Without a strong economy, a government’s ability to provide public goods, services and social programmes would be compromised. Government revenues are derived from taxes on private sector profits and VAT on expenditure. A weak economy means fewer successful businesses and lower tax revenues. Therefore, keeping track of the economy is critical.
The IMF and the Minister of Finance have projected modest annual economic growth (1.5 per cent to two per cent) for 2024 and in the medium term.
To manage the economy’s performance, the Finance Minister needs current data, not 2023 third-quarter data.
In the absence of timely economic data from the CSO, commentators often resort to anecdotal evidence and “soft” statistical data to evaluate the country’s current economic position. Available anecdotal data suggest that the growth estimates would be difficult to achieve.
First, retailers complained that December 2023 sales were below expectations despite the impact of public service retroactive payments (back pay).
Those comments were widely dismissed as belly-aching by the private sector. Preliminary financial data from supermarkets and other retailers confirm that sales in the fourth quarter were flat or negative.
Fourth quarter performance indicates what could be expected in the first quarter which is generally weak, notwithstanding Carnival and Valentine’s Day.
Next, during the recently concluded Energy Conference, the National Gas Company’s president indicated that “we are at a very critical juncture where we don’t have the materialisation of Manatee and Dragon deal until the next four years or so.”
He noted that the decline in natural gas production was “the monster in the room” and in the period 2024-28, “We (NGC?) are trying to keep a plateau.”
If this means maintaining production at the current level of 2.6 billion cubic feet a day, that is inadequate to keep all the petrochemical plants open, even if they are operating at reduced capacity.
Some plants would remain closed. That presumes that international prices would remain buoyant in the face of a sluggish world economy.
The CEO of Massy Wood noted that contracting companies were struggling. Dr Priya Marajh, vice president of the Energy Chamber noted that smaller contractors often complained about cash flow constraints which appears to be a wider issue.
Major carnival band leaders also noted a decline in registration and therefore sales of carnival costumes, though they attributed this to the impact of crime on tourist arrivals.
The inference from the foregoing is that economic growth in the first quarter is likely to be low or negative.
The key question is what could be done to improve this weak performance. The short answer is nothing, apart from increasing government expenditure.
Business decisions take time to formulate, and a gestation period to implement those decisions.
Any response to fiscal incentives would be realised only after the full impact of the incentives on the business has been evaluated and the risks considered.
There are no major incentives that could cause an uptick in domestic business activity in the short term. Except for the opening of Phoenix Park industrial estate, the announcement by local conglomerates and the direction of their investment dollars has been about expansion into external markets, not about investment in the domestic market for export or otherwise.
The commentary and presentations at the Energy Conference were not encouraging. There were no new announcements.
The Energy Minister’s comments confirmed that the energy sector remains the key economic driver. There were no major projects to celebrate. Shell has been silent on its progress on Manatee and the Dragon project.
Shortly after came the news that the US began reinstating sanctions on Venezuela. After Venezuela’s top court upheld a ban blocking the candidacy of Maria Corina Machado, the leading opposition hopeful in presidential elections, a Biden administration source said a roll-back of restrictions on the oil industry could be allowed to expire.
Unblocking this ban is highly unlikely. Even if it is argued that Venezuela’s Supreme Court is stacked with Maduro loyalists, overturning the ban would confirm that the Executive is guilty of an abuse of legal process.
Further, Machado’s remarks have often bordered on treason.
Every energy project has inherent risks. For example, market conditions fluctuate many times in the life of a project which could affect its feasibility. Project costs could increase because of construction overruns, delays or faulty engineering.
Therefore, before any substantial investment is sanctioned several preconditions must be satisfied before FID (Final Investment Decision), all of which are designed to reduce the inherent risks associated with the project.
One stubborn difficulty with the Dragon deal is the political risk which cannot be mitigated by insurance as Venezuela’s track record with international investors is chequered.
Given the geopolitical risks, the Dragon deal cannot realistically be considered a “project,” at least not in the foreseeable future.
Unfortunately, the option of borrowing to increase government expenditure to maintain economic activity has the unfortunate downside that it also increases the demand for foreign exchange.
That is not a sustainable policy option.
Mariano Browne is the Chief Executive Officer of the Arthur Lok Jack Global School of Business. ALJGSB is a not-for-profit corporation.