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Electoral politics vs economic logic

Wednesday, May 6, 2015

Moody’s downgrade of the investment attractiveness of the economy from stable to negative is far more a concluding analysis on the long-term failure of succeeding governments to diversify the economy from its mono-crop reliance on high international oil and gas prices than it is on the potential negative impact on T&T’s ability to borrow on the international market.

But it is not only a comment on government failure, the statement should also be seen in the context of the private sector also being unable to wean itself off government spending of the energy revenues for the purchase of consumer goods and services. 

Therefore, the reliance by Finance Minister Larry Howai on “strong” macroeconomic fundamentals as a defence against the downgrade is irrelevant. That the foreign reserves in the Heritage and Stabilisation Fund and the official reserves are high, that import cover is in place for over one year, that the debt servicing ratio is manageable and unemployment is low at 3.5 per cent are all irrelevant to the three major points raised in Moody’s statement:

n Persistent fiscal deficits and challenging prospects for fiscal reforms;

n Decline in oil prices and limited economic diversification to weigh negatively on economic growth prospects; and 

n Weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and inadequate provision of vital macroeconomic data.

The relatively large quantities of reserves (and there is an argument that they should have been double the present level) a low unemployment rate etc, are where they are today as a result of high oil and gas prices over the last 15 years.

The more insightful reading of the Moody’s statement would lead to the realisation that beyond the decision to monetise and commercialise the natural gas resources, succeeding governments have done precious little to strategically utilise the billions of dollars collected in rents from the multinational corporations, from Petrotrin and the National Gas Company, to establish a base for the long-term transformation of the economy.

But the Moody’s statement goes further and indicts the managers of the economy for not using at least a portion of the Stabilisation element of the HSF to strategically and productively affect the economy:

“It has not been used as a counter-cyclical policy tool, thus limiting its ability to compensate for negative impact of adverse shocks in the economy.”

But the Government, with an election facing it and fearing an electoral backlash from the Moody’s statement and downgrade, set off on a spin-doctoring campaign. Perhaps aware of and “jumbied” by the prospects of the Moody downgrade and statement, Prime Minister Kamla Persad-Bissessar jumped the gun and pronounced great management of the economy through a short-term balancing of the budget. In the process, she ignored completely the overall reality of eight years of billions of dollars in deficit.

Clearly aware that his Prime Minister had by her statement given too positive a picture of the performance of the economy and this based on one small statistic, Finance Minister Howai sought to balance off the political enthusiasm of the PM with some economic reality.

However, as Minister Howai was setting about to balance the communication sleight-of-hand, the Moody’s downgrade statement forced him and others into denial and the usual tactic of attacking the messenger.

For instance, ministers Tewarie and Moonilal have adopted the line of here is an international agency attempting to have the Government reduce expenditure on social welfare programmes. Sure Moody’s commented on “the rigid structure of public expenditure, where wages, subsidies, and transfers account for more than 65 per cent of total expenditures, limits fiscal flexibility.” 

But that must be taken in the context of the increasing expenditure in an economy that remains dependent on high oil and gas prices and without a platform of other foreign exchange earners.

The attempt at conveying that all is well and the Government is managing the economy far better than other oil and gas producing countries, which have suffered from the shock of oil price collapse, is not new and unique to this Government.

Back in 2008-2009 when the financial disaster spread from the United States to Europe and through the rest of the dependent world, Prime Minister Patrick Manning and his then PNM finance minister, Karen Nunez-Tesheira, sought to persuade the national community that the Government was on top things and T&T would not be affected in a major way; and this was notwithstanding the fact that the country’s major trading partners were in financial and economic turmoil.

On the likely immediate impact of the investment downgrade by Moody’s, if the Government is able to place bonds on the international market, interest rates will surely be high. As to the prospects of foreign direct investment in the energy sector being scared-off by Moody’s downgrade, fdi to T&T and the rest of the developing world in the extractive industries is always assured once the trans-nationals have been able to strike a deal.

What we are seeing and hearing is the triumph of electoral politics over economic logic and honest communication with the population.


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