Economist: More Forex to manufacturers good move but other reforms needed

Speaking with Business Day, Economist and UWI lecturer, Dr Roger Hosein said such a shift, once implemented had the potential for several positive spin offs, through improving the manufacturing sector’s capacity utilization.

Capacity utilization is a measure of the extent to which the productive capacity of a business is being used.

According to Hosein, the sector’s ability to be productive declined from 70.2 per cent in 2010 to 68.5 per cent in 2016. He also said employment in the manufacturing sector decreased from 53,100 in 2009 to 51,200 in 2016, while real value added by the manufacturing sector declined from TT$7770 million in 2009 to TT$7162 million in 2016, at constant prices.

An injection of foreign exchange can reverse this trend, said the economist.

“Making foreign exchange available to the manufacturing sector is one avenue through which the state can help improve capacity utilization levels. A vibrant manufacturing sector, can in turn fetch valuable foreign exchange, especially now, with the economy’s maturing oil and gas fields,” said Hosein. “It also has the ability to generate backward and forward linkages as well as externality spillovers that can help improve the economy’s growth rate.” Another benefit arising out of giving manufacturers more foreign exchange was a higher number of available jobs created by companies’ increased productive capacity.

“With an increasing number of unemployed in the country, a strong, robust manufacturing sector could create a significant amount of jobs,” he said.

However, the economist said there were other factors government needed to consider beyond forex which affected manufacturers’ performance. One of those was high levels of crime and violence.

“Some manufacturing firms may have chosen not to run night or may not be able to produce as much output as they would like because they fear the negative attention that increased output or increased profits can bring to their employees, or to the entrepreneur himself,” said Hosein. Government must also cut the amount of red tape required for business to operate.

“These obstacles compromise the manufacturing sector’s ability to do business. On the Ease of Doing Business index, TT’s rank actually worsened from 68

An issuer comment from the Moody’s Investor Service has at least one former minister of energy concerned about another potential ratings downgrade for TT. Kevin Ramnarine has said the wording of the document suggested “the rating agency believes that more needs to be done to re-structure expenditure as it relates to transfer and subsidies.” According to the issuer comment from Moody’s, the latest drawdown on the Heritage and Stabilisation Fund “highlights negative fiscal trends.” The comment continues, “The drawdown is credit negative because it reflects a deteriorating fiscal position driven by large fiscal deficits amid lower energy-related government revenues. By reducing the size of its HSF, the sovereign is also eroding an important fiscal buffer.” Moody’s said while the TT government was able to make significant cuts, too much expenditure was still centred around wages, subsidies and transfers at around 68 per cent of total spending. Ramnarine said government must examine the subventions it is giving to loss making State Enterprises and continue to cut waste.

“If we are downgraded, it means borrowing internationally becomes more expensive. That isn’t good news for a highly leveraged company like Petrotrin which would be seeking to re-finance its 2009 vintage US$ 850 million bond,” said the former energy minister.

“Moody’s would have also noted that revenue streams remain constrained and have been offest by one time interventions such as dividends from the NGC and sale of assets such as the TTNGL IPO,” said Ramnarine, “This strategy can of course only go on for so long. At the end of the day, Moody’s or will assess our ability to service our international debt on a short and medium term basis.” The ratings agency also said that its estimate of the ratio of debt to GDP is different.

According to the issuer comment, Moody’s places the fiscal deficit at “5.5% of GDP for fiscal 2017 (which ends 30 September), compared with the government’s official estimate of 3.9% of GDP, because we expect the sale of assets to be delayed.” Moody’s current credit rating for TT is Baa3 negative.

in 2011 to 96 in 2016,” he said.

Hosein warned that this could result in manufacturers moving to jurisdictions where it was easier to conduct business, a situation that could further drain the country’s valuable forex.

He also again advised government to review its make work programmes as they may be “locking away” workers from manufacturers. “The State is actually depriving manufacturing and similar sectors of a valuable chunk of the labour force and, although well intentioned at the time of creation, make work has backfired over time, compromising the growth of the manufacturing sector,” the economist said.