Oct 2008 Financial News

Negative outlook - S&P less bullish on Jamaica

Oct 22, 2008

Standard & Poor's Tuesday, in a new reading on Jamaica's credit standings, reaffirmed its 'B' rating on the country, but still delivered a body blow when it revised its outlook from stable to negative on expectations of worsening balance of payments. Finance Minister Audley Shaw immediately tagged the reaffirmation of the rating as a positive and said concerns about the deteriorating current account would be ameliorated by falling word oil prices. The S&P revision comes days after the central bank announced it was prepared to shore up financial institutions exposed to the global credit crisis through a US$300 million window, and more than a week after the Finance Ministry acknowledged that top foreign exchange earners, tourism and remittances - both sectors dependent on a healthy US economy - would be stressed by the downturn.

Global bonds
Jamaica's global bonds, which by their 'B' rating are already classified as junk or non-investment grade, have also been falling on the world market - three of the 14 are now trading below US$80 - while pushing up yields (see latest bond prices on page C4). "The financial sector is dealing with lower availability of credit lines from foreign banks - due to tight liquidity in international markets - and there are margin calls stemming from the deterioration in government bond prices," said the ratings agency.

In fact, it warns that if the asset quality of commercial banks was to deteriorate, that could factor into a downgrade of sovereign credit. The ratings agency says, however, that non-performing loans, which are now 2.2 per cent of total loans, are considered 'stable'. But influencing the 'negative' outlook is Jamaica's worsening current account deficit which has doubled in two years from 16 per cent to 32 per cent of goods and services trade inflows, and high debt servicing costs. But S&P also says its unchanged credit rating is influenced by the immediacy of central bank response to steady the markets, and one fiscal indicator.

The Bank of Jamaica does not comment on the size of its interventions in the foreign exchange market, but S&P says recent infusions amounted to US$300 million. Flooding the market with the greenback, however, did not totally halt the slide of the Jamaican currency, forcing the BOJ on Friday to raise interest rates by 65 basis points on 30 day to 180 day tenors, and 120 basis points on the one-year. Rates now range between 14.65 per cent on the lowest tenor to 16.7 per cent. The currency still depreciated 10 cents to $73.99 on Friday, but regained six cents Tuesday to close at $73.93 on the spot market. The markets were closed Monday. "Our ratings on Jamaica are supported by the government's high primary fiscal surpluses; timely policy response to rising pressures in the foreign exchange market; important local capital markets; and support from the trade unions and the business sector," said S&P credit analyst Olga Kalinina in a release from the agency. "These all help Jamaica alleviate its rising fiscal and external risks."

High primary surplus
Even when it runs a high overall deficit, as with the 5.4 per cent of GDP recorded in the 2007/2008 fiscal year, the government runs a high primary surplus of 10-11 per cent of GDP. But S&P also said that Jamaica's fiscal position is seen as "weak", its economic structure "narrow" and that the country faces rising external liquidity risks. In short, external conditions have narrowed Jamaica's scope for borrowing overseas and forced the Finance Ministry to look within its borders for financing for its big budget.

It also would not have helped that taxes are performing below expectations by almost $3 billion according to the August fiscal accounts, which means that the Finance Ministry may be required to cut spending even further or cover its position through additional domestic borrowing and loans from multilateral sources.Jamaica has raised US$350 million on capital markets abroad, but needed another US$250 million. The Inter-American Development Bank this month lent Jamaica US$50 million, leaving a gap of US$200 million. The funds raised are sufficient to cover a global bond that matures next February, it said, perhaps in reassurance to holders of the debt.

Butaid S&P: "The country's reliance on external funding for its sizeable fiscal and external deficits is becoming more problematic because of deteriorating global economic and financial conditions." "The large amortisation and surging current account payments put pressure on the US dollar liquidity," it added. The agency said the current account deficit is projected to widen to 32 per cent of current account receipts this fiscal year, up from 22 per cent in 2007, and 16 per cent in 2006.

Foreign direct investment inflows
At the same time, net foreign direct investment inflows are slowing to an estimated 26 per cent of the CAD in 2008, from 43 per cent last year, the ratings agency said. S&P warned that its negative rating means Jamaica is on watch for a downgrade, warning that it was keeping track of the commercial banking sector and the wider financial system, because of its role as financier of the government, as well as the country's reserves. "External pressures are expected to dampen economic growth, strain already-high government borrowing needs, and weaken the country's external liquidity profile," said the ratings agency."These factors could trigger further weakness in the local currency, with negative implications for fiscal performance and the debt trajectory, given the substantial reliance on foreign currency and foreign-currency linked obligations. Were Jamaica to make it through this period without significant loss of reserves, and the current account deficit adjusts in an orderly manner, said S&P, "we could maintain our rating, and revise the outlook to stable."


Source:
The Jamaica Gleaner
Wednesday October 22, 2008
http://www.jamaica-gleaner.com/gleaner/20081022/business/business1.html