By RALSTON HYMAN
Financial Editor

Some big players including the Bank of Jamaica that bought into the Jamaica Debt Exchange (JDX) programme are seeing red ink spilling on their bottom line.  Reports from the financial sector indicate that the Jamaican economy could experience major fallout, as the programme begins taking effect.

Several public and private sector entities are now reporting significant fallout in their revenue flows and profits, while the central bank has racked up almost $4 billion in losses two months after the JDX programme was implemented.

The bank’s profits stood at $7 billion last November.  The losses and the reduction in the profits of other public sector bodies, which would have to be absorbed by the government, could result in the net gains to the budget from the JDX falling way below the $30 billion being projected by Finance and Public Service Minister Audley Shaw.

The losses could affect the country’s ability to meet the target to keep the losses of public sector entities at $29 billion or 2.9 per cent of gross domestic product (GDP) as at the end of March this year.  GDP is the total market value of all final goods and services produced in the economy, during a given quarter, six-month period or a year.

The negative effects of the JDX are being felt, although many government officials and private sector executives are saying that it is still early days yet.  The JDX has resulted in a lowering of the interest rates and a lengthening of the time, which the government intends to take to repay some $701 billion in domestic debt, which amounts to about 65.5 per cent of GDP.

The authorities however, did not take into consideration the negative impact of the JDX on the public sector and pension funds, although it negotiated a US$950 million bailout fund for members of the financial sector.

Data presented in the central bank’s balance sheet indicated that it chalked up almost $4 billion in losses during the year to date up to February 24, because of the stable exchange rate and the impact of the JDX.

The bank’s profits fall when the exchange rate is stable because it does not benefit from the increase in the Jamaican dollar value of its foreign assets when there is a devaluation of the local currency, relative to its US counterpart.  The value of the bank’s foreign assets jumped to $202.7 billion, as at February 24, compared with $144.9 billion on February 25, 2009.

The value of these assets was also marginally higher than the $198.1 billion reached on February 10, this year.  The bank’s foreign assets represented 53 per cent of its total assets, which climbed to $381.64 billion on February 24, compared with $375 billion on February 10 of this year and $284.1 billion in February of 2009.

Reduction in interest income

The JDX has led to a significant reduction in the interest income being earned by the bank on its holdings of government securities.  The bank held some $12.9 billion investment debentures and $123.3 billion in other marketable securities as at the end February.

This amount was about 35 per cent the bank’s total assets, as at the end of February.  However, despite this reduction in the interest it is earning on its holdings of government securities, the central bank is still paying a higher rate to investors on its open market instruments.  The bank’s open market instruments amounted to $109.9 billion, as at the end of February, down from $112.2 billion on February 10.

The losses of the central bank are hugged up by the Government of Jamaica (GoJ), which will add to the national debt.  The national debt currently stands at $1.50 trillion.  A similar situation is taking place in other public sector agencies such as the National Insurance Fund (NIF), National Housing Trust (NHT) and all other agencies, which hold government securities.  Any reduction in the profits generated by these agencies, would impact on the provision of basic social services. Meanwhile, many of country’s major private sector companies, including the National Commercial Bank Group Limited, Scotia Group Jamaica and the Seprod Group Limited have been reporting reductions in their net interest income and profits.  NCB recently made the post of some 130 workers redundant, as it tries to do more with less in order to cope with the negative effects of the JDX in the first wave of an ongoing streamlining exercise. Scotia DBG Investments says the negative effects of the JDX would force it to accelerate its rationalization programme.  Anya Schnoor, chief executive officer of Scotia DBG Investments, says the JDX would have a negative impact on the amount of money the company would be able to earn in net interest income in the future and as a result, it would have to accelerate the implementation of plans to become more efficient.

The company’s net interest income — the difference between interest paid on investments and that earned from investing in non-productive government paper — zipped by 60 per cent to $995 million during the first quarter of this financial year, up from the $623 million raked in during the previous year.  This amount, which was however, marginally lower than the $999.7 million garnered during the previous quarter, could fall even further under the JDX.

The Seprod Group is reporting a $50 million reduction in its interest income this year because of the impact of JDX.  The conglomerate is reporting that it exchanged some $685 million in Jamaican dollar denominated securities at a rate of 12.1 per cent per annum, down from 19.1 per cent per annum and US$1 million at a rate of 6.75 per cent per annum, down from 7.5 per cent per annum.