Trinidad and Tobago's economy struggled over the last year. The country's Gross Domestic Product (GDP) contracted by 2.4% in the first quarter of 2011 with zero growth in the second quarter and a further contraction of 2.6% in the third quarter. Other indicators suggestive of sluggish activity include the excessive levels of liquidity in the system and persistently low interest rates. While the final figure is still pending, the change in real GDP for the whole of 2011 is estimated at -1.4%. However there are some signs that a recovery may be underway and several prominent institutions have taken note of this.

Last month, the credit ratings agency Standard and Poor's released their most recent report on Trinidad and Tobago in which they stated their expectation that the government would be successful in stimulating economic growth in 2012. Standard & Poor's expects growth of 1.7% in 2012, a forecast also shared by the International Monetary Fund - both institutions perhaps taking their cue from the Ministry of Finance who first suggested a 1.7% growth rate in the FY 2012 Budget Statement. Research provider Business Monitor International was a bit more optimistic with a projection of 2.0%, the forecast from the Central Bank of Trinidad and Tobago was less enthusiastic at 1.5%.

As weak as the figures may be, perhaps they hint at a possible recovery in Trinidad & Tobago? Not so fast. It should be well known by now that the petroleum sector is the most important and single largest contributor to our GDP. According to the Review of the Economy for FY 2011, this sector was expected to account for 45.3% of GDP for the period. Because of this significant weighting of the energy sector in determining our GDP, an increase in overall GDP of 1.7% in 2012 does not necessarily translate into near 1.7% growth rates in all sectors of our economy. The overexposure of the country to the energy sector is compounded by the fact that just about 5% of the entire labour force is employed in the energy sector so that the benefits to the economy (from increased personal consumption) may be further limited.

Following the maintenance shutdowns by several energy companies in late 2010 and 2011, the energy sector experienced contractions of 1.94% and 1.3% during the Q4 2010 and Q1 2011, growth returned to the energy sector in the second quarter of 2011 but the sector once again contracted in Q3 2011, this time by 5.6%.

Going forward, forecasts for energy sector growth are fairly positive. The Central Bank expects a rebound in the sector in 2012 owing to an increase in exploration activities and a return to normal production levels following the shutdowns. Standard & Poor's noted that exploration activity should increase in 2012 following the award of two deep water exploration and production blocks in 2011 and new competitive bid rounds this year. Business Monitor International expects that over the short-term the energy sector will remain relatively stable with declining production being supported by their positive outlook on energy prices.

However, there are some risks to this positive outlook. All the reporting agencies have highlighted the significant threat of US shale gas production. While Trinidad and Tobago has weaned itself off of the US as our primary LNG export market, the concern is that over time the US may become a net exporter of natural gas and may be in direct competition with our own natural gas exports. The other caveat is the risk of lower energy prices, possibly resulting from worsening economic conditions in Europe and the United States.

Returning to the positive news, there are also some healthy signs from the non-energy sectors. The Government remains the single largest employer and consumer in the economy and as such it is encouraging to note that several large projects are expected to get underway in the current year. The highway extension to Point Fortin, CariSal and AUM 2 plants are among some of the more notable projects.

There are more concrete signs than just plans and proposals. Credit consumption appears to be on the increase once again (see Figure 1). Most notable is the recovery of business lending which experienced the deepest decline (-11.3% in July 2010) and has taken the longest to return to growth. It is however, too early to determine whether or not this growth will be sustained. Readers should keep in mind that because the worst declines occurred around July 2010 it is perhaps not at all surprising that there would be growth in July 2011 given that this data represents year-on-year changes. Put in another way, it might just be that business lending in July 2011 could not have gotten much worse than it was one year earlier in July 2010 and resulted in a zero to positive growth rate being recorded. Nevertheless the positive developments are encouraging and may indicate the return of business confidence.

Another positive development hailed by the reporting agencies was the resolution of the outstanding CLICO issue. Standard & Poor's expects that the "smooth rollout of the revised CLICO plan should bring needed stabilization to the financial markets and boost consumer confidence in general" while the IMF noted that the "completion of the restructuring of CLICO claims will also be important to defuse remaining uncertainties".

The reports also highlighted several features of the economy which place us in a good position for growth. Despite the much criticised and heavily politicized levels of government spending of the past and present administration, the country can boast of a relatively low general government debt level which is forecasted by Standard & Poor's at 40.9% for 2012. For the sake of comparison, this compares against 71.5% in Barbados, 124.1% for Jamaica and 93.1% for the United States.

Trinidad and Tobago was also praised for its robust foreign currency reserves and Heritage and Stabilisation Fund which were valued at US$ 13.8 billion. These reserves provide a buffer against fluctuations in energy prices, foreign exchange rates and import prices. According to the Central Bank of Trinidad and Tobago, our foreign reserves at the end of 2011 provided us with 11.9 months of import cover. Again, for the sake of comparison, this compares against just about five months of cover in both Barbados and Jamaica.

Of course one should not get the idea that there were no criticisms coming from the external agencies. Our energy dependence aside, the IMF noted the potential for "possible delays in the implementation of the public sector investment programme". It also highlighted the need for the "strengthening of the tax effort through ongoing improvement of tax and customs administration and a broadening of the tax base". Standard and Poor's emphasised the threat posed by the government's "slow pace of reform implementation, legislation enactment, and decision-making" while Business Monitor International highlighted the susceptibility of the economy to fluctuations in capital flows. The Central Bank of Trinidad and Tobago included the lack of major private sector investments in the economy as one of their concerns.

It is, of course, much too early to tell how the economy will perform in 2012. But the potential for Trinidad and Tobago to do well appears to be there once we can meet the many challenges ahead. Following three years of bad economic news, it's good to know that we might finally have some positive news to revel in.

All information contained in this article has been obtained from sources that First Citizens Investment Services believes to be accurate and reliable. All opinions and estimates constitute the Author's judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by First Citizens Investment Services in any form whatsoever.

First Citizens Investment Services and/or it employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer or a solicitation to buy or sell.