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Business
February 16, 2010

Fitch upgrades Ja’s ratings to ‘B-‘

says outlook stable

FITCH rating agency yesterday upgraded Jamaica’s long-term foreign and local currency ratings to ‘B-‘ and determined the island’s Rating Outlook as stable.

“Fitch has also upgraded the short-term foreign currency rating to ‘B’ and the country ceiling rating to ‘B’,” Fitch said in a press statement issued yesterday.

“While the fiscal consolidation embedded in the IMF programme is encouraging, Fitch notes that meeting the programme targets will still remain challenging, especially as public finances remain vulnerable to external and weather-related shocks. Moreover, revenue underperformance cannot be ruled out given the weak state of the economy,” said Fitch.

According to the release, the upgrade takes into account the recent approval of a US$1.27 billion IMF Stand-By Arrangement which mitigates near-term external liquidity concerns. The successful outcome of the domestic debt exchange also supports the upgrade. The Jamaican authorities estimate that the exchange achieved a 97 per cent participation rate, which could result in interest savings of at least three per cent of GDP in FY 2010/11. The rating is also underpinned by the Government’s commitment to maintain macroeconomic stability and implement reforms as envisioned in the IMF programme, as well as stronger per capita income and governance indicators than the corresponding ‘B’ medians.

“IMF support and the domestic debt exchange reduce Jamaica’s near-term balance of payment and fiscal pressures while allowing the country to embark on economic reforms required to secure a more sustainable fiscal trajectory,” said Shelly Shetty, senior director in Fitch’s Sovereign Group.

The IMF programme targets a steady increase in the central government primary surplus through a reduction in the wage bill and restraint in current spending. A broader fiscal consolidation is expected to take place through a further reduction in interest burden and the streamlining of broader public sector activities. It is also expected to pave the way for additional disbursements of approximately US$1 billion from other multilateral creditors in the coming years.

Fitch’s statement said that notwithstanding the IMF programme, Jamaica’s credit profile remains quite weak. While the sovereign secured interest savings through the domestic debt restructuring, Fitch forecasts that Jamaica’s interest-to-revenue ratio will remain extremely high at over 40 per cent during the forecast period. Furthermore, Fitch expects other fiscal solvency ratios to remain weaker than the ‘B’ medians. For example, general government debt stands at over 120 per cent of GDP compared to a ‘B’ median of 31 per cent.

“While the fiscal consolidation embedded in the IMF programme is encouraging, Fitch notes that meeting the programme targets will still remain challenging, especially as public finances remain vulnerable to external and weather-related shocks,” said Shetty. “Moreover, revenue underperformance cannot be ruled out given the weak state of the economy.”

In order to sustain the fiscal effort, the Government will have to implement politically difficult measures such as rationalising public sector employment and maintaining a public sector wage freeze. At the same time, tax administration efforts to boost revenue collection will need to gain pace, the statement said.

Fitch believes that Jamaica’s external position will remain vulnerable to external shocks, the country is likely to continue incurring relatively large current account deficits during the forecast period, and financing them will depend critically on the disbursements from the multilateral agencies. Meeting the benchmarks set under the IMF programme will be critical for maintaining the multilateral flows, and Fitch cautions that implementation risks related to the IMF programme are high.

Jamaica’s estimated five-year growth of 0.2 per cent in 2009 is significantly below the ‘B’ median of six per cent, highlighting the structural constraints to Jamaica’s economic performance. Fitch believes that a global recovery, lower interest rates and greater investor confidence supported by the IMF programme could boost Jamaica’s growth. However, Fitch expects that the sluggish performance of the US economy and the closure of the two of the three alumina companies on the island will constrain Jamaica’s growth momentum to below two per cent over the agency’s forecast period.

Going forward, sustained fiscal consolidation as well as further reduction in the country’s external vulnerabilities could benefit sovereign creditworthiness. On the other hand, credit pressures could increase if Jamaica’s Stand-By Arrangement with the IMF derails, which could lead to a significant loss in investor confidence and strain Jamaica’s already fragile external liquidity position, the release said.

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