By Keith Collister
The Jamaican dollar has been under pressure since the collapse of Lehman Brothers on September 15th of last year against its US counterpart. At the start of 2008, the US dollar was trading at $70.61 and at the end of the year it had reached $80.47, with most of the fall occurring in the last quarter.
Most of this fall occurred in the last quarter of 2008, as the major Wall Street firms, under massive financial stress from their huge losses, called in virtually all of what was almost an estimated US$400 million in margin loans to the island’s financial institutions against Jamaican bonds. Unsurprisingly, this put enormous pressure on both Jamaica’s bond prices while leading to a rapid devaluation as local brokers bought US dollars to meet overseas margin calls.
To alleviate some of these pressures and restore confidence to the market, Jamaica’s central bank established a special $300 million US loan facility to assist local broker dealers to satisfy margin calls or retire such margin arrangements. The best guess is that just under US $200 million of this facility was accessed (predominantly to two major players), which, coupled with Bank of Jamaica intervention in the market, appears to have been the main reason for the sharp fall in reserves. These fell to a still relatively healthy US$1.76 billion at the end of December, compared with US$1.88 billion as of December 2007.
Towards the end of last year, there has been some conversion of Jamaica dollar holdings to US dollar as a precautionary measure by individuals and companies, and some limited anecdotal evidence of capital flight. The major commercial banks were also thought to be buying substantially more US dollars than they were selling in the final quarter of last year. However, it should not be assumed that all or even most of this was speculation, as it should be noted that the banks would not only have needed to repay margin debt, but replace lost overseas credit lines (withdrawn due to the credit crisis), and help their customers who were facing a massive reduction in trade credit over the period.
The contraction in overseas credit to Jamaica is actually the justification for the Inter-American Development Bank (IADB) loan of US$300 million which was signed (last) week. This “liquidity support loan” is meant to provide credit to the productive sector, with a five year maturity and a 3 year grace period. According to Central Bank statistics, the commercial banking sector (particularly the non-Canadian banking sector), has actually been net sellers of foreign exchange since the beginning of the year. This presumably reflects their anticipation that they will soon receive ample IADB funds to cover their needs, and a view that the dollar would soon peak, at least on a short-term basis.
The continuing pressure on the dollar appears to reflect a combination of the absence of the Central Bank from the market for nearly two weeks (they came in on Friday 23) as well as purchases by Government entities, particularly oil, dividend and other capital repayments to head offices, some limited capital flight, and encouragingly, some purchases of international Eurobonds by local investment houses, suggesting that for the most part Jamaica’s local financial system is now relatively stable.
Oppenheimer’s Greg Fisher advises: “We have been seeing more and more local bidders looking for paper across the Jamaica curve. This really began towards the end of 2008 but has dramatically accelerated in the past few weeks. However, the size of the orders… on average… is still far smaller than, let’s say, a year ago. Over the course of the past three months or so, the total percentage of bonds outstanding held locally… has obviously increased as non-Jamaican institutions have been net sellers of most of the emerging market credits as a whole. As the global markets have continued to depreciate, so too has the level of risk the Hedge Funds have been willing to take when it comes to the non-investment grade names.”
In addition to investment flows, real foreign exchange flows from remittances, tourism and bauxite are believed to have recently fallen relative to last year, and it is likely that these have not been fully offset by the decline in the prices of oil and food.
Government officials believe, however, that there will soon be sufficient foreign exchange available in the foreign exchange market to satisfy demand and ease pressures on the local currency.
Senator Don Wehby, minister without portfolio in the Finance Ministry, suggested at Wednesday’s monthly Mayberry Investor Forum that the disbursement of the IADB loan “will actually help to stabilise the foreign exchange market and I would not be surprised if I see a revaluation of the Jamaican dollar”.
He advised that the Government has secured the funds to repay the euro 200 million loan due on February 9, 2009 (which may have been why the Central Bank had stopped selling US in the market) and that the US$600- million of external funding that was needed to finance the budget is now fully secured.
In addition to the IDB loan to the banking sector, and the very recent World Bank loan of US $100 million (at an excellent rate of under three per cent), the government will borrow US$100 million from Bank of Nova of Scotia (this) week, and US$50 million from the Caribbean Development Bank before the end of the fiscal year. Combined with the disbursement of the US$329 million of loans recently signed with the IDB (last year Jamaica signed US$191 million in loans with the IDB of which US$150 million was disbursed), this should alleviate the immediate foreign exchange shortage, allowing the Jamaican dollar to revalue in the course of the next few weeks. We are also fortunate in having much lower financing needs for 2009/10 of approximately US$233 million and US$204 million for 2010/11. Nevertheless, despite likely additional inflows of foreign exchange from multilateral loans, that two year period is likely to be extremely challenging.
—Reproduced from the Jamaica Observer of January 25, 2009