Volume XV, No. 1 • March 2007

2007 Outlook: U.S. Exports on Track to Reach $45 Billion

A Special Report from the National U.S.-Arab Chamber of Commerce

2006 was a record year for U.S. exports to the Arab world, and 2007 is expected to shatter that record.

“We are charting new territory in America’s trade relations with the Arab world,” says David Hamod, President & CEO of the National U.S.-Arab Chamber of Commerce (NUSACC). “The 2006 numbers are unprecedented, and the outlook for 2007 looks even brighter.”

Sales of American merchandise to the Arab world in 2006 topped $35 billion, a 28 percent increase over the previous year. The outlook for 2007 is even more promising, with estimated U.S. sales surging to $45 billion, according to the Institute for Research: Middle Eastern Policy (IRmep).

U.S.-Arab bilateral trade reached $109 billion dollars in 2006, an increase of 25 percent over 2005 levels. Total Arab market imports are expected to reach $405 billion, an 11 percent increase over year 2006.

Falling Dollar, Soaring Exports

Perhaps the single most important factor in the rise of U.S. exports in 2006 was the depreciating dollar, which made U.S. goods very competitive against comparable products from Europe, Asia, and elsewhere. In 2006, the value of the dollar fell about 10 percent against the Euro, and a further decline is expected in 2007. The continuing weakness of the dollar will cause U.S. global exports to grow by double digits throughout 2007, according to the Economist Intelligence Unit (EIU).

The total U.S. deficit in goods and services reached a new milestone in 2006 – a record $763.6 billion – but this deficit is expected to decrease in 2007 for the first time in six years. In the region, the growth rate of the U.S. trade deficit with the Arab market slowed to 18 percent in 2006, down from 21 percent in 2005 and 45 percent in 2004. The U.S. deficit with the Arab world totaled $39 billion as energy imports outpaced U.S. manufactured exports to the region.

Demand Will Remain Strong

In addition to the comparative weakness of the U.S. dollar, there are other trends that signal impressive increases in U.S. exports in 2007.

Last year, high oil prices translated into greater import purchasing power for Arab energy producing nations and a related “trickle down effect” for non-energy producers in the region. This trend is expected to continue in 2007. West Texas Intermediate (WTI) averaged $66.02 in 2006, according to the Energy Information Agency, and it will drop only 10 percent – to $59.46 – in the coming year. In other words, “megaprojects” initiated by Arab governments in recent years are expected to continue full speed ahead in 2007, and U.S. exporters will supply products for many of these projects.

In the same vein, cyclical demand for big ticket items is on the upswing, including civilian aircraft, military systems, and border security systems. A review of defense-related equipment and service contract filings with the U.S. Defense Security Cooperation Agency in 2006 indicates a robust demand for U.S. defense contractors over the next few years. The total value of contracts, if all options are exercised, exceeds $16 billion in hardware and services.

The region’s consumer market is also helping to drive up U.S. export sales. Arab consumers have more disposable income than ever, and American products continue to carry significant cachet. On the whole, according to a serial survey conducted by MasterCard, consumer confidence in the region is on the rise. Saudi Arabia ranks highest at 97.3 out of 100, Kuwait ranked second at 94.5, and the UAE rose to 80.0. Consumer confidence scores were down slightly in Lebanon and Egypt.

Finally, investor confidence is expected to remain high. Regional stock market activity, a strong indicator of liquidity in portfolio investments, was a “bad news / good news” story in 2006. Speculation and unrealistic price/earnings ratios led to substantial losses throughout the region. Leading the way was Saudi Arabia, whose Tadawul all-share index dropped by 53 percent, and the other markets quickly followed. The good news is that investors seem to have weathered this correction in the marketplace and, according to HSBC Holdings in London, the most important stock markets in the Arab world are expected to rise 30 percent in 2007.