S&P Global Ratings Downgrades Trinidad and Tobago

27 April 2017


Photo Courtesy: http://www.luxembourgforfinance.com/en/news/standard-and-poors-confirms-luxembourg-aaa

A Firstline Securities Limited Blog by: Mike

On the 21st April 2017 S&P Global Ratings (S&P) downgraded Trinidad and Tobago’s long-term sovereign ratings from A- to BBB+. At the same time, S&P confirmed the outlook of Trinidad and Tobago as stable.

S&P cited the following drivers for the downgrade:

  • Despite the government’s efforts to contain expenditure and diversify the tax base, Trinidad and Tobago’s debt burden has increased significantly since 2014, driven by sustained economic recession.
  • Although the government has introduced austerity measures, fiscal imbalance between the revenue collected and expenditure still exists, and the process of budget consolidation will be slower than S&P originally expected.

S&P identified three factors that have caused the economy of Trinidad and Tobago to slide into recession. Those factors are:

  • A sustained period of low oil and gas prices in international markets.
  • Disruptions in domestic production (due to plant shutdowns for maintenance and infrastructure upgrades).
  • A persistent shortage of foreign exchange.

S&P still assess the long-term sovereign rating of Trinidad and Tobago as “investment grade”.

What exactly are credit ratings?

Credit ratings are opinions issued by credit rating agencies. Credit rating agencies are private companies that exist to sell 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 S&P runs from AAA to D/SD whilst 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

Despite the government’s efforts to contain expenditure and diversify the tax base, Trinidad and Tobago’s debt burden has increased significantly since 2014, driven by sustained economic recession.

Economic contraction and lower fiscal revenues from the energy sector resulted in a government deficit of 5% of Gross Domestic Product (GDP) in 2015/16.

Lower fiscal revenues were caused by a calamitous fall in the contribution of the energy sector to total government revenue. The energy sector contributed only 15% of total government revenue in 2015/16 compared to 58% in 2010/11 (the representative year chosen by S&P).

S&P estimate a government deficit of 4.5% of GDP for 2016/17. This is likely to be financed by issuing local currency debt, utilising the Central Bank overdraft facility, and further drawdowns from the Heritage and Stabilisation Fund (HSF).

The government has introduced measures to enhance revenue collection, such as improving the efficiency of tax collection (through the intended reform of the Board of Inland Revenue and the establishment of a Revenue Authority), extending the tax base through the introduction of Property Tax, and the introduction of insurance and gaming legislation.  Despite these measures however, S&P expects the government to continue to rely on one-off revenue sources to assist in closing the fiscal gap.

Over the next three years S&P estimates that general government debt will rise annually on average by 3.7% of GDP.


Looking at the second driver in more detail

Although the government has introduced austerity measures, fiscal imbalance between the revenue collected and expenditure still exists, and the process of budget consolidation will be slower than S&P originally expected.

Net government debt rose from 32% of GDP in 2015 to 35% of GDP in 2016. S&P estimate that for 2017 it will reach 37% of GDP. Due to increased borrowing the interest burden of Trinidad and Tobago has increased with interest payments expected to account for 5% of revenue in the years 2017-2020.

There are some positives in this area. Trinidad and Tobago’s debt burden remains moderate and is only narrowly exposed to exchange rate and rollover risk as foreign currency debt amounts to just 18% of total debt issued.

Why the outlook remains stable for Trinidad and Tobago

S&P have retained a stable outlook for Trinidad and Tobago. This reflects their expectation that Trinidad and Tobago’s economy will begin a modest recovery in the period 2017-2020, driven by a gradual increase in natural gas prices, and an increase in gas production. These two factors should lend support to the Minister of Finance’s attempts to reduce the budget deficit and stabilise the external debt burden.

A word on the exchange rate and the Financial Sector

According to S&P, the combination of a heavily managed exchange rate, and a small open economy, limit the ability of the government to use monetary policy to effectively manage the economy.

During 2016, the TT Dollar depreciated by 6% and S&P expect that the Central Bank will maintain a “pragmatic strategy of gradual currency depreciation.”

Despite severe shortages in US dollars, the Financial Sector of Trinidad and Tobago remains profitable, well capitalised, and highly liquid.

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 many 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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