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.