AMMAN, 5 January 2004 — The region’s economic growth conditions are strong heading into 2004. The major negative consequences of the war on Iraq did not materialize and 2003 turned out to be better than expected economically. The six Gulf states, Jordan, Morocco, Algeria and Tunisia are all expected to record another year of high growth rates. Lebanon and Egypt, while lagging behind, will do better this year compared do 2003. Syria, threatened by US economic sanctions, may witness a slowdown in its economic activities while Palestine will remain in limbo as Israel’s aggression continues unchecked.
The region’s positive economic fundamentals this year are supported by firm oil prices, expansionary 2004 budgets, interest rates continuing at their current low level well into the second half of the year, and increasing opportunities to participate in Iraq’s reconstruction. Egyptians and Kuwaiti firms are building Iraq’s mobile-phone networks, Jordanian companies are providing support services ranging from catering to training of police and army units to various banking services. Contracts for restoring power generation, water supplies, housing and other such huge projects are likely to follow.
The local equity markets have surged last year in all the Arab countries with the exception of Lebanon. The rise in the stock markets together with the solid upturn in real estate prices boosted the “wealth effect “ of consumers and should reflect positively on domestic demand this year.
A strong US economy will pull the rest of the world into the long-awaited recovery this year. Real GDP growth in the US will rise to 4.5 percent in 2004 from 3.2 percent in 2003, supported by expansionary fiscal and monetary policy, a weaker dollar boosting exports and a rebound in capital and consumers’ expenditures. China will continue to grow at around 8 percent this year, while Japan’s growth is unlikely to exceed 2 percent, down from 2.4 percent in 2003. The euro zone is also starting to turn up, but its recovery will be constrained by relatively stringent monetary and fiscal policies, by the euro’s rise and by slow progress on labor, pension and regulatory reforms. Real GDP growth in the euro zone is forecast at 1.9 percent this year, up from 0.6 percent in 2003.
Inflation in the US and worldwide is not expected to change much allowing the monetary authorities worldwide to be patient in lifting interest rates. Any increase in dollar interest rates will most likely not materialize before mid year, with Fed Funds rates ending the year below 2 percent from its current historic low level of 1 percent. With dollar interest rates remaining subdued throughout most of 2004, domestic interest rates in the various Arab countries that move in tandem with dollar rate, will remain broadly stimulative to the region’s interest sensitive sectors, allowing Arab stock markets to continue to outperform.
Jordan’s real GDP grew at 2.8 percent in the first quarter, 3 percent in the second quarter and 3.2 percent in the third quarter, giving an average growth for 2003 of around 3.3 percent. This is below the 4.9 percent recorded in 2002. The slowdown was particularly noticeable in the manufacturing sector which recorded a real growth rate of 1.1 percent in the first nine months of 2003 compared to 12.1 percent during the same period in 2002, due mainly to lower exports to Iraq. The expansionary fiscal policy is targeted to continue next year with the budget projecting a 6 percent increase in government expenditures. Interest rates on the dinar are likely to remain close to their current low levels in the first half of the year before rising marginally in the second half . This should help the expansion of credit facilities, encourage corporate re-financing and boost activities in the interest sensitive sectors of the economy, mainly construction, consumer durables, and the stock market. The return of confidence to the domestic scene as reflected by the rise in share prices of around 54 percent last year, the continuing surge in exports to the US, and a more settled regional environment could see Jordan recording higher real GDP growth of 5 percent in 2004.
Egypt, the Arab world’s second largest economy after Saudi Arabia, has suffered more from the uncertainty that followed the devaluation of the Egyptian pound on Jan. 28, 2003, than from the consequences of the war on Iraq.
The pound is currently trading at 6.5 to the US dollar compared to 4.15 before the devaluation. Market participants have now realized that the new policy was not a clean float, but rather a disguised managed exchange rate policy in which any backlog of demand of hard currency was met in the black market where the Egyptian pound has been trading at 7 to the dollar.
In contrast to Jordan, Tunisia and several Gulf countries, rating agencies Fitch and Standard & Poor’s downgraded Egypt’s long-term local currency rating, citing the country’s deteriorating public finances as the main reason for the move. 2004 is likely to be the first year since 1999 that real GDP growth increases rather than decreases, with growth forecast to reach 3.4 percent, this year up from 3.1 in 2003. The higher growth is being driven by a surge in non-oil exports, following the substantial depreciation of the Egyptian pound and the dollar versus the euro and a pick up in tourism with Egypt hosting a record 6 million tourists in 2003, up 20 percent on 2002. Egypt’s Suez Canal, whose revenues have stayed flat at $2 billion a year for a decade, last year earned 32 percent more. Further improvement in non-oil exports and tourism are also expected this year as the impact of more currency deprecation becomes more pronounced.
Lebanon was able to avoid debt default and financial meltdown due to the Paris II donor conference of November 2002. Other than receiving $4.2 billion in long-term loans, the conference enabled the structure of interest rates in the country to decline. The higher inflow of tourists from the Gulf and the rise in foreign direct investment improved the balance of payment with foreign reserves rising to a record $12 billion. Fiscal deficit could reach 16 percent of GDP this year while total debt to GDP could exceed 170 percent. Economic activity remains slow due to high interest rates, weak competitiveness and political infighting.
The country’s policy making abilities are expected to be “paralyzed” this year because of the presidential elections. The rebound in confidence that occurred following Paris II led to a slight upturn in economic activities with real GDP growth of 2 percent estimated for 2003, following 1.5 percent growth in 2002. Local commercial banks have financed maturing sovereign debt of $8.2 billion last year ($7.3 billion in treasury bills and $0.9 billion in Eurobonds) and are expected to roll over $11 billion in 2004 ($9.4 billion in treasury bills and $1.6 billion in Eurobonds) as well as, finance the budget deficit. This will allow the government to meet its financing requirements and will give it an extra year or so to go ahead with the privatization of the state owned electricity and telecom companies.
Tunisia’s economy is estimated to have grown by 5 percent in 2003, following a weak growth in 2002 and five years of strong economic growth ranging between 4.7 percent and 6 percent during the period 1997-2001.
Higher agricultural output, rise in tourism and a pick up in exports to Europe, the country’s major export market, boosted Tunisia’s growth last year. Moody’s upgraded Tunisia’s sovereign rating, putting it at the highest level among the non-GCC Arab countries. This year’s outlook is more favorable, with real GDP growth approaching the 5.5 percent level.
Morocco is likely to show strong growth rates of 6 percent in 2004 on top of a 5.5 percent growth last year, supported by a rebound in its tourism sector, better agricultural season, strong recovery in domestic demand and higher exports to Europe. Algeria benefiting from higher oil prices and a pick up in non-oil sectors saw growth rising to 6.8 percent last year. This year’s growth is expected to be equally good at around 6 percent, but with a thirty-year legacy of the centrally planned economy, Algeria has significant reforms to undertake.
(Henry T. Azzam is chief executive officer at Jordinvest.)