Home' Trinidad and Tobago Guardian : November 24th 2016 Contents NOVEMBER 24 • 2016 guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | A3
Unrealised losses in
T&T's reserves, HSF
T&T's Central Bank last week admitted
that the country's foreign reserves and
its Heritage and Stabilisation Fund (HSF)
have experienced "some unrealised losses
in value" in their US dollar fixed income
portfolios as a result of the massive sell off
in US treasuries (bonds). This following
Donald Trump's unexpected victory at
the US general election earlier this month.
An unrealised loss occurs when an investment---in this case
T&T's foreign savings portfolios maintained by the Central
Bank---continues to be held after it has declined in price, rather
than being sold when the loss would be realised.
Depending on the price at which the foreign savings invest-
ments were acquired, this could mean that if the Central Bank
sells its US-dollar savings to fund foreign exchange demand
(foreign reserves) or to balance T&T's fiscal deficit (HSF), the
unrealised losses could become realised.
Not only have T&T's foreign currency savings, which have
a total value of over US$15 billion, experienced paper losses
as a result of Trump's electoral victory, but as soon as next
month, the Central Bank could be forced to increase local
interest rates to staunch capital flight and make T&T's fixed
income investments more competitive.
Such a move would further aggravate the steep contraction
in the domestic economy---which the Central Bank earlier this
month estimated at a decline of 6.7 per cent of GDP in the first
half of 2016---jeopardising the jobs of thousands of Trinidadians
and potentially driving up the cost of new borrowing by local
companies and the T&T government.
Finance Minister Colm Imbert, in the 2017 budget, antici-
pated that the Government would need to borrow $6 billion to
finance the country's projected fiscal deficit---the difference
between what the country spends and what it earns.
But T&T's fiscal deficit could be much higher if the prices
of T&T's exports continue to decline and more workers are
retrenched. Higher interest rates also increase the amount of
money T&T must spend to service its local and foreign debts,
both new and existing.
Global investors are estimated to have sold US$1 trillion in
bonds following the election of Trump, who promised during
the long presidential campaign to make America strong again
by increasing expenditure on infrastructure, cutting corporate
taxes and rolling back trade agreements; all of which have the
potential to cause higher US inflation.
The massive sell off, which includes massive selling in US
Treasuries, caused a fall in the price of the bonds, but a spike
in the yields, which is the interest earned by bond investors.
An anticipation of future inflation causes investors to dump
existing bond holdings because higher prices erode their pur-
There are suggestions that, even in T&T, investors are seeking
to exit some bonds. Last Friday, local brokerage house WISE
reported that the offer yield on a T&T government bond ma-
turing in ten years time in August 2026 was 4.76 per cent,
sharply higher than the 4.22 per cent offer yield on the bond
on November 4, just before the US general election.
The Central Bank monitors the yield differential between TT
and US three-month and 10-year treasuries very carefully and
tries to maintain a big enough difference between the rates to
discourage local institutions and high net worth individuals
from buying US-dollar fixed income investments.
Questioned on whether the sharp sell-off in US bonds and
the increase in yields since Trump's victory have any impact
on the Central Bank's monetary policy, capital flight and the
value of T&T's US-dollar savings both in foreign reserves and
in the HSF, the Central Bank on Thursday last said:
"Given that the country's foreign reserves and the HSF have
some exposure to the US bond market, there would have been
some unrealised losses in value to the fixed income portfolios
as treasury prices declined.
"However, given that the Central Bank, like other institu-
tional investors, has been anticipating another policy interest
rate increase by the US Federal Reserve, the foreign currency
reserves are being tactically managed in such a manner that
the overall impact would be minimised."
The Central Bank later clarified that "unrealised losses in
fixed income securities are potential declines in market values
due to increases in interest rates emanating from any source."
Explaining its position on a possible interest rate increase
and potential capital flight, the Central Bank said local rates
must be sensitive to external interest rates and risk factors:
"The increase in US yields is an explicit risk factor as it would
have contributed to a narrowing of the differential between
TT and US Treasury securities. However, the spike in yields
is anticipated to be transient."
The Central Bank said it was "unlikely that investors would
make significant portfolio reallocation decisions resulting in
adverse capital flow movements," but said it would continue
to closely monitor these developments and will consider ap-
propriate monetary policy actions accordingly.
Brent Ford :
Pressure on exchange rate
Brent Ford, the group chief investment officer of Westmoor-
ings-based Guardian Holdings, is not as sanguine as the Central
Bank on the issue of possible capital flight, arguing: "As US
interest rates rise, I would expect there would be pressure on
the T&T exchange rate as investors would expect to be paid
for the additional risk of holding TT dollar investment over
"So the pressure will mount either for interest rates to rise
in Trinidad or for the TT dollar to depreciate or a combination
of both. Therefore I think there will be the threat of greater
capital flight in the immediate future.
"I think the Trump victory, although not the cause, has
continued the trend of the strengthening dollar. His promise
of economic growth along with expectations of rising interest
rates in the US will likely keep the dollar strong.
"This is good for T&T in that its reserves are held in dollars
but bad in that it makes our currency stronger (since we are
tied to the US dollar) and therefore makes our exports less
"The real problem is that, traditionally, as the US dollar
becomes stronger, oil prices usually become weaker. Addi-
tionally, oil prices are not likely to go much higher anyway as
supply is still high and there is no expectation of significant
increase in demand. Most experts believe that oil prices will
at best stay at current levels and possibly weaken slightly in
the foreseeable future."
Ford also said while he was not sure about the present com-
position of the T&T's foreign reserves at the moment, if it is
largely in US Treasuries the portfolio would definitely have
fallen in value.
Ford said: "In the last 10 days the 10 year treasury prices
would have fallen by about 50 basis points (0.50 per cent) which
is dramatic given the low rates that exist. Therefore I would
expect that the GORTT portfolio valuations would have been
Ford said while it may be too early to determine the overall
impact of the Trump win on T&T: "What I think is that it has
cranked up the pressure on the country, as we will be forced
to deal with the adjustments that are likely to be caused by
increased interest rates in the US and we will be forced to deal
with the issue of our exchange rate and capital flight."
Strong US dollar
limits T&T inflation
Another impact of the Trump victory is the strengthening of
the US dollar, which last week climbed to its highest level since
2003 against a basket of globally traded currencies, according
to a Reuters report on Friday.
The US dollar is strengthening for reasons that are similar
to the spike in yields on US bonds: global investors believe
a President Trump will make US assets more attractive be-
cause of increased infrastructure spending, higher inflation
and higher interest rates.
CONTINUED ON PAGE 5
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