IN a little-noticed piece issued only three days before Christmas last year (on December 22 to be precise) international rating agency Standard & Poor’s (S&P) affirmed its ‘B-‘ long-term and ‘C’ short-term sovereign credit ratings on Jamaica. Most importantly, their outlook on Jamaica remained stable.

The rating reflected what S&P described as a “modestly improved” fiscal position after the government concluded its distressed debt exchange (JDX) in February 2010.

S&P estimates that interest payments were reduced from 63 per cent of general government revenue in 2009 to an expected 42 per cent in 2010.

Whilst this is a massive improvement over the crippling interest costs of 2009, buying some welcome breathing space, unfortunately our debt situation has not been fundamentally altered.

As S&P notes, “the country’s debt and interest burden remains one of the highest of all rated sovereigns”.

Despite the JDX reducing the “real” value of the debt by 20 per cent in terms of its net present value (the impact of sharply lower interest rates and the time value of money), and chopping the cash burden by one third as a proportion of GDP, Jamaica still has no fiscal cushion to deal with emergencies.

This is despite a series of tough fiscal measures that included divestment of public enterprises, a freeze on public sector employees’ salaries, a new ad valorem fuel tax, and a five per cent advanced general consumption tax payment on goods imported for commercial purposes.

The government expects an increase in revenues of about 1.8 per cent of GDP from these measures. “In our view however, the slow pace of economic recovery will make this outcome hard to achieve” says S&P analyst Roberto Sifon Arevalo.

S&P advises that “After contracting by three per cent in 2009, GDP is expected to contract again by about one per cent in 2010. Trend growth is not expected to be above one or two per cent over the next three years.”

In addition, they “expect the general government deficit to remain high at 8.4 per cent of GDP in fiscal 2010 due slow growth and reconstruction costs after severe rains hit Jamaica in September 2010.”

The rating agency argues that it will be key for the rating that the government implements a medium-term strategy for reducing the onerous debt burden by improving the primary fiscal balance as well as economic growth prospects. “This is especially the case given that the IMF agreement is due to terminate in August 2012, just a few months ahead of general elections,” said Mr Sifon Arevalo. “If the Government is not able to implement a sustainable economic plan, we would likely lower the rating. Conversely, if the government is able to improve its fiscal stance through a credible medium term economic plan, creditworthiness could improve.”

What should we conclude from S&P’s analysis. On the one hand, the stable outlook makes it unlikely that there will be any negative rating action in the short run, over say the next six to twelve months (always barring unpredictable shocks).

However, S&P forecast of continued low growth of only one to two per cent over the medium term (the next three years) appears to suggest that they currently see only a low chance of Jamaica improving its long-term growth prospects, posing a clear risk of a further downgrade over the medium term, and making the best case scenario one where we continue to “muddle through”.

Even the latter muddle through option (which we are not unfamiliar with) has become much riskier, however, as the economic environment for two of our largest trading partners, the US and Europe, has become much more difficult than in the previous two decades, and is likely to remain so for some time.

All of this suggests that we need a new growth strategy, in terms of both industries and trading partners, which can have an impact over the next one to two years.

The best short-term opportunities would appear to be in health tourism, information and communication technology, and a Panama style free trade zone.

The government needs to target the largest US hospital groups (some Indian groups also deserve an honourable mention although they would be mainly targeting the US market), and simply ask their CEO’s what they require to come to Jamaica. In terms of taxation, a 10 per cent local corporate tax rate (which they can set off against their US tax rate) should suffice.

A Panama style free zone requires that, in addition to studying what Panama is doing (a starting point would be for the policymakers to talk to our Jamaican traders who already go there), we need to interview far Eastern investors and traders to understand what their needs are and what is required to bring them here. Jamaica already has a trans-shipment business, but it is still way below its potential. Our location, combined with English language and common law, makes Jamaica a potentially excellent location for Far Eastern investors to base themselves to trade with Latin America. Implementing a favourable tax regime ( low tariffs), combined with the continued absence of capital gains tax as is the case in Hong Kong, would allow Jamaica to take a major share of this business.

Hopefully, this year our policymakers will finally grasp these decades old opportunities.