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Jordan Deficit Steps May Not Suffice as Costs Jump: Arab Credit

Jordan's Prime Minister Fayez al Tarawneh
Controlling finances would “facilitate getting additional financing sources from sisterly nations, international institutions and financial markets,” Prime Minister Fayez al Tarawneh said in a speech to parliament on May 20, the state-run Petra news agency reported. Photographer: Hhalil Mazrawi/AFP/GettyImages

Jordan’s effort to cut subsidies and tap into reserves may not be enough to bridge the Arab nation’s widening budget deficit as $3.7 billion of debt matures this year and the energy bill spirals.

The country is drawing on foreign reserves and cutting subsidies to access cash after its oil and electricity import bill surged 54 percent to 3.7 billion dinars ($5.2 billion) in 2011, according to statistics department data. Foreign-currency reserves slumped 11 percent in the first quarter from December to $9.36 billion, central bank data show.

Covering the state’s expenses may get harder without issuing new debt after the government this week doubled its 2012 budget deficit forecast to 9.3 percent of economic output, the highest in at least a decade. That exceeds the International Monetary Fund’s deficit forecasts for Lebanon, Morocco and Tunisia. Jordan’s new government, sworn in this month, approved measures to cut spending by 300 million dinars, the official Petra news agency reported May 19.

“Something has to give, either they have to tighten much more than they wanted, which would defeat the object of the original subsidies, or they have to issue more than they planned,” Gabriel Sterne, a London-based economist at investment bank Exotix Holdings Ltd., said by phone yesterday. “They can tap the markets if they so choose. In fact now would be a pretty good time to do so because the bonds have done pretty well recently. That would be the obvious thing to do.”

Yield Tumbles

The yield on the government’s $750 million of 3.875 percent dollar-denominated bonds due November 2015 has tumbled 129 basis points this year to 4.56 percent today, data compiled by Bloomberg show. The yield is up 17 basis points since hitting 4.39 percent on May 7, the lowest in almost 18 months.

The country of 6.3 million people is losing money due to disruptions in its supply of natural gas from neighboring Egypt, where saboteurs have damaged an export pipeline repeatedly since last year.

The government also increased public salaries and subsidies last year after regional unrest spilled into the kingdom, with pro-reform street protests sometimes turning violent. Popular uprisings across the Middle East have toppled longstanding leaders in Tunisia, Egypt, Libya and Yemen, and sparked violence in Syria, which shares a border with Jordan.

Salaries, Taxes

Controlling finances would “facilitate getting additional financing sources from sisterly nations, international institutions and financial markets,” Prime Minister Fayez al Tarawneh said in a speech to parliament on May 20, the state-run Petra news agency reported. “Lean conditions can help us cut borrowing costs and implement reforms gradually.”

To tackle the rising deficit, the cabinet agreed to cut the salaries of the prime minister and government ministers by 20 percent starting this month, Petra reported May 19. The government will soon impose taxes on non-basic commodities and refrain from hiring except for the health and education ministries, the agency said.

Jordan’s local-currency borrowing costs are rising as the country’s total debt climbed 7 percent to 14.35 billion dinars in the first three months of the year from December, Finance Ministry data show.

The average yield on one-year Jordan treasury bills jumped 110 basis points since the final sale of 2011 to 4.875 percent on April 9, the latest auction, data compiled by Bloomberg show. That compares with yields of 5.4 percent and 15.9 percent on similar-maturity Lebanese and Egyptian bills.

Reducing Subsidies

“Any country in this situation should find ways to reduce the dependency on the government for the provision of goods and services,” Jarmo T. Kotilaine, chief economist at National Commercial Bank, said by phone from Saudi Arabia yesterday. “They need to reduce subsidies and scale back the public sector with privatizations or public-private partnerships.”

Jordan has $3.7 billion of bonds and loans maturing before the end of the year, and another $4.7 billion coming due in 2013, data compiled by Bloomberg show. The country’s current account deficit is likely to remain above 8 percent of GDP for a second year, compared with 2.6 percent in Egypt and surpluses across the Gulf Cooperation Council, according to IMF forecasts.

Still, Jordan should have little difficulty accessing cash due to its new affiliation with the GCC. The six-nation bloc including Saudi Arabia, which sits on one-fifth of the world’s proven oil reserves, said last May it may extend membership to Jordan, which imports more than 90 percent of its oil.

GCC Support

“Since the news that Jordan is going to be part of the GCC investors have changed the way they look at the country,” Samer Mardini, vice president of fixed income and Islamic finance products at Dubai-based SJS Markets Ltd., said by phone on May 14. “If Jordan were to come to the market, I think their borrowing costs would be the same as last time because of the GCC.”

Jordan sold $750 million of bonds at a coupon of 3.875 percent in November 2010.

The state’s need for cash may also grow due to the slow arrival of foreign aid. The nation got only $18 million of the $870 million in aid it has been promised by foreign donors this year, Tarawneh said earlier this month.

Selling sukuk, which comply with Islam’s ban on paying interest, would be one way to help Jordan reduce borrowing costs as it services its debt, NCB’s Kotilaine said. The country is drafting a law to govern the sale of Islamic bonds, Maher Sheikh Hasan, deputy governor of the Central Bank of Jordan, said May 14.

The average yield on GCC sukuk was 4.09 percent yesterday, below the 4.6 percent average yield on non-Islamic debt in the region, according to HSBC/Nasdaq Dubai indicies.

Jordan can also raise funds locally as bank deposits grew 8.1 percent last year, enabling lenders “to support whenever needed the rollover of those maturing bonds,” Marwan S. Barakat, the Beirut-based group chief economist and head of research at Banque Audi Sal-Audi Saradar Group, said by phone yesterday. “Banks have the willingness and the appetite to buy Jordanian debt.”

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