Secure loans for expansion projects now, investment analysts tell SMEs
Published:Sunday | January 30, 2022 | 12:09 AM
A panel of investment analysts speaking on inflation and interest rates in Jamaica have advised that entrepreneurs operating within the small and medium-sized business space look to fund capital-intensive projects immediately as interest rates are set to climb over the next six months.
The Bank of Jamaica (BOJ), increased its policy rate by 50 basis points to 2.5 per cent in December, its third hike in three months to keep inflation in check.
“For those considering investing in PPE, it is best to do it sooner rather than later. The outlook for the near term is that borrowing costs will continue to rise, so if you are planning on reinvesting in your business using debt, I would encourage you to get going now,” said Sekou Crawford, acting head of investment banking at NCB Capital Markets Limited. PPE is a reference to fixed assets usually denoted as ‘property, plant, and equipment’ on a company’s balance sheet.
Annual inflation fell in December to 7.3 per cent, down from 7.8 per cent in November, but is still outside the upper end of the central bank’s target range of 4 to 6 per cent. The central bank is forecasting that inflation won’t return to the target range for another eight to 10 months, or midsummer 2022.
The adjustment to the central bank’s benchmark rate, which is applied to the overnight deposits of banking institutions, will eventually make it more expensive for borrowers to access capital or personal loans as market rates adjust and banks hike fees and lending rates.
Already, Jamaica’s two largest banks, National Commercial Bank (NCB) and Scotiabank, have announced an increase in transaction fees, a move that has been met with heavy criticism from the public and the Government.
Fees are a substantial source of income for Jamaica’s banks, totalling tens of billions of dollars annually. Scotiabank and NCB, the only listed banks among the eight operating in the market, netted $6 billion and $22 billion in fees, respectively, in FY2021.
Sekou was one of five panellists speaking on the topic ‘Investing in 2022 and Beyond’ at the Jamaica Stock Exchange Regional Conference on Thursday, the others being Sarah Cummings, vice-president of Scotia Investments; Ryan Strachan, vice-president of GK Capital Management; Peter Thompson, group manager of client investment at JMMB Group; and Richardo Williams, assistant vice-president of Barita Investments.
Thompson of JMMB is suggesting that more companies look to raise funds for their businesses through equity financing rather than by way of debt or loans.
Strachan also warned consumers to brace for heightened interest rates on mortgages and car loans, given signals from the BOJ that future rate hikes are possible to temper prices.
The rate of inflation is expected to remain elevated in 2022 due to ongoing supply-chain issues and rising oil prices.
“There may be a slowing – ultimately time will tell – because there are headwinds coming this year. But the economy is stretched, and it raises the question: How much can consumers accommodate before we start to see defaults?” Strachan said.
“I’m mindful of it because we can’t just have rates going up, and we’re not sure when it comes to an end, but I don’t foresee rates going back up to 20 per cent again,” he added.
The most recent data on lending rates published by the central banks, dated November 2021, puts the average lending rate at 11.44 per cent. The price paid for personal borrowings, or consumer credit, was then averaging 20.8 per cent, while commercial credit averaged 9.37 per cent.
For now, the increases in the policy rate by the central bank are not expected to impede economic activities, said Williams.
“That is our work hypothesis,” he told conference participants. “We think it is a very important point to do fundraising for capital intensive projects for small businesses, and for retail investors it is also important that they continue to invest in equities because that will provide a hedge to portfolios at this point,” he added.