Country Report Jordan
Jordan’s economic situation is improving. GDP growth has picked up to 3.1% in 2014, driven by lower oil prices and growth in the tourism sector. In addition, the government has decreased the budget deficit by increasing energy tariffs. The greatest risk still remains that spill-overs from the conflicts in Syria and Iraq will negative affect political stability, investor confidence and tourism.
Strengths (+) and weaknesses (-)
(+) Strong international support
Jordan enjoys strong (financial) support from the US, the Gulf Cooperation Council (GCC) and Saudi Arabia in particular.
(+) Tourism potential
Jordan is a popular destination for tourists, especially from the GCC, due to historical sites, for example the ancient city of Petra.
(-) Weak fiscal position
The low level of fiscal flexibility is caused by high deficits, modest revenue and weak expenditure flexibility. However, deficits are decreasing and the government has taken actions to increase revenue.
(-) High dependence on food and energy imports
The insufficiency of natural resources makes the country highly dependent on import of basic necessities, such as food, water and energy.
1. Economic growth is picking up, indicating an improving risk profile
Jordan’s GDP growth has accelerated, from 2.8% in 2013 to 3.1% in 2014, which is also above its 5Y average of 2.7% (2010-2014) and indicates that Jordan’s risk profile is improving. The main driver of growth was private consumption (Figure 1), which is partially driven by lower oil prices. Namely, oil constitutes a quarter of total imports, making Jordan a major beneficiary of the recent decline in oil prices. The lower oil prices have also eased inflation, which dropped from 4.8% in 2013 to 2.9% in 2014. This drop in inflation has opened up the door for the Central Bank of Jordan to conduct more accommodative monetary policy to bolster growth, which as we have also argued  will take place for other emerging markets. In fact, the Central Bank of Jordan has already cut its benchmark interest by 0.25% (to a discount and repo rate of 4% and 3.75% respectively) in February this year. Going forward, we believe the central bank will take this opportunity to further cut interest rates in the near future.
But besides the effect of lower oil prices, the government has also made structural improvements, for example government investments in public infrastructure and in the tourist sector. These investments are starting to pay off. Namely, tourism receipts have increased 6% in 2014, compared to 1% in 2013 (according to the Central Bank of Jordan ). This pick up in tourism is important, since the sector comprises about 10% of Jordan’s GDP. However, there are still structural problems that hold back growth, most notably Jordan’s high unemployment rate (12%). Still, going forward, growth is expected to remain above 4% in the near future on the back of further planned major infrastructure investment, loose monetary policy and a further pick up in tourism. The latter does depend though on relative political stability, which could be seriously threatened since Jordan is getting increasingly involved in the US military offensive against Islamic State (IS) after IS executed a Jordanian pilot.
2. The government has taken actions to increase energy diversification
As part of the National Energy Strategy, Jordan’s government has taken actions to reduce its dependence on oil imports as the major source of energy. Most notably, it has signed a contract with Royal Dutch Shell for the supply of LNG, which will meet about 15% of Jordan’s energy need and reduce Jordan’s imports bill since LNG is cheaper than oil (although the difference has narrowed since oil prices have gone down faster than LNG prices in the past year). In addition, the infrastructure needed to supply the LNG (a jetty that connects an LNG vessel to Jordan main inland pipeline) is now in place. All in all, this will make Jordan less dependent on LNG supply from Egypt, for which Jordan signed a 15 year contract in 2002, but which has been unpredictable in its delivery track record in recent years.
In addition, Jordan has signed the first round of contracts for the construction of solar and wind farms, which together will have a generation capacity of about 100MW (about 1% of Jordan’s energy need). Finally, two nuclear power plants are being built, one of which by 2020 is planned to provide about 1000MW of energy (about 6% of Jordan’s energy need). However, this may pose other risks as these power plants might get targeted by terrorists.
Overall, Jordan seems to be on track with its strategy to reduce dependence on oil, which bodes well from a country risk perspective since the high dependence on oil imports, although now a boost for the economy, is a source of risk on the longer term.
3. The government has taken actions to reduce the fiscal deficit
Jordan’s fiscal deficit has been steadily improving since 2012, when it was 12.7% of GDP. This has declined to 7.2% in 2014, partially due to fiscal reforms taken as part of Jordan’s USD 2bn Stand-By-Arrangement with the IMF, including for example liberalization of fuel prices and an increase in electricity tariffs for rich households. Further fiscal consolidation plans include for example a cap on salary increases for government workers.
4. But geopolitical risk remains high due to possible spill overs from Syria and Iraq
The main short term as well as long term risk remains that Syria and Iraq spill overs will lead to political instability, which will reduce tourism, investments and increase the fiscal deficit. The effect on tourism is especially important since that is a sizable part of Jordan’s economy and an important source of foreign reserves. But also the effect on Jordan’s fiscal deficit, which could balloon again as military expenses to fight IS might increase, and a further influx of refugees puts increased pressure on the government’s resources.
Jordan has a population of only 7.7 million and more than half of the total population is of Palestinian origin. Some have become Jordanian nationals, but still almost 2 million are registered as non-Jordanian Palestinian refugees. Jordan’s GDP of USD 36bn in 2014 is among the smallest in the Middle East. There are insufficient supplies of water and the country has no oil resources and other natural resources, apart from potash and phosphates. Currently, the authorities are exploring nuclear power generation and clean energy to prevent a worsening of the energy shortfalls in the long run. Social and economic challenges, including chronically high rates of poverty, unemployment, vulnerability to drought and shortfalls in infrastructure, typify Jordan as a developing country. Moreover, the government and economy have been highly reliant on foreign aid and more recently increasingly on foreign direct investment.
Power in Jordan is expected to remain firmly in the hands of the broadly respected king, Abdullah II, who will also retain the loyal support of the army and the security services. Since 1999, King Abdullah has strongly supported significant economic reforms, such as freer foreign trade, privatizations and cuts on fuel and food subsidies. This has made the country more attractive for foreign investors over the past decade. But with per capita income (adjusted for differences in price levels) at only 65% of world average and relatively high income inequality, the subsidy cuts have negatively affected the living standards of large segments of the population.