JORDANIAN ECONOMY WEAKENS UNDER GLOBAL PRESSURE

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 000472

SIPDIS

STATE FOR NEA/ELA, EEB/IFD/OMA, EEB/EPPD
TREASURY FOR SETH BLEIWEIS

E.O. 12958: DECL: 02/19/2019
TAGS: ECON PGOV ETRD EAID KTEX EFIN JO
SUBJECT: JORDANIAN ECONOMY WEAKENS UNDER GLOBAL PRESSURE

REF: A. AMMAN 433

B. AMMAN 226

C. AMMAN 136

D. 08 AMMAN 3173

E. 08 AMMAN 2982

F. 08 AMMAN 2799

G. 08 AMMAN 1717

Classified By: Ambassador R. Stephen Beecroft for
reasons 1.4 (b) and (d)


1. (SBU) SUMMARY: Jordan is starting to feel the effects of
the global economic crisis, with real growth expected to drop
from 6% in 2008 to 3% in 2009. Although conservative
monetary policies helped protect Jordan from immediate
external shocks, weak domestic and international demand and
tightening credit have caused local companies to lose
business, suffer cash flow problems, and lay off employees.
First quarter 2009 statistics are not yet available, but the
Government of Jordan (GOJ) projects the following: export
growth will drop from 38% in 2008 to -3% in 2009; government
revenue will be reduced 7% by $500 million in 2009; tourism
growth will drop from 16% in 2008 to -2% in 2009;
unemployment will rise to 15%; and remittances from abroad
will decline significantly due to the return of Jordanian
expats from the Gulf. Foreign direct investment is also
expected to fall as Gulf investors repatriate capital.


2. (C) Given the negative projections, the GOJ has requested
USG help in securing grants from Saudi Arabia and debt relief
from Japan. They will almost certainly also look to us to
provide substantial assistance, which they see as necessary
to ensure stability and continued reform. Given that signs
of an economic slowdown are starting to show, many business
people believe the Jordanian government needs to develop and
implement quickly a clear plan to build confidence. The GOJ
is considering a $258 million economic stimulus package aimed
at the construction and agricultural sectors. The bail-out
package may also include tax incentives that will most likely
prevent the submission of a USAID-supported, unified tax code
to parliament this year. On the plus side for Jordanian
citizens, the GOJ projects that the inflation rate will be
reduced from 14.9% in 2008 to 4% in 2009, primarily due to
declining worldwide prices in fuel and food. END SUMMARY.


Public Message: "We're Doing Okay"
--------------


3. (C) The Prime Minister has publicly conveyed the message
that Jordan,s economy is "doing okay." Conservative
monetary policies have been lauded for protecting Jordan from
the initial impact of the global financial crisis (ref C).
Key monetary indicators, such as $8 billion in foreign
reserves and $25.8 billion in commercial bank deposits, have
been highlighted publicly as signs of a liquid economy.
Strong performance in the first three quarters of 2008 led to
relatively impressive year-end 2008 statistics, such as a
decline in official unemployment rates from 13.1% to 12.7%, a
reduction in the budget deficit as a percentage of GDP from
6.4% to 5%, and a 37.7% increase in national exports to $6.19
billion compared to 2007.


4. (C) During a February 15 meeting with the Ambassador,
however, Finance Minister Hamed al-Kasasbeh expressed serious
concerns about a weakening economy under global pressure.
Private sector interlocutors have also told EconOffs that it
is nave to say that Jordan has been completely isolated from
the global financial crisis and clearly represents a
government attempt to prevent a panic. They suggest that the
negative effects of the worldwide economic slump have only
started to show in the first quarter of 2009, for which
official statistics are not yet available, and caution that
Jordan,s economic situation may continue to deteriorate
significantly if not properly managed.

Growth Predicted to Slow in 2009
--------------


AMMAN 00000472 002 OF 003



5. (C) After five years of real GDP growth averaging 6%,
Kasasbeh projected that Jordan,s real GDP growth rate would
fall to 3% in 2009. Although Jordan received $4.24 billion
in foreign direct investment in 2008, he noted that 50-60% of
that was from the Gulf and is expected to drop in 2009 as
Arab states seek to repatriate capital because of falling oil
prices. Kasasbeh added that Jordan is also seeing delays and
potential cancellations of important privatization and
public-private partnerships, including the light rail (ref
G),upgrade and expansion of the refinery (ref A),and the
third Independent Power Producer project. The GOJ also
estimates that tourism which grew 15.7% in 2008 will fall -2%
in 2009, a trend corroborated by some businesses which have
reported a 20% reduction in tourism revenue since autumn

2008.


6. (SBU) Business contacts have indicated that they are only
now starting to see the negative impact of the fourth quarter
2008 on their companies, year-end financials and fear first
quarter 2009 will look even worse. Many businesses bought
materials at high prices in summer 2008 and are now facing
losses as market prices for their goods fall. Arab Potash
Company (APC) Chairman and former Minister of Finance
Mohammad Abu Hammour said that many companies also had
year-long contracts in 2008, which protected them from the
immediate fall-out of the crisis, but now face the problem of
renegotiating contract terms and prices for 2009. Many
garment factories, as well, have indicated that although they
have orders through April, the second half of 2009 remains
uncertain (ref B).


7. (SBU) The GOJ predicts that export growth will fall
dramatically from 37.7% in 2008 to -3% in 2009. Significant
increases in the value of national exports in 2008 were
largely due to increased prices (not volume) of phosphates
and potash before the crisis hit. Abu Hammour noted that now
that worldwide prices of phosphates have decreased
dramatically from $800 to $80 per ton, those export figures
will most likely decline in 2009. He confirmed that APC has
also cut the projected volume of its potash exports in 2009.
Lower demand in the U.S. for apparel caused a 15% decrease in
Jordan,s top export, garments, in 2008, with the trend
expected to continue in 2009. Exports of pharmaceuticals,
which grew from $422 million in 2007 to nearly $500 million
in 2008, also face a difficult year according to Hanan Sboul,
Secretary General of the Jordanian Association of
Pharmaceutical Manufacturers. She explained that Algeria,
which receives about 25% of Jordan,s pharmaceutical exports,
has closed its market to imports to protect its domestic
pharmaceutical sector.

Credit Tightening Hits Industry and Real Estate
-------------- --


8. (C) Abu Hammour noted that Jordan,s commercial banks
have encouraged savings by offering a 7.5% return on deposits
in Jordanian dinars and maintained relatively high interest
rates of 10-11% on loans. Given that the banks are also
cutting back on lending, many companies are now suffering
from credit and liquidity problems (ref C). Several private
sector interlocutors have commented that such banking
policies during an economic downturn will stifle consumer
spending and business expansion. Chamber of Industry CEO
Zaki Ayoubi noted that Jordan,s small industrial companies
are often family-run and tend to have most of their capital
in fixed assets, so are particularly vulnerable to any
tightening of credit.


9. (SBU) Construction projects are also facing serious cash
flow challenges. Work has reportedly slowed down or
completely stopped at many of the largest real estate
development projects in Amman, Aqaba, and Madaba, causing
anxiety in customers who prepaid for apartments or offices
that may not be finished. The ripple effect has reached
ancillary industries, such as one logistics company which is
still awaiting payment for 100 trucks purchased by a real
estate developer.

Unemployment Expected to Grow with Returning Expats

AMMAN 00000472 003 OF 003


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10. (C) Kasasbeh predicted that Jordan,s official
unemployment would rise from 12.7% in 2008 to 15% in 2009.
Indeed, reports of local company lay-offs are starting to
emerge in the press. Various public and private sector
interlocutors commented that large numbers of Jordanian
expats in the Gulf are also expected to return to Jordan when
their contracts expire, usually in June. Some have
speculated that their return may not only create a large pool
of unemployed, talented professionals in Jordan but also
depress wages as supply grows. Kasasbeh noted that the
returnees will put additional pressure on water, energy,
school, and other government expenditures. He also indicated
that Jordan is starting to see a reduction in official
remittances from abroad, which were valued at 19% of GDP in
2007 and have been a large contributor to Jordan's increased
foreign reserves (ref F).

Slowing Economy will Impact Government Revenues
-------------- --


11. (C) Kasasbeh expressed concern about Jordan,s
deteriorating fiscal outlook. He said that the global crisis
is putting pressure on the 2009 budget, which increased 8.2%
over 2008 due to growing capital expenditures and was based
on optimistic assumptions regarding economic growth,
revenues, and mostly unsecured grants before the crisis hit
(ref E). Now the GOJ expects revenues to decrease by $500
million, which will contribute to an increase in the budget
deficit from a projected $967 million to $1.162 billion.
Several business people have criticized the GOJ for
overestimating revenues in 2009, noting that revenues will
surely drop due to declines in sales tax, customs duties, and
corporate income tax in the wake of slower economic growth
and falling commodity prices.


12. (C) Kasasbeh said the GOJ is also fearful that it may
not be able to secure anticipated foreign grants. He
requested USG assistance in ensuring continued aid from Saudi
Arabia and assistance with $1.5 billion in debt owed to
Japan. He also sought additional USG assistance to cover the
expected decline in government revenues.

Stimulus Package
--------------


13. (C) Private sector interlocutors have complained to
EconOffs about the government's lack of a transparent
economic plan to deal with the effects of the global crisis,
although they appreciated the GOJ's recent efforts to discuss
needs with various sectors. The GOJ is reviewing a list of
economic projects to be included in a $258 million economic
contingency plan. Kasasbeh is quoted in local press as
saying that the projects are mainly divided between the
agricultural, construction and water sectors. The Finance
Minister also told the Ambassador that tax incentives in the
government,s stimulus package will reduce revenues further
and prevent the government from submitting a new
USAID-supported, pro-business unified tax code to parliament
this year.

Declining Economy Not Yet Felt by Most Families
-------------- --


14. (C) Kasasbeh predicted that the percentage of families
living in poverty would rise from 14% to 16% in 2009. In the
short-term, however, the worldwide crisis has provided some
relief to the household budgets of many families. In 2008,
GOJ provided significant raises to government workers, about
30% of the workforce, as a means of addressing the record
inflation (ref D). Due to declining global food and fuel
prices over the last four months, Jordanians have benefited
from a 5.9% drop in consumer prices since they peaked in
September 2008.

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