Jamaica Economic Intelligence | Q3 2015 | July–September 2015
Key Findings
- Shanghai Composite loses approximately 30 percent from its June peak; Black Monday August 24 sends global markets into freefall
- Federal Reserve delays September rate hike citing global market turbulence; December now the earliest likely date
- Greece votes OXI July 5 then accepts a tougher bailout deal July 13; eurozone survives but Greek economy contracts further
- Brent crude falls back below US$50 as Iranian nuclear deal removes sanctions and the global supply glut deepens
- Jamaica posts its strongest summer tourism season on record; BOJ cuts rates for fourth consecutive quarter
- IMF EFF quarterly review completed; Jamaica’s debt-to-GDP continues its downward trajectory
The date is Monday, August 24, 2015. At 9:30 a.m. in New York, the opening bell rings and the Dow Jones Industrial Average drops 1,000 points in the first four minutes of trading — the largest intraday point decline in the index’s history. Markets in Shanghai, Tokyo, Frankfurt, London and São Paulo are already in freefall. Trillions of dollars in paper wealth are being erased in real time. Somewhere in the middle of all this, on a humid summer morning in Montego Bay, a hotel bus is transferring a family from the airport to their all-inclusive resort, and the driver is telling them what a great week they’re going to have. And he’s right. For Jamaica, the summer of 2015 — the summer the world panicked — is turning out to be the best tourism season on record. The island has been here before: watching global storms rage, waiting to see how much of the damage will reach its shores. This time, remarkably, it barely gets wet.
Black Monday: China’s Crash Goes Global
The Chinese equity bubble that had been building through 2014 and the first half of 2015 — and had been showing signs of structural fragility since its June 12 peak — ruptured in spectacular fashion through July and August. The Shanghai Composite, which had traded at approximately 5,166 points on June 12, fell through 4,000 in early July, briefly stabilised following aggressive Chinese government interventions — suspending trading in hundreds of stocks, directing state funds to purchase equities, restricting short selling — and then resumed its descent through the summer. By August 26, the index had touched approximately 2,927 points: a decline of roughly 43 percent from its peak in under three months.
The crash’s global transmission mechanism operated through several channels. Chinese equity market participants had leveraged their positions heavily through margin lending; the forced unwinding of those positions produced rapid, disorderly selling that overwhelmed the market-making capacity of Chinese brokerages. As Chinese retail investors sold equities to meet margin calls, they also reduced consumption of luxury goods, overseas travel and imported products — with implications for global exporters. Most consequentially for commodity markets, the crash intensified concerns about the trajectory of Chinese economic growth, which had already been slowing from the double-digit rates of the previous decade toward a “new normal” of 6–7 percent. Lower Chinese growth meant lower demand for iron ore, copper, coal and oil — and commodity-producing economies from Brazil to Australia were immediately affected.
Black Monday — August 24 — was the day the fear peaked. The VIX volatility index surged to its highest level since the 2009 crisis. US equities recovered most of their losses within days, suggesting the initial move was driven by panic and technical factors rather than a fundamental reassessment of the US economic outlook. But the damage to investor confidence was real: the Federal Reserve’s September meeting, which had been widely anticipated to deliver the first US rate hike in nearly a decade, was now surrounded by genuine uncertainty about whether global market conditions were stable enough for the Fed to proceed.
The Fed Blinks: September Hike Delayed
The Federal Open Market Committee’s September 16–17 meeting produced a decision that surprised markets: no rate hike. Chair Janet Yellen, in her post-meeting press conference, cited “recent global economic and financial developments” — a clear reference to the Chinese market crash and the resulting global volatility — as reasons for the Committee’s caution. The Fed’s statement acknowledged that the US economy was continuing to improve but flagged that international developments could affect the outlook for US growth and inflation.
The September delay moved the dominant market expectation for the first hike to December 2015. For Jamaica, the postponement was unambiguously welcome. The EFF programme had been designed with the Fed’s eventual tightening in mind, and Jamaica’s improved fiscal position and lower debt burden were substantially better insulation against that tightening than had existed in 2013. But any additional time for the reform programme to consolidate and for the domestic rate cycle to work its way through to growth and investment was beneficial. The delay meant that Jamaican sovereign bond spreads and the J$ exchange rate would face less upward pressure from US normalisation through the end of 2015.
Greece: OXI, Then Capitulation
The Greek saga resolved — with characteristic drama — in the opening weeks of Q3. The July 5 referendum produced a decisive OXI (No) vote of 61 percent against the creditors’ terms. The result was interpreted by many as a mandate for Grexit. Within hours, Tsipras flew to Brussels. Within a week, he had accepted a third bailout whose terms were significantly more demanding than the package Greeks had voted to reject.
The deal, announced in the early hours of July 13, required Greece to implement pension cuts, VAT increases, privatisations and judicial reforms as conditions for a new EUR 86 billion ESM loan. Greek banks, which had been closed since June 28 with capital controls in place, reopened on July 20. The eurozone had survived its most acute crisis. For Jamaica’s observers, the resolution confirmed what the IMF track record suggested: creditors ultimately prefer a programme to a default, but the terms are determined by the relative bargaining positions — and Jamaica’s own successful reform track record had given it considerably more credibility in that negotiation than Greece ever achieved.
Oil Slides Again: Brent Below US$50
The Iran nuclear deal, concluded on July 14 after years of negotiations, added a new element to the oil supply picture: the removal of international sanctions on Iran’s oil exports would allow Iranian production to return to world markets at scale. Estimates of the potential incremental Iranian supply ranged from 500,000 to one million barrels per day — significant in a market already suffering from oversupply. The announcement pushed Brent crude, which had been hovering around US$55–60 per barrel in early Q3, firmly lower. By late August, Brent had fallen below US$50, briefly touching US$42 — the lowest level since early 2009.
For Jamaica, the renewed oil price weakness was more good news piled atop an already favourable energy position. Electricity tariffs were falling as the Jamaica Public Service Company’s fuel cost passthrough mechanism transmitted lower bunker fuel and diesel prices to consumers. The Statistical Institute of Jamaica recorded year-on-year headline inflation continuing its decline toward the low single digits, with fuel and utilities prices among the primary downward drivers. The BOJ’s inflation target, which had appeared aspirational only two years earlier, was now well within reach.
Tourism: A Record Summer
Against the backdrop of global financial turbulence, Jamaica’s tourism sector delivered what the Jamaica Tourist Board described as its strongest summer season on record. The July–September period generated visitor arrival numbers that ran materially ahead of the comparable 2014 period across all major source markets. The factors driving demand were familiar: lower airfares, competitive all-inclusive pricing, the relative strength of the US dollar making dollar-income travellers feel wealthier, and Jamaica’s sustained brand equity in the North American market.
The Sandals South Coast property in St. Elizabeth, which had opened to considerable fanfare, was attracting visitors to a part of Jamaica that had previously been peripheral to the main tourism corridors. In Montego Bay, hotel occupancy rates through August were at or near capacity for extended periods. The tourism sector appeared on track to exceed two million stopover arrivals for the second consecutive year — and possibly to approach 2.1 million, a trajectory that would represent GDP-relevant growth in the island’s most important economic sector.
The Domestic Economy: Growth Stirring
STATIN’s preliminary national accounts data for the April–June quarter, released during Q3, provided the first concrete indication that Jamaica’s growth rate was beginning to move above the post-crisis ceiling. The combination of lower oil costs, lower interest rates, improving consumer confidence, stronger tourism revenues and a reactivating construction sector was producing a growth impulse that — while modest by international standards — was meaningful in the context of a decade of near-stagnation. The preliminary GDP growth reading tracked in the 1.5–2.0 percent range year-on-year, with tourism and distribution making the largest positive contributions.
The Bank of Jamaica’s Monetary Policy Committee executed its fourth consecutive quarterly rate cut in Q3, bringing the overnight benchmark rate to its lowest level in years. The J$ depreciated by approximately 2–3 percent through the quarter — a very modest rate of decline that, compared to the 12–14 percent annual depreciation of 2013, represented near-stabilisation. Foreign exchange reserves were at comfortable levels, and BOJ interventions in the foreign exchange market were limited and symmetric rather than the sustained one-sided support that had characterised periods of acute J$ pressure in prior years.
What This Means
Homeowners can read Q3 2015 as confirmation that the tailwinds supporting the property market are structural rather than temporary. Mortgage rates at multi-year lows, inflation contained, the J$ stable, the economy growing. Transaction volumes in the residential market are rising. Properties in the J$20–40 million range are generating competitive interest for the first time since before 2008. Those waiting for one final dip before entering the market may find that the dip has already passed.
Renters are experiencing real improvements in purchasing power through lower energy bills and lower food price inflation. The summer’s record tourism performance is supporting employment in the hospitality, transportation and retail sectors most accessible to lower-income Jamaicans. Private-sector wage negotiations in tourism and distribution are beginning to reflect improved employer performance. The rental market remains supply-constrained, but the improving income environment is reducing the pressure that had been tightening household budgets since 2012.
Developers looking at the summer numbers — record tourism, improving consumer confidence, falling borrowing costs — are seeing the clearest possible validation for residential and hospitality development. The pipeline of projects suspended during the 2012–2014 adjustment period is now reactivating. For tourism-adjacent development, the record summer adds further urgency to investment decisions that have been deferred for too long.
Businesses with exposure to the tourism sector are experiencing the best trading conditions in nearly a decade. Those dependent on the domestic consumer are seeing early signs of demand improvement as lower energy costs and falling rates put more disposable income in Jamaican households. The China crash and global volatility are real risks, but Jamaica’s limited direct trade exposure to China and its insulation from commodity market swings mean the damage is modest relative to what Brazil or Australia face.
Diaspora Jamaicans monitoring the island’s economic trajectory are watching a summer that has validated everything the reform programme promised. Record tourism, falling rates, a stable currency, a government that has passed every IMF test — the fundamentals for long-term property investment are better than at any point in living memory. The Fed’s September delay has extended the window of low global rates supporting Jamaica’s borrowing costs. That window will close — December 2015 or early 2016 will bring the normalisation markets have been anticipating for two years. The opportunity to act before that shift is still open.
Outlook
The Federal Reserve will raise rates before the end of 2015, almost certainly in December. The question is how Jamaica’s capital market will respond. The PetroCaribe buyout and the ongoing fiscal consolidation have materially improved Jamaica’s debt metrics; the risk premium embedded in its sovereign spreads has been declining steadily. A December Fed hike, fully anticipated and well telegraphed, may produce considerably less turbulence for Jamaica than the 2013 taper tantrum — which arrived without warning into an environment of much weaker fundamentals.
The fourth quarter will also produce Jamaica’s annual tourism outturn data for 2015, the GDP estimates for the July–September period, and the next IMF review. If all three deliver positive results — and the current trajectory suggests they will — 2015 will stand as the year Jamaica finally emerged from the shadow of its debt crisis and began to grow again in a meaningful way. That is the story the numbers are beginning to tell.
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 Q3 2015: July–September 2015.
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