With the collapse of natural gas and oil prices, Trinidad and Tobago operated on a budgetary deficit to the tune of TTD3.8bn in the 2010 fiscal year. Net public sector debt is estimated at 49.4 percent of GDP, and the budget deficit is expected to grow to TTD7.7bn in 2011 while debt levels remain at just under 50 percent of GDP.
If the government intends to borrow locally to meet the deficit, now is as good a time as any as interest rates are very low. The respective yields on 90–day and 180-day Treasury bills have fallen from 1.44 percent and 1.51 percent in November 2009 to a mere 0.35 percent and 0.48 percent respectively in November 2010 (keep in mind that in November 2008 the 90-day Treasury bill rate was 7.17 percent). The government of Trinidad and Tobago came to the market with four bond issues during the year:
– GOTT 5.95% 2023 – issued at 5.75%
– GOTT 6.50% 2025 – issued at 6%
– NIPDEC 6.25% 2028 – issued at 6.25%
– NIPDEC 6.10% 2028 – issued at 5.9%
Some of these issues were oversubscribed and the lower issue yields indicate that in such a low interest rate environment, investors were willing to accept a lower rate. Additionally, the Central Bank of Trinidad and Tobago has lowered the repo rate to 3.75 percent from 5.25 percent at the start of 2010. As a result, the entire TT Dollar yield curve has trended downwards since 2009.
In their World Economic Outlook, the IMF indicated that Trinidad and Tobago's economy should have expanded by 1.2 percent in 2010 and estimated growth of 2.5 percent in 2011.
Thankfully, the economy's lacklustre performance did not affect Trinidad and Tobago's credit rating in 2010 which remains at A/Baa1 (Standard and Poor's/Moody's), but other countries in the Caribbean were not as fortunate. The majority of Caribbean tourist arrivals originate from Europe and the depressed economic conditions in the EU, along with the imposition of a distance based duty by the UK on British flights, negatively affected the regional tourism industry and the economies that depend on it.
On 22 October 2010, Standard and Poor's downgraded the foreign currency sovereign credit rating on Barbados to BBB- from BBB, just one notch above junk/speculative grade. The downgrade was triggered by rising concerns over Barbados' debt profile. As at the end of August 2010, the government of Barbados recorded a gross debt level above 100 percent of GDP. The IMF believes that public debt could reach 115 percent by March 2011. Barbados' tourism industry generates approximately 50 percent of its foreign exchange earnings and accounts for 15 percent of GDP. Given the downturn in tourism, Barbados' GDP contracted by one percent in the first half of 2010. This compares favorably to a contraction of 7.1 percent in the first half of 2009.
Indicative of weak demand, the inflation rate in the first six months of the year was estimated by the Central Bank of Barbados to be in the region of 3.3 percent. Unemployment in June 2010 increased slightly to 10.6 percent from 10.1 percent in June 2009.
In an attempt to improve the island's revenues, VAT was increased from 15 percent to 17.5 percent as a ‘temporary measure' for an 18 month period starting on 1 December 2010. The excise tax on gasoline was also increased by 50 percent along with a hike in bus fares from BDS $1.50 to BDS $2.00. Tourist arrivals have shown some signs of recovery with a 3.8 percent (year on year) increase by October.
The Barbados dollar yield curve remained relatively stable during the year. The yields on 90-day and 180-day Treasury bills fell from 3.48 percent and 3.5 percent in 2009 to 3.3 percent and 3.31 percent respectively in November 2010. The Government of Barbados came to the market with several new issues:
– GOB 2013 T-note at 4.25%
– GOB 2016 T-note at 6%
– GOB 2019 T-note at 6.5%
– GOB 2020 Debenture at 6.625%
– GOB 2030 Debenture at 7.75%
The IMF expects that the Barbadian economy would contract by 0.5 percent in 2010 but projects growth of 2.5 percent in 2011.
Jamaica lies 1,900 km to the west. During 2009 it was pummelled by all the major rating agencies, but was able to recover some of its former credit rating strength in 2010.
The credit rating recovery was largely due to the approval of a $1.27bn Stand-By Arrangement (SBA) by the International Monetary Fund. The SBA seeks to “support Jamaica's plan to recover from mounting government debt, weak economic growth, and the effects of the global economic crisis.”
The SBA became necessary following the continued deterioration of the Jamaican economy. The island remains heavily indebted with a debt of 120 percent of GDP. Like Barbados, tourism is a major part of Jamaica's economy, contributing some 20 percent to GDP. Remittances from Jamaicans working abroad also contribute approximately 20 percent to economic activity and this, along with tourism, makes Jamaica's economy heavily dependent on external factors. In 2010, an improvement in tourism was noted with a 4.2 percent (year on year) increase in arrivals by August. Additionally, bauxite plants on the island that were closed in 2009 due to poor market conditions reopened in 2010. The IMF predicts that if the government's plans are implemented, growth rates will increase from -3.5 percent in 2009 to 0.5 percent in 2010. Growth in 2011 is expected to rise to two percent.
Also contributing to the recovery of Jamaica's ratings (and also a prerequisite of the SBA) was the Jamaica Debt Exchange. The exchange, offered in January, sought to manage Jamaica's debt repayment by exchanging existing Jamaican dollar denominated debt for new debt instruments at lower interest rates and longer maturities.
Jamaica's debt refinancing will also benefit from the lower yields on Jamaican dollar securities as the yield curve fell considerably over the year (See Figure 3). The yields on 30-day and 90-day Treasury bills fell from 14.41 percent and 15.46 percent one year ago to 8.06 percent and 8.19 percent respectively in September 2010.
During the same period, Jamaica's 270-day and 365-day Treasury bills fell from 16.89 percent and 17.16 percent to 8.51 percent and 8.73 percent respectively in 2009. The Bank of Jamaica has lowered the rate on its benchmark 30-day certificate of deposit to 7.5 percent from 12.5 percent at the start of the year.
As the new year begins the region still has a long way to go to achieve a sustainable recovery. Notwithstanding the useful initiatives taken by individual island states, the revival of the Caribbean economy ultimately depends on the revival of the global economy. This, unfortunately, is not certain to take place in 2011.
Kris Sookdeo is an analyst in the Research Department of First Citizens Investment Services
