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Good prospects seen for Jamaica
STANDARD & Poor's on Thursday affirmed its single 'B' long-term sovereign credit ratings on Jamaica. The outlook was revised to positive from stable. At the same time, Standard & Poor's assigned single-'B' short-term foreign and local currency sovereign currency ratings. It also assigned a single-'B'-plus long-term local currency rating. "The change in outlook reflects better prospects for improved creditworthiness due to progress made in restructuring the country's financial sector in tandem with continued tight fiscal policy. "The process of rationalising Jamaica's financial sector is likely to be completed in the coming year with the sale of the major remaining assets held by the Financial Sector Adjustment Company (FINSAC), the holding company created for failed banks and financial institutions." The top rating agency said this combination with recent steps to strengthen the country's policy framework, could set the stage for economic recovery and a gradual reduction of its very high public-debt burden. The cost of the financial crisis, approaching 40 per cent of GDP, boosted total public-sector debt beyond 140 per cent of GDP. It added: "Progress in the financial sector has been accompanied by tight fiscal policy, which has resulted in a gradual fall in real interest rates. The Government's primary budget balance, which excludes interest payments, is likely to exceed 9 per cent of GDP this year (excluding privatisation and other extraordinary revenue), helping to stabilise Jamaica's debt burden." Jamaica entered into a staff-monitored programme (SMP) with the International Monetary Fund (IMF) in July 2000, signalling a convergence of policy views between itself and the fund. The programme paves the way for US$325 million in loans from the World Bank, Inter-American Development Bank, and Caribbean Development Bank to, among other things, finance the costs of financial sector restructuring. "Long-term funding from multilateral banks should reduce pressures on domestic capital markets and facilitate a gradual reduction in interest rates, provided fiscal discipline is maintained." S & P said its rating, which is at least a grade below that of rival agency Moody's Investor Service, is constrained by: A high Government debt burden and severe fiscal inflexibility. Projected to remain above 130 per cent of GDP at the end of 2000, the gross general Government debt burden is one of the highest for rated sovereigns (exceeded only by Lebanon). Interest payments, excluding capitalised interest on FINSAC debt, now exceed 40 per cent of government revenue and are likely to approach 50 per cent once the Government replaces FINSAC debt with interest-bearing debt instruments next year. Poor growth prospects. GDP declined marginally from 1996 until last year, and is likely to grow around only 1 per cent in 2000. Growth in the coming years is likely to remain below 3 per cent, due, in large part, to continued tight fiscal policy. High, though declining, real interest rates constrain new lending, further dampening growth prospects. External vulnerability. As a small open economy, Jamaica remains vulnerable to adverse external developments, including any downturn in overseas markets that could hurt the country's tourist sector. Foreign exchange reserves have increased to cover four months of merchandise imports this year from around three months last year. However, with central bank reserves covering only half of the nation's gross financing requirement in 2001, Jamaica has limited room to absorb negative terms of trade or financial shocks. S&P said Jamaica's creditworthiness would improve with further financial sector consolidation, including privatisation, in tandem with tight fiscal policy. The financial sector would be strengthened by the sale of Union Bank, National Commercial Bank, and Life of Jamaica; by the replacement of FINSAC paper with regular interest-bearing government debt; and by steps to enhance the central bank's autonomy.
Privatisation, along with fiscal policy aimed at large primary budget surpluses exceeding 10 per cent of GDP, could reduce the general Government debt to around 100 of GDP over four years. The outlook on the ratings could revert to stable if the government's debt reduction strategy is derailed, undermining the recent positive trends, Standard & Poor's said. The information for this article is drawn from CreditWire
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