VZCZCXRO4220
RR RUEHDE RUEHGR
DE RUEHSP #0552/01 3371735
ZNR UUUUU ZZH
R 021735Z DEC 08
FM AMEMBASSY PORT OF SPAIN
TO RUEHC/SECSTATE WASHDC 9556
RUEHDG/AMEMBASSY SANTO DOMINGO 2640
RUCNCOM/EC CARICOM COLLECTIVE
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHHH/OPEC COLLECTIVE

UNCLAS SECTION 01 OF 03 PORT OF SPAIN 000552 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EEB, WHA/EPSC, WHA/CAR 
TREASURY FOR ERIN NEPHEW 
COMMERCE FOR GERRI WORD, MICHELLE BROOKS 
ENERGY FOR GARY WARD, SAM BROWNE 
SANTO DOMINGO FOR REGIONAL COMMERCIAL OFFICE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EPET PGOV TD
 
SUBJECT: INSULATED BUT NOT IMMUNE FROM GLOBAL SLOWDOWN, TRINIDAD AND 
TOBAGO CUTS SPENDING 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY 
 
¶1. (SBU) SUMMARY:  Trinidad and Tobago has avoided financial 
contagion but is feeling the impact of weak demand for its 
commodities.  Two months after the GOTT delivered a record US$8 
billion budget premised on oil at $70 per barrel and natural gas at 
$4 per MMBTU netback, Prime Minister Manning announced cuts in 
discretionary spending in response to a projected budget shortfall 
of US$850 million, while promising that salaries and pensions, 
social programs, and law enforcement spending would be spared. 
T&T's foreign exchange reserves, balance of payments and debt ratios 
were all in healthy ranges going into the global crisis, but GDP 
growth had already slowed substantially, and inflation continued 
spiraling upward, reaching 15.4% (YOY) in October.  The GOTT and 
foreign companies maintain they will not slow the pace of investment 
in upstream oil and gas and downstream gas-based industries.  While 
T&T is well-positioned for the short term, GOTT efforts to diversify 
the economy have yielded modest results that would be overwhelmed by 
a prolonged global recession.  END SUMMARY. 
 
---------------------------------- 
Global Slowdown Forces Budget Cuts 
---------------------------------- 
 
¶2. (SBU) After weeks of downplaying the local impact of the global 
financial crisis, the GOTT has acknowledged a revenue shortfall 
resulting from declining export revenue and consequently has 
announced spending cutbacks for the 2009 fiscal year 
(October-September).  On November 17, a visiting IMF mission 
announced its finding that T&T would experience a budget deficit 
equivalent to 2% of GDP, or TT$3 billion.  Three days later, in a 
prime time address, Prime Minister Patrick Manning predicted a TT$6 
billion (US$1 billion) shortfall and announced that ministers would 
review budget priorities and identify cuts in discretionary 
spending. 
 
¶3. (SBU) On November 30, Manning again took to the airwaves to 
announce a revised shortfall projection of TT$5.3 billion (US$850 
million) and spending cuts of TT$4.55 billion, to be achieved in 
part by deferring the construction of new schools, hospitals, and 
housing.  While this leaves a gap of TT$741 million (US$120 
million), Manning voiced a determination not to resort to deficit 
financing or dip into the sovereign wealth Heritage and 
Stabilization Fund (HSF), suggesting that a marginal increase in US 
natural gas prices could easily make up the difference.  He also 
promised that salaries, pensions, social programs, and law 
enforcement spending would not be cut, and that "make-work" job 
programs would be maintained. 
 
¶4. (SBU) The review of spending plans appears to have been triggered 
by decisions at four of Trinidad's ammonia and nitrogen plants to 
suspend operations for extended maintenance in response to weak 
demand and sharp price declines in international markets. 
Compounding the loss of revenue is a global methanol market in 
gradual decline from its end-2007 peak as well as mechanical 
problems that forced a shutdown at Methanol Holdings' M5000 plant, 
one of the world's largest.  Trinidad's two steel mills also have 
reportedly cut back production in the face of declining prices. 
These demand reductions have left the state-owned National Gas 
Company looking for a market for some 15% of the gas it is committed 
to buy from upstream producers. 
 
¶5. (SBU) The GOTT's record TT$49 billion (US$8 billion) budget for 
FY-2009, which Finance Minister Tesheira presented on September 22, 
raised early concern among local economists that it would fuel 
inflation, already in double digits, while not saving enough of the 
country's windfall energy revenue in the HSF.  Premised on oil at 
US$70 per barrel and natural gas at US$4 per MMBTU netback, the 
original FY-09 budget scenario had the GOTT spending all projected 
revenue and saving only if actual revenues exceeded projections. 
Concern turned to criticism, however, as oil and gas prices dropped 
in the ensuing weeks, particularly since T&T's hydrocarbon exports 
sell below international benchmark prices.  (Note: Energy sector 
contacts estimate that T&T's mix of crude oil averages US$18-$20 
below the West Texas Intermediate benchmark price, while the netback 
for T&T's liquefied natural gas exports runs about half of the Henry 
Hub price.) 
 
¶6. (SBU) Going into the crisis, T&T's macroeconomic outlook was 
mixed.  Economic growth was already slowing, from 5.5% in 2007 to 
3.5% in 2008, but T&T's external financial position was fairly 
 
PORT OF SP 00000552  002 OF 003 
 
 
strong, with US$10 billion in foreign exchange reserves (equivalent 
to 12 months of imports), a current account surplus equivalent to 
26% of GDP, and external debt at 6% of GDP as of end-2007.  The HSF 
balance stands at US$3.2 billion, or roughly 5 months of 
expenditures. 
 
¶7. (SBU) On the downside, T&T has been experiencing its highest 
levels of inflation in 14 years.  After flirting with 10% 
(year-on-year) twice since 2006, headline inflation crossed firmly 
into double digits in June, rising to 15.4% by the end of October. 
Private sector economists are unanimous in faulting GOTT spending, 
fueled by record oil and gas revenue, for undercutting the Central 
Bank's strenuous efforts to contain inflation with monetary tools. 
Employers reacted to the initial FY-2009 budget with strong concern 
over the prospect of more inflation and union demands for increased 
wages leading to a wage-price spiral. Finance Minister Tesheira 
exacerbated concern by omitting any mention of inflation targets 
from her September 22 budget presentation to Parliament.  In 
subsequent meetings with business organizations, Tesheira identified 
a medium term (i.e. 2011) target of 8% and suggested that 10% might 
be achievable in 2010, but she did not name a target for 2009, 
leaving the impression that the GOTT was prepared to watch inflation 
climb significantly higher.  The mid-November budget review and the 
visit of the IMF mission brought welcome clarity, as the IMF 
announced its prediction that declining international food prices 
and GOTT budget cuts would help to moderate inflation to 12% at 
end-2008 and to 7% in 2009. 
 
----------------------------------- 
T&T Banks Avoid Financial Contagion 
----------------------------------- 
 
¶8. (SBU) Apart from some jitters in Trinidad and Tobago's thinly 
capitalized stock exchange in early October, the financial sector 
has avoided any contagion effect.  According to financial sector 
contacts, T&T's leading banks, including those doing business in the 
wider Caribbean and Central America, generally have not relied on 
overseas funds for deposits or lines of credit and tend not to 
invest in sophisticated instruments such as mortgage backed 
securities or derivatives.  Republic Bank chairman Roland Harford 
told one local paper, "We were never brave enough to get into hedge 
funds."  Former T&T finance minister Wendell Mottley echoed the 
assessment in more colorful terms at a recent American Chamber of 
Commerce meeting, saying "Banks in the English-speaking Caribbean 
didn't drink the Kool Aid." 
 
------------------------------------- 
IFC: If you build it, will they come? 
------------------------------------- 
 
¶9. (SBU) On the other hand, the GOTT's plan to launch a Trinidad and 
Tobago International Financial Center (TTIFC) suffered setbacks with 
the sale of Bear Stearns and collapse of Lehman Brothers.  Both 
companies had shown interest in becoming "anchor tenants" at the 
Port of Spain waterfront complex currently designated to house the 
TTIFC.  Finance ministry officials have sought to portray the global 
crisis as an opportunity for "new players like T&T," but as the 
dimensions of the difficulties became apparent, they quietly called 
off an IFC launch event planned for October 23.  Efforts to 
modernize financial regulations are continuing, as the TT 
Parliament's lower chamber passed a Financial Institutions Bill on 
November 14.  The Prime Minister and Finance Minister also traveled 
to the UAE in early November to follow up on previous discussions of 
cooperation and possible investment in T&T's IFC by Dubai's 
International Financial Center.  Central Bank Governor Ewart 
Williams summed up prospects at a November 17 public forum, noting 
that the GOTT is creating physical and regulatory infrastructure for 
an IFC, but it will be up to foreign financial institutions to 
decide whether to establish a presence in Port of Spain. 
 
--------------------------------------------- ----- 
Still Dependent on Energy, but Better Gas than Oil 
--------------------------------------------- ----- 
 
¶10. (SBU) The planned IFC is one of several GOTT initiatives to 
diversify away from energy.  None of these initiatives is very far 
off the drawing board, which leaves Trinidad and Tobago still 
dependent on its energy sector.  Nevertheless, T&T is in a stronger 
position to weather the global slowdown than its tourism-dependent 
Caribbean neighbors, and it is arguably better prepared for the 
current global economic turmoil than it was for the oil bust of the 
 
PORT OF SP 00000552  003 OF 003 
 
 
1980s.  The gradual decline in oil production and rapid increase in 
natural gas has brought less exposure to oil market volatility and 
increased reliance on exports of liquefied natural gas to the US 
market under long-term contracts.  Apart from temporary shutdowns of 
ammonia and nitrogen plants, T&T's major foreign oil companies are 
so far signaling their intent to continue investing in exploration 
and production, while pressing their case for more favorable 
financial terms from the GOTT.  For his part, PM Manning underscored 
his intention to press forward with downstream projects in aluminum 
and plastics, intended to generate increased employment and create a 
reliable supply of low-cost inputs for other downstream 
manufacturing.  The questions on everyone's minds with respect to a 
global slowdown - how long and how deep - are translating into 
questions in T&T about the viability of these projects and the 
availability of financing. 
 
KUSNITZ