Why the dollar slides
IN 2016, the Jamaican dollar (JMD) fell more days than it appreciated in value, depreciating 182 days as against increasing 66 days. For the full year, it declined 6.2%.
Last year, 2017, things got better as the dollar went up 146 days and faltered 103 days. It closed the year up 2.6% at 124.39. Since then, it has declined 10.6%, now hovering around 137. So far in 2018, it has declined 106 days and risen 64 times. What factors account for its slide, and why has the dollar positioned itself, or is positioned over the long term, on a downward trajectory?
It stabilises now and again. It even revalues, but, basically, from the late 1970s, it has been down, down, down. Sometimes we forget that at the turn of this century, the dollar was 43.39, and currently, it has nosedived to 137. In the last three years, however, the rate of decline has slowed considerably.
There is now a flexible foreign exchange regime where the dollar floats and the Bank of Jamaica seeks to limit its footprint in the (FX) market, intervening only in extreme situations such as when there are clear signs of excess volatility or disorderly market conditions.
BUYING DECISIONS
With this caveat of limited intervention on the part of the central bank, suppliers of foreign currency might have been a little nervous as they observed the inching down of our dollar and decided to postpone selling until they could secure a better price. Purchasers, meanwhile, might have made a pre-emptive move by bringing forward their buying decisions to avoid paying more for foreign currency at a later date.
In this scenario, devaluation becomes a self-fulfilling prophecy. This might have prompted the BOJ to intervene in the FX market in August to the tune of US$65 million, with a promised intervention of another US$20 million in two weeks. (In last week’s column, I mistakenly wrote US$50 million when it should have been US$20 million).
The strength of the currency of our major trading partner, the US, gave us no chance of retaining the value of our dollar over the previous months. The US dollar simply outperformed other currencies, including ours. Ongoing slippage was inevitable, irrespective of any attempts the BOJ might have undertaken to bolster the dollar. The best we can hope for is a major correction in foreignexchange markets.
Another reason for the dollar’s descent can be explained in somewhat esoteric language, namely, foreign-exchange refinancing transactions where companies borrowed large sums of Jamaican dollars to pay down their US debt. This debt restructuring resulted in excess Jamaican-dollar liquidity while increasing demand for foreign currency.
I know there are several pluses that are advanced suggesting that the country is on a roll and our preoccupation should be more with the Government’s inflation target than with the dollar, which, in its present float, is likely to move up and down – as long as the inflation rate is low. That’s what counts.
LOW INFLATION RATE
Pluses highlighted include international reserves at all-time highs, the trending down of interest rates, a low inflation rate, employment at its highestlevel ever, and unemployment at record lows.
To me, shifting the language from the exchange rate to the inflation target may not change the current landscape if there are reasons accounting for weaknesses in the dollar.
The first thing we have to realise is that our country has underperformed in the real economy in relation to expectations and that our government policies, especially education, are not in sync with transforming our economy.
Since our economic reforms began five years ago, our growth expectations have not lived up to their billing, having eked out an annual average of less than 1%, and visible exports, which were forecast to climb to US$2.5 billion, have been badly underperforming.
As an oil-dependent country, high oil prices have always taken a toll. We got a reprieve when OPEC crude began trending down from US$96.29 in 2013 to US$40.68 in 2016. This helped in tidying up our external accounts and some of our fiscal excesses, and in 2015, we actually enjoyed a real surplus on our current account. Oil prices have moved up again, currently hovering in the upper 60s.
Compounding our problem is the fact that foreign direct investments (FDI), according to the Economic Commission for Latin America and the Caribbean, declined two years in succession. Last year, they fell 17.8% to US$649 million, from US$790 million. The declines in FDIs continuing into this year, combined with higher oil prices, understandably, created jitters in our foreign-exchange market even though we are awash with foreign dollars in commercial banks and the central bank.
Should we use those dollars to shore up our exchange rate, as we did in May 2017, when a cumulative US$240-million foreign-exchange intervention took place as part of a large Government of Jamaica bond redemption? (In last week’s column, I inadvertently attributed this intervention to May 2018).
The reality of sanctions, tariffs, and trade wars for which we suffer collateral damage, as in the case of Windalco – until Foreign Affairs secured what, hopefully, will be more than a temporary reprieve – and the current standoff with Venezuela, where we are entirely powerless, underscore the fragility of our dollar.
The massive oversubscription of initial public offerings (IPOs), even when a small percentage of ownership equity is offered to the market; the preponderance of passive depositgranting investors, and, except for one or two, the absence of big vision, larger-than-life, domestic entrepreneurs driven by technology, risk disposition; and an ability to transition the present into the future have restrained growth and development. It is interesting that UWI produces many prime ministers in the region but few captains of domestically developed, transformative industries.
This tells you that a truly competitive environment to drive success is absent. There is a lack of synchronisation among talent, capital, finance, credit, risk assessment, knowledge, vision, and experience. Isn’t it any wonder foreigners are buying at discounted prices, or investing in and developing what’s for sale here!
It should be pointed out that some of the foreign companies that invested in the country years ago could reach that point of critical mass where their assets are mature enough and they regard themselves as sufficiently exposed to start diversifying their financial capital for investment outside of Jamaica. This might explain some of the debt restructuring that occurred recently and which helped to place a downward pressure on our dollar.
It is not our reserves that will ultimately save our dollar, but Government, the private sector, and our educational institutions using their intelligence to better order priorities and make more sound economic management and governance decisions.