A Failing Grade For Trinidad Government As Moody’s Issues Downgrade

PORT OF SPAIN, Trinidad, Thursday April 27, 2017 – Trinidad and Tobago has been slapped with its second downgrade in as many days – and it’s even more worrying.

Moody’s Investors Service has revised its previous Baa3 rating to Ba1, a rating deemed by investors as “junk” status.

The New-York based rating agency has however revised the country’s outlook from negative to stable.

The downgrade was driven by three main factors, including ineffective economic policies; increased borrowing, which has resulted in sustainable debt levels; and a significant decline in oil production.

According to Moody’s, with the fall in oil and gas prices, energy-related government revenues fell to only one per cent of GDP in the 2016 fiscal year, from eight of GDP in the previous fiscal year.

Noting that current revenues declined 28% over 2015-16, the agency highlighted some of the economic measures introduced by the Keith Rowley administration, but stressed that they were insufficient to ease the economy’s dependence on the energy sector.

“In response to the fall in revenues, the government reduced gasoline subsidies and current transfers. Still, these measures have not changed a rigid expenditure structure, in which wages, subsidies and transfers account for 70% of total government spending. Furthermore, total expenditures will continue to increase this year amid higher debt servicing costs and larger capital expenditures.

“Measures to raise current revenues have yielded very limited results, equivalent to 1% of GDP this fiscal year,” the report said

With respect to the steady rise in the twin island republic’s debt ratios being driven by large government deficits, Moody’s projected that the island’s fiscal deficit would reach six per cent of Gross Domestic Product (GDP) for fiscal year 2016 to 2017 and rise even further over the next three years.

“Debt to GDP exceeded 56% in 2016, rising from 42% in 2014. We do not anticipate the government will achieve a debt-stabilizing primary balance over the next three years and, consequently, we expect the debt ratio to rise to almost 70% of GDP by 2019.”

It urged the Government to undertake meaningful fiscal adjustment to reduce the double-digit fiscal deficits, and cautioned against the persistent use of resources from the Heritage Stabilization Fund (HSF).

“Even though its [HSF] assets stand at around $5.7 billion (24% of GDP), recurring withdrawals will erode an important credit strength of the sovereign,” Moody’s warned.

The rating agency also raised concern about Trinidad and Tobago’s declining oil production and limited investment prospects, saying that it had caused deterioration in the country’s medium-term growth prospects.

Noting that oil production levels had declined even before a recent drop in energy prices, the rating agency projected minimal growth, stressing that urgent investment was needed to revive the critical sector.

“The economy contracted 2.3% in 2016, according to government figures, and we expect growth this year to be in the range of 0% to 1.5%, with positive growth hinging on the timely completion of two gas projects scheduled to become operational in the second half of this year. Beyond 2017, increased investment is required to reverse the declining trend in oil and gas production and lift production in the medium term,” Moody’s advised.

Finance Minister Colm Imbert knocked Moody’s assessment but told the Trinidad Express newspaper that Government was working to reverse the island’s declining economic fortunes.

“The downgrade is based on the severe reduction in oil and gas revenue. Some commentators believe that, unlike Standard and Poor’s, Moody’s has not taken sufficient account of the recovery in energy prices and the fiscal consolidation work of the new Government,” he said.

Last week, Standard & Poor’s (S&P) also downgraded the country, replacing its “A-” rating with a “BBB+” rating.

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