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Rating Action:

Moody's upgrades Jamaica's government ratings to B2; outlook stable

11 Dec 2019

New York, December 11, 2019 -- Moody's Investors Service ("Moody's") has today upgraded the Government of Jamaica's long-term issuer and senior unsecured ratings to B2 from B3, and senior unsecured shelf rating to (P)B2 from (P)B3. The outlook has been changed to stable from positive.

The key drivers of rating upgrade are:

• Jamaica's strong commitment to fiscal consolidation and structural reforms portends to continued decline in government debt and sustained improvements in economic resiliency

• Improving debt structure limits risks associated with a high levels of government debt

The stable outlook reflects Moody's expectations that the improvements in Jamaica's credit profile, which have improved macroeconomic stability and put debt on a downward trend, will be sustained. The stable outlook also reflects the structural credit constraints due to the country's small size, sizeable economic concentration in the tourism industry, low economic growth and vulnerability to external shock.

In a related action, Moody's has also upgraded the senior unsecured debt ratings of government-related entities Air Jamaica Limited and National Road Operating and Construct. Co Ltd. to B2 from B3. These ratings are based on an explicit debt guarantee provided by the government. The outlook on the ratings has been changed to stable from positive.

Moody's has today also raised Jamaica's long-term local-currency bond and deposit ceilings to Ba1 from Ba2, as well as the long-term foreign-currency deposit ceiling to B3 from Caa1. The long-term foreign-currency bond ceiling remains at Ba3. The short-term foreign-currency bond and deposit ceilings remain at NP.

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO B2

FIRST DRIVER: JAMAICA'S STRONG COMMITMENT TO FISCAL CONSOLIDATION AND STRUCTURAL REFORMS PORTENDS TO CONTINUED DECLINE IN GOVERNMENT DEBT AND SUSTAINED IMPROVEMENT IN ECONOMIC RESILIENCY

The Jamaican authorities have built up a track record of improved fiscal policy management and demonstrated a commitment to fiscal consolidation and structural reforms over the past six years. This commitment, in turn, has supported a reduction in economic imbalances. Moody's expects the government to continue to run large primary surpluses, well in excess of those necessary to stabilize debt, and will maintain the downward trend in debt metrics. Moody's sees government debt falling to around 94% of GDP at the end of fiscal year 2019/20, from a peak of 135% in fiscal year 2010/2011, and anticipates further declines to 84% of GDP at the end of fiscal year 2021/22.

Moody's sees little risk of policy reversal which would undue the downward trend in the government debt ratio. The government has made substantial improvements on both revenue and expenditures, which Moody's doesn't expect to reverse in any meaningful way. The improvements in government revenue intake will keep tax revenue-to-GDP at around 26% of GDP, favorably high for a B-rated credit. While the structure of government spending remains relatively rigid, spending flexibility has improved. In fiscal year 2018/19, interest and wages account for 52% of government revenue, compared to 69%, respectively, in fiscal year 2014/15.

Structural reforms have improved the macroeconomic framework in a way that enhances Jamaica's ability to absorb economic shocks. In particular, the shift to inflation targeting has allowed the Bank of Jamaica to ease monetary policy, stimulating demand for credit and supporting a pickup in credit growth. Additionally, the exchange rate, which is now freely floating, is the first line of defense to absorb shocks. The central bank has accumulated sizeable foreign exchange reserves, which as of October 2019 were sufficient to cover close to 6 months of goods and services imports.

Recognizing that Jamaica is one of the most exposed countries to natural disasters and climate change, the government has taken a number of steps to enhance the country's resilience to these risks. The government has developed a disaster risk financing strategy where it seeks to build a buffer to cover immediate financing needs after a weather-related event. This will reduce the need to shift budget resources to reallocate spending to post-disaster risk management.

SECOND DRIVER: IMPROVING DEBT STRUCTURE LIMITS RISKS ASSOCIATED WITH A HIGH DEBT BURDEN

The Jamaican government has reduced gross borrowing requirements and lengthened the average maturity of its debt stock, while also reducing the cost of debt, resulting an improving debt structure.

Jamaica has taken advantage of favorable market conditions to conduct liability management operations and issue longer-dated external commercial bonds, using the proceeds to buyback upcoming maturities of external debt. This has two positive effects on Jamaica's debt profile. First, by issuing longer-dated bonds -- most recently re-opening an existing bond maturing in 2045 -- to buyback bonds maturing over the next five to eight years, the government has significantly reduced rollover risk, reducing Jamaica's susceptibility to a tightening of financial conditions or a sudden increase in the cost of borrowing. Second, the average time to maturity on Jamaica's government debt has lengthened to 11.3 years in December 2018, from 9.6 years in 2014.

Moody's estimates amortizations on external debt will be no more than 4% of GDP in any single year between now and fiscal 2023/24. Domestic debt amortizations will also remain between 3-4% of GDP over the next three years thanks to past liability management operations.

Jamaica benefits from a relatively deep domestic investor base, which allows the government to issue debt in local currency at relatively favorable interest rates. Total financial system assets as a percentage of GDP stood at 213% as of September 2018 (including central bank assets), which compares favorably to most B-rated credits. Domestic institutional investors provide a source of long-term domestic funding to the government, which increases its ability to issue debt at relatively long maturities.

Moody's notes however that the government's debt structure remains exposed to adverse foreign exchange movements because a significant portion of its debt is denominated in foreign currency. Foreign-currency denominated debt accounts for 62% of government at the end of fiscal year 2018/19, and Moody's expects this ratio will remain at a similar level going forward.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectations that the improvements in Jamaica's credit profile, which have improved macroeconomic stability and put debt on a downward trend, will be sustained. However, structural constraints due to the country's small size, sizeable economic concentration in the tourism industry, low economic growth and vulnerability to external shock mean that despite improved resilience, Jamaica's economy remains exposed to shocks. Even with a very significant decline in its debt burden, Jamaica's debt and interest burdens remain high, and above those of similarly rated peers.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material to Jamaica's credit profile. As a small island economy, the country is highly exposed to the impact of climate change. Jamaica is exposed to a number of weather-related natural disasters, such as hurricanes, tropical storms, earthquakes, droughts, floods and landslides. These events can have a significant impact on Jamaica's credit profile: increasing volatility of GDP through the impact of floods on agriculture output, lower revenue and higher government debt as a result of lower GDP growth and cost of reconstruction following severe tropical storms and hurricanes.

Social risks also inform Moody's view on Jamaica's credit profile. High crime rates represent one of the most significant structural obstacles to growth in Jamaica, with a negative effect on investment. In addition, an aging population and high rates of net migration, particularly among highly-skilled workers, represents a loss of human capital.

Governance considerations are material to Jamaica's credit profile and are a key driver in Moody's assessment of institutions and governance strength. The government has made significant strides in improving overall policy effectiveness, as demonstrated by improvement in revenue collection, improving the flexibility of government spending, and the introduction of fiscal rules which have allowed for a significant reduction in government debt. In addition, the central bank's transition to inflation targeting and improved transparency have also supported policy effectiveness.

WHAT COULD MOVE THE RATING UP

Moody's would upgrade Jamaica's rating if it conclude that a combination of the government's continued commitment to institutional and economic reforms, combined with evidence of higher real GDP growth rates, will result in greater economic resiliency which remains constrained by country's inherent exposure to shocks. Debt declines and increases in external buffers beyond current expectations would also be positive.

WHAT COULD MOVE THE RATING DOWN

Conversely, a sharp reversal in the decline in government debt would weigh on Jamaica's credit profile, particularly as Jamaica's B2 rating incorporates a steady decline in the debt-to-GDP ratio. This could result from a weakening in the government's fiscal performance or from adverse exchange rate developments. An increase in external vulnerability, as reflected in a decline in the country's international reserve buffer would also be negative. Severe weather-related events that materially affect government finances threatening the sovereign's ability to service debt could also trigger a negative rating action.

GDP per capita (PPP basis, US$): 9,473 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.9% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.4% (2018 Actual)

Gen. Gov. Financial Balance/GDP: 1.2% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.3% (2018 Actual) (also known as External Balance)

External debt/GDP: 91.8%/GDP (2018 Actual)

Level of economic development: a 'ba3' level of economic resilience

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

On 06 December 2019, 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 institutions and governance strength, have increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased. Other views raised included: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. 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 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.

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

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

Yves Lemay
MD - Sovereign Risk
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.
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