Jamaica Economic Intelligence | Q2 2014 | April–June 2014
Key Findings
- ISIS seizes Mosul on June 10; Brent crude spikes toward US$115 on Iraq supply fears
- Fed tapers at April and June meetings; monthly purchases down to US$35B
- Jamaica’s 2014/15 Budget maintains primary surplus path; third IMF review passed
- BOJ extends rate-cutting cycle; domestic interest costs on sustained downward trend
- Jamaica dollar depreciates to J$111–114 range by end June
- Tourism spring season delivers modest year-on-year growth in shoulder period
The second quarter of 2014 delivered its most dramatic news from the Middle East. When fighters from the Islamic State of Iraq and Syria captured Mosul — Iraq’s second city — on June 10, triggering a rapid advance toward Baghdad, oil markets reacted with the sharpest single-week spike since the Libyan crisis of 2011. Brent crude, which had been trading around US$108–110 per barrel, pushed toward US$115 before markets concluded that the southern oilfields remained secure. For Jamaica, still paying its US$1.4 billion annual oil import bill at prices that had now been above US$100 for more than three years, the Mosul spike was an unwelcome reminder of the economy’s structural vulnerability to global energy prices. Yet even as the geopolitical headlines dominated, Jamaica’s programme kept its rhythm: the 2014/15 Budget held the fiscal line, the IMF’s third quarterly review was completed, the Bank of Jamaica’s easing cycle continued, and the tourism sector delivered another modest quarter of year-on-year growth.
ISIS and Oil: The Middle East Returns to the Price Equation
The Islamic State’s rapid military advance through northern Iraq in June 2014 — capturing Mosul on June 10, Tikrit two days later, and threatening Kirkuk before Kurdish forces consolidated defensive positions — represented the most significant security deterioration in Iraq since the 2006–2007 sectarian violence. For global oil markets, the critical question was whether the fighting would spread to the southern provinces around Basra, where the bulk of Iraq’s oil production was concentrated. The answer, at least in Q2, was no: Iraqi southern output continued largely uninterrupted, and the initial Brent spike toward US$115 gradually subsided as the supply outlook remained intact.
For Jamaica, the episode crystallised a structural vulnerability that the EFF programme addressed only indirectly. Jamaica imports virtually all of its petroleum — crude for the Petrojam refinery, refined products for transport, and heavy fuel oil for the electricity grid — at prices set by global markets. In a year when Brent averaged around US$108–110 per barrel, the oil import bill represented a persistent drag on the current account, a direct contributor to inflation through electricity and transport costs, and a constraint on the primary surplus through the fuel subsidies and administered price interventions that the government used to manage social pressure. Each US$10 per barrel increase in oil prices added approximately US$100–120 million to Jamaica’s annual import bill — a significant sum relative to total foreign-exchange receipts.
The Petrojam refinery in Kingston Harbour, jointly owned by the Government of Jamaica and Venezuela’s PDVSA through the PetroCaribe arrangement, continued to provide Jamaica with access to Venezuelan crude on deferred payment terms that effectively provided balance-of-payments financing. The PetroCaribe deal — under which Jamaica received oil at market prices but paid only a portion upfront, with the remainder deferred at concessional interest rates — had been a significant source of external financing for the Caribbean region since 2005. With Venezuela’s own economic difficulties intensifying through 2014, the long-term sustainability of PetroCaribe was beginning to attract scrutiny, but supply continued uninterrupted through Q2.
The 2014/15 Budget: Another Year on the Fiscal Tightrope
Finance Minister Peter Phillips presented Jamaica’s 2014/15 Budget to Parliament in April 2014, maintaining the commitment to a primary fiscal surplus of 7.5 percent of GDP that the IMF EFF required. The budget was notable for its continuation of the revenue and expenditure mix that had characterised the 2013/14 effort: further rationalisation of GCT exemptions, continued restraint on the public-sector wage bill, capital expenditure held at minimal levels, and revenue administration improvements through Tax Administration Jamaica intended to improve compliance without requiring new tax measures.
The political economy of a second consecutive austerity budget was challenging. The Portia Simpson-Miller administration faced growing public frustration with the pace of economic improvement — wages were stagnant in real terms, the cost of living was rising with the depreciating dollar, and the growth dividends of the reform programme were not yet visible in household incomes. The opposition Jamaica Labour Party argued that the social costs of the adjustment were being borne disproportionately by working-class Jamaicans while the structural reforms that would generate growth were moving too slowly. These critiques had political force even when the fiscal arithmetic was sound.
The IMF’s third quarterly review, completed in Q2 2014, confirmed that Jamaica was meeting its quantitative performance criteria and advancing on structural benchmarks. The primary surplus for fiscal year 2013/14 — which ran April to March — was confirmed as having met or exceeded the programme target, a second consecutive year of achievement on what was the programme’s most demanding fiscal metric. The completion of the third review, and the disbursement of the associated SDR tranche, maintained the external financing architecture that underpinned the government’s liquidity position.
BOJ Keeps Cutting: The Easing Cycle Gathers Momentum
The Bank of Jamaica continued reducing its overnight benchmark rate through Q2 2014, extending the gradual easing cycle that had begun in the second half of 2013. The rate cuts were made possible by a combination of factors: the fiscal consolidation that had reduced the government’s domestic borrowing requirement, the NDX’s direct reduction in domestic bond yields, moderating (if still elevated) inflation expectations as the Jamaica dollar’s depreciation trend became more predictable, and the IMF programme’s external credibility that reduced the risk premium on BOJ easing.
The transmission of lower policy rates into commercial lending rates was proceeding, though unevenly. Commercial banks were beginning to offer lower rates on new mortgage facilities and business loans, and the National Housing Trust — which provides below-market-rate mortgages to formal-sector workers — was adjusting its lending terms in ways that improved affordability incrementally. The NHT’s mortgage book, which serves a large segment of the middle-income Jamaican housing market, is a significant conduit through which BOJ rate policy reaches residential property buyers, and its downward rate adjustments were a meaningful signal for the Kingston housing market.
The broader structural question — whether lower short-term rates would translate into the private-sector investment and credit growth that sustainable GDP expansion required — remained unanswered. Jamaica’s non-performing loan ratios at commercial banks, while declining from crisis peaks, still reflected the legacy of the 2008–2012 economic contraction. Banks remained cautious in their lending standards, and the demand for productive credit from the business sector was constrained by the same cost-of-doing-business factors — crime, infrastructure, regulatory burden — that limited investment regardless of interest rate levels.
The Fed Completes Its Penultimate Taper Steps
The Federal Open Market Committee reduced its asset purchase programme at its April 30 meeting (from US$55 billion to US$45 billion per month) and again at its June 18 meeting (from US$45 billion to US$35 billion per month), keeping the taper on the US$10 billion per meeting pace that Bernanke had established in December 2013 and Yellen had maintained since taking office. With purchases at US$35 billion per month by end-June and two more scheduled FOMC meetings in Q3 — in July and September — before the expected October termination, QE was visibly in its final phase.
The June FOMC meeting’s accompanying economic projections and Yellen’s press conference provided updated forward guidance on the path of interest rates after QE ended. The “dot plot” — the FOMC participants’ individual projections of the appropriate federal funds rate over time — continued to signal that rate hikes would begin in 2015, though the pace and level of eventual normalisation remained sources of significant uncertainty. For Jamaica and other EM borrowers, the timing and pace of Fed rate hikes after QE’s end was the next major external variable: the taper itself had been absorbed, but the prospect of rising US rates and their effect on EM capital flows was the horizon risk for 2015.
Tourism Spring: Shoulder Season Growth
Q2 is Jamaica’s shoulder tourism season — April and May see lower arrivals than the winter peak of January–March, and June marks the beginning of the summer recovery before the family travel peak of July and August. The Jamaica Tourist Board’s Q2 2014 data showed modest year-on-year growth in stopover arrivals, consistent with the trend of gradual expansion that had characterised the sector since the post-2009 recovery. The US market remained the dominant source, with direct lift from New York, Miami, Atlanta and Toronto providing the bulk of seat capacity into Sangster and Norman Manley airports.
The spring shoulder season is also when the Jamaican tourism industry makes most of its investment and maintenance decisions — slower occupancy periods allow resort operators to close wings for refurbishment, update food and beverage offerings, and prepare the property for the summer peak. The continued investment activity visible across the Montego Bay corridor in Q2 2014 — Sandals’ ongoing expansion, infrastructure upgrades at several Iberostar properties, new villa and boutique hotel openings in Negril — was a signal of operator confidence in the sector’s medium-term trajectory.
What This Means
Homeowners are experiencing the early effects of a gradually improving mortgage market as BOJ rate cuts begin to transmit into NHT and commercial bank lending rates. New buyers who qualify for NHT mortgages are accessing slightly more affordable financing than a year ago, though the improvement is incremental and the gap between mortgage affordability and middle-income wages remains wide. US-dollar-facility holders continue to see their local-currency obligations rise with each J$ depreciation step; those considering switching to Jamaica-dollar mortgages should weigh current rates against the depreciation trajectory.
Renters in the formal and informal markets face continued cost pressure from landlords absorbing higher utility and maintenance expenses. The oil price spike associated with the ISIS advance, if sustained, will feed into electricity tariffs that affect both landlord operating costs and tenant utility bills directly. The rental market in tourism-adjacent areas — Montego Bay, Negril, Ocho Rios — benefits from the sector’s investment cycle, with some informal accommodation supply in these areas serving both tourism overflow and local residential demand.
Developers active in the resort corridor are well-positioned relative to the market. High oil prices, ironically, reinforce the competitiveness of Jamaica’s all-inclusive model — US travellers seeking a fixed-price Caribbean holiday are less deterred by $115 Brent than by $3.50 gasoline at home. Residential developers face the continuing challenge of a middle-market buyer pool constrained by wages and credit costs that are improving only slowly. PetroCaribe financing continues to support some public-infrastructure and social projects that might otherwise compete with private-sector development budgets.
Businesses with significant energy input costs — manufacturers, transport operators, food processors — are watching the Iraq situation closely. Each US$10 per barrel increase in oil adds directly to operating costs in a market where pricing power is limited by consumer budget pressures. Businesses in export sectors — agro-processing, light manufacturing, professional services — continue to benefit from the competitive effect of the weaker Jamaica dollar, though the benefit is partially offset by higher local-currency costs of imported inputs.
Diaspora remitters and investors are operating in an environment of continued exchange-rate advantage. At J$111–114 to the dollar, property purchases and business investments in Jamaica represent strong purchasing-power value for diaspora buyers whose income is in US or Canadian dollars. The NHT’s overseas members programme, which allows diaspora contributors to access NHT mortgage benefits, is attracting increased interest from diaspora Jamaicans who see the current exchange-rate environment as a buying opportunity.
Outlook
The second half of 2014 will be defined by two variables: the trajectory of global oil prices and the pace of the Federal Reserve’s final taper steps and initial rate-hike signals. On oil, the ISIS advance has introduced a supply-risk premium that may persist for several quarters even if Iraq’s southern output remains unaffected; a resolution or escalation in the conflict will move prices accordingly. On the Fed, QE is almost certainly ending in October, and the market conversation is shifting toward the timing and pace of rate hikes — with significant implications for EM capital flows and borrowing costs in 2015.
For Jamaica, the summer tourism season ahead represents both the most important revenue quarter of the year and a test of whether the sector’s growth trajectory can deliver the foreign-exchange earnings the programme needs. The BOJ’s rate-cutting cycle, if continued through H2, will progressively improve the credit environment for private-sector borrowers. And the IMF’s fourth quarterly review — due in the autumn — will provide the next formal assessment of whether Jamaica’s most ambitious fiscal consolidation in a generation remains on track.
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 April–June 2014.
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