Dagong Maintains the Sovereign Credit Ratings of Jordan at B+ with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
March 2, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided to maintain both the local and foreign currency sovereign credit ratings of the Hashemite Kingdom of Jordan (“Jordan”) at B+, each with a stable outlook. Jordan has been bearing a heavy debt burden and its economic growth has been constrained by heightened geopolitical risks and structural problems. Yet, with the promotion of strict fiscal consolidation and stable access to external support, government solvency, although at a low level, will remain stable.
The primary reasons for maintaining the sovereign credit ratings of Jordan are as follows:
1. The debt repayment environment is generally stable, but the government’s socio-economic objectives are difficult to achieve. The Jordanian government will continue to implement its full-scale reforms based on the Jordan 2025 Vision while further tightening its fiscal policy. A stable domestic political environment and a flexible diplomatic strategy will support Jordan’s social and economic development, but due to heightening geopolitical risks, these goals may be too optimistic to realize. While the Federal Reserve accelerates the pace of interest rate hikes, to sustain Jordan’s foreign reserves, the government will have to tighten its monetary policy, which will weaken the credit system’s support for the real economy. Nonetheless, the banking system will remain resilient.
2. The short-term economy is expected to bottom out, while the long-term economy is subject to structural problems and significant improvement will be difficult. Despite the fact that high geopolitical risks and fiscal consolidation will suppress economic development, moderate growth in investment and external demand in the short-term will bolster the acceleration in the manufacturing, tourism, wholesale and retail sectors. After a deceleration for two consecutive years, Jordan’s economic growth is expected to slightly rebound to 2.3% and 2.7% in 2017 and 2018 respectively. In the long run, Jordan will face vulnerabilities due to extremely high consumption, high unemployment, lack of core competitiveness and energy insecurity, conditions that will constrain the release of its long-term economic growth potential.
3. The government’s reliance on external aid to close the fiscal gap will persist, thus making debt repayment sources vulnerable. In 2016, the effect of fiscal consolidation led to a significant decline in the fiscal deficit of the Jordanian central government. In the short term, the abolishment of tax incentives, the rise in the non-essential consumption tax rate and other measures will continue to improve the fiscal balance; however, the fermenting geopolitical risks and a tightening in the international financial environment will make it difficult to cut rigid expenditure on the military, interest and refugee placement spending. Although the Jordanian central government is expected to have a primary fiscal surplus of 0.9% and 0.8% in 2017 and 2018 respectively, the overall fiscal deficit will remain at 2.3% and 2.4% over the same period. As a result, with limited decreases in the fiscal deficit, adequate multilateral and bilateral low-interest loans will continue to be important debt repayment sources.
4. Despite a heavy debt burden, external aid will sustain the low-level of government solvency. Even though the central government has a heavy debt burden and faces significant pressure from short-term debt repayment, bolstered by defrosting economic growth and the converging fiscal deficit, the government debt burden is expected to reach 96.3% in 2017 and enter a downward channel thereafter. A well-developed financial system will ensure smooth domestic financing channels, thus guaranteeing stable government solvency in the local currency. A high current account deficit and declining financial account surplus will weaken Jordan’s international payment capacity, and its foreign reserves will merely cover its short-term external debt. However, the backing of developed countries, appropriate financing costs and diverse external aid will help Jordan to maintain its stable government solvency in foreign currency.
In the short term, although the high geopolitical risks in the Middle East will hamper Jordan’s economic growth, rigorous fiscal consolidation will secure the stability of the central government’s debt repayment sources. Considering the abundant external grants and moderate financing costs, the solvency of the Jordanian government will remain stable. Therefore, Dagong has decided to maintain a stable outlook for both the local and foreign currency sovereign credit ratings of Jordan for the next one to two years.