JordanEconomicReport NO FISCAL ROOM FOR EXPANSIONARY SPENDING POLICIES Economy slowing down amid regional turmoil: The Jordanian economy is reporting a net activity slowdown amid the spillover effects of the regional unrest. Although Jordan does not share the regional political characteristics behind turmoil in MENA countries in general, it does share the tough economic, demographic and social conditions of the countries under turmoil. The IMF has revised the Kingdom’s real May growth for 2011 to 3.3%, keeping the economy within the range of low economic growth for the third year in a row after it had reported a streak of high growth of 8% on average between 2003 and 2008. 2011 Real sector indicators reporting mixed performances: Among rising real sector indicators year-to-date, power production was up by 8.1%, merchandise at the Aqaba Port rose by 18.5%, real estate sales surged by 24% and construction permits grew by 28.0%. On the downside however, cement production fell by 15.1%, the number of tourists dropped by a yearly 5.5% and cleared checks, an indicator of both consumption and investment spending demand, contracted by 4.3% driving a 13.1% drop in velocity of money. Jordan’s foreign trade adversely impacted: The contraction of Jordanian exports to Syria, Egypt, Libya, Tunisia, Yemen and Bahrain that witnessed political and security troubles was offset by a rise in Jordan’s exports to Iraq which continues to retain the lion’s share of Jordanian exports. On the import side however, Jordan’s import bill is apt to be significantly affected by the rise in oil prices. Beyond the adverse inflationary effects that the 30% surge in oil prices year-to-date holds for the Jordanian economy, such an oil shock raises Jordan’s oil import bill by no less than US$ 1 billion on an annual basis. Adverse spillovers on public finance conditions: As a result of expenditure overshoots tied to social related spending on one hand and oil price surge on the other hand, fiscal accounts are likely to come again under pressure. As a matter of fact, the IMF revised its public deficit ratio forecast to 6.7% of GDP for 2011 from an original 5.3% pre-turmoil. It is on that background that Moody’s and Standard and Poor’s recently changed their outlook for Jordan from stable to negative. No fiscal room for expansionary spending policies: As a matter of fact, given than Jordan’s fiscal conditions are already weaker than most countries in the region, funding the new increases in current expenditures cannot but be at the expense of capital expenditures, which adversely impacts both the quality of government expenditure, fiscal consolidation efforts and the near term trend of economic growth. But the Kingdom still enjoys significant buffers: Jordan’s economy is luckily buffered by a relatively high international reserve cushion, a track record of committed support from donors, a relatively favorable structure of government indebtedness and a well developed financial system supporting public sector funding needs. Within such a context, the emerging domestic and regional uncertainties translate into economic slowdown with its adverse impact on the real sector much more than worrisome financial and monetary drifts at large. The Jordan Economic Report can be accessed via the internet at the following web address: http://www.banqueaudi.com STNETNOC Real Sector p3 Bank Audi sal - Audi Saradar Group Bank Audi sal - Jordan branches Group Research Department Le Royal Hotel Complex, 4th & 5th Floors External Sector p5 Bank Audi Plaza, Bab Idriss Zahran Street, Third Circle, Jabal Amman Riad El Solh - Beirut - Lebanon P.O.Box : 840006 Amman 11184, Jordan Public Sector p7 P.O.Box : 11 - 2560 Tel : 962 6 4604 000 Tel : (01) 994000 Fax : 962 6 4680 015 Financial Sector p8 Fax : (01) 985622 e-mail : [email protected] Conclusion p12 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.