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Is the problem culture or supply?
Trinidad and Tobago operates an open capital account system, which means that there are no government-imposed restrictions on the domestic ownership of foreign assets or on foreign ownership of domestic assets. This is unlike the system that operated in this country between 1983 and 1993 when foreign exchange controls were in place. These controls required those seeking to buy foreign currency, a foreign currency draft or a letter of credit to apply to the Central Bank using the EC-0 form. Exchange controls were lifted on April 13, 1993, at the same time the TT dollar was floated and in the context of the programme of liberalisation and adjustment that had been started by Prime Minister Arthur NR Robinson between 1986 and 1991, and continued under Prime Minister Patrick AM Manning between 1991 and 1995.
“This dismantling of exchange controls meant that residents were no longer restricted by law in respect of their foreign exchange dealings and were permitted to hold and operate foreign currency accounts in local banks,” according to the 45th anniversary magazine published by the Central Bank. Unlike in Barbados, for example, anyone can walk into a bank or bureau de change in this country and buy foreign currencies, manager’s cheques, letters of credit or wire transfers. The only restriction placed on the potential purchaser of the foreign currency is availability, which creates the queues referred to last week.
An open capital account gives residents the option of choosing to hold their investments in TT, US or euro or some other currency. This led to a situation where as of November last year, foreign currency deposits constituted 26 per cent of the total deposits held by commercial banks in this country. Residents of this country held US$3 billion in the foreign currency accounts and a total of $72 billion in deposits.
It also led to a situation where that at the end of 2008, the Roytrin TT dollar income fund held $5.8 billion in assets, while its US dollar income fund held US$748 million, which was equal then to about $4.75 billion. (Both Roytrin accounts experienced some slippage at the end of 2009 because of the bank’s decision to move to a floating NAV). The UTC’s TT dollar income fund held $10.8 billion in total assets, while its US dollar income fund held the foreign currency equivalent of $4.9 billion in assets. The UTC’s Growth and Income Fund held $3.1 billion in assets at the end of 2009. If one tabulates the funds under management in these three mutual funds, one finds that the US dollar income fund constitutes 26 per cent of the total, the growth and income fund 16.5 per cent, while the TT dollar income fund holds 57.5 per cent. It is probably just a coincidence that residents of T&T have invested almost exactly the same percentage of the UTC’s funds under management in the three mutual funds as the percentage of foreign currency deposits in the banking system.
Now, let’s put aside the issue of the preferences of T&T residents to hold US dollar accounts or US dollar investments (for all kinds of reasons) and let’s analyse the investment options that are available to T&T residents, especially those who are minded to earn a return on their investment which equals or exceeds the rate of inflation.
- Residents of T&T have an option of choosing to invest their surplus incomes in either TT dollars or a foreign currency as they have the choice of investing their surplus incomes in either fixed-income based instruments of funds or equity-based instruments or funds. There is some evidence to indicate that out of $1 being held for investment in T&T, 26 cents is being converted into a foreign currency;
- Thousands of residents of this country have US dollar accounts in banks or mutual funds;
- In 2010, one Government/state enterprise bond was issued which was available to residents and that was the $360 million 18-year, 6.1 per cent NIPDEC bond which was floated on September 2. Because the bond was oversubscribed, with bids totalling $854 million being received, the yield to maturity was pushed down to 5.9 per cent.
- With the scarcity of Government/ state enterprise bonds on the primary market and with institutional investors holding on to their bonds because of fairly attractive rates, residents looking for a reasonable return on their investments have been forced to look to either foreign currency investments or chase the small pool of stocks listed on the local market;
- Money market or income mutual funds are offering investors two per cent or less;
- In terms of product development, the growth in the local mutual fund industry has come in foreign currency funds. In terms of products the following is today’s reality: The UTC has seven US dollar funds and three TT dollar funds; Scotiabank has six US dollar funds and two TT dollar funds; Guardian Asset Management has 11 US dollar funds and two TT dollar funds; RBTT’s Roytrin has two US dollar funds, one euro fund and three TT dollar funds; Bourse Securities has three US dollar funds and two TT dollar funds; ANSA Merchant has one US dollar fund, one euro fund and one TT dollar fund.
In other words, if one were to ask most of the investment advisers in this country, they would tell you that it is prudent to diversify your investments (as it is, for a number of good reasons) but given the dearth of TT dollar investments, investment diversification in the local context means converting into a foreign currency. The problem, therefore, may not necessarily be in the demand for the foreign currency investments as much as in the lack of supply of TT dollar investments, which I have been arguing for years.
It seems to me that if the Government does not do something to redress this imbalance by divesting state enterprises and limiting its borrowing needs to the local market, T&T is always going to have long queues of people seeking foreign currencies to start or buttress their investment portfolios and the TT dollar would be under constant threat of depreciation. Is this what we as a country want?
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