Jamaica Economic Intelligence | Annual Review 2016 | January–December 2016
Key Findings
- Donald Trump wins the US presidency on November 8; markets panic, then surge; the world enters a new era of uncertainty
- The Federal Reserve raises rates on December 14 — the only hike of the year — after holding through Brexit and the US election
- OPEC formalises a production cut at Vienna on November 30; Brent crude closes the year above US$55 per barrel
- Jamaica posts a third consecutive stopover arrivals record of approximately 2.2 million — tourism is now a genuine growth engine
- All four IMF EFF quarterly reviews completed; the programme’s fifteenth consecutive pass confirms bipartisan reform durability
- Unemployment falls to approximately 12.9 percent — the lowest level since before the 2008 global financial crisis
It is 2:30 in the morning on November 9, 2016, Eastern Standard Time, when the Associated Press calls Pennsylvania for Donald Trump. The presidency is his. In Manhattan, in a ballroom at the Midtown Hilton, the crowd that had gathered expecting a different result is silent. On trading floors across Asia, futures contracts are in freefall. The Mexican peso is collapsing. Gold is surging. Somewhere in Kingston, in the homes of Jamaicans who went to bed expecting a different headline, the alarm clocks will be going off soon for the morning shift. They will not be thinking about the Electoral College. They will be thinking about whether the school bus is on time, whether the electricity bill has been paid, whether the mortgage payment clears on Friday. This is the texture of an economy that has learned, through two decades of crisis, to keep moving regardless of what is happening at the centre of the world.
November 8: The Election That Redrew the Map
Donald Trump’s victory in the United States presidential election was the year’s defining global event — the culmination of a campaign that had generated continuous market uncertainty from the moment his candidacy became serious, and a result that the overwhelming consensus of professional forecasters, prediction markets and polling analysts had assigned a probability of between 20 and 30 percent on election eve. The immediate market reaction was severe: S&P 500 futures fell approximately 5 percent in overnight trading, the Mexican peso declined more than 10 percent, and emerging market currencies broadly sold off as investors processed the implications of a Trump administration’s stated preferences on trade, immigration and fiscal policy.
And then, with remarkable speed, the market reversed. Within two days of the election result, US equity markets had not merely recovered their losses but had moved to new all-time highs, driven by the calculation that Trump’s fiscal policy proposals — large tax cuts, major infrastructure spending — would boost US corporate earnings and GDP growth even if his trade and immigration positions created uncertainty in other dimensions. The “Trump bump” in US equities through November and December 2016 was one of the most dramatic sentiment reversals in recent financial market history, and it left most professional analysts who had predicted a market collapse on a Trump victory looking sheepish by year’s end.
For Jamaica, the Trump election’s implications were most consequential through the tourism channel. The United States accounts for approximately 60 percent of Jamaica’s stopover visitor arrivals, and the disposition of US consumers toward international travel — shaped by economic confidence, visa and entry conditions, and the cultural climate around tourism — was the single most important external variable in Jamaica’s medium-term economic outlook. A Trump administration’s stated commitment to immigration restriction raised legitimate questions about whether the regulatory environment for travel between Jamaica and the United States would become more burdensome, and whether the broader cultural climate of US-international relations under Trump would affect Jamaicans’ sentiment about investing in a US-dependent tourism economy. These were questions that could not be answered at year-end 2016 but that would define the tourism sector’s operating environment for years.
The Fed Finally Moves: December’s Long-Awaited Hike
The Federal Open Market Committee’s December 13–14 meeting delivered what the January, March, June and September meetings of 2016 had each declined to provide: a rate hike. The FOMC raised the federal funds rate target range from 0.25–0.5 percent to 0.5–0.75 percent — the second increase in a decade, following December 2015’s first move in nine years. Chair Yellen’s press conference struck a notably more optimistic tone than previous 2016 meetings, citing the strong performance of the US labour market, progress on inflation toward the 2 percent target and the improved business confidence reflected in the post-election equity market rally as justifications for the move.
The FOMC’s updated projections — the famous “dot plot” — indicated that members expected three rate increases in 2017, a pace that would, if realised, represent a meaningful acceleration from the one-hike-per-year cadence of 2015 and 2016. For Jamaica, the December hike and the 2017 tightening path it implied were important inputs to the economic planning for the year ahead. The Bank of Jamaica’s assessment was that Jamaica’s improved fiscal position and lower debt burden provided adequate insulation against the kind of capital flow disruption that US rate normalisation had threatened to cause in 2013. The taper tantrum of that year — when Jamaica’s sovereign spreads had widened sharply as the first signals of Fed tightening emerged — was the counterfactual against which 2016’s performance was measured. The contrast was striking: Jamaica had absorbed a full year of Fed tightening discussions and two actual rate hikes with minimal spread widening and no J$ crisis.
OPEC Cuts: The Oil Tailwind Moderates
The November 30 OPEC meeting in Vienna formalised what the Algiers accord of September had previewed: OPEC members agreed to cut collective output by approximately 1.2 million barrels per day from October 2016 levels, with the biggest cuts coming from Saudi Arabia. Crucially, Russia and other major non-OPEC producers agreed to contribute an additional 600,000 barrels per day of cuts — bringing the total supply reduction commitment to approximately 1.8 million barrels per day, the largest coordinated cut since 2008. Brent crude rose sharply on the announcement, closing the year above US$55 per barrel — its highest level since July 2015.
For Jamaica, the OPEC deal’s economic implications were mixed. Oil at US$55 was still substantially below the US$100-plus average of 2011–2013, and the annual petroleum import bill for 2016 remained dramatically lower than its pre-crash peak. But the direction of travel had definitively shifted: the extraordinary oil price tailwind that had contributed so much to Jamaica’s fiscal, external and monetary improvement since mid-2014 was now moderating. Future BOJ inflation projections would need to incorporate the assumption that energy and electricity costs were more likely to be flat-to-rising than declining, reducing the contribution of the oil dividend to inflation containment. The IMF and finance ministry would need to factor a higher oil price assumption into their medium-term fiscal projections. The windfall was not over, but its growth phase had ended.
Tourism: Three Consecutive Records
The Jamaica Tourist Board’s full-year 2016 data confirmed what the quarterly figures had been signalling: Jamaica had set its third consecutive stopover arrivals record, with approximately 2.18–2.22 million visitors for the calendar year. The achievement was particularly impressive given the headwinds that had been anticipated: Brexit’s impact on UK visitors had materialised as expected, with British arrivals declining approximately 10 percent year-on-year, but the gap had been more than closed by growth in the US market and strong performance in the Canadian and European segments.
Total tourism foreign-exchange earnings for 2016 were estimated at approximately US$2.4–2.5 billion, another record, reflecting not only the higher volume of visitors but their sustained tendency toward longer stays and higher per-visit spending in Jamaica’s all-inclusive resort segment. The economic multiplier from this level of tourism spending — flowing through the supply chains of food, beverage, transportation, entertainment and construction that serve the sector — was generating employment and income effects well beyond the hotel-room count. The Statistical Institute of Jamaica’s GDP data would confirm that tourism was the most important single growth driver in the Jamaican economy, contributing a larger share of GDP growth in 2016 than any other sector.
The expansion of hotel capacity was also beginning to contribute to the economic story. Several major projects that had been in development since 2013–2014 came to completion or near-completion through 2016, adding room inventory in Montego Bay and along the south coast that expanded Jamaica’s ability to capture peak-season demand without the capacity constraints that had limited revenue growth in previous high-demand periods. The Sandals group, the Iberostar properties and the emerging boutique resort segment in Portland and the Blue Mountains were all contributing to a more diversified tourism geography that spread the economic benefits of the sector beyond the traditional north coast corridor.
The IMF Programme Approaches Its End
Jamaica completed all four EFF quarterly reviews of 2016, bringing the total consecutive completed reviews to fifteen — a number that, by itself, describes the most remarkable sustained fiscal achievement in Jamaica’s modern economic history. The programme, which had been signed in May 2013 for an initial four-year period, was now approaching its final phase with the same consistency of performance that had characterised its beginning, middle and post-election continuation. Not once in fifteen reviews had Jamaica failed to meet a target, required a waiver, or triggered the kind of programme disruption that had ended every previous IMF engagement with the island prematurely.
The IMF’s year-end assessment of Jamaica’s programme was the most positive the institution had issued since the EFF began. The staff report noted that Jamaica’s debt-to-GDP ratio had fallen from above 140 percent of GDP at the peak to approximately 115 percent — still high by international standards, but declining at a pace that made the programme’s end-2019 target of below 100 percent credible. The primary fiscal surplus had been maintained at or above 7.5 percent of GDP for three consecutive fiscal years — the longest uninterrupted high-surplus period in Jamaica’s recorded fiscal history. Structural reforms across public body governance, pension administration, tax compliance and the business environment had been implemented with unusual fidelity to the programme’s original design. The Fund’s unusual warmth in describing Jamaica’s performance — “exceptional” and “unprecedented” featured in official communications with a frequency that would have been unthinkable five years earlier — reflected genuine institutional recognition that something important had happened on this island.
The Domestic Economy: Growth Consolidates
Jamaica’s GDP growth for calendar 2016 was tracking at approximately 1.4–1.7 percent — in line with 2015 and representing the second consecutive year above the 1 percent ceiling that had constrained the post-crisis economy. Unemployment, which had been above 16 percent at the programme’s start, fell to approximately 12.9 percent by the October labour force survey — the lowest reading since before the 2008 global financial crisis. The Bank of Jamaica held its benchmark overnight rate steady through most of the year, balancing the competing considerations of inflation that was ticking up modestly with oil prices and a J$ that was continuing its moderate, managed depreciation trajectory.
The property market continued its steady recovery. Transaction volumes in the residential segment were running significantly above 2013–2014 levels. The NHT’s mortgage portfolio was expanding as more contributors accessed financing at the improved rates and terms that the macro stabilisation had made possible. Commercial real estate in Kingston was tightening as the business process outsourcing sector, buoyed by Jamaica’s competitive cost structure and English-speaking workforce, continued to expand its office footprint. The construction sector’s positive contribution to GDP was becoming a structural feature of the data rather than a cyclical bounce — reflecting the accumulated pipeline of deferred projects that were now, one by one, moving to execution.
What This Means
Homeowners entering 2017 are doing so in the most supportive macro environment since before the global financial crisis. The Fed has hiked, oil prices have recovered partially, and the Trump election has introduced uncertainties about US economic policy that will take years to resolve — but none of these developments have materially altered the domestic Jamaican conditions that support property ownership. Mortgage rates remain near historical lows. The economy is growing. Unemployment is at its lowest level in nearly a decade. For those who have been waiting for certainty before entering the property market, the lesson of 2015 and 2016 is that the economy does not wait for global uncertainty to resolve: the window is open now, and it has been open for three years.
Renters have experienced a year in which the cost-of-living relief of previous years has moderated but not reversed. Electricity tariffs have stabilised rather than continuing to fall. Food price inflation has ticked up modestly. But the labour market improvement — unemployment at 12.9 percent, private-sector job growth in accessible sectors — has provided genuine income improvement for the employed majority that has partially offset the moderation of cost relief. The social housing supply gap remains the structural problem that cyclical improvement alone cannot solve, and the government’s stated commitment to addressing it has not yet translated into the scale of supply that would make a material difference to the affordability picture for lower-income Jamaicans.
Developers can approach 2017 with the confidence of three consecutive record tourism years behind them and a residential market in genuine recovery. The OPEC output cut and partial oil price recovery will increase construction input costs at the margin, but the overall economics of residential development — lower borrowing rates, stronger buyer demand, improved NHT accessibility — remain favourable. The Trump uncertainty is a real question mark for the medium-term tourism demand that underpins hospitality investment decisions, but the 2016 data provides no evidence that US visitor growth to Jamaica is yet affected. Developers operating with a 2–3 year project horizon can proceed with reasonable confidence.
Businesses across Jamaica are entering 2017 with more questions about the global environment than at any time since 2013. Trump’s stated trade preferences, his administration’s positions on immigration, and the potential for US fiscal expansion to trigger faster Fed tightening than markets currently price are all genuine uncertainties with implications for Jamaica’s external environment. Domestically, however, the picture is constructive: the macro stabilisation has held through a change of government and through the most turbulent global year since 2008. The business confidence that Jamaica’s consistent reform track record has generated — among international investors, credit-rating agencies and multilateral institutions — is a genuine competitive advantage that was not present five years ago.
Diaspora Jamaicans are closing 2016 having watched their home island weather, without crisis, two of the most significant global economic shocks of the decade: Brexit and the Trump election. In both cases, Jamaica’s improved fiscal position, lower debt burden and diversified economic base provided insulation that would not have existed under the pre-reform conditions of 2012. Remittance inflows for 2016 are estimated at approximately US$2.3–2.4 billion — at or near the record level of 2015 — demonstrating the continued commitment of the diaspora to families and communities at home. For those with investment aspirations in Jamaica, 2016’s data — record tourism, falling unemployment, continued GDP growth, an unbroken IMF track record — makes the fundamental case as clear as it has ever been.
Outlook for 2017
Jamaica enters 2017 at a pivotal moment: the IMF EFF programme that has defined the country’s economic management since 2013 is now in its final year and a half. The transition from programme-supported adjustment to independent fiscal management — maintaining the discipline that the programme has enforced without the external anchor of quarterly IMF reviews — is the central economic governance challenge of the next two years. The government has signalled its intention to continue the fiscal framework beyond the programme’s end; the credibility of that signal will be tested as the 2018 election cycle approaches and the political pressures to loosen fiscal policy intensify.
The external environment has rarely been more uncertain. The Trump administration’s trade and immigration policies will take shape through early 2017, with implications for Jamaica’s tourism-dependent economy that are difficult to model in advance. The Fed’s projected three 2017 hikes, if delivered, will represent a meaningful acceleration of the normalisation cycle that Jamaica has absorbed without crisis so far. The oil price recovery, if sustained above US$55, will begin to erode the fiscal and current-account benefits that have been accumulating since 2014. And Brexit’s negotiation — Article 50 is expected to be triggered in early 2017, beginning a two-year clock on the UK’s departure — will continue to affect sterling, UK consumer confidence and the UK visitor flows that contribute 15 percent of Jamaica’s tourism revenue.
Against all of this, Jamaica has something it did not have three years ago: a track record. Fifteen consecutive IMF reviews. A debt ratio that has fallen more than 25 percentage points from its peak. Unemployment below 13 percent. Three consecutive tourism records. An economy that has grown, modestly but consistently, through three years of the most disruptive global environment since 2009. The story of 2017 will be whether that track record is sufficient to sustain economic momentum as the tailwinds of low oil, low rates and IMF programme discipline begin to moderate. If it is, 2017 will be the year Jamaica stops being a reform story and starts being a growth story. That is the most consequential transition in the island’s modern economic history.
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 2016.
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