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Sunday, December 14, 2008

Time for a Caribbean wide rate cut!

I sat and thought about a possible- coordinated- rate cut for Caribbean countries. Not surprisingly, I find it, folks would rather sit on conservative principles and in turn wait on the G-8 countries-- and now-- the G-20 countries, to pick up the pieces in their own economies so that they can reap the benefits of their work at a later date; foreign direct investment and; tourism related activity.

That's fine enough if you knew for sure when the major markets and now, the emerging markets, would pick up. Also, it would be fine, if the Caribbean and other developing countries, depended on other major forms of foreign direct investment, other than those from the major G-8 countries.

However, the former question is harder to predict--although some, including this author, happens to think that we will have a rebound in the major markets in mid-2009-- and the latter, while not as wrought with theoretical considerations, is also dependent on stronger G-8 based investor classes, who may have emerging market subsidiaries, but are also cash strapped and are in the same bind Caribbean countries are in as well--basically, the blind leading the blind.

But, back to the question; is a Caribbean wide coordinated rate cut, now, feasible? I find some strong merit in such a move, which basis is not dependent on mirroring other established markets in their coordinated rate cut move to combat the current credit crisis.

Let's examine the situation!

What does the current credit crisis, have to do with the Caribbean and how is it affecting the region?

The main issue is lack of, or, the easing up of foreign direct investment projects. That's the main and obvious answer when we ask about linkages to the current lack of confidence in the market to extend credit to that of Caribbean economies.

There have been a few projects, reportedly tied to investment banks and private equity firms, who have found it difficult to execute their current investment strategy, due to their turning to a conservative position in the times of lean. Or, companies, who have been exposed to the epicentre of the credit squeeze--sub-prime deviates--who have either gone out of business (of sorts), like Lehman Bro's, or, who have simply found themselves in a cash starved position where they could no longer fund their client's investment portfolio into expansive, new, or, potentially economically and politically risky ventures, with no sight of strong returns in the near future; late returns, are endemic to Caribbean investment's.

How will a rate cut affect this? In fact, a rate cut will be otiose. But, not cutting rates, will equally do as much for his situation as well.

The question now is left to individual governments to act on their domestic and national economic instinct and interests, over that of being dependent on foreign direct investment and finding themselves with their hands tied with nothing (capital) to unbind. This may be a time to find some alternative means of economic production and stimulation, where you no longer have the option of a major source of your economic development--foreign direct investment.

Another scenario plays out, when we ask another question of region wide economists; since their is lack of the main alternative to development in lack of foreign direct investment and now, losses in tourism, what can national Caribbean governments and economies in this Elysium alike, do to make the best out of a horrible situation?

The question has been asked and addressed by several countries, worldwide and not just Caribbean countries. In fact, the first answers, were laid out and acted upon by the USA and the UK, in regards to domestic stimulus plans, which are laden with development in infrastructure and capital projects.

For them, the question is easy with an even easier answer-- they have billions of dollars in private equity, to act upon safe, government sponsored programs. Their government debt, is also dependable and at a very low risk of defaulting and thus, spurring security for long term investment all around. The issue is if whether or not Caribbean governments, can follow this strategy, lock step and come out better for it in the long term. Not that they may have difficulty executing on the dotted line and procedure, but if they have that kind of private equity and trust in their government to repay and finance such a huge (if this turns to be the case) debt, if it needs be and becomes a problem for the future. (This is assuming that government, would have to borrow to finance this initiative, which in many cases, they almost always have to)

What would a rate cut do to make this transition easier?

Not much, if no one has the risk appetite, en masse, to act on the new initiative. However, there are merits to having home field advantage if there "must" be some movement on a good deal.

Not cutting rates, on the other hand, would probably slow down private national investors, in regards to them not running- as fast as the foreign investor- towards getting in on the government investment bandwagon. And, Caribbean governments, would have possibly cut of their noses to spite their faces--providing capital investment initiatives, but limiting the amount of people who are able to participate in it and still, possibly, leaving the ready made investment plans to the folks who have the money to act on that investment; companies with foreign direct investment capital.

My position on this is if you are going to run up debt, may as well make it national debt, in a time like this. You can easily repay national debt, when the foreign direct investment or tourism related activity kicks in, with foreign reserves that will be stronger than they are now at current prices.

A third question about this issue is; despite all of the non-interest rate dependent drivers to the economy, how can a rate cut work overall and provide a better end all solution?

My underpinning reason to this is based on an evident factor of the question; " what else do you have now?" My answer in regards to this is on one side, nothing. And, on the other, next to nothing. There is always a third, fourth and fifth way, to do things. I say that with confidence, because if everything in regards to managing an economy was constant, we would not have the free-market and unpredictable cycles of production. Hence, there is always more than one way to skin a cat.

Saying all of that, I feel a strong and coordinated rate cut, would, considering these times, even though the first two scenario's may lend the feeling of Hobson's choice;

1. Increase domestic spending, with little or no risk of short term inflation. The Caribbean markets are price takers. Their economies are not only dependent on FDI but also, dependent on imports. They don't set international prices. So, their local economies, have little to fear from a rate cut spurring expenditure and increasing domestic inflation, if the main reasons for high price inflation is due to foreign companies and the price they set for them to consume at the onset. A rate cut would spur spending, put money into the pocket of large and small importing companies and provide jobs due to the higher demand--or at least, keep jobs.

2. A rate cut would not only spur current demand and raise the level of imports with leaving the a risk of future inflation as secondary and manageable. In fact, a long term plan for a reasoned rate cut now and, a slow deflation after world wide demand on goods rise, would raise inventory, while taking advantage of the low prices globally and at the same time, leave the option of raising the tax thresholds at a future date all in the same time.

The Caribbean, unless by some miracle, corners all sides of the goods market in the next two years, is, and, always will be, price takers. This time, we can be price getter's and deal getter's, considering the current drop in prices world wide and the deflation in goods making companies and commodities. This would work all towards creating true savings in this down time, while increasing tax base revenues -or at least that option for the future. This idea is on the assumption that demand, would always be sticky downwards and high prices, take months to take psychological effects on consumers. The long time it took average consumers to adjust to un-Godly prices in fuel, is enough rationale to believe that this theory would work.

3. Increases personal debt is of little concern. Especially if the rate cut and other policy instruments, are geared towards SME's and importing companies, personal debt to the consumer is something a rate cut would work to diminish--while boosting productivity and perhaps, spurring spin-off investments in the private market by creating more capital to be accessed by average consumers, due to increased purchasing power and current savings to the average dollar.

While the third reason, leads us to a whole litany of other policy initiatives that would be pro-cyclical. They would all be over shadowed by the present and current opportunity, private consumers and businesses in the Caribbean, can and would be able to take advantage of, in the midst of a wide spanning deflationary pressure on foreign stocks and goods in the major markets.

With all of this, I see Caribbean investors, snapping up deals on foreign stocks, goods, services and real-estate. Giving the idea of remittances, third consideration to foreign capital obtaining methods for building Caribbean economies-- under present circumstances, of course.

A coordinated rate cut, while it is not my only policy prescription, is not far fetched. And, it is certainly not follow fashion, because the bigger G-20 countries said and did it!!!

Youri
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