AMMAN, 26 April 2004 — Despite the turmoil in Iraq and the Palestinian territories and the bitterness among the Arab masses concerning developments there, the Middle East was the second fastest growing region in the world after China last year. A combination of high oil prices, low interest rates, ample liquidity in the banking system and expansionary government budgets were the key driving forces for the region’s stellar average economic growth rate of around 6 percent in 2003, compared to a world average of 3.2 percent. The region’s strong economic growth looks set to continue this year as well.
Rising regional tourism, higher remittances of Arab expatriates working in the Gulf, some repatriation of funds from abroad and less capital outflows from the region will boost domestic levels of liquidity and reflect positively on local stock markets and the region’s fiscal and balance of payment positions. The solid upturn in real estate and stock prices in most countries of the region are boosting the “wealth effect” of consumers and should support economic growth.
While events in Iraq are pointing to a disaster in the making in that country, they are also changing the perception of future risk and uncertainty in the region. Last year, the question was who would be invaded after Iraq and which Arab regime will be toppled. This has now changed and worries about who will be next are receding. However companies are re-adjusting their expectations about reconstruction and export opportunities to Iraq, while the oil market is factoring in the prospects that it will take much longer for Iraq to increase its oil export capacity to levels that prevailed in the 1980s.
Key economic trends and developments at the international level are likely to have their impact on the regional economic landscape. The beginning of a global economic recovery should underpin strong growth in world demand for oil, natural gas, petrochemicals, phosphates, aluminum, and other mineral and agricultural products that the region produces and exports. Global inflation in prices of these commodities will further boost the region’s export revenues. Average oil prices this year are likely to be close to $30 a barrel for Brent crude. The expansion now showing strength in the US and the UK is accompanied by a powerful growth in China, which is becoming a global economic powerhouse and the second largest consumer of oil after the US. There are also signs of a recovery in Japan, Europe is pulling out of a recession and growth is strong in the emerging markets of Asia, Latin America and East Europe. The surge in commodity prices benefiting the region is not matched by higher prices of finished good, as global inflation remains subdued giving the region stable import prices at least from dollar based countries. The significant depreciation of the dollar appears to be over, with the US currency likely to end the year close to $1.10 to the euro.
In the Gulf region, nominal GDP growth rates are likely to surge this year supported by firm oil and natural gas prices. Real GDP growth rates which reflect oil production levels are forecast to remain stable this year at least for Saudi Arabia, as the Kingdom reduces its production to 8.3 million bpd from last year’s average of 8.7 million bpd. However, the region’s non-oil activities will witness substantial growth, leaving overall real GDP growth not much lower than last year’s levels. Growth in oil revenues would allow governments in the Gulf to pursue expansionary fiscal policies as indicated in their 2004 budgets, with public sector GDP growing above 5 percent this year. Private sector activities will also do well especially wholesale and retail trade, manufacturing, transport, telecom, real estate, banking, finance and health care. Private consumption expenditures will continue to be propelled by the same factors that were behind their accelerated growth last year, especially rapid expansion in consumer loans and more domestic investments.
For the Arab countries of West Asia: Jordan, Lebanon, Syria and Egypt, the economic outlook this year promises to be a continuation of last year’s good performance. A combination of low domestic interest rate environment, expansionary fiscal budgets, decline in non-performing loans across most banks, a surge in workers’ remittances, more regional tourism, strong corporate earnings and a rise in mostly dollar denominated exports are all positive factors supporting the growth outlook of those countries.
The promise of higher real GDP growth in Jordan this year following the 3.2 percent rate recorded last year may not materialize because of the dampening impact of higher VAT taxes introduced recently and surging fuel costs. Nevertheless, exports especially to the US and the Gulf countries will continue to do well and the strong activities recorded in 2003 in the construction, telecom, tourism, transportation, banking and finance are expected to prevail and will help support real GDP growth of 3.5 percent in 2004. The Lebanese economy is showing signs of improvement with GDP growth for this year expected at 3 percent compared to 2.5 percent last year. Foreign demand for tourism and real estate, mainly from the Gulf region has increased but investment in other sectors has declined. The country’s most significant economic risk remains the high public debt, equivalent to 185 percent of GDP by the end of 2003.
Syria’s economy which grew at around 2.5 percent last year, following the loss of the lucrative Iraq market worth more than $1 billion, is likely to fair slightly better this year growing at 3 percent. Syria is benefiting from higher oil prices, a surge in regional tourism and a gradual opening up of its economy. Egypt’s real GDP growth is forecast at 3.5 percent this year up from 2.8 percent in 2003, making 2004 the first year since 1999 that real GDP growth increases rather than decreases. The country’s higher growth is being driven by a surge in non-oil exports, following the substantial depreciation of the Egyptian pound versus the US dollar and more so against the euro, an increase in tourism (the number of tourists rose 16 percent to 6.04 million last year) and a rise in revenues from Suez Canal, up 32 percent last year. The economies of the Magreb countries, Tunisia, Algeria and Morocco will continue their strong performances this year, recording growth rates of 4 percent to 5 percent.
While economic growth in the region is expected to be strong for the second year in a row, nevertheless, most Arab countries are still far away from attaining their full potential. We need annual growth rates of 5 percent to 6 percent in the region’s private sectors in order for growth to be associated with strong job creation. With unemployment in the region averaging 15 percent while 50 percent of the population are below the age of 20, the only way to absorb all the entrants to the labor force is to have a dynamic private sector capable of creating new jobs.
The whole region will greatly benefit from Iraq once the security issues there are resolved. Jordan, Kuwait and Syria will benefit most given the strong trade relationships that already exist between those countries and Iraq. While Iraq could be a recipe for prosperity for the region it may turn out to be a project for disaster if instability there continues leading to anarchy and civil war.
(Henry T. Azzam is chief executive officer at Jordinvest.)