On April 21, 2017, Standard & Poor’s (S&P) Global Ratings, downgraded Trinidad and Tobago’s credit rating from A- to BBB+. It was not the best news, but S&P has provided a balanced view of our fiscal position which has been challenging for the greater part of three years. The downgrade wasn’t a surprise.
While T&T’s economic contraction had already begun in the fourth quarter of 2014, the population remained relatively unaware of the true state of affairs until the end of 2015.
From this standpoint, we were fortunate in that while our actual finances qualify us as a BBB+ borrower, having an A- rating meant we were able to borrow successfully on the international market at rates lower than what, arguably, we should have enjoyed.
So, last year’s US$1billion bond issue was well-timed on our part. Had we gone to market during this year, we would have had to borrow at a higher cost due to the downgrade.
Increased Overall Debt-to-GDP
S&P accurately highlighted the increase in government debt from 2014 to now, driven by the issuance of international and domestic long-dated bonds, and the Central Bank’s issuance of open market operations (OMO).
According to the report, as at 2016 our total debt to GDP stood at 81.8 percent, which sounds high, but should be understood in context.
First, our external debt to GDP is actually 18 percent, which, in light of the fall in U.S. dollar earnings, remains manageable. At the same time, the contingent liabilities of entities either wholly- or majority-owned by the government represent 17 percent of GDP.
These entities include Petrotrin, the National Gas Company and Trinidad Generation Unlimited, with Petrotrin being the most unruly of the government’s holdings even as they remain preoccupied with how to repay one of its two large international bonds which is due in 2019.
Second, the growth in government debt, albeit slow, coupled with falling GDP, has led to an overall deterioration of the total debt to GDP ratio. Think of it like having a few more household bills in the face of a salary cut.
Third, the government has greater flexibility and fiscal resources available to service TT dollar debt compared to U.S. dollar debt. In the case of TTD debt, both taxation and monetary policy tools can address incremental domestic debt burdens.
However, the ability to service our USD bond obligations is directly impacted by contracting U.S. dollar earnings related to soft energy prices. Future USD debt must therefore be carefully considered.
Energy Revenue Contraction
There has been a painful drop in energy sector revenue. According to the report, the combination of the fall in prices and the shutdown of plants for maintenance and upgrades led to a mere 15 percent contribution to revenues in 2016 compared to 58 percent in 2014.
Historically, the energy sector represents around 40 percent of GDP, with a 60/40 split between oil and gas. With the introduction of bp Trinidad and Tobago’s Juniper and other gas fields contributing to the sector between 2018-2020, energy sector contributions to GDP are expected to improve.
In general, the S&P report projects a gradual improvement in revenue contribution from 2018.
Lower GDP and GDP per Capita
Unsurprisingly, our economy contracted by 2.3 percent according to data sources used by S&P. The energy sector dropped 9.6 percent while the non-energy sector contracted 1.8 percent.
The report also highlights our fall in per capita GDP from approximately US$20,000 to US$16,000.
When we consider net international reserves of US$9.1billion and the Heritage and Stabilisation Fund (HSF) balance of US$5.5 billion, our U.S. dollar position is strong and contributed to the “stable outlook” assessment we got in the report.
Over the last 18 months, the reserves would have fallen as the Central Bank and Finance Ministry tried, unsuccessfully, to meet domestic USD currency demand with government having to meet recurrent expenditure.
Our international reserve position, one of the positives highlighted in the S&P Report, is expected to improve as energy prices slowly recover and output returns to historical levels.
Of course, the report addresses the scarcity of foreign exchange and the surge in black market dealings as people, desperate for U.S. currency, look beyond banks and other authorised dealers.
At the close of business on April 21, 2017, the exchange rate was US$1.00 / TT$6.7793, even higher on the streets.
Standard & Poor’s advanced a conservative estimate that the rate will hover around TT$7.82 by 2019. For those in the know, U.S. dollars are already being sold for more than TT$7.
Banking Sector Strength
The report described the condition of the banking sector as strong. There is little to add here other than the fact that the supernormal profits enjoyed by the banking sector is driven by wide spreads. Uncontrolled high lending, low deposit rates, and extensive fee regimes continue to ensure that today’s challenging macroeconomic conditions are not shared evenly across all sectors.
S&P’s downgrade was inevitable owing to the country’s recent economic misfortunes. However, outside of the integrity and timeliness of data and discipline on the part of our Ministry of Finance and Central Bank, we have little control over what transpires in the international arena and how the rating agencies will respond.
Trinidad and Tobago's credit rating fluctuated between 1993 to 2016 and naturally, the changes correlate with shifts in our economy with the last downgrade taking place exactly one year ago.
S&P’s latest report offers little criticism of what government has been doing to steer the country through the current economic contraction.
To the extent that this is an non-partisan international agency, government must accept the report but resolve to have far more frequent and frank dialogue with the population. Rating agencies, meanwhile, will continue to credit and criticise because that’s what they’re there for.