A time to get a little Moody? – The Reboot

18 April 2016


Moody’s downgrade of Trinidad and Tobago

On the 15th April 2016 Moody’s Investor Services downgraded Trinidad and Tobago’s government bond rating from Baa2 to Baa3, and confirmed the country outlook as being negative.

This downgrade comes just under a year after Moody’s downgraded Trinidad and Tobago’s bond rating from Baa1 to Baa2 on the 30th April 2015.

Moody’s cited two factors for the downgrade:

  1. Despite the Government’s fiscal consolidation efforts, low oil and gas prices will negatively and materially undermine Trinidad and Tobago’s economic and government financial strength at least throughout 2018 (in other words at least for the next two years) and,
  2. There is a high likelihood that the policy response to the commodity price shock will not be as timely and effective as required due to a lack of macroeconomic data and weak policy execution ability.

Why the outlook remains negative for Trinidad and Tobago

On the 30th April 2015 Moody’s downgraded the country outlook from Trinidad and Tobago from stable to negative. Therefore, the review of 15th April 2016 adds nothing new in this area.

The continuation of a negative outlook by Moody’s captures a lack of visibility on how effective fiscal consolidation efforts will likely turn out to be, together with the extent to which the fiscal consolidation measures will have to rely on one-off measures in the next two years. These measures were identified in the mid-year budget review presented by the Finance Minister on the 8th April 2016, and are the subject of a blog entry that can be found here:

http://firstlinesecurities.com/the-2016-budget-review-crisiswhat-crisis/

The negative outlook also captures the possibility that the government will have to offer additional loan support guarantees in respect of the Petroleum Company of Trinidad and Tobago (Petrotrin – currently ranked at Baa3).

Other ranking changes made

Trinidad and Tobago’s foreign currency bond and deposit ceilings were lowered from A3/P-2 and Baa2/P-3 to Baa2/P-3 and Baa3/P-3 respectively. At the same time the local currency bonds and country ceilings were lowered from A3 to Baa1.

What exactly is a credit rating?

Credit ratings are opinions issued by credit rating agencies. Credit rating agencies are private companies that exist for the purpose of selling their financial analysis to investors (or potential investors).

Credit rating agencies mark potential investments using a scorecard system and each of the three main agencies (Moody’s, Standard & Poor’s and Fitch) have their own unique scoring system. The main scoring system used by Moody’s runs from Aaa to C.

In the case of countries, when an agency writes a report they are assessing the creditworthiness of that country. That is essentially that country’s ability to pay back its debts. The less likely a country is to be able to pay back its debts the lower the rating.

Looking at the first driver in more detail

Low Oil and Gas prices will negatively affect Trinidad and Tobago’s economic and government financial strength at least throughout 2018

Moody’s identified something that we all know to be true. Trinidad and Tobago is overly dependent on hydrocarbons as drivers of economic growth. The oil and gas sector accounts for 91% of Trinidad and Tobago’s exports and 35% of her GDP.

Coupled with this over reliance on hydrocarbons has been a period of decline and maturing of oil and gas fields, together with repeated disruption to gas production as a result of maintenance activities. Accordingly, Moody’s expect GDP to contract by 2.5% in FY2016. This decline is driven by a decline in production in the energy sector, and by the impact of the governments’ fiscal consolidation initiatives. Growth in FY2017 is likely to remain subdued at around 1%, due to the continued impact of low oil prices on the oil sector. Although 2017 will see the completion of several gas projects this is only expected to moderately boost production levels.

Looking at the second driver in more detail

A high likelihood that policy response will not be timely and sufficiently effective due to a lack of data and weak policy execution capacity

Trinidad and Tobago has been punished for not maintaining infrastructure and systems that allow it to produce key macroeconomic date in a timely and reliable manner. In Moody’s view the absence of key macroeconomic data and the low quality of the statistical information available relative to Trinidad and Tobago’s Baa rated peers suggest a high likelihood that the fiscal and economic policy response of the government will not be timely and sufficient to arrest a deterioration in the both the economy and the level of revenue available to the government.

Although this weakness was specifically identified by the Minister of Finance in his Mid-Year Budget Review presented on the 8th April 2016 (see the blog reference referred to above), Moody’s expect little progress will be made improving the situation before over the next one to two years.

In specific terms Moody’s identified a number of weaknesses that needs to be addressed in the short term.

  • Addressing the lack of systems that would allow the performance of sensitivity analysis on the impact of the movement of oil prices on government finances.
  • Lack of estimates on how VAT reforms will impact government revenue.
  • Lack of a rigorous medium term fiscal strategy on the part of the government, together with a lack of a clear debt financing strategy. Together these limit the ability of the government to forecast and project the effect of policy changes beyond a one-year time frame.

Trinidad and Tobago clearly needs to do better in this area, and early improvement and reform of the operations of the Central Statistical Office (CSO) is a must.

The effect on Government revenue

With the fall in energy prices, oil and gas taxes and royalties fell from 15.4% of GDP in FY2013 to 10.9% in FY2014. For FY2015 they are expected to fall to 3% of GDP.

All things being equal the effect of depressed oil and gas prices on government revenue is likely to be a fall in the region of 8 percentage points of GDP for FY2015. The one off measures designed to boost revenue identified in Mid-Year Budget review will make up most of this difference but we must all remember that they are what they are – one off measures.

Is Trinidad in a vicious circle?

The continued fall in the price of oil and gas since October when the first budget of the PNM administration was presented, has meant that the spill-over effect in the rest of the economy has been much greater than originally expected.

While the Mandarins at the Ministry of Finance now project a fiscal deficit of around 4% for FY2016, Moody’s are of the opinion that the deficit will likely be higher than this and in the region of 5% of GDP. Moving forward the fiscal performance of FY2017 and FY2018 will therefore depend more on the ability of the government to improve the collection of tax receipts into the consolidated fund while at the same time undertaking significant efforts to control expenditure, than on any “one-off” measure to boost revenue (such as the sale of CLICO assets).

Moody’s conclude that to contain fiscal deficits to 5% of GDP or below, fiscal consolidation efforts would have to be at least equivalent to 6% of GDP.

The effect of controlling government expenditure (for this read reducing) is likely to be an additional drag on the growth of GDP moving forward.

A vicious circle if ever there was one.

Other blog entries in respect of Moody’s grading of Trinidad and Tobago

A blog entry in respect of Moody’s downgrade of Trinidad and Tobago’s credit rating made on the 30th April 2015 can be found here:

http://firstlinesecurities.com/a-time-to-get-a-little-moody/

Closing thoughts – a time to chill and a time to invest?

Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers a number of unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@nullfirstlinesecurities.com or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

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