Jamaica Suffers Negative Vibration

S&P has chopped Jamaica to B minus (negative) from B amid concerns about rising debt service costs. “The downgrade reflects the deteriorating economic situation and its increasing spillover into Jamaica’s fiscal and external accounts, the two weakest areas of the sovereign’s credit profile,” says S&P credit analyst Olga Kalinina. The general government deficit is estimated at 6.6% of GDP in fiscal 2008, while the debt level is estimated at 117% of GDP (113% on a net basis), one of the highest among rated sovereigns, says S&P. The heavy government debt service is rising, after having improved in recent years, reflecting the doubling of the government’s interest rates in 2008 and 22% depreciation of the Jamaican dollar in the past 6 months. S&P expects interest costs to spike to 55% in 2009, from 46% in 2008. “The negative outlook reflects the likelihood of a downgrade should the policy actions fail to contain the fiscal and external deterioration. The global economic environment complicates policy flexibility, and the authorities are struggling with high interest rates, exchange-rate pressures, and fiscal deterioration in the midst of the economic recession,” says S&P. If the government sufficiently tightens its fiscal belt, secures timely disbursements of official financing, and is able to avoid further rates increases, it may revise the outlook to stable. Jamaica’s real GDP declined by 0.4% in 2008, S&P adds. The slowdown affected major foreign exchange earning sectors, such as tourism and mining, with a significant decline in these sectors expected in 2009. S&P expects the economy to contract by 2.5% in real terms in 2009. Moody’s earlier this month cut Jamaica to B2 (stable) from B1.