French bank says Gulf bloc's economy to expand more than 12%
A decision by six Gulf oil producers to admit Jordan and Morocco would add more than 12 per cent to the bloc’s economy which could soar above $one trillion in current prices, a key French bank said on Wednesday.
The two Arab nations are also expected to reap big gains from joining the 30-year-old Gulf Cooperation Council (GCC) in terms of attracting capital from the wealthy Gulf nations and exporting labour to them, Credit Agricole said.
In en eight-page study authored by John Sfakianakis, chief economist at Banque Saudi Fransi, it said moving forward with this proposal would most notably lead to the creation of a new axis of geo-political influence in the Middle East.
The study, sent to Emirates 24/7, said it believed the main impetus for the proposed inclusion of Morocco and Jordan is now mainly political in nature, adding that it does not foresee any market impact in the coming months as a result of this debate.
Yet the economic implications of integrating two oil-importing states into the energy-rich bloc would be immense and demand careful assessment as to whether economic harmonization can be achieved, Sfakianakis said.
“Full integration of Jordan and Morocco into the GCC economic area would add 12.2 per cent to the bloc’s nominal GDP, based on 2010 data, bringing it solidly above the $one trillion mark,” he said.
He said it would be much easier for the GCC to absorb Jordan since its economy, worth $27.5 billion in 2010, is smaller than that of Oman and about a fifteenth of the size of Saudi Arabia’s.
Jordan, which shares a border with Saudi Arabia’s northwest, is also a better geographic fit than Morocco, a Mediterranean coast state in North Africa.
Morocco’s economy was valued at $103.5bn in 2010, not far below Qatar and Kuwait, and its inclusion in the GCC would lead to a sizeable adjustment in the GCC’s economic structure, Sfakianakis said.
He expected full integration of both countries to reduce Saudi Arabia’s total GDP contribution to the GCC to 36 from 42 per cent, based on 2009 GDP data.
Real growth rates of the two countries were broadly in line with rates achieved by Gulf Arab states in the past two years, the exception being Qatar which has experienced double-digit economic growth as it builds natural gas capacity.
Inflation rates are also on par among the eight countries, although pressure on consumer prices are steeper in Jordan and Saudi Arabia than other countries. The report showed inflation in Jordan is likely to reach 6.1 per cent this year, exceeding forecasts for Saudi Arabia of 5.6 per cent.
According to the study, the timing and character of the inclusion of Morocco and Jordan is not known yet while the currency regimes adhered to by both varies. Jordan’s currency is pegged to the US dollar whereas Morocco’s currency is linked to a EUR-denominated currency basket.
Hence, monetary policy in the case of Jordan is mostly US-focused and Eurozone based in the case of Morocco, it said.
It could be that by the time Morocco and Jordan become more fully aligned with the GCC the currency regime would have also evolved for the Gulf Arab states into a broad-based basket of currencies beyond the dollar, it added.
“Neither Jordan nor Morocco holds substantial oil wealth, setting them apart from Gulf Arab states, which rely on oil exports for the majority of their public revenues. As net oil importers, Jordan and Morocco are more economically diversified and unlike their GCC counterparts, their governments face fiscal deficits this year, in a large part due to the rising cost of energy that has been a boon for Gulf Arab states,” Sfakianakis said.
“The two countries thus have a lot to gain from membership in the GCC, which would facilitate greater foreign direct investment, boost trade, commerce and labour mobilization. Agriculture, which accounts for around 16 per cent of the country’s GDP and employs around 42 per cent of the working population, could offer additional opportunities for investment for the GCC in their search of agricultural investments abroad.”
Turning to finances, the report said the differences between the current GCC bloc and the two potential new members exceed their similarities.
It said this is particularly evident on the fiscal front, adding that Jordan’s budget deficit stood at $1.5 billion in 2010, or 5.4 per cent of GDP including foreign grants, and is likely to widen this year.
Morocco also faces a growing deficit, particularly as investment flows and tourism in the region are hit this year due to the current political unrest.
Jordan’s public debt stock stood at 62.7 per cent of GDP in 2010 as the government sought to finance fiscal deficits, the report said.
By contrast, most Gulf Arab states, except Bahrain, have been posting solid budget surpluses, adding to their already rich foreign asset holdings.
“Integrating Jordan and Morocco could in this respect upset some of the bloc’s progress toward economic integration. Gulf Arab states have been working towards a common market – which includes freedom of movement for the labour force, capital, and goods and services,” it said.
“The GCC also has a longer term objective of establishing a single currency, although that plan has been fraught with delays and hurdles, not least of which was the UAE’s decision to pull out of the project in 2009. All GCC states maintain currency pegs to the dollar, except for Kuwait, which pegs its dinar to a basket of currencies comprised mainly of dollar. Jordan’s dinar is also pegged to the dollar, while Morocco pegs its currency to a basket of key major currencies.”
Sfakianakis noted that GCC states had fulfilled many of the preconditions for a currency union - they are mainly oil exporters, are very open to trade and imported labour, and have flexible labour markets.
Their budget deficit and debt limit criteria are complementary, and they have already ratified a basic monetary union agreement and commenced operations of a monetary council which forms the backbone of the central bank.
“Yet the monetary union has been derailed due to a lack of political will and introducing new players – with very different fiscal and monetary circumstances – could complicate the plan even more. The EU sovereign debt crisis revealed the importance of centralizing both monetary and fiscal policy to avoid breaches of budget deficit and debt limits that could potentially destabilize the bloc.”
Sfakianakis said he believed one major question mark over the extension of full membership to the two countries is population.
He said the population of the new GCC bloc including Jordan and Morocco would almost double in size, rising to 82.9 million as of the end of last year, compared with 45 million in the current GCC.
“Gulf Arab countries have porous borders and nationals of the countries are able to travel within the bloc without visas. This has been possible due to the relatively small indigenous populations in most Gulf countries,” he said.
He noted that with the exception of Saudi Arabia, home to about 18.5 million Saudis, the national populations of most Gulf countries are quite small, in many cases just a fraction of the overall population size.
“Extending unhindered travel rights to Jordanian and Moroccan citizens could be problematic, particularly for Saudi Arabia, which applies stringent rules for the issuance of visas for religious tourism to countries outside of the GCC,” he said.
He added that Jordan, with a population of 6.1 million last year, is more populous than Kuwait, Qatar, Oman and Bahrain.
Morocco’s population is substantially larger at 31.8 million in 2010-17 per cent more than Saudi Arabia’s population including expatriates.
Around 2.5 million Moroccans, equivalent to 20 per cent of the country’s total labour force, find employment abroad, mostly in Europe.
An estimated 600,000 Jordanians, mostly employed in the Gulf region, remit annually the equivalent of around nine per cent of the country’s GDP.
“With full inclusion of Morocco, Saudi Arabia’s share of the GCC population would fall sharply from 60 per cent now to 33 per cent. Given the population dynamics, it may not be feasible for the GCC to extend full membership to Morocco in particular without setting conditions on the free movement of people.”
