Outlook Remains Negative Due To Syria Fallout Risk

Lower foreign grants and high petroleum prices weakened Jordan's external and fiscal accounts in 2012.

In our view, fiscal measures and effective reserves management, backed by an IMF agreement, prevented any serious crisis--but external and fiscal liabilities remain higher than they were before 2012.

We are therefore lowering our long-term foreign and local currency sovereign credit ratings on Jordan to 'BB-' from 'BB'. We are affirming the 'B' short-term rating.

The negative outlook reflects our view of the potential for a downgrade over the next year if adverse developments, particularly emanating from the conflict in Syria, again significantly raise financing needs.

LONDON (Standard & Poor's) May 20, 2013--Standard & Poor's Ratings Services today lowered its long-term foreign and local currency sovereign credit ratings on the Hashemite Kingdom of Jordan to 'BB-'. At the same time, we affirmed the short-term sovereign credit ratings at 'B'. The outlook remains negative.

We revised our transfer & convertibility (T&C) assessment to 'BB+' from 'BBB-'.

The downgrade results from our view of Jordan's weakened external and fiscal profiles in the wake of reduced foreign grants and weaker terms of trade in 2011 and 2012. Foreign grants fell to 1.5% of GDP--the lowest in over a decade--from 5.9% in 2011. High oil prices in 2012 made things worse by further increasing the country's energy import bill, while the cheaper Egyptian gas supply remained largely disrupted.

In response, the Jordanian government launched a series of fiscal measures and structural reforms, negotiated a Stand-By Agreement with the IMF, signed a Gulf Cooperation Council-sponsored investment program amounting to 15% of 2013 GDP, and managed to keep foreign reserves at around four months of current account payments. In our view, these steps prevented a balance of payments crisis and we expect they will stabilize Jordan's fiscal and external accounts in the medium term.

We believe, however, that the measures will not reverse the external and fiscal weakening of the past year. Whereas, in 2011, gross external financing needs equaled 88% of current account receipts (CARs) and usable reserves, we expect CARs to remain above 100% through 2016, assuming no further external shocks. Similarly, Jordan's net external liability position, which was 118% of CARs in 2011, rose to 157% last year and we do not project that it will fall below 120% for several years. On our "narrow" measure, which nets official reserves and financial sector assets against nonequity liabilities, Jordan has moved from an asset to a liability position. We expect external vulnerabilities to persist: the risk of losing donor support persists and the country's terms of trade remain disadvantageous.

The fiscal account is also weaker. We forecast the overall 2013 general government deficit at 4% of GDP, declining thereafter. We estimate net general government debt to rise to 51% of GDP in 2014, from 44% in 2011, driven by lower foreign grants (included in revenues). This is despite the government achieving a substantial fiscal adjustment of 3% of GDP in 2012 through domestic revenue and expenditure measures. Higher government debt will also lift the general government interest burden, which we forecast to average 7.3% of revenues during 2013-2016, up from 6.8% during the previous four-year period. The relatively moderate increase is due to favorable financing from the IMF and via U.S. loan guarantees.

The Jordanian government reports its debt, including government guarantees and other public sector debt. We treat both as a separate contingent liability. Guarantees and other public sector debt constitute 14% and 10% of GDP, respectively. We expect these to decrease with the government's energy reforms, which should help the government-owned electricity company achieve cost recovery in the medium term. Including our estimate of potential recapitalization needs of the financial sector, we consider the sovereign to have "limited" contingent liabilities, as defined in our criteria.

The five-year GCC investment program is allocated to specific infrastructure investments (particularly in the energy sector) agreed between the GCC states and Jordan, and largely functions as additional capital expenditures worth about 3% of GDP annually. We expect this investment boost to raise real GDP per capita growth from 0.4% in 2012 to 2.7% by 2016. This is significantly better than growth during 2010-2012.

Last year's external developments tested Jordan's monetary policy framework. Despite declining foreign reserves and devaluation speculation, the increase in the central bank's dinar deposit rates, the inflow of GCC transfers, and the passage of the fuel subsidy reform helped maintain investor confidence. We expect the pegged exchange rate regime to remain.

Politically, Jordan has embarked on gradual reform. The January 2013 elections under a modified electoral law saw a 56% participation rate despite a boycott call by the largest opposition movement. The new government contains many familiar figures, but the smallest cabinet in over 40 years (19 members) and passage of some controversial reforms, notably fuel subsidy and electricity tariff reforms, suggest a slight improvement in institutional effectiveness. However, the larger political risks stem from Syria. The large number of Syrian refugees--with unofficial estimates reaching 10% of the native population--is not only an additional drain on public resources, but also a source of potential social tensions. Lastly, the geopolitical fallout of a growing proxy war in Syria poses various external and security risks.

The negative outlook reflects our view of the potential for a downgrade over the next year if adverse developments, particularly emanating from the conflict in Syria, again significantly raise financing needs. While external pressures may be dissipating, Jordan remains vulnerable to factors that could again worsen external and fiscal balance sheets.

We could consider lowering the rating if fallout from the Syrian conflict worsens; oil prices surge; or remittances, tourism receipts, or FDI suddenly decline. If the domestic political environment were to destabilize, we could also consider lowering the ratings.

On the other hand, we could revise the outlook to stable if forthcoming political and economic reforms improve economic, external, or fiscal indicators. In particular, the ratings could stabilize if growth prospects or external performance are better than we currently forecast.

Standard & Poor's Ratings Services, part of The McGraw-Hill Companies (NYSE:MHP), is the world's leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 23 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

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© Press Release 2013