Home' Trinidad and Tobago Guardian : January 1st 2015 Contents jJANUARY 2015 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
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In his now controversial speech on
December 1 in Chaguanas, Central
Bank Governor Jwala Rambarran
made the point that the repo rate
was increased by 0.25 per cent to
3.25 per cent because the Monetary
Policy Committee---which sets the
repo rate---was "sending a signal it
believes higher interest rates are now necessary
in our financial system to mitigate the dis-
ruptive effects of higher portfolio capital out-
flows and to pre-empt a potential rise in infla-
This was the Central Bank governor saying
that T&T needs higher interest rates to slow
down the impact of portfolio capital outflows
and the prevent an increase in inflationary
The governor said that the MPC based its
start a gradual withdrawal of the accom-
modative monetary stance of the past four
years on three main factors.
He said the first reason was that forward
guidance from the US Federal Reserve (that
country s Central Bank) had altered the expec-
tations of the international stock, bond and
foreign exchange markets about the timeframe
for higher rates in the US.
Mr Rambarran said he expects rates in the
US to start going up gradually from around
summer of this year.
What he said next is very important for
those people who are interested in how the
local economy will operate in the new year.
He said: "At current interest rates, US dollar
assets are more attractive than TT dollar assets,
prompting movements of portfolio capital in
search of higher yields.
"We need to stay well ahead of the curve
if we are to enhance the appeal of TT-dollar
In other words, with all of the economic
research, expertise and insight available at the
Central Bank, Governor Rambarran is arguing
that one of the reasons local interest rates
need to increase is to slow down "movements
of portfolio capital in search of higher yields."
The thinking behind the statement is that
before the two hikes in the repo rate, the inter-
est rate differential between, for example, the
US 10-year Treasury bond and a T&T Gov-
ernment 10-year bond was too small. And
one of the ways to get the managers of "port-
folio capital in search of higher yields" to buy
T&T bonds rather than US-dollar bonds is by
increasing the yield on T&T assets."
In the December Monetary Policy Report
(MPR), which was released on December 22,
the Central Bank underlined the point that
the governor made about the diferential
between US and T&T interest rates when it
said: "With the non-energy sector on a sus-
tainable growth path, as evidenced by 14 con-
secutive quarters of growth by the third quarter
of 2014, the Bank s monetary policy deliber-
ations evolved to consider the potential threats
of a pick-up in inflationary pressures and the
possible disruptive effects arising from narrow
interest rate differentials on TT and US Treas-
On this point, the Central Bank s MPR also
stated: The Higher US Treasury yields have
implications for TT-US yield differentials.
Narrow TT-US yield differentials have been
of some concern to the Central Bank and was
another key factor influencing the decision to
increase its policy rate from September 2014."
The question that arises out of the Central
Bank s decision to hike the repo rate by 0.50
per cent in the space of two months is this:
Is that rate increase enough to persuade man-
agers of portfolio capital to invest new money
in TT-dollar fixed-income assets rather than
continuing to purchase US Government treas-
One indicator would be the appetite shown
by those managers of portfolio capital for the
$2 billion that ANSA Merchant Bank has been
mandated to raise for the Government early
But it seems to me that the Government
has another tool "to enhance the appeal of
TT-dollar assets" and that would be to provide
a firm commitment, along with some indica-
tive timelines, for the divestment of Phoenix
Park Gas Processors and the T&T Mortgage
Bank (TTMB), which is the name that is sup-
posed to be given to the entity that emerges
out of the merger of the Home Mortgage Bank
and T&T Mortgage Finance.
The question is: Would managers of port-
folio capital---which would be pension plans,
insurance companies, trust companies and
mutual funds---view investments in these two
divested companies as being possible alter-
natives to putting their clients funds in US
It can be argued that given the financial
success of the First Citizens Initial Public
Offering in the third quarter of 2013, that
managers of portfolio capital should be quite
anxious to acquire shares in both Phoenix
Park and TTMB.
At the end of 2014, the share price of First
Citizens closed at $37.07, which is 68.5 per
cent more than the $22 offer price. Plus, First
Citizens would have distributed $2.27 in three
dividends payments since it was listed: $1.09,
$0.57 and $0.61. This means that the majority
state-owned bank is trading at an historic
dividend yield of 3.18 per cent.
At the signing ceremony at the Hyatt
Regency on November 20, officials of the
National Insurance Board, National Enterprises
Ltd and the Unit Trust Corporation empha-
sized that the dividend yield of Phoenix Park
would be close to 12 per cent and they acquired
their ten per cent stake from GE Capital at
price of US$1268 million but at a price/earnings
ratio of 8.3 times its 2014 earnings.
The point being that, all things being equal,
a company like Phoenix Park should be quite
attractive to other managers of portfolio capital
apart from three of the country s largest that
consummated their purchase in November.
It s interesting that on November 12, 2009---
more than five years ago---a column with the
same headline as this one was published in
Among the points that the November 2009
piece made was this: "It is also the case that
the Government seems committed to running
budget deficits---which has the laudable effect
of supporting local incomes---as it waits on
the export prices to recover.
"The unintended consequence of chronic
budget deficits, in the absence of domestic
investment opportunities, is a continuation
of the private sector s ability to acquire and
hold foreign assets.
"The situation may become even more dire
as the chronic shortages in the foreign
exchange market will encourage the private
sector to hold foreign assets as a hedge against
the continued depreciation of the TT dollar.
"This will lead to increased pressure on the
exchange rate and an acceleration in the deple-
tion of T&T s foreign reserves.
"The antipathy of the PNM administration
and the private sector, both local and foreign,
towards privatisation and divestment of shares
on the local stock market could, therefore, be
a key factor in driving higher local inflation,
as importers pass on the costs of a depreciating
exchange rate, as well as the further erosion
of T&T s foreign reserves."
Have things changed in five years?
Will divestment curb
US dollar demand?
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