Turning a corner: Fundamentals are strong despite a turbulent environment

Faced with a number of external shocks in recent years, Jordan’s economy has shown a remarkable resilience in dealing with successive challenges. The Hashemite Kingdom has continued to grow in a recession-hit and risk-averse climate, and the government is demonstrat-ing a determination to tackle longstanding structural reforms. The administration has thus been taking impor-tant – if sometimes unpopular – steps to cut deficits, roll back subsidies and tackle inefficiencies; these moves are now beginning to be repaid with strengthened international support. Indeed, with many predicting a better year for the region and the global economy as a whole in 2013, many in the kingdom are also looking forward to a year that may see Jordan turn the corner, heading away from recent difficulties.

At the start of 2013 there were signs that a more buoyant time awaited, as grants and gas flows began to ramp up. A string of major projects ahead should also provide investors with plenty to ponder (see analysis), as Jordan moves its economy forward, exploiting its comparative advantages and location.

OVERSIGHT: The key decision-makers in the Jordanian government, when it comes to economic policy, are the King – as chief executive – along with the prime min-ister and cabinet. The latter body includes key minis-ters of state such as those for Economic Affairs; Finance; Labour; Public Works and Housing; Energy and Miner-al Resources; Agriculture; Industry, Trade and Supply; and Planning and International Cooperation.

Like many other Arab states, the Jordanian econo-my was largely driven by the public sector in its first few decades following independence in 1946, with the private sector taking a secondary role. State run-indus-tries, along with ministerial and governmental direc-tives, were the main impetus behind many economic projects, including the construction of much of the major potash and fertiliser industry infrastructure that still constitutes an economic mainstay today.

FOREIGN AID: The kingdom has also long been a major beneficiary of foreign aid programmes. This began with British financial support in the years immediately fol-lowing independence, followed by aid from the US and the countries of the Gulf Cooperation Council (GCC).

In addition, various multilateral bodies, such as the IMF, the World Bank, the Islamic Development Bank, the EU and European Commission, and the European Bank for Reconstruction and Development, have also been major benefactors of Jordan’s development. This assistance reflects a clear recognition of the strategic importance of the country to the region.

POPULATION PRESSURES: Throughout the kingdom’s history, pressures toward increasing employment and poverty alleviation have been major factors for policy-makers, because the thinly populated country ( just over 500,000 people in 1950) has few natural resources.

Jordan has also had to absorb successive waves of refugees from Palestine in 1948, 1967 and 1973; from Lebanon in the 1980s; and from Kuwait and Iraq in 1991 (Kuwait is mainly a source of Palestinian Jordan-ian refugees expelled following Iraqi defeat in the first Gulf War). This influx continued in the mid-1990s, when Jordan became home to many Bosnian refugees; in 2003 it gave refuge to many more Iraqis fleeing the con-flict there. Since 2011 it has also seen many Syrians seek refuge within its borders. As of February 2013, some 392,000 Syrian refugees were officially residing in the kingdom, according to the interior ministry.

Many of these waves of refugees have assimilated well, bringing not only labour, but also (in many cases) a major surge in capital with them – this is particular-ly true of the Iraqis who arrived after 2003 (see analy-sis). Meanwhile, Jordan’s population, estimated at around 6.4m in 2012 by the IMF, is now around six times what it was in 1960, and nearly twice what is was in 1990.

At the same time, many Jordanians have left to work abroad, particularly in Gulf countries. Remittances from these overseas workers constitute a vital input for the country as a whole. A 2009 report by the European Com-mission suggested that some 600,000 Jordanians were working abroad at the time, with around 50% of them in the GCC. Overseas remittances regularly account for around 15-20% of Jordan’s GDP.

ECONOMIC PLANNING: Historically, the government has undertaken a number of short-, medium- and long-term development framework plans to guide its eco-nomic policies. State development planning began in earnest in 1952, when the Jordan Development Board (JDB) was established. The board drafted the first five-and seven-year plans – the latter interrupted by the Six-Day War in 1967 and the influx of many refugees from the West Bank and Jerusalem. Responsibility for drafting these frameworks then shifted to the Nation-al Planning Council, which issued a series of five-year plans throughout the 1970s, 1980s and 1990s.

Since then, a number of other development agen-cies have been established. These include the Jordan Investment Board, the Jordan Enterprise Development Corporation and the Development Zones Commission, all of which are expected to be merged in 2013.

KEY MOMENTS: During these last few decades, two key moments in economic policy development stand out. The first was in 1989, when a major economic cri-sis led Jordan to sign a structural readjustment pack-age, the first in a series of agreements with the IMF.

This crisis came about due to a combination of fac-tors: First, several years of declining oil and gas prices meant the Gulf countries had less demand for Jordan-ian workers, cutting overseas remittances. Direct finan-cial aid from those countries also declined. External debt then rose as the government borrowed to make up for consequent budget shortfalls, while a number of struc-tural problems were also exacerbated. Unemployment rose to around 30-35%, and a serious default risk emerged. The IMF was invited in to assist, leading to the first structural adjustment package.

To many, the crisis indicated the need for deeper structural renewal. Thus, the second major development was the 1993-97 five-year plan, which radically altered the balance between the public and private sectors in the kingdom for the first time. This plan was also able to capitalise on the dividend from the 1994 peace accord with Israel, which enabled a major restructur-ing of Jordan’s debts and released further IMF fund facil-ities. It also led to a surge in trade with the US, thanks to the establishment in 1996 of the Qualified Industri-al Zones, which brought together Israeli, Egyptian and Palestinian manufacturers with their Jordanian coun-terparts under a favourable export regime with the US.

REFORM: These two key moments provided the build-ing blocks for much of what has happened since. A pri-vatisation programme began in 1996, initially overseen by the Executive Privatisation Unit (EPU). The first major sell-off was the Public Transportation Corporation in 1998. A number of other state enterprises followed suit after the institution of the 2000 Privatisation Law. These included the Jordan Cement Company, the Arab Potash Company, the Jordan Phosphate Mines Compa-ny, the portfolio of the Jordan Investment Corporation, the Jordan Telecommunications Company (which was privatised in four phases) and Royal Jordanian, the flag carrier. The 2000 law also reconfigured the EPU as the Executive Privatisation Commission (EPC) and estab-lished the Higher Ministerial Committee for Privatisa-tion, led by the prime minister.

This programme undoubtedly helped mobilise con-siderable foreign direct investment (FDI) in Jordan, while also decreasing the fiscal burden these state enterpris-es had often exerted on government finances. Indeed, a 2008 report on Jordan by the World Trade Organisa-tion – which the country joined in 2000 – praised the kingdom for “one of the most successful [privatisation] programmes in the region” and for being one of the Middle East’s most open economies.

Jordan followed its groundbreaking 1993-97 plan with the 2002-04 Economic Transformation Programme and the 2004-06 Social and Economic Development Plan. These were the legs of the National Agenda, which then saw the kingdom undertaking a three-phase scheme, the first stage of which was scheduled to run in 2007-12. The plan promoted export-oriented, labour-intensive industries, along with developing education, infrastructure and legislation reforming political life.

The second phase, slotted to run through 2017, intends to generate a move up the value chain, deep-ening the quality of Jordanian industry and initiating a shift towards a knowledge-based economy. Phase three, from 2018 onwards, sees more intensive development of targeted knowledge-based sectors. Running along-side this strategy, and indicative of the rising importance of the private sector, is Jordan Vision 2020 (JV2020), in which 27 business associations came together with the government to form the JV2020 coalition, with the aim of developing and implementing strategies to achieve the goals of the National Agenda.

In parallel with these plans, which aim to boost the private sector’s role, enhance the legislative frame-work available to private investors and boost external trade, successive governments also began implanting more prudent macroeconomic policies, aimed at curb-ing the fiscal deficit and ensuring monetary stability. In particular, they have attempted to address the thorny issue of subsidies, as the kingdom had long subsidised the cost of essential items – particularly energy – as an anti-poverty measure (see analysis).

One other important move in the 1990s was the pegging of the Jordanian dinar to the dollar in October 1995, a policy that has been maintained ever since. The rate, at $1:JD0.709, resulted from the official pegging of the dinar to the IMF special drawing right.

MAKING PROGRESS: Thus, Jordan began to pull out of the economic difficulties it had faced in the late 1980s and early 1990s, with the kingdom’s GDP growth recovering from the crash of 1989 and maintaining a steady upwards momentum during the rest of the 1990s and into the new century.

A recent peak was reached in 2004, when GDP growth hit 8.56%, with this figure remaining above 8% until 2008. These were also years of increasing foreign investment, benefitting in particular from the introduction of a new investment promotions law (see analysis). Figures from the World Bank show net FDI inflows rising from a neg-ative $33.5m in 1993 to a positive $360.9m in 1997, then $913.3m in 2000. The first few years of the new millennium saw this decline to $547m in 2003, before increasing again to $936m the following year, and $3.54bn by 2006. In the first full year of the global financial crisis, 2008, FDI stood at $2.8bn.

GLOBAL IMPACT: The kingdom was not spared the effects of the global financial crisis, yet in many respects, Jordan weathered it better than many peers. Its bank-ing sector was not as exposed to the toxic products that undermined lenders in the West, while the Central Bank of Jordan (CBJ) acted adroitly in addressing the crisis, imposing strict capital and loan controls on the banks. “In 2008-09 the banks here did well,” Maher Hasan, the deputy governor of the CBJ, told OBG. “They were very highly capitalised – about 18% here – and doubled their numbers in the crisis.”

Initially, the decline in oil and gas prices that accompanied the downturn benefitted Jordan by cutting its energy import bill. However, as time went on, this dip, coupled with over-exposed real estate and financial sectors in countries such as Dubai, resulted in a decrease in remittances for the kingdom from its many GCClocated expatriates. CBJ statistics show that total remittances fell from $3.15bn in 2008 to $3.02bn in 2011.

As a result of these straitened circumstances, over-seas grants also declined, as the GCC and Western countries tightened their belts. The downturn in the Gulf also affected trade, as the GCC countries are one of Jordan’s main export markets.

Meanwhile, overseas investors became increasingly risk-averse, leading to a fall in FDI and in the activity of the Jordanian capital markets. The World Bank figures show FDI falling from $2.8bn in 2008 to $2.4bn in 2009, $1.65bn in 2010 and $1.47bn in 2011, while the Amman Stock Exchange (ASE) Index fell from 4654.3 in August 2008 to 2077.59 in August 2011.

ENERGY STRESSES: Over this period, oil and gas prices also started to rise again, resulting in significant infla-tionary effects. CBJ figures show the consumer price index (CPI) rose from 121.1 at year-end 2008 to 127.66 at the end of 2010 and 131.97 in 2011, given a 100-point base line set in 2006.

Subsidised energy also had an impact. In February 2008 the government had adopted an automatic price-adjustment mechanism for energy, a policy whose enactment coincided with a surge in prices occurring in 2008-09. The government then froze the mechanism in early 2011, which calmed social tensions at the cost of pushing up the deficit. By the end of that year, accord-ing to IMF statistics, energy subsidies totalled around 6% of GDP, up from 1.33% in 2010.

While the government was navigating these fiscal challenges, a second wave of external turbulence hit. The Arab Spring swept across North Africa and into the Middle East, causing a fresh round of uncertainty and investor flight, and pushing up oil prices. While in the past, the negative effects of rising energy costs were counterbalanced by increases in remittances, FDI and grants from the oil-producing GCC countries to Jordan, this political turbulence led many of the Gulf countries to adopt a “wait and see” attitude.

The Arab Spring also depressed the tourism indus-try, a vital source of income, as tourists stayed away from the region as a whole. Non-Jordanian arrivals fell from 7.81m in 2010 to 6.37m in 2011, and were down 8.5% between November 2011 and November 2012, accord-ing to Ministry of Tourism figures quoted by the Jor-danian investment bank Capital Investments.

Political protests in the kingdom over high prices led the government to freeze subsidy rollbacks, such as the automatic pricing mechanism, while instability in Egypt led to the frequent interruption of gas supplies carried overland via pipelines. Much of this gas is used in elec-tricity production, making breaks in supply onerous for industry and households alike. The National Electric Power Corporation (NEPCO) reported major losses, which amounted to some $3bn between 2010 and 2011, according to the CBJ (see analysis). To replace Egyptian gas, liquefied natural gas (LNG) imports were also ramped up, which further added to the energy bill because LNG costs more than piped Egyptian gas.

Meanwhile, unemployment was rising – according to the IMF, unemployment averaged around 13% in the 2000-10 period, while youth unemployment hovered around 30%. The country’s growing population was outstripping GDP growth as the downturn hit. Attempts to alleviate the social impact of these pressures led to a series of wage hikes and delays on plans to cut subsidies. As a result, the primary fiscal deficit (excluding grants) rose to 9.6% of GDP in 2011.

STRONG RESILIENCE: Therefore, as 2012 began, a number of dark clouds had gathered over the Jordan-ian economy. What has happened since is a remark-able story of the kingdom’s economic resilience in the face of daunting odds. Indeed, a macroeconomic snap-shot of the period shows that GDP continued to expand during the crisis years, if by declining amounts.

Real GDP growth fell from 7.2% in 2008 to 5.5% and 2.3% in 2009 and 2010, respectively. While there was an uptick in 2011, with annual expansion reaching 2.5%, figures released in 2012 indicate a slight bump and then slowdown over the year. According to the Department of Statistics, annualised GDP growth reached 2.9% in the second quarter of 2012, followed by 2.6% and 2.2% in the third and fourth quarters, respectively.

Meanwhile, inflation had risen from a CPI of 127.66 at year-end 2010 to 131.97 at the end of 2011, then 134.7 in the first half of 2012, finishing the year at 140.5, on a 100-point 2006 basis.

The value of foreign grants has also been rising, according to the CBJ, increasing from JD333m ($469m) in 2009, to JD402m ($565m) in 2010, then JD1.2bn ($1.7bn) in 2011. In 2012, however, this figure was well down, with CBJ figures quoted in press reports in ear-ly 2013 suggesting that the amount received during the year was around half the 2011 total. This was despite some $2.8bn being pledged – an indicator of the dif-ficulties some donor countries were facing at a time of political turbulence in the region.

FOREIGN TRADE: CBJ figures reported by Capital Invest-ment show total exports going from JD4.52bn ($6.36bn) in 2009 to JD4.99bn ($7.02bn) in 2010, then JD5.65bn ($7.95bn) in 2011 and JD5.08bn ($7.15bn) by the end of the third quarter of 2012. Imports had also grown over the same period – and by larger amounts – leav-ing a trade deficit of JD5.58bn ($7.85bn) in 2009, ris-ing to JD6.06bn ($8.52bn) in 2010 and JD7.34bn ($10.3bn) in 2011. The trade deficit by the end of the first nine months of 2012 stood at JD8.43bn ($11.8bn).

During November 2012, Jordan’s top five export des-tinations were the US, Iraq, India, Saudi Arabia and the UAE, while the top five import countries were Saudi Ara-bia, China, the US, Italy and Turkey.

The current account deficit had also been rising, from JD882.9m ($1.24bn) in 2009 to JD1.34bn ($1.88bn) in 2010, then JD2.05bn ($2.88bn) in 2011. Full-year figures for 2012 were not available at time of writing. The capital and financial account also continued to grow, at JD605.6m ($852m) in 2009, JD805.6m ($1.13bn) in 2010, and JD2.21bn ($3.11bn) in 2011.

Foreign currency reserves have also experienced an overall decline over the period. These stood at $10.88bn in 2009, rising to $12.24bn in 2010, then falling to $10.5bn in 2011 and standing at $6.6bn at end of third-quarter 2012. Meanwhile, net outstanding public debt rose, from JD9.66bn ($13.6bn) in 2009 to JD11.46bn ($16.12bn) in 2010, then JD13.4bn ($18.8bn) in 2011 and JD16.35bn ($22.99bn) by end of the third quarter of 2012, or 73.9% of GDP. The fiscal deficit had there-fore risen, despite a fall between 2009 and 2010 from JD1.5bn ($2.1bn) to JD1.04bn ($1.46bn), to stand at JD1.38bn ($1.94bn) at year-end 2011 and JD1.43bn ($2.01bn) at the end of third-quarter 2012.

A February 2013 report in Al Rainewspaper suggest-ed that the cost of servicing the debt in 2012 was around JD1.01bn ($1.42bn), or 21.3% of total govern-ment revenue. In November 2012 figures showed total domestic revenue at JD4.42bn ($6.22bn), up 13.7% year-on-year, partly due to higher taxes on goods and services. This resulted in an improvement in the fiscal balance, excluding grants, which went from -JD1.85bn (-$2.6bn) to -JD1.52bn (-$2.14bn) between November 2011 and November 2012. Between those two peri-ods, current expenditure also rose, by 8.2%, even while capital expenditure fell by 28.4%. Total expenditure was thus up 3.6% year-on-year.

BY SECTOR: In terms of the contribution to GDP by dif-ferent economic sectors, the rankings for 2010 through the first nine months of 2012 were much the same as in previous years. The largest single contributor was the manufacturing sector, with 23.4% of GDP in 2010, ris-ing to 23.8% in 2011 and 24.6% at the end of third-quar-ter 2012, according to preliminary CBJ figures.

The second-largest industry was finance, insurance, real estate and business services, whose share went from 23.36% to 23.79% and then to 22.77% in the same peri-od. Wholesale and retail, restaurants and hotels went from 12.8% to 12.6%, then 15.1% over the same time-frame. Construction, meanwhile, went from 6.7% to 6.06%, then 5.5%, while mining and quarrying moved from 4.6% to 5.48% and then 4.52%.

By 2012 the war in neighbouring Syria was having a major impact on the Jordanian economy. Syrian refugees began to arrive in large numbers, with the cost of pro-viding for them only partly borne by international organ-isations. Evidence also suggests that the Syrian refugees did not bring with them much investment, unlike the Iraqis who arrived from 2003 onwards. The conflict also affected trade, as Syria is a major market as well as a trading route to ports on the Mediterranean and to Turkey. “There were a lot of shocks,” Hasan told OBG, “mostly beyond the control of the government and to do with living in the Middle East.”

RESPONSES: Faced with these challenges, the govern-ment acted. First, in the first half of 2012, it began to take some major measures to remove subsidies and impose an austerity programme (see analysis). Second, the government decided to invite the IMF back and began talks on a further standby arrangement. IMF help was particularly sought in managing an increase in electricity tariffs, made necessary by subsidy rollbacks and the growing losses at NEPCO. The new standby was secured in August 2012 for $2bn.

On energy subsidies, the government also moved back to a cost plus taxes method for subsidised goods, which resulted in some protests in late 2012, but by early 2013 the measure appeared to have been more widely accepted. According to the CBJ, JD500m-600m ($703m-844m) will likely be saved by this measure, or 2.5% of GDP. A new plan for NEPCO was also reported to be with the cabinet in January 2013, while the flow of gas from Egypt also began to ramp back up again. By the start of 2013, the pipeline was delivering around twice the quantity it had in November 2012.

Also helping by late 2012 and early 2013 was the arrival of more grant aid, totalling some $1.5bn from Kuwait, the UAE and Saudi Arabia. This boosted foreign reserves at the CBJ up to $7.7bn by January 2013. A gov-ernment Eurobond issue of $1.5bn-2bn was also being widely discussed in early 2013; the US pledged to guar-antee these bonds following President Barack Obama’s visit to the kingdom in March 2013, and they are expect-ed to be issued in the second half of the year.

The need for more foreign exchange is indeed seen by many as vital to overall recovery. “We had high inter-est rates on government bonds during 2012 due to falling levels of foreign exchange reserves at the cen-tral bank, but we expect this situation to reverse in 2013 as foreign exchange reserves start to rebound,” Tarek Yaghmour, the vice-president and head of research at Capital Investments, told OBG. Interest rates, which are set by the CBJ, had been rising for some time – the CBJ overnight deposit rate went from 2.25% at the end of 2011 to 4% in December 2012 – as government bond and Treasury bill issues were used to finance the deficit. This has also had a “crowding out” effect, as banks go for these high-interest investments, further hamper-ing overall liquidity. Increasing government borrowing was also the main factor behind the 3.2% growth in the money supply between January and December 2012.

OUTLOOK: With grant money beginning to arrive and the IMF standby secure, and as Egyptian gas begins to flow more regularly once again, Jordan’s economic sit-uation is set to improve. The rollback of subsidies should also have a positive impact on fiscal balances, though inflation is likely to remain high in the first half of 2013. The Ministry of Finance forecasts 3.5% GDP growth for fiscal year 2013, with many banks and businesses also forecasting higher growth than in 2012. Longer-term initiatives, such as the expansion of Aqaba’s energy terminals, shale oil development and the Iraqi pipeline, along with renewable energy expansion, should address long-standing energy challenges for the economy.

Meanwhile, the politics of reform in a climate of regional uncertainty may remain the biggest challenge, as will the unpredictability of the conflict next door in Syria. Yet with the fundamentals now on a much sounder basis, and optimism beginning to return to business-es, the corner may have been turned – presenting an opportunity that investors may be delighted to explore.