Jordan Central Bank measures will soften coronavirus impact on lenders, Moody’s says

The regulator reduced its main policy rate from 4% to 2.5% this month and relaxed lending conditions

A supermarket in Jordan on Friday shortly after it was announced that the country would be placed in full curfew from Saturday, with few exceptions. The effect of the lockdown on banks will depend on Show more

Measures taken by the Central Bank of Jordan, including reducing the benchmark interest rate and relaxing lending conditions, will help soften the impact of the coronavirus outbreak on Jordan's economy and minimise asset quality erosion in the banking system, according to Moody’s Investors Service.

Although weaker economic activity as a result of the virus in the first half of the year is "credit negative" for lenders, the central bank's measures will help Jordanian banks to "curb losses incurred during the coronavirus shutdown", Moody's said in in its latest report on Jordanian banks.

Jordan's government imposed a round-the-clock curfew from Saturday until further notice to stem the spread of Covid-19 in the country. The kingdom has reported 85 cases, with no deaths so far and one recovery.

All shops will be closed and authorities will announce specific times and procedures for the population to get essential supplies. Banks will remain closed until the end of March, although some branches and essential departments are on call for emergencies.

The country’s central bank lowered its main policy rate from 4 per cent to 3.5 per cent on March 4, and again to 2.5 per cent on March 16 – a total reduction of 150 basis points. The moves follows similar actions by central banks around the world, including the US Federal Reserve, to offset the economic effects of travel restrictions, business closures and supply disruptions.

The central bank also reduced the cash reserve requirement that banks must maintain to 5 per cent of the monthly average of daily customer deposit balances from 7 per cent, releasing additional liquidity of around 550 million Jordanian dinar (Dh2.85 billion). This will “limit any liquidity stress during the next couple of months” and allow banks to “deploy funds to affected businesses and households”, Moody’s said.

The most vulnerable economic sectors include industry, tourism, agriculture, renewable energy, information technology, transportation, health and education. Apart from lowering interest rates on loans to these sectors, banks have been encouraged to reschedule loans and offer appropriate grace periods with no additional charge to their clients affected by the pandemic.

Small and medium-sized enterprises (SMEs) are particularly susceptible to the economic disruption, Moody's said. Arab Bank, Cairo Amman Bank and Housing Bank for Trade and Finance, which all have stable ratings, have an SME exposure of 12.8 per cent, 8.7 per cent and 6.9 per cent of their gross loans, respectively, it noted.

Central bank measures, along with efforts to curb the spread of the coronavirus, will likely support economic activity that will gradually pick up in the second half of the year, Moody’s said.

However, the full extent of the economic costs and the effect on banks will depend on how long it takes for the spread of the virus to peak and when households and businesses will be able to resume normal activity. The longer it takes, the “more severe the consequences for the lenders and their profitability”, the report said.

Jordan, which as a country has a “stable” rating from Moody’s, reached a $1.3bn (Dh4.77bn) four-year funding agreement with the International Monetary Fund in January. The deal is meant to help the country secure lower servicing costs for the $42bn in public debt that the country holds, which has spiralled in the last decade as a result of the spillover of regional conflicts on its economy.