Home' Trinidad and Tobago Guardian : May 3rd 2015 Contents The decision by Moody s to
downgrade T&T s govern-
ment bond and issuer rat-
ings from Baa1 to Baa2
should not have taken any-
one by surprise. But what
did surprise me was that
the rating agency both downgraded the
country and changed its outlook from
stable to negative.
This change in outlook may be even
more significant for the country s future
prospects and its ability to continue
funding its deficit.
According to Moody s, there were three
key drivers that explain the downgrade:
1) T&T s persistent fiscal deficits and
challenging prospects for fiscal reforms
2) The decline in oil prices and limited
economic diversification to weigh nega-
tively on economic growth prospects
3) Weak macro-economic policy frame-
work given lack of a medium-term fiscal
strategy and inadequate provision of vital
It is clear that two of the three key
drivers of the action by Moody s treat
with the Government s policy of spending
more than it earns (fiscal deficits) and
what the rating agency sees as a weak
policy framework to bring the fiscal
accounts back to balance.
In my view, Moody s downgraded T&T
because the Government has consistently
failed to adopt the fiscal measures neces-
sary to put the country s economy on a
strong fiscal footing.
On the spending side of the fiscal
equation, the People s Partnership has
left the fuel subsidies largely intact
(except for its removal on premium),
which alone could have come close to
ensuring that the country reported fiscal
surpluses for the last five years.
The Government would have avoided
the ignominy and humiliation of the
Moody s downgrade if it had eliminated
all the fuels subsidies as recently as
December, when it would have been
financially justified to do so and when
the mostly indirect impact of the col-
lapsing global oil prices would have been
clear to all.
The reason the Government has
allowed the country to continue carrying
this $4 to $6 billion fuel subsidy burden
is because it is afraid of the potential
political impact of rising transport costs.
In other words, the Government put its
political longevity ahead of the country s
fiscal sustainability and health.
That signal was loud and clear when
the Prime Minister, in her January 8
address to the nation on the economy,
said: "I am of the firm view that this is
no time for sudden changes in the direc-
tion of economic development policies.
Such an approach will negatively impact
your comfort, investor confidence, busi-
ness expansion and employment."
The conscious decision to put politics
first and kick the fiscal can down the
road is finally coming home to roost and
is demonstrated again and again.
This Government inherited from the
previous PNM administration a transfers
and subsidies allocation that was respon-
sible for about 50 per cent of annual
The Government, in its five years man-
aging the T&T economy, has done noth-
ing to reform transfers and subsidies. In
fact, it has added to the allocation by
introducing new measures like the baby
On the revenue side, the Government
has made no adjustments to taxes on
property and failed to collect the minimal
taxes allowed under the old regime.
Knowing that there is massive under-
reporting of income by businesses
throughout T&T, the Government has
done very little to reform the collection
of taxes, which the establishment of a
revenue authority would have facilitated,
but has instead opted to give tax
amnesty after tax amnesty. Why?
This is an administration that has spo-
ken about transfer pricing and how much
revenue can be collected by tightening up
the fiscal rules under which foreign---
mostly energy---companies operate in
T&T. But this remains a work in
The Government s failure to reform
both the expenditure and the revenue
sides of the fiscal equation is what
Moody s referenced when it spoke of
"persistent fiscal deficits and challenging
prospects for fiscal reforms."
The Central Bank put out a statement
on Friday calling the Moody s downgrade
Much of the statement sought to
defend the Government s fiscal perform-
ance in a way that surely goes beyond
the remit of a Central Bank that is sup-
posed to be independent and which is
supposed to be about the promotion of
"monetary, credit and exchange policies
to foster monetary and financial stability."
Is it part of the Central Bank s man-
date to opine on fiscal matters?
That aside, the Central Bank argued
that the Moody s analysis "does not take
into account the severe economic cir-
cumstances under which fiscal surpluses
in the eight years prior to 2009 turned
into budget deficits over 2010 to 2014."
The Central Bank argued that the
Moody s analysis ignores the three simul-
taneous shocks T&T s economy faced
from 2009: the global financial crisis, the
end of the country s third energy boom
and the eruption of the Clico crisis and
that no country among T&T s Baa-rated
peers "grappled with three simultaneous
economic shocks from 2009."
With respect, the Moody s downgrade
is not as a result of actions taken in 2011
or 2012, plus a misguided view of the
impact of declining oil prices.
The downgrade resulted from the Gov-
ernment s failure to impose sufficient fis-
cal adjustment on the population in 2015,
in the wake of the collapse of energy
In responding to Moody s, the Minister
of Finance Larry Howai told Parliament
on Friday that the Government under-
stands the implications of fiscal deficits
and "has enunciated a clear programme
for reducing these deficits over the medi-
um term," which is a view that the rating
agency clearly does not agree with.
Mr Howai added: "The Government
also recognised the importance of moving
the economy out of the slump which it
had inherited. At the time, this required
an expansionary fiscal framework, which
even the IMF has agreed was appropriate
in the circumstances."
Again, this is clearly an attempt to
misdirect the population about the period
of time that is the cause of this down-
grade as it suggests that the Government
is correct to continue with unreformed
deficit spending in reaction to what it
perceives to be a cyclical decline in ener-
gy revenues, when what may have taken
place since the end of November 2014 is
a structural change.
And finally, if the purpose of a sover-
eign rating of a country like T&T is to
assess its ability to meet its foreign debt
obligations as and when they become
due, then it seems to me that what
Moody s placed on the table in its state-
ment on the downgrade falls far short.
T&T is no less able to pay its foreign
debts because of the reasons outlined in
the Moody s statement.
The rating agency s downgrade would
have been justifiable if it had added to
its analysis an assessment of the Central
Bank s management of the country s
exchange rate and its foreign reserves
along with the political decision by the
Central Bank to intervene to prop up the
The real issue for T&T is whether S&P
follows the Moody s lead and what would
be the impact on the country s cost of
borrowing if it did.
MAY 3 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
COMMENTARY | SBG3
Was Moody's right
to downgrade T&T?
Finance Minister Larry Howai
answers a question during the
sitting of parliament on March
24th. PHOTO: KRISTIAN DE SILVA
With respect, the
Moody's downgrade is not
as a result of actions
taken in 2011 or 2012,
plus a misguided view of
the impact of declining oil
The downgrade resulted
from the Government's
failure to impose suffi-
cient fiscal adjustment on
the population in 2015, in
the wake of the collapse
of energy prices.
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