Home' Trinidad and Tobago Guardian : January 28th 2016 Contents BG14 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt JANUARY 28 • 2016
It is often said that history does not repeat itself
but is rhymes (See side bar written in July 2010).
T&T is grappling with a challenging economic
situation due to falling oil and gas prices and this
is coming at a time when a new administration
has come in and is seeking to come to grips with
the challenges at hand. A budget deficit is assured for
a couple years and so there will be a need to borrow in
order to balance the national budget.
The situation is not exactly the same but there is a
similarity to the beginning of the People s Partnership s
term in office just over five years ago. Back then, just
as now, there was a global sense of economic angst as
challenges in Europe---specifically with Portugal, Italy,
Ireland, Greece and Spain---were roiling markets around
There was uncertainty over the solidity of the US
economy to the extent that the US Federal Reserve had
to embark on unprecedented policy measures in order
to keep the economy moving.
In 2009, the price of oil had fallen to around US$55
per barrel rising to around US$75 in 2010 but this must
be seen in the context of oil at over US$120 leading into
The tepid energy prices at that time did not spell
disaster but, when coupled with the collapse of the CL
Financial empire in January 2009, the impact on the
economy was significant. In 2008, the gross national
income per capita was US$28,350. By 2011, that number
had fallen to US$24,990. Over the ensuing years it has
not recovered to the 2008 level.
Lower energy prices after the global financial crisis
plus the fallout out from CL Financial meant there was
a significant fall off in the domestic economy. This
becomes clear when you recognise that the spending
derived from what was then the best-paying investing
instrument, the best-paid commissioned agents, one of
the most significant advertisers and a company actively
engaged in construction came to a screeching halt.
The PP Administration had the political capital at the
time of assuming office to address the economic issues
of the day. The call was made to the private sector to
step up to the plate and, while this was taking place,
they sought to maintain the levels of government spending
by running a deficit for their first budget in office. The
circumstances of today are not significantly different.
However as the years went by, the call to the private
sector and indeed the much-touted tripartite arrangement
between government, business and labour failed to pro-
duce significant results.
As political capital began to wane it became more
challenging to make the difficult choices and, eventually,
populist measures became the policy of choice as political
expediency won out over sound economic principles.
T&T ran budget deficits for each year during the term
of the PP Administration.
If we were to make the same mistake again---especially
if oil prices remain lower for longer---we would be faced
with significant challenges down the road. These chal-
lenges were anticipated in 2010 and were discussed here
on Thursday July 28, 2010, just a few months after the
PP Administration assumed office.
The catalyst for that article was a comment from the
then Minister of Finance where he said: "The country s
debt stock as a percentage of GDP has now passed the
50 per cent threshold which economists use as the area
Having just assumed office it was customary then, as
it is now, to point out the failings of the past administration
in increasing the country s debt burden.
The comment was also made in the context of calls
by many that the country still had the capacity to borrow
in order to fuel economic growth as opposed to cutting
back. It should not take a big memory jolt to reflect on
the growth versus austerity debate of 2010, especially
as it represented the distinction between the US and
Europe at that time.
Back then under the headline: "This Time It Really
Is Different," I suggested "usually everything seems fine
until it isn t and the point of crisis is more a question
of a lack of confidence than an accounting ratio (debt
to gross domestic product)". The point was made that
in the 1990s Russia got into trouble with a debt to GDP
ratio of 12 per cent while Japan has crossed 225 per cent
without a major hiccup.
What matters first of all is the rate of change. I pointed
out back then that, in 2007, the level of public debt to
GDP was 26 per cent. By 2010 it had crossed 50 per
cent. The point to the then administration was: "a ratio
that doubles over a couple of years is much more alarming
than one that has moved from say 48 to 50 per cent
over the same period. In T&T, the rate of increase of our
debt to GDP has been accelerating and despite protes-
tations to the contrary this must be of concern. As anyone
who has tried to rapidly decrease the speed of a car will
know there is bound to be some dislocation when moving
from a period of acceleration to deceleration."
The side bar to this article represents exactly what
was written in July 2010.
As the country embarks on another round of borrowing,
trying to prevent dislocations from excessive expenditure
levels from previous years, we should come to appreciate
how history rhymes. The challenges now are similar and,
in the end, there is always a price to pay.
Ian Narine can be contacted via email
In the context of understanding what level of debt will prove our tipping
point it is not the expected outcome that should be the focus but rather
the probability that we could be faced with an extreme outcome. T&T
can have a lower level of debt but be subject to more variable outcomes
which makes it a lot more risky for the purchasers of our debt than a
country with significantly higher debt burdens but less variable outcomes.
As a result of our dependence on oil and gas, we are at the mercy of
global energy demand. Our economy is far from diversified. While there
is the suggestion that we will be better served focusing on ways to grow
our GDP, as opposed to focusing on the debt level, recognise that oil and
gas revenues are volatile.
Any future revenues achieved from economic diversification would not
have stood the test of time and so this can also prove to be volatile. The
bottom line is: even if we were to achieve GDP growth, globally we are
in a period where recessions are likely to be more frequent and so we
must plan accordingly.
Looking forward, note that our reserve to production ratio is declining
and we have not been able to shore up our reserve position because of
a lack of exploration activity.
Another lesson from the recent financial crisis suggests there is a direct
correlation between commodity prices and global growth. A slowdown
in global growth could see commodity prices fall. Slowdowns also lead
to a reduction in liquidity within the global financial system.
Now imagine a fall in oil and gas prices and a decline in global liquidity
coming together again at a time when state-owned energy enterprises
need financing. Would it not then fall on the State to pick up the slack
at a time when revenues are also falling due to the same decline in oil
and gas prices? These types of movements are called pro-cyclical, in that,
they amplify the existing trend. In this case, the amplification is to the
downside. Can you now appreciate what I mean when I say everything
will seem fine until it isn t?
This is not about painting gloom and doom scenarios but rather making
sure we understand the risks out there and that we have a level of flexibility
to deal with these risks were they to materialise. To the best of my knowl-
edge, rating agencies don t deal in extreme scenarios, so taking a rating
at face value and suggesting that everything is OK on account of a good
rating is not the brightest idea; another lesson from the recent crisis.
One of the bright spots in the T&T equation is the fact that, by and
large, our assets are negatively correlated with our liabilities. Most of our
borrowings are in longer-term bonds carrying a fixed rate and denominated
in TT dollars. If we run into problems, the cost of servicing this debt will
actually fall. This is because a crisis of this nature usually brings with
it higher levels of inflation and or a devaluation of the currency. The debt,
in real terms, actually declines while the size of our assets---foreign currency
reserves and state enterprises---would tend to rise. However, spare a
thought for how such a scenario will impact your day-to-day life.
Some have also suggested that because rates are low we can issue more
debt now to lock in the low rates, using the funds to grow our way into
prosperity. That is fine except that for it to work we need to sell our debts
externally in hard currency.
Our local currency debt is likely to be held by pension plans and long-
term investors and low rates in a high inflation environment means these
long-term savers will not earn the required returns to meet their own
obligations resulting in another problem altogether.
Further, when rates begin to rise---as they must---and there is a dis-
proportionate level of low interest rate debt in circulation, the repricing
of these debts will lead to write downs for the bondholders creating
another problem again.
If we issue our debts on the external market then we move into a state
where our liabilities become more correlated with our assets resulting in
a potentially pro cyclical scenario where a downtrend is amplified as our
hard currency declines, at the same time, our debt service increases.
Once again I reiterate that the objective is not to paint a picture of
doom and gloom but rather to highlight the complexities involved and
further to make the point that tradeoffs are required. We clearly did not
do what was required when we had the capacity and the flexibility to do
it. Now we must make tough choices all the while understanding that
each action carries it own set of risks.
There is no free lunch.
T&T's debt burden
...published July 2010
This time it
really is different
LEFT: Finance Minister
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