The Jordanian Dinar is currently pegged to the Unites States Dollar at a rate of 0.708-0.710 per $ since 1995.
There have been several instances where the Jordanian dinar adjusted its peg to the US Dollar and many traders, business owners have been hit hard and want to avoid a repeat of such instances.
During every economic downturn, the same questions arise: will the JOD/USD peg be maintained? Or will it be a free fall free-for-fall collapse?
The ongoing devaluation of the Lebanese Lira and Syrian Pound, and the economic impact of COVID are raising many questions among the finance/business/investor community in Jordan. Business owners are weary of a fragile system and a change in monetary as well as fiscal policy could further destabilise the economic system with ramifications into the social and political order.
So what should the average investor watch out for?
3 important factors to watch out for:
-Central Bank Foreign Reserves: similar to 1988-89 episode where gold reserves dropped sharply just before devaluation of the dinar. CBJ currently holds 2.6 billion JODs worth of gold (approx. 54 tons or 2 million ounces) as of March 2021. Some officials usually throw in an arbitrary standard number to justify the reserves in maintaining the peg: that a country’s reserves should cover at least 3 months worth of imports. Jordan currently covers for 8-9 months.
-Foreign Debt Service: similar to Lebanon in 2019. Is the government sticking to its payments (mainly external)? There is no question that the sole goal of the current minister of finance is to service the debts of the government and never miss an interest payment especially to foreign investors to its Eurobonds (but delaying a payment to a local contractor is fine).
Source: Ministry of Finance Monthly Report
-Current account deficit and foreign currency: Jordan has been undergoing a goods deficit in trade (-5.1bn in 2020). Yet demand for the currency is balanced out with foreign remittances from Jordanians working abroad as well as tourists coming to the country and exchanging their currencies. The COVID pandemic has hit these two sectors hard and have seen a sharp drop in tourism in the country in 2020 (-70% drop). The tourism sector will be discussed and analysed in the next newsletter.
All three factors are interconnected and they are the main indexes to watch that could give an investor a signal of things to come. However it seems from the outset that JOD/USD peg policy is here to stay and the markets seem relatively stable.
In Conclusion:
The IMF itself expressed that maintaining the current peg policy is an important pillar for Jordan’s economic stability.1
Yet fears still reside in the hearts of many investors weary of a sudden public policy change, rumours of public officials transferring their assets abroad, markets not fully recovering (locally and abroad) from COVID’s impact, or some even worry about a crash in the US Dollar (and prefer a peg to a bag of other currencies including the main trading partners such as China, Japan and Europe or Bitcoin) etc.
The government needs a plan to appease such fears and gain investor’s trust.
https://www.imf.org/-/media/Files/Publications/CR/2020/English/1JOREA2020001.ashx