Standard & Poor's issues positive annual Jamaica report as Bank of Jamaica continues to tighten local monetary policy
On October 5, rating agency Standard & Poor's (S&P) issued its annual report on the Jamaican economy. In summary, the agency expects the country's economic recovery to continue, supported particularly by tourism. It expects Jamaica to continue to run a small fiscal surplus in the current fiscal year 2022/2023 ending March 31 of J$8 billion, or 0.3% of GDP, compared with a surplus of 0.9% of GDP last fiscal year 2021/2022. The agency notes, “Jamaica carefully managed its finances through the pandemic and economic contraction of 2020, emerging with a net debt to GDP ratio of 78.4%, compared with 70.9% before the pandemic,” which it expects to fall to under 70% next year (65.7%).
It is worth noting that the latter “net debt” figure subtracts liquid assets as a percentage of GDP (mainly Bank of Jamaica foreign exchange reserves), which it estimates at 6.5% of GDP next year, so the official 2023 debt-to-GDP figure would still be 72.2%. This is still a remarkably good performance under the circumstances, which essentially means that the government is now expected to meet its 60% debt-to-GDP target under the revised target timeline of 2027/2028 under its fiscal responsibility legislation, an unprecedented achievement for Jamaica, particularly with our still relatively low growth.
The Bank of Jamaica (BOJ) clearly signalled in its recent press release at the end of September, when it raised interest rates another half a point to 6.5%, from 0.5% just over one year ago in August, that it had also revised its target of the eventual US Fed Funds terminal rate, in line with global financial markets at that time. Since then, it is likely the Bank has again raised its projected US terminal rate even further to reflect revised global market sentiment. Accordingly, the BOJ has recently signalled that it is now unlikely to be finished with its own interest rate rises, a different position from July when it was hinted it might be close to the end of its tightening cycle.
Currently, the Central Bank is targeting the exchange rate to reduce inflation through a combination of continuing interest rate rises, liquidity tightening, regulatory restrictions (the BOJ in collaboration with the Financial Services Commission has issued moratoriums or caps on the local issuance of US dollar or US dollar instruments), and increased foreign exchange intervention despite the BOJ’s shift to an inflation-targeting regime. However, we do not believe this reflects the wholesale adoption of the imprudent approach typical of many emerging markets, as in the BOJ’s view at least, it is simply recognizing that in the short term its main way to impact inflation is through the exchange rate channel.
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