Government response to oil prices triggers Moody’s downgrade for Trinidad
PORT OF SPAIN, Trinidad – International credit rating agency Moody’s Investors Service has downgraded Trinidad and Tobago, suggesting that the policies government has implemented in response to falling oil and gas prices won’t be enough.
Moody’s downgraded Trinidad and Tobago’s ratings to Baa3 from Baa2 and assigned a negative outlook.
“Despite the authorities’ fiscal consolidation efforts, low oil and gas prices will negatively and materially undermine the country’s economic and government financial strength at least throughout 2018,” he said.
“There is a high likelihood that the policy response to the commodity price shock will not be as timely and effective as required due to lack of macroeconomic data and weak policy execution capacity.”
Trinidad and Tobago is highly dependent on hydrocarbons as economic growth drivers, with oil, gas and petrochemical sectors accounting for 91 percent of total exports and 35 percent of GDP.
Even before the decline in oil prices – the oil price roughly halved between September 2014 and September 2015 –, economic growth in the twin-island republic had slowed down as a result of maturing oil and gas fields and repeated disruptions to gas production, Moody’s noted.
“For 2016, however, we expect GDP to contract by 2.5 percent, driven by a decline in production in the energy sector and by the impact of fiscal consolidation, as well as by weaker growth in construction and distribution. Growth will remain subdued in 2017-18, around one percent per annum, due to the continued impact of low oil prices on the oil sector and the negative effect of fiscal adjustments. In 2017, the completion of several gas projects will modestly boost energy production and will partially compensate what would otherwise be a contraction in GDP,” Moody’s said.
It added that the absence of key macroeconomic data and the low quality of statistical information suggest a high likelihood that government’s fiscal and economic policy response will be neither timely nor sufficient to arrest the deterioration in the government’s financial strength.
“Although some progress has been made to address this long-standing issue, we do not expect significant progress over the next one to two years. Even though the fiscal data are more reliable, the institutional and execution capacity of fiscal policy remains weak. Some of the limitations include lack of elements to perform sensitivity analysis on the impact of oil prices in government finances, as well as on the estimates on how the Value Added Tax (VAT) reform will impact revenues,” Moody’s said.
It added that government also lacks a rigorous medium-term fiscal strategy and a clear debt financing strategy, limiting visibility beyond one fiscal year.
Moody’s said it would consider moving the outlook to stable if it were to conclude that revenue and expenditure adjustments, in addition to one-off revenue measures, were likely to lead to lower fiscal deficits in the 2016/17 and 2017/18 fiscal years.
9 total views, 1 views today