Moody’s Investors Service has this past week affirmed the Government of Trinidad & Tobago’s Ba1 long-term issuer and senior unsecured debt ratings and maintained the stable outlook.
The affirmation of the Ba1 ratings is supported by the following factors:
- Sizeable fiscal buffers, balanced against an elevated debt ratio relative to peers
- Economic recovery driven by the energy sector, but limited prospects for economic diversification and institutional constraints limit shock absorption capacity of the economy
- Low susceptibility to external financing risks given high reserve coverage of external debt payments
The stable outlook captures Moody’s expectations that risks to the rating are balanced. On the upside, prospects of a sustained increase in oil and gas production would materially improve medium-term growth prospects contributing to fiscal consolidation efforts, which would stabilize government debt ratios. Alternatively, institutional constraints continue to limit policy execution and the country’s fiscal profile remains vulnerable to future commodity price shocks.
Trinidad & Tobago’s long-term foreign-currency bond ceiling remains unchanged at Baa3. The foreign-currency bank deposit ceiling remains at Ba2, while the local-currency bond and bank deposit ceilings remain at Baa2. The short-term foreign-currency bond and bank deposit ceilings remain unchanged at P-3 and Not Prime (NP), respectively.
Sizable fiscal buffers balanced against a still elevated debt burden relative to peers
The decision to affirm Trinidad and Tobago’s Ba1 rating is underpinned by the government’s sizeable fiscal buffers, with close to $6 billion in assets in the Heritage and Stabilization Fund (HSF) as of fiscal 2018, which is equivalent to over 25% of GDP. A large stock of liquid assets provides the government fiscal flexibility when oil prices decline, contributing to lower government liquidity risk as well as external vulnerabilities. HSF assets are liquid and can in principle be used to finance the deficit.
Government debt ratios have stabilized over the past two years, and Moody’s expects the debt burden to remain stable around current levels, supported by moderate fiscal deficits in the order of 2.5% to 3.5% of GDP in 2019-20. An increase in energy-related revenue, along with continued expenditure restraint, underpin these forecasts.
Although government debt, at 63% of GDP, is above the Ba median of 50%, associated credit risks are mitigated by: (i) the government balance sheet’s limited exposure to exchange rate risk given a moderate share of foreign-currency-denominated debt (29% of total government debt); (ii) strong debt affordability despite rising government debt, with the ratio of interest payments to government revenues at around 10%; (iii) a low weighted average interest rate on central government debt, which at 3.68% as of April 2019, is relatively low for an emerging market economy that relies primarily on domestic financing and has only a small portion of concessional debt.
Economic recovery driven by the energy sector, but limited prospects for economic diversification and institutional constraints limit shock absorption capcacity
After a steep contraction in output, with real GDP declining by 8% between 2015 and 2017, economic growth has now stabilized. Moody’s expects the economy to expand by around 1.5% in 2019, and to expand between 1.5%-2.5% over the subsequent two to three years. Increased gas production beginning in 2017 reversed the long-term decline in production, and initially supported the economic recovery. Moody’s expects gas production to stabilize as output from new gas fields offset declining production at existing fields. Exploration in the energy sector will support growth prospects over the next two to three years.
However, Moody’s sees limited prospects of economic diversification away from the energy sector. The business environment remains weak due to structural factors like high crime rates, skills mismatches in the labor force, limited access to finance, and climate-related risks, which pose challenges to the development of more robust non-energy economic sectors. Government bureaucracy also weighs on the investment climate.
Trinidad’s institutional and execution capacity remain a rating constraint, despite some improvements in the government’s policy response and effectiveness. Spending cuts enacted over the previous four years — which amount to a more than 20% reduction in nominal spending — have reduced fiscal imbalances and better aligned spending with revenue. Furthermore, in late 2018, the government announced a restructuring of state-owned energy company Petrotrin (photo above), which included the closure of its sole refinery, as part of a broader revamp of Petrotrin’s operations. This resulted in the creation of a new company — Trinidad Petroleum — aimed at improving the company’s weak financial position. While there are risks to Trinidad Petroleum’s new business model, Moody’s views the government’s decision to close the refinery as a positive step in improving the operations of one of the country’s most important state-owned companies.
Policy predictability and effectiveness remain constrained by poor data quality and uncertainty over medium-term fiscal projections, informing Moody’s low assessment of institutional strength. Data quality remains weak, adversely affecting the timeliness of the government’s policy response to economic shocks and medium-term planning. Continued reliance on asset sales and dividends from state-owned enterprises to generate revenue limits the reliability and predictability of revenue streams, and introduces an element of uncertainty to medium-term fiscal prospects. Measures to broaden the tax base and reduce the government’s reliance on energy-related revenue — e.g., establishment of a single Revenue Authority, introduction of a property tax — have had limited success to date and continue to be subject to prolonged implementation delays.
Low susceptibility to external financial risks given high reserve coverage of external debt payments
The stock of international reserves continues to provide a significant financial buffer to external shocks. For instance, Moody’s projects the external vulnerability indicator, which compares short-term external debt payments to available reserves, to remain low at 22% in 2019, indicating a high level of coverage of external debt payments. Despite low external vulnerability risk, international reserves have declined to $7.3 billion as of April 2019, down from a peak of $11.5 billion in December 2014. Moody’s expects the decline in reserves to continue over the next two years, despite the presence of a large current account surplus of around 6% of GDP, driven by financial outflows and significant errors and omissions. Consequently, the rating agency also expects continued shortages of foreign exchange in the domestic market, which affect small and medium-sized enterprises and weigh on non-energy growth prospects.
Potential positive factors
Over time, a reduction in government debt ratios and improved fiscal performance, particularly if supported by an increase in non-energy-related government revenue and improved tax collection rather than asset sales – or drawing down on fiscal buffers – would result in an upgrade. Material progress in institutional and economic reforms that increase competitiveness and the economy’s shock-absorption capacity would also likely result in a higher rating.
Potential negative factors
The rating would be downgraded if government debt ratios were to materially deteriorate, which would be counter to Moody’s expectations for stable debt ratios. The need for mounting government support for state-owned enterprises, resulting in a material increase in government debt, would weaken the government’s balance sheet and likely result in a downgrade. A weakening of the balance-of-payments position would increase external vulnerability risks over time, and could also lead to a downgrade.
GDP per capita (PPP basis, US$): 32,254 (2018 Estimate) (also known as Per Capita Income)
Real GDP growth (% change): 1.4% (2018 Estimate) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1% (2018 Actual)
Gen. Gov. Financial Balance/GDP: -4.1% (2018 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: 6% (2018 Estimate) (also known as External Balance)
External debt/GDP: 46.8% (2018 Estimate)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 21 June 2019, 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 not materially changed. The issuer’s institutional strength/framework have materially increased. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
Photo credit Marc Christian Photography https://www.flickr.com/photos/[email protected]/6796119355 from Flickr Marc Aberdeen – licensed under Creative Commons https://creativecommons.org/licenses/by-nd/2.0/