Vantage View: Region on solid fundamentals

The region's economic growth conditions are much stronger heading into the fourth quarter than what they were at the beginning of the year. The six Gulf states, Jordan, Morocco, Algeria and Tunisia are all likely to record high growth rates in 2003.

Lebanon and Egypt are lagging behind, although economic activities in the two countries this year are noticeably better than in 2002. Palestine and Iraq, devastated by war conditions, are experiencing a decline in their economic activities.

The region's positive economic fundamentals, likely to prevail for next year as well, are supported by higher oil revenues, lower interest rates and decreased regional uncertainty following the short war in Iraq.

Recent confirmation from the US that the policy of monetary easing is not going to be reversed any time soon is welcome news to the region where domestic interest rates are determined by dollar rates. The local equity markets have surged 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 reflected positively on domestic demand.

Average oil prices so far this year come to $28.6 a barrel for Brent crude, compared to an average of $25 a barrel in 2002 and $24.50 a barrel in 2001. Average prices for 2003 are likely to exceed the record highs achieved in 2000 of $28.40 a barrel.

Higher prices and larger oil production levels will boost revenues and overall government expenditures of the Gulf countries and bring forth lower budgetary deficits.

The private sectors would benefit from surging domestic demand, lower cost of borrowing and resilient corporate earnings. In addition, strong oil revenues in the Gulf usually lead to a rise in the level of regional liquidity, through higher remittances, better export opportunities to the GCC markets, a surge in direct investment flows to the non-oil Arab countries and more regional tourism.

The Gulf economies are enjoying one of the their strongest years since the early 1980s. The region's oil sectors are likely to show real GDP growth ranging from 15 per cent for Saudi Arabia, 6 per cent in Kuwait and 5 per cent in the UAE.

Growth of non-oil GDP will surge this year supported by strong domestic demand. Private consumption is forecast to grow substantially reflecting the return of confidence to the region and rapid expansion in consumer lending by Gulf's commercial banks.

Budget surplus

Higher than expected oil revenues will encourage Gulf governments to boost public expenditures beyond levels stipulated in this year's budgets. Even with a 20 per cent increase in expenditures, Saudi Arabia may end up recording a $5 billion surplus, which would be its second budget surplus since 1981.

Real GDP growth for Saudi Arabia is forecast at six per cent this year, compared to 0.7 per cent per cent in 2002, 1.2 per cent in 2001, and 4.8 per cent in 2000. Kuwait which recorded a growth rate of 2.3 per cent last year and a decline of 7.6 per cent in 2001, is likely to grow at the high rate of 8 per cent this year.

Private sector activity benefited from increased demand for logistical supplies and support services to coalition forces and surging exports to Iraq. The relief of removing Saddam Hussein's regime has created a feel-good factor which brought back confidence and encouraged domestic investments.

Qatar which was the star performer in the past three years, recording the highest growth among the Gulf countries of seven per cent in 2000, 5.2 per cent in 2001 and 4.5 per cent in 2002 is forecast to grow at 6 per cent this year. Strong growth rates are also projected for UAE, Bahrain and Oman at 4.7, 4 and 3 per cent respectively.

After growing at the rate of 2.8 per cent in the first quarter and three per cent in the second quarter, Jordan real GDP is likely to rise by four per cent in the second half of the year, giving an average growth for 2003 of around 3.5 per cent.

This is below last year's growth of 4.9 per cent but closer to the 4.2 per cent recorded in both 2000 and 2001. The economic crisis which was anticipated because of the war on Iraq did not materialise.

The additional aid of $500 million that came from the US and the free oil close to 100,000 bpd supplied by Saudi Arabia, Kuwait and UAE for a six months period that is likely to be extended, provided the much needed support to the budget this year. Besides, Jordan exports to the US continued to rise reaching $265.3 million in the first half of this year, partly compensating for the loss of exports to the Iraqi market.

The rating agencies Standard & Poor's and Moody's upgraded Jordan's foreign and domestic currency debt reflecting the drop in external debt to GDP ratio to 70 per cent, the surge in the country's foreign reserves to more than $4.5 billion and the prudent economic policy being implemented.

The fact that Jordan was able to improve its ratings and present such a robust economic performance, given it turbulent surroundings, is quite an achievement.

Egypt, the Middle East's largest economy outside the Gulf, has suffered more from the uncertainty that followed the devaluation of the Egyptian pound on January 28 this year, than from the 37 per cent loss of tourism revenues due to the war on Iraq. The pound is currently trading at 6.15 to the US dollar compared to 4.15 before the devaluation.

Economic growth this year is forecast at 2.5 per cent, down from three per cent and 3.5 per cent in the preceding two years. Inflation is rising at 18.5 per cent, while domestic interest rates remain above 11 per cent compared with just 4.8 per cent before the devaluation.

Forex market

However, the government worried at the impact of the sharp fall in exchange rate on inflation continues to influence the exchange rate allowing a black market to persist where the pound is trading at 7 to the dollar.

In contrast to Jordan, Tunisia and Saudi Arabia, Standard & Poor's downgraded Egypt's long-term local currency rating from BBB to BBB-. The US and World Bank assistance this year of $3.3 billion will insure that any balance of payment deficit will remain at manageable levels, allowing foreign reserves to stabilise at $13 billion.

Lebanon was able to avoid debt default and financial meltdown due to the Paris II donor conference in 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 inflow of tourists from the Gulf and the rise in foreign direct investment improved the balance of payment with foreign reserves rising to $10 billion.

Fiscal deficit could reach 13.7 per cent of GDP this year while total debt to GDP could exceed 177 per cent. Economic activity remains slow due to high interest rates, weak competitiveness and political infighting. Real GDP growth of two per cent growth is forecast for 2003, following 1.5 per cent growth last year.

Local commercial banks are expected to roll over maturing sovereign debt of $8.2 billion this year ($7.3 billion in treasury bills and $0.9 billion in Eurobonds) and $11 bill