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Privatization: key to growth.

ACCORDING TO INTERnational credit ratings agencies, we have a more solid achievement than at any time in the past," says Jordan's Crown Prince Hassan, King Hussein's younger brother and heir apparent. "Exchange rates have been stable for the last three years, inflation is down from 25% to 4%, the deficit-GDP ratio has remained below 3% and domestic savings are increasing." To these accomplishments can be added strong economic growth of about 6% per annum, a successful economic stabilisation programme and the promise of dividends from the regional peace process.

Yet, in spite of this impressive record, the Amman stock exchange remains depressed and foreign investors are wary. There is interest from overseas, as exemplified by the recent convening in Jordan's capital, of delegates from Pensions 2000, representing $500 billion of US pension funds, but little buying.

The current lethargy of the Jordanian market is a far cry from the boom years between 1991 and 1993. As market capitalisation headed towards $5 billion, prices soared thanks to a surge of capital, from Jordanian expatriates and Palestinians, expelled from the Gulf States after Iraq's invasion of Kuwait. The three year bull run saw the index double as share prices soared. Turnover tripled in the same period and international investment houses, such as Foreign and Colonial, Barings and Lehman Brothers, began to see Amman as a buying opportunity.

As the market began to overheat, with local speculators rushing to buy into equities, often with borrowed funds, the Central Bank stepped in to cool the situation. From a July 1993 peak of 180, the index fell to 158.3 points by the end of the year and drifted further downwards, finishing 1994 at 143.6. Annual turnover fell by some 40% over the period and price earning ratios declined from 25 times, to a more modest 16.5,

Khaled Abdel Majeed, of London-based fund manager Blakeney Management, which invests in Jordan and in other equity markets throughout the region, sees two key reasons for the market's continued sluggishness. The first has been the monetary stance adopted by the Government and the Central Bank, which have kept liquidity tight and interest rates high, whilst the sale of attractively priced development bonds has soaked up any surplus cash from investors. The second factor, says Abdel Majeed, is "domestic political unease at the pace of the normalisation of relations with Israel and the change in stance towards Iraq." Angus Blair of ING Barings, which invests client money directly into Jordanian equities agrees. "Local investor sentiment remains the key and this has been subdued by regional political development," he says.

The Israeli-Syrian track of the peace negotiations has stalled, whilst the assassination of Israeli Prime Minister Yitzhak Rabin has cast doubts over the long term future of the Israeli-Palestinian process. The warming of relations between Israel and Amman has not resulted in significant economic developments, aside from some progress in tourism-related projects, and analysts play down heady talk of a peace dividend for Jordan. Furthermore, whilst the planned Israeli deployment from Palestinian population centres in the West Bank may lead to the gradual re-opening of the West Bank as a potential market for Jordanian businesses, it is anticipated that the volume of business will be small.

Indeed, many see the easing of international sanctions against Iraq as being the key which could unlock the potential of Jordan's economy and its stock exchange. This point was highlighted by a recent report by Barings Securities, which noted that trade with Iraq previously accounted for a quarter of Jordan's exports. The restoration of trade with Iraq to pre-Gulf War levels would provide a significant boost to the Jordanian economy.

The effects of the economic crisis that hit Jordan in the late 1980s, which culminated in the Gulf War, is still being felt in the country. During the 1970s and the first half of the 1980s, the economy grew by an average of about 10% per annum, buoyed by the remittances from Jordanian expatriates working in the oil producing countries of the Gulf. Later, growth was further fuelled by the relentless appetite of the Iraqi economy as the country waged its war against Iran.

The end of the Iran-Iraq war was followed by the virtual closure of the Iraqi market and a devastating loss of remittances from oil workers, as thousands of Jordanian and Palestinians were expelled.

With the economy shrinking in the period from 1985-89, Jordan defaulted on its $8 billion foreign debt and its currency, the dinar, collapsed. It took the intervention of the International Monetary Fund to stabilise the situation and growth has picked up since then, boosted by the savings and spending power of returning expatriates. Inflation has been held in check-falling from 16% to 4% - as the economy has grown at 6% per annum, whilst the country's worryingly large budget deficit has been sharply cut. To help keep the economy in check, real interest rates have remained high. A consequence of his policy, in the last couple of years, has been a lack of domestic savings flowing into equities.

Some locals hope that overseas buyers will re-ignite the market in 1996. The problem is that the government has repeatedly failed to make the necessary moves which are required to attract substantial foreign money. Moves to liberalise investment and tax law have been implemented, but international fund managers have had to face bureaucratic obstructions. According to one expert, 56 foreign funds lodged applications with the government, between 1992 and 1994, requesting total investment of $450 million. To date, less than half the funds have been approved for investment. "So many foreign investors have waited for so long that they have been dissuaded from investing. Some may not be attracted back," says Angus Blair. Money that could have come to Jordan has ended up in Egypt and Morocco instead.

Whilst the government has now removed the need for its approval for foreign investment, other obstacles remain in place. The restriction limiting overseas holdings in most Jordanian companies to no more than 49% looks set to continue. This keeps buyers away from some key corporations, such as Housing Bank and Arab Bank, which have already reached the limit due to the involvement of investors and government agencies from Gulf states such as Saudi Arabia, Oman and Qatar. "The restrictions on foreign ownership look set to continue," says one fund manager, who does predict other reforms in the near future, however.

Although these restrictions may have dampened the flow of investor money from abroad, there have been some advantages. "Jordan has become a far more sophisticated market than Egypt's, with a strong domestic investor base which will underpin the market, even if foreign money is withdrawn," notes Abdel Majeed.

Although few are bullish about the short term prospects of Amman's bourse, prices did rise by as much as 11% at one point in 1995, with the market peaking at 160, before drifting back down to 152 in mid-December. "The market decline was marked by a lack of positive sentiment and declining volumes," says Abdel Majeed.

Aside from an improvement in the climate for foreign investors, three other factors may influence the performance of the market in 1996.

The first is continued economic growth, which needs to be translated into better corporate earnings.

The second is for the government to focus attention on its flagging privatisation programme. Unlike neighbouring countries such as Egypt and Syria, the bulk of Jordanian businesses are not state owned.

The third issue which needs to be addressed is the modernisation of the Amman exchange. With the recent revival of the Lebanese bourse and the continued growth of stock markets in Tunisia, Egypt and Morocco, systems need to be put in place to enhance Jordan's attractiveness. There remains insufficient equity research, whilst plans to computerise the trading system are not planned until 1998. This needs to be accompanied, of course, by further measures to open the market to overseas buyers.
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Title Annotation:Jordan
Author:Album, Andrew
Publication:The Middle East
Date:Feb 1, 1996
Words:1322
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