The Bank of Jamaica draws down more than US$400 million in reserves across a seven-week period to defend the dollar, then acknowledges the unprecedented pressure publicly in November — a quarter that ends with the Jamaica dollar near J$80 per US dollar and the island’s property market in its steepest contraction since FINSAC.
Highlights
- Jamaica dollar depreciates approximately 11 per cent in Q4, accounting for 85 per cent of the full-year decline
- BOJ draws down US$400 million-plus in net international reserves to moderate exchange rate pressure
- Remittances, tourism, and commodity export revenues all contracting simultaneously
- Full-year 2008 real GDP contracts 0.9 per cent, reversing 2007’s 1.5 per cent expansion
- NHT housing completions fall 58.6 per cent for the full year; starts down 17.3 per cent
- Golding government begins informal engagement with IMF as fiscal position deteriorates
The press conference that the Bank of Jamaica convened on 13 November 2008 was not the kind central banks prefer to hold. Governor Derick Latibeaudiere stood before cameras and microphones to explain, in unusually candid terms, why the Jamaica dollar had shed value so rapidly across the previous seven weeks. High debt service obligations — US$1.3 billion in a year when the normal range was US$700 to US$800 million. Seasonal foreign exchange demand. The remnant cost of an oil import bill accumulated when crude was approaching US$140 a barrel. And margin calls. Within a single quarter, all of these pressures had arrived together. The bank had spent more than US$400 million from its net international reserves attempting to slow the currency’s slide. The dollar had nonetheless moved from J$72 in September toward a level approaching J$80 by December, a quarterly depreciation unmatched in recent memory.
The global context made Jamaica’s particular vulnerabilities stark. Every economy in the Caribbean was under stress, but Jamaica’s combination of high debt, high dependence on US remittances, and exposure to commodity-price volatility through both its energy import bill and its bauxite-alumina export revenues created a stress profile more acute than its neighbours. The United States economy shed nearly 700,000 jobs in a single month in December 2008 — the worst reading since 1945 — and the construction and hospitality sectors where Jamaican diaspora members were concentrated felt the contraction most severely. Each lost American job translated, with a lag of one to three months, into a reduced wire transfer. Tourism operators at Sandals and SuperClubs and the independent guesthouses of Negril were watching advance bookings for the 2009 winter season fall in real time as American and British households cancelled holidays, cut discretionary spending, and began building savings buffers.
For those holding property denominated in Jamaica dollars, the currency’s depreciation was mathematically complex. A Kingston townhouse that had sold for J$15 million in 2005, when the exchange rate was J$64 per United States dollar, had been worth roughly US$234,000 at the time of its purchase. With the rate now approaching J$80, the same property in Jamaica dollar terms — assuming unchanged local prices, which was already generous — was worth approximately US$187,000 to a foreign buyer. The nominal price had not changed. The US dollar value had fallen by twenty per cent. This was the arithmetic that offshore investors were calculating, and few liked the answer. Meanwhile, for local buyers financing in Jamaica dollars, the cost of imported construction materials — steel, cement, roofing materials, plumbing fixtures — was rising with the depreciated dollar even as nominal wages held flat. The affordability squeeze was tightening from multiple directions.
The full-year statistics for 2008 confirmed the severity of the turn. Real GDP contracted by 0.9 per cent — a modest negative number in absolute terms but a significant reversal from the 1.5 per cent expansion of 2007 and from the growth trajectory that had sustained the property boom of 2004 to 2006. The NHT’s annual figures were starker: housing completions had fallen 58.6 per cent from their 2007 level, and starts were down 17.3 per cent. These were not merely cyclical statistics. They represented projects that had been designed, permitted, partially funded, and then suspended as developers’ financing costs rose beyond viable thresholds and their buyers’ purchasing power contracted. Partially completed developments across St Andrew, St Catherine, and the north coast stood as physical evidence of the cycle’s turn.
The fiscal arithmetic was equally uncomfortable for Finance Minister Audley Shaw. The Budget that he had presented in April had been constructed around growth assumptions and oil price projections that the subsequent seven months had comprehensively invalidated. Tax revenues were falling with economic activity. The debt service bill, inflated by the unfavourable borrowing undertaken during the FINSAC and post-FINSAC years, was consuming fiscal space that a government facing recession needed for stimulus. Shaw’s room for manoeuvre was narrow. The Golding administration began, in the final weeks of 2008, the preliminary engagement with the International Monetary Fund that would eventually lead to formal programme negotiations — a path that Jamaica had walked before, and whose terms would shape the fiscal environment for the property market through the following years.
On the streets of New Kingston and in the real estate offices of Half-Way Tree, the practical reality of the fourth quarter was a market in suspension. Valuers retained by banks for mortgage assessments were noting that comparable sales data was thinning — fewer transactions meant fewer reference points, which meant that formal valuations lagged market reality by increasing margins. Developers with inventory were offering informal concessions: appliance packages, reduced deposits, extended completion guarantees. Sellers with choice were withdrawing listings rather than accepting offers they considered below value. The result was a curious combination of thin activity and high stated prices — a bid-ask spread that would only close, in most cases, when sellers’ need to transact eventually overrode their resistance to acknowledging that the market had moved against them.
What This Means
The fourth quarter of 2008 closes Jamaica’s most turbulent year since the FINSAC crisis, and the trajectory into 2009 is unambiguously downward across the indicators that matter most to the property market. The IMF engagement that is now beginning will bring fiscal consolidation requirements — reduced government spending, wage restraint in the public sector, possible tax increases — that will further constrain buyer purchasing power. The exchange rate, having depreciated 11.7 per cent in 2008, will remain under pressure as long as remittances and tourism earnings are falling. Interest rates, while the BOJ would ideally cut them to stimulate activity, cannot be reduced aggressively without risking further dollar weakness. The one stable pillar is NHT, whose contribution base from formal-sector employment is contracting slowly rather than collapsing. For the next six to eighteen months, NHT will be the property market’s primary engine — and the size of that engine is considerably smaller than what a recovering market requires.
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