By financial consultant VED SEEREERAM
In one of the daily newspapers dated, May 23rd, 2020 the reporter wrote, “Finance Minister Colm Imbert boasted that Trinidad and Tobago has maintained a good rating from the international rating agencies.” There is nothing to boast about as the rating does not reflect reality. The Minister has on many occasions in the past expressed his concern on the economy and he is the first to know that all sources of income for the Government are drying up while the list of outstanding payables increases by the day. Let us not be fooled by a Ba1 negative rating. The citizens of this country know better and the evidence is out in the open for all to see. The economy is not well and the “negative” qualification to the Ba1 rating is very instructive where Moody’s is letting us know that things will get worse.
The Jaws Syndrome
The Government is suffering from the “Jaws Syndrome” where they know that there are sharks in the water but scared to announce it, fearing that the tourist would not come, leaving the town’s economy in shambles. Most citizens know about the sharks in the water and many of us are being eaten alive. How can the Government, despite the abundance of evidence in the country pretend that all is well? We need a Government that is honest with the true state of the economy, failing which we will not be able to find appropriate solutions and this is where we are now at. If we are in a good position then why the Economic Committee? All is well, all is well ringing the bell. We can go to sleep and wake up to a bright tomorrow. Mr Minister?
The Minister was also quoted as saying “We were able to get our credit rating affirmed because we have a comprehensive medium macro-economic framework that we produced for Moody’s and they accepted it”. Mr Minister. How could the Government produce such a plan when we do not have a short-term plan to get over the Covid-19? That is what the Committee 22 now 23 was established for. How could there be a medium-term plan if the starting point is not yet established?
T&T is in economic crisis
Many commentators in the US are suggesting that approximately 50% of the employees who were laid off due to the lockdown may not be re-employed. That is a big and worrying number. What’s the expectation for this country? What are our economists and experts projecting? This is a critical number for T&T. We must try and anticipate what this number will be to create meaningful short-term, medium-term and long-term plans. We need to feed the unemployed and find jobs for them. Is the Committee of 23 doing this exercise and is the Minister aware of the expected levels of unemployment? Apart from further drawdowns from the HSF to create artificial jobs what are Government plans to deal with the high level of unemployment? Building houses for the unemployed and constructing roads are just not going to cut it. These investments do not create sustainable employment but rather lead us into further debt without the means to repay. When the HSF runs out then what? Moody’s Report (MR) was silent on the high levels of unemployment and the consequential social issues. The MR was also silent on the growing disparity in income in the country which will impact on Government resources and their capacity to repay loans. In other words, impact on the country’s credit rating.
Moody’s previous rating was Ba1-stable now downgraded to Ba1-negative. The Government is being given ample warning that if there are no positive changes to the economy then a further downgrade will be inevitable. This will have serious consequences for our capacity to borrow in the international capital markets and will increase the cost of borrowing. A further downgrade will place us in the junk bonds category and will seriously limit the investor base, many of whom only invest in investment-grade bonds.
There are three major reasons for the generous rating, 1) The size of the HSF, US$6.1 Billion as of April 30th, 2020. 2) The size of our Foreign Reserves of just under US$7Billion, and 3) Liquid local financial market.
Heritage and Stabilisation Fund (HSF)
Moody’s is proposing that in the event of need the Government can draw down on the HSF to facilitate the repayment of external debt. That is true and the extent of the deficit will determine the rate of drawdown. So, we do have funds for another year or so. How comfortable are we to be in the middle of the desert driving in a 4×4 not knowing when and where the next gas station is? We certainly will not be venturing on all the tourist attractions veering from the main path. Notwithstanding the HSF, we are in a very high-risk position and any lender worth their salt will be very reluctant to lend to T&T.
The Government can access the foreign reserves to meet their obligations. However, to do so they will crowd out the private sector and quickly reduce the US$7 Billion reserves (including the funds at the IMF) we now have. Unlike the HSF where the Government can drawdown subject to legal limitations, they cannot just access the Foreign Reserves but must find TT$ to buy from the Foreign Reserves. They can find TT$ by borrowing from the local market. There are however limitations to borrowing as explained in the next paragraph.
Tapping the Local Capital Market
Under normal circumstances, the Government can borrow from the local market. However, challenges to this assumption are becoming evident. The local financial institutions are guided by the debt to GDP ratio to lend to the Government. Notwithstanding how stupid and irrelevant the ratio is, the banks use it to their peril. Mr Nigel Baptiste of Republic Bank once said he would be worried if the ratio is at 80%. We now see that Moody’s is predicting the ration may go as high as 84%.
This puts Moody’s assumptions on the appetite for Government’s risk by the local financial institutions at risk. The local Banks will be getting very nervous by Moody’s revelations. No additional funds from the local market mean that the Government will not have the funds to be able to access the Foreign Reserves. Downfalls two of Moody’s basis for the rating.
The rating agencies are hired by and paid by the Issuers, in this case, Government. There is an inherent conflict of interest and in the circumstances, the Rating Agencies usually grade higher than what the grading should be. Citizens should also be aware of the built-in bias of such a report. In a December 28th, 2015 report by the SEC (USA) said: “The credit rating agencies continue to pose a threat to the existing financial system”. We do remember Enron was rated investment grade not too long before they went belly up. Not too long ago the credit rating agencies had rated the sub-prime mortgages with AAA ratings that lead to the financial slaughter of 2008. Despite the efforts by Dodd-Frank in the US to change the system, very little has changed.
A few years ago, I was asked by a client to assess the risk of a borrower although a Credit Rating Agency had already done a rating. My findings were very different from those of the rating agency. Based on the evidence presented the client accepted my recommendations and did not advance the loans.
Let’s take the rating with a pinch of salt. We are quite capable of conducting our analysis to determine how well the Government is doing and how well the economy is doing. Simply put, it’s bad and getting worse.