Jwala Rambarran: Trinidad and Tobago - reinforcing dialogue with the
private sector
Feature address by Mr Jwala Rambarran, Governor of the Central Bank of Trinidad and
Tobago, at the Inaugural Monetary Policy Forum with the Penal/Debe Chamber of
Commerce, Debe, 18 December 2013.
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Ladies and Gentlemen,
Today is another historic day for the region of Penal/Debe. For the first time in nearly
50 years the Central Bank has ventured outside of its traditional comfort zone in Port of
Spain, arriving at Penal/Debe to deliver its monetary policy message. I must, therefore, thank
the Penal/Debe Chamber of Commerce for graciously agreeing to host our Inaugural
Monetary Policy Forum. We intend to meet with other Chambers of Commerce across
Trinidad and in Tobago to host similar events.
I strongly believe that, especially in these unusual times, greater dialogue with the private
sector is critical. Such insights feed into the Central Bank's understanding of the workings of
the Trinidad and Tobago economy, and thus into our policy deliberations. Equally important,
these events allow the Bank to explain the thinking behind its monetary policy actions and to
account to the national community, who we are here to serve.
So, why did we choose Penal/Debe as our first port of call? On reflection, the answer seems
self evident. The region of Penal/Debe is demonstrating the type of self-sustaining economic
growth that the entire country requires at this point in time. Such economic growth is being
manifested through both the expansion of existing companies and the creation of new ones.
It reflects increasing confidence among businesses and entrepreneurs.
As you drive along the SS Erin Road under almost every home is a small business, from
furniture shops that I understand supply big furniture chains in Port of Spain, to large home
town supermarkets. At least four new outdoor shopping complexes have been constructed in
the community.
The construction of one of government's mega project - the UWI South Campus - is
expected to drive growth in the area, as government looks to create a second education city
centred on this campus in the Penal/Debe area. Construction of a Metal Industries Company
training facility on Petrotrin lands a few miles away will also help generate technical and
vocational opportunities in the area. This building - the NESC Debe Campus - opened in
October 2012 year and has already graduated 72 students in IT and autotronics. It is the only
MICROSOFT certified training facility in the country.
And it would be certainly remiss of me if I did not mention "Debe Doubles". Debe is one of
the few communities to practically trademark and brand doubles to the wider country,
highlighting the innovative nature of the people and the ability to tap into creative capital.
Ladies and Gentlemen, I probably do not need to remind anyone in this audience that we are
indeed living in unusual times. Central banks and other policymakers around the world have
been grappling for more than half a decade with an economic crisis which has repeatedly
mutated, and it is still not clear in what direction the crisis is going to change shape.
Since May 2013, sentiment has shifted dramatically in global financial markets when
US Federal Reserve Board Chairman Ben Bernanke made a small announcement that had
big unintended consequences. The overreaction of financial markets to an
earlier-thanexpected start to the reduction of monetary stimulus in the United States resulted in
largescale capital outflows from major emerging markets economies such as India, Indonesia and
Brazil, prompting several central banks to take defensive actions. Unexpected backtracking
by the US Federal Reserve in September gave global financial markets some temporary
comfort.
As I speak the US Federal Reserve's crucial December meeting is underway in Washington
DC. Later today after 2 pm, we would get a better sense if and when the US Fed will start
reducing its monetary stimulus. Economists are divided over whether the Fed will decide
today to begin "tapering", with some saying that recent economic data is strong enough to
warrant a move, and others that policymakers need to see more evidence that growth is
durable.
Such volatility, however, about the future path of US monetary policy may well signal the
start of a new mutation of the ongoing global financial crisis. It may well be a forerunner to
the new risks that could materialize when the U.S. Federal Reserve begins to scale back its
unconventional monetary policy that has been in place for the past five years or so.
As 2013 comes to an end, it looks like the world economy will be stuck in a subdued growth
phase. Economic growth in the United States, while held back unnecessarily by Congress
political brinksmanship, has again outpaced that of Europe and Japan, both of which are
struggling to cross the 1 per cent annual growth threshold. The main emerging market
economies of Brazil, Russia, India and China are all slowing, with Russia practically at a
standstill.
So, this morning I want to talk about three things:
• First, outline some of the key developments in the Trinidad and Tobago economy
over 2013;
• Second, explain the monetary policy actions of the Central Bank in the context of
evolving economic conditions; and
• Third, conclude with some thoughts on the short term outlook for Trinidad and
Tobago.
Economic developments in 2013
Ladies and Gentlemen, let me begin with a brief overview of the evolution of domestic
economic conditions. Here the news is very encouraging; it is definitely not all doom and
gloom.
The Trinidad and Tobago economy has shown tremendous resilience against a turbulent
global backdrop, and we are seeing signs of a gradual recovery from the sharp downturn that
started in late 2008.
Our preliminary estimates suggest that the Trinidad and Tobago economy grew by 1.3 per
cent in the first nine months of 2013, compared with a contraction of 0.3 per cent in the first
nine months of 2012.
On-going large scale maintenance and safety upgrades at energy companies posed a
considerable drag on the recovery process throughout 2013, especially in the third quarter
when the energy sector underwent the largest co-ordinated maintenance effort to date. The
subsequent sharp shortfall in natural gas production while anticipated adversely affected
both refining activity and output of petrochemicals, generating a decline of 4 per cent in
energy output, and an estimated contraction of 1⁄2 per cent in real GDP.
Intervention by the Ministry of Energy and Energy Affairs was critical to the maintenance
work that involved bpTT and BG taking the bpTT Cassia B hub and BG Dolphin facilities
offline. These turnarounds were co-ordinated with Atlantic LNG's Train 3 and nine major
plants at the Point Lisas Industrial Estate.
Were it not for the planning and co-ordination of these maintenance events, we estimate that
the contraction in energy output would have been severe enough to halt the recovery
underway and push the economy back into negative growth territory for all of 2013.
On the other hand, the non-energy sector continued its slow but steady pace of revival,
providing support to the overall economy but still not enough to fully offset the drag posed by
maintenance activities in the energy sector. In fact, the non-energy sector has registered
growth for the past ten quarters to September 2013, supported by the finance, construction
and distribution sectors.
Growth in the finance sector was driven mainly by an expansion of commercial bank deposits
and loans. The increase in construction activity was likely related to several public sector
projects including highway construction and housing, and perhaps to a lesser extent some
private sector projects. Local sales of cement - a key indicator of construction activity - were
up by 121⁄2 per cent (on a year-on-year basis) in the third quarter of 2013. The performance
of the distribution sector reflected increased retail sales in several industries, including dry
goods, supermarkets and groceries and motor vehicles. Regarding the latter, sales of new
motor vehicles have been running at double digit rates into the third quarter of 2013. The
PDA motor vehicle series was ended within a record 3 months.
In the face of still weak private demand, the government budget has served as the main
stimulus to economic activity over the past few years. Given the country's strong foreign
exchange reserves and low public debt to GDP ratio, I believe that the Government has
enough fiscal space to run temporary budget deficits. In fact, since 2010 the central
government has realized moderate fiscal deficits not exceeding 3 per cent of GDP.
Nevertheless, it is important for the Government to respect its own plan for moving to fiscal
balance over the medium term, and to accelerate these plans, once conditions permit.
Ladies and Gentlemen, our public debt remains within manageable levels. After a decade
long absence, Trinidad and Tobago successfully returned last week to the international
capital markets with international investors demonstrating overwhelming confidence in the
country's medium term prospects. We were able to issue a US$550 million Eurobond that
was oversubscribed by a factor of almost ten times.
Indeed, I see this tremendous vote of confidence by foreign investors as a much needed
wake-up call to the local private sector. The message is clear. The local business community
must get back into the game; stop watching and commenting from the sidelines.
Some commentators have questioned the rationale behind this bond issue. One concern
relates to the government's decision to access the international capital markets rather than
use the ample liquidity available in the domestic financial system. Another concern is that this
bond issue could jeopardize our public debt situation. Let me put to rest these concerns.
First, Trinidad and Tobago enjoys the second strongest credit rating in Latin America and the
Caribbean, after Chile. We need to leverage our investment grade credit rating to
differentiate ourselves from other countries in the region, who are still struggling from the
global crisis, and to highlight the quality of our economic management amidst the global
uncertainty.
Second, it is true that government could have easily raised this volume of financing on the
domestic capital markets but this option would not have allowed us to exploit our credit rating
to re-establish a presence on the international capital market by issuing a benchmark bond.
Moreover, it is important to note that the 2013/2014 budget, which was approved by
Parliament, projected that almost $3 billion of the near $6.4 billion deficit would be financed
through foreign borrowing including commercial borrowing.
Third, even with the bond issue the country's external debt dynamics stay well within
comfortable levels. External debt is projected to rise slightly to a still very manageable 9 per
cent of GDP from about 8 per cent of GDP prior to the bond issue. External debt service is
expected to consume just about 2 per cent of export earnings from 1 1⁄2 per cent prior to the
bond issue. Few countries in the world can boast these impressive debt metrics.
So the Eurobond issue allows us to differentiate ourselves from our neighbours, re-establish
a presence on the international markets and does not compromise our hard won prudent
debt profile.
A key mandate of the Central Bank is price stability, which roughly translates into keeping
underlying inflationary pressures well contained. Inflationary pressures have eased over the
course of 2013. After beginning 2013 at just over 7.0 per cent (year-on-year), headline
inflation slowed to about 4 1⁄2 per cent by November 2013. The slowdown in inflation was
largely associated with a steady fall in food price inflation reflecting increased domestic
production of agricultural supplies, more favorable weather conditions, and an easing of
global food prices.
Meanwhile core inflation, which excludes food prices, has been low and stable over the first
eleven months of the year, ranging between 2-3 per cent, and indicative of relatively
subdued demand pressures.
Of concern is that we are yet to see a broader pick up in business lending. Business loans
granted by the banking system contracted for eight consecutive months, falling by about
3 per cent in September 2013. In such a situation, small businesses should not be facing a
financing constraint. Money is available at very low interest rates to finance business
expansion, subject to an evaluation of credit risk.
Meanwhile, we have seen relatively strong growth in consumer lending, especially for
purchases of motor vehicles, home renovation and debt consolidation.
Aggressive marketing campaigns and lower mortgage rates continue to contribute to
increasing demand for real estate mortgage loans. Although real estate mortgage loans
granted by banks have recorded double digit growth for thirteen consecutive months to
September 2013, there is no compelling evidence of overheating in the property market.
More importantly, commercial banks have maintained their mortgage lending standards, with
still conservative loan-to-value and loan service-to-income ratios.
On the external side, the demand for imports of goods and services has been quite robust,
prompting the Central Bank to intervene deliberately in the foreign exchange market. In the
first eleven months of 2013, the Central Bank sold US$1.3 billion to authorized dealers
compared with US$1.7 billion one year ago. With the Bank calibrating its sales of foreign
exchange to address imbalances in the foreign exchange market, the level of gross official
reserves rose to US$9.3 billion at the end of November 2013. This represented more than
11 months' import cover.
Central Bank monetary policy actions
Before I turn to the Central Bank's monetary policy actions, I would like to reiterate the major
changes made over the past year to the Bank's monetary policy decision making framework.
These were as follows:
Inclusion of two external members on the Monetary Policy Committee, to ensure
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that the MPC benefits from specialized expertise and diverse viewpoints in its
policymaking deliberations.
• Changing the MPC meeting frequency from once a month to every two months to
give the MPC a better opportunity to fully consider economic and financial
conditions, including important issues and policy alternatives; and
• Communication of the Bank's monetary policy decisions, including the setting of the
repo rate, to the public in the form of a "Monetary Policy Announcement" on the
Friday evening of the week in which the MPC meeting is held.
Given the gradual pace of economic recovery and the stability of core inflation, the Central
Bank has maintained a monetary stance geared towards supporting economic activity. This
accommodative stance is reflected in the fact that the Bank has maintained its policy rate,
the repo rate, at a historical low of 2.75 per cent for the past fifteen months.
However, with liquidity levels in the banking system high, the Central Bank took actions to
help curb the excess liquidity. Over the first eleven months of 2013, commercial banks'
excess reserves increased to a monthly average of $6.1 billion, up from a monthly average of
$3.6 billion in the corresponding period of 2012. The main source of this liquidity is generated
from the financing of the government's net domestic budget deficit. These fiscal injections
amounted to $9.6 billion over the first eleven months of 2013.
Having reached the legal limit on the issue of treasury securities for the purposes of open
market operations, the Central Bank sought and received approval from the Ministry of
Finance and the Economy to facilitate the issue of two Treasury bonds, whose proceeds
were sterilized. The first Treasury bond was issued in May 2013 at a face value of $1 billion
and the second in August 2013 with a face value of $559.3 million taken from a $1 billion
offering.
The Bank also rolled over for one year, the commercial banks' fixed deposits held at the
Central Bank which matured to date in 2013. In addition, the Bank indirectly removed just
over $8.0 billion from the system via the sales of foreign exchange to the banking system in
the first eleven months of 2013.
In early December 2013, the Central Bank's liquidity management framework was enhanced
with an increase in the borrowing limits under the Treasury Bills Act (to $30 billion from
$15 billion) and the Treasury Notes Act (to $15 billion from $5 billion).
I wish to emphasize that these Treasury securities are purely for the purposes of monetary
policy, not fiscal policy. The proceeds of the securities are locked away in a blocked account
at the Central Bank and only re-enter the financial system upon maturity of the existing
securities. These funds are not used to finance the government's budget or any government
program.
I also wish to emphasize that this practice is not new. In January 2003, Parliament approved
an increase in limits for both Treasury bills (from $2 billion to $5 billion) and Treasury notes
(from $1 billion to $3 billion). In August 2006, Parliament again approved an increase in limits
for both Treasury bills (from $5 billion to $15 billion) and Treasury notes (from $3 billion to
$5 billion). By 2008, or within two years, these new limits were already reached and the
Central Bank had to resort to rolling over existing maturities to mop up the excess liquidity.
Short-term prospects
I would now like to turn to the outlook for 2014.
It is fairly evident that uncertainty continues to weigh heavily on external conditions. Perhaps
the most immediate downside risks to emerging markets, including Trinidad and Tobago,
relates to shifting expectations about the future path of US monetary policy.
With firmly anchored inflation expectations, the Central Bank is giving more weight to an
accommodative monetary stance until a firm domestic economic turnaround is established.
However, we are paying close attention to the possibility of normalization of monetary policy
in the United States. Should the outlook for inflation, growth, or financial stability change, we
will take appropriate action.
Here at home, certain domestic factors seem to suggest a more optimistic outlook for 2014.
• First, as noted earlier, the significant maintenance work in the energy sector has
been completed. Output in the upstream and downstream energy industries is
expected to return to more normal levels in 2014, providing a strong boost to overall
economic overall growth. In addition, drilling in the shallow water blocks, which were
awarded in 2010, should commence in 2014. Further, the recent on-shore bid round
attracted 11 bids, representing the highest level of interest in around 30 years.
Awards for these bid rounds will lead to increased exploration activity in these
blocks in late 2014 or early 2015.
• Second, there have been indications of a modest improvement in the pace of project
implementation at the level of the central government. On-going public sector
projects include the Point Fortin Highway, the Accelerated Housing Programme, the
Education Modernization Programme and the Roads and Bridges Construction and
Rehabilitation Project. In addition, the Caroni GREEN Initiative is expected to
continue the enhancement of production in the Agriculture sector. Several projects
undertaken by both the public and private sectors are expected to boost non-energy
activity, while spill over effects from improving energy output should also positively
impact non-energy growth.
• Third, for the most part businesses should not be facing major credit constraints. A
final resolution to the long-standing CLICO issue, if successfully negotiated, should
give a cautious boost to overall confidence and reinforce the positive economic
growth trend.
On this basis, the Central Bank is projecting real GDP growth of around 1 1⁄2 per cent for all
of 2013. We expect economic growth to strengthen to 2 1⁄2 percent in 2014.
Though increased demand side pressures created by the pick-up in economic activity can
lead to some up-tick in inflation, we expect core inflation to remain stable. Recent initiatives
to increase domestic food production should continue to help reduce food inflation, barring
shocks such as unfavourable weather conditions.
Conclusion
In conclusion, I wish to reiterate that Trinidad and Tobago has been steadily navigating the
choppy waters of the global financial crisis, and will continue to do so. But this is not the
message that we seem to be absorbing as a nation. Instead, it usually tends to be one of
negative sentiment.
When I assumed office just over 15 months ago, I faced the following economic conditions:
• Sharp contraction in economic growth
Soaring food price inflation
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• Declining external reserve position
• Weak business confidence
Today:
• Economic growth is slow but steady
• Food price inflation is down to within single digits
• External reserves have stabilized
Business confidence is returning, albeit slowly
•
Therefore is not all doom and gloom. At the same time, we are not complacent. We
recognize the inflection point faced by the global economy. We recognize the considerable
economic challenges facing Trinidad and Tobago, especially diversifying away from the
heavy reliance on the energy sector.
The Central Bank is absolutely committed to maintaining macroeconomic stability so the
business sector can continue to make longer-term decisions in an environment of increasing
confidence. By explaining the cross-currents at work in our economy, our projections for
what's ahead, and our monetary policy response, we are doing our part to help strengthen
business confidence.
So now it is your turn to be the positive change you want to see in Trinidad and Tobago.
I thank you.