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S&P affirms T&T’s investment grade rating

Published: 
Wednesday, December 24, 2014

Standard & Poor’s Ratings Services (S&P) has affirmed its ‘A/A-1’ long- and short-term sovereign credit ratings on T&T. The outlook remains stable. “Our ‘AA’ transfer and convertibility assessment for T&T is unchanged,” S&P said. Giving its rationale, S&P said: “T&T’s net external asset position, low external vulnerability, and stable political system support the ratings. The country’s long-established parliamentary democracy and social stability should sustain political consensus on economic policies.”

The fate of the energy sector is tied to T&T’s prosperity and sovereign credit rating, S&P said. 

“Rapid growth led by the energy sector more than doubled T&T’s per capita GDP over the last decade to a projected US$21,900 in 2014. The large energy sector sustains long-term growth prospects and provides substantial fiscal revenues that should allow the government to maintain moderate debt levels. The country’s average growth rate over the next four years is likely two per cent, depending largely on energy output and prices,” S&P said.

At the same time, the energy sector exposes the economy to terms-of-trade shocks. “Even though it accounted for less than four per cent of employment, it nevertheless contributed 43 per cent of gross domestic product (GDP) and 85 per cent of merchandise exports last year,” the ratings agency said.

Other sectors of the economy—whose expansion could help attenuate this vulnerability—are developing slowly, S&P said: The country’s public finances are therefore vulnerable to a prolonged and substantial drop in fiscal revenues from the energy sector. Such revenues have been about 17 per cent of GDP in recent years.”

“Recent shortcomings in official data have reduced economic transparency, especially in the country’s balance-of-payments. We estimate T&T’s gross external financing needs at just below 60 per cent of current account receipts (CAR) plus usable reserves on average for 2014-2016. 

“We project the public sector, as well as the financial sector, will remain in a net external asset position in the coming four years. We project that narrow net external debt will exceed negative 100 per cent of CAR in the next three years and net external debt will exceed negative 140 per cent of CAR. Under our base case, T&T’s external position is likely to remain stable as current account surpluses balance capital account deficits.”

An additional credit strength is the government’s Heritage and Stabilization Fund (HSF), which holds fiscal assets of about 19 per cent of GDP invested abroad and should sustain long-term external and fiscal flexibility.

“We expect that the increase in government debt as a share of GDP will be about three per cent in the coming three years and general government interest payments will remain below ten per cent of revenues. Net general government debt (including central bank debt) is likely to be about 20 per cent of GDP.  

S&P said the stable outlook reflects its expectation that T&T will “continue to enjoy a sound external profile thanks to persistent current account surpluses and largely local financing of the public-sector deficit. The increase in exploration activities in the oil and gas sector in recent years should sustain energy production over the coming decade, contributing to long-term economic growth. 

“We expect that a moderate pace of GDP growth—two per cent on average—over the coming four years and limited fiscal deficits will lead to a stable or only modestly rising burden of government debt.” A sustained fall in global energy prices would hurt fiscal revenues, dampen GDP growth, and weaken T&T’s external liquidity, S&P said. Poor GDP growth could result in a rising general government debt burden, potentially exacerbated by unexpected contingent liabilities from public-sector enterprises. “

Failure to take timely and sufficient steps to address the deterioration of the country’s fiscal and external profile could result in a downgrade,” S&P said. Success in boosting energy exploration and production levels, as well as in enlarging downstream activities, could improve long-term GDP growth prospects. “That, along with steps to strengthen non-energy fiscal revenues, would gradually improve government finances and reduce the sovereign’s debt burden,” S&P said.

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