Rating Monitor July 2013

S&P Feature: Common Characteristics of

Rated Sovereigns Prior to

Default

Rating Rationales: Bourse Securities, The Government

of Dominica, Sagicor Life Jamaica,

The Government of Trinidad

and Tobago

CariCRiS Feature:CariCRIS’ Role in the

Development of the

Regional Financial System

RatingMonitor

DisclaimerCariCRIS has taken due care and caution in the compilation of data for this product. Information has been obtained by CariCRIS from sources, which it considers reliable. However, CariCRIS does not guarantee the accuracy, adequacy or completeness of any information, and is not responsible for any errors or omissions or for the results obtained from the use of such information. CariCRIS is also not responsible for any errors in transmission and especially states that it has no financial liability whatso-ever to the subscribers/ users / transmitters / distributors of this publication.

A CariCRIS rating is not a recommendation to buy, sell or hold an instrument, nor does it comment on the price or suitability for an investor, nor does it involve an audit by CariCRIS. CariCRIS may revise, suspend or withdraw a rating as a result of new information or changes in circumstances or unavailability of information.

CariCRIS has the sole right of distribution of this publication through any media electronic or otherwise. To reprint or reproduce content within this or any other CariCRIS publication, written permission must be provided by CariCRIS.

For editorial enquiries, email [email protected]

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3

2 Disclaimer

5 CEO’s Message

6 About CariCRIS

7 Meet the Team

7 Recent & Upcoming Workshops

8 Standard & Poor’s Feature: Common Characteristics of Rated Sovereigns Prior to Default.

By Marie Cavanaugh, New York 15 CariCRIS Feature: CariCRIS’ Role In

the Development of the Regional Financial System. By Wayne Dass, CFA

18 Bourse Securities Limited

23 The Government of the Commonwealth of Dominica

30 Sagicor Life Jamaica Limited

38 The Government of The Republic of Trinidad and Tobago

46 Rating Symbols & Mapping of Rating Scales

47 Rating Definitions

48 CariCRIS Public Rating List

Features

Rating Rationale Summaries

CONTENTS

4

CariCRIS Rating Monitor

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Following formal recognition in 2008 by the Financial Services Commission of Jamaica (FSCJ), and approval from the Central Bank of Trinidad and Tobago in 2012 for use of our ratings for capital adequacy calculations related to the new proposed Insurance Act, the company continues to pursue similar recognition status from the Trinidad and Tobago Securities and Exchange Commission, and the regulatory bodies in Barbados and the OECS. CariCRIS continues to advocate that a common regional approach to recognition should be adopted by the various jurisdictions in the region, utilising the criteria adopted by the FSCJ as the base, given that these criteria were developed with reference to global standards and best practices, mindful of applicability to the region.

CariCRIS recognises its social responsi-bility to contribute in a meaningful way to wider market development and as such is an active member of a Capital Market Devel-opment Working Group being coordinated by the Trinidad and Tobago International Financial Center. CariCRIS is also an active member of a Working Group established to develop a National Corporate Governance Code for Trinidad and Tobago, and eventu-ally a Code for the Caribbean.

Do enjoy the publication and feel free to send feedback and comments to [email protected]

5

Sovereign DefaultLooking for the signs

“A more developed and integrated regional capital market will lead to a safer and sounder financial system, a key prerequisite for sustainable national and regional economic growth.”

CEO’s Message

W elcome to our eighth issue of the Rating Monitor. The risk of sovereign defaults and debt

restructurings has increased with the global economic crisis and we in the Caribbean have seen our fair share of the same. Wouldn’t it be useful if we could identify some sure-fire signs of defaults? We explore this topic in this issue of our Rating Monitor. On page 8, Marie Cavanaugh of S&P New York, presents her analysis of fourteen rated sovereigns that have defaulted on their foreign currency debt. Her article also identifies some common characteristics of sovereigns prior to default.

CariCRIS, in providing a regional scale credit rating framework to investors, plays a major role in the development and integra-tion of the region’s capital markets. A more developed and integrated regional capital market will lead to a safer and sounder financial system, a key prerequisite for sustainable national and regional economic growth. My article on page 15 explains CariCRIS’ role in the development of the region’s financial system.

By way of an update, the total number of entities rated by CariCRIS since inception has now climbed to one hundred, consisting of 10 sovereign ratings, 43 corporate ratings and 47 small and medium enterprise (SME) ratings. Ratings in the public domain, which are subject to on-going surveillance and formal annual reviews, increased to 23 in the past year, with a further 3 remaining under private surveillance. The company’s ratings span diverse sectors and originate from 11 countries across the Caribbean, reflecting the true regional nature of the institution. Wayne Dass, CFA

Chief Executive Officer


ABOUT US

To contribute to the development

of a vibrant, integrated Caribbean

capital market by setting the highest

standards of credible independ-

ent analysis and opinion to enable

informed financial decisions.

Caribbean Information and Credit Rating Services Limited (CariCRIS) is the Caribbean’s first credit rating

agency, established by the major financial institutions, central banks and multilateral development institu-

tions in the Caribbean to develop and integrate the Caribbean’s debt markets.

CariCRIS provides to bond issuers, investors and financial market regulators, national as well as regional

scale credit ratings which measure the relative creditworthiness of entities in individual countries as well as

the Caribbean as a whole. Apart from supporting the debt-raising efforts of entities in the region, CariCRIS’

credit ratings facilitate a more scientific and risk based approach to investment decision-making, bond

pricing and determination of capital requirements, making the institution a critical part of the capital

market infrastructure in the region.

The comprehensive rating reports accompanying CariCRIS’ credit ratings provide credible independ-

ent analysis and opinion, thereby enabling more informed financial decisions and removing information

asymmetry from the region’s financial markets.

OUR CORE VALUESMISSION

Integrity

Independence

Analytical rigour

Teamwork

6 About CariCRIS

CariCriS rating Monitor

www.caricris.com

7Meet the Team

Paul Birchwood (Rating Analyst), Kerryn De Landro (Office Assistant), Keisha Antoine (Accounting Assistant), Prudence Charles (Administrative Assistant), Anelia Oudit (Research Associate), Sheena Regis (Junior Analyst),

Nicole Budd (Manager, Finance & Administration), Amrita Saha (Intern), Andre Joseph (Manager, Ratings), Stefan Fortuné (Rating Analyst)

Nadia Ramraj (Research Associate), Sherry Ann Persad (Manager, Ratings), Wayne Dass (Chief Executive Officer), Kathryn Budhooram (Rating Analyst), Cherina Daniel (Administrative Officer)

Back Row (left to right):

Front Row (left to right):

Month Workshop Location

Jun 2013 Fundamentals of Risk Management (1 day) Jamaica

Jun 2013 Fundamentals of Risk Management (1 day) Trinidad

Jul 2013 Intensive Credit Risk Analysis (2 days) Barbados

Sept 2013 Financial Ratio Analysis - A Credit Ratings Perspective (2 days) OECS

Nov 2013 Corporate Credit Risk Analysis (1 day) Trinidad

Feb 2014 Intensive Credit Risk Analysis (2 days) Jamaica

Mar 2014 Intensive Credit Risk Analysis (2 day) OECS


This article was reproduced with the permission of Standard & Poor’s Financial Services LLC.

Author/ Primary Credit Analyst:EMarie Cavanaugh, New York (1) 212-438-1000; [email protected]

Contributor:AMaximillian McGraw, New York

Publication Date:E28 Janurary 2013

Publisher:EStandard & Poor’s Financial Services LLC

8

Common Characteristics of Rated Sovereigns Prior to Default

External imbalances and political issues are often the sovereign rating factors that best signal future default. External imbalances are associated with public- or private-sector excesses, and they generally have fiscal and monetary repercus-sions. In Standard & Poor’s Ratings Services’ view, no single measure consistently serves as a good leading indicator of sovereign default. Instead, a confluence of factors, including economic policy shortcomings, underlies most sovereign defaults.

Adding to the challenge of assessing creditworthiness is that some economic indicators improve prior to default, particularly fiscal and current account deficits, which may contract as access to funding is either curtailed or becomes much more expensive. Of course, stresses in any of these factors do not always lead to default. A sovereign is much less likely to default on debt obligations if public- and private-sector borrowings are invested in a way that’s likely to boost production, particularly exports, and if policies are conducive to sustainable economic growth.

To identify and assess the common characteristics of sovereigns prior to default, we’ve done a study of rated sover-eigns that have defaulted on their foreign currency debt. Fourteen sovereigns that we rated prior to default have defaulted on foreign currency obligations (see table). Three of these sovereigns use currencies that they do not control, and three of the remaining 11 sovereigns also defaulted on local currency obligations near the time of the foreign currency default.

Standard & Poor’s Feature

Overview

• Based on our study of rated sovereigns that have defaulted on their foreign currency debt, we found that external imbalances and political issues are often the sovereign rating factors that best signal upcoming default.• In particular, a net external liability position and a weakening currency are common among the defaulting sovereigns.• We note that some economic indicators improve prior to default, particularly fiscal and current account deficits, which adds to the challenge of assessing creditworthiness. • Real economy indicators--such as GDP per capita--are mixed for the defaulting sovereigns.

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We excluded Venezuela from this study because

its 2005 default involved only oil-indexed obliga-

tions for which payments were triggered by rising oil

prices after no payment had been necessary for many

years. It took several months for the government to

calculate the amounts due, and it then made the late

payments with interest. Also, the data for Belize, Greece,

Grenada, and Indonesia pertain to their first defaults after

we initially assigned sovereign ratings, not to their subse-

quent defaults.

External Indebtedness And A Weakening Currency Are Common Features Of Defaulting Sovereigns

A net external liability position is a common denominator for all of the defaulting sovereigns. A net external liability posi-tion indicates that the combined public and private sectors have liabilities to nonresidents that exceed assets invested by residents in other countries. This usually means that interest and dividend payments to nonresidents exceed interest and dividends received

Rated Sovereigns That Defaulted On Foreign Currency Debt

-Long Term Foreign Currency Rating-

Sovereign Date of Default(s)

Local Currency Default as well

Three months prior to default

One year prior to default

Two years prior to default

Argentina November 2001 Yes B-/Negative BB/Watch Neg BB/Negative

Belize December 2006,August 2012

No CC/Negative CCC-/Negative B-/Negative

DominicanRepublic

February 2005 No CC/Negative CCC/Negative BB-/Stable

Ecuador December 2008 Yes* B-/Stable B-/Stable CCC+/Stable

Greece February 2012December 2012

Yes* CC/Negative BB+/Watch Neg BBB+/Watch Neg

Grenada December 2004,October 2012

Yes* B+/Watch Neg BB-/Stable BB-/Stable

Indonesia March 1999, April 2000, April 2002

No CCC+/Negative B-/Watch Neg BBB/Stable

Jamaica January 2010 Yes CCC+/Negative B/Negative B/Stable

Pakistan January 1999 No CCC-/Negative B+/Negative B+/Stable

Paraguay February 2003 No B/Negative B/Negative B/Negative

Russia January 1999 Yes CCC-/Negative BB-Negative BB-/Stable

Seychelles August 2008 No B/Negative B/Stable N.R.

Uruguay May 2003 No CCC/Negative BB-/Negative BBB-/Stable

Venezuela January 2005 No B/Stable B-/Stable CCC+/Negative

*The distinction between foreign and local currencies is less meaningful here because the country uses, as a local currency, a currency that the sovereign does not

control. Ecuador uses the U.S. dollar; Greece, as a member of the European Economic and Monetary Union (EMU), uses the euro; and Grenada, as a member of the

Eastern Caribbean Currency Union (ECCU), uses the Eastern Caribbean dollar. N.R.--Not rated. Source:“Sovereign Rating And Country T&C Assessment Histories,” published

monthly on Ratings Direct.

Common Characteristics of Rated Soverigns Prior to Default


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from nonresidents, which causes a net external outflow that weighs on the current account balance. In most cases, net external liability positions exceed current account receipts (see chart 1), and the liability positions deteriorate prior to default. We identified three exceptions to this deteriorating trend: Belize, which had greatly diminished access to external financing as it struggled for several years to avoid default;

Ecuador, which defaulted almost solely because of political factors; and Greece, which had received sub-stantial official assistance and under-taken some reforms prior to default.

The improvements that occurred in the year after default (D+1 in chart 1) generally resulted from either a weaker currency and an improvement in external performance

because of reforms or a reduction in the debt burden stemming from the debt rescheduling. However, interpreta-tion of this and other charts is com-plicated by the fact that, in some instances, the default occurred early in the year and the statistics for the default year itself improved. In other cases, the default occurred late in the year, and some of the spillover was in the follow-ing year.

In addition, all but the Dominican Republic, Ecuador, and Russia had current account deficits (see chart 2), which we would expect given all of the defaulted sovereigns’ net external liability positions. Current account deficits reflect a country’s shortfall in savings relative to investment and, thus, the need to fund investment externally. Reliance on external financing can become a source of pressure when investment returns disappoint or growth prospects dim and nonresident investors decide to disinvest. Equity investments are usually less burdensome in such situ-ations because prices have fallen, but the foreign investors’ repatriation of their equity investments may reduce a country’s foreign exchange reserves substantially. This, along with a weakening currency, may raise the external debt service


Chart 2

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burden, particularly if it becomes more diffi-cult or more expensive to roll over short-term cross-border interbank deposits or other short-term, or maturing long-term, external liabilities.

In seven of the countries, current account deficits regularly exceeded 20% of current account receipts prior to default. In Indonesia, Paraguay, and Uruguay, the relatively low average current account deficits mask a sharp reversal to surplus from deficit in the year prior to default as a result of severe local currency depreciation (see chart 3). Also, in many cases, short-term external liabilities or changes in investor sentiment reducing equity flows were more important sources of pressure than the current account deficit. Among the surplus countries, Ecuador and Russia are both relatively undiversi-fied, commodity-exporting countries, where political pressures often dominate economic matters. In the Dominican Republic, the default was, in part, related to bailouts of the distressed electricity sector and a troubled bank that experienced governance issues.

Unsurprisingly, given the external imbalances, most sovereigns facing foreign currency default have external financing needs (defined as current account payments plus short-term external debt by remaining maturity) that exceed current account receipts and usable foreign exchange reserves. In Greece, the external financing needs were several multiples of resources.

Along with high external indebtedness, another feature of most of the defaulted sovereigns is a sharply depreciating currency (see chart 3). The exceptions are countries with long-standing pegs to the U.S. dollar (Belize and Grenada), sovereigns in a mone-tary union (Greece), and those that use the U.S. dollar as their local currency (Ecuador), which saw little, if any, currency movements. We’ve omitted these sovereigns from the chart. The sharp currency movements are partly a result of deteriorating political and economic fundamentals and partly a result of rising pressures on heavily managed currency regimes. The latter factor was sharp-est in Argentina, where the peso lost 67% of its value against the dollar after the country abandoned its link to the dollar in early 2002. (The default year is 2001 because of a distressed exchange in November.) This

caused GDP per capita in dollar terms to fall by 63% in 2002. The appreciation in the default year for the Dominican Republic and Indonesia occurred after the distressed debt exchanges, when prospects looked somewhat better, and there was a partial reversal of the depreciation of prior years.

Chart 3



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Real Economy Indicators Are Mixed For Defaulting Sovereigns

GDP per capita varies widely for the de-faulting sovereigns in our study. GDP per capita in the year prior to a sovereign default was lowest in Pakistan, at US$400, and high-est in Greece, at US$26,700 (see chart 4). However, Greece is an outlier, and the next-highest GDP per capita levels are $8,000-$10,000 (Argentina and the Seychelles). Aside from Argentina and Indonesia, which experienced 60%-70% one-year declines in the value of their currencies, GDP per capita fell moderately for the defaulting sovereigns, and in several cases did not drop in the de-fault year or the years preceding or following.

Real GDP per capita growth was nega-tive in at least one year around the time of default for all defaulting sovereigns (see chart 5), but the patterns varied widely. Ecuador, which defaulted primarily because of politi-cal issues; Grenada, which had problems stemming from a devastating hurricane; and the Seychelles all had no contraction in real GDP per capita growth n the year prior to default. On the other hand, Greece and Uruguay experienced persistent economic contraction in the years prior to default.

Following the turmoil resulting from sharp currency depreciation, a country is often in a much better position to increase export-driven growth. If monetary policy can limit the impact that depreciation has on domestic prices, this can be the beginning of economic recovery and the path back to an investment-grade rating, as has been the case for Russia and Uruguay. Recovery can be more difficult for sovereigns that need to absorb the full burden of an economic adjustment in lower wages and economic contraction, as in Greece and Grenada.

Changes In Government Debt Are A Better Indi-cator Of DeterioratingCreditworthiness Than Headline Deficits

Increasing government debt has been a better indicator of impending crisis than the

Chart 5


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headline deficit for defaulting sovereigns (see chart 6). The change in general government debt was of double-digit size as a percent of GDP around the time of default in all coun-tries except Ecuador, where the default oc-curred mainly because of the government’s view of the legitimacy of some of the debt contracted by the prior administration. This is in sharp contrast to the far more modest headline deficits (see chart 6). The large increase in debt did not occur in Argen-tina until it floated its currency, which was about two months after the distressed debt exchange, which led to the default rating. Although higher deficits diminish credit-worthiness, their impact seems to be not as great as the shocks emanating from sharp currency movements and other balance-of-payment pressures, or from the transfer to the sovereign balance sheet of obligations previously recorded in the financial sector, the government-related entities (GRE) sector, or elsewhere.

After adjusting for noncash items, debt forgiveness / restructuring, privatization pro-ceeds, and the use of cash balances, the increase in the stock of debt over the course of a year approximates the headline deficit.

headline deficit, are often an important part of the reason external pressures be-come fiscal problems. However, as we saw in the case of Greece and several other defaulting sovereigns, balance-of-payment pressures may develop independently of exchange rate movements, when current account deficits are large and persistent and the country’s net external liability position is large or widens sharply.

Similar to the change in debt, the general government debt burden tends to worsen around the time of default (see chart 7). However, debt burdens in the year or two prior to default vary consider-ably, from less than 60% of GDP in Argen-tina, the Dominican Republic, Ecuador, Indonesia, Paraguay, Russia, and Uruguay to fairly consistently over 100% in Greece, Jamaica, and the Seychelles.

In contrast, many sovereigns that have never defaulted have long had gen-eral government debt burdens in excess of 60% of GDP. This is because taxation and monetary powers unique to sovereigns, as well as domestic capital market character-istics, can permit governments to manage

But, unlike the headline deficit, it also in-cludes the impact of exchange-rate move-ments on the debt burden, the recognition of off-budget or contingent liabilities that need servicing, and possibly other quasi-fiscal fac-tors. Another shortcoming of the headline, or reported, deficit is that it’s sometimes target-ed, by political and other attention, creating strong incentives to move some programs or functions to public-sector enterprises, where there may be less budgetary scrutiny.

For the 13 defaulting sovereigns in the study, headline general government deficits were rarely double-digit as a percent of GDP and, in several cases, declined in either the year prior to default or the default year. Indonesia reported small general govern-ment surpluses over most of the period. In some cases, deeply negative real effective interest rates, the result of the sharply higher inflation that stemmed from the weaken-ing currency, eased the interest burden on local currency-denominated debt, though the burden of servicing foreign currency-denominated debt rose.

Exchange rate movements, which typi-cally affect the change in debt but not the



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widely varying debt levels. This room to maneuver results, in part, from the credibility a government has established in past periods of stress. Thus, ratings tend not to be highly correlated with govern-ment debt burdens. A sovereign with an unblemished track record of honoring debt obligations and a strong domestic capital market providing long-term and fairly low-cost, market-based financing may have more fiscal flexibility than a sovereign with a lower debt-to-GDP ratio but a higher and more variable debt servicing burden.

In addition, low debt burdens may reflect financing challenges and high interest costs, or, in some cases, recent debt relief, rather than fiscal flexibility.

Future Sovereign Foreign Currency Defaults Would Likely Stem From A Combination Of Political And Economic Factors

It seems likely that external imbalances and policy shortcomings will remain the leading indicators of sovereign foreign currency de-fault. We believe external imbalances are at the root of the problems in the euro zone, though fiscal challenges have grown as a result. With larger financial sectors in many countries and more financial interconnectedness globally, we believe that sovereign decisions to support systemically important financial institutions will play a bigger role in sovereign creditworthiness than they did in these 13 defaults that we studied.

It is important to note that external and fiscal balances often improve in the year prior to default. One reason is that it may be increasingly difficult or costly to fund deficits, forcing cutbacks or arrears, which reduce recorded expenditures. Another reason is that rising inflation tends to boost revenues before expenditures, easing the fiscal deficit initially. In addition, higher inflation raises nominal GDP, which is the common denominator against which deficits and debt burdens are analyzed, and this can lead to improvements in the ratios, which may not be sustainable.

Economic statistics may also be flattered by net inflows from abroad, particularly equity inflows. These provide an economic stim-ulus that boosts investment and growth and usually improves fiscal performance, but they can also affect inflation and may be devas-tating when they reverse. In all of these cases, an important part of analyzing shifts in economic indicators is analyzing their sustaina-bility and their potential impact on other economic indicators.

This article was reproduced with the permission of Standard & Poor’s Financial Services LLC. Taken from the Global Credit Portal, RatingsDirect article “Common Characteristics of Rated Sovereigns Prior To Default” January 28th 2013. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.

Rating Criteria and Research

• Sovereign Rating And Country T&C Assessment Histories, published monthly on RatingsDirect

• Sovereign Defaults And Rating Transition Data, 2011 Update, March 2, 2012

• Sovereign Government Rating Methodology And Assumptions, June 30, 2011.

• Distressed Sovereign Debt Exchanges: Examples From The Past And Lessons For The Future, June 28, 2011.

• Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009.


www.caricris.com

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Through its national scale and regional scale credit ratings of sovereigns, banks and financial institutions, corporates and insurance companies in the Caribbean, CariCRIS provides a mechanism for investors to objectively com-pare the risk/return metrics for various investment opportunities across the

Caribbean, and make a sensible, informed credit or investment decision on which investment best suits their portfolio and provides the best return per unit of risk. This is critical in ensuring the most efficient use of capital and in ensuring investment port-folios are managed in a sound and professional manner, consistent with investment policy guidelines.

Over the last few years CariCRIS’ credit ratings have increasingly being used by sov-ereign, financial and corporate entities to raise debt capital in the region, many times cross-border between one Caribbean country and another. Only recently the Govern-ment of St. Lucia was able to leverage on a CariCRIS regional scale credit rating to raise USD50 million in the Trinidad market. Many of the borrowing entities in the Carib-bean are too small to approach the large international rating agencies, so CariCRIS is therefore filling an important gap in the marketplace. The development of a primary capital market for long term debt is critical for the overall financial system, as it will reduce the over-reliance borrowers currently have on banks for such debt capital. It is not only more appropriate to access long term capital from the market rather than the banks, it is also more affordable. The resultant saving in the cost of capital can facilitate

CariCRiS’ Role In the Development of the Regional Financial System

CariCRIS has a major role to play in the development and integration of the region’s capital markets. A more developed and integrated regional capital market will lead to a safer andsounderfinancialsystem, a key prerequisite for sustainable national and regional economic growth.

Feature by Wayne Dass, CFA, Chief Executive Officer


16

a more competitive Caribbean enterprise. CariCRIS’ ratings also help to create a more active secondary bond market which creates more liquidity in bond portfolios and lead to clarity in pricing, ultimately all redounding to a more resilient financial system. The regional nature of CariCRIS’ operations along with its regional credit rating scale - not offered by any of the international rating agencies - make it a key institution of the regional integration effort and critical for the effective realiza-tion of the Caribbean Single Market and Economy.

Apart from supporting debt-raising efforts, CariCRIS’ credit ratings also facili-tate a more scientific and risk-based approach to bond pricing and determi-nation of capital requirements, reinforc-ing the institution’s critical role in the capital market infrastructure in the region. Indeed, the new proposed Insurance Act in Trinidad & Tobago requires insurance companies to provide capital based on the ratings of their investment securities, and CariCRIS’ ratings have been accepted by the Central Bank of T&T for the purpose of capital adequacy calculations in the Act.

Further, the comprehensive rating reports that accompany CariCRIS’ credit ratings provide credible independent analysis and opinion, thereby enabling an environment with more informed financial decisions. This is particularly significant in the current uncertain economic climate, where there is increasing strain on the part of many entities to meet their debt commitments in a timely and sustain-able manner. CariCRIS’ ratings encourage

rating in the pilot project which was paid for by the project sponsors (IDB and BATT), many of the SMEs have been renewing the ratings at their own cost, demonstrative of the value-adding they see in the exercise.

CariCRIS is of the view that the SME Rating can be a useful requirement for SMEs planning to be listed on the SME stock exchange, as it will provide added com-fort and confidence to potential investors, knowing that the SME to be listed is being independently assessed and monitored by a credible and expert regional rating agency.

CariCRIS is currently working on a sec-ond phase of the SME Ratings programme in Trinidad & Tobago, and also plans to introduce the product in Barbados, Jamaica and the OECS going forward. Successful expansion of the SME Ratings programme will boost SME growth and development and in so doing promote diversifica-tion and increased employed and com-petitiveness in the respective economies.

Bond and Portfolio Valuation

CariCRIS’ bond and portfolio valuation service addresses the need for independ-ence and uniformity in the valuation of domestic and regional fixed income securities, thereby leading to increased investor confidence and ultimately higher traded volumes of securities and better price discovery in the market. This leads to a stronger, more developed secondary mar-ket, which is another important component of a stable financial system and sustainable economic growth.

Conclusion

CariCRIS plans to continue its market development role in the future, and is cur-rently looking at the feasibility of introduc-ing Mutual Fund Ratings and Corporate Governance Ratings in 2014. In developing and implementing these new products and services aimed at filling gaps in our market-place, CariCRIS has clearly distinguished

increased financial discipline in the market-place. The process and the rigorous criteria employed in arriving at credit ratings have an embedded incentive for issuers to adopt and maintain high standards of financial discipline and risk management in order to protect and or improve their credit rating.

Apart from its core credit rating prod-uct for sovereigns and large corporates, CariCRIS has successfully widened its suite of products and services to include small and medium enterprise (SME) ratings and bond valuation services.

SME Ratings

CariCRIS’ SME ratings are designed to im-prove access to appropriately priced credit by the small and medium enterprise sec-tor, by offering SME lenders a comprehen-sive and independent risk assessment and performance grading of each SME. SMEs benefit directly from the diagnostic report accompanying the rating, as the report pro-vides a clear roadmap for improvement in performance by the SME. CariCRIS recently launched SME Ratings in Trinidad by way of a pilot project to rate 25 SMEs in T&T, a pro-ject funded by the IDB and the Bankers As-sociation of T&T. The pilot project has been extremely successful and many of the rated SMEs were able to access financing from the banks at better rates than they would have enjoyed without the rating. The SMEs have also used the ratings to source credit from international suppliers, include in their ten-der documents in their bid for new contracts or renewal of contracts, and to improve their business operations. Indeed, post the initial

Feature by Wayne Dass, CFA, Chief Executive Officer

The development of a primary capital market for long term debt is critical for the overall financial system, as it will reduce the over-reliance borrowers currently have on banks for such debt capital

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itself from the larger international credit rating agencies operating in the region, who for economic reasons and otherwise have not placed any emphasis over the years on the development of these very important sectors. In closing, CariCRIS has not only successfully deepened the credit ratings market in the region through its 100 plus ratings of sover-eigns, corporates and SMEs, it has also built an important platform that would be critical to the financial regulators going forward as they seek to introduce risk based capital requirements and risk-based supervision in the region.

For more info E-mail: [email protected] or call 868-625-3007

CariCRIS’ Role

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Instrument Rating Rating Assigned

Corporate Credit Rating CariA- (Foreign Currency)

CariA- (Local Currency)

ttA- (National Scale)

Bourse Securities Limited

Strengths Good track record of profitability and highly efficient operations. Good asset quality. Low liquidity risk. Well qualified, highly experienced and stable Board of Directors and management team. Adequate risk management policies and procedures.

Weaknesses Limited market share characterized by a small branch network and relatively small size. High client concentration and reliance on institutional funding in the resource profile. Inherently risky business model with significant exposure to market risk.

Rating Sensitivity Factors Sharp changes in interest rates. A significant change in earnings. Significant changes in funding arrangements. Significant changes in asset quality. A material change in the liquidity profile.

RATiNG DRiVERS

Analytical Contacts:

AndreJoseph•Tel:1-868-627-8879Ext229•E-mail:[email protected].

PaulBirchwood•Tel:1-868-627-8879Ext235•E-mail:[email protected].

Bourse Securities Limited (BSL) is a registered broker-dealer, underwriter and investment advisor with the Trinidad and Tobago Securities and Exchange Commission (TTSEC), and a member of the Trinidad and Tobago Stock Exchange (TTSE). The company was founded in 1996. Its range of products/services includes stockbroking, mutual fund management, fixed income investments, investment advisory, securities underwriting, and wealth management services. BSL also has a suite of 6 TT$ and US$ denominated mutual funds and 2 retirement funds. Its flagship fund, the Savinvest India Asia Fund (SIAF), is the first mutual fund to be listed on the TTSE. The suite of mutual funds also includes the recently launched Brazil Latin US$ Exchange Traded Fund, targeted at investors seeking to participate in the above aver-age growth expected in Brazil with the hosting by that country of the FIFA World Cup in 2014 and the Summer Olympics in 2016. This fund is the first mutual fund to be listed on the US trading platform on the TTSE.

BSL has 3 wholly-owned subsidiaries, namely, Bourse Brokers Limited (BBL), the stockbroking arm of the business; Bourse International Asset Management (BIAM), which has external investment operations in the offshore jurisdiction of Saint Lucia; and Vanalta which is a real estate holding company. BSL is domiciled in Trinidad and Tobago (T&T) and has 3 branches located in Port of Spain, Chaguanas and San Fernando.

COMPANY BACKGROUND

RatingRationale

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www.caricris.com

Caribbean Information and Credit Rat-ing Services Limited (CariCRIS), the Car-ibbean regional credit rating agency, has assigned the Corporate Credit Ratings of CariA- (Foreign and Local Currency) on its regional rating scale and ttA- on its nation-al rating scale to Bourse Securities Limited (BSL). These ratings indicate that the level of creditworthiness of BSL as an obligor, adjudged in relation to other obligors in Trinidad and Tobago and the Caribbean, is good.

The factors supporting these ratings are:

Good Track Record of Profitability and Highly Efficient Operations

BSL has been profitable since its incep-tion in 1996, and has managed to maintain profitability even during the difficult years following the global financial crisis in 2008, though at a reduced level. Profit after tax (PAT) averaged TT $20.9 million over the past 5 years, and the company’s return on assets1 (ROA) and return on equity2 (ROE) averaged 3.5% and 19% respectively over this period. The company reported anoth-er year of profitable operations in 2012, albeit at a lower level when compared to 2011. PAT in 2012 was TT $17.6 million, down 23.6% from TT $23.1 million in the prior year. The decline was mainly due to a TT $11.2 million impairment charge large-ly attributable to losses incurred in BSL’s equity portfolio during the year. Notwith-standing the decline, BSL’s ROA was the third best in CariCRIS’ regional sample3 at 2.7%, down from 4% in 2011, and compa-rable to the regional average of 3.3%. Chart 1 shows the trend in ROA and PAT from 2008-2012.

Total income increased by 13.1% to TT $42.6 million in 2012, due mainly to an 11.2% increase in net interest income4

(NII) to TT $19.6 million, as a result of an increase in its investment portfolio. The

yield on average interest earning assets declined slightly to 4.9% from 5% in 2011, with a similar decline in average interest cost to 2.4% from 2.5% in 2011. These changes resulted in a net interest spread of 2.4%, just below the 2.5% achieved in 2011. The net interest margin (NIM)5 remained steady at 3%, the best in CariCRIS’ T&T sample, and comparable to the overall sample average of 3.1%. The company maintained a reasonably diversified revenue base in 2012, earning interest, fee, trading, and dividend income. Net interest income, the largest component, represented 46.1% of total income. Other contributors to total income included management fee income (19.9%), trading and dividend income (7.8%) and other income which included other fee based income (26.2%).

BSL’s costs were fairly well managed in 2012. Though operating expenses increased by 46.7% during the year to TT $14.2 million from TT $9.7 million previously, this increase included one-off expenses associated with the estab-lishment of the new investment fund. This resulted in the cost/income ratio deteriorating to 33.3% from 25.7% in 2011. Despite this degradation, the company’s efficiency ratio was among the best in CariCRIS’ regional sample, while

the 3-year average ratio of 31.7% was the third best in the sample.

CariCRIS expects BSL to remain profit-able in 2013 with total income projected to rise by 2.4%, and ROA and ROE are expected to increase to 3.8% and 18.6% respectively.

Good Asset Quality

As at December 2012, BSL’s total earning assets increased by 18.4% to TT $712.8 million, up from TT $602 million in December 2011. The company has a fairly diverse and good quality asset profile. The investment portfolio is diversified by asset class, issuer, country and industry. The average portfolio credit rating is BBB- (investment grade on the

RATiONALE


19

Footnotes

1Profit after tax/average earning assets.

2Profit attributable to shareholders/average

tangible net worth.

3The sample consists of 10 companies; 6 in

Jamaica and 4 in T&T.

4Total interest income – interest expense.

5Net interest income/average earning assets.

20


Standard and Poor’s (S&P) scale). Fixed income investments represent 74.8% of the overall portfolio, followed by mutual fund holdings with 21.6% and equity investments of 3.6%. Corporate debt accounted for the majority of fixed income holdings at 65.4%, followed by quasi-sovereign (20.5%) and sovereign (14.1%) as at December 2012. BSL’s debt investments spanned 12 countries. The largest exposure was to Russia with 13.1%, followed by T&T with 12.8% and India with 12%. The remaining country exposures ranged between 1.9% and 8.4% of the portfolio. The most signifi-cant industry exposures were to financial and energy companies with 24.9% and 19.1% of the portfolio respectively.

BSL’s impaired assets to invest-ments ratio is estimated at 1.9% as at December 2012. Impaired fixed income assets represent 0.7% of that portfolio. At 4 years as at December 2012, the average portfolio duration was moderate and comfortably within the company’s policy limit of 5.75 years.

The good overall asset quality is tempered somewhat by the substantial proportion of impaired assets in BSL’s equity portfolio, estimated to be 31.9%, though this comprises only 1.4% of the total investment portfolio. This is primarily due to mark to market losses in 7 regional and international stocks. In total, these 7 stocks contributed TT $9 million to BSL’s $11.2 million invest-ment impairment charge in 2012. The company has adopted a ‘Hold’ position on these stocks, as it expects a rebound in prices in the medium to long term.

Low liquidity risk

BSL has low liquidity risk due to its fixed term funding, high funding renewal rates, continuous liquidity monitoring, and healthy cash and near cash reserves. Cash and near cash holdings were TT $153.7 million as at December 2012, up 13.3% from TT $135.3 million in the prior year and represented 27.4% of total interest bearing liabilities. Cash and near cash holdings provided 92.1% coverage of BSL’s exposure to its single largest investor. BSL issues fixed term funding contracts (typi-cally up to 1 year) to its clients, allowing the company to plan its maturity profile

with greater certainty. In 2012 BSL contin-ued to benefit from high funding rollover rates as 95% of contracts were renewed for a further period upon maturity, on par with 2011. Additionally, the company monitors its liquidity requirements on a daily basis. Investors whose funding contracts are set to mature in a given period are contacted at least 1 week prior to maturity to deter-mine whether they would be renewing their funding contracts for a further term. BSL achieved a small positive liquidity gap of TT $0.1 million in its 3-month maturity profile in 2012, though this was substan-tially reduced from TT $129.4 million in December 2011.

During 2012 the company further reduced its liquidity risk by securing a US $25 million repurchase agreement (repo) line with an international investment bank (rated A+ by Standard and Poor’s rating agency), and is currently in discussions with two other international banks with the objective of establishing lines of credit with these institutions.

Well Qualified, Highly Experienced, and Stable Board of Directors and Management Team

BSL’s Board of Directors (BOD) is comprised of six members who are well qualified and highly experienced. Many of its members are well known and highly respected in the regional business commu-nity. There is a high degree of independ-ence on the BOD, as the Managing Direc-tor (MD) is the only executive member. The BOD has been highly stable with four members serving from inception in 1996 and one member serving since 2007. Its newest member joined in February 2013, replacing a director with approximately 6 years’ service.

The senior management team is also well qualified and highly experienced. The team is led by Mr. Subhas Ramkhelawan (MD and founder) who has almost thirty years’ experience in the local financial services sector. BSL’s senior management

team has been very stable, as the most recent member joined BSL 9 years ago. The company has a conservative risk appetite despite the risky nature of the business, and has managed to be consist-ently profitable over the years.

Although the management team is

stable, there is a relatively high turnover at the junior staff level. Management has engaged the services of a human resources consultant in an effort to address this issue.

Adequate Risk Management Policies and Procedures

BSL has appropriate risk management systems, policies and procedures relative to the size and complexity of its operations. Risk is managed at both the BOD and senior management levels. BSL has 2 Board Committees, namely the Board Investment Committee (BIC) and the Finance Auditand Administration Committee (FAAC). The BIC manages investment and t reasury r isk, whi le the FAAC addresses operational risks. BSL also has a Management Risk Committee (MRC), comprised of the senior management team. The BIC and FAAC meet quarterly and review reports relevant to their areas of focus. The MRC meets monthly for overall risk assessment, and on a weekly basis to review specific portfolios on a monthly rotation schedule, or more often as may be required. Quarterly reports are submitted to the BIC which highlight the company’s current asset/liability strategy, a review of fund performance, investment strategy, and compliance. Quarterly reports submitted to the FAAC include insurance coverage, regulatory requirements in addition to account and credit facilities. A monthly MD’s report is also submitted which shows actual versus budgeted income per line of business and currency gaps.

BSL has a documented Risk Management Policy (RMP) which was compiled in 2010 and is updated annual ly. I t ident i f ies permiss ible

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and restricted investment categories and concentration limits. Additionally, it outlines limits in order to ensure the company remains wel l -capi ta l ized. It mandates an asset to capital base ratio of no more than 12:1 and BSL was well within the limit as at December 2012 with an asset to capital base of 5:1. The policy also limits exposure to any one issuer to 10% of BSL’s capital base. Under the policy, exposure can exceed the limit with the prior approval of management or the BOD. In December 2012 BSL was in authorized breach of this limit with respect to 2 countries. The RMP also dictates that BSL cannot invest in debt rated below BBB- (S&P scale) without management or BOD approval and limits asset duration to 5.75 years. There is clear segregation of duties regarding approvals of transactions. The RMP has clearly defined approval limits for all transactions. The Senior Corporate Manager can approve transactions up to US $1.5 million while the MD approves up to US $2 million. Any transaction above this level must be taken to the Board.

BSL’s Compliance Officer reports quarterly to the FAAC. The issues addressed by the Compliance Officer include insurance coverage, regulatory matters, custodianship and anti-money laundering (AML). Staff is trained twice a year on AML policies, and the company is compliant with the Trinidad and Tobago Securities and Exchange Commission (TTSEC), the Trinidad and Tobago Stock Exchange (TTSE) and the Trinidad and Tobago Financial Intelligence Unit (FIU) AML requirements, as they relate to securities companies.

Although BSL’s risk management sys-tems and processes are adequate for its current scale of operations, CariCRIS is of the view that there is room for improve-ment as the company grows. There is limited use of risk management software as many of its processes are manual. Dur-ing 2011 BSL initiated a project to auto-mate its reporting system, however, this project is currently in abeyance. Moreo-ver, although the company conducts regular stress tests on its portfolios to

determine potential losses, these tests are duration-based. CariCRIS considers Value at Risk (VaR) to be a more appropriate measure of market risk.

These rating strengths are constrained by:

Limited Market Share Characterized by a Small Branch Network and Relatively Small Size

BSL has the second smallest asset base and tangible net worth (TNW) in the CariCRIS sample of regional securities companies at TT $737.1 million and TT $147.9 million respectively, as at December 2012. Its share of the mutual fund market in T&T is estimated at 0.8%, although its flagship SavInvest India Asia Fund (SIAF) is the leading US$ denominated equity fund with a 30.1% market share as at September 2012. Notably, the T&T mutual fund market is dominated by 1 large player, the Trinidad and Tobago Unit Trust Corporation which is estimated to control 48% of the market as at December 2012. Although the company is a full-service securities firm, it is not a significant player in any of its markets apart from stockbroking in which it ranks second with an estimated 18% share in 2012 trades. BSL has a relatively small branch network comprising 3 branches in Port of Spain, San Fernando and Chaguanas, compared to its peers that have access to a wider branch network and greater market-ing support. The company has a compara-tively small client base of 7,000 clients; 1/3 of which receive stockbroking services.

BSL continues to focus its efforts on expanding its market share, specifically in the more sophisticated institutional inves-tors, high net worth and mass affluent individual niches. To this end it has intro-duced a marketing strategy that employs both its analyst and marketing teams in an effort to combine technical knowledge with sales. BSL’s recent launch of the Brazil Latin Fund should help in its efforts to

expand market share.

High Client Concentration and Reliance on Confidence Sensitive Institutional Funding in the Resource Profile

BSL relies primarily on repo funding which exposes it to greater short-term funding and liquidity risks. These risks, however, are mitigated by the high renew-al rate of maturing funds which averaged 95% in the last two years. BSL’s funding base is heavily concentrated in confidence sensitive and typically more volatile insti-tutional funding. In December 2012, such funding contributed 98.3% of liability funding, up slightly from 96.3% in 2011. The top 3 lenders accounted for 53.6% of the total liability funding base. The top 3 TT$ investors accounted for 48% of TT$ repos while the top 3 US$ investors repre-sented 66.3% of US$ repos. The largest investor accounted for 29.7% of total interest bearing liabilities, although this represents a significant improvement from 46% in December 2011. This exposure to institutional funding is somewhat tempered by the company’s strong capital base, such that total liability funding consti-tuted 79.2% of the capital structure as at December 2012, a marginal increase from 76.6% in December 2011. Furthermore, as part of its liquidity management policy, the company holds significant balances in cash and near cash investments to safeguard against the potential risk that this exposure presents. In December 2012, these investments provided 92.1% coverage of this exposure. Moreover, management is implementing additional measures to reduce the concentration risk by securing repo lines from international banks and agencies. There are also specif-ic risk management measures in place to mitigate against bunching of funding maturities by client and on aggregate.

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Summary Annual Financial Performance

2012 2011 2010 2009 2008

Equity CapitalTangible Net Worth*Total Assets*Total IncomeProfit After Tax

Interest Rate SpreadTotal Expenses/ Total IncomeProfit After Tax/ Average Earning AssetsTangible Net Worth/ Adjusted Assets

TT $’000

26,700147,940737,14642,57917,626

26,700140,294620,96437,64223,058

26,700125,401587,70739,35425,463

26,700110,429614,40227,49015,618

26,70094,838

734,17636,98122,513

%

2.433.32.7

20.1

2.525.74.0

22.6

2.232.04.4

21.3

0.441.32.4

18.0

0.332.33.9

12.9

* Adjusted to exclude intangible assets

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Inherently Risky Business Model with Significant Exposure to Market Risk

BSL operates in the inherently high-risk securities industry, which is characterized by significant market risk, substantial asset/liabil-ity mismatches and limited availability of hedging mechanisms for local investments. Unlike some of its peers in the sample group, BSL does not have the flexibility to draw financial support from a strong parent company or associate entity, should it require a large capital injection at short notice. Furthermore, the Central Bank of Trinidad and Tobago (CBTT) does not provide emergency funding facilities to securities companies.

Notwithstanding the foregoing, the company is well capital-ized. BSL’s paid in capital is valued at TT $26.7 million, 1.8 times the minimum prudential requirement of TT $15 million. Its TNW to total assets ratio of 20.1% was third highest in the sample group. Moreover, the recently enacted Securities Act 2012, which replaced the Securities Industries Act 1995, provides greater powers to the regulator to ensure a safer operating environment for securities companies. Furthermore, new Repo Guidelines introduced in T&T

in 2012 require a substantially higher level of capitalization from all securities firms, moving from a minimum level of TT $5 million to a minimum of TT $15 million, with the intention of moving to a full risk-based capital adequacy framework in the near future.

Rating Sensitivity Factors Sharp changes in interest rates.Asignificantchangeinearnings.Significantchangesinfundingarrangements.Significantchangesinassetquality.Amaterialchangeintheliquidityprofile.

June 2013

FiNANCiAL PERFORMANCE

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www.caricris.com


USD25millionDebtIssue(Notional) CariBBB- (Foreign Currency and Local Currency)

The Government of the Commonwealth of Dominica

RATiNG DRiVERS



PaulBirchwood•Tel:1-868-627-8879Ext235•E-mail:[email protected].

RATING HISTORY

Date Foreign Currency Local Currency Instrument/Remarks

May27,2013 CariBBB- CariBBB- USD25millionDebtIssue(Notional)

Februrary 2, 2012 CariBBB- CariBBB- USD25millionDebtIssue(Notional)

June 18, 2009 CariBB+ CariBB+ USD25millionDebtIssue(Notional)

Strengths Moderate indebtedness and comfortable debt servicing ratios. Prudent fiscal policy. Moderate financial sector indicators. Consistency of economic policies in a stable political environment. Healthy external sector performance.

Weaknesses Small, open economy with a relatively narrow economic base. Severe capacity constraints.

Rating Sensitivity Factors Significant changes to the fiscal position. Substantial changes in debt levels. Material deterioration in NPLs and provisioning levels . Sharp changes in the macroeconomic environment.

23RatingRationale

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Dominica is a small island with an area of 750 km2 located in the Eastern Caribbean, between the French islands of Guadeloupe to the north and Martinique to the south. The island has a tropical climate, with temperatures averaging twenty five degrees Celsius (250c), and with a relatively high humidity averaging 70%. The dry season is between January and June and the wettest months are between August and October. Dominica is mountainous and volcanic with tropical rainforest covering two thirds of the island and is home to the world’s second largest boiling lake. Total popu-lation is estimated around at 71,294 persons, with the majority of the population living around the capital of Roseau. The official language is English but French patois is also spoken.

While government is the largest employer, the main sectors fuelling growth in 2012 were agriculture (8.2%) and manufacturing (8%), with the former being driven by public policy.

Moderate Indebtedness and Comfortable Debt Servicing Ratios

Compared to some of its regional peers, Dominica’s indebted-ness is relatively low as illustrated in Chart 1 below. Public sector debt increased to EC $946.8 million in 2012 from EC $880.7 million in 2011, a 7.5% increase. Public sector debt has averaged 67.9% of gross domestic product (GDP) in the last 3 years and stood at an estimated 69.8% of GDP in 2012, a marginal increase from 67.5% of GDP in 2011. CariCRIS expects this trend of moderate increases in debt to continue in the short to medium term.

Dominica’s external debt to GDP ratio stood at 51% in 2012, up slightly from 49.2% in the prior year, and among the lowest in CariCRIS’ sample. External debt comprised 71.7% of total public debt in 2012, down marginally from 72.8% in the prior year. Approximately 41.8% of external debt is denominated in US$, which reduces its currency risk due to its fixed exchange rate with the US$. Additionally, 80.1% of external debt owed by the Govern-ment of the Commonwealth of Dominica (GOCD) was issued at fixed interest rates, thereby reducing interest rate volatility, and an estimated 70% of the external debt is on concessional terms, which serves to reduce Dominica’s external interest payments.

After defaulting on its debts in 2004, the GOCD demonstrated its commitment to servicing the debt obligations not restructured by crediting interest payments at an agreed rate into an escrow account at the Eastern Caribbean Central Bank (ECCB). During 2012 the GOCD reached an agreement with another of its credi-tors, RBC Royal Bank Limited, to restructure its EC $100 million bond. As a result of the long stalemate, the GOCD had limited access to the international capital markets. Following the restruc-turing exercise, in an effort to ease debt service pressures, the

DETAiLED RATiONALE


SOVEREiGN BACKGROUND

Caribbean Information and Credit Rating Services Limited (CariCRIS) has reaffirmed its ratings of CariBBB- (Foreign Currency and Local Currency Ratings) on its regional scale of the notional debt of USD 25 million of the Government of the Commonwealth of Dominica (GOCD). The ratings indicate that the level of creditworthiness of this obligation, adjudged in relation to other obligations in the Caribbean1 is adequate. The factors supporting these ratings are:

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GOCD imposed upon itself an interest rate limit of 3% for new borrowings and has indi-cated its unwillingness to borrow at rates in excess of this limit, even if funds are made available. Despite the depressed and volatile global economic environment, the GOCD has been able to consistently secure low cost funding. In recent years, the GOCD’s funding sources have included the Peoples’ Republic of China (PRC) (EC $29 million at 2% interest), the Kingdom of Morocco, and the IMF.

Prudent Fiscal Policy

As evidenced by Chart 2, Dominica continues to have one of the stronger fiscal positions in the region the consequence of two International Monetary Fund (IMF) programs during 2002–20062 ,which result-ed in large fiscal adjustments, debt restruc-turing (2004), and a fairly consistent flow of low-cost funding. In FY2011/12, the country recorded a fifth consecutive current account surplus of EC $30.9 million or 2.3% of GDP, though lower than the surplus of EC $47.1 million or 3.6% of GDP in the prior year. The current account surplus averaged 4% of GDP over the last 3 years, the joint best with Trinidad and Tobago in CariCRIS’ regional sample of 9 countries. Though Dominica realized a third consecutive overall fiscal deficit of EC $58.5 million or 4.4% of GDP in FY2011/12, up 31.8% from the deficit of EC $44.4 million or 3.4% of GDP in FY2010/11, the country’s 3-year average deficit of 2.7% of GDP was better than 5 of its regional peers (see Chart 2).

The lower fiscal outturn was driven

by declining revenues, down 15.8% to EC $410.7 million in FY2011/12 from EC $487.5 million in FY2010/11. The primary driver of this reduction was grant income, which represented 15.6% of total revenues in FY2011/12, and which fell by 49.5% to EC $64.1 million from EC $126.9 million previously. Tax revenues, which accounted for 73.2% of total revenues, also declined, by 5.7%, due to lower tax collections of EC $300.8 million from EC $318.9 million in FY2010/11. Offsetting these declines some-what were increases in non-tax and capital revenues, which contributed 10.6% and 0.6% respectively to total revenues. Non-tax revenue grew by 8.8% to EC $43.4 million,

attributable to growth in fee income from the Economic Citizenship Program3 ,while capital revenues improved by 33.3% to EC $2.4 million compared to EC $1.8 million in FY2010/11.

Total expenditure fell by 11.8% to EC $469.2 million in FY2011/12. This reduction was the result of a 29.2% decrease in capital expenditure to EC $155.9 million compared to EC $220.2 million in FY2010/11. At 33.2%, capital expenditure comprised the largest single component of total expenditure. Current expenditure comprised 66.8% of total expenditure in FY2011/12, and increas-ing marginally, by 0.5%, from the prior year to EC $313.3 million. The growth in current expenditure was due in part to slight increas-es in personal emoluments (0.4%) to EC $135.5 million in FY2011/12 from EC $135 million previously, and to growth in expendi-ture on goods and services (2%) to EC $88.3 million from EC $86.6 million in the prior year. Personal emoluments and expenditure on goods and services comprised 43.2% and 28.2% respectively of current expenditure. Transfers and subsidies, which comprised 22.1% of current expenditure in FY2011/12, fell by 0.6% to EC $69.1 million from EC $69.5 million in the previous year. As a consequence of the reduction in earnings, the GOCD recorded its second ever primary deficit, which was EC $38.1 million or 2.9% of GDP, deteriorating by 60% from EC $23.8 million or 1.8% of GDP in FY2010/11.

CariCRIS expects the GOCD to achieve a primary surplus over the medium term in

accordance with its primary surplus target of 3% of GDP. Within the short to medium term, the GOCD is planning to grow its tax and non-tax revenues. To this end, it is contemplating a revamp of the existing tax system to widen the base and increase collection efficiency; plans to optimize its land management system to facilitate property tax administration, as well as


25

Footnotes

1 The term Caribbean as used here covers the

following countries: Bahamas, Barbados, Belize,

Costa Rica, Dominican Republic, Guyana,

Haiti, Jamaica, Panama, Suriname, Trinidad

and Tobago and the following countries in the

OECS: Anguilla, Antigua & Barbuda, Dominica,

Grenada, Montserrat, St. Kitts & Nevis, Saint

Lucia and St. Vincent & the Grenadines. Refer

www.caricris.com for a more detailed explana-

tion on CariCRIS ratings and rating definitions.

2Source: IMF 2011 Article IV Report – Domi-

nica (page 4).

3Dominica’s Economic Citizenship Program

allows applicants the potential to purchase full

irrevocable Dominican citizenship for life, visa-

free access to countries, including the United

Kingdom, Hong Kong, South Korea, China,

Singapore; tax exemption on capital gains, gifts,

wealth and inheritance as well as other benefits

for a fee paid to the GOCD.

% of GDP

Financial YearOverall Balance Current Account Balance

26


raising transaction fees for some services are also expected to lead to increased revenue.

Moderate Financial Sector Indicators

Financial sector supervision is provid-ed jointly by the Financial Services Unit (FSU), a division of the Ministry of Finance in Dominica, and the Eastern Caribbean Central Bank (ECCB). Relative to its Carib-bean counterparts, the ECCB enjoys a greater degree of political independence. The ECCB has responsibility for all banks registered under the Banking Act, while offshore banks are regulated by the FSU. In 2012 Dominica passed new legislation aimed at improving governance of the insurance sector.

The ECCB sets the minimum savings rate, while lending rates are market determined. This structure has served to promote a stable interest rate environment. In CariCRIS’ opinion the longstanding currency peg and monetary arrangement with the ECCB has served in maintaining price stability4, attract-ing FDIs and facilitating real GDP growth. As a member of the ECCU, Dominica’s financial market infrastructure and legisla-tion is comparable to the rest of the region. Trading on the Eastern Caribbean Securi-ties Exchange (ECSE) occurs twice weekly, however, the market is relatively underuti-lized with only 13 equity securities listed. The Regional Government Securities Market (RGSM), which is the market for the trading of debt instruments of the member states of the ECCU, operates on a fully electronic plat-form. The GOCD issued 5 securities totaling EC $100 million on this platform during 2012.

The 2012 annual average inflation rate continued to be low at 1.4%, though up slightly from 1.3% in 2011. In 2012, average

interest rates have remained comparable to those of the prior year. The average lending rate rose slightly to 9% in 2012 from 8.8%, while the average deposit rate fell to 3% in 2012 from 3.1% in 2011, resulting in a slight increase in the spread to 6% from 5.6% in December 2011. Growth in private sector lending contin-ued, although at a slower rate of 4.3% in December 2012, after increasing by 8.1% in December 2011.

Tempering these strengths is the contin-ued deterioration in the ratio of non-performing loans (NPLs) to total loans, which rose to 12.7% in 2012 from 9.2% in the prior year. This ratio continued to be above the ECCB’s guideline of 5%, but superior to the ECCU average of 15.3% in 2012. Year on year (y-o-y), provision-ing coverage remained stable at 18.3% of NPLs in 2012, though well below the ECCU average of 31.1%. In CariCRIS’ opinion, provisioning coverage of NPLs has reached a dangerously low level. The capital adequacy ratio for the banking system in Dominica is no longer available, following the ECCB’s decision to report this ratio on a consolidated basis for the entire ECCU sub-region.

The failure of Colonial Life Insurance Company Limited (CLICO) and British American Insurance Company Limited (BAICO) in 2009 has largely resulted in undercapitalization in the credit union sector, which had a combined exposure of around EC $29 million (2.3% of GDP in 2009) to these entities. Steps are being taken, however, to improve the balance sheets of entities in the sector and they are expected to write off 10% of their BAICO exposure annually for 10 years and 20% of their CLICO exposure annually for 5 years.

Consistency of Economic Policies in a Stable Political Environment

There is little variance in the economic philosophies of the major parties, as the common focus is on economic develop-ment, poverty reduction and education. As

such, in the event of a change in Govern-ment, it is unlikely that there would be a fundamental shift in macroeconomic poli-cies. The divergence in views between the two main political parties is on issues of housing and the role of the private sector in the economy. Dominica has a low inter-national perception of corruption based on the Transparency International Corruption Perception Index5. The country was ranked 41 out of 176 countries in 2012, which was the fourth highest rank in the entire Carib-bean, and also fourth in CariCRIS sample of 9 countries.

The ruling Dominica Labour Party (DLP) is currently serving its third consecutive term in office having won 18 out of 21 seats in the December 2009 election. The remaining 3 seats are held by the United Workers’ Party (UWP). The ruling party’s majority in Parliament enables it to pass legislation requiring a simple majority and pursue its development objectives. In January 2012, the High Court ruled that the Prime Minister and Education Minister legally contested the 2009 general elec-tion, ending a legal battle over the validity of their Dominican citizenship. The UWP opposition, which insists the election was contested illegally, has considered appeal-ing the ruling. On multiple occasions in the last year, the UWP has boycotted Parlia-ment in silent protest over the desire for electoral reform. Elections are constitution-ally due again in 2014.

Industrial relations have been generally cordial. There is the perception in society that trade unions are aligned to specific political parties, but not openly parti-san. CariCRIS does not foresee any major labour related disruptions to social stability in the near term.

Although not currently a social issue, crime may become an emerging problem, due to the high levels of unemployment and poverty, estimated at 14% and 28.8% in 2011. A contributing factor to this grow-ing social issue is the continued deporta-tion of illegal immigrants from the United States of America. To date, there have been no negative travel advisories in the inter-national tourist markets. CariCRIS believes


26

Footnotes

4Though nominally fixed, the EC dollar de-

preciated in real terms by about 1.1% in 2012

from 2011 .

5The higher the ranking, the lower the percep-

tion of corruption.

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that any significant increase in criminal activity can seriously thwart the efforts at promoting tourism in the country.

Healthy External Sector Performance

Dominica recorded its 4th consecutive balance of payments (BOP) surplus in 2012, although down by 8.1% to EC $15.8 million or 1.2% of GDP, from EC $17.2 million or 1.3% of GDP in 2011. Over the last 3 years, the BOP surplus averaged 1.8% of GDP, favourably comparable to its regional peers. The external current account deficit improved for a fifth consecutive year, falling by 22.9% to EC $148.4 million or 10.9% of GDP from EC $192.6 million or 14.8% of GDP in the previous year. The current account deficit has been improving by an average rate of 19.2% since 2008. The 3-year average deficit of 14.3% of GDP is among the lowest in CariCRIS’ sample. The improve-ment in the deficit was driven by growth in the invisible trade surplus, which has improved by an average of 21.2% over the last 4 years. In 2012, the surplus decreased marginally, by 1.4%, to EC $237 million or 17.5% of GDP from EC $240.3 million or 18.4% of GDP in 2011. Also contribut-ing to the lower current account deficit was the improvement in the visible trade deficit,

which contracted by 14.6% to EC $383.6 million or 28.3% of GDP from EC $449 million or 34.4% of GDP in the prior year. The contraction was driven by a reduction in imports. Dominica also benefitted from increased inflows from foreign direct invest-ment (FDI) in 2012. FDI grew by 38.6% to EC $53.1 million in 2012 from EC $38.3 million previously. On account of the BOP surplus, gross international reserves grew by 37% to US $176.3 million in December 2012 from US $128.6 million in December 2011. Increase notwithstanding, reserves continue to be small relative to peers with import cover improving to 7 months from 5 months in the prior year.

Tempering Dominica’s positive external sector performance is its significant reliance on external sources for debt financing. As at February 2013, external debt represented 71.8% of total public debt, and this ratio has remained fairly consistent for the past 3 years. Mitigating this exposure somewhat is the generally moderate external debt level, which stood at 50.1% of GDP in 2012. The ratio of external debt to GDP has averaged 42.8% for the last 3 years, which was above the regional peer average of 26.5%.

These rating strengths are tempered by:

Small, Open Economy with a Relatively Narrow Economic Base

Nominal GDP for 2012 stood at US $502.2 million and GDP per capita at US $7,044, making Dominica one of the smallest economies in the Organization of Eastern Caribbean States (OECS) and in CariCRIS’ sample. In addition to its small size, Dominica’s economy is relatively narrow with little economic diversification and few goods exports.

Real GDP growth is estimated to have slowed to 0.3% in 2012 from 1.9% in 2011. Growth was driven primarily by expansions of 8.2% and 8% in agriculture and manufacturing respectively, which offset the declines in wholesale and retail trade (7%), construction (4%) and mining and quarrying (2%). The top 3 contributors to real GDP were transport, storage and communication (15.3%), education (14%) and wholesale and retail trade (12.9%). The manufacturing sector on the island is very small and has contributed an average of 3.6% of real GDP in the last 5 years. The Government services industry6, which represented 16% of GDP in 2012, contin-ues to be the largest employer on the island. Chart 3 below shows real GDP growth rates for the past 5 years.


27

28


Considered the mainstay of the economy, the agriculture industry significantly influences activity in other industries such as transportation and wholesale and retail trade. The topography of the landscape however, makes large-scale agricultural produc-tion challenging. The GOCD has continued its efforts at improv-ing the agriculture, livestock and forestry sub-sector, which was also a notable contributor to overall GDP at 12% in 2012. The sector continued to expand, with real growth estimated at 8.2% in 2012, the fastest growth rate of all the sub-sectors. Efforts to diversify the agriculture industry following the virtual destruction of the banana industry in 2007, and the severe damage caused by the Black Sigatoka disease in 2012 are ongoing. The Ministry’s Horticultural Programme has shifted focus to root crops that are less affected by hurricanes including yams, dasheen, tania and sweet potatoes. Rehabilitation programmes for coffee and cocoa are underway, with the aim of export production in the short to medium term. Following the containment of the Black Sigatoka disease in June 2012, the GOCD began preliminary experimen-tation with a genetically engineered Black Sigatoka disease-resistant species of banana. If successful, it would replace the existing crop as the main banana product. Over the last few years, measures have been taken to increase productive capac-ity and quality assurance via infrastructural improvements and related investments. These include the construction of 3 inland distribution centres, 2 packing houses and a National Centre for Testing Excellence (built in 2010), and maintenance/construction of farm access roads. Additionally, the GOCD invested in an agricultural information management system.

Due to its greater reliance on agriculture, Dominica contin-ues to be less affected by ongoing global economic uncertainty compared to its more tourism-dependent counterparts. The coun-try’s geothermal energy project holds considerable potential for the Dominican economy if it proves successful. Three exploration wells were completed during 2012. The results have confirmed the viability of a geothermal energy industry and have prompted the GOCD to start developing plans to construct 2 electricity generation plants on a phased basis. The first plant would have a capacity of 5 megawatts (MW) and would be completed in 2015. Construction of the second plant with a 20MW capacity would commence thereafter. The electricity generated from the geother-mal process has the potential to reduce the population’s elec-tricity costs by an estimated 45%-50%, and substantially reduce the country’s reliance on fossil fuels for power generation in the long-term, contingent on the GOCD’s strategy for their existing installed generation capacity. Upon completion, the projects would increase total generation capacity by 25MW compared to current estimated usage of 17.8MW. The GOCD plans to export

excess electricity to neighbouring countries, including Guadeloupe and Martinique. The GOCD intends to joint venture with interested private-sector parties to pursue this initiative, and has already signed an agreement with an Icelandic firm to construct 1 production well and 1 reinjection well. Thus far, the project has been entirely grant funded, primarily by the European Union (EU), with some assis-tance from the Agence Française de Développement (AFD). Barring any external shocks, CariCRIS expects growth in 2013 to be slightly improved compared to the 2012 outturn, driven by increased invest-ment in the geothermal energy industry, and increased production and exports from the agriculture industry.

Severe Capacity Constraints

Dominica is faced with severe capacity constraints particularly in its human resources, similar to many small Caribbean islands. The island is sparsely populated with just over 70,000 people inhabiting its 750 km2. Barbados, in comparison, has 3 times its population but is a smaller island occupying 431 km2. Further, there is a high rate of emigration of skilled labour, which renders the island unable to effectively execute and complete public sector investment programme (PSIP) projects with a significant level of local content.

Air access also acts as a significant capacity constraint to trade and business. Despite the introduction of night landing facilities in Septem-ber 2010, few airlines have made night flights available. The lack of direct flights from regional hubs and inconvenient timing of flights generally, causes the island to lose business. During 2012, American Eagle became the latest international airliner to discontinue service to Dominica due to low demand. This has contributed to lower visi-tor volumes, with total visitors expected to fall by 16.4% to 357,987 for 2012. However, stay-over arrivals are projected to have increased marginally by 3.4% to 78,119 in 2012. As a result, the country’s fledg-ling tourism industry is estimated to have grown by mere 0.6% in real terms in 2012 compared to 6.1% in the prior year. Further, the tourism marketing budget for FY2012/13 is prohibitively small, and CariCRIS expects it will be insufficient to generate satisfactory exposure for the island in the next year.

Rating Sensitivity Factors

Significantchangestothefiscalposition.

Substantial changes in debt levels.

Material deterioration in NPLs and provisioning levels.

Sharp changes in the macroeconomic environment.


28

Footnotes

6Includes public administration, defence, social

security, and health and social work.

29

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Selected Economic indicators 2009-2012


income & Economic Structure 2012 2011 2010 2009Average2012-10

Nominal GDP (US $ mn.)

Nominal GDP Per Capita (US$)

Real GDP Growth (%)

Unemployment Rate (%)

Human Development Index

Transparency Int’l Corruption Perception Country Rank

502.2

7,044.1

0.3

n.a

72/187

41/176

483.0

6,397.5

1.9

14

81/187

44/178

476.1

6,306.2

0.7

14.0

81/187

44/178

480.3

6,680.0

-0.8

14.0

73/182

34/180

487.1

6,582.6

1.0

14.0

72/187

41/176

Fiscal Accounts (% of GDP)

Central Gov’t Current Revenue

Central Gov’t Current Expenditure

Central Gov’t Current Balance

Central Gov’t Capital Expenditure

Central Gov’t Primary Balance (after grants)

Central Gov’t Overall Balance (after grants)

Central Gov’t Gross Debt

General Gov’t Gross Debt

25.9

23.6

2.3

11.7

(2.9)

(4.4)

58.0

69.8

27.7

24.1

3.6

17.0

(1.8)

(3.4)

55.0

67.5

31.5

25.6

5.9

15.9

1.3

(0.3)

63.2

66.2

31.8

28.5

3.3

15.6

7.7

5.5

54.1

56.8

28.4

24.4

4.0

14.9

(1.1)

(2.7)

58.7

67.9

Monetary, Financial & Exchange Rate indicators

Consumer Price (end of period)

Consumer Price (annual average)

Credit to the Private Sector & NFPE (% of GDP)

Credit to the Private Sector & NFPE (YOY change %)

Non-Performing Loans/ Total Loans (%)

Provision for NPL (% of NPL)

Banking Sector Capital Adequacy Ratio (%)

Base Money (YOY change)

Broad Money or Money Supply (YOY change %)

Average Bank Deposit Rate (%)

Average Bank Lending Rate (%)

Nominal Exchange Rates (per US $)

Real Effective Exchange Rates (YOY change %)

2.0

1.4

63.3

4.3

12.7

18.3

na

16.6

10.1

3.0

9.0

2.7

(1.10)

2.0

1.3

61.1

8.1

9.2

18.3

7.2

17.9

2.3

3.1

8.8

2.7

(3.37)

0.2

2.9

56.8

9.1

8.7

14.2

17.5

8.2

3.8

3.3

8.9

2.7

(1.51)

3.0

0.0

51.3

6.8

5.5

20.6

15.1

14.5

9.9

3.2

10.0

2.7

2.9

1.4

1.9

60.4

7.1

10.2

16.9

13.3

14.2

5.4

3.1

8.9

2.7

(2.0)

External Sector indicators

Current Account Balance (% of GDP)

Capital & Financial Account Balance (% of GDP)

Overall External Balance (% of GDP)

External Public Debt (% of GDP)

Gross International Reserves (US $ mn.)

Net International Reserves (US $ mn.)

Gross International Reserves (in months of imports)

Total Debt Service (% of exports of GNFS)

Gross Financing Requirements/ Reserves (%)

(10.9)

11.6

0.6

41.6

176.30

136.64

9

100.7

36.59

(14.8)

18.3

3.5

40.1

128.64

109.07

6

120.1

59.17

(17.1)

18.4

1.3

46.7

126.00

112.82

6

105.1

67.58

(22.8)

22.9

0.1

37.8

144.33

124.19

7

117.4

74.30

(14.3)

16.1

1.8

42.8

143.6

119.5

6.7

108.6

54.4

29

June 2013

ECONOMiC PERFORMANCE

30


RatingRationale Analytical Contacts:


Sagicor Life Jamaica Limited

RATING HISTORY

Date National Scale Instrument/Remarks

May, 2013 jmAAA USD75millionDebtIssue(Notional)

March 8, 2013 Rating Watch Developing USD75millionDebtIssue(Notional)

February 2, 2013 jmAAA USD75millionDebtIssue(Notional)

March 28, 2011 jmAAA USD75millionDebtIssue(Notional)

March, 2010 jmAAA USD75millionDebtIssue(Notional)

January15,2010 Rating Watch Developing USD75millionDebtIssue(Notional)

January16,2009 jmAAA USD75millionDebtIssue(Notional)

December21,2007* jmAAA USD75millionDebtIssue(Notional)

Strengths Dominant market position. Healthy profitability. Good capitalization levels. Support from Sagicor Group in the event of a crisis.

Weaknesses Operating in a highly indebted economy with limited financial flexibility.

Rating Sensitivity Factors Sharp changes in the macroeconomic environment. Sharp changes in interest rates and inflation. Substantial deterioration in the financial performance and profitability of SLJ.

RATiNG DRiVERS

30


USD75millionDebtIssue(Notional) jmAAA (Jamaica National Scale)

31

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COMPANY BACKGROUND

Sagicor Life Jamaica Limited (SLJ) commenced operations in 1970 as the first Jamaican-owned lifeinsurance company and was the first life insurancecompany to be listed on the Jamaica Stock Exchange (JSE). The company markets an extensive range of long-term and equity-linked individual life insurance products, group life, group health and personal accident plans and group pension plans. Some of the company’s other services include residential and commercial mortgages, annuities, real estate development and management, investment management, and lease financing.Thecompanyoperatesthrough13branchesand has 491 agents in Jamaica as at December 31, 2012. SLJ is a majority owned subsidiary of the Sagicor Financial Corporation. SLJ is a predominantly Jamaican based company and derives approximately 92% of its revenuesand80.6%ofthenetprofits,onaconsolidatedbasis, from Jamaica.

ForthefirstquarterendedMarch2013,SLJGrouphasreported total revenue of J $7 billion and profit aftertaxofJ$618million.Theseresultsreflectthenegativeimpact of the NDX programme for which a large por-tion is one-off. Notwithstanding, the Group does project healthyprofitsforfullyear2013.Forthefullyearended2012theSLJGroupreportedrevenueofJ$31.5billionandprofitaftertaxofJ$6billion.

RATiONALE

Caribbean Information and Credit Rating Services Limited (CariCRIS) has removed Sagicor Life Jamaica Limited (SLJ) from Rating Watch and has reaffirmed the rating of jmAAA on the Jamaica national scale to the debt issue (notional) of the size of USD 75 million. The rating indicates that the level of creditworthiness of this obligation, adjudged in relation to other obligations within Jamaica is the highest.

The factors supporting this rating are:

Dominant Market Position SLJ remains the most dominant life insurance company

in Jamaica with significant market shares enjoyed in several segments of the market. For new life insurance business (New Annualized Premium Income) its market share is estimated to be 54%. Market share for new individual life insurance policy sales is approximately 56%. In the pension funds segment, SLJ has a significant share of roughly 50% of assets under management. In the group life and group health businesses, SLJ’s market share

is estimated at about 50% and 67% respectively. Its subsidiary company, Sagicor Investments Jamaica Limited (SIJL), formerly Pan Caribbean Financial Services Limited (PCFS), is the largest unit trust manager in Jamaica with approximately 45% market share. SIJL is also the largest broker for equities in Jamaica. With consoli-dated assets under management of about J $295.4 billion as at December 2012, the SLJ group is considered as one of the lead-ing financial services players in the Jamaican market; the group is approximately 74% of the size of the largest bank in Jamaica. This dominant market position generally enables the company to price its insurance policies profitably, which in turn has enabled the company to maintain a relatively healthy financial position despite the challenging economic environment in Jamaica.

The current dominant position of SLJ is the result of a series of mergers and acquisitions undertaken over the last twelve years. In 2001, the company was acquired by the Sagicor Group. Post acquisition, various life insurance and other financial services companies were merged with SLJ, as part of its growth strategy. The company has managed these acquisitions well. Since Decem-ber 2008, the group has effectively held control of the public sector group health market through the acquisition of the Blue Cross Jamaica Limited health insurance portfolio. In November 2009, SLJ increased its interest in SIL to 86% through the acquisi-tion of Sagicor Financial Corporation’s (SFC) 33% shareholding. In December 2012, Pan Caribbean Financial Services Limited was rebranded to SIL. While the transaction has increased the compa-ny’s ownership in a significant contributor to its profitability, the increased investment in this non-core subsidiary constrains SLJ’s minimum continuing capital and surplus requirements (MCCSR)1

ratio. Its agents are the most efficient in the industry and typically originate twice the amount of new business on average in rela-tion to the competition. In 2012 the individual life sales team set another industry record of J $2.5 billion in new API2, an increase of 19.9% over the previous year.

Insurance penetration in Jamaica (insurance premium/gross domestic product (GDP)) at approximately 4.3% is quite high in relation to the emerging market average of 2.7%. While the middle and high income markets of Jamaica are almost fully penetrated by the insurance industry, the mass market segment, consisting of low income individuals, is severely underserved and offers significant opportunities for growth. SLJ enjoys first mover advantages in this segment having been first to market with the successful launch of “The Protector Series” in 2008. These prod-ucts, which do not require a high level of underwriting, were tailored to meet the needs of the mass market and have lower levels of sums assured. Over the last four (4) years, the success of

31

Footnotes

1 The MCCSR is a measure of the adequacy of a life insurance company’s

capital to meet its obligations to policyholders. The ratio is expressed as a

percentage of the minimum requirement. A MCCSR ratio of 100% means

that the company has adequate capital to meet its obligations.

2Annualized Premium Income.

32


these products has further consolidated SLJ’s dominant position in the Jamaican market. Moreover, these products have also formed a part of the suite of products being offered to mainstream clients given the prevailing economic climate; some clients appear to have developed a preference for this single premium product as opposed to tradition-al life insurance policies. Latest available information indicates that these products comprised approximately 17.7% of new policy sales for the 9-month period ended September 2012.

Healthy Profitability

During 2012 profit after tax grew to J $6 billion, an increase of 4.1% over the prior year. The company continues to real-ize consistently superior returns despite marginal declines in the ratios for 2012. Return on assets (ROA) slipped to 3.7% from 3.9% in 2011 while return on equity (ROE) fell to 23.6% from 26.7% previously; ROE fell for the fourth consecutive year. SLJ reported total consolidated revenue of J $31.5 billion in 2012, up 9.8% from the prior year. Growth was broad based with all revenue heads reporting increases during the year. Net premium income grew by 4.1% to J $19.5 billion from J $18.8 billion previ-ously, while net investment income grew by 14.1% to J $8.7 billion from J $7.6 billion in the prior year. The 2011 investment income

was tempered by a J $834.2 million impair-ment charge on the company’s investment in Direxion Exchange Traded Funds (ETFs). As a result of the increase in investment income, the net investment yield improved to 6.1% in 2012 from 5.9% previously. Fee, commission and other income grew by 41.8% to J $3.3 billion from J $2.3 billion in 2011. The increase was due mainly to unrealized foreign exchange gains on account of the depreciation of the J$ against the US$.

SLJ realized strong growth in new API in 2012 despite the challenging economic environment. More over, underwriting and claims expenses were fairly well controlled in 2012 as evidenced by the stand-alone claims ratio which deteriorated slightly to 69.9% from 67.7% in 2011. The increase was due largely to the 15.7% increase in net benefits and claims to J $10 billion. The stand-alone expense ratio slipped to 39% from 37.6% in the prior year on account of the 8% increase in operating expenses (including underwriting and administrative expenses) to J $7.6 billion. On a consoli-dated basis, total operating expenses grew by 10.9% to J $10.3 billion and represent-ed 32.8% of total income, up slightly from 32.4% in 2011.

During the first quarter of 2013, SLJ Group reported continued profitabil-ity, though significantly reduced due to

its participation in the National Debt Exchange and subsequent Private Debt Exchange Programme (NDX) that was executed in February 2013. Under the programme, approximately J $60.7 billion in GOJ securities were exchanged for new securities at lower coupon rates, longer durations and lower market values than what the exchanged bonds were trading at. The resulting impact was the realization of a one-time capital loss of J $1.1 billion on the exchange and a reduction in inter-est income. Total income fell by 6% year on year to J $7 billion during the first quar-ter of 2013, from J $7.5 billion in the first quarter of the prior year. The reduction in income was driven by the 52% fall in net investment income to J $1.1 billion from J $2.2 billion previously; adjusting for the one-time loss, net investment income is estimated to have grown by around 2%. The net investment yield also fell, to 0.7% (2.8% annualized) for the 3-month period ended March 2013 from 1.7% (6.8% annu-alized) in Q1 2012. Net premium income grew during the quarter, by 6%, to J $4.9 billion from J $4.6 billion in the corre-sponding period of the prior year. Fee, commission and other income grew by 58.8% during the quarter to J $1.1 billion from J $679.6 million in the first quarter of the prior year. Net insurance benefits and claims increased by 12% over the 3-month period ended March 2013 to J $3.5 billion from J $3.1 billion over the 3-month period


32

33

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ended March 2012 on account of higher death and health claims experiences, as well as higher individual life policy surrenders and overall portfolio growth during the peri-od. As a result, the claims ratio slipped to 71% for the quarter ended March 2013 from 68% in the prior year quarter ended March. Total operating expenses (including adminis-trative and underwriting expenses) grew by 8.1% to J $2.7 billion from J $2.5 billion in Q1 2012. Growth was driven by increased salary expenses during the period. Expenses represented 55% of net premium income and 38% of total income during the quarter, up from 54% of net premium income and 33.3% of total income in the correspond-ing quarter of 2012. Profits after tax fell by 60.1% to J $618 million from J $1.5 billion in the corresponding period of 2012. ROA fell significantly to 0.4% (1.6% annualized) from 1% (4% annualized) in the first quarter ended 2012.

CariCRIS expects SLJ’s overall financial

performance to be reduced in 2013 follow-ing the NDX, and from the continued diffi-culties expected in the Jamaican economy, although the performance is expected to improve from the Q1 outturn. CariCRIS is therefore projecting a decline in the order of 2.8% in total revenue to J $30.2 billion and a fall in profit after tax of approximately 9.1% to J $5.5 billion in 2013.

Good Capitalization Levels

SLJ is well capitalized with a large and growing tangible net worth (TNW)3 base of around J $27.6 billion (excluding minority interest) as at December 2012, up 19% from December 2011 at J $23.2 billion. The ratio of the consolidated TNW (excluding minori-ty interests) to total assets remained comfort-able at 16.2% as at December 2012, which compares favourably with that of the large commercial banks in Jamaica. Healthy accruals to the capital through profits support the capitalization levels.

Capital adequacy, as measured by the MCCSR ratio, has come under considerable pressure on account of SLJ’s investment in its non-core subsidiary SIL. The MCCSR ratio grew slightly to 162.9% in 2012 from to 160.4% in the prior year; the MCCSR has fallen from 203.1% in 2010 on account of its increased stake in the SIL, and also to the increased market value of the company which continues to enjoy good profitabil-ity and growth. The MCCSR ratio, though considerably reduced, was still above the regulatory minimum of 150% for life insur-ance companies in Jamaica. The significant and increasing value of the investment in SIL puts pressure on the MCCSR ratio as SLJ has to make a sizeable appropriation for it in its capital adequacy calculation.

Management is in the process of examining various options with a view to arresting the decline in the capital adequacy ratio as a result of this investment.

As a listed company, SLJ has access

to the Jamaican Stock Exchange to raise additional funds if required although this could have proved challenging in 2012 given the bearish sentimentdisplayed by the stock market4. Moreover, as a member of the Sagicor Group, SLJ has the flex-ibility to raise capital on the regional and international capital markets if necessary. Given the company’s dominant position in the financial services industry and its strategy of focusing on the insurance and wealth management businesses, CariCRIS believes that there is limited scope for inor-ganic growth in Jamaica for SLJ. As a result, current capitalization levels and accru-als should be sufficient to fund the organ-ic growth in its business. Even after the NDX, CariCRIS expects TNW to increase by approximately 9.3% to J $36.1 billion in 2013.


33

Footnotes

3Consolidated, but adjusted for goodwill and

fair value reserves.

4The composite index declined by 3.9%

in 2012.

Financial Year

34


Operating in a Highly Indebted Economy with Limited Financial Flexibility

SLJ operates primarily in a highly indebted economy characterized by limited fiscal flexibility. Real GDP is esti-mated to have contracted in the quarter ended September 2012 when compared with the corresponding quarter of 2011; the third successive quarterly decline. Economic growth is constrained by a crowding-out of private sector invest-ments in the context of the govern-ment’s high borrowing requirements. The contraction experienced in 2012 reflected the continued weak domestic and external demand conditions. The GOJ, on February 12, 2013 announced a National Debt Exchange (NDX) which was a precondition to the execution of a new Stand-By Agreement with the International Monetary Fund (IMF). The NDX, the second debt exchange in 3 years, entailed the swapping of 27 of the 30 bonds issued under the JDX in 2010 for even lower cost instruments. With the NDX the GOJ realized an immediate cash saving of J $119.2 billion and hopes to be in a position to reduce its debt by an estimated J $17 billion per year. On

Support from Sagicor Group in the Event of a Crisis

SLJ is a key member of the Sagicor Group. Sagicor Life Inc., the main oper-ating company in the Sagicor Group, has a 51% shareholding in SLJ; in July 2012 Sagicor Financial Corporation sold 8% of its interest in SLJ to minority share-holder Pan-Jamaican Investment Trust Ltd and Trustee Sagicor Long-Term Incentive Plan. In 2012, the Sagicor Group derived around 42% of its overall revenue and about 78% of its pre-tax profits from SLJ and its subsidiaries in Jamaica. The capital loss and reduced interest income realized by SLJ on account of the NDX contributed to the 8.1% decline in Sagicor Financial Corporation’s net investment and other income to US $85.4 million in the first quarter of 2013. SLJ, by virtue of the re-branding in May 2008, is seen as the Jamaican subsidiary of an international financial services group with operations in 22 countries. This clearly highlights the economic and strategic importance of SLJ to the Sagicor Group and underscores the moral obligation of the parent to support SLJ in the event of a crisis.

These rating strengths are tempered by the following:

May 1, 2013 the IMF approved a 4-year Extended Fund Facility (EFF) of US $932.3 million for the GOJ, of which US $202.6 million was disbursed upon signing of the agreement. As a requirement of IMF support, the GOJ has launched new meas-ures aimed at increasing its revenues by J $23 billion annually. Some took effect from March 1, 2013 while others took effect on April 1, 2013.

They include:

Income taxes on dividends and other miscellaneous income taxes.

General Consumption Taxes (GCT) on telephone calls, as well as the inclusion of port fees and duties under GCT.

Trade taxes via a Customs Administration Fee (CAF).

Miscellaneous revenues due from increased stamp duty, fees on gambling and increases in property tax for property owners in the lower income bracket.

Other reforms being undertaken are aimed at boosting economic growth and employment, improving competitiveness, reducing debt and improving social protection.

NDX notwithstanding, government debt in Jamaica is high at 132.9% of GDP; among the highest in the region. The GOJ expects with the NDX, together with several new revenue measures and other reforms, to be able to reduce the country’s debt to GDP ratio to 95% by 2020. CariCRIS expects that with the new IMF agreement the GOJ would real-ize improved international capital market access as well as renewed access to multi-lateral funding; the Inter-American Development Bank (IDB) and World Bank are expected to make US $1.2 billion of funding available to the GOJ now that an IMF agreement is in place. This in turn is expected to bolster the country’s reserve position which is currently under


34

YearNominal GDP Total Public

Sector Debt

35

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35

significant pressure with net international reserves (NIR) declining every month since May 2011 from US $2.3 billion to US $866 million as at April 2013.


Sharp changes in the macroeconomic environment.Sharpchangesininterestratesandinflation.Substantialdeteriorationinthefinancialperformanceand

profitabilityofSLJ.

2012* 2011 2010 2009 2008

Equity CapitalTangible Net Worth**Total Assets**Total RevenueProfits After Taxes

Loss RatioExpense RationPAT / Average Total AssetsYield on Invested AssetsTangible Net Worth / Total Assets

Total Investment Assets / Policy LiabilitiesPremium / Surplus Ratio

J $ million

7,85527,595

169,96531,4755,988

7,85523,187

155,99628,6705,754

7,85519,858

137,81325,6574,871

7,85516,348

131,95127,8734,886

7,79612,951

115,19828,2594,542

%

70.552.83.76.1

16.2

65.649.53.95.9

14.9

65.457.93.66.6

14.4

67.752.64.06.3

12.4

75.036.84.66.7

11.2

Times

3.50.7

3.70.8

3.60.7

3.31.0

3.21.2

FiNANCiAL PERFORMANCE

36


Mar-13 Mar-12 Mar-11 Mar-10

Equity CapitalTangible Net Worth**Total Assets**Total RevenueProfits After Taxes

Underwriting Expense/ Net Premiums WrittenPAT / Average Total AssetsTangible Net Worth / Total Assets

Net Worth / Net PremiumsTotal Investment Assets / Policy Liabilities

J $ million

7,85528,802

176,2107,040

618

7,85526,060

165,6247,4981,549

7,85520,778

146,1196,8041,352

7,85516,795

140,6116,6201,087

%

55.10.4

16.3

54.21.0

15.7

54.10.9

14.2

53.10.8

11.9

Times

5.93.4

5.63.7

5.13.6

4.32.7

Source: Sagicor Life (Jamaica) Limited Interim Financial Report 2013**Total assets and TNW have been adjusted for intangibles and revaluation reserves

Table 2: Summary 3-month Financial Performance


36

June 7, 2013

FiNANCiAL PERFORMANCE (continued)

www.caricris.com

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RatingRationale Analytical Contacts:


The Government of The Republicof Trinidad and Tobago

RATING HISTORY

Date Foreign Currency Local Currency National Scale Instrument/Remarks

May27,2013 CariAAA CariAAA ttAAA USD500millionDebtIssue(Notional)

June 29, 2012 CariAAA CariAAA ttAAA USD500millionDebtIssue(Notional)

June17,2011 CariAAA CariAAA ttAAA USD500millionDebtIssue(Notional)

June 11, 2010 CariAAA CariAAA ttAAA USD500millionDebtIssue(Notional)

May 8, 2009 CariAAA CariAAA ttAAA USD500millionDebtIssue(Notional)

March 29, 2008 CariAAA CariAAA ttAAA USD500millionDebtIssue(Notional)

March2,2007* CariAAA CariAAA ttAAA USD500millionDebtIssue(Notional)

Strengths Strong, resilient and well diversified economic structure. Very strong external position evidenced by healthy foreign reserves and low financing requirements. Sound fiscal flexibility and relatively low public debt. Well regulated financial system with stable monetary and exchange rate policies.

Weaknesses The high and increasing non-energy fiscal deficit. Heightened crime and an increasing perception of corruption are the main social issues facing the country.

Rating Sensitivity Factors Significant increases in the fiscal deficit. A sustained decline in commodity prices. Substantial increases in government debt.

RATiNG DRiVERS

*Initial Ratings assigned by Rating Committee

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USD500millionDebtIssue(Notional) CariAAA (Foreign Currency and Local Currency)

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The Government of The Republic of Trinidad and Tobago



SOVEREiGN BACKGROUND

Trinidad and Tobago (T&T), a mid-sized country, comprises the southernmost islands in the Caribbean chain, and lies just seven (7) miles off the north-eastern coast of Venezuela. The islands lie outside of the usual path of hurricanes and have largely been spared of the annual devastation that some of its northern neighbours have had to endure. The population, estimated to be just over 1.3 million people, comprises descendants of primarily India and Africa. The adult literacy rate is within the 80-85 percentile range and education is free from the primary to the tertiary level. The official language is English.

The expansion of T&T’s crude oil industry in the 1950s moved the economy from sugar-based to an energy-based economy. The vast petroleum and natural gas reserves have enabled the country to developed heavy industries such as liquefied natural gas, methanol, nitrogenous fertilizers and iron and steel. The country also has a strong presence in manufacturing and a vibrant financial services sector. Tourism is a growing sector in the economy.

RATiONALE

Caribbean Information and Credit Rating Services Limited (CariCRIS) has reaffirmed the ratings of CariAAA (Foreign Currency Rating) and CariAAA (Local Currency Rating) on its regional rating scale, and ttAAA on the Trinidad and Tobago national scale to the debt issue (notional) of the size of USD 500 million of the Government of the Republic of Trinidad and Tobago. The ratings indicate that the level of creditworthiness of this obligation, adjudged in relation to other obligations in the Caribbean1 is the highest.

Strong, Resilient and Well Diversified Economic Structure

Trinidad and Tobago has the largest GDP in the English speak-

ing Caribbean, the 2nd largest in CariCRIS’ Caribbean sample and is one of the wealthiest countries in the Latin American and Caribbean region, with a nominal per capita GDP of US $18,000. Real GDP is estimated to have grown by 0.2% in 2012, following annual contractions in two of the previous three years. The return to growth in real GDP reflected the resumption in growth in the second half of 2012 (1.5%) following a contraction of 1.1% in the first half of the year. The energy sector grew by 0.6% in the third quarter and remained flat in the fourth quarter of 2012, on

account of higher natural gas production and more coordinated maintenance stoppages. Conversely, the petroleum sub-sector was negatively impacted by the ongoing unscheduled mainte-nance stoppages which resulted in a 9.2% reduction in crude oil production during the second half of 2012. The decline in petroleum activity tempered the overall energy sector output. The nonenergy sector grew by 1.7% in the fourth quarter of 2012 following growth of 2.7% in the previous quarter. Growth in the non-energy sector was driven by growth in the finance, insurance and real estate sector which grew by 2.3% in the third quarter and 3.6% in the fourth quarter. The distribution sector grew only marginally in the fourth quarter following 4% growth in the prior quarter.

Economic activity is expected to strengthen in 2013 with the Ministry of Finance projecting real GDP growth of 2.5%. Growth is expected to be broad based with both the energy and nonen-ergy sectors forecasted to grow in 2013. Growth in the energy sector is expected to be driven by increased exploration activity and also by the fact that maintenance work and plant upgrades at the major producers are expected to be better coordinated, and scheduled to occur during the third quarter of the year. Non-energy sector growth is expected to be driven by recovery in the construction sector on account of the implementation of projects under the Public Sector Investment Programme (PSIP), including the Accelerated Housing Programme and work on the extension of the Solomon Hochoy Highway to Point Fortin. Activity in the finance sector is expected to remain strong, with continued high liquidity likely to facilitate credit growth. In the agriculture sector, ongoing reforms including the introduction of the Agricultural Incentive Programme together with efforts to strengthen the fishing industry are likely to drive growth. CariCRIS however, expects real GDP growth of around 1 to 1.5% in 2013 on account of delays in the commencement of some of the government’s capital projects, the low business confidence reflected in the weak growth in business credit, and the fragile economic conditions in Europe and the United States.

Trinidad and Tobago’s well-diversified economic base, with a strong presence in manufacturing and a vibrant financial services industry, makes it one of the more resilient economies in the Caribbean. The financial industry is a leading service industry contributing an average of 11% of GDP in recent years. The country has successfully diversified its energy export basket,

39

Footnotes

1 The term Caribbean as used here covers the following countries: The

Bahamas, Barbados, Belize, The Dominican

Republic, Jamaica, Trinidad and Tobago and the following countries in the

OECS: Anguilla, Antigua & Barbuda, Dominica,

Grenada, Montserrat, St. Kitts & Nevis, Saint Lucia and St. Vincent & the

Grenadines. Refer www.caricris.com for a more detailed explanation on

CariCRIS ratings and rating definitions.

40


thereby mitigating the risk of over-depend-ence on one commodity. Trinidad and Toba-go is the world’s No. 1 exporter of methanol and ammonia from a single destination and one of the largest global exporters of LNG. Domestic producers also have a very strong global cost competitive advantage in petro-chemicals arising from an available supply of cheap natural gas, the industry’s primary feedstock, and a highly skilled work force. Nevertheless, over time, the economy has become heavily dependent on the energy sector. At the end of the first “oil shock” in 1982, the energy sector contributed 25% of total nominal GDP. This grew to 30% by 1990, peaked at 51% in 2008 and in 2012 slipped to 43.7%. This high dependence on a depleting natural resource2 combined with the sluggishness of the non-energy tradable industries, is a definite source of risk in the medium to long term.

Labour market conditions appear to have improved in 2012 as indicated by the unem-ployment rate for the second quarter 20123 of 4.9%, down from 5.4% in the first quarter and 5.8% for the corresponding quarter of 2011. The number of retrenchment notices filed by the Ministry of Labour and Small and Micro Enterprises also fell, as evidenced by the latest available data for the 8-month peri-od ended December 2012 to 612, compared to 1,070 over the corresponding period for the prior year.

Latest available data indicates that the real effective exchange rate appreciated by 5.9% in the 12 months to February 2013, on account of increased inflationary pressures that averaged 9.1% during the period. The

appreciation in the real effective exchange rate may indicate that the country’s exports became less competitive in international markets. The country’s global competi-tiveness ranking deteriorated to 84th /144 in 2012 from 82nd /142 in the prior year, the first fall in the ranking following three successive years of improvement.

Very Strong External Position Evidenced by Healthy Foreign Reserves and Low FinancingRequirements

Trinidad and Tobago continues to enjoy a very favourable external position as a result of the relative buoyancy in the energy industry. This has enabled the government to build up a substantial stock of foreign reserves that have served to cushion the impact of the challenging global economic environment. The latest available estimates suggest that a balance of payments (BOP) deficit of around 2.6% of GDP is expected in 2012; the second overall external deficit in the last 6 years. The overall BOP defi-cit was due in part to the 54.4% decline in the external current account surplus to US $1.3 billion or 5.5% of GDP from US $2.9 billion or 12.3% of GDP in 2011, which was not sufficient to cover the US $1.9 billion or 8.1% of GDP deficit on the capital and financial account. The reduc-tion in the external current account surplus was driven in part by the 27.9% decline in the visible trade surplus together with an increased net outflow (5.8%) of US $3.3 billion on the net investment income account which was attributed to increased dividend payments to foreign investors. The country’s gross official reserves fell by 6.3% to US $9.2 billion. The reserves position represented 10.4 months of import cover, the strongest in the region and underscores an extremely healthy external position especially as the current account has been perennially in surplus, averaging 15.4% of GDP in the last 5 years, while the medium term debt servicing needs are small.

Foreign direct investment (FDI) inflows improved in 2012. Net FDI inflows are

estimated to have totalled US $1.2 billion in 2012, up 55.1% from US $770.6 million in the prior year. The strong growth in FDI inflows was driven by increased re-invest-ments by the multinational energy compa-nies. Energy export production is under-taken mainly by foreign capital resulting in significant outflows of investment income, which exceeded the value of net services exports in the same period. The energy sector dominates total exports, and although oil production has been in secular decline, a more diversified energy industry has reduced the country’s vulnerability to the vagaries of international commodity prices. However, as 2009 demonstrated, the prices of the limited range of energy exports are positively correlated so that there is limited room to truly diversify price risks.

The external debt of the public sector is estimated to have risen by 11.8% to US $1.7 billion by September 2012, from US $1.5 billion in September 2011. Despite this increase, external debt remained low at 6.9%, up marginally from 6.4% in 2011. The external debt stock exhibits a favour-able structure as it is denominated largely in US dollars and comprised mostly of medium and long-term maturities. Despite a reduction of 16.1% in energy exports, external debt service accounted for 1.8% of exports of goods and non-factor services in 2012, up slightly from 1.4% in the prior year and is expected to remain well below 5% in the medium term; the best placed country relative to its regional peers.

Notwithstanding the ongoing sovereign debt crisis in Europe, slowing growth in China and the slow pace of recovery in the United States, T&T’s external sector condi-tions are expected to continue to remain relatively healthy in 2013, although they are not expected to reach pre-crisis levels. Oil prices have thus far averaged US $93.78 for the first 4 months of 2013, well above the budgeted price of US $75, and are conservatively projected to range between US $84 – US $954 per barrel for the rest of 2013. Henry Hub prices have averaged US $3.58 per mcf5 for the first 3 months of 2013, above the US $2.75 per mcf budg-eted and are projected to average US $3.45 per mcf for 20136. International demand


40

Footnotes

2Estimated to be exhausted in 10 years at

current extraction rates assuming no new gas or

oil finds i.e. The prevailing reserves to produc-

tion ratio..

3Official data on unemployment is only avail-

able for the first and second quarters of 2012.

4Source: EIA Short Term Energy Outlook 2013.

5mcf = Thousand Cubic Feet.

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for petrochemical products remained strong. Looking ahead, gas production is expected to increase in 2013 as the significant down-time due to unscheduled maintenance activ-ity that prevailed during 2011 and 2012 will be better coordinated in 2013. The secular decline in oil production is expected to be somewhat slowed by production from the PETROTRIN Jubilee field. Moreover, explo-ration activity is expected to increase follow-ing the award of new production sharing contracts from the 2010 and 2012 bid rounds, and also by the recent award of licenses for Trinmar and North Coast Marine acreages. Overall, low public sector external debt and a strong external position will contin-ue to support the country’s superior credit quality in the short term.

Sound Fiscal Flexibility and Relatively Low Public Debt

A second consecutive overall fiscal deficit was recorded in FY2012, although the outturn was again better than budgeted due to higher than anticipated oil prices while average gas prices generally performed as expected during the year. The outturn was also supported by lower than budgeted expenditure during the year. These factors contributed to the TT $1.8 billion overall fiscal deficit which was well below the TT $7.7 billion deficit budgeted for FY2012. The overall deficit, at 1.2%7 of GDP, while better than budget, deteriorated when compared to the overall fiscal deficit of TT $1.1 billion or 0.8% of GDP recorded in FY2011. The deficit was partially funded by government’s cash balances and also by debt. The government of Trinidad and Tobago predicated its FY2012 budget on an assumed oil price of US $75 per barrel and a gas price of US $2.75 per mcf. During the financial year crude prices averaged US $94.1 per barrel while gas prices were generally in line with budget. As a result the government reported total revenue of TT $48.9 billion in FY2012, up 3% from the prior year outturn of TT $47.5 billion in and 4.2% above budget. Total expenditure and net lending for the year stood at TT $50.7 billion8, up

4.3% from the preceding financial year and 7.2% less than budget. Growth was reflected in almost all segments of expenditure with the most significant increase being realized in transfers and subsidies (TT $1.7 billion or 6.9%) to TT $26.8 billion from TT $25.1 billion in the prior year. Capital expenditure and net lending, at TT $6.8 billion, was 1.8% less than the FY2011 outlay and 9.8% below budget as the rate of project execution continued to be lower than expected. As a result, the below budget capital expenditure once again did not achieve the desired fiscal stimulus envisaged in the FY2012 budget. The non-energy sector deficit, which is another indicator of the size of the fiscal stimulus, was also lower by 1% when compared to FY2011. A relatively low debt stock and excessively liquid financial system gave government the capacity to issue bonds. Fiscal flexibility was further enhanced by the balances in both the HSF and the Infrastruc-ture Development Fund (IDF). Latest available information to June 2012 indicates that the balance in the HSF, driven by the buoyancy in world commodity prices, grew9

by 14.5% to TT $28 billion (US $4.4 billion) year on year and represented 18.3% of GDP. During the year the government was able to transfer approximately TT $1.3 billion (US $208 million) into the HSF on account of the prevailing prices for oil and gas. Including this transfer, the overall fiscal deficit stood at TT $3.1 billion or 2% of GDP in FY2012.

Government has predicated its budget estimates for FY2013 on a gas price of US $2.75 per mcf and an oil price of US $80 per barrel. The budget also assumes an expan-sion in nominal GDP of approximately 8.7%. Total revenue is expected to grow slightly (3.7%) from FY2012 to TT $50.7 billion while total expenditure is expected to increase by 15.2% to TT $58.4 billion. Fiscal operations are expected to result in an over-all deficit of TT $7.7 billion or 4.6% of GDP in FY2013. CariCRIS, however, is projecting an overall fiscal deficit of TT $3.1 billion or 1.9% of GDP.

The current account showed a healthy surplus of 3.3% of GDP in FY2012, down slightly from 3.8% in the prior year. The slippage in the current account surplus was due largely to the 5.3% increase in

recurrent expenditure outstripping the 3.5% increase in recurrent revenue. As the largest component of total expenditure, recurrent expenditure grew to TT $43.9 billion in FY2012 from TT $41.6 billion in the prior year. Transfers and subsidies, the largest component of current expenditure was high and growing by 6.9% to TT $26.8 billion. The increase in transfers and subsidies reflect the increased size of the transfer to the Petroleum Subsidy as a result of the higher than budgeted oil prices. It also includes sums expended on the Highway to Point Fortin project which, in CariCRIS’ opinion, should be accounted for in capital expenditure. In CariCRIS’ view, this significantly erodes the fiscal and operational transparency of this project. The sustainability of the level of transfers and subsidies remains a concern to CariCRIS. Tax income, the largest contributor to recurrent revenue, grew by 2.5% to TT $45.9 billion. This was largely due to the 12.3% increase in tax receipts from the non-energy sector to TT $22.3 billion from TT $19.9 billion in the prior year. The government realized a small primary surplus of 0.6% of GDP in FY2012, down from 1.2% in the preceding year. Government revenues are underpinned by a regionally-competitive and simplified tax system characterized by a unitary rate of tax for individuals and corporations, a moderately efficient VAT system and relatively low dependence on import duties. Tax collections from goods and


41

Footnotes

6Source: EIA Henry Hub forecast and using a

conversion factor of 1.025 per $ mcf.

Gas prices are projected at US $3.36 per

mmbtu for 2013.

7Overall balance excludes transfers to the Herit-

age and Stabilization Fund (HSF).

8Excluding transfers to the Heritage and Stabili-

zation Fund (HSF). Including the HSF, total

expenditure stood at TT $52

billion, up 1.1% from FY2011.

42


services, of which the largest component is VAT, grew by 23.2% and contributed 16.3% of total revenue in 2012, up from 13.6% of total revenues in 2011. Unlike what obtains in many Caribbean countries, there is relative diversity in the contributions to government revenue, despite the dominance of energy sector receipts.

Gross public debt, inclusive of liquidity management instruments stood at 56.7% of GDP in FY2012, up from 48.8% of GDP in FY2011. In nominal terms, total public sector debt grew by 18.5% to TT $87 billion. The increase in public sector debt was attributed to increased domestic and external liabilities during the year. Central government domestic debt grew by 34.5% to TT $52.2 billion while contingent liabilities fell by 3.7% to TT $24.2 billion. Public sector domestic debt, including contingent liabilities and liquidity management instruments of TT $20 billion, amounted to TT $76.4 billion or 49.8% of GDP in FY2012, up 19.5% from TT $64 billion or 42.5% of GDP in FY2011; net of the liquidity management instruments, public sector domestic debt falls to around TT $56.4 billion or 36.7% of GDP which is still relatively low when compared to regional peers. CariCRIS is projecting a total public sector debt/GDP ratio of 60.6% in FY2013 with a 13.9% increase in the

total public sector debt stock to TT $99.2 billion and a 6.5% increase in nominal GDP. Meanwhile, central government debt service consumed a mere 5.5% of recurrent revenue in FY2012, down slightly from 5.8% in the prior year.

Well Regulated Financial System with Stable Monetary and Exchange Rate Policies

The financial sector in Trinidad and Tobago is sound and well supervised. The banking system is mostly privately owned and well supervised, and while there have been no bank failures in the last 20 years, in January 2009, the Central Bank did have to intervene in the operations of CLICO Investment Bank (CIB). The ratio of gross non-performing loans (NPLs) to total loans for the commercial banking sector improved to 5.4% in 2012 following 4 years of steady deteriora-tion. Compared to its regional peers, this ratio is still considered low. Banks remain well capitalized with the average capital adequacy ratio falling slightly in 2012 to 24.6%, well above the regulatory minimum of 8%. Meanwhile, capital markets

are generally in a rudimentary stage of development but improving steadily. In this regard, several key pieces of legislation have either been completed or were in the process of being completed in the last year. A new Securities Act, 2012 was passed, replacing the Securities Industry Act 1995 (SIA). Pending legislative changes aimed at further strengthening the financial system includes the Credit Union Bill which seeks to ensure that credit unions are on par with both domestic financial institutions and their foreign counterparts, a new Insurance Bill and a new Occupational Pension Plan Bill.

Inflationary pressures increased in 2012 with headline inflation averaging 9.3% from an average of 5.2% in 2011. The increase in the inflation rate was due largely to the increase in the rate of food inflation to 19.3% in 2012 from around 6.9% in the prior year. Core inflation, despite the prevailing economic circumstances, accelerated to 2.3% in 2012 from an average of 1.7% in 2011. Going forward the rate of inflation is expected to rise as the increases in world commodity prices impact domestic prices. For the first 3 months of 2013 headline inflation averaged 6.7%. Core inflation also increased to 2.2% from 1.8% in the corresponding period for 2011.


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During the year the Central Bank maintained the accommodative monetary policy stance, adopted since 2009 and aimed at stimulating domestic demand and private sector investment. In this regard, the Bank reduced its main policy tool, the repo rate, on 1 occasion from 3% in January 2012 to 2.75% by September 2012; the lowest level since inception. This policy stance continued into the first quarter of 2013 as the repo rate was maintained at 2.75% in an attempt to support efforts to stimulate growth. The reduction in the repo rate, coupled with the continued high levels of liquidity, resulted in a general decline in interest rates during the year, as reflected in the 3-month Treasury Bill rate which averaged 0.18% in the third quarter of 2012, down from 0.25% from the third quarter of 2011. The commercial bank average prime lending rate also fell to 7.75% in 2012 from 7.99% in the prior year. Deposit rates also fell from an average of 0.61% in 2011 to 0.57% in 2012. Credit to the private sector and non-financial public enterprises grew moderately by 5.4% in 2012. This represented a slight reduction in growth when compared to the 6.5% increase in 2011. Despite the growth in private sector credit, the massive recurring net fiscal injections that totalled TT $14.9 billion in 2012 resulted in a significant build up in liquidity.

In an effort to absorb liquidity, open market operations were maintained at the statutory limit of TT $20 billion. Bank deposits held at the CBTT that were scheduled to mature in December 2011 were rolled over for an additional 12 months. To meet the shortfall in the market and maintain exchange rate stability, the Central Bank sold US $1.9 billion during the year, up 29.6% from the sales of the prior year. Despite the strong demand for foreign exchange, the nominal exchange rate depreciated marginally to TT $6.4033 from TT $6.3995 in the prior year. The sale would have also removed some liquidity from the financial system. During the first 3 months of 2013, the Central Bank sold US $283.2 million to authorized dealers, down from US $495.8 million in the corresponding period for 2012.

CariCRIS expects that apart from the immediate challenges to reduce liquidity and manage inflation, the monetary and financial system will remain sound and well supervised in the medium term.

These rating strengths are tempered by:

The High and Increasing Non-energy Fiscal Deficit

Notwithstanding government’s ongoing efforts to contain expenditure, the level of expenditure in recent times has worsened the underlying fiscal position. Over the last 11 years, the budget has increased from just over TT $17 billion in FY2003 to more than TT $54.6 billion in FY2012 on account of the relatively strong energy revenue being earned. However, although energy earnings have generally improved government revenues, the level of public spending has grown even more rapidly, from the equivalent of 22.3% in FY2003 to 33.9% of GDP in FY2012. As such, the non-energy fiscal deficit has more than doubled from 7.7% of GDP in FY2003 to around 18.5% in FY201210. Monetization of the non-energy fiscal deficit remains a major catalyst for pushing liquidity into the financial system which has placed a critical burden on monetary management and poses a serious risk to the control of inflation. In FY2013 the nonenergy fiscal deficit is projected to rise to around 21.4% of GDP. In CariCRIS’ opinion, the Government of Trinidad and Tobago will have to make some significant adjustments to its fiscal operations, such as in the levels of discretionary spending and particularly in transfers and subsidies, to bring the non-energy fiscal deficit down to a more sustainable level over the medium term.

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A fair amount of public expenditure has moved off budget as spending on behalf of the central government is also undertak-en by statutory authorities and state owned enterprises (SOEs). Firstly, there is the PSIP which is only partly funded by the national budget and partly funded out of the IDF. In FY2012 around TT $3.8 billion was used from the IDF to assist in funding capital projects. Additionally, there is a Supplemen-tary PSIP which allows SOEs to fund their operations through bond financing with government guarantees. The net impact of the operations of these entities is reflected in the public debt statistics through the accumulation of ‘contingent’ liabilities which fell by around 3.7% to approximately TT $24.2 billion in FY2012. During the financial year central government debt grew to 56.7% of GDP from 48.8% in FY2011. However, the size of Trinidad and Tobago’s public sector has remained fairly large on account of the number of special purpose state enterpris-es (SPSEs) that were established over the years to execute its capital program, thereby making the financing of its operations progressively more onerous and somewhat less transparent as many of these enterprises do not provide financial information in a timely manner. Reform of the state sector remains a major fiscal challenge as many of these SOEs are seen as important sources of employment.

Heightened Crime and an Increasing Perception of Corruption are the Main Social Issues Facing the Country

The country has enjoyed a long history of social and political stability. Presently the People’s Partnership Coalition has a comfortable majority in the Parliament which enables the government to pass legislation requiring a simple majority and pursue its development objectives. The political arena is dominated by two major political parties, the United National Congress11 (UNC), a key member of the ruling coalition and the opposition Peoples National Movement (PNM). In the main, there is little variance in the economic philosophies of the major parties, with all being committed to free market policies and increased foreign investment. As such, there has not been a fundamental shift in macroeconomic policy. The level of uncertainty within the private sector continues to linger although there are definite signs of improvement. Persistent


44

delays in the execution of government projects together with recently subsided unrest within the labour movement, largely related to salary negotiations for workers in various sectors including the public service, petroleum and electricity, have negatively impacted private sector and investor confidence. There are, however, indications of a gradual return to confidence, as evidenced by an increase in credit to the private sector of 5.4% in 2012, down slightly from 6.5% in the prior year. Latest available data indicates that despite the good overall growth, business credit grew by just 2.6% year on year despite the high liquidity and historically low interest rates.

The country continues to grapple with an unprecedented increase in crime and violence over the last 10 years which threatens some sections of the non-energy industry and has occasionally resulted in the issuance of negative travel advisories by many major metropolitan countries. Despite significant budgetary allocations and numerous initiatives on the part of the law enforcement agencies, there has been very little success in stemming the crime rate. The high crime rate has resulted in increased security costs to businesses, some degree of an entrepreneurial drain and a possible negative impact on firms’ decision to increase domestic investment.

Meanwhile, Trinidad and Tobago’s ranking on the Transparen-cy International Corruption Perception Index continues to come under pressure. This ranking has deteriorated since 2001 from 31st /91 to 80th /176 in 2012; though improved from 91st /178 countries in the 2011 report. Recent allegations of corruption have resulted in the Minister of National Security having to resign from the Cabinet and as a Member of Parliament. Moreover, the former Minister of Justice was dismissed for allegedly misleading the Cabinet, the Parliament and the President following his recommendation of the early proclamation of Section 34 of the Administration of Justice (Indictable Proceedings) Act No. 24 of 2011. Section 34 prescribed a limitation period of 10 years in respect of all offences with the exception of those listed in Schedule 6 to the Act. The proclamation of this section would have had a beneficial impact on the legal matters of a number of high ranking financiers of the UNC party who are presently before the courts for their involvement in the Piarco Airport Development project. Section 34 was eventually repealed in September 2012 following considerable pressure from the Director of Public Prosecutions, two opposition parties and civil society. There is an urgent need for greater transparency and accountability in the public sector to avoid the ‘stigma’ of corruption particularly associated with large state construction projects. CariCRIS believes that the perception of corruption, if not addressed, could become a very significant deterrent to the investment appeal of Trinidad and Tobago in the future.

Footnotes

9Although the HSF grew, the fund reported a

total return of -0.9% in June 2012, well below

the 1.9%% return reported in June 2011.

10Expenditure does not include transfers to

the HSF of approximately TT $8.3 billion

in FY2012.

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45

Item 2012P 2011r 2010r 2009r 2008r

National Income and Prices (Annual Percentage Change)

Real GDP (2000=100) Energy Non-Energy Agriculture Manufacturing Distribution Construction

Inflation(%)1

(Period average) (end of period)Unemployment Rate (%)2

0.2-1.81.6

-3.8-1.0 2.1

-1.0

9.37.24.9

-2.60.0

-1.0-4.11.0-8.5-7.9

5.25.34.9

0.22.0

-3.860.21.6

-11.6-28.4

10.513.45.9

-4.42.5-6.7

-32.41.4

-21.2-7.1

7.21.35.3

3.4-0.34.97.64.19.84.5

12.014.54.6

(In Percent of GDP)

Overall Central Government Surplus (+)/Deficit)(-)

External Curent Account Surplus (+)/Deficit(-)Overall External Account Surplus (+)/Deficit(-)

Public Sector Debt3

-1.2

5.5-2.6

43.6

-0.8

12.33.2

35.5

0.1

19.92.0

38.4

-5.0

8.1-3.6

33.5

7.3

30.39.7

24.4

Memorandum Items

External Public Debt (US $ mn)Debt Service Ratio (%)4

W.T.I (US $ barrel)

Gross Official Reserves (US $ mn) (net of HSF)

2,231.81.8

93.8

9,070.0

2,062.91.1

95.1

9,822.7

1,943.61.0

79.4

9,070.0

1,822.64.4

61.7

8,651.6

1,539.50.9

99.6

9,380.3

Source: Central Bank of Trinidad and Tobago, Central Statistical Office, Ministry of Finance Trinidad and Tobago1 Changes in the Index of Retail Prices (RPI), January 2003 = 100,2 This represents the average for the second quarter of 2012.3 Includes the external and internal debt of the Central Government as well as contingent liabilities and excludes Treasury Bills and notes for Open Market Operations (OMOs).4Thisisdefinedastheratioofexternalpublicsectordebtservicetoexportsofgoodsandnon-factorservices.r Revisedp Provisional

ECONOMiC PERFORMANCE

Selected Economic indicators


Significant increases in the fiscal deficit. A sustained decline in commodity prices. Substantial increases in government debt.

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CariCRIS Public Ratings List as August O(


48

Entity Issue Ratings

1 The National Gas Company of Trinidad and Tobago

USD 400 Million Debt Issue CariAAA (Regional Scale Foreign Currency)CariAAA (Regional Scale Local Currency)ttAAA (Trinidad & Tobago National Scale)

2 Phoenix Park Gas Processors Limited USD 185 Million Debt Issue CariAAA (Regional Scale Foreign Currency)CariAAA (Regional Scale Local Currency)ttAAA (Trinidad & Tobago National Scale)

3 Goddard Enterprises Limited USD 16 Million Debt Issue (Notional)

CariAA- (Regional Scale Foreign Currency)CariAA (Regional Scale Local Currency)bbAA (Barbados National Scale)

4 St. Lucia Electricity Services Limited USD 15 Million Debt Issue (Notional)

CariBBB (Regional Scale Foreign Currency)CariBBB (Regional Scale Local Currency)

5 Government of the Republic of Trinidad and Tobago

USD 500 Million Debt Issue (Notional)

CariAAA (Regional Scale Foreign Currency)CariAAA (Regional Scale Local Currency)ttAAA (Trinidad & Tobago National Scale)

6 Government of Barbados USD 300 Million Debt Issue (Notional)

CariA+ (Regional Scale Foreign Currency)CariAA- (Regional Scale Local Currency)

7 Government of Anguilla USD 25 Million Debt Issue (Notional)

CariA- (Regional Scale Foreign Currency)CariA- (Regional Scale Local Currency)

8 Sagicor Investments Jamaica Limited USD 25 Million Debt Issue (Notional)

CariBBB- (Regional Scale Foreign Currency)CariBBB (Regional Scale Local Currency)jmA+ (Jamaica National Scale)

9 Republic Bank Limited TTD 1 Billion Debt Issue CariAA+ (Regional Scale Foreign Currency)CariAA+ (Regional Scale Local Currency)ttAA+ (Trinidad & Tobago National Scale)

10 Eastern Caribbean Home Mortgage Bank USD 30 Million Debt Issue (Notional)

CariAA- (Regional Scale Foreign Currency)CariAA- (Regional Scale Local Currency)

11 NCB Capital Markets Limited USD 25 Million Debt Issue (Notional)

CariBBB- (Regional Scale Foreign Currency)CariBBB (Regional Scale Local Currency)jmA+ (Jamaica National Scale)

12 National Commercial Bank Jamaica Limited


CariBBB (Regional Scale Foreign Currency)CariBBB+ (Regional Scale Local Currency)jmAA- (Jamaica National Scale)

13 Sagicor Life Jamaica Limited USD 75 Million Debt Issue (Notional)

jmAAA (Jamaica National Scale)

14 Government of Saint Lucia USD 38 Million Debt IssueUSD 50 Million Debt IssueXCD 140 Million Debt Issue

CariBBB (Regional Scale Foreign Currency)CariBBB (Regional Scale Local Currency)

15 TOSL Engineering Limited USD 10 Million Debt Issue (Notional)

CariA+ (Regional Scale Foreign Currency)CariA+ (Regional Scale Local Currency)

16 Dominica Agricultural, Industrial & Development Bank


CariBBB- (Regional Scale Foreign Currency)CariBBB- (Regional Scale Local Currency)

CariCRIS Public Ratings List as at July 1st, 2013

www.caricris.com

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Entity Issue Ratings

17 Development Bank of Jamaica USD 5 Million Debt Issue (Notional)

CariBBB (Regional Scale Foreign Currency)CariBBB+ (Regional Scale Local Currency)jmAA- (Jamaica National Scale)

18 Government of the Commonwealth of Dominica


CariBBB- (Regional Scale Foreign Currency)CariBBB- (Regional Scale Local Currency)

19 Trinidad and Tobago Mortgage Finance Company Limited

Issuer rating CariAA- (Regional Scale Foreign Currency)CariAA- (Regional Scale Local Currency)

20 Millennium Investments Limited (The Crane Residential Resorts)

Up to USD 40 million Preference Shares

CariA- (Regional Scale Foreign Currency)CariA- (Regional Scale Local Currency)bbAA- (Barbados National Scale)

21 Gulf City Limited TTD 620 million Debt Issue CariA (Regional Scale Foreign Currency)CariA (Reigonal Scale Local Currency)ttA (Trinidad and Tobago National Scale)

22 Bourse Securities Limited Corporate Credit Rating CariA- (Regional Scale Foreign Currency)CariA- (Regional Scale Local Currency)ttA- (Trinidad and Tobago National Scale)

23 Eastern Credit Union Co-Operative Society Limited

Corporate Credit Rating CariBBB- (Regional Scale Foreign Currency)CariBBB- (Regional Scale Local Currency)ttBBB- (Trinidad and Tobago National Scale)

CariCRIS Public Ratings List as at July 1st, 2013

Integrity IndependenceAnalytical rigourTeamwork





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The Rating Monitor is a publication of Caribbean Information & Credit Rating Services Limited

(CariCRIS). © All rights reserved.

Rating Monitor July 2013

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