HIGHLIGHTS
FY2022 Projections
- Revenue: TT$43.3B
- Expenditure: TT$52.46B
- Fiscal Deficit: TT$9.1B
Funding the Fiscal Deficit
- Borrowings – locally and Internationally
- Asset Sales
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- The sale of all gas stations owned by NP
- FCB APO
- Possible TTMF/HMB IPO
Fiscal Measures
- Stock Specific
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- SME Listing Incentives
- Customs Duties, Motor Vehicle Tax Removed for Electric Vehicles
- Wider Economic
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- Tax Relief Increased on Approved Pension Plans and Retirement Fund Schemes
- Fuel Liberalization
- Property Tax
- Utilities Tariffs to be Reviewed
- VAT removed on basic items
- Public-Private-Partnership (PPP) of the Port Authority of Trinidad and Tobago
The Bourse View
- Increased Inflation Risk
- Increased Investor Opportunities
- Credit Rating Under Pressure?
This week we at Bourse evaluate the recently delivered national budget for the FY2022 period, focusing on the opportunities and implications for the investment community. The Honourable Minister of Finance proposed several measures which could (i) introduce new opportunities to public markets and (ii) impact existing positions held by investors, through changing macroeconomic conditions and consumer patterns. We discuss below.
FY 2022 Budget Overview
FY2022 Total Revenue is projected at $43.3, 16.9% higher than $37.1B estimated in FY2021. Forecast Revenue is expected to increase on account of factors including (i) anticipated higher domestic energy production, (ii) higher energy prices and (iii) new revenue initiatives including the Property Tax and Trinidad & Tobago Revenue Authority. Oil Revenue is estimated at $12.6B, while Non-Oil Revenue is projected to be $29.7B.
FY2022 estimated Total Expenditure is $52.4B, up 3.1% from FY2021’s revised estimate ($50.8B). The Fiscal Deficit for FY2022 is expected to be $9.1B. Economic growth is expected to measure 5% in 2022, up from -1% in 2021.
Investor-Specific Initiatives
APO of First Citizens Bank Limited (FIRST)
The Government of the Republic of Trinidad & Tobago (GORTT) intends to raise approximately TT$550M through the capital market in Fiscal 2022, via an Additional Public Offering (APO) of10,869,565 of ordinary shares in First Citizens Bank Limited. The Government’s current controlling interest is 64.4% or 161,946,890 shares. The proposed sale would result in shareholding post-completion of 151,077,325 shares or 60.1% of issued shares.
As at October 7th, First Citizens Bank Limited (FIRST) was currently priced at $50.61, trading at a P/E ratio of 20.3 times, lower than the Banking Sector average of 22.1 times. The stock offers a dividend yield of 2.9%, relatively higher than the sector average of 2.4%. The stock’s share price is up 17.6% YTD. The quantum of shares being offered to the market via APO would be roughly 8.3 times the trailing 1-year total volume of shares traded, which would have taken place at a weighted average price of $46.15. Post-offering, the percentage ownership in FIRST by GORTT would fall to 60.4%. The pending corporate legal restructuring to a new holding company structure, with subsequent issuance of shares of First Citizens Group Financial Holdings Limited (FCGFH) and exchange for FIRST shares, is unlikely to have any impact on the proposed divestment by GORTT.
‘TTMB’ IPO
The Minister of Finance announced the GORTT’s intention to divest – via Initial Public Offering (IPO) – its shareholding in the Trinidad & Tobago Mortgage Bank (TTMB), a newly-created entity formed from the merger between the Trinidad & Tobago Mortgage Finance Company (TTMF) and the Home Mortgage Bank (HMB). The completion of the merger, approved by both TTMF and HMB on August 6th 2021 and still subject to regulatory approvals, is anticipated to be complete within the first half of FY2022 (March 2022). The combined asset base of TTMF and HMB as at FY 2020 is TT$7.5B, with a total equity of $2.3B.
If realized, investors could expect to see the IPO of TTMB before the end of 2022. While no official figures have been provided, estimates suggest the value of the shares held by GORTT in TTMB to be in the range of TT$500-600M.
Regional rating agency CariCRIS recently downgraded the credit ratings of both the TTMF (from CariAA- to CariA+ on October 5th 2021) and HMB (from CariA to CariA- on October 7th 2021) on account of deteriorating asset quality metrics.
Relief for Pension Plan Contributions Increase
Encouraging greater personal savings for retirement, the relief related to contributions to approved Retirement Benefits Schemes or approved Pension Fund plans was increased from an annual TT$50,000 to TT$60,000 effective January 1, 2022. For individuals that are able to fully utilize this benefit, the effective shield on income taxes paid (at a 25% personal income tax rate) would increase from $12,500 to $15,000 annually.
SME Listing Incentives Enhanced
The Minister of Finance proposed, with effect from January 2022, a further enhancement of the tax regime applicable to newly-listed Small and Medium Enterprise (SME) listing on the TTSE will be enhanced as follows: Newly-listed SME’s would enjoy exemptions on Business Levy and Green Fund Levy now accompanying Corporation Tax exemptions for the first 5 years post-listing. The 50% tax holiday for the second five years post-listing was also extended to Business Levy and Green Fund Levy.
Additionally, the Minister indicated that assistance will be provided to the TTSE to operationalize and integrate the SME Mentorship Programme into the broader set of services currently provided to them.
Despite the already attractive incentives in place, it would appear that SME’s are not currently in a rush to list on the TTSE. As was the case at this time last year, only 2 stocks are listed on the SME market Tier; CinemaOne Limited (CINE1) and Endeavour Holdings Limited (EHL). Potential Issuers may still be wary of the prevailing challenging operating environment, which has led investors to be much more discerning when participating in new investment opportunities.
Other Investor-Relevant Measures
Other Initiatives announced could have an impact on the general investment environment, as well as some specific companies.The removal of all custom duties, motor vehicle tax and value-added tax on the importation of battery-powered electric vehicles (EVs) effective January 1, 2022 (and two-year age limit on imported used battery powered electric vehicles) is expected to move the country toward a more carbon-neutral footprint. Publicly-listed automobile dealers such as conglomerates Massy Holdings Limited (MASSY) and Ansa McAl Limited (AMCL) could stand to benefit, should both groups position themselves to quickly meet changing consumer patterns in the automotive space. The measure could potentially reduce the forex costs of importing traditional fuels and encourage private investment in related infrastructure and industries such as charging stations, service and repairs.
Despite the introduction of a ‘fuel cash card’ to vulnerable groups, the liberalization of fuel markets, with the resultant shift in retail prices of premium gasoline, super gasoline and diesel from a fixed to a floating basis could have a broad inflationary impact via direct transportation and associated input costs. A similar effect is likely to occur as Electricity and Water tariffs are adjusted towards subsidy-free levels. Even with rebates offered to vulnerable and low-income power consumers and the introduction of a ‘utility cash card’, the inevitable outcome of utility rate adjustments will be increases in the cost of living and upward pressure on general prices. The introduction of the Property Tax is likely to result in lower disposable incomes for households, while driving up operating costs for commercial owners.
Brighter Days Ahead for Investors?
Trinidad and Tobago’s current economic environment and proposed fiscal measures, investors will be looking forward to the opportunity to add new investments (IPOs, APOs) to their portfolios.
The debt financing necessitated by still-significant shortfalls in Revenue relative to Expenditure at the State level create avenues for investors to acquire bonds directly or access investments using GORTT bonds and other securities as collateral.
Concerns have been raised recently about the creditworthiness of the GORTT, with some experts even discussing the likelihood of the GORTT defaulting/restructuring its debt. Given T&T’s fairly conservative external debt:GDP levels, still-manageable overall degree of indebtedness and considerable stores of international reserves and savings, the likelihood of default in the near-term remains low. Considerable progress in balancing the budget, through some combination of revenue growth and expenditure-cutting measures, could boost investor confidence in this regard.
Inflation will likely be at the forefront of investor concerns, given the aforementioned coming measures when combined with the supply chain issues currently plaguing the global economy. Ongoing difficulty in accessing foreign exchange continues to have a considerable impact on investors’ ability to diversify by geography and currency. With recovering energy revenues and heavily import-dependent domestic consumption patterns, access to foreign exchange is unlikely to be resolved in the short-term.
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