TTD remains overvalued

In its in-depth analysis of TT, published online on June 20, the GED said, “Against standard indicators of fundamental value, such as real effective exchange-rate measures or purchasing-power parity, the TTD remains somewhere between 20 and 50 per cent over-valued.

“Declining foreign-currency reserves and domestic FX (foreign exchange) controls imply that the TTD has further to fall.” “While the CBTT has ample reserve cover at around 13 months of imports,” the GED argued that “if the recent pace of drawdowns were sustained to keep the USD to TTD around 6.75, then reserves would fall near to the critical threshold of three months of import cover within three to four years.” It added that “recent experience implies that mildly higher global gas prices and the prospect of exports to Asia via the newly-expanded Panama Canal will provide little respite for the balance of payments and the TTD.

“The CBTT will need to allow the TTD to fall to prevent a precipitous decline in its foreign-currency reserves or a hike in the repo rate that would stifle the non-energy sector.” Looking at recent economic developments and TT’s reliance on both the “health” of its domestic energy sector and global oil and gas prices, the GED said reductions in gas output and exports over the past three years have generated significant pressure on TT’s fiscal accounts, balance of payments, and international reserves.

“All of which,” it added, “has materially increased the chances of a substantial further weakening in the TTD despite the government’s recent Mid-Year Budget Review promise that, ‘There will be no drastic or sudden depreciation of the currency.’”

While the GED expects that “growth may return briefly in 2017”; a combination of new gas supply coming onstream from, for example, BPTT’s Juniper project, “beyond 2018, the energy sector is likely to put a cap on any further acceleration in Trinidadian economy- wide growth as modest price gains keep investment growth in the sector at modest levels.”

Added to which, the GED expects a “weak fiscal picture will maintain pressure on the TTD.”

“The TT government’s efforts to increase non-energy sector investment from relatively low levels and maintain spending on current policies and programmes, will widen (its) current deficit in outer years, which implies increased debt financing and continued draws on the country’s USD 5.6 billion Heritage and Stabilisation Fund; equivalent to about 23 percent of GDP.”

TT’s total public debt now stands “a hair over 60 percent of GDP”, something which the GED said is “just breaching the threshold beyond which international experience implies that sovereign debt crises become more likely.”

It argued that Government’s need to finance ongoing deficits and service its domestic public debt “may increase its tacit pressure on the CBTT to devalue the TTD in order to increase the TTD-denominated value of public energy-export revenue.”

The GED said this “could, perversely, raise longer-term sustainability questions for TT’s foreign-currency denominated external sovereign debt; currently equivalent to only about 14 percent of GDP.”