Morocco, Jordan membership would test Gulf economies

The Gulf Cooperation Council (GCC) is considering extending membership of the six-nation political and economic grouping to Morocco and Jordan as a means of contending with the region's evolving political landscape. 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 main impetus for the proposed inclusion of Morocco and Jordan is now mainly political in nature. We do 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. Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain form the world's biggest oil-exporting region, and in addition to setting foreign policy objectives within the GCC, they are moving toward achieving mobility of labor, capital, and goods and services. It is unclear whether the GCC is considering full membership for one or both Jordan and Morocco, or whether it would create a new tier of membership focused on their mutual political and military interests. Although the timeline is not clear and the process of integrating Jordan and Morocco could take some time, an association agreement could be one way forward. 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. 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 labor mobilization. Agriculture, which accounts for around 16 percent of the country's GDP and employs around 42 percent of the working population, could offer additional opportunities for investment for the GCC in their search of agricultural investments abroad. Jordan's manufactured exports to the wider region, as well as beyond, could receive a boost from GCC investors. Investment in the tourism sector could also be set to gain in both Morocco and Jordan. The potential inclusion of Jordan and Morocco into the GCC bloc is undoubtedly driven by a desire to strengthen the bloc's political presence and global influence, with the GCC benefiting from Jordan's security and military expertise, and building on its common political objectives with Morocco. GCC foreign ministers have entered into negotiations with both countries regarding membership. It is our view that if full membership is to be extended, Jordan would be more likely than Morocco to receive it. Politics aside, geographical proximity which supports trade links with Saudi Arabia, pegged with the US dollar, smaller economy and demographics, could make Jordan a stronger candidate. In either case, the GCC should tread carefully to ensure economic harmonization, not only political advantages, are at the heart of negotiation efforts. A $1.2 trillion economic bloc Full integration of Jordan and Morocco into the GCC economic area would add 12.2 percent to the bloc's nominal GDP, based on 2010 data, bringing it solidly above the $1 trillion mark. 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 $103.5 billion in 2010, not far below Qatar and Kuwait, and its inclusion in the GCC would lead to a sizeable adjustment in the bloc's economic structure. Full integration of both countries would reduce Saudi Arabia's total GDP contribution to the GCC bloc to 36 percent from 42 percent, based on 2009 GDP data. Real economic 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. Inflation in Jordan is likely to reach 6.1 percent this year, exceeding our forecast for Saudi Arabia of 5.6 percent. Common concerns about youth unemployment and job creation face many of the region's policymakers, particularly so for Jordan, Morocco and Saudi Arabia. The timing and character of the inclusion of Morocco and Jordan is not known, 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 euro-denominated currency basket. Hence, monetary policy in the case of Jordan is mostly US-focused and euro zone based in the case of Morocco. 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 US dollar. Fiscal differences The differences between the current GCC bloc and the two potential new members exceed their similarities, however. This is particularly evident on the fiscal front. Jordan's budget deficit stood at $1.5 billion in 2010, or 5.4 percent of GDP including foreign grants, and is likely to widen this year; while Morocco also faces a growing deficit, particularly as investment flows and tourism in the region are hit this year due to the instability shaking a number of Arab states. Jordan's public debt stock stood at 62.7 percent of GDP in 2010. By contrast, most Gulf Arab states, bar 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 toward a common market - which includes freedom of movement for the labor force, capital, and goods and services. 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 USD, except for Kuwait, which pegs its KWD to a basket of currencies comprised mainly of USD. Jordan's JOD is also pegged to the USD, while Morocco pegs its MAD to a basket of key major currencies. Current GCC states had fulfilled many of the preconditions for a currency union: They are mainly oil exporters, are very open to trade and imported labor, and have flexible labor 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 European Union 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. Demographically speaking One major question mark over the extension of full membership to the two countries is population. 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. Apart from 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. In the UAE, for instance, it is estimated that less than one fifth of the 8.2 million population comprises Emirati nationals, while in Bahrain less than half the 1.2 million population is indigenous. 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. 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 percent more than Saudi Arabia's population including expatriates. Around 2.5 million Moroccans, equivalent to 20 percent of the country's total labor force, find employment abroad, mostly in Europe. An estimated 600,000 Jordanians, mostly employed in the Gulf region, remit annually the equivalent of around 9 percent of the country's GDP. With full inclusion of Morocco, Saudi Arabia's share of the GCC population would fall sharply from 60 percent now to 33 percent. Jordan and Morocco are both Sunni-majority monarchies whose citizens would likely be keen to take advantage of easier travel to Saudi Arabia's holy cities. 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. Moroccans and Jordanians also earn comparatively less than Gulf Arab residents, which raises some considerations with regard to freedom of labor mobility. Per-capita GDP in Jordan was $4,499 in 2010, while in Morocco per capita income stood at $3,252 - both well below Saudi Arabia's per-capita GDP of $16,041, the lowest among GCC countries. It is foreseeable then that GCC membership would increase the ease with which Jordanian and Moroccan professionals seek work in GCC nations. If they seek lower wages than other Gulf citizens, this could exacerbate rather than help unemployment in the Gulf. Trade and tourism ties Closer economic ties would enable Morocco and Jordan to improve their trade balances with the Gulf Arab states, while providing greater diversification for imports into current bloc countries. At present, the trade balance largely favors the GCC. Jordan had a trade deficit of $2.6 billion last year, while Morocco's trade deficit was $1.6 billion. One feature of the GCC bloc is a customs union, including a cap on tariffs of imported goods within the bloc of 5 percent - a benefit that could be extended to a new member. Gulf trade activity with Jordan is already buoyant. In 2010, the Gulf countries accounted for 24.2 percent of Jordan's imports, while 18.4 percent of its exports were destined for the six GCC states. The anticipated rail link between Jordan and Saudi Arabia would be a boost to trade with the rest of the GCC. GCC trade ties are significantly less established with Morocco; only 4.9 percent of its imports in 2009 were sourced in the Gulf, while just 0.5 percent of its exports reached the six countries. Better ties with the Gulf would afford Morocco potential new markets for its agricultural goods. The desert states of the Gulf rely heavily on food imports, particularly as they seek ways to improve food security and phase out production of water-intensive crops. Food exports accounted for 21.4 percent of Morocco's exports in 2009. An alliance with the GCC might also enable Morocco to reduce its reliance on Europe, which accounts for some 60 percent of Morocco's imports and 70 percent of its exports in 2009. By comparison, the Gulf's share of Morocco's imports was only 4.9 percent and it received only 0.5 percent of its exports. Morocco's proximate relationship with the EU could provide an entry point to enhance GCC ties with Europe. Morocco, like Tunisia, is pro-cyclical with the economies of the EU. Moreover, Morocco's tariff regime with the EU would have to be looked at whilst being aligned with the GCC. Tourism ties between Morocco and the Gulf are also trivial at the moment. A substantial 84 percent of tourists to Morocco in 2009 were from Europe, compared with only 2.7 percent from the Middle East, according to government data. The situation is again very different in Jordan; visitors from Gulf Arab countries accounted for 28.2 percent of total tourist traffic in 2010, according to data of the Jordanian Ministry of Tourism and Antiquities. Saudi Arabia alone accounted for 16.2 percent of total Jordanian tourist visits last year. These data show that it may be easier in the initial stages to integrate Jordan into the GCC than Morocco, and as such we expect and move forward in negotiations is likely include caveats to protect the interests of the Gulf Arab economies. There are a few obvious material benefits at could accrue at the moment for the GCC states. However, as the EU evidenced, political considerations can be more powerful determinants for the advancement of economic integration. From Arab News