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Middle East's economic prospects remain bullish for 2005

Despite the turmoil in Iraq and the Palestinian territories, the Middle East was the second fastest growing region in the world after China last year. A combination of high oil prices, low interest rates, ample liquidity in the banking system and expansionary government budgets were the key driving forces for the region's stellar economic growth rate of around 6 percent in 2004, compared to China's 9.4 percent, the U.S.'s 4 percent, and a world average of 5 percent.

The region's strong economic growth looks set to continue this year as well, although at a slightly lower rate than in 2004. Key economic trends and developments at the international level are likely to have their impact on the regional economic landscape.

Though oil prices ended 2004 at $40.30 a barrel for Brent crude after reaching a high of $51 in October of last year, a combination of high oil prices, tighter monetary policy in the U.S. and a weaker dollar might slow global economic growth this year by curbing U.S. demand for imports. Global growth is likely to experience a moderation to 4 percent in 2005 with that of the U.S. and China easing to 3.5 percent and 8 percent respectively. Growth in world demand for oil will continue to be strong at 1.8 million barrels per day (mbd) compared to 2.5 mbd in 2004.

This together with tightness in oil supplies, as Iraq's production is likely to remain constrained, will add up to another likely year of high oil prices. Average price for Brent crude is expected at $32 a barrel down from $38.4 in 2004. In the Gulf region, nominal GDP growth rates are likely to surge in 2005 supported by firm oil and natural gas prices. Real GDP growth rates, which reflect oil production levels, are forecast to edge slightly lower this year, at least for Saudi Arabia, as the Kingdom reduces its production to 9.0 mbd from last year's average of 9.5 mbd. However, the region's non-oil activities will witness substantial growth, leaving overall real GDP growth slightly lower than last year's levels. Oil revenues for the Gulf countries grew by 35 percent in 2004, thanks to a 25 percent rise in oil prices and a 10 percent increase in production.

This year's revenues will be slightly lower, but will be sufficient to allow governments in the region to pursue expansionary fiscal policies as indicated in their 2005 budgets. The region's private sector activities will also do well especially wholesale and retail trade, manufacturing, transport, telecom, real estate, banking, finance and health care. Private consumption expenditures will continue to be propelled by the same factors that were behind their accelerated growth last year, especially rapid expansion in consumer loans, low interest rates, more domestic investments and the positive impact of the "wealth effect" on the average consumer in the region. Saudi Arabia's real GDP growth for 2004 is estimated at 5.3 percent, while nominal GDP increased by 16.9 percent to a total of $248.5 billion, which is bigger than the combined GDP of the second and third largest Arab economies, Egypt and the U.A.E.

Growth in the oil sector, which accounts for about a third of the Kingdom's GDP, is estimated last year at 5.9 percent, and the non-oil private sector, which makes up around 44 percent of GDP, has grown by an equally impressive 5.7 percent. Real GDP growth in 2005 is forecast at around 4 percent, with the non-oil sectors continuing to outperform growing at around 6 percent. Real GDP growth in the U.A.E. is estimated at 10.4 percent in 2004, up from 7 percent in 2003, driven mainly by construction, financial services, tourism and the wholesale/retail trade. The underlying drivers for growth in 2005 remain strong and the stimulus from private investment, booming real estate and stock markets, as well as, consumer expenditures could see the economy growing at 7 percent this year.

Kuwait's economy has also been booming on all levels. Following a surge of 16.4 percent in nominal terms in 2003, and 6 percent in real terms. The corresponding growth rates for 2004 are estimated at 15 percent and 5 percent respectively. The strong growth is attributed to good performance of both the oil and the non-oil sectors of the economy. The government has remained accommodative, as economic policies have positively promoted business investment and stimulated consumer spending, with abundant liquidity in the banking sector reinforcing the trend. The Central Bank of Kuwait acknowledged the robust state of the economy and raised interest rates five times in 2004 to 4.75 percent. Nominal GDP is expected to register an above-trend growth of 13 percent in 2005 in nominal terms and a 4.5 percent in real terms.

The star performer in the region last year was Qatar with real GDP growth of 10 percent expected to decline only slightly to 8 percent in 2005. Oman also did well with growth of 4.5 percent in 2004, compared to 4 percent in 2003, and the Sultanate is forecast to grow at 3.5 percent this year. Real GDP for Bahrain is estimated at 6 percent for 2005, following a 5.1 percent growth in the year before. Oil revenues account for 24.3 percent of Bahrain's GDP and 73 percent of its government revenues. The Abu Saafa oilfield, which Bahrain shares with Saudi Arabia, contributed around 84.2 percent of the total crude oil production of Bahrain.

The major concern is that recently Saudi Arabia decided to suspend its supply of 50,000 barrels per day of oil to Bahrain. If this issue is not sorted out soon, the economy of Bahrain will experience a major blow that will greatly restrict its growth prospects this year. For the Arab countries of West Asia: Jordan, Lebanon, Syria and Egypt, the economic outlook this year promises to be a continuation of last year's good performance. A combination of low domestic interest rate environment, expansionary fiscal budgets, a decline in non-performing loans across most banks, a surge in workers' remittances, more regional tourism, strong corporate earnings and a rise in mostly dollar denominated exports to Europe, the Gulf states and the U.S. are all positive factors supporting the growth outlook of those countries. Jordan real GDP growth is forecast at 6 percent in 2005, following a record year of 7 percent growth in 2004.

Egypt also had an excellent year growing at 5.3 percent in 2004 with real GDP growth edging slightly higher to 5.8 percent this year. Syria benefited last year from higher oil prices and a surge in regional tourism, with real GDP estimated at around 4.5 percent, dropping to 3.5 percent this year. For the third year in a row, the region is expected to record strong economic growth. Nevertheless, most Arab countries are still far away from attaining their full potential.

Annual growth rates of 5 percent to 6 percent in the region's private sectors are needed for several years to come in order for growth to be associated with strong job creation.

With unemployment in the region averaging 15 percent, while 50 percent of the population are below the age of 20, the only way to absorb all the entrants to the labor force is to have a dynamic private sector capable of creating new jobs. While high oil revenues, excess regional liquidity, and inward directed investments could all help promote prosperity in the region, the deteriorating conditions in Iraq and the turmoil in the Palestinian territories will continue to undermine regional stability. It is hoped that the elections planned to take place in early 2005 in the two countries would unfold into something positive that could help change the perception of future risk and uncertainty in the Middle East.

Henry T. Azzam is Chief Executive Officer at Jordinvest in Amman

Amman,01 17 2005
Henri T. Azzam
The Daily Star
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