Resource-barren Jordan relies on foreign aid and remittances to prop up its economy. Courtesy: Four Seasons Hotel Amman
Resource-barren Jordan relies on foreign aid and remittances to prop up its economy. Courtesy: Four Seasons Hotel Amman

Economy

Jordan's income tax law shows commitment to fiscal reforms, Fitch says

Fiscal deficit to narrow starting in 2019, according to its report

Deena Kamel
Deena Kamel

November 22, 2018

Jordan's new International Monetary Fund-backed tax law will be "positive" for its efforts to contain fiscal deficits and signals to investors the government's commitment to forge ahead with economic reforms, according to Fitch Solutions.

The debt-laden country's fiscal deficit is expected to narrow from 2019 onwards as the government slashes spending and increases tax revenues, Fitch Solutions, a unit of Fitch Ratings, said in a report on Thursday.

"Parliament’s approval of the government’s amended income tax law will be positive for Jordan’s fiscal trajectory," the report said. "Jordan’s income tax base is exceptionally low, covering just 4 per cent of the population, suggesting the new tax could potentially generate substantially greater windfalls over the medium-to-long term."

Jordan's parliament approved the income tax law on Sunday after introducing some changes to limit its impact on middle-class earners as it pushes ahead with fiscal reforms needed to lower public debt and get the economy back on track. Earlier this year, the government increased a general sales tax and removed a subsidy on bread as part of a three-year IMF-backed plan to cut a public debt burden of $37 billion or the equivalent to 95 per cent of gross domestic product.

Jordan's senate still has to approve the income tax law to become effective.

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The income tax is expected to raise only around 280 million dinars (Dh1.45 billion), or less than one per cent of GDP in 2019, and will therefore have a "limited" immediate effect on fiscal revenues, Fitch said. However, it signals the government's seriousness about the IMF programme, which will help reduce borrowing costs.

Fitch forecasts the fiscal deficit will narrow to 2.5 per cent of GDP in 2019 from 2.7 per cent of GDP this year but cautioned that progress will be "gradual" in light of protests against fiscal consolidation.

Jordan's persistent but narrowing deficit will be covered by debt issuance, mainly on capital markets abroad, where borrowing costs are relatively cheaper, it said.

Fitch forecasts the public debt to GDP ratio will reach 83.8 per cent in 2022, an improvement on the 95.8 per cent in 2017, but still remains above the 77 per cent government target for 2022.

The country's economic growth has been hurt by regional conflict weighing on investor sentiment since it hosts over a million Syrian and Iraqi refugees.

Saudi Arabia, the UAE and Kuwait pledged $2.5bn in aid to Jordan over the next five years to help it control its finances.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
 
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
 
Round 3: February 7-9, Dubai Autodrome – Dubai
 
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
 
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia