In Part IV of the re-publication of the International Monetary Fund's Article IV analysis, the Fund assesses the state of the T&T economy and the impact that the Government's revised offer to the Clico policyholders could have on the country:
1) The economy is turning the corner and growth is expected to resume in 2012.
A range of indicators point to a broad turnaround in the non-energy sector beginning in the second half of 2011. Commercial bank credit, particularly to the business sector, has expanded steadily since mid-2011 (Figure 1), construction activity grew in September 2011 for the first time since early 2010, and retail sales increased by 6.4 per cent through the third quarter of 2011. The recovery comes after an extended slowdown lasting three years in which ample buffers have provided room for maneuver, accommodating an expansionary fiscal stance in 2010/11, and resources to deal with the collapse of a systemic insurance company (Clico).
2) Weaker than anticipated energy sector activity contributed to a decline in 2011.
Real GDP is estimated to have contracted by 1.3 per cent in 2011 mainly reflecting unscheduled maintenance and technical disruptions in the energy sector and a lackluster performance in the non-energy sector (see chart).1
The latter is the result of delays in public capital spending, the weak regional and global economy, and uncertainty related to CLICO. Inflation has picked up, rising from a historic low of 0.6 per cent in August 2011 to 6.8 per cent in January 2012, as food prices increased by double digits following adverse weather. However, as discussed in the 2010 Article IV staff report, the CPI methodology creates a significant upward bias in food price inflation (Box 1). Core inflation, which excludes the impact of food prices, remained low at 1.8 per cent in January. Industrial relations remain divisive, as some segments of the public workforce with outstanding wage negotiations demand higher wage increases in the face of the 5 per cent government offer (2-1-2) covering the 2008–10 period. Unemployment has remained moderate in part due to government work programmes, falling to 5.8 per cent in mid-2011.
3) In the 2010/11 fiscal year (October- September), the central government's finances were nearly balanced. The better than expected outturn reflects strong revenue performance as a result of higher energy prices, a tax amnesty, and improved compliance following the introduction of a new IT platform, factors which more than offset VAT refunds. Current and capital spending was also lower than planned. Nevertheless, the deterioration in the structural primary balance (adjusted for the output gap, energy prices, and a lag in highway contract implementation) implied a large fiscal stimulus. The rest of the public sector improved to a near balance due to a recovery in revenues and lower capital spending by energy companies.
The debt-to-GDP ratio has increased sharply since 2008 as a result of the large decline in nominal GDP, the Clico bailout, and deficit financing. However, debt net of the Heritage and Stabilization Fund (HSF) assets remains low at 14 per cent of GDP.
4) Monetary policy has remained accommodative in the face of subdued inflation.
The Central Bank of Trinidad and Tobago (CBTT) lowered the policy rate by 75 basis points since end-2010 to 3 per cent, following a reduction of 500 basis points from end-2008. While lending rates generally declined in line with the policy rate with a lag, commercial bank credit to businesses only started to recover mid-2011, reflecting both commercial banks' caution-despite considerable liquidity-and low demand. In recent months credit to the private sector has been more dynamic (5.3 per cent growth in November y-o-y), consistent with the nonenergy sector recovery.
5) Strains have emerged in the financial system as a consequence of the prolonged slowdown and the collapse of the CL Financial Group and its insurance subsidiary Clico.
Commercial banks remain well capitalized, profitable, and liquid. Nevertheless, vulnerabilities remain, largely reflecting the still fragile confidence following the collapse of CL Financial and the financial system's remaining exposure to some of its affiliates. The banking system's nonperforming loans (NPLs), after peaking at 7.6 per cent of total loans in August 2011, have declined to 6.4 per cent in November and remain low by regional standards. The ratio of specific provisions to NPLs declined further to 28 per cent at end-October 2011, from 30 per cent at end-2010 and from 52 per cent at end-2009 (Figure 3).3
6) Progress has been made in compensating CLICO claimants although ongoing legal issues could lead to further delays. The 2011/12 budget provided for an enhanced treatment for Clico claims over the threshold paid in cash (TT$75,000 or about US$12,000) that were to be repaid with up-to 20-year zero-coupon bonds. Bonds maturing in years 1–10 can be sold to banks at a discount of at most 20 percent, and, under the enhanced treatment, bonds due in years 11–20 may be swapped for equity in a trust that will mainly hold shares in Republic Bank taken from the balance sheet of Clico. Thus far, only a small proportion of bonds for years 1–10 have been cashed in. If the share transfer overcomes legal hurdles and is completed as envisaged, the gross fiscal cost of the government's intervention and the associated debt burden could be reduced by as much as 3.3 per cent of GDP, or about one-quarter of the total estimated cost of the bailout. Parliament has passed an amendment to the Central Bank Act that would prevent Clico claimants from suing to enforce their claims, which has provided some space to proceed with the workout.
