Country Report Jordan
The precarious social situation is the largest country risk in Jordan. Protests continue in the wake of the Arab Spring. However, we expect power in Jordan to remain firmly in the hands of the broadly respected King, who will also retain the loyal support of the army and the security services. A regional risk is that the Jordanian arm of the Muslim Brotherhood could intervene in Syria, where it plays an important part in the opposition movement seeking the overthrow of the Assad regime. The country runs substantial twin deficits, which are mainly the result of costly social spending packages and an expensive energy import bill in recent years. However, the fact that Jordan can count on significant donor aid partly mitigates this risk.
We have lowered our economic growth forecast for 2012 of 3.4% in our last country report, dated January 2012, to 2.7%. We expect economic growth to accelerate to 3% in 2013, driven by private consumption and gross fixed investment. A boost for Jordan’s exports will be the post-war economic rejuvenation of Iraq in the coming years. However, the downside risks are large. Especially the civil war in Syria is affecting the Jordanian economy, since Syria is a transit country for a large amount of Jordan’s traded goods. Also, if the US economy continues to struggle, this will result in subdued demand for Jordan’s exports.
Jordan’s largest country risks lie in the social-political sphere. In the wake of the 2011 Arab Spring revolutions, tensions flared again after a cut in fuel subsidies in 2012. Another important risk stems from Jordan’s dependence on imported energy, which has resulted in weak fiscal and external balances. In this update report, we also discuss the energy dependence of Jordan and analyze the government’s policy response.
Fuel subsidies to end
On November 13th 2012, Prime Minister Abdullah Ensour announced the end of fuel subsidies. The decision had been widely expected, with the prime minister and his ministers repeatedly seeking to persuade Jordanians during the week before the announcement that there was no alternative to ending the subsidies, which they said would amount to JOD2.5bn (USD 3.5bn) in 2012. Indeed, Jordanians have been queuing at petrol stations in anticipation of the move.
Nevertheless, protests proliferated immediately after the news broke. The public reaction was immediate and furious. The Islamic Action Front (IAF), the political wing of the Muslim Brotherhood, suggested that the decision to increase fuel prices would be the "last nail in the coffin of the government". In parliament, 89 deputies called for a vote of no-confidence in the government over the increase, and taxi drivers staged a demonstration, blocking traffic in a major thoroughfare in Amman for several hours. Jordan's newspapers were also full of comments from ordinary Jordanians on the difficulties that they would face following the increases.
Following the outcry, the prime minister, citing "national interest", said that the government had been forced to act because international oil prices were rising and this was adding further to the budget deficit. Ministry of Finance figures show the cost of fuel and food subsidies for the first half of 2011 at JOD 313.4m, up from JOD 187.5m the previous year. In comparison, the government had budgeted just JOD 450.8m for total food and fuel subsidies in 2012, despite the fact that the full-year cost reached JOD 796.5m in 2011. In this light, Mr. Ensour's argument for higher fuel prices carries some weight.
But a cash transfer program should compensate
In order to compensate them for the recent fuel price rise, the government has started to make payments to low- and middle-income families, starting from November 18th. According to the government, ending the subsidy will save the government JOD 800m (USD 1.13bn) a year, of which some JOD 300m will be reallocated as cash payments of JOD 420 (USD592) a year to households with an annual income below JOD 10,000 (a category that the government says includes 70% of the population). However, despite the commencement of the cash payments, opposition groups can be expected to keep up the pressure. For example, at a press conference on November 19th, the Muslim Brotherhood, which warned of a "national uprising", called for a reversal of the fuel price increase and the establishment of a national salvation government to deal with Jordan's economic and political challenges. Meanwhile, the influential Professional Associations (which at times act more like political parties) have also staged a demonstration calling for the move to be rescinded. However, the protests have been peaceful of late, with the violence witnessed shortly after the announcement having died down.
In all, since the start of the Arab Spring in 2011, capital expenditures have been increasingly replaced by current expenditures and the budget deficit has widened, which is a worrisome development. As a result of the social spending programs, the budget deficit is estimated at a high 11.6% of GDP in 2012. We expect a slight improvement to 9.1% of GDP in 2013, which is still considered high, as the bulk of social spending has been implemented. Reflecting the wide budget deficits in the past years, public debt has increased to 62% of GDP in 2012. While the fiscal outlook is troublesome, it is partly mitigated by strong donor support from the Gulf Co-operation Council (GCC).
Energy problems to continue
Going forward, Jordan’s energy problems will continue, despite the removal of fuel subsidies. The government is still confronted by the substantial problem posed by its continued subsidizing of electricity prices. Low-cost Egyptian natural gas supplies (which until 2011 had met some 80% of Jordan's energy needs) have been severely reduced following constant attacks on the Sinai pipeline, forcing the country to buy far more expensive fuel products on the international markets.
In an effort to lessen this burden, the government has announced that it will seek to ration electricity consumption by reducing the use of lighting in public buildings and on little-used roads, and large supermarkets that open after 10 pm will have to pay higher electricity costs. The government is also planning to import 1.5m energy-saving light bulbs that will be sold to Jordanians at low prices. If these measures prove insufficient, the government will consider timed blackouts throughout the country in order to save on the use of electricity. Meanwhile, in an effort to reduce fuel consumption, it is planning to facilitate the licensing and importation of motorcycles.
Interestingly enough, the Iranian ambassador to Jordan, Mustafa Zadeh, has offered 30 years of "free oil" to Jordan, in return for unspecified agreements on religious tourism. The Iranian offer appears to be a blatantly opportunistic attempt to exploit Jordan's present energy difficulties and draw it away from its traditional allies (and paymasters) in the Gulf Co-operation Council (GCC) and the US. We believe that the Jordanian government will be wary of such a superficially generous offer and Iran is likely to be disappointed.
These are all one-off measures to reduce the country’s energy problems and, while useful, will not provide a structural solution. The country’s oil imports alone constitute 25% of the country’s total imports, and we believe Jordan will remain a net energy-importer. As a result, the trade balance is estimated to show a large deficit of around 30% of GDP in 2012 and the current account deficit at 10.8% of GDP. The current account deficit is forecast to improve in 2013 to 7.9% of GDP. This forecast is made on the assumption that the global economy continues to falter, which results in softening global energy prices and hence a lower energy import bill for Jordan. Furthermore, if the regional unrest fades in 2013, increased tourism revenues is expected to boost the current account. FX reserves stand at USD 9.1bn, enough to cover 6 months of imports, a moderate level, and FX reserves cover debt service by 392%, which is sound. While the deficit on the current account is large, this is mitigated by substantial donor aid by the GCC. If this donor aid would fall away, the external position of Jordan would become unsustainable.