Dennise Williams, Staff Reporter
The success of the Ministry of Finance and Planning in floating its Eurobond earlier this month has swung against them. Finance Minister Omar Davies at the official opening of the Arnett Garden Amusement Park in St. Andrew on December 11, 2004. At right is David Hall CEO Digicel Jamaica. - JUNIOR DOWIE/STAFF PHOTOGRAPHER
ON WEDNESDAY evening, the Bank of Jamaica (BoJ), for the second time in as many months, convened a meeting with the major players of the financial sector.
The topic was the same as the last time - the rapid depreciation of the Jamaican dollar against its U.S. counterpart.
However, there was a twist to Wednesday's meeting. The BoJ wanted speculators to be identified and segregated from the real users of foreign exchange.
As reported in yesterday's Gleaner ('Central Bank Bracing Against Dollar Plunge') the BoJ has kept up an aggressive stance in the foreign exchange market with 20 interventions over the last four months.
GENERAL INFLATIONARY PRESSURES
Now there have been suggestions in some quarters that the movement in the dollar is a result of the general inflationary pressures in the economy. Essentially, it can be said that the foreign exchange movement is not speculation but market sentiment.
Claudette Crooks, financial analyst and director of Today's Money Limited, said, "My understanding is that what has caused pressure on the local currency is that investors were gathering up funds for investment instruments."
Indeed, the time line tells the tale.
Between September 28 to October 11, three U.S. dollar-denominated instruments were issued by the Ministry of Finance.
By September the dollar was at $62.56 and by this mid-week, the dollar reached a high of $64.50.
US DOLLAR BOND
According to a source at Barita Investments, "The U.S. dollar 2010 bond came out first. This was woefully oversubscribed and the offer was closed off in one day. Then there was a U.S. dollar index bond redemption on October 4. And usually, when index bonds mature, the Jamaican dollars are converted to U.S. dollars. Added to that, the Eurobond came out on October 11, which investors rushed to get hold of because of the returns in U.S. dollars."
At this point, Orville Johnson, chairman of Today's Money added, "And the basic thing about Eurobonds issued by the Government of Jamaica is that they are bought by Jamaicans."
In fact, the Financial Gleaner understands that Jamaicans hold over 60 per cent of Jamaican Eurobonds.
That said, our Barita source concluded, "From an instrument standpoint, the money to invest has to come from somewhere. I cannot address the situation of speculation, but collectively these instruments required US$300 million from Jamaican investors."
Indeed, Ms. Crooks said, "Investment funds were being converted to U.S. dollars and drove the spiral to the levels it is now at. And because the Bank of Jamaica funds are from their reserves, those funds are available mainly to end users such as large industrial and commercial entities. So what you find is that the end user needs are lagging behind the investors needs. However, my understanding is that person's left Wednesday's meeting with the understanding that their demands will be met by the BoJ. And so you should see a fall off in foreign currency trading."
And this fall off is vital to the management of the wider economy.
Another financial analyst told the Financial Gleaner that, "Although the demand is caused by instruments issued by the Government, the BoJ has the additional burden to maintain the Jamaican dollar at a stable level for the Jamaican people. Local consumers cannot face a massive devaluation.
"And so the BoJ has to act. While they have enough reserves to push the dollar anywhere they like, they have to be realistic."
The analyst said our foreign reserves are borrowed money and unless a new supply of foreign exchange comes in, then the existing stock has to be carefully managed.
