THE BACKGROUND INFORMATION
How does the drop in oil prices and gas stagnation affect Trinidad? In 2013, it was recorded that the countrys largest earner of foreign exchange (FX) is the energy sector, providing 75 per cent of the supply. Even though the country produces much more gas than oil on an energy equivalency basis, so that its fortunes are more closely tied to the price of natural gas, the drop in the oil price could still have a negative impact on the governments revenue and thus its ability to reduce the fiscal deficit.
In the 2015 Budget Speech: Total revenue : $60.351 billion Oil revenue: : $21.223 billion Non-oil revenue: $39.128 billion This revenue was based on an expected oil price of US$80/bbl (WTI) and a natural gas price of US$2.75/MMBtu (NYMEX).Despite many warning signs that diversification is necessary (eg. The Barbados Economy), Trinidad and Tobago is seen as having low capacity for innovation. (Graph sourced from The Guardian Newspaper, September 28 2014).
In a publication by the World Development Bank in 2014, it was reported that while the energy sector represented 65.8% of exports and 44 % of gross domestic product it only employed 3.1% of the labor force over the last decade.
Should the drop in Oil Prices been expected? Oil Prices go through cycles.According to Michael Klare (http://www.thenation.com/article/oil-price-collapse-not-just-another-bust-cycle/) Bust cycles like this have occurred before in the oil industry, most notably in the later 1980s and 90s, when a glut of new production from Mexico, Saudi Arabia, the North Sea, West Africa and elsewhere depressed prices and discouraged investment in frontier regions. But eventually demand, much of it from China, overtook supply, again boosting prices. This, in turn, prompted investment in new technologies that permitted drilling in previously inaccessible or noncommercial areas. With demand continuing to grow, prices rose from as low as $10 per barrel in 1998 to the recent average of $100 (except for a sharp but temporary plunge after the financial crisis of 2008). It is reasonable to assume, therefore, that prices will again recover, as occurred in 2009The oil cycle is like all business cycles/commodity cycles, only more so. In your typical cycle, cheap oil shuts down supply, as small firms go under whenthey can't produce at a profit. Cheap oil also spurs on demand as people buy bigger cars, drive more, use more air conditioning, etc. This creates higher prices, more investment, and more drilling, and the cycle starts all over (http://www.energyandcapital.com/articles/where-is-the-oil-cycle/4969)
Recession? Yes or No?
Recession is defined as two consecutive quarters of falling Gross Domestic Product. The following graph shows estimated and forecasted GDP growth:
The Central Bank recorded the following Economic Indicators:
DateReal GDP Growth (year-on-year)Unemployment RateForeign Direct Investment (US$Mn)Central Government Total Revenue (TT$Mn)Central Government Total Expenditure (TT$Mn)
Dec-121.44.7-661.510,587.3010,593.40
Mar-132.73.7225.113,981.3015,734.00
Jun-132.83.5121.315,472.7013,342.20
Sep-130.33.7-232.412,720.6018,002.70
Dec-132.63.8-180.315,445.0011,294.60
Mar-140.23.1305.79,301.3013,204.70
Jun-1413.5446.816,753.2015,026.80
Sep-142.13.3-84.516,813.5021,507.00
Dec-140.13.380912,752.8012,424.40
Mar-15-1.23.7420.912,299.1012,580.20
Jun-15n.d.n.d.n.d.14,056.3015,133.60
Sep-15n.d.n.d.n.d.n.d.n.d.
Real GDP Growth (2012-2014)
DateAgriculture - 2000=100Construction - 2000=100Distribution - 2000=100Electricity & Water - 2000=100Finance Insurance & Real Estate - 2000=100Government - 2000=100Manufacturing - 2000=100Non-Petroleum Sector - 2000=100Other Services - 2000=100
2012-19.1-2-1.54.54.61-5.81.83.3
20135.14.1n.d.3.53.30.5-1.81.66.7
20140.87.12.83.15.5n.d.-0.72.53.5
DateReal GDP Growth - Petroleum Sector - 2000=100Real GDP Growth - Petrochemicals - 2000=100Real GDP Growth - Other Petroleum - 2000=100Real GDP Growth - Total - 2000=100Real GDP Growth - Transport Storage & Communication - 2000=100
2012-1.8-5.8-1.31.414.4
20131.6-1.721.71
201415.20.51.9-1.6
A period of recession is also characterized by general economic decline. Did the economy experience any growth in other sectors?
Further, during recessionary times, high unemployment rates persists Compared to major economies, the unemployment rate in Trinidad and Tobago is really low. However, it increased in the first quarter of 2015 (from 3.30% in the last quarter of 2014 to 3.70% in the first quarter of 2015). The graph below outlines the unemployment rate in Trinidad and Tobago since July 2012.
Also, a fall in inflation is expected during recession:
THE COMPARATIVE ANALYSIS
Current Economic Indicators in Singapore:
Singapore vs. Trinidad
SINGAPORETRINIDAD
Percent of National Parliament Seats Held by Women12%3%
GDP$298 Billion$24.6 Billion
GDP Growth Rate3.85%1.60%
Unemployment Rate2.8%5.8%
Graph below shows GDP in Trinidad vs. Singapore
In the 1960s, both had similar economic structures, history, and institutions. But since 2007, Singapore has been one of the 5 most competitive nations in the world. A major difference between Singapore and Trinidad is their political strategy. Mr. Lee Kuan Yew was reportedly in power for 30 years to oversee Singapores Development. Lee Kuan Yew had charted the course from Third World to First by strong and decisive leadership, macroeconomic stability, and high quality institutions and infrastructure. (See: http://caribjournal.com/2015/05/29/could-the-singapore-experience-have-happened-in-trinidad/#) In 2010, the Singapore Government published a decade-long strategy toward development. Singapore does not have the (physical) resource capacity as Trinidad. In fact, its most dominant resource is human capital. Throughout the 10-Year development strategy, the thought what matters most is the growth of incomes of our people is repeated throughout. Major parts of this strategy includes: to fully utilize the potential of the human capital so as to increase productivity. to develop thriving creative and arts clusters encourage diverse talents to grow and develop. Our workforce will become significantly better educated over the next decade. By 2020, 50 percent of our resident workforce is projected to possess at least a diploma, including 35 percent holding degrees. This is comparable to the leading global cities today. However, we have to complement these academic routes of advancement with a range of new, practice-based pathways to excellence. plan ahead for a city that remains extremely liveable even as we grow. The graph below, (taken from their Development Strategy) is Singapores Plan to experience economic growth:
Singapore has based its economic development on a proactive strategy to attract FDI using its trade openness. According to the World Bank, Singapore is the easiest country for doing business: favourable lending to foreign investors, a simple regulatory system, tax incentives, a high-quality industrial real estate park, political stability and the absence of corruption make Singapore an attractive destination for investment.According to the UNCTAD 2014 Global Investment Report, Singapore is the 5th largest recipient of FDI in the world, ranking at the same level as Brazil and the 3rd largest among the East and South-East Asian countries. In 2014, FDI flows into Singapore increased by 27% from 2013, reaching USD 81 billion.The main investors are the United States, the Netherlands, the United Kingdom and Japan.
(For a more detailed view: http://www.guidemesingapore.com/incorporation/foreign-company/why-foreign-companies-relocate-to-singapore)
A look at Trinidad
I) Diversification PillarsIn the Trinidad & Tobago 2015 Budget Speech, reference was made to focus on:a. Manufacturingi. comprised 9.0 percent of gross domestic product.ii. Tamana InTech Park built with an investment of $2.2 billion iii. invesTT and exporTT - to facilitate the creation of competitive firms in the non-energy manufacturing and service sectors. iv. Plans were made to export creative arts and entertainment, yachting, Maritime Sector, Food & Industry
b. Financial Servicesi. contributing approximately 15.0 percent of Gross Domestic Product
c. Tourismi. Trinidad and Tobago Tourism Development Fund ii. Total Contribution to GDP- 8.2 % in 2013iii. Direct Contribution to GDP- 3.1% in 2013
d. Agriculture (Food Sustainability)i. National Food Action Plan (2012-2015)ii. Contributed 0.62% to GDP in 2013
e. Energyf. Information and Communication Technology
II) Foreign Investment PillarsOpenness to foreign direct investment inflows is the most fundamental driver of diversification. Greater openness to foreign direct investment and improving the business climate appear to be key policies the twin-island republic could implement further in order to expand the range of activities of its economic structure. According to InvesTT, flows to Trinidad and Tobago increased by 21 per cent as the result of the $1.2 billion acquisition of the remaining 57 per cent stake in Methanol Holdings Trinidad Limited (MHTL) by Consolidated Energy Company (Mauritis)
The stock of FDI in Trinidad and Tobago has not stopped increasing in the recent years to reach USD 23,420.6 million in 2013, thanks to the excellent investment opportunities in the region. The company BHP Billiton is planning to invest in four projects aimed at hydrocarbon production. In 2013, it invested USD 565 million in the first stage of exploration and has continued its investment since then. Mitsubishi also plans to invest USD 850 million in an ether dimethyl plant, a new second-generation biofuel produced from methanol. The Chinese president Xi Jiping recently stated that China too was planning to invest in the hydrocarbon sector. Thanks to cheap energy, the country has a good chance of attracting FDI, especially to open new data centres.Factors that discourage foreign investment include the difficult weather conditions, the lack of a skilled labour force and the country's heavy dependence on oil prices at the international market. In 2014, the country ranked 79th out of 189 countries in the World Bank's Doing Business report.Hydrocarbons, petro-chemicals and metals are the sectors that attract most of FDI. The main investing countries are the United States, the United Kingdom, Canada and France
III) Growth PillarsIn the 2015 Budget Statement, there were 5 growth poles identified: The ones in Trinidad, of course, are East Port-of-Spain, the north coast, central, southwest and Tobago. These are the five areas we would like to see increased economic activity in the attempt to diversify away from the energy resource base of the economy.
In addition, the commissioned Galeota Port, was to provide significant logistic support to the oil and gas industry and in the process, generate economic development and job creation.
Innovation Fund capitalised with $50.0 million to be utilised as matching grants for the innovation needs of companies.
What measures should we put in place as a country to stave off the shocks for the economy? What does this mean for the Budget? Rebound, not Recession should be the watchwords On the downside, lower oil prices could spur a prolonged recession in T&T's economy, particularly if foreign investment into the energy sector dries up on the back of smaller prospective profit margins. On the upside, we will be watching to see if the Trinidadian government looks to secure any major bilateral loans, which could help to soften the impact of lower oil prices on the country's fiscal accounts
Strategic Measures Spend less we need to reduce our spending. Critical will be to decide what items to give up. On Thursday, October 1 2015, there is a debate between USC and UWI on the moot: cutting expenditure in the Health Sector during periods of low economic growth is a viable option. The levels of spending in the budget cannot be the same as last year, since we will definitely have a retracted revenue base. Something must be cut. The issue is identifying where. In the Express Newspaper (September 30, 2015), Dr. Roger Hosein (a senior economics lecturer from UWI) is quoted as expressing that GATE may need to be restructured. While educating citizens is a great strategy to invest in future productivity, there needs to be a way to measure returns on investment. Possibly, GATE can be restructured to focus on the sectors that are projected to contribute significantly to GDP.
Use past savings or reserves did we put aside some cash when the going was good? When the oil prices were high?
Augment existing income; in other words, DIVERSIFY our sources of incomeThe PP and the PNM have indicated (via PNM Manifesto and the Budget Speech in 2014 & 2015) areas of possible diversification. Other than those already identified as diversification strategies previously:
