Mr Zacca's appeal

Thursday, July 10, 2014

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MR Chris Zacca, the PSOJ president, made an interesting call at this week's Jamaica Observer Monday Exchange. It was time, he said, to stop talking down the Jamaican dollar which, for many months, has been falling against the US dollar.

As is natural, this movement had acquired a certain momentum, verging on fear in some quarters due to its unpleasant consequences on the standard of living of almost every Jamaican.

A key reason for the fall was that for much of that period there was a fundamental shortage of foreign exchange, a combination of a high current account deficit, which had reached nearly 15 per cent of GDP in 2011 or a little over US$2 billion, and low foreign direct investment (FDI), which in 2011 was only US$200 million.

By the end of 2013, the current account deficit had shrunk by one-third, although still high at just under 10 per cent of GDP, or a little over US$1.3 billion. FDI had nearly trebled, approaching US$600 million, now financing just under half of the deficit.

In the first quarter of this year, the current account deficit shrank by a further 75 per cent to US$100 million, compared with the first quarter of 2013, which was a little less than three per cent of GDP.

Undoubtedly, the current account deficit will be higher than three per cent of GDP for the full calendar year. However, the IMF's recently released Article 4 projection of eight per cent of GDP for this year looks too high, with the deficit likely to be closer to six per cent of GDP, as the current account is correcting faster than projected.

At somewhat above US$800 million, the current account deficit for the entire year is almost the size of last week's bond deal, and is thus already covered. The Bank of Jamaica's estimate for FDI of US$450 million already looks low, being less than last year. Even if it turns out to be correct, due to the almost inevitable delays in major projects, the most likely result is that a much higher level of FDI will become available by the second half of 2015.

All of this suggests that the current account deficit is now at sustainable levels, which the IMF calculates at roughly five per cent of GDP, or a little over US$700 million. The breathing space achieved through the bond issue means we are more than covered for this fiscal year, and next fiscal year should see much higher levels of foreign investment, more than covering the long-term projection for a current account deficit of around five per cent.

In this context, the IMF's macroeconomic balance and external sustainability approach, focusing on fundamentals such as the drivers of current account deficits and the sustainability of our international investment position appear to more accurately reflect the level of overvaluation.

Mr Zacca's PSOJ colleague, GraceKennedy CEO Don Wehby, correctly argued that the rate of devaluation should slow down between now and the end of the year. Indeed, it is likely to be much lower than the double-digit levels of the past one-and-a-half years, roughly 13 to 14 per cent on an annualised basis.

Longer term, the annual rate of depreciation should be reasonably close to the current difference between US and Jamaican inflation, roughly five to six per cent, to maintain competitiveness. In the short term, a much lower rate of depreciation may be appropriate, perhaps half that level. The Bank of Jamaica's intervention in the foreign exchange market yesterday hopefully signals the return to relative stability.




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