Ratings downgrade seen as big blow to T&T

(Trinidad Express) Trinidad and Tobago has suffered a big blow to its status as the place to invest in the Caribbean after international agency Moody’s downgraded the country’s credit rating from stable to negative.

Moody’s on Thursday downgraded Trinidad and Tobago’s Government bond rating and issuer rating to from Baa1 to Baa2.

The ratings are used and considered by international investors looking to do business in T&T.

Moody’s justification for the downgrade, which happened on Thursday, are:

  1. Persistent fiscal deficits and challenging prospects for fiscal reforms.
  1. Decline in oil prices and limited economic diversification to weigh negatively on economic growth prospects.
  1. Weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and inadequate provision of vital macroeconomic data.

As a consequence of that action, Moody’s also downgraded two State energy companies—the National Gas Company’s (NGC) and the Petroleum Company of Trinidad and Tobago (Petrotrin)—because of the high dependency on the companies by the Government.

In explaining why it chose to downgrade T&T, Moody’s said several factors contributed to this:

  1. Persistent fiscal deficits and challenging prospects for fiscal reforms.

Moody’s noted that since 2009 there has been recurring deficits, on the order of two to three per cent of GDP after consecutive surpluses were observed over the previous eight years.

“Going forward, implementing fiscal reforms to put the Government accounts on a more sound footing will likely be challenging in a context of low oil prices and potential spill over of low gas prices in the US to other markets.

Furthermore, the lack of a medium-term fiscal framework and reliance on one-off measures to cut spending undermines the authorities’ ability to achieve a durable turnaround in fiscal metrics.

“While Trinidad’s Heritage and Stabilisation Fund is an important element of the sovereign balance sheet, it has not been used as a counter-cyclical policy tool, thus limiting its ability to compensate for negative impact of adverse shocks in the economy.

“In addition, the rigid structure of public expenditure, where wages, subsidies, and transfers account for more than 65 per cent of total expenditures, limits fiscal flexibility,” Moody’s said.

  1. Decline in oil prices and limited economic diversification to weigh negatively on economic growth prospects.

Moody’s noted Trinidad remains heavily reliant on the oil and gas sector and, accordingly, economic activity and fiscal stability is predicated on its performance.

“Economic growth has slowed down in the post-crisis period as a result of maintenance-related disruption in gas production.

“Although normal production is likely to resume in 2015, the prospects of injecting new investments to boost growth appears challenging given the decline in oil prices, which are projected to remain below US$60 in 2015/16.

“We anticipate that maturing oil and gas fields will limit Trinidad’s prospects of significantly increased hydrocarbon revenues in the ­medium term.

“A return to higher pre-crisis growth rates is unlikely, a condition we think will be aggravated in the context of low energy prices. Given this, we project GDP growth will rebound to less than two per cent in the medium term,” it said.

iii. Weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and inadequate provision of vital macroeconomic data.

Moody’s said T&T’s macroeconomic institutional capacity, including fiscal and monetary policy frameworks, are weaker than those observed in several other investment-grade peers.

“As a resource-rich country, the absence of a medium-term fiscal framework, coupled with a lack of debt-management strategy, represent important policy shortcomings that place the country in a weaker standing relative to most Baa-rated peers.

“In addition, Trinidad compares poorly in terms of the quality of statistical information. Although some progress has been made to address this long-standing issue, we do not anticipate a rapid resolution and, accordingly, expect this condition will continue to be present, negatively impacting the country’s relative standing in the Baa rating space,” it said.

Moody’s said assigning a “negative” outlook for T&T to the country’s Baa2 “reflects the impact we expect the sharp drop in oil prices will have on both the Trinidadian economy and the fiscal accounts”.

To positively change Moody’s outlook on T&T, oil prices would have to increase, the Government would have to find a strategy to return its budgets to surplus in short order and utilise the Heritage and Stabilisation Fund as a counter-cyclical fiscal tool.

Conversely, should there be no progress to address fiscal slippage, persistent low oil prices and further deterioration in data quality, it will further negatively impact on Moody’s downgrade.

Central Bank:

Downgrade unjustified

In an immediate two-page response, the Central Bank said Moody’s downgrade is unjustified.

The bank said T&T remains an investment-grade destination that is able to meet its debt obligations.

And to support its statement, the bank cited the “country’s strong net external asset position (including assets in the Heritage and Stabilisation Fund), low external vulnerabi­lity and stable political system”.

And despite Moody’s expressed concern about oil prices and T&T’s dependency on them, the bank said T&T would continue “experiencing healthy current account surpluses and strong foreign direct investment flows mainly to the energy sector, despite the sharp downturn in oil prices.

“The recent increase in oil and gas exploration activities, especially in the deep-water acreages, should sustain energy production over the next few years, contributing to moderate economic growth prospects.”

The bank said Moody’s concern about “persistent fiscal deficits and challenging prospects for fiscal reforms” does not take into account the severe economic circumstances under which fiscal surpluses in the eight years prior to 2009 turned into budget deficits over 2010-2014.