Jamaica has gotten a ‘B+’ credit ratings from international ratings agency Fitch, which also accorded the country with a stable outlook.
In giving its assessment, Fitch says that Jamaica’s ‘B+’ rating is supported by World Bank Governance Indicators that are substantially stronger than the ‘B’ and ‘BB’ medians, which indicates a favorable business climate based on the World Bank Doing Business Survey. Fitch assessed that the Jamaican economy has manifested moderate inflation and moderate commodity dependence.
These strengths, Fitch opined are balanced by vulnerability to external shocks, a high public debt level and a debt composition that makes the sovereign vulnerable to exchange rate fluctuations. The ratings agency remarked that, “Rhe stable outlook is supported by our expectation that the public debt level will return to a firm downward path post-pandemic, which is underpinned by political consensus to maintain a high primary surplus, the resilience of external finances, and stronger economic policy institutions.”
Citing economic data to justify its ratings, Fitch reports, “The general government deficit is projected at 4.3 per cent of GDP (Gross Domestic Product) in fiscal 2020-2021 (ending March 31) from a surplus of 0.9 per cent a year ago. This deficit compares favourably with the ‘B’ median in 2020 of 7.6 per cent. Jamaica is expected to be one of the few Fitch-rated sovereigns to post a primary surplus (2.6 per cent of GDP).”
Slowdown in expenditure in 2021
Expenditure growth is projected at only 3.8 per cent year-over-year (compared to an average of 7.8 per cent between fiscal 2017-2018 and fiscal 2019-2020) as the government reallocated planned CAPEX to pandemic-related support. Revenues declined by a projected 12.3 per cent year-over-year pushed down by a fall in consumption and the downturn in the tourism sector.
“In the budget for fiscal year 2021-2022, the government targets a surplus of 0.3 per cent of GDP. A one-off dividend payment of JMD33 billion (1.5 per cent of GDP) from BOJ (Bank of Jamaica) to the government and the gradual return of tourists due to the vaccine roll out support the fiscal consolidation,” Fitch explains. The agency is projecting a deficit of 0.8 per cent of GDP. The fiscal 2021-2022 target is determined by an amended fiscal rule (after being suspended fiscal 2020-2021) that sets looser, but more realistic targets.
In fiscal year 2021-2022, the government plans to cover 70 per cent of its funding requirements locally. Fitch judges that local banks will be willing to lend to the government at relatively low rates owing to ample liquidity as supply of government paper has fallen in recent years and the number of local investment opportunities decreased during the pandemic. External financing will come from multilaterals; the government has stated that it is not planning to issue an external bond in the upcoming fiscal year.
Debt-to-GDP is projected to reach 110.9 per cent by end-March 2021 from 94.8 per cent a year before, largely reflecting exchange rate depreciation and GDP contraction (61 per cent of total government debt is in foreign currency). Fitch assumes that debt-to-GDP will return to a clear downward path reflecting cross-party political consensus around the fiscal stance.
Economic growth expected in 2021
Fitch expects that the economy will grow by 4.5 per cent in 2021, with risks to the downside stemming from uncertainty around the vaccine roll out and a possible third wave of the virus. Fitch expects that growth will accelerate in 2022 to 5.2 per cent assuming that the tourism industry will have a better 2021-2022 winter season than the one that is just ending.
The GDP contraction in 2020 is projected at 10.2 per cent, much worse than the median of the ‘B’-rated peers (4.2 per cent). External finances were resilient to the pandemic. Fitch estimates that the current account deficit narrowed in 2020 to 0.9 per cent of GDP, from two per cent of GDP in 2019 despite a halving of services credits (mostly tourism).
The improvement reflected a contraction in imports caused by lower tourism-related products and energy prices, and a jump in inflows from remittances. The 2020 deficit compares favourably with the ‘B’-median of 3.7 per cent. Fitch expects the current account deficit to widen to 1.2 per cent of GDP in 2021, despite an improvement in tourism revenues, as imports increase.
Exchange rate flexibility
The BOJ made limited interventions in the FX market letting the currency depreciate eight per cent in 2020. In May 2020, the IMF approved USD520 million (3.5 per cent of GDP) disbursed to the BOJ under the Rapid Financing Instrument (RFI), which the government could tap into if the need arises.
The RFI funds contributed to an increase in gross reserves by 12 per cent in 2020 and given the import contraction they now provide 7.1 months of current external payments cover, which compares favorably with the ‘B’-median of 4.9 months. Fitch expects that the reserve coverage will converge to the ‘B’-median in 2021 and 2022 as imports recover.
The BOJ Amendment Act passed last year makes price stability the only and explicit target of the bank, it also makes the BOJ accountable only to parliament. The banking sector is well-capitalised and while NPLs showed an uptick they remain relatively low. NPLs to total loans in December 2020 were 2.9 per cent, only a minor increase from 2.2 per cent a year earlier. Liquid assets to average prescribed liabilities were above the statutory requirement (19 per cent) in December 2020 at 25.7 per cent.
Rating sensitivities
Factors that could, individually or collectively, lead to positive rating action/upgrade are:
- Public finances: A large and sustained decline in government debt/GDP ratio over the medium term;
- Macro: A strengthening of growth prospects without the emergence of macroeconomic or fiscal imbalances;
- Public Finances: Entrenchment of institutional improvements in the fiscal policy framework that enhances confidence in medium-term economic and fiscal performance.
- Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Public Finances: An increase in government debt-to-GDP, for example, owing to marked depreciation of the Jamaican dollar or revenues failing to recover at expected rates;
- Macro: Economic growth below expectations caused, for example, by the tourism industry being affected by a third wave of the pandemic;
- External Finances: An inability to access financing or evidence of distressed financing conditions.
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