Aug 2016 Financial News

ECLAC: T&T economy expected to contract 2.5%

Aug 25, 2016

The Government has realised that energy prices will not be rising any time soon and so they have begun to take a position to stabilise the economy, says Ravi Suryadevara, president of American Chamber of Commerce of T&T (AmCham TT).

“It appears as though they were monitoring the international situation to discern whether or not a petroleum price rebound was likely. At this point, it appears as though they have come to the sensible conclusion that there is unlikely to be any significant petroleum price rebound and are preparing to deal with the implications of this ‘new’ reality for the country,” he told the Business Guardian on Monday by email.

The Economic Commission for Latin America and the Caribbean (ECLAC) has projected that T&T’s economy’s gross domestic product (GDP) will contract by 2.5 per cent this year. This means T&T’s economy is in the bottom five worst performing economies in Latin America and the Caribbean in 2016.

“We believe that ECLAC’s projection appears to be sound considering that the prospects for growth in both this fiscal and calendar year are slim. Having come into office with a budget due, it appears that the new government attempted to stabilise the economy. Since then, they have been sending signals about the precarious position of the economy pointing to the need for deep reform.”

Suryadevara also said through action on programmes such as GATE and the decrease in the fuel subsidy, the Government has started tinkering with the necessary structural reform.

“We hope and expect that in the 2017 budget, the Government will lay out a plan, along with specific action to address inter alia, institutional strengthening, improvements in the business environment, enhanced public sector efficiency, greater transparency in public procurement and facilitation to sectors that can provide future growth. We are also looking forward to a comprehensive statement on the public debt and debt management as this, too, is an area of concern.”

He also referred to an article in Bloomberg on Monday, which questioned the use of GDP as the sole way of measuring how a country’s economy functions.

Suryadevara said the country has to look at more than just examining the GDP to understand the economy.

The Bloomberg article stated: “Gross domestic product is so 20th century...the problem is—whether compiled by production, income or expenditure approaches—GDP is increasingly struggling to keep up with the pace of economic change. In an age where $10 can buy one compact disc or a month of unlimited music streaming, it’s getting tougher to put a price on economic output. And, as an aggregate measure that ignores distribution effects, GDP has masked rising inequalities that helped fuel anti-establishment politicians like Donald Trump or the backlash that contributed to Brexit.”

ECLAC report

According to ECLAC’s Economic Survey of Latin America and the Caribbean published on July 26, six countries are expected to show an economic contraction in 2016: Venezuela (-8.0 per cent),

Suriname (-4.0 per cent),

Brazil (-3.5 per cent),

T&T (-2.5 per cent),

Ecuador (-2.5 per cent) and

Argentina (-1.5 per cent)

In an ECLAC media release on August 8, the institution said it had revised downward its growth projections for the region’s economic activity, forecasting an average contraction of -0.6 per cent in Latin America and the Caribbean in 2016. This new estimate reflects that the contraction experienced by regional GDP in 2015 (-0.5 per cent) will extend to the current year.

“The new projections evidence the difficult global scenario in which low growth continues in developed countries, there is a significant deceleration in emerging economies (China in particular), increasing volatility and costs in financial markets, and low prices for commodities especially hydrocarbons and minerals.”

Resource economies impacted

Economist Dr Ronald Ramkissoon told the Business Guardian on Monday that the fact that T&T is among the worst performing countries in the region shows that it is not the only country that has economic woes but is similar to other countries in the region who also rely on oil, gas and similar commodities to drive their economies.

“T&T has a natural resource-based economy and the price of our major export-based commodities has been on the decline for several years as well as on the production side. We have been hit by a ‘double whammy’ with respect to that. That straddles two governments,” he said.

He said while the oil-based economies like T&T have been hit hard, other service-type economies in the region have seen some growth.

“That is because there has been some uplift in the United States economy from where the tourists would come. Our economies are externally driven and this is the classic case, so if you have growth in the developed economy then you tend to have some growth in the domestic economy,” he said.

He said it is standard practice and policy that when a country is hit by a decline in its major commodity or revenue earner that the Government’s ability to spend to drive the economy is constrained and curtailed.

“This contracting phase of the economy will be with us for a few years. We are in an adjustment phase and in such a phase you go through negative growth and a contracting economy. The country has to bring its expenditure in line with its revenue which the country should have been doing over the last five to six years. We did not do it and continue to generate deficits,” he said.

He added only when the Government takes tough decisions and the period of economic adjustment is completed then economic growth will resume.

“There are certain capital projects that the Government has, some highways, buildings and so on. Time will tell how successful they are at generating growth. But I think one would have a few years of adjustment before the country begins to see growth.”

Poor economic planning

Dr Roger Hosein, senior lecturer at the St Augustine campus of the University of the West Indies (UWI), told the Business Guardian that T&T’s economic failure is a clear indication of the boom/bust scenario and terrible fiscal planning.

Apart from ECLAC’s statistics, he also referred to the International Monetary Fund’s (IMF) statistics which indicate that real GDP is projected to decrease by 2.7 per cent in 2016 having declined by one per cent and 2.1 per cent in 2014 and 2015, respectively.

“Indeed, while in this time period the state collected energy sector revenues, it spent a very large amount as well on transfers and subsides. Indeed the State engaged procyclical behaviour seemingly deducing that it could forecast the increase in petroleum rents and in turn increasing state expenses.

“This worked for a while but when the energy commodity price super cycle came to an end the inertia in the expenditure pattern of the State triggered a series of fiscal deficits as the fiscal revenues of the State fell in relation to its fiscal expenses.”

Hosein pointed out that the ECLAC did not make detailed “probing comments” on what would happen with exports, imports and the current account balance.

“Likely the inertia of import consumption in the presence of falling export revenues would trigger a series of current account deficits and the stock of international reserves that was built up in the last few years would decline with an associated decrease in the economy’s import cover ratio.”

As he has done in the past, Hosein said all this in indicative of the need to diversify T&T’s economy.

“Unless we urgently diversify this economy—and we are currently doing very little in this regard—we will continue to see the value of the TT dollar slide. This is a new normal and all hands on deck is required in recalibrating the economy. Strong leadership, as the economy had in the mid 1980s, will be required and waiting for oil or gas improvements to bail the economy out as we move forward cannot be the main policy strategy.”

 

Source:
RAPHAEL JOHN_LALL
raphael.lall@guardian.co.tt
Business Guardian, BG6 and BG7
Thursday August 25, 2016