foreign currency shortage, Trinidad & Tobago

The Surprising Upside of our Foreign Currency Issues

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The need to attract greater Foreign Direct Investment (FDI) has now been brought to the forefront as an issue requiring urgent attention.

Production levels had been steadily decreasing year on year. Oil output reduced from 145,000 barrels per day (bpd) in 2006 to 73,000 bpd in 2016, ie a reduction of $72,000 bpd or almost 50% while gas output decreased from 4.3 billion standard cubic feet per day in 2010 to 3.2 billion standard cubic feet per day in July 2016, a decline of 1.1 billion standard cubic feet day or just over 25%.

The reduced prices and lower output levels are diminishing the country’s revenue generating capabilities which is the main source of FX revenues for Trinidad & Tobago and as such, the trade gap is widening resulting in an increasing BoP deficit.

Nonetheless, the current situation served to highlight our level of vulnerability and operational deficiencies forcing an acceleration of the implementation of measures to help alleviate our plight. It harshly reinforced the longstanding argument regarding the urgent need for diversification.

Although our economy is fairly young, Trinidad & Tobago conversely possesses one of the most developed finance industries in the Caribbean.

In 2012, arising out of the International Monetary Fund (IMF)’s assessment of our economy, it was found that although our level of import cover was considered adequate, as a commodity-based economy, greater levels of precautionary holdings were necessary and as such an auction system was recommended for the allocation of foreign exchange to the different institutions.

This was intended to lead to a more competitive environment to allow for more control over allocations. Additionally, there were the added benefits of allowing for the prevention of leakages from capital flight, a reduction in hoarding from tighter controls on disbursements and some measure of exchange rate stability.

The longer-term goal was for further growth of the financial system with the development of an interbank trading system allowing for greater market deepening.

Several challenges persist which prevented this occurrence such as the value of allocations are not market-clearing leading to queuing and skewed demand signals; and the narrowness of the band (1%) is inflexible and as such leads to the burden of excess demand placed on the shoulders of the market participants as they use up their margins in the bidding process.

This burden is also not necessarily shared equally among the players as allocations are not dependent on the participant’s demand or asset base and can, therefore, lead to market inefficiencies.

The underlying dangers are the hazards of having any single participant significantly over-exposed, the risk of formation of asset bubbles if the currency devalues and the continuing risk of currency repatriation given the persistent liquidity overhang and perceived lack of investment opportunities.

Also, as most of us are aware, our dollar is currently overvalued and the gap between the real exchange rate and the nominal exchange is increasing steadily over time.

The opportunity here lies in the realization for the need to proactively manage our current level of reserves in order to preserve value in the near term and for future generations.

Given that our coverage currently exceeds the level as required by all acceptable measurable standards, it presents the opportunity for developing a more robust portfolio with objectives devised with consideration for present and future consumption needs.

Several economies have developed portfolios separated according to goals such as liquidity management and long-term safety.

One such example is Norway whose reserves are split into four sub portfolios as follows:

1-    Liquidity Management 22% – For interventions and to align with interest rates for implementation of fiscal policy.

2-    Long-Term Portfolio 67% –  For long-term consumption needs and market operations

3-    Immunization portfolio 5% – Equivalent to government foreign debt

4-    Petroleum Fund Buffer Portfolio 6% – Receives capital daily and transfer to the government at monthly intervals.

This of course, must be implemented with the proper management tools such as a robust Management Information System with regular stress testing and benchmarking in line with market risks. If for example, a small portion were to be allocated toward providing a buffer to prevent involuntary currency devaluations, indices chosen should be based on specific criteria such as transparency, the depth of the relevant market and the quality of the underlying investment asset.

Another important advantage that is becoming increasingly apparent is that our level of consumerism is not realistically sustainable given the high instability of commodity prices.

Over the years, greater access to a wider range of products and services has led to a paradigm shift in tastes and appetites which means that we now demand goods and services to sustain a quality of life that was not accessible several years ago.

Since the majority of these goods are not manufactured locally, it increases our import demand to a level that is unsustainable in a downturn.

Cutbacks are therefore needed on some items in order to stabilize the economy.

In essence, our situation is extremely pressing and the need for clear cut moves toward diversification, measures to increase FDI, manage existing flows and sufficiently plan for the future are now more important than ever.

The trick is to not become complacent or ‘bury our heads in the sand’ and recognize the need for increased, immediate action. The opportunities are there, but some forward movement is necessary.

Welcome to our new LinkedIn page, the Progressive Process, where we will be discussing important issues for the improvement of our way of life.

Join our community of like-minded individuals as we allow our voices to be heard.

Together, let’s discuss change, let’s welcome change and let’s work toward implementing change!

“Here’s to the crazy ones.!

The rebels.

The troublemakers.

The round pegs in small holes.

The ones who see things differently…

Because the ones who are crazy enough to think they can change the world are the ones who do!”

  • Rob Siltaren

Let’s change the world!

Please check out my blog at Progress & Process.

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