Wynter: JMD no longer overvalued, credit market correction favours private investment
A combination of increased credit expansion and the Jamaican Government's hiatus from the domestic bond market has reversed the stifling of private investment, according to the Bank of Jamaica (BOJ), which is describing it as a positive "crowding in" effect.
At the same time, the central bank is reporting that the Jamaican currency, which is trading just shy of $120 against the US dollar, is no longer overvalued.
Government domestic borrowing for the quarter to September 2015 declined by almost 70 per cent relative to the same period in 2014, central bank Governor Brian Wynter said on Wednesday.
There was also an encouraging increase of 7.8 per cent in private-sector credit in the past year to September, compared to an annual rate of 4.5 per cent in the June quarter.
Wynter attributed the Government's ongoing fiscal consolidation to the sharp reduction in demand for domestic financing, noting that it has, cumulatively, hardly, changed since the four-year Extended Fund Facility with the International Monetary Fund took effect in 2013.
"In previous years, we have all seen that government's appetite for domestic borrowing was crowding out private-sector investment, and shifting too much of those investment sources towards government paper and away from productive activity," said the BOJ governor.
"In contrast, the recent combination of increasing private-sector credit and sharply falling government borrowing represents a long-overdue correction, and demonstrates the positive crowding in effect of the economic reform programme," Wynter said at his quarterly press briefing in Kingston.
He said that a major boost to the 'crowding in' effect will occur with the Government's payout of $62 billion of maturing National Debt Exchange bonds in February next year.
Lending rates shifting
"This is going to provide the banking system with additional liquidity to prompt further expansion in loans to the productive sector at which, we anticipate, will be even more affordable interest rates," Wynter said.
Noting that lending rates, in particular mortgage rates and those on instalment credit have been falling, he said "the decline, so far, has been at a pace that is slower than we would want to see".
Wynter said the preference is for most of the NDX liquidity flow into productive activity as well as the stock market, and for private- and public-sector interests to jump into the market with debt issues and equity to finance projects or acquisitions.
The central bank also anticipates that some of the funds will fuel consumption through car and home loans, and that some may go into building up foreign exchange positions as some stakeholders fall prey to alarmism of just a degree of anxiety about a potential depreciation of the Jamaican dollar, he said.
"I'd like to say to those and to everybody, please rest assured that the Bank of Jamaica has been carefully preparing for this event for some time. The Jamaican dollar is not any longer overvalued, and therefore it is less susceptible to unpredictable slippage," the BOJ governor said.
As additional insurance, he said, the BOJ has carefully built up net international reserves, which are running at about US$1 billion above the agreed IMF target.
Wynter also noted the proposed reductions in the primary surplus targets for fiscal years 2015-16 and 2016-17, stating that it will allow the Government to enhance the potential for growth and job creation with a timely boost to capital and growth-inducing expenditures.
"These expenditures will further enable private-sector investors to exploit the benefits to them of the crowding in effect," he said.
"With the move from an environment of crowding out by the public sector to one of crowding in of the private sector, there is a virtual red carpet for private-sector investment," the governor said.
"It is hoped that the banks and broader private sector will quickly, enthusiastically and effectively embrace the emerging opportunities."