On June 14, 2024, Moody’s Ratings (Moody’s) changed the Government of T&T’s outlook from positive to stable, while affirming the country’s Ba2 long-term local and foreign currency issuer and senior unsecured ratings.
In changing T&T’s credit rating outlook, Moody’s said the decision was driven by “increasing external vulnerability risks as highlighted by the accelerated pace of liquid foreign exchange reserves drawdown observed over the first four months of 2024.”
The global rating agency noted that following a period of foreign exchange reserve stability in 2022 until mid-2023, liquid foreign exchange reserves have resumed a decade-long downward trend that has further accelerated over the first four months of 2024. Moody’s defines liquid foreign exchange reserves as gross reserves excluding gold and T&T’s SDR, which is the country’s Special Drawing Rights with the International Monetary Fund.
“This drawdown of foreign exchange reserves to US$4 billion in April 2024 from US$4.9 billion in December 2023 is mainly driven by declining energy receipts owing to declining gas prices and significant capital outflows, exacerbated by the persistent interest rate differential with the US.
“Compared to one year before, foreign exchange reserves as of April have declined by an unprecedented 28 per cent, indicating a higher than previously anticipated degree of capital flow volatility during the transition phase until large new natural gas developments are projected by the government to come onstream starting 2026 or 2027.
“The weaker level of foreign exchange reserve coverage that Moody’s estimates at 5.5 months of imports (based on goods and services imports as of Q3 2023) reduces the economy’s external shock absorption capacity in case this trend persists,” according to Moody’s.
The following can be drawn from the rating agency’s analysis of T&T’s foreign reserves position:
1) Moody’s has chosen to use the country’s liquid foreign exchange reserves, which is not unreasonable because it is the easily convertible reserves that are used to service T&T’s debt. The purpose of a sovereign credit rating is to assess the country’s ability to repay its debt, as and when it becomes due;
2) The reduction of T&T’s liquid foreign exchange reserves is principally as a result of less energy revenue due to lower natural gas prices and “significant capital outflows;”
3) The rating agency’s estimates that this country’s liquid foreign exchange reserves only cover 5.5 months of imports;
4) Due to the “unprecedented” 28 per cent decline in T&T’s liquid foreign exchange reserves between April 2023 and April 2024, this country’s ability to deal with shocks has been diminished.
Moody’s use of T&T’s liquid foreign reserves certainly presents a gloomier picture of the country’s ability to service its foreign debt AND pay for all of the imports we consume than the Central Bank’s use of net official reserves.
For the first four months of 2024, according to Central Bank data, T&T’s net official foreign reserves declined by 14.24 per cent from US$6.257 billion to US$5.366 billion. That equates to a decline from 7.8 months of import cover to 6.7 months.
By my calculation, the decline in T&T’s net official foreign reserves between April 2023 and April 2024 was 22.83 per cent, from US$6.954 billion to US$5.366 billion or from 8.7 months of import cover to 6.7 months.
If Moody’s defines liquid foreign reserves to exclude T&T’s SDR and its holdings of gold, then that means this country’s SDR and gold position as at April 2024 totaled US$1.366 billion. This country’s SDR with the IMF is currently 777.83 million and at the April 2024 conversion, that amounted to US$1.025 billion.
What is govt’s position?
In his June 3, 2024 affidavit on the issue of the appeal of the Trinidad and Tobago Revenue Authority (TTRA) matter to the Privy Council, Finance Minister Colm Imbert pointed to the revenue shortfall as a result of lower international natural gas prices.
He said the 2024 budget was based on a natural gas netback price of US$5 per MMbtu, while the actual price received for natural gas exports from T&T for the period October 1, 2023 to April 30, 2024, was US$3.22. That is a reduction of 35.6 per cent of the price expected, along with a 5 per cent less natural gas output than predicted.
“This significant shortfall in the actual price of gas for the first half of fiscal 2024 versus the projected price is very serious,” according to Mr Imbert’s affidavit.
In making the case for the quick implementation of the TTRA, Mr Imbert’s sworn affidavit stated, “The government cannot continue to sustain budget deficits by increasing government borrowing and debt much longer, and international credit rating agencies have warned that if the government is not able to achieve fiscal consolidation in the near future, the country’s international credit rating will be downgraded...These ratings are important for this country, as they are for all countries, in that they impact the state’s access to foreign currency, influence the cost of government borrowing and inform the perception of investors and development banks.”
Forex options
Given the estimate by Moody’s that T&T’s liquid foreign exchange reserves declined by an unprecedented 28 per cent between April 2023 and April 2024, what options does Mr Imbert have with regard to the availability of foreign exchange to individuals and companies?
* Maintain the status quo
That status quo resulted in a US$1.613 billion imbalance between the sale of foreign exchange to the public in 2023, which amounted to US$6.228 billion, and the purchase of US$4.614 billion from the public, according to the Central Bank’s 2023 Annual Economic Survey.
To support the foreign exchange market, the Central Bank sold US$1.341 billion to authorised dealers, which accounted for 83 per cent of the total sales by the dealers to the public. That left a 17 per cent deficit. The sale by the Central Bank of US$1.341 billion, which averages US$111 million a month, would have been a drawdown on T&T’s net official reserves.
The 2024 status quo may be slightly different to 2023’s because last year’s repayment of VAT arrears, which meant energy companies were flush with TT dollars and therefore had to convert less foreign exchange. That will not recur;
* Change the status quo
Mr Imbert may attempt to further constrain the availability of foreign exchange by suggesting to the Central Bank that less foreign exchange should be sold to authorised dealers. That could mean a fresh reduction in allowable credit card purchase limits, which would put an additional squeeze on retailers. It could also mean a new decrease in the amount of foreign currency sold to bank customers over the counter.
Do NOT expect this government to do what many other countries have done when faced with demand for foreign exchange far exceeding the supply of it.
The Minister of Finance may, of course, be consoled by the following comments in the June 2024 Article IV consultation report on T&T by the International Monetary Fund:
“Gross international reserves are adequate under all metrics. They stand at 114 per cent of the IMF’s composite reserve adequacy (ARA) metric and exceed the benchmark of six months of prospective imports of goods and services for commodity exporters, and 20 percent of broad money and short-term debt falling due within one year. In the short term, reserves may see a further decline as oil and natural gas production softens. However, over the medium term, increased energy production and external borrowing will help to keep reserves steady.”
Box
And for those who may be interested, the following is how the Central Bank defines T&T’s foreign reserves:
“International reserves have been revised to include T&T’s reserve position in the IMF. International reserves are defined as external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitudes of such imbalances through intervention in exchange markets and for other purposes.
“Typically, they include a country’s holding of foreign currency and deposits, securities, gold, IMF special drawing rights (SDRs), reserve position in the IMF, and other claims.”