Home' Trinidad and Tobago Guardian : October 15th 2015 Contents We all understand that
the fundamental rea-
son for the economic
challenges faced by
T&T is our depend-
ence on oil and gas
revenues. During times of high oil and gas
prices, we expanded our expenditure to unsus-
tainable levels. To the extent that these expenses
were primarily subsidies and transfers, it meant
that it was both non-productive and pro-cycli-
cal.The issue of pro cyclicality is important to
this discussion. During times of higher energy
prices one would expect a more buoyant econ-
omy and so the need for broad-based social
interventions should be less. History will show
a timeline of accelerated social interventions
under the false logic of "an energy dividend"
to the citizenry.
It is during times of lower energy prices that
you would expect the economy to contract
requiring that social interventions be stepped
up so as to ensure the more vulnerable in
society are taken care of. This requires adequate
levels of savings going into the downturn. The
reality is that, in T&T, we have squandered
our energy windfall. I suggest to you that the
responsibility for this rests across the political
Now we are at a juncture where our savings
by any measure---including but not limited to
the Heritage and Stabilisation Fund (HSF)---
are inadequate and we are projecting deficit
budgets through to 2018 which, if realised, will
give us 10 consecutive years of budget deficits.
We have to look at our current situation in
the context that, up to 2009, we had about a
decade and a half of positive economic growth.
What did we accomplish during that time?
Now we are faced with a decade where our
gross domestic product is likely to be zero at
best. I will not take the time to rehash all the
many warnings and predictions that have come
to pass since the start of this column in 2004.
The issue now is: how do we move forward.
While we were focused on the budget dis-
cussion, a few things were happening around
the world that are worth nothing. The first
comes from a Bloomberg report that suggests
that tax revenue from petroleum extraction in
Norway is down 42 per cent year-on-year. So,
it is not just T&T that is being affected by the
sharp fall off in oil.
The difference here is that Norway is now
taking steps to tap into its Sovereign Wealth
Fund for the first time since its inception. At
the same time, the managers of the fund are
also pointing out that investment returns on
the fund are falling due to low interest rates
and challenges in the stock market.
While Norway has the luxury to tap into
their wealth fund on account of it being in
place for 20-odd years and being over $830
billion, T&T has played politics with our fund.
We talked about establishing one for about
seven years, belatedly establishing one in late
2006 with elections due in 2007.
Then, only seeing contributions to the fund
in five out of its eight years in existence. Both
political parties are guilty of going through a
budget year without making contributions to
Further, it should be clear to all that if we
are not going to tap into our HSF now (and
we should not) then we should enact legislation
to move it to a pure heritage fund and invest
with a long-term horizon in mind as opposed
to investing 60 per cent of the fund with a
short-term mindset and not utilising the funds
over the short term. This issue is very pressing
when you consider the afore mentioned 10
years of budget deficits where the associated
borrowings has to be paid for by future gen-
The extent of the removal of a premium for
geopolitical risk on the oil price should provide
a sharp wake-up call for our local budget plan-
ners. Saudi Arabia recently became the third
largest spender on military hardware in the
world surpassing Russia. They are also the
swing producer for global oil production.
Currently, fighting in Yemen and with ten-
sions escalating on their border with Syria and
Iraq, oil prices have hardly budged.
Two lessons need to be fully understood
from the new paradigm.
Firstly, the major consumer of oil globally,
the US, no longer relies on external sources of
oil.In 2008, with oil prices at US$147 per barrel,
the US was importing around 12 million barrels
per day of oil. Now, that number is less than
five billion and excluding Mexico and Canada,
you are down to half that or 2.5 billion.
Secondly the absence of a geopolitical risk
premium due to the above changes in supply
dynamics means that the super profits that
traditionally accrued to companies in the energy
sector are no longer present. The result is that
from the standpoint of the producer alternative
energy solutions become practical and as tech-
nology advances the cost to the consumer falls
making its use viable and increasingly main-
The combined effect means that the marginal
demand for energy can ostensibly come from
both traditional and non-traditional means
and this places a long-term limit on overall
price appreciation in the traditional energy
In simple English, the energy super cycle
where oil prices rose by 1000 per cent over
the past 15 years or so, is now at an end. In
fact, the overall commodity super cycle, which
has seen everything from copper to corn and
from aluminum to wheat rise significantly over
the past 15 years, is now at an end.
What is likely to happen, at least over the
next five years is that demand and supply
should be very much in balance.
Further in a world where there are pockets
of overcapacity and also pockets of economic
weakness the supply side is likely to hold sway
which effectively places a cap on any significant
A review of the long-term trend in com-
modities prices will show that they tend to
track inflation and given the sharp increases
over the past decade what is taking place now
is a reversion to the mean in the context of
strong deflationary pressures globally.
For T&T this means we really have to rethink
what economic diversification means.
Brought up as an energy economy, we are
conditioned to think that producing widgets
and exporting is the way to go. For our entire
economic history those widgets are crude oil,
natural gas and accompanying derivatives.
Diversification, in that sense, is restricted to
looking for what else we can produce and
Whether it is methanol or aluminum, the
concept is the same but, in reality, this is not
economic diversification since it is all linked
to the same underlying set of risks.
When we talk economic diversification, the
issue is really about developing an onshore
service economy to compliment the off shore
export economy. This year, the majority of our
revenues will come from tax receipts in the
Surely we should be focusing on how we
can generate more of a similar nature. We can
either raise taxes, which is not ideal, or we can
have more activity that generates more tax
revenues at the same tax rate.
Based on the PNM s manifesto an Economic
Development Board will be put in place. Their
first issue should be to determine what is the
population size required for a sustainable
onshore economy based on a thriving services
sector. The manifesto also speaks to reaching
out to the diaspora abroad. This should involve
both the export of local goods to these markets
but also determining how to have people return
While we remain fixated on a produce to
export model countries such as St Kitts and
St Lucia have gone so far as to offer wealthy
individuals around the world the chance to
obtain citizenship in exchange for investment.
Even the US does this so why not T&T? Just
last week at a forum in Monaco, the PM of St
Lucia announced such a measure starting in
We all tout the Singapore model without
realising that Singapore has seven million people
on one fifth of the land space of T&T.
T&T needs to work out how to develop a
larger onshore economy, especially a service
sector. Consistent with this is the issue of
capital market development to fund onshore
activities as opposed to the current reliance
on bank loans at terms that may be prohibitive
to the development of small- and medium-
Now is the time for innovative thinking, not
a rehash of 15-year-old measures. The world
has changed. Have we?
Ian Narine can be contacted via email at
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 15 • 2015
Looking beyond the 2016 Budget
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