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Challenging policy choices ahead

Thursday, February 16 2017

This newspaper has written about the external deficits and fiscal deficits that have resulted from the weaker performance of the energy sector, which have impacted the outturn from the external sector. Current account and Balance of Payments deficits have placed pressure on the exchange rate, although external borrowing has increased foreign reserves and brought temporary relief to the anxiety of rapidly falling reserve levels.

Indeed, the first half of 2017 represents a difficult time for the country, as continuing fiscal deficits brought on by relatively weak performance of the energy sector and the inadequate progress of fiscal consolidation result in disequilibrium between demand and supply of foreign currency.

Of course, there are those who would point to the anticipation that natural gas production is expected to reverse its steep slide in the coming quarters. BP’s offshore Juniper development is to commence production in a few months’ time.

This hopefully will stop, if not reverse, the deterioration in output experienced from the country’s maturing assets. Additionally, if higher average energy prices are experienced, this will buttress the continued development of new upstream projects, including BP’s Amherstia, EOG’s Sercan field and BHP Billiton’s Greater Angostura project. Despite this positive expectation there is also the matter of having to deal with possible rate hikes from the Federal Reserves in the USA.

To finance the present budgetary shortfall, we have seen the floating of a billion-dollar bond on the local market. This is expected to soak up liquidity, if only temporarily, as well as affect private sector credit creation.

Of course, the targeting of the domestic capital market may be a reflection of rising global interest rates, resulting in policymakers’ not wanting to return to the international capital markets.

If over the next two quarters we see wide current account deficits, fiscal deficits and shortages of foreign currency, the Central Bank (CBTT) will have to consider allowing the currency to depreciate.

Any such action will raise import costs and drive price pressures on a wide range of goods and services.

Additionally, there may also be an increase in transport costs if global prices for oil edge higher.

The truth is, as has been stated earlier, the CBTT must pay attention to preserve the country’s interest rate differential with the US to limit, if not prevent, portfolio realignment. Of course, there are those who suggest that the present combination of events could create a loss of confidence and we could see capital flight that would exacerbate the country’s already strained external accounts, thus placing downside pressure on the Trinidadian dollar.

This means that the government and the CBTT have some delicate balancing ahead of them. They must decide how much to allow the currency to depreciate, as the external accounts worsen, but not too sharply less inflation exasperates conditions for the poor, unemployed and destitute.

Interest rate hikes may be considered if inflationary pressures arise and/or the spread between Trinidad and Tobago and US Treasury bills widens.

Of course, in an economic environment in which the economy has experienced negative growth for a sustained period, reversing this trend is also in the mandate of the CBTT. Which policy choice is viewed as more important to the economy we wait and see. Indeed, challenging policy choices ahead.



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