Aug 2006 Financial News

Moody's maintains stable outlook on Jamaica but the spectre of Debt still overshadows the Economy

Aug 25, 2006

Moody's investor service, the world's number two rating agency, maintained its B1 foreign currency government bond rating and stable outlook on Jamaica.

The rating agency noted that the country's B1 rating reflects the authority's limited manoeuvring room to respond to shocks without triggering a deterioration in the fiscal balance and the public-sector debt ratios. The economy, the fiscal and external positions as well as public sector debt dynamics all remain sensitive to external and domestic shocks.

On the positive side, the ratings remain supported by the government's commitment to return to a balanced budget position, by a constitutional provision mandating debt service payments as the first expenditure priority, by a proven ability to face severe shocks and a strong willingness to pay.

The rating agency also pointed out that for the rating on Jamaica to increase the country would need to experience a combination of sustained fiscal surpluses, lower external imbalances and a significant reduction in public debt ratios. This they noted had a low near term probability of occurrence.

The rating could decline if a fiscal adjustment deemed insufficient to prevent further improvements in the public debt ratios should occur or a loss of confidence in the macroeconomic programme accompanied by a costly defence of the currency.

So what does all this mean? Speaking with CBR from his Kingston office, JMMB's Investment Research and Sovereign Risk Analyst Jermaine BurreLl said: "This was no major pronouncement. We have been hearing the same thing from Moody's and Standard & Poor's since 2004. Our debt to GDP ratio, which stands at 136, makes Jamaica one of the highest in the "B" sovereign range. But we are slowly pulling ourselves back. Remember, our debt to GDP ratio was 150 back in 2003."

Burrell said that the report points to a lack of progressive growth, and constraints with both the public sector wage bill and the cost of interest payments. These two factors now represent 90 per cent of where tax revenues go and is a serious drag on the economy.

On the positive side, factors underpinning the report's rating are Jamaica's willingness to meet its debt payments and its proven ability to withstand shocks.

Only last week Jamaica received a development loan from Venezuela for US$275 million (J$18 billion). This money is earmarked for work on Highway 2000, an upgrade of the refinery, the construction of the Montego Bay Sports Centre and a host of other civic projects. The loan was granted at an interest rate of 7.5 per cent per annum repayable over 20 years and with a five-year grace period making it very attractive.

This loan follows the Government's issue of a variable rate investment bond with a tenor of 20 years at an interest rate of 12.81 per cent per annum which was well received by investors.

Already, the Government has surpassed its targeted J$39 billion it said it would borrow for the first half of this year by borrowing some J$51 billion to service both internal and external debt. This means that the government will have to continue slashing expenditure.

The Moody's rating on Jamaica follows Standard & Poor's affirmation of Trinidad's "A" rating thereby reflecting its booming energy economy which underpins continuing fiscal and current account surpluses. However, Trinidad does have an increasing non-energy fiscal deficit due to slow development of the more labour-intensive, non-energy sector.

On July 26, 2006, Standard & Poor's revised its outlook on the Barbadian economy to "stable" from "negative", and affirmed its 'BBB+' long-term foreign currency rating on the sovereign.

Subsequent to the debt-restructuring announcement by the Belize Government, S&P executed a downgrade to the country's long-term foreign-currency rating to CC from CCC-, while maintaining its negative outlook.

In contrast, Moody's upgraded Trinidad & Tobago's rating to Baaa2 based on a strong external position and the declining debt ratios.

Source:
Al Edwards
The Jamaica Observer
Friday 25th August, 2006

http://www.jamaicaobserver.com/magazines/Business/html/20060824T230000-0500_111923_OBS_MOODY_S_MAINTAINS_STABLE_OUTLOOK_ON_JAMAICA_BUT_THE_SPECTRE_OF_DEBT_STILL_OVERSHADOWS_THE_ECONOMY_.asp