Sabrina N. Gordon, Business Reporter

The Net International Reserves (NIR), which act as a measure of foreign goods and services that can be purchased over a period of time, has fallen back below the US$2 billion mark to levels last seen in 2005.

At its current level of US$1.9 billion, recorded at the end of September, the NIR is back to two-and-half-year lows.

Its month-to-month decline to September was US$151 million.

The reserves have plunged alongside the Bank of Jamaica's desperate interventions in the market to contain the slide of the dollar.

At least one analyst has described the central bank's actions as futile.

"Intervention is a waste of time as the desired effect is not being achieved," said Christopher Chin-Loy of investment bank Dehring Bunting and Golding.

"We are in a precarious position and this speaks to a bigger problem of what is happening in the economy in terms of stability," he said.

On Wednesday, the central bank sold U.S. currency into the foreign exchange market - or as the market puts it, 'provided liquidity support' - at its highest level, supplying the hardback to dealers at $70.91 for resale to end users at $70.96.

The central bank has intervened three times up to Thursday, but the spot trades at market close was weighted at $71.13.

While the level of currency sales to the foreign exchange market affects the performance of the reserves, it is not the only factor determining its movement.

significant drop

"The magnitude of the drop in the NIR over a one-month period is significant and the foreign exchange market is certainly a part of that reason," said Dean McDonald assistant vice-president of economic analysis at First Global Bank.

Notwithstanding the BoJ's strong hand, the Jamaican dollar swung to another low, ranging as high as commanding up to $72 across the market in spot trading on Thursday.

The NIR's record high reached US$2.33 billion in March 2007, but with the plump accounts available, the BOJ has been dipping generously into the funds.

Analysts say that even though there is a concern in the market at this time about the monetary authorities activity, the US$1.9 billion stock of reserves is still considered high, and has not triggered any alarms.

But it was noted at the same time that if expenditure continues in the way it is now, running down the reserves by more than a US$100 million monthly in the coming periods, the situation could easily become a serious issue.

"We believe the NIR position is still very strong," said Christopher Williams, managing director of NCB Capital Markets Limited.

"The current pressure on the currency does not signal a fundamental shift in investor confidence and we expect it will settle in due course."

Clinton Brooks, managing director, Investments at Stocks and Securities Limited, said the level of the reserves was not necessarily of concern to local investors, saying "they tend to follow how the JMD is doing against the USD more than how the NIR level is doing."

It would be more a worry to bond holders overseas, he said, as the level of the NIR signals the government's ability to pay coupon and principal payments on its eurobonds.

debt level

Outside of the BoJ's forex forays, McDonald noted that balance of payments performance and the significant debt level faced by the country would have factored in the depressed reserves.

"The widening of the deficit on the current account is also pulling down on the reserves as the surplus on the capital account is unable to compensate for this deficit so the reserves have been tapped," he said.

Added Chin-Loy: "The debt level is way too high and if we don't have growth to sustain thsi level, then we will face significant problems."

The major issue to be addressed in the currency's performance said brokers was the source of the demand for the U.S. dollar.

"There is always supply, but where the demand is coming from is the real cause for concern, because as soon as money is on the market it is taken up," said Chin-Loy.

Brooks, meantime, cautions that the NIR's position might be temporary, saying the US$150 million proceeds from the refloated 2039 bond a week ago may well be used to rebuild the reserves "back over the US$2 billion mark by the end of October."

The market is now expecting even higher interest rates, which are now hovering at 14 per cent on treasuries, given the excess demand for the U.S. dollar and the pending issue of variable instruments with higher rates by the government.

"Expect new issues of Government Paper and local interest rates increasing by 1-2 per cent in the short term," said Brooks.

Chin-Loy believes that the currency should be left to settle on its own at around US$72:US$1.

Brooks believes that there will be continued depreciation of the Jamaican dollar between 3 to 5 per cent over the short term, with exchange rate expected to level off between J$73 and J$75, he said.

On the other hand, McDonald believes that by the end of the year the central bank would have taken additional steps to stem the currency's decline.

sabrina.gordon@gleanerjm.com

TAKEN FROM THE FINANCIAL GLEANER, FRIDAY, OCTOBER 12, 2007