Moody’s ‘bad weather’ warning

As a reminder, Moody’s downgraded Trinidad and Tobago’s issuer and government bond ratings to Ba1 from Baa3 on April 25 and changed the TT outlook to stable from negative.

The factors that determined Moody’s rating were: (1) an insufficient policy response to effectively offset the impact of low energy prices on government revenues, as fiscal consolidation efforts have mostly relied on one-off revenue measures; (2) a steady rise in debt ratios driven by large government deficits, which have been eroding fiscal strength; and (3) declining production from maturing oil and gas fields coupled with limited investment prospects, in a context of low energy prices which have materially undermined medium-term growth prospects.

Moody’s latest update could have been described as a “bad weather warning” with the agency suggesting that the “Low” assessment of TT’s economic strength reflects low economic growth in recent years and the economy’s relatively small size. They also consider the medium-term growth prospects to remain subdued because of the heavy dependence on oil and gas sectors and vulnerability to exogenous shocks of energy price variations.

The growth prospects are not helped by the maturing oil and gas fields and repeated disruptions to gas production on the downstream industries.

Moody’s assessed TT’s institutional strength as low, based on the lack of timely macroeconomic data to inform policy, and weak fiscal policy execution capacity. Fiscal strength receives a score of “moderate (-)” which rests on the heavy reliance of government revenues on the energy sector and the reliance of the government on capital revenues such as asset sales, which cannot be sustained over an extended period.

There were several developments that Moody’s noted.

One was the discovery of two gas fields in June and May with reserves totalling two trillion cubic meters.

These discoveries can partially offset the natural gas shortage, but they will impact growth and government revenues only after 2020.

In addition, central government’s operations for the first half of 2017 resulted in a mid-year budget deficit of approximately $5.40 billion, $1.55 billion more than the forecast.

This shortfall Moody’s considered was due to lower-than-expected tax collections and a shortfall in capital revenues related to asset sales.

Moody’s also pointed out that oil prices will be critical to the final fiscal balance in 2017. If prices fall below US$50 a barrel the fiscal deficit could be larger than official budgeted estimates.

Fiscal measures, such as the reform of the Supplementary Petroleum Tax, is important to “facilitate investment” given the continued importance of oil and gas to our economy and the limited progress in diversifying the economy. Moody’s pointed to the plans laid out by the Finance Ministry to eliminate fuel subsidies and to improve tax collections.

If implemented effectively, tax reform can boost revenues over the medium term, but Moody’s does not anticipate a material effect in the near term.

Moody’s re-affirmed its warning that downward pressures would arise if fiscal deficits turn out to be significantly higher than initially expected and if government debt ratios increase at a higher rate than they currently expect. Depletion of fiscal buffers, such as reduction in assets available for sale and assets held in the Heritage Stabilization Fund, coupled with limited fiscal consolidation beyond 2018, would add negative pressure to the rating.

Government must be brave enough to take every stop, despite the temptations, political and otherwise, to avoid this. We are warned.