Is the environment propitious for growth?

As T&T begins the countdown to the 2013 budget, which will be presented by the new, growth-oriented Minister of Finance, Larry Howai, it may be useful to come to terms with the economic realities that may impact on the Government’s ability to achieve its objective of increasing the country’s output. The actual total revenue for the first six months of the current fiscal year, was $24.3 billion, which 21.2 per cent higher than for the same period in the previous fiscal year (October 1, 2010 to March 31, 2011). Actual total expenditure between October 1 and March 31 amounted to $21.4 billion, which was 6 per cent higher than for the same period in the previous year. Of total revenues of $24.3 billion during the first half of 2012, energy revenues were 26 per cent higher than the first half of 2011 at $13.6 billion, comprising 56 per cent of earnings. Non-energy revenues were 15.3 per cent higher than for the first half of 2011 and accounted for about 43 per cent of total revenues.

 

 

As a result of higher prices of T&T’s petrochemical exports for the first half of the 2012 fiscal year, between October 1, 2011 and March 31, 2012, it is estimated that the economy generated a surplus of $2.8 billion. This compares with a deficit of $207.4 million during the first half of the 2011 fiscal year, when the total expenditure amounted to $20.22 billion and total revenue was $20 billion. The fact that he inherited a Treasury that generated a surplus during the first half of the year may give Mr Howai some comfort. It certainly gives him some room...but not much. That’s because it is quite likely that energy revenues in the second half of T&T’s fiscal year will be substantially less than the $13.6 billion that the Government is estimated to have earned during the first half of the fiscal year. Oil prices have declined by about 20 per cent since the end of May with crude trading on the New York futures market on Tuesday closing at US$83.91, which is uncomfortably close to the US$75 a barrel on which the 2012 budget was predicated. While the amount of revenue that T&T derives from Atlantic, the LNG production facility in Point Fortin, continues to be unclear, the quoted price of natural gas on the New York market was US$2.737 per 1,000 cubic feet on Tuesday, which is slightly less than the US$2.75 netback price on which the 2012 budget was predicated.

 

 

As I understand it, the netback price is the price used by the Government to calculate its revenues and is the market price minus the cost of regasification, shipping and liquefaction. It also seems as though LNG is less profitable than it used to be, if one is to judge by the comment in the National Enterprises Ltd (NEL) 2012 financial results that “NGC LNG experienced a small decline in profits.” Would the Government want to embark on a new phase of construction-led growth, which is likely to be financed largely by debt, if the external environment for T&T’s energy exports is likely to be volatile and at lower price levels than for the last 18 months? The second issue—and this is one that the Ministry of Finance has some control over—that is likely to impact on T&T’s growth prospects is the possible impact of additional capital expenditure on the rate of inflation.

Construction spending is a quick means of ensuring that the money that the Government earns trickles down to the population. There is clear evidence that the policies of the previous administration contributed to the overheating of the economy. While it will take some time before additional spending begins to impact on the inflation rate—primarily because of the increased levels of unemployment in the construction sector and the excess capacity in the manufacturing sector—it is difficult to determine in advance when an economy is going to be at full capacity.

 

 

The other issue with inflation is that there are serious methodological issues with the Retail Price Index (RPI) on which our inflation numbers are based. The RPI is based on a basket of goods derived from the Household Budgetary Survey (HBS) from 1997/98. While an HBS was conducted in 2008/09, the CSO announced recently that it will continue using the 15-year-old basket until January 2013 when it will switch to the four-year-old basket; Also, the actual Retail Price Index has not been rebased since 2003. When the revisions are made by January 2013, the Index will be rebased to Sept 2011. Thirdly, the CSO is changing its methodology of determining the rate of inflation from one based on an arithmetic average of price ratios  (the CARLI method) to one based on the geometric averaging of price ratios. This, according to a CSO statement in May, will reduce the significant upward bias and volatility of the current method. Therefore, one can conclude that the current means of measuring inflation is based on a 15-year-old basket of goods, an index that has not been rebased in nine years and calculation methods that facilitate the upward bias of volatile food prices. As a means of measurement, the current inflation data published by the Central Bank on the last Friday of every month is ALMOST USELESS.