Jamaica Economic Intelligence | Q1 2016 | January–March 2016
Key Findings
- Brent crude touches US$27 in January — the lowest price since 2003 — before recovering toward US$40 by quarter’s end
- Andrew Holness and the JLP win the February 25 general election 33–30; the reform programme survives its first change of government
- The Federal Reserve holds rates in March; global volatility and China fears push back the 2016 tightening timeline
- China’s yuan devaluation fears and stock market falls trigger January panic; global markets suffer their worst start to a year since 2008
- New JLP government immediately signals IMF programme continuity; twelfth consecutive quarterly review proceeds on schedule
- Winter tourism season sustains record momentum; stopover arrivals run ahead of the comparable 2015 period
The polling stations close at 5 p.m. on February 25, 2016. For months, the polls have called it too close to call — the most competitive Jamaican election in a generation, fought on a razor’s edge between a government that rebuilt the economy from rubble and an opposition that says it can do more, faster. By midnight, the Jamaica Labour Party has won 33 seats to the People’s National Party’s 30. Andrew Holness, 43 years old, will be Prime Minister. Somewhere in Kingston, in the halls of the finance ministry and the Bank of Jamaica, in the IMF’s Western Hemisphere Department in Washington, a question that has haunted the last three years of painstaking reform is finally being answered in real time: will the next government keep the programme? The answer, to almost everyone’s relief, comes within hours. Yes.
Oil at the Floor: US$27 and Counting
Brent crude, which had ended 2015 near US$37 per barrel, fell further through January 2016 to reach a trough of approximately US$27 per barrel on January 20 — its lowest level since November 2003, and a decline of more than 75 percent from the June 2014 peak of US$115. The fall reflected the continuing oversupply that had defined global oil markets since OPEC’s November 2014 decision to maintain production: American shale output had fallen from its peak but had not collapsed as quickly as many analysts had predicted; Iranian barrels were returning to the market following the lifting of nuclear sanctions in January 2016; Russian output was at post-Soviet highs; and global demand growth, while positive, was insufficient to absorb the surplus.
The January 20 low marked what would turn out to be the quarter’s nadir. Brent recovered through February and March as a combination of market positioning, modest evidence of US production declines and the first tentative conversations among major OPEC and non-OPEC producers about a potential output freeze began to support sentiment. By the end of March, prices had recovered to approximately US$38–40 per barrel — still deeply depressed by historical standards, but meaningfully above the January floor that had briefly generated genuine fears about the long-term viability of many oil-producing economies.
For Jamaica, the oil price’s trajectory through Q1 2016 represented an almost unambiguous windfall. The Bank of Jamaica’s estimates of the annual petroleum import bill suggested that even at US$40 per barrel, Jamaica’s energy import costs were running at roughly half the 2013 levels that had been such a severe drag on the current account and the public finances. Headline inflation — tracked by the Statistical Institute of Jamaica — was running in the low single digits, with fuel and electricity price components providing downward pressure that gave the BOJ unprecedented room for its monetary policy decisions. The arithmetic of low oil was good for Jamaica, and the question in the first quarter of 2016 was not whether the dividend would continue but whether oil’s partial recovery from the January floor would eventually work its way back toward levels that removed some of the tailwind.
The Election: Democracy’s Test of the Reform
The general election of February 25, 2016 was the most consequential political event in Jamaica’s economic history since the National Debt Exchange of 2013. Not because the margin was narrow — though it was, 33–30 seats, a JLP majority of three — but because of what the election was testing. For three years, Jamaica’s economic reform had depended on a continuity of political commitment that had no precedent in the island’s post-independence history. The EFF programme had been designed with the explicit recognition that it would span two administrations; the fiscal rules, the institutional reforms and the IMF programme’s conditionality structure were intended to create anchors strong enough to hold regardless of which party formed the government. February 25 was the test of whether those anchors had been set deep enough.
Prime Minister-elect Andrew Holness moved quickly to dispel any uncertainty. Within hours of the result, his team signalled that the JLP government would continue Jamaica’s IMF EFF programme without interruption. The party’s manifesto, which had emphasised economic growth and private-sector development over and above the consolidation theme of the PNP years, was in substance compatible with the programme’s remaining conditionality. The fiscal surplus targets, the debt-reduction trajectory and the structural reform agenda were all broadly endorsed — albeit with a different emphasis on the pace of growth and the distribution of the adjustment’s benefits. The IMF, whose Western Hemisphere Department had been watching the election closely, responded to the new government’s signals with an assessment that the programme remained on track for its next quarterly review.
The significance of a peaceful, democratic transfer of economic programme custody was not lost on international observers. Rating agencies that had been gradually upgrading Jamaica’s credit outlook through the previous two years noted the transition as a positive signal about the institutionalisation of fiscal discipline. Sovereign bond spreads, which had been expected to widen modestly in the uncertainty surrounding election night, barely moved — a judgement by the market that Jamaica’s economic direction was now a bipartisan consensus rather than a single-party project. For those who had watched the political economy of Jamaican reform from close quarters, this was arguably as significant an achievement as any budget target met or IMF benchmark cleared.
China and the January Panic
January 2016 opened with global markets in the grip of a fear that had been building since the summer: that China’s economic slowdown was sharper and more disorderly than official data suggested, and that the management of the yuan exchange rate — which the People’s Bank of China had been gradually depreciating against the US dollar — risked triggering a currency crisis that would transmit across emerging market economies through capital outflows and competitive devaluations. The Shanghai Composite, which had never fully recovered from its 2015 crash, fell sharply in the first week of January, triggering circuit breakers that had been designed to halt trading but instead amplified panic by confirming investors’ fears about the authorities’ capacity to manage the market.
Global equity markets suffered their worst start to a calendar year since 2008. In the first two weeks of January, the S&P 500 fell approximately 8 percent, the FTSE 100 declined by a similar amount, and emerging market indices underperformed even those depressed benchmarks. The episode was a reminder that China’s integration into the global financial system had created transmission channels for Chinese policy uncertainty that had not existed during the previous episodes of Chinese market volatility in 2007–2008. For Jamaica, the January panic had limited direct impact — the country’s exposure to Chinese capital flows and Chinese trade is modest — but it contributed to the global risk-off sentiment that kept emerging-market borrowing costs elevated and added to the external uncertainty that the incoming Holness government would need to navigate.
The Fed Pauses: December’s Hike Goes Alone
The Federal Open Market Committee, which had signalled in December 2015 that it expected to raise rates four times in 2016, convened its March 15–16 meeting against a backdrop of global market turbulence, Chinese uncertainty and US economic data that — while not weak — was not strong enough to justify the pace of tightening that had been projected just three months earlier. Chair Janet Yellen’s post-meeting statement and press conference struck a notably cautious tone, emphasising the international risks to the US outlook and signalling that the Committee’s median projection for 2016 rate increases had shifted from four hikes to two.
For Jamaica, the Fed’s March pause was a welcome extension of the low-rate global environment that had supported the country’s external financing position through the entire reform period. Every quarter in which US rates remained below their historical average was a quarter in which Jamaican sovereign spreads faced less upward pressure from the normalisation of the risk-free benchmark. The BOJ’s own policy rate decisions were being influenced by a complex set of domestic and external considerations — inflation was low enough to permit further easing, but the pace of J$ depreciation and the need to maintain adequate foreign exchange reserve cover were constraints on how aggressively the central bank could ease. The Fed’s restrained pace of tightening gave the BOJ more degrees of freedom than a more aggressive US rate cycle would have permitted.
IMF Review: The Twelfth Consecutive Pass
The IMF’s twelfth consecutive quarterly review of Jamaica’s EFF programme was completed in Q1 2016, with the Fund’s staff team confirming that fiscal performance remained on track through the first months of the new JLP government’s tenure. The review was notable not only for its substantive findings — all targets met, all benchmarks in compliance — but for its political symbolism: it demonstrated that the programme’s institutional architecture was robust enough to survive a change of government and the associated transition period during which policy priorities were being clarified and cabinet appointments finalised.
The primary fiscal surplus was being maintained at the programme’s 7.5 percent of GDP target. Revenue performance was in line with projections. The public-sector wage bill remained within programme parameters despite the new government’s desire to signal relief for public servants who had endured multi-year wage freezes during the adjustment. The IMF’s staff report noted that the new government had inherited a strong fiscal foundation and that the programme’s remaining two years offered an opportunity to consolidate the gains of 2013–2015 while beginning to create room for the growth-oriented investment that both administrations had identified as the next phase of Jamaica’s development strategy. The IMF’s tone — constructive, encouraging, still demanding — reflected the mature phase of a programme that had largely achieved its stabilisation objectives and was now focused on sustaining them.
Tourism: The Winter Season Accelerates
The January–March period — Jamaica’s peak winter tourism season — was delivering arrival numbers ahead of the comparable 2015 period, building on two consecutive record years and extending a growth trajectory that the Jamaica Tourist Board was tracking with growing confidence. North American visitors, the dominant source market, were arriving in record numbers, driven by low airfares, competitive resort pricing and the sustained strength of US consumer confidence and employment that was translating into travel spending. European visitor numbers — always more volatile and more sensitive to currency fluctuations — were somewhat softer given the euro’s weakness against the US dollar, but were recovering from earlier-year softness as spring booking patterns solidified.
The all-inclusive resort model was continuing to demonstrate its resilience as a crisis-resistant tourism product: when global uncertainty rises and discretionary spending comes under pressure, travellers who do commit to a holiday tend to choose the certainty of pre-paid, all-inclusive pricing over more variable budget options. Jamaica’s dominance of the all-inclusive Caribbean market — anchored by Sandals, Iberostar, Couples and the major hotel chains — positioned it well for this kind of “flight to certainty” dynamic. Hotel occupancy rates in Montego Bay and Ocho Rios through February were approaching the capacity constraints that the pre-2008 peak years had encountered, a signal of genuine underlying demand strength rather than cyclical rebound.
What This Means
Homeowners in Jamaica are navigating a property market that is recovering steadily in the context of a supportive macro environment. A new government that has explicitly committed to economic growth, private-sector development and continued IMF programme compliance is broadly positive for the medium-term fundamentals underpinning residential property values. Mortgage rates remain at multi-year lows. Inflation is contained. The economy is growing, if modestly. For those considering a purchase or refinancing decision, Q1 2016 offers conditions that are markedly better than anything available in the 2011–2013 period.
Renters are continuing to experience the cost-of-living relief of low energy prices and moderate food inflation. The private-sector employment growth that the improving macro environment is beginning to generate — particularly in tourism, business process outsourcing and distribution — is creating genuine income opportunities for lower-income Jamaicans at a pace not seen in the post-crisis decade. The election of a new government has raised expectations of accelerated private-sector development; whether those expectations translate into tangible employment and income improvements in 2016 will be one of the defining questions of the Holness administration’s first year.
Developers should read the election outcome as constructive. The JLP’s pro-growth, private-sector emphasis creates an expectation of regulatory and business environment improvements that could accelerate project approvals, reduce bureaucratic friction and improve the economics of residential and commercial development. The continued low interest rate environment and record tourism performance provide the demand backdrop. The primary constraint on residential development — land titling, infrastructure connectivity, NHT financing accessibility — is being addressed through structural reform commitments that both parties have endorsed.
Businesses in Jamaica are operating in the most constructive macro environment in a decade, with the added uncertainty of a new government’s policy priorities still being clarified. The early signals from the Holness administration — programme continuity, pro-growth rhetoric, emphasis on private-sector partnership — are broadly positive for business confidence. The global environment, with oil at the floor and the Fed pausing its tightening cycle, is providing additional support. The risks are those that Jamaica cannot control: further Chinese slowdown, renewed global market turbulence, or an oil price recovery that reverses some of the import-bill savings.
Diaspora Jamaicans watching the February 25 election from London, New York, Toronto and Miami have witnessed the most important stress test of Jamaica’s reform programme: a contested election, a change of government, and an incoming administration that immediately confirmed continuity of the economic framework that has been built, at enormous collective cost, over the previous three years. The answer — that the reform is now bipartisan, institutional, embedded — is the most reassuring signal the diaspora could have received. The window for diaspora property investment in Jamaica remains open, and the political risk premium that would previously have been attached to any change of government has, for the first time, been materially reduced.
Outlook
The second quarter will provide the new JLP government’s first full budget opportunity — the chance to set out its own fiscal framework within the IMF programme’s parameters and to signal the balance it intends to strike between continued consolidation and growth-oriented expenditure. The budget will be watched closely by the IMF, by credit-rating agencies and by the bond markets that have been financing Jamaica’s reform period at improving terms. Any signal of fiscal loosening beyond what the programme accommodates would be met with immediate market reaction; a budget that stays within the programme while identifying a credible growth agenda would be warmly received.
The oil price recovery from January’s US$27 floor toward US$40 is also a watch item. The further oil recovers, the more the import bill tailwind fades and the more inflation, the current account and the BOJ’s monetary policy degrees of freedom are affected. The difference between oil at US$40 and oil at US$60 — a level that was still being discussed as possible within the year — is significant for Jamaica’s fiscal and external position. For now, the direction of travel is constructive on every front that Jamaica can influence. What lies beyond Q2 — a Brexit referendum, a US election, a China that has still not found a stable growth equilibrium — adds layers of uncertainty to an otherwise improving picture.
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 Q1 2016: January–March 2016.
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