Jordan’s score for economic strength is low. Compared to other countries that we rate globally, Jordan has a low level of GDP per capita. Although the economy is relatively well diversified and has a moderate level of human development, it is small and has structural weaknesses, which limits its robustness.

The score for institutional strength is medium. Overall, the quality of governance and institutions in Jordan continues to improve gradually, but lags that of higher rated countries. The government does however display a strong willingness to repay its obligations, illustrated by its recent debt buyback.

Jordan’s government financial strength is assessed as medium. Although the central government deficit, excluding grants, is wide, the overall general government is close to balance owing to substantial external grants and government agencies’ surpluses.

Notwithstanding a recent debt buyback, the public debt is comparably large. The government’s shrinking external debt has a favourable structure; an important consideration in light of the country’s balance of payment vulnerabilities.

Jordan’s susceptibility to event risk is scored at medium. While we consider the risk of serious domestic political upheaval to be low, the volatile regional political environment is unsettling. The main economic risks are the excessive level of inflation and the very wide current account deficit. We are wary of the balance of payments’ heavy reliance on potentially changeable inflows of private capital. Although it is comforting that these are largely in the form of FDI from wealthy oil-exporting countries, and that the authorities have a large stock of foreign exchange reserves at their disposal.

Jordan’s banking sector remains in relatively good health and is not exposed significantly to the current turmoil in global financial markets, although strong domestic credit growth in recent years could be a source of vulnerability in the event of an economic downturn.

ECONOMIC STRENGTH
GDP per capita is the single best, albeit imperfect, indicator of economic strength, a key parameter used to evaluate capacity and willingness to pay. In Jordan’s case, it remains rather low when compared with other countries globally. According to the IMF, Jordan’s GDP per capita on a purchasing power basis has averaged $4,500 over the past four years, a similar level to that of Angola, China, Guatemala, or Egypt. Of the 180 countries covered by the IMF, Jordan ranks at 102 according to this metric.

Jordan’s GDP per capita continues to rise as robust real growth rates are slowly achieved. Real GDP grew by six per cent during the first half of 2008 and is expected to post a five per cent growth in 2008.

Jordan’s economy suffers from a number of structural weaknesses. The most important of these is a high reliance on oil imports to meet its energy needs. This has contributed to a marked deterioration in the current account since 2003. Jordan is now reliant on large inflows of private capital, mostly in the form of FDI, to finance its current account deficit.

Notwithstanding a high level of official foreign exchange reserves, this is a vulnerability that warrants close monitoring, especially in today’s fragile financial environment. Jordan’s inflation rate has also risen significantly in recent years. If untamed, this could damage potential growth by undermining consumption and investment despite government efforts to broaden the social safety net.

On the positive side, Jordan’s economy is quite well diversified, and hence its performance is not as volatile as those of most other countries. Over the past 10 years, Jordan’s real GDP growth has displayed a standard deviation of approximately 1.7, a relatively low figure. Currently, commodity producing sectors generate around a quarter of nominal GDP versus three quarters for services.

"THE GREATEST REASSURANCE IN REGARD TO THE LARGE CURRENT ACCOUNT DEFICIT IS THE LARGE STOCK OF OFFICIAL FOREIGN EXCHANGE RESERVES."

WELL DIVERSIFIED
Jordan’s primary goods exports are clothes, medical and pharmaceutical products, vegetables, fertilisers, potash, and phosphate. Geographically, Jordan’s exports are well diversified. The US is Jordan’s largest individual export market but it only accounts for around 20 per cent of domestic exports with the rest directed to a variety of destinations.

Jordan’s dominant services sector is financial given the country’s large banking sector, although tourism and transport services are also important.

In terms of longer-term structural factors, Jordan performs relatively strongly in rankings of innovation. For example, the World Economic Forum’s Global Competitiveness Index (2007-08) ranks Jordan at 49 out of 131 countries. Jordan’s level of human development is more modest. The latest UN Human Development Index (2007/08) ranks Jordan at 86 out of 177 countries.

After consideration of these various characteristics, Moody’s evaluates Jordan’s economic strength to be low.

MARKETABLE BOND DEBT
The government of Jordan has never defaulted on either its local or foreign currency bonds (unlike some other Ba-rated governments), although marketable bond debt has never composed a large proportion of its external debt. Jordan has however defaulted on other external debt owed to both public and private creditors. Jordan rescheduled its obligations to Paris Club official creditors on six occasions between 1989 and 2002. It also rescheduled loans owed to London Club private creditors in 1993.

Despite this default history, it seems that the government of Jordan is currently strongly committed to honouring its obligations and we have few doubts about its willingness to repay. An example of this commitment was the government’s recent buyback of $2.4 billion of Paris Club debt. In summary, Moody’s assesses Jordan’s institutional strength to be medium.

Jordan’s central government financing requirement, excluding grants, tends to be large. Over the past five years, the central government deficit excluding grants has averaged 11.1 per cent of GDP. In 2007, the deficit stood at 8.5 per cent of GDP and this is expected to widen in 2008, mainly owing to inflation-offsetting current expenditure increases. This is in spite of a robust increase in tax revenues and the removal of most fuel subsidies earlier in the year.

The overall general government balance, including grants, is much stronger, however. The most recent five-year data (2002 to 2006) show that the general government posted an average annual surplus of 0.4 per cent of GDP during this period. This is due to the following:

First, Jordan’s sensitive geopolitical location and strong international relations attract budgetary support in the form of grants, especially from the US and Saudi Arabia. Grant inflows are generally dependable in times of difficulty but are volatile from year to year. For example, in 2003 when the US invaded Iraq, grants shot up to 13 per cent of GDP.

Secondly, Jordan’s various government agencies, including the public Social Security Corporation, tend to post substantial operating surpluses. These surpluses are included in the general government balance.

RISING INFLATION
The combination of a general government surplus, rising inflation, and high real growth rates have led to a gradual attrition of Jordan’s large public debt. The general government’s gross direct and guaranteed debt fell from over 100 per cent of GDP in 2002 to just under 80 per cent of GDP in 2007.

A buyback in March of external debt owed to Paris Club official creditors has led to a further large drop in gross debt, to around 65 per cent of projected 2008 GDP at the end of June.

Despite its large size, the structure of Jordan’s government debt is quite favourable. Although around 40 per cent of the gross debt is owed to external creditors in foreign currencies, this portion has low servicing costs and long maturities with low roll-over risk.

The average maturity profile of the government’s external debt is currently 7.5 years, on a remaining maturity basis, and the average interest rate paid on this debt in 2007 was 4.1 per cent. Almost all of the government’s external debt is owed to bilateral and multilateral creditors. Marketable bonds, which totalled just $145 million at the end of June, compose 2.8 per cent of the external debt.

"THE COMBINATION OF A GENERAL GOVERNMENT SURPLUS, RISING INFLATION, AND HIGH REAL GROWTH RATES HAVE LED TO A GRADUAL ATTRITION OF JORDAN’S LARGE PUBLIC DEBT."

EXTERNAL DEBT
A thorough analysis of the government’s external debt structure is particularly important given the country’s balance of payments vulnerabilities. In the unlikely event that a balance of payments crisis (possibly caused by large capital outflows) caused an exchange rate devaluation, the cost of the government’s external debt service could leap in local currency terms. This possibility acts as a constraint on the government’s financial strength, although this is tempered by the favourable structure of the external debt. After weighing up the various issues outlined above, Moody’s scores Jordan at medium on government financial strength.

This factor assesses a country’s vulnerability to adverse shocks that could materially impact the government’s creditworthiness. Such shocks could be financial, economic or political.

Jordan’s susceptibility to event risk is assessed at medium. The risk of a domestic political upheaval in Jordan is considered to be low, and certainly lower than many other countries in the Middle East region. Despite ethnic and tribal divisions, the well-established monarchy and a loyal and pervasive internal security service provide an anchor for internal stability.

Our main political concerns surround the volatile regional political environment given the ongoing violence in Iraq, the Palestinian Territories, and Lebanon as well as increasing tensions between Iran and the US and Israel.

CPI inflation accelerated to 19.4 per cent in July; an excessive level. If untamed, such a high level of inflation could prove socially destabilising, especially in light of Jordan’s weak social indicators (although the country’s history of domestic political stability is reassuring).

A sustained high level of inflation could also undermine potential growth by damaging consumption and investment. It has already prompted an expansion of current fiscal expenditure that could be difficult to reverse. Although the government is keen to stress that the recent inflation-offsetting measures should be viewed as a one-off event as it is hopeful that inflation will moderate in light of recent decreases in global commodity prices.

ACCOUNT DEFICIT
Jordan’s external current account deficit approached 18 per cent of GDP in 2007, one of the widest in the world. The current account deficit is being boosted by the country’s reliance on oil imports although non-oil imports, many of which are investment-related, are also booming.

In 2007, two thirds of the current account deficit was financed through FDI, which is a considerably more stable source of financing than portfolio inflows. We expect that FDI will again provide most of the financing for the deficit in 2008 and 2009.

Published data on the constituency of FDI inflows are scant. A recent IMF report indicated that they are relatively diversified in terms of sectors and that they come mainly from wealthy oil-exporting countries. Again, this is encouraging, although investors could still be spooked by adverse economic events in Jordan or in their home countries, such as significant declines in real estate or equity prices.

The greatest reassurance in regard to the large current account deficit is the large stock of official foreign exchange reserves. These reserves stood at $7.3 billion, or 40 per cent of projected 2008 GDP at the end of July, six per cent higher than their nominal level a year previously, despite the government’s recent debt buyback operation.

These reserves are enough to cover around five months of imported goods and services. Jordan’s large banking sector appears to be in relatively good shape, despite the ongoing turmoil in global financial markets.

WHOLESALE FUNDING
Local banks have not been directly exposed to sub-prime related securities and in general are not reliant on wholesale funding from international money markets. The loan-to-deposit ratio, while continuing to inch up, remains well below 100 per cent. The rapid growth in credit facilities since 2003 could, however, become a source of vulnerability in the event of an economic downturn (especially a real estate correction).

The average Moody’s bank financial strength rating for Jordanian banks is C (on a scale from A to E). This compares with a global average of C+ and is stronger than regional peers such as Egypt (D) and Morocco (D+).

Tristan Cooper is vice president and senior analyst of the sovereign risk group for Moody’s Middle East