The re­cent move by the Unit­ed States to in­crease its in­ter­est rate will have a di­rect im­pact on T&T, says econ­o­mist Dr Vaalmik­ki Ar­joon.

For in­stance, he said high­er rates can com­pound cap­i­tal flight, where in­vestors and pri­vate sec­tor en­ti­ties will in­vest more in the US mar­kets, giv­en that they can earn a high­er re­turn there.

"This means greater forex leak­age from our lo­cal econ­o­my, and can al­so cause our Cen­tral Bank to in­crease their in­ter­est rates to make our re­turns more at­trac­tive and curb some of the cap­i­tal flight," Ar­joon said.

But in do­ing so, he said this means that com­mer­cial banks will push up their bor­row­ing rates, and make con­sumer and busi­ness loans more ex­pen­sive.

In­deed, this means that pri­vate sec­tor ex­pens­es will in­crease via high­er in­ter­est on new loans, there­by low­er­ing their prof­itabil­i­ty.

Ad­di­tion­al­ly, he said it can slow pri­vate sec­tor ac­tiv­i­ties, which has dam­ag­ing ef­fects on our com­pet­i­tive­ness, ex­ports and growth.

Ar­joon ex­plained that since March 2022, the US em­barked on an ag­gres­sive cam­paign of mon­e­tary pol­i­cy tight­en­ing to con­trol in­fla­tion, by in­creas­ing the Fed­er­al Re­serve’s in­ter­est rates eight times – the most re­cent in­crease was on Feb­ru­ary 1, bring­ing the rate to a range of 4.5 per cent to 4.75 per cent, the high­est since Oc­to­ber 2007.

Nat­u­ral­ly, he said, these rate in­creas­es af­fect eco­nom­ic per­for­mance lo­cal­ly, es­pe­cial­ly since the US is this coun­try's largest trad­ing part­ner, its pri­vate sec­tor has many in­vest­ments in the US and a sig­nif­i­cant part of our Her­itage and Sta­bil­i­sa­tion Fund port­fo­lio com­pris­es US fi­nan­cial se­cu­ri­ties.

"Our au­thor­i­ties there­fore ought to be pre­pared for the strong pos­si­bil­i­ty that the US can in­crease the pace of these rate hikes in the com­ing weeks," he ad­vised.

Since the last quar­ter of 2022, the US rate hikes caused oil and gas prices to fall to lev­els be­low the prices which we pred­i­cat­ed our na­tion­al bud­get on (oil at $92.50 per bar­rel and gas at $6 per MMB­tu) with Brent prices falling from a high of US$122.27 in June 2022 to US$83.45 in Feb 2023, and gas prices falling from a high of US$9.6 in Au­gust 2022 to US$2.73 in Feb­ru­ary 2023.

In­deed, the US rate in­creas­es caused the US dol­lar to ap­pre­ci­ate rel­a­tive to oth­er economies glob­al­ly.

Since oil and gas are trad­ed in US cur­ren­cy, this ap­pre­ci­a­tion made it more ex­pen­sive for coun­tries to buy these en­er­gy com­modi­ties, and there­fore caused them to low­er their pur­chas­es of oil and gas there­by low­er­ing their prices.

"What com­pound­ed this was that over 50 oth­er economies al­so in­creased their in­ter­est rates to con­trol in­fla­tion, which slowed down their eco­nom­ic ac­tiv­i­ties and trad­ing with oth­er coun­tries – this in turn low­ered the de­mand for oil and gas and nat­u­ral­ly low­ered their prices," Ar­joon said.

He said a more ag­gres­sive pace of US rate hikes in the com­ing weeks will not on­ly fur­ther ap­pre­ci­ate their dol­lar, but may al­so slow their over­all spend­ing, in­dus­tri­al and com­mer­cial ac­tiv­i­ties, which is what the Fed is try­ing to achieve to bring down in­fla­tion.

He said this may cause oil and gas prices to fall even fur­ther, as it will low­er oil and gas de­mand in the US and in­ter­na­tion­al­ly.

Low­er prices will, of course, af­fect T&T's fis­cal rev­enue streams, es­pe­cial­ly since its re­cent gains were due to high en­er­gy prices last year and not pro­duc­tion.

"Oil and gas pro­duc­tion de­clined by 23 per cent and 30 per cent since De­cem­ber 2017," Ar­joon said.

How­ev­er, he not­ed the Chi­nese econ­o­my is ex­pect­ed to re­bound in the third quar­ter of this year, and this can lessen the ex­tent to which prices may fall as Chi­na is the largest im­porter of oil and gas.

Ad­di­tion­al­ly, he said T&T's HSF and pen­sion funds will al­so be af­fect­ed.

"Over 75 per cent of our HSF is in­vest­ed in US se­cu­ri­ties, and the rate hikes last year low­ered the val­ue of US eq­ui­ties and bonds, there­fore low­er­ing the over­all HSF val­ue from US$5.58 bil­lion to US$4.77 bil­lion over June 2021 to June 2022," Ar­joon said, adding that this

can be ex­ac­er­bat­ed with an­oth­er rate in­crease.

Fur­ther, the rate hikes will make it more ex­pen­sive for US firms to bor­row, and this will lim­it their over­all prof­its and cause their stock prices to fall. This again can hurt our HSF val­ue de­pend­ing on how much its port­fo­lio com­pris­es those stocks.

How­ev­er, Ar­joon said if af­ter the rate in­crease, the fund man­agers in­vest in new short-term bonds, they will earn a high­er in­ter­est re­turn on the new bonds and this will off­set some of the po­ten­tial de­clines in the HSF val­ue.

It will al­so make it more ex­pen­sive for the state to bor­row from the US mar­kets when the need aris­es due to high­er in­ter­est pay­ments, there­by fur­ther ag­gra­vat­ing our debt bur­den.

Ac­cord­ing to Ar­joon there is al­so a strong pos­si­bil­i­ty of a US re­ces­sion, if a new rate hike suc­cess­ful­ly low­ers eco­nom­ic ac­tiv­i­ties and de­ters con­sumer and busi­ness bor­row­ing.

Al­ready, he said, there are signs of an im­pend­ing US re­ces­sion giv­en the in­ver­sion of the US yield curve (all re­ces­sions have been pre­dict­ed by the in­vert­ed curve). Ar­joon added that this may lessen their im­ports from our lo­cal econ­o­my, es­pe­cial­ly from the man­u­fac­tur­ing sec­tor. It could al­so slow down tourist trav­el to the Caribbean re­gion, and this means that re­gion­al ho­tels etc. may low­er their pur­chas­es of our food items which our food proces­sors usu­al­ly ex­port to them. It could al­so re­duce the rev­enues for Caribbean Air­lines.