Aug 2009 Financial News

Moody's maintains stable outlook on Gov't bonds

Aug 24, 2009

Ratings agency Moody's has maintained its stable outlook on Jamaica's B2 government bond rating.

In a press release Friday on the sovereign ratings of Jamaica, Moody's said its outlook reflected its expectation that the Government will sign off on the pending US$1.2-billion stand-by arrangement with the International Monetary Fund (IMF) and address financing shortfalls exacerbated by the global crisis.

"Multilateral disbursements and a stand-by agreement with the IMF will prove vital to preserving liquidity and closing the financing gap this year," said Alessandra Alecci, a vice president-senior analyst in Moody's Sovereign Risk Group.

The agreement, she said, is likely to incorporate strict macroeconomic reform conditions, particularly on the fiscal front, in order to address structural impediments to debt sustainability.

Alecci added that the Jamaican government is facing mounting pressure to contain the fiscal deficit, which, due to a drop in revenues, is very likely to exceed the official 5.5 per cent of GDP target for the fiscal year ending in March 2010, pushing central government debt-to-GDP towards 120 per cent.

"With interest and wage expenditures alone consuming 70 per cent of the total, a fiscal adjustment is very complicated," said Alecci, who explained that both the domestic and external financing situations have been under pressure until recently.

"However, as external vulnerability remains high, a further decline in tourism revenues, family remittances or foreign investment inflows, and/or higher oil prices could easily renew concerns about the balance of payments and pressure the currency once again," said Alecci. "Continued currency stability is in part due to expectations of official inflows from multilaterals, especially the IMF."

Going forward, she said, Jamaica's situation is highly vulnerable although the ratings outlook is stable as it is assumed that multilateral financing will continue, and that the government will address its structural fiscal challenges in order to lighten its debt burden over time.

"We are cognisant that this will be difficult politically as well as economically, making further downgrades possible," said Alecci.

Given that B2 is only two notches away from the Caa range, Moody's emphasised that, on its scale, a Caa rating reflects not only the probability of default, but also the anticipated loss to investors in the event of a default.

"Generally speaking, a Caa rating is assigned to a country when the government is very close to default, and losses are likely to be between five per cent and 30 per cent," said Alecci. "Although Jamaica's vulnerability is still very high, the government's well-documented willingness to honour its debts and the likelihood that it will continue to receive multilateral financing, an involuntary restructuring is not a base-case scenario at this stage."

Meanwhile, the rating agency said that it finds the Jamaican government's announcement earlier this week that it will not pursue a voluntary domestic debt exchange - despite considerable challenges - underscores the importance the government places on maintaining its creditworthy reputation.

Finance Minister Audley Shaw said Tuesday that Cabinet had decided it would not be pursuing private sector-led initiatives aimed at providing the state with short-term debt relief.

The announcement by Moody's came just days after international ratings agency, Fitch, said that the imminent return of Jamaica to the IMF will strengthen the country's credit outlook.

Jamaica has been hit hard by the global financial crisis and continued concerns about the country's balance of payments and what could be a debilitating erosion of the country's Net International Reserves. The country's major foreign exchange earners have all been impacted. Remittances have declined by 17 per cent, tourism earnings have fallen by 12 per cent, and bauxite/alumina production has dropped by 50 per cent this year.

Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20090822T220000-0500_158029_OBS_MOODY_S_MAINTAINS_STABLE_OUTLOOK_ON_GOV_T_BONDS.asp
Date Published: Sunday, August 23, 2009