Various World Bank research papers have estimated that a financial crisis can have a prolonged effect on an economy. Researchers have estimated that full recovery from the impact of a financial crisis can take five years or more and can depress the national income by as much as one per cent on average. COVID-19 has had a more profound impact on the world economy than the 2008 financial crisis leading the IMF to project that the world economy will decline by -4.4 per cent in 2020, but will rebound by 5.2 per cent in 2021. The T&T rebound is projected at 2.6 per cent but this is not automatic.
What is unknown is the extended and continuing impact of COVID-19. Following the disruption of the global financial crisis just 12 years ago, it will undoubtedly have significant long-term consequences for the economies and businesses of all affected countries, their politics, and international relations. Much will change, but exactly what will change is still uncertain.
We know that the widely adopted social distancing measures have damaged all human activity which requires direct human interaction, whilst facilitating those activities which allow remote interaction, benefiting those people who can stay at home. Border closures and pervasive health restrictions have decimated all travel. The big loser has been tourism and those businesses associated with the travel and entertainment industry, cruise ships, airlines, hotels, live entertainment, and related trades.
Fiscal and monetary interventions by governments worldwide have exceeded the interventions associated with the 2008 financial crisis especially in those countries with internationally accepted currencies. Ultimately, those interventions will have to be paid for. Fiscal deficits must come to an end and the resources found to retire the debt and return to more balanced fiscal conditions.
In T&T, economic conditions were challenging before COVID-19. The debt to GDP ratio is 80 per cent and climbing, in the effort to maintain current lifestyles. GORTT which has been borrowing to meet its debt service requirements will have to reverse its deficit financing approach soon if it is to live up to its anti-IMF mantra. Even if natural gas prices recover, there are still pressing long-term issues such as an ageing population and an energy sector that faces a future which is less buoyant than its past.
What are the longer-term opportunities?
The first hurdle is how long will the pandemic and the associated policies last. What policies can be retained whilst allowing the economy to function “normally”?
Businesses which do not have the financial reserves will close their doors. Some will emerge debt burdened and will struggle to survive. Many will have to restructure their operations through process efficiency improvements, especially those processes that can be automated or make greater use of the internet. Most importantly, these improvements need to be made in the areas which can generate foreign exchange in new and creative ways. The foregoing implies a continued contraction in GDP and job losses. Restructured businesses also imply a restructured economy.
What are the human resource requirements or priorities in a shrinking economy?
For example, both GATE funding and job opportunities are contracting. Excluding those who seek tertiary education abroad, this will lead to a reduction in the number of students seeking places and the number of institutions offering educational products. Thirteen organisations are offering some level of undergraduate and tertiary training. Adjustment is inevitable. This process is being enacted across all businesses.
If restructuring is already ongoing, the second hurdle is how best to restructure the economy. COVID-19 has created a negative feedback loop for the energy sector. The refinery was already closed under the combined weight of inefficiency and debt. Lower economic activity internationally may have accelerated the prospect of peak oil and the recognition that the Petrotrin refinery may not reopen. Similarly, increased natural gas input prices and soft market prices for petrochemical products has brought the petrochemical sector to its knees. Will a return to pre-COVID-19 market prices make a difference and when will this happen?
The third issue is the enhanced role of technology. Technology has the capacity to make systems more efficient and by so doing, change the capital to labour ratios and the skill level demanded of a more modern workforce. This will require reskilling in all sectors. But it also raises the issue of how best to domesticate technology. For example, looking to the banks for assistance in developing web embedded settlement mechanisms immediately raises the issue of foreign service providers and foreign exchange leakage.
Similarly, shopping from home has a knock-on impact on the retail sector. This is precisely what an ill-conceived “internet tax” was attempting to address. Why go to a cinema, if there is Apple TV, Netflix, or Disney? Big tech is ubiquitous. Zoom, Microsoft meetings, Google Meet have changed the way people interact and do business. Digitisation, therefore, also means accelerating “virtual” globalisation, notwithstanding the negative geopolitical impact on world trade.
These are some of the “big-picture” issues. Growing the economy is not simply a matter of waiting for energy prices to rebound or finding more gas. There are many fundamental issues which require more considered policy formulation. Buying time whilst selling hope is not a sustainable approach.