Jun 2010 Financial News

Dollar gain underlines positive signs

Jun 04, 2010

The Jamaican dollar closed trading on Wednesday this week at $87.99 to the United States (US) dollar, representing a significant 1.8 per cent appreciation against the US currency since the start of the year. This is seen as a welcomed sign of underlying improvements in some key macroeconomic fundamentals and an indication that efforts by the Government to build confident in the market and wider economy are beginning to bear some fruit.

At the top of the year, the Jamaican dollar traded at $89.59 against the US dollar, and by the end of the three-month period to March, the central bank reported that the local currency had appreciated 0.1 per cent with most of the positive changes occurring in March. Much of this stemmed, at the time, from improved net private and official capital inflows and, to a lesser extent, from buoyant tourism receipts.

This time last year the currency was trading at $89.05, and had experienced a more than 10 per cent depreciation in its value for the year.

"It indicates a sign of reduction in demand for foreign currency," said Curtis Martin, deputy group president, banking & investment services and chief executive officer of Capital & Credit Merchant Bank.

"The balance of payment outturn would be giving support to this as well as significant multilateral inflows given the International Monetary Fund (IMF) agreement," he added.

Foreign-exchange purchases at the end of Wednesday's trading totalled US$32.9 million while sales stood at US$49.44 million.

The positive trend in the foreign-exchange market comes, too, against the backdrop of a relatively safe level of net international reserves of US$1.7 billion at the end of April, representing 18.49 weeks of projected goods and services imports.

At the same time, recently released central government figures show major improvement in key fiscal indicators. At the end of April, revenues and grants collected outperformed its target for the month by $324.9 million to stand at $12.5 billion.

Tax revenue collected for the month was $18.3 billion compared to the budgeted $17.9 billion. The government also managed to curtail its spending in the period, shaving $147.9 million off its expenses for the month to post an expenditure figure of $27.831 billion compared to the budgeted figure of $27.979 billion.

For Merrick Plummer, research and portfolio manager at Pan Caribbean Financial Services, given Jamaica's reliance on imports and the well known implications of depreciation in the Jamaican dollar in terms of higher prices for fuel, food and other goods and services, most Jamaicans would have welcomed the 1.83 per cent appreciation since the start of the year.

"The current appreciating trend reflects the confluence of favourable trends in the supply and demand for foreign currency," he said.

On the supply side, he pointed to improvements in the world's major economies beginning to have a positive impact on Jamaica with stopover tourist arrivals increasing by 9.2 per cent for the first quarter of 2010 and remittance inflows climbing by 9.7 per cent.

During the period of uncertainty that characterised 2008 to 2009, too, Plummer pointed out, a number of institutions built up significant US dollar balances at rates above US$1:J$89.00.

"With rates now trending below US$1:J$88, these institutions are forced to book unrealised foreign currency losses on these positions (and) in an effort to stem the losses, some institutions are aggressively selling these positions resulting in increased supply to the market."

The country having passed the first IMF test and anticipating a second disbursement of US$100 million before end-June under the standby arrangement, is having a positive effect on supply side, according to the Pan Caribbean analyst.

"The additional inflows will increase Bank of Jamaica's (BOJ) ability to promote continued stabi-lity in the FX market."

Pointing to moderating foreign exchange demand, Plummer said there are also favourable developments in Jamaica's trade dynamic. For the month of January, imports declined by 18.8 per cent while exports increased by 6.9 per cent, he noted.

"Importantly, non-fuel imports fell by 33 per cent, following a 26 per cent decline for all of 2009. The surge in Jamaica's agricultural output is partially responsible for this favourable turnaround."

Consistent with the fall-off in imports, he suggested, the demand for foreign currency to fund shipping charges also slumped.

"Overall demand pressures are also being eased by BOJ's direct handling of US dollar demand from large public entities."

Barring a significant jump in the price of oil or any adverse weather conditions, the stability in the exchange rate is expected to persist for the remainder of 2010.

"This is likely to improve Jamaica's prospects of attaining certain IMF targets such as fiscal deficit, debt ceiling and inflation," Plummer said.

The current outlook should also enhance investor confidence and provide the backdrop for lower interest rates, he said.


Source:
Sabrina Gordon, Business Reporter
sabrina.gordon@gleanerjm.com
Jamaica Gleaner
Friday June 4, 2010

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