Comments on 20102011 budget R Hosein Main Economic

Comments on 2010/2011 budget R Hosein

Main Economic Considerations l l l International environment Regional environment Basic national macroeconomics: a) b) c) d) e) 2 Real GDP: growth and structure of the economy Unemployment Inflation CAB Fiscal balance and debt

International Environment

International environment l 4 This raises the whole issue about the demand for oil which in the context of the supply of oil will (other things constant) help to determine the price of oil. The budget went at $65 a barrel, which means that we are expecting a price of oil on the market of US$78 -85 a barrel, as we receive according to one of this country leading energy economist, on average around 0. 7 to 0. 8 (say. 75) of the quoted WTI price. Is this US$65 realistic?

International Environment 160 Cushing, OK WTI Spot Price FOB (Dollars per Barrel) 140 120 100 80 60 40 20 0 Jan 04, 1999 Jan 04, 2000 Jan 04, 2001 Jan 04, 2002 Jan 04, 2003 Jan 04, 2004 Jan 04, 2005 Jan 04, 2006 Jan 04, 2007 Jan 04, 2008 Jan 04, 2009 Jan 04, 2010

Summary sample statistics Summary of sample statistics for WTI Spot Price FOB (Dollars per Barrel) Post 1999 Post 2003 Post 2005 Post 2008 Mean (Average) 49. 99 62. 8 72. 13 80. 15 Median 23. 11 61. 56 68. 63 76. 53 Max 145. 31 Min 11. 38 25. 25 30. 28 Standard dev 26. 51 24. 01 20. 68 25. 56 Range (Max-Min) 133. 93 120. 06 115. 03 Source: Computed 6

10 n- Ja 09 n- Ja 08 n- Ja 07 n- Ja 06 n- Ja 05 n- Ja 04 n- Ja 03 n- Ja 02 n- Ja 01 n- Ja 00 n- Ja 99 n- Ja 98 n- Ja 97 n- Ja 96 n- Ja 95 n- Ja Crude Oil Production Daily Average (000's Barrels) 155 145 135 125 115 105 95

International environment l 8 As concerns gas prices, for the first 8 months Henry hub natural gas prices averaged US$4. 7 per mmbtu and for the last fiscal year it averaged US$4. 5 per mmbtu. On a netback basis, T&T receives approximately 50 -55% of the Henry hub gas price. On this basis the effective fair market value at the well head would be around US$2. 3 mmbtu. The budgeted price of US$2. 75 is not very far off from this type of practical reasoning.

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Employment by industrial sector (% of total employees) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 p BT 19000 18200 16900 14100 12800 17100 17800 18000 17600 18500 15900 15400 15900 16100 16900 17100 17524 14986 15600 15500 17100 16100 18400 19095 21400 19900 20000 % share 4. 89 4. 55 4. 23 3. 47 3. 27 4. 56 4. 79 4. 92 4. 71 4. 62 3. 92 3. 81 3. 83 3. 73 3. 81 3. 72 3. 66 3. 06 3. 1 3. 02 3. 27 3. 03 3. 28 3. 32 3. 27 3. 64 3. 33 3. 34 Employment NBT % share 64400 16. 57 65600 16. 4 64200 16. 08 62500 15. 37 56700 14. 48 49500 12. 68 49000 13. 17 53900 14. 51 52400 14. 33 50200 13. 43 59000 14. 74 60100 14. 81 56800 14. 05 59700 14. 37 61900 14. 36 61000 13. 74 63400 13. 79 65058 13. 58 68287 13. 97 70000 13. 93 69000 13. 46 73500 14. 04 66900 12. 58 67700 12. 08 63000 11. 02 62345 10. 66 59700 10. 16 59900 10. 04 60000 9. 98 NT 305300 316200 318200 330000 322100 323100 306000 299800 295300 306000 322800 329900 332200 339800 353200 366000 379200 396357 405671 417000 428100 433000 448900 474200 489500 503275 506300 517000 521000 % share 78. 54 79. 05 79. 69 81. 16 82. 25 82. 76 82. 24 80. 75 81. 86 80. 64 81. 28 82. 15 81. 8 81. 91 82. 45 82. 49 82. 76 82. 97 83. 52 82. 7 84. 4 84. 63 85. 65 86. 07 86. 19 86. 63 86. 7

Output of industrial sectors (as % of GDP) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Real value added BT 11, 425. 95 10, 842. 24 9, 631. 90 10, 221. 03 10, 880. 21 10, 648. 13 9, 892. 68 9, 782. 40 9, 724. 33 9, 889. 06 9, 955. 95 9, 555. 52 8, 896. 34 9, 674. 61 9, 724. 10 10, 413. 40 10, 599. 90 11, 472. 90 13, 993. 90 16, 072. 80 16, 970. 50 19, 259. 60 25, 302. 30 27, 383. 80 29, 651. 20 36, 102. 60 36, 723. 80 36, 883. 70 % share 23. 88 24. 07 22. 45 23. 85 33. 34 34. 77 44. 29 40. 14 33. 45 31. 14 32. 79 30. 76 28. 5 30. 92 28. 14 28. 66 27. 29 27. 44 30. 24 31. 29 31. 71 33. 34 38. 29 38. 08 39. 13 42. 1 40. 8 39. 8 NBT 4, 546. 31 4, 348. 78 4, 215. 97 3, 899. 99 3, 207. 36 3, 490. 97 2, 921. 27 2, 753. 75 2, 848. 82 3, 053. 33 3, 151. 41 3, 153. 52 2, 833. 51 3, 025. 84 3, 086. 20 3, 119. 50 3, 478. 90 3, 870. 30 4, 129. 40 4, 162. 00 4, 568. 70 4, 796. 80 5, 156. 40 5, 472. 40 6, 061. 00 6, 762. 50 7, 699. 50 8, 082. 50 % share 9. 5 9. 66 9. 83 9. 1 9. 83 11. 4 13. 08 11. 3 9. 8 9. 62 10. 38 10. 15 9. 08 9. 67 8. 93 8. 58 8. 96 9. 26 8. 92 8. 1 8. 54 8. 3 7. 8 7. 61 8 7. 86 8. 55 8. 78 NT 31, 883. 15 29, 846. 75 29, 058. 25 28, 740. 84 18, 543. 80 16, 486. 00 9, 520. 54 11, 834. 11 16, 495. 62 18, 811. 23 17, 252. 20 18, 351. 24 19, 485. 33 18, 588. 49 21, 746. 20 22, 805. 60 24, 757. 40 26, 472. 90 28, 156. 70 31, 135. 90 31, 976. 80 33, 702. 80 35, 625. 70 39, 057. 20 43, 073. 40 43, 162. 80 45, 596. 40 47, 450. 30 % share 66. 62 66. 27 67. 73 67. 05 56. 83 53. 83 42. 63 48. 56 56. 75 59. 24 56. 83 59. 08 62. 42 59. 41 62. 93 62. 76 63. 75 63. 31 60. 84 60. 61 59. 75 58. 35 53. 91 54. 31 56. 84 50. 17 50. 66 51. 54

MEASURES IN THE BUDGET TO STIMULATE OFFSHORE ECONOMIC ACTIVITY Why stimulate the energy sector? a) Drilling was 117, 311 in 2005. In 2009 the depth drilled was 38, 650 or 32% of the depth drilled in 2005. From an exploration perspective, virtually zero (0) meters was drilled in 2009 as compared to 17, 868 meters in 2005. Production of crude oil fell from 52. 7 m in 2005 to 35. 8 mn barrels per annum in 2009, or just 67% of the 2005 level. Exports of crude oil in 2009 was 73% of the level in 2000. Modification of the energy tax regime so that the tax on petroleum profits in deep water blocks is decreased from 50% to 35% is therefore welcome as a measure to stimulate exploration. b) The government announced in the budget that it revised the Supplemental Petroleum 12 Tax Regime. Under the new system, base rates and a sliding scale mechanism will be introduced for both marine and land operations. The Government in the budget also stated that it will implement sustainability incentives for mature marine and small marine oil fields. These incentives will provide for a reduction of 20 percent on Supplemental Petroleum Tax rates for mature or small marine oil fields. An Investment Tax Credit of 20 percent on qualifying capital expenditure will also be granted, in respect of the Supplemental Petroleum Tax for mature oil fields, both land marine.

Measures to stimulate the offshore sector c) The government plans to return to the conventional production sharing contract as compared to the competitive production sharing contract that was used in the 2006 Competitive Bid Round. Under this new production sharing contract model, the contractor will be liable to Petroleum Profits Tax, Unemployment Levy, Supplemental Petroleum Tax, Royalty, Oil Impost, Petroleum Production Levy, Green Fund Withholding Tax, Stamp duty and any new tax charged on revenues from petroleum operations. However the liabilities, with the exception of Withholding Taxes and Stamp Duty will be met from Government’s share of profits. 13

Measures to stimulate the onshore economy Agriculture: classic case of deagriculturalization in the context of an oil boom, Agricultural employment in 2009 was 23, 450 as compared to 36, 600 in 2000. Tomato production in 2005 was 1. 645 mn kg, in 2009 it was 1. 412 mn kg. Cucumber production was 4. 59 mn kg in 2005 but in 2009 it was 1. 213 mn kg. Melongene which was 2. 23 mn kg in 2005 decreased to 1. 14 mn kg in 2009. Imports of food in 2008 was TT$3. 86 bn as compared to TT$1. 68 bn in 2001 an increase of 126%. Against this backdrop the government plans to: 14 a) Provide a loan default fund b) Reduce ADB interest rates from 6 -8% to 3 -5% c) Allocate TT$75 mn to the ADB with the potential of a further allocation of TT$75 mn and d) $20 mn will be designated by the bank for greenhouses and other such type of projects

Manufacturing a) An amendment the Seventh Schedule of the Income Tax Act to change the minimum wear and tear allowance of 10 percent. b) Reduction of the repo rate c) Ploughing back profit incentive d) Extension of the Aid of industries act to facilitate shipbuilding and recycling. e) First time home owners tax credit f) Pioneer investment innovation financing facility g) Change at the BDC to the extent that the grant for single projects would be increased from $100, 000 to $500, 000 and for alliance projects from $200, 000 to $1 million. h) Expansion of the List under Approved Manufacturing Industries i) Increase the value to $20, 000. 00 for which no formal customs entry is required. j) Removal of the ceiling of the Free Trade Zone legislation which excluded large scale projects over US$50 million. k) Building new non energy export platforms through the industrial estates. 15

Manufacturing l) A business incubator programme to enhance the link between entrepreneurship and small business development. m) Planned creation of a National Innovation System that consists of Centers of Excellence, small and medium enterprises, finance, marketing and market development systems. n) Targeting the outsourcing industry o) Strengthening the domestic fashion industry p) the process of establishing an International Business Centre (IBC) working together with E-teck, the Tourism Development Company, and the Ministries of Trade and Industry and Finance. It replaces the old idea of the International Financial Centre. 16

Tourism a) expanding the tourism product and by using the country’s festivals and cultural diversity to anchor a significant year–round tourism development. b) upgrade the country’s sights and attractions to maximize its potential and attractiveness to both local and foreign visitors. c) establish a Sugar Heritage Village and Museum at Sevilla House in Caroni. d) With respect to hotel room stocks, the Government is currently reviewing a proposal for the construction of a 251 -room Radisson Hotel at Piarco and another proposal to develop a luxury resort in Tobago. 17

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Unemployment a) The opening up of economic space b) The various stimulus to the onshore and particularly the offshore sector c) The tax amnesty 19

Inflation rate

Trade in various food sector prices

Inflation a) reducing the cost of production via reducing credit cost at the ADB b) Strengthening the output of manufacturing 22

Regional Environment

Need to strengthen the non-energy trade balance

Trends in external competitiveness

Trend in non energy exports

Improving external competitiveness a) Deteriorating EODB rank and GCI rank b) One of the critical process here is the need to reign in domestic price levels c) No explicit increase in the minimum wage d) Expansion in the size of firms allowed in the free zones e) Removal of duty on capital goods imports 27

Deficit financing Total Revenue is estimated to be $41, 283. 7 million Total Expenditure net of Capital Repayments and Sinking Fund Contributions $49, 015. 9 million Overall fiscal deficit of $7, 732. 2 million 28

Social sector a) Youth mentoring program b) National Security Operation Centre (NSOC) - intelligence gathering through a comprehensive electronic database of all criminal related activities. Officers on mobile patrols will be able to link with the National Security Operation Centre and log on to the information network to ascertain all relevant data on vehicle and individuals through license plates and driver’s permit numbers. This Centre is expected to lead to a response time of less than 10 minutes to emergency calls in most locations across the country. Additionally, a computerized crime statistics and reporting (COMPSTAT) programme will record daily all reports of criminal activities to identify hot spots and assist with the effective deployment of protective personnel. c)Special duty allowance d) dedicated national recognition programme that honors those officers who go above and beyond the call of duty e) Bicycle patrols f) aggressive recruitment drive and recalling retired senior police officers g) Violent crime support program h) Special criminal court i) Milk feeding program j) Ensuring higher standards at homes for the age and the launch of an elderly mobile shuttle service 29

Some concluding comments a) b) c) d) e) f) g) 30 Tourism Remittances Real natural trading partners Corporate social responsibility GATE Farmpep Oil price modeling and determination be brought under the ambit of the Economic Development Board.