Economic prospects worsen as key sectors weaken
Published:Friday | August 28, 2020 | 12:23 AM
The worsened economic picture painted Wednesday by the governor of Bank of Jamaica, BOJ, is largely associated with the resurgence of the virus in major trading partner countries as well as updated assessments of the impact of the crisis on some sectors of the Jamaican economy, among then utilities, transport, construction and hospitality.
The revised outlook for transport primarily relates to lower-than-anticipated demand for public transportation, given lockdown measures and work-from-home arrangements, said Governor Richard Byles.
For electricity and water, the revision is associated with a reduction in demand arising from the general decline in business activity, while the decline in hotel and restaurants is consistent with a more pessimistic outlook for the United States economy, the governor said.
The US, which Jamaica is heavily dependent on for tourism, remittances and markets for its exports, contracted by an unprecedented 32 per cent in the June quarter. And since then, its problems with COVID have worsened, with deaths now above 180,000 and climbing daily at a rate of a thousand or more.
All told, BOJ now projects that Jamaica’s economy could shrink by seven to 10 per cent in fiscal year 2020-21, above its earlier forecast of four to seven per cent.
The central bank reported that COVID-19 has adversely affected loan demand, but more so for consumer and personal lending, due to job losses. But there was a bright spot in the commercial credit segment.
“Growth in business loans remained relatively strong at 16.9 per cent at June 2020, slightly below the growth rate of 18.2 per cent recorded in February 2020, but for personal loans, we observed a more significant drop-off in growth to 10.7 per cent at June 2020 from 15.3 per cent at February 2020,” Byles said at his quarterly press briefing on Wednesday.
The buoyancy in growth in business lending has been largely driven by increased demand for working capital as well as the issuing of loans that had already been in the pipeline, he said.
As expected, said Byles, there has been a slight worsening of non-performing loans since the onset of the pandemic, but he said the financial system remains well capitalised, with adequate liquidity to facilitate the continued smooth running of the sector.
Turning to the depreciation of the currency, which hit a new milestone on August 12, when it closed above $150 to the US dollar, the BOJ governor said the public’s anxiety about the decline was understandable.
“The reason for the weaker Jamaica dollar, ladies and gentlemen, is the significant reduction in the availability of US dollar inflows into the system, due mainly to the sudden stop in tourist arrivals since the onset of COVID-19 in Jamaica at end-March 2020 and the slow recovery in the sector since the reopening of our borders in mid-June 2020,” said Byles.
Since then, he added, remittance inflows regained some strength, rising by 42 per cent in June, “and has supported liquidity in the market”.
However, there was a pick-up in foreign exchange demand in August, leading to pressure on the exchange rate.
The BOJ sold US$30 million to the market on August 19 to help satisfy demand.
“We also offered a US dollar-indexed bond to investors seeking a hedge against future exchange rate movements. This comes on the heels of several prior initiatives to provide extra liquidity to the foreign exchange market since March of this year …,“ said the central bank chief.
“These measures have already provided in excess of US$700 million in foreign currency liquidity support to the market,” he added.
He also reaffirmed the central bank’s stance on market interventions, saying it only does so when it detects or anticipates “disorderly movements” in the exchange rate that could threaten the 4 to 6 per cent inflation target.
The BOJ expects partial economic recovery starting in fiscal year 2021-22, with growth projected in the range of 3 to 6 per cent, but Byles said the economy won’t return to pre-COVID levels before fiscal 2023.
The BOJ last adjusted interest rates on August 18, choosing to hold the policy rate unchanged at 0.5 per cent.
Key to the policy rate decision was that inflation remains within the forecast band of 4 to 6 per cent; however, the rate is projected to average 4.6 per cent over the next eight quarters, up from the May forecast of 4.4 per cent, due in part to price increases for agricultural products and processed foods, and higher energy costs.
The next rate decision is due September 30.