Trinidad & Tobago now officially 'junk' at Moody's
Wednesday, April 26 2017 @ 09:46 AM AST
Contributed by: AleemKhan
New York, April 25, 2017 -- Moody's Investors Service ("Moody's") has today downgraded Trinidad and Tobago's issuer and senior unsecured debt ratings to Ba1 from Baa3 and assigned a stable outlook.
The rating action was based on the following key drivers:
1. The authorities' policy response has been insufficient to effectively offset the impact of low energy prices on government revenues, as fiscal consolidation efforts have mostly relied on one-off revenue measures
2. A steady rise in debt ratios driven by large government deficits has eroded fiscal strength
3. Declining production from maturing oil and gas fields coupled with limited investment prospects, in a context of low energy prices, have materially undermined medium-term growth prospects
The stable outlook on the Ba1 rating incorporates moderate external risks as well as the benefits of the government's sizeable fiscal buffers in offsetting further downside risks and ample access to a relatively deep domestic financial market.
Trinidad and Tobago's foreign-currency bond and deposits ceilings were lowered to Baa3/P-3 and Ba2/NP from Baa2/P-3 and Baa3/P-3, respectively. At the same time, the local-currency bond and deposits country ceilings were lowered to Baa2 from Baa1.
RATIONALE FOR DOWNGRADE TO Ba1 FROM Baa3
POLICY RESPONSE TO THE ENERGY PRICE SHOCK CONTINUES TO BE INSUFFICIENT TO CONTAIN ELEVATED BUDGETARY PRESSURES
With the fall in oil and gas prices, energy-related government revenues fell to only 1% of GDP in the 2016 fiscal year from 8% of GDP in the previous fiscal year, and current revenues declined 28% over 2015-16.
In response to the fall in revenues, the government reduced gasoline subsidies and current transfers. Still, these measures have not changed a rigid expenditure structure, in which wages, subsidies and transfers account for 70% of total government spending. Furthermore, total expenditures will continue to increase this year amid higher debt servicing costs and larger capital expenditures.
Measures to raise current revenues have yielded very limited results, equivalent to 1% of GDP this fiscal year. Even though the government eliminated exemptions from the value added tax while lowering the overall rate to 12.5% from 15%, revenues increased less than originally expected. Changes to the property tax will yield modest results, but these will not be fully reflected in revenues until next year.
The government has also been relying on dividends from National Gas Company (NGC) and asset sales to contain the fiscal deficit. While the government expects to earn TTD 9.69 billion (6.4% of GDP) from one-off capital measures in 2017 fiscal year, we believe TTD 6 billion (4% of GDP) is a more likely outcome given significant implementation risks.
Lack of timely macroeconomic data and weak policy execution capacity have limited the effectiveness of the policy response to the energy price decline. Government efforts have promoted only limited economic diversification, modestly decreasing the dependence of the economy in the energy sector.
STEADY RISE IN DEBT RATIOS DRIVEN BY LARGE GOVERNMENT DEFICITS HAS BEEN ERODING FISCAL STRENGTH
We expect the fiscal deficit will be close to 6% of GDP in this fiscal year (2016/17), once we include our 4% of GDP capital revenue estimate derived from asset sales and dividends from National Gas Company (NGC).
Despite heavy reliance on asset sales to close the fiscal balance, debt to GDP exceeded 56% in 2016, rising from 42% in 2014. We do not anticipate the government will achieve a debt-stabilizing primary balance over the next 3 years and, consequently, we expect the debt ratio to rise to almost 70% of GDP by 2019. This is substantially higher than the baseline scenario we assumed when we lowered the rating to Baa3 from Baa2 one year ago.
Without meaningful fiscal adjustment to reduce double-digit fiscal deficits excluding capital revenues, the government will likely continue to use resources from the Heritage Stabilization Fund (HSF). Even though its assets stand at around $5.7 billion (24% of GDP), recurring withdrawals will erode an important credit strength of the sovereign.
DECLINING PRODUCTION FROM MATURING OIL AND GAS FIELDS COUPLED WITH LIMITED INVESTMENT PROSPECTS IN A CONTEXT OF LOW ENERGY PRICES HAVE UNDERMINED MEDIUM-TERM GROWTH PROSPECTS
Trinidad and Tobago is highly dependent in the oil and gas sectors as growth drivers. Even before the decline in energy prices, economic growth in Trinidad and Tobago had slowed down as oil and gas fields matured and production levels declined.
The economy contracted 2.3% in 2016 according to government figures and we expect growth this year to be in the range of 0% to 1.5%, with positive growth hinging on the timely completion of two gas projects scheduled to become operational in the second half of this year. Beyond 2017, increased investment is required to reverse the declining trend in oil and gas production and lift production in the medium term.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook captures the effect that sizeable fiscal buffers will have in offsetting any further downside risks. Asset sale proceeds and dividends from the National Gas Company, as well as drawdowns from the Heritage Stabilization Fund (HSF) will help finance the government deficit, slowing the rate of debt increases. The outlook also reflects moderate external risks given very low external payments relative to foreign exchange reserves and modest current account deficits. Low gross borrowing requirements and access to a relatively deep domestic financial market buffer against international financial risks.
FACTORS THAT COULD LEAD TO AN UPGRADE
Moody's would consider moving the outlook to positive if we conclude that fiscal consolidation will likely lead to lower fiscal deficits in 2018-19, and stabilize government debt ratios faster than currently anticipated. The emergence of a fiscal and economy policy response that proves effective in containing the deterioration in government debt metrics would be supportive of a rating upgrade. Higher GDP growth and a recovery in government revenues would also put upward pressure on the rating.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Downward pressures on the rating would emerge if fiscal deficits and government debt ratios rise at a higher rate than we currently expect. Depletion of fiscal buffers -- i.e., reduction in assets available for sale and assets held in the Heritage Stabilization Fund -- coupled with limited fiscal consolidation beyond 2018, would add negative pressure to the rating. The possibility that government support in the form of loan guarantees to Petrotrin could be higher than we currently assume would also add downward pressure, as would a weakening balance of payments position.
GDP per capita (PPP basis, US$): 32,637 (2015 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -2.5% (2016 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3% (2016 Actual)
Gen. Gov. Financial Balance/GDP: -5% (2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.9% (2016 Actual) (also known as External Balance)
External debt/GDP: 56.3
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 24 April 2017, a rating committee was called to discuss the rating of the Trinidad & Tobago, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased.