TT not out of the woods

The gap in natural gas supply and demand may be closing and oil prices may have recently hit US$70 a barrel, but TT's economy is still in recovery.

This is the cautionary note of economist and manager of Republic Bank's Economic Intelligence Unit, Garvin Joefield ahead of Finance Minister Colm Imbert's presentation in Parliament today of the mid-year review of the 2018 budget.

"With the increase in domestic gas production and the rise in international oil prices, the tone in this latest mid-year review will no doubt be more optimistic. However, it is important for the Government to clearly highlight to the population that the domestic economy is by no means out of the woods," Joefield shared with Business Day.

"This is because the improved conditions in the energy sector are not expected to produce rapid improvement in the country’s fiscal accounts, non-energy sector economic activity and foreign currency reserves. Additionally, with the continued growth in shale oil production in the US, it remains to be seen how long the current rally of international oil prices will last. Accordingly, it is important for Government to continue to manage expectations."

TT is at a critical juncture where the right decisions and actions must be made, especially about diversification, he said.

"While increased energy revenue is expected to provide some ease to the domestic economy over the next couple years or so, it is essential for us to remain focused on diversifying the economy and improving the way we manage our resources. This requires the continued commitment of key stakeholders and must be done in an environment where expectations are appropriately managed."

When Imbert announced, last Friday, the date of the review, he told the nation to expect some positive news.

Commenting on this, Joefield said, "Based on the improved performance of the energy sector in the second half of last year and early in 2018, it appears the downturn of the domestic economy bottomed out in 2017. Given current trends in the energy sector, government revenue is likely to increase in 2018, producing a smaller than budgeted fiscal deficit in the process.

"We have already seen a deficit of $228 million during the first quarter of the fiscal year – October to December 2017 – which was less than a tenth of the figure recorded in the same period in the previous fiscal year ($2.5 billion). GDP is expected to expand in 2018 after contracting by 2.6 per cent in 2017 – a figure which has since been revised upward to – one per cent. As a result of this, debt and the fiscal deficit as a per cent of GDP will be revised downward for 2017 and are envisaged to be slightly lower than initial projections in 2018."

In terms of what the presentation will likely include, Joefield said considering the review is not usually the occasion to implement major new initiatives, he doesn't expect the announcement of any new measures.

However, he does expect Government will use the occasion to "adjust downward" its 2017-2018 projections for the fiscal deficit and the debt-to-GDP ratio as well as increase its forecasts for revenue and GDP.

"This will effectively create more space for Government to borrow and in this regard, it will not be a surprise if the review makes provisions for the State to raise additional debt financing in 2018."

Looking at what he thinks should be included, Joefield told Business Day it is important to provide "the usual macroeconomic review and update on key initiatives previously announced by Government."

"However, with several of these initiatives delayed, in some cases for extended periods, I think it would be a good opportunity for realistic deadlines to be set for these items. For instance, when can we expect the Revenue Authority to be operational? When will Government likely be able to benefit from the revenue from the sale of key assets? It is worth remembering that the delay in the sale of Clico assets in the 2016-2017 fiscal year was a major reason why the deficit significantly exceeded initial projections – 3.9 per cent of GDP or $6 billion – to reach 8.4 per cent of GDP or $12.6 billion."

Joefield said making significant headway in these initiatives/projects is important because they will determine, to a large extent, either government revenue streams or the level of activity in the non-energy sector.

The economist also argued that it is important for Government to continue with "much-needed fiscal and other reforms", given previous inefficiency and wastage associated with public spending.

"Although positive developments in the energy sector are likely to push revenue beyond budgeted levels, any upward adjustment in expenditure is not recommended at this time. Having run deficit budgets for a number of years and with net public sector debt above 60 per cent of GDP, returning TT’s fiscal accounts to a sustainable path is of critical importance," Joefield said.