The impact of the global economic crisis on Jordan has been unspectacular. There have been no high-profile bail-outs and no debt defaults, unemployment has remained relatively static, and economic growth has stayed positive throughout. But while the direct effects have not been as disastrous as elsewhere, the country's reliance on capital inflows from overseas to buoy a modest economy has meant that as its neighbours and trading partners have suffered, so too has Jordan.
Economic growth has fallen dramatically. In 2009, real gross domestic product (GDP) growth was 2.3%, compared with 8.9% in 2007 and 7.2% in 2008, according to the International Monetary Fund's (IMF) latest Article IV report, published in September. A modest increase to 3.4% is expected this year, but growth is not expected to return to pre-crisis levels in the medium term. The IMF forecasts GDP growth of no more than 5.5% in any of the next five years, compared to an average of 6% a year between 2000 and 2008.
Faced with the global financial crisis and falling domestic growth, Jordan's banking sector has proved to be resilient. The government was quick to react to the threat of contagion, guaranteeing all deposits in Jordan's banks and lowering capital reserve requirements to help stimulate lending. Exposure to toxic assets was low, with a loan-to-deposit ratio of about 75% meaning limited borrowing from volatile equity markets, and capital adequacy at the end of 2009 was 19.6%, far exceeding the government's already conservative threshold of 12%.
Crisis contained
"Prudent regulations, strict supervision and relatively low exposure to structured products and financial wholesale markets meant that the direct effects of the downturn were relatively containable," says Marwan Barakat, chief economist at Lebanon's Bank Audi, which operates in the country.
"None of Jordan's banks have had any major problems," says Laila Sadak, a banking specialist at Fitch Ratings. "We haven't seen any massive movement in impairments, and the banks are still fairly profitable."
But the banking sector has been far from immune from the effects of the downturn. Although all the country's banks posted a profit in 2009, earnings have dropped substantially. Return on assets dropped to 1.1% in 2009, from 1.6% in 2007, while return on equity was 8.8%.
In 2009, lending growth evaporated, with credit to the private sector falling from 91.3% of GDP in December 2007 to 71.2% in December 2009. "Just as the banking sector in Jordan benefited from the boom in the Gulf, now it is suffering from the downturn," says Nassib Ghobril, chief economist of Byblos Bank in Beirut. "Lending is almost flat."
Profitability has also been hit by the substantial levels of liquidity held by Jordan's banks in Organisation for Economic Co-operation and Development countries, where three-month Libor has dropped to just 30 basis point, from between 3% to 4% before the crisis. "Banks have not been able to decrease their deposit rates as fast as Libor has fallen, so there has been a decline in spreads just at the time when an increase in non-performing loans [NPLs] has put further pressure on profitability," says Mr Barakat.
The ratio of NPLs to total loans increased to 6.8% at the end of 2009 from 4.1% in 2007. But while coverage has increased, provisioning is still just 52%, and NPLs could increase further. "I think we'll see NPLs peak by year-end 2010 or perhaps mid-2011 and then gradually start declining as the economy picks up," says Nondas Nicolaides, a senior banking analyst at Moody's ratings agency.
Concerns over poor asset quality mean that banks are taking a cautious approach to the resumption of lending. Although there have been some signs of recovery in 2010, the pace has been slow. "Loans are increasing only moderately because banks are worried about a deterioration in lending quality," says Mr Barakat. "They are afraid of an increase in NPLs, so are unable to be aggressive."
Nevertheless, Jordan's banks have substantial liquidity that is looking for a home. An estimated $4bn in deposits at the central bank is earning interest at an overnight rate of less than 2%, compared to customer deposit rates of 3.75%. "Their money is making losses every day, so banks are looking for investment opportunities," says Tarek Yaghmour, assistant vice-president for research at Capital Investments in Amman.
Potential growth
One potential growth area is retail lending, which currently accounts for about a fifth of the market, and is equivalent to just 20% of GDP, compared to more than 50% in the UK. A government programme to build 8000 low-cost houses has prompted banks to develop specialised mortgage programmes for low earners, and with almost 70% of the country's population aged less than 30, there is potential for an increase in conventional mortgage demand too.
A government programme to encourage small and medium-sized enterprises (SMEs) has meanwhile spurred banks to set up dedicated business units for small companies, and in recent months there has been an explosion in advertising in the local press for both consumer loans and small business loans. "In the past five to six months, banks have been focusing more on retail lending," says Mr Yaghmour. "It is considered a less risky way of doing business, especially when it comes to residential loans."
But despite the growth potential of the retail market and small business market, in the medium term it cannot compensate for the drop in corporate lending. A cash-poor and risk-averse population means that demand for consumer borrowing is likely to be confined to the mortgage sector, and that growth will be moderate at best. "The retail market depends on consumer confidence and on disposable income, neither of which is very high," says Mr Ghobril.
The banks themselves have little incentive to promote unsecured borrowing at such uncertain times, says Mr Nicolaides. "They have been telling us that there is potential for growth in retail lending, but we've not seen much of an increase in the past couple of years, and we believe that some banks are more cautious than before and not very willing to provide unsecured lending to consumers."
As a result, the prospects of growth in Jordan's banking sector remain largely reliant on corporate lending. Here, the outlook is for a steady resumption of growth, focused initially on the most secure projects.
"If companies come trying to find money for real estate projects they'll find it hard to come by," says Mr Yaghmour. "But big government-backed infrastructure projects won't have any problems." Mr Ghobril agrees: "Banks are looking for opportunities where they can find them. When projects come on line in Jordan there will be appetite. It's a stable market, and there are no real risks."
Green shoots
There are already signs of a modest banking recovery in 2010. According to figures released by Jordan's central bank in early October, deposit growth in the first eight months of 2010 was 6.8%, compared to an average of about 2% across the Middle East, while lending increased by 4.7% over the same period, compared to a regional average of 2.8%.
But the slow pace of economic growth, the conservatism of the banking sector and the government's determination to cut its fiscal deficit from 8.5% of GDP in 2009 to 3% by 2013 means that local demand for lending is likely to resume only gradually. In the meantime, Jordan's fortunes are likely to remain as dependent as ever on those of its partners overseas.
