Moody's downgrades T&T again; says policy responses to oil prices unlikely to be effective

Date: 
Thursday, April 14, 2016 - 20:00

International cedit rating agency, Moody's, has downgraded Trinidad and Tobago's ratings once more, with a negative outlook.

The announcement was made in a statement today.

Moody's says the Government's policies in response to the oil and gas prices, are unlikely to have any timely effects because of weak execution.

It expects the country to be faced with low oil prices through 2018.

The following is Moody's full statement:

"Moody's Investors Service has today downgraded Trinidad and Tobago's ratings to Baa3 from Baa2 and assigned a negative outlook based on the following key drivers:

1. Despite the authorities' fiscal consolidation efforts, low oil and gas prices will negatively and materially undermine the country's economic and government financial strength at least throughout 2018.

2. There is a high likelihood that the policy response to the commodity price shock will not be as timely and effective as required due to lack of macroeconomic data and weak policy execution capacity.

This rating action closes the review period initiated on 4 March when Moody's placed the ratings on review for a possible downgrade.

The negative outlook captures lack of visibility on how effective fiscal consolidation efforts will ultimately be and the extent to which fiscal consolidation will have to rely on one-off measures in the coming 1 to 2 years.

The negative outlook also captures the possibility that government support in the form of loan guarantees to Petroleum Company of Trinidad & Tobago (Petrotrin, Ba3) could be higher than currently assumed.

Trinidad and Tobago's foreign-currency bond and deposits ceilings were lowered to Baa2/P-3 and Baa3/P-3 from A3/P-2 and Baa2/P-3, respectively. At the same time, the local-currency bond and deposits country ceilings were lowered to Baa1 from A3.

RATINGS RATIONALE

FIRST DRIVER - LOW OIL AND GAS PRICES WILL NEGATIVELY AFFECT THE COUNTRY'S ECONOMIC AND GOVERNMENT FINANCIAL STRENGTH AT LEAST THROUGHOUT 2018

Trinidad and Tobago is highly dependent on hydrocarbons as economic growth drivers. Oil, gas and petrochemical sectors account for 91% of total exports and 35% of GDP. Even before the decline in oil prices (the oil price roughly halved between September 2014 and September 2015), economic growth in Trinidad and Tobago had slowed down as a result of maturing oil and gas fields and repeated disruptions to gas production.

For 2016, however, we expect GDP to contract by 2.5%, driven by a decline in production in the energy sector and by the impact of fiscal consolidation, as well as by weaker growth in construction and distribution.

Growth will remain subdued in 2017-18, around 1% per annum, due to the continued impact of low oil prices on the oil sector and the negative effect of fiscal adjustments. In 2017, the completion of several gas projects will modestly boost energy production and will partially compensate what would otherwise be a contraction in GDP.

With the fall in energy prices, oil and gas taxes and royalties fell from 15.4% of GDP in fiscal year 2013/2014 to 10.9% of GDP in 2014/2015. For the fiscal year 2015/2016, they are expected to fall to 3% of GDP. Assuming no policy response and everything else being equal, the depressed oil and gas prices would imply a reduction in government revenues of around 8 percentage points of GDP for that fiscal year.

To compensate for the significant fall in energy-related revenues, the government expects to rely mostly in one-time revenue measures, which it expects to yield a little over 8% of GDP. These measures include asset sales, partial repayment by CLICO relating to the Government's prior financial support and higher dividends from the National Gas Company.

The rest of the adjustment would come from measures to increase tax revenues equivalent to 3% of GDP and from keeping expenditures almost constant in nominal terms.

The continued fall in oil prices since October, when the budget was presented, has meant that the spillover effect in the rest of the economy has been larger than initially expected. While the Ministry of Finance now estimates a fiscal deficit of around 4% for the 2015/16 fiscal year, we expect the one-off measures to yield around 6% of GDP and we estimate that the deficit will be around 5% of GDP in 2015/2016F.

Going forward, we expect fiscal results in 2017/18 will depend more on tax and expenditure control measures than on one-off measures. To contain fiscal deficits to 5% of GDP or below, fiscal consolidation efforts would have to be at least equivalent to 6% of GDP according to our estimates.

While we do not expect government support to state owned enterprises (SOEs) to be substantial, we do expect some to be needed, in the form of loan guarantees to Petrotrin. We expect such support to increase central government debt in 2016 by between 2% and 4.5% of GDP, in the latter case should the government need to guarantee all of Petrotrin's financing needs -- which we think is unlikely.

SECOND DRIVER - HIGH LIKELIHOOD THAT POLICY RESPONSE WILL NOT BE TIMELY AND SUFFICIENTLY EFFECTIVE DUE TO LACK OF DATA AND WEAK POLICY EXECUTION CAPACITY

The absence of key macroeconomic data and the low quality of the statistical information represent important shortcomings relative to Baa-rated peers, and suggest a high likelihood that the fiscal and economic policy response will be neither timely nor sufficient to arrest the deterioration in the government's financial strength.

Although some progress has been made to address this long-standing issue, we do not expect significant progress over the next 1 to 2 years. Even though the fiscal data are more reliable, the institutional and execution capacity of fiscal policy remains weak. Some of the limitations include lack of elements to perform sensitivity analysis on the impact of oil prices in government finances, as well as on the estimates on how the Value Added Tax (VAT) reform will impact revenues.

The government also lacks a rigorous medium-term fiscal strategy and a clear debt financing strategy, limiting visibility beyond one fiscal year.

WHAT COULD MOVE THE RATING UP

Moody's would consider moving the outlook to stable if it were to conclude that revenue and expenditure adjustments, in addition to one-off revenue measures, were likely to lead to lower fiscal deficits in the 2016/17 and 2017/18 fiscal years. Evidence of institutional strength, most likely manifest in the emergence of a credible fiscal and economy policy response which offers the prospect of containing the deterioration, would be considered a credit positive.

While higher GDP growth rates and a recovery in energy-related government revenues would add positive pressures to the rating, they would only lead to upward migration in concert with the institutional and policy changes needed to enhance resilience to future price shocks.

WHAT COULD MOVE THE RATING DOWN

Moody's would downgrade Trinidad and Tobago's Baa3 ratings if it concluded that the government's planned fiscal efforts for 2016/17 were unlikely to reverse the deteriorating fiscal performance and the steady rise in government debt. The possibility that government support in the form of loan guarantees to Petrotrin could be higher than currently assumed would add negative pressure to the rating.

Early signs of an emerging balance-of-payments crisis, such as a further sustained fall in the price of oil, pressure on the exchange rate regime or a significant fall in international reserves, would also exert downward pressure on the rating.

GDP per capita (PPP basis, US$): 32,650 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.2% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.5% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -4.2% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.2% (2015 Actual) (also known as External Balance)

External debt/GDP: 33.9% (2015 Actual)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 12 April 2016, a rating committee was called to discuss the rating of the Trinidad & Tobago, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. Other views raised included: The issuer's institutional strength/framework has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating.

For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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