• The country enjoys a stable political scene
  • The island made a remarkable recovery after being hit by the global financial and economic crisis
  • Public finances, the Achilles heel of the economy, are vastly improving
  • Relatively high external debt remains a weak point

Stable political scene

Jamaica, the third largest island of the Greater Antilles, has enjoyed independence from the United Kingdom since 1962. Since then, power in Jamaica has alternated between the social-democratic People’s National Party (PNP – centre left) and the conservative Jamaica Labour Party (JLP – centre right). Since March 2016, Andrew Holness, leader of the JLP, has governed the country. Even though he has only a slim majority, Holness has been able to advance his agenda (e.g. a new IMF agreement and tax reforms). Government priorities in the coming years will remain tackling the high corruption and the rising crime rates related to the presence of gangs and drug trafficking.

Remarkable recovery after being hit by the global financial and economic crisis

Jamaica was hit hard by the global financial and economic crisis starting in 2008. It was mainly the dwindling tourism receipts and remittances (accounting for about half of export revenues before the crisis hit) that affected the economy. As of 2008, the economy plunged into a 3-year recession while inflation stood at a high level. Moreover, during the Jamaican economic crisis the current-account deficit peaked at a mind-boggling -18.7% of GDP in the fiscal year April 2008/March 2009. As FDI also declined sharply, foreign-exchange reserves decreased to just 2.1 months of imports in March 2008.

However, the island engaged in an IMF economic reform programme, beginning in May 2013. This proved to be a turning point for Jamaica. In recent years the current-account deficit has narrowed and has stood at roughly -3% of GDP in the last 2 years, which is a modest level.

The main reasons are the historical low oil import bill due to lower oil prices and growing earnings from tourism revenues and remittances (which together now represent almost 70% of current-account receipts) thanks to the improving competitiveness of the tourism sector. Furthermore, the deficit is chiefly being financed by FDI inflows, which have returned to pre-crisis levels of around 5% of GDP. Hence, foreign-exchange reserves more than doubled to a comfortable level of 5.5 months of imports in October 2017. Furthermore, inflation has nearly halved from 9.1% in 2012/2013 to 5% in 2017/2018.

Reviving growth has been a more daunting task. Even though in the first years of the IMF programme the island managed to emerge from recession, it has been enduring sluggish GDP growth of on average 0.9% in the past 5 years. Nevertheless, GDP growth seems to be on a firmer growth path as of this year with expected growth of 1.7%.

Public finances, the Achilles heel of the economy, are vastly improving

Public finances have long been the Achilles heel of the Jamaican economy. Jamaica moved to reschedule its domestic public debt in 2010 and again in 2013 as public debt stood at a high level of around 145% of GDP in those 2 years. Since 2013, the island has been strongly committed to fiscal consolidation. As a result, the country has recorded only small fiscal deficits since the beginning of the IMF programme (on average -0.2% of GDP compared with elevated fiscal deficits of on average -8% of GDP between 2008/09 and 2012/13). Moreover, the primary balance has been positive at around 7% of GDP since the start of the IMF programme. Indeed, the interest payments to public revenues ratio, though on the decline, remains relatively important at roughly 25% of public revenues in the current fiscal year 2018/2019. As a consequence of fiscal consolidation, public debt has been on the mend and was estimated at 111.9% of GDP in March 2018, a sharp decline of more than 30% of GDP over 5 years.

It is expected that in the medium term, the positive evolution will continue, thanks to fiscal consolidation. That being said, given that around two thirds of public debt consists of external debt, it is increasingly denominated in foreign currency and thus exposed to an exchange-rate risk.

An ambitious key pillar of the IMF programme is to reduce public debt to 60% of GDP by 2025/2026. Hence, in order to meet this goal, the high wage bill, which accounts for around a third of its public revenues, needs to be tackled. Additionally, continued social support for the government’s policy efforts will rely on clear evidence that past reforms are generating better growth and employment outturns, and improving security. Without these dividends, maintaining reform momentum could be challenging.

Relatively high external debt remains a weak point

Relatively high external debt remains a weak point for Jamaica. External debt to GDP has increased sharply since 2005/2006 from close to 60% of GDP to above 100% of GDP in 2016/2017. It was mainly driven by a sharp increase in public external debt, which almost doubled, as it represents roughly 70% of total external debt. On the positive side, external debt is expected to decline thanks to public debt deleveraging.

External debt service is moderate. Debt service peaked in 2015 when the debt to PetroCaribe was paid back. Indeed, Kingston has been a member of the Venezuelan-backed PetroCaribe oil scheme since 2005, under which Venezuela provides oil and petroleum products to the island on preferential financing terms. In July 2015, as the economic crisis worsened in Venezuela, the governments agreed to stop the programme while Jamaica paid back its debt to PetroCaribe on favourable terms.

Improved macroeconomic fundamentals

The improvement of macro-economic fundamentals, in combination with the bright outlook in the medium term, explains the upgrade of the MLT political risk. Indeed, also in the next few years inflation is expected to remain stable while GDP growth is expected to be roughly 2%, which is still a relatively low level. Furthermore, the current-account deficit is expected to remain at the moderate level of around  4% of GDP. Firmer growth in the USA is likely to support growth in tourism revenues and remittances while rebounding oil prices are expected to remain contained in comparison with the oil prices before 2014. Lastly, foreign-exchange reserves are expected to gradually increase on the back of rising FDI inflows.

There are some downside risks. Firstly, Jamaica’s relatively narrow export base makes the country vulnerable to the risk of a tighter US immigration and trade policy. However, up to now, Trump is not thinking of Jamaica. Secondly, the country is exposed to natural disasters. Nonetheless, a historical IMF study shows that the impact of hurricanes on tourist arrivals is not significant in Jamaica.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com