“Having power is not nearly important as what you do with it.”–Roald Dahl
Management’s task is always to do the best, whatever the economic conditions. If market conditions are favourable, then management is expected to achieve the best possible outcome. If external market conditions are unfavourable, then the task is to make the smallest loss. But management is also responsible for seeking new opportunities to create sustainable growth.
The Prime Minister and Cabinet are the country’s management team responsible for selecting and coordinating the economic policies to achieve the best result. To be clear, no government can make a country prosperous, but it must choose the policies and deploy its resources to create an enabling environment that will facilitate growth and engender confidence. The rest is up to the dynamism and ingenuity of the private sector.
The fall in energy prices in 2014 and declining natural gas production created a difficult economic environment. Angelin and Juniper temporarily reversed the trend in falling gas production. The Spotlight on Energy in 2018 promised a new dawn, a new boom which did not materialise. Instead, the energy majors negotiated higher contract prices to NGC which were passed on to the petrochemical sector whilst international ammonia and methanol prices were depressed. This led to plant closures. Then came the pandemic in 2020 and social distancing measures which added to the economic depression.
Reliance on the export of hydrocarbons and their byproducts exposes the country to a roller coaster ride. Since independence, fiscal policy has been procyclical, meaning that government spends more when energy prices are high and when energy prices fall the country goes into a depression, a prolonged multi-year recession. This has happened three times; in the 1960s, in the 1980s and in 2014. Three booms during which the Government tried to do too much followed by periods when it couldn’t do much.
The Prime Minister eloquently summarised the position in responding to criticisms over his recent foreign trip to visit some of T&T’s energy partners, “Without the earnings from [oil, gas and petrochemicals], our budgetary arrangements would be extremely challenging and dire…it is in the interest of Trinidad and Tobago to ensure that the best arrangements are in place in these three areas–we have to understand that we are still heavily dependent…” ( Express Newspaper September 14)
There are three reasons why a procyclical finance strategy is not sustainable.
First, depending on one major staple is inherently destabilising. Can market slumps or spikes be reliably predicted? How long will they last? What happens in the intervening period? Can the public withstand prolonged austerity measures without social instability? Public sector wage negotiations have been delayed for nine years, since 2013. This has happened twice before. It undermines the bargaining process thereby creating conditions which are more susceptible to political influence rather than economics in the process creating economic disparity and social inequality.
Second, are the economic buffers, the foreign reserves and the Heritage and Stabilisation Fund (HSF) sufficient to carry the country for prolonged periods? The HSF is also subject to economic volatility. In his recent update, the finance minister referred to the HSF’s 2021 value when markets were buoyant. Since then, central banks in the largest markets have responded to the current inflationary conditions by raising interest rates making financial markets more volatile and depressing the value of the stocks and bonds in which the HSF is invested, diminishing its value.
Third, the hydrocarbon industry faces an uncertain future due to climate change. The environmental impact of climate change is increasingly evident suggesting that the industry has an uncertain future. The move to renewables and the increasing popularity of electronic vehicles indicates a change of direction for the energy sector internationally and is reflected in the changing investment patterns by the energy majors.
T&T’s current favourable position is due solely to the fortuitous increase in energy prices arising from the post-pandemic hard start and the war in Ukraine which has added volatility to energy markets. The reality is that domestic natural gas production is 37 per cent below peak production and 25 per cent below 2018, while oil production is 72 per cent lower than its peak production.
T&T’s economic experiences suggest that the economic policy direction needs to be rebalanced. The public expectation is that increased energy prices will lead to good times and more expansive government expenditure when the opposite is required. Mixed messages by the finance minister encourage this sentiment. Having a seat at the table is important, but it is more important what you do with it.