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Rating Action:

Moody's upgrades Jamaica's ratings to B3 from Caa2, changes the outlook to stable from positive.

21 Nov 2016

New York, November 21, 2016 -- Moody's Investors Service, ("Moody's") has upgraded Jamaica's government issuer, senior unsecured, and provisional shelf ratings to B3 from Caa2 and changed the outlook to stable from positive. Concurrently, Moody's has also upgraded the ratings of government-related entities Air Jamaica Limited and National Road Operating and Construct. Co Ltd to B3 from Caa2 and changed the outlook to stable from positive.

The long-term foreign currency bond ceiling was changed to Ba3, while the short-term foreign currency bond ceiling is unchanged at NP. The long-term foreign currency deposit ceiling was changed to Caa1, while the short-term foreign currency deposit ceiling remains at NP. The long-term local currency bond and deposit ceilings were changed to Ba2.

RATINGS RATIONALE

Moody's decision to upgrade Jamaica's ratings was driven by the following factors:

• Significant and sustained fiscal consolidation and the government's strong commitment to continued reforms to reduce its high debt burden

• Significant improvement in the current account balance and in reserve levels, which has reduced external vulnerability

The stable outlook assigned to the B3 rating balances our expectation that the debt burden will come down materially over the next 2-3 years against Jamaica's high susceptibility to external shocks, particularly natural disasters.

At B3, Jamaica's rating reflects its low economic growth, very high debt burden and very high interest payments, which require strong fiscal efforts to service debt and bring the debt-to-GDP and interest-payment-to-revenue ratios down. Jamaica has made significant progress in this direction and its fiscal metrics, although still very weak, have improved since 2013. Although GDP growth is recovering, its sovereign credit profile remains constrained by structural impediments to growth and a very high government debt and debt servicing burden.

Jamaica has relatively strong institutions compared to similarly rated peers but its recent track record of debt restructurings constrains our assessment of institutional strength to 'Low'. In recent years, however, policy effectiveness has been demonstrated in credit positive fiscal consolidation and structural reforms. The authorities remain committed to fiscal reforms, while shifting focus to boosting growth through FDI-financed investment in tourism, energy, and infrastructure. This policy stance has raised investor confidence, which we expect will contribute to economic growth recovering in 2016 and 2017 to average 1.7%, up from 0.9% in 2015. Meanwhile the drop in oil prices has supported a reduction in average annual inflation to historically low levels of around 4% in 2016. Combined with fiscal consolidation, improved exchange rate competitiveness and lower oil prices have reduced Jamaica's external vulnerability, narrowing the current account deficit and attracting FDI inflows.

RATIONALE FOR THE UPGRADE TO B3 FROM Caa2

FIRST DRIVER -- Significant and sustained fiscal consolidation and strong commitment by the government to continued reforms to reduce its high debt burden

Over the past two years, the authorities have made steady progress towards achieving their fiscal adjustment goals, introducing tax and expenditure measures and maintaining a sizable primary fiscal surplus of around 7% of GDP to put public finances on a sounder footing over the medium-term. Many of these reforms were part of a four-year fiscal and structural reform program under the EFF arrangement, supported by the IMF, which ended in November 2016. The authorities reached agreement on a successor precautionary stand-by arrangement with the IMF.

A factor underpinning the upgrade is our expectation that even as the authorities shift focus towards achieving higher growth rates, they will maintain their fiscal performance and primary surplus of around 7% of GDP over the next three years. The support of the public and business community for the reform program, along with the country's broad consensus on economic policies, buttress our expectation that reforms will continue.

Fiscal reforms are likely to focus on the privatization, merger, or closure of state-owned enterprises. We expect the authorities to achieve a balanced budget in the fiscal year FY2017/18 and to increase the overall fiscal surplus over the medium term, resulting in the debt burden falling to 106% of GDP by 2020 from 122.4% at the end of FY2015/16. As the government has pre-financed upcoming debt maturities, we expect debt repayments in 2017 and 2018 to lead to a reduction of the debt-to-GDP ratio by roughly 10 percentage points. Debt service costs will also decline gradually over the next three years.

At 27% of revenues, the government's interest payment burden remains very high. That said, the government has pursued an active debt management strategy of lengthening maturities and taking advantage of low interest rates to reduce debt service costs and buy back some of its outstanding debt. This has put the interest-to-revenue ratio firmly on a downward trajectory, and we expect it to drop from nearly 10% of GDP in 2012/13 to 6.1% in 2019.

SECOND DRIVER -- Significant improvement in the current account and reduced external vulnerability

Jamaica's current account deficit narrowed significantly to 2.3% of GDP in 2015 from 8.1% in 2014 as a result of continued import compression and the drop in oil prices, of which Jamaica is a beneficiary as an oil-importer. As we expect oil prices to remain low relative to past peaks, the risk of a reversal in current account trends is expected to remain contained. In addition, public and private sector investment in LNG and renewable energy instead of oil for electricity generation is reducing Jamaica's reliance on oil-imports and hence its exposure to an increase in oil prices.

FDI inflows were close to US$ 1 billion in FY2015/16, an increase of nearly 42% from a year earlier, and we estimate they will exceed 7% of GDP in FY2016/17, supported by foreign investment in tourism and infrastructure and the successful privatization of Kingston Container Terminal (KCT). Improving current account dynamics, together with nominal exchange rate depreciation of around 15% since mid-2014, have helped to improve competitiveness and reserve accumulation with net international reserves recovering to USD 2.7 billion (17.9% of GDP). This, in turn, has reduced Jamaica's external vulnerability indicator -- Moody's measure of the ratio of foreign reserves to upcoming external payments -- to 67% in 2016 from 127% in 2014.

RATIONALE FOR THE STABLE OUTLOOK ON THE B3 RATING

The stable outlook assigned to Jamaica's B3 rating reflects a balance of risks. On the one hand, we expect the debt burden to come down materially over the next 2-3 years. On the other, Jamaica remans highly susceptible to external shocks, particularly natural disasters. We expect that the authorities will sustain the reform momentum under the successor IMF-supported program, and solidify fiscal adjustment to put government debt metrics firmly on a downward trajectory consistent with Jamaica's medium-term goal of reducing government debt to 106% of GDP by 2020. Implementation of the government's economic growth agenda also has the potential to reduce energy cost on a sustained basis and boost GDP growth beyond our current assumptions, which could accelerate the pace of debt reduction.

On the other hand, weaker-than-expected growth performance could slow down the pace of debt reduction. While external liquidity risks have tapered over the last two years, the government's financing needs expose it to a degree of liquidity risk.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upward rating pressure, although unlikely in the short-run, could result from faster than anticipated fiscal consolidation and falling government debt ratios and/or materially higher GDP growth.

Downward pressure on the rating could arise from a slowdown in the pace of structural fiscal reforms, which could lead to an increase in debt ratios and/or weaker-than-expected recovery in economic growth, a rise in external sector risks, or a natural disaster that would threaten the authorities' ability to service debt or lead to a material increase in government liquidity risk.

GDP per capita (PPP basis, US$): 8,771 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.9% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.7% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -0.3% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.8% (2015 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Low level of economic resilience

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

On 17 November 2016, a rating committee was called to discuss the rating of Jamaica, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's external vulnerability risk has been reduced.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Samar Maziad
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Atsi Sheth
MD - Sovereign Risk
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

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

No Related Data.
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
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