US embassy cable - 04AMMAN350

UNCLAS SECTION 01 OF 03 AMMAN 000350 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - A. DEMOPULOS 
USTR FOR NED SAUMS 
USDOC 4520/ITA/MAC/ONE/PTHANOS 
OPIC FOR ABED TARBUSH 
EXIM FOR ROBERT BOSCO, GRAYSON WOLFE 
TDA FOR HENRY STEINGASS/CYBIL SIGLER 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, EFIN, ETRD, EINV, JO 
SUBJECT: JORDAN: BUSINESS CONFIDENCE STRONG 
 
REF: AMMAN 72 
 
1.  (SBU)  Summary:  As a new year begins, Jordan's economy 
continues to perform well and the business community is 
looking forward to continued strong activity, based in part 
on new opportunities in Iraq and under the U.S. FTA, as well 
as on good policies at home.  Nevertheless, business people 
are worried about the new government's commitment and ability 
to follow through in moving to a new stage of economic 
reforms, including on the tough issues posed by 
privatization.  We remain optimistic, with the increased 
engagement offered by USDOC, EXIM, OPIC and TDA during recent 
meetings in Amman creating new opportunities to help lock in 
Jordan's economic progress and role as an economic model for 
the region.  End Summary. 
 
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GDP Growth Back to Pre-War Pace 
------------------------------- 
 
2.  (SBU)  Last summer's post-war, post-WEF boomtown pace may 
have slowed, but Jordan's business community continues to 
brim with confidence for the new year.  We see this in the 
economic data, as well as in anecdotes of deals and prospects 
of deals.  After a war-related slowdown in the first half of 
the year, second half real GDP growth seems to have returned 
to or surpassed a 5% annual pace, so that growth for the year 
should average 3.3% according to the Finance Ministry.  The 
industrial production index, an indicator of future growth 
that fell 35% in early 2003, returned to its prewar high by 
October.  With a growing economy, foreign exchange reserves 
remain high and the stock of foreign debt to GDP ratio -- 
long a drag -- continues to fall. 
 
3.  (SBU)  For 2004, the economy is on track to reach the 6% 
GDP growth targeted by the budget and IMF.  Exports will 
continue to play a driving role.  They were up 6.5% in the 
first 11 months of 2003, and will exceed $600 million to the 
U.S. alone for the year (bringing total bilateral trade to 
over $1 billion).  Exports to Iraq are rebounding to pre-war 
levels: October's total of $39.7 million surpassed October 
2002's $35.6 million.  At the same time, imports are growing 
strongly -- a positive sign for better domestic investment 
and consumption levels.  Still another indicator of 
confidence in the future is the booming stock market.  The 
ASE index rose 64% in the last twelve months, and is already 
up by more than 8% in January, with volumes twice those of a 
year ago. 
 
4.  (SBU)  GDP growth and stock market activity have been 
fueled by interest rates cuts that have matched the U.S. Fed; 
the current 2.5% dinar discount rate is at only a small 
spread above comparable U.S. rates.  Last year also saw 
upgrades in Jordan's sovereign credit ratings and approval of 
portfolio investment in Jordan by the bellwether Calpers 
pension fund.  Jordan also benefits from the broader regional 
economic upturn described recently in the Economist magazine 
through increased regional exports and remittances (which are 
equal to 20% of GDP).  Inflation also appears in check, 
although the appreciation of the euro and British pound (the 
dinar is pegged to the U.S. dollar) may be putting pressure 
on consumer prices.  With most of Jordan's imports coming 
from Europe, this has led to complaints from importers about 
higher costs. 
 
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Smiling Business Community 
-------------------------- 
 
5.  (SBU)  The smiles on business people's faces are another 
leading indicator.  A major manufacturing exporter to the 
U.S. and Gulf said he has so far this month signed as many 
deals as he completed in all of 2003.  A top pharmaceutical 
company is working with a U.S. investment bank to go public 
on the New York Stock Exchange.  The staid Arab Bank acquired 
the hard-charging local Atlas Investment Group to be the 
nucleus of a new investment banking unit.  Another local drug 
maker signed a joint production agreement with a major 
international pharma company.  And yet another international 
pharma company is close to a major deal with the Ministry of 
Health. 
 
6.  (SBU)  Even some of the "dinosaurs" that traded with Iraq 
are grinning: one is working with Proctor and Gamble to 
upgrade the quality of the detergents it has traditionally 
exported to Iraq, others -- like contractors, plastics 
makers, and steel mills -- are finding their old customers, 
as reflected in the export numbers cited above.  Resuming 
Jordan's traditional role as a gateway to Iraq, Jordanian 
firms are supplying the U.S. military in Iraq and CPA, and 
contractors like KBR and Bechtel have set up procurement and 
back office shops in Amman.  (One unintended consequence has 
been severe congestion at the port of Aqaba -- not to mention 
the luxury hotels of Amman.)  The Export and Finance Bank, an 
innovative and aggressive local bank, is finalizing a $6.5 
million purchase of 49% of an Iraqi private bank.  This 
should ease some of the difficulties in financing Iraq trade, 
which since April has been conducted on a cash and carry 
basis.  The success of the recent Iraq Outreach 2004 trade 
show, the fifth similar international business gathering here 
in the past five months, was another sign of how new 
opportunities in Iraq are bolstering local spirits. 
 
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Downside Risk is Political 
-------------------------- 
 
7.  (SBU)  A report of this nature is not complete without a 
look at the downside.  In Jordan's case, the risks continue 
to come from a very unequal distribution of income and wealth 
that puts strong political pressure on the government to 
intervene in markets and to slow down on economic reform. 
Since June, this pressure has also been coming from a 
Parliament that gives disproportionate weight to 
"traditional" groups that long depended on government 
handouts and are therefore the "losers" from economic 
reforms, at least in the short-term.  With poverty stubbornly 
high and an official unemployment rate of 14.3%, job growth 
in the QIZs and export sectors will take time to have a wider 
impact.  Thus, the government's economic agenda faces strong 
public and private opposition in Parliament.  The Fayez 
government faces difficult economic decisions, such as to 
whether to move forward with privatization -- particularly in 
the case of the mismanaged phosphate company, which employs 
considerable excess labor in the politically sensitive 
southern governates.  Military pension reform, a major fiscal 
priority, also faces strong opposition given the large 
influence of the military in Jordanian society, particularly 
among the "East Bankers" who dominate Parliament. 
 
8.  (SBU)  Understanding the need to increase foreign and 
domestic investment (a weak link in Jordan's economic 
recovery), ministers are clear to us about their commitment 
to reforms, including privatization as well as the tough tax 
and price measures included in the budget (ref).  However, 
they acknowledge that they have to be very careful addressing 
the subject in public.  Also putting pressure on the new 
government are the increasingly vocal charges of corruption 
leveled in Parliament against former PM Abu Ragheb and other 
former and sitting ministers, notably Planning Minister 
Awadallah, who has been accused of personally benefiting from 
last year's privatization of the Arab Potash Company and of 
helping a relative's company secure USG subcontracts.  With 
such charges likely to continue, they are, at best, a 
distraction, and, at worst, embarrassments that weaken the 
government.  Thus, the stage is set for political-economic 
dramas sure to come in 2004. 
 
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Comment 
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9.  (SBU)  Extraordinary financial assistance from the U.S. 
and Gulf oil countries, as well as Jordan's unique access to 
the U.S. market under the QIZ program and the FTA, were key 
to Jordan's ability to emerge from the war in a good 
position.  Our assistance programs will continue to be vital 
both in funding needed public investments (e.g. water, 
health, and education) and in providing technical assistance 
and incentives for continued reform, ultimately helping close 
the wealth divide.  Jordanian officials were impressed by the 
offers of visiting senior officials from USDOC, EXIM, OPIC 
and TDA to increase their engagement in Jordan in ways that 
will help firms here take advantage of the opportunities in 
Iraq as well as bilaterally under the FTA.  We look forward 
to working with those agencies, such as in organizing a 
mission to the U.S. of Jordanian companies interested in Iraq 
reconstruction proposed by Deputy PM Halaiqa. 
GNEHM