FEAS Yearbook FEAS Yearbook 2010 | Page 52

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