Special to Business Day Credit Rating

A lot has been written about this event and certainly what we have heard from the local authorities appears to be more of a reflection of their own denial of bad economic management rather than an understanding that energies need to quickly focus on charting a course to reverse the rating at the next possible opportunity and decisively deal with the negative outlook. Trinidad and Tobago cannot afford back to back downgrades. Let us analyse the arguments presented by Moody’s, the poor response by the authorities and the implications of the downgrade.

The first explanation of the down grade is the persistent fiscal deficits and challenging prospects for fiscal reforms. There are several points to be made here. After the global financial crisis, the policy response from developing and emerging economies, mainly consisted of low-rates monetary policy (Asia and the Middle East mainly) coupled with the depreciation of their currency against the US dollar. There were also stimulus plans in some Asian countries, in the Middle East and in Argentina.

The response of the Trinidad and Tobago Government was to adopt a Keynesian approach to economic management which advocates government intervention to help overcome the lack of aggregate demand to reduce unemployment and increase growth. This has seen budget deficits of between 2-3 percent annually since 2009. There are two problems that arose. First, the idea of running a deficit makes sense if the fall in GDP is as a result of a falloff in economic activity that you had some control over.

The Trinidad and Tobago economy can be divided into energy and non-energy sectors. The major factor causing negative growth in GDP 2009 and 2011 was the decline in economic activity in the energy sector during the years 2009-2011. The fall in energy sector output was largely a result of maintenance and upgrade work, the upgrades were completed at the end of 2013. Keynesian policy would be of little value in stimulating activity on the energy sector, as the curtailment of activity was based on strategic plans for infrastructure upgrade following on the Macondo disaster in the Gulf of Mexico by BP-Amoco.

Trinidad and Tobago has had 14 quarters of growth in the non-energy sectors, the area that monetary policy and Keynesian economic management policies can influence. Second, once the energy sector returned to growth and unemployment was brought below 5 percent there was no sound economic argument for continuing to run a budget deficit. This then begs the question why was there a deficit? Why are we being told by the Prime Minister that the down grade would not deter pursuit of their plan? What plan is this?

The lack of a Medium Term Fiscal Framework speaks to the lack of planning by this government. Once the Vision 20/20 Strategic Plan was abandoned there was no long term plan to anchor spending or position a medium term framework. Whose responsibility is it to develop a medium term framework? Is it the Ministry of Planning and Sustainable Development? A budget is not a plan but a tool very similar to the steering wheel of a car that positions the car or changes direction based on where you would like or have to go. Without a framework, spending had no road map.

No wonder Moody’s was left with no doubt that knee jerk reactions to treat with the fall in oil prices and statements that all was fine were inadequate and misleading. That we in this country accepted this is also telling. The second argument for the downgrade presented by Moody’s says that an international agency is of the view that as presently configured the Trinidad and Tobago economy will not be able in the medium term to provide growth of more than two percent. This should be of concern to us all. At what level of growth are jobs created? Do we think that we can maintain the present level of unemployment? Others are seeing structural weaknesses that we should note. Equally important is the view that oil prices may not go pass US$60 a barrel during 2015/16. This has implications for revenues not only for 2015 but also 2016. It implies the need to adopt a far more aggressive stance to address the spending patterns and curtail present levels of expenditure.

Perhaps the most worrisome of Moody’s three explanations for the downgrade was the third. It spoke to the weakness of the fiscal and monetary policy frameworks and a lack of debt management strategy. Even more disturbing is the statement that the statistical information produced by the statistical agencies in Trinidad and Tobago compares poorly with other countries similarly ranked. This newspaper has articles about the problems experienced by the CSO on Thursday 12 February (and made suggestions for improving the CSO on February 26) which Moody’s in turn described as comparing poorly and the problems are not expected to be solved anytime soon. After five years in office the state of the CSO is shameful. One is left to wonder if this is not by design rather than incompetence. Is the country been starved for data so no proper assessment of performance can be conducted? One wonders.

What could Moody’s be looking for in the monetary policy framework? In a normal Central Bank, logical monetary policy must start with an objective function and have at least one macroeconomic model that explains how at least one monetary policy instrument affects the economy and the underlying concept of dynamic programming of thinking ahead to make today’s decision. Policy makers must work out a path from the present to the desired future situation. The dynamic programming is used to prevent overshooting which can occur from time lags in economic reactions.

The alternative approach is static in nature and known as “looking out the window”. In this approach monetary policy makers have base policy judgments on present circumstances, in doing so a Central Bank’s policy stance can be too tight or too loose for too long.

Do we have a static monetary policy approach? Do we simply “look out the window” and determine both the best way forward and how long to keep a monetary policy stance? What was the monetary policy explanation for increasing interest rates this year? Is this the reason for the criticism by Moody’s? That we do not have a debt management system is surprising. This was in place under the Ministry of Finance Economic Management Division, well so we thought. Findings suggest that poor public debt management leads to large adverse effects for the private sector. Public debt management affects credit markets through sovereign ceilings, and not only through fundamentals such as interest rates. When the sovereign has a rating that is not at the high end of the scale, ratings for even healthy banks from that country will suffer with deteriorating sovereign credit quality.

Now that we have discussed the rationale for the downgrade, we now need to analyse exactly what are the implications. One of the major consequences of being downgraded is that it can have a significant effect on the country’s ability to borrow money on the markets. The cost of government borrowing usually goes up with a downgrade as they will be forced to pay higher interest rates, simply because they are seen as being slightly riskier than before. Additionally, consideration will have to be given as to whether the appetite for Trinidad and Tobago debt might change among foreign investors.

Part 2 continues next week