Mar 2007 Financial News

S&P rates Ja for fiscal discipline, debt reduction - Despite derailed budget targets

Mar 10, 2007

Standard & Poor's Ratings Services on Wednesday affirmed its 'B' long-term and 'B' short-term sovereign credit ratings on Jamaica, saying its outlook was stable, a day after lawmakers approved a $14 billion increase in the national budget resulting from a bigger wage bill and higher debt servicing costs.

Finance Minister, Dr. Omar Davies, had underestimated the wage by $4 billion, and debt servicing by $2.4, having over-borrowed by $29 billion - according to the country's most recent financials issued for January - and despite new record lows for interest rates with the benchmark six-month Treasury Bill last yielding 11.94 per cent.

Taxes and grants were also $5 billion off-target, carrying the fiscal deficit to $38 billion ($7 billion larger than forecast.)

S&P nevertheless said in its statement that its reaffirmation was benched on "government's ongoing commitment to fiscal discipline and debt reduction."

Said credit analyst Olga Kalinina: "This, together with the favourable external situation in 2006 — both in terms of the access to the global financial markets and uneventful hurricane season - helped maintain macroeconomic stability and boost the growing confidence of domestic businesses and international investors."

National debt

The national debt now stands at $925.8 billion, but as a percentage of revenues debt servicing, said S&P, was down to 43 per cent from 47 per cent.

Supported by lower interest rates, rising investment resulted in higher economic growth. "Real GDP grew by an estimated 2.6 per cent in 2006, the best performance over the past decade," said the agency.

"At the same time, strong foreign currency inflows further increased the Bank of Jamaica's reserves and helped stabilise the local currency."

Its rating was also linked to contained headline inflation which ended the calendar year at 5.8 per cent, down from 12.9 per cent in calendar 2005.

"This stability allowed the central bank to ease its monetary policy and led to a decrease in interest rates that reduced the government's interest costs to 43 per cent of revenue in fiscal 2006 (ending March 31, 2007), down from 47 per cent one year earlier."

"Standard & Poor's expects continuation of these prudent macroeconomic policies in 2007, which would build upon last year's good performance," said Kalinina. "Real GDP growth is expected to hover at around three per cent on the back of strong investments."

But, Finance Minister, Dr Omar Davies, said in Parliament, Wednesday, that real growth, which was estimated on a higher inflation rate than the actual outcome, would be lower than his original forecast.

S&P also acknowledged that Government's commitment is not always equivalent to outcomes.

Deficit

The general Government deficit is projected at 6.1 per cent of GDP in fiscal 2006, according to Standard & Poor's methodology, compared to 5.4 per cent in fiscal 2005.

This includes the direct government deficit of 4.0 per cent, the central bank's cash losses of 2.5 per cent, and a social security surplus of 0.4 per cent, it said.

Given these fiscal setbacks, the rating agency noted, the government's debt decline (projected at 131 per cent of GDP in 2006 from 137 per cent in 2005) would be smaller than expected.

"Should the Government be successful in bringing down the debt more decisively, the upward revision of Jamaica's ratings will be considered," said Kalinina, offering a carrot.

"Conversely," she warned, "any sign of fiscal loosening would undermine business confidence, pressure the Jamaican dollar and domestic interest rates, and ultimately hinder the debt decline and hard-won macroeconomic stability of past years."


Source:
Lavern Clarke (lavern.clarke@gleanerjm.com)
The Jamaica Gleaner
Saturday 10th March, 2007

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