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Trinidad and Tobago Sovereign Rating Lowered To 'BBB-' From 'BBB' On Lower Hydrocarbon Price Assumption

Mar 27, 2020

Rating Action

On March 26, 2020, S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings on the Republic of Trinidad and Tobago to 'BBB-' from 'BBB'. The outlook is stable.

At the same time, S&P Global Ratings lowered its short-term foreign and local currency sovereign credit ratings to 'A-3' from 'A-2'. S&P Global Ratings also revised down its transfer and convertibility assessment to 'BBB' from 'BBB+'.



The stable outlook reflects our expectation that lower oil and gas prices will lead to larger increases in net general government debt, a fall in exports that will contribute to a moderate current account deficit, and an economic contraction in 2020. Nevertheless, we believe that the government's liquid external assets provide some flexibility to mitigate the impact of lower hydrocarbon prices and current economic volatility.


On March 19, 2020, S&P Global Ratings materially lowered its oil assumption for 2020. This follows an earlier significant downward revision of its oil and gas price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased on the back of rising geopolitical tensions. When we last reviewed Trinidad and Tobago ("Trinidad and Tobago Sovereign Rating
Lowered To ‘BBB’ From ‘BBB+’ On Economic And Fiscal Stress; Outlook Stable" published July 9, 2019, on RatingsDirect), we expected West Texas Intermediate (WTI) oil prices to average $55 per barrel (/bbl) in 2020 and beyond, while we expected Henry Hub natural gas prices to average $2.75/million British thermal unit (mmBtu) in 2020, and then rise to $3/mmBtu in 2021 and beyond. We now assume an average WTI oil price of $25/bbl in 2020, $45/bbl in 2021, and $50/bbl by 2022 and beyond, while we expect an average Henry Hub gas price of $2/mmBtu in 2020,
$2.25/mmBtu in 2021, and $2.5/mmBtu in 2022 and beyond (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).

Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of the coronavirus. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try to maintain market share and market relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. At the same
time, gas prices have continued to decline in 2020, owing in part to oversupply conditions in the U.S. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through the second half of 2020 and into 2021 as the most severe impacts from the coronavirus outbreak moderate.

We expect lower oil and gas prices will materially affect Trinidad and Tobago's government revenues, and lead to larger increases in net general government debt as a result, over the forecast horizon. Trinidad and Tobago is heavily dependent on the energy sector, which has historically contributed over a third of the government's revenues, on average, over 30% of the country's real GDP, and over 80% of its exports. Lower energy prices will lead to lower tax collections from oil and gas companies, and we do not expect the government will cut spending as a result, particularly given its desire to avoid a further contraction in its economy, as the country approaches national elections, which are due by December 2020. We now expect the average change in net general government debt will reach 4.9% of GDP in 2020-2023.

Despite its reliance on volatile hydrocarbon sector revenues, we expect the government's sizable financial assets will somewhat soften the impact of the downturn, as the government draws down on these assets to partially finance its deficit. By our estimates, government liquid assets, including its sovereign wealth fund, the Heritage and Stabilization Fund (HSF), reached 44% of GDP in 2019. Despite some drawdowns, the HSF has accumulated value over the past decade, and we expect that it, along with other government financial assets and central bank reserves, will continue to provide fiscal and external buffers. Unlike many commodity exporters in the region, during the boom years Trinidad and Tobago saved excess fiscal revenues in the HSF. The government created the fund in 2007 to generate public sector savings that would reduce economic volatility from fluctuating energy prices. Although the government used some of the funds to finance deficits in fiscal years 2016-2017 and 2017-2018, we estimate that the fund reached 26% of GDP in 2019, and we expect further drawdowns in 2020 and 2021.

The hydrocarbon price shock will have a significant impact on Trinidad and Tobago's exports, and consequently, the current account balance, over the forecast horizon, by our estimates. We expect that this, coupled with continued financial account outflows, and heavy central bank intervention in the foreign exchange market, will lead to a deterioration in the country's central bank reserves. While we expect the country's narrow net external balance position will deteriorate beyond our previous expectations, we forecast that liquid external assets will continue to exceed external debt, by an average 6.2% of current account payments from 2020-2023. The country's still sizable, although lower, external assets, including the HSF and central bank reserves, will continue to support this position. At the same time, we expect external financing needs will grow, averaging 92% of current account receipts and usable reserves, over the forecast horizon.

We expect lower hydrocarbon prices will also adversely affect Trinidad and Tobago's economic growth, continuing the country's contraction in real GDP per capita over the past several years. We forecast that real GDP per capita will fall to about $16,600 in 2020, which is over 19% lower than in 2014. The country's growth continues to fall below that of other countries with similar income levels, partially reflecting challenges in its oil exploration and production sector, and a shortage of gas production to supply the downstream sector.

S&P Global Ratings
Friday 27th March, 2020


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