The State of Emergency & You

19 September 2011

It’s Time For Intelligent Spending

The topic is contentious to say the least, but aside from political squabbles, let’s examine the likely effects of this now-extended State of Emergency (the SoE) on the economy.

One definition of an SoE reads as follows:

“When a government gives itself special powers in order to try to control an unusually difficult or dangerous situation, especially when this involves limiting people’s freedom.”

According to Prime Minister Persad-Bissessar, the aim of emergency rule was to halt the current spike in gang activity and crime in general in the shortest possible time. Based on reports, there certainly has been a sharp reduction in crime (especially serious ones), but this success does not tell the whole story.

While crime has held the nation in its vicious grip from administration to administration for far too long, we all recognise that the current SoE scenario is not sustainable. Imagine adding 20 to 30 pounds over the course of years, aided by stress, poor eating habits and a non-existent workout regime. Then try to lose that weight within 90 days with two-a-day workout sessions, zero carbs (not recommended), and a few days of Union-style hunger strikes. Results? Of course! Great results at that, but does it attack the real root of the problem? After 3 months of a starvation diet, what will happen when you re-introduce your body to the joys of food?

This aggressive approach to governance is not confined to the crime issue or our country if we look at discussions regarding manifestations of QEIII, the raised US debt ceiling and potential buy-back of Euro-zone debt talks. Feel free to insert any suitable idioms or analogies here (band-aids, kicking the can…).

The implementation of this SoE has serious economic implications which must concern us all. We can examine these through the prism of some country risk factors that should be of interest to the public and finance practitioners alike:

From 2008 to the present hasn’t been a stellar period by any means for the global economy, with negative or anaemic growth experienced. Following the SoE implementation, even with the decreased hours, indications point to disruptions to ‘business as usual’ for companies here, with continued adjustments to working hours or shifts. While we believe that T&T’s fundamentals remain quite strong, a shutdown (planned, impromptu or forecasted) hurts our productive capacity. Again, unsustainable habits, practices and policies cannot replace consistent and reliable methods.

Confidence is another aspect which cannot be underestimated. The dearth of confidence at home and abroad overrides fundamentals. The $3.7BN in excess bank reserves and continuously declining business lending figures speak to this. Those of us who don’t mind ‘parking’ funds locally now, may have a sudden change of heart if the kind folks at S&P take a dim view on our quasi police state. Potential capital flight and even a longer-term brain drain can become additions to a compendium of confidence issues. This works both ways though, as a favourable outlook on the SoE along the lines of “A proactive approach to tackling crime among other factors, leads to an affirmation of Trinidad and Tobago’s A rating,” would give the market a much-needed lift.

Let’s take a look at Fisher’s (American neo-classical economist) MV = PT model in terms of inflation, where;

M = money supply

V = velocity of circulation (how quickly money is spent)

P = price level

T = number of transactions

The model in essence shows a positive relationship between the money supply and inflation, all things being equal. Our inflation figures of less than 2% as at July, may be portrayed by some as “good,” but I would argue that 2% is too low in that “V” from the equation above is not high enough to stimulate growth.

This is not to say that money isn’t being spent quickly enough at your nearest burger and doubles vendors, but it’s not being used to develop productive capacity/ infrastructure (think new businesses, buildings, roads, houses etc.) in a substantial manner that spurs employment or demand for consumer goods. Therefore, one likely effect of this SoE (especially an extended version), is to curb the spending habits of both the common man and investors.

While a wait-and-see approach appears to be the modus operandi among investors given global uncertainty, we would suggest that instead of slogging through the next few curfew-riddled months, one can take a closer look at fixed income instruments (namely bonds) and put that excess liquidity to some use. Perhaps we should seek out a balance between the likely decline in sentiment by the economy’s general consumers, and more frequent, substantial, and intelligent spending by capital owners & investors who should feel safer in their business activities and simultaneously provide a boost to the economy.

Gerard Stephens
Account Executive Sales

2 Responses to “The State of Emergency & You”

  1. Ceejae says:

    How likely do you think it is that a SoE will have an impact on a future S&P rating?

    • Gerard says:

      I think T&T’s fundamentals remain strong, despite the crime rate which has existed for several years now (unfortunately). Given that we don’t heavily rely on tourism; a sector which one would guess would be affected by crime, I would remain cautious but not pessimistic.