Trinidad & Tobago Business Forecast Report Q4 2007

Election Will Have Little Bearing On Strong Economy

The economic outlook for Trinidad & Tobago remains favourable. The pace of growth will moderate in 2007, to 7.0% in real terms (from 12.0% in 2006), as the effect of increased output is offset by a decline in world prices and base effects. While oil output is gradually declining, overall energy output will continue to rise over the forecast period thanks to higher gas and methanol production.

Meanwhile, a presidential election is due by the end of the year, with late November the most likely date. Although we believe that Prime Minister Patrick Manning and his party will encounter political difficulties related to the ongoing violent crime problem and consumer price inflation, his re-election remains the most probable scenario.

Indeed, amid a roaring economy, Manning's government has the upper hand going into the upcoming vote, and the election is essentially the ruling People's National Movement (PNM)'s to lose. In policy terms, there will be little change under a new government. For all their strife, the two main parties differ little in policy terms and both are committed to the democratic rule of law and orthodox macroeconomic policies.

While the overall outlook for Trinidad & Tobago remains generally very robust, the economy is operating at full tilt, and the resulting capacity constraints may increasingly come into play over the next few months. In output terms, the energy sector, accounting for an estimated 41.2% of GDP in 2006, will remain the engine of growth in the forecast period and beyond. Energy exports accounted for 91% of the value of total exports in 2006, underlining the country's heavy dependence on the energy sector. Moreover, Trinidad's excessive reliance on the energy export sector as an engine of growth makes it highly vulnerable to an external shock. In the short term, the main risk is on the monetary side, amid the strong fiscal stimulus to the domestic economy, which has been the main source of inflation pressures. Moreover, with high inflation expectations there are growing signals of emerging wage pressures in both the public and private sectors. The central bank's liquidity tightening measures appear to be taking effect, however, and we believe that inflation may well have peaked in 2006.

Trinidad & Tobago's business environment rating of 55.2 puts the country among the leaders in the Latin America and the Caribbean region, and 48th worldwide. The country enjoys a high investment grade rating from the major agencies, which is underpinned by policy measures to attract foreign investment. The energy industry, including a rapidly growing natural gas sector, continues to offer lucrative investment opportunities. The major risk factors to the business environment outlook include high levels of crime and inflation.