A general strike is the "worst possible thing" T&T can face at this time says Central Bank Governor Ewart Williams.He explained that a general strike in the face of global uncertainty following the downgrade of the United States credit rating, coupled with the fragile state of business confidence in T&T, could affect consumer demand and put a halt to any resurgence of economic activity in T&T.
He was speaking at the bank's presentation of its economic bulletin yesterday.Angered by the Government's refusal to remove a five per cent cap on the wage negotiations, the trade union movement has threatened a general strike.While he didn't have advice to offer the Government on how to deal with the issues on the labour front, Williams said:
"We can't afford a general strike with the fragility of the economy. There's a nervousness that pervades the international capital markets now. We can't afford it."To this end, he observed that T&T's rainy day savings - its US$3.7 billion Heritage and Stablisation Fund (HSF) - had "taken a hit" following the downgrading of the US credit rating.He explained that 35 per cent of the HSF assets were held in equities which have experienced losses after eight consecutive days of decline in the world's stock markets.
But the diversity of the HSF portfolio left room to accommodate the losses, explained Williams.He said the Central Bank would monitor the situation and issue a statement in the coming days.He observed that the downgrade of the US credit-rating had come at "the worst possible time" with severe implications for world markets and the T&T economy.
He pointed out that while all the Asian countries, as well as the G7 countries have made statements re-confirming the US dollar as the world's reserve currency, the downgrade was reminiscent of the 2008 global recession and raised the spectre of double digit inflation.
Williams said there was still a question mark on what would happen to interest rates.That, he said, had an impact on what was happening in T&T and the region with a projected fallout in remittances and tourism."In T&T," he said, "we are not yet seeing the long awaited recovery."To illustrate his point, the Governor provided these statistics:
Preliminary data suggest a decline in real GDP of 1.7 per cent during the first quarter of 2011, following two consecutive years of negative growth;
There was an eight per cent decline in crude oil output and a 2.1 per cent decline in natural gas production;
Subdued construction activity. Cement sales declined 18 per cent year-on-year;
Capital spending is lower than budgeted. Government spends an average $350 million a month for the first six months of 2011 but the pace has increased to over $1 billion a month in the third quarter of the fiscal year; and
there is evidence that unemployment is increasing. For now, it stands at 4.8 per cent.
However, there are some positive signs:
Government recorded a surplus of $1,227 million for the first nine months of the fiscal year. Elevated oil and petro-chemical prices, coupled with collections from the tax amnesty, resulted in a year-on-year increase in Government revenue of 8.4 per cent;
headline inflation decelerated to 0.8 per cent in June;
bank excess liquidity has declined from unusually high levels. This has lead to an increase in three-month Treasury Bill rates from a historic low of 0.38 per cent in December 2010 to one per cent in June 2011;
the domestic stock market indices rose in the first six months, albeit on low trading volume; and
T&T's external current account balance strengthened to US$3,842 million - eight per cent of GDP.
Toward Economic Growth
Williams maintains that T&T can achieve a "tepid" 1.5 per cent to two per cent growth in 2011 and can sustain this for the next three years.He said part of achieving that must involve bringing the public finances back to balance.The Government, he says, must look at the elements of expenditure and consider its focus to achieve fiscal balance in the next three to five years.
"The priorities must be set in the PSIP, whether it is energy or non-energy or other areas, like subsidies or the wage bill. It is not an easy challenge but it is a challenge," he said.He said the downgrade would precipitate the US taking fiscal consolidation seriously, a move which T&T could follow.For now, public debt to GDP stands at 35 per cent.Williams pointed out that the 2011 budget would have a deficit of $6.5 billion.He said the impact of the deficit and the Clico bailout (which ranges from $5-$8 billion) would move the debt to GDP to about 50 per cent.
"You cannot continue at this rate," he added.Asked his thoughts on the imminent Budget 2012, Williams said:"The bank's view is that this budget should mark the beginning of fiscal consolidation, moving to a balanced budget or a smaller deficit."Williams insists that the public debt burden should not move beyond 50 per cent.
Questioned on the issues of subsidies in the budget, inclusive of a $4 billion fuel subsidy, Williams maintained that those decisions were based on the political economy but that "difficult choices cannot be put off."He added: "The energy subsidy... no one talks about it but we are going to have to face it to get public debt at a level that is sustainable and deal with issues on the revenue side."He also pointed out that there were leakages in the VAT system which ought to be strengthened to allow people to pay their fair share.