On April 30, Moody's downgraded Trinidad and Tobago’s government bond rating from Baa1 to Baa2, and also changed the outlook from stable to negative.
The downgrading of the Trinidad and Tobago economy by Moody’s should not come as a great surprise, particularly as oil and gas prices were fairly flat between 2011 and June 2014. (In June 2014, the price of a barrel of crude oil was US$105.)
After June 2014, though, the price of crude oil fell sharply, and averaged US$48.47 for March 2015, about US$57 less than in June 2014. Using the Henry Hub marker, gas prices fell from US$6 mmbtu in February 2014 to US$2.83 in March 2015.
These are significant declines. Between January 2011 and March 2015, there was also an overall negative movement in the prices of other key export goods such as methanol, urea and propane.
At the same time, there was a decrease in the production of crude oil and natural gas. Specifically, in January 2011 the T&T economy produced 2.97mn barrels of crude oil. By March 2015, production declined to 2.23mn barrels. In the same time period, there was also a decline in the average monthly production of natural gas.
Central government total expenditures increased from TT$10.99 billion in 2000 to TT$53.04 billion in 2014. This is a phenomenal increase.
Annual growth in government spending, averaged 14.53 percent from 2001 to 2009, but only 7.66 percent from 2010 to 2014. It is a well-established economic principle that increases in prices reduce the purchasing power of money, so it makes good economic sense to see how real government expenditures performed during the same time period, 2000 to 2014. This is an especially relevant exercise, as the retail price index increased 250 percent from 2000 to 2014.
In 2003, using 2000 as a base year, transfers and subsidies stood at TT$3.64bn. By 2007 they had escalated to TT$8.99bn.
After 2007, although transfers and subsidies increased again until 2014, this was a much smaller 16 percent compared to the percentage of the previous increases.
So where does this leave the T&T economy? The clear answer is that the T&T economy is in need of structural adjustment. This has been the case since 2008.
In the first instance, the labour market is too skewed. Excess state participation started in 2003 with the CEPEP Programme (but with a dynamic of its own thereafter) and served to crowd out the private sector from sufficient access to the limited pool of labour.
As it stands, there is already a labour shortage in the private-sector economy. Parallel to this, there has been a rapid increase in the number of workers employed in make-work programmes.
A downsizing of these make-work programmes will increase the marginal and average productivity of labour therein, and will shed labour to allow other productive segments of the economy to expand capacity, a win-win situation!
There is also a need to implement a greater focus on manufacturing. The manufacturing sector employs around 50,000 people. If a strategy could be designed that would double the size of the manufacturing sector, this would increase the number of long-term, sustainable jobs created.
The seven e TecK parks planned by the government for various places within the economy have to be brought onto the front burner, as the direct employment and indirect opportunities would help stabilise the long-term growth of the economy.
A process will have to be formulated to find an equilibrium between wage demands and productivity increases, especially in the now-stressed petroleum sectors.
Unreasoned demand for wage increases by trade unions must be a thing of the past, as there is no longer any basis for such, logical or otherwise.
Unreasoned wage increases which are higher than associated productivity increases compromise the overall competitiveness of the economy.
Already, output per worker in some segments of the economy has fallen, and Moody’s would have certainly considered all these factors in its decision to downgrade the economy.
Perhaps this downgrade may help to persuade the few remaining critics of adjusting the fuel subsidy that such a change must occur. This subsidy comes at a great fiscal cost to the economy and its contribution to the economy’s global competitiveness is marginal at best.
Indeed, the fuel subsidy may have backfired, as it may have stimulated an abnormal demand for vehicles in the TT economy, given low interest rates in the banking system.
The rapid increase in the number of vehicles would have increased traffic congestion, decreased worker punctuality and attendance, and also increased overall levels of pollution.
In the context of the commentary by Moody’s wherein the T&T economy was downgraded from a Baa1 to a Baa2, we need to exercise more fiscal discipline. The rapid growth in transfers and subsidies must not continue.
Let us not waste this crisis, but use it to remedy some of the ills that have developed in the economy. We must recognise that we are in a new normal. The policy makers should proceed accordingly.