Credit Ratings and the Trinidad and Tobago Economy
By Renuka Kangal, Project Coordinator, TTEITI Secretariat
(Business Guardian Article, Thursday 13th April, 2017)
In the simplest definition, credit ratings are a measure of risk and indicate the credit worthiness of a given entity. It seeks to convey the level of confidence that an investor or creditor would have in a debtor, whether an individual, company or country, insofar that it gives indication on how likely the debtor is to either return the debt or default on it. But credit ratings are much more than this…
On the international market and on financial platforms, credit ratings speak to investor protection, transparency, capital assurance, borrowing costs, market stability and venture efficiency. A poor credit rating is not meant to be taken as a total negative, but can be seen as a directional tool in that it provides a base for improvement, a means to achieve transparency and a measure of efficiency of capital markets performance.
According to Amitabh Kundu, economist, author and lecturer, “rather than being carried out in an objective manner, the credit rating exercise has been used as an instrument to persuade the local bodies to follow market-based financial discipline”. Credit ratings are therefore a financial instrument that can be leveraged to influence and direct domestic capital structure decisions. Good credit ratings ought to be exploited where they can be used to advantage in bolstering investor confidence and improving access to external financing options, improving country attractiveness for Foreign Direct Investment (FDI) while also fostering profitable trade and industry linkages with international partners. They, together with several other indicators including levels of indebtedness, competitiveness, ease of doing business and corruption perception indices, act as red flags to stakeholders, where there is reluctance to publicly divulge sensitive information, thus still allowing insights into stability and debt management capacities. Credit ratings are also key in logistics performance indices which are essentially benchmarking tools to help countries capitalize on opportunities, meet challenges and improve their market performance.
Credit ratings are determined by credit rating agencies and amongst the most recognized are Moody’s Investors Service, Standard and Poor’s Financial Services, and Fitch Ratings Inc. and Table 1.1 shows the structuring and meaning of ratings from these companies.
As of April 2016, the rating from Moody’s Investors for Trinidad and Tobago was at Baa3 with a negative outlook, this being a downgrade from Baa2 with a negative watch standing in March of the same year. According to Moody’s, the key drivers behind the downgrade can be assigned to the low oil and gas prices that have affected economic growth, and associated growing fiscal deficits which are projected to continue well into 2018. Moody’s also identifies that the inability of the country to formulate responsive macroeconomic policies and the bend towards short-term fiscal planning provides significant challenges to acquiring financial strength and stability.
This comes as consequence of the heavy dependence on hydrocarbons with this industry accounting for around 40% of GDP, according to Trading Economics 2017 data but more importantly, it accounts for about 87% of exports and 90% of FDI. With the country so reliant on one sector, and considering the volatility of this commodity on international markets where the oil price roughly halved between September 2014 and September 2015 and which has continued to be in a state of flux through 2016 and 2017, it is not surprising that the country’s finances and abilities are severely weakened. Based on the combined effects from Trinidad and Tobago’s lack of diversification and declining production profiles from its maturing oil and gas fields, the economy has been severely debilitated where the GDP was seen to contract 10.8% in the third quarter of 2016 over the same quarter of the previous year (Trading Economics, 2017). Taxes and royalties from oil and gas fell from 15.4% of GDP in FY 2013/2014 to 10.9% of GDP in FY 2014/2015 (Central Bank, 2016).
Government’s operations and capital expenditures will continue to be adversely affected by the retracting global energy price levels coupled with its own declining domestic energy outputs. This being the case, it is glaringly evident that unless judicious fiscal management measures are applied and robust macroeconomic policies are devised, deployed in tandem with real strategy to widen the revenue generation nets of the country, it cannot be a case of business as usual for Trinidad and Tobago. Provisional estimates indicate that public debt stood at $89,764.2 MM at the end of September 2016 compared to $77,341.1 MM at the end of September 2015. Table 1.2 shows the increasing public debt, as a percentage of GDP, over the period 2011 to 2016.
The country’s growing level of indebtedness owing to openness to external shocks and inelasticity of economic reforms exacerbated by a trend of fiscal deficits and the failure to approach national debt management with sustainability fuels the insecurity of credit worthiness. Substantive efforts are needed to correct fiscal imbalances, debt overhangs, and balance of payment issues, which will effectually manage capital flows independent of the volatility associated with the current revenue generation streams.
Government is ultimately obligated to ensure that debt data and indicators are accurately recorded and disclosed, the legislative authority to borrow is clearly defined and executed within that framework, contingent liabilities are included in debt data and debt management activities are regularly audited externally and reported. The importance of proper disclosure and openness cannot be overstated. It is on these foundations that confidence is built, leading to reputational enhancement and improving investment climate, which currently are in reducing supply in Trinidad and Tobago. From a solid foundation of internal supportive management systems and external perceptions (through international rating indices), come opportunities that are the building blocks on which Trinidad and Tobago can achieve economic strength and sustainability.
Given that Transparency International downgraded Trinidad and Tobago by four notches in 2016 on the Corruption Perception Index (CPI), causing the country to move from 72nd out of 168 countries assessed in 2015 to 101st out of 176 countries assessed in 2016, significant focus needs to be placed on rebuilding investor confidence. To do this, public integrity must be reinforced and this means improving institutional capacity of the state to control the aspects of bureaucracy that facilitate corruption, encourage greater public disclosure, underscore public integrity and ensure financial as well as social accountability.
These mechanisms of affirmative behavior are at the heart of the Trinidad and Tobago Extractive Industries Transparency Initiative (TTEITI) implementation. The objectives of improving openness and accountable management of the public purse, including responsible management of revenues from extracting natural resources, are anchored in its mission to bring about greater levels of disclosure and information to the public. It is through the promotion of progressive reporting and financial declaration that any opacity is removed, which is essential in enhancing the country’s reputation and improving its international credit ratings and perceptions.