Managing Exchange Rates amidst tumbling oil prices

Transcription

1 exchange rate Managing Exchange Rates amidst tumbling oil prices Dr. Anthony Birchwood The University of the West Indies 24/1/15

2 Foreign Exchange Dilemma How could Trinidad and Tobago (TT) boast of having a healthy foreign Exchange Balance (FX) but businesses cannot obtain FX? News media have been pointing to acute Scarcity of foreign exchange.

3 Could TT maintain a stable exchange rate when oil prices fall below US$40 per barrel? When TT floated the ER, oil prices averaged 20$ per barrel in 1993, and it stabilised at 6.25 by 1997 even though prices sometimes dipped below 14 by December of that year. By 2000 oil prices stabilised around 6.25 and 6.30 as oil prices climbed from US$27.0 to as much as per barrel by 2008.

4 Market Microstructure I argue that this points to two essential weaknesses: Wrong Market Microstructure and Erosion of Market Confidence. Defence of the exchange rate would require massive employment of foreign exchange.

5 Is there a double Whammy Effect? Expansion of licensed dealers not optimal. Inclusion of conglomerates Massy and MACAL as licensed FX dealers did not help. Double Whammy effect This means that as licensed dealers they are entitled to receive the allocation of US dollars to the market and then return to purchase foreign exchange from the commercial banks.

6 Is it desirable to stabilise the exchange rate? Central Bank has been making regular shortterm interventions by pumping in US dollars in order to stabilise the rate. As a result there have been a massive inflow of US dollars. But these are short term solutions.

7 Is this a Long term Solution? To build Exchange Rate Credibility the public must be convinced that the central bank has a long term solution. Otherwise there would be a lack of confidence by the users of the market that foreign exchange could be obtained when requested. Government response has been to appoint an inter ministerial committee to study the problem and make recomendations.

8 Long term solutions? Need to find long term solutions in order to cultivate currency credibility. Flawed Microstructure can create shortages. Who to include in the list of licence foreign exchange dealers.

9 Risk of Sowing the Seeds for Creation of a Black Market We run the risk of creating a black market because of a perceived foreign exchange shortage. It may be more prudent to tolerate a bit of depreciation to free up US Dollars. 60% of OPEC countries have exchange rates below TT.

10 OPEC Comparative Exchange Rates Exchange rates below TT: Iran 27,074.32; Ecuador ECS; Nigeria ; Angola ; Same as TT Venezuela 6.3 Above TT: Kuwait 0.29; Libya 1.31; Qatar 3.64; UAE 3.67; Saudi Arabia 3.75

11 Is oil price linked to the exchange rate? Not surprising that a fall in the oil price could lead to a depreciation in the real exchange rate. I suggest that in order to resist this, it would call for massive injections of foreign exchange so as to keep the exchange rate stable. Already In January the Central bank has injected about quarter (US$400 Million) of the total injection of the previous year (US$1.7 Billion).

12 Negative implications Why is it that despite government large fiscal expenditure on the economy there has been little economic growth? The tumbling of oil prices threatens TT Balance of Payments Stability, foreign exchange availability, exchange rate. Defence of the exchange rate would require massive employment of foreign exchange.

13 The best use of Foreign Exchange TT would have to prepare for the scenario if oil prices remain under US$100 per barrel. Depressed conditions could lead to a significant drop in investment under bust conditions. There can be a drop in new drilling if oil prices remain low. Stress test is advisable to assess the consequences of continued low oil prices. How long can TT withstand low oil price.

14 Borrowing was on a different scale by 2010 Borrowing is not advisable.

15 Scarcity of foreign exchange Given these shortages, either the rate depreciates or there would be black marketing of the currency.

16 Conclusion We depart from the IMF conclusion so that we suggest that Trinidad and Tobago may need to allow the rate to slide a bit in order to ease the pressure on the US dollars. The wisdom of allowing the rate to depreciate depends on how long we expect the slide in oil prices to continue. Already the Exchange rates in most OPEC Countries have begun depreciating.