Jwala Rambarran: The current state of the Trinidad and Tobago economy
and the outlook for 2013
Feature address by Mr Jwala Rambarran, Governor of the Central Bank of Trinidad and
Tobago, at the Trinidad and Tobago Chamber of Industry and Commerce Luncheon Meeting,
Port-of-Spain, 27 November 2012.
* * *
At the outset, I thank the Chamber of Commerce for inviting me to speak at this
luncheon session on the outlook for the Trinidad and Tobago economy. Over the past few
years, the Chamber has certainly emerged as a strong advocate for promoting the candid
exchange of views on issues of importance to the national and business community.
In particular, I commend the Chamber for its pioneering efforts to develop a national
corporate governance code, an issue that revolves around ethical conduct, leadership and
better management of our economic wealth, and has the potential to affect the success of
every public and private entity in Trinidad and Tobago. I give the assurance that the Central
Bank will support the development of such a national governance code.
At a time when genuine partnership and compromise across multiple stakeholders
seems to be elusive on matters of national importance, I look forward to the Chamber
remaining a strong, respected voice for business in Trinidad and Tobago.
Ladies and Gentlemen, policymakers around the world have been grappling for
more than five years with an economic crisis, which has morphed several times over, from its
origins as a sub-prime crisis in the United States to a sovereign debt crisis in Europe, to its
current manifestation of a political crisis across both sides of the Atlantic. We are certainly
witnessing the virtues and spillovers of an increasingly complex and interconnected global
economy.
So, this afternoon I want to talk about three things:
•
First, some of the key to global growth occupying our attention and which have
implications for the pace and strength of the economic recovery in Trinidad and
Tobago and in the Caribbean;
•
Second, recent developments and prospects for the Trinidad and Tobago economy
in 2013; and
•
Third, conclude with some brief thoughts on the medium term challenges ahead.
Global and Caribbean economic situation
Ladies and Gentlemen, let me begin with a brief overview of the global growth
situation. While the first half of 2012 was characterized by weaker global activity and an
escalation of financial stress in the Euro area, incoming data since September suggest that
global GDP growth might be stabilizing, albeit slowly, and that financial risk aversion seems
to be easing following further policy actions by major central banks.
Among the advanced economies, the U.S. economy continued its moderate pace of
recovery, with GDP growing at an annualized rate of 2 per cent in the third quarter of 2012.
Although more recent economic indicators have been stronger-than-expected, such as the
pick-up in household consumption and the housing market, U.S. employment is still more
than 3 per cent below its pre-crisis peak. Industrial production has partly recovered but it is
too early to fully gauge the extent to which Hurricane Sandy in late October has affected
activity.
Across the Atlantic, the situation remains volatile. Indicators of activity and
confidence in the Euro area continue to deteriorate, despite recent improvement in financial
market sentiment. Economic conditions remain weakest in Greece, Italy, Portugal and Spain
given persistent difficulties in the balance sheets of banks and governments in these
countries. Even the stronger economies of the Euro zone are showing signs of deterioration.
The French economy has hardly grown since March 2011, and growth in Germany is slowing
further.
Major emerging market economies such as China, India and Brazil are experiencing
noticeably lower growth rates in 2012 partly due to contagion effects from the European
crisis and slower economic growth in the United States.
Policy actions by major central banks have supported an improvement in global
financial market sentiment since the middle of 2012. Unconventional monetary measures
have been at the heart of the policy response in advanced economies, while central banks in
emerging markets and developing countries have either cut policy rates or postponed
interest rate hikes.
Conditions in Euro area sovereign debt markets improved markedly following
announcements in late July 2012 by the European Central Bank about its willingness to take
decisive actions to preserve the euro, and improved further after confirmation of its
willingness to purchase shorter term sovereign bonds in secondary markets through the
Outright Monetary Transaction (OMT) program.
In the United States, the Federal Reserve announced additional measures in
September 2012 to ease monetary policy by expanding its asset purchases until a
substantial improvement in the labor market is seen, and emphasized that its exceptionally
low level of federal funds rates are likely to be in place until mid-2015.
The picture, Ladies and Gentlemen, is one where policymakers in our major export
markets of the United States and Europe are battling weak growth, stubbornly high
unemployment, widening fiscal deficits and burgeoning public debt. And what about the
Caribbean, which accounts for a substantial share of our exports?
While the Caribbean region as a whole appears to be gradually recovering from the
deep recession caused by the global economic crisis, the twin constraints of low growth and
high debt are weighing on regional economic prospects, and the state of affairs in the
Eastern Caribbean is not too encouraging.
Some Caribbean countries have approached the International Monetary Fund (IMF)
for financial support. Antigua and Barbuda and St. Kitts and Nevis are receiving financial
assistance from the IMF in the context of Standby Arrangements, while Grenada and Haiti
are under the Extended Credit Facility. In addition, Dominica received IMF financing under
the Rapid Credit Facility in early 2012 to help manage the economic fall-out from a series of
natural disasters in July-September 2011.
Jamaica is actively negotiating a new IMF program. The Government of Jamaica
hopes to conclude a new Standby Agreement with the IMF by the end of 2012. Some of the
outstanding issues revolve around Jamaica's tax and pension reform, and the need for cuts
in the public sector payroll.
Other Caribbean countries have delayed or resisted the implementation of harsh
austerity measures, preferring to rely mainly on fiscal stimulus to kick-start growth, which, in
turn, is elevating the risk of debt distress.
Generally, a public debt ratio of below 50 per cent of GDP is considered
comfortable. By this measure, only three countries - Haiti, Suriname and Trinidad & Tobago
- have low debt. Another six countries have heightened debt vulnerabilities, averaging in the
range of 50 to 90 per cent of GDP. These countries are the Bahamas, Belize, Dominica,
Guyana, St. Lucia and St. Vincent and the Grenadines.
Four countries in the Caribbean have accumulated exceptionally high public debt,
averaging in excess of 90 per cent of GDP: Jamaica (143 per cent), St. Kitts & Nevis
(145 per cent), Grenada (105 per cent), and Antigua & Barbuda (98 per cent).
The gravity of the Caribbean's debt situation is generating debt restructuring or
credit events in a few countries, and placing significant pressure on credit ratings. Already in
2012, three Caribbean countries have been downgraded by rating agencies.
Recent economic developments in Trinidad and Tobago
Ladies and Gentlemen, the Trinidad and Tobago economy has shown tremendous
resilience against this turbulent backdrop, but we are yet to experience a full and solid
recovery from the downturn that started in late 2008.
Let me give a brief summary of our current economic position.
Before I do so, I must engage in a detour. I must emphasize that the Central
Statistical Office (CSO) is the official source of real annual GDP data, which is published in
the Ministry of Finance and the Economy's "Review of the Economy" and which is also
published in the Central Bank's "Annual Economic Survey". On the other hand, the Central
Bank, using a different methodology from the CSO, prepares and publishes quarterly real
GDP estimates, which are published in its "Economic Bulletin" and "Monetary Policy Report".
It is, therefore, foolhardy to treat these two entirely different sets of GDP data as one
consistent source for the purpose of evaluating economic projections, either of the Bank or
the CSO. In fact, a simple call to the Research Department of the Central Bank will shed
much light on such ignorance.
I now return to the substantive discussion. Based on its revised estimates, the CSO
indicates that real GDP in Trinidad and Tobago declined by a much larger than expected
41⁄2 per cent in 2009 and growth was flat in 2010. Real GDP declined further by just over
21⁄2 per cent in 2011. Projections made by the CSO point to a turnaround in 2012, with real
GDP increasing by just over 1 per cent.
High frequency data compiled by the Central Bank indicate that economic activity is
still quite sluggish but the pace of contraction of the Trinidad and Tobago economy seems to
have slowed in the first half of 2012. According to the Bank's Quarterly Index of Real GDP,
the domestic economy declined, on average, at a slower rate of 1 1⁄2 per cent in the first
six months of 2012, following a deeper contraction of 21⁄4 per cent over the second half of
2011.
Despite more intense exploration activity, longer-than-expected plant maintenance
operations and security upgrades at energy sector companies continued to hinder crude oil
and natural gas production. Lower supplies of natural gas impacted the production of
petrochemicals. In the first half of 2012, crude oil production fell by 13 per cent, averaging
82,700 barrels per day, while natural gas output was lower by 6 per cent when compared to
the same period in 2011.
Activity in the non-energy sector was fairly robust although the prolonged strike
action at Trinidad Cement Limited led to a severe drop in cement output that curbed growth
in the construction and manufacturing sectors.
In fact, the non-energy sector has registered growth in three of the past four
quarters to June 2012, supported mainly by the finance and distribution sectors. Growth in
the finance sector was driven by an expansion of commercial bank deposits and loans. The
performance of the distribution sector reflected increased retail sales in several industries,
including dry goods, supermarkets and groceries and motor vehicles.
Some other notable economic developments are:
•
One, some tightening in labor market conditions in the face of still weak economic
activity. According to the latest official data provided by the Central Statistical Office,
the unemployment rate rose to 5.4 per cent in the first quarter of 2012, from a
historic low of 4.2 per cent in December 2011.
•
Supplemental data on retrenchment notices from the Ministry of Labour and Small
and Micro Enterprise Development (MLSMED) suggest that this deterioration in
employment might not have extended beyond the first quarter of 2012. These data
show that retrenchment notices declined by more than 10 per cent during the first
eight months of 2012, from 567 to 503 notices. Over half of these notices originated
in the distribution sector; transportation accounted for close to 11 per cent of total
retrenchment notices registered in 2012.
• inflationary pressures have retreated from the high double digit rates that were
Two,
recorded earlier in the year to more moderate levels. Headline inflation slowed to
7.7 per cent in September 2012 from 11 per cent in June 2012. Core inflation has
remained low and fairly stable at just under 3 per cent for the past two years. A
major factor behind this deceleration has been the sharp slowdown in food prices,
as supply shocks resulting from inclement weather have lessened.
•
Three, private sector credit continued to grow at a steady but slow pace for much of
2012. On a year-on-year basis, loans granted by the commercial banks grew by
almost 5 per cent in September 2012, compared with 6 per cent at the end of
December 2011. Among the major categories of credit, consumer lending grew very
slowly while loan demand from the business sector, which had been declining for
most of 2011, staged a partial recovery in 2012. Real estate mortgage lending by
the consolidated system has maintained a strong, steady pace.
In the face of weak private demand, the government budget has served as the main
stimulus to economic activity over the past few years. In fiscal 2012, the non-energy fiscal
deficit increased to $31.5 billion compared with $28.4 billion in the previous fiscal year,
suggesting that the magnitude of the fiscal stimulus was higher than envisaged. At the same
time, the overall deficit of central government operations widened from almost $4 billion in FY
2011 to $6.6 billion in FY 2012.
As at end-September 2012, public debt (exclusive of treasury bills and treasury
notes issued for open market operations) outstanding increased to TT$71.6 billion
(46.6 per cent of GDP) from TT$54.4 billion (36.2 per cent of GDP) for the same period in
2011. The increase in public debt resulted largely from financing of the overall fiscal deficit
and financing of payments to CLICO policyholders.
Given the country's strong foreign exchange reserves and low debt to GDP ratio, I
believe that the Government has the fiscal space to promote a strong enough economic
recovery by means of a deficit budget.
With headline inflation on a declining trend, the Bank maintained an accommodative
monetary stance to support a recovery, especially in the non-energy sector. The repo rate
was held steady at 3.00 per cent since July 2011 before being reduced to an all-time low of
2.75 per cent in September 2012. Commercial banks have already started to adjust
downwards their prime lending rates in response to the reduction in the Bank's policy rate.
Significant net fiscal injections along with sluggish credit demand continue to
influence the build-up of liquidity in the financial system and helping to suppress interest
rates. Commercial banks' excess reserves peaked at $6.6 billion in March 2012, but fell
steadily thereafter following Central Bank action, reaching a daily average of $2.1 billion in
June 2012. Since then, continued fiscal injections have steered excess liquidity back on an
upward trend. Towards the end of September 2012, excess reserves reached a daily
average of $3.8 billion.
On the external side, the demand for imports of goods and services is still quite
robust, even in the sluggish economic climate, prompting the Central Bank to intervene
consistently in the foreign exchange market. The Bank sold US$1.4 billion to the market over
the period January-October 2012, compared with US$1.2 billion for the corresponding period
in 2011.
With the Bank increasing its sales of foreign exchange to address imbalances in the
foreign exchange market, the level of official reserves, although still quite substantial, fell
slightly to US$9.3 billion at the end of September 2012, the equivalent of 10.7 months of
imports.
Outlook for 2013
I would now like to turn to the outlook for 2013.
First, it is evident that uncertainty is weighing heavily on external conditions. Overall,
global prospects have weakened and in its October 2012 World Economic Outlook, the IMF
lowered its forecasts for world economic growth to just over 31⁄2 per cent in 2013 (from an
earlier estimate of almost 4 per cent for 2013). Projections for growth in the United States
have been trimmed slightly, with a larger downward revision for the Euro area.
The implications of these external conditions for our regional economies are mixed.
Guyana and Suriname are expected to show robust growth. Jamaica and Barbados are likely
to experience sluggish growth. What is clear, however, is that policymakers in the Caribbean
must begin to rethink their policy strategy and consider more innovative approaches to
financing in order to help solve their onerous debt dilemma.
Here at home, certain domestic factors seem to suggest a cautiously optimistic
outlook for 2013.
• First, as noted earlier, there are some underlying signs of an incipient recovery this
year. Preliminary estimates from the Central Bank suggest a turnaround in the
Trinidad and Tobago economy, with real GDP growth expected to be around
3⁄4 per cent in the third quarter of 2012. A revival in the production of natural gas and
Liquefied Natural Gas (LNG) is expected to increase activity in the energy sector by
some 1⁄2 per cent in the third quarter of 2012. A better performance in the finance
sector and a slight increase in construction should support overall growth of
1 per cent in the non-energy industrial base. The full completion by firms in the
energy sector of their major maintenance operations would provide a further strong
boost to growth in 2013.
•
Second, there have been indications of a modest improvement in the pace of
project implementation at the level of the central government. In FY2010, the below
budget Public Sector Investment Program (PSIP) was 10 per cent below budget.
This improved to 4 per cent below budget in FY2011 and to around 11⁄2 per cent
below budget in FY 2012.
•
Third, for the most part businesses should not be facing major credit constraints.
The launch of the CLICO Investment Fund (CIF) on November 1 should give a
cautious boost to overall confidence and reinforce the economic growth trend.
Based on these underlying assumptions and the turnaround in the third quarter, the
Central Bank is maintaining its projection for real GDP growth of around 1 per cent for all of
2012, and growth is expected to strengthen to 2 1⁄2 per cent in 2013.
Let me elaborate a bit on this projection.
If executed as envisaged, the 2012/2013 budget could stimulate a firm recovery in
construction activity and, by extension, economic growth through certain public construction
projects and tax incentives for construction of residential and commercial buildings. However,
contracts would need to be awarded soon and the pace of project execution would need to
be accelerated if the planned programs are to be implemented on schedule. Continued
delays in settling the long-standing payment of arrears to contractors could dampen these
expectations.
In principle, the sluggish recovery should not have a significant impact on
employment creation. However, the projects that the Government has targeted for
implementation do have a high labour intensive component, and could help to somewhat
ease the current tightening we have seen in the labour market.
I should also point out that the revival of growth and substantial fiscal deficit
programme for FY 2013 should not re-kindle underlying inflationary pressures because
considerable slack still exists in various parts of the economy, as evidenced by excess
capacity in manufacturing and other activities. Nonetheless, bottlenecks in key sectors such
as construction could lead to escalation of prices in these areas while the level of wage
settlements would also influence the pace of household spending.
Barring any weather-related setbacks or a new round of commodity price shocks,
inflation is projected to remain below double digits in 2013.
Budget 2013 announced the removal of VAT on food. Based on analysis done at the
Central Bank, we estimate that the immediate impact of the removal of VAT on certain food
items could reduce by 21⁄2 per cent the cost of food for an average consumer (based on the
CSO's basket of goods in the retail price index (RPI)). It should be noted, however, that the
most volatile food items driving inflation, fruits and vegetables, are already zero-rated.
Budget 2013 also removed the fuel subsidy on premium gasoline. Again, based on
the Bank's analysis, we do not expect the reduction in the subsidy of premium gasoline to
significantly impact inflation in the short term. The higher price of premium gasoline could
increase the RPI by around 1⁄2 per cent in the first round, with the impact concentrated on the
users of higher-end vehicles unable to substitute to other fuels. However, as the petroleum
subsidy is cut across the board over the next few years, the cost of transportation and some
related goods and services will increase.
Ladies and gentlemen there are, of course, several downside risks to the Central
Bank's outlook for 2013. The most obvious is a pronounced deterioration in the global
environment, which could constrain our exports and weaken economic confidence, pushing
the economy back to scenarios which prevailed during 2009.
The first major setback to the global recovery relates to policy uncertainty
surrounding resolution of the sovereign debt crisis in the Euro area. Failure of European
policymakers to deliver on their commitments to deeper fiscal and financial integration would
not only worsen fears about a black swan scenario in which Greece exits the Euro zone, but
also set in motion destabilizing forces in which persistent fiscal and debt problems spread
virulently from Euro area periphery to the core.
Another setback revolves around the ability of President Obama and the Republican
controlled Congress to resist the temptation for political brinksmanship and to agree on a
budget plan that avoids the looming "fiscal cliff". If expiring tax provisions and expenditure
cuts come into play, growth in the United States could fall to zero or contract. Moreover, U.S.
public debt is rapidly approaching its statutory limit which, if not resolved, would curtail the
options available to the U.S. Treasury to stave off a debt default.
A second downside risk is the deterioration in the industrial relations climate.
Prolonged industrial action similar to that experienced at the TCL plant could setback the
incipient growth trend in the non-energy sector.
Finally, bottlenecks in project implementation (for example, failure to settle
contractor payment of arrears or to agree on which projects are suited to the P3 model) also
represent a serious downside risk to the envisaged growth outlook. The recovery in 2013
depends heavily on a strong fiscal impulse.
Conclusion
I would like to conclude with some brief thoughts on the economic policy challenges
for the medium term.
The first is on fiscal sustainability. As we are all aware, the fiscal programme for
2012/2013 is being implemented against the backdrop of unsettled economic conditions
globally and several years of negative or negligible domestic growth. In this context, the Bank
supports the Government's approach to maintaining a fiscal stimulus via temporary deficits
over the next few years.
At the same time, we firmly believe that it is important for the Government to respect
its own plan for moving to fiscal balance over the medium term. Indeed, these plans should
be accelerated once conditions permit, in order to avoid a further build-up of national debt.
This brings me to the second thought, which concerns public debt sustainability. The
public debt trajectory has important implications for the Government as it would reduce the
room for maneuver of fiscal policy (given the need to devote more resources to servicing the
debt). It is estimated that the public debt (Central Government plus Government Guaranteed
debt, excluding open market operations bills) could reach close to 50 per cent of GDP over
the course of FY 2012/13. External debt is projected to increase from just over 8 per cent of
GDP to about 10 per cent over FY 2013.
I, therefore, believe that the Central Government has the opportunity to take
advantage of the current very low interest rate environment, high liquidity and appetite for
government paper to finance its operations cost-effectively on the domestic market. Foreign
borrowing also offers the benefit of increasing foreign exchange availability and if financed on
the international capital markets, could re-introduce Trinidad and Tobago, which is still a very
sound credit, to global investors. In any event, it is crucial that the Ministry of Finance and the
Economy coordinate its borrowing schedule with the Central Bank to allow for proper liquidity
management.
My final thoughts are on management of the energy wealth. Budget 2013 addresses
the issue of falling crude oil production by reducing the Supplemental Petroleum Tax (SPT)
rate on shallow water marine exploration and by granting a 5-year tax holiday on deep water
exploration. While there could be a boost to exploration and drilling in the near term, the long
production lag implies that the positive impact of these tax measures on oil output would be
more felt in the medium term.
Meanwhile, three hydrocarbons discoveries have been announced in 2012 which
are expected to positively affect energy output in coming years. Bayfield Energy and
Petrotrin announced discoveries early in the year while BPTT announced a 1 trillion cubic
feet gas find in mid-November.
I must caution against the increasing euphoria that has accompanied these
discoveries. The Government must resist the easy seduction of another energy boom.
Instead, it must treat any of the associated revenue windfalls from these hydrocarbon
discoveries as temporary, placing the windfalls as additional savings in the Heritage and
Stabilization Fund, rather than imprudently consuming them. And it must move on with the
diversification thrust that it has already kick-started if it wants to secure lasting prosperity for
all.
I thank you.