Wed | Jan 24, 2018

BOJ : Jamaica household debt rising faster than income

Published:Thursday | April 13, 2017 | 12:00 AMSteven Jackson
The Bank of Jamaica at Nethersole Place, Kingston. Household debt is on the rise, at a rate that outpaces income, according to the 2016 Financial Stability report newly released by the central bank.
Branches of Jamaica's two largest banks sit on opposite sides at the entrance to the business district, at Knutsford Boulevard in New Kingston. Household debt is on the rise, at a rate that outpaces income, according to the central bank.

Jamaicans are becoming more indebted with their ability to service loans at the worst level in a decade, even after factoring for central bank revisions.

Roughly $5.40 of every $10 of household disposable income in 2016 went towards paying down debt to deposit-taking institutions, a group designation for the various classifications of banks. That compares with about $3.30 in 2006, according to the Fiscal Stability Report 2016, published this month by Bank of Jamaica (BOJ).

A year-on-year comparison shows that the debt-servicing capacity of the household worsened by 4.3 percentage points to 54 per cent in 2016, according to the BOJ. Jamaicans are increasing their debt appetite with cars, homes and microfinance loans in greater numbers.

Notably, BOJ revised it projections for personal income to presumably include a wider array of sources, including remittances.

The revision resulted in the reduction of household debt as a share of disposable income by nearly 20 percentage points. Specifically, prior to the revision, the 2015 report indicated that household debt servicing worsened by three percentage points year-on-year to 69.5 per cent in 2015. In other words, roughly $7 of every $10 of household income went to paying down debt.

"BOJ's projection for disposable income was revised. It is computed as gross personal income less statutory deductions," stated the report, which noted that gross personal income are proxies for the sum of compensation to employees domestically and internationally, as well as current transfers from the rest of the world, which primarily includes remittances. Operating surplus for households is excluded from personal income due to data unavailability, the central bank added.

The BOJ also proxies total household debt as the sum of residential mortgage loans, consumer loans, which include credit card receivables, and National Housing Trust loans.

Despite the revision, the BOJ stated that personal debt was rising faster than income. It added that this outturn was primarily as a result of the growth in household debt, at 12.3 per cent rising about four times faster than disposable income at 3.3 per cent. However, the growth for 2016 was below the Western financial crisis levels.

"Prior to the global financial crisis in 2008, growth in household sector debt averaged 13.7 per cent for the period 2003-2007," stated the annual report, which provides an assessment of the main financial developments, trends and vulnerabilities of Jamaica's financial system.

Commercial banks, building societies and near banks' gross loans totalled $643.2 billion as at December 2016, up 18 per cent year-on-year, stated the BOJ in its prudential indicators.

The increased exposure of the banking sector to the household sector occurred against a reduction in non-performing loans, or NPLs, unserviced for 90 days. Specifically, NPLs as a share of total household loans decreased to 2.9 per cent at end-2016 relative to 4.1 per cent at the end of 2015, the prudential indicators show.

Household debt increased in the year within a context of a relatively stable macroeconomic environment supported by the BOJ's accommodative monetary stance, real GDP growth as well as decreased unemployment levels, the central bank explained.

"The increase in real household sector credit was driven by both consumer and mortgage loans. The performance in household sector credit was partly driven by lower interest rates on personal and mortgage credit due to increased competition by institutions in an effort to grow market share," added the report.

The report described the financial system as experiencing balance sheet expansion.

"The expansion reflected strong credit growth which contributed to increasing debt burdens of households and corporate," said the BOJ. "Stability concerns were also rooted in the continued trend of financial system dollarisation and the estimated reduced resilience to interest rate shocks by both the deposit-taking institutions and securities dealers sectors."