Aug 2010 Financial News

High Expectations. Will the Govt deliver on campaign promises without increasing debt?

Aug 26, 2010

In 13 days, Trinidad and Tobago’s third deficit budget will be read.
It’s a budget billed with high expectations and great challenges. And according to Mary King, Minister of Planning, Economic and Social Restructuring and Gender Affairs, the economic times ahead d not call for the faint of heart. Especially since Finance Minister Winston Dookeran has admitted to looking for “wiggle room” in the face of an increasing deficit and stagnated economic growth. At the core is the question of whether the People’s Partnership can reconcile its ambitious campaign promises without increasing this country’s debt burden.

T&T’s economic profile
July 2010 data from the Central Bank point to:

• GDP growth in the first quarter of 2010 was 2.3 per cent
• A struggling construction sector
• Manufacturing sector operating below capacity.
• Consumer demand is still low and the distribution sector is still to pick up after a decline of some 14.2 per cent in 2009.
• The unemployment rate has increased to 5.1 per cent
• High liquidity in the market with demand for credit from the banks is declining (4.5 per cent over the last year)
• Investment in safe bets: government securities and treasury bills.
• An increase in our foreign reserves, now standing at US $9.1 billion, an estimated 12.5 months of import cover.
• The HSF now stands at US$3.1 billion.

King said while the country’s economic profile appears relatively optimistic, it should not be read in a vacuum. T&T, she explained, is still vulnerable to global economic dynamics. “The immediate prospects for our economy depend on the continuation of the recovery of the global economy and its increased demand for petroleum products. The off-shore revenue for the Government will depend on the growing production of petrochemicals, their prices and that of oil,” she said. The economy’s first quarter growth has been attributed to renewed activity in the energy sector, which grew by 5.5 per cent in the first quarter.

“The recovery of the Caricom market does not appear to be imminent and if (as it appears it will) the on-shore sector remains stagnant we could see increasing unemployment and increasing demand for social spending,” said King. She echoed the Central Bank’s determination that a strong recovery of the on-shore sector will be the key to a faster growth rate (expected to be 1-1.5 per cent for 2010) of output and employment in 2011. “Though liquidity is high, on-shore consumer demand is low, and bank credit is decreasing, the velocity of money has dropped, people are not spending. Hence, as a characteristic of our plantation economy, the hope for increasing economic activity on-shore, is for the Government to increase its spending,” she said.

This, she explained, is a justification for continued deficit spending for the next fiscal year. The hope? That this will put money into the hands of those who will spend. A feat that Central Bank Governor Ewart Williams couldn’t achieve no matter how many times he called on commercial banks to lower their interest rates.
“The short-term task for the Minister of Finance, as he hopes for increased off-shore revenue, is to stimulate the on-shore economy via deficit spending, yet be careful not to restart the bush fire of inflation,” she said.

Debt

With two previous budget deficits—$7.4 billion in 2008/2009 and $7.7 billion in 2009/2010—getting an accurate picture of the country’s debt profile is difficult. Economist Indera Sagewan-Alli pointed out that a third consecutive deficit budget has “the attendant implication of increased indebtedness, accumulated through borrowing to finance the last two years of budget deficits ($15 billion), state enterprised borrowings, borrowings to finance the previous government’s public sector investment programmes, institutional borrowings.”

“It has also inherited a situation where 36 per cent of government revenue is allocated to transfer payment (social programmes) which it would be hardpressed to reduce; let us not forget increasing unemployment and double-digit inflation as agriculture continues to real from drought to drowning and, of course, increasing crime,” she said. Fellow economist Hayden Blades explained that there are several levels of debt: Central Government borrowing, Central Government guarantee, bonds and loans. He pointed out that all bonds and loans come with interest rates so calculating total debt is a challenge.

And those figures don’t include the recently reported billions owed to the construction industry by the Government. Or a reported $96 million owed by Ministries to Udecott. King noted monies owed has implications for increases in government debt. But the Government estimates that, at fiscal year end, the deficit could be in the region of $5.8 billion, a bit less than budgeted. “The public sector debt will stand at 38 per cent of GDP excluding open market operations, the unguaranteed debts of the virtually bankrupt Petrotrin, and the yet to be decided the Government’s commitment to the CL Financial shareholders,” she said.

Inflation

Dealing with debt though isn’t the concern of 2010/2011 Budget.
It’s inflation. Inflation has spiked from 1.3 per cent in December 2009 to 13.7 per cent by June 2010 due mainly to food inflation.
“It is imperative that the inflation rate be arrested given its potential impact on wage demands and the positive feedback on the self same inflation. We have found ourselves in the catch-22 situation in which we need to spend on the on-shore sector yet we need to contain the inflation, both calling for fiscal activity that are mutually detrimental to each other.

This dilemma is a fundamental characteristic of our plantation economy in which energy sector fiscal revenues drive activity in the on-shore sector with their continuing non-energy deficit that spawns liquidity and inflation,” said King. So while the Government will stick to formula in the short term, they’re ready to make hard decisions to ensure that stimulation does not shift to social support. “The medium- to long-term solution is economic restructuring which will take some hard-nosed decisions and the ability to stick with new thrusts into economic research and experimentation that are non-deterministic and higher risk,” she said.

Budget Financing

Just how will the Government finance the way forward?
Dookeran has said that the Government is engaged with multilateral lending agencies like the Inter-American Development Bank and the World Bank. Blades explained that to maintain its high recurrent expenditure, the Government will have to borrow in the short term. But he’s wary about the Government borrowing to meet its recurrent expenditure. “Even as he already signalled the coming of a deficit budget, us analysts will be looking at where and how he proposes to spend borrowed money: will it be to meet recurrent expenditure at which we will frown or will be activities that will facilitate income earning activities, at which we will nod in agreement for then he will be displaying the foresight to put measures in place to repay debt while engendering growth,” said Alli.

Dookeran has already given some hints on what will be the Government’s first official policy statement:
• The Government will retain billion-dollar social programmes
• A significant change in the Public Sector Investment Programme
• The Government has committed to $584 million to meet the cost overruns of the Scarborough Hospital
• Greater regulation for state-owned special purpose enterprise companies (SPECS) with the possibility of being restructured to open their ownership to the public.
• A reduction of the petroleum profits tax to 35 per cent to encourage oil and gas exploration.
• An aggressive investment strategy which will see the overhaul of and restructuring of the controversial IFC and eTeck
• An Economic Development Board

Dookeran has also stated that it will indicate the Government’s position on CL Financial and Clico. The former administration has already spent $5 billion on the failed Duprey assets. Alli said Dookeran must show through his budgetary policy statements how the Government plans to diversify the economy beyond oil and gas, even as it stimulates exploration to increase the volume of proven reserves of oil and gas available for monetisation. “In the final analysis, while the minister has it easy because he will not be judged on the failures of the recent past budgets. On the other hand, he has inherited challenges which he must attack head on through strong and effective budgetary initiatives to put a stamp of confidence back into the economy. To do otherwise is not an option,” said Alli.


Source:
Asha Javeed
Trinidad Guardian
Thursday August 26, 2010

http://guardian.co.tt/business/business-guardian/2010/08/26/high-expectations