Reproduced from the GUARDIAN media - 6 August 2011
Standard & Poors, the rating agency, capped off a truly frightening week for the global economy when it downgraded the AAA credit rating of the United States by one notch to AA+ last night.
Standard & Poors, the rating agency, capped off a truly frightening week for the global economy when it downgraded the AAA credit rating of the United States by one notch to AA+ last night.
In its statement issued last night (Friday), S&P said that it lowered its long-term rating on the US because it believed that “the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate” indicate that a consensus on spending cuts or tax increases was unlikely.
“We also believe that the fiscal consolidation plan that Congress and the administration agreed to this week falls short of the amount that we believe is necessary to stabilise the general government debt burden by the middle of the decade,” the rating agency said.
With analysts making dark references to the bleak days of 2008 when Lehman Brothers and AIG imploded, this was also the week in which investors in stock markets around the world lost a significant percentage of their accumulated wealth.
With analysts making dark references to the bleak days of 2008 when Lehman Brothers and AIG imploded, this was also the week in which investors in stock markets around the world lost a significant percentage of their accumulated wealth.
The Dow Jones Industrial Average, the benchmark of the biggest and best companies in the US, dropped 698.63 points, or 5.8 per cent, to 11,444.61. The S&P 500 declined by 7.2 per cent to 1,199.38, its biggest weekly drop since November 2008 and the lowest level since November 30, 2010.
It’s estimated that investors in US equities have lost about US$1.87 trillion since July 22. Stocks also fell sharply in markets around the world. What is likely to have unsettled stock markets is the fact that what US President Obama signed on Tuesday was a reduction in spending by as much as US$2.4 trillion over the next 10 years when clearly what the US economy may require for the next few years is additional targeted spending.
It may also have unsettled the markets that interest rates in the US are already very low, which means that the possibility of stimulating the economy there by reducing the cost of borrowing is limited.
It may also have unsettled the markets that interest rates in the US are already very low, which means that the possibility of stimulating the economy there by reducing the cost of borrowing is limited.
The issue for T&T—a small, open, energy-dominated economy—is the extent to which what is happening in the metropolitan capitals of the world is likely to impact us. Benchmark West Texas Intermediate crude futures ended the week at US$86.88 per barrel—a decline of US$8.82 or close to 10 per cent from the week before.
Natural gas futures on the New York Mercantile Exchange were down by 4.9 per cent on the week, closing the period at US$3.941 per unit. While there is certainly need for maturity and watchfulness, the dismal global financial news of the past week is not cause for panic in T&T.
That’s because the 2011 budget calculation was predicated on an oil price of US$65 per barrel, a natural gas price of US$2.75 per mmbtu, along with real GDP growth of two per cent and an average inflation rate of seven per cent.
That’s because the 2011 budget calculation was predicated on an oil price of US$65 per barrel, a natural gas price of US$2.75 per mmbtu, along with real GDP growth of two per cent and an average inflation rate of seven per cent.
For oil prices to decline to below US$65 per barrel and average natural gas prices to below US$2.75, the US economy would likely need to be in a depression. Based on the estimated oil and natural gas prices, Finance Minister Winston Dookeran predicted that he would collect $41.3 billion during the 2011 fiscal year, while he projected that total expenditure would amount to $49 billion.
It is also important to note the breakdown of the estimated revenues. When he read the budget on September 8, 2010, Mr Dookeran had estimated that the T&T economy would earn $26.1 billion in non-energy revenue and $15.2 billion from the energy sector. This means that he estimated that 63 cents in every dollar would come from the non-energy sector.
If it maintains tight control over its expenditure, T&T is also in reasonable shape to face whatever uncertainties the global economy throws up because of the management of the last natural gas boom.
If it maintains tight control over its expenditure, T&T is also in reasonable shape to face whatever uncertainties the global economy throws up because of the management of the last natural gas boom.
Unlike many countries around the world, T&T has the benefit of a not insignificant amount of foreign savings: US$9 billion in foreign reserves along with over US$3 billion in the Heritage and Stabilisation Fund. T&T has managed, as well, to stay away from the addiction of foreign-currency debt that has hooked many countries.
No comments:
Post a Comment