Fitch Ratings yesterday, January 29, revised Jamaica’s sovereign credit rating outlook to positive from stable while maintaining a debt grade of ‘B+’.
“The outlook revision reflects Fitch’s expectation that Jamaica will continue to make progress in reducing government debt, supported by large primary budget surpluses,” a press release from the ratings agency read.
“Fitch expects government debt-to-GDP to fall to 92 per cent at end-FY19 (April 2019 to March 2020) from 135 per cent at end-FY12. Fitch projects it to decline to 85 per cent of GDP by end-FY21 and to 63 per cent of GDP by end-FY28, ” the release continued.
Notwithstanding, Fitch notes that government debt-to-GDP and interest-to-revenue ratios are still about two times the ‘B’ range median.
At the moment, Standard & Poor’s credit rating for Jamaica stands at B+ with stable outlook. Moody’s last update of Jamaica’s credit rating was B2 with stable outlook.
Overall, sovereign wealth funds, pension funds, and other investors use the credit ratings to gauge the creditworthiness of Jamaica. This, as a result, determines if the country can borrow money, how much it receives, and the interest rate paid on loans.
“Jamaica’s ‘B+’ rating also reflects World Bank Governance Indicators that are substantially stronger than the ‘B’ and ‘BB’ range medians. The rating is also supported by GDP per capita above the ‘B’ range median, a favourable business climate, according to the World Bank Doing Business Survey, moderate inflation, low GDP growth volatility and moderate commodity dependence,” Fitch explained.
The agency indicated, further, that it has taken into consideration the reform implemented by the Government of Jamaica to entrench fiscal discipline, even without an International Monetary Fund agreement.
It also highlights the fiscal responsibility law passed in 2014 — which aims to reduce public debt to 60 per cent of GDP by the end of FY25 — as a positive indicator.
Anticipating the passing of the fiscal council legislation in Parliament in April this year, Fitch also highlighted that the Government has signed a memorandum of understanding with the Economic Programme Oversight Committee to continue monitoring economic activities until the fiscal council is functional.
The credit rating agency also believes that the Government will achieve the primary surplus target of 6.5 per cent of GDP, having exceeded the 7.0 per cent target in previous years.
Having a large primary surplus has been instrumental in keeping government debt-to-GDP at a stable rate, Fitch said.
“The target reduction created room for a tax break that the Government estimated was going to reduce revenue by JM$14 billion or 0.7 per cent of GDP. Despite the tax reduction, Fitch expects tax revenues in FY19 will be 4.5 per cent higher than the year before,” the release read.
Notwithstanding, Fitch believes that, despite the Government sticking to fiscal rules, targets for FY25 are ambitious. The agency, therefore, raised concerns about threats to achieving such targets.
“…Fitch believes there are risks associated with the implementation of the rule over the longer term as debt comes down and economic priorities shift or in the event of shocks,” the credit rating agency argued.
Among the risks the credit agency identifies are inflation and the depreciation of the Jamaican dollar.
However, having a flexible exchange rate, Fitch believes, should reduce the effects of external shocks on the Jamaican economy and lower the risk of external imbalances.
“However, the advent of the BOJ’s move to inflation targeting has led to an increase in the volatility of the JMD with respect to the US dollar,” the agency noted.
“The BOJ points at two reasons to expect market volatility to fall over the medium to short-term:
1) The launch in March 2020 of an electronic trading platform for authorized dealers and cambios.
2) Greater use of forward contracts that allow participants to hedge against FX swings.
In terms of growth in the medium term, Fitch predicts GDP to improve to 1.5 per cent next year.
In addition, the agency posits that international reserves will remain substantial with the current rate of foreign direct investment and low current account deficit.
“However, the economy has a narrow base with a high import content, exposing it to shocks. Net external debt at 31.5 per cent of GDP and a net international investment position of -153.0 per cent of GDP compare unfavorably with ‘B’ rated peers,” Fitch underscored.
“As the government borrows less from local markets, investors look for other ways to invest excess liquidity, creating risks of financial imbalances emerging,” the agency warned further.
Fitch also commends the Government’s efforts to develop a natural disaster risk financing policy to mitigate the impact of high-severity natural disasters.
With a general election due next year, Fitch believes that monetary and fiscal policy will remain the same, even if there is a change in the Government.