Transcript Trends – RE 2

Fitting the Trinidad and Tobago Real
Estate Industry into the Economy
Presented at Association of Real Estate Agents
Seminar: 2011 May 15
Anthony Birchwood
Caribbean Centre for Money and Finance.
Gone pass the bottom of economic
crises?
• Bottom of global crises may be over since
2009.
• Recovery widespread in advanced
industrialised economies. eg.
– US, UK, Eurozone.
• Emerging markets continue to exhibit robust
growth. Possible decoupling of global growth.
eg.
– Brazil, India, China.
Recovery still fragile in some advanced
developed economies
• Developed economies mortally afraid of stagflation.
–
–
–
–
Fear flat growth, rising inflation and high unemployment.
Oil prices remain above US$100 per barrel.
Sharp rise in food prices.
Threat that rise in fuel and food prices could spread to other
goods.
• Forecast downgraded for growth in developed economies
and Inflation upgraded.
– UK cut its growth forecast for the year to 2.75%, down from
3.1%. CPI inflation hit 4% in April, which was above the 2%
target.
– US growth forecasted to be between 3.1 to 3.3 %. Inflation
forecasted to 2.1 to 2.8%. Consumer price inflation reached
3.2% on May 14th, the highest forecast since October 2008.
Imperatives for Developed Economies
• Reform rules for global financial system.
• Addressing jobless growth.
• Bring down high debt levels.
– Possible fiscal rules.
• Address public debt ratios.
• Trim discretionary spending.
• Tax reforms.
• Address Inflationary Pressures.
– High food and fuel prices.
Comparative Growth for Trinidad and
Tobago
• Trinidad and Tobago can be compared to Small Island Developing
States (SIDS). SIDS are
– CARICOM – Antigua and Barbuda, The Bahamas, Barbados, Belize,
Dominica, Grenada, Guyana, Jamaica, St. Kitts, St. Lucia, St. Vincent,
Suriname and Trinidad and Tobago.
– Pacific island states – Fiji, Samoa; Solomon Islands, Kiribati, Maldives,
Marshal Islands, Moldova, Nairu, Tonga, Tuvalu, Vanuatu
– Meditaranian – Malta.
– Africa – Guinea-Bissau, Mauritius, Seychelles, Sao Tome and Principe;
– Middle East – Qatar;
– Indian Ocean – Singapore
– Black Sea Basin – Macedonia
• Economic Cycles in SIDS were wrapped around that of the US.
2009 was a lost
year for SIDS.
•Percentage of SIDS recording
negative growth:
2007
2008
2009
2010
3%
24%
61%
18%
•Dampening of foreign direct
investment (FDI) in 2009.
•Fell in 71% of SIDS.
•TT recorded a ¾ fall in FDI.
•Increase in Debt overhang.
•Increased in 31% of SIDS.
•TT debt comparatively low.
(%)70
60
50
40
30
20
10
0
2007
2008
2009
2010
Taking Shape from
US Growth Cycles
(%) 16
•US began recording a down turn
in mid 2008 which bottomed out
in 2009.
12
8
•Growth in Trinidad and Tobago
economy amplified US economic
growth.
4
0
•FDI to TT essential to its growth
cycles.
•Modest recovery of the TT
economy for 2010. Recovery
was thwarted in 4th quarter by an
annualised decline of 3.8%. As a
result, overall decline for the year
was -0.6%.
-4
2005
2006
2007
2008
Trinidad and Tobago
United States
2009
2010
Real Estate Industry Still Grew
• Banks remained liquid.
• Demand for real estate investment increased.
– Indicators show growth in mortgage loans.
– Relatively lower home prices compared to 2007.
– Mortgage rates fell to a weighted average of 6.9% in
December 2010 compared to 9.3% in 2009.
– Construction material increased modestly by 4.8% by
December 2010 and 4.9% for the first quarter of 2011.
Energy Price
Recovery
•Oil and Natural Gas
bottomed out from JanMar 2009.
•Generated Foreign
Exchange inflows to
build up energy related
liquidity.
Balance of Payment
(BOP) % of GDP
•Trinidad and Tobago
recorded sharp deficit
in 2009.
•Expectations were
anchored on the 20078 period of strong
robust energy led
growth.
•Real estate industry
benefitted from
confidence built up
prior to 2009.
Fiscal Stimulus not
as large as
budgeted for!
•Fiscal stimulus in TT was
more pronounced in Oct
2008 to Sep 2009.
•Deficit not as large as
budgeted for in Oct 2009
to Sep 2010.
•Contained because of
higher revenues from
energy exports.
•The downfall is that it is
difficult to reverse
increases in fiscal outlays
if the revenue base
shrinks.
•Fiscal savings was not
eroded as wage
increases were subdued.
Wages are a major part of
recurrent expenditure.
Actual
Oct 08-Sep
09
Actual
Oct 09-Sep
10
Budget
Oct09Sept10
Total Rev
(TT$M)
39,044.8
43,211.9
36,644.7
Total Exp
(TT$M)
45,730.8
43,520.3
44,347.3
Overall
Surplus
(TT$M)
-6,686
-308.2
-7,702
Overall
Surplus as
%GDP
-4.9
-0.2
-5.4
Budget deficits in last couple years
• Trinidad and Tobago budget is the largest in
CARICOM.
• Big question is how to achieve balance budget
given expectations?
• Fiscal stimulus was employed in 2009 and
2010 and expended mainly on capital
expenditure projects.
Low debt levels allowed for fiscal
space
• So called fiscal stimulus did not result in large
debt overhang.
– Expenditure on projects turned out to be smaller
than what was originally envisaged.
• All projects were not fulfilled.
• Revenue inflows during project cycles.
• The low debt levels occurred as
– Total debt was 37.4%. Low by international
standards.
– External debt: 7.1% of GDP.
More than
adequate foreign
exchange reserves.
•Trinidad and Tobago vastly
exceeded CARICOM
requirement of 3 months
import cover.
Import Cover
14
12
10
8
•Import cover was over a
year in 2009-2010. Other
CARICOM member states
average 3 to 6 months.
6
4
•TT therefore had a
cushion of foreign
exchange to sustain global
shocks.
2
0
2005
2006
2007
2008
2009
2010
Dealing with Expectations
• Danger of government spending based on current
revenue. Need to budget, based on projected
revenue based on sustainability of current
activities.
• Revenue expectations can lead to government
increasing revenues beyond the capacity of the
economy to accommodate it if revenue falls
short.
– Containing of budget on the expenditure side.
– Cater for life after energy?
TT Growth
Performance
Forecast of a recovery was
dashed given 2nd and 4th
quarter shrinking of the
economy.
Recovery of the energy
sector did not firmly take
root in 2010 .
Private sector response to
fiscal stimulus was not as
strong as anticipated.
2009
2010
Year
2010 2010: 2010: 2010: Year
:Q1
Q2
Q3
Q4
-3.5
1.9
-1.2
0.8
-3.8
-0.6
Energy 2.6
5.4
0.7
5.3
-4.1
1.7
Non-7.2
Energy
-0.6
-2.6
-2.4
-3.6
-2,3
Total
Why economy did not recover in 2010
• Recovery has been slow.
• Weak domestic demand in non-energy sector.
– Manifested in sluggish outcomes in construction,
manufacturing and retail sectors.
– Fiscal stimulus and energy exports did not restore
these sectors within the year.
• Weak Multiplier effect of fiscal stimulus.
– US experienced a similar fate in 1930s and under
Obama administration.
– Central bank estimate unemployment between 5-6%.
• Subdued labour market.
• Stimulus assisted in the creation of temporary jobs.
Inflation held in check
• Weak domestic demand held core inflation in
check. Central bank estimated it to hold
around 4%.
• Headline inflation was 13.5% in the central
bank in April 2010.
– Temporary effects on inflation was through food
inflation.
• Global food price increases led food inflation to
increase by 30%.
14
Correlation: 0.66
12
Inflation
10
8
6
4
2
120
160
200
240
280
Industry Wage Index
CPI Inflation and wage index nexus.
General wage increases tightly correlated
with growth in prices.
60
40
20
0
-20
-40
-60
2001
2002
2003
2004
OILINF
2005
2006
HEADLINE
2007
2008
2009
2010
TTWINF
Headline Inflation and Wage Inflation
Wage Increases just about the level of growth of
prices.
Spending power restricted by headline Inflation.
Private sector credit did not respond
as expected
• In spite of the reduction in interest rate, credit
remained weak
– 2.2% below previous year.
– Mortgage lending was the only buoyant part of
the credit market as it was 9% above previous
quarter of the year.
• Excess liquidity therefore accumulated, thus
suppressing interest rates.
2011
Forecasted World
Economic Growth
•Trade has bounced
back to pre crises
levels.
•Strong growth
forecasted for
advanced
industrialised
countries
•Opportunity for
healthy capital flows
to developing
countries.
IMF WEO World 4.5
Growth
USA Growth
2012
4.5
2.4
2.6
OECD Growth 2.8
2.9
World Bank:
World Growth
3.3
3.6
US Growth
2.8
2.9
OECD Growth 2.4
2.7
Global Forecast can be impeded
by downside risks
• Depends on developed countries ability to formulate credible
fiscal plans to restore employment.
• Ability of developed countries ability to counter high Sovereign
debt.
• Ability to sustain capital flows depend on risk posed by
individual markets.
• Active domestic markets in Europe. This includes continuation
of growth in industrial activities following their rebounding in
mid 2010.
• Rising commodity price levels can create uncertainty and
instability. Adverse Impact on spending power of consumers.
Forecasts of Economic
Growth for Trinidad and
Tobago
•Forecasts are positive.
CBTT is the most
conservative. International
bodies are more
optimistic.
•Enhanced growth for TT
assisted by improve
prospects of external
capital inflows.
•Need to embark on
Diversification Strategy to
make growth robust.
2011*
2012*
CBTT
1-2%
IMF WEO
2.2
2.4
World Bank
2.8
2.8
Global Finance
2.5
Conclusions
• To some extent, aspects of the domestic real
estate market did not suffer the negative fall outs
of the global economy.
– Low domestic interest rates and modest increases in
building materials fostered increased demand in the
domestic real estate market.
– Speculative demand for real estate, since return on
financial savings was low.
– High liquidity of domestic consumers in contrast to
the US where demand for real estate slowed.
• Real estate prices may rebound once confidence
in the economy picks up.
Conclusion (cont’d)
• Fear of stagflation in the global economy.
• Rising commodity prices can offset growth forecasts
globally.
• Growth forecast by CBTT more conservative than that made
by international bodies.
– Fiscal stimulus was not as pronounced in TT as in other
countries.
• The key for sustainability, is for the government to be able
to manage expectations.
– Mitigation of wage pressures and containment of other costs.
– Strong foreign exchange inflows but failure to curb excess
demand for foreign exchange.