By Dr Vaalmiki Arjoon
In budget 2020, stability, strength, and growth were promised but the exact opposite has been achieved, with the economy riddled with worsening uncertainty and shattered business confidence – this is before we were even hit by COVID-19. We recorded an overall deficit of $31 billion in the last four fiscal years, spending over $202 billion.
What do we have to show for it? In the immediate pre-COVID period, we landed in an economic depression, with five consecutive years of persistent economic decline. In fact, when we look at the figures, Trinidad and Tobago declined by 8.7 percent between 2015 and 2019. It is clear that before COVID we were not in a healthy position. Now with the fallout from COVID, we should be expecting a decline similar to 1983 levels of over negative 10 percent in 2020, meaning that over 2015 to 2020, our economy is likely to decline by an overall negative 18 percent. Suggesting that we are projected to decline by 2.4 percent is startling – despite being an election year, now is not the time to camouflage the gravity of the economic fallout from COVID. Economic confidence isn’t built by masking the true picture. It requires earnest effort to stimulate private sector business activities, protect jobs, and create avenues for spending. We will see the effect of this fallout well into 2023.
Naturally, given that the total fiscal deficit for the last five years is likely to be in the vicinity of $45.4 billion (including the ministry of finance (MoF’s) estimated deficit for 2020), no real savings have taken place, which necessitates increased borrowing to ease the budgetary fallout from COVID-19 and low energy prices. Given the perilous fall in our GDP expected this year, and that we will have to borrow some eye-watering amounts to offset some of the fall in revenues, we may find that the Debt to GDP ratio could possibly rise to 83 percent by next year and not 70 percent as estimated by the MoF.
To service our debt burden and soften it to the pre-COVID level of 63 percent, the state must arduously implement new strategies to develop the productive capacity and earn meaningful revenues from the non-energy sectors, especially since revenues from energy are likely to be low in the short term. Indeed, we are heavily dependent on gas sales, and global consumption of gas is projected to fall by its largest historical amount of 4 percent in 2020, increasing marginally thereafter by 1.5 percent each year to 2025. Further, while the HSF currently has a balance of approximately US$6 billion, this is not due to any policies of the state but rather the performance of the financial market in which the fund is invested in, especially the US market.
Our credit ratings are also nothing to be proud about – we should be aiming to return to the pre-2016 investment-grade region under Moody’s, which we were a part of since 2000, and not comparing ourselves to other Caribbean countries who are ranked worse than us. Our current rating of Ba1 means that the global community regards us as having considerable credit risk – our abilities to repay our international debt is increasingly problematic. This is not something we should feel honoured about!
The main thrust of the relief packages promised by the state is to ensure that consumption and business activities do not grind to a halt. However, the longer the state takes to provide these reliefs, we will see a worsened economic vulnerability for households and Small and medium-sized enterprises (SMEs). It will exacerbate the low spending levels expected in the short term and compound the financial stress of the business sector, especially the SMEs. Indeed, the private sector was already hurt by low revenues prior to COVID, evident by a fall in taxes on income and profit fell by 24.4 percent in the first six months of this fiscal year (Oct 2019 to March 2020) relative to last year.
The lockdown would have severely disrupted SME activities, leading to many layoffs, but it isn’t just going to stop there. Now with gradual re-openings of these companies, the public will be cautious about how they spend, especially since many would have lost jobs, and household incomes would have fallen.
Demand will still be low, so despite being open for business, sales revenues would be low for quite some time. This means that SMEs won’t be earning sufficient amounts to meet their costs of doing business, pay utilities, service loans, and of course, pay wages, etc. We will continue to find that more workers will be laid off. In fact, this year, we could end up seeing the worst unemployment levels in our history, between 22 to 25 percent, which means lower income tax payments. It is therefore possible that the state may have to provide more rounds of relief packages, which will dampen the HSF savings and create more debt.
Export revenues will also take a serious hit for several reasons, apart from low energy prices. Our trading partners are facing worsened income streams, limiting the degree to which they can buy our local items. Local manufacturers are at risk of lowered production and limited local and foreign sales, given declines in staffing, shipping delays, while some suppliers of raw materials are not functioning, forcing them to find other suppliers. With fewer suppliers to choose from, some manufacturers are incurring higher prices and many are being asked to pay their forex upfront, given the uncertainty surrounding the financial state of companies across the globe.
Some suppliers have a backlog of orders to meet which is preventing them from meeting new or existing orders for local manufacturers. These will prolong our paucity of forex earnings – in the last five years, our annual balance of payments recorded a deficit averaging negative US$913.64 million, showing that we haven’t been earning foreign exchange
Given that SMEs will be in an unprofitable state, how will they afford to pay installments on existing loans? The debt to GDP ratio of the private sector is approximately 46 percent. We could very well find in the short-term, the level of loan defaults will increase. This would cause banks to become extra cautious with who they lend to – if a business is unprofitable and does not have attractive collateral, they most likely will be denied access to loans as they would be regarded as risky. And if you can’t even access the loan facility, then it really does not matter if interest rates on loans are lower or zero. Those who would have access are predominantly the larger companies with better collateral, which means that they will be in a far better position to weather the storm.
At the end of the day, the large companies are the ones who will be left standing and not the SMEs. This is disastrous because SMEs are the largest employers in the country! With a high possibility of staggering economic activities in the short term, the sales revenues of many SMEs will be low – which creates doubt about whether some will be able to pay off these new loans if they do access it.