The Amman Stock Exchange (ASE)Amman Stock Exchange (ASE) lost many points in September as if mirroring the global financial markets. Some believe that the hiatus and collapse of several firms in Jordan that purportedly traded in global stock exchanges had to do with the global credit crunch. This has been taken by many as evidence of a strong link between the financial market in Jordan and the world markets, which led to pessimism about markets in the Kingdom.

Such determination is not totally precise. Before making any value judgements, one must take the following into consideration: Jordan is a small economy, much smaller than the budgets of some of the companies we mentioned, and hence it is neither as complex as the US economy nor is it similar to it.

Neither is Jordan a competitor to the United States. Therefore a slowdown in the US does not mean a ripple effect here or a similar deceleration. In fact the Jordanian economy witnessed great jumps in growth and unemployment in the last quarter. The GDP grew by 6.7 per cent in real terms compared to 5.4 per cent in the previous quarter and unemployment decreased from 13.1 per cent to 12.1 per cent.

The Central Bank of JordanCentral Bank of Jordan employs a highly conservative policy, which actually stagnated growth in the real estate market (only 20 to 12.1 per cent of loanable deposits are allowed to go into real estate credit). However, this conservatism may have inadvertently sheltered Jordan from a crisis similar to that of the US. In addition, since Jordan does not have a market for derivatives (financial instruments that are used to decrease the riskiness of investment), it is not subject to similar credit risks; in other words, the lack of sophistication of credit in Jordan has been a blessing in disguise.

So why did the ASEASE seem to dive with the rest of the world? The answer is that 45 per cent of investment in the ASEASE is generated by non-Jordanians, mainly from the Gulf countries. Their portfolios are distributed geographically and are heavily invested in the developed markets, so when they hurt somewhere they balance their investment elsewhere. Furthermore, the sovereign funds of the Gulf economies, which benefited from the oil price rise in the neighbourhood of $1,600 billion in surplus revenues, placed over $400 billion in the US and EU markets in investment. Such flows (together with other sovereign funds from China, Russia and India) have helped buoy the US economy when growth was falling and the market needed funding. As their US assets fall, their investment in small markets will of course be affected. Still, the sovereign funds have little investment in the ASEASE. So, only private non-Jordanian investors may have taken flight. Again strict controls by the Stock Exchange Commission and limited daily fluctuation margins derogated the negative effect of herd-like capital flights on the Jordanian market.

In addition, the panic hit Jordanians because of the collapse of several brokerage firms that claimed to deal strictly with foreign stock exchanges and global markets. People forget, however, that these firms have nothing to do with the local market; albeit, they did leak cash out of the domestic economy and thus decreased liquidity and once investors lost there they were bound to spread the scare into the Jordanian stock market. Hence what happened in Jordan had nothing to do with the credit crunch in the US.

In fact, the outlook in Jordan and on the ASEASE should be positive. The fall in oil prices and other commodities due to falling world demand as the global economy decelerates should enable producers and consumers to purchase their imports cheaply. This explains why unemployment decreased and growth accelerated during the last quarter as oil prices dropped to less than $90 per tonne. Furthermore, the rise in the exchange rate of the US dollar, which took place in the last three months, made necessary imports cheaper, and as companies started to feel less burdened by the costs of imports they increased output and employment.

The exchange rate of the US dollar may continue to rise as the euro and yen fall due to the spread of contagion, and the crisis in the US is further somewhat curtailed by the $700 billion bailout. The EU and Japan may become more exposed if their governments underestimate the level of the crisis and the US dollar will bounce back as a result of the growing relative confidence in the US economy. In addition, a new administration in the White House will most likely bring back some optimism to the US economy. All these are indicators that the US dollar will rise against major world currency, and with it the Jordanian dinar - no thanks to anything we have done.

The combination of falling oil prices and rising dollar will increase the value of Jordanian exports; reduce the cost of imports (the trade deficit is currently at 53 per cent of the GDP), which will make intermediate goods and inputs cheaper for local producers and enable industry to regain some of its competitiveness; ease inflationary pressures; reduce outstanding public debt; lower the balance of payments deficit; and enhance local spending capacity. Furthermore, Gulf sovereign funds will have to retrench itself in smaller, more stable neighbouring markets such as Jordan, which will increase the indirect and direct foreign investment inflows. Based on this, the ASEASE should do better and Jordan should benefit from the global credit crunch. So why officials don't come out and say this, or something similar to it to assure people, is beyond me!

By Yusuf Mansur

© Jordan Times 2008

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