SYRIA'S ECONOMY CONTINUES TO STRENGTHEN

UNCLAS SECTION 01 OF 02 DAMASCUS 000111 SIPDIS SENSITIVE SIPDIS NEA/ELA NSC FOR MARCHESE TREASURY FOR GLASER/LEBENSON E.O. 12958: N/A TAGS: ECON EFIN EINV ENRG EPET ETRD PGOV SY SUBJECT: SYRIA'S ECONOMY CONTINUES TO STRENGTHEN REF: A. 06 DAMASCUS 150 ¶B. 06 DAMASCUS 716 ¶C. DAMASCUS 87 ¶D. 06 DAMASCUS 1696 ¶1. (SBU) Summary. Syria,s economy is starting 2007 much stronger than it began 2006. Growth rates, which increased modestly the last two years, are generally expected to continue upwards if current trends continue. Still, the SARG faces a number of economic challenges in 2007, including increasing budget and trade deficits, the fact that it is spending more on fuel subsidies than it gains from oil exports, and a drought - the severity of which it is still too early to discern. Other variables that could darken Syria,s economic forecast are the increasing economic costs of Iraqi refugees, and threats from political instability in the region. End summary. ,07 - A Stronger Start -------------- ¶2. (SBU) The Syrian business community is more optimistic about the prospects for the Syrian economy at the start of 2007 than it was at this time last year when the Asad regime was still reeling from the withdrawal of its forces from Lebanon and the accusations of regime involvement in the killing of Rafiq Hariri leveled by then UNIIC chief Detliv Mehlis (ref A). In January 2006, the loss of public confidence in President Asad and the course the regime was on had played out most publicly in the stability of the Syrian Pound (SYP),which had devalued by over 20 percent from September to December 2005. The devaluation had caused capital flight, closing of factories, the scarcity of some products, and a profound feeling of unease in the Syrian public (ref B). ¶3. (SBU) By contrast, the SYP has been stable for the last twelve months. Foreign direct investment (FDI),especially from Iran and the Gulf, is increasing, albeit from a very modest baseline. The SARG claims GDP expanded by 5.7 percent in 2006, though most Syrian economists believe the IMF's estimation of 3.2 percent is closer to reality. Ironically, Syria is also profiting economically from the political instability in neighboring Lebanon and Iraq. Syria,s tourism sector is profiting from regional tourists that normally would visit Lebanon who are instead coming to Syria. Syria,s ports are now officially operating over capacity as they process the increasing transshipments to Iraq, and Syria,s own exports to Iraq are increasing. Furthermore, Syrian businessmen are optimistic that the recent warming of relations between the SARG and Iraq will translate into increasing business opportunities for them. Looming Challenges -------------- ¶4. (SBU) In spite of these positives, Syria continues to suffer from a number of chronic economic problems. Though economic statistics in Syria are difficult to come by and notoriously inaccurate, inflation continues to be a significant concern. The SARG officially places the current inflation rate at eight percent though independent economists believe it to be well above ten percent and Minister of Trade and Economy Amer Lutfi was quoted recently commenting that the spike in real estate prices could push it as high as 18 percent. Regardless of the exact figure, there is no doubt that rising prices are a major concern for Syria consumers and a regular front-page news item. The SARG has resorted to regressionary policies in an attempt to contain prices, with predictable results. When the price of lamb started to rise steeply in October, the SARG banned exports. Prices did not come down but Syrian farmers did lose a USD 300 million dollar contract with the Gulf. The Prime Minister also recently directed the Ministry of Economy and Trade to double the number of squads it had patrolling to ensure stores were abiding by price controls, causing some items to be scarce. ¶5. (U) 2007 will be the first official year that the SARG spends more on subsidies of fuel than the income it receives from oil exports. Even though this fact is not acknowledged in the SARG,s official budget, SARG officials are starting to admit it publicly. Since oil revenue has been primarily DAMASCUS 00000111 002 OF 002 responsible for the accumulation of SARG hard currency reserves, the crossover is expected to put additional pressure on the SYP. It will also rob the SARG of one of its key tools to balance its books ) understate the selling price of oil in order to increase its discretionary and unaccounted-for spending (ref C). The added budgetary pressure is also more difficult for the SARG this year given that its admitted deficit, which is always smaller than the actual deficit, is set to increase by 43 percent over the 2006 budget. ¶6. (SBU) Syria is also facing a potentially serious drought this year. The agricultural sector still accounts for around 23 percent of Syria,s GDP with a significant portion of the sector dependent on annual rainfall. Though no official amounts have yet been released, informal estimates have rainfall this season as much as 30 percent below normal. If current trends continue, Syria,s two most important crops, wheat and barley, could be devastated. It may already be too late for barley, but February, March, and April are, in general, the most important months for rainfall for Syria,s agricultural sector. Largest Variables -------------- ¶7. (SBU) The most determinative factor for Syria,s economic fortunes in 2007 could be political stability. As long as the SARG is able to keep out of the negative international spotlight, FDI can be expected to continue to come from the Gulf, regional tourism will continue to increase and the Europeans will slowly start returning. Given its believed hard currency reserves (USD 12 billion or more),the SARG also has the means to continue to defend the SYP at its current value. Nearly all Syrian businessmen we talked to are nervous about regional events but are moving forward with expansion plans in 2007 as long as no new crisis occurs. ¶8. (SBU) Another large variable is the increasing number of Iraqi refugees, the costs of which are only starting to become apparent to the SARG. The exact number of Iraqis in Syria is uncertain, but over a million and increasing is becoming the most often quoted and the number used by President Asad and FM Muallem in their conversations with Codels in December. The Iraqis are most often blamed for the price and real estate inflation Syria is increasingly suffering from. They also are contributing to the increasingly serious budgetary strains of SARG subsidies, especially diesel and electricity (ref D). This week the SARG has reportedly put into place a number of new measures to restrict the ability of Iraqis to remain indefinitely in Syria without publicly announcing what they are, but it is too early to say whether the SARG will implement its measures or how effective they will be at addressing the economic costs of hosting the Iraqis. ¶9. (SBU) Comment. Prophets of doom have been quick to seize on the fact that Syria,s oil exports can no longer support the increasing cost of subsidies in order to predict a short-term economic crisis. Most local economists have been more sanguine, however, and estimate the hard currency reserves the SARG has accumulated over the last four years and its lack of foreign debt will allow it to delay any crisis into the medium term. That buys the SARG time to reduce subsidies and attract the needed FDI to fund further growth. As far as subsidies are concerned, little dramatic change is expected, however, until after the elections ) parliamentary, presidential, and local - the last of which occur in August. Both continued FDI and subsidies also require the SARG to avoid the negative international spotlight that staggered its economy in the fall of 2005. CORBIN