IMF TRACKER - BOJ signals improved investor confidence
McPherse Thompson, Assistant Editor - Business
The Bank of Jamaica (BOJ) has been able to raise funds for between four and seven years, using its United States-dollar certificates of deposit to build a more stable foreign exchange-reserve base, which it envisaged as a sign of improved investor confidence in the market.
Nearly two weeks ago, the Bank made an early repayment of US$145 million of two-year CDs it issued last year, replacing them with four, five and seven-year instruments.
"We are now able to raise funds for four, five and seven years, and so what we've been doing is essentially pre-paying or paying back early the shorter maturities, which aren't as valuable to us, in terms of having a stable reserve base, and replacing them with four-, five- and seven-year CDs, slowly but steadily," central bank governor, Brian Wynter, told a media briefing in Kingston last week.
He said the yields on those instruments are substantially below last July's US$800-million government bond coupon of 7.625 per cent.
"That Jamaican investors find that attractive, is fair to say, is a sign of improved confidence, certainly on the part of those particular investors," the governor added.
Head of treasury and trading at Scotia Investments, Gregory Samuels, agreed with the governor, arguing, "It is no secret that there is some level of confidence returning, compared to a year or two ago."
He said that was largely driven by the success, so far, in passing the International Monetary Fund (IMF) tests and the vote of confidence from other multilaterals, as well as the rating agencies, noting that Jamaica is poised for an upgrade.
In addition, Samuels told Wednesday Business the success of the Government's bond issue last July "in itself speaks not only to local confidence but also international confidence".
Manager of treasury and trading at Victoria Mutual Wealth Management, Evette Bryan echoed similar sentiments, noting that it represented a mix of both investor confidence given Jamaica's success with the IMF tests as well as the government staying out of the market, thereby limiting options to purchase locally issued bonds to mostly Bank of Jamaica offerings.
"The odd corporate offering is a good option, but these are not as available or tradeable as the BOJ papers," she said.
The BOJ issues CDs as part of its open market operations, its most important monetary policy tool. According to Wynter, its activity in the market has been following "sort of a normal pattern" that it established over the last 12 months.
"It helps to maintain a liquidity environment that is appropriate to the broadly accommodative monetary policy that we have been following," he said.
He said every month, the BOJ tends to bring in between US$20 million and US$30 million, "sometimes more, sometimes a bit less, meeting the appetite of investors who need a safe place to store US-dollar liquidity".
The BOJ said placements on its US-dollar CDs have averaged US$36 million per month over the past two months.
The governor said the market was very liquid in US dollars, "and there aren't many opportunities to earn returns of the kind of levels that we are prepared to pay".
Wynter said the central bank has been able to put back US$145 million of liquidity into the foreign exchange market because "we actually find that we can do better. We can get funds for the longer maturities because there is greater confidence. That then should affect the kind of relative pricing for shorter-term, versus longer-term money in US dollars in Jamaica. Our ability to do this is not different from, it's related to the Government's success with the bond issue last year".
But the governor cautioned: "I think there's more to go, in terms of rebuilding confidence, so I don't want these remarks to be taken as signalling victory or (that) we are there. I think there are people who continue to remain uncertain, who stand on the sidelines, are not sure."
Last week, Wynter revised downwards the forecast and outlook for inflation, noting that the bank is now expecting it to come in below the seven to nine per cent for fiscal year 2014/15, and three to five per cent for the 12 months to September 2015.
"I think it's important, though, as we evaluate where we are and whether we are going, that people have this information about the inflation outturn and have this information about the outlook for inflation in Jamaica, because it does have significance for assessing the relative attractiveness of US and Jamaican-dollar investment instruments, and it also impacts the foreign exchange market, for both buyers and sellers," he said.
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