You are here

Jordan’s sovereign debt: The never-ending cycle of Eurobonds

Nov 22,2018 - Last updated at Nov 22,2018

Facing enormous fiscal challenges in the past years, Jordan had extensively issued sovereign bonds, namely Eurobonds, hitting a record high of reliance on international bond loans. The Eurobond is a debt instrument to raise capital that is issued in a currency other than the currency of home country. 

Over the past decade, Jordan successfully tapped the international bond markets nine times and raised a total of $7.5 billion. Out of these nine issuances, only the 2010 issue was redeemed. The remaining issuances have an outstanding balance of $6.75 billion which need to be redeemed between the years 2019 and 2047.

Jordan’s last Eurobond issuance was in October, 2017 at a value of $1 billion and a coupon rate of 7.375 per cent; the highest coupon rate among all issues hitherto. A coupon rate is the annual interest payment paid by the issuer to a bondholder based on the face value of the bond. 

A main concern is the high coupon rate that Jordan incurs progressively with every issuance. It is important to question why international investors ask for higher rates of return to lend to Jordan. Presumably, a number of external factors contributed to such a behaviour, mainly credit rating, influx of refugees, weak trade ties with neighbouring countries due to regional conflicts and a rapid decline in aid flows among other factors. There are also a set of internal factors within Jordan which created this behaviour, including the status of the economy, tax evasion, the unemployment rate, political and regulatory environments and corruption. 

With the absence of systematic national strategies to address the above-mentioned challenges, Jordan will, most likely, tap the international bond markets again in the near future. But if this happens, what would the next coupon rate be? Alarmingly, Jordan pays semi-annual interests on its Eurobonds, and the total annual interest payments for 2017 reached approximately $282.9 million.

Thus, the government should systematically battle the challenges which fall under its control in order to enhance the borrowing conditions and lower coupon rate to reasonable and comparable standards. Strategies to stimulate trading and exporting should be effectively implemented.

Another concern is for how long Jordan will continue to borrow money from international bond markets? Does Jordan use these cash proceeds to finance its economic growth and generate new cash inflows, or are these cash proceeds being mostly used for fulfilling its obligations of due interest and principal payments to other bondholders and creditors? If this is the case, then this will be a never-ending borrowing cycle. Other sources should be sought. 

In fact, lessons must be learnt from the Greek debt crisis, which led Greece into risky financing and negative consequences. It should become widely known that spending borrowed money on paying back other due loans is an inadvisable strategy to tackling economic constrains.

During the coming two years, a huge challenge lies ahead for Jordan. Two Eurobonds must be retired, one in June 2019, with a value of $1 billion, and the other in June 2020, with a value of $1.25 billion. Has the government already planned ahead on how it is going to pay the due amounts of these Eurobonds without having to issue new ones? 

One should also question whether the short tenure of cabinets in Jordan is playing a role in expanding the issuance of new Eurobonds.

If the decision-making process related to Eurobonds is highly dependent on leadership styles of senior government officials, then we should not expect the government to have a well-defined plan to addressing the sovereign debt and the issuance of Eurobonds. Experts with profound knowledge and understanding of the international bonds market should be empowered to help and lead Jordan safely in this regard. 

Jordan’s economy faces enormous pressure in light of regional instability. Internally, the government should introduce national amendments and reforms to tackle the never-ending cycle of Jordan’s Eurobonds.

 

The writer is a Fulbright visiting scholar at the University of Illinois at Urbana-Champaign in the US, an associate professor of financial accounting at Al al-Bayt University and a visiting research fellow of the International Banking Institute at the University of Leeds in the UK. He contributed this article to The Jordan Times

up
58 users have voted.


Newsletter

Get top stories and blog posts emailed to you each day.

PDF