Main Drivers of Trinidad and Tobago’s Economy

Post on: 23 Август, 2015 No Comment

Main Drivers of Trinidad and Tobago’s Economy

Trinidad and Tobago (T&T) has enjoyed great economic success over the last decade, primarily because of the rapid growth in its natural gas production and the country’s substantial exports of petrochemicals. Income earned through the energy sector constitutes a large percentage of Trinidad’s total GDP. government revenues, and foreign exchange earnings. Although Trinidad and Tobago has been heavily reliant on energy-based revenue-earners, however, they have also been implementing initiatives to diversify their economy. Specifically, the T&T manufacturing sector stands to benefit immensely from a suite of government incentives directed at reducing costs and the hurdles to doing business. The Government has also gotten increasingly friendly towards foreign and local investors who are interested in tourism-based enterprises.

Trinidad’s Success

Over the last decade, Trinidad and Tobago (T&T) has enjoyed growth rates that have been in excess of 4 percent per year, according to data from the Central Bank of Trinidad and Tobago (CBTT). The rapid growth of T&T allowed the nation to have income per capita growth rates in excess of 4 percent, to record current account surpluses above US$4Bn, and to grow foreign exchange reserves to US10Bn—the highest in the Caribbean & almost 1 year of import cover— by 2013. T&T’s fiscal profile has thus improved dramatically. Today the country enjoys a Debt-to-GDP ratio of 40 percent, a fiscal deficit-to-GDP ratio of -3 percent, and an ‘A’ rating from Standard and Poor’s. The country’s excess fiscal surplus over the years has allowed it to build a Heritage and Stabilization Fund of approximately US$5.6Bn. (For more information on how countries record their monetary transactions, and what a surplus in a country’s current account means, see article: Exploring The Current Account In The Balance Of Payments .)

Energy’s Contribution

The great success of the T&T economy is due mainly to the rapid growth in the energy sector. Energy-related output has contributed over 40 percent of Trinidad and Tobago’s GDP over the last decade, and the energy sector is over two times the size of the second largest sector in Trinidad and Tobago. The contribution of energy is also heavy on the fiscal side. Total energy-related revenues account for over 50 percent of total central government revenues for Trinidad and Tobago. Additionally, revenues from the sale of energy-based products to the rest of the world represent 80 percent of all trade receipts. The strong inflows from the sale of energy-related goods to the rest of the world in fact helped to push Trinidad and Tobago’s net international reserves from approximately US$2.2Bn in 2003 to US$10 Bn by 2013. Trinidad today has the largest current account balance in the Caribbean. The extent of the contribution of energy to T&T’s financial standing is also evidenced by the recent currency market tensions that arose, partly because of a slowdown in the country’s earnings from gas exports, prompting its central bank to pump unprecedented amounts of US dollars into currency markets. (For related reading, see article: What Are Central Banks ?)

Trinidad and Tobago has proven crude oil reserves of approximately 728 million barrels as at 2013, according to the Energy Intelligence Agency (EIA). Proven, probable and possible natural gas reserves total 25.4 trillion cubic feet. The twin island republic engages in a range of energy and petrochemical activities. They produce liquefied natural gas (LNG) and crude oil, which account for over 50 per cent of total exports, and which constitute the largest share of energy-based production in Trinidad. In the past, most of the LNG produced (over 90 percent) was sold to the US market. Since the shale revolution in the USA, Trinidad has had to find other areas in Latin America and the Caribbean to which to sell LNG, of which the most notable markets are the Dominican Republic, Panama and Costa Rica. Additionally, T& T produces large amounts of ammonia, urea ammonium nitrate — used as fertilizer — and urea. They are also one of the largest exporters of methanol in the world. (To understand more about the shale revolution in the USA which has impacted the strategies of countries like Trinidad and Tobago, see the article: Guide To Oil And Gas Plays In North America .)

Other Sectors

The other three major sectors in the economy of Trinidad and Tobago each contribute a significantly smaller share of total output than that of energy. The ‘Manufacturing Industry’ averaged 8 per cent over the last 5 years, ‘Finance Insurance and Real Estate’ averaged 14 percent, and ‘Restaurants and Distribution’ averaged 12 percent of the total revenues of Trinidad and Tobago. For the first half of the last decade the growth in the energy sector was the strongest of the various sectors, but in recent times most of the growth has been seen in the ‘Finance and Insurance Sector’, which consists mainly of domestic and Canadian banks. Other countries in the Caribbean boast greater economic diversity. The Dominican Republic, for instance, has a manufacturing sector which contributes 20 percent of output and a communication sector that contributes 16 percent, with the tourism, financial, and transport and storage sectors contributing 6 percent, 4 percent and 5 percent respectively.

In a bid to diversify the economy of Trinidad and Tobago, the government has been placing emphasis on growing the other sectors of the economy. Tourism has been a main area of focus in recent times. Today, tourism contributes less than 1 percent of total economic output in Trinidad and Tobago, while it contributes 4 percent of total output in Jamaica, 6 percent of total output in the Dominican Republic, and over 11 percent of total output in Barbados. The government of Trinidad and Tobago has thus been devoting resources to the development of infrastructure and to the encouragement of foreign direct investment, particularly in the location of Tobago. Non-energy manufacturing, which currently contributes 8 percent of GDP, is also another area of focus. Trinidad and Tobago has the benefit of relatively cheap energy and easy access to Latin America and the Caribbean. Some companies, such as the Caribbean arm of Unilever and West Indian Tobacco, have taken advantage of these areas of strength, and more is expected to come as the government continues to unfold more incentives.

The Bottom Line

Trinidad and Tobago has enjoyed great success due to the development of its energy industry. Over the last decade, the production and export of LNG and petrochemicals has led Trinidad to real growth rates in excess of 4 percent per year. On the other hand, the energy sector grew while the non-energy sector languished. Today the energy sector contributes close to 40 percent of total output. The heavy contribution of the energy industry makes Trinidad and Tobago susceptible to shocks in commodity markets, and though they have established a US$5.6Bn stabilization fund, the potential shocks to the economy can be minimized more efficiently through further economic diversification. For an island with a tropical climate, the amount of income generated by tourism should constitute a much larger percent of Trinidad and Tobago’s total revenue. The tourism sector is one of the low-hanging fruits that can be enjoyed.


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