Jamaica Economic Intelligence | Annual Review 2015 | January–December 2015
Key Findings
- Federal Reserve raises rates December 16 for the first time in nine years; Jamaica absorbs the hike without a crisis
- PetroCaribe buyout retires US$3 billion in obligations at a discount; gross debt falls by over US$1 billion in one transaction
- Tourism posts approximately 2.1 million stopover arrivals — a new record — for the second consecutive year
- All four IMF EFF quarterly reviews completed; Jamaica’s unbroken programme track record extends to eleven consecutive reviews
- Inflation falls to approximately 3–4 percent — within the BOJ’s target range for the first time in over a decade
- GDP growth accelerates modestly toward 1.5–2 percent; the post-crisis ceiling is finally beginning to crack
On December 16, 2015, at 2:00 p.m. in Washington, Janet Yellen walks to the podium and announces that the Federal Reserve has raised interest rates for the first time since June 2006 — nine and a half years. It is a moment the financial world has been anticipating, and dreading, for the better part of three years. In Jamaica’s finance ministry, they watch the announcement carefully. They have been preparing for this moment through four years of grinding fiscal adjustment, two debt restructurings, a PetroCaribe buyout and eleven consecutive IMF programme reviews. And then — almost anticlimactically — the markets shrug. Jamaica’s spreads barely move. The J$ holds. The crisis that was supposed to arrive with the rate hike does not arrive. Something has changed. After seven lean years, the arithmetic of Jamaica’s economy has quietly, painstakingly, been rebuilt from the inside out. 2015 is the year the world notices.
The PetroCaribe Buyout: The Move That Changed the Balance Sheet
The defining financial transaction of 2015 occurred in its opening months. Jamaica had accumulated approximately US$3 billion in obligations to PDVSA, Venezuela’s state oil company, through a decade of PetroCaribe arrangements under which Venezuela had supplied petroleum products with 40–60 percent of payment deferred as long-term concessional debt. By late 2014, Venezuela — its economy devastated by the collapse of oil prices — was in acute fiscal distress and urgently needed hard currency. Jamaica’s finance ministry, recognising the opportunity, moved quickly: it raised approximately US$2 billion in international bonds and used the proceeds to retire the PetroCaribe obligations at approximately 50 cents on the dollar.
The transaction’s impact on Jamaica’s gross public debt was immediate and material. By extinguishing US$3 billion in obligations for approximately US$1.5 billion in cash — funded by US$2 billion in new bonds, with the remainder used for other purposes — Jamaica achieved a net reduction in gross debt of over US$1 billion in a single quarter. Gross public debt, which had been above 130 percent of GDP at the start of the IMF EFF programme in 2013, fell to a level that — while still among the highest ratios in the Western Hemisphere — was materially and visibly declining. Credit-rating agencies, which had begun upgrading Jamaica’s outlook when the NDX was completed in 2013, took additional note of the PetroCaribe transaction as evidence of the quality of financial management that the Simpson-Miller administration had developed over three years of programme adherence.
The IMF welcomed the buyout as complementary to the EFF’s debt reduction objectives. The transaction had not been designed as part of the formal programme conditionality — it was an initiative of Jamaica’s finance ministry, acting on a window of opportunity that Venezuela’s distress had created — but it accelerated the programme’s debt metrics by several years. The EFF’s target of reducing Jamaica’s debt-to-GDP ratio to below 100 percent by the end of the programme period in 2019 became materially more achievable as a result of the buyout.
Eleven Consecutive Reviews: The Unbroken Record
Jamaica completed all four quarterly reviews of the EFF programme in 2015, bringing the total number of consecutive completed reviews since the programme’s signing in May 2013 to eleven — a track record without precedent in Jamaica’s history of IMF engagement. No previous Jamaican programme — not the Stand-By Arrangements of the 1980s and 1990s, not the SBA of 2010, not any of the various informal consultations in between — had maintained continuous compliance across more than three or four reviews before experiencing a waiver, an off-track episode or an outright programme failure.
The 2015 reviews confirmed that Jamaica’s primary fiscal surplus — at or above the programme’s 7.5 percent of GDP target — was being delivered with increasing consistency across the revenue and expenditure dimensions of the budget. Tax Administration Jamaica, reformed and strengthened since 2013, was delivering improved compliance rates across the GCT, income tax and customs revenue streams. The public-sector wage bill was within programme parameters. Structural reforms across pension administration, public body governance and business environment metrics were advancing, though some benchmarks — particularly the land registration and titling programme — were running behind their original design timelines.
The IMF’s year-end assessment of the programme noted the progress with an unusual degree of warmth, calling Jamaica’s reform track record “remarkable” and noting that the economy was beginning to generate growth that would reduce the social costs of adjustment. The IMF also noted the risks ahead: the programme had two years remaining, an election was approaching (Jamaica’s next general election was constitutionally due by February 2016), and maintaining programme discipline through an election cycle would be the final and perhaps most demanding test of the political commitment that had brought Jamaica to this point.
Tourism: 2.1 Million Arrivals
The Jamaica Tourist Board’s annual outturn for 2015 confirmed what the quarterly data had been signalling: a new stopover arrivals record of approximately 2.1 million visitors, building on 2014’s two-million milestone and extending what was now a seven-consecutive-year trend of growth in Jamaica’s most economically significant sector. The performance was driven by strength across all major source markets — the United States, Canada and Europe — and by both leisure and business travel segments, with the all-inclusive resort product maintaining its dominance of the leisure market.
The economic contribution of the record tourism year extended well beyond the arrival count. Average hotel room rates and total tourism expenditure per visitor both increased year-on-year in 2015, suggesting that the growth in volume was not coming at the expense of yield — a critical distinction for a sector that is sometimes tempted to fill beds by discounting. The JTB estimated that total tourism foreign-exchange earnings for 2015 exceeded US$2.3 billion — roughly equal to the country’s annual debt service obligations — an astonishing parallel that underscored the sector’s central role in Jamaica’s economic viability.
The cruise sector reinforced the positive picture. The Port of Falmouth continued to rank among the Caribbean’s most significant cruise destinations, handling the world’s largest vessels and generating visitor flows that supported livelihoods across Trelawny and the surrounding parishes. Total cruise passenger arrivals at Jamaica’s three main ports — Falmouth, Ocho Rios and Montego Bay — were at record levels for the year, and the investment in port infrastructure made over the previous five years was demonstrably paying off in volume and revenue terms.
Oil Stays Low: The Full-Year Dividend
Brent crude averaged approximately US$52 per barrel over the full year 2015 — compared to an average of roughly US$99 per barrel in 2013 — a decline of nearly 50 percent that translated directly into one of the most significant supply-side economic stimuli Jamaica had received in its post-independence history. The annual petroleum import bill for 2015 was an estimated US$600–700 million less than the 2013 peak: a saving equivalent to roughly 6 percent of GDP that would have otherwise required either higher taxes, lower spending or additional borrowing to finance.
The full-year impact of lower oil prices showed up across every dimension of the economic data. Inflation for calendar 2015 fell to approximately 3–4 percent — within the Bank of Jamaica’s target range for the first time in over a decade. The current account deficit narrowed substantially as the fuel import bill contracted. The Jamaica dollar depreciated by approximately 6–7 percent for the full year — significantly less than the 12–14 percent rate of 2013 and broadly in line with the inflation differential with Jamaica’s major trading partners, suggesting that the real effective exchange rate was more stable than the nominal rate decline implied. And consumer purchasing power, which had been eroded steadily through the 2009–2014 period, recovered modestly in real terms — the first real-income improvement for most Jamaican households in several years.
The Fed Hikes: Jamaica Weathers It
December 16, 2015 arrived as the most anticipated interest-rate decision in modern financial history. The Federal Open Market Committee, meeting for the last time in the calendar year, raised the target range for the federal funds rate from 0–0.25 percent to 0.25–0.5 percent — the first rate increase since June 2006 and the end of seven years of zero-interest-rate policy that had reshaped global capital flows, asset prices and risk appetites across every market in the world.
The reaction in global markets was broadly calm — a testament to the Fed’s success in communicating its intentions over a two-year period of forward guidance that had prepared markets far more thoroughly than any previous tightening cycle. Emerging market currencies came under modest pressure in the days surrounding the decision, but the acute selloff that many analysts had feared — a repeat of the 2013 taper tantrum in a tighter liquidity environment — did not materialise. Jamaica’s sovereign spreads widened by a manageable amount; the J$ held within its recent range; and the BOJ’s foreign exchange reserves provided an adequate buffer against any temporary imbalance in supply and demand.
The relatively benign Jamaica-specific outcome reflected the structural improvements of the previous three years. The NDX, the EFF, the PetroCaribe buyout and the sustained primary surplus had collectively reduced Jamaica’s vulnerability to external financial conditions to a degree that was visible and credible to international investors. The country that had been described, in 2012 and 2013, as a high-risk frontier market with an uncertain programme trajectory was now being assessed by rating agencies and emerging-market investors as a genuine reform success story — one whose debt trajectory was improving, whose fiscal discipline was demonstrated and whose growth prospects were, at last, turning constructive.
Growth: The Corner Is Turned
The Statistical Institute of Jamaica’s national accounts estimates for fiscal year 2015–16 (the April 2015–March 2016 period) were tracking GDP growth of approximately 1.5–1.8 percent — a figure that, while modest by regional and global standards, represented a material acceleration from the 0.5–1.0 percent rates of the 2013–2014 period and signalled that the multiple reform and supply-side impulses were beginning to aggregate into measurable economic expansion. Tourism and distribution were the leading contributors; construction was recovering; and the financial services sector, driven by lower interest rates and improved credit conditions, was supporting private investment at a pace not seen since before the global financial crisis.
The employment picture was improving, albeit gradually. The unemployment rate, which had peaked above 16 percent during the worst of the adjustment period, was declining toward 13–14 percent as private-sector hiring, particularly in tourism and business process outsourcing — an increasingly significant sector in Kingston and Montego Bay — absorbed more of the workforce. Youth unemployment remained stubbornly high, a structural challenge that the macro improvement alone could not resolve, but the direction of travel was encouraging for the first time in years.
What This Means
Homeowners in Jamaica enter 2016 in the most favourable macro environment for property ownership since before the 2008 crisis. Mortgage rates have declined by several hundred basis points from their 2012–2013 peaks. Inflation is within the BOJ’s target range. The J$ has stabilised. The economy is growing. For those with stable income and adequate deposit savings — or with NHT contributions accumulating — the case for entering the property market has rarely been stronger. Residential property in well-located Kingston and resort-town communities has recovered some of its value from the 2013–2014 trough, but prices are not yet at levels that would deter a purchase decision on value grounds.
Renters have experienced the most direct benefit from 2015’s economic improvement through lower electricity bills, lower pump prices and more moderate food price inflation — three costs that weigh heavily on lower-income household budgets and that all moved favourably through the year. The labour market improvement, while gradual, is beginning to support real wage growth in the private sector for the first time in years. The social housing supply deficit remains structural and unresolved; the improvement in affordability conditions will not reach the lowest-income Jamaicans until the supply side of the housing market responds more directly to their needs.
Developers can enter 2016 with the most positive medium-term outlook in a decade. Record tourism validates continued hospitality investment. Falling mortgage rates and improving buyer confidence validate middle-market residential development. Lower construction input costs — particularly in the energy-intensive materials and transport components — have improved project economics. The NHT’s mortgage accessibility improvements have deepened the effective buyer pool for new housing. Developers who missed the bottom of the cycle in 2013–2014 can still access a market that is in early recovery rather than late-cycle excess.
Businesses across Jamaica are entering the most constructive macro environment in years. The combination of lower energy costs, lower interest rates, improving consumer demand and a government that has demonstrated consistent, credible economic management creates conditions in which investment and expansion decisions can be made with greater confidence than at any point since 2007. The risks — further oil price recovery, Fed tightening, a potential Chinese slowdown — are real but well understood and, from Jamaica’s improved position, more manageable than at any previous point in the post-crisis decade.
Diaspora Jamaicans monitoring 2015’s full-year performance are seeing the clearest possible validation of the reform programme they have been watching — and in many cases financially supporting through remittances — for seven years. Record tourism, record low inflation, falling rates, a stable currency, an unbroken IMF track record, and a debt trajectory that is finally, demonstrably improving. Remittance inflows for 2015 are estimated at approximately US$2.2–2.3 billion — the highest on record — reflecting both the continued growth of the Jamaican diaspora’s earning capacity and the unbroken commitment to families at home that has been one of the most important stabilising forces in Jamaica’s economy through the entire adjustment period.
Outlook for 2016
Jamaica enters 2016 at a genuinely different position than it has occupied at the start of any year since 2007. The macro architecture — fiscal, monetary, external — is the most sound it has been in a generation. The reform programme has two years remaining, and its remaining objectives — continued debt reduction, further structural reforms, sustaining the primary surplus while creating room for growth-supporting public investment — are demanding but, given the 2015 track record, plausibly achievable.
The overriding domestic event of early 2016 will be a general election — constitutionally required by February 25, 2016. Every previous Jamaican election since independence has been accompanied by some combination of fiscal loosening, programme slippage or exchange rate volatility. The question of whether the next election will break that pattern — whether Jamaica has finally institutionalised the fiscal discipline to survive a change of government without economic disruption — is the most important single question about Jamaica’s economic future. The EFF programme’s design has attempted to answer it by creating legal and institutional anchors for the fiscal rules that go beyond the preferences of any single administration. Whether those anchors hold through an election and a potential change of government is what 2016 will determine.
The international environment will also be a factor. The Fed has signalled further rate hikes in 2016 — the December 2015 statement pointed toward four additional increases in 2016, which the market judged as too aggressive. Oil prices, which ended 2015 near US$37 per barrel, could fall further or recover; either outcome has implications for Jamaica’s import bill and inflation trajectory. China’s transition to slower, consumer-led growth — still underway and still uncertain — will continue to affect global commodity markets and the growth of Jamaica’s most important tourism source markets. The difference from 2012 or 2013 is not that these risks have disappeared but that Jamaica is facing them from a position of structural strength rather than structural fragility. That is the achievement of 2015, and it is a genuinely significant one.
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 2015.
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