CIB INVESTS IN ENTREPRENEURS

Clico Investment Bank (CIB) will invest five hundred thousand dollars ($500,000) over a period of five (5) years (2007 – 2011) to the University of Trinidad and Tobago’s (UTT) Industrial Innovation, Entrepreneurship and Management (IIEM) Business Plan Competition.

The University’s IIEM Programme is being implemented with the assistance of the University of Cambridge. The objective is for the Programme to become a teaching, research and consulting centre for excellence, culminating with the Business Plan Competition, a model adopted by accredited business schools in the United Kingdom, the United States and elsewhere.

CIB is the major sponsor of the Business Plan Competition which challenges students to design a product that is innovative, able to meet industry needs in Trinidad and Tobago, and has the potential to be marketed both regionally and internationally.

At the inaugural Awards Function recently held at the University’s O’Meara Campus, President and CEO of CIB, Richard Trotman, provided a brief history of the Bank, stating that CIB was born from one of the Caribbean’s most illustrious entrepreneurs, Cyril Duprey. He explained that Duprey added value to the lives of many persons in society when he formed Colonial Life Insurance Company. CLICO, Trotman added, has now grown into the CL Financial Group encompassing more than 65 companies operating in 26 countries worldwide. CIB is a wholly owned subsidiary of CL Financial Limited.

Describing CIB, in particular, as the “Entrepreneurial Bank”, Trotman suggested that because of the risk aversion of the traditional banking sector, his company, has been able to provide an investment source that was lacking. According to Trotman, this was made possible when the Bank became the first financial institution to launch a venture capital company in this country, AddVenture Capital Fund, thereby supplying the market with much needed venture capital financing.

Trotman revealed that the intention of the Bank is to forge an ongoing relationship with the Programme to facilitate the development of young entrepreneurs.

INFLATION AND THE EFFECTS ON THE FINANCIAL SECTOR

by Risk & Research, CIB

Introduction

Following this country’s general elections on November 05, 2007, one of the most critical policy issues facing Trinidad and Tobago is inflation. Inflation is a sustained increase in the general level of prices. Inflation is a monetary phenomenon that occurs when the quantity of money in circulation rises faster than the stock of goods and services available. The inflation rate is normally measured by percentage changes in the cost of a basket of consumer goods and services. In Trinidad and Tobago, the retail price index is the indicator used to measure inflation.

Generally, the cause of inflation can be explained by either demand-pull factors and /or cost push factors. Demand pull inflation relates to the adage “too much money chasing too few goods”. It is normally associated with money creation which, in most cases, comes from the monetization of a fiscal deficit. Cost-push inflation relates to the increases in prices of key inputs such as electricity, gas, and oil to name a few, which is passed on to the consumer through higher prices of the final product. Additionally, it could result from the devaluation of the currency which increases the prices of imported inputs in domestic currency terms.

Inflationary Environment

In the local economy, the rapid rate of economic growth and the high level of government expenditures over the last three years, in the context of declining spare capacity resulted in a sharp rise in inflationary pressures. The most recent inflation data released by the Central Statistical Office indicate that the rate of inflation has fallen from a high of 10% (October 2006) to 7.9% as at August 2007.

Notwithstanding the fall in the rate, the populace is still being faced with high prices, which increased significantly over the last two years, on average by 27.4% per year. The price of food was a major contributor to the creation of inflationary pressures within the economy. In addition to food prices and wages, credit to the private sector and government expenditure were also contributors to inflation. The current stickiness of core inflation suggests that underlying inflationary pressures in the form of fiscal and monetary impulses are quite strong.

Looking at the inflation rate over the last 30 years, from 1975, the inflation rate has averaged in excess of 12% in the first two - five year periods. The second lowest rate of 4.8% was experienced in the last five years. The upward trend of the inflation rate is consistent with the general trend in many hydrocarbon-exporting countries, for example Nigeria and neighboring Venezuela. However, in comparison to some of our major trading partners, such as the USA and Caricom, inflation is running ahead.

In an effort to curb this trend, the Central Bank of Trinidad and Tobago has implemented an aggressive liquidity absorption policy. This policy enables the Central Bank to utilize open market operations to control the supply of money and thereby prevent inflationary trends. However, the Central Bank’s policy actions have had varying levels of success in curbing this trend. Due to the Central Bank’s inability to effectively curb inflation through the use of its REPO rate, which was not permeating through the other interest rates, the Central Bank resorted to less market driven measures; requiring that commercial banks make two one-time special deposits of about TT$ 1 billion and creating a secondary reserve requirement (2% of liabilities). The Bank has maintained the REPO rate at 8% since September 2006.

Inflation and its implications on the Financial System

Inflation adversely affects various sectors of the economy, prompting those affected to seek to protect the real value of their incomes. Inflation affects the purchasing power of money, hence reducing the quantity of goods that can be purchased with a given amount of money. More importantly, increases in inflation not only reduce the real rate of return on money, but it also drives downward the real rate of return on assets in general, since investors would tend to shift from financial assets into real assets. Theoretical insights into inflation suggest that inflation exacerbates frictions in the credit market by reducing the overall amount of credit available to businesses. This is critical to developing countries such as Trinidad and Tobago since high inflation can decrease the real rate of return on assets causing a disincentive to saving, while encouraging borrowing for speculation. As a result, the banking sector tends to make fewer loans, resource allocation is less efficient, and intermediary activity diminishes with adverse implications for capital investment. Empirical evidence has shown that financial sector development is strongly linked with long-run economic performance. Hence, the reduction in capital formation can negatively influence long run economic performance of the country.

To facilitate the increased demand for credit that usually occurs during periods of rising inflation, commercial banks tend to price loans higher to compensate for the declining real returns. This results in a widening of the interest rate spreads and a crowding out of less risky but productive investment projects. The widening interest rate spreads can be of great advantage to commercial banks, by increasing their net interest income. However, it can also give rise to higher levels of delinquency, which is a cost to the banks.

Inflation also affects investment and savings decisions as it adds greater uncertainty to the future and hence complicates strategic planning. It hurts people who are retired and living on a fixed income, since their purchasing power is diminished. This discourages savings because the money is worth more today than in the future. This expectation reduces economic growth because the economy needs a certain level of savings to sustain capital investment.

In conclusion, high inflation not only disrupts the operation of a nation's financial institutions and markets, it also discourages its integration with the rest of the world’s markets. Inflation causes uncertainty about future prices, interest rates, and exchange rates, and this in turn increases the risks faced by potential trading partners, ultimately discouraging trade.

REGIONAL ECONOMIC SUMMARY

The overall macroeconomic performance in the Regional Economy continues to be favourable with economic growth averaging at 5.5% in 2006, and inflation on average at 4.5% for the same period. In Jamaica, economic growth in the second quarter of 2007 continued in the range of 1.5% - 2.5%. This represented a moderation in growth relative to the June 2006 quarter, and is the consequence of the slower expansion in tourism and mining. However, the performance in the second quarter was stimulated by investment spending. Headline inflation for the second quarter was 1.9%, bringing the inflation for the calendar year to 2.9%. The September's general election results gave the Jamaica Labour Party (JLP) a narrow edge of victory, paving the way for Bruce Golding's JLP to form its first government since 1989. While the results indicate a readiness for political change in Jamaica, no drastic shift is expected in the country’s policy agenda. The JLP has outlined its plans for the next five years and will focus on four key areas: education, health, employment and domestic security.

In Grenada, the economy is gradually recovering from the ravages of two major hurricanes in 2005, with strong growth projected in the tourism sector. On August 1 2007, Standard and Poor’s raised its long-term sovereign credit rating to B- from CCC, in recognition of the government’s efforts to contain its debt. Moreover, inflation has fallen markedly, from a high of 5.8 percent (on a year-on-year basis) in late 2005 to only 2.2 percent by April 2007.

St. Kitts & Nevis recorded increased economic activity for the first quarter of 2007 attributable to growth in agriculture, construction, the distributive trade, banking, wholesale, retail and government services. Public sector and Central Government debt are both decreasing as the government has expressed pleasure in the positive direction of the growth of the National Economy and the improvement in the government’s fiscal provision. The settlement of a maritime border dispute between Guyana and Suriname will benefit both countries' development. The Basin is expected to be rich in oil and gas reserves, particularly in the newly marked Guyanese territory, and should help encourage considerable inward investment. Long-term success for Guyana however, will still remain heavily contingent on stabilising the current political and economic environment. Given the worldwide scramble for energy resources amid consistently high demand (and prices), the end of the dispute should clear the way for rapid investment in Guyana. If oil reserves are found, we would expect further investment into the sector, especially from refining and distribution companies.

The economy of Trinidad and Tobago is expected to grow 5.5% in 2007 after 12% growth in 2006, on the strength of the energy sector. Construction is likely to continue leading the non-energy sector with the number of projects that are continuing around the country. The expansion in the non-energy sector has led to the creation of new job opportunities, thereby causing unemployment to decline to historically low levels of between 5-6%.

The Central Statistical Office indicators measured headline inflation at 7.9% y-o-y for August 2007, easing from 8% in July 2007. This inflation rate remains significantly outside of the Central Bank’s target of 4 – 5%. Core inflation fell marginally to 4.5% from 4.7% in the same period. The Central Bank continues to hold the Repo rate at 8.0% since the last change in September 2006.

In late August the 2007-2008 national budget was presented, with expenditure over the next fiscal period estimated at a record $42 billion. The key areas of focus were accelerating the diversification of the economy, poverty alleviation, development of the agricultural sector, enhanced delivery of health services and security.

While inflation continues its downward trend, food price inflation continues to pose a problem as the price of grains for flour and bread rise. The proposal to address this trend involves the dual strategy of on-going support for small farmers, as well as the establishment of large commercial farms.

THREE USEFUL INVESTMENT TIPS

Investing is important to create and grow your personal wealth. This in turn could facilitate early retirement, fund your children’s tertiary education or fulfill your dreams, whatever they may be.
Here are three tips for wealth creation:

1. Set a Goal
   Clearly determine your purpose for creating wealth. You may utilize the services of a financial advisor, who will guide your goal setting exercise. Ask yourself the following questions:
   • What is my current financial position?
   • What wealth do I need to accumulate in order to satisfy my wealth creating purpose?
   • How am I going to create the wealth? What will be my investment strategy?
2. Pay Yourself First and Implement your Investment Strategy
   Make investing a part of your daily life. Money is already part of your daily life . You spend money daily on various items, then why not spend money on investment opportunities first. Set up automatic standing orders to facilitate your investing process. As a general rule you should try to save/invest at least 10% of your gross salary.
3. Stay on Schedule
   Be disciplined and consistent . Do not make ad-hoc revisions to your investment strategy due to short term market movements. Stay focused and committed to your goal and strategy , then watch your money grow.