Last Thurs­day's S&P rat­ing re­port af­firm­ing Trinidad and To­ba­go's BBB- in­vest­ment grade rat­ing while shift­ing the out­look to neg­a­tive has, as ex­pect­ed, gen­er­at­ed a fair amount of com­men­tary. I did in­ter­act with one such com­ment on so­cial me­dia from a not­ed econ­o­mist who sug­gest­ed that “main­tain­ing in­vest­ment grade there­fore sig­nals low­er cred­it risk and sup­ports con­fi­dence in our fi­nan­cial sys­tem… Re­main­ing in­vest­ment grade im­proves the odds of at­tract­ing a wider set of in­vestors and se­cur­ing fi­nanc­ing on bet­ter terms and at low­er in­ter­est rates”.

This state­ment of re­as­sur­ance, how­ev­er well in­ten­tioned, rep­re­sents a dan­ger­ous mis­un­der­stand­ing of how cap­i­tal mar­kets ac­tu­al­ly func­tion and as I in­di­cat­ed in my re­sponse, mis­leads the pub­lic about the pre­car­i­ous­ness of our cur­rent po­si­tion. Over the past month of writ­ing this col­umn, I have re­peat­ed­ly set out that as a coun­try, we lack an un­der­stand­ing of how mar­kets work and this is why we are chal­lenged with our for­eign ex­change poli­cies, in par­tic­u­lar, and our eco­nom­ic poli­cies in gen­er­al.

Let me be clear about what a BBB- rat­ing with a neg­a­tive out­look ac­tu­al­ly means in prac­tice, not in the­o­ry. Yes, tech­ni­cal­ly BBB- re­mains in­vest­ment grade. But many in­sti­tu­tion­al in­vestors op­er­ate un­der strict man­dates that lim­it hold­ings to in­vest­ment grade se­cu­ri­ties, and a BBB- rat­ing al­ready sits at the ab­solute thresh­old for many of these in­sti­tu­tions.

Mar­kets are for­ward look­ing and the en­tire essence of mar­ket be­hav­iour is to at­tempt to front run what is like­ly to hap­pen. If one is able to es­tab­lish what is like­ly to hap­pen be­fore it hap­pens then you are able to prof­it from the price move­ment when it hap­pens. There is no prof­it from at­tempt­ing to trans­act in some­thing that is al­ready known be­cause by then the in­for­ma­tion is fac­tored in­to the price.

The neg­a­tive out­look from S&P sig­nals that a down­grade to BB+ is a re­al pos­si­bil­i­ty in the near term. Here is what hap­pens in the re­al world: port­fo­lio man­agers at pen­sion funds and in­sti­tu­tion­al in­vestors do not wait for the ac­tu­al down­grade. A neg­a­tive out­look on a BBB-rat­ed is­suer trig­gers proac­tive re­duc­tion in ex­po­sure be­cause these man­agers know that if the rat­ing drops to BB+, their man­dates will force them to sell, of­ten at a loss and in a po­ten­tial­ly illiq­uid mar­ket. The ra­tio­nal move is to be­gin re­duc­ing ex­po­sure now while mar­kets are rel­a­tive­ly sta­ble, not to wait for the forced fire sale.

The buy­ers at this stage are those who can in­vest be­low in­vest­ment grade and so the ar­gu­ment about a “wider set of in­vestors” and “se­cur­ing fi­nanc­ing on bet­ter terms” is not a re­al­is­tic one. The the­o­ret­i­cal dis­tinc­tion be­tween BBB- and BB+ is mean­ing­less in prac­tice when you sit at the cliff edge with a neg­a­tive out­look push­ing you to­ward it. The pool of in­vestors will­ing to hold T&T pa­per is al­ready shrink­ing. Our bor­row­ing costs are ris­ing.

We need to op­er­ate as if the mar­ket will price in the down­grade risk (like­ly with­in a year) and act ac­cord­ing­ly. That is ac­tu­al­ly how you avoid the down­grade. It should al­so be not­ed that one day af­ter the out­look re­vi­sion, S&P al­so re­vised the out­look to neg­a­tive from sta­ble on the long-term rat­ings on Re­pub­lic Bank and First Cit­i­zens Bank. This is nor­mal as their rat­ings will be tied to the coun­try rat­ing.

What would be of par­tic­u­lar con­cern is com­pa­nies with in­ter­na­tion­al bonds in is­sue that may need to re­fi­nance those bonds. That re­fi­nanc­ing, is like­ly to come at terms that are more chal­lenged than the ini­tial is­sue. This is where we shift the con­ver­sa­tion to the as­sump­tion that we have mean­ing­ful fis­cal buffers to weath­er the storm. The truth is that we don’t.

Im­me­di­ate­ly fol­low­ing the S&P an­nounce­ment, Fi­nance Min­is­ter Tan­coo is re­port­ed in the Trinidad Guardian to have said:

“Al­though this is a cau­tion­ary flag, it is not a rea­son to pan­ic,” Tan­coo stressed. “The neg­a­tive out­look re­flects da­ta from re­cent years, be­fore this Gov­ern­ment came in­to of­fice. It is proof of why our agen­da to re­store fis­cal dis­ci­pline, di­ver­si­fy the econ­o­my and re­build in­vestor con­fi­dence is both ur­gent and nec­es­sary.”

The Min­is­ter is cor­rect in sug­gest­ing that it is both ur­gent and nec­es­sary. In the past it was al­most a rou­tine to point to the Her­itage and Sta­bil­i­sa­tion Fund and our for­eign re­serves as proof of fi­nan­cial re­silience. That is no longer the case and has not been for a long time. Such ref­er­ences rep­re­sent­ed a cat­a­stroph­ic fail­ure to ac­count for what sits on the oth­er side of the ac­count­ing ledger.

Back­log

T&T has spent the past decade de­fer­ring oblig­a­tions, ne­glect­ing in­fra­struc­ture, and al­low­ing crit­i­cal sys­tems to de­te­ri­o­rate while con­grat­u­lat­ing our­selves on main­tain­ing head­line fis­cal met­rics. We have been gen­er­at­ing con­tin­gent li­a­bil­i­ties at a pace that would shock any­one who both­ered to add them up. These are not record­ed as debt in of­fi­cial fig­ures, but they rep­re­sent re­al claims on fu­ture re­sources that are now com­ing due.

Con­sid­er the wage ne­go­ti­a­tions back­log. Most pub­lic ser­vice wages have been frozen since 2014. The pre­vi­ous gov­ern­ment's of­fer for the 2014-2019 pe­ri­od im­plies a back­pay bill of $2.4 bil­lion for the core pub­lic ser­vice alone. Ex­tend that to all state em­ploy­ees and you dou­ble it to $4.6 bil­lion. More is now on the ta­ble. A ques­tion of­ten asked is “where will the mon­ey come from”. My ques­tion sits be­fore that – “Why do we con­tin­ue to dis­ad­van­tage work­ers by hav­ing ne­go­ti­a­tions back­logged for 10 years.” These are hid­den li­a­bil­i­ties where work­ers were in ef­fect be­ing asked to fi­nance the State, in much the same way that cor­po­ra­tions fi­nanced the State through the non pay­ment of VAT re­funds.

The sto­ry has al­ready evolved in­to bil­lions but it gets worse. Our pub­lic trans­port in­fra­struc­ture is al­so in­ad­e­quate and now we have to add a sig­nif­i­cant­ly de­te­ri­o­rat­ed road net­work. This is an­oth­er hid­den li­a­bil­i­ty be­cause there is now a back­log of road re­pairs that has to be fund­ed in or­der to pre­vent fur­ther de­te­ri­o­ra­tion. The rate of change of the de­te­ri­o­ra­tion is like­ly to ac­cel­er­ate as main­te­nance fal­ters.

The cost of de­fer­ral is that roads left to de­te­ri­o­rate re­quire far more ex­pen­sive re­con­struc­tion than rou­tine main­te­nance would have cost, and in the in­ter­im they im­pose mount­ing costs on the econ­o­my through ve­hi­cle dam­age, con­ges­tion, and safe­ty risks. Not to men­tion the in­creased use of for­eign ex­change for ve­hi­cles and parts and the high­er cost of in­sur­ance.

We are at a stage now where we can no longer pre­tend we are “sav­ing mon­ey” by not spend­ing what we need­ed to spend yes­ter­day or even to­day. We are cre­at­ing a li­a­bil­i­ty for to­mor­row with less and less room from which to make those pay­ments.

Lurk­ing be­neath all of this is per­haps the largest con­tin­gent li­a­bil­i­ty of all: our un­sus­tain­able pen­sion sys­tem. I have writ­ten about this nu­mer­ous times be­fore. Here we go again.

From my read­ing of the doc­u­ments avail­able, the Na­tion­al In­sur­ance Sys­tem is on track to ex­haust its re­serve fund com­plete­ly by fis­cal year 2033-34. Ac­tive con­trib­u­tors are de­creas­ing, while the num­ber of pen­sion­ers steadi­ly in­creased. It is hu­man na­ture that as we get clos­er to the 2033-34 time­line, com­pli­ance is go­ing to de­cline in the face of un­cer­tain ben­e­fits.

The NIB's an­nu­al ben­e­fit pay­outs are now ex­ceed­ing con­tri­bu­tion in­come. By some ac­counts the gap is around $2 bil­lion an­nu­al­ly which is erod­ing the fund's cap­i­tal base.

T&T is un­de­ni­ably ag­ing. This de­mo­graph­ic shift cre­ates mount­ing fis­cal pres­sures: more spend­ing on health­care, so­cial as­sis­tance and pen­sions, with few­er work­ing age tax­pay­ers to sup­port that spend­ing. This sys­tem is al­ready un­sus­tain­able and we have to now fix it while nav­i­gat­ing a cred­it rat­ing that is like­ly to go be­low in­vest­ment grade.

When you add up out­stand­ing wage set­tle­ments, de­ferred in­fra­struc­ture main­te­nance, un­der­re­sourced crit­i­cal ser­vices, un­fund­ed or un­der fund­ed pen­sion oblig­a­tions, and state en­ter­prise debt fa­cil­i­ties, you ar­rive at a fig­ure that dwarfs our sup­posed buffers. The Her­itage and Sta­bil­i­sa­tion Fund and for­eign re­serves are al­ready spo­ken for by these hid­den claims.

This is why the S&P neg­a­tive out­look mat­ters more than the main­te­nance of BBB- in­vest­ment grade. The rat­ing agen­cies un­der­stand what too many have re­fused to ac­knowl­edge: T&T's fis­cal po­si­tion is far more pre­car­i­ous than head­line num­bers sug­gest. We have been run­ning up a tab while pre­tend­ing the bill will nev­er come due.

We are not a coun­try with com­fort­able buffers nav­i­gat­ing a rough patch. We are a coun­try that has been de­fer­ring es­sen­tial oblig­a­tions for decades. The con­ver­sa­tion about our fis­cal po­si­tion must be­gin with hon­esty about these hid­den li­a­bil­i­ties. On­ly then can we have a mean­ing­ful dis­cus­sion about the choic­es ahead.

Ian Nar­ine is a fi­nan­cial con­sul­tant who is work­ing to make mar­kets work. Please send your com­ments to ian@ian­nar­ine.com