Trinidad and Tobago Sovereign Rating Lowered To 'BBB-' From 'BBB' On Lower Hydrocarbon Price Assumptions

  • We expect lower oil and gas prices over the next several years will weaken Trinidad and Tobago's government revenues and lead to larger increases in net general government debt.
  • We are therefore lowering our long-term foreign and local currency sovereign credit ratings on Trinidad and Tobago to 'BBB-' from 'BBB', and our short-term foreign and local currency sovereign credit ratings to 'A-3' from 'A-2'.
  • We are also revising down our transfer and convertibility assessment to 'BBB' from 'BBB+'.
  • The stable outlook balances the risk that lower hydrocarbon prices may lead to greater deterioration in the country's growth, external finances, or interest burden, with our expectation that the government's financial assets will provide a safeguard for economic volatility.

Rating Action

On March 26, 2020, S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings on the Republic of Trinidad and Tobago to 'BBB-' from 'BBB'. The outlook is stable. At the same time, S&P Global Ratings lowered its short-term foreign and local currency sovereign credit ratings to 'A-3' from 'A-2'. S&P Global Ratings also revised down its transfer and convertibility assessment to 'BBB' from 'BBB+'.

Outlook

The stable outlook reflects our expectation that lower oil and gas prices will lead to larger increases in net general government debt, a fall in exports that will contribute to a moderate current account deficit, and an economic contraction in 2020. Nevertheless, we believe that the government's liquid external assets provide some flexibility to mitigate the impact of lower hydrocarbon prices and current economic volatility.
Downside scenario
We could lower the rating over the next 12-24 months should lower oil and gas prices, or the effects of COVID-19 on demand, contribute to a larger economic contraction; a deterioration of external liquidity or debt beyond our current expectation, should balance of payments outflows be larger than expected; or a weaker fiscal position; and if we believe that the government will take longer to unwind the deterioration in public finances expected this year, causing larger increases in the net general government debt or interest burden.
Upside scenario
On the other hand, although we view this scenario as unlikely, we could raise the rating over the next 12-24 months should the government manage to limit the deterioration of public finances and stabilize the debt and interest burden, and should stronger-than-expected growth in the energy sector lead to significantly above-average economic growth, stemming balance of payments outflows.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil assumption for 2020. This follows an earlier significant downward revision of its oil and gas price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased on the back of rising geopolitical tensions. When we last reviewed Trinidad and Tobago ("Trinidad and Tobago Sovereign Rating Lowered To ‘BBB’ From ‘BBB+’ On Economic And Fiscal Stress; Outlook Stable" published July 9, 2019, on RatingsDirect), we expected West Texas Intermediate (WTI) oil prices to average $55 per barrel (/bbl) in 2020 and beyond, while we expected Henry Hub natural gas prices to average $2.75/million British thermal unit (mmBtu) in 2020, and then rise to $3/mmBtu in 2021 and beyond. We now assume an average WTI oil price of $25/bbl in 2020, $45/bbl in 2021, and $50/bbl by 2022 and beyond, while we expect an average Henry Hub gas price of $2/mmBtu in 2020, $2.25/mmBtu in 2021, and $2.5/mmBtu in 2022 and beyond (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of the coronavirus. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try to maintain market share and market relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. At the same time, gas prices have continued to decline in 2020, owing in part to oversupply conditions in the U.S. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through the second half of 2020 and into 2021 as the most severe impacts from the coronavirus outbreak moderate.
We expect lower oil and gas prices will materially affect Trinidad and Tobago's government revenues, and lead to larger increases in net general government debt as a result, over the forecast horizon. Trinidad and Tobago is heavily dependent on the energy sector, which has historically contributed over a third of the government's revenues, on average, over 30% of the country's real GDP, and over 80% of its exports. Lower energy prices will lead to lower tax collections from oil and gas companies, and we do not expect the government will cut spending as a result, particularly given its desire to avoid a further contraction in its economy, as the country approaches national elections, which are due by December 2020. We now expect the average change in net general government debt will reach 4.9% of GDP in 2020-2023.
Despite its reliance on volatile hydrocarbon sector revenues, we expect the government's sizable financial assets will somewhat soften the impact of the downturn, as the government draws down on these assets to partially finance its deficit. By our estimates, government liquid assets, including its sovereign wealth fund, the Heritage and Stabilization Fund (HSF), reached 44% of GDP in 2019. Despite some drawdowns, the HSF has accumulated value over the past decade, and we expect that it, along with other government financial assets and central bank reserves, will continue to provide fiscal and external buffers. Unlike many commodity exporters in the region, during the boom years Trinidad and Tobago saved excess fiscal revenues in the HSF. The government created the fund in 2007 to generate public sector savings that would reduce economic volatility from fluctuating energy prices. Although the government used some of the funds to finance deficits in fiscal years 2016-2017 and 2017-2018, we estimate that the fund reached 26% of GDP in 2019, and we expect further drawdowns in 2020 and 2021.
The hydrocarbon price shock will have a significant impact on Trinidad and Tobago's exports, and consequently, the current account balance, over the forecast horizon, by our estimates. We expect that this, coupled with continued financial account outflows, and heavy central bank intervention in the foreign exchange market, will lead to a deterioration in the country's central bank reserves. While we expect the country's narrow net external balance position will deteriorate beyond our previous expectations, we forecast that liquid external assets will continue to exceed external debt, by an average 6.2% of current account payments from 2020-2023. The country's still sizable, although lower, external assets, including the HSF and central bank reserves, will continue to support this position. At the same time, we expect external financing needs will grow, averaging 92% of current account receipts and usable reserves, over the forecast horizon.
We expect lower hydrocarbon prices will also adversely affect Trinidad and Tobago's economic growth, continuing the country's contraction in real GDP per capita over the past several years. We forecast that real GDP per capita will fall to about $16,600 in 2020, which is over 19% lower than in 2014. The country's growth continues to fall below that of other countries with similar income levels, partially reflecting challenges in its oil exploration and production sector, and a shortage of gas production to supply the downstream sector.

Key Statistics

Table 1

Trinidad and Tobago -- Selected Indicators
201420152016201720182019e2020f2021f2022f2023f
Economic indicators (%)
Nominal GDP (bil. LC)176.99159.84148.62152.37161.2162.49152.98160.63163.92167.28
Nominal GDP (bil. $)27.6225.0622.2822.4723.8124.0122.6523.7824.2724.77
GDP per capita (000s $)20.518.616.516.617.517.616.617.317.617.9
Real GDP growth(0.7)1.8(6.3)(2.3)(0.2)(0.2)(2.7)0.70.91.6
Real GDP per capita growth(1.1)1.5(6.6)(2.5)(0.4)(0.6)(3.0)0.40.61.3
Real investment growth(0.7)1.8(6.3)(2.3)(0.2)(0.2)(2.7)0.70.91.6
Investment/GDP12.412.412.412.412.412.412.412.412.413
Savings/GDP26.219.3817.718.217.561012.713.8
Exports/GDP52.642.934.338.239.638.127.530.433.133.7
Real exports growth(24.2)(17.0)(25.2)9.13.3(4.0)(29.7)156.23.5
Unemployment rate3.33.43.64.83.85.5676.56.5
External indicators (%)
Current account balance/GDP13.87(4.4)5.45.85.1(6.4)(2)0.40.8
Current account balance/CARs22.613.1(9.8)10.511.310.3(17)(5.7)0.91.8
CARs/GDP61.253.3455151.449.638.241.143.944.4
Trade balance/GDP25.515.55.513.316.215.64.98.611.311.8
Net FDI/GDP2.50.20(2)(3.2)0.4(0.4)(0.4)(0.4)(0.4)
Net portfolio equity inflow/GDP0.20.7(0.1)(0.8)00(0.1)000
Gross external financing needs/CARs plus usable reserves55.754.664.457.660.869.782.491.59798.7
Narrow net external debt/CARs(68.4)(80.8)(89.3)(67.9)(52.3)(42.5)(19.5)(3)(2.2)(0.4)
Narrow net external debt/CAPs(88.4)(92.9)(81.3)(75.9)(59)(47.4)(17)(2.7)(2.2)(0.4)
Net external liabilities/CARs(39)(45)(49.5)(40.6)(23.9)(29.8)(3)10.59.010.4
Net external liabilities/CAPs(50.4)(51.8)(45.1)(45.4)(26.9)(33.2)(2.8)9.99.010.6
Short-term external debt by remaining maturity/CARs121518.81614.124.732.626.626.725.8
Usable reserves/CAPs (months)9.41210.911.29.38.68.35.13.63.1
Usable reserves (mil. $)11,5679,9939,5378,4517,6557,0234,3543,1672,8223,095
Fiscal indicators (general government; %)
Balance/GDP(2.5)(1.7)(5.4)(8.9)(3.5)(2.4)(7.8)(5.9)(3.7)(1.9)
Change in net debt/GDP6.515.9(8.3)(1.9)0.41.39.25.72.32.5
Primary balance/GDP(0.7)0.5(2.8)(5.9)(0.8)0.6(5.0)(3.3)(1.1)0.9
Revenue/GDP3335.830.323.726.828.726.926.227.227.7
Expenditures/GDP35.537.535.632.630.331.134.732.130.929.6
Interest/revenues5.368.412.410.410.510.310.29.410.2
Debt/GDP56.371.276.37471.673.485.887.689.589.6
Debt/revenues170.8198.7252.1311.7267.4256.2319.3334.6329.2323
Net debt/GDP19.637.53229.328.129.240.24445.447
Liquid assets/GDP36.833.744.344.743.544.245.643.744.242.6
Monetary indicators (%)
CPI growth5.74.73.11.9110.71.92.12.1
GDP deflator growth2.1(11.3)(0.8)56.11(3.2)4.31.10.5
Exchange rate, year-end (LC/$)6.396.456.756.766.786.756.756.756.756.75
Banks' claims on resident non-gov't sector growth8.47.30.93.24.76(4.8)4.11.71.7
Banks' claims on resident non-gov't sector/GDP36.443.34747.346.849.249.749.349.148.9
Foreign currency share of residents' bank deposits22.323.324.425.224.825.929.329.73132.4
Sources: International Monetary Fund, Trinidad and Tobago Ministry of Finance, Central Bank of Trinidad and Tobago (Economic Indicators), Central Bank of Trinidad and Tobago and International Monetary Fund (External Indicators), Trinidad and Tobago Ministry of Finance, International Monetary Fund, The National Insurance Board of Trinidad and Tobago (Fiscal Indicators), International Monetary Fund, Central Bank of Trinidad and Tobago (Monetary Indicators). Adjustments: Debt/GDP includes guaranteed debt and debt holding letters of comfort, central bank debt issued for sterilization and open market operation purposes, and deducts government debt held by the National Insurance Board. Net debt/GDP and Liquid assets to GDP inclue assets from the Heritage and Stabilization Fund, liquid assets of the National Insurance Board net of holdings of overnment debt, government deposits at commerical banks and government sinking funds. Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. e--estimate. f--forecast.

Ratings Score Snapshot

Table 2


Trinidad and Tobago -- Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment3Generally effective policymaking in recent years, but policy shifts are possible because of significant long-term fiscal challenges. Evolving checks and balances between institutions and statistical information that may be less timely or subject to large revisions.
Economic assessment4Based on GDP per capita (US$) and growth trends as per Selected Indicators in Table 1. Weighted average real GDP per capita trend over a 10-year period is a 0.7% contraction, which is well below sovereigns in the same rating category.
External assessment3Based on narrow net external debt and gross external financing needs/(CAR + useable reserves) as per Selected Indicators in Table 1. The country is exposed to significant volatility in terms of trade, due to its dependence on hydrocarbons. The sovereign’s external data lack consistency, as demonstrated by elevated errors and omissions.
Fiscal assessment: flexibility and performance4Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. Based on liquid assets/GDP as per Selected Indicators in Table 1. Those assets primarily consist of Trinidad and Tobago’s Heritage and Stabilization Fund. The sovereign also has a volatile revenue base, because more than a quarter of general government revenue is based on hydrocarbon production.
Fiscal assessment: debt burden3Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in Table 1.
Monetary assessment4The Central Bank intervenes heavily in the foreign exchange market. The operational independence of the central bank is less secure than at better assessments. Annual inflation has averaged below 10% over the past decade.
Indicative ratingbbb-
Notches of supplemental adjustments and flexibility
Final rating
Foreign currencyBBB-
Notches of uplift
Local currencyBBB-
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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