Home' Trinidad and Tobago Guardian : September 17th 2015 Contents SEPTEMBER 17 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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The Bloomberg website published a story on
Wednesday headlined "Inside South Amer-
ica s oil-fueled currency battle," in which
the business news organisation looked at the
exchange rate regimes of three South Amer-
ican countries: Venezuela, Colombia and
Venezuela has a pegged currency that is overvalued at official
rates and price controls, Colombia has a freely floating currency,
while Ecuador uses the US dollar, which means that that coun-
try s onshore productive sector would have become less com-
petitive with the strengthening of the US dollar in the last year
All three countries produce oil and have economies that
have been affected, in one way or another, by the sharp decline
in the global prices of the commodity in the last year.
As everyone knows, basic goods are in short supply in
Venezuela, but the story outlined a thriving trade along the
Venezuela/Colombia border in which price-fixed goods like
milk, shampoo or toothpaste from T&T s closest neighbour
are sold in Colombia "for several times the purchase price---
even 1,000 times, in the case of gasoline."
On the border between Colombia and Ecuador, a different
dynamic is at work: Ecuadoreans with US dollars are flocking
across the border to buy made-in-Colombia goods, which have
become cheaper because of the 35 per cent depreciation of
Colombian peso against the US dollar in the last year.
According to the Bloomberg article: "Whatever the pitfalls
of changing currency regimes, the 52 per cent oil slump in the
past year has hit some exporting nations hard enough to make
them at least weigh the option. Kazakhstan has actually done
it: Central Asia s biggest energy producer cut the tenge loose
The business news organisation concluded that in the Andean
currency experiment, Colombia s flexible regime is "emerging
as the winner as economists surveyed by Bloomberg expect
the Colombian economy to grow 3 per cent this year, almost
twice as fast as Ecuador," and far outpacing the Venezuelan
economy, which is expected to decline by more than 5 per cent
It seems to me that your suggestion that the Central Bank
and the Government should use monetary and fiscal policies
(higher interest rates and higher taxes) instead of correcting
a grossly overvalued currency is incorrect.
As T&T looks at its current forex system, there are clearly
some options on the table:
• Maintain the current Central Bank thinking of an inflexibly
"floating" exchange rate with intermittent interventions by the
Bank when the crescendo of criticism from businessmen who
cannot pay their bills gets too loud;
• Go back to the system of the 1970 s and 80s of foreign
currency controls along with the bureacratic impediment of
the need to apply to the Central Bank for foreign exchange
(the much-maligned EC-O system); or
• Allow greater flexibility in the pricing mechanism for
foreign exchange, which was advocated by the IMF a year ago
as one of two options that "would likely restore confidence in
the foreign exchange market, eliminate shortages and hoarding
and provide authorities with a rapidly responding barometer
of foreign exchange supply and demand conditions, thus pro-
viding useful signals about macro-economic policy.
There is a fourth option, put forward by a regular commentator
in this newspaper, which suggests that the foreign exchange
problem can be addressed by monetary and fiscal policies---
in other words, higher interest rates and higher taxes.
In my view, this ignores the fact that monetary and fiscal
policies take time to work their way through the system. Any
economics textbook would tell you that higher interest rates
take up to 18 months to have an impact. Also in T&T there
is normally a three month lag between the announcement of
new taxes and their implementation.
Also, using interest rates and taxes to dampen demand for
foreign exchange ignores the fact that, as the IMF said more
than a year ago, there is need to restore confidence in the
foreign exchange market. For example, using interest rates and
taxes to dampen demand for foreign exchange does nothing
for the businessman who has an immediate need for US$2
million to pay a bill, but is being offered US$50,000 by his
bank.Here are seven reasons why I believe a correction in
the grossly overvalued TT dollar is likely to benefit
the T&T economy as it:
1) Turns a fiscal deficit for the 2016 financial year
into a fiscal surplus because a depreciation will lead to
more TT dollars for the US-dollar taxes that this country
For example, if T&T expects to collect US$5 billion in taxes
from energy companies in 2016, at an exchange rate of TT$6.37
to US$1, that would result in revenue of TT$31.85 billion.
However, at an exchange rate of TT$10 to US$1, the energy
tax collection of US$5 billion results in TT-dollar revenues of
$50 billion, which is 57 per cent more revenue than at the
lower exchange rate.
2) Lessens the need by the Government to call on
the population to make immediate adjustments by cut-
backs in the transfers and subsidies subvention or increas-
es in taxes on the population. If the Government collects
more TT dollars from converting the US dollars it receives in
energy taxes, there would be less immediate need to rush to
tamper with transfers and subsidies.
3) Turns the capital flight of US dollars into a massive
repatriation of US dollars. People who have sold the grossly
overvalued TT dollar to buy US dollars in order to hedge against
a possible depreciation will be encouraged by the increased
value of the US dollar to repatriate and convert their US-dollar
holdings. To be very blunt, they would be able to profit from
the fact that the Central Bank failed to address the confidence
issue in the foreign exchange market.
For example, if you have a US-dollar Income Fund investment
of US$10,000, you know that the money in that account would
buy local goods worth TT$63,700 (at an exchange rate of
TT$6.37 to US$1).
But, if the exchange rate goes to TT$10 to US$1, you would
have TT$100,000, which can buy 57 per cent more local goods
4) Transforms moribund real estate and capital mar-
kets into bouyant real estate, stock and bond markets.
As a result of point 2, investors who bet on a depreciation of
the TT dollar, will now have excess liquidity in the local currency,
some of which will go into purchasing long-term TT-dollar
assets, such as local real estate, local stocks and bonds.
(Both points 2 and 3 assume that the depreciation of the TT
dollar is large enough to be credible)
5) Transforms depleting foreign reserves into increas-
ing foreign reserves. T&T s net official foreign reserves
declined by US$724 million between December 2014 and June
2015, moving from US$11.316 billion to US$10.592 billion. That s
a decline of 7 per cent in six months. At that rate, the foreign
reserves will be well under US$10 billion by year end.
By making the US dollar more expensive, the Central Bank
will be required to intervene in the foreign exchange market
on fewer occasions to defend the grossly overvalued TT dollar.
It will also be able to sell less US dollars to the commercial
banking system as the higher price of the US dollar will staunch
demand for foreign goods and services, which is now being
driven by cable television, broadband Internet, credit cards
and access to US e-commerce websites.
That will result in an accretion of net official foreign reserves.
6) Transforms a current account deficit into a current
account surplus. The current account deficit is a measurement
of a country s trade in which the value of goods and services
it imports is greater than the value of goods and services it
Between October 2014 and May 2015, T&T ran a current
account deficit of TT$1.245 billion. In the same period in the
2014 financial year, the country reported a current account
surplus of TT$926 million and in the same period in the 2013
financial year, the current account surplus was $3.758 billion.
Making the US dollar more expensive results in a reduction
in imports and an increase in exports, all things being equal,
thereby giving the country a chance to reverse its current
7) Could lead to an upgrade from the credit rating
agencies. In downgrading T&T s credit rating in April
this year, the credit rating agency Moody s cited three
drivers for its decision. The first driver was the existence
of persistent fiscal deficits and challenging prospects for fiscal
reforms. In its analysis, Moody s said: "Trinidad and Tobago s
fiscal accounts have been reporting recurring deficits on the
order of 2-3% of GDP since 2009 after consecutive surpluses
were observed over the previous eight years.
"Going forward, implementing fiscal reforms to put the gov-
ernment accounts on a more sound footing will likely be chal-
lenging in a context of low oil prices and potential spillover
of low gas prices in the US to other markets."
In other words, what Moody s is saying is that if T&T were
to move from persistent fiscal deficits to persistent fiscal sur-
pluses, its credit rating would be upgraded.
In fact, the rating agency outlines the three factors that could
cause T&T to be upgraded and these include "improved fiscal
policy framework by adopting a medium-term strategy and
return to fiscal surpluses."
What is the right forex
system for T&T now?
"Whatever the pitfalls of changing cur-
rency regimes, the 52 per cent oil slump
in the past year hard hit some exporting
nations hara enough to make them at least
weigh the option"
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