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From stable to positive – Moody’s improves economic outlook for Jamaica

Office of the Prime Minister  – MOODY’S Investors Services has maintained its B3 rating for Jamaica, but has shifted its outlook on the country from stable to positive, the ratings agency announced last Friday.

The international ratings agency said the key drivers for the improvement were ongoing fiscal consolidation which, if sustained, supports continued reduction in Government debt burden, as well as an improving institutional capacity and policy effectiveness.

“The affirmation of the B3 rating captures the authorities’ commitment to continued fiscal consolidation, implementation of structural reforms, progress in lowering Government debt ratios, and reduced external vulnerabilities,” Moody’s said, noting “these credit strengths are set against the very high Government debt ratios, large interest burden, and low GDP growth rates”.

Giving its rationale on the improved outlook, Moody’s said it believes the “Government is likely to run sizeable primary surpluses of some 7.0 per cent of GDP and to report a broadly balanced fiscal accounts”.

It added that it sees Government debt falling to around 100 per cent of GDP by FY2018/19, down from 105 per cent in FY2017/18, and anticipates further declines in subsequent years.

“The Jamaican authorities have shown a strong commitment to fiscal consolidation,” Moody’s stated, noting that spending on wages and interest declined to 59 per cent of Government revenue in FY2017/18, down from 80 per cent in FY2012/13.

Moody’s noted that the Jamaican Government had broadened the tax base, increasing tax revenue collection to 26 per cent of GDP in FY2017/18 up from 24 per cent in FY2012/13.

“Tax reforms included a shift from direct to indirect taxation. Furthermore, the Government was able to more than offset revenue losses derived from a higher exemption threshold for households by increasing a range of indirect taxes.”

Moody’s also noted that Jamaica had built up a track record of responsible fiscal policy management.

“Adherence to the IMF programmes spans two different administrations and two different political parties with broad consensus among the business community on the need to preserve conservative economic and fiscal policies,” it said.

The agency said it does not expect the Government to enter into a new International Monetary Fund (IMF) programme when the current stand-by arrangement ends in 2019. Still, Moody’s expects the reforms to the fiscal policy framework to prevent a reversal of fiscal consolidation gains after the IMF programme expires.

“The cumulative impact of these and other reforms have improved macroeconomic conditions, leading to low and stable inflation, a moderate current account deficit, higher FDI inflows, and increased levels of international reserves. Combined, these elements increase the overall resilience of the economy,” Moody’s said.

Prime Minister Andrew Holness

Though news of the positive outlook is good, a B3 rating is not, as it reflects very high Government debt ratios, low GDP growth, and vulnerability to external shocks.

The ratings agency said that despite significant progress in fiscal consolidation and debt reduction, the Government’s debt burden is among the highest in its (Moody’s’) rated sovereign universe and a high interest burden weighs on debt affordability.

“A large share of foreign-currency denominated debt exposes the sovereign balance sheet to an exchange rate shock and the economy remains vulnerable to external shocks due to its geographic location and high reliance on the tourism industry,” Moody’s said.

It also noted that real GDP growth in Jamaica has been stagnant over the past decade, not reporting material improvement despite structural reforms.

“If growth remains lacklustre, maintaining primary surpluses in the order of 7.0 per cent of GDP will prove increasingly difficult,” Moody’s said.

But the agency expects growth to pick up in the coming years, with GDP increasing at an average annual rate of 2.0 per cent in 2018-19, as Jamaica benefits from the expansion of the tourism sector and a pickup in construction activity.

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