Trinidad & Tobago’s finance minister, Colm Imbert, has sought to justify the country’s policies despite the 23 November downgrade by international credit ratings agency Moody’s from Ba1 to Ba2. In response to the downgrade, he said: “This decision by Moody’s collides with the policy advice we have received from all international organisations to protect our country and support the recovery in the current circumstances…[The use of fiscal policy] helped avoid destruction of the economic and social fabric and was both sensible and sensitive in our view.” The problem for Imbert, however, is that there is not necessarily any incompatibility between Moody’s assessment of increasing risk and the fact that his policies have generally been in line with the advice of “all international organisations”, by which he primarily means the International Monetary Fund (IMF). The fact that the IMF and others believe that Trinidad has been doing what it must do to protect the country’s economic and social fabric in the face of the coronavirus (Covid-19) pandemic is not incompatible with the conclusion that these policies involve increased risk for the country’s creditors.
Moody’s justified its decision by saying: “The Ba2 rating reflects the sovereign’s [TT’s] diminished shock-absorption capacity in the aftermath of the pandemic, evidenced by a materially higher general government debt burden of 85-90% of GDP over the next three years, up from 62% in fiscal 2019.” The agency added: “A higher debt burden will result in a weaker credit profile even with a strong economic recovery in 2022 (of 5.9%) and GDP growth of about 2% in 2023-24 driven to a large extent by both higher energy prices and hydrocarbon production levels.” Moody’s main concern, over the longer term, is the “mature profile of the hydrocarbon sector” and the “limited progress in economic diversification”. However, despite the downgrade, Moody’s did give Trinidad a “stable” outlook based on its view that the government’s efforts “will prove effective in improving the fiscal position by increasing non-hydrocarbon revenue and curtailing spending”.
The present increase in the debt burden is a result of pandemic-related fiscal support “which drove the fiscal deficit to 11.2% of GDP last fiscal year and 9.2% this year” plus economic contractions every year since 2016. After a projected recovery of 5.9% in 2022, Moody’s is projecting annual GDP growth “of about 2% in 2023-24” against the government’s projections of growth above 3.5% in 2023 and 2024.
Two days before Moody’s passed its latest judgement on the Trinidad & Tobago economy, the IMF had issued the preliminary findings on its 2021 Article IV Consultation, and these did support Imbert’s contention that his policies had the IMF’s seal of approval. The IMF statement, issued on 21 November, said: “Trinidad and Tobago faced unprecedented challenges in 2020-21. The combined effects of Covid-19, energy production cuts, and price shocks pushed the economy further into recession. The authorities’ decisive policy response helped contain Covid-19’s spread, protect lives and livelihoods, and pave the way for a strong recovery.”
Imbert couldn’t really have asked for more than that, although the key IMF recommendation was that “once the recovery is firmly in place, policy attention should focus on reducing public debt levels and rebuilding fiscal buffers, supported by a credible fiscal framework”.
Both Moody’s and the IMF point to an estimated economic contraction of 1% in 2021, following the 7.4% contraction in 2020. For 2022, the IMF is projecting growth of 5.7%, slightly below Moody’s projection of 5.9%. On the fiscal deficit, Moody’s is looking for a 9.2% deficit this fiscal year (ending 30 September 2022), falling to 5.8% the following year. The IMF is working on slightly different figures, saying: “The fiscal deficit is projected to narrow to 7.5% of GDP in FY 2022, reflecting a combination of higher revenue mobilisation and modest spending cuts. Over the medium term, the fiscal deficit is projected to gradually narrow and reach balance by FY2027.”
The IMF says that public debt, which reached 87% of GDP in FY2021, will “remain above the soft target of 65% of GDP over the projection horizon”.
With regard to the outlook, the IMF sees the risks “tilted to the downside”, largely due to risks beyond the country’s control such as a resurgence of the pandemic with new strains emerging, weakening energy demand and prices, and “unexpected supply-chain or logistics issues [that] could affect levels of energy production”. The IMF is urging the government to prepare a contingency plan and to publish a full report on its Covid-19 related spending.
The IMF is by no means taking a hawkish line on Trinidad’s policy dilemmas. Indeed, it specifically states: “Careful planning and coordination will be essential to withdraw support gradually and avoid undermining the recovery”. It also says that the government’s plan to keep expenditure at last year’s levels is appropriate and justified because “the availability of fiscal buffers allows continued temporary high spending to mitigate the effects of the pandemic”.
The IMF also says that the medium-term fiscal plan should be “growth-friendly and inclusive” while at the same time aiming to reduce public debt and rebuild buffers. It calls on the government to improve revenues through “tax reforms and expenditure rationalisation”. On the expenditure side, the IMF is urging the government to “streamline” transfers to state-owned enterprises (SOEs) and to “phase out” subsidies.
Both Moody’s and the IMF agree that diversification of the economy is essential. Moody’s notes that the hydrocarbons sector accounts for about 25% of GDP and “close to 80% of exports”, but it is a mature sector and the “significant reliance on hydrocarbons for government revenue and export earnings leaves TT highly vulnerable to price and production downturns”. As the agency points out, the risk can already be seen in the fall in per capita income levels from US$29,053 in 2015 to US$23,359 this year.
But if the answer for Moody’s is diversification, it also warns that “economic diversification takes time” and structural factors including skills, mismatches in the labour market, high import dependence, and shortages of foreign exchange “will likely limit diversification prospects”.
The IMF equally urges the need for diversification, saying “policies to develop the non-energy sector are critical to support medium-term inclusive growth and enhance resilience”. The reforms it says are necessary to achieve this include removing obstacles to doing business and improving education and vocational training “to help address skills mismatches and boost productivity and stimulate entrepreneurship”.
Although Imbert has enthusiastically cited the IMF in defence of the country’s Covid-19 response, and as an attempted rebuttal of the Moody’s downgrade, he has been equally adamant that there can be no formal recourse to IMF aid. In his 3 October budget speech, he warned against the downsides of entering an IMF programme, adding that, other than surveillance, technical assistance, and capacity advice, “we see no need to seek any…form of assistance from the IMF at this time on in the near future”.
