INSULATED BUT NOT IMMUNE FROM GLOBAL SLOWDOWN, TRINIDAD AND

UNCLAS SECTION 01 OF 03 PORT OF SPAIN 000552 SENSITIVE SIPDIS STATE FOR EEB, WHA/EPSC, WHA/CAR TREASURY FOR ERIN NEPHEW COMMERCE FOR GERRI WORD, MICHELLE BROOKS ENERGY FOR GARY WARD, SAM BROWNE SANTO DOMINGO FOR REGIONAL COMMERCIAL OFFICE E.O. 12958: N/A TAGS: ECON EFIN ETRD EPET PGOV TD SUBJECT: INSULATED BUT NOT IMMUNE FROM GLOBAL SLOWDOWN, TRINIDAD AND TOBAGO CUTS SPENDING SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY ¶1. (SBU) SUMMARY: Trinidad and Tobago has avoided financial contagion but is feeling the impact of weak demand for its commodities. Two months after the GOTT delivered a record US$8 billion budget premised on oil at $70 per barrel and natural gas at $4 per MMBTU netback, Prime Minister Manning announced cuts in discretionary spending in response to a projected budget shortfall of US$850 million, while promising that salaries and pensions, social programs, and law enforcement spending would be spared. T&T's foreign exchange reserves, balance of payments and debt ratios were all in healthy ranges going into the global crisis, but GDP growth had already slowed substantially, and inflation continued spiraling upward, reaching 15.4% (YOY) in October. The GOTT and foreign companies maintain they will not slow the pace of investment in upstream oil and gas and downstream gas-based industries. While T&T is well-positioned for the short term, GOTT efforts to diversify the economy have yielded modest results that would be overwhelmed by a prolonged global recession. END SUMMARY. -------------- Global Slowdown Forces Budget Cuts -------------- ¶2. (SBU) After weeks of downplaying the local impact of the global financial crisis, the GOTT has acknowledged a revenue shortfall resulting from declining export revenue and consequently has announced spending cutbacks for the 2009 fiscal year (October-September). On November 17, a visiting IMF mission announced its finding that T&T would experience a budget deficit equivalent to 2% of GDP, or TT$3 billion. Three days later, in a prime time address, Prime Minister Patrick Manning predicted a TT$6 billion (US$1 billion) shortfall and announced that ministers would review budget priorities and identify cuts in discretionary spending. ¶3. (SBU) On November 30, Manning again took to the airwaves to announce a revised shortfall projection of TT$5.3 billion (US$850 million) and spending cuts of TT$4.55 billion, to be achieved in part by deferring the construction of new schools, hospitals, and housing. While this leaves a gap of TT$741 million (US$120 million),Manning voiced a determination not to resort to deficit financing or dip into the sovereign wealth Heritage and Stabilization Fund (HSF),suggesting that a marginal increase in US natural gas prices could easily make up the difference. He also promised that salaries, pensions, social programs, and law enforcement spending would not be cut, and that "make-work" job programs would be maintained. ¶4. (SBU) The review of spending plans appears to have been triggered by decisions at four of Trinidad's ammonia and nitrogen plants to suspend operations for extended maintenance in response to weak demand and sharp price declines in international markets. Compounding the loss of revenue is a global methanol market in gradual decline from its end-2007 peak as well as mechanical problems that forced a shutdown at Methanol Holdings' M5000 plant, one of the world's largest. Trinidad's two steel mills also have reportedly cut back production in the face of declining prices. These demand reductions have left the state-owned National Gas Company looking for a market for some 15% of the gas it is committed to buy from upstream producers. ¶5. (SBU) The GOTT's record TT$49 billion (US$8 billion) budget for FY-2009, which Finance Minister Tesheira presented on September 22, raised early concern among local economists that it would fuel inflation, already in double digits, while not saving enough of the country's windfall energy revenue in the HSF. Premised on oil at US$70 per barrel and natural gas at US$4 per MMBTU netback, the original FY-09 budget scenario had the GOTT spending all projected revenue and saving only if actual revenues exceeded projections. Concern turned to criticism, however, as oil and gas prices dropped in the ensuing weeks, particularly since T&T's hydrocarbon exports sell below international benchmark prices. (Note: Energy sector contacts estimate that T&T's mix of crude oil averages US$18-$20 below the West Texas Intermediate benchmark price, while the netback for T&T's liquefied natural gas exports runs about half of the Henry Hub price.) ¶6. (SBU) Going into the crisis, T&T's macroeconomic outlook was mixed. Economic growth was already slowing, from 5.5% in 2007 to 3.5% in 2008, but T&T's external financial position was fairly PORT OF SP 00000552 002 OF 003 strong, with US$10 billion in foreign exchange reserves (equivalent to 12 months of imports),a current account surplus equivalent to 26% of GDP, and external debt at 6% of GDP as of end-2007. The HSF balance stands at US$3.2 billion, or roughly 5 months of expenditures. ¶7. (SBU) On the downside, T&T has been experiencing its highest levels of inflation in 14 years. After flirting with 10% (year-on-year) twice since 2006, headline inflation crossed firmly into double digits in June, rising to 15.4% by the end of October. Private sector economists are unanimous in faulting GOTT spending, fueled by record oil and gas revenue, for undercutting the Central Bank's strenuous efforts to contain inflation with monetary tools. Employers reacted to the initial FY-2009 budget with strong concern over the prospect of more inflation and union demands for increased wages leading to a wage-price spiral. Finance Minister Tesheira exacerbated concern by omitting any mention of inflation targets from her September 22 budget presentation to Parliament. In subsequent meetings with business organizations, Tesheira identified a medium term (i.e. 2011) target of 8% and suggested that 10% might be achievable in 2010, but she did not name a target for 2009, leaving the impression that the GOTT was prepared to watch inflation climb significantly higher. The mid-November budget review and the visit of the IMF mission brought welcome clarity, as the IMF announced its prediction that declining international food prices and GOTT budget cuts would help to moderate inflation to 12% at end-2008 and to 7% in 2009. -------------- T&T Banks Avoid Financial Contagion -------------- ¶8. (SBU) Apart from some jitters in Trinidad and Tobago's thinly capitalized stock exchange in early October, the financial sector has avoided any contagion effect. According to financial sector contacts, T&T's leading banks, including those doing business in the wider Caribbean and Central America, generally have not relied on overseas funds for deposits or lines of credit and tend not to invest in sophisticated instruments such as mortgage backed securities or derivatives. Republic Bank chairman Roland Harford told one local paper, "We were never brave enough to get into hedge funds." Former T&T finance minister Wendell Mottley echoed the assessment in more colorful terms at a recent American Chamber of Commerce meeting, saying "Banks in the English-speaking Caribbean didn't drink the Kool Aid." -------------- IFC: If you build it, will they come? -------------- ¶9. (SBU) On the other hand, the GOTT's plan to launch a Trinidad and Tobago International Financial Center (TTIFC) suffered setbacks with the sale of Bear Stearns and collapse of Lehman Brothers. Both companies had shown interest in becoming "anchor tenants" at the Port of Spain waterfront complex currently designated to house the TTIFC. Finance ministry officials have sought to portray the global crisis as an opportunity for "new players like T&T," but as the dimensions of the difficulties became apparent, they quietly called off an IFC launch event planned for October 23. Efforts to modernize financial regulations are continuing, as the TT Parliament's lower chamber passed a Financial Institutions Bill on November 14. The Prime Minister and Finance Minister also traveled to the UAE in early November to follow up on previous discussions of cooperation and possible investment in T&T's IFC by Dubai's International Financial Center. Central Bank Governor Ewart Williams summed up prospects at a November 17 public forum, noting that the GOTT is creating physical and regulatory infrastructure for an IFC, but it will be up to foreign financial institutions to decide whether to establish a presence in Port of Spain. -------------- -------------- Still Dependent on Energy, but Better Gas than Oil -------------- -------------- ¶10. (SBU) The planned IFC is one of several GOTT initiatives to diversify away from energy. None of these initiatives is very far off the drawing board, which leaves Trinidad and Tobago still dependent on its energy sector. Nevertheless, T&T is in a stronger position to weather the global slowdown than its tourism-dependent Caribbean neighbors, and it is arguably better prepared for the current global economic turmoil than it was for the oil bust of the PORT OF SP 00000552 003 OF 003 1980s. The gradual decline in oil production and rapid increase in natural gas has brought less exposure to oil market volatility and increased reliance on exports of liquefied natural gas to the US market under long-term contracts. Apart from temporary shutdowns of ammonia and nitrogen plants, T&T's major foreign oil companies are so far signaling their intent to continue investing in exploration and production, while pressing their case for more favorable financial terms from the GOTT. For his part, PM Manning underscored his intention to press forward with downstream projects in aluminum and plastics, intended to generate increased employment and create a reliable supply of low-cost inputs for other downstream manufacturing. The questions on everyone's minds with respect to a global slowdown - how long and how deep - are translating into questions in T&T about the viability of these projects and the availability of financing. KUSNITZ