Fitch Upgrades Jamaica to 'B'; Outlook Revised to Stable
KEY RATING DRIVERS
The upgrade of Jamaica's IDRs reflects the following key rating drivers:
The government has continued to adhere to the fiscal primary surplus targets agreed with the IMF, passing the 10th review of the programme in December. Austerity has proved unpopular, but Fitch believes that the policy stance will remain unchanged after the general election on February 25, as the goals of the IMF programme are backed by diverse stakeholders. While the IMF and Jamaica agreed to a slight relaxation in the targeted primary fiscal surplus in December (which will allow the government to increase public investment), it will still reach 7.25% of GDP in FY15 and 7% of GDP in FY16. This is consistent with a small overall budget deficit of less than 0.5% of GDP. Reforms and tax hikes in 2015 have boosted revenues above budget, despite below-target economic growth.
The decline in public debt has slightly outpaced Fitch's expectations. The government has reduced its debt stock and demonstrated access to both external and domestic markets. A buyback of Petrocaribe debt in July 2015 owed to Venezuelan national oil company PDVSA, for half of its face value, reduced debt by 10pp of GDP and alleviates the external debt repayment burden. Jamaica funded the buyback by issuing USD2 billion in Eurobonds in July 2015. The bond issue also prefunded the repayment of JMD45 billion of a JMD60.9bn billion (3.6% of GDP) domestic debt maturity in February. The government today made its first medium-term domestic debt issue since a 2013 restructuring. Re-establishing market access will help the government to meet a spike in maturities to 11.6% of GDP in FY2017-2018. Government debt repayments in the coming FY2016-2017 are relatively light at just 3.3% of GDP.
External finances continue to improve. Lower oil prices slashed the import bill in 2015 and helped drive down the current account deficit to 3% of GDP, from 7.7% of GDP in 2014. Subdued energy prices, a change in the energy mix and a more competitive Jamaican dollar promise to keep the CAD in check through 2017. Tourism and remittances, the main sources of foreign exchange, are performing well. Reserves increased USD441m (or by 17.8%) during 2015, boosted by external government borrowing, as well as FX purchases and borrowing by the Bank of Jamaica. Reserves now cover between four and five months of current external payments (CXP), closing the gap with the 'B' median.
Falling energy prices have helped lower inflation to an average of 3.7% in 2015, and allowed the Bank of Jamaica (BoJ) to lower its policy interest rate by 50bps during 2015 to 5.25%. The BoJ is taking steps towards inflation targeting. Reforms to the securities dealer sector, which has channelled savings into government bonds through so-called "retail repos", have reduced risks to financial stability. Commercial banks' non-performing loan portfolios are falling and credit growth is picking up.
Jamaica's 'B' IDRs also reflect the following key rating drivers:
Government debt/GDP is still very high at an estimated 124.7% of GDP in March 2016, compared with a 'B' median of 52% of GDP and over 60% of it is denominated in foreign currency. Fitch's debt dynamics analysis suggests that public debt including guarantees will stay above 100% of GDP until 2020, even if the primary surplus is maintained at 7% of GDP. Debt interest payments still consume 27% of revenues, and current spending accounts for over 90% of the total, squeezing the amount available for investment. While Jamaica has avoided imposing punitive losses on bondholders, it has twice re-profiled domestic debt (in 2010 and 2013), which constitutes a default under Fitch's methodology.
Economic growth is a longstanding relative rating weakness for structural reasons; growth has averaged 0.7% over the past five years, compared with 4.6% for the 'B' median. There are signs of a recovery as the impact of a drought eases, and public employees receive the first base wage increase after a five-year freeze. Real GDP grew 1.5% year on year in 3Q15 (July - September 2015), the latest period for which data is available, and Fitch expects it to reach 1% year on year in calendar 2015, and 2% in calendar year 2016. Growth will be supported by the opening of new and refurbished capacity in the tourism industry and new private infrastructure investments such as a major north-south highway, investment in a port and special economic zones.
Structural indicators such as governance, human development and per capita income are better than the 'B' median. Business environment indicators are improving. Jamaica rose seven places in the World Bank 2016 Doing Business survey to 64th place, on a number of regulatory changes. As a small open, island economy, Jamaica is vulnerable to shocks, including natural disasters, which have adversely affected growth and public finances in the past.
The following risk factors could individually or collectively lead to positive rating action:
--Higher economic growth and improved fiscal performance leading to faster debt reduction.
--Further reserve accumulation and strengthening in the balance of payments would improve confidence in the Jamaican dollar. This would ease pressure on government solvency and inflation.
The following factors could lead to a negative rating action:
--Failure to adhere to the IMF programme would remove a source of balance of payments support and hurt private sector and creditor confidence, renewing concerns about fiscal and external financing.
--A sustained fiscal deterioration that worsens debt dynamics.
--Confidence shocks that lead to macroeconomic and financial sector instability.
Fitch expects that the fiscal policy stance will remain broadly unchanged after the general election called by prime minister Portia Simpson-Miller for February 25 and that the next government will adhere to the IMF programme through March 2017.
U.S. growth and employment will underpin steady growth in remittances, which form the second largest source of hard currency after tourism.
Oil prices (Brent) will average USD45/b in 2016 and USD55/b in 2017.