Despite the international financial crisis, Karen Nunez-Tesheira, Trinidad’s minister of finance, said in a recent speech that the country’s government was moving ahead with the planned establishment of a Trinidad and Tobago International Financial Centre (TTIFC) “to take advantage of the growing dynamism and strength of our domestic financial sector”.
Ms Nunez-Tesheira said: “[Trinidad and Tobago intends] to maximise the opportunities that are certain to be part of the new financial landscape which will emerge in the aftermath of the crisis, as well as to exploit the current potential for linking our strong international position in the energy and petrochemical sectors, as the basis for a commodities hub.”
At a symposium in April 2008, the minister had defined the activities planned for Trinidad’s centre.
“We envisage that the TTIFC will be a designated hub that will provide a range of front-office financial services, including – but not limited to – banking, asset management, capital market activities, specialised insurance operations and futures transactions on international commodities markets. It will not be involved in traditional offshore banking activities,” she said.
“The government sees the concept of the TTIFC as being similar to the international financial centres (IFCs) located in countries such as Singapore, Dubai and Ireland. Our country’s fortuitous location between North and South America will assist in promoting a core business that consists of a regional ‘captive market’,” Ms Nunez-Tesheira added.
Consulting on IFC
The Trinidad government had contracted financial strategy consulting firm Oliver Wyman to guide it on the type of IFC that it should create and how to do so. The firm submitted a report on the way forward for Trinidad more than a year ago, in August 2007.
At the April symposium, Samir Misra consultant and report author at Oliver Wyman summarised the “immediately possible” short to medium-term initiatives to “take advantage of Trinidad and Tobago’s existing capabilities and building the core skill set and reputation for long-term development of the IFC” as being in the areas of capital markets expansion, credit card collections and insurance middle and back office.
Trinidad had used an international conference, held in its capital Port of Spain on June 11 and 12, the Caribbean Investment Forum 2008, as a launch party for its IFC initiative – to reach the conference’s audience of fund managers, bankers and other financial professionals from all over the region and the US.
In her keynote address at the conference, Ms Nunez-Tesheira noted that Trinidad’s proposed IFC will offer an attractive array of opportunities in investment management, international loan syndication and bank office activities.
Referring to the strength of Trinidad’s domestic financial sector, she said: “Trinidad and Tobago has in fact already ensconced itself as a regional capital-raising centre through fixed-income securities, amassing some $2.4bn and TT$40bn [$6.6bn] on its debt market from 2003 to the present.”
A key part of Trinidad’s financial centre thrust, the plan to set up a commodities hub, is based on Trinidad’s strength in the oil and gas industries. Robert Riley, chairman and CEO of Trinidad and Tobago’s most important energy company, British Petroleum Trinidad and Tobago (BPTT), notes that gas has overtaken oil in economic importance.
According to Mr Riley, in 2007 an average of only 120,000 barrels of oil a day were produced in Trinidad. However, if the gas produced in 2007 was converted into oil as barrels of oil equivalent (BOE), that would be nearly six times Trinidad’s oil production or 705,000 barrels a day. BPTT produces more than half (450,000 BOE) of the combined total country production of 825,000 BOE, of which 96% is gas.
Senator Mariano Browne, minister of state in the Ministry of Finance, agrees on the importance of gas, noting: “Trinidad is no longer an oil economy, that is clear.”
He adds: “Trinidad and Tobago is doing well from its tax take on energy revenues. This is due in large measure to significant decisions taken many years ago to monetise gas resources, not simply about increases in gas prices. It should be noted that only 38% of Trinidad and Tobago’s marine acreage has been explored.”
While agreeing that further exploration will require additional investment expenditures due to the need for bigger investment and more expensive technology, he argued that there “was always a balancing act between revenue take and what one is prepared to offer” investors.
Potential niche
Trinidad’s oil and gas make its recent focus on the international commodities markets one of the more promising areas for the country’s IFC initiative.
Ms Nunez-Tesheira believes that Trinidad and Tobago’s planned IFC could include a commodities exchange to trade liquid natural gas, methanol, ammonia and other products which Trinidad exports, and says that Trinidad and Tobago is the largest exporter of liquid natural gas to the US, and the fifth largest exporter of LNG globally.
She has been negotiating with the Dubai International Financial Centre (DIFC), and advised in late August of its “interest in partnering with [Trinidad and Tobago] to develop our own IFC”, she says.
“[DIFC has] reviewed other potential IFCs in the Caribbean and Latin America and decided that we have the best value proposition in the region. It has agreed to provide us with the roadmap and necessary technical assistance to ensure success. It also believes that the TTIFC is the gateway by which they can transact business with Latin and South America,” she adds. “It has indicated that there is potentially $1000bn available in the Middle East for investment into the region. We believe that this relationship will attract many of the world’s largest and best-known financial institutions.”
Unusual features
Ms Nunez-Tesheira believes the TTIFC concept has some features unusual to other regional IFCs. The first difference is that Trinidad intends to combine a commodity trade facility with financial services. This approach is similar to that of the DIFC, which is also home to the Dubai Mercantile Exchange.
Second, she distinguishes between Trinidad’s planned special purpose economic zone (SPEZ) and the normal special economic zone, the latter being “an enclave defined with physical borders”.
According to Ms Nunez Tesheira, unlike some other centres, the SPEZ will not be tied to a location, but “will be based on the nature of the business or the project that an international financial institution undertakes”.
The Trinidad government, however, is in the process of building two 26-storey office towers for the proposed TTIFC in central Port of Spain. One tower is 90% complete, and the other 60%, with a total combined space of 130,500 square metres.
Perhaps unsurprisingly, in view of its recent purchase of Trinidad banking giant RBTT, Royal Bank of Canada has already committed to taking space in one of the TTIFC towers under construction, to accommodate its offshore business.
The implementation of the TTIFC is set for the first quarter of 2009, although this timetable appears challenging in the current international environment.
When asked which of the specific country models outlined in the Oliver Wyman report that Trinidad was likely to follow, Mr Browne, said: “There is no single model. There is judgemental consideration on what will work and what is appropriate to the circumstances.” With respect to the planned regulatory framework, Mr Browne added: “It is critical to have an appropriate regime generally. The overarching legislation must be in position and must be robust and functioning, and up to international standards. Legislation for the IFC must follow best practice.
“The legislation has to be robust for both the domestic and international market. It can’t just be strong for the international market and not for the local.”
In this regard, it is noteworthy that the International Monetary Fund (IMF) believes that the deteriorating global environment is adding urgency to the enactment of improved financial sector legislation and the strengthening of supervisory practices by Trinidad. It therefore mentioned approvingly that Trinidad and Tobago has passed a new Financial Institutions Act.
“The mission welcomes the recent passage in the House of Representatives of a new Financial Institutions Act, whose swift adoption will be crucial to enhance the central bank’s ability to supervise the country’s complex financial sector and lay the foundation for various follow-up legislation in the areas of insurance, securities, pensions and credit unions,” said Mr Browne.
“In implementing the improved framework, the authorities are encouraged to (i) press for changes in conglomerates’ holding structures, with a clear separation of financial and non-financial activities; (ii) review risk management practices and enforce prudential standards on a consolidated basis; and (iii) co-ordinate closely with regional and international supervisors on the basis of clear home/host country responsibilities.
Economic situation
The backdrop for Trinidad’s push into international financial services was its strong economy, which according to the IMF, has been growing at an average of 9% between 2002 and 2007. Mr Browne notes Trinidad’s “ranking among the top global performers” is “upheld by the macroeconomic fundamentals for 2007, which indicate that economic growth averaged 7%”.
Unemployment recently hit a low of 4.5%, and external debt as a percentage of gross domestic product (GDP) declined from 41% to 11%.
The IMF notes in its press release of November 17, 2008, regarding its Article IV discussions with Trinidad and Tobago, that over the period 2002/07, “per-capita income doubled in US dollar terms, both the unemployment rate and the public debt ratio were halved, and the country became a net external creditor with one of the strongest credit ratings in the region”.
In a recent speech on “the implications of the international financial crisis for Trinidad and Tobago”, Ms Nunez-Tesheira advised that Trinidad’s stock of foreign reserves stood at a healthy $8.5bn, or 11 months’ import cover (and higher than CIA Factbook sourced figure in our table). The reserves do not include Trinidad’s new sovereign wealth fund, the Heritage and Stabilisation Fund, which is sizeable at just less than $2.9bn.
Commenting on how the latter fund functions, Mr Browne noted: “The rate of accumulation is set legislatively, with 60% of the difference between budgeted and actual energy revenues transferred to the fund. That is a pretty powerful accumulation mechanism.”
Economy is slowing
However, in the same report, the IMF predicts that Trinidad’s growth will decline sharply in the face of the deteriorating external environment.
“Recessions in advanced economies, their spillovers to the tourism-dependent economies of the region, and sharply lower prices for energy products are projected to slow growth to 3.5% in 2008 and 2% in 2009,” notes the report.
Tuuli McCully, an economist in the global economic research division of Canada’s Scotiabank Group, which has domestic operations throughout the Caribbean region including Trinidad, agrees with the IMF that Trinidad’s 2009 growth will slow sharply: “Trinidad and Tobago will not be immune to the global slowdown and the recessionary environment in the US and Europe. However, on the back of its strong external position, Trinidad and Tobago has been relatively resilient to global financial conditions.
“Nevertheless, as the energy sector accounts for 43% of the country’s total output (2007 figures), lower commodities prices and weaker global demand for oil and gas will dampen the country’s economic activity through the forecast horizon. We expect the economy to expand by just less than 2% in 2009 and about 3% in 2010,” said Ms McCully.
However, for the IMF, the silver lining of the decline in growth is that it will have a positive effect in reducing Trinidad’s high, double-digit inflation rate: “This, together with falling international food prices, should help dampen domestic price pressures, but the base effect of this year’s food price shock, in combination with still tight capacity constraints and labour market conditions, is projected to limit the decline in headline inflation to 7.5% in 2009, down from 11.75% this year,” she added.
Ms McCully sounds slightly less positive than the IMF on inflation: “Persistent price pressures will remain a concern. Inflation, measured by the 12-month increase in the index of retail prices, was more than 15% year on year in October, with food prices being the key driver. However, easing in international grain and energy prices should ease price pressures somewhat in the coming months.
“The Trinidad and Tobago dollar is expected to remain in a narrow trading range against the US dollar over the coming quarters. However, elevated inflation and the relatively stable currency will have adverse impacts on the country’s competitiveness,” says Ms McCully.
At the same time, the IMF projects the external current account surplus will decline by 13 percentage points to about 15% of GDP, in response to falling energy export earnings, and the central government balance would move into a deficit of about 2% of GDP under current budget plans. It notes that these projections, however, are subject to an unusually high degree of uncertainty, given the unsettled global outlook and volatile commodity prices.
Ms McCully expects a current account surplus about 40% lower than that projected by the IMF in 2009.
“High oil and gas prices generated large trade and current account surpluses over recent years. However, export receipts will be adversely affected by markedly lower oil prices (we expect crude oil price to average $55 a barrel in 2009 compared with $100 in 2008) and a retrenchment in developed economies. Nevertheless, the current account will remain in surplus through 2010; we expect it to be about 9% of GDP in 2009,” he adds.
The fiscal deficit
The IMF is concerned about the issue of Trinidad’s non-energy fiscal deficit: “Further policy adjustments will be needed over the medium term to preserve long-term sustainability. Sustainability considerations call for a reduction in the large non-energy deficit to generate adequate savings in the Heritage and Stabilisation Fund that would allow the country to benefit permanently from its existing energy wealth,” it says.
“On the basis of current projections, the mission estimates that the non-energy deficit will need to be reduced from about 14.5% of GDP in financial year 2007/08 to 8.5% by 2012/13 – an adjustment of four percentage points of GDP beyond the tightening suggested for the current fiscal year. Such policies would avoid a much larger, forced adjustment in the future, in the context of non-renewable energy resources.”
In an interview a few months before the current collapse in oil prices, Mr Browne had argued that the non-energy fiscal deficit was not something to be overly concerned about because it had been a feature of the structure of the Trinidad economy for decades. He noted that it has been negative for the past 32 years, varying between a high of 33% of revenue and a low of 8% of revenue.
Tightening its belt
The IMF is, however, encouraged by the government’s recent announcement to adjust fiscal spending in the face of lower energy prices, and urged a careful assessment of the entire spectrum of expenditures, with a view of maintaining nominal spending at its financial year 2007/08 level.
It stated that relative to the 2008/09 budget: “This would translate into spending reductions of some TT$3bn (2% of GDP) beyond those resulting from lower fuel subsidies, and would broadly balance the central government accounts under current energy price projections. Moreover, it would give the government room to let automatic stabilisers operate in the event of a sharper decline in energy prices and economic activity in 2009, thereby cushioning the adverse impact on the domestic economy.”
Right niches
The IMF also commented on Trinidad’s IFC plans. “Further improvements in the business climate would also buttress the authorities’ plans for establishing an IFC – the prospects of which may have become more challenging in light of global financial developments. Success will depend on finding the right niches, that could also provide links and synergies with existing businesses and expertise. At the same time, a modern regulatory environment and market infrastructure are important requisites, not just for the IFC, but also to promote financial deepening and efficient resource allocation, more generally. In this respect, the mission warmly welcomes the government’s efforts to modernise the tax, legal, and regulatory framework.”
This article was sponsored by the ministry of finance of the Republic of Trinidad and Tobago and independently written and edited by The Banker.
