Moody’s changes T&T’s outlook to ‘stable’ from ‘positive’

INTERNATIONAL ratings agency Moody’s has changed this country’s outlook from positive to stable and affirmed our Ba2 long-term local and foreign currency issuer and senior unsecured ratings.

According to Moody’s the change in the outlook to stable was driven by increasing external vulnerability risks as highlighted by the accelerated pace of liquid foreign exchange reserves drawdown observed over the first four months of 2024.

“The drawdown is the result of declining energy receipts owing to declining gas prices and significant capital outflows, indicating higher than previously anticipated macroeconomic and fiscal adjustment costs for the next two years until large new natural gas developments are projected to come onstream starting 2026 or 2027,” it stated.

Moody’s stated that following a period of foreign exchange reserve stability in 2022 until mid-2023, liquid foreign exchange reserves (defined as gross reserves excluding gold and SDR, FX reserves) resumed a decade-long downward trend that was further accelerated over the first four months of 2024.

“This drawdown of FX reserves to $4 billion in April 2024 from $4.9 billion in December 2023 is mainly driven by declining energy receipts owing to declining gas prices and significant capital outflows, exacerbated by the persistent interest rate differential with the US,” it stated.

“Compared to one year before, FX reserves as of April have declined by an unprecedented 28%, indicating a higher than previously anticipated degree of capital flow volatility during the transition phase until large new natural gas developments are projected by the government to come onstream starting 2026 or 2027. The weaker level of FX reserve coverage that Moody’s estimates at 5.5 months of imports (based on goods and services imports as of Q3 2023) reduces the economy’s external shock absorption capacity in case this trend persists,” Moody’s stated.

Moody’s stated that these increased downside risks balance upside risks resulting from the Government’s continued economic and fiscal revenue diversification effort in light of a mature domestic energy sector and volatile natural gas prices.

“For instance, despite lower than budgeted energy revenue projected for fiscal 2024 (ending September 2024) according to the government’s mid-year review, Moody’s projects the fiscal deficit to remain close to the budgeted 2.7% of GDP in light of the government’s spending reduction and non-energy revenue raising efforts,” it stated.

“The Government is expected to continue fiscal consolidation through revenue enhancing measures such as the establishment of the new Revenue Authority (TTRA), as well as the implementation of property and gaming and gambling taxes. The government also continues to make progress with the gradual phasing out of remaining fuel, electricity and water subsidies with the objective to increase the operational efficiency of public utilities to ultimately reduce the large transfer and subsidies bill which was recorded at about 17% of GDP in fiscal 2023,” Moody’s stated.

Rationale for the Ba2 affirmation

Meanwhile Moody’s stated that the Ba2 rating is supported by a return to sustained positive growth mainly driven by the non-energy sector, following several years of contraction owing to the weak energy sector performance.

“The Ba2 rating also takes into account Trinidad & Tobago’s moderate institutional and governance strength and moderate event risk, including external vulnerability risk. At the Ba2 rating level, Moody’s expects the credit profile to be resilient to potential project delays and increased capital flow volatility around current FX reserve levels,” it stated.

Moody’s stated that this country’s return to positive growth was mainly driven by the non-energy sector, following several years of contraction owing to the weak energy sector performance as existing fields mature and major new projects are scheduled to come onstream in 2026.

It stated that the establishment of the EXIM Bank has helped channel scarce foreign exchange for intermediate goods imports for the development of new export markets in particular in the manufacturing sector.

“The government’s diversification strategy to mitigate mounting carbon transition risks over the next decade includes the launch of a green hydrogen road map in December 2022, as well as the installation of a combined 112-megawatt solar power project — the largest in the Caribbean — to help decarbonise power generation and free up gas for export,” it stated.

“On the fiscal side, Moody’s projects the adjusted general government debt ratio (defined as debt of the central government debt plus guaranteed debt of non-self serviced state-owned enterprises and statutory authorities) to increase to 73.4% in fiscal 2024, a relatively high level, and stay at similar levels in fiscal 2025 before declining thereafter, driven by a stronger energy production profile and improved revenue generation capacity. Moody’s assessment of fiscal strength and the rating also takes into account the benefits to the government balance sheet from significant fiscal buffers via the Heritage and Stabilization Fund at about 20% of GDP—plus cash buffers at a similar amount—which mitigates fiscal risks,” Moody’s stated.

Moody’s stated that a solid strength of civil society and the judiciary assessment supports Trinidad & Tobago’s institutions and governance strength, reflecting its constitutional system of checks and balances, and institutional transparency.

“Meanwhile, external vulnerability risk drives the sovereign’s moderate event risk exposure, capturing falling FX reserves despite large current account surpluses, together with banking sector risk reflecting potential risks to the government balance sheet stemming from the size of the domestic banking sector and credit unions in case of a systemic crisis,” it stated.

Moody’s said the local currency (LC) and foreign currency (FC) country ceilings remain unchanged at Baa2 and Ba1, respectively.

“The three-notch gap of the LC ceiling at Baa2 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 FC ceiling remains at Ba1. The two-notch gap with the LC 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,” it stated.

Moody’s stated that on June 12, a rating committee was called to discuss this country’s rating.

“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 increased. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risk has not materially changed but external vulnerability risk has increased,” it stated.

Factors that could lead to an upgrade or downgrade of T&T’s ratings

“T&T rating would likely be upgraded if government measures prove effective in addressing the weakening energy production trend with a boost to domestic oil or gas production or by accessing gas supplies from neighbouring countries. These elements would support growth and economic resiliency, providing the government with additional room to make continued progress with the structural economic diversification agenda, while containing external vulnerability risks. A track record of continued primary surpluses as targeted by the government that places adjusted general government debt/GDP on a downward trajectory would further strengthen the sovereign credit profile,” it stated.

“Conversely, a further substantial drawdown of foreign-exchange reserves as a result of capital outflows would adversely affect the sovereign credit profile, as would the stalling of fiscal reforms — for example, fuel subsidy reform and tariff liberalization — resulting in a sustained build-up in the debt ratio,” Moody’s stated.