Some financial sector bosses have shrugged off the threat the revaluation of Jamaican currency will have on their foreign exchange denominated assets or liabilities, but say the real threat of the impact could be on productive enterprises.

Over the past three months the Jamaican dollar (JMD), has seen a revaluation relative to major trading currencies the US dollar (USD), Canadian (CAD) and British pound (GBP). The local dollar has appreciated by 4.3 per cent against the USD, 1.26 per cent against the CAD and 1.7 per cent against the GBP. Up to yesterday the JMD traded at $87.18 per US dollar, $125.22 per GBP, and $82.56 per CAD.

Financial institutions typically hold a portion of their assets or liabilities in foreign currencies in order to mitigate the risk of single currency exposure and maximise gains on foreign exchange movements, especially as the local currency has a history of declining relative to hard currencies such as the USD.

However, this does not mean that losses cannot occur as it will if a financial institution with net USD assets such as loans or GOJ securities, will realise an exchange loss following appreciation. Conversely, those which have net USD liabilities or deposits will see an exchange gain.

Courtney Campbell, CEO of GK Investments Limited, a division of Grace Kennedy believes the revaluation will not continue for very long and therefore will not have a significant impact on the institution’s financial position.

“The appreciation of the Jamaican dollar in the last few weeks can be explained by increased market confidence, arising from the IMF support which has reduced the market’s concerns and minimised the need to hoard USD,” Campbell said. “The appreciation has also been supported by strong USD liquidity in the market and a reduction in aggregate demand and therefore demand for imports. This trend will likely continue in the month of June as there are players who are now selling USDs given the expectation of further strengthening in the JMD against the USD. However, a slowdown in the rate of devaluation is expected through the summer months as the excess supply of USD in the market should taper,” Campbell said.

He further added that GK Investments continues to manage its risks proactively and therefore has “no major concerns” about the appreciation of the currency.

However Campbell argued that companies will be impacted by the translation of foreign exchange income and the extent to which the appreciation impacts the relative competitiveness of customers that are export driven.

Ian McNaughton, General Manager of Barita Investments noted that even though the causes of the revaluation are obvious, an “environment which is inimical to FX speculation” makes it harder to say whether the movement will continue. He added though that Barita has a portfolio that includes both FX denominated assets and liabilities in both the USD and Euro currencies. And while the JMD has been appreciating against the USD, the Euro has been depreciating relative to the USD.

“This is obviously and area of concern,” McNaughton said. “Our approach has centred around how we can reconfigure our business to manage this issue and to take advantage of any opportunities that exist,” he added.

Similarly, Donovan Perkins, President and CEO of Pan Caribbean Investments Limited said even though some losses may occur, the institution has sufficiently reduced its exposure to the risk.

“We are long USD but we have some hedges in place. We have some Jamaican dollar hedges in and some Euro hedges in. But I think everybody will just have to take it like a man,” Perkins said of any potential losses which may occur. He added Pan Caribbean’s exposure is mainly due to the institution tendancy to lend to exporters.

“We try to lend in the currency that people earn in,” Perkins said.

Gary Peart, CEO of Mayberry Investments Limited (MIL) also said that his company is not overly concerned about the appreciation, but he is mindful of the implications for business activity. “As a financial institution we have to manage our FX exposure,” Peart said.

“Our concern is that hopefully the revaluation is being pushed by significantly less imports and greater exports and hopefully not because there is a reduction in the business demand. Because whilst the imports numbers are down and exports are up, we are concerned that the feedback from businesses is that demand is down. Hopefully that trend changes and that would be the impetus for a real turnaround in the economy,” Peart said.

All the bosses agree that the continued appreciation, without a significant improvement in market fundamentals for growth, will not be good for the economy.

“Neither dramatic depreciation or appreciation is welcomed by markets,” said Campbell. “Instead, orderly, predictable market adjustments are preferred to dramatic shifts,” he added.

“The fiscal accounts can only see significant improvement through sustained positive GDP growth, which requires the government to create an environment of macro-economic stability. Job creation, facilitating the growth of small and medium sized businesses, and an effective crime plan will be key ingredients to achieving sustained positive rates of GDP growth,” Campbell argued.

McNaughton is calling for an increase in production and productivity, especially in areas that provide for local consumption such as agriculture.

Peart points to the effect the revaluation is having on the tourism product, one of Jamaica’s major FX earners.

“You have to decide what is driving that revaluation. If you are getting a revaluation that makes your tourism product more expensive, that is due to less business activity- in other words people are importing less because they are selling less and that is going to impact on revenue. So you have to do a wholesome analysis to see exactly what is driving the revaluation,” he said.

“A benefit of the revaluation is that it can lead to lower interest rates in the short term, which is what we are seeing. But again you have to look at the bigger picture. If you are having lower interest rates and you are not having business productivity then its an opportunity that is wasted,” Peart pointed out.

If the revaluation is occurring because businesses are not selling enough, then government revenue will also be affected, Peart declared.

“You might have short term positives but if you are not going to see that money in productive enterprises then it is going to create problems down the road.”