TT 2015 Economic outlook. The reputation of many an economist has been undermined by the weakness of their predictions in the light of changed circumstances. The framers of the 2015 budget have egg on their faces. The economic stance of the budget speech was one of “cautious optimism” in the light of projected economic growth of 2.5 %. They ignored the warnings of the IMF in their annual projections who advised “caution” as there were more risks on the downside and the new normal was increased volatility and uncertainty. In addition, in its Article IV consultation in 2014, the IMF again warned of the inadequacies of the CSO and the lateness and unreliability of its data. The budget speech was read on September 8th and passed unchanged. The two basic assumptions, an oil price of USD $80 per barrel and a net back price of USD $2.75 per mmcf for natural gas are the same assumptions that have been used in the last 6 budget speeches. The difference is that the base expenditure has increased from TTD $45 billion in 2009 to roughly TTD$ 60 billion on average over the last four years. Subsidies and transfers have risen from 40% of the lower number to approximately 50% of the bigger figure. In short, subsidies and transfers account for virtually all of the expenditure increases in the budget. The increased revenues came from increased prices, not supply, masking a critical weakness. And the HSF has moved marginally in the last 4 years. The windfall was spent. Yet in less than 90 days the base assumptions of the budget have been brutally undermined by the sharp fall in world energy prices. The Central Bank Governor has dramatically reduced the growth forecast of 2.5%, so confidently made earlier in 2014, by 80% to 0.5%. We have been in this situation before, as recently as 2008. But it is clear that neither the country nor the administration have learnt any lessons in the intervening period. Had we done so, the pace of expenditure growth would have been more measured, the election promises less expansive, the fiscal strategy more conservative. But that is behind us. Public expectations remain high and managing the transition will require a great deal of political capital and robust communication skills. But it is not simply that prices have fallen. We are in a grave crisis. The world supply conditions have changed. There are more new producers, of whom the shale oil and gas producers are the easiest to identify. But there are others. At the same time, our capacity to supply even the TT domestic producers is doubtful. We have been experiencing gas shortages for the last four years, but have hidden this under various euphemisms such as ”gas curtailments” and “scheduled maintenance”. And these shortages took place at a time when prices were buoyant, affecting foreign investors doubly hard; by increasing their costs and turning a profit into a loss. Investors understand risk, but avoid uncertainty. If the supply of natural gas is uncertain and subject to unscheduled outages, Trinidad and Tobago will loses its status as an attractive investment destination. What is worse, it is quite possible that some firms could consider relocating to other jurisdictions .Methanex for example closed its plant in Chile and shipped it to the Louisiana, USA. Unfortunately, we are at that stage. The fall in the price of gas complicates the situation. To increase production, more investment is required in fields which are in deeper waters, and therefore are more expensive to develop. And to maintain production at existing levels also requires increased expenditures. In other words, marginal costs are rising whilst marginal revenues are falling. Why is this important? Businesses invest where the prospect of reward is greatest and the cost lowest. Multinational companies in times of budgetary constraints choose the countries that have the best possibilities. We are simply one alternative amongst many. The letter from the Point Lisas CEOs addressed to the Minister of Energy noting losses of $10 billion over a 3 year period is of critical concern and demonstrates that this is not business as usual. We do not know how long this fall in prices will last. No one does. But it comes at a time when we are most vulnerable. To continue producing at the same level of output, Trinidad and Tobago needs substantial additional investment, the full benefits of which will not be seen for the next 5-7 years. In the meantime, we need to exercise discipline, forbearance, and leadership all of which, like natural gas, have been in short supply. Mariano Browne Managing Partner Browne & company 16 Damian St., Woodbrook 2015 January 4
Posted on: Thu, 08 Jan 2015 16:22:36 +0000
Trending Topics
Recently Viewed Topics
© 2015