Director of portfolio management at securities firm KSBM Asset Management Ltd, Brent Salvary, said the US-dollar and the TT-dollar bonds raised by the Government in the last three months are enough to fund the fiscal deficit for the 2016 fiscal year, but if energy prices remained low in the 2017 fiscal year, which begins on October 1, it would mean T&T would have to continue borrowing.
He was commenting on the impact that the $2 billion bond would have on T&T's economy as well as the US$1 billion bond. Salvary spoke to Business Guardian last Wednesday at his Murray Street, Woodbrook office, to comment on the two bonds as well as the investment climate in T&T as a result of those two bonds.
Salvary said while there were several factors which could have contributed to the mopping up of liquidity within the last two to three months, the $TT bond would have been one of those factors which helped soak up some of the excess liquidity.
"What the $TT bond (did), we saw a significant decrease in excess liquidity in the commercial banks. It went from an average of $6.4 billion in May, to $5.6 billion in June, to $3.5 billion in the first 25 days of July." However, given the intended uses of the bond, some of that may re-enter the system.
Referring to the US-dollar bond, he said there is a consistent demand for foxer and "not much" is generated in T&T apart from our energy exports. Therefore T&T, "needs a lot of US-dollar inflows to match our significant foreign exchange demands, so some of the proceeds of that bond would be to provide for that demand." What is clear, he said, is that the US-dollar bond would not result in increase in liquidity in T&T.
Commenting on the 4.5 per cent coupon which the bond was placed at, he described it as "good" and reflected the expectations of investors that deposit rates would remain low into the foreseeable future.
Spending patterns of consumers have resumed, to some extent, compared to the first three months of 2016, where consumers were holding back their spending, Salvary said, adding that consumers are aware that they are in a recession but they are selective about where they spend their money. Consumers are cautious about spending because they are not too certain what the future holds, he said.
"They will cut back in some areas but they will still continue to spend, until they see the reality of our situation. Then they would have to adjust even more."
Asked whether the taste patterns of the consumer have changed to demanding more locally produced food and other items, Salvary said: "For us to survive we have to continue imports until we create new industries that can meet our demand. It is going to be challenging because industries can only survive and be profitable if they are competitive. We should be producing more."
Overall, he said, the economy cannot change overnight.
"It is going to be a serious cultural shift to supply ourselves with things that we need on a fairly regular basis, that's not going to change overnight. With regard to the local economy, Salvary said economic activity is going to remain a bit stagnant in the short-term."
JAMB Bank Ltd
Stating that investment opportunities are "limited" in T&T the bank, in embalmed responses, said the investment opportunities are limited because, "there are many more options for investment in more developed markets. And, secondly, the quality of opportunities available. For example, the stock market is often too illiquid to invest or divest positions and that limits investors."
This comes months after the bank officially penetrated the T&T market after it acquired the IB bank and rebranded in early May 2016.
Asked whether investors have stopped looking for investments now that T&T is in a recession, the bank said it has seen a slow down in activity on the T&T Stock Exchange as well as, "most investors are still looking but have increased their emphasis on safety. Other investors have taken this time as an opportunity to seek out valuable assets at depressed values. But, overall, there has not been a halt."
JAMB Bank Ltd tells investors that they should seek "trusted advisers" when they take advantage of investment opportunities and also to protect their investments. Referring to the US$1 billion bond which was oversubscribed, and the $ billion bond which was floated by Republic Bank Ltd on behalf of the Government, the bank said it would not result in increased liquidity in the economy.
"Liquidity in the system will be decreased as funds leave commercial banks and go to the Central Bank of T&T as clients pay to purchase bonds issued. Liquidity is put back into the system through government investment into projects or subventions to government ministries."
Generally, the bank said high liquidity in any economy has its advantages and disadvantages because, "liquidity in the system can have the effect of encouraging investment and stimulating economic growth; which is of course an advantage. However, high liquidity may signal a lack of consumption, investment and economic growth. There must be a balance."
Adding that: "Foreign exchange liquidity remains a significant concern for most investors, and will likely continue until recovery in the natural gas sector; not expected before 2017. In terms of the investment climate, safety is key. Investors are being more cautious in taking investment action given the lack of visibility for full economic recovery.
The JMMB Group grew its operating revenue by 9.9 per cent, for the first quarter of the 2016/17 financial year ending June 30, moving from J$3.10 billion in the corresponding prior period, to J$3.42 billion.
Mariano Browne
Former Minister in the Ministry of Finance, Mariano Browne, said the challenge with the T&T economy is not liquidity. He added that the private sector has the funds but are not investing enough and is depending on the Government to invest.
"A key part of the of our current situation is that the private sector has been under investing and has left the lead to the Government. The stagnation we are experiencing is due to a decline in government expenditure a result of falling oil and gas revenues and has little to do with liquidity or illiquidity."
Referring specifically to the $2 billion bond which was floated by Republic Bank Ltd, Browne said it can be positive in its effect on the economy.
"Since the system is liquid, the locally sourced bond can have a an expansive effect depending on the speed which government's spends it and the purpose. Since much of it will be going to repaying old debt the effect is likely to be "0". In any event, it is approximately one per cent of current GDP, so its effect will be minimal if any."
As for the US$1 billion bond, he said it depends on what the Government would be spending it on, will determine the effect it would have on the economy. "The US bond has the capacity to be expansionary, as this is money that is being injected into the system. But it depends on what these funds will be used for. Foreign exchange support? Payment of debt? Purchase of goods and services? Purchase of goods and services has an expansionary effect, whilst debt payment will be less so and forex support will have the least effect."
Asked whether investors are continuing to look for investments given that T&T is well into a recession, Browne said it depends on the risk appetite of the investor adding that fortunes are made and lost in times of a recession.
"It depends on who can hold his nerve the longest, or who has the best cash position or borrowing capacity.
People are always on the lookout for opportunities but this can only work if you have the capacity to take up the investment opportunity that is, you have cash or you can borrow. And this depends on your risk appetite.
"Investors are calculating the right price at which to invest. The general level of prices is one indicator as in the price of foreign exchange. Will the rate band hold or fall further? When will the official rate equate with the grey/black market rate? When there is balance in the forex market and investors will be optimistic about the future. As an indicator of this, the cambio price is currently $7.50 vs a bank range of $6.75-85."
He is not ruling out that investors are looking outside of T&T for investment opportunities.
"At this stage in our economic history, a key criterion is available forex. So the rate of return on forex-denominated instruments is a lesser consideration. The idea is capital flight/certainty. Given the disparity in the forex market, there is little confidence that the rate will hold at $6.75. If I have free or investible cash it is better to buy as much forex as one can as a loss avoidance device since, the likely depreciation will beat any interest rate. If I hold TT$ balances/instruments, using the cambio rate as a tracker, if I hold TT$, I can lose 9.5 per cent (7.50-6.85 /6.85). Which TT instrument is paying 9.5 per cent?"
Calling for a policy to be put in place so that there can be increased confidence in the investment climate, Browne said confidence is a function of belief in the future.
"At the moment, there is no clarity. Indeed, one wonders if there is a policy in Government's expenditure plan. The Government needs to set an agenda and a direction and act on it. It was clear from the first budget speech that there was no answer to the revenue gap.
"Borrowing is a short-term answer that is not sustainable. Yes, there is need to borrow in the short term to ease a transition but the country must transition to a more sustainable income level. As it is now, the country cannot spend its way out of trouble as increased expenditure leads to forex outflows. Nor can you wait for energy prices to recover. Therefore, expenditure priorities have to be set and everyone has to be more efficient, work harder and export more."