As a challenging year drew to a close, Trinidad and Tobago’s newly elected Prime Minister Keith Rowley told the nation to expect a combination of growth-oriented solutions and difficult spending decisions in 2016.
As an energy-rich nation, where hydrocarbons typically account for more than 40% of GDP and 85% of exports, T&T felt the full weight of falling oil prices in 2015.
Rowley, who led the Peoples’ National Movement party to victory in September’s general election, said in his end-of-year address that the government would find a balance between stimulating the economy and limiting public debt.
Measures to consolidate public sector finances, he added, would include spending cuts and changes to the tax regime.
Finding a balance
The government’s 2015/16 budget, which was drawn ahead of the beginning of T&T’s fiscal year on October 1, gave priority to absorbing the fall in oil and gas revenues. The government is looking to reduce the fiscal deficit from 4.2% of GDP in 2014/15 to 1.8% in 2015/16.
According to Rowley, the government will begin its public sector cost-cutting drive by addressing what he described as “waste and inefficiencies” at government bodies and state-owned enterprises.
Each organisation, ministry and statutory body, including the Tobago House of Assembly, has been asked to submit proposals before the end of January 2016 to reduce their operating costs by 7%.
On the revenue side, the government plans to boost collection through the reintroduction of land and building taxes and a revised value-added tax (VAT) regime in February. While the VAT was reduced from 15% to 12.5% and the ceiling for VAT registration was increased by nearly 40%, the list of eligible items has been broadened.
The Ministry of Finance also plans to step up efforts to collect arrears of taxes, which Rowley characterised as “considerable”.
Perhaps most significantly, the Rowley administration aims to tap up to $1.5bn of the country’s Heritage and Stabilisation Fund, reportedly worth some $5.5bn, to cover the projected fiscal shortfalls in 2016 and 2017. The government first plans to separate the “Heritage” and “Stabilisation” components of the fund in order to ensure the bulk of the sovereign wealth fund is treated as long-term savings.
In an effort to spur growth, the coming months will see the government step up its focus on diversifying T&T’s economy, both within and outside of the hydrocarbons industry.
In the energy sector, Japan’s Mitsubishi Group, T&T’s Massy and the National Gas Company of T&T are slated to begin work on a new methanol and ether complex, worth a reported $1bn, in 2016. Construction is forecast to be completed in mid-2018, with operations to begin later that year.
A national drive announced in Rowley’s December address, aimed at galvanising private sector housing construction through a government programme, is also expected to spur non-hydrocarbons growth. According to the prime minister, the initiative will speed up the process from construction to sale, encouraging private sector developers to participate.
Nonetheless, the challenges facing the government remain significant, with Jwala Rambarran, then-governor of the Central Bank of T&T (CBTT), declaring in December 2015 that the country was officially in recession after a reported four consecutive quarters of declining growth.
In his speech, Rambarran said T&T was stuck in a low-growth cycle and vulnerable to further declines in energy prices and production. Citing CBTT data, Rambarran said the economy was expected to contract by 1.5% in 2015, after having grown by 1% in 2014.
According to IMF estimates, however, the country registered positive growth in 2015, with GDP expanding by around 1% over the period, and is projected to record a modest recovery in 2016, with 1.4% growth forecast. Estimates from the country’s Central Statistics Office were more modest, with GDP expected to expand by 0.2% in 2015.
Ratings agency Standard & Poor’s has warned that prolonged low energy prices and weak GDP growth could see T&T’s credit rating downgraded in the next two years, after revising its long-term outlook from stable to negative in late December.
Private sector concerns
In the year ahead, the country’s exchange rate will likely remain a top concern for the private sector. According to Rolph Balgobin, president of the T&T Manufacturers Association, uncertainty over the CBTT’s exchange rate management has negatively impacted business confidence.
While the new government has replaced the much-criticised system previously used for allocating US dollars to T&T’s private sector, business leaders have continued to voice concern that the exchange rate – which is a heavily-managed float – has remained virtually unchanged at around TT$6.40:$1 despite the sharp fall in energy export revenues.
Maintaining the current exchange rate has put greater pressure on the country’s foreign currency reserves, which fell by 13.4% between end-2014 and November 2015 to reach $9.6bn, or 10.9 months of imports.