Jamaica Economic Intelligence | Annual Review 2017 | January–December 2017
Key Findings
- The Federal Reserve delivers three rate hikes in 2017 — March, June, December — the first year since 2005 to see three increases; Jamaica absorbs them all without crisis
- Jamaica completes eighteen consecutive IMF EFF quarterly reviews; the programme’s final review on September 29 ends the most successful IMF engagement in Caribbean history
- A successor Precautionary and Liquidity Line with the IMF is approved, maintaining an external anchor for fiscal discipline without new programme conditionality
- Hurricanes Harvey, Irma and Maria devastate parts of the Caribbean; Jamaica is largely spared and absorbs redirected tourism demand from destroyed competitors
- Jamaica posts a fourth consecutive stopover arrivals record of approximately 2.35–2.40 million — a 10 percent increase on 2016, the largest single-year gain in the modern series
- Unemployment falls to approximately 11.7 percent and GDP grows at approximately 2.0 percent — both the strongest readings in nearly two decades
There is a moment, late in the evening of September 29, 2017, in Washington, when the paperwork is complete. The International Monetary Fund’s Executive Board has approved Jamaica’s final quarterly review of the Extended Fund Facility programme — the eighteenth consecutive review since May 2013. Eighteen times in a row, every three months for four and a half years, through two governments, two finance ministers, a PetroCaribe debt buyout, a US election, a Brexit referendum and the worst Atlantic hurricane season in recent memory, Jamaica met every condition, every benchmark, every target. Somewhere in Kingston, in the finance ministry that has lived inside this programme for the better part of a decade, someone crosses the final item off the list. The programme is over. Not because Jamaica failed, as every previous IMF engagement had eventually ended. But because it succeeded. Because the island, for the first time in its modern economic history, has done what it said it would do. And the question now — the question that is both exhilarating and terrifying in its openness — is what Jamaica does next.
The Fed Finally Delivers: Three Hikes, Zero Crises
The Federal Open Market Committee delivered something in 2017 that it had promised for two years without delivering: a three-hike year. The March increase — the first of the three — was followed by June and December, bringing the federal funds rate target range to 1.25–1.5 percent by year-end. For the first time since 2005, the FOMC had executed the pace of tightening it had projected. The year was, in its monetary policy execution, a vindication of Chair Yellen’s approach: patient, data-driven, unhurried by political pressure and unperturbed by the external shocks — hurricanes, political turbulence, a North Korea nuclear programme that briefly dominated market commentary in the autumn — that might have derailed a less disciplined committee.
For Jamaica, the significance of the three-hike year was not just in its domestic economic management — though that was remarkable enough — but in what it proved about the reforms of 2013–2017. Four years earlier, in the summer of 2013, the Fed’s first hint of tapering its asset purchase programme had sent Jamaica’s sovereign spreads widening and provoked genuine concern about whether the island could absorb the coming normalisation without a balance-of-payments crisis. By December 2017, with five rate hikes in two years completed and the federal funds rate at its highest level in a decade, Jamaican sovereign spreads were compressed, the J$ was depreciating at its managed pace, foreign exchange reserves were comfortable and the Bank of Jamaica had not been required to raise its own benchmark rate in response to any of the Fed’s moves. That was not an accident. It was the product of four years of fiscal adjustment, debt reduction and institutional reform that had transformed Jamaica’s external vulnerability from a systemic risk into a managed variable.
Eighteen: The Number That Changed Everything
Jamaica’s completion of the eighteenth quarterly IMF EFF review on September 29, 2017 was not merely a number. It was the culmination of the most consequential economic programme in the island’s post-independence history — a programme that had restructured the national debt through the NDX, rebuilt the primary fiscal surplus from a deficit position to 7.5 percent of GDP, reduced the debt-to-GDP ratio from 146 percent to approximately 106 percent, reformed the tax administration, overhauled the governance of public bodies, and established the institutional architecture for sustainable fiscal management that would outlast the programme itself. No previous IMF engagement with Jamaica — and there had been many, stretching back through the 1980s and 1990s — had ended in anything other than disappointment. All of them had failed, stumbled or been abandoned before completion. The EFF was different. It was, in the IMF’s own words, “unprecedented.”
The political economy of the achievement deserves emphasis. The programme had survived a change of government in February 2016 — an event that had historically been the point at which Jamaica’s reform commitments dissolved under the pressure of electoral politics. It had survived three prime ministers, significant internal party pressures in both the PNP and JLP governments, and the accumulated fatigue of a public that had been bearing the cost of adjustment in wages, services and purchasing power for years without yet seeing the full dividends of the reform. The bipartisan political consensus that held through four and a half years of quarterly reviews — not because politicians had suddenly become more principled but because the institutional architecture of the programme, the fiscal rules, the BOJ’s independence and the IMF’s quarterly oversight had made deviation from the programme more costly than adherence — was perhaps the most durable institutional achievement of the entire exercise.
The IMF’s response to the programme’s completion was unlike anything the institution had said about a Caribbean programme country in the modern era. The final staff report described Jamaica’s achievement as “exceptional across all dimensions.” The debt trajectory was characterised as representing “a transformation of the country’s fiscal and debt dynamics.” The structural reforms were noted to have “fundamentally changed the institutional framework for economic management.” For an institution that prides itself on measured language, these were extraordinary statements. They reflected not sycophancy but genuine institutional recognition that something historically unusual had happened on this island.
The Successor Arrangement: A Lighter Anchor
Jamaica did not walk away from the IMF at the EFF’s completion. The simultaneous announcement of a Precautionary and Liquidity Line arrangement — a precautionary credit facility that Jamaica could draw upon in the event of an external shock but that it did not intend to use in normal circumstances — provided a formal successor to the quarterly review discipline that the EFF had imposed. The PLL was not a new adjustment programme; it did not require new targets, new conditionality or new structural reforms beyond the continuation of the fiscal framework Jamaica had already established. But it signalled to credit rating agencies, sovereign bond investors and the international business community that Jamaica’s relationship with the IMF was not simply over but had evolved — from a programme relationship, in which the Fund was a creditor enforcing conditions, to a partnership relationship, in which the Fund was a backstop endorsing the sustainability of policies that Jamaica had made its own.
The market response to the PLL was positive. Jamaica’s sovereign credit rating, which had been gradually improving through the reform period, received further upgrades from Moody’s and S&P through the year — both agencies citing the EFF programme’s successful completion, the improved debt trajectory and the PLL’s successor arrangement as evidence of sustained commitment to fiscal discipline. Sovereign bond spreads compressed further. The cost of Jamaica’s external borrowing — the annual interest bill that had been the single largest item in the government’s expenditure for years — was falling in both absolute and relative terms. The fiscal arithmetic that had driven the primary surplus requirement was beginning to relax, creating the space for the growth-oriented investment that both the PNP and JLP had identified as the next phase of Jamaica’s development.
The Hurricane Season and the Tourism Windfall
The 2017 Atlantic hurricane season was the most economically destructive in the region’s history. Harvey, Irma and Maria collectively caused damage estimated at more than US$300 billion, killed more than 3,000 people — the majority in Puerto Rico’s post-Maria humanitarian crisis — and rendered entire island economies non-functional for months. Barbuda’s population was evacuated entirely. The British Virgin Islands’ tourism economy was effectively destroyed. Puerto Rico’s electrical grid failed completely. Saint Martin’s resort infrastructure, which had been among the finest in the Caribbean, was devastated. The Dominican Republic, Cuba and Florida all suffered significant though less catastrophic damage. For the Caribbean tourism industry as a whole, Q4 2017 was a disaster whose effects would be felt through 2018 and beyond.
For Jamaica, the season’s geography was a gift it had not sought and did not celebrate. The storms curved north of the island, with outer bands producing rain and gusty winds but no structural damage. And in the weeks that followed — as travel advisories for competing destinations spread across booking platforms, as airlines rerouted capacity, as all-inclusive chains redirected their autumn group bookings — the phones at the Jamaica Tourist Board rang without stopping. The Q4 tourism surge was extraordinary: arrivals in October, November and December 2017 ran significantly above the comparable 2016 periods, driven by the combination of displaced Caribbean demand and the island’s continuing organic growth in the North American market. Full-year 2017 stopover arrivals came in at approximately 2.35–2.40 million — a fourth consecutive record and an increase of more than 10 percent over 2016’s 2.2 million, the largest single-year volume gain in the island’s modern tourism history.
Total tourism foreign-exchange earnings for 2017 were estimated at approximately US$2.9–3.1 billion — another record, and a figure that now represented more than 50 percent of Jamaica’s total foreign exchange earnings from goods and services. The economic linkages from this level of spending — through agricultural supply chains, local transportation, entertainment, construction of new hotel capacity and the expansion of the informal economy around resort corridors — were generating employment and income effects across the island at a pace that the macroeconomic data was only beginning to capture. Tourism was no longer merely Jamaica’s largest sector. It was the sector that was lifting every other sector.
The Domestic Economy: The Growth Story Begins
Jamaica’s GDP growth for calendar 2017 was approximately 2.0 percent — the strongest annual performance since before the 2008 global financial crisis and the third consecutive year of above-1 percent growth. Unemployment, which had been 16.9 percent when the EFF was signed in 2013, fell to approximately 11.7 percent in the October survey — its lowest reading since before 2001 and a decline that represented, in human terms, the employment of several hundred thousand Jamaicans who had not been working when the programme began. The debt-to-GDP ratio had fallen to approximately 106 percent — a decline of 40 percentage points from its peak — and the primary fiscal surplus, maintained at 7.5 percent of GDP for five consecutive fiscal years, had become the most enduring fiscal achievement in Jamaica’s recorded history.
The Statistical Institute of Jamaica’s sector data showed the growth being distributed more broadly than in the early reform years, when tourism and construction had dominated the positive contributions while other sectors lagged. By 2017, financial services, business process outsourcing, retail and distribution and agriculture were all contributing positively. The construction sector was sustaining its growth as the commercial and residential development pipeline that had been building since 2015 continued to execute. Private sector credit growth — the indicator of domestic investment confidence that had been weakest through the most intense adjustment period — was accelerating toward 10 percent year-on-year, reflecting the improvement in business confidence that the programme’s completion and the PLL’s announcement had produced. For the first time in fifteen years, the domestic economy was generating its own momentum, rather than depending entirely on external conditions and fiscal adjustment to keep it moving.
What This Means
Homeowners close 2017 in a property market that has been transformed by the reform period’s achievements. Unemployment at 11.7 percent, GDP growth at 2 percent, mortgage rates at multi-year lows, the IMF programme concluded and the Precautionary arrangement in place — the foundation under residential property values is as solid as it has been in twenty years. The tourism sector’s record year, and the Q4 windfall from diverted Caribbean demand, has created employment and income effects that are flowing through the economy’s supply chains and into the household balance sheets of the workers and small business owners who supply Jamaica’s resorts. The property market, in this environment, is not a speculation. It is the most natural expression of confidence in an economy that has earned the right to be trusted.
Renters are experiencing the most sustained period of economic improvement in a generation. Five years of moderate inflation, five years of falling unemployment, five years of improving private-sector employment conditions — the accumulated effect, for the employed majority of lower-income Jamaicans, is genuine real income improvement of a kind that the pre-reform years had denied. Energy costs are stable. The labour market is tightening in ways that give workers bargaining power they did not previously have. The social housing supply gap remains the structural challenge that macroeconomic success alone cannot resolve — but 2017’s data makes the economic case for investing in that supply more compelling than it has been for two decades.
Developers enter 2018 with the clearest green light in the history of Jamaica’s modern property market. The IMF programme is complete. The tourism record is confirmed. The Caribbean competitive landscape — devastated by Irma, Maria and Harvey — has created a multi-year opportunity for Jamaica to capture market share in hospitality that, if managed well, will permanently expand the island’s tourism ceiling. The residential pipeline is deep, the buyer pool is expanding as NHT mortgage accessibility improves and private credit growth accelerates, and the government is actively reducing the regulatory friction that has historically slowed project execution. The investment case has never been clearer. The question is execution.
Businesses across Jamaica close 2017 in a domestic environment that is, by every available measure, the most constructive since before the global financial crisis. The IMF programme’s completion removes a significant source of uncertainty about Jamaica’s medium-term policy trajectory. The Precautionary arrangement’s announcement signals that fiscal discipline will be maintained without the programme’s quarterly review mechanism. Credit is expanding. Consumer confidence is improving. The tourism sector’s record performance is generating demand that flows through every layer of the supply chain. The external environment — three Fed hikes absorbed, the Caribbean hurricane season weathered, the European political landscape stabilised by Macron’s election — has been better than any reasonable assessment of 2017’s risks would have predicted at the start of the year. Jamaica has had a good year. The challenge is making sure the next one is better.
Diaspora Jamaicans close 2017 having watched the island complete the most ambitious economic reform programme in its history. From New York, London, Toronto and Miami, they have watched the quarterly reviews pass, watched the debt ratio fall, watched the tourism records accumulate, watched the unemployment rate decline, and watched an IMF that had been a source of anxiety and controversy become a partner in what the Fund itself has called an “exceptional” achievement. For those with investment aspirations in Jamaica — and the diaspora’s engagement with the Jamaican property market has never been deeper than in the reform years — 2017 is the year the fundamental case became inarguable. The island has earned its credibility. The economy has earned its confidence. The data, for the first time in memory, is telling a story of a future that is better than the past.
Outlook for 2018
Jamaica enters 2018 at a genuinely new moment in its economic history. For the first time since independence, the country is managing its fiscal affairs without an active IMF conditionality programme imposing quarterly discipline from Washington. The Precautionary and Liquidity Line provides a backstop and a signal, but the day-to-day discipline must now come from within — from the fiscal responsibility framework embedded in law, from the BOJ’s evolving independence and its movement toward a formal inflation-targeting regime, and from the political leadership of a government that knows its economic legacy will be measured against the standards the reform period has set.
The external environment for 2018 carries its own set of uncertainties. The Fed’s tightening cycle is continuing; Jerome Powell, who will succeed Janet Yellen as Fed Chair in February 2018, has signalled a continuation of the gradual normalisation approach, and three further hikes in 2018 are a plausible central case. The Trump administration’s tax reform — the Tax Cuts and Jobs Act signed in December 2017 — will stimulate US growth in the near term, potentially extending the American economic expansion that has been the primary engine of Jamaica’s tourism growth. Brexit’s negotiations are entering their most complex phase, with the Irish border question still unresolved and the UK’s trade relationship with Europe still deeply uncertain. And the Caribbean’s post-hurricane reconstruction — Puerto Rico’s electrical grid, Barbuda’s housing stock, the BVI’s resort infrastructure — will take years, not months, meaning that Jamaica’s competitive advantage in Caribbean tourism is likely to persist well into 2019.
The story of 2018 will be, above all else, whether Jamaica can translate the stability of the reform period into the growth that its people have been waiting for. Two percent GDP growth is not enough. The development aspirations of a country with Jamaica’s demographics, its talent base and its location in the heart of the Americas require 3–4 percent sustained growth — the kind that reduces poverty, expands the middle class and creates the tax revenue that makes improved public services possible. That growth will not come from fiscal adjustment alone; it has to come from private investment, from the sectors that are already working — tourism, BPO, construction — and from new sectors that the reform-period institutional improvements have made possible. The conditions are there. The opportunity is there. 2018 is the year Jamaica has to take it.
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 full calendar year 2017.
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