Trinidad and Tobago Business Forecast Report Q4 2008

Promising Outlook Beyond Commodities Boom

Despite global economic and financial concerns, in particular a consumer-led slowdown in the US, the outlook for Trinidad & Tobago remains relatively healthy. Other Caribbean economies are suffering as external conditions take a turn for the worse, but Trinidad & Tobago has a sizeable foreign reserves buffer, low levels of external public debt, and still-strong domestic demand - all factors that should keep the economy motoring along at a firm pace this year and next. The investment climate is still attractive - especially in the dynamic energy sector - but we are concerned about a general shortage of quality labour in the non-energy sector, which could stifle future growth potential. The political scene has been dominated by the run-up in inflationary pressures. While social unrest is subdued in comparison to some of its regional peers, strike action and protests over wages have started to become increasingly commonplace.

Political noise is relatively quiet. Several investigations - including a high-profile inquiry into mismanagement of the Urban Development Corporation of Trinidad & Tobago - remain unresolved. Moreover, the international spotlight is firmly back on crime in the Caribbean, an area in which Trinidad & Tobago's business environment falls down significantly. However, altogether, the country scores well in both of our short- and long-term political risk ratings, at 74.6 and 64.3 respectively. As in many emerging markets, soaring inflation is creating political problems, and the hiking of electricity tariffs in Q208 was a necessary, if politically unpopular, move by the Manning administration.

The key economic issue going forward is preparing for the eventual exhaustion of the twin island nation's energy reserves. We do not believe that a mild, gradual correction in commodity prices, which we see occurring over our forecast period, will be a massive blow to the local energy sector. In our view, investment in the sector, decent output growth potential and a diversified product base should ensure a strong performance over the medium term. However, efforts should be focused on improving training schemes, education and infrastructure in the non-energy sector - all of which should help economic activity diversify. We see real GDP growth converging to 4.0-5.0% over the next five years, and beyond.

Trinidad & Tobago's business environment rating of 53.7 puts the country among the leaders in the Latin America and the Caribbean region, and 58th worldwide. The country certainly has a lot going for it in terms of investment appeal: an investment grade credit rating, natural resource richness and decent education standards, just to name a few. There is significant scope for improvement, however. The country's supply constraints, bottlenecks and infrastructure problems have been exposed during the surge in global agricultural prices in early 2008. Institutional weakness is also a concern, especially given the spate of high-profile corruption cases in recent years.