Don’t Believe the Hype! There’s Nothing Positive About T&T’s Credit Rating
Moody’s released its Annual Credit Analysis on the Government of Trinidad and Tobago (GORTT) on June 28, 2019, followed by a FAQ on growth prospects, fiscal consolidation, and external risks on July 15, 2019. Moody’s has maintained its Ba1 (non-investment grade/speculative/junk) rating on T&T with a stable outlook. On July 9, 2019, S&P Ratings downgraded T&T’s sovereign credit rating to BBB from BBB+ (one notch above speculative/junk) on economic and fiscal stress, with a stable outlook. The Ministry of Finance published a release on Moody’s report on July 17, 2019. Here I take a look at what a sovereign credit rating is, and why the above is NOT good news for Trinidad & Tobago.
What’s in a rating?
In the first place, it is important to note that a sovereign credit rating like Moody’s and S&P’s for Trinidad and Tobago is not a reflection of the country’s economic performance and prospects, per se. It is an assessment of the creditworthiness of the state — the Government’s willingness and ability to service its existing debt. So, a stable outlook DOES NOT imply a stable economy. A stable outlook means the rating is stable, and is most likely to remain unchanged / stable at the current level, rather than downgrade or upgrade, in the next 12–18 months.
Secondly, Moody’s downgraded T&T to non-investment grade or ‘junk’ as it’s commonly known, to Ba1, on April 25, 2017. That was two notches below S&P’s rating at the time. Now S&P has downgraded T&T to BBB, which is still investment grade but is only one notch above Moody’s rating, or ‘junk’. This is nothing to celebrate and there is nothing positive whatsoever about this latest downgrade by S&P. Moody’s report is being touted as a positive, but really what they are saying, for over two years, is that the debt issued by the GORTT is NOT an investment — it’s non-investment grade / junk / speculative in nature because of the risks associated with it, and that the risks have remained the same — there was no improvement. Again, this is nothing to celebrate.
Similarities between the assessments of Moody’s and S&P
There are important similarities between S&P and Moody’s analyses.
- Moody’s and S&P both project primary fiscal deficits, meaning that GORTT has to borrow just to pay the interest on current debt, which indicates that the debt level is already unsustainable.
- Both S&P and Moody’s point to foreign exchange controls by the Central Bank as limiting non-energy sector growth.
- Both expect the level of foreign exchange reserves will further decline, as it has for the past few years.
- Both cite the unusually large Errors and Omissions item on the Balance of Payments as a major risk, and Moody’s directly suggests that it is due to capital flight. (See TT Outlook 2019: Another Year of Errors and Omissions)
- Both agree that lack of economic diversification / over-reliance on the energy sector increases economic vulnerability and volatility.
- Both indicate that the lack of data poses a major risk to surveillance, policy formulation and effectiveness.
- Both agree that reliance on dividends from State Owned Enterprises and otehr one-off sources of budget deficit financing is not sustainable in reducing the fiscal deficit in the long-term.
Let’s take a deeper look at these points.
1. Primary fiscal deficits mean our debt is already unsustainable
Moody’s and S&P expect we will continue to borrow just to pay the interest on our current debt over the next several years.
2. Exchange controls and ineffective policy response
Moody’s and S&P both suggest that exchange controls and an ineffective policy response have contributed to the country’s difficulty in responding to shocks.
● S&P: “[Energy] sector’s sharp downturn over the past several years and the limited effectiveness of policy response — particularly given a heavily managed exchange rate and a small open economy that we believe limit the role of monetary policy — pose risks to the country’s ability to respond to shocks.”
● S&P: “A heavily managed exchange rate and a small open economy effectively limit the role of monetary policy, in our view. The central bank has sustained a quasi-fixed exchange rate since 2016, when it allowed the currency to depreciate by about 6%. Since then, U.S. dollar shortages have constrained economic activity, weakening local businesses’ ability to pay suppliers and obtain key imports.”
● Moody’s: “Significant data limitations and institutional constraints limit policy predictability and effectiveness. This has been a long-standing issue in Trinidad. (…) In essence, the CBTT tries to determine both the price and residual supply of foreign exchange in the market, resulting in foreign exchange shortages. This has resulted in both limited movement in the official exchange rate against the US dollar and persistent reports of foreign exchange shortages for the private sector (see Exhibit 11).”
● Moody’s: “Foreign exchange shortages also remain a constraint on non-energy business activity, weighing on business confidence and hampering trade and economic growth. Private companies have indicated that it can take months to get foreign exchange both to transfer dividends to their foreign headquarters and to pay for imports. Although it is difficult to quantify the exact impact on economic growth, we believe this has weighed on business confidence, particularly in certain sectors like retail and manufacturing. Moreover, foreign exchange shortages undermine investor confidence as the scarcity of hard currency likely increases the demand for foreign exchange, which leads to further capital outflows.”
3. Reserves are expected to further decline
T&T is losing reserves at a quick and accelerating pace. In June 2019, international reserves fell below USD7 billion for the first time since December 2007. The ratings agencies do not anticipate an improvement.
● S&P: “We believe heavy central bank intervention in the foreign exchange market will also continue weighing on reserve levels. We estimate gross external financing needs will reach near 72% of current account receipts and useable reserves by 2022.”
● Moody’s: “In this context, and barring a change in policy, the steady decline in reserves at the central bank are only likely to be solved with an increase in energy production or prices, or further curtailment of sales to the private sector (see Exhibit 12).”
4. Billions in Errors and Omissions in the Balance of Payments
The Net Errors and Omissions item is the balancing item which equates the balance of payments account with the level of reserves we have, after taking into account transactions such as imports, exports, remittances, foreign direct investment, etc.
Since 2015, USD8 billion are (un)accounted for as ‘errors and omissions’ on the Balance of Payments.
Both ratings agencies highlight the risks associated with these massive outflows, which are essentially unaccounted for.
● S&P: “Errors and omissions outflows have accounted for about 128% of the current account balance on average over the past five years.” (…) “The sovereign’s external data lack consistency, as demonstrated by errors and omissions at about negative 14% of CAR.”
● Moody’s: “Even after these revisions, balance of payments data continue to exhibit large, and consistently negative, errors and omissions, suggesting continued data quality issues.”
● Moody’s: “The decline in international reserves despite a current account surplus is explained by offsetting outflows in the financial account and persistently large errors and omissions (see Exhibit 10). By definition, errors and omissions are not easily explained, but we believe they likely reflect problems with the balance of payments data collection, likely on the financial account as well as a combination of underreported imports and capital flight. The size of errors and omissions, and uncertainty over their origin drive our concern over external vulnerabilities in the medium term. Since the fourth quarter of 2015, errors and omissions have been larger than the current account surplus in absolute terms, in all quarters except for one. Although we cannot accurately forecast errors and omissions, we currently expect them to moderate, thereby leading to a stabilization in reserves at the central bank. However, if error and omissions continue to be of this magnitude, reserves would likely fall.”
5. Overdependence on the Energy Sector is not improving
The economy is not suffering from a “shock” related to energy prices or production, rather a correction that is the direct result of the high reliance on the energy sector for economic activity, unclear policies that create uncertainty for businesses and investors, and weak institutions that hinder the development of other sectors.
According to the Central Bank’s quarterly economic activity index, the Manufacturing sector has only posted 1 quarter of growth in the last 22 quarters. The performance of the non-energy sector is not improving and policy choices are in fact making things worse.
● S&P: “Trinidad and Tobago’s external accounts depend greatly on the energy sector, given that the sector’s exports account for over 80% of the total. This concentration exposes the country to significant volatility in terms of trade, and subsequently, its external liquidity and debt position.”
● Moody’s: “the country’s prospects for economic diversification away from hydrocarbons remain limited because of deep-seated institutional shortcomings and short-term policy decisions. Among the more structural features limiting private sector activity and diversification is Trinidad & Tobago’s complex and inefficient bureaucracy, which limits the ability of the private sector to drive investment and develop within the country.”
6. Lack of data creates substantial risk
To analyse the economy in the first place, we must begin by asking: Where are the data? Why do we still not have a properly functioning, independent Central Statistical Office? Isn’t it in the policymakers’ interest to have the statistics to show whether their management of the economy is effective or how it should be adjusted? Or are they not concerned with managing the economy? Is it in somebody’s interest not to have the data that show what’s really going on? Both agencies suggested that the lack of data represents a substantial risk.
● S&P: “There have been repeated delays in implementing a stronger and autonomous National Statistical Institute. This reform aimed to address historical shortcomings in the country’s economic data, which hamper surveillance and policy formulation.”
● S&P: “At the same time, institutional reforms to strengthen revenue collection and improve the provision of timely economic data have taken longer than expected, and we do not expect to see material dividends from these reforms in the near term.”
● Moody’s: “Significant data limitations and institutional constraints limit policy predictability and effectiveness, creating uncertainty over medium-term fiscal projections.”
● Moody’s: “The government’s policy effectiveness is further limited by a lack of basic macroeconomic data, and substantial quality issues on the data that is available. This is a long-standing issue and, despite the government’s efforts, it remains unresolved. In terms of data availability, demand-side gross domestic product, for instance, is a notable data input that remains absent after being discontinued in 2009.”
7. Reliance on one-off revenues is not the answer to reducing the fiscal deficit long-term
The reliance on one-off capital revenue and dividends from SOE is not a sustainable way to finance the budget deficit, period. Meanwhile, spending has returned to 2015/2016 levels at over TTD52 billion, and fiscal spending has historically been more accommodative as we get closer to elections.
● S&P: “At the same time, we believe that the government will continue to rely on one-off revenues, principally related to the recovery of assets from the CL Financial Conglomerate, which failed in 2009 and was bailed out by the government, to support its revenues. These revenue sources will contribute to a decline in the government’s deficit to 2.9% of GDP in fiscal 2019, down from 4.1% a year earlier, under our forecasts. Nevertheless, we do not expect this additional revenue to fully offset the impact of contracting non-energy sector revenue and rising spending over the outlook horizon. We forecast the fiscal deficit to average 4.7% of GDP from 2019–2020 to 2021–2022, and do not expect the government to meet its previously established target of reaching a balanced budget by 2020–2021.”
● Moody’s: “Actual fiscal out-turns can deviate significantly from budgeted targets (see Exhibits 8 and 9), particularly due to uncertainty over the size and timing of asset sales as well as a reliance on dividends from SOEs. This is reflected in execution rates on current and capital revenue. Practices for both budget formulation and reporting of past fiscal outturns are subject to frequent revisions and often include unrealistic assumptions.”
So what is the outlook for T&T’s economy?
Growth will continue to suffer as it has for the past decade. T&T is in an economic stagnation, which is worse than a recession. The economy has averaged -0.5% growth for the last decade. The Government’s 1.9% preliminary estimate for GDP growth in 2018 was based on the energy sector, with the non-energy sector posting flat performance y/y. In nominal terms, the economy is 10% smaller than it was in 2008. Just to recover to the 2008 level, the economy must grow above 2% for the next 5 years — a scenario that is currently not expected by the ratings agencies or any other credible institution.
I expect further job losses in 2019–2020 and an increase in poverty. We have lost a decade in Trinidad and Tobago and we need very different policy approaches to turn this ship around. T&T has deep, structural, long-term problems that we need to address urgently. Only a swift and meaningful change in policy can spare us another year or more of stagnation and negative outcomes for the people of Trinidad & Tobago.