Home' Trinidad and Tobago Guardian : May 5th 2016 Contents The Government of T&T is
seeking to raise $1 billion for
12 years, at a rate of 4.5 per
cent via a bond auction. This
is very much expected and
quite a few more issues are
necessary over the next few months in order
to fund our burgeoning budget deficit.
The public debt to gross domestic product
of T&T is expected to reach the 60 per cent
region in 2016/17 as our expenses remain
sticky and our revenues have plummeted. The
issue at hand is financial flexibility or rather
the lack thereof.
We have introduced so many pro-cyclical
measures during the last 15 years, so
entrenched into the economic landscape that
it is almost impractical to remove them in
any meaningful way, at least in the short term.
The fact that these measures are so
entrenched means that citizens have factored
it completely into their lifestyle and so the
political risk to removing them is huge. If it
is true we have the same poverty rate as in
2004, then it highlights the extent of the
failure of our policies.
Beyond the failed pro-cyclical measures,
we have grossly neglected counter-cyclical
measures that are now necessary. These are
measures designed to help citizens when the
economy declines and they find themselves
in problems. These new calls on the State are
taking place at exactly the time when we don t
have the resources to address these concerns.
Let s be clear there is no benefit, at this
time, in our economic life to be pointing
fingers since both sides of the political divide
are very much culpable in the current state
of affairs. Indeed, former ministers of gov-
ernment on both sides who have found their
voice were part of the problem when they
had the opportunity to positively influence
Our management of the economy has been
poor not because of our dependence on oil
and gas but rather because we failed to observe
a basic rule that every school child is taught:
save sufficiently for a rainy day.
When we were experiencing significant
inflows of oil and gas revenues we set up a
number of programmes that delivered free
education, pseudo state employment, free
medical services and medication, continued
subsidies on fuel and sought to maintain an
exchange rate even though, as I explained last
week, our currency should have been adjusting
to reflect our inflationary realities since 2008.
Either that or, as I was arguing between
2005-08, we could have---and in my estimation
should have---saved more of our foreign
exchange inflows thus not only further building
up our reserve position but also reducing the
impact on imported inflation. That could have
seen our currency appreciate during the boom
Today we are faced with a different propo-
sition. Job losses are on the rise but we don t
have any safety net to deal with people who
have lost their job. At least we can t support
those who have lost their jobs and those who
have benefited from the many "make work"
programmes on offer at the same time. Those
who have lost their jobs have paid taxes and
contributed positively to the country s devel-
opment yet they are left without support in
their time of need. We are now trying to man-
ufacture a solution when we don t have the
fiscal space to do so.
Currently, 20 per cent of our population is
over the age of 55, the largest this demographic
has been in our history.
Yet, we have challenges to maintain the level
of healthcare spend and this is coming at a
time when the call on state-funded healthcare
services are likely to increase exponentially
over the next couple decades.
Even more damaging is our accommodative
monetary policy position of the last decade
or so that has come despite inflation rates
being consistently above short-term invest-
ment rates of return. Here the fault lies not
so much with the Central Bank but with the
Central Government as the excessive spend
associated with energy revenues caused a
surplus of TT dollar liquidity, which pushed
interest rates down.
The problems associated with low interest
rates and high inflation were for a time
masked by the sucking sound that represented
money flowing into Clico executive flexible
premium annuities (EFPA) during the period
2005 until the collapse of its parent company
CL Financial in January 2009.
The attraction to the EFPA product was
the payment of the best rate of return relative
to the rate of inflation in TT dollars at the
time. It was a product that presented a false
premise of a guarantee, and was poorly reg-
ulated that much is known and accepted.
However, we are yet to recognise or even
admit that a mismanaged economy where
inflation was significantly higher than the
rate of return on traditional investments was
the reason why the product became so pop-
ular in the first place.
When the collapse came the liquidity pre-
viously associated with the EFPA as well as
new liquidity scared of the prevailing envi-
ronment flooded into the banking sector
pushing rates down to record levels. While
those low rates assisted in boosting credit
formation and, ultimately, economic growth
as measured by gross domestic product, it
Lower interest rates post the CL Financial
collapse provided support to property prices.
An accumulation of publicly available data
shows that real estate prices increased by
around 450 per cent from 1991 to 2008, with
the biggest part of the move occurring towards
the last five years.
Similar data shows prices dipped by 20
per cent from 2009 to 2012.
A drop in real estate prices post 2012 would
have had a significant negative impact on the
population due to the rapidly increasing val-
uations from 2003 to 2008. We were saved
from a potential fall out by the decline of
mortgage interest rates by over two per cent
from 2009 to 2012. This facilitated an increase
in mortgage demand as the real estate market
rebounded. The accompanying graph shows
how demand increased.
Lower interest rates and the ability and
propensity to borrow afforded many house-
holds the opportunity to purchase a home.
However, because of the rapid increase in
property valuations, that opportunity has
come with a hefty debt burden. Those debts
need to be repaid and the installment for
multi-million dollar properties at current low
interest rates leave very little margin for error.
Job losses and increases in the cost of living
will make debt servicing more challenging
going forward. This is coming after a period
when low interest rates meant the return to
savers since 2009 has been miniscule and
since 2004 the return has been below the
rate of inflation.
Many are without adequate financial buffers
and, as I said earlier, the State is limited in
its ability to assist.
The biggest challenge now awaits as a
mortgage is a variable rate instrument. This
means that if interest rates rise then mortgage
rates are likely to rise. The catalyst for rising
interest rates is the degree that the Govern-
ment has to borrow in the coming years cou-
pled with the credit rating of the country.
Many will look at the level of public debt
to GDP and suggest that we still have space
On the face of it that may be true. However,
to the extent that incremental borrowing
pushes up interest rates then the level of debt
on household balance sheets comes into focus.
Beyond that, we have a demographic
dynamic that sees 40 per cent of our pop-
ulation over the age of 40 years. That speaks
to a grouping that owns a home, likely car-
rying a significant mortgage and has not been
able to attract a rate of return on any savings
to satisfy their retirement objectives. Further,
the funding of their children s tertiary edu-
cation will now fall at least partly to them
as those subsidies are scaled back.
The cumulative impacts of all these meas-
ures are likely to be significant. Increased
debt is a call on future revenues so as this
demographic ages, Government borrowing
today will likely result in less benefits to this
demographic when they retire.
The descriptions of our challenges---both
from the Government and the various advi-
sory committees---have either focused on the
politics or sound bites. There is no point in
debating whether we are in a recession or a
period of structural adjustment if the impact
and consequences of the adjustments are not
broken down for every citizen to understand.
We are faced with a situation where the
private sector debt burden, when added to
the impending increase in the public sector
debt burden, can have significant conse-
quences for decades to come. Where is the
holistic discussion on this issue?
Till debt do we part!
Please email your questions and com-
ments to Ian Narine via email@example.com
BUSINESS GUARDIAN www.guardian.co.tt MAY 5 • 2016
Till debt do us part
To the extent
then the level
of debt on
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