NEW YORK, USA -- On Tuesday, Standard & Poor's Ratings Services raised its long-term foreign and local currency sovereign credit ratings on Jamaica to 'B-' from 'CCC+'. At the same time, S&P raised its short-term foreign and local currency sovereign credit ratings on Jamaica to 'B' from 'C'. The outlook on the long-term foreign and local currency sovereign credit ratings is stable.
In addition, S&P affirmed its 'B' transfer and convertibility (T&C) assessment.
The upgrade reflects recent progress in stabilizing the economy, staunching the loss of foreign-exchange reserves, and gaining access to new external funding from official creditors. After undertaking a debt exchange (NDX) in February of 2013 -- the second such exchange in the past three years -- the Jamaican government entered into a four-year loan agreement with the IMF. Enhanced access to external funding, which the government plans to use to fund its fiscal deficit this year and next year, and an expected decline in the fiscal deficit should ease the pressure on external liquidity in the coming year, reducing the risk of near-term default.
The government has undertaken various reforms over the course of 2013 in order to meet its ambitious fiscal targets, including tax increases and austere wage settlements with most public-sector unions.
S&P believes that recent policy measures, along with expected disbursements of external funding, should moderately enhance the government's room to maneuver and bolster its ability to service its debt. However, Jamaica's ability to service debt remains vulnerable to sharp fluctuations in the exchange rate or interest rates, as well as fiscal slippage and lower-than-expected GDP growth.
The level of foreign exchange reserves -- just under $1 billion on a net basis -- remains vulnerable to external shocks (such as higher oil prices) and a potential loss of external funding (through either lower foreign direct investment [FDI] or official lending). Moreover, if continued sluggish growth and high unemployment contribute to public protests, weakening the government's ability to implement fiscal austerity measures and gradually reduce its debt burden, Jamaica's reform program may not be sustainable.
Similarly, the weakened health of the financial system following the recent NDX debt exchange raises the risk of economic disruption and possible government recapitalization of financial institutions. S&P ratings on Jamaica reflect the sovereign's high general government debt and interest burden, which contribute to very low fiscal and monetary flexibility.
S&P projects the gross general government debt burden to be 135% of GDP in 2013 (deducting debt that the public-sector National Insurance Fund holds). Interest payments are likely to consume about 30% of general government revenues in the current fiscal year.
The country's weak economic structure, with negative per capita GDP growth on average over the past seven years, and small, open economy increase its vulnerability to adverse external economic developments. The country remains vulnerable to hurricanes because of its location in the hurricane belt.
The ratings also reflect Jamaica's stable democracy and open political system that sustains policy predictability and the country's willingness to service its debt. The government of Prime Minister Portia Simpson-Miller of the People's National Party enjoys a strong majority in parliament and does not face elections until late 2016.
The country has demonstrated its willingness to service its debt through running primary budget surpluses (the budget balance less interest payments) averaging 7.3% of GDP over the past two decades.
However, the government failed to reduce its high debt burden during those years despite such high primary surpluses, partly because of other economic weaknesses. Hence, S&P remains cautious when analyzing Jamaica's longer-term debt repayment capabilities because the breathing room the government gained after the NDX -- about 8.5% of GDP from lower interest payments by 2020, according to official estimates -- may not be enough, absent successful implementation of other reform measures, to sustainably reduce its debt burden.
Public finances remain vulnerable to a substantial depreciation of the local currency because more than half the debt is denominated in foreign currencies.
The stable outlook reflects S&P’s expectation that the government will largely meet its ambitious fiscal targets this year while advancing its tax reform agenda and avoiding a fall in foreign-exchange reserves. S&P expects a gradual decline in the current account deficit to 10% of GDP in 2013 and slightly lower in 2014.
S&P also expects that growing external official capital flows, combined with FDI, will limit pressure on the central bank's holdings of foreign-exchange reserves. Reserves are likely to stabilize and may gradually increase, sustaining the current level of external liquidity. Failure to meet fiscal and debt targets could weaken investor confidence, placing pressure on the exchange rate to depreciate and potentially lowering the country's foreign-exchange reserves.
The resulting fall in external liquidity and the country's growth prospects could result in a downgrade. Conversely, adherence to the government's ambitious fiscal targets and reform agenda, as well as improving external liquidity, could bolster investor confidence and contribute to better GDP growth prospects.
Higher economic growth would allow Jamaica to gradually bring down its very high debt burden, further reducing the risk of default and potentially resulting in a higher rating.