Jamaica Economic Intelligence | Q1 2015 | January–March 2015
Key Findings
- Jamaica issues international bonds and retires PetroCaribe obligations at a discount; gross debt falls by over US$1 billion in a single transaction
- SNB removes the CHF/EUR floor January 15; Swiss franc surges; global markets absorb a sudden liquidity shock
- Brent crude dips below US$50 in January before recovering toward US$55–60 by quarter’s end
- Syriza wins Greece on January 25; Grexit fears return; ECB launches QE to counter deflation pressure
- BOJ cuts benchmark rate again as low inflation provides room to ease; mortgage rates follow lower
- Jamaica’s winter tourism season sustains the momentum of 2014’s record-setting year
In a single financial transaction in the first quarter of 2015, Jamaica achieved a reduction in its gross debt burden that would have taken three to four years of primary surpluses to replicate. The PetroCaribe buyout — using proceeds from international bond issuances to retire Venezuela’s oil-financing obligations at a significant discount — was the most consequential public finance move in Jamaica since the NDX two years earlier. It did not emerge from the IMF programme’s formal conditionality; it emerged from the recognition that Venezuela, reeling from the oil price crash, was prepared to accept cash at roughly half the nominal value of Jamaica’s outstanding obligations. Jamaica’s decision to seize that window — moving quickly before Venezuela’s position changed or capital market conditions worsened — demonstrated the kind of opportunistic financial discipline that separates reforming economies from stagnant ones.
The PetroCaribe Buyout: Debt Reduction in a Single Stroke
The PetroCaribe arrangement had been a fixture of Jamaica’s balance-of-payments financing since 2005. Under the agreement, Venezuela supplied Jamaica with petroleum products at market prices but allowed 40–60 percent of the invoice to be deferred as a long-term concessional loan to PDVSA, the Venezuelan state oil company, repayable over up to 25 years at 1–2 percent interest. The arrangement had provided Jamaica with an estimated US$300–400 million per year in effective balance-of-payments support, helping to finance current-account deficits that would otherwise have required more expensive commercial borrowing or greater reserve drawdowns.
By end-2014, Jamaica’s accumulated PetroCaribe obligations to PDVSA stood at approximately US$3 billion — a significant liability that carried long maturities but also created dependence on Venezuela’s continued willingness and ability to maintain the programme. The collapse of oil prices through the second half of 2014 had devastated Venezuelan government revenues — oil accounted for roughly 95 percent of Venezuela’s foreign exchange earnings — and by early 2015 Venezuela was in acute fiscal distress, with its foreign-exchange reserves depleting rapidly and its ability to service its own external obligations under mounting question.
The opportunity this created was remarkable: a creditor in extreme distress and in urgent need of hard currency might accept a discounted cash payment in lieu of its long-dated receivables at face value. Jamaica’s finance ministry, working with its international advisers, assessed the situation and concluded that Venezuela would accept approximately 50 cents on the dollar — that is, a cash payment of roughly US$1.5 billion in exchange for extinguishing the full US$3 billion face-value obligation. The question was whether Jamaica could raise that capital at a cost that made the transaction accretive to its debt position.
The arithmetic was compelling. Jamaica’s new international bonds carried interest rates in the 6.75–7.5 percent range — significantly higher than the 1–2 percent PetroCaribe rate. But by paying US$1.5 billion in cash to extinguish US$3 billion in obligations, Jamaica was eliminating US$1.5 billion in gross debt that would otherwise have sat on its balance sheet for two decades. The net present-value calculation favoured the buyout even at the new bonds’ higher cost of capital. Jamaica executed the transaction, issuing a combination of international bonds and using the proceeds, in a move that the IMF welcomed as consistent with — and complementary to — the EFF’s debt-reduction objectives even though it was not a formal programme requirement.
The impact on Jamaica’s debt-to-GDP ratio was immediate and material. Gross public debt, which had been above 130 percent of GDP at the start of the EFF in 2013, fell by several percentage points in a single quarter. The transaction was widely covered in regional financial media and noted by credit-rating agencies as evidence of Jamaica’s improved capacity for proactive balance-sheet management — a quality that no previous Jamaican administration had demonstrated in living memory.
The SNB Shock and Global Market Volatility
January 15, 2015 delivered one of the most sudden and severe market dislocations in recent financial history. The Swiss National Bank, without warning, abandoned its minimum exchange rate of CHF 1.20 per euro — a peg it had maintained since September 2011 and had as recently as early January 2015 reiterated its commitment to defend. Within minutes of the announcement, the Swiss franc surged by as much as 40 percent against the euro, before settling in the CHF 0.85–0.95 range. Currency brokerages and hedge funds that held large short-franc positions suffered catastrophic losses; several retail foreign-exchange brokers faced insolvency within hours of the announcement.
For Jamaica, the SNB shock was consequential not in direct bilateral terms — Jamaica’s trade with Switzerland is negligible — but in its effect on global risk sentiment and the cost of emerging-market capital. Episodes of sudden, extreme volatility in developed-market currency markets tend to trigger risk-off responses that increase spreads on EM sovereign bonds and reduce capital flows to developing economies. The SNB shock produced a brief but sharp deterioration in EM financing conditions that made the timing of Jamaica’s PetroCaribe bond issuance more consequential: Jamaica’s finance ministry needed to price its bonds into a market that had just absorbed a major confidence shock.
The SNB’s action was driven by a calculation about the European Central Bank’s upcoming decision. With the ECB expected — and in late January confirmed — to launch a large-scale quantitative easing programme, the SNB concluded that defending the CHF/EUR floor would have required it to purchase euros at an accelerating pace, expanding its balance sheet indefinitely. The decision to abandon the peg preemptively, before the euro weakened further against the franc, was a judgement that the cost of maintaining the floor had become prohibitive. For markets, the event was a reminder that policy commitments that appear unconditional can be abandoned without notice when the cost becomes sufficiently large.
Greece and the ECB: Europe’s Dual Story
Europe in the first quarter of 2015 was defined by two simultaneous and contradictory stories. On January 25, the Syriza party — led by Alexis Tsipras and committed to rejecting the terms of Greece’s EU-IMF bailout programme — won a decisive victory in the Greek parliamentary election, triggering an immediate resurgence of Grexit fears and a sharp selloff in Greek bonds. Syriza’s position, that Greece’s debt was unsustainable and that austerity had failed, resonated with Greek voters after five years of severe economic contraction; the party’s challenge was to translate that mandate into a renegotiation with creditors who had no legal mechanism to provide debt relief and limited political appetite to set a precedent for other peripheral eurozone economies.
The ECB’s action on January 22 provided the European counterpoint. Mario Draghi announced a quantitative easing programme — the purchase of EUR 60 billion per month in sovereign and agency bonds beginning in March 2015 — that was larger than most market participants had anticipated. The ECB’s bond purchases immediately compressed yields across the eurozone periphery, reducing the contagion risk from the Greek situation even as negotiations between the Tsipras government and the Troika became increasingly acrimonious. For Jamaica and other emerging market borrowers, ECB QE was a double-edged signal: it suppressed European yields and pushed investors toward higher-yielding EM assets, supporting Jamaica’s bond issuance; but it also signalled that global monetary policy was diverging sharply, with the US moving toward tightening while Europe intensified easing — a configuration that strengthened the US dollar and put pressure on dollar-indebted EM sovereigns.
Oil Below US$50: The Dividend Deepens
Brent crude, which had ended 2014 around US$57 per barrel, fell further in the opening weeks of 2015 to a low of approximately US$45–47 in late January — the lowest level since 2009. The fall reflected continued oversupply: American shale production had not yet responded meaningfully to lower prices, OPEC was maintaining output, and global demand growth remained moderate. By the end of March, prices had partially recovered to the US$55–60 range, but it was already clear that the annual average for 2015 would be dramatically below the US$100-plus average of 2011–2013.
For Jamaica, the continued low oil price environment was compounding the benefit that had begun accumulating in the second half of 2014. The Bank of Jamaica estimated that the petroleum import bill savings were running at several hundred million US dollars annually on an annualised basis relative to the 2012–2013 peak. These savings flowed through to lower inflation — the Consumer Price Index, tracked by the Statistical Institute of Jamaica, showed year-on-year inflation continuing to moderate toward the 4–5 percent range — and lower electricity tariffs, as the Jamaica Public Service Company’s fuel charge component fell with global oil prices. Real household incomes, squeezed by several years of high inflation and wage restraint, were beginning to recover modest purchasing power for the first time since before the 2008 crisis.
BOJ Rate Cuts and the Mortgage Market
The Bank of Jamaica’s Monetary Policy Committee continued its rate-cutting cycle in the first quarter, reducing the overnight policy rate toward levels that were beginning to translate meaningfully into lower commercial bank lending rates. The pass-through from central bank policy rates to commercial lending in Jamaica had historically been slow — Jamaica’s banking system, heavily concentrated among three major players, had not competed aggressively on lending rates during previous easing cycles — but the combination of falling inflation, improved fiscal credibility and lower US Treasury yields was creating an environment in which banks were under more pressure than usual to reduce their lending costs to avoid losing borrowers to the NHT and the broader capital market.
The National Housing Trust adjusted its mortgage lending rates downward through the quarter, making the institution’s mortgages more accessible to a wider range of NHT contributors. The NHT had been the primary source of formal mortgage financing for middle-income Jamaicans throughout the adjustment period, and rate reductions at the NHT were among the most direct ways in which the macro stabilisation was translating into tangible benefits for working Jamaicans with property aspirations. Commercial bank mortgage rates were also declining, though from higher bases; the competitive dynamic between the NHT and commercial lenders was healthy from a consumer perspective.
Tourism: The Winter Season Holds
The winter tourism season — January through March — was sustaining the momentum of 2014’s record year. Advance bookings for the peak winter period had been strong, US consumer confidence was improving and the combination of lower airfares (reflecting lower jet fuel costs) and competitive resort pricing was driving demand. The Jamaica Tourist Board tracked visitor arrivals continuing to run ahead of the comparable 2014 period in the key North American markets. The Sandals and Iberostar properties reported near-capacity occupancy through February, and the emerging spring break market — driven by university students and younger travellers — was showing growing traction.
The cruise sector was equally strong. The Falmouth cruise pier was handling some of the world’s largest ships and attracting visitors who were spending meaningfully in both the Trelawny environs and day-trip destinations across the island. The economic multiplier from cruise visitors remained lower than from stopover guests — cruise passengers spend on average a fraction of what overnight visitors spend — but the sheer volume of cruise arrivals was generating significant port fees, transportation revenue and retail activity that benefited communities across the north coast corridor.
What This Means
Homeowners are entering a window of genuine opportunity. Mortgage rates are falling. The NHT is pricing its products more accessibly than at any point in the past five years. Inflation is low, preserving the purchasing power of household savings. For those who have been waiting for the right moment to enter the property market — or to trade up — the macroeconomic conditions in Q1 2015 are among the most favourable since before the 2008 crisis. The PetroCaribe buyout’s reduction in Jamaica’s gross debt, while abstract in balance-sheet terms, is meaningful for long-run interest rate trajectory: a lower debt burden reduces the risk premium embedded in Jamaican interest rates and creates more room for the BOJ to ease further.
Renters are experiencing the oil dividend through lower electricity bills and more moderate food prices, both of which are providing marginal relief to household budgets. The broader wage environment remains constrained by the public-sector wage bill limits embedded in the IMF programme, which ripple through to private-sector wage negotiations. But the cost-of-living compression is easing in real terms, and if the growth momentum building through 2015 translates into private-sector job creation, the labour market outlook for lower-income Jamaicans will improve meaningfully through the year.
Developers should read the PetroCaribe buyout as a structural signal: Jamaica has demonstrated the capacity for decisive, proactive balance-sheet management at the sovereign level, and the reduction in gross debt opens a path toward lower long-run interest rates that makes residential and commercial development projects more financially viable. Construction cost pressures are easing as fuel-cost components of materials and transport prices fall. The NHT’s expanded mortgage accessibility is creating demand in the middle-market residential segment. The conditions for a residential construction upturn in 2015 are better than they have been in a decade.
Businesses are operating in the most supportive macro environment in years: lower energy costs, lower inflation, declining interest rates, and a Jamaica dollar that is depreciating at a more moderate pace. The SNB shock and Greek uncertainty are reminders that global conditions can deteriorate quickly, but Jamaica’s improved fiscal credibility and lower debt burden mean it is significantly better insulated from external volatility than it was in 2012 or 2013. The domestic demand environment remains subdued — consumer spending growth has not yet materialised at the scale needed to drive meaningful revenue growth for most businesses — but the foundations for improvement are in place.
Diaspora Jamaicans will note that the PetroCaribe buyout, structured through international bond markets, signals that Jamaica is a credible borrower capable of accessing capital at competitive rates for productive financial purposes rather than merely to roll over existing obligations. For diaspora investors weighing property or business investment in Jamaica, the combination of lower interest rates, lower inflation and an economy that has demonstrated genuine reform capacity makes the fundamental investment case stronger than at any point in recent memory. The exchange rate at J$117–120 remains favourable for dollar-income earners, though the pace of depreciation advantage is moderating as the J$ stabilises.
Outlook
The second quarter of 2015 will be shaped by three primary variables: the trajectory of the Greek debt negotiations, the Federal Reserve’s rate-hike timeline, and Jamaica’s ability to sustain its fiscal programme through the next IMF quarterly review. Of the three, the IMF review is the most within Jamaica’s control — and the track record of the past two years suggests confidence is warranted. The Greece story is more uncertain; an outright default or eurozone exit would create market volatility that could increase Jamaica’s external borrowing costs, but the direct transmission mechanism is limited compared to what Jamaica’s own fundamentals will drive.
The Fed’s rate-hike timing is a watch item for the whole year. Markets are pricing a first hike somewhere between June and September 2015. When it comes, it will test whether Jamaica’s improved fiscal position and lower debt burden are sufficient to insulate the J$ and domestic interest rates from the upward pressure that typically accompanies US rate normalisation. The PetroCaribe buyout has improved that insulation. Whether it has improved it enough will be one of the defining questions of 2015.
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 Q1 2015: January–March 2015.
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