‘The numbers don’t add up’: Dr Farrell on Covid, costs, challenges and consequences

“[…] Non-energy revenues have fallen in 2020-2021 and for next fiscal, 2021-2022, it is going to be worse—partly because people pay taxes on the previous year’s numbers and partly because the recovery is going to be slower than expected because of the state of emergency and the impact of the Delta variant on the global recovery.

“[…] Layoffs in the public sector are not going to be immediate because it is intensely political. But quite frankly, I don’t see how you could avoid it. I think we have passed the point where you start saying: well, we’ll deal with it by attrition and we’ll wait for public servants to retire and we wouldn’t replace them, and we will institute a freeze on hiring…”

Earlier this year, respected economist Dr Terrence Farrell, former deputy governor of the Central Bank of Trinidad and Tobago and ex-chairman of the government’s economic development advisory board, spoke with Wired868 editor Fayola Bostic on the state of the local economy:

Wired868: How has the economy been impacted by Covid-19 and the government’s response to it?

Dr Terrence Farrell: The Covid-19 impacts have been layered on top of a trend that was already adverse. I think it’s important to understand that.

The economy was already not in a good place when Covid-19 came along. Essentially, I think the government’s response was, in large measure, pretty much how all the other countries responded in the context of the pandemic, and that is that you had to have some form of lockdown of certain sectors of the economy. You then had to make some decisions about the extent of relief that you would give to the population as a result of that.

In Trinidad and Tobago’s case, we did try to provide some relief to sections of the population. If you look at the public sector, central government and state enterprises, the relief there was actually in not laying off anybody.

People got paid even though most of the public sector was furloughed or worked from home when they could, and so on. And that’s a form of relief. Remember the public sector employs about one-third of the labour force!

And then, of course, there was another form of relief, where the government gave some money to people who had been laid off. The effect of all that is that government expenditure would have increased—or has been increasing—at the same time that its revenue has been declining.

The effect of that was, in the last fiscal year, a deficit that went from a projected TT$4.5bn to TT$11bn. The question is what will the deficit be for this fiscal year 2021. The finance minister has already given some indication that, in the first four months of the year, things are not going particularly well from the revenue standpoint.

Wired868: Would you care to put some flesh on those bones?

Farrell: The latest unemployment numbers that we have from the CSO are from back in the first quarter of 2019 which, quite frankly, is just absurd.

That period, for example, does not take into account what has happened with Petrotrin; it doesn’t take into account the closure of several plants in the petrochemicals sector. A lot of the energy services companies have had to send home workers in that period of time. 

Over the past two years there have been labour force reductions due to ongoing economic challenges that different sectors have been facing, but we just don’t have the numbers to tell us what’s really going on. The government did give some indication as to the numbers of people to whom they have granted relief, but I know some of those data were in dispute.

The actual method that they used to provide the relief I thought was perhaps not the best way of doing it. I would have proposed that they should have done it through the companies themselves, rather than through the NIB. And that would have given us a better handle as to the numbers that we were in fact dealing with.

So the truth is, we don’t really know. We don’t have good data.

And that would not only be Trinidad and Tobago but almost everywhere else—even the United States and the United Kingdom. Even when these economies began to come out of lockdown and to re-open, what you found is there were a lot of businesses that simply could not, and cannot, recover.

They have simply gone out of business and those jobs have been lost. For those jobs to come back, it will take a much longer time for new businesses to arise to replace them and to pick up those workers and so on.

In addition, some workers, for example, those close to retirement, would have dropped out of the labour force. Others would find it more convenient to work part-time from home especially with children out of school. That is going to be true not only in Trinidad and Tobago, it would be true of all economies around.

Wired868: So are you saying that it’s not all bad?

Farrell: The truth is that there are a lot of businesses that would not have survived the situation. In the United States, the government gave direct support to the airlines to allow them to keep their staff on—the last US$1.9 trillion support package, a part of it is for the airlines—so American Airlines and Delta United kept their staff on. British Airways got a similar kind of support. 

We know that the government has had to support Caribbean Airlines, but it is going to shed some of its workforce. But you could imagine that if you’re an airline and you didn’t have that kind of relief, then obviously you would go bust.

There are a lot of bankruptcies [and] a lot of companies in hospitality and hospitality-related fields that would have simply gone out of business. Once you can’t have sporting events and you can’t have people dining indoors at restaurants, which continue to rely on curbside pick-up and that type of thing, then, even when they’re not shut down completely, they are affected.

If you look at the data that we do know—for example, the Prestige Holdings results (and Prestige is KFC, Subway, Starbucks and so on)—they made a lot for the year despite the reduced activity and trying to carry their staff for a period of time and then ended up with a substantial loss.

There are other companies in the restaurant business that we know of that are not public companies, but from information that’s around, we know Trotters, that’s one of Peter George’s restaurant companies, is closing. I believe Chaud in St Ann’s has closed permanently. Whether we have a lockdown or not, once we do have restrictions with economic activity much lower as a result, there will be consequences.

Again, Trinidad would not be any different from almost every other country in the world. Sectors that have been hardest hit globally have been those sectors that depend on people coming together, which is travel, tourism, hospitality, restaurants, etc—those have been the ones hardest hit.

There are other sectors, for example, the public sector, which have been hardly affected at all because the government has continued to employ and pay its workers.

The construction sector was allowed to continue to operate, so building continues and so on. In the UK, for example, the one sector that actually grew was the construction sector.

There’s an increase in GDP in construction because that sector, quite frankly, never really closed down. With the sector open, it meant there was some amount of transportation taking place. Activity was proceeding but obviously at considerably lower levels, so Trinidad would have been no different in that regard—that is until the state of emergency caused even construction to shut down for a while.

Wired868: What about Tobago? Did the sister isle fare any better than Trinidad?

Farrell: The sectors most affected would’ve been sectors related to travel, tourism and hospitality. Tobago has been affected because it wasn’t getting any international visitors. From what I’ve observed, there’s some activity taking place with respect to internal tourism, but it’s at a much lower level.

In the hotel business, in the low season, you are losing money, so in the peak season, you need to get your occupancy up to 85% or 90% to compensate for the low season when your occupancy is 50% or lower. So your breakeven occupancy over the course of the year, if you just want to make a dollar of profit, might be about 60%.

Now if you are operating in Tobago with only internal visitors, you’ll end up with a below break-even level of occupancy and definitely with losses.

Anecdotally, I have friends who have hotel businesses in Tobago and they tell me that the situation is bad! One of them, who’s involved with one of the bigger hotels, privately-owned, says that that property had zero visitors a couple of months ago.

So in that kind of situation, even if you send some of your staff home, you still have overheads running, you still have costs, so you are still making losses. In fact, I understand that Coco Reef has now closed—hopefully not permanently.

There does not seem to have been an increase in credit card usage. In the UK, in fact, one of the interesting things happening is that, as people are at home, children are also at home because there’s no school and household savings have actually increased during the course of the pandemic.

As the economy recovers and opens up, a lot of that money that is pent up is going to get spent, and there should be a rebound in economic activity. Indeed we did see a solid rebound in the first quarter of 2021, but the spread of the Delta variant has disrupted the pace of recovery.

In Trinidad, commercial banks have not seen any increase in significant lending over the last 12 months or so. Just the opposite, in fact.

The increases in lending have been relatively small; probably because, remember, the banks were encouraged to—and most of them did—implement moratoriums for people who wanted them. So moratoriums were given for mortgages and, if you had commercial loans and a business, you could get a six-month moratorium. And I think that would’ve helped some businesses.

The banks had to make provisions for their expected credit losses. So again, if you looked at the results for Republic Bank, say, or First Citizens, you would see significantly lower profits for the last few quarters in 2020.

There has been no significant increase in lending during the course of the pandemic but, equally, we have not yet seen any appreciable increase in actual defaults. Non-performing loans have crept up a bit, but we haven’t seen any major defaults happening.

I think the number one reason for that is the moratoriums that people would have taken advantage of, and those have been extended by the banks into 2021 in some cases.

When it comes to things like people’s homes, most people tend to make mortgages the absolute priority in terms of whatever income they have so that they can keep their homes. But, of course, the longer the situation goes on, the more difficult it becomes to be able to do that.

The fortunate thing is that most people either have continued to be employed, or with the benefit of the government relief, they are making their own adjustments in terms of their expenditures to be able to cope with the situation.

Wired868: And the impact of the closed border policy?

Farrell: So, first of all, it has impacted in terms of visitor arrivals for leisure and business. Business travellers, particularly people coming in for the oil companies, actually account for the majority of arrivals in Trinidad and Tobago—unlike in Jamaica or Barbados.

So CAL has to be significantly subsidised by the government simply to try to keep its staff intact; but even that has not been sufficient and CAL will lay off some of its employees. And the lack of visitor arrivals means loss of revenue for the Airports Authority.

[…] So again, they’re impacted by that loss. Then, of course, you have the multiplier effects of all of that: no arrivals coming in, people not spending money on hotels, on meals, on whatever. We had no Carnival, so the impact of Carnival in terms of revenue generation and foreign exchange earnings has been completely lost this year.

So, yes, the border closure obviously contributed to the overall contraction of the economy.  Now that the borders are reopened, there will be some improvement, although testing and vaccination requirements make much more travel difficult, so that improvement will be slow.

When you looked at the budget presentation for fiscal 2021, it was very clear that the projections for the energy revenues were too optimistic. In addition they didn’t take into account Covid-19, and the fact that the taxable revenues in the non-energy economy would decline as a result of the lockdowns.

Non-energy revenues have fallen in 2020-2021 and for next fiscal, 2021-2022, it is going to be worse—partly because people pay taxes on the previous year’s numbers and partly because the recovery is going to be slower than expected because of the state of emergency and the impact of the Delta variant on the global recovery.

Even though oil and natural gas prices have rallied since the fourth quarter of 2020, the production decline in the energy sector continues, so the budget outturn for this fiscal year will get blown out of the water.

What does that mean? I am worried but I am anticipating that we may well get a further downgrade by S&P—Moody’s already has us as junk non-investment grade and S&P has us as borderline investment grade. They have us under watch and I suspect that we’re drawing down on the HSF simply to pay current expenditure, wages, salaries and so on. That would be really bad news.

If you are a rating agency and you are concerned about the country’s ability to meet its obligations to external bondholders and they tell you they are taking that money and they are using it to pay public servants, that would be a red flag! (S&P maintained T&T’s borderline investment grade rating, but changed the outlook to ‘negative’.)

Wired868: Do you believe that the government will have to lay-off people?

Farrell: Well, layoffs in the public sector are not going to be immediate because it is intensely political. But quite frankly, I don’t see how you could avoid it.

I think we have passed the point where you start saying: well, we’ll deal with it by attrition and we’ll wait for public servants to retire and we wouldn’t replace them, and we will institute a freeze on hiring.

I think we’ve gone past that point.

The numbers don’t add up. The ability to finance that deficit is seriously compromised. We have apparently mortgaged the HSF to external bondholders. But I don’t see that the government will take such tough action; they will probably continue to limp along as best they can, use up the savings, which are still considerable for as long as they possibly can, and hope that oil and gas prices will bring some relief in the short term.

That has been our pattern in the past, and I think that is what they will do.

Editor’s Note: Click HERE to read the second and final part of our interview with Dr Terrence Farrell, as we discuss the fuel subsidy, WASA, VMCOTT, social development, and retrenchments.

 

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