2012: A Critical Year for the Economy

1. 2012: A Critical Year for the Economy December 2011

2. Economic pressure barometer As we bid farewell to 2011 and welcome 2012, we would like to present our economic hot spots for 2012. These hot issues will be presented on our economic pressure barometer which ranges from the most positive topic to the least favorable one. ECONOMIC PRESSURE

3. 2012 LOCAL ECONOMIC THEMES Foreign grants to support the budget, GCC development fund at the right time

4. Foreign grants still anchoring the budget • Foreign grants witnessed an unprecedented surge in 2011, especially with the strong Saudi support. • This extraordinary level of grants helped finance the extra fuel and food subsidies launched by the government in early February 2011. • In 2012, grants are expected to remain at a healthy level of JD 870 million buoyed by the Arab and US grants. • Moreover, the committed multi-year $2.5 bn development fund enacted by the GCC to boost economic growth in Jordan.

5. 2012 LOCAL ECONOMIC THEMES JOD is stable, the peg is just fine

6. The Dinar is Just Fine • On an accumulated level, the JOD has depreciated by 2% since December 2010, This depreciation is within the baseline scenario of the IMF and does not threaten the currency peg. • The pegged system is expected to remain stable throughout 2012, as long as FX Reserves cover more than 5 months of imports. Depreciation Appreciation

7. JOD Export Weighted Index confirms the stability • JOD Export weighted Index showed minor depreciation since the start of 2011, adding to the stability of the JOD. • Kindly note that the volatility of the JOD export based index is expected to remain marginal, anchoring the stability of the pegged currency regime, as the economic fundamentals for 2012 still foster maintaining the peg.

8. Monetary Aggregates Support Stability • Dollarization ratios remained stable within the first three quarters of 2011, fuelled by the latest increase in JOD benchmark interest rates. • Moreover, dollarization levels are expected to remain stable throughout 2012 buoyed by high interest rate differential. • In the meanwhile, issued currency increased by 16% in the first three quarters of 2011.

9. 2012 LOCAL ECONOMIC THEMES Satisfactory Foreign Reserves to boost the peg

10. FX Reserves under pressure, yet covering healthy amounts of imports • FX Reserves are expected to remain under pressure throughout 2012, fuelled by the spreading geopolitical unrest in the MENA region and its downside effect on tourism activity and foreign investments. • However, the IMF has forecasted in its latest regional economic outlook that FX reserves will remain above the optimal range which covers more than 5 months of imports.

11. 2012 LOCAL ECONOMIC THEMES Sluggish growth amid clueless inflation

12. GDP Growth: Positive Albeit the Slow Pace • Real GDP has posted timid growth of 2.40% in the first nine months of 2011. However, the current growth rates are in line with IMF’s estimates of 2.5% growth for 2011. • GDP is expected to grow by a modest 2.8% in 2012 given the repercussions of the global slowdown and the turbulent geopolitical situation in the middle east. • Moreover, inflation continued its increase reaching 4.6% in the first ten months of 2011 despite the government’s economic relief package that subsidized food and oil prices and stemmed their increase. Nonetheless, inflation remains within controllable ranges between 4-6% . • The IMF expected inflation to hover around 5.5% in 2012, while the Economist Intelligence Unit expect inflation to hover around 6% next year especially if the government partially lifted the subsidies.

13. 2012 LOCAL ECONOMIC THEMES Foreign currency sources under stress

14. FX Reserves under pressure, yet covering healthy amounts of imports • Tourism sector was hard hit throughout 2011 as a direct result to lower touristic flow to the whole MENA region • Tourism revenue declined by 17% in the first ten months of 2011, while it is expected to remain sluggish in 2012 as early reservations for the first months of 2012 remain subdued. • Jordan has showed less decline in the tourism activity than many countries in the MENA area, especially the countries of the Arab Spring. % Decline in the tourism sector in the 1st H of 2011

15. Workers Remittances and foreign investments face tremendous downside pressures • Workers remittances declined throughout 2011, given the geo-political situation in the Middle East. • However, reversing this downward trend in the vital workers remittances relies on the outcome of the euro zone debt crisis, whether it intensifies or gets a remedial solution, in addition to how deep its impact may be on the GCC economies, where the bulk of our workers reside. • Nonetheless, foreign direct investments continued their declining streak . • Their direction in 2012 remains somehow vague, given the continued tension in the Levant area but the prospects are slightly brighter after the announcement of the $2.5 bn development fund from the GCC.

16. 2012 LOCAL ECONOMIC THEMES Higher borrowing costs amid lower appetite for domestic debt

17. Workers Remittances and foreign investments face tremendous downside pressures • As the government intends to roll over and issue new local debt of nearly JD 5 billion, stress is increasing on the government given the unfavorable economic context. • Recently, we have also witnessed lower appetite from local banks to participate in Jordanian treasuries following S&P’s single notch downgrade of local currency debt. • However, debt service has ballooned to nearly 50% of the budget deficit of 2011.

18. 2012 LOCAL ECONOMIC THEMES Current Account deficit sends an alarming signal

19. Current Account Deficit sends a serious alarm • Widening current account deficit is posing a serious threat on Jordan’s credit ratings in addition to exacerbating pressures on the stability of the Jordanian Dinar. • Current account deficit is expected to exceed 10% of GDP in 2011 while posting nearly 8.6% of GDP in 2012. In absolute values, current account deficit is expected to reach an unprecedented level of $2.6 billion in 2012. • This deficit is aggravated by the higher oil import bill which Jordan had to pay in 2011 to substitute disruptions in Egyptian gas and to settle for higher global oil prices, coupled with significantly lower foreign inflows. • In 2012, downward oil prices coupled with unexpected recovery in foreign investments and tourism income might help in partially trimming the deficit

20. 2012 LOCAL ECONOMIC THEMES Fiscal Deficit in the Red

21. Fiscal Balance Boosted By Abnormal Grants • Fiscal balance trimmed its deficit in the first eleven months of 2011 reaching JD 740.5 mio vs. JD 800.9 mio in the same period of 2011 thanks to the generous Saudi grant. • However, fiscal deficit (excluding grants) continued to deteriorate by nearly 69% as it reached JD 1841.8 miovs JD 1089.5 mio in the same period of 2010. • The government expected deficit in 2011 to slightly deviate from the preliminary estimates of JD 1160 mio to JD 1265 mio representing nearly 6.2% of estimated GDP in 2011.

22. Rollercoaster of the Fiscal Balance • Earlier on December, the government referred to the Lower House the general budget draft law and the draft law covering the budgets of independent public agencies for the fiscal year 2012. • The 2012 budget estimated the deficit including grants to hover around JD1027 mio or 4.6% of estimated GDP for 2012. • However, the budget deficit excluding grants is expected to trim to JD 1.897 million compared to JD 2.400 million. • The government estimated its total revenues in 2012 to reach JD5.81 bn, of which JD 870 mio in the form of grants. In the meanwhile, total expenses are expected to be capped at JD 6.837 bn. • It is quite obvious that the major assumptions on which the budget was prepared tend to be optimistic. • However, if the assumptions fail to realize and the government was forced to issue subsequent supplements, the fiscal situation will significantly seteriorate posing a serious threat on the economy.

23. 2012 LOCAL ECONOMIC THEMES Public debt reaches 65% of GDP and nears JD15 bn

24. Yet, public debt on the rise nearing psychological barriers • Foreign grants reached an unprecedented level this year, with the Saudi grant that topped $1.4 billion alongside with other grants from USA, Germany and France. • Yet, public debt edged rapidly higher , crossing the JD 13 bn mark, while constituting 64% of estimated GDP in 2011. • Public debt is expected to continue edging up in 2012 given the increased dependence of the government on local banks to bridge its financing gap. • Debt service is on the rise as well, it is expected to reach JD 545 mio in 2012 constituting nearly 50% of the expected deficit.

25. HAPPY NEW YEAR Thank You,,,

26. Disclaimer The materials of this report may contain inaccuracies and typographical errors. Cairo Amman Bank does not warrant the accuracy or completeness of the materials or the reliability of any advice, opinion, statement or other information displayed or distributed through this report. You acknowledge that any reliance on any such opinion, advice, statement, memorandum, or information shall be at your sole risk. Cairo Amman Bank reserves the right, in its sole discretion, to correct any error or omission in any portion of the report without notice. Cairo Amman Bank may make any other changes to the report, its materials described in the report at any time without notice. The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and are provided "As Is" without any representation or warranty and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy any securities or other investment and\or to be relied on for any act whatsoever. Information and opinions contained in the report are published for the assistance of recipients "As Is", but are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient; they are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. Cairo Amman Bank does not accept any liability whatsoever for any direct, indirect, or consequential loss arising from any use of material contained in this report. All estimates, opinions, analysis and/or any content for whatsoever nature included in this report constitute Cairo Amman Bank’s sole judgments and opinions without any liability and/or representation as of the date of this report and it should not be relied upon as such. Cairo Amman Bank reserves the right to change any part of this report or this legal Disclaimer at any time without notice. Any changes to this legal Disclaimer shall take effect immediately. Notwithstanding the above, Cairo Amman Bank shall not be obliged to keep this report up to date. The Recipient agree to defend, indemnify and hold harmless Cairo Amman Bank and its subsidiaries & affiliate companies and their respective officers, directors, employees, agents and representatives from any and all claims arising directly or indirectly out of and in connection of the recipient activities conducted in connection with this report.