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Friday, November 17 2017 @ 10:31 PM AST

First Citizens forecasts Central Bank US$ reserves will decline further

Let TT dollar weaken or worse to come, say analysts, economists

SOURCE: Dr Roger Hosein, University of the West Indies

First Citizens Research and Analytics and a University of the West Indies (UWI) senior economics lecturer coincided this week in loud calls to allow the Trinidad and Tobago dollar (TTD) weaken for fear worse will ensue otherwise. Failure to let the TT dollar float down would result in a deeper, harsher involuntary devaluation as occurred in the 1980s, UWI Senior Economics Lecturer Dr Roger Hosein warned in emailed responses to queries last week (ending October 27).

"In drawing lessons from the 1980s, one of the things we observe, and we can perhaps take forward to the present situation is the rapid depletion of the economy’s stock of reserves, which fell from about US$12.7 billion in September 2015 to about US$8 billion today. The last time we hesitated the stock of reserves disappeared completely. At the same point in time, the State has continued to manage the economy’s unemployment rate by intervening in the labour market in a variety of ways to keep the unemployment rate down. This cannot continue as it's clearly not business as usual, and all hands are required on deck pulling in the same direction to progress this troubled economy," said Hosein.

In his five-page document, Hosein said: "In terms of devaluing the TT currency as a means of improving the net energy current account balance, many commentators point to Guyana, Suriname and Jamaica and the consequence for those economies of floating their dollars. Let it be clear that the policy suggestion to the State here, is not to just float the dollar but to undertake a change in the value of the dollar like policymakers did in 1992/1993 when the dollar was devalued and then it was carefully managed by gradually adjusting the exchange rate in alignment with relative inflation rate changes between TT and its main trading partners."

Hosein asked: "Is it that the Central Bank of T&T (CBTT) no longer has the personnel to maintain this type of surveillance on the exchange rate, so they are unsure how to manage the rate now, as it did in the period after 1993? Wouldn’t the institution have appropriate records to address this gap even if there were a changing of the guards?"

Hosein warned: "Whilst we take our time trying to find the right formula, much like George Chambers did in an earlier era, and appropriate personnel to execute the required amendments, the stock of reserves continue to disappear."

US$ reserves will decline further

The global economy is finally on the upswing, said First Citizens Research and Analytics late Friday in a 10-page paper titled 'Trinidad and Tobago's Test of Economic Fortitude'. As a result of the global economic pickup, many central bankers, including the US Federal Reserve have signalled plans to normalize interest rates, First Citizens said.

"This will have significant implications for Trinidad and Tobago’s capital and financial account, in terms of interest rate differentials and impact on capital mobility, conceivably placing greater pressure on the exchange rate, further complicating administration of the managed peg," First Citizens said.

"The CBTT has intervened in the foreign exchange market, often offsetting the pressure on the TTD to depreciate, and to maintain the range of the unofficial managed peg – this at the expense of using up the country’s foreign currency reserves. The level of CBTT intervention declined by just over 31 per cent in 2016, as compared to 2015 - a deliberate move by the authorities (as outlined in the mid-year budget review in 2016)," First Citizens said.

The bank's analysts and economists wrote: "However, based on data for year to date (YTD) 2017, the monthly average of CBTT intervention thus far is higher than last year's for the same period, and assuming this trend continues for the last quarter, intervention should end the year higher than 2016. This projected increase is expected to result in the currency remaining stable around an average buying/selling rate of $6.75/US$1 by the end of 2017. On the flipside, net official reserves are expected to continue to decline into 2017 and 2018."

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