Event

Nationwide protests led by Jordan’s unions against a reduction of energy subsidies and a proposed tax increase led to the dismissal of the country’s Prime Minister on 4 June 2018. He was replaced by former World Bank economist Omar Al-Razzaz. The Prime Minister’s dismissal shows how continued fiscal consolidation has led to strong public discontent. Nevertheless he is expected to continue the implementation of fiscal consolidation, although the proposed tax increase is likely to be postponed. This week, in order to increase fiscal space, Saudi Arabia, Kuwait and the UAE promised Jordan USD 2.5 bn in economic support additionally Qatar promised USD 500 mio in support.

Impact on country risk

The recent protests in Jordan were the largest since the Arab Spring protests of 2011. They were sparked by the government’s plan to implement a tax hike and to increase fuel and energy prices. The measures were proposed in the framework of the IMF programme the country is currently under. The IMF programme is a three-year programme worth USD 723 m, aiming to lower Jordan’s public debt level and to restore GDP growth, which has been subdued since 2010.

The government urgently needs to implement fiscal consolidation as public debt reached 96% of GDP by the end of 2017. Jordan’s public finances mainly deteriorated due to the government’s reaction to the Arab Spring protests in 2011. In response to the protests the government increased fiscal spending which led to large fiscal deficits in the years 2011-2014 (peaking in 2013 at 11.2% of GDP). As a consequence, gross government debt rose from 67% of GDP at the end of 2010 to 87% of GDP in only three years as is shown in graph 1.

Since 2015 the government – helped by lower oil prices and thus lower subsidy expenditures – has implemented fiscal consolidation. This was done through a mix of subsidy cuts and increased government revenue. Additionally, the country received substantial grants from donor countries. These grants averaged USD 1.4 bn yearly (or around 3.5% of GDP) over the last three years. The new USD 2.5 bn grant that Saudi Arabia, Kuwait and the UAE are offering Jordan is to be spread over the coming five years (which equals around 1% of GDP a year) and will give the country more fiscal space to gradually implement its fiscal consolidation plan. By providing financial support the gulf monarchies are probably trying to prevent the protests from escalating.

The challenges the country is facing remain large. First of all, real GDP growth has remained subdued since 2010. While it averaged 6.2% in the decade up to 2009, it was only at an average 2.5% in the years since then. This was due to multiple reasons, such as spillover effects from the conflicts in Syria and Iraq due to lower export demands from these countries, but also because of increased business uncertainty due to the 2011 protests. Secondly, as a consequence of persistent subdued growth, unemployment has risen significantly in recent years. While it was around 12% in 2011, it has strongly risen (especially since 2014) to around 18% by the end of 2017. This has been one of the main sources of discontent among the population.

Thirdly, Jordan’s external imbalances have remained large given that it has run a structural current account deficit of around 9% of GDP. Fourthly, the fiscal deficit and the structurally large current account deficit, in combination with a stagnation of exports since 2010, have pushed the external debt to current account receipts ratio to an estimated 170% by the end of 2017. This is a high level, putting pressure on Credendo’s medium-/long-term political risk rating. Additionally, the increased external debt is putting pressure on the short-term political risk rating, given that a large and increasing part consists in short-term external debt. At the end of 2017 Jordan’s short-term debt was around 70% of its total exports receipts, putting pressure on the country’s liquidity position.

Additionally, the country is struggling to stem the impact of the large migrant flows due to the conflict in Syria and Iraq. This is one of the factors putting pressure on the government budget.

With the king’s demission of the Prime Minister, the pace of fiscal consolidation is likely to slow down. Nevertheless, the new Prime Minister is expected to continue the economic reforms and to implement fiscal consolidation, since room for additional public borrowing is very limited and would place Jordanian public finances on an unsustainable footing. The question is therefore whether the government will be able to control public discontent while maintaining fiscal consolidation efforts. The large grant from the gulf countries should give the Jordanian government additional breathing space.

Analyst: Jan-Pieter Laleman - jp.laleman@credendo.com