Jason Morris, Contributor
STANDARD & POOR'S (S&P) has revised its outlook on Jamaica's 'B' long-term sovereign credit ratings to stable from negative.
The rating agency also affirmed its 'B' long- and short-term local and foreign currency sovereign credit ratings on Jamaica. Standard & Poor's stated that "the revised outlook is supported by Jamaica's improving fiscal and external liquidity situation, ongoing commitment to the fiscal austerity, and stronger growth prospects," all of which has resulted in the stabilisation of the Jamaican dollar and an increase in the confidence of domestic businesses.
"The support of fiscal and macroeconomic policies by the trade unions and the private sector, as demonstrated by the preparation of the Partnership for Progress agreement and the signing of the Memorandum of Understanding with labour unions, makes it more feasible to meet the challenging fiscal targets this year and beyond. It also lowers the risk of social tension in times of austere reform." On the fiscal front, Jamaica's 2003 central government fiscal deficit stood at 5.8% of GDP (the primary surplus at 12.2% of GDP), within the budgeted target. However, according to Standard & Poor's methodology, which takes into account off-budget expenditure (including central bank losses) and excludes one-off capital revenue, the central government deficit actually stood at 9% of GDP (down from 10.5% in fiscal 2002).
HIGHER GRANT RECEIPTS
The government is committed to lowering the central government deficit to 4.4% of GDP in fiscal 2004 (revised upward from the initially budgeted deficit of 4% due to the impact of Hurricane Ivan). The rationalisation of expenditure (which was on target for the first seven months of fiscal 2004) and higher grant receipts should help achieve this goal. According to Standard & Poor's definition, the central government deficit is expected to stand at 6.9% of GDP in fiscal 2004, which includes 2.5% of off-budget expenditure. More importantly, the support of both trade unions and the business community is likely to remain unwavering; the stable exchange rate since September 2004 is a good indication of this confidence.
The external liquidity situation is also improving, reflecting increasing reserves (US$1.8 billion in November 2004, up from US$1.2 billion at year-end 2003) and stronger current account performance. The current account deficit is expected to decline to 7% of GDP in 2004 from 9% in 2003, boosted by robust mining and tourism revenue.
The general government debt stock has been declining, reflecting a fiscal performance that has been improving since mid-2003 and is expected to total 130% of GDP by fiscal year-end 2004 down from 138% in 2003 and 140% in 2002. Still, the looming debt size, worsened by the unfavourable debt profile evidenced by the high (albeit declining) sensitivity to interest and exchange-rate fluctuations and an increasing share of more expensive commercial debt remains a major constraining factor on the ratings.
CONTINUED FISCAL EFFORTS
The general government debt burden is expected to decline further (to an estimated 120% in 2005) on the back of continued fiscal efforts (the government confirmed its commitment to a balanced budget in 2005/2006) and improving growth prospects.
Standard & Poor's also stated that "medium-term growth is expected to hover around 2.5%-3.0% of GDP, based upon significant investment in the tourism (totalling US$600 million over the next five years) and mining (US$300 million over the next three years) sectors. Real growth in 2004, however, has been revised down by 1% to 1.5% due to Hurricane Ivan, whose impact is estimated at roughly US$600 million (or 7% of GDP). As such, growth prospects remain vulnerable to the risk inherent in the island's geographical location, size, and openness." Standard and Poor's also revealed that "overall, the stable outlook balances the improvement in the fiscal and debt positions, supported by promising growth prospects and a stronger external liquidity stance, with significant risk stemming from the government's debt size.
"A larger-than-expected deviation from the fiscal target in fiscal 2004 may endanger both public support for reform and macroeconomic stability as well as foreign investors' sentiment toward the country, all of which may harm Jamaica's creditworthiness. On the other hand, Jamaica's track record of fiscal prudence (including during the next election period) and a continuing decrease in the government's debt burden will support a positive outlook."
Jason Morris is JMMB investment research and sovereign risk analyst
Government welcomes new credit rating
KINGSTON, Jamaica, CMC:
THE GOVERNMENT has welcomed the latest rating of the country's long-term foreign and local currency debt by Standard and Poor's.
The international rating agency has upgraded its outlook from negative to stable and reaffirmed the 'B' ratings assigned to long-term foreign and local currency debt following a review last month of Jamaica's fiscal performance and external liquidity position.
The Government said it was pleased with the revision in the rating outlook, saying that it was a recognition of its achievements in the management of the public finance, and reflected confidence in its ability to meet its targets.
The revision was a powerful signal to international and local investors and it is against this background that the government continued to expect the markets to take a positive view of the outlook for Jamaica, the Ministry of Finance said.
Meanwhile, financial analyst Errol Gregory said that any kind of improvement in the country's rating was good news for the P. J. Patterson administration.
"An upgrade in the ratings will make it easier for the Government to pursue its debt management strategy by replacing high cost debt locally with relatively cheaper foreign debt," he said.
