Country Analysis
Macroeconomic Management
in a Period of Uncertainty
Dr. Alvin Hilaire
In this address, given in May 2016, the Governor of the Central Bank of Trinidad and Tobago assesses the large terms-of-trade shock which Trinidad and Tobago is currently experiencing, caused
by a sharp decline in the prices of major exports and compounded by a decline in the volume of
domestic output of petroleum and natural gas. “In this setting, the Central Bank’s perspective is to
look at the longer-term horizon and react as if the shock were permanent,” the Governor explains,
“This approach has the benefit of preparing for the worst, while we can easily accommodate the
upside if energy prices recover.”
I
t is quite clear that Trinidad and Tobago is currently experiencing a large terms-of-trade shock — this means that the
prices of our major exports (energy products) have declined
markedly in relation to the prices of what we import. A clear
manifestation of this situation is the accelerated downward drift
in the West Texas Intermediate (WTI) global price of petroleum:
WTI, which averaged US$93 per barrel in 2014, slipped to US$52
over the first three quarters of 2015, hit a low of US$26 in the
first quarter of 2016 and by this week is hovering around US$47.
The oil price dynamics not only reflect current and prospective developments in energy demand (slowdown in China, the
switch away from fossil fuels etc.) and supply (such as Saudi
Arabian reluctance to cut output, shale production in the US
and Iran’s entry into production for the global market) but also
a broader turnaround in the commodity cycle. The softening of
commodity prices in general has wider implications for growth
in many emerging and developing economies. The upshot of
this state of affairs is that the price shock that Trinidad and Tobago is facing should be viewed in the international context of
lingering fragility following the major 2008/09 financial crisis.
Despite very low yields in industrial countries, investors have become increasingly jittery about risks in several emerging markets… since September 2015 both Moody’s and Standard and
Poor’s have downgraded Brazil, Nigeria, Oman, Saudi Arabia,
Venezuela and Gabon among other energy producers — and
the pace of capital flows to su ch markets has substantially weakened.
Output Declines: Compounding the energy price situation
is the decline in the volume of domestic output of petroleum
and natural gas. The maturation of energy fields as well as
maintenance, upgrade and infrastructural work have resulted
in the following: oil and natural gas output averaged 88,262
million barrels per day (b/d) and 4,186 million cubic feet per
day (mmcf/d) annually during 2010-2013; the average dropped
to 81,251 b/d and 4,069 mmcf/d in 2014 and further to 78,668
b/d and 3,835 mmcf/d in 2015. Early data for 2016 show no improvement (74,710 b/d and 3,596 mmcf/d).
The short-term outlook is for a gradual recovery, but starting
in 2017 as the results of exploration and investments emerge.
Apart from the direct loss of earnings from the export of these
products, the output of several other goods which rely on natural gas as an input, such as ammonia, urea and methanol, has
suffered.
Repercussions & Consequences: The direct repercussions of the falls in energy prices and production are already
evident in Trinidad and Tobago’s balance of payments and
Government revenue. According to rough estimates by the
Central Bank, over the period 2010-2015, every US$1 change in
the price of oil affected export values by about US$50 million.
Government revenue is also closely aligned to international
oil prices-in particular the Supplemental Petroleum Tax only
kicks in when oil prices are at or exceed US$50 per barrel. Of
course, when we add the decline in the price and volume of
natural gas, the situation is exacerbated, particularly as much of
the Government’s revenue currently comes from natural gas.
Over the 1990s petroleum taxes contributed the bulk of energy
revenue, eventually giving way to the tax take from natural gas,
which in recent years formed the base for around two-thirds of
energy revenue.
Spillover Effects: Spillover effects have also been evident in
overall economic growth and to a more limited extent in the
unemployment numbers. Real GDP is estimated to have con43