Moody’s upgrades Jamaica credit rating
Moody's Investors Service is more bullish, if somewhat cautious, about the Jamaican economy, saying its outlook is based on a balance of potential risks.
On the plus side, it expects the debt burden to fall but is otherwise concerned that Jamaica is susceptible to nature-induced external shocks.
On Monday, the international ratings agency upgraded Jamaica's government issuer, senior unsecured and provisional shelf ratings to B3 from Caa2 and changed its outlook to stable from positive.
It comes with the sign-off of a successor arrangement with the International Monetary Fund (IMF), with which Jamaica now has a US$1.67-billion standby agreement.
Moody's said Monday that its decision to upgrade Jamaica was driven by sustained fiscal consolidation and the Government's strong commitment to continued reforms to reduce its high debt burden, as well as significant improvement in the current account balance and foreign reserves.
"The stable outlook assigned to the B3 rating balances our expectation that the debt burden will come down materially over the next two to three years against Jamaica's high susceptibility to external shocks, particularly natural disasters," said Moody's.
The ratings agency's assessment of Jamaica was tempered by low economic growth, very high debt burden and very high interest payments. This requires continued efforts, it said, to service debt and bring the debt-to-GDP and interest-payment-to-revenue ratios down.
"Jamaica has made significant progress in this direction and its fiscal metrics, although still very weak, have improved since 2013. Although GDP growth is recovering, its sovereign credit profile remains constrained by structural impediments to growth and a very high government debt and debt servicing burden," said Moody's.
The 'precautionary' standby agreement with the IMF replaces the Extened fund facility, which was originally due to run for four years to March 2017. However, with the progress already made by Jamaica on its economic reform programme, the new Holness administration sought a different arrangement that it is pitching as more of an insurance policy that is, funds can be drawn down from the IMF but only if the Jamaican government deems it necessary.
The current agreement still requires Jamaica to maintain a seven per cent primary surplus, and foresees a fall in the debt ratio to 60 per cent of GDP by March 2026.
One of the criticisms of the last IMF programme was that it placed too many constraints on growth-inducing initiatives.
Still, Moody's said the reforms raised investor confidence, and it expects that in 2016 and 2017, growth will average 1.7 per cent, or double the 0.9 per cent out-turn in 2015.
"A factor underpinning the upgrade is our expectation that even as the authorities shift focus towards achieving higher growth rates, they will maintain their fiscal performance and primary surplus of around seven per cent of GDP over the next three years," said the ratings agency.
"The support of the public and business community for the reform programme, along with the country's broad consensus on economic policies, buttresses our expectation that reforms will continue."
It sees continued fiscal reforms as more likely to focus on the privatisation, merger or closure of state-owned enterprises.
Moody's expects Jamaica to achieve a balanced budget in the fiscal year FY2017/18, and its debt burden to fall to 106 per cent of GDP by 2020 from 122.4 per cent at the end of FY2015/16.
Additionally, debt-servicing costs are predicted to decline gradually over the next three years.
"At 27 per cent of revenues, the government's interest payment burden remains very high. That said, the government has pursued an active debt management strategy of lengthening maturities and taking advantage of low interest rates to reduce debt-service costs and buy back some of its outstanding debt. This has put the interest-to-revenue ratio firmly on a downward trajectory, and we expect it to drop from nearly 10 per cent of GDP in 2012/13 to 6.1 per cent in 2019," Moody's said.
Concurrent with its sovereign upgrade of Jamaica, Moody's also upgraded the credit ratings of Government-related entities Air Jamaica Limited and National Road Operating and Construction Company to B3 from Caa2, and similarly changed the outlook to stable from positive.
The long-term foreign currency bond ceiling was changed to Ba3, while the short-term foreign currency bond ceiling is unchanged at NP; the long-term foreign currency deposit ceiling was changed to Caa1, while the short-term foreign currency deposit ceiling remains at NP; and the long-term local currency bond and deposit ceilings were changed to Ba2.