Republic Bank: High commodity prices fuel growth, high wage demand a threat

Boosted by positive developments in the dominant hydrocarbon sector, the Trinidad and Tobago economy continued its strong performance into the final three months of last year, according to Republic Bank’s economic news letter. Preliminary Republic Bank estimates show real output growth of over 2.0 percent in the final quarter as compared to a 2.3 percent contraction in the corresponding quarter a year earlier. Growth for the whole of 2003 is estimated at 3.4 percent. The inflation rate grew marginally in the fourth quarter by just under 1.0 percent and the unemployment rate is expected to average just over 10.0 percent. The fall in interest rates seems to have finally found favour with borrowers as credit demand rose towards the end of the year, said the newsletter.

On commodity prices, it was pointed out that civil unrest in Venezuela and war in Iraq crippled the production capabilities of these two OPEC members in 2003 and provided some impetus for the resulting high oil prices. Growing international demand also helped sustain higher energy prices into the fourth quarter, the bank said. Crude oil (WTI) averaged US$30.93 in the quarter, a 4.6 percent increase over the previous quarter and 13.3 percent higher than the same quarter in 2002. Prices edged even higher in January 2004, crossing US$34 a barrel. Natural gas prices also remained buoyant with an average of around US$5.50 in the final quarter and rising even higher in 2004.

Current world economic and political conditions suggest generally strong but erratic price behaviour in 2004. Derivative products have also enjoyed buoyant prices in 2003 with methanol and ammonia registering averages of US$226 per tonne and US$240 per tonne, respectively in the final quarter. Strong world demand by countries such as China helped drive up steel prices with billets averaging US$244 per tonne and wire rods US$278 per tonne in 2003. Steel prices continue to rise and seem to have experienced the largest windfall with some prices in March reaching over US$400 per tonne.

While this situation is undoubtedly a blessing to steel exporting countries it is at the same time adverse for importers, it was noted. Local steel importers have had an additional setback in the form of a weak TT dollar vis a vis the euro and the pound sterling. Europe and the UK are two major suppliers of steel imports to this country. The jump in a wide range of internationally traded commodity prices is captured by the Economist’s All Industrials Commodity Price Index which rose 31.5 percent over the twelve-month period ending February 2004. Under fiscal conditions, it was noted that at the end of the fiscal year September 2003, a surplus of $28.9M was recorded in the fiscal account, notwithstanding the Government budgeting for a deficit of $618M.

While recent data is not yet available, in the prevailing environment of high commodity prices it is not unreasonable to expect a surplus for the first six months of the new fiscal year and indeed in the fiscal accounts for 2003/2004, in contrast to the $313M deficit  budgeted. Energy sector revenues are providing a solid platform for public sector savings, which must not be undermined by profligate and unsustainable recurrent spending. The domestic stock exchange registered a strong performance in the fourth quarter, the newsletter said. 

The Composite Price Index closed at 694.12 and the All TT Index ended at 911.96 representing gains of 15.68 percent and 20.13 percent respectively over the previous quarter. These indices also represent significant gains over 2002. It was a year of cross listings on the local exchange with three Jamaican companies listing locally: Jamaica Money Market Brokers (JMMB), Capital Credit and Merchant Bank (CCMB) and National Commercial Bank Jamaica (NCBJ).  As a result the total number of shares traded was boosted to 409,624,427 compared to 96,498,976 in 2002,  representing a phenomenal increase of 324.5 percent.

Reasons for this surge include low interest rates, continuing good economic growth and strong profit outturns of major companies. “What happens next depends on a host of uncertain factors including the underpinnings of the recent bull run and confidence by investors in the ability of the Government to take charge of a worsening industrial relations climate,” the bank said.