Apr 2016 Financial News

Moody's downgrades T&T again

Apr 18, 2016

Moody’s Investors Service yesterday downgraded T&T’s government bond ratings to Baa3 from Baa2 and assigned the country a negative outlook.

The New York ratings agency said despite recent fiscal consolidation efforts, low oil and gas prices will continue to “negatively and materially undermine the country’s economic and government financial strength at least throughout 2018.”

It also warned of a high likelihood that Government’s policy responses might not be as timely and effective as required due to a lack of macroeconomic data and weak policy execution capacity.

“The negative outlook captures lack of visibility on how effective fiscal consolidation efforts will ultimately be and the extent to which fiscal consolidation will have to rely on one-off measures in the coming one to two years,” Moody’s said.

“The negative outlook also captures the possibility that government support in the form of loan guarantees to Petroleum Company of T&T (Petrotrin, Ba3) could be higher than currently assumed.”

Moody’s has lowered the country’s foreign-currency bond and deposits ceilings to Baa2/P-3 and Baa3/P-3 from A3/P-2 and Baa2/P-3, respectively. The local-currency bond and deposits country ceilings were lowered to Baa1 from A3. In an immediate response to the downgrade, Finance Minister Colm Imbert, who is in Washington DC attending meetings of the International Monetary Fund (IMF), told the T&T Guardian: “The downgrade is primarily based on the effect of the collapse of oil prices and the uncertain outlook for oil prices going forward. This is not a surprise with oil at US$40 or less for so long.

“Moody’s has recognised, however, that the new Government has initiated the process to consolidate and strengthen Trinidad and Tobago’s fiscal position. And baa3 is still investment grade.”

The minister said he expected the impact on the country’s cost of borrowing to be between 25 and 59 basis points.

The rating agency noted T&T’s continued high dependence on hydrocarbons as economic growth drivers, with the energy and petrochemicals sectors accounting for 91 per cent of total exports and 35 per cent of gross domestic product (GDP).

However, even before the decline in oil prices, economic growth had slowed as a result of maturing oil and gas fields and repeated gas disruptions. Its forecast is to expect GDP to contract by 2.5 per cent this year, driven by a decline in production in the energy sector and the impact of fiscal consolidation, as well as weaker growth in construction and distribution.

In addition, growth will remain subdued 2017-18 at around 1 per cent per annum, due to the continued impact of low oil prices and the negative effect of fiscal adjustments.

“In 2017, the completion of several gas projects will modestly boost energy production and will partially compensate what would otherwise be a contraction in GDP.”

Moody’s said oil and gas taxes and royalties fell from 15.4 per cent of GDP in fiscal year 2013/2014 to 10.9 per cent in 2014/2015 and for 2015/2016, they are expected to fall to 3 per cent.

It also estimates the reduction in government revenues to be around 8 percentage points of GDP.

The agency said the absence of key macroeconomic data and the low quality of the statistical information “represent important shortcomings relative to Baa-rated peers, and suggest a high likelihood that the fiscal and economic policy response will be neither timely nor sufficient to arrest the deterioration in the government’s financial strength.”

“Although some progress has been made to address this long-standing issue, we do not expect significant progress over the next one to two years.

“Even though the fiscal data are more reliable, the institutional and execution capacity of fiscal policy remains weak.”

The agency said it would consider moving T&T’s outlook to stable revenue and expenditure adjustments, as well as the one-off revenue measures lead to lower fiscal deficits in fiscal years 2016/17 and 2017/18 fiscal years.

However, there could be a further downgrade if government’s planned fiscal efforts for 2016/17 do not reverse the deteriorating fiscal performance and the steady rise in government debt.

This latest downgrade follows similar action by the rating agency on April 30, 2015, when the country’s government bond rating, and issuer rating moved to Baa2 from Baa1 and the outlook was changed to negative from stable.

At that time Moody’s cited persistent fiscal deficits and challenging prospects for fiscal reforms, along with the decline in oil prices and a weak macroeconomic policy framework.

 

Source:
Suzanne Sheppard
Trinidad Guardian
Saturday April 16, 2016

http://www.guardian.co.tt/business/2016-04-16/moody%E2%80%99s-downgrades-tt-again