Jordan: Public debt levels and composition make Jordan vulnerable to tighter refinancing conditions amid slow pace of reforms
Recurring protests hamper adoption of necessary reforms
In Jordan, recurring popular protests have made it difficult to implement further fiscal consolidation. Nevertheless, this has an important impact given that large fiscal deficits in the years following the Arab Spring have led to a strong increase in the public debt level. In the coming years it is not expected that the government will be able to credibly shift its policies around to implement bold economic reforms. The protests that erupted in June 2018 and again in December of 2018 were the largest since the Arab Spring protests of 2011 and were sparked by the government’s plan to implement a tax hike and to increase fuel and energy prices. The reforms needed to be implemented in the light of the current IMF programme under which Jordan is currently. However the protests led to the dismissal of the then prime minister Hani al-Mulki and the postponement of the proposed bill. Public discontent is however not only triggered by the consolidation efforts but is also reflective of deeper underlying issues such as the high unemployment rate which is estimated to be around 18%.
Public deficits increasingly financed through external borrowing
The public deficit in Jordan increased as of 2010 and peaked in 2013 when it reached 11.5% of GDP. Since 2013, the government implemented significant fiscal consolidation measures. Being helped by lower oil prices and thus lower energy subsidies, the deficit initially reduced to 2.9% of GDP at the end of 2017, but finally rose again to 4% of GDP at the end of 2018. The initially very large deficits pushed up the public debt level from around 67% of GDP in 2010 to 89% of GDP by the end of 2014, but even after 2014 it continued to rise given the albeit lower but persisting government deficits in combination with subdued real GDP growth (which has been subdued since 2009). Hence, the public debt level rose further to a very high level of 93.7% of GDP at the end of 2018. The main issue is however the changed composition of the public debt. Over time the public deficits have been increasingly financed on the international capital markets in foreign currency. This increased external borrowing by the public sector has been the driving factor behind the rising external debt level. While the external debt was equal to around 110% of total current account receipts in 2011, it rose to more than 180% at the end of 2018. Additionally, short-term external debt has remained very large. It stood at 65% of total current account receipts at the end of 2018. As a result of the rising external debt levels, the external debt service has also risen. This makes the country relatively sensitive to a tightening of the global refinancing conditions, as is expected with the further rise in advanced economies.
External support will be increasingly important
In the past years, Jordan has already extensively relied on external budgetary support, and given the lack of further significant reforms, this is expected to continue to play an important role. In October 2018 Jordan already obtained a USD 2.5 bn aid package from Saudi Arabia, the United Arab Emirates and Kuwait, which will be spread over 5 years’ time. Additionally, they also have received support from the World Bank, Qatar and the USA. The issue is that past financial support had come with little strings attached and therefore allowed for a further postponement of the necessary reforms and thereby led to a further build-up of the country’s debt levels. This is what we are currently seeing with the USD 723 m IMF programme. Jordan is currently still under (this programme runs until August 2019), but has not yet gone beyond the first review, given that a number of reforms have not been implemented. While an agreement has now been reached over the policies that need to be implemented to conclude the second review of the IMF programme, reforms have not been fully implemented yet. Therefore we expect that the access to other financial support will lead to a further postponement of the deep structural reforms needed and therefore to a continued rise in the external debt levels. This explains why Credendo has decided to downgrade Jordan’s MLT political risk to category 6/7 from 5/7.
Analyst: Jan-Pieter Laleman – firstname.lastname@example.org