Jordan: Looking to bonds for lending

A government decision to access funding via the bond market could pave the way for banks to increase lending to the private sector.

Prime Minister Abdullah Ensour said in mid-January the Kingdom planned to issue a euro-denominated bond that would help bridge its budget deficit. A drop in state demand for locally sourced funds could spell good news for private enterprises, particularly small businesses that have struggled to obtain credit lines.

The move to tap the markets comes after the governor of the Central Bank, Zaid Fariz, acknowledged that a drop in international funding last year had placed the budget and domestic market under pressure. Jordan was awarded about $900m in grants last year, just half the amount it received in 2011.

The bond issue, which marks Jordan’s first venture into the market in more than two years, will allow the government to meet demands being made on its limited reserves, although the issue value has yet to be announced.

Jordan is struggling to rein in public debt, which rose 23.7% year-on-year (y-o-y) in 2012 to $23bn, according to data issued by the Ministry of Finance on February 24, equating to 75% of GDP. Around $16.49bn of the debt was held domestically at the end of 2012, marking an increase in internal debt of 30.7% on the previous year.

The rise in state borrowing, combined with an increase in perceived risk levels, has made it more difficult for the private sector to obtain financing from banks, prompting concerns that growth among businesses will remain restricted. Small and medium-size enterprises, which account for 99% of all businesses in Jordan, have been hit particularly hard, obtaining just 11% of bank lending. However, the government’s plans to reduce spending, which include cutting fuel subsidies, could prompt banks to consider alternative ways of generating loan revenue.

Any increase in private sector lending would be welcomed by the business community, according to Ayman Hatahit, president of the Jordan Chamber of Industry (JCI). Hatahit told the Petra news agency on February 9 that financing had been identified as one of the main challenges facing Jordan’s industrial sector. This issue, along with other problems, such as weak marketing and high production costs, need to be addressed if industry was to achieve growth and support the national economy, he said.

The difficulties enterprises are facing in accessing loans weighed on Jordan’s ranking in the World Bank’s most recent report comparing the ease of doing business in economies across the globe. While Jordan was placed 106th out of 185 countries overall, the country ranked 167th for ease with which private firms could obtain credit, significantly lower than its positions in other categories. The country came 35th for ease of paying taxes and 38th for business electricity connectivity.

Businesses have voiced concerns that accessing credit could continue to be problematic until confidence is restored in the Kingdom’s broader economy.

Yet, while Jordan’s banks are adopting a cautious approach to lending, and despite the fact that some financial institutions have been exposed to high levels of state debt, the sector continues to command widespread confidence. International organisations have noted the domestic lenders’ strong balance sheets, with the IMF last year describing Jordan’s banks as well capitalised when it agreed to provide $2bn in standby support to Amman.

Jordan’s high level of public debt, however, has prompted some analysts, including Fitch Ratings, to question how much support the government could give to the sector should the need arise. “While Fitch believes that Jordan has a strong propensity to support the banks, given its supportive stance towards the domestic banking system, potential support is limited by constraints on its ability to do so,” the agency said in a statement issued on February 15.

As one of the banking sector’s leading customers, the government is also restricted in what it can do to encourage financial institutions to boost their lending to the private sector. An increase in funds from international grants and agencies may lead to a rise in private sector borrowing, but it may still take time for any change in lending patterns to produce ripple effects across the business community.

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