NIR hits 12-year low
Marcella Scarlett, Business Reporter
The Net international reserves (NIR) dipped below US$1 billion for the first time in 12 years, but the market has been sanguine about the development signalling faith that nothing will derail the expected bailout deal with the International Monetary Fund at monthend.
The NIR dropped from J$1.009 billion in January to US$953.53 million at the end of February. The last time it was that low was January 2001 when the reserves were at US$927 million.
"A month ago compare to now we are in a better position even though the NIR was higher. Back then we were not sure if we would get an agreement but now we know what it will take to get one and we are working on the prior actions to satisfy the IMF," said Brian Frazer, vice-president and general manager of Scotia Asset Management.
Colin Steele, an analyst and director of Sagicor Investment Jamaica, said foreign reserves are used for balances-of-payment support and since last year was a "difficult year", and Jamaica's economic conditions were unchanged, the market expected that the NIR would be depleted.
At its current levels, the NIR represents imports for 16.7 weeks of goods or 12.49 weeks of goods and services. The rule of thumb employed by economists and analysts is that the reserves should be sufficient to pay for 12 weeks of imports of goods and services.
Steele said any worry about the NIR right now is "unnecessary."
He said that while the market may be concerned about the NIR, "we need to remember that the whole reason for the NIR is to use it when we have difficulty - and last year we had difficulty."
In calendar year 2012, the NIR lost US$840.53 million of its value - decreasing from US$1.96 billion to US$1.13 billion - some of which was deployed by the Bank of Jamaica in a vigorous defence of the Jamaican dollar. For the two months in 2013, the NIR fell by US$186.05 million, a faster decline than the similar period last year.
The JMD meantime continues to lose value at the breathtaking pace of about nine cents per trading day. On January 1, the currency was valued at J$92.98 per USD; today the rate is J$97.34.
The market expects demand pressures to ease once the IMF signs off the US$750 million extended fund facility. The funds will be distributed in tranches under a two-year programme.
The execution and work in progress of the prior actions required by the IMF are well under way - a J$860 billion debt swapped was wrapped up in February, a new tax package amounting to J$15.9 billion has been imposed, the powers of the finance minister to distribute tax subsidies have been curtailed, and the Government is in the process of inking three-year wage freeze agreements with public-sector unions.
"With the debt exchange done and other prior actions, the market is expecting an IMF agreement in short order. A scenario without an agreement is not an option right now - the uncertainty is still there but at least there is no panic because people are anticipating the deal," Frazer said.
This uncertainty is reflected in the continued slide of the JMD.
Both Steele and Frazer said that the completion of an agreement with the IMF will positively impact the NIR immediately as getting the stamp of approval from the IMF will open up the flow of monies from other multilaterals and the capital markets.
"I agree that it is low, actually very low," said Frazer, "but remember that it is not just the monies from the IMF that is important, but that it opens up - funding from other multilaterals, and grants as well," he said.
Another analyst, John Jackson, said he is also not too worried about the declining NIR.
"What hasn't been said is that the fiscal deficit feeds into a balances-of-payment deficit. The programme the Government is putting in place will reduce the fiscal deficit and help to improve the balance of payments, so when the funds come in they will basically stay there because there will be less demand for foreign exchange," Jackson said.
"The measures will ease pressure for foreign exchange, and multilaterals flows that we have not been able to access will start coming in. In addition, there will be a likely revaluation during the year and that will cause people who converted before to shed their US dollar investments - converting back to Jamaican dollar. So the NIR will increase from funds coming in, plus from the conversions."
Jackson said there is "a great possibility" that the reserves will climb back above US$2 billion before yearend. The NIR peaked at US$2.6 billion in April 2011, more than a year after the first IMF bailout agreement was inked in 2010.
Frazer said the markets will be keeping close tabs on the fiscal trajectory looking out for the quarterly updates and the other fiscal indicators post-IMF agreement, "because we don't want the IMF to pull their support prematurely," he said.
The first agreement was derailed after the Government breached the terms of the bailout programme relating to wages, other spending and divestments.