US embassy cable - 04AMMAN7153

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 007153 
 
SIPDIS 
 
E.O. 12958: DECL: 08/19/2014 
TAGS: EFIN, JO, IZ 
SUBJECT: JORDAN'S FINANCE MINISTER ON DEBT POLICY, IRAQI 
ASSETS 
 
REF: AMMAN 04410 
 
Classified By: CDA: David HALE, Reasons 1.5 (b) and (d). 
 
1.  (C)  SUMMARY:  Jordan's Finance Minister reviewed how he 
hopes to reduce Jordan's debt burden, complying with a 
Jordanian debt management law setting a debt/GDP ratio of 60% 
by end-2006.  He explored with a visiting Treasury delegation 
the measures he has taken and the steps he hopes to take to 
ease the debt burden.  He also previewed a 100 million JD 
bond issuance that was held the next day, with bonds with a 
seven-year maturity, a first for Jordan. When asked about the 
final settlement of Jordanian commercial claims against 
frozen Iraqi assets, he expressed frustration that the 
settlement process was taking so long but hoped that it would 
be completed by mid-September.  END SUMMARY. 
 
--------------------------- 
Background on Jordan's Debt 
--------------------------- 
 
2.  (C)  On August 16, Finance Minister Mohammad Abu Hammour 
met with a Treasury delegation to discuss a MEPI-funded 
proposal to house a Treasury debt specialist at the Finance 
Ministry to advise the GOJ on improving its debt management. 
In the course of the meeting, Abu Hammour provided an 
overview of his assessment of Jordan's debt situation.  He 
said that during the previous two weeks, both the upper and 
lower houses of Parliament had met to discuss the debt 
situation in the country.  The key topics of both sessions 
were how to cut both the level of the debt itself and the 
debt service. 
 
3.  (C)  Providing some history, Abu Hammour explained that 
Jordan had arranged a number of concessional loans in the 
1970's which were to come due in the late 1980's. 
Unfortunately for Jordan, the debt crises of the mid 1980's 
in other countries caused some of Jordan's lenders to change 
their terms.  As a result, Jordan was forced to re-pay the 
debt it accrued in the first half of the 1980's in the last 
half of the decade, precipitating the 1989 financial crisis. 
Under a series of agreements with the Paris Club, Jordan 
received $5 billion in new loans as well as a $700 million 
write-off of debt owed to the U.S. and another $72 million 
owed the U.K.  Jordan then pursued debt buy-backs and debt 
swaps to bring down the debt level further. 
 
--------------- 
Public Debt Law 
--------------- 
 
4.  (C)  Abu Hammour explained his desire to meet the targets 
set by Jordan's debt management law.  The law, which does not 
set a target date, stipulates that Jordan's domestic debt 
must not exceed 60% of GDP nor should its foreign debt exceed 
60% of GDP.  In addition, Jordan's overall debt/GDP ratio 
should not exceed 80%.  According to Abu Hammour, the 
government has set end-2006 as a deadline for these targets. 
In achieving the targets, Abu Hammour plans to cut both 
Jordan's debt stock and budget deficits as well as use the 
proceeds from government privatizations to buy back debt.  He 
also hopes that Jordan's current strong growth rates will 
help improve the ratio. 
 
5.  (C)  Abu Hammour repeated what post has earlier reported, 
that in his recent meetings with the Paris Club, he had 
requested that Jordan be allowed to increase its debt swap 
allowance from 30% to 50% of debt.  He said he had also 
raised the idea with both the U.S. and Britain.  Abu Hammour 
prefers to shift Jordan's borrowing more to domestic sources; 
noting that Jordan's debt burden had increased by $1 billion 
solely due to the appreciation of the euro.  Although 
exporters benefit from a stronger euro, euro debtors do not. 
Abu Hammour added that Jordan's foreign official reserves 
stood at $4.7 billion. The Ministry could consider buying $1 
billion in euros to hedge against a further deterioration in 
the dollar and the dollar/JD peg. 
 
---------------------- 
Hope for a Bond Market 
---------------------- 
 
 
6.  (C)  In that connection, Abu Hammour previewed a next-day 
announcement of a JD 100 million bond issuance for seven 
years, a longer term than earlier issuances.  The auction was 
to be held August 18.  Abu Hammour said he had spoken to all 
three of the banks involved in the auction and to the 
government's Social Security Corporation to ensure the 
issuance would be completely subscribed.  The rate for the 
issuance would be 7-7.25%.  According to Abu Hammour, 
previous government debt issuances had been for much shorter 
periods.  In addition, Jordanians tend to hold the bonds to 
maturity, preventing development of a secondary bond market. 
(NOTE:  A Finance Ministry official later reported that the 
auction was a great success.  Instead of the JD 100 million 
sought, demand was so high that the government sold JD 177 
million in bonds, at a rate of "around 7%."  END NOTE.) 
 
--------------------- 
The Shape of the Debt 
--------------------- 
 
7.  (U)  Abu Hammour provided a copy of the Ministry's new 
quarterly bulletin on public debt and reviewed the structure 
of Jordan's debt.  He noted that 44% of Jordan's debt was at 
a floating rate with 56% at a fixed rate.  29.4% of the debt 
was denominated in US dollars, 21.6% in Japanese yen, 20.3% 
in euros, 10.5% in Kuwaiti dinars, 8.4% in British pounds, 
6.0% in SDRs and 3.8% in other currencies.  In terms of 
maturities, 46.5% has maturities of more than 20 years; 43.3% 
maturities of 15 to 20 years; 9.9% five to fifteen years; and 
only 0.3% has maturities of one to five years.  Finally, the 
debt with fixed interest rates includes 10.2% at more than 
6%; 22.8% at 4-6%; 29.6% at 2-4%; and 37.5% at 0-2%. 
 
----------------- 
Lowering the Debt 
----------------- 
 
8.  (C)  Abu Hammour reviewed the four steps Jordan has taken 
in recent years to reduce its debt burden.  These are (1) a 
buy-back of Brady bonds last year; (2)  the debt swap with 
the British for 74 million pounds; (3) a 35 million euro debt 
swap with Germany; and (4) a $12 million debt swap with 
Spain.  These moves helped cut Jordan's debt stock by $620 
million, yielding a savings of $25 million per year over the 
next 20 years in reduced debt service payments. 
 
9.  (C)  Abu Hammour said he has had discussions with the 
World Bank on partial risk guarantees.  Jordan wants to 
attract strategic partners for state-owned companies the 
government is privatizing wholly or in part.  In these cases, 
companies often want government guarantees but Jordanian law 
allows no such guarantees which would also count as 
additional debt.  Abu Hammour hopes partial risk guarantees 
may be an alternative. 
 
10.  (C)  Abu Hammour has also invited Moody's and Standard 
and Poor's to upgrade Jordan's credit rating and reviewed how 
he made his case to the two credit rating agencies. He told 
them that, for the first time, Jordan's domestic revenue 
covers the government's current expenditures as well as 20% 
of capital expenditures.  Jordan continues to cut spending 
and the government currently enjoys higher revenues and lower 
spending than were originally budgeted. 
 
11.  (C)  In other steps, government ministries have cut 
their telephone, water and electricity bills by an average of 
20%, with the Finance Ministry itself leading the way by 
cutting those costs by 30%.  Thanks to these and other 
measures, the budget deficit, excluding grants, for the first 
seven months of 2004 was half what it was during the same 
period in 2003.  When grants are included, the budget shifted 
to a JD 50 million surplus compared with the same period last 
year, even though grants were lower by JD 250 million. 
 
12.  (C)  Thanks in part to these steps, both of the credit 
rating agencies told Abu Hammour they will upgrade Jordan's 
rating.  Abu Hammour welcomed the news even though he said 
Jordan currently has no intention to borrow overseas, due in 
part to excess liquidity in Jordan.  Nevertheless, upgrades 
should help Jordan attract foreign investment. 
 
----------------------------- 
Better Cash Management Needed 
----------------------------- 
 
13.  (C)  In response to a question from Treasury about the 
need for better cash management, Abu Hammour said that the 
Ministry has begun focusing on financial management reforms. 
There is an on-going joint IMF/WB expenditure review of 
Jordan, and cash management is a part of that program. 
Jordan also enjoys French and Italian technical assistance in 
these areas.  The Finance Ministry compiles a daily financial 
position report of government finances.  During the fourth 
week of each month, the minister reviews the positions to 
decide whether to cut spending or take some other action to 
better meet IMF targets.  Finally, Jordan is working with 
Germany on developing a result-oriented budgeting system. 
 
14.  (C)  As Abu Hammour explained, the Finance Minister 
previously met with each minister to direct and design the 
budget cuts for each ministry.  Under the new system, the 
government agrees on an expenditure ceiling instead and lets 
each ministry set its own priorities. 
 
15.  (C)  Abu Hammour has also prepared a plan for reform of 
financial management which has been approved by the cabinet. 
The plan targets each ministry's financial directorate to 
improve budgeting and to apply results-oriented budgeting 
precepts.  In this connection, Abu Hammour said he would like 
technical assistance under this financial management reform 
plan for the period 2004-2006. 
 
----------- 
Projections 
----------- 
 
16.  (C)  Abu Hammour projects 8-9% nominal growth for Jordan 
in 2004 and the same rate of growth for 2005.  He expects a 
deficit in 2005 of 3% of GDP and hopes the current debt/GDP 
ratio of 89.5% will fall another 6% in both 2004 and 2005. 
If debt needs to be financed, he want to do so from domestic 
sources. 
 
------------ 
Iraqi Assets 
------------ 
 
18. (C)  ECOUNS asked whether the review of commercial claims 
against the frozen Iraqi assets was nearly complete.   Abu 
Hammour said he had told Deputy Prime Minister Mohammad 
Halaiqa that the committee reviewing the assets needed to 
speed up the process.  Abu Hammour says he still spends an 
hour and a half each day talking to members of Parliament 
about specific claims and that more than 1500 claims have 
been settled.  He hopes the process can be completed by 
mid-September. 
 
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COMMENT 
------- 
 
19.  (C)  Abu Hammour is clearly eager to get the frozen 
Iraqi assets issue behind him.  It is apparently taking a 
significant part of his time.  Nevertheless, Jordan has 
already made a significant contribution to re-building Iraq 
with its earlier transfers of $250 million to the DFI to 
date.  Furthermore, Abu Hammour has assured us that if any 
paid claims are found to be fraudulent by the Iraqis, the 
funds will be reimbursed. 
 
20.  (C)  In contrast to dealing with frozen Iraqi assets, 
Abu Hammour clearly relishes macroeconomic discussions.  He 
is taking to heart the plan to reduce significantly Jordan's 
debt burden by the 2006 deadline set under the Public Debt 
Law.  If he continues as minister for some time longer, he 
may view gaining control of Jordan's fiscal house his key 
legacy. 
HALE