In his now controversial speech on December 1 in Chaguanas, Central Bank Governor Jwala Rambarran made the point that the repo rate was increased by 0.25 per cent to 3.25 per cent because the Monetary Policy Committee–which sets the repo rate–was "sending a signal it believes higher interest rates are now necessary in our financial system to mitigate the disruptive effects of higher portfolio capital outflows and to pre-empt a potential rise in inflationary pressures."
This was the Central Bank governor saying that T&T needs higher interest rates to slow down the impact of portfolio capital outflows and the prevent an increase in inflationary pressure.
The governor said that the MPC based its decision tostart a gradual withdrawal of the accommodative monetary stance of the past four years on three main factors.
He said the first reason was that forward guidance from the US Federal Reserve (that country's Central Bank) had altered the expectations of the international stock, bond and foreign exchange markets about the timeframe for higher rates in the US.Mr Rambarran said he expects rates in the US to start going up gradually from around summer of this year.
What he said next is very important for those people who are interested in how the local economy will operate in the new year.He said: "At current interest rates, US dollar assets are more attractive than TT dollar assets, prompting movements of portfolio capital in search of higher yields."We need to stay well ahead of the curve if we are to enhance the appeal of TT-dollar assets."
In other words, with all of the economic research, expertise and insight available at the Central Bank, Governor Rambarran is arguing that one of the reasons local interest rates need to increase is to slow down "movements of portfolio capital in search of higher yields."The thinking behind the statement is that before the two hikes in the repo rate, the interest rate differential between, for example, the US 10-year Treasury bond and a T&T Government 10-year bond was too small. And one of the ways to get the managers of "portfolio capital in search of higher yields" to buy T&T bonds rather than US-dollar bonds is by increasing the yield on T&T assets."
In the December Monetary Policy Report (MPR), which was released on December 22, the Central Bank underlined the point that the governor made about the diferential between US and T&T interest rates when it said: "With the non-energy sector on a sustainable growth path, as evidenced by 14 consecutive quarters of growth by the third quarter of 2014, the Bank's monetary policy deliberations evolved to consider the potential threats of a pick-up in inflationary pressures and the possible disruptive effects arising from narrow interest rate differentials on TT and US Treasury securities."
On this point, the Central Bank's MPR also stated: The Higher US Treasury yields have implications for TT-US yield differentials. Narrow TT-US yield differentials have been of some concern to the Central Bank and was another key factor influencing the decision to increase its policy rate from September 2014."The question that arises out of the Central Bank's decision to hike the repo rate by 0.50 per cent in the space of two months is this: Is that rate increase enough to persuade managers of portfolio capital to invest new money in TT-dollar fixed-income assets rather than continuing to purchase US Government treasuries?
One indicator would be the appetite shown by those managers of portfolio capital for the $2 billion that ANSA Merchant Bank has been mandated to raise for the Government early this month.
But it seems to me that the Government has another tool "to enhance the appeal of TT-dollar assets" and that would be to provide a firm commitment, along with some indicative timelines, for the divestment of Phoenix Park Gas Processors and the T&T Mortgage Bank (TTMB), which is the name that is supposed to be given to the entity that emerges out of the merger of the Home Mortgage Bank and T&T Mortgage Finance.
The question is: Would managers of portfolio capital–which would be pension plans, insurance companies, trust companies and mutual funds–view investments in these two divested companies as being possible alternatives to putting their clients' funds in US Treasuries?It can be argued that given the financial success of the First Citizens Initial Public Offering in the third quarter of 2013, that managers of portfolio capital should be quite anxious to acquire shares in both Phoenix Park and TTMB.
At the end of 2014, the share price of First Citizens closed at $37.07, which is 68.5 per cent more than the $22 offer price. Plus, First Citizens would have distributed $2.27 in three dividends payments since it was listed: $1.09, $0.57 and $0.61. This means that the majority state-owned bank is trading at an historic dividend yield of 3.18 per cent.At the signing ceremony at the Hyatt Regency on November 20, officials of the National Insurance Board, National Enterprises Ltd and the Unit Trust Corporation emphasized that the dividend yield of Phoenix Park would be close to 12 per cent and they acquired their ten per cent stake from GE Capital at price of US$1268 million but at a price/earnings ratio of 8.3 times its 2014 earnings.
The point being that, all things being equal, a company like Phoenix Park should be quite attractive to other managers of portfolio capital apart from three of the country's largest that consummated their purchase in November.It's interesting that on November 12, 2009–more than five years ago–a column with the same headline as this one was published in this space.
Among the points that the November 2009 piece made was this: "It is also the case that the Government seems committed to running budget deficits–which has the laudable effect of supporting local incomes–as it waits on the export prices to recover."The unintended consequence of chronic budget deficits, in the absence of domestic investment opportunities, is a continuation of the private sector's ability to acquire and hold foreign assets."The situation may become even more dire as the chronic shortages in the foreign exchange market will encourage the private sector to hold foreign assets as a hedge against the continued depreciation of the TT dollar."This will lead to increased pressure on the exchange rate and an acceleration in the depletion of T&T's foreign reserves."The antipathy of the PNM administration and the private sector, both local and foreign, towards privatisation and divestment of shares on the local stock market could, therefore, be a key factor in driving higher local inflation, as importers pass on the costs of a depreciating exchange rate, as well as the further erosion of T&T's foreign reserves."
Have things changed in five years?