How CFOs should navigate the current environment

Whether you are managing a large corporate balance sheet or your retirement portfolio, all CEOs, CFOs, investors or financial controllers benefit from understanding the impact of the macro-economic environment on their business or investment strategy. Today we look at US and Jamaican monetary policy and their implications for our investment strategy:

Central Bank Policy - Interest rates, liquidity injected or withdrawn by Central Banks and other policy tools that are primarily intended to manage Inflation. These levers affect your access to financing, end user demand for your goods and services and of course, the rate you pay on your debt and the rates you earn on your investments. Here are some observations, data points and implications for local and US investors:

USA: In the US, we have observed falling benchmark rates but rising Treasury Bill yields. The Federal Reserve has cut the upper bound of its benchmark rate from a high of 5.5% in September 2024 to 4.5% in December 2024, while the yield on the 10-year US Treasury has increased by more than 100 basis points over the same period. Some analysts posit that the growing US deficit and uncertainty around fiscal policy have kept US Treasury bill yields elevated. This has a very big implication for local investors: Real Yields on US Treasuries are now higher than real yields on some GOJ tenors. Using a 3 year US Treasury yield of 4.3% and inflation of 2.9%, investors are earning a real yield of 1.4% in USD terms. In Jamaica, using a 3 year GOJ 2028 note yield of 5.99% and an inflation rate of 5%, investors are earning a real yield of 0.99% in JMD terms. CFOs should take note of this. The sovereign credit risk, counterparty risk and liquidity risk should also be “priced in” when assessing repos or other money market Instruments. For example, many CFOs do not consider the risk inherent in the underlying assets of the money market instruments in which they invest. This is an often-overlooked source of risk. Investors should consider this risk when comparing rates or instruments across institutions.

Jamaica: Point to Point Inflation fell to 5% for the calendar year of 2024, from 6.9% in 2023. The BOJ lowered rates 4 times in 2024 to 6.0% (from a high of 7%). T Bill yields are also lower and BOJ CD issuance has declined but liquidity withdrawals via FX interventions increased in 2024 to US$1.1 billion from US$944.5 million during 2023. This has sustained the somewhat tighter liquidity conditions observed by the private sector. Despite higher interest rates, commercial bank loans to the private sector grew at a cumulative average growth rate of roughly 10% per annum between 2022 and 2024 (relative to the 20 year average of 15% per annum). The exchange rate is another closely watched data point by businesses and investors. According to IMF data, the real exchange rate appreciated by 1% in 2022 and 6.6% in 2023. One hypothesis posits that this reduction in competitiveness has led to a decline in demand for Jamaica’s exports thus slowing / restricting growth. Economic growth moderated to 4.7% in 2023 (from 8.2% in 2022) and the BOJ projects that real economic activity would be between -1% and 0.5% for the 2024/25 fiscal year. Lower growth and lower liquidity are themes that impact the investment strategy of local corporates and can be mitigated with innovative investment strategies.

Marian Ross-Ammar is a Vice President of Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm