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PolicyFebruary 1 2010

Poised for the fast lane

Amman: Jordan's capital is home to many of the country's family-run banksConservative policies and tight banking regulations have given Jordan the stability it needs to foster business confidence. But it remains to be seen how its banking sector will adapt to the leaner, fitter economy. Writer Stephen Timewell
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Poised for the fast lane

If the modern banking world wanted to find a place where traditional conservative banking rules are applied and provide a bulwark against all potential banking crises, then Jordan is the place to look. While it is a relatively small non-oil economy that has clearly been affected by the global economic crisis, careful and prudent management by the government and the Central Bank of Jordan (CBJ) has enabled the country to maintain stability and growth and provided a positive platform for the future.

Although a high real growth rate of more than 8% was achieved between 2004 and 2007, this slowed to 7.9% in 2008 and, as a result of the global financial crisis, slowed further to 3% in the first half of 2009 and is expected to have maintained that level of growth for the rest of 2009. However, in line with the global recovery, the governor of the central bank, Dr Umayya Toukan, forecasts 4% growth in 2010 and believes Jordan is relatively fortunate to be in a good position.

"The global slowdown has hit us in Jordan; growth slipped to 3% in 2009 as a result of the decline in global demand. But Jordan is very much connected to the Gulf Co-operation Council [GCC] states, and if the oil price continues [in the $70 to $80 a barrel range] and the high level of government spending in Saudi Arabia continues, then the region will be in a better situation than other regions."

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Dr Umayya Toukan, governor of the Central Bank of Jordan

Major strength

Jordan's sound economic management, especially in the banking sector, which is seen as the cornerstone of growth and development in its economy, is viewed as a major strength. Mr Toukan, who recently received The Banker's Central Banker of the Year in the Middle East Award, explains: "At the CBJ the greatest service we can do is to maintain confidence and confidence needs both good governance and stability."

Jordan's efforts to maintain stability are well acknowledged. In a November banking report by ABC Investments, Tanya Khammash notes: "The banking sector in Jordan has shown a degree of resilience on the back of prudence by the central bank and the heavy regulations in place." She adds: "The Jordanian government's continued guarantee of bank deposits with no ceiling up to the end of 2010 will also instil some confidence in the banking sector, particularly as the sector's position is largely stable."

Conservative policies in place include a high capital adequacy ratio, which reached 19.3% at banks in June 2009, well above the CBJ requirement of 12%, and the maintenance of high liquidity ratios, which reached 155.6% at banks in June 2009. Despite this, Jordan faces stiff macroeconomic challenges.

While inflation dropped from 13.9% in 2008 to -0.7% in September 2009 as world prices declined, analysts are concerned that inflation will resurface again in 2010. Also, unemployment rose to 13% in the first three quarters of 2009 and could worsen if the slowdown continues. Jordan's budget deficit is expected to widen in 2009 to nearly 7.3% of gross domestic product from 2.2% in 2008 and the internal debt/GDP ratio increased from 17.3% in 2000 to 35.7% in September 2009 to finance the larger deficit.

Nevertheless, Jordan's external debt/GDP ratio has declined to a manageable 22.5% in August, from 84% in 2000.

Key concerns

Key concerns for Jordan are also tourism receipts, foreign worker remittances and foreign direct investment (FDI) which are all vital to the economy and are in danger of decline. Tourism, which peaked at $2.1bn in 2008, reached $1.6bn in September 2009, only a slight 0.6% decrease on the previous year, which is a good sign in the current climate.

Remittances from Jordanians abroad dropped 5.6% in the first nine months of 2009 to $1.9bn. But analysts believe that while jobs were affected in the Gulf, Jordanians have not been laid off but have simply moved, for example, from Dubai to Saudi Arabia, helping to maintain the outlook for remittances.

FDI, however, represents a significant decline, dropping to $310m in the first half of 2009 from $1.4bn in 2008. Any improvement here is seen to depend on the overall global recovery and so considerable uncertainty exists in this area.

On a positive note, Jordan's foreign reserves continue to increase steadily, reflecting trust in the banking system and financial management. From $7.7bn at the end of 2008 they reached $10.4bn at the end of October 2009 as exports declined and imports declined even more. In the first eight months of 2009, exports dropped $2.1bn to $2.3bn while imports declined by $5.6bn to $6.5bn.

Conservative approach

Overall, Jordan's conservative policies and tight regulation have helped maintain stability. The CBJ has implemented three half-point interest rate reductions since November 2008 and also slashed reserve requirements on dinar and foreign currency deposits three times to reach 7%.

The conservative approach taken in Jordan can also be clearly seen in the high level of its banks' excess liquidity and flat credit growth. Banks' liquidity increased significantly in 2009 to Jd4.3bn ($6.1bn) from Jd1.4 at the end of 2008, a huge increase compared to the average level of Jd400m shown in pre-crisis years. Banks have also failed to increase lending, reflecting their cautious approach; bank credit grew marginally in 2009 to reach Jd13.2bn in September 2009 compared to Jd13bn at end 2008, a sharp contrast to the 10% to 15% growth in previous years.

The government has been applauded by industrialists in early 2010 for a new income tax law which cuts income taxes across the board and is designed to stimulate the economy. The new temporary law was described by Hatem Halawani, chairman of the Jordan Chamber of Commerce, as flexible as it mandates the government to lower the income tax on any sector by up to 1% annually if it deems such a move appropriate to support any slump-hit sector.

Mr Toukan believes the new tax will impact positively on fiscal policy. "Although there is no guarantee it will work, Jordan has a bad deficit problem and countries in eastern Europe and Egypt have shown that reducing income tax can in fact increase tax revenues."

In line with Jordan's policy of maintaining a strong capital adequacy ratio for its banks, the CBJ is also thinking of strengthening the banks' capital base. At present the minimum capital requirement for a bank in Jordan is Jd100m and for the 16 local banks (including three Islamic banks) most are in that range with the third largest bank, Capital Bank, having a paid-up capital of only Jd132m. But Mr Toukan believes the minimum capital should be much higher.

"We are seriously considering doubling the requirement to Jd200m and I think it should be Jd250m. This may encourage bank mergers," he explains. Despite banks having witnessed substantial growth in recent years, the sector remains largely fragmented and ripe for consolidation through mergers and acquisitions. This has not happened however, because the smaller banks are largely family businesses which do not seem to be keen on mergers.

Consolidation on the horizon

The CBJ is keen to see consolidation, and raising capital requirements could force family-owned banks to seek partners to remain competitive. The central bank is now also allowing new large players such as National Bank of Abu Dhabi and Saudi Arabia's Al-Rajhi Bank and others to enter the market, which will help add size and depth to the market. So 2010 could be the year of consolidation as the CBJ's increasing requirements and new entrants put the squeeze on the smaller banks.

In examining the global banking crisis, Mr Toukan has clear views on the rights and responsibilities of bankers and also some gripes with the media. "We say there are issues that are highly technical and can easily be misunderstood. We think it is in the overall interest to quietly address issues but the media may prefer otherwise."

Mr Toukan is also clear on two important regional issues, the long-standing financial dispute in Saudi Arabia between the Saad Group and Ahmad Hamad Algosaibi & Brothers (AHAB), and Dubai's controversial debt standstill in November. On the $20bn dispute over debts between the groups and more than 100 regional and international banks, the governor notes: "I believe that the Saudi government and the Saudi Arabian Monetary Agency (SAMA) will not treat Saudi banks differently from other banks. I am confident that the Saudi government will address this issue, it will treat all creditors equally and a resolution is just a matter of time.

As for Dubai's debt problems, Mr Toukan views it as a cashflow issue that will be addressed. "It will not affect the sovereign rating of the region but it may affect confidence which will take time to be restored."

As for Jordan, 4% growth is forecast for 2010 and, while the non-performing loan ratio rose to 6.4% in June 2009 and the outlook may be uncertain, the country has the financial management in place and the resilience to withstand any future shocks.

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