New York, November 26, 2020 -- Moody's Investors Service, ("Moody's") has
today affirmed the Government of Jordan's B1 issuer and senior unsecured
ratings and maintained the stable outlook.
The coronavirus shock has aggravated Jordan's credit challenges,
in particular the government's elevated debt burden and social pressures
stemming from weak growth and high unemployment. However,
the decision to affirm the ratings takes into account credit supports
such as the government's sustained commitment to economic reforms
and to medium-term fiscal consolidation, namely in the context
of the new IMF program. Furthermore, it reflects the broad-based
international commitment to support Jordan's economic, financial
and social stability agenda through budgetary grants and concessional
lending, and the pre-pandemic structural improvements in
Jordan's current account, which reduced its external vulnerability.
The stable outlook reflects Moody's expectation that government
debt (excluding liabilities to the state-owned Social Security
Investment Fund, SSIF) will peak below 90% of GDP in the
next few years, mainly as a result of expenditure control,
improvements in tax compliance and administration, and gradually
improving growth dynamics. The stable outlook recognizes downside
risks that the government's fiscal consolidation efforts may fall
short of eventually reversing the debt increases expected in 2020-21,
possibly due to higher spending in response to increased social pressure.
However, the stable outlook balances those downside risks against
longer-term upside risks to growth, which could accelerate
more than Moody's currently assumes as a result of the ongoing structural
reforms. It also takes into account Jordan's institutional
capacity and demonstrated track record of implementing large fiscal adjustments
in the past, notwithstanding fiscal slippage during 2018-19.
Jordan's country ceilings are unchanged. The foreign currency
bond ceiling remains at Ba1/NP, the foreign currency deposit ceiling
at B2, and the long-term local currency bond and deposit
ceilings at Ba1.
RATIONALE FOR AFFIRMING THE B1 RATINGS
CORONAVIRUS SHOCK AMPLIFIED LONG-STANDING CREDIT CHALLENGES
Jordan's long-standing credit challenges, including
high government debt and social pressures stemming from weak growth and
high unemployment, have been aggravated further by the coronavirus
shock. Moody's expects that in the coming years these challenges
will continue to constrain Jordan's creditworthiness, although
the government's commitment to structural reforms, its medium-term
fiscal consolidation plan, and the steady international support
for Jordan offer a prospect that many near-term negative trends
will reverse over the next few years.
Moody's expects that Jordan's economy will contract by around
3% in 2020. Although this will be the first contraction
in more than three decades, it comes on the heels of already subdued
growth of only 2% during 2015-19, which was significantly
below the population growth rate and insufficient to arrest a steady rise
in unemployment. The unemployment rate had breached 19%
even before the coronavirus shock, spiking to 23% during
the second quarter of 2020 and Moody's estimates that youth unemployment
is close to double that figure.
Moody's also expects that weak growth, a contraction in imports
and increased spending to accommodate higher health costs related to the
pandemic will lead to a significant widening of the fiscal deficit in
2020 to around 8.6% of GDP (including the central government
deficit and the net financing needs of state-owned electricity
and water utility companies) from 6% of GDP in 2019 and will push
up government debt to nearly 87% of GDP (excluding SSIF holdings
of central government debt) from 78% of GDP in 2019. Including
all central government debt, the ratio will likely increase to around
109% of GDP from 97.4% of GDP in 2019.
STRUCTURAL REFORMS IMPLEMETATION TO LIFT JORDAN'S GROWTH POTENTIAL
Near-term growth and fiscal risks are skewed to the downside in
view of a second wave of the pandemic, which gathered momentum in
September and saw a very significant increase in new daily cases in Jordan
compared to a very subdued first wave. However, Moody's
expects that Jordan's recovery during 2021-22 and its growth
trend in the medium-term will benefit from the ongoing implementation
of the government's comprehensive economic reform agenda and could
lift the potential growth rate by at least one percentage point relative
to the pre-pandemic average.
The structural reform agenda, dubbed the Five-Year Reform
Matrix, was launched in early 2019 and is focused on reducing the
cost of doing business, strengthening governance and regulatory
predictability, increasing labor market flexibility while also encouraging
formality and gender equality, improving access to credit,
and enhancing the overall competitiveness and efficiency of Jordan's
private sector. Nearly half of all 256 regulatory and legislative
reforms planned under the Reform Matrix have already been implemented
and Jordan's progress has been captured by its large jump in the
World Bank's 2019 Doing Business Report to 75th from 104th place
(out of 190 countries) with the prospect of stronger growth trend,
enabled by these reforms, supporting medium-term fiscal consolidation.
NEW IMF PROGRAM ANCHORS MEDIUM-TERM FISCAL ADJUSTMENT
The new four-year arrangement under the IMF's Extended Fund
Facility, which was signed in late March 2020 at the expiration
of the previous program, provides an effective policy anchor that
will support the government's implementation of structural reforms
and the fiscal adjustment planned for the next four years. The
program was updated in May, in the context of Jordan's request
for additional funding under the IMF's Rapid Financing Instrument
to accommodate additional spending and policy constraints due to the pandemic,
and in late October the government and the IMF reached a staff-level
agreement on the first review of the program.
The program is aimed at stabilizing the government's debt-to-GDP
ratio in the next couple of years and reducing it below 80% of
GDP (excluding SSIF holdings) by 2024-25 through a combination
of expenditure control, improvements in tax administration and tackling
of tax evasion and tax avoidance, and through enhancing efficiency
of public spending. To this end the government has already taken
a number of policy actions, including a cabinet decision to prohibit
the use of treasury cash resources other than for budgeted allocations,
a temporary freeze on public sector wage increases, introduction
of a single window for customs clearance to eliminate loopholes,
the launch of a major anti-tax evasion campaign during 2020,
and passage of the new Public-Private Partnership Law and the new
Public Investment Management framework.
INTERNATIONAL SUPPORT HELPS TO MITIGATE GOVERNMENT LIQUIDITY AND EXTERNAL
Moody's expects Jordan to continue benefitting from strong and broad-based
international donor support in the coming years. This support derives
from Jordan's unique geopolitical position in a volatile region
and has come in the past mainly in the form of budgetary grants (averaging
around 3% of GDP in the past five years) and bilateral and multilateral
concessional lending (constituting around 50% of the government's
total external debt in 2019). Jordan has also been the recipient
of extra-budgetary aid, including technical assistance grants
and project-based assistance related to its hosting of a large
number of Syrian and other refugees.
While budgetary grants will support the government's fiscal position
(accounting for more than 10% of total government revenue in 2019),
Moody's also expects that the budget-support loan disbursements
in the pipeline for 2021 will more than cover next year's scheduled
redemptions of government external debt ($1.6 billion),
reducing government liquidity risk and contributing to the funding of
next year's current account deficit.
Although the coronavirus shock has led to a sharp drop in Jordan's
tourism revenues and has contributed to a large current account deterioration
during 2020, this deterioration follows a significant structural
current account improvement during the past two years. Jordan's
current account deficit narrowed to 2.7% of GDP in 2019
from 10.6% of GDP in 2017, despite an increase in
oil prices during the same period. Moody's expects that this
structural improvement, driven by a decline in imports but mainly
strong growth in exports, will re-emerge over the next couple
of years with the recovery of global demand, including eventually
in the tourism sector, and support a reduction of Jordan's
current account deficit towards 4% of GDP by 2022 from an expected
6.5% of GDP in 2020.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances the risk that the government's fiscal
consolidation efforts fall short of eventually reversing the debt increases
expected in 2020-21 against longer-term upside risks to
growth. A weaker implementation of the planned fiscal adjustment
than Moody's currently expects could result from higher nominal
spending increases in response to rising social pressures. The
upside growth risks, relative to Moody's baseline scenario
in which trend growth accelerates to around 3% in 2022-25
from 2% during 2015-19, stem from the potential that
would be unlocked by the ongoing structural economic reforms.
Reducing government debt below 80% of GDP by 2024-25 implies
a cumulative fiscal adjustment of around 5% of GDP. While
an adjustment of this size is very ambitious and undoubtedly subject to
implementation risks in the context of Jordan's existing social
pressures, Jordan has a track record of implementing similar large
adjustments, namely during 2005-16 when it reduced central
government spending by around 10% of GDP. This spending
reduction in turn helped to reduce government debt to less than 60%
of GDP in 2010 (excluding SSIF holdings) from 74% of GDP in 2005
and nearly 100% in 2000.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Jordan is exposed to environmental risks because of the country's inadequate
water supplies due to high population growth (including the influx of
refugees in recent years), an ongoing depletion of nonrenewable
groundwater aquifers, and a very hot and arid climate with limited
rainfall, a situation that is likely to be exacerbated by the impact
of climate change. Water scarcity remains an important problem
and will require public investment into water infrastructure to reduce
significant technical losses during water transmission, and increase
the use of reclaimed water through building of wastewater treatment plants.
The current per capita water supply in Jordan is only around 200 cubic
meters per year which is close to one-third of the global average.
Social risks mainly relate to high unemployment, which increased
to 23% as of the second quarter of 2020). Popular protests
occurred during 2018-19, partly in response to fiscal consolidation
reforms, including fuel and electricity price hikes, low and
stagnant wages and lack of employment opportunities. Furthermore,
the large influx of refugees from neighboring countries over the past
decade has increased Jordan's population by 35%, putting
strain on infrastructure, public services, and the labor market.
Governance risks in Jordan are relatively contained, reflecting
the country's ranking in the 50-60th percentile amongst Moody's
rated sovereigns on institutional governance factors, as measured
by the Worldwide Governance Indicators included in Moody's methodological
scorecard, and the government's relatively strong track record
of reform implementation and fiscal policy effectiveness.
GDP per capita (PPP basis, US$): 10,530 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2% (2019 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.8%
Gen. Gov. Financial Balance/GDP: -6%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.7% (2019 Actual)
(also known as External Balance)
External debt/GDP: 72.6% (2019 Actual)
Economic resiliency: baa2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 23 November 2020, a rating committee was called to discuss the
rating of the Jordan, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An increasing likelihood that the government's debt burden is on
a sustained downward path, achieved through a combination of durable
primary fiscal surpluses and higher economic growth rates, would
likely lead to an upgrade. Over time, a marked and durable
improvement in Jordan's external position through increased exports
and a lower energy import bill would also support creditworthiness.
Conversely, indications that the government's debt burden
is likely to rise markedly and for several years, potentially because
of lower effectiveness of the government's fiscal consolidation
and/or its structural reform policies than currently expected, would
exert negative pressure on the rating. This scenario could be a
result of rising domestic social and political pressures, due to
elevated unemployment and weak growth.
A significant erosion of Jordan's foreign exchange reserves would
also likely exert downward pressure on the rating, in particular
if it pointed to a likely loss of investors' confidence that,
in turn, raised pressure on government liquidity.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
The local market analyst for this rating is Alexander Perjessy,
+971 (423) 795-48.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653