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Moody's downgrades Trinidad and Tobago

NEW YORK, United States (CMC) – The New York based rating firm, Moody's Investors Service, has downgraded Trinidad and Tobago's government bond rating and issuer rating to Baa2 from Baa1 and changed the outlook from stable to negative.

In a statement, the company said that the main reasons for its decision were the persistent fiscal deficits and challenging prospects for fiscal reforms, decline in oil prices and limited economic diversification to weigh negatively on economic growth prospects and weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and inadequate provision of vital macroeconomic data.

“At Baa2, the investment grade rating is supported by a strong government balance sheet, underpinned by the country's Heritage and Stabilization Fund (HSF), and also benefits from a moderate and affordable debt burden and a strong external position,’ Moody’s said.

It said that Trinidad and Tobago's fiscal accounts have been reporting recurring deficits on the order of two to three per cent of gross domestic product (GDP) since 2009 after consecutive surpluses were observed over the previous eight years.

“Going forward, implementing fiscal reforms to put the government accounts on a more sound footing will likely be challenging in a context of low oil prices and potential spill over of low gas prices in the US to other markets.

“Furthermore, the lack of a medium-term fiscal framework and reliance on one-off measures to cut sending undermines the authorities' ability to achieve a durable turnaround in fiscal metrics. While Trinidad's Heritage and Stabilization Fund is an important element of the sovereign balance sheet, it has not been used as a counter-cyclical policy tool, thus limiting its ability to compensate for negative impact of adverse shocks in the economy.”

Moody’s said in addition, the rigid structure of public expenditure, where wages, subsidies, and transfers account for more than 65 per cent of total expenditures, limits fiscal flexibility.

The rating agency said that Trinidad and Tobago remains heavily reliant on the oil and gas-sector and, accordingly, economic activity and fiscal stability is predicated on its performance.

“Economic growth has slowed down in the post-crisis period as a result of maintenance-related disruption in gas production. Although normal production is likely to resume in 2015, the prospects of injecting new investments to boost growth appears challenging given the decline in oil prices, which are projected to remain below $60/bbl in 2015/16.

“We anticipate that maturing oil and gas fields will limit Trinidad's prospects of significantly increased hydrocarbon revenues in the medium-term. A return to higher pre-crisis growth rates is unlikely, a condition we think will be aggravated in the context of low energy prices. Given this, we project GDP growth will rebound to less than two per cent in the medium-term.”

Moody’s said that weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and inadequate provision of vital macroeconomic data.

The company said Trinidad and Tobago’s institutional strength is assessed as moderate, based on the World Bank's governance indicators.

“However, its macroeconomic institutional capacity, including fiscal and monetary policy frameworks, are weaker than those observed in several other investment -grade peers. As a resource-rich country, the absence of a medium-term fiscal framework, coupled with a lack of debt management strategy, represent important policy shortcomings that place the country in a weaker standing relative to most Baa-rated peers.

“In addition, Trinidad compares poorly in terms of the quality of statistical information. Although some progress has been made to address this long-standing issue, we do not anticipate a rapid resolution and accordingly expect this condition will continue to be present, negatively impacting the country's relative standing in the Baa rating space.”

Moody’s said the negative outlook assigned to the country's Baa2 rating reflects the impact “we expect the sharp drop in oil prices will have on both the Trinidadian economy and the fiscal accounts.

“Overall, we anticipate material reductions in government revenues, the current account surplus, and FDI flows that could further weaken the country's credit profile.

“Absent durable fiscal adjustment, debt metrics would also be expected to deteriorate. In addition, we note material implementation risks around the resolution of the severe data limitations, which is likely to take 18-24 months to implement.”

But Moody’s said that upward rating pressure could result from upward trend in oil prices that could lead to increased foreign investment in oil/natural gas exploration and production that substantially boosts hydrocarbon output and reserves; improved fiscal policy framework by adopting a medium-term strategy and return to fiscal surpluses; and integrating the Heritage and Stabilization Fund into a medium-term fiscal framework, and enhancing its role as a counter-cyclical fiscal tool.

It said downward pressure on the rating could arise from lack of progress to address fiscal slippage in a durable medium-term strategy; persistent low oil prices that limit prospects for deep-water oil and gas exploration and further deterioration in data quality.

Courtesy: Jamaica Observer

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