The 2017 Mid-Year Budget Review – Part One

25 May 2017


A Firstline Securities Limited Blog by: Mike

On the 10th May 2017 the Minister of Finance of Trinidad and Tobago, Colm Imbert, presented his 2017 Mid-Year Budget Review. In this blog entry, and in the subsequent two blogs, we explore the main contents of that presentation and the implications of the review for the citizens of Trinidad and Tobago.

The economic climate

The economic climate of Trinidad and Tobago can be characterised as follows:

  • The economy of Trinidad and Tobago has experienced three consecutive years of decline fuelled by a 23% fall in petroleum output between 2013 and 2016 (oil production in 2016 was 66,000 barrels per day – the lowest recorded figure for 50 years).
  • The sustained period of low oil and gas prices has severely reduced Government revenue. This in turn has led to a necessary reduction in central government expenditure from TT$63 billion in 2015 to TT$53 billion in both 2016 and 2017 (projected). The reduction in expenditure has impacted the construction, manufacturing, and services sectors of the economy.
  • Since 2014, Trinidad and Tobago has lost annually TT$20 billion in revenue and US$2.5 billion in foreign exchange earnings.


A partial recovery of oil and gas production and prices?

One of the problems Trinidad and Tobago has faced over the last three years has been a shortage of gas production. There are signs that this trend is starting to reverse. In 2016, production from the Angostura and Sercan gas fields commenced, and in 2017 we will witness the start-up of the Trinidad Onshore Compression Project (TROC) and new production from the Juniper field.

The Minister also stated that he expected oil and gas prices to continue a gentle recovery in 2017, leading to a moderate growth in energy related tax collections for the state. There is some support for the Ministers view. Compared to 2016, when gas prices dropped below US$2.00 per MMBtu, in 2017 prices have averaged above US$3.00 per MMBtu.

In comparative terms the 2017 budget was predicated on an average oil price of US$48 per barrel and a natural gas price of US$2.25 per MMBtu. In the first six months of fiscal year 2017 the prices have averaged US$50.45 per barrel and US$3.30 per MMBtu. This has resulted in tax collections from the energy sector of TT$3.6 billion against a budget of TT$2.6 billion for the first half year of 2017.


The performance of Trinidad and Tobago in the first half of Fiscal Year 2017

Measuring the performance of the economy of Trinidad and Tobago is difficult because of a lack of key economic data from the Central Statistical Office (CSO). However, preliminary figures for 2016 released by the CSO indicate that real GDP declined by 2.3% in 2016.

There are, unfortunately, no official estimates for 2017 as at the date of the Minister’s presentation.

Despite a 7% depreciation of the TT$ against the US$ over the last year, and an increase in fuel prices (driven by the commencement of a process to remove fuel subsidies totally over the next three years), inflation (measured by the Retail Price Index) has fluctuated between 2.5% and 3.6% in the year, while core inflation has remained relatively stable between 1.3% and 2.7%.

Unemployment has risen by just over half a percent to reach 4% at the end of 2016.

Despite the significant fall in foreign exchange earnings referred to above, the level of foreign reserves has suffered only a marginal fall from US$10.4 billion in May 2014 to US$9.1 billion in April 2017. This represents a reduction in import cover from 12 months to 10 months.


Central Government Finances

In respect of central government finances the Minister of Finance advised:

  • In the first half of the fiscal year central government operations resulted in an interim deficit of TT$5.4 billion against a budgeted deficit of TT$3.85 billion. The unfavourable variance arose because of shortfalls in capital revenues from asset sales (CLICO assets are included here), and a shortfall in tax collections especially from VAT. The deficit has been financed by a drawdown from the Heritage and Stabilisation Fund of US$251 million (TT$1.7 billion) on the 16th March 2017, and by increased central government borrowing.
  • Tax collections from petroleum companies increased as oil prices averaged above US$50.45 per barrel and triggered the levying of the Supplemental Petroleum tax (SPT).
  • Government expenditure for the first half year was 14% lower than projected in the budget, with the central government spending TT$23.5 billion against a budget of TT$27.3 billion.
  • The government is in the process of selling CLICO assets. The sale of CLICO’s shareholding in Methanol Holdings International Limited is expected to yield TT$2.3 billion while the sale of other CLICO assets is expected to yield a further TT$3.4 billion. According to the Minister the sale of CLICO assets has been “delayed because of complex legal, regulatory, corporate, and administrative roadblocks which we are in the process of unravelling, once and for all.”
  • The VAT system continues to perform poorly with a shortfall in collections of TT$669 million year to date.
  • On a positive note, income tax collections were 11% higher than projected because of the collection of the SPT (mentioned above), as well as the imposition of the new 30% income tax band levied on corporations and individuals (the so called “Millionaires Tax.”).
  • At the end of fiscal year 2016 net public sector debt amounted to TT$87.6 billion which equated to a debt-to-GDP ratio of 60.1%. For comparative purposes, at the end of 2010 the corresponding debt-to-GDP ratio was 32.1%.

 

Revised fiscal projections for 2017

Over the last 18 months the government has made several adjustments to the tax regime of Trinidad and Tobago. These adjustments include:

  • The introduction of the 30% tax band on those who make over $TT1 million annually.
  • The commencement of a three-year process to remove the fuel subsidy entirely.
  • An intensified effort on improving tax administration and compliance, and a reduction in the impact of tax leakage and tax avoidance.
  • Accordingly, the central government deficit for 2017 is now projected to be TT$5.9 billion representing 3.8% of GDP compared to an original estimate of TT$6 billion or 3.9% of GDP.

 

The Property Tax

The Minister reported that Phase One of the implementation of the Property Tax (the development of Valuation Rolls) was progressing smoothly.

Under this new tax property owners must submit Valuation Return forms on or before the 22nd May 2017. The Minister estimated that the central government have lost TT$2.5 billion since 2009 because of the non-imposition of the Property Tax.

To administer the tax the Ministry of Finance is recruiting 248 new staff members for the Valuation Department. This number includes 180 field assessors and 15 field assessor supervisors.

The Ministry of Finance is currently in the process of gathering information on all relevant properties in Trinidad and Tobago. Only on completion of the Valuation Rolls will property owners receive a notice from the Commissioner of Valuations detailing the tax due and payable. According to the Minister it is at this point that the collection of the Property Tax will commence.

 

The Property Tax – A Footnote

The Property Tax is currently the subject of legal action brought in the High Court before Justice Frank Seepersad on the 19th May 2017 by the former Agriculture Minister of Trinidad and Tobago, Devant Maharaj. Under the terms of a court order issued on that date, homeowners are not required to submit valuation return forms.  The parties return to court on the 31st May 2017.

The Trinidad and Tobago Revenue Authority

The government still intends to have a new Revenue Authority in place by the end of the next fiscal year. Both the International Monetary Fund (IMF) and the Caribbean Regional Technical Assistance Centre (CARTAC) visited Trinidad and Tobago in October 2016 to review the current state of revenue and customs administration, and recommend strategies for strengthening that system including the creation of a new Revenue Authority. Accordingly, a project implementation committee has been established to expedite the work required to create the Revenue Authority.  It is expected that the new Revenue Authority will come into being next year.

 

Regulating the Gaming Industry

A Joint Select Committee (JSC) of Parliament has been reviewing the Gambling (Gaming & Betting) Control Bill of 2016 together with all the supporting regulations. A final report is expected from the JSC before the end of the current Parliamentary session.

The government expects to have in place a rigorous licensing process, compliance, and enforcement provisions, and an efficient taxation system to regulate an industry that is estimated to be generate economic activity of TT$10 billion annually.

The passing of the Bill will not only assist the government on the revenue front, but will also represent an additional step towards complying with international anti-money laundering standards and requirements.

 

The Sale of Assets Programme

The Minister reported that the sale of assets programme remained on track.

  • The additional offering of shares in First Citizens Bank (FCB) attracted 4,440 applicants who received 32,035,770 shares out of a total 48,495,665 available for sale. This generated TT$1.025 billion.
  • An additional offering by the National Gas Company of Trinidad and Tobago Limited (NGL) of 40,248,000 Class B shares representing 26% of the issued share capital of Trinidad and Tobago NGL would be launched shortly. This is expected to generate TT$800 million and would reduce NGL’s shareholding to 25%. The remaining 25% holding allows NGL to continue to retain strategic control of Phoenix Park Gas Processors Limited (PPGPL).
  • The divestment of Trinidad Generation Unlimited (TGU) by Union Estate Electricity Generation Company Limited is advancing. The government intends to pursue the introduction of an Independent Power Producer into the ownership and operational structure of TGU. It is proposed that the Independent Power Producer will hold 40% of the company while an additional 10% of the share capital will be offered to the public. Divesting TGU is expected to generate at least TT$3 billion depending on the valuation of TGU.

 

Continuation of this blog entry

This blog entry continues in a second part.

Closing thoughts – a time to chill and a time to invest?

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