Although lower hydrocarbons prices are set to reduce government revenues, Trinidad and Tobago's economic fundamentals remain strong

Despite its small size, Trinidad and Tobago ranks highly on a number of economic development indicators. According to estimates by the IMF, per capita income in T&T was $21,310 in 2014, the third-highest level in the Americas, after the US and Canada. Meanwhile, the World Bank categorises T&T as a high-income, non-OECD nation, while the World Economic Forum (WEF), in its reports on global competitiveness, sees T&T as an innovation-driven economy, like the US or the UK.

Energy Sector Strength

Having discovered oil over 100 years ago, the T&T economy is underpinned by hydrocarbons. In 1992 the country produced just over 100,000 barrels of oil per day (bpd), and almost as many barrels of oil equivalent per day (boepd) in natural gas. By 2011, natural gas production had surged to about 700,000 boepd while oil output had slipped to a little below 100,000 bpd, according to the Central Bank of T&T (CBTT). The country also hosts one of the largest gas-processing facilities in the Americas, which is the backbone of the local petrochemicals industry. The growth in the output of natural gas has enabled T&T to become the world’s leading exporter of methanol and ammonia, which, combined with urea, are the country’s main petrochemical products.

One of the other defining characteristics of T&T is that state enterprises (59 companies ranging from the national carrier Caribbean Airlines to the National Gas Company) play a key role in the economy. In 2013, the total profits of these organisations amounted to $7.59bn. This is in the context of a country with an estimated nominal GDP of TT$178.8bn ($27.6bn) in the 2013/14 fiscal year, with total government spending estimated at TT$64.8bn ($10bn) for the same period.

The strength of T&T’s energy sector has enabled the country to maintain a stable and strong currency, and post persistent current account surpluses. At the same time, a “two-tier” economy has developed, in which changes in the terms of trade have not had an equitable impact on the fortunes of all households and enterprises. Lastly, resources have been skewed towards the broadly defined energy sector at the expense of other parts of the economy.

Diversification

According to World Bank estimates, T&T’s oil and gas reserves are expected to be exhausted by 2025-30, so economic diversification will be high on the agenda for policymakers. While progress has been made in the downstream hydrocarbons industry, through the development of petrochemical products and other derivatives, it has been slow in other segments of the economy. The non-hydrocarbons share of the economy has grown from 58.1% in 2010 to 60.9% in 2014, while the hydrocarbons share has contracted from 41.6% to 38.5% over the same period, according to the “Review of the Economy 2014” published by the Ministry of Finance and the Economy.

Within the energy sector, exploration and production accounted for 21.4% of total GDP in 2014, while refining accounted for 8.8%. After energy exploration and production, the second-largest sector of the economy is financial services, including insurance and real estate: its share of overall GDP has risen from 14% in 2010 to an estimated 16% in 2014. Other major sectors include distribution and restaurants, with 10.8% of GDP, and transport, storage and communication, whose share reached an estimated 8.7% in 2014.

Another reason why diversification of the economy is an important objective is that the energy sector has not been growing rapidly. In fact, the value added by the sector contracted in each of 2009, 2010 and 2011, and has since been growing at low single-digit rates. Production was curtailed in the first half of 2014 by a number of shutdowns and stoppages that have constrained output in the past few years. Due in part to the central role that the energy sector plays in the economy, the non-energy sector has also faced challenges as consumer and government spending drops in line with lower hydrocarbons revenues.

Other Key Features

Aside from low growth, there are a number of other salient features that stand out from T&T’s economy. One is that it has consistently operated at near full employment, with the unemployment rate slipping from 5.3% on average in 2009 to just 3.3% in the July to September period of 2014.

Inflation in recent years has been higher than in the US and developed countries in Europe, but the general trend has been downward. According to the IMF, however, inflation has been calculated with an upward bias due to a methodological flaw that was fixed in April 2013. The government has generally operated with slight deficit spending in the past five year, leading public sector debt to rise as a percentage of GDP from 30.9% to 40.2% over the same period. As a portion of public sector debt, external debt has remained broadly constant as a portion of GDP at around 7%.

Over recent years, the current account surplus has moved quite markedly between about 3% of GDP and 20% of GDP, in part due to an issue with data calculations flagged up in the IMF’s 2014 Article IV report. In 2014 it was equivalent to 8.3% of GDP, according to figures from Moody’s Investors Service. Foreign reserves have long been substantial and growing; at the end of 2014 they amounted to $11.3bn.

Structural Strengths

In addition to being a functioning democracy with high ratings for political rights and civil liberties from NGO Freedom House, T&T has a number of structural strengths. One is a financial system that is well capitalised and in which most banks are backed by the government or large multinationals. Proposed legislative changes, such as the new Insurance Bill, should further reinforce the sector.

The country also benefits from a number of well-established institutions that promote social inclusion, such as free education and public health care. For example, the Government Assistance for Tuition Expenses programme provides T&T’s students with free tertiary education (with the exception of postgraduate education), while the Higher Education Loan Programme helps them study both locally and overseas. The Housing Development Corporation provides affordable housing, while T&T Mortgage Finance Company lends to home-buyers with relatively low incomes on concessional terms. Additionally, the Heritage and Stabilisation Fund theoretically provides the government with a financial cushion in the event of a downturn in revenues, although this has not yet been tested.

Meanwhile, the National Insurance Board of T&T provides universal retirement incomes (and protection against some other contingencies). In many countries with structural current account surpluses, household savings would be channelled through mutual savings banks, state-owned savings banks or postal savings systems. In T&T the conduit is provided by the Unit Trust Corporation, the mutual fund company established via an act of parliament in 1982 and run on commercial lines. Finally, National Enterprises Limited holds many of the government’s stakes in state enterprises and offers share units for purchase by investors.

In addition, economic diversification has highlighted a number of internationally competitive sectors. One of these is financial services. Franco Siu Chong, chairman of the T&T International Financial Centre, noted that T&T’s tertiary education system provides it with a considerable advantage in some areas. “Education in T&T is free at the undergraduate level and 10, 000-12,000 English-speaking graduates enter the job market every year. Together with the low cost of energy, T&T is quite competitive as a location for business process outsourcing (BPO) activities such as finance, accounting and financial analysis,” Siu Chong told OBG. “RBC Royal Bank and Scotiabank have recently moved some of their BPO operations to Trinidad, while global services firm Quattro has signed a memorandum of understanding to start a 40-seat pilot project.”

Another competitive sector is education, with medical graduates from the St Augustine campus of the University of the West Indies frequently completing their hospital residencies in the US. Meanwhile, the Arthur Lok Jack Graduate School of Business operates in T&T, Guyana and Suriname. In its “Global Competitiveness Report 2014-15”, the WEF rated T&T 33rd out of 144 nations for the quality of its management education.

Short-Term Challenges

Despite diversification efforts away from the energy sector, T&T’s economy has still been exposed to the slippage in the prices of oil and gas since mid-2014. In particular, the energy sector accounted for around 48% of government revenues in the 2013/14 fiscal year and contributed around 42% to 2014 GDP, according to estimates from the CBTT.

On January 8, 2015, Prime Minister Kamla PersadBissessar noted that the government’s budget for the year to September 2015 included TT$64.7bn ($10bn) in spending and had originally been based on an assumed oil price of $80 per barrel and an assumed gas price of $2.75 per million British thermal units (Btu). In early 2015, the government reassessed the budget, using assumed prices of $45 per barrel for oil and $2.25 per million Btu for gas. According to the prime minister, the government expects on that basis that the overall revenues will be around TT$7.4bn ($1.1bn) lower in the year to September 2015.

At the end of January 2015, Elie Canetti, the head of an IMF mission visiting T&T, remarked that the IMF agreed with “the authorities’ goal of returning to the original 2014/15 target of a fiscal deficit of 2.3% [of GDP] which, barring the emergence of further downside risks, appears feasible”.

Ratings

In April 2015the US ratings agency Moody’s Investors Service downgraded the government bond and issuer rating from “Baa1” to “Baa2” and changed the outlook from “stable” to “negative”, in line with many other oil-based economies worldwide. According to Moody’s, the downgrade is driven by the persistent fiscal deficits, the decline in oil prices in a context of limited economic diversification and the country’s “weak macroeconomic policy framework”. Immediately after, the CBTT issued a statement deeming the downgrade as “unjustified”. The central bank indicated that the country is still an investment-grade destination by virtue of its strong net external asset position despite the exogenous shocks that hit the country’s economy since 2009. In its statement the central bank highlighted the country’s low external vulnerability given that “three-quarters of T&T LNG exports are sold at guaranteed, fixed long-term contract prices in various regions around the world”; the stable political system; and the improvements to public data collection and reporting.

The government has reviewed its Public Sector Investment Programme and recurrent spending and identified savings of TT$4.5bn ($693.9m). Some TT$1.4bn ($215.9m) of this comes from a reduction in subsidies that lower the retail price of fuel. The government has also cut back on plans for infrastructure projects for which financing has not been confirmed. Spending on non-critical goods and services by ministries has been lowered; for some ministries, expenditure has been cut by up to 15%. Looking forward, the government hopes to raise funds through the initial public offering of a 49% stake in T&T NGL, which in turn holds a 39% shareholding in Phoenix Park Gas Processors.

New Dynamics

Events in Cuba and Venezuela may present T&T with new challenges, if indirectly. Because much of T&T’s manufacturing sector is dependant on exports to other Caribbean nations, any slowdown in their economies is likely to have an impact on T&T.

The liberalisation of trade and investment links between Cuba and the US could result in a surge in inbound tourists visiting Cuba, who might otherwise have travelled to destinations in Jamaica or the eastern Caribbean. Meanwhile, the fall in the price of oil has exacerbated the various problems faced by Venezuela’s government, leading to an increase in social unrest in that country. This may in turn make it difficult for the government to maintain commitments to supply oil on subsidised terms to other countries in the region under the Petrocaribe framework. In the absence of Petrocaribe, the countries that benefit from the agreement would have to import energy at world prices, and pay upfront, which would further weaken their economies.

All this matters because many of T&T’s export markets – particularly for the manufacturing sector – are members of Petrocaribe and/or are competing for tourists. According to the World Trade Organisation (WTO), manufactured goods accounted for 26.5% of T&T’s exports in 2013, and Dhanraj Harrypersad, manager of the Export Market Research Centre at ExporTT, the national export promotion agency, told OBG that members of the CARICOM account for around four-fifths of T&T’s non-energy exports.

Jamaica, which accounted for 6.5% of T&T’s export revenues in 2013, was the third-largest market after the US (48.1%) and the EU (9%), while Barbados (3.4%) and Suriname (2.7%) were, respectively, T&T’s fourth-and fifth-most-important export markets.

Despite the potential downside, Harrypersad also noted that the opening up of Cuba’s economy could directly benefit some of T&T’s exporters, which may find a growing market for their products.

The government is also working to promote trade with new markets. In its “Review of the Economy 2014”, the government indicated that it might pursue a bilateral free-trade agreement with Canada in the event that negotiations over the CARICOM-Canada trade and development agreement stall. Negotiations with the governments of El Salvador, Panama and Guatemala in relation to partial scope agreements are already under way as well. The government of T&T also noted that the agreement on trade facilitation, a key element of the “Bali Package” agreed upon by members of the WTO in late 2013, would complement official efforts to improve the ease of doing business.

Crime

Crime and violence have been identified by respondents to the WEF’s “Global Competitiveness Report” as among the most problematic factors in conducting business in T&T. According to the UN Office on Drugs and Crime, the homicide rate in the country increased from 9.5 per 100,000 people in 2000 to a peak of 41.6 in 2008 before subsequently falling to 28.3 in 2012. A report published in early 2014 by the Overseas Security Advisory Council (OSAC), a part of the US Department of State, indicated that the rate rose to 31 per 100,000 in 2013, and described the crime situation in T&T as “critical”. As a regional comparison, homicide rates for Guyana, Jamaica, and Venezuela were 17, 36 and 82 per 100,000 inhabitants.

OSAC ascribes the high rate of homicide and other violent crimes to the “influence of gangs, illegal narcotics and firearms”. OSAC says that over 100 gangs, many of which are involved with drugs, arms smuggling and fraud, among other activities, have been identified.

There are also pockets of poverty and crime in the country, particularly in the eastern side of Port of Spain, and official data suggests that around 15% of the population lives below the poverty line. Errol McLeod, the minister of labour and small and micro-enterprise development, told OBG, “The government is aware that behind the low levels of unemployment the country still faces serious job market inefficiencies. Social development programmes like the Community-based Environmental Protection and Enhancement Programme and the Unemployment Relief Programme should be better organised to focus more on training capabilities.”

For its part, the T&T Police Service (TTPS) indicates that the total number of serious crimes (including but not limited to homicide) fell from a peak of 22,162 in 2009 to 13,146 in 2013. The TTPS suggests that this is due to a number of factors, such as: five new laws, including the Anti-Gang Act, which were promulgated in 2011; an improved focus on border security; a national security assessment of T&T, which was carried out in collaboration with the New York Police Department; the re-organisation of the National Operations Centre; and increased police presence on the highways and around the country in general.

Obstacles to Growth

The WEF’s “Global Competitiveness Report 2014-15” also identifies corruption, or at least the perception of it, as an impediment for business. Randall Karim, director of policy and strategy at the Ministry of Trade, Industry, Investment and Communications, told OBG that a “culture of impunity” has long been a challenge in T&T. However, other commentators pointed out that the energy sector, which makes up the largest portion of the economy, is generally free of corruption thanks to the very high corporate governance standards of the major multinationals present in T&T. Kathrin Renner, international cooperation officer with the EU delegation to T&T, told OBG, “While perception of corruption is rather high, compared on a global scale, most people in T&T do not experience corruption in their daily lives and there is no evidence to suggest that it is structural.”

Transparency

In general, there is move towards more transparency. Mikey Joseph, president of the T&T Contractors’ Association, told OBG that the new Public Procurement and Disposal of Public Property Bill (see analysis) is a positive development, but noted that it remained to be seen how the new law will be enforced in practice once it has been enacted. The bill was approved by the parliament in December 2014.

The IMF’s Canetti agreed that implementation of the new procurement bill should “help to improve expenditure efficiency and allay concerns regarding corruption”. He added, “Improving the functioning of the civil service, and reducing the distortions to the labour market caused by government temporary employment programmes remain critical priorities.”

Boosting Competitiveness

Inefficient bureaucracy has been identified as a major problem by the WEF and the IMF. In mid-2014, the IMF noted that the government had taken some positive steps to boost T&T’s competitiveness, and to make it an easier place in which to do business. However, the IMF also highlighted problems with the recruitment and promotion of permanent, contract and daily-paid workers in the government’s 48 ministries, agencies and departments – in a country where public service employees account for one-quarter of the total labour force. Hiring authority is split between the chief personnel officer, the Service Commissions Department (SCD) and the Ministry of Public Administration. In 2006, the SCD allowed ministries to directly hire staff on a temporary or acting (i.e. with more responsibilities but without a formal promotion) basis. Numbers of such personnel have since surged, but hiring permanent workers can continue to be a lengthy process.

In terms of government data, the situation at the Central Statistics Office (CSO), which temporarily ceased operations in mid-2013 and which was still operating under resource constraints a year later, has been especially problematic. After his visit to the country in early 2015, Canetti observed that “data provision by the CSO has materially improved, but still falls short of acceptable standards. Therefore it will be important that the pace of CSO improvements is sustained, and we encourage the government to press ahead with its plans to put the CSO on an independent and well-funded footing within 18 months.”

Issues Affecting the Labour Market

Imbalances exist in the country’s labour market. “The challenge is not about finding qualified personnel, but rather about ensuring that the qualified personnel possess the practical experience and skills to perform effectively in the real life work environment,” Brenda Lee Tang, the head of the Association of Chartered Certified Accountants, Caribbean, told OBG. She added, “A practical experience requirement in education and training provides a framework that supports sustainable improvements in workplace performance and creates more motivated and valuable employees.”

Another challenge is the limited size of the labour market. The number of employed people fell from 597,700 in mid-2008 to 585,300 in mid-2011, before rising again to 625,600 in mid-2013. This can be attributed to the very gradual increase in the total population, from 1,308,587 to 1,340,557 over the five years to mid-2013, and the decline in the participation rate, from 63.5% to 61.3%. At the same time, there is a disconnect between the structure of the economy and the labour force. While the energy sector accounts for around 40% of the country’s total GDP, it employs just over 3% of the labour force.

Even more problematic has been the lack of productivity growth. The WEF’s “Global Competitiveness Report 2014-15” indicated that businesses in T&T did not feel that their workforces were delivering value for money. Labour productivity rose by 7-9% annually in each of the three years to September 2011. However, productivity dropped by 6.3% in the year to September 2012, and rose by just 3.2% in the subsequent 12 months. The latest indications are that labour productivity was falling again in early 2014.

Monetary Policy

From January 2011 to December 2014, the CBTT’s index of retail prices for all items rose by 27.9%. Over the same period, the index of food prices grew by 56.9%. Despite these overall increases, core inflation remained relatively stable over the period, ranging from a high of 3.1% year-on-year (y-o-y) in late 2012 and mid-2013 to a low of 1.2%, with December 2014 recorded at 1.4%. After holding its key repo rate unchanged for nearly two years, the CBTT increased the rate at its policy meetings in September and November 2014 in response to the low interest rate differentials between T&T and US government securities. It was also in response to potential inflationary pressures from what the CBTT describes as “robust levels of government spending budgeted in fiscal year 2014/15”. The CBTT subsequently increased the repo rate by 25 basis points at its meetings in January, March and June 2015, reaching 4% as of June 2015.

The CBTT also undertook measures to contain excess liquidity in the banking system. These included expanded open market operations with Treasury securities, the issue of a liquidity-sterilisation Treasury bond in June 2014 and the rolling over of the commercial banks’ special fixed deposits which matured during 2014. Commercial banks’ excess reserves held with the CBTT had averaged about TT$3.9bn ($601.38m) daily over the first four months of 2015, down from TT$6.6bn ($1.02bn) in the corresponding period of 2014.

Foreign Exchange Transactions

The CBTT, which determines both the price and the quantity of foreign exchange that is made available, has increased its sales of US dollars in order to counter temporary shortages, which has also reduced the liquidity in the financial system. Net sales of US dollars in the first four months of 2015 amounted to $2.5bn, or about 20% more than in the previous corresponding period.

Fiscal Policy

Government policies have largely been expansionary over recent years, at a time when production levels in the energy sector, and the government’s revenues from it, have generally been tracking sideways. The overall budget balance has deteriorated from deficits of 0.7% in the year to September 2011 and 1.4% of GDP in the year to September 2012 to 2.7% in September 2014 and – in spite of the drop in energy prices – the budgeted 2.3% of GDP in the 2014/15 fiscal year.

Typically, well over half of government spending is accounted for by transfers and subsidies, including various social programmes and the subsidy to reduce the retail price of fuel; however, despite the forthcoming elections, the 2014/15 budget foresaw a reduction in overall subsidies. Although the budget deficit has been slowly growing, overall government debt, at around 40.6% of GDP, is still low by regional standards and compared to major OECD countries.

Major Infrastructure Projects

In his budget speech of September 8, 2014, Larry Howai, the minister of finance and economy, highlighted how activity would be underpinned over the next year by major infrastructure and construction projects. These include the Tamana InTech Park and TT$2.4bn ($370.1m) for spending on improvements to the country’s telecommunications infrastructure. Major road projects include the 47-km San Fernando to Point Fortin highway, a part of which is already in operation, and the 6.2-km Rivulet Road near the Point Lisas Industrial Estate.

Work is expected to start in 2015 on a new highway to connect San Fernando with Mayaro and another to link Wallerfield with Manzanilla. There are also changes to the main East-West Corridor, which should reduce traffic congestion near Port of Spain.

In relation to health care, the government has developed a new 216-bed teaching hospital in San Fernando and the new National Oncology Centre in Port of Spain, while the Children’s Hospital and Multi-Training Facility in Couva is currently under construction. In relation to education, the government is providing (or upgrading) new primary schools, secondary schools and facilities for tertiary institutions. At the time of the budget, some 3000 new housing units were being built as a part of the government’s programme to provide affordable housing. Major new sporting facilities include the National Cycle Centre, the National Tennis Centre and the National Aquatic Centre.

In the private sector, investment in the $987m Mitsubishi-Massy methanol to dimethyl ether plant, and the development of Galeota Port, should boost activity in the coming years. So too will expected investment by major energy companies of around $3bn annually. This includes the $2.1bn Juniper project, the main component of which is the construction in T&T of the Juniper natural gas drilling platform. Meanwhile, at least 53 exploration wells will be drilled over the next eight years on the basis of new seismic data.

Outlook

There are two key factors that will likely shape the evolution of T&T’s economy through calendar year 2015. One is the election, which will likely delay the making of major policy decisions to late in the year, or 2016. The other is energy prices. Dramatic moves in energy prices in either direction will have an impact on the perceptions of likely growth.

For example, a sharp reduction in energy prices would prompt another review of spending priorities. However, the government would have ample time to make adjustments given its still low debt ratio, the substantial foreign reserves, the additional protection provided by the Heritage and Stabilisation Fund, the social stability provided by various public institutions and the momentum provided by major infrastructure projects. Indeed, T&T is well placed to deal with the challenges associated with another sharp fall in energy prices.