Former Central Bank governor: T&T needs a competitive non-energy sector

Former Central Bank governor Ewart Williams is convinced that if T&T is to reach its economic potential, the country will need to have a vibrant, diversified and competitive non-energy sector in which the capital market will be a major contributor. To achieve this, he said, the capital markets would have to renew its role in the financial landscape.

Speaking at the Securities Dealers Association of T&T (SDATT) 2012 Annual Capital Markets Awards Dinner held at the Casablanca Ballroom at the Fiesta Plaza in MovieTowne, Port-of-Spain, on October 18, Williams called on SDATT to rally its members who possess the expertise to achieve this task.

“While the T&T economy had made significant progress as a result of our oil and gas endowment, we continue to be subject to ups and downs (booms and busts) because we have not succeeded in establishing a competitive non-energy tradable sector. Put another way, we have not used our considerable energy bonanza to establish a platform from which we could continue to maintain our current living standards when our oil and gas resources have dwindled.”

Williams noted that we have been facing “a secular decline in oil production from around 120,000 barrels a day to a mere 80, 000 barrels a day.” Gas output has also declined, though some of the fall could be due to temporary shutdowns for long delayed maintenance, he said.

As if this was not enough bad news, Williams said available technical reports show dwindling proven reserves. Williams said, “There are reports of renewed interest in oil and gas exploration which, if successful, could mean increased production five to so years down the road, at a minimum.

“But according to the experts, given the high costs of deep water exploration, exceptionally high international prices will be needed to make any new oil discoveries profitable.” On the other hand, Williams said, the rapid expansion of shale gas production could significantly reduce demand for our gas and our petro-chemicals and drive prices way below current levels.

Williams referred to the 2013 budget presentation by Finance Minister Larry Howai, in which the minister projected real growth of 2.5 per cent next year. The former governor, however, did not share that view. He said assuming that gas production returns to normal levels and that the Government’s infrastructural programme is implemented as budgeted, while the private sector construction activity recovers that projection, at the very least, carries high downside risks.

“We certainly should not expect the rapid growth of the pre-2008 period, when real GDP increased by an average of seven to eight per cent a year. The bottom line is that we may be coming to the point where the impulse from the energy sector could be getting progressively weaker. In these circumstances, without the benefit of a competitive non-energy tradable sector, our medium term economic sustainability and even our current living standards could be under threat.

 In short, Williams said, we urgently need to transform our non-energy sector and the upgrading of our capital market is critical to this effort. “In a fundamental sense, our dual economy and the economic strategy pursued over the past decades have conspired to limit the development of our capital markets,” Williams added.

T&T’s energy sector accounts for almost 40 per cent of GDP. Excluding Government, most of the local investment since the 1960s has been in the energy sector. The sector, Williams said, has had no recourse to domestic financing since its expansion was funded by foreign direct investment or by returns on earnings.

But in his forecast for stimulating growth in the capital markets he was convinced that the time was right for Government to step up its contribution to the development of this sector. Williams said the facts show that in T&T there exist a chronic shortage of government securities and that bolstering this sector would better shift national dependence away from energy revenues, while making efforts at diversification more achievable.

“In good times (in the booms) the Government runs surpluses and thus has no need to issue securities to finance deficits. When energy revenues decline and the Government needs to run a deficit, it invariably takes the position that it should be able to use its accumulated savings. Thus, instead of using securities, it runs down its deposits at the Central Bank.

“Over the years, it has proven to be difficult to convince Governments of the need to issue securities to serve as benchmarks for the private sector and to help in the development of the capital markets. While officials complain about the net cost of such bond issuance, they tend to underestimate the potential benefits of capital market development,” Williams said.

The chronic shortage of government securities and the inability of the private sector to count on a steady stream of government securities of varying maturities have contributed to the ‘buy and hold’ syndrome, which has stymied the development of the secondary market for government securities.

And then there is the non-energy private sector which has depended disproportionally on the banking system for its financing needs, he said. “Because of the predominance of construction and distribution activities the availability of collateralised bank financing generally fits the bill. In these relatively low-risk activities, new firms see the need to seek equity financing or funding through the issue of corporate bonds.”

 The non-energy sector’s dominance by small family firms reluctant to dilute ownership or face the more stringent disclosure requirements are additional contributors to the stunted growth of the private securities market, Williams noted. Challenges aside, Williams lauded the strides in the capital market over the last decade.

With the Securities and Exchange Commission and the Central Bank as the main drivers of change, he said, SDATT played its role well. He pointed to the introduction of electronic trading in 2005, followed by the establishment of a secondary market for government securities in 2008.

Two years later came the corporate bonds market and then the agreement reached between the stock exchanges of Jamaica, Barbados and T&T on the Caribbean Exchange Network. Williams called on local industry experts to lobby for the passage of the Securities Industry Act (SIA). “This, just like several other pieces of financial legislation, has taken too long,” Williams said.

The new SIA will promote and improve market transparency, efficiency and integrity. It will expand the functions and powers of the SEC, enhance disclosure requirements and will enhance the enforcement capabilities of the SEC. “If we are really interested in being an international financial centre, as we say we are, we need legislation that gives the regulator the necessary legislative authority to manage and enforce the rules,” Williams said.