TEXT - Fitch revises Jamaica's ratings outlook to negative
Jan 18 - Fitch Ratings has revised the Rating Outlook on Jamaica's sovereign ratings to Negative from Stable. Fitch has also affirmed the ratings as follows: --Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'B-'; --Short-term foreign currency rating at 'B'; --Country Ceiling at 'B'. RATING RATIONALE Jamaica's ratings balance the sovereign's structural strengths, such as relatively high income per capita and social indicators, policy consensus and relatively strong institutional capacity against continued growth underperformance, high vulnerability to external and confidence shocks, weak public finances and fiscal solvency indicators. Jamaica's ratings incorporate the sovereign's vulnerability to external and cyclical downturns as well as financing risks. NEGATIVE RATING OUTLOOK The Outlook revision to Negative reflects Jamaica's rising financing constraints in the context of elevated fiscal and external imbalances. The sustained erosion of the country's international liquidity position has sharply reduced the authorities' maneuver capacity to manage external and fiscal pressures, thereby increasing the urgency of reaching a new agreement with the International Monetary Fund (IMF) in the near term. Growth underperformance poses serious challenges to sustained fiscal consolidation and debt sustainability. Large external vulnerabilities reflected in weak external solvency ratios and large current account deficits have been compounded by sustained decline in international reserves through most of 2012. International reserves fell by USD832 million to USD1982 million driven by deteriorating domestic confidence, an estimated current account deficit of 11.6% of GDP and limited financing inflows. The Jamaican dollar (JMD) has come under pressure in 2012, as domestic confidence slipped due to the delay in reaching a new agreement with the IMF. So far, the authorities have managed the increased currency pressures by primarily intervening in the FX market. However, the present limited international reserves firepower could lead to rapid adjustment in the monetary policy stance in the event of significant loss of confidence. Domestic financing conditions have tightened in recent months due to increased market uncertainty. This is a source of concern given the sovereign financing needs (at 15.8% of GDP) will likely continue to remain large and increase to 17.7% in FY13 driven by increasing domestic amortizations and the start of repayments to the IMF. While the domestic market has continued to provide financing to the government, it has done so at higher cost and in shorter terms. FX financing for the government remains limited, as multilateral disbursements and access to international disbursements is presently constrained by the absence of an IMF agreement in place. The economy contracted by an estimated 0.5% in 2012. Weighed down by structural constraints, growth is likely to remain lackluster over the next two years, which would in turn continue to test the government's ability to achieve a sustainable fiscal consolidation. Challenges have already increased for the government to meet its primary surplus target of 6% of GDP in FY12 due to continued revenue underperformance. Government debt remains among the highest of all sovereigns rated by Fitch at 130% of GDP. While an eventual IMF program could stabilize confidence and thus provide relief to JMD and balance of payments pressures, Fitch considers that developing a record of fiscal predictability and moving ahead with structural reforms to strengthen public finances will be key to reduce credit vulnerabilities. RATING SENSITIVITIES The main factors that could lead to a negative rating action are: --Continued weakening in external liquidity combined with currency pressures leading to increased macroeconomic instability; --Increasing financing constraints and fiscal imbalances leading to unsustainable debt dynamics could increase the risk of some form of debt restructuring. Future developments that may individually or collectively lead to a stabilization of the Outlook include: --Stabilization of international reserves and increased confidence that risks to macroeconomic instability have reduced materially; --Improved growth performance, fiscal consolidation and easing of financing constraints. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: --Fitch assumes that Jamaica will finalize an agreement with the IMF in the near term. Failure or an extended delay in reaching such an agreement would be negative for creditworthiness. --Fitch assumes that Jamaica's domestic market will continue to provide financing to the government and roll-over maturing debt, albeit at higher cost and shorter maturity. --Fitch base case scenario assumes no deepening of the financial crisis in developed economies, most notably the U.S. and no adverse weather phenomenon that would severely impact Jamaica's growth and/or fiscal accounts.