This announcement 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 rating agency also downgraded the government's local currency bond rating to Ba2 with a negative outlook from Baa3.
This action, guided by Moody's published methodology, aligns the local currency rating with the government's foreign currency bond rating.
Jordan does not display limited capital mobility. Nor is there evidence of a significant bias in the government's ability or willingness to service its debt in favor of local currency. This rating action also reflects higher fiscal and economic downside risks.
Jordan's local currency ceilings were downgraded to Baa1 from A3.
Moody's believes that rising political event risk has led to a moderate deterioration in the operating environment for businesses and other entities based in Jordan.
The outlook on Jordan's foreign currency ceilings was changed to negative from stable.
Moody's may downgrade Jordan's Ba2 government ratings if there were disruptive political turmoil that threatened a structural weakening of Jordan's credit fundamentals relative to rating peers.
This could include deterioration in the balance of payments leading to a significant decline in official foreign exchange reserves or a sustained fiscal slippage that caused a jump in public debt.
Moody's decision to change the outlook on Jordan's sovereign ratings to negative from stable was triggered by the recent rise in domestic political tensions. There have been a number of anti-government protests in Jordan in recent weeks, although not on a comparable scale to those in Tunisia or Egypt. Demonstrators have been demanding political reform and an improvement to living standards. King Abdullah's recent dismissal of the government and his promise to accelerate reform was a reaction to these escalating political pressures.
Jordan suffers from a number of socio-economic challenges including a high rate of unemployment, which is officially reported to be 12.5 percent.
Moody's notes that this is one of the higher rates in the region and similar to that of Tunisia.
Over the past year, consumer price inflation has increased to around six percent in December.
Moody's points to the possibility that the new Jordanian government could significantly relax its fiscal stance as part of its policy response to such popular discontent.
In January, the previous government announced a hike in salaries and pensions along with a reduction in fuel taxes and a lowering of subsidized food prices. This may set a trend as the government seeks to raise living standards.
While perfectly understandable from a social policy perspective, Moody's believes that this would likely have an adverse effect on the overall state of Jordan's public finances, which in some respects are weaker than those of Ba rating peers. The government's gross debt approximates 60 percent of GDP, compared with a Ba median of around 45 percent of GDP.
Moody's also notes the country's external vulnerabilities that include a relatively wide current account deficit and a potentially volatile stock of non-resident equity holdings. Jordan's balance of payments is sensitive to changes in oil prices because the country imports nearly all of its energy needs.
However, the rating agency stresses that Jordan's ratings continue to be supported by a number of factors.
These include a historically high level of foreign exchange reserves and a track record of committed support from foreign donors, most importantly the US and Saudi Arabia.
Moreover, Jordan's public debt has a favorable structure, with little external market debt and limited refinancing risk given that the government's main creditors are the domestic banks.
Jordan's banking system is well developed.
Moody's decision to bring Jordan's local currency government bond rating in line with its foreign currency government bond rating is as per its published methodology cited below.
Specifically, Jordan does not display limited capital mobility. Nor is their evidence of a significant bias in the government's ability or willingness to service its debt in favor of local currency.
In fact, the government has little external market debt and the bulk of its debt is denominated in local currency. This rating action also reflects Jordan's indicated fiscal vulnerabilities and downside risks.
The last rating action affecting Jordan was implemented on Nov 1, 2010 when Moody's assigned a Ba2 rating to the government's dollar-denominated bond.
Prior to that, Moody's last rating action on Jordan was taken on Jan 8, 2007 when the rating agency changed the outlook on Jordan's sovereign ratings to stable from negative to reflect Moody's increased confidence in the country's ability to finance its large external current account deficit and the government's success in containing fiscal pressures.
The principal methodologies used in rating the Government of Jordan were Moody's Sovereign Bond Methodology published in September 2008, and Narrowing the Gap - a Clarification of Moody's Approach to Local versus Foreign Currency Government Bond Ratings published in February 2010.
