Saturday, December 16, 2017

It all depends on a big 'if'


Central Bank Governor Jwala Rambarran, centre, flanked by Trinidad and Tobago Chamber of Commerce president Andrew Sabga and Chamber chief executive Catherine Kumar at the Chamber's luncheon meeting last Tuesday at its Westmoorings headquarters. —Photo: Anisto Alves

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Next year could be a good news/bad news economic scenario for Trinidad and Tobago.

Central Bank Governor Jwala Rambarran maintains a cautiously optimistic outlook for the New Year 2013.

"There are some underlying signs of an incipient recovery this year. Preliminary estimates from the Central Bank suggest a turnaround in the Trinidad and Tobago economy, with real GDP growth in the third quarter of 2012," he said last Tuesday.

He spoke of the recovery as he delivered the feature address at a Trinidad and Tobago Chamber of Industry and Commerce Luncheon Meeting on the country's economic outlook for 2013 at the Chamber Building, Westmoorings.

All major sectors, energy, finance and construction should give the economy a boost into the new year.

There have been indications of a modest improvement in the pace of project implementation at the level of the central government.

The recent launch of the CLICO Investment Fund (CIF) on November 1 should give a cautious boost to overall confidence and reinforce the economic growth trend, he said.

"Based on these underlying assumptions and the turnaround in the third quarter, the Central Bank is maintaining its projection for real GDP growth of around one per cent for all of 2012, and growth is expected to strengthen to 2 1/2 percent in 2013," Rambarran said.

But, with this silver lining, comes a cloudy caveat.

"Bottlenecks in project implementation (for example, failure to settle contractor payment of arrears or to agree on which projects are suited to the P3 model) also represent a serious downside risk to the envisaged growth outlook. The recovery in 2013 depends heavily on a strong fiscal impulse," he said.

It's not all doom and gloom for Trinidad and Tobago; it all depends, however, on a big "if".

"If executed as envisaged, the 2012/2013 budget could stimulate a firm recovery in construction activity and, by extension, economic growth through certain public construction projects and tax incentives for construction of residential and commercial buildings. However, contracts would need to be awarded soon and the pace of project execution would need to be accelerated if the planned programmes are to be implemented on schedule. Continued delays in settling the long-standing payment of arrears to contractors could dampen these expectations," Rambarran said.

Inflation should be under control for the upcoming year, even in the face of a financial package focused on stimulating growth, mainly because considerable slack still exists in various parts of the economy, as evidenced by excess capacity in manufacturing and other activities.

However, holding up construction projects could lead to escalation in these prices. Wage settlements would also influence the pace of household spending. At the same time, drought conditions in the United States could push up international prices of grain which could spill over to import costs of food in Trinidad and Tobago.

"Barring these weather-related setbacks or a new round of commodity price shocks, inflation (driven primarily by food price inflation) is projected to remain below double digits in 2013," he said.

Ironically, the one measure the government had been touting as the panacea for the spiraling cost of living, removal of value added tax (VAT) on food, was dismissed by the governor as a one-off impact of 2.5 per cent for the average consumer.

The other major change to impact cost of living, the reduction in the fuel subsidy, was not expected to have any short term inflationary blow—yet.

"The higher price of premium gasoline could increase the retail price index by around 0.5 per cent in the first round, with the impact concentrated on the users of higher-end vehicles unable to substitute to other fuels. However, as the petroleum subsidy is cut across the board over the next few years, the cost of transportation and some related goods and services will increase," he said.

Despite the fair outlook for 2013, the biggest setback for growth in the domestic economy is potentially the shortfalls in the global economy.

"The first major setback to the global recovery relates to policy uncertainty surrounding resolution of the sovereign debt crisis in the Euro area. Failure of European policymakers to deliver on their commitments to deeper fiscal and financial integration would not only worsen fears about a black swan scenario in which Greece exits the Euro zone, but also set in motion destabilising forces in which persistent fiscal and debt problems spread virulently from Euro area periphery to the core.

The second setback revolves around the ability of President Obama and the Republican controlled Congress to resist the temptation for political brinksmanship and to agree on a budget plan that avoids the looming 'fiscal cliff.' If expiring tax provisions and expenditure cuts come into play, growth in the United States could fall to zero or contract. Moreover, US public debt is rapidly approaching its statutory limit which, if not resolved, would curtail the options available to the US Treasury to stave off a debt default," he said.

Rambarran noted the government's fiscal programme for 2012/2013 is being implemented against the backdrop of unsettled economic conditions globally and several years of negative or negligible domestic growth.

"In this context, the Bank supports the government's approach to maintaining a fiscal stimulus via temporary deficits over the next few years.

At the same time, we firmly believe that it is important for the Government to respect its own plan for moving to fiscal balance over the medium term. Indeed, these plans should be accelerated once conditions permit, in order to avoid a further build-up of national debt," he said.

He expressed some concern for public debt management and sustainability.

"The public debt trajectory has important implications for the Government as it would reduce the room for manoeuvre of fiscal policy (given the need to devote more resources to servicing the debt). It is estimated that the public debt (Central Government plus Government Guaranteed debt, excluding open market operations bills) could reach close to 50 per cent of GDP over the course of financial year 2012/13. External debt is projected to increase from just over eight per cent of GDP to about ten per cent over the next financial year 2013.

I therefore believe that the Central Government has the opportunity to take advantage of the current very low interest rate environment, high liquidity and appetite for government paper to finance its operations cost-effectively on the domestic market. Foreign borrowing also offers the benefit of increasing foreign exchange availability and if financed on the international capital markets, reintroducing Trinidad and Tobago to global investors. In any event, it is crucial that the Finance ministry coordinate its borrowing schedule with the Central Bank to allow for proper liquidity management," he said.

Rambarran noted the government needs to address its management of energy wealth.

"Budget 2013 addresses the issue of falling crude oil production by reducing the Supplemental Petroleum Tax (SPT) rate on shallow water marine exploration and by granting a five-year tax holiday on deep water exploration. While there could be a boost to exploration and drilling in the near term, the long production lag implies that the positive impact of these tax measures on oil output would be felt in the medium term.

Meanwhile, three hydrocarbons discoveries from Bayfield, Petrotrin and bpTT have been announced in 2012 which are expected to positively affect energy output in coming years," he said.

He cautioned against the increasing euphoria that has accompanied these discoveries.

"The government must resist the easy seduction of another energy boom. Instead, it must treat any of the associated revenue windfalls from these hydrocarbon discoveries as temporary, placing the windfalls as additional savings in the Heritage and Stabilisation Fund, rather than imprudently consuming them. And it must move on with the diversification thrust that it has already kick-started if it wants to secure lasting prosperity for all," Rambarran added.