Home' Trinidad and Tobago Guardian : December 18th 2014 Contents DECEMBER 2014 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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In this space last week, the commentary headlined "Is
the Governor checking his list twice" seemed to have
resonated widely as Central Bank Governor Jwala Ram-
barran s thinking on the issue of foreign exchange---
reported first here---may have surprised and shocked
In a piece on Monday, former deputy Central Bank Governor
Terrence Farrell put forward several points that he thought
that Governor Rambarran should internalise.
The first was: "When it comes to their money, people will
do whatever they have to do to protect and preserve their
assets in real terms, and that means in US dollar terms.
"If indeed businessmen are funding their US dollar deposit
accounts, and are engaging in capital flight, that is an entirely
rational response to their loss of confidence in the governor s
management of the foreign exchange market."
Is Farrell s suggestion that T&T residents "will do whatever
they have to do to protect and preserve their assets in real
terms, and that means in US dollar terms," borne out by the
To test Farrell s proposition, let us take as an example a
couple who run a small business and who were in their mid-
fifties in 2009. They had $2 million in financial assets in Sep-
tember 2009 and were looking to "retire" this year and maintain
their standard of living in retirement.
For them, a big part of maintaining their quality of life
means visiting their two children---who were educated in North
America and now live there---once a year and planning a cruise
through the Mediterranean in a year s time
For this couple, let s call them Trevor and Sandra Smith,
the protection and preservation of their assets in real, US-
dollar terms, means that they would want to ensure, to the
greatest extent possible, that their $2 million in financial assets
can fund both their TT-dollar expenses (as they intend to
continue living in their four-bedroom suburban home, whose
mortgage has been paid off) as well as their annual visits to
their children in North America (which is funded from their
jointly held US-dollar account).
It is clear that since Trevor and Sandra have consistent,
monthly expenses in TT dollars and an annual expense in US
dollars---more realistically monthly expenses in US dollars as
they have got into the habit of buying a wide variety of products
on the amazon.com Web site---that they would be concerned
about preserving and protecting the value of their TT-dollar
But they would also be concerned about their ability to buy
US dollars to fund their monthly purchases on the Web site
and their annual vacation---which in effect means paying off
the accumulated balances on their credit cards.
In slightly technical terms, they would be concerned about
inflation risk and exchange rate risk.
If Trevor and Sandra were a typical T&T couple, there is
a good chance that most of their financial assets would be
held in commercial bank deposit accounts and in one of the
income funds offered by a mutual fund provider.
That s because between September 2009 and September
2014, the total deposits held in local commercial banks jumped
by 51.4 per cent from $65.2 to $98.7 billion. The amount of
money held in foreign currency accounts increased by 9 per
cent between September 2009 and September 2014, moving
from US$3.27 billion to US$3.56 billion. Expressed another
way, foreign currency deposits were equal to 32 per cent of
total deposits in September 2009, but this declined to 23 per
cent of total deposits in September 2014. (As an aside, between
January and September 2009, foreign currency deposits jumped
by about 29 per cent).
What does the fact that T&T citizens have expressed a pref-
erence for the safety of TT-dollar commercial bank deposits
over almost all other investment classes tell us?
It may point to the fact that in the last five years, many
citizens have chosen to preserve the value of their assets in
nominal TT-dollar terms, rather than in real terms (nominal
refers to the amount of money that would be in the account
after five years and real refers to the adjustment for the impact
It also points to the fact that there has been a level of comfort
in the citizenry with the amount of money in their foreign
currency accounts as many have been safe in the knowledge
that they could access those funds when they need to AND
that buying US dollars would be easy and at an affordable
In nominal terms, if Trevor and Sandra had left the $2
million in a deposit account, they would have generated at
most $40,000 in interest as rates on deposit accounts have
declined substantially in the last five years.
In real TT-dollar terms, their $2.04 million lump sum would
be worth less as the rate of inflation could have reduced the
purchasing power of the lumpsum by about one-third in that
The fact that TT-dollar deposits have increased, while at
the same time deposit rates have plummeted and inflation
has trended up to 13 per cent may be an indication be an indi-
cation that T&T residents are less interested about protecting
and preserving the purchasing power of their TT-dollar assets
But the important inference from the Farrell piece is that
$2.04 million today can purchase almost the exact same
amount of US dollars as it could five years ago and that if the
US dollars were available for purchase, people could preserve
the real value of their savings.
The problem is that there is no commercial bank, at this
point, has the ability to convert $2 million into US$315,000
for one customer without severely disrupting their distribution
of the foreign currency for other customers.
For me, the crucial question is this: If the collapse in the
price of oil and the inevitable softening in the prices of T&T s
other energy exports mean less foreign currency coming into
the country, would the Central Bank and the Ministry of
Finance be able to curb aggregate demand aggressively enough
to reduce the outflow of US dollars?
Additionally, if a bank customer cannot empty his or her
foreign currency account as and when they wish, is there any
basis for believing that funds in a locally domiciled, US-dollar
account are, in fact, accessible as and when required?
Given the high rate of inflation, the prospect of reduced
foreign currency inflows and a sub-optimal distribution system
for foreign exchange, is there a sense in which we may have
passed a tipping point in which a majority of the country s
big-money people feel less confident about keeping their
money in TT-dollars?
Farrell is absolutely correct that Governor Rambarran needs
to do much more to restore confidence in the market for US
dollars, but is he right to personalise to the Governor what
must be considered to be the Central Bank s management of
the foreign exchange market?
Is he suggesting that the Governor---in the job for less than
three years---is not taking advice from his very competent
technical staff or is Farrell casting aspersions on his former
colleagues as well?
Do we need to restore
confidence in the TT dollar?
Former deputy Central Bank
governor Terrence Farrell
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