The second quarter of 2007 was the season in which Jamaica’s domestic political calendar — an election coming, its date still unannounced — ran directly into the opening phase of a global financial disruption that would take more than a year to fully manifest. Omar Davies presented the 2007-08 national budget in April in the language of continuity and fiscal discipline. Bruce Golding’s JLP and Portia Simpson Miller’s PNP traded campaign positions that both parties knew were final positions before a vote that would determine who governed Jamaica through the gathering storm ahead. And in June, two Bear Stearns hedge funds heavily exposed to subprime mortgage collateral collapsed, providing the global credit market’s first institutional signal that the crisis was no longer theoretical.
- Davies 2007-08 budget maintains primary surplus; oil at US$70 tightens the fiscal margin
- Simpson Miller and Golding both campaign without election date; polling shows razor-thin race
- Bear Stearns closes two subprime-exposed hedge funds June 19–20, global credit markets seize
- Oil breaches US$70 and continues rising; PetroCaribe buffer increasingly critical for Jamaica
- Spring tourism season solid; all-inclusive north coast properties report strong occupancy
- Crime environment continues to deteriorate; security agenda dominates election discourse
Omar Davies’s seventh and final budget as Finance Minister — though neither he nor Jamaica yet knew it was the last — was an exercise in defending the primary surplus against an oil price that had crossed US$70 per barrel and was on a trajectory that the budget’s planning scenarios struggled to accommodate without either cutting expenditure or reducing the surplus target. The government chose, as its predecessors had consistently chosen in similar circumstances, to defend the surplus. The capital expenditure envelope absorbed the adjustment, infrastructure investment was deferred, and the social programmes that Simpson Miller had committed to accelerating competed for a reduced residual with the operational costs of a public sector whose pay demands were running above the budget’s inflation assumptions.
The election campaign that both parties were conducting without a formally declared date was, by the second quarter of 2007, the dominant context of every significant public event in Jamaican politics. Simpson Miller’s government was making the case for its record — the Cricket World Cup hosting, the tourism growth, the fiscal discipline that had kept Jamaica’s sovereign creditworthiness intact through three storm seasons and two years of elevated oil prices — while simultaneously signalling the social investments she intended to accelerate when the election delivered a fresh mandate. Bruce Golding’s JLP was prosecuting the security argument with the detail and consistency of a party that had chosen it as its central campaign proposition: Jamaica’s homicide rate, which had reached approximately 1,600 killings in 2006, was among the highest per capita in the world, and every Jamaican knew someone whose daily life was shaped by the fear of violence in ways that the macroeconomic aggregates did not capture.
On June 19 and 20, 2007, Bear Stearns announced the collapse of two hedge funds that had been heavily invested in collateralised debt obligations backed by subprime mortgage pools. The announcement was not the beginning of the global financial crisis — that credit market stress had been building since at least the previous year’s subprime delinquency data — but it was the moment that transformed a specialist credit concern into a headline event across global financial markets. The two funds lost essentially all their value, and the revelation that major Wall Street institutions had concentrated exposure to instruments whose underlying credit quality was now demonstrably impaired triggered a reassessment of risk pricing across the structured credit markets that would eventually propagate through the entire global financial system.
For Jamaica, the Bear Stearns collapse registered as a concern about the medium-term outlook for US consumer confidence and Caribbean tourism rather than an immediate shock to the island’s financial system. The Bank of Jamaica‘s financial stability monitoring was watching the international developments closely, but Jamaica’s banking sector — which had no direct exposure to the US structured credit markets that were seizing up — was not in the immediate transmission path of the Bear Stearns fallout. The more immediate concern was what the credit market disruption would do to the US housing market, to US consumer confidence, and eventually to the travel spending that sustained Jamaica’s tourism revenue. The Bank’s assessment in the second quarter was that the risks were real but the transmission lag was significant.
The spring tourism season performed solidly through the second quarter. The all-inclusive properties of the north coast corridor reported occupancy rates consistent with the strong trajectory that 2006’s record year had established, and the visitor expenditure data that the Tourist Board collected from hotel surveys suggested that guests were spending at or above historical seasonal norms. The Jamaica Tourist Board was watching the forward booking data from North American source markets for early signals of the kind of consumer confidence softening that a US housing market in difficulty might eventually produce, but through June the patterns were not yet indicating a meaningful weakening in Jamaican tourism demand.
Oil crossed US$70 per barrel during the quarter and continued upward. The combination of OPEC production management, sustained Chinese and Indian industrial demand, and the geopolitical risk premiums on supply from Iraq, Nigeria, and Iran was producing a crude price trend that showed no meaningful correction despite the credit market turbulence that the Bear Stearns collapse had introduced. For Petrojam, every additional dollar per barrel on the import price was a direct addition to the refinery’s cost base, and the PetroCaribe arrangement’s deferred payment terms — which provided a portion of relief on the current account — were becoming increasingly central to Jamaica’s current account management as the oil trend continued its upward path.
What This Means
The second quarter of 2007 positioned Jamaica at the intersection of two timelines that would shape the rest of the decade: a domestic political clock counting down toward an election that would change the government, and a global financial clock counting down toward a crisis that would change the external environment within which whoever won that election would have to govern. Neither timeline was yet at its most consequential moment: the election had not been called, and the Bear Stearns collapse was not yet the Lehman Brothers collapse. But the second quarter established that the Jamaica entering the election season of mid-2007 was doing so in a global financial environment that was materially less stable than the one that had sustained its 2006 tourism record and its primary surplus maintenance.
The Road Ahead
The third quarter of 2007 would bring Jamaica’s general election — called for September 3 — and Hurricane Dean, which would make landfall as a Category 5 storm on August 19 before tracking through the island with winds that would test the north coast’s rebuilt infrastructure and south coast communities’ defences. The election result would determine not just the government but the governing philosophy that would confront the global financial crisis then assembling itself in the US credit markets. It was a quarter that would make history for Jamaica, and not only political history.
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