NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Jamaica's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B-'. The issue ratings on Jamaica's senior unsecured foreign and local currency bonds are also affirmed at 'B-'. The Rating Outlooks on the long-term IDRs are revised to Positive from Stable. The Country Ceiling is affirmed at 'B' and the short-term foreign currency IDR at 'B'.
KEY RATING DRIVERS
The revision of the Outlook of Jamaica's IDRs to Positive reflects the following key rating drivers:
External financing risks have diminished. The Bank of Jamaica has built up reserves equivalent to more than three months of current account payments. The current account deficit declined to an estimated 6% of GDP in 2014, compared with an average of nearly 10% of GDP in 2009-2013. The current account adjustment has been driven by tight fiscal policy and currency depreciation, but services and remittances are also on an upward trend.
Fitch expects the CAD to narrow further in 2015-2016, to 3%-4% of GDP, assisted by lower imported fuel prices. Capital inflows have also strengthened. FDI doubled in 2014 to reach 4%-5% of GDP, and Fitch expects similar levels of FDI in 2015-2016. A narrower CAD has contributed to lower external financial needs.
The government is sticking to a fiscal and structural adjustment designed to bring down government indebtedness. Jamaica is on course to meet its 7.5% of GDP primary fiscal surplus target for the second successive fiscal year (FY) in FY2014/2015, recording a small overall deficit. Maintaining this primary surplus is the overarching target under the Extended Fund Facility (EFF) arrangement with the IMF.
Under realistic assumptions, maintaining this surplus will put government debt/GDP on a downward path from its very high starting point of 131.6% of GDP (estimated) at end FY2014/2015 to 120% of GDP by end FY2016/2017. The government's biggest near term challenge is to reduce the public sector wage bill to 9% of GDP in 2015-2016, an adjustment of 1pp of GDP.
The economy is showing signs of revival, growing at an underlying rate of almost 2% before being hit by a sharp contraction in agriculture in the second half of 2014 (2H'14). Unemployment fell by 1.6pp in 2014, but remains high at 13.8%. Growth in tourism, the re-opening of some shuttered capacity in the bauxite and alumina sector, infrastructure investments, a strengthening U.S. economy and an improvement in terms of trade all point to stronger growth in 2015-2016 of around 2%, well above the lacklustre five-year average of 0.2%.
The government has demonstrated access to external bond markets, prefinancing external debt maturities in 2015. But it has been unable to reopen the domestic debt market at medium and long term maturities in local currency, still highly illiquid following the domestic debt exchange in 2013. Financing flexibility is therefore limited.
The rating level also reflects the following factors:
Jamaica's government debt burden is the fourth-highest among rated sovereigns, and well above the 'B' median. Even after the debt exchange, interest payments account for 28% of spending. Around 61% of government debt is denominated in foreign currency, including some domestic debt. Currency depreciation worsens government solvency. While Jamaica has avoided imposing punitive losses on bondholders, it has twice reprofiled domestic debt (in 2010 and 2013), which constitutes a default under Fitch's methodology.
Structural indicators such as governance, human development and per capita income are better than the 'B' median. The crime rate, which has deterred investment, is falling and business environment indicators are improving, according to the World Bank's Doing Business survey.
The following risk factors could individually or collectively lead to positive rating action:
--Higher economic growth and improved fiscal performance leading to faster debt reduction.
Further reserve accumulation and strengthening in the balance of payments would improve confidence in the Jamaican dollar. This would ease pressure on government solvency and inflation.
The current rating Outlook is Positive. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to a downgrade. However the following factors could lead to a negative rating action:
Failure to adhere to the IMF programme would remove a source of balance of payments support and hurt private sector and creditor confidence, renewing concerns about fiscal and external financing.
--A sustained fiscal deterioration leading to higher unfavorable debt dynamics.
--Confidence shocks that lead to macroeconomic and financial sector instability.
Fitch assumes that Jamaica will continue to make the necessary policy adjustments to successfully perform under the EFF, contributing to rebuilding domestic confidence and receive technical and financial support from multilaterals.
Fitch assumes that the Petrocaribe agreement with Venezuela for the financing of oil imports will remain in place over the forecast period.
Fitch's fiscal and external projections do not factor in weather-related shocks over the forecast period. Such events would require additional policy adjustments to maintain fiscal consolidation and macroeconomic stability.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Sovereign Rating Criteria' dated Aug. 12, 2014;
--'Country Ceilings' dated Aug. 28, 2014.
Applicable Criteria and Related Research:
Sovereign Rating Criteria