Trinidad and Tobago. Summary. Moody s Ba1 / S&P BBB+ / Fitch NR 1 Economy: Industry 48%, Services 51% Economic Indicators

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1 Trinidad and Tobago Summary Moody s Ba1 / S&P BBB+ / Fitch NR 1 Economy: Industry 48%, Services 51% Trinidad and Tobago is the largest oil, natural gas, and petrochemical producer in the Caribbean. The country is also the largest liquefied natural gas (LNG) exporter to the United States, though almost half of its exports go to South America. Years of double-digit current account surpluses led by energy exports have resulted in substantial foreign-exchange reserve accumulation, as well as the establishment of a sovereign wealth fund (SWF). However, production volume of both oil and gas has gradually decreased over the years. The country s over-reliance on the energy sector is its main vulnerability the oil shock caused fiscal deterioration and it had to tap its SWF for the first time. Trinidad and Tobago has embarked on a fiscal-adjustment plan that includes reduction of fuel subsidies and the divestments of certain state-owned enterprises (SOEs), which represent a relatively large contingent liability. However, there is much room for progress as the IMF estimates that the country needs to adjust GDP by 6.5% over several years to ensure debt levels remain manageable. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 19,611 19,332 17,323 15,454 14,785 15,072 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Haver Analytics, IMF 441

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency Local Currency A+ AA- A A+ A- BBB+ BBB A A- BBB+ BBB BBB- BBB- BB+ BB+ BB BB Moody s S&P Moody s S&P As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Trinidad 2012 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 442

3 Trinidad and Tobago Strengths Energy Exporter Trinidad and Tobago is the largest oil and natural gas producer in the Caribbean. Its hydrocarbon sector moved from an oil-dominated to mostly natural gas-based sector in the early 1990s. Trinidad and Tobago produces 3.3 billion cubic feet (bcf) per day, ahead of Bolivia and Brazil with production rates of 1.9 bcf and 2.3 bcf, respectively. 2 Excluding pipeline imports from Canada, Trinidad and Tobago is the largest LNG exporter to the United States, accounting for 95% of total US LNG imports in 2016 although its export volume has decreased as the United States becomes more energy independent. 3 However, only 10% of its exports go to the United States, as Trinidad and Tobago has diversified its exports base to other markets such as South America and Europe, accounting for 49% and 11% of exports, respectively. 4 Trinidad and Tobago houses one of the largest natural gas processing facilities in the Western Hemisphere, the Phoenix Park Gas Processor complex, which can process 2.0 bcf per day. The Government has also signed an agreement with Venezuela to build a gas pipeline that would allow Trinidad to import and re-export gas for domestic consumption. 5 In addition, the country has developed a vibrant downstream petrochemical sector. With eleven ammonia plants and seven methanol plants, Trinidad and Tobago is the world s largest exporter of ammonia and the second-largest exporter of methanol. 6 Strong External Position and Sovereign Wealth Fund Energy exports have underpinned solid current account surpluses for many years, averaging 13.6% of GDP from 2000 to 2014, before the commodity shock. However, in the years following the shock, the IMF expects this to change to an average deficit of 7.5% of GDP from 2018 to 2022, 7 due to lower gas export volumes and prices. Years of surpluses led the country to have a relatively strong foreign currency (FX) buffer of US$8.7 billion 8 as of August 2017, the equivalent of more than 40% of GDP. 9 In addition, the government set up a stabilization fund in 2007, which, as of June 2017 had assets of US$5.61 billion, 10 approximately 27% of GDP, cementing Trinidad and Tobago s net external creditor position. Trinidad and Tobago has instituted a savings rule which contributes 60% of excess energy revenues toward the fund, and allows withdrawals of up to US$1 billion if needed, given energy revenues shortfalls are at least 10% of that budgeted in a fiscal year. 11 Trinidad and Tobago last contributed to this fund in September 2013, and withdrew savings in both 2016 and Solid Banking Sector Trinidad and Tobago has a strong banking sector, with eight commercial banks operating in the country. These banks have not experienced adverse effects of the negative recessionary macro conditions since the 2014 oil shock. The banking sector is liquid, has a strong riskweighted assets capital adequacy ratio of 21.4%, and a relatively low nonperforming loan ratio of 3.4%. 13 Contributing to the strong attributes of this sector, Trinidad and Tobago plans to implement Basel II standard in Increased Indebtness but Low Level of External Debt While government debt has increased from 40% of GDP, prior to the oil shock, to its current level of approximately 60% of GDP, most of the debt is denominated in local currency. As of September 2017, local debt amounted to 46% of GDP while external debt was at 16%. 15 About 74% of Trinidad and Tobago s total debt is local, providing a stronger buffer against external shock and mitigating credit risk. Despite the local liquidity in the banking system, 443

4 Lazard Emerging Markets Debt the IMF noted that Trinidad and Tobago will need to make a significant multi-year adjustment of 6.5% of GDP in the medium term, in order to put debt on a sustainable path. 16 SOE Divestment Program and Reforms The government has 62 SOEs, of which 49 are wholly owned. These SOEs operate across a wide range of sectors, including oil and gas, infrastructure, financial services, tourism, and agriculture, which in aggregate had an equity value of TT$13.94 billion in In response to the downturn in the oil and gas sector, the government has started a divestment program of some of its SOEs. This is positive in the short term because it helps with government finances. More importantly, increases in private participation tends to push for more efficiency in SOEs, ultimately bringing greater economic growth. Additionaly, in 2017 the government started the restructuring of PetroTrin, a money-losing SOE. 18 Weaknesses Dependence on the Energy Sector For the past few years, energy and its derivatives have accounted for an average of approximately 40% of GDP, half of all total government revenues, and 85% of exports. 19 As such, the economy is highly vulnerable to developments in the sector, even though the country has a growing financial services hub and a relatively large manufacturing industry that supplies beverages and processed food items to the rest of the Caribbean. The IMF has assessed that diversifying its economic base is the country s most important medium-term challenge. The recent oil shock illustrates the perils of such dependency; for instance, energy-sector revenues decreased from 13% of GDP in 2015 to an estimated 6% 7% from 2016 to Secular Decline in Oil Output and Challenges in Natural Gas Market As most efforts have gone into developing the natural gas and petrochemical industries, oil production has declined from 170,000 barrels per day (bpd) in to 96,000 bpd in 2016, its lowest level ever. This decline is due to a combination of a lack of new discoveries and a reduction of condensate production. Similarly, natural gas production peaked at 4.3 bcf in 2010, but production declined to 3.3 bcf per day in At the same time, the shale gas revolution in the United States has led to significant price changes. The Henry Hub gas price, the weighted average price for Trinidad and Tobago, steadily decreased from US$4.37 per million British thermal units (BTUs) in 2014, to US$2.49 in In addition to pricing pressure, the gas sector suffers from curtailment problems, expected to continue at least until Structural challenges will likely persist going forward, and energy output is unlikely to rise significantly in the next few years. Contingent Liabilities The true size of Trinidad and Tobago s public sector is evidenced not only by government expenditures, estimated at 34.7% of GDP in 2018, 25 but also by relatively large contingent liabilities, amounting to 19.9% of GDP as of September These represent obligations of the government for a number of entities that, for the most part, it fully owns and for which there are explicit guarantees, such as the Trinidad and Tobago Electricity Commission and the Housing Development Corporation. The profitability of these entities is unclear, though the IMF has reported in previous Article IV consultations that public utilities and state enterprises receive significant annual transfers, as high as 3.5% of GDP

5 Trinidad and Tobago Country Background Size Capital Population 5,128 KM 2 (174th) Port of Spain 1.2 Million Religion Protestant 32%, Roman Catholic 22%, Hindu 18%, Muslim 5%, Other 23% Median Age 36 Years Literacy Rate 99% Independence 31 August 1962 Political System Government Leadership Next Election 2018 Legislative Branch Parliamentary Republic President Anthony Carmona; Prime Minister Keith Rowley Bicameral Parliament Economy Agriculture 0.4%, Industry 48.4%, Services 51.2% Labor Force Agriculture 3.4%, Industry 11.5%, Services 84.7% Merchandise Exports Petroleum and Petroleum Products, Liquefied Natural Gas, Methanol, Ammonia, Steel Products, Beverages, Cereal, Cocoa, Fish, Preserved Fruits, Cosmetics, Household Cleaners, Plastic Packaging Export Partners United States 39.2%, Argentina 9.3% Currency As of November 2017 Source: CIA Trinidad and Tobago dollars (TTD) 445

6 Lazard Emerging Markets Debt Country Timeline 1976 Trinidad and Tobago becomes a republic with the former Governor-General, Ellis Clarke, as president and Eric Williams as prime minister Tobago-based National Alliance for Reconstruction (NAR) headed by Arthur Robinson wins the general election More than 100 Islamist radicals blow up the police headquarters, seize the parliament building and hold Robinson and other officials hostage for several days in an abortive coup attempt Capital punishment restored General election yields an unprecedented tie, with the governing party and main opposition winning 18 seats each. Prime Minister Patrick Manning requests parliament be suspended amid continuing deadlock over tied elections 2003 Third general election in three years ends months of political deadlock. Prime Minister Patrick Manning's ruling People's National Movement declares victory President Maxwell Richards is sworn in after being elected by MPs in February. State-owned sugar company Caroni shuts down with the loss of more than 8,000 jobs Regional leaders gather to inaugurate the Trinidad-based Caribbean Court of Justice, a final court of appeal intended to replace Britain's Privy Council. The court hears its first case in November At least 10,000 people take part in a protest named the Death March against a soaring rate of violent crime Former Prime Minister Basdeo Panday is sentenced to two years in prison for failing to declare an overseas bank account while he was in office. The conviction is quashed on appeal Plans are announced to close the centuries-old sugar industry. Production had been hit by cuts in European subsidies The governing People's National Movement is re-elected. Source: BBC 446

7 Trinidad and Tobago Notes 1 As of December BP Statistical Review of World Energy 2016 BP, June 2016, energy-economics/statistical-review-of-world-energy/downloads.html. 3 Natural Gas: U.S. Natural Gas Imports by Country, U.S. Energy Information Administration, accessed on December 3, Olivierre, Nicole, Speech to Stakeholders at Chamber AGM, Ministry of Energy and Energy Industries, 7 October 2015, accessed on 7 December 2015, accessed 3 December Oil and Gas Industry: Overview, Ministry of Energy and Energy Industries, accessed on November 18, 2016, 7 World Economic Outlook Database, October 2017 edition, International Monetary Fund, accessed 3 December Bloomberg data, 3 December Based on 2017 nominal GDP. 10 Trinidad and Tobago Heritage & Stabilization Fund: Quarterly Investment Report, gov.tt/wp-content/uploads/2017/09/hsf-quarterly-report-april-june-2017.pdf accessed 3 December African Development Bank, accessed on 7 December 2015, Documents/Generic-Documents/Presentation%20-%20Trinidad%20and%20Tobagos%20Heritage%20 and%20stabilisation%20fund%20(hsf).pps. 12 Trinidad and Tobago Heritage & Stabilization Fund: Quarterly Investment Report, gov.tt/wp-content/uploads/2017/09/hsf-quarterly-report-april-june-2017.pdf accessed 3 December 2017 accessed 3 December Trinidad and Tobago 2017 IMF Article IV accessed 4 December accessed 3 December accessed 4 December Press-Release-Staff-Report-and-Statement-by accessed 4 December State Enterprises Investment Programme 2017, Government of the Republic of Trinidad and Tobago, accessed on 19 November 2016, accessed 3 December Trinidad and Tobago: 2014 Article IV Consultation, International Monetary Fund, IMF Country Report No. 14/ 271, September 2014, 20 IMF Article IV Trinidad and Tobago, June 2016, 21 BP Statistical Review of World Energy 2017, BP, energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-full-report.pdf 22 BP Statistical Review of World Energy 2017, BP, energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-full-report.pdf. 23 Economic Bulletin September 2017, Volume XIX No. 2, Central Bank Trinidad & Tobago, accessed 4 December Burnett, Verne, Gas problems won t end soon, Trinidad and Tobago Newsday, 30 October 2015, accessed on 7 December 2015, 25 Trinidad and Tobago 2017 IMF Article IV accessed 4 December Public Sector Debt Outstanding per cent of GDP, Central Bank of Trinidad and Tobago, accessed on 4 December 2017, 27 Trinidad and Tobago 2017 IMF Article IV accessed 4 December

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