BOJ adjusts stance on US bond issues

The Bank of Jamaica, BOJ, has changed its stance and will no longer require brokers and deals to suspend the issue of foreign currency bonds in defence of the exchange rate which had been on the rise and to preserve its foreign reserves.

But while the withdrawal of the six-month suspension would seem to be a softening of the central bank’s stance, brokers on Tuesday said the strict condition attached to the new directive would be difficult to satisfy and could serve to keep a de facto ban in place.

Last month, the BOJ blocked new FX issuances but allowed the refinancing of US dollar-denominated bonds under US$15 million.

In correspondence seen by the Financial Gleaner, the BOJ has now advised dealers that it won’t proceed with the suspension, but they must demonstrate that their issue of US dollar debt won’t serve as a negative drag on the forex market in order for their transactions to be approved.

A rising exchange rate means the Jamaican dollar is losing value against the US dollar. That in turn can fuel inflation.

Amid rising inflation to 9.7 per cent that has breached the central bank’s inflation target range by nearly four percentage points, the BOJ in January spent nearly US$500 million of its reserves to supply the foreign exchange market and prop up the exchange rate. It was the largest monthly decline in the net international reserves in a decade.

The correspondence from the BOJ withdrawing the ban was addressed to the Jamaica Securities Dealers Association, whose president Steven Gooden said he would respond later to Financial Gleaner queries on its implications.

BOJ is also yet to respond.

The suspension, when it was announced, was met with anger from some in the brokerage community who say it as an unfair curtailment of their business activity and one that would give advantage to commercial banks, which were not included in the ban.

In its revision, the BOJ said that dealers must meet three new criteria with “every application”, including the “attestation” that the distribution would “not create demand” for US dollars in the FX market; dealers must list the intended sources of subscription across the dealers’ various client buckets; and following the closure of the transaction, dealers must verify the sources of the subscription.

Bank of Jamaica, as the regulator of the foreign exchange market, uses different tools to manage the market, including supplying foreign cash to the system through its dealers to stabilise the rate.

In February, the forex rate rose above $158 but has since fallen back below $155.

“The BOJ reserves the right to review the arrangement and will revert to a moratorium on issues of FX instruments if our objectives are not met,” the central bank warned. It’s unclear whether the falling exchange rate influenced the central banks’ change in position; or whether it was the uptick in the NIR in February; or whether it was swayed by the pushback from the investment community.

The NIR rose to US$3.59 billion in February, up from US$3.5 billion in January, but still well shy of the US$4 billion of net foreign reserves held by the central bank last December.

At the point of the record decline, the BOJ explained that the foreign exchange market had experienced a notably higher level of demand. This in turn put pressure on the exchange rate, and would have led to higher inflation if left unchecked.

However, the dealers insisted that the US dollar liquidity in the money market was fairly robust, and that they could serve their clients, including natural borrowers such as outsourcing companies and hotels, without investors having to convert Jamaican dollars to US currency.

Gooden previously told the Financial Gleaner that generally 21 per cent of those outstanding loans are in hard currency.

business@gleanerjm.com