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A crisis of confidence
The Fourth Biennial International Business, Banking and Finance Conference hosted by the University of the West Indies, St Augustine campus, was held last week. The overall theme of the conference was: Restoring Business Confidence and Investments in the Caribbean. The restoration of confidence is a topic that is both timely and relevant to the investment climate in T&T and that is why in my address to the conference I focused on the issue of confidence itself. The issue of confidence is often seen as a rather obscure concept in that there are a number of ingredients that go into creating confidence. Further, it is often how these ingredients are mixed together as opposed to their mere presence that lends to confidence.
I offer a definition of confidence that it is rooted in its simplicity, since it is important to define and understand a concept as a first step. If you accept the view that confidence is “the conviction that tomorrow will be better than today,” then you will appreciate just how broad is the issue of developing confidence and just how fragile is its sustainability. Appreciate that economic growth comes through investment. Investment is a form of deferred gratification in that it involves committing resources to work today that can otherwise have been used for immediate consumption in order to generate a return in the future. Essentially, confidence manifests itself in the form of increased levels of investment activity and, such investments take place on the basis that the current and future environment is conducive to generating a level of return that makes the activity worth the risk.
Those investments will inevitably create jobs, which will create economic activity, generate tax revenues, and spur the economy onto greater heights. Essentially confidence is the factor that leads to prosperity.
The absence of confidence implies that people do not invest for the future but seek to consume for the present. Either that or they hoard current resources for future consumption instead of investing those resources in order to generate a gain and then consume from that future gain.
You may recall a couple years ago when food price inflation was rampant that there were allegations of price gouging on the part of “middle-men.” The suggestion was that the farmers were producing foods at reasonable prices but “middle-men” responsible for bringing goods to the consumer were placing unreasonable mark ups creating the inflation that we were experiencing. At the time, I made the point writing in this space that price gouging was only possible when other businesses were unwilling to step in to compete away some of the excess profits. This only happens when people are unsure of the environment that they are operating in. Confidence thrives when there are reasonable and known parameters in assessing an outcome and disappears when the landscape lacks transparency.
While the authorities of the day were keen to pass the blame onto the business community in labelling the term “price gouging,” they were implicitly highlighting their own inability to engender confidence in the economy. Essentially, the situation was one where existing business were seeking to earn as much as they can in the shortest possible time (the price gougers), and potential business entrants were reluctant to enter the market because they are unsure of the landscape that they will face.
When there is a lack of confidence, everyone loses including the common man and especially those that can least afford to support themselves. The opposite is also true in that confidence brings prosperity. When we look at the T&T business landscape over the past decade, question the level and type of indigenous business activity that has taken place.
Most of the activity has come in the form of retail superstores where people import goods and sell to consumers ready and willing to conspicuously consume for today. There has been a preference for the fast food and casual dining experience as well as entertainment centres. All of these are not investments that seek to create sustainable wealth for the nation but, rather, they are geared towards capturing as much of the wealth that is currently in circulation. Let me be clear that I have no issue with the business community by and large adopting this approach, since money will follow the path of least resistance, and it is the role of the administrators of the economy to create and develop a sustainable path such that businesses will be prepared to take the risk of innovation, investing in technology, importing expertise and competing internationally.
Using foreign expertise
Sadly this has not been our focus. Instead we sought to import labour and utilise foreign expertise in a mad rush to develop infrastructure, which now lies idle. Our attempts at fostering entrepreneurship in the form of Cepep turned into a mechanism to share the largesse of the State to those faithful to the party in power and very little of that has changed up to today. Energy crisis. If you accept this as our business reality over the past decade, then appreciate that we have not had an environment of confidence for a very long time. There have been precious few investments outside of pandering to retail consumption and such consumption was only possible due the unprecedented levels of spending in the local economy over the past decade. That spending created an illusion of confidence and now that such expenditure is no more, having been unsustainable in the first place, the lack of confidence in the economy is exacerbated.
There are many ingredients that go into the confidence soup and how the pot is stirred is as important as the ingredients that goes in. It is my firm view that the number one issue affecting confidence in the T&T economy is our level of proven energy reserves. At last count, we were down to about ten to 12 years of proven reserves at current consumption levels. Unless and until we can rebuild our reserve position to the point where we are not anxiously looking to the depletion of our energy resources within the next decade, then I suggest that the economy of T&T is going to go nowhere. We have invested precious little in increasing the level of proven reserves from 2005 onwards, but implemented a number of initiatives that led to the rapid decline in our reserve position. Now with the global reserve to production ratio for natural gas in excess of 60 years, such that natural gas prices are at extremely low levels, it is increasingly difficult to generate investment activity in this sector in order to improve our reserve position.
If we fail to address our declining reserve position, then we will be faced with a population that will be increasingly seeking to maximise their immediate return as opposed to investing in the nations future. It is essentially a case of running away while trying to gather all that you can now.
This attitude has manifested itself in the predominant retail business trade, in the unions fight for higher wages, in what and where people choose to study (abroad) and even where they invest and in what currency they invest in. The longer we are unable to address this issue, the more pervasive it becomes and the more uphill the task of engineering confidence in the economy. Another key issue is that of moral hazard. As a people, we have become accustomed to the Government stepping in and saving the day, and so outside of the cultural and entertainment circuit, there is very little business innovation on show. To be fair, the moral hazard issue is not unique to T&T.
There is the feeling in the United States that the US Federal Reserve will do what it takes to prop up the stock market, there is the view that the European Union will do what it takes to ensure that Greece does not default, there is a view that the Chinese government will ensure that the economy does not crash.
The problem with all these views is that it leads to complacency and here in T&T, our dependence on the State means that our complacency is almost cultural. At the end of the day, it is important that the State recognise its role in engineering the required confidence in the economy. The lengthy delays in appointing state boards followed by a Cabinet reshuffle just after one year in office suggests that there is a long hard task ahead. Let’s see how well we rise to the challenge.
Ian Narine is a broker registered
with the Securities and Exchange Commission.
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