Fitting the Trinidad and Tobago Real Estate Industry into the Economy

Presented at Association of Real Estate Agents Seminar: 2011 May 15

Anthony BirchwoodCaribbean 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 3%2008 24%2009 61%2010 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. 0

10

20

30

40

50

60

70

2007 2008 2009 2010

(%)

Taking Shape from US Growth Cycles

•US began recording a down turn in mid 2008 which bottomed out in 2009.

•Growth in Trinidad and Tobago economy amplified US economic growth.

•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

0

4

8

12

16

2005 2006 2007 2008 2009 2010

Trinidad and TobagoUnited States

(%)

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 Jan-Mar 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 2007-8 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

ActualOct 09-Sep 10

Budget Oct09-Sept10

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 was over a year in 2009-2010. Other CARICOM member states average 3 to 6 months.

•TT therefore had a cushion of foreign exchange to sustain global shocks.

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

2009 2010

Year 2010:Q1

2010:Q2

2010:Q3

2010:Q4

Year

Total -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-Energy

-7.2 -0.6 -2.6 -2.4 -3.6 -2,3

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.

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%.

CPI Inflation and wage index nexus.General wage increases tightly correlated with growth in prices.

2

4

6

8

10

12

14

120 160 200 240 280

Industry Wage Index

Infla

tion

Correlation: 0.66

Headline Inflation and Wage InflationWage Increases just about the level of growth of prices.

Spending power restricted by headline Inflation.

-60

-40

-20

0

20

40

60

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

OILINF HEADLINE TTWINF

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.

Forecasted World Economic Growth

2011 2012

IMF WEO World Growth

4.5 4.5

USA Growth 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

•Trade has bounced back to pre crises levels.•Strong growth forecasted for advanced industrialised countries

•Opportunity for healthy capital flows to developing countries.

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

2011* 2012*

CBTT 1-2%

IMF WEO 2.2 2.4

World Bank 2.8 2.8

Global Finance 2.5•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.

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.