MENA Quarterly. Quarterly. 21 January MENA in 2014: A tale of two regions

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1 MENA Quarterly The dichotomy in economic performance between oil exporters and oil importers in the MENA region is expected to continue in 214. GCC governments are expected to maintain relatively high levels of spending, underpinning growth in the non-oil sectors of their economies, while continuing to post substantial budget and current account surpluses. In contrast, oil importers have limited room to maneuver as fiscal and external deficits remain significant, and against a backdrop of political transition which has limited their governments abilities to adjust macroeconomic policy. Quarterly 21 January 214 In 214, we expect GCC growth to again average 4.3%, driven mainly by the nonoil sectors. We expect Qatar and the UAE to be the fastest growing economies in the GCC this year, with real GDP expanding.2% and 4.% respectively. Kuwait is likely to remain the laggard of the region in terms of growth. The average fiscal surplus of the oil exporting countries is expected to narrow to 6.1% of GDP in 214 on slightly lower oil prices (consensus forecast USD 1/bbl, down from USD 1/ bbl in 213); and as expenditure continues to rise. Oman and Bahrain are forecast to run budget deficits this year. The outlook for MENA s net oil importers in 214 is cautiously optimistic. We forecast average real GDP growth of 3.% on a GDP-weighted basis, compared to an estimated 2.4% in 213. Morocco is again expected to be the fastest growing economy among the oil importers, with growth forecast at 4.2% in 214. The aggregate budget deficit for oil importers is expected to narrow to -9.4% of GDP this year from -11.% in 213. In Jordan and Lebanon, the outlook is tempered by the negative spillovers stemming from the crisis in Syria, while a degree of caution is warranted in North Africa due to the slow pace of economic reform and event risks associated with upcoming elections in Egypt and Tunisia. MENA in 214: A tale of two regions GCC MENA oil importers Khatija Haque Head of MENA Research khatijah@emiratesndb.com Jean Paul Pigat MENA Economist jeanp@emiratesnbd.com GDP growth (%) -4.2 Current Account (% GDP) -9.4 Budget Balance (% GDP) Inflation (%) Regional aggregates are weighted by nominal GDP Source: Emirates NBD Research

2 Contents GCC Overview... Page 3 MENA Oil Importers... Page Bahrain... Page 7 Egypt... Page 8 Jordan... Page 9 Kuwait... Page 1 Lebanon... Page 11 Morocco... Page 12 Oman... Page 13 Qatar... Page 14 Saudi Arabia... Page 1 Tunisia... Page 16 UAE... Page 17 UAE - Dubai... Page 19 Key Economic Forecasts... Page 2 Page 2

3 GCC Overview The GCC enjoyed solid growth we estimate 4.3% on a weighted average basis - in 213, likely outperforming advanced economies, central and eastern Europe, CIS and Latin America and the Caribbean (IMF WEO projections, October 213). Nevertheless, GCC growth last year was markedly slower than 212, which had benefitted from a substantial increase in oil production across the region. Fiscal and external balances in 213 were supported by a stable oil price, which averaged USD 1/bbl. This year, we expect GCC growth to average around 4.3%, driven mainly by the non-oil sectors in most of the GCC. Inflation is expected to rise to 3.6% on average this year from 2.7% in 213. Oil price and output broadly stable in 213 Bloomberg data shows that total oil production for the GCC s OPEC members in 213 was largely unchanged from 212, at 1.9bn bpd. However, there was significant variation in oil output between the GCC member states. The UAE (+4.7% to 2.8mn bpd) and Kuwait (+.3% to 2.9mn bpd) increased oil production last year, while Saudi Arabia (-2.4% to 9.mn bpd) and Qatar (-.2% to.7mn bpd) reduced their output. Oman and Bahrain, which are not OPEC members, also saw oil production increase in 213, contributing to their relatively high overall growth. USD per barrel GCC oil output and reference price Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Source: Bloomberg, Emirates NBD Research Libya, Iraq, Iran oil output 4 3 GCC oil production (excl Oman, Bahrain) OPEC reference price mn barrels per day OPEC s reference oil price averaged just over USD 1 /bbl in 213, -3.3% lower than 212. Oil prices have been relatively stable by historical standards the standard deviation in the OPEC reference price over the last 3 years has been just USD 6. /bbl compared with a standard deviation of USD 27 /bbl over the last decade. Bloomberg consensus forecasts for 214 put the oil price at USD 1 /bbl (average of WTI and Brent forecasts), -.% lower than 213. mn bpd 2 1 Iraq Libya Iran Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Overall, we expect oil production to remain broadly stable for the GCC as a whole in 214. Many analysts have highlighted the downside risks to oil production, particularly in Saudi Arabia, as Iraq, Iran and Libya are expected to boost their supply onto the global market. While Iraq did increase output in Q4 213, there is little sign yet that Libya has resolved the disputes that have disrupted production and exports since last summer. At this stage, we are projecting no change to Saudi Arabia s average oil production in 214. We also think the UAE and Kuwait could increase oil output marginally this year, but at a slower pace than 213. However, oil is unlikely to contribute significantly to aggregate real GCC growth this year, in our view. Non-oil sector to be the engine of GCC growth in 214 We expect Qatar and the UAE to be the fastest growing economies in the GCC this year. In Qatar s case, government spending on infrastructure is likely to remain a key driver of non-oil growth, as the country continues to prepare for the FIFA World Cup in six years time. We expect growth to slow to.2% from an estimated 6.% in 213. Source: Bloomberg, Emirates NBD Research % 214 real growth forecasts Qatar UAE Bahrain Saudi Arabia Source: Emirates NBD Research 4. Oman 3. Kuwait Page 3

4 In the UAE, the authorities have run a tighter fiscal policy, and we expect this to remain the case in 214, with expenditure growth forecast at 3.2. Instead, we anticipate UAE growth will continue to come from the domestic private sector, supported by external demand as the global economy strengthens. Consumer and investor confidence has been buoyed by the sharp recovery in real estate prices and winning the right to host Expo 22. Private sector credit growth is accelerating and the tourism and hospitality sectors continue to show robust growth. Consequently, we expect the non-oil sectors to compensate for slower growth in the hydrocarbon sector, and project overall GDP growth of 4.% this year. A decline in oil production was the main reason Saudi Arabia s GDP growth slowed to 3.8% last year, according to official estimates, from.8% in 212. However, the pace of non-oil growth in the kingdom was also slower than we had expected at the start of last year, with PMI readings last year consistently lower than the corresponding months in 212. For 214, our base case is for stable oil production, and non-oil growth of around.4%. Overall, we expect real growth of 4.2% in Saudi Arabia this year. Kuwait has likely been the laggard of the region in terms of growth in 213, despite an estimated.3% increase in oil production, as non-oil expansion has been hampered by political uncertainty and lack of progress in implementing the economic development plan. At this stage, prospects for 214 are not looking much better, and we expect growth to remain in the low single digits. We expect growth in Oman and Bahrain to slow to 4.% and 4.3% in 214, from 4.7% and 4.8% respectively in 213, largely on the back of moderating oil production after a strong 213. We also anticipate that both economies will run budget deficits this year, as oil revenues fail to keep pace with government spending. Indeed the average GCC fiscal surplus is expected to narrow to 6.1% of GDP in 214 from an estimated 8.4% in 213, as expenditure growth outpaces revenue growth. Inflation likely to accelerate in 214 Consumer inflation surprised on the downside across most of the GCC in 213, relative to our forecasts at the start of last year. We estimate average inflation of 2.7% (weighted by nominal GDP) for the GCC, up from 2.3% in 212. This year we expect consumer inflation to accelerate to 3.6% as higher housing costs feed through to the official indices, and as rising input costs are increasingly passed on to consumers. 6 6 PMIs show strong non-oil growth Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Source: Markit/ HSBC, Emirates NBD Research % GDP GCC average* fiscal balance * Average weighted by nominal GDP GCC average* inflation 4 UAE 8.4 Saudi Arabia e 213f 214f 21f 3 % e 214f 21f * Average weighted by nominal GDP Page 4

5 MENA Oil Importers The outlook for MENA s net oil importers (Egypt, Jordan, Lebanon, Morocco and Tunisia) in 214 is slightly more optimistic compared to last year. Our regional weighted average real GDP growth projection currently stands at 3.%, compared to an estimated 2.4% in 213. Of course, these rates of economic expansion remain far below pre-211 levels, when headline GDP was growing above %. In the near term, our outlook on the economies of the Levant is tempered by the negative spillovers stemming from the crisis in Syria, while a degree of caution is warranted in North Africa due to policy vacuums and event risks associated with upcoming elections. On the other hand, in several countries there are encouraging signs as a result of foreign aid commitments, IMF policy anchors, and tentative reform momentum, which should eventually benefit these economies as the regional and global backdrop improves. Greater convergence ahead The economic performance of MENA s net oil importers has by no means been uniform of late. As we had been expecting, recently released data shows Morocco as the clear outperformer in 213, with real GDP estimated to have expanded 4.8 in Q4, bringing full-year growth to 4.4% (compared to our forecast of 4.2%). Morocco s strong GDP reading was due in part to a favorable harvest which boosted the agricultural economy by 2.6, while growth in the nonagricultural economy came in at a more modest 2.1%. In contrast, Jordan and Tunisia have recorded unspectacular rates of expansion of between 2.-3.% since the start of 213, while real GDP in Egypt has lagged behind and fallen to a two-year low of only 1.% between July-September. Although we see scope for a significant degree of divergence in the economic trajectory of MENA s oil importers over the long term, in the coming quarters we are forecasting a broad convergence in growth rates. In the first instance, last year s outperformer Morocco should see headline GDP slow on the back of lower agricultural output and still anemic activity in the nonagricultural sector. At the same time, we are projecting an acceleration in investment and consumption in 213 s underperformer Egypt as a result of higher business and consumer sentiment, and the government s recently implemented stimulus measures. Some positive signs have already emerged in this regard, with the last two monthly PMI surveys for 213 coming in above the level which separates expansion from contraction. Duel deficits could improve Assuming global energy and food prices remain relatively stable this year, a slight improvement in the region s current and fiscal accounts is a distinct possibility. After hitting a record 11.2% of GDP in 213, our base case currently sees the weighted average budget deficit of MENA s net oil importers beginning to narrow in 214. Some progress has already been made in the case of Egypt and Morocco, with the former s budget deficit narrowing 18.3 Regional Real GDP Growth * Average weighted by nominal GDP Source: Emirates NBD Research e 214f 21f Purchasing Managers Indices 3 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Source: Markit, Emirates NBD Research Credit Growth Egypt Lebanon Egypt Private Egypt Public Jordan Private Jordan Public -1 Jan-1 Aug-1 Mar-11 Oct-11 May-12 Dec-12 Jul-13 Source: Havers, Emirates NBD Research Page

6 in the first five months of this fiscal year (running July-June), which is largely due to a large reduction in the national subsidy bill. Regional Budget Balances An improvement in the region s underlying fiscal positions will be attributable to several factors, and in some cases include lower subsidy outlays (Egypt, Jordan), weaker CAPEX (Morocco), or increased foreign grants (every state). That said, even in those states which have signed IMF agreements, we do not believe governments will be willing to curtail spending too rapidly lest they risk undermining the near-term growth prospects. Although full GDP by expenditure breakdowns for 213 are not yet available, we believe public spending is still playing a key role in propping up domestic demand across the region. A breakdown of recent credit trends in Egypt and Jordan would certainly seem to suggest that banks are significantly more willing to lend to the public sector. % of GDP e 214f 21f Moreover, given Egypt s weighting in our regional average forecasts (accounting for 3%), the headline readings may be slightly misleading. Indeed, both Tunisia and Lebanon have witnessed sharp deteriorations in their public finances since the start of 213, with the latter at risk of having posted its second consecutive annual primary budget deficit. With one of the highest government debt-to-gdp ratios in the world (approximately 134%), the increasingly fragile state of Lebanon s fiscal position is likely to become more of a concern this year given the economy s deteriorating outlook amidst elevated political risks. Source: Emirates NBD Research *Weighted average the stability of the dinar, while Jordan and Egypt have maintained an easing bias in the face of weak economic activity. Going forward, although we cannot rule out the possibility that the Central Bank of Egypt will cut rates further (possibly by 2bps), we see significantly greater scope for further easing in Jordan, where inflation has recently fallen to a four-year low, and a recent influx in foreign aid has bolstered balance of payments stability. Policy vacuums could emerge With unemployment across the region still a major concern, there is a strong likelihood that governments may once again attempt to avoid pushing through with unpopular, yet necessary, reforms. This is particularly the case in Egypt and Tunisia where constitutional referendums, in addition to parliamentary and presidential elections, are set to take place in less than stable environments. In Tunisia, the former government of Prime Minister Ali Larayedh was quickly forced to suspend an increase in a vehicle tax after a strong public backlash, which could put the country s ability to secure the next tranche in its IMF aid program in jeopardy. The threat of a prolonged policy vacuum is most acute in Lebanon however, which has been without a functioning government since the first half of 213. With the possibility of holding elections in 214 looking low in light of a sharp deterioration in the security environment, 214 will be another year when major policy reforms are put on the backburner. In early January, it was announced that the government would delay for a third time the auction of licenses for offshore hydrocarbon exploration. Despite the massive benefits that could arise from tapping into these oil and gas resources, policy inertia looks set to prevent any substantive progress this year. Central banks as the last resort Against this backdrop of policy inertia, central banks will continue to carry the responsibility of maintaining economic stability and stimulating domestic demand. At the moment, monetary policy across the region is diverging, with Tunisia s central bank recently forced to hike rates (to 4.% from 4.%) due to concerns over Page 6

7 Bahrain GDP Growth Growth expected to slow to 4.3% in 214 Q3 213 GDP growth was higher than expected, rising 2.1% q/q and 4.6. The oil sector has been the main driver of growth in 213, expanding 1.4 in the third quarter and by a cumulative 12% in the first three quarters of 213. To a large extent, this has been due to the resumption of oil production that was disrupted due to technical issues in Non-oil growth has been more modest, at around 3% in the first three quarters of 213, with hospitality and social/ personal services enjoying the fastest growth of 9.% and 7.4% respectively over the period. The largest non-oil sectors of Bahrain s economy are financial services (17% of GDP), government services (13% of GDP) and manufacturing (1% of GDP), and growth in these sectors was between 2-3% in Jan-Sep last year. Nevertheless, overall GDP growth in Q1-Q3 has averaged 4.7%, and we now expect full year growth of 4.8% for e 214f 21f Budget balance Due to the technical factors behind last year s sharp expansion in the hydrocarbon sector, we do not expect the pace of growth in that sector is to be maintained in 214. Consequently, we expect overall GDP growth to slow to 4.3% in 214. Budget deficit set to widen Notwithstanding the substantial boost to oil revenues in 213 on the back of higher production, and a relatively stable oil price, we anticipate the budget deficit widened to BHD 424mn or -3.4% of GDP last year from -2.% of GDP in 212. Expenditure growth was likely in the region of 11 last year. The draft budget makes provision for a further 2.3% increase in expenditure in 214, and we expect the deficit to widen further to BHD 66mn (-.% of GDP this year). % GDP e 214f 21f Higher inflation reflects normalisation of housing costs Inflation has averaged 3.2% in the year to November 213, up from 2.8% in 212. The main driver has been the continued normalisation of housing costs after the sharp declines in 211, with housing and utility costs up by nearly 9% last year. Furniture and household equipment prices also rose sharply in 213, with average inflation of 7.1% in this component of the index. We expect inflation to average 3.% in 214. Inflation 16 Headline CPI Housing Food Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Page 7

8 Egypt Following three years of stagnation, we should finally see the Egyptian economy begin to gain momentum. There are positive signs in the recent data, with the latest purchasing managers surveys for December and November both coming in above the level that separates expansion from contraction. Although presidential and parliamentary elections set for H1 will keep risk aversion somewhat elevated in the near term, our base case sees a more stable political backdrop emerging thereafter. Given a large output gap, this should help spark a revival in investment and consumption in the first instance. Having expanded only 1. in real terms between July-September, we are penciling in GDP growth of 2.8% in FY213/14 (fiscal year running July-June), before accelerating to a five-year high of 4.2% in FY214/1. The key to Egypt s improved outlook has been the inflow of financial assistance from the GCC, particularly at a time when private sector foreign capital inflows remain muted, and the prospects of an IMF agreement still appear remote. The USD1bn in aid commitments has bolstered balance of payments stability, and as a result, helped underpin a tentative revival in business and consumer confidence and improved market sentiment. On the latter point, since July 213 the EGX3 equity index has rallied over 4%, while yields on 12 month treasury bills have dropped from 1.4% to 1.9% at the start of 214. The key challenge this year will be attempting to transition away from a reliance on aid, and facilitating a revival in foreign investment inflows. Don t underestimate the challenges Despite the improved outlook, the coming year will present authorities with a host of macroeconomic challenges which could derail a more pronounced recovery. In terms of balance of payments stability, even following the influx in GCC aid and the ongoing imposition of capital controls, FX reserves at the central bank have declined for four consecutive months through December. Although we are forecasting the Egyptian pound to remain stable in the EGP 6.9/USD area, fundamental downside pressures on the currency do not yet appear to have abated. In addition, with the budget deficit at nearly 14% of GDP in FY212/13, the importance of addressing the deterioration in Egypt s public finances has only increased in recent months. Every government since 211 has been reluctant to make difficult decisions in terms of curtailing public spending, and it remains to be seen if any new administration will have the willingness to fundamentally reform the energy subsidy system or slow the expansion in the public sector payroll. With the central bank now appearing actively involved in deficit financing, Egypt can ill afford another year of policy drift PMI 36 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Source: Markit/ HSBC, Emirates NBD Research Monetary Trends Employment Index PMI Jan-1 Aug-1 Mar-11 Oct-11 May-12 Dec-12 Jul FX Reserves & EGP Core CPI M1 Money Supply FX Reserves, USDbn EGP/USD (lhs) Jan-9 Oct-9 Jul-1 Apr-11 Jan-12 Oct-12 Jul-13 Page 8

9 Jordan More than any other state across the region, Jordan s primary macroeconomic troubles stem from factors well beyond the central government s control. In particular, the sustained inflow of Syrian refugees into the country, in addition to frequent disruptions to natural gas supplies from Egypt, are making the task of addressing the economy s duel deficits all the more difficult. According to our calculations, in percentage of GDP terms Jordan currently possesses the largest current account deficit of MENA s oil importers (16%), and a budget deficit (9.%) only surpassed by Egypt. Although household consumption is being supported by the population influx, fixed investment has stalled, while net exports are likely to drag heavily on headline GDP in the near term. We are forecasting growth of 3.2 in 214, up slightly from 3.% in 213. Not uniformly bearish This is not to say there is no cause for optimism. Although economic growth is likely to remain below trend over the coming quarters, Jordan s current predicament has forced authorities to begin pushing ahead with reforms that should ultimately benefit the economy over the long term. Helped by a strong policy anchor in the form of an IMF Stand-By Arrangement, Amman has already started raising domestic energy prices in a bid to improve the financial health of the state energy firm NEPCO, which in 213 received transfers from the government estimated at just under 8% of GDP. Moreover, the Central Bank of Jordan (CBJ) has been able to rebuild its buffer of FX reserves, as foreign aid inflows have helped to finance the massive current account deficit. This has drastically reduced fears of a change to the dinar s peg to the dollar. Alongside de-dollarization within the domestic banking system, the CBJ has been able to loosen monetary policy by slashing rates 7bps since the start of H213. As core inflation in December fell to only 1.% - its lowest level since November 29 - we would not be surprised if further rate cuts materialize in the first half of 214. Trade Figures (3mmavg) Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Budget Deficit* JODmn *Excluding grants, Jan-Oct Exports Imports In the event that Jordan experiences further negative shocks to its fiscal and external accounts (whether from Syria, Egypt or global energy prices), strong support from bilateral partners should help to mitigate near-term risks to the economy s external position. In addition to foreign aid inflows from the Gulf and the aforementioned IMF SBA, Amman can also count on the support of the US, whose bond guarantees were crucial in helping the sovereign raise USSD1.2bn in October 213 at a yield only 6bps above US treasuries of the same maturity. Syrian Refugees chg m/m (rhs) Refugees Dec-11 May-12 Oct-12 Mar-13 Aug-13 Source: United Nations, Emirates NBD Research Page 9

10 Kuwait Hydrocarbon sector drives growth Kuwait boosted oil production by.3% to 2.94mn bpd on average in 213, according to Bloomberg estimates, the biggest increase of all the GCC member states. This follows a 12.6% rise in oil output in 212, again the highest in the region, and comes against a backdrop of flat oil production for the GCC as a whole in 213. With non-oil growth hampered by policy inertia, the hydrocarbon sector is likely to remain the engine for growth in 214. We expect overall GDP growth of 3.6% in 213, easing to 3.% in 214. GDP Growth Real GDP growth Hydrocarbon sector Non oil sector Budget and external surpluses remain substantial We estimate Kuwait s budget will record a surplus of 2.4% of GDP in FY213/214 (April-March). While this is slightly lower than the 23.9% of GDP surplus in FY212/13, it remains the highest in the region. Increased oil revenues have contributed to the substantial budget surpluses over the last few years, but they also partly reflect the government s inability to fully execute its budget due to political deadlock and policy inertia. In FY211/12 and FY212/13, the government underspent by more than 1% of its budget. However, data for the first 6 months of the current fiscal year (ie April-September 213) show that spending has increased by more than % compared with the same period in 212, and we have assumed that this year s budget will be fully executed f 213f 214f 21f Source: Haver Analytics, IMF, Emirates NBD Research % GDP Budget and current account balance 9 Budget balance Current account balance We anticipate that spending growth will slow in FY213/14, as the authorities take on board IMF recommendations to curb current spending. Nevertheless, we forecast a narrowing of the budget surplus in FY214/1 to just under 18% of GDP f 213f 214f 21f Kuwait s balance of payments position is also likely to remain strong in 214, despite a forecast easing in the oil price this year. We expect the current account surplus to narrow slightly to 4.% of GDP in 214 from an estimated 41.9% of GDP in 213. Private sector credit growth has accelerated Both money supply and private credit growth accelerated in 213, despite the political uncertainty. M3 growth reached 11.3 in November, up from 7.8% at the end of 212. We expect broad money growth to ease slightly to 9.1% by December 213. Source: Haver Analytics, IMF, Emirates NBD Research Money and credit growth 12 M2 Private sector credit 1 8 Private sector credit growth has also picked up steadily during the course of last year, reaching 6.4% in November. We think it could end-213 at 7.2%. In contrast, government borrowing from domestic banks has continued to contract on an annual basis, reaching in November Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Page 1

11 Lebanon Downgrade to 213 growth forecast Since our last quarterly report, the economic and political backdrop in Lebanon has deteriorated, and we have revised many of our forecasts accordingly. Although a significant amount of volatility was already incorporated in our base case projections, the security situation (particularly in Beirut) appears to have deteriorated further. As a result, we have revised down our 214 real GDP growth forecast to 2.2%, from 3.4% previously. At the same time, in late December ratings agency Fitch cited heightened political risk, worsening public debt dynamics, and weak growth prospects in its decision to downgrade the outlook on Lebanon s sovereign credit rating (B) from stable to negative. While the economy is likely to underperform its regional peers in 214, we concede that available leading indicator data through end-213 has been mixed. December s purchasing managers index rose to 49. from 4.1 in November, with the new orders sub-component bouncing to a seven-month high of Multimonth highs were also recorded in passenger arrivals, cement deliveries, and the economic coincident indicator - which expanded 4.6 in October (3mmavg). On the other hand, as of October, customs receipts had dropped in y/y terms for eight consecutive months, while the value of goods exports contracted -2.9 (3mmavg) in November, which was the fastest pace of decline in our time series that dates back to 21. From these figures, it appears that although the economy is stabilizing, this is taking place at a very low base. Policy vacuum and debt dynamics The deterioration in Lebanon s public finances in recent months is potentially of greater concern, in our view. A drop in tax receipts has seen revenues contract by an average 3.3% in the first ten months of 213, while expenditure growth remained relatively steady at 7.8%. According to our calculations, the country is set to post its second consecutive full-year primary budget deficit, which would risk reversing the progress that has been made since 26 on reducing the country s public debt load. Indeed, we project estimate public debt (as a share of GDP) to have risen to 142% in 213, compared to 133% in 211. A key factor undermining Lebanon s outlook is the ongoing policy vacuum, which has left the country without a functioning government since H Not only does this undermine the near-term growth outlook, but it will also have longer-term implications. Indeed, in early January it was announced that authorities would delay for a third time the auction of licenses for offshore hydrocarbon exploration. Despite the massive benefits to external and fiscal accounts that could arise from tapping into these resources, policy inertia once again looks set to prevent any substantive progress this year PMI May-13 Jul-13 Sep-13 Nov-13 Source: Markit, Emirates NBD Research Credit Growth Public Debt PMI New Orders - -1 Claims on Private Sector Claims on Public Sector -1 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 LBPbn (lhs) % of GDP f Page 11

12 Morocco Recently released data shows the Moroccan economy as the clear outperformer among MENA s net oil importers in 213, with real GDP estimated to have expanded 4.8 in Q4, which would bring full-year growth to 4.4% (our initial projection saw growth of 4.2%). That said, a look beneath the GDP figure suggests underlying business activity may not be as strong as the headline print suggests, as growth last year was supported by an exceptionally strong harvest which boosted the agricultural economy by 2.6. At the same time, the non-agricultural economy expanded by a more modest 2.1% - a figure broadly in line with the pace of growth being recorded in MENA s other oil importers. Growth set to slow Our base case for 214 sees real GDP growth slowing to 3.1, as negative base effects from last year s agricultural harvest are likely to weigh on the pace of headline GDP expansion. Looking at currently available data, there is little to suggest that momentum within the non-agricultural economy will soon pick up. Fixed investment looks particularly weak at the moment, with the country s cement industry issuing a statement in early January that sales dropped 6.3 in 213 (following a fall of 1.6% in 212) on the back of a slowdown in housing projects. In addition, latest figures for tourism and remittance receipts are less than inspiring, with the former contracting 4.9 in November (3mmavg), while the latter posted growth of only 1.7%. As tourism and remittance receipts account for roughly 9% and 7% of GDP respectively, this data would suggest household consumption may remain relatively anemic in 214. In both cases, improving conditions in the Eurozone could provide some respite. However, as we are projecting full-year growth of only.% in the common currency bloc, the external environment cannot be relied on to boost economic activity by any meaningful extent. External financing gap not yet a concern In early January, Morocco s finance ministry stated the current account gap had narrowed to 7.7% of GDP in 213, from 9.7% in 212. Despite the improvement, financial account inflows in Q312 and Q2 were insufficient to cover the current account deficit, which raises questions over the stability of the economy s external position. Nevertheless, we do not believe Morocco will experience significant difficulty meeting its external financing requirements in 214. Not only is the country a beneficiary of stable foreign aid inflows (USD276mn from the AMF, USD1.2bn from Qatar and USD4bn from the World Bank over the next four years), but Rabat can also count on its USD6.2bn Precautionary Liquidity Line from the IMF, which the government has not yet been tapped. GDP Growth Q18 Q48 Q39 Q21 Q111 Q411 Q312 Q213 Tourism & Remittance Receipts (3mmavg) Balance of Payments MADmn Agriculture Non-agriculture Tourism Remittances -3 Jan-8 Dec-8 Nov-9 Oct-1 Sep-11 Aug-12 Jul Financial Account Current Account -4 Q18 Q48 Q39 Q21 Q111 Q411 Q312 Q213 Page 12

13 Oman Growth set to slow in 214 Recently released revised GDP data put real growth at.7% in 212, up from.1% previously. Consequently, we have revised down our estimate for 213 growth slightly to 4.7% from.% (off the higher base). We still expect the main driver of growth last year to have been the hydrocarbon sector, with crude oil production up 3.8% in the year-to-november according to Energy Intelligence Group estimates. We expect real growth to slow to 4.% in 214, as we think it unlikely that oil production will increase at a similar pace this year. As the hydrocarbon sector still accounts for more than 44% of real GDP, a slowdown in oil expansion to 2.% in 214 would have a significant impact on the headline growth rate. Non-oil growth is likely to remain underpinned by government spending next year. Indeed, public administration and defense account for more than 8% of Oman s real GDP, and growth in this component has been strong since 211, as the government has increased both current and development spending. Th. Bpd Oil Production Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Source: EIG via Bloomberg, Emirates NBD Research GDP growth 8 Budget to move into deficit in 214 The official budget for 213 makes provision for OMR 12.9bn in total expenditure, which is in line with our estimates for budget revenue last year, and suggests a balanced budget. Data for Q1- Q3 show that the budget recorded a surplus of around OMR.3bn, compared with OMR 22.9bn in the same period the year before, as expenditure was 26% higher y/y. If the government expenditure is as high in Q4 as has been the case in previous years, the budget could show a deficit already in For 214, the authorities have drafted a budget with OMR 13.bn in spending, up almost 4% on our 213 estimate. Current expenditure (mainly wages and salaries) accounts for 6% of the total budget. Subsidies and exemptions account for a further 1% of the budget. Investment spending will continue to focus on development of oil and gas fields as well and other infrastructure projects e 214f 21 Budget balance Official revenue projections are typically conservative at OMR 11.7bn, based on an oil price of USD 8pb. We forecast revenues of OMR 13.bn using the Bloomberg consensus oil price forecast of USD 1pb and higher oil production estimates. Consequently, we project a budget deficit of around OMR.bn (-1.6% of GDP) this year, substantially lower than the official budget s projected OMR 1.8bn deficit. % GDP The government has indicated the deficit will be financed by drawing on accumulated surpluses and reserves, as well as some foreign and domestic borrowing if required e 214f 21 Page 13

14 Qatar 213 growth forecast revised up to 6.% Real GDP growth accelerated to 4.3% q/q and 6.2 in Q3 213, from.3% q/q and.7 in Q The third quarter is typically a good one for Transport & communication, trade & hospitality and utilities, due to summer seasonal effects, and 213 was no different with these sectors all recording double-digit growth q/q. Transport, trade and hospitality also expanded strongly on an annual basis in Q3 however, as did building & construction, financial services and government services. The data supports our view that government spending on infrastructure and public services has replaced hydrocarbons as the main engine of growth in Qatar, and this trend is likely to remain the case in 214 in our view. Given the stronger than expected growth in Q1- Q3 213, we have revised up our forecast for full year 213 GDP growth in Qatar to 6.% from.2% previously. We retain our 214 GDP growth forecast at.2%. Money supply growth slowed in 213 Money supply growth slowed sharply over the summer last year, and has remained around 1 in H The main drivers appears to have been declining demand deposits as well declining FX deposits for most of the second half of last year. However, we expect M2 growth to accelerate to 18 in December 213, due to base effects. Government deposits increased sharply from August through October however, and this is reflected in significantly higher M3 growth through H We expect broad money growth (excluding government deposits) to reach 1. by December 214. Private sector credit growth was relatively steady for most of last year, ranging between 13-1%. Public sector borrowing slowed sharply during the course of last year, off the very high base of 212. We expect private sector credit growth to remain broadly stable in 214, reaching 1. by the end of this year. Qatar s LNG Prices Remain High e 214f 21f Source: Haver Analytics, IMF, Emirates NBD Research Money supply growth M2 M3 (incl govt deposits) Dec-12 Mar-13 Jun-13 Sep-13 Housing costs drive inflation Inflation accelerated to 3.2% in the year-to-november 213, up from an average 1.9% in 212. Higher rents and utilities were the main driver, with housing costs in the CPI rising nearly 6% on average last year. Inflation in the entertainment and recreation component accelerated to 7.% last year, up from 6.% in 212, likely reflecting stronger consumer demand. Imported inflation was relatively muted in Qatar, as elsewhere across the GCC. We expect inflation to accelerate to 4.% on average this year, again fuelled mainly by housing and services. Inflation Headline CPI Food Housing -8 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Page 14

15 Saudi Arabia 213 growth estimated at 3.8% Official estimates released in the 214 budget statement put 213 growth at 3.8%, largely in line with our 3.9% forecast. We had revised our growth forecast for Saudi Arabia down during the course of last year, due both to a decline in oil production and weaker than expected non-oil growth. Official estimates show the hydrocarbon sector contracting -.6% last year, but Bloomberg estimates show oil production declined by around -2.% in 213, suggesting a downward revision to this component is possible. In the non-oil sector, construction (8.1); transport, storage & communication (7.2); trade & hospitality (6.2) and financial services (4.9) enjoyed strong growth last year. mn bpd Oil production and price 1.4 Oil production (lhs) Oil price (rhs) Jan-12 May-12 Sep-12 Jan-13 May-13 Sep USD per barrel Expenditure growth set to slow in 214 Preliminary estimates put government spending in 213 at SAR 92bn, nearly 13% higher than the official budget but in line with our forecast. Government spending has been a key driver of real growth in Saudi Arabia since the financial crisis, and especially post-211 after the government announced a raft of new spending initiatives in the wake of the Arab Spring. Over the last decade, expenditure has grown by an average 14.3, but this slowed to less than 6 in 213 according to preliminary estimates. We expect this trend to continue this year, and we forecast just a 3% rise in budget spending in 214, taking it to SAR 93bn; 13% higher than the official budget. Thus, while public sector expenditure remains an important driver of growth, momentum from this sector is slowing. Budget revenue is also projected to decline in 214, as the oil price is expected to average USD 1/bbl down from USD 1/bbl in 214, and oil production is assumed to be stable. Consequently, we expect Saudi Arabia s budget surplus to narrow to 4.9% of GDP from 7.4% in 213. We also project a slight increase in the break-even oil price for Saudi Arabia to USD 86/bbl. Non-oil sectors to be the engine for growth in 214 Growth in the non-oil sectors is likely to be underpinned by still substantial public sector spending, as well as improved global and regional growth prospects. Indeed, PMI data in the fourth quarter showed a rebound in the private non-oil sectors of the economy, after a sluggish summer. Private sector credit growth remains robust at around 14, and employment in the private sector is increasing. We expect real GDP growth to accelerate slightly to 4.2% this year, assuming stable oil production. Inflation likely to rise in 214 Inflation in 213 averaged 3.%. PMI data suggests that inflationary pressures are building, as the rate of growth in input prices is exceeding that of output prices. However, firms raised output prices at the fastest pace in 1 months in December, and we expect inflation to accelerate to 4.% on average in 214. Source: Bloomberg, Emirates NBD Research GDP and budget spending growth 16 Real GDP growth () 14 Budget balance (% GDP) f 213f 214f 21f PMI input and output price indices 6 Output Prices Index Input Prices Index 6 4 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Source: Markit/ HSBC, Emirates NBD Research Page 1

16 Tunisia Stability around the corner? Three years since the start of its political transition, underlying stability in Tunisia is still proving elusive. After months of negotiations throughout H213, an agreement to name former Industry Minister Mehdi Jomaa as interim prime minister was only announced in late December. Jomaa took office in early January and is now tasked with forming a technocratic government, which will rule until parliamentary elections are held later this year. From our standpoint, the key risk is that these elections will result in a similar outcome to that seen in 211, and resolve none of the fundamental issues that have pushed Tunisia into its current predicament. Latest data shows the Tunisian economy posted growth of 2.7% y/y in real terms in Q3 213, down from 3.4% in Q2. The manufacturing sector appeared particularly weak in the second half of 213, having expanded only.1 in the third quarter, while the trade sector, in contrast, grew 3.1% - its fastest pace since Q2 21. Since 211 the economy has not recorded a single quarter s growth exceeding 4., except for Q1 212, when GDP growth was boosted by low base effects. Looking ahead, although we have penciled in growth of 3.4% for 214 (compared to our estimate of 3.1% for 213), this could prove overly optimistic. Indeed, as investment and exports have remained anemic since early 211, one of the key drivers of economic activity has been the public sector. Going forward however, we would not be surprised to see the IMF put greater pressure on Tunis to curtail government spending as part of its ongoing Stand-By Arrangement (SBA). In Q3 the public administration sector expanded.2, which was the slowest pace since the fourth quarter of 21. With the central bank having also recently hiked interest rates by bps (to 4.%), there is certainly a risk that fiscal and monetary tightening could result in slower growth this year. A difficult environment for austerity We estimate Tunisia s budget deficit at 7.7% of GDP in 213, up sharply on the.% and 3.% shortfalls posted in 212 and 211 respectively. Efforts at reining in this fiscal shortfall may prove difficult at a time of weak growth and still elevated unemployment (the latter stood at 1.7% as of Q3 213). Indeed, before leaving office, the former government of Prime Minister Ali Larayedh quickly suspended an increase in a vehicle tax after a strong backlash led to public protests. Shortly thereafter, the government said it would also suspend energy price hikes, which had initially been planned for the 214 budget. GDP Growth 1 1 GDP - Manufacturing Trade Public Administration -1 Q18 Q48 Q39 Q21 Q111 Q411 Q312 Q213 Exchange Rate EURTND Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: Bloomberg, Emirates NBD Research Monetary Policy Policy Rate, % CPI, y/y Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Page 16

17 UAE Expect another year of strong growth The UAE economy enjoyed robust growth last year, as oil production increased and the continued recovery in domestic and regional demand boosted the non-oil sectors. Oil production rose by an estimated 4.7% in 213 (Bloomberg), well above our forecasts at the start of the year, and in contrast to Saudi Arabia which saw oil production ease in 213. As oil production accounts for around one-third of GDP, this provided a substantial boost to overall growth. The non-oil sector has also enjoyed strong expansion, particularly in Dubai where data shows that manufacturing, hospitality and trade grew robustly in the first half of last year. We expect these trends to have continued in the second half of the year. Indeed, the purchasing managers surveys suggest that the non-oil sectors in the UAE expanded at a record pace in the fourth quarter, driven mainly by domestic demand rather than exports. As fiscal policy in the UAE has been relatively contained compared with the substantial fiscal stimulus in Saudi Arabia and Qatar over the last couple of years, this suggests that the private sector has been a key driver of the UAE s growth in 213. The acceleration in private sector credit growth, strong retail sales and continued recovery in the real estate sector provide further evidence of this. Overall, we conservatively estimate the UAE s economy expanded by 4.6% in real terms last year. Looking ahead, we expect growth at a similar pace this year. The oil sector is unlikely to contribute significantly to the UAE s growth in 214, as substantial increases to crude output in are now in the base, and supply from Iran, Iraq and Libya is expected to rise this year. We have assumed the UAE s oil production will increase by around 2% this year. We expect growth to come largely from the non-oil sectors, which are likely to benefit from an improving global growth environment as well as strong domestic and regional fundamentals. These include supportive fiscal policy in the rest of the GCC, which will continue to spillover into the UAE through trade and tourism; as well as increased consumer and investor confidence in the UAE s medium and long-term growth prospects. Private sector credit growth picks up After remaining subdued since the financial crisis, private sector credit growth finally accelerated during the course of 213, with bank loan growth accelerating to 6.9 in August, before easing to 4.9 in October (the latest available data). While private credit growth remains well below the double-digit credit growth in Saudi Arabia and Qatar, the pick-up in lending is another indicator that the UAE s private sector is rebounding. We expect credit growth to continue to rise slowly and steadily through 214, as consumption and investment recover, and as banks look to growth their balance sheets. mn bpd Oil Production 3.4 Oil production (lhs) Oil price (rhs) Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Source: Bloomberg, Emirates NBD Research GDP Growth Purchasing Managers Index e 214f 21f Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 USD per barrel Source: HSBC/ Markit, Emirates NBD Research Page 17

18 Liquidity conditions in the UAE banking system have also improved this year, with M2 growth accelerating to 18.8 in October 213, the fastest pace of growth since December 28. The main driver appears to have been a sharp rise in quasi money (FX and long-term dirham deposits), although demand deposits also showed strong annual growth in the first ten months of last year. In a statement, the central bank attributed the growth in bank deposits this year to increased residents deposits, suggesting that the funds are relatively sticky. The growth in deposits and improved liquidity in the banking system through 213 is reflected in the easing in interbank rates, with 3m EIBOR declining by nearly bp during the course of last year. With the Fed having already started tapering, the scope for further tightening in the EIBOR rate is limited in our view. Inflation likely to rise in 214 Inflation was lower than we had anticipated at the start of 213, averaging just 1.1% last year. Food and imported inflation was relatively low, and although the housing sub-index bottomed, official measures of housing inflation were still relatively low. As we have noted before, the difference between the official CPI measure of housing costs and the market prices for residential real estate is due to different survey methodologies. Nevertheless, the inflation outlook for 214 is less benign than it has been for several years as we do expect higher housing costs to gradually feed through to the official inflation indices. The PMI surveys also indicate a build-up of inflationary pressure, which could put upward pressure on CPI this year. Input prices have been rising much faster than output prices since the record began (August 29), as firms were reluctant to pass on higher input costs post-crisis, when consumer demand was relatively muted and there was spare capacity in the UAE economy. However, as the economy (and consumer demand) recovers, firms should gain pricing power and be able to pass on rising production costs to consumers. We thus expect inflation to average 3.% this year, up from just over 1% in 213. Money supply and credit growth 4 M2 3 Private sector credit 3 Public sector credit Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Consolidated budget balance e 214f 21f Source: IMF, Emirates NBD Research Inflation 12 9 CPI Food Housing Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Page 18

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