Transcript Slide 1

2013: Psychological factors will weigh
on the economy
December 2012
2013 LOCAL ECONOMIC THEMES
More austerity in the horizon
2
Fiscal balances are on a more sustainable track
•
•
•
•
The budget balance has deteriorated over the first ten months
of the year, as the fiscal deficit widened to JD 1.17 billion
compared to a deficit of JD 457 million for the same period last
year, as grants remain sluggish in comparison to last year.
However, the fiscal deficit (excluding grants) at JD 1.3 billion
for the first ten months, is actually narrower compared to last
year’s JD 1.5 billion for the same period.
The government re-estimated fiscal deficit in the 2012 budget
to JD 1.5 billion by the end of this year, representing around
7% of GDP.
If we exclude grants, then the fiscal deficit would reach 10.7%
of GDP by end of 2012.
•
Nevertheless, fiscal balances are on a more sustainable track
following the latest price increases and the IMF coordinated
economic adjustment program.
•
Forecasts for 2013, expect the budget balance to improve. At
the very least, as part of its National Economic Reform
Programme, the government is expected to reduce central
government’s deficit through extra measures equivalent to 1%
of GDP in 2013.
3
Fiscal balances are on a more sustainable track
•
Fiscal measures exceeding 3% of GDP have
already been implemented, without which
the deficit for 2012 would have reached
9.6% of GDP.
•
On the revenue side, the authorities raised
taxes on a number of luxury goods,
broadened the coverage of the tax base,
phased out some tax exemptions, and
increased certain nontax fees.
•
On the expenditure side, the authorities
reduced subsidies on gasoline, diesel,
kerosene and electricity; cut military
spending and subsidies to independent
public institutions; in addition to reducing
capital spending on non-priority projects.
•
Moreover, the government's programme
also includes comprehensive reforms in
the electricity sector through further
increases in electricity tariffs and
diversification of energy sources.
4
Fiscal balances are on a more sustainable track
•
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Reports indicate that the projected deficit in the government's
2013 budget, expected to be finalized soon, is around JD800
million after including foreign grants, while by excluding foreign
assistance, the deficit is estimated to reach JD1.3 billion.
This is taking into account that austerity measures
recommended by the IMF were implemented, which might be
somewhat optimistic.
•
The drop is likely to come from an increase in revenues following
implementations of the IMF programme.
•
The finance minister in his latest interview stressed that state
budget of 2013 will focus on increasing domestic revenues to
cover around 84% of current expenditures, up from 74% in 2011,
adding that the spending bill will also see expansions in capital
expenditures to stimulate the economy. The capital spending will
be financed by the $2.5 billion GCC development fund.
•
Nevertheless, government balances are still exposed to oil
shocks and downside risks of social unrest.
Also, the assumptions on which the budget was prepared tend to
be optimistic, as the historically the closing fiscal deficit balance
tends to overshoot preliminary projections.
•
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Medium Term Strategy For The Electricity Sector
Egyptian Gas Supplies Back to Normal Levels
Source: IMF staff estimates
End of Nov 2012
As of Dec 2012
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Financial losses of the state-owned National Electric Power Company (NEPCO) are estimated to exceed JD1.19
billion by the end of this year due to dependency on expensive imported heavy fuel as a result of frequent
disruptions of natural gas supplies from Egypt.
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If gas supplies remain at its maximum capacity as of today, NEPCO losses will go down from 5.30% in 2012 to 1.8%
or JD 280 Million in 2013.
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This decrease in NEPCO losses does not mean dropping the plan of increasing electricity tariffs, since this lower
loss should be addressed and since NEPCO arrears should be covered.
It is likely that electricity average tariffs will increase by 10% at least in 2013.
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In addition, the hike in tariffs should remain there in order to reduce the government’s exposure to gas and oil
shocks.
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Yet, public debt on the rise nearing psychological
barriers
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Despite these strong efforts, public debt is projected to
increase from 70.7% of GDP in 2011 to 83.9% in 2014, by
IMF Staff estimates.
•
According to data from the Ministry of Finance, public
debt had climbed by 19% toward the end of 2012,
crossing the JD16.5 billion mark, representing 75% of
estimated GDP in 2012.
Of this total, roughly two-thirds had been raised on the
domestic market, with the remaining owed to overseas
lenders.
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Public debt is expected to continue edging up in 2013 to
around JD19 billion, reaching 79.6%, edging close to the
80% public debt law of 2011.
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Nevertheless, if inflation was to rise above expectations,
then this could stabilize debt to GDP.
•
As for financing needs, the expected rollovers of public
debt will reach JD4.1 billion, implying that debt service is
highly exposed to higher interest rates in the coming
years.
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Reliance remain substantial on grants and external
borrowing
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Under the assumption that budgetary grants will come in
as projected (3% – 4% of GDP, around $1 billion), IMF
estimates suggest that to maintain reserves at about
four months of imports, Jordan’s additional external
financing needs would reach $1.1 billion in 2013.
External Negative Gap (USD Million)
1.2
1.1
1.1
1.0
0.9
0.8
0.8
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The aforementioned gaps is anticipated to be covered
through donors and external financing. Receiving
expected grants will leave the Jordanian economy with a
minimal external foreign currency gaps.
0.6
0.4
0.2
0.0
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If a eurobond was to be issued at $1.5bn, and grants
come in as expected, then the government can cover its
financing needs using external sources, which would
relieve pressure on domestic debt and the need for large
bond issuance.
•
Over the longer term, reliance on external grants is
expected to be reduced through more frequent market
financing.
2012
2013
2014
2015
8
2013 LOCAL ECONOMIC THEMES
Mobilizing additional external financing
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Issuing New Eurobonds – Expected Size $ 1.50
Billion
• This new issue aims at reducing the
crowding out effect of the credit granted
to the private sector.
• Private sector credit went down as a
percentage to GDP from 7% in the first
five months 2011 to 5% over the same
period in 2012.
• This step will improve foreign reserves’
levels and boost excess liquidity levels in
Dinar.
• Expectations that the new issue will take
place in Q1 2013.
• IMF strongly recommends issuing the new
bonds in 2013
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Issuing New Eurobonds
Expected Yield 5.50% for 5 years & 6.70% for 10 years
The Issue will be supported by huge amount of liquidity in the market & the recent
positive feedback from the IMF
Average Spread of 4.60% Above US Treasuries
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5.9
5.5
6
5
6.70
4.87
4.93
4
3
1.73
2
1
0.27
0.33
2 years
3 years
0.72
1.115
0
US Treasury Yields
5 years
7 years
Jordan Proposed Bonds' Yields
10 years
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Issuing New Eurobonds
Expected Yield 5.50% for 5 years & 6.70% for 10 years
Compared to Jordan’s credit peers, the abovementioned expected yields appear to
be reasonable, especially when taking into account economic fundamentals
10 Years Bonds' Yield
8.00%
CAB Estimation
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Turkey
Hungary
Guatimala
Jordan
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2013 LOCAL ECONOMIC THEMES
Foreign currency sources under stress
13
FX Reserves under pressure
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Concerns over regional and domestic instability have put
pressure on Jordan's foreign reserves.
•
The more expensive fuel imports resulted in a decline in the
Central Bank of Jordan’s (CBJ) reserves, which was exacerbated in
May by an increase in deposit dollarization, reflecting depositor
nervousness. CBJ reserves dropped to $6.5 billion at mid-July—a
decline by almost 40% since end-2011.
Although the reserve loss has stabilized recently, foreign reserve
holdings were down by 34% by end of October, bouncing up to
$6.85bn.
•
•
FX reserves are expected to remain under pressure throughout
2013, fuelled by the continued geopolitical unrest in the region
and its downside effect on tourism activity and foreign
investments.
•
However, if Egypt resume pumping gas, eurobond
issued successfully and committed grants received then the trend
will be upwards ending two years of hemorrhage where reserves
shed nearly 45% of their value.
•
FX reserves are anticipated to have an average of 4 months of
imports in the coming 3 years.
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FX Reserves under pressure, but the peg remains
stable
Depreciation
Appreciation
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A main factors in the drop of FX reserves are the high oil import bill and psychological factors. Investor concerns and fears
resulted in a move away from the dinar, with some investors shifting into overseas currencies as a hedge against further
unrest.
Dollarization rose, especially in the past couple of months, the ratio reached 26.9% in October, compared to 21.6% in 2011.
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The Central Bank of Jordan countered these risk, by creating a new monetary tool––a weekly repo operation––and narrowing
the interest rate corridor. The central bank also injected liquidity into the market by trading government papers on the
secondary market. It also raised in December its overnight rate on dinar deposits to 4%, a 0.75% increase, with the aim of
making investments in dinar-denominated assets more attractive.
•
This may encourage more capital to flow into the market, though further unrest or negative reports on the economy in 2013
could erode any gains made through the CBJ's intervention.
•
The pegged system is expected to remain stable throughout 2013, as long as FX Reserves cover more than 4 months
15of
imports. As noted by IMF staff, the real effective exchange rate remains broadly in line with medium-term fundamentals.
Some positive prospects for foreign currency
inflows
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On the positive side, tourism income increased by 15.3%
in the first eleven months of this year, and remittances
started to recover while the oil price declined from its
level in the first half of the year and is likely to be on a
downward trajectory.
•
However, uncertain regional developments and a
significant increase in oil prices remain important
vulnerabilities.
•
Workers remittances increased throughout 2012,
rebounding from their drop the previous year. Though
the trend into 2013 will depend on how the global factors
such as the eurozone crisis play out, and the effect it will
have on the GCC economies, where the bulk of Jordan’s
workers reside.
•
Foreign direct investment is expected to increase slightly
in the next year, with expected official support for
investment projects, in particular from the Gulf
Cooperation Council (GCC).
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Current account deficit could pose a serious
threat
•
Widening current account deficit is posing a serious
threat on Jordan’s credit ratings in addition to
exacerbating pressures on the stability of the
Jordanian Dinar.
•
The current account came under intense pressure
during the first half of 2012, mostly reflecting
imports of expensive fuel products for electricity
generation. For the whole year, the current account
deficit is projected at 14.1% of GDP, about 2% of GDP
higher than in 2011.
•
The current account deficit is projected to undergo
adjustment in 2013, reflecting lower food and fuel
prices, a rebound in export growth—following a
sharp deceleration in 2012 due to disruptions in
transit trade through Syria and in potash and
phosphate production (caused by long worker
strikes)— and continued improvements in travel
receipts, including from the GCC.
•
Nevertheless, a deteriorating regional and global
environment could hurt tourism receipts and FDI.
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2013 LOCAL ECONOMIC THEMES
Promoting growth
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Positive growth albeit at sluggish pace
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•
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The year is closing much as it opened, with the government looking
to reduce subsidies while having to deal with the burgeoning costs of
supporting the tide of Syrian refugees fleeing the conflict across the
border. According to a study by UNDP, the cost of hosting Syrian
refuges is estimated to reach $300 million in 2012.
These two factors have played on the economy throughout 2012 and
are expected to continue into next year.
Despite these concerns, Jordan's economy continued to expand, with
growth expected to reach 3% by the end of 2012, according to the
IMF.
The IMF predicts GDP will increase by 3.5% in 2013, mostly through a
JD495 million projected increase in capital spending and expected
structural reforms to enhance the business environment and
competitiveness.
Jordan's recovery is expected to remain sluggish, since the kingdom's
main trading partners are on sluggish trend and risk balance remain
downward tilted.
Global economy is still on the slide as the IMF reduced global growth
forecasts.
The ongoing Arab spring is hampering growth in the MENA region,
and the GCC is at crossroads, as ballooning governmental spending is
hampering sustainability.
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Significant inflationary pressures in 2013
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Despite the expected moderation in international
food prices, CPI inflation is expected to increase to
4.5% by the end of 2012, only slightly up from the
4.2% in the first three quarters of the year, due
mainly to an increase in fuel pump prices.
•
However, inflationary pressures on the rise going
into 2013, as the impact of higher fuel costs kick in,
as well as the potential increase in electricity and
water tariffs. These price hikes are likely to infiltrate
to the core economy.
•
International agencies project inflation rate of 4.3%
for 2013, though the preliminary assumptions likely
have not taken into account the recent price hikes,
which might push inflation towards 6%.
•
Also expectations are for international fuel and food
prices to drop, if that was to change then inflation
will likely rise.
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2013 LOCAL ECONOMIC THEMES
Tight interbank liquidity
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Excess Liquidity in Jordanian Dinar to Remain
Under Pressure
•
JD excess liquidity in the banking sector
dropped significantly due to deficit in balance of
payments & dollarization.
•
Till end of December 31st 2012, excess liquidity
went down to JD 1.9 billion from JD 3 billion at
the beginning of the same year.
•
The JD1.1 billion drop came despite the new
injected liquidity by CBJ by JD1.1 billion.
•
The new liquidity was injected through weekly
and monthly repos (JD550 million) and
purchasing government bonds (JD 600 million).
•
JD Excess liquidity would have reached a critical
level of JD 800 Million, if no CBJ intervention
was there.
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Excess liquidity is expected to reach JD2.5bn in 2013
Increases in Liquidity will be Partially Curbed by Reversing CBJ Easing
Instruments
Negative External Gap is anticipated to be over-covered by IMF
loan & eurobond Issue
The projected surplus in Balance of Payment is anticipated to
fund the excess liquidity with JD 800 million
The growth of JD deposits if Dollarization amounts for JD 700
million will fund excess liquidity with extra JD 800 million
The CBJ is anticipated to withdraw repos and outrights by JD 1
billion
1900 + 800 +800 – 1000 = JD 2,500 million
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2013 LOCAL ECONOMIC THEMES
Maintaining calm
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Vulnerabilities and downside risks to the economy in
2013
Domestic factors:
Regional and global factors:
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The government needs to stay committed to its
National Economic Reform Programme, which
includes politically sensitive measures.
•
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A difficult domestic situation could jeopardize
reform plans and adversely impact confidence.
A deteriorating regional and global
environment could hurt tourism
receipts and FDI, and might also have
fiscal and political implications.
•
The situation in Syria disrupts transit
trade and introduces significant
uncertainty into the government’s
spending to accommodate refugees’
needs.
•
Moreover, activity in the regional oil
exporters could slow as a result of an
escalation of the eurozone crisis, and
this could spill over to Jordan through
lower
tourism,
exports,
and
remittances.
•
The government will be hoping that general
elections in late January will provide it with
parliamentary support for its austerity
programme.
•
However, many opposition groups have vowed
to boycott the poll over the issue of subsidy
cuts, which could lead to further unrest in
2013.
If this were to happen, investors and donors
may delay in committing funds.
•
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Psychological factors played a large role in the
deterioration of 2012
70% of FX reserves drop was driven by
dollarization as psychological factors in the form of
investors concern regarding reports of the drought
of grants as well as political uncertainty led to
conversion to foreign currencies and an increase.
in dollarization to in.
FX reserves would
have ended the year
at $9 billion
Otherwise
This in turn led to an increase in domestic interest rates, as
higher burden was then placed on individuals and
businesses, who had to facer higher borrowing costs, which
likely hampered economic growth.
Also led to an increase in the government’s debt service
Window rate would
have been at 3.25%
instead of 4.00%
Excess liquidity
would have been
around JD3 billion
instead of JD2 billion
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Psychological factors will weigh on the economy
throughout 2013
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HAPPY NEW YEAR
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