MENA Economics Outlook Update Tuesday, 30 August MENA economic reform: Walking the talk Updating our Macro Score Meter

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MENA Economics Outlook Update Tuesday, 30 August 2016 Ramy Oraby Economist Mubasher International Ramy.Oraby@MubasherFS.

1 MENA Economics Outlook Update Tuesday, 30 August 2016 Ramy Oraby Economist Mubasher International MENA economic reform: Walking the talk Updating our Macro Score Meter Tightrope walking: Economic policymakers to go gradually but also steady. Top picks: Sovereign debt, low price elastic producers, and sectors with larger exposure to public investments. Our Macro Score Meter updated: Downgrading Kuwait and the UAE. Reform in action: In our previous Macro Outlook Update note, we had explained the root cause of the current economic malaise as nearly all the region s economies are expected to run twin deficits (budget and current account deficits) in We noted that delaying economic reform is no longer an option. The broad reform objective is to achieve more economic diversification in oil-dependent economies, while oil importers need to address unsettled structural deficiencies more seriously. In line with the aforementioned logic, we have witnessed various pro-reform measures across the region. For example: (1) The disclosure of Saudi Vision 2030 and launching the National Transformation Plan (NTP), (2) The International Monetary Fund (IMF)-supported programs in Egypt, Tunisia, and Iraq, (3) Initiation of fuel subsidy reform programs in the UAE, Qatar, and Kuwait, (4) GCC states intention to introduce the value-added tax in 2018, while Egypt is taking the lead in applying it in 2016, and (5) Morocco s pledge to implement a more flexible exchange rate by early 2017 amid other reforms. In reality, steering major economic reform is tricky; going so fast could escalate adverse social and political reactions in an already troubled region, while going so slow induces extended economic pressure. Similar to a tightrope walker, policy makers are expected to go gradually but also steady. Fiscal discipline is the starting point: The magnitude of the public sector activity in the economy means that traditional austerity will be counterproductive. Instead, we are looking into more fiscal efficiency through: 1. Current expenditure rationalization: Recently, the Egyptian parliament has approved the Civil Service Law which aims at linking wage increase to performance as the government seeks restructuring its large inefficient public sector. Saudi Arabia targets reducing public salaries share of the budget from 45% to 40% by Furthermore, various subsidy reform measures have been imposed broadly in the region. 2. Capital expenditure stimulation: Reviving the region s infrastructure is vital for higher growth prospects as it helps raise productivity and attract more foreign direct investments (FDIs). Accordingly, the government of Abu Dhabi has recently approved carrying out infrastructure projects worth USD148mn. Moreover, the government of Egypt raised capital expenditure to 4.2% of GDP in its FY2016/17 budget (vs. 2.7% of GDP in FY2015/16 budget). In Saudi Arabia, the work is ongoing to complete the Riyadh underground on schedule. 3. Secure more sustainable revenues by undertaking various tax and customs reforms. 4. Strengthen domestic financial markets through state-owned entities initial public offerings (IPOs), which will also help generate more revenues for the government. In Saudi Arabia, the government plans to offer a number of entities, including the stock exchange Tadawul as well as a small share of Aramco. Similarly in Egypt, the government intends to float 2-3 state-owned banks by end of 2016/early Support private sector activity through PPP projects and privatization: Late 2015, Dubai issued a law regulating partnership between the public and the private sectors. Meanwhile, Saudi Arabia s NTP promotes more active publicprivate partnership in addition to direct privatization. Page 1 For more information on MubasherTrade, please visit our website at or contact us at Research@MubasherTrade.com. Please read the important disclosure and disclaimer at the end of this document.

MENA Economics Outlook Update Tuesday, 30 August 2016 Where we see opportunities Attractive sovereign debt: In our view, tightened monetary conditions, along with high fiscal deficit across the

2 MENA Economics Outlook Update Tuesday, 30 August 2016 Where we see opportunities Attractive sovereign debt: In our view, tightened monetary conditions, along with high fiscal deficit across the region, make sovereign debt more attractive. Regional economies tend to diversify funding sources, relying on domestic, external and sovereign funds to finance their budgets. We note that the UAE is expected to issue a new law enabling the federal government to issue sovereign bonds. Meanwhile, Saudi Arabia, which plans a USD10bn international bond issuance soon, intends to raise its gross debt level from c.8% to 30% of GDP by Also, Egypt and Kuwait look to tap international markets for a sum up to USD13-15bn bond issuance. In that context, we reiterate our view that gross debt levels (both domestic and external) are below the threshold of 60% of GDP in most countries in the MENA region. Even in the case of Egypt and Jordan, where gross debt is above 80% of GDP, default risk is still considered low as external debt is relatively small at 16% and 35% of GDP, respectively. On the equity side: I. Low price elastic producers: The instant adjustment to fix the macroeconomic imbalances (current account deficit and fiscal deficit) will be on the demand side in the short run. The direct outcome of more fiscal discipline and monetary tightening is lower consumption. Therefore, the more price elastic a sector is, the more vulnerable and affected in the short run it will be. II. Sectors with larger exposure to public investments: As we explained earlier, we believe that listed firms with a larger exposure to public investments should enjoy better growth prospects. III. Planned public sector IPOs: This should expand the investment opportunity set further. IV.Inflation-hedging sectors (Egypt): Inflation will remain elevated in the short run due to: (1) the implementation of a flexible exchange rate and (2) price adjustment attributed to VAT and subsidy reform measures. V. The pace of labor market reforms (KSA): Speeding Saudization could raise operating costs as low-cost labor is replaced. Page 2 Our Macro Score Update We note that our previous scores (dated March 2016) were based on the IMF WEO data as of October 2015, which were revised lower in the following editions (IMF WEO April and July 2016). Accordingly, the change in the country scores is attributed to the IMF updated figures while the theme remains unchanged. Therefore, we maintained the country macro ratings for seven countries but downgraded them for Kuwait and the UAE. Kuwait Downgraded Kuwait remains in a relatively better position when compared with other GCC peers due to large foreign currency reserves. However, we downgrade it as 2016 surpluses are now expected to turn into deficit. Indeed, estimates for fiscal and current account surpluses were initially at 0.1% and 7% of GDP, respectively, but they are now expected to turn into deficits of 14% and 1% of GDP. United Arab Emirates Downgraded Similar to Kuwait, the UAE budget balance is expected to deteriorate further. Budget deficit is now expected to reach 10.8% of GDP in 2016 versus a previously-expected 4% of GDP. Moreover, Moody s has assigned the UAE a negative outlook, which also steered its macro score down. The credit rating agency attributed the decision to the lack of clarity of the government policies to addressed the large deficits and a weakening net asset position due to lower oil prices. Country Scorecard Country Score Update Source: MubasherTrade Research Type Real Monetary Fiscal External Credit Rating KPI Budget Current Country Real GDP Diversified Credit Inflation surplus/ Debt/ GDP account/ Outlook Score Macro growth economy Rating (deficit) GDP Rating Weight 20.0% 10.0% 10.0% 15.0% 10.0% 15.0% 10.0% 10.0% 100.0% Bahrain Egypt Jordan Kuwait Morocco Oman Qatar Saudi Arabia UAE Source: MubasherTrade Research For more information on MubasherTrade, please visit our website at or contact us at Research@MubasherTrade.com. Please read the important disclosure and disclaimer at the end of this document.

3 MENA Economics Outlook Update Tuesday, 30 August 2016 Appendix Macro Score Meter Methodology Country Macro Rating: Our scoring system methodology from a macroeconomic perspective analyzes four main macroeconomic sectors in each country as well as that country s credit rating and outlook by the three major rating agencies (Standard & Poor s, Moody s, and Fitch). We assign 3 stars, 2 stars, and 1 star for low risk, moderate risk, and high risk, respectively. (a) Real sector (30% weight): We look at: i. The estimated growth rate (GR) of the economy in 2015 and compare it to the 5-year average: 1. GR above 5-year average plus half standard deviation: Favorable. 2. GR between 5-year average minus half standard deviation and 5-year average plus half standard deviation : Neutral 3. GR below 5-year average minus half standard deviation: Unfavorable ii. The level of diversification in the economy by using an adjusted Hershmann Herfindahl Index (HHI). (e) Credit Ratings and Outlook (20%): We look at: i. Credit ratings as set by the three mentioned credit ratings agencies, divided into three main groups: 1. Prime and high grade ratings (AAA to AA-): Favorable 2. Upper medium and lower medium grade ratings (A+ to BBB-): Neutral 3. Non-investment, speculative, and highly speculative (BB+ and below): Unfavorable ii. Economy outlook as set by the ratings agencies: 1. Positive: Favorable 2. Stable: Neutral 3. Negative: Unfavorable (b) Monetary sector (10% weight): We look at the stability of inflationary pressures in the economy: i. Between 1% and 3%: Stable ii. Between 0% and 1%: Neutral iii. Below 0% and above 3%: Unstable (c) Fiscal sector (25% weight): We look at both the state of the budget s balance and the level of fiscal gross debt. i. Fiscal Balance: 1. Surplus above 0%: Favorable 2. Deficit between -3% and 0%: Neutral 3. Deficit to GDP below -3%: Unfavorable ii. Gross debt: 1. Gross debt to GDP below 60%: Favorable 2. Gross debt to GDP above 60% and decreasing over the last 5 years: Neutral 3. Gross debt to GDP above 60% and increasing over the last 5 years: Unfavorable (d) External sector (15% weight): We look at the current account balance as follows: i. A shift from deficit to surplus or an increasing surplus: Favorable ii. A decreasing deficit or a decreasing surplus: Neutral iii. A shift from surplus to deficit or an increasing deficit: Unfavorable Page 3 For more information on MubasherTrade, please visit our website at or contact us at Research@MubasherTrade.com. Please read the important disclosure and disclaimer at the end of this document.

4 Investment Rating Disclosure Appendix Important Disclosures METHODOLOGY: We strive to search for the best businesses that trade at the lowest valuation levels as measured by an issuer s intrinsic value on a per-share basis. In doing so, we follow both topdown and bottom-up approaches. Under the top-down approach, we attempt to study the most important quantitative and qualitative factors that we believe can affect a security's value, including macroeconomic, sector-specific, and company-specific factors. Under the bottom-up approach, we focus on the analysis of individual stocks by running our proprietary scoring model, including valuation, financial performance, sentiment, trading, risk, and value creation. COUNTRY MACRO RATINGS: We analyze the four main sectors of a country s macroeconomics, then we assign,, and star for low risk, moderate risk, and high risk, respectively. We use different weights for each economic sector: (a) Real Sector (30% weight), (b) Monetary Sector (10% weight), (c) Fiscal Sector (25% weight), (d) External Sector (15% weight), and (e) Credit Rating and Outlook (20%). STOCK MARKET RATINGS: We compare our year-end price targets for the subject market index on a total-return basis versus our calculated required rate of return (RRR). Taking into account our Country Macro Rating, we set the Neutral borderline (below which is Underweight ) as 20% of RRR for Country Macro Rating, 40% of RRR for Country Macro Rating, and 60% of RRR for Country Macro Rating. That said, our index price targets are based on the average of two models. Model (1): Estimated index levels based on consensus price targets of all index constituents. Stocks with no price targets are valued at market price. Model (2): Estimated index levels based on our expected re-pricing (whether re-rating, de-rating, or unchanged rating) of the forward price-earnings ratio (PER) of each index in addition to consensus earnings growth for the forward year. SECTOR RATINGS: On the sectors level, we focus on six major sectors, namely (1) Consumer and Health Care, (2) Financials, (3) Industrials, Energy, & Utilities, (4) Materials, (5) Real Estate, and (6) Telecom Services & IT. To assess each sector, we use the SWOT analysis to list the strengths, weaknesses, opportunities, and threats in each country. We then translate our qualitative SWOT analysis into a quantitative model to evaluate all six sectors across countries. Each of the measures we used, although mostly subjective, is assigned a score as either +1 (high impact), 0 (medium impact), or -1 (low impact). At a later stage, when assigning the final rating Overweight, Neutral, or Underweight for each sector in each country, we realize that sometimes it is unfair to assign equal weights for the sub-sectors in each major sector assessed. Hence, some of the sub-sectors are given different weights for their significant profile in each country. Additionally, the final rating for each sector in each specific country is assigned based on a relative calculation comparing this sector to all other sectors in this country. SECURITY INVESTMENT RATINGS: We combine intrinsic value, relative valuation, and market sentiment into a single rating. Our three-pronged methodology involves (1) discounted cash flows DCF valuation model(s), (2) relative valuation metrics, and (3) overall sentiment. Whenever possible we attempt to apply all three aspects on the issuers or securities under review. In certain cases where we do not have our own financial and valuation models, we attempt to scan the market for other analysts value estimates and ratings (i.e. consensus view) on average. We compliment this with relative valuation and sentiment drivers, such as positive/neutral/negative news flows. For all issuers/securities covered, we have three investment ratings (Buy, Hold, or Sell), comparing the security s expected total return (including both price performance and expected cash dividend) over a 12-month period versus its Required Rate of Return RRR as calculated using the Capital Asset Pricing Model CAPM and adjusted for the Risk Rating we attach to each security. Our price targets are subjective and are estimates of the analysts where the securities covered will trade within the next 12 months. Price targets can be derived from earnings-based valuation models (e.g. Discounted Cash Flow DCF ), asset-based valuation models (e.g. Net Asset Value NAV ), relative valuation multiples (e.g. PER, PBV, EV/EBITDA, etc.), or a combination of them. In case we do not have our own valuation model, we use a weighted average of market consensus price targets and ratings. We review the investment ratings periodically or as the situation necessitates. SECURITY RISK RATINGS: We assess the risk profile of each issuer/security covered and assign one of three risk ratings (High, Moderate, or Low). The risk rating is weighted to reflect different aspects specific to (1) the sector, (2) the issuer, (3) the security under review, and (4) volatility versus the market (as measure by beta) and versus the security s average annualized standard deviation. We review the risk ratings at least annually or as the situation necessitates. Other Disclosures MFS does not have any proprietary holding in any securities. Only as a nominee, MFS holds shares on behalf of its clients through Omnibus accounts. MFS is not currently a market maker for any listed securities. If Total Return is Buy (B) Hold (H) Sell (S) Not Rated (NR) Not Covered (NC) Low (1) Moderate (2) High (3) Higher than RRR Higher than RRR Higher than RRR Between RRR and 20% of RRR Lower than 20% of RRR Risk Rating Between RRR and 40% of RRR Lower than 40% of RRR Between RRR and 60% of RRR Lower than 60% of RRR We have decided not to publish a rating on the stock due to certain circumstances related to the company (i.e. special situations). We do not currently cover this stock or we are restricted from coverage for regulatory reasons.

5 Analyst Certification I (we), Ramy Oraby, Economist, employed with Mubasher International, a company under the National Technology Group of Qatar being a shareholder of Mubasher Financial Services BSC (c) and author(s) to this report, hereby certify that all the views expressed in this research report accurately reflect my (our) views about the subject issuer(s) or security(ies). I (we) also certify that no part of my (our) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed in this report. Head of Research Certification I, Amr Hussein Elalfy, Global Head of Research of Mubasher Financial Services BSC (c) confirm that I have vetted the information, and all the views expressed by the Analyst in this research report about the subject issuer(s) or security(ies). I also certify that the author of this report, has not received any compensation directly related to the contents of the Report. Disclaimer This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Mubasher Financial Services BSC (c) ( MFS ) has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; MFS makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the document are based upon publicly available information at the time of publication and are subject to change without notice. This document is not intended for all recipients and may not be suitable for all investors. Securities described in this document are not available for sale in all jurisdictions or to certain category of investors. The document is not substitution for independent judgment by any recipient who should evaluate investment risks. Additionally, investors must regard this document as providing stand-alone analysis and should not expect continuing analysis or additional documents relating to the issuers and/or securities mentioned herein. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognized market, it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. References to ratings/recommendations are for informational purposes only and do not imply that MFS adopts, supports or confirms in any way the ratings/recommendations, opinions or conclusions of the analysts. This document is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MFS or its affiliates to any registration or licensing requirements within such jurisdiction. MFS accepts no liability for any direct, indirect, or consequential damages or losses incurred by third parties including its clients from any use of this document or its contents. Copyright Copyright 2016, Mubasher Financial Services BSC (MFS), ALL RIGHTS RESERVED. No part or excerpt of this document may be redistributed, reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of MFS. MubasherTrade is a trademark of Mubasher Financial Services BSC. Mubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated by the Central Bank of Bahrain. Issuer of Report Mubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated by the Central Bank of Bahrain. Website: Research@MubasherTrade.com

6 Sales & Research Contact Details INSTITUTIONAL SALES RETAIL SALES RESEARCH MENA Bahrain Libya Research Team Call Center: Egypt Egypt UAE Institutions-Egy@Mubasher.net Egypt@MubasherTrade.com UAE@MubasherTrade.com Call Center: / Call Center:

Elsewedy Electric Egypt Equities Industrials Rating/PT Change Monday, 1 August 2016

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