Home' Trinidad and Tobago Guardian : February 12th 2015 Contents BG14 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt FEBRUARY 2015 • WEEK TWO
There has been much angst
and commentary regard-
ing the availability of US
dollars. However, within
these discussions there
are certain fundamental
points that are either
missing or ignored.
The reference exchange rate for the T&T
dollar (TTD) is the US dollar (USD). If the
USD moves up or down relative to other world
currencies, the TTD will also move in a similar
fashion to those currencies as it remains linked
to the USD.
A key indicator to assess where the USD is
relative to other global currencies is what is
known as the US Dollar Index. This is a meas-
ure of the USD relative to a basket of foreign
currencies including the euro (EUR), Japanese
yen (JPY), pound sterling (GBP), Canadian
dollar (CAD), Swedish krona (SEK) and the
Swiss franc (CHF).
This index started in 1973 at a value of 100.
Since then it has traded as high as 164.72 in
February 1985 and as low as 70.70 in March
2008. Appreciate that the 1995 high coincides
with the collapse of oil prices. Also note that
the low in March 2008 also correlates to the
all time high of US$147 per barrel. As I have
stated before in this space the current strength
of the USD is more of a catalyst for the collapse
in oil prices than any fundamental changes
in demand and supply dynamics.
Today, the US Dollar Index is around 95
with a 52-week low of 78. The first thing to
note is that 78 is not significantly higher than
the all-time low in the dollar index reflecting
that since 2008 to the beginning of 2014 the
USD has been relatively weak against other
major global currencies.
As the US Federal Reserve, the Central Bank
to the United States began to unwind the
policy of monetary easing and other central
banks around the world moved in the opposite
direction the value of the USD against other
world currencies began to increase.
Over the past 12 months the USD has appre-
ciated by approximately 22 per cent against
the global basket. The implication here is that
the TTD is now stronger against these global
currencies. The two major currencies in the
basket are the EUR and JPY.
At the beginning of May 2014 the EUR was
at 1.39 against the USD, just a couple weeks
ago it was at US$1.11, a 20 per cent depre-
ciation. At the beginning of 2012 the JPY was
at 76 against the USD whereas today it is trad-
ing just off the December 22 high of 120. That
represents a 58 per cent move in this currency
pair with the JPY weakening against the USD
and likewise the TTD.
At the end of April 2014, the TTD to USD
exchange was $6.46.
Today, the exchange rate is coming off a
low of $6.30 and stands at around $6.35. This
move in and of itself represents a 2.5 per cent
appreciation in the TTD against the USD dur-
ing the past nine months.
The first question that needs to be addressed
by the authorities is why is the TTD appre-
ciating against the USD when there is an
acknowledged shortage of USD? If there were
no shortage then there would be no need for
the record interventions from the Central Bank
of T&T over the past few weeks.
It is counter intuitive and one would have
expected that the rate should have been closer
to $6.50 if only to remove some level of mar-
ginal demand and reflect the state of the mar-
ket. One has to ask whether an appreciating
currency in a time of acknowledged shortage
brings confidence to the market.
The next issue is whether there is a fun-
damental case for the TTD to fall further
against the USD by virtue of the strength of
the USD itself. Many emerging market coun-
tries have seen the value of their currency fall
against the USD over the past three months
in order to maintain a level of export com-
petitiveness and also to stymie demand for
Most of the motor vehicles we import into
T&T come from Europe and Japan. If the TTD
is appreciating against the USD and the USD
is appreciating significantly against the EUR
and the JPY then one would expect the cars
purchased from Europe and Japan to be rel-
atively cheaper all other things being equal.
Research has to be done to see whether
there has been an acceleration in motor vehicle
sales over the past 12 months but, intuitively,
one only has to look at the rate at which licence
numbers has changed to conclude that the
sales have increased.
One way of addressing the use of USD for
consumption is by slowing the demand. One
way to do that is to tighten monetary policy.
The problem here is the fiscal authorities (gov-
ernment) have not engineered the structural
reforms necessary for the economy to function
in a higher interest rate environment without
causing significant dislocations. This is all part
of the dysfunction.
In an environment such as ours where there
is surplus liquidity in the financial system, it
becomes very difficult for the Central Bank
to influence interest rates. That problem of
surplus liquidity has built up over a decade
and it means that the current exchange rate
challenges that we face were put in motion
It was back in 2004 that the then admin-
istration sought to reduce tax rates and, at the
same time, increase expenditure. The TTD
revenue shortfall had to come from somewhere
and it was receipts from the off shore economy
(oil and gas) that were used for spending on
the on shore economy.
All would have been fine had the spending
been for increasing the productive assets in
the country but that was not the case. In effect
what we were doing was taking USD as part
of our receipts from the energy sector and
converting it into TTD for spending on the
onshore economy. That TTD liquidity needed
to find a home and the most viable home was
to engineer investment opportunities for TTD.
Instead we mostly got big buildings that gen-
erally only served to increase the recurrent
expenditure in later years.
The increased TTD liquidity first caused
the local stock market to rally until 2005, then
the property market took off and valuations
skyrocketed. Next came consumer price infla-
tion and the combination of all this and the
absence of investment opportunities led locals
to the Clico EFPA which attracted billions of
TTD in its last couple years.
The latter, masked the dysfunction that was
taking place regarding how the economy was
being managed and removed any immediate
pressure on the exchange rate.
When CL Financial collapsed Treasury Bill
rates fell from around 7.0 per cent to under
one per cent as the TTD liquidity that was
being created on an annual basis and accu-
mulating over time had no where to go except
into government paper and bank deposits.
The irony is that we then had to take addi-
tional receipts from the energy sector to bail
out the persons who invested in the EFPA,
individuals who although they acted on their
own were effectively "pushed" in that direction
by the economic dysfunction at the time. The
country effectively paid twice and that does
not take into account the opportunity cost.
This is where we are at now and while this
process was unfolding every saver and investor
in this country was "cheated" because the
increased spending fuelled inflation but the
trapped TTD liquidity pushed rates so low
that there was no real rate of return available.
The real rate of return is the return after fac-
toring in inflation.
This dysfunction will impact all of us for
years to come as most will find the level of
their retirement nest egg insufficient because
of insufficient investment opportunities. It is
called financial repression. That retirement
crisis will come at a time when our energy
resources will be on the wane.
In 2003, the spread between US and TT
rates was 300 basis points. At the end of last
year that spread had narrowed to 60 basis
points on a 10-year bond.
On a risk adjusted basis there is no incentive
to hold TTD and there has not been for years.
Add to the mix the reduced USD earnings
from the energy sector, the appreciation of
the USD globally and the increased demand
for durable goods, the general lack of invest-
ment opportunities in TTD and throw in some
political instability and the reason for our
predicament should be very clear.
Ian Narine is a broker registered with
Our economic dysfunction
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