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Second year of recession, forecast growth 1.6%

Published: 
Thursday, February 2, 2017
T&T economic review

Lower returns from the energy sector due to weaker prices and a drop in production weighed down T&T’s economy in 2016, though stronger prospects for the industry in the new year should fuel a rebound in 2017.

 

Budget to bite back

 

The T&T economy remained in recession for the second year in a row, with the Central Statistical Office (CSO) estimating that GDP would fall by 2.3 per cent in 2016, following a contraction of 0.6 per cent the previous year.

With hydrocarbons accounting for 39 per cent of state fiscal income and 83 per cent of export values over the 15 years through to 2015, according to the Central Bank of T&T (CBTT), much of the recessionary pressure has come from low global energy prices.

The average price of T&T crude fell from US$48 per barrel in 2015 to US$44.90 last year, while oil and gas production also decreased, bringing total revenue to an estimated $37 billion (US$5.5bn)—well down on a peak of $57 billion (US$8.5bn) recorded in 2014.

This decline, coupled with a projected deficit of $6 billion (US$887.1m), prompted the government to outline a number of spending and tax reforms in its 2017 budget statement issued at the end of September.

Handed down by Colm Imbert, the Minister of Finance, the spending plan outlines amendments to value-added tax regimes, including a reduction in the number of zero-rated items; cuts in fuel subsidies; full implementation of a property tax; increased levies on alcohol and tobacco sales; stricter oversight and taxation of the gambling industry; and tariffs on online sales.

The need for deeper collaboration with the private sector as a means of stimulating economic recovery is also apparent in the recent budget, which states that the government will offer 50 per cent tax relief to “businesses that can mobilise private sector funding to provide public infrastructure and/or public facilities, amenities and services, now provided solely by the government.”

The proposed shift toward greater use of public-private partnership models in infrastructure and development projects could boost the construction industry which, in 2016, saw a 7.6 per cent decline in activity.

Cement sales—a good proxy of the sector—also slowed 22.2 per cent year-on-year (y-o-y) in December 2016 to 54,690 tonnes, according to latest figures from the CBTT. This represented a month-on-month decrease of 27.4 per cent from November 2016.

Rising unemployment has been another knock-on effect of the slowing economy, reaching 4.4 per cent of the total labour force at the end of June, according to the CSO, up from 3.2 per cent at the end of 2015. In its October 2016 “World Economic Outlook” report, the IMF predicted that the jobless rate would close out 2016 at four per cent and remain static for the rest of the decade.

 

Rates steady, inflation cools

 

At the most recent monetary policy committee meeting at the end of November, the CBTT decided to leave the repo rate unchanged at 4.75 per cent; its level throughout 2016. The body cited weak inflationary pressures and sluggish credit growth in the private sector as the underlying reasons for its decision.

Those weak inflationary pressures saw the consumer price index rise by just 3.1 per cent y-o-y as of September, according to the latest data issued by the CSO. This was below IMF year-end forecasts of 4.7 per cent and well short of the 5.3 per cent inflation figure predicted by the fund for 2017.

 

Better energy prospects

 

While T&T has been hard hit by the sharp decline in hydrocarbons prices, the second half of 2016 saw some modest relief.

Increases in the third quarter took oil prices to around the US$50 per barrel mark and pushed the average price for the year to US$44.90 a barrel, up from US$39.40 in the first six months of 2016.

Higher prices also helped to offset a 10 per cent y-o-y reduction oil and gas output in the first seven months of the year; the result of planned maintenance work carried out on a number of upstream and downstream plants in 2016.

The timing of these scheduled shutdowns, coinciding as they did with lower energy prices during the first half of the year, helped lessen the negative economic impact of reduced hydrocarbons flows.

With the Organisation for Petroleum Exporting Countries announcing at the end of November that production would be cut by 1.2m barrels per day to 32.5m barrels, global prices are widely expected to edge up further this year.

The prospect of higher prices, coupled with four natural gas projects expected to come on-stream this year, led the CBTT to forecast economic growth of 1.6 per cent in 2017, with the IMF expecting an expansion of 2.3 per cent.

 

This T&T economic update was produced by Oxford Business Group.