Jordan: US bond guarantee to ease rates

A US offer to back Jordanian bond issues may help lower the Kingdom’s borrowing costs and boost confidence in the country’s securities, which has been dented by regional instability that has slowed economic growth.

On March 22, 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 timing has been given, Obama did say they would be in place sometime in 2013.

Jafar Hassan, minister of planning and international cooperation, welcomed the offer, saying the guarantee would help reduce borrowing costs. The US guarantees 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, though the exact level and timing of any offer would depend on the fiscal 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 second half of 2013, and a further $500m to follow sometime later.

The US offer will be a welcome one for the Jordanian authorities, who are struggling to narrow the budget deficit, which is expected to reach $1.85bn in 2013, the equivalent of 5.4% of GDP. By guaranteeing Jordanian bonds, Washington is seeking to reassure 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 figure 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, were trading at slightly under the three-year rate, though still costing Amman 7.75%, according to the Central Bank of Jordan.

Jordan’s first foray into the international bond market was a five-year, dollar-denominated bond valued at $750m, carrying a fixed 3.88% interest 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 number of leading agencies revised their rating for Jordanian 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 in the region as factors.

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

The concerns of ratings agencies make borrowing more costly for the government, and so backing from Washington could serve to 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 Standard Chartered, has warned that reforms are essential to help reduce public debt, which he says has reached worrying 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, though it has yet to follow through, despite the Kingdom’s growing need for funds. Now, with the US behind it, Amman looks set to take advantage of its newfound support, hopefully impressing the markets, investors and creditors with its strengthened ties with Washington.