(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