Home' Trinidad and Tobago Guardian : May 29th 2014 Contents MAY 2014 • WEEK FIVE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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Last Friday, May 23, the Central
Bank issued a news release---
one that was not signed by its
Governor Jwala Rambarran---
in which it announced that it
was selling US$200 million to
authorised foreign exchange
dealers "to ease the current tightness being
experienced in the domestic foreign exchange
The Central Bank also said it met with the
Bankers Association (BATT) last Thursday and
"mutually agreed to further improvements in
the distribution of foreign exchange. This size-
able intervention, together with the enhanced
distribution system, will help to restore normalcy
and eliminate accumulated unsatisfied demand."
The Central Bank's statement last Friday
raises a number of questions:
What caused the "current tightness" in
the foreign exchange market (and by "tightness,"
readers should understand the Central Bank
means legitimate demand for foreign exchange
was not being satisfied)? Was the "current
tightness" based on increased or excessive
demand for foreign exchange or a decline in
the supply of foreign exchange or some problem
with the system of foreign exchange allocation,
which was introduced on April 1, All Fools Day?
What does the reference to "further
improvements in the distribution of foreign
exchange" mean? Would the Central Bank tell
the population what is the current method by
which foreign exchange is distributed and how
it differs from what went before? In what ways
was this system improved?
What assurances can the public have
that this sale of US$200 million---along with
what was described as "the enhanced distri-
bution system"---will, in fact, eliminate the
accumulated unsatisfied demand for foreign
exchange? What exactly was the unsatisfied
demand? Why was it allowed to accumulate?
Why was it unsatisfied?
In its statement last Friday, the Central Bank
also said the sale of US$200 million brought
the amount of foreign exchange the bank had
sold in the first five months of 2014 to US$610
million. In the period January to May last year,
the bank sold US$490 million to the banking
system, according to the bank s statement.
Then, citing the fact that T&T had US$10.378
billion in net official reserves as at May 16, the
bank said it "wishes to assure the general public
and the business community that the country
has enough foreign exchange reserves to satisfy
In an earlier statement on May 9, T&T s
Central Bank said: "In anticipation of a seasonal
decline of foreign exchange inflows and to alle-
viate immediate trade-related demand pressures
in the economy, the Central Bank of T&T under-
took a sale of US$50 million to authorised
dealers on May 9."
According to the Central Bank, on May 9,
T&T s foreign-exchange market remained "rel-
atively liquid" in the first four months of 2014
(that is, one assumes, from January 1 to April
30) with authorised dealers purchasing US$1.884
billion mainly from the energy sector and selling
US$2.077 billion to the general public.
"The resulting market shortfall of US$193
million was completely met by the Central
Bank s sales of foreign exchange to the financial
system. In the period January to April 2014,
the bank sold US$360 million."
In the May 9 statement, the Central Bank
stated it provided just under 20 per cent of the
total foreign-exchange market needs during
the period January to May 9 and "the remaining
80 per cent came mostly from the energy sector
companies selling funds to the banking sys-
This May 9 statement also raises questions:
What is meant by "a seasonal decline of
Is it that the supply of foreign exchange goes
down in the middle of the year? And if so, can
the Central Bank explain what accounts for
this seasonal decline?
Is it not a fact that about 45 per cent of our
LNG exports (which, one assumes, is still the
largest single source of foreign exchange) go to
South American markets where it is colder dur-
ing the "summer" months?
What constitutes "immediate trade-
related demand pressures?"
Does this refer to manufacturers with letters
of credit or other proofs of purchase of foreign
goods or to importers who are requesting foreign
exchange to pay for goods to distribute on the
local market? What percentage of the demand
for foreign exchange is trade-related and what
percentage is not related to trade?
More fundamental is the Central Bank
statement that for the period January to May
9, some 80 per cent of T&T s total foreign-
exchange market needs "came primarily from
energy sector companies selling funds to the
Have energy sector companies always pro-
vided about 80 per cent of T&T s total foreign
exchange market needs? Didn t the energy
companies sell most of their foreign exchange
to the Central Bank at one point?
Is there a binding agreement in which energy
companies are obliged to sell foreign-exchange
funds to the banking system or is this at their
Is the country comfortable knowing that
so much of T&T s foreign exchange needs come
from energy sector companies selling funds to
the banking system?
By asking that question, one is not implying,
for example, that any energy sector company
would deliberately withhold foreign-exchange
sales to the banking system as part of a nego-
tiating strategy to get the Government to agree
to certain conditions in long-term gas supply
contracts. Because, of course, none of the energy
companies operating here would seek to use
T&T s great thirst for foreign exchange as lever-
age in its negotiations with the Government.
That would be so base, self-interested and
ungentlemanly, which we all know large multi-
national energy companies are incapable of
being. Right? And I would never, never, never
suggest such a thing.
But IMF staffer Judith Gold in the May 24,
2012, edition of this publication said: "What
we realised is that the capital outflows are linked
to the energy revenues. There is a strong cor-
relation between the capital outflows and the
energy revenues and the stronger the energy
revenues, the higher the capital outflows."
At this point, T&T may be in a position in
which, based on generous fiscal incentives,
energy companies (like BP, BG and BHP Billiton)
are investing capital (foreign exchange) here in
hopes of boosting profits down the road.
But what happens when those companies
come to the end of their investment phase and
begin to look for returns on their investments?
What happens if one of the large energy
companies decides that T&T no longer fits
within its long-term vision and decides to dis-
Is new forex system better?
RBC: How the system works
The Central Bank announced major
changes to the way US dollars are
distributed to the financial system,
effective April 1.
In the new system, some 90 per cent
of the injections of US dollars from the
Central Bank will now be auctioned
among 12 licensed foreign-exchange
dealers (which include non-bank financial
institutions as well as T&T's commercial
Before the introduction of the new
system, about half of the US dollars
would have been auctioned by the
commercial banks. (The members of the
Bankers Association of T&T are Republic,
RBC Royal Bank, First Citizens, Scotia,
CIBC FirstCaribbean, Citi, Bank of Baroda
There are no limits on the amount that
can be allocated to any one bidder for
these auctioned funds, while previously
these funds would have been allocated
among commercial banks according to
their market share.
As before, the maximum price that one
can bid, would be the current sell price.
The remaining ten per cent of the
injection will be allocated equally
amongst the 12 dealers at a price
determined by the Central Bank, as
opposed to the former allocation
amongst commercial banks based on
their market share.
The Tier 1 system, where the US
dollars supply from three large energy
companies was previously allocated to
commercial banks according to market
share, will now function differently.
The "originating" institution (the one
to which the US dollars are sold by the
energy company) will keep 25 per cent of
these funds and the remaining 75 per
cent will now be shared equally amongst
the remaining 11 dealers.
The Central Bank has also announced
it will not support the Tier 2
arrangement going forward, where US
dollars from several other energy
companies and exporters would have
been allocated amongst commercial
banks according to market share.
Notwithstanding the public outcry
based on the limited availability of US
dollars in the banking system, this new
approach does not articulate any
changes to the supply of US dollars
coming to the market.
Source: RBC Royal Bank's
Caribbean Economic Report, March
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