Analyzing the Impact of the Global Financial Crisis on the Government of Trinidad and Tobago Fiscal Accounts

Transcription

1 Analyzing the Impact of the Global Financial Crisis on the Government of Trinidad and Tobago Fiscal Accounts Presented by: Richard Cassie and Kester Thompson XLIV (44 th) Annual Conference of Monetary Studies Central Bank of Suriname November 7-9, /1/212 1

2 Outline Objective Background Pre-Crisis Performance Impact of the Global Financial Crisis Trinidad and Tobago Fiscal Accounts The CLICO Bailout Comparison with rest of CARICOM Conclusions 12/1/212 2

3 Objective To assess the impact of the global crisis on the Trinidad and Tobago Fiscal Operations. To compare the effects with other countries in the region. 12/1/212 3

4 % % of GDP Pre-Crisis Macroeconomic Performance % US$ Million Months Large positive growth was recorded over Growth in the non-energy sector resulted in the period in a continuous fall in unemployment Energy Non-energy Real GDP Inflation (Average) Unemployment Rate (Average) The Current Account Balance strengthened account of an increase in energy exports Resulting in an accumulation in Gross Official reserves , 9, 8, 7, 6, 5, 4, 3, 2, 1, Gross Official Reserves (US$M) Import Cover 12/1/212 4

5 US$WTI/bbl % of GDP Pre-Crisis Fiscal Performance US$HH/mmbtu TT$Million % of GDP % of GDP Energy commodity prices moved favorably over the period Resulting in increased revenues for Government to pursue expansionary fiscal policy , 5, 4, 3, 2, 1, Petroleum (WTI) Natural Gas (HH) Revenue Expenditure Large overall & primary balances were recorded Leading to a decline in public debt Overall Balance Primary Balance External Debt (Right axis) Total Public Debt (Left axis) 12/1/212 5

6 Effects of the Global Financial Crisis Various studies have discussed the economic impact of the global financial crisis on the Caribbean region. Generally, the region was impacted through four (4) main channels. International trade and prices Tourism Remittances Foreign Direct Investments The main impact was felt through the trade channel given the openness of CARICOM countries. Natural resource countries suffered from a sharp fall in commodity prices Tourism dependant economies were severely impacted from the fall out in the tourism industry and decline in remittances. 12/1/212 6

7 Impact of the Global Financial Crisis on Growth in the CARICOM Region % All countries except Guyana and Suriname experienced negative growth in Annual Growth Rates in the CARICOM Region The Bahamas and ECCU countries were hit the hardest on account of the decline in tourism Among the natural resource countries, Trinidad and Tobago experienced the largest decline owing to the fall in exports ECCU SUR TNT BAHS BDOS BELZ GUY JAM Source: Economic Commission for Latin America & the Caribbean 12/1/212 7

8 % of GDP US$ Million % of GDP No. of Persons Transmission Channels of the Crisis The fall in export demand & commodity prices led to a decline in the current account Current Account Balances for CARICOM The tourism industry was negatively affected with the ECCU region hit the hardest Tourist Arrivals in the Caribbean, , 1, 8, 6, 4, 2, Remittances into the region were also impacted on account of increased migrant unemployment Worker Remittances into CARICOM (23-21) The economic recession created a gloomy investment climate resulting in a decline in FDI Net FDI Inflows into CARICOM Guy Jam 12/1/

9 % of GDP The Fiscal Balances Deteriorated The fiscal balances deteriorated shown by the decline in the main indicators of fiscal performance. The overall balance went from a record surplus of $12.1 billion (7.5% of GDP) in 28 to a deficit of $6.9 billion (-5.% of GDP) in 29. The primary balance moved from a surplus of 9.1% of GDP to a deficit of 2.4%, while the non-energy deficit increased from -12.5% to -19.3% of GDP. During the period the recovery in revenues led to an improvement in the fiscal accounts Central Government Fiscal Balances (28-212) Deficits were recorded for most of the period due to increased spending to stimulate economic activity. Overall Balance Primary Balance Non-Energy Balance Source: Ministry of Finance and Central Bank of Trinidad and Tobago. 12/1/212 9

10 Following the deterioration in the Current Account % of GDP A positive relationship exist between the current account balance and fiscal revenues. The decline in energy production and energy prices led to a reduction in exports in 29. Lower exports impacted Government revenues leading to a large deficit in 29. The improvement in the current account balance in 21 resulted in a recovery in the fiscal accounts Relationship between the Current and Fiscal Accounts Current Account Balance Fiscal Balance Source: Ministry of Finance and Central Bank of Trinidad and Tobago. 12/1/212 1

11 TT $Millions Energy Revenue Mirrored Commodity Prices US$/bbl WTI US$ HH 35, Energy Revenues , , 2, 15, 1, , Natural Gas Price Crude Oil Prices Source: Ministry of Finance and Central Bank of Trinidad and Tobago. Source: Central Bank of Trinidad and Tobago. 12/1/212 11

12 Energy Revenues fell in 29 but quickly recovered TT$ Millions Receipts from corporations reflected the changes in energy prices. In 29, receipts from oil companies were cut in half. As energy prices recovered in 21, collections from oil corporations increased. 3, 25, 2, 15, 1, 5, Energy Revenues: Revenue from the Petrochemicals sector increased post-crisis. The Government administered a tax amnesty in 211 which boosted energy collections. Corporation Withholding Tax Royalties Oil impost Unemployment levy Excise duties Petrochemicals Source: Ministry of Finance and Central Bank of Trinidad and Tobago. 12/1/212 12

13 TT$ Millions The Heritage and Stabilization Fund remained strong with regular Government deposits US$ Millions Government made transfers to the HSF except in 29 The Net Asset Value of the HSF increased throughout the period 7, 6, 5, 4, 3, 2, 1, Transfers to the Heritage and Stabilization Fund from Net Asset Value of the Heritage and Stabilization Fund 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, 5 Source: Ministry of Finance and Central Bank of Trinidad and Tobago. Source: Central Bank of Trinidad and Tobago. 12/1/212 13

14 Slower recovery in Non-Energy Revenue TT$ Millions Taxes on income and profits fell by 42% in 29. Non-Energy Revenue from Collections from Goods and Service fell in 29 due to an 18.5 % decline in VAT receipts but recovered thereafter. Non-energy collections improved during , 1, 8, 6, 4, 2, The tax amnesty administered in 211 increased receipts from both businesses and individuals TAXES ON INCOME AND PROFITS TAXES ON GOODS AND SERVICES NON-TAX REVENUE TAXES ON INTERNATIONAL TRADE CAPITAL REVENUE TAXES ON PROPERTY Source: Ministry of Finance and Central Bank of Trinidad and Tobago. 12/1/212 14

15 Expenditure trended upwards TT $ Millions Despite the significant fall in revenue in 29, expenditure increased by about $2 billion. 3, Central Government Spending from , The largest increase in recurrent expenditure was seen in transfers and subsidies. The fall in expenditure in 21 was related to the change in Government. The steady increase in spending after 21 reflected the Government s attempt to stimulate economic activity. 25, 2, 15, 1, 5, 5, 4, 3, 2, 1, Wages and salaries Interest payments Capital expenditure & net lending Goods and services Transfers & Subsidies Total Expenditure Source: Ministry of Finance, Trinidad and Tobago. 12/1/212 15

16 The main driver was Transfers & Subsidies Transfers and subsidies accounted for 49 % of expenditure on average during Share of Expenditure (Average for ) The increase has been driven by the increases in: Petroleum subsidy, Higher Senior Citizens Grants Transfers to State Enterprises. Wages & salaries accounted for 15% over due to the settlement of several wage negotiations. Goods and Services increased owing to higher payments in rents and leases and contract employment. Capital expenditure & net lending 16% Transfers & Subsidies 49% Wages and salaries 15% Goods and services 13% Interest payments 7% Interest payments only accounted for 7 per cent of expenditure. Source: Ministry of Finance, Trinidad and Tobago. 12/1/212 16

17 TT$ Millions Capital Expenditure increased in the latter years The fall in capital spending in 29 and 21 was due to: The winding up of several large scale projects A slowdown in project execution Capital expenditure gained momentum in 211 and 212. Accelerated Housing Programme Education Modernization Programme Road Infrastructure Multi - Fuel Pipeline Capital Expenditure Source: Ministry of Finance, Trinidad and Tobago. 12/1/212 17

18 Deficit Financing TT$ Million Large fiscal surpluses enjoyed prior to the crisis resulted in an accumulation in Government balances. Borrowing for deficit financing was minimal. Draw down on Government Balances (28-211) The $6.7 billion deficit recorded in FY 29 was mainly financed through draw downs on Government balances /28 28/29 29/21 21/211 Government Balances Fiscal Balance Source: Ministry of Finance and Central Bank of Trinidad and Tobago. 12/1/212 18

19 Collapse of CL Financial The collapse of Trinidad and Tobago-based CL Financial Limited(CLF) and related companies represented a major financial shock to T&T and had spill-over effects to the rest of the region. Main reasons for the collapse: Excessive related-party transactions. Offering of high interest rate investment products to finance investments in methanol and real estate developments. The global financial crisis resulted in a collapse in real estate and methanol prices. This caused a significant reduction in the inflow of funds to CLF and its subsidiaries. The Government of Trinidad and Tobago announced a financial package to support three (3) of CLF s subsidiaries: CLICO (Trinidad), BAT and CIB. 12/1/212 19

20 Cost of the CLICO Bailout TT$Million TT$Million % of GDP The bailout comprised the following:. o Cash payments up to a maximum of $75, o Remaining amounts settled through zero-coupon bonds with maturities of 1-2 years. As at end-september 212, the cost of the bailout amounted to $2.5 billion (13.5 per cent of GDP). 12, 1, 8, 6, 4, 2, Annual CLICO support Cash Payments Zero-Coupon Bonds Cumulative Support to CLICO CLICO SUPPORT (% o GDP) CLICO SUPPORT (TT$M) Source: Ministry of Finance & Central Bank of Trinidad & Tobago 12/1/212 2

21 Impact of the Global Crisis on Public Debt % of GDP The large fiscal deficit in FY 29 did not significantly impact the public debt since it was financed through draw downs on Government balances. The CLICO bailout resulted in a sharp increase in debt since it was financed through Central Government domestic borrowing. Central Government domestic debt almost tripled during the period Trinidad & Tobago Public Sector Debt (27-212) Cost of the CLICO Bailout 8.2 The external debt remained below 9 % of GDP. The small increase in 212 reflected new IDB project-oriented loans. Central Gov't Domestic Debt Public Debt without CLICO Source: Ministry of Finance, Trinidad and Tobago. Central Gov't External Debt Public Debt with CLICO 12/1/212 21

22 Comparing T&T fiscal performance with the rest of the CARICOM Region % of GDP Revenues in service- based economies were affected by the sharp downturn in Tourism. Revenues of primary producers of agriculture (Guyana) and Minerals (T&T and Surname) suffered from price declines. Faster recovery in T&T s fiscal accounts due to the quick turn around in energy prices Overall fiscal balances of CARIOM Countries (27-211) ECCU The Bahamas Barbados Belize Guyana Jamaica Suriname Trinidad & Tobago Source: Economic Commission for Latin America & the Caribbean 12/1/212 22

23 % Comparison of Public Debt % of GDP Tourism-intensive countries experienced significant growth in public debt Amongst the commodity-dependant countries, T&T recorded the largest increase in public debt driven by the CLICO bailout. The debt to GDP ratios for Suriname and T&T were relatively lower than the rest of the CARICOM region Growth Rates in Public Debt for CARICOM (28-211) Public Debt in Per cent of GDP (28-211) Source: International Monetary Fund and Central Banks Source: International Monetary Fund and Central Banks 12/1/212 23

24 Fiscal Responses by CARICOM Countries % of GDP Governments attempted to provide fiscal stimulus in 29 to cushion the fall out in economic activity. 7 Government Spending during and after the Crisis In 29, Government spending increased in most countries. 6 5 Suriname and Trinidad and Tobago had the largest increase in spending due to greater fiscal space. There was fiscal consolidation in 21 except in Suriname and T&T BDOS BELZ GUY JAM SUR TNT ECCU Source: Economic Commission for Latin America & the Caribbean 12/1/212 24

25 % of GDP US$Million % of Exports Fiscal Space in the CARICOM Region: Key Indicators % % of GDP % of GDP Average Fiscal Performance (23-27) ECCU TNT JAM GUY BDOS BEL SUR BAH Primary Balance Overal balance Public Debt at the end of ECCU TNT JAM GUY BDOS BEL SUR BAH External Debt Total Debt/GDP Gross Official Reserves at the end of Current Account Balance (23-27) ECCU TNT JAM GUY BDOS BEL SUR BAH ECCU TNT JAM GUY BDOS BEL SUR BAH Debt Service Ratio at the end of De Facto Fiscal Space ECCU TNT JAM GUY BDOS BEL SUR BAH 12/1/212 ECCU TNT JAM GUY BDOS BEL SUR BAH Fiscal Space 1 Fiscal Space 2 25

26 Fiscal Responses by CARICOM Countries Accumulated savings from pre-crisis surpluses and the quick recovery in revenues enabled T&T and Suriname to maintain expenditure. Other countries had limited fiscal space and borrowed to make up revenue shortfalls. As credit ratings in the region fell, private external financing became difficult. Table 1 CARICOM NEW LOAN ARRANGEMENTS WITH THE IMF Jamaica COUNTRY IMF LENDING PROGRAMME LOAN SIZE Macroeconomic & Debt Restructuring $1.27 billion Grenada Extended Credit Facility $13.3 million Antigua & Barbuda Standby-Arrangement (SBA) $125 million Governments relied on borrowing from international institutions such as the IMF to provide a level of fiscal stimulus (Table 1). Jamaica and ECCU countries were constrained due to high pre-crisis debt levels and entered into Standby- Arrangements with the IMF. Haiti Extended Credit Facility $1 million Belize Emergency Assistance $6.9 million Dominica Exogenous Shocks Facility $5.1 million Saint Vincent & Grenadines Exogenous Shocks Facility $5.7 million Saint Lucia Exogenous Shocks Facility $1.7 million Saint Kitts & Nevis Emergency Assistance $3.5 million Source: Caribbean Center for Money and Finance 12/1/212 26

27 Conclusions Trinidad and Tobago s fiscal accounts were hardest hit in fiscal year 28/29. The overall balance moved from a $12.1 billion surplus to a $6.9 billion deficit. The main channel of impact came through international trade. The current account balance fell from 3.3 % of GDP in 28 to 8.5 % of GDP in 29. For commodity exporting countries like T&T, the current account has a direct impact on fiscal performance. The crisis severely impacted Government revenues. The improvement in T&T s fiscal accounts was the fastest in the CARICOM region due to the recovery in energy prices. 12/1/212 27

28 Conclusions The Government of T&T continued to ran fiscal deficits in the postcrisis period on account of increased spending financed by fiscal savings with limited borrowing. Within the CARICOM region, growth in expenditure during 29 was the largest in Suriname and T&T on account of greater fiscal space. The CLICO bailout in T&T was costly and increased the public debt significantly. Notwithstanding, the debt remained manageable and below international benchmarks. 12/1/212 28

29 Thank You! 12/1/212 29