Gulf states enter new year with positive fundamentals

Jan 10, 2004 01:00 AM

The region's economic growth conditions are strong heading into 2004. The major negative consequences of the war on Iraq did not materialise and last year turned out to be better than expected.
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 with last year. Syria, threatened by US economic sanctions, may witness a slowdown 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 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.
Egyptian 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 banking services. Contracts for restoring power generation, water supplies, housing and other huge projects are likely to follow.

Equity markets surged last year in all 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 % this year from 3.2 % last year, supported by expansionary fiscal and monetary policy, a weaker dollar boosting exports and a rebound in capital and consumers' expenditure.

China will continue to grow at around 8 % this year, while Japan's growth is unlikely to exceed 2 %, down from 2.4 % last year.
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 due toslow progress on labour, pension and regulatory reforms. Real GDP growth in the euro zone is forecast at 1.9 % this year, up from 0.6 % last year.

Inflation in the US and worldwide is not expected to change much, allowing monetary authorities to be patient in lifting interest rates. Any increase in dollar interest rates most likely will not materialise before mid-year, with Fed Funds rate ending the year below 2 % from its current historic low level of 1 %. With dollar interest rates remaining subdued throughout most of 2004, interest rates in Arab countries that move in tandem with the 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 % in the first quarter, 3 % in the second quarter and 3.2 % in the third quarter, giving an average growth for last year of around 3.3 %. This is below the 4.9 % in 2002. The slowdown was particularly noticeable in the manufacturing sector which recorded a real growth rate of 1.1 % in the first nine months of last year compared with 12.1 % 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 % 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 interest-sensitive sectors, 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 % 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 % this year.

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 January 28 last year than from the consequences of the war on Iraq. The pound is trading at 6.5 to the dollar compared with 4.15 before the devaluation. Market participants have now realised 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 and Poor's downgraded Egypt's long-term local currency rating citing deteriorating public finances as the main reason for the move. This year is likely to be the first since 1999 when real GDP growth will increase rather than decrease, with growth forecast to reach 3.4 %, up from 3.1 last year.

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 mm tourists last year, up 20 % on 2002. Suez Canal, whose revenues have stayed flat at $ 2 bn a year for a decade, last year earned 32 % 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 bn 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 bn. Fiscal deficit could reach 16 % of GDP this year while total debt to GDP could exceed 170 %.

Economic activity remains slow due to high interest rates, weak competitiveness and political infighting. The country's policy-making abilities are expected to be paralysed this year because of 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 % estimated for last year, following 1.5 % growth in 2002.
Local commercial banks financed maturing sovereign debt of $ 8.2 bn last year ($ 7.3 bn in treasury bills and $ 0.9 bn in eurobonds) and are expected to roll over $ 11 bn this year ($ 9.4 bn in treasury bills and $ 1.6 bn 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 privatisation of power and telecom companies.

Tunisia's economy is estimated to have grown by 5 % last year, following a weak growth in 2002 and five years of strong economic growth ranging between 4.7 and 6 % during 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. This year's outlook is more favourable, with real GDP growth approaching the 5.5 % level.
Morocco is likely to show strong growth rates of 6 % this year on top of a 5.5 % growth last year, supported by a rebound in its tourism sector, better agricultural season, strong recovery in domestic demand and higher exports to Europe.
Benefiting from higher oil prices and a pick up in non-oil sectors, Algeria saw growth rising to 6.8 % last year. This year's growth is expected to be equally good at around 6 %, but with a 30-year legacy of the centrally planned economy, Algeria has significant reforms to undertake.

Source: Al Nisr Publishing
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