INTERNATIONAL. Standard & Poor's Ratings Services today affirmed its 'BB/B' long- and short-term foreign-currency sovereign credit ratings on the Hashemite Kingdom of Jordan.
At the same time, we lowered our long-term local-currency sovereign credit rating on Jordan to 'BB' from 'BB+' and affirmed the short-term local-currency rating at 'B'. The outlook is negative. The recovery rating is '4'. The transfer & convertibility (T&C) assessment is 'BBB-'.
Like many other Arab countries in 2011, Jordan is under public pressure to meet expectations for political and socioeconomic change. At the same time, the economy has suffered external shocks from commodity price inflation and the fallout from regional instability, which has resulted in slower economic growth and larger fiscal deficits.
However, in our view, these challenges are partially mitigated by Jordan's close relations with donor countries supporting comparably modest external borrowing needs, though these are rising as net FDI covers a decreasing share of the current account deficit.
Nevertheless, the domestic political situation is fluid and unpredictable. On Oct. 17, 2011, media reported that King Abdullah II had sacked Prime Minister Marouf al-Bakhit after blaming him for failing to deliver any reform momentum. His replacement, Mr. Awn al-Khasawneh, appears to have international credibility as well as access to all Jordanian political factions.
The appointment of what we see as a more-moderate and technocratic cabinet may indicate the King's increased sense of urgency to accelerate political and economic reforms. Even so, we believe the new government faces major challenges in meeting the demands of an increasingly impatient public expecting more-rapid changes.
In our view, any reform efforts could also be complicated by greater polarization between the country's two communities (Jordanians from the "East Bank" versus those of Palestinian origin).
The mission of the new finance minister, former central bank governor Ummaya Toukan, is to reduce fiscal imbalances. These imbalances are:
•The general government budget deficit remains sizable according to our estimate, at 6.2% of GDP in 2011, compared with 6.7% in 2009;
•The composition of spending has shifted away from capital expenditures and toward current expenditures such as food and energy subsidies or transfer payments; and
•The fiscal deficit would be higher without foreign grants, notably a transfer from Saudi Arabia this year amounting to 18% of general government revenues.
While we consider Jordan's structural deficit to have worsened, bi-lateral international governmental support is an important buffer. We project net general government debt will peak at 45% of GDP in 2013, and gradually decline thereafter.
Jordan's external liquidity may be marginally weakening as its net external liability position edges up to an estimated 114% of current account receipts (CARs) in 2011. However, a large portion of this liability is the result of FDI and external liquid assets continuing to exceed external debt by over 30%. At 82%, gross external financing needs as a percentage of CARs plus useable reserves also remain manageable.
Due to higher import prices and a decline in tourism receipts as well as remittances, we forecast the current account will widen to 7.3% of GDP in 2011. Similarly, foreign reserves have declined by about 3.5% to cover the loss of foreign investment in response to regional unrest.
Nevertheless, sufficient foreign reserves and what we consider as a prudent monetary policy should in our view prevent any risks to the Jordanian dinar's peg against the dollar. We consider the disorderly departure of the central bank governor in September 2011 to be a reflection of rising political risk more than a decline in institutional independence.
The lowering of the local-currency ratings is based on Standard & Poor's new sovereign criteria. Among several factors, local-currency ratings can only enjoy uplift from the foreign-currency ratings under an independent monetary policy with a track record of a floating exchange rate. The Jordanian dinar, however, has been pegged to the U.S. Dollar since 1995. As a result, the local-currency ratings are equalized with the foreign-currency ratings at 'BB/B'.
The recovery rating of '4' indicates our view of a post-default recovery rate of 30%-50% and assumes a default by Jordan would likely be related to the withholding of foreign financial support or a deep recession in key trading partners such as the Gulf Cooperation Council (GCC). Under this scenario, the recovery rating is constrained by our consideration of Jordan's default history with both public and private creditors during 1989-1993.
The T&C assessment is two notches above the foreign-currency rating to reflect our opinion that the likelihood of Jordan restricting access to foreign exchange needed by Jordan-based non-sovereign issuers for debt service is moderately lower than the likelihood of the sovereign defaulting on its foreign-currency obligations.
Economic policies are focused outward and there are very few foreign exchange restrictions, suggesting a lower likelihood than in more-interventionist sovereigns of resorting to such restrictions in a severe downside scenario.
The negative outlook reflects the likelihood of a downgrade if the political environment deteriorates and Jordan's fiscal performance fails to strengthen, and if we see a lag in planned reforms, an economic rebound, and integration with GCC states.
While international support has provided some buffer this year, we could lower our ratings if foreign grants were to decline without an offsetting fiscal adjustment. Similarly, if Jordan's external position were to weaken significantly, the ratings could also come under downward pressure.
On the other hand, we could revise the outlook to stable if the new government is able to launch reforms that lead to a steadier political environment, provide support for public finances, and boost external investor confidence. We could also review the outlook if Jordan's relationship with the GCC becomes more institutionalized, with measurable and predictable benefits for the Kingdom.