Trinidad and Tobago

Trinidad & Tobago’s economy is estimated to have declined by 6.7% in 2020 due to a reduction in both Non-Petroleum and Petroleum industries. Contraction in domestic aggregate demand occasioned by the coronavirus pandemic, and recession in Caribbean territories, resulting in lower exports, have contributed to the reduction in output in the Non-Petroleum Industry. On the other hand, subdued hydrocarbon prices in H2:20 and supply-side challenges were the primary factors behind the contraction in output in the Petroleum sector. Unlike some other Caribbean countries, for example, Jamaica, Trinidad & Tobago avoided lockdown in H1:20, as the number of persons who contracted COVID-19 was relatively low. However, inertia in the economy from the previous period, especially in the oil sector, and recession in other Caribbean countries resulted in low growth. The challenges previously noted in the oil sector influenced output H2:20.

Both the fiscal and monetary authorities embarked on several initiatives in Q1:20 to help minimise the effect of the impending recession on the citizens and lessen the overall impact on the economy. The Central Bank of Trinidad & Tobago (CBTT) reduced the policy rate and the required reserve for commercial banks. On the fiscal side, the government issued unemployment and food grants. In addition, there were early repayments of tax refunds, and hoteliers in Tobago were given cash to improve their properties. The government also created a $100 million low-interest rate credit facility accessible through the credit union movements.

Central government revenue declined relative to expectation because of economic contraction and lower than programmed hydrocarbon prices and output. As a result, revenue intake amounted to 20.7% of GDP in 2020 compared to 27.6% of GDP in 2019. Central government operations generated a fiscal deficit of 11.6% of GDP while debt to GDP increased to 67.9%, up from 55.3% in the previous year.

To help fill the fiscal gap, the government withdrew US$900M from the Heritage Stabilization Fund. The resources made available through this facility lowered the fiscal deficit. We believe that the worst of the economic pressure from COVID-19 on the local economy has passed. However, with a low vaccination rate and structural problems in the energy sector, the path to full recovery remains a challenge.

Figure 6: SELECTED MACROECONOMICS DATA

Nominal GDP per capita, USD Real GDP , % chg y-o-y Consumer price index inflation, eop, % chg y-o-y Central Bank policy rate, % Lending rate, %, eop LCU/USD, eop Total revenue, % of GDP Total expenditure, % of GDP Fiscal balance, % of GDP Primary balance, % of GDP

Current account balance, %of GDP

2016 2017 2018 2019 2020 2021 E 2022 F 2023 F 16,177 16,238 17,130 17,603 15,742 17,579 18,313 19,218 -5.6 -3.0 0.1 -0.1 -6.5 3.1 2.1 2.7

3.1 1.3 1.0 0.4 0.8 1.9 2.2 2.2

4.75 4.75 5 5 3.50 3.50 3.75 4.25

9.08 9.08 9.23 9.58 7.33 7.83 8.03 8.43

6.75 6.76 6.78 6.77 6.73 6.75 6.75 6.75

28.1 24.4 27.6 27.4 20.7 21.6 23.2 24.0

35.6 32.6 30.3 30.6 32.3 27.3 26.9 26.7

-7.5 -8.2 -2.7 -3.2 -11.6 -5.7 -3.7 -2.7

-5.0 -5.2 -0.2 -0.2 -8.9 -1.8 0.2 1.2

-4.4 5.4 5.5 4.8 -2.8 3.1 2.9 2.8

Capital and financial account, % of GDP -6 2 -1 - - - - -

Foreign reserves ex gold, % of GDP 43.0 37.2 31.9 28.3 31.5 29.6 29.8 29.7

Foreign reserves ex gold, USD

Total government debt, % of GDP 9,466 8,370 7,575 6,929 6,954 7,301 7,667 8,050

60.1 60.0 58.9 55.3 67.9 68.1 67.7 67.1

Government domestic debt, % of GDP 45.6 44.3 42.6 38.9 46.7 48.3 48.0 47.7

Unemployment, % of labour force, eop 3.6 4.4 3.5 4.0 5.5 5.0 4.7 4.5

Unemployment, % of labour force, eop E - Estimates, F - Forecast

INFLATION

Low aggregate demand has contained the 12-month headline inflation below 2% since April 2017. The currency peg, which limits the pass-through effect of external price rise, also facilitated low inflation. At end-March 2020, the 12-month inflation rate was 0.4%, which was well below our baseline forecast. Despite the relatively low headline inflation, food inflation was 5.4%.

Over the next 12 months, we expect moderate improvements in economic activities and, by extension, household income should increase. We also expect the government to maintain an austere fiscal policy to curtail the deficit. Because of these opposing forces in the economy, demand-pull inflation is likely to remain relatively subdued over the forecast horizon. We envisage a moderate rise in external prices, but the currency peg will curtail the impact on local prices. The combined effect of these forces is likely to result in a low-to-moderate increase in headline inflation over the forecast horizon.

EXCHANGE RATE

The Trinidad & Tobago dollar was relatively stable throughout the year and traded at an exchange rate of TT $6.76 to US$1 at the end of March 2021. Compared to the same period in 2020, the local currency appreciated by 0.1%. The COVID-19 pandemic had a negative effect on the petroleum industry and, by extension, currency inflows from the sector. However, end-user demand declined marginally as a result of lower consumption.

Figure 7: NET INTERNATIONAL RESERVES

Sources: : CBTT and JMMBIR

The local currency price does not fully reflect conditions in the currency market, as the Central Bank has a profound influence on its price. Shortages in the foreign exchange market remain an issue, and many corporates find it difficult to get their desired amount. As a result, a parallel market has developed alongside the official market, where the US dollar trades at a premium.

After declining by 8.4% per annum over the last three years, at the end of March, net international reserves at US$6.7 billion increased by 1.2% relative to the same period in 2020.

We expect the currency peg to hold in the short run. However, the long-run economic fundamentals are not supportive of this view. Many of the existing oil wells have long reached their maturity, and gas production is in decline. High costs associated with exploiting off-shore gas acreage and a less than ideal investments climate do not support increased investments. We are bearish in our investment view on the Petroleum sector. Over the period March 2016 to March 2020, the reserves declined at a compounded average annual rate of 7.1%. A combination of falling investments and output in the petroleum sector would exacerbate the risk in the currency market, leading to depreciation of the local currency and capital flight.

POLICY RATE

In early March 2020, recognising the path that the global economy was likely to take and its attendant impact on energy prices and the domestic economy, the CBTT cut the policy rate by 150 basis points to 3.0%. The thrust of the authority was to maintain an enabling credit environment that would allow banks to continue extending credit to households and businesses.

Further reduction in the policy rate would incentivise non-petroleum production. However, it would push the interest rate differential between TT- and US- dollar assets into negative territory, increasing the risk of capital flight. The authority does not need to take this risk given the expected path of the local economy over the next 12 months. We expect the CBTT to remain neutral on policy rate change over the short run. Should growth fall well below the expected path, we believe that this would compel the Central Bank to cut the policy rate to push the economy on to a higher growth path.

OUTLOOK

Following a contraction in growth in 2020, Trinidad and Tobago’s economy is expected to return to growth in 2021. We project that the economy will expand by 3.1% in 2021, driven by increased energy prices and output. However, the COVID-19 pandemic and lower energy prices pose a downside risk to our growth forecast.

In the early part of Q2:21, there was a spike in the number of daily COVID-19 cases to over 500 persons compared to an average number of daily cases of less than 10 in Q1:21. The rise in COVID-19 cases has forced the government to curtail movement, as was done in Q2:20. We expect this to last for at least three months and is highly likely to constrain growth, especially in the non-energy sector. Trinidad & Tobago is not explicitly engaged in contractual agreements with any vaccine companies to supply the islands.

Like most other Caribbean countries, the sovereign depends on the WHO’s COVAX facility for its vaccine supply. WHO has so far found it very challenging to receive supplies to meet its obligation. Less than 10% of the adult population in Trinidad & Tobago is vaccinated against COVID-19. It will take at least two to three quarters for the

sovereign to receive additional supplies to vaccinate at least 50% of the population. The low vaccination rate poses a downside risk to growth. The timeframe for the re-opening of the economy may be longer than we expect.

Trinidad & Tobago’s economy depends heavily on the energy sector. Despite the significant rise in energy prices in Q1:21, output challenges are likely to constrain growth. We do not expect a meaningful shift in energy supply soon. It takes time to develop energy facilities, and investment flows are subdued.

Despite slower growth in the sector, higher prices redound positively for foreign exchange flows. We expect the current account to move to a surplus and for the authority to maintain the currency peg over the forecast horizon. With the increased overall level of economic activities expected, the demand for hard currency will rise, resulting in shortages. We expect the policy rate to remain stable, with risk-weighted towards the downside. Increased domestic demand and rising international prices are likely to put moderate upward pressure on domestic prices.

On the fiscal side, increased energy prices will help to boost revenues. Coupled with expenditure restraint, we expect the fiscal deficit to decline to 5.7% in 2021. Debt to GDP is projected at 68.1% in 2021 and should taper off to 67% in 2023 with lower fiscal deficit and moderate GDP growth.