Wednesday, January 24, 2018

Key factors in 2013 outlook


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This recession has been given the term the "Great Depression" because it has been estimated to be the longest and deepest since the 1929 depression. It was not anticipated that the decline would have been so prolonged and many governments have attempted to spend their way back to positive growth. The result has been ballooning fiscal deficits and debt-to-GDP ratios and falling credit ratings amongst the major economies as they have attempted to muddle through.

The eurozone has presented a shining example of brinkmanship in its attempts to deal with the difficulties posed by the debt crisis of Greece, Spain, Portugal and Italy. In the US, not only have we seen state intervention and nationalisation, but there has also been quantitative easing (printing money and expanding the money supply), versions one, two and three.

In T&T, the response has been broadly similar. Much to the annoyance of its critics, the Manning administration indicated that it would finish the projects it had begun, but would rationalise recurrent expenditure. It calculated that it had built sufficient surplus balances to allow it to accommodate at least three deficit budgets and to maintain the level of economic activity. The debt-to-GDP ratio was then a healthy 36 per cent. As a result 2009 was a deficit year and 2010 was virtually a balanced budget.

The Kamla Persad-Bissessar administration, despite its rhetoric about stabilisation and building a platform for economic growth and growth poles, has continued this policy stance deficit financing with an accommodating monetary policy whilst waiting for the turnaround to arrive. In the process however, it has increased the level of recurrent expenditures in face of declining revenues.

There have been deficits in 2011-12 and 2013 will be the same. Indeed, the Finance Minister has promised a return to a balanced budget in 2016, suggesting at least a further two years of deficits which will bring the total number of deficits to seven years. Meanwhile, the debt-to-GDP ratio is climbing steadily.

There are clear limits to the success of fiscal expansion even where your currency is an international reserve currency. The eurozone is an apt example. Yet, despite the successive fiscal deficits, the T&T economy has continued to contract, as evidenced by the quarterly declines that have been experienced over the last five consecutive quarters ending September 2012.

But there are two important differences between this administration and its predecessor. Some key projects (which were designed to continue the diversification of the economy) were stopped and the energy policy options have changed. And there has been no new initiative to carry the country forward.

The T&T economy has been built on the following cornerstones: cheap gas; foreign direct investment to exploit the cheap gas; proximity of the US market; and weak supply conditions in the US. Unfortunately, all this has changed. Although the US economic recovery has been weak, it has had one bright spot an expansion in the energy sector on the back of a plentiful and inexpensive supply of natural gas from shale rock.

Thanks to new technologies, US proven reserves of natural gas have surpassed the 300 trillion cubic feet (tcf) estimated in 2010, to reach 2,200 tcf according the US Energy Information Administration. The present rate of US consumption is 24 tcf per year, suggesting that the US can comfortably meet domestic demand for 90 years. In short, investment which could have come to T&T can now comfortably stay in the US to the detriment of T&T. At the last estimate, the volume of new gas projects for the US market had passed US$90 billion.

But this is not the worst part. The substantial reserves give the US the opportunity to become a net exporter of natural gas by 2016. Apart from the economic benefits, becoming an exporter would provide several added advantages. First, it would buttress the geopolitical leadership on trade currently enjoyed by the US. Second, it could provide a vital role in supplying its allies who currently depend on unfriendly powers which are hostile to US interests. Third, using natural gas has significant environmental considerations, not the least of which will be to reduce the level of carbon emissions and by extension, global warming.

In summary the policy matrix and the available policy options have changed significantly for Trinidad and Tobago. Whilst the revenue derived from gas has performed admirably in difficult market conditions, it is clear that this cannot continue indefinitely. On the other hand, expenditures have ballooned and continue to grow at a rate greater than our revenue growth or revenue capacity. This is not sustainable and if not dealt with soon, Trinidad and Tobago will soon face its own version of a fiscal cliff.

* Mariano Browne is a former government minister.