ANNUAL REPORT JUNE 2010
FEDERATION OF EURO-ASIAN STOCK EXCHANGES
AMMAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Outlook for 2010-11
Power in Jordan will remain firmly in the hands of the
king, Abdullah II, who is expected to retain the loyal
support of the army and the security services.
The cabinet will prioritise economic reform and
stability over political liberalisation. An election is
scheduled for late 2011, but parliament should
remain conservative and tribally dominated, and thus
generally pliant.
The government is set to keep a tight rein on
spending in 2010-11, in an effort to bring the fiscal
deficit down to a more manageable level. However,
with revenue growth sluggish, the deficit will remain
large.
Although it will recover over the forecast period, real
GDP growth is likely to remain below the highs of
2004-08, as the economy struggles because of weak
public spending growth and the end of the
construction boom.
Headline average inflation will rise sharply in 2010,
but, once the declines in commodity prices of early
2009 fall out of the year-on-year comparison, we
expect price growth to fall, to an average of 2.5% in
2011.
DOMESTIC POLITICS: King Abdullah is expected to
remain in power throughout the forecast period and
beyond, supported by his loyal, well-trained and
effective armed forces. In July the king appointed his
eldest son, Prince Hussein, as crown prince,
banishing any residual doubts there may have been
about the succession. (The position had been vacant
since 2004, when King Abdullah removed the title
from his half-brother, Hamzah.) Nevertheless, threats
to stability will persist, with periodic outbursts of
Islamist violence possible, although these are most
likely to be the result of actions of aggrieved
individuals (rather than organised groups), and the
general threat to security is relatively low. An election
is due in late 2011, but the EIU expects parliament to
remain conservative and tribally dominated, and thus
generally pliant (albeit resistant to economic reform).
The only coherent parliamentary opposition, the
Islamic Action Front, will remain beset by factional in-
fighting, which, should it participate in the election,
will undermine its chances of a strong showing. On
the whole, however, domestic political machinations
will remain subordinate to the more immediate
problems associated with Israeli-Palestinian violence
and the fallout from the global economic recession.
INTERNATIONAL RELATIONS: Jordan's pro-Western
orientation will remain the cornerstone of the king's
foreign policy, complemented by a policy of
maintaining good relations with all Middle Eastern
states in order to prevent regional tensions from
having a negative effect on the country. Jordan's ties
with the US have been buttressed by the increased
attention given to the Israeli-Palestinian conflict by the
US president, Barack Obama, but the failure of his
efforts to revive the peace process may lead Jordan
to increasingly criticise US tactics–in particular
regarding the US's perceived bias in favour of Israel.
Meanwhile, ties with Iraq will continue to improve, as
commercial links between the two countries deepen,
although Jordan will be wary of any resurgence in
violence in Iraq as the US troop drawdown
progresses. However, in reality, although the king
may have a sympathetic ear in the White House,
Jordan's direct influence on the myriad conflicts and
rivalries that afflict the region will be limited, given the
leadership's unwillingness to jeopardise its peace
treaty with Israel and its reliance on the US (and
Saudi Arabia) for financial aid.
POLICY TRENDS: Government policy will continue to
focus on shielding the population from the impact of
the economic downturn, forcing the government to
delay the introduction of a host of economic reforms.
(For example, the National Investment Strategy
appears to have been postponed.) The government
is planning to overhaul the tax system, including by
introducing a 12% flat tax for nearly all corporations
and a simpler, two-tier income tax for individuals,
although gaining parliamentary approval will be
challenging (and the fiscal cost of these measures
raises questions about affordability). Nevertheless, if
passed, such changes, together with a scheme to
streamline the tariff system, could boost Jordan's
attractiveness to foreign investors. Because of its
heavy reliance on tourism and financial services, and
because of the recent property boom, Jordan is
especially vulnerable to the global economic
slowdown. Mindful of this, the government front-
loaded capital spending in the first half of 2009,
although, given the fragile state of the public
finances, it will be forced to rein in spending growth
considerably from 2010.
INTERNATIONAL ASSUMPTIONS: We estimate that
world GDP (at purchasing power parity rates) will
have contracted by an estimated 1.3% in 2009, as
the deep recession in the EU and the US has
dragged down global growth, and expect it to
expand only weakly over the forecast period, by 3.2%
in 2010 and 3.4% in 2011, led by non-OECD states.
We forecast that the average price of dated Brent
Blend will decline in 2011, as a number of OECD
economies, including the US, experience a slowdown
that year, from US$74/barrel in 2010 to US$70/b.
ECONOMIC GROWTH: Although it will recover over
the forecast period, real GDP growth in Jordan is
likely to remain far below the highs it reached in
2004-08, as the economy struggles in the face of
weak government spending growth and the ending of
the construction boom. Although a number of leading
indicators, including the industrial price index, have
picked up lately, the ongoing slowdown in the
domestic financial sector will gradually spread across
the broader economy. In addition, having surged in
recent years (as the Gulf Arab states have channelled
some of their oil wealth into the country), inward
foreign direct investment will almost certainly decline
as many Arab investors scale back their investment
plans. The difficult global economic situation is also
Key Information Contacts
Jordan Securities Commission www.jsc.gov.jo
Securities Depository Center www.sdc.com.jo
Jordan Investment Board www.jordaninvestment.com
Arab Monetary Fund www.amf.org.ae
PAGE 48
likely to depress consumer confidence, although the
effect of this will dissipate in the latter stages of the
forecast period. Exports will be restrained by sluggish
growth in the US, but this should be partly offset by
fast-rising demand for Jordanian goods from
neighbouring Iraq. Meanwhile, the gradual softening
of domestic demand will restrain import growth.
Overall, we expect economic expansion to remain at
around 3% in 2010, before rising slightly in 2011, to
3.7%, as a number of Jordan's export markets begin
to strengthen and domestic construction activity
picks up again.
INFLATION: We expect the year-on-year inflation rate
to be volatile over the forecast period, although this
will largely reflect the sharp variations in the
consumer price index in 2008-09 (owing to swings in
commodity prices), rather than any shifting price
fundamentals within Jordan. Consumer prices have
fallen back since the start of 2009, reflecting lower
international oil and food prices, as well as the
strengthening US dollar. However, with these
currency and commodity trends likely to reverse
during 2010, we expect inflation to rise from an
estimated average rate of just 0.1% in 2009 to 5.5%
in 2010. However, by end-2010, as the decreases in
commodity prices fall out of the year-on-year
comparison, we forecast that year-on-year price
growth will be just 1.1%. In 2011 we expect average
inflation to remain low, at 2.5%, as oil prices fall
slightly and interest rates begin to rise.
EXCHANGE RATES: The Central Bank of Jordan is
committed to the maintenance of the Jordanian
dinar's peg to the dollar, despite the associated lack
of monetary flexibility and the recent weakening of
the US currency. The peg has instilled monetary
confidence and has not substantially harmed
competitiveness (perhaps because the US is
Jordan's largest single export market). As a result, we
expect the CBJ to maintain the peg at JD0.709:US$1
in 2010-11. We also believe that the stock of
international reserves (including gold), which has
surged in recent months, will be sufficient to offset
any pressure on the currency stemming from short-
term liquidity problems or negative political
developments.
EXTERNAL SECTOR: We expect Jordan's current-
account deficit to narrow slowly over the forecast
period, as a widening of the non-merchandise
surplus offsets increases in the trade deficit. Having
declined by an estimated 19% in 2009, to
US$12.1bn, the import bill is set to grow by around
7% a year in 2010-11, as global commodity prices
and domestic demand begin to recover. Exports,
meanwhile, will grow by an annual average of over
8%, reaching US$7.9bn in 2011, as recovering
demand in Asia, and increased re-export trade with
Iraq, makes up for sluggish demand in the US.
Nevertheless, the trade deficit is forecast to widen
from an estimated US$5.5bn (26.6% of GDP) in 2009
to US$5.8bn 2010-11.*
*Information provided by Amman Stock Exchange
Ministry of Finance www.mof.gov.jo
Central Bank of Jordan (CBJ) www.cbj.gov.jo
National Information Center www.nic.gov.jo
Department of Statistics www.dos.gov.jo