AMMAN, 19 January 2004 — It is useful to start the year reflecting on important issues and developments that may play out quite differently from what most observers expect. A surprise is an event that the consensus would assign a low probability of less than 25 percent for it to happen. Our view is that each of the surprises listed below may have a 50 percent chance or better of taking place, especially later in the year.
1. In spite of a strong US economy, the Federal Reserve does not increase short-term dollar interest rates at all during 2004 in order not to be seen influencing results of this year’s presidential election, especially that inflationary pressures in the US are still very low. Accordingly, domestic interest rates in various Arab countries would remain close to current low levels throughout most of 2004, boosting credit expansion and liquidity. This will reflect positively on the region’s interest sensitive sectors and help maintain strong economic growth, at least in the non-oil sectors of the economies.
2. The US dollar has corrected strongly last year, dropping by more than 30 percent against the euro. Those Arab countries whose currencies are pegged to the US dollar have experienced a similar devaluation. Higher costs of imports from Europe and cheaper export prices when measured in euros helped to correct trade and current account imbalances. However, weaker economic growth in Europe compared to the US and rising inflows to the US capital markets could see the euro dropping to $1.1 in the second half of 2004. The impact of that on the Arab countries will be exactly opposite to what had happened in 2003.
3. The long awaited correction in the region’s stock markets does not take place. Low interest rates, excess liquidity conditions, high oil revenues, ongoing repatriation of Arab capital from abroad and good corporate results will see the region’s stock markets recording another year of strong performance. Expectations of up to 20 percent increase in corporate profits this year materialize, taking away the over valuation from the current price-earning ratios. Jordan, Kuwait and UAE will outperform benefiting from increasing opportunities in Iraq and good performance of their domestic economies and so would stock markets in the other GCC countries. Morocco and Tunisia will be the star performers of the year as their valuation is currently the lowest in the region and their economies are forecast to do quite well this year.
4. The $13 trillion US economy is growing at 5 percent annually which is equivalent to China growing at 60 percent. Between these two countries, world demand for oil is expected to surge at a much higher rate than in 2003. Political troubles in Venezuela and Nigeria, and rising conflict between the hard-line religious establishment and the government in Saudi Arabia will magnify the perception of supply side volatility in the world oil market. The rising uncertainty on both the demand and the supply sides could push oil prices to the $40 a barrel level in the second half of the year.
5. Signs of profound political change in the Middle East become increasingly more visible in 2004. The giants of the region, Egypt, Saudi Arabia, Libya and Syria are all exploring options for new policies with one or more of them taking a bold step in that direction this year. Libya’s abrupt acceptance of responsibility for the Lockerbie plane bombing and its decision to unilaterally end its weapons of mass destruction program is a step in the direction of changing the country’s ideology and alliances. Under pressure from Washington the next presidential elections in Egypt will be more open and transparent, with increasingly more democratic practices being introduced. Syria under the threat of punitive legislation and embargo from the US decides finally to pull out from Lebanon, starts negotiating for a permanent peace settlement with Israel and expedite the move toward economic reform and political liberalization.
6. Saudi Arabia introducing democratic practices starting with municipal elections in late 2004, to be followed by Majlis Al-Shoura elections sometimes later. Women may soon be allowed to drive and all this will provide a platform for a wider range of political reforms. Saudi Arabia may very well join the World Trade Organization (WTO) this year. One of the requirements is for the Kingdom to update its laws and regulations to conform with WTO agreements and open up its stock market to foreign investors, improve government processes, liberalize its banking, insurance and telecom sectors and repeal discriminatory measures against foreign contractors and suppliers. A new capital market law and a new insurance law have been passed last year. Saudi Telecom has been partially privatized, Deutsche Bank has already been issued with a license to set up investment banking activities in the Kingdom and a new tax law is expected soon.
7. The bubble in Dubai’s real estate and tourism sectors burst later this year following years of over-investments in these sectors, that amounted last year to around 20 percent of Dubai’s GDP. While Dubai has proved the skeptics wrong before and there are indications that a lot of projects are sold out already, yet the scope of some of the recent projects is very ambitious and there are sizable over-investments in the tourism and real estate sectors, all show signs of a bubble in the making.
8. Lebanon fails to avert a financial crisis this year, because not enough progress has been made on the fiscal and privatization fronts to reverse the debt dynamics. With presidential elections coming up this year, political uncertainty and growing differences between the president and the prime minister will block any tangible steps to address the country’s problems and stimulate economic growth. Budget deficit reached 20 percent of GDP and total public debt is heading towards 180 percent of GDP. The crisis, if it happens could be triggered by the departure of Hariri with no clear replacement who would be able to lead the country during difficult times ahead.
9. Political conditions in the Palestinian territories deteriorate further as Israel continues its unilateral separation plan and completes the Wall that carves parts of the Palestinian territory as defined by the 1967 borders. The Palestinian National Authority decides to dissolve itself, return to Israel full responsibility of administering the Palestinian territories, opting as such for a one state, two nations solution based on one man one vote principle.
10. Conditions in Iraq stabilize, allowing the reduction of US forces there, with a representative national government in place in late 2004. Osama Bin Laden is finally captured leaving Al-Qaeda in a state of financial distress and disorganization boosting President George W. Bush chances for re-election.
(Henry T. Azzam is chief executive officer at Jordinvest.)
