Mar 2016 Financial News

TT credit rating may fall

Mar 07, 2016

THIS country’s Baa2 government bond and issuer ratings by Moody’s Investors Service (Moody’s) were last Friday (March 4) placed “on review for downgrade” to allow the international credit rating agency to assess the extent to which TT’s economic performance and Government’s balance sheet will be impacted “in the coming years (by) the further sharp fall in oil and gas prices”.

Moody’s said Government’s balance sheet and the economy, “and therefore also its credit rating” are being weakened by the “structural shock” to the oil and gas markets. “Assuming no policy response and other factors being equal,” Moody’s argued that “the depressed energy prices for the coming years would imply a further reduction of 22 percent in Government revenues (to 23 percent of GDP from 30.6 percent of GDP), an increase of 7.7 percentage points in the fiscal deficit and a rise of 15 percentage points in Trinidad and Tobago’s debt burden over a four year period (2013-2016).” Moody’s also noted that in attempting to manage the depreciation of the exchange rate against the US dollar “(only 0.78 percent since the start of 2015), the Central Bank of TT has run down its reserves from US $11.3 billion in 2014 to US $9.8 billion at the end of 2015, from 12.7 months of imports to 11.1 months of imports.” Taking into consideration several measures announced by Government to compensate for the fall in revenues, including changes to the Value-Added Tax (VAT) regime, Moody’s said the rating review would allow it to “assess the credibility and sustainability of the authorities’ plans.” “It will assess the clarity, scope and ambition of the Government’s plans relative to the scale of the task, the time required for them to bear fruit, and the reliance that can therefore be placed on them to sustain TT’s credit strength.” “Moody’s will also assess how much positive weight should be placed on the country’s strong fiscal buffers (including the Heritage Fund). At around US$ 5.6 billion (or roughly 22 percent of forecast 2016 GDP), the country’s foreign currency assets are large, but potential calls on these funds are growing - emanating from the possible future need to fund larger budget deficits and/or the possibility of assisting state-owned enterprises with liquidity needs.” The credit rating agency also said it will also assess how much positive weight should be placed on this country’s strong fiscal buffers, including the Heritage Fund.

“At this point, there are no indications that either the Petroleum Company of Trinidad & Tobago (Petrotrin, Ba1) or the National Gas Company of Trinidad and Tobago (NGC, Baa2) will require sovereign support. However, the review will also consider the potential for this to change should the environment continue to deteriorate,” Moody’s stated.

The announcement of this review, which is expected to be completed within two months, comes approximately ten months after Moody’s downgraded these same two ratings from Baa1 to Baa2 on April 30, 2015 and changed the outlook to negative from stable. Last April, Moody’s cited three key drivers for its then downgrade from Baa1 to Baa2: 1) Persistent fiscal deficits and challenging prospects for fiscal reforms; 2) Decline in oil prices and limited economic diversification to weigh negatively on economic growth prospects; and 3) Weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and inadequate provision of vital macroeconomic data. “At Baa2, the investment grade rating is supported by a strong government balance sheet, underpinned by the country’s Heritage and Stabilisation Fund (HSF), and also benefits from a moderate and affordable debt burden and a strong external position.” Last Friday, in explaining the rationale for initiating this review, Moody’s noted that TT is highly dependent on the energy sector, specifically hydrocarbons, to drive economic growth and to finance Government expenditure.

Moody’s said a downgrade would be done if it concludes that Government’s plans are “unlikely to be adequate to sustain TT’s economic or government balance sheet strength.”

Source:
Sasha Harrinanan
Newsday
Monday March 7, 2016

http://www.newsday.co.tt/news/0,224982.html