On March 26, 2020, Standard and Poor’s (S&P) downgraded Trinidad and Tobago’s sovereign credit rating from ‘BBB’ to ‘BBB-‘ after the collapse in energy prices forced them to significantly lower their price assumptions over the next few years. The outlook is ‘stable’.
According to S&P they “expect that lower oil and gas prices over the next several years will weaken Trinidad and Tobago’s government revenues and lead to larger increases in net general government debt”.
S&P also stated the rating could be further lowered in the next 12-24 months should lower oil and gas prices, or the effects of COVID-19 on demand, contribute to a larger economic contraction AND if they believe it will take longer to fix our finances thus resulting in increased debt levels.
You might be thinking “so what, what’s the big deal?”. That’s where I come in. I’ll tell you what the big deal is. Credit ratings are an indication of the risk associated with a borrower. The higher the rating the lower the risk and vice-versa.
There are three main globally recognized credit rating agencies: S&P, Moody’s Investor Service and Fitch Ratings. S&P and Moody’s are the Kees and Iwer of ratings while Fitch is like Erphaan Alves or Preedy, they’re good but not quite on the bosses and them level.
S&P has a rating scale that ranges from ‘AAA’ to ‘C’ and then down to default ratings. That scale is further divided into two categories, “investment grade” aka “high grade” (not the Kush or Vincy kind) and “non-investment grade” aka “junk” (like what’s in Nadia’s trunk…Phat!). Any rating below ‘BBB-‘ is considered junk on S&P’s scale. So we’re right on the edge.
Which is better than where we are with Moody’s who already has us at ‘Ba1’ which is below their cut off of ‘Baa3’ so to them we’re already junk. So if we’re downgraded again by S&P we’ll be fully junk and all that would be missing is Fred Sanford holding his chest and bawling for Elizabeth (🎶puh-puh-panap…puh-puh-panap-panap-puh🎶).
Anyone that tells you that credit ratings don’t matter is either trying to trick you or don’t know what they’re talking about. Rating agencies factor both quantitative and qualitative variables into deriving a credit rating. Investors rely heavily on them. So much so that some investors are prohibited from owning bonds with a rating below certain levels.
So what are the implications? Well, because credit ratings are a view on the riskiness of a borrower, the lower the rating, the higher the risk and the higher the interest rate investors require when you’re borrowing.
This is especially relevant now as T&T may need to seek funding on the international capital markets to plug the revenue gap and pay for the Covid-19 response. This may have been why S&P rushed to put out this rating change (tongue in cheek). S&P allyuh stink! 🤣
Seriously though, this change wasn’t unexpected as T&T government bonds have been trading at rates (we say “yields”) comparable to bonds at a lower credit rating for some time. The market may have already been pricing in this rating action.
People often refer to the difficultly of juggling plates, well balancing the current public health crisis on top of the economic woes we already had before Covid-19, is like juggling knives, with one hand, while wearing a blindfold.