Q: You may have dealt with some of this before, but what is the basic difference between saving and investing, especially for a small income earner?
Darren, Carapichaima

A: The only difference between saving and investing is a matter of degree. In the local context, saving can be defined as a passive way of accumulating wealth whereas investing is a more active way of increasing the value of your money. Most people in Trinidad and Tobago tend to put what remains from their monthly salary, after expenditure, into a savings account at a commercial bank. The rates on these instruments have been traditionally much lower than other investment vehicles on the market. But lately, due to a general level of increased awareness in the market, individuals are becoming more open to new ways of making their money spin. They are now thinking more often of “investing” as opposed to merely “saving”. Investing involves a calculated construction of a financial portfolio composed of a variety of instruments suitable to the special needs and circumstances of the investor. A financial advisor, in building an investment portfolio, would look at a number of factors chief of which is the level of risk tolerance of the individual, which is indirectly related to the level of wealth the individual has already accumulated.

The time over which investments can be held is also critical and would determine the mix of suitable instruments. The probability of the individual needing the funds before the investment has matured is also pertinent and determines the portfolio allocation between different instruments. Finally the individual’s tax bracket must also be factored. In short, investing involves a holistic consideration of an individual’s goals, needs and circumstances all of which when combined with his or her risk tolerance can be factored into constructing an investment portfolio which seeks to optimise returns. This is markedly different from saving which is tantamount to merely parking funds on the lowest yielding instrument available without any consideration of other opportunities in the market.

Q : What are junk bonds?
Shirley, Tunapuna

A: A high yield, or “junk”, bond is a bond issued by a company that is considered to be a higher credit risk. The credit rating of a high yield bond is considered “speculative” grade or below “investment grade”. This means that the chance of default with high yield bonds is higher than for  other bonds. Before the 1980s, most junk bonds resulted from a decline in credit quality of former investment grade issuers. This was a result of a major change in business conditions, or the assumption of too much financial risk by the issuer. These issues were known as “fallen angels”. Their higher credit risk means that “junk” bond yields are higher than bonds of better credit quality. Generally, all bonds that are graded less than BBB are considered junk bonds. Junk bonds are issued by corporations or municipalities with bad credit ratings. In exchange for the risk of lending money to a bond issuer with bad credit, the issuer pays the investor a higher interest rate. Typically, junk bonds offer interest rates three to four percentage points higher than safer government issues. Above is a table showing the rating classes derived by Standard & Poor’s,  which gives an indication of the credit quality of issuers.

Q: I know people don’t like to think about it, but from a financial point of view are their any specific areas people need to be aware of when it comes to death (costs, what happens to investments, etc.)
Bharat, San Fernando

A: Estate planning is the process of creating a will or trust to pass on to your heirs after death. This is critical as it avoids the complications, which could arise if someone dies “intestate”, that is without instructions as to distribution of assets. In such a case there is a process called  probating where the State has to identify the heirs and apportion the shares according to their formula, which may not be in line with what you had intended.The process is expensive and time consuming and could well erode a portion of your estate in fees. Also even if you have a will, retitling would have to be done through a Court of law which is also time consuming. Therefore it is advisable to set up a will and a trust arrangement such that you have complete control of your assets while alive, but the trust is considered legal owner for transfer of title purposes.  This would take place smoothly without lawyers, court supervision, excessive costs or delays. You want to make sure your loved ones are protected and are given their just due according to your wishes. Talk to a qualified financial planner for further guidance, as this is a highly technical area where you would need advice.

“Special and differential treatment provisions must be crafted to facilitate structural adjustment and promotion of the development of small, developing economies, in particular, the small island developing states.”

Jamaica Prime Minister
PJ Patterson

Developing countries worldwide, including those in the Caribbean, are heading towards next week’s World Trade Organisation (WTO) Fifth Ministerial Meeting in Cancun, Mexico with a great degree of pessimism. And there’s justifiable reasons for it. Two years after the fourth Ministerial in Doha, Qatar where an over-ambitious agenda was adopted, rich developed nations have yet to demonstrate their commitment of putting development at the heart of the WTO rule making. The Doha round of trade talks covered issues such as agriculture, industry, services, environment, special and differential treatment for poor countries, problems of implementation of past agreements, subsidies, anti-dumping duties and much more. Various deadlines were drawn up as milestones for the completion of the talks by 2005

but none of the issues have moved forward and no progress made. Deadlines on the important areas of agriculture, special and differential treatment, implementation issues and industrial tariffs have all been crossed without any agreement. In fact agriculture which became the central focus of Doha – the so-called Development round – has been the subject of accusations and counter-accusations between countries that provide large subsidies and those wanting to liberalise global trade in this sector. Trinidad and Tobago’s Minister of Trade and Industry Ken Valley who will attend the Cancun meeting said even within the Caribbean Community (CARICOM) there’s a “real split” on the issue of agriculture. “At one level, we benefit from subsidised agriculture. We’re net importers and there are others who say if there’s no subsidy, we will be competitive in certain areas so that there is no hard consensus nor unanimity in the case of agriculture even within Caricom….Quite frankly I don’t know whether one can be hopeful on agriculture/WTO,” said Valley.

With countries at loggerheads and the usual North-South divide, developing nations throughout the world could find themselves in a more disadvantaged position as there are no signs that many of the key issues that affect them will be settled at the September 10 to 14 ministerial meeting in Mexico’s popular tourist resort. The WTO, established eight years ago as a successor to the General Agreement on Tariffs and Trade (Gatt) to reduce tariffs and other barriers that inhibit fair trade practices, would no doubt have to defend itself against severe criticism from members particularly from the developing  world for its obvious double standards. The best example is seen in the inability of the developed countries to agree to provisions that would provide special and differential treatment to the developing countries and modify the problems in existing GATT/WTO agreements. Jamaican Prime Minister P.J. Patterson has already called upon regional leaders to work together to ensure that the rules and pace of multilateral, hemispheric and inter-regional trade arrangements take full account of the goals and disabilities of small, developing countries, such as those in the Caribbean. “ Special and differential treatment provisions must be crafted to facilitate structural adjustment and promotion of the development of small, developing economies, in particular, the small island developing states,” he said. “This unity of purpose and action has never failed the region, but it is needed now more than ever,” Patterson emphasised. Already CARICOM in a lengthy Declaration on the upcoming WTO meeting has sounded a caustic note of dissatisfaction over the treatment of rich developed countries to the developing member states.

The sub-regional grouping said it is “ disappointed by the lack of appreciation by some powerful countries for the acute vulnerability of small Caribbean economies and the harmful implications of their actions as they pursue their claims through WTO dispute settlement and the insensitive  manner in which rulings have been implemented disregarding their damaging effects on the livelihoods of thousands of farmers, agricultural employees and their dependents, as the ruling on bananas illustrates. “ With no firm decisions to take forward to Cancun, the odds that the ministerial will end in disarray is increasing. Commonwealth Business Council director of trade policy, Dr Razeen Sally said if this happens, the multilateral WTO could quickly lose its importance as countries turn to bilateral and regional free-trade arrangements. Developing countries could also find it harder to get a stronger voice if bilateral arrangements take center stage in world trade, he added. “ The US and the EU have their insurance policy. If the WTO doesn’t work, they can negotiate bilaterally and regionally, which is what they have done in the past and may do more in the future,” Sally said. Already bilateral and regional FTAs have been increasingly popular – one just has to look at the US – as the WTO seems to be progressing at a snail’s pace since the Doha ministerial meeting. Since Cancun will be the last ministerial meeting before the January 2005 deadline, analysts believe the direction of the conference, particularly on the deadlock over agriculture and industrial tariffs will indicate whether or not the Doha round can be completed on schedule. With the Doha debacle, its now left to be seen whether Cancun will end in chaos and confusion.

Rich country farm policies cost agricultural producers in the developing world about $24 billion in lost income each year, with the European Union the biggest culprit, researchers said.

The report from the International Food Policy Research Institute comes as members of the World Trade Organization are struggling to agree on a global framework for reducing domestic farm payments, export subsidies and agricultural tariffs. The issue is expected to take center stage at next month’s WTO meeting in Cancun, Mexico. Unless countries make progress in agriculture, there is little hope for other areas of world trade talks launched in November 2001 in the Qatari capital of Doha and targeted for conclusion by January 2005. Eliminating trade-distorting farm subsidies and tariffs in the EU, the United States and other industrialized countries would allow developing countries to triple net agricultural exports to about $60 billion annually, Eugenio Diaz-Bonilla, a senior research fellow at the institute, told reporters.

EU farm policies displace more than $20 billion in developing country farm exports, the study found. U.S. polices are responsible for about $11 billion in lost exports and Japanese policies about $5.3 billion. The lost exports reduce incomes for farmers and other agricultural-based businesses in developing countries by about $24 billion annually, the study said. The greatest regional impact is on Latin America and the Caribbean, which lose about $8.3 billion in income annually, Diaz-Bonilla said. Asia loses about $6.6 billion and countries in sub-Saharan Africa about $2 billion, he said. David Orden, another senior research fellow, said it was unlikely that world trade talks — officially known as the Doha Development Agenda — would completely reform agricultural policies. But substantial progress could be made, he said. Developing countries would also benefit from reducing their own import barriers and subsidies, in addition to any cuts that rich countries make, Orden said. US farmers are expected to receive about $19 billion in government subsidies this year. Leading U.S. farm groups oppose any cuts in those payments, unless developing countries significantly reduce their import barriers.

She cited TT as an example, noting that while there is the typical sun, sea and sand, it has a differentiated tourism product because of its culture and the energy of the island.

“If we benchmark with Malaysia which has had about 2 million visitors, it is the same kind of package they are selling — the culture and multi-cultural experience.” TIDCO is bent on tweaking its tourism goals. “Since we are looking at promoting our culture and eco-tourism, it means that we will not be building the 200-room hotels, but more eco-lodges and more environmentally stable-types of development,” she says. Additionally, she said they are also trying to work on improving the local transportation networks and increasing the number of air and sea ports.

If numbers are anything to go by, then the Tourism and Industrial Development Company of TT (TIDCO) has it made.

Sharifa Ali-Abdullah, Manager at Economic Intelligence Unit (EIU), TIDCO, is as fastidious with her numbers on tourism as a stockbroker would be on the price earning ratio of local companies listed on the Stock Exchange. By TIDCO’s calculations, tourism, she says, can create about 87,800 direct and indirect jobs by 2020. However, before those jobs are created, she said TT needs to change the way it views tourism. “Our attitude has to change. It is not that we are rich and do not need it, because there is a definite need for tourism because of the job creation potential it has.” TIDCO’s projections, she insists, are not based on “fly by night assumptions,” which were picked from a hat, noting that the company is relying on projections done by the the World Travel and Tourism Council. (WTTC). Tourism in TT will create 66,840 direct and indirect jobs, says the WTTC.

In its publication, Trinidad and Tobago: Travel and Tourism, a World of Opportunity, the world tourism body offered employment projections to 2013 based on simulated tourism satellite accounts that were produced in conjunction with Oxford Economic Forecasting. The WTTC is the forum for global business leaders in travel and tourism. To substantiate TIDCO’s projections for 2020, the company is negotiating to have WTTC come to TT and work with them to tailor a model and conduct a study that they (TIDCO) can use. “We cannot articulate our concerns or lobby for change and dare to dream big if we do not try to escalate some of these numbers and try to work with agencies to come up with a clearer picture,” Ali-Abdullah, said. Diana Cohen Chan, President of the Trinidad Hotels Tourism and Restaurants Association (THTRA) agreed with Ali-Abdullah, saying that an economic impact study would provide TT with hard facts needed to sensitise government to the importance of tourism to the economy and how it can create employment.

Ali-Abdullah said so far, TIDCO has used the WTTC’s assumptions and found them to be quite conservative in its projections. That may be because TIDCO has seen an increase in tourist arrivals over the last couple of months and believes that this trend will continue and create more jobs. Ranjiv Shandilya, Managing Director, Chancellor Hotel, is not optimistic. Having built a hotel four years ago he said he had not been able to receive one single concession. He noted that he was currently paying 15.5 percent interest when he should be paying five percent. “There is no sensitivity by government with respect to the tourism sector and the energy sector would not be treated in the same manner.” William Latchman, of the Downtown Owners and Merchants Association (DOMA), said the business community lacks confidence in the figures because of crime. “The areas that create the most jobs would be the hotel industry, the agricultural sector and retail business. These three sectors are the largest employers of the unemployed and the unemployable and we need to establish facilities within our society to ensure that this can take place, but we must deal with the crime situation first,” he said.

Ali-Abdullah said the Caribbean region is portrayed by the Caribbean Tourism Organisation (CTO) as peaceful, which is what makes it different from other parts of the world. “This is why people like to come to the Caribbean, because there is fear in other region’s like the Middle East and Asia.” She said even though there was a “dip” in tourist arrivals to the region after September 11, 2001, these countries have actually started seeing an increase in visitors and they are bouncing back. “I think the reason for this is that the Caribbean region is re-inventing itself in terms of the kind of tourism. A number of countries are looking at event tourism and trying to offer an experience.” She cited TT as an example, noting that while there is the typical sun, sea and sand, it has a differentiated tourism product because of its culture and the energy of the island. “If we benchmark with Malaysia which has had about 2 million visitors, it is the same kind of package they are selling — the culture and multi-cultural experience.” TIDCO is bent on tweaking its tourism goals. “Since we are looking at promoting our culture and eco-tourism, it means that we will not be building the 200-room hotels, but more eco-lodges and more environmentally stable-types of development,” she says. Additionally, she said they are also trying to work on improving the local transportation networks and increasing the number of air and sea ports.

Now it’s time to dream. If money were no object, how would you like to spend your retirement years? If you are married, sit down with your spouse and brainstorm your ideal retirement together. Most importantly, have fun with this task.

Would you like to take a trip around the world? Maybe you’d like to buy a home in the country to get away from it all. Or, you may enjoy living at the beach. Whatever strikes your fancy, add it to the list of your dreams. Don’t edit as you go along. Put everything down at this point. If it’s easier or less pressure for you, post the list in a convenient place and add to it throughout the week as ideas pop into your head. Remember this should be fun, not work. Don’t get stressed trying to think of everything. We’re not etching this in stone. You can revise the plan later in life as your priorities change. Once you have your list, put a number next to each item. Place a five next to the things you absolutely must do. Put a one next to the things that you would not miss terribly if you were not able to get them done. Use numbers two, three, and four for items in between those two points.
Here’s a sample of what your list should look like.

Dreams      Rankings

Alaskan Cruise               5
Estate in the Country  4
Start My Own Business               5
Buy a Boat   2
Retire at 55   3

Now reorder your list, placing the “5’s” on top, next the “4’s”, then the “3’s”, then the “2’s”, and finally the “1’s”. That wasn’t so hard. Now you have a list of your retirement dreams and how important each one is to you and your spouse. Why did I put you through this exercise? Before you can even start to develop a plan you need to know the critical items for which you want to plan. How can you develop a budget for retirement if you don’t have some idea of how you want to live during that time period? Of course, as you grow older and get closer to retirement your dreams and desires could change. That’s not a problem, just step through the planning process again and revise your needs based on the new goals. In fact, as you’ll read often, it’s best to revisit your plans yearly to be certain you are still on track and there aren’t any major changes in your life that could have an impact on your retirement goals. Each of these goals will have a different impact on your planning process. We’ll take a look at some questions you must answer. Your answers will affect your money needs during retirement.

When Do You Want to Retire?
The first big question: When do you want to retire? Your financial needs will vary greatly once you figure out the answer to this question. You may even want to develop budgets based on all three options-retire early, retire on time, or delay retirement as long as possible-to see what you can afford to do.

Retire Early
Retiring early sounds great to many people until they consider what it will mean financially. Unless you are entitled to some kind of early retirement package from your place of work, you will have to drain your savings to meet all costs. Rather than your hopefully sizeable portfolio building steam, its growth will stall as you begin draining it.
Assume Government Pension isn’t even a possibility until after sixty. If you decide to start your Pension before your full retirement age, it will be significantly reduced, and this reduction is a permanent one throughout your retirement years. So, how much of your Pension benefit is at risk if you decide to retire at age sixty-two? If you were born before 1937, the reduction in benefits would be:

* At age 62: Your benefits would be reduced 20 percent.
* At age 63: Your benefits would be reduced about 13 1/3 percent
* At age 64: your benefits would be reduced about 6 2/3 percent.

For people born after 1937, the reductions are higher; how much depends on your year of birth. I just wanted to give you an idea of what is at stake if you retire early. Medical costs can be one of the biggest deterrents to early retirement, even if you think you have enough saved to live on otherwise. Not only are private medical insurance plans very costly, frequently topping $1,000 per month, if you have significant medical problems you may have trouble even getting coverage. Or, you may find that some medical conditions could be excluded from coverage completely, increasing your out-of-pocket expenses dramatically.

Retiring on Time
This is self-explanatory.
Delayed Retirement
Waiting to retire may be just what you need to stretch your retirement savings. This is often the case with self employed professionals who have self managed pension plans. Not only does your money get to grow for a longer period of time before you start drawing it down, your Pension benefits may be permanently increased as well. There is a point, however, where it makes no sense to wait any longer to begin collecting your pension. Once you reach that age, your benefits won’t increase any more if you wait and there is no penalty if you want to keep working anyway. In fact, as I mentioned earlier, you can continue working once you reach full retirement age without risking a benefit reduction. Now you understand why the date for retirement is so critical to budget planning. The next most critical decision is where you want to live.

Where Do You Want To Live?
The first big question is whether you will want to continue living in your current home or you will definitely want to move out of it. You may wish to stay in the same general location, but simply find something smaller that will be less costly and easier to maintain, especially since you hopefully will be providing living arrangements for only you and your spouse. Another option will be to move into a retirement community and use the assets from your home to buy into that community. If your children have relocated, you may choose to move closer to them. Or you may just want to move to a more tranquil environment. What ever your choice, there are many financial options to consider.

Your Home
First, of course, you must decide whether to keep or sell your home. For many people, their home is their largest asset. Sometimes, its value is even more than what they have saved in their retirement portfolio. Even if you decide to keep your home, you may want to consider accessing some of the assets you’ve built up in that home in order to afford your retirement plans. Be certain you understand the implications if you choose to take any kind of equity loan on your property. Remember, you won’t get much in the way of raises in retirement. You’ll essentially be living on a fixed income. If an emergency comes up and you can’t make a loan payment, you could risk losing the home.

Scotiabank Trinidad and Tobago Limited results for the nine months ended July 31, 2003

Scotiabank’s (SBTT’s) third quarter performance in 2003 was lower when compared with the similar quarter in 2002.  Overall, the results for the nine months were 11.2 percent better in 2003, when compared with the similar 2002 period. 

Net interest and other income was 6.5 percent higher in 2003 at $393.6 million, while in 2002 the corresponding figure was $369.6 million.  Non interest expenses rose 9.9 percent to $191.2 million in 2003 when compared to the $173.9 million incurred a year earlier during the same period.  The two significant areas here were loan loss expenses and other expenses.  Other expenses rose 74.3 percent to $39.6 million in 2003, while loan loss expenses fell 32.7 percent to $18.9 million.  The decrease in loan loss expenses were the result of write-backs of bad debt, rather than decreases in write-offs.  In terms of other expenses, SBTT incurred some ‘costing initiatives,’ which led to the increase in cost. Net income before taxes improved 3.4 percent to $202.3 million at the end of the third quarter of 2003.  This was in comparison to the $195.7 million posted for the same period in 2003.  The effective tax rate declined to 28.3 percent in 2003 from 33.3 percent in 2002.  Profit after taxes rose 11.2 percent to $145.2 million in 2003 in comparison with the previous year’s $130.5 million. 

Earnings per share for the three completed quarters in 2003 was $1.23, compared with the $1.11 recorded in the same period in 2002.  The Managing Director referred to ‘focused treasury management’ as the main driver of SBTT’s continued profitability.  The current excess liquidity is forecast to exert downward pressure on interest rates.  This will no doubt challenge management to seek out the best opportunities for their excess funds. With the above environment in mind, we therefore revise our forecast EPS to $1.70, together with a total dividend pay out of 75 cents per share.   

First Caribbean International Bank Limited For the nine months ended July 31, 2003
All figures are in BDS$’000

Please note the results for 2003 are for nine months of First Caribbean International Bank Limited to July 31, 2003 while the comparisons for 2002 are the actual nine months results for CIBC WI Holdings (Excluding Cayman Wealth) and normalised nine months results for Barclays Caribbean Operations to July 31, 2002. The Bank has stated that it continues to suffer the consequences of difficult market conditions and the slackening of loan demand.  Net interest income for the nine months ended July 31, 2003 was $377.613 million, a decline of 7.75% over the corresponding 2003 figure of $409.323 million. 

Non interest income declined marginally from $172.371 million in 2002 to $171.202 million in 2003.  Overall total income declined by 5.65% moving from $581.694 million in 2002 to $548.815 million in 2003.  Non interest expenses and provision for credit loss declined marginally.  Integration cost reached $31.420 million.  Overall operating profit declined by 31.86% moving from $200.410 million in 2002 to $136.550 million in 2003.  Another new cost item was the amortisation of goodwill which reached $23.784 million.  Overall net income achieved was $96.895 million, a decline of 44.69% over the corresponding 2002 figure of $175.188 million.  If the goodwill and integration cost is backed out the decline in net income drops to 13.18%. The earnings per share for the nine months ended July 31, 2003 was 6.3 cents as compared to 11.7 cents in 2002.  We maintain our full year earnings forecast of 10 cents per share and our hold recommendation.  The Bank not only has to contend with the cost of integrating the two operations, but also the weak economies in which it operates.

BWIA West Indies Airways Limited
results for the six months ended June 30, 2003

The National Airline continued to endure some difficult times in the first half ended June 30, 2003.  Operating revenue was down by 9.7 percent in the first half of 2003 to $705.7 million, compared to the similar period’s 2002 figure of $781.3 million.  As a result of some stringent cost cutting, operating expenses declined by 5.0 percent to $767.6 million in 2003 from the $808.3 million incurred in 2002. The operating loss more than doubled in the first half of 2003 to $61.9 million in 2003 from the 2002 amount of $27.0 million.  Losses after taxation amounted to $84.3 million in 2003, while in the corresponding 2002 period, the loss was 54.6 million.  BWIA’s loss after taxes and minority interest reached $85.9 million in the first half of 2003.  In 2002 the comparable figure was $54.3 million. The July to September quarter is the best period for BWIA with the usual two-way passenger traffic.  We however remain guarded on the near-term prospects of the airline, given initiatives by the Government of Trinidad and Tobago (GORTT) and a possible partnership with another regional carrier.

Only a few days ago the country celebrated its 41st anniversary of Independence from Britain. It was a time for reflection and to assess what have been the achievements during the past four decades. Admittedly, forty years is a very short time in the life of a country but we cannot continue pleading that we are still an infant nation since we must grow up and accept responsibility for our actions or inactions. 

The insurance industry was principally foreign-owned and controlled until the decade of the 1970’s so it is relatively young in terms of local ownership. However, the industry leaders have been taking stock especially in the area of business ethics since this is a matter that concerns all persons involved in the insurance business. The very core principle of insurance is that of “utmost good faith”. This is unlike the principle that is found in most commercial transactions -i.e. “buyer beware” or caveat emptor. In insurance, the law recognises that parties to a contract must exercise utmost good faith both on the part of the buyer as well as the seller. It simply means that the buyer must provide complete and accurate information of his risk so that the insurance company can make an assessment while the insurance company must act in manner that is not intended to deceive the buyer and consequently it must make good its promise. In the real world and in particular with regard to Trinidad and Tobago the principle of utmost good faith is not scrupulously practised and in many instances buyers of insurance withhold pertinent information which at the time of a claim turn around to haunt them and in some cases they are not able to collect on their claim. Some insurance companies are equally at fault because they pursue practices that are inimical to the interests of their customers and view the insurance business as any other commercial enterprise where the principle of “buyer beware” is applied. How times have changed! The old school taught you that your word was your bond and if even there was no written contract you were expected to honour your agreement. There were instances where a claim would have occurred but no policy had been issued but you would have been paid your claim. Those were the good old days! Today, there is a feeling within the insurance industry that those principles no longer apply and all decisions must be reduced to writing otherwise there is every chance that verbal agreements will not be honoured.

The question has to be asked- how did we arrive at this stage? There are many reasons and that is not only a local situation but rather the business has evolved where standards of behaviour have changed worldwide. Many leaders in the insurance industry around the globe are calling for a return to ethics since they see ethics as the bedrock of professionalism and reputation. This issue has not been lost on the local insurance industry either since ATTIC has been addressing this issue as it is acknowledged that the industry must have an up to date code of conduct at least for its members. Much of what is done in insurance relies on trust- between the various parties whether they are the insurance companies, the agents or brokers and the customers. However, if this trust is lacking then steps must be taken to restore confidence. How does one behave in an ethical manner? It is all too easy to behave unethically especially if through conduct and example there is no intention to act fairly. There is a view that ethics and ethical behaviour must be inculcated from very young. There must be a clear understanding of what is right and what is wrong and these are judgments that you arrive at by learning from the home environment. The modern world has been teaching that “wrong is right” as long as you are not caught and if caught there is some loophole through which you can escape.

There is too much play on words and semantics and an obsession with spin-doctoring and public relations in order to confuse rather than taking the moral high ground and owning up to the misdeed. Greed has been the underlying cause of all the financial scandals but at least the authorities are taking steps to punish the wrongdoers and that in itself must be a lesson for us in Trinidad and Tobago. The various professional bodies have been attempting to treat with this matter by shaping thinking and practice. In the past, breach of ethics would have been dealt with through a disciplinary procedure that could lead to disbarment and or other sanctions. While these still remain, there is likely to be a more proactive approach in which persons are introduced to ethical behaviour as a component of professional training. Management competence is another key pillar in the determination of ethical conduct since a study carried out in the United Kingdom concluded that managerial incompetence has been the root cause of every collapse in the insurance industry. In spite of rules and regulations scandals do take place because people circumvent rules and it is only if the rule of right or wrong is applied then this might have prevented such a situation. At the heart of regaining trust by the public will be the modernization of the written code of conduct but more importantly there must be a return to core principles of utmost good faith and ethical standards of behaviour. In short, insurance companies must provide their customers and the public with a high quality service by paying their legitimate claims in a fair and timely manner but equally they must guard against the increasing insurance fraud which is a worldwide phenomenon. They must uphold the public trust at all times and exercise prudence in the management of their business which is the hallmark of successful companies.

E-mail: daquing@cablenett.net

Deposit rates are still sliding and financial gurus are warning that while this might have a positive effect on interest rates in the short term, it can also have an inflationary effect on the economy in the long term.

The Central Bank in its Economic Bulletin up to May 2003 reported that retail lending rates remained soft following their persistent decline in 2002. The Central Bank said, as a result, commercial banks have been plagued with what it describes as “persistent excess liquidity” in the local financial system. This means that TT’s commercial banks have lots of money to lend and no one to lend it to. The excess liquidity in the financial system has forced banks to reduce their lending rates to as low as 11.25 percent to 11.50 percent, a range which they hope will encourage customers to borrow.

Peter Clarke, Managing Director, West Indies Stockbrokers Limited (WISE), said he is not sure what is causing the liquidity in the financial system and warned that if it continues it can have an inflationary effect on the economy. Clarke noted that part of the reason could be that the energy sector, which forms a large part of TT’s gross national product (GNP), is being funded from external sources. This, he said means that the domestic money  market is not playing a role in terms of providing funding to the energy sector. “There are a number of factors which are causing the liquidity in the financial system and I think perhaps we need to look closely at what those causes are,” he said. Clarke said it certainly appears that this situation is going to continue for the rest of the year. “If you look at the level of interest rates and what has been happening to deposit and lending rates, all indications suggest that rates are going to remain low caused by the liquidity situation.” He said the Central Bank usually intervenes in situations like these and uses their market operations to influence liquidity by trying to “sterilise” some of the excess funds in the system, so that it does not have any negative impact on the economy.

“But inspite of this, I think that we really have to try and better understand the causes of the excess liquidity and that might help us decide what we can do about this situation.” Clarke said while this can result in inflation, one effect on the positive side is that there have been lower interest rates. “While that is negative for savers, it is certainly better for the economy in terms of people being able to access funds for productive investments.” However, he noted that if people are not actually taking advantage of the opportunity and going into productive investments, then there may be cause for concern. The excess liquidity has had a positive effect on the commercial banks. “The results that have ben published by the banks reveal that their interest rate margins have improved meaning that deposit rates have generally fallen faster than lending rates and that their profitability increased.”

However, he said commercial banks obviously need to look at ways to encourage investment. He said thus far, the main beneficiary of lower interest rates has been the property market which has seen quite a surge in the last 12 months. “This is all fair and good, but I think from an economic perspective, we would like to see more of the funds going to productive investments that can create long term sustainable jobs.” Richard Young, managing director, Scotiabank and president, Bankers Association of Trinidad and Tobago (BATT) said that liquidity levels now stand at a high of about $1.4 billion. “The system is very liquid.”

Young added that while banks have money to lend, borrowing in the private sector from banks and non-financial institutions has contracted by about one percent in the first two months of the year and has remained at low levels. He explained that uncertainty in the international arena, tensions in the Middle East, the escalating crime rate and even consumer saturation of the market have kept lending down. “There are only so many cars you can buy or so many houses and people are being smart with their money.” The BATT president added that lower lending rates means “cheap money which benefit borrowers, but is tough on depositors.” Young added that if banks are not earning as much in individual income instruments because of reduced credit demand, individuals may have to turn to investment income type instruments regionally or internationally.

However, he noted that returns in international markets have tended to be lower because of uncertainities internationally and mixed economic performances. Lyndon Guiseppi, general manager, Corporate Banking, RBTT said because of the uncertainty in the United States (US) investment market, investors are bringing back funds to TT, which can contribute to the surplus funds. Additionally, he noted that local investors are not aggressively pursuing investment opportunities in TT and government has not yet initiated a large number of projects which would trigger investor and contractor activity. “Manufacturers may also be viewing the crime rate and the impending Free Trade Area of the Americas (FTAA) in 2005 with some apprehension and are not spending on plant and business expansion.” Dr Ronald Ramkissoon, senior economist at Republic Bank said excess liquidity has been present in the financial system for quite sometime. He explained that excess liquidity usually means that there is a surplus of funds in the system, more than the public wants to borrow or the Central Bank can absorb in the short term.

Dr Ramkissoon said this does not necessarily mean that it will have a negative impact on the economy, once it does not put undue pressures on prices. “Excess liquidity is sometimes a potential source of higher demand in the economy which can drive prices and foreign exchange balances.” On the excess funds, he said, “they might be available for long-term investments, which I doubt. But something has to drive greater demand for these funds from businesses and entrepreneurs for doing business, exporting and maybe creating employment.” However, he said the banks cannot have the funds go out through bad loans because that might create some problems for both the banks and investors. He said there is always the possibility of investing these funds in the capital, bond or equity markets. However, he said banks should try to channel some of these surplus funds in a prudent manner. “These are some of the challenges we have to address and we have to find prudent answers to the problem of excess liquidity. But once these funds remain and do not create undue problems in the system then we are alright.” Dr Ramkissoon said thus far, the local banks and TT have managed these excess funds very well.