Jordan: Improving prospects

Early estimates show that Jordan's economy grew by over 7% in real terms in the first half of 2004. Overall we expect Jordan to reach 6% for the full year of 2004 and 4.5% in 2005. Jordan's remarkable export performance continues to drive the economy forward. Exports rose by 46% y/y in the year to August. In part this reflects an improved business climate - the World Bank cited Jordan as having made the most progress in the region in its annual Doing Business survey- and in part the preferential trade access to the US granted through the Free Trade Agreement. US dollar weakness, and therefore a more competitive dinar, is also helping boost external demand.

There are also tentative signs of a recovery in domestic demand. Falling unemployment, rising incomes and a boom in construction is helping support consumer confidence. At the same time business confidence is rising. The recent stock market performance highlights the turnaround, with the general index up 50% year to date in US dollar terms. Industrial production, a useful proxy for domestic output, is up 12.8% January to August. The government's fiscal position also reflects the improved domestic picture. Sales tax revenues have grown by 42% over the first eight months of the year compared to the same period in 2003, while corporate tax receipts are running about 33% higher. This should ensure that the fiscal deficit comes in well below the 3.9% (excluding foreign grants 10.1%) forecast in the 2004 budget.

Plenty of momentum for 2005…

The rebound in growth should be sustained into 2005. In particular the tentative recovery in domestic demand bodes well for next year. There are a number of factors that could lead to growth beating our expectations. Progress with the government's privatisation plans, for example, would do much to support domestic and international confidence. It is the outlook for Iraq, traditionally Jordan's largest trading partner, however, that is key. Jordan is already benefiting from the booming trade between the two countries. Over the first eight months of 2004 Jordan's exports to Iraq have risen by 140% compared to the same period in 2003. Visitor numbers to Jordan are also recovering, partially as a result of business activity related to Iraqi reconstruction. If the security situation in Iraq stabilises, and exports continue to grow, it could add at least another 2% to growth next year.

Equally, however, Jordan remains vulnerable to a deterioration of the situation in Iraq, or indeed any of its neighboring states. The outcome of the Palestinian elections, scheduled for January, and the prospects for renewed Israeli/Palestinian peace talks will be closely watched. Further improvements in the regional political situation would be welcome given our expectations for a more challenging global economic environment in 2005. We anticipate a moderation in global growth, with slowdowns in both the US and China. US, and therefore (because of the currency peg) Jordanian, interest rates are expected to continue to rise. Part of the impact may be offset by a projected fall in oil prices (see our focus on page 6). However falling oil prices are not straightforwardly good news. Remittances from expats working in the Gulf economies provide important balance of payments support. Net remittances totaled USD 1.8bn in 2003.

…but the MFA could apply a brake

However the biggest economic risk next year will be the end of the Multi Fiber Agreement (MFA), which will expose Jordanian textile and clothing exports to the US to a greater degree of competition. The growth in clothing sales has been at the heart of Jordan's export renaissance. They now account for 30% of Jordan's total exports compared to just 3% five years ago. The value of clothing exports, mainly to the US, grew by 50% alone in the first eight months of the year. The IMF has warned that this growth is likely to halt in 2005 and then only grow at a reduced annual rate of 7.5%. This is its best case scenario. Potentially, the IMF suggests, clothing exports could drop by as much as 75% in 2005, widening Jordan's current account deficit by 2.2%.

This seems unlikely. Jordan's free trade deal with the US will offer some protection to Jordan's exporters, as they will not have to pay American trade tariffs. However the impact on their market share from low cost producers such as China should not be underestimated. After the lifting of restrictions on 29 apparel categories to the US market in 2001 China's market share went from 9% to 51% in terms of volume in just two years. The impact from the end of the MFA is unlikely to be so sudden nor perhaps as straightforward. Several US textile companies have already petitioned for further tariffs to be imposed against Chinese imports. Nonetheless it underlines the need for Jordan's exporters to move quickly up the value chain.

In spite of the challenges posed by the end of the MFA, Jordan's outlook is improving. The economy now has a firm macro foundation and government policy continues to move in the right direction. Jordan's geopolitical importance suggests that donor flows will continue to provide economic support. Moreover Jordan's economy has shown remarkable resilience in recent years in the face of a series of external shocks. As 2004's performance demonstrates the economy has much potential.