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Rating Action:

Moody's affirms Jamaica's B2 ratings; maintains stable outlook

23 Nov 2021

New York, November 23, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Jamaica's long-term issuer and senior unsecured ratings at B2. The senior unsecured shelf rating has also been affirmed at (P)B2. The outlook on the ratings remains stable.

The rating affirmation at B2 reflects the following key drivers:

• Jamaica's strong commitment to fiscal consolidation will support declining government debt metrics after a temporary increase

• Low growth, limited diversification and the small size of the economy are structural factors that constrain Jamaica's economic and credit prospects

The stable outlook reflects balanced risks to the rating. The pace of economic recovery will remain tied to that of tourism, and the economy will remain vulnerable to weather-related shocks. Moody's expectation for a return to pre-pandemic fiscal trends of large primary surpluses and declining government debt ratios rests on the authorities' continued adherence to medium-term debt targets.

In a related action, Moody's has also affirmed the senior unsecured debt ratings of government-related entities Air Jamaica Limited and National Road Operating and Construct. Co Ltd. at B2. These ratings are based on an explicit debt guarantee provided by the government. The outlook on the ratings remains stable.

Jamaica's long-term local-currency (LC) bond ceiling remains unchanged at Ba1 and its long-term foreign-currency (FC) bond ceiling remains unchanged at Ba3. The four-notch gap between the LC ceiling and issuer rating reflects very low political risk and predictable and reliable institutions balanced against a reliance on tourism, which represents a shared macro risk. The two-notch gap between the LC and FC ceilings balances the recent track record of improved policymaking against a high level of external indebtedness and limited capital account openness.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE B2 RATING

JAMAICA'S STRONG COMMITMENT TO FISCAL CONSOLIDATION WILL SUPPORT DECLINING GOVERNMENT DEBT METRICS AFTER A TEMPORARY INCREASE

Moody's expects the rise in debt and deterioration in Jamaica's fiscal accounts to be temporary compared to most B-rated peers, which will experience a permanent increase in debt burdens. Jamaica's debt burden will begin to decline in fiscal 2021/22 (year ending March 2022), driven by an improvement in the primary surplus to around 6% of GDP. Government revenue has recovered quickly, with tax revenue up 20% year-over-year through the first six months of fiscal 2021/22 (April to September 2021) compared to the same period in the prior fiscal year, and down just 2.7% compared to the same period in fiscal 2019/20, the last pre-pandemic fiscal year.

Total government revenue also benefits from a JMD33 billion dividend from the Bank of Jamaica, which reflects three years of profits by the central bank. Even excluding the Bank of Jamaica dividend, the easing of containment measures and normalization of economic activity will support revenue returning to pre-pandemic levels by fiscal 2022/23. With pandemic-related spending measures being temporary and equal to around 1% of GDP, Jamaica's primary and fiscal balances will be consistent with the government's target to reduce government debt to 60% of GDP by fiscal 2027/28.

Despite improving debt burden and debt affordability, fiscal metrics will remain weaker compared with other B-rated sovereigns. Moody's estimates Jamaica's government debt will end fiscal 2021/22 at 103% of GDP, compared to the B-rated median of 58%. Debt affordability, as measured by interest to revenue, has improved from 30% in fiscal 2014/15 to 22% in fiscal 2020/21, but will remain above the median of B-rated peers (8.4%).

With around 60% of debt denominated in foreign currencies, the government's balance sheet has a high exposure to exchange rate shocks. Moody's expects the debt structure to improve over time, as the government seeks to fund 70% of its gross financing needs in the domestic market on an annual basis in the coming years. Over time, this will reduce the share of foreign-currency-denominated debt.

Jamaica's ability to withstand the coronavirus shock without a permanent deterioration in its credit fundamentals reflects structural reforms undertaken prior to the pandemic, which resulted in the buildup of buffers to limit the impact of the economic shock. The establishment of the Fiscal Responsibility Law, which sets medium-term target for government debt, supported a reduction in the interest burden, fiscal consolidation efforts and lower gross borrowing requirements. Very large primary surpluses, averaging over 7% of GDP between 2015 and 2019, afforded the government space to provide fiscal stimulus without jeopardizing the government's medium-term fiscal objectives.

LOW GROWTH, LIMITED DIVERSIFICATION AND A SMALL SIZE OF THE ECONOMY CONTINUE TO CONSTRAIN JAMAICA'S ECONOMIC AND CREDIT PROSPECTS

Jamaica's economic strength is constrained by its historically low growth rates, small size, limited diversification and exposure to natural disasters, which result in high real GDP growth volatility. Between 2010 and 2019, Jamaica averaged real GDP growth of 0.6%, significantly lower than the median 4.2% growth rate for B-rated sovereigns over the same period. Jamaica's economy also displayed higher volatility in real GDP growth, a reflection of structural features that constrain economic strength. These include the economy's small size and reliance on tourism as a key source of employment, income and export earnings, and vulnerability to external shocks.

Given large direct and indirect contributions from tourism, economic activity declined more significantly in 2020 than most other B-rated sovereigns, with real GDP contracting by 10%. Moody's expects a subdued recovery, in part because tourism will recover more slowly than most other sectors. Jamaica will be one of only two B-rated sovereigns that will not return to 2019 levels of output until 2023.

The tourism industry has enjoyed a robust recovery since the beginning of 2020, driven primarily by pent-up demand from US travelers. Recent monthly data show tourist arrivals are around 70%-75% of 2019 levels, up from the start of the year when tourist arrivals were 20%-25% of 2019 levels. The recovery has occurred despite a relatively low vaccination rate on the island and restrictions on movement, which included curfews and limits of social gatherings.

Jamaica's economy will experience very high growth in 2021, with real GDP expanding 4.5%, followed by another year of above-normal growth in 2022 at 2.7%, before growth returns closer to its potential rate of around 2%.

RATIONALE FOR A STABLE OUTLOOK

The stable outlook reflects balanced risks to the rating. The pace of economic recovery will be tied to the outlook for the tourism sector, while the economy will remain vulnerable to weather-related shocks. Moody's expectations for a return to pre-pandemic fiscal trends of large primary surpluses driving a reduction in government debt rests on the government's continued adherence to its medium-term debt targets. An increase in exchange rate volatility could slow the pace of debt reduction, while inflationary pressures could lead to an increase in public sector wages and higher domestic borrowing costs.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Moody's assesses Jamaica's exposure to environmental risks as moderately negative (E-3 issuer profile score) reflecting physical climate risks and water risk, given the significant risks posed by climate events on the economy and government finances. Hurricanes and tropical storms have a significant negative impact on Jamaica's tourism industry and its physical capital stock. Water risks capture the impact of droughts and heavy rain on Jamaica's agriculture production, which represents a significant share of GDP and employment.

Exposure to social risks is highly negative (S-4 issuer profile score), and it is mainly related to health and safety, which captures the country's very high crime and murder rate. In addition, high rates of outward migration, particularly among highly skilled workers, result in a loss of human capital.

The influence of governance on Jamaica's credit profile is moderately negative (G-3 issuer profile score) and captures Jamaica's history of default, which weighs on otherwise improving institutional capacity and policy effectiveness. Jamaica ranks particularly well in terms of government effectiveness, control of corruption and regulatory quality relative to other B-rated peers.

GDP per capita (PPP basis, US$): 9,993 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -10% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.2% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -3.1% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -0.3% (2020 Actual) (also known as External Balance)

External debt/GDP: 159.7% (2020 Actual)

Economic resiliency: ba3

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 19 November 2021, a rating committee was called to discuss the rating of the Jamaica, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD MOVE THE RATING UP

Moody's would upgrade Jamaica's rating if it were to conclude a steady and extended recovery in tourism is sufficiently strong to assure a return to pre-pandemic GDP growth rates in the order of 1%-2%. A sustained improvement in fiscal metrics, including steadily declining government debt and interest burdens would also place upward pressure on the rating.

WHAT COULD MOVE THE RATING DOWN

A reversal of the progress observed in previous years on Jamaica's fiscal position and government debt metrics driven by lower-than-expected economic growth, insufficient fiscal consolidation efforts or the effect of adverse exchange rate shocks on the government's balance sheet, would weigh negatively on Jamaica's credit profile. Increased external credit vulnerability caused by a decline in international reserves and reduced coverage of external debt-service payments would also be negative. Severe weather-related events that would materially undermine the government's ability to service debt could also trigger a negative rating action.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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