A Brighter Future Awaits

The economy is slowly recovering after years of sluggish growth and high unemployment under the latest of many International Monetary Fund programmes, and signs of latent economic dynamism are beginning to emerge as the market starts to gather pace

For the first time in almost 30 years, a future King of Jordan’s royal family married into one of Saudi Arabia’s prominent business families – a union that is expected to reinforce local and global alliances.

The high-profile wedding at the Zahran Palace saw several global royals travelling to the Jordanian capital Amman to witness the historic event.

Global dignitaries including Britain’s Prince William and Princess Catherine, US First Lady Jill Biden, Malaysia’s King Sultan Abdullah and Sheikh Khaled bin Mohamed, the Crown Prince of Abu Dhabi were among the 140 guests who attended the wedding ceremony.

Tens of thousands of cheering Jordanians lined the streets and waved flags to the bride and groom who are destined to become one of the Middle East region’s power couples. Jordan has relied on Western support to shore up its economy, reportedly one of the world’s biggest per capita recipients of US and European aid.

The fact that the Hashemite Kingdom is one of the region’s most politically stable countries attracts the world’s attention and international investors have come to the country’s aid – so the West and regional powers have long valued their relationship with Jordan.

While other countries in the Middle East boast of large reserves of oil and gas, Jordan has the location and a stable political environment compared to its peers in the region. The country’s economy is slowly recovering after years of sluggish growth and high unemployment under the latest of many International Monetary Fund (IMF) programmes.

However, many Jordanians took to the streets in the recent past protesting over a cost-of-living squeeze, including deadly riots last year over rising fuel prices and some quarters of the society who criticised Crown Prince Hussein bin Abdullah II’s glitzy wedding ceremony as a waste of public resources.

The IMF said Jordan has preserved macroeconomic stability in a most difficult environment, having weathered a series of severe and highly persistent shocks, including the outbreak of the pandemic, geopolitical tensions, the hosting of Syrian refugees, the disruption of critical export markets and rising borrowing costs.

While external support is vital, the government in Amman has plans of its own. Jordan is keen to capitalise on its identity as pro-Western and stable to attract foreign direct investments.

The country is one of the few countries in the Middle East whose economy is not dependent on natural resources due to the scarcity of hydrocarbons and water. Nevertheless, it is also one of the most committed to fiscal reforms within the region having taken steps to privatise the economy, introduce tax reforms as well as open up the banking sector.

More broadly, the Hashemite Kingdom is keen to trumpet itself as a base for business with a far wider reach than its domestic market of 10 million. Jordan’s key fiscal reforms, backed by efforts to close tax loopholes and combat tax evasion, have started bearing fruit.

“Fiscal performance has been strong, on the back of sustained legislative and administrative reforms to reduce tax evasion and avoidance,” said the IMF. The fund projected that the planned gradual fiscal consolidation together with the authorities’ efforts to enhance public investment management and monitoring of fiscal risks will continue to support debt sustainability.

The authorities replaced untargeted and fiscally unaffordable fuel subsidies with cash transfers to protect the most vulnerable segments.

Economists also expect the implementation of structural reforms to reduce the cost of doing business and improve public service delivery would support a more dynamic private sector and job-rich growth.

Jordan signed 12 agreements with Egypt, Bahrain and the UAE in February to cushioned the economy from the three years of COVID-19 and the economic knock-on effects of the war in Ukraine.

The country maintains strong external financial support. Total foreign aid - including funding for the refugee programme - reached $4.4 billion in 2022 (similar to 2021) with budget support at $2.6 billion ($2.4 billion in 2021). “Jordan estimates that it will receive around $2.6

– set up nine integrated industrial projects with an investment of over $2 billion. The investment agreements, which cover a range of sectors, including agriculture, medicine, minerals, chemicals and electric cars, are expected to create as many as 13,000 job opportunities and boost the national GDP in the partnering countries by over $1.6 billion.

Meanwhile, the visit by Saudi Arabia’s Prime Minister Crown Prince Mohammed bin Salman last year is highly expected to unlock as much as $3 billion in investment projects that the oil Gulf state committed to in recent years but never materialised. Jordan is also on the investment radar of UAE-based companies including AD Ports and sovereign wealth funds ADQ and Mubadala.

The Hashemite Kingdom has freetrade agreements with the US and the EU, where it has been granted simplified rules of origin requirements to help boost exports into the eurozone.

Jordan is still in recovery territory though a rebound in tourism, remittances and higher exports of fertiliser have billion (5.2% of GDP) in budget support in 2023, of which about 56% consists of loans,” said Fitch Ratings.

Jordan issued $1.25 billion of Eurobonds at 7.5% in April. The bonds were oversubscribed six times amid strong investor demand, allowing the government to raise the amount over a five-year and nine-month maturity from the original $750 million sought after attracting bids worth more than $4.7 billion.

The IMF approved the fifth review of Jordan’s Extended Fund Facility (EFF) arrangement in December 2022 and the country is currently undergoing its sixth review. The programme is set to last until March 2024, with remaining disbursements totalling $218 million, of which $97 million could be disbursed in 2023.

“Jordan enjoys strong relations with the IMF and its programmes have provided a policy anchor,” said Fitch. The rating agency said Jordan and the IMF are currently exploring a followup programme to the current EFF, due to end in March 2024, to anchor fiscal consolidation and reform momentum.

Last September, the Hashemite Kingdom finalised a seven-year MoU with the US worth $1.45 billion in economic and military assistance per year. Fitch said the US Congress increased the envelope by $200 million for the current fiscal year with strong bipartisan support.

Meanwhile, the European Bank for Reconstruction and Development has financed 71 projects in Jordan worth more than $2.1 billion since 2012, including financial support for the country’s banking sector through loans to businesses and subordinated debt and trade finance facilities.

The kingdom also receives aid from its allies to support the general budget and finance development programmes, including $218 million from the European Commission in May and a three-year development cooperation with France valued at $995 million.

Jordan’s senate passed the country’s 2023 budget in February and the country is forecasting $16.1 billion (JOD 11.4 billion) in state expenditure, an 8.3% increase from a year ago while domestic revenues and external grants are expected to reach $13.5 billion. The authorities are expecting the deficit to shrink to 2.9% this year from 3.4% in 2022.

In spite of the prevailing global economic conditions, the Jordanian financial service sector started 2023 on a solid footing as banks are recalibrating their operations to new methods of working and evolving regulatory landscape.

S&P Global Ratings projected that lending would grow this year despite the rising interest rates, driven by corporate demand for credit to fund working capital needs as the central bank has started the gradual phasing out of its programme to support strategic sectors of the economy.

“Increased lending will support loan portfolio repricing at higher interest rates, which would be positive for banks’ profitability,” said S&P Global.

Jordanian banks’ creditworthiness and their ability to absorb potential losses is supported by their strong capitalisation, compared to regional peers and should benefit from higher interest rates’ positive effect on profitability.

S&P Global cautioned that major risks to the banking sector’s outlook are weaker than anticipated economic performance and more aggressive monetary policy tightening. The Central Bank of Jordan (CBJ) raised its key interest rate on various monetary policy instruments by 25 basis points in March and vowed that it stands ready to act proactively to support monetary stability in the kingdom.

Meanwhile, competition among banks for deposits will likely add to pressures on their cost of funding, which could hurt the margins of smaller banks. Just like their regional peers, Jordanian banks have been consolidating to improve economies of scale, reduce operating and funding costs as well as boost profitability and efficiency.

Standard Chartered agreed to sell its Jordanian business to Arab Jordan Investment Bank (AJIB) in March. The deal will see Standard Chartered’s corporate, commercial and institutional banking, consumer lending and private banking businesses migrated to AJIB.

Last year, Jordan’s Capital Bank acquired 100% of Societe Generale Bank Jordan, took over Lebanese Bank Audi’s businesses in Iraq and Jordan and sold a 23.97% stake to Saudi Arabia’s Public Investment Fund for $185 million in a deal that will help the bank expand its operations in Jordan, Saudi Arabia, Iraq and other markets.

Banks in Jordan have robust solvency and liquidity ratios and remained stable through the global banking crisis earlier this year, which culminated in the collapse of three US lenders and UBS Group’s takeover of long-time rival Credit Suisse Group. “The latest available total capital adequacy ratios, leverage ratio, and liquidity coverage ratio stood well above regulatory minima,” said the IMF.

Going forward, policies should remain focused on maintaining macroeconomic stability and advancing fiscal reforms to boost employment, economic growth and competitiveness. However, the million-dollar question remains: will this be enough to get Jordan on track without deeper, more painful reforms?