Strong
economic growth, inflation jitters
Trinidad
Express
Port
Spain
Petroleumworld.com
07 02 06
The
following is an overview of economic developments
in Trinidad and Tobago contained in the 2005 Annual
Economic Survey released last week by the Central
Bank.
The Trinidad and Tobago economy continued to register
strong growth on the basis of the ongoing expansion
of the energy sector and record high commodity prices.
However, against a background of strong domestic
demand there was a rise in inflation beyond the
targeted 4-5 per cent range.
*Range
GDP increased by 7 per cent in 2005 on the strength
of a 10.9 per cent expansion in value-added in the
energy sector. There was an increase in crude oil
production reversing the downward trend of the past
several years. However, the major boost to the sector
came from increased output of the petrochemical
industry, reflecting the first full year of production
of two new methanol plants and the start-up of another.
*The
non-energy sector is estimated to have increased
by 4 per cent with the manufacturing and construction
sectors being the main drivers, the latter benefiting
from the government's major infrastructural development
and housing thrust as well as strong private sector
construction activity.
*The
rapid growth in domestic demand and the emergence
of domestic supply bottlenecks have prompted a significant
rise in merchandise imports and given rise to an
increase in inflationary pressures. On an end-of-year
basis, inflation measured 7.2 per cent in 2005 as
the increase n food prices reached 22.6 per cent.
Core inflation which excludes the impact of volatile
food prices increased modestly from 2.0 per cent
to 2.7 per cent.
*The
continued buoyancy in the non-energy sector has
contributed to the creation of 11.6 thousand jobs.
Accordingly,
the average unemployment rate declined to 8 per
cent and fell to a historical low of 6.7 per cent
in the fourth quarter. The increase in employment
was largely in the construction and services sectors.
*While
comprehensive wage data are not available, preliminary
information suggests that capacity constraints put
upward pressure on wages in some sectors; skilled
and unskilled wages in construction, wages for unskilled
labour more generally. There is also evidence of
sizeable increased in wages in professional, technical
and managerial grades.
*While
an expansionary fiscal stance boasted non-energy
sector growth it also contributed to the increase
in inflationary pressures. In fiscal 2005, the significant
growth in energy sector revenues [74.8 per cent'
masked an underlying weakening in the central government
finances, as reflected in the expansion in the non-energy
sector deficit from 7.9 per cent of GDP to 9.7 per
cent of GDP. Non-energy sector revenue showed remarkable
buoyancy [thanks to an upgrade in tax administration],
but government expenditure increased from 25 to
27 per cent of GDP. All in all, central government
registered an overall surplus of 5.1 per cent of
GDP, the bulk of which [TT$2,593.1] million was
transferred to the Revenue Stabilisation fund.
The
impact of the rise in central government expenditure
was compounded by an increase in spending by government
agencies, financed by domestic debt. Nevertheless,
public debt [direct and government-guaranteed] declined
to 40.7 per cent of GDP, as at September 2005 from
48 per cent of GDP a year earlier.
*The
budget for fiscal 2006 will continue to boost demand
in the economy. While it includes, two important
initiatives - energy tax reform and the start to
the reform of the non-energy tax regime - it provides
for a major expansion of public sector investment.
Accordingly, the non-energy fiscal deficit is projected
to rise from 9.7 per cent of GDP to 17.5 per cent
of GDP.
*During
2005, in the face of buoyant domestic demand and
rising interest rates in the US, the Central Bank
adopted an increasingly restrictive monetary stance
in an effort to contain inflation and protect the
balance of payments. The Bank raised the Repo rate
on four occasions by twenty-five [25] basis points
each to 6 per cent and sought to
sterilise
liquidity by intensifying open market operations
requiring commercial banks to deposit a total of
$1 billion at the Central bank in a one-year interest
bearing account and through increased foreign exchange
sales.
As
a result of these measures, banks' prime lending
rates increased by 100 basis points to 9.75 per
cent. During the year, there were also significant
increases in interest rates along the entire maturity
spectrum. However, with steady increases in US interest
rates. The spread between T&T and US short-term
rates remained around 100 basis points, the lowest
in several years.
*Rapid
economic growth, excess liquidity and a sharp rise
in the private sector demand for foreign assets
increased demand for foreign exchange. The Central
Bank responded by increasing foreign exchange sales,
while allowing greater exchange rate flexibility.
*Rising
treasury bill yields and real estate prices, a possible
market correction and prudential requirements have
put a dampening effect on the stock market. Thus,
after increasing by a cumulative 97 per cent over
the previous two years, the composite index declined
by 0.7 per cent in 2005. In contrast, bank deposits
showed strong growth during 2005 while investments
in mutual funds increased moderately.
*Reflecting
higher export volume and record prices for oil and
petrochemicals, the external current account strengthened
to the equivalent of 18.5 per cent of GDP in 2005.
This facilitated an increase in official reserves
of some US$1,475.8 million to a level of US$4.0
billion, net of the Revenue Stabilisation fund.
Trinidad & Tobago Express
Wednesday, June 28th 2006
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