THE foreign exchange market in Trinidad and Tobago continued to face pressures as the fall in export earnings as a result of the terms of trade shock has not been matched by a fall in foreign exchange demand, the Central Bank of Trinidad and Tobago (CBTT) has said in its latest Monetary Policy Report (MPR) May 2017 released last Friday.
Not only did the demand for foreign exchange (forex) not subside, but imports rose, driven by Government spending on crude oil imports to feed the State-owned Petrotrin refinery, as domestic crude oil production fell, the MPR said.
“Imports rose to an estimated $9,421.7 million, surpassing the 2015 level by 9.5 per cent, but this was mainly reflective of higher energy imports. Higher refining activity at the Petrotrin refinery along with lower production of crude oil locally led to increased crude oil imports for use as feedstock to support refining activity. The estimated value of energy imports grew by 44.4 per cent to $3,507.6 million,” the MPR said.
“The services account deficit widened by 4.0 per cent, reaching $1,163.5 million, mainly driven by a lower transport surplus. Air passenger fares, which is one of the larger components of domestic transport earnings, declined by approximately 8.1 per cent. In addition, both the number of visitors as well as expenditure by tourists fell when compared to 2015,” the MPR said.
So the “Central Bank continued to support the market with bi-weekly sales of foreign exchange to authorised foreign exchange dealers; in the first five months of 2017 the (CBTT) sold US$810 million to authorised dealers, which represented an increase of 41.6 per cent from the comparable period of 2016. The weighted average selling rate of the TT dollar was US$1=$6.7802 in May 2017 unchanged from December 2016,” said the MPR.
HSF withdrawals and borrowing
The MPR said: “The Central Government drew down on the Heritage and Stabilisation Fund (HSF) and borrowed domestically to help finance its operations during the first six months of the fiscal year. The Government withdrew US$251 million ($1.7 billion) from the HSF on March 16, 2017. This was the second drawdown from the HSF since it was established in March 2007. In addition, the Government borrowed a total of $3.5 billion on the domestic capital market through the issuance of three bonds.”
Government also announced July 13, it will be borrowing US$300 million from the Andean Development Corporation (CAF).
Responding to the development, University of the West Indies (UWI) financial economics Lecturer Vaalmikki Arjoon said: “Amid a widening fiscal gap anticipated at six per cent of gross domestic product (GDP), our spending pattern requires further adjustment. For instance, in the first half of this fiscal year, an unwarranted 77 per cent of our expenditure comprised of wages and salaries and transfers and subsidies. This must be lowered. It is quite likely that we will continue to borrow to meet the fiscal gap in the short to medium term.”
19% drop in revenue
Arjoon added: “Although we will see some uptick in revenues from increased gas production courtesy Juniper, Angelin, Trinidad Onshore Compression (TROC) and Sercan, a portion of this revenue will inevitably be used to service existing debt. This (CAF) loan will cause our total net debt to surpass $90 billion and take the debt-to-GDP ratio to approximately 63 per cent. This represents a 32 per cent increase in our debt since June 2014. This is against the back drop of a 19.2 per cent drop is fiscal revenues in the first half this fiscal year relative to the same period in fiscal 2015/2016, weakened exports and a current account deficit expected at -6.3 per cent of GDP this year.”
The CBTT agreed, in part, with Arjoon in its MPR May 2017. “On the domestic front, the economy is expected to recover modestly in 2017, mainly as a result of new energy sector output during the latter half of 2017. Much of the prospect for growth rests upon three natural gas projects: the Trinidad Onshore Compression (TROC) project, the Sercan field and bpTT's Juniper project which is likely to start production in the third quarter of 2017. The additions to natural gas production will be welcomed by the downstream LNG and petrochemical industries which will benefit from more reliable gas supplies for their operations,” the CBTT said in its outlook.
The MPR recalled that in April 2017, Trinidad and Tobago's sovereign credit rating was downgraded by two international rating agencies.
On April 21, 2017 Standard and Poor's lowered the long-term rating of the country to BBB+ from A-. Later, on April 25, 2017 Moody's Investors Service downgraded the country's issuer and senior unsecured debt ratings to junk at Ba1 from Baa3.
“Our debt repayment capacity will be further questioned should we continue our current expenditure pattern and borrowing rate without placing emphasis on spending finances productively. In the coming years, some investments on national development by the state and the private sector will have to be foregone, in favour of repaying debt,” Arjoon forecast.
Deterring business activity
Arjoon said: “Some Government policies will also have to be altered to be able to repay debt. The state may raise taxes or use some of our national savings to raise funds to repay loans, which could back-fire as this promotes further capital flight, urging individuals and entrepreneurs to invest their excess funds elsewhere instead of locally, and deter business activity. Altering policy for debt repayment or lowering the fiscal deficit also creates a sense of heightened uncertainty, as businesses will not be aware of which direction government policy is headed, causing them to be extra-cautious, and restrain new investments and business expansion, due to fear of, for instance, increased taxation. With a fall in investment and business activity come worsened productivity, employment and continued poor export performance. Indeed, the International Monetary Fund (IMF) forecasts our current account imbalance will persist all the way to 2022, at -2.74 per cent of GDP.”
Arjoon advised: “It is imperative we reduce this reliance on debt. At March 2017, contingent liabilities accounted for over $30 billion or 33 per cent of our debt burden. This is equivalent to 56 per cent of our national budget. Many state enterprises have been unprofitable for years and it is likely that the state will at some point have to pay-off part of these liabilities, which will deprive some areas of capital investment in the national budget. Selling some state enterprises might enable the state to rid themselves of a portion of this and future contingent liabilities, thereby lowering the debt burden, while raising funds through the sale. In the hands of the private sector, their organisational behaviour, institutional quality, corporate governance, cost management and profitability could significantly improve, allowing the state to gain from tax revenue over time.”
He recommended: “Expenditure can also be cut by lowering the number of directors on state board and the amounts which they are paid in stipends and benefits. The salary levels/benefits of some senior staff members in state enterprises and various ministries also needs to be re-evaluated, especially in this time of sluggish revenue earnings and dwindling productivity.”