Sep 2006 Financial News

Fitch gives Jamaica B+ rating but says growth will be anaemic at best

Sep 01, 2006

According to the New York based Fitch Rating Agency, it is the best of times and the worst of times for Jamaican foreign currency debt.

On Wednesday, Fitch assigned a B+ rating to Jamaica which tells international debt investors that the outlook is stable and the prospects for recovery of funds invested is average. Two weeks ago, rating agency Moody's Investor Service reconfirmed Jamaica's B1 rating which places Jamaican debt below investment grade.

Average Outlook
The saving grace that holds up the ratings by both rating agencies is the unblemished track record of timely debt repayment. In its August 30th report, Shelly Shetty, a Senior Director in Fitch's sovereign group said, "Jamaica's ratings are supported by an impressive commitment of authorities to maintain fiscal consolidation to reduce public debt despite the various external shocks the island has faced in recent years."

Two weeks ago, Moody's noted that, "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."

And one of the severe shocks that the government has faced is managing the tough wage negotiations with the public sector workers. Shetty noted, "Over the past two fiscal years, the society at large has shouldered the burden of fiscal adjustment, as public sector workers sustained heavy real income losses under the aegis of the Memorandum of Understanding ('MOU') agreement between the government and the public sector labour force. Notwithstanding the spending pressures and the possibility of elections in 2006, the government has been able to secure another MOU with a significant proportion of the public sector workers, which envisages little growth in real wages."

Another saving grace that Jamaica has, according to Fitch, is the focus on tax collection. In its report, Fitch states, "Rather than increasing tax rates and risking reduced compliance, the authorities have taken efforts to strengthen tax administration, which bore fruit in the last few months of fiscal-year (FY) 2006. In view of the spending rigidity, the government will have to rely on greater tax collection to meet its fiscal targets."

Major Obstacles
Of course, there are major problems that prevent Jamaica from enjoying higher debt ratings which would correspond to lower cost of debt.

Fitch notes, "Jamaica's ratings are constrained by a very high public debt burden of 130 per cent of GDP, which is twice the 'B' median, and heavy financing needs."

Two weeks ago, Moody's stated, "The general government debt to revenues ratio continues to surpass countries within the B1 to C rating category."

That said, both rating agencies note that Jamaica has very little wiggle room in terms of reducing this debt burden. On August 30th, Fitch stated, "Finally, while public finances are on the mend, they are extremely vulnerable to external and weather-related shocks. An escalation of oil prices and/or a severe hurricane could test the resolve of the authorities to meet its fiscal target in any given year."

Moody's noted that, "there are no fiscal "cushions" for the possibility of another hurricane."

Of course, the way out of debt is economic growth. However, Fitch does not foresee the country growing at more than an anaemic rate. "Jamaica's growth performance is among the worst in the 'B' category, with its 2001-2005 average growth of 1.4 per cent comparing poorly with the 4.6 per cent 'B' median. Jamaica's growth performance is hampered by crowding out from the large fiscal deficits, a heavy public debt burden, a significant vulnerability to external and weather related shocks, volatility in the exchange and interest rates, and a wide range of other structural constraints, such as low labour productivity, and a high crime rate."

There is some hope however, as the rating agency observed, "Growth prospects appear to be better for 2006-2008, partly owing to the expected foreign direct investment in the country."

At the end of the day, regardless of where growth comes from, the rating agency is concerned with how fast Jamaica can reduce its debt burden.

Fitch further stated, "Going forward continued fiscal consolidation will be the linchpin of Jamaica's credit story. A significant reduction in the public debt burden may be required before Jamaica could move up the rating scale."

Dennise Williams
The Jamaica Observer
Friday, September 01, 2006
http://www.jamaicaobserver.com/magazines/Business/html/20060831T200000-0500_112358_OBS_FITCH_GIVES_JAMAICA_B__RATING_BUT_SAYS_GROWTH_WILL_BE_ANAEMIC_AT_BEST.asp