Jwala Rambarran: Monetary policy presentation for November 2014
Speech by Mr Jwala Rambarran, Governor of the Central Bank of Trinidad and Tobago, at
the Chaguanas Chamber of Industry and Commerce, Port-of-Spain, 1 December 2014.
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Ladies and Gentlemen,
I thank the Chaguanas Chamber of Industry and Commerce for graciously agreeing to host
our third Monetary Policy Forum. Events such as this Monetary Policy Forum are important
to Central Bank's communication strategies, as communication is now the new monetary
policy tool for central banks around the world. From Debe to Tobago and now Chaguanas,
this Forum provides a platform to explain the thinking behind our monetary policy actions,
interact with stakeholders and account to the national community, who we are here to serve.
As we enter the final month of 2014, global economic prospects are muted compared to the
more optimistic sentiments which prevailed at the start of the year. Recovery from the global
crisis is taking longer than anyone expected. More than a half decade onwards and many
countries are still struggling with painful legacies of the crisis, including extraordinarily high
debt and soaring unemployment and it's not yet over.
The Managing Director of the International Monetary Fund, Christine Lagarde, at the recent
Annual Meetings of the IMF and World Bank, talked about the "new mediocre" as the
descriptor for low economic growth which is now the new reality. In the advanced economies,
the United States grew at its fastest pace in over decade and the United Kingdom is showing
encouraging signs of steady growth. Recovery in the Eurozone remains fragile. Japan's
economy has slipped back into its fourth recession since 2008.
Emerging markets, which fuelled a great deal of global activity in the recent past, are likely to
do their heavy lifting at a slower pace than before. Output growth in China, the world's
second-largest economy, has slowed to a five- year low. The Indian economy is rallying,
while the other two members of the BRIC bloc, Russia and Brazil, are facing significant
headwinds to growth.
Still on the international front, there are dark clouds gathering. These clouds coming from the
United States are bringing murky conditions associated with normalization of US monetary
policy. These conditions have the potential to have a powerful impact on emerging market
economies such as Trinidad and Tobago, when they reach us.
As expected, the US Federal Reserve ended its era of quantitative easing at its October
2014 meeting. Next year, for the first time in eight years, we are likely to see a hike in the
Fed funds rate, probably in summer of 2015. There is considerable uncertainty in global
financial markets about the pace and magnitude of these expected increases in US interest
rates.
For Trinidad and Tobago, this uncertainty could result in a weakening of capital inflows or
acceleration of capital outflows. Central Bank of Trinidad and Tobago is already putting
measures in place, through available monetary policy tools, such as increasing its policy
interest rate, to insulate our economy, as much as possible, from the shocks we are
expected to feel by rising US interest rates.
Apart from the dark clouds hovering in the United States, geopolitical risks are mounting in
various parts of the world. We started 2014 with a possible escalation of conflict between
Russia and Ukraine. We are ending the year with an Ebola outbreak in Africa and an
upsurge of ISIS in the Middle East.
So, you will realize I have gone through the trouble of first raising these murky international
matters as they are early warning signs for global financial markets. Developments on
battlefields across the world can have an impact on our small island state. This is why I have
raised them as they set the tone of how things are likely to unfold.
Recent economic developments
I'll begin with a brief overview of domestic economic conditions. Following no growth in 2010
and in 2011, our economy recovered by approximately 1 1⁄2 percent in 2012 and grew by
1.7 percent in 2013. In early 2014, Central Bank expected the Trinidad and Tobago economy
to have continued its recovery, with growth projected at 21⁄2 percent. For a number of
reasons, this did not materialize.
Central Bank's latest economic review of the year now indicates economic growth is likely to
be a modest 1⁄2 percent for 2014. This, of course, is well below our forecast for economic
growth, made at the beginning of the year, of 2 1⁄2 percent. So what accounts for this
deviation? How could we the experts, as well as other agencies such as the IMF, S&P and
our own CSO, get it so wrong?
The unexpected slowdown in the economy was caused by a dismal performance in the
energy sector, with declines most pronounced in natural gas and LNG production. Energy
companies had indicated, in October 2013, the planned supply shutdowns and stoppages
that had been taking place for the past two years would be no more and energy production
would have normalized in 2014. However, supply disruptions mainly from the two largest
energy companies continued throughout 2014 and stifled the recovery process.
In January and May 2014, bpTT took down the company's largest production platform,
Savonette, to facilitate drilling activities. BGTT had a planned shutdown of its Dolphin
platform for five days in June 2014 to facilitate the installation of equipment required for the
Starfish development programme. BG also took the opportunity to undertake a parallel
maintenance exercise. These are just a few instances of shutdowns by the country's two
largest natural gas producers. Routine maintenance by Atlantic LNG Train 2 facility and
Petrotrin's oil refinery worsened the situation in our energy sector.
Energy output, therefore, contracted by an estimated 1 1⁄2 percent in the first nine months of
2014. Energy production rebounded to an extent - within the last two months but not strong
enough to compensate for the prolonged sharp drop in output. NGC's gas pipeline leak over
the last few days, which led to the shutdown of the country's main power provider, is
expected to be resolved soon and should not have a significant impact on production.
Central Bank expects growth in the energy sector to decline by a little over 2 percent in 2014.
This is the harsh reality to which we are tied in an energy- based economy. The bright spot of
news in the midst of all these dreary developments came from the non-energy sector, as its
steady performance prevented the economy from veering completely off its growth trajectory.
Output in the non-energy sector increased by just over 2 percent in the first nine months of
2014 and indications of non-energy performance remain encouraging in the final quarter of
2014. Overall growth in the non-energy sector is expected to be around 3 percent in 2014,
which surpasses Central Bank's projected growth rate of 2 percent. Much of the growth in the
non-energy sector has been concentrated in three areas - construction, distribution and
finance.
In the construction sector, local sales of cement have been expanding strongly, reaching
almost 8 1⁄2 percent in the first nine months of 2014. Higher construction activity reflects
several on-going, large public sector projects such as the Point Fortin Highway, the
Children's Hospital, the National Aquatic Centre and the Port at Galeota. Further impetus is
coming from private sector projects breaking ground, such as the "C3" movie and shopping
complex in Corinth, South Trinidad.
New car sales - a main indicator of distribution activity - are still hitting double-digit rates.
Dealers sold just under 14,000 new cars in the first nine months of 2014. At the end of
November, we had already reached near the 4,500 marker on the PDE series. For the first
time in five years, new car sales have surpassed 18,000 units on an annual basis.
Low interest rates, high liquidity and the cautiously optimistic sentiment of the business
community have supported the expansion in private sector lending. The recovery in business
lending which emerged in the first quarter of 2014 strengthened as the year progressed.
Over the nine months leading up to September 2014, business lending increased by an
average of 4 1⁄2 percent compared to an average decline of nearly 4 percent over the same
period in 2013.
Consumer loans continued to accelerate into 2014. The expansion in consumer loans
averaged 7 1⁄2 percent over the period January to September 2014, up from an average
increase of 5.0 percent over the first nine months of 2013. A disaggregation of consumer
credit showed strong growth of loans for the purchase of vehicles, home renovation and debt
consolidation. Record low mortgage rates continue to spur demand for real estate mortgage
financing.
I now turn to a matter grabbing headlines and generating intense interest in the country over
the past month - falling international crude oil prices and the impact on the budget.
Prices for West Texas Intermediate (WTI) fell by 30 percent since the start of the fiscal year
on October 1st to a four-year low of US$66 per barrel, last Friday, following OPEC's decision
not to cut output. This is lower than the 2014/2015 Budget estimate of US$80 per barrel. The
weakness in oil prices is due to abundant global supply from OPEC and the United States
combined with slower growth in world demand especially from Europe and China. The
general expectation is lower crude oil prices could persist for some time.
There are several reasons why we should be concerned about falling oil prices but I hasten
to add, we should not suffer a panic attack or hyperventilate yet. First, we have become
accustomed to using the oil price as a psychological barometer of our economic forecast of
sunny skies or murky weather. Oil prices rise...we feel euphoric; oil prices fall...we feel
"doom and gloom" and reach for a paper bag to breathe into. This see-saw sentiment
neglects the fact there is another even more important, but apparently not as well known,
barometer of our economic outlook. I refer to the natural gas price. This is not breaking news,
ladies and gentlemen, and members of the media. Trinidad and Tobago became a
gasbased economy 18 years ago in 1996.
Last year, we produced about nine times more natural gas than crude oil on an energy
equivalent basis. A large portion of our energy production and exports are natural gas-based.
At Central Bank, we estimate natural gas now contributes roughly 70 percent to Government
revenue and oil the remaining 30 percent.
The second reason we should not panic over plummeting oil prices is because budgeted
revenue estimates are based on the Henry Hub natural gas price in the United States, even
though less than 10 percent of our LNG exports go to the United States. We now have more
varied LNG export markets which consist of South America, Europe, the Middle East and
Asia. This means our LNG is sold at different prices in these various markets. Government's
natural gas revenue is based on the net back price for LNG at Point Fortin, which is an
average price tallied from the various markets for our LNG exports. The Henry Hub natural
gas price is currently trading at US$4.00 per million British thermal units, that is, 45 percent
above the budgeted natural gas price. The netback price for LNG at Point Fortin is currently
around US$5.50 per million British thermal units, which is double the budgeted natural gas
price. However, in some regions, such as Asia and Europe, natural gas prices are indexed to
oil and can move in tandem with movements in oil prices. Even so, Central Bank estimates
the netback price for LNG at Point Fortin would have to fall by 50 percent for an extended
period of time to significantly compress energy revenues. Therefore, the bottom line is this:
falling oil prices should not have an immediate impact on our budget, as 70 percent of our
revenue comes from the sale of natural gas-based exports which are currently trading at
double the budgeted natural gas price.
The third reason we should avoid hysteria over falling oil prices is that the Minister of Finance
and the Economy has several fiscal options he can exercise to adjust to a shortfall in energy
revenues. Last Friday, Minister Howai, indicated his plan of action would be to slash
$1.3 billion in expenditure across Ministries. The Minister also has the option to access the
Heritage and Stabilization Fund to partly finance budgetary shortfalls. However, as I've
advised Government, the current situation does not warrant withdrawals from the HSF, and
further expenditure cuts should be made if shortfalls in energy revenues persist for an
extended period of time.
We have lived with oil price volatility for more than 100 years. Trinidad and Tobago survived
the collapse of oil prices in the mid1980s and, more recently, in 2008 when oil prices
dropped by more than 30 percent. What is important, as I have advised the Minister of
Finance and the Economy, is the need to exercise prudence when making choices to
stabilize the fiscal position.
I would now like to turn to another murky matter that has grabbed headlines for most of the
year - foreign exchange, but not just foreign exchange, everyone's needs for precious US
currency being unfulfilled, from the vacationer wanting US$500, to you, the business
community being unable to pay for goods, and seeing your credit standing being affected.
Foreign exchange has been turned into a murky matter by some with agendas and others
who pretend to be ignorant about how our system works.
I'm sure when the business reporters write the 2014 year in review, they will probably say the
so called, "foreign exchange shortage" is the business story of the year and perhaps it is -
but there are always three sides to a story... yours, mine and the truth... and may be after a
year and more, some of you will see the truth today.
Let's start at the beginning. As banker to the Government, we receive the country's revenue
from the energy sector through the taxes energy companies are required to pay every
quarter in US dollars. That money forms most of the country's "Official Reserves". Central
Bank invests the reserves and we use the interest income we make from those investments
to fund the operations of the Bank itself. Central Bank is not funded by the taxpayer, and we
do not receive funding from the Government. In fact, it is the other way around. At the end of
the fiscal year, we send our surplus to Government. We also use the reserves to service
Government's external debt payments and to sell foreign exchange to the banking system to
meet shortfalls in supply. Through our sales of US to the financial system we foster orderly
conditions in the foreign exchange market, thereby maintaining exchange rate stability.
As you are well aware, demand for foreign exchange from the business community and the
public is perennially high, but supplies come to the market at discrete intervals, usually when
energy sector companies convert foreign exchange with the banking system to pay local
bills. So foreign exchange supplies to the country come in two ways:
1. Directly to the Central Bank when energy companies pay their quarterly taxes in US
dollars and;
2. When energy companies convert US dollars through the banking system year-round
to meet local commitments.
However, demand is always higher than supply and these gaps result in shortfalls in the
system and it is at these points when Central Bank steps in to meet the shortfalls by selling
foreign exchange from our stock of official reserves. Therefore, Central Bank only enters the
system to meet shortfalls in foreign exchange supply, not to provide the entire supply to the
financial system. Right now we account for just over 25 percent of the total foreign exchange
supply while the money that comes directly from the energy companies account for the rest.
What then, based on this structure, has created all the noise in the past year? There was a
time when shortfalls would occur seasonally, close to Christmas and the hectic August travel
period. Over the last two decades, demand for foreign exchange not only expanded but its
composition has also changed to reflect new patterns of consumer spending, for example,
use of credit cards for making online payments. Today is now known as "Cyber-Monday" in
the United States and many locals will flood US retailers' websites from the comfort and
warmth of their homes in Trinidad and Tobago thanks to the Internet, credit cards and US
delivery addresses.
Foreign credit card purchases devoured US$570 million for the year so far. That excludes
today's Cyber-Monday sales and upcoming Christmas purchases. Last year, foreign credit
card payments consumed US$530 million. That is more than US$1 billion spent foreign credit
card purchases in just two years. Commercial banks must meet these credit card payments
before they meet any other foreign exchange demand.
That's one source of demand, then there's that double-digit growth in sales of new cars,
many of which are higher-end luxury vehicles. For the year so far, we've spent
US$205 million on purchases of new cars; last year that figure was US$340 million. That is
nearly US$750 million on purchases of new cars in two years.
Foreign currency deposits are another source of foreign exchange demand. Currently, we
have US$ 3.3 billion dollars in foreign currency deposits in the banking system.
Here's where it gets interesting, and the foreign exchange story gets a bit murkier. There are
many business leaders who often give their opinions freely on foreign exchange, many go
the media and have been extremely vocal on the matter. Many businesses have legitimate
requests for foreign exchange and we acknowledge your requests are not always met on
time, and it is for this reason Central Bank has taken US$1.7 billion dollars from our reserves
for the year so far to help meet your unsatisfied demand. However, we've noticed a trend,
where businesses make noise for foreign exchange to pay bills for trade-related purposes
and actively lobby the authorized dealers and Central Bank for US dollars. When the money
is provided, the funds are promptly deposited in their foreign currency account and left
unused and the noise about not being able to get money for business continues. I do have
one tip for businesses trying to get foreign exchange; it helps if you don't conduct business
with companies with terrorist links as we have strict laws on Anti-Money Laundering and
Combatting the Financing of Terrorism.
As I indicated before, Central Bank steps into the market to meet the shortfall in foreign
exchange supply and that presently accounts for just over 25 percent of total supply. So why
can't we supply 50 percent or 80 percent, or even all? Why must we ensure that we have
enough official reserves put aside?
Well...let me ask you this...What if the global financial crisis goes on for another five years?
What if the Fed raises interest rates faster and more than expected next year and causes
tremendous volatility in global currency, stock and bond markets? What if the Ebola virus
spreads to the Caribbean region? When we factor in the chance of these external events
happening, we have to ensure we have enough official reserves as insurance just in case
something does happen.
The plan is to ensure we don't deplete these reserves, as we once did in the late 1980s,
because it took us 30 years to finally reach to today's US$11 billion. And yes, this
US$11 billion includes US$1.175 billion from proceeds from the sale of MHTL. In
benchmarking, we have just over one year's worth of official reserves. This means if I took all
the official reserves and gave it to the business community, you would actually be able to buy
everything you need for a year. Is that enough?
Should I keep using the country's official reserves to ensure every commercial activity that
demands foreign exchange gets it from Central Bank? I will not be the Governor who ran
down the country's reserves to make everyone happy. I prefer to continue to be the
Governor, who all armchair economists say disrupted the foreign exchange market, because
of improvements I know will benefit you and the entire country in the long run, than the one
who tried to get everyone to like him and make friends by playing loose and fast with the
country's foreign exchange reserves.
Central bank's monetary policy actions
I now turn to Central Bank's monetary policy actions.
At its November 2014 meeting, the Monetary Policy Committee (MPC) of Central Bank
resolved to again increase the "Repo" rate by another 25 basis points to 3 1⁄4 percent. This is
the second hike in just two months, after holding the Repo rate at an historical low for nearly
two years. The MPC is 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. The MPC based its decision to start a
gradual withdrawal of the accommodative monetary stance of the past four years on three
main factors.
First, forward guidance from the US Fed has altered market expectations about the time
frame for the end of quantitative easing and the start to an increase in the Fed funds rate. As
indicated before, the US Fed ended its quantitative easing programme in October 2014 and
is expected to gradually increase its policy interest rate from around summer of 2015. At
current interest rates, US dollar assets are more attractive to 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.
Second, headline inflation is accelerating, reaching just shy of 10 percent double-digit
territory in October 2014, up from 3 percent at the start of the year. This was the highest
headline inflation rate since July 2012, when I assumed office as Governor. The pick-up in
headline inflation is mainly due to an escalation in food price inflation, which is currently
hitting almost 20 percent. Rising food prices reflect lower domestic agricultural output partly
due to the cessation of planting by Caroni Green Limited as a consequence of its prolonged
organizational restructuring. With the recent heavy rainfall and flooding in some parts of
Trinidad, we expect further increases in food crop prices. Looking ahead, higher public
spending through the expansionary 2014/2015 Budget is already adding to elevated liquidity
levels (currently nearly $8 billion) and may further push up core inflationary pressures.
Third, the non-energy sector has delivered fairly respectable growth for 14 consecutive
quarters to September 2014 and the near-term outlook is for continued steady performance
in non-energy output. This suggests the non- energy sector is developing enough resilience
to withstand a gradual increase in interest rates. In addition, growth is strengthening in the
United States, and this augurs for CARICOM countries which are the major market for our
non- energy exports.
Apart from increases to the Repo rate, Central Bank has been very active over the past year
managing excess liquidity. The main source of this liquidity arises from financing
Government's net domestic budget deficit. For the year-to-date, net domestic fiscal injections
added over $11 billion into the system, while the maturity of two Central Government bonds
previously issued for liquidity absorption purposes, also returned approximately $1.5 billion
into the system.
In order to effectively manage liquidity levels, the Bank utilized several tools at its disposal.
Given the increased limits under the Treasury Bills and Notes Acts, over the period January
- October 2014 the Central Bank intensified its use of open market operations and withdrew
$10.7 billion from the banking system. Of this amount, $7 1⁄2 billion in open market securities
were issued to sterilize or lock away the liquidity arising from an extraordinary, one-off
purchase of US$1.175 billion in foreign exchange from a bank.
In addition, Central Bank rolled over three commercial banks' fixed deposits totalling
$4.5 billion and facilitated the issue of a $1 billion liquidity sterilization Treasury bond in June
2014. Further, Central Bank sales of foreign exchange to authorized dealers indirectly
removed $9.1 billion from the system over the review period.
The Bank plans to re-open the un-issued portion ($440 million) of the $1 billion liquidity
Treasury bond issued in August 2013 as well as use other liquidity absorption measures to
rein in excess liquidity in coming months.
Short-term prospects
I would like to turn now to the outlook for 2015.
We are facing weaker global growth prospects with significant downside risks. Perhaps the
most immediate downside risk to Trinidad and Tobago stems from market volatility about the
future path of US monetary policy. Against this backdrop, Central Bank's outlook is
circumspect for 2015.
Several factors support central bank's 2015 outlook:
• First, we expect energy production to return to more reasonable levels next year,
providing a firmer boost to economic growth. This, of course, is dependent on many
factors. So far, both bpTT and BGTT, the two main gas producers, have given no
indication of any major planned supply disruptions. We expect some resolution to
the on-going negotiation of gas supply contracts. In addition, oil production appears
to have stabilized driven by Petrotrin and the smaller, independent producers.
• Second, we expect the non-energy sector to maintain its respectable growth
performance. With general elections due in 2015, construction activity is likely to
remain strong even if Government slows down its heavy capital expenditure
programme which plays a critical path in providing fiscal stimulus to the economy.
This, combined with other projects undertaken by the private sector, is expected to
further boost non-energy activity.
• Third, we are guarded in our 2015 outlook, as results from the third Business
Confidence Survey, conducted by Central Bank and Arthur Lok Jack Graduate
School of Business, once again point to cautious optimism among the local business
community. Just over half of respondents anticipate improvements in the local
economy over the coming year, while 65 percent expect their financial outlook to
improve over the next 12 months. Businesses in Central Trinidad and in Tobago
remained the most confident about the business and economic outlook in the
shortterm.
Conclusion
As I conclude, I know many of you will leave here today with the 1⁄2 percent growth in our
economy as the number on your mind, and the projected growth that didn't happen. What
you need to contemplate as you walk out of here is this: the biggest threat to our economy's
growth prospects at this time will not come from the weak performance of the energy sector
nor will it come from falling oil prices. The peril that has the potential to test us the most in
2015 will come from those storm clouds gathering over increases in US interest rates. Two
consecutive increases in the Repo rate by Central Bank will mean higher lending rates.
However, it is difficult and painful action needed to shield the Trinidad and Tobago economy
from the murky weather ahead. Central Bank will continue to make the difficult and tough
choices to help keep our economic house in order.
I thank you.