Coke Extradition Clouds Jamaica’s Investment Climate as Housing Market Awaits IMF Clarity — November 2009

Publication Date: 3 November 2009 | Coverage Period: 3 October–2 November 2009 | Category: Monthly Review

Month in Brief

• US extradition request for Christopher Coke arrives; Golding government declines to act immediately.
• Jamaica–IMF Stand-By Arrangement discussions at advanced stage; formal agreement expected soon.
• US GDP returned to positive growth in Q3 2009, the first expansion after five contracting quarters.
• Jamaica dollar under sustained pressure; exchange rate approaching J$92–93 per US dollar.
• Commercial mortgage rates unchanged; NHT remains only viable ownership pathway for most households.
• Jamaica full-year 2009 GDP contraction now broadly estimated at 3–4 per cent by external analysts.

Housing Market Conditions

Jamaica’s residential property market enters November 2009 in fundamentally the same posture it has occupied throughout the year: transaction volumes suppressed well below historical norms, financing accessible primarily through the National Housing Trust for most buyers, rental demand firm but purchase activity limited, and property values in the mid-to-upper segment under gentle but persistent downward pressure. The October coverage period produced no material change in these dynamics.

The introduction of the Coke extradition dispute as a political variable during the coverage period has added an overlay of uncertainty to the investment environment. When Jamaica’s political stability — or the perception of it — is called into question, the first casualty is typically discretionary foreign investment, including the kind of tourism-linked and retirement-oriented real estate investment that has historically supported property values in resort parishes. The extradition matter is at an early stage and its resolution is uncertain, but its existence as a diplomatic friction point between Jamaica and its most important trading partner and remittance source is unwelcome at a moment of already-fragile recovery.

In the Kingston corporate area, October is traditionally a period of increased property market activity as households make year-end residential decisions. In 2009, this seasonal pattern has been muted. Some professional-class buyers who deferred decisions through the depth of the recession are beginning to re-engage with the market, taking advantage of the pricing softness that has emerged in the J$8–18 million segment. A modest uptick in viewing activity was noted by practitioners in St. Andrew, but it has not yet translated into a material increase in concluded transactions.

The north coast property market is monitoring the Coke extradition situation with particular attention. Foreign buyers — the primary demand driver in resort villa, retirement home, and vacation condominium segments — are acutely sensitive to reputational and stability signals about their destination countries. An extended or escalating dispute between Jamaica and the United States government would be likely to chill already-subdued buyer enquiries from North America.

Government Policy and the IMF

The IMF Stand-By Arrangement is understood to be at an advanced stage of negotiation. A formal agreement — expected to be announced before year end — would provide Jamaica with access to international financial support and, critically, an external framework for fiscal credibility that might over time reduce the risk premium embedded in Jamaican interest rates. For the housing market, a credible IMF programme that begins to stabilise Jamaica’s sovereign metrics would be the most important medium-term positive development possible.

The Golding government is simultaneously managing the Coke extradition matter, the IMF negotiations, and the fiscal consolidation demands of the 2009–10 budget. The interaction between these pressures is complex. The IMF programme’s success depends in part on maintaining Jamaica’s relationship with the US — a relationship that is being tested by the extradition dispute. The government has signalled that it is seeking legal advice before responding to the extradition request, a stance that preserves options but does not resolve the underlying diplomatic tension.

For housing policy, the NHT continues to be the operative instrument. Market observers note that discussions are under way about whether loan ceiling revisions can be implemented before the end of the financial year. A ceiling revision to J$4.5 million or above would be a significant positive for the affordable segment, expanding the addressable buyer pool for units currently priced just above the existing threshold. The actuarial case for such a revision, in a low-inflation, high-unemployment environment, is arguably more supportable than in a boom period.

There is also quiet discussion in financial circles about the possibility that the government may need to undertake some form of domestic debt restructuring in 2010 to place its fiscal trajectory on a sustainable path. Such a restructuring — if it occurs — would primarily affect the holders of Jamaican government bonds, including domestic financial institutions. The implications for the housing market would depend on its design, but any scenario that reduces the interest rate burden on the government over time would have positive second-order effects on the broader credit environment.

Construction Sector

The construction sector has stabilised at its 2009 low but has not yet begun a meaningful recovery. October is typically an active month for construction commencement, as projects initiated at the start of the dry season can progress through the first quarter of the following year without weather disruption. In 2009, no significant new private residential project commencements were recorded, and the commercial pipeline remains effectively frozen.

Government-supported housing schemes continue to be the exception. HAJ projects in St. Catherine and the Spanish Town corridor are advancing, with completion of some phases anticipated in the first half of 2010. These units — priced within NHT-eligible ranges — will provide some relief to the supply constraint that is suppressing transactions in the affordable segment. Their timely delivery is important both for housing market function and for the government’s capacity to demonstrate policy delivery in a challenging environment.

Material costs in October remained elevated relative to the affordable housing development margin. Oil’s continued recovery toward the US$75–80 range by late October is adding to energy and transportation costs in the sector. Industry bodies have renewed calls for targeted relief on construction materials used in affordable housing — a measure that would require budget allocation but could be structured as a targeted duty remission rather than a broad subsidy, limiting fiscal cost.

Investment Climate

The Coke extradition request has introduced a variable into Jamaica’s investment environment that did not exist a month ago. The diplomatic dimension — a formal US government request being declined, at least initially, by a government that depends heavily on US trade, aid, and diplomatic relationships — is being closely observed by international investors and credit analysts. Jamaica’s foreign exchange reserves, its tourism revenue, and its diaspora remittances all depend significantly on the US relationship, and any deterioration in that relationship carries real economic risk.

At the same time, US GDP growth of 3.5 per cent in Q3 2009 — reported on 29 October and the first positive quarter in five — provides the clearest signal yet that the global recession has ended. For Jamaica, this is unambiguously positive in direction: a recovering US economy means improving employment prospects for the Jamaican diaspora, rising travel budgets for US tourists, and increased risk appetite among US investors with Caribbean exposure. The question is how quickly these benefits flow through to the Jamaican economy, and whether any deterioration in the bilateral diplomatic relationship might offset them.

Diaspora and Remittances

Remittance data for Q3 2009 is not yet fully reported, but preliminary indicators suggest that the year-on-year decline has moderated somewhat from the double-digit contractions of the first half of the year. US employment data — while still showing an elevated unemployment rate of 10.2 per cent in October — shows some stabilisation in the pace of job losses, which is a leading indicator of future remittance capacity. However, the Jamaican diaspora in construction and services has been among the most severely impacted segments of the US workforce, and recovery of sending capacity in this community will lag the aggregate employment picture.

The political dimension of the Coke extradition matter is, paradoxically, also a diaspora issue. Many overseas Jamaicans follow domestic political developments closely and form views about Jamaica’s investment environment that influence their remittance-driven property decisions. Any prolonged diplomatic controversy is likely to reinforce diaspora caution about committing capital to Jamaican real estate until the matter is resolved.

Affordability

The November affordability review marks the end of a year in which affordability conditions for Jamaican residential property have been at their most challenging in living memory for the majority of households. The combination of 14–18 per cent commercial mortgage rates, GDP contraction of three to four per cent, rising unemployment approaching 15 per cent, and declining remittances has removed the three principal preconditions for healthy housing market function: accessible credit, stable income, and buyer confidence.

The NHT has been the market’s lifeline, and the Trust’s institutional resilience through 2009 reflects the strength of its contributory funding model and the management discipline that has kept its loan programme operational. For NHT-qualifying households, the affordability differential — zero to five per cent versus 14 to 18 per cent — represents the difference between home ownership as a realistic prospect and home ownership as an aspirational impossibility. Protecting and expanding the NHT programme is the single most important housing policy imperative for the year ahead.

Looking Ahead into 2010

As this edition closes out the 2009 review series, the housing market’s outlook for 2010 is cautiously more constructive than conditions at the start of this year would have warranted. The global recession has ended, by the evidence of US GDP data. The IMF programme, when finalised, will provide external fiscal anchor and potentially create conditions for a gradual reduction in Jamaican interest rates over the medium term. Tourism, while well below 2008 levels, has stabilised and may recover somewhat in 2010 as H1N1 anxiety recedes and US consumer confidence rebuilds.

The risks are also clear. The Coke extradition dispute, unresolved, is a political and reputational overhang that could complicate Jamaica’s relationship with its most important economic partner at a moment of recovery. Domestic debt dynamics — the subject of increasingly frank discussion in financial circles — may require a restructuring intervention in 2010 that, while ultimately positive for fiscal sustainability, creates near-term uncertainty for financial institutions and investors. And the housing market’s structural problems — the 100,000-plus unit deficit, the misalignment between NHT ceilings and construction costs, the effective inaccessibility of commercial financing for most households — predate the recession and will persist beyond it without deliberate policy action.

The market has survived 2009. Surviving it with the NHT intact, the affordable housing pipeline advanced, and the structural case for home ownership still compelling is the best that could have been hoped for under the circumstances. The task for 2010 is to begin the work of recovery.

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