A deal with the IMF, which Jamaica is negotiating a US$1.2 billion (J$10.5 billion) standby facility, is essential to avoid a debt default Fitch said.

"Such an agreement gains importance in light of Jamaica's increased external vulnerabilities and a precarious fiscal situation," it said in a statement issued yesterday.

Jamaica owes overseas bondholders US$4.2 billion (J$36.9 billion), the largest component of the total external debt, which stands at US$6.3 billion (J$55.4 billion).

Fitch said the country's traditionally high level of commitment to debt service is "being tested" by its deteriorating fiscal position, as well as the conditions on the world stage.

Fitch estimates Jamaica could overshoot its 5.5 per cent fiscal deficit target as a result.

Negative outlook

The agency also cautioned that Jamaica's "extremely weak fiscal profile amid a rising interest burden and recession was placing the government under financial stress" and that the risk of default was "significant".

Fitch rates Jamaica as 'B', but with a negative outlook.

Its warning comes two weeks behind a downgrade by Standard and Poor's which cut Jamaica from 'BB-' to 'CCC+'.

"An IMF programme is critical for providing support to Jamaica's balance of payments, assuaging investor sentiment, allowing the central bank to navigate the unfavourable external environment and potentially opening up the door to additional multilateral funds," said Fitch analyst Shelly Shetty. Jamaica expects to finalise negotiations with the IMF by mid-September.

But the possibility of an agreement has already helped stabilise the Jamaican dollar, Shetty said, and has allowed the central bank to cut interest rates in recent weeks.

She also said that interest rate cuts must continue to alleviate fiscal pressures and support the economy, especially with inflation falling.

Jamaican analysts expect the Bank of Jamaica, by yearend, to shave another 250 to 300 basis points off its benchmark security which is now priced at 19 per cent.

"A significant delay or a non-approval of an IMF agreement would seriously undermine Jamaica's creditworthiness," said the Fitch analyst.

business@gleanerjm.com