Comments on 2010/2011 budget

R Hosein

Main Economic Considerations

International environment Regional environment Basic national macroeconomics:

a) Real GDP: growth and structure of the economy

b) Unemployment

c) Inflation

d) CAB

e) Fiscal balance and debt

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International Environment

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International environment

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?

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International Environment

Summary sample statistics

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Summary of sample statistics for WTI Spot Price FOB (Dollars per Barrel)  Post 1999 Post 2003 Post 2005 Post 2008Mean (Average) 49.99 62.8 72.13 80.15Median 23.11 61.56 68.63 76.53Max 145.31 145.31 145.31 145.31Min 11.38 25.25 30.28 30.28Standard dev 26.51 24.01 20.68 25.56Range (Max-Min) 133.93 120.06 115.03 115.03Source: Computed

International environment

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)

  Employment   BT % share NBT % share NT % share

1981 19000 4.89 64400 16.57 305300 78.541982 18200 4.55 65600 16.4 316200 79.051983 16900 4.23 64200 16.08 318200 79.691984 14100 3.47 62500 15.37 330000 81.161985 12800 3.27 56700 14.48 322100 82.251986 17800 4.56 49500 12.68 323100 82.761987 17100 4.6 49000 13.17 306000 82.241988 17800 4.79 53900 14.51 299800 80.71989 18000 4.92 52400 14.33 295300 80.751990 17600 4.71 50200 13.43 306000 81.861991 18500 4.62 59000 14.74 322800 80.641992 15900 3.92 60100 14.81 329900 81.281993 15400 3.81 56800 14.05 332200 82.151994 15900 3.83 59700 14.37 339800 81.81995 16100 3.73 61900 14.36 353200 81.911996 16900 3.81 61000 13.74 366000 82.451997 17100 3.72 63400 13.79 379200 82.491998 17524 3.66 65058 13.58 396357 82.761999 14986 3.06 68287 13.97 405671 82.972000 15600 3.1 70000 13.93 417000 82.972001 15500 3.02 69000 13.46 428100 83.522002 17100 3.27 73500 14.04 433000 82.72003 16100 3.03 66900 12.58 448900 84.42004 18400 3.28 67700 12.08 474200 84.632005 19000 3.32 63000 11.02 489500 85.652006 19095 3.27 62345 10.66 503275 86.072007 21400 3.64 59700 10.16 506300 86.192008 19900 3.33 59900 10.04 517000 86.63

2009p 20000 3.34 60000 9.98 521000 86.7

Output of industrial sectors(as % of GDP)

  Real value added

  BT%

NBT%

NT%

share share share1981 11,425.95 23.88 4,546.31 9.5 31,883.15 66.621982 10,842.24 24.07 4,348.78 9.66 29,846.75 66.271983 9,631.90 22.45 4,215.97 9.83 29,058.25 67.731984 10,221.03 23.85 3,899.99 9.1 28,740.84 67.051985 10,880.21 33.34 3,207.36 9.83 18,543.80 56.831986 10,648.13 34.77 3,490.97 11.4 16,486.00 53.831987 9,892.68 44.29 2,921.27 13.08 9,520.54 42.631988 9,782.40 40.14 2,753.75 11.3 11,834.11 48.561989 9,724.33 33.45 2,848.82 9.8 16,495.62 56.751990 9,889.06 31.14 3,053.33 9.62 18,811.23 59.241991 9,955.95 32.79 3,151.41 10.38 17,252.20 56.831992 9,555.52 30.76 3,153.52 10.15 18,351.24 59.081993 8,896.34 28.5 2,833.51 9.08 19,485.33 62.421994 9,674.61 30.92 3,025.84 9.67 18,588.49 59.411995 9,724.10 28.14 3,086.20 8.93 21,746.20 62.931996 10,413.40 28.66 3,119.50 8.58 22,805.60 62.761997 10,599.90 27.29 3,478.90 8.96 24,757.40 63.751998 11,472.90 27.44 3,870.30 9.26 26,472.90 63.311999 13,993.90 30.24 4,129.40 8.92 28,156.70 60.842000 16,072.80 31.29 4,162.00 8.1 31,135.90 60.612001 16,970.50 31.71 4,568.70 8.54 31,976.80 59.752002 19,259.60 33.34 4,796.80 8.3 33,702.80 58.352003 25,302.30 38.29 5,156.40 7.8 35,625.70 53.912004 27,383.80 38.08 5,472.40 7.61 39,057.20 54.312005 29,651.20 39.13 6,061.00 8 43,073.40 56.842006 36,102.60 42.1 6,762.50 7.86 43,162.80 50.172007 36,723.80 40.8 7,699.50 8.55 45,596.40 50.662008 36,883.70 39.8 8,082.50 8.78 47,450.30 51.54

2009p 37,582.10 42.3 7,728.81 8.12. 43,927.10. 49.2

MEASURES IN THE BUDGET TO STIMULATE OFFSHORE ECONOMIC ACTIVITY

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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 52.7m in 2005 to 35.8mn 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 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 and marine.

Measures to stimulate the offshore sector

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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.

Measures to stimulate the onshore economy

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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 1.645mn kg, in 2009 it was 1.412mn kg. Cucumber production was 4.59mn kg in 2005 but in 2009 it was 1.213mn kg. Melongene which was 2.23mn kg in 2005 decreased to 1.14mn kg in 2009. Imports of food in 2008 was TT$3.86bn as compared to TT$1.68bn in 2001 an increase of 126%. Against this backdrop the government plans to:

a) Provide a loan default fundb) Reduce ADB interest rates from 6-8% to 3-5%c) Allocate TT$75mn to the ADB with the potential of a further allocation of

TT$75mn andd) $20mn will be designated by the bank for greenhouses and other such type of

projects

Manufacturing

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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 ratec) Ploughing back profit incentive d) Extension of the Aid of industries act to facilitate shipbuilding and recycling.e) First time home owners tax creditf) 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.

Manufacturing

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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 Centersof Excellence, small and medium enterprises, finance, marketing and market development systems.n) Targeting the outsourcing industryo) Strengthening the domestic fashion industryp) 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.

Tourism

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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.

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Unemployment

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a) The opening up of economic spaceb) The various stimulus to the onshore and particularly the offshore

sectorc) The tax amnesty

Inflation rate

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Trade in various food sector prices

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Inflation

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a) reducing the cost of production via reducing credit cost at the ADBb) Strengthening the output of manufacturing

Regional Environment

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Need to strengthen the non-energy trade balance

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Trends in external competitiveness

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Trend in non energy exports

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Improving external competitiveness

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a) Deteriorating EODB rank and GCI rankb) One of the critical process here is the need to reign in domestic price

levelsc) No explicit increase in the minimum wage d) Expansion in the size of firms allowed in the free zonese) Removal of duty on capital goods imports

Deficit financing

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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

Social sector

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a) Youth mentoring programb) 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 allowanced) dedicated national recognition programme that honors those officers who go above and

beyond the call of dutye) Bicycle patrolsf) aggressive recruitment drive and recalling retired senior police officersg) Violent crime support programh) Special criminal courti) Milk feeding programj) Ensuring higher standards at homes for the age and the launch of an elderly mobile shuttle

service

Some concluding comments

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a) Tourismb) Remittancesc) Real natural trading partnersd) Corporate social responsibilitye) GATEf) Farmpepg) Oil price modeling and determination be brought under the ambit of the Economic Development Board.