According to OECD Economic Outlook of June 2002 edition, the attacks of Sept. 11 resulted in the destruction of physical assets in the US amounting to around $17 billion, while rescue, cleanup and related costs are estimated at around $11 billion. The implied projected cumulative loss in national income through the end of 2003 amounts to 5 percent of annual GDP, or $500 billion. Airlines and the tourism industry were hit hard. Equity prices in the financial markets tumbled, with the index recording its highest one day drop of 684 points or 7.13 percent on Sept. 17, the first day of resuming trading on the stock exchange. Share prices adjusted higher in the following months, but in contrast with earlier wartime events, equity prices did not yet regain their pre-Sept. 11 level.
Central banks worldwide injected liquidity in their respective financial markets. In the US, the Federal Reserve brought Fed funds rate down to 1.75 percent, its lowest level in 40 years and the other major central banks in the world have been lowering their domestic interest rates as well. Real interest rates (defined as nominal interest rates less inflation rates) on the dollar and the euro are still positive, which suggests that there is still room for interest rates to drop further. Local interest rates in the various Arab countries have been moving down in line with US rates, bringing lower borrowing cost to businesses in the region.
Sept. 11 attacks resulted in losses for the insurance industry (including reinsurance) amounting to $30 billion-$60 billion, making it the largest in history. But despite the magnitude of these payments, no major bankruptcies have occurred so far, in part because the risk was spread over a number of companies and countries. Reinsurance, most of them European, are expected to incur over half the losses. But, because the capital base of many insurance and reinsurance companies was also severely affected by declines in their respective stock markets, it is likely that several companies may require additional capital to survive.
Global foreign direct investment in 2001 suffered the biggest fall in more than three decades, triggered by a slump in the information technology industry, and the Sept. 11 attacks on the US.
The world’s foreign investment last year plunged 52.7 percent from the previous year to $694.8 billion, the Japan External Trade Organization (JETRO) said in an annual report compiling statistics from 41 economies. It was the biggest decline since 1970.
Global trade, measured in terms of exports, totaled $6.08 trillion last year, down 4.3 percent, the first decline since the early 1990s.
Global foreign direct investment is forecast to fall again in 2002 due to the shrinking number of large-scale takeovers. Cross-border mergers and acquisitions totaled $209.1 billion in the first half of 2002, a year-on-year fall of 45.9 percent, and the downward trend appears to be continuing.
Events of Sept. 11 have been as much a wake up call for the Arab countries as for the US. Many Arabs have recognized that their countries’ institutions need reform. Increasingly more democratic practices and freedom of expression need to be introduced, with more accountability for leaders both in the public and the private sector. The dilemmas of freedom versus security, globalization versus fundamentalism and modernity versus traditions need to be addressed. If reform measures are not instigated from within our countries, change will be imposed on us from outside, and its impact may be far more destabilizing. Another impact of the Sept. 11 attacks on the US has been the surge of anti-Arab sentiments abroad and a wider political gap between the US and the region. Human rights have been a big loser. Several countries in the world tightened security and cracked down on internal opposition hiding behind the banner of fighting terrorism.
The mood of outrage in the US, expressed most recently by the $651 billion lawsuit, has provoked a backlash in the conservative Arab societies already infuriated by US support for Israel.
Investors are drifting away from US investments, with around $200 billion believed to have been withdrawn from the US in recent months, partly contributing to the weakness of the dollar. Calls to boycott American goods have been raised and the number of Arab tourists visiting the US has plummeted.
The two sectors that were affected most in the region were the airlines and tourism sectors. Unofficial estimates suggest that air travel to and from the region has dropped by around 30 percent since Sept. 11, 2001. Many of the major local carriers have canceled certain destinations, and reduced the number of flights operated. The Arab Carriers Organization estimates losses of Arab Airlines to exceed $5 billion by year’s end. Hotels in Egypt, Jordan, Tunisia, Morocco and Dubai reported drop in occupancy rates. International tourists arrivals in the Arab world were in excess of 30 million tourists in 2001, spending around $20 billion annually. Direct and indirect revenues generated by tourism in the Arab world are estimated at $ 60 billion and the losses of these sectors for the region as a whole could reach $10 billion.
Countries of the region that have been especially affected by the events of Sept. 11 are Egypt, Lebanon, Syria and Saudi Arabia. Egypt’s tourism industry and revenues from the Suez Canal, which are important sources of current account receipts have suffered. Faced with lower foreign exchange earnings, a potentially more volatile region and lower growth expectation, the Egyptian pound remained under pressure. Lebanon continued to be vulnerable to regional geographical developments which could jeopardize its privatization drive and reduce the ability of the government to service its huge debt burden. Uncertainty in the region has pushed Syria to delay the liberalization of its economy and to channel more resources towards defense and security.
The Gulf economies in general have been less affected by the events of Sept. 11 as oil prices and oil revenues resumed the high levels that prevailed before those events. However, most of them saw their risk profile rising. Saudi Arabia may not be able to attract the kind of foreign direct investment it has been contemplating, because of the negative reporting on the Kingdom by the Western media. The impact of the crisis on Jordan has so far been manageable, with the decline in tourism more than made up for by the strong economic growth in the other sectors of the economy.
(The author is chief executive officer of Jordinvest.)
