As T&T comes to the end of its Investment Week, during which the Caribbean Investment Forum and the Trade and Investment Convention are held, it might be useful for both visitors and residents to know that between the period 2006 and 2011, T&T attracted foreign direct investment of US$6.3 billion, according to a study of investment flows into the region published last month by the Economic Commission of Latin America and the Caribbean (ECLAC). That study indicates that foreign direct investment into T&T peaked in 2008 at US$2.8 billion but declined every year since then to US$293 million for the first half of 2011. Of the 18 Caribbean countries analysed by ECLAC, the Dominican Republic attracted the most foreign direct investment with US$12 billion between 2006 and 2011.
While in T&T foreign direct investment declined by 90 per cent between the peak year of 2008 and the first half of 2011 (from US$2.8 billion in 2008 to US$293 million in 2011) foreign direct investment flows into the Dominican Republic only declined by 17 per cent (DR reported its full-year 2011 numbers). And whereas foreign investment in T&T declined by 3 per cent between the first half of 2010 and the same period in 2011, it increased by 25 per cent in the DR in 2011. Also, T&T attracted 27 per cent of all foreign direct investment into the Caribbean in 2008 (compared with the DR which received 28.5 per cent); but this country only got 6.6 per cent of total inflows in 2011 (ECLAC used first half 2011 figures), while the DR received 53 per cent.
In economics, the amount of foreign direct investment a country receives is measured in the capital account of the balance of payments statistics. The capital account measures the changes in national ownership of assets. The easiest way to grasp the concept of the capital account is that it is the difference between foreign ownership of domestic assets and local ownership of foreign assets.
A surplus in the capital account means that money is flowing into a country as foreigners increase their ownership of local assets (for example, the establishment of a caustic soda and calcium chloride plant in Point Lisas). A deficit in the capital account means that money is flowing out of the country as locals increase their ownership of foreign assets (such as the decision by a T&T bank to purchase a bank in Barbados or the decision by locals to buy condos in Fort Lauderdale). What is the position of T&T's capital account?
It has been consistently negative for years and, in fact, even in 2008, the year in which this country attracted a record US$2.8 billion in foreign direct investment, the Central Bank's 2011 Annual Economic Survey indicates that T&T reported -US$5.7 billion (negative US$5.7 billion) in the capital account. This means, quite simply, that in 2008-which was the peak year for foreign direct investment into T&T-nationals of this country increased their ownership of foreign assets to a much larger extent than foreigners increased their ownership of local assets.
Since 2008, the capital account has reported the following: negative US$2.3 billion in 2009; negative US$3.7 billion in 2010 and negative US$1.38 billion between January and June 2011. Should the fact that T&T's capital account is consistently negative be a source of concern for the country's Government? Put another way, should the Government be worried that T&T nationals buy more foreign assets than foreigners buy local assets? In and of itself, and on balance, a negative capital account is not necessarily damaging to a small, open economy like T&T's, if the foreign assets that are being purchased by nationals of the country lead in the future to increased flows of foreign exchange. The First Citizens purchase of the Barbados branch of Butterfield Bank, for example, will lead to an outflow of US$45 million when the local state-owned bank pays the Bermuda-based financial institution. But as Butterfield Bank of Barbados increases its loan portfolio and achieves profitability, it must be assumed that eventually those profits will be repatriated to Port-of-Spain-to benefit the future T&T shareholders of First Citizens, whenever the Cabinet gets around to giving the green-light for its divestment.
On the other side of the coin, when foreign companies make decisions to invest in T&T (such as the CariSal plant referred to earlier, which is a partnership between local and foreign investors), the country benefits. The construction of the US$430 million plant will generate hundreds of construction jobs and when the plant is established, it will pay millions of dollars in new taxes into the Treasury as well as millions more in salaries to its permanent employees and natural gas, water, electricity and other raw material costs. There is no doubt that a country like T&T derives huge benefits from foreign direct investment. But it should also be clear to readers that when (if?) the Carisal plant is established and becomes profitable, the investors (whether local or foreign) will require a return on their investment in the form of dividends paid from the profits of the enterprise and that to the extent that those investors are foreign, that means an outflow of foreign exchange. In answer to the question of whether the Government should be worried that T&T nationals buy more foreign assets than foreigners buy local assets, it really depends on the nature of the investments by both the local investors in foreign assets and the foreign investors in local assets.
It is a positive for the economy if the capital account is negative because locals are making investments in foreign assets that will redound to the benefit of the country as a whole (such as the aforementioned investment by First Citizens and my proposal last month that the Government should establish a new sovereign wealth fund to make investments in strategically important foreign companies). It is a negative for the economy if the reason that the capital account is negative is that T&T nationals are engaging in capital flight with no prospect of that money being returned in the near future and with the returns on that investment being parked overseas. A problem for the Central Bank and for the Government is that there is no easily discernable reported metric by which one can even estimate the reason why locals are purchasing foreign assets. On page 110 of the 2011 Annual Economic Survey (table 36 A), the Central Bank breaks down the capital account into portfolio investment, direct investment, regional bond issues, commercial banks, official loans and borrowing, the Heritage and Stabilisation Fund and state enterprises.
But then there is the category of "other private," which always constitutes the largest outflow. All the Central Bank says about "other private" is that it represents short-term foreign capital. In the peak year of 2008, when the Central Bank measured foreign direct investment as an inflow of US$2.1 billion, "other private" was an outflow of US$5.8 billion. Is this category where the Central Bank attempts to grapple with capital flight?
Also, the only way that T&T is able to continue running a deficit on its capital account is because it continues to report a surplus in its current account. This is the category of a country's balance of payments in which its balance of trade, factor income (earnings on foreign investments minus payments to foreign investors) and cash transfers are measured. In effect, T&T energy sector is facilitating the purchase by locals of foreign assets. While it is clear that foreign direct investment in T&T has slowed (as has local investment abroad), the more pertinent but difficult question is what has become of local investment in the domestic economy.
More anon.
