Jamaica: Risk Assessment
Country Risk Rating
Business Climate Rating
- Natural resources (bauxite, sugar, bananas, coffee) and tourism
- Financial support from multilateral institutions
- Substantial remittances from the diaspora
- Stable democratic framework
- Poorly diversified economy
- Vulnerable to external shocks (climate, US economic cycle, commodities)
- Very high public debt and debt interest payments inhibiting growth
- High rates of crime and poverty
Tourism and consumption keep activity alive
Jamaican growth will remain weak in 2020, even declining compared to 2019, mainly because of a drop in metallurgy production. The temporary closure of the country’s largest aluminum refinery during 18 to 24 months for an upgrade will have an adverse impact on activity, especially since aluminum accounts for half of exports and that world prices are on a downward trend. In contrast, tourism (20% of GDP) will be a growth driver, capitalizing on a steady increase in the number of visitors, an effective marketing strategy and adequate tourism infrastructure. However, the sector will continue to suffer from the very high crime rate, which also affects the business environment more generally. With household confidence riding high, household consumption will maintain solid momentum due to the ongoing fall in unemployment (8% in 2019) and continued robust growth in disposable income. The gradual decline in the central bank’s key policy rate, which was cut from 5.0% to 0.5% between March 2017 and August 2019, continues to fuel private sector credit growth. The Microcredit Act, which is likely to be adopted in early 2020 and aims to more effectively regulate the practices of microfinance institutions (including excessive interest rates), will further encourage private investment. Finally, after being hard hit by a long drought in 2019, agriculture will remain at the mercy of weather conditions, at a time when the prices of agricultural products, including sugar and coffee, are relatively low.
Slight easing of fiscal discipline
Still struggling with a huge public debt burden, with debt service (about 14% of GDP, including 6% spent on interest payments) continuing to monopolize public finances, the Jamaican government will maintain a prudent fiscal policy for FY 2020/2021. In line with previous years, efforts to control the wage bill and improve tax collection, among other things, will continue, resulting in a primary surplus (excluding interest on debt) of around 6.5% of GDP. Nevertheless, some expenditures are expected to increase slightly again, in order to mitigate the country’s main deficiencies. First, security expenditures (new barracks, equipment purchases) will continue to increase in response to the country’s persistently high crime rate. Social transfers will also head upwards, as will investments in infrastructure that are mainly focused on improving the road network. This slight budgetary shift comes after the government had already decided to ease corporate taxes a little in the 2019/2020 budget, which reduced its surplus. However, the public debt burden will remain on a downward trend. Reducing it remains a priority because nearly two-thirds of this debt is external and denominated in foreign currencies, which creates a high exchange risk, as the Jamaican dollar is backed by a floating regime.
Regarding external accounts, the current account deficit will increase in 2020, hit by the deterioration of the trade deficit (23% of GDP). Although oil prices are set to remain low, goods imports will increase in line with robust consumption, while exports will suffer from tough conditions in the metals sector. Tourism revenues will continue to contribute to the services surplus (8.5% of GDP), while remittances from expatriates (14% of GDP) should be stable, despite the slowdown in the United States, the main source of remittances. Inward investment, mainly in the shape of FDI, is expected to almost entirely finance the current account deficit. Foreign exchange reserves will remain at a relatively comfortable level, representing about five months of imports.
Popular support for the government but challenges ahead
Despite implementing austerity policies since 2016 (the year of his election and the budgetary support agreement with the IMF), Prime Minister Andrew Holness and his Jamaica Labour Party (JLP) have maintained popular support because the economy and employment have been relatively healthy. In addition, the main opposition party (People’s National Party) is plagued by significant internal divisions that weaken its influence. However, other major issues will determine the success of the JLP in the upcoming elections, scheduled for early 2021. On the one hand, the government will have to step up its efforts to fight crime, which remains Jamaica’s number-one problem. On the other hand, the perception of corruption and non-transparency seems to be growing in public opinion, especially after a recent scandal over the misuse of public funds, involving a former minister.
At the geopolitical level, the government will focus on relations with the United States, the country’s main trading partner and source of remittances from expatriate workers. It is also likely to concentrate its efforts on regional cooperation, especially to combat drug trafficking and crime, which affect the business environment. It is to be noted that Jamaica’s business environment has moved up 4 places in the World Bank’s Doing Business ranking (71st out of 190 countries), lifted by the ease of business creation and access to credit.