Home' Trinidad and Tobago Guardian : October 22nd 2015 Contents BG14 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt OCTOBER 22 • 2015
It seems that Dire Straits---the band
from the 1980s---was in the T&T Par-
liament for the past couple weeks per-
forming their biggest hit "Money For
Nothing". Certainly those were the two
themes of the 2016 budget debate
where the highlights were how much money
was allegedly spent on nothing and that the
economy is in dire straits, including---but not
limited to---our gas supply situation.
With the T&T economy being where it is
on the back of the sharp decline in oil prices,
it is difficult to separate truth from fear mon-
gering, blame from reality. It will soon become
apparent to both sides that there is a limited
window through which one can reasonably
expect to conduct business, in such a manner,
given the challenges that lie ahead.
Essentially, the Prime Minister is correct in
his assessment that all of T&T needs to work
together and, the truth is, there is much work
to be done.
The gravity of what lies ahead comes from
looking not at the 2016 budget but rather
trying to assess the situation in 2016/17. The
2015/16 numbers show projected expenses of
$63 billion and revenues of $60 billion leading
to a deficit of around $3 billion.
Energy sector revenues are anticipated to
be $5.5 billion, with approximately $13 billion
coming from one-off items such as the TTNGL
initial public offering and a further $5 billion
in improved tax collection. It means that rev-
enues of just $36 billion to meet expenses of
$63 billion (57 per cent) are expected to come
from fairly predictable and recurring sources
in the 2016 fiscal year.
Appreciate, as well, that even the $36 billion
revenue---primarily from onshore tax receipts---
can be challenged as there are already signs
of a slowdown in economic activity. If it were
to take root, it would mean job losses in certain
sectors, reduced business activity and an overall
loss of confidence. All of these factors will
combine to produce lower tax revenues.
It is no surprise, therefore, that the Minister
of Finance will seek to put on a brave face
suggesting that there is a path to a brighter
economic future. Talking up the country s
economic prospects is, in reality, part of his
job. Even more so, due to the call in the budget
for the private sector to step up to the plate
and provide some capital investment into the
We should note that the call to the private
sector is not a new approach. It has been
echoed many times by the previous admin-
istration during their budget presentations.
The reality is: the private sector over the years
has not stepped up to the levels required.
Some of the calls in the past were for capital
expenditure of around $7 billion, which would
supplement the then government s public sec-
tor investment programme (PSIP) of $7 billion.
If government spending is not increasing and
private sector investment does not come on
at the required rate, then it is difficult to see
from where the economic growth is going to
For the year 2016/17, the Minister of Finance
has suggested that if oil prices rebound to
US$65 per barrel, it would mean an additional
$10 billion in revenues.
Adding $10 billion to the baseline $36 billion
gets us up to $46 billion. If expenses were
again held in check in 2016/17, it means that
there will be a $17 billion gap that has to be
Again, if a $3 billion deficit is maintained,
you are talking about $14 billion in increased
revenues from the on-shore sector either
through increased tax collection or through
the diversification initiatives. Getting to $14
billion from both sources may seem aggres-
This is the challenge that lies ahead for T&T
and, if the consultation, collaboration and
inclusiveness are not there so that the entire
population is behind the various initiatives,
then dire straits will move from being a headline
to our reality.
The task that lies ahead can be better under-
stood if we appreciate what is going on in the
oil and gas space, globally, and also in the
global economy as a whole. While US$65 per
barrel oil in 2017 is a good baseline---supported
as the minister mentioned by forecasts from
the IMF, the World Bank and others---there
are significant risks to this forecast and so
prudence will require that other scenarios
come into the discussion.
For the past 15 years, the main driver of
global growth has been the emerging markets
(EM). Prior to the 2008 financial crisis, com-
bined EM growth was in the order of nine per
cent per annum while the developed markets
were chugging along at three per cent. This,
according to IMF statistics.
In the post-recession era, the relationship
was 7.5 to 3.0. However, over the past couple
of years, there has been a convergence where
EM growth slipped towards a four handle while
developed market growth is stuck at a two
To appreciate the point from another per-
spective, the US share of global GDP was 24.2
per cent in 2009 falling to 21.4 per cent in
2011 as expansion in China increased the
emerging market share of the global pie. How-
ever, it is estimated that the US will have a
24.4 per cent contribution to global GDP in
2015 at a time when US GDP is operating at
just above two per cent year-on-year.
Global growth is slowing and it is happening
at a time of unprecedented accommodative
monetary policy across the globe. This is cause
for concern as central banks are now facing
limitations as to how much more accommoda-
tive they can be. Also, the level of debt on a
global basis is extremely high. The uneven
growth path has led to differing central bank
responses. The US dollar has strengthened
against most world currencies and this is where
the problems begin.
Firstly, due to our "managed float," the TT
dollar has also appreciated against most other
Also, because of the decline in oil and gas
revenues, we are likely to earn less US dollars.
By my estimates, over 55 per cent of our GDP
comes from consumption, which speaks to a
thriving retail (import and sell) sector. To the
extent that the access to US dollars continues
to be challenged then this sector is likely to
shrink with the knock-on effect on VAT and
On October 7, the IMF published its Global
Financial Stability Report. In it they noted
that emerging market companies have "over
borrowed" by $3 trillion in the last decade.
This represents a quadrupling of private sector
debt between 2004 and 2014. If global growth
continues to slow and the US dollar continues
to appreciate, this debt burden is likely to
create challenges for many emerging market
countries. It is prompting capital outflows
from many of these countries, further weak-
ening their currency positions.
The most notable economic slowdown is
in China and this has a knock-on impact
across the globe. As China imports less, com-
modity prices have become depressed. So
when iron and steel used in China declines,
countries that produce iron ore suffer. When
China, which accounts for 40 per cent of
global copper demand slows, countries like
Peru begin to face challenges. Then it flows
over to their neighbours and trading partners
and a cycle of contagion ensues.
What should be apparent is that there is a
knock-on effect that is felt across the globe.
A research report from HSBC a couple weeks
ago suggested that in June of this year, global
trade declined by 8.4 per cent year-on-year.
The fundamental question if, in fact, there is
a slow down: what is likely to reverse this
trend. Central Bank policy measures are chal-
lenged and the global debt profile is now worse
than the last debt crisis.
Appreciate that slowing global trade neg-
atively impacts global oil demand and just last
week the International Energy Agency in its
report for October confirmed this reality.
According to the IEA, global demand growth
is expected to slow from its five year high of
1.8 million barrels per day in 2015 to 1.2 million
barrels per day in 2016, closer towards its
long-term trend. Demand is growing but it is
expected to grow at a slower pace.
Supply on the other hand is steady at 96.6
million barrels per day in September. Here the
anticipated fall off in non-OPEC supply---pre-
dominantly coming from reductions in US
production---is being off set by increased OPEC
production through Iran and Iraq.
Logically, OPEC will eventually max out its
production levels and US production will slow
to a point where supply will decrease and
prices will move higher. The rate at which
demand is decreasing is a determining factor
in assessing the date for this reversal.
If global demand does not accelerate in 2017
we could be in dire straits.
Ian Narine can be contacted via email at
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