The coupon or 4.5 per cent interest rate obtained from Government's US$1 billion ten-year bond is a "positive development," RBC Royal Bank said in a statement to the T&T Guardian.
"Considering the Moody's rating, the size of the issue, the current oil price scenario, and that the Government initially expected to pay a coupon around 4.625 per cent, the fact that they landed on 4.5 per cent based on 3.5 times oversubscription, could be seen as a positive development. Our information tells us that local accounts received on average 20 per cent of their expected orders. This will lead to fairly active secondary market trading as local investors try to secure more of the bond.
"According to Central Bank statistics, gross public sector debt outstanding stood at $108.7 billion in March 2016, which is 60.5 per cent of GDP, which is already over the debt sustainability threshold. This means that each additional dollar of debt actually has a negative impact on growth.
"Add to this the US$1.0 billion or roughly $6.7 billion, and US$300 million from CAF, and $3.0 billion currently being raised domestically–this gives roughly a total of about $120 billion–an increase of 10.4 per cent in four months over the March 2016 total."
The bank warned of "possible negative ratings implications from this steep increase in debt, combined with the drawdown on the Heritage and Stabilisation Fund, and the current economic contraction.
"However, the fact that the Government was able to raise these funds before any downgrade, particularly from Moody's, into non-investment grade territory, could be considered a pro-active and positive development."
Specifically on the investment rating for the bond, RBC said the the rating assigned by Moody's for the bond of Baa3 with a negative outlook the lowest investment grade rating. Any lower and it would be considered non-investment grade or junk.
The bank suggested that the funds be used for capital spending.
"The Government stated that the proceeds of this bond will be used for the development programme over the current and 2016-17 fiscal years, but it is unclear what specific projects these funds have been earmarked for. Assuming that these funds would be used for capital spending in any event, this would be considered positive, but not so if used to finance recurrent expenditure," RBC said.