MOODY’S yesterday upgraded Jamaica’s local and foreign currency bond ratings on the Government’s improved liquidity following the Jamaica Debt Exchange (JDX), which has led to lower interest cost and inflows of funds from multilateral institutions.

Moody’s increased the ratings to B3 from Caa1 on foreign currency and Caa2 on local currency, which it says “reflect diminished credit risks following the domestic debt exchange completed in February”.

“The new ratings take into account a significant improvement in the Government’s liquidity position due to lower debt-servicing costs and substantial multilateral inflows while acknowledging medium-term credit vulnerabilities due to a debt burden that remains very high,” said Moody’s Alessandra Alecci, senior analyst for Jamaica. “Despite the difficult fiscal adjustment required to access multilateral funding, the population has broadly supported the Government’s macroeconomic programme.”

In announcing the revised ratings, Moody’s observed that last month’s domestic debt exchange proceeded in an orderly fashion with a close to 100 per cent participation rate, no pressure on the currency, and limited repercussions on the local financial system, at least for the time being. Unprecedented amounts of official assistance, the equivalent of 20 per cent of GDP, coupled with fiscal relief as a result of lower debt servicing costs, have significantly reduced liquidity risks in the short term. Over the next few years, Government’s financing needs are projected to be halved, due to lower interest payments on domestic debt and a longer maturity profile.

“However, given Jamaica’s still-high public debt levels, around 136 per cent of GDP, and implementation risks associated with the requirements of the IMF programme, vulnerabilities remain high, as reflected in the B3 ratings,” said Alecci. “Plans to limit public companies’ losses and comprehensive public sector reforms to further contract expenditures could run into difficulties once Jamaica’s economic situation stabilises and the political resolve wanes.”

Jamaica’s structurally low economic growth poses challenges to medium-term fiscal solvency. Real GDP growth has averaged one per cent in the decade prior to the global crisis, a rate that is low relative to the country’s stage of development and the complexity of its debt dynamics.

Medium-term growth projections point to growth recovering to around two per cent over the next few years, leaving most of the improvement in debt levels to a fiscal adjustment.

Over the next year, Moody’s will closely monitor Jamaica’s adherence to the structural benchmarks and quantitative targets set out by the IMF programme in order to assess whether public debt dynamics have entered into a virtuous cycle that would reduce the debt burden to more sustainable levels. Conversely, setbacks in the fiscal adjustment could test Jamaica’s still-fragile macroeconomic equilibrium resulting in additional downward rating actions.

The foreign and local currency government bond ratings are now at the same level at B3, despite the clearly different treatment of foreign-currency obligations, on which Jamaica’s government remained current during the distressed exchange. This is because, in Moody’s opinion, risks are similar in light of Jamaica’s weak external position and high foreign-currency debt burden. Moody’s has detailed its approach towards uniting local and foreign-currency government bond ratings in a special comment titled “Narrowing The Gap”, published in February 2010.

Moody’s also upgraded Jamaica’s foreign-currency bond ceiling to Ba3 from B1 and the foreign-currency bank deposit ceiling to B3 from Caa1. Although Moody’s usual practice is to assign a foreign-currency bank deposit ceiling lower than the Government’s foreign currency bond rating, the strong precedent of no pressure on deposits during challenging times supports a higher rating. The local currency bond and bank deposit ceilings remain at Baa2. All ratings have a stable outlook.

The last change to Jamaica’s ratings was implemented on January 22, 2010, when the government’s Caa1 local currency government bond rating was downgraded to Caa2 with a stable outlook.