Apr 2013 Financial News

BOJ tests forex market - New USD-indexed bond greeted with scepticism

Apr 10, 2013

Jamaica's central bank has issued a new financing instrument which it describes as a hedging tool for investors seeking alternatives to Jamaican-dollar holdings, but market reaction so far has been mixed.

The US dollar-indexed notes to be paid for in Jamaican dollars gives the market a new instrument to invest excess cash, instead of buying up US dollars and in so doing crowding out the demand for transactional foreign cash.

The current demand for hard currency, which the central bank says has been driven by uncertainty, has carved almost 12 per cent off the value of the local currency in the past year, and has nudged it closer to the J$100 mark.

The one-year indexed bond has a fixed coupon rate of 4.75 per cent and will be sold at J$98.0153 to the USD, equivalent to the 10-day moving average in the forex rate.

"It is strictly a technical calculation," linked to the moving average, said Bank of Jamaica (BOJ) Governor Brian Wynter, indicating that nothing more should be read into the conversion rate.

Wynter said the dollar had lost some of its competitiveness, but has now regained much of it. He said the BOJ does not subscribe to the view that depreciation is the way to maintain the dollar's competitiveness. Rather, the best route is through "improved productivity," he said.

The uncertainties surrounding the International Monetary Fund (IMF) agreement have roiled Jamaica's foreign exchange markets, which Wynter said at a press briefing on Tuesday have been characterised by excessive swings.

The USD-indexed bond is meant to have a calming influence. But, Charles Ross, managing director of Sterling Asset Management, is not convinced that the BOJ's strategy will succeed.

"I don't know why someone would buy an indexed note really. For us, we haven't in the past and we don't see ourselves doing that now. Our policy is to match Jamaican-dollar exposure with Jamaican-dollar investments," said Ross.

"If I am comfortable with Jamaican-dollar exposure, then I will invest in Jamaican dollars; same way, if I am comfortable with US-dollar exposure, I invest in US dollars. I don't know what is the advantage of doing this," he said.

Donovan Perkins, the president of Sagicor Investments Jamaica, said the new BOJ security will provide an alternative hedge against the sliding local currency but that persons who have bills to pay in Jamaican dollars should not use this as an option.

He declined to weigh in on whether it is a good or bad investment.

"The indexed bond will appeal to segments of the market that are concerned with the sliding dollar and that this instrument should help to slow the currency depreciation," Perkins said.

One analyst from another prominent financial institution who spoke on condition of anonymity said the new issue was a "bad investment".

"Even though the money you will be paid will be in Jamaican dollars at maturity, the fact is, if you want to convert to US dollars you are going to be faced with a spread at buy-back; plus, you will have to buy back at the prevailing exchange rate next year," the analyst said.

"So, yes, they will say that they are getting the benefits of additional foreign-currency exposure, but if they want to convert a substantial amount at maturity, it could take a long time; there might still be a shortage in the market because the IMF deal that they are getting now might not provide the cash flow that they are talking about."

And, the Jamaican currency could appreciate "and that could cause tightness in the market as well," he said.

The most optimistic of the analysts polled - Marie James, assistant vice-president of investment at Scotia Investments; and Gary Peart, president of the Jamaica Securities Dealers Association and CEO of Mayberry Investments - both said the instrument is very attractive.

Peart was not available to expound as he was in a meeting at the time. James said the BOJ instrument will provide a way to give investors, especially fund managers, an opportunity to invest in US dollars without putting added pressure on the exchange rate.

"… This instrument would give US exposure to your portfolio, yet limit the pressure on the dollar," she said.

On Tuesday, the day that the indexed note opened for subscriptions, the dollar closed down at J$99.75. The offer closes Thursday.

The JMD continued to lose value despite announcements from the IMF that the Fund would recommend to its executive board that a US$958-million bailout agreement for Jamaica be approved, and subsequent announcements from the World Bank and Inter-American Development Bank that they would each be providing funding of US$510 million over four years.

Wynter on Tuesday said the announcements by multilaterals should help to calm fears in the foreign-exchange market and "bring the excessive movements to an end".

But he also said decisively that the BOJ will continue to defend the JMD if the currency continues to decline, while reaffirming that the central bank was committed to a flexible exchange-rate regime.

"We are not targeting an exchange rate," said Wynter. "We want the market to go back to regular trading activity.

The central bank's capacity to defend the dollar has diminished, with the gross reserves having fallen to US$1.7 billion, while the nine international reserves is at US$884 million, which is below the benchmark 12 weeks of import coverage.

James of Scotia Investments said that under the National Debt Exchange, a one-year Jamaican-dollar instrument pays coupon of 7.5 per cent and the US note pays 5.25 per cent; while the BOJ issue promises to pay 4.75 per cent per annum.

"It has been projected that the Jamaican dollar will depreciate beside the US dollar by about five per cent, so — add 4.75 per cent to the five per cent — you are much better off with this instrument," she said. "You have more than nine per cent."

James said substantial take-up of the BOJ USD note could remove enough Jamaican dollars from circulation to reduce the pressure on the exchange rate, since investors would have fewer resources to invest in foreign currency.

With that same reasoning, Perkins said he is hoping that the tightening of liquidity will not cause interest rates to rise.

The USD note is a good investment for fund managers, as they would get additional foreign exchange exposure on their portfolio without breaching the limits on holdings of foreign currency assets set by the BOJ, said James.

Currently, entities are required to hold at least 95 per cent of their investments in JMD, leaving a maximum of five per cent that can be invested in foreign currency. BOJ has said it is willing to adjust the ratios after consultations.


Source:
Marcella Scarlett, Business Reporter
marcella.scarlett@gleanerjm.com
Jamaica Gleaner
Wednesday April 10, 2013

http://jamaica-gleaner.com/gleaner/20130410/business/business1.html