Mar­i­ano Browne

A na­tion­al debt trap hap­pens when a coun­try bor­rows mon­ey it can­not re­pay, forc­ing it to spend most of its rev­enue on in­ter­est in­stead of pub­lic ser­vices. Ac­cord­ing to the In­ter­na­tion­al Mon­e­tary Fund (IMF), glob­al pub­lic debt is ap­proach­ing 100% of world GDP, near­ing post-WWII peaks. The IMF has raised se­ri­ous alarms re­gard­ing this rapid ac­cu­mu­la­tion of sov­er­eign debt and its im­pact on eco­nom­ic sta­bil­i­ty. Debt bur­dens are grow­ing faster than pre­vi­ous­ly pro­ject­ed, dri­ven by per­sis­tent­ly high fis­cal deficits.

Why are so many coun­tries ex­pe­ri­enc­ing fis­cal deficits? There is no sin­gle an­swer, as the rea­sons dif­fer be­tween coun­tries. Struc­tur­al, sit­u­a­tion­al, and po­lit­i­cal fac­tors ex­plain why many coun­tries are in this po­si­tion. One can point to three key events. First, the glob­al de­pres­sion caused by the US hous­ing cri­sis in 2008 led many gov­ern­ments to try to res­tim­u­late their economies by bor­row­ing more to fund deficits. Sec­ond, the oil price shock be­tween 2011 and 2014 caused many re­source-de­pen­dent coun­tries to run bud­get deficits. Next, the COVID-19 pan­dem­ic led to bor­der clo­sures and oth­er mea­sures that se­vere­ly cur­tailed eco­nom­ic ac­tiv­i­ty. Many gov­ern­ments bor­rowed to fi­nance their at­tempts to keep their economies go­ing.

The longer-term is­sues are struc­tur­al and af­fect coun­tries dif­fer­ent­ly. The first is age­ing, which af­fects West­ern de­vel­oped economies more than oth­er parts of the world. This af­fects health care and so­cial se­cu­ri­ty costs, as re­flect­ed in the dif­fi­cul­ties fac­ing the Trinidad and To­ba­go Na­tion­al In­sur­ance Scheme. Age­ing al­so af­fects the tax base, as earned in­come de­clines with age. The tax­a­tion base is there­by erod­ed. Manda­to­ry en­ti­tle­ment pro­grammes ab­sorb grow­ing shares of na­tion­al rev­enue. In Trinidad and To­ba­go, sub­si­dies and trans­fers now ac­count for more than 53% of gov­ern­ment spend­ing in 2026, up from 38% in 2008.

Why does na­tion­al in­debt­ed­ness mat­ter now? Fol­low­ing the Great De­pres­sion (2008-2012), in­ter­est rates were very low and re­mained low. Banks paid lit­tle for de­posits, and the bond mar­ket fol­lowed suit. Rates are now ris­ing across fi­nan­cial mar­kets be­cause de­fault risk is high­er—the more in­debt­ed an en­ti­ty, whether a coun­try or a busi­ness, the greater the risk of de­fault. Mar­ket con­di­tions are al­so chang­ing. The in­fla­tion threat is grow­ing due to the war in the Mid­dle East and the war in Ukraine.

Both wars are es­ca­lat­ing. Houthi at­tacks on Sau­di Ara­bia’s en­er­gy fa­cil­i­ties added up­ward pres­sure on oil prices, and fi­nan­cial mar­kets re­act­ed neg­a­tive­ly. En­er­gy costs are cen­tral to every econ­o­my. In­creas­es in en­er­gy prices are in­fla­tion­ary. Fi­nan­cial mar­kets mat­ter to both the pub­lic and pri­vate sec­tors, as they all bor­row in the same mar­ket. Ris­ing oil prices, high debt lev­els, and com­pe­ti­tion from the pri­vate sec­tor are dri­ving in­ter­est rates high­er. On Tues­day last, the rate on 10-year US Trea­suries crossed its high­est lev­el since 2007, reach­ing 5.04%.

Why does the price of US trea­suries mat­ter? The in­ter­est rate on US Trea­sury bonds mat­ters glob­al­ly be­cause it serves as the pri­ma­ry “risk-free” bench­mark that sets bor­row­ing and as­set prices world­wide. In­ter­na­tion­al cen­tral banks are al­so sig­nalling that they have be­come more sen­si­tive to the threat of in­fla­tion. In­vestors want com­pen­sa­tion for the risk. In the last 8 days, the three ma­jor cen­tral banks (The Eu­ro­pean Cen­tral Bank, the Fed­er­al Re­serve Board, and the Bank of Japan) all raised their bench­mark in­ter­est rates by .25% (twen­ty-five ba­sis points), in­di­cat­ing that the era of cheap mon­ey is over and Cen­tral Banks be­lieve that in­fla­tion pos­es the greater threat.

How does this af­fect Trinidad and To­ba­go? Trinidad and To­ba­go’s debt-to-GDP ra­tio is ap­prox­i­mate­ly 87%. This is com­par­a­tive­ly high. As a re­sult, on­ly Stan­dard & Poor’s (S&P) rates T&T as in­vest­ment grade. The GORTT suc­cess­ful­ly is­sued two bonds amount­ing to USD 1.8 bil­lion in Jan­u­ary and Ju­ly. The nom­i­nal rate on these in­stru­ments was 6.5%, con­sid­er­ably high­er (44.4% high­er) than the 4.5% rate on the bonds they re­placed. In the cur­rent US mar­ket con­di­tions, if T&T on­ly does more rollovers (re­plac­ing ex­ist­ing debt with new debt), the cost of ser­vic­ing these debts will rise. Ac­cord­ing to the Au­di­tor Gen­er­al’s re­port for Fis­cal 2025 (page 26), debt ser­vice was 21.6% of ac­tu­al spend­ing. This is high. High­er in­ter­est rates will in­crease this ra­tio and weak­en gov­ern­ment spend­ing,

Notwith­stand­ing boom­ing en­er­gy prices, Trinidad and To­ba­go is in a dif­fi­cult fis­cal po­si­tion. It is im­port­ing fu­el, which means the fu­el sub­sidy is in­creas­ing. Fur­ther, nat­ur­al gas sup­ply is in­suf­fi­cient to meet in­stalled plant ca­pac­i­ty. As a re­sult, many plants re­main closed. It is un­clear whether gas from the new projects will ar­rive dur­ing the 2027 fis­cal year to gen­er­ate the tax rev­enue need­ed to meet the pub­lic sec­tor union wage set­tle­ments, guar­an­tee­ing an­oth­er deficit in 2027. The on­ly ques­tion is whether the deficit will be less than 3% of GDP.

In its last re­view, S&P not­ed that “the gov­ern­ment’s re­cent midyear up­date sug­gests high­er en­er­gy prices and the in­tro­duc­tion of new tax­es were not enough to main­tain the fis­cal deficit be­low 3% of GDP, high­light­ing the on­go­ing risks to fis­cal sus­tain­abil­i­ty.” It al­so not­ed it “could low­er the rat­ings on Trinidad and To­ba­go over the next 12 months if gov­ern­ment fails to take time­ly steps to strength­en the sus­tain­abil­i­ty of pub­lic fi­nances, en­sure long-term bal­anced growth, and main­tain the coun­try’s strong ex­ter­nal pro­file.” Dif­fi­cult de­ci­sions must be made.

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