September 30, 2019
Overview
- Jamaica has made material progress in achieving macroeconomic stability and strengthening of its external position, improving its ability to withstand external shocks.
- As a result, we are raising our long-term foreign and local currency sovereign credit ratings on Jamaica to ‘B+’ from ‘B’ and affirming our short-term foreign and local currency sovereign credit ratings at ‘B’.
- The stable outlook reflects our expectation that Jamaica will continue to bolster its fiscal resilience through continued public-sector reform, a declining debt burden, and will generate modest real GDP growth.
Rating Action
On Sept. 27, 2019, S&P Global Ratings raised its long-term foreign and local currency sovereign credit ratings on Jamaica to ‘B+’ from ‘B’. The outlook is stable. At the same time, S&P Global Ratings affirmed its ‘B’ short-term foreign and local currency sovereign credit ratings on the country. S&P Global Ratings also raised its transfer and convertibility assessment to ‘BB-‘ from ‘B+’.
Outlook
The stable outlook reflects our view that, in the next 12 months, Jamaica’s fiscal policy will remain broadly consistent following the expiry of its IMF Stand-by Arrangement (SBA) in November 2019. We expect that the government will continue to deliver robust primary fiscal surpluses, leading to a gradual reduction in debt and interest burdens, and helping to boost external reserves. We also expect that the country will be able to maintain its growth momentum, with modest GDP growth, and that the government will continue advancing toward a more effective monetary policy framework for the central bank, including a more flexible exchange rate.
- Upside scenario
We could raise the ratings if, over the next couple of years, higher and sustained economic growth strengthens Jamaica’s economic profile. In addition, continued strengthening and effectiveness of monetary policy could bolster Jamaica’s resilience to unexpected setbacks, including external shocks, leading to an upgrade.
- Downside scenario
Poor economic growth or a weather-related shock that leads to a reversal in the improving trajectory of Jamaica’s external position could result in higher external financing needs or a significant decline in usable foreign exchange reserves. Absent corrective fiscal and other measures, we could lower the rating in such a scenario.
Rationale
The upgrade reflects the continued improvement in Jamaica’s external liquidity. A stronger overall external position, along with continued adherence to the government’s fiscal strategy, bolters the country’s resilience against external shocks.
Our ratings on Jamaica continue to be limited by the country’s high debt and interest burden, which restrict its fiscal flexibility. Despite a recent pick-up, GDP growth remains low, constrained by structural impediments. Nevertheless, the government’s commitment to fiscal prudence fosters macroeconomic stability–including low inflation–and supports the country’s creditworthiness. The country’s external position has improved in recent years with declining indebtedness and growing international reserves. We believe that Jamaica’s policymaking stability and predictability are bolstered by the continuity and institutionalization of fiscal consolidation policies. In addition, ongoing changes in the governance and mandate of the central bank could gradually improve Jamaica’s currently limited monetary flexibility.
— Institutional and economic profile: Continued GDP growth, which we expect will modestly accelerate over the next year, may facilitate the implementation of further institutional reform
- The government’s commitment to sustainable fiscal policy should underpin macroeconomic stability in the medium term.
- Economic growth will facilitate public-sector reform as an expanding private sector can absorb displaced public-sector workers.
- Nevertheless, we anticipate that bottlenecks, such as crime, will continue limiting the pace of growth, despite the strong performance of some sectors.
We believe that the government’s commitment to fiscal consolidation will continue to foster macroeconomic stability in Jamaica beyond the national elections that are constitutionally due in 2021. This political commitment has survived changes in government and we believe is representative of bipartisan consensus on the general direction of macroeconomic policymaking. Jamaica’s two main political parties–the ruling Jamaica Labor Party (JLP) and the opposition People’s National Party (PNP)–share a similar outlook on economic policymaking. While we view Jamaica’s policymaking as relatively effective, crime continues to aggravate civil society. This, in addition to concerns about the prevalence of corruption and concerns about the enforcement of contracts, continue to be key factors that hamper the country’s productivity.
Since taking office in 2016, the JLP has largely continued the macroeconomic policies of the former PNP administration, including achieving strict fiscal targets set under the previous IMF Extended Fund Facility program and its successor program, the three-year IMF SBA, which expires in November 2019. The SBA serves primarily as a precautionary liquidity backstop but also as an anchor for policy continuity. Under the program, the government initiated a shift in spending toward growth-inducing expenditure. To do so, local authorities are focused on identifying redundancies and services that public-sector entities can share; and establishing clear controls on public-sector wages, among other measures. The government has made progress toward these ends. Starting from fiscal 2018, it reached a four-year agreement on public-sector wages that helped reduce wages to 9% of GDP target in fiscal 2019. In addition, 38 public bodies have been rationalized since 2017 through mergers, divestments, closures, and integration into parent ministries. Nevertheless, we believe it will take time to fundamentally shift the structure of spending, as structural growth limitations will be hard to overcome in the near term.
Of importance, we expect that the government will continue with public-sector reforms once the SBA expires. To further entrench fiscal sustainability, the government is creating an independent fiscal council, scheduled to be operational in the next year. The fiscal council will be a permanent, independent, non-partisan institution enshrined by legislation that will promote sustainable fiscal practices and deepen government accountability, as policymakers will have to maintain credible policies and explain deviations to plan.
In our opinion, structural barriers will continue to impede stronger economic growth in Jamaica. We expect annual real GDP growth to average 1.8% over the next three years (or 1.4% in per capita terms), despite stronger performance in certain sectors of the economy. We also expect that the country’s per capita GDP will be close to US$5,800 in 2019. Tourism, agriculture, mining, and manufacturing make the Jamaican economy diversified for a small open economy. Nevertheless, growth is constrained by high security costs, perceived corruption, low productivity, a lack of business competitiveness, and vulnerability to external shocks. Some sectors, such as tourism, which directly represents about 9% of Jamaica’s GDP, have grown quickly in the past couple of years. Improvements in capacity utilization in the mining sector over the past year have also contributed to economic growth. We expect employment to rise; as of April 2019, employment grew by a healthy 2.5% year over year, while unemployment fell to a record low of 7.8% from 9.7% in the previous year. However, links between tourism and other sectors, in particular agriculture, are limited, in our opinion, muting the impact of tourism growth on the overall economy. While the government continues to address this issue through the Economic Growth Council and a dedicated department in the Ministry of Tourism, we expect that the dividends of these efforts will take time to translate into higher GDP growth.
— Flexibility and performance profile: We expect continued fiscal austerity will ease the still-high general government debt burden while vulnerability to external shocks remains, despite a strengthening external positon
- We expect the government to meet its 6.5% of GDP primary fiscal surplus target through the medium term.
- Although this tight fiscal policy will slowly reduce Jamaica’s debt burden, fiscal flexibility will remain limited due to a still high debt burden.
- Still-high, albeit improving, external liquidity needs and indebtedness make the country vulnerable to external shocks and potential loss of investor confidence.
The government reduced its primary fiscal surplus target to 6.5% of GDP (from 7%) for fiscal 2019, with the support of the IMF. We expect that the government will largely meet its fiscal target over the next four years. Higher-than-expected tax revenues from a policy shift to indirect taxation of a broader tax base, and improved compliance over the past year, in addition to the fiscal space created by the lowering of the primary surplus target, will be used to fund investments that will stimulate growth in security, infrastructure (namely roads and rural water), and social protection programs. Because of the success of previous tax reform measures, no new tax measures were taken in the fiscal 2019 or fiscal 2020 budgets. Rather, the 2020 budget includes the removal of distortionary taxes to stimulate growth, such as the minimum business tax and the asset tax for non-financial businesses, as well as lowering the transfer tax for home purchases and eliminating land registration costs. We expect that the government’s recent fiscal performance and debt reduction trajectory will be sustained through further tax reform, the divestment of some public assets, cost restraint through continued public-sector reform, and modest GDP growth.
Continued compliance with ambitious fiscal targets will contribute to a gradual decline in net general government debt in our forecasts, to about 67% of GDP by 2022, while the change in general government debt will average 0.8% over the same period. Net general government debt represented about 79% of GDP in fiscal 2019, a notable decline from the 93.5% it averaged in the previous three years. In addition, the general government surplus was 1.4% of GDP in fiscal 2019, reflecting a continued improvement compared with the modest deficit position recorded before fiscal 2018. Nevertheless, we expect that interest payments will represent a significant portion of the budget, averaging about 19% of government revenue over the next four years. The high interest burden will continue to limit fiscal flexibility.
Jamaica’s debt burden has significant exposure to exchange rate movements, as approximately 60% of general government debt is denominated in foreign currency. Notably, the government is not expected to raise new foreign currency-denominated debt in the domestic market in the medium term. Notwithstanding, external maturities will be refinanced from funds raised through domestic issuances and revenue, to the extent that the private sector is not crowded out, given the domestic market is not deep enough to facilitate full refinancing. In addition, the country’s financial institutions have significant exposure to government debt, limiting their capacity to lend more to the government without possibly crowding out private-sector borrowing. More recently, with the government’s focus on debt reduction and minimal debt issuance, this risk has abated somewhat. We assess Jamaica’s contingent liabilities from the financial sector and all nonfinancial public enterprises as limited. The limited assessment of contingent liabilities of banks is based on our Banking Industry Country Risk Assessment score of ‘8’ (with ‘1’ being the lowest-risk category and ’10’ the highest) and the ratio of banking-sector assets to GDP of under 100%.
Strong fiscal performance will serve as an anchor for external stability. In the past couple of years, Jamaica’s external profile has benefited from favorable conditions, as reflected in a relatively stable current account deficit (CAD) of about 2.9% of GDP. Growth in the tourism industry has benefited Jamaica’s external profile, given that tourism receipts represent 35%-40% of the country’s current account receipts (CAR). We expect Jamaica to record a CAD of about 3% of GDP for 2020-2021. In line with recent years, the bulk of the deficit will likely be funded by foreign direct investment. We also expect that, against a backdrop of relatively stable oil prices (see “S&P Global Ratings Lowered Its Henry Hub Natural Gas Price Assumption For The Rest Of 2019 And For 2020, 2021; Long-Term U.S. Natural Gas, Canadian AECO, And Crude Oil Price Assumptions Unchanged,” published July 29, 2019, on RatingsDirect), and a declining contribution of oil as a fuel source, Jamaica’s external financing needs will be relatively stable. Strong growth in tourism earnings and remittances should mitigate import growth due to increased investment and consumption from a strengthening economy. As a result, we expect Jamaica’s external financing needs to average 96% of CAR and foreign exchange reserves and narrow net external debt to average 60% of CAR over the next four years. The country’s external accounts are linked to the U.S. primarily through tourism and personal remittances, which account for about 30% of CAR. At the same time, we expect external debt net of international reserves and liquid public- and financial-sector assets will continue improving to about 60% of CAR, on average, during the same period.
Despite the recent improvement in the external liquidity and debt burden, Jamaica remains vulnerable to external shocks. Of note, in lieu of using the SBA as a backstop for external liquidity after its expiration, the government has created a disaster risk policy framework as a way to build resiliency and respond quicker in the aftermath of a weather-related event. In addition, we believe the country is vulnerable to a sudden loss of external funding, given that Jamaica’s net external liability position is substantially worse than its net external debt position. Negative developments that undermine FDI and other private capital inflows could again lead to falling foreign exchange reserves and put pressure on the currency to depreciate further.
We believe that economic policy continuity will support historically low inflation over the next several years and that through accommodative monetary policy, inflation will gradually increase to the mid-point of the central bank’s target of 4%-6% through 2022. Although it has a short track record, the central bank will continue to facilitate orderly movements in the local currency, in line with the country’s floating exchange rate, as shown by the two-way movement recorded against the U.S. dollar in the past year. While dollarization is still high in the financial system, it has steadily declined in the last couple of years. At the end of 2018, about 41% of financial assets were denominated in U.S. dollars, down from 46% at the end of 2016. Steps to reduce the level of dollarization, such as capping open positions at financial institutions, could gradually strengthen monetary policy.
In addition, the government is introducing revisions to the Bank of Jamaica Act to support inflation targeting, such as changing the central bank’s mandate, strengthening its operational independence, and improving market transparency. Still, it will take time before these measures lead to fully operational inflation targeting. We believe that monetary policy tools still have a limited impact on the economy given low–albeit rising–levels of private-sector lending and limited secondary bond market trading.
Key Statistics
Table 1
| Jamaica — Selected Indicators | ||||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019f | 2020f | 2021f | |
| Economic indicators (%) | ||||||||||
| Nominal GDP (bil. LC) | 1,314.13 | 1,431.93 | 1,541.75 | 1,659.40 | 1,760.99 | 1,897.30 | 2,025.58 | 2,144.37 | 2,283.45 | 2,445.57 |
| Nominal GDP (bil. $) | 14.81 | 14.26 | 13.90 | 14.19 | 14.08 | 14.83 | 15.72 | 16.67 | 17.31 | 18.07 |
| GDP per capita (000s $) | 5.2 | 5.0 | 4.9 | 4.9 | 4.9 | 5.2 | 5.5 | 5.8 | 6.0 | 6.2 |
| Real GDP growth | (0.6) | 0.5 | 0.7 | 0.9 | 1.4 | 1.0 | 1.5 | 1.5 | 1.9 | 2.0 |
| Real GDP per capita growth | (1.0) | 0.1 | 0.3 | 0.6 | 1.3 | 0.9 | 1.4 | 1.1 | 1.5 | 1.6 |
| Real investment growth | (5.0) | 5.6 | 3.0 | (4.8) | 0.1 | 4.6 | 0.0 | 1.5 | 1.9 | 2.0 |
| Investment/GDP | 19.9 | 21.3 | 22.5 | 21.4 | 21.3 | 22.6 | 0.0 | 0.0 | 0.0 | 0.0 |
| Savings/GDP | 10.2 | 11.7 | 14.5 | 18.3 | 21.0 | 20.0 | (2.9) | (2.9) | (3.1) | (3.2) |
| Exports/GDP | 30.2 | 30.6 | 31.3 | 29.9 | 31.3 | 34.1 | 0.0 | 0.0 | 0.0 | 0.0 |
| Real exports growth | (3.2) | 4.8 | 1.0 | 4.4 | 0.9 | 2.6 | 0.0 | 1.5 | 1.9 | 2.0 |
| Unemployment rate | 13.9 | 15.2 | 13.8 | 13.5 | 12.9 | 10.5 | 8.7 | 9.5 | 10.0 | 10.0 |
| External indicators (%) | ||||||||||
| Current account balance/GDP | (9.7) | (9.5) | (8.0) | (3.0) | (0.3) | (2.6) | (2.9) | (2.9) | (3.1) | (3.2) |
| Current account balance/CARs | (20.0) | (19.4) | (15.6) | (6.0) | (0.6) | (4.9) | (5.3) | (5.4) | (5.7) | (5.9) |
| CARs/GDP | 48.6 | 49.1 | 51.5 | 50.5 | 52.2 | 52.8 | 55.9 | 54.3 | 54.1 | 53.8 |
| Trade balance/GDP | (26.4) | (27.2) | (27.0) | (22.5) | (20.5) | (24.0) | (22.5) | (22.0) | (22.1) | (22.1) |
| Net FDI/GDP | 2.2 | 3.3 | 3.8 | 6.3 | 4.7 | 5.8 | 4.8 | 4.2 | 4.0 | 3.9 |
| Net portfolio equity inflow/GDP | (3.5) | (0.2) | 3.3 | 8.9 | (4.9) | 9.7 | 2.5 | 2.4 | 2.3 | 2.2 |
| Gross external financing needs/CARs plus usable reserves | 114.0 | 120.7 | 122.7 | 110.4 | 94.3 | 99.5 | 97.2 | 98.6 | 97.0 | 96.6 |
| Narrow net external debt/CARs | 130.0 | 143.4 | 131.6 | 114.3 | 109.9 | 90.8 | 78.0 | 70.0 | 63.4 | 57.2 |
| Narrow net external debt/CAPs | 108.3 | 120.1 | 113.9 | 107.8 | 109.3 | 86.5 | 74.1 | 66.4 | 59.9 | 54.0 |
| Net external liabilities/CARs | 287.7 | 302.0 | 289.2 | 290.9 | 287.1 | 278.8 | 253.1 | 247.6 | 242.3 | 236.9 |
| Net external liabilities/CAPs | 239.7 | 253.0 | 250.2 | 274.5 | 285.4 | 265.7 | 240.4 | 235.0 | 229.2 | 223.7 |
| Short-term external debt by remaining maturity/CARs | 27.3 | 32.5 | 34.6 | 39.0 | 28.0 | 31.1 | 29.2 | 27.1 | 24.9 | 25.8 |
| Usable reserves/CAPs (months) | 2.9 | 2.6 | 2.3 | 3.6 | 4.3 | 4.2 | 4.4 | 3.9 | 3.9 | 4.1 |
| Usable reserves (mil. $) | 1,803 | 1,602 | 2,248 | 2,670 | 2,875 | 3,366 | 3,111 | 3,238 | 3,523 | 3,899 |
| Fiscal indicators (general government; %) | ||||||||||
| Balance/GDP | (3.9) | 0.4 | (0.3) | (0.2) | 0.0 | 0.7 | 1.4 | 0.4 | 0.7 | 0.8 |
| Change in net debt/GDP | 13.0 | 10.2 | 4.8 | (2.5) | 1.6 | (11.3) | (0.9) | 0.5 | 0.5 | 1.0 |
| Primary balance/GDP | 5.7 | 8.1 | 7.8 | 7.4 | 7.9 | 7.8 | 8.1 | 6.7 | 6.7 | 6.1 |
| Revenue/GDP | 26.4 | 28.0 | 26.9 | 27.6 | 28.6 | 29.8 | 31.2 | 30.2 | 30.6 | 29.6 |
| Expenditures/GDP | 30.4 | 27.6 | 27.2 | 27.8 | 28.6 | 29.1 | 29.8 | 29.8 | 29.9 | 28.8 |
| Interest/revenues | 36.5 | 27.4 | 30.0 | 27.4 | 27.7 | 23.9 | 21.5 | 21.0 | 19.8 | 18.1 |
| Debt/GDP | 132.5 | 131.8 | 127.6 | 116.5 | 112.1 | 97.3 | 89.6 | 85.1 | 80.4 | 76.1 |
| Debt/revenues | 501.0 | 471.1 | 473.8 | 421.8 | 392.2 | 326.8 | 286.8 | 281.9 | 263.1 | 257.6 |
| Net debt/GDP | 129.5 | 129.1 | 124.7 | 113.3 | 108.4 | 89.3 | 82.7 | 78.6 | 74.3 | 70.4 |
| Liquid assets/GDP | 3.0 | 2.8 | 2.9 | 3.2 | 3.8 | 8.0 | 6.9 | 6.5 | 6.1 | 5.7 |
| Monetary indicators (%) | ||||||||||
| CPI growth | 6.9 | 9.3 | 8.3 | 3.7 | 2.3 | 4.4 | 3.7 | 4.3 | 4.5 | 5.0 |
| GDP deflator growth | 6.6 | 8.4 | 6.9 | 6.7 | 4.7 | 6.7 | 5.2 | 4.3 | 4.5 | 5.0 |
| Exchange rate, year-end (LC/$) | 92.56 | 106.05 | 114.39 | 120.03 | 127.82 | 124.30 | 126.80 | 130.50 | 133.37 | 137.24 |
| Banks’ claims on resident non-gov’t sector growth | 10.3 | 13.0 | 7.9 | 2.2 | 21.8 | 14.3 | 12.0 | 11.6 | 11.6 | 11.7 |
| Banks’ claims on resident non-gov’t sector/GDP | 34.5 | 35.7 | 35.8 | 34.0 | 39.0 | 41.4 | 43.5 | 45.8 | 48.0 | 50.1 |
| Foreign currency share of claims by banks on residents | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| Foreign currency share of residents’ bank deposits | 38.2 | 43.3 | 45.4 | 45.7 | 47.2 | 42.2 | 40.0 | 40.0 | 40.0 | 40.0 |
| Real effective exchange rate growth | 3.0 | (4.6) | (2.3) | 6.9 | (2.7) | (100) | N/A | N/A | N/A | N/A |
| Sources: Government of Jamaica, Statistics Institute (Economic Indicators), Bank of Jamaica, Ministry of Finance (External Indicators), Ministry of Finance, (Fiscal Indicators), and Bank of Jamaica (Monetary Indicators). Adjustments: 2018-2022 real and nominal GDP and 2019-2022 CPI and 2019-2022 J$ estimates by S&P Global Ratings. Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A–Not applicable. LC–Local currency. CARs–Current account receipts. FDI–Foreign direct investment. CAPs–Current account payments. e–Estimate. f–Forecast. The data and ratios above result from S&P Global Ratings’ own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings’ independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. | ||||||||||
Ratings Score Snapshot
Table 2
| Jamaica — Ratings Score Snapshot | ||
| Key rating factors | Score | Explanation |
| Institutional assessment | 4 | Civil society with high crime rates. More uncertain checks and balances owing to less enforecment of contracts and respect for the rule of law. |
| Economic assessment | 6 | Based on GDP per capita ($) as per Selected Indicators in Table 1. |
| Weighted average real GDP per capita trend growth over a 10-year period is 1.3%, which is well below sovereigns in the same GDP category. | ||
| External assessment | 4 | Based on narrow net external debt and gross external financing needs as per Selected Indicators in Table 1. |
| There is a risk of marked deterioration in the cost of or access to external financing, due to a potential shift of FDI and other private capital inflows could lead to falling foreign exchange reserves and put pressure on the currency to depreciate. The net external liability position is worse than the narrow net external debt position by over 100% of CAR, as per Selected Indicators in Table 1. | ||
| Fiscal assessment: flexibility and performance | 2 | Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1. |
| Fiscal assessment: debt burden | 6 | Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in Table 1. |
| Over 40% of gross government debt is denominated in foreign currency. | ||
| The banking sector’s exposure to the government is more than 20% of its assets. | ||
| Monetary assessment | 4 | Jamaica’s exchange rate regime is a managed float, and it has a short track record. |
| The Bank of Jamaica’s operational independence is not enshrined in law and presently has structural issues in monetary policy transmission. | ||
| Indicative rating | b+ | As per Table 1 of “Sovereign Rating Methodology.” |
| Notches of supplemental adjustments and flexibility | None | |
| Final rating | ||
| Foreign currency | B+ | |
| Notches of uplift | 0 | Default risks do not apply differently to foreign- and local-currency debt |
| Local currency | B+ | |
| S&P Global Ratings’ analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings’ “Sovereign Rating Methodology,” published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings’ sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology. | ||
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