Apr 2014 Financial News

Moody’s: Economic activity in T&T set to pick up in 2014-15

Apr 17, 2014

Economic activity in T&T is set to pick up in 2014-15, Moody’s Investor Services, one of the world’s three largest credit rating agencies, said in a credit analysis of the T&T Government dated April 14.

The agency was affirming its rating on government’s foreign currency bonds at “Baa1,” which is three notches above junk, and eight notches below the highest rating of “Aaa.”

After a deep contraction in 2009, the economic recovery of T&T has been weak and uneven, Moody’s said. “Growth underperformed in 2012 due to a contraction in the energy sector, triggered by a combination of a continuing structural decline in oil output and prolonged energy infrastructure maintenance,” Moody’s said in its analysis.

Activity in the non-energy sector, particularly construction, was also subdued due to a threemonth strike at Trinidad Cement Ltd (TCL) that led to a 20.9 per cent drop in cement output in 2012, and a 16.9 per cent increase in cement prices from January to March 2013, the agency said.

“Despite continuing upgrade and repair activities in the natural gas sector throughout 2013, we estimate that the economy expanded by 1.5 per cent relative to 2012, supported by a rebound in cement and refinery production and a steady performance in the non-energy sector (see Graph 1), Moody’s said.

Hydrocarbon output recovered strongly in the last quarter of 2013 as maintenance operations wound down.

“We expect the economy to maintain this positive momentum and forecast growth of 2.9 per cent in 2014, further picking up to 3.2 per cent in 2015, driven by increased exploration activity and foreign investment in the energy sector, as well as public sector infrastructure projects. Offshore oil and gas exploration is likely to accelerate, but uncertainty remains over whether this will yield additional oil and gas reserves,” Moody’s said.

T&T has the potential to further diversify within the energy sector, as new petrochemical projects are in the pipeline and could boost investment and growth in the next two-three years, Moody’s said. Currently, the bulk of upstream gas output is utilised in liquefied natural gas (LNG) exports (57.4 per cent), while the rest feeds into domestic fuel, electricity, and petrochemicals production, the agency said.

Moody’s said: “Recent bids on offshore and onshore exploration rights are also good precursors to increased foreign direct investment FDI.”

Diversification to non-energy economic activity has been limited, said Moody’s.

“Although T&T is a manufacturing hub for the Caribbean region, sales are too small to meaningfully complement energy exports as growth drivers, and an appreciating real exchange rate has progressively made manufacturing exports less competitive. Medium term growth prospects depend on supportive global energy prices, the efficacy of public sector investment, the completion of oil/gas infrastructure maintenance operations, and the government’s ability to prevent renewed industrial action by unions,” the analysis said.

Energy sector prospects

T&T’s oil reserves are relatively mature and oil production has been in decline due to limited exploration activity (see Graph 2), Moody’s said. “This has boosted the relative importance of the gas sector, although output temporarily contracted in 2011/2012 due to a reduction of downstream activity (in part because of poor execution of public sector capital expenditure). Energy production slowed significantly in 2012 due to large scale repairs on upstream infrastructure and industrial action that shut down a number of offshore drilling rigs,” Moody’s said.

By 2012, increased US shale gas production had depressed gas prices in that market to such an extent that most of T&T’s LNG cargoes were diverted to more lucrative markets of South America, Europe and the Far East, thereby mitigating any immediate concerns over the medium term outlook, the agency said.

Over the longer term, US LNG exports are projected to come online by 2020, bringing global gas prices down and depressing producers’ margins.

“However, given rising energy demand worldwide, and the relatively small quantities produced and exported by T&T, we expect any negative impact on the country’s LNG exports to be limited,” Moody’s said. “We expect renewed investment in exploration and commercialisation activities, particularly upstream gas projects, to invigorate the energy sector, assuming prices remain supportive.”

Our assessment of T&T’s “Moderate” institutional strength is based on the country’s scores on the World Bank’s governance indicators, which place its government effectiveness, rule of law, and other dimensions of institutional quality around the 50th percentile among sovereigns rated by Moody’s, according to the latest 2012 survey figures. These scores are in line with “Baa” category medians, underpinning our moderate assessment of T&T’s institutional strength.

Gov’t lax with Heritage Fund

Moody’s also took issue with what is going on with the nation’s sovereign wealth fund.

Moody’s said: “Our assessment of overall institutional strength also incorporates the sovereign’s policy credibility, which is a factor of both its track record and the institutional arrangements that anchor it. In this regard, our ‘moderate’ assessment of policy credibility balances a weaker-than-peers track record on inflation performance, with the Heritage and Stabilisation Fund (HSF), the most important institutional arrangement that supports the sovereign’s credit profile. Recent fiscal laxity could weigh on our assessment of policy credibility and the sovereign’s creditworthiness if not reversed.” Moody’s identified as T&T’s key peers Bahrain, Lithuania, South Africa, Russia, and Kazakhstan.

The HSF, established in 2000, is managed by the Central Bank and had accumulated savings of around 20 per cent of gross domestic product (GDP) as of September 2013, Moody’s said. The purpose of the fund is two-fold: to sustain fiscal performance during energy downturns (stabilisation) and prepare the country for the eventual depletion of energy resources by investing in diversification (heritage), the agency said.

Savings are mandated whenever actual oil revenues exceed budgeted oil revenues by ten per cent. The Government must deposit at least 60 per cent of the difference. If the excess is less than ten per cent, all or part of the excess revenue may be transferred to the fund, Moody’s said.

Withdrawals can occur when prices fall below ten per cent the budgeted price and can amount to either 60 per cent of the shortfall or 25 per cent of the fund savings, whichever is smaller. However, Moody’s said, budgeted oil prices tend to be so conservative, this never happens.

“Budgeted oil prices tend to be very conservative, making it more difficult for the government to satisfy withdrawal conditions during periods of economic stress,” Moody’s said.

T&T does not have an explicit inflation target, Moody’s said, and “although it actively manages a floating exchange rate, there is a lack of a durable nominal anchor.” The analysis said: “A high pass-through of global food prices has led to volatile headline inflation (core inflation is in the 2-3 per cent range), even when compared to other small open Caribbean economies. Relatively high and volatile inflation has limited the flexibility of employing monetary policy to stimulate the economy.”

Moody’s then reiterated what Standard & Poor’s and more recently the IMF have been saying: “Data deficiencies hinder more thorough economic analysis.”

The Government finance statistics data coverage is broadly in line with that of similarlyrated sovereigns, Moody’s said. Government debt and transactions are compiled using a national classification system and the availability of these statistics is broadly adequate for fiscal analysis.

“Nevertheless, we believe that shortcomings persist in terms of the timely delivery and quality of some macroeconomic data, including national accounts and the external sector, which make the economic analysis more challenging. This situation largely reflects resource and capacity constraints in the national statistical office. The authorities have reiterated their commitment to addressing these constraints.”


Source:
ALEEM KHAN
akhan@news.co.tt
Trinidad Guardian
BG8 | NEWS BUSINESS GUARDIAN www.guardian.co.tt APRIL 2014 • WEEK THREE
Thursday April 17, 2014