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Jordan's Financial Sector Performance During the COVID-19

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Jordan's Financial Sector Performance During the COVID-19 Jordan’s Financial Sector Performance During the COVID-19 Pandemic August 2020 Jordan’s Financial Sector Performance during the COVID-19 Pandemic – August 2020 1 يقوم منتدى اﻻستراتيجيات اﻷردني بمشاركة املعلومات اﻻقتصادية املهمة التي يتم تجميعها من مصادر محلية وعاملية مختلفة؛ وذلك بهدف نشر الوعي حول اﻷمور اﻻقتصادية واﻻجتماعية والتوعية في ظل التغييرات التي يشهدها العالم وذلك ملواكبة آخر التطورات وطرح مجال للتفكير في حلول تعمل على تنمية وتعزيز اﻻقتصاد الوطني. Jordan Strategy Forum shares important economic information that is collected from various local & international sources; with the aim of raising economic and social awareness. This is done in order to track the latest developments and suggest solutions that would develop and strengthen the national economy. Jordan’s Financial Sector Performance during the COVID-19 Pandemic – August 2020 2 On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a pandemic. Soon after, the swift and massive shock of COVID-19 and the various shutdown measures to contain it have plunged the global economy into a severe recession. Nevertheless, since the outbreak began, “more than 1,400 measures have been adopted to support the financial sector by more than 140 different countries” (World Bank). Indeed, the objectives of the adopted measures are to stabilize financial markets, and maintain the flow of credit and liquidity to the most affected sectors, especially small and medium enterprises, as well as households. The International Monetary Fund (IMF) estimates that global public debt (as a percentage of Gross Domestic Product / GDP) will increase by 18.7% compared to the 10.5% increase following the 2008 global financial crisis. In addition, the IMF expects that the global fiscal deficit will increase by 10% of GDP. Again, this ratio is higher than that caused by the 2008 global financial crisis (4.9%). Figure 1 - Changes in Public Debt & Fiscal Deficit 18.7% 10.5% 10.0% 4.9% Public Debt Fiscal Deficit 2008 Global Financial Crisis COVID-19 Within the context of the impact of COVID-19, it should be noted that the IMF’s estimates are based on the status quo (base scenario). These estimates are likely to improve depending on the availability of a vaccine during the next few months (best-case scenario), or any evolving situations that may require another lockdown which could aggravate economic circumstances (worst case scenario). In common with other governments and central banks, the government as well as the Central Bank of Jordan (CBJ) have adopted a number of fiscal and monetary measures whose objective is maintain financial and monetary stability. As far as the Central Bank of Jordan is concerned, the Bank has taken some precautionary measures to contain the negative repercussions of the Coronavirus on the performance of the local economy and these measures include the followings: 1. Postponing the credit facilities installments granted to the economic sectors clients (companies and individuals) affected by the spread of the Corona virus: A. Allowing banks to postpone the due installments on the affected companies. This procedure should not be considered a loan restructuring, and should not affect the credit rating of these companies with CRIF. In addition, banks should not charge these companies any commission or delay interest as a result of this procedure. Jordan’s Financial Sector Performance during the COVID-19 Pandemic – August 2020 3 B. Allowing banks to conduct scheduling of clients' debts to whom the scheduling conditions applies without any down payment and without charging them any delay interests. C. Postponing the retail customers' installments including credit card payments, housing loans and personal loans without charging them any commissions or delay interests. D. The above procedures will be implemented until the end of the current year 2020. 2. Inject additional liquidity to the banks with an amount of 550 million dinars: The Central Bank has decided to reduce the compulsory reserve ratio on deposits with banks from 7% to 5%. This measure will provide additional liquidity to banks in the amount of 550 million Jordanian dinars. This will enable banks to reduce the interest rates they charge on the facilities granted by them to all economic sectors, including individuals and companies. It should be noted that this is the first time that the Central Bank has reduced compulsory reserves since 2009. 3. Inject addition liquidity (JD 500 million): The Central Bank launch a JD500 million soft financing program for small- and medium-sized enterprises (SMEs), with the Jordan Loan Guarantee Corporation acting as guarantor on the loans. 4. Reducing the financing costs of the Central Bank's refinancing program, that targets small and medium size projects, as follows: A. Reducing the refinancing program's interest rates that targets small and medium size projects, from 1.75% to 1.00% for projects inside Amman Governorate and from 1.0% to 0.5% for projects in the other governorates. B. Banks should reduce interest’s rate on existing loans at the same rate. C. Increase the maximum maturity available for advances for all the targeted sectors in the program within the capital and unify them with the other governorates to become 10 years, including two years as a waiver period for those who wish. D. Increasing the advances limit for all sectors to 3 million dinars, while maintaining the limit for the renewable energy and transportation sectors at 4 million dinars. E. Expand the coverage of the program to target export sector (noting that the sectors currently covered by program are industry, tourism, agriculture, renewable energy, information technology, transportation, health, technical and vocational education and engineering consulting). 5. Support the procedures of the Jordan Loan Guarantee Corporation by reducing loan guarantee commissions and increasing the coverage of the local sales guarantee program: Jordan’s Financial Sector Performance during the COVID-19 Pandemic – August 2020 4 A. Reducing the guarantee commissions of the industrial and services finance program from 1.50% to 0.75% for all loans that will be granted from this date until the end of the current year 2020. B. Reducing the start-up loans guarantee commission from 1% to 0.75% for loans to be granted from this date until the end of the current year 2020. C. Increasing the insurance coverage percentage of the local sales guarantee program from 80% to 90%. In addition to these measures, the CBJ, in a statement to all licensed banks in Jordan, instructed them not to distribute cash dividends to shareholders. Relative to the above arguments and observations, we outline a number of developments in Jordan’s Financial Sector during the past few months. First, the Jordanian banking system has a higher capital adequacy ratio (16.9%) than Basel Committee’s recommended ratio (10.5%). This indicates that Jordanian banks are relatively sound to withstand any credit shocks. Figure 2 - Licensed Banks in Jordan: Capital Adequacy Ratio (2018- 2019) Turkey 18.4% Brazil 17.1% Jordan 16.9% Canada 16.9% China 14.6% Russia 12.3% Morocco 10.8% Second, the CBJ lowered its main interest rate from 3.5% to 2.5%. In addition, the Bank reduced the mandatory reserve ratio from 7% to 5% during May 2020. This measure has increased the ability of banks to lend more and hence, increase local liquidity. Indeed, these measures have resulted in a 2.2% increase in the total value of loans (credit facilities) provided by licensed banks in Jordan at the end of May (post-lockdown) compared to February (pre-lockdown), This is equivalent to about 1.5% increase in liquidity compared to the same period (Central Bank of Jordan, Monthly Bulletin). Jordan’s Financial Sector Performance during the COVID-19 Pandemic – August 2020 5 Figure 3 - Total Credit Facilities (Monthly) During 2020 (JD Million) 28,058 27,867 27,637 27,466 27,235 January February March April May Third, by the end of May 2020, the total value of bank deposits dropped by 2.3% from its level in February 2020 (pre-lockdown). In addition, foreign reserves have also dropped by 8% compared to the same period and this reflects a deceleration in GDP due to low tourism income, foreign investment, as well as a decline in national exports. Figure 4 - Liscensed Bank's' Total Deposits (Monthly) During 2020 (JD Million) 35,678 35,341 35,324 34,914 34,847 January February March April May Figure 5 - Liquidity (Monthly) During 2020 (JD Million) 35,856 35,685 35,753 35,336 34,971 January February March April May Jordan’s Financial Sector Performance during the COVID-19 Pandemic – August 2020 6 Figure 6 - Size of Foreign Reserves in 2020 (JD Million) 8,608 8,591 8,326 7,987 7,908 January February March April May Fourth, the value of returned (bounced) cheques during the lockdown period (March and April) was equal to JD 494 million. This increase from JD 205 million in January and April 2020, as expected, was the result of the lockdown. Figure 7 - Number & Value of Returned Cheques 494 295 205 171 50 83 January + February March + April May + June Number (Thousand) Value (Million) Fifth, the Amman Stock Exchange’s performance was also impacted. During the first half of 2020, total trading volume was equal to JD 416 million and this is much lower than in the same period of 2019 (JD 668 million). The total number of traded of shares has also decreased. Figure 8 - No. of Traded Shares & Trading Volume 668 534 416 403 Trading Volume (JD Million) Number of Traded Shares (Million) First Half of 2019 First Half of 2020 Sixth, the market capitalization of all listed shares, and the general free float weighted index have also declined.
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