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Standard and Poor's downgrade final warning of Jamaica's need to make tough decisions
Keith Collister
Friday, March 20, 2009
Late Wednesday afternoon, on the 18th of March, international rating agency Standard & Poor's lowered both Jamaica's long-term foreign and local currency sovereign credit ratings on Jamaica by one notch to 'B-' from 'B', and lowered our short-term ratings a notch to 'C' from 'B'.
According to Standard and Poors, an obligation rated 'B' "is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation."
Standard and Poors (S&P) also lowered Jamaica's country transfer and convertibility assessment to 'B+' from 'BB-', while leaving Jamaica's recovery rating of '4' unchanged. According to S&P's website, a transfer and convertibility rating is the rating associated with "the probability of the sovereign restricting non-sovereign access to foreign exchange needed for debt service" and, as is the case with Jamaica, is typically higher than the sovereign rating because Standard and Poors believes this risk is normally lower than that of default. The recovery rating "reflects its opinion on the extent to which a sovereign government will be able to repay non-official foreign currency debtholders post-default."
The downgrade reflects our deteriorating economic situation and "its increasing spillover into Jamaica's fiscal and external accounts, the two weakest areas of the sovereign's credit profile. Jamaica's real GDP declined by 0.4% in 2008, reflecting the impact from the external environment on major sectors, such as tourism, bauxite, construction, and manufacturing, as well as continuous difficulties faced by the agricultural sector."
The downgrade is also driven by their expectation that the slowdown will intensify in 2009, with an expected economic contraction of 2.5%.
Fiscal concerns driving lower rating
Standard and Poors notes that this economic deterioration has weakened fiscal performance, with revenues and grants falling eight per cent below the budget in the first 10 months of fiscal 2008, only partially offset by a 40 per cent reduction in capital spending during the same period.
They estimate the general government deficit at 6.6% of GDP for this fiscal year ending March 31st, up from 5.4 per cent in 2007.
Their methodology includes both the Central Bank's quasi-fiscal losses and any social security surpluses, but excludes certain capital revenues, such as from privatisation.
"This fiscal deterioration is especially worrisome in light of the high government debt level, which they estimate at 117 per cent of GDP in fiscal 2008 (113 per cent on a net basis)", one of the highest levels among the sovereigns they rate.
S&P notes with concern our higher interest costs. "The heavy government debt service is rising, after having improved in recent years. Treasury bill yields almost doubled in 2008, and little near-term improvement is expected because exchange rate pressures likely will preclude the easing of monetary policy. Exchange rate depreciation (22% depreciation against the dollar in the past six months) has raised external debt service. Overall, interest cost was 46% of revenues in 2008, and we expect it to spike to 55% in 2009."
They also expect a further fall in the dollar, despite what they believe will be a reduced current account deficit. "External pressures stemming from high current account deficits (19 per cent of GDP in 2008 and 12 per cent of GDP expected for 2009), sharply lower foreign-direct investments, and high (albeit lower than in 2008) amortisation needs will be alleviated only partially by multilateral disbursements in 2009. Despite the Bank of Jamaica's proactive efforts to stabilise the demand for foreign exchange, the difficult external situation in 2009 likely will lead to further Jamaican dollar depreciation, with its negative impact on growth, debt level, and inflation. Net international reserves have been declining since August 2008, and they totaled US$1.65 billion as of Feb. 28, 2009, down from US$1.77 billion at year-end 2008. Overall, the external financing gap (defined as current account payments plus short-term debt and medium- and long-term debt amortisation) is projected at 125 per cent of current account receipts plus usable reserves in 2009."
Outlook is negative
The retention of a negative outlook, which Jamaica has had since October 21st last year, is a clear warning to Jamaica, and "reflects the likelihood of a downgrade should the policy actions fail to contain the ongoing fiscal and external deterioration."
S&P notes that the global economic environment complicates the Governments policy flexibility, and that "the authorities are struggling with high interest rates, exchange-rate pressures, and fiscal deterioration in the midst of the economic recession".
They add "In these challenging times, the policy options are few and the risk that economic fundamentals will weaken even further is great."
Finally, they clearly state the next step : "As such, if the government's options for fiscal stabilisation narrow or if the external situation worsens, impairing domestic confidence and the value of the currency, we likely will lower the rating to the 'CCC' category."
On their website, S&P states that an obligation rated 'CCC' "is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation."
Finally, they provide a glimmer of hope that "Conversely, if the government sufficiently tightens its fiscal belt, secures timely disbursements of official financing, and is able to avoid further increases in the interest rates, we might revise the outlook to stable".
In a brief comment on the rating action, Oppenheimer's Dr Carl Ross noted that the rating downgrade was not completely unexpected as the outlook was already negative.
However, in his view, the rating is still a blow for three main reasons.
Firstly, it is coming on the heels of Moody's recent downgrade of Jamaica from B1 to B2.
Secondly, S&P kept the negative outlook in place, leaving Jamaica perilously close to the CCC category.
Finally, he believes the timing is unfortunate as the rating action is coming just as the FY2009/10 budget is being framed, making the process even more difficult. Moreover, the fact that S&P didn't wait for the budget itself implies that they think that "almost whatever Jamaica does for this budget, it will only deserve a B- rating".
In Dr Ross's view, the fiscal results for the year ending March 31 are likely to be disappointing, with a deficit above six per cent of GDP. The government will therefore need to rely heavily on multilateral disbursements to fund the capital spending programme this year.
Commenting on the trading of Jamaica's international debt, Dr Ross noted that "it has been light recently" adding that while Oppenheimer had moved U.S. "$5 million of the Jaman 2022s this week, as well as other smaller sizes across the curve, it has been tough to move paper." In his view, the downgrade had made it harder to move large amounts of Jamaica's debt without lowering the price.
http://www.jamaicaobserver.com/magaz..._DECISIONS.asp
Keith Collister
Friday, March 20, 2009
Late Wednesday afternoon, on the 18th of March, international rating agency Standard & Poor's lowered both Jamaica's long-term foreign and local currency sovereign credit ratings on Jamaica by one notch to 'B-' from 'B', and lowered our short-term ratings a notch to 'C' from 'B'.
According to Standard and Poors, an obligation rated 'B' "is more vulnerable to non-payment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation."
Standard and Poors (S&P) also lowered Jamaica's country transfer and convertibility assessment to 'B+' from 'BB-', while leaving Jamaica's recovery rating of '4' unchanged. According to S&P's website, a transfer and convertibility rating is the rating associated with "the probability of the sovereign restricting non-sovereign access to foreign exchange needed for debt service" and, as is the case with Jamaica, is typically higher than the sovereign rating because Standard and Poors believes this risk is normally lower than that of default. The recovery rating "reflects its opinion on the extent to which a sovereign government will be able to repay non-official foreign currency debtholders post-default."
The downgrade reflects our deteriorating economic situation and "its increasing spillover into Jamaica's fiscal and external accounts, the two weakest areas of the sovereign's credit profile. Jamaica's real GDP declined by 0.4% in 2008, reflecting the impact from the external environment on major sectors, such as tourism, bauxite, construction, and manufacturing, as well as continuous difficulties faced by the agricultural sector."
The downgrade is also driven by their expectation that the slowdown will intensify in 2009, with an expected economic contraction of 2.5%.
Fiscal concerns driving lower rating
Standard and Poors notes that this economic deterioration has weakened fiscal performance, with revenues and grants falling eight per cent below the budget in the first 10 months of fiscal 2008, only partially offset by a 40 per cent reduction in capital spending during the same period.
They estimate the general government deficit at 6.6% of GDP for this fiscal year ending March 31st, up from 5.4 per cent in 2007.
Their methodology includes both the Central Bank's quasi-fiscal losses and any social security surpluses, but excludes certain capital revenues, such as from privatisation.
"This fiscal deterioration is especially worrisome in light of the high government debt level, which they estimate at 117 per cent of GDP in fiscal 2008 (113 per cent on a net basis)", one of the highest levels among the sovereigns they rate.
S&P notes with concern our higher interest costs. "The heavy government debt service is rising, after having improved in recent years. Treasury bill yields almost doubled in 2008, and little near-term improvement is expected because exchange rate pressures likely will preclude the easing of monetary policy. Exchange rate depreciation (22% depreciation against the dollar in the past six months) has raised external debt service. Overall, interest cost was 46% of revenues in 2008, and we expect it to spike to 55% in 2009."
They also expect a further fall in the dollar, despite what they believe will be a reduced current account deficit. "External pressures stemming from high current account deficits (19 per cent of GDP in 2008 and 12 per cent of GDP expected for 2009), sharply lower foreign-direct investments, and high (albeit lower than in 2008) amortisation needs will be alleviated only partially by multilateral disbursements in 2009. Despite the Bank of Jamaica's proactive efforts to stabilise the demand for foreign exchange, the difficult external situation in 2009 likely will lead to further Jamaican dollar depreciation, with its negative impact on growth, debt level, and inflation. Net international reserves have been declining since August 2008, and they totaled US$1.65 billion as of Feb. 28, 2009, down from US$1.77 billion at year-end 2008. Overall, the external financing gap (defined as current account payments plus short-term debt and medium- and long-term debt amortisation) is projected at 125 per cent of current account receipts plus usable reserves in 2009."
Outlook is negative
The retention of a negative outlook, which Jamaica has had since October 21st last year, is a clear warning to Jamaica, and "reflects the likelihood of a downgrade should the policy actions fail to contain the ongoing fiscal and external deterioration."
S&P notes that the global economic environment complicates the Governments policy flexibility, and that "the authorities are struggling with high interest rates, exchange-rate pressures, and fiscal deterioration in the midst of the economic recession".
They add "In these challenging times, the policy options are few and the risk that economic fundamentals will weaken even further is great."
Finally, they clearly state the next step : "As such, if the government's options for fiscal stabilisation narrow or if the external situation worsens, impairing domestic confidence and the value of the currency, we likely will lower the rating to the 'CCC' category."
On their website, S&P states that an obligation rated 'CCC' "is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation."
Finally, they provide a glimmer of hope that "Conversely, if the government sufficiently tightens its fiscal belt, secures timely disbursements of official financing, and is able to avoid further increases in the interest rates, we might revise the outlook to stable".
In a brief comment on the rating action, Oppenheimer's Dr Carl Ross noted that the rating downgrade was not completely unexpected as the outlook was already negative.
However, in his view, the rating is still a blow for three main reasons.
Firstly, it is coming on the heels of Moody's recent downgrade of Jamaica from B1 to B2.
Secondly, S&P kept the negative outlook in place, leaving Jamaica perilously close to the CCC category.
Finally, he believes the timing is unfortunate as the rating action is coming just as the FY2009/10 budget is being framed, making the process even more difficult. Moreover, the fact that S&P didn't wait for the budget itself implies that they think that "almost whatever Jamaica does for this budget, it will only deserve a B- rating".
In Dr Ross's view, the fiscal results for the year ending March 31 are likely to be disappointing, with a deficit above six per cent of GDP. The government will therefore need to rely heavily on multilateral disbursements to fund the capital spending programme this year.
Commenting on the trading of Jamaica's international debt, Dr Ross noted that "it has been light recently" adding that while Oppenheimer had moved U.S. "$5 million of the Jaman 2022s this week, as well as other smaller sizes across the curve, it has been tough to move paper." In his view, the downgrade had made it harder to move large amounts of Jamaica's debt without lowering the price.
http://www.jamaicaobserver.com/magaz..._DECISIONS.asp