Trinidad and Tobago’s mid-year budget review announced new initiatives by the government to boost revenues, cut expenditures and raise financing to correct the fiscal imbalances brought about by changes in the energy market. Inevitably, many of these initiatives will have consequences for both T&T’s equity and debt capital markets.
Equity Market Hurdles
Increases to several taxes and duties were announced in April 2016, aimed at raising government revenues. If successfully implemented, these taxes could change the spending patterns of consumers, with knock-on effects for the companies providing the goods and services covered.
First, a 50% increase for motor vehicle taxes and Customs duty on private motor vehicles with engine sizes exceeding 1999cc was announced with immediate effect. Potentially this could reduce consumer demand for larger-engine (and higher-priced) vehicles, while also stoking price increases in smaller-engine vehicles. Stocks which could be specifically affected include Massy Holdings and Ansa McAl, each of which owns extensive distribution rights for new vehicles across several brands. However, first quarter sales of new vehicles in 2016, at around 4300 units, have been almost identical to sales in 2014 and 2015 despite the announcement of a recession. It remains to be seen whether the mix of vehicles sold (luxury, economy and mid-grade) has changed. The effect of the change in taxation on unit sales – if any – should be observable in subsequent data points.
Second, in May 2016 taxes on alcohol and tobacco products are set to increase. Companies which may be directly affected by this include Angostura Holdings, a leading Caribbean rum producer, and the West Indian Tobacco Company, a producer and marketer of tobacco products. Both firms generate considerable revenues from the T&T market.
The gradual and managed depreciation of the T&T dollar could also have an impact on the operations of listed companies. In the mid-year review the T&T minister of finance suggested that the dollar would not be allowed to depreciate beyond TT$6.82 per USD. Were this to be achieved, it would mean that the T&T dollar would have depreciated by approximately 7% in the fiscal year 2015/16.
The impact of currency depreciation will likely be an increase in the cost of imports. This could affect almost all listed securities on the country’s stock exchange, including distributors of consumer durables, fast-moving consumer goods and manufacturers who import raw materials for processing and finished goods. Indirectly, the banking sector, via reduced demand for credit, could also be impacted. The extent to which firms can pass on increased costs will be tested, particularly in a weaker consumer environment characterised by current higher lending rates and rising unemployment.
Overall, the state’s revenue generating initiatives may impact consumer disposable income and discretionary demand. The reallocation and redeployment of this purchasing power will set the tone for T&T’s equity markets over the next 12 to 24 months.
Monetary Policy Changes
As the government embarks on its borrowing programme to meet deficit funding needs, monetary policy adjustments may be required to facilitate cost-effective financing. First, the primary reserve requirement of the Central Bank of T&T (CBTT), currently at 17%, could be adjusted downward to release excess reserves into the financial system. A second initiative may well involve lowering the benchmark repo rate, given its limited impact on stemming capital outflows.
It is possible to argue that the repo rate would have pushed up prime lending rates in the financial system (140 basis points between September 2014 and March 2016) as the CBTT began its rate hike cycle, while the average ordinary savings rate at banks has not budged from 0.20% over the same period.