Earlier this week, the international rating agency Moodys weighed in on Jamaica, pronouncing that its fiscal situation was perilous and that funds from an IMF Standby Agreement would not be the answer to Jamaica’s problems, thus adding its voice to a chorus of damming assessments on the state of the Jamaican economy.

Moody’s

On Wednesday Moody’s downgraded Jamaica’s local and foreign currency bond rating to Caa1 from B2. Moody’s vice-president and senior analyst Alessandra Alecci said Jamaica may well have to restucture its debt which could lead to potential losses for bondholders.

“Options to restore debt sustainability without a debt restructuring are narrowing despite the strong resolve of the authorities to avoid a rescheduling. Delays in reaching an IMF agreement are also an issue of concern.

“After several months of negotiations with the IMF and various statements indicating, there are signs that an agreement with the IMF may not be within reach yet. Such agreement is crucial to maintain confidence, meet this year’s government-funding needs and provide foreign currency inflows to sustain the external position,” read the Moody’s release.

Moody’s made it clear that even though the Standby Agreement for US$1.2 billion would probably give some much-needed breathing room to the fiscal position the national debt at J$1.2 trillion was such that Jamaica was unlikely to restore debt sustainability in the medium term without some sort of meaningful debt restructuring at some point.

The agreement with the IMF has been a case of shifting goal posts. With a decision expected initially in October, that date was moved to November and now some are saying it will take place in December. However, there are no clear indications as to when this agreement will be concluded thus leading to a degree of uncertainty. Meanwhile the country waits in Pavlovian zeal.

Standard & Poor’s

Moody’s downgrade follows that of Standard & Poor’s earlier this month. Citing the resignation of the Governor of the Bank of Jamaica Derick Latibeaudiere, who was the lead negotiator in talks with the IMF, Standard & Poor’s dropped Jamaica’s domestic and foreign currency long-term rating to ‘CCC’ with a negative outlook. A CCC rating indicates there could be a disruption in the servicing of the debt. The downgrade was the second by Standard & Poor’s in three months, having first done so on August 5th, lowering the country’s rating from B- to CCC+.

“At that time, we highlighted the fact that Jamaica’s severe fiscal situation, as well as the vulnerabilities in the Government’s debt profile, may give it incentives to renegotiate with its creditors, particularly its resident creditors that hold the larger bulk of Jamaica’s debt.

“Since then the Government’s room to manoeuvre continues to narrow as it becomes increasingly difficult to further cut public expenditures – as reflected, in part, in the recently amended budget – in order to sustain an interest burden of about 60 per cent of general government revenue” said Standard & Poor’s analyst Sifon Arevalo.

The Economist

An article appeared in last week’s edition of the esteemed magazine, The Economist, entitled ‘Unfixable?’ which painted a picture of a country at the abyss. It read: “Just over two years ago when Bruce Golding’s Labour Party came to power in Jamaica , ending 18 years in opposition, there were modest hopes that it might make progress in tackling the island’s endemic problems of economic stagnation and gang violence. Quite how hard that is has become clear in the past fortnight with the departure first of the central bank governor and then the police chief. “Mr Golding’s people inherited a huge national debt, much of it borrowed in the markets at interest rates that have sometimes topped 20 per cent. Just servicing this eats up about 60 per cent of Government revenues. Then came the world recession, which has hit tourism, bauxite and remittances from Jamaicans abroad, the island’s three big foreign exchange earners. With tax revenue down and privatisation plans stalled, the fiscal deficit has soared.

“The Bank of Jamaica’s Governor, Derick Latibeaudiere, was leading negotiations for a US$1.2-billion loan from the IMF. But midway through the talks he lost his job. Mr Golding has complained about Mr Latibeaudiere’s generous salary and housing allowance, granted by the previous government. There was talk in Kingston, the capital of policy disagreements, with the finance minister. Either way, the timing of Mr Latibeaudiere’s departure was unfortunate. Standard & Por’s, a rating agency, immediately downgraded Jamaica’s debt. Talks with the IMF will continue. Mr Golding has promised a fresh effort to cut the fiscal deficit.”

Barclays Capital

Barclays investment banking division, Barclays Capital, is also calling on the government to restructure the debt. In its latest research note on Jamaica, released last month, Barclays Capital’s credit analyst for Latin America and the Caribbean Alejandro Gristani writes: “We believe that Jamaica is approaching the point of no return and that it will take more than fiscal adjustments to regain sustainability for the long term. It may be more prudent for the IMF to place its emphasis on balance of payment support.

Of particular concern is that Jamaica’s fiscal deficit could reach 20 per cent of GDP. We think it is extremely unlikely that any reform programme will be able to put the country on a sustainable medium-to longer-term fiscal path and believe that the IMF is weighing whether it would be costlier to allow the country to restructure its debt or to give the Jamaican government the US$1.2 billion that it is soliciting in order to postpone the agony.

“Unfortunately, we believe that Jamaica may have already passed the point of no return and that for the IMF, as well as for the country in the long term, it would be more convenient to assist in a restructuring of debt.”

Barclays Capital is projecting a decline in output of 5.5 per cent for Jamaica this year. Making matters worse for the government is its inability to meet revenue targets. Latest figures reveal that revenue collection was behind target by $16 billion.

“Responding to Moodys’ decision to downgrade Jamaica, the Minister of Finance Audley Shaw, speaking with Caribbean Business Report, said: “Moody’s is expressing concern on the delay in concluding the Standby Agreement with the IMF. I would like to remind the country that the IMF has already issued two statements declaring that progress is being made. I can tell you that we are now in the process of preparing the letter of Intent. The agreement is written in the form of the Letter and all the issues have been pinned down. At this time I cannot give a definitive date as to when the agreement will be signed as that would appear pre-emptive and, besides, we all have to be respectful of the IMF’s internal processes. What I can say is that we are close to an agreement.

“I can put firmly on the table that this Government is committed to reducing interest rates. It is now a fundamental feature of our debt management strategy, and the IMF also shares that view. I am calling on all stakeholders and the entire country to co-operate with the Government in reducing interest rates. A one per cent drop in interest rates means $4 billion off the budget. I am attempting to free up more money for the private sector which will allow it to invest in the productive sector thus creating more jobs and liberating the economy. I am giving my commitment that the narrowing of spreads will go a long way in stimulating the Jamaican economy.

“The US$1.2 billion from the IMF and a reduction in interest rates will play their part in leading to adequate foreign exchange in the country and will send a positive signal which will see the freeing up of funds from other multilateral institutions.”