A few weeks ago, the ubiquitous headlines revealed a downgrade from Standard and Poor’s (S&P) regarding the national economic outlook. Given the recriminations and the ‘confuffling’ banter that usually occupies the political space after such an announcement, I opted to go straight to the source of the information—the S&P website (https://www.standardandpoors.com).
In case you wonder about the credibility of S&P, they have been in business for more than 150 years and are recognised as the world’s leading provider of credit ratings for government, corporate, structured finance entities, among others.
S&P ratings are considered essential to driving growth, providing transparency and helping educate market participants so they can make decisions with confidence.
The rating for T&T making the headlines was a lowering to ‘BBB’ From ‘BBB+’ on Economic and Fiscal Stress. The lower rating notwithstanding, the national economic outlook remains “stable” according to this global agency.
Credit ratings are opinions about credit risk. In this case the S&P ratings are an opinion about the ability and willingness of the T&T government to meet its financial obligations in full and on time.
The range of S&P ratings is AAA: Extremely strong capacity to meet financial commitments. Highest rating; AA: Very strong capacity to meet financial commitments; A: Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances; BBB: Adequate capacity to meet financial commitments, but more subject to adverse economic conditions; BBB minus (BBB-) : Considered lowest investment-grade by market participants.
It should be noted that “Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.”
To be honest it really should come as no surprise that the country’s rating was lowered given lower-than-expected energy production and consequently lower economic growth.
Remember the mid-term review and the disclosure that lower gas production was likely to threaten Atlantic LNG operations? Remember the “whirlwind gas tour” led by the PM to multinational energy giants shortly after the mid-term review? Remember the PETROTRIN Bullet payment of US$850 million due in August 2019? And the recent Petroleum Holdings Limited (PETROTRIN successor) borrowing of about US$720 million?
Well, S&P simply digested information available to them and deduced that the government’s revenue base (still strongly predicated on the Oil and Gas sector) was weak and would delay plans to balance the budget by fiscal year 2020–2021. A lot of borrowing is being guaranteed by the government which means debt is increasing.
You may recall that since assuming office the Minister of Finance has signalled his intent to have a balanced budget—where revenues and expenditures are in sync—by 2020. Such an accomplishment would be a feat given the successive fiscal budgets (where expenditure has been greater than revenue) that have occurred in the past.
S&P’s lower rating also was based on yet-to-be-delivered institutional reforms to (a) strengthen revenue collection (remember the Revenue Authority?) and (b) improve the provision of timely economic data (remember the reforms to the CSO?).
The combination of the weak economic base and the as yet to be seen institutional reforms weaken the country’s ability to withstand external shocks. The letters of the downgrade notwithstanding, there continues to be a stable outlook for given what S&P describes as “…large government financial assets [that] will continue to provide a fiscal and external safeguard that will mitigate economic volatility…”. One presumes this is in reference to the balances in the Heritage and Stabilization Fund.
At the risk of sounding facetious, we should breathe a sigh of relief that S&P’s focus is primarily on things economic. Imagine if they decided to add to the A&B of their ratings a “C” for crime or even an “F” for the fear that the society continues to live in—those factors would certainly swing the ratings pendulum from “stable” to …. ? Well, that’s just my point of view.