1. Central Bank of Trinidad and Tobago Energy and the Economy: The Macroeconomic Impact Shelton Nicholls Deputy Governor UWI Conference on the Economy October 8-9 2008

2. Central Bank of Trinidad and Tobago Outline of Presentation 1.Energy Sector and the Macroeconomy: Theoretical Perspectives 2.Energy Sector and Macroeconomic Linkages 3.Energy Sector and Macroeconomy : Some Performance Measures 4.Macroeconomic Management 5.Current Risks in Global Environment

3. Central Bank of Trinidad and Tobago 1.0 Energy Sector and the Macroeconomy: Theoretical Perspectives Development is constrained by low levels of investment. Access to capital and foreign exchange from the energy sector could help to “push” or propel growth. [Lewis, Rostow, Rosenstein-Rodan, Roemer] Natural resource abundance can have a negative impact on economic growth and development if not managed optimally. [Auty, Gelb] Riding the crest of the product cycle which may imply deriving optimal benefits from the energy sector. [Farrell]

4. Central Bank of Trinidad and Tobago 1.1 Key Issues from Theoretical Perspectives Dependence on energy can make economic performance susceptible to economic shocks. Resource boom can result in a decline in the tradeable sector and an expansion in the non-tradeable sector. Inflows of significant foreign exchange resources could lead to real exchange rate appreciation and impact competitiveness in the non-energy sector.

5. Central Bank of Trinidad and Tobago 2.0 Energy Sector and Macroeconomic Linkages 2.1Macroeconomic Linkage Diagram 2.2 Main features of Linkages

6. Central Bank of Trinidad and Tobago 2.1 Macroeconomic Linkage Diagram Output Energy GDP Non-Energy GDP Energy Exports Non-Energy Exports Oil & Gas Prices DOMESTIC PRICES Consumption Investment Oil & Gas Reserves Energy Revenue Non-Energy Revenue Overall Fiscal Balance Non-Energy Balance Monetary Aggregates Money/Financial Markets Fiscal Sector Employment

7. Central Bank of Trinidad and Tobago 2.2 Main features of Linkages High energy prices in an environment of increasing energy production raises export earnings and increases tax revenues. Increased tax revenues helps to bolster government expenditure envelope. Increased expenditure in tradeable sector could expand investment, output and employment. Expansion in non-tradeable activities could have distortionary effects on investment, aggregate demand, labour market and prices.

8. Central Bank of Trinidad and Tobago 3.0 Energy Sector and the Macroeconomy: Some Performance Measures 3.1Energy and National Output 3.2 Energy Sector and Trade 3.3 Energy Sector and Fiscal Accounts

9. Central Bank of Trinidad and Tobago 3.1.0 Energy Sector and Output More diversified energy sector since onset of first oil boom in 1970s. Energy sector output continues to dominate total output. Energy sector employs a relatively small share of the labour force.

10. Central Bank of Trinidad and Tobago 3.1.1 Distribution of GDP

11. Central Bank of Trinidad and Tobago 3.1.2 Distribution of Energy GDP

12. Central Bank of Trinidad and Tobago 3.1.3 Energy Output as a per cent of GDP 1975198519952000200520072008 Energy GDP/Total GDP44.126.727.531.341.745.846.3 of which: Oil and Gas GDP/ Total GDP 44.126.715.922.934.832.933.8 Petrochemical GDP/ Total GDP n.a. 5.84.26.07.26.7 Memo Energy Employment to Total Employment n.a. 3.73.23.43.73.1* * Represents data for Q1 2008.

13. Central Bank of Trinidad and Tobago 3.1.4 Contribution of Tradeable and Non- tradeable Sectors to Total GDP 1975198519952000200520072008 TRADEABLE Agriculture5.02.42.31.40.50.40.3 Manufacturing6.37.38.27.15.35.85.2 NON-TRADEABLE Construction7.611.27.87.57.48.39.4 Distribution12.512.214.016.411.912.311.4 Finance, Insurance and Real Estate6.912.112.314.211.610.911.1 Government8.515.22.11.66.66.46.2 Other12.817.524.121.110.69.59.2

14. Central Bank of Trinidad and Tobago 3.2.0 Energy Sector and Trade Energy exports continue to dominate extra-regional and intra-regional exports. Sharp increases in energy prices in the new millennium. Significant volatility exhibited in energy prices over last four (4) decades. Decade of 1970s: High energy prices resulted mainly from supply side restrictions. New millennium: Booming global demand, especially by China and India, and increasing speculation contributed largely to high energy prices.

15. Central Bank of Trinidad and Tobago 3.2.1 Contribution of Energy Exports 197519851995200020052007 Energy Exports / Total Exports 52.591.972.481.291.086.7 Energy Exports to CARICOM / Total Exports 3.68.69.713.116.48.6 Energy Exports to Non- CARICOM / Total Exports 96.491.490.386.983.691.4

16. Central Bank of Trinidad and Tobago 3.2.2 Energy and Gas Prices

17. Central Bank of Trinidad and Tobago 3.2.2 Energy and Gas Prices

18. Central Bank of Trinidad and Tobago 3.2.3 Real Effective Exchange Rate (year-on-year changes)

19. Central Bank of Trinidad and Tobago 3.3.0 Energy Sector and Fiscal Accounts Energy revenue still accounts for a significant proportion of government revenues. Non-energy revenue has however been increasing over time with the expansion in the non-energy sector. Heritage and stabilisation fund provides a viable avenue for increased savings and for lessening demand pressures.

20. Central Bank of Trinidad and Tobago 3.3.1 Energy Revenue and Expenditure (in per cent of GDP) 1975198519952000/20012006/20072007/2008 Total Revenue34.134.927.425.930.035.5 Of which: Energy Revenue25.013.58.29.716.719.4 Non-Energy Revenue9.121.419.216.213.316.1 Total Expenditure23.942.427.224.228.332.2 Recurrent16.933.425.222.522.425.5 Capital7.09.02.01.75.96.7 Overall Balance10.2-7.50.21.61.73.2 Non-Energy Balance-14.7-21.0-8.0-8.1-14.9-16.2 1.In 1997 the central government's reporting of the fiscal operations was changed from calendar year to fiscal year. 2. Energy revenue between 1975-2000 excludes receipts from petrochemical companies.

21. Central Bank of Trinidad and Tobago 3.3.3 Official Reserves, HSF and Import Cover

22. Central Bank of Trinidad and Tobago 4.0 Macroeconomic Management Managing the existing buoyant economic environment requires focused attention on: 1.Expanding the absorptive capacity of the economy via focus on expanding the non-energy tradeable sector (agriculture, financial services, tourism). 2.Managing rapid appreciation of the nominal and real exchange rates so as to sustain competitiveness of the economy.

23. Central Bank of Trinidad and Tobago 4.0 Macroeconomic Management Managing the existing buoyant economic environment requires focused attention on: 3.Managing inflationary pressures arising from rapid growth in aggregate demand. 4.Investing additional energy resources to provide for inter-generational savings and to smoothen consumption.

24. Central Bank of Trinidad and Tobago 4.0 Macroeconomic Management Managing the existing buoyant economic environment requires focused attention on: 5.Creating an enabling environment for private sector investment: –Provision of appropriate economic and social infrastructure (education, health, physical infrastructure). –Maintaining a consistent and transparent policy framework.

25. Central Bank of Trinidad and Tobago 5.0 Current Risks in Global Environment Strong likelihood of slower economic growth could dampen demand for energy and exert downward pressure on oil prices. Current financial market turmoil has already depressed yields in global financial markets and could lead to lower returns on financial capital.

26. Central Bank of Trinidad and Tobago END OF PRESENTATION