Government’s big spend

Manning considers biggest budget ever

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“Any government which is facing this rush of energy sector revenues, and that has so many demands for infrastructure enhancement, poverty alleviation, social is a challenge to contain expenditure and, therefore, we need to keep making the point that we recognise the challenge, but it’s in the long-term interest of the economy that we chart a path for a gradual decline in government expenditures to a more sustainable level.”

Central Bank Governor

Ewart Williams on government spending

(Business Guardian January 3)


[email protected]

By the close of the 2007-2008 fiscal year, the Government would have deposited US$9 billion in the Heritage and Stabilisation Fund (HSF).

The global oil price see-saw has produced some windfalls for T&T and its daily production of 120,000 barrels of oil a day.

Meanwhile, the natural gas price has been creeping up in the last year, up to US$7.65 per million metric British thermal units (mmbtu), and the Government has also been earning revenue from the downstream industries; fertiliser and methanol prices are at all time highs.

Energy Minister Conrad Enill and bpTT chief executive Robert Riley have both expressed optimism that the natural gas price will go higher.

This can only bode well for T&T’s energy future as recent gas finds by Canada Superior and PetroCanada did not register in Ryder Scott 2007’s audit.

The upcoming budget, scheduled to be presented next Monday, will not address the concerns expressed by the country’s top energy executives—bpTT’s Riley, BHP Billiton’s Vincent Perreira and BGT&T’s Dereck Hudson—that T&T should revise its tax incentives for energy exploration.

Prime Minister Patrick Manning had said that, “What is needed now is a new fiscal regime of incentives to stimulate further drilling in the deep marine areas of the east coast, marginal fields, heavy oil and farm in and farm out arrangements. We propose to introduce this new regime in fiscal 2008. By these new arrangements we confidently expect, as has happened in the past, new discoveries of oil and gas and the preservation of T&T’s position as an industrial centre in the region.”

That was before the year’s two big gas finds.

Enill said that the revision was unfinished so it would not be included in this year’s budget.

“No new tax regime. We are not ready as yet.”

So, what’s the hold up?

“It’s not a question of keeping it back but trying to understand exactly where the industry is at this time.”

His ministry is in a favourable position compared to 2007 when the Government called a two-day energy conference to allay fears about energy security.

Yet, it still halved the number of downstream projects it will bring on board at the last budget.

The ministry has internationally marketed its two blocks—5d and 4b—for bidding which should take place in November.

And at a time when governments around the world have slashed their fuel subsidies, Enill said the local gas subsidy would not be touched in this year’s budget.

Enill has consistently maintained that the fuel subsidy is one way the population is benefitting from this country’s oil-and-gas wealth. He said that the Government was reviewing the subsidy but was being careful to consider how it affected the transport grid.

Finance Minister Karen Nunez-Tesheira, who will deliver the budget on Monday, had said the Government’s fuel bill was $6 billion. Meanwhile, Manning said at a rally in Woodford Square last Friday that 40,000 new cars have been sold so far this year.

The price of fuel for State carrier, Caribbean Airlines (CAL), is included in Nunez-Tesheira’s $6 billion. The price CAL pays for fuel is fixed and Enill said this allows the airline to remain a viable carrier despite global oil price challenges.

Is the Government going to continue bearing the burden?

Enill said the discussion was centered on how to improve the situation but reduce the cost to the Government. He noted that the Ministry of Works was reviewing two options of travel: water taxis and a rapid rail service to make public transportation efficient.

And while the world economy has garnered its fair share of blows in the past 12 months: a subprime mortgage crisis in the US and UK which has sent several major companies into bankruptcy, and a probable recession in the US and UK, T&T’s economy has remained unscathed.

The Central Bank estimated that growth in 2008 will be 6.0 per cent. Construction has continued apace and the retail sector has remained strong.

T&T’s economic challenge has been inflation.

The depreciation of the TT dollar in line with the US dollar against non-US dollar currencies—the euro and the pound—is another factor as it puts cost pressures on the exchange rate.

Then there’s the domestic sector: agricultural production has not been increasing.

Inflation now stands at 11.9 per cent fueled by sharply escalating food prices which has plagued the population over the past year.

Central Bank governor Ewart Williams has envisaged that the only way to reduce food price inflation on a sustainable basis is by increasing domestic agricultural supply and containing demand.

Matching expenditure to revenue ?

As the PNM-led Government embarks on its seventh budget, being touted as the biggest fiscal package to date, there are concerns that the spending proposed in the budget will do nothing to quell double-digit inflation.

The Central Bank’s monthly repo rate statements have laid the blame on food prices.

What can a budget do to stem rising food prices thereby reducing inflation?

Last year, Manning ambitiously proposed an agricultural policy after a two-day national food consultation. Fourteen initiatives were earmarked to be implemented at a total cost of $1.2 billion.

The result?

Fewer than half of the proposals have been implemented and those which have been undertaken have not succeeded in making a dent in prices.

The torrential rains, in the last two months, have not helped.

Farmers have been left with rotting vegetables and a slump in the market in the short term has lead to higher prices.

An initiative by National Flour Mills (NFM) to buy bulk staple products in non-traditional international markets and sell those items at cheaper prices locally was abandoned after racking up losses for NFM.

Last year, the Ministry of National Security received the second highest allocation: $4.4 billion.

Consider that the murder rate, at the time of this writing, is now 377 with three months to go to the end of the year.

Manning had proposed that the 2007 fiscal year would be a major turning point in the country’s fight against crime, but naysayers and critics have been less than kind to the Government’s measures intended to ease the crime scourge.

However, even the murder rate and a high level of crime generally has not stifled investment.

Last week, the Government inked a deal for the development of an integrated polypropylene complex with LyondellBasell and Lurgi. At US$2.3 billion, it’s the largest energy investment in the country.

So what to expect in this year’s budget?

Last year, the trend appeared to be to match expenditure to revenue.

Revenue: $40,381.2 million. Expenditure: $40,292.0 million.

A surplus of $89.2 million.

With its coffers brimming, the Government expects to continue that trend on Monday.

Finance Minister: Govt assessing global financial meltdown

Karen Nunez-Tesheira

Finance Minister Karen Nunez-Tesheira last Tuesday issued a statement on the implications for T&T of recent developments in the international financial market.

Following is the text of the minister’s statement:

A number of significant events have unfolded over the past weekend. In a fundamental sense the changes taking place in the international financial system are unprecedented. To have in short order the collapse of two of the world’s largest investment banks (Lehman Brothers and Merril Lynch) and the world’s largest insurance company (AIG) being given a lifeline of US$20 billion all over the same weekend, implies a major restructuring in the international financial system.

It is the cumulative effect which is significant, since this weekend’s events follow upon the bail-outs of Bear Stearns a few months ago and, more recently, of Fannie Mae and Freddie Mac.

At this juncture, it is extremely difficult to anticipate exactly how the ongoing turbulence in financial markets will impact T&T.

The Central Bank is still examining how these developments could impact on the economy of T&T. The Governor has informed me that the bank has no holdings of paper issued by any of these institutions. The very small proportion of the bank’s foreign assets that were being managed by these institutions are ring-fenced since they are not on the balance sheets of these institutions.

The Central Bank is now in touch with the commercial banks and the insurance companies to clarify whether these institutions had any direct exposures to the failed investment banks. Our preliminary indication is that it is minimal.

If there is any message that the current turmoil brings it is the critical importance for T&T to tighten the regulatory regime for all financial institutions. And for all financial institutions, banks and insurance companies, the message is the need to put in place adequate risk management strategies to protect from adverse developments.

Amendments to the Financial Institutions Act (FIA) and a new Securities Act are to be brought to Parliament immediately after the 2009 budget presentation.

The proposed amendments to the FIA clarify the Central Bank’s supervisory mandate, strengthen the office of the Inspector of Financial Institutions, and establish new prudential requirements to provide more effective oversight of significant investments.

The new Securities Industry Act provides for a more effective and encompassing regulatory regime in greater alignment with international best practice as set out by the International Organisation of Securities Commissions (IOSCO).

Essentially, the new Securities Act will make T&T’s capital market significantly more attractive to both foreign and local investors.

The price of oil has fallen to US$95. As of now, the experts suggest that this decline is temporary but we would need to wait and see.

We fully expect oil prices to moderate as global growth subsides, but this decline in oil prices will be limited to the extent that current high prices reflect increasing production costs and market fundamentals.

Volatility has always been a characteristic of the oil market and our budgeting processes recognise this and it is for this reason that the oil price for the budget is determined on a moving average basis. It is our assessment that oil prices will align to market fundamentals over the medium term and therefore we do not believe that there is any need to revise the assumptions on which our budget is based.

It is perhaps heartening that T&T is facing this difficult situation with significantly less macroeconomic vulnerabilities that in past episodes of financial market disruption. In general, T&T has been operating on fiscal surpluses or near surplus positions for the past five years.

In addition, we have been constantly reducing our sovereign debt as a percentage of gross domestic product (GDP) and our exchange rate arrangements provide additional flexibility for such a situation.

“T&T’s economic performance has been remarkable in a regional context and in comparison to other energy producing economies.” This was the view expressed by the International Monetary Fund (IMF) following its 2007 Article IV consultation with T&T.

More recently, Standard & Poor’s Ratings Services raised T&T’s long-term foreign currency sovereign credit rating from A- to A, affirmed its A+ long-term local, its A-2 short-term foreign, and its A-1 short-term local currency sovereign credit ratings.

Standard and Poor’s cited the continued strengthening of the republic’s fiscal and external accounts on the back of an economy that had grown at an average of 9.3 per cent annually since 2003 and which according to the agency was expected to grow a further 7.0 per cent in 2008.

It is also worth remembering that while our financial system is quite robust by any standard, it is still at an early stage of development.

Perhaps that is our strength in this particular situation as our exposure to the international financial system is not yet large enough to make us vulnerable to such contagion effects.






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