OranHall, Personal Financial Advisor
When a currency loses value, some people lose, but others gain. The Jamaican dollar has depreciated steadily in recent months and consumers are feeling the change, even the best planners.
Who are the people that gain when times are getting so hard? People who receive remittances from abroad, gain. They get more Jamaican dollars for each unit of foreign currency so, in Jamaican-dollar currency terms, they are better positioned to cope in the new environment.
Those who earn foreign exchange by working as consultants for clients abroad or earn income from conducting business on the Internet, are in a good position to protect themselves in the current environment.
People have invested in securities and other assets denominated in a foreign currency should benefit from the depreciation of the Jamaican dollar when they convert their interest, rental and dividend income to Jamaican currency.
The same should happen if they realise the gains on their assets by selling them. An interesting fact is that they can realise a gain in Jamaican-dollar terms in a case in which they make a loss in foreign currency terms if the gain arising from the depreciation is greater than the capital loss.
If they invest in Jamaican- listed companies that are net earners of foreign currency, they should also be better off due to the positive effects that the foreign-currency gains would have on profits.
If the monetary authorities choose to increase interest rates as a means of protecting the local currency by making it more attractive to persons with money to save or invest, thus making them less inclined to demand foreign currency or foreign securities, buyers of such local interest-earning financial instruments gain from the higher returns.
On the other hand, individuals who require foreign currency for any kind of transaction are hurt by the depreciation of the local currency. Some people need to pay fees for their family members who are attending school abroad; others incur expenses related to health care abroad. These two groups are generally not large.
But there is a group that includes all of us. It comprises all persons who use goods, including basic food items, which are imported.
A depreciating currency causes the prices of such items to increase. By causing the price of critical goods, such as oil, to increase in Jamaican-dollar terms, depreciation causes the price of goods that use oil as an input to increase. Consequently, the price of electricity and transportation, for example, increases. The inflation induced by depreciation thus reduces the spending power of all of us.
When interest rates increase, the cost of borrowing increases to individuals who need funds for their business, who need mortgages and who need to borrow for other purposes. Investors wanting to sell fixed-rate bonds may have to sell at discounted prices to enable buyers to derive yields that are in line with prevailing market rates.
Pensioners are among those who are very seriously hurt when a currency depreciates. If their pension is indexed to inflation, they have some protection. If their pension is fixed, with no provision for increase, they usually hurt seriously.
It is important to build a diversified investment portfolio including, as much as possible, securities denominated in foreign currency. It is also important to use goods produced locally although there is no guarantee that their prices will remain stable considering the extent to which foreign inputs are included in goods produced here.
Situations such as we are experiencing now help us to understand why it is necessary to evaluate and perhaps modify our financial plan periodically.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of "The Handbook of Personal Financial Planning", offers free counsel and advice on personal financial email@example.com