Fitch Ratings on March 09, 2022, affirms a stable outlook ‘B+’ for Jamaica’s Long-Term Foreign-Currency Issuer Default Rating (IDR). It was noted the stable outlook is based on Fitch’s expectation that hasn’t been interrupted by the pandemic, a downward trend in public debt-to-GDP will be underpinned by political consensus to maintain a high primary surplus. Fitch noted, “Jamaica’s ‘B+’ rating is supported by World Bank Governance Indicators that are substantially stronger than the ‘B’ and ‘BB’ medians, a favorable business climate and consistent fiscal policy efforts to lower the debt burden.” These strengths are offset by the vulnerability to external shocks, average GDP growth below peers, a high public debt level and a debt composition that makes the sovereign vulnerable to exchange rate fluctuations and hikes in interest rates. The following concludes Fitch ratings:
- Debt on a Downward Path: Government debt-to-GDP is expected to fall to 87.8% by 2024 from 109.7% in 2021, as higher interest rates and currency weakness weigh on the government’s financial position. Notably, Of total debt as of December 2021, 61.3% was in foreign currency, 27.2% was variable-rate debt and 2.7% CPI-linked debt. Financing costs have risen recently due to a rise in the central bank policy rate, with the government selling in February 2022 three-month T-bills with a yield of 3.59%, up 206bp from a year earlier.”
- Ambitious Debt-Reduction Target: The target to reduce government debt to 60% of GDP by March 2028 is the main fiscal policy objective that the country has been focusing on. It has been maintained as the main anchor for the country’s creditworthiness. However, achieving the target may require more aggressive fiscal policy measures in the future.
- Weak Growth Outlook: Fitch expects that the economy will only return to its pre-pandemic level by 2023 while most ‘B’-rated peers did so in 2021. Notably, the average annual growth between 2021 and 2023 is projected at 4.0% (B median is 4.2%), however, the sharp contraction in 2020 (9.9% in Jamaica versus 3.7% B median) shows the relative weakness of the rebound. This is as a result of the staggered nature of the tourism recovery; however, Fitch expects tourist arrivals to return to their pre-pandemic level in 2022. Additionally, the aluminum sector also faces headwinds as two of four mining operations are off-line and another faces Russia-related sanctions risks; in 2018, when all sites were online bauxite and alumina exports were 7.8% of GDP.
- Strong Inflationary Pressures: Fitch estimated that average inflation for 2022 at 8.0% well above the target range of 4% to 6%. Annual inflation in January 2021 was 9.7%, the highest since August 2014. The central bank has responded by rising policy rate to 4.0%, 350bp higher than in September 2021.
- Strong Reserves Pushed by Remittances: Fitch estimates that in 2021, “the current account had a surplus of 1.9% of GDP driven primarily by strong growth in remittances (net inflows grew by 20.7% YoY). In 2021, net remittances were USD3.4 billion (23.7% of GDP), while in 2019, they were USD2.3 billion (14.4% of GDP). At YE 2021, gross international reserves reached a record high of USD4.8 billion (7.0 months of current external payments).” Fitch projects that the current account surplus will narrow in 2022 driven by stronger imports and deceleration of remittance growth, we project gross international reserves to reach USD5.2 billion by YE 2023.
- Well-Capitalized Banks: The banking sector is well capitalized with low non-performing loans despite the pandemic shock and the expiration of repayment moratoria. As of December 2021, the capital adequacy ratio was 14.2% (well above the regulatory requirement of 10%) and NPLs were 2.9% of total loans (in December 2019 they were 2.2%). The health of the banking sector supports the government’s goal of borrowing 70% of its financing needs locally.
Factors that could, individually or collectively, lead to negative rating action/downgrade are; an increase in government debt-to-GDP and/or a sustained period of economic growth below expectations. On the other hand, Factors that could individually or collectively, lead to positive rating action/upgrade are; a large and sustained decline in government debt-to-GDP ratio over the medium term and/or a strengthening of growth prospects without the emergence of macroeconomic or fiscal imbalances. Also, entrenchment of institutional improvements in the fiscal policy framework that enhance confidence in medium-term economic and fiscal performance could possibly result in a rating upgrade.
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