Home' Trinidad and Tobago Guardian : May 14th 2015 Contents tricity rates among others. It does not matter
whether you are a millionaire or a pauper.
In fact the ability of the wealthy to benefit
from these types of subsidies is actually
greater for the wealthy will own more and
therefore consume more of the subsidy as
evidenced by diesel powered SUVs and air
For the average person these subsidies
mean that when considering which vehicle
to purchase you can easily overreach in the
amount you spend in part because you
underestimate the recurring cost of fuel as
you have come to expect that the subsidy
will always be there.
The catch is that if you are conscientious
about your finances and choose not to over-
reach, someone else will and consume the
marginal amount of the fuel subsidy that
you have forgone. The impact on the Treas-
ury and, by extension, you as a citizen is
the same. Hopefully you appreciate that
subsidies by their nature contribute to inef-
ficiencies and in many instances wastage.
Similarly, you may not set aside money
for your children s education on account of
the GATE programme that provides free
tertiary education. The question is not
whether GATE exists now but rather whether
you think it is likely to be in place when
your child is ready to use it.
Around half of T&T s population is within
25 years to retirement or retired. A number
of increases have also been offered to senior
citizens in the recent past and the cost asso-
ciated with providing these benefits will
increase over time as the population ages.
Citizens heading into retirement must ask
themselves how much they intend to rely
on the State to provide for them in retirement
through grants, pensions, free medicines,
free hospital care and how much they are
prepared to set aside for themselves.
The average 40-year-old in T&T has to
consider these issues in the context of the
credit rating downgrade and hopefully it
provides a wake up call. From 1992 to 2007,
the T&T economy grew in terms of gross
domestic product every single year. This is
equal to the working life of the average mid-
dle aged person in T&T.
An expanding economy meant increasing
job opportunities, upward mobility, salary
increases and more benefits and perks. It
also meant greater amounts of subsidies as
time when by.
Going forward, that is likely to change in
a number of ways. In the first instance, the
country is using its energy resources with
each passing day and so in 20 years time
consider the level of revenues that can be
derived from this sector and how adequate
will those revenues be to meet your needs.
Even if we get lucky it is imprudent to base
your future on the possibility of expansive
oil and gas finds and hope that prices at
that time will also be as supportive.
It means that the onshore economy is
going to have to play an increasingly larger
role in generating government revenues to
meet its obligations. Yet our birth rate in
T&T is just below replenishment levels
which means that all other things being
equal we will continue to be faced with an
increasingly aged population.
As more people move into retirement and
live longer there will be a smaller workforce
of persons who can be taxed to provide the
subsidies and transfers that we have grown
The downgrade should bring to every cit-
izen the realisation that as far as day-to-
day consumption goes, we are overspending
and you are also likely under saving as far
as saving for big ticket items like your chil-
dren s education and retirement.
Realising this and acting on this realisation
creates another problem known as The Par-
adox of Thrift. If people recognise they have,
in effect, been downgraded as well and take
steps to rectify their situation then they are
likely to consume less. As this happens eco-
nomic activity slows with a knock on effect
on tax receipts for the State and job oppor-
tunities for individuals.
What often happens in situations like this
is that the Government picks up the slack
through increased spending. This is the aus-
terity versus expansion debate that has taken
place around the world for the past seven
The problem is that in our years of plenty
we have not saved as needed. I have made
this point at least once per quarter every
year for the past 11 years of writing this col-
umn. Our overspending during the past
decade saw claims from many in the busi-
ness sector that they were being crowded
out by government. Over the last five years
there have been calls to the business com-
munity by government for increased invest-
ment with the figure $7 billion often being
bandied about. This reversal of roles speaks
to the paradox of economic mismanagement.
A business sector that is crowded out by
government spending will not seek to invest
in plant and machinery for the long term
because they know that spending is unsus-
tainable. Instead, they will import and sell
in order to profit short term from the
increased spending. When the economy
slows down, as it did in 2009, the business
sector will be unwilling to take up the slack
meaning that government, having positioned
themselves as the only game in town,
remains as such.
How we balance the need for cut backs
with the inventiveness to engineer an entre-
preneurial class prepared to invest in onshore
T&T is the challenge that lies ahead of us.
We have all been downgraded. If we were
to ever be upgraded again, we will have to
overcome this challenge.
Ian Narine is a broker registered with
the SEC and can be contacted at ian.nar-
BUSINESS GUARDIAN www.guardian.co.tt MAY 2015 • WEEK TWO
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T&T was recently downgraded by
the credit rating agency Moody s.
It may not have been properly
understood before the fact but
the reality is that every state
enterprise that is rated by
Moody s will be downgraded
along with the country rating.
The simple reason is that whether explicit or implied
investors will expect the Government to be supportive
of a state enterprise as to do otherwise will have a
further negative effect on the country rating putting
in place a downward cycle. It means that those ratings
will be directly linked to the State s ability to support
and once the country rating falls there will be a knock
Having dealt with the country rating and the asso-
ciated entities, what about you?
As a citizen of T&T have you been downgraded?
Almost every discussion to date focused on the
role of the Government. We take positions depending
on whether we were already predisposed to thinking
that it is not as bad as it seems, or where our pre-
disposition rests with the view that the economy is
crumbling. Few questions have been asked related
to how citizens will be affected by a downgrade from
a credit rating agency.
Appreciate that a credit rating speaks to one s
ability to pay one s debt obligations. T&T still has
an investment grade rating. It is analogous to you
earning $10,000 per month with $2,000 of your
salary going towards servicing your debts. If your
earnings falls to $8,000 a bank will still see you as
a good credit risk but they will be looking at you a
bit closer going forward because your margin of safety
Note $2,000 on $10,000 represents 20 per cent
of your earnings going towards debt. At $8,000 it
means 25 per cent of your earnings goes towards
debt. To convince the bank that your ability to service
your debts remains at the initial level you may want
to either increase your revenues or reduce your expens-
es so that in percentage terms the amount available
for debt servicing remains the same.
In simple terms that is the situation that T&T
finds itself in now and how this is addressed going
forward will have a direct impact on you. For an indi-
vidual to reduce his expenses as suggested above one
has to consider the mix of fixed versus variable costs
and discretionary versus non discretionary income.
Sometimes it is not always clear cut.
For example, you have to spend money on food
so at some level those costs are fixed. How much
you spend depends on your lifestyle choices. If your
salary decreases you may cut back and simply purchase
the basics. This will then flow down to your ability
to service your debts.
At a country level, T&T has a number of subsidies
and benefits given to the population. Many of these
are broad based and given to all citizens regardless
of need or ability. All citizens have access to a fuel
subsidy, to free tertiary education, to subsidised elec-
Have you been downgraded?
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