Ministry of Finance and the Public Service Fiscal Policy Paper 2021 Page 98

Table VII (a): Fiscal Risk Sources Risk Factor Implications for Fiscal Position Macroeconomic Risks Economic Growth Deviation of actual economic growth from forecast is expected to impact key

fiscal variables, including revenue. Slower than budgeted growth will likely lead to a shortfall in revenue.

Inflation Lower than programmed inflation can have a negative impact on revenue collection and nominal growth, thereby thwarting the achievement of fiscal and debt targets. Higher than programmed inflation could negatively impact the Government’s expenditure bill.

Interest Rates Increasing interest rates are a risk to debt service costs, based on the interest rate composition of the debt stock. That is, the higher the percentage of the portfolio that is contracted on a floating rate basis, the greater the risk from an increase in the interest rate.

Exchange Rates Jamaica dollar depreciation could contribute to the external debt stock, debt service, and imports increasing in J$ terms. However, a depreciation of the $J will have a positive revenue effect through increased earnings primarily from international trade taxes and external grant receipts (in J$ terms).

Commodity Prices Oil Prices - Oil prices directly impact both revenue and expenditure. Revenue is impacted through the SCT on petroleum and petroleum products, whereas expenditure is impacted through the Governments housekeeping expenses.

Contingent Liabilities Natural Disasters Jamaica is located in a multi-hazard zone, and is therefore susceptible to

natural disasters such as hurricanes, flooding, excess rainfall and earthquakes. Realisation of any of these disasters could lead to significant infrastructural damage, and the need for an increase in and/or adjustment of the GOJs expenditure, as well as lower revenue from economic disruption and fallout.

Public Bodies Public Entities may require support from the Central Government to cover operating costs or pay debt, adding pressure to the Governments budget.

Public Private Partnerships (PPPs)

PPP Projects have to be carefully designed, taking into account the probability of losses that may have to be assumed by the Government.

Judicial Awards Court judgements made against the GOJ pose a risk to fiscal targets, through increased unplanned expenditure.

Other Wage Settlements Uncertainty surrounding the final settlements, compounded by the protracted

nature of wage negotiations can lead to higher than planned costs to the budget.

4. SCOPE OF WORK

The consultant is required to, utilizing best practice, develop the structure, templates

and drafts for the Public Investment Performance Report. The report will contain a

review of the public investment portfolio of the GOJ to include the central government,

Self-Financed Public Bodies and Public Private Partnerships under the purview of the

DBJ. The report will include an examination of ;

 Sectoral and functional classification of existing and planned investment

portfolio;

 Alignment of existing public investments with the long term national

development plan and medium term socioeconomic policy objectives;

 Trends in total public investment

 Efficiency and impact of public investment

 Actions taken to improve GOJ’s public investment management capacity

 Overview of the institutional performance along the project cycle including an

assessment of investment planning, investment allocation, investment

implementation, monitoring and evaluation

 Provide a review of the policy that guided the investments for the reporting

period to determine alignment to and variation from the policy and the resulting

outputs and impact;

 Include standard metrics to compare annual portfolio performance and sector

performance;

 Status of PIMSEC Project Pipeline

 Status of DBJ’s PPP Pipeline

The consultant will be required to have consultations with key stakeholders in the process to include:

 Ministry of Finance and the Public Service  Public Investment Management Secretariat  Planning Institute of Jamaica  Specified Public Sector entities  Development Bank of Jamaica  Cabinet Office  Donor Agencies

36

Appendix II

FISCAL RISK STATEMENT

The April 2016 FPP presented a detailed outline of the key fiscal risks being monitored by the

MOFPS/GOJ and the associated strategies for managing them. This report provides a brief

update on some of the risks identified.

Natural Disasters

The GOJ recognizes the country’s vulnerability to natural disasters and the potential financial and

economic pressures that could result. As such, for the 2016/17 policy year of the Caribbean

Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC) programme, the

government has renewed the policy coverage for Jamaica for Tropical Cyclone (TC), Earthquake

(EQ) and Excess Rainfall (XSR) at a premium cost of US$4.9mn.

Arrears

Tax Refund Arrears are being closely managed by the GOJ to ensure that the arrears decline as

programmed. The level of tax refund arrears is monitored under the EFF programme and this

quantitative target has been met under successive quarterly IMF reviews. During FY 2015/16, the

stock of tax refund arrears was reduced by $4.4bn and ended the fiscal year at $17.3bn. The stock

continues to be steadily reduced, declining to $14.8bn at end-July 2016, representing a $2.5bn

reduction since the start of the fiscal year.

Domestic Arrears represents a category of fiscal risk that includes amounts due to suppliers and

all recurrent and capital expenditure commitments. This category of arrears is closely managed

by the GOJ and is also monitored under the EFF programme. During FY 2015/16 the stock of

domestic arrears was reduced by $524.3mn to $21.0bn at end-March 2016. The GOJ has

continued to steadily reduce the stock of domestic arrears and at end-July 2016, a further

reduction of $128.7mn had been achieved.

Public Private Partnership (PPP)

The GOJ recognizes that PPP projects have the potential to impose significant fiscal risks if not

appropriately designed and financed. Therefore, the risks associated with PPP’s are actively

monitored by the GOJ. The following provides an update on the status of PPPs since the FPP was

published in April.

• Kingston Container Terminal – a 30 year Concession Agreement (CA) was executed on

April 7, 2015 with Kingston Freeport Terminal Limited (KFTL) to finance, expand,

operate, maintain, and transfer the Kingston Container Terminal (KCT). The

Medium-Term Debt Management Strategy FY2020/21-FY2023/24 18 | P a g e

Low Moderate Major

Low

Government Guaranteed Loans

(GGLs):

GGLs are a potential fiscal risk to the

Government. The impact on the debt will

depend on the probability that a GGL will

be called or assumed by the GOJ and the

value of the guarantee. Consistent with

the legislated limits as per the PDMA, the

GOJ has been reducing its exposure to

risks from GGLs. Accordingly, the share

of GGLs to GDP has been decreasing

and is estimated at 4.4 percent at

December 2019, 0.6 percentage point

below the legislated target for FY2021/22.

Fiscal Management:

Weak institutional frameworks in many

developing economies precipitate

unsustainable and irresponsible fiscal and

monetary policies by country governments.

This has led to fiscal slippage, economic

contractions and ballooning public debt across

these countries. However, implementation of

structural and economic reforms in Jamaica

has resulted in stronger fiscal and monetary

policy institutions. Further, the improved

macroeconomic conditions in Jamaica suggest

that the potential fallout from poor policies

may have a moderate impact on the debt

portfolio in the short run.

Financial Crises:

Financial crises can have significant

negative effects on the economy and the

sovereign debt. The financial crisis in

Jamaica is estimated to have cost

upwards of 40 percent of GDP. However

the adoption of stronger financial

regulations and best practices reduces the

likelihood of a reoccurrence.

Moderate

Public Private Partnerships (PPPs):

The use of PPPs as a modality to mobilize

investment, particularly in infrastructure

development and energy and water

generation are common in many

developing economies. These types of

arrangements impose potentially

significant fiscal risks if not properly

managed and monitored. The GOJ’s PPP

Policy provides a framework to support

the monitoring of PPPs in Jamaica. PPPs

are adjudged to pose minimal risk to the

debt portfolio at this point in time.

However their growing popularity

suggests increasing risks from PPPs over

the medium term.

Shocks in Commodity Prices:

Adverse shocks in commodity prices,

especially oil prices, can have major effects on

the governments BOP and overall fiscal

accounts. Though potentially large on the

fiscal, the pass through to the debt portfolio is

expected to be more moderate. The thrust

towards energy diversification - achieving a 50-

50 mix by 2030, will reduce Jamaicas

vulnerabilities to oil price shocks over the

medium to long term. The advancement of the

Governments Energy Management and

Efficiency Project will also aid in reducing

costs in the short-term.

Natural Disasters:

Natural disasters (floods, hurricane and

earthquakes) pose significant fiscal risks

to the GOJ. The annual average fiscal

cost associated with hydrogeological

events is estimated at 0.85 percent of

GDP but has been as high as 26 percent

of GDP. The adoption of a suite of

disaster risk finance instruments including

indemnity type insurance coverage and

contingent lines of credit will aid in

reducing the fiscal impact of natural

disasters.

High

Low Growth and High Crime Rates:

High rates of crime pose a significant risk to

prospects for improvements in productivity and

economic growth. Higher crime related

expenditures will also impact the budget

directly. Low rates of economic growth

(GDP) will impact the fiscal through low

revenue generation and potentially higher

demand for social spending, which could lead

to increases in Government borrowing.

However, an increased focus on crime fighting

and strong and improving macroeconomic

fundamentals support projections for economic

growth of 2 percent over the medium-term.

Market Volatility:

Volatility in macroeconomic and market

variables can result in higher debt service

costs and stock valuation. Estimates of

the 95 percent VaR and CaR for the debt

portfolio suggest possible maximum

expected losses of over $300.0 billion.

Ongoing reforms of the BOJ, including

the move toward an independent central

bank and the adoption of an inflation

targeting regime could aid in the

stabilization or reduction in the volatility of

domestic market rates thereby reducing

the risks to the debt portfolio.

Low Moderate Major

Low

Moderate

High

Fiscal Impact

L ik

el ih

o o d o

f E v en

t

L ik

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o o d

Fiscal Impact

SECTION IV: RISK FACTORS AFFECTING THE DEBT PORTFOLIO

Identifying and quantifying the main risk factors and their impact are important prerequisites for

effectively managing the risks to the debt portfolio. Adverse changes in key

macroeconomic/market variables and other exogenous shocks (example: natural disasters) can

negatively impact the fiscal and debt dynamics. The relative risk to the portfolio from the

realization of an event will depend on the likelihood of occurrence and the fiscal or financial

impact. Figure 11 highlights selected risk factors, their likelihood of occurrence and their

potential impact on the debt portfolio.

Figure 11: Selected Risks and Implications for the Debt Portfolio

Notes: The risks to the debt portfolio are ranked based on the severity of outcome and probability of the event. High probability and high impact

events are the most impactful and are coded in red. Low probability and low impact events are the least impactful and are coded green. Yellow

and brown highlights more moderate and major risks to the debt portfolio.