July 25, 2012 / 3:53 PM / 5 years ago

TEXT-S&P affirms Jordan's 'BB/B' ratings, outlook is negative

 (The following statement was released by the rating agency)
Overview
  -- A combination of external developments has weakened Jordan's external 
balances and its public finances, raising the country's dependency on foreign 
grants.
  -- Nonetheless, we expect donor goodwill to remain sufficiently 
forthcoming.
  -- We are therefore affirming our long- and short-term foreign and local 
currency sovereign credit ratings on Jordan at 'BB/B'. 
  -- The negative outlook on the ratings reflects our view that we could 
lower the ratings if there are delays or shortfalls in foreign grants, and if 
Jordan's external and fiscal financing needs become more acute.
 
Rating Action
On July 25, 2012, Standard & Poor's Ratings Services affirmed its long- and 
short-term foreign and local currency sovereign credit ratings on the 
Hashemite Kingdom of Jordan at 'BB/B'. The outlook is negative.

The recovery rating is '4'. The transfer & convertibility (T&C) assessment is 
'BBB-'.
Rationale
The ratings on Jordan are constrained by the vulnerability of its economy to 
regional economic and political shocks, and by its limited fiscal flexibility. 
The ratings are supported by the country's geopolitical importance, which 
underpins strong donor support and funds much of the country's persistently 
large current account deficit.

In Jordan, commodity price inflation and the fallout from regional instability 
have translated into slower-than-expected economic growth, weaker external 
balances, and larger fiscal deficits. In our view, these external pressures 
remain acute.

Jordan's close relations with donor countries, as well as the government's 
fiscally prudent emergency measures, have partially helped it meet its fiscal 
and external financing needs. However, the government's efforts have not fully 
offset the decline in foreign reserves, the increase in government debt, and 
structurally weakened public finances.

At the same time, increasing dependence on donor support is limiting the 
government's medium-term planning capabilities and is becoming an increasing 
vulnerability, in our view. The $2 billion (6.5% of GDP) stand-by agreement 
(SBA) with the IMF, announced today, would alleviate Jordan's short-term 
liquidity constraints to some extent and could strengthen donor appetite to 
meet Jordan's financing needs. However, the SBA remains subject to approval by 
the IMF's Executive Board.

The main external stresses have centered on energy imports. First, the 
Egyptian gas pipeline--which supplies the bulk of natural gas for electricity 
production--was shut down for most of 2011 and only partially came online (at 
about 28% capacity) for a few months in 2012. To compensate for the lack of 
gas, Jordan has had to buy more-expensive liquid diesel oil.

Second, world oil prices have been high, averaging $111 per barrel in 2011 and 
forecast to average close to that in 2012. As a net importer of oil, Jordan's 
terms of trade deteriorated. This found expression in the current account 
deficit widening to 10% of GDP in 2011, which had to be funded partially by 
foreign reserves. Foreign reserves coverage of current account payments has 
declined to a low of 5.4 months. However, we forecast the current account 
deficit to narrow to 8.2% of GDP in 2012 and reserves to climb to 6.0 months 
coverage of current account payments by year-end as foreign grants trickle in. 
Higher energy costs have also weakened public finances in 2011 and 2012 
through the higher cost of commodity subsidies, bringing government budget 
deficits to about 6% of GDP.

We expect the Jordanian dinar's peg against the U.S. dollar to remain in 
place, supported by prudent monetary policy. The Jordanian central bank raised 
deposit rates by 50 basis points in February in order to strengthen the appeal 
of the currency.

Jordan's domestic political situation is fluid and unpredictable, with four 
different governments since early 2011. Each of the governments had been 
tasked to meet the somewhat conflicting demands of generating a reform program 
to maintain investor confidence, while also addressing public demands for 
greater state largesse.

New prime minister Fayez Tarawneh has signaled a focus on economic and fiscal 
reform. His government's first major step was to agree on a 3% of GDP 
austerity package, which passed in May 2012. This broke with convention, 
particularly regarding the reduction of energy subsidies and military 
spending. While we consider these fiscal measures to be positive for the 
ratings, political reform seems to be progressing more cautiously now and is 
likely to be complicated by the polarization between the country's two 
communities (Jordanians from the "East Bank" versus those of Palestinian 
origin).

In 2011, Saudi Arabia and other donor countries increased their budgetary 
support to an unprecedented 6% of Jordanian GDP. As a result, Jordan's 
headline deficit stayed at a still-high 6.2% of GDP, (12.2% of GDP before 
foreign grants). The new government's austerity package aims to stabilize 
expenditure and raise domestic revenues. We view these measures as fiscally 
prudent. However, we expect lower foreign grants to offset this and lead to a 
comparable headline deficit of around 6.0% of GDP in 2012, with foreign grants 
amounting to only 4.5% of GDP (a budget deficit of 10.5% of GDP before foreign 
grants). We note significant uncertainty around the level and timing of 
grants. Medium-term measures, such as building the liquefied natural gas 
terminal in Aqaba, should lessen the volatility of energy imports, thereby 
gradually improving the current account deficit and lowering the general 
government deficit closer to 4% by 2015.

Persistent deficits have raised net general government debt close to 60% of 
GDP, though this figure also includes the rising guaranteed debt of the 
government-owned electricity company, NEPCO. General government interest 
payments account for about 8.5% of general government revenues.

Despite crisis-like conditions, real GDP per capita growth has remained 
positive, rising 0.4% in 2011 and estimated to grow 1.0% in 2012. By sector, 
tourism appears to be slowly recovering, but the rest of the economy remains 
anemic. As conditions improve, we expect real GDP per capita growth to be in 
the 2%-3% range.

Outlook
The negative outlook reflects our view that we could lower the ratings if 
there are delays or shortfalls in foreign grants, and if Jordan's external and 
fiscal financing needs become more acute. If oil prices increase, political 
tensions in the region rise, or foreign grants fall short of our current 
expectations by year end--worsening either the fiscal or external profile--we 
could lower the ratings. Similarly, if the domestic political environment were 
to become more difficult, we could also consider lowering the ratings.

We could revise the outlook to stable if planned political and economic 
reforms proceed or if grants delivered before year-end exceed expectations. If 
Jordan's relationship with the Gulf Cooperation Council became more 
institutionalized, facilitating more measurable and predictable foreign 
assistance, we would consider this a rating strength.

Related Criteria And Research
  -- Jordan (Hashemite Kingdom of), May. 31, 2012
  -- Sovereign Government Rating Methodology And Assumptions, June 30, 2011.
  -- Methodology: Criteria For Determining Transfer And Convertibility 
Assessments, May 18, 2009.
  -- Introduction Of Sovereign Recovery Ratings, June 14, 2007
Ratings List
Ratings Affirmed

Jordan (Hashemite Kingdom of)
 Sovereign Credit Rating                BB/Negative/B      
 Transfer & Convertibility Assessment   BBB-               
 Senior Unsecured                       BB                 
 Short-Term Debt

Our Standards:The Thomson Reuters Trust Principles.
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