The Liming House

Good to see you again. Glad you enjoy the Limes.

A not unexpected move from Standard & Poor’s, which has been deeply negative on Jamaica for some time now. Rival rating agency Fitch issued a similar downgrade, cutting the island’s local currency rating to ‘C’ from ‘CCC” on Thursday.

It’s not all bad news though – the debt exchange that triggered the rating actions will significantly improve Jamaica’s fiscal footing, and affects virtually all of the country’s J$ denominated outstanding debt.

And as an IMF official quoted by Reuters pointed out, the country is likely to have its ratings *upgraded* once the exchange has been successfully completed – as defined by rating agency criteria.

Here’s a line from Fitch on the prospect of an upgrade:

“In the event that the successful conclusion of the upgrade is followed by approval of an IMF program in support of the government’s fiscal and economic program, Jamaica’s ratings will likely be raised into the single ‘B’ category.”

According to the anonymous IMF official, S&P had also “acknowledged they would raise Jamaica’s credit rating by a number of notchratingses once the debt restructuring was complated,” Reuters said.

The S&P statement:

Jamaica has announced a domestic debt exchange program that officially launches today.

We consider this exchange to constitute a default, so we have revised the foreign- and local-currency sovereign credit ratings on Jamaica to ‘SD’ from ‘CCC/C’ and the ratings on the exchanged bonds to ‘D’.

NEW YORK, Jan. 14, 2010–Standard & Poor’s Ratings Services said today that it revised its foreign- and local-currency sovereign credit ratings on Jamaica to ‘SD’ from ‘CCC/C’.

Standard & Poor’s also said that it revised its ratings on the rated bonds that are included the sovereign’ proposed domestic debt exchange to ‘D’.

The ratings on the government securities not included in the debt exchange remain at ‘CCC’. The recovery rating remains at ‘4′.

…

“These rating actions follow Jamaican Prime Minister Golding’s announcement yesterday of the domestic debt exchange and its official launch today,” explained Standard & Poor’s credit analyst Roberto Sifon Arevalo. The offer seeks to exchange all categories of the Jamaican domestic debt except Treasury bills. It does include foreign-currency-denominated domestic debt, which carries foreign-currency ratings, which is why we have revised the foreign-currency credit rating to ‘SD’. External debt is excluded from this transaction

“Overall, the domestic efforts, together with the ongoing multilateral support, should help Jamaica manage its long-standing fiscal and structural problems going forward,” Mr. Sifon Arevalo added. “In this context, we expect to assign a ‘B-’ sovereign credit rating and ‘B-’ debt ratings to the new bonds upon the completion of the debt restructuring and issuance of the new bonds, which is scheduled for Feb. 16, 2010.”

Other Jamaica-related limes are available in the archives.

Verbatim from rating agency Moody’s on Jamaica, highlighting mine:

The IMF, which has been negotiating the terms of a $1.2 billion stand-by facility with Jamaica for several months, said on Friday after fund officials spent several days in Kingston, that discussions would continue in Washington next week. The focus, said the IMF, is “on how to reduce the large fiscal deficit and put the debt on a clear downward path.” There was no clarification with respect to the timing for finalizing the discussions.

A delay in reaching an agreement with the IMF could have potentially adverse credit consequences given Jamaica’s continued fiscal underperformance. An agreement with the IMF is crucial to provide essential multilateral funding to strengthen Jamaica’s external position, shore up confidence and meet financing obligations.

A sizeable fiscal adjustment required to stabilize debt dynamics is presenting a major challenge to the government as the majority of expenditures are devoted to wages – which have already been frozen – and interest payments while revenues are declining amid depressed economic activity. This year’s fiscal deficit is projected at 8.7% of GDP and public debt is expected to reach some 120% of GDP.

The government has repeatedly expressed its commitment to service its obligations in both local and foreign currency and has a long track record of timely debt service even during difficult times. However, Jamaica’s limited resources relative to the size of the public debt raise the possibility of a debt restructuring in order to place the government financial position on a sustainable path.

Jamaica’s B2 rating, among the lowest assigned by Moody’s to a sovereign nation, already reflects significant concerns about the government’s ability to honor obligations given its limited policy options to deal with the effects of the on-going economic downturn. High levels of public debt and vulnerability to interest and exchange rate movements limit the country’s flexibility in meeting these challenges.

Hot on the heels of the decision by Standard & Poor’s to slash Jamaica’s sovereign rating comes this announcement from the rating agency:

S&P: National Commercial Bank Jamaica Counterparty Credit Rating Lowered To ‘CCC’; Survivability Assessment Lowered To ‘B’

* On Nov. 2, 2009, we lowered the long-term sovereign rating on Jamaica to ‘CCC’ from ‘CCC+’.
* We are lowering our ratings on NCB, including the long-term counterparty credit rating, to ‘CCC’ from ‘CCC+’. We are also lowering our survivability assessment on NCB to ‘B’ from ‘B+’.
* The outlook on NCB remains negative, mirroring that on Jamaica, as a result of the bank’s concentration in government debt securities and loans to public entities in the country.

MEXICO CITY Nov. 4, 2009–Standard & Poor’s Ratings Services said today that it lowered its ratings on National Commercial Bank Jamaica Ltd. (NCB), including the long-term counterparty credit rating, to ‘CCC’ from ‘CCC+’. At the same time, we lowered our survivability assessment on NCB to ‘B’ from ‘B+’, as assigned on Aug. 6, 2009. The outlook is negative.

[In rating agency speak, the survivability assessment is "a current opinion on the likelihood that over the medium-term, a bank will either directly or through a successor organization, remain in operation, regardless of whether it is solvent or insolvent, paying all of its obligations on a timely basis or not."

Moreover: "A relatively low survivability assessment does not constitute an opinion by Standard & Poor's that a particular bank is likely to fail; rather it indicates a vulnerability to adverse circumstances which could affect the bank's ability to meet its financial obligations on a timely basis, without special circumstances which would clearly enhance the likelihood that it would continue to operate in such an event. "

And here's what S&P means by a "B" rating in this area: "A bank with a survivability assessment of 'B' is VULNERABLE. Adverse business, financial or economic conditions will likely impair the bank's ability to maintain operations in which case the bank may become subject to regulatory intervention."]

The rating action followed the downgrade of the long-term sovereign credit rating on Jamaica (CCC/Negative/C) to ‘CCC’ from ‘CCC+’.

“NCB has a very large exposure to Jamaican sovereign-debt securities and loans to public entities,” said Standard & Poor’s credit analyst Alfredo Calvo. “Also, Jamaica’s deteriorating economic situation and the more-challenging conditions for the Jamaican banking system will continue to pressure the financial performance of the bank.”

The action on the survivability assessment was based on the downgrade of NCB and our view that vulnerabilities in the government’s debt profile have grown significantly from previous years, narrowing the government’s capacity to support the bank in times of stress.

However, we are still maintaining our survivability assessment at three notches higher than the counterparty credit rating on NCB. This reflects our continuing expectation that the government could give certain assistance to the bank if needed because of NCB’s significant market share in the country, adequate financial performance, and large branch network and deposit base.

If the liquidity and market share of the bank shrink significantly, we could further adjust our survivability assessment.

The ratings on NCB are limited by the bank’s large exposure to Jamaica’s government; greater loan concentration than peers; operation within a relatively small and nondiversified economy with high debt; and the more challenging environment for the Jamaican banking system.

However, the bank’s leading market presence in the Jamaican banking system, adequate but pressured performance under more-challenging conditions, and consistent improvements in its operating performance support the rating.

Can’t say you weren’t warned, but this is still a serious blow to Jamaica.

From rating agency Standard & Poor’s on Monday, highlighting mine:

Jamaica Long-Term Ratings Lowered One Notch To ‘CCC’, Outlook Negative

– Jamaica’s Central bank governor, who was the lead negotiator on a possible standby facility from the IMF, has resigned.

– We are lowering the long-term foreign and domestic currency ratings on Jamaica to ‘CCC’ from ‘CCC+’.

– The negative outlook on the ratings signals the growing risk of a debt exchange operation that could be an event of selective default under our distress debt exchange criteria.

NEW YORK, Nov. 2, 2009–Standard & Poor’s Ratings Services lowered its long-term foreign and domestic currency ratings on Jamaica to ‘CCC’ from ‘CCC+’. The outlook on the ratings is negative.

We kept the recovery rating on the senior unsecured debt at ‘4′ and the country transfer and convertibility (T&C) assessment at ‘B’.

The downgrade on Jamaica follows the resignation of Central Bank governor Derick Latibeaudiere, who was the lead negotiator within the framework of a possible standby facility from the International Monetary Fund (IMF).

On Aug. 5, 2009, we downgraded Jamaica’s domestic and foreign currency long-term ratings to ‘CCC+’ with a negative outlook. At that time, we highlighted the fact that Jamaica’s severe fiscal situation as well as the vulnerabilities in the government’s debt profile may give it incentives to renegotiate with its creditors, particularly its resident creditors that hold the larger bulk of Jamaican debt.

“Since then, the government’s room to maneuver continues to narrow as it becomes increasingly difficult to further cut public expenditures–as reflected, in part, in the recently amended budget–in order to sustain an interest burden of about 60% of general government revenue,” said Standard & Poor’s credit analyst Roberto Sifon Arevalo.

The negative outlook on the ratings signals the growing risk of a debt exchange operation that could be an event of selective default under our distress debt exchange criteria. While the government’s engagement with the IMF is a positive effort to address the long-standing structural issues in Jamaica, recent events highlight the complexity of the negotiation process and create more uncertainty about the timeframe for reaching an agreement with the Fund.

Usain Bolt, by Richard Giles, via flickr/tagaroo

Just one month after rating agency Standard & Poor’s released a downbeat assessment of the outlook for Jamaica comes an equally – if not more – negative take from Barclays Capital Research.

The research note issued today by a New York-based BarCap analyst is unequivocal:

we believe that Jamaica is approaching the point of no return and that it will take more than fiscal adjustments to regain sustainability for the long term. For 2009, we expect interest payments to be 16.0pts of GDP, or more than 60% of revenues. Fiscal sustainability in Jamaica has been under pressure for the past ten years, but we believe that at this time, the IMF is more willing to help Jamaica restructure its debt than to prolong its agony.

Elsewhere in the note, which also examined El Salvador, Panama, Costa Rica, the Dominican Republic and Guatemala, the analyst is even less sanguine about Jamaica’s financial prospects:

Of particular concern, Jamaica’s fiscal deficit could reach around 20% of GDP (with more than 15% of GDP in interest payments). We think it is extremely unlikely that any reform program will be able to put the country on a sustainable medium- to longer-term fiscal path and believe that the IMF is weighing whether it would be costlier to allow (and maybe help) the country to restructure its debt or to give the Jamaican government the USD1.2bn that is soliciting in order to postpone its agony.

Unfortunately, we believe that Jamaica may have already passed the point of no return and that for the IMF, as well as for the country in the long term, it would be more convenient to assist in a restructuring of debt.

As the three tables below – also from the note – illustrate, Jamaica is in dire straits both in absolute terms and as compared with other countries in Central America and the Caribbean:

BarCap