GCC Quarterly. Quarterly. 4 April GCC oil production and OPEC reference price

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1 USD per barrel mn barrels per day GCC Quarterly Higher than expected oil prices in Q1 will benefit the GCC in the short term, boosting budget revenues and accumulated reserves. However, in the absence of diversification of revenues, GCC budgets are more vulnerable to negative oil price shocks. GCC producers increased crude output slightly in Q1 in a bid to ease supply concerns and reduce the oil price. In the UAE, higher oil prices should provide authorities with additional comfort to push ahead with recently approved infrastructure projects and spending, particularly as the UAE has the highest break-even oil price in the region according to our estimates. Quarterly 4 April 212 Dubai continues to benefit from tourism, and recent data suggests real estate prices may have bottomed. Dubai-based issuers have taken advantage of improved market conditions, reflected in lower CDS spreads, and tapped debt markets to the tune of USD 2.5bn in Q The risks to our Saudi GDP growth forecast for 212 are on the upside, as oil production has increased in Q1 and domestic demand is strong. However, the authorities have indicated that while they stand ready to meet any shortfall in oil supply, current high oil prices are reflecting geopolitical risks rather than an actual shortage. Qatar likely posted a budget surplus of almost 7% of GDP for fiscal year 211/12, even with increased spending measures announced during the course of last year. The announcement of the new budget has been delayed as the authorities move to a medium-term fiscal policy framework. In Kuwait, the 211/12 budget surplus was likely higher than we had initially forecast, on the back of both higher revenue and lower spending than budgeted. We expect the budget surplus to narrow slightly to 26.9% of GDP this year from an estimated 28.9% of GDP in 211/12. GCC oil production and OPEC reference price GCC oil production (excl Oman, Bahrain) OPEC oil price Khatija Haque Senior Economist khatijah@emiratesndb.com Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Source: Bloomberg, Emirates NBD Research 1

2 Contents Overview... Page 3 UAE... Page 5 UAE - Dubai... Page 7 Saudi Arabia... Page 8 Qatar... Page 1 Kuwait... Page 11 Oman... Page 12 Bahrain... Page 13 Key Economic Forecasts... Page 14 Page 2

3 USD per barrel USD bn USD per barrel Overview Oil prices surge in Q1 212 Oil prices (OPEC reference price) rose to an average USD 123 per barrel in March, the highest monthly average since July 28, mainly on geopolitical tensions and risks. For the GCC oil producers, the additional export revenues should provide further comfort to push ahead with planned expenditure, particularly for the UAE which has a relatively high break-even oil price and has been more conservative with spending growth in recent years. Higher than forecast oil prices will also help to boost accumulated fiscal reserves, providing a bigger cushion in the event of a future negative oil price shock. Furthermore, to the extent that governments repatriate oil revenues, domestic banking systems should continue to benefit from improved liquidity. Increased spending is a double-edged sword While we have long argued that public spending in the GCC will be a key driver of growth this year, and that recent increases in spending are easily financed by higher oil prices, there is flip side to the coin. Higher spending, in the absence of a diversification of budget revenues, increases the GCC budgets vulnerability to a negative oil price shock. This issue has been highlighted in the most recent IMF Article IV reports for the GCC countries. Expenditure growth has been high in the context of the Arab Spring, and much of the increased spending has been in the form of wage increases and other current spending measures. In the event of a sharp, sustained decline in oil prices, governments would either have to finance deficits by running down reserves, or they would need to cut public spending which could have a negative social and economic impact. One way to measure the GCC s vulnerability to a negative oil price shock is to consider the break-even oil price the minimum oil price required for the budget to break-even in a particular year. This would take into account the level of spending, the volume of oil produced, and the amount of budget revenue from non-oil sources. Clearly, countries that produce less oil, and have fewer non-oil revenue generators are likely to be the most at risk in the event of a sharp drop in oil prices. UAE has the highest break-even oil price in the region Our analysis indicates that of the main GCC oil producers, the UAE has the highest breakeven oil price at just under USD 17 per barrel in 212, followed by Saudi Arabia with an estimated 212 break-even oil price of around USD 8 per barrel. This is based on forecast budget expenditure of USD 15bn for the UAE and USD 213bn for Saudi Arabia, recognizing that the kingdom s oil production is more than 3.5 times the UAE s. Oman and Bahrain also have break-even oil prices between USD 95-1 per barrel. Kuwait s is the lowest at just USD 55 per barrel, OPEC reference oil price Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Source: Bloomberg, Emirates NBD Research GCC: Total budget expenditure e 212f GCC: Break-even oil prices Saudi Arabia UAE 2 Kuwait Oman Bahrain f 212f Source: Emirates NBD Research Page 3

4 mn barrels per day mn barrels per day as its expenditure is relatively low at around USD 55bn (212 forecast) and it has similar oil production levels as the UAE. Oil production has not moderated despite rising output from Iraq and Libya Our 212 GCC growth forecast of 3.9% was based on the assumption that oil output would decline on the back of slower global growth and rising output from Libya and Iraq. While Libya s and Iraq s oil production has indeed risen in Q1, reaching 4.1mn bpd in March from 3.4mn bpd in December 211, GCC oil output has not moderated. GCC oil production rose to 15.81mn bpd in March from 15.68mn bpd in December 211, according to Bloomberg estimates. To a large extent, this reflects efforts to ease supply concerns related to declining Iranian exports that are contributing to the current high oil price. Saudi Arabia has indicated it will boost production to offset any shortfall in supply due to Iran sanctions, and has reportedly increased shipments of crude oil to the US. Kuwait and the UAE have also raised crude oil production in Q1. GCC: Oil production estimates 18 GCC (ex. Oman & Bahrain; lhs) Libya + Iraq (rhs) Iran (rhs) Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: Bloomberg, Emirates NBD Research GCC: GDP growth (weighted average) If GCC oil production is maintained at current levels, or indeed rises further during the course of the year, then risks to our regional growth forecasts are skewed to upside. However, with heightened concerns about slower growth in China and the US recovery still in its early days, we prefer to wait for further data before revisiting our GCC macro forecasts e 212f Page 4

5 USD per barrel mn bpd USD per barrel UAE Steady growth The UAE s PMI has been broadly stable in Q1, with a reading of 52.3 in March. Although private sector activity is expanding modestly (5 is the neutral level), the pace of growth has not accelerated so far this year. The backlog of work neither expanded nor contracted last month, while the new export orders index declined to 52.6 from 55 in February. Indeed the only components of the UAE PMI that seem to be showing a rapid acceleration are input prices and purchase prices. With output prices unchanged, it appears that manufacturers and producers are unable to pass on price increases to consumers, and their margins are consequently under pressure. The UAE s oil output rose by 3.5% in Q1 12, averaging 2.6mn bpd, compared with 2.5mn bpd in 211. Our 212 growth forecast is based on stable oil production in the UAE this year relative to 211, and at this stage we see no reason to change our 2.5% GDP growth forecast for this year. Following its recent annual mission to the UAE, the IMF has revised up its estimate of 211 real GDP growth to 4.9% from 3.3% previously. The new estimate is more in line with our own 4.6% estimate for last year, and reflects higher than anticipated oil production last year. For 212, the IMF has revised down its growth forecast from 3.8% to 2.3%, largely in line with our 2.5% forecast. High oil price a boon to UAE budget... Higher than forecast oil prices should clearly be positive for GCC budgets as oil revenues are likely to be substantially higher than official budget projections. This is particularly encouraging for the UAE, which has a high break-even oil price relative to other GCC oil exporters. If oil prices are sustained at current levels, this should give the authorities greater comfort to push ahead with recently approved infrastructure spend. but reliance on oil revenue is a concern The Fund highlighted several risks to its outlook however, the first of which was a pronounced decline in oil prices if regional geopolitical risks subside. This is particularly relevant given the UAE s relatively high breakeven oil price, which we estimate at USD 17 per barrel in 212. The UAE s breakeven oil price has risen sharply over the last five years, as expenditure has grown from around 18% of GDP in 27 to an estimated 3% of GDP in 212. At the same time, non-hydrocarbon budget revenues have declined from 25.5% of total revenue in 27 to an estimated 2.8% of total revenue in 212. Oil revenues have thus become a more important source of budget revenue, and the fiscal position is more vulnerable to a sharp decline in oil prices than was the case five years ago. UAE: PMI Jan-11 May-11 Sep-11 Jan-12 Source: Markit, Emirates NBD Research UAE: oil production and price 2.7 Oil production (lhs) Oil price (rhs) Jan-11 May-11 Sep-11 Jan-12 Source: Bloomberg, Emirates NBD Research UAE: Breakeven oil price e 212f Source: Emirates NBD Research Page 5

6 Public sector credit growth likely to remain high The second key risk highlighted by the IMF is the high refinancing needs of GREs and their reliance on foreign funding. To the extent that European banks (in particular) are unwilling or unable to roll over loans maturing this year because of their own balance sheet issues, demand for local borrowing by public sector entities is likely to remain high in 212. The latter leads to the third risk highlighted by the IMF, which is the high concentration of banks loans to the public sector. Recent central bank data shows that public sector borrowing surged to 36.8 at the end of 211, up from 13.3 at end- 21. The most obvious casualty of the increase in public sector borrowing is the anaemic rate of private sector credit growth, which stood at just 2.1 at the end of last year compared with 1.6% y/y in Saudi Arabia and 19.3 in Qatar. Banks starting to lend more While we expect private sector credit growth to remain relatively muted in 212, in the context of still strong public sector demand, there are some encouraging signs in the data. Bank lending to the private sector appeared to be improving in the last quarter of 211, reaching 3.4 in December after contracting for much of 21. In contrast, non-bank financial institutions (including finance companies that extend advances or loans for personal consumption as well as trade finance), saw loans contract during 211 after relatively strong growth in 21. In our view, this suggests a move back towards traditional bank loans rather than smaller, and likely more expensive, finance companies. Inflation still contained Average UAE inflation has accelerated a little in the first two months of 212, averaging.5 compared with.% inflation in Q Nevertheless, inflationary pressure is contained as housing costs (which account for almost 4% of the consumer price index) continue to fall on an annual basis in both Dubai and Abu Dhabi. We expect inflation to rise to an average 1.3% this year from.9% in 211, slightly lower than the IMF s 1.5% forecast. UAE: Credit growth 5 public sector credit 4 private sector credit Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 UAE: Bank loan and deposit growth 2 Bank deposits (lhs) Bank loans Jan-11 May-11 Sep-11 UAE: Inflation 12 CPI Food Housing Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Page 6

7 bp % UAE - Dubai Annual inflation turns negative Dubai s CPI showed price deflation in the first two months of 212, reaching a record low -1.7 in February. The main driver for the downward trend in inflation since 29 has been the decline in housing costs, which account for almost 44% of Dubai s consumer price index. The chart on the right shows that the cost of housing reflected in the CPI has not adjusted downwards as quickly as the real estate values (as surveyed by Cluttons). We thus expect to see the housing component of the CPI continue to ease over the course of this year, even as there are signs that real estate prices have stabilized and some sectors are showing rising prices. Data from Cluttons shows that high-end villa prices continue to recover, posting 8.1% price growth in February, and mid-range villa prices have also risen over the last three months. Apartment prices are lagging, but even those appear to have bottomed, with high end apartment prices rising.9 in February 212. Anecdotal evidence and recent press reports suggest that as mortgage rates in the UAE have declined and banks appear to be more willing to lend, demand for residential real estate by owneroccupiers has increased. Hotels continue to enjoy high occupancy Dubai s hotels continue to enjoy the highest occupancy rates in the region. Data from STR Global for February 212 show average occupancy of over 86% in Dubai, similar to February 211 when the emirate s tourism and hospitality sectors benefitted from the political turmoil in the wider MENA region. At the same time, hotels are enjoying pricing power as revenue per available room continues to rise from 21 lows, reaching AED 85 in February, up from AED 763 a year ago. CDS narrows sharply in Q1; debt issuance rises The easing in global risk aversion in recent weeks has benefitted Dubai; the emirate s 5Y CDS has declined 11bp year-to-date and is currently at the lowest level since early August 211. Dubai based issuers have taken advantage of the improved market conditions and issued USD 2.5bn worth of debt in Q1 212, more than double the USD 1.1bn issued in Q Given the high refinancing requirements of Dubai GREs this year, the strong start to the year in terms of debt issuance is encouraging and reduces some of the re-financing risk facing the emirate in 212. Dubai: Real estate prices & housing component of CPI Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Source: Haver Analytics, Cluttons, Emirates NBD Research Dubai: Hotel occupancy and RevPAR Source: STR Global, Emirates NBD Research Dubai: CDS narrows in Q Occupancy rate (lhs) Growth in RevPAR (rhs) Mid-range villas Mid-range apartments CPI - Housing Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: Bloomberg, Emirates NBD Research Page 7

8 mn bpd Saudi Arabia Under pressure to boost oil output Oil production at the end of Q1 stood at 9.71mn bpd, almost unchanged from December 211. However, average Q1 oil output (9.68mn bpd) is still almost 5% higher than average 211 output (9.24mn bpd). The authorities have made it clear that they stand ready to meet any shortfall in global oil supply, and recent comments by the oil minister has highlighted the capacity that Saudi Arabia still has to boost output further, if this is required. However, the authorities have also indicated that they believe the current high oil prices are reflecting geopolitical risks rather than an actual shortage of supply. Nevertheless, Saudi Arabia has reportedly hired 11 very large oil tankers, each with a 2mn barrel capacity, to deliver oil to the US over the next few of weeks in a bid to ease supply concerns and lower prices. Risks to growth are on the upside Our Saudi growth forecast of 3.8% is based on the assumption that oil production in the kingdom will decline slightly this year, on the back of weaker global demand. If the increase in oil production in Q1 relative to 211 is sustained, then this would poses an upside risk to our growth forecast. Non-oil GDP growth also looks to have been robust in the first quarter, as the PMI readings remain around 6. While external demand appears to have weakened during Q1 (new export orders index declined to 54 in March from 57 in January), the incoming new business index printed in the high 6s. This reinforces our view that domestic demand, supported by government spending and credit growth, is driving the non-oil economy in the kingdom. Although we recognize that the risks to our GDP growth forecast are skewed to the upside, we would prefer to wait for more data before revising our growth estimates for this year. Higher oil revenue likely to be saved Fiscal policy has been a key contributor to domestic demand, and recent high oil prices suggest that the government is unlikely to tighten the purse strings anytime soon. However, we think it unlikely that the government will boost spending this year in the event of higher than expected oil proceeds, as there are indications that inflationary pressures are building. The input price and purchase price components of the PMI show much stronger growth than the output price component, suggesting that producer margins are being squeezed. If this trend continues, producer price increases will eventually be passed on to consumers and show up in the CPI. Saudi Arabia: oil production Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Source: Bloomberg, Emirates NBD Research Saudi Arabia: PMI Jan-11 May-11 Sep-11 Jan-12 Source: Markit, Emirates NBD Research Saudi Arabia: Inflation Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Page 8

9 USD bn We thus retain our forecast for budget spending at SAR 8bn; unchanged from 211 and higher than the official budget of SAR 69bn. High oil prices to boost NFAs Consequently, we expect net foreign assets (NFAs) to be the main beneficiary of higher than forecast oil prices this year. SAMA s NFAs have already increased by USD 2bn in the first two months of this year, reaching USD 555.2bn at the end of February. and domestic liquidity To the extent that the government brings oil revenues into the domestic banking system, liquidity conditions are likely to benefit and this should continue to support private sector credit growth which has been gradually accelerating since January 21 and reached 12.1 at the end of February 212. Government deposits have increased by SAR 9bn (7.6%) in the first two months of 212, and this is reflected in accelerating M4 (M3 plus government deposits) growth, which reached 2 in February from just 6.2% at the end of 21. If government deposits are excluded, money supply (M3) growth has been relatively stable between 12% and 15% since H M3 growth reached 13.8 in February from 13.6 in January. M1 (currency in circulation and demand deposits) appears to have been the main source of liquidity growth over the last year, rising 23.3 in February, while quasi money (FX and long-term SAR deposits) has seen more modest annual growth of just.5 in February. In our view, this reflects the budget transfers to households in the form of public sector wage increases, unemployment benefits, subsidies etc, which would all be captured in M1. Saudi Arabia: Net Foreign Assets Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Saudi Arabia: M3 and M4 25 M3 2 M4 (M3 + govt deposits) Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Saudi Arabia: Credit growth 3 2 Private sector Public sector Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Page 9

10 % GDP Qatar 212/13 budget postponed We expect the 211/12 budget (ended 31 March) posted a surplus of 6.8% of GDP, despite a substantial increase in public sector wages in Q3 211 that was not originally budgeted for. The IMF estimates the wage increases at around USD 1.6bn, but even after adjusting for this, the Fund expects the budget surplus to reach 7.2% of GDP for the fiscal year ended March 31, 212. Qatar: Budget balance The 212/13 budget has been delayed due to changes in methodology; the authorities reportedly want to introduce a threeyear fiscal framework and details are expected towards the middle of the year. However, finance and economy minister Youssef Kamal has indicated this year s budget will be approximately the same size as last year s, or slightly bigger. We forecast the 212/ 13 budget will record a surplus of 6.7% of GDP, even assuming an 8% increase in total spending. Bank deposit growth slows in 212 Bank deposits in Qatar declined -1.6% m/m in February, but were still 5.4% higher than February 211. The main driver appears to have been a -6.7% m/m decline in public sector deposits, as private sector deposits rose.9% m/m in February. Despite the decline in deposits, loan growth was 5.3% m/m (3.3% y/y) in February, up from 24.3 in January. Public sector credit surged 13.% m/m (58.) last month, as government institutions increased borrowing. Private sector credit grew.7% m/m (16.5% m/m), down from 21.7 in January. Within the private sector, loans to industry contracted -6.9% m/m, while credit to the general trade sector rose 3.8% m/m in February. Last month, the governor of the Qatar Central Bank (QCB) said in an interview that the central bank had been issuing around USD 1.1bn per month in treasury bills, in a bid to develop the domestic debt market. It is likely that the bond issues have contributed to the slower growth in M2 in 2H 11. The governor said that the aim of the treasury bill issues was to develop the domestic bond market, but if money supply and credit growth slow further, we think there is still scope for a rate cut by the QCB. Inflation slows on housing Inflation has slowed to 1.2 in February from an average 2.3% in Q As in the UAE, housing costs (which account for just under one-third of the consumer price index) are still declining, and this is helping to offset inflation in other sectors; notably miscellaneous goods & services. Entertainment and recreation costs are also rising at a faster pace, which suggests increasing demand. We expect average inflation in Qatar to rise to 3.5% this year from an average 1.9% in Source: Bloomberg, as at 27 November 211 Qatar: Bank deposit growth Source: Reuters, Emirates NBD Research Qatar: Inflation e 212f Total customer deposits Public sector Private sector Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Headline CPI Food Housing Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Page 1

11 % GDP Kuwait Kuwait: GDP growth Political developments continue to dominate the headlines in Kuwait following the February elections. Despite an announcement in March that public sector workers would receive a 25% wage increase, employees in the customs department and Kuwait Airways Corporation went on strike, disrupting flights and government services. The strike has been suspended to allow negotiations with the government to continue budget surplus likely to beat forecasts Kuwait s budget has benefitted from higher than expected oil revenues in fiscal year (FY) 212, which ended 31 March. Budget data for April 211 January 212 suggests that Kuwait s full-year 211/12 budget surplus could be around KWD14.7bn, higher than our forecast of KWD 12.6bn, even assuming a substantial increase in spending in the last two months of the fiscal year. The authorities clearly have room to meet public sector wage demands, but appear reluctant to commit to wage increases that they deem unsustainable. Officials have commented on the budget s reliance on oil revenues and may be concerned about the vulnerability to oil price shocks. and remain high in FY 213 For 212/ 13, officials have indicated that spending is budgeted at USD 79bn (around KWD 22.5bn). However, as Kuwait rarely meets expenditure targets, we have assumed a rise in spending to KWD 16.9bn for the current fiscal year, from an estimated KWD 14.7bn in FY 212. On the revenue side, we forecast revenue of KWD 28.4bn, assuming no increase in oil production this year. This is almost double the official revenue forecast of KWD 14.2bn, which is based on a conservative oil price of USD 65 per barrel for the current fiscal year. Overall, we expect Kuwait to post a sizeable budget surplus of KWD 12.7bn (27.2% of GDP) in FY 212/13. Inflation eases in February Kuwait s inflation has eased to below 4% in the first 2 months of 212, from an average 4.8% last year. The main driver still appears to be food prices, and we expect food prices to moderate this year as the declines in global food prices in Q4 11 feed through to the local CPI. We expect average inflation of 4% this year. Credit growth shows signs of life As banks in Kuwait have sought to repair their balance sheets following the financial crisis, credit growth to the private sector has been muted since Q3 21. However, credit growth has accelerated slightly in the last few months, reaching 3.2 in February 212. As in the UAE, we expect only a gradual improvement on this front this year e 212f Kuwait: Budget balance e 212f Kuwait: Money supply and credit growth 12 M2 Private sector credit Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Page 11

12 thousand barrels per day Oman Oil production continues to rise Oman s oil production rose by almost 2.5% in 211 relative to the 21 average, according to data from the Energy Intelligence Group. Data shows that production has continued to rise in the first two months of this year, reaching 897 thousand barrels per day, a further 1.9% increase on 211 s average output. We expect Oman s oil sector to remain a key driver of GDP growth this year, which we forecast at 4.5%, down from an estimated 5% in 211. We note that the IMF, in its recent Article IV press release, estimated growth last year at 5.5%. Public sector credit growth is high Money supply and private sector credit growth at the end of last year were slightly lower than our forecasts at 12.2% and 12.8% respectively. Data for January shows that both indicators have accelerated at the start of 212. However, the public sector remains the engine of growth in Oman: claims on public sector enterprises have grown by over 5 since Q2 21. As with many other oil producing countries, government deposits have surged in recent months, contributing to liquidity and high public sector credit growth. The sharp rise in government deposits in the last two months of 211 also suggests an increase in government spending at the end of the fiscal year. Oman: Oil production GDP growth 6 GDP growth (lhs) Avg oil production (rhs) e 212f Oman: Money supply 5 M2 (excludes govt deposits) Government deposits Budget surplus to have widened in 211 Although full year 211 budget data is not yet available, the latest estimate suggests that the surplus has widened significantly on the back of higher oil prices and output, even as expenditure has grown. We retain our estimate for an OMR 2.4bn surplus in 211 (8.7% of GDP). The 212 budget makes provision for OMR 1bn in expenditure this year; we estimate spending will be slightly higher at OMR 1.1bn or 35% of estimated GDP. However, we also forecast significantly higher revenue than the official budget, which assumes a USD 75 per barrel oil price for 212. Consequently, we expect the budget to run a surplus of 5.3% of GDP this year. In its annual economic review, the IMF again highlights the vulnerability of the budget to oil price corrections, particularly in the context of high expenditure growth. The Fund argues that in the absence of continued rises in oil prices, the fiscal surplus could disappear within 5 years. Inflation higher than expected in 211 Average inflation last year was 4.%, slightly higher than our 3.7% forecast and up from 3.2% in 21. The service sectors appear to have seen the highest inflation in Oman last year, although they have a relatively low weighting in the CPI basket. We expect inflation to remain broadly stable at 3.9% in Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Oman: Credit growth 1 Private sector Public sector enterprises Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Page 12

13 % GDP USD bn Bahrain 211 GDP growth in line with expectations Bahrain s real GDP grew 1.3% q/q and 3.2 in Q4 11, up from 2.9 in Q3 11. Sectors that saw the strongest annual growth were social & personal services (11.3); transport & communication (1.3); manufacturing (8.1) and surprisingly, agriculture & fishing (7.1). However, the construction sector contracted while real estate & business services contracted -9.2 in Q4. Hotels, restaurants and trade sectors also contracted in Q4. For the full year 211, Bahrain s economy grew 2.2%, exactly in line with our forecast, and down from 4.5% in 21. The financial sector, which accounts for about 18% of Bahrain s economy, grew just 2.6 in 211. Government services, another key pillar of the economy, grew 5.6% last year, while manufacturing (almost 17% of GDP) grew 3.9% down from 11.4% in 21. Mining & quarrying expanded 3.2 in 211, up from 2.7% in 21. We expect real GDP growth to accelerate to 3.3% in 212. Inflation rises in February, but is still low After declining m/m since November 211, inflation rose by 1.5% m/m in February on the back of a sharp increase in food prices during the month. Inflation in other components of the index, particularly housing which accounts for almost 24% of the CPI, remains benign. We expect average inflation to rise to 2.5% this year from -.4% in 211, as growth recovers. Money and credit growth recovered in 2H11 Money supply growth stood at 5.2 at the end of 211, only slightly lower than our 5.4% forecast, and was at a similar level at the end of January. As with inflation, we expect liquidity to improve and forecast M3 growth at 6.2% by the end of this year. Private sector credit growth recovered well in 2H 11, reaching 15. by end-211, slightly higher than our 14.5 forecast. We expect the pace of private sector credit growth to slow to 6.5% by December 212 off the high annual base. Public sector credit growth eased to 28.5% at the end of 211 after growing in excess of 5 last summer. Current account surplus higher than expected in 211 Bahrain s current account surplus reached USD 3.2bn (12.6% of GDP) in 211, up from 3.5% of GDP in 21 and well above our 3.9% of GDP forecast for last year. Although oil export revenues were slightly higher than we had estimated, the big positive surprise was the strength of non-oil exports, which rose 2 in 211. Non-oil imports were also lower than we had projected. The surplus on the services account was almost half that recorded in 21 as export revenues from financial services and travel were negatively affected by the political upheaval. We have revised up our current account forecast for 212 to USD3.3bn (12.3% of GDP) on the back of the latest data. Bahrain: GDP growth Bahrain: Money supply and credit Bahrain: Current account surplus and FX reserves e 212f Money supply Private sector credit Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 Current account balance (lhs) FX Reserves (rhs) f Page 13

14 Key Economic Forecasts: UAE National Income e 212f Nominal GDP (AED bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth () Monetary Indicators () M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure Page 14

15 Key Economic Forecasts: Saudi Arabia National Income e 212f Nominal GDP (SAR bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth () Hydrocarbon Non- hydrocarbon Monetary Indicators () M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP SAMA's Net foreign Assets Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure Public debt Source: Haver Analytic, Emirates NBD Research Page 15

16 Key Economic Forecasts: Qatar National Income e 212f Nominal GDP (QAR bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth () Hydrocarbon Non- hydrocarbon Monetary Indicators () M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Total external debt % GDP Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure Source: Haver Analytic, Emirates NBD Research Page 16

17 Key Economic Forecasts: Kuwait National Income e 212f Nominal GDP (KWD bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth () Monetary Indicators () M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure Source: Haver Analytic, Emirates NBD Research Page 17

18 Key Economic Forecasts: Oman National Income e 212f Nominal GDP (OMR bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth () Monetary Indicators () M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure Source: Haver Analytic, Emirates NBD Research Page 18

19 Key Economic Forecasts: Bahrain National Income e 212f Nominal GDP (BHD bn) Nominal GDP (USD bn) GDP per capita (USD) Real GDP Growth () Monetary Indicators () M Private sector credit CPI (average) External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure Source: Haver Analytic, Emirates NBD Research Page 19

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21 Emirates NBD Research& Treasury Contact List Emirates NBD Head Office 12th Floor Baniyas Road, Deira P.O Box 777 Dubai Tim Fox Head of Research & Chief Economist timothyf@emiratesnbd.com Research Khatija Haque Senior Economist khatijah@emiratesndb.com Irfan Ellam Head of MENA Equity Research MohammedIE@emiratesbank.com Nick Stadtmiller Head of Fixed Income Research nicholass@emiratesndb.com Aditya Pugalia Research Analyst adityap@emiratesnbd.com Sales & Structuring Head of Sales& Structuring Sajjid Sadiq Sayed sayeds@emiratesnbd.com Saudi Arabia Sales Numair Attiyah numaira@emiratesnbd.com Singapore Sales Supriyakumar Sakhalkar supriyakumars@emiratesnbd.com Group Corporate Communications Ibrahim Sowaidan ibrahims@emiratesnbd.com Claire Andrea clairea@emiratesnbd.com Page 21