Yet another credit downgrade for Trinidad and Tobago
NEW YORK, USA — Rating agency Moody’s announced on Wednesday that it had downgraded Trinidad and Tobago’s credit rating to Ba1 from Baa3, just days after Friday’s announcement by Standard and Poor’s (S&P) that it had lowered its long-term sovereign credit ratings from “A-” to “BBB+”.
In Moody’s ranking, Ba1 is considered to be non-investment grade, or junk-bond status, while S&P’s BBB+ is considered as investment grade. Bonds are rated as investment grade or junk based on the credit rating agencies assessment of the risk of the issuer of the bond defaulting on interest or principal payments.
In its assessment of Trinidad and Tobago, Moody’s said the key driver of its decision was because the authorities’ policy response has been “insufficient to effectively offset the impact of low energy prices on government revenues, as fiscal consolidation efforts have mostly relied on one-off revenue measures.”
In relation to the property tax that government wants to implement this year, Moody’s said “it will yield modest results but these will not be fully reflected in revenues until next year.”
According to Moody’s, the steady rise in debt ratios driven by large government deficits has eroded the country’s fiscal strength and it is forecasting that the country’s debt to GDP ratio which exceeded 56 per cent in 2016 from 42 per cent in 2014 will rise to almost 70 per cent of GDP by 2019. This, it said, “is substantially higher than the baseline scenario we assumed when we lowered the rating to Baa3 from Baa2 one year ago.”
Moody’s is also forecasting that government’s dependence on the Heritage and Stabilisation Fund (HSF) will continue, saying “without meaningful fiscal adjustment to reduce double digit fiscal deficits excluding capital revenues, the government will likely continue to use resources from the HSF.”
It cautioned that although the Fund’s assets stand at around $5.7 billion or 24 percent of GDP, “recurring withdrawals will erode an important credit strength,” of the country.
With the fall in oil and gas prices, Moody’s said energy-related government revenues fell to only one percent of GDP in fiscal 2016, from eight percent in the previous fiscal year, and current revenues declined by 28 percent over the period 2015-2016.
While the rating agency said government responded to the fall in revenues by reducing gasoline subsidies and current transfers, it was not enough.
Moody’s said: “These measures have not changed a rigid expenditure structure in which wages, subsidies and transfers account for 70 percent of total government spending.”
Moody’s said it expects that “total expenditures will continue to increase this year amid higher debt servicing costs and larger capital expenditures.”
While this is happening Moody’s said there have been “limited results equivalent of 1 percent of GDP this fiscal year,” to measures to raise current revenues.
It noted that even though government had eliminated exemptions from the value added tax and lowered the overall rate from 15 percent to 12.5 percent, revenues gained were “less than originally expected.”
The government, it said, had been relying on dividends from the National Gas Company (NGC) and asset sales to contain the fiscal deficit. But Moody’s said while government expects to earn TT$9.69 billion or 6.4 percent of GDP from one-off capital measures in fiscal 2017, “we believe TT$6 billion or 4 percent of GDP is a more likely outcome given significant implementation risks.”