Regulator suspends US dollar debt, bond issues amid record drop in NIR

Financial regulators have blocked dealers from issuing new US dollar loan facilities or bonds for clients for six months, amid a near-US$500-million drop in net foreign reserves in a month – the largest fall in at least a decade.

The only exceptions to the ban imposed by the Bank of Jamaica, BOJ, which still require approval, are for refinancing facilities under US$15 million.

The suspension took effect Tuesday, February 22.

Chairman of Mayberry Investments Limited Christopher Berry took to Twitter to question the fairness of the ban, while the Jamaica Securities Dealers Association, JSDA, said in reaction that the move was regrettable and an overreaction based on their reading of the market, as well as contradictory to the objective of driving activity within the capital markets.

The dealers say that since the suspension only applies to their sector, the banks will be able to snatch business from them, especially those brokerages that are not owned by banking or other financial conglomerates.

The regulators, however, argued that the foreign exchange system came under pressure in January, and felt the need to react.

The corporate debt market is said to be worth about half-trillion dollars, however, the size of the foreign currency component was not ascertained.

“In an effort to ensure stability of the foreign exchange rate, the BOJ, following consultation with the Minister of Finance, has advised the Financial Services Commission that effective immediately, a moratorium will be placed on the net issuance of foreign currency instruments for the next six months,” stated a notice from the FSC to securities dealers.

The FSC regulates the securities market, whereas BOJ oversees the banks, but the is also in charge of and regulates the foreign exchange system.

Jamaica’s net international reserves, or NIR, are still hovering at fairly high levels, at US$3.5 billion as of January, but reflects a steep fall of US$492 million, or 12 per cent, from US$4 billion last December. It was the largest drop in a month since at least 2011, based on Financial Gleaner analysis of BOJ data.

Jamaica-dollar pressure

The BOJ in its rationale for the suspension, focused on the Jamaica dollar pressure, even though on the surface, the exchange rate has remained stable year to date. It started 2022 at $155.64 and closed at $156.39 on Wednesday.

“The foreign exchange market, since the beginning of the year, has experienced a notably higher level of foreign currency demand, which has put pressure on the exchange rate, and which, if not checked, would exacerbate the significant inflationary pressures in the economy,” said BOJ Deputy Governor Dr Wayne Robinson, in response to Financial Gleaner queries. “Some of this demand stems from portfolio or capital market transactions.”

Robinson added that given the significant challenge the country now faces, the BOJ also “suspended the issuance of foreign currency bonds that would result in a net demand for foreign exchange from the system”.

“As such, brokers can arrange the issue of bonds that are intended only to finance the payout of maturing bonds. Bank of Jamaica will continuously review this and adjust where necessary,” he said.

The Jamaica Securities Dealers Association will meet shortly with the BOJ and FSC to further understand why the central bank is so concerned.

“The decision to place a moratorium on the issue of foreign currency instruments is unfortunate. It goes against the principles of a liberalised foreign currency regime and is not consistent with the efforts to further develop and deepen our domestic capital markets,” said Steven Gooden, CEO of NCB Capital Markets Limited and president of the JSDA.

“Additionally, it puts securities dealers at a disadvantage to the banking sector that is free to do US dollar loans. This differentiation ultimately impacts USD borrowers, as they will now have less financing options.”

The securities dealers indicated that from their perspective, US dollar liquidity in the money market is fairly robust; and say there is an existing pool of US dollar funds that issuers of instruments have been tapping into without investors having to convert Jamaican dollars to US dollar to participate.

They’re also concerned about the effect the ban will have on the business they do with companies that are natural borrowers of US dollars, such as call centres and hotels.

Gooden said that around 21 per cent of outstanding loans are generally in hard currency. The JSDA, however, redirected the request to the FSC when asked the size of the foreign currency corporate debt market.

“There are instances where a bank loan may not be the best fit; as such, these companies must tap into the capital markets,” he said.

When those companies are forced to borrow in JMD then convert to USD, instead of tapping into the existing pool of hard-currency liquidity, “this essentially creates currency pressures, the same problem the authorities are trying to avoid,” Gooden said.

The dealers also argue that high net worth investors who really want hard-currency exposure will just simply move their funds overseas if there is a scarcity of quality local assets to invest in, creating a bigger problem, that of capital flight, he added.

“We understand that the capital markets could cause occasional pressures in the foreign currency market. However, we believe that the concern is overstated and that the residual risk is manageable,” said Gooden.

“There may be the occasional pressures. However, having acknowledged that a well-functioning market is important to the economy, the capital markets should not be treated differently. Instead of shunning the hard-currency aspect of the market, let us embrace it and use it as a catalyst for greater financial inclusion,” he said.

business@gleanerjm.com