In recent weeks, the credit events of several sovereigns have commanded the attention of investors internationally. The downgrade of key European nations Greece, Portugal and Ireland, and the threat of a possible downgrade of the United States, increased volatility in international financial markets. In the Caribbean region, Barbados' local currency rating was downgraded and both the local and foreign currency ratings were assigned negative outlooks. On June 5, Moody's affirmed T&T's Baa1government bond rating, while maintaining the stable outlook of the country's credit standing.
Rationale for rating
Sovereign credit rating indicates a country's ability to repay its borrowing and takes into consideration the country's economic performance, political strength and level of investor confidence. T&T's Baa1 credit rating from Moody's is the second highest sovereign rating in the Caricom region, after the Bahamas Aa2 sovereign rating. The Baa1 rating assigned to T&T's bonds indicates the country has adequate capacity to repay its borrowings and is investment worthy. Moody's rating places T&T on the same credit standing as Mexico, Russia, Bahrain and Thailand. It should be noted another international credit rating agency, Standard and Poor's, assigned a rating of A to T&T, which is two notches above the Baa1 rating by Moody's. Moody's indicated T&T's strengths include a relatively high level of economic development, low government debt levels and a solid institutional framework.
Over the past decade, T&T benefitted from strong energy sector revenues and experienced buoyant growth, as indicated in Figure 1. However, following the 2008 economic downturn, the country's recovery was muted. The economy expanded by 2.5 per cent in 2010, and the Central Bank forecasts a growth rate of 2.0 per cent in 2011, in stark contrast to the 9.0 per cent average growth rate of the economy for the 2003-2008 period. Similar to most oil exporting countries, the Dutch Disease effect on T&T resulted in low levels of diversification within the economy and a high dependence on the energy sector. In 2010, the energy sector accounted for 35.7 per cent of gross domestic product (GDP) and 43 per cent of government revenues (Figure 2). T&T's dependence on the energy sector heightens the economy's vulnerability to external oil price shocks. This inherent vulnerability within the economy increases susceptibility to boom-bust economic cycles and indicates the need for greater diversification of the country's non-energy sector.
Pre-2008 debt levels
When compared to other Baa1 peers, GDP per capita is "almost double the median of Baa sovereigns," owing to the country's oil and gas natural resources. However, Moody's expressed concerns about limited success at economic diversification and the country's future non-energy driven growth prospects.
The economy's dependence on oil and gas resources was highlighted following the financial crisis when depressed energy sector prices caused a significant decline in government revenues in 2009 and the economy contracted by 3.5 per cent. Moody's noted T&T had some success in improving its debt levels prior to the financial crisis in 2008. This is reflected in the declining debt-to-GDP ratios as seen in Figure 3. While debt levels improved prior 2008, it is significantly higher than Russia-another comparable Baa1energy-based economy. Russia's debt-to-GDP ratio rose to 9.5 per cent from 7.7 per cent during 2006 to 2010. However, T&T's debt-to-GDP ratio increased to 52 per cent from 39.7 per cent during the same period. The deterioration in T&T's debt levels after the financial crisis was attributable to declines in energy revenues, which resulted in amplified government borrowings. The increase in debt levels was also a result of costs associated with the rescue of the distressed financial institutions, Clico and the Hindu Credit Union.
Moody's noted the government's implicit guarantee on debt issued by the country's public enterprises has led to an increase in the overall debt levels. As of April 2011, there were 44 fully government-owned public enterprises within the local economy and nine companies which were partially owned by the Government. As such, any borrowings undertaken by these companies are contingent liabilities of the Government and will increase the country's overall debt levels. Moody's indicated a possible negative outlook or downgrade of T&T's credit standing may occur if the country's debt levels deteriorate further. The costs of bailing out the distressed financial institutions are not resolved and may place further pressure on the country's debt levels. The onus remains on local policymakers to ensure the country's public debt metrics remain at their current low level to avoid any deterioration of its fiscal position and reduce the likelihood of any downgrade on the country's credit standing. Theoretically, an improvement in credit ratings lowers the perceived risk attached to a country and reduces the country's cost of borrowing in financial markets. The affirmation of T&T's Baa1 rating by Moody's, allows the government to maintain its relatively low cost of borrowing in international financial markets. Additionally, by Moody's maintaining T&T's Baa1 rating, investors internationally will continue to be attracted to the relative stability and investment worthiness of the local economy, potentially increasing foreign direct investment inflows.
Conclusion
The confirmation of T&T's credit ratings is a sign that the country is following the path to sustained economic development. However, the vulnerabilities of the local economy highlighted by Moody's should be noted. In the event of any significant increases in government borrowings and a deterioration of the country's fiscal position, there may be a downgrade in the country's credit ratings.
On the other hand, T&T may benefit from an improvement in credit standing if economic growth picks up and the country's debt levels remain at their current levels.