Trinidad and Tobago's central bank continues tightening monetary policy to reduce excess levels of liquidity

In line with the expectations of the financial sector, the Central Bank of Trinidad and Tobago (CBTT) has continued tightening its monetary policy in 2015. In late May the CBTT’s Monetary Policy Committee (MPC) decided on a fifth consecutive increase in its repo rate of 25 basis points to 4%. The MPC’s decision was based on three factors. One was the recent forward guidance from the US Federal Reserve in relation to its monetary policy through 2015 and beyond. The second was the potential for higher domestic inflation in the medium term. The third was what the MPC sees as being the relatively positive outlook for nonenergy sector growth in T&T over the remainder of 2015. The MPC had previously increased the repo rate by 25 basis points in September 2014, November 2014, January 2015 and March 2015.

Monetary Policy

These rate increases have begun to have an impact on domestic money market rates, or commercial banks’ prime lending rate, which rose to 8% in May 2015, up from around 7.5% before the repo rate hikes. During the first four months of 2015 excess reserves held by the commercial banks with the CBTT averaged around TT$3.9bn ($601.4m) daily, according to the CBTT’s “Monetary Policy Report” released in May 2015, down from an average of TT$7.2bn ($1.1bn) in December 2014 and TT$6.63bn ($1bn) over the first four months of 2014.

Fiscal injections amounted to TT$11.85bn ($1.8bn) in 2014 and TT$3.14bn ($484.2m) in the first four months of 2015, down from TT$4.88bn ($752.5m) in the previous corresponding period. The CBTT used several tools at its disposal to manage the liquidity. Some TT$2.1bn ($323.8m) in liquidity was withdrawn through open market operations in February and March 2015, while sales of foreign exchange totalled TT$5.4bn ($832.7m) in the first four months of the year. However, some open market Treasury securities were allowed to mature without reissue in April 2015. At the same time, the CBTT noted that, thanks to its aggressive liquidity management programme, as well as a significant reduction in commercial banks’ excess reserves, interbank activity had also increased.

Government Bonds

The Domestic Market Operations Department of the CBTT is responsible for the central bank’s activity in terms of domestic money, capital and foreign exchange markets. These include the issue of Treasury securities on behalf of the government: the CBTT also acts as registrar and paying agent, using automated systems. Secondary market trading in government securities takes place through the T&T Stock Exchange (TTSE). Most of the seven member equity stockbrokers are bond brokers or government securities intermediaries.

Four other financial institutions are also government securities intermediaries. In its December 2014 report the CBTT noted that it had collaborated with other market players to develop a standardised T&T Treasury yield curve. It is hoped that the new curve will become a benchmark for the entire financial sector and will facilitate more uniform and efficient pricing of government bonds and other securities.

The CBTT noted that total public sector debt, including the government’s contingent liabilities, rose from TT$96.13bn ($14.82bn) at the end of the December 2013 fiscal year to TT$109.19bn ($16.84bn) by the end of December 2014. The CBTT identified a number of reasons for the rise, primarily during the first nine months of the year. The government raised $550m through the issue of a eurobond in December 2013, as well as drew down $36.7m from a facility with the Inter-American Development Bank, most of which was used for the Multiphase Wastewater Rehabilitation Programme. The government also borrowed $29.3m from the ANZ Banking Group for the construction of the South Campus Teaching Hospital of the University of the West Indies.

Meanwhile, the Export-Import Bank of China lent $16.6m for the construction of six national sporting facilities. Contingent liabilities rose by TT$30.19bn ($4.66bn) by the end of 2014. Most of this was accounted for by the issuance of a TT$1bn ($154.2m) bond by the National Insurance Property Development Company (NIPDEC) to fund the Programme for Upgrading Roads Efficiency, and the National Infrastructure Development Company’s TT$1.5bn ($231.3m) bond to meet payment obligations. Conversely, there was a reduction of TT$484m ($74.63m) in outstanding Colonial Life Insurance Company ( CLICO) zero-coupon bonds between September and December of 2014, which had been issued to holders of some of that insurance firm’s investment products following the collapse of the CL Financial Group, of which CLICO had been an important element.

In April 2015 Moody’s downgraded T&T’s bond rating and issuer rating from “Baa2” to “Baa1” and changed the outlook from stable to negative. The downgrade was motivated by the government’s persistent fiscal deficits since 2009, the decline in oil prices and its projected effect on economic growth, and what the agency described as a weak macroeconomic policy framework.

Non-Government

The scale of the government’s contingent liabilities, which account for nearly one-third of total public sector debt, highlights how issuance by non-government entities is substantial. A survey of press releases issued by ratings agencies CariCRIS, Moody’s and Fitch Ratings, along with other sources, indicates that at least 25 entities have sought ratings. These entities include government agencies and state-owned enterprises such as the Vehicle Management Corporation of T&T and the Water and Sewerage Authority, as well as the Petroleum Company of T&T (Petrotrin). Financial institutions with bond issuance programmes include Republic Bank, First Citizens Bank, Scotiabank T&T, T&T Mortgage Finance Company (TTMF) and Home Mortgage Bank (HMB).

In the private sector, rated entities include several insurance firms, along with conglomerate Massy Holdings. In connection to the government’s rating, Moody’s downgraded the state-owned National Gas Company, the Tobago House of Assembly and Petrotrin, stating that “it is uncertain if First Citizens Bank, also state-owned, is next.”

Of the non-government bonds, the only ones that are listed on the TTSE are those issued by Scotiabank T&T. The other non-government bonds are either placed with investors who hold them to maturity, or traded privately on an over-the-counter basis. In any event, the CBTT noted that activity in both primary and secondary markets had been moderate in the first nine months of 2014. In the primary market, four issuers raised a total of TT$4.15bn ($639.93m) through six separate securities. In the previous corresponding period, six issuers had raised just under TT$4bn ($616.8m). In the secondary market, based on the TTSE, government bonds with a total value of TT$909m ($140.2m) were traded in 2014. This was 59% of the value of government bonds traded in 2013. With the exception of government bonds with short to medium tenors, yields moved in an upwards direction between the beginning of 2014 and the end of September. For the benchmark 10-year Treasury bond, for instance, the yield rose from 2.50% to 2.71%.

CLICO

As the discussion on the government’s obligations indicates, it collaborated with the CBTT to ensure that the collapse of the CL Financial Group in 2009 did not become a systemic crisis. Steps were also taken to protect the positions of the holders of investment products that had been sold by CLICO.

At the end of March 2015, the central bank announced significant progress with the repayment by CLICO of the money that had been injected into the firm by the government.

Following the October 2014 sale of Methanol Holdings Trinidad, on March 27, 2015 the government received a payment of TT$4bn ($616.8m) in cash from CLICO’s statutory fund. It has received TT$3bn ($462.6m) in specie, through the transfer of CLICO’s holdings in three companies. By July 2015, the 1500 holders of CLICO investment products who did not accept the government’s original offer of bonds and other securities will receive around TT$950m ($146.5m). These payments to the government and to the policyholders will represent 85% of their claims against CLICO’s statutory fund.

The remaining 15% of claims will be paid when the government has raised a further TT$2bn ($308.4m) or so from the sale of CLICO’s 57% stake in Methanol Holdings International. This transaction will also provide enough funds to cover the needs of holders of CLICO’s traditional policies. The government is committed to selling the portfolio of traditional insurance products, which has been independently valued.

Other creditors, such as non-resident holders of CLICO’s investment products, will be paid from the proceeds of the sale of CLICO’s 7% stake in Republic Bank and other assets. The government will also take steps to ensure that the resident holders of CLICO investment products who accepted the original offer of bonds and other securities are not disadvantaged for having accepted the offer.

As of April 2015, the government also continues to support British American Insurance Company Trinidad (BAT) – another life insurance firm that collapsed in the wake of the global financial crisis. The government is looking for a buyer of BAT’s traditional life insurance portfolio.

Capital Pools

By a small margin, T&T’s occupational pension plans appear to be the largest single pool of investment capital in the country. According to the CBTT, which oversees the pensions sector, there are around 150 plans registered under the Insurance Act Chapter 84:01. As of the end of July 2014, the total assets of the pension funds amounted to TT$45.8bn ($7.06bn).

The second-largest pool of investment capital is T&T’s mutual fund industry. The CBTT notes that aggregate assets under management (AUM) of the mutual funds amounted to TT$41.8bn ($6.45bn) at end-December 2014. Over the course of 2014, the AUM of equity funds rose by 4.9% to TT$3.48bn ($536.62m), followed by income funds with 9% to TT$5.8bn ($894.36m). The AUM of both US-dollar-denominated and local currency funds expanded by 4.2% and 6.8%, respectively, in 2014.

The Mutual Fund Association of T&T has eight members. By far the largest is the Unit Trust Corporation (UTC), a mutual fund founded in 1982 via an act of parliament. The UTC’s market share in terms of AUM was 47% by the end of 2013. Other players include: Republic Bank, the largest and one of the oldest banks in T&T; RBC Investment Management; Guardian Asset Management; First Citizens Asset Management, which is a subsidiary of the second-largest local banking group; Bourse Securities, T&T’s largest independent stockbroker; ANSA Merchant Bank; and AIC Financial Group, which is owned by Canada’s Portland Holdings. Sekou Mark, UTC’s vice-president of investment research and portfolio management, told OBG, “While the major players in the local mutual fund industry are unlikely to change significantly over the next few years, product innovation will likely usher in many new and exciting market developments.”

As of the end of September 2014, the investments of T&T’s insurance sector amounted to around TT$18bn ($2.77bn), with life insurers accounting for 83.3% of this. Insurers invest in government bonds, non-government bonds and equities, with CBTT data showing that the investments of life and non-life insurers rose by 7.7% and 4.2%, respectively, over the preceding year. However, the most rapidly growing pool of investment capital is T&T’s commercial banking sector. Over the course of 2013, the commercial banks’ net investments rose by 17.5% to TT$28.2bn ($4.35bn). At the end of the year, their total assets amounted to TT$124bn ($19.12bn) – this also included TT$50.1bn ($7.72bn) in net loans to customers and TT$23.8bn ($3.67bn) in deposits with the CBTT.

National Insurance Board

The other main pool of investment capital is held by the National Insurance Board of T&T (NIBTT), which is the central institution in the country’s social security system. It is governed by the T&T National Insurance Act No. 35 of 1971 and began operations in 1972. It covers around 519,000 employees and 18,000 employers. Although the NIBTT is classified by the CBTT as a systemically important financial institution, it is not regulated by the central bank. The board of directors includes nine members nominated by the government, as well as business and trade union interests, and includes the executive director and an independent chairman. Other such institutions include: TTMF, which provides low-cost mortgage loans to low-income households; UTC, which mobilises the savings of the public; and National Enterprises Limited (NEL), the state-owned strategic investment company that enables portfolio investors to take indirect stakes in several of the most important public enterprises.

The IMF describes the NIBTT as a “partly funded, pay-as-you-go, old age, disability and survivors’ pension system”. Participation is mandatory for all wage earners. In 2010, 79% of the workforce and 58% of all people of working age (16-59) were enrolled. Contributions are 12% of wages – which is divided between 8% from employers and 4% from the employees – and are capped at TT$12,000 ($1850) per month. The standard age at which participants begin receiving a pension is 65 years.

The NIBTT’s “Eighth Actuarial Review”, which was published in mid-2012, estimated that the ratio of the working-age population to the elderly (60+) is due to fall from 5:4 in 2010 to 1:7 in 2060. The review also noted that expenses would exceed contributions after 2017 and that in the absence of reforms the board’s financial assets would be depleted by 2039/40. In 2012 the NIBTT also stepped up the minimum monthly retirement pension from TT$2000 ($310) to TT$3000 ($460), increased paid maternity leave to 14 weeks and made progress in extending coverage to self-employed workers. Local press reported that the next actuarial review was expected to be completed before the end of 2015.

Over the course of 2012, the latest year for which annual figures were available, total investment assets rose from TT$15.24bn ($2.35bn) to TT$16.15bn ($2.5bn). At the end of the period, the main asset classes were equities (26.86%), cash/ fixed deposits and money market investments (22.54%), government securities (16.97%), overseas investments (11.11%) and corporate bonds (10.99%). Minor asset classes included debentures (7.32%), mutual funds (3.21%), real estate (0.87%) and mortgages (0.13%). The NIBTT also owns three subsidiaries: the National Insurance Property Development Company (NIPDEC), TTMF and HMB. In November 2014 the NIBTT was one member of a consortium including NEL and UTC that took a 10% stake in Phoenix Park Gas Processors. At the time Adrian Bharath, the NIBTT’s chairman, told local press that the investment “is in keeping with our strategy of portfolio diversification, which is being pursued to safeguard the national insurance fund and promote the long-term sustainability of the national insurance system”.

NIPDEC was established in 1977, and its main clients include various government ministries and agencies. The company’s core business is property development, including development of upscale residential projects. NIPDEC’s commercial operations include car park management, warehouse management and prisoner transport for the Ministry of National Security. NIPDEC also provides various facility management services to both private and public sector organisations and housing developments. However, NIPDEC is best known as a property developer. It has used a variety of financing mechanisms that have been tailored to meet the needs of its predominantly public sector clients. NIPDEC used the build-own-lease-transfer mechanism for the property that houses the Ministry of the Attorney General and the Industrial Court. NIPDEC is also the leading provider of procurement services for state ministries and agencies.

Foreign Exchange Assets

The government controls two substantial pools of foreign exchange. One of these is the foreign exchange reserves held by the CBTT. Over the course of 2014, these rose from $10bn to $11.3bn. As of September 2014, foreign currency assets on the CBTT’s balance sheet amounted to TT$70.43bn ($10.86bn), out of a total of TT$76.41bn ($11.78bn). Of this amount, slightly less than half was held as cash and balances. The liabilities side of the balance sheet was dominated by deposits from commercial banks (TT$27.08bn, $4.17bn), external liabilities (TT$7.9bn, $1.22bn), currency in circulation (TT$6.57bn, $1.01bn), and other liabilities and provisions (TT$32.71bn, $5.04bn). Capital and reserves amounted to TT$1.68bn ($259.06m).

The other pool of foreign exchange, which totalled $5.53bn by the end of September 2014, is the Heritage and Stabilisation Fund (HSF). The fund was created in March 2007 with the passage of the Heritage and Stabilisation Fund Act No. 6 of 2007. The HSF is the successor to the Interim Revenue Stabilisation Fund, which dated from 2000. The HSF has three objectives: providing a financial cushion for the government during periods of revenue downturn due to slippage in oil and gas prices; maintaining an alternative source of income during falls in revenue due to the depletion of non-renewable energy resources; and administering a fund for future generations. The HSF receives contributions from the government’s petroleum revenues, and although it is a separate legal entity with its own board, it is managed by the CBTT.

The HSF follows a conservative strategy. As of the end of September 2014, some 37.5% of the HSF’s portfolio was invested in core US domestic fixed-income securities. The remainder was invested roughly equally between US core domestic equity (21.33%), nonUS international equity (18.68%) and short-duration US fixed income (22.47%). The respective weightings of the four asset classes in terms of the HSF’s strategic asset allocation are 40%, 17.5%, 17.5% and 25%. Within the money market portion of the HSF, counterparties must have a minimum credit rating of either “A-1” from Standard & Poor’s or “P-1” from Moody’s. No single counterparty can account for more than 5% of the HSF’s portfolio. Bonds held by the HSF must have an implied investment grade rating as defined by either of those two ratings agencies or Fitch. Duration cannot be more than one year longer or shorter than that of the benchmark. Within the equity portfolio, the HSF cannot hold more than 3% of the outstanding shares of any issuer. Relative to the relevant benchmark, sector deviation cannot exceed 5%. No more than 10% of the core US domestic fixed-income securities and core domestic equities portfolios can be invested in securities that are denominated in currencies other than the US dollar. No more than 15% of the non-US equity portfolio can be hedged back into that currency.

Outlook

Conditions in T&T’s capital markets will continue to be shaped by the CBTT’s tightening of monetary policy. Excess government spending and the caution of T&T’s financial institutions and savers have the potential to constrain the reduction of liquidity in the banking system. The dynamics of the various pools of capital mean they will continue to grow faster than the main asset classes: T&T bonds, both government and non-government, and local equities.