In advance of expectations

JORDAN'S LOCAL INVESTORS are in a positive mood. Share prices on the Amman Stock Exchange (ASE) are up more than 7% so far this year, a rise that began even before the end of the US-led invasion of Iraq. Gulf financiers are also increasingly positive about prospects but western investors remain cautious.

There are some grounds for the optimism. The reconstruction of Iraq will provide opportunities for Jordanian companies and the transit of goods through Aqaba port is also expected to rise sharply. In the longer term, Iraq, which has the human and natural resources to become one of the wealthiest and most dynamic states in the region, will become a more attractive export market.

However, the end of Saddam Hussein's regime also poses major challenges for Jordan. Iraq, boycotted by most of the world, was an important market for its neighbours, taking 20% of Jordan's exports. Iraq's new trade links may be based more on economic than political interests.

Another problem for Jordan is the impact on its budget of the cutting off of heavily subsidized Iraqi oil. Kuwait, Saudi Arabia and the UAE have agreed to provide free oil for three months but the Amman government will be need a longer-term arrangement if it is avoid making painful cuts.

On balance, though, local analysts remain confident. Henry Azzam, managing director of Amman investment bank Jordan Investment Trust (Jordinvest), says: "A 4% growth rate for the year remains a possibility, a figure that exceeds population growth, leading to higher per capita income and employment."

Azzam says growth will be "driven by improved macroeconomic fundamentals, the impact of structural reform and a continued strong export performance".

A key test of whether this is enough to attract international investors will be the success of the Jordan Fund. Managed by Deutsche Bank and two Jordanian institutions - Atlas Investment Group and regional private-equity specialist the Foursan Group - it aims to raise overseas money to invest in private-equity opportunities.

These institutions' success in raising money for the fund, whose target size is $50 million and in which the government has already placed $20 million, will indicate the attitude of local and international investors towards Jordan.

"We expect to raise the bulk of the money locally and from the Gulf states. But we have targeted some groups in Europe and we hope to interest some investors from outside the region," says Omar Masri, managing director of Atlas, which is one of Jordan's leading investment banks.

Masri is confident that investors will support the fund, the brainchild of Jordan's king, Abdullah II, but it has taken a difficult two years to get it off the ground. Citibank was the original choice as the fund's international manager but pulled out 15 months ago. There are plenty of investment opportunities in the areas targeted by the fund, which is looking to construct a diversified portfolio by investing between $3 million and $7 million in each of a series of businesses.

The fund aims to provide established businesses with growth capital, participate in consolidation, make strategic investments, restructure underperforming companies and offer growth capital for start-up businesses.

The marketers' success will depend on investors' conviction that the recent robust performance of the economy and the structural reforms introduced in the past two years have set Jordan on the path to stability and prosperity.

Their main target will be those Gulf investors who remain positive about the region; bankers in Kuwait and Saudi Arabia report that they have customers interested in investing in Jordan. The poor performance of western stock markets means that there is more Arab money than usual looking for investment opportunities. The decision by MTC of Kuwait to buy mobile telephone company Fast Link from Egyptian company Orascom is evidence of this.

"There may be some risks in investing in the Middle East. But there are many opportunities and investors should look at how well their previous investments in this country have done," says Jalil Tarif, the executive manager of the ASE.

However, most western investors don't seem to share this view. They remain mostly negative about Jordan, as illustrated by their indifference to the recent flotation of shares in Jordan Telecom.

This viewpoint has been reinforced by recent reports by rating agencies. Moody's Investors Service, Standard & Poor's and Capital Intelligence all rate Jordan at three levels below investment grade.

Moody's acknowledges Jordan's stable and resilient political system and commitment to structural reform, which, it says, over the medium term could strengthen its fundamentals and external payments capacity. But, says Moody's country risk analyst Adel Satel: "Jordan remains vulnerable to external shocks and room for policy manoeuvre is limited. The heavy debt burden and continuing political and security uncertainties in the region continue to limit the country's creditworthiness."

Although most Jordanian analysts take a more positive view, they do not give the economy a completely clean bill of health. According to Atlas's latest economic report, any "improvement in outlook hinges on the country's ability to pursue structural reform, which is essential to improve per capita income levels and move towards socioeconomic equilibrium."

Some analysts remain unhappy. Heba Allaf, analyst at Amman-based investment bank Export & Finance Bank, says that the economy's capacity for growth remains "vulnerable". Even if it hits the 4% target local analysts have set says Allaf, this "is still inadequate to resolve long-standing development challenges".

There is also some concern at the size of the budget deficit for this year which is estimated to rise to JD316 million ($449 million) compared with the preliminary estimate of JD260 million for 2002. The financing of this deficit will crowd out a private sector that is already finding it difficult to raise money.

There is also concern about the high level of interest rates required to maintain the value of the Jordanian dinar and the high rates of tax on banks. "We need profitable banks because they are the risk takers in the economy and the engines for growth," says Ali Al-Husry, chairman and chief executive of Export & Finance Bank.