Jamaica's capital flows a likely victim of downgrade
Published:Wednesday | August 10, 2011 | 12:00 AM
Sabrina Gordon, Business Reporter
Jamaica could experience a slowdown of capital inflows, as markets around the world digest the downgrade of America's credit, the central bank said Tuesday.
Beyond that, analysts were not clear just how big an impact the downgrade would have on private investors' foreign-asset portfolios, even as the US dollar weakens. They expect, however, that the broader economy will find it that more difficult to achieve the projected 1.5 per cent growth this year.
"The impact on the financial account is expected to be negative due to an expected reduction in net private-capital inflows, foreign-direct investment and portfolio flows," said a representative of the Bank of Jamaica (BOJ).
But the BOJ representative was not immediately able to put a figure on the expected reduction.
FDIs to Jamaica were already down 62 per cent last year at US$210 million.
The impact on the country's current account remains uncertain as effects of lower oil prices might be offset by lower export revenues.
"Lower export revenues associated with lower growth and loss of wealth in the US and lower remittance earnings may be counter balanced by lower spending on imported fuel," said the BOJ representative. Late Friday evening, Standard and Poor's announced that it was downgrading its credit rating for the US government long-term debt by one notch, from AAA, the highest rating, to AA+.
Since then, world stock markets have been exhibiting volatile swings, gold prices have risen above US$1,740, as investors seek safe haven, and oil has dropped below US$81 per barrel.
Wall Street regained some of its footing Tuesday after the US Federal Reserve said it would keep interest rates near zero for the next two years, introducing a level of certainty on the cost of capital.
"Companies that own international equities will find it tough going, given all the concerns about global growth. Jamaican financial companies tend to own mostly GOJ bonds, regional assets and have fairly limited exposure to global assets. This will prove to be a good thing in the current environment, given the significant downward pressure in most markets," said Anya Schnoor, executive vice president at Scotia Group Jamaica and chief executive officer of Scotia Investment Jamaica Limited.
Claudette Crooks, president of MoneyMasters Limited added that local investors will not be affected in any significant way, saying regulators restrict Jamaican pension funds' investments in foreign assets, and that investors were currently more likely to be holding cash than assets.
"So companies portfolios will be least affected. The major impact is moreso to the economy," said Crooks.
"The slowdown in the economy is more critical than the portfolio aspect," she said.
The bottom line, said Schnoor, is that "the global environment is shrouded with uncertainty, which doesn't lend itself to companies wanting to go out and taking on risk. Asset prices will tend to be subdued in the current environment. Therefore, it is reasonable to expect limited upward valuation price pressure from a portfolio perspective over the next quarter."
The value of foreign assets held by Jamaican institutions and individuals was not immediately available. However, Bank of Jamaica data shows foreign assets of J$273 billion on its balance sheet at June, whereas deposit-taking institutions are invested in J$25.7 billion of foreign securities up to March.