Recent decline in exchange rate excessive, sparked by bond rumour — Wynter
A bond offer from a top American bank, Goldman Sachs, has proven disruptive to Jamaica's foreign exchange market in recent weeks, forcing the Bank of Jamaica to call on its reserves in order to stop the local currency from falling too far and too fast.
On Thursday, BOJ Governor Brian Wynter proclaimed that a 0.9 per cent depreciation in the rate of exchange between the Jamaican and United States dollar in April and a 1.8 per cent decline so far in May was excessive and not supported by prevailing economic conditions.
It's a view that confirms the concerns expressed by some in the business community that the currency has been decelerating at too rapid a pace.
Wynter said the pressure on the foreign exchange rate since April appeared to have been influenced by specific financial account transactions and their impact on market pricing.
The most significant of those "appears to have been the prospect of a large US dollar bond issue in the local capital market by a foreign financial institution," Wynter told his quarterly press briefing at the BOJ's offices in downtown Kingston on Thursday.
"This stimulated additional demand for foreign exchange and influenced expectations of further depreciation."
Wynter declined to name the foreign financial institution, but talk has been circulating for a while about expected dealings by Goldman Sachs.
The term sheet for a Goldman Sachs bond to be issued in Jamaica was released on April 20. It's understood that some in the investment community have quietly been railing against the offer as essentially a bet against the Jamaican dollar, even as Jamaican investors line up to subscribe.
"We should kill this deal," declared one fund manager, who spoke on condition of anonymity on Thursday.
The offer is said to be priced in US dollars, but Goldman Sachs reserves the right to service the bond in Jamaican dollars. The bond matures in six years in December 2022.
The BOJ governor said the bank's assessment, supported in recent statements by the International Monetary Fund (IMF), is that the Jamaican dollar, which traded at $125.42 to the US dollar on Wednesday, is now fairly valued.
In maintaining that position, the exchange rate can be expected to move in line with the difference between Jamaica's inflation rate and that of its main trading partners, he said.
Wynter said that assessment reflected the substantial gains in external price competitiveness that had been achieved over the past four years, noting that, in addition, the current account of the balance of payments at current levels is sustainable.
The estimated current account deficit of 2.2 per cent of gross domestic product (GDP) for fiscal year 2015-16 was more than covered by the inflows of foreign direct investment, estimated at 5.8 per cent of GDP, the Governor said.
The BJJ's forecast is for the current account deficit to remain within the range of two to three per cent of GDP in fiscal year 2016-17.
According to Wynter, the experience of two consecutive years of low, sustainable deficits will be the first Jamaica has had in nearly 20 years and only the second time since 1963 that Jamaica will have had a sustained period of balance in the external current account.
Against that background, the central bank governor said, the BOJ sold US$95 million into the market on April 28, representing the single largest intervention volume sales to the market on any given occasion.
"It signalled the Bank's commitment to ensuring orderly adjustments in the exchange rate within the context of a flexible exchange rate system," Wynter said.
The BOJ re-entered the market last Friday, May 20, and has maintained a presence in the market since then with sales of US$63 million so far.
Wynter said the Bank's policy stance will be geared towards maintaining low inflation as the foundation for higher GDP growth. The Bank's inflation target for fiscal year 2016/17 has been lowered to 4.5-6.5 per cent.
"The target assumes that international commodity prices will gradually increase and that there will be continued improvements in domestic demand," he said.
However, the Governor said "the impact of the recently announced tax measures on inflation is not expected to be significant, although there is some risk arising from second round effects. When you move a price even by a small amount there is the potential that other prices are moved and we have to monitor carefully to ensure that if we maintain the conditions we've been describing there should not be much."
Last week, the IMF said the level of the exchange rate appeared broadly in line with fundamentals, but the balance of risks points towards a modest overvaluation.
Wynter said "it's an issue on which we don't have any disagreement. The exchange rate is broadly in line with fundamentals. That is the same language as mine that it is fairly valued."
However, he said "if the oil price retraces we have to recognise that that is a risk that we have a different current account deficit by potentially significant amounts."
If that happens and the deficit moves to six to eight per cent, for example, then one could not then say the exchange rate is fairly valued, he added.
"That's one risk. There are probably other risks that the IMF is looking at, but that's one that we can talk about clearly," Wynter said.