On Christmas Eve, the rating agency Standard & Poors revised to negative its outlook on the T&T economy, a decision that Finance Minister Colm Imbert described as neither “unexpected nor surprising” given the fact that oil and natural gas prices have collapsed and therefore a negative outlook based on current and projected oil prices is “not unfair.”
Imbert said the Government is continuing to work on a package of measures to restore growth to the economy.
Following is the S&P ratings report on T&T, verbatim:
OVERVIEW
A net external asset position, low external vulnerability, and stable political system support the sovereign credit ratings on T&T
A sharp fall in energy revenues has led to large fiscal deficits and contributed to negative GDP growth in 2015 and likely in 2016.
We are affirming our ‘A’ long-term foreign and local currency sovereign credit ratings on Trinidad and Tobago. We are revising the outlook on the long-term ratings to negative to reflect an at least one-in-three chance that prolonged low energy prices could result in potentially low GDP growth prospects and a steadily rising debt burden, causing a downgrade in the next two years.
RATING ACTION
On Dec 24, 2015, Standard & Poor’s Ratings Services affirmed its ‘A/A-1’ long-and short-term sovereign credit ratings on the Republic of Trinidad and Tobago (T&T). At the same time, we revised the outlook on the long-term ratings to negative from stable. Our ‘AA’ transfer and convertibility assessment for T&T is unchanged.
RATIONALE
The change in outlook to negative from stable reflects an at least one-in-three chance that prolonged low energy prices and potentially poor GDP growth prospects could result in a steadily rising debt burden, leading to a downgrade in the next two years.
T&T’s public finances are vulnerable to a prolonged and substantial drop in energy revenues. The energy sector contributed around half of total government revenues during the recent boom years, but may contribute less than 20 per cent of total government revenues in fiscal year 2015-2016 (ending Sept 30, 2016).
Fiscal revenues from the energy sector fell to 10.9 per cent of GDP last year from 16.2 per cent in the previous year and were only partially offset by a rise in non-energy revenues. They are set to decline again this year as a share of GDP.
A combination of declining revenues from the energy sector and sustained spending resulted in a reported government fiscal deficit exceeding 4 per cent of GDP in fiscal year 2014-2015 (ended Sept 30, 2015), nearly double the original deficit target of 2.3 per cent of GDP. Falling energy prices have also sharply reduced T&T’s typically large trade and current account surpluses.
T&T’s long-term prosperity is tied to the fate of the energy sector. Rapid growth led by the energy sector more than doubled T&T’s per capita GDP over the last decade to over $20,000 in 2015. GDP likely contracted up to 2 per cent in 2015, mainly because of the spillover of lower energy prices, and could fall by up to 1 per cent in 2016.
The non-energy sector, which may have fallen into recession in 2015, is likely to perform poorly in 2016.
We project that the country’s average per capita GDP growth rate, which has been less than 1 per cent in the past five years, to be just over 1 per cent over the next three years, assuming a gradual recovery in energy prices and continued investment in the sector.
The country’s exchange rate, adjusted for different inflation rates among its trading partners, has appreciated nearly 30 per cent since 2010, potentially affecting negatively T&T’s long-term external competitiveness.
We expect economic policy to remain pragmatic after the change in government earlier this year. The People’s National Movement government, elected in September, has taken initial steps to address the fiscal problem, including raising some taxes and administered prices, reducing some spending, and plans to take further measures in its midyear fiscal review in March 2016.
Timely implementation of additional fiscal measures, along with steps to boost non-energy sources of growth, will largely determine whether the government can contain fiscal deficits and stabilize its debt burden. We expect that the increase in government debt as a share of GDP will be about 3 per cent on average in the coming three years, and gross general government interest payments (excluding interest income on liquid government assets) will remain below 10 per cent of revenues. Net general government debt (including central bank debt) is likely to remain below 25 per cent of GDP.
The country’s long-established parliamentary democracy and social stability should sustain political consensus on pragmatic economic policies. We estimate T&T’s gross external financing needs at just below 60 per cent of current account receipts plus usable reserves on average for 2015-2017.
We project the government’s official foreign-exchange reserves and other liquid external assets, plus financial-sector external assets, will exceed the external debt of the public and private sectors by over 100 per cent of current account receipts (CAR) in the next three years.
T&T’s net external asset position, low external vulnerability, limited external financing needs, and stable political system support the ratings. However, shortcomings in official data have reduced economic transparency, especially in the country’s balance of payments.
The government has external assets of nearly $5.7 billion (or 20 per cent of GDP) in the Heritage and Stabilization Fund (HSF). The HSF fiscal assets are invested abroad and should sustain long-term external and fiscal flexibility.
OUTLOOK
We expect that T&T will continue to enjoy a sound external profile thanks to its net external asset position and largely local financing of the public-sector deficit.
An increase in exploration activities in the oil and gas sector in recent years should sustain energy production over the coming decade, contributing to long-term economic growth.
A sustained fall in global energy prices that depresses fiscal revenues, dampens GDP growth, and weakens T&T’s external liquidity could result in a rising general government debt burden, potentially exacerbated by unexpected contingent liabilities from public-sector enterprises.
Failure to take timely and sufficient steps to address the deterioration of the country’s fiscal profile and address the challenge of sustaining long-term GDP growth could result in a downgrade in the next two years.
Timely implementation of both revenue and spending measures, including steps to strengthen non-energy fiscal revenues, would contain fiscal deficits. Successful stabilization of the sovereign’s debt burden, along with steps to boost the long-term growth prospects of the energy and non-energy sectors, could lead us to maintain the ratings at their current level.
RATINGS SCORE SNAPSHOT
Table 2
Trinidad and Tobago Ratings Score Snapshot
Key rating factors Ratings
Institutional assessment Neutral
Economic assessment Neutral
External assessment Strength
Fiscal assessment: flexibility/performance Neutral
Fiscal assessment: debt burden Strength
Monetary assessment Neutral
Standard & Poor’s analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment.