How are Trinidad & Tobago’s recent economic reforms affecting the growth outlook?
31 Jul 2018
Only a couple weeks ago the IMF released a statement on Trinidad & Tobago, embracing the reforms undertaken by the twin-island sovereign in recent months. After two years of economic recession the IMF projects a return to growth in 2018.
While such a recession is to be expected in a country that is very dependent on its commodities – particularly gas reserves, in the case of T&T – the reforms could be a game changer. The rebound in commodity prices is certainly welcome news, but the progress towards fiscal consolidation and economic diversification is even more significant for the sustainability of the country’s long-term development.
According to the IMF, GDP contracted by 2.6% in 2017, a marked improvement from the 6.1% drop in 2016. While gas production rebounded in late 2017, oil output remained flat. The non-energy sectors also failed to provide respite from the oil and gas crisis, with construction and financial services largely idle due to delays in public projects and a foreign exchange shortage.
Regained optimism amid rebounding commodity prices and regulatory reform
The reforms have brought about improved fiscal performance and a brighter – albeit modest – medium- term economic outlook, which was reflected in our third Oxford Business Group Business Barometer: T&T CEO Survey.
Regulatory changes and the recovery of commodity prices have led local business leaders to adopt a more optimistic perspective. In fact, their forecasts for GDP growth far exceed those of the IMF: while the fund expects nearly flat growth of 0.25% for 2018, 52% of survey participants project expansion of up to 1% for the year, and 15% expect this figure to surpass 2%.
Furthermore, 69% have positive or very positive expectations of local business conditions in the coming 12 months.
This marks a considerable rise from the 57% who had positive expectations in our survey released late last year, and it is a nearly four-fold increase on the 18% figure recorded in our inaugural OBG Business Barometer in T&T two years ago, when the nation was in the midst of an economic crisis.
This wave of recovering optimism is a key factor motivating plans to make capital outlays, with 67% of participants reporting that their company is likely or very likely to make a significant capital investment in the next 12 months.
Tax environment remains competitive despite rising rates
In a recent interview with OBG, Christopher Lewis, president of InvestTT, the domestic investment promotion body, said that the relatively low cost of doing business in T&T makes it a particularly attractive investment destination. “In spite of the recent increase in corporate taxation, with rates going up from 25% to 30%, the country is still very competitive when compared to other jurisdictions in the Americas or the Caribbean,” he said.
CEOs appear to agree, as a notable majority (64%) find the tax environment to be competitive or very competitive on a global scale. This was only a slight decline from 67% in last year’s survey.
Given the global trend of declining corporate tax rates, T&T’s 5% increase is likely to weigh on global competitiveness. However, the government needs to prioritise fiscal strength over the global tax race for the time being.
Indeed, T&T’s focus is internal, but the trends of its Caribbean neighbours remain key to its economic performance. Guyana is perceived to be the largest player by far influencing T&T’s interests, with 56% of respondents naming it as the CARICOM country with the most potential as an export and/or investment destination. This was followed by Jamaica, a distant second with 27%, and Barbados with 9%.
Shortage of soft skills
T&T is also facing a skills mismatch. As we see in many emerging markets where we conduct our CEO surveys, leadership (49%) was cited as the skill in greatest need in the country, followed by customer service (29%).
This indicates a greater perceived shortage of soft skills than that of science, technology, engineering and maths capabilities.
Persistent challenges to address for longer-term growth
With all this in mind, our outlook for T&T is cautiously optimistic: indicators have certainly taken a positive turn, but we must also understand the unique challenges facing the twin-island nation, including volatility in energy prices, pending reforms, delayed public projects and a lack of soft skills.
Furthermore, to maximise growth potential, the government will need to promptly execute the tax reform and address the foreign exchange shortage. C-suite executives agree that these efforts will require consistent measures to diversify the economy and increase the competitiveness of non-energy sectors.