JORDANIANS FEELING UPBEAT, FOR A CHANGE

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
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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.

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And Even about the United States
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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.

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Private/Public Sectors Buoyant
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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.

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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.

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First Credit Upgrade in Years
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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.

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2003: A Balanced Budget is Possible
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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.

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2004 Deficit Target Tougher, but Within Reach
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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.

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Comment: A Fragile Moment
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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