Get used to a flexible exchange rate

Business reporter

Sunday, October 14, 2018

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CANADA-based Chief Investment Strategist, Myles Zyblock, reckons that Jamaican companies should get more in tune with hedging programmes to mitigate unexpected movements in the local currency in accordance with first-world countries.

His remark, which came days before the Jamaica Chamber of Commerce (JCC) reported the devaluation of the Jamaican dollar as the main factor adversely affecting investment plans for businesses, was based on economic notions that a weaker currency will stimulate exports and make imports more expensive, thereby decreasing the country's trade deficit or increasing surplus over time.

For the first time in several quarters, the devaluation of the Jamaican dollar replaced crime as the major concern for businesses looking to invest. The survey of business confidence, which was conducted over the period July 6 to September 2018, highlighted that business expectations for economic growth has waned somewhat with a smaller proportion of firms, 48 per cent compared to 64 per cent three months earlier, reporting that they expect the economy to improve in the next 12 months.

Firms' willingness to invest in new plant and equipment dipped to 136 index points, four points from the 140 points set in the first quarter of 2018. Still, 64 per cent continued to agree that the time was right for expansion still exceeding the 58 per cent average in the year 2017.

“I know the devaluation has caused some anxiety. There are benefits to a flexible exchange rate that will become relevant overtime and one of those is that if your economy is under a substantial amount of pressure the currency should cheapen. While Jamaica is not a big exporter, exports will cheapen and that should be partially an offset to any pressure the country is feeling,” Zyblock told the Jamaica Observer.

“Corporations will have to get used to a flexible exchange rate and they are going to probably have to employ people that manage a hedge book, a lot of big companies in the US or internationally, they have hedging projects, so ultimately companies will have to get a lot more in tune with hedging programmes to mitigate unexpected moves in the currency,” he said.

Zyblock is attached to 1832 Asset Management IP one of Canada's largest asset managers with over Can$100 billion in assets under management since 2013. The CFA, charter holder, who also serves as the company's portfolio manager was in Jamaica last month at an Asset Management luncheon hosted by Scotiabank Investments under the theme “Prudent Investment Management Philosophy: Are you Maximising Stakeholder Value?”.

He noted that while this is a learning experience for Jamaica, companies that are now unsure about how to deal with such events will, eventually, become quite good at managing the variability in the currencies.

Zyblock referenced the Canadian dollar which roughly six years ago traded at par with the United States dollar. Today, the Canadian dollar trades at $1 to US$0.77.

“That gets a lot of Canadians upset but ultimately as the currency depreciated it made Canadian exports cheaper and helped to buffer some of our growth problems. There are good and bad things from a flexible exchange rate, it's early days and Jamaica's Central bank will have to understand how to manage the currency, but almost all countries have moved to a flexible exchange rate and there are really very few left that have either a fixed or managed exchange rate,” he reasoned.

At the start of the year, the Jamaican dollar averaged $125 to US$1. However, over the period June to September 2018, the exchange rate climbed to an average of $137 to US$1.

Earlier this year, the Bank of Jamaica opened its foreign exchange auction – B-FXITT – to buy US dollars for the first time, after only selling to dealers since July last year. At the same time BOJ, in accordance with the International Monetary Fund agreement, had moved from a foreign exchange rate target to inflation targeting, which was running at 2.9 per cent from a prescribed rate of 4 to 6 per cent.

“So from the IMF target, they had a buffer and they were going to stabilise the dollar. What you're seeing on one hand is that for businesses, the dollar moved too quickly to keep them comfortable and that shattered the confidence, because the objective of having people trying to get people to save in the Jamaican dollar and not US dollar had moved,” president of the JCC Larry Watson said during the presentation of Jamaica's Business and Consumer Confidence last week.

The Bank of Jamaica and the Ministry of Finance, in responding to the currency movements, placed over US$100 million into the market, as well as a flash auction of US$40 million.

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