Over the weekend, the world’s leading rating agency, Standard and Poor’s (S&P), revised Jamaica’s long-term sovereign outlook upwards to positive from stable. In their note, S&P advised that although Jamaica’s rating remains at B-, the improved outlook reflects a one-in-three chance that S&P could raise the long-term ratings to B in the next six to 18 months.

Such an upgrade requires a sustained improvement in Jamaica’s external liquidity, continued economic growth and the achievement of fiscal targets. The recent fiscal surplus, albeit only 0.1 per cent of GDP, also provides more credibility to sustain the faith that things will get better.

In an exclusive interview with the Business Observer, veteran S&P analyst Joydeep Mukherji (who knows Jamaica well as he has been coming here since the late 1990s) advised that an important factor in their assessment was their perception that, although the currency could be a little cheaper (as measured by the real exchange rate), most of the previous overvaluation had now been reduced.

This had also been confirmed by their conversations with local investors, and in any case there is always uncertainty in these calculations. As a consequence, they believe that if the Government is able to meet its ambitious fiscal policy and other commitments, this should gradually boost domestic confidence and lead to greater investment.

The resulting reduction in the risk of a sharp fall in the currency could also improve Jamaica’s debt trajectory, leading to a higher credit rating. Encouragingly, despite the significant exchange rate depreciation that has already happened, inflation has not exploded and remains at tolerable levels, and the Central Bank has managed to build up its reserves.

The chance of an upgrade would be increased if the currency did not depreciate very much further, allowing the debt-to-GDP ratio to come down as more than half of Jamaica’s total debt is dollar-denominated. Mukherji says, however, that S&P does not have a specific exchange rate target, but just a scenario that the depreciation of the currency should be slow enough so that people don’t panic, thereby damaging investor confidence, the pass-through to inflation is limited, and the overall inflation rate is stable or preferably falling.

After his recent visit, he doesn’t see much sign of capital flight, and his conversations suggest that much of the likely shift from Jamaican to US dollars seems to have already occurred.

S&P’s growth projection is conservative, rising to only 2.2 per cent in 2015, 2.4 per cent in 2016, and only 2.5 per cent in 2017. Their projection, however, does not include any of the so-called megaprojects, about which he notes there appears to be some level of local investor scepticism, but assumes a continuation of the current, more limited investments in areas such as hotels and call centres.

This suggests a faster growth “upside” if and when these larger projects finally arrive. In addition, he believes these larger investments are required for there to be a substantial improvement in investor confidence. The current account deficit is projected to fall to just over six per cent in 2015 and 2016, and below five per cent in 2017.

Downside risks include a loss of investor confidence due to slippage on fiscal or other reforms that could diminish investor confidence and limit growth prospects. External shocks such as the loss of PetroCaribe funding (although Mukherji notes Jamaica is fortunate in already having tapped international capital markets for US$800 million), or a sudden rise in oil prices could unexpectedly weaken the currency, putting pressure on interest rates as well as boosting inflation.

In a scenario where the recent improvement in external liquidity was reversed, and depreciation increased the Government’s debt burden, S&P would revise Jamaica’s outlook back to stable.

Overall, Mukherji argues, whilst things are still clearly difficult, they are at least going in the right direction with the possibility of improvement on the horizon.