Moody’s In­vestors Ser­vices re­cent­ly pro­vid­ed their lat­est sov­er­eign cred­it rat­ing on Trinidad and To­ba­go. The coun­try rat­ing was af­firmed at Ba2 and the out­look was moved from sta­ble to pos­i­tive.

If there are no un­to­ward oc­cur­rences a move from sta­ble to pos­i­tive can have two pos­si­ble move­ments go­ing for­ward. Ei­ther there is an ac­tu­al rat­ings up­grade in the fu­ture or the rat­ing re­mains the same but the out­look moves from pos­i­tive back to sta­ble.

What should be clear, is all oth­er things be­ing equal, T&T is not at im­me­di­ate risk, at least ac­cord­ing to Moody’s, of a cred­it rat­ing down­grade. A re­lease from the Min­istry of Fi­nance spoke about the con­ver­gence and har­mon­i­sa­tion of the coun­try’s cred­it rat­ing and sug­gests a mea­sure of con­fi­dence that oth­er rat­ing agen­cies would al­so see T&T’s per­for­mance in a pos­i­tive light.

Of­ten times when there is bad eco­nom­ic news, the Min­is­ter of Fi­nance is called to ac­count. That hap­pens in this col­umn, but al­so and quite ap­pro­pri­ate­ly, the Min­is­ter al­so re­ceives cred­it here where it is due. This is one ex­am­ple where one has to com­mend the Min­is­ter for his stew­ard­ship.

A cred­it rat­ing agency is ex­ter­nal and in­de­pen­dent and so their re­port should be re­spect­ed and the re­spon­si­ble per­son­nel recog­nised for the re­sults achieved.

The re­lease from the Min­istry of Fi­nance makes the point that bears re­peat­ing. “The im­prove­ment in the coun­try’s out­look is al­so an ac­knowl­edg­ment of pol­i­cy ef­fec­tive­ness, il­lus­trat­ed by the ca­pac­i­ty of the Gov­ern­ment to im­ple­ment dif­fi­cult but nec­es­sary long-term re­forms in re­struc­tur­ing trans­fers and sub­si­dies and im­prov­ing rev­enue col­lec­tion.”

The re­lease fur­ther goes on to quote from the re­port—“Moody’s no­tably ob­served: “The gov­ern­ment’s adopt­ed struc­tur­al fis­cal and eco­nom­ic re­forms are re­flect­ed in an im­prov­ing in­sti­tu­tions and gov­er­nance strength as­sess­ment as a dri­ver of this ac­tion.”

My very first col­umn in this space all of 19 and a half years ago made the point that the mar­ket is not the econ­o­my. I was at the time demon­strat­ing that there can be in­stances when an econ­o­my is per­form­ing well and it is not re­flect­ed in the stock mar­ket per­for­mance. There are al­so in­stances where the re­verse is true.

I want to ex­tend that analy­sis be­tween the econ­o­my and the stock mar­ket to com­pare the econ­o­my ver­sus you the per­son read­ing this col­umn. That com­par­i­son gives rise to the ques­tion in the head­line­have you been down­grad­ed?

Cred­it rat­ing

Ap­pre­ci­ate that a cred­it rat­ing speaks to one’s abil­i­ty to pay one’s debt oblig­a­tions. In per­son­al fi­nance terms, it is anal­o­gous to you earn­ing $10,000 per month with $2,000 of your salary go­ing to­wards ser­vic­ing your debts. At that lev­el, you may be on a good cred­it rat­ing (in­vest­ment grade).

If your earn­ings fall to $8,000 a bank will still see you as a good cred­it, but they will be look­ing at you a bit clos­er go­ing for­ward be­cause your mar­gin of safe­ty has de­clined.

The sum of $2,000 on $10,000 rep­re­sents 20 per cent of your earn­ings go­ing to­wards debt. At $8,000 it means 25 per cent of your earn­ings goes to­wards debt. To con­vince the bank that your abil­i­ty to ser­vice your debts re­mains at the ini­tial lev­el, you may want to ei­ther in­crease your in­come or re­duce your ex­pens­es so that in per­cent­age terms the amount avail­able for debt ser­vic­ing re­mains the same.

For an in­di­vid­ual to re­duce their ex­pens­es, one has to con­sid­er the mix of fixed ver­sus vari­able costs and dis­cre­tionary ver­sus non-dis­cre­tionary in­come. Some­times it is not al­ways clear cut; for ex­am­ple you have to spend mon­ey on food so at some lev­el those costs are fixed. How much you spend de­pends on your lifestyle choic­es as well as in­fla­tion. If your salary de­creas­es, you may cut back and sim­ply pur­chase the ba­sics. This process flows down to de­ter­mine your abil­i­ty to ser­vice your debts.

Sub­si­dies

Cit­i­zens have ben­e­fit­ed from a num­ber of sub­si­dies and trans­fers. The re­lease from the Min­istry of Fi­nance spoke about re­struc­tur­ing trans­fers and sub­si­dies. This is a nec­es­sary mea­sure but the oth­er side to that ac­tion is more of the cost be­ing trans­ferred to the cit­i­zens.

In the past, these sub­si­dies meant that when con­sid­er­ing which ve­hi­cle to pur­chase you can eas­i­ly over­reach in the amount you spend in part be­cause you un­der­es­ti­mate the re­cur­ring cost of fu­el as you had come to ex­pect that the sub­sidy will al­ways be there.

Sim­i­lar­ly, in the past you may not have set aside mon­ey for your chil­dren’s ed­u­ca­tion on ac­count of the GATE pro­gramme that pro­vides free ter­tiary ed­u­ca­tion. Now that it has been scaled back, you have an­oth­er cash flow is­sue to con­tent with. There are many more ex­am­ples that I can cite but the bot­tom line is, as cit­i­zens you have a high­er cost struc­ture to con­tend with, and if that comes on top of ex­ist­ing debts and your in­come isn’t in­creas­ing to match this new cost struc­ture, then you are go­ing to strug­gle.

By my es­ti­ma­tion, around half of T&T’s pop­u­la­tion is with­in 20 years to re­tire­ment or re­tired. Those cit­i­zens have an even big­ger wake up call be­cause there will like­ly be more chal­lenges as­so­ci­at­ed with things like free med­i­cines and free hos­pi­tal care.

The av­er­age 40 -50 year old in T&T has to con­sid­er these is­sues. Their in­di­vid­ual cred­it rat­ing has like­ly been down­grad­ed and there isn’t much time to catch up. Be­tween 1992 and 2007 the T&T econ­o­my grew in terms of gross do­mes­tic prod­uct every sin­gle year. This is equal to the work­ing life of the av­er­age mid­dle-aged per­son in T&T. An ex­pand­ing econ­o­my meant in­creas­ing job op­por­tu­ni­ties, up­ward mo­bil­i­ty, salary in­creas­es and more ben­e­fits and perks. It al­so meant greater amounts of sub­si­dies as time when by. All of that is no longer the case.

Last year was the first time since 2007, that our econ­o­my achieved a mea­sur­able lev­el of eco­nom­ic growth. As en­er­gy sec­tor rev­enues re­main volatile, the on-shore econ­o­my is go­ing to have to play an in­creas­ing­ly larg­er role in gen­er­at­ing Gov­ern­ment rev­enues to meet its oblig­a­tions. Yet our birth rate in T&T is be­low re­plen­ish­ment lev­els which means that, all oth­er things be­ing equal, we will con­tin­ue to be faced with an in­creas­ing­ly aged pop­u­la­tion. As more peo­ple move in­to re­tire­ment and live longer there will be a small­er work­force of per­sons who can be taxed to pro­vide the non en­er­gy sec­tor rev­enues that we need.

In the short term our out­look is rat­ed pos­i­tive but over the longer term we have sig­nif­i­cant head­winds to nav­i­gate. At a per­son­al lev­el many are com­ing to re­alise that they can­not con­tin­ue to over­spend and they are al­so like­ly un­der sav­ing.

Re­al­is­ing this and act­ing on this re­al­i­sa­tion cre­ates an­oth­er prob­lem known as The Para­dox of Thrift.

If peo­ple recog­nise that they have in ef­fect been down­grad­ed and take steps to rec­ti­fy their sit­u­a­tion, then they are like­ly to con­sume less. As this hap­pens, eco­nom­ic ac­tiv­i­ty slows with a knock-on ef­fect on tax re­ceipts for the State and job op­por­tu­ni­ties for in­di­vid­u­als.

What of­ten hap­pens in sit­u­a­tions like this is that Gov­ern­ment picks up the slack through in­creased spend­ing. This is the aus­ter­i­ty ver­sus ex­pan­sion de­bate that has tak­en place around the world over the last decade.

The prob­lem is that in our years of plen­ty we have not, as a na­tion, saved as need­ed. I made this point at least once per quar­ter every year for more than a decade dur­ing the pe­ri­od when we were sup­posed to have been sav­ing more. We now have to re­verse many things from that era.

Our past over­spend­ing re­sult­ed in the busi­ness sec­tor be­ing crowd­ed out by Gov­ern­ment. The re­sult of this crowd­ing out, was a lack of in­vest­ment in plant and ma­chin­ery for the long term be­cause busi­ness­es in­tu­itive­ly knew the Gov­ern­ment spend­ing was un­sus­tain­able. In­stead they opt­ed to im­port and sell in or­der to prof­it short term from a “boom” econ­o­my.

Now as we re­struc­ture, we have to bal­ance the need for cut­backs with the in­ven­tive­ness to en­gi­neer an en­tre­pre­neur­ial class pre­pared to in­vest in on shore T&T. That is the chal­lenge that lies ahead of us. Thank­ful­ly T&T did not re­ceive a cred­it down­grade but at an in­di­vid­ual lev­el we have ex­pe­ri­enced pro­gres­sive down­grades.

If we were to ever be up­grad­ed again, we will have to build out a thriv­ing on­shore econ­o­my. That is the chal­lenge that lies ahead.

Ian Nar­ine is a fi­nan­cial con­sul­tant try­ing to shore up what is hap­pen­ing on shore. Please send your com­ments to

ian@ian­nar­ine.com