Jordan Economic/Political Outlook

POLITICAL STABILITY: Despite ongoing regional unrest, King Abdullah II is expected to remain in power throughout the forecast period and beyond, supported by his loyal, well-trained and effective armed forces. The general security threat is fairly low: periodic outbursts of Islamist violence are possible, but these are more likely to be carried out by aggrieved individuals than by organised groups. The government was rocked in January by popular demonstrations inspired by similar protests in Tunisia and Egypt. In response to the protesters, who were complaining about rising unemployment and corruption, the king dismissed the unpopular prime minister, Samir Rifai, on February 1st. Mr Rifai’s successor, Marouf Bakhit, faces the difficult task of balancing the demands of the protesters and those of the entrenched elite, as well as satisfying activists’ desire for higher living standards while retaining long-standing government priorities of economic reform and development. Protests are likely to continue in the short term, but should be fewer in number and more modest in their demands than those elsewhere in the region. Anger will be directed more at Mr Bakhit and the security forces than at the king, who retains broad support from the opposition and loyalists.

ELECTION WATCH: The current parliament was elected in November 2010 under a newly amended electoral law. The new law, like the previous one, discriminates in favour of rural areas, which has in the past resulted in a legislature dominated by loyal, but economically conservative, members of parliament. It keeps in place the single non-transferable vote (known locally as “one person, one vote”) formula that opposition parties insist favours tribal candidates over political parties. Consequently, the lower house is dominated by loyalist and tribally oriented members and largely fails to meet the political aspirations of the increasingly educated electorate in Jordan’s major cities.

INTERNATIONAL RELATIONS: Jordan’s pro-Western orientation will remain the cornerstone of the king’s foreign policy, complemented by a strategy of maintaining good relations with all Middle Eastern states. Recent regional unrest is likely to strengthen US-Jordanian ties as the US seeks to consolidate its alliances. Jordan’s relations with the US have been buttressed in recent years by the increased attention given to the Israeli-Palestinian conflict by the US president, Barack Obama. However, the Jordanian public remain sceptical about the outcome of the recent peace negotiations—in particular because of the US’s perceived bias in favour of Israel—which are currently suspended. 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. Relations with the Gulf states are also expected to strengthen as Jordan seeks to join the Gulf Co-operation Council and to gain the greater economic support expected to come with it. The king may have a sympathetic ear in the White House, but Jordan’s direct influence on regional politics 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 attempts to liberalise the economy are likely to be impeded in the short term by political concessions made in the aftermath of the January demonstrations. Having shielded the population from the impact of the economic downturn in 2008-09, the government prioritised pushing ahead with economic reform in 2010. Aware of the large fiscal deficit, it sought to rein in social security outlays, for example with a temporary law in October 2009 raising the minimum retirement age. It may have trouble getting these changes passed into law, however. The make-up of the parliament strongly resembles that of the previous one, which was lethargic in tackling economic reform, contributing to the king’s decision to dissolve it two years early. In addition, economic promises made in response to the January demonstrations have forced some revisions of deficit-cutting measures.

ECONOMIC GROWTH: Although it will recover in 2011-12, the economy will struggle in the face of limited government spending growth (notwithstanding recently announced current spending pledges) and the end of the construction boom. In recent years, Jordan’s growth rate has been lifted by a strong upturn in foreign direct investment (FDI), especially from the Gulf Arab states. However, owing to slower growth in the Gulf states since the 2008-09 global economic downturn and recent fears of regional instability following popular unrest, inflows from the Gulf states have dropped. Such flows are expected to recover by the end of the forecast period, although they could be affected by a decline in tourist arrivals, if the domestic and regional political situation worsens, as much FDI was allocated for tourism projects. Exports will be constrained by sluggish growth in the US, but this should be partly offset by fast-rising demand for Jordanian goods from neighbouring Iraq, which will boost activity at the Aqaba Container Terminal, which is currently undergoing relocation and development. Economic growth in 2010 was 3.1%; and the Economist Intelligence Unit forecasts that it will rise slightly in 2011, to 3.3%, as the strengthening of some of Jordan’s export markets offsets any short-term decline in tourism numbers caused by regional unrest. Even though we expect real GDP growth to pick up later in the forecast period, with the economy expanding by an average of 4.6% in 2012-15, it will remain well below the stellar levels seen in the five years before the downturn. The difficult global economic situation and regional instability are also likely to depress consumer confidence, although the effect of this should fade in the latter part of the forecast period.

INFLATION: Having fallen by an average of 0.7% in 2009, the consumer price index (CPI) increased by an average of 5% in 2010, as commodity trends reversed during the year. Average inflation in 2011 is forecast at 6.4%, despite an unexpected drop in the CPI in January and February, driven by a reduction in the cost of vegetables and dairy products. However, we do not believe that the recent introduction of higher price subsidies will offset the impact of an overall rise in commodity and oil prices during 2011. We expect price growth to remain fairly stable throughout the remainder of the forecast period, averaging 4.9% in 2012-15, as prices of international commodities stabilise.

EXCHANGE RATES: The Central Bank of Jordan is committed to the maintenance of the Jordanian dinar’s peg to the US dollar, despite the associated lack of monetary flexibility. The peg has instilled monetary confidence and has not substantially harmed competitiveness (perhaps because the US is one of Jordan’s largest export markets). The peg does make Jordan susceptible to any devaluation in the dollar, as imports from non-US sources become more expensive. Although the IMF has raised the issue of abolishing the peg during its annual Article IV consultations with the Jordanian authorities, on balance the Fund has come down in its favour on the grounds that it has ensured stability and has helped to build confidence in the Jordanian currency during the past decade. In addition, according to the IMF, at present there is no evidence of a misalignment of the peg. As a result, we expect the Central Bank to maintain the peg at JD0.709:US$1 throughout the forecast period. We also believe that the stock of international reserves will be sufficient to offset any pressure on the currency stemming from short-term liquidity problems or negative political developments.

EXTERNAL SECTOR: Exports of goods will grow by an annual average of 9.4% in 2011-12, reaching US$8.8bn in 2012, as recovering demand in Asia and increased re-export trade with Iraq make up for sluggish demand in the US. Having fallen by about 17% in 2009 on the back of lower oil prices and the resumption of discounted oil supplies from Iraq, the import bill grew again in 2010 as commodity prices recovered. It will continue to grow in 2011-12, by around 7.6% a year. Rising fuel and commodity costs will continue to push up imports, despite the recently increased supply of discounted Iraqi crude currently being trucked over from Iraq–this was increased by 50% to 15,000 barrels/day (b/d) in June, with a plan eventually to reach 30,000 b/d. The growth in exports will only partly offset the rise in imports in 2011-12, and the trade deficit will increase gradually in the second half of the forecast period, averaging around US$6.9bn in 2013-15.

SOURCE: Country Outlook