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Morris: Despite depreciation Jamaican dollar still overvalued

Published:Wednesday | March 25, 2015 | 12:00 AMNeville Graham

The value of the Jamaican currency against its US dollar is expected to continue to slide for the rest of the year albeit at a slower rate, according to strategists at Scotia Investments Jamaica Limited.
On Tuesday, Jason Morris, Scotia’s vice president for business analytics, portfolio advisory and product development, said at a company forum touting opportunities in mutual funds that the Jamaican currency is nearly seven per cent overvalued and that he expects that there will be some amount of correction in the near to medium term.
He made the observation as he traced the currency’s depreciation toward the REER – the real effective exchange rate.
“In 2008 our currency was at its highest level of overvaluation at that time so we needed a depreciation of the nominal exchange rate to correct this imbalance. In May 2012 again the overvaluation was the highest it has been since we started (watching it), and so the nominal exchange rate needed to depreciate, which is what effectively happened,” Morris said. He adds that the rate of depreciation has slowed since 2013 in percentage terms.
The ‘Client Opportunity Forum’ was hosted at Scotia Investment’s head office at Holborn Road.
Morris said that despite the present level of overvaluation he expects the adjustment to be gradual over an expended period.
He noted that recent corrections in the exchange rate may have been significant in basic dollar terms but percentage-wise there was no cause for alarm.
“The reason people were saying the depreciation was rapid is because they were looking at the nominal dollar value - one per cent of a hundred dollars is certainly larger than one per cent of fifty dollars - so when the currency depreciates by one per cent after it has gone to $110, that dollar change is going to be larger than when the currency was at $80 and it did the same one per cent depreciation,” he said.
“That’s what people were focusing on - the nominal dollar change instead of the percentage change - but it is the percentage change which is more important,” he told the forum.
Morris also indicated that inflows from Foreign Direct Investments have provided a buffer against any currency pressures, hence the optimistic outlook.
He reported that the rate of currency depreciation has slowed especially since FDI flows doubled, taking Jamaica back to `pre-global cash crunch levels of US$700 million. Morris says these inflows coupled with a moderation of inflation augur well for the Jamaican investment climate.
Scotia Investments is on a drive to promote investment opportunities for current and prospective clients. In addition to its Jamaican Dollar Money Market Fund and the Scotia Caribbean Income Fund, the firm is pushing a Global Growth Fund, a US Growth Fund, a US Dollar Bond Fund and the Canadian Growth Fund.