The announcement by Prime Minister Kamla Persad-Bissessar on Friday that the 2015 general election will be held on September 7 raises three questions that should be of interest to those who keep a close eye on the T&T economy:
• What is the current state of the economy?
• Will the management of the country’s finances play a role in the outcome of the election?
• Does it matter who wins the election?
In terms of the current state of the economy, the official statistics indicate that unemployment is low at 3.3 per cent, inflation is moderate at 6.7 per cent but that economic growth is at a virtual standstill.
According to the Monetary Policy Report (MPR), T&T’s single most important source of revenue, natural gas production, declined by 5.3 per cent for the first quarter of 2015, when compared with a year earlier.
The petrochemical sector contracted by roughly 6.6 per cent in the first quarter of 2015 as “curtailments at several plants limited activity in the downstream industry in early 2015, as a number of plants were taken down for maintenance.”
While oil production increased by 4.4 per cent in the first quarter, the report noted that “the increase in oil production comes at a time when energy prices are relatively low.”
As a result, the Central Bank concluded: “Given these considerations, preliminary data suggests the energy sector as a whole, declined by just over 3.0 per cent (year-on-year) in the first quarter of 2015.”
The report also suggests that the performance of the energy sector is not expected to pick up during the second half of 2015.
The MPR states: “Early evidence suggests economic activity was anaelic in the first quarter of 2015 as maintenance-related activity once again weighed on the energy sector’s performance. Discussion with key energy industry players suggest there may be further stoppages during the year.”
Further, the report states that the “non‐energy sector is expected to grow, albeit at a slower pace, in the coming quarters, even as the Government’s capital and infrastructure programmes continue apace.”
The MPR noted that there have been few private sector projects initiated over the past months—with the exception of the C3 and Caribbean 10 cinema and shopping complexes in south—which may drive growth forward.
“Evidence of waning business confidence in the economy over the next six to 12 months, coupled with sluggish borrowing by the corporate sector, suggest private sector investment may be limited in the coming months,” according to the MPR.
In terms of the country’s fiscal performance going into the election, in a speech on June 1, Central Bank Governor Jwala Rambarran said that despite the collapse of oil and natural gas prices over the last nine months, the Government is expected to realise a moderate fiscal deficit of around $2.5 billion or 1.5 per cent of GDP during the 2015 fiscal year.
Rambarran said the Government is expected to receive large extraordinary revenue inflows amounting to close to $8 billion that will boost non-energy receipts, partly offsetting the $2.5 billion decline in energy revenues.
“These inflows represent proceeds from the sale of Clico’s assets, receipts from the Phoenix Park IPO (Initial Public Offering) and unbudgeted loan repayments from Trinidad Generation Unlimited,” he said.
Will economy be a factor?
The extraordinary revenue inflows have saved the Government from having to make severe fiscal adjustments before the election because if the on-off revenues are excluded, “the fiscal deficit would widen substantially to around $10.5 billion or almost 6 per cent of GDP.”
Put another way, Government has close to $8 billion in revenue that is available to it, if everything goes according to its plans. Not all of that money will be in cash. On March 27, the Central Bank announced that, as part of the Clico resolution, the Government would receive $4 billion in cash and about $3 billion in lieu of cash through the transfer of Clico’s shareholdings in Angostura Holdings Ltd, CL World Brands and Home Construction Ltd. The dismissal of Gerry Yetming and Carolyn John from Clico may slow down the transfer of the shares in the three companies to the Government.
Also, it was originally projected that the Government would receive close to $1.9 billion from the 100 per cent state-owned National Gas Company for the sale of shares in Phoenix Park Gas Processors. But, as has been reported in this space, it appears that the Government will accept less from the IPO of Phoenix Park.
But the point is that the Government will have substantial one-off, non-energy revenue with which to start paying higher salaries and salary arrears (backpay) to public servants and teachers.
It is expected that the public servants and teachers are due to begin receiving their backpay by the end of this month. This means that if the Phoenix Park IPO is in July, the country stands a reasonable chance of evading the inflationary pressures that the Central Bank referenced recently.
Will the payment of backpay to public servants and teachers, the Clico payouts to non-assenting policyholders and the transfer of wealth from the State to the population by way of the Phoenix Park IPO influence the outcome of the 2015 general election?
I am sure it will. But the issue is by how much.
Does who wins matter?
If T&T’s energy prices remain low, whichever party wins the 2015 general election will be forced to make serious adjustments to the country’s spending and its taxation.
The 2016 budget is unlikely to have the benefit of the one-off revenue from the Clico resolution and the sale of shares that the 2015 will have.
Plus, whichever party wins the general election will have to move quickly to come to grips with T&T’s economic situation as the 2016 budget must be debated and passed before October 1, the beginning of the new fiscal year.
There is little doubt that the 2016 budget will make substantial cuts to expenditure and raise revenue through higher taxes or new taxes—in an effort to bring T&T’s fiscal ship back on the right path
Also, a strong argument can be made that when it comes to the economy, both the ruling People’s Partnership and the opposition People’s National Movement sing from the same International Monetary Fund-inspired hymnbook.