Moody's Investors Service today changed the outlook on Jordan's sovereign ratings to negative from stable in light of the ongoing deterioration in the country's external balance of payments and fiscal account.
The outlook change affects Jordan's Ba2 issuer rating for long-term foreign currency government bonds, its Baa3 issuer rating for long-term domestic currency government bonds, its Ba2 country ceiling for long-term foreign currency bonds and notes, and its Ba3 country ceiling for long-term foreign currency bank deposits. Jordan's country guideline for local currency obligations and its local currency bank deposit ceiling both remain at A3.
Moody's said that today's rating action reflects the sharp deterioration in Jordan's external current account balance over the past two years, from a surplus of around 12% of GDP in 2003 to an estimated deficit of around 16% of GDP in 2005. This has been caused mainly by three factors: (i) the large increase in international oil prices since 2003 (Jordan imports virtually all of its energy); (ii) a significant reduction in foreign grants since their peak in 2003 (namely in those from Saudi Arabia and the US); and, (iii) a surge in private capital inflows, mainly from the oil-rich Gulf states, which has boosted domestic demand for imports.
Moody's notes that although the current account deficit continues to be financed largely through non-debt-creating inflows, a potential slowdown or reversal of such inflows could swiftly put pressure on the country's external liquidity. This vulnerability is unsettling in light of the currency's fixed exchange rate peg and the fact that around two-thirds of the government's debt is denominated in foreign currencies.
Moody's also notes that the fiscal account has deteriorated over the past year for similar reasons, despite some bold offsetting measures by the government. The increase in international oil prices has inflated the government's oil subsidies, while the cut in foreign grants has reduced its revenues. These imbalances are unlikely to be unwound in the near term, with oil prices likely to remain high and the rate of GDP growth likely to slow, albeit from a high level. Although it is possible that friendly foreign donors such as the US may once again increase their assistance to Jordan in order to alleviate potential economic pressures, the degree and timing of such assistance will remain unpredictable.