Between Murky Waters And Silver Lining

The Year Ahead

By Gregory McGuire

For followers of Chinese astrology, 2012 is the Chinese year of the water dragon. According to one source, the dragon is a major symbol of good fortune, and dragon years are associated with wealth and prosperity. For citizens of Trinidad and Tobago looking for a beam of light this must be good news. Given the degree of uncertainty about the immediate and medium term future of the T&T economy, however, it’s going to take a lot more than Chinese astrology to turn around our economy and society. This uncertainty is fuelled not only by the weak economic conditions in our major trading partners but moreso by our own internal circumstances. Consequently, recovery and economic stability will depend more on correcting internal issues than on the fortuitous circumstances of the global economy.
To fully understand what portends in the year ahead, we need to recap the economic performance and key drivers of the last couple of years. The T&T economy would have declined by an estimated 1.4 to 2.5 per cent in 2011, driven in part by the negative consequences of the State of Emergency. This was the third consecutive annual decline in output, a trend not experienced in Trinidad and Tobago since the years 1983-1986. At that time, it was the sudden collapse of oil prices, which took the wind out of the sails of the State-financed, resource-based industrialization and infrastructure expansion. In other words, the collapse of oil prices severely constrained Government revenue and, with it, its capacity to continue to fund both economic and social investments. This time around, the economic slowdown was first triggered back in 2007 by the lower levels of direct foreign investment as expansion of the natural gas sector plateaued. However, the decline was precipitated by the global economic recession and the consequent impact on commodity prices along with the CL Financial collapse.
The quick and surprising recovery of commodity prices in 2009-10 boosted Government revenue and export earnings, and the economy began showing renewed signs of growth following a brief recession. In the last year however, in spite of relatively high commodity prices, overall economic performance has deteriorated. Output was lower in both the energy and non-energy sectors. Contributory factors in the energy sector included the ongoing natural decline in oil production due to maturing fields, and lower natural gas and related petrochemical production due to supply constraints arising from maintenance and safety upgrades of production facilities.
At the same time there has been no revival of private sector investments in the energy sector, a major driver of growth over the period 1993 to 2008. In the non energy sector, the slow pace of project implementation under the PSIP, weak investor and consumer confidence, weak external markets and the devastating effects of the State of Emergency on business activity and employment were among the major factors contributing to declining output.
Against this background there can be little optimism when looking ahead to 2012. However, in order to suppress personal bias, I opted to solicit a range of views on the economic outlook from a broad cross section of persons representing academia, business, labour and civil society . The responses revealed a broad consensus around the key factors that may impact on economic growth in 2012. The most frequently mentioned factors were: political stability, the industrial relations climate; the effectiveness of the law enforcement and criminal justice system in response to rising criminality and corruption; local and foreign investor confidence; consumer confidence; energy sector expansion and the Government’s PSIP expenditure.
Interestingly, while the outlook for our key markets- Euro Zone and USA, was considered, it was not listed among those most important factors impacting growth in 2012. There was much less consensus however on how these factors would impact on overall economic performance. Expectations of economic growth in 2012 ranged from, -1.5 per cent to + 2.0 per cent. The forecast range highlights the degree of uncertainty that pervades the environment. Under such conditions of uncertainty, scenario planning is a useful tool in assisting economic agents- Government, firms, labour and households- to develop strategies for the future.

Two scenarios are presented below: “Muddy Waters” and “Silver Lining” represent probable confluence of events with different outcomes for the economy in 2012. The Government sits at the centre of both scenarios reflecting the critical role that Government and politics play in the economic fortunes of Trinidad and Tobago. Equally important is the level of oil and gas prices. The market evidence suggest that oil prices will remain firm or increase in 2012 . While US gas prices are expected to remain depressed, significant cargo diversions will allow the T&T Government to maintain its revenue take from LNG sales. On the revenue side, therefore, the fiscal account should remain solid.
THE MUDDY WATERS SCENARIO
The first scenario “Muddy Waters”, is characterised by further missteps on the part of the Government which exacerbates a volatile political situation. Sharp differences arise within the ruling coalition over allocations of funds, raging rumours of corruption and kickbacks in several ministries, questionablE appointments in central Government and state enterprises, and the failure to successfully prosecute known party financiers. As the political waters become murkier public disenchantment rises. and business and consumer confidence wanes. Although natural gas supply and petrochemical output return to normal levels, there are no new investments within the downstream energy sector. This further reduces aggregate demand to create a further slowdown in business activity. Despite the successful floating of the shares of divested state enterprises- including First Citizens- and the settlement of the Clico/ HCU matter, private sector investments remain lukewarm. Moreover, plant capacity utilization in the manufacturing sector falls below the current 65 per cent as the economies of our Caricom trading partners continue to contract due to rising debt and foreign exchange earnings. In the circumstances, the trend of haemorrhaging of foreign exchange, aka capital flight, intensifies thereby placing pressure on the exchange rate.
The industrial relations climate worsens under this scenario as both labour and the Government harden their positions. In an environment of rising unemployment and social dislocation the Government comes under increasing pressure. The crime situation rises towards pre-SOE levels, headed in the wrong direction. The pacify the rising groundswell of protest and disquiet, the Government responds by further dispensing cash transfers and subsidies thereby worsening its fiscal situation while hoping for short term political mileage in the event it is forced into an early elections as its best bet.
Under this Murky Waters scenario, the economy experiences its fourth consecutive year of decline with the task of recovery becoming more imposing. A political solution seems the only hope.
THE SILVER LINING SCENARIO

But there could be an entirely different scenario for 2012. The year of the dragon brings some good news under the Silver Lining scenario. Here Government embraces a conscious and deliberate strategy to consolidate its position by improving governance, stamping out corruption and articulating and pursuing a focussed economic strategy aimed at real economic diversification. Ministerial portfolios are reassigned and or lost. Throughout the management system of the state sector, nepotism and favouritism are debunked in favour of quality professionalism. There is some political fallout from political investors but a stronger more united and purposeful Government emerges. In this environment, implementation of the PSIP shows marked improvement. Works commence on major infrastructure projects – highways, dams, housing, thereby providing much needed impetus for output and employment growth, particularly in non energy sector

In the spirit of tri-partism, Government, Business and Labour recognize the legitimate claims of each other and increasingly resolve outstanding wage disputes through the introduction of productivity bonuses and staff non-cash incentives. There is a vast improvement in the industrial relations climate. Law enforcement and the criminal justice system score major successes that make a material difference to levels of crime and corruption in the society. The combination of these successes helps boost investor confidence. Consumer spending also increases as workers become more secure in their jobs as the threat of eminent retrenchment fades. Increased spending on the part of Government, business and consumers enhance aggregate demand, output and employment .
Energy sector activity returns to normal as companies complete their integrity upgrade works. An active exploratory and development programme ensues, bringing renewed activity to the oil services subsector. More importantly, some key new investments are announced thereby rekindling confidence in a full turnaround in economic activity. In the non energy sector, both agriculture and manufacturing begin to show growth. As a result of improved efficiency in Government project delivery, several new farms and other projects are commissioned yielding increases in agriculture output. Although Caricom markets continue to be weak, the increase in local demand generates higher levels of capacity utilization among firms in the manufacturing sector. However, efforts at diversification through targeted sectors remain unfulfilled.
Under the Silver Lining scenario, the economy recovers and generates a positive growth between .5 to 1 per cent.
It is evident from the above that economic turnaround is possible in 2012. How well the economy performs is less dependent on the global environment and more on the ability of this Government to put its house in order. Our chances of realizing the Silver Lining is enhanced by improved Government and Governance. If it fails to do so, however, then we will all need to brace ourselves for a tsunami of Murky Waters.

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