Following GDP growth of 2.8% in 2012 according to IMF numbers, up slightly on 2011, Jordan is working to maintain similar expansion this year, despite a drop in foreign grants and a simultaneous rise in its energy bill.
The government has implemented tight fiscal measures to keep its deficit from getting out of hand, as well as comply with IMF loan requirements. The IMF’s recent approval of a $385m payment to Jordan, the second tranche of a three-year, $2bn loan program to assist the country in pushing through economic reforms, has given the government a bit of breathing room to address the issues of the budget deficit and rising energy costs.
Despite of a growing current account deficit that the IMF expects to reach 10% this year, Nemat Shafik, the fund’s deputy managing director, recently said the overall outlook for 2013 remains positive. ”Real GDP growth is expected to accelerate above 3%, reflecting an increase in government capital spending, higher domestic consumption and a recovery in exports.” Additionally, the IMF predicts that while inflation will rise to around 5.9% this year, it is expected to drop to 3.2% by 2014.
Meanwhile, confidence in the kingdom’s capital markets was also lifted recently following US President Barack Obama’s visit in March 2013 when he pledged to work with Congress to secure a US guarantee of Jordanian bonds on the international market in a bid to lower the kingdom’s local borrowing costs and boost confidence in securities.
Aram Rabadi, head of research at AB Invest, a local investment firm, told OBG, “The market is enjoying its best start in five years. The gains are widespread but the financial sector is leading the way with an 8% gain, thanks to the amazing performance of the diversified financial and real estate sectors.”
Following Obama’s pledge to guarantee Jordanian sovereign bonds, the government is now planning to float around $1.5bn in US-guaranteed euro bonds as a way to finance its high energy costs and trim the deficit.
Furthermore, according to the Central Bank of Jordan, the most recent government bond issue was oversubscribed with a coverage ratio of 297%, while interest on Jordanian domestic debt instruments declined. Rates on three-year government bonds fell to 6.9% in March, and interest on one-year treasuries dropped from 6.7% at the end of February to 5.3% at the end of March, the lowest level since May 2012.
While the political scene in surrounding countries remains bleak, investors are beginning to display a renewed confidence in Jordan due to a rebound in the local currency as well as a boost in the central bank’s foreign exchange holdings. According to Tarek Yaghmour, head of research for Capital Invest, foreign exchange reserves grew by 24% year-to-date to stand at $8.22bn by the end of February, due to sizeable grants from the GCC and a successful US dollar-denominated domestic bond issuance. Local banks have also benefitted from the growing confidence, and some are now looking to increase lending, particularly to small and medium-sized enterprises, supported by a $70m loan from the World Bank targeting the segment.
All of this comes as Prime Minister Abdullah Ensour works to form another new government. The main concern for the majority of members of parliament has been the proposed hike in electricity prices, which follows on the heels of the lifting of fuel subsidies last November. Despite this unpopular decision, the move, from a public finance perspective, has proved positive thus far. As Alaa Batayneh, former minister of energy, told OBG, “The lifting of the subsidies has already saved Jordan JD500m ($703.53m) of debt”.
However, with the industrial sector seeing potential increases ranging from 8% to 40% according to a proposed tariff, there is a growing concern that the kingdom’s manufacturers, particularly those in energy-intensive businesses, will be rendered uncompetitive, resulting in a decrease in the sector’s export figures and employment levels. Many companies are already straining from the high operating costs due to energy expenditures and have experienced a slimming of profit margins.
Kamil Nader, CEO of Nader Group, a local foodstuff distributor, recently told OBG, “Due to the rise in operating costs brought on by increasing energy prices, we’ve seen some margins decrease, mainly due to the large transportation bill. We offer service against a fixed commission and cannot pass off the additional costs to the consumer. This leaves many industrial companies scrambling to increase efficiency in order to remain competitive and maintain profitability.”
Despite these challenges, a number of positive signs are beginning to emerge. The capital markets appear to be recovering, while the banks are looking to increase credit lines. With tourism revenues up, a multitude of large energy projects in their early stages and renewed construction activity taking place, efforts to maintain a steady level of growth look more promising than they did last year.
Oxford Business Group
30 April
