Dependence on oil makes TT vulnerable says Central Bank boss

Central Bank Governor, Ewart Williams, warns that Trinidad and Tobago should take notice of the slow growth of the non-oil sector. In his address at the 2004 Petroleum Conference on Monday at the Hilton Trinidad Hotel, Williams noted that the economic growth in the last two years has been due almost entirely to developments in the energy sector, which averaged approximately 11 percent per year. Williams said that the non-oil sector on the other hand had declined, with an average growth of 1.5 percent a year. “This proportionate dependence on the energy sector,” he asserted, “clearly implies a certain measure of vulnerability. The extent of this however, has been reduced over the past several years because of the steady diversification in the energy sector.”

Williams noted that although the country’s macro-level indicators were presently strong, they masked several challenges which needed to be successfully addressed if TT was to achieve its vision of developed nation status by the year 2020. He maintained that while much of the country’s economic growth came from developments within the energy sector, it was important to reduce our reliance on energy resources, concentrating on improving the already strong manufacturing sector and increasing the focus on other unexploited areas of competitive advantage. However, the positive economic indicators still remained to give heart to the struggle. Williams said that at present, the local economy continued to register strong growth. In 2003, he said, real GDP was estimated to have grown by 3.5 percent, an expansion unparalleled in Latin America and the Caribbean, the only exception being Chile.

Much more assuring, he continued, was the continued buoyancy in energy prices and the fact that major downstream energy projects, namely the Atlantic LNG Train IV Project and planned expansions in methanol and ammonium, were on their way to fruition. “Assuming that these things fall in line,” he maintained, “real GDP could grow by as much as 10 percent in 2005 and this is even with a modest performance in the non-energy sector.” Twenty years ago, Williams explained, the energy sector was dominated by exploration and production activity, which amounted to 85 percent of GDP. Today, reality has changed somewhat, with the contribution of other activities like the development of petrochemicals, the production of LNG and gas processing. Exploration and production activity now account for 55 percent of GDP. Another drawback, he continued, was the fact that the energy sector was highly capital intensive, employing only three percent of the labour force. “As a result, in the absence of a strong increase in non-energy growth, the real GDP increase over the last few years has not translated into a sufficient increase in employment,” Williams lamented.

Quoting data from the Central Statistical Office (CSO), he explained that the current employment rate stood at approximately 10.3 percent, as compared to the 10.6 percent for the corresponding period last year. “This slow growth in the non-oil sector,” he said, “has stymied job creation, with the average number of jobs being created in the last two years falling below that of the previous period.” “Again this has to do with growth being concentrated in the energy sector which is capital intensive.” Incidentally, he went on, the services sector now stood as the greater source of employment growth in TT, as employment opportunities in the government sector, agriculture and manufacturing have either stagnated or declined. Williams stated that where fiscal accounts were concerned, the performance over the last few years has been mixed, with Central Government accounts  being basically balanced with small surpluses upsetting small deficits. “We had deficits of 2 percent of GDP in 1998 and 1999. The latest data for the last fiscal year suggests that there was a surplus of 1.4 percent of GDP in the Central Government accounts,” he said.

The performance of the Central Government, he noted, has been heavily influenced by the trend in oil prices and by oil tax collections from the energy sector. These collections increased from 12.7 percent of GDP in 2002 to nine percent of GDP in 2003. The performance of the rest of the public sector, however, has not been as disciplined since there were some state enterprises which consistently registered large deficits financed by domestic borrowing. The borrowing requirements of these state enterprises, he said, has served to raise public sector debt to up to 50 percent of GDP. In 2002, this stood at 55 percent of GDP. However, total public sector debt declined to around 52 percent of GDP in 2003. “With external indebtedness at less than 5 percent of GDP and with the favourable maturity of our external debt, it’s my view that public sector indebtedness is still not a critical issue in TT,” Williams maintained. “This is not to say that we should not keep the trend in public sector debt in close review. In particular, we should ensure that public sector borrowing as much as possible is contracted for investment purposes only.”

Fortunately for TT, he continued, public sector borrowing was not crowding out private sector financing requirements at present, nor was it putting pressure on domestic interest rates. This is due in part to the high level of domestic savings and also to the sluggish private sector investment. “The high level of private savings in our economy in our current low interest rate environment is now being reflected in the boom in the local stock market. We can also see that the local stock market has by far outperformed that of NASDAQ and DOW.”