US embassy cable - 03AMMAN4233

C O N F I D E N T I A L SECTION 01 OF 03 AMMAN 004233 
 
SIPDIS 
 
PASS USTR FOR SAUMS 
TREASURY FOR OASIA - ABIGAIL DEMOPULOS 
USDOC/4520/ITA/MAC/ONE/PTHANOS 
 
E.O. 12958: DECL: 07/07/2008 
TAGS: ECON, EFIN, PGOV, PREL, JO 
SUBJECT: JORDANIANS FEELING UPBEAT, FOR A CHANGE 
 
 
Classified By: CLASSIFIED BY AMBASSADOR EDWARD W. GNEHM.  REASONS 1.5 ( 
B) AND (D). 
 
1.  (C)  Summary.  Jordan is currently on a high:  the war in 
Iraq is over, parliamentary elections succeeded, the World 
Economic Forum was a shot in the arm, there is movement on 
the roadmap, the stock market is up, foreign debt is down, 
and Jordan's credit rating was just upgraded.  The private 
sector is looking for new opportunities in Iraq and to the 
west of the Jordan River and new foreign investment seems to 
be coming in from the Gulf.  This is a welcome mood swing, 
but setbacks in the peace process and instability in Iraq 
could reverse the swing.  Jordan will need continued 
encouragement to move forward with reforms as well as 
continued financial support to help spread economic benefits 
more broadly in the society.  End Summary. 
 
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Feeling Good About Ourselves 
---------------------------- 
 
2.  (C)  Having weathered the war with Iraq with minimal 
economic fallout (thanks to U.S. assistance), held 
parliamentary elections, and received an international boost 
from the President's visit to Aqaba and the World Economic 
Forum (WEF) meetings at the Dead Sea, Jordanians are feeling 
good about themselves.  Sourness no doubt remains among 
"intellectuals," journalists, and old guard politicians, but 
the overall mood of government and the private sector 
contacts these days is one of optimism and even enthusiasm 
about the future. 
 
-------------------------------- 
And Even about the United States 
-------------------------------- 
 
3.  (C)  As Israel and the Palestinians take first steps on 
the road to peace, the good feelings are even spilling over 
into the way Jordanians see the United States.  Attendance at 
our Fourth of July reception was unprecedented in recent 
memory.  The heavyweight U.S. delegation to the WEF was 
noticed and appreciated by Jordanians, who were buoyed by 
Secretary Powell's, Ambassador Zoellick's and other officials 
 
SIPDIS 
repeated references to Jordan as the region's model for good 
policy. 
 
------------------------------ 
Private/Public Sectors Buoyant 
------------------------------ 
 
4.  (C)  Rather than the economic and political catastrophe 
so many feared would result from the severing of Jordan's 
"special" economic relationship with Iraq, there is a 
boomtown atmosphere in the private economy.  Iraqis with cold 
cash are buying up everything from cars, to clothing and 
consumer goods, to manufactured products.  Lines at the Iraqi 
border are miles long.  Brimming with schemes to get involved 
in Iraqi reconstruction, businesspeople are again looking 
west to participate in rebuilding the shattered West Bank 
economy.  At the same time, there appears to be a new 
interest by Gulf investors in Jordan.  The leading mobile 
phone company was purchased by a Kuwaiti counterpart earlier 
in the year, and Saudi investors are moving into real estate 
and retail development in Aqaba, Amman, and the Dead Sea. 
 
5.  (C)  A similar loosening is true in politics. 
Parliamentary elections were conducted with relative ease and 
the outcome maintained the traditional balance as tribal 
groupings retained the upper hand over Palestinians and 
Islamists.  Increasingly, Jordanians are spontaneously 
approaching us to say that, in the end, the U.S. did the 
right thing in Iraq.  The Aqaba Summit and movement on the 
roadmap also brought relief.  The trade and water ministers 
noted with satisfaction that they were able to have their 
first public meetings with Israeli counterparts in years 
during the WEF.  After some hesitant contacts with the 
Embassy during the war, other ministers are now competing 
among themselves to be the first to go to meet CPA in Baghdad. 
 
--------------------------------------------- -- 
Real Economy Scarred by the War, but Looking up 
--------------------------------------------- -- 
 
6.  (C)  The limited numbers available bear out the positive 
mood.  With the economy preparing for war, real GDP in the 
first quarter (not seasonally adjusted) declined 13% compared 
to the previous quarter, which was itself down 2% over the 
third quarter.  But compared to the first quarter of 2002, 
GDP actually grew by 2.8%.  Besides seasonal drops in 
construction and agriculture, manufacturing, electricity and 
water, and wholesale and retail trade saw the sharpest 
declines in activity in the first three months.  There also 
appears to have been a drop in government spending following 
a usual end of year spurt. 
 
7.  (C)  The focus, however, is on the 2.8% increase over the 
first quarter of 2002.  Government officials and private 
analysts hope this performance will be sustained through the 
following three quarters to achieve a 3% annual growth rate. 
Exports and QIZ activity remain solid.  January-April QIZ 
textile production appeared to be up over 15% according to 
partial results from Irbid's al-Hassan Industrial Estate. 
The one down note is uncertainty over the status of contracts 
for shipments to Iraq under the OFF and bilateral trade 
protocol that were interrupted or for which payment was not 
received due to the war.  The old-guard businesses that held 
such contracts are putting the government under considerable 
political pressure to make them whole. 
 
----------------------------- 
First Credit Upgrade in Years 
----------------------------- 
 
8.  (C)  Financially, Jordan is in its best position in 
decades.  Foreign reserves stand at $4.4 billion (including 
the $700 million transferred by the United States to cover 
war-related budget needs).  Banks are flush and the stock 
market is up 32% from its pre-war low in February.  In a 
another sign of market confidence, the finance ministry 
recently succeeded in issuing $200 million in five-year JD 
treasury bonds at 4.25%, about 2.25% over LIBOR, the lowest 
spread ever.  An especially important vindication for Finance 
Minister Marto's policies of fiscal restraint was Standard 
and Poor's July 3 upgrade of Jordan's long term sovereign 
credit rating to BB from BB-.  This was the first upgrade in 
years and one that Marto hopes will be followed by Moody's 
after it completes an assessment this month. 
 
------------------------------------ 
2003:  A Balanced Budget is Possible 
------------------------------------ 
 
9.  (C)  Fiscally, the government is also feeling 
comfortable.  According to its recently published staff 
report, the IMF expects a JD 175 million deficit this year, 
equivalent to 2.8% of GDP.  This improvement over the 5.0% 
realized last year is mainly thanks to extraordinary 
assistance from the United States, the Gulf states (in the 
form of free oil), and Japan that more than offset the loss 
of the oil subsidy from Iraq and additional spending related 
to the war.  This outcome would reduce the external debt 
burden by 4 percentage points, to 73% of GDP, compared with 
90% in 1999 and over 100% earlier in the decade.  In fact, 
Finance Secretary General Abu Hammour recently told ECON/C 
that he thought the budget for the year could well end up in 
balance, adding that Jordan had no intention of requesting 
U.S. agreement to use the last $200 million of the recent 
$700 million budget transfer this year. 
 
10.  (C)  As Prime Minister Abul Ragheb and Marto reaffirmed 
to Under Secretaries Larson and Taylor during the WEF, the 
government remains committed to the undertakings it made to 
the U.S.  All spending will be through the previously 
approved budget (with "surplus" amounts going to deficit 
reduction rather than new projects) and Jordan will continue 
to implement steps to wean itself off cheap oil imports by 
raising consumer prices of oil products. 
 
--------------------------------------------- 
2004 Deficit Target Tougher, but Within Reach 
--------------------------------------------- 
 
11.  (C)  Meeting the IMF's 2004 deficit target of 3.9% of 
GDP (JD 289 million) will be more difficult, but still seems 
achievable.  Reserving $200 million of the $700 million 
provided by the U.S. for the 2004 budget will be a big help, 
as would continuation of the concessional oil supplies from 
the Gulf.  Abu Hammour said that so far, the Saudis have 
promised to continue the current arrangement only through 
end-September, but that he was hopeful they would agree to 
continue it through next year, along with Kuwait and the UAE. 
 (A top palace official told the Ambassador the Saudis had 
already agreed to continue it through March 2003, but this 
appears to be closely held.) 
 
12.  (C)  Even with this help, deficit reduction measures 
equivalent to 1.3% of GDP (about JD 100 million) would still 
need to be identified to meet the 2004 target.  Abu Hammour 
said these will be achieved through continued price increases 
for petroleum products, other tax increases and some spending 
curtailment.  He admitted that a sitting Parliament would 
make implementing such measures more politically complex than 
in the past few years.  We hear that Marto will make a major 
outreach campaign to new deputies to educate them on budget 
realities and prepare the ground for the 2004 budget debate 
that will take place in December. 
 
-------------------------- 
Comment:  A Fragile Moment 
-------------------------- 
 
13.  (C)  After years of pessimism, a mood swing is welcome. 
But we should welcome it as just that:  lack of sustained 
progress on the road map and/or in stabilizing Iraq could 
swing the public in the opposite direction very quickly. 
There is also a complacency risk.  Improving the investment 
climate so as to achieve the higher growth rates needed to 
reduce unemployment and poverty will remain hard work.  New 
Parliamentarians weary of years of fiscal austerity will make 
this task more difficult for the King and his government. 
Reducing poverty and unemployment remains Jordan's most 
pressing economic and political challenge.  Funding for the 
productivity enhancement projects under the Social and 
Economic Transformation Program (SETP) will continue to 
remain crucial for political stability and medium term 
growth.  The embassy will continue to engage to maintain the 
positive momentum.  Washington's continued focus and 
engagement will also be critical in the months ahead. 
GNEHM