Jun 2009 Financial News

S&P maintains Jamaica's B- rating

Jun 12, 2009

In its latest report dated June 11th, 2009, international rating agency Standard & Poor's maintained its rating of Jamaica's long-term foreign and local currency debt at 'B-' and our short-term debt rating of 'C'. However, it also maintained a negative outlook on Jamaica's sovereign debt to reflect "the likelihood of a downgrade if policy actions fail to contain the ongoing fiscal and external deterioration".

They noted that the governments "policy options are few, and the risk that economic fundamentals will weaken even further is high". They warned that "if the government's options for fiscal stabilisation narrow or if the external situation worsens, impairing domestic confidence and the value of the currency, we likely will lower the rating to the 'CCC' category.

Conversely, if the government sufficiently tightens its fiscal belt, secures timely disbursements of official financing, and is able to avoid further increases in interest rates, we might revise the outlook to stable."

Standard and Poor's expects Jamaica's economy to worsen, projecting an economic contraction of 3.5 per cent in 2009, with another fall in real Gross Domestic Product (GDP) of one per cent in 2010, before a forecast recovery of one per cent of GDP in 2011.

Given this dim outlook, Standard and Poor's projects that the general government deficit will worsen slightly from 7.6 per cent of GDP in fiscal year 2008 (ended March 31st 2009) to eight per cent of GDP in the current 2009 fiscal year.

Standard and Poor's calculates this fiscal deficit by including the quasi fiscal losses of the Central Bank (which it estimates at one per cent of GDP in 2008), and excluding certain capital revenues (1.7 per cent of GDP in 2008). It then adjusts the central government deficit of eight per cent by the value of the social security surpluses to get the general government deficit figure of 7.6 per cent of GDP in 2008, which was itself above their estimate of the comparable fiscal deficit in 2007 of 5.1 per cent.

Standard and Poor's note that the government plans to meet its fiscal deficit target of 5.5 per cent for the current year (this figure includes capital receipts etc) through a number of measures, including "an increase in the taxes on fuel, a broadening of the general consumption tax base, and a new phase of the tax amnesty programme (to run through October 2009). the public - sector wage freeze was announced in April 2009, effectively postponing the seven per cent increase agreed for fiscal - year 2009 as part of the 2008 - 2010 Memorandum of Understanding between the government and the Confederation of Trade Unions. Capital spending will also remain subdued".

In addition to the tough fiscal measures previously stated, they note approvingly that "the ongoing talk with the IMF signals a new attitude of the government toward possible engagement with the fund."
They forecast Jamaica's borrowing requirement to be 20 per cent of GDP in fiscal 2009, with financing reliant "on predominantly domestic sources and ongoing official disbursements, including sizeable assistance from the multilateral institutions".

Standard and Poor's note that Jamaica's net government debt is expected to remain above 110 per cent (similar to the 113 per cent of GDP for fiscal year 2008), and that Jamaica's high inflation (they expect the inflation rate to be 15 per cent in 2009) conceals the negative impact of our sizeable fiscal deficits.

Worryingly, they expect debt service pressures to surge to 58 per cent in 2009 compared with 48 per cent in 2008, and believe that "due to exchange rate pressures" the Bank of Jamaica "is unlikely to ease its monetary policy despite declining inflation, so interest rates will remain high". They note that the improvement in the debt structure remains uneven, as interest rate sensitive debt accounts for more than 60 per cent of domestic debt (Jamaica stands out negatively compared with its peers on this measure), whilst the share of external and foreign currency linked debt remains at about 50 per cent of total debt. In addition, the central government's external debt (excluding Bank of Jamaica debt) is skewed, at almost 70 per cent, towards commercial creditors.

Nevertheless, Standard and Poor's believes that Jamaica has stronger institutions and political will than its similarly rated peers of Seychelles, Grenada, Belize, Lebanon and Fiji (the first three of which have defaulted on their debt) and all of whom also have very high levels of debt and limited fiscal flexibility.

They ascribe Jamaica's stronger debt payment culture to their belief that our institutions - such as our civil service, judiciary and media - "are stronger and play a more vital role" than most countries in the 'B' rating category, including higher-rated peers such as Belize, Suriname, the Dominican Republic, or any African country in the same rating category.

Whilst noting that the rise in the official unemployment rate, from 10.7 per cent in 2007 to 12.7 per cent in 2008, has not been too severe so far (in many sectors companies have been trying to reduce work weeks rather than laying off staff), they believe this is likely to change as economic conditions get tougher, and they expect unemployment to rise to 15 per cent in 2009.

Although they note Jamaica's economic structure is more diversified than that of many smaller Caribbean sovereigns, Standard and Poor's believe Jamaica's reliance on tourism (roughly 25 per cent of current account receipts) and remittances (roughly 30 per cent of current account receipts) will affect growth over the next two years. They note that the bauxite industry is also suffering, with a sharp fall in alumina prices (almost half their peak in mid 2008), and that some mines have been closed.

Standard and Poor's expect that Jamaica's tourism industry, after a relatively positive 2008 (four per cent growth in stopover arrivals and a 1.2 per cent rise in visitor spending), "will take a strong hit in 2009, declining by 10 per cent. Heavy discounting will mean that tourism expenditures will have an even larger dip." They note that many tourism projects are on hold, reflecting the financial difficulties of their Spanish investors.

Critically, whilst they expect the current account deficit to fall from 19 per cent of GDP in 2008 to 12 per cent of GDP in 2009, they believe the "foreign direct investment outlook is dim" and expect net foreign direct investment (FDI) of only 2.7 per cent of GDP in 2009 compared with an estimated 10 per cent of GDP in 2008. On the positive side, they note that public sector debt repayment in 2009 will be lower than last year, that multilateral creditors will likely provide "important relief", that Jamaica's banks have managed to roll over their international credit lines, and that large nonfinancial private sector players such as Digicel have successfully tapped the international capital market

Article by: Keith Collister
Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20090612T040000-0500_153329_OBS_S_P_MAINTAINS_JAMAICA_S_B__RATING_.asp
Date: 12-06-09