S&P Raises the Short term Ratings of Jamaica

Standards & Poor’s ratings agency has raised its short term ratings of Jamaica to B from C but has affirmed the B- long term foreign currency and local currency rating.

The change in the short-term rating results from the revision of Standard & Poor’s criteria on the linkage between long-term and short-term ratings for sovereigns. Using the revised criteria, the short-term rating on a sovereign is derived uniquely from the long-term rating on the sovereign by applying a linkage that is consistent with that applied to corporate entities with “strong or adequate” liquidity. As a result, the change in the short-term ratings on Jamaica does not reflect a change in Jamaica’s short-term credit prospects.

Of note, the outlook on the country’s ratings remains negative. The negative outlook reflects the likelihood of a downgrade if the government fails to increase the primary surplus and meet other requirements that are necessary to once again receive funding from the IMF and other multilateral lending institutions. That said, if the government is able to improve its fiscal stance through a credible medium-term economic plan that will bring its IMF agreement on track while reducing external pressures, the credit worthiness and ratings could improve.

For the first two months of the fiscal year, the country has been so far on track to meet its fiscal year end targets. The primary surplus was $13.14Bn relative to a budget of $12.11Bn. This was achieved given slightly better than expected revenue receipts and lower than budgeted expenditure. The revenue receipts of roughly $76.59Bn were $522.1Mn more than anticipated due to higher receipts from all tax-revenue categories. In addition, the government spent $85.40Bn ($63.45Bn excluding expenditure on interest payments) which was $830.4Mn less than expected.

If one is to go by the targets set for the Net International Reserves (NIR) in the previous agreement’s macroeconomic framework, meeting the US$1,450Mn (16.7 weeks in imports) is a concern. Current, NIR levels are at US$1,483Mn (15.5 weeks of imports). This represents a US$56.6Mn decline relative to the previous month and just US$33Mn above target for the 2012/13 fiscal year outlined in the old agreement. As a result of the depletion in the NIR levels, we expect that the Bank of Jamaica will be restricted in using funds from the NIR to intervene in foreign exchange market activity. Instead, the Central Bank is likely to rely on moral suasion to address supply imbalances.