While Standard and Poor’s may have improved T&T’s rating to stable from negative, leading economists are warning this does not mean all is well with the economy. Former Finance Minister Selby Wilson says the report speaks volumes about the country’s inability to diversify the economy from oil and gas.
“We must not pat ourselves for this improved performance which is driven by changes in international environment and not by actions taken by the Government in managing the economy. The report makes it quite clear that oil prices compensates more than adequately despite the productions declines in oil and gas. This, in my view, is a red flag that policymakers must take serious note of and double the efforts to have both sides of the revenue equation working in a positive direction,” Wilson told the Business Guardian.
On July 21, S&P revised the outlook on T&T to stable from negative and affirmed its ratings, including the ‘BBB-’ long-term sovereign credit rating. Finance Minister Colm Imbert had crowed that the rating “is a testimony to our country’s ability to face the COVID-19 crisis in a way that protected the population and the economy, and to exceed expectations in terms of growth and budget restraint, leading to a decline in the public debt trajectory.”
He also boasted that the new dynamics of T&T’s credit rating will translate into upgrades as the country stay the course of “budget discipline and growth reinvigoration.”
But Wilson advised the positive outlook must not result in inefficient spending as this does not provide for sustainable development, both socially and economically.
“The good news must stir policymakers to utilise this saving position to build sustainable and diversified economic growth. In this way, we would be better positioned to control the country’s growth and prosperity trajectory for the benefit of all,” Wilson emphasised.
Economist Dr Vanus James echoed similar sentiments, saying S&P has sounded a somewhat “ominous warning” to the Government and the country about “persistent delays in making reforms,” citing as examples The National Statistical Institute and the Revenue Authority, both of which have been under discussion for many years.
According to the report, S&P also predicts GDP per capita of US$19,337 in 2022 and GDP per capita in excess of US$20,000 within a year.
According to James, given that the country was at about US$19,129 in 2019, and since “no fundamental structural reforms are in sight,” then if achieved this would only be reasonable annual GDP per capita growth of about 4.8 per cent stimulated by buoyant energy prices. He emphasised more could be achieved with targeted and simultaneous efforts to diversify the economy, upgrade its institutions, and invest adequately in the national capacity to innovate.
“In that context, S&P warns that its ratings could be lowered in the medium-term if actual performance falls short of its predictions and the associated “pace of fiscal consolidation is materially slower than expected.”
Important, James posits the ratings could be lowered if the Government’s economic policies contribute to a weakening of the long-term sustainability of public finances, limit the prospects for balanced GDP growth, or materially worsen the country’s external position. According to the economist, it would not be lost on the “discerning reader” that the basis of the improved rating was almost entirely projected higher prices for oil, gas, and petrochemicals caused mainly by Putin’s war in Ukraine.
He said these higher prices are expected to last at least the next year or so, and are expected to cause an economic recovery in T&T this year and in the medium term.
In particular, James noted S&P’s expectation is that higher prices would cause growth in the value of energy-based exports and the GDP, and related improvements in the current account of the balance of payments. These realisations, he said, would enable the Government to collect higher revenues and achieve a strongly positive primary budget balance, clear some of its liabilities, add some savings to the Heritage and Stabilisation Fund, and consolidate the country’s fiscal position.
“The debt-to-GDP ratio would fall predictably, just as the Minister of Finance has already boasted in some of his recent public statements claiming both good fortune and prudent economic management,” James said.
He explained the improvement in outlook and credit rating are set against a background of a long period of low energy prices and persistent economic contraction, exacerbated by COVID-19. These had observed consequences of falling Government revenues, rising budget deficits and growing indebtedness.
“One thing should be said here for the Minister of Finance. He stoutly resisted calls (by ‘uninformed commentators’) to go to the IMF and relied instead on his own home-grown solutions to these problems.
“Now, the rising energy prices and the easier borrowing ratings would only strengthen his resolve on that matter, justifiably so,” James said.
Regarding other aspects of S&P’s rating, he said it failed to add concerns about the longer-standing delays in meeting commitments to ensure diversification of the national economy or even autonomy and the end of perpetual economic underperformance in Tobago.
James said the rating agency also misinterpreted “a stable transfer of power through elections as a stable democracy.”
Noting that S&P however, could be “forgiven” for these shortcomings James explained such matters are for the national community to care about.
“In particular, it is for the national community to care that failure to address commitments to structural economic reforms is a fundamental underpinning of the periodic weakening of the long-term sustainability of public finances. It is also for the national community to care that every round of energy price increases provides powerful incentives to ignore the need to undertake the key economic reforms needed,” James said.
He added it is for the national community to also care that a necessary element of a stable democracy that supports successful economic reforms is political and institutional reform that empowers the willing citizen to petition the legislature and participate routinely in the policymaking process.
Serious issues facing T&T
Dr Ronald Ramkissoon, former senior economist at Republic Bank is also advising that the report be should not be misused to make it appear T&T is “so much better” than it actually is, and, at the same time, it should not be used to make it appear the country has the worst economy, he said.
“We need some balance first to recognise many countries are doing far worse. To get a report which turns negative into stable is something positive. It is positive we are benefiting from high energy prices and we as a country should be grateful we are in a place where we still have with us certain strengths,” Ramkissoon explained.
He said T&T has very serious economic and social issues which must be addressed and these discussions must entail the people.
“We need to have the population get to the truth of the matter; the underlying cases of why we are where we are if we are going to ask the population to make the sacrifices that are going to be necessary,” Ramkissoon said. Additionally, he said much more can be achieved in the non-energy sector which has been neglected for far too long.
“We now know the importance of agriculture and the agroprocessing sector; that is sad. We have not done very much with our creative sectors. We have not done enough with pan and calypso and with the entertainment sector that we could export. We have not done enough with festival tourism. We have not done enough with our marine environment and those are things we should have been addressing all the time. It is now becoming even more urgent and it is a danger to encourage the population to believe the price of oil and gas will remain where they are at present,” Ramkissoon added.
Further, economist Dr Vaalmikki Arjoon added the rating is not an indication of T&T’s overall economic realities rather he notes, it is an indication of its debt repayment capabilities.
“It is in no way reflects that the cost of living and doing business are the highest ever; with many households becoming more vulnerable each day given that food prices increased by 14 per cent over the last two years.
“There is still high uncertainty and reduced confidence in the economy. We will continue to experience capital flight, where several businesses and individuals invest their funds in economies deemed less risky,” Arjoon explained.
Additionally, he said many are investing in properties and setting up businesses in the wider Caribbean and in the US.
Naturally, this will further exacerbate T&T’s foreign exchange woes. And unless business conditions become more favourable, foreign investors will be further dejected from setting up operations in T&T which further limits much needed foreign direct investment, Arjoon warned.