The sky not falling

At the same time, they affirmed their A-2 short-term sovereign credit ratings. S&P also lowered their transfer and convertibility assessment for TT to A from AA-.

The man whose fingers are always on the pulse of these analyses, Finance Minister Colm Imbert, was not smothered by the news. He was quick to point out in his usual sky not falling manner that the downgrade was not surprising and that it was not that bad after all, given S&P’s more positive spin on TT’s economic outlook.

The rationale for S&P’s rating action was centered on the view that Trinidad and Tobago’s debt burden has increased sharply since 2014 amidst an economic recession. Although they acknowledge that the government has introduced austerity measures to reduce fiscal imbalances, they expected budget consolidation to be slower than was initially anticipated and interest costs to be higher.

As a result, they took the decision to lower their long-term sovereign credit ratings to BBB+ from A-. The stable outlook reflects their expectation that TT’s economy will modestly recover in 2017-2020, primarily due to higher natural gas prices and production, assisting with deficit reduction and the stabilization of the debt burden.

BBB+ is considered investment grade by S&P. This means that, as a country, we have adequate capacity to meet our financial commitments. However, it is felt that adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the country to meet those commitments.

One group of economists, Heitor Almeida et Al, pointed out that sovereign downgrades lead to greater increases in the cost of debt and greater decreases in investment and leverage of firms.

They also indicated that public debt management generates negative externalities for the private sector and real economic activity.

Rating downgrades lead to an increase in the cost of capital, causing firms to cut investment and deleverage. This we must look at carefully since increased interest rates will have a knock-on effect on business activity.

Once again S&P pointed out that TT continues to suffer from shortcomings in the production of economic data, which they argue hampers surveillance and policy formulation. Yet another time a rating agency is writing about our lack of economic data.

When will the new statistical agency be established? Are there now problems with this committee? Is there a minority report on this matter? Despite the stable outlook, S&P warned that if there was no gradual recovery in economic growth or there was weaker-than-expected fiscal results, they would lower the country’s rating in the next two years.

Government therefore should not be side-tracked. Its focus should be on effectively implementing structural reform that boosts economic diversification and investor confidence, firming up TT’s growth and fiscal profile while containing external vulnerabilities.

Government must also explore all means to fast track fiscal consolidation that results in a reduction in the fiscal deficit.

This will not only assist in warding off another downgrade, but can help in raising the ratings, as could sustained improvement in the quality of TT’s economic and external data.