The Weekly Report: Our Two Cents On The Budget

13 October 2012


Much has already been said about the budget, with everyone from the proverbial man on the street to the political and economic intelligentsia expressing a multitude of views. No national budget is perfect, and the budget is not a panacea for social or economic ills. While the old saying proffers a penny for your thoughts, at Firstline we like to give you value for your money (except where jokes are concerned). We will give you not a penny, but two cents. You’re welcome.
This is not an attempt to comprehensively analyse and deconstruct the budget. We will, however, zero in on a few items that we believe should be highlighted.

THE FIRST CENT. IT IS SHINY.

The announcement of a timeline for the implementation of the CLICO Investment Trust marks the denouement of a sordid episode that has tarnished the reputation of the entire financial industry, and caused significant trauma across the region. While far from being made whole, once bondholders redeem their zero coupon bonds into investment trust shares, they will have recovered a substantially larger portion of their principal, which they have been waiting three and a half years to do. Together with the proposed offerings of shares in First Citizens Bank, and the merged mortgage bank, investors will finally have high quality, domestic investment options to consider, and much of the liquidity overhang in the market may dissipate.

The tax measures for residential and commercial development are also very timely. Developers who trade in new houses with construction costs under 1.5 million dollars will benefit from the elimination of taxes for a two year period. This will go some way towards solving the housing stock bottleneck in the country, where there is an estimated shortfall of 200,000 houses that has led to multi-year (often multi-decade) waits at the HDC. The urgent need for modern, multi-storey parking in the nation’s major urban centres was addressed, with tax holidays for their construction that would hopefully help alleviate the typical congestion, in Port of Spain especially. This may provide opportunities for investors, if developers and project sponsors use the Junior Exchange to raise capital for residential and commercial projects.

Extension and expansion of tax allowances for sporting and cultural projects should encourage companies to support two areas that have attracted increasing attention over the past years, as T&T’s creative industries—and its Olympic athletes—flourish with limited funding and gain international recognition.

Lastly, another important measure that was announced was the move to accept electronic payments at customs, which would eliminate a considerable time hassle for many importers who previously had to pay using certified manager’s cheques or cash. This caused settlement and processing delays, and was very time consuming, thereby adding to the cost of doing business for the crucial distribution sector.

THE SECOND CENT. IT NEEDS SOME BRASSO.

Here comes some criticism.

While we can hardly expect the government to offer open-ended tax holidays on some of the measures that were announced (or can we?), the two year time period seems likely to expose the construction sector to overheating—assuming that developers and contractors decide to take advantage of the opportunities. This could lead to conditions similar to the early to mid-2000s, where material and labour were in short supply and contributed to escalating home prices, which may very likely have had inflationary effects on the broader economy during that period.

We suspect that the two year time frame was meant to add some urgency to the situation, and may be extended depending on the success of the initiative. Yet as another saying goes, the road to hell was paved with good intentions.

Lastly, the 44% increase on the price of premium gasoline, while it will not affect the larger part of the population, is still a significant psychological shock and is probably one of the most discussed items from the budget. A more gradual and phased increase may have made more sense, but instead, with such a drastic symbolic increase as a warning sign, it is likely that many of the more unscrupulous businesspersons out there will use it as an excuse to increase prices on goods that they sell.

Where successive governments have failed repeatedly is in the timely implementation of the measures announced in a given budget. The Honourable Minister seems to be taking a very hands-on approach, and certainly has a very commendable track record in the private sector. The public sector, however, is a very different animal to the private sector, and we can only hope that over the next year many of the measures proposed actually come to fruition. At the very least, we hope that the Ministry is able to manage and contain the inflationary risks from the new incentives.

What are your two cents on the budget? We also accept bills so don’t rein yourself in.

Michael J Cooper
Trading / Investment Strategist
Firstline Securities Limited

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