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Trinidad & Tobago's 2015 budget smaller than 2014's: RBC analyst

Trinidad & Tobago's deficit is shrinking.

RBC Caribbean Economics

TRINIDAD AND TOBAGO FISCAL BUDGET REPORT

FY2014/15

Analyst: Marla Dukharan, Group Economist, RBC Caribbean

“Empowering Our People Through Sustained Economic Growth and Prosperity”

Given that the next General Election is due in 2015, most commentators predicted that the 2014/15 fiscal budget would contain the usual giveaways.

Indeed, the measures announced include a 20% increase in the minimum wage to TTD15 per hour, higher social welfare spending, and a tax amnesty among others. However, a 32% narrower fiscal deficit of 2.3% of GDP at TTD4.313 billion is budgeted for FY2014/15, compared to the TTD6.357 billion or 3.6% of GDP which was planned for FY2013/14. Also, the level of expenditure budgeted for FY2014/15 is marginally lower than the level now estimated for FY2013/14—not characteristic of an “election budget”. This in itself warrants praise, and represents a major departure from the unfortunate norm.

Expenditure—Yet again, the projected level of expenditure for the next fiscal year is the highest ever at TTD64.664 billion, representing a 5.32% increase over the FY2013/14 budget of TTD61.4 billion. However, total expenditure is now estimated to reach TTD64.788 billion for FY2013/14, overshooting the budget by 5.52%, as recurrent and capital expenditure are estimated to have exceeded the budget by 3% and 22% respectively. Therefore, the budgeted level of expenditure for FY2014/15 is 0.19% lower than the level estimated to be spent in FY2013/14.

Revenues— FY2014/15 total revenue is budgeted at TTD60.351 billion— TTD21.223 billion from the energy sector, and TTD39.128 billion otherwise. This represents an increase of roughly 9.65% over the FY2013/14 budget. However, in the same vein as with expenditure, revenues are now estimated to come in at TTD58.64 billion in FY2013/14, which is 8.6% higher than budgeted for that fiscal year, and almost 2% higher than the FY2014/15 budget.

Overall Fiscal Deficit— Given that an overall fiscal surplus of TTD1.967 billion is estimated for the first three quarters of FY2013/14, that fiscal year’s deficit is now expected to come in at around TTD4.877 billion, 23.3% lower than the budgeted deficit of TTD6.357 billion. The FY2014/15 deficit is budgeted at TTD4.313 billion or 2.3% of GDP, 32.15% lower than the TTD6.357 billion or 3.6% of GDP budgeted for FY2013/14, and 11.56% lower than the deficit now estimated FY2013/14. This trend in the deficit is consistent with the Government’s stated goal of balancing the fiscal budget by 2016, and is prudently inconsistent with the trend typically seen in the run up to a General Election.

Budgeted Oil and Gas Prices— As with previous years, FY2014/15 budgeted revenue is based on an assumed crude oil price of USD80 per barrel and a natural gas price of USD2.75 per MMBTU. For the FY2013/14 to 5 September 2014, the West Texas Intermediate crude oil price has averaged USD99.59 per barrel, and the Henry Hub natural gas price has averaged USD4.41 per MMBTU. These price levels partially explain why fiscal revenues for FY2013/14 are expected to exceed budget.

Growth— According to the IMF’s August 2014 Article IV staff report, growth is estimated at 1.6% for 2013, and projected at 2.3% in 2014 and 2.1% in 2015. The Ministry of Finance estimates real growth in 2013 at 1.7%, and is projecting 1.9% growth in 2014. Growth in 2014 is being driven by a projected 2.5% expansion in the non-energy sector, and growth of 1% in energy. Since 2009, the economy has been driven more by the non-energy sector, having grown from 54% of total output in 2011 to 57% in 2013. This means that the non-energy sector stood at roughly TTD93.7 billion in 2013, compared to the energy sector at TTD70.9 billion. Financial services account for 15% of GDP. The steady rise in fiscal spending partly explains the growth in the non-energy sector.

Transfers and Subsidies— The government maintains its plan to balance the budget by 2016, partly by reducing spending on Transfers and Subsidies, which accounts for just under half of total revenues. But this category of spending has grown from TTD21 billion in FY2011/12 to TTD29.7 billion budgeted for FY2013/14. According to the Government’s estimates of revenues and expenditure, spending on Transfers and Subsidies is now expected to reach TTD31.7 billion in FY2013/14, and is budgeted to decline slightly to TTD31.02 billion in FY2014/15. As a comparison, the level of capital spending is now expected to reach TTD9.78 billion in FY2013/14, and is budgeted at TTD8.2 billion in FY2014/15.

Debt—Public sector debt stands at 43% of GDP according to the Minister. The level of debt has been rising however, and is being raised to finance largely recurrent expenditure (93% of total expenditure). Empirical research has shown that in the Caribbean, debt beyond 30% of GDP has a progressively weaker positive impact on growth, and beyond 55% of GDP, debt actually lowers the rate of growth (Greenidge et al, 2012). T&T is therefore at the level where the positive impact is reduced.

Foreign Reserves— The Minister announced that Foreign Reserves had reached USD10.2 billion in July 2014, representing y-o-y growth of 9.58%. Following the Balance of Payments deficit of USD622 million recorded in 2012, a surplus of USD786.3 million is estimated for 2013. The Heritage and Stabilization fund has reached USD5.6 billion, according to the Minister. The TTD/USD exchange rate has appreciated by 1.24% y-o-y to a monthly average selling rate of TTD6.3657 : USD1.00 in August 2014. This is the steepest rate of appreciation seen since July 2008.

Foreign Direct Investment— The United Nations reported net FDI inflows of USD970.7 million as of September 2013, representing the highest level since 2008. The Minister has projected gross FDI at USD3.3 billion for 2014.

A summary of the various initiatives announced:

The Bankruptcy and Insolvency Act, 2007 was proclaimed in May 2014.

The National Gas Company of Trinidad and Tobago Limited will be offering to the national community 49% of the shareholding of the Trinidad and Tobago NGL Limited, which company holds the 39% shareholding of the National Gas Company in Phoenix Park Gas Processors Limited.

Two pilot Public-Private Partnerships are underway and more to come.

A high-level Task Force on Integrated Financial Regulation and Supervision, under the chairmanship of an independent consultant, has undertaken research and consultation to determine the most feasible model for integrated financial regulation and supervision. The recommendations will inform the preparation of a new Green Paper.

The Securities Act 2012 was amended to bring it in line with international best practice, in particular on prosecuting market misconduct and manipulation, as well as on measuring and evaluating risk exposure in the securities industry. A revised Insurance Act will soon be laid in Parliament, reflecting the deliberations of the Joint Select Committee, modeled on Canadian Law, and including a major strengthening of regulatory capital.

New Credit Union Bill to be laid in Parliament, which will transfer supervision of credit unions from the Commissioner for Cooperative Development to the Central Bank.

Established an Innovation Fund capitalized with TTD50 million to be utilized as matching grants for the innovation needs of companies.

Establishing a subsidy for testing services in order to assist our manufacturers in covering such costs.

Shipping legislation which has already been finalized by the Chief Parliamentary Counsel will soon be laid in Parliament.

Quatrro Global Services PVT Limited based in India, has selected T&T to launch a pilot project to establish a card processing centre.

The Tourism Development Fund as at August 2014 had already issued Letters of Undertaking to 11 businesses in Tobago with a total cash allocation amounting to TTD19.0 million.

Various initiatives to support growth in the agriculture sector.

By the first quarter of 2016, 35 CNG fuelling stations will be launched.

With technical assistance from the World Bank Group, the Government is spending TTD2.4 billion on high-impact programmes to improve infrastructure supply, in particular the provision of new networks and demand initiatives to stimulate ICT usage. Public-Private-Partnerships will be utilized both in the expansion of supply and in the delivery of services.

In 2015, close to 100% of the population will receive a 24/7 supply of water.

Received funding from the Inter-American Development Bank of USD120 million for a 5 year programme targeting flood alleviation and to improve drainage in the capital city of Port of Spain.

Various improvements to the road and highway network were announced.

Four new hospitals are being considered.

3,000 new housing units are being built with resources from the public sector investment programme and local borrowing; more than 1,000 have already been completed.

Government is procuring on a phased-basis, 100 new CNG–powered buses.

The World Bank will review all social programmes to ensure efficiency.

Major capacity building in the Police service is currently underway.

Proposed tax amnesty for tax penalties and interest for late filing of returns and late payment of income, corporation and Value-Added Taxes, business levy and environmental levy, to March 31st 2015.

Regulation of the gambling industry is being proposed.

Self-employed persons to be covered by National Insurance.

Various changes to the legislation governing the Unit trust Corporation and the Heritage and Stabilization fund are being proposed.

Reintroduction of savings bonds, in much smaller denominations, including TTD1,000 denominations. Purchases of bonds from the Government will be tax deductible up to TTD5,000 per annum for a period of 5 years.

Participation in Euroclear, which one of the principal clearing houses for Euro bonds and other securities.

Disability, Public Assistance, senior citizens pensions, senior citizens’ personal allowances and public officers’ pensions will all be increased.

Tax deduction for approved annuity contributions up from TTD30K to TTD50K.

Hybrid cars under 2 years old exempt from VAT and motor vehicle tax.

Deeper incentives for first-time homeowners in lower income brackets. Tax allowance increased to TTD25,000 per household per annum on mortgage interest.

Procurement legislation to come soon.

The VAT backlog owed to businesses which amounted to over TTD5 billion in 2010 has been substantially reduced and will be completely cleared by the end of FY2014/15.

The minimum wage, which was TTD9.00 per hour in 2010 has been increased to TTD15.00 per hour.

50% increase in several motor related fines.

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