Keith Collister, Business Writer

Citing concerns about the current budget, Bear Stearns has downgraded Jamaica's debt to underperform less than a month after it signalled concerns about the economy by reclassifying GoJ issued bonds as 'market-perform'.

In fact, in an apparent indictment of finance minister Dr. Omar Davies' management of the economy, Bear Stearns said Jamaica was "losing ground to its peers" in a context of "most other single -B sovereigns posting very strong growth and fiscal performance".

It projects that debt as a percentage of GDP will likely rise from 133 per cent to 136 per cent in a year when Davies overshot his borrowing targets by $19.6 billion to February.

March figures are not yet available, but the central government financials should reflect a US$350 million ($23.5 billion) eurobond issue on March 8, which will place Davies at more than $40 billion above the $120 billion target for debt he had planned to raise in fiscal 2006/07.

Fiscal targets

Jamaica's failure to meet its fiscal targets last year, in a period when there were no weather shocks — big storms — nor any significant exogenous factors to derail spending, has pushed the deficit to about 4.0 per cent, relative to the 2.5 per cent target, while expectations are that the primary surplus will round out the year at about 10 per cent, a point below Davies' target.

Bear Stearns, in its latest Central American and Caribbean Report of April 3, indicated that it downgraded Jamaica because it does not expect that Davies can, when he announces the financing of the budget, pull off any positive surprises that will turn around the country's finances.

Worrying trends

It had downgraded Jamaican debt from outperform to market-perform in March, saying then it was "slightly more concerned" about the recent fiscal trends in Jamaica.

"We are further downgrading Jamaica to underperform because we do not expect any positive surprises coming out of the budget debates," said the company. "In the context of a generally benign economic environment, as well as the absence of major hurricane activity in 2006, the fiscal performance of Jamaica for the year ending March 31, 2007 was disappointing."

Bear Stearns also said it believes none of the rating agencies would see anything in the numbers to warrant an upgrade in their outlook.

The new $380.4 billion estimates of expenditure tabled in parliament by Davies include a recurrent bill of $239.3 billion, which is $14.7 billion or 6.6 per cent above the revised 2006/07 estimates published in February.

Over half of the recurrent budget is allocated to the Ministry of Finance and Planning (51 per cent), while the other large allocations include the Ministry of Education with 17 per cent, the Ministry of National Security with 11 per cent, and the Ministry of Health with 8.0 per cent.

The largest increase in the recurrent budget over the recently revised 2006/07 figures is within the Ministry of Finance and Planning itself, where planned expenditure is nearly $9 billion more, from $115.6 billion to nearly $124.5 billion.

The largest part of this increase was because of interest costs, which moved up to $101.5 billion due to a further $4.42 billion increase above the revised estimates for 2006/2007.

This constitutes a massive 42 per cent of projected total current expenditure in the new fiscal year of 2007/08.

The revised estimate for interest costs at the end of the 2006 fiscal year of around $97 billion was itself more than $4.63 billion above what was budgeted at the beginning of fiscal year 2006/07 despite a continued, albeit marginal, fall in both domestic and international interest rates over the period.

The further increase in projected interest costs for the new fiscal year appears to be on the back of a further rise in the debt.

Of the roughly 82 per cent used for interest charges, 69 per cent is for internal debt while the remaining 31 per cent goes towards external debt interest.

The largest non-debt item in the Ministry of Finance's non-interest recurrent expenditure budget, pension costs, continued their sharp upward trend, increasing by $1.3 billion above last year's $9.6 billion to a projected $10.9 billion for fiscal year 2007/08.

In 2005/2006, pension costs were less than $8.6 billion.

The budget for the main Ministry of Finance functions, including general government services, increased by $2.9 billion over the revised estimates for last year to $7.6 billion.

But this figure includes a contingency of over $3 billion, so that pure administrative spending actually fell slightly.

New budget increased

The new budget included an over $2.6 billion (11 per cent) increase in recurrent spending on the Ministry of National Security. Over $2 billion of this was for the police, to be spent largely on auxiliaries, support services and police operations in the maintenance of law and order.

On the capital side of the budget, Finance was responsible for approximately 77 per cent ($109.25 billion) of the planned $141.43 billion gross spend for the new fiscal term. Most of the allocation to Finance, $102.18 billion or 95 per cent of the locally funded capital expenditure, was for debt repayment.

Approximately 98 per cent representing GoJ-funded projects, with the remainder being multilateral and bilateral-funded projects. Despite the significant allocation of resources to the Finance Ministry, the funds are not project-related.

The other big department, the Ministry of Housing, Transport, Water and Works, was responsible for approximately 11 per cent ($15.8 billion) of the scheduled capital expenditure. The $5.85 billion multilateral/bilateral portion will be largely used to fund the Northern Jamaica Development Project.

The $5.7 billion allocated to the Ministry of Education will be used largely for improvements in administration, and the rehabilitation and rationalisation of primary and secondary school facilities.

Other major capital expenditure allocations are the ministries of Agriculture and Lands, and National Security, each at approximately 2.0 per cent.

business@gleanerjm.com.