Feb 2017 Financial News

BOJ working to make savings more attractive in J$ than US$

Feb 22, 2017

Jamaicans’ appetite to invest in US currency has driven the Bank of Jamaica (BOJ) to increase its holdings on the foreign currency deposits of financial institutions, thus creating a disincentive for the banks to take deposits in any other currency but the Jamaican dollar.

The BOJ adjustment means that individuals seeking to hedge against the sliding local currency by saving in foreign currencies will — effective march 2017 — no longer see the returns they were once offered by the banks on deposits prior to October last year.

“That appetite to buy US dollars pretty much by everybody meant that they’ve got dollars sitting in bank accounts and there is nothing much that people can do with it because there is not a lot of demand for the dollar. The current account deficit in Jamaica has narrowed so much that when you take account of the imports...we actually have more foreign exchange coming in than people want,” Governor Brian Wynter stated during a quarterly press briefing yesterday.

“That’s a very unusual situation for Jamaica, but I want to stress that that’s been the case over the last two years and we project for that to continue into the medium term. That’s one of the reasons we say the exchange rate is fairly valued,” he continued.

On Monday the BOJ announced that it is implementing a three-percentage-point adjustment in the cash reserves and liquid assets that deposit-taking institutions are required to hold against foreign currency liabilities. The adjustment will be in two steps, beginning with an increase of two percentage points on the first business day in March 2017, while the remaining one percentage point will be on the first business day in April 2017.

According to Wynter, the adjustment is aimed at removing the bias that the financial system favoured foreign currency deposits. It is viewed by the BOJ as positive because deposits in Jamaican dollars will now be favoured by the banks.

“The banks basically have got into this position because of this appetite that Jamaicans have had to dollarise. If they have Jamaican dollars, they try to buy US dollars; nobody cared what they were earning in many respects because they were protecting themselves from this devaluation fear.”

“It was rampant last year. If you recall, despite our repeated statement that the exchange rate was fairly valued. Nevertheless, it was very clear during the year that there was a fear on devaluation, and this fed on itself until we took some stronger actions towards the end of October so that you see in November, December a reversal of that mood and into February now,” he said.

Wynter added that the fear of devaluation had led a financial system flush with foreign currency deposits, with banks nowhere near able to lend the quantity that they borrow — which left money sitting abroad in accounts earning very little interest rates.

The BOJ then began the adjustment last October when cash reserves for US dollar deposits stood at nine per cent, while the Jamaican currency reserve was 12 per cent, making deposits in the US currency more attractive. It sought to rectify the issue when it raised the cash reserve liabilities on US currency to equalise with the 12 per cent for Jamaican dollars, while removing the interest paid on foreign currency reserves held.

“Having removed that bias in a steady way, we had indicated that we were considering going further on the US dollar cash reserves, hence this step now,” he said.

It means that, as of April, cash reserves requirement on foreign currencies will move to 15 per cent — a total increase of six percentage points, or six cents more in every dollar, compared to October last year.

Source:
BY KARENA BENNETT
bennettk@jamaicaobserver.com
Business reporter
Jamaica Observer
Wednesday February 22, 2017    

http://www.jamaicaobserver.com/business/BOJ-working-to-make-savings-more-attractive-in-J--than-US-_90322