Jordan’s economic rebound supports outlook for banking system, says Moody’s

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

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

“Jordan’s commitment to economic reforms, the full reopening of the economy, growing export demand and rebounding tourism will support economic growth,” said Christos Theofilou, vice president and principal analyst at Moody’s. .

The rating agency expects the Jordanian economy to grow between 2.5% and 3% in 2022 and 2023, respectively.

The faster growth rate from the 2% achieved in 2021 will keep “loan performance stable despite rising cost of living and higher interest rates,” he said.

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

Inflation in the country will also rise in line with global trends, reaching around 5% this year. However, Jordan will be less susceptible to inflationary pressures due to its high food reserves, long-term energy price agreements and reduced currency volatility due to its peg to the dollar.

The kingdom’s economy is recovering from the slowdown caused by the pandemic, helped by the fiscal and monetary reforms it adopted under the International Monetary Fund’s financing program.

Despite the difficult circumstances, sound policies have contributed to macroeconomic stability and the IMF expects the country’s gross domestic product to grow by around 2.4% in 2022, which is lower than an earlier estimate of 2. .7%, the fund said in May.

GDP will exceed 3% in the medium term for the country, which has limited natural resources and imports more than 90% of its energy needs. Jordan also hosts more than three million refugees from Syria, Iraq and Palestine.

Jordan’s commitment to economic reforms, fully reopening the economy, increasing export demand and rebounding tourism will support economic growth

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

Jordan relies heavily on foreign aid and grants to fund its fiscal and current needs, but it is trying to reduce state grants and reduce its large public debt as part of its economic reform.

“A stronger rebound in tourism receipts and robust exports” will help narrow Jordan’s current account deficit to 6.5% of GDP in 2022, from 8.8% last year, the IMF told Reuters. ‘era.

Moody’s said on Monday that problem lending “will nonetheless remain elevated” despite the economy opening up and business conditions improving. Doubtful loans are expected to amount to around 5% of the banking system’s total gross lending, but are covered by large loan loss reserves built up by the country’s lenders.

“Additional supply requirements will be small as pandemic risks abate,” Moody’s said.

“At the same time, the anticipated interest rate hikes will widen banks’ net interest margins, their main source of income, which will boost bank profitability.”

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

However, high levels of public debt and social challenges, including “structural unemployment above 20%, remain major risks…as does the region’s volatile geopolitics,” Moody’s said.

Updated: July 26, 2022, 4:30 a.m.

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