EDITORIAL - S&P and Jamaica's economic crisis
This week's signal from the rating agency, Standard & Poor's (S&P), of a likely downgrade of Jamaica's sovereign debt represents, at once, a statement about the dire state of our economy, the procrastination of the administration in taking the necessary tough decisions to fix the problems, and a lack of confidence in the Government and the Opposition to do what is required.
Of course, neither the governing Jamaica Labour Party (JLP) nor the People's National Party (PNP) wishes to interpret it that way. The Government's spin is that it is well on its way to getting the job done. Therefore, it is just that S&P doesn't quite get it.
For the Opposition, this is another indication of the incompetence of the Golding/Holness administration that has mismanaged the economy, including Jamaica's stalled standby agreement with the International Monetary Fund (IMF).
Implications for borrowing
It is perhaps useful to note what exactly was the action taken by S&P. It, for the time being, maintained this country's long-term foreign-currency rating at B-, or three rungs below investment grade. Jamaica is in the junk bond category. More worryingly, S&P told investors that its outlook on Jamaica is now negative, rather than stable.
The more immediate consequence of this is that, perchance Jamaica were to go to the market to raise debt, lenders would demand higher rates. Then there is the psychology of a negative outlook or downgrade: potential investors are likely to wonder whether Jamaica is a place to be.
The action of the Jamaican Government, beyond a response to the S&P action, would be, in so far as that is possible, not to go to the market for new debt. For debt, in the region of J$1.5 trillion, or 130 per cent of gross domestic product, is the crux of the country's economic malaise. Meeting the interest costs of servicing debt, even after the agreed rescheduling of the domestic portion of the obligation, accounts for a third of the Government's expenditure. Overall, debt servicing accounts for more than half the Budget.
It is agreed all round that Jamaica's debt is unsustainable and is a drag on the economy, limiting the Government's ability to invest in things that will drive growth. Moreover, what the selective default of 2010 offered was breathing space, not dissipation of an obligation. The crisis will worsen if nothing is done.
No confidence in pnp
This is where S&P has grave concerns. The rating agency, in rationalising its action, noted Jamaica's becalmed IMF programme and the likelihood of an early election, which could lead to a change of government. The latter is hardly a vote of confidence in the willingness of the PNP, should it come to office, to take the hard decisions. Nor is the S&P enamoured with the way the finance minister, Mr Audley Shaw, and his supporting team are handling things.
If Jamaica is serious about confronting this crisis, it must urgently begin to cut public expenditure. Among the things the administration can do are:
Freeze public-sector wages;
Reform public-sector pensions so that government employees are part of a defined contribution scheme; and
Reform the tax system to widen the net, to cause everyone, including the tourism sector, to pay their fair share.
It is time, as Prime Minister Andrew Holness declared, to stop running away and face reality.