Iraqi Conflict To Stymie Jordanian Exports

BMI View: Iraq's political crisis adds another headwind to the Jordanian export sector, and will complicate Amman's efforts towards energy diversification. We have scaled down our export growth forecasts for Jordan, and now forecast an average current account deficit of 9.8% of GDP between 2014 and 2018, compared with 7.9% previously.

The prospect of long-term political instability in Iraq adds another headwind to the Jordanian export sector, which is already struggling to recover from the disruptions to regional trading activity engendered by the Syrian conflict. Our baseline view is that Iraq's political crisis will continue over the coming years, with Baghdad lacking the means to retake the country's western and northern regions following their takeover by radical jihadist group Islamic State (IS, previously known as ISIS) and other Sunni insurgents in June. We recently revised downward our 10-year growth forecasts for Iraq's economy, and expect the country's consumer spending, government consumption, and fixed investment to be hard hit by the violence over the coming quarters (see chart below).

The Iraqi market, while more vital to Turkey (to which Iraq represents the prime oil supplier and second largest export destination behind Germany), has also assumed significant importance for Jordan in recent years. Iraq absorbed 18% of total Jordanian goods exports in 2013 - the largest share and up from 13% in 2008 - on the back of demand for a wide variety of Jordanian products, including foodstuffs, electronics, and other manufactured goods. Moreover, the trade relationship between the two countries is firmly tilted in Jordan's favour, having resulted in trade surpluses for the Kingdom throughout the past decade. The surplus rose to a record high of JOD614.5mn (USD866.6mn) in 2013, compared with an overall trade account deficit of JOD8.1bn during that year.

Iraq's Outlook Significantly Impaired
Iraq - Real GDP Growth, %

BMI View: Iraq's political crisis adds another headwind to the Jordanian export sector, and will complicate Amman's efforts towards energy diversification. We have scaled down our export growth forecasts for Jordan, and now forecast an average current account deficit of 9.8% of GDP between 2014 and 2018, compared with 7.9% previously.

The prospect of long-term political instability in Iraq adds another headwind to the Jordanian export sector, which is already struggling to recover from the disruptions to regional trading activity engendered by the Syrian conflict. Our baseline view is that Iraq's political crisis will continue over the coming years, with Baghdad lacking the means to retake the country's western and northern regions following their takeover by radical jihadist group Islamic State (IS, previously known as ISIS) and other Sunni insurgents in June. We recently revised downward our 10-year growth forecasts for Iraq's economy, and expect the country's consumer spending, government consumption, and fixed investment to be hard hit by the violence over the coming quarters (see chart below).

Iraq's Outlook Significantly Impaired
Iraq - Real GDP Growth, %

The Iraqi market, while more vital to Turkey (to which Iraq represents the prime oil supplier and second largest export destination behind Germany), has also assumed significant importance for Jordan in recent years. Iraq absorbed 18% of total Jordanian goods exports in 2013 - the largest share and up from 13% in 2008 - on the back of demand for a wide variety of Jordanian products, including foodstuffs, electronics, and other manufactured goods. Moreover, the trade relationship between the two countries is firmly tilted in Jordan's favour, having resulted in trade surpluses for the Kingdom throughout the past decade. The surplus rose to a record high of JOD614.5mn (USD866.6mn) in 2013, compared with an overall trade account deficit of JOD8.1bn during that year.

An Advantageous Relationship, Until Now
Jordan - Trade With Iraq, JODmn

Yet we now expect Jordanian exports to Iraq to remain weighed down by dampened Iraqi demand for consumer goods and construction materials, in addition to the disruptions to traditional overland trade routes. Sunni tribesmen aligned with IS allegedly took control on June 23 of the Traybil border area, the only legal crossing between Iraq and Jordan. Transport of goods and commodities to Iraq via Jordanian trucks is now completely halted, as a result of the worsening security conditions. Turkish truckers in Mosul were among the first foreigners to be taken hostage during the IS offensive.

Effects Of Regional Disruptions Evident
Jordan - Exports To Neighbouring Countries, JODmn

The start of the Syrian conflict led to a substantial decline in regional trade, with Jordanian exports to Syria and Lebanon falling by 47.3% and 53.5% respectively between 2011 and 2013. We do not expect the Iraqi crisis to cause a similarly devastating drop in trade flows. A more accurate reference point could be the outbreak of sectarian tensions in Iraq in 2006, which saw Jordanian exports to the country falling by 13.8% year-on-year before experiencing a rapid rise from 2008 onward.

Nevertheless, we have scaled down our export growth and current account forecasts for Jordan. We now expect the current account deficit (including transfers from foreign donors) to average 9.8% of GDP between 2014 and 2018, compared with our previous forecast of 7.9%. While we see Jordanian real GDP growth accelerating to 4.1% in 2015 from 3.3% in 2014, risks to our outlook are now firmly to the downside given the difficulties confronted by the export sector.

Iraqi Crisis Adds Further Headwind
Jordan - Current Account, % Of GDP

Other forms of economic cooperation between Jordan and Iraq had been picking up before the IS attack, and are now at risk of being impacted. Capital Bank of Jordan holds a 72% stake in private-owned National Bank of Iraq, a Baghdad-listed lender with eight branches. Iraqis accounted for 9.2% of total foreign visitor arrivals in Jordan in 2013, despite a stringent entry visa requirement. At the start of 2014, Baghdad announced it was ready to export via truck as much as 20,000 barrels per day (b/d) of oil at a discounted price - although the security troubles in Iraq's western region (which preceded the more extensive IS takeover) placed an early roadblock on these plans.

Most significantly, the two countries had been planning the construction of an USD18bn oil pipeline running from mega-fields in Iraq's south to Basra and then onwards to Aqaba. The link was projected to come online by 2018, and could eventually offer Jordan some 150,000 b/d of crude supplies. Jordan remains the only option for Iraq to diversify its oil export routes over the medium term, and a pipeline to the country would enable Iraq to access the Red Sea, adding a potential new seaborne route to exports from Ceyhan and Basra (see 'Partnership With Jordan Crucial To Export Diversification', March 10).

The Basra-Aqaba pipeline project is now highly unlikely to be completed on schedule given Iraq's current situation, delaying Jordan's efforts towards energy diversification. On the one hand, Jordan is already moving forward on other plans, including the exploitation of domestic oil shale, nuclear energy, the construction of a floating liquefied natural gas terminal at Aqaba, and gas imports via a pipeline from Israel (see 'Energy Diversification Key To Current Account Improvements', November 28 2013). Yet technical, commercial and financial challenges surround both Jordan's nuclear energy plans and its unconventional potential, while any energy deals with Israel remain politically contentious.

Read the full article

This article is tagged to:
Related sectors of this article: Economy, Balance of Payments
Geography: Jordan, Iraq
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.