Home' Trinidad and Tobago Guardian : October 6th 2015 Contents Tuesday, October 6, 2015 www.guardian.co.tt Guardian
New Government, Old Challenges
Commentary by: First Citizens Research & Analytics
In May 2010, the People's Partnership had secured an overwhelming victory over
the People's National Movement (PNM), with a resounding 29 seats out of a total
of 41, giving them a two-thirds constitutional majority in the parliament. Five
years later, following a very heated campaign period, the country went to the polls
on 7 September 2015 and the incumbent coalition force was ousted from power
after just one term in office, as the PNM snatched victory with a 23/18 majority.
As a result, the country witnessed the swearing in of its eighth Prime Minister,
The Honorable Dr. Keith Rowley on 9 September 2015, with the rest of the new
Cabinet sworn in two days later. The Honorable Colm Imbert was appointed to
serve as Minister of Finance.
The new administration has entered office at a time when the economic landscape
of Trinidad and Tobago (T&T) has deteriorated markedly against the backdrop of
a sharp decline in commodity prices worldwide. Furthermore, the global economy
has not yet fully recovered from the almost decade-old 'Great Recession' and
the lingering effects continue to affect T&T. The major advanced economies of
the world are yet to show sustainable signs of improvements in their respective
economies and the trajectory of the major emerging markets has deviated and
taken a turn for the worse. The only clear green shoot globally, is that of the
US, where the US Federal Reserve is only now contemplating tightening interest
rates after almost 10 years of near-zero rates on the back of a stronger macro
economy. According to the International Monetary Fund (IMF) projections in July
2015, world output is likely to grow 3.3% and 3.8% in 2015 and 2016, respectively,
with the US economy expected to drive the advanced economies' rebound.
The T&T economy has weakened severely, on the basis of the plunge in energy
prices on the global market. Crude oil prices have plummeted by 47% since the
start of the 2014/2015 fiscal year, while natural gas prices (as measured by Henry
Hub) fell 43%. The glut in supply of oil and to an extent natural gas was one of
the reasons for the sharp drop in prices, however, lower demand from some of
the larger economies like China has also affected the demand side. As a result of
the softer energy markets, the T&T economy has now recorded two consecutive
quarters of economic contraction. For the first half of 2015, the economy shrank
by close to 2%, according to the Central Bank of Trinidad and Tobago (CBTT),
with the energy sector recording a 3.5% decline, largely due to the protracted
shortfalls in natural gas production. The non-energy sector lost momentum
during the period, recording a decline of around 1% for the period. This is the
first year-on-year decline in the sector since March 2011.
Table 1: Energy Sector Contributions
2012 2013 2014
Share of GDP
41.2 43.4 42.1
Share of government revenue:
Petroleum Profit Tax (PPT)
25.5 20.4 20.5
Supplemental Petroleum Tax (SPT)
Share of Merchandize Exports Receipts
Share of Total Employment
Source: Central Bank of Trinidad and Tobago, First Citizens Research & Analytics
Table 1 highlights the precarious position in which T&T finds itself -- a situation
which has perpetuated for decades. With the country dependent on one sector for
more than 80% of its foreign exchange earnings and close to half of government
revenue, it is evident that urgent measures to stimulate the economy again will be
crucial for the new government. The longstanding appeal for diversification into
other potential foreign exchange earning sectors remain - the benefits of which
are clear especially in the situation in which T&T finds itself. Diversification of the
T&T economy will not happen overnight, but should be part of a wider strategy to
build competitive advantages in other viable sectors.
"Restoring Confidence and Rebuilding Trust: Let's Do This Together"
The budget is based on an oil price of USD45 per barrel and a mix of gas prices to
reflect our markets, including Henry Hub of USD2.75 per mmbtu and Indonesia of
USD8.00 per mmbtu. GDP growth is expected to range between 1% - 1.4% per
year, and the modest expectations are based on the uncertain outlook for the
energy sector and increasing public sector financing constraints.
Based on these assumptions, the budget for the fiscal year 2016 expects the
Table 2: Budget 2016
(In TTD, billions)
FY 2015 (Prov.) FY 2016 (Budgeted)
Total expenditure net of capital repayments and
sinking fund contributions
Overall Fiscal Balance
Overall Fiscal Deficit (In % of GDP)
The non-energy revenue is expected to be boosted by taxation measures,
• Initiate reform of VAT (reduced from 15% to 12.5%, tax base widened)
• Enhance tax collection and compliance
• Reform the fuel subsidy ( 15% increase in diesel and super gasoline)
• Increase business Levy (increased from 0.2% per quarter to 0.6%)
• Increase Green Fund Levy (increased from 0.1% per quarter to 0.3%)
• Phase in Property Tax Regime (revert to existing Property Tax Act 2009)
• Introduce a tax regime for the gaming industry
The government expects to yield an additional TTD5.2 billion from the above
taxation measures and reduce expenditure by TTD340 million by reforming the
fuel subsidy. Further, the government expects to supplement revenue by an
additional TTD13.4 billion through:
• Partial repayment of CLICO relating to the Government's financial support
• Proceeds from the IPO of TT NGL
• Capital repayment from Trinidad Generation Unlimited
• Dividends from the NGC
Easing the FX Pressure
The government plans to request the CBTT to revert to the previous foreign
exchange allocation system as well as to clear the backlog of arrears of foreign
exchange demand. If this is implemented by the CBTT, the foreign exchange
market will ease significantly, assuming that the issue was in fact that of allocation
in the first place.
Much to be Done...
The Budget 2016 is predicated on a cautiously optimistic USD45 per barrel oil price
and a basket of natural gas prices, and forecasts another year of deficit of 1.7%
of GDP. The energy sector is expected to bring in a mere 10% of total revenue in
fiscal year 2016, a far cry compared to the 50% average over the past three years.
Clearly, the non-energy sector is positioned to take on a much more prominent
role in 2016. The new fiscal year budgets that the non-energy sector will yield 55%
more revenue than the previous fiscal year. Whether or not the stated measures
will yield the additional revenues required to bridge the fiscal shortfall remains
to be seen. It is clear though that the various measures mentioned in the budget
must be effectively implemented soon in order to yield the required results.
The budget was silent on financing options for the fiscal deficit. The country's
indebtedness has increased over the past years, given the successive fiscal deficits.
This has reduced fiscal flexibility, and the new government's plans to balance the
budget by fiscal 2018. The Minister has repeatedly stated that the government
will review the fiscal plan at the end of March 2016, and it is hoped that fiscal
prudence will be a recurring theme in order to improve fiscal flexibility especially
in light of the negative outlook for the global energy markets.
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