S&P Global Ratings expects loan growth in Jordan despite rising interest rates

Standard and Poor
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AMMAN Standard and Poor's (S&P) Global Ratings agency released a report on the Jordanian banking sector, carried by Al-Mamlaka TV, indicating that despite rising interest rates, loaning is expected to grow. This is driven by corporate demand for credit to finance working capital needs.اضافة اعلان

The Central Bank of Jordan will gradually phase out its program to support strategic sectors of the economy, the report found.

Bank profits riseS&P's report states that the increase in loaning will support repricing of loan portfolios at higher interest rates, which will be positive for banks' profitability. However, competition among banks for deposits may increase due to pressure on financing costs, which could negatively impact the margins of smaller banks.

The agency expects non-performing loan ratios to increase moderately as inflation rises and costs increase, leading to a decline in available income.

Despite these expectations, the S&P is confident that Jordanian banks will still be able to manage asset quality and demonstrate their flexibility.

The agency noted that banks are exposed to volatile sectors such as construction (25 percent of loans), trade (16 percent), and tourism (3 percent), all of which are highly sensitive to economic fluctuations.

Approximately 10 percent of credit is allocated to SMEs, which the agency considers more vulnerable to decline.

The creditworthiness of Jordanian banks is supported by their strong capitalization compared to their peers in the region, which should benefit from the positive impact of the high-interest rate environment on profitability.

Weaker-than-expected economic performanceThe agency warned that weaker-than-expected economic performance and more aggressive monetary policy tightening — which would serve to protect the Central Bank of Jordan’s foreign exchange reserves — could pose a risk to their expectations.

Sovereign exposure also poses a risk to Jordanian banks, with sovereign debt exposure accounting for 22 percent of total assets at the end of 2022, rising to 24.3 percent when considering credit facilities secured by the government for government-related companies such as the Jordan National Electric Power Company.

However, the agency expects transfers to continue to support deposits at Jordanian banks in 2023, supported by strong economic expectations for the Gulf Cooperation Council (GCC) countries compared to other regions.

But, the agency does not expect a significant increase in deposit growth in the near term when inflationary pressures and tight financing conditions affect the population's ability to save.

Sustaining Jordanian dinar link to US dollarOne-quarter of bank deposits in Jordan are denominated in US dollars, and the agency confirmed that it is unlikely that the link between the Jordanian dinar and the dollar will be broken due to Jordan's large foreign exchange reserves and external support.

The report predicts that the individual share of GDP in Jordan will grow moderately in 2023 after several years of decline despite a global economic slowdown.

 Economic expansion in Jordan is supported by strong external demand for fertilizer products and incoming tourism flows, especially from neighboring GCC countries.

Structural reforms and broader efforts to attract investment are likely to support medium-term growth.

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