Jamaica Economic Intelligence | Q2 2015 | April–June 2015
Key Findings
- Greece imposes capital controls June 28 as Troika talks collapse; Grexit risk rises to its highest point since 2012
- Chinese equity markets reach a speculative peak in June before warning signs of instability emerge
- Brent crude recovers toward US$65 in April–May before renewed selling pressure; oil stays well below 2013 levels
- Fed holds rates at June FOMC; Yellen confirms hike anticipated “later this year” as US data continues solid
- BOJ cuts benchmark rate further; commercial mortgage rates fall toward multi-year lows
- Jamaica’s IMF programme passes another quarterly review; fiscal targets on track through mid-year
On June 28, 2015, the Greek government closes its banks. Queues form outside every ATM in Athens. A pensioner weeps on the steps of a shuttered branch in Thessaloniki — the image is transmitted around the world within the hour. The eurozone, the great political and monetary experiment of half a century, is closer to losing its first member than it has ever been. Somewhere in Kingston, a finance ministry official reads the wire reports and feels something unfamiliar: relief, of a particular and hard-won kind. Jamaica knows what fiscal failure looks like. It lived through its own version of it for the better part of fifteen years — the debt spirals, the IMF standoffs, the interest payments that consumed every dollar of effort. And now, watching Athens implode in real time, this small island economy finds itself in a position almost no one predicted two years ago: stable, credible, and — for once — not the country anyone is worried about.
Greece: Capital Controls and the Referendum Gamble
The Greek debt crisis that had been simmering since January — when the Syriza government of Alexis Tsipras won its mandate to reject the creditor-imposed austerity terms of Greece’s existing bailout — reached a critical juncture through the second quarter. Negotiations between Athens and the so-called Troika of the European Commission, the ECB and the IMF oscillated between apparent progress and dramatic breakdown through April and May, with each round of talks accompanied by optimistic statements from European capitals followed by a new impasse as the fundamental incompatibility between Syriza’s mandate and the creditors’ conditions resisted resolution.
The crisis came to a head at the end of June. On June 25, Tsipras announced a national referendum for July 5 on whether Greece should accept the creditors’ latest offer. The ECB, citing the uncertainty created by the referendum announcement, declined to extend the emergency liquidity assistance keeping Greek banks funded. The Greek government, facing a bank run it could not contain without access to the ECB’s liquidity backstop, imposed capital controls on Sunday June 28 — limiting ATM withdrawals to 60 euros per day and prohibiting transfers abroad — and closed the banking system for a week.
The images of Greek pensioners queuing outside closed banks were among the most arresting economic news photographs in years. For financial markets, the week of capital controls was a test of eurozone cohesion: would Greece default on its IMF obligations (a payment of approximately EUR 1.6 billion fell due on June 30) and, if so, would it precipitate an exit from the single currency? Greece did miss the IMF payment on June 30 — becoming the first developed economy to do so in the IMF’s history — but the referendum outcome remained in the balance as the quarter ended.
For Jamaica, the Greek episode was a reminder of what fiscal adjustment failure looks like when it becomes irreversible and political resistance finally overwhelms programme discipline. The contrast with Jamaica’s own trajectory was pointed: Jamaica had completed nine consecutive IMF review benchmarks by the end of Q2 2015, while Greece was in open confrontation with its creditors over the terms of a third rescue. The difference was not simply economic scale but the quality of political commitment to adjustment — a factor that Jamaica’s current administration had demonstrated more consistently than any previous government.
China’s Markets: The Bubble’s Peak
While Europe’s drama played out in Athens, a different kind of financial excess was reaching its apex in China. The Shanghai and Shenzhen equity markets had been in the grip of a speculative retail investor-driven bubble since mid-2014, with margin lending on mainland Chinese exchanges expanding at an unprecedented pace and retail investors — many with no prior market experience — opening brokerage accounts in the millions. By June 2015, the Shanghai Composite had risen approximately 150 percent in twelve months, an appreciation rate that bore no relationship to the underlying trajectory of Chinese corporate earnings or GDP growth.
Warnings from international market observers that a correction was inevitable were reaching a crescendo as Q2 ended. Chinese regulators had begun attempting to cool the market through tighter margin-lending restrictions, but each intervention produced only a brief pause before the advance resumed. The Shanghai Composite peaked at approximately 5,166 points on June 12, 2015 — a level that would represent the high-water mark of the bubble — before beginning to crack. The full collapse would come in Q3, but the structural signs of instability were already visible to any attentive observer by the time Q2 closed.
For Jamaica, China’s equity bubble mattered primarily through its implications for global commodity demand and Chinese tourism. China’s continued economic growth — even at the 7 percent annual rate it was reporting — was an important support for global commodity prices that in turn affected the oil outlook. A sharper-than-expected Chinese economic slowdown — the worst-case scenario that the equity crash could precipitate — would reduce global commodity demand and potentially slow the US and European economies that accounted for the bulk of Jamaica’s tourism and remittance income.
Oil’s Partial Recovery: The Dividend Holds
Brent crude staged a partial recovery through April and May 2015, rising from the US$55–60 range at end of Q1 to briefly approach US$65–68 per barrel in late May. The recovery reflected some moderation in US shale production growth — the dramatic drop in the US oil-rig count through early 2015 was beginning to translate into a modest reduction in output — and ongoing OPEC output discipline among most members. By late June, however, fresh concerns about the pace of the global supply glut and the impending agreement on Iran’s nuclear programme were pushing prices back toward the US$60–62 range.
For Jamaica, the partial oil price recovery was an acceptable development. Even at US$65 per barrel, the country’s annual petroleum import bill remained dramatically below its 2012–2013 peak. The Bank of Jamaica’s monthly statistical digests through the quarter showed the merchandise trade deficit continuing to narrow year-on-year, driven primarily by the lower energy import bill. Foreign exchange reserves were stable to improving, providing the BOJ with a comfortable buffer against potential currency volatility associated with the anticipated Federal Reserve rate hike later in the year.
The Fed Holds: September Remains Live
The Federal Open Market Committee’s June 16–17 meeting concluded, as markets expected, with no change to the federal funds rate. Chair Janet Yellen’s post-meeting press conference reaffirmed the FOMC’s view that a rate hike would be appropriate “later this year,” and the Committee’s updated dot plot of members’ individual rate projections was consistent with a first hike in September 2015. US economic data through the quarter was broadly supportive: non-farm payrolls growth was averaging well above 200,000 per month, the unemployment rate had fallen to 5.3 percent by June, and core inflation was running below the Fed’s 2 percent target but expected to move toward it as the labour market continued to tighten.
The September FOMC meeting was thus the clear focal point for rate-hike watchers as Q2 ended. For Jamaica, the prospect of the first US rate hike in nearly a decade was a known and planned-for risk, but the Greek crisis and China’s equity bubble had introduced new uncertainty about whether global conditions would be stable enough in September for the Fed to proceed. A postponement of the hike to December 2015 would give Jamaica additional time to consolidate its improved fiscal position before facing the external pressure that tighter US monetary policy would bring.
BOJ Easing and the Property Market
The Bank of Jamaica’s Monetary Policy Committee reduced its benchmark overnight rate for the third consecutive quarter in Q2 2015, continuing a rate-cutting cycle that was beginning to show meaningful pass-through to the commercial banking sector. The National Housing Trust announced a further reduction in its standard mortgage rates during the quarter, and commercial banks responded with promotional mortgage products targeting the middle-income market. Estate agents in the Kingston metropolitan area reported a measurable increase in transaction enquiries relative to the same period in 2014, with particular activity in the St. Andrew residential market and in the resort-adjacent communities of Montego Bay and Ocho Rios. The construction sector was beginning to respond — housing starts trending upward through the first half of 2015 as developers who had deferred projects during the 2012–2014 adjustment period returned to the market.
IMF Programme: Mid-Year Review
Jamaica’s Extended Fund Facility completed another quarterly review in Q2 2015, with the IMF’s staff team assessing fiscal performance through the first half of the fiscal year as on track. The primary fiscal surplus remained at or above the programme’s 7.5 percent of GDP target, tax revenue performance was meeting projections, and the public-sector wage bill was within programme parameters. The IMF’s staff report noted that Jamaica’s debt-to-GDP ratio had fallen further following the PetroCaribe buyout in Q1 2015, characterising the trajectory as “encouraging” while flagging the external environment — particularly the anticipated Federal Reserve rate hike and potential Chinese slowdown — as the primary risks to Jamaica’s near-term outlook.
What This Means
Homeowners are the primary beneficiaries of Q2 2015’s domestic story: falling mortgage rates, improving NHT accessibility and a property market beginning to show genuine signs of recovery in transaction volumes. Those who purchased at the bottom of the cycle in 2013–2014 are beginning to see modest appreciation. Those still waiting face a market where the entry window may be closing — if growth continues to accelerate through 2015, the combination of improved buyer confidence and tighter supply will put upward pressure on well-located residential prices.
Renters are experiencing cost-of-living relief through lower electricity tariffs and moderating food inflation, but the rental market is not yet providing meaningful supply relief. The upturn in construction activity is primarily in the ownership segment. Public housing investment remains limited by fiscal programme parameters. The most significant near-term improvement for lower-income Jamaicans would come from private-sector employment growth — which the improved macro environment is beginning to support.
Developers are returning to the market. The economics of residential development at the J$20–50 million price point are improving with lower input costs, lower financing rates and stronger buyer demand. Commercial developers focused on tourism-adjacent markets are seeing continued validation from the tourism sector’s sustained strength. The Greek crisis and Chinese volatility are abstract risks; the concrete local story in Q2 2015 is positive and becoming more so.
Businesses operating in Jamaica are navigating a domestic environment that is genuinely improving while watching external risks with appropriate caution. The Greek drama demonstrates that programme failure is possible; the contrast with Jamaica’s own track record is a competitive advantage in investor perception. Businesses with primarily JMD revenues are experiencing the welcome relief of declining borrowing costs and lower energy bills.
Diaspora investors are watching the Greek crisis with the specific recognition that the alternative to sustained programme compliance can be catastrophically worse than the adjustment itself. Jamaica’s demonstrated commitment to its programme, now extending across two administrations and seven years of IMF engagement, is precisely the quality that distinguishes it from the high-risk end of the EM investment spectrum. Mortgage rates near multi-year lows keep the investment window attractive for those with dollar income looking to acquire real estate in Jamaica.
Outlook
The third quarter will resolve the two major uncertainties that defined Q2: the Greek referendum outcome and the September Fed decision. For Jamaica, the summer tourism season will provide the next data point on whether the record trajectory of 2014 is being sustained. The domestic property market is poised for its most active second half in several years. If mortgage rate declines continue, if the tourism sector holds its momentum, and if private-sector employment growth begins to register meaningfully, Jamaica’s GDP growth rate may finally begin to challenge the 1–2 percent ceiling that has defined the post-crisis period. That would be the most important development possible — not just for the economic statistics, but for the political sustainability of the adjustment that has brought Jamaica to this point.
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 Q2 2015: April–June 2015.
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