Trinidad and Tobago: Risk Assessment
Country Risk Rating
|A4||A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average.|
Business Climate Rating
|A4||The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.|
An economy affected by the persistent fall in hydrocarbon prices
After three years of sluggish growth, the country slid into in recession in 2015 and the probability of a recovery starting in 2016 is small. The energy sector (natural gas, oil and petrochemical industry), which accounts for close to 40% of the country’s GDP, is affected by the persistent fall in hydrocarbon prices. The economy’s dependency on hydrocarbons is huge. The government budget is highly dependent on tax revenues from the energy sector (and foreign trade, as hydrocarbon exports account for close to 85% of total sales abroad). Local natural gas production supplies the country’s power plants and oil production supplies the refineries. The fiscal consolidation policy initiated by the new prime minister in place since September 2015 will slow down public investment in transport infrastructures, education, healthcare and sanitation. Private investment will probably also falter, barring a rebound in hydrocarbon prices. The expected rise in unemployment and the slowdown in credit should curb household consumption and help bring down inflation.
Increase in the fiscal deficit and appearance of a current account deficit
In 2015, the increase in spending under the expansionary fiscal policy conducted by the government until September (electoral period), combined with the decline in revenues from the energy sector, has increased the fiscal deficit. In 2016, the low level of hydrocarbon prices will probably continue to limit the government’s revenue collection. Taxes, fees and royalties paid by the actors in the energy sector account for close to 50% of budget receipts. Even though efforts have made to avoid a major imbalance in public finances (sales of certain assets abroad, partial sale of state-owned companies), as well as a planned increase in levies and in the tax on corporate earnings, these measures seem doomed to failure because of the contraction in activity. Revenues should also decrease once the new VAT rate enters into force in January 2016: its will be lowered from 15% to 12.5%. The public accounts deficit will contribute to an increase in the debt level.
As for foreign trade, the country will in all likelihood post its first current account deficit in nearly fifteen years. The persistent fall in hydrocarbon prices (oil & gas), combined with the fall in oil demand from the United States (main export client), is the main contributor to this deficit. Agricultural exports are suffering from the local currency’s peg to the dollar while most of the regional currencies are on a downward trend, which is making them more competitive. Tourism revenues, concentrated on the island of Tobago, should also be adversely affected by the recession in Venezuela, where a good part of the visitors originate, in particular due to their geographical proximity. The FDI, concentrated in the energy sector should slow down.
Against this backdrop, the central bank does not rule out the possibility of another hike in its monetary policy rate in order to maintain a stable exchange rate for the local currency, the Trinidadian dollar (TT$) against the dollar. The central bank’s leeway is helped by comfortable foreign exchange reserves (covering 11 months of imports). It should nevertheless be reduced because of the fall in hydrocarbon exports. Lastly, monetary policy could also be used to prevent a significant rise in inflation.
Return to power for the People's National Movement
Given as favorite by the opinion polls, the coalition led by the prime minister, Kamla Persad Bissessar of the People’s Partnership (PP) eventually handed over the baton to the opposition. The opposition party, the People’s National Movement (PNM) led by Keith Rowley, won 23 seats versus 18 for the PP during the elections that were held in September 2015. One of the government’s priorities will be to adjust public finances in order to mitigate the fiscal slippage in 2015, but this exercise will be difficult given of the persistent fall in revenues from the energy sector. The geopolitical environment is marked by the close proximity of Venezuela, with which the relations are good. The two countries have also started discussions about exploration in the Loran-Manatee gas field located on the maritime borders between les two countries, and the plan is that the liquefaction will take place on the island of Trinidad.