Bharath, Arjoon: Worrying signs from S&P

FORMER minister in the Ministry of Finance Vasant Bharath and economist Dr Vaalmiki Arjoon expressed concern on Thursday about a decision by international ratings agency Standard and Poors (S&P) to change its economic outlook for Trinidad and Tobago from stable to negative

In a report on Tuesday, S&P said, "The negative outlook incorporates the risks that poor economic performance and only modest GDP growth prospects prevent TT from recovering the economic resilience lost in recent years, as measured by GDP per capita.

In a response on Tuesday, Finance Minister Colm Imbert said S&P reaffirmed an investment grade of BBB-, a sign that the country is "a safe investment place."

He added, "This decision validates our strategy to support the economy in the short term while having a clear plan to put our public finances back under control.”

Bharath said, "What the report highlighted was the government's incompetence in creating any economic activity in the five years preceeding the covid pandemic, leading to five consecutive years of negative growth and resulting in GDP per capita that is now 19 per cent lower than it was ten years ago.

"The report was clear that TT is not likely to recover from this economic slide anytime soon."

The S&P report, Bharath continued, also indicated there was a one in three chance that the ratings could be further lowered in the next 12 to 24 months if debt levels continue to rise and govt policy choices continue to weaken support for balanced economic growth.

"This will come as no surprise to those of us who have been warning of our economic demise and decline in our quality of life and standard of living over the last six years.

Bharath said, "The situation, unfortunately, is likely to worsen as the economy reopens and many find themselves unemployed with many businesses operating on a smaller scale or permanently closed, and with little or no investment appetite from either foreign or local investors because of that missing ingredient....confidence."

He described Imbert's response to S&P's report as flippant, cavalier and out of touch with reality.

Arjoon agreed with Bharath about the possibility of TT's ratings being lowered.

"A negative outlook means a strong possibility of a downgrade in the next ratings exercise, as opposed to a positive outlook which signals an expectation of an upgrade, while a stable outlook signals the expectation that the rating will be unchanged."

He said the change in economic outlook "reflects an economic decline of over eight per cent in 2020 with a fiscal deficit of $16.8 billion in the last year alone."

Arjoon said the latter was "attributed to the shutdown of the private sector due to the pandemic, which would have deprived the State of revenues from taxes on income and profits." He said this fell from $22 billion in 2019 to $15 billion in 2020.

While taxes on income and profits typically account for over 60 per cent of state tax revenues, Arjoon said, "Energy sector production fell by over 13 per cent in 2020."

He said the most recent Central Bank data suggests that "natural gas production fell by a whopping 26 per cent in April 2021 relative to one year ago, while oil production was 2.8 per cent lower."

Last year, Arjoon said, this fall in revenue came when TT had no choice but to take on "additional debt to meet our spending obligations and covid fiscal relief packages."

He said this caused the overall debt burden to climb to approximately 85 per cent in May and this fiscal deficit this year could be over $8 billion.

Arjoon said one reason why S&P kept TT in the investment grade region so far "is that they expect if we cannot meet our external debt repayment obligations, we can always use the HSF (Heritage and Stabilisation Fund) and forex reserves to repay these loans."

He said this must be avoided at all costs because these funds ought to be used to foster new investment opportunities in the country, build productive capacity and new revenue earning mechanisms.

He was concerned that many small and medium enterprises that were hard hit by the pandemic may not be able to reopen, and those that do may sustain losses for some time. "The overall riskiness and financial stress of the TT economy is not going to meaningfully improve in the short term, and this will prompt a downgrade next year."