Jamaican dollar appreciation rains on listed companies' parade
Jamaican companies experienced foreign exchange losses in 2022 due to the appreciation of the Jamaican dollar.

While the Bank of Jamaica's (BOJ) fight against inflation has yielded solid returns, the stability in the foreign exchange (FX) market and subsequent appreciation of the Jamaican dollar (JMD) against the greenback in 2022 has resulted in numerous listed companies mentioning FX losses in their latest financial reports.

Point-to-point inflation moderated to 8.1 per cent in January 2023, which represents a trend towards the BOJ's upper inflationary target of 6.0 per cent. This was supported by the BOJ increasing its policy rate from 2.50 per cent to 7.00 per cent over the last year and using other tools from its monetary policy toolkit to assist in maintaining financial stability.

Along with these actions, the BOJ intervened multiple times in the FX market through its flash sales under its BOJ Foreign Exchange Intervention Tool (B-FXITT). The combination of these actions saw the weighted average buy rate decline from $153.06 to $149.96 for the United States dollar (USD) and JMD currency pair. The weighted average sell rate also moved down from $155.08 to $154.30 over the period. The general exchange rate trended between $150 to $156 in 2022 with the average selling rate as of Tuesday at $154.96 and weighted average buying rate of $153.67.

Although a stable FX rate and an appreciating currency represents a net positive to importers, this was not the same case for companies listed on the Jamaica Stock Exchange (JSE). Several JSE firms reported reduced earnings or FX losses due to the appreciation of the JMD and their FX position at particular periods.

One clear example is Wisynco Group Limited, which reported its best-ever quarter for revenue earned and recorded its third-consecutive quarter of net profit being over $1 billion. The company's second-quarter (October to December) report noted that it recorded a $71.4-million FX loss compared to a $279.5-million FX gain in the prior 2021 period.

It was so significant that Wisynco Group Chief Executive Officer Andrew Mahfood mentioned that the swing represented an $0.11 or $400 million change at the company's annual general meeting. For context, Wisynco had an earnings per share of $0.32 for the quarter or $1.21 billion in net profit.

Barita Investments Limited also experienced a sharp reduction from $784.38 million foreign exchange gain in 2021 compared to the $40.41 million gain recorded in 2022 which resulted in its net profit growth being flat at $1.07 billion.

"The group's FX trading and translation gains declined to $40 million in the period, attributed to continued volatility experienced in the local FX market during the period, though it obscured commendable improvement in our Cambio business line," said Barita first quarter report.

Even Eppley Limited, a private credit and asset management company, noted that its $237 million net profit for 2022 was impacted by a FX loss of $9.13 million relative to the $76.33 million FX gain, due to the appreciation of the JMD in 2022.

Salada Foods Jamaica Limited reported that there was a significant reduction in interest and foreign exchange gains for its first quarter with the net finance income line item shrinking from $12.73 million to $592,000.

Productive Business Solutions Limited (PBS), which reports in USD, noted in its third quarter (July to September) report that it recorded a US$1.3 million year to date FX loss because of the appreciation of the JMD and strengthening of the USD against most other currencies. PBS had US$4.3 million in net profit for that period and had just completed a $500 million cumulative redeemable preference share raise on the JSE. JMD represents only nine per cent of PBS' revenue with another 41 per cent being in USD or pegged to the USD.

Sterling Investments Limited, which has mainly USD assets but reports in JMD, suffered a $20.46 million FX loss compared to a $54.59 million FX gain for the nine months up to September. Even after accounting for the reduction from the sale some investment securities, flat expenses and no preference share payment to its investment manager, Sterling Investments' net profit still dropped 74 per cent from $104.65 million to $27.66 million.

In the past, the JMD typically depreciated against the USD on a yearly basis which meant that firms with large USD balances could report significant FX gains due to that FX movement. However, with the relative FX stability, many firms are seeing a stark contrast to the prior years.

This has also created a relative dilemma for many exporters as highlighted by Jamaica Manufacturers and Exporters Association President John Mahfood. Last June, Mahfood pointed out that the decline in FX rate from $156 to purchase goods for production to $154 on collection for export meant that some exporters would be collecting less. This was also exacerbated by the fact that price increases to foreign consumers is not as easy when those markets were accustomed to low and stable prices.

The BOJ in its February press release stated, "The projected level of liquidity in the financial system, if left unchecked, poses material risks to the achievement of the inflation target as well as to the maintenance of stability in the foreign exchange market. Therefore, to further underpin inflation returning to the target range and to underwrite continued stability in the foreign exchange market, an additional precautionary liquidity control measure of increasing the cash reserve requirement (CRR) was required."

The BOJ also injected US$200 million into the FX market between January 6 to February 8 through B-FXITT with nearly every auction being almost oversubscribed by twice of what was on offer. The rate on settlement for these transactions ranged between $152.72 to $154.72.

The BOJ also raised the administrative threshold to US$20 million for FX denominated instruments to be issued by companies through securities dealers and required securities dealers to demonstrate that transactions would not disturb the FX market in 2022.

The impact of a strengthening currency has also become a notable topic for many S&P 500 firms in 2022 which noted unfavourable FX impacts to their earnings and subsequent guidance. Microsoft Corporation in its second quarter report noted that its revenue for the period had a five per cent unfavourable foreign currency impact and had net recognised FX losses on investments and derivatives of US$214 million compared to a FX gain of US$307 million in the prior period. Microsoft's revenue for that period was US$52.75 billion with net profit coming in at US$16.43 billion.

BY DAVID ROSE Observer business writer davidr@jamaicaobserver.com

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