Trinidad & Tobago: time to ease off the gas

Sir Ronald Sanders

With its booming oil and gas industry, Trinidad and Tobago fared well in the global economic downturn, but the government must act now to move beyond the country’s dependency on its finite resources and focus on diversifying the economy – only then will it sustain growth and stability, increase employment opportunities and reduce its worryingly high crime rate.

Trinidad and Tobago is the most industrialised nation in the Caribbean, and its economic performance is the envy of its partners in the 15-nation Caribbean Community (CARICOM). There is good cause for envy. At the end of 2011, with a high-income GNI per capita of TTD15,040, the 1.3 million people of the twin-island Caribbean state enjoyed a low unemployment rate of 5.8 percent, a low debt to GDP ratio of 33 percent, and high gross official reserves of US$9.8 billion (over 13 months of imports).

Additionally, the British company, BP, just unearthed 1 trillion cubic feet of new gas; the state-owned company, Petrotrin, recently discovered 48 million barrels of oil; in December the most successful bid round in the country’s history was held with BHP Billiton of Australia winning rights to explore in four deepwater blocks; and the government just signed an agreement with a joint venture consortium led by Mitsubishi and involving a local company, Neal and Massy, for a methanol complex.

That is the credit side of the balance sheet. On the debit side, the country suffers from high crime; it is highly dependent on exports of its hydrocarbon resources, which will face new competition in the coming years; its manufacturing and agricultural sectors are in urgent need of an overhaul to make them competitive; and its services sector, particularly its financial services, are limited to Caribbean markets because of increased pressure on financial centres by extra-territorial laws of the USA and costly regulatory requirements, initiated the Organisation for Economic Co-operation and Development (OECD) and enforced by the International Monetary Fund (IMF).

Trinidad and Tobago is, therefore, at a pivotal point in its economic development strategy. It has to find ways of maximising the benefits of the remaining years of its oil and gas industry while developing the productive and competitive capacity of its manufacturing, agricultural and service sectors.

These are challenges to which its present government is alert and that it has set about tackling. Trinidad and Tobago’s future growth and development will rest on how successful the government is in overcoming the challenges.

The country’s positive economic performance is directly due to exports of its hydrocarbon resources, particularly gas, oil and petrochemicals, which, in 2011, accounted for 45.3 percent of GDP and 82.3 percent of export receipts. But, while the oil and gas industry brings in massive revenues, it employs only 4 percent of the country’s workforce. Income is, therefore, unevenly distributed. Traditional sectors of agriculture and manufacturing have declined, and progress has been slow in the development of other industries that can contribute to sustained growth. High incidents of violent crime have also scarred the country, discomfiting its local population, but, interestingly, have not damaged foreign investment, which doubled in 2011-12 compared to 2010-11.

The present People’s Partnership (PP) government, led by the country’s first woman prime minister, Kamla Persad-Bissessar, came to office almost three years ago in May 2010 deeply conscious that to achieve a stable and sustainable economy in the future it had to get the most out of oil and gas assets and create new opportunities in agriculture, manufacturing and services, especially because energy assets are inevitably finite.

Reports indicate that the country’s proved oil reserves now stand at approximately 728.3 million barrels, and its gas reserves at 408.2 billion cubic metres. The new government was also acutely conscious that the social stability of the country – as much as its appeal for investment – was teetering on the brink, pushed there by high instances of violent crime fuelled by drug trafficking. The entire Caribbean region is a transhipment area between the supply countries in South America and the demand countries in Europe and the USA. Trinidad and Tobago is especially vulnerable because of its proximity to the South American coast.

To its credit, on coming into office, the government set about tackling both the economic priorities and the crime imperatives simultaneously. In August 2011, it imposed a state of emergency (SoE) after a spike in crime. A recent US State Department report confirmed that during the SoE, which expired in December 2011, the number of murders was greatly reduced – down to 354 in 2011 from 480 in 2010, 508 in 2009 and 550 in 2008.

At the root of Trinidad and Tobago’s social challenges, including crime, is maintaining and improving the country’s earnings and spreading the resulting economic benefits across the population in a fashion that is more equitable than has been obtained in the 50 years since independence.

Recognising this, the present government has been unique in the Caribbean by launching a Medium Term Policy Framework (MTPF) for the period 2011-14. The MTPF is designed to foster a sustainable and stable economy in the future. It is the brainchild of the country’s Planning Minister, Dr Bhoe Tewarie, a former principal of the Trinidad campus of the University of the West Indies. Tewarie was also the chief architect of the PP’s election manifesto. Therefore, the MTPF is, unusually, a mix of political objectives with rigorous criteria for measuring whether or not objectives have been met.

According to the MTPF, the government has embarked on a number of strategies to ensure sustained macro-economic stability and growth. It has targeted seven clusters to diversify the economy. These are: down-streaming energy and energy services; food sustainability; tourism; finance; ICT-driven industries; dry dock/ship repair/ship building; and creative industries.

Trinidad and Tobago currently ranks 69th out of 185 nations for ease of doing business, as measured by the World Bank. To be really competitive outside the oil and gas industry, where it has a natural resource advantage, the country has to do much better to attract investment. In response to that summons, the government has taken some bold steps, among them measures to ease delays in customs and to fast-track action on investment. For instance, a ‘one stop’ facility, invesTT, has been created to support investment. Further, unlike any other Caribbean country, a ‘Performance Framework’ with targets has been established to assess progress on the MTPF. The framework has laid down requirements to strengthen competiveness, toughen standards, raise productivity and increase the country’s attractiveness to investors.

The journey will be arduous, but Trinidad and Tobago has put its feet on the ladder, and, in doing so, has started a climb that many other developing countries are failing to acknowledge as important and necessary.

In this effort, the government has gained the confidence and support of the Inter American Development Bank (IDB), which approved a new Country Strategy with Trinidad and Tobago in November 2011. Specifically, the strategy aims to help the country to transition its economy from one that is dependent on the oil and gas industry. Implementation of the strategy envisages funding of around TTD$1.6 billion over the period 2011-15. The IDB has identified the main areas of its involvement as: trade, public sector modernisation, education, housing and citizen security. In 2011, it approved loans of TTD$290 million, and it says that the current loan portfolio consists of eight loans for a total of US$205 million, of which 93 percent is undisbursed. There is clearly, therefore, a gap in the government’s take-up of the IDB’s support, and this would suggest the need to accelerate implementation of the strategic plan.

Such acceleration is made urgent because of the market threat posed by the production of shale gas in the USA. It is anticipated that within the next decade, the USA will not only be self-sufficient in gas because of shale gas production, but it will also be an exporter. This means that, in addition to losing its market for gas in the USA, Trinidad and Tobago will have to compete with the USA for the sale of gas in the global market.

Sensibly, Trinidad and Tobago’s gas producers have been diversifying their export destinations successfully to other higher price markets. By 2011, the US market, which accounted for 70 percent of Trinidad and Tobago’s gas in 2007, had already been reduced to 20 percent.

The two good things with regard to the oil and gas industry is first, competition from the USA is not immediate; and second, there is time both to increase the production of existing known reserves of oil and gas, and to lay a new economic foundation in manufacturing, agriculture, tourism and services, including financial services. This is why implementation of the country strategy in cooperation with the IDB assumes very great importance.

Apart from the support of international financial institutions, such as the IDB, Trinidad and Tobago is fortunate that it can call on the resources of its Heritage and Stabilization Fund (HSF), which was created in 2007 to save and invest surplus petroleum revenues derived from production business. As of September 2011, the HSF had assets of TTD$4.1 billion. The government has run small budget deficits over the past three years and has not drawn down on the HSF. Further, the HSF is invested prudently in low risk assets outside Trinidad and Tobago and unconnected to the energy sector.

It is a matter for the Trinidad and Tobago government to decide – and it would be hotly debated in the country’s parliament – on whether more of the proceeds of the HSF should be used for development projects now or savings increased to cater for revenue downturns in the future, as well as to enlarge the fund from which future generations could derive an income.

The IMF, in a June 2012 discussion of the country, favoured “a clearer focus on savings together with more constraints on withdrawals”. But the government seems to prefer a separation of the ‘savings’ and ‘stabilisation’ aspects of the HSF obviously to give it room to utilise the country’s own savings to finance the improvement of the manufacturing, agriculture and services sector and diversify its markets.

However that discussion turns out, Trinidad and Tobago is in the enviable position of being able to make a choice at a time when it is universally agreed that its economy is once again set to grow.

About the author:

Sir Ronald Sanders is a Visiting Fellow at London University, a consultant and former Caribbean diplomat


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