The International Monetary Fund (IMF) and Moody’s Ratings (Moody’s) perform two different but similar functions, one medium-term and one short-term.
The IMF’s main role is to monitor the international monetary system and the economic and financial policies of its 190 member countries. In addition to international economic surveillance, it monitors the economic health of its members through what is known as “Article IV Consultations”. Moody’s examines the same data to provide an evaluation of the country’s creditworthiness (ability to repay its debt) and assigns a “rating” which is used by international lenders to gauge how much to lend, and at what price/ interest rate. Moody’s reports tend not to look much beyond two years.
Given the roles, the language used by each organisation is very different. Moody’s language is sharper and more pointed. It reaffirms GORTT’s rating as BA2 positive but describes T&T as “a mature hydrocarbon producer” with declining supply trends with ten years of recoverable gas reserves “which exposes the country to very high energy transition and economic diversification risks.”
It notes that “a comparatively weak” growth trend and adjusted general government debt. The positive outlook is based on an “improved government effectiveness assessment” that increases the prospect that the “post-pandemic fiscal windfall” will be preserved.
Moody’s points to the strong fiscal buffers, the HSF and forex reserves as strengths and notes GORTT’s low vulnerability to liquidity risks. Conversely, it notes that the GORTT debt is high relative to its peers and its dependence on the energy sector which is “maturing” is risky. The assessment notes that the ratings could improve if there is tangible success in growing the economy and improving its resiliency. It mentions government management of its finances and its ability to generate enough revenue to cover its expenditure (primary surplus) and the performance of the energy sector as improvement areas.
Like Moody’s, the IMF notes an improved fiscal balance, meaning that the Government moderated its expenditure relative to its revenue. However, it does not expect this trend to continue in the short run and expects the 2024 deficit to be twice as large. But the general tone of the report is positive, noting that it expects growth to continue in the medium term based on the strength of the non-energy sector. This non-energy sector, however, is not well defined. The petrochemical sector is now included in the manufacturing sector and therefore counts as part of the non-energy sector. This complicates things as petrochemical manufacturing depends on natural gas production, a complication left unclarified in the report.
Like Moody’s, the IMF also notes the strong fiscal buffers (HSF and Forex reserves) as positives. It also welcomed “the authorities” efforts to enhance revenue mobilisation,” meaning the GORTT’s efforts to increase taxation (eg, property tax, gambling tax, and the operationalisation of the T&T Revenue Authority). It also suggested that the Government should tax the energy sector more by adjusting the fiscal regime, boosting non-energy revenue, and strengthening tax compliance and administration.
The IMF’s outlook assumes improved taxation, managing government expenditure more tightly and boosting future natural gas production. But it also raises some important red flags. Whilst it suggests continued growth in the medium term it remains silent on the size of the growth rate. If real growth remains low the country will not be able to maintain the generous level of transfers and subsidies which account for approximately 50 per cent of GORTT expenditure. Instead, it speaks to the need for fiscal discipline, a “rules-based medium-term fiscal framework will enhance fiscal discipline, avoid procyclical spending, and mitigate fiscal risks.” How many politicians will agree to that given the inherent limitation on spending?
Government publicists will speak to the fact that the IMF report is positive on medium-term growth because it is consistent with the electoral five-year cycle. Bigger risks continue beyond the electoral cycle, for example, the ability to generate foreign exchange. The warning is very subtle. The global energy transition “will impact the viability of fossil fuel extraction and result in lower government revenues. To avoid disruptive policy adjustments, it is important to design a sustainable long-term fiscal strategy.”
This is very diplomatic language as is the argument that there is a structural imbalance in the foreign exchange market which cannot be addressed by using the current oligopolistic “rationing” system (my words). It says addressing this weakness is a priority. The current approach maintains the existing business structure and does not facilitate change
How can there be growth, stability and resilience in the medium term if the social security system is financially unsustainable? Economic growth is predicated on investment expenditure, investing for the future which in turn depends on savings for the long term. This means pension money. The IMF quietly points out the potential fiscal risks posed by the widening fiscal deficit in the National Insurance system but avoids addressing the bigger risk posed by the Government’s unfunded pension plan to its public sector employees which is a multiple (3X) of the NIB fund. Changing the retirement age is only a small step in a series of steps that need to be implemented with some urgency
If these two reports were focused on providing an evaluative summary they would both say that there has been some improvement, but a considerably greater effort is required.
