Saving the region’s investment grade region’s last grade rating

by PROFESSOR JUSTIN ROBINSON

FOR TRINIDAD AND TOBAGO’S 1.4 million citizens, the recent warning from Standard & Poor’s (S&P) could mean the difference between affordable government services and painful economic hardship.

The rating agency’s decision to downgrade the country’s outlook from “stable” to “negative” puts the twin-island nation just one step away from joining its Caribbean neighbours in financial exile – with borrowing costs that could cripple public spending on everything from healthcare to education.

Key takeaways The warning: S&P sees a one-in-three chance of credit downgrade within six to 24 months.

The stakes: Trinidad and Tobago is the Caribbean’s last investment-grade sovereign; losing this status means much higher borrowing costs.

The problem: Over-dependence on declining oil/gas sector, chronic deficits, economic stagnation.

The deadline: Government has less than two years to implement fundamental reforms.

What’s at stake for everyday citizens

When countries lose their investment grade status, the impact ripples through every household. Look no further than Barbados, which saw borrowing costs surge after its 2014 downgrade, eventually forcing the government to suspend debt payments in 2018. The result? Austerity measures that cut public sector wages, reduced social programmes, and increased taxes on essential goods.

“The US dollar shortage is already affecting our ability to import medical supplies and spare parts,” explains a Port of Spain business owner who requested anonymity. “If borrowing becomes more expensive, it will only get worse.”

Trinidad and Tobago currently sits at BBB-, the lowest rung of investment grade status. Fall one notch to BB+, and the country enters “junk” territory – a classification that forces institutional investors like pension funds to sell their holdings and dramatically increases the cost of government borrowing.

Understanding the credit rating cliff

Think of credit ratings as financial report cards that determine how much countries pay to borrow money. The system works like this: AAA to AA: Premium borrowers with rock-solid finances.

A: High quality with minimal risk. BBB: Good quality but vulnerable to economic shocks.

BBB-: The critical threshold – investment grade’s last line of defense.

BB+ and below: “Junk” status with significantly higher borrowing costs.

grade’s The difference isn’t academic. When Barbados lost investment grade status, its borrowing costs increased by several percentage points. For a government budget, that translates to millions less available for hospitals, schools, and infrastructure.

The Caribbean’s domino effect

Trinidad and Tobago now stands alone as the Caribbean’s only investment-grade sovereign – a position that carries both privilege and pressure. The region’s other economic anchors have already fallen. Barbados tumbled first, losing investment grade status in 2013-2014 before defaulting on external debt in 2018. While the country has since restructured and improved to B status, it remains firmly in junk territory.

The Bahamas followed around 2016-2017 and currently sits at B+ – well below the investment grade threshold. Both countries now pay premium rates to access international capital markets. Trinidad and Tobago’s potential downgrade would leave the entire English-speaking Caribbean without a single investment-grade sovereign.

The numbers behind the crisis

S&P’s concerns aren’t abstract – they’re grounded in troubling economic fundamentals:

Energy addiction: Oil and gas still represent over 25 per cent of GDP, nearly 80 per cent of exports, and the bulk of government revenues. But production has been declining for years, and new projects require expensive deep-water drilling.

Chronic deficits: The government spent six per cent more than it earned in 2024, with S&P projecting similar deficits through 2026. Energy windfalls traditionally covered these gaps, but that strategy is no longer sustainable.

Anemic growth: Economic expansion is projected at just one per cent annually through 2026 – far below what developing economies need to improve living standards and generate sufficient tax revenues.

Debt burden: Government debt reached 81.3 per cent of GDP in 2024, while the Heritage and Stabilisation Fund – built from past oil booms – continues shrinking as the government withdraws funds to balance budgets.

Currency crunch: Chronic US dollar shortages have hampered businesses’ ability to pay suppliers and import essential goods, from medical equipment to food staples.

The government’s reform challenge

S&P has essentially issued an ultimatum: implement fundamental structural reforms within six to 24 months or face junk status. The required changes include: Economic diversification: Moving beyond oil and gas into tourism, agriculture, manufacturing, and services – something successive governments have promised but failed to achieve.

Fiscal discipline: Reducing dependence on volatile energy revenues while improving tax collection and spending efficiency.

Currency management: Addressing the US dollar shortage through more flexible exchange rate policies or improved foreign exchange management.

Institutional strengthening: Building robust institutions that can weather political changes and implement long-term strategies.

Reasons for cautious hope

Despite the challenges, Trinidad and Tobago retains several advantages that distinguish it from regional peers:

Political stability: The country maintains a functioning parliamentary democracy with peaceful transitions of power – increasingly rare in a volatile global environment.

Financial cushions: Unlike many developing nations, Trinidad and Tobago still possesses substantial liquid assets and maintains a strong external creditor position.

Monetary discipline: Inflation has averaged just 2.7 per cent over five years, indicating sound monetary management.

Strategic location: The country’s position as a regional energy hub and gateway to South America offers diversification opportunities.

Learning from regional examples

While the Caribbean’s recent credit history offers cautionary tales, it also provides roadmaps for recovery. Barbados, despite its ongoing junk status, has successfully restructured its debt and stabilised its economy through comprehensive reforms and international support. The key lesson: early action matters. Countries that wait until crisis hits face far more limited and expensive options.

The bottom line

S&P’s negative outlook serves as both final warning and last opportunity. For too long, Trinidad and Tobago has relied on energy windfalls to mask fundamental economic weaknesses. That luxury has expired. The stakes extend far beyond credit ratings.

Success could position Trinidad and Tobago as a model for small island developing states navigating the transition to post-petroleum prosperity. Failure would not only burden citizens with higher borrowing costs but also eliminate the Caribbean’s last beacon of investment-grade credibility.

Professor Justin Robinson, Professor of Finance, Pro-Vice Chancellor and Principal, University of the West Indies Five Islands Campus.

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