Factbox: Political risks to watch in Jordan

AMMAN Tue Feb 1, 2011 8:37am EST

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AMMAN (Reuters) - Economic woes and rising domestic dissent plague Jordan, where a new parliament was elected two months ago in a vote boycotted by the Islamists, the country's largest political opposition group.

The kingdom has seen growth fall by a half and is struggling to curb a record $2 billion budget deficit.

Tensions between Jordanians and the majority Palestinian population, many of them refugees from conflict with Israel, could also escalate in the event of a Middle East peace accord which settles Palestinians permanently in Jordan.

TRIBAL DISSENT

Tribalism has been on the rise as a political element, blunting the emergence of national parties and curbing the influence of Islamists, Jordan's most popular political force.

Analysts say protests from East Bank Jordanian tribes, the backbone of support for Jordan's King Abdullah, alongside inter-tribal violence that has spread in recent months, could develop into wider troubles.

This is not only hampering modernization efforts, but threatening to undermine the monarchy which is seen as a unifying force in the country of nearly 7 million people.

Most tribes that defend the interests of the native Jordanian dominated state bureaucracy and have sought to frustrate free market reforms that would cut state welfare and widespread patronage they rely on to maintain their power and influence.

The economic downturn is making it more difficult for the state to satisfy demands of this vocal constituency as proceeds from foreign aid and tax revenues have shrunk, analysts say.

Political infighting in government agencies is also on the rise, as well as frustrations fueled by perceptions of corruption and widening inequalities.

What to watch:

-- Indications the economic recovery falters, triggering strikes by public sector workers who see the state as abandoning them.

PEACE PROCESS

The economic influence and citizenship rights of many of the country's citizens of Palestinian origin are becoming a bigger concern for Jordan's largely East Bank, or indigenous Jordanian, political elite who hold a firm grip on power .

That grip was further strengthened in the November elections that resulted in a parliament dominated by tribal East Bank pro-monarchists with a token Palestinian representation.

Analysts say the issue will come to the fore if Middle East peace talks bring a permanent settlement of Jordanians of Palestinian origin in the country.

Jordan hosts the largest number of Palestinian refugees and when the kingdom made peace with Israel in 1994 it did not get any guarantee of right of return for its Palestinian citizens.

Jordanians of Palestinian origin are grossly marginalized in government posts, the army and security forces and underrepresented in parliament.

But economic liberalization and privatization appear to have empowered the largely Palestinian business class, alienating many East Bank Jordanians whose power base has been in large state-run industries and the bureaucracy.

What to watch:

-- Aggressive or defiant comments by ultra-nationalist Jordanians that further polarize the two communities.

-- A tougher policy toward Israel if peace talks sour and prospects for a two-state Israel-Palestinian solution dim, leading to fears of an Israeli "transfer policy" that expels West Bank Palestinians to Jordan.

RECORD DEFICIT/ SLUGGISH ECONOMY

A budget deficit that doubled to $2 billion in 2009 is viewed as the country's major economic challenge in the few years to come.

The government plans to cut the deficit to 5 percent of GDP this year and stabilize its rising public debt which hit $14.7 billion in August.

But analysts say Jordan has been reluctant to pursue aggressively an IMF-guided austerity program or tackle corruption within state owned enterprises that eats up tens of millions of dollars of public funds.

Although a drop in foreign aid and revenues forced the government to cut spending, civil service salaries and pensions -- which form 80 percent of the budget -- remain a red line.

Many officials still hope for infusions of foreign aid that have traditionally covered budget shortfalls and are extended to underpin the stability of the pro-U.S. country. But the kingdom cannot expect high levels of aid to be maintained indefinitely.

What to watch:

-- Whether policy makers resort to higher levels of domestic borrowing from banks and abroad to finance the budget deficit.

-- Degree of success in absorbing 2009's record deficit to restore fiscal prudence for a sustained recovery in 2011-2013.

-- More drastic steps such as raising more taxes or through sharply higher electricity and water prices.

-- Rising current account deficit as an indicator investors should monitor to show Jordan's external financing shortfall.

-- Signs of donor fatigue over pace of political and economic liberalization and lower aid levels from the United States, the country's biggest donor.

INVESTMENT CLIMATE WORSENS

Although the opening of the economy in the early 1990s drew more foreign firms and capital inflows, the hidden costs of business and rising competition from neighbors is blunting the country's edge, analysts warn.

Inflows of funds from the Gulf have been hurt by a perception that Jordan has an unfriendly investor climate.

Analysts warn the kingdom stands to lose if regional peace prevails, with aid money and capital flows redirected to the Palestinian territories, Syria and Iraq.

What to watch:

-- A slow pace of recovery in the oil producing Gulf region would reduce remittances from over 600,000 expatriates living there and lower capital inflows and investments.

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