March 7, 2024
Fitch Ratings – New York – 05 Mar 2024: Fitch Ratings has upgraded Jamaica’s Long-Term Foreign-Currency and Local-Currency Issuer Default Ratings (IDRs) to ‘BB-‘ from ‘B+’. The Outlook remains Positive.
In addition, Fitch has upgraded Jamaica’s Country Ceiling to ‘BB’ from ‘BB-‘.
KEY RATING DRIVERS
Upgrade; Positive Outlook: The upgrade of Jamaica’s ratings to ‘BB-‘ reflects significant progress with debt reduction, backed by a sound fiscal framework and a strong political commitment to deliver large primary surpluses. Robust fiscal management has contributed to a turnaround in creditworthiness following the 2013 distressed debt exchange that Fitch considered a default. Aside from a Covid-19-related spike in 2020, debt-to-GDP has fallen every year for more than a decade, to a forecasted 73.5% in fiscal 2023/2024 from a high of 135.3% of GDP in fiscal 2012/2013. Although this remains above the ‘BB’ median of 52.2% of GDP, it represents the third largest decline in debt burden among all rated sovereigns over this period – only Ireland and Iceland experienced a larger decline. Concurrently, ‘B’ and ‘BB’ median debt-to-GDP increased over this period by 23 ppts and 14 ppts, respectively.
The Positive Outlook reflects Fitch’s expectation of continued improvement in debt metrics and further deepening of the policy framework over the next few years.
Jamaica’s ‘BB-‘ rating is also supported by governance indicators that are substantially stronger than the ‘BB’ median. The ratings remain constrained by deep structural weaknesses, including subdued growth potential owing to a high crime rate, low productivity and weak demographics, as well as vulnerability to external (including weather-related) shocks.
Primary Budget Surpluses: The budget balance has improved significantly since 2020, when the pandemic support measures led to the first deficit since 2015. We forecast that the overall surplus will be JMD9.1 billion (0.3% of GDP), with a primary surplus of JMD181.9 billion (6.1% of GDP) in fiscal 2023/2024. Revenues are forecast to grow by 14.5% yoy, exceeding the forecasted growth rate of nominal GDP and just a touch above expenditure growth. The higher-than-normal expenditure growth is being driven by a large increase in the public sector wage bill, which we expect to increase by nearly 50% over the next three years. Some of this increase is due to the reclassification of certain allowances from program expenditures to wages. Fitch does not expect that the higher wage bill will push the fiscal balance into deficit, in part owing to fiscal space generated by the lower interest bill.
Declining Debt Trajectory: Fitch forecasts these large primary surpluses will reduce general government debt-to-GDP to 69.7% by fiscal 2024/2025 and to around 66.4% in fiscal 2025/2026, putting it on target to meet the government’s 60% debt target by 2028, which is still higher than the current ‘BB’ median of 52%.
Stable Policy Framework: Jamaica has remained committed to an economic policy framework built on two key pillars: Bank of Jamaica’s (BoJ) inflation-targeting monetary policy and fiscal policy anchored on debt reduction targets. The policy framework proved flexible enough to cope with the recent shocks without undermining medium-term fiscal and inflation expectations. The government has built a record of fiscal prudence that has gained credibility in recent years and may be further strengthened over the next several years, including through the successful implementation of the new fiscal commission.
Monetary Policy Strengthening: The BoJ’s independence and credibility have improved in recent years; however, the bank does have to contend with some weakness in policy transmission, particularly given the country’s exposure to imported inflation. Inflation has remained above the target band (4%-6%) given recent hikes in transportation fares. Nonetheless, the bank is likely to cut its main policy rate, which is currently at 7%, later this year when inflation comes back down.
Growth Stabilizing at Potential: The Jamaican economy stabilized following a rebound from the sharp pandemic-induced decline in 2020. Following two years of relatively rapid growth (4.6% and 5.2% in 2021 and 2022), Jamaica’s real GDP growth rate moderated to an estimated 2.0% last year. The recovery was boosted by the tourism rebound, especially owing to stopover visitors from the U.S., the largest market. Fitch forecasts real growth to slow further to 1.8% in 2024 and 1.7% in 2025, in-line with its medium-term potential rate (around 1%-2%), which is particularly weak relative to rating peers.
Resilient External Sector: Jamaica has had a current account deficit (CAD) in the range of 1%-3% of GDP since 2015, a significant improvement over the prior decade when the CAD averaged 11.4%. The CAD is amply funded by foreign direct investment inflows. While the current account balance contains a large trade deficit, it is offset by a tourism-driven services surplus and a large surplus on secondary incomes, consisting mainly of remittances from the diaspora.
Improving External Balance Sheet: Jamaica’s external balance sheet has continued to improve. Net sovereign external debt is forecast to fall to 19.7% of GDP this year from a high of 41.6% in fiscal 2015/2016, as a result of this deleveraging and a significant build-up in international reserves. Official international reserves have increased nearly threefold to USD4.9 billion in 2023 from a low of USD1.8 billion in 2013. Jamaica has no need to issue external, foreign-currency debt on the global financial markets given its fiscal surplus and low external maturities.
Sound Banking Sector: The banking sector is well capitalized, and non-performing loans remained at low levels. As of September 2023, the capital adequacy ratio was 14.5%, well above the regulatory requirement of 10% and the NPL ratio was 2.5%, below the five-year pre-pandemic average.
ESG – Governance: Jamaica has an ESG Relevance Score (RS) of ‘5[+]’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Jamaica has a medium WBGI ranking at 59.2, reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
COUNTRY CEILING
Fitch has upgraded Jamaica’s Country Ceiling to ‘BB’ from ‘BB-‘. The Country Ceiling for Jamaica is one notch above the Long-Term Foreign-Currency. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments. The IMF’s reclassification of the exchange-rate regime to ‘floating’ in June 2018 and low FX surrender requirements indicate institutional improvements that reduce transfer and convertibility risk. Jamaica has trade agreements with the US, EU and belongs to CARICOM. The sovereign did not restrict private-sector foreign debt service during the debt default.
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