Adjustment time in Trinidad and Tobago

It has been a challenging week for Trinidad and Tobago where crime seems to dominate the headlines in the dailies. In fact, crime had to share space with news on the economy and more dramatically with natural events in which persistent and unusual rainfall caused severe flooding in several regions of the country, including its capital, leading to the death of two persons. The central bank announced that food price inflation in October increased on a year-on-year basis to 33.4 per cent, slightly below the 34.6 per cent recorded in September. Core inflation, which factors out the cost of food, increased for the first time in three months to 7.4 per cent from 6.2 per cent as consumers paid more for water, electricity, gasoline and transportation. That was not all. The IMF reported on its visit to the country and then Prime Minister Patrick Manning addressed the nation on how the government proposed responding to the revenue shortfall. Let us look at the address first.

Oil and gas run out of steam
The thrust of his address when shorn of politics and rhetoric was that in the face of an international financial crisis that shows no sign of abating, the Government of Trinidad and Tobago has moved to cut discretionary expenditure to match the fall in revenues from key sectors. These of course, form the backbone of the economy of the twin-island economy. Revenue losses are being felt in the prices of the country’s major exports − oil and petroleum products, ammonia, methanol, urea and steel. Because of the significance of those sectors to the economy, the budget makes certain assumptions about the international price − and therefore the revenue the country will receive – of those products.

In the budget presented at the end of September, the Minister of Finance used a price for oil and gas of $70 per barrel and $4/mmbtu (Million British Thermal Units) respectively based on international estimates at the time. If anyone had a clue of the falls that were likely to take place following the budget, they certainly did not mention it. Yet, by the end of October, crude oil fell significantly to US$67.81 per barrel at the end of October, losing more than 50 per cent of its value since peaking in July 2008 at US$148 per barrel. Natural gas at the US benchmark trading hub was priced at US$6.58/mm but at the end of October 2008, it was down 11 per cent since the beginning of the month and trending downwards. Between September and October this year, the price of ammonia fell from US$887.60 to $772.90 per tonne (13%); urea from US$798.75 to $573.40 per tonne (28%) and methanol, also softening, from US$411.00 per tonne to $399.00 (3%). Because the markets for these products are different, prices do not move in tandem.

Compounding a bad situation that may yet get worse, are a number of temporary plant closures and reduced output at the Point Lisas Industrial Estate, the 860 hectares, world-class facility that is the heart of the country’s petrochemical sector.

Taken together, revenue is projected to fall short by six billion dollars or US$1B for the financial year. Describing the situation as “very serious” and warranting immediate action, Prime Minister Manning in a national address earlier this week reported that his government had done a reassessment of its planned expenditure and cabinet had considered recommendations from the Minister of Finance. Out of those, according to the Prime Minister, the government was reordering its developmental priorities and deferring some projects considered essential to the realisation of developed country status. Trinidad and Tobago has targeted the year 2020 for the achievement of that status and has in place a multi-sectoral group of twenty-eight subcommittees working with a National Development Strategy Plan.

All ministries, departments and statutory authorities have been targeted for reduction of budgetary allocations including discretionary expenditure like promotion, publicity and printing; materials and supplies. Not without significance is the decision to put on hold any further consideration to buy a jet for the country’s increasingly mobile Prime Minister. But the real brunt of cutbacks are in relation to the country’s development programmes with “downward adjustments” for new projects other than those of an urgent or critical nature; for those projects for which there were no firm contractual obligations; for ongoing projects for which the pace of implementation could be reduced without legal penalties; and for ongoing projects for which some components could be deferred.

Trinidad and Tobago has the largest economy in CARICOM. Since 2001, the economy has grown at Asian rates of 8.3 per cent per annum, tripling in size from 55 billion dollars in 2001 to 160 billion dollars in 2008. Comparatively in CARICOM, the T&T economy is a giant among ordinary mortals. The Prime Minister recognised in his statement, however, the interdependence of the CARICOM economies which represent T&T’s second largest market for its goods and services. Amid all the cuts and belt-tightening Manning emphasized the need for the continuing availability of the CARICOM Petroleum Fund for the assistance of its partners.

Reaction to the address has been varied and while the announcements have largely been welcomed by the various private sector organizations the political opposition has been less generous calling on Manning to begin by cutting governmental excesses. But it seems that most Trinidadians are prepared to wait on the details of the cuts following a review by ministers of their respective budgets and cuts in specific programmes and projects decided by the cabinet to ensure that expenditure is kept in line with revenue.

At the end of a mission to discuss economic and financial developments, policies, and prospects, as part of its routine annual consultation with Trinidad and Tobago, the IMF issued what may be considered a cautiously optimistic assessment of the economy with its usual caveats and warnings. The team acknowledged the impressive growth of the economy and achievements in key macro indicators including the low unemployment rate, the halving of the public debt and moving from a net debtor country to a net external creditor, and having one of the strongest credit ratings in the region.

The report notes, however, that while its large international reserves and low debt ratios make Trinidad a better place than many countries to weather the international financial crisis, it is not immune from contagion. The report notes that the country’s banking sector has entered the period of global turmoil from a position of strength, being well capitalized, liquid, and profitable, and funded mainly through domestic deposits and equity, as opposed to external borrowing. Spillovers and disruptions are not likely to be significant even with the risk of liquidity shocks transmitted through foreign parent banks. Ironically RBTT one of the country’s largest banks has only just been taken over by Royal Bank of Canada although there is no suggestion or indication that RBC is anything but strong.

The problem will come if the global slowdown becomes more acute. If that is accompanied by a more dramatic decline in energy and asset prices things could change with risks arising from exposures of large and complex financial conglomerates operating across the region. No one wants to bet on the unlikelihood of that happening but the odds must still be in the country’s favour.

If the external environment continues to deteriorate and recession bites deeply in the advanced economies there will certainly be spillovers to the tourism-dependent economies of the region, and sharply lower prices for energy products. The IMF sees the effect in sharp declines in growth of the economy to 3½ per cent in 2008 and 2 per cent in 2009. While this will dampen demand and ease price pressures, it will also see the external current account surplus declining by 13 percentage points to about 15 per cent of GDP and transform the central government balance into a deficit of about 2 per cent of GDP under current budget plans.

The mission noted the urgency to the enactment of improved financial sector legislation and the strengthening of supervisory practices and welcomed the recent passage of a new Financial Institutions Act (FIA). Trinidad and Jamaica have perhaps the most sophisticated but complex financial sectors in the region and the mission called for changes in conglomerates’ holding structures, with a clear separation of financial and non-financial activities; risk-management practices; and enforcement of prudential standards and for coordination with regional and international supervisors.

The Manning government is by nature very populist in its ways and the developments will no doubt come at an inopportune time for the PNM government that was busy trying to cement some form of union with the OECS countries. Manning did not indicate whether that initiative is still on the front burner, but there must now be serious doubts about the gestation of that wish.

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