Eustace: 2009 budget will be most critical

In light of the ongoing financial crisis in the United States (US), the 2009 budget may be the most critical one that Prime Minister Dr Ralph Gonsalves will ever deliver.{{more}}

This is the view of Opposition Leader Arnhim Eustace, who said that as this country braces for the effects of the American financial crisis, the Prime Minister must now exercise much prudence in the upcoming budget.

“You can’t go out on a limb; you have to recognize the impact. When you are expecting a loss of income for your growth, it will affect your spending,” Eustace told SEARCHLIGHT.

At a press conference earlier this week, Prime Minister Dr Ralph Gonsalves acknowledged that what is taking place in US will affect the local economy.

He said that the crisis will affect the tourism sector as people may put off travelling plans as they wait to see how they will be affected by the financial situation.

“When uncertainty is created in the US, we can expect a slow-down in tourist coming because people are going to watch their pennies,” Dr Gonsalves said.

In 2007, the tourism sector contributed over $300 million to the local economy.

Dr Gonsalves also expressed concern that as nationals living in the US go through the financial crisis and even lose their jobs, there can be a drop in remittances.

He also noted that investors who are borrowing on the international market will also find that money “is more expensive”, and said that the real exchange rate of the US currency will also take a hit.

The Eastern Caribbean dollar is tied to the US currency.

In the area of investment funds from the US, Dr Gonsalves said “People who are sourcing investment funds out of the US, there is going to be for a while, uncertainty, and therefore a slowdown of the investment monies coming.”

The Prime Minister however used the opportunity to question the philosophy that frowns at government regulation and calls for a loosening of regulations-allowing the market to deal with itself.

“The market did not take care of everything. What we saw is a failure of the market,” he said of the US situation.

Dr Gonsalves said that the relaxing of regulations in the US is a key reason for the situation in the United States, saying that even the regulations that were in place were too loosely enforced.

“What happened in the US couldn’t happen here in our banking system because we are better regulated than they are,” he said.

He said that it was important that there be a proper management of the state, cooperative and private sectors.

He used the example of the local credit unions, suggesting that while they had been supervised by the Co-operative Division when they were much smaller, as the credit unions have grown into multi million dollar operations; such a supervisory mechanism is now inadequate.

“There is no specific regulatory mechanism to ensure that the credit unions don’t, for instance, over invest in real estate. So far, the real estate market is good, but suppose the real estate market crashes. Commercial banks can only invest a certain amount of their assets in real estate.”

Dr Gonsalves said that between the laws and the regulations of the Eastern Caribbean Central Bank, the commercial banks are properly regulated, not to kill initiative, but to protect citizens.

The Prime Minister told reporters that the crisis in the US also provides some opportunity to St Vincent and the Grenadines. He said that it is important that this country’s international financial services sector attracts some of the resources “which may be uncertain where they are.”

He again defended his government’s often questioned foreign policy, saying that what is happening in the US supports this government’s position of the diversification of external relations and the sourcing of grants, soft loans and the like.

“The US remains the powerful economy, but there are other powerful economies in the world…and there are middle level economies which can provide very important forms of assistance to us,” he said.