In the space of a couple of months and with breathtaking speed, what began as the bursting of the private housing market bubble in the United States, has turned into a gargantuan financial crisis, credit crunch, and global recession. Every country in the world, albeit at different rates, is either seriously affected or will be sooner or later seriously affected by these developments.
The issue we begin to consider in this week’s column is: what are the likely effects on the developing countries as a whole, Caricom and Guyana in particular. None of these will escape unscathed, as already the crises have negatively impacted the world’s principal markets: USA, Europe and East Asia.
There are surprising numbers of channels through which the effects of these adverse developments are being transmitted to the region. I shall discuss some of these in what follows, but in no special order of significance.
Caricom: Net commodity exporter
Caricom is a net-commodity exporting region. This is principally due to the export of natural gas, petroleum and petroleum-related products by Trinidad and Tobago, whose main export market is the United States. Other member states like Guyana, Suriname, Belize and to a lesser extent Jamaica are also highly specialized and dependent on commodity exports.
As a consequence there is the confident expectation that world trade will decline in the coming months and with it the prices of a wide range of commodities.
Of course, the fall in commodity prices would be due largely to declining global demand as the recession reduces global purchasing power. To make up for this decline in prices countries are expected to seek to export more in order to maintain earnings. This would, however, exacerbate the imbalance between global demand and supply causing prices to fall further. This is the familiar poverty-trap exporters of commodities face on world markets.
The World Bank has already projected a decline in world trade for 2009. If this takes place, it would be the first reversal in the expansion of global trade in two-and-a-half decades! These circumstances could very well result in the terms of trade shifting against the region. That is, the index of its exports prices fall, while that of its imports remains the same or rises. In other words import prices do not fall, but export prices do.
Declining commodity prices and an adverse movement in the region’s commodity terms of trade will likely be compounded by a decline in the region’s exports of services. In particular, we can confidently predict this for the two main sub-sectors − travel and tourism. In all previous recessions, consumers in the United States and Europe have reduced travel and tourist expenditures. Consumers seem to consider these items as ‘discretionary’; that is, expenditures that can be deferred or missed altogether in hard times. The region depends heavily on the export of services. In several countries this accounts for about two-thirds of their GDP.
The fall in natural gas and petroleum prices best typify the difficulties the region will face in its export markets. Usually, the Trinidad and Tobago government uses a benchmark price of US$70 per barrel of oil, for budgetary purposes. At one point, only a few months ago, this was less than one-half of the price ruling on the world market. The resultant windfall gain for budgetary purposes was huge. In the space of a couple of months, however, that has completely dissolved as the world market price for oil has plummeted to a level 40 per cent below the bench-mark pricing by Trinidad and Tobago’s budgetary authorities, and 70 per cent below the price ruling in the world market a few months ago (US$150 per barrel).
The repercussions of all this on Caricom’s economic growth, incomes, jobs, consumer spending and tax revenues and expenditures will be considerable. I would project a definite slowdown in the region’s economic activity, but cannot be sure which, if any regional economies will go into recession. Some economists believe that, at this stage, Trinidad and Tobago, the hardest hit by the fall in commodity prices, might be able to avert a recession.
Apart from the transmission of a decline in export earnings, another important area of loss to the region is in remittances sent back to the region by its diaspora and reduced earnings and opportunities for the region’s workers to earn a livelihood through organised temporary migration for jobs in the US and Canada. Estimates vary widely about regional income earned from remittances. In every case, however, the estimate is that the region depends on remittances to a significant extent. As adverse economic conditions unfold in the rich developed economies, remittances will definitely decline.
Fall in security prices
The third channel through which the economic troubles overseas impacts the region, is through the portfolio of assets that Caricom firms hold in the markets of the USA and Europe. There has been no mention of this in regional circles, but clearly two developments on the securities markets are likely to adversely impact the region. One is the broad-based and persistent decline in securities prices since the bursting of the private housing bubble. The other is the number of frauds and swindles and the huge sums involved. This has been perpetrated by securities markets insiders with minimal regulatory controls by the agencies appointed to do this. The most recent fraud is attributed to Bernard Madoff, a former Chairman of the Nasdaq securities exchange who ran a Ponzi pyramid scheme bilking investors of up to US$50 billion.
The region has been provided with no information on the exposure of Caribbean firms to these disasters. Pension funds, trusts, insurance companies holding of securities, and other financial institutions are all likely to have been exposed. After all the region maintains good communication links with the securities markets of North America, Europe and Japan.
Next week I shall continue from this point.