Bank Audi, Jordan Economic Report, March 28, 2012

Jordan economy slowing down but avoiding recession
The Kingdom of Jordan has reported a relatively slow economy activity over the past year, yet without going into a recessionary mode. According to IMF estimates, Jordan real GDP growth extended its low rate of 2.5% in 2011 for the second consecutive year, after the economy had expanded by an average of 7.5% per annum in real terms in the previous five years. The domestic sluggishness comes within the context of the arising regional political turmoil, the increased domestic uncertainty and the weakening global economy.

Slower macro environment engenders reversal in fiscal dynamics
Jordan public finances have come under pressure in 2011 on the back of increased commodity subsidies and other social spending aimed at quelling domestic disturbances, coupled with a cyclical weakening in domestic revenues. Consequently, the Jordan fiscal deficit is estimated to have reached 6.2% of GDP in 2011 as per IMF figures, thus regaining an upward streak after it had contracted to 5.4% of GDP in 2010. Political upheavals have taken their toll on government finances but support from GCC limited the deterioration in fiscal accounts.

Monetary policy curbs inflation but reserves on the decline
Monetary conditions in Jordan were marked by a decline in inflation rate, partly driven by reinstating fuel subsidies that helped offset the impact of a rise in oil prices, in addition to a relatively moderate expansion in money supply. The Consumer Price Index reported an average rise of 4.4% in 2011. The Central Bank's foreign currency reserves fell by 12.2% year-on-year, weakening reserve coverage both in absolute terms and relative to money supply or months of imports, though such coverage ratios didn't reach worrisome zones.

Growing external vulnerability on the back of widening external deficits
The foreign constraint comes back to the fore in the Kingdom this year, with the current account deficit getting close to double-digit level as a percentage of GDP. Rising commodity prices and declining foreign receipts are contributing to a worsening current account balance despite higher exports. It is thus essential to adopt measures that would promote import substitution goods and export oriented products to reduce particularly Jordan's trade deficit that rose by 20% last year accounting today for circa 41% of GDP.

Moderate banking activity growth with challenging operating conditions
The Jordan banking sector witnessed a tougher operating environment in 2011 but managed to withstand the turmoil rather satisfactorily. Measured by total assets of banks operating in the Kingdom, banking activity pulled out a moderate 7.6% yearly growth to reach US$ 53.2 billion in December. In particular, credit facilities extended by banks registered a sound 9.5% growth. The sector's main challenge remains at the level of asset quality, with non-performing loans to total loans reporting 8.5% at end-June 2011. Other financial soundness indicators remain strong on the overall, with high liquidity, adequate capitalization and relatively good return ratios.

Capital markets caught in a "wait and see" investor mood
The political and security turmoil across the region has had negative repercussions on the Amman Stock Exchange that posted drops in equity prices, market capitalization and turnover ratios. The Amman Stock Exchange general weighted price index fell by 12.6% in 2011. Total trading value amounted to a mere US$ 3.9 billion, falling by 58.8% relative to the previous year. At the level of the bond market, no new sovereign bonds were issued, but Jordan's five-year bond, launched in November 2010, saw its spread expanding significantly over the year, moving from 270 basis points in December 2010 to 472 basis points in December 2011 amidst fixed income investors concerns.

Challenging economic outlook for the Kingdom in 2012
The adverse external environment is set to continue weighing on Jordan's near term aggregate demand and growth. The IMF is expecting an extension of the low growth trend, with real GDP growth forecasted at 2.75% for 2012, as high commodity import prices, rising sovereign financing costs and regional sociopolitical unrest are apt to adversely affect the economy. Still, though challenges in the realms of fiscal sustainability, external deficits and socioeconomic pressures are real macro challenges, they should not hide middle-run opportunities for an economy operating at well below full employment and potential output.