By Newsday

Copyright newsday

THE EDITOR: In my last published letter to the editor, entitled “Government facing a self-inflicted economic storm,” I highlighted the dismantling of revenue-generating measures, the economic impact of tens of thousands of terminated workers and the inadvertent decline in business and investor confidence caused by political attacks and rhetoric.

Standard and Poor’s (S&P), a globally respected debt-rating agency, in revising our debt-rating outlook to negative, has issued a stark warning to the government – get your house in order or face a downgrade.

S&P notably highlighted three areas of weakness which can lead to a downgrade if not immediately addressed. The first is sustainability of our public finances which have seen prolonged deficits but is at risk of further deterioration, given the government’s policies.

The S&P report not surprisingly identified the dismantling of the Revenue Authority and non-collection of the property tax while highlighting increased expenditure in some sectors.

According to the report, “We could lower the ratings over the next six to 24 months if the government fails to take timely corrective steps to strengthen the sustainability of public finances.”

I have previously warned that the combination of dismantling revenue-generating measures together with expenditure-increasing campaign promises will place our finances in an unsustainable position and put the country at risk.

Given these serious issues, the government is faced with tough choices and trade-offs. If it is to keep its promises, given the current climate, it can and will face a downgrade in the country’s credit rating, reducing our status of debt to below investment grade. This will have a significant impact on the cost and ability to borrow as well as investor confidence in the economy.

The S&P report also points to a weakening economy potentially leading to a downgrade. After three consecutive years of growth and an IMF forecasted growth rate in April of 2.3 per cent, S&P has downgraded projected growth to one per cent and is warning of stagnation. However, future prospects for growth, due to lower energy prices and production, rising unemployment and lower business and investor confidence, may be strained.

Our external sector was also identified as an area at risk, which can lead to a downgrade in our debt rating. Forex inflows are severely impacted by lower energy prices and production and have been so for over a decade. Tariffs in the US, our largest trading partner, appear to have already impacted exports and deteriorated our balance of trade, according to initial data.

The geopolitical tensions escalating in our region and made worse by government rhetoric add heightened risk which may affect foreign investment. Our external position may be hindered again in the short to medium term.

This has certainly added a different dimension to the Minister of Finance’s budget preparation. While I foresee an attempt to plug some of the self-inflicted holes, the horse may have already bolted.

Utilising the Board of Inland Revenue to do what a progressive Revenue Authority was designed to do may be fraught with challenges and already small businesses are complaining of being targeted. The question remains: where will the revenue and growth come from?

Fiscal discipline may be difficult when there are excessive promises to be kept and unions breathing down your neck. Big businesses, already verbally attacked, may be targeted for increased taxation to make up for lost revenue caused by a political position. This can be a further disincentive to investment and economic activity.

Failing to acknowledge the supply side problem of the forex issue and continuing to blame imaginary cartels will see reserves further deteriorate to dangerous levels and the devaluation conversation may become a real one, sooner than we think.

Diversification, especially export-oriented manufacturing industries, would be key but this takes time and the question remains: where are our markets? Has our geopolitical posturing hindered this possible expansion?

As the budget looms, these are some of the issues which must be addressed. For the Minister of Finance, his policy direction, based on the competing forces of politics and economics, may not allow for much middle ground.

It seems while politics has prevailed, inevitably the economic realities will always catch up to us.

VYASH NANDLAL

Carapichaima