It is unfortunate that both the Prime Minister and Minister of Finance have chosen to try to ‘spin’ the recent downgrade of T&T’s credit rating by International rating agency Standard and Poor’s Global (S&P), instead of telling the country what will be done to address it.
In spite of the “optimism” the Government is trying to express regarding the downgrade, it is indicative of their incompetence and mismanagement of our economy.
Since April 2017, when the PNM’s fiscal mismanagement led to S&P lowering Trinidad and Tobago’s investment-grade sovereign credit rating, I have been warning the Government that unless they adjusted their failing policies, another downgrade was coming.
S&P’s downgrade to ‘BBB’ from ‘BBB +’ has serious implications for our economy, particularly in our ability to attract Foreign Direct Investment. It also adversely affects our banking sector. S&P’s rating serves as a damning indictment on the Government’s false narrative that our economy is growing. There is also now a danger that Trinidad and Tobago may be in a downward spiral towards speculative or junk rating status.
This downgrade signals that our debt repayment capacity is now more challenging, and we will face increased difficulty in accessing loans from foreign countries. Given our decline in revenues in the last few years, the continued underperformance of the non-energy sector and the expected fall in LNG production from Train 1, and especially as we are in an election year, it is likely that the Government will attempt to acquire more debt from the foreign market to meet our budgetary obligations.
These loans will be at a higher interest cost, which will worsen the debt repayment burden for the next generation. It also has implications for our local capital (treasury bond) market – since the government issues treasury bonds, we could find less investor trading of these bonds, unless they are offered at a lower price with a higher yield.
The downgrade also signals increased uncertainty and reduced confidence in the economy. Trinidad and Tobago will, therefore, continue to experience capital flight, as businesses and individuals choose to invest their funds in economies deemed less risky with better returns. This will also further exacerbate our foreign exchange woes. Foreign investors are likely to be deterred from setting up operations in our country, which would negatively impact foreign direct investment.
Our revenue collection continues to be worrying. In the last few years, we have consistently taken on new debt to meet our budgetary obligations with our debt to GDP ratio increasing in the last five years, currently standing at 61.9%.
The non-energy sector will not be able to compensate for the decline in revenue from the energy sector. The manufacturing sector is still underutilised by over 32% while retail sales continue to be low, falling by over 20% from December 2015 to December 2018. Many firms are still in loss-making states which means less tax revenue for the government, which in turn, translates to a more problematic debt repayment scenario. The Revenue Authority, which is touted to be able to limit these activities, is not likely to be a reality soon, and as we have pointed out – it is not the best option for Trinidad and Tobago.
We expect that this Government will continue to borrow, which will continue the cycle of downgrades and financial stress, because they have no plan and no idea how to manage the economy.
S&P downgrade premised on lower oil and gas production
S&P cites “lower than expected energy production and economic growth” that will weaken the revenue base, a situation that they expect to persist for the next two years. The rating agency refers to the BPTT failed infill drilling programmes on Cannonball and Cashima and the consequential reduction in that company’s natural gas production in 2020.
They also refer to oil production reaching historic lows in 2019. In 2019, BPTT is expected to produce approximately 2.1 billion cubic feet per day (bcfd) of natural gas. It is expected that in 2020, this figure will fall to about 1.8 to 1.9 bcfd. With no new major natural gas supply projects scheduled to come into production in the short term, we can expect a national natural gas production figure of approximately 3.5 bcfd in 2020 which will be less than what was produced in 2019 (roughly 3.8 bcfd). It must be noted that the supply of timely energy data from the Ministry of Energy is now an issue.
Given the correlative relationship between natural gas production and GDP, this situation could precipitate recessionary conditions in 2020. Despite the best efforts of BPTT to bring about projects including Juniper, Angelin and TROC we continue to experience a shortage in natural gas supply. However, the situation would have been a lot worse if these investments didn’t happen.
The figures for oil production show a significant decline, which is not surprising, given that in the last three years, there has been no drilling in Trinmar. The cancellation of the South West Soldado Mobile Offshore Production Unit (MOPU) project in 2016 was a major blow to efforts to increase oil production at Trinmar. It is understood that Heritage Petroleum has appreciated the value of this project and is now moving with haste to complete it. In the meantime, this country has lost significant production, and by extension revenue, to the tune of billions.
The fall in oil production due to maturing acreages and the lower anticipated LNG production next year due to BPTT’s challenges to supply Train 1 will hurt our tax revenue collections from the energy sector.
It is also well documented that the Supplemental Petroleum Tax (SPT) regime is a major obstacle to new investments in oil production. There have been calls for the SPT to be amended by the private sector, but these calls have gone unheeded. In the current environment, it can be expected that oil production will continue to fall.
Going forward, there must be a greater focus on getting more oil and natural gas out of the ground. The main factors mitigating against that are “above ground” conditions that relate mainly to the fiscal regime and “ease of doing business” factors.
In its report, S&P outlined key governmental failings such as the inability to provide reliable and current economic data, strengthen revenue collection institutions as well as failing to adopt policies to stimulate economic growth. This report begs the question, what exactly has the Keith Rowley Government been doing for the past four years?
Despite all the warning signs from respected international agencies and economists that the Keith Rowley government’s economic policies or lack thereof, is taking our nation down a dangerous path, the Government continues to bury their heads in the sand.
The United National Congress has crafted a National Economic Transformation MasterPlan 2020-2025, in which we address the very concerns raised by S&P as well as provide solutions and a roadmap towards economic growth.
Unlike the Government, the UNC is ready to put Trinidad and Tobago back on the road towards prosperity and sustainable development, and get our country working again.