The 2016 Budget Review – Crisis…what crisis?

11 April 2016


Introduction

On the 8th April 2016 the Minister of Finance presented his 2016 Mid-Year Budget Review. In this blog entry we explore the main contents of that presentation and the implications for Trinidad and Tobago and its citizens.

Why is there a need for a Supplemental Budget?

The first question to address is perhaps why is there a need for a supplemental budget in the first place? The answer to that question can be found in a number of places within the Ministers presentation and can be summarised as follows:

  • The Government is seeking a variation of appropriations arising as a result of portfolio changes in Ministries and adjustment to Ministry budgets.
  • The 2016 National Budget was presented on the 5th October 2015 less than one month after the new Government entered office.
  • The Government traditionally presents a review of the economic developments in the first half of the fiscal year (although it doesn’t usually make as many significant adjustments to the national budget as this supplemental budget will make.
  • The government needed to identify the policy changes required to meet its medium term economic objectives.
  • The economic environment Trinidad and Tobago finds herself in has turned out to be significantly worse than the situation that was originally envisaged at the time the national budget for FY2016 was presented on the 5th October 2015.
  • The Government considered that very serious and corrective action needed to be taken “immediately lest we find ourselves in such dire straits that we would have no choice but to request the IMF for balance of payment support.”

Some good news and frankly some quite bad news

First the bad news. Fiscal revenue for the first part of FY2016 is $2.96 billion lower than anticipated at the time of the budget.

The good news is that budgeted expenditure is also lower – by a whopping $7.75 billion but this is not in fact good news because it has mainly arisen as a result of the deferral of a number of big ticket expense items that still need to be paid. Public Servants are the main casualties under this heading (see below).

As a result, there is a budget deficit of $2.91 billion compared to the original estimate of a deficit of $7.70 billion to March 2016. The main drivers of this deficit are a revenue shortfall in tax receipts of over $2 billion from the oil and gas sector (as a result of lower than expected oil and gas prices), and a shortfall in corporation tax receipts from the non-oil and gas sector of $1 billion. Because of the shortfalls in revenue, the government has therefore revised its estimate of budgeted expenditure for FY2016 to $59 billion.

Moving forward – The revised projections

Moving forward and looking at the period from April to September the Minister announced the following measures and targets:

  • Government projections will now be based on an oil price of US$35 and gas prices on US$2.00 per MMBtu.
  • There will be an aggressive effort to collect tax arrears and a special effort will be made to collect Gaming taxes from the betting and gaming sector.
  • The government will use extra-ordinary dividends from state enterprises to bolster the consolidated fund.
  • The Government will look at further divestments along the lines of the First Citizens Bank and TTNGL models.
  • The Government will look to sale some of the remaining CLICO assets including MIHL. Disposal of CLICO assets is likely to yield an additional $3 billion.
  • Government will factor in additional income from Trinidad Generation Unlimited (TGU) expecting to collect an additional S1.7 billion in the second half of FY 2016.

Winding down on the CLICO Issue

At the time of writing over $20 billion of the taxpayer’s money has been spent bailing out CLICO. According to the Minister of Finance now is the time to begin to plan liquidating the remaining assets in order to recoup those funds. Accordingly, the Minister announced the following:

  • The remaining shares in MIHL will be disposed of in accordance with the terms of the shareholder’s agreement. This is expected to generate $2 billion.
  • Attempts will be made to sell CLICO’s portfolio of insurance policies. This is expected to generate an additional $1 billion.
  • CLICO’s shares in Angostura, Home Construction, and CL World Brands which are valued collectively at over $3 billion will be transferred from the Central Bank to the Government. The Government will then take the decision to sell those assets in a “sensible and productive manner”.
  • All “legitimate creditors and policy holders” of CLICO will be repaid in 2016.
  • In respect of Republic Bank, the Minister has requested the Central Bank to begin the preparation work that will allow the disposal of those shares in 2017.

Read the Ministers Lips – Lots of New Taxes

The Minister made a number of changes in respect of taxation that will have implications for all Citizens of Trinidad and Tobago. These changes which are designed to increase the revenue available to the Government include:

  • The imposition of a 7% levy on online purchases of goods and services made through the internet from retail companies resident overseas that are not subject to taxation in Trinidad and Tobago. This will come into effect by September 2016 once the systems are in place with the retail banks.
  • A 50% increase in the customs duty and motor vehicle tax due on luxury vehicles with an engine size that exceeds 1999cc. This increase will come into effect immediately.
  • Significant improvements in the collection of taxes from the gaming and gambling industries.
  • Increased tax on alcohol and tobacco to come into effect from May 2016.
  • As previously announced the introduction of a comprehensive property tax in FY2017. In addition, legislation will shortly be brought to Parliament to allow the Government to collect the amounts due under the Land and Building Taxes Act of 2009. It is expected that assessments of all properties within Trinidad and Tobago will be completed in 2017.

With the above provisions revenue estimates for FY2016 have been revised from $60.28 billion to $52.68 billion. The major components of the shortfall are:

  • Lower than expected taxes from Oil and Gas Companies – $2.4 billion.
  • Lower than expected taxes from Other Companies (declined as a result of slowing of the economy – $1.0 billion.
  • A shortfall in the collection of VAT against expected targets – $3.00 billion.

Looking at the Expenditure side

The Minister made a number of announcements in respect of Government expenditure. These include announcements that:

  • Capital Expenditure will be increased in order to set the platform for future growth. There will be no mass transit system but significant investments will be made in roads and infrastructure.
  • The arrears due to public servants will be paid (see below).
  • The Fuel Subsidy which has cost the state $31 billion over the previous ten years will be phased out (see below).
  • To counter the effect of the removal of the Fuel Subsidy and to assist providers of taxi services there will be a reduction in the amount of tax paid by maxi taxi and taxi providers effective from May 2016.
  • The price of Super Gasoline will increase by 15% to $3.58 per litre. Diesel will also increase by 15% to $2.00 per litre. The effect of the increase in the price of Super Gasoline is that this fuel will no longer be subsidised. The increase in fuel prices comes into effect immediately.

Bridging the Finance Gap

Because of the severe shortfall in Government revenue total expenditure in 2016 will be capped at $59 billion. This is $4 billion less than the original budget.

Looking at revenue and expenditure side by side the government will therefore run a fiscal deficit of $6.7 billion representing 4% of GDP. This shortfall will be financed through borrowings and as necessary withdrawals from the Heritage and Stabilisation Fund.

However current revenue in FY2016 is only expected to be $44 billion leaving a $15 billion “finance gap” in the budget.  This gap will be closed by additional governmental borrowing and one-off extraordinary income items. The measures that will be used to bridge this “finance gap” include:

  • Additional borrowing.
  • Use of one off extraordinary items including the sale of the remaining CLICO assets and the repayment of previous lending to TGU.
  • Additional dividends from NGC.
  • Drawdowns from the HSF.
  • Proceeds from the Phoenix Park IPO.

The imposition of a new fuel price regime

A new fuel price regime will be introduced in 2016 that will mean that the fuel price paid will be linked to changes in the price of oil and petroleum products. However not all the news is bad in this area. The Minister announced the following initiatives and changes:

  • The conversion of all Government vehicles to CNG/Alternative Fuels. Attempts will also be made to convert the fast ferries and water taxies.
  • The removal of all taxes on CNG, electric, and hybrid cars with engine sizes up to 1999cc.

CEPEP and the URP

According to the Minister of Finance with a combined annual cost of $1.3 billion in 2015 the running of CEPEP and the URP has proved to be a costly enterprise offering dubious returns while at the same time distorting the job market. Therefore, commencing in FY2017, Government support of the contractors of the CEPEP program will be reduced over an undisclosed time period.

The URP which cost the taxpayer $600 million in 2015 will also be restructured with a shifting of its focus from maintenance activities that have questionable value to substantive community construction projects and other infrastructure projects that have clearly defined tangible outputs.

Reform of GATE

The Government has established a high level committee to examine the reform of the GATE education programme. To run the GATE programme now costs in excess of $600 million annually and the programme has achieved a significant increase in the rate of tertiary education participation moving that rate from 11% in 2001 to 55% in 2015.

According to the Minister “it is time for the programme to conserve expenditure and make a paradigm shift towards a better alignment with the country’s development needs, coupled with the introduction of some form of means testing.”

The Gate Committee is expected to report in July and changes to the Gate system are likely to come into effect in 2017.

Social Programmes and Subsidies – is austerity knocking at your door?

The Minister made an important statement in his speech that highlighted the Government’s position in respect of social welfare programmes and subsidies in general.

The Minister stated that the Government plans to “focus on rationalising social programmes, improving the effectiveness of existing short term employment programmes, and constraining the growth of transfers and subsidies.”

In other words, the amounts spent on social programmes and subsidies is likely to be significantly reduced moving forward.

Good news for Public Servants

The Minister announced that 50% of the outstanding arrears of salary payments due to public servants will be paid by the end of June 2016. The remaining 50% will either be repaid in interest-bearing Government Bonds by the end of September 2016, or in two further instalments in cash payable in 2017. Public Servants will have to therefore decide which of the two options to select.

Dipping into the Heritage and Stabilisation Fund

According to the Minister of Finance the Heritage and Stabilisation Fund (HSF) is not “a trophy to be kept on a shelf and never be touched” and that the fund caters for withdrawals when the revenues from petroleum taxes are lower than projected by 10%.

Currently Trinidad and Tobago faces a situation where those revenues are 75% lower than expected and accordingly withdrawals will be made from the fund.

The Minister highlighted that other countries in similar situations, such as Saudi Arabia, have withdrawn significantly from their own funds, and that the Government of Trinidad and Tobago plans to do the same.

Reform of the Energy and Non-Energy Tax Regimes

As a result of new global energy environment reform of the energy sector is now considered to be a critical issue for Trinidad and Tobago. The policy of the previous administration to significantly increase allowances for capital investment made by oil companies will result in many of the major players in Trinidad and Tobago paying little or no corporation tax in 2016.

Accordingly, the Government plans to accelerate discussions with the energy companies on a suitable fiscal regime that is fair and works for both parties.

The Government also plans to amend the Oil and Gas tax regimes to promote production in marginal fields and in areas of so called “stranded gas” in order to encourage drilling and production in those areas.

The Government has therefore adopted the position that “every barrel of oil and every cubic foot of gas matters and we will do whatever we can to accelerate and maximise income generating activity in our energy sector.”

Foreign Exchange – stop hoarding your Yankee dollars!

According to the Minister of Finance a “sharp rise in bank credit, particularly for automobiles, undoubtedly some capital flight due to economic uncertainties and the widespread availability of credit cards for online shopping, have added to the pressures in the foreign exchange market. “

As a result, the Trinidad and Tobago dollar has depreciated against the United States dollar by 3.7% from $6.37 to US$1 in September 2015 to $6.61 to US$1 in April 2016. Despite these pressures the exchange rate has been managed by the Central Bank.

The Minister is of the view that “uncertainty about our exchange rate is fuelling demand ad giving rise to speculation and some degree of hoarding.” To remove that hoarding the Minister has stated that the exchange rate will not be allowed to fluctuate by more than 7% from the rate of exchange that prevailed in September 2015, and that as a result measure will be taken to ensure that the rate does not move more than a further 3.3% from the current April rate.

The Ministry of Finance plans to enter into discussions with the Commercial Banks to ensure that foreign exchange priority is given to trade inputs into manufacturing, medical expenses, tuition fees and items of a similar nature. In addition, measures will be taken to improve the availability of foreign exchange for small and medium sized businesses.

A word on liquidity

The government will be working with the Central Bank to improve the liquidity situation in the country. This will likely mean that the Central Bank will perform more open market operations moving forward, and the Minister also suggested that they would be looking at the reserve requirements.

Focusing in on Diversification

In order to ensure the long term economic growth and sustainability of living standards in Trinidad and Tobago diversification is essential. The Governments diversification strategies centre around a number of initiatives. These include:

  • The provision of international financial services.
  • The promotion of tourism.
  • Maritime activities.
  • Promoting manufacturing (see below).

Discussion have commenced with foreign investors in respect of the construction of an International Financial Centre including a 5-star hotel and convention centre to be located at Invaders Bay. This facility will be coupled with the construction of a new commercial port and a maritime and ship building complex to be located South of the Beetham in Port of Spain. This would involve the relocation of the landfill and dump currently situated on this site.

Promoting Manufacturing and Agriculture

A number of initiatives were announced aimed at promoting manufacturing activities and improving the work ethic of employees within Trinidad and Tobago. These include:

  • Provision of a US$ credit line to be channelled through the TT Exim Bank to provide raw material funding for export manufacturing. This should ease manufacturers concerns over the supply of foreign exchange moving forward.
  • Introduction of incentives to investment in the manufacturing sector along the same lines as those offered in the energy sector including the availability of accelerated capital allowances on investment in plant and machinery.
  • Establishing a National Tripartite Advisory Council with a core objective of creating a national campaign highlighting the importance of productivity and a proper work ethic.
  • Continuing incentives for agricultural production already announced in the 2016 national budget together with the provision of new incentives and tax holidays for businesses that process agricultural products.

Reforms to help and stimulate manufacturing are long overdue and we look forward to the Minister giving additional information in respect of the incentives that will be provided moving forward.

Most of these reforms will come into effect in May 2016.

Housing and Construction

The Minister announced a number of concessions aimed at helping the construction sector. Although full details of those concessions were not provided measures are likely to include:

  • Extending the present concessions for the construction of multi-storey car parks and commercial buildings until 2025.
  • Provision of tax concessions for businesses that construct multi-family residential buildings.
  • Provision of concessions in the form of grants and other fiscal incentives to motivate the private sector to get involved in urban renewal and rural development within designated areas.

We are all in this together for the long-haul with a little reality check

Even if oil and gas prices recovered in the next 6 months to the more comfortable vicinity of US$60 per barrel the damage has been done. Exploration budgets have been trimmed and there have been significant lay-offs in personnel in the oil and gas industry. While we have Juniper and we have Starfish coming on line (and possibly the shared field of Loran-Manatee), we should not expect that there will be significant new developments or exploration in the next five to ten years. Also we should expect some of the smaller producers to go out of business. That is the reality we find ourselves in.

Chastisement of the Board of Inland Revenue – a time to privatise?

The Minister of Finance made a number of statements that implied he expected the Board of Inland Revenue (BIR) to up its game. Perhaps now is the time to consider whether the imposition and collection of taxes should be in private hands. Let us know your views in this area.

Implications of sinister manipulation of data by the previous administration

The presentation contained a number of accusations that the previous administration had manipulated economic data, or placed road blocks in the way of independent organisations attempting to assess the economic situation of Trinidad and Tobago. Specifically, the Minister of Finance stated:

  • There are no official estimates of GDP from the Central Statistical Office (CSO) for 2015 because of the dysfunctional condition that organisation was left in by the previous administration. Accordingly, the actual economic performance in FY2015 was much worse than originally anticipated or portrayed with growth in real GDP being estimated by the Central Bank at -2% rather than 0% as previously published. For the record the Minister expects a similar decline of -2% for 2016.
  • As part of the conditions attached to Trinidad and Tobago’s membership of the International Monetary Fund (IMF) consultations are supposed to take place with IMF officials. These consultations should have taken place in 2015 before the election but were delayed by the previous administration. A similar delaying tactic was also pursued in respect of visits by the main credit rating agencies, Standard and Poor’s, and Moody’s. The Minister confirmed that visits have now taken place with all major agencies including the regional agency CARICRIS.

Crisis…what crisis?

Although it may seem that this blog entry presents a grim tableau of gloom and despair this is perhaps not in fact the case.

According to the IMF team that recently visited Trinidad “with substantial financial buffers and low albeit rising levels of public debt, Trinidad and Tobago is not in crisis.”

Crisis…what crisis?

Closing thoughts – time to consider your investing strategies

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