Although an important part of the Trinidad and Tobago economy, the manufacturing sector’s performance has been disappointing in recent years. According to the T&T Manufacturers’ Association (TTMA), the value of manufacturing output declined at an average annual rate of 4.3% from 2010 to 2014.
In its “Review of the Economy 2014”, a report published in mid-2014, the government noted that economic activity in manufacturing fell by 5.8% in 2012, and by 1.8% in 2013. At that point, the review said the government was predicting a further contraction of 0.7% in 2014. By sub-sectors, the biggest declines were expected in wood and wood-related products; garments and footwear; and assembly type and related industries. But positive growth was expected in food, beverages and tobacco – the largest sub-sector – and in printing and publishing. Growth was also expected in iron and steel, where it was noted that output of iron and steel products had risen by 5.6% in the first nine months of fiscal 2013/14, to reach 1.96m tonnes.
Overshadowed by Energy
One potential explanation for the poor recent performance of the manufacturing sector is that it has tended to be overlooked when the country’s energy sector is performing well. Strong domestic demand based on rising oil and gas revenues is seen as pulling in greater levels of imports rather than helping local manufacturers, while exports are limited by price and exchange rate factors, and by the rate of economic growth in the Caribbean market. Anthony Wilson, chief editor for business at Guardian Media, told OBG that T&T has been experiencing a version of Dutch disease, with high hydrocarbons revenues blunting the competitiveness of manufacturing by driving up the value of the T&T dollar. As he put it, “The economic system we have makes it too easy for people to buy products overseas, import them, apply a 15% mark-up and then sell them locally. It has been too difficult to make money by manufacturing goods and services in this country.” Wilson also noted that the IMF has suggested that foreign currency regulations at the central bank should be made more flexible, to help sectors like tourism and light manufacturing.
While Wilson acknowledged the export successes of the manufacturing sector, saying, “go to any supermarket anywhere in the Eastern Caribbean and you’ll see it is full of goods manufactured in T&T”, he warned that it is a very price-sensitive market. “We need to export outside the Caribbean, otherwise we’ll be too dependent on a region that could be hit by a decline in the US market,” he added. “The Caribbean is a weak market.”
Ramesh Ramdeen, CEO of the TTMA, has a different perspective. He told OBG that it has taken local manufacturers a number of years to recover from the global downturn of 2008-09, and just as the recovery was set to begin, the slump in international oil prices introduced a new element of disruption. But as he put it, “Every curse has a silver lining. In the last crisis we found that the non-oil sector of the T&T economy had to carry us forward, and we are better placed to diversify now. Manufacturing represents approximately 9% of GDP and we could go up to 12-15% in the right environment.”
Ramdeen argues that the T&T manufacturing sector has important strengths and that both the private sector and the government should play to them. He says that the strengths vary from case to case. Angostura, the manufacturer of Angostura Aromatic Bitters, a botanical flavouring, relies on strong branding to exploit an important global marketing segment. Local companies are strong in food and beverages. “In addition to a competitive geographical location, international accreditations are boosting the competitiveness of T&T’s manufacturers. This enables them to seize new opportunities in Latin American’s fast-growing markets,” Robert Wong, CEO of Angostura, told OBG.
T&T has also seen the emergence of important conglomerates with manufacturing interests, such as Massy Group, whose 60 companies include units active in retail, insurance, automotive, IT, energy and industrial equipment. Also with major manufacturing interests is the ANSA McAL Group, active in the production of materials for the construction, automotive, industrial and household chemicals sectors, as well as consumer goods. Other key players include ArcelorMittal, which operates an iron and steel mill taking advantage of T&T’s low energy costs; Electrical Industries Limited, which manufactures electrical conductors; and SM Jaleel, which makes carbonated drinks, juices and water.
Iron & Steel
At the ArcelorMittal iron and steel plant, Robert Bellisle, president and chief executive, told OBG that to cope with a profits squeeze caused by downward movements in iron and steel prices, the company must constantly seek to achieve efficiencies and keep itself competitive. From the perspective of a global company, he notes that T&T offers a good operating environment. It has competitive gas and electricity prices, relatively good infrastructure and skilled labour. “Most people here are trained for the oil and gas sector, so we need to do some extra training for steel. But there is materials training at the local universities, and we get people with the right fundamentals,” he told OBG.
Given tough market conditions in early 2015, Bellisle said ArcelorMittal “will be using the formula we applied during the last downturn, when we sought to focus rigorously on three things: cash, costs and customers. That’s what we are doing once more this time round. We have heavy fixed costs so we try to variabilise them. Over the coming quarters we’ll focus on those areas, and we’ll also be considering some long-term footprint changes.” Bellisle added that labour relations at the plant were good. The company worked closely with its trade union, the Steel Workers’ Union of T&T. “We make sure we have a good dialogue going with them. We see them as business partners for the long term with whom we have a shared interest in safety, quality and productivity issues,” he told OBG.
T&T has the largest manufacturing sector in the Caribbean. According to the TTMA, the estimated value of manufacturing output in 2014 was TT$7.95bn ($1.2bn), making it the second-largest non-oil sector within the economy. Manufacturing represented about 8.5% of GDP. Direct employment in manufacturing is estimated at more than 60,000. There are eight main manufacturing sub-sectors: assembly type and related industries; chemicals and non-metallic materials; food, beverage, and tobacco; household products; printing, publishing and paper converters; steel products; textiles and garments; and wood and wood-related products. The largest of these sub-sectors is food, beverages and tobacco, followed by chemicals and non-metallic materials. Between them, these two segments account for about two-thirds of manufacturing output. The food, beverages and tobacco sector has performed well partly due to exports to the wider Caribbean market. It includes alcoholic and carbonated beverages, juices, cereals, chocolate confectionery, canned foods, baked foods and tobacco products.
Whenever oil and gas prices fall, an ongoing debate on the need to diversify the local economy away from excessive reliance on hydrocarbons gains new impetus. The debate has ebbed and flowed over the years. At its root is the question of how best T&T should develop its comparative advantage across a range of activities, including manufacturing but also extending to service industries such as tourism, banking and finance, and IT. The Guardian’s Wilson is frank about T&T’s comparative advantage in manufacturing. “Outside of the energy sector, I don’t think we offer many advantages. The cost of labour is just too high. Of course we need to diversify, and there has to be a mix of services and manufacturing, but the government should be going further downstream and developing the gas economy,” he told OBG.
Sheldon McLean, acting coordinator of the Economic Development Unit at the UN’s Economic Commission for Latin America and the Caribbean, disagrees on the need for greater focus on hydrocarbons. “It is true that the growth of gas production has led to some diversification within the hydrocarbons sector,” he noted. “But more widely there are questions about diversification and resilience. There has been some diversification into light manufacturing and services. However, has the economy diversified enough? Can there be an economic rebound-based on value added in manufacturing? Generally, it seems that the economy has not diversified enough,” McLean added.
TTMA head Ramdeen acknowledges that “we don’t have particularly low labour costs”, but takes a more encouraging view about the long-term future. “We do have very low energy costs. Here in T&T we are paying $0.04 per KWh of energy, while they pay $0.37 in Jamaica. Our energy bills represent only 5-10% of total manufacturing costs. We also have skilled labour with a high level of university education. Relative to the rest of the Caribbean we are more competitive and more prepared to compete. We’re also more open – we have allowed competitors to come in here. Doing this allows our domestic market to build its competencies,” he says.
To successfully pursue a diversification strategy, the manufacturing sector will need to tackle significant supply-side issues. Ramdeen says one of the most important is a shortage of labour. Unemployment at end-2014 was down to 3.3% of the economically active population, which according to Ramdeen is, in effect, full employment. Unemployment has been kept at this low level by state spending on “make work programmes” like the Community-based Environmental Protection and Enhancement Programme (CEPEP) and Unemployment Relief Programme (URP).
These programmes provide paid work for the otherwise unemployed. Critics say actual working hours are short and tasks undemanding. The programmes are said to introduce rigidities in the local labour market and push up costs. While the programmes are supposed to prepare people for employment, Ramdeen says, “Maybe only 4% of the people on CEPEP and URP have the skills for employment in a factory. There is a cultural issue and a degree of dependence on the state.”
In January 2015 discussions between the government, the TTMA and the American Chamber of Commerce of T&T (AmChamTT) led to the identification of 10 companies to take part in a pilot programme to absorb CEPEP workers into the private sector. Alyson West, a tax consultant at PwC, said the initiative was an attempt by the private sector to resolve acute labour shortages. “We don’t have a choice because people are looking for labour and they can’t find it,” she was reported saying. “Labour now has tonnes of choices, they have easy jobs and the first approach is to go to CEPEP because they don’t have to work as hard as they have to in the private sector, and they are getting regular pay to live on. If we use a lot of our cheaper labour force in that area, then we are depriving the productive sector of getting access to that labour.” West warned, “We are becoming a society of entitlement. We all have to contribute if we are to sustain ourselves.” Nirad Tewarie, CEO of AmChamTT, estimated that at least 6000 people are involved in the CEPEP programme, with another 6000-plus on other types of social programmes, adding up to maybe 12,000-15,000 in total. As he put it, “It is not a huge percentage of the workforce but in a small economy it makes a difference, especially when it also brings a culture with it.” Tewarie said this form of underemployment co-exists with a garments industry, for example, that is experiencing acute labour shortages “where you go into the factories and you see empty machines, and management tells you that they could run two shifts if they could get the labour, but even on a single shift they are still under-resourced.”
In his view small and medium-sized garments producers could offer good jobs with good facilities – decent wages and conditions. He told OBG that up to 4000 people could potentially be transferred from publicly funded employment programmes to jobs in the private sector. “If we can explain what the opportunities are, and how the job skills learned will stay with workers whether they continue to work at a business or not, job seekers can more easily see the value of the private sector,” Tewarie told OBG. “I think some people may transfer from government employment programmes. I’m not saying we will get 4000 people immediately, but perhaps we could start with a target of 250.”
IMF & IDB Views
Multilateral funding agencies have also commented on the issue. In July 2014, in a statement issued after an Article IV Consultation visit to T&T, the IMF said that the unemployment rate, then at 3.75%, masked “sizeable underemployment in government ‘make work’ programmes”. The Inter-American Development Bank (IDB) issued a critical report in August 2014, noting that “generous labour and social programmes are causing duplication, escalating costs and disincentives to work”. According to the IDB’s audit, there were 62 social protection and labour programmes in operation, of which 27 were safety net programmes, 32 were active labour market programmes and three were social insurance programmes. The main benefits sought by the programmes were human capital development, micro-enterprise development, training, cash and labour market intermediation services. The IDB suggested there were overlaps between the programmes, and most were not fully audited. Although CEPEP and URP were the two main employment creation schemes “little is known about their impact”, and they were also not linked to labour market conditions in the private sector. The IDB concluded, “Many of these social programmes, while virtuous on their own, are unfortunately part of an over-generous state, which, in recent years, has markedly increased transfers and subsidies to households and public entities (from 9% to more than 19% of GDP in the decade ending in 2013).” As a result there was an erosion of local labour productivity. The IDB added, “Sustainable economic growth in the long term, which leads to reduced structural poverty, occurs as a result of increased labour productivity, not larger handouts.”
The TTMA highlights other supply-side problems. The association is worried over a perceived increase in crime rates that, it says, puts up costs because of factory thefts and the need to hire security guards. Port and road congestion adds a further problem – and expense. There has also traditionally been a significant burden of government bureaucracy. However, the association welcomes government efforts to simplify and speed up various business processes (see analysis).
In late 2014 and early 2015 several local manufacturers said they were having difficulty in obtaining foreign exchange in a timely fashion to pay for key imports. Under the system operated by the Central Bank of T&T (CBTT) importers must request the US dollars needed for specific transactions from their banks, which then submit the request to a queue managed by the CBTT. Although the country has plentiful hard currency reserves, there were reports that the process was too slow, and some importers were unable to carry out transactions and secure dollars in a timely fashion. The TTMA said its members regularly need from $200,000 to $1m to pay for imports, and have been unable to do so within the 30-day credit terms offered by suppliers in the US and elsewhere. The issue was raised by representatives of manufacturers at an AmChamTT meeting in January 2015, which was attended by Vasant Bharath, the minister of trade, industry, investment and communications. He responded, “The situation with foreign exchange has been a bugbear for the past few months. I believe we have found the formula that will ease tensions in the market so that on a weekly basis there is enough foreign exchange.”
At a more strategic level, one of the issues facing the manufacturing sector is the need to expand its markets and production runs, thereby capturing greater economies of scale and lowering per-unit costs. There are two main ways to do this: expand the export market and/or expand the domestic market. The industry has been reassessing export market opportunities, traditionally other Caribbean countries that are part of CARICOM.
While these markets remain important, Tewarie says T&T must “look beyond CARICOM”. He believes the impact of the thaw in US-Cuba relations on Caribbean tourism is uncertain, but notes there have traditionally been good relations between Cuba and CARICOM. There is high potential to turn that good will into business opportunities and “to partner with some of the companies from the US, the UK and Spain that are already moving into Cuba, and to take advantage of what are likely going to be years and years of growth”, he said.
While the domestic T&T market has a population of 1.34m people, there are much bigger markets in the immediate region. Tewarie points out that the Dominican Republic has a population of 12m. To the extent that the Cuban market begins to open up, there are another 11m potential consumers there. He adds, “I think stability in Haiti presents another opportunity, and we need to be looking at what I call ‘the near Latin America’ – Central America, Colombia and, although we don’t know what will happen, Venezuela, where there may be some opportunities.”
TTMA’s Ramdeen has been thinking along similar lines. He identifies the community of expatriate Trinbagonians living in the US and Canada – totalling around 100,000 – who are niche buyers of products that represent “our own indigenous taste and fashion”. He added that “because T&T manufacturing companies have saturated the Caribbean market, we should now also be looking at Panama, Guatemala and El Salvador.”
Randall Karim, director of policy and strategy at the Ministry of Trade, Industry, Investment and Communications, told OBG the government has been helping this process, pursuing bilateral and multilateral trade agreements in an aggressive fashion. “We have preferential agreements with the US and Canada, and are now expanding that into Central and Latin America,” he said. Under the previous government T&T had secured a trade agreement with Costa Rica in 2004, and had now reached or was working on agreements with Panama, Guatemala and El Salvador. The government was also seeking to leverage the EU-CARICOM agreement. “Our aim is to consolidate what we have – in other words to update the EU and Canada agreements, and to concentrate on opening new markets – hence the focus on Central America,” Karim said. “CARICOM gives us a market of 16m people. If you add the Americas we are looking at a market of around 1bn people. The EU has no trade deal with Latin America, but CARICOM does, so perhaps that is an opportunity for us,” he added.
Exports also offer T&T an incentive to bring related legislation in line with international standards. “We need to update legislation and regulations to meet international standards. Most exporters must meet certain basic requirements by recipient countries and import approval is based on the legislation, standards and regulations of the country of origin,” Shameer Ronnie Mohammed, vice-president of local food processing company Nutrimix Feeds, told OBG.
In the short term, opportunities to boost sales in T&T look limited, as per capita income levels are already high and the drop in oil and gas revenues expected in 2015 is likely to depress consumer demand. However, Tewarie raises a long-term issue on the ideal size of the T&T population and economy.
His argument is that all the countries in the top-20 positions in international competitiveness rankings, whether for ease of doing business, ICT quality or as destinations for financial industry outsourcing, have populations of over 3m. The two exceptions are Luxembourg and Qatar, both of which have many migrant workers than may not be fully counted in their population statistics. So he suggests T&T should consider an immigration policy “that deliberately facilitates achieving a population of about 3m people in the next 50 years, or even faster, say in 30 years.”
While doubling the population may sound extreme, Tewarie notes that Panama, Costa Rica and Singapore all have done this. “If you look at the statistics, in 1962 T&T and Singapore had almost the same population, and now Singapore has well over 4m inhabitants,” he told OBG. While acknowledging geographical and historical differences, Tewarie suggests that the Singaporean model of a small but dynamic, outward-looking and business-friendly economy, is in T&T’s interests.
Year 2015 is expected to be challenging for the manufacturing industry. First, it is an election year, meaning there will be political uncertainty and something of a hiatus in terms of economic policy during the transition between administrations. Second, because of the fall in global hydrocarbons prices, it is likely that 2015 will be marked by fiscal austerity and potentially a reduction in household consumption. Wilson says, “I am hoping for a year of crisis, because that will force change as it did in the early 1990s when, under IMF and World Bank programmes, T&T floated its currency, reduced import tariffs, lowered corporate taxes, increased allowances for new plant and equipment, and privatised state-owned companies. These measures facilitated the strengthening of the manufacturing sector at a time (in 1993) when the country’s foreign reserves had almost been wiped out.” Meanwhile, Ramdeen told OBG, “I remain optimistic about the future and about the possibility of economic diversification. Not just into manufacturing but also into the business of sport, business tourism, financial services, and particularly oil and gas services. We have some excellent skills in this area.”
Tewarie agreed with the idea of taking advantage of difficult periods. “I think there is a tremendous opportunity now to get some of the things done that we should have done a long time ago, both on the public sector side and on the private sector side,” he told OBG.
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