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”.
The Jordan Fund 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.
Vulnerable to shocks 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.
These assessments, particularly the low credit ratings, have frustrated ministers, who believe that Jordan has received too little credit for its macroeconomic, trade, legal and regulatory reforms. They point to positive assessments by the IMF, which recently approved a new stand-by arrangement, and by the World Bank, which in 2001 said that the privatization programme “ranks as one of, if not the, most successful in the region”.
Finance minister Michel Marto says: “We have pressed ahead with these reforms in the last five years and are now seeing positive results. The World Bank, the IMF and the EU have all paid tribute to Jordan’s economic reforms and achievements. But unfortunately, risk assessment agencies and investors are not yet fully aware of the progress the economy has made.”
Marto’s case is that Jordan has addressed all the issues raised by the international financial community. He says that structural imbalances are being eliminated. In addition, the budget deficit is being reduced, outstanding borrowing is being cut down and better managed, and trade reforms have enabled exports to rise by 20% a year for the past two years.
Reserves are at a record level, inflation is under control and state industries have been privatized. Marto says that this has been achieved while emphasizing investment in education and healthcare.
“We have passed laws which will ensure fiscal discipline to control budget deficits and excessive borrowing. We have reformed the economy and succeeded in improving the standard of living for Jordanians,” says Marto.
Western analysts acknowledge the success of policies such as privatization and the government’s commitment to a reduction of the role of the state. Ministers believe that this should be limited to regulation. They also believe that having even essential services provided by private companies will make it impossible to return to the days when services to consumers were heavily subsidized.
Although in most countries in the Middle East commitments to privatization have in practice produced comparatively few sales of state assets, Jordan has, after a slow start, implemented a sizeable shift away from the state to the private sector.
“Despite its slow implementation, Jordan’s privatization programme has demonstrated the government’s ability to conform to strict transparency guidelines in the process of privatizing public enterprises,” says a recent report by Atlas.
Privatizations have for the most part been successful. However, the recent sale of a stake in Jordan Telecom through an ASE flotation was probably the least satisfactory of recent issues. Last November, the government tried to sell 15% of the company but was only able to sell 10.5%, less than 1% of which went to overseas investors.
The sale would have been even less successful had the Social Security Corporation (SSC) not been strong-armed into taking 5%. However Tarif takes comfort from the fact that 10,000 individual Jordanians bought the shares.
Bankers attribute the comparative failure of this issue to the combination of nervousness about the region’s political situation and the reluctance of investors to buy telecommunications stock.
They also say that this is only a short-term setback in a policy that has already earned the government more than $1 billion in revenue, as well as bringing in international management expertise, financial resources and improved services.
The most successful sale was the first 40% stake in Jordan Telecom in 2000 for $508 million to a consortium led by France Telecom and Arab Bank. This was followed by a further sale of 9% to the SSC for $109 million. The introduction of new capital into the privatization of Jordan Telecom also made it possible for the company to launch a mobile phone services, MobileCom, to take on the existing service provider Fast Link.
Other sales in the past four years include a 33% stake in Jordan Cement Factories sold to France’s Lafarge for $102 million, which was followed by a further 14% sale to the SSC for JD30.2 million.
The government has been unable to find a buyer for a strategic stake in Royal Jordanian Airlines, following the downturn in the industry since September 11. However, it has spun off and sold the non-airline businesses. Jordan Flight Catering was sold to British company Alpha Flight Services for $20 million, the air academy was sold to a local company for JD4.118 million and the duty-free business went to Spanish airport retail group Aldeasa for $60.1 million.
Equally significant has been the divestment of the government’s holdings in quoted companies. The Jordan Investment Corporation (JIC) has raised $137 million by selling its stakes in 44 companies.
Although privatization in 2002 was limited to the flotation of Jordan Telecom shares, the government is determined to press ahead with more sales. The electricity industry is being split into generation, transmission and distribution companies. The finance ministry wishes to sell to strategic investors, though debates on the level of tariffs and consumer subsidies have to be resolved before the companies can be priced. The next stage is the sale to a strategic investor of a 60% stake in the Central Electricity Generating Company, which is planned for the second half of this year.
The government is also negotiating with Canadian company Potash Corporation of Saskatchewan (PCS), for the sale of a 40% stake in the Jordan Phosphate Mining Company. HSBC has been retained to assist in the sale of 25% of the government’s holding in the Arab Potash Company. Three companies – PCS, Mitsubishi and Kali und Salz of Germany – have already expressed an interest.
Ministers also plan to sell several water companies and the remaining non-core businesses of Royal Jordanian Airlines, while changes in the law to convert the postal service into a public company have been approved. The JIC is also selling the government’s equity holdings in seven quoted companies in the tourism, agriculture and mining sectors.
These privatizations, and the sale of government holdings in quoted companies, should boost the ASE. “Some 16% of the exchange’s capitalization used to be owned by the government,” says Tarif. “That figure has now been reduced to 6%, with further reductions likely to come this year. This has the added benefit of bringing more liquidity to the market.”
The exchange has ridden a roller-coaster in the past 30 months. The strong performance this year followed a tough 2002 when stocks fell back a little; in contrast, during 2001 shares rose 30%, with more Jordanians than ever before investing in the market.
However it may prove harder to attract more western investment. The exchange has been removed from emerging market indices because its companies are not large enough or traded frequently enough. Consequently the funds that track the indices closely no longer need to invest in Jordan. Although foreigners hold some 31% of shares, these investors are almost all from the Middle East.
For all this, the ASE is one of the largest exchanges in the Middle East, with a capitalization of almost $8 billion and more than half a million investors, and it is reaping the rewards of a four-year modernization strategy. The exchange now wants to increase the number of companies listed by persuading some of Jordan’s large private trading companies of the benefits of flotation.
Despite the efforts of the ASE management and some of the banks, which have tried to persuade companies to raise money through traded bond issues, Jordan’s businesses still overwhelmingly use overdrafts from commercial banks to finance operations.
“We need to expand the number of instruments available to the commercial sector which will mobilize up to JD2 billion currently locked in low-yield investments,” says Al Husry. “There should be more corporate bonds, a more active government secondary bond market and derivatives including options and treasury stock.”
The exchange is now sophisticated enough to cope with this expansion of business. It has some of the toughest rules on disclosure and transparency and there is an independent Securities Commission and depository centre.
Two years ago the exchange moved from manual to electronic trading and subsequently eliminated floor trading. “We have also made information available in real time through data vendors and the internet and introduced a system where all internal and external communication is done electronically. We are on the way to creating a virtual exchange,” says Tarif.
There is though still a long way to go before the ASE comes back on to the radar screens of the international emerging market investment funds. Like the rest of the economy, it has been hit by regional uncertainties and memories of poor economic management. Economic management is moving in the right direction now but international investors will require a longer track record before they take large financial exposures. The success of the Jordan Fund will show just how much progress has been made.
