflation. The Statistical Institute of Jamaica tracked headline CPI inflation falling from the high single digits of 2013 toward the low single digits by end-2014, a decline driven in large part by the fuel component of the index. Lower fuel prices reduced electricity tariffs, transport costs and the prices of fuel-intensive goods across the economy. This was the most direct and visible benefit of the oil crash for ordinary Jamaicans: a bill that was visibly smaller, prices in the supermarket that were rising more slowly, and pump prices that were declining week by week through the autumn.
The Bank of Jamaica’s rate-cutting cycle accelerated through the second half of 2014 as the lower inflation environment gave it more room to ease. The overnight benchmark rate, which had begun the year significantly above 5 percent, was progressively reduced through a series of quarterly cuts that by year-end had brought it to levels that were beginning to translate into meaningfully lower commercial bank lending rates. The NHT adjusted its mortgage lending rates downward in response, and the residential property market was beginning to register the first signs of improved transaction activity in the upper-middle and middle-income segments.
QE Ends; The Fed Waits
The Federal Reserve’s Open Market Committee formally ended its quantitative easing programme at the October 29 meeting, as scheduled. The final purchase of US$15 billion in Treasuries and mortgage-backed securities brought to a close a six-year experiment in unconventional monetary accommodation that had pumped approximately US$3.5 trillion into the global financial system and had been a primary driver of the EM capital inflows of 2010–2012 and the taper-driven volatility of 2013–2014. Markets absorbed the end of QE with barely a ripple — the most anticipated end to an accommodation cycle in memory, having been telegraphed and discussed for more than a year, produced precisely the reaction the Fed’s forward guidance was designed to achieve.
The post-QE conversation shifted immediately to rate hikes. The FOMC’s December 2014 meeting — at which it removed the “considerable time” language from its forward guidance and signalled that it would be “patient” in normalising rates — was interpreted by markets as pointing toward a first rate hike sometime in 2015, most likely June or September. For Jamaica, the prospect of rising US rates was a known and planned-for risk: the EFF’s fiscal consolidation was explicitly designed to reduce debt-service vulnerability to higher global rates, and the four successful 2014 reviews demonstrated that the consolidation was delivering. Whether Jamaica’s external borrowing costs would rise materially when the Fed began hiking would depend on how much of the risk premium the market was demanding for Jamaica’s remaining debt burden and how confident investors were in the programme’s durability.
What This Means
Homeowners enter 2015 in a materially more favourable position than at any point since the 2008 crisis. Lower electricity costs are reducing monthly outgoings. Mortgage rates are declining as the BOJ’s easing cycle passes through to commercial lending products. Inflation is falling, reducing the cost-of-living squeeze on household budgets. The Jamaica dollar’s depreciation pace has moderated, reducing the rate at which US-dollar obligations increase in local-currency terms. For those with stable employment and an adequate deposit, the conditions for property purchase have improved meaningfully and are likely to improve further in 2015.
Renters are experiencing the oil dividend most directly through lower electricity tariffs and lower transport costs. The cost-of-living inflation that has been squeezing lower-income budgets since 2012 is easing, and if wage negotiations in the private sector begin to reflect the improved economic outlook in 2015, some real-wage recovery may finally arrive. The social housing supply constraint remains: the fiscal programme leaves little room for public residential construction, and the private sector is not yet building affordable units at scale for the rental market. The structural supply shortfall will persist through 2015.
Developers are reading the same signals and beginning to plan accordingly. The two-million-arrivals milestone validates continued investment in resort and hospitality product. In residential development, the mortgage market improvement — lower rates, more accessible NHT finance, moderating inflation — is creating conditions in which middle-market housing development makes financial sense for the first time in several years. Construction costs are also beginning to fall as lower fuel prices reduce transport and materials costs. 2015 may see a meaningful uptick in residential development activity, particularly in the Kingston metropolitan area and resort-adjacent communities.
Businesses across Jamaica are registering the most significant improvement in their macroeconomic operating environment since before the global financial crisis. Lower energy costs, lower inflation, declining interest rates and a moderating Jamaica dollar depreciation are all moving in the right direction simultaneously for the first time in years. The missing piece remains demand: Jamaican consumers, whose real incomes have been under pressure for several years, have not yet returned to the spending levels that would drive revenue growth for domestic businesses. The oil dividend’s impact on consumer purchasing power — through lower electricity bills and pump prices — will provide a modest demand stimulus in 2015.
Diaspora Jamaicans ended 2014 in a position where the exchange-rate advantage of their dollar income, while still significant at J$114–117, was beginning to narrow relative to the 2013 peak. The improved economic outlook makes Jamaican property and business investment attractive on fundamentals rather than just exchange-rate opportunism. Remittance inflows, which continued to grow through 2014 and are estimated at approximately US$2.1–2.2 billion for the year, remain the single largest source of foreign exchange and the most important economic lifeline for hundreds of thousands of Jamaican families.
Outlook for 2015
Jamaica enters 2015 with the wind, for the first time in years, at its back rather than in its face. The oil price may recover if Saudi Arabia changes course or if global demand surprises to the upside; at US$57 per barrel, the market is at levels that are straining the budgets of major Gulf producers and may not be sustained. But even if prices recover modestly, the 2015 import bill will be dramatically lower than 2013— 2014 levels, and the current-account improvement will be real and significant.
The PetroCaribe situation will crystallise in 2015. If Jamaica moves to retire its PetroCaribe obligations through an international bond issuance at discount to face value — and the arithmetic is compelling if capital market conditions allow — it would represent a further significant improvement in Jamaica’s gross debt position, complementing the NDX’s domestic restructuring with an external debt reduction of comparable structural importance.
The Fed will raise rates in 2015. The question is when and how fast. Jamaica’s IMF programme has been explicitly designed for this scenario, and the four completed reviews of 2014 suggest that the design is being executed. The growth question — when GDP expansion meaningful enough to improve employment and living standards will arrive — remains the programme’s most important and least resolved issue. If 2015’s oil dividend, combined with declining interest rates and an improving business environment, finally catalyses the private-sector investment and consumer spending growth that Jamaica has been waiting for, 2014 will be remembered as the year the macro stabilisation began to pay off. If growth continues to disappoint, the political sustainability of the adjustment will come under sharper test.
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 full calendar year 2014.
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