Monday 27, November 2017 by Jessica Combes

Jordan sovereign ratings affirmed


Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed Jordan’s Long-Term Foreign and Local Currency Ratings of ‘BB-’ and ‘BB’, respectively, as well as its Short-Term Foreign and Local Currency Ratings of ‘B’. At the same time, CI Ratings has affirmed the Outlook for Jordan’s Foreign and Local Currency Ratings at ‘Negative’.

The Ratings and the outlook reflect the continuing decline in the country’s foreign exchange reserves, which is weakening the capacity to absorb external shocks. The ratings also take into consideration the high debt metrics and the ongoing fiscal weaknesses, in the context of a low growth environment, increasing unemployment, and regional instability. 

External liquidity has remained under pressure in 2017 and the country’s chronic current account deficit is expected to stay high at around 8.9 per cent of GDP due to relatively low worker remittances and tourism revenues. Foreign exchange reserves fell further to $11.1billion in the first nine months of 2017 (equivalent to around six months of import coverage), compared to $12.9 billion at end 2016.

While external vulnerabilities remain high, Jordan’s adequate access to international markets and the availability of support from the International Monetary Fund (IMF) financing under the extended external fund facility agreement should help partially mitigate near-term external refinancing risks and alleviate any immediate pressures on the exchange rate regime. In addition, although foreign currency reserves are declining, they continue to provide reasonable coverage of the country’s gross external financing needs.

The public finances remain the major constraint on Jordan’s ratings, owing to the heavy debt burden and high financing requirements. Gross central government debt remained high at 94.8 per cent of GDP in the first nine months of 2017, out of which JOD 6.7 billion (22.6 per cent of GDP) is the guaranteed debt of NEPCO and the water authority. However, near-term refinancing risks appear manageable given that the majority of scheduled debt repayments are in local currency and local banks appear able and willing to buy local currency debt.

Fiscal performance is expected to remain on track in 2017, underpinned by the continued implementation of IMF supported fiscal consolidation measures, such as tax increases and capital spending reductions. The central government budget deficit (excluding grants) is likely to be around 6.4 per cent of expected GDP in 2017 (6.2 per cent in 2016). Including grants, the budget deficit remained in the region of 3.5 per cent of GDP in the first nine months of 2017, compared to 3.2 per cent of GDP in 2016. Based on CI’s baseline scenario and provided that the government presses ahead with tougher fiscal consolidation measures, the budget deficit (including grants) is likely to remain below three per cent of GDP in 2018 to 2019. However, downside risks remain substantial as high regional uncertainties, escalating social pressure against austerity, and low economic growth could slow the pace of consolidation and debt reduction.

Real GDP growth is expected to be around 2.3 per cent in 2017, compared to two per cent in 2016, far below the economy’s potential growth rate of six per cent. CI has revised down its growth forecasts for 2017 and 2018 to an average of 2.6 per cent (from 3.5 per cent) as higher taxes, the removal of certain VAT exemptions, combined with a further decline in worker remittances, is expected to weigh on domestic consumption. Geopolitical risk factors also remain pronounced, with the elevated conflict in Syria and Iraq threatening the security situation in the country’s northern cities and contributing to a higher influx of refugees. Unemployment has also increased significantly (to around 18 per cent in June 2017), while poverty and declining living standards have become widespread.

Jordan’s ratings continue to be supported by several factors including the authorities’ commitment to structural reforms, which are aimed at correcting the economy’s chronic imbalances, the likelihood of regional and international support from the IMF, USA, and the GCC–although the latter is deemed to be untimely and unpredictable due to fiscal strains in key GCC member states. Jordan’s ratings are also supported by the relatively sound banking sector and its willingness to invest in government domestic debt.

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