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Devaluation: no problem?

Sunday, January 31, 2016

Since last year’s election, the currency is down ten per cent against the US dollar. The Government and Central Bank have said almost nothing about it. The media have barely noticed. There’s no fuss. 

That’s not us. That’s Britain. The pound dipped below US$1.42 on Tuesday. Soon after David Cameron won the May 2015 election, sterling was close to US$1.60. In mid-2014, it was over US$1.70. And in the sunny days before the financial crisis, the rate was upwards of US$2. 

Over the past couple of years, almost every major currency has drifted steadily down against the US dollar. 

Since mid-2014, when the oil price started to tumble, the euro has dropped around 20 per cent, and the Japanese yen by close to 15 per cent. The Canadian and Australian dollars are down by more than one-quarter, Mexico’s peso by almost one-third. And Brazil’s real has lost almost half its US$ value. 

Don’t even ask about the Venezuela’s bolivar. 

China’s tightly managed yuan or renminbi has moved from just over six to the US dollar at the start of 2014. The rate is now around yuan 6.58 to the US$. 

Meanwhile, the US$ rate for the TT$ and its pegged Caribbean counterparts remains written in stone. Against other world currencies, they have been carried sharply up—as they have against the Jamaica dollar. 

Given the economic fundamentals, it’s a move in the wrong direction. Most of all for T&T, with energy prices tumbling. 

Internationally, exchange rates shift, sometimes in a couple of seconds. It’s part of their job description. In most countries, most of the time, that’s not news. 

When the exchange rate is pegged to the US dollar, it’s different. Back in the 1960s, Britain has a fixed-value currency. Prime minister Harold Wilson devalued the pound by 15 per cent. There was a political earthquake. He was booted out at the next election. 

In the last couple of years, David Cameron has allowed sterling to drift down by much more than this. Few people raise even an eyebrow. 

For almost a generation, the TT$ has in theory floated—but it has in practice been pegged at just over six to the US$. Central Bank currency management has efficiently smoothed out the out week-to-week variations in currency flow. Foreign exchange reserves trended steadily upwards. 

Is that policy sustainable with oil prices down by more than two-thirds since mid-2014? It’s not just oil prices. As we heard at the Energy Chamber conference, the bad news extends to methanol, ammonia and LNG. Optimists talk of a turnaround in a couple of years, others are looking at the 2020s. 

In pure theory, market forces should be trending the TT$ downwards. They have not been allowed to. There has been only a marginal shift in exchange rates. 

Moving from a currency peg is not easy. A sudden drop in the TT$ would be big news, and big trouble. The price of US imports would jump. Fear of further depreciation could lead to capital flight and other nasties. 

In principle, the downward shift in other currencies should soften the blow. A TT$ depreciation of 15 per cent would leave purchases from Europe, Canada, Japan and South America slightly cheaper in local currency terms than they were in mid-2014. 

But it’s not that easy. Catch number one: most manufactured imports are Chinese. The yuan has depreciated too, but by less than other non-US currencies. 

Catch number two: importers are used to buying from Miami, and pricing in US dollars. Would they shift to new sources? Would they pass the savings on to consumers? I don’t know enough about logistics and purchasing to judge. 

Devaluation is a tough call. Suriname, like T&T, has been under pressure from falling commodity prices. The tax take from oil and gold plunged last year, and the bauxite industry shut down altogether. 

Suriname devalued its currency by 16 per cent in November, moving the rate to four Suriname dollars for US$1. Since then, their experience has not been encouraging. 

Inflation bumped up immediately. Worse, the currency continued to slide on the parallel market. The under-the-counter rate for US$ was up to SRD5.50 a couple of weeks ago. 

Then something odd happened. The head of the private-sector cambio owners’ association popped up at the head table of a finance ministry press conference. 

Next, the cambios supplied a small state-owned bank, Postspaarbank, with a flood of US$ of uncertain origin, which it offered for sale at SRD5.15. Asked where all this currency came from, Suriname’s president, Desi Bouterse, said he had no idea. Commentators asked whether money laundering source-of-funds controls had been relaxed. 

The influential Suriname Association of Trade and Industry is unhappy. The main commercial banks last week blocked large transfers to or from the Postspaarbank. “War breaks out,” headlined Suriname’s leading daily De Ware Tijd on Thursday. 

Suriname meanwhile has asked the IMF, World Bank, Caribbean Development Bank and Inter-American Development Bank for longer-term help. 

Britain’s David Cameron should count himself lucky.


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