Statement by Prime Minister on Global Economic Decline

Speech

January 14 2009

Statement by the Honourable Patrick Manning Prime Minister of  Trinidad and Tobago to the House of Representatives as an update on the National Situation in the light of Continuing Global Economic Decline

Wednesday 14th January, 2009

Thank you, Mr. Speaker, for this opportunity to make this important statement to this Honourable House and the Nation.

When I last addressed the nation on the global financial crisis and the implications for Trinidad and Tobago, I outlined the actions the Government intended to take to deal with the situation. Since then, there has been no improvement in the global economy. Indeed the situation has continued to deteriorate in most major and emerging economies, taking us closer to the real possibility of a deepening world-wide recession. As promised, we have been constantly monitoring the situation and the effect it continues to have on the economy of Trinidad and Tobago. Revenues continue to fall and we have therefore found it necessary to take further measures that we consider necessary and appropriate at this time.

Our strong economy
I wish however to assure the national community that the Government remains firmly confident of our ability to steer our country through this increasing inclemency in the international economy. Our confidence comes form the strength of our economy which, in spite of the difficulties caused by global developments, performed quite creditably in 2008. Real GDP growth is estimated at about 3.5 percent, compared with 5.5 percent in 2007.The decline is due mainly to reduced activity in the energy sector. On the other hand, growth in the non-energy sector remained robust, at about 8 percent, due to both public and private investment and entrepreneurship. The unemployment rate fell to a historical low of 4.5 percent by the second quarter of 2008, which meant that for every 100 persons in the labour force approximately 96 persons were employed.

Inflation
At the same time the high level of economic activity, increased domestic demand and unprecedented international increases in food and commodity process throughout the first three quarters of the last year, led to a sharp increase in inflation from the level of 7.6 percent that we achieved at the end of 2007. In fact, by the end of October 2008 food prices had increased by 33. 4 percent leading the surge in higher prices. In addition, core inflation also registered a strong increase in 2008- from 3.9 percent to 7.4 – suggesting that underlying inflationary pressures were very strong in 2008.

Action by other nations
Mr. Speaker, when we look at how other countries have been dealing with this situation, it is clear that most are necessarily adjusting their strategies as global events continue to unfold. For instance, in the industrialized nations, initially, the focus was on stabilizing financial markets with public funds though, among other measures, purchasing distressed assets, recapitalization of banks, providing comprehensive deposit guarantees and coordinated reduction of policy interest rates by major central banks.

The focus has now changed and in recent weeks, most developed countries have either already adopted or are in preparation for fiscal stimulus programmes to deal with the worsening recession. For instance, in the United States of America, in addition to a bank-support programme of US$700 billion, there is a proposal by the incoming administration, for a fiscal stimulus package of us to US $1 trillion. The UK, Euro-Zone nations, Canada and other developed countries have also announced significant fiscal packages which call for Government intervention to the tune of hundreds of billions of dollars.
The fastest growing major emerging economies, China and India, have also had to adopt similar strategies to shore up their flagging economies, with a US$600 billion plan in China, and a US $56 billion package in India. All these state interventions are geared towards public spending no economic, social and physical infrastructure in an attempt to inject life into limping economies.
CARICOM nations are also doing what they can. Jamaica is implementing a stimulus package which includes tax cuts, duty exemptions and loans to help the economy's most vulnerable sectors; and in Barbados the effort is to defend existing jobs, support the poor and vulnerable and protect the ailing tourism sector.

In each case, as you would note Mr. Speaker, the common thread in the strategy to ward off recession is continued fiscal initiatives by Governments to maintain or improve infrastructure and to stimulate the real and productive sectors of the economy in the face of the severe credit crunch being experienced in those economies.

The uncommon position of Trinidad and Tobago

Mr. Speaker, whilst it is true that, like all other nations, Trinidad and Tobago is not immune to the fallout from the present global economic environment, it is also a fact that our position is not the same as so many other countries. In fact, from one very important perspective, our situation is very different. We have been experiencing high levels of liquidity from developmental activity in both the public and the private sectors, high levels of employment and very buoyant revenues. As a result, credit expansion has been such that the Central Bank has had to pursue tight monetary policy by increasing the repo rate and the reserve requirement ratios over the last year in its attempt to contain liquidity and dampen inflationary pressures. In other words, whilst at the domestic level in so many countries, the flow of credit has almost dried up, we have had to take steps to dampen the flow.

Declining Revenues
But Mr. Speaker, as is well known, our revenues have fallen as a result of the precipitous drop in the price of oil, and in the less dramatic but gradual decrease in the price of gas. The prices for some of our major commodity exports, ammonia, methanol and steel have also fallen significantly.

We have therefore had to review our budgetary assumptions, and in November we brought to the attention of the nation the fact that government revenues would be $5.3 billion lower than projected. To meet this shortfall, we identified cuts of $4.7 billion, spread between current expenditure of $3.3 billion and capital expenditure of 1.4 billion.

In making our decision, we were mindful that if we are to avoid a recession in these challenging times, we could not take the contractionary approach to our economic development. We cannot completely shut down our development programme. This, as I have pointed out, is a major pillar of growth of all economies and we are no exception. And, as I said on the last occasion, the country must keep growing even at though at a more measured pace. Standing still is simply not at option. Not in this situation.

Under these circumstances, therefore, the Government has a special responsibility to pursue a level of economic activity that would keep our economy on a growth path; keep our people employed; and keep resilient, the social fabric of Trinidad and Tobago.

The worsening situation
Mr. Speaker, as the world economy continues to worsen, Trinidad and Tobago is increasingly experiencing its negative impact. The evidence can be seen in the following:

• The weakening stock market activity in the last quarter;
• discernable softening in the real estate market;
• A reported decline in retail sales during the Christmas season;
• The postponement of some private sector investments because of the adverse market outlook;
• The continuing temporary closure of the plants in the domestic energy sector; and
• The postponement of new plants in the energy sector which were carded to begin construction this year.

The facts of the situation
Thus far, in response to our efforts to reduce inflation, there has been a sizeable increase in interest rates which has had a noticeable effect on both consumer purchases and business credit expansion. However, these trends, if taken too far, could contribute to a marked slowdown in private sector activity and a rise in unemployment. In addition, due to prevailing circumstances, it is very possible that oil and gas prices in 2009 could fall even lower than the revised projections made in late November 2008.

But there is a silver lining. With a projected continuing fall in global and domestic demand, and the reduction in international commodity prices, particularly in the area of food, we are already beginning to see a reduction in the rate of inflation. Therefore further measures to tighten the system may not have to be instituted, thereby easing the interest rate pressure presently existing in the system.

Also, after much discussion and deliberation, including with the Central Bank, it was agreed that we would base our oil and gas revenue projections on US$45 per barrel for oil as referenced by West Texas Intermediate Index and US$3.25 per mmbtu for gas, representing Henry Hub Prices less transportation, liquefaction and regassification. With this adjustment, we are forecasting a further decline of approximately $3 billion in government revenues. These are the facts, Mr. Speaker, that we must accept.

The required adjustment in approach
The Government is of the view that we cannot continue to cut government expenditures to fully compensate for the additional revenue shortfall. The Government is convinced that in this very difficult economic environment, which we did not create, our first priorities must be the welfare of all the people of Trinidad and Tobago. We are firmly committed to doing everything possible to avoid a recession which would seriously affect employment levels and negativity affect our social welfare and poverty alleviation objectives.

We are convinced that with the global recession impacting on local private sector confidence, and with weakening export demand from our Caribbean markets, the Government has the responsibility to maintain an adequate level of domestic demand. At the same time we have already demonstrated our commitment to fiscal discipline by trimming expenditure by 8 percent compared with the original budget. But continued weakness in oil, gas and commodity prices have lead to a further decline in fiscal revenues and the government must therefore make an adjustment in our approach. We have consequently decided that we will employ a two-pronged attack. We will continue to trim expenditure; and recognizing that we cannot totally compensate for the revenue shortfall, we will also run a temporary deficit. That is to say we will fund a part of our expenditure out of savings.

On the basis of what is generally considered to be conservative assumptions, US$45.00 per barrel for oil and US$3.25 per mmbtu for gas, our latest projections are for government revenue of $42.2 billion, some $7.2 billion less than the original budget figure. Our expenditure is now estimated to be 43.9 billion, approximately $5.6 billion less than in the approved budget. You may recall that in my last address on this issue we estimated revenue of 44.2 billion dollars and expenditure of 49.4 billion dollars with a resultant shortfall of deficit of 5.3 billion dollars. After expenditure adjustments of 4.7 billion dollars we realized a deficit of 700 million dollars. In this scenario with revenues of 42.2 billion dollars and expenditure of 43.9 billion dollars we will realize a deficit of 1.7 billion dollars or 1.3 percent of GDP.

The government will issue bonds in order to finance the deficit without compromising our economic fundamentals. We are able to do this because over the years, we have realized a significant build up of savings as well as growth in our foreign reserve position which could more than adequately meet the necessary repayments on our sovereign debt. Given the existing high liquidity environment, we are certain that this can be done exclusively on the domestic market. We believe that this is a far-more acceptable solution than accessing the Heritage and Stabilisation Fund, permitted under the provision of the existing Heritage and Stabilisation legislation.

I want to also emphasise that the decision to have resources to moderate amount of deficit financing, on a temporary basis, does not indicate a relaxation of the government's commitment to rapid inflation reduction.
Rather, the government's view is that inflation will continue to fall throughout 2009, based on the ongoing decline in international food prices, the growth in domestic food production, evidence of which is already forthcoming, and the generally lower level of domestic demand in 2009.

The limited deficit financing and the adverse export outlook will also not affect our commitment to exchange rate stability. The fact is that as at December 31, 2008, the Central Bank now has US$9.2 billion of official reserves, the equivalent of 11 months of imports, available to moderate exchange rate fluctuations as necessary.

Also, our strong reserve position and our exceedingly low external debt burden will continue to underpin the country's investment grade rating, as emphasized by the recent Moody's report which endorsed our present policy position, and which can be used to access foreign financing at favourable terms, if and when necessary.

Conclusion
In summary therefore, Mr. Speaker, as I indicated earlier, we are confident that we can weather this storm. Our economy will continue to grow in 2009, even though at a slower rate than that to which we have become accustomed over the last seven years. We also expect a reduction in inflation during the year with headline inflation falling to about 7-8 percent by December 2009. And while the slowdown will ease pressures on the domestic labour market, we do not expect and major increase in unemployment.

Mr. Speaker, I want to emphasise that notwithstanding the revised expenditure position, there will be no cuts in wages and salaries, pension benefits, senior citizens grants, disability grants, and social assistance grants. Most importantly, all programmes dealing with the fight against crime will be continued.

As we move forward in this challenging period, I wish to assure the national community that the government will continue to manage our economy and society with strength and resolve. The present situation is an opportunity for all of us to become more creative and careful in the management of our lives. Be frugal in your spending. Save wherever you can. These circumstances must be a lesson to all, particularly the young, of how accident or unforeseen circumstances can arbitrarily alter the path or projections that you have so carefully charted. But it is situations like these that test your mettle and your ability to hold on to your dreams no matter what the obstacles.

We know that the transformation of Trinidad and Tobago into a developed nation is the next giant step that out country needs to make. All the plans have been meticulously laid out for moving to this destination. We were moving smoothly until this rough patch descended on us. But we have the courage of conviction to hold on to our dream that Trinidad and Tobago must become a country of abundant and equal opportunity for all citizens, a nation of sustained prosperity and security for present and future generations.

Thank you, Mr. Speaker.
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