Country risk: Jamaica’s surge continues

Jamaica’s risk score has continued to rise in Euromoney’s crowd-sourcing survey this year, extending a five-year trend that has pushed the country three places higher in the global risk rankings, to 107th out of 186 countries.

This is prior to the release of the Q2 survey results scheduled for mid-July, which may see further change.

That’s a big difference on Euromoney’s risk scale, nudging the country from the lowest category, tier five, containing the highest-risk defaulters, to tier four, lining up with a B- to BB+ credit rating.

Moody’s B3 (B- equivalent) rating is put on a positive outlook. So is S&P’s B rating – and based on the views of Euromoney’s contributing experts it may be only a matter of time before they fall in line with the higher B+ rating awarded by Fitch in January.

Of course, Jamaica has a long way to go to provide a wholly convincing argument to investors. This is reflected by the fact it is a tier-four borrower, similar in risk terms to Angola, Ecuador, Kenya, Papua New Guinea and Tanzania, all similarly low-lying sovereign issuers on Euromoney’s global scale.

Crime for one thing is a particularly serious challenge for authorities, draining resources and acting as a major disincentive to tourists and entrepreneurs.

There have been corruption scandals, too, and governance issues at the state-owned Petrojam refinery, heightening uncertainty over its future due to Venezuela owning a 49% shareholding that Jamaican authorities are planning to take over after PDVSA, the Venezuelan state oil company, reneged on plans to upgrade the facility.

Adding in the other tourism-related vulnerabilities linked to hurricanes (a not inconsequential risk in the region as previous years have shown), plus global trade risks and exchange rate volatility – another key survey factor – affecting longer-term debt sustainability, the country is evidently still a high-risk option, with low scores for numerous economic and structural risk indicators.

Yet Jamaica is the biggest improver in the Caribbean region over the past five years (see chart), providing a major reason why ECR singled out the country as one to watch way back in December 2017, and notably ahead of the credit rating upgrades which followed in 2018.

Multilateral creditor support has been crucial for maintaining the upward trend in Euromoney’s survey.

The IMF and Jamaican authorities signed a three-year precautionary stand-by arrangement in November 2016, bolstering investor confidence that, of course, encourages other creditors and donors to engage.

In June, following its latest visit, the IMF issued a relatively upbeat report noting the fact that the primary budget surplus has remained in excess of 7% of GDP for a sixth consecutive year.

Consequently, public debt has declined to 95% of GDP as of the end of March, and it will likely slide some more before the end of the year, following a longer-term path towards sustainability.

Plus investors will take heart that there is no imminent electoral uncertainty – with polls not due until 2021 – as well as from the fact this government is demonstrating it takes the IMF’s advice seriously.

Monetary policymakers, meanwhile, are playing a supportive role providing liquidity-enhancing measures with lower borrowing rates and by cutting commercial banks’ cash reserve requirements, given moderate inflation, which is just below the central bank’s 4% to 6% target range, anchoring expectations.

Optimistic

Many of Euromoney’s survey contributors in the region are optimistic about the country’s prospects, not least in view of a fairly respectable ranking of 75th out of 190 countries for the ease of doing business, according to the World Bank.

“Jamaica continues to put policies in place to enhance the ease of doing business,” says Winston Moore, a professor at the University of the West Indies.

Notable improvements have been made making it easier to launch a new business enterprise and access credit. Enhancements to customs procedures have also taken place in previous years.

“The island passed the National Building Act in 2018, which significantly enhanced the ease of doing business in the construction industry,” Moore adds.

“Such reforms are already paying dividends, with the construction industry being one of the key drivers of economic growth in recent years.”

That and mining have helped real GDP growth rates improve, which the IMF foresee accelerating to 1.7% this year, and to 1.9% in 2020.

The current-account deficit is narrowing, and unemployment is at an all-time low of 8%, which can only help to improve social indicators as more of the unemployed find work, boosting household income.

And crucially, non-borrowed reserves are above target, providing the government with a useful buffer to cope with future shocks.

Jamaica is certainly a risky option, but is on the up. It will be interesting to see whether this improvement continues.