Home' Trinidad and Tobago Guardian : June 15th 2014 Contents SBG12
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JUNE 15 • 2014
Senior executives at three of T&T's
largest banks by network---with a
combined 127 branches across the
country---assured the public of cer-
tainty that there will be foreign exchange to
meet their demand at the end of a Tuesday
meeting at the Central Bank, a recording of
which was sent to Business Guardian.
"There were modifications to the system
and those modifications brought a certain
degree of anxiety," said Darryl White, managing
director of RBC T&T. White said he would
sum up the meeting with the word "confi-
dence" that there will be supply of US dollars
(USD) for its customers.
"Any client coming into our branches for
foreign currency will have their needs met,"
Republic Bank executive director Nigel Bap-
tiste echoed the sentiment that "the angst"
over getting US dollars will reduce, and assured
his customers their demand will be met.
First Citizens Bank CEO Larry Nath said
the Central Bank will be intervening on a more
timely, proactive basis that is meant to essen-
tially ensure that there is a reliability of supply
for all demand that is based on legitimate
"So going forward, even through the travel
season which is quite hectic and even in July
when schools close and folks travel more than
normal, we expect that all demand will be
met both on a cash and non-cash basis," said
No documentation will be required when
purchasing foreign exchange, Nath said. He
said in response to the question about whether
documentation will be required: "No, this is
an open market. It is a floating currency and
in that regard the supply will be there to meet
all those demands, and at the end of the day,
no special documentation will be required to
evidence that demand," Nath said.
He said the banks "will be sharing queue
information or unmet demand with the Central
The First Citizens executive said he thinks
"this further agreement for timely, proactive
interventions was sort of the last piece of the
puzzle to complete an overall model for sus-
tained supply and predictable supply, so that
banks through their 127 branches could meet
the demand of the man in the street, the trader,
the entrepreneur, large companies, in a very
sustained and satisfying way."
He told customers they "can expect for their
demand to be fulfilled in a timely and pre-
dictable manner. There should be less need---
if it happened before---to forward-buy or to
buy more safety stocks of USD because one
wasn't sure when the supply was coming
He said it would allow them to move more
into the business of managing their businesses
and less about worrying about treasury deeds
and making sure that they had adequate foreign
exchange not for just now but for the future.
He said businesses can now "essentially nor-
malize their relationships with their suppliers.
I know there were reports that those relation-
ships were under strain, and to improve and
to take advantage of the economy and the
economic situations and to essentially make
their businesses progress in that regard."
Nath noted, however, that his expectation
is that legitimate demand will be met, and
the banks will be using their own anti-money
laundering (AML) and know your customer
(KYC) policies, which is a regulatory require-
ment. "So you will have to meet the AML
KYC policy requirements. AML and KYC is a
regulatory requirement. All banks follow that,
but other than that, once it is legitimate
demand, that demand will be met on a timely
basis," Nath reassured.
Nath said: "We are cautiously optimistic
that the situation not only has improved but
will improve further over the next three to
four months. One can expect material enhance-
ment to the way and time and frequency with
which foreign exchange is supplied to the mar-
ket and how easily and seamlessly that can
All forex demands will be met
Ido not propose to enter into an
extended debate with the central bank
via the media or otherwise on the
merits of the new (or modified) foreign
exchange allocation system.
Such a debate could in itself sustain
uncertainty in the marketplace which must
be avoided at all costs. However my con-
cerns, which date back to the end of March
and tested in conversations with bankers,
central bankers, and businessmen, are not
relieved by the governor's latest statements.
He is to be commended for coming out and
speaking at the Chamber breakfast meeting
on Friday last, but his presentation, repeated
in essence in his Sunday Guardian interview,
First, the Governor showed a chart claim-
ing that the demand' for foreign exchange
was exceeding the supply' by ever widening
margins since the initial float 21 years ago.
If this is factually correct, then as any econ-
omist knows, the price must rise, that is
the exchange rate must depreciate.
But the governor had averred that no
depreciation is warranted! I believe he is
right that there may be no need for depre-
ciation of the currency, but that is because
his analysis of demand' and supply' in the
market is misleading and flawed.
The supply' he is referring to must be
the inflows of foreign exchange into the
commercial banks alone. That supply has
always been inadequate to meet the demand
of the non-energy economy.
But, as I have pointed out, a significant
portion of the supply flows directly to the
central bank itself. These inflows are not
separate from the other inflows, nor do they
belong' to the central bank. However they
serve the very useful purpose that they per-
mit the central bank to exercise effective
control over the foreign exchange market
and to influence the direction and pace of
change of the exchange rate.
If this analysis is wrong or things have
changed, then the Central Bank has to accept
that where there is chronic and widening
excess demand for foreign exchange, there
are only two choices -- either the exchange
rate is allowed to depreciate or the Ministry
of Finance reinstates exchange controls!
Second, one of the keys to the successful
management of the market was precisely
the small number of banks the central bank
has to deal with. Expanding the number
of players simply makes management of
the market harder.
Moreover, why give special privilege to
the two conglomerates in the country with
captive financial institutions to acquire for-
eign exchange for their companies?
Will persons and companies not part of
those conglomerates be able to go to those
non-banks and buy foreign exchange? Will
they be able to have overdraft facilities there?
Do these institutions have the balance sheets
large enough to accommodate significantly
higher foreign exchange operations? Are
those non-banks fully equipped in terms
of correspondent banking relationships?
Will they have enough time to implement
effective know your customer and anti-
money laundering procedures to handle
foreign exchange requests from the public?
This expansion of the number of author-
ized dealers does not help the market to
function effectively and opens up the pos-
sibility for certain businesses to get a priv-
ileged position in the marketplace, a position
which I doubt they requested.
Third, in his response to the idea of a cap
in the competitive auction, the response of
the governor is that it ensures that "no one
authorized dealer secures all the funds. ..
the funds are allocated in a more equitable
manner, reducing price volatility..."
With the greatest of respect, and assuming
the governor is quoted correctly, none of
this makes sense! It is either an auction
or it isn't! If it is a real auction, the highest
bidder with enough TT dollars can in fact
get all the foreign exchange on offer.
Auctions are not intended to be "equi-
table"; they are intended to establish the
highest price possible for a good or service.
Some bidders will get and those who bid
too low simply will not, unless special pro-
visions are made, as in the Treasury Bill
Auctions also produce price volatility. In
periods where supply is scarce, an open
auction will generate a high price. When
supply is greater, banks will bid lower. In
our market, those moves could be in the
order of several percentage points at any
one time. The fact is that under the new
system, banks are not allowed to use the
auction price for a period of five days after
the auction, but must use a selling price
based on the non-competitive allocation
where the price is set by the central bank.
Banks who get foreign exchange in the auc-
tion at a high price will simply hold it until
the 5 day period has passed so that they
can avoid a loss on the sale of foreign
Fourth, the central bank claims that it
will now inject foreign exchange in antic-
ipation of market tightness. This assumes
a level of knowledge about the size and
timing of inflows and the size of anticipated
demand that is reasonably accurate. I wish
the central bank luck with that approach.
But it is likely to end up supplying far more
foreign exchange than it actually needs to,
or it will end up operating a version of
exchange controls, scrutinizing and vetting
the demand for foreign exchange as advised
by the banks. This will create delays and
even more problems in my estimation.
Finally, the data on the external accounts
are in bad shape, confirmed by the recent
IMF consultation report. The latest pub-
lished Balance of Payments Report is for
2011 and the Central Bank is using 'mirror
data' to estimate merchandise imports.
Given the poor state of the data on the bal-
ance of payments and weak data on inflation
and productivity in the non-traditional
export sector, one wonders how the central
bank can form a reasoned view on the evo-
lution of the real effective exchange rate
and hence what the 'right' level and pace
of change of the nominal exchange rate
should be. It needs timely and reasonably
accurate data, which it does not have.
The Chamber breakfast meeting on Friday
also suggested to me that the business com-
munity does not fully appreciate the sea
change which occurred in 1993 when the
TT dollar was floated. Much of the discourse
took me back to the bad old days of exchange
control, and maybe that is indeed where
we are headed with this new, modified'
foreign exchange allocation system. Foreign
exchange is not in short supply at the central
bank, but it appears that something else is!
In short supply
If it is a real auction, the
highest bidder with
enough TT dollars can in
fact get all the foreign
exchange on offer.
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