Tweet
Widening current account deficit leaves Jamaica vulnerable - Fitch
published: Wednesday | October 17, 2007
The Ministry of Finance, domain of the keeper of the treasury, National Heroes Circle, Kingston. Fitch Ratings agency says the new Government is expected to redouble efforts to tighten spending. - File
But ratings agency maintains stable outlook on Jamaica.
Fitch Ratings has affirmed its rating and maintained a stable outlook on Jamaica, but warned on Friday that the heavy imbalance in trade, evidenced by its expanding current account deficit, leaves the country vulnerable to external shocks.
The current account deficit was estimated at US$609.1 million over the period January to May, according to central bank figures last released in September, US$248 million higher than the deficit for the comparable period in 2006.
Essentially, Jamaica continues to pay out more foreign currency than it earns in the trading of goods and services, leaving a supply gap.
The excess demand over supply means that buyers are prepared to pay more to acquire hard currency, leading to a depreciation of the JMD.
Positives for Jamaica are its political stability and debt service record, despite what Fitch referred to as the country's "crushing debt burden".
The national debt is now running at $978 billion, representing 130 per cent of GDP.
A watch is now on to see what plan the new finance team will unveil alongside the supplemental budget expected to be presented in a matter of weeks.
Belt-tightening
Fitch also noted that a surplus on the primary balance was no longer enough to maintain confidence, cautioning that "the persistent failure to achieve fiscal targets in recent years could eventually undermine hard-won fiscal credibility," according to Shelly Shetty, senior director in Fitch's Sovereign Group.
The agency is also watching the Golding administration to see how the Jamaica Labour Party's election promises will impact spending.
But it signalled that it belt-tightening was expected, saying "it will be important for the PM Golding-led government to redouble its efforts to tighten fiscal policy and move toward a balanced fiscal budget."
Fitch already anticipates that with government's spending commitments - the administration has promised, among other things, free high school tuition and termination of hospital fees - plus hurricane recovery costs, Jamaica will "quite likely miss its 2007/08 fiscal targets again."
It is also concerned about developments on the monetary side of the economy.
"Already, the Jamaican dollar has faced downward pressures in the last two months, while the central bank has lost over US$300 million in foreign reserves since the beginning of this year," Fitch said.
"Although the central bank has tightened its monetary policy in response, it is too early to judge to what extent this will permanently stabilise the foreign exchange market, especially, given uncertainty regarding the length and depth of the turmoil in the international credit markets."
Higher inflation
The ratings agency warns that continued decline in the currency could lead to higher inflation, bigger debt servicing costs, and amid concerns that the depleting reserves could limit future interventions by the central bank, signalled that strong measures were expected from both the Bank of Jamaica and the Finance Ministry.
Otherwise: "Jamaica's credit-worthiness could come under pressure if the Government fails to respond adequately by tightening its monetary and fiscal policies should further depreciation pressures continue," it said.
A slip in the ratings would inevitably mean higher cost of borrowing for the country in foreign markets, and consequently bigger debt serving costs on the external debt stock.
lavern.clarke@gleanerjm.com Fitch ratings on Jamaica
Foreign and local currency
Issuer Default Ratings (IDRs) B+
Country ceiling BB-;
Bond obligations B+/RR4
published: Wednesday | October 17, 2007
The Ministry of Finance, domain of the keeper of the treasury, National Heroes Circle, Kingston. Fitch Ratings agency says the new Government is expected to redouble efforts to tighten spending. - File
But ratings agency maintains stable outlook on Jamaica.
Fitch Ratings has affirmed its rating and maintained a stable outlook on Jamaica, but warned on Friday that the heavy imbalance in trade, evidenced by its expanding current account deficit, leaves the country vulnerable to external shocks.
The current account deficit was estimated at US$609.1 million over the period January to May, according to central bank figures last released in September, US$248 million higher than the deficit for the comparable period in 2006.
Essentially, Jamaica continues to pay out more foreign currency than it earns in the trading of goods and services, leaving a supply gap.
The excess demand over supply means that buyers are prepared to pay more to acquire hard currency, leading to a depreciation of the JMD.
Positives for Jamaica are its political stability and debt service record, despite what Fitch referred to as the country's "crushing debt burden".
The national debt is now running at $978 billion, representing 130 per cent of GDP.
A watch is now on to see what plan the new finance team will unveil alongside the supplemental budget expected to be presented in a matter of weeks.
Belt-tightening
Fitch also noted that a surplus on the primary balance was no longer enough to maintain confidence, cautioning that "the persistent failure to achieve fiscal targets in recent years could eventually undermine hard-won fiscal credibility," according to Shelly Shetty, senior director in Fitch's Sovereign Group.
The agency is also watching the Golding administration to see how the Jamaica Labour Party's election promises will impact spending.
But it signalled that it belt-tightening was expected, saying "it will be important for the PM Golding-led government to redouble its efforts to tighten fiscal policy and move toward a balanced fiscal budget."
Fitch already anticipates that with government's spending commitments - the administration has promised, among other things, free high school tuition and termination of hospital fees - plus hurricane recovery costs, Jamaica will "quite likely miss its 2007/08 fiscal targets again."
It is also concerned about developments on the monetary side of the economy.
"Already, the Jamaican dollar has faced downward pressures in the last two months, while the central bank has lost over US$300 million in foreign reserves since the beginning of this year," Fitch said.
"Although the central bank has tightened its monetary policy in response, it is too early to judge to what extent this will permanently stabilise the foreign exchange market, especially, given uncertainty regarding the length and depth of the turmoil in the international credit markets."
Higher inflation
The ratings agency warns that continued decline in the currency could lead to higher inflation, bigger debt servicing costs, and amid concerns that the depleting reserves could limit future interventions by the central bank, signalled that strong measures were expected from both the Bank of Jamaica and the Finance Ministry.
Otherwise: "Jamaica's credit-worthiness could come under pressure if the Government fails to respond adequately by tightening its monetary and fiscal policies should further depreciation pressures continue," it said.
A slip in the ratings would inevitably mean higher cost of borrowing for the country in foreign markets, and consequently bigger debt serving costs on the external debt stock.
lavern.clarke@gleanerjm.com Fitch ratings on Jamaica
Foreign and local currency
Issuer Default Ratings (IDRs) B+
Country ceiling BB-;
Bond obligations B+/RR4
Comment