Last week we ex­am­ined the IMF Ar­ti­cle IV con­sul­ta­tion re­port and its growth pro­jec­tion for the lo­cal econ­o­my. We not­ed that the growth in the three years 2021-23 was due large­ly to a price ef­fect. The prices of nat­ur­al gas and petro­chem­i­cal ex­ports rose be­cause of the war in Ukraine and a post-COVID lock­down surge in de­mand even though pro­duc­tion de­clined. We con­trast­ed the op­ti­mism of the IMF re­port with its warn­ing … “The bal­ance of risks is tilt­ed to the down­side.”

We com­ment­ed on the Fi­nance Min­is­ter’s af­fi­davit re­gard­ing the Civ­il Ap­peal CA P351 of 2023 (Ter­risa Dho­ray and the AG and the TTRA) not­ing that it pro­vid­ed a re­al­is­tic as­sess­ment of T&T’s vul­ner­a­bil­i­ty in its con­tin­ued de­pen­dence on the en­er­gy sec­tor. The min­is­ter al­so in­di­cat­ed that the prospects for im­prov­ing tax rev­enues for the next three years were bleak with­out the TTRA be­cause the ex­ist­ing tax ad­min­is­tra­tion process­es were weak. His ar­gu­ment is re­al­is­tic be­cause the ben­e­fit of any pol­i­cy change needs three to five years to have an im­pact.

The IMF projects con­tin­ued deficits as the Gov­ern­ment’s ex­pen­di­ture will in­crease nat­u­ral­ly in line with in­fla­tion and salary ad­just­ments over the next three years as tax rev­enues are like­ly to de­cline with weak­er gas pro­duc­tion.

Bud­get deficits are fi­nanced by bor­row­ing. In ad­di­tion, gov­ern­ments will al­ways need to bor­row be­cause there are tim­ing dif­fer­ences be­tween tax re­ceipts and ex­pen­di­tures. Larg­er deficits in­crease the bor­row­ing re­quire­ment. The pro­ject­ed rev­enue short­fall not­ed by the Fi­nance Min­is­ter in his af­fi­davit leaves him in a quandary.

He states that T&T on­ly “achieved a bud­get sur­plus once in the last 15 years, in 2022 due to an in­crease in oil and gas price caused by the war in Ukraine.” (para 20)

In para­graph 27 he ac­knowl­edges the im­por­tance of in­ter­na­tion­al rat­ing agen­cies not­ing “… in­ter­na­tion­al rat­ing agen­cies have warned that if the Gov­ern­ment is not able to achieve fis­cal con­sol­i­da­tion in the near fu­ture the coun­try’s in­ter­na­tion­al cred­it rat­ing will be down­grad­ed.”

The com­ment is sig­nif­i­cant. By grad­ing a coun­try’s cred­it­wor­thi­ness, rat­ing agen­cies in­flu­ence the ap­petite of in­ter­na­tion­al in­vestors for a coun­try’s fi­nan­cial in­stru­ments (bonds) and the pric­ing of those in­stru­ments. The low­er the cred­it rat­ing, the high­er the in­ter­est rate. This in­creas­es bor­row­ing costs and debt ser­vice to the is­su­ing coun­try. The Fi­nance Min­is­ter says this very elo­quent­ly in para 28. “These rat­ings are im­por­tant … in that they im­pact the State’s ac­cess to for­eign cur­ren­cy, in­flu­ence the cost of gov­ern­ment bor­row­ing and in­form the per­cep­tions of in­vestors and de­vel­op­ment banks.”

There are three ma­jor rat­ing agen­cies; Fitch Rat­ings (Fitch), Moody’s In­vestor Ser­vices (Moody’s), and Stan­dard and Poor (S&P). Fitch and Moody’s cur­rent­ly rate T&T’s in­ter­na­tion­al bond at a notch be­low in­vest­ment grade, while S&P rates T&T as BBB-/Sta­ble/A3, a bor­der­line in­vest­ment grade (para 32). On Fri­day, June 14, Moody’s ad­just­ed the out­look slight­ly, from “pos­i­tive” to “sta­ble”.

S&P is the largest of the three rat­ing agen­cies. Its 2023 re­port/eval­u­a­tion of TT warned it could change its rat­ings if GDP per capi­ta does not re­cov­er in line with S&P’s fore­cast ex­pec­ta­tions, or the Gov­ern­ment debt/bud­get deficits are ma­te­ri­al­ly slow­er than an­tic­i­pat­ed. In short, T&T is on the edge of a rat­ings’ precipice. S&P’s next rat­ing eval­u­a­tion is due in Ju­ly 2024. The fear of a “low­er qual­i­ty rat­ing” as­so­ci­at­ed with a high­er risk of de­fault has caused the ur­gency to im­ple­ment the prop­er­ty tax and the TTRA.

Some may dis­miss this ex­pla­na­tion as an ex­ag­ger­a­tion. It is worth point­ing out that the most plau­si­ble rea­son for the abrupt clo­sure of the Petrotrin re­fin­ery was the fear of hav­ing to ac­cept re­spon­si­bil­i­ty for Petrotrin’s US dol­lar debt oblig­a­tions which amount­ed to rough­ly US$1 bil­lion-plus. Clos­ing the loss-mak­ing re­fin­ery put a cap on the debt and al­lowed the new­ly cre­at­ed Her­itage to gen­er­ate enough cash to re­pay the USD oblig­a­tions of the hold­ing com­pa­ny. As a re­sult, the Gov­ern­ment avoid­ed re­spon­si­bil­i­ty for these debts.

The Au­di­tor Gen­er­al’s au­dit dis­claimer on the 2023 Pub­lic Ac­counts would have been dis­turb­ing as it ques­tioned the ac­cu­ra­cy of the rev­enue re­port­ing and the size of the deficit.

In fair­ness, the min­is­ter has been dealt a dif­fi­cult hand. He con­trols nei­ther in­ter­na­tion­al prices nor nat­ur­al gas pro­duc­tion which have both de­clined. How­ev­er, over­play­ing the theme of “pru­dent fis­cal man­age­ment” when the coun­try ben­e­fit­ed from favourable in­ter­na­tion­al gas and petro­chem­i­cal prices has ex­posed the min­is­ter. The gam­ble that gas and petro­chem­i­cal prices would re­main buoy­ant and fa­cil­i­tate the ex­pen­di­ture pro­file has not ma­te­ri­alised. The down­side risks iden­ti­fied by the IMF in its re­port are in­con­ve­nient facts, not risks.

To sur­mount the fis­cal chal­lenges, the econ­o­my must grow, there­by in­creas­ing GDP and tax­able in­comes. This is not a short-term ex­er­cise. T&T is a small coun­try. To suc­ceed, poli­cies must be ap­plied con­sis­tent­ly, re­gard­less of which par­ty forms the ad­min­is­tra­tion.

Man­ag­ing the econ­o­my is a col­lab­o­ra­tive ex­er­cise be­tween the Gov­ern­ment and the pri­vate sec­tor (busi­ness­es and house­hold­ers) as the pri­vate sec­tor gen­er­ates wealth, not gov­ern­ments. But with­out sen­si­ble, well-im­ple­ment­ed poli­cies by the Gov­ern­ment, the pri­vate sec­tor will strug­gle. The neg­a­tive plat­form rhetoric and un­sta­ble crime sit­u­a­tion are draw­backs. A coun­try grows when there is the rule of law, peace, sta­bil­i­ty, and or­der.

Mar­i­ano Browne is the Chief Ex­ec­u­tive Of­fi­cer of the UWI Arthur Lok Jack Glob­al School of Busi­ness.