STNETNOC monetary drifts at large. at drifts monetary JordanEconomicReport economic slowdown with its adverse impact on the real sector much more than worrisome financial and financial worrisome into than more translate much sector uncertainties real the regional on impact and sector adverse domestic its with public emerging slowdown economic supporting the context, system a financial such developed Within well needs. favorable funding a relatively and a donors, indebtedness from government support of committed structure of record track a cushion, reserve international buffers: significant enjoys still Kingdom the But growth. economic of trend term near the and efforts consolidation fiscal expenditure, expenditures current in increases new cannot the but be at the expense funding of capital expenditures, which adversely region, impacts both the quality of the government in countries most than weaker already are No fiscal room for expansionary spending policies: recently Poor’s and Standard and Moody’s that negative. to stable from background Jordan for outlook their changed that on is It pre-turmoil. 5.3% original an from 2011 for GDP of 6.7% to forecast ratio deficit public its revised IMF the fact, of matter a As pressure. under again come to likely are accounts fiscal hand, other the on surge price oil and hand one on spending conditions: finance public on spillovers Adverse basis. annual an on billion 1 US$ than less no by bill import oil Jordan’s effects that the 30% surge in oil prices year-to-date holds for the Jordanian economy, such an oil shock raises Jordan’s import bill is apt to be significantly affected by the rise in oil prices. Beyond the adverse inflationary Jordan’s in however, side import the On rise exports. Jordanian of share lion’s the retain a to continues which Iraq to exports by offset was troubles security and political witnessed that Bahrain and Yemen Tunisia, impacted: adversely trade foreign Jordan’s money. of velocity in drop 13.1% a driving 4.3% by contracted demand, spending investment and consumption both of indicator an checks, cleared and 5.5% yearly a by dropped tourists of number the 15.1%, by fell production cement however, downside the On 28.0%. by grew permits construction and 24% by surged sales estate real 18.5%, by rose Port Aqaba the at merchandise 8.1%, by up was production power performances: mixed reporting indicators sector Real 2008. and 2003 between average on 8% of growth high of streak a reported had it after row a in year third the for growth economic low of range the within economy the keeping 3.3%, to 2011 for growth economic, real Kingdom’s the revised tough has IMF The turmoil. under the countries the of conditions social share and demographic does it general, regional in countries the MENA share in not turmoil does behind Jordan characteristics political Although unrest. regional the of effects spillover the amid turmoil: slowdown regional amid down slowing Economy The Jordan Economic Report can be accessed via the internet at the following web address: http://www.banqueaudi.com address: web following the at internet the via accessed be can Report Economic Jordan The ocuinp12 Conclusion p8 Sector Financial p7 Sector Public p5 p3 Sector External Sector Real NO FISCAL ROOM FOR EXPANSIONARY SPENDING POLICIES SPENDING EXPANSIONARY FOR ROOM FISCAL NO e-mail : [email protected] 985622 : (01) : 994000 (01) : e-mail Fax Tel 2560 - 11 : P.O.Box Lebanon - Beirut - Solh El Riad Idriss Bab Plaza, Audi Department Research Group Bank Audi sal - Audi Saradar Group Saradar Audi - sal Audi Bank h cnrcin f odna eprs o yi, gp, Libya, Egypt, Syria, to exports Jordanian of contraction The As a result of expenditure overshoots tied to social related social to tied overshoots expenditure of result a As Jordan’s economy is luckily buffered by a relatively high relatively a by buffered luckily is economy Jordan’s As a matter of fact, given than Jordan’s fiscal conditions h Jrain cnm i rprig nt activity net a reporting is economy Jordanian The mn rsn ra sco idctr year-to-date, indicators sector real rising Among Fax : 962 6 4680 015 4680 6 962 : 000 4604 6 962 : Fax Tel Jordan 11184, 840006 : P.O.Box Amman Jabal Circle, Third Street, Zahran Floors 5th & 4th Complex, Hotel Royal Le branches Jordan - sal Audi Bank 2011 May The Jordanian economy is reporting a net activity slowdown amid of payments deficit as evidenced the contraction of net foreign the spillover effects of the regional turmoil. The IMF has revised assets of the financial system. CPI inflation is set to rise from 5.0% the Kingdom’s real growth for 2011 to 3.3%, keeping the economy in 2010 to 6.1% in 2011 according to IMF forecasts mainly driven within the range of low economic growth for the third year in a by an overall increase in commodity and oil prices. Amid few row after it had reported a streak of high growth of 8% on average domestic conversions from national currency holdings to foreign between 2003 and 2008. The domestic scene was rocked this year currency holdings, Jordan’s deposit dollarization ratio rose from by popular demonstrations complaining of rising unemployment 21.7% at end-December 2010 to 22.4% at end-March 2011. The and weak living conditions. Within such an environment, the stock of international reserves, which covers today circa 45% of newly appointed government is addressing the difficult task of the domestic currency Money Supply, is yet believed sufficient to balancing the social demands of the protesters with long-standing offset any pressure on the currency stemming from short term government priorities of economic development and fiscal liquidity issues or adverse political developments. consolidation. At the banking sector level, activity indicators reported somehow The impact of the regional turmoil on the real sector indicators mixed performances amid relatively tougher operating over the first quarter was actually mixed. Power production was conditions. While deposit growth remains shallow at 1.0% over up 8.1% relative to the 2010 corresponding period. The the first quarter, bank loans reported a significant recovery with a merchandise at the Aqaba Port likewise rose by 18.5% year-to- 4.3% growth over the period despite the turmoil. On the date. The property sector looked relatively resilient, with a 41% background of strong capitalization and improving liquidity growth in property turnover and a 24% rise in real estate sales levels, the rise in bank loans covered a large number of economic over the first four months of 2011 relative to the corresponding sectors, with the industry sector accounting for the lion’s share of 2010 period. Construction permits likewise grew by 28.0% over 31% of new loans, followed by the general trade sector with 25% the first quarter of the year, although cement production, and the construction sector with 13%. Following the deterioration reflecting a coincident indicator for construction activity, fell by in lending quality over the past couple of years, a noticeable 15.1% year-to-date. While the unrest in Syria has prompted many development year-to-date is the contraction in bounced checks Jordanians to cancel trips to the neighboring country giving a which fell by 22% over the first four months of this year, boost to domestic tourism with Aqaba recently seeing a higher accounting for 5.9% of total cleared checks, against 4.5% over last than usual number of visitors, touristic activity was negatively year’s corresponding period. impacted by the domestic protests contracting the number of tourists by a yearly 5.5% during the first three months of 2011. At the capital markets level, no major drifts were reported in the Finally cleared checks, an indicator of both consumption and first quarter of the year in a market that saw a wait and see attitude investment spending demand, contracted by 4.3% over the first among foreign investors amid overall uncertainty. The Stock quarter driving a 13.1% drop in velocity of money. market price index retreated by 8.2% year-to-date, driving a parallel drop in market capitalization to US$ 28.7 billion from At the foreign sector level, a widening of the foreign constraint is US$ 30.9 billion in December 2010. The market was actually likely this year. Although partly offset by fast rising demand for characterized by a cautious mood, with the share turnover in the Jordanian goods from neighboring Iraq and from Asia, the first quarter of 2011 accounting for around half of its volume in Kingdom’s exports are being constrained by sluggish growth in the similar 2010 period. As a matter of fact, the first three months’ the US on one hand and the regional turmoil on the other hand. turnover ratio reported a low of 18.0% of market capitalization, a Exports to Egypt, Yemen and Tunisia have contracted year-to- ratio lagging behind emerging and global peer markets. date by 44%, 28% and 10% respectively. Not less importantly, the rise in international oil prices is likely to widen Jordan’s import Following is an overview of the detailed developments in the real bill and ultimately its foreign trade deficit, with Jordan importing sector, external sector, public sector and financial sector, while the circa 96% of its power needs. Jordan’s workers remittances, which concluding remarks focus on challenges raised by the recent emanate from circa 600 thousand Jordanians working abroad regional turmoil for Jordan. mostly in the Gulf region and which represent a major source of foreign currency inflows for the home economy, have contracted Gross Domestic Product by circa 0.7% year-to-date. US$ billion 35 10% At the fiscal level, a net deterioration in public finances is expected 8.6% 8.5% 30.0 30 8.1% 7.9% 7.6% 27.5 this year, with fiscal deficit set to outpace the budgeted one. 25.1 8% 25 Within the aim of reinforcing social stability and addressing 22.7 20 17.8 6% inflationary pressures, the economic relief package would result in 4.2% 15.6 15 12.6 11.4 4% reducing domestic revenues by US$ 170 million due to the 6% cut 10.2 10 3.3% on oil derivatives which is coupled by raising salaries of public 3.1% 2% 5 2.3% sector employees and pensioners (costing circa US$ 226 million) 0 0% and by a reduction of US$ 310 million in capital expenditures in 2003 2004 2005 2006 2007 2008 2009 2010 2011F light of resetting spending priorities. Within this context of Nominal GDP Real GDP Growth widening deficit, the Kingdom’s debt to GDP ratio, currently Sources: IMF, Bank Audi's Research Department standing at 60.5% of GDP is apt to rise slightly in 2011 to reach 62.0% at year-end, yet with no current plan to issue further international debt after the successful closing of the US$ 750 million bond issue of last December.

At the monetary level, a modest money supply growth along with rising inflation was reported in the first quarter of the year. Money supply (M2) grew by a mere 1.1% within the context of a balance

2 1. ECONOMIC CONDITIONS Saudi Arabia. However, vegetables exported to Syria have declined over the first two months of 2011 relative to the same period of 1.1. REAL SECTOR last year, as a result of the political turmoil in Syria. 1.1.1. Agriculture and Industry At the level of the secondary sector, the industrial production quantity index for the first two months of 2011 reported no Slowdown in agricultural activity and stagnation in the industrial change relative to the same period of 2010, following a 3.1% sector decline last year. This index includes three components: the mining and quarrying sub-index, the manufacturing sub-index The Jordanian primary sector, which accounts for about 3% of and the electricity, gas, steam and hot water supply sub-index. GDP, is set to witness a slight slowdown in 2011. According to the EIU estimates, the sector would grow by 2.3% this year, down The mining and quarrying sub-index recorded a 34.8% rise in the from a relatively higher growth of 2.9% in 2010. first two months of 2011 relative to the same period of 2010. As a matter of fact, the production of Jordan’s Following protests against the difficult living conditions, the two main commodity exports, potash and phosphate, government announced within its economic package a direct increased by a significant 79.8% and by 18.4% support to the agricultural sector. The Prime Minister noted that May the government turned to the social economic policies to protect respectively in the first quarter of 2011 relative to the citizens from market manipulation of food prices, saying the same period of last year. 2011 government would respond “immediately and firmly” to curb The manufacturing sub-index decreased by 2.7% in the unjustified hikes in prices of basic commodities via the Supplies first two months of 2011 relative to the corresponding and Monitoring Department at the Ministry of Industry and period of 2010. Some components of the Trade. The weight of food prices in Jordan’s CPI is around 37%. manufacturing sub-index reported notable declines, such as radio, According to the FAO, food prices are set to increase in 2011 but television and communication equipment (-67.6%), machinery not to the levels of 2008. and equipment (-53.0%), electrical machinery and apparatus The government also said it would work on boosting the (-42.5%), cement and lime (-25.5%), and rubber and plastic contribution of the agriculture sector to the gross domestic products (-17.4%). However, the production index of the medical product and would allocate US$ 42.4 million to support small equipment sub-index grew by a significant 125.1%, followed by farmers. In addition, it would continue subsidizing gas cylinders basic precious and non-ferrous metals (36.6%) and at an annual cost of US$ 141.4 million, as well as fodder, which pharmaceuticals (30.6%). As for the production of the most would cost the treasury US$ 56.6 million. The measures include important manufactured goods, the cement production went lowering by 1% the on loans worth US$ 14,144 or down by 15.1% over the first quarter of 2011, and the fertilizers’ more extended by the Agricultural Credit Corporation. output declined by 2.1%, while the petroleum products’ output rose by a slight 2.1% and the chemical acids’ production increased An important move initiated by the Ministry of Agriculture in by 5.4%. March 2011, in partnership with the private sector, was to adopt a new mechanism to regulate the export of fruit and vegetables. This During the third month of the year, the of Jordan was initiated after some foreign importers complained that (CBJ) issued instructions to licensed commercial to Jordanian fruits and vegetables entering their countries have stimulate the relatively stagnant industrial sector. The CBJ would excessive levels of pesticides. The new mechanism involves provide banks with loans at the rediscount rate to relend to compiling a “Golden List”, meaning that only farmers and traders industrial firms at a fixed interest rate with a maturity period of whose fruits and vegetables prove to be up to international five years. The measures seek to offer medium-term credit standards would be given export permits. facilities to boost the competitiveness of the industrial sector. The Agricultural exports increased by 26.6% in the first two months of government also allocated US$ 16.3 million in this year’s budget 2011 relative to the same period of 2010. This may be partly due to promote and develop local industries. Previously, the to a price effect given that the prices of vegetables rose by 13% in government had already taken several steps and made legislative the first quarter of 2011, according to figures released by Jordan’s changes to enhance the industrial sector’s competitiveness Department of Statistics. It is worth noting that Saudi Arabia has including incentives and tax exemptions to local and foreign lifted a ban in force since 1990 relative to Jordanian agricultural investments, and exempting production inputs from taxes, as the produce, a measure that is set to increase Jordanian exports to sector faces high production costs.

Agriculture and Industry US$ million 2006 2007 2008 2009 2010 2011 Variation Q1 Q2 Q3 Q4 2010 Q1 Q1/Q1 10/09 Agricultural exports 543 594 743 734 276 204 187 212 880 --19.8% Bank credit facilities to agriculture (variation) 42 22 76 30 -15 -7 -14 9 -28 15 -201.7% -191.7% Industrial exports 3,600 3,909 5,524 3,054 1,140 1,293 1,284 1,365 5,082 --66.4% Bank credit facilities to industry (variation) 138 393 328 64 103 278 -122 155 414 322 211.5% 543.9% Phosphate (000 tons) 5,871 5,541 6,266 5,153 1,562 1,655 1,614 1,698 6,529 1,850 18.4% 26.7% Potash (000 tons) 1,699 1,794 2,005 1,123 312 520 509 592 1,934 561 79.8% 72.2% Fertilizers (000 tons) 862 831 788 721 177 204 202 176 760 173 -2.1% 5.4% Petroleum Products (000 tons) 4,017 3,740 3,670 3,539 838 835 907 771 3,350 856 2.1% -5.3% Electricity and Water (Mill.K.W.H.) 9,227 10,078 9,023 8,130 1,900 1,872 2,184 1,850 7,806 2,054 8.1% -4.0%

Sources: Central Bank of Jordan, Bank Audi's Research Department

3 1.1.2. Construction with Starwood Hotels & Resorts Worldwide, Inc. to start the St Regis in Amman and the Residences at the St Regis Amman. The St Positive growth in construction activity along declining government Regis Amman is scheduled to open in 2014 and would feature 270 infrastructure spending rooms and suites, while the Residences at the St Regis Amman would provide 80 private luxury residences for purchase featuring The construction sector in Jordan witnessed positive growth since two, three, four and five bedrooms. the start of the year, after registering a drop in its activity level over the past year. In parallel, the property market was relatively On the other hand, Damac Properties, a large developer in the demanded in the early months of 2011, with a 41% growth in MENA region, awarded the main construction contracts for the property turnover and a 24% rise in real estate sales (37% for completion of its projects situated at the gateway to the Abdali apartments and 21% for land sales) over the first four months of master plan in Amman. Damac Properties’ projects include the 2011 relative to the corresponding 2010 period. The decline in Heights, a luxury 35-storey residential tower, the Courtyard, a government capital expenditures for 2011 would yet adversely residential property with an open-air rooftop terrace, and the Lofts affect the sector’s activity, noting that the slowdown in at the Heights, an executive residence. infrastructure and non-residential projects last year was partly attributed to the meager financial allocations in the government’s It is worth recalling that the Jordanian government moved swiftly budget for capital spending. in adopting policy changes to protect the real estate sector including limitations on price increases and the waiving of transfer While cement production posted a decline of 15.1% in the first fees. Outlook for the sector in the remaining months of 2011 would three months of the year, totaling 798,000 tons, the number of undeniably depend on the consecutive outcome of domestic building permits increased by 24.3% year-on-year and reached political and regional political milestones with what this would 6,967 in the first quarter of 2011. The area relative to new entail in terms of spillover effects on investor confidence over the construction permits also increased by 28.0% year-on-year to reach foreseeable future. 3,426 thousands square meters. Banks’ credit for construction

Construction US$ million 2006 2007 2008 2009 2010 2011 Variation Q1 Q2 Q3 Q4 2010 Q1 Q1/Q1 10/09 Number of construction permits 23,691 24,918 21,705 25,238 5,606 7,530 6,837 6,687 26,660 6,967 24.3% 5.6% New construction permits in 000s of m2 12,925 12,066 10,041 11,798 2,677 3,325 3,098 3,622 12,722 3,426 28.0% 7.8% Production of cement (000 tons) 3,967 3,969 4,284 4,081 940 1,123 924 942 3,929 798 -15.1% -3.7% Bank credit facilities to construction (variation) 564 539 497 410 674 132 6 16 828 118 -82.5% 102.0% Number of registered companies 265 288 339 294 82 90 78 63 313 92 12.2% 6.5% Capital of new registered companies 28 37 123 29 764522 22 216.0% -25.4%

Sources: Central Bank of Jordan, Bank Audi's Research Department 1.1.3. Trade and Services reached US$ 4.6 billion at end-March 2011, up by 6.3% relative to end-March 2010. Jordanian banks had a more pro-active approach Slowdown in tourist activity amid regional unrest since the beginning of the year, with some approaching developers directly to offer products and services aimed at attracting more The Jordanian economy remains a trade and services’ economy as buyers and stimulating market activity. the tertiary sector accounts for the bulk of the economy (about 70% of the country’s gross domestic product). The important recent Among large real estate projects is the US$ 10 billion Marsa Zayed news is the fact that the GCC welcomed Jordan’s request to join the project in the city of Aqaba, which is the largest real estate and six-nation group, noting that membership in the GCC would offer tourism development of its kind in Jordan stretching over an area an avenue for financial support to Jordan and would boost the of 3.2 million square meters with a 2 kilometers waterfront. The trade and services sector. development has been designed as a mega mixed-use waterfront project, which would offer premium residential villas, townhouses, The touristic sector was adversely affected by the regional turmoil apartment units and hotels rooms as well as business, leisure and year-to-date. According to the EIU, the tourism industry may tourism facilities. The first phase of the Marsa Zayed project, struggle in 2011 if the regional unrest continues, although Arab developed by the Al Maabar company, is underway and tourists, including Gulf and expatriate summer visitors, are less construction works are expected to be completed in 2014. likely to be deterred by the current geopolitical situation in the region. In addition, Al Maabar recently announced partnership in Jordan

Trade and Services US$ million 2006 2007 2008 2009 2010 2011 Variation Q1 Q2 Q3 Q4 2010 Q1 Q1/Q1 10/09 Foreign trade 15,508 17,965 23,126 19,097 4,838 5,193 5,182 5,451 20,665 --8.2% Number of vessels at the Aqaba Port 2,516 2,587 2,662 2,331 592 572 595 610 2,369 637 7.6% 1.6% Merchandise at the Aqaba Port (000 tons) 17,165 17,793 16,952 14,201 3,887 4,063 4,037 4,864 16,851 4,606 18.5% 18.7% Tourist arrivals (000s) 9,536 8,948 9,459 9,500 2,212 2,997 3,790 2,391 11,391 2,091 -5.5% 19.9% Bank credit facilities to trade and services (variation) 2,109 1,215 1,573 -118 -602 248 302 441 390 430 -171.4% -431.0% Number of new registered companies 6,725 5,998 5,739 5,424 1,596 1,347 1,086 975 5,004 1,424 -10.8% -7.7% Capital of new registered companies 909 577 682 258 76 59 33 49 217 45 -41.7% -16.0%

Sources: Central Bank of Jordan, Bank Audi's Research Department

4 The Kingdom’s tourism industry, which is one of the main aircraft movements rose by 3.1% over the said period. It is worth contributors to the gross domestic product, witnessed a slowdown noting that the use of the Jordanian airport has been reinforced by since January after the popular uprising in Egypt resulted in the the open skies agreement signed between Jordan and the EU in cancellation of joint package tours to Egypt and Jordan. Some 2010, a year during which the QAIA reported a record number of Western media reports linking peaceful protests across the passengers. The Jordanian airport has received a large number of Kingdom to unrest in Egypt, Libya and elsewhere, further new carriers, routes and additional flight frequencies over the last contributed to the downturn, prompting concerns for the industry. three years from a broad range of scheduled air carries in addition to new charter services. The US$ 750 million rehabilitation and Over the first quarter of 2011, tourist arrivals declined by a yearly expansion works at QAIA are well underway, including the 5.5% to reach 2,091,000, and major tourism sites witnessed a construction of a new state-of-the-art 100,000 square meter decline in visitors. The number of visitors to Petra reached 107,416 passenger terminal. in the first two months of the year, down by 7.9% compared to the same period of 2010, while visitors to the northern city of Jerash Maritime transport indicators recorded growth over the also fell by a yearly 4% to reach 39,300 over the first two months of first quarter of the year. The number of vessels using the 2011. As a matter of fact, many tourists cancelled their trips to Aqaba port reached 637 in the first quarter of 2011, up by Jordan in February and March due to the regional unrest. 7.6% from the corresponding period of 2010. The weight of merchandise handled at Aqaba Container Terminal May Trips’ cancellations triggered a drop in Amman hotel occupancy reached 4,606 thousand tons in the first quarter of the that averaged 52% in the first quarter of 2011, down by 6% from year, up by 18.5% year-on-year. Outlook for the 2011 the same period of last year, according to Ernst and Young Middle remainder of the year obviously depends on the East Hotel Benchmark Survey. The major decline in hotel evolution of domestic political and regional political occupancy was witnessed in the third month of the year. In fact, milestones with what this would entail in terms of hotel occupancy had risen by 2% year-on-year in January 2011, spillover effects on trade activity at large. before falling by 2% and 15% in February and March, respectively. On the other hand, banks’ credit facilities to the hospitality sector (tourism, hotels and restaurants) rose by a yearly 3.5% to reach US$ 658 million at end-March 2011. 1.2. EXTERNAL SECTOR

The Ministry of Tourism issued a statement trying to reassure Brief disruptions at the beginning of the year potential tourists that Jordan was still a safe destination. The Ministry is working with other industry bodies to correct what it Jordan’s external sector activity was briefly disrupted in early described as misconceptions or wrong perceptions about the 2011, when public demonstrations included some violent situation in Jordan following global media attention on the region incidents. Further, an attack on the gas pipeline bringing natural in general. Tourism officials also turned to social networking sites gas from Sinai to Aqaba during political turmoil in Egypt to promote the country’s tourism sector. The Jordan Tourism interrupted Jordan’s supplies or gas imports for a brief period. Board (JTB) planned to intensify its promotional campaigns in Nonetheless, as demonstrations in Jordan became more peaceful European and Asian countries, and as part of a summer campaign in March and then began to gradually fade away, the overall targeting the Gulf market, the JTB started inviting journalists from outlook for the external sector began to look brighter and the the Gulf region to explore and write on the county’s tourism sites. trend for 2011 could be a growing one with both imports and exports set to rise. Another important sector related to trade and other services is transport and communication. Air traffic recorded minor growth In aggregate terms, the trade volume is expected to increase by over the first quarter of 2011 amid a general decline in travel within 7.1% in 2011 to reach US$ 21,746 million, triggered by a rise of the MENA region. The Queen Alia International Airport (QAIA) 8.0% in exports as well as a growth of 6.5% in imports. This welcomed 1,124,035 passengers in the first quarter of the year, up projected improvement at the level of both imports and exports by 2.4% relative to the corresponding period of last year, while follows yet another progress achieved in 2010 when imports rose by 7.2% and exports went up by 10.2%, thus triggering an increase of 8.2% in the overall trade volume. Within this context, it is Breakdown of GDP by sector in 2010 worth noting that Jordan’s external sector was severely hit by the Others global financial crisis in 2009 and the step up in 2010 comes as a 12.0% Agriculture 2.7% Mining and result of the recovery from the crisis. Moreover, in 2010, Jordan’s Government services Quarrying trade deficit expanded by a relatively small 4.2%, as the growth in 22.0% 5.1% exports slightly surpassed the growth in imports. In 2011, this trend is projected to continue and the trade deficit is set to rise by

Manufacturing 4.9% to US$ 5.9 billion. 16.8% In details, export growth in Jordan in 2011 would be triggered by recovering demand in Asia and increased re-export trade with Iraq, which would make up for sluggish demand in the US, as the

Finance, Construction latter, one of the main importers of Jordanian products, has to a Real Estate 4.2% certain extent not fully recovered from the global financial crisis. and Business services Trade, Restaurants 15.6% and Hotels Latest figures on domestic exports available for the first two 8.9% Transport and Communications months of the year show that the Kingdom’s exports to India saw 12.7% a significant upsurge, rising by 68%. Meanwhile, the Kingdom’s Sources: Central Bank of Jordan, Bank Audi's Research Department exports to Arab countries, North America and Europe showed modest increases during the said period. Growth in demand for

5 Jordanian products dampened slightly in the mentioned three likely to remain limited in 2011, with oil prices increasing and country groups be it from the overall regional political turmoil likely to stimulate growth in the Gulf States, following a 1.5% when it comes to demand from Arab countries, or from sluggish increase in 2010 to US$ 3.8 billion, after having fallen back in 2009 recovery from the global financial crisis when it comes to demand following the downturn of the Gulf Arab economies. An from North America and Europe. During the remainder of the estimated 600,000 Jordanians are working abroad, mostly in the year, exports to Arab countries would likely rise, bearing in mind Gulf region, and they are a major source of foreign-currency that a lot of the Kingdom’s exports target Gulf nations such as inflows, therefore they have a serious impact on sectors such as Saudi Arabia, the UAE, Qatar and Kuwait, which are set to benefit real estate and on the stock market and also subsidize the living from an oil boom this year, and therefore witness higher demand, standards of a large section of the Jordanian population. in general. This, accompanied by higher exports to Asia and a rise in re-exports to Iraq, suffices to trigger a rise in Jordanian exports Tourism receipts were affected by the recent turn of events in the in full-year 2011. country as overall tourism activity in the country suffered in the first two months of 2011. They remained unchanged from their As to imports, they are expected to register an increase in 2011, value in the same period of 2010. Over the full year, such receipts following the rise in 2010, partly on account of rising commodity are set to remain flat or maybe increase only marginally, but they prices, but also reflecting an overall strong demand in Jordan. would surely not pull the surplus on the Kingdom’s services However, EIU forecasts indicate that the growth in imports in balance down. It is worth noting that tourism receipts in Jordan 2011 is highly unlikely to replicate the sharp rises witnessed in recorded a 20% rise in 2010. 2007 and 2008 which averaged around 21.4%, and could even fall once more if the supply of discounted Iraqi crude is stepped up. The services account is in fact set to register a significant growth At present around 10,000 barrels/day (b/d) are being trucked over in its surplus in 2011, following another major rise of 38.6% in from Iraq, but the target is for this to reach 30,000 b/d in a 2010 caused chiefly by a recovery in custom receipts from foreseeable future. international trade, tourism revenues, and remittances. The forecasted 21.6% increase in this account in 2011 is likely to be Meanwhile, official figures for the first two months of the year driven by a continued improvement in all the aforementioned indicate that overall import activity in Jordan did not falter factors, except for tourism receipts. despite the brief stoppage of activity of the gas pipeline that brings natural gas from Sinai to Aqaba in January 2011 as a result of Overall, the current-account deficit would narrow gradually, from turmoil in Egypt. Indeed, imports into Jordan went up by 20.1% an estimated US$ 975 million (3.5% of GDP) in 2010 to a in the first two months of 2011 relative to the same period of the forecasted US$ 729 million or 2.4% of GDP in 2011. This previous year. Imports from Arab countries, and specifically Iraq, advancement follows an important drop of 23.2% in the current Syria, and Gulf countries soared significantly, rising by 28.2% in account deficit in 2010. Indeed, Jordan is on its way to the first two months of the year, and thus may have incorporated significantly boosting its current account position moving into the rise in oil prices as Jordan’s oil imports come from the said surplus in 2015, as per EIU forecasts. countries. Nevertheless, the 30.1% surge in imports from the European Union and the 16.8% rise in imports from Asian The capital and financial account, in parallel, is expected to countries reflect higher demand in Jordan and therefore indicate continue improving in 2011, following an upward stance in 2010, that the overall confidence of Jordanian nationals remained bearing in mind that this account plunged significantly in 2009 as somewhat undeterred by the events witnessed in the country. It a result of the global financial crisis. However, within this account might also reflect higher spending by Jordanian nationals in the progress is expected to remain mostly at the level of the response to the stimulus package announced by the government, financial account, as has been the case in 2010. Indeed, back then, which in turn would reflect positively on economic growth. the overall capital and financial surplus recorded an expansion of 38.0%, after being slashed by more than half in 2009, on account The breakdown of domestic exports by country of destination of a 38.2% growth in the financial account. Meanwhile, the capital reveals that Iraq captured the lion’s share in domestic exports, as account did not show full recovery in 2010, as its main the two countries worked hard on boosting their trade ties in component, foreign direct investment (FDI) fell significantly by 2010. Iraq captured around 18.5% of Jordan’s exports in the first 30%. So far in 2011, empirical evidence suggests that FDI into two months of 2011, followed by the United States with 13.4% of Jordan is still in a dire state, whereas the financial account is faring total exports, India with 10.4% of the total, Syria (7.4%), Saudi Arabia (7.0%), Lebanon (3.4%), and the UAE (2.6%). Foreign Sector Indicators

The breakdown of Jordanian imports by country 70% 60.7% 70% 60% 53.5% 50.7% 52.6% 50.4% 51.8% of origin shows that, as has been the case 46.2% 47.0% 60% previously, Saudi Arabia ranked first with 20.8% 50% 50% of total imports in the first two months of 2011, 40% 40% due to purchase of oil products. China came in 30% 30% second with 10.3% of the total, followed by 20% 12.2% 20% Germany with 6.7%, the United States with 5.2%, 10% 0.8% 10% 0% -10.9% 0% and South Korea with 4.0%. -16.1% -10% -18.0% -5.1% -3.5% -10% -9.4% On the invisibles side of the external sector, i.e. -20% -20% the services, income, and transfers balance of the 2003 2004 2005 2006 2007 2008 2009 2010 current account, prospects also look bright for Exports/Imports Current account balance/GDP 2011, following an improvement in 2010. The Sources: Central Bank of Jordan, EIU, Bank Audi's Research Department impact of the turmoil on workers’ remittances is

6 much better, with EIU expecting a boost of 1.4% in total its budgeted spending allocated for infrastructural projects to international reserves in 2011. meet its rising current spending. Due to such amendments, a total of 11 projects worth US$ 4.2 million were delayed till 2012. In conclusion, Jordan’s external sector’s outlook, in the wake of what’s happening in the Arab region, looks broadly positive. On In the new draft budget, foreign grants are forecast to increase by one hand, merchandise trade activity is expected to pick up and US$ 198 million to US$ 622 million, almost the same amount of both imports and exports are likely to maintain a strong foreign grants the Kingdom received last year. It is worth noting momentum, whereas on the other hand the services, capital and that historically, Jordan has relied heavily on foreign grants to financial accounts, would gradually step up benefitting from the make up for high spending and cover to a certain extent the imminent oil boom in Gulf countries. The IMF has however deficit. As a matter of fact, without grants the deficit would exceed pointed out two medium-term challenges facing Jordan, namely 10% of GDP. Prior to the global financial crisis, such grants had lower private capital flows to developing countries and a lower reached around US$ 1 billion per year, stemming mostly from global and regional growth outlook. While Jordan would be hard Saudi Arabia and the United States. While the pressed to solve the last issue, it is clear that the Kingdom is weakened global economic climate caused a drop in forging ahead with the first challenge, that of increasing foreign foreign grants in 2009, they resumed their upward investment within its borders. trend in 2010 and currently in 2011, the regional crisis should prompt a further increase in grants from the US May and Saudi Arabia.

1.3. PUBLIC SECTOR The new budget incorporated a 7.8% rise in local 2011 revenues to US$ 6.7 billion from the US$ 6.2 billion re- Plans to contain spending put on hold for the time being estimated domestic revenues in the 2010 budget, while total public revenues, including foreign grants, were estimated at Before the eruption of public demonstrations in the Arab region, US$ 7.4 billion compared to US$ 6.9 billion re-estimated for last which at some point spread to Jordan, the Kingdom had planned year, an increase of 7.4%. Current spending is expected to increase a contractionary fiscal stance in 2011, as part of it fiscal reform to US$ 7.6 billion from the previously budgeted US$ 6.9 billion plan aimed at gradually reducing the budget deficit. Nonetheless, this year, while capital expenditure would stand at US$ 1.44 as public demonstrations reached Jordan, the Kingdom had to billion compared with US$ 1.39 billion in 2010, an increase of succumb to the public’s demand and therefore revised its 2011 3.6%. The Finance Ministry remarked that the development budget to include higher spending and lower taxes. As such 2011 projects selected under the capital expenditure item are of is currently a year set to witness an expansionary fiscal stance. economic and social value, seeking to generate more employment The government’s desire to keep a tight rein on spending in 2011, opportunities for Jordanians and attract investments. It is yet in an effort to bring the fiscal deficit down, has been undermined argued that the government would cross the spending and deficit by new spending commitments made during the January protests. levels set by the 2011 budget, especially since gas supply from Within this context, it is worth highlighting the spending Egypt is currently suspended, a fact which is costing the commitments made by the government which include an extra government some US$ 4.2 million on a daily basis. Within this US$ 340 million to raise public sector salaries, a funding plan of US$ 169 million to subsidize food and promote job creation, as Public Indebtedness well as a US$ 141 million fund for gas subsidies. Furthermore, the US$ billion government announced its willingness to reduce taxes on diesel 99.6% 25 91.8% 100% and fuel by around 6%, a measure which would not entail any 84.3% extra spending, but would nonetheless put further pressure on 20 73.5% 71.0% 18.6 80% 16.7 public finances through lower revenues. 58.1% 61.4% 15 60% 12.6 15.4 60.5% 62.0% 10.2 10.5 10.6 11.5 13.2 As such, the Jordanian Cabinet in late February 2011 endorsed an 10 40% amended draft state budget for 2011 with an overall expenditure of US$ 9.0 billion and an estimated deficit of US$ 1.6 billion, or 5 20% 5.5% of GDP. The government had to withdraw the first draft 0 0% budget for 2011 from the Lower House, which was prepared in 2003 2004 2005 2006 2007 2008 2009 2010 2011F October last year, as it announced the aforementioned economic Public Debt Public Debt/GDP relief package. The Finance Minister explained that as the draft Sources: Central Bank of Jordan, IMF, Bank Audi's Research Department budget was prepared before the relief package, the best scenario was to withdraw the draft budget in order to avoid issuing a supplement. The overall expenditure in the first draft budget was Fiscal deficit/GDP US$ 8.8 billion with a projected deficit of US$ 1.5 billion, or 5% 10% of the GDP. 8.1% 8% The Finance Minister stated that the economic relief package, 6.7% 6% 5.6% 5.4% announced in January this year, would result in reducing 4.5% 3.9% 4.1% domestic revenues by US$ 169.7 million due to the 6% tax cut on 4% oil derivatives, adding that in a bid to prevent the deficit in the 1.5% budget to rise by the same amount of the package, the 2% 1.1% government reduced capital expenditure (which was estimated at 0% US$ 1.7 billion) by US$ 311.2 million, in light of resetting 2004 2005 2006 2007 2008 2009 2010 2011F Emerging Countries spending priorities. Indeed, the government had to shift some of Sources: IMF, Bank Audi's Research Department Avg 2011F

7 context, it is believed that if the Jordanian government doesn’t 1.4. FINANCIAL SECTOR find some new sources for a major increase in its foreign grants throughout the year, the budget deficit could actually reach US$ 1.4.1. Monetary Situation 3.5- 4.2 billion by the end of the year. Slight drop in Central Bank reserves amid conversions It is worth recalling that Jordan’s fiscal performance in 2010 had witnessed some improvement, as general economic conditions Amid the wide regional political turmoil and the domestic were favorable and traces of the global financial crisis were fading economic slowdown, monetary conditions in Jordan were marked away. Compared to 2009, the deficit contracted significantly from by a moderate rise in prices, a mild expansion in money supply, US$ 2.2 billion to US$ 1.4 billion. The drop in the fiscal deficit and a drop in the Central Bank’s foreign reserves. was triggered by a 3.1% rise in revenues, accompanied by a 5.3% drop in expenditures, and specifically capital expenditures. The The Consumer Price Index grew by an average of 4.3% year-on- latter fell by 33.3% to reach US$ 1.36 billion in 2010. It year during the first quarter of 2011 after rising by 5.0% on seems that efforts by the Jordanian government to reduce the budget deficit always come at the expense of capital Money Supply and Inflation spending, with the government finding it hard to put a 17.3% reign on current spending. 18% 17.0% 18% 14.0% 13.9% 12.4% 13% 11.7% 11.5% 13% Elsewhere, the government would continue to rely heavily 10.6% 11.1% on the domestic banks to secure debt finance to fund its 9.3% 8% 6.3% 6.1%* 8% fiscal deficit, although it has recently successfully issued a 5.0% US$ 750 million bond, its first on the international 3.4% 3.5% 1.6% market, which was heavily oversubscribed. As such, and in 3% 4.7% 3% light of the current events, Jordan’s overall gross public -2% -0.7% -2% debt is expected to rise to new levels, reaching some US$ 2003 2004 2005 2006 2007 2008 2009 2010 Mar-11 18.6 billion by the end of this year, up from US$ 16.7 Yearly money supply growth (M2) Average CPI Var. billion at end-2010. This year, the ratio of gross public * IMF full-year forecast debt-to-GDP is set to cross the 60% benchmark, reaching Sources: Central Bank of Jordan, IMF, Bank Audi's Research Department around 62%, a ceiling that the government of Jordan had been trying to avoid. Exchange Market Indicators In conclusion, spillovers from the turmoil of the Arab US$ million region would take their toll on Jordan’s fiscal 20,000 50.8% 55% performance in 2011. The challenges for the Kingdom lie 47.4% 48.4% 48.5% 44.2% 44.6% 44.9% in two areas here. The first short-term challenge lies in the 39.3% 40.5% 44% 15,000 13,093 Kingdom’s ability to secure significant foreign grants for 11,721 12,148 it not to incur a large amount of extra spending in 2011. 33% 10,000 8,586 7,563 The second medium-term challenge lies in rationalizing 6,740 22% Jordan’s public spending, as soon as domestic economic 5,209 5,281 5,250 5,000 conditions permit within the context of much needed 11% fiscal consolidation at large. 0 0% 2003 2004 2005 2006 2007 2008 2009 2010 Mar-11

Gross CBJ Reserves Gross CBJ Reserves/Money Supply JD Sources: Central Bank of Jordan, Bank Audi's Research Department

Monetary Situation Flows in US$ million 2009 2010 Q1 2010 Q1 2011 Vol Share Vol Share Vol Share Vol Share

Net foreign assets 2,518 82% 1,693 49% 510 344% -520 -58% Net Claims on Public Sector 464 15% 457 13% -515 -347% 528 59% Claims on Private Sector (resident) 226 7% 1,306 38% 141 95% 893 100% Claims on Financial Institutions -138 -4% -21 -1% 12 8% -12 -1% Uses=Sources 3,070 100% 3,435 100% 149 100% 890 100% Money Supply (M2) 2,417 79% 3,244 94% 393 265% 332 37% Net other items 652 21% 191 6% -245 -165% 559 63%

Sources: Central Bank of Jordan, Bank Audi's Research Department

Monetary Indicators 2009 2010 2011 Variation US$ million Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q1/Q1 10/09 Var M2 541 647 581 649 2,417 393 709 1,169 972 3,244 332 -15.7% 34.2% Cleared checks 12,200 12,539 11,747 12,780 49,265 12,554 11,344 12,145 12,479 48,522 12,018 -4.3% -1.5% Velocity (Cleared checks to average deposits) 1.88 1.87 1.70 1.81 1.81 1.73 1.53 1.60 1.59 1.60 1.50 -13.1% -11.6%

Sources: Central Bank of Jordan, Bank Audi's Research Department

8 average in 2010, noting that the IMF expects an average inflation requirements, raising the policy rate, or by the resumption of rate of 6.1% in 2011 that would come in line with the upward issuance of Certificates of Deposits. adjustment of global commodity prices. The breakdown of the Consumer Price Index by category reveals that the miscellaneous 1.4.2. Banking Activity goods and services category surged by 5.3% year-on-year during the first quarter of 2011, followed by the clothing and footwear Banks’ healthy financial standing helps them steer through domestic category with +4.9%, the housing category with +4.4%, and the tensions food items category with +3.6%. The Jordanian banking sector has witnessed tougher operating Given the moderate level of inflation, the Central Bank of Jordan’s conditions since the start of the year 2011. The waves of protests remained steady since February 2010 when that hit the Kingdom in the past few months has had an impact on interest rates were last cut by 50 basis points, bringing the total the overall business climate and economic activity, with negative cuts since November 2008 to 250 basis points. In details, the corollary spillovers on banking sector activity growth. rediscount rate was reduced from 4.75% to 4.25% in February Such spillovers mostly translated into mild yet positive 2010, the interest rate on repurchase agreements was lowered banking aggregate growth over the first quarter of 2011, from 4.50% to 4.00%, and the overnight window rate was cut which actually suggests that Jordanian banks, to a from 2.50% to 2.00%. These cuts came within the context of the certain extent, demonstrated resilience to domestic and May Central Bank of Jordan’s efforts to stimulate regional political developments. This can be attributed lending and spur national economic growth, as domestic banks to the domestic sector’s steadily improved financial 2011 remained rather cautious with regards to lending. strength throughout recent years, and which has played an important role in helping Jordanian banks steer The broader money supply (M2) widened slightly by 1.1% or US$ through the turmoil period. 332 million during the first quarter of 2011 to reach US$ 31.9 billion at end-March 2011, after expanding by 11.5% in 2010. The Measured by the aggregated assets of banks operating in the variation in money supply during the first quarter of 2011 Kingdom, total sector activity managed to pull out a positive compares to a of US$ 890 million, resulting mostly albeit mild growth so far this year, rising by 1.6% in the December from an increase of US$ 893 million in claims on private sector, a 2010 to March 2011 period to reach US$ 50.1 billion at end- US$ 528 million increase in net claims on public sector, a drop in March 2011, a growth rate broadly in line with that witnessed over net foreign assets of US$ 520 million, and a US$ 12 million the corresponding period of 2010. Total deposits, the traditional decrease in the financial institutions’ indebtedness. The difference activity driver accounting for 64% of total balance sheet as at end- between the growth in money supply and money creation, March 2011 and providing banks with a stable source of funding, amounting to US$ 559 million, suggests a demonetization of recorded a small 1.0% growth year-to-date to reach US$ 32.1 monetary claims during the first quarter of 2011. billion at end-March 2011. The US$ 312 million rise in deposits over the first quarter of this year yet proved 53% lower than that The CBJ’s foreign exchange reserves (excluding gold), which recorded during last year’s first quarter, thus somehow reflecting surged by 11.7% in 2010 due to an increase in expatriates the slowdown in deposit flows into the Kingdom’s banking sector remittances and tourism revenues, slipped by 7.2% during the in the midst of domestic and regional tensions. first quarter of 2011 to reach US$ 12.1 billion at end-March 2011. Seemingly, monetary authorities intervened in the foreign Still, the positive growth achieved during the first three months of exchange market during the first three months of 2011 to meet this year is mostly attributed to private resident sector deposits, demand for foreign currencies, noting that the fall in foreign which rose by US$ 401 million over the covered period, while reserves came along a 3.1% increase in foreign currency deposits those of the public sector slightly nudged down by US$ 108 of the financial system (Central Bank and licensed banks) and a million. Private non-resident deposits practically stood still so far 0.4% decline in local currency deposits over the first quarter of this year, moving up by a minor US$ 14 million. Not only does 2011. The Central Bank’s foreign reserves accounted for 44.9% of this suggest a quasi-absence of deposit outflows from the sector the money supply in Jordanian Dinar and covered nine months of over the covered period, but it also shows that confidence in the imports at end-March 2011, providing a cushion against external banking system has been maintained despite the most serious shocks as they allow the Central Bank of Jordan to alleviate domestic setbacks in recent years. It is worth noting that pressures on the domestic currency stemming from short-term Jordanian authorities removed as of the start of the year the liquidity problems or adverse political developments. blanket bank deposit guarantee introduced post-global crisis outburst, and replaced it with a larger threshold for deposits The Jordanian dinar remained pegged to the US Dollar and the guaranteed by the Jordan Deposit Guarantee Corporation. The CBJ stays committed to the maintenance of the peg, despite the latter limit was raised from JD 10,000 to JD 50,000 on the back of associated lack of monetary flexibility. The peg has instilled the safety and soundness of domestic banks, according to Jordan monetary confidence and has not substantially harmed Deposit Guarantee Corporation officials. competitiveness as the United States is one of Jordan’s largest single export markets. A look at bank deposits from a currency angle shows that the bulk of the first quarter 2011 deposit growth (more than 90%) was Looking forward, the Central Bank of Jordan is expected to keep accounted for by foreign currency deposits. Within this context, rates low throughout 2011, and to shift its focus to anti- the deposit dollarization ratio slightly moved upwards, from inflationary strategy from 2012, along with the expected start of 21.7% at end-December 2010 to 22.4% at end-March 2010 but rate hikes by the US Federal Reserve. According to the IMF, the remains well below levels exceeding the 30% mark a scant few authorities should stand ready to tighten monetary policy if years ago. rebounding private sector credit raises domestic demand and places upward pressure on domestic prices, noting that monetary Although politico-security developments on both the local and tightening could be implemented by increasing reserve regional scenes likely curbed appetite for bank lending and

9 increased banks’ cautiousness, lending activity expanded at a during the first quarter, as evidenced by latest Central Bank noticeable pace. Bank credit facilities grew by 4.3% over the first figures (31% of total new credit facilities). More generally, banks quarter of 2011 to reach US$ 21.3 billion at end-March 2011. The mostly channeled funds towards the industrial, general trade and US$ 882 million rise in lending volumes actually turned out to be construction sectors which accounted for a combined 70% of total 5.5x higher than that recorded over the first quarter of 2010. lending growth over the first quarter of 2011. New credit facilities While one can righteously argue that the latter period was still extended over the covered period were mostly accounted for by affected by the global credit crunch and general reluctance of local currency funds, which captured more than 85% of total banks to extend credit, this year’s first quarter lending activity lending growth. growth also exceeded by 1.4x the lending volume growth recorded over the last quarter of 2010 which saw a relative improvement in Over and above Jordanian authorities’ measures, domestic banks’ operating conditions across the Kingdom and a higher demand commendable high liquidity and overall financial flexibility for bank credit at large. favored the healthy rise in lending activity growth. The financial sector is indeed well regulated and its macro-policy framework The noticeable lending activity so far this year comes within the remains generally sound. Jordanian authorities’ efficient context of domestic authorities’ aim to give a boost to economic supervision and regulation of the domestic banking sector over activity and, in particular, encourage lending to the industrial the years helped banks remain well capitalized and liquid in the sector. Authorities reportedly granted 5-year fixed rate loans to face of difficult conditions such as the one witnessed in the banks for re-lending to the industrial sector, and also allowed aftermath of the global crisis outburst, or more recently, in the them to extend direct facilities in foreign currencies for export and midst of the regional turmoil and domestic tensions. re-export purposes, while working on boosting credit facilities extended to small and medium-sized enterprises. The industrial Jordanian banks’ comfortable liquidity levels are evidenced by sector actually captured the lion’s share in total lending extended their relatively lower loan-to-deposit ratio, which stood at 66% at end-March 2011 (against levels above the 70% mark in the couple of years preceding the global Comparative Financial Soundness Indicators (Year 2010) crisis outburst) and compare favorably to regional 100% and global benchmarks estimated at 77% and 83%, 89.4% respectively. Banks’ primary liquidity ratio also 80% 77.2% remains at a comfortable level in absolute terms 64.2% and relative to regional and international 60% benchmarks. Comfortable liquidity ratios actually reflect the safety of the banks’ financial positions 40% while promoting financial stability in the 19.5% 20% 15.9% 16.2% Kingdom. Within this respect, the Central Bank 7.9% 5.2% 6.6% lately reiterated its emphasis on the sound bases of 0% banks’ liquidity management through liquidity Loans/DepositsCapital adequacy NPL/Total Loans instructions according to the maturity ladder, Jordan MENA countries Emerging countries taking into consideration the matching between Sources: IMF, Bankscope, Central Bank of Jordan, Bank Audi's Research Department maturities of uses and sources of funds, and non- reliance on short-term and fluctuating funds to finance long-term uses.

Banking Sector Interest Rates in JD Of no lesser importance, domestic banks maintain 14% more than adequate capitalization levels, which 12% show they hold sufficient capital to hedge against 9.48% 10% 8.92% 9.07% 9.01% various risks. The broad sector’s capital adequacy 8.56% 8.86% 8.83% 8.10% 8% 7.59% ratio reached 19.5% at year-end 2010, well above 5.66% the 12% Central Bank minimum requirement and 6% 5.13% 5.56% 4.23% the 8% Basle II minimum ratio. Similarly, capital 4% 3.52% 3.40% 3.35% 2.75% 2.49% accounts represent 14.8% of total assets, more 2% than twice higher than the Central Bank minimum

0% requirement of 6%. These high ratios show that in 2003 2004 2005 2006 2007 2008 2009 2010 Mar-11 spite of their expanding asset base and, in Average Loan Rate Average Time Deposit Rate particular, growing credit facilities, banks still Sources: Central Bank of Jordan, Bank Audi's Research Department retain sufficient capital to withstand adverse

Banking Activity 2009 2010 2011 Variation US$ million Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 Q4 2010 Q1 Q1/Q1 10/09 Var. Total assets 594 1,133 305 1,023 3,056 640 706 1,036 1,884 4,266 782 22.2% 39.6% % change 1.4% 2.7% 0.7% 2.3% 7.3% 1.4% 1.5% 2.2% 4.0% 9.4% 1.6% 0.2% 2.1% Var. Total deposits 838 896 473 899 3,106 668 624 837 991 3,121 312 -53.3% 0.5% % change 3.3% 3.3% 1.7% 3.2% 12.1% 2.3% 2.1% 2.8% 3.2% 10.9% 1.0% -1.3% -1.2% Var. Total credit facilities -199 253 115 217 386 160 651 172 621 1,604 882 450.4% 315.6% % change -1.1% 1.4% 0.6% 1.2% 2.1% 0.9% 3.4% 0.9% 3.1% 8.5% 4.3% 3.4% 6.4%

Sources: Central Bank of Jordan, Bank Audi's Research Department

01 conditions, which enhances further financial system stability in compared to other Arabian markets, the Amman Stock Exchange the Kingdom. Still, Jordanian authorities appear keen to reinforce ranked in the 6th position in the MENA region in terms of further banks’ capital base, and decided towards end-2010 to raise performance during the first quarter of 2011, according to the banks’ minimum capital requirements, from JD 40 million to JD S&P Pan Arab Composite Index. 100 million for local banks within a one-year time span. Foreign The number of listed companies at the ASE declined slightly from banks operating in the Kingdom were asked to have a minimum 277 at end-2010 to 276 at end-March 2011. The small decrease in capital of JD 50 million, up from JD 20 million. the number of listed companies on the ASE coupled with a fall in In contrast, a challenge for Jordanian banks lies at the level of asset the general price index resulted in a 7.3% drop in market quality metrics. Following a streak of improvements in the few years capitalization to reach US$ 28.7 billion at end-March 2011. The preceding the global crisis outburst from double-digit to low single- ASE market capitalization stood at 103.8% of the GDP at end- digit levels, the ratio of non-performing loans (NPLs) to total loans March 2011, down from 122.7% in 2010, which reflects the deteriorated in 2009 and 2010 within the context of global crisis declining dimension of the ASE relative to the spillovers on loan repayment capacities, moving from 4.2% at end- Jordanian economy. Despite local and regional political 2008 to 6.7% at end-2009 and 7.9% at end-2010. The latter ratio developments, non-Jordanians ownership of market now stands higher than regional and global averages estimated at capitalization remained almost stable, moving from 5.2% and 5.5%, respectively. In parallel, the rise in non-performing 49.6% at end-2010 to 49.8% at end-March 2011. May loans led to an overall decline in loan loss coverage, with the ratio of The ASE total trading value amounted to US$ 1.3 provisions to NPLs down from 63.4% at end-2008 to 51.9% at end- billion during the first quarter of 2011, falling by 54.7% 2011 2009 and 46.4% at end-2010, against much higher 2010 regional relative to the corresponding period of the previous and global averages estimated at 75%. The Central Bank yet argues year. The division of the total trading value by category that despite the decrease in the coverage ratio, banks are still able to during the first quarter of 2011 showed that the handle the uncovered part of NPLs thanks to their high capital financial sector captured 56.5% of activity, followed by the levels. Anyhow, within the context of accrued politico-security industrial sector with 26.0%, and the services sector with 17.5%. tensions in the region and slower economic activity across the On the backdrop of a decline in the market capitalization and a Kingdom, some banks resorted to increasing provisions this first sharper fall in the total trading value, the annualized turnover quarter, which weighed on their bottom lines and led to somewhat ratio stood at 18.0% at end-March 2011, noting that the turnover mixed first quarter 2011 profit disclosures. ratio reached 30.6% in 2010 and 42.9% in 2009.

All in all, the Jordanian banking sector has shown resilience to As to the valuation ratios, the ASE price-to-earnings and price-to- adverse events both on the domestic and regional scenes. Within book value ratios stood at 18.4x and 1.48x respectively at end- the context of maintained depositor confidence and banks’ more March 2011, as compared to 20.0x and 1.60x respectively at end- than comfortable liquidity and capitalization levels, Jordan’s 2010. At such prices, the market might be increasingly attractive banking institutions have so far succeeded in continuing to provide for equity investors. financing to the economy without drawing on liquidity reserves and At the level of the bond market, the Jordanian fixed income capital. On the flipside though, the current regional unrest is likely market saw some rating changes in the wake of the local and adding to pressures on banks’ asset quality, which to a certain extent regional political uprising in 2011. In fact, Moody’s downgraded remains domestic banks’ Achilles heel to date. Reversing recently the outlook on Jordan’s Ba2 foreign-currency government bond deteriorated asset quality metrics in the period ahead through from “stable” to “negative” in February 2011 on worries that the further improvement in credit quality monitoring and political situation will make it harder for Jordan to control the strengthening in risk management practices remains the most deficit. The credit rating agency was concerned that following pressing challenge for local players, especially at a time when a great January’s decision to raise pay and pensions and lower fuel and deal of regional uncertainties continue to dominate the headlines. food prices, the new government might also pursue measures to raise living standards at the cost of fiscal discipline. Similarly, 1.4.3. Equity and Bond Markets Standard & Poor’s revised the outlook on its long-term foreign and local currency ratings to “negative” from “stable”. The Maintained investor confidence but cautious mood prevails negative outlook reflected S&P’s concerns about social unrest in Jordan and the likely repercussions of the regional conflicts on The local and regional political developments at the beginning of economic growth and fiscal revenue expectations. the year 2011 left their impact on the Amman Stock Exchange, and the cautiousness of banks to lend to local businesses As to sovereign bond issues, it is worth mentioning that Jordan negatively affected investor confidence, putting some pressures on equity prices. The Amman Stock Exchange general weighted price index Capital Markets Performance dropped by 8.2% during the first quarter of 2011 to close at US$ million 45,000 41,321 100% 37,719 4,883.5 at end-March 2011, despite the strong set of 2010 financial 40,000 35,935 90% 35,000 31,863 80% results released by some listed companies, notably the banks, with 63.3% 29,814 30,917 28,673 30,000 80.0% 70% 67.4% 60% Bank of Jordan, Cairo Amman Bank, Jordan Commercial Bank, 25,000 50% Capital Bank, ABC (Jordan) and Invest Bank posting a healthy rise 20,000 18,435 40% 42.3% 42.9% in profits. The fall in prices during the first three months of 2011 15,000 10,994 30% 10,000 29.1% 30.6% 20% followed a 3.7% drop in prices in 2010. The breakdown of the ASE 23.9% 5,000 18.0% 10% general weighted price index by sector during the first quarter of 0 0% 2003 2004 2005 2006 2007 2008 2009 2010 Q1-11 2011 shows that the industrial sector witnessed the sharpest fall in prices (-13.7%), followed by the banking sector (-5.8%), the Market Capitalization Trading Volume / Market Capitalization services sector (-5.5%), and the sector (-3.7%). As Sources: Amman Stock Exchange, Bank Audi's Research Department

11 launched early-November 2010 a five-year US$ 750 million bond on per capita income which lags 50% below the regional average. with a coupon rate of 3.875%. The proceeds of the bond sale were Jordan’s unemployment rate stands at 12.5%, quite higher than partly used in refinancing the budget deficit for fiscal year 2010. the regional average of 10.1% and the global average of 6.3%. It is Regarding corporate bonds, Al-Rajhi Cement Company became on that background that Jordan got its deal, though relatively in April 2011 the first company in Jordan to tap Islamic Sukuk limited, from the contagious uprisings in the Arab World. market through a JD 85 million (US$ 120 million) seven-year Not less importantly, the regional turmoil created a wait and see Sukuk to finance its capital expansion projects in the Kingdom, a attitude among investors who were reluctant to commit funds in transaction that took place despite the absence of local laws for a cloudy regional environment with growing uncertainties. issuance of Sukuks. Within this context, a consortium of seven Notwithstanding the adverse impact of the economic local banks through which the Sukuk was issued stated that they set up a Special Purpose Vehicle abroad in which assets of the sluggishness of the countries under turmoil on the income generation of Jordanians in those economies and the corollary seven-year ijarah deal were transferred to banks. impact, though limited, on financial remittances towards Jordan. In addition, Jordan’s foreign trade is somehow adversely impacted as Jordanian exports to Syria, Egypt, Libya, Tunisia, 2. Concluding remarks: Jordan’s economic status Yemen and Bahrain that witnessed political and security troubles amid regional turmoil in the early months of 2011 represent circa 10% of its total The Middle East and North Africa region witnessed an acute exports, although this is offset by a rise in Jordan’s exports to Iraq political turmoil in early 2011 on the basis of widespread protests which remains the lion’s share of Jordanian exports. On the triggered by political and socioeconomic demands. The import side, Jordan’s import bill is apt to be significantly affected deteriorating politico-security conditions had obvious by the rise in oil prices. Beyond the adverse inflationary effects contractionary effects on the region’s real economy. Within this that the 30% surge in oil prices year-to-date holds for the environment, the IMF revised downward its MENA growth Jordanian economy, such an oil shock raises Jordan’s oil import forecast for 2011 by one percentage point to 4.1% amid growing bill by no less than US$ 1 billion on an annual basis. near term uncertainties. The region’s external growth drivers, The main issue remains the indirect spillovers on public finance such as inflows, FDI and tourists are indeed being adversely conditions which are apt to come under further pressure in the impacted by the regional turmoil. Such adverse spillovers are current environment. As a result of expenditure overshoots tied partly compensated by favorable domestic growth drivers driven to social related spending on one hand and oil price surge on the by higher government social spending with corollary effects on other hand, the deficit may be considerably wider than the private demand. While the regional turmoil has undoubtedly currently budgeted 5.5% of GDP for 2011. As a matter of fact, the near term costs in terms of lost output, forgone investment, IMF revised its public deficit ratio forecast to 6.7% of GDP for weakened inflows and monetary pressures, a successful transition 2011 from an original 5.3% pre-turmoil, although the to a MENA region with improved political freedoms and human government expects that the gap will be filled with further grants rights, better governance and bolstered institutional framework from foreign governments with a US$ 100 million new grant cannot but have positive spillovers on the region’s economic announced by the US. It is on that background that Moody’s and efficiency and ultimately its standard of living and welfare. Standard and Poor’s recently changed their outlook for Jordan Where does Jordan stand amid such a regional turmoil? Although from stable to negative. Although the market impact of the rating Jordan does not share the regional political characteristics behind actions remains relatively limited, such actions reflect weakening turmoil in MENA countries in general, it does share the tough fiscal dynamics and translate the impact of the turmoil on fiscal economic, demographic and social conditions of the countries performance and corollary economic growth in the near term. under turmoil. More importantly, the Kingdom is not fully The problematic challenge is tied to the fact that Jordan does not insulated from the adverse indirect effects that the turmoil had on have fiscal room for expansionary spending policies within the the flow of people, goods and capital within the region. The context of large dual deficits. Given than Jordan’s fiscal change in the IMF 2011 real growth forecast for Jordan from conditions are already weaker than most countries in the region, 4.2% pre-turmoil to 3.3% post-turmoil is a reflection of such a funding the new increases in current expenditures cannot but be relative impact on the Jordanian economy. at the expense of capital expenditures, which adversely impacts First of all, Jordan does not fully share the political characteristics both the quality of government expenditure and the trend of that triggered the turmoil in some MENA countries. At the economic growth. In addition, government attempts to liberalize political level, Jordan does not lag in democracy indicators, civil the economy will probably be impeded in the near term by liberties and political freedoms like a number of other countries political concessions following domestic social demands. What in the region. As a matter of fact, Jordan’s democracy index remains to be said is that Jordan’s economy is luckily buffered by stands at 3.7 as per the Economist intelligence Unit, versus a a relatively high international reserve cushion, a track record of MENA average of 3.2, though still less than the emerging markets committed support from donors, a relatively favorable structure average of 4.8. The country ranks relatively well in political of government indebtedness and a well developed financial liberties, civil rights, media freedom, voice and accountability system supporting public sector funding needs. Within such a scoring above regional averages in all those global indices. But context, the emerging domestic and regional uncertainties Jordan’s socio-economic and demographic indicators lag well translate into economic slowdown with its adverse impact on the behind. Its long term population growth stands at 5.2% versus a real sector much more than worrisome financial and monetary 3.2% regional average and a 1.6% global average, putting pressure drifts at large.

The content of this publication is provided as general information only and should not be taken as an advice to invest or engage in any form of financial or commercial activity. Any action that you may take as a result of information in this publication remains your sole responsibility. None of the materials herein constitute offers or solicitations to purchase or sell securities, your investment decisions should not be made based upon the information herein. Although Bank Audi Sal Audi Saradar Group considers the content of this publication reliable, it shall have no liability for its content and makes no warranty, representation or guarantee as to its accuracy or completeness.

21