Fitch does not lower Jamaica’s foreign and local currency ratings
KINGSTON, Jamaica, Thursday February 9, 2012 - Jamaica's improving macroeconomic stability and relatively high level of institutional strength, has led the New York-based Fitch Ratings to affirm Jamaica's Foreign and Local Currency Issuer Default Ratings (IDR) at 'B-'; its short-term IDR at 'B'; its Country Ceiling at 'B'.
Fitch also projected that this rating was unlikely to drop in the near future, terming the Rating Outlook for the island as “Stable”.
The rating report issued by Fitch this week credited the country for the way in which it had responded to significant fiscal and balance of payments pressures over the years, and noted that its performance compared favourably with its peers in terms of Gross Domestic Product per capita and Human Development Indicators.
However, Fitch pointed out that its key credit weaknesses included one of the highest debt burdens of all sovereigns rated by the company, weak external and fiscal solvency indicators, continued growth underperformance, and high vulnerability to external and confidence shocks.
On the positive side, Fitch did acknowledge that in 2011, the central bank, the Bank of Jamaica, had been able to maintain, and even reduce, historically low interest rates in the context of broad exchange rate stability and reduced inflationary pressures. Inflation averaged 7.5% in 2011, while the exchange rate was stable in spite of the absence of reviews under the International Monetary Fund (IMF) Stand-By Arrangement (SBA) since December 2010.
Fitch also cited promises by the recently installed government to negotiate a new agreement with the IMF (as the 2010 SBA ends in May 2012), reign in expenditure pressures, and move forward with policies to reform the tax system, bring public sector salaries under control and contain rising pension costs, in its ratings consideration.
“Maintaining the credibility of fiscal policy and multilateral support will be key given Jamaica's sizeable twin deficits and limited buffers, which leave the economy vulnerable to swings in investor confidence and a variety of shocks ranging from a weaker global growth to natural disasters,” said Erich Arispe, Director in Fitch's Sovereign Group.
Fitch projected that Jamaica’s current account deficit (CAD) would stand at near 10% of GDP in 2012m a decline from the estimated 11.7% of GDP in 2011, but still prompting in its opinion a need for continued multilateral support would be necessary to mitigate Jamaica's external accounts vulnerability to shifts in investor confidence and international oil price shocks as the country was still under pressure from soft demand for exports and a large fuel import bill.
Fitch forecasted that Jamaica's central government deficit would reach 5.2% of GDP in fiscal year (FY) 2011 (April 2011 until March 2012), down from 6.2% in FY 2010. “The domestic debt exchange and low domestic interest rates have supported fiscal consolidation in spite of the lacklustre growth performance and continued expenditure pressures, especially in terms of public sector salaries,” noted the agency.
The ratings agency noted that Jamaica's burdensome debt stock, estimated at 131% of GDP, is the fourth highest among all sovereigns rated by Fitch and, in spite of improvements in recent years, debt dynamics are highly sensitive to currency and interest rate risks. It added that the government’s financing needs, at 16% for FY 2012, placed it among the highest of the sovereigns rated by Fitch in the 'B' category.
After three years of recession, Fitch said it expected the Jamaican economy to grow by 1.2% and 1% in 2011 and 2012, respectively. However, it said higher growth was currently constrained by structural weaknesses such as crime and the high cost of energy.
“Reforms designed to improve the structure of public finances by either increasing government revenues or reducing expenditure rigidities, as well higher growth are key to achieve sustainable fiscal consolidation and positive debt dynamics,” added Arispe.
Whether Jamaica’s credit rating improved in future would be dependent on continued fiscal consolidation and higher economic growth that ensures medium-term debt sustainability as well as further reduction in the country's external vulnerabilities, noted the agency report. “On the other hand,” concluded Fitch, “increased external and fiscal financing risks as well as destabilizing fiscal dynamics would be negative for Jamaica's ratings”.