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‘Budget 2019: An area of light?’

Thursday, September 27, 2018
Photo by:Allan Ganpat

“It is entirely possible that Government’s lack of transparency on Petrotrin is due to the fact that it simply does not know or does not have the answers to the increasing number of questions being asked from every quarter. Under normal circumstances, the answers to such questions would be found in a full, thorough and wide-ranging impact assessment. However, if any such assessment was done prior to taking the decision to close the refinery, that too resides in an area of darkness surrounding the Petrotrin decision.” September 23, 2018 Express Editorial.

In his last three budget speeches, the Finance Minister lamented the parlous financial state he inherited, complicated by the negative revenue impact of the fiscal incentives given by the previous administration. In the 2018 midterm review, he foresaw growth prospects and improved revenue flows resulting from the improvement in gas production as a result of those incentives. That view is now complicated by the proposed refinery closure, which adds to uncertainty regarding economic growth and transformation of the T&T economy.

The energy model is changing as a result of increased international competition in the LNG market segment and the changing fortunes of the energy industry. Moreover, the upstreamers are now in a position to reduce the monopolistic profits previously enjoyed by the National Gas Company (NGC). The balance of power has shifted as the upstreamers are now in a position to demand higher prices arising from the sale of gas to the petrochemical sector, constricting NGC. The acrimonious dispute with CNC exemplifies the adjustment process to come.

Disputes notwithstanding, the economy is still expected to grow as a result of the increased gas output. The gas shortage has eased and will only be eradicated in 2019 when Angelin comes onstream. Economic growth is projected by the IMF to range between 1-2% for the next five years, whilst the energy sector is projected to remain the main contributor to GDP at 30% and the main generator of foreign exchange. With the exception of the petrochemical sector (which now forms part of the non-energy manufacturing sector), growth in the non-energy sector is expected to remain flat. This is important as the non-energy accounts for the majority of unemployment. The unemployment rate should grow by at least 1% in the next 12 months due to severance of Petrotrin employees. Core inflation is projected to remain relatively flat with foreign exchange reserves declining to three months import cover by 2023

Because of the recovery in the energy sector, we can expect the Government’s revenue position to improve from the weak $38 billion projected last year to a more robust $46-47 billion in 2019. But the budget will still be in deficit relative to the current $50 billion-plus expenditure profile. Therefore, whilst the revenue position has eased, the country’s economic position is still very tight, and the circumstances require caution. The IMF projects fiscal deficits for the foreseeable future (i.e. to 2023). In this regard, Ewart Williams, former Central Bank Governor, warned at the National Awards Ceremony on Republic Day that the debt position is an important constraint limiting the fiscal space.

Therefore, the key areas of focus have been predetermined. First, establishing and communicating the key priorities and rebalancing the allocations between priorities. Second, communicating the policy initiatives, backed by incentives, to facilitate economic growth in targeted sectors. Third, how the debt position will be managed and how should the deficit be financed in a way that allows debt sustainability. The fourth and most politically important variable would be the measures proposed to address the unemployment rate.

The final variable and perhaps the most important cannot be addressed by any fiscal device in a Budget speech; the foreign exchange rate. The Central bank has all the tools at its disposal to address the exchange rate. Technically we have a floating rate system; in practice, we have a dollar peg. The TT dollar is pegged to exchange rate which managed the Central Bank in a narrow band.

As a result, the exchange rate is overvalued. This has ensured that forex demand is bloated by hoarding and capital flight all facilitated by a thriving peer to peer market. Trading arrangements in the banking sector clearly favour some clients above others. This has stymied confidence in the foreign exchange market and business confidence generally. Increasing domestic investment in new initiatives will fall flat unless this matter is addressed. Addressing this matter will not necessarily lead to inflationary pressure, as most businesses are restocking and have repriced inventory at costings which reflect a market rate higher than that quoted by the banking sector.

What could affect inflation will be the price of fuel. Most economic activity requires energy in one form or another, transportation in particular. The comments made to date regarding the future fuel arrangements lack transparency and certainty and there are more questions than answers. Who will import? What will be the pricing arrangements? How will the government taxes at the pump work?

All budgets are important, this one more so as it marks a watershed in our energy arrangements caused by the closure of Petrotrin. In times of uncertainty, leadership and management become even more significant.


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