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Making the new year happy

Thursday, January 5 2017

Last week we looked at the performance of the Trinidad and Tobago economy for 2016. We reflected on the fall in oil prices and the effect that, and other changes, had on oil revenue. In addition, the significant increase in fiscal deficits and the use of one-off measures to bridge the gap in revenues were pointed out. The fall in oil prices also affected foreign exchange reserves and access by businesses to foreign currency. Ultimately market forces influenced a five percent depreciation in the local currency. The closure of firms and the rise in unemployment were also a part of the economic landscape. What does 2017 have in store for us?

Perhaps we can start with the world economy which - based on projections by the Economic Commission for Latin America and the Caribbean (ECLAC)) - is expected to grow at around 2.7 percent, an improvement over the 2.2 percent recorded for 2016. In large measure this performance will be based on an upturn in both emerging and developed economies. India is projected to have a growth rate of 7.7 percent for 2017. China’s growth will slow to around 6.5 percent. In the Caribbean average growth is projected to be around 2.4 percent , up from the low of 0.3 percent estimated by ECLAC for 2016. This improvement will come from a moderate uptick in commodity prices, the OPEC deal, new gas fields coming into production in Trinidad and Tobago, the gold mine in Suriname, oil royalties and gold production in Guyana, rebound in agriculture and increase in tourism.

Business Monitor International, a Fitch Group Company, has estimated that economic growth in Trinidad & Tobago (TT) will rebound in 2017, based on higher energy prices and new natural gas production capacity coming online, to grow 2.0 percent in 2017, from what some estimates place between 2.3 percent and 4.4 percent negative growth in 2016. It is anticipated that several new offshore projects, including the large Juniper project, will come online, offering the strongest gain in production in a decade. It is forecast that West Texas Intermediate (WTI) will rise from an average of approximately USD44.0/ bbl in 2016 to USD53.5/ bbl in 2017. There is a view that economic growth will be accounted for in large measure by exports, since it is expected that the government’s fiscal consolidation will weaken private and public consumption, while a low business sentiment will constrain private sector investment.

A rather crude description of the way the economy functions is as follows: the government channels revenues from oil sales into the rest of the economy through transfers, public consumption, and employment. With the hydrocarbon sector experiencing a combination of weak production outlook and structurally lower oil prices, the economy will, increasingly, come to depend on private consumption to drive growth. It is expected that private consumption will rise from TT$112.7 billion in 2016 to TT$118.2 billion. This increase may not be sufficient to replace the significant fall-off in investment in the energy sector.

Government consumption will rise marginally, constrained in large measure by fiscal consolidation underway and low revenues from the energy sector. The use of debt issuances and assets held in its sovereign wealth fund to maintain expenditures may prevent any deterioration in Government consumption.

Fixed investment is forecasted to see fixed capital formation increase from TT$25.5 billion in 2016 to TT$26.8 billion in 2017. While this is a nominal increase, care must be taken in interpreting this data since as a percentage of GDP, fixed investment reached 28.9 percent of GDP in 2005, but began declining as the bulk of TT’s most accessible oil reserves were developed.

In 2016 it was projected to be 17.9 percent. Increasing the investment flows to the non-energy sector is the key going forward.

The OPEC oil deal and the apparent agreement by non-OPEC members to reduce output will depend on all parties being honest brokers. The moment any country decides to break the agreement for any reason, or shale producers, who exited the market, decide to re-enter because the price is now right could result in prices ceasing to rise or, worse, falling. If either were to occur, the resulting lower oil prices will place depreciatory pressure on the Trinidadian dollar (TTD) over 2017, resulting in a deterioration of the country’s terms of trade and weaker investment inflows. Since we have a managed float it can be expected that there will be continued tight control over foreign exchange sales by the Central Bank. Such a course of action may mitigate any significant depreciation of the currency.

However, reflecting a significant fall-off in market supply of foreign currency, it is felt that the bank may permit the TT dollar to gradually depreciate over 2017. Running models to ascertain the possible rate through which the currency may be allowed to depreciate suggests a range between TTD6.80/USD to TTD7.25/USD in 2017. The higher range could be far worse if oil and/or gas price were to fall precipitously or average much lower than the budgeted figure for 2017.

Any weakening of the TT dollar can see in response, an increase in the price of imported items. This can lead to a possible acceleration of inflation, cutting into household purchasing power. As 2017 is on us, there are forces over which we have no control that will influence our macro-economic aggregates. However, in our hands rests the requirement for efficiency, productivity, and innovation, all very essential to getting our economy on a sustainable growth path.

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