Double message in that S&P upgrade

Standard and Poor's (S&P) upgraded assessment of the risk of lending to Jamaica is one of the most positive developments in this country this year and a feather in the cap of the Government, which has been doing well in managing the economy.

For those who are not au fait with these matters, international credit ratings matter because they are the yardstick used by lenders to decide how much to charge when lending to the Jamaican Government and to private companies. The rating agencies also claim to provide an objective analysis of the outlook for the economy.

Last week's upgrade by S&P, from B+ to BB-, sent the double message that Jamaica has passed an important milestone in reducing the risk of not paying its debts and is expected to continue in that direction. It did, however, include a couple of clear warnings.

First, S&P stressed that the cost of servicing public debt is still high, although it is expected to keep falling to 17.5 per cent of total government revenue in the next fiscal year and drop to below 15.0 per cent by 2026. This is a stark warning that policy reversal to slow debt reduction in favour of increased fiscal spending could trigger a downgrade. It also speaks loudly to the major policy divergence between the Government and the Opposition over the pace of debt reduction.

Second, S&P says that it expects the sustained improvements in Jamaica's creditworthiness to continue in the short to medium term. This refers largely to its sense of Jamaica's ability to manage external shocks like oil price spikes, pandemics and hurricanes. Jamaica's buffers against these shocks have never been this strong. International reserves are strong, a culture of fiscal balance is being entrenched, our financial sector is well capitalised, poverty is falling, and the Statistical Institute of Jamaica is reporting the lowest unemployment numbers ever.

Although not part of S&P's assessment, some local analysts are also wary of overextending the central bank's successful policy of managing the exchange rate to reduce the impact of imported inflation. Over the last two years devaluation has slowed significantly while inflation spiked in the US, Canada and UK. This means that Jamaica's exports and tourism products got more expensive for purchasers from those markets. Managing the rate helps to keep inflation in check, but it also hurts Jamaica's competitiveness.

The central bank explains that previous aggressive real devaluation of the rate during the period of the International Monetary Fund agreements created a buffer that now allows slower devaluation without a significant loss of competitiveness. It is important to keep an eye on this policy stance to avoid impairment of our ability to export, reduction of our supply of foreign exchange, and devaluation pressure that drives volatility.

The message of the S&P upgrade is clear: Our decision to hold strain during the height of the COVID-19 pandemic and after was right on target and has paid dividends. The room to continue increasing fiscal expenditure in a sustained and steady way has been protected and the probability of better and more equal growth is higher.

All this is towards one outcome - a better life for all Jamaicans.

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