All is not lost in the midst of downgrades

Melanius Alphonse, The Lucian People’s MovementThe Republic of Trinidad and Tobago is under enormous scrutiny following Moody’s Investor Service downgrade of its bond rating and issuer rating to Baa2 from Baa1; changing the outlook to negative from stable.  Added to that, Moody’s downgraded the long term local and foreign currency deposit ratings of First Citizens Bank Limited (FCBL) – 82.64% owned by the Republic, with consolidated assets of TT$37 billion (US$5.8 billion) and shareholders’ equity of TT$6.2 billion (US$980 million), as of December 2014 – to Baa2 from Baa1 and assigned FCBL a counterparty risk assessment of Baa2 / Prime-2.

FCBL’s foreign currency short-term deposit rating was also downgraded to Prime-3 from Prime-2, while the Prime-2 local currency short-term deposit rating was affirmed. In addition, the bank’s outlook was revised to negative from stable.  First Citizens (St Lucia) Limited, long term, foreign currency senior debt rating, was also downgraded to Baa2 from Baa1, outlook changed to negative from stable.  At the same time, Moody’s lowered T&T’s short term foreign currency deposit ceiling to Prime-3 from Prime-2.

FCBL’s deposit ratings and First Citizens (St Lucia) Limited’s debt rating incorporate uplift from FCBL’s baa3 baseline credit assessment (BCA), reflecting Moody’s assumptions of a very high probability of public support for the bank’s obligations if needed, based on the government’s majority ownership and the importance of the bank’s lending and deposit franchise to the local economy. This assumption is unchanged.

However, the downgrade of the government’s bond rating reflects a lower capacity on the part of the government to provide support. Consequently, the uplift incorporated in FCBL’s ratings has declined to just one notch from two previously. The bank’s negative outlook reflects the negative outlook on the government bond rating. Should the government be downgraded again, the bank is very likely to be downgraded as well.  The last rating action on First Citizens Bank Limited was on 23 May 2014 when Moody’s lowered the bank’s BCA to baa3 from baa1 and downgraded the local and foreign currency deposit ratings to Baa1/Prime-2 from A2/Prime-1; and in Saint Lucia when Moody’s downgraded the foreign currency senior debt rating to Baa1 from A2. Both outlooks changed to stable from negative.

Coupled with that, the latest IMF projected GDP growth for Trinidad and Tobago is 1.2 percent for 2015 and 1.5 percent for 2016.  Despite the impact that credit rating agencies and IMF reports can have on any economy, Trinidad and Tobago has a unique opportunity to pull towards inclusive political cooperation, expand regional cooperation and the opportunity to double benchmarks with new regional economic developments that are likely to emerge in trade and investment.  Moody’s affirmed that “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 indicated the government should have used the Heritage and Stabilization Fund (HSF) to cushion the impact of sharply falling oil prices on the economy. However, this rationale, according to Central Bank, “fails to consider the fact nearly 70% of energy revenues are derived from the natural gas sector and the remainder comes from oil. More importantly, fiscal adjustment must be the first response to a negative external shock”.

The Central Bank further assured the international community that “Trinidad and Tobago remains an investment grade destination and is able to fully meet all its debt obligations. The sound credit worthiness of Trinidad and Tobago’s natural gas-based economy is firmly supported by the country’s strong net external asset position (including assets in the Heritage and Stabilization Fund), low external vulnerability and stable political system. The recent increase in oil and gas exploration activities especially in the deep water acreages should sustain energy production over the next few years, contributing to moderate economic growth prospects.”

Central Bank has taken the position that Moody’s downgrade is unjustified, stating a few significant pointers:

“Moody’s has taken the current cyclical decline in oil prices added it to long standing structural issues affecting our natural gas-based economy to recalibrate downwards Trinidad and Tobago’s position among its Baa-rated peers. We maintain the global LNG trade and the long term view of the LNG industry must be central to any forward looking analysis of the Trinidad and Tobago economy, not developments solely in the global oil market.”  

With regard to the first driver for Moody’s decision to downgrade Trinidad and Tobago’s credit rating, persistent fiscal deficits and challenging prospects for fiscal reforms do not take into account “the severe economic circumstances under which fiscal surpluses in the eight years prior to 2009 turned into budget deficits over 2010-2014.  “Moody’s analysis ignores the three simultaneous shocks Trinidad and Tobago’s economy faced from 2009 – the global financial crisis, the end of the country’s third energy boom and the eruption of the CLICO crisis. No country amongst Trinidad and Tobago’s Baa-rated peers grappled with three simultaneous economic shocks from 2009.

“Even so, Trinidad and Tobago’s fiscal and debt metrics are not alarming and have not deteriorated, especially in relation to its Baa-rated peers. While Trinidad and Tobago recorded consecutive fiscal deficits since 2009, these have been moderate, ranging between 1-3% of GDP from 2010 to 2014, helping to keep net public sector debt well below a very comfortable 20 % of GDP.”

On the second driver, the decline in oil prices and limited economic diversification to weigh negatively on economic growth prospects: “Moody’s analysis neglects the fundamental differences between the global LNG trade and the global oil market.  “Almost ¾ of Trinidad and Tobago’s LNG exports are sold at guaranteed, fixed long-term contract prices in various regions around the world. This diversification of our LNG export market buffers the negative impact of low energy prices on our fiscal accounts and economic growth. Furthermore, prices are falling with respect to spot LNG trades, not guaranteed LNG contract prices. Even so, on the U.S. East Coast we receive substantially higher spot LNG prices than the spot Henry Hub natural gas price which is typically used as a benchmark.”

The third driver was weak macroeconomic policy framework given lack of a medium-term fiscal strategy; and inadequate provision of vital macroeconomic data.  “The Central Bank provided 19 statistical officers to the CSO to support the production of national accounts, international trade and labour force statistics – the CSO revised GDP data spanning 2010 to 2013 and completed GDP fieldwork for 2014 – trade statistics for 2012 and 2013 are ready for public release and trade statistics for 2014 are currently in progress. The labour force report has been released up to the third quarter of 2014, closing the lag by one quarter.

“Critically, as of April 2015, the Central Bank working with the CSO has resolved other severe data limitations. Firstly, the Quarterly Real GDP rebasing exercise has been almost completed, and secondly, the newly rebased Retail Prices Index (RPI) is due to be launched in May 2015.”

In the coming months, discussing these gambits with a focus on tipping the balance of fear ahead of upcoming national elections no later than September 17, 2015, requires re-configuring fiscal policy that provides flexibility locally, regionally and on external markets.  Sustainable growth continues to be the main challenge to boosting long-term growth through structural reforms, labour market strengthening and to diversify the Trinidad and Tobago energy-based economy, which contributes 40 percent of gross domestic product (GDP).

The minister of finance Larry Howai’s budget statement on September 8, 2014, estimated revenue based on an expected oil price of US$80/bbl and natural gas price of US$ 2.75/MMBtu(NYMEX). A focused effort to ensure the long term sustainability of the fiscal accounts, which has more implication than just short-term deals, was taken in consideration.  The fall in global energy prices gave rise to revised budget plans, intended to achieve long-term goals of diversification, monetary policy and investing for the future, with the expectation of continuing to meet foreign exchange demands in a timely manner.

The current outlook for oil prices through 2017 is pretty optimistic at US$75/bbl per barrel at the West Texas Intermediate benchmark and Brent crude at US$85/bbl.  Granted, Moody’s dual downgrade actions will impact access to borrowing, with additional conditions to secure funding, which will include higher borrowing costs, a dent in investor confidence, and more costly projects.

In an election year, it will be unusual for government to cut back on recurring and capital expenditure, and in the heat of political posturing to find the right balance between maintaining strong financial fundamentals and making the necessary investments to foster long term growth, and to intensify economic development.  But that’s a storm on the main stage, at the end of the day, on the appropriate level of debt to GDP ratio the country can bear.  Identifying areas for diversification requires a public and private sector approach that includes public offerings of state enterprises and other capital assets as part of the equation to maintain a competitive advantage.

Taking into consideration the geography of Trinidad and Tobago, other areas of diversification can include creative industries, manufacturing, marine industries, offshore bulk transshipment, dry docking facilities, and dynamic sectors of information and communication, agriculture and tourism.  Financing and access to financing is the life blood of small and medium-sized enterprises (SMEs). Therefore, government must step in to soften the blow and allow affordable credit and non-bank funding to flow, as banks gradually increase interest rates and seek to ration credit.

The Trinidad and Tobago stock exchange could provide an additional spark to make the most of external networks that have good ideas on what’s most useful on each trading day, to commercializing a new product or service, providing direct access to bond markets, private equity, and venture capital more specific to the wider region.

Trinidad and Tobago has a rich history, culture and advantageous geography in the region to impact Organisation of Eastern Caribbean States (OECS) and Caribbean Community (CARICOM) member states. Offering technical assistance for strategic investments and cooperation is a very positive venture; alongside diplomatic and soft instruments to provide island states the ability to manoeuver with international powers in a variety of investment options.  Looking forward, through the lens of regional self-dominion and inclusiveness, regional integration and a common stance on international organizations need to establish new opportunities to ensure stability and prosperity.

It is not a question of when the implementation of an action plan to reverse negative outlooks using the appropriate incentives, to set financial targets, and define market spaces will come to pass.  Before long, progressive governments will have to act with innovation, strategy, and capable minds that are continually focused on achieving results.

Melanius Alphonse is a management and development consultant. He is an advocate for community development, social justice, economic freedom and equality; the Lucian People’s Movement (LPM) spokesman on youth initiative, infrastructure, economic and business development. He can be reached at malphonse@rogers.com

 

*The Views Expressed in this article are the author’s own and do not necessarily reflect Silent Crow News editorial policy.

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