Nov 2010 Financial News

State of the economy: Inheritance and Expectation

Nov 11, 2010

If confidence is currency in the business world, then T&T is just about broke. The Government’s challenge: how to turn its inherited economy into an engine of economic expectation? The Central Bank Governor’s forecast is gloomy: unless the private sector begins to spend, the economy can experience another year of economic stagnation. Last year, a debate raged on whether T&T was in recession. One year later, no one’s debating the unhealthy state of the economy. It’s gone from recession, two quarters of economic growth, and now it’s stagnating.

The blame is being placed on the feet of the Government:
• It’s been criticised for taking too long—almost four months—to appoint about 50 state boards. This affected the companies’ daily operations and its ability to make investment decisions or carry out strategic initiatives.

• It’s been almost two months since Finance Minister Winston Dookeran announced his Government’s position to deal with Clico policyholders during his budget presentation. To date, negotiations are still on-going between a Cabinet team and Clico policyholders.

• The ongoing battle with the Public Servant’s Association (PSA) and the Government during its wage negotiations has lead to PSA workers taking regular industrial action- to the streets and on the job. There are 83,000 public servants. Labour Minister Errol McLeod would like to conclude negotiations by year-end.

Two variable factors make the country’s present state cause for concern: inflation and unemployment. Inflation now stands at 13.2 per cent and unemployment at 6.7 per cent. Governor Ewart Williams expects both these figures to increase in the coming months. With regard to inflation, Williams attributed the increases to local food prices. But he’s concerned that present inflation data is not showing the impact of imported food products such as wheat, rice and edible oils. “I’m concerned about what will happen a few months down the road,” said Williams as he delivered the Monetary Policy Report last week. For the past year, 24,700 jobs have been lost. Unemployment has steadily increased: from its lowest point at 3.9 per cent in the fourth quarter of 2008 to its present 6.7 per cent; the highest it’s been in three years. Most job losses are attributed to the country’s construction sector which is in decline.

Williams expects unemployment to reach 7.0 to 8.0 per cent.
Other negative indicators include:
1. Retail sales declined by 18.3 per cent
2. Non-oil imports declined by 39 per cent
3. Bank credit has contracted by 2.2 per cent.
4. House prices fell by 5.6 per cent.
5. Sales of new motor vehicles declined by 12.1 per cent.
A $49 billion budget by the People’s Partnership Government has yet to fill its required mandate to turn the economy around.
“Based on the latest indicators, real GDP growth in 2010 could be flat or at most 1.0 per cent with inflation in double digits and unemployment reaching perhaps 7-8 per cent.

The outlook for 2011 will depend critically on the extent to which we arrive at a formula to re-establish consumer confidence and re-energises the private sector to begin investing and creating job opportunities,” “The resurgence of private sector activity in 2011 is even more urgent since, after three successive years of fiscal deficits, the public sector cannot continue to be the sole engine of growth without pushing public debt to unsustainable levels.

The Governor envisages two scenarios:
Firstly, with the recovering of domestic private sector confidence, household spending and private investment will rebound. In this scenario, GDP growth is projected at two to three per cent, just barely enough to generate new job creation and a marginal reduction in the unemployment rate. Secondly, if global growth recedes, there’s implications for both T&T’s energy and non-energy exports. Such an event, said the Governor, may not promote an improvement in business and consumer confidence and would lead to another year of economic stagnation. “A clear strategy for returning the fiscal accounts to approximate balance in the next two or three years should be an urgent priority. The Government should seek to do this without unduly compromising essential social programmes and infrastructural investment. This would require some combination of non-energy tax reform, a review of current expenditure and some re-prioritisation of government capital spending.”

Williams said measures to bring inflation down to the six to seven per cent range by end 2011 will help in economic recovery. Economist Indira Sagewan-Ali pointed out the Budget 2010/11 has yet to be translated into actionable programmes aimed at stimulating positive economic activity in the form of employment and production generation, consumer spending and investment the economy. As a result, she says, the economy will continue to decline or remain flat.

“This is especially so as both domestic consumers and investors are largely risk averse and look to government behaviour as the lead to follow. Unfortunately, further to the budget announcement, instead of confidence building initiatives coming from government action, we have had the headlines dominated by new instalments of the Clico fiasco, stalled wage negotiations, bond payments in lieu of cash to contractors all sending a message that the state of the public purse is anything but healthy. Added to this we are yet to see signs of a roll out of initiatives stated in the budget,” she told the Business Guardian.

The economy’s contraction, she said, has negative implications for projected income and increasing fiscal deficit. “At this stage using deficit financing is one of the few options available to the Minister of Finance, whether this becomes a handicap or manageable is a function of what is done with the borrowing,” she said. For instance, she pointed out that financing increased wages to trade union members without negotiating a commensurate measurable increase in productivity would be heading down the wrong road. She insists that the Government has to make a reasonable offer to labour but, at the same time, labour has to be understanding of the state of the economy’s finances and the worsening impact too high wages can have on the cost of production, living and export capabilities.”


Source:
Asha Javeed
Trinidad Guardian
Thursday November 11, 2010

http://guardian.co.tt/business/business-guardian/2010/11/11/state-economy-inheritance-and-expectation