WITH only two weeks left in the calendar year, it is essential that we take a moment to rest aside the excitement of ringing in 2011 and look back at the challenges and triumphs throughout 2010.

Following a particularly arduous year in 2009, Jamaica has undergone a phase of macroeconomic stability as the Government has been compelled by the International Monetary Fund (IMF) to take steps toward stimulating long-term economic growth. Some of the major indicators include significantly lower interest rates coupled with a relatively stable exchange rate and improved fiscal numbers.

The Jamaica Debt Exchange (JDX) has been more successful than expected by the IMF in terms of its impact on reducing local interest rates. At the end of April, only one month into the new fiscal year, interest rates were already well ahead of the March 2011 target. Interest rates continued on this downward trend throughout the year, with the yield on the 6-month Treasury Bill in November falling to 7.61 per cent from 7.99 per cent in October 2010. This is the lowest rates have been in over three decades, since 1979, according to Finance Minister Audley Shaw, “when the interest rate both in the Treasury Bill and the Bank of Jamaica (BOJ) was in the region of 8.49 per cent”.

In addition to an improved interest rate environment, data from the Statistical Institute of Jamaica (STATIN) shows that while local prices have not declined since the beginning of 2010, the pace at which they have increased has moderated. The 12-month inflation rate which peaked at 14.34 per cent in April 2010, has since gradually declined to stand at approximately 11.19 per cent in October.

Another closely watched indicator has been the level of Net International Reserves (NIR), which acts as a measure of foreign goods and services that can be purchased over a period of time. NIR was healthy throughout the year and exceeded the target stated in the IMF’s Letter of Intent. At the end of November, NIR stood at US$1.92 billion, with gross reserves at US$2.72 billion, representing 21.41 weeks of imported goods and services. This compares to 2009, when NIR levels were perilously close to the internationally acceptable 12 weeks of goods imports. The improvement was mainly attributable to the Government of Jamaica (GOJ) accessing funding from the International Development Bank (IDB).

Jamaica’s current account deficit has also improved, narrowing by approximately US$63.3 million for the first-half of the year, compared with the corresponding period in 2009. Of note, the current account posted its first quarterly surplus in six years in Q01 2010 of US$1.1 million, a sharp swing from the US$165- million deficit posted in Q01 2009.

This stable environment has fostered stability in the exchange rate. Notably, during the second quarter, the Jamaican dollar sold below $86 for US$1 and has continued to hold its own against its US counterpart, moving from a monthly average of 89.66:1 in January to 85.89:1 in November. This reflects improving external accounts, as well as multilateral flows that have allowed the Government of Jamaica (GOJ) to service its external debt, eliminating the need to source foreign exchange on the local market to pay foreign debt as well as reducing the need to borrow locally.

So the question remains as to whether lower rates and a stable dollar has trickled over into the stock market?

Theoretically a lower interest rate environment facilitates investment, and there is a positive correlation between falling interest rates and increased stock market activity. This was the case, immediately following the JDX, as the Jamaica Stock Exchange (JSE) saw an increase in both the volume and value of stocks traded. A comparison of the JSE Main Index’s performance in March and February showed that in February, a total of 64.2 million of ordinary units traded versus 249.14 million units in March, an increase of 288 per cent. The value of stocks traded for March stood at $2.042 billion, more than double February’s $744.3 million.

This performance however, did not follow throughout the year, with the market settling back to pre-JDX levels. For the month ended November 30, 2010, 60.87 million units valued at over $795.45 million traded on the Exchange. Looking at the year-to-date performance of the Main Market, the JSE Market Index has advanced marginally by 2.93 per cent compared to a 4 per cent annual gain for 2009. This was partially attributable to the fact that due to the prolonged recession most large or mature companies have registered flat or declining revenue and earnings growth. In addition, the lower interest rate environment resulted in a significant fall-off in Interest Income, which traditionally represented an important revenue stream for many chompanies.

However, despite this, a few companies continued to produce solid results, with their core operations strengthening and having a positive impact on their stock prices. Some of the best performers on the Main Market have been Carreras Ltd (CAR), which has advanced 48 per cent, First Jamaican Investments Ltd (FJI), which rose 31 per cent and Pan-Jamaican Investment Trust Ltd (PJAM), which climbed 29 per cent. On the other hand, some of the worst performers included Ciboney Group Ltd (CBNY), which declined by 70 per cent, Jamaica Pegasus (PEG), down 40 per cent and Salada Foods Jamaica Ltd (SALF), down 48 per cent.

In addition to Main Market stocks, SSL sees value in the JSE Junior Market, which has provided a medium through which investors can invest in smaller or mid-size companies in our economy that are regulated. In 2010, seven companies completed successful Initial Public Offerings (IPO), all of which were oversubscribed. The latest and the largest, Dolphin Cove Ltd will list in the coming weeks. Looking at the junior market’s performance, its index has more than doubled year to date (YTD), significantly outperforming the Main Market Index. Stocks such as Lasco Manufacturing Ltd (LASM) and Blue Power Group Ltd (BPOW), both of which listed within the year, have rallied in excess of 60 per cent. Likewise, AFS which listed last year is also up more than 60 per cent as well, meanwhile the other three stocks have also advanced but by smaller amounts.

While the overall stock market has produced mixed results, what is more significant is the improvement in the macroeconomy as Jamaica seeks to produce sustainable growth. With Jamaica passing all three quarterly IMF tests, despite obstacles not limited to natural disasters, the outlook is positive and SSL remains optimistic about Jamaica’s long-term growth prospects.

Deirdre Witter is an Investment Analyst at Stocks & Securities Ltd (SSL). You may contact her at dwitter@sslinvest.com.