Easing rates: New avenue of support could increase investor confidence

A US offer to back Jordanian bond issues may help low-er the kingdom’s borrowing costs as well as boost con-fidence in the country’s securities, which has been dented by regional instability that has slowed econom-ic growth. On March 22, 2013, during a visit to Amman, US President Barack Obama said his administration would work with Congress to obtain approval to issue a guarantee for Jordanian bonds in the international market. While no specific timing has been given, Oba-ma did say they would be in place sometime in 2013.

RESPONSE: Jafar Hassan, the minister of planning and international cooperation, welcomed the offer, saying the guarantee would help reduce borrowing costs. A US guarantee on Jordanian bonds would allow Amman to borrow funds on international markets at terms and costs similar to those of US sovereign bonds, he said. Hassan also said the US would underwrite guarantees for bond issues valued up to $2bn, although the exact level and timing of any offer would depend on the fis-cal requirements of funding economic reforms.

Two days after Obama’s announcement, the Dow Jones news service reported Jordan was looking to offer around $1.5bn in euro-denominated bonds, with the first tranche – worth $1bn – to be issued in the sec-ond half of 2013 and a further $500m to follow later.

The US offer will be a welcome one for the Jordan-ian authorities, who are struggling to narrow the budg-et deficit, which is expected to reach $1.85bn in 2013, or the equivalent of 5.4% of GDP. By guaranteeing Jor-danian bonds, Washington is seeking to reassure the international markets that Jordanian debt is a solid investment. In early 2010 Jordanian Treasury bonds issued for a three-year term were earning 4.16%, a fig-ure that more than doubled to 8.39% for bonds issued in mid-March 2013. Jordan’s most recent five-year bonds, offered on March 11, 2013, were trading at slightly under the three-year rate, though still costing Amman 7.75%, according to the Central Bank of Jordan.

BEGINNINGS: Jordan’s first foray into the internation-al bond market was a five-year, dollar-denominated bond valued at $750m that carried a fixed 3.88% inter-est rate, which was issued in 2010. However, any new issue could cost Amman more, as its credit standing has deteriorated since that time. In early 2011 a num-ber of leading agencies revised their rating for Jordan-ian sovereign debt, with Moody’s downgrading the kingdom’s government bonds to “BA2” from “BAA3” and shifting the outlook from stable to negative.

At the same time, Standard & Poor’s cut its long-term and short-term local currency ratings for Jordan from “BBB-/A-3” to “BB+/B”, with both agencies citing the worsening political and economic situation at home and within the region as a whole as factors.

In early February 2013 credit ratings agency Capital Intelligence also moved, cutting its long-term local cur-rency sovereign rating for Jordan to “BB+”, which it fol-lowed by a downward revision in late March for all the Jordanian banks it had rated. The banks saw their out-look changed from stable to negative and their cur-rency ratings reduced by one notch. Capital Intelligence warned that Jordan’s banks had a high exposure to government debt, which data from the UK’s Standard Chartered suggests is running at close to 80% of GDP.

FORECASTS: The concerns of ratings agencies make borrowing more costly for the government, and thus backing from Washington could reassure investors and make the proposed offering a less expensive exercise.

While Jordan will be able to go to the international capital markets with the guarantee of the US behind it, not all believe that Amman should be loading up its debt stock further. Sayem Ali, an economist with Stan-dard Chartered, has warned that reforms are essential to reduce public debt, which he says has reached wor-rying levels. “Public debt build-up is unsustainable and reforms are critical,” Sayem told The Jordan Times in late March. In 2012 the then-government had flagged the plan to tap the international markets for $750m-1.5bn, but it has yet to follow through, despite the kingdom’s growing need for funds. With the US behind it, Amman looks set to take advantage of its newfound support.