Fitch Ratings-Hong Kong-June 13: Fitch Ratings has published Jordan's Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Jordan's ratings are supported by a track record of fiscal and economic reforms and resilient availability of domestic and external financing linked to the liquid banking sector, growing public pension fund and funding from Jordan's external partners. Jordan's ratings are constrained by high government debt, weak growth and risks stemming from domestic and regional politics, large external financing needs and GDP per capita that is lower than the 'BB' median.
Jordan has built up a track record of reforms that have substantially reduced the budget deficit and stabilised government debt/GDP after being hit by multiple shocks and a slowdown in economic growth since 2011. The central government (CG) budget deficit (including transfers to state water and electricity companies) narrowed by 9pp of GDP in 2013-2018, albeit helped by a fall in energy input prices for electricity generation.
The authorities continue to pursue a programme of fiscal and economic reforms and are back on track with the IMF Extended Fund Facility (EFF) signed in August 2016, after protests slowed measures in 2018. In May the IMF completed the second review of the EFF, while emphasising the need for continued gradual fiscal consolidation and further measures to improve the finances of the state electricity sector. We would expect a follow-on arrangement between Jordan and the Fund after the EFF ends in March 2020.
Public finances remain a core rating weakness, despite the fiscal consolidation in recent years. Gross general government (GG) debt at 79.5% of GDP at end-2018 is far higher than the 'BB' median of 43%. We project a gradual reduction in government debt over the medium term, assuming Jordan maintains fiscal discipline. Availability of domestic financing owing to a fairly large and liquid banking sector and the fact that half of government external debt is owed to multilateral and official bilateral creditors are mitigating factors.
Gross public debt, as reported by the Ministry of Finance and IMF, is higher at 94.4% of GDP at end-2018, while Fitch has calculated a consolidated general government estimate by netting out the Social Security Investment Fund's (SSIF) holdings of government debt (17.7% of GDP at end-2018) and adding municipal debt (the SSIF manages the assets of the Social Security Corporation; SSC). Like the official public debt numbers, Fitch's GG estimate includes all government guaranteed debt, namely the debt of the public water authority (WAJ) and the electricity company (NEPCO). In 2018 the government decided to assume the debt of WAJ and material risks remain from the debt burden NEPCO accumulated during the period after Jordan lost access to Egyptian natural gas.
The headline CG budget deficit narrowed marginally to 2.4% of GDP in 2018, but missed the government target of 1.7% of GDP because weak growth hit revenue performance and the income tax reform assumed in the budget was delayed. Including cash transfers to NEPCO and WAJ (0.7% of GDP), which are not included by the government above the line as spending, the central budget deficit widened to 3.1% of GDP, from 2.9% of GDP in 2017.
We forecast that the headline CG budget deficit will narrow to 2.2% of GDP in 2019 (and to 2.9% of GDP including further transfers to WAJ and zero transfers to NEPCO), helped by the income tax law, which came into force in January and could add 0.7% of GDP in revenue, but constrained by further increases in interest payments. Fitch's GG estimates indicate an almost balanced budget in 2019 owing to the substantial annual surplus of the SSC, but this does not give a good indication of the government's financing needs as the SSIF cannot invest more than 60% of SSC assets in CG securities
Jordan's external financing flexibility is a rating strength, underpinned by strong relations with the international donor community, multilateral organisations, and bilateral allies, including the US and partners in the GCC. Foreign grants and concessional loans averaged 7.3% of GDP in 2012-2017. Of this, grants averaged 4.8% of GDP in 2012-17. In 2018 committed amounts were higher than in 2017 and grants in the central budget increased. Most recently, the World Bank has agreed to a second Development Policy Loan for Jordan of USD1.45 billion.
While the availability of external financing has helped the Central Bank of Jordan (CBJ) retain a significant stock of international reserves despite persistent current account deficits, Jordan's net external debt is rising. The CBJ's reserves fell in 2018 but remained robust at 7.1 months of current external payments, backing the dinar's peg to the US dollar. However, non-debt creating inflows such as foreign direct investment have weakened and Jordan's net external creditor position of 2004-2014 has reversed, with net external debt reaching 16.2% of GDP in 2018. We forecast the current account deficit to average 6.3% of GDP in 2019-2020 and for gross external financing needs of 15%-16% of GDP.
Low inflation is a rating strength. Jordan has preserved macroeconomic stability, albeit with slowing GDP growth (to 1.9% in 2018), despite multiple and severe shocks since 2011, including heightened regional instability since the Arab Spring, violent conflicts in neighbouring Syria and Iraq, the closure of important trade routes and markets in those countries, and an influx of Syrian refugees. Fitch forecasts growth to improve but remain moderate, at 2.3% in 2019-2020, given fiscal constraints and only gradual improvement in trading and investment conditions in the region. A border crossing reopened with Syria in late 2018 and trade and border agreements with Iraq were updated in 2019 following the reopening of the border in 2017, with the latter already helping Jordan's exports. Travel receipts increased by over 13% in 2018 and we expect tourism to continue growing in 2019.
Jordan scores above the 'BB' median for governance as measured by the World Bank governance indicators, but in Fitch's view these scores do not fully capture the domestic and regional political risks that Jordan faces. Jordan has weathered multiple regional shocks since 2011, but these did adversely affect the economy and public finances. The geopolitics of the region remain volatile, presenting the risk of further negative spillovers. While political stability has been maintained under the leadership of King Abdullah, low growth and the high unemployment rate (19.1% in 1Q19, with youth unemployment far higher) present ongoing risks of social unrest. Over the medium term there may be calls for further political and constitutional reforms that could disrupt economic policymaking.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns the Hashemite Kingdom of Jordan a score equivalent to a rating of 'BB+' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- Public finances: -1 notch, to reflect high public debt: the SRM is estimated on the basis of a linear approach to government debt/GDP and does not fully capture the increased risks at a high level. In addition, central government financing needs are higher than implied by the general government numbers; and there are risks from loss-making government entities and to fiscal consolidation posed by persistent weak growth.
- Structural features: -1 notch, to reflect domestic and regional political risks that are not fully captured in the World Bank governance indicators that are used in the SRM.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that, individually or collectively, could lead to positive rating action are:
- Progress in fiscal consolidation leading to a sustained reduction in government debt/GDP
- Higher and sustained real GDP growth
- Sustained reduction of the current account deficit and net external debt
The main factors that, individually or collectively, could lead to negative rating action are:
- Rising external indebtedness or a weakening of support from external partners
- A deterioration in government debt/GDP for example due to loosening of fiscal policy
- Deterioration in domestic political stability or geopolitical shocks that adversely affect the economy or public finances
We assume global economic trends to develop as outlined in Fitch's latest Global Economic Outlook.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR published at 'BB-'; Outlook Stable
Long-Term Local-Currency IDR published at 'BB-'; Outlook Stable
Short-Term Foreign-Currency IDR assigned at 'B'
Short-Term Local-Currency IDR assigned at 'B'
Country Ceiling published at 'BB'
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Summary of Data Adjustments
Jordan does not publish consolidated general government data for the budget or for debt. Fitch produces its own estimate of consolidated general government debt by netting out SSIF holdings of central government debt and adding municipal debt. Fitch produces its own estimates for the consolidated general government budget based on data from the Ministry of Finance for central government, own budget agencies, municipal/local government and the social security corporation and flows between the different levels of government.
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