COVID backlash! - Disease expected to ravage economy; low oil prices offer ray of hope

Ratings agency Fitch has said the Jamaican economy is expected to contract by four per cent this year as the shock from the COVID-19 pandemic has led to the foreign currency revenues drying up.

Fitch yesterday revised Jamaica’s outlook from positive to stable but has maintained its Long-Term Foreign-Currency Issuer Default Rating at B+.

The agency said the sharp contraction of the foreign currency revenues will interrupt the prior downward trend in government debt to GDP (gross domestic product).

“Fitch projects that tourism receipts will decline by 20 per cent year-on-year in 2020, although this could well be steeper if an easing in the global pandemic does not materialise by the key Northern Hemisphere winter season,” said the agency.

Finance Minister Dr Nigel Clarke welcomed the Fitch’s decision in maintaining Jamaica’s credit rating at B+.

“In that context, Fitch’s decision to maintain Jamaica’s credit rating at B+, when many sovereigns’ credit ratings are being downgraded globally, says something about Jamaica’s economic resilience. This is a challenging time for our economy, however, Jamaica has options that many countries do not have,” he said in a release to the media yesterday.

COVID-19 uncertainty

However, Professor Densil Williams, reacting to the latest report put out by the international ratings agency, argued that it might have been premature to quantify the expected contraction of the economy because of the uncertainty surrounding the pandemic.

“I wouldn’t jump to put a number on the amount it would contract by at this stage because we still don’t know how long this thing will last,” he said.

Opposition Spokesman on Finance Mark Golding said “their projection of a four per cent contraction in the economy underscores the need for a comprehensive safety net programme that will protect the vulnerable people in the society from a sharp reduction in the economy that is unfolding”.

He mentioned that other countries such as St Vincent and the Grenadines have stepped up and are spending in excess of one per cent of GDP to help cushion the effects of the coronavirus fallout on the citizens.

Fitch said the economy is expected to rebound by two per cent in 2021, but again, Williams has raised eyebrows at the figure.

“I am not that optimistic that we can recover by two per cent in a year’s time. Because if you have looked at all the figures in terms of our growth for 2019, our grow has actually been declining,” he argued.

“Yes, we may recover, but I don’t think we are going to recover that drastically in one year,” he added.

Not until around 2025 should the country expect growth levels achieved in 2019, Williams said, if Fitch’s projected four per cent contraction holds.

“… And then we could have a consistent growth rate after that of about 0.7 to one per cent. If we grow faster than that now, we would be able to grow much quicker. But if growth continues along the general trajectory that we have been having, it would take us five to six years to take us back to our 2019 level,” he argued.

He dismissed the argument put forward by some pundits that pent-up demand in the economy is likely to fuel an economic boom after the COVID-19 crisis.

“I don’t generally agree with that at all. If you look at the trend, there is nothing that says because of the virus, there is this pent-up demand that is going to move things so radically forward,” Williams reasoned.

Low oil prices

But low oil prices on the world market could temper the fallout of the economy.

Fitch expects that average oil prices in 2020 will be US$35/barrel which is a 45 per cent fall year-on-year.

Fitch estimates that the primary surplus will be 3.6 per cent of GDP in FY2020-21 and 5.3 per cent in FY 2021-22, arguing that a smaller primary surplus will make it very hard to achieve the Fiscal Responsibility Law debt-reduction goal.

The agency also expects that with the economic contraction in 2020, revenue to GDP will contract 1.5 percentage points on top of the announced tax cut which included a reduction of general consumption tax from 16.5 per cent to 15 per cent as at April 1.

Fitch forecasts that the general government balance will deteriorate to -2.5 per cent of GDP for FY 2020-2021 from 0.2 per cent in FY 2019-2020.