Jordan's economic rebound supports banking system outlook, Moody's says

Strong capital buffers, ample deposit funding and liquidity buffers bode well for financial stability of Jordanian lenders

Arab Bank in Amman is among the Jordanian lenders that stand to benefit from a rise in interest rates. Reuters

The rebound in the Jordanian economy has helped to improve operating conditions for the country’s financial institutions and continues to support the banking sector’s stable outlook, Moody’s Investors Services has said.

Strong capital buffers, ample deposit funding and liquidity buffers also bode well for the financial stability of banks in the kingdom, the rating agency said in a report on Monday.

“Jordan's commitment to economic reforms, the full reopening of the economy, rising demand for exports and a rebound in tourism will support economic growth”, said Christos Theofilou, vice president and senior analyst at Moody’s.

The ratings agency expects the Jordanian economy to expand between 2.5 per cent and 3 per cent in 2022 and 2023, respectively.

The faster rate of growth when compared to the 2 per cent achieved in 2021 will keep “loan performance stable despite the rising cost of living and higher interest rates”, it said.

Longer-term structural reforms to address labour and product market rigidities to improve the business climate as well as planned investment projects have the potential to raise the economy's medium-term growth rates, which will further support Jordanian banks, Moody's said.

Inflation in the country will also rise in line with global trends, hitting around 5 per cent this year. However, Jordan will be less susceptible to inflationary pressures by virtue of its high food reserves, long-term energy price agreements and reduced foreign-exchange volatility due to its dollar peg.

The kingdom’s economy is recovering from the pandemic-driven slowdown, helped by fiscal and monetary reforms it has enacted under the International Monetary Fund’s financing programme.

Despite the challenging circumstances, sound policies have contributed to macroeconomic stability and the IMF expects the country's gross domestic product to expand by about 2.4 per cent in 2022, lower than an earlier 2.7 per cent estimate, the fund said in May.

GDP will rise to above 3 per cent over the medium term for the country, which has limited natural resources and imports more than 90 per cent of its energy needs. Jordan is also host to more than three million refugees from Syria, Iraq and Palestine.

Jordan's commitment to economic reforms, the full reopening of the economy, rising demand for exports and a rebound in tourism will support economic growth

Christos Theofilou,
vice president and senior analyst at Moody’s

Jordan relies heavily on foreign aid and grants to finance its fiscal and current account needs, but it is trying to cut state subsidies and reduce its large public debt as part of its economic overhaul drive.

“A stronger rebound in tourism receipts and robust exports” will help to narrow Jordan's current account deficit to 6.5 per cent of GDP in 2022, from 8.8 per cent last year, the IMF said at the time.

Moody’s on Monday said problem loans will “nevertheless remain high” despite the opening of the economy and improving business conditions. Bad loans are expected to reach about 5 per cent of aggregate gross loans in the banking system, but are covered by ample loan-loss reserves set aside by lenders in the country.

“Additional provisioning needs will be low as pandemic-related risks unwind,” Moody’s said.

“At the same time, anticipated interest rate hikes will widen banks' net interest margins, their main source of revenue, boosting the banks' profitability.”

Capital buffers also remain strong and Jordanian banks will continue to be primarily funded through deposits and be highly liquid, with significant amounts in cash and interbank balances.

However, high government debt levels and social challenges, including “structural unemployment exceeding 20 per cent, remain key risks … as does the region's volatile geopolitics”, Moody’s said.