Home' Trinidad and Tobago Guardian : May 7th 2015 Contents MAY 2015 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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In the Sunday BG, in this space, the
question was asked: "Was Moody s
right to downgrade T&T?" based
on the country s "persistent fiscal
deficits and challenging prospects
for fiscal reform," the decline in oil
prices and the weakness of the
country s "macro-economic policy
framework given the lack of a medium-term
In a real sense, though, rushing to condemn
the credit rating downgrade as unjustified
(as the Central Bank did on Friday last) is
itself an exercise in futility as no amount of
criticism of a rating agency has led them to
amend their rating decision.
All that could, or should, be said of the
decision is that the timing of it is strange,
given the reference by the Moody s statement
to things that have been true of the T&T
economy for some time (such as the per-
sistent deficit and the inadequate provision
of vital economic data).
The more relevant question for the coun-
try s population is what does the downgrade
mean for the management of the economy
going forward and will it have a direct impact
on the standard of living and quality of life
of T&T residents.
In terms of getting at the deeper meaning
of the downgrade, the first point to be made
is that the Moody s action was a downgrade
of T&T s credit rating, which is related to
the country s foreign currency bonds in issue,
or bonds issued by entities that the Gov-
The main users of credit ratings are the
large institutional and high net worth
investors who purchase bonds issued by
countries and by companies.
These investors depend on credit rating
agencies to do the analysis of the ability of
the country or the company to maintain the
interest payments (called coupons) during
the life of the bond and to repay the principal
of the bond when it matures.
So a bond rating is an assessment of the
creditworthiness of a country or a company.
In effect, what Moody s is saying is that
based on their assessment, T&T is a little
less creditworthy than we have been.
In a local context, the entities that are
affected by the Moody s downgrade, there-
fore, are the Government, wholly owned
state enterprises and some privately owned
local companies (in much the same way that
Sagicor is affected every time Barbados is
downgraded). And the instruments impacted
will be the US dollar bonds issued by the
country and the companies.
Among the debt instruments that are likely
to be affected by the downgrade, therefore,
are the US$550 million Government of T&T
bond issued in December 2013, the two US
dollar Petrotrin bonds that are outstanding
and, potentially, the Phoenix Park Gas
Processors debt instrument (because that
company is now owned more that 80 per
cent by the National Gas Company, which
itself is 100 per cent state owned.
While there may be some impact on the
existing bonds, the real impact would be on
new US dollar bonds that the Government
or local companies intend to issue.
In other words, if the Government or
Petrotrin were looking to access the inter-
national capital market to refinance existing
debt or for new funds, it is quite likely that
they will have to pay a higher rate of interest
to the potential bondholders, as a result of
the Moody s downgrade action.
The question, therefore, is do the Gov-
ernment and the state-owned enterprises
need to access the international capital mar-
kets to raise funds in the near future?
With regard to the Government, I would
argue that it has been able to borrow money
on the local capital market at very compet-
itive interest rates. Up to now, mainly because
of the lack of other high-quality fixed income
instruments on the local market, the Gov-
ernment has been able to tap the local market
for low-cast funds.
A good example was the successful attempt
by the Government to raise $1 billion in June
2014 with a seven-year, 2.2 per cent, fixed-
rate bond, which received subscriptions of
But it is noteworthy that the attempt by
the Government to raise $2.5 billion at a
coupon of 2.8 per cent fixed for 12 years was
a failure as that issue only attracted $1.4 bil-
lion in funds, mainly because the coupon
offered was not attractive enough given the
time span of the bond (called the tenor).
In other words, the Government should
not assume that anything it puts on the
market, however mispriced, will be gobbled
up by local investors.
So the point can be made that the Gov-
ernment does not need to tap the interna-
tional credit market in order to raise funds
as it can do so locally, if it puts an appropriate
price and tenor on its offering.
The pertinent question is whether the
Government will be forced to return to the
local capital market before the general elec-
tion in order to raise funds to finance its
deficit or will it attempt to draw down its
TT dollar savings in order to finance the
In my view, the Government will choose
the option of drawing down its TT dollar
savings given the possible political conse-
quences of the failure of a new deficit-
financing bond or the need for an interest
rate that is too attractive.
These TT dollar savings include the div-
idends that state-owned companies will be
forced to cough up whether the boards of
those companies like it or not.
In short, then, the Moody s downgrade is
expected to have little short-term impact
on the ability of the Government to raise
The real question then becomes what
would be the longer term impact of the
Moody s downgrade and does it presage a
whole slew of new measures aimed at raising
revenue or reducing expenditure by the polit-
ical party that has the good fortune to win
the next general election.
What does Moody's
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