Gas and fiscal action

It is still expected that revenues may eventually benefit from rising energy prices, increased production from a new gas field and the imposition of a property tax, while attempts at fiscal consolidation may keep expenditures from rising.

Asset sales will once again provide one-off avenues of income. How do the rating agencies view our revenue prospects? BMI Research has already, as at mid-April, lowered their revenue growth forecast from 9.1% to 2.0% in FY17. This is based on the weak revenue performance in the fourth quarter of 2016 and a downward revision of WTI crude oil price forecast. The preliminary figures suggest that current revenues fell 34.0% year on year in the fourth quarter of 2016. In addition the rating agency revised the forecast of average WTI crude price, which best reflects the price that Trinidad and Tobago receives for its crude oil exports, to USD53.75/bbl, from USD55.0/bbl because of rising global supplies.

The other half of fiscal consolidation, expenditure, is expected to fall, brought on by cuts to fuel subsidies. There is the anticipation that government may raise prices in diesel fuel to 75.0% of market rate during the fiscal year. Certainly, credit has to be given to the government for lowering current expenditures by 11.2% year on year in the fourth quarter of 2016, based on reduced discretionary spending, which was more than earlier anticipated. This could have arisen due to financing difficulties that inhibit budget execution, assuming that all the ministries have in fact reported in a timely manner. This has resulted in BMI reducing their expenditure growth forecast to -1.0%, from 5.0% previously.

Since the budget will be in deficit, financing government operations is anticipated to be a challenge. The government signalled its intention to utilise withdrawals from its Heritage Stabilisation Fund (HSF) and multilateral credit to finance its deficit, with the remainder possibly to be obtained on domestic financial markets. We know that in March, the government withdrew TTD1.7bn from the HSF. There is intention to split the fund into two parts to make future withdrawals easier and to allow it to secure a USD$300m loan from the Andean Development Corporation.

Despite the efforts to lower expenditure, we have seen that the rating agencies raise a number of issues including the level of fiscal consolidation and debt. Both Moody’s and Standard and Poor’s have downgraded the country’s sovereign credit rating.

There is the concern that Government’s use of credit from the banking sector may limit lending to the private sector. Data available at the end of 2016 tells us that credit extended by the local commercial banking sector to the central government increased by 31.1% year-on-year, compared to an increase of just 3.4% for all other domestic credit.

The pace of growth in private sector credit has slowed, partially explained by the downturn in the economy as well as a lack of available lending opportunities.

However, it has to be admitted that the government has utilized a substantial portion of the sector’s liquidity over the last year. Just remember that the commercial banks’ holdings of treasury bills finished 2016 up 43.4% year-on-year.

Until new gas fields come on stream, fiscal action, while required, is going to affect many aspects of the economy, some not in a good way.