Recovery Risks

Continuing uncertainty is the only certainty

By GREGORY McGUIRE

Even in the best of the times, the task of economic management is never easy. During a recession, it can become a nightmare. Just ask Barack Obama.
In a resource-based economy like T&T, this task is filled with perils—both economic and political. The risks associated with management of the economy, however, can be mitigated by winning the confidence of people, through true open dialogue and consistent policy positions, among other things.  In this context, the Prime Minister’s description of the current economic crisis as a “blip” may well be an unfortunate error.  Was the Prime Minister caught up in the euphoria of his Summit’s “success”  or  did he feel obliged to give some good news to the business sector who had gathered for breakfast ?
Whatever the motivation—and sometimes it is difficult to find a motive for political action-there are consequent dangers in Mr Manning’s statement. One is that an earlier request for tripartite discussions has been rendered impractical if not downright impossible. Neither labour nor business will regard any such initiative as serious.  We can now expect to see unions, particularly public sector unions, harden positions across the negotiating table. And who can blame them?  The second and perhaps more significant consequence is really the fiscal stance foreshadowed by the Prime Minister’s address.   The mere hint of recovery seems to have given the Government renewed confidence to press ahead with its expansionist fiscal stance, even at the expense of undermining gains made on inflation.  So how did we come to this juncture?
In an address to the nation just six months ago, the Prime Minister pronounced  that “we are therefore faced with an economic slowdown in many industrialised nations, with most either already in recession or heading there. It all points to a global economic slump which, in the view of experts, could be deep and prolonged”.  He continued “… No country can escape the effects of a global recession…..All countries would be wise to take appropriate action”.  On the impact of the crisis on the T&T economy, the Prime Minister noted the collapse of all export commodity prices which, he estimated, “will lead to a Budget shortfall of six billion dollars”.  “Things could get more challenging”, he warned “…it is clearly a very serious situation requiring immediate action.” The Prime Minister advised that the situation had led his Government to “… a reordering of our developmental priorities and deferral of some of the projects we consider essential to the realization of developed country status.”  The Prime Minster appealed for “restraint at all levels since this is a period when we must tighten our belts”
So the question is: What could have happened in the world over the last six months to cause this dramatic reversal in the Prime Minister’s perspective? If anything, developments in both the international and domestic economy since then have confirmed the prognosis of a global recession. The latest IMF and World Bank forecasts are even more pessimistic than they were three months earlier. In April, the IMF projected a 1.3% decline in global economic activity for 2009, down sharply from the 0.5% growth projected by the Fund in January.  The Fund predicts only a slow recovery in 2010. The World Bank concurs that this year’s decline in world output would be the first since World War II.
Here at home, the Central Bank provided a reality check to the extent that the data allowed it to do so.  Further anecdotal evidence supports the view that the economy may well be in recession as we speak.  Consider the following developments in the key sectors of the economy:
Crude Oil production is now running at about 114 thousand barrels per day, 3% below 2008 but, significantly, 26% lower than in first quarter 2006.
Gas production and consumption remain flat. Only one new Petrochemical plant has been opened in the last three years and only one is under construction in 2009. Apart from Alutrint, several other planned investments are stalled because of financing challenges.
Petrochemical and steel experienced cuts in production in late 2008 with steel remaining at below normal levels.
Private sector investment has slowed all around as investors adopt a wait and see attitude.
Government has scaled back its home construction programme.
CL Financial’s collapse has created major dislocation in the financial system thereby further undermining consumer confidence in financial services.
Manufacturing sales and output are down primarily because of the difficult circumstances facing the rest of Caricom – the primary market for T&T manufactured goods.
Notwithstanding the Summit of the Americas, hotel occupancy rates, particularly in Tobago, are at record low levels.
Nothing in the above gives reason to cheer.  So is it, then, the recent uptick in oil prices that has influenced the Prime Minister’s optimism that recovery is around the corner?  If so, then is it not premature? While oil prices have topped US$ 60/bbl in recent weeks, the oil market is far from settled. Both the International Energy Agency and the US Energy Information Administration expect oil demand to fall in 2009.  In the absence of any demand increase, then, the current price run up seems to be due mainly to speculative buying on the part of traders seeking to cash in on lower prices.  The result has been a build-up of inventories in the major consuming nations.
US commercial stocks are at the highest level in ten years, while Europe is running 30 million barrels above last year.  OPEC discipline seems to be the key to market stability and a strengthening of prices in the short to medium term.  There are signs that the cartel’s exemplary solidarity, evident since July 2008, is beginning to wane as some cash-strapped members wilt under the fiscal strain.  Not surprisingly, those worst affected—including Venezuela and Iran—have been exceeding their quotas.   It is worth recalling that continuous quota violations and the consequent decision of Saudi Arabia to abandon the swing producer role helped to accelerate the price collapse in 1985-6.
But whatever happens in the oil market, it is natural gas prices that have greater impact on government energy sector revenues. Natural gas prices in the US fell sharply over the last six months to US$3.25 in April- the lowest level in seven years.  Cargo diversion to higher priced markets has mitigated, somewhat, the impact of falling US prices. However, the prognosis is that gas prices are likely to remain soft in the short to medium term on account of large increases in LNG supplies.   A recent BP study anticipates unprecedented growth in LNG capacity and trade over the period 2009-11 with the biggest largest increment, some 6 billion cubic feet /day, coming in 2010.  For both oil and gas, therefore, continuing uncertainty is the only certainty.  It is futile therefore, for Trinidad and Tobago to bank on a price revival in these markets.
Economic management must proceed on the assumption that prices will remain at long term average levels.  In terms of fiscal policy, this implies reversion to a lower level of Government expenditure, with greater emphasis on saving unplanned surpluses. The Government should now subject itself to fiscal rules that provide guidelines for the management of hydrocarbon wealth in a context of price volatility.  The required adjustments should not be too difficult to accomplish, beginning with a rescheduling and reprioritisation of the capital expenditure programme.
Elements of recurrent expenditure must also be redirected.   It would be highly desirable for Government to place priority on those areas of basic needs that seem to be crying out for help.
How long are farmers to continue enduring the problems of poor access roads and praedial larceny, or policemen the discomfort of dilapidated stations? Does it make sense to build ultra-modern early childhood education centres while primary schools, sometimes within the same district, are being shut down because of unsafe conditions?   Why does the HDC continue to build new housing settlements without recreational or community facilities? The list of these obvious contradictions in policy and actions of the Government could go on and on.
Unfortunately, the Prime Minister’s recent utterances on the current circumstances and his prognosis of an early recovery suggest that there would be no alteration in Government’s fiscal behaviour.  Unlike several countries in the region and across the world, they have not seen wisdom in using this crisis as an opportunity to engage the population in meaningful dialogue.  Instead, citizens of the Republic are invited to have blind faith that “this too shall pass”.   This Government may well become an object of the old adage: “who cyan hear go feel”.

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