By Deon McLennon, ContributorIS THERE a case for optimism? Well, logic started to slide out of our market in March and panic had fully set in by mid-May.
Five years ago, when Asian contagion hit the Far East markets, we saw vivid pictures in the press of traders gripped with fear and frustration as currencies and equities dived on exchanges. Now we know how they must have felt. Uncertainty and unfounded rumours have recently ruled our markets, sending the Jamaican dollar into a tailspin.
The only remedies for rumours are fact and strong action. The news that the economy grew 3.4 per cent, that tourism arrivals were up strongly in the first quarter, and that rumours of exchange controls were officially refuted have helped.
INTERVENING HEAVILY
This week, the Bank of Jamaica (BoJ) came out swinging, intervening heavily in the market at $66. Facts and strong action have flushed sellers back into the market and by midday Monday, the Jamaican dollar had clawed back to well under $66. The pendulum has now swung back in favour of buyers for a change. Let's see what happens in the coming weeks. Hopefully, equilibrium will be restored and interest rates can begin to decline. Confidence is brittle and the authorities need to nurture and restore the market's belief that things will improve, but this will require action and a continuing flow of information, not just talk.
1. The treasury bill auction came shortly after the BoJ cut its six-month rates to 28 per cent. Despite bids of $872 million for $300 million in T-bills, the weighted yield was 232 basis points above the BoJ repo rate as investors demanded a premium for participating in the auction.
2. BoJ cut its six to 12-month repo rates as it scrambled to create a more positive market sentiment, given rising local and international concerns regarding the impact of interest rates on the Government of Jamaica fiscal accounts.
3. The Consumer Price Index (CPI) kicked up 1.6 per cent in April after two consecutive months of decline. Fuel costs, along with the currency weakness, began to manifest themselves in prices as all areas saw rising costs. The challenge in coming months will be to determine if the combination of taxes and foreign exchange slippage will be fully reflected in the CPI.
4. The fiscal deficit worsened by $16 billion versus last year, and was $21 billion behind budget. Revenues were off five per cent, while expenditure was 10 per cent over targeted levels. The negative variances have been the source of great concern, one of the frequently noted factors in the loss of confidence and uncertainty that have battered our money and foreign exchange markets as well as global bond prices. As a result, a massive corrective tax package will likely curb consumption this year.
5. The Net International Reserves (NIR) grew marginally but will be a closely monitored indicator in coming months for investors to gauge overall economic dynamics and factor in their decision-making. The NIR is likely to decline in May as the BoJ's intervention strategy ratchets up. The NIR at levels between US$800 million to US$1.0 billion have historically been adequate to meet the country's needs.
6. Tourist arrivals rose by 24 per cent (we had to check the numbers twice!) in 2003. The travel uncertainty has kept North Americans (up five per cent) closer to home, while Europe registered strong stopover growth (up 24 per cent). Cruise-ship arrivals have overtaken stopover tourists, growing 24 per cent and accounted for 52 per cent of total arrivals. Ship visits increased from 139 to 180 for the first quarter. While these are positive developments, stopover arrivals still lag 2001 figures by four per cent.
7. The negative trends noted in our current account continue to worsen. Imports grew two per cent to US$3.14 billion, while exports fell seven per cent to US$1.34 billion as our trade gap continues to widen. Growth in remittance flows was strong and rose 23 per cent to US$980 million to plug a part of the hole in our balance of payments. Travel, largely tourism receipts, fell 11 per cent despite just a one per cent decline in stopover visitors as room discounting was heavy to retain market share.
8. U.S.-dollar deposits rose to US$1.43 billion, an increase of US$253 million over last year. Deposits continue to rise as locals hold foreign exchange accounts at home where better interest rates are available.
9. Internal debt was up $60 billion in the last 12 months as the remaining FINSAC debt was converted to Local Registered Stocks and became interest-bearing.
10. External debt increased seven per cent, primarily from new global bonds issued in 2002.
Article written by Deon McLennon, Assistant Manager, Research & Analysis at Pan Caribbean Merchant Bank. Please call 9295583 for more information.
