Talk of Free Trade  left  delegates attending the third Euromoney and Latin Finance Caribbean Investor Forum jaded and disillusioned. The issue became a flash point after the session “Forging Ahead” which primarily dealt with how FTAA will impact on the Caribbean and which also looked at how regional economies can work together to compete for investment in an increasingly global economy.

One delegate noted that the four percent Jamaican tax put on goods entering the country was inimical to free trade and was roundly condemned as styming the pace of the Caribbean Single Market and Economy (CSME). Mark Golding of Hart Muirhead  was critical of his government’s new trade tax and questioned how that was going to help the free movement of trade.“Why is this permissible in the context of the CSME,” he said in an interview and suggested that the Caricom Secretariat needed to be strengthened to deal with this sort of thing. “How can we move forward ?” he said. “Business people,” he said, “must have some sort of redress when unilateral decisions like this are taken.”

The conference was held at the all-inclusive resort, Casa de Campo, in the Dominican Republic (DR) from May 7-10. Among the sponsors of the conference were, Guardian Holdings Limited (GHL), RBTT, the Commercial Bank Association of the Dominican Republic and Indotel, DR’s telecommunications authority. Other co-sponsors were, Bear Stearns, Jamaica Money Market Brokers (JMMB), Standard Bank Group, and Cap Cana, a billion dollar mega tourism project being built in the Dominican Republic. Dr Aleem Mohammed, Chairman of SM Jaleel said the Jamaican tax had a significant impact on his business and expressed grave doubts about the future of free trade within the region. He wondered how the Caribbean was going to cope with FTAA when Caricom could not get its own house in order.“Where are we going?” he asked and suggested that Caribbean leaders seek to develop economies of scale to deal with FTAA. On the panel discussion, “Caribbean Finance and Funding,”Junior Finance Minister Ken Valley noted that developed countries were not buying into special or preferential treatment for developing countries.

Responding to the criticism that nobody in Caricom wanted to give up anything, Valley said TT had set up a $50 million fund to help fragile economies.  He acknowledged that a sticking point was how to pull together economies that were at various stages of development.  Valley said when it came to trade, he did not support the theory that “one size fits all.” On one delegate’s charge that regional goverments were the main hurdle to free trade, Valley charged that Caricom had done quite a lot. It was the private sector that needed to catch up.  Caricom delegates were of the unanimous view that countries were putting up uncessary hurdles to trade. Ambassdaor Myles Frechette.

President & CEO, Council of the Americas, was blunt when he told his audience in his address that Caricom had no choice but to get into the river of Free Trade. His anology rubbed the wrong way Kris Astaphan, Executive Vice President, AIC Limited and Deputy Chairman, NCB Jamaica. Astaphan reminded his audience that a river flows only one way. Gary Voss, Chairman, Caribbean Association of Industry and Commerce, took the view that  the Dominican Republic had created an enabling environment for foreign investment. While Latin America was off and running, Caricom was furthest behind, he said. On the CSME, Voss charged that it as very far away and doubted that regional leaders would meet its deadline. With CSME on the slow burner,  investment inflows were not likely to materialise, he warned.

He was scathing in his criticism of the Caricom Secretariat, saying that it had no executives; nobody was in charge of tourism, marketing and finance. He charged, too, that the private sector was dysfunctional, noting there were 10 different private sector organisations who did not speak to each other. His advice was that now was the time to work together to create a facilitating environment to take Caricom forward and  maintained that the game had changed. He gave his own view on the liquidity problem plaguing the region. There was, he said, more money than projects.  Why? “Because big business was waiting to see how the FTAA was going to pan  out and depending on how that went, make their acquisition or investment.” Central Bank Governor, Marion Williams, made the case for capital and people to cross the region freely, noting that success must rest with the Caribbean Single Market and Economy (CSME). She observed that if free trade issues aren’t resolved then Foreign Direct Investment (FDI) could end up elsewhere.

She warned that  Caricom needed FDI to stimulate growth. In his keynote  address to delegates at the opening ceremony, Jamaica Prime Minister PJ Patterson was critical of the concern showed by developed countries for developing marketing economies, describing this as  “token” and “peripheral.” He said the prevailing view in 2003 was that the contagion of poor growth was spreading to developing countries, leading to adjustment problems. He sounded a note of caution when he asked, “How much longer can poor countries remain at peace ?” He also spoke of the perils of the drug trade and a migrant population. What was needed, he said, was immediate investment for economies to grow. “We have to find ways to get FDI in…we have to boost investment levels,” he said.  “We must find ways to do it.”

Professor Compton Bourne, President, Caribbean Development Bank (CDB) also spoke about coping with international competitiveness, noting that economic diversification was needed if Caricom countries were to see growth. Bourne took the view that people must be able to invest in each other’s capital markets, something needed for the smooth running of the CSME. Responding to a question from the audience on the CSME, Bourne said government needed to address structural balances in the CSME so that no one country remains disadvantaged. All integrationist schemes only work when trade, labour movements and capital are allowed to do their work,” he said. Trade, he believed, can only seen as a limited approach to integration.

The announcement earlier this month that the International Monetary Fund (IMF) had advised the St Lucia government to control spending — particularly on wages — and to curtail growth of its overall debt serves to underscore the turbulent economic period confronting Caribbean states in their quest to survive a changing global environment.

The St Lucia economy, like others in the English-speaking Caribbean, suffered several exogenous shocks during 2001 and 2002. The September 2001 terrorist attacks in the United States were felt around the region through decreased revenue from the vital tourism sector and harsh weather patterns have hit the agriculture sector hard making life much more difficult for Caribbean nations. St Kitts-Nevis Prime Minister Dr Denzil Douglas addressing the annual meeting of the Board of Governors of the Caribbean Development Bank (CDB) this week warned of the “possible long-term consequences” of these external situations. “In particular, the many external shocks that we continue to face have masked a fundamental failure in many of our economies — our programmes of economic transformation and change have not kept pace with the ever accelerating wheels of globalisation,” he said.

The banana-producing Windward Islands have recorded a drop in exports for the first quarter of this year compared to last year, with earnings being  put at EC$22.2 million (US$8.48 million) down from EC$31.3 million (US$11.9 million) for the first three months of last year. In fact, one year after it went cap in hand to its Caribbean neighbours, Dominica has not been able to reduce its US$18.4 million fiscal deficit and climb out of the economic rut that has made life harder for its estimated 80,000 citizens. Even an IMF- administered Stabilisation and Adjustment programme to reduce the deficit by 50 percent seemed to have failed. Following a mid-term review of the programme in February, the IMF, though complimentary of the Pierre Charles administration’s attempts to improve its economic fortunes, said another major effort was now needed to contain the deficit. “The problem comes back to the issue of lack of cash and the need to deal with it,” says the IMF Division Chief for the Caribbean Division I Jorge Guzman. While he does not believe that the government’s efforts were over ambitious, he concedes, “What is happening here is that Dominica made an effort, but the situation was much worse than government had anticipated.” And he has had bad news for Dominicans, saying that the Charles administration will have to implement other measures to deal with the worsening situation.

The new measures have forced public workers on to the streets in Roseau in protest, while the main opposition United Workers Party (UWP) tried unsuccessfully to get the Charles administration to seek a new mandate from the population. Last weekend Prime Minister Charles travelled to Washington with the aim of trying to convince the IMF to accept less stringent measures for reviving the ailing Dominica economy. An IMF team is due in Dominica this week for further talks. The smaller islands of the Eastern Caribbean have already agreed on the need to establish their own economic union as a means of preparing themselves for the future.
“Combining the resources of our individual states into a single economic space will multiply economic activity in each our countries to the benefit of all,” Antigua and Barbuda’s Prime Minister Lester Bird said at the OECS summit last month. But the economic problems are not confined to the smaller states of the Caribbean Community (CARICOM). In fact some of the Caribbean’s steady performers have been registering economic problems even as the region contemplates establishing its own single market and economy by 2005.

Barbados, where a general election is scheduled for May 21, has experienced economic declines of 0.6 percent last year and 2.8 percent in 2001. For calendar year 2003, the fiscal deficit is projected to decrease to 3.9 per cent of GDP, and 4.7 per cent of GDP for the fiscal year 2003/2004. Bridgetown has blamed the September 11, 2001 terrorist attacks for the decline. “Despite the achievement of positive real economic growth in the first quarter of 2003, the outlook for the remainder of the year largely depends on the changes in expectations in international markets regarding daily events in Iraq,” says Barbados Central Bank Governor Dr Marion Williams. She says assuming that a second-quarter end to substantive armed conflict will sufficiently spur business and consumer confidence in Barbados’ major trading partners, the economy is projected to expand within the range of zero per cent and one per cent for 2003.

However, Trinidad and Tobago stands out among those countries that have managed to remain on a path of growth, despite a loss of momentum suffered in the fourth quarter of 2002. Last year, the economy registered a ninth consecutive year of economic expansion, the Central Bank has reported. The Bank said that real Gross Domestic Product (GDP) grew by just over three per cent, largely on the strength of the energy-based industries where real value added rose by 10.7 per cent. The Bank was even predicting “robust growth in Trinidad and Tobago in 2003 and 2004” even as it acknowledged that the international outlook has weakened and become even more uncertain as a result of the war in Iraq. The PJ Patterson administration in Jamaica has had to tread carefully amid warnings from labour leaders of “a wave of social unrest” in the near future as a result of the worsening economic fortunes that have seen the local currency continue its precipitious slide against the major world currencies including United States dollar and the British pound sterling.

Finance Minister Omar Davies has had to perform an astonishing balance role in recent weeks, placating local interest while satisfying the international communities that the government is exercising fiscal prudence. He has promised to gradually reduce the fiscal deficit, which stood at 7.7 percent of GDP at the end of the 2002-3 fiscal year in March. The target is for a deficit of five to six percent this fiscal year. However Jamaica’s biggest worry lies with its staggering debt to GDP ratio of 152 per cent, with debt servicing this fiscal year consuming 65 per cent of total spending in the US4.7-billion-dollar budget. Further, Jamaica’s economic performance has not been helped by the advisory from the US firm Prudential that last month warned investors against Jamaican bonds. It was a similar position adopted by the credit rating firm Credit Sights. Trade union officials in Jamaica believe that the PJ Patterson administration and other Caribbean governments must start a process of dialogue to help balance their fiscal programmes with their countries’ social needs. President of the National Workers Union (NWU) Clive Dobson believes that major stake-holders like the trade unionists, the employers’ federation, manufacturers, government, NGOs need to begin some serious dialogue in order to try to find a solution to the economic problem.

Tobacco stocks are traditionally defined as “consumer/non-cyclical”, meaning that even in times of business cycle downturns, these companies outperform others that are more sensitive to economic swings. This makes these types of shares good defensive stocks that earn relatively high dividends and more or less maintain their value. The main factor that contributes to this is the inelastic demand for the product meaning even when prices increase, demand remains fairly constant.” For this reason a tobacco stock is a good addition to an investor’s portfolio since the stock provides the required stability and earnings for the investor to take more risks when diversifying portfolios.

Consequently, West Indian Tobacco Company (WITCO) has focused on increasing its market share through the CARICOM territories.  Revenues derived from the region grew by TT$7.8m (11%) in 2002. The regional contribution is notable as total sales (regional and domestic) increased by 13% from TT$388.4m in 2001 to TT$439m in 2002. Increased Turnover was met by an 8% reduction of product cost.  This was a result of “the Company’s initiative to strengthen strategic alliances with suppliers.” “This achievement is directly attributable to improved materials management and the development of improved processes and systems across the Supply chain” explains the Managing Director, Anthony Phillip. “Total operating expenses increased by 7%” from a 2001 position of TT$91.5m to TT$112.2m.  The increase resulted from the investment in “projects aimed at increasing efficiencies in our primary and secondary supply chain coupled with significant increase in our insurance cost.  These projects have already begun to impact significantly on operating efficiencies” (i.e. reduction in product cost.) The combined effect has been to increase operating profit by 19.4% to TT$113.6m in 2002 from TT$95.2 in 2001 with after profit tax growing by 22% to TT$75.9m from TT$62.2m in 2001. It is safe to predict that these initiatives will continue to reduce product cost and  increase operating profit if all other things remain equal.  The five year data (1998 to 2002) supports this assumption as after tax profits almost tripled (265%) from the 1998 position of TT$28.1m to the 2002 position of TT$75.9m.

WITCO’s Balance Sheet reflects a stable and mature company.  The company is without debt and is obligated in the long term to the government (deferred taxation of TT$14m) and to its employees (Retirement and post employment medical benefits of TT$4.3m.) Cash in hand of TT$19.6m with short term deposits of TT$8m provide the company with a healthy assets to liabilities ratio of 2:1; the removal of the inventory reduces the ratio to 0.73:1. The company has a 36% efficiency utilisation rate on its assets. The company is seizing the opportunity to boost production and sales potential through the implementation of aforementioned initiatives.  Factory output rose “to new record levels with a volume increase of 3.5% over 2001”.  Utilisation rates will increase in the short term. WITCO’s 2002 Financial Statement is an investor’s dream.  The company will distribute 97% of its after tax profits as dividends to shareholders, and maintain the remaining 3% for the Revenue Reserves of the company.    50% of the dividend will be remitted to the British American Tobacco Company (BAT), and 12% to Colonial Life Insurance Company (Trinidad) Limited (CLICO) in accordance with their shareholdings. The company has opted to pay out large portions of the after tax profits to shareholders instead of growing the revenue reserves of the company. Over the five-year period the company’s reserve or equity position has grown by only 24% while assets and after tax profits have grown by 43% and 265% respectively.

A company’s reserves show the commitment of the company’s shareholders to the future growth and longevity of the company and an indication of what they are willing to risk for that opportunity. WITCO’s expression of commitment is that it has “raised the level of our corporate sponsorships, providing increased support for the development of sport and promotion of culture in the country”.  The reader needs to be aware that these are tax deductible expenses and reduce the tax payable (to the Government) at the end of the financial period.  The company benefits from these sponsorships as well. The real story of a company’s contribution to a national perspective is in the levels of equity it maintains. This is a statement of intent. In real terms 50% of WITCO’s after tax profit leaves the company, the real beneficiaries of a strong profit position are not resident in Trinidad and Tobago.

None of the stakeholders seem to have a problem with this approach.  The Seamen and Waterfront Workers’ Trade Union (SWWTU), representatives of the hourly and monthly paid employees, has not made any statements about this.  Shareholders are themselves compromised since their main concern is in making money in the short term to recover their investments. Even though product demand remains fairly constant, tobacco is a luxury item. Sales will be boosted by increases in disposable income in the market. Expectations are that WITCO will continue to do well.  The company will responsibly market its products as stipulated by the “International Products marketing Standards.” Considerable profits will be made and shareholders will enjoy large dividends; 50% of which will be remitted overseas.

Maxie Attong is a financial& management consultant.
email:  enhanceink@hotmail.com

Q. Someone told me that rich people don’t have pension plans, they live off the interest on their investments. I’m 35, is it better for me to put money in a pension plan or should I build an investment portfolio for my retirement?
Satish, Chaguanas

A: It is true that rich people can generate a significant monthly income because they already have amassed a significant amount of capital. However, if you are 35 and do not yet have significant savings, you still have 25 years before retirement over which to generate wealth. Since you do not yet have a pool of funds, the better option would be for you to contribute to a pension fund where you set aside a small amount per month. Over 25 years you would be able to contribute to a substantial target payout in order to live comfortably during retirement. Most plans are structured so that you would receive a lump sum payout on retirement and then monthly income flows. There are different ways in which the payouts can be structured to suit your individual circumstances, so talk to a qualified financial planner to get a few options or to customise the cash flow to suit your preference. Obviously, the more you can afford to contribute to your pension plan each month, the greater would be the amount you get at retirement. Also, the higher the interest rate that you earn on your contributions the greater the income at retirement. So make sure and shop around and get the best possible return on your funds. In wealth building all you need is time and a good rate of return.

Q. In your columns you keep advising people to diversify their investments. With the amount I earn my savings and investments are the same thing. All I can put aside is $200 a month in Units. How can I diversify that?
Jasmine, Trincity

A: It is possible to diversify your investments even by setting aside $200 a month. In fact, Units are set up for that very reason. Units contain a wide variety of underlying assets in a variety of economic sectors. When you buy units your investment returns are a composite of the performance of all the underlying assets in the trust. Therefore, if you invest in units there is a much greater degree of diversification than say investing in a savings account at the bank, where the investment is located in only one company, the bank itself. In addition to spreading your eggs in different baskets the rate of return is much higher than conventional deposits. However, not all units are the same. There is one variety where your principal is kept intact while there is another where your principal could be eroded. So make sure and ask specific questions as to which kind of investment you are getting into so as to make an informed decision. Given your situation you may not want to have your capital at risk.

Q.What is a Eurobond and what role would it play in an investment portfolio?
Vernon, Santa Rosa

A: A Eurobond has nothing to do with the currency of the European Union, the Euro. This is a common misconception. Rather, a Eurobond is a bond raised in a currency for a borrower living outside of the currency’s home country. For example, the Governments of the Caribbean can raise bonds in US dollars on the international market. These are referred to as Eurodollar bonds as they are bonds denominated in US dollars raised for borrowers outside of the United States, namely Caribbean Governments. Therefore if the Government of Trinidad and Tobago (GOTT) raised a bond on the international market in US dollars it is called a Eurodollar bond. Alternatively, if the Government raises funds in Yen on the international market the bond would be referred to as a Euroyen bond. Or if the Government raises sterling on the international market the bond would be referred to as a Eurosterling bond. Eurodollar bonds are the ones applicable to investors in Trinidad and Tobago since our markets in Yen and Sterling are small. Eurobonds are very similar to normal bonds. They are characterised by semi-annual interest payments, lump sum principal payments at maturity and terms to maturity greater than ten years. Hence a GOTT Eurodollar bond would be applicable to a corporation or individual looking for a safe, long-term US dollar investment.

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

In the old days, your ability to save was predicated largely upon how much money you spent on a house, car, and other big-ticket items. Today you have far less discretion over your spending.

Consider taxes. Under the current revenue  law, you have few deductions, and therefore little opportunity to lower your tax bill. And because your total tax burden has never been higher, you are devoting more and more of your income to tax payments. I’m not just talking about income taxes (30% for most people), I’m also talking about Value Added Taxes (15% on most items), property taxes, gasoline taxes, and many more. All told, close to 50% of your income is lost to taxes. Then there’s housing.  Most people spend 20% (on average) of their income on rent or mortgage payments. Add another 7% for home-related expenses, including insurance, repairs, and maintenance, and you’ve just spent another 35% of your income. So before you eat dinner, before you buy a pair of pants, and before you hail a taxi or buy a car, 85% of your total income is already gone. And since a university degree is a virtual requirement in today’s workforce, you also can regard the money you’re saving for university to be a tax of sorts. Clearly, your remaining 15% must go a loooong way.

With those precious few remaining pennies, you decide to buy a soft drink with lunch. No big deal, you say. After all, it’s only three dollars. Considering the huge amounts you’re spending on taxes, homes, cars, clothing, insurance, food, and day care, what possible difference could three dollars make? A $570,000 difference, that’s what. It’s true, Spending three dollars a day (instead of investing it) for 40 years — a normal working career — on soft drinks, chocolates, even the daily newspapers, translates to $570,000 that you won’t have when you retire. Can you afford to throw away nearly six hundred grand? Because that’s what you’re doing by buying that soda or ice-cream.

Under The New Rules of Money, you simply are not in daily control over most of the money you spend. That is why it is crucial that you carefully allocate the money that is in your control. So the next time you reach for that Coca Cola  on the supermarket shelf, or head to the fast-food joint, or subscribe to all the premium channels on the cable, ask yourself one simple question; Is this expense going to help you achieve your financial goals?

STOP SPENDING MONEY ON THINGS THAT FALL IN VALUE

Without question, “the good life” is within the grasp of more people than ever before. However, many people are trying nonetheless to live a life they cannot yet afford. Too often they act like they have wealth even though they are not, in fact wealthy. For example, you probably can’t afford to buy a $15,000 Rolex; it’s likely you won’t even try. But you might be willing to spend $400 on a Raymond or Gucci watch. Not that you should, mind you. Because to spend $400, you first must earn $667, while that money, if invested for 40 years at 8%, would grow to nearly $10,000. But you won’t have that ten grand, because you’ll have spent the $400 instead. The biggest irony is that the watch won’t be worth anywhere near $400 in 40 years. In fact, it’ll be a surprise if you still have it. On the other hand, you’ll not only still have the Rolex, it will have held its value, and probably have even appreciated — not just because expensive watches become collector’s items, but because such watches are laden with gold, a valuable commodity in any form.

So if you really want to boost your ability to build a large net worth, stop buying assets that you really can’t afford to buy, like $400 watches. Either buy a $15,000 watch (which is likely to hold its value or appreciate) or buy a $25 Timex. Better yet, ask a rich friend what time it is.

OBSERVE THE NEW RULES FOR SURVIVING THE HOLIDAYS

The numbers are astounding. Retailers sell 35% of their entire year’s products between September and January — and toy stores rack up 60% of annual sales during the Christmas Season. Indeed, the holidays put people into a shopping frenzy, with budgets ignored in favour of the latest gifts and gadgets. When the bills arrive, people often realise they spent more than they could afford — way, way, way more! You must no longer allow the holidays to bust your budget. Instead, despite your best intentions, recognise that you will spend money. Every year, we will tell ourselves we won’t spend too much. But who are we kidding?

You’re going to spend a ton of money. You always do. If you don’t believe me, just look at last year’s chequebook and credit card bills (and the year before that, and the year before that). Go back to last December. I’m willing to bet that you will spend as much or more next time, too. What’s startling is that people are shocked when they discover how much money they have spent. But the holiday season comes every year, so stop acting like it’s a surprise. Instead, plan on it. If you spent $1,200 last year on holiday expenses (gifts, parties, food) you need to save $100 a month all year long. For just this purpose, banks used to offer special savings accounts called the “Christmas Club.” Regrettably, few still do. To help you survive the next holiday season, follow these steps:

1. Make a list — not of what you’re going to buy — but for whom you are going to buy: Family, friends, business associates, and so on.
2. Next to each name write — not what you’re going to give — but the amount you’re going to spend on that person’s gift.
Too often people focus on the gift they plan to buy rather than the gift’s cost. If you decide to give a sweater to cousin Sara, you’re forcing yourself to spend whatever sweaters cost, even if they cost more than you should spend. (“It wasn’t my fault I spent so much,” you’ll rationalise later. “That’s what the sweater cost.”) Therefore, you need to decide the amount you’ll spend on Sara, and if you can’t buy a sweater for that amount, then buy something else.
3. Once your list is complete, total it up. If you’re happy with that number, great. If you’re not happy, start cutting. Remove people from your list, reduce the amount you’re intending to spend on each person, or both.
4. Now your list is ready — but don’t head off to the mall yet. First, you have to go to the bank to get some cash (or travellers cheques if carrying lots of cash makes you nervous). Why bother with cash when you have credit cards? Because you’re going to leave all your credit cards at home! You overspend because your credit card is a virtual bottomless pit, but your wallet isn’t. So if your list adds up to $800, go to the bank and withdraw $800. Then head to the mall, and spend freely. And when you run out of cash, you’re done!

Following this strategy will keep you from overspending, and it will reduce or eliminate impulse buying. You will force yourself to spend your cash wisely, or the last person on your list will get a five-cent lollipop! And let me add this point; Don’t buy gifts just because you feel obligated. Spending more than you can afford is not mandatory. You can make a charitable donation for the entire family, giving each person a card saying, “I made a donation in your name to so-and so charity.” Or make your own gifts — bake cookies, even. Everybody loves chocolate chip cookies. January should start off with Baby New Year knocking at your door, not creditors.