Home' Trinidad and Tobago Guardian : May 18th 2014 Contents SBG4 | NEWS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MAY 18 • 2014
Although public debt is
forecast to reach 40
per cent of gross
(GDP) in 2014, large
savings accumulated in
the 2004-2008 boom
years cushion the pub-
lic finances from energy-price shocks, the
Economist Intelligence Unit (EIU) has said in
its latest country ratings of T&T released Mon-
day (May 13).
On May 6, Finance Minister Larry Howai
had said after speaking at a manufacturers
event at the Hyatt Regency hotel in Port-of-
Spain that the debt to GDP ratio is 41 per
"The fiscal deficit is set to widen, but financ-
ing risks remain low," the EIU said. "A strong
international reserves position provides the
Central Bank of T&T with ample firepower
to manage the exchange rate heavily, keeping
devaluation risk low."
Banks are fairly well capitalised and prof-
itable, and could absorb losses should the
economy perform worse than expected, the
EIU said. Accommodative monetary policy
will help to boost credit growth.
The People s Partnership (PP) coalition holds
a parliamentary majority, and risks to gov-
ernability are low, despite recurrent tensions
among coalition partners, the EIU said. Violent
crime remains a concern, but is not likely to
hamper creditworthiness, the unit said.
"Currency overvaluation undermines the
competitiveness of the non-energy sector.
However, this is mitigated by savings in the
Heritage and Stabilisation Fund (HSF), which
provides resources for substantial fiscal stim-
ulus," the EIU said. The HSF has approximately
T&T s underlying sovereign risk score has
remained stable since November 2013, in the
middle of the BBB-rating band, the EIU said.
"Public debt has risen in recent years and
now stands close to 40 per cent of GDP, a
level similar to other BBB-rated sovereigns,"
the EIU said.
However, at under 10 per cent of GDP, public
external medium- and long-term debt is low,
reducing the sovereign s exposure to external
financing and currency risks.
Alongside sluggish GDP in recent years
(which has made it difficult for the government
to reduce the public-debt ratio), the increase
in public debt also reflects a widening non-
financial public sector (NFPS) deficit.
This reached an estimated 2.4 per cent of
GDP in 2012/2013 (October-September) as a
result of more rapid spending growth and
lower natural-gas prices. However, interest
payments compose a relatively small share of
government revenue (5.0 per cent).
"The government has little difficulty financ-
ing deficits. In addition, it has saved a large
portion of earnings accrued during the energy
boom of the mid-2000s. Savings held in a
fiscal-stabilisation fund amounted to US$5
billion in early 2014, equivalent to 20 per cent
of GDP, much higher than most other com-
modity producers. This reduces the weight of
gross debt and would provide financing if
needed," the EIU said.
With the US importing much less liquefied
natural gas (LNG) from T&T, most gas exports
have been sold on the spot market "at
favourable prices, supporting fiscal and export
revenue," the EIU said.
Proven hydrocarbons to deplete in
"The extremely high non-energy fiscal deficit
needs to be addressed in the longer term. At
current rates of extraction and, assuming no
further discoveries, proven hydrocarbons
reserves would be depleted in around ten years,"
the EIU said.
Persistent weakness in non-energy sectors
of the economy will continue to hamper rev-
enue growth, with revenue as a share of GDP
falling steadily in both 2014 and 2015, the EIU
Transfers and subsidies exact a heavy toll
on the public finances, accounting for over
half of expenditure, and 17 per cent of GDP,
the EIU said.
"Although the public finances will register
a wider deficit in 2013/2014 (2.8 per cent of
GDP), before shrinking marginally, to 2.4 per
cent of GDP, in 2014/2015, this should not be
sufficient to result in a significant impairment
of creditworthiness," the EIU said.
The outlook is supported by T&T s strong
payments capacity, a large reserves cushion
and a manageable public-debt burden. The
EIU s forecast assumes that there will not be
another sharp fall in energy prices, but even
were this to occur, the country would be cush-
ioned, owing to assets in its sovereign wealth
Currency devaluation risk low
T&T s underlying currency risk score has
remained broadly unchanged since the EIU s
November 2013 report, at the riskier end of
the BBB-rating band. AAA is the highest and
below BBB- is non-investment grade.
Underpinning the rating is the country s
strong foreign-exchange reserves position (at
over 600 per cent, the ratio of reserves to
short-term external debt is double the median
of 300 per cent for BBB-rated countries),
which leaves policymakers with ample
resources to defend the Trinidadian dollar.
Although the Central Bank of T&T officially
operates a managed float, heavy intervention
in the foreign currency market has maintained
a nominal peg of around $6.4: US$1 since
2010, the EIU said.
This is designed to anchor inflation and to
avoid the effects that large foreign-currency
inflows could have on a small economy. The
EIU expects continued nominal currency sta-
bility in 2014, meaning that the currency will
continue to appreciate in real terms.
"There is little risk of the emergence of
imbalances that would put the quasi-peg under
pressure. High reserves (accounting for around
15 months of import cover), combined with
a low reliance on short-term capital inflows,
underpin the currency regime," the EIU said.
A still-solid current-account surplus and
steady capital inflows related to the energy
sector will offset other net capital outflows
and support the currency, the EIU said.
T&T is vulnerable to price fluctuations for
non-energy commodities (especially food).
Any supply-side shocks would quickly cause
inflation to spike and trigger further real cur-
In the medium term, currency pressures
could arise, stemming from problems with
Dutch disease (where large capital inflows to
commodity producers lead to currency over-
There is little risk of significant depreciation
in the next 12 months. Although the authorities
have in the past indicated that they might
introduce greater flexibility into the currency
system, we do not believe that the de facto
peg will be abandoned while the country is
reliant on energy income and open to sudden
injections of foreign capital. Large reserves
will enable policymakers to intervene to support
the currency, should it be necessary. Average
inflation is forecast to fall moderately in 2014,
but real interest rates will remain very low,
which could boost capital outflows, particularly
now financing conditions have tightened, as
Economist Intelligence Unit:
T&T's devaluation risk low
Continued on Page 5
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