New York, May 22, 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook on the Government of Trinidad and Tobago's ratings
to negative from stable. At the same time, the government's
long-term issuer and senior unsecured debt ratings have been affirmed
The negative outlook reflects increased downside risks to Trinidad and
Tobago's economic and fiscal strength stemming from medium-term
challenges that have now been exacerbated by the severe shock to global
oil and gas demand and prices, triggered by the coronavirus pandemic.
The negative outlook is also informed by uncertainty regarding the degree
to which the government will be able to offset revenue losses over time
and sustain robust economic growth and budgetary outcomes conducive to
a stabilization or gradual reduction in its debt burden. In Moody's
view, fiscal and debt dynamics are highly sensitive to a recovery
in the energy sector and risks to government debt ratios remaining at
higher levels have materially risen.
Trinidad and Tobago's government's balance sheet has weakened since
the previous oil price shock in 2015, notwithstanding recent fiscal
consolidation efforts, leaving the sovereign's credit profile exposed
to a further prolonged period of depressed oil and gas prices or lower
investment in the energy sector than what the authorities currently expect.
In addition, despite renewed efforts, limited prospects for
economic diversification and institutional constraints will continue to
limit the shock absorption capacity of the economy.
The affirmation of Trinidad and Tobago's Ba1 rating recognizes that the
sovereign maintains sizable fiscal buffers, which underpins the
government's fiscal strength, low government liquidity risks
and limited external vulnerabilities.
The rapid and widening spread of the coronavirus pandemic, which
has led to a sharp deterioration in the global economic outlook and,
relatedly, to a large fall in the price of oil, has created
an unprecedented shock to a wide range of regions and markets.
Moody's regards the coronavirus outbreak as a social risk under its ESG
Trinidad and Tobago's long-term foreign-currency bond ceiling
remains unchanged at Baa3. The foreign-currency bank deposit
ceiling remains at Ba2, while the local-currency bond and
bank deposit ceilings remain at Baa2. The short-term foreign-currency
bond and bank deposit ceilings remain unchanged at P-3 and Not
Prime (NP), respectively.
RISKS OF LASTING NEGATIVE IMPACT ON ECONOMIC STRENGTH FOLLOWING THE CORONAVIRUS
The deep global economic recession that Moody's expects in 2020
triggered by the pandemic will reduce prices and demand for oil and gas
products, and while the rating agency expects a recovery in 2021,
risks are tilted to the downside. A period of prolonged lower prices
and depressed demand would have a lasting impact on Trinidad and Tobago's
medium-term economic growth given the relevance of energy sector
dynamics on GDP growth. Oil and gas products account for about
26% of GDP and 80% of exports. Importantly,
without a strong recovery in energy production levels in the country relative
to 2019-20 it would be difficult for Trinidad and Tobago to post
positive real GDP growth - real GDP has contracted every year since
2016 and is expected to do so again in 2020. If prices were to
remain depressed in the coming years or if the private companies that
dominate the energy sector in Trinidad and Tobago were to decide against
ramping up investment, the continuation of consecutive years of
economic stagnation or contractions could follow.
While the government of Trinidad and Tobago has lowered its forecasts
for oil and gas prices in 2020 through 2022, the authorities still
expect high investment levels in the energy sector and project a very
strong production rebound in 2021 and 2022. As Moody's baseline
scenario assumes weaker gains in oil and gas production levels in the
coming years, lower growth in the energy sector, coupled with
a sharp decline in the non-energy sector derived from "shelter-in
place" policies to contain the spread of the coronavirus,
will lead real GDP to contract by 4.3% in 2020 followed
by a moderate recovery of 3% growth in 2021.
Despite renewed efforts, limited prospects for economic diversification
and institutional constraints will continue to limit the economy's
shock absorption capacity and the country's growth potential.
The business environment remains challenging, which raises the cost
of doing business and impedes investment activity. Other factors,
such as skills mismatches in the labor force, pose challenges to
the development of a more robust non-energy sector of the economy.
Government bureaucracy also weigh on the investment climate.
RISKS TO DEBT STABILIZING GIVEN THE SENSITIVITY OF FISCAL AND DEBT METRICS
TO A RECOVERY IN THE ENERGY SECTOR
Moody's expects the sharp GDP economic contraction in 2020 to significantly
reduce government revenue this year. This, in addition to
a modest increase in government spending relative to 2019 to address health
risks and mitigate the negative economic impact of the pandemic,
will lead to a rise in the fiscal deficit to around 10% of GDP
Looking beyond the shocks of 2020, Moody's believes there
is relevant risk in the ability of the government to sufficiently curb
expenditures and materially improve debt dynamics in the medium term,
even more so if government revenue does not recover as much as the authorities
expect. While the rating agency expects the fiscal stimulus measures
implemented to address the pandemic to be scaled back in 2021, and
assumes a recovery in energy prices and production to increase government
revenue next year, Moody's believes that fiscal consolidation
efforts on the expenditure side could prove insufficient to place the
debt trend on a sounder footing.
Measures that could also help arrest the debt trend, such as phasing
out a significant part of transfers to state-owned enterprises
(SOEs), are politically sensitive and therefore challenging to implement
since the government plays an important role in maintaining employment
levels and domestic demand through its spending on social programs and
transfers to public-sector enterprises. That said,
after the 2015 oil price shock, the government did cut spending
on goods and services and capital expenditures, and reduced subsidies
and transfers to SOEs, including the closure of a loss-making
refinery. While the fiscal consolidation implemented in 2016-17
was larger and more effective than what Moody's had initially anticipated,
demonstrating institutional capacity to do so, it still accounted
for only around half of the lost government revenue, and the policy
response came in mid-2016 and 2017, after the impact of the
oil price shock in government revenue was evident.
Moreover, downside scenarios highlight how sensitive GDP growth
and debt dynamics are to drops in energy prices and to oil and gas production
assumptions, underscoring the impact a prolonged period of lower
oil prices or depressed demand would have in Trinidad and Tobago's
credit profile. Under Moody's baseline scenario, debt
will increase to 78% of GDP in 2021 from 64% in 2019.
In a scenario where gas prices remain low, or in which private investment
in new wells is not being carried out, debt could increase to a
range of 81%-84% of GDP by 2021.
RATIONALE FOR THE AFFIRMATION OF THE Ba1 RATINGS
Moody's decision to affirm Trinidad and Tobago's Ba1 rating recognizes
that the sovereign maintains sizable fiscal buffers, which underpins
the government's fiscal strength, low government liquidity
risks and limited external vulnerabilities.
The assets at the Heritage and Stabilization Fund (HSF) provide a sizable
fiscal buffer, supporting our assessment of fiscal strength.
The rules that allow withdrawing from the fund are strict and the government
has tapped it only three times. As of 30 April 2020, the
stock of assets in the fund amounted to $6.19 billion (or
26% of our estimate for 2019 GDP). These assets are liquid
and invested in international equities and fixed income assets.
The authorities secured legislative authorization to withdraw up to $1.5
billion (6% of our estimate for 2019 GDP) from the HSF to cover
part of this year's fiscal deficit. That said, the
authorities do not expect to withdraw the entirety of the approved amount
this fiscal year. Moody's believes the authorities may be
eligible to withdraw an additional amount, under the rules of the
HSF, in the next fiscal year. As a result, the rating
agency expects the HSF to decline to 20% of GDP by the end of 2021
from the current 26% of GDP.
Trinidad and Tobago also has low government liquidity risks due to ample
access to a relatively deep domestic financial market. In the past,
the government has comfortably met most of its financing needs from domestic
funding sources, which have covered on average around 80%
of its total needs. Given the significant increase in gross financing
needs for 2020, which the authorities estimate at around 15%
of GDP, the government plans to complement domestic market issuances
with multilateral financing and withdrawals from the heritage stabilization
funds, as well as tap international markets to refinance a maturing
In terms of external vulnerabilities, pressures are contained by
a positive international investment position, recurring current
account surpluses (although Moody's expects a deficit this year),
and a low level of external debt payments relative to international reserves.
A large stock of international reserves provides a significant financial
buffer and contains external pressures associated with imbalances in the
foreign exchange market. That said, foreign exchange shortages
and a consistent balance-of-payments deficit have contributed
to a decline in international reserves to less than $7 billion
in December 2019, from a peak of around $12 billion in December
2014. Foreign exchange shortages continue to affect businesses,
particularly small and medium-sized businesses, manufacturers
and retailers, weighing on growth prospects in the non-energy
sector. Despite recurring current account surpluses, financial
outflows and significant net errors and omissions have resulted in a balance
of payments deficit over the past 5 years.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental risks are derived from carbon transition. Under a
scenario of a gradual slowdown and eventually fall in hydrocarbon demand,
Trinidad and Tobago's credit profile would face downward pressure,
albeit over the longer term. Given the country's small size and
location in the Caribbean basin, Trinidad and Tobago is also exposed
to regular hurricanes. However, the country lies on the south
of the Hurricane belt, and as such is not as exposed as other Caribbean
Social risks carry limited weight in Moody's credit assessment of
Trinidad and Tobago. Moody's regards the coronavirus outbreak as
a social risk under its ESG framework, given the substantial implications
for public health and safety. The outbreak will test the country's
welfare infrastructure, but Moody's does not expect social
risks to materially impact the credit profile. Although the population
is markedly divided by ethnic lines, any potential tensions are
channeled institutionally, with political parties prizing social
Governance issues are a key limitation to Trinidad and Tobago's credit
profile, as reflected in Moody's institutions and governance
strength assessment. Despite meaningful efforts in recent months
to improve data reporting, significant data limitations and institutional
constraints limit the government's capacity to execute fiscal policy,
weakening the sovereign's credit profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a rating upgrade is unlikely at this
time. An improvement in government debt ratios and debt affordability,
particularly if supported by an increase in non-energy revenue
or improved tax collection rather than asset sales or fiscal buffer drawdowns,
would stabilize the outlook and, if sustained, result in an
upgrade. Material progress in institutional and economic reforms
that increase competitiveness and the economy's shock absorption
capacity would also likely result in a higher rating.
Poor prospects for the oil and gas industry, affecting economic
growth and straining government finances beyond what is captured in Moody's
current baseline, would add negative pressure to the rating.
The rating would be downgraded if government debt ratios were to continue
their upward trend beyond this year, due to the absence of healthier
growth prospects and revenue-enhancing or fiscal adjustment measures
aimed at stabilizing the debt ratios over time. The need for mounting
government support for state-owned enterprises, resulting
in an increase in government debt, would weaken the government's
balance sheet and likely result in a downgrade. A weakening of
the balance-of-payments position would increase external
vulnerability risks over time and could also lead to a downgrade.
GDP per capita (PPP basis, US$): 32,284 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.2% (2018
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1% (2018
Gen. Gov. Financial Balance/GDP: -3.6%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 5.8% (2018 Actual) (also
known as External Balance)
External debt/GDP: 46.8% (2018 Actual)
Economic resiliency: ba3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 19 May 2020, a rating committee was called to discuss the rating
of the Government of Trinidad and Tobago. 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 institutions and governance strength, have not materially
changed. The issuer's susceptibility to event risks has not materially
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating 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.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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At least one ESG consideration was material to the credit rating action(s)
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653