T&T and the global financial crisis

tobagocrownpoint.jpgThere is no doubt that T&T is in a better position to weather a financial crisis, but just as a rising tide carries all, a falling tide can also suck you in.

President of the T&T Manufacturers’ Association (TTMA), Karen De Montbrun, has warned that T&T could face an unsustainable national budget because of government’s spending plans for next year. She said that the oil price of US$70 a barrel to which the 2008/2009 budget had been pegged remained an area of concern for local manufacturers.



“It is the TTMA’s belief that the high levels of expenditure, projected to be $49 billion over the next fiscal year, may not be sustainable in the context of declining energy prices.

“In addition, declining energy prices could result in a deficit budget, which would lead to a reduction or no deposits made to the Heritage and Stabilisation Fund. The Government may then have to make some decisions on work projected for the next fiscal year.

“The question must also be asked about what impact the fall in demand for oil and resulting low prices would have on oil and gas exploration in T&T? Would the Government have to resort to cutting back on the tax regime in order to encourage exploration, which would lead to a further reduction in the country’s revenues?

“It is expected that the Government will exercise greater restraint in its utilisation of the revenue that is being generated from the hydrocarbon sector, and to intensify its efforts at diversifying the economy.”

De Montbrun made the comments last Friday as she addressed a breakfast meeting on the topic, The global economic crisis and its impact on the T&T economy, hosted by the Institute of Chartered Accountants of T&T (ICATT) at the Hilton Trinidad and Conference Centre, St Ann’s.

She was part of a five-member panel including Ian Narine, centre director, wealth management at Scotiabank T&T Ltd; Sean Ramirez, ICATT president; Wain Iton, CEO of the T&T Stock Exchange; and Mariano Browne, Minister in the Ministry of Finance.

She said that T&T was not immune to what was taking place in the global economy, particularly since the price of its major sources of income—oil and gas —remained “volatile.”

“A sudden decline in energy prices would lead to a decline in this country’s revenues, and therefore measures must be put in place to mitigate the effect that this will have on the local economy.”

She said that one of the world’s second largest exporters of crude oil, Nigeria, had based its 2008/2009 national budget on a price of US$45 dollars a barrel. She said that Venezuela had based its budget on a price of US$60 a barrel of oil and that Venezuelan government officials had said they planned to watch spending closely.

“Oil prices are continuing to fall, dragged down by the expectation that the turmoil in the global financial sector will lead to a wider economic slump.”

She said that the price of natural gas, T&T’s major revenue earner, was also dropping.

“The recent market price of natural gas has been about US$6.80, well below the US$8 at the time of the budget. Is it that our US$4 for each unit is now too high?”

She said that the local manufacturing sector had “always been a vibrant part of our economy and a foreign exchange earner,” adding, “surely no one will forget the part manufacturing played in the eighties when the oil market bottomed out.”

In his presentation, Narine said several of the positive economic indicators enjoyed by T&T at present were similar to the economic shape of the US before it entered into “the credit crunch.”

Narine said that an appreciation for what happened in the global financial climate, why it happened and the extent to which T&T faced similar risks, and what should be done about these risks gave reason not to panic.

He referred to the state of the US economy up to 2007 and tried to spot “real and obvious cracks that could have given an insight into what we were witnessing today.

“GDP (gross domestic product) was fairly consistent, which is good. We can boast of the same here in T&T.

“Unemployment is declining, (this is) also good and (...) both the US and T&T can effectively boast of full employment.

“Personal income growth is on the rise, another positive both for the economy as well as for home affordability. Once again this matches well with T&T.

“Population wise, same story, good positive growth that speaks well for housing as more people means more demand.

“You will note as well that personal bankruptcies were also down, no red flag there, delinquencies not out of the ordinary and foreclosures less than one per cent.

“All healthy benchmarks and if we wanted to we can boast of the same positives in our economy,” Narine said.

He added that T&T was also showing a trend toward increasing interest rates, similar to the US in 2004.

How did the environment (in the US) up to 2007 give rise to this in 2008?

“Home prices (were) declining and delinquencies (were) rising among both prime and subprime borrowers. What was it that caused the housing market to turn sour? The market (was) coming off a low interest rate environment in 2004 followed by an increase in rates for adjustable rate mortgages in particular, but the overall market as a whole,” Narine said.

“The rising interest rate environment gave rise to a fall in property prices to the point where homes started to carry negative equity. Once this happened, persons who purchased homes at elevated prices, that they could not afford, chose to go into default rather than carry the negative equity.

“This is the trend of interest rates in T&T.”

Narine questioned what would happen to home price affordability in T&T with, among other things, high property prices relative to local incomes, the erosion of disposable income through inflation and rises in the mortgage rate in T&T.

He said that the fundamental question was whether the systemic risks in the financial system of T&T were properly understood.

“Do we have anything like credit scoring in T&T so that we can assess loans on a risk- based level? How many borrowers in T&T have missed credit card payments? Look at the amount of revenues that banks earn on credit cards and you will appreciate how poor the management of cash is in this country. All these factors influence the credit score,” Narine said.

“What happens when interest rates rise and debt servicing increases, property prices pause or fall in value and people’s disposable income declines because of rising inflation? It did not take much to tip the scales in the US.”

He said that although it was agreed that the local banking sector was strong, well capitalised and well regulated, there were credit unions and mutual funds in T&T which were “not so well regulated.”    

“We have a number of finance houses that have popped up over the course of this current cycle of expansion where the regulations may not have kept pace with the level and type of activity being undertaken.”

He said that T&T needed to be careful of “the financial crisis (that) is cascading around the world.

“There is no doubt that T&T is in a better position to weather a financial crisis, but just as a rising tide carries all, a falling tide can also suck you in.”

He said that the local manufacturing and tourism sectors would be affected.

He added that T&T’s Caribbean Community (Caricom) trading partners, which were heavily indebted, might find it difficult to finance their respective budgets. He also said that the private sector would be highly geared because it had not accessed the equity markets “as maybe they should have,” and that this leverage would increase the financial risks of the private sector which could lead to repayment issues down the road.

Narine said that commercial real estate could come under pressure with the availability of the Government Campus and a slowdown in the private sector.

Ian Narine, centre director,

wealth management at Scotiabank T&T