2013-01-15 13:40:16 - Jordan and the West Bank and Gaza Business Forecast Report Q1 2013 - a new country guide report on companiesandmarkets.com

We maintain the view that Jordan´s long-term political outlook is among the most stable in the region, with the monarchy having implemented a series of political and economic reforms in recent years. Nonetheless, the social uprisings that emerged in the region since 2011 are indicative of the threat that low living standards and lack of political freedoms pose to long-term stability. While we expect the regime to navigate through its current troubles, deteriorating economic conditions and public finances are reducing its margin of manoeuvre.

Jordan´s near-term economic outlook is bleak. We have long been highlighting the detrimental impact that widespread regional unrest was having on the economy, as it hits inflows of foreign direct investment as well as the all-important tourism

 

 

sector. With government austerity set to bite in the coming months, we do not expect an economic recovery any time soon.

We forecast a sharp deterioration to Jordan´s balance of payments position over the coming quarters, as a sharp slowdown in tourism receipts and a surge in the commodity import bill pushes the current account further into deficit. We are forecasting a current account shortfall of 10.8% of GDP in 2012, narrowing to 9.3% in 2013. Given this outlook, our core view is for the dinar to be devalued at some point in 2013.

Major Forecast Changes

Despite recent fiscal consolidation measures, we forecast Jordan to post a record budget deficit of JOD2.6bn (US$3.7bn or 12.3% of GDP) in 2012, with budgetary pressures badly exacerbated by a collapse in foreign grants and continuing difficulties in the procurement of energy supplies. Although we expect the deficit to narrow to 7.6% of GDP in 2013 as fiscal reforms take effect, much will depend on the materialisation of external assistance.

We expect prices to trend higher through 2013, as efforts to scale back government subsidies send inflation upward. We project inflation to average 5.5% in 2013, up from our previous forecast of 5.0%.

Key Risk To Outlook

Maintaining consolidation measures will be key to persuading international donors to speed up their assistance to the country. However, actual delivery of funds has been slow in the past, and there could be a risk that 2013 turns out to be another poor year for Jordan in terms of foreign grants. This would once again raise fears over the possibility of an uncontrolled devaluation of the dinar.

The implementation of the reconciliation agreement between rival factions Fatah and Hamas will face major difficulties, as ideological differences between the two parties remain stark and Israel and the international community will continue to exert pressure on Fatah to abandon its efforts to make a deal with Hamas.

Our outlook for private investment and exports remains bleak, with cutbacks in government spending (promoted by a drought in external funding) set to weigh on headline growth.

Major Forecast Revisions

On the back of continuing financing difficulties and direct material damage to the Gaza Strip following eight days of intensive Israeli fire, we have made a further downward revision to our growth forecasts.

We are now forecasting headline GDP growth of just 2.5% in 2012 (down from our previous forecast of 5.1%) and 4.5% in 2013.

Key Risks To Outlook

Any sustained punitive economic measures imposed by Israel that further constrain exports and imports, or disrupt governmental revenue flows, would pose downside risks to our forecasts for growth and the government budget.

Popular discontent, either with Israel or the lack of progress among Fatah and Hamas, could lead to social unrest and thereby undermine the growth prospects of the West Bank and Gaza, and weigh on the territories´ political risk profile.

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