Fitch Ratings-New York-18 November 2008: Fitch Ratings has downgraded Jamaica's ratings as follows:
--Long-term foreign Issuer Default Rating (IDR) to 'B' from 'B+';
--Local currency IDR to 'B' from 'B+';
--Country ceiling to 'B+' from 'BB-';
--Senior unsecured debt 'B/RR4' from 'B+/RR4'.
Fitch has also assigned a Short-term Foreign Currency IDR of 'B'. The Rating Outlook is Negative.
The downgrade reflects Fitch's view that shocks from global financial turbulence and the expected US recession have heightened downside credit risks given Jamaica's modest and deteriorating international liquidity, large current account deficit and comparatively high public debt burden.
'The recent depreciation pressures on the Jamaican Dollar as well as sales of international reserves signal rising challenges facing the island due to the worsening international environment,' said Shelly Shetty, Senior Director in Fitch's Sovereign Group.
While the government continues to demonstrate a strong willingness to service its debt in a timely manner, its capacity to respond to current external shocks has weakened. In October 2008, the central bank lost nearly 20% in international reserves. Moreover, the Bank of Jamaica (BOJ) established a USD300 million facility to assist the financial system in meeting external margin calls on certain Government of Jamaica (GOJ) bonds.
On the back of declining reserves, Fitch's international liquidity ratio is estimated to fall to 111% in 2009 from 141% in 2007, against the 'B' median of 184%. Furthermore, at 10.6 weeks, international reserves coverage of goods and services imports is currently lower than in 2002/03 when the island last faced financial crisis. In addition, the GOJ must finance a EUR200 million Eurobond maturity in February 2009, although raising these funds in international capital markets currently appears difficult. Nevertheless, Fitch notes that the government's pro-active engagement with multilaterals could yield disbursements which could supplant the sovereign's external market financing needs.
Jamaica's macroeconomic environment is challenged by stalled economic growth, double-digit inflation and a large current account deficit. 'Although falling commodity prices are likely to provide some relief on external accounts and inflation in the coming months, weakening global demand and lower capital inflows increase the risk of a sharper macroeconomic adjustment in 2009,' added Shetty. The island is heavily dependent on the U.S. for tourism and remittances, both of which could be adversely affected by a U.S. recession. Furthermore, the global slowdown could temper growth in foreign direct investment, which has been essential to financing double-digit current account deficits. Fitch projects that the current account deficit plus net FDI flows could reach a 'B' category high of over 8% of gross domestic product (GDP) in 2009, reflecting Jamaica's vulnerability to a potential reduction in private capital inflows.
Jamaica's fiscal indicators, such as government debt of over 100% of GDP and nearly 400% of revenues, compare quite unfavorably with the 'B' median. The GOJ has consistently missed its fiscal targets in recent years, and chose a rather unambitious goal of a 4.5% of GDP deficit for the current fiscal year. Rising domestic interest rates and a weakening exchange rate could add to the government's debt servicing costs, especially as a high proportion of government debt is either linked to interest rates or the exchange rate. In addition, slowing economic growth, falling alumina prices, hurricane-related reconstruction costs and increasing wage demands by certain public sector employees could further challenge fiscal accounts.
Jamaica's 'B' ratings are supported by its political stability and a debt service record that is better than most rating peers. The ratings incorporate the authorities' commitment and the country's institutional strengths which have allowed it to service its crushing debt burden even during periods of extreme financial stress.
Absent an appropriate policy response, rising macroeconomic pressures could lead to economic and financial crisis and result in a downgrade of Jamaica's ratings. Additionally, a significant erosion of the country's external liquidity position would be negative for sovereign creditworthiness. On the other hand, easing of external financing constraints and resilience of the policy framework in the face of the deteriorating external environment could help stabilize the ratings.