- File
Dr. Omar Davies, Minister of Finance, faces new pressures with a warning from Moody's that Jamaica's debt ratios are worse than comparative countries.

Keith Collister, Business Writer

Moody's, a leading international ratings agency, has reconfirmed Jamaica's B1 rating, which in its classification is four notches below investment grade of Baa3, but warned that the country's finances were weak.

Moody's specifically drew attention to the fact that Jamaica was among countries with the weakest finances, in terms of debt to GDP, debt to revenues (mainly taxes) and interest to revenues ratios.

In fact, the agency said that if its rating assessments were based on quantitative criteria alone, "Jamaica's government bond ratings would likely be assigned to a lower rating category."

Jamaica's debt ratios are not consistent with its B1 rating cohort, or even the entire B1 to C rating category, Moody's acknowledges, but justified its current rating for Jamaica, saying its analysis included strong qualitative elements of steadfast commitment to fiscal discipline, proven ability to respond to shocks, and a strong willingness to pay debts.

Jamaica's key debt ratios, though falling, are considerably worse than its peers.

only surpassed by Lebanon

Its 2005 debt to GDP ratio at 131.5 per cent - compared with its 2002 peak of 150 per cent - is only surpassed by Lebanon's among similarly rated countries, and is more than double the average of 61.3 per cent for the B1 to C rated cohort.

The debt to GDP ratios of the Dominican Republic and Belize, whose ratings are two notches below Jamaica's, stand at 26.4 per cent and 84.6 per cent, respectively.

According to Moody's, at 447 per cent in 2005, the level of government debt to revenues has improved from its peak of over 500 per cent in 2002, but is "just about the highest such ratio among sovereigns."

Even taking into account the expected improvement to 386.7 per cent in 2006, the general government debt to revenues ratio continues to surpass the mean of 240 per cent in 2006 for countries within the B1 to C rating category.

Jamaica's interest to revenues ratio of 46 per cent is also three times the B1 to C average of 15 per cent.

Noting that last fiscal year's unmet "balanced budget" had now been postponed to 2007/08, Moody's argued that the 2006/07 target fiscal deficit of 2.5 per cent of GDP depended on a pickup in revenues in line with the real GDP forecast of between three to four per cent growth, and single-digit inflation allowing a resumption of monetary policy easing and, therefore, lower interest rate payments.

In Moody's view, there is considerable downside risk to the official scenario.

First, there are no fiscal "cushions" for the possibility of another hurricane, and the numbers have been indicating that GDP growth will fall considerably below target.

Due to global tightening of monetary policy and the volatility of the Jamaican dollar, the agency does not foresee "a meaningful downward trajectory of local interest rates."

It, however, foresees the possibility of some fiscal loosening in light of the upcoming general election, as happened in the run-up to the 2002 election that Finance Minister Dr. Omar Davies later attempted to correct with measures that included a near $14 billion tax package.

Government's ability to stick to its programme is now seen as critical to market confidence.

Exchange rate movements

Given its exposure to the path of interest and exchange rates - 52 per cent of the general government debt stock is sensitive to exchange rate movements - the Govern-ment's ability to stick to the broad parameters of its medium-term programme will be crucial to the adjustment process over the next few years.

Indeed, it is market confidence in the programme that is underpinning Jamaica's precarious macroeconomic equilibrium.

Domestic market agents play a very important role in this regard, given that they hold significant amounts of not only domestic, but externally-issued Government debt.

Despite last year's missed targets, Moody's believes confidence in the Government's willingness to stick to the medium-term programme remains high.

Jamaica's strategy to deal with its debt overhang has been to run an extremely tight fiscal policy, mainly by restraining expenditure.

It has exhibited high willingness to pay by delivering primary surpluses (budget surplus before interest costs) of around 10 per cent of GDP since 2003, despite shocks such as hurricanes that have done major damage to the country's infrastructure.

"Jamaica's demonstrated willingness to pay has probably been amongst the highest within its peer group in recent years," said Moody's.

The country has also managed, said the agency, to cope with shocks that could have disrupted its ability to pay, including the financial crisis of the 1990s, the steep fall in the exchange rate of 2003, and sizeable, consecutive deviations from our fiscal targets.

Moody's concludes that in large part, its ability to handle shocks has been due to "a very high degree of credibility in Jamaica's key policy makers, who have been in place for over 10 years and who have navigated the country through particularly difficult moments."

Although it said it was too early to make the call, the agency is of the view that the current fiscal stance is not at risk under the administration of Prime Minister Portia Simpson Miller, given her reappointment of Davies as Finance Minister.

It appears to confirm, the agency said, "A unified view with respect to the macroeconomic agenda."

The agency went on to describe the consensus on the need for the painful fiscal adjustment as "remarkable".

The "distinguishing feature of Jamaica's macroeconomic programme has been the ability of policy makers to enlist the support of civil society in a painful, multi-year fiscal adjustment," the agency wrote.

Full support

"Indeed, it is rare to see such unanimity of support for fiscal tightening within all levels of the population, particularly among countries at similar income per capita levels where typically such programmes are politically unfeasible after a short period of time when no macroeconomic payoff materialises."

The agency took note of the new Memorandum of Understanding with unions to contain the wage bill, which it said represents 30 per cent of total expenditure.