NEW YORK, CMC – The US-based Fitch Ratings has upgraded Jamaica’s long-term foreign-currency and local-currency Issuer Default Ratings (IDRs) to ‘From ‘B+,’ also noting that the outlook remains positive.
In addition, Fitch has upgraded Jamaica’s country ceiling to ‘BB’ from ‘BB-. ‘
Fitch said Jamaica’s rating upgrade to ‘BB—’ reflects significant progress with debt reduction, backed by a sound fiscal framework and a strong political commitment to delivering large primary surpluses.
It said robust fiscal management has contributed to a turnaround in creditworthiness following the 2013 distressed debt exchange that Fitch considered a default.
“Aside from a COVID-19-related spike in 2020, debt-to-GDP has fallen every year for more than a decade, to a forecasted 73.5 percent in fiscal 2023/2024 from a high of 135.3 percent of GDP in fiscal 2012/2013.”
Fitch said that although this remains above the ‘BB’ median of 52.2 percent of gross domestic product (GDP), it represents the third most significant decline in debt burden among all rated sovereigns over this period, noting that only Ireland and Iceland experienced a more substantial decline. “Concurrently, ‘B’ and ‘BB’ median debt-to-GDP increased over this period by 23 ppts and 14 ppts, respectively.”
Fitch said that the positive outlook reflects its expectation of continued improvement in debt metrics and further deepening of the policy framework over the next few years.
It said Jamaica’s BB ‘rating is also supported by governance indicators that are substantially stronger than the ‘BB’ median.
“The ratings remain constrained by deep structural weaknesses, including subdued growth potential owing to a high crime rate, low productivity, and weak demographics, as well as vulnerability to external (including weather-related) shocks.”
The rating agency said the budget balance had improved significantly since 2020 when the pandemic support measures led to the first deficit since 2015.
“We forecast that the overall surplus will be J$9.1 billion (One Jamaica dollar = 0.008 cents), or 0.3 percent of GDP, with a primary surplus of J$181.9 billion, or 6.1 percent of GDP, in fiscal 2023/2024.
“Revenues are forecast to grow by 14.5 percent year on year, exceeding the forecasted growth rate of nominal GDP and just a touch above expenditure growth. The higher-than-normal expenditure growth is being driven by a large increase in the public sector wage bill, which we expect to increase by nearly 50 percent over the next three years.”
Fitch said that some of this increase is due to the reclassification of specific allowances from program expenditures to wages.
Fitch said it does not expect that the higher wage bill will push the fiscal balance into deficit, in part owing to fiscal space generated by the lower interest bill.
Fitch forecasts that large primary surpluses will reduce general government debt-to-GDP to 69.7 percent by fiscal 2024/2025 and to around 66.4 percent in fiscal 2025/2026, putting it on target to meet the government’s 60 percent debt target by 2028. This is still higher than the current ‘BB’ median of 52 percent.
It said Jamaica has remained committed to an economic policy framework built on two key pillars, namely the Bank of Jamaica’s (BoJ) inflation-targeting monetary policy and fiscal policy anchored on debt reduction targets.
It said that the policy framework proved flexible enough to cope with the recent shocks without undermining medium-term fiscal and inflation expectations.
“The government has built a record of fiscal prudence that has gained credibility in recent years and may be further strengthened over the next several years, including through the successful implementation of the new fiscal commission.”
Fitch said that the BoJ’s independence and credibility have improved in recent years.
However, the bank does have to contend with some weakness in policy transmission, particularly given the country’s exposure to imported inflation.
Inflation has remained above the target band (four to six percent), given recent hikes in transportation fares. Nonetheless, the bank is likely to cut its primary policy rate, which is currently at seven percent, later this year when inflation comes back down.
Regarding the island’s growth stabilizing potential, Fitch said the Jamaican economy stabilized following a rebound from the sharp pandemic-induced decline in 2020 and following two years of relatively rapid growth—4.6 percent and 5.2 percent in 2021 and 2022 -Jamaica’s real GDP growth rate moderated to an estimated two percent last year.
It said the recovery was boosted by the tourism rebound, mainly owing to stopover visitors from the United States, the largest market.
“Fitch forecasts real growth to slow further to 1.8 percent in 2024 and 1.7 percent in 2025, in line with its medium-term potential rate, estimated at between one and two percent, which is particularly weak relative to rating peers.”
Jamaica’s current account deficit (CAD) has been in the range of one to three percent of GDP since 2015, a significant improvement over the prior decade, when it averaged 11.4 percent.
“Foreign direct investment inflows amply fund the CAD. While the current account balance contains a large trade deficit, it is offset by a tourism-driven services surplus and a large surplus on secondary incomes, consisting mainly of remittances from the diaspora,” Fitch added.
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