Jordan’s Sovereign Ratings Affirmed

Capital Intelligence, the international credit rating agency announced that it has affirmed Jordan’s longterm foreign and local currency ratings of ‘BB’ and ‘BBB-‘, respectively. The sovereign’s short-term ratings are also unchanged at ‘B’ for foreign currency and ‘A3’ for local currency obligations. The credit outlook is stable. Jordan’s ratings reflect the authorities’ careful management of the economy and commitment to structural reform, as well as improving public debt dynamics and an adequate international liquidity position. The ratings are constrained by structural fiscal weaknesses, growing external financing needs, comparatively low per capita income, and the challenges associated with a fast growing population and relatively high rates of poverty and unemployment. The stable outlook weighs improvements in the economic structure and external solvency against limited fiscal flexibility, significant vulnerability to external shocks, and the challenges posed by rising inflation.
Jordan’s economy is growing strongly, but accelerating inflation and a worsening external environment pose major risks to the short-term outlook. Real GDP increased by an annual average of 6.6% in 2001-07, compared with 3.2% in the second half of the 1990s, and rose by 6% year-on-year in the first half of 2008. While the direct impact on
Jordan of the current turmoil in the global banking and financial sectors will probably be small, spillover effects from the global economic downturn are likely to dampen economic activity going into 2009 and growth is projected to slow to about 5%. Consumer price inflation has taken off – reaching 19.9% in September – reflecting the rapid rise in global oil and food prices in the first half of the year and the government’s decision to eliminate costly fuel subsidies. The headline rate should fall significantly in 2009 as the impact of fuel and food price hikes passes through the system, but there is a risk that the disinflationary process will be weakened by second round effects, including wage increases.
Compensatory expenditure measures to offset the impact on living standards of the jump in energy prices are expected to contribute to a further increase in the central government budget deficit to about 6% of GDP this year (10% of GDP excluding grants) from 5.2% in 2007. Without further structural fiscal reforms the deficit is likely to remain at relatively high, albeit declining, levels over the medium term and the government will remain dependent on foreign grants to keep the shortfall of domestic revenues against expenditure within manageable financing limits. The high deficit and debt stock, along with a rigid spending structure, leave little room for fiscal policy to be used counter cyclically or as a shock absorber without adverse consequences for long-run fiscal sustainability.
In the absence of an economic shock, public debt dynamics should remain favourable in the near term. Net central government debt, which takes into account government financial assets, has declined from 69.9% of GDP at end- 2007 to an estimated 60.5% – mostly because of an inflation-driven increase in nominal GDP – and is projected to reach 59.0% in 2009. The government’s foreign currency exposure has fallen significantly this year following the repayment in advance of maturity of USD2.4 billion of non-concessional Paris Club debt. The buy-back operation, financed from accumulated privatisation proceeds, has reduced foreign currency-denominated debt from 44.8% of
GDP to an estimated 26% and should save the government around 1% of GDP in annual external debt service payments.
Jordan’s external accounts remain a cause for concern, but not alarm. The current account deficit was equivalent to 18% of GDP in 2007 and is projected by Capital Intelligence to reach 19% of GDP this year (making it one of the largest in the world) and to narrow to a still-high 11.6% of GDP by 2010. The deficit has so far been fully covered by foreign capital, in particular net FDI and other non-debt creating flows. But its size leaves Jordan vulnerable to low-probability extreme events such as sudden stops and large reversals in capital flows. Near-term external risks are mitigated, however, by a good level of official foreign exchange reserves, modest public external debt service needs, and the comfortable net foreign asset position of the public and banking sectors.