Special feature: JORDAN

Interview with Mr. H.E. Omar Malhas, Minister of Finance, Jordan

May, 2017

Q. Your Excellency, last year King Abdullah II presented a new economic programme to further support the socioeconomic development in Jordan. This ‘Vision 2025’ plan notably aims at boosting the country’s GDP, fighting poverty and unemployment. How healthy is the Jordanian economy today and how will those reforms guarantee a better financial situation in the country?

OM: As you know, to have a solid foundation for any economy you need a strong financial system. At the same time, you need a sound government financial status. Our finances to date are somewhat between a rock and a hard place. We have been suffering since 2011 due to the Syrian crisis and due to the Arab Spring. They happened simultaneously, and because of the Arab Spring some popular decisions were made by previous governments that really did not help the general status of the Treasury. At the same time, what we call the SRC (Syrian refugee crisis) has severely impacted the Jordanian economy. In the sense that today we need to work a lot on our infrastructure, on our water resources – and as you know Jordan is one of the poorest countries in the world in terms of water. And other places like hospitals, medical centres, schools, where host communities have a number of refugees.

To add to that, due to the war in Syria and Iraq, and with the closure of the borders from the Iraq side, a lot of pressure has been put on the Jordanian economy. Because of that pressure, so many things did not go the right way for the Treasury. We ended up with a higher debt than is safe today – our debt to GDP is north of 94%. It put a lot of pressure on economic growth rather than looking at 4% or 5% economic growth which a developing country like Jordan should be targeting at least. The reason I’m saying around 5% is because that is double the natural population growth. In order to have enough jobs, or be able to create jobs to absorb new entrants to the market you need to grow at least double the size of the economic growth.

The economy is not really growing, as it has been subjected to a number of exogenous shocks due to the regional conflict. You’re seeing that Jordanians are not remitting to Jordan the same amounts they used to remit. Direct form investment is at lower levels than it used to be and of course, tourism has dropped substantially. So you look at these factors and you blend them together and you end up with lower economic growth, higher debt. Of course, higher debt is caused by the continuous deficit in the budget. And due to the lower investments coming in plus the regional conflict, and people are at “wait and see” status. Unemployment has increased, today we talk about 15% which is a very high level.

There are so many points raised on the way this number is calculated, but nevertheless let’s say there is a margin of error of 10% that is still a very high level of unemployment. You put these together including the severe impact on Jordanian exports to Iraq because we used to truck them to Iraq and Jordan exports were about 17-20% of whatever is produced here. And you add to that the transit trade, because a lot of goods were coming through the airport of Aqaba and trucked to Iraq so the closure of the border is causing a lot of slow-down in the transportation sector. The transportation sector in Jordan is more-or-less an SME-style sector. We do not have a lot of big companies who own the trucks. Basically, these are individuals or a group of individuals who own the trucks, so that has caused a lot of issues for them. We are up against a lot of challenges.

It is true that a lot of countries are trying to help us cope with the refugee crisis, but that is not really enough. There are a number of factors because of the SRC that have caused us issues. For example, we are estimating that our debt went up by about 4 billion dollars due to having the refugees here. Two weeks ago, the IMF concluded a study of the indirect impact on economic growth of the SRC. They said that since 2011 our economy has been growing by 1% less, for example rather than growing by 5% we are growing by 4%, so there is 1% lower growth every year due to the SRC. It is not only that it is impacting our resources and causing our debt to increase, it also has an indirect impact on indirect growth, you put all of these things together and we are really in a tough situation, we need to do something about this.

Donor countries and countries that are helping us said in order for Jordan to continue to continue to receive assistance and grants, you need to do fiscal reform and you need to do structural adjustment or the other way around – fiscal adjustment and structural reform. We had to start a program with the IMF, the program is called the extended fund facility or the EFF. It is a very challenging program; it is a 3 year program that tackles the fiscal side and the structural reform side. Now on the fiscal side, it is a blend of issues, but the result is we expect the GDP to drop to 77.3% or 77.4% by 2021. On the structural side, there are a number of laws that need to be passed such as an inspection law, income tax law, empowering women in business, etc.

On our website, we have the previous IMF programs, we also have all of the details and synopsis of what this program is all about and you can extract any information you may need. A full schedule, timeline, and what we need to do to achieve it.

QIn July, Jordan signed a letter of intent with the IMF for a $700 million EFF programme. On the markets, the country also succeeded in attracting a diversity of investors. Recently, it has issued $1bn of Eurobonds at a lower coupon rate than the previous year. You believe it reflects international investors’ confidence in Jordan, its economy, and its reforms. Your Excellency, you have studied in both the UK and the USA. How do you explain that 50% of the bonds’ purchase orders were done by American Financial institutions, and 27% by British’?

OM: First of all, the bond was part of our financing plan which for 2017 will be published on our website in January. So in January it will show what amounts we are targeting to borrow in the local currency, from which donors, and the same thing if we want to tap the international market. The reason we have that bond is that we needed to diversify – we didn’t want it to crowd the private sector out of the local credit market.

2. We will help the Central Bank in maintaining a very comfortable level of foreign currency.

3. This lends well with our updated public debt strategy in extending the maturities because if you look at our public debt maturity bucket, its concentrated in two years. You cannot function on a daily basis trying to raise issue bonds and trying to raise funds in order to meet your obligations. Prudent management says you need to space it out. This is the second time we do a 10 year, as you are spreading out the maturity bucket, we are making it easier to manage debt and at the same time relax your cash flow requirements.

As you know, 2-3 years ago, Jordan did issue bonds with the guarantee of the U.S. government. Having these in the market gave some confidence to the issuer – which is Jordan in this case. Over 60% or 70% of investors in the new bonds were U.K. and U.S.-based. I’m sure it’s due to the extra efforts of His Majesty The King while visiting these countries – speaking with the investors and the business community and explaining what Jordan is doing, what the plans are, and people are seeing that on the ground.

We are putting our money where our mouth is, in the sense that people come here and they see that we are trying hard to improve. It’s a relatively peaceful and safe area, we are the right country in the wrong neighborhood. We have political stability; we have proper security. You are not worrying; you do not see what you see in the countries around us. His Majesty makes every effort when he is in the U.S. or the U.K. to speak to the business community. Businesses like to hear it from the top. It makes them feel better, it makes them more comfortable in tackling all of the related issues.

Most importantly, all of the emerging market fund managers are either located in the U.K. or the U.S. so it is a natural thing. I worked for Alliance Capital Management which is now called Alliance Bernstein and I know exactly where they are located. If you are not domiciled in the U.S. you are likely situated in the U.K. Most of these funds have to be in the U.K.. For example this is the very first time PIMCO has come in and bought bonds and it is registered under a U.K.-based entity not a U.S. entity. There are tax issues, and sometimes even though it is a U.S. name, the manager is sitting in London, but the books are done in Luxembourg; so it’s all tax-related issues. That is where most of the investment managers are.

It is true that the current spread over the mid-swaps on the Jordanian papers does not reflect the credit rating of Jordan. Jordan has a split credit rating of single B+ with Moody’s and BB- with S&P so we should be talking at probably another 150 base points of credit before swap added on to whatever the current spread is. It’s clear that the market is interpreting the Jordanian risk in a completely different way from the rating agencies. Sometimes these things happen. They were trading at better spreads than a BBB country is trading at which is Bahrain for example. There is a good element of confidence and investors don’t really care what your name is, they look for specific criteria, and if that criteria is met, they will go ahead and invest. It is clear that we are meeting the criteria of these investors. I don’t know what the price of our bonds is today but I heard there was a negative market movement. We will see how the market behaves today. There is a good sense of interest in the Jordanian paper, I remember within 3 hours the book was 4 times the amount because JP Morgan gave us an online tracking system of the amounts that are coming in. After 3 or 4 hours the book was close to 4.5 billion.

QLast year, Jordan announced it would issue an Islamic sukuk worth ¼ billion JD, three years after the Parliament passed the Islamic Sukuk Law to allow both public and private sectors to issue Islamic bonds. Could you tell us more about this opportunity, and how your country is preparing to sustain its economy through sukuks?

O.M.: It is very difficult, Islamic financing, because you need the Sharia board to approve it. I believe they have a lack of experience and knowledge. When I was with Alliance in 2000, we did an Islamic technology fund with Dresdner Bank (which merged into Commerzbank), we did Islamic options. It took him 3 minutes to explain to us how to do it. These individuals took 2 years to get it. So we have issues locally, I don’t know if you want to tap the international market and do Sukuk. I don’t see the added value of it, I think we need to be focusing on the local market because there is still some free liquidity in the market that is looking for Islamic solutions. With the way the Sharia Board is looking at things and keep changing their mind, it is going to make it very difficult to move forward on Islamic Financing.

QJordan is in a region where many large financial centres operate for example Istanbul, Dubai, Doha, what role do you think Jordan, as a country, can play as a country in the region in terms of its financial services with regards to the region and the world?

OM: I don’t know if Istanbul is a regional financial hub. I think what we can probably call a regional financial hub is Bahrain. Bahrain probably has the best financial laws in the region. It is the only one really that could be looked at as a financial hub. In a financial hub, you need easy access. Today it is very difficult to travel to the U.A.E. with their visa requirements. It is still somewhat difficult and they still differentiate between the local people and the imported people. Bahrain is a little bit more professional. That is why it is really the banking hub of the region.

The banking system is very well set up in Jordan, very well regulated, very well capitalized and the capital adequacy ratio is probably one of the highest in the region. But Jordan is not really a financial hub. One of the reasons may be that we are still in a terrible area. At one point in time we were a hub for the Iraqi market, but then with all of the anti-money laundering and anti-terrorist financing, most of the banks in Europe or the U.S. look at this region in a very suspicious manner. There are rigorous compliance requirements you must go through; it makes it quite difficult to say we are a regional banking or financial hub.

I think we are subjected to more scrutiny than Dubai for example. Maybe we can compete with back office services for example, which we are doing. We have a number of call centres set up throughout the country, I think there are some in the northern part of Jordan. There are a number of call centres that handle global solutions. That is something we can compete with and we should be working very hard on achieving.

Today I don’t think it has a lot of merit to say we are a financial hub, you would be under a lot of scrutiny. Today as a foreigner, if you go to London for example and tried to open an account, it takes 28 days before they come back to you with a yes or a no answer – it is becoming difficult. I think the focus even now in London, is on the capital market, on the stock market, on the fixed income market, derivatives market. It is more of a capital market and derivatives of the capital market, I don’t think the money market today is very lucrative anywhere in the world due to the rigorous and unnecessary compliance issues.

QThe PPP Unit, which is under your supervision, has ambitious goals for Jordan. We are in a new era of private sector-led growth and development in the country. How are PPPs a catalyst for growth and employment in Jordan? Very recently, UAE-based company, Masdar, and Jordan’s National Electric Power Company have signed an agreement to build the largest solar power plant in the country. Could you tell us more about this project, and what other PPP initiatives are considered?

OM: I think this is a way for the Jordanian economy to move and to be able to start a lot of capital-intense projects without government interference. The government would become an enabler rather than an investor. Even in the Gulf, the private sector is a satellite of the public sector. But this is ever-changing and it cannot continue in this way. In this part of the world if the government is spending the money, the economy thrives. If the government is not spending money or employing people, then you start to have a lot of economic issues.

One of the factors in order to offset this, is to have a strong public-private partnership project. Of course, the region is not helping in attracting a lot of international or foreign investors for example to come in here and do projects. We were able to start numerous projects with the private sector but small projects, for example hospitals. Rather than the government borrowing money to build the hospital and then it keeps increasing our debt, the private sector will build and maintain the hospital. The government or Ministry of Health would then come in and rent the hospital on a lease-to-own contract. After 10-12 years of this, the government will own the hospital. We started out with two hospitals, both south of Jordan. The 3rd big project for which tender will be released very soon, is the new Customs Department. Today Customs is literally in the heart of a very populated area. It is too small. We need more space, more buildings, we need better access, better roads. There was an area that was identified almost 16 years ago but the master plan stayed on the shelf. I spun off the Customs Department from the master plan, we did a PPP agreement and we have done the pre-bidding qualifications and now we are waiting to tender it. It will take 2-3 years, but it will pay in 2-3 months. If Customs starts attracting ancillary businesses to move as well, suddenly an area in the middle of nowhere will become something. Maybe some of the government entities will be encouraged to take similar steps. We lead as we are needed to lead.

QWhat would you say to potential foreign direct investors in terms of coming to Jordan and how would you sell Jordan and incentivise them to come here?

OM: First of all, Jordan is open for business. We have world-class laws and regulations. Jordan is a gateway to the area, if you are doing, or intend to do business in the countries around us, in Jordan there is a very good opportunity to set yourself up in order to start with the rebuilding of Syria, especially the southern part of Syria. The northern part is already on the radar of Turkey. As you know, we have a long border with Syria, I think it is a great launching pad for rebuilding Syria. It has a lot of potential and re-building will take some time. Whether you are going to be a logistic facilitator of products, goods, or even services, or if you are a contractor of any kind; a lot of businesses thrived on the re-building of Iraq. Until 2011 when U.S. forces left Iraq – up until that time there was so much business. I think the same will apply to Syria with a better element which is proximity. From the centre of Amman to the centre of Damascus it is 196 Kilometres. It is a massive opportunity; everything is destroyed, it is even worse than Iraq as the cities were intact. In Syria, it is massive destruction, it has a lot of natural resources, before the war Syria had 0 debt. It was one of the few countries in the world to have no debt. This area hopefully over the medium term has a lot of potential. That is the message I have for investors.

QWhat is the main thing you would like potential investors in the U.K. and the rest of the world to think of when thinking of Jordan?

OM: They need to be happy. It’s a good place to set up business in, to benefit from the upcoming opportunities in the area. We hardly have any economic growth as Jordan cannot function as an island. We need the situation to improve and it has to improve, war cannot go on forever. We are at the point of finalising things. So it is very important for them to be here for the next step.