The Consumer Price Index (CPI) is driven by food prices. Headline inflation is often unpredictable. High (demand for) food imports denote key effects by international food prices, although research finds medium-term trends, but ultimately non-stationary relationships in said prices’ impact lag and intensity using the Food and Agricultural Organisation (FAO) index. Less critical to the index is that local agriculture is highly vulnerable to adverse weather. Other demand and supply dynamics include VAT on select segments. Historically, recessions and decreases in headline inflation coincided since 1995.

Core inflation adjusts only for transitory food inflation. Energy inflation is not as volatile as in other economies but is manifested in other sub-indexes and measures, such as transport and exports in the economy. For example, GORTT committed to continue to gradually phase out its fuel subsidy. Other high-weight core sub-indexes include housing prices; furnishings, household equipment and routine maintenance; and recreation & culture. The Producers’ Price Index (PPI) is driven by building materials’ prices for many sub-indexes, often cement.

Core inflation was just below 1% as at March 2018. Moody’s and IMF each forecasted CPI above 2% and trending to 3%.

Policy Outlook: Exchange Rate and Interest Rate Expectations

Investments’ attractiveness depend on macroeconomic demand and supply dynamics, which are interrelated with GORTT fiscal policy and monetary policy of the Central Bank of Trinidad & Tobago (CBTT). The following puts depreciatory pressure on the USD-TTD rate: deteriorations in current account flows, debt sustainability and TTD-USD interest rate differentials.

Regarding the current account flows, it’s necessary to recall the energy price shocks in 2014 which slashed exports’ share of GDP from 67% in 2011 to 37% in 2016. CBTT statistics for the current account (CA) balance per GDP as imports are flat or higher while exports fell. Debt sustainability pressure regarded the worsened fiscal and primary balances, as well as debt measure trajectories. In other words, weaker prospects of an economy means a less competitive fair value for its currency.

The IMF estimated in 2016 that the TTD was 21-50% overvalued, meaning that TTD-USD should otherwise trade between TTD 8 and TTD 10. A 2016 UN ECLAC report listed the TTD as the single most overvalued currency in the Caribbean and Latin America. Lastly, in the 2017-2018 World Economic Forum’s Global Competitiveness Index, ‘foreign currency regulation’ surpassed ‘crime and theft’ and became the fourth most problematic factor in doing business in Trinidad & Tobago.

Thirdly, the 3-month TT-US differential reached -74 basis points in May from -18 basis points at 2017 yearend, driven almost entirely by the upward movement of the US 3-month Treasury rate. The US Fed signalled further hikes in the context of solid US growth outlook.

Policy responses to everything above involved fiscal tightening that since slowed, and de facto FX controls and a 25 basis point repo rate rise in late June 2018 on the monetary side.

Given the aforementioned key characteristics, medium-term GORTT positions will probably remain dependent on energy prices and local energy production as well as for benefits of additional budgeted sources of revenue generation to be slow to implement. Thus, despite sufficient impetus to invest externally, there are no significant capital outflows.

We expect the gradual depreciation and CBTT FX intervention to continue (to the above fair value range) via the de facto FX regime in the medium term. As a price-taker in (energy) export markets, it is probable that a cheaper TTD would not materially make exports competitive.

CBTT foreign reserves’ downtrend, in turn, will depend on energy exports’ USD contributions to the economy. Importantly, however, the regime limits capital outflows—it is and will likely remain difficult to exchange TTD for USD to meaningfully invest internationally so long as the regime can be sustained, measured by months of import cover.

The repo rate impact on the TTD interest rate environment regards the CBTT TTD GORTT yield curve, the commercial bank average prime lending rate, the CBTT mortgage reference rate and rates offered by local fixed deposits.

We expected a two- to three-month lagged increase of the same amount in prime and mortgage rates, gradually and stepped, respectively. Previously was a bout of eight (8) repo rate increases from 2.75% to 4.75% between late 2014 and 2015 (that coincided with the energy shock).

The CBTT TTD GORTT yield curve flattened over that period into 2016 via greater basis point changes—and volatility—in the short end of the curve. Fixed deposit market reads were not readily available, but commercial bank deposit rates have remained near zero since 2008.

The June 2018 CBTT rate hike decision regarded the aforementioned US rate hikes, as well as emerging market and domestic growth (the latter was energy led), and private sector credit growth.

In an interview on the Offer, Finance Minister Colm Imbert said (timestamp 25:25) that the crux of that decision was to prevent leakages or capital outflows given the US rate hikes. He also said that the 25 bps on its own will not have a material impact on local rates generally, but multiple increases had a clear impact in the 2014-2015 case.

The following section on local capital markets discusses the GORTT and local corporate fixed income investments; additional repo rate activity will certainly affect the coupon rates and prices of existing and new issues.

As of writing, US-China trade tensions, high US equity valuations and a flatter US yield curve—potentially heading to inversion—rings some alarms for what would have been the first US recession since 2009.

Except for trade uncertainty, against those were that US valuations were ultimately based on strong fundamentals and that the US Fed was far more prudent than in the past: a severe correction was not likely. Both considered, we did not expect as large a CBTT response as in 2014-2015, because the nature of the external shock was less direct to the local economy than before.

RFHL owns Republic Bank Limited, Republic Bank (Guyana) Limited, Republic Bank (Barbados) Limited, Republic Bank (Grenada) Limited, Republic Bank (Suriname) Limited, HFC Bank (Ghana), as well as Republic Securities Limited and other subsidiaries.

The RFHL Group was profitable over the last 5 years, with a 10.1% 5-year compound annual growth rate (CAGR) of profit after tax. In FY2017, RFHL recorded a profit after tax (PAT) of TTD 1.3 billion, up 39.7% from the prior year’s outturn.

RFHL recorded total interest income of TTD 3.8 billion in FY2017, an increase of TTD 186.4 million or 5.2% compared to FY2016 as the Group continued to expand its loan and investment portfolios and increase its footprint in the Trinidad and Tobago, Barbados, Suriname, Guyana and Cayman/Eastern Caribbean markets. Despite a TTD 123 million, or 4.7%, increase in total operating expenses, RFHL’s PAT improved by TTD 373.9 million, or 39.7%, in FY2017 compared to FY2016.

RFHL’s dividend pay-out ratio over the past 5 financial years (FY2013 – FY2017) averaged 59.5%, with the average dividend over the period being TTD 693.4 million.

RFHL continued to be well-capitalised with a tangible net worth (TNW) of TTD 9.2 billion as at September 2017, up 6.8% from TTD 8.6 billion one year earlier. RFHL’s TNW is the largest in CariCRIS’ sample of regional banks. The large TNW provides adequate coverage of total assets (adjusted for goodwill, revaluation reserves and intangibles) at 13.4%, above CariCRIS’ sample of regional commercial banks of 11.8%, and good capital coverage of non-performing loans (NPLs) at 11.6 times, up from 9.5 times as at September 2016.

Each subsidiary within the RFHL Group recorded strong capital adequacy ratios (CAR) as at September 2017, well above the CBTT’s minimum requirement for systemically important financial institutions (SIFIs) of 10% and the Group’s minimum requirement of 12%. Republic Bank Limited (RBL), RFHL’s subsidiary in Trinidad and Tobago, was thelargest commercial bank in T&T in terms of assets, with an asset base of TTD 45.3 billion as at September 2017 and was the 2nd largest in CariCRIS’ sample of regional commercial banks.

Supported by its network of 129 automated banking machines (ABMs), the largest in the country, and 41 branches, the Bank maintained its leading market share in 2017. RBL’s share of the market for net loans and advances and for deposits averaged 34.9% and 33.6% respectively over the past 3 years, with RBL having the largest real estate mortgage and credit card portfolios in T&T.

Notably, RBL contributed more than 60% to RFHL’s total income and PAT in FY2017.

TGU

TGU owns and operates a 720 Megawatt (MW) net capacity combined-cycle gas-fired power plant in the Union Industrial Estate in La Brea, South Trinidad, which currently is the largest power generation plant in T&T in terms of installed capacity. TGU contributes much to local energy security and improves the fuel efficiency of the entire grid. As at January 2016, the plant accounted for 34% of all power generation in T&T and delivered approximately 45% of the country’s average demand.

In 2017, TGU recorded 255% or a TTD 127.7 million increase in PAT to TTD 177.8 million over the prior year. This improvement, however, was primarily due to a 70.5% decline in tax expense for the year. Operating revenue fell slightly in 2017 to TTD 698.7 million from TTD 716.2 million previously, as finance lease income and capacity revenues fell by TTD 3.4 million and TTD 11.4 million respectively.

These revenue shortfalls were offset by a 25.3% reduction in operating expenses, leading to an operating profit of TTD 563.4 million, in line with that of the prior year. TGU’s dividend pay-out ratio over the past 3 years has averaged 212%, with the average annual dividend paid over the period being TTD 612.9 million.

VALUATION

Investment Recommendation & Suitability

NIF recommendation

1. Fair value offered, expected premium and tax benefits;
2. Expected high or oversubscription; and
3. Investment grade credit rating and stable outlook.

Allocation recommendations

1. Each Series is Highly appropriate for TTD fixed income allocations.
2. Opportunity for institutional interest rate risk management and cash flow laddering: namely Series B and Series C for fairly similar duration matching and/or Series A for timing short-term cash needs.
3. We highly recommend that individuals allocate with liquidity risk in mind—buy-and-hold strategies only—unless capital appreciation, approximated above, is sufficiently exceeded over several months, or any risk factors discussed above become subject to change.
4. Individual investors should generally consider allocating across each Series to achieve target ranges via the Offer (or eventually on the secondary market). Investment portfolios should exclude value of one’s home but must include investments in real estate, stocks and mutual funds in all currencies:

• Aged below 25—no more than 15% of total portfolio; tilt to Series C and Series B; about 3-0-0 or 2-1-0.
• Aged below 45—no more than 20% of total portfolio; tilt to Series C and Series B; and Series A as needed; about 3-1-0 or 2-1-1.
• Aged below 55—no more than 25% of total portfolio; tilt less to Series C than to Series B and Series A in turn; about 2-2-1.
• Aged above 55—no more than 30% of total portfolio; tilt less to Series C than to Series B and Series A in turn; about 1-2-2 or 0-2-3.