Rating Action: Moody's downgrades Jamaica's government debt rating to Caa3, outlook stable
Global Credit Research - 06 Mar 2013
New York, March 06, 2013 -- Moody's Investors Service has today downgraded Jamaica's government debt rating to Caa3 from B3, concluding the review for downgrade initiated on February 14. The outlook is stable.
Today's downgrade was prompted by the following factors:
(1) The debt exchange announced on February 12 affecting US$9.1 billion in domestic debt, equivalent to 54% of total government debt outstanding at year-end 2102, that Moody's considers a distressed exchange; the debt exchange resulted in net present value losses for investors in excess of 10% and is the second distressed debt exchange in three years;
(2) The still high debt burden as nominal debt levels remain unchanged since the announced restructuring did not impose any principal haircuts; at a projected 119% of GDP and 470% of revenues, Jamaica's 2013 debt metrics are among the highest of all rated sovereigns; and
(3) Expectations of continued slow growth that will make fiscal consolidation efforts more difficult.
As part of today's rating action, Moody's has lowered Jamaica's country ceiling for foreign-currency bonds to B3 from Ba3 and the country ceiling for foreign-currency bank deposits to Ca from B3. Moody's has also lowered Jamaica's local-currency bond and deposit ceilings to B2 from Baa2.
In addition, the ratings of Air Jamaica and National Road Operating Company Limited, both tied to the rating of the government of Jamaica, are lowered to Caa3 from B3. The outlook on both entities is stable.
RATINGS RATIONALE
On February 12 2013, Jamaica's government announced a debt exchange of its domestic debt which Moody's considers a distressed debt exchange. The government's offer, which did not incorporate haircuts to principal, involved both lower coupon rates as well as maturity extension of 3-5 years for domestic instruments and closed on February 28 with approximately 99% participation rate.
This debt exchange follows the one carried on January 2010 which Moody's also categorized as a distressed exchange.
Despite net present value losses in excess of 10%, Jamaica exits its most recent debt restructuring with a very high debt burden, raising the specter of yet another debt exchange in the next few years. Jamaica's government debt-to-revenues ratio is the 5th highest among rated sovereigns, and the government dedicates 40% of its revenues to make interest payments.
High debt levels are exacerbated by continued fiscal deficits. Last year's fiscal deficit reached 5.5% of GDP, and Moody's expects the deficit will fall below 5% of GDP in 2013 as the government implements greater fiscal consolidation in the context of a new IMF program. However, since the Jamaican government has failed to meet its fiscal targets in seven of its last eight budgets, fiscal sustainability remains an elusive target.
Government gross financing needs - fiscal deficits plus amortizations - averaged 20% of GDP in the last five years. We expect financing needs will drop to less than 10% of GDP this year and next as the debt restructuring pushes out upcoming maturities. Our projections indicate that the debt burden will rise rapidly starting in 2015, posing credit concerns absent greater growth.
Jamaica's growth rate is among the lowest of all countries rated by Moody's averaging just 0.5% annually in the last 10 years - GDP growth was negative in four of the last five years. Low growth is the result of a series of structural factors, including high reliance on a mature industry (tourism) and limitations including high energy costs. As these factors will be hard to change in the medium term they will likely remain a ratings constraint for the foreseeable future. For 2013 we expect that modest growth of 1% of GDP will be insufficient to improve the country's debt metrics.
OUTLOOK
The stable outlook incorporates the view that Jamaica could enter a third debt exchange over the rating horizon, with losses consistent with a Caa3 rating.
WHAT COULD CHANGE THE RATING UP
At present an upgrade is unlikely over the near term. A change in the rating outlook to positive would require improved debt sustainability associated to both effective fiscal consolidation efforts and higher economic growth, conditions that are necessary to support a sustainable drop in government debt metrics.
WHAT COULD CHANGE THE RATING DOWN
Failure to avoid a persistent increase in debt ratios and/or continued low economic growth could lead to another negative rating action.
PREVIOUS RATING ACTION
Moody's previous action affecting Jamaica's government bond rating was implemented on 14 February 2013, when the rating agency placed Jamaica's government bond ratings on review for possible downgrade.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on
Moody's - credit ratings, research, tools and analysis for the global capital markets for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on
Moody's - credit ratings, research, tools and analysis for the global capital markets.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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Please see the ratings tab on the issuer/entity page on
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