ARAB BANK PLC

1
ARAB BANK PLC

• THE HASHMITE KINGDOM OF JORDAN
• SUMMARY ON
• SURROUNDING ENVIRONMENT
• June 2002

2
POLITICAL SCENE
3
Global Scene

• Political instability manifested by regional
  turmoil following US military actions in
  Afghanistan, chaos in Palestine possibility of
  military strike against Iraq.
• The predominance of a state of unclear vision
  fickle expectations.
• Regional instability risks are mitigated by
  friendly relations with Arab neighbors and
  support from the USA.
• Jordan-US FT Agreement signifies a message of
  support appreciation for Jordan.

4
Global Scene (Contd)

• Having a clear moderate stand on the crisis
  (Sept.11th), Jordan has no political bills to
  pay.
• The warmth of Jordan-US relations started to wane
  due to differences over regional issues (Iraq
  Israeli-Palestinian conflict).
• Jordan relations with Israel have remained cool.

5
Domestic Scene

• Tense atmosphere public dissatisfaction with
  regional events.
• Internal stability is reinforced by the Kings
  popularity and the improving relations with Arab
  states.
• The king, acting as a CEO, is keenly pushing
  towards political economic reform.
• Despite regional political turbulence, Jordan
  will pursue its economic agenda.
• Parliamentary elections planned late 2002.

6
ECONOMIC ENVIRONMENT
7
Economic Highlights

• Jordan has been pursuing IMF recommended
  comprehensive economic re-adjustment policies
  since early 1990s.
• Policies have been significantly successful in
  stabilizing the economy and maintaining monetary
  stability.
• However, structural reforms, earnestly
  under-taken since late 1990s to cover all aspects
  of the economy, are still emphasized to set the
  stage for sustainable future growth.

8
Economic Performance

• During the 1990s, the economy faced several
  difficulties due to trade deregulation,
  liberal-ization political instability.
• Hence, economic growth had been modest over the
  period 1996/2000 (3 on average).
• This growth had been below population growth rate
  causing a deterioration in per capita income.
• However, the continuous reform policies laid the
  bases for future growth.

9
Economic Performance (Contd)

• In year 2000, economic growth stood at 4 despite
  difficult conditions.
• All other indicators were satisfactory
• Low inflation (0.7).
• Stable JD exchange rate.
• Comfortable level of net foreign reserves (US
  2.7 billion covering 8 months of imports).
• Improvement in external debt / GDP ratio (95 in
  1996 to 80 in 2000).

10
Economic Performance (Contd)

• Strong performance in 2001 despite unfavorable
  regional intl conditions
• 4.2 real GDP growth (4.5 nominal).
• Growth sectors (mining, telecommuni-cations,
  money, banking insurance, construction
  industry).
• Slow growth (petroleum products, electricity
  potash).
• Retreat sectors (tourism, air transport,
  shipping, investment).

11
Economic Performance (Contd)

• Year 2001 performance (Contd)
• Inflation 1.8 (0.7 in 2000) due to price
  increases.
• JD stability has been maintained.
• Unemployment 14.9.
• Net foreign currency reserves of US 2.6 billion
  (7-month export coverage).
• External debt of US 6.7 billion (75.8 of GDP
  vs. 80 in 2000).
• Industrial production rose by 5.4.

12
Economic Performance (Contd)

• Year 2001 performance (Contd)
• Narrowing down of trade deficit
• Exports (JD 1.62 billion) rose by 21.
• Imports (JD 3.41 billion) rose by 5.
• Deficit decreased by 6.2 (28.5 of GDP vs. 31.7
  in 2000).
• Current account after grants at the same level
  (JD 40 million) representing 0.6 of GDP vs. 0.7
  in 2000.

13
Fiscal Performance

• Fiscal deficit is still high (6.9 of GDP before
  grants 3.0 after grants) due to
• Drop in non-tax revenues (-21)
• Fall in custom tariffs on many goods.
• Drop in tourism activities proceeds.
• Drop in mining proceeds (JPMC).
• Tax relief extended to tourism sector.
• Rigidities on expenditure side (pension funds,
  rural development, subsidies).
• Capital expenditure at 84 of budgeted.

14
Fiscal Performance (Contd)

• External debt is still high ( 6.7 bln) entails
  heavy burden ( 720 mm. in debt service).
• Paris Clubs debts on Jordan are expected to be
  rescheduled with the help of the IMF.
• Securitization of internal debt and more
  dependence on public debt instruments to cover
  budget deficit.
• New Public Debt Law allowing for domestic
  borrowing up to 40 of GDP.

15
Monetary Policy

• Successful in containing inflation maintain-ing
  monetary stability.
• 7 cuts on domestic interest rates vs. 11 cuts on
  the US Dollar interest rate.
• 2 drop in 3-month CDs following the decline in
  US Treasury Bills.
• Reserve ratio slipped to 8.
• Recent loosening shows restored confidence in the
  economy, and is justified by the level of net
  foreign reserves (US 2.6 billion).

16
Monetary Policy (Contd)

• M.S. increased by 5.8 (10.2 in 2000) due to the
  absence of UN compensations effect.
• Credit to the private sector recovered strongly
  (increasing at 11) in response to low interest
  rates (JD 402.4 million).

17
Economy During 2002

• Outlook for the economy since Sept., 2001 has
  been dampened by intl and regional developments
  (USA military reaction to Sept.11th events,
  turmoil in Palestine, possibility of a military
  strike on Iraq).
• Sectors most affected (tourism, airline
  activities, shipping, capital investment inflow).
• SPs has revised Jordans outlook from Positive
  to Stable.

18
Economy During 2002 (Contd)

• Real GDP growth anticipated around 4.0.
• Motors of growth
• Investment projects (Disi water conveyance,
  Jordan-Egypt gas pipeline, Jordan-Iraq oil
  pipeline).
• Foreign investment recovery.
• New socioeconomic development plan.
• Inflation is expected within 3.5.
• Fiscal deficit anticipated at 6.5 of GDP (7 in
  year 2001).

19
Economy During 2002 (Contd)

• Economic policies
• Sustain economic growth in the face of difficult
  regional situation.
• Maintain price stability.
• Increase foreign exchange reserves by a moderate
  amount.
• Achieve a further reduction in net public debt.

20
Economic Re-adjustment

• Long process of reform since 1989.
• Review shows strong macro rather than
  microeconomic indicators, reflecting success of
  stabilization policies need to further address
  structural reform policies.
• Since 2000, the King has been successfully
  pushing forward structural re-adjustment policies
  (privatization, world integration, trade
  liberalization, financial deregulation).

21
Econ. Re-adjustment (Contd)

• Performance exceeding targets in many areas

22
Econ. Re-adjustment (Contd)

• The current economic re-adjustment (1999/02)
  expired in late April 2002.
• The process of re-adjustment to be extended to an
  additional period of 3 years in the after math of
  the government subsidy cuts on some basic
  commodities (bread, kerosene, fuel oil, diesel,
  fodder, barely).

23
Banking Environment

• Long process of reform (since early 1990s).
• More open competitive environment.
• Demand for credit financing started to pick up
  after a long period of retraction.
• Margins are getting slimmer due to fierce market
  competition.
• Surplus liquidity without satisfactory
  profitable channels of investment.
• Income from public debt instruments CDs
  contributes a larger share of banks profits.

24
Banking Environment (Contd)

• Banks financial results for 2001 showed a
  healthy performance.
• Early 2002, three small banks experienced
  difficulties due to a fraud case involving
  falsified contracts used as collateral against
  loans.
• Loans still outstanding around US 100 mm.
• The crisis has been dealt with maximum care and
  is about to be contained.

25
Financial Market (ASE)

• Despite regional intl instability, year 2001
  proved to be one of ASEs best.
• Trading volume doubled reaching JD 669 million,
  the highest level since 1994.
• Stock Price Index increased by 30.
• The banking sector was the driver of growth
  (30), followed by industry (22), insurance
  (11) services (10).
• Market capitalization surged by 28 to reach US
  6.35 billion.

26
Financial Market / ASE (Contd)

• Hopes of a better future performance with the
  increase in export potentials, evidenced by
• Jordan-US Free Trade Agreement.
• Partnership agreement with the E.U.
• Spread of Qualifying Industrial Zones.
• Launching of Aqaba Special Economic Zone.
• Continued privatization.

27
Economic Prospects

• SPs maintained Jordans rating at BB-, with a
  stable outlook rather than positive.
• The adverse regional politics will continue to
  impair tourism investments.
• Yet, with the reform process expedited the
  expected benefits of the new growth engines
  (ASEZ, privatization, Jordan-US FTA QIZ),
  economic prospects seem more favorable.

28
Economic Prospects (Contd)

• However, maintaining regional political stability
  remains crucial for Jordan to reap the benefits
  of its reform agenda domestic strategy to boost
  economic growth.

29
LEGAL REGULATORYENVIRONMENT
30
General Reforms

• Comprehensive reform overhaul of the legal
  climate to adapt to more market deregulation,
  openness globalization.
• Tariff cuts on many industrial inputs.
• Custom ceiling reduced to 30.
• General Sales Tax replaced by VAT.
• Property Rights Competition Law.
• Investment Promotion Law equating foreign with
  Jordanian investors.
• New Public Debt Law.

31
Banking Reforms

• Obligatory Reserve Ratio down to 8.
• Banks to publish their Prime Lending Rate.
• Deregulating lending rates commissions.
• New Banking Law (enhance indirect control).
• Deposit Insurance Law.
• Un-cleared checks (new unit).
• National Payment System to be launched.
• New loan provisioning credit concentration
  instructions.
• Efforts to broaden E-banking services.

32
Global Integration

• Partnership agreement with the E.U.
• Joined the WTO.
• Free Trade Area with the USA (Jordan is the
  fourth country to sign such an agreement).
• QIZ status for selected industrial estates.
• Tariff ceiling reduced to 30 (25 by 2005).
• Bilateral treaties with Arab foreign countries.
• Joined Arab Free Trade Area (Jan., 1998).

33
Privatization Program

• Commenced in 1996 and started to aggressively
  roll in August 1998.
• Government shares in 44 companies have been fully
  or partially privatized.
• Sale of 49 of government stake in Jordan Cement
  Factories Co. to the French Lavarge. All other
  government shares sold to S.S.C.
• 40 of government shares in JTC sold to France
  Telecom Arab Bank 8 to S.S.C.
• Management of Amman water waste water networks
  awarded to the French LEMA.

34
Privatization Program (Contd)

• Main Spa leased to the French ACCOR.
• Bus routes in Amman partially handed over to
  three private companies.
• Selling of R.J.s (national carrier) non-core
  businesses (Duty Free Shop, Flight Training
  Center, Catering Center, Alia Hotel Engine
  Maintenance).
• National Electric Power Co., sliced into a
  generating co. (CEGCO) a distribution co.
  (EDCO) as a prerequisite for privatization.

35
Privatization Program (Contd)

• The Dutch Nepostel was awarded a 4-year contract
  to prepare postal services for privat-ization
  (RFP to be completed before 2003).
• JPMC slated for privatization in 2002.
• Government to sell 26 of its shares in APC (RFP
  to be completed by 9/2002).
• R.J.s Air Academy to be restructured slated
  for privatization.
• Selected electricity water projects to be
  privatized on B.O.T. or B.O.O. bases.

36
Privatization Program (Contd)

• A consortium has been selected to build operate
  the first independent power plant.
• New Privatization Law to regulate the use of
  privatization proceeds.

37
Other Reforms

• Further reforms are underway to address the
  following issues
• Reduction equality of treatment in tax burden
  (new Income Tax Law).
• Law on mortgage of moveable property.
• Speeding up legal procedures.
• Review of Evidence Law.
• Financial Leasing Law.
• Postal Services Law.