On 8th March 2024, S&P Global Ratings affirmed the Hashemite Kingdom of Jordan's sovereign rating at B+ with a stable outlook. Rating agencies continue to recognise the resilience of the economy to external shocks, and substantial progress on structural reforms, supported by good relations with donors and multilateral institutions. Cygnum Capital serves as credit rating advisor to the Kingdom of Jordan.
Overview
On March 8, 2024, S&P Global Ratings affirmed its 'B+/B' long- and short-term foreign and local currency sovereign credit ratings on Jordan. The outlook remains stable.
The stable outlook reflects our expectation that the war between Israel and Hamas will not escalate beyond Gaza. We think Jordan will effectively leverage international support and has adequate domestic policy buffers to manage the conflict's impact on tourism and the broader economy.
We could raise the ratings if Jordan's economic growth accelerated, leading to greater labor participation and higher GDP per capita. A higher rating is also likely to hinge on whether the government can place its net debt-to-GDP ratio on a clear downward path without markedly undermining growth.
We could lower the ratings if the reform momentum stalled, undoing fiscal consolidation efforts, for instance due to rising domestic spending pressure. Rating pressure could also stem from a larger and more prolonged economic shock linked to the Israel-Hamas war. Additionally, a negative rating action could materialize if the currently strong bilateral and multilateral donor support unexpectedly diminished, causing external financing pressure.
The Israel-Hamas war, ongoing since October 2023, is indirectly impairing tourism flows to Jordan, the country's main export and the key source of private sector employment. Preliminary data for November 2023–January 2024 shows a 10.2% decline in tourist arrivals compared with the same period a year prior. The recent decline was concentrated among American and European tourists; there were 46% fewer non-Arab tourists. That said, we note that non-Arabs contribute less than a quarter of total tourism income. The impact on investment and economywide confidence might also become a risk if the conflict persists. For now, however, anecdotal evidence over the past several months suggests that numerous big investment projects are still in the pipeline and consumers have continued spending.
Positively, Jordan's external imbalances appear to be easing. Gross international reserves held by the Central Bank of Jordan (CBJ) rose to just over $19 billion at the end of January 2024, representing a $900 million increase since the start of October (before the Israel-Hamas war) and likely reflects falling international energy and commodity prices. More structurally, the government's fiscal consolidation and tight monetary conditions in the wider economy will drag on demand and hence imports. This will likely narrow Jordan's current account deficit-to-GDP ratio to a projected 4.5% on average over 2024-2027, from an average of 7.2% over 2020-2022.
Should, contrary to our base-case expectation, the Israel-Hamas war escalate into a broader regional conflict, Jordan could face additional economic risks including:
We expect economic growth will ease to 2.1% this year, from 2.6% in 2023, as tourism arrivals will likely be lower than last year's record-breaking outturn. Our GDP growth forecast also reflects fiscal drag and an expected increase in precautionary savings amid rising regional tensions.
Tourism contributed about 15% to GDP in 2023. In the near term, we expect American and European tourist arrivals to decline the most. Arab tourists arrivals, including Jordanians living abroad, should continue to prove resilient to regional tensions.
Our forecasts assume no interruption in gas supplies from Israel, which make up about 90% of Jordan's natural gas needs. Despite interruption to Israel's southern gas fields near Gaza, the Leviathan field that supplies Jordan remains operational. Moreover, the country's state-owned importer has legal status in Israel, equivalent to domestic users, due to an agreement established before the war started.
We expect that the Israel-Hamas war will not cause significant domestic political disruption for Jordan. Several protests took place in Jordan, but these appear to have been largely targeted at Israel rather than the Jordanian government. Furthermore, we assume that the war will not broaden beyond Gaza and Israel.
We think growth will bounce back toward 3% by 2027, as regional tensions eventually ease. We expect Jordan's structural reform efforts--aimed at improving competitiveness and fostering investment–-should eventually start to pay off; several exploratory mining projects for fertilizer-related compounds are in the pipeline, and the United Arab Emirates signed a $2 billion investment pledge with Jordan in October 2023.
Due to Jordan's high population growth, currently running near 2.2%, it would take an acceleration in GDP and job creation to improve real per capita income trends. According to the World Bank's estimates at end-2022, the male labor force participation rate is 62.5%, while women represent 14.7%--among the lowest of all rated sovereigns. In the years following the Syrian civil war, Jordan's population dynamics have been skewed by strong migratory flows, which has widened the gender gap in participation rates.
Unemployment is still very high, at 22% as of fourth-quarter 2023. The government's reform agenda aims to spur medium-term economic activity and prioritize job creation in the private sector through improvements to the business and investment environment. Fiscal reforms center around widening the tax base through compliance enhancements and reforming heavily loss-making state-owned enterprises (SOEs).
We expect international financial support for Jordan to remain strong. The U.S. and the Gulf Cooperation Council (GCC) see maintaining Jordan's stability as an important foreign policy objective, given its key location between Israel and other Middle Eastern states. The current memorandum of understanding signed by Jordan and the U.S. covers 2023-2029, and the U.S. has pledged to send $1.45 billion in annual budgetary and military support. U.S. Congress has consistently approved higher funding than pledged due to strong cross-party support for Jordan among U.S. lawmakers. We saw this when the lawmakers passed a $200 million top-up for the December 2023 grant, and we expect these supplementary resources to continue.
Data quality in Jordan is generally in line with those of peers at the same rating and development level. However, national income accounts have notable reporting delays; GDP by expenditure is reported with a three-year lag. That said, data provision is comparatively good in other areas, including the publication of a full balance of payments and international investment position dataset.
Jordan so far appears capable of handling the economic reverberations from the Israel-Hamas war. Consistent with our downward revisions to the growth forecasts, we think consolidation will ease somewhat in the near term although won't be derailed. For instance, we see no sign of a pause in the reform momentum, including important ongoing efforts to widen the tax base. Moreover, external grant and concessional support has been forthcoming, as seen with the $200 million grant top-up (above the memorandum of understanding) passed by U.S. Congress in late 2023, the $2 billion cooperation deal agreed with the United Arab Emirates in November 2023 that included $400 million worth of grants (a portion of which is direct budgetary support), and the latest $1.2 billion IMF program signed in January 2024. In total, the government expects $1.4 billion in grants and $2.3 billion in concessional loans in 2024. The continuation of this very strong external support, along with continued reform momentum, are central assumptions to our projections of ongoing medium-term fiscal consolidation in Jordan.
We project a general government deficit of 1.1% in 2024, which includes deficits of 4.2% and 0.4% at the central government and local government levels, respectively, largely offset by a projected surplus at the Social Security Corporation (SSC) worth 3.5% of GDP. However, the net debt position accumulates faster than suggested by this headline balance for two main reasons: the allocation of a portion of SSC surpluses toward assets that do not fall within our definition of liquid government assets, and losses at SOEs. Combined, these two effects accelerate the pace of debt accumulation by an estimated additional 3% of GDP.
While Jordan's debt to GDP levels are elevated, its debt to revenue ratio of 243% compares well with 'B' category peers, given general government revenue equivalent to 37.3% of GDP.
Worsening performance at Jordan's SOEs has limited broader fiscal improvements in recent years. We project combined losses at the National Electric Power Co. (NEPCO) and the Water Authority of Jordan (WAJ) will peak at 2% of GDP in 2024. Most of the recent deterioration relates to the coming online of the Attarat oil-shale plant last year, which binds NEPCO to an expensive power purchase agreement originally signed in 2014. These two entities receive sizable ongoing government support in the form of government guarantees and direct cash transfers, so we consolidate their debt (estimated at about 11.3% of GDP in 2023) into general government debt. Positively, restructuring plans are in place for the two entities. We expect structural reforms at both NEPCO and WAJ will lead to a gradual reduction in their combined losses toward 1.4% of GDP by 2027. We anticipate the effective implementation of these plans would materially ease the entities' longstanding reliance on state funds.
Surpluses at the SSC have been building. We estimate those surpluses will rise to 3.5% of GDP this year as investment and interest income increases, a compliance drive yields results, and the economy's informal sector continues to decrease in share. Jordan's demographics remain highly favorable, and actuarial estimates suggest the fund has several decades before it will need to draw down on its assets.
We expect net general government debt to increase slightly in the near term due to fiscal pressure emanating from the Israel-Hamas war and weak SOE performance. However, the ratio should start declining again after peaking at about 81% in 2025, when we assume regional tensions should start to ease. Much depends on growth outcomes, which compare poorly to other sovereigns in our 'B' rating category.
Despite this still relatively high debt ratio, the burden is manageable; we estimate interest payments will represent 11% of government revenue on average over 2024-2027. Consistent with Government Finance Statistics (GFS) international accounting standards, we exclude the central government debt held by SSIF from our estimate of general government debt (24% of GDP in 2023) and general government interest. We view the fund as a voluntary source of domestic funding, in part because there are limited other domestic investment opportunities for the fund's asset-liability management strategy.
We estimate Jordan's current account deficit eased somewhat, falling to an estimated 4.2% of GDP in 2023, driven by the record year for tourism and lower energy prices. Although gas, which makes up the largest part of Jordan's energy mix, is largely imported on long-term contracts that have a relatively limited pass-through of market volatility into prices paid, Jordan's meaningful fuel import bill (including oil derivates for transport) is significantly more exposed to fluctuating global oil prices. Despite a more challenging outlook for the tourism sector this year and next, as tourist arrivals from America and Europe (combined worth of 17% of tourism receipts) appear likely to decrease, developments on the import side outsize their impact on Jordan, given the import bill was 45% larger than export receipts in 2022. Indeed, in the medium term, efforts to reduce Jordan's reliance on hydrocarbons, including through further development of solar and other renewables (currently contributing about 29% of the energy mix, versus 1% in 2007), will be important if the country is to deal with its external imbalances.
As of January 2023, gross foreign reserves came to $19.1 billion (7.1 months of future current account payments), which should support the existing exchange rate peg. Our measure of usable reserves--which aims to capture the resources available for external debt service--excludes the monetary base (we assume an amount equivalent to this is needed to maintain the peg), reserves sold forward, swaps, and required reserves on foreign currency deposits. We estimate usable reserves were $5.2 billion at end-2023.
The Jordanian dinar's peg to the U.S. dollar has supported price stability and contained inflation. However, it also limits the central bank's room for policy maneuver as the CBJ effectively follows the decisions of the U.S. Federal Reserve, which may not always be appropriate for Jordan's economic conditions. Real effective exchange rate analysis by the IMF indicate no significant overvaluation relative to key trading partners, many of whom also peg their currencies to the U.S. dollar.
Inflation has been contained, with prices increasing by an average of 2.1% in 2023. The CBJ has followed the U.S. federal reserve in hiking a cumulative 500 basis points since early 2022. Additionally, the peg to the U.S. dollar, which appreciated considerably in 2022, has kept non-oil imports relatively inexpensive. Still, service sector inflation has been more entrenched, and we expect the deflationary impact from tradables to become less extreme, as the foreign exchange impact fades from the data. We therefore expect inflation will average 2.6% over 2024-2027.
