- Political consensus remains in favour of structural adjustments through the country's IMF programme.
- The government achieved the target 7.5% of GDP primary surplus in FY13, up from 5.4% in FY12.
- Jamaica still faces a large fiscal challenge, as the 7.5% primary surplus target needs to be sustained over the next three fiscal years.
Fitch Ratings (London): Jamaica’s achievement in hitting fiscal targets is considerable given the background of persistent economic weakness and revenue underperformance, Fitch Ratings says. Political consensus remains in favour of structural adjustments through the country’s IMF programme, but sustained fiscal consolidation will be challenging if there is growth underperformance or reform fatigue.
The achievement of quantitative targets in the first year of the IMF’s four-year Extended Fund Facility is significant because most of the fiscal adjustment under the programme had to be carried out in FY13 (ended March 2014). Not only did the government achieve the target 7.5% of GDP primary surplus, up from 5.4% in FY12, but it this week it announced that it had recorded a fiscal surplus that, although small (about 0.1% of GDP), was Jamaica’s first in nearly 20 years. The government was able to restrain expenditure through under-execution of close to 5% of budgeted spending, outweighing revenue underperformance.
Jamaica still faces a large fiscal challenge, as the 7.5% primary surplus target needs to be sustained over the next three fiscal years. The government’s FY14 budget proposal in parliament is consistent with this, and supports our view that there is political will to address the public debt overhang. It includes revenue measures worth JMD6.7bn (USD61m), 0.5% of GDP. Although Finance Minister Peter Phillips on Wednesday withdrew a controversial proposal for a levy on bank withdrawals, he announced offsetting measures in the form of a withholding tax on insurance premiums paid to non-residents and a modification of the general consumption tax on imported services.
The economy is improving, and we forecast growth of 1.1% in 2014, through agriculture, tourism, and infrastructure. The current account deficit has shrunk to an estimated 9.6% of GDP in 2013 from 12.9% in 2012, and net international reserves recovered to USD1.3bn in March 2014, the highest level since August 2012. But economic weakness has resulted in persistent revenue underperformance. Sustaining the present fiscal effort will therefore depend on the authorities’ ability to further rein in expenditure. This may prove more difficult if the emphasis shifts from capital expenditure, which fell sharply in FY13, to current expenditure.
The government has a comfortable parliamentary majority and elections are not scheduled until 2016, so election-related fiscal slippage is unlikely for now. But the scale of the adjustment and possibility of austerity fatigue could present risks to the medium-term sustainability of the IMF programme.
We upgraded Jamaica to ‘B-‘ from ‘CCC’ in February, to reflect reduced refinancing risks due to fiscal consolidation and the lengthening of domestic debt repayments through the National Debt Exchange, and compliance with the IMF programme, easing external financing constraints, and broad macroeconomic and financial stability.