In 2008, T&T recorded a debt/GDP ratio of 14 per cent (a record low), just one decade later this important ratio stands at a shocking 61 per cent.
The Government should be commended for announcing in this week’s budget its strengthening of the social safety net; with increases in allocations towards food cards, disability grants, public assistance grants, senior citizens pensions, and tax allowances for tertiary education. The economic wave approaching T&T may call for further strengthening of this safety net in the future. The digital economy, with its impetus on mechanisation and the meandering but certain death of brick and mortar retail, are sure to have significant negative impact.
Much of T&T’s business class is comprised of retailers (buyers and sellers) and online shopping is disrupting that space on a global scale. Mechanisation is making unskilled labour virtually obsolete and applies further pressure to the working class.
How is T&T to prepare for these inevitabilities?
The focus has to be on revenue generation and job creation; stringent cost cutting alone eventually leads to such an impairment of quality of life that no one is happy; some costs simply shouldn’t be cut.
Revenue generation offers a comprehensive solution to many of the problems which plague our current economy—exchange rate pressures, forex shortages, lack of meaningful jobs, no growth, tax revenue deficits, etc. Heavy government expenditure on non-revenue generating projects do not make sense at this time and only leads to greater debt. How will these debts be repaid while creating opportunities throughout the economy?
T&T is not the only energy producing country that finds itself in this Dutch disease hangover (an overreliance on one industry), so what have others been doing to recover? Norway is a great example.
Norway, regarded as the King of North Sea Oil was forced to diversify when it realised that oil and gas prices would be lower for longer. In a global context where; alternatives were becoming cheaper, the global economy slowed, shale oil drilling was flooding the market with an oversupply of oil; all of these factors made diversification an urgent priority.
Also telling, Norway has some of the highest gasoline prices in the world; even though Norway is one of the largest global exporters of oil. No fuel subsidy here; they prefer to place that money in their stabilisation fund for investment diversification and use returns to finance public sector operations.
Early on, Norway divested their sovereign-wealth fund of all investments in energy related companies. Oil and gas risk had already been priced in to its domestic economy; since new funding for Norway’s sovereign-wealth fund was already derived from oil and gas profits, the fund was too heavily tied to the fluctuating prices of the energy markets.
Norway ratified its sovereign-wealth fund and began investment abroad in 1990. It now stands as the world’s largest sovereign wealth fund, managing over US$1 trillion in assets and accounting for 1.3 per cent of global equity markets.
Norway is also the 30th largest export economy in the world and the country enjoys a positive trade balance of US$17.1 billion (exports minus imports). Beyond oil and gas, Norway is the fourth largest aluminium exporter in the world and has a 5.8 per cent share of the worldwide aluminium export market worth US$41.7 billion annually. This is a natural play for energy economies since aluminium smelting requires large amounts of energy.
Norway produces low-cost electricity from natural gas and hydroelectric power. This low cost energy advantage has also given wings to its manufacturing sector which produces passenger and cargo ships—US$1.29 billion, raw nickel—US$891 million, liquid pumps—US$679 million, valves—US$541 million, hydrogen—US$477 million.
The opportunities are endless. Mexico uses a financial trading strategy affectionately called the Hacienda Hedge.
The hedge is designed to protect the federal budget from the inevitable boom-and-bust cycles of oil prices by being a fiscally responsible exercise that reduces the country’s borrowing costs. The hedge means that Mexico pays about 30-basis points less on its sovereign debt and acts as a form of insurance, also they usually make a profit on the trades.
From 2001 to 2017, Mexico made a profit of US$2.4 billion and its hedges raked in US$14.1 billion in gains. The country earned US$6.4 billion in 2015 and US$2.7 billion in 2016. Mexico first hedged oil in 1990, after Saddam Hussein invaded Kuwait and threw the global energy markets into chaos.
Mexico spent about US$740 million in the first half of 2018 from its budget stabilisation fund, which historically has been used exclusively to hedge forward oil prices, according to a quarterly report. The hedges, known as Wall Street’s largest oil trade, aren’t declared till after they are executed to prevent hedge funds and trading houses from front-running the orders. T&T needs to become creative.
Saudi Arabia, the oil capital of the world, has the second largest proven oil reserves (estimated to be 268 billion barrels) and ranks as the largest producer and exporter of oil on the planet. Saudi Arabia has embarked on a development plan to boost its lagging economy, led by the ambitious and popular Crown Prince Mohammad bin Salman.
Despite being in pole position in global energy, Saudi Arabia has embarked on an ambitious 15-year plan that includes diversification, privatisation of state assets, tax increases and creating a US$2 trillion sovereign wealth fund. Economic reforms had been discussed previously but the sense of urgency has been heightened since in 2015 the government ran a record budget deficit of nearly US$100bn.
Technology has proven to be one of the main focal points of this diversity push.
Saudi Arabia is attempting to protect itself against oil’s decline by investing in futuristic technologies. It has accumulated a stake in electric carmaker Tesla Inc for about US$2 billion through its Public Investment Fund (PIF) and aims to be part of any investor pool that emerges to take the company private.
There has also been a $3.5 billion investment in ride-sharing company Uber Technologies Inc, a US$45 billion commitment to SoftBank Group Corp’s US$100 billion technology fund and a planned investment of about US$1 billion in Virgin Group’s space companies.
Domestically, Saudi Arabia is pursuing diversification and expansion of private enterprise in industries in which it already has an advantage.
There is really no need to reinvent the wheel. A close look at Norway, Mexico, Saudi Arabia and other oil and gas producing countries like T&T would reveal multiple diversification strategies that have proven successful.
T&T would be wise to follow.