US embassy cable - 03AMMAN2028

UNCLAS SECTION 01 OF 03 AMMAN 002028 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA--MARSHALL MILLS, WON CHANG 
USDOC 4520/ITA/MAC/ONE/COBERG 
 
E.O. 12958: N/A 
TAGS: EFIN, EAID, ETRD, JO 
SUBJECT: JORDANIAN ECONOMY: WELL-PREPARED, FOR NOW 
 
1.  (SBU) SUMMARY: A high state of preparedness on a number 
of levels has enabled the Jordanian economy to thus far 
weather the war with few dislocations.  However, the 
expectations that have shaped the current economic stability 
factored in a nonprotracted and a relatively--at least for 
Jordan-- undisruptive conflict, resulting in quick and easy 
access to a lucrative post-Saddam Iraq with minimal negative 
political spillover in Jordan.   Strains are already 
beginning to show; if the war turns out to be longer than 
locally expected, the conflict's drag on the Jordanian budget 
and economy could grow proportionally.  END SUMMARY 
 
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CRISIS? WHAT CRISIS? 
-------------------- 
 
2.  (SBU) Central Bank of Jordan (CBJ) and commercial bank 
managers did a good job of managing expectations ahead of the 
conflict so as to minimize the chance of bad surprises when 
war actually began.  For example, public statements by CBJ 
Governor Touqan highlighted the high level of foreign 
currency reserves and strong capitalization of the banking 
sector, and the Bank brought in extra cash dollars just in 
case.  Public statements by CBJ Governor Touqan emphasizing 
the high level of reserves served to reassure clients and 
investors alike.  Thus, no unusual movements of capital nor 
even short-term runs on deposits occurred in the early days 
of the conflict, unlike 1991 and when King Hussein died in 
1999.  CBJ officials and bankers say that currently, "things 
are quite calm" and that they are "very comfortable with the 
situation," but emphasize that they continue to keep a close 
watch. 
 
3.  (SBU) Trading on the Amman Stock Exchange (ASE) has 
increased in both volume and value since the war began, with 
investors positioning themselves for opportunities in a 
post-war Iraq.  Local investment analysis and brokerage firm 
Atlas Investment Group (AIG) issued "Allocating the Spoils of 
War," an analysis that featured 10 Jordanian companies that 
were, according to AIG, well positioned to profit from the 
war.  Subsequently, the companies enjoyed a 6% increase in 
their share prices over the past week.  In addition, positive 
2002 results for some Jordanian companies, released ahead of 
annual meetings traditionally held this time of year, 
resulted in higher volume as well.  The ASE is relatively 
highly capitalized as a share of GDP and has a large number 
of small investors, making it a useful gauge of business 
confidence. 
 
4.  (SBU) When the war started, prices of many commodities 
dropped as the result of overstocked shelves in anticipation 
of a run on basic goods and foodstuffs that fell short of 
grocers' expectations.  The government also reassured the 
public that at least six months of essential food supplies, 
including wheat, sugar, and rice were stocked in the country. 
 Although below-market cost oil shipments from Iraq have 
ceased, the accumulation over the past year of 45 days worth 
of strategic oil reserves (up from 15 days) enabled the 
government to avoid, so far, disruptive rationing or price 
increases for fuel and related products. 
 
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IT, TELECOMS GLITCH-FREE 
------------------------ 
 
5.  (SBU) Mobile and fixed-line telecommunications operators 
were well-prepared, too, having taken steps to protect, 
maintain and upgrade infrastructure in recent months.  As a 
result, there has been virtually glitch-free phone and 
internet service since the conflict began, unlike during 
other high traffic events such as holidays and snowstorms 
when the mobile system has been overwhelmed and knocked out 
of service.  According to a Jordan Telecom (JT) official, the 
sole complaint the network is fielding these days regards the 
increasing inability for Jordanian callers to establish 
connections in Iraq, due to the degradation of the Iraqi 
telecom infrastructure.  Major IT companies say Internet 
service, while nearing capacity levels at times, continues to 
run normally. 
 
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BUT TROUBLE IN TOURISM 
---------------------- 
 
6.  (SBU) Civil aviation, airport, and airline officials 
increased airport security profiles and established 
contingency plans in anticipation of the possibility of 
conflict-related events spilling over into Jordanian 
airspace.  National carrier Royal Jordanian Airlines (RJ) 
made preliminary arrangements to base its operations in 
Athens, with limited shuttle service in and out of Amman. 
However, as the Jordanian skies have remained clear and open, 
normal airport operations have continued.  RJ continues to 
offer weekly direct service to New York, with full loads out 
of Amman but running at 30% of capacity for return flights 
and down 65% overall.  The government on April 1 authorized a 
transfer of JD 5 million ($7.05 million) to RJ to offset 
extraordinary costs associated with the war.  While some 
European carriers have restored limited service to Amman, 
flight frequency has been reduced considerably due to low 
load levels.  Perhaps educated after the Afghan conflict, 
Jordan has done a better job dealing with insurance companies 
and showing them how to better distinguish Jordan from the 
rest of the region.  As a result, insurers have not imposed 
war risk premiums on air or sea transport, allowing export 
and import trade to continue at near normal levels. 
 
7.  (SBU) Although late winter-early spring is considered low 
season for travel to the region, hotel operators are 
nonetheless alarmed at occupancy rates that have dropped to 
25% at many hotels in Amman and even lower in traditional 
tourist sites such as Petra and Aqaba.  Even worse, summer 
booking cancellations are beginning to appear, and an 
industry that had just begun to recover from the impact on 
international travel of the Intifada and 9/11, by 
concentrating its tourism marketing efforts on nearby Gulf 
countries, seems destined to take another hit.  Were it not 
for the hundreds of journalists in Amman, one owner told us, 
the situation would be much worse.  He added, however, that 
due to the longer-than-expected (by some) duration of the 
war, some reporters are pulling out because of limited 
resources. 
 
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WHEN IS A BOYCOTT A BOYCOTT 
--------------------------- 
 
8.  (SBU) American companies doing business in Jordan have 
seen no evidence of an organized boycott of American 
products.  While business is down by approximately 50% for 
many fast-food restaurants as well as for locally-produced 
Coke and Pepsi, company officials told us they can not 
directly attribute the downturn to any concerted action. 
Rather, they said, it may be due to what has in fact been a 
cooler than normal spring and a rather somber time "when 
people are more likely to stay home and watch TV." 
Regardless, observers tell us of an increased frequency in 
mobile phone text messages and emails exhorting readers to 
boycott all things American and British.  The owner of the 
KFC and Burger King franchises in Jordan acknowledged the 
possibility of a "random" boycott, but added that "it was 
only a matter of time" before something more organized 
surfaces. 
 
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IRAQI TRADE 
----------- 
 
9.  (SBU) Exports to Iraq, which amount to $400 million per 
year, have virtually ceased as fighting has intensified and 
both overland and air transport routes between the two 
countries have been cut off.  The attendant effects of this 
cut-off are likely to be felt in the near term most acutely 
by exporters and transport companies, which nonetheless 
expect greater opportunities once trade connections are 
restored. In the short term, this will require significant 
government transfer payments to the most affected groups. 
However, as one analyst told us, the possibility of a new, 
open Iraqi market is looked upon skeptically by many traders 
here, even those with long-established Iraqi relationships, 
who wonder "what will be the picture afterwards."  He said 
that the fear is that an open Iraq will mean more competition 
and a change in rules and procedures that have been in place 
for twelve years. 
 
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THE MACRO PICTURE 
----------------- 
 
10.  (SBU) Other exports appear to be continuing as normal, 
although land freight rates are up to GCC countries because 
of higher war-related insurance costs and air freight rates 
have also increased.  While QIZ export activity has continued 
throughout the conflict, as time goes on, exporters are 
beginning to report low level cancellations of orders.  In 
addition, jittery rumors of bridge closures, limited port 
access, and rising freight insurance rates have unsettled QIZ 
producers.  Finally, a customs strike in Israel, unrelated to 
the war, has served to raise the specter of more limited QIZ 
exports at a very sensitive time. 
 
11.  (SBU) The same analyst expressed greater concern over 
the effect of even a short conflict on Jordan's budget 
deficit.  He noted that "there did not seem to be much 
clarity" for the public regarding publicly reported plans to 
replace Jordan's below-market priced oil with supplies from 
Gulf states, such as Kuwait and Saudi Arabia.  As a result, 
he said, people will expect to pay the same price for 
gasoline, at least for the time being, making it politically 
difficult for the government to raise prices, thereby putting 
added strain on the budget.  Our observer also said that last 
year's 5% increase in GDP barely outpaced the rise in 
government salaries and pension outlays; it was doubtful, he 
opined, that such would be the case this year.  He said 
although grants and foreign aid may help alleviate some of 
these strains, he worried that the "disciplined, 
macroeconomic fundamentals" that have undergirded Jordan's 
improved economic results in recent years could become 
"unraveled" due to the conflict.  Finally, he added that 
foreign investors are not traveling to Jordan, "not at all," 
and said that foreign direct investment will look elsewhere 
if the war is not over soon, if it has not already done so. 
 
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COMMENT 
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12.  (SBU) One can scarcely imagine what more the Jordanian 
government and key infrastructure and economic players could 
have done to better prepare the Kingdom for a conflict that 
has been a long time coming.  That level of preparedness has 
served Jordan well, and insulated it from even greater 
dislocations, either present or future.  However, as long as 
the conflict in Iraq continues, uncertainties will grow and 
cracks could begin to appear.  The recently announced 
supplemental appropriation of $700 million in economic 
assistance will go a long way to help keep Jordanians 
reassured about our continued commitment to Jordan's economic 
stability and growth. 
 
 
 
 
 
GNEHM