Country gets another stable outlook

International credit ratings agency Fitch has maintained Jamaica’s Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘B+’ with a stable outlook.

Fitch today (March 10) released its latest credit assessment of Jamaica noting that its ‘B+’ rating of Jamaica “is supported by World Bank Governance Indicators that are substantially stronger than the ‘B’ and ‘BB’ medians, a favorable business climate and consistent fiscal policy efforts to lower the debt burden. These strengths are balanced by vulnerability to external shocks, average GDP (gross domestic product) growth below peers, a high public debt level and a debt composition that makes the sovereign vulnerable to exchange rate fluctuations and hikes in interest rates.” 

The stable outlook is supported by Fitch’s expectation that having been interrupted by the pandemic, a downward trend in public debt-to-GDP will be underpinned by political consensus to maintain a high primary surplus. As it regards continued deficit reduction, Fitch projects that in fiscal 2022 (ending March 2022) the fiscal deficit will narrow to 0.3 per cent of GDP from 3.1 per cent a year prior, among the narrowest deficits in the ‘B’ category. 

Continued improvements in fiscal outturns projected

In a news released, Fitch said it is projecting “fiscal outturns to continue to improve, reaching a surplus of 0.3 per cent of GDP by fiscal 2024, with strong revenue growth being the main driver. Between April and December 2021, revenue grew by 15.4 per cent year-over-year (excluding a 1.5 per cent of GDP dividend payment made by the central bank), while expenditure grew by 7.0 per cent, lower than the pre-pandemic annual growth rate (8.5 per cent between fiscal 2016 and fiscal 2020), partly reflecting lower CAPEX.”

The ratings agency added that gradual refinancing of expensive debt issued after the 2013 restructuring will continue to lower debt service costs. As for the downward path of Jamaica’s debt, Fitch projects government debt-to-GDP to fall to 87.8 per cent by end-March 2024 from 109.7 per cent at end-March 2021. 

However, it cautioned that. currency weakness, rising interest rates and high inflation are risk factors that could put upward pressure on the debt and debt service. Of total debt as of December 2021, 61.3 per cent was in foreign currency, 27.2 per cent was variable-rate debt and 2.7 per cent CPI-linked debt. 

Financing costs have risen recently due to a rise in the central bank policy rate, with the government selling in February 2022 three-month T-bills with a yield of 3.59 per cent, up 206bp from a year earlier.

Ambitious debt-reduction target 

The target to reduce debt to 60 per cent of GDP by March 2028, a target date postponed by two years amid the pandemic, continues to be the main fiscal policy anchor and appears to retain broad political support, Fitch highlighted. The ratings agency contended that, “the fiscal rule specifies the fiscal balance needed to reach the target, a surplus of 0.3 per cent of GDP in fiscal 2023, which is stated in the budget”.

While Fitch sees the renewal of debt reduction as positive for Jamaica’s creditworthiness, it posited that future shocks may emerge that would necessitate more aggressive tightening of fiscal policy between now and 2028, which might conflict with other policy objectives and render the target difficult to achieve. Fitch projects that the economy will only return to its pre-pandemic level by 2023 while most ‘B’-rated peers did so in 2021. 

Average annual growth between 2021 and 2023 is projected at 4.0 per cent (B median is 4.2 per cent). However, the sharp contraction in 2020 (9.9 per cent in Jamaica versus 3.7 per cent B median) shows the relative weakness of the rebound. This reflects the staggered nature of the tourism recovery. 

Fitch expects tourist arrivals to return to their pre-pandemic level in 2022. A low vaccination rate is slowing down the re-opening of the economy. The aluminum sector also faces headwinds as two of four mining operations are off-line and another faces Russia-related sanctions risks; in 2018 when all sites were online bauxite and alumina exports were 7.8 per cent of GDP.

Fitch observed that “the banking sector is well capitalized with low non-performing loans despite the pandemic shock and the expiration of repayment moratoria. As of December 2021, the capital adequacy ratio was 14.2 per cent (well above the regulatory requirement of 10 per cent) and NPLs were 2.9 per cent of total loans (in December 2019 they were 2.2 per cent).”

The health of the banking sector, it said supports the government’s goal of borrowing 70 per cent of its financing needs locally.