Publish in Perspectives - Wednesday, September 16, 2020
Jamaica's borders reopened to international tourists on June 15 but stopover arrivals in July were only 16 percent of those a year ago. Here Ocho Rios. (Photo: Jamaica Tourism Board)
Efficient distribution of income support has tempered the pandemic’s economic impact.
The incumbent Jamaica Labour Party’s (JLP) general election victory signals economic and fiscal policy continuity. The scale and efficacy of Jamaica’s coronavirus policy response remain important to sovereign credit metrics, as data from 2Q20 and uncertainty over tourism’s recovery point to a fiscal deficit and a GDP contraction bigger than our most recent forecast published in July.
Prime Minister Andrew Holness announced the snap election last month as opinion polls gave the JLP a strong lead, partly due to the perceived effectiveness of the pandemic response. On March 21, Jamaica closed its borders to foreigners and Jamaican nationals to limit the spread of the coronavirus, while the government announced the CARE program to support the unemployed and small businesses, particularly in the tourism sector. Approximately 440,000 people had received grants by mid-August.
Efficient distribution of income support has tempered the pandemic’s economic impact. Nevertheless, the Bank of Jamaica recently revised its FY20/21 GDP forecast to a 7 percent-10 percent contraction from 4 percent-7 percent. It estimates the economy shrank by 14 percent-17 percent from April to June. The border closure has hit tourism, which contributes 20 percent of GDP, with no tourist arrivals in April and May, compared with 2019’s monthly average of 223,410 stopover tourists.
The government estimates CARE program costs at JMD14 billion (US$98 million or 0.7 percent of GDP) in FY2020/2021. Sustained primary surpluses (averaging 7.4 percent of GDP from 2013-2019) have created space for this response, but the fiscal impact could increase as budgeted funds are used up and pressure to extend parts of the program grows. The government says it is not contemplating additional payments under the Compassionate Grant -- the CARE program’s largest component -- beyond the one-time grant of JMD10,000 (about US$70). But the second largest component -- Set Cash, which provides income support for those who lose their jobs due to the pandemic -- has been extended to five months from three.
Pandemic-related spending helped central government expenditure increase 5 percent yoy from April to June while revenues contracted 20 percent yoy. Our most recent FY2020/2021 deficit forecast of 2.7 percent of GDP assumed revenues for the full fiscal year fall 11 percent and GDP shrinks 5.3 percent in calendar year 2020. Borders reopened to international tourists on June 15 but stopover arrivals in July were only 16 percent of those a year ago. Visitors from countries deemed high risk, including the U.S., have to test negative for COVID-19 prior to arrival. Therefore, the possibility that Jamaica misses a substantial portion of the winter vacation season is a meaningful risk to our current 2020 GDP and FY2020/2021 deficit forecasts.
Our revision of the Outlook on Jamaica’s ‘B+’ rating to Stable from Positive in April reflected the likely contraction in foreign currency income from tourism, remittances and alumina exports. Local banks are liquid and can provide credit to the government and external financing is available, with interest rates having dropped after spiking between March and April. However, government debt-to-GDP remains above rating peers, and the government has postponed the goal of reducing the ratio to 60 percent (from 94 percent at end-FY2019/2020) by two years to FY2027/2028.
General government debt metrics are exposed to exchange rates (61 percent of total debt is in foreign currency). At end-August, the JMD had depreciated by 13 percent YTD to a record low against the U.S. dollar. However, the flexible exchange rate helps absorb external shocks and reserves were 3 percent higher in July than at end-2019. In May, the IMF approved a US$520 million (3.4 percent of GDP) loan to the central bank, which the government can draw down should the need arise. Lower oil prices and recovering alumina prices support the current account, although net remittance inflows were down an average of 8 percent yoy in March and April.
This article is based on a non-rating action commentary from Fitch Ratings.