Home' Trinidad and Tobago Guardian : June 23rd 2016 Contents JUNE 23 • 2016 www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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On Monday, the Central
Bank of Nigeria allowed
the currency of the West
nation to float freely
against the US dollar, fol-
lowing Governor Godwin
Emefiele s announcement last week that the
exchange rate "would be purely market driven,"
in an "open, transparent two-way system."
In opting for a free-floating naira---one in
which the price of the Nigerian currency is
determined by supply and demand---the Cen-
tral Bank there abolished its policy of attempt-
ing to defend the naira/US dollar peg at 197
to 199 per US$1 and the naira depreciated by
40 per cent on Monday.
Nigeria joins a growing list of oil and natural
gas exporters that have allowed their currencies
to absorb some of the shock that they have
experienced as a result of the sharp decline
in the price of the commodities since the end
These countries include: Norway, Canada,
Colombia, Russia, Kazakhstan, Azerbaijan,
Angola and Venezuela.
But not Trinidad and Tobago.
Unlike other oil and natural gas producing
countries, T&T s Minister of Finance, Colm
Imbert, has stubbornly refused to budge from
his position of allowing the Central Bank to
defend the TT dollar by controlling the price
of the exchange rate.
The irony of this situation is that Imbert
has repeatedly said the current administration
is not in the business of controlling prices on
any product sold in T&T, while he insists on
controlling the exchange rate of the US dollar.
An indication of price control, within a
wider band, is Mr Imbert s announcement
during his April 8 speech that the Government
intended to take "appropriate measures" to
ensure that the exchange rate does not move
by more than 3.3 per cent from the $6.61 to
Defence of the TT dollar and maintaining
the stability of the TT/US exchange rate has
come at a terrible cost to the country.
The country s foreign reserves declined by
US$1.83 billion, or over 16 per cent, from
US$11.31 billion in December 2014 to US$9.47
billion in May 2016.
The main cause of this decline in foreign
reserves, of course, is that T&T---like Nige-
ria---is earning much less US dollars from taxes
on the sale of oil and gas in the 2016 fiscal
year than it did, for example, in 2013.
In 2013, according to the 2015 Review of
the Economy, T&T earned $26.4 billion (US$4.1
billion) in current energy sector revenue. This
year, T&T expects to earn less than US$750
million, a reduction in energy revenues of over
80 per cent.
The plunge in foreign exchange revenues
earned by the Government has meant that
the Central Bank has much less foreign
exchange coming into its accounts with which
to defend and stabilise the exchange rate.
During the January to May 2016 period, the
Central Bank s injections of foreign exchange
into the system declined by 42.5 per cent to
US$572 million from US$995 million in the
comparable period in 2015.
The sale of foreign exchange by authorised
forex dealers in 2016 was 28 per cent lower
in 2016 at US$2.27 billion than the US$3.16
billion sold in the January to May 2015 peri-
od.While T&T is earning much less foreign
exchange in 2016 than it did in 2013---as a
result of lower prices, lower production and
the 100 per cent capital allowance granted to
energy companies---the total demand for for-
eign exchange in the economy remains
unchanged, or may have increased because of
That s mainly because the exchange rate---
the price of US dollars---is not only controlled,
it is also artificial, in that it bears no relationship
to the demand and supply of foreign exchange
or, to put it another way, to T&T s macro-
In most markets, when the supply of some-
thing is reduced but the demand remains con-
stant, there is an immediate adjustment in
the price. This demand/supply equation---
which is at the heart of economics---has been
applied everywhere throughout history.
If you think about US dollars like tomatoes,
you would realise that the price of the fruit
is low in the dry season, because of an over-
abundance of supply, and high in the wet sea-
son, as a result of reduced supply.
Faced with a dramatic decline in foreign
exchange supply and demand that remains
constant or has increased, the Central Bank
and the Ministry of Finance are attempting
to maintain a stable and predictable exchange
rate, which is only allowed to decline to $6.828
T&T s exchange rate---artificially propped
up and price-controlled---subsidises imports
and penalises exports, to borrow from the
headline of a commentary in the Business
Guardian last year---one of at least 20 columns
in 2015 in which I advocated a free-floating
Mr Imbert s policy of defending and sta-
bilising the exchange rate has led to severe
rationing and long queues for foreign exchange,
the creation of an active black market and the
embarrassing situation of importers being
unable to settle their bills and invoices when
As Nigeria realised last week, after 16 months
of a fixed peg to the US dollar, in situations
of reduced supply of foreign exchange, it is
much less costly and fairer to control demand
by making foreign exchange more expensive
than by rationing and queues.
One of the few downsides of a free-floating
exchange rate is that it makes imports more
expensive and will lead to a short-term increase
in the rate of inflation.
But higher import costs are also one of the
main benefits of a free-floating exchange rate
because demand for foreign exchange to fund
non-essential imports---such as foreign beer,
bagels, strawberries and Angus beef---will be
reduced as a result of the demand/supply
equation for foreign exchange being brought
back into equilibrium.
As Mr Imbert gets ready to pack his bags
for the roadshow to North America to drum
up foreign investor interest in the US$1 billion
bond (TT$6.6 billion) that T&T proposes to
raise in the international capital market, he
should be aware of certain things.
If Mr Imbert does not have a Plan B for
raising $6.6 billion to fund the 2016 fiscal
deficit, he will be at the mercy of the inter-
national capital market which will not hesitate
to impose "unacceptable" terms on T&T, espe-
cially with regard to the interest rate that will
In terms of a possible Plan B:
• Mr Imbert has said no to privatisation;
• He has said no to accepting a US$3 billion
cheque for Clico assets and returning the com-
pany to its owners;
• He has said no to serious fiscal consol-
idation, which would reduce the deficit to an
amount that can be sourced locally or with
a smaller US dollar loan;
• And, most importantly, Mr Imbert has
said no to a market-based exchange rate, which
would increase the amount of TT dollars the
Government gets from the energy sector,
reduce the demand for imports and provide
non-oil exporters with a price advantage.
Bond traders at international banks know:
1. That the Government desperately needs
the US$1 billion ($6.6 billion) to fund
the 2016 budget deficit;
2. They know that having raised $3.16
billion in two bonds on the local market,
it would be difficult for the Government to
raise more money locally.
3. They know, as well, that the one-off
sources of capital revenue have dried
up.4. The maxing out of the government s
overdraft at the Central Bank is known;
5. The Government s problems in paying
monies owed to contractors and public
officers are well known to international bond
traders and analysts; and
6. The seeming reluctance of the Gov-
ernment to impose further fiscal
adjustment on the population by reducing
transfers and subsidies and increasing taxes.
On the other hand, the international capital
market is aware of the fact that, despite the
Moody s downgrade in April, T&T still main-
tains investment grade status.
And, although depleted, the country still
has more than 11 months of foreign reserve
import cover and foreign debt that is below
15 per cent of GDP.
Faced with a bond issuer with limited
options for sourcing $6.6 billion, what interest
rate do you think bond traders will demand
that T&T pay on the US$1 billion bond?
For me, the benchmark that should be
applied to Mr Imbert s roadshow is whether
he is able to use his powers of persuasion to
convince international bond traders to lend
T&T money at or below the 4.75 per cent
interest rate that the Government is paying
on the 12-year, fixed rate TT-dollar bond raised
It is noteworthy that a US-dollar bond issued
by the T&T government maturing in 2027, 11
years from now, has a yield bid of 4.42 per
One local investment banker said on Tues-
day, that given T&T s credit rating, the 12-
year, fixed rate US$1 billion bond should be
priced at 275 to 300 basis points over US 10-
year Treasuries. This means a rate of between
4.43 and 4.68 per cent.
However, he noted, that because this is the
first time T&T is looking to borrow US$1 bil-
lion, "we may have to provide a higher spread
of about 325 to capture the incremental buyers,
which puts the price at 4.93 per cent."
We will see, won t we?
Will foreign bondholders
demand a free-floating TT$?
Finance Minister Colm Imbert
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