Tuesday, January 23, 2018

‘The problem with the system is certainty’

The foreign exchange crunch continues, and one reason for the tightness in the domestic market is a lack of confidence customers have in obtaining foreign currency—especially United States dollars, RBC Royal Bank Trinidad managing director Daryl White says. 

“The problem with the system right now is certainty. Any system—banking or financial system—operates on confidence and what has happened is people have lost confidence in the ability to get US dollars and that causes a reaction. If you have US dollars, you’re not going to be as anxious to sell because you don’t know when you’ll get again. That applies to businesses and individuals. Confidence is what will drive that reaction along with the unpredictability of the flows,” White told the Express Friday.

The Central Bank has recognised this lack of communication, and Central Bank governor Jwala Rambarran said the bank is making efforts to be more communicative in informing the public on its injections into the system. For June, he said, which is supposed to be a liquid month for the local foreign exchange market, the expected supply is US$475 million and demand should be $525 million. As such, the Bank on Thursday injected a preemptive US$50 million to alleviate the anticipated shortfall. 

For the year-to-date, the Central Bank has injected US$660 million into the financial system, US$130 million more than the corresponding period in 2013, the bank said in a release Friday.  

White noted that the bank’s increased transparency to notify the public on its injections will work towards improving confidence. 

Another challenge for the system is 30-year low local interest rates, which tie in to the excess liquidity in the financial system and insufficient opportunities to invest that excess cash. The country’s low interest rates are also on par with US interest rates; since US currency is a “harder” currency, people are more likely to hold on to their US cash and (based on the exchange rate) get a higher rate of return. 

“The interest rate situation is a real issue. People say lower interest rates will spur growth (by encouraging borrowing), but statistics have shown that there was a huge amount of borrowing in Trinidad when interest rates were higher. What spurs growth is confidence. Once our interest rates are lower here than outside, there is going to be a flight of capital and US interest rates have already started to inch up so that’s a serious thing we have to look at because we are a small open economy,” White said. 

Bankers’ Association president and First Citizens chief executive Larry Nath noted that low interest rates are a symptom of high liquidity. 

“When one earned three to four per cent interest on a saving account (in years gone by) there was a natural incentive to hold TT dollars. As rates have converged and come down there is a greater incentive to save in a hard currency. In that regard the demand for foreign exchange is being paralleled in US dollar accounts and US dollars being held in banks. It’s a question of what is the monetary policy the Central Bank wants to implement; how it caters to that situation, because on the one hand you have to cater for savers and borrowers, so if savings rates go up borrowing rates go up in tandem,” Nath said.

Nevertheless, Nath noted that with the flush expected in the latter half of this month as energy companies convert foreign currency to pay taxes, the expectation is the system will be adequate to fulfil needs. 

“It comes down to a timing issue and we have to be aware that outside of tax quarters you do have troughs so there are times when you go to your bank you may not be able to get all you need. The comments (from business people) were very instructive- nobody has said they went to the bank and got (no money)- they said they got something. So I think that is evidence that the banks are trying to work with customers,” he said.