Jordans Long-Term Foreign and Local Currency Ratings Lowered Outlook Revised to Stable
(MENAFN Press) 11th December 2013
Jordan's Long-Term Foreign and Local Currency Ratings Lowered; Outlook Revised to 'Stable'.
Capital Intelligence (CI) today announced that it has lowered Jordan's Long-Term Foreign Currency Rating by one notch to 'BB-' from 'BB', and its Long-Term Local Currency Rating to 'BB' from 'BB'. At the same time, CI has affirmed Jordan's Long- and Short-Term Foreign Currency Ratings of 'B'. The Outlook for Jordan's Long-Term Foreign and Local Currency Ratings has been revised to 'Stable' from 'Negative'.
The ratings downgrade reflects the weakness of public finances, characterised by large fiscal deficits, growing central government debt, and high financing requirements. The downgrade also discounts the prolonged geopolitical risk factors that continue to exert pressure on the country's limited fiscal resources, hampering its medium term growth potential and aggravating its socioeconomic imbalances.
Jordan's ratings continue to be supported by the authorities' commitment to fundamental reforms “ aimed at correcting the economy's chronic imbalances “ and by the country's geopolitical importance, which increases the likelihood of financial support from regional allies and international financial institutions at times of stress.
Public finances remain under significant pressure, although the headline budget deficit is expected to decline to about to 6.4% of GDP this year from 8.2% in 2012, largely due to the partial reversal of costly fuel subsidies. Public debt continues to rise and is likely to breach the legal limit of 80% of GDP this year (it was 60% of GDP in 2008), reflecting the fiscal deficit and the continued issuance of government-guaranteed debt for loss-making public entities, in particular the National Electricity Production Company (NEPCO). Interest expenditure is projected to have increased to around 12% of budget revenue in 2013, reflecting growth in the debt stock and high domestic borrowing costs.
Further fiscal consolidation is planned over the coming years, with the government aiming to reduce the budget deficit to about 4.5% of GDP in 2014 and 3% in 2015. However, this could prove extremely challenging, in view of the politically sensitive nature of the planned reforms and emerging spending pressures related to the growing Syrian refugee problem. CI considers the likelihood of fiscal slippage to be high and expects the budget deficit to be in the region of 6% of GDP in 2014 and 4% of GDP in 2015 “ with the debt-GDP ratio climbing to around 83.5% over the same period.
The structure of public finances remains relatively weak, with the government dependent “ to some extent “ on potentially volatile donor support to finance more than one-third of the budget deficit. CI expects the budget deficit, excluding grants, to be about 9.8% of GDP in 2013, compared to 9.7% in 2012.
Refinancing risks remains high, as debt falling due is in the region of 21% of GDP in 2014. However, near term refinancing risks are mitigated as the majority of the debt stock is local currency denominated; in the short term, local banks are expected to be willing and able of buying local currency debt. Additionally, the government has met part of its 2014 financing requirements through the issuance of a USD 1.25 billion bond guaranteed by the US government. This 7-year bond, which covers nearly 12.5% of the financing requirements of 2014, was issued at a favourable coupon of 2.5%.
At present, the domestic political environment is relatively stable, but the situation in neighbouring states is giving rise to security and humanitarian challenges. The growing exodus of refugees from Syria has strained the country's scarce fiscal resources and aggravated Jordan's social challenges “poverty and unemployment. Moreover, the military conflict in Syria undermines Jordan's growth prospects, in view of the continued disruptions of the trade channels.
The current account deficit remains unsustainably high, although it is likely to have declined slightly to about 14% of GDP in 2013, mainly due to the resumption of natural gas supply from Egypt, albeit at higher prices and lower quantities. However, large external financing needs of 33% of GDP (79.5% of CARs) continue to weigh on the country's external position.
The authorities have managed to reverse the sharp decline in official reserves that occurred in 2012, through a combination of donor support and relatively costly external borrowing. Reserve adequacy has improved, with reserves currently twice as large as external debt falling due within a year and around 1.8 times the country's gross external financing needs. Nevertheless, the balance of payments position remains vulnerable and prospects for sustainable reserve accumulation are uncertain.
LOCAL CURRENCY RATINGS
The higher local currency rating reflects the government's stronger repayment capacity in Jordanian dinars due to moderate monetary policy flexibility and control of the tax system. The local currency ratings also reflect banking sector liquidity and progress with developing the government debt market. Local banks are expected to remain willing and able purchasers of government debt over the medium term, in part due to the lack of alternative domestic investment opportunities and the availability of substantial levels of excess liquidity (estimated at USD4.0 billion in conventional banks). In addition, the implementation of the newly ratified sukuk law is expected to diversify the government's financing sources, enabling it to issue local currency denominated, sharia compliant debt instruments.
The 'Stable' Outlook balances the improvements in both the current and fiscal gaps and the increase in foreign reserves, with the country's significant vulnerability to exogenous shocks stemming from its limited shock absorption capacity, and the continued increase in public debt above its healthy thresholds - further reducing the government's already limited fiscal flexibility.
The ratings could be lowered in the near-term if adverse developments, especially external, cause considerable deterioration in the fiscal and external positions and increase refinancing risks.
Conversely, the ratings could be revised upwards if external pressures ease and the fiscal position shows signs of durable improvement.
Tel: 357 2534 2300
Rating Committee Chairman
Senior Credit Analyst
The above ratings have been initiated by Capital Intelligence (CI). The rated entity did not participate in the rating process. The information source used to prepare the credit ratings is public information. CI had access to the published fiscal and external accounts of the rated entity, but did not have access to any internal documents. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the rated entity were first released in December 1996.The ratings were last updated in February 2013.
The principal methodology used in determining the ratings is Sovereign Rating Methodology. The methodology and the meaning of each rating category and definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com.
About Capital Intelligence (Cyprus) Ltd.
Capital Intelligence (CI) has been providing credit analysis and ratings since 1985, and now rates over 400 Banks, Corporates and Financial Instruments (Bonds & Sukuk) in 37 countries. A specialist in emerging markets, CI's geographical coverage includes the Middle East, the wider Mediterranean region, Central and Eastern Europe, South Asia, South-East Asia, the Far East, and North and South Africa.In May 2012, CI registered as a credit rating agency in accordance with Regulation (EC) No. 1060/2009 of the European Parliament and of the Council on credit rating agencies.www.ciratings.com
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