AS the Bank of Jamaica (BOJ) looks to ensure the stability of the foreign exchange (FX) rate, the Financial Services Commission (FSC) has put a moratorium on the net issuance of foreign currency instruments for the next six months by its regulated licensees and registrants.

As a result, securities dealers and other entities regulated by the FSC will be unable to issue instruments such as bonds, loans, notes and other financial securities in foreign currencies, primarily the United States Dollar (USD). However, this restriction doesn't apply to the refinancing of bonds which will be considered by the FSC. Any application above the threshold of US$15 million ($2.34 billion) will need to be sent to the BOJ for review.

The BOJ also indicated that it would be taking firm action for breaches of the foreign currency investment limits by regulated financial entities. Consequently, the BOJ and FSC will be engaging with the management and board of securities dealers shortly.

This move comes days after the BOJ hiked its policy rate by 150 basis points (1.50 per cent) to 4 per cent as it tackles inflation which reached 9.7 per cent in January. Its mandate is for inflation in the 4-6 per cent range.

In its quarterly press briefing on Monday the BOJ noted that further tightening would be coming through issuing longer-tenure open market instruments, direct FX sales to the energy sector, and ensuring adherence to FX investment limits by regulated financial institutions. The BOJ's Monetary Policy Committee (MPC) also decided to pursue stronger measures to contain Jamaican-dollar liquidity expansion and to maintain stability in the FX market.

“The prospects of earlier and stronger monetary tightening among Jamaica's major trading partners may precipitate capital outflows and pressures on the exchange rate if domestic monetary policy is not appropriately aligned. Underlying demand pressures may also begin to threaten the stability of the foreign exchange market and with it, diminishing the prospects of inflation returning to the target range,” the BOJ MPC report stated on the possibility of capital flight.

The US Federal Reserve didn't increase its feds funds rate at its January 25-26 meeting from the 0-0.25 per cent range. However, the BOJ's quarterly monetary policy report stated that it expects the Fed to raise rates by 100 basis points in both 2022 and 2023. This comes as Morgan Stanley and JP Morgan — two US banks — say they expect the Fed to raise rates above the BOJ's expected range. The Fed's and MPC's next meetings are set for March 15-16 and March 29, respectively.

The BOJ has already sold US$270 million ($42.12 billion) to the FX market through its B-FXITT (BOJ Foreign Exchange Intervention Tool) in 2022, with US$100 million sold between February 14-18. This exceeds BOJ sales of US$205.3 million in the last quarter and represents nearly double the US$140 million done through B-FXITT in that period.

The BOJ's 4.50 per cent, 30-day certificate of deposit auction held on February 23 received $22.02 billion in bids relative the offer amount of $15.5 billion. The average yield on successful bids was 5.29 per cent, with the highest submitted bid rate coming in at 8.999 per cent. There were a total of 92 successful bids from 123 bids sent.

The BOJ's average 180-day Treasury Bill yield was 4.12 per cent at the February 9 auction which is well ahead of the 1.20 per cent in July 2020, two months before the BOJ's first rate hike.

Executive chairman of Mayberry Investments Limited Christopher Berry expressed concern at the move on Twitter. He highlighted that a lot of the company's clients raise money in USD to operate their business and that they won't be able to derive higher returns than what they would get by depositing funds in a bank. He explained a comparison through a one per cent interest rate on a bank deposit compared to a five to nine per cent return on a USD bond issued by a Jamaican corporation.

The Jamaica Observer's Caribbean Business Report reached out to the BOJ for comments on the possibility of similar measures being applied by the central bank on commercial banks. A response was pending up to press time.

Various brokerage firms stated that they hav not yet had the chance to meet with their teams to effectively discuss the impact of the new measures on their business activities. However, one executive who wished to not be identified explained that she understands the actions of the BOJ, especially in light of rising oil prices and other external events such as the war in Eastern Europe impacting commodity prices.

Jamaica's petroleum bill, according to the Ministry of Science, Energy and Technology (MSET), was US$1.62 billion in 2019 when WTI prices traded at US$55 a barrel. The country currently generates 47.4 per cent of its energy needs from crude oil and another 23.8 per cent from natural gas, according to a 2020 MSET report.

Despite the restrictions placed on securities dealers by the FSC, chief investment officer and co-founder of Sygnus Capital Limited Jason Morris is not worried about the ability of Sygnus Credit Investments Limited (SCI) to raise additional capital. SCI is a private credit company listed on the Jamaica Stock Exchange.

“First, please note that the vast majority of the debt that SCI has raised over the past 2 years is actually JMD debt. Second, we didn't have plans to raise USD debt; our plan is simply to raise debt irrespective of what currency the debt can be raised in. Perhaps because SCI is a USD reporting entity, when the firm reports it quotes everything in USD to align with the financial statements, which may be why you assumed SCI was planning on raising USD debt, but that isn't necessarily the case. So, in summary, it will have no impact on SCI's capital-raising efforts,” stated Morris.

SCI raised US$10.2 million in its January 2021 additional public offering (APO), during which it raised US$27.6 million in total. Sygnus Real Estate Limited faced a US$15-million limit in its July 2021 initial public offering. Proven Investments Limited had to stop accepting USD subscriptions in its January 2021 APO days before it closed, due to the BOJ's FX limits in that offer.