Trinidad and Tobago: Country outlook

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Country Data and Maps
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Economist Intelligence Unit
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Economy, Outlook, Forecast, Overview
Political Geography
Trinidad and Tobago

Trinidad and Tobago: Country outlook

FROM THE ECONOMIST INTELLIGENCE UNIT

POLITICAL STABILITY: The political climate will remain challenging in 2021 amid the coronavirus (Covid-19) pandemic. The government of the prime minister, Keith Rowley of the centrist People's National Movement (PNM), began a second term following victory in the August 2020 general election, when the PNM secured a majority in Congress, with 22 seats (out of 41). This will support policymaking during The Economist Intelligence Unit's 2021-25 forecast period. However, as the country grapples with the consequences of the pandemic, economic malaise will cause the risk of social unrest to rise substantially. In late 2020 the government announced a comprehensive plan--called the Road Map to Recovery--for tackling the development challenges posed by the ongoing Covid-19 crisis and laying the groundwork for a recovery of growth. However, implementation of the plan will be rocky, as the uncertain path of the coronavirus continues to pose risks in terms of reduced economic activity and a slow return to pre-pandemic life. An already difficult political environment, marked by simmering ethnic tensions and perceptions of corruption, as well as public fatigue with lockdown measures, could trigger outbreaks of unrest and hurt the government's popularity.

ELECTION WATCH: The next general election is due to take place in 2025, the last year of our forecast period. In the most recent general election, held on August 10th 2020, the PNM won 22 out of the 41 seats in the House of Representatives (the lower house), losing one seat to the opposition United National Congress (UNC) from the previous election in 2015. Given the government's difficulties with the economy, this was a relatively good performance for the ruling PNM.

INTERNATIONAL RELATIONS: The government will generally maintain cordial relations with the US, the UK, Canada and the EU, and with the Latin American countries that are now major export markets for its liquefied natural gas (LNG). However, relations with the US will remain strained by Trinidad and Tobago's commercial ties with Venezuela, raising the risk of US sanctions being imposed on Trinidad and Tobago in the short to medium term. However, that scenario is not our baseline forecast. It would be hard for the small, open Caribbean economy to deal with US sanctions, as its economic relations with that country are stronger than with Venezuela. Moreover, US foreign policy towards Venezuela under the new US administration, led by Joe Biden, will be less hawkish than under the former president, Donald Trump (2017-21), which will enable relations between the US and Trinidad and Tobago to improve during the forecast period.

POLICY TRENDS: In the near term, controlling the spread of the coronavirus will take centre stage. In the months ahead the government will focus on keeping some mobility restrictions in place while it awaits the delivery of coronavirus vaccines through the Covid-19 Vaccine Global Access (COVAX) Facility--a multilateral pooling mechanism for the equitable distribution of Covid-19 vaccines--expected in the second quarter of the year. The country will receive vaccines from bilateral donors but will depend mainly on COVAX. This reliance on COVAX means that the government will not secure enough doses to inoculate its entire population this year. This will pose huge risks to the island's ability to fully reopen its economy.

ECONOMIC GROWTH: The economic recovery from the coronavirus crisis will be slow and gradual. We forecast that real GDP will not return to 2019 levels until 2024 and expect real GDP growth to average 2% in 2021-25. Our projections assume that policy uncertainties will gradually wane, allowing for modest improvements in the business environment.

INFLATION: Price pressures will grow (albeit timidly) from 2021 as demand recovers gradually. A withdrawal of fuel subsidies in the 2018/19 budget has increased the likelihood of volatility in prices, as changes in global oil prices feed through to domestic transport costs. This will contribute to price pressures in 2021-25; we expect year-end inflation to average 1.2% in the forecast period. The economy will remain exposed to supply-side inflationary pressures, with foodstuffs especially vulnerable. The greatest risk to our forecast is from weather-related shocks, which would hit food supply and increase prices.

EXCHANGE RATES: Even though the currency came under stress in 2020 amid a new oil price shock, we expect the Central Bank of Trinidad and Tobago (CBTT, the central bank) to keep the exchange rate close to the implicit peg of TT$6.8:US$1 during the forecast period. Although the foreign-exchange market has improved in recent months, as foreign-exchange reserves have increased (we assume an increase in uncategorised capital inflows), the CBTT will continue to draw on reserves to meet commercial demand in the short term. However, pressure on reserves should lessen in the medium term as a gradual recovery in the energy sector improves inflows of foreign exchange. We forecast that foreign reserves will increase to US$7.2bn by end-2021. However, amid rising imports this year, import cover will decline to about ten months, compared with an estimated 12.2 months in 2020. Reserves will continue to increase in 2021-25.

EXTERNAL SECTOR: After widening to an estimated deficit of 3.9% of GDP in 2020, the current-account balance will return to a surplus, averaging 1.8% of GDP in 2022-25. With oil and natural-gas prices set to recover--albeit slowly--in the short to medium term, export revenue will gain some momentum, leading to an increasing merchandise trade surplus (although it will be lower than in recent years). Meanwhile, the primary income deficit will remain at around its historical average as profit remittances by foreign energy firms keep the income account in deficit. The services deficit will widen gradually, from an estimated 5.8% of GDP in 2020, to peak of 8.9% of GDP in 2023, as shipping costs increase and tourism income growth remains weak. We anticipate a slight easing again in 2024-25. We expect the current account to reflect these trends.

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