In this space last week, the commentary headlined "Is the Governor checking his list twice" seemed to have resonated widely as Central Bank Governor Jwala Rambarran's thinking on the issue of foreign exchange–reported first here–may have surprised and shocked many people.
In a piece on Monday, former deputy Central Bank Governor Terrence Farrell put forward several points that he thought that Governor Rambarran should internalise.
The first was: "When it comes to their money, people will do whatever they have to do to protect and preserve their assets in real terms, and that means in US dollar terms.
"If indeed businessmen are funding their US dollar deposit accounts, and are engaging in capital flight, that is an entirely rational response to their loss of confidence in the governor's management of the foreign exchange market."
Is Farrell's suggestion that T&T residents "will do whatever they have to do to protect and preserve their assets in real terms, and that means in US dollar terms," borne out by the available evidence?
To test Farrell's proposition, let us take as an example a couple who run a small business and who were in their mid-fifties in 2009. They had $2 million in financial assets in September 2009 and were looking to "retire" this year and maintain their standard of living in retirement.
For them, a big part of maintaining their quality of life means visiting their two children–who were educated in North America and now live there–once a year and planning a cruise through the Mediterranean in a year's time
For this couple, let's call them Trevor and Sandra Smith, the protection and preservation of their assets in real, US-dollar terms, means that they would want to ensure, to the greatest extent possible, that their $2 million in financial assets can fund both their TT-dollar expenses (as they intend to continue living in their four-bedroom suburban home, whose mortgage has been paid off) as well as their annual visits to their children in North America (which is funded from their jointly held US-dollar account).
It is clear that since Trevor and Sandra have consistent, monthly expenses in TT dollars and an annual expense in US dollars–more realistically monthly expenses in US dollars as they have got into the habit of buying a wide variety of products on the amazon.com Web site–that they would be concerned about preserving and protecting the value of their TT-dollar financial assets.
But they would also be concerned about their ability to buy US dollars to fund their monthly purchases on the Web site and their annual vacation–which in effect means paying off the accumulated balances on their credit cards.
In slightly technical terms, they would be concerned about inflation risk and exchange rate risk.
If Trevor and Sandra were a typical T&T couple, there is a good chance that most of their financial assets would be held in commercial bank deposit accounts and in one of the income funds offered by a mutual fund provider.
That's because between September 2009 and September 2014, the total deposits held in local commercial banks jumped by 51.4 per cent from $65.2 to $98.7 billion. The amount of money held in foreign currency accounts increased by 9 per cent between September 2009 and September 2014, moving from US$3.27 billion to US$3.56 billion. Expressed another way, foreign currency deposits were equal to 32 per cent of total deposits in September 2009, but this declined to 23 per cent of total deposits in September 2014. (As an aside, between January and September 2009, foreign currency deposits jumped by about 29 per cent).
What does the fact that T&T citizens have expressed a preference for the safety of TT-dollar commercial bank deposits over almost all other investment classes tell us?
It may point to the fact that in the last five years, many citizens have chosen to preserve the value of their assets in nominal TT-dollar terms, rather than in real terms (nominal refers to the amount of money that would be in the account after five years and real refers to the adjustment for the impact of inflation).
It also points to the fact that there has been a level of comfort in the citizenry with the amount of money in their foreign currency accounts as many have been safe in the knowledge that they could access those funds when they need to AND that buying US dollars would be easy and at an affordable rate.
In nominal terms, if Trevor and Sandra had left the $2 million in a deposit account, they would have generated at most $40,000 in interest as rates on deposit accounts have declined substantially in the last five years.
In real TT-dollar terms, their $2.04 million lump sum would be worth less as the rate of inflation could have reduced the purchasing power of the lumpsum by about one-third in that five-year period.
The fact that TT-dollar deposits have increased, while at the same time deposit rates have plummeted and inflation has trended up to 13 per cent may be an indication be an indication that T&T residents are less interested about protecting and preserving the purchasing power of their TT-dollar assets
But the important inference from the Farrell piece is that $2.04 million today can purchase almost the exact same amount of US dollars as it could five years ago and that if the US dollars were available for purchase, people could preserve the real value of their savings.
The problem is that there is no commercial bank, at this point, has the ability to convert $2 million into US$315,000 for one customer without severely disrupting their distribution of the foreign currency for other customers.
For me, the crucial question is this: If the collapse in the price of oil and the inevitable softening in the prices of T&T's other energy exports mean less foreign currency coming into the country, would the Central Bank and the Ministry of Finance be able to curb aggregate demand aggressively enough to reduce the outflow of US dollars?
Additionally, if a bank customer cannot empty his or her foreign currency account as and when they wish, is there any basis for believing that funds in a locally domiciled, US-dollar account are, in fact, accessible as and when required?
Given the high rate of inflation, the prospect of reduced foreign currency inflows and a sub-optimal distribution system for foreign exchange, is there a sense in which we may have passed a tipping point in which a majority of the country's big-money people feel less confident about keeping their money in TT-dollars?
Farrell is absolutely correct that Governor Rambarran needs to do much more to restore confidence in the market for US dollars, but is he right to personalise to the Governor what must be considered to be the Central Bank's management of the foreign exchange market?
Is he suggesting that the Governor–in the job for less than three years–is not taking advice from his very competent technical staff or is Farrell casting aspersions on his former colleagues as well?