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Plummeting energy prices sting economic powerhouse, Trinidad and Tobago

Plummeting energy prices sting economic powerhouse, Trinidad and Tobago

Posted by Shanelle Weir on January 17, 2015
The unrelenting slide in energy prices has thrown Trinidad and Tobago into economic turmoil, pushing the country’s Prime Minister into a tight corner.

When oil and gas prices tumbled precipitously last fall, Kamla Persad-Bissessar, the country’s leader, offered nothing but optimistic economic outlooks, suggesting Trinidad and Tobago was immune to other countries’ woes. But on Jan. 8, in a nationally televised address, she finally changed her tune.

Trying to pacify business leaders who have pleaded with the energy-dependent government to slash spending, Ms. Persad-Bissessar conceded that the volatile energy market has “created the conditions where our reforms, strength and resilience are being tested.”

The roiling energy market is beginning to bite. When the country laid out its annual budget in September, the government assumed the price of oil would average $80 (U.S.) a barrel. Since then, the price of crude has dropped below $50. And while natural gas prices are still above the budget’s original estimate of $2.75 per million British thermal units, they are extremely volatile, plummeting 35 per cent at the end of 2014. Trinidad and Tobago now expects natural gas to average $2.25 per million BTU this fiscal year.

The government is loath to play with the public purse, especially since 2015 is an election year, but it is starting to scrap some infrastructure projects and slash departmental budgets. These cuts are the first acknowledgements that the economy is feeling the heat from lower energy prices, which is inevitable since oil and gas production comprises 45 per cent of the country’s gross domestic product and accounts for 80 per cent of exports.

The government already projected a fiscal deficit in September, despite its energy riches, but the new price estimates have boosted this shortfall by 17 per cent to $1.4-billion (Canadian).

Trinidad and Tobago, which has 1.3 million people, has been pumping oil for more than a century, but it became a global energy player after shifting its focus to natural gas two decades ago. The country now produces eight times as much natural gas as it does oil, and the energy boom has kept its unemployment rate at 3.2 per cent and helped secure a single-A credit rating from Standard & Poor’s, the highest in the Caribbean.

The vast resources have lured multinationals, such as BP PLC and Repsol SA, and the country was prescient enough to build a port to export liquefied natural gas long ago.

The recent downturn in energy prices is yet another blow to the broader region. Since the financial crisis, tourism-dependent Caribbean countries, such as the Bahamas, have struggled. The economic outlook is so bleak on some islands, including traditional heavyweight Barbados, that the International Monetary Fund has been forced to step in.

These woes have put Canadian banks at risk. Three of Canada’s largest lenders compiled Caribbean losses worth hundreds of millions of dollars in the past year, largely stemming from bad loans that went bust. Until now, the hope had been that they would be able to restructure by refocusing on resource-rich islands such as Trinidad and Tobago. Royal Bank of Canada and Bank of Nova Scotia are two of the country’s leading banks while Canadian Imperial Bank of Commerce is also a major lender in the region, based out of Barbados.

With energy prices falling, Trinidad and Tobago no longer looks like the region’s safe haven – and the government has been caught off guard. Whereas Norway, which started producing oil in the 1970s, set up a rainy-day fund now worth roughly $860-billion (U.S.), Trinidad and Tobago’s equivalent, the Heritage and Stabilization Fund, is worth just $5.5-billion – even though the island has produced oil for more than 100 years.

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