By Al Edwards, Business co-ordinator
Latibeaudiere
THE Governor of the Bank of Jamaica (BoJ), Derick Latibeaudiere, at his quarterly briefing at the bank's downtown headquarters on Wednesday, forecasted stronger growth in the September and subsequent quarters.
"This growth is predicated on the maintenance of relative stability in the foreign exchange market, the continued lowering of inflation expectations and sustained reduction in interest rates. With the exception of agriculture, all sectors are expected to experience growth in the present quarter," he said.
INFLATION RATES ON TRACK
The inflation rate for the June quarter stood at 1.7 per cent which overshot the BoJ's forecast of 1.4 per cent. However, this compares favourably with last year's corresponding quarterly figure of 2.9 per cent.
On a monthly basis, the Consumer Price Index (CPI) increased by 0.5 per cent, 0.3 and 0.9 per cent for April, May and June respectively.
In spite of the higher than projected level of inflation in the reviewed quarter, the resulting rate of 2.2 per cent for the first six months of the calendar year, with the exception of 1999, was the lowest for all comparable quarters since 1988. As a result of the fall-out in agriculture supplies, the projection for inflation for the September quarter is in the range of 2.3 per cent to 2.9 per cent.
Mr. Latibeaudiere said: "This forecast takes into account the seasonal strengthening of prices in the September quarter relative to the June quarter. In addition, we expect some second round effects from the recent increase in electricity rates. The prospect for oil prices is still uncertain so we have continued to closely monitor the market and adjust our forecast accordingly.
"These factors mentioned were the major considerations in revising our inflation forecast for the fiscal year to a range of 6.0 per cent to 7.0 per cent, from the earlier 5.0 per cent to 6.0 per cent."
FACTORS THAT LEAD TO
CURRENT INFLATION
RATE FIGURE
The out-turn for the quarter was influenced largely by higher than anticipated increases in international oil prices and in June, more pronounced price movements for some agricultural products caused by the disruption to supplies by extensive flood rains. There was also marginal pass-through of the movement in exchange rate to prices in the quarter.
CHALLENGES FACING THE BOJ IN THE JUNE QUARTER
The instability in the foreign exchange market, which emerged in May and continued to mid-June, was the major challenge that confronted the Central Bank in the June quarter.
"This instability was associated largely with the expectations surrounding the placement of a million euro- bond on the international market by the Government. While the bond placement did not materialise until late June, investors wishing to participate in the offer started sourcing foreign exchange from early May.
"This increased demand was exacerbated by estimated growth in end-user demand to undertake payments for merchandise imports. The pressure in the foreign exchange market only abated after it was confirmed in June that the bond issue would attract withholding tax. This reduced the attractiveness of the bond to local investors. As a consequence of the demand pressures in the quarter, the exchange rate depreciated by 1.9 per cent, relative to 0.4 per cent in the March quarter."
The proceeds from the euro-bond issue were received in late June, but there was the payout of US$200 million related to a maturing euro-bond. In addition, the Central Bank sold foreign exchange to the market to augment the available supply.
NET INTERNATIONAL RESERVES
At the end of June the Net International Reserves (NIR) stood at US$1.7 billion declining by US$160 million relative to the position at the end of March.
Gross reserves at the end of the review quarter were US$1.8 billion representing 21 weeks of estimated goods and service imports still much higher than the international benchmark of 12 weeks.
DAMAGE CAUSED BY THE RAINS
The 10 days of continuous rain from May to early June caused major destruction in the island. This was the major factor that led to the BoJ estimates for growth output being lower than had been projected in the previous report, with the goods producing sector experiencing a decline. In particular, the agricultural sector, which suffered the greatest damage, is estimated to have declined in the quarter. Information suggests that there was a decline in production in both the domestic and export agriculture sub-sectors. Domestic crops particularly cash crops, and livestock were assessed to have suffered the most severe damage.
THE MINING SECTOR
Production in the mining sector is estimated to have contracted in the June quarter. Damage to the railways caused by the rains, hampered the movement of raw materials, as well as shipments of crude bauxite and alumina.
THE MANUFACTURING SECTOR
The out-turn for the manufacturing sector was lower than the BoJ had projected earlier in the year owing to a contraction in the agro-processing industry, consequent on the disruption to supplies in May. The performance of the construction sector was also constrained by the adverse weather conditions during the review period.
"While our estimates indicate that the services sector grew in the review quarter, the growth was retarded by continued decline in the tourism sector.
The Central Bank is of the view that the factors that accounted for the relatively slow growth in the review quarter are temporary."
GROWTH IN PRIVATE
SECTOR CREDIT
The BoJ has high expectations of a more robust rate of expansion during the remainder of the year based on the renewed growth in private sector credit from the commercial banks during the June quarter.
"There was an increase of 9.6 per cent in private sector credit, which surpassed the targeted growth of 5.1 per cent for the quarter.
"This indicates a strong potential for the expansion in real sector activities in subsequent quarters. The increase in loans to the private sector was reflected in both domestic and foreign currency loans, but more-so in foreign currency denominated lending. While most sectors benefited from the overall expansion in credit, the Electricity and Transport, Storage and Communications were the dominant recipients."
Why the growth in credit?
The growth in credit can be attributed to the abatement of inflation expectations, which has facilitated a general lowering of interest rates. There was a reduction of 111 basis points in the overall weighted average lending rate of commercial banks during the quarter. Similarly, the average yields on Government's six-month Treasury bills declined by 49.0 basis points. In the context of the relatively unsettled state of the foreign exchange market the Bank of Jamaica did not adjust the rates on its open market instruments during the quarter.
CONTAINING THE GROWTH IN MONETARY AGGREGATES
Consistent with the need to contain underlying inflation in the face of the shocks to the agricultural sector, the BoJ will aim to contain the growth in the monetary aggregates in line with its programmed targets.
The monetary base is projected to grow by 0.5 per cent for the September quarter. The BoJ has declared its intent to continue the gradual reduction in interest rates. It signalled its intent, when on July 11, it reduced the entire spectrum of rates on its open market instruments. The 30 day signal rate is now at 12.95 per cent down from 13. 25 per cent at the end of June, while the rate on 365-day instrument, our longest- term tenor is 14.9 per cent, a reduction of 10 basis points.
THE GLOBAL ECONOMIC
ENVIRONMENT
Uncertainty still pervades the prospects for growth in the world economy for the remainder of the year. The prevailing view is that the United States' economy which in essence drives the rest of the world - is now out of recession and growth in the range of 3.0-3.5 per cent is being projected for the year.
The Canadian economy has been growing at a more robust rate than was expected and the European economies are on average, recording encouraging growth. The outlook for the Japanese economy remains tenuous at best.
" The international financial markets continue to be fragile as the number of reports of corporate delinquency that has come to the fore in recent months in the USA have made investors cautious. These developments are likely to have an adverse impact on the flow of capital to emerging market economies such as ours and indeed. affected the price of Jamaica's latest euro-bond. The situation in Argentina, Brazil and Venezuela has also increased the scepticism of investors with regard to the perception of risk in the bond market."
HOW WILL PRE-ELECTION SPENDING IMPACT ON THE BOJ'S FORECASTS
The general election may well create demand induced inflation and pre- election spending may have some impact on meeting fiscal targets set for the September quarter.
"This is a quarter where we have to just batten down and hold down monetary policy tightly and that's exactly what we are going to do. We are not going to let the base money get out of hand. We are going to mitigate any of that demand induced inflation brought on by a general election called in the near future. Don't forget we started out with a forecast of 3 per cent and that has now come down to 2 per cent."
FUND FOR CARIBBEAN ECONOMIES
"There are some initiatives to establish a Stabilisation Fund to deal with Caribbean economies that are doing worse than us. Although it has been said that I may well be playing a central role in this fund the truth of the matter is that I will send an officer to Barbados on Friday (today) to participate in a meeting on the fund."
BOJ LOSSES RED ON
THE BALANCE SHEET
The Governor took the opportunity to address concerns regarding losses of $2.1 billion on its balance sheet.
"We are currently reviewing our losses and are taking measures to address them. But I must say that over the last five years the BoJ has generated over $15 billion in profits. Last year the country's reserves increased by US$1 billion.
When you increase your reserves you tend to invest in AAA instruments that are closer to three 3 per cent but you have to reabsorb the Jamaican dollar portion of it at closer to 14 to 15 per cent on average. Therefore there is a cost that the Central Bank bears for the time being on behalf of the nation. We simply have to bear it because there are so many things that depend on our reserves.
"The BoJ's current operations are highly profitable. The losses people are referring to should be worked out and put right in about two to three years time. These losses are one of the personal challenges I have set myself to deal with."
FALLING INTEREST RATES
"We have recently had a 4 percentage point reduction in interest rates - that took place on August 1. We will do another 3 per cent by the end of this fiscal year. It now stands at 23 percent coming from 27 per cent. The cash reserves account for 9 per cent and the non cash portion was then 18 and is now 14 per cent."
The banking sector is now getting stronger and competition bodes well for falling interest rates. The sector is in far better shape this year as opposed to this period last year.
