Home' Trinidad and Tobago Guardian : May 11th 2017 Contents "Our sovereign rat-
and quality and
timeliness of the
authorities' policy responses. Russia's coher-
ent and credible policy response resulted in
the revision of its outlook to stable in October
2016, marking the first positive rating action
for any major Fitch-rated oil-exporter since
the 2014 price shock.
"It is not always clear whether exporters will
maintain policy responses. Fiscal adjustment
has generally slowed as oil prices have risen,
and some of the improvement in break-even
oil prices in Gulf Co-operation Council expo-
sures resulted automatically from lower pow-
er generation costs and falling fuel and utility
subsidy bills. This will be partly reversed as oil
prices recover, to the extent that prices have
not been fully liberalised or brought above cost
The above extract is taken from a report by
the rating agency Fitch published last month.
It serves two purposes.
The first shows that the issues facing T&T are
very similar to many other energy producing
nations. I would venture to suggest that most,
if not all, emerging market energy producers
have seen their credit rating downgraded since
the collapse of energy prices over the past 24
The second reason for the quote is that it
gives an insight into what the rating agency is
looking for from energy dependent sovereign
A close examination would suggest that it is
not materially different from S&P and Moody's
although, that is not to say there may not be
nuances in the rating from one agency to the
The report from Fitch quoted above was a
review of 14 major oil exporting countries in the
Emerging Europe, the Middle East and Africa
(the EEMEA group).
Fitch provided an average oil price forecast
for 2017 of US$52.50 per barrel. It further went
on to state that with the exception of Kuwait
all of the other countries in the review would
require a higher level of oil prices in order to
balance their budgets.
Yet higher oil prices is the one thing that
does not seem to be on the cards. During the
course of last week, oil prices fell by just under
nine per cent and, in the process, eliminated
the upward market moves that resulted from
the OPEC price cuts.
One day it almost represented a mini flash
crash falling from around US$45 to US$43 in
under half an hour. Moves such as these don't
just reflect market fundamentals but also some
element of anxiousness on the trading floor.
That anxiousness spilled over in the com-
modity markets where iron ore prices fell
double digits during the week, nickel fell to
an 11-month low and copper to a five-month
low. This then had a knock-on effect on the
currency market with the traditional com-
modity currencies such as the Canadian and
Australian dollar falling to 14- and four-month
One should clearly appreciate the intercon-
nectedness of the global financial markets and
that interconnectedness lends to a very fragile
environment in the face of growing levels of
To get a sense as to how difficult it is to
navigate this environment, last week's price
action came a week after the World Bank issued
its April Commodity Markets Outlook where
it forecast oil prices holding steady at US$55
per barrel in 2017; increasing to an average of
$60 in 2018. The World Bank also forecasted
natural gas prices to gain 15 per cent this year.
The truth is with so many forecasts out there
it is very easy to find a forecast that suits a
purpose and amplify that accordingly.
At some point, though, a forecast has to
come to reality for a successful outcome. So
hanging your economic fortunes on a forecast
that proves to be incorrect is equivalent to a
candle blowing in the wind.
Whether it is US$52, US$55 or US$60,
whether natural gas prices rises or falls, the
reality for us is a structural shift in the ener-
gy market and such structural shifts require
structural adjustments to expenditure.
For the avoidance of doubt I use the term
structural to reflect a very persistent and, some
might even argue, permanent change. It should
be clear this is what we face.
By now, therefore, the debate should be well
away from whether oil and gas prices will rise
next year and to what extent. It does not matter.
The only caveat to this is that at some stage
the revenues from the major energy compa-
nies operating in T&T will rebound from its
current level due to the tax concessions that
were provided over the past few years in order
to restart our stalled exploration programme.
From my vantage point, I would suggest
that from a revenue perspective our two most
challenging years are behind us. The question,
though, is will we be able to generate the nec-
essary economic momentum going forward in
order to overcome the inertia caused by the
past couple years of economic decline?
As I pointed out two weeks ago, we have had
negative or flat year-on-year movements in
gross domestic product since 2009. An in-
crease in gas production later this year, some
increased revenues from the energy sector next
year will only serve to mask the structural chal-
lenges that we are yet to deal with properly.
This is not new ground.
In 2008, oil and gas prices also collapsed.
In 2009, we had the collapse of CL Financial.
In 2009 into 2010, there were significant
challenges for foreign exchange and, if memory
serves, we faced rates of TT$ 6.50 to US$1.00.
There was rationing, there was economic
uncertainty. The administration that came into
power in 2010 immediately suggested that T&T
was not an automatic teller machine for the
wider Caribbean. The unions were told, in no
uncertain terms, that there was no money for
any significant wage increases.
In the ensuing years, energy prices rebound-
ed somewhat and so did the broader commodi-
ties space on the back of China's unprecedented
Opportunity was also there at that time for
us to change our expenditure profile, to lower
the level of transfers and subsidies, to improve
tax collections. There were two moratoriums
on taxes during this period. An attempt was
made to adjust the fuel subsidy but there was
no further follow through.
As the political capital waned during the
term of the last administration so with it was
the conviction to make the appropriate fiscal
adjustments to keep the economy on solid
Will history repeat?
If our revenue position improves even slight-
ly in the coming years, we run the risk of making
the same mistake again as the political capital
of the present administration wanes in the face
of a number of unpopular measures.
Let me be clear. We have had cuts to expendi-
tures out of necessity, that necessity being that
we simply did not have the revenues to spend
any more. However, we have not had the struc-
tural changes to our expenditure profile that
is required and we run the risk of 2012 to 2015
being repeated in some way in 2018 to 2020
if our revenue profile changes for the better.
Further, the manner in which we have raised
revenue via taxation, in my humble view, will
likely reduce the velocity of money in the local
economy which, in turn, will lead to the fall off
in confidence and sentiment. In the coming
years it places an even higher burden on the
government to spend to move the economy
Appreciate that it is this reliance on govern-
ment spending and the initial crowding out of
the private sector by government when things
were good that has us in this situation.
A couple weeks ago I wrote a piece entiltled,
"We can't just muddle through"
. Yet, muddling
through is exactly what we seem to be doing
under the present trajectory. The problem is:
with each rebound after a muddle through we
would have increased levels of borrowing and
reduced savings and other buffers from which
to continue to muddle.
If T&T was represented in a stock chart it
would be a line descending from the upper right
to the lower left. If you held a stock like that
you would sell it.
In country terms that is represented in the
currency where there is hoarding and selling
pressure. Once we keep muddling through
these pressures will remain.
That's the risk that we continue to face as
we move forward.
Ian Narine can be contacted via email at ian.
BG14 | FINANCE
BUSINESS GUARDIAN guardian.co.tt MAY 11 • 2017
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