Despite better economic performance, secondary bond market trading absent
The Sterling Report
THE fortunes of the Jamaican economy have been much improved in 2014. Economic activity has picked up, evidenced by first quarter Gross Domestic Product (GDP) growth of 1.6 per cent reported by the Planning Institute of Jamaica (PIOJ) -- a significant improvement from first quarter 2013 at 0.4 per cent.
Jamaica continues to record favourable performances under its 2013 IMF deal -- passing all four quarterly tests to date. The rates of devaluation and inflation have slowed compared to outturns in 2013 and there has been a return of investor appetite for the government's external debt evident in the recovery of its international bond prices after the plunge in 2013 following the second debt exchange within a three-year period.
However, despite the aforementioned improved economic performances and achievements, there continues to be an absence of secondary market trading in locally issued Government of Jamaica (GOJ) bonds as investors continue to avoid GOJ's locally issued debt which has been the target of the two debt exchanges to date.
As a consequence, and coupled with the ongoing sale of instruments by the Bank of Jamaica (BOJ), Jamaican dollar (JMD) liquidity continues to be extremely low (although much improved since the latter part of May with the maturity of a GOJ bond) and short-term JMD interest rates continued to rise. For instance, the 30-day repo rate which averaged around eight per cent at the start of the year has progressed to an average of around nine per cent, with quotes exceeding 10 per cent on occasion. However, given the absence of secondary market trading in GOJ bonds, there continues to be no significant deviation in yields on long-term instruments and so two-year to 30-year GOJ instruments continue to offer yields within the range of 7.5 per cent to 12 per cent, respectively.
Primary market activity
With the exception of its monthly offers of Treasury Bills through the Bank of Jamaica, the Ministry of Finance (MOF) has been absent from the domestic capital market since the execution of the last debt exchange in February 2013. The BOJ continues to offer short to medium-term instruments on a monthly basis to regulate the flow of Jamaican dollars. Notwithstanding its increased intervention in the primary market, BOJ continues to offer its 30-day instrument to manage daily JMD liquidity and has kept the rate at 5.75 per cent since a 50bps reduction in February 2013. There also continues to be sporadic offers of commercial type offerings and private placements, as corporate borrowers seek to take advantage of relatively low interest rates and as investors seek to diversify their portfolio away from predominantly GOJ risk.
Treasury bill yields
Treasury bill (T-bill) yields trended upwards for the first quarter of 2014 but have been trending downwards in the second quarter. The 30-day T-bill rate started the year at 6.25 per cent and peaked at 6.99 per cent in May before falling to 6.80 per cent in June to record a year-to-date increase of 55bps. The 90-day T-bill rate started out at 7.53 per cent, increased to 8.35 per cent by March and then steadily declined to 7.66 per cent by June to record a modest year-to-date gain of 13bps; while 180-day rate which began at 8.25 per cent increased to 9.11 per cent by March and then fell to 8.37 per cent by June to post a small increase of 12bps for the year-to-date.
Foreign exchange market
The JMD has devalued against the USD on each month of the year so far. JMD started the year with a weighted average selling rate (WASR) of $106.38 per US$1 and then eroded at a rate of almost one per cent (0.99 per cent) per month to end the first quarter with a WASR of 109.57 and devaluation for the period of 2.97 per cent. This represents a much-improved performance over last year when the JMD devalued in excess of 6 per cent for the first quarter.
Devaluation has slowed in the second quarter to a monthly average of 0.7 per cent for the two completed months in the quarter so far. As at end of May, the cumulative devaluation for 2014 was approximately 4.5 per cent or loss of $4.80 (compared to a devaluation of 7 per cent or a loss of $6.47 over the corresponding period last year) with the WASR at 111.18. BOJ occasionally sold USD into market to stem the slide of the JMD but has been hampered by moderate NIR levels and therefore continued to utilise open market instruments to regulate the flow of JMD in the financial system and curtail speculative demand for USD.
Net international reserves
The NIR commenced the year at a level of US$1.047 billion (reserves in weeks of goods and services imports of 12.60) but fell to US$917.77 million in January, which represented reserves of 11.83 weeks which was below the international benchmark of 12 weeks. The NIR then grew over the next couple months to peak in March at US$1.303 billion or reserves of 14.08 weeks, but then declined over the ensuing months to reach US$1.165 billion (reserves of 12.66 weeks in goods and services imports) in May. Overall, the NIR has risen by US$117 million for the five completed months of the year so far, in contrast to the corresponding period last year when the NIR was down approximately US$137 million and below the US$1 billion level (US$989 million).
Jamaica has recorded an average monthly inflation rate of 0.48 per cent which has resulted in a calendar year-to-date (YTD) level of 2.4 per cent as at the end of May compared to a level of 3.7 per cent for a similar period last year. So far, the highest monthly rate at 1.1 per cent was recorded in March and the lowest level of negative 0.3 per cent was achieved in April. For the Fiscal YTD (as at May) inflation is estimated at 0.7 per cent, in comparison to 1.0 per cent for the same period last year, and the point-to-point inflation rate was at 8.0 per cent versus 9.2 per cent for the corresponding period in 2013. Inflation ended calendar year 2013 at 9.7 per cent (eight per cent in 2012) and 8.3 per cent for the fiscal year 2013/2014 versus 9.1 per cent in fiscal year 2012/2013. The average annual inflation rate has been 10.70 per cent over the last five years, with a high of 16.8 per cent in 2008 and a low of six per cent in 2011.
Eugene Stanley is Vice President -- Fixed Income and Foreign Exchange Trading at Sterling Asset Management. Sterling provides medium-to-long term financial advice and investments in US and other world market currencies to the corporate, individual and institutional investor. Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: email@example.com. You may visit us on Facebook or follow us on Twitter and for more information please visit our website www.sterling.com.jm