Home' Trinidad and Tobago Guardian : May 7th 2015 Contents Last week s downgrade of
T&T s credit rating by
Moody s has made the
rounds both from an eco-
nomic as well as a political
perspective. May I suggest
that much of political dia-
logue offers little more than
On the one hand, you cannot accept previous
positive ratings for what they were and then,
when faced with a downgrade, claim that it
is unjustified. At the other extreme, you have
the prophets of doom who have failed to recog-
nise their substantive role in the state that we
The truth is T&T is well on course to blow
away another boom. It is only when the blame
game is stopped that we can actually move
to address the real and pressing issues. To be
clear, this recent downgrade represents a col-
lective failure and, in simple English, you reap
what you sow.
Let us start with two basic truths.
First is that the economic cycle is longer
than the political cycle. To be blunt, economic
malfeasance from a previous term by a previous
administration will take time to become visible
as economic malaise. The second is that to
whom much is given much is expected and
this administration---with the largest majority
since 1988---have not used the political capital
at their disposal to effect the necessary reforms
that were required.
For context appreciate that, as reported in
the Trinidad Guardian on December 24, 2014
(four months ago), the other rating agency,
Standard and Poor s (S&P) reaffirmed T&T s
rating of "A" with a stable outlook. T&T s
economy did not suddenly fall off a cliff in
four months. What you are witnessing is the
steady erosion of our economic fortunes. Those
fortunes were achieved, not by any overt action
on the part of our politicians, but rather
because energy prices went up during the last
decade and now they are falling.
Last December, S&P as quoted in the
Guardian stated: "The stable outlook reflects
its expectation that T&T will continue to enjoy
a sound external profile thanks to persistent
current account surpluses and largely local
financing of the public-sector deficit. The
increase in exploration activities in the oil and
gas sector in recent years should sustain energy
production over the coming decade, contribut-
ing to long-term economic growth.
"A sustained fall in global energy prices
would hurt fiscal revenues, dampen GDP
growth, and weaken T&T s external liquidity.
Poor GDP growth could result in a rising gen-
eral government debt burden, potentially exac-
erbated by unexpected contingent liabilities
from public-sector enterprises.
"Failure to take timely and sufficient steps
to address the deterioration of the country s
fiscal and external profile could result in a
downgrade. Success in boosting energy explo-
ration and production levels, as well as in
enlarging downstream activities, could improve
long-term GDP growth prospects. That, along
with steps to strengthen non-energy fiscal
revenues, would gradually improve government
finances and reduce the sovereign s debt bur-
Bottom line: it s about oil and gas prices
and our ability to increase production in order
to offset the effect of price declines and main-
tain a stable revenue base. We do not need a
rating agency to tell us that we will become
increasingly challenged going forward. It is as
simple as that.
For the past 15 years, we have been living
under the illusion of prosperity and one only
needs to look at the Moody s report from 2007
to appreciate this point. One year after our
2006 upgrade we were told that "despite the
continued rapid improvement in most key
debt indicators over the past year, T&T s ratings
are lower relative to other energy producers."
Moody s further went on to point out that
"the rapid pace of growth has created a number
of challenges. There are clear signs that the
economy is operating at full capacity and over-
heating, with raw material and labour shortages
in some sectors.
This, together with a significant influx of
foreign exchange and a large non-oil fiscal
deficit, has led to price pressures. After aver-
aging around 3.0 per cent for a number of
years, inflation spiked to 5.6 per cent in 2004,
7.2 per cent in 2005 and 9.1 per cent in 2006."
By 2008, we were well past 10 per cent infla-
Back then we were warned by Moody s that
"the relevance of inflation to the rating is due
to the possible impact this can have on external
competitiveness via a real effective exchange
rate (REER) appreciation... a significant REER
appreciation could complicate the outlook for
other exports as well as intensify import
demand. REER appreciation has picked up
over the past two years...this is a situation
that can deteriorate easily and that is worth
How do you diversify an economy when
runaway inflation as a result of a misguided
construction boom will negatively impact your
export competitiveness outside of the energy
sector? As I said it takes time for these things
to filter through the economy and for their
effects to become manifest.
Taking data from the World Bank and using
2010 as the base index of 100 our REER has
appreciated from 76.5 in 2005 to 117 in 2014.
That is a 53 per cent move while our actual
exchange rate has remained relatively steady.
If you manage the exchange rate but don t
manage the fundamentals that goes into deter-
mining the exchange rate then disconnects
will emerge. It may take time to become man-
ifest but that is what we are now experiencing.
It should be clear why our economy has
become increasingly predisposed to imports
and why we are less export competitive. It
should also be clear why there are shortages
of US dollars, why there is now hoarding and
why we have had to increase the pace of US
These challenges that also included an econ-
omy in recession and significant unpaid expen-
ditures were assumed by the current admin-
istration upon taking office.
They did not address the expenditure side
of the equation as transfers and subsidies actu-
ally increased. Their justification was that the
economy was in a morbid state and increased
government expenditures was the way to keep
While I do not totally agree even if one were
to concede that argument the failure to address
low hanging issues on the revenue side were
in the context of today s situation just as reck-
less as the spending by their predecessors.
The campaign promise of no new taxes did
not mean the continuation of lax tax collection.
These are the reforms that the rating agencies
would look to in order to gauge sustainability.
We were promised a balanced budget by
2016, however with the current fall off in oil
prices that may no longer be possible. Further
we have gone five years without dealing with
the property tax issue with the revenues fore-
gone and even more damning has been the
failure to introduce a system of gaming taxes.
A couple years ago the Minister of Finance
gave a figure of $300 million as possible annual
revenues if the gaming industry was properly
taxed. How useful would those revenues be
The issue of tax non-compliance has also
not been addressed in a sustainable manner
over the past five years. Two tax amnesties in
five and three in seven years is not a sustainable
approach and is rather counter productive to
efficient tax collections as taxable persons
may wait for the next amnesty instead of
meeting their obligations.
We all have a responsibility to shoulder and
the issue of tax non-compliance is not one
only for the State but the general public also
has questions to answer.
How many times have you gone to a place
of business and be told they only accept cash,
or don t provide a receipt with a VAT invoice
or a payment for a business service is made
out to an individual? Yet the same persons
and entities that engage in such practices
ostensibly benefit from subsidised gas, free
education for their children, subsidised inter
island transport, low electricity rates and the
list goes on.
According to Moody s transfers and subsidies
account for 65 per cent of our total expen-
In 2010 the Minister of Finance announced
a tax amnesty with the expectation of collecting
$7 billion. The size of our budget deficit in
that year was $7 billion. At the time he sug-
gested that if we paid our taxes there would
be no deficit.
On this course we only have to take a look
at what is happening to Greece to see where
our future lies. Let me suggest that one of the
key differentiators between the US, Canada
and Northern Europe and their Southern Euro-
pean counterparts is the effectiveness of their
system of tax collection.
These are the places that we consider to be
prosperous. Something to consider as the illu-
sion fades away.
Ian Narine is a broker registered with
the SEC and can be contacted at
MAY 2015 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG17
Living under the illusion of prosperity
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