A difficult year

In Latin America and the Caribbean, the direction of change was different where a contraction of 1.1 percent was recorded. Such a slowdown and contraction have affected the region since 2011. The region’s negative growth was caused mainly by a large drop in investment and consumption. ECLAC estimates that for the region as a whole, domestic demand is estimated to have fallen by 2.0 percent in 2016, with all its components contracting: private consumption (0.9 percent), public consumption (1.0 percent) and gross fixed capital formation (6.8 percent).

In the Caribbean economic growth is projected to be approximately 0.3 percent for 2016. Belize, Trinidad and Tobago and Suriname are three countries whose economies contracted significantly based on ECLAC’s estimates. These contractions had a considerable influence on the overall low level of economic growth.

ECLAC estimated that Trinidad and Tobago’s economy contracted by a rather large 4.4 percent in 2016. Driving this outturn was the fall-off in production in oil and gas as well as the fall in global prices for both commodities and its negative effects on exploration and drilling activity. There were energy sector layoffs, the closure of steel giant, ArcelorMittal, and the decline in private consumption which contributed to manufacturing activity decline by an estimated 6 percent in 2016.

In addition, most of us will know that Trinidad and Tobago has a dual economy; the government channels revenues that accrue from the sale of oil and gas to the remainder of the economy through transfers, public consumption and employment.

The weakness in production (oil production was 66,000 barrels per day in July 2016) and structurally relatively low prices facing the hydrocarbon sector (the price of oil dropped to $27 per barrel in January 2016) have led to conversations which have suggested that the non-energy sector will have to gear up to replace some of the losses experienced in the energy sector.

Furthermore, the economy in some people’s view will increasingly have to rely on private consumption to drive growth. Of course readers may correctly feel that this may not work as it does in the developing world because of the timely availability of foreign currency as well as in the supplies demanded. Even if hard currency was available, a change to the economy to one driven by consumption would take time.

Most of the Caribbean economies have operated fiscal deficits since 2011, with 2016 seeing some contraction in fiscal deficits as a number of countries embarked on fiscal consolidation.

In the case of Trinidad and Tobago, as revenues from the energy sector fell dramatically because of changes to the tax regime and from the significant fall in energy prices, the government introduced much needed austerity measures, including reducing subsidies on fuel, cutting expenditures across all ministries and the introduction of new and re-introduction of previously existing taxes to control expanding deficits.

Of course to treat with the large fall in revenues from the energy sector, which moved from TT$19 billion in 2014 to TT$2.575 billion for 2016/17, fiscal year current revenues would now be around TT$37 billion. Total revenue has been budgeted at $47.4 billion; this figure includes the estimated yield from new tax measures as well as from one-off revenues.

With expenditures budgeted at just over TT$53 billion, the ensuing deficit will have to be funded from a combination of borrowings and drawdowns from the Heritage and Stabilisation Fund. It has to be remembered that the Government borrowed, in order to meet the fiscal deficit in 2016. This led to the largest increases in the public debt to GDP ratio being recorded in the Caribbean. Only Anguilla recorded similar large increases in the ratio.

The media reported that preliminary data for Trinidad and Tobago showed a current account deficit of 5.0 percent of GDP in 2015, the Business Monitor Index (BMI) expected a shortfall of 6.8 percent in 2016.

In 2016, when the data is in, Trinidad and Tobago is expected to experience its first goods trade deficit in nearly 20 years. Contributing to this possible scenario is the fall in oil and gas production as well as goods exports which have dropped consistently since 2012. Added to this, low energy prices have made the losses worse leading to goods exports contracting some 23.1 percent in 2015.

Based on data from the Central Bank of Trinidad and Tobago (CBTT), headline inflation has been relatively muted for 2016 with the highest rate of 3.5 percent recorded in April. Core inflation has been very flat fluctuating between 2 and 2.3 percent. Monetary policy has been more challenged by the recession and curbing demand for foreign currency. This has seen CBTT allow the currency to depreciate by about 5 percent thus far.

This has been a difficult year in many respects. Next week we will look at the forecast for 2017.