Energy and the Economy: The Macroeconomic Impact

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

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

3. 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] Central Bank of Trinidad and Tobago

4. 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. Central Bank of Trinidad and Tobago

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

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

7. 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. Central Bank of Trinidad and Tobago

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

9. 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. Central Bank of Trinidad and Tobago

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

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

12. 3.1.3 Energy Output as a per cent of GDP * Represents data for Q1 2008. Central Bank of Trinidad and Tobago

13. 3.1.4 Contribution of Tradeable and Non-tradeable Sectors to Total GDP Central Bank of Trinidad and Tobago

14. 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. Central Bank of Trinidad and Tobago

15. 3.2.1 Contribution of Energy Exports Central Bank of Trinidad and Tobago

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

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

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

19. 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. Central Bank of Trinidad and Tobago

20. 3.3.1 Energy Revenue and Expenditure(in per cent of GDP) • In 1997 the central government's reporting of the fiscal operations was changed from calendar year to fiscal year. • Energy revenue between 1975-2000 excludes receipts from petrochemical companies. Central Bank of Trinidad and Tobago

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

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

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

24. 4.0 Macroeconomic Management Managing the existing buoyant economic environment requires focused attention on: 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. Central Bank of Trinidad and Tobago

25. 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. Central Bank of Trinidad and Tobago

26. END OF PRESENTATION Central Bank of Trinidad and Tobago