Why finance current account deficits

The current account can also be expressed as the difference between national (both public and private) savings and investment. The latter is not the case for us. Preliminary data for Trinidad and Tobago shows a current account deficit of 5.0% of GDP in 2015; the B usiness Monitor Index (BMI) now expects a shortfall of 6.8% in 2016. This is substantially wider than some forecast. We should be concerned since this can further undermine the country’s sovereign credentials, increasing the risks of further credit rating downgrades in the immediate future.

It is sad to note that measurement of the country’s current account position is complicated by statistical revisions. Recently, the Central Bank of Trinidad and Tobago (CBTT) substantially revised its GDP and balance-of-payments data series from 2010 onwards. This is very curious and the CBTT has to strongly explain that the coincidence of the revision and the start of the last regime’s term in office is just that: coincidence. We must avoid any suggestion that the figures are being doctored.

The latest available data from CBTT indicates an expansion of 0.2 % of real GDP while the current account recorded deficit of 0.2% of GDP. However, there appears to be differences between these data series and those estimated by the IMF and other international organisations. While this is not the first time this has happened a simple explanation as to the basis of the differences could go a long way in instilling confidence in the data produced locally.

There is a high probability that in 2016, Trinidad and Tobago will experience its first goods trade deficit in nearly 20 years.

Contributing to this possible scenario is the fall in oil and gas production as well as goods exports which have fallen consistently since 2012. Added to this, low energy prices have made the losses worse.

This has led to goods exports contracting 23.1% in 2015. It is quite possible that 2016 will see an even bigger contraction in exports.

Given the pattern of the approach by the CBTT, the heavily-managed exchange rate will prevent an offsetting response from imports.

If we look at the data for imports, there was an expansion of 6.3% in 2015. There are some who see the modest depreciation of the currency leading to a small fall in imports in 2016.

The irony is the contraction in imports may reflect to a larger extent a shortage of foreign exchange, which have undermined companies’ ability to import. In no way are we suggesting that CBTT’s actions are not the optimum response to the problem. Indeed, the choices are quite stark: allow the currency to depreciate rapidly and stem the loss of foreign exchange by reducing imports but allowing rapid increase in inflation. The alternative is to allow, as has been done, a small depreciation in the currency and use Central Bank’s allocation of the reserves to stem the tide of imports while at the same time keeping goods affordable. These are difficult choices indeed.

Higher anticipated energy prices in 2017 may lead to higher exports and a return to a goods trade surplus.

However, rising energy prices will also lead to a wider primary income account deficit, simply because foreign firms operating in the energy sector can be expected to repatriate greater profits. It is anticipated that while there maybe goods trade surpluses over the coming years, these are not expected to be greater than the country’s primary income account deficit. This means the net effect is for the current account balance to remain in the red.

In the event that the current account deficits are not offset by financial and capital account inflows, then we can expect increased pressures on both the country’s foreign exchange regime and its rating. If we are to be honest, the non-energy sector has had little appeal to investors outside of the energy sector historically. Indeed, even the energy sector may have difficulty attracting the same high levels of capital in the coming years.

Our reality is to finance the current account deficits while at the same time maintaining a managed float with a managed depreciation which eases pressures slowly.

This can be expected to result in a continued draw down of the country’s external reserves.

Falling revenues have seen the government having to borrow and in so doing, increasing domestic debt substantially, precipitating an April downgrade of the country’s sovereign credit rating by Moody’s.

Its deteriorating external accounts position raises the risks of further downgrades in the immediate future although the country maintains an investment-grade rating from both Moody’s and Standard & Poor’s (S&P). A downgrade will undermine the country’s ability to service its external debt obligations. Indeed, both Moody’s and S&P hold a negative outlook on the country’s debt. The management of the external account is tricky at best. Are we up to the challenge?