Rating Agency calls for multilateral support

Wednesday, February 08, 2012

FITCH Ratings Agency said on Monday that it expects Jamaica's current account deficit to ease this year but warned that multilateral support is needed.

Jamaica's current account deficit — the amount of foreign exchange Jamaica spends above the amount it earns — rose to an estimated 11.7 per cent of GDP in 2011, according to Fitch, which said it reflected continued soft demand for exports and a large imported fuel bill.

"With Fitch projecting the current account deficit to be near 10 per cent of GDP in 2012, continued multilateral support would be necessary to mitigate Jamaica's external accounts vulnerability to shifts in investor confidence and international oil price shocks," said the agency, while affirm Jamaica's sovereign ratings as stable.

Fitch also forecast Jamaica's central government deficit to reach 5.2 per cent of GDP in the current fiscal year, which ends March 31, 2012), down from 6.2 per cent the year before.

"Maintaining the credibility of fiscal policy and multilateral support will be key given Jamaica's sizeable twin deficits and limited buffers, which leave the economy vulnerable to swings in investor confidence and a variety of shocks ranging from a weaker global growth to natural disasters," said Erich Arispe, director in Fitch's Sovereign Group.

The new PNP administration has announced that it intends to negotiate a new agreement with the IMF, as the current Stand-by Arrangement (SBA) ends this May, reign in expenditure pressures, and move forward with policies to reform the tax system, bring public sector salaries under control and contain rising pension costs.

Jamaica's ratings are supported by improving macroeconomic stability and its relative high level of institutional strength, which has allowed the sovereign to respond to significant fiscal and balance of payments pressures over the years, according to Fitch.

"Jamaica also compares favourably with peers in terms of GDP per capita and Human Development Indicators (HDI)," it said, adding that "key credit weaknesses include one of the highest debt burdens of all sovereigns rated by Fitch, weak external and fiscal solvency indicators, continued growth underperformance, and high vulnerability to external and confidence shocks".

In 2011, the Bank of Jamaica (BOJ) has been able to maintain, and even reduce, historically low interest rates in the context of broad exchange rate stability and reduced inflationary pressures. Inflation averaged 7.5 per cent in 2011, while the exchange rate was stable in spite of the absence of reviews under the IMF SBA since December 2010.

After three years of recession, Fitch expects the Jamaican economy to grow by 1.2 per cent and one per cent in 2011 and 2012, respectively. Higher growth is currently constrained by structural weaknesses such as crime and the high cost of energy.

"Reforms designed to improve the structure of public finances by either increasing government revenues or reducing expenditure rigidities, as well higher growth are key to achieve sustainable fiscal consolidation and positive debt dynamics," said Arispe.