Cur­tis Williams

cur­tis.williams@guardian.co.tt

The in­va­sion of Ukraine by Rus­sia has sent shock­waves around the world. It is, af­ter all, war on Eu­ro­pean soil, on a scale now seen since 1945 and in­volves the largest mil­i­tary in Eu­rope and one of the largest coun­tries on the con­ti­nent.

It is al­so a war among the Slav­ic peo­ple and the com­men­ta­tors have wast­ed no time in re­mind­ing the west­ern world that these Ukraini­ans are peo­ple who look like them and must be pro­tect­ed from the in­vaders.

T&T’s po­si­tion as ar­tic­u­lat­ed by our Am­bas­sador to the Unit­ed Na­tions is that the war is un­pro­voked and a breach of in­ter­na­tion­al law. Ac­cord­ing to our am­bas­sador it is al­so im­por­tant to coun­tries like ours who re­ly on the rule of law to pro­tect us from larg­er coun­tries that may sim­ply want to claim ter­ri­to­ry.

It is an im­por­tant point and one that has shaped T&T’s for­eign pol­i­cy for decades. It is why the Kei­th Row­ley ad­min­is­tra­tion, some years ago, came out against Venezuela’s at­tempt to bul­ly Guyana and claim part of that coun­try’s ter­ri­to­ry as its own.

So the war in Ukraine has im­por­tance for T&T on the geopo­lit­i­cal side and so far the coun­try has ac­quit­ted it­self well in adopt­ing a clear po­si­tion on the is­sue.

But the cri­sis in Ukraine po­ten­tial­ly has sig­nif­i­cant im­pli­ca­tions for the T&T econ­o­my.

As the 2021 IMF coun­try re­port not­ed, the pan­dem­ic sig­nif­i­cant­ly im­pact­ed the econ­o­my with a mas­sive 7.4 con­trac­tion in 2020 and a pro­ject­ed one per cent de­cline in 2021. It must be not­ed most econ­o­mists be­lieve the ac­tu­al­ly con­trac­tion in 2021 was clos­er to three per cent.

The IMF blamed weak­er de­mand for en­er­gy prod­ucts in the first half of 2021, the clo­sure of some petro­chem­i­cal plants and low­er out­put from the en­er­gy sec­tor as ma­jor rea­sons for the con­trac­tion.

“En­er­gy pro­duc­tion de­clined sig­nif­i­cant­ly in 2020 and fur­ther in ear­ly 2021 due to unan­tic­i­pat­ed main­te­nance ac­tiv­i­ty in some en­er­gy fa­cil­i­ties and the clo­sure of sev­er­al petro­chem­i­cal plants. Com­bined with weak­er glob­al de­mand and the drop in en­er­gy prices in 2020, these fac­tors sub­stan­tial­ly low­ered en­er­gy ex­ports and rev­enues,” the coun­try re­port read.

Fur­ther, T&T’s over­all fis­cal deficit widened to 11.6 per cent of GDP in FY2020 from 3.7 per cent of GDP in FY2019, dri­ven most­ly by low­er en­er­gy tax pro­ceeds and out­lays to mit­i­gate the pan­dem­ic. At 10.1 per cent of GDP, the over­all fis­cal deficit in FY2021 re­mained high due to con­tin­ued weak rev­enue per­for­mance not­ed the IMF.

“As a re­sult of the large deficits and the deep GDP con­trac­tion, cen­tral gov­ern­ment debt rose sharply from 45.4 per cent in FY2019 to 66 per cent of GDP in FY2021. Pub­lic debt rose to 87 per cent of GDP, sig­nif­i­cant­ly sur­pass­ing the gov­ern­ment’s soft pub­lic debt tar­get of 65 per cent of GDP” said the IMF re­port.

So we are fac­ing ma­jor hur­dles in the coun­try. We have bur­geon­ing pub­lic debt with a debt to GDP ra­tion of 87 per cent, much high­er than the rec­om­mend­ed 70 per cent as the out­er lim­it.

We have faced low en­er­gy rev­enues due to de­pressed prices in 2020 and the first half of 2021 and per­haps more im­por­tant­ly low en­er­gy out­put.

The fail­ure of suc­ces­sive gov­ern­ments to trans­form the T&T econ­o­my means that the coun­try still re­lies on oil and gas rev­enue for more than 70 per cent of its for­eign ex­change and al­so de­pends on en­er­gy rents for a sig­nif­i­cant por­tion of gov­ern­ment rev­enue.

The prob­lem is over the last sev­en years the ad­min­is­tra­tion, has at best, failed in its ef­forts to get more pro­duc­tion go­ing in both oil and gas and while the pan­dem­ic did have an im­pact on bpTT’s projects, T&T’s oil and gas pro­duc­tion has fall­en sig­nif­i­cant­ly over the last sev­en years.

The war in Ukraine re­sult­ed in high en­er­gy prices. On Tues­day, the price of Brent set­tled at over US$105 while West Texas In­ter­me­di­ate was over US$102 a bar­rel.

These prices are fu­ture prices but it shows that the mar­ket an­tic­i­pates chal­lenges with sup­ply due to the on­go­ing con­flict and with Rus­sia be­ing one of the world’s largest pro­duc­ers of both oil and gas, there is a glob­al sen­ti­ment that the val­ue of a bar­rel of oil at this stage is over US$100.

My own feel­ing is that with the lack of sanc­tions on Rus­sia’s oil and gas in­dus­try and the sym­bi­ot­ic re­la­tion­ship be­tween Russ­ian en­er­gy and Eu­rope’s need for the com­modi­ties that the oil and gas will con­tin­ue to flow and all things be­ing equal there will be some sta­bil­i­sa­tion of the prices over time.

But it means that the T&T gov­ern­ment and oil com­pa­nies op­er­at­ing here, in­clud­ing state-owned Her­itage, must be smil­ing all the way to the bank.

To un­der­stand the im­pact one can look at the Min­is­ter of Fi­nance bud­get pre­sen­ta­tion. The Min­is­ter of Fi­nance ex­pect­ed that oil prices would av­er­age US$65 a bar­rel dur­ing the fis­cal 2022. So far for the fi­nan­cial year crude prices have av­er­age about US$85 a bar­rel. If we break it down fur­ther, at US$65 a bar­rel the Min­is­ter of fi­nance was not ex­pect­ing any Sup­ple­men­tal Pe­tro­le­um Tax­es. By a rough back of the en­ve­lope cal­cu­la­tion, in the last five months the Min­is­ter should have re­ceived in SPT alone be­tween $250 mil­lion to $300 mil­lion that he would not have ex­pect­ed.

The chal­lenge he will face are two-fold. Part of that ad­di­tion­al SPT will be writ­ten off on the in­creased sub­sidy for fu­el at the pump. Ad­di­tion­al­ly he bud­get­ed for over 80,000 bar­rels of oil per day. I had warned the Min­is­ter in Oc­to­ber that he would not achieve his es­ti­mates on pro­duc­tion and true to form the Min­is­ter’s num­bers are prov­ing wrong, with crude pro­duc­tion av­er­ag­ing a mere 60,000 bar­rels of oil per day. Even if he was blind-sided by the BHP débâ­cle, he should have known that 80,000 was not pos­si­ble at this stage.

So the high­er prices caused by the war and its pre­lude will help but the net ef­fect of low­er pro­duc­tion could still leave Mr Im­bert in a pick­le.

Sim­i­lar­ly nat­ur­al gas and petro­chem­i­cal prices have re­mained high.

Again, as he has done in every bud­get since 2016, Mr Im­bert has got­ten his pro­duc­tion fig­ures wrong. The high­er prices are a ma­jor help but the wor­ry is the low nat­ur­al gas pro­duc­tion. That hurts with tax­es at the well head, tax­es on prof­its, tax­es on the petro­chem­i­cal com­pa­nies.

In all of this we have not con­sid­ered loss­es brought for­ward. In oth­er words, we should be in a boom­ing econ­o­my and while the open­ing up of the rest of the econ­o­my will help, the IMF’s five per cent growth pre­dic­tion is in se­ri­ous doubt.

This takes us to the ele­phant in the room. That of ris­ing in­fla­tion. With many peo­ple on fixed salaries that are now at least five years old and with glob­al prices in­creas­ing, this war in Ukraine threat­ens to add to that in­fla­tion.

High­er oil prices will lead to high­er ship­ping costs and the pass­ing on of these in­creas­es to the con­sumers. It will like­ly re­sult in high­er wheat prices and with it flour prices, so from roti, to bread, to pas­tries, the pos­si­bil­i­ty ex­ist of high­er prices.

To seek to re­duce in­fla­tion­ary pres­sure in the west one can ex­pect high­er in­ter­est rates. That will have im­pli­ca­tions for T&T’s for­eign pub­lic debt and the need for more forex to ser­vice that debt. It will al­so lead to the Cen­tral Bank hav­ing to raise the re­po rate, mak­ing in­ter­est rates high­er, cost of bor­row­ing for in­di­vid­u­als and busi­ness­es greater and po­ten­tial­ly im­pact both the spend­ing pow­er of in­di­vid­u­als and busi­ness­es and the tim­ing of in­vest­ments.

It is al­so like­ly to neg­a­tive­ly im­pact the val­ue of our sov­er­eign wealth fund.

So Ukraine mat­ters and even though we have lit­tle or no trad­ing links with the two Slav­ic coun­tries, what hap­pens there will im­pact cit­i­zens in T&T.

The chal­lenge is whether the gov­ern­ment and the coun­try will awake for its slum­ber and re­alise that eco­nom­ic trans­for­ma­tion is our on­ly chance and pre­tend­ing every­thing is okay, or be­ing afraid to of­fend the max­i­mum leader will not help our cause.

The Russ­ian oli­garchs are be­gin­ning to find this out the hard way.