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.

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Global Slowdown Forces Budget Cuts
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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

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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.

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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."

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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.

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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