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This evening, I will address the impact of the current unprecedented global financial turmoil on the local economy as well as the policy actions that have been taken to preserve financial stability. I will also review the outlook for the Jamaican economy.
The Global Crisis Impact
First, let me briefly review the impact of the deteriorating external environment on the Jamaican economy.
Since the middle of last year, many developed nations have been confronted by the financial turbulence originating from the sub-prime mortgage meltdown in the United States. This situation has triggered the global credit crisis and worldwide economic slowdown.
Developing countries, until recently, had been relatively resilient to the global crisis given overall low direct exposure to US sub-prime mortgage assets. However, the deepening global credit crunch is now presenting challenges to the financial systems and economies of developed and developing countries alike.
The challenges facing financial systems of developing countries are primarily rooted in uncertainty. The fast deteriorating global economic outlook and some nervousness about the resilience of companies to weather the financial shock have temporarily dislocated funding markets. Consequently, in light of the ambiguity surrounding the full economic impact from the current global financial market crisis, international ratings agencies have issued ratings downgrades on many countries.
Impact & Challenges on the Jamaican economy
As you know, the Jamaican economy has been affected by these challenges. In line with many other developing nations, normal financial flows to domestic institutions have been temporarily disrupted until international investors feel safe again to lend across, and even within, their borders. Recently, similar to many other countries, the local foreign exchange market has experienced some pressure arising from the temporary constraint on international credit markets and the consequent price declines across a broad range of financial assets internationally.
The Challenges Are Not Insurmountable
Nevertheless, the challenges faced by the external financial system are not insurmountable if they are counteracted by appropriate policy responses. When the crisis escalated on Wall Street several weeks ago with the collapse of Lehman Brothers, the authorities at the Bank of Jamaica and the Financial Services Commission were mandated to undertake an immediate assessment of the local financial institutions to determine the extent of their exposure to the risk of contagion.
We were satisfied then that the level of exposure was manageable and in the event of margin calls on the few financial entities affected, the Central Bank was in a position to provide liquidity support. I assured you then and assure you now that there is no cause for alarm as there is no significant threat with respect to our local financial institutions.
Monitoring Unit Established
We have established a Monitoring Unit comprising the leadership and technocrats of the Ministry of Finance & the Public Service, Bank of Jamaica, Financial Services Commission and Planning Institute of Jamaica. This team monitors and analyses developments in the global financial market on a day-to-day basis with a view to determining the likely impact on Jamaica and to allow for timely and pro-active policy intervention.
GOJ policy actions so far
What have been our policy actions so far?
The Bank of Jamaica, like central banks around the world, implemented a coherent set of policy measures to improve the flow of funding within domestic markets and preserve the financial stability of our country. Allow me to briefly mention two critical initiatives.
. The first component of the Bank’s strategy was the establishment of a temporary collateralized lending facility of US$300million to supply liquidity to financial institutions. We undertook this measure to satisfy financing agreements related to payments on Government of Jamaica global bonds held with institutions abroad. This arrangement has had a positive impact on the prices of our global bonds, resulting in a reduction in this source of foreign exchange demand. Indeed, of the US$300 million window, some US$170 million has been taken up with demand for it now slowing to a trickle.
. To complement this facility, the Bank formally established a programme to oversee and facilitate the flow of credit among local financial institutions. In this arrangement, banks with funds available for inter-bank lending can place these funds with the BOJ, which then on-lends to borrowing institutions with the appropriate collateral. This action has also moderated some of the pressures in the foreign exchange market and assisted in the continued functioning of the inter-bank credit market.
US$ Indexed Bond
On November 12th the Ministry of Finance introduced a US$ Indexed Bond to the local financial market. This Bond assisted the Government in raising funds to finance the Budget as well as in stabilizing the foreign exchange market. Additionally, the Central Bank implemented a two-pronged strategy to improve the overall supply of foreign currency to the market by reducing the incentives and ability of some institutions to hoard foreign currency liquidity. The Bank offered on November 18th a Special Certificate of Deposit to local financial institutions. This offer has had a positive effect on the foreign exchange market as investors reversed their build-up in foreign currency positions in order to purchase the instrument.
On maturity of this instrument on the 3rd of December 2008, the Central Bank will increase the cash reserve requirement of banks from 9 per cent to 11 per cent of Jamaican Dollar liabilities. This action will ensure that the excess liquidity removed this week will not return to threaten market stability in two week’s time.
Projected Impact Of policy initiatives
Altogether, these policy initiatives will address the temporary gap in the foreign exchange flows and maintain order in the domestic financial markets. I must emphasize that throughout the current global financial crisis, the capital adequacy of Jamaica’s financial institutions has remained at fundamentally strong levels. The banking sector, subject to strict Central Bank supervision, has remained resilient.
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