Fitch: Jamaica Budget Shows Broad Fiscal Policy Continuity

NEW YORK--()--Jamaica's 2016-2017 budget supports our assumption that fiscal policy would remain broadly unchanged following February's change of government by maintaining a high primary surplus target and aiming to reduce government debt, Fitch Ratings says.

Last month, Prime Minister Andrew Holness presented the first budget since his Jamaica Labour Party (JLP) won February's general election. Holness described public debt reduction as a national priority and confirmed the 7% of GDP primary surplus target agreed with the IMF. He also said that the primary surplus target "must be supplemented by other strategies" including boosting growth.

Shortly before the election we upgraded Jamaica's sovereign rating to 'B' from 'B-' to reflect strong fiscal and external performance under the IMF's Extended Fund Facility (EFF). We assumed that the next government would keep a tight fiscal stance and adhere to the EFF programme through to April 2017. Austerity measures have not been popular, but EFF goals are supported by businesses, labour unions, and the leadership of both of the main political parties. The main goal is to reduce government debt/GDP to 96% by 2020 from 124.5% of GDP in March 2016.

The new government's policy stance is not identical to that of the previous PNP government. There is greater emphasis on boosting growth, which is falling short of the 2.5% rate originally assumed in the IMF programme in FY2016/2017 (real GDP grew 0.9% yoy in 1Q16), to reduce the debt/GDP ratio. The prime minister has created a new Ministry of Economic Growth and Job Creation and an Economic Growth Council.

A number of entities have been earmarked for privatization. A higher income tax threshold from 1 June will exempt up to 250,000 taxpayers from income tax. This is designed to incentivise work and stimulate consumption, with the loss of revenue (estimated by Jamaica's Economic Programme Oversight Committee at JMD26.5bn or around 1.5% of GDP over the next two fiscal years) compensated by higher indirect taxes including a rise in gasoline prices.

Holness said that as growth, debt reduction, tax reform and government efficiency measures take effect, "we expect commensurate reductions in this [7% primary surplus] target." There is a precedent for a slight relaxation of programme fiscal targets -- in December, the IMF agreed to reduce last year's and this year's primary surplus targets by 0.25pp of GDP (to 7.25% of GDP in FY2015/2016 and 7% of GDP in FY2016/2017, respectively).

However, the debt management strategy published in April assumes that the 7% of GDP target is maintained through FY2018-2019. "Debt-for-nature" and debt-for-assets swaps featured in the budget are unlikely to have a major impact on the debt burden in the short-term. Debt-for-nature swaps would be limited to bilateral debt, which was just 4.4% of Jamaica's total debt stock at end-March.

Fitch projects that debt/GDP will fall by 10pp of GDP by March 2018, assuming that growth recovers to 2% and the government adheres to fiscal targets. On 20 May, the IMF said Jamaica's programme was on track and a preliminary staff-level agreement had been reached on measures that would complete the 11th and 12th EFF reviews, and that fiscal discipline "is critical for further reducing debt."

IMF Executive Board approval would make about USD80m available to Jamaica, providing further balance-of-payments support.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

Jamaica

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877928

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Charles Seville
Senior Director
Sovereigns
+1 212-908-0277
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY
or
Mark Brown
Senior Analyst
Fitch Wire
+44 20 3530 1588
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Charles Seville
Senior Director
Sovereigns
+1 212-908-0277
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY
or
Mark Brown
Senior Analyst
Fitch Wire
+44 20 3530 1588
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com