One could be forgiven for thinking that the People’s National Movement’s strategy for this term of office is to blame the Opposition for extravagance and corruption whilst waiting for energy prices to recover. Apart from the drydock in La Brea and the industrial parks in Couva, there are no signals or incentives which indicate a credible effort to reduce dependence on the energy sector or to use any gains therefrom to facilitate a transition. Like “magic,” without a single policy measure, gas production is recovering. As a consequence, LNG and the petrochemical “manufacturing sector” have also increased production.
Gas production has not yet recovered to 2014 levels, though this is expected to be achieved in 2019/2020 when Angelin comes on stream. The rising tide in energy is outweighing the negative figures in other sectors. GDP is expected to grow by .9 per cent in 2018 as estimated by the IMF. The impact of the refinery closure and the dislocation that will follow therefrom has been excluded. Chart 1 shows the estimated change in Real GDP, excluding the impact of Petrotrin’s closure.
It also shows the rapid increase in Government borrowing caused by the deficits and Clico. When the borrowing position is projected to 2023 at current rates of expenditure, a huge gap is exposed. In this context, the debt obligations of Petrotrin are worrying as they are not factored into these projections.
Chart 2 sets this out graphically, showing rising debt, increasing debt service obligations and declining foreign exchange reserves (not including the effects of Petrotrin’s closure, or Petrotrin’s debt). This means that any revenue gain will be extinguished in the same way that margins were wiped out in Petrotrin because of interest costs. The lesson of Petrotrin applies equally to Government.
Further, despite all the protestations about Petrotrin’s losses and its debt load by the Finance Minister, it is clear that the State would have given some form of guarantee or undertaking to ensure that bondholders do not take precipitate action, as Petrotrin is already in default of its bond agreements. These trends, together with the inability to address the high level of subsidies and transfers, leads to a corridor of uncertainty; declining foreign exchange reserves and rising debt both local and foreign.
So, what are the pitfalls?
First, the Government is so concerned with its re-election that it has lost the opportunity to get the society united around a mission to improve our economy and state enterprises. While one could expect some political banter over the United National Congress’ fiscal irresponsibility in its spending, the opportunity to galvanize the country around a programme for change and discipline was lost. So much for leadership for change or change management. In a context where people play on the one per cent theme, no one will accept any burden of adjustment. Interest groups will simply make their claims. This budget played the populist card laying the groundwork for bigger giveaways next year.
Second, the Petrotrin matter confuses the public. Little is known about the industry. Suddenly, the public has to follow some very creative arguments about the complex business affairs of Petrotrin, set out in an emotional narrative at the union and employees’ expense. It is a partial attack on efficiency concerns, divorced from Government’s inefficacy and all other state enterprises. It demonstrates the inconsistency and lack of commitment to a process of national reordering. As with the NIS issue, that is for someone else to deal with. That is why any talk of diversification arouses the Prime Minister’s anger and annoyance.
Third, the foreign exchange issue remains unresolved. It is possible, even probable, that there will be more gas finds which will improve Government’s revenue position. But the energy equation has changed. NGC is not the cash register business it once was. This may be saleable to the electorate looking for an easy way out, but it is not sustainable. No serious effort at reordering the country’s economic and social priorities can take place if the exchange rate remains overvalued.
Leadership and management are critical for the country to have a chance of successfully negotiating these turbulent waters. Political survival is assured if these skills are deployed. Otherwise, it is simply a question of who will next feed at the trough.