Jordans sovereign ratings affirmed

International credit rating agency Capital Intelligence Ratings (CI) has affirmed Jordan’s Long-Term Foreign Currency Rating of ‘BB-’ and its Long-Term Local Currency Rating of ‘BB’.

At the same time, CI has affirmed Jordan’s Short-Term Foreign and Local Currency Ratings of ‘B’. The Outlook for the ratings has been affirmed as ‘Negative’.

Jordan’s economy has been adversely affected by regional instability in the past few years. The conflicts in neighbouring Iraq and Syria have weighed on economic growth through strong decreases in exports and tourism, while the influx of refugees has impacted the public finances. Because of sluggish economic growth, Jordan’s official unemployment rate increased to 18.5 per cent in 2017 from 11.9 per cent in 2014. While CI’s baseline scenario projects a modest increase in real GDP growth to 2.8 per cent in 2018, from two per cent in 2017, current economic growth dynamics are considered insufficient to reduce unemployment significantly. Moreover, Jordan’s economic growth outlook remains subject to substantial regional instability risks.

As a result of persistent fiscal deficits, central government gross debt reached a high 95.9 per cent of GDP in 2017 (67.1 per cent in 2010). Jordan’s high government debt burden well-exceeds the average government debt burden of other sovereigns rated in the ‘BB’ range (65.5 per cent of GDP in 2017) and constitutes a major rating constraint. Fiscal consolidation measures contributed to a steady decline in the overall government budget deficit to 2.5 per cent of GDP in 2017 from 10.1 per cent in 2014. However, even though the government intends to implement additional fiscal measures in 2018 and 2019, supported by the IMF programme agreed in 2016, CI does not envisage a marked decrease in the central government debt-to-GDP ratio over the period given our expectation that economic growth will remain modest.

Despite the declining budget deficit, Jordan’s fiscal sustainability continues to rely on the inflow of foreign grants, particularly from the United States and GCC countries. Foreign budgetary grants accounted for 2.5 per cent of GDP in 2017. This dependency on foreign grants exposes Jordan to the risk of donor fatigue. That said, the willingness of external donors to provide support is considered moderately high due to Jordan’s strategic position in the Middle East.

The government debt profile has changed in recent years due to greater reliance on external commercial borrowing to fund the budget deficit. Borrowings from international capital markets accounted for 21.9 per cent of total central government debt in 2017, up from three per cent in 2012. Borrowing from international capital markets has also become an important source of financing for Jordan’s very large current account deficit, which was at 10.6 per cent of GDP in 2017.

The issuance of sovereign debt on international capital markets provided Jordan with capital inflows in the amount of 3.7 per cent of GDP during 2017. Jordan’s gross external financing needs are projected at a sizeable 13.4 per cent and 14.3 per cent of GDP in 2018 and 2019, respectively. Not least in view of elevated regional instability, we consider the increased reliance on external commercial borrowing to be an important risk factor as it raises the vulnerability of government and external financing to sudden shifts in foreign investor sentiment towards Jordan.

Jordan’s ratings continue to be supported by manageable – albeit increasing – net external debt (14.7 per cent of GDP in 2017). In addition, the domestic banking sector remains characterised by satisfactory loan asset quality, good liquidity, and sound capital adequacy and profitability.