T&T is going through a period of adjustment that the population is not prepared to deal with because the changes imposed by the previous and the current administrations have not as yet affected people’s pockets, economist Terrence Farrell says. He said already there have been many changes such as job losses in the Energy sector.
Farrell, who is chairman of the Economic Advisory Board, was commenting on S&P's revision of its outlook for T&T from stable to negative.
In its December 24 statement, rating agency Standard and Poor’s had said: “The change in outlook to negative from stable reflect an, at least one-in-three chance that prolonged low energy prices and potentially poor GDP growth prospects could result in a steadily rising debt burden leading to a downgrade in the next two years.”
And in a statement to the Guardian newspapers on Monday, Farrell said: “We are not prepared for adjustment because citizens have not yet felt the effects of the decline in our incomes, that is, in what we can earn for our oil and gas exports.
“We have used up almost US$2 billion of our foreign exchange reserves in 2015, and this has made it appear that nothing much has changed. But the reality is that employment in the energy sector is falling, government revenues from oil and gas have declined sharply, and the non-energy sectors will begin to feel the adverse effects before long.”
Asked whether a devaluation of the TT dollar would be an appropriate move for T&T, he said the Government does not directly dictate the exchange rate and this is determined by market forces.
“We operate a managed float and in that system the exchange rate may appreciate or depreciate in accordance with market forces.
“The Government does not directly dictate or set the exchange rate. It is determined by the Central Bank taking into account various factors including the competitiveness of the economy, the level of foreign exchange reserves, the stance of fiscal policy, and wage and price pressures. The government's views on the likely impact of any depreciation or appreciation on prices and on wage demands.”
Expanding his point further he said: “It is theoretically possible for us to do like Barbados and maintain the exchange rate more or less fixed. But then, we must also be prepared to do like Barbados has had to do (if we have a fixed rate), and retrench large numbers of workers in the public service, cut wage rates, run down the foreign exchange reserves, and increase the domestic debt substantially. We can't have our cake and eat it. Choices have to be made.”
What is clear, he said is that there is need to have adjustments to be able to cope with the declines in the energy sector and in other parts of the economy.
“It is frankly silly to say: "no devaluation", "no wage freeze", "no reduction in employment", "no price increases", "no tax increases", "no expenditure reduction", "no reduction of subsidies". If one says 'No' to any policy to effect the required adjustment, what then will be the outcome of that?”
Making adjustments in the country's economy is unavoidable, it must be done and there may be impact. If changes are not made to operate the economy effectively, he said there may be negative outcomes.
“The outcome will be that the foreign exchange reserves will haemorrhage at an ever faster rate and we will surely fall into the embrace of the IMF in a couple of years.”
Describing the decision by S&P to downgrade ( T&T, as being predictable, he said their rating action is fair and reasonable and he did not have an issue with it.
“They have pointed out that they expect our macro-economic situation to be stabilized within two (2) years and this too is reasonable. However, we have maintained our investment grade rating and this is very important to our debt management strategy over the medium term.”
Not surprised that one of the criteria for revising its outlook for T&T, is low energy prices, he said the indicators were showing the decline in energy revenues.
“Since the fourth quarter of 2014, the indicators were there that the global energy market was entering a period in which prices would remain low for some time. The November 2014 OPEC meeting confirmed the Saudi strategy and that strategy has recently been reaffirmed. However, Trinidad and Tobago cannot generate export revenues to replace those revenues we have lost from falling oil and gas prices. In addition, our output of oil and natural gas has been falling as well.
Former Minister in the Ministry of Finance, Mariano Browne said S&P’s downgrade was expected given falling oil and gas prices leading to falling revenues, no medium-term strategies to deal wish the fiscal deficit and, or return to a position of balance or surplus. The third factor which he believed would have contributed to S&P’s downgrade, he said would have been “inadequate economic data and data which is not delivered in time to facilitate evidence based decision making.”
He said the declining revenues have been “on the wall” since June 2014 according to Browne, the signals of declining revenues were “ignored.”
“Several commentators are on record indicating that government expenditures needed to trimmed to more realistic levels. This is not simply a fall in prices,” Browne said.
Browne who is Managing Partner at Browne and Company, said the international markets have changed substantially. He said: “The shale revolution has changed the energy equation. And we are in middle of war for market share between the US and the rest versus OPEC. America is now self-sufficient and is soon to be an exporter. China's rate of growth is slowing and the super commodity cycle is now at an end. We can therefore expect energy prices to be depressed for some time estimated to be at least 5-7 years.”
There are no quick or short-term fixes for this situation, he said. Browne added that the country was not prepared for a recession.
“The last administration spoke to a small budget shortfall and at times to budget surplus refusing to acknowledge the danger signs or that times had changed.
“The current administration has indicated that they are waiting for confirmation, saying that we are in some kind of downturn and that they are awaiting confirmation of the figures. The best opportunity to address the situation was the budget speech in October. Rather than address the situation prospectively, it played the blame game and said that things were worse than they expected.”
On the issue of a devaluation, he anticipated that there would be a change in the rate but there would not be a devaluation.
“The TT dollar is a floating peg to the US dollar and its price will be determined by demand and supply. When oil and gas prices fall the supply of foreign exchange diminishes. In 2009, the rate went to $6.495= US $1 and devaluation was the specter raised by the UNC opposition; it did not happen. Indeed it will not happen. But that is not to say that the rate will not change.”
Concerning natural gas prices, he said it is likely to recover just like oil.
“OPEC (according to a report carried in the Financial Times 24/12/2015) has forecast an eventual return to an oil price in the region of US$70 by 2020. This also has implications for the natural gas prices which will recover in a similar fashion.”
Overall, he said the short-term revenue outlook is “grim,” and the immediate options are, “to cut expenditure and to focus on inefficiencies. To make good the deficit, the Ministry of Finance has already started to prepare the ground for accessing the Heritage and Stabilisation Fund. But this will not solve anything. And it is better too keep a trophy than to spend it.”
He suggested that the country should adjust to the “new economic reality” and that T&T’s “standard of living cannot be maintained doing what we are currently doing. It will require much more work and improvement in our work ethic and productivity if we wish to stay in the same place. This is not business as usual.,” Browne warned.
