Tue | Dec 12, 2017

Borrowers turn to foreign currency loans amid market stability

Published:Wednesday | August 23, 2017 | 12:00 AM

Despite the continued fall-off in the cost of borrowing in local currency as interest rates declined, borrowers turned to foreign currency loans in the first quarter of the year, according to the central bank's latest Credit Conditions Survey released last week.

The survey reviews demand and supply for credit on a quarterly basis. It is done in retrospect, meaning that it falls one quarter behind the period reviewed in the Bank of Jamaica's (BOJ) Quarterly Monetary Policy Report, the QMPR, for the April-June period.

During the March quarter covered under the credit conditions report, the Jamaican dollar gained 2.1 per cent against its US dollar counterpart.

The central bank indicated that overall demand for credit fell below other periods, but said nevertheless that there was strong demand for foreign-currency loans from the construction, tourism and distribution sectors.

"The stability in the exchange rate during the review quarter made it more feasible for businesses to borrow in foreign currency," the BOJ stated in the June QMPR.

And what demand there the report noted, was driven by factors such as increased business activities, loan promotional activities, lower interest rates, and developments in various economic sectors.

Generally, however, growth in credit demand, as measured by the Credit Demand Index (CDI), was relatively muted in the March quarter, the central bank said. The CDI fell from 107.7 points to 101.5 due to a fall-off in demand for both business and personal loans, but the

BOJ said lenders reported that the response was seasonal and related to the tabling of the budget by government.

Loan demand fell in the mining and quarrying, distribution, manufacturing and entertainment sectors. At the same time, borrowing costs fell by 477 basis points on average to 20.7 per cent, influenced by lower rates offered by new commercial bank entrant JN Bank. And foreign currency loans fell 13 basis points 10 per cent on average.

The cost of new loans fell 183 basis points on average to 13.8 per cent for local currency, relative to the previous quarter, with lower cost of business loans partly offsetting more expensive personal loans. New foreign currency loans declined by 79 basis points to 7.7 per cent.

BOJ said the lower loan rates to businesses were "associated with reported changes in lenders' risk appetite as well as their economic outlook for specific sectors".

avia.collinder@gleanerjm.com