Davies
FINANCE MINISTER Dr. Omar Davies's plan to bring interest rates down to 14 per cent by next April appears to be in tatters.
Interest rates on the signal 30 day Bank of Jamaica repurchase rate currently stands at 16.45 per cent, substantially above the 15 per cent target set for November. And the central bank on Friday hiked its 365 day rate by four per cent to 22 per cent for the second time in eight weeks in a bid to defend the Jamaican dollar.
Of the five money market dealers canvassed this week all said a 14 per cent end of fiscal year target was now "impossible" and raised question marks about the growing debt service obligations of the Government.
Bank of Jamaica (BoJ) Governor Derick Latibeaudiere said yesterday he was "not dissatisfied" with where the rate was and again highlighted the fact that the signal 30-day rate, which sets the benchmark for broader interest rates, had not changed and was in fact trending down.
Mr. Latibeaudiere said the central bank had reacted to speculative movements in the currency by using the two primary tools in its arsenal, interest rates and drawing on net international reserves (NIR).
Net impact
The BoJ chief said the bank had sold over US$50 million into the local market over the past month and purchased about US$30 million, leaving a net impact of around US$20 million.
He said the market should remember that "the central bank will use the tools available to it to stabilise things. A central bank's primary objective is to dampen inflationary pressures". He added: "We see this as short term instability and acted accordingly... People should remember that we all desire for interest rates to go down but it's a target and has to be viewed in that context."
"I'm not dissatisfied by the current rate," Mr. Latibeaudiere said. He drew a strict line between the central bank's open market operations and the Ministry of Finance's debt raising operations. "The central bank by its nature deals with the tools at its disposal and it is only natural that that does not always synchronise with debt-raising activities".
He said it was right for the central bank to restrict money supply and try and keep a lid on inflation, while by its nature the Ministry of Finance would face demands to spend more money.
Traders this week said that much of the demand was genuine, that as much as US$15 million was due to a large commercial bank having to meet its obligations. They argued that investors were no longer comfortable in holding local dollar debt below a 17 per cent yield given that tax free instruments are now trading at around 13 per per cent for US dollar debt, without the currency risk.
"There is no way the rate is coming down to 14 per cent any time soon, not unless they are prepared to see the currency fly and that is not about to happen," according to one dealer who asked not to be named.
Another major market player said traders were growing increasingly suspicious of using treasury bills and other benchmark rates because of the BoJ's actions. "The signal rate may not have changed but we are not fools. Investors can see what is happening and will act accordingly." He added: "The Government has several issues that are maturing before the end of the year, I think they'll have to come to the market at an attractive rate and will probably come with a new index-linked bond."
Interbank overnight rates shot up to close to 30 per cent on Friday immediately after the BoJ hike as dealers scrabbled to cover positions.
In a move that took many by surprise, the BoJ said it was increasing short-term rates on its 270-day and 365-day Reverse Repurchase instruments.
The 270-day rate has jumped from 17.60 to 20 per cent, while the 365-day rate rose from 18 per cent to 22 per cent.
In its statement the BoJ said: "This adjustment in rates is a direct response to the sharp movement in the foreign exchange rate over the past week. The Bank of Jamaica cannot tolerate this rapid rate of movement as it jeopardises the attainment of key economic objectives."
And in his national broadcast on Sunday, Prime Minister P.J. Patterson said the dollar would be strongly defended against speculators.
The central bank move, the second such action in a few weeks, upset several traders as it came two days after a $350-million one-year Treasury Bill auction closed on Wednesday with an average yield of just 17.28 per cent. Also it came a day after an investment debenture closed at a similar rate.
At the same time it moved the short-term rate, the BoJ intervened in the foreign exchange market selling at US$1 to $45.20 in a bid to drive down the exchange rate which was heading towards closing the day at $46. The move appeared to work, at least temporarily, because the Jamaican dollar slipped back from a $45.80 to US$1 finish at closer to $45.50 to US$1, according to traders.
On Monday there was almost US$24 million traded among foreign exchange dealers and cambios with the currency closing at a ten-day moving average of $45.25 to US$1.
Memorandum
In his recent memorandum to the International Monetary Fund (IMF), Dr. Davies said he expected interest rates to be at about 15 per cent at the moment and fall to 14 per cent by the start of the new fiscal year in April 2001.
He added that the Government would take $73.6 billion of FINSAC debt on to its books at the end of March 2001 and that interest payments would cost around 3 per cent of gross domestic product (GDP).
For every one per cent jump in interest rates, debt service costs on the $73.6 billion jump by another $733 million for the FINSAC debt.
Government's borrowing on the domestic market has continued apace and rose by $9 billion in the first six months of the fiscal year to almost $184 billion. The five per cent increase was down from a high at the end of August of $189 billion but comes despite regular inflows of cash from overseas and pledges by Finance Minister Dr. Omar Davies to cut the stock of debt raised by Government locally as part of his plan to bring down interest rates.
Debt management unit (DMU) figures show that domestic debt has risen from $175 billion at March to $184 billion at the end of September this year. External debt at the end of July had slipped from US$$3.13 billion to US$3.02 billion.
The total debt stock at the end of July is up from $308.7 billion to $318.1 billion.
With the FINSAC debt added the total stock of debt could be more than $400 billion next year.
Analysts focus on domestic debt because of the cost of servicing it and the impact it has on local interest rates.
Total interest payments this year are expected to be $500 million less than last year at $41.4 billion. Domestic interest accounts for $33.1 billion of that, with external interest expected to be just $8.3 billion.
On top of this is domestic repayments on existing loans of an estimated $43 billion, while external amortisation is just $13.1 billion.
