Jordan’s economy is “resilient” and can withstand regional political turmoil and higher commodity prices, central bank Governor Faris Sharaf said after the country’s local-currency rating was cut to junk and its sovereign debt outlook was lowered.
Protests that have unseated Tunisia’s ruler and threatened Egypt’s President Hosni Mubarak aren’t a comparable problem for Jordan because “there is very clearly a reform momentum both politically and economically,” Sharaf said today in a phone interview from Jordan.
Standard & Poor’s Ratings Services cut Jordan’s long-term local-currency rating to BB+ while Moody’s Investors Service changed the outlook on Jordan’s Ba2 foreign-currency government bond rating to negative from stable. King Abdullah last week dismissed his government in response to demonstrations organized by opposition groups demanding improvements in living standards.
Sharaf said Jordan’s “economic fundamentals are stable and are being addressed with full commitment in terms of our budget deficit and the accumulation of debt.” The kingdom’s banking industry “remains very strong, our currency is very strong and the growth outlook for 2011 is positive.” Jordan’s foreign currency reserves are about $12 billion, an increase of about 10.5 percent from the end of 2009 and equivalent to about 8 1/2 months of imports, Sharaf said.
The change in outlook was “triggered by Moody’s concern that fiscal and economic downside risks related to ongoing turmoil in the region have risen following events in Tunisia and Egypt,” the company said in an e-mailed statement today. “Rising political event risk has led to a moderate deterioration in the operating environment for businesses and other entities.”
S&P said it didn’t view the protests that took place in Jordan as “being in the same category as those in Tunisia or Egypt, but we do believe that the demonstrators could use the regional uprisings as an opportunity to express their discontent about high unemployment and the lack of economic development for lower-income groups.”
S&P affirmed Jordan’s BB/B long-term and short-term foreign currency ratings.
Jordan’s monarch appointed Marouf Bakhit, 64, as prime minister last week, replacing Samir Rifai, and tasked the new premier with forming a government that would start a “genuine political reform process” and put the country on “the path to strengthen democracy.”
King Abdullah met Feb. 3 with Islamic leaders who’ve been calling for political and economic changes after the appointment of Bakhit.
“Economic reform must continue to ensure a better life for all citizens and will not reach its required level without political reform,” Abdullah said during the meeting, according to a Royal Court statement at the time. The Islamic Action Front has said it’s not interested in joining Bakhit’s government. The group, the political arm of the Muslim Brotherhood, is the largest opposition movement in Jordan and hasn’t called for a change of leadership.
“Because of the regional civic unrest, and to a lesser degree in Jordan, it would suggest foreign grants will be forthcoming this year from the United States and Saudi Arabia, who will be keen to make sure Jordan remains stable and make up for additional spending by the government,” said Ali Al-Saffar, analyst at the Economist Intelligence Unit in London.
Moody’s and Standard & Poor’s “ignore the grants aspect and assume that higher spending will necessarily divert away from the capital spending allocation.”
Jordan, one of the smallest economies in the Middle East, imports more than 90 percent of its oil and relies on foreign investment and grants to finance deficits in the budget and the current account. Foreign grants increased 25 percent in the first 11 months of last year to 288.6 million dinars ($408 million), according to the Ministry of Finance.
The kingdom’s budget deficit narrowed 19 percent to 786.4 million dinars in the same period after receipt of the grants and a reduction in spending, according to the ministry. Jordan plans to cut the budget deficit to 5 percent of gross domestic product this year, outgoing Finance Minister Mohammad Abu Hammour said in a November interview.
Foreign debt increased by 16 percent to 4.48 billion dinars in the first 11 months of last year, according to the Finance Ministry. Domestic debt increased 14.7 percent in the same period to 6.64 billion dinars.
“I think 2011 will be a challenging year for everyone, not just for Jordan, and that is reflected in the higher global commodity prices and the regional uncertainty, but the Jordanian economy is far more resilient today than it has been in the past,” Sharaf said. “It will be able to absorb any fundamental shifts in global commodity prices and the government is committed to addressing the budget deficit and the build-up of debt.”
Before the regional turmoil, the International Monetary Fund forecast Jordan’s fiscal deficit would narrow to 5.3 percent of GDP this year from 5.75 percent in 2010 because of reductions in government costs and an increase in external grants.
Economic growth could accelerate to 4.25 percent this year “on the back of slowly rising domestic activity,” and helped by “fiscal prudence and credible monetary management,” the Washington-based organization said. Jordan had an average inflation rate of 5 percent in 2010, compared with a drop in consumer prices of 0.7 percent the year before.
Economic growth may accelerate to as much as 6 percent this year from an expected 3.4 percent in 2010, outgoing Finance Minister Mohammad Abu Hammour said in a Jan. 22 interview. The country’s economy grew 2.3 percent in 2009.
The central bank is still accumulating foreign currency reserves and there has been no change in the financial flows to the country, Sharaf said.
“The monetary stance of the country is geared towards enhancing growth and addressing structural imbalances and we feel strongly that we will be able to achieve that,” Sharaf said.
“It’s inconceivable to think that the monarchy in Jordan will be abolished anytime soon,” al-Saffar said. “For those people looking at Jordan and thinking it might be next, that’s unrealistic simply because the monarchy is much more stable,” he added.
“It has a get-out-of-jail mechanism and that’s dissolving the Cabinet and appointing a new premier, like it did when it had riots in 1989,” al-Saffar said, referring to unrest sparked by an increase in bread prices after government subsidies were removed.
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