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Rating Action:

Moody's downgrades Trinidad & Tobago's ratings to Ba2 from Ba1, changes outlook to stable from negative

19 Nov 2021

New York, November 19, 2021 -- Moody's Investors Service ("Moody's") has today downgraded the Government of Trinidad & Tobago's long-term issuer and senior unsecured ratings to Ba2 from Ba1. The outlook was changed to stable from negative.

The Ba2 rating reflects the sovereign's diminished shock-absorption capacity in the aftermath of the pandemic, evidenced by a materially higher general government debt burden of 85%-90% of GDP over the next three years, up from 62% in fiscal 2019 (ending September 2019). A higher debt burden will result in a weaker credit profile even with a strong economic recovery in 2022 and GDP growth of about 2% in 2023-24 driven to a large extent by both by higher energy prices and hydrocarbon production levels. Higher GDP growth will help arrest, but not fully reverse, the loss in real income - i.e., real GDP per capita in PPP terms - that has been recorded over the past decade. Stronger economic activity will support the authorities' fiscal consolidation efforts, but the mature profile of the hydrocarbon sector and limited progress in economic diversification are structural factors that continue to constrain Trinidad & Tobago's credit profile.

The stable outlook incorporates Moody's view that the government's efforts will prove effective in improving the fiscal position by increasing non-hydrocarbon revenue and curtailing spending. Fiscal and external buffers will continue to support Trinidad & Tobago's rating by limiting the sovereign's exposure to government liquidity and balance of payments risks in the case of adverse shocks.

Trinidad & Tobago's country ceilings were lowered by one notch. Namely, the local-currency ceiling was lowered to Baa2 from Baa1. The three-notch gap with the sovereign rating reflects the economy's significant exposure to the hydrocarbon sector with spillovers to activity in the non-energy sector, balanced by low exposure to domestic and geopolitical risk. The foreign-currency ceiling was lowered to Ba1 from Baa3. The two-notch gap with the local-currency ceiling captures potential transfer and convertibility risks reflected in the track record of balance of payments weakness over the past few years, which contributed to reported foreign exchange shortages and has the potential to affect the import capacity of small and medium-sized businesses in the non-energy sector.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Ba2

HIGHER DEBT BURDEN HAS WEAKENED THE SOVEREIGN'S SHOCK-ABSORPTION CAPACITY

The impact of the pandemic increased the general government debt-to GDP ratio to almost 85% at the end of fiscal 2021 from 62% in 2019. Moody's projects the debt ratio will remain in the 85%-90% range over the next three years. The higher debt burden, which compares with a 70% of GDP median among Ba-rated peers in 2021, is the result of both pandemic-related fiscal support measures that drove the fiscal deficit to 11.2% of GDP in fiscal 2020 and 9.2% in fiscal 2021, and a track record of successive economic contractions that have extended over a six-year period, with average annual contractions of 2.4% in 2016-19, followed by a 7.4% contraction in 2020 and a 1% decline in 2021.

Moody's expects the fiscal deficit to decline to 5.8% of GDP in fiscal 2022 and narrow further thereafter, with the sovereign projected to post a primary balance by fiscal 2024 from a primary deficit of 5.5% in fiscal 2021. Delivering on this front will depend on the authorities' ability to address fiscal challenges that involve increasing non-energy revenue and cutting spending. On the revenue side, the government has introduced a bill to implement gaming taxes starting fiscal 2022, in addition to legislation for the establishment of the Trinidad and Tobago Revenue Authority (TTRA) that will be operational starting in fiscal 2022, as well as property tax reforms. Spending reduction efforts will be directed to streamlining transfers and subsidies, which currently amount to 18% of GDP, reducing the share of SOE debt serviced by the government, and improving cost efficiency at SOEs.

Trinidad & Tobago's fiscal strength remains supported by the Heritage and Stabilization Fund (HSF), despite withdrawals that amounted to almost $1.0 billion (4.6% of GDP) in fiscal 2020 and another $892 million (4% of GDP) in fiscal 2021 -- amendments to the HSF Act adopted on 26 March 2020 allow for government withdrawals of up to $1.5 billion per fiscal year under specific circumstances, including the declaration of a dangerous infectious disease. At the end of fiscal 2021, the HSF's net asset value was $5.6 billion, equivalent to 25% of GDP.

LACK OF DIVERSIFICATION AND EXPOSURE TO CARBON TRANSITION MATERIALLY CONSTRAIN THE CREDIT PROFILE DESPITE IMPROVED NEAR-TERM GROWTH PROSPECTS

Moody's projects an economic expansion of 5.9% in 2022 driven by increased oil and gas production to be followed by annual GDP growth of about 2% in 2023-24 against the government's projections of growth above 3.5% in 2023 and 2024. Still, Trinidad & Tobago is a mature oil and gas producer where the hydrocarbon sector accounts for about 25% of GDP and close to 80% of exports. As part of diversification efforts, the government is promoting policies to support agriculture and reduce food imports, and expand manufacturing production. However, economic diversification takes time and structural factors including skills mismatches in the labor market, high import dependence, and shortages of foreign exchange, will likely limit diversification prospects.

The government remains focused on developing natural gas reserves, a cleaner fuel option, while heeding the energy transition imperative over the next decade. Significant reliance on hydrocarbons for government revenue and export earnings leaves Trinidad & Tobago highly vulnerable to price and production downturns. The erosion of income levels (as measured by real GDP per capita in PPP terms) to $23,359 in 2021 from $29,053 in 2015 on the back of adverse energy sector developments highlights this risk.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook captures the government's efforts to improve fiscal policy effectiveness by increasing non-hydrocarbon revenue, and to curtail spending. The current rating remains supported by the sovereign's fiscal and external buffers, which limit exposure to government liquidity and balance of payments risks in case of adverse shocks.

Exposure to balance of payment risks is mitigated by foreign exchange reserves that cover about ten months of prospective imports and provide a solid backstop for the currency peg to the US dollar. Moody's projects reserves will gradually increase driven by improved revenues from the energy sector.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE RISKS

Trinidad & Tobago's ESG Credit Impact Score is highly negative (CIS-4), reflecting very high exposure to environmental risks derived from carbon transition.

Trinidad & Tobago's exposure to environmental risks is highly negative (E-4 issuer profile score) and is related to carbon transition risk. With a gradual slowdown and eventual fall in hydrocarbon demand, Trinidad & Tobago's credit profile will face downward pressures in the longer term.

Exposure to social risks is moderately negative (S-3 issuer profile score). Historically, social considerations have not affected Trinidad & Tobago's credit profile significantly, although social demands for maintaining housing, education and health services could strain government finances. Although the population is markedly divided by ethnic lines, any potential tensions are channeled institutionally, with political parties prizing social stability.

The influence of governance on Trinidad & Tobago's credit profile is also moderately negative (G-3 issuer profile score), reflecting its weak government effectiveness. Despite significant efforts in recent months to improve data reporting, data limitations and institutional constraints limit the government's capacity to execute fiscal policy.

GDP per capita (PPP basis, US$): 25,022 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -7.4% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.8% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -11.3% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.1% (2020 Actual) (also known as External Balance)

External debt/GDP: 62% (2020 Actual)

Economic resiliency: ba3

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

On 16 November 2021, 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 not materially changed. The issuer's institutions and governance strength have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The systemic risk in which the issuer operates has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Sustained improvement in the government's debt burden and debt affordability, supported by an increase in non-energy revenue and improved tax collection (rather than asset sales or HSF drawdowns) would be credit positive. Significant and steady progress in structural reforms that lead to increased economic diversification and competitiveness would result in a higher rating, as well as a detailed strategy on how Trinidad & Tobago plans to manage carbon transition risks.

Prospects for the energy sector that turn out to be significantly below those incorporated into Moody's baseline with adverse implications for economic growth and government finances would have a negative impact on the rating. Underperformance on the part of the authorities on their fiscal consolidation efforts, particularly those involving non-oil revenue, would also result in a downgrade, as would the materialization of contingent liabilities from state-owned enterprises. A weakening of the balance of payments position that results in a material drawdown of external buffers would also lead to a lower rating.

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.

REGULATORY DISCLOSURES

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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