ON October 10, 2021, whilst occupying the office of president of Generation 2000 (G2K), this newspaper was kind enough to publish my submission titled ‘History will absolve BOJ’s rate hike’. That article was drafted in response to (in my view) the unwarranted disquiet greeting the Bank of Jamaica (BOJ) increasing its key policy rate (the rate they pay as interest for funds borrowed/held on behalf of commercial banks/financial institutions) for the first in some time.

The article stated: “In August 2021 the Bank of Jamaica (BOJ) announced their likely departure from the accommodative monetary policy framework of several years. This intent was consummated on September 30, 2021 when they announced a 100-basis point (one per cent) increase in the BOJ base rate from 0.5 per cent to 1.5 per cent, with a concerning rise in inflation being among the reasons for their decision.”

I recall people saying that it was a precursor to an eventual return to FINSAC (!) days, whilst others believed that the BOJ had simply taken the wrong route. I have consistently stated that the BOJ was quite correct in its course of action, and that history would absolve them. With such a bold call I have not been shy in reminding all concerned about that article and my sentiments that remained. Where I believe I erred was in failing to emphasise the monetary policy committee’s (MPC) — and by extension the BOJ’s — overarching pursuit of stability in the local financial landscape. While this was understood and appreciated, to not overtly state it was an oversight that I will now attempt to rectify.

In the 1990s as a pre-teen/young teenager I vaguely recall anecdotes and empirical data that strongly attributed the twin breakdowns of investor confidence and expansive, transformational projects to the unpredictability of interest rates. This trust deficit had investors pursuing smaller projects that required less time, capital and confidence, and benefited a limited number of people relative to the transformative outcomes that appear to be the order of the day now.

The new buildings are taller, roads are wider, and real estate projects that are much larger in scope can be directly tied to investor confidence built on the foundation of stability and trust. The chief example of ground-breaking (pardon the pun) infrastructure is the cable, water and sewage infrastructure that lies beneath the South Coast Highway Improvement Project (SCHIP) that will bring unprecedented economic gains to the south-eastern belt of the island. The frequency of listings of companies on the Jamaica Stock Exchange’s (JSE) Junior Market and Main Market also attest to this renewed confidence, for in times prior one would have been fortunate to have a single Initial public offering (IPO) in a calendar year.

The saying goes that perception is reality, and stability has raised the average multiples of JSE companies from the mid-single digits in the mid-2010s to circa 13 times earnings in May 2023. This has caused larger companies contemplating going public to view the Jamaica Stock Exchange as a viable conduit for the realisation of value that aptly rewards them for their many decades of diligence in operating and building their businesses. Today’s status quo is a far cry from 25 years ago when most large companies were private and not interested in accessing external equity capital via an IPO. One could also surmise that the opposite is now the rule, rather than the exception. Another direct outcome is larger deals, with the landmark multi-billion-dollar transaction between PanJam Investments and Jamaica Producers Group that created the Pan Jamaica Group being a prime example.

That said, I was sitting in a hotel lobby a few days ago and remarked to my associates that 10 years prior, our seating area was part of an empty plot of land that was occasionally used as a football field. That particular area is now prime real estate, and judging by the number of cranes in full view around it, I am minded to agree with the sentiment.

With that said, what is the foundation that underpinned this new normal?

Stable interest rates

The days where a project would break ground with an interest rate of 5 per cent that was raised on a whim to 20 per cent halfway, appear to be long gone. This aligns with my previously expressed view that any real estate project implies a seven-year expression of confidence, if a realistic recoupment rate (circa 15 per cent per annum, in real terms greater than or equal to net of inflation and devaluation) is applied. Be that as it may, construction projects can be reasonably considered a leading indicator of investor confidence, given the preceding information.

Stability brings confidence, and confidence brings financing and opportunities to raise equity capital, the ultimate arbiter of investor confidence. These in turn create employment opportunities and contribute to economic growth, representative of a value chain.

If so, the chain is only as strong as its weakest link.

Value is chained to stability.

Ryan Strachan is a stockbroker. Further questions may be directed to the Jamaica Observer or ryan@sweatequityholdings.com.