Currency Forecast - TTD: Sideways Trading Through 2014 - JUNE 2014


TRINIDAD & TOBAGO CURRENCY FORECAST
Spot Short-Term 2014 2015
TTD/USD, ave 6.43 6.43 6.43 6.42
TTD/EUR, ave 8.94 - 8.62 8.03
Policy Rate, % eop 2.75 - 3.25 4.00
Source: Bloomberg, BMI, May 6 2014

Short-Term Outlook

Having modestly weakened since the beginning of 2014, the heavily managed Trinidadian dollar will find stability in its current trading range of TTD6.38-6.48/USD in the coming months. While a recent shortage of US dollars in the domestic foreign exchange market put depreciatory pressure on the TTD, we expect that stronger export performance will stem the downside. Moreover, the Central Bank of Trinidad & Tobago (CBTT), which remains oriented towards maintaining stability in the exchange rate as the country's economic recovery accelerates, has an ample supply of foreign reserves with which to defend the currency, if needed. We have revised our average exchange rate forecast for 2014 from TTD6.36/USD to TTD6.43/USD to reflect our view that the Trinidadian dollar will trade sideways in its new range through the remainder of the year.

Trading In A Modestly Weaker Range
T&T - Exchange Rate, TTD/USD (Monthly)

Core View

We expect the Trinidadian dollar to trade between TTD6.38-6.48/USD over the coming quarters, as moderate appreciatory pressures will counteract recent shortages of foreign exchange that prompted the exchange rate to depreciate in Q114. First, we expect stronger export performance in the energy sector to increase US dollar inflows in the coming months. Indeed, following a dip in production and exports of natural gas during H213 due to maintenance delays at multiple key downstream plants, we expect production to return to full capacity in the second quarter of 2014, underpinning our forecast for the current account surplus to widen to 10.9% and 11.7% of GDP in 2014 and 2015 respectively ( see 'External Position To Strengthen On Robust Export Performance', May 6).

Second, we believe that recent tax reform - most notably, a reduction in the tax on deepwater profits from 50% to 35% - will continue to encourage an uptick in foreign direct investment into the energy sector, easing the shortage of foreign exchange. Third, we forecast that stronger real GDP growth in 2014, along with moderate inflationary pressures, will prompt the CBTT to hike the repo rate by 50 basis points to 3.25% during the latter months of the year, providing support for the currency ( see 'Rising Core Inflation To Prompt Rate Hikes By Year-End', April 17).

While these factors, in sum, might suggest a stronger TTD during the second half of 2014, we believe the central bank will seek to prevent the exchange rate from appreciating in order to avert an erosion of the country's export competitiveness. The TTD has appreciated in real effective exchange rate terms since 2008, and while this has thus far had minimal downside for the economy, we believe that a lack of export competitiveness could become a greater concern in the coming years. Indeed, the government has a policy goal of bolstering non-energy sectors of the economy, which would be more vulnerable to a loss of competitiveness due to currency strength. Natural gas exports, by contrast, are mostly locked into longer term, US dollar-denominated supply contracts, and have proven resilient to a strengthening in the real effective exchange rate.

Further Real Appreciation Could Weigh On Export Competitiveness
T&T - Real Effective Exchange Rate

In the event that these appreciatory factors fail to materialise, we see a limit to further downside beyond the lower band of the current trading range. Indeed, should domestic supply of foreign exchange remain inadequate in the coming months - for instance, on the back of disappointing energy export performance - we would expect the central bank to continue to utilise its foreign reserves to maintain stability in the market and defend the TTD from depreciating further ( see 'FX Shortages No Threat To Reserves Position', February 26). We forecast T&T will have USD9.3bn in reserves at end-2014 and USD9.6bn at end-2015, amounting to a substantial 10.6 and 10.0 months import cover respectively. As the CBTT and various media reports have noted, a number of Trinidadian businessmen and members of the public have been experiencing difficulty in obtaining foreign currency, particularly US dollars, from authorised dealers, leading the bank to sell in excess of USD500.0mn to the banking sector since November 2013.

Risks To Outlook

A surge of violent crime thus far in 2014, including the recent murder of a former Senator, Dana Seetahal, could negatively affect the country's investment appeal, primarily due to the cost burden associated with hiring private security. In addition, rising crime rates could weigh on tourist arrivals, as foreigners avoid the islands. Either development could put downside pressure on the Trinidadian dollar, forcing the central bank to drawdown its foreign reserves more than we anticipate, or allow the currency to depreciate.

Exchange Rate (Trinidad & Tobago 2010-2018)
2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f
TTD/US, ave 6.40 6.42 6.38 6.36 6.43 6.42 6.50 6.50 6.49
TTD/USD, ave % y-o-y 1.1 0.3 -0.6 -0.4 1.1 -0.2 1.2 0.0 -0.2
TTD/EUR, ave 8.49 8.92 8.11 8.40 8.62 8.03 7.80 7.80 7.79
TTD/GBP, ave 9.92 10.34 10.18 9.86 10.48 10.34 10.66 10.73 10.84
TTD/CHF, ave 6.14 6.71 6.86 6.91 6.61 6.45 6.40 6.35 6.37
TTD/AUD, ave 5.88 6.63 6.61 6.14 5.53 5.14 4.97 4.88 4.87
JPY/TTD, ave 561.69 511.92 509.67 620.79 649.43 648.42 663.00 663.00 661.98
f = BMI forecast. Source: National sources, BMI

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