THE LEBANON BRIEF. ISSUE 952 Week of January 18, 2016 January 22, 2016

Your Investment Reference THE LEBANON BRIEF ISSUE 952 Week of January 18, 2016 January 22, 2016 ECONOMIC RESEARCH DEPARTMENT BLOMINVEST Bank Headquarters Bab Idriss, Beirut, Lebanon T (01) 991 784/2 F (+961) 1 991 732 research@blominvestbank.com www.blom.com.lb

TABLE OF CONTENT FINANCIAL MARKETS 1 Equity Market 1 Foreign Exchange Market 3 Money & Treasury Bills Markets 3 Eurobond Market 4 ECONOMIC AND FINANCIAL NEWS 5 Efforts of Car Importers Paid Off with a 3.78% Increase in New Cars Registration in 2015 5 Retail Sales Activity Improved in H1 2015 6 Check Clearing Activity Down in 2015 6 Public Debt Up by a Yearly 5.71% to $70.4B by November 7 Public Sector Wages Reached $1.51 Billion in H1 2015 8 CORPORATE DEVELOPMENTS 9 BLC Bank to Hold General Assembly Next Month 9 FOCUS IN BRIEF 10 Lebanon s Eurobonds Market in 2015 10 This report is published for information purposes only. The information herein has been compiled from, or based upon sources we believe to be reliable, but we do not guarantee or accept responsibility for its completeness or accuracy. This document should not be construed as a solicitation to take part in any investment, or as constituting any representation or warranty on our part. The consequences of any action taken on the basis of information contained herein are solely the responsibility of the recipient.

The Lebanon Brief Page 1 of 14 FINANCIAL MARKETS Equity Market Stock Market 22/01/2016 15/01/2016 % Change BLOM Stock Index* 1,161.41 1,148.25 1.15% Average Traded Volume 185,386 81,401 127.74% Average Traded Value 2,769,701 765,983 261.59% *22 January 1996 = 1000 BLOM Stock Index On the Beirut Stock Exchange, the BLOM Stock Index (BSI) gained 1.15% during the week to 1,161.41 points. The average traded volume and value increased from last week s 81,401 shares worth $765,983 to 185,386 shares worth $2,769,701. Over the past week, the market capitalization on the Beirut Stock Exchange increased from $9.48B to $9.49B. 1240 1220 1200 1180 1160 1140 HI: 1,236.40 Markets in the region were all down which allowed the BSI to outperform all three of its regionals peers the S&P Pan Arab Composite Large-Mid-Cap Index, the Morgan Stanley Emerging Markets Index (MSCI) and the S&P AFE 40 Index which dropped by 5.77%, 4.79% and 5.98%, respectively. 1120 Banking Sector LO: 1,108.49 1100 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Mkt 22/01/2016 15/01/2016 % Change BLOM (GDR) BSE $9.70 $9.70 0.00% BLOM Listed BSE $9.40 $9.50-1.05% BLOM (GDR) LSE $9.56 $9.65-0.93% Audi (GDR) BSE $6.00 $6.00 0.00% Audi Listed BSE $6.09 $6.00 1.50% Audi (GDR) LSE $5.80 $6.00-3.33% Byblos (C) BSE $1.63 $1.62 0.62% Byblos (GDR) LSE $75.00 $75.00 0.00% Bank of Beirut (C) BSE $18.80 $18.80 0.00% BLC (C) BSE $1.70 $1.70 0.00% Fransabank (B) OTC $27.00 $27.00 0.00% BEMO (C) BSE $1.90 $1.90 0.00% All Arab bourses ended the week in the red mostly on account of lower oil prices and the slump of global equity markets. The most pronounced drops were registered by the Dubai stock exchange which lost 6.87%, by Qatar s bourse which shed 6.54% and by Saudi Arabia s stock exchange which fell by 6.42%. On the Beirut Stock Exchange, the banking sector accounted for 90% of the week s traded value while 9.5% were grasped by the real estate sector and a minor 0.2% was taken by the industrial sector. In the banking sector, BLOM Bank s listed shares dropped by 1.05% to $9.40. As for the listed shares of Bank Audi and Byblos Bank, they gained a weekly 1.50% and 0.62% to end the week at $6.09 and $1.63, respectively. Mkt 22/01/2016 15/01/2016 % Change Banks Preferred Shares Index * 106.01 105.87 0.13% Audi Pref. F BSE $102.00 $101.60 0.39% Audi Pref. G BSE $100.90 $100.90 0.00% Audi Pref. H BSE $101.50 $101.50 0.00% Byblos Preferred 08 BSE $101.00 $101.30-0.30% Byblos Preferred 09 BSE $101.00 $101.10-0.10% Bank of Beirut Pref. E BSE $26.50 $26.50 0.00% Bank of Beirut Pref. I BSE $26.50 $26.50 0.00% Bank of Beirut Pref. H BSE $26.50 $25.75 2.91% Bank of Beirut Pref. J BSE $10.15 $10.15 0.00% BLOM Preferred 2011 BSE $100.00 $100.00 0.00% BEMO Preferred 2013 BSE $101.50 $101.50 0.00% * 25 August 2006 = 100 The BLOM Preferred Shares Index (BPSI) ticked up by 0.13% to 106.01 points due to the 2.91% increase in the share price of BOB s preferred J shares to $26.50 and the 0.39% increase in the share price of Audi s preferred F shares to $102.00. However, Byblos Bank s preferred 08 and 09 shares declined by 0.30% and 0.10% to settle at a uniform price of $101.00. In the real estate sector, Solidere A and B shares gained 5.57% and 5.05% to close at $10.61 and $10.41, respectively.

The Lebanon Brief Page 2 of 14 Real Estate Mkt 22/01/2016 15/01/2016 % Change Solidere (A) BSE $10.61 $10.05 5.57% Solidere (B) BSE $10.41 $9.91 5.05% Solidere (GDR) LSE $10.15 $9.70 4.64% In the industrial sector, HOLCIM shares rose by 0.35% to $14.50. On the London Stock Exchange, Solidere s GDR shares rose by 4.64% to $10.15 while BLOM and Audi s GDR shares declined by 0.93% and 3.33% to $9.56 and $5.80, respectively. Looking ahead, the Lebanese Bourse will follow the political progress made in regards to the presidential election and the upcoming releases of the banks financials for the year 2015. Manufacturing Sector Mkt 22/01/2016 15/01/2016 % Change HOLCIM Liban BSE $14.50 $14.45 0.35% Ciments Blancs (B) BSE $3.90 $3.90 0.00% Ciments Blancs (N) BSE $3.10 $3.10 0.00% Funds Mkt 12/01/2016 21/01/2016 % Change BLOM Cedars Balanced Fund Tranche A BLOM Cedars Balanced Fund Tranche B BLOM Cedars Balanced Fund Tranche C ----- $7,399.80 $7,402.12-0.03% ----- $4,861.48 $4,863.01-0.03% ----- $5,620.20 $5,621.96-0.03% BLOM Bond Fund ----- $9,172.49 $9,172.49 0.00% Retail Sector Mkt 22/01/2016 15/01/2016 % Change RYMCO BSE $3.23 $3.23 0.00% ABC (New) OTC $27.00 $27.00 0.00% Tourism Sector Mkt 22/01/2016 15/01/2016 % Change Casino Du Liban OTC $323.00 $323.00 0.00% SGHL OTC $7.00 $7.00 0.00%

The Lebanon Brief Page 3 of 14 Foreign Exchange Market Lebanese Forex Market 22/01/2016 15/01/2016 %Change Dollar / LP 1,512.50 1,512.50 0.00% Euro / LP 1,644.08 1,639.26 0.29% Swiss Franc / LP 1,502.09 1,505.69-0.24% Yen / LP 12.84 12.74 0.78% Sterling / LP 2,166.73 2,198.24-1.43% NEER Index** 169.50 169.28 0.13% *Close of GMT 09:00+2 **Nominal Effective Exchange Rate; Base Year Jan 2006=100 **The unadjusted weighted average value of a country s currency relative to all major currencies being traded within a pool of currencies. The NEER represents the approximate relative price a consumer will pay for an imported good. Nominal Effective Exchange Rate (NEER) 173 170 167 164 161 158 155 152 149 146 143 140 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Demand for the Dollar in the Lebanese Forex Market remained almost stable over the past week as the value of the Lebanese Pound stood unchanged against the dollar with a quote of $/LP 1,510.5-1,514.5 and a mid-price of $/LP 1,512.5. Foreign assets (excluding gold) of the Central Bank fell by a monthly 1.91% to $37.09B at the end of December 2015. As for the dollarization rate of private sector deposits, it slid from 65.71% in December 2014 to 64.57% by November 2015. By Friday 22 nd of January, 2016, 12:30 pm Beirut time, the euro depreciated against the dollar-pegged LP as the exchange rate decreased by 0.65%, over the last week, from /LP 1,644.08 to /LP 1,633.38. As for the Nominal effective exchange Rate (NEER), it increased by a weekly 0.13% to 169.50 points. Draghi s announcement on Friday weighed on the euro which lost a weekly 0.65% against the dollar and ended the week at /$ 1.0835. Mario Draghi announced that the monetary policy should be reviewed in March in order to boost the fading economic growth and inflation. This will mostly imply the extension of the quantitative easing program in the coming months. The price of gold increased from last week s $1,088.96/ounce to $1,096.40/ounce this week. This rise was shown as the global equity markets crashed during this week. Money & Treasury Bills Markets Money Market Rates 22/01/2016 15/01/2016 Change bps Overnight Interbank 3.00% 2.75% 0 BDL 45-dayCD 3.57% 3.57% 0 BDL 60-day CD 3.85% 3.85% 0 Treasury Yields 22/01/2016 15/01/2016 3-M TB yield 4.39% 4.39% 0 6-M TB yield 4.87% 4.87% 0 12-M TB yield 5.08% 5.08% 0 24-M TB coupon 5.84% 5.84% 0 36-M TB coupon 6.50% 6.50% 0 60-M TB coupon 6.74% 6.74% 0 Change bps During the first week of 2016 ending January 7th, broad Money M3 decreased by LP 401B ($266.11M) to reach LP 186,196B ($123.51B). M3 registered a 5.07% yearly growth and a 0.21% year-to-date downtick. Similarly, M1 regressed by LP 142B ($94.29M) over the mentioned period, due to the decrease in demand deposits by LP 80B ($53.07M) and in money in circulation by LP 62B ($41.13M). Total deposits (excluding demand deposits) dropped by LP 259B ($171.81M) during the week ending January 7th, given the $246M contraction in deposits denominated in foreign currencies, that exceeded the LP 111B increase in term and saving deposits in LP.Over the above mentioned period, the broad money dollarization rate ticked down from 57.94% on December 31st, to 57.87% on the 7th of January. According to the Central Bank, the overnight interbank rate steadied at 3.00% by the end of October 2015. In the TBs auction held on the 14th of January 2016, the Ministry of Finance (MoF) raised LP 367.82B ($243.99M), through the issuance of bills and notes maturing in 3M and 2Y. The highest demand was achieved on the 2Y notes, which grasped a 68.20% share of total subscriptions, while the 3M bills captured the remaining 31.80%. Yields on the 3M bills stood at 4.39%, while the coupon rate on the 2Y notes was 5.84%.

The Lebanon Brief Page 4 of 14 Eurobond Market Eurobonds Index and Yield 21/01/2016 14/01/2016 Change Year to Date BLOM Bond Index (BBI)* 102.425 103.018-0.58% -1.62% Weighted Yield** 6.47% 6.35% 12 145 Weighted Spread*** 500 479 21 70 *Base Year 2000 = 100; includes US$ sovereign bonds traded on the OTC market ** The change is in basis points ***Against US Treasuries (in basis points) Lebanese Government Eurobonds 12/01/2016 Maturity - Coupon Price* 21/01/2016 Price* Weekly Change% 21/01/2016 Yield 14/01/2016 Yield 2017, Mar - 9.000% 104.64 104.77-0.12% 4.84% 4.79% 5 2017, Oct - 5.000% 99.5 99.5 0.00% 5.30% 5.30% 0 2018, Jun - 5.150% 99.13 99.38-0.25% 5.54% 5.43% 12 2018, Nov - 5.150% 98.75 99-0.25% 5.63% 5.53% 10 2019, Apr - 5.500% 97.88 98.25-0.38% 6.23% 6.09% 13 2020, Mar - 6.375% 99.75 100.38-0.63% 6.44% 6.27% 18 2020, Apr - 5.800% 97.63 98.25-0.63% 6.45% 6.27% 17 2021, Apr - 8.250% 106.75 107.88-1.05% 6.69% 6.45% 24 2022, Oct - 6.100% 96.5 97.25-0.77% 6.76% 6.61% 14 2023, Jan - 6.000% 95.75 96.38-0.65% 6.77% 6.65% 12 2024, Dec - 7.000% 101.4 101.95-0.54% 6.79% 6.70% 8 2025, Feb - 6.200% 96 96.5-0.52% 6.80% 6.72% 8 2026, Nov - 6.600% 96.38 97.25-0.89% 7.08% 6.96% 12 2027, Nov - 6.750% 97.25 98-0.77% 7.10% 7.00% 10 2030, Feb - 6.650% 96 96.25-0.26% 7.10% 7.07% 3 7.00% 6.50% 6.00% 5.50% Mid Prices ; BLOMINVEST bank Weighted Effective Yield of Eurobonds Weekly Change bps 5.00% Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Demand for Lebanese Eurobonds declined during the week, as reflected by the BLOM Bond Index (BBI) that declined by 0.58%, to end the week at 102.43 points. However, the Lebanese Eurobond Market fared better than bonds in emerging markets, as the BBI outperformed the JP Morgan Emerging Markets Bond Index, which fell by a weekly 0.70% to 657.21 points. The yields on the 5Y and 10Y Lebanese Eurobonds went up by 24 basis points (bps) and 10 bps, during the week, to 6.64% and 6.94%, respectively. In contrast, global deflationary pressures kept on pushing investors preferences in favour of the safer US treasuries. This was shown by the yields on the 5Y and 10Y US treasuries that declined by 8 bps each, to 1.44% and 2.02%, respectively. Consequently, the spread between the yields on the 5Y and 10Y Lebanese Eurobonds and their US comparable broadened from last week s 488 bps and 474 bps to 520 bps and 492 bps, respectively. 21/01/2016 14/01/2016 Mid-Price Mid-Price Lebanon 443 442 KSA 199 196 Dubai 310 294 Brazil 283 488 Turkey 483 303

The Lebanon Brief Page 5 of 14 ECONOMIC AND FINANCIAL NEWS Car Brands, Share in Total Passenger Cars Efforts of Car Importers Paid Off with a 3.78% Increase in New Cars Registration in 2015 According to the Association of Lebanese Car Importers, the number of newly registered commercial and passenger cars in 2015 increased by 3.78% to 41,654 cars. The improvement is the result of price reductions, aggressive promotional campaigns and after-sale services carried out by importers in reaction to the sluggish market demand. 2.17% 2.61% 2.66% 3.30% 17.4% 19.12% 15.93% In the festive month of December alone, the number of new registered cars increased by 3.73% year-on-year to 3,616 cars. Interestingly, the progress in car registration in 2015 and during the month of December alone was led by passenger cars rather than commercial cars. The number of registered commercial cars dropped by a yearly 1.12% to 2,293 cars in 2015 and fell by 8.33% in December alone to 176 cars. 3.30% 3.51% 4.46% 10.40% 15.15% In 2015, the depreciation of the Japanese yen by 2.33% and of the euro by 10% boosted the sales of Japanese and European cars, which represent a combined share of 60% in total registered passenger cars. The number of new registrations for Japanese and European cars increased by a yearly 18% to 15,166 cars and 17% to 6,951 cars, respectively. KIA TOYOTA HYUNDAI NISSAN RENAULT SUZUKI MITSUBISHI CHEVROLET MERCEDES BMW MAZDA Others Source: Association of Car Importers in Lebanon Korean cars were knocked-off first place on the Lebanese market to second after Japanese as their number dropped from 15,490 in 2014 to 13,542 in 2015. The importer with the largest market share in 2015 was NATCO, the importer of Kia, with an 18.07% share of the market. BUMC came in close second with a share of 16.08%, followed by 14.60% for Century Motor Co and 11.54% for Rymco.

The Lebanon Brief Page 6 of 14 Evolution of Retail Sales for Consumer Goods 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Retail Sales Activity Improved in H1 2015 According to the Lebanese Franchise Association (LFA), retail sales activity witnessed a positive yearly performance during the first six months of 2015, on both consumer goods and services levels. Retail indicators of the LFA s survey resulted from data mainly collected from the largest shopping malls and the biggest payment systems operators in Lebanon. In details, the semi-annual report examines the performance of six consumer goods and four consumer services starting January 2013. Starting with the retail sales of consumer goods, a 2.2% yearly increase was recorded in H1 2015 mainly driven by the progressing levels of retail sales in food & beverages, cosmetics, luxury items and sports & hobbies. This increase was largely affected by the partial political inertia, the impact of advertising expenditures and the improvement of the consumer s confidence during this period. In contrast, the study showed that clothing and household goods retail sales witnessed yearly decreases of 8.7% and 14.6% in the first half of 2015, respectively. Source: LFA Jan-Jun 15 Jan-Jun 14 Moving to the retail sales of services, the overall indicator posted an 11.4% upturn mostly boosted by the improvement of both hospitality and tourism industries. This mainly resulted from the progressing number of tourists by 15% in H1 2015 coupled with the 7% increase in their spending. In details, retail sales of tourism services edged up by a substantial 28.8% y-o-y in H1 2015, while those of the hospitality sector increased by a yearly 20%. Value of Cleared Checks (in $M) $56,834 $56,030 $55,304 $59,675 $53,120 Check Clearing Activity Down in 2015 According to the Association of Lebanese Banks (ABL), the number and the value of cleared checks respectively declined by a yearly 3.51% and 7.31% to 12.51 million checks worth $72.03B. Cleared checks denominated in foreign currency saw their number fall by 6.16% year-on-year to 8.39 million checks and their value decline by 10.98% year-on-year to $53.12B. $14,249 $14,972 $17,046 $18,034 $18,910 As for cleared check in Lebanese Pounds, they increased in number and value from 4.02 million checks worth $18.03B in 2014 to 4.12 million checks worth $18.91B in 2015. Accordingly, the dollarization of cleared checks fell from 68.98% in 2014 to 67.09% in 2015. 2011 2012 2013 2014 2015 The share of returned checks in the total number of cleared checks declined from 1.98% in 2014 to 1.88% in 2015. Source: ABL Value of Local Currency Cleared Checks Value of Foreign Currency Cleared Checks

The Lebanon Brief Page 7 of 14 Holders of Lebanon s Local Currency Debt 16.9% 16.8% 16.8% 32.1% 36.1% 36.6% 51% 47.1% 46.6% Public Debt Up by a Yearly 5.71% to $70.4B by November According to the Association of Lebanese Banks, gross public debt grew to $70.4B by November 2015 indicating a 5.71% increase on a year-on-year basis and a 2% monthly increase. Public debt denominated in Lebanese pounds accounted for 61.5% of overall debt and registered a 5.98% yearly increase to reach $43.32B by November 2015. As for debt in foreign currencies it increased by 5.29% on a year-onyear basis to reach $27.12B in November 2015. Net public debt, which excludes public sector deposits at Lebanese commercial banks and at the Central Bank, grew by 7.3% year-onyear and 6.3% since year start to $60.94B by November. Dec 14 Oct 15 Nov 15 Non-Banking Sector BDL Comerical Banks Lebanese commercial banks remained the top holders of Lebanese public debt denominated in Lebanese Pounds with a share of 46.6%, followed by a stake of 36.6% for the Central Bank of Lebanon and a 16.8% share for the non-banking sector. Source: ABL

The Lebanon Brief Page 8 of 14 Basic Salaries and Total Public Sector Wages, In $M Basic Salaries Total 2014 2015 2014 2015 Military Personnel 678.61 713.10 890.22 1,001.66 Army 429.19 454.39 538.64 626.87 Internal Security Forces 196.35 197.68 273.96 284.58 General Security Forces 41.79 47.76 60.36 70.32 State Security Forces 11.28 13.27 17.91 19.90 Education Personnel 258.71 258.71 285.24 283.25 Civilian Personnel 106.80 113.43 143.95 153.23 Government contribution to employees cooperative - - 62.35 62.35 Custom Salaries - - 12.60 9.95 Public Sector Wages Reached $1.51 Billion in H1 2015 According to the Ministry of Finance (MoF), Salaries, Wages and Related Benefits, which mainly include the cost of basic salaries, allowances and indemnities paid to employees of the public sector, grew by 8.3% by June 2015 to $1.51B compared to $1.4B in 2014. Basic salaries, which represent 71.8% of Salaries, Wages and Related Benefits, increased by 4% year on year (y-o-y) to $1.09B in the first half of 2015. This was mainly driven by the respective rises of 5.08% in salaries of Military personnel (65.71% of total basic salaries) and of 6.21% in Salaries of Civilian Personnel (4.5% of total salaries), totaling $713.10M and $113.43M. Meanwhile, salary expenditures on the Education Personnel (23.83% of total salaries) remained steady at $258.71M. Allowances, which include payments for maternity and sickness, marriage, birth, death, hospital and education, which are provided only to military personnel, hiked by a yearly 41% from $185.74M by June 2014 to $262.68M by June 2015 mainly due to higher allowances disbursed to the Army and Internal Security Forces which rose by a yearly 66.43% and 12.38% to $154.56M and $78.28M, respectively. Total 1,044.11 1,085.24 1,395.02 1,510.45 Source: Ministry of Finance

The Lebanon Brief Page 9 of 14 CORPORATE DEVELOPMENTS BLC Bank to Hold General Assembly Next Month BLC Bank s Financial Results, $B Sept 30, 2015 Dec 31, 2014 % change Customers Deposits 4.58 4.29 7% Loans and Facilities to Customers 1.88 1.94-3% Total Assets 5.72 5.38 6% Shareholders Equity ($M) 487.5 477.02 2% Net Profit ($M) 32.78 44.04* -26% The board of directors of BLC Bank called on the bank s shareholders to attend the general assembly meeting which is to be held at the bank s headquarters on the 04/2/2016 at 11 o clock. On the meeting s agenda is agreeing over a $40 million loan to Merit Corporation SAL along with other items. Source: BLC Bank, Beirut Stock Exchange

The Lebanon Brief Page 10 of 14 FOCUS IN BRIEF Lebanon s Eurobonds Market in 2015 BBI Yearly Performance (End of Period) 16.20% 1.83% 1.73% -0.90% -1.79% -3.14% -3.13% 2009 2010 2011 2012 2013 2014 2015 Source: BLOMINVEST Research Department BBI Month-ago Performance in 2015 0.87% -0.01% 0.11% 0.07% -0.70% -0.46% -0.15% -0.68% -0.49% -0.49% -1.23% -2.20% Source: BLOMINVEST Research Department The local Eurobonds market witnessed a lackluster year, not only because of the worsening security developments in Lebanon that affected the capital markets in general but also due to the global dynamics and monetary decisions influencing developed and emerging markets. This kept the BLOM Bond index (BBI) on its downward trend in 2015 with the BBI declining by 3.13% during the year to 104.11 points. Excluding the mere 0.41% yearly gain in 2014, the BBI had been witnessing losses since 2011, declining by 0.90%, 1.79% and 3.14% in 2011, 2012 and 2013, respectively.

The Lebanon Brief Page 11 of 14 Overview of Global Bond Market Performance Internationally, investors rushed to safer assets in developed economies to hedge against several challenges on the global scene, and emerging markets participants, including Lebanon, preferred to follow the same lead to escape the black swans. The challenges that marked 2015 were namely the bearish trend of oil prices, the launching of the European quantitative easing program, the political tensions between Russia and Ukraine, the Greek economic crisis, the Chinese equity market s plunge, and the much-awaited US interest rates hike. In fact, the JP Morgan Emerging Markets Bond Index lost 1.26% throughout the year to end up at 662.27 points by December 2015, while the fixed income markets in developed countries, such as US and Europe, ended in the green in 2015. This was illustrated by the US Treasury Bond Index compiled by Bloomberg and the S&P Eurozone Sovereign Bond Index up ticking by a yearly 0.64% and 1.04% to 122.07 points and 213.85 points, respectively, by December. In the US, the treasury market was mainly based around when the Federal Reserve would increase interest rates, creating a cautious sentiment among investors regarding placing their money in risky assets. In fact, the Federal Reserve had initially announced that the interest rate hike would take place in June 2015 only to postpone that event to September 2015, and with eventually implementing it in December through a 25 bps increase. The decision of increasing US rates came on the back of a recovery following a 0.8% inflation rate (still below the targeted 2%) and a 5% unemployment rate (the rate targeted by the Fed). Furthermore, the plunge of Chinese equities that started in the beginning of June 2015 was another factor that drove investors into the US treasuries. Short-term US treasuries were the place to go at the expense of medium and longer term notes. This was illustrated by the yields on the 5Y notes increasing by 12 bps to 1.80% in 2015, and that of the 10Y went up by 11 bps to 2.31%. Moving to the Eurozone, an improved outlook for European bonds came on the back of tensions in the area in addition to the introduction of the Quantitative Easing (QE) program. The Greek debt crisis in addition to the Russia/Ukraine conflict was prominent throughout the year especially during the first. Peace between Ukraine and Russia remained elusive throughout 2015, which also caused a wary outlook for investors across the region. After numerous deliberations between Athens and its Eurozone creditors, and despite the situation being partially resolved with a third bailout program in July, the bond market in the Eurozone market still improved. A deal of $7.16bn in emergency funding from the European Central Bank, enabled the government to pay its debts with the International Monetary Fund (IMF). In emerging countries, some investors exited their respective markets, especially in the second half of the year, in hopes of higher returns in safer assets in the US and Europe. Thus, the bonds market s performance in emerging markets ended the year in the red, and yet still achieved better than the Eurobonds market in Lebanon. Speculation about an economic recovery in developed nations following better than expected job data in the US, partially caused the largest monthly sell off in emerging market in May since the summer of 2013 (also known as the taper tantrum when US treasury yields surged during that period). In details, there was about $4.4B worth of notes that were sold. The continued disruptions in Ukraine, the heightening geopolitical risks in the Middle East coupled with the depreciation of several emerging countries currencies also contributed to the fall of the JP Morgan Emerging Market Bond Index throughout the year. In fact, the Turkish Lira, the Indian Rupee, The Korean Won and the Chinese Yuan all experiences devaluations throughout 2015. Performance of the BBI and JP Morgan Emerging Market Bond Index in 2015 109.00 107.00 105.00 103.00 101.00 700 690 680 670 660 650 640 BLOM Bond Index JP Morgan Emerging Market Bond Index Source: BLOMINVEST Research Department

The Lebanon Brief Page 12 of 14 Developments in the Lebanese Eurobonds Market varied between H1 and H2, 2015 Locally and throughout 2015, the Lebanese capital markets were subject to a bleak political and security framework that impacted the country s economic performance. In hindsight, the Syrian spillovers, the local presidential deadlock, numerous security incidents in addition to a number of demonstrations regarding the garbage crisis, clouded the year. This is illustrated by the mere 0.5% forecasted GDP growth in 2015 as well as the BLOM Purchasing Managers Index (PMI) remaining below the 50 point mark at an average of 48.4 points all year. The weak performance in the Lebanese bond market s performance followed that of emerging markets but fared worse because of the local security downfall and the negative outlook of credit agencies on Lebanon. Actually, Lebanese Eurobonds in H1, 2015 showed a loss, albeit a mere one, but recorded a larger decline in H2. In the first half of 2014, and despite the irregular global economic growth and the geopolitical tensions in Ukraine and Iraq, many emerging borrowers drew the attention of high-risk investors due to their considerably greater yields. In particular, the JP Morgan emerging countries bond index edged up by 9.10% on a year-to-date basis by June 2014 to reach 684.97 points. Lebanese Eurobonds could also have been part of the shift of international investors towards bond markets especially the relatively high Lebanese returns offered to foreign investors and funds. The BLOM Bond Index (BBI) ended H1 at 107.13 points, down by 0.89% year-to-date. Demand for medium and long term notes improved, but what actually held back the performance of the BBI was the fall in demand for short term bills (which constitute 32% of outstanding total bonds). Each of the 5Y and 10Y bonds saw their yields respectively decline by 10 bps each to 5.20% and 6.06%. The cause of this improved demand was the $2.2B Eurobonds issuance in February. It was the first time the Lebanese government issued a 15Y tenor bond which attracted a lot of hype because of its high yield. In fact, Investors appetite for the issuance was substantial as bids almost reached 2.2 times the requested amount, hovering at $4.9B. The details of the issuance were as follows: it enclosed 2 new categories: $800M of 10Y Eurobonds maturing in 2025 and yielding 6.20%, and $1.4B of 15Y Eurobonds yielding at 6.65%. The lead managers for the issuance were: BLOM Bank, Citi, and Société Générale de Banque au Liban (SGBL). Besides the strong demand from Lebanon s local banks, Banque du Liban (BdL) also took a share of the new issuance. Finally, international orders were promising as they hovered around 15% which could be partly due to the overflowing cash in the global financial markets following the decreasing oil prices. In the 2 nd half of the year, the Lebanese Eurobonds market took a big hit. The BBI saw a 2.82% decline mainly due to the mentioned eventual rate hike in the US and repetitive local demonstrations regarding the garbage disposal crisis in Lebanon. The negative views of credit agencies on Lebanon didn t bode also. The Standards & Poor s downgraded their credit rating of Lebanon from B- stable outlook to B- negative outlook in September. Furthermore, there were speculations that Moody s would downgrade its credit rating on Lebanon as well, which they eventually did in December, decreasing it from B1 to B2. Lebanon s sovereign rating occurred on the back of the country s high debt burden, dual deficits, and challenging political environment. This had a large negative effect on the demand for medium term notes, as the yield on the 5Y bonds surged by 90 bps to 6.10% by December. The yield on the 10Y notes increased by 61 bps to 6.67%, also reflecting the weakened demand for long-term Eurobonds in the latter part of the year. The $1.6B Eurobond issuance in November was received with mixed views. The specificities of the issuance were as follows: $500M of 10Y Eurobonds maturing in 2024 and yielding 6.25%, $500M of 13Y Eurobonds maturing in 2028 and yielding 6.65%, and $600M of 15Y Eurobonds maturing in 2030 yielding 7.05%. Leading managers were: Standard Chartered Bank, FransaBank and SGBL.

The Lebanon Brief Page 13 of 14 Perceived Risk in the Lebanese Eurobonds Market During 2015 The spread between the yield of the Lebanese 5Y and 10Y notes and their US counter-part broadened from 362 bps and 396 bps at the end of 2014 to 430 bps and 436 bps, respectively. This reflects the higher perceived risk from locals investors compared to 2014. In the same context, the Lebanon s default risk as perceived by international investors fluctuated throughout the year. The 5Y Lebanese Credit Default Swaps (CDS) were trading at 426 bps in December 2015, compared to 379 bps in 2014. The 5Y Lebanese CDS actually dropped by 29 bps to 365 bps in H1 2015, and then widened by 61 bps in H2 2015 due to the worsening local security developments during that period. Performance of the 5Y Spread and Lebanon s 5Y CDS in 2015 500 450 400 350 300 250 Jan-15 Jul-15 Jan-16 5Y Spread 5Y CDS Source:BLOMINVEST Research Department With the local political and security developments dominating in 2015 combined with macroeconomic changes in the global front, the Lebanese Eurobonds market witnessed a lackluster performance. Nevertheless, in 2015 the Lebanese government allotted 2 successful Eurobond issuances worth $3.8B. In turn, the government managed to extend the portfolio s duration from 4.07 years in 2014 to 5.19 in 2015 while the weighted yield increased from 5.24% to 6.14%, over the same period. Due to the recent increase of interest rates in the US, and the recent downgrade of Lebanon s sovereign credit rating of Lebanon, the bond market is likely to see higher yields in the coming future.

The Lebanon Brief Page 14 of 14 Research Department: Wael Khoury Lana Saadeh Riwa Daou Marwan Mikhael wael.khoury@blominvestbank.com lana.saadeh@blominvestbank.com riwa.daou@blominvestbank.com marwan.mikhael@blominvestbank.com Your Investment Reference