The 2017 Mid-Year Budget Review – Part Two

26 May 2017


A Firstline Securities Limited Blog by: Mike

On the 10th May 2017 Trinidad and Tobago’s Minister of Finance, Colm Imbert, presented his 2017 Mid-Year Budget Review. In this second blog entry, in a series of three, we continue to explore the main contents of that presentation and the implications for the citizens of Trinidad and Tobago.

The energy fiscal regime

The government is currently being assisted by the Fiscal Affairs Department of the International Monetary Fund (IMF) to establish a suitable legal and fiscal framework for oil and gas operations which would promote investment in the energy sector. Part of the reform process will involve a reform of the Supplemental Petroleum Tax (SPT) because it deters investment when the price of oil is close to US$50 per barrel.  Reform of the SPT is expected to bring a degree of stability and predictability to the fiscal regime.

Accessing Venezuelan Gas – the Dragon Field Project

The government is continuing its negotiations to secure access to Venezuelan natural gas as access to this gas would help to alleviate the current chronic shortage in supply being experienced in Trinidad and Tobago. An agreement was signed with the Venezuelan government on the 23rd May 2016 allowing the purchase of gas from the Dragon Gas Field. This field is located close to Shell Trinidad Limited’s Hibiscus Gas Field. It is intended that a pipeline will be constructed from the Dragon Field to Shell’s Hibiscus Platform, which is already connected to the Atlantic LNG plant in Point Fortin. To advance the project a preliminary agreement was signed between PDVSA (the Venezuelan Oil Company), the National Gas Company of Trinidad and Tobago (NGC) and Shell on the 15th March 2017. It is anticipated that the first gas from the Dragon Field would be received in fiscal year 2019/20.

Petrotrin

Petrotrin currently has two significant long term international bonds. Those bonds are:

  • A US$750 million 6% fixed rate bond due in 2022.
  • A US$850 million 9.75% fixed rate bond due in 2019 with a bullet payment payable at maturity.

In respect of the 2022 bond, Petrotrin is meeting its obligations as they fall due. However, given the depressed state of hydrocarbon commodity prices, and based on a current assessment, the settlement of the bullet payment due in 2019 may, in the Minister’s own words, be “problematic” for Petrotrin.

Accordingly, discussions are taking place between the Ministry of Finance and Petrotrin, with the aim of identifying a cost-effective solution that would allow Petrotrin to meet all its obligations under the 2019 bond without an explicit guarantee from the government of Trinidad and Tobago. Despite the recent downgrade of Petrotrin by Moody’s, the Minister does not foresee problems in refinancing this debt on international markets without having to resort to a government guarantee. The Minister does not want to refinance Petrotrin’s long term debt in a manner that would affect Trinidad and Tobago’s debt profile or its debt to GDP ratio.

Refinancing Petrotrin will allow the company to focus on the necessary strategies required to return it to profitability. In this regard, a seven-member committee comprising of representatives of the public sector and the trade unions are looking at the operations of Petrotrin with a view to making suggestions that will assist with the streamlining of operations at the company.

Public sector review in conjunction with the World Bank

The government has commenced negotiations with the World Bank to conduct a review of public expenditure in Trinidad and Tobago. This review would consist of:

  • An assessment of public spending, budget processes, and institutions to arrive at a more streamlined and cost effective process that would assist with the reduction of expenditure and a stronger budgetary process.
  • An assessment to evaluate the efficiency, effectiveness and sustainability of the expenditure within the education sector.
  • An assessment to evaluate the efficiency, effectiveness and sustainability of the expenditure within the health sector.
  • An evaluation of efficiency, effectiveness, and sustainability of public expenditure on social assistance, labour programmes, and pensions. This review will also consider whether expenditure on these areas is sufficient to cover the needs of the poor and vulnerable. It will also involve an assessment of whether existing programmes are correctly targeted to reach the people that are in most need of assistance.

The Heritage and Stabilisation Fund (HSF)

The government is looking to reform the structure of the HSF. To this end, a high-level stakeholder’s forum was formed on the 16th September 2016 to discuss the path forward to reform the HSF.

It is proposed that the HSF should be segregated into two funds: one for stabilisation, and one for heritage. It is also proposed that there should be a single savings rule that will determine savings to both funds and that the savings rule should be closely aligned to the governments medium-term fiscal consolidation plan.

The Minister is ‘moody’ over the vexed issue of credit ratings

In recent times both Moody’s and S&P Global Ratings have downgraded Trinidad and Tobago. While S&P Global Ratings continue to rank Trinidad and Tobago as investment grade, Moody’s now rank Trinidad and Tobago as “speculative”.

Given that Trinidad and Tobago can boast that it has…

  • Foreign reserves of US$9.1 billion representing 10 months import cover and;
  • A Heritage and Stabilisation Fund of US$5.5 billion equivalent to 25% of GDP and;
  • Deposits in sinking funds for the express purpose of repaying debt totalling TT$6.5 billion;

…the Minister considers Moody’s opinion and downgrade to be harsh in the extreme.

The government have therefore approached Fitch Ratings Inc (the third of the three largest credit rating agencies) for an indicative costing for the conduct of a private rating of Trinidad and Tobago. The arrangement with Fitch is expected to be finalised shortly.

The Insurance Bill

The Insurance Bill was laid in Parliament in 2016, and referred to a Joint Select Committee in February 2017, for deliberations that are expected to complete in June 2017. The Minister stated that “the Insurance Bill is an important instrument to Trinidad and Tobago’s Financial Sector and the Government is working assiduously to ensure that the Bill is appropriately implemented.”

Procurement legislation

At the request of the President of Trinidad and Tobago, the Ministry of Finance is assisting the President with the creation of a pool of suitably qualified and experienced candidates from which a Board of the Office of Procurement Regulation could be formed.

With the help of an external consulting firm, the Ministry hopes to provide the President with a list of approximately 20 suitable candidates.

Since April 2017 the government has been actively working with the United Nations Development Program (UNDP) to create robust procurement legislation. The UNDP Consultants have “met with key stakeholders in ministries, departments, and state agencies, in order to understand the challenges faced by entities that undertake significant construction activity, allocate public monies to non-governmental organisations with which they partner in meeting certain strategic objectives, and those where significant procurement is undertaken by decentralised units.”

The Foreign Account Tax Compliance Act (FATCA)

Legislation to support the Inter-governmental agreement between Trinidad and Tobago and the United States passed both Houses of Parliament on the 20th March 2017. The Act will come into force once it has received the necessary Presidential Proclamation.

The Board of Inland Revenue, the Central Bank of Trinidad and Tobago, the Trinidad and Tobago Securities Exchange Commission, and all relevant financial institutions in Trinidad and Tobago (banks, finance houses, and insurance companies) are now busy putting in place systems that would allow the reporting of information as required under the Act.

The Global Forum on Transparency and Exchange of Information for Tax Purposes

While FATCA represents the United States’ approach to global tax evasion, the rest of the world relies on the Global Forum.

Trinidad and Tobago is currently deemed ‘non-compliant’ with the Global Forum’s Standard for the Exchange of Information on Request (EOIR) for tax purposes. To improve its rating Trinidad and Tobago has:

  • Obtained the approval of the Global Forum to defer a commitment given in 2014 to commence the exchange of information automatically in accordance with the Global Standard from 2017 to 2018.
  • On the 7th April 2017, Trinidad and Tobago applied to the Global Forum’s Fast Track Procedure with a view to improving its rating. It is intended that Trinidad and Tobago will become a party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC), and Trinidad and Tobago also intends to become party to the Multilateral Competent Authority Agreement once it has joined the MAC.

CL Financial and CLICO

As at the end of September 2016 the government and citizens of Trinidad and Tobago would have expended TT$20.3 billion in relation to the bailout of CL Financial. In addition to this sum, by the end of April 2017, the government has spent an additional TT$3.2 billion in funding costs, advisor fees, and other costs associated with continuing to support CL Financial. Considering other liabilities that may arise in respect of CL Financial and CLICO, when the dust finally settles, the government, and by extension the citizens of Trinidad and Tobago, may be owed as much as TT$27.7 billion by the CL Financial Group (CLF).

The government’s repayment plan envisages that legitimate non-conflicted third party creditors will be paid in addition to the repayment of the government’s debt. The remaining creditors include CLICO’s and British American Insurance Company (Trinidad) Limited (BAT’s) legitimate policyholders (TT$10.6 billion) and the CIB Investment Note Certificate holders.

The Minister identified several assets of the CLF Group that could be used to repay the remaining creditors and settle the government’s debt. These assets include:

  • 57% of Methanol Holdings International Limited currently held by CLICO.
  • 25% of Republic Bank Limited currently held by CLICO and CIB.
  • 78% of Angostura Holdings Limited (AHL) currently held by CLICO, CLF and CIB.
  • 94% of Colfire.
  • 100% of Caribbean Petrochemicals Manufacturing Limited.
  • 23% of One Caribbean Media.
  • 51% of L J Williams.
  • Other traded equities.
  • A real estate portfolio in CLICO, the value of which has yet to be determined.

According to the Minister, the government will seek to divest some of these assets as required to repay the debt owed to the taxpayers of Trinidad and Tobago.

The Minister made no mention of the CLICO assets already disposed since the government assumed control or the material sums involved in those disposals.

Continuation of this blog entry

This blog entry continues in a third part.

 

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

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