Republic of Trinidad & Tobago: Summary Bond Terms

Transcription

1 Republic of Trinidad & Tobago: Summary Bond Terms Trinidad & Tobago Bonds 9.75%, %, 2027 Issuer Currency Republic of Trinidad & Tobago USD Issue Date July 1, 2000 May 17, 2007 Tenor at Issue 20 Years 20 Years Time Remaining Till Maturity 7.58 Years Years Duration Maturity Date July 1, 2020 May 17, 2027 Maturity Type Bullet Bullet Coupon 9.75% p.a. semi-annual (January & July) 5.875% p.a. semi-annual (May & November) Day Count Basis 30/360 30/360 Bond Rating Baa1 (Moodys; Dec 2012 ), A Baa1 (Moodys; Dec 2012 ), A (S&P; Dec 2012) (S&P; Dec 2012) Issuer Rating Baa1 (Moodys; Dec 2012 ), A Baa1 (Moodys; Dec 2012 ), A (S&P; Dec 2012) (S&P; Dec 2012) Use of Proceeds General Development Projects Repay / Refinance Debt Governing Law New York New York Recommendation Sell Sell Page 1 of 10

2 Republic of Trinidad & Tobago Bonds - Analysis Country Overview The Republic of Trinidad and Tobago (T&T) is described as one of the wealthiest, most prosperous and developed nations in the Caribbean region. Its prosperity over the past 2 decades can be attributed to the petroleum and natural gas production and processing industries which accounted for 40% of GDP and 80% of exports in Not surprisingly, the economic fate of the country is strongly influenced by the petroleum and natural gas industries. In recent years however, there has been a decline in production in the energy sector coupled with limited exploration activity and declining reserves. Trinidad & Tobago has successfully managed to diversify its economic activities and also receives significant economic gains from the manufacturing of food and beverage products, cement and services, especially tourism and financial services. Trinidad & Tobago follows the Westminster model of government and upholds the traditions of a parliamentary democracy which it has inherited from Britain. The country gained independence in 1962 and became a republic in It is a member of the British Commonwealth. Executive power lies with the Prime Minister, Mrs Kamla Persaud-Bisesar, and her Cabinet appointed from Members of Parliament. Persaud-Bisesar was sworn in on May 26, 2010 as the country s first female Prime Minister. Her administration, going into 2013 will be pursuing conservative strategies to encourage economic growth in the midst of an uncertain global macroeconomic environment. The country boasts a strong foreign exchange position, fairly low unemployment, acceptable public debt-to-gdp levels and a wellcapitalized banking system. Because of these factors, the Republic of Trinidad & Tobago has the ability to embark on strategic investment projects in social and physical infrastructure aimed at boosting further growth for the economy. The country is deemed an excellent investment centre for international businesses and boasts one of the highest Foreign Direct Investment (FDI) rates (TT$574 million in 2011) in the region. Trinidad & Tobago is viewed as a first-rate investment because the economy has a rich resource base and is becoming increasingly diversified. It is one of the Caribbean s largest economies (behind the Dominican Republic) which is inclusive of oil and natural gas, methanol and chemicals production as well as activities related to agriculture, fishing, manufacturing and tourism. The population boasts a literacy rate of 98% and Page 2 of 10

3 there are a series of programmes to continuously develop the skill set of the work force. Historically, hydrocarbons, petro-chemicals and metals are the sectors that attract most of the foreign investment which comes from countries such as the United States, the United Kingdom, Canada and France. Despite its status as being one of the most developed and highly industrialized nations in the Caribbean region, Trinidad and Tobago is not without its faults. The main challenges come in the form of the country serving as a transshipment point for the trade of illegal drugs as well as the prevalence of money-laundering. At the forefront of its socio-political maladies is the high level of excessively violent crimes, inclusive of kidnappings and domestic violence, especially against women and children. The amalgamation of these issues can lead to serious social unrest and political instability if left unaddressed. The government of the Republic of Trinidad & Tobago has been working assiduously to address the country s deficiencies while developing its economic capabilities despite the uncertain global market. Thanks to its conservative policies, the country boasts the highest sovereign credit rating ( A/A-1 ) on long and short-term sovereign debt compared to strategic Caribbean neighbours (Barbados and Jamaica). Its fairly low debt ratios and sufficient Net International Reserves confirm the country s ability to meet its debt obligations. With this in mind, Trinidad &Tobago is not expected to default on its debt or face any excessive liquidity constraints in the near term. Page 3 of 10

4 Republic of Trinidad & Tobago: Economic Indicators As a result of the global economic contraction, Trinidad & Tobago recorded negative real GDP growth in 2009 and Weak performance in both energy and non-energy sectors coupled with the impact of the state of emergency declared by the government in August 2011 resulted in negative growth for that year as well. By 2012 T&T is estimated to have resumed growth at a rate of 1.7% thanks to the non-energy sectors gaining momentum along with the energy sector resuming normal operations in the second half of the year. The annual percent change in inflation has been fluctuating over the review period. The recorded rate changes in 2009 and 2010 were mainly due to the global economic crisis, which was a period characterised by increased prices, especially on food items. This translated into higher levels of inflation stemming from a Value Added Tax (VAT) on imported foods. In 2012, another seriess of increases in food prices has caused the estimated inflation annual percent change to be 10%. In order to combat this, the government has stated that it will embark on a campaign to expand domestic food production. Trinidad & Tobago s unemployment rate has remained fairly stable over the review period. The marginal estimated decline in this rate for 2012 is due to the government s efforts of the initiation and restructuring of the Community- Protection and Based Environmental Enhancement Programme (CEPEP) and the Unemployment Relief Programme (URP) which focuses on skills development as the participants are transferred from these programmes into productive private sector activities. Page 4 of 10

5 Republic of Trinidad & Tobago: Economic Indicators Trinidad & Tobagoo recorded public deficits in 2009 and 2010 after which it recorded a minuscule surplus of 0.3%. The estimate for 2012 is recorded as -2.9%, which is consistent with government expenditure surpassing revenues. It is with this is mind, that the administration has outlined plans to embark on strategic expenditures which will serve to increase revenue potential while stimulating positive growth. Public Debt as a percentage of GDP has been relatively stable over the period This ratio however, recorded an estimated increase in 2012 to 46.6% of GDP. In her budget presentation the Prime Minister stated that this was due to the debt issued in respect of a Colonial Life Insurance Company (CLICO) settlement offer. Despite this increase, the current estimated public debt as a per cent of GDP remains well within acceptable international benchmark levels. There has been a steady decline in the central bank benchmark interest rate which may be seen as an expansionary policy to moderately stimulate the economy. With declining interest rates, the mandate of the current administration is to focus on strategic investments in social and physical infrastructure which will bolster additional growth of the economy without excessive expenditure. Page 5 of 10

6 Republic of Trinidad & Tobago: Economic Indicators Trinidad & Tobago s reserves of foreign exchange and gold have been consistently increasing over the review period. At the current estimated levels the country boasts a strong foreign exchange position and has surpassed the suggested levels as stipulated by the International Monetary Fund (3 months worth of goods and services imports). With reserves estimated at US$10,280M and equivalent to 14.3 months of goods and services imports, it is clear that T&T is able to repay foreign debt, address BOP needs and can handle exogenous shocks without experiencing a crisis. *Estimated Figures Page 6 of 10

7 Republic of Trinidad & Tobago Bonds Historical Data 1 Trinidad & Tobago sovereign debt has experienced aggressive price movements to record highs due to tight liquidity in the market. From a market perspective, this represents a consistent increase in current investor confidence. However, it also illustrates that potential investors may want to look elsewhere for more attractive yields. As the global economy remains in a state of inertia, it is clear that investors are turning to emerging market debt backed by strong economic fundamentals and growth potential. Even though the sovereign offers just that, this may not be the right time for potential investors to add T&T sovereign bonds to their portfolios. 1 Historical data retrieved from Bloomberg as at January 30, 2013 Page 7 of 10

8 Republic of Trinidad & Tobago Bonds Historical Data Trinidad & Tobago bonds have seen a gradual contraction in yields which signifies an overall increase in confidence in the sovereign from both a socio-economic and political standpoint. As the future outlook for T&T remains favourable, the trend of declining yields is expected to continue and this selection of sovereign bonds has the potential to offer attractive capital gains to current bondholders wishing to sell. Page 8 of 10

9 Risk Factors 1. The economic growth of Trinidad and Tobago is significantly dependent on the production, demand and prices of natural gas and oil. 2. Exchange rate fluctuations of the TT dollar could have a material adverse effect on the republic s economy and its ability to service its debt obligations. 3. Inflation may rapidly escalate which could adversely affect the republic s economic performance and public finances. 4. There is an inherent liquidity risk for bondholders that may want to sell their securities quickly. Currently, these bonds are not widely traded in the markets and as such there may not be a medium through which to sell and realize immediate capital gains. 5. Policies imposed by the central government in the future such as the adjusting of any interest rates will have an impact on bond prices. The trend suggests that the government has been periodically reducing interest rates while performing a review every fiscal year. Duration analysis measures this interest rate risk and demonstrates the sensitivity of bond prices to a change in interest rates. Based on the duration calculations, for every 100 basis-point (1%) decrease in interest rates for the 2020 and 2027 bonds it is expected that bond prices will increase by 5.72% and 9.95% respectively. Considering the fixed-rate nature of the Trinidad & Tobago sovereign bonds, if there is any change in interest rates, investors will see bond price changes reflective of the increasing volatility associated with a longer time until maturity and potential bondholders need to be cognizant of this fact before making any decision to invest in these securities. Outlook & Recommendation From an emerging market bond perspective, Trinidad & Tobago s debt remains attractive for current bondholders. Despite the global economic outlook which seems to be clouded with uncertainty, the fundamentals of T&T remain strong and the outlook on the sovereign by rating agencies has remained stable due to the large currency reserves, net external asset position and the substantially lower public debt levels than industrialised nations, which limit its external vulnerability. In order to address any further susceptibility associated with the country s dependence on its energy sector, T&T is putting forth Page 9 of 10

10 diversification strategies as an economic priority while seeking to improve the ease of doing business, improve competitiveness and reduce the crime rate. As it relates directly to Trinidad & Tobago sovereign bonds, the ability of the country to generate revenues from both energy and non-energy sectors remains promising and the sovereign has not restructured or defaulted on debt in over 20 years. The economic indicators suggest that, going forward; T&T will resume robust growth. However, based on the record high bond prices as high as $ (2020) and $ (2027) in January 2013, it would be wise for potential investors to look elsewhere to lock in more attractive yields. It is with this in mind that we recommend these bonds as a SELL at this time. Sources: Bloomberg, Central Bank of Trinidad & Tobago, Central Intelligence Agency (CIA) World Factbook 2012, International Monetary Fund (IMF). Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any investment decision, please consult a VM Wealth Management Advisor. Page 10 of 10