Jordan Economy

GCC region is in the midst of high tidal wave of petrodollar-driven liquidity. The trade surplus of oil exporters jumped to more than $450 billion in 2005, equivalent to more than half of total oil revenues, and GCC countries account for a major share of this surplus. Although there are talks of major investments being made in the GCC region, GCC economies have been active in investing the surplus in other upcoming Mena economies such as Egypt, Jordan, Lebanon, Syria and Palestine. The region is also actively investing in the Asian tigers such as Pakistan, India, China, and Asean countries. In the coming months, we will be covering these economies and discuss the opportunities available to the investors and we start with Jordan.
Jordan economy saw increased investment from the Arab countries as the economy saw signs of improvement. In the first half of 2006, Arab investors invested JD89mn in the country, taking benefit of the investment promotion laws. The government has been also a great supporter for the sector, providing numerous incentives such as the establishment of industrial estates, free-trade zones and granting tax breaks to industries outside the Amman-Zarqa corridor, where most industries are located. Major industrial zones outside Amman include the industrial zone at Sahab, Irbid, kerak, Ma'an and Aqaba.

The booming real estate market has attracted regional and international interest into the Kingdom with Kuwaiti investors topping the list. The US$1bn Royal Metropolis which is considered to be one of the iconic projects coming up in Jordan is developed jointly by Kuwait's Gulf Finance House of Bahrain and Kuwait Finance & Investment Company. Site preparation for the US$1bn Al-Abdali project is under way, with the local Masar United Contracting Company expected to finish the works by March. Saudi Oger Jordan is the main contractor for the phase 1 infrastructure work. Jordan Bonyan City will involve one 55-storey tower, two 45-storey towers and two 35-storey towers. It will be a mixed-use residential and commercial development including a shopping mall. Bonyan has short-listed at least four local companies for the contract to carry out shoring and piling works. Four consortia including local and UAE companies have been short-listed for the main construction contract.
Tourism has been a major driver of the real estate market in Jordan, with many projects under construction coming up shortly in the tourism sector. Jordan accounted for 7.8% of total tourist arrivals in the Middle East region in 2005, and grew by 4.7% on a year on year basis.
The Jordanian economy was hit in the aftermath of the Iraqi war in 2003 resulting in the sharp decline in exports to Iraq and the shortage in supply of cheap oil as the Kingdom mainly depended on Iraq in securing its energy needs by getting half of its oil needs free of charge and the other half at subsidized prices. The dual effect of declining foreign grants and high oil subsidies resulted in widening the Kingdom's overall budget deficit (on a commitment basis) from JD222mn in 2004 to JD476.8mn in 2005.
In order to strengthen the resilience of Jordan's economy against external shocks, and improve the competitive position of Jordan, the government has adopted the "National Reform program 2005-2009". Key reform measures within the program include the removal of subsides, rationalizing expenditures, maximizing tax revenues, and privatisation proceeds. Regarding subsidies, the official plan launched in July 2005, aims at eliminating oil subsidies by March 2007. Also, in order to lessen the reliance on external debt, the government is shifting towards internal sources of debt through issuing treasury bills and bonds. Other measures to lessen public debt included the early repayment of Brady bonds, rescheduling external debt, and writing-off part of it. The ratio of net domestic debt to GDP increased from 18.1% in 2003 to 27% in 2005, while the ratio of external debt to GDP decreased from 74.5% in 2001 to 56.1% in 2005. The ratio of total debt to GDP declined from 92.6% in 2001 to 83.1% in 2005.
The government's privatisation programme is also progressing at full speed. To date, 66 transactions have been completed including the government's shares in 55 companies under the Jordan Investment Corporation Portfolio. To date, total proceeds were around $1.3bn including a 33% sale of the Jordan Cement Factories (JCF); the granting of four bus concessions in the Greater Amman area [Public Transport Corporation (PTC)]; the granting of a concession for the Ma'in Spa; a 49% sale of the Jordan Telecommunications Corporation (JTC); a water management contract for the Greater Amman area [Water Authority of Jordan (WAJ)]; and the divestiture of the government's shares in 55 companies.
Going forward, we believe that key challenges to Jordan's economic growth remains in high oil prices, lower external grants, and increasing unemployment rate. However, on the bright side, we expect that the economy will get through these challenges and sustain the growth achieved earlier given the government's commitment to the reform program. We believe that the growth will be sustained by strong inflows from privatisation proceeds, and from foreign direct investments, which will also play a positive role in boosting the kingdom's job market.
Corporate earnings
The sharp correction in the regional capital markets can be seen in the regional corporate earnings during the first half of 2006 as many companies derived a significant part of their income from investments and activities related to the stock market. The sectors which have been hampered the most due to the declining capital markets were the investment and real estate sectors. These two sectors were the best performers during the year 2005 on the back of surging capital markets.
The regional corporate earnings of 410 companies (reported profits at the time of this report) listed exhibited lacklustre growth in the first half of 2006, reporting an increase of 10.64% compared to the corresponding period of the previous year. However, with the exception of the industrial, investment, real estate and insurance sector, all remaining five sectors have achieved profit growth in excess of 10% in 1H-2006 as compared to the same period last year.   
Banking sector achieved a profit growth of 41.80% during the first half of 2006. The regional banks interest income received boost on back of an increasing interest rate environment. The management fees, commission, and investment banking activities have recorded lower growth and it was one of the primary reasons that resulted in lower profits for the regional banks especially UAE banks.
Telecom sector achieved a growth of about 24.50% in 1H-2006, thanks to the increasing profits as a result of increase in the penetration levels especially in Saudi Arabia and Oman. This has been further complemented by the increase in Average revenue per unit (ARPU) by the regional players. In the telecom sector, Mobile Telecommunication Company (MTC) and Qatar Telecom (QTel) were the top performers with improved earnings of 54.89% and 58.12% respectively mainly attributed to their expansion outside the region. We believe that the telecom sector will continue to perform well with the help of expansions both in and out of the GCC region. Hotels & Tourism companies witnessed their profitability increase by 24.50% backed by increased regional tourism and rising interest of both government and private sector in developing the nascent tourism sector.
On the other hand, services sector recorded growth of 13.21% in profitability on back of expansion through acquisition of related companies, which increased their revenues substantially over the last year. The industrial sector reported a profit drop of 3.35% in the 1H-06 as compared to the same period previous year. The industrial giant "SABIC" (accounts for almost 60% of the regional industrial sector profits) registered an earnings drop of 11.0% during the first half of 2006, which can be attributed to the price pressures in its various lines of businesses. If we exclude SABIC from the industrial sector, the sector has witnessed a  growth of 10.65% during the 1H-06.
As mentioned earlier, the major correction witnessed in the GCC capital markets has hindered the profits of insurance sector. Insurance sector reported a decline in earnings of 49.12% in the first half of 2006, which can be attributed to the decline in investment yields as most of the insurance companies in the GCC invest about 40-50% of their total investments in equity market. On other hand, investment sector earnings are mainly triggered by the performance of regional equity markets. As a result of the declining capital markets, the investment sector reported a drop of 34.85% during the first half of 2006. Talking on the same lines, even real estate sector reported an earnings drop of 78.32% in 1H-2006, being the biggest decliner among the sector profits.
Despite the regional markets having suffered huge setbacks in the last few months, the regional economic growth and improving geopolitical conditions are pointing towards the likeliness of a comeback in the final months of 2006. This gives all the more reason to remain bullish towards the regional bourses, which have already started showing growth in the last month or so. We believe that this is likely to improve the profitability of sectors such as investment, insurance and real estate for the full year of 2006.
The tourism sector is one of the major components of the government's diversification plan. The government has undertaken lot of measures to revive the sector, starting with the establishment of the Ministry of Tourism in 2004. The freehold ownership law which allows foreigners to own real estate in designated integrated tourism-related areas on a freehold basis is another sign of the government's commitment to revive the sector.  The government is also granting subsidised land to major developers for tourism projects. Accordingly, tourism related projects such as the Wave, Blue City, Muscat Golf & Country Club, and Yitti have snowballed in Oman.
The hotel business in Oman has picked up last year after a long period of recession, which is evident from the strong financial performance of hotel operators in 2005. Hotel occupancy rates are almost 100%, and there is already a massive shortage of hotel rooms in Oman. Around 1000 hotel rooms will be needed in the upcoming 3 years to satisfy the increasing demand mainly from European tourists.
The real estate market in Oman has changed rapidly over the last year, and is expected to gain further momentum in the short to medium term. We believe that the future of the Omani real estate market looks bright underpinned by strong macroeconomic conditions, high liquidity, favourable demographics, and a proactive government which encourages private & foreign participation in the sector. 
Market activity
The gain in the month of Aug-06 was accompanied by the increased trading activity on the GCC bourses. The volume of shares traded on the exchanges increased to 12.05bn shares as compared to 11.2bn shares recorded in the previous month. The market capitalisation of the GCC stock markets too witnessed growth on the back of gains in Saudi market capitalisation which increased to $444.6bn in Aug-06 as compared to $434.4bn recorded in the previous month.
GCC stock market breadth was heavily skewed towards the advancers as 308 stocks reported monthly gains as compared to only 130 decliners. The regions biggest market, Saudi Arabia recorded the highest advance-decline ratio of 4.33 as 65 out of 81 listed stocks recorded monthly gains in August.