Much of the discussions on the S&P rating downgrade from B- to CCC+ suggest it was premature, given that in recent months Jamaica's credit profile has improved steadily.

In particular, commentators point to the relative stability in the foreign exchange market, the recent reductions in domestic interest rates, as well as the tightening of the spreads of GOJ-issued foreign currency denominated debt traded on the international capital markets, as positive economic developments.

Further, the Government has announced that it intends to enter into a standby arrangement with the International Monetary Fund (IMF).

Country's balance

This IMF programme will help to shore up the country's balance of payments problems, which has been compounded this year by the significant reduction in the country's foreign exchange receipts as a result of closures of three of the four bauxite/alumina plants, the fall-off in remittances, the impact of the heavy discounting in the tourism sector, as well as the fall-off in private foreign investment flows.

The Bruce Golding administration intends to sign a letter of intent with the IMF for a US$1.2 billion standby facility over two years.

In addition, the Bank of Jamaica should be receiving a further US$320 million in early September from the IMF, which represents the additional funds to be made available to Jamaica as a result of the increase in the SDR quotas which is currently before the IMF executive board for approval.

The government expects that once it reaches an agreement with the Fund on a medium-term programme for Jamaica, it will be able to access additional funds from the other multilateral lending agencies - primarily the World Bank, the Inter-American Development Bank and Caribbean Development Bank - which it would use for budgetary support.

This is critical given the fact that the international capital markets are virtually closed to further GOJ issues.

It is in this context that the S&P downgrade is being viewed as being rather premature.

However, the fundamental premise of the S&P assessment rests on the fact that the rating agency is extremely concerned with the country's vulnerable and precarious fiscal situation. S&P and the other major credit-rating agencies since late 2008 have pointed to the widening fiscal deficit.

This includes, for example, the added pressure that has been placed on the Government's debt servicing requirements in the last quarter of FY 2008/09 and in the crafting of the current budget as a result of the decision by the BOJ to raise domestic interest rates in November 2008.

This coupled with the fall-off in revenue flows from the real economy which have been impacted by the effects of the global financial crisis, have compounded the fiscal problems facing the Golding administration.

Earlier this week the prime minister noted that the preliminary numbers for the first five months of FY 2009-10 through to the end of July 2009 indicate that revenue intake is still below the budgeted estimates.

Expenditure constrained

As a result, fiscal expenditure has been severely constrained across the board.

The Opposition has called for a supplementary budget prior to signing of the loan agreement with the IMF. However, beyond the estimates for the current fiscal year, much of the way forward will depend on the medium-term framework and the economic medicine it prescribes.

Jamaican nationals are key members of the IMF team currently working with the GOJ in crafting Jamaica's medium-term programme.

One of these persons should be returning to Jamaica in about a month's time to rejoin the public sector, and will be a welcome addition to the Government's depleted economic team.

S&P suggests that by the end of FY 2009-2010, public debt will be approximately 120 per cent of GDP.

And given the vulnerability of the country's fiscal accounts, even if there is some breathing space provided by the voluntary liquidity management programme proposed by enlightened members of the local financial sector, S&P is still concerned about whether the Government will be in a position to keep servicing its debt obligations going forward.

renee.shirley@gleanerjm.com