Moody’s downgrades T&T’s bond rating

A major international credit rating agency in New York has downgraded Trinidad and Tobago’s bond ratings to Baa3 from Baa2 and assigned a negative outlook to the twin-island republic’s economic performance.

Moody’s Investors Service, or Moody’s, on Friday warned that, despite the Keith Rowley-led administration’s fiscal consolidation efforts, “low oil and gas prices will negatively and materially undermine the country’s economic and government financial strength at least throughout 2018.

“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 lack of macroeconomic data and weak policy execution capacity,” said Moody’s, adding that the negative outlook “captures lack of visibility on how effective fiscal consolidation efforts will ultimately be and the extent to which fiscal consolidation will have to rely on one-off measures in the coming one to two years.”

Moody’s said the negative outlook also captures the possibility that government support in the form of loan guarantees to Petroleum Company of Trinidad & Tobago (Petrotrin, Ba3) could be higher than currently assumed.

Trinidad and Tobago’s foreign-currency bond and deposits ceilings were lowered to Baa2/P-3 and Baa3/P-3 from A3/P-2 and Baa2/P-3, respectively, Moody’s said.

At the same time, it said the local-currency bond and deposits country ceilings were lowered to Baa1 from A3.

The rating agency noted that Trinidad and Tobago is highly dependent on hydrocarbons as economic growth drivers, stating that oil, gas and petrochemical sectors account for 91 percent of total exports and 35 percent of the republic’s gross domestic product (GDP).

Even before the decline in oil prices — the oil price roughly halved between September 2014 and September 2015 — Moody’s said economic growth in Trinidad and Tobago had slowed down as a result of maturing oil and gas fields, and repeated disruptions to gas production.

For 2016, however, Moody’s projected that Trinidad and Tobago’s GDP will contract by 2.5 percent.

It predicted that this will be driven by a decline in production in the energy sector and by the impact of fiscal consolidation, as well as by weaker growth in construction and distribution.

Moody’s also warned that growth will “remain subdued” in 2017-18, to around 1 percent per annum, due to the continued impact of low oil prices on the oil sector and the negative effect of fiscal adjustments.

But Moody’s said, in 2017, the completion of several gas projects will “modestly boost energy production and will partially compensate what would otherwise be a contraction in GDP.”

With the fall in energy prices, Moody’s said oil and gas taxes and royalties fell from 15.4 percent of GDP in fiscal year 2013/2014 to 10.9 percent of GDP in 2014/2015.

For the fiscal year 2015/2016, oil and gas taxes and royalties are expected to fall to 3 percent of GDP, Moody’s said.

“Assuming no policy response and everything else being equal, the depressed oil and gas prices would imply a reduction in government revenues of around 8 percentage points of GDP for that fiscal year,” Moody’s said.

To compensate for the significant fall in energy-related revenues, the rating agency said the government hopes to rely mostly in one-time revenue measures, “which it expects to yield a little over 8 percent of GDP.”

These measures include asset sales, partial repayment by CLICO relating to the government’s prior financial support and higher dividends from the National Gas Company, Moody’s said.

It said the rest of the adjustment would come from measures to increase tax revenues equivalent to 3 percent of GDP and from keeping expenditures almost constant in nominal terms.

Moody’s said the continued fall in oil prices since October, when the budget was presented, has meant that the spillover effect in the rest of the economy has been larger than initially expected.

It said while the Ministry of Finance now estimates a fiscal deficit of about 4 percent for the 2015/16 fiscal year, Moody’s said it anticipates the one-off measures to yield around 6 percent of GDP, with the deficit projected to be about 15 percent of GDP in the 2015/2016 fiscal year.

Going forward, Moody’s forecasts that fiscal results in 2017/18 will depend more on tax and expenditure control measures than on one-off measures.

To contain fiscal deficits to 5 percent of GDP or below, Moody’s said fiscal consolidation efforts would have to be at least equivalent to 6 percent of GDP.

“While we do not expect government support to state-owned enterprises (SOEs) to be substantial, we do expect some to be needed, in the form of loan guarantees to Petrotrin,” Moody’s said. “We expect such support to increase central government debt in 2016 by between 2 percent and 4.5 percent of GDP, in the latter case should the government need to guarantee all of Petrotrin’s financing needs – which we think is unlikely.”

Moody’s said the absence of key macroeconomic data and the low quality of the statistical information “represent important shortcomings relative to Baa-rated peers, and suggest a high likelihood that the fiscal and economic policy response will be neither timely nor sufficient to arrest the deterioration in the government’s financial strength.”

Although some progress has been made to address this long-standing issue, Moody’s cautioned that it does not expect significant progress over the next one to two years.

“Even though the fiscal data are more reliable, the institutional and execution capacity of fiscal policy remains weak,” it said, stating that some of the limitations include lack of elements to perform sensitivity analysis on the impact of oil prices in government finances, as well as on the estimates on how the Value Added Tax (VAT) reform will impact revenues.

Additionally, Moody’s said the Trinidad and Tobago government “lacks a rigorous medium-term fiscal strategy and a clear debt financing strategy, limiting visibility beyond one fiscal year.”

Moody’s said it would consider moving Trinidad and Tobago’s economic outlook to stable “if it were to conclude that revenue and expenditure adjustments, in addition to one-off revenue measures, were likely to lead to lower fiscal deficits in the 2016 / 17 and 2017 / 18 fiscal years.”

The rating agency said evidence of institutional strength, most likely manifest in the emergence of a credible fiscal and economy policy response which offers the prospect of containing the deterioration, “would be considered a credit positive.”

While higher GDP growth rates and a recovery in energy-related government revenues would add positive pressures to the rating, Moody’s said they would only lead to upward migration in concert with the institutional and policy changes needed to enhance resilience to future price shocks.

Moody’s also warned that it would downgrade Trinidad and Tobago’s Baa3 ratings if it concluded that the government’s planned fiscal efforts for 2016/17 were unlikely to reverse the deteriorating fiscal performance and the steady rise in government debt.

“The possibility that government support in the form of loan guarantees to Petrotrin could be higher than currently assumed would add negative pressure to the rating,” it said.

Moody’s said early signs of an emerging balance-of-payments crisis, such as a further sustained fall in the price of oil, pressure on the exchange rate regime or a significant fall in international reserves, would also exert downward pressure on the rating.

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