Home' Trinidad and Tobago Guardian : October 19th 2014 Contents OCTOBER 19 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
COVER STORY | SBG5
were down 4.5 per cent last week and 22 per cent this year.
Global supply rose by almost 910,000 barrels per day (kb/d)
in September to 93.8 mb/d, on higher output from both Organization
of Petroleum Exporting Countries (OPEC) and non-OPEC countries,
the IEA said. "Compared with a year earlier, total supply stood
2.8 mb/d higher, as OPEC supply swung back to growth and ampli-
fied robust non-OPEC supply gains of 2.1 mb/d. Non-OPEC supply
growth is expected to average 1.3 mb/d 2015," said the IEA.
Howai said government established US$80 per barrel as the
benchmark for oil for "a number of reasons" and gave two:
• The first is that Saudi Arabia, the main swing producer in
OPEC, needs oil at US$92 per barrel to balance its budget, he said.
"In addition most shale oil producers require prices at US$85
per barrel to break even. Prices much below this level result in
curtailment of investment and output. This would result in prices
moving back up in the short term," Howai said.
He said government sees these as "two important barriers for
our price and therefore we budget at US$80 which we think is
a reasonably safe price. I should also point out that our information
is that international lenders have been using a price of US$90 to
evaluate investments. This doesn t mean that they are correct or
that they would not adjust that number but it suggests that the
available information points to a price of US$90 as being, on
average, a reasonable one for the long term at the moment."
He said if the price comes down below the US$80 per barrel
level, government would have to determine whether the effect is
temporary or likely to be prolonged. "For the time being, there are
two issues that we are monitoring. The first is the Russian situation.
We believe that the Saudis have reduced prices based on the overall
global situation of supply and demand but we also note that Russia
needs oil at US$100 per barrel and we believe that the US is com-
fortable with a price of US$88 which will bring pressure to bear
until the recently imposed sanctions on Russia over the Ukrainian
situation begin to take effect," Howai said.
• The second issue, he said, is the OPEC meeting on November
27 and this move may be important for establishing output and
price when trying to bring the more "recalcitrant" members in
line. Howai said a price of US$90 keeps oil investments going,
does not price US shale oil out of the equation, addresses certain
geo-political issues and does not significantly impact the global
economic situation in a negative way.
Howai: Low oil price likely temporary
"We believe that given the foregoing that a price at close to
US$80 - if it does get to that point - is unlikely to be prolonged
but we continue to monitor the situation, as markets can continue
to surprise," he said.
Asked about government s plan to cope with a sub-US$80/bbl
price, Howai said: "Regarding measures to address a price below
US$80, based on the foregoing analysis we do not see this as likely
to be a prolonged situation and, in any event, unless the price of
gas and related derivative commodities also show a significant
decline, it is unlikely that we would have to do anything."
In the run up to the 2015 election, Howai was also asked if it
is conceivable that instead of cutting spending in the face of a
reduced oil price, government would instead issue more local
currency debt (bonds) to finance the potentially wider deficit. He
said government would do no such thing. On the same day of the
reading of the 2014/2015 budget, the Central Bank of T&T
announced the issue of a $2.5 billion bond to finance the 2013/2014
budget deficit. However, the issue was under-subscribed by $1.1
billion, or as industry analysts would put it, "failed."
No plan to borrow to make up shortfall in election year
Government also considers the worst case scenario, Howai said,
and "in such a situation, the short answer is that we would not
borrow to make up the shortfall. We have already begun an exercise
to address expenditure and that process will be accelerated if prices
do fall below US$80 for an extended period and if gas prices also
In the 2015 overview of its World Oil Market Forecast released
in September, the PIRA Energy group predicted Brent prices will
average US$91.65/bbl, down almost US$12 from 2014, while WTI
declines US$13 to US$83.60/bbl.
What the IMF said
The International Monetary Fund 2013 Article IV report on T&T
had said: "Although a sharp decline in international energy prices
would likely have little short-term effect on output, the fiscal
position and external reserves would suffer, although the budget
is based on quite conservative assumptions about energy prices."
IMF staff estimated that a gradual decline in energy prices of 30
per cent from their 2012 level until 2015 would result in "a fiscal
deterioration of 3.8 per cent of gross domestic product (GDP)
during the period vis-à-vis the passive scenario, while net inter-
national reserves (NIR) would fall by more than US$0.6 billion by
2015 compared to the baseline."
The IMF said a modified, more extended shock scenario that
prolongs the lower 2015 prices until 2018 would further weaken
the fiscal stance, leading to higher public debt by about 10 percentage
points of GDP, while the current account surplus would be about
half that of the baseline in 2018.
"There is an urgent need to re-engineer the composition of
spending. Subsidies and transfers are on an unsustainable path,
eating up a rapidly growing share of total spending, from 45 per
cent in fiscal year (FY) 2007/2008 to 53 per cent in FY 2012/2013,"
the IMF said.
"While some subsidies and transfers can be justified as improving
equity or fostering positive externalities, others are poorly targeted
at rich and poor alike and some may impose negative externalities.
Of particular concern are costly fuel subsidies, which dispropor-
tionately benefit the wealthy and contribute to severe road congestion
that is materially harming productivity," said the IMF.
The IMF noted that the fuel subsidy is partially covered by a
special levy of four per cent on the value of crude oil produced
by large producers but in FY 2011/2012, less than one fifth of the
total bill was paid for with proceeds from that special levy.
Following nearly a decade of rapid
growth, Latin America and the
Caribbean has decelerated over
the past three years. The slow-
down has intensified further in
recent months, as growth in several economies
came to an effective standstill in the first half
of this year.
In our recent Regional Economic Outlook
Update, we revised our growth projections
downward, to only 1.3 per cent in 2014 and
2.2 per cent in 2015. Why has growth slowed
down so sharply? And what is needed to get
the region up to speed again?
Brakes on growth
The brakes that have held back activity in
the region appear to be partly external and
On the external side, some important trad-
ing partners have not been growing as fast
as before. In particular, slowing demand from
China, along with a rise in global supply, has
ended the boom in commodity prices. For
the commodity-exporting economies of the
region, this has removed an important positive
Meanwhile, the recovery in the US economy
has taken longer than expected to materialize,
delaying positive spillovers to Mexico and
other economies with close ties to the US,
including tourism-dependent Caribbean
Beyond external headwinds, domestic fac-
tors have also acted as a brake on growth.
Many economies in Latin America reached
their productive capacity limits in recent
years, and without improvements to produc-
tivity and the capital stock, it will be difficult
to rekindle strong growth going forward. In
the Caribbean, growth in tourism-dependent
economies has continued to disappoint.
While the improving conditions in the US
and the UK will shore up visitor arrivals,
long-standing competitiveness issues and
deteriorating policy frameworks in some
countries stand in the way of a robust recov-
ery. Prospects for Caribbean commodity
exporters are better, but still disappointing
compared to earlier expectations given soft-
ening commodity prices and the challenges
of boosting growth outside of the commodi-
ties sectors. Although fiscal risks in T&T are
contained, they have generally grown else-
where in the Caribbean.
The road ahead: uphill, with risks of slip-
Moreover, increasing external risks are
clouding the horizon. If China were to decel-
erate more than currently projected, demand
for the region s commodity exports would
weaken even further. Financial market volatil-
ity could also spike and capital outflow pres-
sures emerge if, for example, US interest rates
were to rise more abruptly than expected.
Indeed, such a concern was a major moti-
vation cited by the Central Bank of Trinidad
and Tobago when it recently raised its key
monetary policy instrument, the repo rate,
by a 0.25 per cent. Policymakers will need
to keep their eyes closely on the road ahead
and make sure to be ready for rougher ter-
Tuning up the engines of growth
What else should countries do? External
conditions are what they are. What policy-
makers can influence is their economies pre-
paredness and capacity for sustained future
growth via structural reforms. Improving the
performance of education systems is one
important priority in most countries in the
Higher investment in infrastructure---within
tight budgetary envelopes in most coun-
tries---will also be needed, and our advice for
T&T has emphasized the importance of shift-
ing public spending from consumption to
investments for the future. Improving the
business environment is an important pre-
condition for raising private investment, cre-
ating jobs and boosting growth.
In this regard, the Trinidadian government
has made a concerted effort to remove imped-
iments to doing business, and this has had
some payoff already in a three-notch improve-
ment in the country s ranking on the World
Economic Forum s Global Competitiveness
Although the future of the energy sector
in T&T looks promising, recent sharp declines
in oil prices further reinforce the case for
policies to help wean the economy s depend-
ence on energy.
The IMF has, in addition to the structural
reforms noted above, emphasized the impor-
tance of making the public service more effi-
cient and improving the functioning of labour
markets and the production of economic sta-
While the government is pursuing fiscal
consolidation to achieve budget balance, the
IMF has advocated that the government
should move beyond that towards fiscal sur-
pluses, in order to save more of the country s
natural resource endowment for future gen-
erations. Of particular importance would be
the gradual elimination of fuel subsidies,
which are costly (around TT $6-7 billion a
year, similar in magnitude to what the gov-
ernment has spent in recent years on health),
disproportionately benefit the wealthy,
encourage smuggling, and lead to serious
traffic congestion. These sets of reforms could
help Trinidad and Tobago to secure a more
prosperous future by putting the country on
the road to more durable and diversified
Continued from page 4
IMF: Oil plunge reinforces
case for T&T's diversification
Government urged to alter spending
Elie Canetti, IMF mission head to T&T
IMF MISSION HEAD TO T&T
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