T&T economy is at risk of depleting its foreign exchange (FX) reserves if there is no meaningful macroeconomic intervention.
This is the outlook that economist Marla Dukharan revealed in her report titled “Trinidad & Tobago Balance of Payments Risk: Why T&T could be heading to default and a balance of payments crisis by end-2022”.
Dukharan explained in her report that a country’s Balance of Payments account which includes but is not limited to imports, exports, remittances, and foreign direct investment, captures all the foreign currency transactions a country makes with the rest of the world.
A balance of payments crisis, Dukharan highlighted, occurs when a country does not have enough foreign currency to meet its foreign currency-denominated obligations, either debt or otherwise.
She said, “Our declining FX reserves (and Heritage and Stabilization Fund) in the context of rising debt and persistent weakness in our exports, suggest that at some point we will run out of foreign currency if nothing is done.”
She also argued, “The net effect of all these foreign exchange transactions is reflected in the change to the level of FX reserves held at the Central Bank – if we earn foreign currency, FX reserves increase, if we lose foreign currency, FX reserves decline.”
She offered that T&T is one of the most difficult places in the Caribbean to source US dollars.
Dukharan also pointed out that while the Heritage and Stabilization Fund (HSF) was never designed to be used to defend the exchange rate.
However, the recent legislative amendment allows the Minister of Finance to access the fund to the tune of USD1.5 billion in a crisis.
According to Dukharan, the cumulative contributions of the Government to the HSF have only been USD2.5 billion since inception, with the remainder being earned by the fund manager.
The balance on the HSF is currently about USD 6 billion, which provides approximately seven months of import cover, but Dukharan expressed that no new Government contributions have been made in the last six fiscal years, meaning the fund has only grown through portfolio performance.
She indicated: “Combined, the HSF and the level of FX reserves currently provide about 14-15 months of import cover, and as argued below, unless the policy stance of the Government changes, T&T could run out of foreign exchange in about two years.”
She noted that the current level of FX reserves now stands around USD7.2 billion, returning to the level of February / March 2008, following an uptick from the June 2020 USD500 million bond issue.
She expressed that this USD 7.2 billion levels represents a decline of 37% from the all-time high in December 2014.
The economist warned it will end in default or a Balance of Payments crisis in T&T if it is maintained, and that this is not a sustainable situation.