Wednesday, October 25, 2006

Regarding COHA’s September 18 Press Release “Trinidad and Tobago’s Dirty Peg to the U.S. Dollar and Inflation Galore: Fateful Days for the Economy”

Thursday, October 12th, 2006

Mr. Anthony Wilson
Business Editor
Trinidad Guardian

Thank you for the time you spent in critiquing my analysis. You made several valid points and the necessary changes will be made to the article. However in several concerns you voiced, you had been overly hasty to prove the thesis wrong and missed important facts that compromise your position. For your benefit in the following I have included some sources from widely respected economic analysis providers.
Brittany Bond
Research Associate, Council on Hemispheric Affairs
I respond piece-meal leaving intact your original critiques.

Mr. Wilson: 1)COHA states that the Trinidad government is “disproportionately channelling investments into its natural gas and oil production.”
The government is described as engaging in a “biased allotment of funds to the energy sector.”
This statement is entirely bogus.
The TRUTH is the Trinidad government has made few direct investments in the energy sector. Such investments as have been made were made by State-owned companies such as NGC and Petrotrin. All projects were scrupulously analysed, were funded by foreign project financiers and were based on the balance sheets of the companies.
Most of the investments in the energy sector have been made by foreign and local private sector businesses.

COHA STAFF: According to reliable sources such as (Trinidad Government to Ease Inflationary Pressures 08/31/2006) and The Economist, (Trinidad’s dash for development 08/42/2006) there is warranted reason to believe that the Trinidad government is channeling extra investments towards natural gas and oil production. For example, Minister in the Ministry of Finance, Conrad Enill, made the announcement while speaking in the Senate on Tuesday August 22 on a government motion meant to increase the borrowing limit in the country from TT$8 billion to TT$20 billion to better manage excess liquidity in the economy. He also noted that while Trinidad and Tobago was not directly affected by record-high global oil prices due to Government’s TT$1.3 million subsidy on fuel, it was experiencing indirect effects with regard to inflation.

Mr. Wilson: 2) COHA states:
“Most significantly, this inflation-rate statistic is actually being negatively altered by Trinidad and Tobago¹s record-breaking gas and oil revenues. This is due to government restraint in raising interest rates in the energy sector so as not to deter investments from the only area supporting the country¹s economy. If gas and oil figures were not included in the average, the inflation rates would be seen as bordering on the astronomical. ”
This statement is entirely bogus.
The TRUTH is the all energy companies fund most of their capital expenditure requirements in US dollars from foreign banks. Even the local energy companies fund their capex requirements from foreign banks.
The Government (really the Central Bank) has little influence over interest rates on US dollars held in Trinidadian banks.
Therefore, rising interest rates have little impact on the energy sector

COHA STAFF: It is basic economics that in order to abate increasing inflation, a government should raise interest rates. In carefully reading the above quote from Trinidad’s Finance Minister, it is seen that although indirectly, Trinidad’s energy sector is, in fact effected by inflation.
In regard to energy companies trading funds, you are correct, in that it is in fact, relevant and important to mention that oil and gas are by-and-large traded in U.S. dollars.

Mr. Wilson: 3) The COHA analysis suggests that the TT dollar would appreciate if it was allow to float freely, “given the positive effects of foreign investment and trade surplus.”
This statement is false, misleading and shows a woeful lack of knowledge of Trinidad realities. One Trinidad reality is that the Central Bank has had to sell hundreds of millions of US dollars to the market to prop up the TT dollar thereby preventing its depreciation. Anyone who has even fleeting knowledge of the T&T economy would know this. If it were not so, the Central Bank would be in a position of having to buy US dollars from the market to maintain exchange rate stability.
As most people know, foreign investment and energy tax payments (trade surplus) are lumpy with tax payments being made quarterly and foreign investments being disbursed as necessary.

COHA STAFF: You say “One Trinidad reality is that the Central Bank has had to sell hundreds of millions of US dollars to the market to prop up the TT dollar thereby preventing its depreciation.” I am fairly certain that is another way of defining a Dirty Peg. A Dirty Peg if I must reiterate often creates an illusionary value of the smaller country’s currency vis-à-vis the currency it is pegged to.
This is very similar to the current issue at the IMF and World Bank where China’s peg to the U.S. dollar has become a very contentious issue because if China allowed it’s currency to float freer it would appreciate relative to the US dollar. As of now, it is artificially cheapened (just like the Trinidadian dollar) so that Chinese exports are cheaper in the U.S. and U.S. goods are more expensive in China.

Mr. Wilson: 4) The COHA analysis states: “Since the T & T dollar is kept at a lower pegged rate, foreigners can buy Trinidadians and Tobagonian products, like natural gas and other products, cheaper than if the currency was appreciating as would happen if it freely floated.”
If this argument were correct, it would mean that Trinidad nationals would be able to buy foreign products at cheaper prices. But it would also mean a flood of “cheap” foreign products into T&T with no guarantee that prices would be lowered as a result given the structure of the economy. (The proof of this is that lower import tariffs have had little impact on prices)
In my view, an appreciation of the exchange rate would lead to a massive draw-down of the country’s foreign reserves as everyone would expect the appreciation to be temporary.

COHA STAFF: Again, it is basic economics that an artificially appreciated currency from pegging means that this country’s (Trinidad’s) exports are equally artificially cheaper abroad and the imports from countries whose currencies are artificially cheapened by the peg (United States) are artificially more expensive. Therefore, no there would not be a flood of “cheap” foreign products into T&T; just the opposite.

Mr. Wilson: 5) COHA states: “So far, the Trinidadian Bank has concentrated all its efforts into managing monetary policy, largely ignoring the fiscal aspect of inflation risks.”
The TRUTH is that the Central Bank is responsible for managing monetary policy. As in most other countries, fiscal policy is the province of the Minister of Finance.

COHA STAFF:Thank you. Valid observation. It would be more correct to say the Trinidad and Tobago has concentrated all its efforts into managing monetary policy… There is a need to distinguish between the separate roles the Central Bank and the Minister of Finance play. This error will be corrected in my analysis.

Mr. Wilson: 6) COHA states: “For example, flushed with large sums of energy revenues, the Central Bank has taken on large-scale construction of roads, railways, factories and medical facilities.”
The TRUTH is that it is the Central Government that is responsible for undertaking the large-scale projects, not the Central Bank. The Central Government has NOT “taken on” the large scale construction of factories and medical facilities. The railway project is in the planning stage as is the construction of most highways.

COHA STAFF: Again, you are correct in pointing out my errors in enumerating the responsible bodies. It is not the Central Bank but in fact the Central Government that is taking on large-scale construction projects. This error too will be fixed in my analysis.
I am however not alone in cautioning Trinidad and Tobago in over-extending itself with these over ambitious construction projects. (you can refer to The Economist as well as Economic Intelligence Unit for similar voicing of concerns)

Mr. Wilson: 7) COHA states: “However, missing in these mega-projects are the doctors for the new facilities, as well as water sources for those communities desiccated because of the water-guzzling new factories.
Trinidad’s problems with provision of medical services and water are well known but the statement that doctors are “missing” in the “new” facilities is a figment of the authors over-active imagination. There are no “water-guzzling new factories” and existing petrochemical plants are supplied with desalinated water from the Gulf of Paria.

COHA STAFF: This analysis came from several of my news sources including the aforementioned Economist article which states:
“Flush with revenue, the government has gone on a spending spree: on free higher education and skills training as well as roads, a commuter railway, low-cost housing, a national cancer-treatment programme and leisure facilities. It seems to find such mega-projects easier to implement than reforming routine public services. Hospitals are short of good administrators and, sometimes, medicine. Waiting lists for operations are long.”
In relation to the problems of water guzzling factories consider the following assertion again from the Economist:
“But the boom is throwing up problems too, ranging from rising food prices to traffic jams, with two hours of gridlock each morning. In the rural south a middle-aged householder says his district has had no mains water for days because of the demand from thirsty factories.”

Mr. Wilson: 8) COHA states: “The government¹s asymmetrical spending, which benefits the energy sector, crowds out investment from less favored parts of the economy.”
It would be a stretch to claim that the Government’s spending is benefiting the energy sector. The TRUTH is that the Government’s asymmetrical spending is being poured into unnecessary building projects. These are crowding out less favoured parts of the economy, as stated.

COHA STAFF: To continue my consistency, please consider the following point recently enumerated by experts at the Economist:
“Some Trinidadians fear that the island is trying to grow too fast. If planned industrial projects go ahead, known gasfields could be used up in about 20 years. They worry about the environment, and note that growth is lopsided: agriculture is in swift decline, for example.”

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