Industry watchers are warning the Manning government to ensure that it properly invests the gains from the LNG trains for the long term benefit of the country. Senior Economist, Dr Dhanayshar Mahabir said while revenues from the LNG to the government’s coffers could result in an improvement in the country’s social welfare, it will depend on how government manages it. “The greatest benefit is if government saves and invests the bulk of this revenue so that economic stability can be preserved in an environment of uncertainty and volatility in the world economy,” said Dr Mahabir, a senior lecturer at the St Augustine Campus of the University of the West Indies (UWI) . After a century of involvement in oil production, natural gas has now emerged as the premier export commodity and as a major cash-cow for Trinidad and Tobago. The radical shift in Trinidad and Tobago’s energy sector was triggered by the start up of LNG exports in 1999 by Atlantic LNG to its American and Spanish markets. From an established oil base, which saw an oil boom in the late 1970s and early 1980s, Trinidad and Tobago has now firmly planted itself on the global LNG map, becoming the single largest exporter to the United States as it continues to also service Spain and new markets in Puerto Rico and in the Dominican Republic. The export of LNG is expected to provide substantial long-term flow of both revenue and net foreign exchange earnings to aid the country’s economic and social development.

Government last week gave the green light to Atlantic’s shareholders, BP, BG, Repsol, Tractebel and the National Gas company to expand the plant into a US$1.2 billion fourth train which will see total LNG output close to 15 metric million tonnes per annum (mmtpa) when the latest train goes into production. Professor Anthony Bryan of the North South Centre, University of Miami believes that distributing the gains from the energy windfall equitably is probably the most complex and the most important problem facing Trinidad and Tobago. “The government and society together need to find a mechanism to spread the growing energy wealth and determine how these resources can best be invested to create a sustainable economic base for current and future generations. These are issues with road-maps but no easy solutions,” said Professor Bryan in the March edition of Latin Finance.

Government makes no bones about trying to squeeze everything it could during the year-long negotiations with Atlantic’s shareholders for Train 4. “This is an agreement which will bring maximum benefits to the people of Trinidad and Tobago. It is an agreement which will ensure the continuing prosperity of this country and provide a platform for a stronger social and economic development,” Prime Minister Patrick Manning said. Train 4, with a processing capacity of 800 million cubic feet per day and the largest LNG train in the world when it comes on stream will earn greater revenue for the country than all other previous agreements. According to Manning, starting in 2008, the country will receive annual direct revenue of TT $1.5 billion for the duration of the contract which is expected to be 20 years as the previous gas arrangements with Trains 1, 2 and 3. No tax holiday will be granted to Train 4 as was the case with the other three trains. Among the taxes government will collect are the Business levy, Green levy, land and building and Corporate taxes. Based on negotiations with BP Trinidad and Tobago, a substantial tranche of gas will be freely provided to the government for 15 years between 2003-2017 following which a ten per cent royalty on gas will kick in. The arrangement will ensure a stable price for electricity, already one of the lowest in the western hemisphere. It will also allow government the flexibility to provide competitive pricing for electricity for electricity intensive industries such as the proposed Aluminum Smelter Plant. The agreement for Train 4 also provides for the extraction of ethane from natural gas to support Government’s proposed 800,000 metric tonnes per year world class Ethylene Complex for new gas-based downstream industries. With the capital-intensive energy industry accounting for only 3 per cent of direct employment in the country, Government hopes the downstream industries will absorb a large part of the unemployed population. The new agreement also includes a detailed strategy to increase the input of local service contractors into the building of Train 4 over foreign contractors.

Atlantic LNG has also been getting a fillip as natural gas prices in the US market have been on the upswing, moving from a low of US$2.98 per mmbtu to peak at US$8.6 in March and settling to US$6.05 over the past two months. While demands for natural gas in the US will mean more revenues for Trinidad and Tobago, Dr Mahabir said government will have to be very prudent in its financial dealings. Dr Mahabir however said successive governments have been unable to control its recurrent expenses and that more money has gone into financing the rising public debt, increased transfers to ministries and paying out more money to senior citizens among others. “We are in a fortuitous position because revenues are flowing because of the buoyancy of the export prices but without a buffer of savings, we would have some problems,” Dr Mahabir said. The energy sector generates nearly three quarters of the country’s export earnings. Royalties and taxes on the oil and gas industry generate one-quarter of government revenues. It attracts over 40% of total investment.

The economy has been registering positive growth for the past nine years. In 2002, the economy grew almost three per cent last year but the energy sector registered an 8 per cent growth. In 2001, the energy sector contributed 24 per cent of total GDP and 70 per cent of export earnings. British Professor Richard Dawe, Head of the Petroleum Engineering Unit at UWI St Augustine said with the upstream sector being “big money but small employer” the question of job creation is a real factor for the government.” There are just not enough jobs around to give people satisfying, well-paid jobs to take it from what is called a third world to the first class world, such that the graduates have jobs (in the energy sector) where they are stretched intellectually and well as energy-wise,” he said in a recent interview with Newsday Business. “You need first rate minds with vision and good political and sales people who can deliver, who say they will, over a period of time.” Professor Bryan also believes that much remains to be done to improve the quality of life and alleviate poverty in the country and the best way to achieve this is by creating well-paying, economically sustainable jobs. “The government also has a duty to ensure good education, proper health care, modern telecommunication systems and adequate transportation networks. The government must also design policies to diversify the economy,” he said.

In 1998 when David Kipps graduated from UWI, St Augustine, he left his carefree college days firmly behind him, but in the distance loomed the daunting prospect of having to repay his school debt. By the end of his four-year period of study,  David (name changed ) had borrowed a total of $56,000 from Republic Bank. Getting the loan was easy, he says, it’s paying back that’s hard. The banks usually give students a one-year moratorium, or grace period, after graduation before payments on their loans become due. Payments of approximately $1,500 per month, or 25% of David’s salary of $6,000, started being deducted every month at the end of his grace period. Luckily, he landed a job with a decent salary after graduation. Many other UWI graduates are forced to take jobs that start below $3,000, even with degrees under their belts. David, who has a young son, explains, “If you’re single, it’s comfortable but if you have commitments, it’s tough.” He tries to offset the accumulation of interest by making larger payments when he can but on the whole, repayment has proven to be quite burdensome. David, however, did not make use of the facility offered by the banks whereby payments can be made towards the interest during the term of study. This facility is very impractical, he contends, because most students don’t work while they’re studying and have no means of getting the additional income to pay. David does not attribute his woes solely to the bank, arguing that UWI has some culpability due to its high fees. Karen Lee (name also changed), another graduate who borrowed $40,000, also through Republic Bank, complains that students who don’t pay on time are continually harrassed by the bank. This young graduate, who makes a payment of $1,300 a month on a $5,000 salary, tries to pay on time. She knows of another student who found herself in the predicament of being unable to pay, however, and who subsequently received numerous phone calls and letters from the bank. Karen also found Republic’s policy of forwarding her file to the Tunapuna and UWI branches inconvenient. Making matters worse, once a student has graduated, interest on a student loan can no longer be claimed when filing taxes.

That’s bad news for Karen. According to her own calculations, she will pay over $9,000 in interest alone this year. “Interest rates are too high,” she argues. “The bank should give students special consideration.” Richard Singh (name changed) qualified for a Cess Loan at Scotiabank for the last two years of his enrolment at UWI, his principal amounting to $11,000. After leaving school, he was required to make payments of $700 a month towards the loan, almost one half of his first job’s salary of $1,500. Two years ago he was led to believe that he had paid off the loan completely. The bank has since told him that he has an outstanding balance. “Right now they call every two weeks and I’m just trying to get them off my back but I really don’t have the luxury of time to wrangle with them.” Richard says that he was never informed that he could start paying off the interest while still in school. He confesses though that he “never really looked at the terms of the loan” because his family never really had choices. “We took what we could get,” admits Richard. “When people take loans they don’t fully appreciate the impact of it until it is due. At a time you should be establishing yourself and starting to build your life you have to spend your salary on payments.” Another student who obtained a Student Revolving Loan at First Citizens Bank (FCB)  and started payments in 2002 says, “It would be so nice if we didn’t have to take loans in the first place because of the high rates, but they do come in handy in meeting our needs. My experience wasn’t too bad at all.” Her payments account for 25% of her salary. She also has a car loan and utility bills to pay, among other commitments. The banks offer a small range of specialised options regarding student loans. Most offer the University Students’ Guarantee Loan, also called the UWI Student Loan, and the Student Revolving Loan.

An experienced Credit Officer at FCB explained the UWI Student Loan (USL) has replaced Cess Loans. The student needs to be full-time and have a guarantor to qualify. An acceptance letter needs to be accompanied by a UWI document stating the tuition cost. The guarantor needs to have a salary slip, a job letter and must fill out a form stating assets and liabilities. Family income must not exceed $150,000 a year. Naturally there is no minimum income stipulated, only the condition that assets and liabilities would be weighed. The bank shoulders  90% of costs for the year and the student is responsible for 10%, which is brought into the bank and then forwarded with the rest to UWI. In cases where Dollar for Dollar is accessed, the bank provides 40% of the total fee, the student provides 10% and the rest is provided through the Dollar for Dollar programme. This proces is repeated for each subsequent year and is especially crucial in cases where the tuition is very high. For medical students, for example, a second guarantor may be needed if the original guarantor’s net worth goes down. “This loan is backed by the government but the bank does all the work,” says the bank official.

It is a demand loan which means that at any time the bank can demand that the full amount owed be paid, a solution at times employed for delinquent cases. Scotia Trust, the trustees of the SGL scheme, may even resort to taking legal action against both student and guarantor. The figure at the concessional rate of just over 8%. Unfortunately for the borrower, though, this rate jumps to the prime rate as soon as the grace period of one year is up. At this point the loan is converted into an instalment loan and the borrower begins to pay on principal, interest already accrued as well as the new interest accumulating at a higher rate. To implement the new terms, the bank meets both the student and the guarantor who must again present documents: payslip, job letter and identification. If the borrower can provide security in the form of a fixed deposit or some other viable, appropriate asset, a rate of interest below the prime rate but still higher than the initial rate may be negotiated. Republic Bank’s UWI student loan mirrors this process, being part of the same government initiative. According to one official at Republic Bank, prior and future interest on these loans accumulate on a simple interest basis rather than being compounded. They also offer instalment loans at a fixed rate of 9.5% to 9.25%

Students hoping to attend other tertiary education institutions may access regular instalment loans. Acccording to FCB, RBTT and Scotiabank, the interest rate varies between 5% and 12%. Deciding factors include the amount of collateral, the borrower’s ability to repay and whether the borrower is an existing customer. RBTT also offers a Higher Education Loan Plan which is applicable to both local and foreign study. It is a demand loan which can run for up to 11 years. There is no grace period. Payments are due as soon as funds are disbursed.
There is, additionally, a minor amount of insurance coverage associated with the loan. Finally, the guarantor should not be 70 before the loan is repaid. Student Revolving Loans (SRL) are also open to all government tertiary education institutions except Cipriani Labour College, and accrue interest at a low rate of 4.5%. They are limited to nationals who wish to study within TT. Those wishing to study abroad must plumb other sources. This plan, which is administered through FCB, is not applicable to studies in law, agriculture, education and the humanities. This SRL plan is targetted to those of the lower income brackets, with family income not to exceed $96,000. The maximum amount which can be borrowed on an SRL is $80,000 but this also makes provision for a book allowance and living expenses allowance. A six-month grace period is granted after the student has left the learning institution before the loan must be repaid.

“A pessimist sees danger in every opportunity whereas an optimist sees opportunity in every apparent danger,”said Botswana President Festus G. Mogae. Botswana’s leader is a keen optimist when it comes to Regional Trading Blocs (RTBs) and believes they can be a significant factor in realising sustainable development and increased trade in developing countries given the globalisation phenomenon. He was speaking at the Central Bank auditorium last week. Like the inevitable approach of the hot summer which must follow the winter, says Mogae, globalisation cannot be halted. It is likely to have a telling impact on human development in the coming years, he says. Improvement of Third World living standards is contingent upon the management of its effects, one avenue being through the favourable influence of RTBs. Although some detractors predict negative effects of globalisation like exploitation, marginalisation of the poor globally and increased underdevelopment, Mogae is more optimistic. He feels that given access to technology, poverty can be reduced and new trade and investment opportunities could arise for all countries.Bereft of proper management, however, “suffering and division will grow” and the world will be negatively affected overall. For both Botswana and TT, predicts Mogae, “the greatest opportunities of globalisation will come from international trade” which also creates jobs and reduces poverty. Mogae likened Botswana to TT, saying that both small economies face similar challenges and are comitted to regional collaboration.

Both countries are dependent upon non-renewable natural resources, Botswana’s diamonds being 84% of its total exports and TT’s petroleum and gas being 63% of our total exports. Also the GDPs of both countries thrive on trade, exports and imports, accounting for 85% of Botswana’s GDP and 87.7% of TT’s GDP in 2001. As a result, small economies like these are at the mercy of fluctuations in the prices of imports and exports which affect economic performance significantly, he said. Also, due to small populations and limited domestic markets, unit costs tend to be higher, in this way negatively impacting upon international competitiveness. Mogae notes that RTBs are responsible for regional trade agreements which are catalysts in the process of world trade liberalisation. It is estimated that more than one-third of the world’s trade takes place within such agreements, this figure jumping to 59% if OPEC is included. The Southern African Development Community (SADC), says Mogae, is one of the institutions targeting trade liberalisation with a view to promoting fair, mutually equitable, beneficial terms. “It seeks to eliminate tariff and non-tariff barriers and improve the climate for domestic, cross-border and foreign investments to facilitate economic diversification,” he said, with the ultimate aim being to establish a complete SADC free trade area by 2012.

Mogae also emphasises regional integration which, he says, is becoming more outward looking and more committed. Increasingly integration is taking the form of “investments, intellectual property, labour mobility and the free flow of goods and services.” The heightened opportunities derived from combining markets through RTBs also enable small economies to overcome the disadvantages of smallness. Moreover, many RTBs cultivate partnerships between high-income industrialised countries and developing states. Mogae emphasises that “through regional integration agreements small states can achieve political and non-economic objectives including national and regional security and the enhancement of bargaining power.” SADC and Caricom, good examples of regional solidarity, facilitate the important goal of articulating the concerns of small economies to the international community, he says. Further, he advises that small countries should increase their representation in the WTO in Geneva and regions should maximise limited resources by sharing representation for issues on which they hold a common position. RTBs, he says, must harness “our collective power to ensure that non-tariff barriers do not hinder exportation by developing countries into the market of industrialised countries.” Indeed, he notes, developing nations entering into agreements without bargaining power or proper negotiations could exacerbate existing inequity. For small states to be effectively integrated into the global economy, says Mogae, there is need to address issues such as erosion of trade preferences and the strict enforcement of WTO regulations on subsidies. Also, it must be recognised, he says, that the vulnerability of small states to natural disaster, HIV/AIDS and fluctuations in world market prices and exchange rates warrants international attention.

Q. Could I apply for a home equity loan in order to pay off my credit card debt which stands at over $20,000?

Phillip, Arouca

A: That might not be a prudent thing to do given that the interest rate on credit card facilities is extremely high and so it is not a cost-efficient mechanism to be financing long-term expenditure. The interest rates on credit card facilities have been around 24% over the past five years even though all other interest rates have come down to historic lows over the past two years. It’s worth noting that the rates on mortgages or “home equity loans” have fallen in tandem with the market and they can be stretched over a much longer period of time thereby reducing the monthly repayments. However, to qualify for a home equity loan your house must be free and unencumbered, meaning that there must be no charges on it from your current mortgage if you have one. If your house is already mortgaged then it may not be possible to access this facility as your house is already held as collateral by your mortgage institution. Still, there are cases where some institutions have taken “second mortgages” over houses in advancing “home equity” loans. Talk to a qualified financial advisor to explore the possibilities open to you. On another note, one must be careful putting up one’s house as collateral to refinance unnecessary expenditure. Remember, if you are engaging in consumerism and using your house to refinance, you are exposing yourself and your family to the risk of the bank taking your house if you cannot pay. You do not want to find yourself out on the streets if for some reason you are unable to meet your payments. Therefore, you should use this option as a last resort.

Q. What is a long bond?

Tracy, Woodbrook

A: Generally, a long bond is simply one with a long maturity, i.e. its maturity date is a long time into the future usually over ten years. However, the term can also be used in a specific context. In the Treasury market (that is, the market for Government debt in any country) there is going to be debt with different maturities. You may have a range of maturities including 90 days, 180 days, 3 years, 5 years, 10 years, 20 years or even 30 years. The treasury issue with the longest maturity is sometimes referred to as the “long bond”. The interest rates on the “long bond” in any developed market is an important indicator of the long term expectations for interest rates and also signals the long run growth rate of the economy. The long bond should not be confused with the expression “going long a bond”. The latter has to do with taking positions on any bond, not necessarily a Treasury issue. When a trader says he is “long a bond” it simply means that he is betting that the price of the bond is going to increase as opposed to if he is “short the bond”, meaning that he is betting that the price of the bond would fall.

Q. What sort of interest rate should I look for so that my money is not eaten away by inflation?

Anjanie, Couva

A: There are certain investment instruments, the rates of return on which track the rate of inflation. So if you invest in these, the rate of return you earn would be inflation-adjusted or would exceed the rate of inflation. For example, if the rate of inflation is 2% and the return on your investment is 5% then the “real” rate of return is 3%. If the rate of inflation subsequently increases by 0.5% then you would want your return on that same instrument to also increase by 0.5% to 5.5% in order to earn the same ‘real’ rate of return of 3%. If the return on the instrument does not increase commensurately with the rate of inflation then the real rate of return falls to 2.5% from 3%. An example of an instrument, which stays fixed irrespective of the rate of inflation, is a fixed deposit. However, a money market account, which floats with market conditions, would tend to fluctuate with the level of inflation. So it’s not an absolute rate that you should be looking for to preserve the value of your wealth. Rather, you want an instrument whose return is sensitive to changes in inflation so that the real rate of return on your funds is maintained when inflation changes up or down.

Questions can be sent to PO Box 1830, Wrightson Road, Port-of-Spain. email : cmmbsecurities@mycmmb.com

RECOGNITION of the need for a Caribbean regional carrier and the initiative to establish it have now come full circle. The revival of that quest is born out of the current agonies of BWIA and LIAT which are now the subject of merger negotiations among a group of Caricom governments. Already four states, Trinidad and Tobago, St Vincent and the Grenadines, Barbados and Antigua-Barbuda, have agreed to set up a company, Caribbean Airlines Holdings Limited, (CAHL) to serve as a forerunner to the union of these two airlines. This is not the first time that such a merger has been attempted but, having regard to the present depression in the aviation industry and the dire financial situation of both carriers, one expects that the sheer necessity of survival will finally bring them together. But the wisdom and logic of having a single regional carrier were there from the beginning. It was an idea that sprang naturally from the spirit of Caribbean integration which reached a culmination in the sixties with the achievement of independence by the major West Indian territories. The winds of change had introduced an exhilarating period to societies of the region, breathing the fresh air of freedom from British colonial control and the idea of forging a West Indian nation became a widely cherished vision. A single regional carrier connecting the newly independent states would have been an integral part of that movement and already the services of BWIA provided an ideal and ready operation to assume that role. But the hopes and aspirations of West Indian nationhood were shortlived; the Federation which was formed to unite the peoples of the Commonwealth Caribbean into one whole collapsed after a couple of years and the independent states went their different ways. And so too did the concerted effort of Trinidad and Tobago to have BWIA designated as the carrier for the region. The economic and operational wisdom of having such an airline was still there however and this was made all the more propitious by the excellent and valuable service which BWIA had been providing the WI territories for many years. But the spirit of insularity which eventually broke up the Federation was also responsible for grounding TT’s regional aspirations for BWIA.

The patriotic but totally silly idea among most of these small independent states to have their own “national airline” prevailed and so BWIA was left to soldier on by itself. The fact that the TT airline had been largely responsible for air travel among the islands and for bringing tourists into the region for many years apparently accounted for nothing. But the wisdom and logic of having a single regional carrier rather than several small struggling “national airlines” now seem more compelling than ever, with the world economy stagnating and tourism travel after the September 11, 2001, terrorist attack in the USA in decline. The aviation industry, in fact, is still struggling to recover from the worst downturn in its history with a number of airlines going under and others having to undertake agonies of readjustment. Renewed impetus to the quest for a regional carrier should also come from the impending advent of the Caribbean Single Market and Economy which is another step in the process of Caribbean integration. Prime Minister Patrick Manning reflected this history and fresh interest when he observed that the effort to form a regional carrier had “come out of adversity” and expressed the hope that “something very positive” would emerge from the upcoming Caricom Summit. He was optimistic that other regional airlines would eventually come on board. The movement of history towards “a global village” and the lessons of the past should now serve to press home the economic and communal imperative of Caricom states having one regional carrier in which all the countries are shareholders.