Jordan's credit profile constrained by high public debt and geopolitical risks

The credit profile of the Jordan, which has struggled with an economic slowdown amid the growing burden of caring for more than a million Syrian refugees, is constrained by high public debt, persistent external imbalances and elevated geopolitical risk, according to Moody's Investors Service.

"Although Jordan has benefitted from lower oil prices, falling remittances and transfers from regional oil exporters continue to weigh on external accounts, as does the disruption of traditional trade routes via Syria and Iraq," said Elisa Parisi-Capone, a Moody's vice president said in Jordan’s annual credit analysis report. "In addition, the arrival of almost 1.4 million Syrians –655,000 of which registered as refugees -- since 2012 has added to fiscal and capital spending and put pressure on Jordan's labour market through higher unemployment and lower wages."

Moody’s, which rates Jordan's B1 stable, said the country's credit strengths include a history of official sector external support and a strong institutional framework compared with regional peers.

Based on fiscal performance data up to September 2017, Moody's expects a fiscal deficit of 3.9 per cent, up from 3.2 per cent in 2016, and higher than the budgeted 2.5 per cent, mostly due to slower grant receipts. Going forward, the rating agency expects the government to resume fiscal consolidation in 2018, particularly through the implementation of revenue measures, such as the removal of exemptions, as well as income tax reform.

“These measures should sustainably compensate for the gradually declining foreign grant contributions,” Moody’s report noted.

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Jordan's gross public debt ratio includes the domestic and external debt of the central government in addition to guaranteed debts of state-owned enterprises. Based on Moody's deficit projections of 3.9 per cent in 2017 and 3.4 per cent in 2018, the rating agency expects the gross public debt ratio to peak this year at 95.6 per cent of GDP and to gradually decline thereafter.

Jordan's strong economic growth, which averaged 6.1 per cent between 2000 and 2010, has boosted per capita income to levels in line with regional peers, despite the country's small size. However, following the global financial crisis and particularly in the wake of the Arab Spring uprisings, Jordan's trend growth outlook for 2011-21 has shifted to a significantly lower average of 2.6 per cent.

Last week, BMI research, a unit of the Fitch group, forecasted Jordan’s real GDP to grow at 3.0 per cent in 2018 and 3.2 per cent in 2019. The kingdom's economy is projected to expand by 2.4 this year. The Washington-based International Monetary Fund, estimates Jordan’s GDP to grow by 2.3 per cent this year after expanding 2 per cent in 2016.

Exports will gradually rise as economies across the Arabian Gulf region, which altogether accounted for 29 per cent of its total exports in 2016, are improving, BMI said. It is also to likely see exports to Iraq increase, following the late-August reopening of the Turaibil-Karameh border crossing, which was shut in mid-2015 after the so-called Islamic State (IS) took over the Anbar province.

Moody’s said the main drivers of the more subdued trend growth outlook are the continuing conflicts in Syria and Iraq - two of Jordan's main trading partners - which have dented investor sentiment and closed regional trade routes, and the refugee wave, which has put pressure on infrastructure and public services as well as demand for housing and consumption goods. Lingering security threats in border regions have also subdued tourist arrivals, one of the main sources of foreign exchange for the kingdom.