By: Guardian Asset Management

Tuesday March 10,

Dear Chef,

 

What do you think are the odds of a

devaluation of the TT currency

within the coming months? If it does

occur how best do I prepare for this?

 

Mr. D. Martin

Arima

---

 

Dear Mr. Martin,

 

Generally, the odds of a depreciation in the TTD is very low in the coming months. In Trinidad we have a 'managed float' and given the desired objectives of the Central Bank, they will continue to allow the currency to float within a narrow range, currently between 6.15 to 6.35.

 

As, in any market, the price (in this case the exchange rate) is determined by demand and supply factors. Locally, the manufacturing and trading and distribution sectors continue to demand USD and other foreign currencies, on the other hand, the energy sector 'supply' most of the USD in the market. Therefore, we have a 'dual economy' if we split both sectors. Due to the large Foreign Investments and Government Tax Receipts from the energy sector, we would have a net supply of USD (surplus funds). Therefore, if the exchange rate regime is a  'free float' the currency should in fact appreciate.

 

Trinidad's foreign reserves as at the end of 2008 stood at approx. US$ 9.2 billion, this represents about 10 months import cover. The IMF typically recommends an import cover of 3 months, therefore Trinidad has significant 'excess foreign reserves.'

 

Also, one should note that in Trinidad all the USD does not enter the market directly. As the Government collects tax returns from energy sector companies, these funds are placed in the Government's bank account - the Central Bank foreign reserve account. The Central Bank will then release a portion of funds periodically, via the sale of USD to banks in the local market. Therefore, the Central Bank in Trinidad acts as a supplier of USD funds to the market to maintain exchange rate stability. Likewise, they would purchase USD funds from the local market from time to time.

 

Therefore, given that T&T has a trade surplus (export greater than imports), a healthy foreign reserve account balance and healthy foreign direct investment flows that are expected to continue, a depreciation of the currency in the coming months outside the current range is unlikely.  An increase in the Government's debt balances and a continued fall in global commodity prices could however some temporary pressure on the local currency.

 

In the unlikely event of a depreciation of the local currency, the best way to prepare would be to have some savings in USD. While your income may be in TTD and you have expenses in TTD you would have to hold some TTD. It would be wise to invest some of your funds in a USD investment (such as Guardian Asset Management’s USD Monthly Income Fund.) if you are concerned of any depreciation of the TTD in the future.

 

Thank you for your question, I hope I have provided some comfort and we are always ready to assist you in your future financial planning.

 

Author: Dave Dookie

(Portfolio Manager & Investment Strategist at

Guardian Asset Management)

Email: dave.dookie@ghl.co.tt