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BUSINESS GUARDIAN www.guardian.co.tt APRIL 2014 • WEEK THREE
Economic activity in T&T is set to
pick up in 2014-15, Moody s
Investor Services, one of the
world s three largest credit rating
agencies, said in a credit analysis
of the T&T Government dated April 14.
The agency was affirming its rating on gov-
ernment s foreign currency bonds at "Baa1,"
which is three notches above junk, and eight
notches below the highest rating of "Aaa."
After a deep contraction in 2009, the eco-
nomic recovery of T&T has been weak and
uneven, Moody s said. "Growth underperformed
in 2012 due to a contraction in the energy sector,
triggered by a combination of a continuing
structural decline in oil output and prolonged
energy infrastructure maintenance," Moody s
said in its analysis.
Activity in the non-energy sector, particularly
construction, was also subdued due to a three-
month strike at Trinidad Cement Ltd (TCL)
that led to a 20.9 per cent drop in cement output
in 2012, and a 16.9 per cent increase in cement
prices from January to March 2013, the agency
"Despite continuing upgrade and repair activ-
ities in the natural gas sector throughout 2013,
we estimate that the economy expanded by 1.5
per cent relative to 2012, supported by a rebound
in cement and refinery production and a steady
performance in the non-energy sector (see Graph
1), Moody s said.
Hydrocarbon output recovered strongly in
the last quarter of 2013 as maintenance oper-
ations wound down.
"We expect the economy to maintain this
positive momentum and forecast growth of 2.9
per cent in 2014, further picking up to 3.2 per
cent in 2015, driven by increased exploration
activity and foreign investment in the energy
sector, as well as public sector infrastructure
projects. Offshore oil and gas exploration is
likely to accelerate, but uncertainty remains over
whether this will yield additional oil and gas
reserves," Moody s said.
T&T has the potential to further diversify
within the energy sector, as new petrochemical
projects are in the pipeline and could boost
investment and growth in the next two-three
years, Moody s said. Currently, the bulk of
upstream gas output is utilised in liquefied
natural gas (LNG) exports (57.4 per cent), while
the rest feeds into domestic fuel, electricity, and
petrochemicals production, the agency said.
Moody s said: "Recent bids on offshore and
onshore exploration rights are also good pre-
cursors to increased foreign direct investment
Diversification to non-energy economic activ-
ity has been limited, said Moody s.
"Although T&T is a manufacturing hub for
the Caribbean region, sales are too small to
meaningfully complement energy exports as
growth drivers, and an appreciating real exchange
rate has progressively made manufacturing
exports less competitive. Medium term growth
prospects depend on supportive global energy
prices, the efficacy of public sector investment,
the completion of oil/gas infrastructure main-
tenance operations, and the government s ability
to prevent renewed industrial action by unions,"
the analysis said.
Energy sector prospects
T&T s oil reserves are relatively mature and
oil production has been in decline due to limited
exploration activity (see Graph 2), Moody s said.
"This has boosted the relative importance of
the gas sector, although output temporarily con-
tracted in 2011/2012 due to a reduction of down-
stream activity (in part because of poor execution
of public sector capital expenditure). Energy
production slowed significantly in 2012 due to
large scale repairs on upstream infrastructure
and industrial action that shut down a number
of offshore drilling rigs," Moody s said.
By 2012, increased US shale gas production
had depressed gas prices in that market to such
an extent that most of T&T s LNG cargoes were
diverted to more lucrative markets of South
America, Europe and the Far East, thereby mit-
igating any immediate concerns over the medium
term outlook, the agency said.
Over the longer term, US LNG exports are
projected to come online by 2020, bringing
global gas prices down and depressing producers
"However, given rising energy demand world-
wide, and the relatively small quantities produced
and exported by T&T, we expect any negative
impact on the country s LNG exports to be lim-
ited," Moody s said. "We expect renewed invest-
ment in exploration and commercialisation
activities, particularly upstream gas projects, to
invigorate the energy sector, assuming prices
Our assessment of T&T s "Moderate" insti-
tutional strength is based on the country s scores
on the World Bank s governance indicators,
which place its government effectiveness, rule
of law, and other dimensions of institutional
quality around the 50th percentile among sov-
ereigns rated by Moody s, according to the latest
2012 survey figures. These scores are in line
with "Baa" category medians, underpinning
our moderate assessment of T&T s institutional
Gov't lax with Heritage Fund
Moody s also took issue with what is going
on with the nation s sovereign wealth fund.
Moody s said: "Our assessment of overall
institutional strength also incorporates the sov-
ereign s policy credibility, which is a factor of
both its track record and the institutional arrange-
ments that anchor it. In this regard, our mod-
erate assessment of policy credibility balances
a weaker-than-peers track record on inflation
performance, with the Heritage and Stabilisation
Fund (HSF), the most important institutional
arrangement that supports the sovereign s credit
profile. Recent fiscal laxity could weigh on our
assessment of policy credibility and the sovereign s
creditworthiness if not reversed." Moody s iden-
tified as T&T s key peers Bahrain, Lithuania,
South Africa, Russia, and Kazakhstan.
The HSF, established in 2000, is managed by
the Central Bank and had accumulated savings
of around 20 per cent of gross domestic product
(GDP) as of September 2013, Moody s said. The
purpose of the fund is two-fold: to sustain fiscal
performance during energy downturns (stabil-
isation) and prepare the country for the eventual
depletion of energy resources by investing in
diversification (heritage), the agency said.
Savings are mandated whenever actual oil rev-
enues exceed budgeted oil revenues by ten per
cent. The Government must deposit at least 60
per cent of the difference. If the excess is less
than ten per cent, all or part of the excess revenue
may be transferred to the fund, Moody s said.
Withdrawals can occur when prices fall below
ten per cent the budgeted price and can amount
to either 60 per cent of the shortfall or 25 per
cent of the fund savings, whichever is smaller.
However, Moody s said, budgeted oil prices tend
to be so conservative, this never happens.
"Budgeted oil prices tend to be very conser-
vative, making it more difficult for the govern-
ment to satisfy withdrawal conditions during
periods of economic stress," Moody s said.
T&T does not have an explicit inflation target,
Moody s said, and "although it actively manages
a floating exchange rate, there is a lack of a
durable nominal anchor." The analysis said: "A
high pass-through of global food prices has led
to volatile headline inflation (core inflation is
in the 2-3 per cent range), even when compared
to other small open Caribbean economies. Rel-
atively high and volatile inflation has limited
the flexibility of employing monetary policy to
stimulate the economy."
Moody s then reiterated what Standard &
Poor s and more recently the IMF have been
saying: "Data deficiencies hinder more thorough
The Government finance statistics data cov-
erage is broadly in line with that of similarly-
rated sovereigns, Moody s said. Government
debt and transactions are compiled using a
national classification system and the availability
of these statistics is broadly adequate for fiscal
"Nevertheless, we believe that shortcomings
persist in terms of the timely delivery and quality
of some macroeconomic data, including national
accounts and the external sector, which make
the economic analysis more challenging. This
situation largely reflects resource and capacity
constraints in the national statistical office. The
authorities have reiterated their commitment
to addressing these constraints."
in T&T set to pick
up in 2014-15
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