WHILE the top line for many companies improved during the first quarter (Q1), many saw a reduction in foreign exchange (FX) gains due to the Jamaican dollar (JMD) appreciating against the United States dollar (USD) during the first quarter.

When the FX rate for the USD to JMD moves from $157JMD – 1 USD to $156JMD – 1 USD, it takes one less JMD to purchase a single USD. Buying and selling the two currencies at different rates create a spread which is profitable to a trader or company. Also, companies which earn USD income, but report their financials in JMD would see an exchange gain when the JMD depreciates against the USD and an exchange loss when the JMD appreciates against the USD.

In the first quarter (January 1 to March 31), the FX rate moved from $155.08 to $153.78. During this period, the FX rate hit a low of $153.45 and a high of $158.03. As a result of this activity, various firms’ net finance income lines ended the period lower compared to the prior year.

This impacted financial firms the hardest as the bond and equity markets swung sideways along with the fluctuation of the JMD. VM Investments Limited attributed the 91 per cent decline in its net profit to these factors which saw their gains on investment activities line item shrink from $199.39 million to $72.66 million. Even investment holding company Sterling Investments Limited saw its FX gains of $28.41 million become a $7.99 million FX loss in Q1. Mayberry Investments Limited’s consolidated net FX gains declined by a third to $47.59 million.

The company which was hardest hit, GraceKennedy Limited, whose money services arm saw a nine per cent decline in revenue to $2.14 billion with profit before tax dropping to $776.72 million. This was accompanied by a three per cent reduction in the net remittances for Jamaica to US$722 million.

“The dollar revalued for the first quarter December to March 2022. One of the things, certainly that we’re guided by is the differential inflation. When you have an appreciation of a dollar when your differential inflation is so wide, you will have to manage that very carefully,” said Group Chief Executive Officer Don Wehby at the company’s annual general meeting held last week.

Inflation in Jamaica, the United States of America, Canada and the United Kingdom hit multidecade highs in the first quarter with point-to-point inflation peaking at 8.5 per cent in the USA and at 11.3 per cent for Jamaica. This has begun to impact the spending power of people in the diaspora.

“All the major markets are up in terms of inflation, and that is significant. If you think about our brothers and sisters in the diaspora for UK, Canada and USA, they’re facing significant inflation. The truth of the matter is that their disposable income must be down, so they have less money to send home. That is one of the primary reasons we saw a 9.4 per cent reduction in remittances to Jamaica for March and is down quarter over quarter by four per cent. It’s not a unique situation to GraceKennedy. Because of global inflation, disposable income in these markets are down which means they have less to send home,” Wehby expounded on the point.

Even GK’s remittance partner, Western Union reported a four per cent decline in its Q1 revenue to US$1.2 billion. It also revised its outlook for its 2022 revenue to be down between 9 to 11 per cent in 2022. Its adjusted earnings per share was up from US$0.44 to US$0.51.

“We went to meet with Western Union in Denver. We had a long strategic meeting with Grace Burnett, myself and a few others, trying to figure out why remittances are down. The other thing that was said to us was that because of the easing of COVID-19, people are travelling more and carrying the funds with them instead of remitting in true Jamaican and Caribbean style. We have a strategy in place which we refer to as MPACC: Marketing, Pricing, Agents, Consumers and Compliance. I’m very confident with the management team working with Western Union that we’re going to turn around and actually improve the performance of money services going forward,” Wehby added.

The BOJ has tried to contain the risk of capital flight and inflation through an increase in its policy rate which hit five per cent on May 20 and limiting securities dealers from issuing FX instruments unless they can prove that the capital already exists in the market and wouldn’t disrupt the FX market. After the FX restrictions were put in place, the BOJ only intervened twice in March and only had a flash sale on May 13.

This has pushed various commercial banks to increase interest rates on their loans over the next two months. First Global Bank (FGB) told its clients in an email on May 18 that it will be raising rates on July 4 for customers. NCB Jamaica, JN Bank and Sagicor Bank Jamaica have announced rate hikes to take effect this quarter.

“The banking sector has been cautious about when and how to raise interest rates, but given what is happening in the macro environment, we realize that we really have no choice. We’re going to be very thoughtful about how we raise rates. What we’re doing though is where we can, we’re moving the tenure out so that the monthly payments don’t change. So, there would be little impact on customers from a monthly payment standpoint,” stated FGB CEO Mariamme Mcintosh Robinson at the GK annual general meeting.

FGB’s loan book was worth $32.76 billion at the end of 2021 with the bank earning an effective interest rate of 9.66 per cent. Its sensitivity analysis from its audited financials show that a 100 basis point (one per cent) rise in interest rates would result in FGB seeing a $162.90 million reduction in profit but a $171.07 million rise in other comprehensive income.

“The Bank of Jamaica has been coming under some criticism for their policy on interest rates and how they are managing the foreign exchange. Let me say as the Group CEO that I have all the confidence in Governor Richard Byles’ team to manage us through this difficult period, and I believe the moves they’re making, in terms of monetary policy, is the right one and we just have to manage very carefully,” Wehby closed as he reiterated his confidence in the BOJ’s actions.