How the economy performs affects all citizens today, and their grandchildren tomorrow. Dependence on “energy export revenues” is inherently volatile and leads to large and persistent external shocks.
In 1937, the region was in turmoil because of the 1930’s depression. During the early post-independence years oil prices were low, production fell, and Shell and BP left. A weak economy led to unstable socio-economic conditions which provided fertile ground for the 1970 “revolution”.
The country was saved by two external events. First, OPEC raised oil prices as an anti-US political weapon following the Yom Kippur War in 1973.
Second, new offshore fields were discovered by Amoco (now BP) which increased T&T’s production at these higher prices resulting in the first post-independence boom which lasted from 1974 to 1985.
Bust followed boom, starting in 1986 and lasted approximately five years. The 1990 attempted coup, initiated by a handful of insurrectionists, took place during this depression, hence the widespread looting and destruction.
T&T returned to a lower, more normal growth path with the implementation of adjustment programmes which continued throughout the 1990’s.
The commissioning of the liquified natural gas (LNG) project and LNG exports caused the next boom which continued through to 2014 (with a blip between 2008-10 caused by the US financial crisis).It coincided with a “super commodity cycle” which changed demand conditions and caused buoyant energy prices. This “super cycle” in world commodity prices was due to China’s rapid increase in domestic demand resulting from its economic growth. TT’s GDP (market prices) expanded from approximately TT$50 billion in 1999 to $171 billion in 2014 (2019 ROE).
The “energy bonus” was used to increase government expenditure on subsidies and transfers, salaries and wages, and public building programmes. There was relatively little improvement in efficiency or the development of productive capacity.
Since 2015, real GDP (i.e. adjusted for inflation) has declined every year. The finance minister’s boast that “the rain had gone” was premature despite the grandiloquently titled budget speeches.
The Juniper and Angelin projects only reversed some of the natural gas production loss. Further, the increased gas feedstock prices resulting from the renegotiated contracts with upstream producers coincided with a decline in market prices for the downstreamers, resulting in the closure or idling of seven plants.
If the pricing issue cannot be solved in a way that allows the more efficient to survive, or ammonia and methanol market prices do not recover quickly, the Point Lisas story will close in failure.
Fiscal 2020 was in decline before the impact of the pandemic and the closure of businesses to slow the spread of the disease. What we do not know is the extent of the economic decline as no statistics or estimates have been published to give the public a working estimate. Bad news is to be avoided or deferred in an election year.
The ILO (April 29) has projected that all industries world over will be negatively impacted, and that unemployment will rise. The question for everyone is how long will this decline last, and how will the fiscal adjustment affect citizens?
The future of T&T’s natural gas production depends on decisions made by BP and Shell head offices as they account for 75 per cent of gas produced in T&T. This is a complex decision-making environment in which decisions are dependent on the incremental rates of return and the groups’ investment horizons.
Investment dollars will be directed to those opportunities that are the most profitable.
If natural gas production remains at a lower or declining level of production and the downstreamers remain unprofitable, then some hard decisions must be made by the owners of these plants, which will affect government’s revenue.
This option is the equivalent to the government’s decision to close Petrotrin, retrench staff, and concentrate on producing crude oil only. Heritage may be able to repay the international bondholders and maintain its downsized position. Employment levels and tax revenues would be lower, and the human capital, developed over many years, lost as technical staff seek alternatives elsewhere.
Five years have passed, and energy prices have not recovered. The four key questions to be addressed to improve the economy’s performance remain the same as in 2015. First, what must be done to arrest the decline? Second, what will be the new spending priorities for government and individuals in the face of declining revenues? Third, how can the foreign exchange reserves be used more productively? Fourth, how will the communication process be shaped to involve the public in the turnaround exercise?
The real productive capacity of a country are its people and how they are engaged to create a new paradigm. Will the country’s leadership accept the responsibility for the turnaround or continue to deflect blame?