Home' Trinidad and Tobago Guardian : October 30th 2014 Contents OCTOBER 2014 • WEEK FIVE www.guardian.co.tt BUSINESS GUARDIAN
NEWS | BG7
September s $2.5 billion, 12-year bond issue,
issued to finance the 2014 budget deficit, failed
because of fears that the country s $65 billion
2015 budget would trigger inflation, said asset
management company KSBM in its October
(2014) newsletter for investors.
Woodbrook-based KSBM Asset Management is a T&T Secu-
rities and Exchange Commission (TTSEC)-licensed broker,
dealer and investment adviser. The company says in its brochure
it has more than $200 million under management and has
traded over $400 million in bonds since its inception in 2010.
"This issue was launched in September as a $2.5 billion
fixed-rate bond with a coupon of 2.8 per cent and a maturity
date of September 2026. The proceeds were to fund the gov-
ernment s budget deficit. The auction received less than $1.5
billion in bids, a significant under subscription. The bond was
issued at a discount with an allotment amount of $1.45 billion
at a yield of 3.2 per cent. Prior to the issue the estimated yield
for 12-year TT dollar sovereign risk was just under 3 per cent,"
Inflation was thought to have reached its highest for the
year at 5.9 per cent in July, but spiked to 7.4 per cent in August,
according to latest available statistics from the Central Bank
of T&T (CBTT). Up to press time, September inflation, (usually
out one month later) had not yet been published. Between
August 2004 and August 2014, the inflation rate has breached
15 per cent on two occasions: 15.4 per cent in October 2008
and 16.2 per cent in August 2010.
"The results of the recent (government) bond issue not only
reflects investor s reluctance to push TT dollar yields lower
than already historic lows, but may also be a sign of concern
about future inflation. We believe the 2015 budget, which was
announced before the bond issue, and which shows govern-
ment s planned expenditure at over $65 billion for the 2015
fiscal year, has the potential to trigger higher inflation and
this concern by investors may have limited participation in
the bond," KSBM added.
This view was reinforced, KSBM said, by the Central Bank s
September 26 monetary policy announcement that it was
raising the repo rate by 25 basis points - the first such increase
since the Bank commenced monetary policy easing more than
five years ago. The Bank cited the need to pre-empt a potential
rise in inflationary pressures and to mitigate higher portfolio
outflows as its primary justification for the increase, KSBM
KSBM s view on TT dollar interest rates is that "rates have
already bottomed out and should start to gradually drift upwards
as we get into 2015."
The speed at which TT dollar interest rates increase will be
very much dependent on the trend in core inflation which is
in turn impacted by government spending and the level of
slack in the economy, KSBM said.
At this time, core inflation is low and stable at around 2.0
per cent and therefore, KSBM said it "does not expect a major
jump in TT dollar interest rates over the rest of 2014."
As government spending ramps up even further in 2015,
however, KSBM said "this could potentially create pricing
pressure amid higher demand and a build up in excess liquidity,
forcing core inflation higher. Rising core inflation would force
the CBTT to accelerate monetary tightening leading to higher
interest rates. Furthermore, should US dollar interest rates
start to rise, this would put pressure on the CBTT to increase."
US dollar interest rates remain low, as they have been for
most of 2014, and KSBM said it "saw financial institutions
in T&T lower the rate paid on US dollar income funds even
further over the last quarter. The returns offered on the larger
US dollar income funds are now generally below 1 per cent
per annum. Yields on longer maturities did not change materially
over the quarter as reflected in fairly stable bond prices."
Still, KSBM said the outlook is still for US dollar interest
rates to rise in 2015 when the Federal Reserve (Fed) is expected
to start raising its benchmark Fed Funds Rate. There is, however,
greater uncertainty regarding the timing of such increases in
light of declining global economic growth and a strengthening
US dollar, KSBM said. The consensus view is that the Fed
would start raising rates from the fourth quarter of 2015.
Stage set for rise in interest rates
Giving its outlook on the T&T economy, KSBM said the
central bank reduced the repo rate between 2008 and 2012
and has kept it at a low level to support economic growth.
This policy was enabled by the fact that excess liquidity (mea-
sured by excess reserves in the banking system) was at man-
ageable levels and there was excess capacity in the economy,
"Over the past 18 months, however, there has been a sig-
nificant build up in excess liquidity in the banking system
driven largely by increases in government spending. Excess
liquidity has the potential to spur inflation through higher
bank lending and an increase in aggregate demand," KSBM
"With this build up in liquidity occurring in the context of
a growing economy and with the threat of inflationary pressures
from expansionary fiscal policy, the stage is set for the CBTT
to start raising interest rates."
KSBM said that the Government s running a budget deficit
is unwarranted by circumstances (relatively healthy economy
and high energy prices) because such an approach "weakens
a country s ability to deal with headwinds in the future. Not
only are we not saving when revenue is high but there is also
an increase in recurrent expenditure beyond a level that is
sustainable at moderately lower energy prices."
Citing falling oil prices, KSBM said: "While it is possible
that such dip in the oil price may be temporary, it does highlight
the fact that falling energy prices are a real risk. Current fiscal
policy is not equipping the country to deal with this risk."
Phoenix Park IPO on back burner
Turning to the stock market, KSBM said: "With no catalyst
in sight for an end-of-year rally, we can expect further down-
ward movement for all three (stock) indices. Earnings reports
are expected to be a mix of good (NML) and not so good
(banks generally) and have no real net effect.
KSBM also gave its opinion on the proposed initial public
offer (IPO) of shares in local downstream operator Phoenix
Park Gas Processors Ltd.
"The Phoenix Park Gas Processors (PPGL) IPO is definitely
off the front burner with the general elections rapidly approach-
ing in addition to the investigation into the FCB IPO scandal
nowhere near completion."
KSBM: $2.5 billion bond
failed on inflation fears
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