Appetite for USD loans and foreign government securities grows
Foreign currency loans held by Jamaican investors and firms climbed by nearly 26 per cent last year, driven mainly by sovereign securities, according to the Bank of Jamaica.
Meanwhile, borrowing in US dollars also increased as business owners sought out lower rates on foreign currency-denominated debt issues, which totalled US$300 million in 2022, according to the Financial Services Commission.
“Whenever local interest rates rise beyond approximately 8 to 10 per cent, companies start looking at borrowing in US dollars, which are 3-5 per cent lower than Jamaican rates,” said President of the Jamaica Manufacturers and Exporters Association John Mahfood, explaining the demand.
“Obviously, they weigh the savings against the possible risk of devaluation, and it appears that the devaluation risk is viewed as low,” he said.
At the end of the last year, Jamaican dollar debt issues were estimated at $419 billion, with $15 billion paid down. For US dollar debt issues, the stock was estimated at US$1.46 billion with US$9 million paid down.
Comparatively in 2021, the respective issues were $394.9 billion with $6.99 billion paid down; and US$966 million with US$5 million paid down.
The central bank in its 2022 annual report also pointed to growth in foreign government securities, which increased by $72 billion and accounted for almost all of the near $77 billion in overall growth of foreign held assets.
This was in comparison to an increase of $37.5 billion in 2021.
The pursuit of overseas assets in 2022 came amid increases in local and international interest rates. In addition, holdings of Government of Jamaica securities issued in foreign currency increased by $18.5 billion in 2022, slower than the increase of $32.9 billion in 2021.
“This slower growth was in the context of DTIs continuing to experience increased fair value losses on these investments (predominantly medium- to long-term GOJ global bonds) due to rising interest rates,” the central bank said.
The term DTIs refers to banking institutions.
“Notably, licensees reduced their holdings in reverse repurchase agreements, which contracted by 53.6 per cent ($15.9 billion), which were mainly backed by GOJ securities, in light of falling collateral values and credit growth initiatives pursued by some DTIs.”
Both investing and saving in USD became a growing trend in 2022.
As for the confidence displayed by businesses in foreign currency borrowing, which comes with risk, were the value of the currency to swing. Mahfood, who heads a tea manufacturer company, said it is due to the stability in the foreign exchange market and confidence in the central bank.
“We have had a number of years of relative stability in the exchange rate where the rate has varied between $152 and $156. Our inflation rate is similar to the rate in the US and is on a declining trend,” he said.
“The BOJ has sufficient US dollar reserves to protect the exchange rate and have shown that they are prepared to defend it. We have come through the COVID epidemic, and tourist arrivals are strong, and there are 8,000 new rooms planned for the next two to three years. The Government has done a good job in reducing the national debt and has maintained economic stability for many years,” he said.
Jamaica’s net international reserves topped US$4 billion in March.
“Even with oil at a very high price, and we are spending more than US$2 billion per year on oil, we are able to balance our US dollar inflows with outflows,” the JMEA president said.