Apr 2017 Financial News

Cabinet's drawdown of US$251 million from HSF. It's credit negative says Moody's

Apr 03, 2017

The credit rating agency, Moody’s, has described last month’s decision by Cabinet to drawdown US$251 million from T&T’s Heritage and Stabilisation Fund (HSF) to finance part of the capital expenditure in the 2017 budget as “credit negative because it reflects a deteriorating fiscal position driven by large fiscal deficits amid lower energy-related government revenues.”

In a March 23 note from its twice-weekly Credit Outlook. Moody’s said of the drawdown decision: “By reducing the size of its HSF, the sovereign is also eroding an important fiscal buffer. The HSF currently totals $5.7 billion, roughly 24 per cent of GDP, and is composed of financial assets derived from oil and gas revenues accumulated during boom years.”

In a statement on March 17, the day after the Cabinet took the decision to drawdown US$251 million from the HSF, Finance Minister Colm Imbert was at pains to point out that the March 2017 drawdown returned the HSF to where it was in May 2016, when the government withdrew US$375 million from the fund

Imbert noted that before the May 2016 drawdown the HSF was US$5.79 billion and after the withdrawal of US$375 million it was at US$5.420 billion. Imbert said that between May 2016 and March 2017, the HSF increased to US$5.695 billion “through good management and good returns on investments.”

In other words, between May 2016 and March 2017, the HSF recovered US$274 million. After this latest drawdown, the balance in the Fund will be of the order of US$5.44 Billion, which is the same level that it was after the first drawdown last year.”

According to Moody’s “The fall in oil and gas prices has battered government revenues, cutting them by approximately eight percentage points of GDP annually from 2014 to 2016. To compensate for the significant fall in energy-related revenues, the government has reduced the gasoline subsidy three times since 2014 and we expect it to reduce the subsidy again this year.

“The cuts have lowered the cost of the subsidy to US$100 million in 2016 from more than US$1 billion in 2014.”

Despite reducing the fuel subsidy by US$900 million ($6.12 billion), Moody’s added: “Government has done little to change its rigid expenditure structure, where wages, subsidies and transfers account for 68 per cent of total spending.”

Moody said the government’s attempt to increase its revenues on a sustained basis and reduce the dependence on energy-related revenues have shown mixed results.

“For the past two years, the government has relied mostly on onetime measures such as asset sales and dividends from state-owned companies, from which it expects to earn $9.69 billion (6.6 per cent of GDP) in 2017.

“The government also eliminated exemptions from the value-added tax, while lowering the overall rate to 12.5 per cent from 15 per cent. The measure has increased revenues, although much less than the government originally expected.

“Similarly, the government added a new income tax bracket, which, along with a new tax on alcohol and tobacco, has increased revenues, but at the margin.”

The rating agency said that its projections put the fiscal deficit at 5.5 per cent of GDP for fiscal 2017 (which ends 30 September), compared with the government’s official estimate of 3.9 per cent of GDP, “because we expect the sale of assets to be delayed.”

Moody’s described the purpose of the HSF as being “to assist during energy downturns (stabilisation) and prepare the country for the eventual depletion of energy resources by investing in a diversified portfolio (heritage).”

Moody’s admitted that the 2016 and 2017 drawdowns from the HSF were “in accordance with HSF rules and are in line with the funding strategy presented in the budget last September.”

However, it added: “The use of HSF resources erodes an important credit strength of the sovereign and is a consequence of a limited adjustment to the fiscal deficit in response to the oil and gas price shock that has adversely affected the country for the past three years.”

Last year, reacting to the Opposition’s chastisement of his decision to withdraw US$375 million from the HSF, Imbert said that the fund was “not a trophy, to be put on a shelf and never used.”

Source:
Trinidad Guardian
Sunday April 2, 2017

http://www.guardian.co.tt/business/2017-04-02/cabinet%E2%80%99s-drawdown-us251-million-hsf