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| April 7, 2003 | Monday | Safar 4, 1424 |
World economic report
The outlook for the Middle East economy remains uncertain after the US-led invasion of Iraq commenced in the early hours of March 20. The initial optimism apparent on March 20, which saw oil prices drop and world markets stage a slight rally, has dissipated as the prospect of a victory along the lines of the 1991 Gulf war has receded. Instead, in the face of new uncertainties, analysts have retreated to the pre-war position of scenario forecasting.
The economic impact of the war on the countries of the region depends in large part on the nature of their economies. For the oil-dependent economies of the Gulf states the immediate impact of the war has been to remove the ‘war premium’ of around $5-10 per barrel which had inflated oil prices in the run-up to the war. Oil prices will remain volatile as the war continues, however, and there remains the potential for prices to climb again should the conflict be drawn out, as has been witnessed in the last few days. In the longer-term, in the aftermath of the war, with uncertainty removed and Iraqi oil supplies back on-stream, there is the potential for prices to move down towards $20 per barrel.
Since a large proportion of the revenues of the Gulf states are tied to the price of oil, the effect of the war on oil prices over the coming months will directly affect the impact on those economies. The longer-term impact on oil prices of the resumption of full Iraqi production growth remains to be seen. Other regional economies will suffer direct impacts as a result of decreased trade with Iraq, and adverse effects on industries such as aviation and tourism. Jordan and Turkey are expected to be hit hard by the reduction in trade and the drop-off in tourism, while Egypt, Tunisia and Morocco will also see fewer holiday-makers this year.
Jordan is likely to be one of the countries worst affected by the war due to its close trading ties with Iraq. According to Jordanian economists losses to the economy will amount to some $2 billion, equivalent to 25 per cent of GDP. This includes $800 million in extra crude oil and petroleum products costs resulting from the loss of Iraqi oil imports which Jordan received at rates below market prices.
The cost in terms of reduced tourism revenues will amount to $700 million. Exports to Iraq, which amount to $230 million per annum and represent 11.9 per cent of total Jordanian exports are likely to be hit, as is the amount of foreign direct investment the country will receive. The Jordanian finance minister puts losses to the Jordanian economy at the smaller but nevertheless significant figure of $1.5 billion, closer to the amount of $1.46 billion the US is expected to give Jordan to help cover the cost of the conflict to the economy.
The Kuwaiti economy is benefiting from contracts to supply the US forces stationed there. Following regime change, Kuwait would also stand to benefit from reconstruction efforts, acting as a port and entry point for Iraq. Despite a lack of investment in the infrastructure of Kuwait’s ports since 1990 compared to developments in Saudi Arabia and the United Arab Emirates, Kuwait’s proximity to Iraq gives it a competitive advantage.
Furthermore, despite a lack of government initiatives to mobilize the private sector to take advantage of the lucrative contracts which would follow regime change in Iraq, local businessmen hope that the improved security situation will encourage inward investment.
Egypt is Iraq’s largest Arab trading partner and Iraq accounts for around 30 per cent of Egyptian exports. As a result there are potentially serious consequences for Egypt as a result of the war following disruption of this trade. However, following regime change in Iraq, Egypt could have an opportunity to take advantage of this preeminent position.
Egypt’s tourism sector has already suffered as a result of the increased tension in the region and the industry federation has forecast that lost revenue as a result of the war will be at least $1.7 billion, almost half the country’s yearly earning from this sector.
Syria will also feel the effects of war through oil prices and trade. The loss of the oil agreement with Iraq will cost the country $500 million per annum. With the Syrian oil exports standing at some 350,000 bpd, the country will also benefit from current high oil prices. Trade with Iraq, which has been growing steadily in the past three years to reach a total of $2 billion in 2002 will be negatively affected to the detriment of local industries.
Offsetting these negative indicators are the good agricultural season expected this year due to heavy rainfall and the potential for increased business for Syria’s Mediterranean ports as reconstruction efforts in Iraq get under way.
The effects on Lebanon will largely be related to trade and the current high level of oil prices. As an importer of oil, Lebanon is not afforded the luxury of providing for its own energy needs with domestic supplies like most of its neighbours. The war premium which has inflated oil prices and the volatility of oil prices which will remain as long as the war continues will, therefore, hurt the Lebanese economy.
As for trade, Lebanese exports to Iraq total some $150-200 million per annum out of gross exports of around $1 billion. In addition Lebanese contracts with Iraq worth $150 million have been suspended.
The Iraq war has frozen much of the US economy, throwing a four-month manufacturing expansion into reverse, trapping consumers at home and unnerving employers. The build up to the combat, combined with a harsh winter, sapped demand for manufactured goods, and left businesses unsure whether to hire or fire staff. When the first missiles were launched, people stayed home to watch the television coverage, further stalling activity. US manufacturing activity slumped to 46.2 points in March from 50.5 in February. A reading below 50 points indicates an industry contraction.
The shrinkage in the manufacturing sector broke four consecutive months of growth. War jitters undoubtedly hurt the economy but unseasonably severe weather and the decline in payrolls play an important role. The number of job cuts in March was down 17 per cent when compared with March 2002. In the important area of consumer activity, some of the first signs of the impact of the Iraq combat revealed weakness.
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