Growing economic confidence in Trinidad and Tobago to support government initiatives

In a public address delivered in January 2018, Prime Minister Keith Rowley promised a “slow return to growth” for the twin-island nation. An uptick in economic activity would certainly be welcomed by Rowley, who was elected in September 2015 during the middle of a difficult period: Trinidad and Tobago posted negative GDP growth for three out of the five years between 2013 and 2017. In its “Summary of Economic Indicators” report published in March 2018, the Central Bank of T&T noted that 2017 ended with real economic activity contracting by 1.2% year-on-year in the fourth quarter, with the IMF putting negative growth for the whole year at 2.6%.

Optimism is returning, with Rowley telling press in July 2018 that the country was “about to experience growth”, and the IMF forecasting expansion of 1% in 2018 and 0.9% in 2019. Rowley spent the first few years of his term tackling short-term economic problems, but as T&T’s economy stabilises, his administration should have the opportunity to shift their focus to long-term reforms and new policy initiatives.

Quick Facts

T&T has one of the largest economies in the English-speaking Caribbean, with a GDP of $22.2bn in 2017, according to the central bank. The country’s population has grown slowly since 2000, rising from 1.26m that year to 1.37m in 2017. During 2017 the population expanded by 4125 people, a growth rate of 0.3%. T&T has an adult literacy rate of 99%, an average life expectancy of over 70 years and 11 years of schooling on average, according to the UN. The organisation gives the country a “high” rating for human development, with a human development index score of 0.78 out of 1.00 in 2016, which placed it 65th out of 188 countries and territories.

In terms of economic activity, the country remains largely dependent on oil and gas, with the energy sector comprising around 75% of exports. According to the central bank, the petroleum sector accounted for 18.5% of GDP in 2016 and 21.3% in 2017, down from 35.2% and 34.5% in 2013 and 2014, respectively. The Ministry of Finance (MoF) estimates that the energy sector is responsible for roughly one-third of the country’s total economic output. Financial services comprise the next most important sector in T&T, accounting for 14.5% of total economic output in 2016, the latest year in which the central bank broke down the non-petroleum sector. Government spending equalled 10% of GDP, while transportation comprised 7.4%, construction 6.4%, manufacturing 5.7% and education 2.9%. Agriculture accounted for 0.5% of output, as did the hotel industry.

In 2016, the most recent year for which data is available, T&T had a labour force participation rate of 59.7%. The oil and gas sector provided 18,400 jobs, or just 2.9% of all employment positions, whereas the construction sector supplied over 100,000 jobs, or 15.6% of total employment. Just under 7.5% of T&T’s labour force worked in manufacturing, and despite the fact that agriculture accounts for such a small percentage of GDP, it employed 3.1% of T&T’s working population. The unemployment rate was 3.9% in 2016, or 25,200 people from a labour force of 638,300. T&T adopted a minimum wage of TT$15 ($2.22) per hour in 2015.

These employment figures may overstate the strength of the country’s labour market and blanket certain factors, however. The IMF gauged youth unemployment at 12% in 2017, while a report by the Inter-American Development Bank that year estimated that over 30% of T&T’s GDP between 1990 and 2014 was generated by the informal economy.

By the Numbers

The primary goal of the administration is to support growth outside of the energy sector and encourage economic diversification (see analysis). However, while the energy sector expanded by 3.2% in the fourth quarter of 2017, agricultural activity dropped by 11.7%, construction activity fell by 6.9% and manufacturing declined by about 3%.

An overall disappointing economic performance in the last five years has contributed to a weakening of T&T’s financial health. Total public sector debt increased from TT$90.9bn ($13.5bn) in 2013 to TT$121.1bn ($18bn) in 2017, ballooning from 39.1% of GDP to 62.7% – a level that approaches the central bank’s soft upper limit of 65%. The body estimates that as the economy begins to grow again in 2018, the debt-to-GDP ratio will fall to 60.3% for the year. Moreover, the central bank held $8.4bn in foreign currency reserves at the end of 2017, down from $10.2bn in 2013 and $11.5bn in 2014. The country maintains a favourable current account balance, which stood at $2.3bn in 2017, according to the IMF. T&T exported goods and services valued at $9.9bn in 2017, while imports totalled $6.1bn. However, the overall balance of payments stood at negative $1.1bn in this year, with disinvestment totalling $3.5bn. Nevertheless, inflation was reported at 1.7% in 2017 by the central bank – below its target of 2% – while the IMF states that headline inflation sat at 1.9% and consumer prices increased by 2.1% that year.

While Prime Minister Rowley has been working to cut government expenditure and boost tax collection (see analysis), the country still suffers from a fiscal deficit. In 2017 the MoF reported revenues of TT$37.8bn ($5.4bn) and expenditures of TT$50.5bn ($7.6m), figures that translate into an annual budget deficit of TT$12.6bn ($1.9bn), or 8.4% of GDP that year. Some economists may argue that deficit spending can help boost economic output and assist in pulling the country out of a multi-year slump, but T&T still needs to balance its budget. Ten years of fiscal deficit reveal serious structural issues in the national economy. The last time the country posted a surplus was in 2008 when oil peaked at $145 per barrel; that year government revenues totalled $56.8bn and expenditures came in at $53.8bn.

Energy Impact

The economy is now caught in a policy squeeze, where the government must find a balance between the short-term goal of erasing the budget deficit through fiscal conservatism and the medium-to-long-term initiative of fundamentally transforming the economy and kick-starting meaningful development across an array of sectors.

The current fiscal situation largely stems from low global oil prices taking a toll on the local economy since mid-2014. Revenues derived from the upstream segment of the petroleum sector decreased dramatically from TT$20.9bn ($3.1bn) in 2014 to just TT$2.8bn ($415.3m) in 2017. Foreign exchange income from the energy sector fell as well, from $3.2bn in 2011 to $500m in 2017.

According to figures from the central bank, the economy contracted by an average of 1.2% each year from 2013 to 2017, and the IMF has revised its forecast for T&T’s 2018 GDP growth several times since the beginning of 2017. Still, the economic outlook is cautiously optimistic, and halfway through 2018 T&T appears to have recovered from the worst of its recent recession. An IMF report from July 2018 stated, “The economy is projected to grow at a modest pace, as energy projects come on-stream and recovery takes hold in the non-energy sector.” In the short term, growth in the sector is likely to be driven by natural gas production. Yet, while rising energy prices and the launch of new sector operations are set to boost state revenue, the main challenge going forward is to wind back spending and catalyse more dynamic growth in the country’s non-energy sectors. Supporting tourism, construction, finance and education will help reduce exposure to oil price shocks, and improve overall economic and financial health.

Currency Valuation

In addition to trade, diversification and government handling of finances, another factor that economists analyse when measuring the health of a country is its currency. T&T does not have a free floating currency, but instead allows the central bank to set a pegged exchange rate. As of August 2018 the central bank held the average US dollar exchange rate at $1:TT$6.74.

In 2016 the IMF estimated that the T&T dollar was overvalued by between 21% and 50%, meaning it would otherwise trade at between $1:TT$8-TT$10. “By maintaining an overvalued currency, the Central Bank of T&T is in effect subsidising imports, and making exports more expensive, which frustrates any efforts towards economic diversification and the expansion of the non-energy sector,” Marla Dukharan, chief economist at financial technology company Bitt, told OBG. “In the 12 months to August 2018, the T&T dollar has depreciated at an average pace of 0.1% year-on-year – which is virtually flat – suggesting that holding the T&T dollar steady is a deliberate policy decision of the central bank.”

Prime Minister Rowley has openly resisted floating the currency, saying that such a step would make imports more expensive. However, according to “The Global Competitiveness Report 2017-18” by the World Economic Forum, foreign currency regulation is the fourth-most problematic factor for the country’s businesses. With the currency depreciating at 3.3% per year since 2015, T&T’s official exchange rate may not align with the estimated market rate of $1:TT$8 until November 2021, according to Dukharan.

2018 Budget Plan

While currency valuation is just one issue on the minds of fiscal policymakers, keeping to budget targets is another. At the end of September 2017 Colm Imbert, the minister of finance, presented the FY 2018 budget, which runs from October 2017 through to September 2018. The introduction of the budget report states, “It is critical to understand the changes that have taken place in global energy markets over the past decade or so, and how these have affected our public finances and external accounts. These changes clearly indicate that we need to improve our revenue administration, re-think our expenditure patterns and intensify efforts to diversify our economy. ”

Issues in need of addressing include inefficient government spending and tax collection, poorly targeted subsidies, excess employment in the public sector, and outdated and inflexible institutions. Measures in the FY 2018 budget are designed to increase government income and reduce spending through raising the corporate income tax rate from 25% to 30%, increasing taxes on the gambling industry, cutting fuel subsidies, ending incentives for the importation of some hybrid vehicles, and imposing new royalties on oil and gas (see analysis).

The current fiscal year has also seen the government create a $100m facility to help exporters obtain foreign currency for purchasing inputs, and a TT$50m ($7.4m) New Business Development Programme designed to help at least 500 small enterprise owners grow and develop their businesses. In addition, the budget includes a TT$20m ($3m) programme that offers grants of up to TT$100,000 ($14,800) to farmers to help them establish and expand full-time farming operations. Meanwhile, in a more controversial move, the government cut subsidies on fuel, causing diesel prices to increase by 15% to a level equivalent to 75% of the true market value. Yearly cuts to fuel subsidies continue to be part of T&T’s strategy for improving the country’s fiscal balance. Furthermore, in terms of administrative efficiency, T&T merged its two tax authorities, the Board of Inland Revenue and the Customs and Excise Division, into one single authority in 2017 to streamline processes and address tax evasion.

The budget for FY 2018 was set at TT$45.7bn ($6.8bn), a TT$7.9bn ($1.2bn) increase over FY 2017, with TT$6.4bn ($949.2m) of this to come from hydrocarbons tax revenue. Meanwhile, total expenditure is forecast to come in at TT$50.5bn ($7.5bn), the same as 2017. If matched, these figures will result in a fiscal deficit of TT$4.8bn ($711.9m), or 3.1% of GDP.

Targeted Measures

In addition to these broader goals, the plan looks to remedy the largest drains on the country’s finances. One is the construction and sale of subsidised housing, through which the state loses up to TT$500,000 ($74,200) on each home sold. According to the budget, officials will narrow their focus to providing rental housing through the state Housing Development Corporation, and will adopt new incentives such as land grants, tax exemptions, and up to TT$50m ($7.4m) in cash bonuses to developers who build low-income housing.

The budget also allocates TT$50m ($7.4m) for audits to evaluate the country’s state-owned enterprises (SOEs) and devise a strategy for scaling back intervention and expenditure in activities that could instead be carried out by the private sector. The most critical SOE is the Petroleum Company of Trinidad and Tobago (Petrotrin), an enterprise that generated a net loss of TT$393m ($58.3m) in the first nine months of 2017. Petrotrin had accumulated a debt burden of nearly TT$12bn ($1.8bn) and tax arrears of TT$3.2bn ($474.6m) as of October 2017.

T&T must also resolve the ongoing problem of CL Financial, an entity that was once the largest privately held financial company in the country, but was taken over by the central bank after experiencing serious financial problems in early 2009. CL Financial owed the government TT$15.6bn ($2.3bn) at the start of the fiscal year in October 2017. T&T has worked to re-package CL Financial’s assets in order to end its involvement with the company and recoup its investment. In June 2018 officials created a vehicle called the National Investment Fund Holding Company to take control of CL Financial’s assets and issue high-interest, tax-free bonds. The government also said it would review its contributions to the country’s Heritage and Stabilisation Fund in 2018, saying it made little sense to invest resources in a stabilisation fund during a period of economic difficulty and persistent budget deficits. Asset sales from the CL Financial liquidation and withdrawals from the Heritage and Stabilisation Fund are expected to contribute TT$7.5bn ($1.1bn) to 2018 revenues.

Budget Response

The budget has received different reactions from an array of analysts and observers. Accountancy group PwC supported the government’s effort to balance the budget over a multi-year period, but raised questions on some technical aspects of the tax-raising measures and urged Prime Minister Rowley’s administration to take action as soon as possible to reduce government expenditure. PwC argued that difficult and potentially painful cuts to government employment at key agencies, as well as expenditures on transfers and social spending, would in the short term “undoubtedly be required”. Advisory firm EY also touched on state employment, detailing concerns that although salaries equal 31% of annual revenues, T&T has “no clear strategy on how the government’s wage bill is going to be significantly reduced”.

Another area of concern is Rowley’s reluctance to adjust T&T’s exchange rate or float the country’s currency. In PwC’s budget review, Brian Hackett, territory senior partner, encouraged the prime minister to adjust the over-valued exchange rate, arguing that a devaluation “would likely have material benefits to the overall economic well-being of all citizens”. PwC also urged the government to release more details about proposals to overhaul the country’s oil and gas fiscal regime. There is wide consensus among analysts that T&T needs to take serious steps to move away from relying so heavily on hydrocarbons exports and further improve government finances.

PwC acknowledges that fiscal transformation will not happen overnight, and questions whether measures designed to increase short-term tax collection will have an adverse effect on economic competitiveness and incentives for private sector investment in the long term. Overall, while T&T is taking positive steps towards transforming its economy, more action is needed over coming years to further reduce government spending and cultivate a more diverse and dynamic mix of private sector activity.

Credit Ratings

To get a snapshot of a country’s financial environment, international investors often look to credit ratings. In April 2016 US-based credit ratings agency Moody’s downgraded T&T’s government bond rating from “Baa2” to “Baa3” with a negative outlook. At the time, Moody’s listed low oil and gas prices and concerns about the government’s will to effectively tackle long-standing structural issues as the primary factors undermining T&T’s financial strength. One year later Moody’s downgraded T&T’s issuer rating again to “Ba1” with a stable outlook, believing the government had not done enough to correct fiscal imbalances and address fundamental weaknesses. Rising debt levels was another concern that negatively affected the rating, combined with declining production at oil and gas fields and low energy prices that considerably dampened medium-term growth prospects.

In May 2018 Moody’s maintained the government’s rating at “Ba1”, stating that it would increase the rating if oil and gas production began to rise or if the authorities reduced debt levels. In its 2018 report Moody’s classifies T&T’s institutional strength as “low” due to “weak fiscal policy execution capacity”. The agency ranks T&T’s overall fiscal strength as “moderate”, but warns that even though the country has savings accumulated in its Heritage and Stabilisation Fund of 27% of GDP, it still suffers from “heavy reliance of government revenue on the energy sector and on capital revenue such as asset sales, which cannot be sustained over an extended period”.

In April 2018 US ratings agency Standard & Poor’s maintained its sovereign credit rating for T&T at BBB+ in the long term and A-2 in the short term, but revised its outlook from stable to negative due to concerns about the exchange rate, lack of access to foreign currency and historical gas supply shortages.

Recovery Challenges

Regaining lost credibility in ratings and strengthening macroeconomic fundamentals will begin with fiscal reform. In the short-term, however, the government may struggle to offset cuts in social spending and income subsidies with enough private investment and job growth in industries beyond the energy sector. Over the medium-term, the country has the task of confronting a number of serious structural problems including inefficient tax collection, poorly managed public utilities, excessive staffing at government agencies and ineffective public security policies.

Reform is threatened by opposition from organised labour groups and a lack of inter-party legislative collaboration. Union workers at Petrotrin have adamantly opposed job cuts, while the current administration has struggled to rally majority coalitions in Parliament for simple measures such as the consolidation of the two tax authorities. A September 2017 poll shows that the majority of residents in T&T believe the country is moving in the wrong direction, and are frustrated with Prime Minister Rowley’s performance in tackling crime, corruption and unemployment. Facing a potentially tough re-election campaign in 2020, Rowley seems more likely to cautiously pursue incremental economic adjustments instead of pushing through an ambitious policy package.

Corruption & Crime

T&T – like many other countries in the region – struggles with problems related to corruption and crime. According to the 2017 Corruption Perceptions Index by watchdog Transparency International, T&T was ranked 77th out of 180 countries, with the country in first place, New Zealand, perceived as the least corrupt. Uruguay ranked highest in Latin America and the Caribbean, in 23rd place, while Venezuela ranked the lowest at 169th. When it comes to doing business in the country, survey respondents of “The Global Competitiveness Report 2017-18” ranked corruption as the third-most problematic factor. The MoF acknowledged that inflated government contract budgets for housing and public building works had been a drain on finances in the past, and that the government is working to implement a new procurement law which may serve to reduce corruption.

T&T also faces problems of gang activity and street crime in select, mainly urban, areas. The US State Department gives T&T as a whole a “level 1” risk rating and simply advises visitors to “exercise normal precautions”. The capital, however, has received a “critical” crime and security risk rating. Illustrating the varying levels of crime experienced in different parts of the country, statistics from the T&T police service show that Port of Spain recorded 74 homicides in 2017, while the entire island of Tobago had only 12. According to a study by the Inter-American Development Bank, residents of T&T rank crime and security as the country’s most pressing problem. To address concerns, in July 2018 T&T launched a new comprehensive anti-crime strategy called the National Crime Prevention Programme and appointed a new Commissioner of Police.

Outlook

With global energy prices recovering and a new natural gas project now on-line (see Energy chapter), some predict an end to T&T’s recession in 2018. “T&T has a pretty well developed oil and gas sector, and production is increasing. That, combined with rising energy prices, gives them an advantage,” Jeffrey Lamoureux, an analyst at New York-based consultancy BMI, told OBG. “The near-to-medium-term outlook is improving, and I expect to see growth pick up in 2018 and 2019.”

In May 2018 the MoF reported that as energy activity recovers and other sectors begin to grow, tax revenues will likely exceed expectations, and the budget deficit was revised down from 3.1% of GDP in 2018 to 2.5%, compared to 8% in 2017. However, while a rebound in the energy sector is welcome, it is other industries that require the majority of government focus if the country is to become sustainably diversified and financially secure for the long haul.