Moody's: Jordan's credit profile challenged by high public debt and external imbalances

Friday 24 November 2017
New York - MENA Herald:

Jordan's (B1 stable) credit profile is constrained by high public debt, persistent external imbalances and elevated geopolitical risk, Moody's Investors Service said in a report published yesterday. The country's credit strengths include a history of official sector external support and a strong institutional framework compared with regional peers.

The report, "Government of Jordan -- B1 stable, Annual credit analysis", is now available on Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Although Jordan has benefitted from lower oil prices, falling remittances and transfers from regional oil exporters continue to weigh on external accounts, as does the disruption of traditional trade routes

via Syria and Iraq," said Elisa Parisi-Capone, a Moody's Vice President -- Senior Analyst and the report's co-author. "In addition, the arrival of almost 1.4 million Syrians (655 thousand of which registered as refugees) since 2012 has added to fiscal and capital spending and put pressure on Jordan's labour market through higher unemployment and lower wages."

Jordan's strong economic growth - which averaged 6.1% between 2000 and 2010 - has boosted per capita income to levels in line with regional peers, despite the country's small size. However, following the global financial crisis and particularly in the wake of the Arab Spring uprisings, Jordan's trend growth outlook for 2011-21 has shifted to a significantly lower average of 2.6%.

The main drivers of the more subdued trend growth outlook are the continuing conflicts in Syria and Iraq - two of Jordan's main trading partners - which have dented investor sentiment and closed regional trade routes, and the refugee wave, which has put pressure on infrastructure and public services as well as demand for housing and consumption goods.

Lingering security threats in border regions have also subdued tourist arrivals.

Jordan's high institutional strength is supported by the kingdom's relatively strong institutional framework and track record of policy implementation under the umbrella of the 3-year External Fund Facility program with the IMF entered in 2016. The country's low fiscal strength stems from its weak fiscal fundamentals, as reflected in consistent fiscal deficits and a very high debt burden.

Based on fiscal performance data up to September 2017, Moody's expects a fiscal deficit of 3.9%, up from 3.2% in 2016, and higher than the budgeted 2.5%, mostly due to slower grant receipts. For 2018, Moody's expects the government to resume fiscal consolidation, particularly through the implementation of revenue measures, such as the removal of exemptions, as well as income tax reform. These measures should sustainably compensate for the gradually declining foreign grant contributions.

Jordan's gross public debt ratio includes the domestic and external debt of the central government in addition to guaranteed debts of state-owned enterprises. Based on Moody's deficit projections of 3.9% in 2017 and 3.4% in 2018, the rating agency expects the gross public debt ratio to peak this year at 95.6% of GDP and to gradually decline thereafter.

The stable outlook on Jordan's sovereign rating reflects Moody's view that the government will pursue fiscal consolidation that stabilises and reverses the country's high debt metrics over the medium-term.

A substantial reversal of the recent increase in debt metrics, moving closer to those of rating peers, would be credit positive. Conversely, continued modest growth that increases the debt burden or persistent external imbalances amid a continuing decline in foreign-exchange reserves would put negative pressure on the rating.

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