S&P report: Jamaica more vulnerable to downgrade
Published:Wednesday | August 31, 2011 | 12:00 AM
Jamaica and other regional countries heavily tied to the United States could face a downgrade and declines in foreign exchange inflows based on the negative outlook in the US, rating agency Standard & Poor's suggests in a new report released last week.
The report, 'What The US Downgrade Means For Latin American And Caribbean Sovereign Ratings', adds that countries with a low sovereign rating and high deficits were exceedingly vulnerable.
S&P rates 26 countries in the region. Jamaica, Ecuador and Grenada are tied with the lowest sovereign ratings in the region at B-/B-.
S&P downgraded United States' sovereign rating from AAA to AA+ with a negative outlook earlier this month, citing politics and the contentious debt-ceiling debate in Congress.
"Prolonged economic problems in the US and Europe would have a bigger direct impact on GDP growth in the Caribbean, Central America, and Mexico than on South America. The impact would be felt through lower exports of manufactured products, especially from Mexico; agricultural products, especially from Central America; and depressed tourism inflows, especially in the Caribbean," stated the S&P report.
S&P expects the US economy to grow 1.7 per cent this year, and about 2.0 per cent in each of the next two years.
"The combination of higher risk aversion and slower global GDP growth could pose risks to Latin America and the Caribbean both directly and indirectly," it added.
S&P, however, thinks that "most countries" can absorb potential external shocks and maintain their ratings, "though those more closely tied economically to the US, such as Mexico and countries in Central America and the Caribbean, could face more uncertainty".
Lowering Ja's debt rating
In June, S&P warned that it would likely lower Jamaica's debt rating unless its original International Monetary Fund (IMF) deal was followed by what it called a sustainable economic plan leading up to the general elections.
The rating agency said it feared political risk associated with the 2012 elections and its impact on sovereign debt.
Contextually, S&P noted that countries in the Caribbean have experienced negative rating trends, due largely to growing debt burdens, a fall in tourism earnings from the North American and European markets, and weak prospects for a rapid recovery of external inflows. It forecasts that continued negative news from the US, such as a further downgrade over the next 24 months, would result in greater risk aversion and perhaps lower capital flows to emerging markets.
"Such a scenario would impair the ability of both the public and private sectors in Latin America and the Caribbean to maintain access to external funding, raising the risk of a sudden loss of liquidity. The biggest impact would fall on those countries with larger current account deficits, indicating their greater dependence on external funding. It could also result in currency volatility, as well as potentially sharp spikes in interest rates," said S&P.