Ammon News - AMMONNEWS - “The affirmation of Jordan’s ratings takes into account the recent improvement in the country’s capacity to absorb economic shocks in view of the decline in international oil prices and the progressive increase in foreign exchange reserves.

“Benefiting from lower oil prices and continued support from international donors, Jordan’s foreign exchange reserves continued to increase in 2014, and now cover almost all external debt falling due within a year. The external current account deficit narrowed in 2014 to 9.7 per cent of GDP compared to 14.5 per cent of GDP in 2013. The dollarization rate in the financial system and the yields on government treasury bonds also declined, reflecting confidence in the local currency.

“Balance of payments risks remain relatively high, but are expected to decline slightly in the intermediate term. The country’s gross external financing needs are also high at about 30 per cent of GDP. Although Jordan is vulnerable to external shocks, near-term risks are greatly mitigated by the recently restored official reserve buffer and ongoing financial assistance from regional and strategic allies, as well as international financial institutions.

“The ratings affirmation also takes into account the authorities’ commitment to structural reforms, which are aimed at correcting the economy’s chronic imbalances. Despite a challenging regional environment, the economy grew by 3.1 per cent in 2014 and is expected to expand by a further 3.7 per cent in 2015. Medium-term growth prospects would be more favourable if it were not for the currently unsettled geopolitical situation, with the influx of refugees from neighbouring Syria aggravating socioeconomic imbalances and putting pressure on scarce resources. The growing insurgency in Iraq is also adding to security concerns.
“The public finances remain the major constraint on Jordan’s ratings in view of the high debt burden and high financing requirements. According to the Ministry of Finance, the overall central government budget deficit declined to 2.3 per cent of GDP in 2014 from 5.5 per cent in 2013. However, the deficit would have been around 7.2 per cent of GDP but for foreign grants –underscoring the importance of external support for fiscal sustainability.

“Gross central government debt continues to rise and is likely to exceed 90 per cent of GDP in 2015, reflecting the size of the fiscal deficit and the continued issuance of government-guaranteed debt for loss-making public entities – particularly the National Electricity Production Company (NEPCO). Interest expenditure is expected to exceed 10 per cent of budget revenue in 2015, and is expected to remain substantial in view of the high debt stock and related borrowing costs.

“Refinancing risks remain high, with gross financing needs in the region of 28 per cent of GDP in 2015 and 2016. However, near-term refinancing risks appear manageable given that the majority of scheduled debt repayments are in local currency and local banks appear able and willing to buy local currency debt. In addition, the government is expected to meet a large part of its short-term financing needs through the issuance of a eurobond guaranteed by the US government, and a possible request of extending the Standby Agreement (SBA) already in place with the International Monetary Fund (IMF).

“The government has expressed its commitment to fiscal consolidation over the coming years and aims to reduce the budget deficit to about three per cent of GDP by 2016. However, this could prove extremely challenging in the current economic and geopolitical environment.

“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 the progress made with regards to 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 excess liquidity (estimated at $2.7 billion in conventional banks).

“The ‘Stable’ Outlook indicates that Jordan’s sovereign ratings are likely to remain unchanged over the next 12 months, and balances improving international liquidity and the likely availability of external financial assistance in times of need against the country’s high debt metrics and significant geopolitical risk.”

*CPI