Jordan and the West Bank and Gaza Country Risk Report Q2 2016
Core Views Jordan's political risk profile remains intrinsically connected to the region's security outlook. Threats to the country's stability will remain elevated as long as the fighting in Syria and Iraq continues. Domestically, high youth unemployment and the government's uncompromising approach towards the Jordanian Islamist opposition raise longer-term risks, with this trend exacerbated by the large influx of Syrian refugees in the country. We are more positive towards the Jordanian economy than at any point since 2010, with lower oil prices and signs of progress on the government's infrastructure investments set to boost economic activity throughout 2016. We forecast real GDP growth of 3.0% in 2016, compared to an annual average of 2.7% between 2010 and 2013. Jordan's twin deficits – in the budget and current accounts – will narrow over the coming years, to 2.6% and 2.5% of GDP respectively in 2018. The EU offering an enhanced trade agreement, lower oil prices, progress towards energy diversification and government efforts to increase revenues will drive these improvements. Given the very slow progress made by the Iraqi Defence Forces and the Syrian army in Iraq and Syria against radical jihadist group Islamic State (IS) and other opposition movements, the security risks confronting Jordan are set to remain prominent over the coming years. Core Views International recognition of a Palestinian state is gathering momentum, a trend that will continue over the next decade and deepen Israel's diplomatic isolation. However, actual statehood remains a far-off prospect. The dissolution of the Palestinian unity government in June 2015, followed by President Mahmoud Abbas' resignation from the chairmanship of his political faction in August, points to a growing governance vacuum in the West Bank and Gaza. The risk of a comprehensive collapse of the Palestinian political system is increasing, amidst a stagnating economy and the multitude of challenges confronting the Palestinian leadership. Tensions between the rival Palestinian factions will remain high, preventing the reconstruction of the Gaza Strip and fuelling political instability. Elevated political risks, a continued decline in competitiveness and an overreliance on debt amidst shrinking donor disbursements all present constraints to the Palestinian territories' economic outlook. In our baseline scenario, which assumes no major change to the political situation, growth will reach 3.6% this year, compared to an annualised 5.7% between 2010 and 2014. Israeli-Palestinian peace talks resumed in August 2013, but failed to progress past their April 2014 deadline. We retain our view that, despite efforts by US Secretary of State John Kerry, the current political configuration in Israel, combined with the increasing fragmentation of the Palestinian governance system, will hinder any progress in negotiations.
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