Jordan’s new Prime Minister faces appeasing the country’s investors at the expense of its people
editor's pickSunday 14, October 2018
When Jordan’s people took to the streets in June to protest over subsidy cuts and new taxes they chanted 'we have nothing'—and they weren’t far wrong. With unemployment running at a two-decade high of 18.4 per cent and a third of the population living below the poverty line for at least one quarter of the year, the people of Jordan feel they are paying for the failings of successive governments. Jordan has one of the smallest economies in the Middle East and few natural resources. It has lavished subsidies on its public thanks to the support of its richer cousins, however an unprecedented influx of refugees from Syria have put a strain on Jordan’s already fragile economy and it can no longer afford to be so generous.
Refugees have inflated Jordan ’s population by 50 per cent since 2011, and security concerns have weighed heavily public resources. Rising military, medical, and education bills have eaten into Jordan’s finances and sent debt levels soaring. At the same time, conflicts in Syria and Iraq have severed the country’s major trade routes. Saudi Arabia, previously Jordan ’s most enthusiastic benefactor, has had to tend to its own financial wounds in the wake of falling oil prices and cut funding in 2016.
The World Bank and the IMF stepped in with fresh funds, but in return they want to see Jordan commit to reforms that could easily see its cash-strapped population take to the streets again. “Regional developments have significantly affected foreign investment, while weakened macroeconomic activity in the GCC has reduced remittances and investment inflows,” S&P noted. “We do not anticipate a quick resolution to the Syrian conflict and security risks will remain high, which will weigh on economic growth.”
This makes the new Prime Minister’s job very difficult. His predecessor, Hani Mulki, was ousted by King Abdullah when his proposed reforms transpired to be too bitter a pill for the public to swallow. As a former World Bank economist, new Prime Minister Omar al-Razzaz probably knows that Mulki had little choice. Jordan’s central government debt levels soared to 96 per cent in 2017 from around 62 per cent of GDP in 2011, according to S&P. World Bank data suggests that real GDP is in its third year of two per cent growth. Moody’s said that economic growth in Jordan will remain below potential in 2018, despite a gradual rebound.
It expects real GDP growth to inch up to 2.5 per cent this year, from around 2.3 per cent in 2017. Jordan’s external financing needs increased to over 150 per cent of current account receipts and usable reserves in 2017, owing mainly to larger current account payments and a high proportion of short-term bank debt, S&P said. Jordan’s current account deficit increased in 2017 to 10.6 per cent of GDP, from 9.5 per cent in 2016. Al-Razzaz has the unhappy task of reducing debt levels and pushing through structural reforms which are bound to prove unpopular with a population prone to protesting. However, he has made a good start.
In June, GCC countries pledged $2.5 billion to help support Jordan’s economy in the form of deposits, project finance, and a very small grants portion. The package also includes guarantees to the World Bank and annual support for the budget of the Jordanian Government for five years, according to the Saudi Press Agency. The World Bank also extended $500 million in concessional financing, Bloomberg reported. The funds consist of a $111 million grant from the Global Concessional Financing Facility and a $389 million non-concessional portion with a final maturity of 35 years. The fact that Jordan is one of the region’s most politically-stable countries has not escaped the world’s attention, and international investors have also come to the country’s aid.
The European Investment Bank (EIB) is preparing to invest EUR 850 million in Jordanian businesses. In January, the US committed to providing economic and military aid of at least $1.275 billion annually over five years, representing a 28 per cent increase from 2017, and the first five-year memorandum of understanding (MOU) with Jordan. To demonstrate the US’s strong commitment to Jordan, the US Congress the approved aid of $1.52 billion in March for 2018, which is $250 million higher than the MOU amount.
However, the odds of Jordan fulfilling its obligations to its supporters are stacked against it. “While the three-year Extended Fund Facility programme from the IMF has provided a policy anchor, we do not expect the Government to meet initial programme targets,” S&P stated. In July, Bloomberg reported that Jordan was trying to renegotiate the terms of the $700 million IMF loan. The Kingdom was reportedly trying to extend the programme beyond its current 36 months and revisit some targets. Under the terms of the extended fund facility that Jordan and the IMF negotiated in 2016, the Kingdom was to have implemented reforms that would have generated the n additional JOD 540 million ($761 million) this year, but state revenue in the first half was much lower than forecast.
In a demonstration of commitment to the IMF programme, in September Reuters reported that Jordan’s cabinet presented an IMF-backed draft tax bill containing austerity measures to ease rising public debt. Al-Razzaz promised that he would consult civic bodies over a new tax system that would not trample on citizens’ rights. The Government claims that the new law softens the impact of the tax hikes on middle-class families by raising personal income thresholds and reintroducing personal exemptions. Unsurprisingly, this has not gone down well with the unions and civic associations behind last June’s protests, who want the Government to give priority to fighting corruption and cutting public waste.
However, S&P thinks that further protests on any significant scale are unlikely. “While protests against further fiscal reforms are possible, we do not expect them to be large enough to result in social upheaval in our base-case scenario,” it said. In October, Al-Razzaz announced a cabinet reshuffle which cut the 29-member cabinet to 27, warning that Jordan would pay a heavy price if a tax reform bill failed to pass into law this year. He said that he wanted to push through the tax bill in 2018 to retain IMF support and avoid higher servicing costs on over JOD 1 billion of foreign debt due in 2019. So far, this has worked to his credit.
In September, S&P affirmed its ‘B+/B’ long and short-term foreign and local currency sovereign credit ratings on Jordan and maintained its stable outlook. “The stable outlook balances our expectation that donor funding will continue to support public finances and low-interest costs against the risk that the government will reverse planned fiscal consolidation to alleviate social and economic challenges,” it said. The rating agency explained that the authorities’ efforts to implement fiscal consolidation and measures to reduce losses in state-owned enterprises could result in gradually falling government debt levels over the forecast horizon through 2021.
The World Bank also expects Jordan ’s fiscal balances to improve, albeit gradually. It estimates that the overall fiscal balance, including grants, will to narrow to -1.8 per cent of forecasted GDP in 2018, from -2.2 per cent of GDP in 2017. The primary balance is expected to improve to 1.5 per cent of GDP in 2018, from 0.8 per cent of GDP in 2017. “Jordan’s current account deficit is expected to narrow in 2018 on the back of a narrower trade deficit, while inflows remain sluggish,” the World Bank said. “In the first half of 2018, the merchandise trade deficit narrowed by five percent year-on-year compared to a widening of 5.4 per cent for the same period in 2017, driven by improving exports and declining non-energy imports, despite the higher energy bill.”
Trade with major partners such as the US and India is also rebounding, the World Bank said, and the benefits of reopening trade routes with Iraq are gradually materializing. In addition, tourist receipts are rising. The opening of the border with Iraq in late August 2017 helped increase exports to Iraq by 33 per cent year-on-year in the first half of 2018, according to S&P. Following the Syrian regime ’s repossession of control over the border Daraa area, Jordan could potentially reopen the Nassib border with Syria in the medium term, which would boost exports further.
Jordan’s banks are a further source of optimism. Throughout its severe financial shocks, Jordan’s banking system has remained remarkably sound. A financial stability report from the country’s own Central Bank ranked Jordan third among 19 European countries that have developed a similar index. It claimed that Jordan enjoys a “healthy, sound, and stable” banking sector. International credit rating agencies don’t entirely disagree. According to Moody’s, Jordan’s banks will be protected from their high credit risk by solid capital levels and strong liquidity. However, such plaudits can’t detract from the fact that its banking system is under pressure. Given the precarious financial situation its banking clientele live in, this is hardly surprising.
According to Moody’s, credit risk at Jordanian banks is high, affected by rising interest rates, inflation and increasing unemployment, which in addition to high household indebtedness will hamper households’ ability to repay debt. As a result, non-performing loans will rise slightly from 4.4 per cent of loans at the end of June 2017, the rating agency said. Jordanian banks also have a concentration of exposure to the Government, which links their credit profiles to that of the sovereign. Nevertheless, Moody’s expects capital levels at Jordan’s banks to remain solid, given the modest growth in risk-weighted assets and some profit retention.
Banks in the country posted a Basel III capital adequacy ratio of 17.8 per cent at the end of June 2017, one of the highest levels in the Middle East and North Africa region. “Jordanian banks on aggregate will also continue to benefit from stable retail deposits, ensuring limited reliance on foreign and short-term market funding,” said Christos Theofilou, an Assistant Vice President and Analyst at Moody’s. “We expect banks to maintain solid liquidity buffers, which stood at 39 per cent of total assets as at the end of September 2017.” Moody’s also expects stable profitability at the nation’s banks, as higher interest rates will lead to higher net interest margins that will counter elevated loan loss provisions.
The World Bank explained that Jordan has maintained a contractionary monetary stance so far in 2018, in a bid to support the Jordanian dinar, strengthen monetary and financial stability, limit inflationary pressures and maintain a competitive return on dinar-denominated investments. Central bank gross reserves— including gold—have been declining since 2015, reaching $15.6 billion at the end- 2017 from $16.5 billion at end-2015, S&P reported. Despite the issuance of US dollar domestic bonds of $500 million and Eurobonds of $1.5 billion, total reserves did not increase from 2016 levels. Instead, reserves continued to decline in 2018 and stood at $13.7 billion at the end of July. “Jordan’s exchange market pressure, high dollarisation rates, and low foreign inflows have imposed downward pressures on foreign reserves,” the World Bank warned.
“The foreign reserves at Central Bank declined to $10.7 billion by end-July 2018, 12.8 per cent lower than end-2017 levels and the lowest recorded since July 2013.” This leaves the Prime Minister facing an enormous challenge. Raising taxes is politically unpalatable in a low-growth environment with high unemployment and ongoing regional instability. The final proposal for a new tax system is likely to be a shadow of its first version. Because of this, S&P expects general government debt to decline only gradually to around 74 per cent of GDP by 2021, warning that it could lower its ratings on Jordan if strong bilateral and multilateral donor support were to diminish, or the pace of fiscal consolidation was to slow significantly. This leaves Jordan more or less where we started, with continuing uncertainty, a reliance on external assistance and lenders demanding reforms that are likely to infuriate its public. Whichever way al-Razzaz turns, he’s likely to learn that he simply can’t please everyone.