Credit rating to impact positively - PIOJ THE PLANNING Institute of Jamaica (PIOJ) says the country's improved credit rating will have a positive impact on the economy, as it will enable the Government to access increased funding on the international capital market, thus facilitating the thrust by Government to shift the debt portfolio towards foreign debt and away from the higher cost domestic market. "This is aimed at reducing domestic interest rates, the cost of public debt and the potential for crowding-out private sector investments," the PIOJ says in its 'Economic Update and Outlook' published for the January to March quarter of fiscal year 2000/01. The document notes that the Government's low interest rate objective should be facilitated further, as with the upgraded rating, Jamaican bonds floated on the international bond market should now attract a lower interest rate, which is influential in the determination of domestic interests. "Hence, during upcoming periods, there should be a greater degree of success in further lowering domestic interest rates, thereby encouraging investment in the economy," it states. On May 2, 2001 the credit rating agency, Standard and Poor, announced an upgrade of Jamaica's long-term sovereign credit ratings from B+ to BB- and from B- to B+ for the long-term foreign currency credit. In addition, a single B+ rating was assigned to the planned US$200 million bond offering in May. This bond was subsequently floated and was significantly oversubscribed. The PIOJ says the upward credit rating reflected the continued strengthening of the financial sector, fiscal consolidation, which will facilitate more positive prospects for the resolution of government debt and improved prospects for economic recovery and growth. The document states that the country's prospects for continued macro-economic stability will also be boosted by adherence to strict monetary management regime as the authorities try to consolidate on past gains and further entrench stability. The achievement of a strong net international reserve (NIR) position should support stability in the exchange rate market, and along with the recovery of domestic agriculture, should support continued moderation in consumer price changes. Evidence of continued stability in the economy was already clear during the post quarter period, with the inflation rate for the month of May being 0.4 per cent, 0.1 percentage point below that of the similar period for 2000. Further, wage settlements reached during the period was on average, four per cent per annum, significantly below levels agreed on in the preceding round of salary negotiation and in line with the expected trending down of inflation. The economic base, however, remains fragile as it moves through this transitional period. Evidence of this emerged in the balance of payment out-turn for January to February 2001, which registered an overall deterioration as reflected in a US$3.3 million decrease in the NIR. This out-turn was primarily due to a large increase in the current account balance which moved to US$96.5 million from US$38.8 million in 2000. However, the capital and financial accounts increased by US$57.7 million to US$96.5 million, reflecting the large inflow of private investment in the financial account. Declining exports The PIOJ credits the deterioration in the current account to the worsening in both the goods and income accounts. More specifically, the trade deficit increased by US$42.4 million to US$232.8 million due to a combination of declining exports and rising imports, while the deficit on the income account widened from US$44.5 million. This was due primarily to the larger outflow of investment from direct investment companies. Both the services and current transfer accounts, however, improved. As the economy picks up growth momentum, imports are likely to increase as capital investment is accumulated without the concurrent increase in exports in the short-run. However, this should not negate the expected positive overall balance of payments changes, as divestment proceeds from the Financial Sector Adjustment Company (FINSAC) controlled assets continue to flow in, and official flows from the Government of Jamaica US dollar denominated bond issue are received. Positive macro-economic prospects are complemented by very good growth prospects for the short to medium term. The Medium Term Economic Framework (MTEF) is predicted on a 2.5 per cent growth for fiscal year 2001/02 to be generated through continued positive growth performances in services, but also growth in the major goods producing sectors.
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