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Financial News

Jan 2015 Financial News

Perfect Storm Coming. RBC economist warns how low oil prices, shortage of US dollars could lead to higher inflation

Jan 28, 2015

Group economist at RBC Caribbean Marla Dukharan has predicted an economic contraction for 2015 if oil prices remain low.

She says low prices will result in weaker US dollar inflows which could then contribute to increased inflation.
Dukharan presented her outlook for 2015 during a forum hosted by the American Chamber of Commerce in Port of Spain last Friday.

The forum, titled “Half Empty, Half Full”, was held at the Radisson Hotel and attracted businesspeople from various sectors.

“In my estimation if you have weaker prices and weaker production and you have 0.5 per cent of growth last year, even though we saw very strong prices for our exports last year, my sense is that it’s quite possible that we can have a contraction this year,” she said.

“Inflation should have been trending downward because on an international price basis, commodity prices are coming down. We had an appreciation of our exchange rate last year which means that each US dollar cost us a little bit less, just under two per cent less. All of this would have led us to a decline in inflation which we had been seeing until the middle of last year,” Dukharan added.

Inflation Causes
Dukharan pointed to the shortage of foreign exchange as the possible cause of inflation.

According to her hypothesis, the difficulty in accessing US dollars to honour trade commitments has driven food importers in particular to lose credit terms with their overseas suppliers.

She noted that businessmen are also stockpiling US dollars in anticipation of bills coming due, which she noted ties up “precious working capital”.

At least one businessman present at last week’s forum admitted that the shortage of US dollars resulted in his suppliers putting his company, the TSL Group, on credit hold.

“This is something that has never happened to us in history,” said TSL chairman Nicholas Galt.  
Dukharan also hypothesised that the difficulty in getting foreign exchange has driven businessmen to pay for US dollar invoices in Euros, pounds sterling and Canadian currency.

“This means that they have to use a cross rate which cost more money than just buying US dollars alone and in some instances it has driven people to purchase US dollars on a parallel or unofficial market at higher rates or unofficial rates,” she explained.

“All these factors drive up the cost of importing which of course is passed on to us as consumers hence headline inflation around nine per cent,” she said.

Dukharan added:
“So if in 2015 we expect to see weaker US dollar inflows to the extent that we might even have a balance of payments deficit, it is my expectation that we might see some continued tightness in US money supply and if my hypothesis is correct we might continue to see some of this inflation.

The other side is that when you are seeing inflation at these levels of nine per cent, it means that your economy has to grow at above nine per cent at nominal terms for you to record real growth, and that’s a lot of growth.
In my opinion, this adds to the fact that we’re likely to see in real terms an economic contraction this year.”
 
Fiscal deficit could increase
Dukharan is of the view that the fiscal deficit could reach between $11 billion to $12 billion or 6.7 per cent of Gross Domestic Product if further reduction in expenditure is not executed.

“Government revised the fiscal budget at an oil price of (US)$45 a barrel and a gas price of (US)$2.25 per mmbtu. If you add the shortfall of $7.4 billion the Prime Minister announced to the initial budgeted deficit, we get a total of $11.7 billion as our fiscal deficit for the current fiscal year. That’s based on fiscal revenue shortfall from the energy sector,” she said.

She noted that in December Governor of the Central Bank Jwala Rambarran revised the country’s growth projection for 2014, down from 1.9 per cent to 0.5 per cent, and that implied that non energy fiscal revenues might also fall short from the original targets set in the budget.

“We have the perfect storm as this is an election year. This is the perfect opportunity to display a high level of fiscal and monetary prudence and responsibility,” she urged Government.

 

Source:
By Leah Sorias
Trinidad Express
Wednesday January 28, 2015

http://www.trinidadexpress.com/business-magazine/Perfect-Storm-Coming-290017051.html