Sunday 28th August, 2008

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Turbulence threatens T&T turbo-prop economy

(Presentation at CMMB breakfast panel on the T&T budget on Friday 26)

The Trinidad and Tobago economy is analogous to a twin-engine turbo prop plane, not a 747 jet. Let us utilise this as the framework for discussing the 2008/09 budget.

The twin propeller “engines” that keep the economy afloat are oil and natural gas.

Currently, hydrocarbon exports contribute 91 per cent of merchandise exports and a little over 60 per cent of government revenue.

Its share of gross domestic production has jumped from 26 per cent in 2002 to 43 per cent last year.

Types of fuel?

These twin engines of oil and gas run on the complementary “fuels” of foreign investment and foreign demand. Virtually all of the foreign investment coming into T&T is targeted at the hydrocarbon sector.

As a result, the vast majority of the firms involved are foreign-owned. (Exceptions are Petrotrin, NGC/NEC and the Clico group of methanol companies).

World oil and gas demand—and hence prices—have been growing for much of the last decade, providing the complementary “fuel” to the engines.

Identifiable forms

Four main forms of longer economic “turbulence” can be identified as facing the T&T turbo-prop economy.

First is climate change, with its likely negative impacts in terms of storms, hurricanes, food production, breeding ground of vector diseases, etc.

Anticipatory action needs to begin now, not when climate change is upon us: particularly as the impacts are not likely to be linear.

Second, the T&T population is ageing. Today, there are ten working people for every one retired person. By mid-century, a dramatic fall is projected to some two or less working people for every retired.

The time to begin to address this is now.

Third, the oil and gas reserves “engines” are beginning to “sputter” in economic time terms. Oil production has been in secular decline since the late 1970s.

While natural gas reserves have grown, this has been counteracted by “gas guzzling” consumption, particularly from the liquified natural gas (LNG) industry.

The remaining years of proven oil and gas reserves, relative to existing rates of use, range between 12 and 15 years.

While, some people point to large, unexplored reserves, a conservative banker understands the distinction between the bird in the hand and the one thought to be in the bush.

The fourth area of “turbulence” is that of inadequate national savings, which needs to be located with the above three factors of the likely substantial costs required to adapt to climate change/natural disasters; prepare for the ageing of the population and also address likely declines in oil and gas production.

Immediately ahead

As pilots many times warn passengers, there is something called “clear air” turbulence, which is difficult—if not impossible—to anticipate, and hence avoid.

We already are on to the “speed bumps” from the US financial meltdown and its likely contagious spread to other OECD countries. These countries are now almost certain to dip into economic recession.

There is an outside probability that it could even get worse, and we could be looking down the wrong end of an economic depression.

The US Government and Congress are groping for a solution to a problem created by a quarter century of greed as ruling philosophy and marked by the gutting of independent regulation, including in the auditing industry, the equity markers and the financial markets.

Turbulence within

There also is turbulence within the passenger cabin. “Terrorists” threaten to crash the entire turbo-prop economy as a result of several festering sores on which only plasters are being slapped.

First is the persisting weaknesses in the security system, in terms of arresting “Messrs Big” (ie the drug lords).

Second is the failure to fully grasp and treat with the underlying, long-term neglect of communities that create the conducive environment for a culture of gangs, guns, violence and death.

To this we can add the internal turbulence resulting from fiscal profligacy and its inflationary impacts, together with the persistent inadequacies in the health, education and traffic systems.

Proposals for addressing turbulence

The forms of turbulence identified—particularly the immediate and within—are so potentially huge, that this turbo-prop economy can quickly become a “chi-ke-chong.”

A responsible pilot with a full passenger load would assume the worst and take evasive action.

I, therefore, propose, first, a slashing of the assumed oil price in the coming year to US$40-45. Second, the establishment of a multi-stakeholder advisory group drawn from business, labour, NGOs, academia and the public service technocracy to prepare a “turbulence” preparedness plan.

Third, this advisory think tank to report to an all-party committee mandated to draw up a consensus based on its findings and recommendations.

As the US has shown, in times of grave economic uncertainly, partisanship needed to be tempered: That is a key sign of a mature, developing society.

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