Economy and Outlook

Following a period of lackluster performance, evidence suggest that a nascent recovery is beginning to take hold. The pick-up in natural gas production which began during the second half of last year, continued into the first half of 2018 with positive spill-overs to the petrochemical industry. Meanwhile, following declines in 2016 and 2017, the authorities believe that the non-energy sector has bottomed-out. They expect that the non-energy sector will be helped in part by government’s capital spending, as key construction projects take shape. As such, the authorities anticipate growth of around 2.0 percent in 2018.

By most if not all metrics, Trinidad and Tobago’s external position remains strong. After recording a deficit in 2016, the current account swung to an estimated surplus of 10.2 percent of GDP in 2017 due largely to a positive trade balance. The authorities highlight that external buffers including gross official reserves and assets in the sovereign wealth fund are robust, while public sector external debt is relatively low. However, while they appreciate staff’s attempt to better tailor the analysis to Trinidad and Tobago’s circumstances, they take note of the divergences between the various external sector assessment methodologies, and are uncertain whether a current account norm of 13.5 percent of GDP is appropriate, sustainable or even realistic, in the new global energy price environment.

Trinidad and Tobago’s medium-term prospects are positive. Additional gas production is expected to come on stream over 2019 and 2020, and there are several other projects in the development stage with very positive prospects. Spill-overs from the energy sector, including through government capital spending and stronger confidence, are expected to spur domestic demand to the benefit of key sectors such as distribution, manufacturing, finance and construction. Meanwhile, although there may be some continued weakness in the short run, the authorities anticipate that the external position will strengthen over the medium term. At the same time, the authorities recognize that several factors including technical delays in bringing new energy production on stream, under execution of government’s capital spending, sluggish domestic demand as well as external factors such as a sharp drop in energy prices, can tilt risks to the downside.

Fiscal Policy

The authorities’ fiscal adjustment effort remains on track. Having trimmed expenditures by roughly 20 percent between FY2014 and FY2017, the authorities continued to exercise prudent control over spending during the first half of FY2018.¹ At the same time, although revenues are expected to benefit from the rebound in the energy sector, early evidence also suggest that non-energy revenue mobilization efforts are beginning to bear fruit. Given the performance in the first half of FY2018, the overall fiscal deficit (authorities’ definition) is now anticipated at around 2.5 percent of GDP for FY2018 compared with 8.6 percent of GDP in the previous fiscal year.² Additionally, public-sector debt and gross financing needs have remained at sustainable levels throughout the challenging economic episode, and are expected to be stable or improve over the medium term – a position also supported by staff’s Debt Sustainability Analysis.

As welcomed by staff, progress has been made on developing a medium-term fiscal framework (MTFF). The MTFF is underpinned by the authorities’ goals to balance the budget by 2020 and keep the public-sector debt-to-GDP ratio below 65 percent. Further, technical assistance scheduled for later in 2018 by the IMF’s Fiscal Affairs Department is expected to help improve the MTFF.

Reforms to ensure long-run fiscal sustainability, which involves reducing the reliance on energy revenues, are also progressing. The Revenue Authority, which is intended to improve tax administration, is expected to be operationalized in the near term, a comprehensive gaming industry tax policy is being prepared and after some delay, property taxes are being re-introduced in FY2019. Additionally, work towards establishing a Tax Policy Unit and a dedicated committee to review transfer pricing is advancing. On the expenditure side, the authorities remain committed to introducing an automatic fuel price mechanism, and based on initial findings from the World Bank Public Expenditure Review (PER) mission earlier in 2018, they are exploring measures to increase spending efficiency in key areas. The authorities will also use the outcome from the recent IMF Fiscal Transparency Evaluation (FTE) mission to enhance fiscal management.

Monetary Policy and Foreign Exchange Market

At its June 2018 Monetary Policy Committee meeting, the Central Bank of Trinidad and Tobago (CBTT) took the decision to increase its main policy rate for the first time since end-2015. In the recent past, against the backdrop of low inflation, the CBTT’s deliberations have focused on balancing the need to support the economy on one hand, against the domestic implications of higher international interest rates, on the other. With signs that domestic economic activity is picking-up, and the likelihood that domestic interest rate differentials vis-à-vis relevant international benchmarks could move deeper into negative territory given the expected trajectory for global rates, the CBTT considered the latter as the most pressing challenge.

There are signs that conditions in the domestic foreign exchange market may be beginning to ease. After declining steadily over the last few years, market led foreign exchange supply (excluding CBTT interventions) was nearly 20 percent higher in the first seven months of 2018 when compared with the same period last year. This is consistent with the recovery in domestic energy production and prices, and the turnaround in the current account more generally. The authorities reiterate their intention to carefully coordinate fiscal, monetary and structural policies to address imbalances in the foreign exchange market. Additionally, while the authorities concur that exchange rate flexibility has worked well for some countries, in Trinidad and Tobago’s case, they are more cautious than staff regarding the pass through to inflation, particularly as the fiscal and structural reform agenda is not yet completed.

Financial Sector

The financial system has remained on a strong footing despite the recent economic downturn. Commercial banks are well capitalized, profitable and have robust asset quality, while CBTT stress tests show that the system can withstand severe shocks. Banks are well prepared to meet any new capital and provisioning requirements, following the adoption of IFRS 9 and Basel II. The CBTT also undertook a thematic review of banks’ credit risk in 2017, which helped identify potential risks to asset quality. The insurance sector is also well capitalized and profitable, with the general insurance sector displaying a fair degree of resilience following last year’s active hurricane season in the Caribbean region.

Although the system is stable, the authorities recognize the multi-faceted nature of financial risks and are committed to maintaining a well-regulated and sound financial system. The authorities are keeping a close eye on systemically important financial institutions (SIFIs), examining the risk posed by large cross-border conglomerates and monitoring developments in the fintech space. The CBTT recently issued revised AML/CFT guidelines, which emphasize a risked-based approach to compliance. Meanwhile, the new Insurance Bill will facilitate risk-based supervision in the sector, helping to align this aspect of the CBTT’s oversight framework to international best-practice. To assist with this, and to thoroughly assess the strengths and weaknesses in the financial system, Trinidad and Tobago will participate in a joint IMF/WB Financial Sector Assessment Program (FSAP) in 2019/2020.

Structural Reforms

The authorities intend to use the opportunities provided by the positive medium-term prospects to implement key structural reforms. Among them, state-owned enterprise (SOE) reform remains a priority. The operational restructuring of the state-oil company Petrotrin is on-going, with the aim to transform it into a competitive, sustainable and profitable entity. Meanwhile, as signaled by the Minister of Finance in his FY2018 budget presentation, the Regulated Industries Commission will commence a rate determination exercise for the domestic electricity and water providers in the near term.

Export base diversification with a vibrant private sector at its core is an integral part of Trinidad and Tobago’s economic strategy. The government recognizes its role as a facilitator, and is upgrading public infrastructure, pursuing trade arrangements, and has attracted foreign investors to occupy new industrial parks and expand Trinidad and Tobago’s dry-docking capacity. The authorities also sought to improve the ease of doing business through the establishment of a new foreign exchange facility administered by the Export-Import Bank of Trinidad and Tobago. The authorities see such initiatives to facilitate trade and manufacturing, as well as on-going plans to expand the tourism, business processing, financial and other services sectors as key to diversifying Trinidad and Tobago’s economic base.

The authorities appreciate the importance of high quality and timely statistics, and point to the progress being made in this regard. Although the transition from the Central Statistical Office (CSO) to the National Statistical Institute (NSI) has not progressed as quickly as the authorities envisaged, important improvements are nevertheless being made. The CSO has fully relocated to a new office space with the requisite IT infrastructure, and is near its full complement of staff. Having successfully migrated to SNA 2008, the CSO is working towards producing a quarterly GDP series, getting the labor force statistics back on track, and finalizing the revamped indices of producer and building material prices. Meanwhile, the CBTT has made significant improvements in the external account statistics over the last few years, including adopting BPM6 and producing quarterly international investment positions (IIP). In this regard, staff’s assessment that data provision has ‘serious shortcomings that significantly hamper surveillance’ seems somewhat harsh.

Conclusion

Our Trinidad and Tobago authorities continue to regard the Fund as a trusted advisor. They underscore the importance of, and their appreciation for the technical assistance support provided through IMF headquarters and the regional technical assistance center – CARTAC. They welcome the Fund’s close engagement with the Caribbean region in general, appreciate initiatives such as the High Level Caribbean Forum and the dialogue on correspondent banking relationships, and look forward to the joint IMF/WB/IDB Conference on climate change scheduled for later this year.