Citing persistent fiscal deficits, the decline in oil prices and a weak macroeconomic policy framework among other concerns, Moody's Investors Service has downgraded T&T's government bond rating and issuer rating to Baa2 from Baa1 and changed the outlook for the country from stable to negative.
Moody’s said its negative outlook for T&T reflected the impact the sharp drop in oil prices was expected to have on the T&T economy and the country’s fiscal accounts.
“Overall, we anticipate material reductions in government revenues, the current account surplus, and FDI flows that could further weaken the country's credit profile,” the agency said in an April 30 report.
“Absent durable fiscal adjustment, debt metrics would also be expected to deteriorate. In addition, we note material implementation risks around the resolution of the severe data limitations, which is likely to take 18-24 months to implement.”
Citing one of the key factors for the downgrade, the ratings agency said the country’s fiscal accounts had been reporting recurring deficits of 2-3 per cent of gross domestic product (GDP) since 2009. It said implementing fiscal reforms to put government accounts on a more sound footing “will likely be challenging in a context of low oil prices and potential spillover 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,” the agency said.
“While Trinidad's Heritage and Stabilisation Fund (HSF) 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 the 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 also said T&T remained heavily reliant on oil and gas, so its economic activity and fiscal stability was predicated on the performance of that sector.
“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 2 per cent in the medium-term,” the ratings agency said.
Moody’s assessed T&T’s institutional strength as moderate, based on World Bank governance indicators, adding that “macroeconomic institutional capacity, including fiscal and monetary policy frameworks, are weaker than those observed in several other investment-grade peers.”
The agency said, “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.”
The agency said T&T’s ratings could improve if there was an upward trend in oil prices that would lead to increased foreign investment in oil/natural gas exploration and production, as well as an improved fiscal policy framework by its adopting a medium-term strategy and return to fiscal surpluses.
It also recommended integrating the HSF into a medium-term fiscal framework, and enhancing its role as a counter-cyclical fiscal tool.
According to Moody’s, the lack of progress in addressing fiscal slippage with a durable medium-term strategy; persistent low oil prices that limit prospects for deep-water oil and gas exploration; and further deterioration in data quality could lead to a further downgrade. (See story on Page A15)
Central Bank: Unjustified move
In a statement yesterday, Central Bank Governor Jwala Rambaran said Moody’s downgrade of T&T’s credit rating and change in the country’s outlook was unjustified.
“Moody's has taken the current cyclical decline in oil prices, added it to longstanding structural issues affecting our natural gas-based economy to recalibrate downwards Trinidad and Tobago's position among its Baa-rated peers.
“We maintain the global LNG trade and the long-term view of the LNG industry must be central to any forward looking analysis of the Trinidad and Tobago economy, not developments solely in the global oil market,” the bank said.
The Central Bank said T&T remained an investment grade destination and was able to fully meet all its debt obligations.
“The sound creditworthiness of Trinidad and Tobago’s natural gas-based economy is firmly supported by the country's strong net external asset position (including assets in the Heritage and Stabilisation Fund), low external vulnerability and stable political system.
“Central Bank expects Trinidad and Tobago to continue experiencing healthy current account surpluses and strong foreign direct investment (FDI) 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.”