The uncertainty associated with the war on Iraq that prevailed in the past few months has had a dampening impact on the region’s economic prospects. Tourism and air travel collapsed, oil prices shot up, trade in oil and non-oil products with Iraq halted and foreign direct investment dwindled.
Now that the war is over and some of the fog hovering over the region has been lifted, there is hope that the end of the crisis could bring new opportunities. The severity of the situation could hopefully herald the beginning of fundamental political and economic reforms across the region in the months and years ahead.
Virtually all Arab stock markets surged following the removal of Saddam Hussein from power. This has dissipated fears of a protracted war and spurred hopes that several companies, especially in the neighboring countries of Kuwait, Saudi Arabia and Jordan, are likely to benefit from reconstruction contracts in Iraq.
Kuwait’s stock exchange surged to a new record as the fall of Saddam eliminated possible future Iraqi threat to the country.
Jordan’s shares have also been on the rise as several listed companies are expected to provide support services and supplies to Iraq. These include companies producing pharmaceuticals, food products, tobacco, detergents, steel, aluminum, cables, paper, ceramics and plastic products. Jordanian contractors, exporters and suppliers of services are well positioned to participate in the reconstruction of postwar Iraq either directly or as subcontractors to the American companies working in the country.
The strong relationship established over the years with the Iraqi private sector, the quality and price of Jordanian products, Jordan’s proximity to Iraq and the availability of credit facilities from the local banking sector should give Jordanians a competitive edge in this respect.
Oil prices finished the first quarter of the year at an average of $31 a barrel for Brent crude. Prices are likely to stay above $22 a barrel in the second quarter before dropping toward an average of $20 a barrel in the second half of the year. Average oil prices for the whole of 2003 are likely to be close to $22 a barrel which is $4 a barrel above oil prices assumed in this year’s budgets of various GCC countries.
Furthermore, Saudi Arabia, the UAE, Kuwait and Qatar are currently producing 14.7 million bpd, more than 2 million bpd above their quota of 12.7 million bpd decided in January. Iraq’s return to the oil market is expected to be gradual and is not seen regaining its prewar level of 2.5 million bpd before the end of the third quarter at the earliest. It would take Iraq two to three years to boost its oil production level to 3.5 million bpd that prevailed in 1990 before Iraq’s occupation of Kuwait.
Oil revenues this year will be much higher than projected in the budgets of the GCC countries allowing them to record better than expected internal and external imbalances. This coupled with high liquidity levels, no capital flights and very low interest rates suggest good economic growth prospects in the Gulf this year.
The UAE and Bahrain are likely to do especially well because of their viable non-oil sectors and so will Qatar which is becoming a major exporter of liquefied natural gas (LNG) to the world market. But it’s the Kuwaitis who have the most to gain from the change of regime in Iraq. While Kuwait may have to forego collecting tens of billions of dollars in Iraqi debt and war reparations, nevertheless, these will be more than offset by the major shot in the arm that greater security and a revived Iraqi market would give the country’s private sector.
The countries of the region who had established strong trade ties with Baghdad will feel the fallout from the change of regime in Iraq. Jordan, Egypt, Lebanon and Syria will be affected most. Iraq has become an important “captive” export market to its neighboring countries, the majority of whom have put in place trade agreements with Baghdad. Exports to Iraq constituted last year around 40 percent of total Lebanese exports, 35 percent of total Syrian and Egyptian exports and 20 percent of Jordanian exports. Now that the sanctions will be lifted allowing Iraq to eventually trade freely with the rest of the world, the country’s trade patterns would change and Baghdad may choose to establish new trade ties based on economic rather than political interests. Accordingly, those Egyptian, Syrian, Lebanese and Jordanian companies which were established to export solely to the Iraqi market will have to either restructure or close down.
Jordan is expected to remain on a strong growth path for the remaining part of the year following a weak start in the first quarter. A growth rate of 4 percent remains a possibility for the year as a whole, and this will be in excess of population growth, leading to higher per capita income and employment. Growth will be driven by improved macroeconomic fundamentals, the impact of ongoing structural reforms, and continued strong export performance. Jordan which obtained annually 5.5 million tons of oil from Iraq, half free of charge and the rest at a preferential rate of around $19 per barrel may incur a higher oil import bill this year as it tries to replace Iraqi oil. Fortunately, Kuwait and Saudi Arabia have pledged to provide free oil to Jordan to compensate the country for its loss of Iraqi crude. The deal in the form of 25,000 bpd from Kuwait and 75,000 bpd from Saudi Arabia will hold for a three-month period that can hopefully be renewed.
Syria will suffer from a decline in trade with Iraq and from the loss of 150,000 bpd of Iraqi oil that it used to get at subsidized prices. Concerns related to Syria following US warnings is another element of uncertainty affecting the country’s economic growth prospects.
In Lebanon, the public debt burden remains a difficult issue although the Lebanese authorities, benefiting from Paris II donors’ meeting, have taken courageous steps to address the issue. The outlook is much improved and could lead to a sustainable position if the authorities persevere in their reform strategy.
The war had a negative impact on Egypt’s economy mostly by eroding tourism and by cutting its receipts from Suez Canal traffic. This amounted to a drop of 1.5 percent to 2.0 percent of gross domestic product, plus a negative hit on its external trade and financial balance estimated at around $1.5 billion. The impact of the war on Morocco and Tunisia was felt mostly through lower tourism and non-oil trade. However, tourism in North Africa will gradually regain momentum, now that the regional uncertainty associated with the war has started to fade.
The prospects remain grim for the Palestinian territories, as long as, the current situation prevails. However, the expectation that the “road map” for a Palestinian state will soon be made public, could herald the beginning of the search for a peaceful solution.
(Henry T. Azzam is chief executive officer at Jordinvest)
Arab News Business 18 April 2003