WITH the looming fiscal cliff, the recent passage of the presidential elections and the Black Friday and Cyber Monday sales, everyone’s attention has been focused on the US economy, politicians and society. As we approach the end of our calendar year, let’s take a look at what happened locally.

Low levels of secondary market activity continue in the domestic fixed income market both for Government of Jamaica (GOJ) Jamaican Dollar (JMD) denominated bonds and GOJ global bonds.

This has been brought on by the uncertainty surrounding the prospect and terms of a new IMF Agreement as well as the Bank of Jamaica’s (BOJ) depleting stock of Net International Reserves (NIR), JMD liquidity and USD liquidity have also been extremely low in recent months and have resulted in upward pressures on both interest and exchange rates.

In contrast, the primary debt market has seen much more activity. The GOJ has been active in the domestic debt market all year issuing and/or reopening existing securities to raise JMD for its budgetary needs. On average the Ministry of Finance (MOF) has issued two instruments per month, which have pulled in $7.5 billion on average per month.

In recent months however, the take up on GOJ offers has declined, averaging just $1.3 billion over the last two months. The GOJ has also been predominantly issuing variable rate instruments to entice investors wary of a potential interest rate increase. For the majority of 2012, investors have exhibited a preference for variable rate instruments in contrast to what was observed over the majority of the same period in 2011 when investors generally preferred fixed rate bonds.

BOJ continues to offer its 30-day instrument to manage daily JMD liquidity and has kept the rate at 6.25 per cent since September 2011. However, in October BOJ temporarily introduced three new instruments to augment its liquidity management operations in an effort to stem the pace of devaluation of the JMD. All the securities offered were variable rate short-term instruments which attracted current coupons ranging from 6.81 per cent on the 49-day Certificate of Deposit (CD) to 7.38 per cent on the 364-day CD.

Yields on Treasury bills (T-bills) trended downwards during the first half of the year but have been increasing in the second half. The 30-day T-bill rates started the year at 6.49 per cent, reached a low of 6.15 per cent in July and has since increased to 6.26 per cent as at November. Notwithstanding, 30-day T-bill rates have fallen by 23 bps for the year to date. 90-day T-bill rates started the year at 6.21 per cent but have increased to 6.90 per cent as at November. The 180-day T-bill rate has also recorded an overall increase for the year, opening the year at 6.46 per cent and moving up by 35 bps to a rate of 6.81 per cent as at the close of November’s auction.

The foreign exchange (FX) market has seen mixed fortunes throughout the year. The JMD started the year at 86.60 against the USD and steadily declined to 88.70 by June (losing $2.10 for a devaluation of 2.5 per cent over the first half of the year). However, as uncertainty about the GOJ inking a deal with the IMF before the year ends mounted and a depleting NIR, the pace of devaluation accelerated and the JMD lost $3.10 (devaluation of 3.50 per cent) over the next five months (Weighted average sell rate “WASR” of 91.80 as at Nov 28th). Year-to-date devaluation is at six per cent, or a loss of $5.20, in contrast to a modest devaluation of 1.10 per cent or a loss of 94 cents in 2011 and a revaluation of 4.1 per cent (gain of $3.65) in 2010. BOJ sold USD regularly throughout the year to stem the slide of the JMD but has been hampered by a depleting and relatively low NIR in recent times.

The NIR which began the year at a level of US$1.97 billion (reserves of 19.74 weeks) declined to US$1.13 billion as at the end of October, representing reserves of 13.25 weeks, which is perilously close to the international benchmark of 12 weeks. YTD NIR has fallen by US$834 million or a monthly average decline of US$83 million.

Jamaica has recorded an average monthly inflation rate of 0.63 per cent which has resulted in a calendar YTD level of 6.3 per cent as at the end of October versus a level of 5.20 per cent for a similar period last year. The inflation rate for 2011 was recorded at 6.00 per cent. For the Fiscal YTD inflation is estimated at 4.5 per cent, which is similar to the level last year, and the point-to-point inflation rate is at 7.2 per cent versus 8.4 per cent for the corresponding period in 2011. The highest monthly inflation rate for the 2012 was recorded in September at 1.90 per cent.

Eugene Stanley is the Manager of Securities and Foreign Exchange Trading at Sterling Asset Management. Sterling provides advisory and financial services 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: info@sterlingasset.net.jm