Transcript Impact of global downturn on business & How can they manage in

Mary K King
(c) 19th February 2009
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In order to do justice to these topics it is
important to understand the business
structure of T&T. There are really 3 types:
The off-shore energy sector that is mainly
driven by foreign direct investment
The on-shore sector that consists of
commerce, banking, and non-tradable goods
and services that support the population.
Small business/craftsman sector (mechanics,
appliance repair)
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One industry, petroleum based, generates the
bulk of foreign exchange (>90% in T&T) that
is necessary for sustaining the rest of the
economy. Traditionally the plantation gave
most of the employment but in T&T employs
4% of the labour force.
Technology, innovation and investment
capital comes from abroad
GOTT is a large earner of F.E. via taxes from
the off-shore sector (50% of its income).
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The on-shore sector is low risk and produces
little tradable goods and services (small
manufacturing) with little local inputsdepends on the energy sector and mirrors the
boom-bust fortunes of the plantation.
Such a system is prone to the Dutch disease
resulting in the reduction of what little
tradable goods the on-shore sector had.
The small business/craftsman sector is part
of the on-shore but attracts little low risk
capital so stymieing its growth.
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The Energy Sector is a production node of the
global petroleum sector.
Before the financial meltdown there were signs of
global economic slowdown.
Because of rapidly emerging countries, China etc.
demand for energy, oil, was rapidly exceeding
capacity of world to supply- high oil prices.
Resulting in a move to alternative sources of
energy, and so driving high food, copper, steel
etc prices.
Global economic growth depends on cheap
energy. Hence economic collapse because of
Peak Oil was inevitable.
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Financial collapse simply made the economic
meltdown more spectacular.
Local energy sector went to bust mode as oil/gas
prices collapsed from US$147/bbl and
US$13/mmBtu respectively.
Pt Lisas’ plants shut down, electricity and gas
demand dropped, people laid off, income to
GOTT dropped, reducing support for on-shore.
GDP trebled in the last five years with increasing
oil/gas price. Expect GDP to drop similarly with
these price and consequent income reductions.
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The Energy Sector business is driven by FDI
and global demand for petroleum and its
products.
Traditional bust-response of the petroleum
plantation is to freeze investment, lay off
staff, mothball plants that are uneconomic
and wait out the downturn while innovative
activities are carried on abroad.
Local service companies go into survival
mode- layoffs, closures and some live off the
fat accumulated during the boom.
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Repsol told us, our PM and the King of Spain
that the global economy will turn back up
(when?) and that the emerging economies,
China, India and the rest of the world will
continue their voracious demand for oil and
gas and the good times will be here again –
music to the ears of our Government.
What we must heed is that the petroleum
producers could not supply this demand
before the recession, forcing the world to
turn to alternative fuels. Nothing has
happened to really change this situation re oil
production .
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Further, no energy source besides nuclear energy
(France depends on this for its major energy) can
supply electricity as cheaply and with the same
capacity factor as petroleum driven generators.
Now the US is looking at the recycling of nuclear
waste (it is not really waste) into fuel for the next
generation of very safe nuclear plants as opposed
to storing it in a mountain.
Nuclear energy can give us all the clean water the
world needs, all the traditional fuel for our
transportation if only it is not seen as a bomb!
Repsol may be looking back to the future.
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New response of GOTT is to look to tar sands
(more expensive source) and alternative energy.
Tar sands exploitation pollutes the environment.
Choice of solar and wind is not a result of foresighting, just feasibility and may not be the way
to go re: economic development.
All the hard info. we have suggests gas reserves
limited (Ryder-Scott). Energy security and
efficiency are the more important requirements.
Modern local energy sector should engage in
R&D on new exportable products and services for
the sector instead of GOTT’s current industrial
policy.
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Business model of T&T is the exploitation of
petroleum resources mainly by FDI (except for CL
Financial) and the rest of the economy lives off
the rents and utilities’ payments etc.
In boom times with plenty of rents, on-shore
activity also booms- commerce, imports and
distribution, banking, construction accompanied
by high GOTT spending, high liquidity, high
interest rates and inflation.
Global depression will sharply reduce rents and,
with little local savings, mirrors itself in T&T.
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Expect unemployment to increase, non-tradable
goods and services activity, as construction, will
collapse. General incomes will drop so general
drop in prices will not benefit many.
But the on-shore sector business is accustomed
to boom-bust and with little sunk capital
investments, can afford to live off fat
accumulated by high prices during the boom.
This is in part why on-shore business has
remained low risk- it understands how to
prosper in the plantation.
No-capital small business also joins the ranks of
unemployed unless innovative- support of agric.
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It is expected that the global economy will turn
up again. Also many of the world’s economies
will be restructured - to be more energy efficient
conscious of climate change, with new business
models that look to global poverty reduction &
with the free financial and economic markets
more vigorously regulated.
On-shore sector has another opportunity to start
the reconstruction of its economy into a
knowledge based one, sustainable and able to
support itself, after the petroleum is done.
The biggest constraint to so doing is the lack of
high risk capital. This has to be local (Porter,
Demas), however the on-shore sector is low risk.
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Some mechanism has to be provided to alleviate
this risk and allow the low risk savings and
investment to be used in the required high risk
ventures.
This was done before by GOTT in the
construction of Pt Lisas: GOTT accepted the risk
and spread it across all of us.
CL Financial also attempted classic risk
alleviation by spreading its activities across many
industries and markets, a venture that was
brought down by the global recession, and
compounded by poor local regulation.
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For the reconstruction of the on-shore we need a
risk alleviation mechanism that will allow our low
risk savings (insurance, pension funds etc.) to be
used in high risk economic development.
CL Financial has experimented with one
approach.
Another is for GOTT to underwrite this risk via
for example raising low risk Treasury Bonds and
funnelling the proceeds into the creation of a
knowledge economy. Also use part of the HSF for
economic development.
The details of this and the knowledge economy is
for another talk.
Mary K King