Ian Narine
As we approach our 54th anniversary as an independent nation, T&T has taken more than a few nervous glances at neighbouring Venezuela. Many have asked if what is happening in Venezuela can happen here. No one expects that it should and there is every logical reason why we should never be close to a scenario like that.
However, we would be complacent in the extreme to ignore the issues that lead to Venezuela being where it is today and not to analyse the path that they have travelled.
Our current situation is one where we are experiencing a sharp fall off in revenues but our expenditure levels have remained fairly high. It means we have had to undertake significant borrowings and also tap into our heritage and stabilisation fund in order to meet our financing needs.
There is an ongoing debate over whether our debt as a percentage of our gross domestic product (GDP) is rising or falling, whether we should use net or gross debt to GDP and whether we are borrowing too much. The arguments as currently constructed add little value to understanding the risks that we face.
Firstly, there is a difference between stock and flow. The amount of debt on our books is referred to as stock. The rate of change of our debt burden is referred to as the flow. Many countries have been able to manage their affairs with debt to GDP levels higher than ours.
The issue is in the rate at which our debt burden is increasing. The discussions so far have centered around current levels. My concern is in relation to what is forecast to occur during the next fiscal year and in the years to come.
Energy prices have not recovered and are not likely to for the foreseeable future. We have already gotten a signal of budget deficits to 2018/19. Our GDP growth rate has remained fairly stagnant for six years now. This trend is likely to continue. We have borrowed US$1.5 billion on the international market from 2013 to 2016.
Rather than debate the present I would prefer to see a forecast from official sources as to what our debt level is likely to be in 2020 at the current rate of borrowing and what our GDP prospects are expected to be under the current development plan. Our challenges at this time are manageable, however, to avoid the path that Venezuela took we have to assess our future.
Arbitrage
While debt levels have occupied the public attention at the moment, the real problem that we face and one that encapsulates the path that Venezuela has taken lies in an understanding of the concept of arbitrage.
Arbitrage occurs when different prices are obtained from the buying or selling of the same goods or services in different markets. Arbitrage presents the opportunity for a riskless profit for those who are able to exploit it. In an efficient and proper functioning market, arbitrage opportunities are quickly eroded as the forces of the market bid up the price in one market and lower the price in the other market until they are in equilibrium.
The best example of a functioning arbitrage scenario came with the cross listing of Jamaican stocks on the T&T stock exchange. If the price of the stock in T&T was significantly different to the price in Jamaica then buyers would buy more in the lower priced market and sell in the higher price market causing the price in both markets to equalise.
The best example of the current opportunity for arbitrage is in the quest for hard currency, specifically US dollars. All the international agencies have stated that our currency is overvalued relative to the US dollar. We have, save for a seven per cent depreciation attempted to manage the exchange rate and so it remains overvalued. This has impacted the functioning of the market with shortages on the one hand and a black market on the other.
There is a perception that the playing field is not level and some entities have greater access to US dollars than others. This alleged inequity has political implications. We are a nation that has been brought up on the redistribution of resources. We were able to continue on this path because of our oil and gas windfalls.
Redistribution
Redistribution serves the interests of politicians as it allows them to promote social justice and other seemingly laudable initiatives. Redistribution serves the interests of many citizens in that it ostensibly provides something for nothing.
It seems like a “win win” but only when there are resources to redistribute. When there is a perceived inequity—as may be the case in accessing foreign currency—the politics demands that there be more redistributions in other areas. More often the onus is put on the business community to lower prices or manage the costs to the consumer in some way.
Recall how often during the Chavez era that Venezuela sought to malign the so-called “business elite” in order to appear favourable to the masses. Even in T&T we have been here before. It was in 2006 when inflation was rising to unacceptable levels in T&T largely due to high levels of government spending that the blame for this scenario was shifted to the business community.
The terms “middle men mark ups”, “price gouging” and “mark up inflation” were introduced to the national lexicon. There were instances where ministers were suggesting scenarios of where “a Breadfruit leaving Toco at $1.50 a pound and arriving in the market at $21.50 a pound.”
If we understand the concept of arbitrage we will appreciate that such a situation will not be sustained (if it ever existed at all) in a proper functioning market. The outsized profits would most likely attract other middle men to the point where the price margins adjust to more reasonable levels. The only way this is sustainable is if there are imperfections in the market or if the economics makes those margins necessary. It is the State that is responsible for promoting market efficiency by establishing a framework for its operations yet the easy sell is to blame the business community.
Once we go down the route of blaming business, the next step is to compel them to conform to a particular way of doing business. This causes some to exit, exacerbating the arbitrage potential in the form of price gouging. In time as public anger is directed towards those that don’t conform the next step is expropriation of assets and nationalisation. Further, redistributions then lead to further inefficiency and the downward spiral that results in Venezuela ensues.
Appreciate that Venezuela has a constitution and people vote to elect their leaders. It is not very different to T&T and their system of government is not an outlier as say North Korea or even Cuba. Their challenge has, and continues to be, their approach to allowing the forces of the market—demand and supply—to function effectively.
In a time of plenty the ability to redistribute to cater for market inefficiency is not an issue. We have had currency shortages for more than a decade. However, that was augmented by distributions in the form of fuel subsides, make-work programmes, state-sponsored housing, education and medical care. As the ability to fund these decreases the public angst increases.
The availability of foreign exchange is the one element that has an external market dimension that we cannot totally control without instituting explicit currency controls. As pressures build, prices increase and shortages ensue, the easy way out is to find someone to blame. The Opposition and then the business community are the regular candidates.
This only works for a time. The rate at which we borrow and accumulate debt is the rate at which we use up that time. If we enact the proper reforms to our markets and infrastructure so that we reduce arbitrage then the system will solve much of the problems we face. If, however, we decide to introduce more and more controls over various aspects of the economy then we heighten the opportunity for arbitrage.
Arbitrage works to the benefit of a few and at the expense of the many. If the benefits to the few are funneled towards the financing of political campaigns then the system holds a bit longer. However eventually the forces of the market will hold sway and the masses will take to the streets.
That’s where Venezuela is now. On the eve of our 54th anniversary of independence we should take the time to understand how they got there and avoid that path.
Ian Narine can be contacted at ian.narine@gmail.com
