The Tourism Machine Went Silent. The Fiscal Cushion Held.

Jamaica Economic Intelligence | Q2 2020 | April–June 2020

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Key Findings

• Jamaica’s GDP contracts approximately 18 percent in Q2 2020 — the most severe quarterly decline in the island’s recorded modern economic history — as tourism, its primary foreign exchange earner, generates essentially zero revenue for the full quarter
• WTI crude oil futures trade at negative $37.63 per barrel on April 20, the first negative oil price in recorded history, as a glut of supply and collapsed global demand overwhelm storage capacity; the episode signals the depth of the pandemic’s economic dislocation
• The IMF approves a Rapid Financing Instrument of approximately $520 million for Jamaica in May 2020, providing emergency balance-of-payments support at a moment when tourism revenues and fiscal buffers are simultaneously under strain
• The S&P 500 delivers its best quarterly performance since 1998 — rising approximately 20 percent — as Federal Reserve liquidity and $3 trillion in US fiscal stimulus support a market recovery whose disconnect from the underlying economic data defines the quarter’s central tension
• The United States records its worst quarterly GDP contraction since the Great Depression — a 32.9 percent annualised rate — as unemployment peaks at 14.7 percent in April before beginning a partial recovery; US remittances to Jamaica prove more resilient than tourism revenues, providing an unexpected partial buffer
• Jamaica announces in June that its borders will reopen to international tourism in October 2020, providing the first concrete horizon for the industry’s recovery and the clearest signal that the government intends to rebuild rather than defer

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It is April 20, 2020, and oil is trading at negative $37.63 per barrel. Not low. Not cheap. Negative. Traders who hold WTI crude futures contracts expiring that day are paying counterparties to take the oil off their hands, because the physical storage infrastructure of the United States — the tank farms and pipeline terminals of Cushing, Oklahoma — is full, and there is nowhere left to put it. The pandemic has destroyed global oil demand so completely, so instantly, that the world’s most traded commodity cannot find a buyer at any positive price. On the same day, Jamaica’s Sangster International Airport in Montego Bay is recording its forty-first consecutive day of zero international commercial arrivals. The oil price and the arrivals count are, in their different ways, making the same point: the global economy has never experienced a demand shock of this speed and totality. Jamaica is experiencing the demand shock in its most concentrated form — a tourism-dependent economy with its primary source of foreign exchange simply absent, with no precedent in its modern economic history for a disruption of this kind, and with a fiscal framework that will determine whether absence becomes catastrophe or crisis becomes managed.

The Empty Quarter: Jamaica’s GDP Contracts

The Q2 2020 GDP data that the Statistical Institute of Jamaica would publish in subsequent months told a story that required no statistical training to understand: the Jamaican economy contracted approximately 18 percent year-on-year in the April–June quarter, the sharpest single-quarter decline in the island’s modern recorded economic history. The contraction was not evenly distributed across sectors. Tourism and accommodation — which in 2019 had employed tens of thousands of Jamaicans and generated approximately 9 percent of GDP directly, with tourism-related activities accounting for a third or more of the island’s total economic output — fell to essentially zero. The resorts were empty. The all-inclusive properties, which had been generating the occupancy revenues that funded staff salaries, supply chain purchases and maintenance operations, were closed. The tour operators, transportation providers, craft vendors, entertainers and informal economy participants whose livelihoods moved with tourist spending were, in Q2 2020, either idle or surviving on government support.

The sectors that cushioned the blow were the ones that the pandemic’s specific nature had spared. The business process outsourcing industry — which in 2019 had been one of the reform period’s most visible success stories, with call centres and back-office operations employing tens of thousands across Montego Bay and Kingston — transitioned, with varying speed and difficulty, to remote working arrangements. The work itself had not disappeared; the global companies that outsourced customer service and administrative functions to Jamaica continued to need those functions performed, and the BPO operators’ ability to adapt their workforce to home-based operations partially preserved the sector’s employment and revenue contribution through the quarter. The agriculture sector, which had been a secondary beneficiary of the reform period’s credit expansion, continued to produce; domestic food supply was maintained without disruption. The financial sector, backstopped by the Bank of Jamaica’s liquidity support and regulatory flexibility, remained functional. None of these sectors were adequate substitutes for the absent tourism revenues. But they prevented the contraction from being worse than it was.

The government’s fiscal response to the Q2 contraction was the first comprehensive test of the reform period’s legacy in a genuine crisis. The Coronavirus Allocation of Resources for Employees — the CARE programme — provided direct cash transfers to workers whose employment had been disrupted by the pandemic, funded through emergency budgetary allocations that the primary surplus discipline of the reform years had been building toward a different purpose. The decision to run a fiscal deficit — the first since the reform programme began — was unavoidable and correct; the question was not whether to borrow but at what cost, on what terms and with what effect on the debt trajectory that seven years of primary surplus had so painfully constructed. The answer, given Jamaica’s improved creditworthiness and the IMF support that arrived in May, was more favourable than it would have been in any prior period of Jamaica’s modern economic history.

Oil Goes Negative: The Pandemic’s Price Signal

The April 20 episode in which WTI crude oil futures traded at negative $37.63 per barrel was, in its technical structure, a function of the specifics of the futures contract settlement mechanism and the physical constraints of the Cushing, Oklahoma storage hub. Traders holding front-month contracts as the settlement deadline approached faced a choice between taking physical delivery of oil they had no means to store and paying counterparties to relieve them of the obligation; the second option was cheaper. The negative price was therefore, in a narrow technical sense, a storage problem as much as a pure demand problem. But the conditions that made the storage problem insurmountable — the OPEC-Russia oil price war that had begun in March, layered on top of a pandemic-driven demand collapse that had reduced global oil consumption by roughly 25 percent — were entirely a function of the pandemic’s economic consequences.

For Jamaica, the negative oil price was a signal of conditions that were, in their direct effects, actually modestly positive. Jamaica imports essentially all of its petroleum needs; a sustained collapse in global oil prices reduces the island’s fuel import bill and provides some relief to the electricity generation costs and transportation fuel prices that affect every sector of the domestic economy. The $30 oil that prevailed through much of Q2 2020 was cheaper by half than the $60 oil of 2019 — a terms-of-trade improvement that, in more normal circumstances, would have been a meaningful positive for Jamaica’s external accounts. In Q2 2020, the external accounts were under sufficient pressure from the tourism revenue collapse that the oil price relief was a secondary consideration rather than a macroeconomic tailwind. But it was real, and it contributed to the management of the external position in a quarter that tested the reserve buffers the reform period had accumulated.

The IMF Returns: This Time as Ally

The International Monetary Fund’s approval in May 2020 of approximately $520 million in emergency financing for Jamaica through its Rapid Financing Instrument was, in its symbolic dimension, the most vivid illustration the reform period could have produced of what institutional transformation meant in practice. The IMF that Jamaica approached in May 2020 was not the IMF that Jamaica had approached in 2013 — and Jamaica was not the Jamaica of 2013. In 2013, Jamaica had arrived at the Fund in a position of fiscal desperation, needing structural adjustment programmes, primary surplus targets, quarterly performance reviews and conditionality requirements that would govern the island’s fiscal and monetary policies for six years. In May 2020, Jamaica arrived at the Fund as a country whose fiscal and institutional track record qualified it for rapid-disbursing emergency support without the programme conditionality that the 2013 context had required. The IMF was disbursing, not supervising. The relationship had fundamentally changed.

The RFI proceeds provided immediate balance-of-payments support at a moment when tourism revenues — which would normally have been generating the foreign exchange that funded Jamaica’s import bills, debt service obligations and reserve maintenance — had fallen to near zero. The Bank of Jamaica’s foreign exchange reserve position, which the reform years had built to levels that exceeded standard adequacy benchmarks, was the first line of defence; the IMF financing was the second. Together, they provided the liquidity buffer that prevented the external shock from producing the kind of currency crisis that Jamaica had experienced in every prior decade and had specifically designed the reform programme to avoid. The J$ depreciated through the crisis period — orderly, managed, within the range that the BOJ’s intervention framework targeted — rather than collapsing in the disorderly, confidence-destroying manner that pre-reform Jamaica had experienced in comparable external shocks.

The Market Recovery: Divorced from Reality

The S&P 500’s performance in Q2 2020 was, by the numbers, the best quarterly gain since 1998: an increase of approximately 20 percent from the end of March to the end of June. The index that had fallen 34 percent in 33 days had recovered more than half of that loss in the subsequent quarter, driven by the Fed’s unlimited liquidity, the CARES Act’s $2.2 trillion and the additional fiscal and monetary support measures that flowed through April, May and June. By early June, the S&P 500 had turned positive for the year — a feat that, when the March 23 lows were fresh, had seemed improbable over any reasonable time horizon. The Nasdaq composite, driven by the technology companies whose revenues had benefited from the pandemic’s acceleration of digital adoption, reached new all-time highs in June.

The disconnect between financial market performance and economic reality was the defining feature of Q2 2020 and the subject of almost universal commentary. US GDP contracted at a 32.9 percent annualised rate in the second quarter — the worst in the history of the data series. US unemployment peaked at 14.7 percent in April, the highest since the Great Depression, before recovering partially to 11.1 percent by June as partial reopenings restored some employment. More than 45 million Americans filed initial unemployment insurance claims in the ten weeks between mid-March and late May. And yet the S&P 500 posted its best quarterly performance in 22 years. The explanation lay in the scale of the monetary and fiscal response: investors were buying assets whose values were being implicitly guaranteed by an unlimited Fed backstop and whose near-term cash flow losses were being covered by direct government transfers at an unprecedented scale. The market was pricing the recovery that the stimulus was designed to produce, not the contraction that the pandemic had created.

Remittances Hold: The Diaspora’s Unexpected Resilience

Among the economic developments of Q2 2020 that defied the expectations of almost every forecaster, the resilience of remittances to Jamaica was among the most consequential and the least anticipated. Conventional economic logic suggested that remittances to developing countries would fall sharply in a pandemic concentrated in the high-income countries where their diasporas worked: US unemployment at 14.7 percent meant fewer diaspora Jamaicans with jobs, fewer jobs meant less income, less income meant less to remit. The data did not follow the prediction. Remittance flows to Jamaica in Q2 2020 held, and in some months actually exceeded the comparable prior-year period. The explanations, as they emerged through the quarter, pointed to the specific character of the US fiscal response: the $1,200 direct payments and the $600-per-week enhanced unemployment benefits provided diaspora Jamaicans with income even when their employment had been disrupted, and a significant portion of that government-transferred income was remitted to family members on the island. The CARES Act, in an indirect but measurable way, was supporting Jamaican household incomes thousands of miles from Washington.

The remittance resilience mattered enormously for Jamaica’s external account management through Q2 2020. In a normal year, tourism and remittances together accounted for roughly a third of Jamaica’s GDP in foreign exchange earnings. With tourism at zero, remittances became not a secondary earnings source but the primary one — the main channel through which US dollars entered the Jamaican economy and provided the foreign exchange that the BOJ needed to manage the J$’s depreciation within orderly bounds. That the diaspora maintained and in some cases increased its transfers home in the depths of the pandemic was a demonstration of a social solidarity that no economic model had captured and no policy instrument had engineered.

October: A Date, a Decision, a Horizon

Jamaica’s announcement in June 2020 that international tourism would resume in October — that the borders that had closed to commercial flights in March would reopen to visitors in the fourth quarter — was the most economically significant domestic policy decision of the quarter. The announcement did not resolve the question of what a COVID-era tourism recovery would look like; it provided a date around which the industry could begin to organise. The resort operators who had maintained their physical plants through the shutdown, the airline partners who needed lead time to restore route schedules, the tour operators who needed advance notice to package itineraries, and the tens of thousands of workers who needed to know when they would be called back to their hotels — all of them required a horizon. October was that horizon.

The June decision to target October reopening reflected a government judgment about the asymmetric risks of the two alternatives. A decision to keep borders closed until COVID-19 was eliminated or controlled to a higher standard would have protected public health at the cost of an indefinite extension of the tourism sector’s zero-revenue period — an extension whose fiscal consequences, given Jamaica’s budget deficit and the debt trajectory, would compound through the second half of the year. A decision to reopen earlier, before adequate health protocols were in place, would have risked both public health outcomes and the international perception of Jamaica as a safe destination, potentially destroying the brand equity that six consecutive record years had built. October represented the government’s best judgment about the earliest point at which a safe, structured, protocol-based reopening was achievable. As a signal to investors, to the industry and to workers across the tourism supply chain, it was unambiguous: Jamaica intended to reopen, and it intended to do so at scale.

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What This Means

Homeowners close Q2 2020 in a property market that has absorbed the pandemic’s deepest economic quarter without a structural collapse, but with the employment conditions that sustained residential demand fundamentally disrupted. The Fed’s zero interest rates and unlimited QE are holding global asset values above where pure economic logic would place them in a quarter of the deepest peacetime GDP contraction in memory. NHT mortgage operations continue, and the institution’s long-term structural soundness is not in question. The medium-term property case — built on the labour market improvement and income growth of the reform years — is suspended, not reversed. The October reopening announcement is the most direct signal available that the employment recovery will begin in the second half of the year. How quickly the recovery in tourism employment translates back into residential demand will be the property market’s defining story for 2021.

Renters are experiencing Q2 2020 as a labour market catastrophe of unprecedented speed. Workers who in October 2019 had been employed in the tightest labour market in Jamaica’s modern recorded history are, in April 2020, idle or dependent on the CARE programme’s direct transfers. The government’s social protection response has provided a floor; the question is whether the floor is sufficient for the duration of the closure, and whether the hospitality sector skills and employment relationships that the reform years built are preserved or eroded by a prolonged absence. The October reopening horizon is the most important labour market signal of the quarter: it provides a target around which hotels can begin planning staff recalls and workers can anticipate the restoration of income. The period between July and October — the gap between the quarter’s end and the announced reopening — is the bridge that the social protection system must hold.

Developers processing Q2 2020 are sitting with the most complex risk picture this series has presented. The demand-side fundamentals of the pre-pandemic period — the tightest labour market, the widest tourism margins, the most favourable financing conditions — are all suspended. The residential development opportunity that the reform period created is not gone; it is deferred. The fiscal and monetary frameworks that made Jamaica an investable market are intact, reinforced rather than undermined by the government’s managed response to the crisis. The IMF’s rapid support, the BOJ’s maintenance of currency stability and the credible October reopening announcement are each evidence that the institutional quality that distinguished Jamaica’s reform period has survived the pandemic’s first two quarters. Developers who maintain positioning through the crisis will re-enter an economy that has lost no structural improvement but will need to recover its tourism employment before residential demand fully restores.

Businesses across Jamaica close Q2 2020 having navigated the most severe external shock in the island’s modern economic history with the institutional tools that the reform period assembled: a central bank with reserves, credibility and a functioning inflation-targeting framework; a government with the fiscal track record that qualified it for rapid IMF support; a currency management framework that has delivered orderly rather than disorderly depreciation; and a business support programme that, while imperfect and under-resourced relative to the shock’s scale, has maintained a floor under the economy’s most vulnerable participants. The BPO sector’s adaptation to remote working has been the quarter’s most important domestic commercial story: the proof that Jamaica’s formal-sector service economy had the digital and logistical capacity to maintain operations through a global mobility shutdown is a competitive asset that will outlast the pandemic itself.

Diaspora Jamaicans closing Q2 2020 from New York, Toronto, London and Miami have lived through the pandemic’s most acute phase in their countries of residence and have, in many cases, continued to remit to family on the island at levels that the pre-crisis framework would not have predicted. The solidarity that remittances represent — the transfer of a portion of diaspora income to support family members at home — has been, in Q2 2020, one of the most consequential economic acts available to individual Jamaicans. For those with investment positions in Jamaica, the quarter has tested the thesis in a way that the reform period’s more gradual challenges did not: a zero-tourism, 18-percent-contraction quarter is the sharpest stress test the series has encountered. The architecture has not collapsed. The fiscal space was used. The external position was managed. The October horizon exists. The investment case has been stress-tested. It has not failed.

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Outlook

Q3 2020 will be the transition quarter — the period between the full closure of Q2 and the announced October reopening. July, August and September will see Jamaica’s domestic economy operating with tourism still absent from the production side but with the October date now providing an organising horizon for the industry’s return. The labour market data that STATIN releases through Q3 will reveal the full depth of the employment contraction that the closure has produced; the fiscal data will reveal the cost of the CARE programme and the budget deficit’s trajectory. Both sets of data will be the worst Jamaica has recorded in the modern era. That is the price of the pandemic’s Q2 impact, now being paid in Q3’s statistics.

The external environment in Q3 2020 will be shaped by the pandemic’s second-wave dynamics in the United States — Jamaica’s primary source market — and by the global vaccine development timeline whose early Phase III data will begin to emerge in the autumn. A US second wave that produces new lockdowns and sustained consumer caution would delay both the Jamaica reopening’s success and the remittance flows that have provided its secondary support. A US recovery that sustains consumer confidence into the autumn would support the October reopening’s demand side in ways that the April–June period cannot yet evidence. The pandemic that ended Q1 2020 on a note of shock has, by Q2’s end, become a managed crisis rather than an unmanaged one. Q3’s task is to keep it that way — and to be ready for October when it comes.

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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 2020: April–June 2020.

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