Moody's Investors Service today changed the outlook on Jordan's Ba2 foreign currency government bond rating to negative from stable. This announcement was triggered by Moody's concern that fiscal and economic downside risks related to ongoing turmoil in the region have risen following events in Tunisia and Egypt.
The rating agency has also downgraded the government's local currency bond rating to Ba2 with a negative outlook from Baa3.
Jordan's local currency ceilings were downgraded to Baa1 from A3. Moody's believes that rising political event risk has led to a moderate deterioration in the operating environment for businesses and other entities based in Jordan. The outlook on Jordan's foreign currency ceilings was changed to negative from stable.
Moody's may downgrade Jordan's Ba2 government ratings if there were disruptive political turmoil that threatened a structural weakening of Jordan's credit fundamentals relative to rating peers. This could include a deterioration in the balance of payments leading to a significant decline in official foreign exchange reserves or a sustained fiscal slippage that caused a jump in public debt.
Moody's decision to change the outlook on Jordan's sovereign ratings to negative from stable was triggered by the recent rise in domestic political tensions. There have been a number of anti-government protests in Jordan in recent weeks -- although not on a comparable scale to those in Tunisia or Egypt. Demonstrators have been demanding political reform and an improvement to poor living standards. King Abdullah's recent dismissal of the government and promise to accelerate reform was a reaction to these escalating political pressures.
Jordan suffers from a number of chronic socio-economic challenges, including a high rate of unemployment, which is officially reported to be 12.5%. Moody's notes that this is one of the higher rates in the region and similar to that of Tunisia. Poverty is also reported to be widespread and corruption is perceived to be an issue. Moreover, over the past year, consumer price inflation has increased to around 6% in December.
Moody's points to the possibility that the new Jordanian government could significantly relax its fiscal stance as part of its policy response to such popular discontent. In January, the previous government announced a hike in salaries and pensions along with a reduction in fuel taxes and a lowering of subsidised food prices. This may set a trend as the government seeks to raise living standards for the poorer sections of society.
Moody's believes that this would likely have an adverse effect on the overall state of Jordan's public finances, which in some respects are weaker than those of Ba rating peers. The government's gross debt approximates 60% of GDP, compared with a Ba median of around 45% of GDP.
Moody's also notes the country's external vulnerabilities that include a relatively wide current account deficit and a potentially volatile stock of non-resident equity holdings. Jordan's balance of payments is sensitive to changes in oil prices because the country imports nearly all of its energy needs.
However, the rating agency stresses that Jordan's ratings continue to be supported by a number of factors. These include an historically high level of foreign exchange reserves and a track record of committed support from foreign donors, most importantly the US and Saudi Arabia. Moreover, Jordan's public debt has a favourable structure, with little external market debt and limited refinancing risk given that the government's main creditors are the domestic banks. Jordan's banking system is well developed.
