News Column

Fitch Upgrades Jamaica's IDRs to 'B-'; Outlook Stable

February 28, 2014

Fitch Ratings has upgraded Jamaica's ratings as follows:

-- Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B-' from 'CCC'; assigns Stable Outlook;

-- Senior unsecured foreign and local currency bonds to 'B-' from 'CCC';

-- Country Ceiling to 'B' from 'B-';

-- Short-term foreign currency IDR to 'B' from 'C'.


The upgrade of Jamaica's IDRs reflects the following key rating drivers:

-- Reduced financing risks due to fiscal consolidation and the lengthening of domestic debt repayments achieved through the National Debt Exchange (NDX) in February 2013. Government debt maturities have declined to an estimated 4.6 percent of GDP in 2014 from 13.7 percent in 2012. Despite a tepid economic recovery, the central government deficit could decline to 0.4 percent of GDP in fiscal year (FY) 2013 from 4 percent of GDP in FY2012, driven by interest savings and current and capital expenditure containment. Hence, the government is likely to meet the primary surplus target of 7.5 percent of GDP for FY2013 under the Extended Fund Facility (EFF) with the International Monetary Fund (IMF).

-- Jamaica's IMF program remains on track. Jamaica has successfully completed two reviews under the program and has reportedly met all the quantitative targets and structural benchmarks for the third review. Compliance with the EFF boosts policy credibility and unlocks multilateral support, which in turn allows Jamaica to meet financing requirements, mitigate financial sector and external vulnerabilities, and restore business confidence.

-- The country has preserved broad macroeconomic and financial stability despite the NDX and the continued depreciation of the Jamaican dollar. The Jamaican dollar depreciated by 13 percent in 2013 and the currency has continued to fall in 2014 reflecting limited Bank of Jamaica (BOJ) intervention and an orderly adjustment towards a more competitive currency. Inflation has stayed within the official target range of 8.5 percent to 10.5 percent despite the depreciation as the pass-through has been mitigated by weak domestic demand and lower imported commodity prices. The financial system has not experienced liquidity or solvency pressures. While banks' profitability has declined after the NDX, deposits have continued to grow and capitalization remains above regulatory levels.

-- Jamaica's NDX, coupled with an increase in primary surpluses and a modest economic recovery, have set public debt/GDP on a declining path. Nonetheless, public debt remains high at 129 percent of GDP, the fourth largest among sovereigns rated by Fitch in 2013, while domestic and external market access remains uncertain. Moreover, 61 percent of Jamaica's debt is denominated in foreign currency, exposing debt dynamics to exchange rate risk. In spite of significant interest savings through the NDX and wage restraint agreements with public sector unions, Jamaica's expenditure profile remains highly rigid, with wages and interest accounting for 67 percent of government revenues.

-- Access to multilateral funding has eased external financing constraints, while the current account deficit declined to 10.7 percent of GDP in 2013 from 12.9 percent in 2012, driven by weaker domestic demand and lower imported oil prices. Nevertheless, Jamaica's international reserves coverage, at less than three months of current external payments (CXP), highlights its vulnerability to external and confidence shocks. Reliance on Petrocaribe financing by the sovereign increases Jamaica's exposure to economic and political developments in Venezuela.

-- Growth underperformance has become chronic in Jamaica. Real GDP has contracted on average by 0.7 percent over the past five years, to well below the 'B' median of 4.2 percent in 2013. As growth returned to positive territory in 2013, Fitch expects economic activity to accelerate at an average 1.5 percent in 2014- 2015. Investment in energy and infrastructure provides upside risk to this scenario. Nevertheless, the economy remains vulnerable to global growth dynamics and weather events.


The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger a positive rating action are:

-- Higher economic growth and improved fiscal performance leading to faster debt reduction;

-- Reduced external vulnerabilities through the sustained accumulation of international reserves and a decline in external financing needs.

The main risk factors that, individually or collectively, could trigger a negative rating action are:

-- Pervasive non-compliance with the IMF program, leading to a prolonged interruption in disbursements and renewed 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.


The ratings and Outlooks are sensitive to a number of assumptions:

-- 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 oil prices will remain stable and that the Petrocaribe agreement 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.

Applicable Criteria and Related Research:

-- 'Sovereign Rating Criteria' dated Aug. 13, 2012;

-- 'Country Ceilings' dated Aug. 9, 2013.

Applicable Criteria and Related Research:

Sovereign Rating

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