On December 8, 2020, S&P Global Ratings affirmed Jamaica’s B+ long-term foreign and local currency credit rating with a “negative” outlook. The rating came at a time when tourism inflows had witnessed the most drastic decline in recent history while the economy contracted 9.9% and fell as much as 18.4% in the June 2020 quarter. For further context, since February 3, 2020, S&P has downgraded 1,462 global corporate (financial and nonfinancial) and sovereign issuers compared to only 583 upgrades. Needless to say, S&P maintaining its credit rating and outlook as opposed to initiating a downgrade spoke to the prudence of Jamaica’s fiscal management and commitment to economic stability. Notably, despite the pandemic, this posture towards fiscal responsibility has continued. Consequently, on October 4, 2021, just eight months after its December 2020 release, S&P Global Ratings has revised Jamaica’s outlook from “negative” to “stable”, reflecting the agency’s position that fiscal and economic risks that have stemmed from the pandemic have receded and the government’s finances will return to a fiscal surplus in 2021.
Over the next two years, S&P indicates the potential for an upgrade if the economic recovery is stronger than expected which would boost government revenues, support sustainable fiscal surpluses and shrink Jamaica’s debt and interest burden. At its most basic level, this vote of confidence from S&P represents a clear signal to the international community that Jamaica has maneuvered the pandemic without a massive deterioration of its fiscal and external position. Why is this important? Essentially, direct access to the international capital markets represents a channel for sovereigns to access capital and any improvement in credit ratings or outlooks supports government borrowing at relatively lower costs. This inherently supports a stronger fiscal position, and if managed well, cheaper capital can be utilized towards growth-inducing investments. Historically, Jamaica’s debt burden has dampened the nation’s ability to embark on high-value, growth-inducing capital expenditures. With that said, the pandemic has been a true measure of how much Jamaica has grown and it has highlighted that the posture towards fiscal responsibility will not easily be derailed. In keeping with this overall long-term posture towards stability, Jamaica has taken a multilayered approach towards combating and mitigating the fiscal woes that stem from catastrophic events like hurricanes. This multilayered approach, as indicated by S&P, includes contingency fund, insurance, a disaster line of credit with a multilateral institution, and the recent issuance of a catastrophe bond.
Beyond 2021, S&P projects economic growth will average 3.4% between calendar years 2022 and 2024, a marked improvement over the 1.3% average growth prior to the pandemic and an outturn that implies returning to pre-pandemic output in 2022. This growth forecast suggests considerable optimism for the underlying economy. However, risks continue to remain heightened as global supply chain issues persist and have been a major driver of upward price pressures. Additionally, a relatively low vaccination rate of 10.2% (fully vaccinated) compared to global vaccination of 36% means Jamaica continues to lag well behind its international counterparts. Finally, and perhaps most importantly, like many nations globally, Jamaica is faced with the dilemma of fighting inflation pressures at the expense of robust growth or simply waiting for these inflation pressures to correct themselves. In response, the BoJ has maintained that quelling inflation expectations by increasing the policy rate is most appropriate. Importantly, many nations are facing the same issue as supply chain disruptions have been global and despite the pandemic remaining an issue, there have been approximately 72 interest rate hikes from 34 other central banks since the start of the year, indicating that this policy stance is not an outlier. Of course, this then implies that these central banks, like our own, have determined that the risk of inflation outweighs any output loss from a rate increase. Clearly, the current economic conditions have created a situation whereby the correct policy stance is far from mechanical and consequently, highly controversial.
The defining characteristic of Jamaica’s fiscal management throughout this pandemic has been one of unwavering commitment to economic stability, not forgetting the dangers of excessive debt and the trap of a high debt burden. This commitment coupled with the expected improvement in the underlying economy have been the major drivers behind the recent change in S&P’s outlook. Admittedly, risks remain pronounced, and we continue to monitor them but, at this juncture, do not expect the risks to thwart the recovery. Within that context, we believe the stable rating outlook not only signals confidence in Jamaica to international investors but should do the same for local investors. In our view, the supply chain and shipping constraints that have weighed on several companies’ performance, particularly those with strong balance sheets, present a buying opportunity as the trajectory of the economy remains upward, despite accounting for the known risks.
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