Trindad and Tobago's stable political and macroeconomic foundations help to weather challenges

Situated at the southern end of the Caribbean and only 11 km from the Venezuelan coast, the twin islands of Trinidad and Tobago have long stood out in the Caribbean and South American regions. Rich in oil and gas, T&T’s economy is comparatively wealthy, features a robust democratic system and is known for its vibrant cultural traditions. Abundant oil and gas reserves ensure the country of 1.36m people enjoys impressive growth rates. Annual GDP growth averaged slightly over 8% between 2000 and 2007, significantly above the Latin American and Caribbean average of 3.7%.

Growth rates have since slowed considerably, averaging 0.8% in the 2008-10 period, in the aftermath of the global financial crisis. A gradual recovery began after 2010 but came to a halt in 2014, with the decline in global energy prices exposing the country’s vulnerability to commodity cycles and pushing the hydrocarbon-based economy into recession. The recessionary environment has continued into 2016, testing the country’s political and economic foundations and making economic recovery one of the current government’s priorities. Though it faces a challenging environment, T&T continues to display significant strengths, in particular a stable democratic political system and sound macroeconomic fundamentals.

Democratic Rule

Except for a short-lived insurrection in 1990, T&T has enjoyed uninterrupted democratic rule since it gained independence from British colonial rule in 1962. The People’s National Movement (PNM) party, founded by Eric Williams in 1956, won the first post-independence election and established itself as a dominant party in T&T’s political life, remaining in power until 1986. Economic instability in the 1960s and early 1970s led to growing discontent and the emergence of the black power movement. This contributed to PNM’s popularity, which to this day draws most of its popular support from Trinbagonians of African descent. Williams was the country’s first prime minister from 1962 to 1981, including when it became a republic in 1976.

Increased public revenues following the surge in oil prices between 1973 and 1982 allowed the government to increase public spending and regain a degree of popular support, though this was not enough to keep the PNM in power. In 1986 Williams’ successor, George Chambers, was defeated by the newly formed National Alliance for Reconstruction (NAR), a multi-ethnic coalition of opposition parties led by A.N.R. Robinson, campaigning under the slogan of national unity. Discord within the coalition soon led the United Labour Front, led by Basdeo Panday, to quit the alliance and form the United National Congress (UNC).

Insurrection

In July 1990 T&T’s democratic rule was temporarily shaken by an attempted coup, staged by the militant Muslim faction Jamaat Al Muslimeen. Led by Abu Bakr, the faction stormed Parliament, took over national media and held the prime minister and members of Parliament hostage over a six-day period. The events unleashed violence, widespread looting and chaos in Trinidad’s capital. While the army ultimately defeated the insurrection, the NAR was not able to recover from the political blow and the PNM, under the leadership of Patrick Manning, regained power.

Manning called for early elections in 1995, but the PNM failed to secure the substantial majority it had in Parliament. The newly formed UNC, traditionally identified with the Indo-Trinidadian community, gained the support of NAR and formed a new government, led by Panday, who became the country’s first prime minister of Indo-Trinidadian descent. Panday stayed in office until 2001, when the PNM regained power once again, under the leadership of Manning, who served as prime minister for a second time from 2001 to 2010.

In May 2010 amid fears of a vote of no confidence, Manning called for elections, but the PNM was unable to maintain power. A new, five-party, multi-ethnic coalition, the People’s Partnership (PP), campaigning on a platform of national unity, rose to power under the leadership of Kamla Persad-Bissessar. As leader of the UNC, the largest party in the coalition, Persad-Bissessar became the country’s first female prime minister, acquiring a historical three-fifths constitutional majority, or 29 of the 41 seats in the lower house, with 42.9% of the popular vote. The PNM, which received 39.6% of the vote, secured 12 seats. Persad-Bissessar ran for re-election in 2015, pledging to help rebuild the nation, but was defeated by the PNM.

Led by Keith Rowley, the PNM regained power after winning a closely contested election, taking 23 seats in the 41-seat Parliament, with 51.68% of the popular vote against the PP’s 46.41%. The party, which has its most loyal base among Afro-Trinis, won all 13 marginal seats, following a 13% swing vote in its favour relative to the 2010 election. The increase in swing voters suggested that local politics are becoming gradually less ethnically based. According to the Commonwealth Observer Group, the elections were held in a peaceful and orderly manner. In its report, the group noted the election “affirmed the country’s track record of peaceful and credible elections” and demonstrated “the people’s commitment to democracy”.

Challenging Times

Rowley took office in September 2015 facing a challenging macroeconomic environment, pledging to put the nation back on a path of sustainable and inclusive growth. In its second year in office, the current government’s priority is to restore fiscal balance and macroeconomic stability, after the sharp decline in global energy prices led to significantly lower public revenues. According to Colm Imbert, the finance minister, the country’s petroleum revenues fell by 92% between 2014 and 2016, from TT$19.3bn ($2.9bn) to an estimated TT$1.7bn ($254m), while revenue from taxation, royalties on oil, and profits from state enterprises declined by 35% over the same period, from TT$57bn ($8.5bn) to TT$37bn ($5.5bn). The decline in revenues pushed the government’s current account into deficit and raised government debt. Public sector debt rose to 47.2% of GDP in 2015 and is expected to reach 58.5% by 2017. Meanwhile, the fiscal deficit is estimated at TT$7.3bn ($1.1bn) in 2016.

The country’s energy sector, traditionally the backbone of the economy, was hit by a combination of lower prices, dwindling output from mature oilfields and plant shutdowns for maintenance. This had a ripple effect on the economy, leading to a decline in private consumption, manufacturing activity and a moderate increase in unemployment. GDP growth contracted for a third consecutive year in 2016, by an estimated 2.3%, according to figures from the Central Statistical Office, which follows IMF-recorded declines of 1% and 2.1% in 2014 and 2015, respectively.

The sector’s contribution to GDP declined from 40% in 2010 to 32.1% by 2015, according to the Central Bank of T&T, while unemployment, though still at moderate levels, reached 4.4% in the second quarter of 2016, up from 3.2% in the same period in 2015.

Fiscal Management

To restore macroeconomic balance, the Rowley government has embarked on a fiscal plan designed to achieve a balanced budget by 2020, with a public sector debt limit of no more than 65% of GDP. The plan projects growth to resume in 2017 by 1%, increasing to 2% annually from 2018 to 2020, based on a projected recovery of global energy prices and accelerated growth in non-energy sectors.

A series of measures were introduced in 2016, aimed at reducing expenditure, streamlining government operations and increasing revenues. Among the measures introduced were a 7% expenditure cut for all government ministries, state enterprises and statutory bodies; the reintroduction of the property tax; a combination of a lower value-added tax with a wider scope; higher business and green fund levy rates; and a personal and corporate tax hike from 25% to 30% for individuals whose income exceeds TT$1m ($149,000). In addition, the government is phasing out its long-standing fuel subsidy which, according to Imbert, cost the country a total of TT$31bn ($4.6bn) in the decade leading up to 2016.

Facing continued fiscal pressure and significant cash flow constraints, in April 2016 Imbert announced that the country was also shelving plans for a highly anticipated multi-billion-dollar mass transit project for Trinidad. Other big ticket items, such as the tertiary education programme, Government Assistance for Tuition Expenses are also under review.

Additional decisive steps are being taken in 2017, including the establishment of a new T&T Revenue Authority and the passage of procurement legislation designed to improve tax collection, streamline operations, and increase transparency and accountability. The announcement of a revenue authority comes on the back of a number of tax hikes in 2016, including a 50% increase in Customs duty and taxes on luxury vehicles, a tax increase for alcohol and tobacco products, and a 7% levy on online purchases of goods and services from overseas retail companies, intended to help manage the increase in foreign exchange outflows.

Though T&T faces a challenging scenario, current efforts towards recovery and the country’s inherent strengths are expected to aid in the process. In its June 2016 report, the IMF noted, “Despite the significant challenges posed by the need to adjust to lower energy prices, T&T is far from a crisis situation.”

Indeed, T&T’s financial buffers include TT$9.2bn ($1.4bn) in international reserves and TT$5.8bn ($866.6m) in its Heritage and Stabilisation Fund. The 2017 deficit will be serviced by a drawdown of $2.5bn from the fund and domestic and foreign borrowing.

Reviving the Economy

Currently nearing completion, the government’s National Development Strategy, known as Vision 2030, will be instrumental in guiding the country’s development over the long term, as it moves towards developed country status.

The focus of the plan will be on achieving sustainable growth while improving social conditions in an inclusive and environmentally sensitive manner. Diversification is expected to be a pillar of the new plan. Though previous diversification strategies failed to gain significant traction outside of the energy sector, the current depressed environment is expected to accelerate efforts for non-energy growth.

The government’s diversification strategy targets a number of areas where T&T offers significant untapped potential, in particular international financial services, tourism, maritime industries, manufacturing and agriculture. With a well-educated English-speaking labour force, the country is particularly well positioned to provide global back-office processing services. Moreover, given its potential for growth and foreign currency generation, tourism is a key target for current diversification efforts. Unlike many tourism-dependent Caribbean economies, tourism contributes a modest share to T&T’s GDP, at an estimated 3.2%. Tobago remains a classic Caribbean sun and sea destination, while Trinidad’s robust business and cultural scene attracts a stream of visitors every year, offering significant potential in the cultural, sports and ecotourism segments.

In the agriculture sector, T&T has all the ingredients to be successful, especially in agro-processing and the coconut and cocoa industries, but has yet to take full advantage. However, there have been some promising developments, such as growth in the cocoa industry being kick-started in 2015 with the launch of the country’s first cocoa-processing facility, the T&T Fine Cocoa Company. Moreover, T&T’s location at the southern base of the Caribbean, outside of the hurricane belt, puts the country in a prime position to develop a shipbuilding and ship repair industry to serve commercial ships and the yachting industry. Finally, with an already developed industrial base, the manufacturing sector could play a larger role in driving economic growth and export diversification. The government hopes to foster an environment conducive to the development of these industries through the introduction of incentives.

In a sign of the country’s economic resilience, T&T’s rankings in the World Economic Forum’s Global Competitiveness Index have remained stable in recent years. T&T ranked 89th out of 140 countries in the 2016 edition of the index, unchanged from 2015, and up from 92nd in 2014. However, its performance in the 2017 edition did fall slightly to 94th out of 138 countries.

Sphere Of Influence 

The country’s effort to strengthen political ties and expand its presence in export markets in recent years also bodes well for economic recovery. Already an important exporter within CARICOM, T&T is now looking to expand its presence to new markets, particularly in Latin America. The country signed a partial scope trade agreement with Panama in October 2013, which came into force in 2016, granting it preferential market access, and is currently in negotiations for similar agreements with Chile, Cuba and Venezuela. The negotiations are expected to open up strategic export opportunities.

Budding political and economic ties with Venezuela in particular should ease some of the recent pressure on the energy sector. In May 2016 the governments of T&T and Venezuela signed a memorandum of understanding and framework agreement for cooperation within the energy sector to explore the development of cross-border gas fields. Discussions are ongoing for the supply of gas to T&T from two fields in Venezuela: the Dragon Field, located 15 miles from Trinidad and the Loran-Manatee Field, the largest cross-border field. According to Imbert, plans could be ready as early as the first half of 2017. If successful, the deal could provide some relief to shortages currently affecting upstream petrochemicals operations in T&T.

Insecurity

Outside of the economic realm, insecurity remains the leading social challenge in T&T. Addressing the nation on December 25, 2016, Rowley declared that crime prevention remained the country’s highest priority, as a wave of murders brought the issue to the forefront. While the T&T Police Service (TTPS) reported a 6.7% decrease in crime statistics in 2015, the number of murders has continued to rise. According to the TTPS, 420 murders were recorded in 2015, up from 403 in 2014, while local media reported a total of 463 murders in 2016 in a rising trend over the past five years. On a comparative basis, the average annual murder rate in T&T was recorded at 25.1 murders per 100,000 inhabitants from 2000 to 2010, according to the Inter-American Development Bank.

The high incidence of murders is linked primarily to gang and drug-related activity in certain urban areas. According to the UNDP Council on Hemispheric Affairs 2013 report titled “Gangs Are the New Law in Urban Trinidad and Tobago”, some 100 criminal gangs have been identified in the country with links to varied criminal activity, including weapon smuggling and fraud. In Tobago, murder and theft continue to hinder the prospects of further development of the tourism sector, an issue highlighted in 2014 and 2015, with two violent incidents of murder and theft targeting British and German couples on the island.

Tackling Crime

Since taking up office, Rowley’s government has increased funding for national security. In September 2016 the Cabinet approved a $17.5m transfer to the Criminal Gang and Intelligence Unit of the TTPS for the purchase of equipment to increase intelligence gathering and law enforcement capacity. During the announcement, Rowley told local media that the “government will sustain its resourcing of the police and other security agencies to allow them to better engage in crime prevention and detection”. The TTPS is also nearing completion of a new strategic plan that will guide law enforcement operations for the 2017-19 period. Among the complex challenges facing the current administration are an overburdened legal system, stretched police force, overcrowded prisons and bureaucratic resistance to change.

Constitutional Reform

On the political front, 2017 could prove to be a decisive year for Tobago’s autonomy. In October 2016 the Tobago House of Assembly (THA) formally accepted a draft bill for constitutional reform. The draft bill is due to be debated in Parliament in 2017. If approved, the bill would see Tobago drop its current status as a ward within T&T and instead be granted equal status with Trinidad. In addition, the draft bill would significantly expand the THA’s executive and legislative powers (see analysis).

Established in 1980, the THA remains Tobago’s main governing body, tasked with administration of local affairs, though it has limited executive and legislative powers. While demands for greater autonomy have continued throughout the decades, the most recent campaign started after Tobago’s 2013 local elections, in which the Tobago-based PNM, won all 12 seats in the THA. The Forum of Political Parties was established soon after the elections to lead the campaign and hold extensive consultations. The rise to power of the PNM has created the conditions for a national debate. After winning the September 2015 national elections, Tobago-born Rowley said his government would set up a joint select committee to examine the autonomy bill.

Among the most significant changes is that the draft bill seeks the establishment of an autonomous Tobago legislature, which would comprise the House of Assembly and a new second house, with members to be determined by the THA. In addition, the draft bill proposes the establishment of an executive council with substantially expanded powers, which would have greater control over the general direction of the Tobago Island Government and would be collectively responsible for the Tobago legislature.

Outlook

Despite a challenging environment T&T will be looking forward to a number of positive developments in 2017. These include the passage of key procurement legislation, a new revenue authority, improvements to education and health care delivery systems and strengthened ties with key partners, all of which will contribute to lifting the country’s political and economic profile. Over the medium term, prudent financial management, a well-educated workforce and a stable democratic political system bode well for economic recovery. Still, to establish long-term sustainable growth, the country must pursue diversification in earnest, while current efforts to diversify the economy are building the foundation. The twin-island republic will have to address important long-term challenges, which include the impact of climate change on its economy, a potential decline in the use of fossil fuels in the global energy mix over the coming decades, and the rapidly changing global political and economic context.