THE JAMAICAN market never seems to be short of the kind of excitement and uncertainty that can make both traders and investors go bald, tearing their hair out as they try to really figure out where the markets are headed. You can probably add the Bank of Jamaica (BoJ) and Ministry of Finance to that bunch also. The main question on people's lips remains, "Where is the exchange rate going?". There are two schools of thought building out there.
The college graduates forecasted that the Jamaican dollar will be at least $60 to the US dollar by year-end. That's a further 11 per cent depreciation versus the current rate. They believe that we have to produce, and the balance of payment is a clear case that exporters need help and imports need to be curbed. Besides, high interest rates will eat up the Government of Jamaica's (GoJ) budget if sustained for 2003, so rates must decline or else the deficit targets won't be met.
The college professors, however, have a different view. These experts say that at J$60 to US$1, inflation expectations will creep back in and all the pain endured since 1994, will be for nothing. Eventually, that will lead to higher interest rates.
Players on the sideline think that while the roads are different, they may eventually end up at the same location. Big bets are being placed on both sides in this high stakes game. However, the professors have the BoJ's Governor, Derick Latibeaudiere, on their side and that is enough to make the odds 50/50 in our view.
ANALYSIS
The Ministry cancelled its six-month T-Bill auction in February as it sought to avoid any further run-up in interest rates. Tight liquidity would have likely driven this re-pricing benchmark for floating rate Government of Jamaica securities above 20 per cent, a yield not seen since December 2000.
On February 14, the Bank of Jamaica delivered a Valentine's Day gift to the market as it withdrew its 30 per cent five-month open-market instrument after four days. The introduction of this instrument created chaos in the money market as over $7 billion in liquidity disappeared. This extraordinary action had the effect of temporarily stabilising the foreign exchange market, but raised concerns about the underlying fundamentals of the economy, given the need for a rate hike of this magnitude
The Consumer Price Index (CPI) fell 0.3 per cent in January 2003, as the prices of vegetables, fruit and starchy foods all declined. Food and drink represent 56 per cent of the CPI, and a glut of food on the local market depressed the Index despite a 6.4 per cent jump in electricity costs and higher prices across all other categories.
The fiscal deficit worsened by $16 billion when compared to the same period last year. Revenues were 11 per cent behind the targeted level as tax receipts anticipated were not achieved, and were only three per cent ahead of last year. On the other hand, expenditure was seven per cent ahead of budget, and 19 per cent ahead of the financial year 2001/2002.
The Net International Reserve (NIR) fell 17 per cent from a combination of foreign exchange sales by the BoJ, but more importantly, the GoJ's decision not to refinance a Euro$200 million bond maturing in February 2002 at terms it considered unfavourable, accounted for most of the decline.
Tourist arrivals fell by 0.8 per cent. Only the United States registered a one-per cent increase, with all other market regions registering declines. Canada and Latin America fell by 12 per cent and 19 per cent respectively. Tourism expenditure fell five per cent, declining by US$56 million.
The current account worsened by US$217 million over last year. The trade gap continues to widen as imports grew two per cent while exports declined by 13 per cent. Consumer goods remain the fastest-growing category of imports. Remittances continue to plug a hole in the Balance of Payment (BOP), growing by US$104 million over 2001, helping to offset declines in tourism receipts.
Foreign exchange deposits rose to US$1.43 billion, an increase of US$253 million over last year. We believe Jamaicans continue to hold US dollars in Jamaica as a result of a slumping US stock market as well as substantially better deposit rates available in the local market.
The country's internal debt stood at J$351 billion at December 2002 up J$56 billion from the year before.
The country's external debt increased by US$0.1 billion to US$3.9 billion when compared to the same period last year.
Deon McLennon is..............Pan Caribbean Merchant Bank
