Notes From The Margin

April 7, 2008

Is The Barbados Stock Exchange Becoming Irrelevant? Is it already?

We on the margin were reflecting on the recent conclusion of the Neal & Massey BS&T takeover. Neal & Massey were successful of course in buying the entire company. Some 97% of shareholders willingly took the offer and the remainder were bought out by N&M following the 90% rule. (If you own 90% of a public company you can take possession of the other 10% of shares just by paying for them). So lock stock and barrel, BS&T as an independent entity is history. What was once considered the symbol of white corporate power in Barbados has been sold (but that is another post).

So what happens next? Of course the company will be de-listed from the BSE, it’s now a wholly owned subsidiary so it won’t be traded. As a result the numbers of companies on the exchange take a hit. This will be the latest in a series of reductions in the number of public companies in Barbados. Island Properties Ltd. was taken off the exchange by Colin Brewer & Tony Hoyos, Life of Barbados was taken down by the Mutual (now Sagicor), BWIA was grounded by the Trinidad Government. If we want to think back that far Plantations Ltd. went in a long agonizing slide into oblivion. Now we have BS&T joining the ranks of companies that were once public.

Along with this slow dwindling, there is a scarcity of new companies going on to the exchange. Of course unless you count Sunbeach (we won’t go any further on that one). To make matters worse there’s an overwhelming tendancy for people to buy shares and then hold onto them for long term appreciation. So we have far more buyers than sellers. The mutual funds have added a new dimension but the returns (if you take out the BS&T takeover) have been pretty much moribund.

Merging the regional exchanges will buy time, however the fact of the matter is the investment arena in Barbados is pretty stagnant. If you listen to the rumour mill, the stories floating around about “back room deals” may or may not have substance, but they don’t engender confidence in smaller investors.

The management of the exchange must see the trends, and also must realise that from a long term view, if they do not take action they will be consigned to the same file folder that currently holds BS&T.

Marginal

March 18, 2008

Welcome to the 5 year long election campaign!

When the dust settled on January 16th the two parties ended up being quite far apart on number of seats but actually quite close on total number of votes cast. With only an 8% difference in terms of total votes, it means that the current government is vulnerable to a 4% swing. This means that despite a comfortable majority in Parliament, the Thompson administration must politically plan from now with an eye to elections in 2013. It also means that the Mottley opposition is already keeping an eye on that year.

As a result of this we are likely to see Mr. Thompson trying to attack what has long been perceived as the BLP’s strongest point; it’s management of the economy. The BLP for it’s part will pick at every flaw in the government’s actions.

This leads to the  ludicrousness of things such as Government suddenly becoming skeptical about unemployment statistics despite never having said a word about it before or during the campaign. It certainly was not a part of their platform. They are not releasing those figures because it will reinformce the BLP’s perception of good governance.

For the BLP’s part, this whole “We don’t know why the government won’t work with our consultants” is laughable. They damn well know why and they would do the same if they were in office as well.

What it amounts to is that we are in for a five year long election campaign, with the cut and thrust of January continuing at a lower intensity until 2013

Strap yourselves in, it’s going to be a wild ride!

Marginal

March 3, 2008

Why We DON’T Want Obama To Win (Or Clinton For That Matter)

This is one of the more difficult posts to write, difficult because we don’t want to be misunderstood, and difficult because it’s a difficult choice to make. As we write this the Primary season of the US presidential election is rolling forward. The Republican front runner John McCain appears to have his hand on the nomination (barring something quite unexpected happening) In the Democrats camp there is a heated battle for the nomination going on between Hillary Clinton and Barack Obama.

In the Caribbean the popular sentiment is understandably for Obama, he’s personable, has an agenda for change in Washington and of course, he’s black. For the first time ever it would seem that an African American has a real chance of ending up in the White House. For a region that is mostly African in descent it’s heady stuff.

However….

As cool as it is that the United States has reached the stage of maturity that they could seriously consider a black man for the post of Commander in Chief, we on the Margin have come to the conclusion that Mr. Obama’s race is (or should be) for us in the Caribbean irrelevant.

Why have we reached this conclusion?

We have to recall the Clinton presidency (That’s Bill if you are confused) Bill Clinton was one of the most “human” US Presidents in living memory. Former President Clinton was enormously popular in the Caribbean, mostly on his personal charisma. However when you look at the effects the Clinton presidency had on the Caribbean, Bill Clinton did more damage to us than any hurricane that has struck the island chain. Why do we say this?

1. Dole/Chiquita Bananas and the WTO.  This action destroyed the livelihoods of hundreds of Caribbean farmers basically to repay a campaign contributor.

2. The Ship Rider Controversy. Remember the pressure that was brought to bear on Barbados when it resisted?

3. The OECD “Harmful Taxation” initiative.  Despite the BLP’s efforts to say that it fell apart because of Owen Arthur, we really know that it fell apart because when Bush came to power the US was no longer interested in backing the initiative.

This isn’t meant to be a US bashing post, but the fact is the Caribbean has ALWAYS done better under a Republican in the White House than a Democrat. We can see the echoes of similar policies in Mr. Obama’s current political career. With rhetoric against NAFTA (Ironically which was enacted by Clinton) and action in sponsoring the “Tax Haven Abuse Act”.

If we lived in the US we would probably vote for Mr. Obama, but the fact is that we don’t live in the US. Rather than get caught up in the euphoria that surrounds his campaign we are forced to apply the same logic that we do to our local politicians “Judge them not by what they say, but by what they do” and when judged on that scale (from a Caribbean perspective anyway) Mr. Obama is found to be less than an ideal candidate.

Marginal

February 14, 2008

The Royal Rumble…..

Well after simmering for a few weeks the Royal Shop Vs. Barbados Workers Union is beginning to bubble. On the one hand the owner of the Royal Shop insists it is a straightforward case of a worker refusing to follow a reasonable instruction on the other hand the BWU is maintaining that the worker in question was fired for trying to organise the Royal Shop workforce.

The drama has rolled on through several acts, with allegations of untruths and insults being thrown around, the parties have met several times and there has been no shifting of positions. The latest salvo in the firestorm has the union reaching for perhaps its biggest gun, that of a national strike.

Now the Union actually doesn’t have many cards to play against the Royal Shop, there is no other unionised workforce there that it can call out, so it can’t stop the store from working. Further because of the smallness of the operation it can be run by literally a few people, so in a worst case scenario the owner can run it with friends and family. The stock of the store is high value, and brought in by individual courier so the union can’t say it’s not handling cargo consigned to the Royal Shop at the port. The shop’s main customers are tourists so it’s business is unlikely to suffer from a withdrawal of custom from Barbadian customers. That leaves the Union pretty much in the position of having to use the labour relations equivalent of an atom bomb to squash the proverbial cockroach.

However the Union should exercise some care with the idea of a national strike, while Bajans will support the idea of freedom of association in theory and in practice while it costs them nothing, the Union may well find that their support wavers if it suddenly starts becoming personally inconvenient to the average man in the street.

A national strike is in no one’s best interest, we on the margin would urge both sides to return to the bargaining table and let cool heads prevail.

Marginal

February 12, 2008

Concerns On The Cost Of Living

We have been watching with interest the efforts of the government to contain the rising costs of food, and while we see a genuine effort being made we have serious concerns about how sustainable that effort is.

Pinnacle Feeds warned about the impending price increase and was asked by the Minister of Agriculture to hold off pending talks with stakeholders. After intially stating that Governement could not subsidize the industry the minister went to bat at cabinet and the following statement appeared in the press today.

The Thompson administration agreed to the price increase but promised financial support to poultry and dairy farmers. When contacted, Minister of Agriculture Haynesley Benn assured farmers they would not be out of pocket.

“We have assured the farmers that they would be compensated. A mechanism has been worked out where there will be a price support for the farmers. A sub-committee met on Friday afternoon with farmers’ representatives and they will report to the Minister of Trade who will meet with them along with the Ministers of Finance and Agriculture.

“We would’ve worked out by that time how the farmers would be compensated. We will get back to the farmers’ representatives as to how soon compensation will come,” he said.

While we applaud the aims of the Government, this clearly cannot be a long term solution particularly in the face of a global rise cost of grain.

Now to be fair the subsidising did not start with this Government, the BLP subsidised domestic power prices by way of a subsidy on the fuel charge. At the time we on the margin chalked up to being an election gimmick that we felt would quickly disappear. However this spreading of subsidies into a new area gives us pause.

Economics cannot be denied.

The upward pressure on prices is mostly exogenous in nature, that is, caused by factors outside of the Barbados economy. There would appear to be a “perfect storm” contributing to these raises including increasing oil prices, increased use of food for fuel, demand for raw materials such as steel etc. by the rapidly developing economies of China and India, and the list goes on. In the face of these forces a policy of subsidization simply is not sustainable, it is at best a stopgap measure that has the potential to damage the economy if it is allowed to continue beyond its limits.

We on the margin are not saying that the government should NOT subsidise, but we would be more comfortable if there was some public indication that the government acknowledged where the limits to this policy are.

Marginal

January 31, 2008

Economic Advice From Prof. Howard

Local Economist Prof. Michael Howard who has become a regular commentator on Government’s economic policies today wrote an guest column in the daily Nation offering his views on the way forward for Prime Minister Thompson’s government and Owen Arthur’s stewardship.

His comments on former PM’s Arthur are interesting:

Whether he knew it or not, Arthur was also influenced by Rostow’s misleading “catch-up” notion of Barbados becoming a “developed country”. We may have already reached there since we are now in Rostow’s stage of “high mass consumption”.

Arthur’s expansionary policies eventually led to “overheating” of the Barbadian economy. Overheating was caused by heavy expenditure on the World Cup, the bunching of lumpy capital projects, and high levels of conspicuous consumption. The positive aspects of overheating were increased employment and economic growth.

The Barbados model has now reached a critical turning point where serious decisions have to be made to reduce high levels of spending, maintain capital controls, and curb illegal immigration. Without capital controls the exchange rate will come under significant pressure, as the economy faces a possible recession.

( If you want a quick overview of Rostow’s Theory click HERE.)

The point on the removal of capital controls we have spoken about on the margin already. It does seem to be a judgement call. As we said in our post “Capital Account Liberalisation – Good or Bad? ” it seems that no one REALLY knows what will happen when capital controls come off. Prof. Howards view that the world economic situation is less favourable MAY be right.

Interestingly his other points include tax policy:

It’s likely that it may happen in a cosmetically changed format and Thompson may claim that it was his idea! Arthur’s tax policy seemed logical to us on the margin, and it favoured gradual incremental change over a period of years rather than sharp adjustments. In lowering the income tax rate he was able to address the issues with the NIS pension fund without the population feeling poorer. With his policies he began moving the economy away from income taxes which inhibit investment and towards VAT. Arthur had indicated publicly on more than one occasion that he considered moving to one tax rate for both onshore and offshore sectors to be desirable.
On the issue of VAT Prof. Howard had this to say.
We on the margin agree with the professor on this point, and are concerned that once exceptions are made to the VAT tax, it becomes easier to make further exceptions. “You zero rated sports equipment so why not this?” Also the more zero ratings the more loopholes there are for abuse. (Are rally cars sports equipment? How about clothes to train in?) The objective is socially laudable, but we believe that the Government should find another way of achieving it.
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We aren’t sure that we agree with Prof. Howard on one of his later points on the cost of living.

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“Reliance on imported food is a major cause of the high cost of living in Barbados.”
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We believe this argument ignores the fact that (1) Many of the input into local agriculture are imported, (2) Much of the imported food is so subsidized that it lands at costs BELOW the cost of local production. While the lack of competition in the distributive sector is definitely a factor it is in our view simplistic to view them as a major part of the problem of local agriculture withering, without a full examination of ALL of the factors involved.
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That said we are happy to see input from some of the best brains “On The Hill”. Barbados is at a stage of it’s development where precious few countries have gone before. Input such as Prof. Howard’s is invaluable in helping both policymakers and the public understand the issues of the day.
Marginal

January 25, 2008

Reality Begins to Set In….. Mr. Thompson Does Some Management of Expectations

Barbados’ new PM, met with the private sector this week, in his first address to the business community Mr. Thompson made his first attempt to reign in some of the overly optimistic expectations that some people may have.

The admission by the prime minister, who is also minister of finance, may have been the first time that Mr. Thompson has tried to lower expectations as to his incoming administration’s performance, at least in the short term.

Mr. Thompson told his audience that the new administration was taking office at a time when the world economy was at the height of uncertainty, with analysts predicting an imminent downturn in the U.S. economy, and a slowdown in some European economies.

If economic recession occurs in those countries, which constitute Barbados’ major trading partners, he said, “it would have negative implications for the Barbados economy and the economies in the rest of the region.”

One of the direct causes of the financial turbulence around the world, said the prime minster, is that it can disrupt capital inflows into developing countries like Barbados and put more pressure on their already large current account deficits. He said the government would continue to monitor the trends and take what he termed appropriate economic action in order to keep the economy stable.”

In the heady days following an election victory, readership of the comments on many of the blogs have revealed immensely high (some of which we would say are unrealistic) expectations of the newly elected government. In fact, even here on the margin we have had comments that reflect this….

  1. Don’t worry Marginal, the country is in good hands.We now have a team which is interested in the welfare of the electorate nad not in their self aggrandizement.

    From here on in everything will get better.

    Comment by Anonymous — January 22, 2008 @ 2:32 am

Mr. Thompson who now sits in the big chair must manage these expectations and ensure that the Government remains fiscally prudent. The promises of the election campaign must now meet the reality our resources, and the reality of the economic environment we operate in. Those constraints DID NOT CHANGE on election day and Mr. Thompson’s comments reflect a mature appreciation of the realities of the country’s position. The tone of his Prime Ministership will depend on how successfully he can communicate this to people like our anonymous commenter.

Marginal

January 22, 2008

Our Thoughts On The Cabinet

PM Thompson showed the first inkling of his plans for the new term by naming a cabinet which is bolstered by some of the brightest brains in the island. We on the margin are particularly pleased to see Darcy Boyce being named to the cabinet as his skill set fills the most obvious hole in the qualifications of the elected cabinet.

Another interesting move was divorcing the International Transport ministry from the Tourism ministry and placing back with Transport and Works. The previous BLP administration had considered international transport to be the handmaiden of tourism with a focus on attracting new airlift. It will be interesting to see what new direction this brings.

International Trade, Foreign Affairs, and International Business have been joined under one Minister and one Junior minister. While we can understand the linkage, given the importance of International Business to the economy, we would have been more comfortable with it being given the exclusive focus of one minister. However we will have to see what results this brings.

Perhaps the most surprising omission was that of a Deputy Prime Minister while we have seen comments on Barbados Underground that the post exists only in tradition (let’s be clear it was the opinion of a commenter not David or one of the BU family) we on the margin view the post as having considerable importance. The Deputy Prime Minister runs the country in the absence of the PM. This is true when the PM travels or (God Forbid) becomes incapacitated or dies in office. It would be easy to dismiss the latter scenario as unlikely except for the fact that it has happened twice already.

However apart from the above comments we think that Mr. Thompson’s first cabinet appears to be a credible, well thought out team. The most obvious weakness has been adequately supported and it is clear that he has put his best brains in charge of the key ministries.

We wait to see what changes in policy will come from this new configuration.

Marginal

January 10, 2008

Politicians, It’s One Week Before Elections, Do You Know Where Your Vote Is?

With one week left to go before elections, Barbados is in the grips of one of the most intense election campaigns in recent memory. The two parties’ campaigns appear to be evenly matched, and evenly funded, and to a certain extent evenly supported. We on the Margin have been watching the silly season unfold in all its glory, and we have to admit we are unable to predict a winner at this stage.

Yes, if you listen to Waiting In Vain and Royal Rumble and the other party hacks that inhabit the blogosphere, they all predict a resounding victory for their particular party. But having spent the last week talking to many people, we think that both parties are “Whistling past the graveyard”. For as much bluster as either side makes we’re not sure that either of them has captured the hearts of the electorate.  Barbadians are looking at both parties with a skeptical eye and the hard truth is that this election could go either way.

What we have noted that this campaign has been more about accusations and counter accusations rather than issues. We would like to see some serious discussion about both parties’ visions for the next five years. While we wish that we could say that we thought we would get such reasoned debate in the next next week, we really don’t think so. We think that this next week will get wilder and dirtier with each passing day.

We on the margin would urge Barbadians,  think long and hard about both parties before you go into the polling booth. Whoever you choose is entirely up to you, but be sure to participate, be sure to cast your x. Be sure to treat that decision with the seriousness it deserves.  Hopefully we will all be better off for your doing so.

Marginal

October 9, 2007

More Sage Advice From The IMF – “Cut Your Tax Incentives!”

We had a bit of a laugh in hearing the most recent advice from the IMF, in their latest Public Information Notice the IMF covers a seminar that was held t0 address selected cross border issues affecting the Caribbean and the three issues selected are financial integration, tax incentives and investment, and trade preference erosion.

On two of the three issues the IMF’s position isn’t that bad.

On Financial Integration:

 

... Directors considered that closer integration of the Caribbean’s still largely segmented financial markets can be expected to help generate higher economic growth by improving access to credit and lowering interest rate spreads. However, more integrated financial markets will also allow shocks to spread across borders more rapidly and pose greater regulatory challenges, especially with large financial conglomerates operating across different industry segments and in several countries.

 

On Trade Preference Erosion:

 

Directors recognized that the erosion of preferential access to European markets for bananas and sugar entails significant losses for several Caribbean countries….

… the strategy to address this difficult challenge will need to involve carefully targeted social safety nets to alleviate the impact on affected vulnerable groups; efforts to raise the efficiency of existing banana and sugar industries, where viable; and transition away to new economic activities, in countries where production is unlikely to be competitive even after significant efforts and investments.

Now we come to the fly in this ointment…..

Directors noted that, while the Caribbean countries’ heavy reliance on tax incentives may help attract investors, they are costly in terms of foregone revenues…..

… In light of this, and recognizing the intense competition for global investment funds which the region faces, Directors encouraged Caribbean policy-makers to weigh carefully the costs and benefits of tax exemptions and consider reducing them if possible; to step up efforts to improve other determinants of investment; and to make remaining tax incentives more cost-effective.

So if I’ve got this right, the incentive to get the revenue is costing you too much revenue, so you should cut the incentive to reduce your losses. But….. if you cut the incentive you may not get the revenue so you will end up foregoing even more revenue.

Hmmm so after some thinking we in the margin came up with this economic theory.

“While tax incentives may be expensive and may have costs associated with foregone revenue, not having the incentives is even more expensive” In short it’s better to have 75% of something rather than 100% of nothing. (And we aren’t even trained economists!)

This advice comes from the same people who managed the Jamaica’s and Guyana’s structural adjustment programs!

Marginal

 

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