Outlook on Jordan's 'BB-' foreign currency issuer rating revised to positive from stable

Rationale

The ratings on Jordan are constrained by:

* Low real economic growth, at 3.9 per cent in 2000 and forecast at 3.5 per cent in 2001, with real GDP per capita rising only slowly. Growth prospects are damaged by regional political instability, which undermines investor confidence and reduces tourism receipts. Although the government's reforms set the stage for higher growth, regional stability is required if Jordan's economy is to grow more quickly.

* High, although declining, central government deficits (excluding foreign grants), at 7.4 per cent of GDP in 2000 and forecast at more than 6.0 per cent for 2001. Jordan relies on external budgetary support, in the form of politically sensitive grants, to reduce the overall central government fiscal deficit to a manageable level — 3.4 per cent of GDP in 2000 and less than 3.0 per cent in 2001. In the medium term, however, flexibility should increase as the tax base is broadened.

* A high debt burden. Although repeated Paris Club reschedulings make Jordan's general government debt burden manageable at an estimated at 126 per cent of GDP in 2001, it is higher than both the `BB' and `B' medians. General government interest payments will amount to 13 per cent of revenues (4.8 per cent of GDP) in 2001. Official creditors may reschedule additional debt in the medium term, but, as in the past, are unlikely to impose burden-sharing stipulations that will adversely affect Jordan's rated Brady Bonds.

Jordan's ratings are supported by:

* The government's commitment to economic reforms underpinned by internal political stability and supported by His Majesty King Abdullah. The Jordanian government has joined the World Trade Organisation (WTO), has signed a free trade agreement with the US, and has accelerated privatisation efforts.

* A record of relatively low inflation, supported by an autonomous central bank and the de facto pegging of the Jordanian dinar to the US dollar, with no evident overvaluation pressures developing. Consumer prices are likely to increase by 2.0 per cent in 2001, up from 0.7 per cent in 2000.

Outlook

The outlook reflects improved prospects for an upgrade if, despite ongoing turmoil in the region, the government continues its effective macroeconomic management, including the gradual reduction of high fiscal imbalances, and its implementation of an impressive structural reform agenda. The recently accelerated pace of reforms should boost the country's long-term growth prospects, improve the efficiency of the economy, and enlarge the role of the private sector. Renewed slippage in fiscal targets and structural reforms, however, would curtail Jordan's upgrade prospects.

Comparative Analysis

* Jordan's commitment to economic reforms and monetary stability compares well with similarly rated sovereigns.

* The country's dependence on foreign grants to reduce fiscal deficits and improve external finances compares unfavourably with peers.

* Jordan's government debt stock exceeds the `BB' median and other `BB-' rated peers; however, the favourable structure of the external debt results in debt servicing costs slightly lower than the `BB' median.

In the `BB' and `B' categories, Jordan's key peers are Kazakhstan (BB/Stable/B), Morocco (BB/Stable/B), Lebanon (B+/Stable/B), and India (BB/Stable/B). First, examining the level of economic development using GDP per capita as a proxy, Jordan fits neatly among these countries, with per capita GDP of more than $1,650 in 2000, which is between the other two sub-investment grade rated sovereign in the region: Lebanon $3,900 and Morocco $1,280. It is also marginally lower than that of the `BB' median of $1,800, but higher than Kazakhstan ($1,300) and India ($550).

Jordan's policymakers have chosen to pursue an economic reform programme that should rapidly liberalise the country's economy, and have committed themselves to reducing the fiscal deficit and maintaining macroeconomic balance. Examining the key peers in this regard finds them lacking somewhat. Morocco has embarked on what seems to be a programme of higher spending, financed through privatisation proceeds, in an attempt to improve its low human development indicators. Lebanon's governments have sought to restrain the growth of fiscal deficits — in vain until now — and while they have stated their commitment to privatisation, a sale is yet to be recorded. Consecutive Indian governments have decided to pursue a very slow pace of reform, and fiscal discipline is lacking.

Comparing economic performance, however, Jordan's track record leaves it behind the other peers. The second half of the 1990s was a period of low growth, averaging 3 per cent, and barely more than the population growth rate of 2.5 per cent. Structural reforms have set the stage for higher growth, although all the necessary conditions have yet to fall into place — particularly that regional unrest will result in lower growth than would otherwise occur. GDP growth has translated into slowly improving income levels, a trend that is likely to continue as long as tourism and investor confidence remain vulnerable to regional developments. In comparison, India averaged 6.2 per cent real GDP growth over the past five years, and Kazakhstan, which is benefiting from high investment in the oil and gas sectors, is expected to register GDP growth of 9.6 per cent for 2000. Morocco's economy is highly vulnerable to fluctuations in rainfall, and its growth record reflects this: Growth there was as high as 6.8 per cent in 1998, followed by two years of minimal growth in 1999 and 2000; growth this year is expected to be more than 5 per cent. On price stability performance, several of Jordan's peers have equally good track records, Jordan's inflation rate is likely to remain less than 3 per cent in the medium term, while Lebanon's was about 0 per cent last year and should not exceed 2 per cent this year, and Morocco's has been below 3 per cent in recent years. India's and Kazakhstan's price performance are somewhat worse, with inflation rates of more than 5 per cent in 2000-2001 for the former and more than 13 per cent in 2000 for the latter.

Overall, Jordan's fiscal health has improved over the past two years, unlike India, Lebanon, and Morocco. In Morocco, expenditures growth has outstripped revenue growth, although large privatisation receipts are financing the higher deficits, estimated at 6.7 per cent of GDP in 2000. In Lebanon's case, the government has been unable to contain the deficit, which is the highest among rated sovereigns at more than 20 per cent in 2000. India's general government deficits have hovered around 9 per cent in recent years. The Jordanian general government deficit was 4.8 per cent of GDP without grants in 2000, and is estimated at 3.9 per cent of GDP in 2001, compared with the `BB' median of 3.2 per cent and 3.8 per cent, respectively. Including foreign grants, Jordan's figures fall to 0.7 per cent and 0.1 per cent, respectively. Going forward, if the government is able to restrain expenditures and raise revenues — as it intends to do — then this indicator will be increasingly favourable. Jordan's stock of government debt, at about 131 per cent of GDP in 2000, is higher than that of all other `BB-' rated countries, and both the `BB' and `B' medians of 49 per cent and 80 per cent, respectively, in 2000. Kazakstan's stock is 21 per cent, India's 67 per cent, Morocco's slightly less than 100 per cent. Only Lebanon has a higher debt burden, estimated at more than 160 per cent this year. Owing to debt rescheduling, however, which has resulted in a very favourable debt structure, interest payments as a percentage of government revenues are less than the `BB' median. The ratio of general government interest payments to revenues was 14.2 per cent in 2000, and is expected to fall to 13.2 per cent in 2001, compared with 15.9 per cent and 16.7 per cent, respectively, for the `BB' median. The structure of Jordan's debt makes this otherwise very onerous burden much easier to manage and less of a negative rating factor. Fiscal consolidation and continued foreign support should reduce debt, but even with substantial reduction the burden would probably remain more than the `BB' median, limiting the long-term rating potential and highlighting the need for significantly higher long-term growth.

Jordan continues to experience very high trade deficits, at 25 per cent of GDP, far more than its peers: Less than 10 per cent for Morocco and 3 per cent India, and a surplus of 12.7 per cent for Kazakhstan. Jordan's ability to use the current account to make good its trade deficits is weaker than elsewhere as it depends on politically sensitive official grants, private transfers that might be affected by energy price fluctuations, and tourism receipts that are negatively impacted by regional instability. This external situation is translated into higher external vulnerability, measured by reserves to the gross financing requirement (the current account balance, principal payments, and short-term debt), than most key peers. This ratio for Jordan in 2000 was 55 per cent, compared with more than 100 per cent for India, 89 per cent for Kazakhstan, and 70 per cent for Morocco.

Therefore, Jordan's ratings in comparison with key peers reflect its improving economic policies, but slow growth record; its renewed commitment to fiscal discipline but high debt stock; and its level of economic development, good inflation record, and higher level of external vulnerability.