A new economic report on Jordan was issued this week by Bank Audi s.a.l-Audi Saradar Group. The report, entitled “Fiscal consolidation requirements: The key challenges for the Kingdom’s economy”, addresses the most important economic developments in 2009 at the macro side and by sector of activity and discusses the outlook for 2010 at large.
The Jordanian economy reported signs of weakening amid one of the worst global economic crisis in the World contemporary history. According to Bank Audi, the real sector slowed down in real terms as foreign demand collapsed post-crisis, but recession was avoided thanks to several domestic growth drivers within the Kingdom. The stable political/security domestic environment, the government post crisis stimulus package aimed at improving domestic liquidity, in addition to the effects of recent structural reforms contributed partially to alleviate the adverse global financial spillovers.
The report actually stated the Jordanian economy was actually impacted by the repercussions of the global crisis through several external transmission channels. Those were tied to the contraction of external growth drivers in 2009: A 20% decline in exports as a result of the contraction in global trade, a reduction in FDI from US$ 1.9 billion to UU$ 1.2 billion amid regional liquidity squeeze, a 5.2% drop in remittances due to the regional economic slowdown and a 1% decline in touristic receipts within the context of a slump in global touristic spending.
But the Jordanian banking sector was more or less unscathed by the global financial turmoil, despite the impact of the latter on lending quality at large. The consolidated assets of domestic banks grew by 7.3% in 2009, driven mainly by customer deposits which grew by 12.1%. Depositors increasingly headed towards deposits in Jordanian Dinars within the context of massive conversion aimed at benefiting from interest rate differentials helping generated a rise in Central Bank reserves to a record high of above US$ 11 billion. Credit facilities yet went up by a mere 2.1% in 2009, against 15.6% in 2008, within the context of global deleveraging.
The bank’s report said that the Kingdom’s economy, while slowing down from a 4-year growth trajectory of nearly 8% per annum to circa 3% last year, managed to avoid a recessionary trap due to the support of significant domestic demand drivers. The government adopted important countercyclical policies hinging over monetary policy measures (four times drop in benchmark interest rates, decline in reserve requirement and deposit guarantee across the board) and fiscal policy measures (stimulus spending packages with accommodating tax policies). While those measures reflected positively on the overall liquidity in the economy during a tough year, the outlook for 2010 remains somehow uncertain, as an austere 2010 budget was put in place to address the aggravating requirements of fiscal consolidation at large, after the debt to GDP ratio reported slightly below 70% and the deficit ratio approximated 8% of GDP over the past year.
According to Bank Audi, the growth outlook for 2010 depends on a large extent on the signs of global and regional recovery, but also on domestic factors such as the extension of new waves of loans by banks operating in Jordan after the relative deterioration in the quality of lending over the past year, the launch or continuation of projects under the auspices of both private and public sectors and the impact of new fiscal measures on consumption and investment aggregates in the Kingdom. Within this context, the IMF adopted recently a 4% real growth forecast for 2010 along with a 3% inflation rate.
When looking at the 2010 domestic outlook, Bank Audi says a SWOT analysis actually imposes itself overviewing the economy’s strengths, weaknesses, opportunities and threats. At the level of strengths, the report mentioned the kingdom’s long term domestic political and security stability, adequate institutional framework and legislation, the strong recent accumulation of foreign reserves at the Central Bank and the strict banking regulatory oversight and prudent banking policies.
At the level of weaknesses, the Kingdom suffers from a number of negative factors, namely the large current account deficit ratio, (one of the largest worldwide despite the relative improvement over the past year), the country’s vulnerability to swings in international oil prices, the elevated fiscal deficit and public debt ratios relative to the size of the national economy, the high cost of living with Amman being one of the most expensive cities in the region, and the recent bank credit tightening in an environment of macroeconomic sluggishness.
At the level of opportunities, the report mentioned first the large infrastructural projects underway or in the pipeline. Among those we mention the erection of the new airport, the newly built Abdali project, the large Aqaba project, the ambitious railway project, the peaceful nuclear power project, and the growing number of touristic projects. Such large scale infrastructural projects, while possibly facing rising financing challenges within an environment of overall fiscal consolidation needs, are apt to create significant investment opportunities and leave clear imprints on the country’s overall investment framework.
At the level of threats, a number of challenges lie at the horizon according to the report. Those are mainly tied to the lagged effects of the global crisis, the uncertainty about the sustainability of public finance imbalances, the gradual fading of external donor support, the high unemployment rate within growing social pressures, and the threats of regional political/security instabilities at large.
While all those risks represent serious challenges, it is believed that the country’s large opportunities outpace challenges at the horizon concludes the report. Still, the country is not likely to witness again in the foreseeable future the same significantly strong growth trajectory that was reported between the years 2003 and 2008, even in an assumption of the long awaited softlanding scenario in public finance conditions. The 5% average annual growth forecasts by the IMF for Jordan over the period 2010-2014 are a plausible outcome in the event of a persistent regional stability and in the absence of major fiscal drifts over the years ahead.
