By Al Edwards, Business Co-ordinator
Latibeaudiere
OVER THE last few months the economy has dominated national debate, with the cess, the devaluation of the local dollar and interest rates taking centre stage. The Bank of Jamaica has remained above the fray, with its Governor, Derick Latibeaudiere at the helm, maintaining that the BoJ will both continue its tight monetary policy stance and intervene as it sees fit to stabilise interest rates.Happy birthday.
This week the Governor celebrated his 52nd birthday, making him a relatively young head of the Central Bank. You would have thought that he might have taken a little time away from the country's banking obligations in order to celebrate but it was business as usual with a full itinerary both at the Bank of Jamaica and at Jamaica House.
STABILISING THE JAMAICAN DOLLAR
The Governor is now preoccupied with bolstering the local dollar, which slide precipitously over the last month, hitting a high of J$72 to US$1. He confidently proclaimed that there is now a semblance of stability and that the panic that had been rampant only a few weeks ago has abated.
"Let me say that the initiatives we took have gone very well so far. As we speak the dollar is trading below $59 to US$1, which in the context of what happened last month is extremely good. It has continued its appreciating trend and overall the initiatives were successful."
There is speculation that the Minister of Finance is looking for the dollar to settle at around $57 to $1. However, the Governor made it clear that he has not got an exact figure in his mind and that if the market determines that $57 is the magic number then so be it but he has not wavered from his determination to intervene into the foreign exchange market as the BoJ sees fit.
RUN ON THE DOLLAR
However, the question remains, why did we have this run on the dollar? There are those who lay the blame at the feet of the speculators, others blame the large commercial banks for hoarding US dollars. How does Mr. Latibeaudiere see it?
"I think that is a rather complex issue. We had the announcement of a fiscal deficit in December and observers both inside and outside Jamaica were a bit alarmed at the level of that deficit. This in turned spurred a number of people to both comment and write and many of those articles were not positive. In addition to which, during that quarter, we had the threat of war which threatened both oil prices and tourism. That in itself had the effect of creating a lot of uncertainty and increasing oil prices, and as you know all of our oil and gas is imported. Also it led to a reduction of tourism inflows and everything taken together had the effect of impacting people's perception of the future. It is difficult for a country like ours to sustain all these shocks at the same time."
PRICE ADJUSTMENTS
Now that a degree of stability has been achieved, many businesses have not readjusted their prices. Many had to do so on a daily basis but there are those who have left them artificially high, some say, in anticipation of the local dollar sliding further later this year.
"It is heartening to know two things. One is that a number of firms did not readjust to the higher dollar valuation and two, there are some that adjusted to the higher prices initially but have employed a degree of prudence and settled for what is deemed fair."
HIGH INTEREST RATE REGIME
The business community has long bemoaned the high interest rate regime and have said that it acts as a deterrent to growth and limits the abilities of the banking sector. Many of the barbs have been aimed at the Bank of Jamaica and it remains stoic in its attempts to deflect them, always putting out the line that rates will come down as and when circumstances demand.
Many business leaders are asking why was the latest US dollar indexed bond priced at $57 and there is a growing clamour for interest rates to be reduced as quickly as possible.
"You asked why the indexed bond was priced at $57 and many people ask me that same question but the truth of the matter is we don't price those bonds, neither do we issue them. The Government chose an exchange rate that relative to the existing exchange rate would have yielded investors a capital gain and it is not to be taken one way or the other as a signal. Indeed, I know it has been taken as a signal. I am not going to dissuade people from trying to bid the dollar down to $57 but you must know that the pricing came from the Ministry of Finance."
The Governor admits that interests rates are high now, which breaks the recent trend of steady reductions. He considers the current high interest rates as being nothing more than a blip with underlying conditions being favourable. The way he sees it , once conditions are right, rates should reasonably return to the declining trends that were once prevalent.
"You must understand that the Central Bank can only signal it, it is really the markets that determines it. It is a case of supply and demand of resources that puts interest rates into some sort of context. If you have the Government borrowing funds from the market and at the same time the private sector wants to also borrow, this will only have the effect of increasing rates. This is something that the Minister of Finance has spoken to on a number of occasions.
INSTRUMENT
"The Minister cannot afford to put out an instrument and not have people subscribing to it. That having been said there are other issues to consider here, more notably the consistency of the monetary stance we have taken to ensure that inflation doesn't get out of control. There will be challenges ahead this year, that's for sure. " What I can tell you though is that we will be seizing opportunities to reduce interest rates as they present themselves but we have to be very careful because what we are doing is re-establishing confidence. Our focus is to reduce rates in a sustainable manner. Nothing looks more ridiculous than reducing interest rates and no sooner have you done so, you are forced to increase them. An institution can lose credibility doing that."
The Minister of Finance, Dr. Omar Davies has said that he is looking for an average interest rate of 19 per cent somewhere by the end of the year. There are those in the business community who view this as being a tad optimistic. What are the Governor's thoughts?
" The Minister has said that a part of the interest rate structure should be at 14 per cent. Therefore, if the fixed part is 14 per cent and the average is 19 per cent that means the other part must come down to 24 per cent or in that region. I think that is an achievable figure and we must hope that there are no further shocks to prevent us from meeting that target. Now to achieve that we must have confidence returning to the foreign exchange market and we must be poised to record another quarter of growth together with the need for a more benign external environment for Jamaican borrowing on the international capital markets."
Some people are of the opinion that the Governor should borrow a leaf from Alan Greenspan's book and continually reduce interest rates to spur growth in the economy. The Governor, however, counters that the American economy is far more self sufficient than the Jamaican economy. He says that in the American economy, interest rate reduction can be quickly translated into output because the United States utilises its own internal resources. "What we have to be careful about is that interest rate reduction doesn't lead to a demand for foreign exchange and also a demand for borrowing that leads to greater consumer demand. What we are talking about here is different economic structures." Why is our debt stock so high?
ASSURANCES
Dr. Omar Davies has given assurances to the more renown international finance houses that Jamaica will maintain its fiscal targets with the Government aiming for a 5-6 per cent deficit and a primary surplus of 12 per cent. He has said that he is looking to borrow US$350 million on the international markets this year to service the external debt but only if market conditions improve. If that move should prove unsuccessful he is likely to turn to the reserves. The US$350 million represents amortisation on the US$4.2 billion external debt stock.
What is glaringly apparent is that the country's stock of public debt which now stands at J$613 billion means that every Jamaican will now be nominally required to repay $235,000 mainly through taxes just to cover principal payments. It is hard to believe that the public debt in 1991 stood at $45.8 billion and today it sits at $613 billion (external-$240 billion, internal-$373 billion). " The truth of the matter is that we have been borrowing quite steadily to pay amortisation which means the debt stock has not increased significantly over the last few years even though it seems that we are borrowing heavily on the external market. The increase in the debt stock was a deliberate strategy to swap FINSAC-related domestic debt for cheaper foreign debt. By and large borrowings have been just about what amortisation payments are."
Part II next week
