T&T has recently been downgraded in its currency sovereign rating by Standard and Poor’s (S&P) from BBB+ to BBB. The reasons given for this are; lower than expected energy production and economic growth which will weaken Government’s revenue base and delay its plans to balance its budget by fiscal year 2020-2021. Further, S&P said that institutional reforms to strengthen revenue collection and improve the provision of timely economic data have taken longer than expected, hence material benefits from these reforms are not expected in the near term. S&P estimated that T&T’s real GDP grew by 0.8 per cent in 2018 and the rate of economic expansion will decrease to 0.4 per cent in 2019. To S&P, the energy sector contributed to lower and sometimes negative growth over the last several years and this is expected to continue—particularly now in the gas sector where there is a lot of uncertainty, and oil production continues to be low, continuing a decline seen over a long time. And, as usual for these agencies, the exchange rate certainly limits the monetary policy flexibility and this comes at a cost for defending the rate. S&P expects that this rating of T&T will continue over the next two years. The one positive was that the economic outlook was raised from negative to stable.
S&P’s downgrade did not meet with the approval of the Government in that it disagreed with S&P’s assessment of a projected decrease in natural gas production given its recent intervention via meetings with the major energy players—these meetings were supposed to make sure that the reduction in gas production does not come about. Though S&P also predicted a loss in oil production, Heritage was now drilling 16-18 wells. Still, the Prime Minister admitted that Government’s assignment to run the country on TT$10 billion less is unpleasant, a shortfall that is due explicitly to the reduction in the performance of the energy sector. Indeed, the Government’s ability to spend, its budget, depends on the vagaries of the local and international energy industry over which the Government has no control. Hence Government’s decisive role in the economy is reactive, modified only by its ability to save, spend counter cyclically and in the longer term transform the economy.
One of our economists tells us that this downgrade was not unexpected, a view that was also expressed by the CEO of the T&T Chamber of Industry and Commerce. This is because the continuing decline in the energy sector- oil and gas production- is common knowledge. To date this one-horse economy depends on the energy sector for its very survival; the horse is now lame!
As a small open economy we depend on exports, the earning of foreign exchange, to purchase at least the necessities of life that we cannot produce for ourselves. With the energy sector (oil, gas and petrochemicals) producing some 85 per cent to 90 per cent of our foreign exchange earnings and as price takers economic downside risks are extremely high. Thus, the crucial requirement to diversify the economy was/is always there. Some attempts have been made in the past by government- building industrial parks to attract on-shore foreign investment; negative listing to encourage the private sector to undertake import substitution with the longer term aim of producing export goods; building Pt Lisas to offer the private sector local commodities to go downstream. None of these produced any positive results since the economic horse, energy, was always there to shoulder the load, which has shaped the local investment rules of the economic game on shore that favour the non-tradable sector.
Successive governments have failed to appreciate the dynamics of economic diversification especially when one has to start from an economy based on the sole exploitation of a natural resource as virtually its only foreign income earner in a small open economy. Hence, the recent talk about turnaround in the local economy is simply random fluctuations from being a rentier economy in the global energy industry. Still, the projects on the plate of this Government now include; the building of a dry-dock; the building of another industrial park and the invitation to the Chinese to locate some companies there; the establishment of an aluminium processing plant to produce wire, flat plate and motor car wheels; and vague talk about constructing highways to open up the interior for economic activity. But one which was fundamentally strategic was the plan to build out Tobago’s tourist system into a global value chain by engaging Sandals to do the global market development, marketing and operating of government-owned hotel plant. Unfortunately this project fell apart because the population at large, goaded on by a few, did not understand the need for such a global value chain and how this could come about in Tobago.
There are two characteristics of the T&T economy which inhibit diversification. These are; the investment rules of the economic game on shore which favour business in the non-tradable sector and such businessmen; the lack of appreciation that to be globally competitive the activity should not simply be mimicking what others are doing, but eventually doing something new, creating a differentiated product or service, done by entrepreneurs who are, as Schumpeter termed them, men of action, something which all of our governments’ attempts at diversification ignored.
Even if we can create this new group of entrepreneurs we need to put in place the institutions that will provide the knowledge, the ideas, the innovation, the finance, the market development and the marketing. If we were to take another look at what is at present on the government’s plate and the activity of the private sector on-shore it is painfully evident that diversification may be beyond our reach!