Jordan Ratings Affirmed At 'B+/B'; Outlook Remains Stable

  • We expect a strong investment pipeline supported by international donor support, as well as rising exports, will drive stronger growth prospects.
  • We are therefore affirming our foreign and local currency sovereign credit ratings on Jordan at 'B+/B'.
  • The outlook remains stable.
RATING ACTION
On March 15, 2019, S&P Global Ratings affirmed its 'B+/B' long- and short-term 
foreign and local currency sovereign credit ratings on Jordan. The outlook 
remains stable.

At the same time, we affirmed our 'B+' long-term foreign currency issue rating 
on the sovereign-guaranteed bond of senior unsecured debt issued by The 
Development and Investment Projects Fund of the Jordan Armed Forces.


OUTLOOK
The stable outlook balances our expectation that over the next 12 months donor 
funding will continue to support the government's financing needs and keep 
debt-servicing costs low, against the risk that the government will 
significantly increase spending to alleviate social and economic challenges. 

We could lower our ratings on Jordan if we saw higher debt accumulation by the 
central government and/or state-owned enterprises (SOEs) such as National 
Electric Power Company (NEPCO). We could also lower the ratings if domestic or 
external funding sources were to become strained. This could happen, in our 
view, if the Social Security Investment Fund's (SSIF) holdings of government 
debt were to reach a level indicating restricted capacity to further increase 
their exposure to the government or if strong bilateral and multilateral donor 
support were to diminish. 

We could raise the ratings if Jordan's external imbalances were to narrow 
significantly, boosting foreign exchange reserves, or if previous 
terms-of-trade volatility stabilized.


RATIONALE
The ratings on Jordan are constrained by its high public debt and the 
economy's large external financing needs, which are driven by sizable current 
account deficits. Ongoing pressures from regional conflicts have significantly 
increased its population through refugee inflows, while slowing its growth 
trajectory. 

The ratings are, however, supported by the authorities' fiscal consolidation 
efforts and measures taken to reduce losses at SOEs. We project that 
government debt will gradually decrease over the forecast horizon through 
2022. We expect that further international assistance, particularly from the 
U.S. and the Gulf Cooperation Council (GCC; Bahrain, Kuwait, Oman, Qatar, 
Saudi Arabia, and the United Arab Emirates), would be forthcoming if needed. 
This continues to support our rating on Jordan.

Institutional and Economic Profile: Economic growth will gradually improve 
  • Social pressures remain high, and we anticipate the government will prioritize growth-related spending and only gradually implement planned fiscal measures.
  • We expect donors to continue to support Jordan through grants (albeit declining) and concessional funding to maintain political stability.
  • We forecast that economic growth will gradually improve to 3.5% by 2022, supported by public and private investment and growth in exports.
The country's policymaking and institutional capacity have been strained by 
both the regional protests and revolutions of 2011 and the Syrian crisis. 
Large refugee inflows, resulting in a population increase of 50% since 2011, 
and security concerns have weighed on public resources. In particular, rising 
military, medical, and education costs have led to a deterioration in Jordan's 
fiscal position and increased its debt levels, as well as heightened its 
dependence on donor support.

Given the challenging environment, we expect that risks to Jordan's public 
finances will persist and that improvements will only gradually become visible 
over our forecast horizon. While the three-year Extended Fund Facility (EFF) 
program from the International Monetary Fund (IMF) has provided a policy 
anchor, the government has slowed its pace of fiscal consolidation, compared 
to initial targets, to alleviate social pressures. After the program ends in 
2019, we anticipate that the government will likely continue its commitment to 
improving its fiscal position--but more gradually. Renewed protests against 
fiscal reforms, similar to 2018, are possible, but our base case is that they 
will not be widespread enough to result in social upheaval. Yet, in our view, 
centralized decision-making reduces the predictability of future policy 
responses, especially given Jordan's changing demographics and the rising 
desire for more political participation among sections of the population.

We expect international support for Jordan to remain strong. Jordan is one of 
the most politically stable countries in the region, and maintaining this 
relative stability is an important foreign policy objective for the U.S. and 
the GCC. The U.S. has committed to providing economic and military aid of at 
least $1.275 billion annually (about 3% of 2019 GDP) over 2018-2022. 
Exceptionally, U.S. Congress approved a higher disbursement of $1.52 billion 
in 2018. The GCC also stepped in following the protests in June 2018, and GCC 
countries (excluding Qatar) pledged an aid package of $2.5 billion over five 
years in the form of deposits, project finance, and a very small grants 
portion. Qatar has promised to provide $500 million and jobs for around 10,000 
Jordanians in Qatar. 

Jordan also benefits from concessional lending from bilateral partners and 
multilateral agencies (around 17% of GDP outstanding as of end-2018), which 
have been important sources of financing twin fiscal and external deficits. In 
addition, the U.S. has guaranteed Eurobonds of $3.75 billion issued over 
2013-2016. Jordan has upcoming Eurobond redemptions with U.S. guarantees of 
$1.00 billion in 2019 and $1.25 billion in 2020. If the guarantees are not 
extended, we expect that U.S. bilateral support will nevertheless continue in 
other forms. We also understand that additional issuances could benefit from 
loan guarantees offered at the London Initiative conference in February 2019 
of $1 billion from the World Bank, $250 million from the U.K., and $200 
million from Saudi Arabia. Moreover, donors including the World Bank, the 
African Development Bank, the U.K, Japan, the European Union, and the European 
Investment Bank pledged new multiyear concessional loans and grants in 
February.

We estimate that real GDP grew by 2% in 2018. Regional developments have 
significantly affected foreign investment, while weakened macroeconomic 
activity in the GCC has reduced remittances and investment inflows. The Syrian 
conflict has abated but security risks will remain high--although the 
authorities have reopened the border. At the same time, the unemployment rate 
remains high at around 18.6%.

However, the new government under Prime Minister Omar Razzaz appointed in June 
2018 has outlined an ambitious growth plan to improve competitiveness, foreign 
investment, and exports. We project that real GDP growth will increase over 
the next four years, from 2.5% in 2019 to 3.5% in 2022. We expect key drivers 
of growth to be public and private investment into priority sectors such as 
energy, water, and transport; rising exports of goods and services to Iraq; 
and tourism. In February 2019, Jordan and Iraq signed several agreements, 
which included the restoration of customs exemptions on several Jordanian 
goods, export of Iraqi oil to Jordan at concessional rates, a door-to-door 
freight transport agreement, and the establishment of a joint industrial free 
economic zone at the border.

Jordan's economic growth has not kept pace with the rapid rise in its 
population. We estimate GDP per capita of US$4,100 in 2019. Including our 
growth forecasts through 2022, 10-year weighted-average real GDP per capita is 
expected to contract by about 1.7%, significantly lagging peers at similar 
income levels. However, population growth has normalized because refugee 
inflows had slowed since the closing of the borders with Syria in June 2016. 
We do not see a material risk of large Syrian refugee inflows following the 
border reopening, but we also do not anticipate lots of refugees returning to 
Syria at this time.

Flexibility and Performance Profile: The central government's gross debt stock 
is high, and current account deficits will remain large but on a declining 
trend
  • Gradual fiscal consolidation should help slowly reduce high government net debt levels, though we expect the pace of reforms to slow compared to recent years.
  • We project the government will rely more on external concessional loans to fund budget deficits as grants continue to decline.
  • We expect growth in exports and tourism receipts will stabilize Jordan's external financing needs through 2022.
Jordan's central government debt levels have stabilized over the last three 
years at around 95% of GDP, reflecting a substantial increase from around 62% 
in 2011. The increase stems from high central government fiscal deficits and a 
significant rise in government-guaranteed debt at NEPCO and the Water 
Authority of Jordan (WAJ). The government has been directly servicing NEPCO's 
debt payments since 2013, and is now doing the same for WAJ to reduce WAJ's 
interest costs. We therefore include the government-guaranteed debt of NEPCO 
and WAJ of around 11% of GDP in 2018 in our government debt stock 
calculations. We also see as credit constraints the large banking exposure to 
public debt--of more than 20% of total assets--and the exposure to foreign 
currency debt of around 42% of total central government debt at end-2018.

We estimate that Jordan's general government debt narrowed slightly to 78% of 
GDP in 2018. To calculate general government debt, we deduct the SSIF holdings 
of government debt because the SSIF falls within our definition of general 
government. However, we note that the proportion of debt held by SSIF has been 
steadily increasing, to around 18% of total debt in 2018, doubling from 2010. 
We could decide to include this portion in our government debt calculation if 
we assess that SSIF's bond purchases continue to represent a material amount 
of the central government's deficit financing (averaging more than 60% in the 
last five years), and if this debt becomes a larger proportion of central 
government debt and the fund's total assets. This is because it would 
increasingly reflect insufficient voluntary domestic financing sources.

We anticipate that the government will raise more external debt, primarily on 
a concessional basis, over 2019-2022 to meet its funding needs and as an 
attempt to lengthen its debt maturity profile. As a result, we expect 
debt-servicing costs to remain under 10% of total revenues over 2019-2022.

We believe that the government's fiscal consolidation slowed in 2018. While 
gross general government debt as a percentage of GDP declined slightly, there 
was a drawdown of 1.5% of GDP in government deposits from the Central Bank of 
Jordan (CBJ). In 2018, the government raised the goods and services tax (GST) 
on several basic commodities to 10% (previously, exemptions had brought down 
rates to 0%, 4%, and 8%), eliminated flour subsidies, and increased taxes on 
imported cars, carbonated drinks, and cigarettes. The government also 
increased electricity tariffs, monthly, until July (except June) based on a 
formula linked to global oil prices, but revised tariffs downward in September 
and December. We attribute the small deterioration in the fiscal position to 
some underperformance in tax administration and collection. The 
lower-than-expected tax revenues were partly offset by additional grants from 
the U.S. and a 10% decrease in capital expenditure. 

We anticipate that the pace of fiscal measures could slow further as the 
government prioritizes growth-enhancing policies and increases capital 
expenditure, while budget grants decline. We expect fiscal gains from the 
implementation of the new income tax law passed in December 2018, which lowers 
the personal tax exemption threshold and broadens the tax base. The government 
is also focused on strengthening tax data administration and reducing tax 
evasion. However, we understand that the authorities do not plan to increase 
GST further in 2019, contrary to our prior expectation. The government also 
revised down GST on basic food items to 4%, from 10% and 16%. As increasing 
taxes further is politically more contentious with high social pressures, we 
expect central government debt will remain broadly stable through 2022. Yet, 
we forecast narrowing general government debt levels to be supported by 
continued growth (though at a lower rate) in debt holdings by the SSIF.

The weak performance of NEPCO and WAJ in recent years has resulted in 
significant financial costs to the government. Although the government started 
implementing an automatic tariff adjustment mechanism in 2018 linked to global 
oil prices, we believe that the adjustment could be insufficient to meet 
NEPCO's operational breakeven. However, the start of Egyptian gas and Iraqi 
oil imports in 2019 on concessional terms, and gas imports from the Leviathan 
Field in Israel in 2020 could help to reduce NEPCO's input costs over the next 
four years. Although losses at WAJ continue, it has a target date for 
operational cost recovery by 2020.

We estimate that Jordan's current account decreased to 9.3% of GDP in 2018, 
from 10.7% in 2017, helped by a narrowing trade deficit and rebound in 
tourism. We forecast that declining current account deficits will reduce its 
external financing needs to an average of 153% of current account receipts and 
usable reserves over 2019-2022, owing mainly to rising exports to Iraq and 
tourism receipts as the regional security environment stabilizes. There could 
also be some upside from higher exports to Syria given the reopening of the 
Nassib border in October 2018. Yet, we anticipate that normalization of trade 
with Syria will likely take time due to continued security concerns and 
infrastructure damage. We expect current account deficits averaging 7.8% of 
GDP over 2019-2022 will continue to be financed by foreign direct investment 
and external debt issuances (mostly government external debt) and project 
lending.

Mainly because of the large external imbalances and lower financial account 
inflows in recent years, gross foreign exchange reserves (including gold) have 
been declining since 2015, reaching $14.6 billion at end-2018 from $15.6 
billion at end-2017. A rise in the deposit dollarization rate due to higher 
political uncertainty in mid-2018 and lower gold valuation also weighed on 
reserves. Deposit inflows from GCC countries of $1.2 billion in 2018 were 
unable to offset this decline. However, we expect foreign currency reserves to 
improve somewhat from 2019 on the back of higher FDI and debt inflows, along 
with lower current account deficits. 

At the current level, we believe Jordan has sufficient external assets to 
uphold the currency peg to the U.S. dollar. The Jordanian dinar's peg supports 
price stability, although it also limits the central bank's room for policy 
maneuver. Despite subdued economic activity, CBJ has followed the U.S. Federal 
Reserve in hiking interest rates to maintain competiveness of the Jordanian 
dinar. However, the CBJ continues to provide subsidized rates of 1.75% in 
Amman and 1.00% outside Amman for lending to key economic sectors including 
industry, tourism, agriculture, and renewable energy to support growth. We 
expect inflation to slow to 2.5%-3.0% over the next four years after peaking 
at 4.5% in 2019, supported by lower oil prices. 

Nonresident deposits in the financial sector make up more than 40% of total 
external short-term debt. Although these deposits have steadily increased over 
the years, and we understand that they mainly relate to the Jordanian 
diaspora, we view their reversal as a potential risk.