Fitch Ratings - London: Fitch Ratings has affirmed Jordan's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

Reform Progress, Resilient Funding: Jordan's ratings are supported by a record of macroeconomic stability, progress in fiscal and economic reforms, and resilient financing linked to the liquid banking sector, public pension fund and international support. The ratings are constrained by high government debt, weak growth, risks stemming from domestic and regional politics, and current account deficits and net external debt that are higher than rating peers.

Heightened Geopolitical Risks: As the war in Gaza continues, geopolitical risks have increased with Houthi attacks on commercial vessels in the Red Sea and the direct, albeit contained, hostilities between Israel and Iran. Uncertainty remains regarding the conflict's duration and potential for further escalation, but Jordan maintains strong multilateral and bilateral support, including military and economic assistance from the US.

Fitch notes that Jordan has preserved economic and political stability despite significant external shocks including social instability in the region (Arab Spring) and wars in neighbouring countries (Iraq and Syria), but these shocks have led to lower growth and significant government debt build-up. A prolonged or expanded Gaza conflict, even if it does not involve Jordan directly, could weaken growth prospects and increase the challenges for debt reduction.

Continued Reform Progress: The government maintains its commitment to advancing its three-pillar (economic, public administration and political) reform agenda despite the external challenges, for example, by starting gradually increasing water utility tariffs in 2023 following the removal of temporary fuel subsidies in 2022. Jordan will also hold parliamentary elections in September, in which about 30% of the 150 seats will be selected by party list. Fitch expects that the pace of reform progress will continue to depend on the objective of preserving social stability, the resistance of vested interests and institutional capacity constraints.

Slower Growth: Growth averaged 2.6% in 2023, but similar to our November review, we expect that lower tourism inflows, weaker external trade performance and continued regional political uncertainty will slow growth to 2.3% in 2024. We assume that improved global growth prospects, assuming some easing of geopolitical risks, will lift growth to 2.8% in 2025, still below the projected 3.4% growth for the 'BB' median.

Fiscal Consolidation Needs Growth, Reform: Fitch estimates the general government deficit increased to 3% of GDP in 2023 reflecting a wider central government deficit (5.2% of GDP) due to higher interest payments and slower revenue growth. We project that the deficit will ease to 2.6% and 2.4% in 2024 and 2025, respectively, as expenditure restraint will balance lower-than-budgeted revenue growth and higher interest payments.

Jordan continues to improve tax collection, most notably income tax, but fiscal space is limited, in Fitch's view, given the high level of debt and rigid expenditure profile. The weak electricity and water sector financial position remains a fiscal vulnerability, as the government has taken on the debt of the water company, provides transfers to the water sector and guarantees the financing required to cover the National Electric and Power Company's (NEPCO) losses.

High Government Debt, Slow Decline: Fitch estimates the general government debt (consolidating central government debt holdings of the Social Security Investment Fund (SSIF) and including the Water Authority of Jordan (WAJ) debt and NEPCO guaranteed debt) rose to 93.3% of GDP at end-2023, from 92.9% in 2022. We forecast debt will decline to 91.3% by 2025, significantly above the projected 53.6% for the 'BB' median, balancing sustained primary surpluses against continued financial support to the water and electricity sectors. Guarantees principally relate to these sectors and are at high risk of being called, in Fitch's view, since the government already services WAJ's debt.

Central government debt (including SSIF holdings) rose to 114% of GDP in 2023. Close to 62% of external debt (not including domestically issued US dollar bonds) is to official creditors. General government interest payments rose to 10.8% of revenues in 2023, above the 9.6% estimate for the 'BB' median.

Strong International Support: Jordan and the IMF have begun a new four-year USD1.2 billion Extended Fund Facility, which aims to anchor the government's fiscal consolidation strategy, targeting government debt of 80% of GDP in 2028, support investor confidence and maintain the reform momentum to improve the economy's growth and job creation potential. Jordan could also enter into a new Macro-Financial Assistance programme with the EU (EUR500 million).

Jordan benefits from significant financial and technical cooperation from multilateral and bilateral partners. Jordan is projected to receive total foreign assistance of USD3.5 billion (6.5% of projected GDP) in 2024. Under the 2022 seven-year Memorandum of Understanding, the US will provide economic and military assistance of USD1.2 billion per year. Congress increased the support to UD1.45 billion for the fiscal year ending September 2024 (FY24).

Lower External Deficits, Rising Debt: The current account deficit declined to 3.5% of GDP in 2023, as record travel receipts boosted the services surplus, while the trade deficit narrowed due to lower energy imports and growth in non-traditional exports. We expect the deficit to widen to 5% of GDP in 2024, mostly reflecting lower export and tourism receipts. Before the start of the Gaza conflict, Jordanian expats, Arab and GCC tourists accounted for almost three-quarters of total visitors, and we expect these to partly compensate the expected decline in US and European tourists.

As FDI inflows will remain relatively subdued (net FDI 1.5% of GDP in 2023), borrowing will remain the key financing source, maintaining the net external debt on an upward trend from an estimated 23% of GDP in 2023 to 27% by 2025, above the forecast 14.5% for the 'BB' median.

Macro-Financial Stability: Macroeconomic and financial stability are underpinned by the longstanding exchange rate peg to the US dollar, adequate level of international reserves (covering 7.2 months of current external receipts in 2023), low dollarisation (17.7% of total deposits), resilient banking sector and access to external financing. Fitch expects average inflation to decline to 2.1% in 2024, below the 3.5% forecast 'BB' median.

ESG - Governance: Jordan has an ESG Relevance Score (RS) of '5' for Political Stability and Rights, and '5[+]' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Jordan has a medium WBGI ranking at the 49th percentile reflecting incipient level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

  • - Structural: Geopolitical shocks, for example, derived from the intensification and/or widening of the Israel-Hamas war, that increase the risk to domestic political stability and/or significantly affect the economy or public finances.
  • -Public Finances: Increase in government debt/GDP over the medium term, for example, due to a sustained widening of the budget deficit or weak growth.
  • -External Finances: Weakening of support from external partners and further marked rise in external indebtedness.
  • Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
  • - Public Finances: Sustained decline in government debt/GDP, for example, through a combination of reforms to boost revenue/GDP, increase the flexibility of government spending, reduce fiscal risks from the electricity and water sectors and boost growth
  • -Macro: Sustained increase in growth to above pre-pandemic levels, particularly if leading to lower unemployment
  • -External Finances: Lower current account deficit, especially if combined with higher net foreign direct investment that reduces upward pressure on net external debt.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Jordan a score equivalent to a rating of 'BB' on the Long-Term Foreign-Currency (LT FC) IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

  • - Public Finances: -1 notch, to reflect high government debt/GDP and risks to medium-term debt trajectory, including from loss-making government entities, social pressures, weak growth and rigid expenditure profile.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

COUNTRY CEILING

The Country Ceiling for Jordan is 1 notch above the LT FC IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

Fitch's Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. Fitch's rating committee did not apply a qualitative adjustment to the model result.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Jordan has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Jordan has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Jordan has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Jordan has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Jordan has an ESG Relevance Score of '4'for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Jordan has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Jordan has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Jordan, as for all sovereigns. As Jordan has a track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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Elizabeth A. Fogerty
Senior Director, Corporate Communications
Fitch Group
elizabeth.fogerty@fitchratings.com