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
