Reflecting on the 2019 Mid-Year Budget Review

The 2019 Mid-year Budget Review was delivered with an air of optimism, which was bolstered by the improved performance of the country’s external and fiscal accounts. In 2018, Trinidad and Tobago ran a balance of payments surplus after registering deficits in the previous two years. This development was largely based on a stronger current account performance. Government’s finances received a boost as revenue was $706 million higher than was budgeted for the first half of the fiscal year, while the fiscal deficit was $3.3 billion lower. In addition to this came news that the Heritage and Stabilisation Fund rose to its highest ever level (US$6.1 billion) in May 2019. During his presentation, the Minister of Finance used quarterly GDP data from the CSO to support 2018 growth estimates, which were first announced during the reading of the Budget in October. This note takes a brief look at some of what was stated in the Mid-year Review.

Government’s decision to offer a three-month tax amnesty should encourage many individuals and institutions to bring their filings up to date and may help the state to recoup much-needed revenue. However, like previous tax amnesties, it is not expected to completely clear tax arrears due to the government, which the IMF estimated to be 7 percent of GDP (roughly $11 billion) as at March 2018. The magnitude of the arrears highlights the urgent need to reform the country’s system of tax administration, which is currently plagued by significant tax leakage and other inefficiencies. In this regard, bringing the Revenue Authority onstream should remain a government priority.

Given the weaker outlook for oil prices in 2019, it was prudent of the government to adjust its budgeted price downward to US$60 per barrel. The Energy Information Administration (EIA) forecast West Texas Intermediate oil prices to average US$62.79 in 2019. On the other hand, government increased its price assumption for gas from US$2.75 per MMbtu to US$3.00 per MMbtu. The EIA anticipates that Henry Hub gas prices will average US$2.79 per MMbtu in 2019. However, since a significant proportion of Trinidad and Tobago’s gas is sold in the European and Asian markets where prices are generally higher than Henry Hub’s, the adjustment is reasonable.

The move to start settling outstanding VAT refunds and government’s arrears with commercial suppliers is indeed commendable. Delayed payments can significantly affect a company’s liquidity and undermine its ability to pay suppliers or even invest. While the total outstanding figure was not disclosed, the IMF estimated outstanding VAT refunds alone to be $6 billion as at March 2018. Therefore, with only a portion of the $1.8 billion supplemental budget earmarked for this initiative, affected firms will have to wait a while longer for the complete liquidation of these balances.

Notwithstanding the positive developments reported in the review, the domestic economy still faces severe challenges on several fronts. For instance, government finances continue to be strained and is only likely to see gradual improvement. Secondly, despite some bright spots, activity in the non-energy sector remains subdued. Although conditions in the energy sector are expected to improve in 2019, there are still some obstacles for the sector to surmount. Even as oil production continues to trend downward, comes news that BPTT’s gas production in 2020 and 2021 is likely to be 200 million cubic feet per day less than projected, with possible implications for Atlantic’s LNG Train 1. Considering all this, many of the challenges that confronted the economy and government over the last few years are expected to persist for some time. Consequently, the domestic economy is anticipated to improve at only a gradual pace over the medium term.