Economic Update

Recent forays into the international bond market have underscored investor support for Trinidad and Tobago’s economy, though accelerated borrowing has raised some concerns over rising debt levels.

In late July the T&T government successfully closed the book on a $1bn international bond, following an extensive road show in New York, Boston and London.

Investor confidence

The 10-year bond arranged by Deutsche Bank and T&T’s First Citizens Bank was heavily oversubscribed, with $3.5bn worth of orders placed by more than 250 international investors.

The interest rate for the bond was set at 4.625%, but tightened to 4.5% as a result of the strong demand. The revised rate reflects investors’ confidence in the government’s oversight as well as T&T’s fiscal and monetary outlook in the medium term, according to the Ministry of Finance (MoF).

The pricing fell on the lower end of market estimates, with analysts predicting the bond would attract a price of between 4.4% and 4.95% ahead of the issue.

The last time the government tapped global markets in December 2013, its 10-year $500m bond – subsequently upsized to $550m – was priced at 4.375%.

According to a statement issued by the MoF in late July, the proceeds from the bond will be funnelled into the country’s development programme.

With a widening budget deficit, however, there is an expectation that at least some of the funds raised will be directed to bridge the gap. The projected budgetary shortfall this year would be close to TT$10bn ($1.5bn), down on earlier estimates of TT$15bn ($2.2bn), according to a written statement from Colm Imbert, minister of finance, to parliament.

Agencies cautious

Ratings agency Moody’s assigned the bond a “Baa3” rating with a negative outlook, one level above sub-investment grade.

In its advisory note, Moody’s said low GDP growth rates and high exposure to oil and gas-related shocks were somewhat offset by an affordable debt burden and a relatively strong external position anchored by adequate foreign exchange reserves.

The rating assigned to the latest bond dovetailed with Moody’s earlier assessment of the government’s credit standing.

Concerns that low oil and gas prices will undermine the country’s economy through at least 2018 prompted the agency to downgrade its bond rating for T&T from “Baa2” to “Baa3” with a negative outlook in mid-April.

That negative outlook was maintained for the July issue, with Moody’s saying that the efficacy of government efforts for fiscal consolidation remained unclear.

“Large fiscal deficits and a rising debt trend, coupled with heavy dependence on energy-related government revenues and a rigid expenditure structure (mostly comprised of wages and salaries and transfers and subsidies) add negative pressure to the credit,” Moody’s said in a statement issued in late July.

The IMF has also cited the need to re-establish a sustainable fiscal path. In its latest country report on T&T released in June, the fund said that while debt-servicing capacity was feasible, the country’s debt was sensitive to exchange rate shocks.

Even though T&T’s external debt to GDP ratio was relatively low at 12.2% last year, debt levels had been on the rise – having stood at 8.9% at the close of 2014 – and would likely continue to do so in the medium term.

“External debt would continue to steadily rise to 22.8% of GDP at end-2020 before stabilising as government financing needs abate. External debt may increase above the current baseline if the government increases reliance on external financing (including multilateral loans) to help fund infrastructure projects,” the IMF report said.

Bonds closer to home

While attracting a higher level of investor and media attention, the $1bn bond issue has not been the government’s only venture into the credit market.

At the end of July, the government also closed a TT$2bn ($300m) fixed-rate bond arranged by T&T-based Republic Bank, with the lender issuing a statement saying the capital will be used to assist in financing T&T’s 2015/16 budget. The bond, which has a 14-year maturity term, was priced at 4.5%.

“From an economic perspective, this bond assists government in meeting its expenditure requirements and reflects continued confidence in the local economy,” Nigel Baptiste, managing director of Republic Bank, told local press.

According to press reports, the two bond issues could contribute to government borrowing, reaching an estimated TT$10.7bn ($1.6bn) by the end of the new administration’s first year in office.

If, as the IMF has suggested is likely, the government will have to raise additional funds from the markets to support its budgetary programme in the coming years, the budget deficit will rise still further, despite efforts to broaden the revenue base and rein in spending.

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