“We cannot spend more than we earn”
On April 8, 2016, the minister of finance delivered the mid-year fiscal review, ending months of speculation on several issues, while evidently igniting new anxieties and debates on others. The minister noted that in March 2016 alone, the government entertained annual review visits by the International Monetary Fund (IMF), Moody’s, and Standard and Poor’s – all of whose reports we now eagerly anticipate, although downgrades are likely. The Central Bank of Trinidad and Tobago (CBTT) recently issued its March 2016 economic bulletin, which included several important fore-casts, some of which the minister mentioned in his review. Notably, the Central Bank is expecting inflation to average 6.2% and unemployment to average 4.1% this year, while the economy will con-tract by 2.3% in 2016, up from 2.1% in 2015.
In the financial year (FY) 2015/16, the government originally expected to collect TT$5.5 billion in tax revenue from the energy sector — roughly TT$20 billion less than usual. Notwithstanding this, total expenditure was then budgeted at TT$63 billion, up 2% from revised estimated expenditure in of TT$61.8 billion in FY 2014/15. In his mid-year review, the minister cut budgeted expenditure for FY 2015/16 by roughly TT$4 billion or 6%, to TT$ 59 billion, most of which would be recurrent spending. The proposed Inter-American Development Bank (IADB)- funded mass-transit system mentioned in the initial budget was deemed unfeasible at current energy prices, and was therefore shelved.
The original FY 2015/16 budget had projected a 10% or TT$5.5 billion year over year (y/y) increase in fiscal revenue (despite energy prices collapsing) to TT$60.3 billion, including one-off capital revenue/financing items such as IPOs, divestment and extraordinary dividends, totaling TT$13.4 billion. However, tax revenue from the energy sector came in over TT$2 billion lower than anticipated in the first half of FY 2015/16, while non-oil corporation tax and VAT revenues were about TT$1 billion softer than expected, based on weak compliance, the economic slowdown and lower than budgeted energy prices and production. As such, the minister is now expecting current revenue at roughly TT$44 billion in FY 2015/16, which is TT$2.9 billion or 6.1% less than the TT$46.9 billion originally budgeted — TT$2.4 billion less from the energy sector, TT$1.0 billion less from non-energy companies, and TT$3.0 billion less from VAT. Based on the arithmetic presented in the minister's mid-year review, it appears that capital revenue/financing items are now expected to yield roughly TT$8.7 billion — down TT$4.72 billion or about 35% less than originally budgeted, and total fiscal revenue is now budgeted at TT$52.7 billion, which is 13% or TT$7.6 billion less than originally budgeted.
Overall fiscal deficit
The original FY 2015/16 budgeted deficit of TT$2.8 billion, or 1.5% of GDP, would have been 60% lower than the FY 2014/15 estimated deficit of TT$7 billion, or 4.2% of GDP. The revised deficit, after one-off capital transactions/financing items of TT$8.7 billion, is now budgeted at TT$6.7 billion or 4% of GDP — just slightly below that of the previous fiscal year. Public expenditure rose over the last five years from TT$46.7 billion in 2010 to TT$62.0 billion in FY 2014/15 — an in-crease of 33%, mostly devoted to wages and salaries, transfers and subsidies. The original plan to balance the budget by 2018 has been revised. The minister now plans that by FY 2019/20, only capital spending will be financed by borrowing.
Budgeted oil and gas prices
The original FY 2015/16 budget used an oil price assumption of US$45 per barrel (/bbl) and a mix of gas prices to properly reflect our markets, including Henry Hub of US$2.75 per million British thermal units (MMBtu) and Indonesian LNG at US$8.00/MMBtu. Both prices and production levels for oil and gas turned out lower than anticipated in the first half of FY 2015/16, and the budget will now be based on oil at US$35/bbl, and natural gas at US$2.00/MMBtu. The minister expects oil to reach US$55/bbl by 2018. According to the IMF’s recently released World Economic Outlook, West Texas Intermediate (WTI), Brent and Dubai Fateh (which it uses as Trinidad and Tobago’s oil benchmark) averaged US$50.79/bbl in 2015, and is forecast at US$34.75/bbl in 2016, US$40.99/bbl in 2017, and US$44.52 in 2018, based on future prices. The IMF also reported that natural gas (Henry Hub spot prices) averaged US$2.61/MMBtu in 2015, and is projected at US$2.07/MMBtu in 2016, US$2.52/MMBtu in 2017, and US$2.58/MMBtu in 2018. According to the Ministry of Energy’s latest publication, crude oil production stood at 72,190 barrels per day, and natural gas production stood at 3,810 million standard cubic feet per day (MMcf/d) in January 2016. This represents an 8.2% decline in crude oil production in January 2016, versus the average for 2015 at 78,630 b/d, and a steady downward trend in production is apparent. The natural gas production level in January 2016 is just below the 2015 average of 3,835 MMcf/d with fluctuations.
The Central Bank estimates that the economy contracted by 1% in 2014, 2.1% in 2015, and is projected to contract further by 2.3% in 2016. Following a recent visit, the IMF had announced its projection for a 1% contraction this year, and online IMF data show contractions of 1.76% in 2015 and 1.1% in 2016. The IMF is expecting positive growth to return in 2017 however, at 1.78%, intensifying to 2.7% in 2018, according to their online statistics.
Unemployment The Central Bank reported that the number of employed persons fell from 637,900 in the third quarter of 2014, to 620,200 in the third quarter of 2015 — a 2.8% y/y decline. The unemployment rate increased from 3.3% at the end of 2014 to 3.4% in September 2015, and is expected to average 4.1% in 2016. The increase in the unemployment rate may appear subdued, based on lower labour force participation rates. From October 2015 to February 2016, retrenchment notices increased by 756 y/y according to the Central Bank, mainly in the construction, finance and petroleum sectors. Additionally, there was a 6.3% y/y decline in the number of job openings for the same period.
Fuel subsidies The gradual phasing out of the fuel subsidy continues, as the minister – as he had also done in October 2015 – increased super gasoline and diesel prices by 15% each, to TT$3.58 and TT$2.00/litre respectively, which translated into a 32.23% cumulative increase since October 2015. At current crude oil prices, neither super nor premium gasoline is subsidised. At US$45/bbl, the unsubsidised price of super gasoline is TT$3.61/ litre, and TT$3.13/litre for diesel. At current prices, diesel attracts a subsidy of roughly TT$1.00/ litre. Empirical research has shown that a 5% y/y increase in diesel and super gasoline prices, ceteris paribus, triggers an overall inflationary impact of 2.6% per annum. Assuming a linear relationship between changes in fuel prices and changes in the overall price level, a 32.25% cumulative increase in fuel prices since October 2015 could lead to an almost 17% increase in the overall price level, all other factors remaining constant. In reality, the decline in government spending, higher unemployment and overall economic contraction, should temper the inflationary impact of the difficult but necessary reduction in the fuel subsidy. Given that minerals and fuel lubricants are Trinidad and Tobago’s primary import, averaging 38% of total imports from January 2004 to September 2015, and machinery and transport equipment is the second, at 26% of total for the same period, the reduction in the fuel subsidy and the increase in taxes on vehicles with engines larger than 1,999 C-C are much needed policy initiatives to stem the import and overuse of fuel, which has broad-based negative implications. In the 12 months to November 2014, there were 20,732 new motor vehicles sold, up 13.4% y/y — the highest ever, according to Central Bank data. Since the 12 months to November 2015, there have been four consecutive months of y/y decline in sales of new motor vehicles, which reached 19,743 in February 2016 — the lowest level since June 2014.
CBTT data show that in March 2016, the TT dollar depreciated 3.51% y/y to a monthly average selling rate of TT$6.5944 to US$1.00. The minister announced that the TT dollar will depreciate by no more than 7% from the September 2015 level of TT$6.3725, taking the exchange rate to TT$6.8186 to USD1.00, presumably by the end of the fiscal year. This forward guidance on the exchange rate should reduce the level of uncertainty, and speculative demand for US currency. Reserves stood at US$9.37 billion or 11 months of imports in March 2016, down 12.5% or US$1.336 billion y/y, marking six consecutive months of y/y doubledigit declines in reserves. The Central Bank is projecting reserves at US$8.5 billion or 10 months of imports by the end of 2016, signalling a net drawdown of 13% or US$1.263 billion in reserves during 2016. The Central Bank injected US$1.125 billion in the first half of FY 2015/16, down 8.9% y/y from the US$1.235 billion injected in the first half of FY 2014/15, while at the same time, conversions (purchases of US currency from the public) fell by over US$257 million or 9.8% y/y, according to Central Bank data. This adds some much-needed context to the minister’s statement that “more and more” foreign exchange is being injected into the system. The IMF recently stated, “Against a backdrop of foreign exchange shortages that have intensified since the beginning of 2015, the recent sharp falls in energy prices are further reducing the available supply…the current account of the balance of payments is estimated to have registered a deficit of over 5% of GDP in 2015, after years of surpluses. The modest pace of depreciation should help to improve the current account. On the other hand, speculative and precautionary motives are reportedly increasing demand for foreign exchange. In the circumstances, greater flexibility in the foreign exchange market would be critical to resolving the foreign exchange shortages.” The minister noted that nominal GDP was at the same level in 2015 as it was in 2012 — at TT$165 billion — adding to the apparent confusion surrounding the cause for the increased demand for US dollars. The minister should note that in Trinidad and Tobago, fiscal spending is a major driver of consumption — and, by extension, imports — and has increased by TT$8 billion, or 14.8%, from TT$53.8 billion in FY 2011/12 to TT$61.8 billion in FY 2014/15. In addition, the government has incurred deficits each year since FY 2008/09, which is known to directly and indirectly contribute to deficits on the current account of the balance of payments. Put simply, balancing the fiscal budget is critical to reducing the demand for US currency. Hoarding of US dollars was mentioned by the minister and discussed widely in the media, but it should be noted that in January 2016, the public’s US dollar deposits with commercial banks stood at US$3.63 billion, up a mere 0.67% y/y, representing roughly 23% (steady for about two years) of the total deposit base.
Headline inflation stood at 3.5% in February 2016, with core inflation at 2.1%. As mentioned earlier, the IMF has projected inflation to average 6.2% this year, while the CBTT’s projection is at 8.7%. The increase in inflation is expected based on the pass-through effect on retail prices, the TT dollar depreciation, the introduction of VAT on previously exempt/zero-rated items, and higher fuel prices. This upward pressure on prices would be tempered by the effect of lower consumption, based on the overall economic slowdown, slower credit growth, and lower fiscal spending.
Gross public sector debt had been expanding in the double digits y/y, from TT$97.2 billion in September 2014 to TT$114.7 billion in September 2015 — an increase of TT$17.5 billion, or 18%, in one year. This brought the level of gross public sector debt from 56% to 68.4% of GDP over the same period. In the fourth quarter of 2015, debt repayment and amortisation saw the level of gross public sector debt post its first y/y decline in several years at 2.4% y/y, bringing the level to TT$106.6 billion — the lowest since September 2014, according to Central Bank online data.