The internationally acclaimed ratings agency Fitch has downgraded Jamaica’s economic outlook from a positive B+ to stable.
In April, Fitch had assigned a positive B+ rating but five months later this positive outlook has been downgraded to stable. The downgrade is due to what Fitch described as “the likely contraction in foreign currency income from tourism, remittances and alumina exports”.
The ratings agency notes that “local banks are liquid and can provide credit to the Government and external financing is available, with interest rates having dropped after spiking between March and April”.
However, Fitch stated that the Government debt-to-GDP remains above rating peers, and the Government has postponed the goal of reducing the ratio to 60 per cent (from 94 per cent at end-FY2019-2020) by two years to FY2027-2028.”
Fitch cautions that general government debt metrics are exposed to exchange rates, given that 61 per cent of Jamaica’s total debt is denominated in foreign currency. At the end of last month the Jamaican dollar depreciated by 13 per cent year to date to a record low against the US dollar.
However, Jamaica’s flexible exchange rate helps absorb external shocks, and reserves were three per cent higher in July than at end of 2019. Fitch points out that in May, the International Monetary Fund approved a US$520-million (3.4 per cent of GDP) loan to the central bank, which the Government can draw down should the need arise.
The rating agency is anticipating that that lower oil prices and recovering alumina prices will support the country’s current account, although net remittance inflows were down an average of eight per cent year over year in March and April.
ELECTION VICTORY SIGNALS FISCAL POLICY CONTINUITY
Turning to local politics, Fitch reports that the incumbent Jamaica Labour Party’s general election victory signals economic and fiscal policy continuity.
It says “the scale and efficacy of Jamaica’s coronavirus policy response remain important to sovereign credit metrics, as data from Q2 of 2020 and uncertainty over tourism’s recovery point to a fiscal deficit and a GDP contraction bigger than our most recent forecast published in July”.
According to Fitch, “efficient distribution of income support has tempered the pandemic’s economic impact. Nevertheless, the Bank of Jamaica recently revised its FY20-21 GDP forecast to a seven -10 per cent contraction from four-seven per cent. It estimates the economy shrank by 14-17 per cent from April to June”’
The border closure has hit tourism, which contributes 20 per cent of GDP, with no tourist arrivals in April and May, compared with 2019’s monthly average of 223,410 stopover tourists. Fitch assessed that pandemic-related spending helped central government expenditure increase five per cent year over year from April to June, while revenues contracted 20 per cent year-over-year.
“Our most recent FY2020-2021 deficit forecast of 2.7 per cent of GDP assumed revenues for the full fiscal year fall 11 per cent and GDP shrinks 5.3 per cent in calendar year 2020,” Fitch states. In concluding, Fitch argues the possibility that Jamaica missing a substantial portion of the winter vacation season is a meaningful risk to its current 2020 GDP and FY2020-2021 deficit forecasts.