Nation building is neither easy nor pretty. That is the unappetising truth. T&T is in the midst of one of those difficult periods which is neither pretty nor easy. The nation is at a crossroad. An economy driven by gas, but gas output has plateaued, and no new reserves have been found. The expansion of the petrochemical and LNG sectors were predicated on adequate supplies of gas at “reasonable” prices. But gas in T&T is no longer cheap. The shale revolution in the US has complicated matters; there gas is cheaper, more plentiful and all the economies of scale are available.
Newsday's interview with David Cassidy of the Proman Group on February 15 details unpalatable truths that need to be addressed by policymakers. “T&T is not part of our growth strategy at the moment because of the current environment.” He explained that the plants at Point Lisas have been suffering from chronic gas “curtailments” for almost a decade now, and many of them are operating below capacity. The company has mothballed various methanol plants over the past four years and two, the M1 methanol plant and the Melamine 2 plant, are currently idle because there's simply not enough gas to run them. He added that the companies have been operating at a loss over the last three years.
This is not the stuff of which turnarounds are made.
Meanwhile, the energy majors operating in T&T have indicated that they will operate in accordance with their contracts. Since they are key to gas output, the only segment showing growth and the bedrock of the country's foreign exchange earnings, these matters must be addressed and quickly.
The economic difficulties are mirrored in the foreign exchange markets. The decline in energy prices and output caused a decline in foreign exchange earnings and therefore, the amount of foreign exchange available to those who don't earn US dollars. Those who have revenues in foreign currency do not have an issue. It is the non-energy sector (retail and distribution, construction and related services, insurance and other non-bank financial services, cable etc) and individuals who have been affected.
Expenditure in the local economy has a high import content. It is estimated that 80-90 per cent of every dollar spent locally uses foreign exchange. Chicken, for example, is locally “assembled” as the major inputs, eggs feed, pharmaceuticals are all imported. Similarly, so too is the flour, baking powder, and peas used in the roti that often accompanies the chicken. Therefore, any expansion in the non-energy sector or any additional investment translates into foreign exchange demand.
Even simple things like general insurance have a foreign exchange component as many of the larger casualty risks are reinsured abroad. That means the (foreign) reinsurers have to be paid with forex. Borrowing internationally also means that repayments including interest (debt service payments) must be made in foreign currency.
Chart 1 (CBTT data) shows the gap between the sales of foreign exchange by dealers to the public (businesses and individuals) compared to purchases from the public. The market has never been in balance but the gap between forex sales to the public widened between 2009 to 2018 averaging $1.8 billion a year. Central Bank fills the gap from the official reserves. This works when export earnings are high as forex supply is greater than the demand. When forex earnings are low, reserves decline.
Chart 2 (CBTT data and IMF projections) shows official reserves reaching a high of USD $11.5 billion in 2014, declining to 2018 continuing to decline to 2023 as long as energy prices continue at the current rate. Debt is projected to rise marginally to 63 per cent with debt service payments increasing in line with foreign debt. These numbers do not include debt for the Dry Dock project in La Brea nor Petrotrin's debt service obligations of which there has been no official statement to date.
Investment in pursuit of diversification or growth in the domestic economy requires foreign exchange and the confidence that it will be available on demand. But queuing for forex continues, evidence that forex shortages continue. Reinsurance premiums remain unpaid as are many foreign suppliers. This market imbalance creates incentives for misuse. Hoarding, speculation and capital flight are the result, the negative feedback from which serves only to reduce confidence in the system.
Recently, Minister Imbert explained the increased credit usage as being linked to increased internet shopping, a minor influence. The increase is explained by new development. Businessmen, unable to get sufficient foreign exchange through authorised dealers, have resorted to buying from and paying foreign suppliers with credit cards confident that the banks must meet these obligations as they (the banks) are part of an international settlement system.
When demand exceeds supply on a continuous basis, the way to rebalance the market is to allow the floating rate mechanism to work. We have dithered and delayed allowing our competitiveness to decline and the economy to stagnate. Growth in the non-energy sector will not happen unless this and the uncertainty it engenders is addressed. This is the beginning of the 2020 election season. Construction projects will be given priority only exacerbating the situation. Leadership is required to put the country before party.