Avoiding another downgrade

Against the backdrop of President Trump’s anticipated policy changes, the world of international trade as we know it is about to change. Based on initial comments it would appear globalization, with its features of free trade, open markets and neo-liberalism has been heavily criticized. Certainly there has been a ground swell both in the UK and USA about the lack of benefits accruing to the masses and all the gains appearing to go to the wealthy segments of the population.

This discussion is taking place at a time when the BMI forecasts that our Balance of Payments (BOP) for 2017 will be in deficit just as the current account is expected to be, and the capital inflows maybe inadequate for the capital account to compensate for the country’s current account shortfall. In addition, the country’s very wide fiscal deficit would contribute to the negative balance of trade leading to a further draw down on the foreign reserves and putting pressure on the exchange rate.

Certainly the Central Bank would have added pressure to allow the currency to depreciate further knowing full well that this course of action, while a logical text book decision, will have a significant negative impact on large segments of the population.

The question is therefore by how much the currency will have to depreciate. The authorities and certainly the political leaders will have to understand that the inflationary impact from depreciation on low income households, the increasing unemployed and the destitute, will be catastrophic.

Measures will have to be put in place to mitigate the impact.

Certainly there has been growing comments on increasing the productivity levels and profitability if consideration is to be given to wage increases. However, increasing productivity in many instances can take time if it has to be sustained. Getting the private sector to take up the mantle of growth, especially if the government has become the major client for many a private sector outfit, will be near impossible.

This means that increasing government’s revenues will be a challenge. Of course the question of foreign direct investment (FDI) inflows into the non-energy private sector during the fiscal year is reasonable. Certainly some FDI will take place, but this is not expected to be adequate to finance the deficit from the current account. This means sales of the “country’s assets”, draw downs from the heritage and stabilization fund (HSF) and borrowing as has been stated by the Minister of Finance, will continue.

By the second quarter of 2016, exports had fallen 50.1 percent since end-2013, while imports fell just 27.4 percent. This deficit in the trade account is going to be impacted by two important factors in 2017. First, West Texas Intermediate price of crude is expected to move from an average price of US$43.5 per barrel in 2016 to approximately US$55.5 per barrel in 2017. Second, an increase in natural gas production is possible following the start of operations at BP’s Juniper field.

As a result, goods exports are expected to rebound 30.4 percent in 2017, from the 32.5 percent contraction in 2016.

Until these two occur, net reserves will continue to fall to possibly below US$9 by the end of 2017. One can only wonder if a shaky external performance, shrinking buffers, limited exchange rate movement and lack of adequate progress on fiscal consolidation, may lead to a credit rating downgrade in 2017. We all must put our shoulder to the plough to ensure this does not happen. We await sound leadership to navigate these choppy waters in 2017.

Our regular Monday columnist, Jean Antoine Dunne, will return next week