Kevin Ramnarine
Last week (June 20, 2016) the IMF issued a press release on its 2016 Article IV consultation with T&T. The Article IV consultation allows for an assessment of the health of the economy and for the identification of issues that could cause financial problems in the future.
The press release itself was fairly predictable and we will await the full Article IV report. However, one thing that jumps out is that the IMF isn't happy with the current exchange rate policy and believes that TT dollar is "substantially overvalued." They suggest "greater exchange rate flexibility." That means the dreaded "d word."
Of course there are two sides to this exchange rate coin. On the one hand an overvalued TT dollar means a faster erosion of the country's foreign reserves and impacts negatively on the competitiveness of local manufacturers who export. On the other a further devaluation can lead to inflation as almost everything we consume is imported.
The IMF also observed that real GDP (or GDP adjusted for inflation) in T&T declined by 2.1 per cent in 2015 and is expected to fall by 2.7 per cent in 2016. That is the bad news which we all know–we are in a recession. The good news is that the IMF forecasts a 2.3 per cent growth in real GDP in 2017. Underlying the projected 2.3 per cent growth in 2017 is a robust 6.5 per cent growth in the energy sector. The IMF goes on to project that nominal GDP (GDP based on current prices) would increase from TT$155.3 billion in 2016 to TT$165.2 billion in 2017 or 6.4 per cent.
What is responsible for this projected turnaround in the economy next year? The answer is quite simply–increasing natural gas production predicated on investments made by oil and gas companies between 2013 and 2015 which were predicated on changes to the oil and gas fiscal regime between 2010 and 2014.
One might ask about oil and gas price and what role it will play in 2017. Real GDP is calculated based on "constant year 2000 prices." It therefore means that real GDP is much more a function of physical output (production) rather than price.
Price however has an indirect impact on real GDP as lower prices mean lower Government revenue. Lower Government revenue means less spending by Government on goods and services (such as construction). Lower prices for oil and natural gas may also cause some oil and gas companies to cancel drilling campaigns and this will negatively impact production in the medium term.
Despite the fall in oil and gas prices, two of the country's major oil and gas companies BPTT and BHP Billiton continue to invest heavily in T&T. The latter is currently pursuing an historic drilling campaign in our deep water province. The investment levels is reflected in recent Central Bank data which show that petroleum related Foreign Direct Investment in 2015 was US$1.49 billion which compares to US$501 million in 2010.
Getting into the details of what is leading the 2017 turnaround, we see that in 2017 three major projects will be ready to deliver natural gas. These are Juniper a BPTT project, Sercan a joint development of EOG Resources and BPTT and hopefully Trinidad Regional Onshore Compression or TROC project. I say hopefully because it seems that BP has not gotten the final approvals for this important project. The urgency of the situation seems to have escaped some. BP should have had all approvals for the TROC project many months ago. The fact that they are still awaiting final approvals remains a mystery.
If we assume that TROC is approved and Juniper and Sercan come on as planned, we can expect a 28 per cent increase in natural gas production in 2017 the effect of which will roll over into 2018. Thanks to natural gas investments planned between 2013 and 2015 the country will be out of the recession in 2017 and we can expect growth in 2018. I should caveat this optimism by adding that the increase in natural gas production in 2017, while significant, will not eliminate the shortage of natural gas but will go a long way to easing the pain of the last two years.
The fiscal incentives provided to oil and gas companies between 2010 and 2014 have done their job. The most important of these was the restructured capital allowances. The restructured capital allowances have been criticised from the Parliament to the political platform by the Minister of Finance. They have been blamed for the fact that BPTT isn't paying much or any taxes in 2016.
The fact of the matter is that even if the capital allowances were not changed and the old status quo held, BPTT still would be paying little or no taxes in 2016. The reason for this is the low price environment we are currently in. The reality is that the incentives and the restructured capital allowances have rejuvenated drilling offshore. Some of the fruits of the energy policy of 2011 to 2015 will be picked in 2017 as has been projected by the IMF but there is a lot more fruit to pick if we make the right decisions.
Kevin Ramnarine is a former Minister of Energy of Trinidad and Tobago