Jamaica Economic Intelligence | Q3 2013 | July–September 2013
Key Findings
- Jamaica dollar breaches J$100 per US dollar for the first time
- Fed’s Bernanke clarifies taper intentions; emerging-market rout stabilises
- IMF completes first EFF quarterly review; next tranche disbursed
- Summer tourism arrivals post 4–5% year-on-year growth
- Pension reform bill advances through Parliament as structural benchmark
- BOJ holds benchmark rate steady as external uncertainty persists
When the Jamaica dollar slipped through J$100 to the US dollar in the summer of 2013, a psychological threshold crossed that no exchange-rate table could fully capture. Three digits where two once sufficed. Yet as the Federal Reserve’s taper panic gave way to clarification and cautious stabilisation, Jamaica’s underlying programme held its shape: the IMF signed off on its first quarterly review of the new Extended Fund Facility, the tourism sector delivered a solid summer season, and the reform agenda — pension overhaul, business environment improvements, public-sector wage discipline — continued its slow, difficult advance through Parliament and the negotiating table. The J$100 barrier was less a crisis than a milestone on a road Jamaica had been travelling for a decade.
The Taper Panic Recedes — But the Damage to Emerging-Market Confidence Lingers
The chain reaction triggered by Federal Reserve Chairman Ben Bernanke’s May 22 Congressional testimony — in which he raised the possibility of stepping down the pace of asset purchases in the next few meetings — had sent tremors through emerging-market currencies, bonds and equities from Brazil to India. By mid-June 2013 the US ten-year Treasury yield had risen from around 1.9 percent to nearly 2.6 percent, a move of more than 70 basis points in a matter of weeks, and capital had begun flowing back toward dollar-denominated assets with a speed that caught many developing-economy central banks off guard.
The tipping point in the other direction came on July 10, when Bernanke, speaking at the National Bureau of Economic Research in Cambridge, Massachusetts, emphasised that highly accommodative monetary policy remained necessary for the foreseeable future. Markets interpreted the remarks as a deliberate softening of the May message, and the dollar index retreated modestly while emerging-market currencies recovered a portion of their losses. The Indian rupee, Brazilian real and South African rand, which had each fallen sharply in June, began to stabilise through July and August, though none recovered to pre-taper levels.
For Jamaica, the transmission channel ran primarily through the foreign-exchange market. The Bank of Jamaica had been managing a controlled depreciation of the Jamaica dollar since 2012 — a policy that served the twin purposes of improving export competitiveness and reducing the real burden of foreign-currency obligations — and the taper panic accelerated what would have been a gradual move. The Jamaica dollar, which had entered 2013 around J$92–94 to the US dollar and breached J$97–100 by the end of June, pushed through the symbolic J$100 level in July 2013. By September it was trading in the J$102–104 range. The Bank of Jamaica intervened at the margins but did not attempt to defend any specific level, consistent with its programme commitments under the IMF Extended Fund Facility.
J$100: A Psychological Watershed With Real Economic Consequences
The breach of J$100 was more than symbolic. For Jamaican households, it meant that every US dollar of remittance income — and remittances had been running at approximately US$2 billion per year — now converted to at least J$100, a cushion that partially offset the higher import costs that depreciation also brought. For manufacturers and exporters, the weaker dollar improved price competitiveness in US and European markets, providing a marginal but real benefit to agro-processing, apparel and light manufacturing. For importers — and Jamaica imports the large majority of its fuel, food and consumer goods — each dollar of import cost now required more Jamaica dollars to settle, feeding into the headline inflation that the Statistical Institute of Jamaica was tracking in the mid-to-high single digits.
The tourism sector sat in a particularly interesting position relative to the weakening dollar. Room rates at Jamaica’s major all-inclusive resorts were priced in US dollars, meaning that revenue converted at the new, higher exchange rate delivered more local-currency income per tourist night — a benefit that flowed through hotel payrolls, local food procurement and tax receipts. At the same time, the cost of imported inputs — fuel for generators and air conditioning, imported food and beverage, foreign machinery parts — rose in local-currency terms. The net effect was broadly positive for resort operators with a high share of Jamaica-sourced labour and food, and broadly neutral for heavily import-dependent operators.
In the real estate sector, the dollar’s move through J$100 had a dual effect that was becoming familiar to Kingston developers and diaspora buyers alike. Properties priced in US dollars — particularly in the upper segments of the Kingston and resort-area markets — became more expensive in Jamaica-dollar terms for locally financed buyers, compressing demand at the top. Meanwhile, diaspora buyers sending US dollars found that their purchasing power in Jamaica-dollar terms had improved, maintaining interest in residential investment at a time when the domestic economy remained sluggish.
IMF Passes the First EFF Review: The Programme Holds
The structural centrepiece of Q3 2013 was the completion of the first quarterly review under Jamaica’s four-year IMF Extended Fund Facility, which had been signed on May 1, 2013. The IMF’s review — conducted by a staff mission that assessed Jamaica’s performance against the quantitative performance criteria and structural benchmarks agreed at the time of programme approval — concluded that Jamaica had met the key targets for the period through June 2013. The International Monetary Fund approved the completion of the review and the disbursement of the associated tranche of Special Drawing Rights, maintaining the flow of programme financing that underpinned the government’s external liquidity position.
The review’s positive outcome reflected genuine progress on several fronts. The primary fiscal surplus — the programme’s anchor target — was tracking at or above the agreed path, driven by a combination of revenue measures from the 2013/14 Budget (rationalisation of GCT exemptions, adjustments to the income tax threshold) and restraint on non-capital expenditure. Public-sector wage negotiations remained a sensitive area: the government was seeking multi-year wage agreements with public-sector unions within tight fiscal envelopes, and the process was slow, contested and politically costly. But the aggregate wage bill was holding within programme parameters.
The National Debt Exchange, completed in February 2013, had restructured approximately J$860 billion in domestic bonds, reducing the interest payment burden on the budget by an estimated J$40–50 billion annually and extending maturities in ways that reduced rollover risk. The breathing room created by the NDX was the foundation on which the EFF programme rested: without the lower debt-service costs, the primary surplus targets would have been unachievable without even deeper expenditure cuts. The first review’s successful completion validated the sequencing — NDX first, EFF second — that the Portia Simpson-Miller administration had pursued.
Pension Reform: The Hard Structural Benchmark
Among the structural benchmarks embedded in the EFF agreement, pension reform stood out as the most politically sensitive and technically complex. Jamaica’s public-sector pension arrangements — defined-benefit schemes for central government employees and a range of statutory bodies — carried long-term liabilities that were not fully funded and that represented a significant contingent fiscal risk. The reform agenda aimed to introduce a defined-contribution element for new entrants, cap pensionable salaries, extend retirement ages progressively, and bring the National Insurance Scheme into closer actuarial alignment with its long-term obligations.
The Pensions (Public Sector) Act and associated legislation were advancing through Parliament during Q3 2013, though the process was contentious. Public-sector unions, whose members stood to be most directly affected, mounted sustained opposition to provisions that would reduce the benefits available to younger workers relative to those already in the system. The government negotiated modifications to some provisions while holding firm on the core architecture of the reform. The pension reform bill’s progression through the legislative process was being monitored closely by IMF staff as a structural benchmark with a specific completion date, adding programme credibility pressure to the political imperatives of managing union relations.
Tourism Summer: Arrivals Up, Occupancy Solid
Jamaica’s summer tourism season, covering the peak family travel months of July and August, delivered solid results in Q3 2013. Stopover arrivals — the highest-spending category of visitor — were running approximately 4–5 percent ahead of the comparable period in 2012, according to preliminary data from the Jamaica Tourist Board. The growth reflected both the resilience of the US leisure market — where consumer confidence was recovering from the 2012 fiscal-cliff anxieties — and the continued competitive positioning of Jamaica’s resort products against Caribbean alternatives.
The Sandals and Iberostar resort groups, both of which were in various stages of expansion or refurbishment projects across the island, reported strong occupancy through the summer peak. Montego Bay’s Sangster International Airport processed higher passenger volumes than in the same period of 2012, a leading indicator of broader tourism performance. Cruise arrivals, which generate less per-visitor spend but significant port and retail revenue, were also running ahead of 2012 levels. The aggregate picture was one of a tourism sector that had effectively absorbed the post-September-11 shock of 2001 and the global-financial-crisis contraction of 2009–2010 and was now operating at or near historic capacity in several major resort corridors.
The sector’s performance had important fiscal implications. Tourism generates earnings in US dollars, contributing directly to Jamaica’s foreign-exchange supply and reducing the pressure on the Bank of Jamaica’s intervention capacity. Hotel and restaurant tax receipts, general consumption tax on tourism inputs, payroll taxes on resort employment — all of these flowed into the budget at a time when the government needed every dollar of revenue to meet programme targets. A strong summer season was not merely a sectoral success story; it was a fiscal buffer.
BOJ Holds Rates; Easing Path Visible but Cautious
The Bank of Jamaica maintained its benchmark overnight rate through Q3 2013, keeping monetary policy on hold as external uncertainty — taper anxiety, EM volatility, the unresolved trajectory of Fed normalisation — made pre-emptive easing inadvisable. The NDX had created the fiscal space for a meaningful reduction in the debt-service burden; BOJ rate cuts would, when they came, reinforce that by reducing the cost of private-sector borrowing and supporting economic activity. But timing mattered, and the July–September quarter was not the moment.
The BOJ’s quarterly monetary policy reports during this period consistently noted the balance between the desire to support growth through lower rates and the need to maintain sufficient policy credibility to prevent depreciation expectations from becoming self-fulfilling. With the Jamaica dollar already through J$100 and inflation in the mid-to-high single digits, aggressive rate cuts risked triggering a further depreciation spiral that would undermine the programme’s macroeconomic targets. The holding pattern was a deliberate choice to preserve optionality for when the external environment became clearer.
Commercial banks, meanwhile, were seeing some improvement in loan quality as the NDX restructuring removed a portion of the government paper overhang that had historically crowded out private-sector lending. The spread between deposit rates and lending rates remained wide by international standards, reflecting Jamaica’s persistently high operating costs in banking — crime-related security costs, branch infrastructure, provisioning requirements — and the limited competition in the retail lending market. The path to lower lending rates for Jamaican businesses and households ran through sustained monetary policy easing combined with structural reforms to reduce the cost of doing business in the financial sector.
What This Means
Homeowners face the sharpest immediate impact of the dollar’s move through J$100. Mortgages denominated in US dollars or indexed to the exchange rate are now significantly more expensive in local-currency terms than they were twelve months ago. Those with Jamaica-dollar fixed mortgages are better insulated, but the general cost of living — fuel, imported food, household goods — is rising alongside the exchange rate. Homeowners considering refinancing should seek advice on currency exposure before locking into new facilities.
Renters in Kingston and major urban centres are experiencing rental inflation as landlords pass through higher operating costs. Utility bills — electricity above all — are rising with oil prices and the exchange rate, and landlords in the inner-city market are adjusting rents accordingly. The broader rental market remains constrained by limited purpose-built rental supply, meaning that renters have limited ability to shop for alternatives and absorb cost increases through household budget compression.
Developers operating in the resort corridor and upper residential segments are navigating a mixed picture. The weaker Jamaica dollar improves the competitiveness of Jamaican resort product in international markets, supporting occupancy and revenue for hotel developers. In residential development, construction costs in Jamaica-dollar terms are rising as imported materials become more expensive, while the domestic buyer pool — particularly for middle-market housing — faces tighter affordability constraints. Diaspora demand, priced in US dollars, provides a partially offsetting source of purchasing power.
Businesses across the Jamaican economy are navigating the double bind of a weaker currency and restrained domestic demand. Exporters and import-competing manufacturers benefit marginally from improved price competitiveness, but the benefit is offset by higher imported input costs and the continued difficulty of access to affordable credit. Businesses in the tourism supply chain — food processors, craft producers, entertainment providers — are among the clearest beneficiaries of the summer season’s solid performance. The IMF programme’s business environment benchmarks, including improvements to the Companies Office registration process and land titling, remain important medium-term priorities.
Diaspora remitters to Jamaica are finding that their dollar transfers go further than at any point in history. At J$102–104 to the dollar, every US$200 monthly remittance delivers over J$20,000 — a meaningful contribution to household budgets in an economy where median wages remain well below equivalent US levels. Diaspora investors looking at Jamaican real estate are similarly advantaged: Kingston and resort-area properties priced in US dollars represent better purchasing-power value than a year ago, even accounting for any exchange-rate and political risk premium.
Outlook
The critical question entering Q4 2013 is whether the Federal Reserve will announce the beginning of QE tapering before year-end — and if so, whether emerging-market currencies will absorb the announcement more calmly than they absorbed Bernanke’s May hint. Market consensus in late September 2013 is that the Fed will begin tapering by December, but the September FOMC meeting — at which many had expected an announcement — produced no change, surprising markets and prompting a fresh look at the strength of the US recovery data that would need to materialise before tapering could begin. The delay provides a further window of relative calm for Jamaica and other emerging markets.
Domestically, the successful first IMF review positions Jamaica to complete subsequent reviews and maintain the programme’s financing architecture through 2014 and beyond. The pension reform legislation, if passed before year-end, will represent a significant structural benchmark achieved and will demonstrate to international investors that the reform agenda is progressing. BOJ rate cuts, when they arrive, will provide a demand stimulus that the economy — which has been in or near stagnation for much of the post-crisis period — genuinely needs.
The J$100 threshold has been crossed and will not be recrossed in the near term. The structural drivers of Jamaica-dollar depreciation — the current-account deficit, the import dependence, the long legacy of high public debt — do not resolve in a single quarter or a single year. What the EFF programme offers is a managed path toward fiscal consolidation and structural reform that, over its four-year duration, should bring the primary surplus, the debt-to-GDP ratio and the external current account to more sustainable positions. The dollar at J$100 is not a disaster; it is the price Jamaica is paying for a decade of adjustment deferred, and it is a price that the EFF programme aims, slowly, to bring under control.
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 period July–September 2013.
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