On its review of the financial system’s performance for 2023 as well as current and emerging risks, the Financial Policy Committee (FPC) issues the following statement:
Within the context of inflation generally remaining above Bank of Jamaica’s (BOJ) target range of 4.0 to 6.0 per cent, BOJ maintained its tight monetary policy stance during 2023. The Bank’s liquidity management strategy during the year also incorporated increases in the domestic and the foreign currency cash reserve requirements and the removal of the absolute limits on the foreign currency net open positions (FXNOP) for authorised foreign exchange dealers.
Driven by the effects of Bank of Jamaica’s monetary policy actions and falling international commodity prices, inflation moderated to 6.9 per cent at end-2023 from 9.4 per cent at December 2022. The exchange rate, a principal driver of inflation and inflation expectations, remained relatively stable over the year, depreciating by 1.9 per cent. However, the equity markets continued to decline with the main Jamaica Stock Exchange (JSE) index falling by 8.5 per cent for the year.
Notwithstanding the impact of tight monetary policy, the Jamaican economy is estimated to have expanded by 2.6 per cent in 2023, following strong recovery of 5.2 per cent in 2022. The expansion of the economy in 2023 was driven by expansions in the Mining & Quarrying sector and Tourism, the impact of which was partly offset by declines in Construction, Agriculture, Forestry and Fishing. Additionally, unemployment fell to a record low of 4.2 per cent and the public debt continued to fall, reaching 74.2 per cent of gross domestic product (GDP) at the end of the year.
In light of the generally favourable macroeconomic conditions, the Bank’s Macro-Financial Index which serves as an aggregate measure of systemic risk to the financial sector, remained stable for the year and well below the crisis threshold. The financial sector remained stable and resilient to shocks.
Deposit-taking institutions’ (DTIs’) assets grew more rapidly than in the previous year in a context where they maintained strong liquidity and capital positions, as well as improved their profitability. Notably, DTIs’ fair value losses receded in 2023 due to efforts by the entities to minimise these losses through portfolio adjustments. Proactive interventions by the regulators also supported the institutions in shoring up their capital positions in the context of this shock.
Significantly, DTIs’ exposure to foreign non-financial corporates (NFCs) increased noticeably between 2017 and 2023 and were mainly in the form of loans to Jamaican-owned companies incorporated overseas. The non-performing loans (NPLs) on these loans, as well as on the overall loan stock, however remained very low.
For the non-deposit taking financial institutions, securities dealers’ (SDs) capital positions strengthened during the year, but their profitability declined, relative to the previous year. Fair value losses for SDs also declined for the year. The insurance sector’s asset base expanded for the year and the sector remained adequately capitalized, while its profitability improved substantially. The pension funds sector and collective investments schemes (CIS) however recorded relatively weak asset growth for the review period.
Looking forward, BOJ has identified climate-related financial risks, cyber-risks and higher inflationary pressures, possible due to geopolitics, as the key risks facing the financial sector in the near and medium-term. The Bank’s stress tests focussed on the quantification of the risks in the macro economy arising from higher than projected inflation and interest rates. The results of the stress tests continued to indicate that the financial sector remained broadly resilient to a range of shocks.
The Bank continued its commitment to addressing climate-related financial risks with the aim of enhancing Jamaica’s regulatory capacity to identify and manage these risks. At the close of 2023, the Bank published a set of commitments towards this end. Phase II of the climate risk project is anticipated to commence in the second quarter of 2024 and should span a period of three to four years. Additionally, as cyber risks become a more prominent feature of the modern, digitized financial system and as DTIs have reported a general increase in bank fraud, the need for industry participants to develop cyber resilience has become crucial. In this context, BOJ and the Financial Services Commission (FSC) made significant strides towards creating a Cyber Resilience Framework through the publication of the “10 Cyber Resilience Principles”. This document serves the purpose of establishing guiding principles and minimum standards for cyber security for the financial sector. The Bank is committed to further bolstering cybersecurity measures for the sector in 2024.
The report is available at https://boj.org.jm/boj-publications/
Financial Policy Committee
10 April 2024
