In addition to the real and perceived negative socio-economic effects of low oil and gas prices and record low production levels, in Trinidad and Tobago (where God is alleged to have been born/naturalised), weak macroeconomic statistics have given rise to public disagreement on whether the economy is in a recession. It may therefore seem unrealistic at best, to hope for a reliable, official macroeconomic outlook, which could provide a reasonable basis upon which to plan our affairs over the next year or two. As such, and strictly in empathy (i.e. not to be confused with ‘advice’), I summarise here my best guesses for possible macroeconomic events and trends (i.e. not to be confused with forecasts) over the next 12- 18 months.
It is quite possible that the (official) data could eventually confirm that the economy contracted in 2015 by roughly 2%, and a further 1-1.5% contraction is possible in 2016. Further, Standard and Poor’s could place the Government of Trinidad and Tobago’s sovereign credit rating on a negative outlook, and/or issue a downgrade from the current ‘A’ rating. The ratings action would be due largely to the broad-based negative effects of lower oil and gas prices, and record low production levels, which contribute to weaker overall macroeconomic performance and outlook, fiscal deterioration and higher debt, external deterioration, and a negative growth outlook. Other rating agencies may act similarly.
The TTD depreciated by 1.14% y/y to average TTD6.43:USD1.00 in November 2015 – the first y/y depreciation since May 2014. It is possible that the TTD/USD exchange rate could continue to depreciate in 2016, hopefully at a measured pace in order to minimise overall price and macroeconomic instability.
The level of official reserves could also decline further, having fallen by USD1.466 billion or 13.2% y/y in October 2015 (to USD9.644 billion or 11 months of imports) – the steepest y/y decline in any one month, in this century. However, it is unlikely that the level of reserves will fall below the three-month import cover precautionary benchmark.
The October 2015 Fiscal Budget estimated the fiscal deficit for FY2014/15 at roughly TTD7 billion, but if this figure is revised to include all arrears on obligations incurred during that fiscal year (on back pay to public servants for example), the deficit could approach the revised FY2014/15 target of TTD11.7 billion announced by the former Prime Minister in January 2015.
It is likely that in March 2016 when the Minister of Finance gives his half-year update for the FY2015/16 budget, he could announce a smaller budget, closer to TTD55 billion, and maybe a larger deficit, based on lower non-energy tax receipts as a result of economic contraction. Recall for a moment that the October 2015 budget announcement stated “growth is not expected to exceed 1.4% for the next two years”. This suggests that non-energy tax revenue estimates may have assumed higher growth projections, and could therefore prove over-optimistic. In addition, if the Government receives weaker than budgeted capital/financing inflows from IPOs, dividends and divestment for example, there could be higher than budgeted borrowing.
The number of employed persons is falling, having declined by 20,400 in one year to March 2015, as unemployment increased to 3.7%, after holding at 3.3% throughout the latter half of 2014. In theory, the unemployment rate could increase further as private sector layoffs continue and as government make-work programmes are trimmed in an effort to reduce fiscal spending. The public sector wage bill could become a target for reduction if the Government adheres to its plan to balance the budget by 2018, in which case we may see public sector layoffs and/or adjustments to compensation.
A sovereign credit rating downgrade, higher Government borrowing, tighter TTD liquidity, and further increases in the Repo rate may push domestic interest rates up further. As such, based on the usual effects of overall economic contraction, slower private sector credit growth is possible as well as crowding-out from higher government borrowing. Moreover, current lower liquidity levels in the banking system mean that additional hikes in the Repo rate could have a more immediate and direct impact on interest rates, and by extension, private sector borrowing, spending and therefore, overall economic activity.
Presumably, the Central Bank of Trinidad and Tobago (CBTT) could continue to raise the Repo rate, until policymakers realise that the past 18 months of so doing has not satisfactorily stemmed capital flight (which was the stated intention of this policy action), and may have even exacerbated the current economic contraction. It is arguable that the net USD outflow via capital flight (as evidenced by a capital account deficit of USD803 million in the first half of 2015) is currently driven by a number of factors including a stronger USD, more available external investment instruments, uncertainty associated with domestic USD availability and the exchange rate, confusion and lack of confidence in current monetary and foreign exchange policy, and lack of confidence in domestic macroeconomic and fiscal performance. Until these and/or other issues are meaningfully addressed, higher domestic interest rates alone could continue to prove relatively ineffective in convincing liquidity to remain within our borders.
Higher interest rates are not likely to be effective in addressing current supply-push inflation, prompted by higher import costs (on domestic importers’ loss of credit terms with overseas suppliers, persistent USD tightness, and TTD depreciation against the USD), and higher super gasoline and diesel prices (which exert a one-off/temporary inflationary impact). Higher interest rates can reduce demand-pull inflation (which arises when higher demand prompts retailers to raise prices), by reducing borrowing and encouraging saving versus consumption. As such, it is probable that inflation will climb in early 2016, assuming tightness persists with the public availability of USD, if the TTD continues to depreciate against the USD, if the majority of VAT exemptions on food items are removed in January 2016, and if the fuel subsidy is further reduced, pushing super gasoline and diesel prices up again. The inflation rate may be tempered later in 2016 by slower private sector credit growth and the resulting lower levels of private consumption and investment spending, softer private consumption spending based on higher food and fuel prices, reduced fiscal spending, and overall recessionary conditions.