Writing about Jamaica today feels rather like waving those marshalling wands by the airport gate for the last few moments of the two and a half thousand kilometres flight from JFK in New York to Sangster in Montego Bay. It still matters but it feels as if all the action has already happened.
Jamaica has staged a model recovery under the umbrella of successive IMF programmes, reducing debt via impressive fiscal control (it has achieved a large primary fiscal surplus for the past six years).
Its equities and sovereign US$ bonds reflect this. It is the best-performing equity market in our coverage over the past year (up c55%, compared with EM and FM, both up c10%) but it is also the most expensive compared with history (c140% premium to the five-year median trailing price/book).
Growth remains low and vulnerable to external factors (North America growth, which drives tourism and remittances), aluminium prices and output (where an outage for expansion has taken half of alumina refining offline for up to two years) and weather (drought and hurricanes).
Politics is unlikely to disrupt the economy (the next election is due by 2021) because both parties (in a two-party system) have supported fiscal control under the IMF programmes.
Jamaica's economy repaired but merely growing slowly
Jamaica has successfully navigated its way through its historical debt problems in recent years, but vulnerabilities remain. Supported by a homegrown economic reform programme, a strong fiscal effort under successive IMF programmes and a successful domestic debt exchange in 2013, Jamaica has avoided a deeper debt crisis and default.
Public debt fell below 100% of GDP in 2018 for the first time in nearly 20 years, and the primary surplus exceeded 7% of GDP in FY 18/19 for a sixth consecutive year (an almost unprecedented performance). Official reserves have also recovered strongly to some five months’ import cover, providing a stronger liquidity buffer.
But real GDP growth remains weak. Despite a rebound in growth in 2018 to 1.6%, it has eased to 1% in 2019. Indeed, growth has averaged a meagre 0.7% over the past 20 years, more recently constrained by the debt overhang. The IMF projects growth of merely c2% from 2022.
Jamaica is due to exit IMF support after its current programme expires in November 2019. Performance under the precautionary three-year stand-by arrangement (SBA) approved in 2016 has been impressive. A successor arrangement is not expected. This will mark the end of 10 years of IMF programmes.
Equities: most expensive market versus history in our coverage
The MSCI Jamaica equity index (entirely made up of financials) is up c55% in the last year alone and is valued on 2.8x trailing price/book (with 16.5% trailing ROE), which is a c140% premium to the five-year median.
This makes it both the best performing and the most expensive relative to history equity market in our small emerging and frontier coverage.
NCB Financial (61% of MSCI Jamaica, the only stocks with over US$1m average daily value traded) is on 3.8x trailing PB (for 16.5% ROE) and 18x trailing price/earnings.
Consumer play Grace Kennedy (money transfer, with the exclusive agency for Western Union, and branded food manufacturing) appears to offer better value (on 13.5x trailing price/earnings) but it is much less liquidly traded (merely US$160k ADV).
Sovereign US$ bonds: not compelling, we rate them Hold
We assign a Hold to Jamaica’s US$ bonds (previously unrated).
An impressive multi-year fiscal effort under IMF supervision has helped to reduce the public debt burden, but, at 93% of GDP projected by the IMF for 2019 (down from 146% in 2012), debt sustainability is still fragile. Weak growth prospects and vulnerability to external shocks provide further downside risks. Yet the bonds have rallied strongly over the past three years in tandem with the fiscal performance, policy commitment and improvement in the debt burden.
We do not regard yields of 3.9% on the US$ 2028s (z-spread 200bps), and still only 5.5% on the longest-duration 2045s as attractive, with Jamaica appearing rich on our ratings versus spreads model (Jamaica is rated B3/B+/B+ by the credit rating agencies), although solid domestic and regional ownership provides some downside protection.
Jamaica equity performance