While advanced economies of the world are trying to return to a sustainable path in the aftermath of the global financial crisis, magnified by fiscal and debt uncertainties in the Eurozone area, the GCC countries, and the UAE in particular, have recovered. Their growth is buoyed by higher crude oil prices, stimulatory government spending, and growing links with emerging economies, predominantly from Asia. During 2011, despite the upheavals associated with the Arab Spring, oil producers renewed their record levels of export earnings and international reserves, allowing for expansionary fiscal policy that boosted economic activity and led to an acceleration of economic growth, at least in the short term.

During 2011 the DIFC has benefitted from the economic activity revival in the UAE and the region as a whole, as evidenced by the findings in DIFC Economic Note 20 titled “DIFC Economic Activity Survey 2011”, and strengthened its position as a growing financial hub of the region.

This report is based on the survey responses from 533 DIFC entities (8.6% higher than the number of entities that participated in the survey in the previous year – 479) that represent 65.2% of the DIFC’s 817 companies that were active during 2011. The response ratio for the current survey slightly improved from the 63.5% response rate in 2010.

As Table 1 below shows, the growth in number of establishments at the DIFC in 2011 was driven entirely by the non-bank Business sector, while the number of companies in the Financial sector remained stable. At the same time we note that a growing number of firms are joining the DIFC from the emerging market economies.

Table 1: No. of Companies By Type of Economic Activity

ISIC Code	Economic Activities	2007	2008	2009	2010	2011
K	Financial Intermediation	257	366	354	383	382
G,H,I,J,L,M,N,P,R,S	Business services	243	346	348	386	431
O	Public administration	5	3	4	4	4
	Total	505	715	706	773	817

Source: DIFC Economics.
Note: Total number of registered entities with “active” status was 848 as of end of 2011.

We estimate that total value added (the equivalent of GDP) of the DIFC reached USD 3.13bn in 2011 with an acceleration of the growth rate to 7% from 5.5% in the previous year.

Table 2: GDP By Type of Economic Activity in DIFC for 2011
(in US$ million, current prices)

ISIC Code	Economic Activities	2007	2008	2009	2010	2011
K	Financial Intermediation	1,514.7	2,224.6	2,029.6	2,105.6	2,199.7
G,H,I,J,L,M,N,P,R,S	Business services	295.2	550.7	687.5	774.8	876.3
O	Public administration	28.8	64.2	54.5	43.5	51.4
	Total	1,838.7	2,839.6	2,771.7	2,923.8	3,127.4

Source: DIFC Economics.

The performance of economic sectors and activities of the DIFC entities at current prices in 2011 can be broken down as follows: Financial intermediation sector recorded a value added of USD 2.2bn, while its contribution to the total value added of the DIFC was 70.3%. The balance of 29.7%, amounting to USD 0.9bn, was generated by Business sector entities (e.g. accounting and audit services, management consultants, law firms, restaurants, retailers, and other service providers) and the public sector.

While the contribution of companies to the value added of DIFC can be estimated as above, the indirect contribution of the DIFC to the economies of Dubai and the UAE cannot be so accurately accounted for. As residents in the Emirate, the DIFC workforce contribute to the economy as consumers who invest, rent housing, travel, shop, eat, have relatives visit from abroad (who also shop, eat, travel within the UAE), consult doctors, drive cars, buy real estate all causing an increase in demand for key goods and services in the Emirate – leading to what is called a multiplier effect. This value is more difficult to estimate, but given that the average DIFC workforce compensation falls in the higher end, it is a safe assumption to make that the stimulus to the economy from their spending is substantial.

The questionnaire for the current survey, which is based on the UN-OECD principles and methodology for compiling national income statistics, was expanded to include new sections to capture additional workforce characteristics, paid-up capital, assets and liabilities, and the geographical origin of DIFC entities’ ultimate controlling parents. The new data show that aggregate paid-up capital of DIFC entities owned by non-UAE residents is about 2 times higher than that owned by UAE residents (based on the actual data from responding companies), and that more than half of all ultimate controlling parents of the responding DIFC companies originate from only 4 countries, with the UAE leading the list, while the total number of countries in the list exceeds 50. Also, the new data shed some light on the hierarchical structure of the DIFC labour force, revealing that in the financial sector companies, in contrast to the entities involved in business activities, the proportion of executive officers and managers in the total workforce is notably higher.

A large proportion (55.6%) of the total DIFC’s labour force, estimated at 12,945 people as of end of 2011, was employed in the finance and banking sector. Business sector and public administration entities provided jobs to 41.7% and 2.7% of the total DIFC labour force, respectively. UAE nationals, accounting for only 2.2% of the total DIFC labour force, were mostly represented in the public administration sector (around 1/3 of all people employed by the DIFC and DFSA, on a consolidated basis), while their share in the labour force of private companies was minor at 1.4%.

DIFC human capital is of high quality, with 87.6% of all employees holding university level and post-graduate degrees. Educational attainment features are similar among male and female populations. About 85% of both men and women are university graduates and above, underscoring the availability of an equally highly skilled workforce at the Centre.

The data were collected through the interactive secure web-based online portal DIFCSTAT, which manages all official and administrative communications between the DIFC Authority and licensed companies (https://www.difcstat.ae/difcstatonline/default.aspx).

Markets

At the beginning of the week stock markets worldwide extended the tumble recorded the previous Friday. Then after a few days dominated by a declining trend, ECB President Mario Draghi declared that the central bank is “ready to do whatever it takes” within its mandate to preserve the single currency and the tensions on the markets eased. Regional markets were mostly down with Saudi bourse bucking the trend. The euro made gains last week while the dollar advanced against the yen. Gold prices hit a 3-week high on Draghi’s statement while oil prices rebounded.

Global Developments

Americas:

• US Q2 GDP grew 1.5% qoq ann. following a revised 2.0% rise in Q1 (revisions went as far back as Q1 2009). The factor pulling down growth was household consumption - which grew 1.5% in Q2 compared to a gain of 2.4% in Q1.
• Against expectations, sales of new single-family homes in June declined 8.4% mom to 350,000 annualized units. However, performance is not as bad as the June reading indicates. The Census Bureau revised upward the May figure significantly to 382k, the strongest pace since April 2010. Meanwhile, pending home sales unexpectedly declined by 1.4% mom in June, following a strong 5.9% pickup in May.
• Durable goods orders surged 1.6% mom in June (May:1.6%), helped by aircraft orders (+14.3%) while orders excluding transportation dipped by 1.1% (vs 0.8%). Non-defense capital goods, a good proxy for business spending, was down 1.4% (May: +2.7%).
• Initial jobless claims fell 35k to 353k with the four-week moving average down to 367,250 - the lowest since March. These numbers need to be read with a cautious tone, as data are influenced by changes in yearly auto plants’ shut downs.

Europe:

• The UK GDP contracted -0.7% qoq in Q2 after a -0.3% drop in Q1. Inclement weather and the extended public holiday affected construction and mining, but overall the situation is bleak.
• The German Ifo business confidence index in July fell to 103.3 (the lowest since June 2010) from 105.2 in June, continuing a trend prevailing since April's nine-month high of 109.8.
• Eurozone composite PMI held below 50 for a sixth consecutive month - at 46.4 in July. Manufacturing sector index fell to 44.1 from 45.1, while the output index fell to 43.6 - the lowest since May 2009. Though the services sector index increased to 47.6 from June’s 47.1, it remains in contraction territory. More worrisome were the dips in business expectations to 50.1 (52.1) and new orders to 42.9 (43.5).
• The net percentage of banks reporting tighter credit conditions in Euroland for corporates remained broadly stable at 10% in Q2.
• Credit conditions remained tight in Italy in Q2, due to declining demand for loans. The net percentage of banks reporting tighter conditions for enterprises remained unchanged at 25%. Banks expect to tighten the criteria for lending to enterprises in Q3.
• Moody’s lowered the outlook for Germany, the Netherlands and Luxembourg citing “rising uncertainty” over Europe’s debt crisis. S&P however affirmed the AAA status on the UK’s sovereign debt.

Asia and Pacific:

• The flash HSBC PMI for China in July rose from 48.2 last month to 49.5, a five-month high but still below the 50 threshold between growth and recession. While factory output is contracting at a mild pace, the employment sub-index indicated a sharper deterioration.
• Growth in Korea slowed to 2.4% yoy in Q2, the weakest performance since Q3 2009. Also consumer confidence in July declined to its lowest level in five months.
• Taiwan industrial production dropped -2.4% yoy well below expectations, in June, after -0.2% yoy in May. Production is falling victim of the global slowdown especially as demand for tech goods remains weak.
• The Philippines central bank reduced policy rates by 25bps to 5.75% while the Bank of Thailand held rates steady.

Bottom line: Last week, which began with escalating borrowing costs in Spain and Italy alongside revised ratings outlook from Moody’s, saw several statements from Eurozone officials: Draghi’s reassurance to the markets on the euro and the statement issued after the Merkel-Hollande meeting reiterating that the two countries were “deeply committed to the integrity of the euro zone”. Not only did these statements lift the euro out of its current misery, but also led to a slight dip in borrowing costs - in Spain and Italy by about 20bps and 14bps respectively.

Regional Developments

• Egyptian President Mursi named the US-trained, politically unaffiliated, Water Resources Minister Hisham Kandil as the country’s prime minister-designate, an appointment that sparked skepticism due to Kandil’s limited political and economic experience.
• The Central Bank of Egypt kept its overnight deposit and lending rates unchanged at 9.25% and 10.25% respectively, amid slowing headline inflation - 7.26% yoy and 0.55% mom in Jun (May: 8.30% yoy; 0.28% mom). Due to favourable base effects, annual core inflation also declined to 7.04% (May: 7.22%).
• The IMF announced a preliminary agreement with Jordan, providing access to credit facilities for 3 years valued at about USD 2bn to support the government’s economic reform program.
• Fitch affirmed Kuwait’s long-term foreign and local currency rating at ‘AA’ with stable outlook outlining its solid net foreign assets at 191% of GDP (in 2011) and persistent fiscal surpluses (since 1999) due to oil revenues - while identifying dependence on oil sector as a source of vulnerability.
• Fitch rating agency affirmed Bahrain’s long-term foreign currency sovereign rating at ‘BBB’ and local currency rating at ‘BBB+’ with stable outlook as internal political crisis effects waned, and fiscal and external positions remained quite stable. Bahrain is expected to receive substantial financial assistance from the GCC, mainly Saudi Arabia, will help ease budget constraints but are a disincentive to required reforms.
• According to the Saudi Ministry of Labour, it is a violation of the Kingdom's labour regulations to insist that only single women are eligible for employment.
• A statement by the Jeddah Chamber of Commerce and Industry Chairman revealed that family businesses in Saudi Arabia contribute to about 25% of GDP (SAR 350bn) while only 156 of the 5000 family-owned companies are listed on the exchange highlighting its potential.
• Tunisia lost its two highest level financial authorities in the past few days. The central bank chairman was dismissed by Parliament due to his refusal to coordinate policies with the government. This decision raises the issue of central bank independence while the candidacy of the recently appointed central bank chairman was criticized. The Minister of Finance also resigned in disagreement with the government’s policies, in particular with excessive government spending and “unfair” central bank governor dismissal.
• In H1 2012, at least USD 68bn worth of Sukuk were issued globally, up 36% from H1 2011. Saudi Arabia recorded a notable performance with a benchmark sovereign sukuk, while Malaysia remained the largest overall issuer with 70% of the pie, according to Zawya.
• IFC investments in MENA’s private sector reached USD 2.9bn during last year. The IFC also remarked in its press release that public sectors in the MENA can no longer be the main source of job creation.

UAE Focus

• UAE's Federal Authority for Nuclear Regulation announced it has given the green light to the Emirates Nuclear Energy Corp., or ENEC, to build two nuclear power reactors in Abu Dhabi, the first of 5 civilian power plants planned in the emirate.
• UAE oil minister Mohammad Al-Hamli declared that the government is happy with current oil prices as the market is well-supplied. Earlier the president of OPEC announced that his organization does not feel the need to hold an emergency meeting as oil prices are rising.
• The UAE Minister of Finance stated last week that there would be no bond issue to fund the estimated fiscal deficit this year. It was also announced that the MoF has completed its work on the preparation of the draft Federal Public Debt Law and this would soon be debated by the Federal government.
• The DIFC recorded a growth of 7% yoy in total value added in 2011, with financial sector accounting for 70.3% of the total. Total employees increased to 12945, of which 55.6% worked in the financial sector.
• In the first five months of 2012, UAE was the largest GCC market for Japanese products: exports to the UAE rose by 51% yoy to USD 3.8bn. Meanwhile, exports to Japan from UAE - consisting mostly of crude oil, gas and aluminium - increased by 17.3% yoy to USD 19.2bn in Jan-May 2012.
• In Abu Dhabi hotel and hotel apartment guests in H1 2012 grew 14% yoy to 1.189 mn while guest nights recorded an increase of 9%.
• Total real estate transactions in Dubai increased to AED 4bn in Q2, compared to AED 3.1bn in Q1. The number of residential transactions increased to 3,165 compared to 2,745 in Q1. This places the total value of residential property transactions in H1 2012 at AED 7.1bn, with an average deal value of AED 1.2mn. Meanwhile, Iranian investment - the fifth largest group of investors - in Dubai properties dipped by almost a quarter to AED 1.5bn in H1.
• The UAE Cabinet passed a motion for issuing a draft Federal Law making education compulsory until the age of 18 instead of the current elementary level.

 

Markets

Another week, another EU Summit. Bundeskanzlerin Merkel in a TV interview asserted that support to EU periphery without strong conditions and control over the use of resources is out of question. More concerns about faltering economic growth led to strong dip in global stocks while in the Middle East some markets were helped by strong corporate earnings results. The euro has oscillated wildly against the dollar and especially after Merkel’s remarks, fell sharply - closing last week at a two-year low against the dollar and at the lowest against the yen since 2001. Oil prices continue to increase on tensions in the Middle East while gold prices edged up on Fri but posted a weekly loss.

Global Developments

Americas:

• Bernanke portrayed a gloomy view of the US economy saying that job creation will be painfully slow, and left the door open to additional stimulus measures.
• Retail sales fell -0.5% mom in June (May: -0.2%), the third consecutive monthly decline. Excluding autos, sales fell 0.4% for the second consecutive month led by gasoline station.
• US IP ended a dismal quarter on a stronger note, rising a better than expected 0.4% in June (May: -0.2%). Manufacturing and mining output advanced 0.7% mom, outweighing a 1.9% drop in utilities production. Overall manufacturing output slowed to a 1.4% yoy in Q2.
• On the wake of lower energy prices, the US CPI was unchanged in June, as expected, and marks the third straight month the index has either slid or failed to advance. The core CPI maintained its 0.2% mom rate of increase from the past several months.
• US housing starts rose 6.9% to 760k annualized units in June from 711k in May. The figure compared to past norms remains depressed, but signs of bottoming out are solidifying (completions were up 2.6% mom). Leading indicators softened in June, as permits fell to 755k annualized, down 3.7% from May.
• Initial jobless claims rebounded last week, rising 34k to 384k - reversing the four-year low it had dropped to earlier this month.

Europe:

• The Eurozone finance ministers have agreed to lend up to EUR 100bn towards the recapitalisation of Spanish banks. However, the exact amount will be known only in Sep, after in-depth audits of its banking sector to test recapitalisation needs.
• Spain’s borrowing costs have surged, with yield at the latest bond auction almost 40bps higher than at the previous sale almost a month ago.
• The euro zone ZEW index of economic sentiment decreased to -22.3 in July (June: -20.1), and the measure for Germany declined to -19.6 from -16.9 previously due to the uncertainty over the sovereign debt crisis.
• The UK consumer price index fell 0.4% mom in June, while the annual inflation rate dropped to 2.4% from 2.8% in May. A sharp fall in the price of Brent crude/energy prices and heavy discounting by retailers during the traditional summer sales were contributors.
• The euro zone’s CPI yoy inflation remained unchanged at 2.4% in June, in line with preliminary estimate.

Asia and Pacific:

• India's PPI inflation cooled slightly in June to 7.3% yoy, in line with expectations in the wake of lower fuel and power prices. India still has an inflation overhang and central bank is unlikely to alter its policy stance.
• China boosted its US Treasury holdings by USD 5.2bn to USD 1.17 trillion in May, while strong buying from Japan also boosted its holdings by USD 15bn to USD 1.105 trillion.  
• Foreign direct investment in China fell 6.9% yoy in June (May: 0.1%), with inbound investment declining to USD 12bn. For the first half of 2012, inbound investment dropped by 3% to USD 59.1bn.
• In a bid to protect retail investors from excessive risk, Singapore is contemplating lifting forex margin requirements, following Japan and South Korea’s moves previously. The central bank has already prepared a consultation paper and is expected to finalise rules by Sep, looking at implementation by year-end.
• Singapore’s non-oil domestic exports were up 6.8% yoy and 3.2% mom in June, boosted by both electronics (1.6%, May: 3.9%) and non-electronics exports (9.4%, May: 2.8%).
• Taiwan’s export orders continued to disappoint, declining for the fifth consecutive month in June. Orders were down 2.6% yoy (May: -3%) to USD 36.4bn, with orders from China and Europe falling 3.63% and 0.39% respectively.

Bottom line: The IMF shaved its 2013 forecast for global growth to 3.9% from 4.1% projected in April, trimming projections for most advanced and emerging economies. The IMF expects emerging markets to be dragged down by faltering Europe. It said a drop in exports in these countries would combine with tightening measure meant to counter overheating especially in Asia. It left its 2012 forecast unchanged at 3.5%. The assessment is still quite optimistic and in fact the IMF does not refrain from pointing at "downside risks [which] continue to loom large".

Regional Developments

• Major Middle East sovereign wealth funds (SWFs) are reducing international investments compared to the last three years. According to the annual study by US-based investment firm Invesco, investment in GCC related assets increased from 33% to 56% this year.
• According to Finance Minister Momtaz El- Saieed, Egypt will receive a USD 1bn loan from the Islamic Development Bank in a matter of days after signing an agreement earlier this month.
• Saudi Arabia plans to allow cross-listing foreign companies on its stock market within a year as part of the broader plan to open its financial sector to foreign investors.
• Remittances from Saudi Arabia reached USD 27.8bn in 2011, as per the latest SAMA data. This had little impact on the current account, which registered a surplus of USD 174bn on higher oil prices.
• Non-oil exports in Saudi Arabia increased slightly by 0.34% yoy to SAR 14.83bn in May with exports of petro-chemical products accounting for more than one-third of total non-oil exports (37.2%, USD 5.5bn), followed by plastic products (almost 30%) and foodstuff (7.9%). Saudi oil revenues meanwhile increased 48% yoy to USD 318.5bn as volumes of crude oil shipments picked up in 2011.
• Tunisian government issued 7-year bonds for the amount of USD 485mn backed by the US Treasury. As the US government agreed to guarantee repayment of principal and interest, the bonds yielded 1.686%, significantly lower than for the regular government securities issued by Tunisia.
• Real GDP growth in Egypt for the fiscal year ended in Jun 2012 was estimated at 1.8%, according to the Minister of Finance. The minister highlighted the importance of fiscal consolidation to attain sustainable level of government debt, while subsidy reform is seen as a key pre-condition.
• Turkey’s Minister of Finance hinted that new taxes may be introduced as fiscal stance is deteriorating.
• Consumer confidence index in Turkey decreased to 91.8 in June 2012 (May: 92.1), thus remaining in the pessimistic outlook zone, as per the country’s official statistical agency.

UAE Focus

• Barclays will leave the Eibor-setting 12-member panel after a mandatory 90-day notice period. This has initiated the search for another international bank to replace Barclays on the panel.
• A Merrill Lynch report identified Dubai as “one of the best GCC cities in which to develop business”, also making a call of “buy Dubai” property, based on its view of population growth at 6.1% on average over the next eight years while supply of residences grows by only 4.9% in the same period.
• In line with the provisions of Basel III, the UAE Central Bank has announced that lenders need to hold 10% of liabilities in liquid assets which could include cash, certificates of deposit and highly rated local government bonds. This new rule would come into effect from Jan 2013 and will be replaced by a “liquidity coverage ratio” at the end of 2014.  
• Bank assets in the UAE fell by AED 17bn to AED 1725bn in May, while deposits declined for the second consecutive month to AED 1.1bn and NPL provisions increased 2.3% mom to AED 61.7bn.
• UAE has received the necessary approvals for building its first nuclear power plant, with the first reactor expected to be operational by 2017, with a capacity of producing 1,400 MW of electricity.
• Data released by OAPEC showed UAE’s energy demand went up by 5.2% yoy in 2011. Consumption of crude oil, gas and other energy grew to nearly 1.56mn equivalent barrels per day (ebpd) from 1.48mn ebpd, second only to Saudi Arabia where it was 3.22mn ebpd.
• A new real estate sector law is in the offing, according to a recent Jones Lang LaSalle report, which will be geared towards protecting the investors in case of delayed handovers, violation of terms and conditions and related obligations.

Markets

The Eurogroup made some progress on the Spanish bank deal lifting up the stock markets in developed countries, but the summer rally seems to have ended; the flurry of data from China suggesting no hard landing with GDP growth at 7.6% and slowing inflation, did however help Asian markets recover from their losing streak. Regional markets were mostly down, though the Qatar government’s Sukuk sale led to a positive impact. The euro was at its weakest level in two years, while the yen continued to rise against the greenback for a third consecutive week. The end of the strike at Norwegian Statoil pushed down the oil price, but it crossed the $100 mark on fresh Iran sanctions; gold prices gained on Fri erasing losses suffered earlier in the week.

Global Developments

Americas:

• US May trade deficit narrowed by 3.8% mom to USD 48.7bn (Apr: USD 50.6bn) as imports declined by 0.7% (lower demand for oil) alongside a slight increase of 0.2% in exports (food and capital equipment).
• Federal budget deficit was reported at USD 59.7bn in June, taking deficit to a total USD 904.2bn in the first nine months of the budget year - revenues were up 5.2% and spending down 0.9%. The CBO estimates full year deficit to be around USD 1.17 trillion (2011: USD 1.3trillion).
• Producer Price Index (PPI) for May rose by 0.1% mom (Apr: -1.0% mom), with the 0.5% increase in food prices offset by a 0.9% drop in energy prices. Core PPI, meanwhile, was up 0.2% (0.2%).
• Initial jobless claims dropped to a 4-year low, falling 26k to 350k - also recording the biggest drop since Jan. The four-week moving average fell 9,750 to 376,500.
• Brazil’s central bank slashed interest rates for an eighth consecutive time, reducing the Selic rate to an all-time low of 8%.

Europe:

• Euro-area industrial production rebounded unexpectedly in May (+0.6%) as growth in Germany more than offset a decline in France (-2.1%). German industrial output rose 1.5% mom in May (April: -2%) while Italy and Spain reported monthly gains of 0.8% and 0.9%, respectively.
• Italian borrowing costs fell at an auction hours after Moody’s Investors Service downgraded its bond rating by two levels to Baa2 from A3, citing the worsening political and economic outlook. Italy sold EUR 3.5bn (USD 4.3bn) of three-year bonds, and later sold EUR 1.75bn of three longer-dated securities. Treasury sold the 2015 bond at 4.65%, down from the 5.3% on a similar-maturity bond sold on June 14. Investors bid for 1.73 times the amount offered, up from 1.59 times last month.
• Inflation data for June were released in key EU countries including Germany and France: German inflation was at a 17-month low of 2% yoy (May: 2.2%) on lower oil prices while in France, inflation held steady at 2.3% yoy despite cheaper energy prices. Hungary’s inflation meanwhile was the fastest growing in the EU - prices were up 5.6% yoy in June (May: 5.3%).

Asia and Pacific:

• China has permitted the entry of foreign hedge funds to its markets, its latest move to open its capital account.  
• China released a slew of data last week: Q2 GDP grew 1.8% qoq and 7.6% yoy (Q1: 8.1% yoy), but stories of “hard landing” were fewer as fixed-asset investment grew 20.4% yoy to CNY 15.07trillion; its growth rate moderated by 0.5pp qoq, and was down 5.2pp yoy. IP was up 9.5% in June, hence taking the H1 figure to 10.5% (Q1: 11.6%) while retail sales grew 13.7% in June, buoyed by purchases of furniture and electronics (14.4% in H1, 14.8% in Q1).
• Inflation in China fell for the 5th consecutive month in June to a two-year low of 2.2% (May: 3%) while broad money growth M2 was up 13.6% (13.2%) and new Yuan loans totalled CNY 919.8bn in June  (May: CNY 793.2bn).
• Trade data for June in India and China were released last week: China recorded a trade surplus of USD 31.7bn, as imports grew only 6.7% yoy (May: 12.7%) on lower domestic demand, while exports grew 11.3% (15.3%). As Europe slows, China reported that US had replaced Europe as its largest exporting market in H1. Provisional data revealed India’s trade deficit narrowed to USD 10.3bn as exports declined by 5.5% and imports fell 13.5%.
• India’s May industrial production (IP) was up 2.4% yoy (Apr: -0.9%), recording the biggest pick-up since Feb, but the reading of a fall in capital goods production by 7.7% raises concern.  
• Japan’s current account surplus, at JPY 215.1bn in May, was the smallest since 1985 while machinery orders fell 14.8% mom (Apr: +5.7%) - the biggest fall since 2001.
• In Asian central bank meetings last week, both Japan and Indonesia kept policy rates on hold, while South Korea’s BoK unexpectedly cut rates by 25bps to 3% and reduced its economic growth forecasts for 2012 to 3% from 3.5% announced previously in April.
• Singapore’s Q2 GDP contracted by an annualised 1.1% qoq (Q1: + 9.4%), with manufacturing dragging growth down. This sector shrank 6% qoq, reversing the 20.9% gain registered in Q1 while services and construction sectors were up 0.4% and 0.3% respectively.

Bottom line: Contrasting views among developed and emerging market central banks were evident with Korea being the latest to lower policy rates. Global inflation-adjusted real policy rates are all in negative territory. With FOMC minutes indicating that more monetary stimulus will not be injected, corporate earnings, Bernanke’s Congress testimony and the Eurogroup finance ministers meeting on 20 July are likely to determine investor sentiment this week.  

Regional Developments

• Investor appetite and demand was obvious in the USD 4bn Sukuk sale undertaken by Qatar’s government last week. The largest dollar-denominated Sukuk ever, at USD 4bn (2 five- and ten- year tranches of USD 2bn each), was priced cheaper than a conventional bond and attracted close to USD 24bn in orders, 6 times over-subscribed.
• The Governor of Mumtalakat, the sovereign wealth fund of Bahrain, announced net consolidated loss of BHD 270.6mn (USD 718mn) for the year 2011, mainly driven by the financial problems at the state-run carrier Gulf Air reportedly suffering from local and regional turmoil and high fuel prices.
• Iran's oil output was at a 20-year low on impact of the sanctions from US and Europe. According to OPEC estimates, production fell 188,500 barrels per day (bpd) in June to 2.96mn bpd while it has fallen 570k bpd since sanctions were imposed in the beginning of the year.
• The Central Bank of Jordan has released a few macro statistics: inflation stabilized at 3.9% by end of Jun, unemployment decreased to 11.5%, and bank credit grew 7% yoy. The Department of Statistics meanwhile issued GDP data: growth was 3% yoy in Q1 2012, compared to 2.3% for the same period a year ago.
• Budget surplus in Oman amounted OMR 1.6bn in Jan-May 2012. Public expenditure reached OMR 4.5bn, growing at a faster pace (+38%) than revenues (+34%), which totalled OMR 6.1bn. The latter was mostly due to the substantial increase in crude oil prices, implying a higher non-oil fiscal deficit in the current year.
• Available data indicate overall trend for inflation slowdown across the GCC region, partly supported by lower food prices growth, however it is not yet clear whether this trend is sustainable. In particular, inflation in Saudi Arabia reduced to 4.9% yoy in Jun (May: 5.1%), in Oman – to 2.2% yoy in May (the lowest level since Feb 2010) from 2.9% in Apr, and in Kuwait – to 2.8% yoy in May (Apr: 3.3%).
• Government subsidies remain a big concern for the MENA economies: the government of Jordan plans to improve subsidy targeting of low-income groups of population to tackle corruption, according to the Minister of Industry and Trade; Lebanese authorities have reached USD 360mn agreement to lease Turkish electricity-generating equipment to cover power shortages, and reduce high cost of electricity which have led to excessive subsidies to the state-owned Électricité du Liban, which reached record level of USD 1.2bn in 2011, according to the Daily Star citing country’s officials.
• Issuance of conventional bonds in the MENA region in Q2 2012 increased by 17% qoq to USD 12.4bn, while the number of issues was higher by 25%, according to the quarterly Zawya Bonds Monitor.
• MENA M&A activity demonstrated strong growth in H1 2012: total value of deals increased by 137% yoy to USD 14.3bn, an estimate reported by Thomson Reuters.

UAE Focus

• 1.5 million-bpd Abu Dhabi Habshan- Fujairah 370-kilometre crude oil pipeline, costing $3.3bn, will be inaugurated on Sunday (according to Gulf News), provides direct access to Indian Ocean and bypasses Straits of Hormuz. 
• Dubai Group’s USD 10bn restructuring talks ran into trouble last week with the withdrawal of three banks - RBS, Commerzbank and Standard Bank Group - from the negotiation table. While the trigger may have been the delay to reach a consensus, with talks ongoing for almost 18 months, the ongoing crisis in Europe would have added additional pressure on the banks’ loan books.
• Dubai Drydocks received a thumbs-up from almost 97% of its creditors for the USD 2.2bn restructuring deal. The property group Limitless announced it is nearing the completion of a restructuring deal for its USD1.2bn debt, with prospects looking up with the passing of the mortgage law in Saudi Arabia last week: one of the biggest projects stalled had been Al Wasl, a USD 12bn development on the outskirts of Riyadh.
• Inflation in Dubai was up 0.8% yoy in June on food and transportation costs; H1 inflation clocked a drop of 1.5% as declines in housing, electricity and fuel (-6.0%) more than offset the rise in food prices (+3.8%), transportation (1.9%), furnishing (2.2%), and education (1.8%) among others. In contrast, inflation in Abu Dhabi was up 1.3% in H1, with food prices accounting for almost two-thirds of the rise.
• A Central Bank official stated that the UAE Mortgage Law would be issued by end of this year. The Law, which differentiates between mortgage-to-own and mortgage-to-invest, will help boost the real estate sector through secure financing.
• Dubai Duty Free announced that it raised USD 1.75bn through a 6-year syndicated loan, after having an initial target of raising USD 1.1bn.
• Data released by UNCTAD showed that FDI inflows into the UAE advanced by almost 40% to USD 7.6bn in 2011 while flows into the Arab region were down by about 35%. However, UAE remained most affected by cancellation of ongoing/ announced projects, worth USD 958bn.

Markets

The aftermath of the EU agreement failed to further impress the markets. Worse, after the sequence of monetary easing from China to Europe, stock markets fell sharply partly because Draghi stated that downside risks have materialized and partly because markets were expecting stronger monetary measures. The spreads between sovereign debts in core and peripheral Eurozone countries widened to pre-summit levels. Investors are awaiting the next round of negotiation due to start at the Eurogroup tomorrow. Regional markets were mixed, though earnings season began on a positive note in Saudi markets. The euro retrenched with the dollar rising to a 10-month high, while gold remained broadly stable. Oil prices were lifted by a strike at Norwegian Statoil.

Global Developments

Americas:

• Non-farm payrolls disappointed again, growing only 80k in June (May: 77k) though the ADP report was encouraging with the private sector adding 176k jobs; unemployment rate held steady at 8.2%.
• The ISM in June plunged 3.8 points to 49.7, its first sub-50 reading of the recovery. The forward-looking components weakened, with both new orders and new export orders coming in below 50 as global developments appear to have sharply hit the industrial sector. The only positives were the employment index, little changed, and the inventory measures, which signal that the overbuilding of stockpiles is not an imminent concern.
• Factory orders for May increased by 0.7% mom (Apr: -0.7%), with durable goods orders up 1.3% and non-durables up by 0.2%. Capital goods orders, excluding military equipment and aircraft, grew 2.1% (-1.5%).
• An increase in investment in residential and federal government projects lifted May US construction spending by 0.9% mom to USD 830bn - a record high since Dec 09.  
• Brazilian Industrial Production in May contracted by -5.7% yoy sa after -3.4% in Apr, the ninth consecutive monthly drop, showing that recession is not sparing the BRIC, in this case due to a loss of competitiveness following last year’s monetary tightening and resulting currency appreciation.
• Argentinian authorities forbade converting pesos into dollars, a new confiscatory measure that pushes the country closer to economic collapse.

Europe:

• Policy rates were cut 25bps to 0.75% at the ECB meeting, and Draghi warned that the outlook is worrisome.
• The French Budget does little to reform a bloated public sector and introduces higher taxes on the rich and big firms, hardly a recipe for growth. The Cour des comptes (France’s official audit) chief Didier Migaud said France needs an "unprecedented brake on spending."
• The unemployment rate in the euro zone rose to 11.1% in May from 11% in the previous month, while Italian youth unemployment recorded the highest since 1992, at 36.2%.
• Russia’s GDP rose 4.9% yoy after 4.8% growth in Q4 2011 thanks to oil prices and a fiscal stimulus. Robust domestic demand will maintain the economy in high gear in the coming months.
• The Bank of England left rates unchanged at 0.5% but decided to inject GBP 50bn more in a new round of QE, as expected.
• Eurozone’s Composite PMI was revised up to 46.4 in June from the initial estimate of 46.0, though employment still remains a concern as the sub-component index fell to 48.3 (May: 48.5). German services PMI moved to “contraction” territory, falling to 49.9 from an initial estimate of 50.3.
• Diverse May industrial production (IP) data: in Germany, IP grew 1.6% mom (Apr: -2.1%) on consumer goods and construction while Spain’s IP fell 6.1% yoy, for the consecutive ninth month, following Apr’s decline of 8.3%. Meanwhile, German factory orders unexpectedly picked up by 0.6% mom in May (Apr: -1.4%) on demand from the Euro area.
• A week after the Euro Summit, and while details are awaited, Finland announced its intention to block ESM secondary market bond buying, with Netherlands also opposing the idea.

Asia and Pacific:

• Unexpectedly, the Chinese central bank cut its benchmark interest rate by 0.25% and lowered its one-year lending rate by 0.31% aiming to boost bank lending to counter a lower than forecast real growth rate.
• South Korea recorded a trade surplus of USD 4.96bn in Jun (May: USD 2.3bn), the highest since Oct 2010, as exports grew 1.3% yoy against a decline in imports by 5.4%. Total trade surplus for H1 2012 was at USD 10.7bn, while exports to US recorded an impressive 10.5% yoy growth, on the back of a FTA signed in Mar.
• Hong Kong retail sales declined to 8.8% yoy growth in May, down from April’s 11.1%, dragged down by a slowdown in Chinese demand.
• Business sentiment in Japan, captured by the BoJ Tankan survey, improved in Q2 to -1 from -4 in the previous quarter. Leading indicators index increased to 95.9 in May (Apr: 95.6) while the coincident indicator, which tracks current activity, fell to 95.8 (97.0).

Bottom line: The drop in global manufacturing has intensified in the past couple of months: from southern Euroland contagion has spread to China and now to the US and South America. The global manufacturing PMI index from Markit/JP Morgan fell almost 2 points from May, to 48.9 in June, i.e. recession territory. The focus has shifted from the euro crisis towards global growth weakness: the response of the central bank essentially is buying time to allow another round of political squabbling in the hope that some decision emerges on how to reignite the growth engine through structural reforms rather than fiscal profligacy.

Regional Developments

• An economic advisor to Egyptian President Mohammed Mursi has stated that the country is not opposed to resuming talks with the IMF once the president’s economic team is in place for $3.2 bn funding.
• Egypt will spend around USD 850mn on infrastructure projects in the new cities, according to the country’s New Urban Communities Authority referring to the 2012-2013 fiscal year budget.
• Three Bahraini financial institutions, Capivest, Elaf Bank and Capital Management House, are expected to merge conditional on the approval of the Central Bank and Ministry of Industry and Commerce. Total assets of the new entity may exceed USD 400mn, while shareholders’ equity is estimated at almost USD 350mn, according to the statements made by the institutions’ executives.
• Re-offer yield on the recent 10Y Bahraini government bonds for USD 1.5bn was 6.14% - 4.4ppts higher than the US 10Y mid-swap rate. Majority of investors were asset managers and hedge funds (38%), with local banks comprising 35%. By geographical breakdown, 29% of investors were Middle Eastern, 16% each from the UK and Europe, followed by US (14%), Asia (11%) and local Bahraini investors (14%).
• Kuwait is expected to provide USD 1.25bn financial assistance to Jordan within the next 2 months, according to Jordan’s Finance Minister. Part of the USD 5bn Gulf Fund package agreed to by KSA, UAE, Qatar and Kuwait, the resources will be spent in 5 years on development projects.
• Fitch has affirmed Lebanon’s ratings at ‘B’ level, pointing to adequate foreign exchange reserves, lower debt levels, and positive trends in financial and budgetary sectors.
• Libya went to elections after four decades yesterday to elect a 200-seat interim legislature that will appoint the PM. Almost 142 parties and 3700 individual candidates were running for these seats and the preliminary results are expected on Mon or Tues.   
• Oman’s social security and welfare government expenditure surged by 123.7% yoy to OMR 702.8mn in 2011. Subsidies and other current transfers more than tripled to OMR 666.7mn, while total wage expenditure (including Pension Fund contributions), rose 12.3% to OMR 1.9bn.
• Qatar’s GDP growth was 6.9% yoy in Q1, unchanged on Q4, but down sharply from an overall rate of 12% for 2011 reflecting the expected levelling off in the expansion of LNG production.
• Foreign assets at the Saudi Arabian Monetary Agency increased to SAR 2239.9bn (USD 597bn) as of end of May 2012 to set another record, while profits of Saudi commercial banks reached SAR 15.4bn in Jan-May 2012, according to official statistics.
• The Saudi Ministry of Housing and Ministry of Finance are drafting a law to reform the real estate finance based on four pillars (1) Create real estate financing market; (2) Promote house ownership among Saudis; (3) Ensure transparency of real estate financing; (4) Creation of a Real Estate Development Fund in support of mortgage financing.
• Saudi Arabia has issued a package of new financial laws, comprising of the Execution/Enforcement Law, the Finance Lease Law, the Real Estate Mortgage Law, the Real Estate Finance Law, and the Law on Supervision of Finance Companies. The new regulations will enter in force 90 days after publication in the Official Gazette; the copies of the laws are not yet available.
• Algerian foreign currency reserves, comprising mostly of USD and European sovereign bonds, reached USD 182bn as of end of the last year.
• Turkey’s public debt is expected to decrease to 37% of GDP from 40% of GDP currently by end-2012, as per the Central Bank governor.
• Consumer prices in Turkey declined by 0.9% in Jun’12, more than market expectations at 0.4%, while annual inflation reached 8.9% yoy.
• Turkey’s real GDP increased by 3.2% yoy in Q1 2012, demonstrating economic growth slowdown, according to official data from the Statistical Institute; seasonally adjusted data indicate 2.3% yoy growth.
• GCC witnessed a strong quarter for IPOs, with four IPOs raising about USD 1.1bn in regional exchanges; average IPO value, at USD 276mn, was higher than Q1’s USD 39mn and Q2 2011’s USD 113mn.
• S&P, in a recent report, stated that it does not expect a strong adverse effect of the Euro zone turmoil on banks in the Gulf region, which remain adequately capitalized with positive trends in asset quality as measured by loan loss provisions.

UAE Focus

• UAE non-oil foreign trade grew by almost 23% to AED 927.6bn in 2011, as per National Bureau of Statistics, with Dubai accounting for the majority share of non-oil trade: AED 7004.4bn or 76% followed by Abu Dhabi (AED 139.4bn, 15%) and Sharjah (AED 68.3bn, 7%).  
• UAE PMI, compiled by HSBC, fell to a 3-month low of 53.2 in June (May: 53.8) but numbers on the employment front were encouraging - expansion was the steepest since last July as companies hired more workers to meet the increasing workload.
• Abu Dhabi’s nominal GDP grew almost 30% yoy to AED 806bn in 2011, helped by higher oil prices, while non-oil GDP grew by about 7%.
• In a year when there was a “freeze” on school fees, cost of education was up by an average 4.5%, according to Dubai's Knowledge and Human Development Authority. This implies a further spike in inflation this year, when schools were permitted to raise fees. Meanwhile, the Ministry of Economy announced that the price of 27 staple food items would be made cheaper by almost 30% in the month of Ramadan.
• The Habshan-Fujairah pipeline, which was expected to be commissioned by June, is only “approaching the phase of continuous operation” and will be operational (“have regular flow of oil”) by Aug, as announced by a senior ADNOC official.
• The World Travel and Tourism Council estimates that UAE tourism will grow by 6.5% annually until 2021, with the report highlighting that almost three-quarters of the spending was on leisure activities. Furthermore, the news that India and UAE are progressing towards the signing of a MoU for tourism only adds to this forecast, with one of the aims of the MoU being to double tourist flows by 2015.
• About 4.4mn passengers passed through Dubai airports in May, taking year-to-date number to about 23.2mn (+13.2% yoy). Etihad, operating out of Abu Dhabi, posted record Q2 revenues (+30% yoy to USD 1.25bn) on higher passenger growth (Q2: +34% yoy to 2.55mn; H1: 4.89).
• A TRA official was quoted stating that UAE might get new telecom operators after 2015 as per the official commitment by the government to the WTO.

Markets

The EU Summit bank recapitalisation deal led to a much needed boost in global equity markets. Though regional markets were mixed, the Presidential election results in Egypt led to a surge in the Cairo exchange. Following the EU Summit outcome, the euro recorded its biggest daily gain in the past eight months, oil prices increased and so did gold, with the latter posting its biggest gain in 6 months.

Global Developments

Americas:

• Both new and pending home sales rose to two-year highs in May, offering a sliver of hope of recovery in the US housing market. New home sales were up 7.6% mom to an annual rate of 369k in May (Apr: 3.3%, 343k), while pending home sales index posted a monthly gain of 5.9% to 101.1 in May (Apr: 95.5).
• S&P Case Shiller index of house prices declined by 1.9% yoy in Apr, following Mar’s declining of 2.6% - the slowest pace of decline since Nov 2010.
• Durable goods orders increased 1.1% mom in May (Apr: -0.2%), higher than market expectations, led by stronger demand for machinery, defense equipment and cars. Excluding transportation and defense, durable goods orders were down.
• Initial jobless claims fell slightly by 6k to 386k, while the four-week moving average fell to 386,750 (previous week: 387,500).
• The 3rd estimate of US GDP remained unrevised at 1.9%: a downward revision of household spending to 2.5% from 2.7% earlier was matched by a gain in commercial construction and lower trade deficit.
• The PCE price index fell 0.2% mom and core PCE increased by 0.1% mom in May (Apr: unchng, 0.1%). Personal spending fell less than 0.1% (0.3%), recording the first decline since last Nov while incomes rose by 0.2% mom (0.2%) and savings rate climbed to 3.9% (3.7%).

Europe:

• The Eurozone Summit deal paved the way for the EUR 500bn bailout fund to recapitalise ailing banks directly, without passing through national budgets and adding to countries’ rising debts. However, this will be done only after a Europe-wide banking supervisory body is established later this year.
• UK PM Cameron has called for a review of inter-bank rates after the LIBOR manipulation scandal, in which Barclays involvement was exposed, with investigations ongoing for HSBC, RBS, Citigroup and UBS.
• Cyprus needs about EUR 10bn to cover fiscal requirements and it might be the fifth of the euro’s 17 member states to request a bailout, following Greece, Ireland, Portugal and Spain. The request will be limited to support for Cypriot banks, in hopes of securing aid with fewer conditions than a full-fledged economic rescue package.
• Euro-area consumer confidence declined in June, adding to signs that the economic slump probably deepened in Q2. An index of household sentiment in the 17-nation euro area fell to minus 19.6 (May: 19.3).
• French consumer spending rose 0.6% mom and 0.4% yoy in March (Feb: -2.6%), higher than market consensus, as the prospect of a change in government improved household confidence.
• IMF’s international reserves data for Q1 revealed that central banks have reduced Euro holdings. Dollar share was unchanged at 62.2% while the euro’s share was slightly lower at 24.9% from 25% at end-2011.

Asia and Pacific:

• China PMI hit a 7-month low of 50.2 in June (May: 50.4), with both orders and employment contracting. New export orders fell 2.9 ppts to 47.5 and overall orders (including domestic) fell 0.6 ppts to 49.2.
• India announced a set of reforms to arrest the slide in the Rupee last week, but failed to live up to market expectations. The reforms included an increase in foreign portfolio investment limits in government bonds to USD 20bn from USD 15bn previously, and to allow manufacturing and infrastructure companies with foreign exchange earnings to refinance INR debt (up to USD 10bn) with external borrowings (as long as it is intended for capital expenditures).
• South Korea IP grew 2.6% yoy and 1.1% mom in May (Apr: unchng yoy, 0.9% mom). This data came after the government reduced its forecast for economic growth in 2012 to 3.3% from 3.7% estimated previously.
• Japan’s IP declined 3.1% mom in May, recording the biggest fall since the Mar 2011 earthquake. But retail sales were up 3.6% yoy and 0.7% mom in May, as government vehicle subsidies increased consumption - motor vehicle sales grew 66.3% yoy in May. Jobless rate fell to 4.4% in May, edging down from 4.6% the previous month. Rebuilding efforts in Japan saw a 9.3% yoy increase in May and housing starts - the fourth straight yoy rise.

Bottom line:The EU Summit in Brussels, expected to provide no immediate relief, took the spotlight last week though the optimism is likely to fade once the now sketchy details are clarified. Spain and Italy were the biggest gainers from the outcome at the Summit with lower borrowing costs, while 10-year Irish government bond yields also fell to new lows, but the rally could fade as more details emerge. Attention will now be on the July 5th ECB meeting. Some positive news out of the US as well, with the Supreme Court ruling in favour of “Obamacare” which is likely to boost his re-election bid.

Regional Developments

• Gulf bond markets have been very active in H1 2012, with companies of the region selling about USD 20.4bn of bonds, of which USD 12.4bn were Sukuk issues. The Saudi General Authority of Civil Aviation issued the biggest sovereign-linked Sukuk raising USD 4bn, followed by Dubai Government at USD 1.9bn.
• Qatar government domestic debt was stable at an estimated QAR 121.5bn in the 2011/2012 fiscal year, while external debt increased to USD 24.1bn (QAR 87.8bn) after the government’s USD 5bn issuance of international bonds in Nov 2011. (Source: Qatar’s daily Peninsula referring to the Qatar Economic Outlook).
• The government of Kuwait has submitted its resignation amid an escalating corruption scandal, and after the opposition gained majority in the country’s Parliament.
• The Central Bank of Bahrain has issued 10-year development bonds for the amount of USD 1.5bn. The securities were issued on behalf of the Bahraini government and received BBB rating with a stable outlook from both S&P and Fitch and the issue was oversubscribed by over 400%.
• Omani budget revenues demonstrated substantial growth at 39.6% yoy in Apr 2012 to reach OMR 4.6bn mostly due to the increase in oil revenues from OMR 2.4bn to OMR 3.3bn, or by 35.
• Inflation in Oman increased to 2.9% yoy in Apr 2012 compared to 2.8% yoy in the previous month.
• Broad money growth in Saudi Arabia was at a 17-month low of 7.7% yoy in May (Apr: 8%). Net foreign assets touched a record high of SAR 2.19 trn while lending to the private sector declined to 13% (13.3%).
• Saudi Fund for Development will open credit links of USD 210mn to finance non-oil exports to Turkey.  
• Risk adjusted capital ratio – a measure of banks’ capital adequacy developed by S&P – was estimated at 12 to 13% for the GCC banks as of end of 2011. This level was about 5 percentage points higher than the average projected for the 100 largest banks, according to the rating agency’s recently released report.
• The IMF stays ready to provide financial assistance to Egypt, according to the local media referring to the conversation between the fund’s chief and the newly elected president of Egypt. During its last visit to Egypt, the IMF mission discussed with authorities a new arrangement for an amount of around USD 3.2bn.
• Egyptian stock exchange index surged by 13% in the first 4 days after the official announcement of the presidential elections results.
• Overall consumer prices in Lebanon grew 6% yoy in May 2012. The major part of inflation growth was observed in Jan-May 2012, when prices increased by 4.7%.

UAE Focus

• Dubai’s Q1 non-oil foreign trade grew 6.6% yoy to AED 298.1bn, with imports at AED 175.2bn (5.4%) and value of exports and re-exports at AED 122.9bn (8.5%). Top trading partners were India, China and US.
• UAE personal loans grew 0.8% to AED 255.9bn in April, the highest level since the crisis hit. For the period Jan-April, personal loans grew by 1.5% compared to the slight 0.1% growth in overall loans.
• Nasdaq Dubai saw the listing of Jebel Ali Free Zone USD 650mn Sukuk, taking the nominal value of total listings on ND to USD 7.1bn. The order was oversubscribed by more than 3 times with ME investors taking up 65% of total allocation, followed by European and Asian investors at 26% and 7% respectively.
• Adia’s average annual investment return over the last 20 years, at 6.9%, was lower than last year but the 30-year returns remained unchanged at 8.1%. Meanwhile, in the introduction of the annual review, the chief of ADIA warned in connection with Europe that “In the absence of clear guidance from policy makers and central banks, markets are prone to behave in unpredictable and unwelcome ways”.
• Dubai licenses issued registered an increase of 14% yoy to 1542 in May, of which tourism licenses topped the list, followed by professional and commercial licenses.
• Net profit of UAE’s corporates increased 11.5% to USD 3.01bn in Q1 - this compares to a rise of 12.9% in GCC companies’ net income to USD 14.5bn.
• Abu Dhabi’s Executive Council has sanctioned the construction of a power plant, to be completed by 2015, with the capacity to generate 1,500 megawatts of electricity and desalinate 53 mn gallons of water per day.

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Markets

The elections in Greece allayed fear of disruptive events, but left open all the unsolved issues that beset the governance of Euroland. Global equities were hit by Moody’s downgrade of 15 of world’s biggest banks in addition to weak data across the board. Regional markets were mostly down, on global cues, weaker oil prices, and as the region continued to be affected by bad news including MSCI not reclassifying UAE and Qatar and the delay in announcing Egypt’s election results. The dollar gained against the euro; the yen and pound tumbled and most Asia currencies dropped, with the rupee hitting record lows. Crude oil prices picked up from the 18-month low while gold prices tumbled, as last week witnessed its biggest one-day decline since end-Feb.

Global Developments

Americas:

• The US Fed extended beyond June 30 the sale of short-term bonds against purchases of longer-term securities, a move aimed at “twisting the yield curve”, hence the name “Operation Twist”, but refrained from more aggressive QE measures. The effects on the real economy are likely to be modest. The FOMC depicted a bleaker picture than 2 months ago: US labour market weakened while stress associated with Euroland debt crisis worsened.
• Housing starts in the US dipped in May by 4.8% mom to 708k (Apr: 744k), dragged down by construction of apartments and existing home sales which declined by 1.5% mom to an annual rate of 4.55mn units (Apr: +3.4%). Meanwhile, building permits rose 7.8% to 780k, the highest level since Sep 08, providing a ray of sunshine to an otherwise cloudy set of readings.
• Initial jobless claims declined by 2k to 387k (for week ended June 16) and the 4-week average, at 386,250, was the highest recorded this year.

Europe:

• The euro zone ZEW indicator of economic sentiment index tumbled in June to -20.1 from -2.4 in May. The measure for Germany showed an even larger drop to -16.9 in June from 10.8 previously.
• Ifo business climate index, which tracks German business sentiment, fell to 105.3 in June (May: 106.9) with outlook for future more dismal than current conditions - the business expectations sub-index fell to 97.3 (May: 100.8).
• UK inflation is slowly reacting to falling oil prices and weak demand: CPI increased 2.8% in May compared to 3% in April. The BoE could grab the occasion to extend QE in July.
• Euroarea’s composite PMI sank to a 3-year low of 46.0 in June, unchanged from May, with even Germany no longer remaining immune to the trends in the rest of EU. Manufacturing dropped by the steepest since May ‘09 - PMI for the manufacturing sector dropped to 44.8 in June (May: 45.1). June PMI for France and Germany also disappointed, with German flash manufacturing PMI contracting at the fastest pace in 3 years to 44.7 (May: 45.2).

Asia and Pacific:

• HSBC PMI for China dipped to 48.1 in June (May: 48.4). At a seven-month low, this flash figure, indicates a growing contraction of industrial activity.
• Brazil and China agreed on a bilateral USD 30bn currency swap agreement, to be used for trade or to boost reserves, seen as a move towards lower reliance on the dollar. This was announced as an initial step towards closer financial integration among the BRICS nations.
• Taiwan’s export orders dropped 3.04% yoy to USD 36.47bn in May, registering a decline for the third consecutive month this year, indicating that Taiwan has been hit harder by weaker external demand than other Asian nations (only orders from US showed a positive annual growth).
• The stronger yen and unending eurozone crisis led to a decline in the June Reuters Tankan for Japan. For the first time in four months, the reading was pessimistic at -3, compared to +4 in May.

Bottom line:While most eyes are focused on Europe, the US is faltering: data on employment which constitute a reliable indicator of sustainable growth continue to deteriorate and weekly hours worked, has fallen abruptly since February, with manufacturing output flat over the past four months. Retail sales in nominal terms have decreased for the past two months and consumer confidence is waning. The Fed is paralyzed because previous massive monetary easings have proved effective at countering the emergency, but have done little to restore growth.

Regional Developments

• Announcement of the Presidential election results in Egypt has been delayed, with the Commission stating it is a result of the numerous complaints filed by the candidates. This along with the judicial decision that Parliamentary elections were unconstitutional has added to the reluctance of investors to trade on its exchange, invest in the country’s projects and will also lead to delays in aid promised from international agencies like the IMF and WB.
• The Arab Monetary Fund has announced that it will arrange a USD 65mn credit facility for Egypt, to facilitate trade with its Arab counterparts.
• The Governor of the Central bank of Egypt recently stated that real GDP growth is expected at around 2% in 2012, a level close to 2011’s 2.3%.
• Jan-Apr 2012 trade deficit in Jordan increased by more than one third compared to the same period of 2011, mostly due to the surge in prices of imported energy products. Financial support has been requested from the IMF and the Fund is ready to provide such assistance; the type of arrangement is yet to be determined, according to the sources cited by the Petra Jordan News Agency.
• Broad money supply in Kuwait increased 8.9% yoy to KWD 29.3bn as of end of May. Breakdown of money supply components demonstrates higher growth rate for demand deposits (10.6% yoy) compared to quasi-money (8.6% yoy). Credit to private sector increased by 4.7% yoy to KWD 28.8bn.
• The Board of the Central Bank of Kuwait adopted guidelines on governance at the local banks that will be effective from July 2013. The new regulations, including the role of banks’ boards, risk management, information disclosure and transparency, and allowances and bonuses, are in line with the international best practices, especially those promoted by the Basel Committee.
• The IMF’s Article IV consultation report for Kuwait places real GDP growth relatively high in 2012, above 6%, mostly due to expansionary fiscal policy. Though increasing public spending might have been the appropriate response due to the adverse effects of the global financial crisis, maintaining excessively supportive fiscal policy will deteriorate the country’s fiscal sustainability in the medium term.
• The yield on the Omani government 10-year development bonds averaged 4.75%; the bids more than twice exceeded the announced issuance at OMR 100mn, and ranged from 3.75 to 5.05%.
• Saudi Arabia’s monetary aggregate M3 grew 6.8% since Dec-2011 to reach SAR 1307.4bn as of Jun 14th, as per SAMA’s records. Separately, inflation in KSA remained unchanged mom at 0.2% in May 2012.
• More than 90% of Saudi Arabia’s Islamic finance assets, estimated at USD 94bn, are concentrated in 4 banks, according to a recent report by Deloitte Middle East Islamic Finance Knowledge Center.
• Better public finance stance and current account sustainability improvement led to an upward revision of Turkey’s sovereign credit rating by Moody’s to Ba1, just one step below investment grade.
• Total assets of the 57 GCC banks listed at the local stock exchanges amounted to USD 1158bn, representing 83.1% of the combined assets of the 75 largest Arab banks included in the Forbes Middle East’s list.

UAE Focus

• The long-awaited MSCI upgrade for UAE & Qatar from frontier to emerging markets failed to happen, with the MSCI stating that the index “meets all requirements besides specific market accessibility issues related to custody and clearing and settlement”. The implementation of a “proper false trade mechanism” and “the formal introduction of the regulation governing SBL agreements” is expected in 2013 - when MSCI will undertake its next review.
• Moody's reported that Tamweel plans to raise USD 235mn from a mortgage-backed Sukuk, and its certificates would be due to mature in 2046.
• A study titled “Economic Impact of Uprisings on the Mena Region” revealed that the UAE witnessed a 15% increase in outward remittances during the period of the turmoil, while remittance flows to MENA countries grew only by 2.6%, with GCC accounting for about one-quarter of these flows.
• Broad money supply M2 in the UAE increased by 4% in Jan-Apr ‘12 while deposits increased by 6.5% to AED 1138.9bn and loans and advances during the same period remained unchanged at AED 1072.3bn.
• The latest company to refinance its existing debt is Arkan, which provides integrated building products and construction materials. The 78-month term loan of AED 1.4bn will be used to fund new projects in UAE.
• Abu Dhabi Energy Company (Taqa) announced that it has secured project financing for an amount of USD 1.4bn to facilitate the 700 MW expansion of Taqa's Jorf Lasfar coal-fired power complex in Morocco.
• Forbes Middle East reported that Emirates NBD was the biggest lender in the MENA region (USD 55.3bn), followed by Qatar National Bank (USD 53.2bn) and National Bank of Abu Dhabi (USD 43.4bn). Total loans of the 75 surveyed banks totalled USD 855.7bn, with UAE and KSA accounting for 6 banks each in the list of top 20 lenders.

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Markets

Inventories of cardio tonic drugs on trading floors must have been depleted, in one of the most feverish weeks in quite a while. The equity market roller-coaster was driven primarily by contradictory news on rescue plans for Spanish banks and expectations of more monetary stimuli in both the US and Eurozone. This was followed by the G7 teleconference, the Chinese rate cut, statements by Draghi and Bernanke, pressure from the US on Germany and the umpteenth downgrade for Spain. The S&P scored on Wed its biggest one-day percentage gain of 2012 and the following day China’s surprise cut sparked another rally in global stock markets, with investors confident that Beijing will ride to the rescue of a global economy. Then Bernanke poured cold water on QE3. The oil price reflected these wild gyrations, ending near the lowest since Oct 2011 year and almost 25% below the high in Feb. Gold lost its shine slightly after Bernanke’s testimony. The Euro overall fell and the Yen rebounded once again.

Global Developments

Americas:

• US manufactured goods orders fell -0.6% mom in Apr vs. no change in Mar, more or less as expected, but hardly a sign of robust performance.
• The service sector stabilized in May, with the ISM non-manufacturing index virtually unchanged at 53.7 from 53.5. Business activity and new orders gained, while inventory fell and employment stayed just above the threshold for expansion. More robust growth is not imminent.
• Initial jobless claims fell by 12k to 377k but the four-week moving average still rose to 377,750 - the highest in a month.
• US Trade deficit narrowed to USD 50.1bn in Apr (Mar: USD 52.6bn) as imports were down by 1.7% mom and exports fell for the first time in five months by 0.8% to USD 182.9bn, led by capital goods and industrial supplies. Trade deficit with China widened to USD 24.6bn (Mar: USD 21.7bn).
• Brazilian inflation slowed to 0.36% mom in May after 0.64% in Apr (5% yoy from 5.1% in Apr), as the economy remains well below capacity.

Europe:

• The ECB left rates unchanged but hinted that it is ready to open the liquidity gate if the banking sector were to come under strain.
  • After dragging its feet the Spanish government is bowing to the pressure to accept assistance for bank recapitalization. Spain requested a EUR 100 billion loan from the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Fitch estimates Spanish lenders need EUR 50 to 60 billion in fresh capital.
  • Spanish IP collapsed -8.3% yoy in Apr (after a -7.5% decline in Mar) led down by durables and capital goods. If you think this was bad news, it was still better than the performance in Italy, where IP dropped -9.2% yoy and -1.9% mom.
• The sa annual growth of the euro zone’s M3 money supply slowed in Apr for the first time in four months: 2.5% yoy, down from 3.1% in Mar.
• The euro zone business and consumer confidence index hit a two-year low of 90.6 in May from 92.8 in Apr. due to the deterioration in confidence of manufacturers and service providers. The fall in the index underscores that the recession in the euro zone will continue.
• The euro area GDP remained constant qoq in Q1 against a -0.3% drop in Q4 2011. Compared to Q1 2011 GDP is 0.1% lower.
• Eurozone PMI reached a three-year low in May, with a dip in new orders: composite PMI fell to 46.0 (Apr: 46.7). Even in Germany services PMI fell (May: 51.8; Apr: 52.2) followed by France (May: 45.1; Apr: 45.2). In Italy, services PMI was slightly up (May: 42.8; Apr: 42.3).
• German manufacturing orders fell -1.9% mom in Apr (Mar: +2.2%). Foreign orders collapsed -3.6% mom hit by orders from euro zone. Domestic orders increased 0.4% mom. Orders are unlikely to pick up soon given the recession in the euro zone.
• German IP plunged -2.2% mom in April, offsetting the 2.2% gain in Mar. The index is well below levels reported in the summer of 2011. The German PMI has been below 50 for 3 months which means that over the summer a rebound is unlikely.

Asia and Pacific:

• In an unexpected move to sustain growth, China cut interest rates by 25bps for the first time since 2008. The benchmark one-year lending rate will be 6.31% and the one-year deposit rate 3.25%. The stimulus from such a measure will be modest, but it signals that the authorities are on alert.
• Inflation in China fell to a two-year low of 3.0% yoy in May (Apr: 3.4%), the only positive amongst a host of weak data. Both IP, which increased by 9.6% yoy (Apr: 9.3%), and retail sales, up 13.8% yoy (Apr: 14.1%), came below expectations. Official non-manufacturing PMI eased to 55.2 (Apr: 56.1) while HSBC’s services PMI was jumped up to a 19-month high of 54.7 in May (Apr: 54.1). China’s foreign trade rebounded in May with imports up 12.7% yoy (Apr: 0.3%) and a 15.3% growth in exports (4.9%). The surplus increased USD 300 ml to 18.7bn.
• Japan’s current account balance dipped in Apr to JPY 334bn (Mar: JPY 1589bn) dragged down by higher energy costs and falling exports.
• Taiwan exports fell by 6.3% yoy, declining for the third consecutive month, to USD 26.1bn in Apr but grew faster compared to imports causing trade surplus to widen to USD 2.26bn (+83.9% yoy; Mar: USD 0.69bn).

Bottom line: 6 Eurozone countries (Greece, Ireland, Portugal, Spain, Italy and Cyprus) have wide fiscal gaps (the difference between the current government primary balance and one that would stabilize the public debt-to-GDP ratio) and large resource gaps (the difference between the current trade deficit and one that would stabilize the foreign debt-to-GDP ratio). As a consequence, government and external debts are unsustainable, especially if growth stalls and interest rates remain high. This is the good news. The bad news is that the US might be mired in the same situation, but the international role of the dollar is hiding this reality and postponing the day of reckoning, thanks to a flight to safety that keeps interest rates low. Meanwhile even the rare bright spots, Germany and China, are now struggling. The next few days will be again tense with the Greek and French parliamentary elections looming and Spanish banks negotiating a bailout from the Eurozone.

Regional Developments

• Retrenching European banks have withdrawn almost USD 18.4bn from the GCC region in Q4 2011, according to BIS data, mostly from the UAE and Saudi Arabia. Also, loans by international financial institutions to borrowers in the Gulf, excluding interbank lending, fell USD 7.3bn in Q4. Deposits in the region, however, increased by 1.2% to USD 392.9bn, thanks to Qatar.
• Unemployment in Bahrain declined to 3.8% in Q1 2012 compared to 4% a year ago, according to the country’s Ministry of Labour.
• At the auctions held by the Central Bank of Bahrain last week interest rates on 6-month and 1-year Government treasury bills declined, while remaining unchanged for 3-month securities. Total issuance amounted BHD 165mn, of which BHD 100mn for 1-year bills, which were oversubscribed by 193%. Average weighted interest rate on 3-month and 6-month bills was lower than that of 1-year securities (1.69%) by 50 and 40 basis points, respectively.
• Public capital expenditure on construction projects in Kuwait amounted to KWD 526.7mn, or 94% of the approved budget, in the fiscal year ending March 31, 2012, according to the Ministry of Public Works.
• According to the Central Bank of Morocco, monetary aggregate M3 increased 5.2% yoy in Apr, banking deposits by 3.1%, and lending to the economy by 7.2%. Net foreign assets of the Central bank and local banks declined 14.6% yoy, while net claims on Central Government increased 38.5%.
• Total value of projects implemented in Qatar may increase to USD 108bn in the next few years from the current USD 63bn, according to the country’s financial centre.
• Real GDP growth in Saudi Arabia in Q1 2012 was 5.94%, slightly lower than 6.64% observed in Q4 2011. Nominal GDP was up 16% yoy to SAR 612.3bn. The oil sector, which expanded by 7.17%, while the private sector grew 6.33% and government sector grew 4.24%. Inflation rate rose to 5.1% yoy in May 2012.
• Saudi Arabia could rein in oil sales after it achieved its target of USD 100 by cutting the price of its crude and pumping at the highest rate in at least three decades. According to Vienna-based researcher JBC Energy GmbH citing tanker data oil shipments from KSA are lower this month. Furthermore KSA raised the July official selling price to Asia of its Arab Light, for the first time in three months. Oil production was cut to 9.8mn (bpd) in May reducing output by 300k bpd from the previous month.
• Saudi Arabia agreed to extend another USD 430mn loan to Egypt in addition to USD 1.5bn provided earlier. The new loan is expected to support infrastructural projects and SMEs.
• Monetary aggregate M4 in Tunisia increased by 11.6% in Jan-Apr 2012 to reach TD44.7bn, while net foreign assets declined by 47.2% during the same period, or by TD 4.3bn in absolute terms.
• Year-end inflation in Turkey is expected to reach 7.47% according to the survey of decision makers conducted by the Central Bank twice a month. This month’s first assessment is lower than previous one by 0.19 percentage points. This is in line with the current trends in actual inflation, which declined from 11.14% yoy in Apr 2012 to 8.28% yoy in May 2012, and country’s Minister of Economy expectations of further inflation slowdown.
• Turkey aims at expanding its annual trade turnover with Arab League Countries to USD 100bn in the next five years from USD 35bn in 2011, according to the country’s Minister of Science, Industry and Technology.

UAE Focus

• DIFC Investments (DIFCI) secured a USD 1.03bn syndicated facility to help finance the repayment of its USD 1.25bn Sukuk which matures on the 13th of June this year. The 5-year Islamic facility contains a commodity Murabaha and Ijarah tranches, was priced at 380 bps over EIBOR/Libor, and secured on DIFCI's Grade A property portfolio. S&P affirmed its B+/B rating for DIFC Investments, with a stable outlook.
• UAE is expected to grow by 3.0% in 2012, according to the Minister of Economy, citing the ongoing euro-zone sovereign debt crisis and weaker global growth as the main factors for the decline from 4.2% growth recorded in 2011.
• Inflation in Abu Dhabi increased 1.2% for the period Jan-May 2012, driven by higher prices of food and non-alcoholic beverages. In the month of May, CPI was up 1.7%.
• Etisalat could be going public, allowing foreign investors to own its shares, once a new draft law is approved (Source: Emarat Al Youm). If Etisalat becomes a public shareholding company, it might also result in the reduction of royalties the company makes to the government.
• The Telecommunications Regulatory Authority (TRA) announced that the number of subscribers in the UAE increased by 13% yoy to 12.4mn. Pre-paid subscribers, at 10.9mn, outnumbered the post-paid subscribers - 1.5mn, at the end of Mar 2012. With population at 8mn, penetration rate is now estimated at 154% as opposed to 200% previously with population closer to 5.5mn.
• UAE has been ranked 7th globally in public sector financial management efficiency, as per the World Competitiveness Report 2012. The report underscores the zero-based budgeting policy followed by the UAE in 2011-13 in “enhancing the efficiency of government spending and the preservation of public money”.
• The Securities and Commodities Authority (SCA) revealed that the GCC’s IPO draft rules have been approved (including unified disclosure of securities and unified corporate governance principles) and it has been submitted to the Supreme Council for endorsement and implementation.
• On the heels of the delisting of Damas on Nasdaq Dubai came the news that RegisCard is planning to list within the next 75 days. The company has “developed software to introduce prepaid debit cards and discount cards to the international community”.
• Etihad acquired a 3.96% stake in Virgin Australia - its fourth acquisition in the past 6 months. With this collaboration, the two would operate 24 flights a week between Abu Dhabi and Australia, reaching over 150 destinations.

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Markets

Disappointing data across the board - US jobs, growth concerns in China and India - added to the existing fears of a global slowdown and sent equity markets sliding. Ireland’s positive vote on the EU fiscal compact was the only cheerful note for European markets. Regional markets were no different with most markets down with the exception of Oman (it hit a 3-week high after Bank Nizwa’s IPO and almost 11 times oversubscribed). The euro hit a 23-month low against the dollar and fell to its weakest in more than 11 years against the yen (safe haven). Crude oil prices are the lowest since Oct 2011 as worries about weaker global demand led prices tumbling down while gold price rose as investors flocked to safe-haven assets.

Global Developments

Americas:

• Weak jobs report: non-farm payrolls in the US increased by 69k in May (Apr: 77k), much lower than market expectation of 150k, while ADP private sector employment increased by only 133k (Apr:113k) and unemployment rate rose to 8.2%.
• Initial jobless claims rose 10k to 383k for the week to May 26, with the four week average at 374,500 - still lower than Apr’s 384,250.
• Q1 GDP was revised downwards to an annualised rate of 1.9% from a previously announced 2.2%, on a decline in private inventory investment and non-residential fixed investment amidst pick-up in imports.
• Both consumer spending and incomes increased in Apr by 0.3% (Mar: 0.2%) and 0.2% (0.4%) respectively. Core PCE rose by less than expected in Apr: 0.1% mom and 1.9% yoy; and savings rate fell to a 4-year low of 3.4%.
• The Case-Shiller 20-city house price index increased by 0.1% mom in Mar (Feb: 0.15%), slightly less than expected. However, earlier months’ data were revised upwards. The index has been crawling up in 2012 but overall real estate remains mired in a post-bubble depressed state.
• Pending home sales fell unexpectedly in Apr, falling by 5.5%, compared to Mar’s 3.8% gain. Sales of existing homes meanwhile increased 3.4% to a 4.62mn annual rate.
• Chicago PMI continued on a downward trend, slowing to 52.7 in May (Apr: 56.2), as new orders fell to 52.9 (57.4) - the lowest since Sep 09.
• ISM factory index fell to 53.5 in May (Apr: 54.8), indicating that manufacturing was growing at a slower pace; the silver lining was the expansion in orders, which climbed to 60.1, the highest since Apr 2011 (Apr 2012: 58.2).
• Brazil’s Central Bank last week reduced its benchmark Selic overnight rate, for the seventh consecutive time, by 50 bps to a record low of 8.5%. This follows the more aggressive 75bps cut in Mar and Apr and the Selic rate is now down 400bps compared to Aug 2011.

Europe:

• Unemployment rate in the Euro area increased to 10.9% mom in Mar (Feb: 10.8%). Spain had the region’s highest unemployment rate, at 24.1% while the lowest jobless rates were recorded in Austria and the Netherlands, at 4% and 5% respectively. The unemployment data showed that the number of people out of work in the euro area rose by 169k in Mar to 17.4 mn; from a year earlier, unemployment increased by 1.73mn.
• German retail sales rebounded in Mar as declining unemployment, slowing inflation (the lowest level in more than a year) and higher wages bolstered households’ purchasing power. Sales, adjusted for inflation and seasonal fluctuations, rose 0.8% mom (Feb: -0.9%) and 2.3% yoy.
• German EU-Harmonized May CPI declined by a greater-than-expected 0.3% mom as energy prices eased. It rose by 2.1% in yoy terms.
• Economic confidence in the euro area declined in May to 90.6 (Apr: 92.9), registering the lowest since Oct ‘09. A gauge of sentiment among European manufacturers fell to -11.3 (-9) while the indicator of services confidence dropped to -4.9 (-2.4) alongside sliding sentiment in construction as well.

Asia and Pacific:

• China’s PMI continued to slide in May, dropping to 50.4 from April's 53.3, with a decline in the sub-index for new orders.
• China accelerated the internationalisation of the Yuan: China and Japan set up a facility to settle trade in Yuan in a move also expected to boost both bilateral trade and investment, and reduce transaction costs substantially.
• India GDP expanded 5.3% yoy in Q1 (vs. Q4 6.1%), the lowest quarterly rate in 9 years, led by sharp declines in both manufacturing and agriculture. Annual GDP growth hence fell to 6.5% for the financial year 2011 from 8.4% growth in 2010.
• Philippines Q1 GDP increased 2.5% qoq and 6.4% yoy (Q4: 0.9% qoq, 3.7% yoy) on robust exports, and higher government spending.
• A host of data for Apr was released in Japan: retail sales continued to rise, up 5.8% yoy (Mar: 10.3%) thanks to car subsidies; industrial production showed a slight uptick, 0.2% mom (Mar 1.3%), as an increase in inventories led to a pull-back by some manufacturers.
• Industrial production in South Korea for Apr registered an increase of 0.9% mom (Mar: -2.9%) while trade surplus in May widened to USD 2.4bn (USD 2.1bn), in spite of another drop in export growth (May: -0.4% yoy, USD 47.2bn). Exports to the Middle East and Latin increased 38% and 22.4% respectively while exports to the US, EU and China recorded double-digit declines.
• May CPI was mixed in Asia: in Indonesia, inflation was almost stable, 4.45% yoy from 4.5% in Apr as basic food prices dropped during the harvest season; in Thailand it picked up to 2.5% on higher food prices and lower farm produce (2.47%); in South Korea, inflation was unchanged at 2.5% yoy.

Bottom line: The US labour market improvement is faltering as we see more signs of weaker global growth in emerging markets, with disappointing India GDP and China PMI numbers. As the world awaits elections in Greece and France, there were opposite signals from Europe: Ireland’s referendum on the EU fiscal compact and Eurozone austerity rules resulted in a “Yes” from 60.3% of the voters. In Greece, Alexis Tsipras, leader of leftist Syriza, denounced the austerity measures and stated that the bailout package will be reneged if his party comes into power. As global activity drops, inflation retrenches.

Regional Developments

• Establishment of a new regional statistics centre, to “provide comprehensive and comparable statistical data”, is the latest initiative being discussed by GCC Ministerial Committee for Planning and Development.
• Inflation in Kuwait was 3.3% yoy in end-Apr 2012, mainly driven by food prices growth at 10% yoy.
• S&P affirmed Kuwait’s sovereign credit ratings for long- and short term debt in both local and foreign currencies at AA level with a stable outlook, on strong external and fiscal positions, despite internal political and geopolitical risks, and dominance of public sector, which is highly dependent on oil revenues.
• At the last auction of 91-day Sukuk Al-Salam Islamic securities, regularly held by the central bank of Bahrain on behalf of the government, the expected returns reached 1.18%; the issuance for the amount of BHD 18mn was oversubscribed by 178%.
• The central bank of Egypt eased its required reserve ratio for local currency deposits from 12 to 10%, effective from June 26th, to provide additional liquidity. Annual inflation rate remained relatively stable in the range 10-12% during the last 36 month period ending in Mar 2012.
• Egypt’s Hosni Mubarak was sentenced to life imprisonment yesterday as the country continues without an elected President; more than a year after the turmoil began.
• Jordan hiked both fuel and electricity prices (premium petrol was hiked by almost 25%) in a bid to rein in the burgeoning budget deficit, expected to touch USD 4bn this year.
• Inflation in Lebanon increased to 3.5% yoy as of end-Apr 2012: food and non-alcoholic beverages prices increased 6.3%, while housing prices remained practically unchanged.
• S&P revised the outlook for Lebanon to negative, citing the ongoing conflict in neighbouring Syria and “heightened domestic tensions in Lebanon”.
• At the weekly tender held by the Central Bank of Oman, local commercial banks purchased certificates of deposits for the amount of OMR 98mn; average interest rate for these 28-day securities amounted 0.08%.
• Foreign direct investment into Oman totalled OMR 6.2bn as of end-2011, of which OMR 800mn was attracted during 2011, according to a Ministry of National Economy official, cited by the local media.
• Qatar plans an expansionary budget this fiscal year, boosting government spending by 27% to USD 48.9bn though a substantial amount has been set aside for public sector salaries, which are up 48% yoy to more than USD 10bn; budget is based on average crude price of $65 per barrel.
• SAMA added USD 11bn to reserves in April, despite lower oil prices, taking total holdings to USD 580bn.
• IMF, in its concluding statement after the Article IV mission to Saudi Arabia, cautioned that while inflation is likely to remain at around 5% in 2012, monetary authorities have to carefully track developments and detect overheating signs in order to avoid acceleration of inflation. Output growth was estimated at 7.1% in real terms for 2011, with 8% growth in non-oil sector. Strong external and budget positions will be maintained, as measured by current account and fiscal surpluses at 27 and 17% of GDP, respectively.
• Turkey’s exports for Jan-May 2012 increased 10.3% yoy to USD 59.8bn. These data support government’s plans to meet medium term economic growth target at 4%, according to the Ministry of Economy.

UAE Focus

• Dubai’s GDP recorded an increase of 3.4% yoy to AED 306.2bn in 2011, propelled by strong performances in the trade and tourism sectors. The non-oil sector grew by 5.8% in the last year, with exports surging by 44.3% and supported by 13.9% rise in the hotels and restaurants sector.
• The UAE Central Bank’s Annual Report for 2011 showed that there was a significant outflow of capital to AED 95bn, the highest outflow since 2008, from AED 10bn in 2010 - this could be interpreted as debt repayments and/or an increase in investments abroad by UAE entities, including the SWFs.
• The Fujairah oil pipeline, which could serve as an alternative to the Strait of Hormuz, is expected to open in June and will have an initial capacity of about 1.5mn bpd, which can increase upto 1.8mn bpd.
• A study by the Dubai Chamber of Commerce finds that inflation will gradually increase in the second half of 2012, as fall in international food prices and a stronger dollar will help keep prices in check in spite of wage increases putting pressure on demand.
• The UAE government announced that it would be extending food subsidies, usually given during Ramadan to the local population, to the full year. This would enable a savings of close to AED 13k as opposed to AED 1.5k saved previously.
• Jafza announced that its USD 7.5bn Sukuk, originally set to mature this Nov, will be repaid ahead of time, after consent was received from holders of 89% of the Sukuk.
• Promising disclosure rate of 97.5% in UAE markets: as per the SCA, 80 listed PJSCs issued corporate governance (CG) reports in H1 2012 and 71 companies had submitted the 2011 CG reports in approved formats.

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Markets

The long Greek journey into the night continues to send shock waves throughout the markets (with additional input from Spain’s Catalonia, after Bankia’s bail-out, needing help to refinance its debts and ongoing banking sector troubles) which have been highly volatile around a downward trend driven by entrenched risk aversion. Regional markets were mixed, with Egypt’s exchange gaining the most amongst its counterparts on domestic elections. The euro hit a 2-year low against the USD on worries about a collapse in Greece and an exit from the euro zone. Oil slumped and gold has lost its allure as a safe haven.

Global Developments

Americas:

• Positive news from the housing sector: existing home sales improved by 3.4% to 4.62mn units in Apr (Mar: -2.8%, 4.47mn), showing signs of a slow recovery helped by lower prices and mortgage rates. New home sales also increased 3.3% mom in Apr to 343,000 (Mar: -7.3%, 332k).
• Durable goods orders were up 0.2% mom in Apr (Mar: -3.7%); however, the increase was driven by volatile aircraft orders while core capital goods fell by 1.9%, following a 2.2% decline in Mar. Meanwhile, the US flash manufacturing PMI fell to a 3-month low of 53.9 in May (Apr: 56).
• Initial jobless claims declined by 2k to a sa 370k with the 4-week average down 5k to 370k; continuing claims fell by 29k to 3.26mn.

Europe:

• Q1 German GDP was up 0.5% qoq (Q4: -0.2%), underpinned by exports, +1.7% qoq, (Q4: -1.5%) and private consumption +0.4%, (Q4 -0.2%). UK’s Q1 growth was revised down further to 0.3% qoq, due to a slump in construction, -4.8%, against the previously estimated -3.0%.
• Eurozone’s flash composite PMI was at a 3-year low of 45.9 in May (Apr: 46.7), with manufacturing PMI at 45.0, the lowest since June 2009 (45.9). German manufacturing PMI fell to 45.0, a 35-month low, led by a decline in both exports and new orders for goods.
• German Ifo survey showed a substantial dip in sentiment as the index fell to 106.9 in May (Apr: 109.9), disappointing markets and sinking the euro.
• Distressed banks continue to be bailed through liquidity injections: Greece's bank stability fund approved EUR 18bn to recapitalise its four largest banks, while Spain needs to inject about EUR 19bn into Bankia, its fourth largest bank pushed into insolvency by loans to real estate.

Asia and Pacific:

• The World Bank lowered its forecast for China GDP growth in 2012 to 8.2%, but stressed that the country has plenty of fiscal resources to achieve a “soft landing” after the hangover of the 2008 stimulus measures. The WB predicts GDP to expand by 8.6% in 2013.
• HSBC Flash China PMI fell to 48.7 in May (Apr: 49.3), marking the seventh straight month when PMI reading has been under 50 i.e. in “contraction”.
• India’s fuel price was hiked by an unprecedented and steep 11% (by INR 7.50 a litre), with the state-run oil firms justifying the increase due to the recent slide in the Rupee and higher oil prices.
• Volatile pharmaceuticals and electronics sectors led to a decline in Singapore’s Apr industrial production by 0.3% yoy (Mar: -3.1%). Inflation, meanwhile, accelerated to 5.4% in Apr (Mar: 5.2%) as housing costs continued to increase amidst slower rise in transport and food prices.
• Both Thailand and Malaysia released Q1 GDP, with the former growing 0.3% yoy and by 11% qoq as both the industrial sector and exports bounced back after the floods last year. Malaysia reported 4.7% yoy growth in Q1, (5.2% in Q4), as exports decelerated due to weaker external demand.
• Japan’s Apr trade deficit surged to JPY 520.3bn (Mar: JPY 84.5bn) as exports rose by a lower-than-expected 7.9% yoy alongside an 8% gain in imports & energy costs. This decline in exports from weaker external demand was evident in other Asian countries including Thailand, Taiwan and Philippines.

Bottom line: While Spain’s troubles rise along with uncertainty in Greece, another inconclusive EU Summit sapped the irrational hopes that the election of Hollande would lead to a miraculous revamp of “growth”. More generally, the EU crisis with a recession which is intensifying is compounded by the slowdown in China and the lacklustre data from the US. June will see political elections in Greece (again), in France and then the referendum in Ireland. A hot summer is in perspective.

Regional Developments

• In the Egyptian Presidential elections two front runners emerged, a former General (who was the last Prime Minister under Mubarak) and the Muslim Brotherhood candidate. Meanwhile, the Saudi Finance Minister mentioned that a USD 2.7bn aid package for Egypt was being finalised.
• Egypt GDP grew an annualised 5.2% in Q1 2012 compared to a contraction by 4.3% the previous quarter.
• The ILO’s Global Employment Trends for Youth report recorded a 27.5% yoy increase in MENA youth unemployment in 2011, while in the Middle East alone unemployment was up 26.5%. This compares to a 12.7% increase in youth unemployment globally, as a result of the crisis.
• Reuters reported that Bahrain plans to issue a USD 1.25bn bond, with 7-10 year maturity in the 2nd or 3rd week of June, citing a Central Bank official.
• Nominal value of Bahraini Government treasury bills in circulation reached BHD 930mn after the last regular issuance of 91-day securities for the amount of BHD 35mn. When compared to the previous issuance a week ago, the weighted average interest rate decreased by 2 basis points to 1.18%; issuance was oversubscribed by 190%.
• The US and five other countries began a round of talks in an attempt to persuade Iran to accept restrictions on its nuclear programme. This comes alongside a report that Iran may have sufficient uranium to build at least 5 nuclear weapons.
• The last issuance of 1-year Kuwaiti treasury bonds for KWD 75mn was 6 times oversubscribed; interest rate, when compared to the previous auction, remained unchanged at 1.25%.
• The Kuwaiti Minister of Finance resigned following hearings in Parliament where he was accused of financial violations by opposition MPs.
• According to the revised draft Lebanese budget for 2012, VAT and tax on deposit interest revenues may be increased by 2%, to 12% and to 7%, respectively. Also, the new 15% tax on profits from real estate transactions was proposed and will be imposed on sales of land and real estate purchased after 2009. These measures are deemed necessary due to the increased public expenditure, mainly salary hikes in the public and quasi-public sectors.
• Oman Telecom is expecting single digit revenue growth, although with a potentially double digit growth in profit in 2012. The balance sheet is likely to become cash rich by year end as amortization gradually decreases. Separately, the Omani regulator has liberalized VOIP, which implies that Skype might be introduced in Q3 in the Sultanate.
• Islamic financing facilities are expanding in Saudi Arabia: Saudi Hollandi Bank extended SAR 480mn to an agricultural sector company as a long-term investment.
• According to Saudi Arabia Monetary Authority, M3 reached SAR 1297.5bn as of May 17, 2012, a 7.2% growth compared to end 2011.
• Tunisia’s sovereign rating was reviewed to speculative level by S&P due to political uncertainty in the medium term, and weaker than anticipated fiscal and external positions.

UAE Focus

• A proposal to reduce gasoline prices by 60% was approved by the UAE Federal National Council, and awaits further approval by the Cabinet, according to local media. This would substantially increase already high subsidies.
• The UAE will settle personal loans of some 400 Emiratis with debts below AED 5mn, amounting to AED 568mn, based on the recommendation of the Supreme Committee of the Debts Settlement Fund for Citizens with limited income.
• In an effort to improve transparency, a new rule issued by the Securities and Commodities Authority now requires disclosure of shareholdings of spouses and children of directors.
• The UAE Central Bank’s deputy governor reiterated that the new regulation setting limit on lending to local governments and government related entities will be applied to all banks without exemptions.
• Dubai Islamic Bank’s 5-year Sukuk for the amount of USD 500mn was 4 times oversubscribed at a profit rate of 4.75%.
• Dubai Investments announced that it may secure a loan of USD 180mn in addition to issuing Sukuks worth AED 1bn. Total bbb’s GREs stood at USD 184.8bn in March 2012 (almost 51.3% of UAE’s GDP), according to IMF estimates while Dubai’s GREs owe USD 84.3bn of debt (60.4% of Dubai’s GDP).
• Dubai Duty Free, which is tapping markets to fund its expansion, has raised the loan amount to USD 1.5bn from USD 1.1bn previously announced, on “strong interest from the banks”.

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Markets

It was a dismal week for equity investors with all regions affected by the ongoing Greek drama and Spain sub-plot as even the Facebook IPO received only a muted response. Regional markets were not spared either, with Tadawul closing near a 3-month low on Saturday. While the euro continued to be battered, the Indian rupee continues to slide to record lows given its burgeoning current account and fiscal deficits alongside withdrawals by foreign funds. Among commodities, gold was one of the gainers, posting its biggest weekly gain in a month, while crude oil prices slipped.

Global Developments

Americas:

• Industrial production in Apr recorded an uptick of 1.1% mom (Mar: -0.6%), above market consensus, with manufacturing rising by 0.6%. Motor vehicle production, at 3.9% (Mar: 1.2%), accounted for much of the rise; factory output excluding this segment recorded only 0.3% hike. Capacity utilisation increased to 79.2% (78.4%) - the highest since Apr ‘08.
• Retail sales grew at the slowest pace this year by 0.1% mom in Apr (Mar: 0.7%), weighed down by building materials (-1.8%) and clothing (-0.7%).
• Housing starts increased 2.6% mom to 717k (sa) in Apr, though building permits fell to 715k (sa) from a 3.5 year high largely owing to a 23% drop in the volatile apartments segment.
• CPI for Apr was 2.3% yoy and remained unchanged mom (Mar: 0.3%) while core CPI, which excludes food and energy costs, picked up 0.2% mom.
• Initial jobless claims remained flat at 370k in the week ended May 12, taking the four-week average to 375k from 379,750 previously.
• US tax rules that require reporting of Americans' overseas bank accounts has resulted in some Asian banks turning away US customers while an official from BlackRock stated that “foreign investors may choose not to invest in funds that include US securities because they could be penalised if they work with a foreign broker who isn't compliant”.

Europe:

• With no coalition government in Greece, the country goes into another election, scheduled for June as the speculation that Greece could leave the euro continues to spook markets. It was also reported that about USD 894mn was withdrawn from Greek banks on Monday alone, leading to a potential bank run.
• The Bank of Spain disclosed that bad bank loans had risen to EUR 148bn at end-Mar, the highest since Aug ‘94, accounting for about 8.4% of the sector’s entire loan portfolio. Moody’s, meanwhile, downgraded 16 Spanish banks, citing “recession, reduced funding access for lenders and deterioration in loan quality.
• Q1 GDP data was released for the Euro area along with a clear divergence pattern emerging in growth numbers of Germany, France, Italy and Spain. Euro area growth was unchanged from the previous quarter (Q4: -0.3%), avoiding a recession headline helped by Germany, which reported a strong 0.5% qoq pick-up helped by exports (Q4: -0.2%). France’s growth dissipated in Q1 (Q4: +0.1%) while growth in Italy was down by 0.8% (Q4: -0.7%).
• EU industrial production fell 0.3% mom and 2.2% yoy in Mar (Feb: +0.8%), as energy production declined by a whopping 8.5% (+8.7%). Production increased in Germany by 1.3% while most other nations reported declines: Netherlands (9%), Spain (1.8%), Greece (1%).
• German ZEW registered a decline by 12.6 points to 10.8 in May: as per the report, "the outcome of the elections in Greece and France has made it more doubtful that European governments will resolutely fight the sovereign debt crisis", resulting in lower investor confidence.
• 26 Italian banks, including UniCredit SpA and Intesa Sanpaolo SpA, were downgraded by Moody’s last week citing “the banks' vulnerability to mounting loan defaults and potential funding problems”.

Asia and Pacific:

• Japan’s machinery orders declined by 2.8% mom in Mar (Feb: +2.8%), largely from the volatile chemical sector which dipped followed a rise the month before. However, inspite of the decrease, orders for Q1 remained positive at 0.9% qoq.
• Domestic demand and exports rebounded in Q1, enabling Japan’s GDP to expand by 1.0% qoq, from Q4’s unchanged reading. In yoy terms, growth was up 2.7%, the first yoy rise in 5 quarters.
• Singapore’s non-oil domestic exports (NODX) rose by 8.3% yoy in Apr (Mar: -4.3%) with strong performance from both electronic (+1.0%, Mar: +2.8%) and non-electronic (12%, -7.8%) segments. While NODX to US and Europe declined, the top three countries expanding were Japan, Hong Kong and South Korea.
• Singapore GDP grew 10% qoq and 1.6% yoy in Q1, a tad higher than initial projections, compared to 2.5% qoq contraction and 3.6% yoy growth recorded in Q4 2011. Growth forecast for this year has been maintained in the range of 1-3%, amidst uncertain global outlook.
• Unemployment rate in Korea held steady at 3.4% in April, while total employment was up 1.9% yoy to 24.76mn. Meanwhile, the UN’s Social and Economic Survey of Asia and the Pacific forecast youth unemployment in the region to remain unchanged at 10.2% this year.

Bottom line: Even as Greece dominates headlines and heads to another round of elections in June, the G8 leaders have sent out a statement that “we reaffirm our interest in Greece remaining in the euro zone while respecting its commitments”. The balance of power between Germany and France is likely to come into the forefront again, if the G8 meeting (where France’s growth-oriented strategy found some acceptance) is anything to go by. Till the question of Greece’s “will it or won’t it” leave the Eurozone is answered, market volatility can be expected, irrespective of data releases.

Regional Developments

• Saudi Arabia’s Arriyadh Development Authority started accepting business proposals for the projects related to the construction of metro in Riyadh, which is expected to be completed in 4 years. Metro construction is one of the infrastructural projects included in SAR 690bn budget for 2012.
• Revenues of Oman LNG, primary liquified natural gas producer in the Sultanate, was 26.5% yoy higher totalling USD 3.96bn in 2011, according to the company’s report cited by Oman Daily Observer.
• According to the Chairman of the Saudi Commission for Tourism and Antiquities, the share of tourism in Saudi Arabia’s 2011 GDP was estimated at 7.2%, while the sector employed around 9% of workforce, of whom more than 26% are locals.
• Jordan’s government discussed measures aimed at fiscal consolidation, that would allow reduce public agencies’ operational expenditure by 15%, and capital expenditure by 10%.
• Revenues from tourism sector in Jordan in Jan-Apr 2012 reached JOD 776.7mn, demonstrating 10.5% growth over the same period of the previous year, according to data released by the Central Bank of Jordan.
• Net foreign assets of the GCC area increased by USD 456bn to reach USD 1,605bn by the end of the last year, and high hydrocarbon prices would allow the region to increase its foreign assets by another USD 300bn in 2012, and USD 234bn in 2013, according to the estimates of the IIF.
• According to the law recently approved by the President of Turkey, the amount of land that can be purchased by foreigners has been increased from 25 to 300 thousand square meters.
• Unemployment rate in Turkey was estimated to decrease from 11.5% in Q1 2011 to 10.4% in Q1 2012, according to the survey conducted by the country’s statistical agency.

UAE Focus

• IMF, in its concluding statement of the Article IV consultation for the UAE, estimated growth at 4.9% in 2011 and a lower 2.9% in 2012. Government related entities are expected to pay close to $30bn this year, with “a significant amount of debt falling due in 2014–15”. (More details in the Addendum)
• The Dubai Economic Council’s Chief Economist has projected Dubai’s real GDP growth in 2012 at the level of 4-5%, higher than last year’s 3%. These estimates, supported by the results of Q1 2012, and revised growth projections for the region by the IMF, are based on the assumption of strong performance of emirate’s key sectors, including trade, tourism, and industry.
• The UAE’s proposed new banking law is expected to establish a new regulator for financial services, giving the country a twin regulator model - “a prudential regulator and a conduct-of-business regulator”. The Central Bank will remain the prudential regulator and the new entity will control consumer protection in addition to its role of managing the day-to-day running of the financial system.
• Total loans increased by 0.2% mom in Mar to AED 1.074 trillion while deposits were up 3.3% to AED 1.146 trillion, taking total growth in loans and deposits to 0.3% and 7.1% respectively in Q1, according to latest data released by the UAE Central Bank. Broad money grew 2.8% mom to AED 880.4bn in Mar.
• UAE inflation touched a nine-month high of 0.9% yoy in Apr, while rising by 0.1% from March. Prices in Dubai were up 1.5% yoy and 0.2% mom while in Abu Dhabi the increase was a tad higher in comparison - at 1.8% yoy and 0.2% mom.
• UAE unemployment among the local population was reported to be 14.4% by Alrroya newspaper, citing a committee at the Federal National Council.
• Dubai Summer Surprises 2011 recorded total spending of about AED 8.8mn (AED 5.9mn by regional and international visitors, AED 2.9mn by residents) from the close to 1 million visitors in addition to the 3mn residents, as per data released by Dubai Events and Promotions Establishment.
• The UAE Insolvency Law is expected to be issued by end of this year, as per the UAE Minister of Justice on the sidelines of a conference on the issue of bankruptcy and insolvency.
• UAE and South Korea signed a customs cooperation agreement, with an aim to “facilitate the movement of trade and enhancing cooperation” between the two countries.
• Bilateral trade between UAE and Italy trade was close to USD 5.0bn in 2011, further increasing by 20% in Q1 2012. An official at Italy's Embassy in Abu Dhabi also announced that there were about 50,000 Italian professionals in UAE and close to 170 Italian companies operating out of free zones.
• Dubai Investments net profit increased 6% yoy to AED 107mn in Q1 2012, while total assets reached AED 13.5bn, according to its financial statements.

Addendum: IMF released UAE’s Article IV report for 2012 on May 18, 2012

The IMF estimates that the UAE grew a healthy 4.9% in 2011, owing to its perception as a “safe haven” in the region amidst regional turmoil. Growth in hydrocarbon sector was high at 9.2% in 2011, largely supported by higher oil prices and increased production in response to disruptions in Libya. But as economic diversification increased, non-hydrocarbon sector grew at 2.7%, supported by trade, logistics, and tourism sectors while the real estate sector continued to be a drag. In 2012, the IMF forecasts real GDP growth slightly lower at 2.3%, with no real growth in the hydrocarbon sector (given limited potential for further increases in oil production) alongside a recovery in non-oil sector growth to 3.5% (thanks to stronger trade, tourism, logistics, and manufacturing). Inflation remained subdued at 0.9% in 2011, largely as a result of declining housing rents and is estimated at a tad higher 1.5% in 2012.

Fiscal policy remained expansionary and thanks to higher oil prices the consolidated overall balance improved from a deficit of 2.1% of GDP in 2010 to an estimated surplus of 2.9% of GDP in 2011. Fiscal consolidation is on the books in 2012, with the IMF revealing that “the federal and emirate budgets imply a modest consolidation of the fiscal stance by 0.5% of non-hydrocarbon GDP”. According to the IMF, estimated total GRE debt had declined to 51% of 2011 GDP as of March 2012, from 61% of 2010 GDP. While the IMF lauded better availability of information on GRE debt (especially with Abu Dhabi’s debt management office), it underscored the fact that the “passage of the draft Public Debt Law would help to further strengthen the monitoring of GRE debt”. While Dubai’s debt-to-GDP is on a declining path (baseline scenario), a simulation showed that GREs could pose fiscal risk: assuming a constant primary balance at 2011 levels (1.6% of GDP) and augmenting government debt by 20% of GRE debt would raise the debt-to-GDP ratio by about 26 percentage points by 2017 compared to the baseline.

The banking sector remained well-capitalised and profitable, in spite of a rise in NPLs and higher provisioning, and lending to the private sector has been sluggish. Meanwhile, stress tests undertaken by the IMF showed that the domestic banking system could absorb a significant increase in nonperforming loans. Given the rise in exposure of the banking system to government and public institutions by 3.5% of GDP (roughly 2.6% of banking system assets), the IMF warned that it would be “important to avoid channeling bank funding to non-viable GREs” given strains in external financing. The IMF, in its Staff Appraisal, stated that developing the domestic fixed income market would support banks’ liquidity management, an argument that has long been proposed by the DIFC.

The full report can be accessed here.

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Markets

Election week created generalised turbulence in equity markets, with news on JP Morgan’s loss adding fuel to fire. Asian markets had their worst ever week since Nov last year. Regional markets mirrored activity in world markets, with all markets closing lower compared to the previous week, except for Egypt where Presidential elections are ongoing. The Greek uncertainty led to a three and a half month low in the euro alongside a rise in the pound as BoE decided to put QE on hold. Gold prices recorded the biggest weekly drop this year, losing its safe haven status while oil prices were down on slowing Chinese demand concerns.

Global Developments

Americas:

• A rise in imports by 5.2% led to widening of the US trade deficit to USD 51.8bn in Mar (Feb: USD 45.42). The pickup in imports, the largest in almost a year, overshadowed the 2.9% gain in exports. Imports from China rose by 12%, widening the US-China trade gap to USD 31.5bn (USD 28.1bn).
• US posted a budget surplus of USD 59.1bn in Apr, the first since Sep 2008, as tax revenues increased alongside a drop in expenditure. Compared to a year ago, receipts rose 10% to USD 318.8bn and spending was lower by 21%.
• Initial jobless claims dropped by 1k to 367k in the week ended May 5, recording the lowest since end-March and the 4-week average touched 384k. Continuing claims, meanwhile, fell 61k to 3.2mn.
• The Producers Price Index fell slightly by 0.2% mom in Apr (Mar: unchg) as energy prices dropped by 1.4% while the core PPI was up 0.2%.
• U. of Michigan consumer sentiment picked up for the ninth straight month, rising to 77.8 in May (Apr: 76.4) - also the highest level since Jan 08.

Europe:

• German factory orders grew by 2.2% mom in Mar (Feb: 0.6%), driven by overseas demand - domestic factory orders increased 1.3% while export orders climbed 3%, the latter driven by a 4.8% increase in sales outside the Eurozone.
• Trade balance in Germany recorded a surplus of EUR 13.7bn (sa) in Mar, unchanged from Feb, after exports grew 0.9% mom (sa) alongside a 1.2% rise in imports.
• Industrial production data for March was released in Germany, Italy, France and UK - with the first two recording unexpected rebounds of 2.8% mom (Feb: -0.3%) and 0.5% (-0.7%) respectively. In France, output slid by 0.9% mom (+0.3%) though manufacturing production climbed for the first time this year by 1.4%. In the UK, IP fell 0.3% largely due to a decline in oil and gas production while manufacturing output grew a higher-than-expected 0.9% (-1.1%).
• April harmonised CPI was released in both Germany and Spain - at 2.1% and 2% respectively, both were higher than the ECB’s comfort zone of "close to but below two percent" level.

Asia and Pacific:

• The PBoC on Saturday announced a cut in the reserve requirement for commercial lenders again by 50bps, effective May 18. This follows Apr data on new Yuan loans, which dipped to CNY 681.8bn - a drop of CNY 61.2bn and CNY 328.2bn compared to a year ago and a month ago respectively.
• A host of Apr data was released in China last week: trade surplus widened to USD 18.4bn in Apr as exports increased by 4.9% to USD 163.3bn and imports rose 0.3% to USD 144.8bn; retail sales increased at a slower pace of 14.1% yoy (Mar: 15.2%), the lowest in almost 14 months, to CNY 1.56trillion; fixed asset investment grew 20.2% in Jan-Apr - this was the slowest since Dec 02; inflation moderated to 3.4% (Mar: 3.6%) as food prices rose by 7% compared to 7.5% in Mar.
• Latest industrial production data released in both China and India recorded a decline. Chinese IP, at 9.3% yoy in Apr (Mar: 11.9%), was the lowest in three years while India’s IP fell by 3.5% in Mar (Feb: +4.1%), contracting for the first time since Oct last year.
• Sluggish export growth dragged down Hong Kong’s Q1 GDP, which eased to 0.4% yoy compared to 3% in Q4. Indonesia, which also released Q1 GDP data, recorded a growth of 1.4% qoq and 6.3% yoy (Q4: -1.3% qoq, 6.5% yoy) on resilient private consumption as exports and total investments declined yoy.
• Japan’s coincident index, an indicator of current economic activity, rose for the third consecutive month to 96.5 in Mar (Feb: 95.2). Mar current account surplus, at JPY 1.589 trillion, fell 8.6% yoy though exports gained by 7.3% - the first rise in six months.
• Central banks of Malaysia, Indonesia and South Korea met last week and as expected, kept policy rates unchanged.
• China, Japan and Korea have agreed to hold talks to create a Free Trade Area. They account for about 20% of global GDP and 19% of exports.

Bottom line: Sentiment has been largely overshadowed by elections and their outcomes: Sarkozy losing to Hollande in France and Greece failing to form a coalition government put a big question mark as to the fate of the Eurozone and the euro. China’s latest data has only added to the worries about a global slowdown.

Regional Developments

• Foreign exchange regimes with local currencies pegged to reserve currencies, mostly USD, set limits on the MENA region central banks, preventing them from running independent monetary policies. Such limited monetary policy flexibility, along with high political risks, and underdeveloped capital markets, limits some MENA countries’ sovereign ratings, according to S&P. The agency defined Morocco as the country with the highest degree of monetary flexibility in the region.
• Kuwait authorities mull 160 km metropolitan road project worth USD 7bn to be implemented within a PPP framework in five stages from 2013 through 2020.
• High oil prices led to Omani banks’ balance sheet expansion through extensive credit provision to public sector companies: while total assets of commercial banks increased 22.2% yoy as of end of Mar 2012, credit to public enterprises grew 53.8% yoy. This compares with much lower credit growth to private sector – 16.3% yoy. Such pattern of credit allocation may indicate relatively high risks associated with private sector companies, as investment in Oman central bank’s CDs increased 57.8% yoy, and stock of foreign securities in the portfolio of commercial banks surged by 139% yoy.
• With the release of the Qatari budget for 2012-2013 fiscal year postponed to June, the Ministry of Finance revealed that the new budget may be compiled on an oil price of USD 65 per barrel. The current 2011-2012 budget was based on oil price at USD 55, while the actual price remained above USD 100.
• Saudi Arabia deposited USD 1bn with the Central Bank of Egypt, according to the agreement recently signed between the countries’ authorities. Another USD 500mn for development projects, and USD 250mn for petroleum products purchase, may be provided by Saudi Arabia, according to the Egyptian government.
• Saudi Arabia has spare capacity of 2.5mn barrels of oil per day above its current production of around 10mn barrels per day, according to the statement made by the country’s oil minister.
• According to the press-release issued by the Central Bank of Egypt, headline inflation slightly reduced to 8.78% yoy in Apr (Mar: 9.03%); core inflation also decreased to 8.36% in Apr (8.68%).
• Economic growth forecast for Turkey was reviewed by the European Commission to increase from 3% to 3.3% for 2012, and from 4.1% to 4.6% in the next year.
• According to the data released by the Turkish statistical agency, country’s industrial production index decreased to 2.4% yoy in Mar (Feb: 4.4%).

UAE Focus

• Inflation in Abu Dhabi increased by 0.2% mom and 1.8% yoy in Apr with the major contributor being the restaurants and hotels group where the prices were up a high 18.9% yoy, followed by alcoholic beverages and tobacco at 9.8% and food and beverages at 6.2%.
• The Dubai Economic Council has forecast 2012 growth at 4-5% in Dubai compared to 3% growth last year on strong trade performance and pick-up in non-hydrocarbon sector, including tourism and industry.
• Mubadala’s committed capital spending at end-2011 was AED 29.62bn, with majority of the spending expected this year; this compares to AED 32.73bn the year before, as per an updated bond prospectus.
• Dubai’s business optimism for Q2 was upbeat at 120.5 points, as compiled by DED’s Business Confidence Index. Manufacturing was the most optimistic sector, with positive outlook for all key parameters - sales volume, selling prices, profits and employees.
• FT reported that Istithmar World has given up its control in Barneys, which it acquired in 2007 for USD 942mn.
• Drydocks World has asked for a delay in its Monday hearing at the Dubai World Tribunal, in order to give sufficient notice to three creditor banks in Singapore about the proceedings.
• Trade licenses issued by the DED in Dubai increased by 27% yoy to 4343 in Q1, with tourism sector accounting for the highest increase of around 213%.
  
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Markets

Holidays in Japan and Labour Day around the world resulted in low liquidity amidst choppy trade in most markets, then at the end of the week data on the weakness of US and European labour markets hit stocks, sending the S&P 500 to its biggest weekly retreat this year after two weeks of gains. Electoral results in France and Greece will be affecting Eurozone markets by tomorrow, likely leading to greater economic policy uncertainty if Socialists regain power in France. Since the bad news came on Friday, regional markets were less affected. Gold benefited from the uncertainty, while oil retreated on renewed concerns for the global economy. The yen gained as a result of the weak data, but other main exchange rates remained broadly stable.

Global Developments

Americas:

• US consumer spending rose 0.3% mom in Mar after a revised 0.9% in Feb, the biggest gain since August 2009.
• Beating expectations, the ISM index on US manufacturing increased from 53.4 in Mar to 54.8 in Apr, providing a forward looking sign that the US recovery is on track. The breakdown adds to the positive side, as new orders and production rose mom 58.2 vs. 54.5, and 61.0 vs. 58.3, respectively.
• US construction spending in Mar remains anaemic (up 0.1% mom, versus +0.5% expected) pushed down by public spending (-1.1% mom)
• US PCE Core Price inflation in Mar was 0.16% mom, a number that will not cause anxiety for Fed governors.
• US Initial jobless claims declined to 365k, more than expected, but probably due to seasonal quirks caused by school spring breaks.
• Factory orders in the US dropped 1.5% mom in Mar (Feb: +1.1%) on the back of reduced demand for aircraft that offset gains in turbines and household appliances.
• Job creation slowed for the second consecutive month as non-farm payroll increased by only 115k in Apr (vs. 154k in Mar). US unemployment dropped to 8.1% (Mar: 8.2%), primarily on account of workers dropping out of the labour force.

Europe:

• EU inflation remained at 2.6%yoy in Apr a tad below the 2.7% registered in Mar.
• The UK manufacturing PMI fell in Apr to 50.5 from 51.9 in Mar, hit by a sharp drop in reported export orders.
• A drop of -0.3% qoq in Spain’s GDP, the same drop as in Q4, confirms a bleak situation poised to worsen and deepen unemployment. Annual growth fell from 0.3% to -0.4%.
• EU manufacturing PMI in Apr fell again to 45.9, in line with expectations, down from 47.7 in Mar underscoring a deepening recession.
• Euro area unemployment hit record highs of 10.9%, sa, in Mar (Feb: 10.8%), led by Spain at 24.1%. The French rate was close to the Euro Area average at 10.0%, while German unemployment came in at 5.6%.

Asia and Pacific:

• China’s manufacturing PMI rose to 53.3 in Apr, a yearly top, from 53.1 in Mar. It was the fifth straight month above the 50 level, which signals the threshold between expansion and contraction. This figure lends support to the expectations that Chinese soft patch bottomed out in Q1.
• Taiwan’s Q1 GDP rose 0.4% yoy compared to 1.9% in Q4, below expectations of about 1%. On a seasonally-adjusted qoq annualized basis growth was 1.1%, after 1.0% drop in Q4. The drag was investment with an estimated drop of -10.6% qoq ann. (-14.5% in Q4). Exports fell 4.3% qoq, ann.
• Korea’s Apr CPI inflation was 2.5% yoy, on the lower side of the 2%-4% target range and below expectations of 2.8%. Sequentially, inflation was flat mom after a -0.1% decline in Mar. Core inflation was 1.8% yoy, down a decimal from Mar, and 0.1% mom in Apr compared with -0.4% in Mar.
• The Reserve Bank of Australia stunned markets with a 50 bps rate cut, another symptom of nervousness in policy circles over the prospects of the economy given slower Asian growth affecting exports.
• South Korea posted a trade surplus of USD 2.2bn in Apr (Mar: USD 2.5bn), recording a contraction in both exports (4.7% yoy) and imports (0.2%). Industrial Production dropped 3.1% mom, sa (Feb: +0.6%), expanding 0.3% on year.
• Indonesian inflation accelerated 4.5% yoy in Apr (Mar: 3.97%), a seven month high, while Thai inflation eased for the month to 2.47% (3.4%). The Bank of Thailand left its key interest rate unchanged.

Bottom line: After the gloomy figure on US GDP last week, more cheerful data from the US and China manufacturing seemed to improve the outlook. But the weak US payroll data, probably the most important indicator of economic conditions, reminded that the recovery remains a chimerical wish for the time being. The only uplifting data came from the inflation front, both in Asia and in the US. In Europe (including the UK) on the contrary despite the double dip recession, inflation continues to be stubbornly high. Starting from next week markets will be reacting to the electoral results in France and Greece. A victory by Hollande will open a Pandora box in Euroland reopening the discussion on the fiscal compact and the ESM with unpredictable outcomes on the stability of the euro.

Regional Developments

• An S&P report stated that the GCC economies are pulling ahead on account of high oil prices, supporting ratings across the corporate and infrastructure sectors. The ratings agency, in addition, sees rising confidence in the Dubai government’s ability to support government related entities in need.
• Royal Bank of Scotland has assessed that debt requiring refinancing in the GCC states amounts to USD 60bn for the remainder of 2012, although no issues in refinancing are foreseen.
• New railways air and see ports are some of the largest infrastructure projects in Oman’s new five-year development plan for 2011-2015, with a total construction cost of USD 78 bn. Total infrastructure expenditure is expected to increase by 113% over five years.
• According to the Central Bank of Bahrain, in Mar 2012 deposits with the local retail banks grew at a slower pace +7.7% yoy than the credits provided to corporates and individuals (+15.9%), however the total volume of deposits (BD 9719.8 mn) exceeded credit portfolio (BD 6585.9 mn) by 47.6%.
• According to SAMA M3 growth was 10.5% yoy in Mar 2012, vs 13.8% in the previous month; central bank’s net foreign assets increased by 21.6% yoy to reach USD 561 bn at the end of Mar.
• While public expenditure on education in Saudi Arabia increased from SAR 13.4 bn in 2004 to SAR 46.9 bn nowadays, the country’s authorities plan to spend another SAR 81.5 bn on university projects in the coming years to develop campuses in the different regions of the country, according to the Saudi Minister of Higher Education.
• According to the IMF’s FSAP report on Saudi Arabia, authorities managed to cushion the impact of the financial crisis. However, the legal framework needs to be strengthened to provide SAMA with greater operational independence, in compliance with recognized international standards.
• The number of tourists visiting Egypt reached 2.5 mn in Q1 2012, rising by 32% when compared to the same period of the last year. Country’s Minister of Tourism expects tourist inflows for the whole 2012 to exceed the level of pre-revolutionary levels of 2010.
• According to the Minister of Finance of Lebanon, the country’s gross public debt is expected to increase to USD 60 bn by the end of 2012 from USD 53.9 bn in Feb 2012 (138% of GDP). The country’s foreign currency reserves amounted USD 30.7 bn in Feb 2012.
• Turkey saw a surge in tourists originating from the GCC in 2011, led by Qatar (102.3%), UAE (86.8%) and Bahrain (54.4%), as reported by the Turkish Tourism and Culture Office.
• Turkey officials criticized S&P for its decision to revise country’s foreign and local currency sovereign credit ratings from positive to stable, arguing that this decision was biased, despite the outstanding economic performance of Turkey in the last years. The agency backed its decision by referring to the concerns over the risks for Turkey’s external sustainability arising from dependence on short-term financing from foreign sources.
• FDI inflows in Turkey for the first two months of 2012 increased by 25%, when compared to the same period of the previous year, and reached USD 1.7 bn, according to the Ministry of Economy.
• Due to electricity and natural gas prices hikes, inflation in Turkey jumped to 11.1% yoy in Apr, after remaining stable at 10.4% during the previous two months. Inflation in Turkey remained below 11% yoy during the last 42 months.

UAE Focus

• HSBC UAE Purchasing Managers Index (PMI) recorded a 10-month high in Apr at 53.5 (Mar: 52.3) as new business orders and hiring rose during the month.
• The Minister of Foreign Trade Sheikha Lubna Al Qassimi expressed plans to increase Emirati export penetration into Arab markets, increasing intra-Arab trade.
• FDI in the UAE reached USD 60 bn over the past five years, while UAE investments abroad amounted to USD 327 bn.
• The UAE Energy Minister has announced the completion of the Fujairah oil pipeline, built to bypass the Strait of Hormuz through which one-fifth of the world’s oil is shipped.
• Dubai World subsidiary, Istithmar World confirmed the purchase of Kerzner International Holdings Limited's 50% interest in The Atlantis for USD 250mn, thus becoming the sole owner.
• Cargo volumes at Dubai World Central surged 382% yoy in Q1 2012, according to the Dubai Airports quarterly traffic report. The airport is in its second year of operations. DP World’s flagship Jebel Ali Port was awarded Shipping Port of the Year at the annual Supply Chain and Transport Awards 2012.
• A seven-member European Union delegation visited the UAE to bridge religious and cultural differences, and strengthen EU-UAE ties.
• Arrangements for a free trade agreement between Pakistan and the GCC states are also in the pipeline, with UAE being the single largest investor in the country.
• The National Council for Tourism and Antiquities has reported that tourism in the UAE generated AED 22 bn in 2011, with hotel and hotel apartments receiving 14.5 mn guests.
• Actions to speed up the transit of goods through Dubai ports reduced the number of days required to process imported and exported goods from 12 to 7, with an estimated total savings equivalent to AED 148 bn for the period 2007-2011, according to a study by the Emirates Competitiveness Council.
  
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Markets

Markets were volatile, though strong corporate earnings results overshadowed the soft data releases, especially the muted GDP growth in US, and the S&P downgrade of Spain’s sovereign debt last Thursday. Regional markets were mixed, with Q1 profits announcements key; many UAE listed companies, including real-estate firms, announced better-than-expected earnings. The US$ weakened on soft US data though the euro held surprisingly strong in spite of the downgrade; the pound, meanwhile, hit a 22-month high against the euro. Gold prices were up and EIA’s announcement that increased Saudi output helped global oil supply exceed demand by 500k bpd in Feb-Mar also led to some minor fluctuation in oil prices.

Global Developments

Americas:

• The US posted lacklustre GDP growth for Q1 at 2.2% yoy (Q4: 3.0%) on the back of a slowdown in inventory investment. Real personal consumption expenditure rising 2.1% qoq in the same period (1.3%).
• Bernanke said US monetary policy was "more or less in the right place" but the Fed is ready to launch another QE round if the economy falters.
• The S&P/Case-Shiller 10-City Composite Home Price Index slid for the sixth consecutive month, dropping 3.6% yoy in Feb 2012 (Jan: -4.1%). New home sales experienced a sharp decline of 7.1% mom (Feb: +7.3%), amounting to 328k units, saar, in March.
• Durable goods orders slumped in March 4.2% mom (Feb: +1.9%), a record since Jan 2009, due to a drop in demand for civilian aircrafts and parts.
• Initial jobless claims dropped by 1k to a seasonally adjusted 388k. The 4-week moving average rose 6,250 to 381,750, the highest since Jan 7.

Europe:

• UK GDP in Q1 contracted 0.2% qoq after a 0.3% drop in Q4 2011, implying recession. Construction was the biggest drag with a 3% qoq drop.
• Flash Composite PMI for Euroland in Apr was 47.4 versus 49.1 in Mar, signalling that the recession in Europe is worsening. Flash German Manufacturing PMI came in at 46.3 in Apr (Mar: 48.4), contracting at the fastest pace since July 2009. The French index rose to 47.3 (46.7).
• German inflation eased mildly to 2.0% yoy in April (Mar: 2.1%) as energy prices rose at a slower pace.
• According to the ECB’s Ewald Nowotny, the EU will never issue general obligation euro-zone bonds because Germany is opposed to this.
• BIS reported that in Q4 2011 banks cut lending to Italy by USD 68.5bn, to Spain by USD 54bn, to Portugal by USD 12bn and to Greece by USD 18.6bn.
• S&P cut Spain’s credit rating to BBB+ on account of a dismal economic outlook and the current state of its budget deficit, down two notches from A. Spanish unemployment hit 24.4% in Q1 2012 (Q4: 22.9%), reinforcing the S&P downgrade. Inflation accelerated to 2% in Apr (Mar: 1.8%).

Asia and Pacific:

• S&P changed the outlook for India to negative and threatened to downgrade its sovereign debt unless the widening fiscal deficit, currently at 6% of GDP, is brought under control. Fiscal discipline however is sapped by a political gridlock which makes it impossible to reduce subsidies and modernize tax collection.
• China’s Flash HSBC Manufacturing PMI rose to 49.1 in Apr (Mar: 48.3), indicating a contraction in the sector, but at a slower rate.
• The National Consumer Price Index in Japan saw a mild 0.5% yoy increase in March (Feb: 0.3%), while its unemployment rate came in flat at 4.5%. Japanese construction orders were down 0.3% yoy in March (-1.8%), rising 7.1% for the whole of FY2011. Housing starts were up 5% yoy for the month (7.5%). Bank of Japan left interest rates unchanged at 0.1%.
• Japanese IP rose 1% mom (Feb: -1.6%), surging 13.9% on a yoy basis, while Thai IP fell 3.2% yoy and Singapore’s dropped 3.4% yoy (Feb: +11.8%), but rose 2.7% mom.
• South Korean GDP rose 0.9% qoq and 2.8% yoy during Q1 2012 (Q4: 0.3% qoq & 3.3% yoy) as manufacturing and exports (+3.4% qoq) expanded, but was weighed down by the 0.7% qoq drop in construction investment.
• Taiwanese Industrial Production (IP) fell 3.42% yoy in Mar led by a 3.77% drop in manufacturing.
• Singapore’s March CPI inflation accelerated to 5.2% yoy from 4.6% year in Feb, led by higher costs of housing (+9.1%) and transport (+8.6%).
• Thailand’s trade deficit in Mar ballooned to USD 4.6bn as imports surged 25.6% yoy and exports decreased by 6.5% yoy. Thai Capacity Utilization for the month increased to 68.1, from Feb’s 62.5.

Bottom line: The week was a mildly worrisome on the macro front: soft GDP data from US and UK in recession, S&P action on Spain and India, but equities held strong on company profit announcements. Politics could play havoc as Greece and France prepare to go to polls next week; meanwhile, Romney is de facto anointed as the Republican nominee; Sarkozy is trailing the Socialist challenger Francois Hollande; in Egypt, the Presidential candidates have been announced, with 13 names including that of former Prime Minister Ahmed Shafiq.

Regional Developments

• The IMF Regional Economic Outlook forecasts growth at 4.2% for MENA, higher than previously expected (see addendum below) but with divergent trends between oil exporters and oil importers.
• Funds managed by the Gulf's roughly 100 asset management companies totalled USD 26.5bn, in about 328 funds at end 2011, according to a report by Markaz.
• Ernst and Young reported a 40% yoy decline in value of mergers and acquisitions to USD 8.5bn in the MENA region in Q1 2012 while the number of transactions was up 7% to 105. Top 10 deals accounted for 85.5% of the regional total while UAE, Qatar and Saudi Arabia accounted for 78% of total announced domestic deals in the region.
• Citigroup reports that Saudi Arabia tops the market for construction in MENA with USD 750bn of new projects in the pipeline, making up 31% of the regional market.
• UNCTAD reported that of the total USD 284bn in FDI received by the Arab nations between 2001 and 2010, close to 60% was received by the GCC nations. Of these Saudi Arabia topped the list with USD 154bn, followed by UAE and Egypt at USD 75bn and USD 53bn respectively. The bulk of FDI went to energy and telecommunications.
• An agreement in principle to increase of customs tariffs on cigarettes and tobacco imported by the GCC states from 100% to 200% may be approved during the meeting of finance and health ministers of the Council, scheduled for May 2012, according to a senior Saudi official.
• At the monthly auction of Bahraini Government’s 91-day Sukuk Al Salam Islamic Securities, held by the Central Bank of Bahrain, the total issuance of BHD 18mn was oversubscribed by 232%; expected return amounted to 1.18%.
• Kuwait’s Central Bank released its monthly bulletin for March: monetary aggregate M3 increased 7.8% yoy to reach KWD 29.0bn; growth rate of private sector deposits at the local banks, which amounted KWD 27.97bn, was 7.4% yoy; local banks’ claims on private sector grew at a slower pace of 3.5% yoy; average interest rate on 12-month customer time deposits at the local banks was 1.63% for KWD, and 0.77% for USD.
• Growth of food prices was the main driver of inflation in Kuwait, where CPI increased to 4.1% yoy in March from 3.8% yoy in February.
• Oman is in the process of setting up a new Small and Medium Enterprises (SMEs) Development Fund with an initial capital of OMR 100mn provided by private sector pension funds, financial institutions and a few large business groups.
• The Omani Ministry of Transport signed 11 agreements worth OMR 158.4mn for road construction projects.
• According to a senior official of the Qatari SWF, its assets under management exceed USD 100bn, and it may invest around USD 30bn in 2012.
• Turkey’s economy minister said his country could achieve 5% real GDP growth in 2012, while the IMF projections imply 2.3% growth for the current year. As for data releases, Capacity Utilization in Turkey increased in April to 74.7 from 73.1 in March.
• Confidence indices recently released by the statistics authority of Turkey improved markedly and demonstrate moderate optimism in Services, Retail trade, and Construction sectors: the indices for these sectors increased in April 2012 by 7.0%, 4.7%, and 3.7% to reach 110.1, 111.5, and 99.5 respectively (index value between 100 and 200 indicates optimistic outlook).

UAE Focus

• Dubai’s USD 1.25bn Sukuk, to be issued in two tranches was oversubscribed by 3.5 times, with as many as 260 investors showing interest. The issue, expected “to manage budget deficits and refinancing plans proactively”, is the first one after the previous successful tap into the market in June 2011.
• The prospectus issued alongside the Sukuk highlighted that Dubai government’s budget deficit fell sharply in 2011 to AED 3.7bn (2010: deficit of AED 6.0bn), in spite of an increase in actual government spending to AED 35.98bn as opposed to AED 33.68bn planned.
• Arab Monetary Fund estimates that oil prices boosted the UAE's trade surplus to a record level, USD 86.2bn in 2011, while the current account surplus surged above 10% of GDP.
• The UAE Central Bank announced an increase in banks’ assets by AED 38bn in Jan-Feb 2012 to touch AED 1.7 trillion as of end-Feb. Loan to deposit ratio fell to 96.6 in Feb, from just above 100 in Dec 2011.
• Abu Dhabi’s real estate transactions totalled AED 43bn in 2011, up 5% yoy, according to Abu Dhabi Municipality. Meanwhile, CB Richard Ellis reported that rents were down 3.5% qoq and 18% yoy.
• The IMF stated that there were several loans in the pipeline to the Arab countries, without specifying the nations. In UAE, National Bank of Abu Dhabi announced a AED 1.0bn fund to revitalise the property market, with the plan to go public within two years.
• UAE air traffic in Q1 reaffirmed the role of transportation in contributing to the economy. In Abu Dhabi, passenger traffic increased by 21.2% yoy to 3.4mn passengers in Q1 and was up 22% yoy to 1.2mn in March alone. At Dubai’s airports, March witnessed a 15.4% growth in passengers to 4.85mn.
  
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Markets

Markets were volatile and choppy. US Shares rallied for most of the week, buoyed by corporate earnings, while Eurozone worries persist in the background, somewhat alleviated by increased IMF funding of $430 bn. Regional markets were mixed, with Saudi’s Tadawul rising the most from a week ago on strong Q1 profits. Euro had a good week, helped by German IFO & ZEW numbers, while the yen fell on speculation of additional stimulus from the BoJ. Oil price was gliding down while gold posted a weekly drop.

Global Developments

Americas:

• Industrial Production (IP) for March was unchanged mom for the second consecutive month, rising 3.8% on a yoy basis (Feb: 4.0%). Manufacturing, which constitutes 75% of IP, saw an increase of 4.8% yoy. Capacity utilization dipped marginally to 78.6%.
• US housing starts dropped unexpectedly by 5.8% mom to 654k, saar in March (Feb: 694k), a five month low; housing starts were up 10.3% yoy. Building permits surged to their highest level since Sep 2008, rising 4.5% mom to 747k (715k). Existing home sales decreased 2.6% mom to 4.48mn, saar.
• Retail sales rose 0.8% in March, lower than the previous month’s 1% increase.
• Initial jobless claims for the week ended Apr 14 stood at 386k, a 2k drop from last week’s revised 388k. Continuing claims rose 26k to 3.3mn, sa, in the week ended Apr 7.
• Argentina’s government expropriated the energy giant YPF from Repsol, a desperate move in a country headed towards a hard landing, with no international capital market access.

Europe:

• German producer prices accelerated in March to 3.3% yoy (Feb: 3.2%), owing to higher energy prices.
• ZEW indicator for Germany rose to 23.4 in Apr (Mar: 22.3), signalling that market analysts are positive on the prospects for German firms. The IFO German Business Confidence Index rose for the sixth consecutive month to 109.9 in April (Mar: 109.8), the highest reading since July last year.
• Euro area seasonally adjusted trade surplus contracted in Feb to EUR 3.7bn (Jan: EUR 5.3bn) as month-on-month import growth outpaced exports at 3.5% vs. 2.4%.
• Eurozone inflation stood at 2.7% yoy in March, unchanged from Feb, led by energy inflation of 8.5%. Greece recorded one of the lowest rates at 1.4%, while German and French inflation came in at moderate levels of 2.3% and 2.6%, respectively.
• UK posted a small uptick in March inflation to 3.5% yoy (Feb: 3.4%), the first rise after a steady five-month drop. The Retail Price Index slipped slightly to 3.6% yoy for the month (Feb: 3.7%). ILO-measured unemployment fell to 8.3% in the three months to Feb, compared to 8.4% in the three months to Jan, the first drop in nine months. Jobless claims in the UK rose 3.6k to 1.61mn in March.
• UK retail sales were up 1.8% mom in March (Feb: -0.8%) as demand surged for clothing, footwear and gardening supplies on account of warm weather.
• The Italian government reneged the promise of balancing the budget by 2013 and revised its GDP growth forecast downwards to -1.3% (versus -1.9% by IMF)

Asia and Pacific:

• Home prices in China slid in 37 of the 70 cities surveyed declining on average by 1.5% yoy in March, potentially straining credit conditions. An IMF-led stress test of Chinese banks suggested that a mild slowdown would result in non-performing bank loans in excess of 5%, while a more dire scenario had the estimate at 8%.
• The Hong Kong Exchange has announced plans to offer renminbi futures, widening its role as an offshore centre for the Yuan and a step further for the internationalisation of the currency.
• Japanese Industrial Output dropped a revised 1.6% mom in Feb on account of a slowdown in machinery and auto output, compared to an earlier estimate of 1.2%. Capacity utilization slipped 1.7% mom in Feb, revised down from a 3.4% rise.
• Japanese Exports rose 5.9% yoy in March due to a 33.6% hike in car exports, while imports rose 10.5% yoy led by higher oil and gas purchases.
• The Reserve Bank of India surprised markets by an aggressive 50bps cut in the repo rate to 8.0%, reversing 3 year hiking cycle in the hope of countering a slowing economy.
• India’s inflation, measured by the Wholesale Price Index, came in at 6.89% yoy in March (Feb: 6.95%). Core inflation dipped below the 5% mark for the first time since March 2010. Consumer prices rose 9.47% yoy for the month (Feb: 8.33%) on the back of rising food prices.
• India recorded its highest ever trade deficit for Apr 2011-Mar 2012 of USD 185bn. The 21% on-year expansion in exports was dwarfed by the 32.1% surge in imports, driven by imports of crude oil and precious metals.
• Malaysia’s March inflation saw a 2.1% yoy increase (unchanged from Feb) due to higher food and non-alcoholic beverage prices.

Bottom line: Very little of substance came from the few economic news and data releases. Attention was all on the IMF-WB Annual Meetings. The G20 financial leaders have committed USD 430bn in new funding to the IMF. In its Global Financial Stability Report, IMF warned that European banks looked set to shrink their balance sheets by USD 2.6trn (€2tn), i.e. could offload almost 7% of their assets by end 2013. This deeper-than-anticipated balance sheet clean up would exacerbate the contraction in the Eurozone. The World Bank appointed Jim Yong Kim as its next president, ending a controversial selection process harshly criticized by the US nominee’s main rival and emerging economies.

Regional Developments

• Real GDP growth in the MENA region is projected to accelerate to 4.2% in 2012 from 3.5% in 2011, according to IMF’s World Economic Outlook. This is 0.6 p.p. higher than the projection outlined in the January 2012 edition. Output growth in the MENA countries is expected to decrease to 3.7% (-0.2 p.p., when compared to the previous WEO edition) in 2013.
• GGC’s real GDP is projected to grow 5.3% in 2012 by the IMF, mostly driven by Saudi Arabia, where output is expected to increase by 6%. Relatively high levels of real GDP growth are also projected for Qatar (6.0%) and Kuwait (6.6%) in 2012. The mentioned countries, except for Kuwait, are expected to have inflation at levels higher than the average for the whole GCC area, which is projected at 3.8% for 2012.
• Projects in Middle East and Africa increased by 16% yoy to 1530 in 2011, while capital investments were slightly down by 1%, according to fDi Intelligence. South Africa was ranked highest, while the negative impact of the Arab Spring was quite evident: projects in Libya, Yemen, Egypt, Syria and Tunisia were down by 80%, 80%, 29%, 26% and 14% respectively.
• Middle East debt issuance totalled USD 11.0bn in Q1 2012, compared to USD 5.7bn in Q1 2011, as per Reuters data. M&A recorded an increase of 22% to USD 4.9bn and the telecoms industry accounted for about 36% of the activity.
• Global Takaful premiums increased by 19% to USD 8.3bn in 2010, with GCC accounting for 68.4%, led by Saudi Arabia which remains the largest market (USD 4.3bn) followed by Malaysia (USD 1.4bn) and the UAE (USD 818mn).
• MasterCard Worldwide Index of Consumer Confidence recorded a three-point rise in Middle East consumer confidence from the previous six-month period, bringing the index to (85.7), significantly higher than Africa (73.8) and Asia Pacific (52.1).
• The last issuance of short term Islamic leasing bonds, Sukuk Al-Ijara, offered for sale by the Central Bank of Bahrain, on behalf of the government, on a monthly basis, was oversubscribed by 195%. The volume of sale was BHD 20mn, and the expected return reached 1.34%.
• Core inflation in Egypt, increased 1.12% mom, and 8.68% yoy in March 2012, while headline inflation growth rates were slightly higher at 1.22% mom, and 9.03% yoy, respectively.
• Lebanese monetary aggregate M2 (currency in circulation + deposits in local currency) increased 10.7% yoy, to reach LBP 62073 bn as of April 5th, 2012.
• Oman's economy is expected to expand by 6.4% in 2012, according to the Institute of International Finance (IIF), with the non-hydrocarbon sector contributing to 70% of this growth.
• Inflation in Oman inched higher to 3.72% yoy in Feb (Jan: 3.65%), primarily due to the base effect of certain components such as personal care and educational services. Food, beverage and tobacco prices declined 2.5% in Feb.
• Annual inflation in Qatar was 1.2% in March 2012, while overall price level practically did not change, when compared to the previous month, according to the data released by the Qatar Statistics Authority.
• Qatari authorities plan to invest around USD 125bn in construction and energy projects in the next six years, which is seen as a good opportunity for the private sector to expand its role.
• Diversification risks for the banking sector of Saudi Arabia were highlighted in a recent IMF report. The recommendations are aimed to encourage SAMA to implement a set of measures to enhance risk management in the local banks, for example, by limiting large exposures to 25% of banks’ capital.
• According to the Tunisian central bank, it has finalized a borrowing from Qatar in an amount equivalent to USD 500mn. The credit was extended for 5 years at 2.5% per annum.
• Turkey has developed regulations necessary for the issuance of Islamic rent certificates, according to the Deputy PM. These certificates, which are expected to be traded at the local exchange, are considered an important step towards Turkey’s financial market deepening and diversification.
• Turkish unemployment for Jan 2012 stood at 10.2%, a 1.7% drop from Jan 2011. Youth unemployment dropped to 18.4% for the month, from 22.0% a year earlier.
• Budget deficit in Turkey amounted TL 5.5bn in the first quarter of 2012. The major part of the deficit was observed in March 2012, when budget expenditure exceeded revenues by TL 5bn.
• Yemen’s approved budget for 2012 will see expenditure expand by 50% to USD 12.56bn in the light of increased initiatives to create jobs and social services following last year’s violent political protests. To meet its fiscal needs, Yemen has been seeking financial assistance including a recently secured USD 93.7mn IMF loan.

UAE Focus

• IMF estimates real GDP growth in the UAE at 2.3% in 2012, with relatively low inflation at 1.5%.
• IIF forecast a decline in Dubai’s GDP growth to 2.6% this year, from 3.2% in 2011, citing “weaker global prospects and the sanctions on Iran, which would adversely impact trade activity”. Medium-term prospects would, however, be underpinned by “excellent infrastructure and its prime location as a global hub for trade and tourism”.
• Dubai’s foreign trade touched a total of AED 1.1 trillion in 2011, an increase of about 22% from a year ago, according to Dubai Customs. Imports were up 21% to AED 442bn, higher than exports, at AED 98bn, which was an increase of 44% and re-exports grew 18% to AED 161bn.
• UAE and India have signed an amended Double Taxation Avoidance Agreement, allowing for exchange of information about tax matters and expected to encourage bilateral investment flows.
• UAE was ranked top in the Middle East and Africa region by fDi Intelligence for attracting the highest number of projects, at 328. In terms of outward flows, UAE-based companies invested in 169 projects - a decline of 3% compared to a year ago, as interest in real estate projects dipped by 57%. Capital investment overseas also declined by 43%.
• Aldar Properties has secured a AED 4bn 3-year credit facility from National Bank of Abu Dhabi.

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Markets

Markets are again on the defensive. Lower Chinese growth rates spooked investors. Regional markets were mixed, with profit taking weighing on exchanges like Saudi while the Muscat Securities Market surged, helped by the banking and services sectors. The euro fell as the spike in Spanish bond yields revived debt concerns in Europe while the dollar gained against the CHF and JPY. Gold prices, which were rallying most of last week, dipped almost 1.5% on Friday after release of China’s Q1 data. Oil prices have been fluctuating within a rather narrow band despite IEA assessment of weaker future demand.

Global Developments

Americas:

• The US trade gap shrank 12.4% to USD 46.0bn in Feb (Jan: USD 52.5bn), the biggest monthly decline since May ‘09. Exports edged slightly higher to a record USD 181.2bn, while imports dropped 2.7% to USD 227.2bn, the largest monthly drop in 3 years, largely due to a plunge in oil imports. Imports from OPEC tumbled 23.3%.
• The FED Beige Book reported that growth was “modest to moderate”, the same description used in the Feb report. The survey noted better retail spending and some improvement in hiring activity, but overall a subdued mood from the roundup of the Fed regional antennas.
• The CPI rose modestly by 0.3% mom, sa, in March (Feb: 0.4%) led by a 0.9% increase in the energy index. Over the last 12 months, consumer prices were up 2.7%. Producer prices were unchanged from last month, rising 2.8% yoy.
• US initial jobless claims increased by 13K to a sa 380K, disappointing expectations for a drop to 355K. The 4-week moving average rose 4,250 to 368K. Due to the Easter break the figure might be distorted, but it corroborates signs of a weaker labour market.

Europe:

• Eurozone industrial production unexpectedly rose in Feb by 0.5% mom, but dropped 1.8% yoy. German IP was stable (-0.1%) in yoy comparison, while French IP slipped further by 1.3% yoy. In Spain however IP collapsed by 5.1% yoy in February, following a 4.3% decline in January.
• UK trade deficit widened more than expected in Feb, to GBP 8.8bn (Jan: GBP 7.9bn), as non-EU exports dropped by 8.8% mom and imports rose by 1%.
• German exports rose for the second consecutive month by 1.6%, narrowing the trade deficit to EUR 13.6 bn in Feb (Jan: EUR 15.1bn). The Wholesale Price Index eased to 2.2% yoy in March (Feb: 2.6%).
• Italian 3-year sovereign interest jumped to 3.9%, 113 basis points higher than a month ago, while 1-year interests doubled at 2.84%.
• Greek inflation dropped to its lowest level in seven months at 1.7% yoy in March (Feb: 2.1%). Industrial production also saw a sharp decline in Feb of 8.3% yoy (Jan: -6%), pointing to further contraction in the Greek economy.
• Youth (below 25yrs) unemployment rate in Greece & Spain is now over 50%, signalling contraction and a troubled labour market.
• French inflation accelerated to 2.6% yoy in March (Feb: 2.5%). Feb trade deficit widened to EUR 6.6bn (Jan: EUR 5.8bn) as imports outpaced exports, rising 2.8% mom compared to 1% export growth.

Asia and Pacific:

• China’s Q1 GDP came in below expectations at 8.1% (2011 Q4: 8.9%). The World Bank cut China’s growth outlook for 2012 to a 13-year low of 8.2% from Jan’s 8.4% projection. Domestic investment and consumption are expected to decelerate, along with a decline in exports owing to sluggish global economic recovery. Chinese Q1 export growth was 7.6% yoy, down from 14.4% in Q4. March industrial production rose 11.9% (Feb: 11.4%).
• Chinese new bank loans grew to RMB 1.01trillion (US$160 bn) in March, smashing forecasts for RMB 800 bn, an impressive result for the efforts to avoid a hard landing through looser monetary policy and credit expansion.
• China’s inflation was 0.2% mom or 3.6% yoy in Mar (up from -0.1% mom and 3.2% yoy in Feb vs. expectations of 3.4%), primarily due to soaring food prices (7.5% yoy). However, producer prices declined 0.3% yoy after remaining flat in Feb. March inflation data was above consensus of 3.4%.
• Japan’s current account posted a surplus in Feb of JPY 1.178 tn (Jan: JPY 437.3 bn deficit), a fall of 30.7% from a year earlier.
• Orders for Japanese machinery jumped nearly 5% mom sa, beating expectations of a small decline. The increase was the second in a row and provided comfort for pull out from the recession in 2011. Japan’s retail sales also increased in February, by 3.5% yoy, well above the Bloomberg survey median estimate of 1.4%. Automobile sales jumped 78% yoy in March.
• Bank of Japan reported that business sentiment was flat in April, as “continued improvement in domestic demand-oriented sectors” was offset by “lingering cautiousness in export-oriented ones”.
• Malaysia’s Feb industrial production (IP) surged ahead at 7.5% yoy (Jan: 0.3%) led by strong growth in manufacturing (9.4%) and electricity production (11.3%). Indian IP slowed to 4.1% yoy in Feb, up from Jan’s revised 1.1% growth, sluggish on account of weaker overseas demand and high interest rates.
• Singapore registered a 9.9% qoq GDP growth for Q1 2012 (Q4: -2.5%), growing a modest 1.6% from the first quarter of 2011. Retail sales in Feb experienced a sharp 19% hike on-year (Jan: 1.8%), as vehicle sales increased.

Bottom line: The markets are back in global slowdown red alert: spike in Spanish bond yields and widening CDS spreads are bringing back concerns about the state of the Eurozone, while the slower Q1 growth in China begs the question of the pace of emerging market growth. Eyes are now on US retail sales and the Reserve Bank of India meeting this week. Meanwhile, the PBoC’s widening of the RMB-USD trading band to 1.0% from 0.5% can be read as a positive sign with efforts to improve the international role of the Yuan.

Regional Developments

• Private sector in the GCC has grown at an annual average of 15% over the past years, contributing about USD 320bn in 2010 (2005: USD 205bn) - which is roughly 33-35% of GCC’s GDP, as per data released by the Federation of GCC Chambers of Commerce and Industry.
• Jones Lang LaSalle reported a 20% surge in MENA property deals amounting to USD 166bn in 2011 (2010: USD 138bn), although far below the 30.5% global increase for the year.
• IMF loan to Egypt is suspended until after the May presidential elections (with possible runoffs in June). After rejection of a USD 3.2bn loan in June 2011, the IMF demands the backing of all political parties, as the next government will need to implement the deal, and the approval of the 2012/13 budget.
• Inflation in Egypt eased slightly to 9% in March (Feb: 9.2%) as food prices rose at a slower pace (10.9% vs. 12.6% in Feb).
• According to the official sources, 12-month inflation rate in Kuwait fell to 3.8% in Feb, from 5.3% a year ago. Considering the effect of the recent decision to increase salaries and allowances in the public sector of Kuwait, which has yet to be seen, analysts’ estimates of inflation ranging between 4-4.4% are somewhat optimistic.
• Kuwait maintained oil production at the average level of 3 million barrels per day since September last year to meet increased global demand. According to the official sources, the country has spare capacity of around 0.15-0.20 million barrels per day.
• The government of Oman is mulling issuing development bonds for OMR 200mn, according to the Central Bank. Local experts believe that, while the most likely objectives of the bond issuance are to cover the anticipated 2012 budget deficit and refinance bonds maturing this year, it could be a good chance to move towards a more active government securities market, if funds are raised through a series of bond sales in the open market, instead of a single bond issue.
• Official data show 1.2% increase in the overall price level in Qatar for the period Mar 2011 through Mar 2012. Prices in category “Rent, fuel and energy” declined 5.7%, outweighing the 21.9% surge in the prices for rest of consumer basket.
• Reasonable quality of asset portfolio, stable deposit base, healthy capitalization, and ample liquidity buffers, amid strong macroeconomic position and expansionary fiscal policy, supporting economic activity, were among the factors that helped Qatar’s banking sector get a stable outlook from Moody’s.
• Saudi Arabia’s Q4 2011 GDP growth came in at 6.64% yoy (Q3: 5.1%) led by oil sector growth (6.13%), which accounts for a third of total GDP. Private sector growth outpaced the public sector, expanding at 9.9% versus 3.6%. Banking loans in Saudi Arabia are expected to grow by more than 10% for the year 2012 owing to steady growth in deposits.
• Fitch ratings reaffirmed Saudi Arabia’s long-term local and foreign currency Issuer Default Ratings at ‘AA-’ with Stable Outlook.
• Annual inflation rate in Saudi Arabia was 5.4% as of end of Mar 2012. Excess demand on the housing market, as well as growing public expenditure, may lead to inflation acceleration to 7% by the end of this year, according to the economists cited by local media.
• Turkish industrial production gained 4.4% yoy in Feb (Jan: 1.5%), the largest contributions coming from electricity (12.4%) and mining output (6.9%), indicative of expanding economic output. Turkey’s industrial turnover in Feb 2012 increased 17.3% yoy and 3.8% mom.
• Current account deficit in Turkey for Jan-Feb 2012 amounted USD 10.1bn, which is 15.9% lower than in Jan-Feb 2011. Automotive production in Jan-Mar 2012 decreased 8% yoy.

UAE Focus

• Dubai Duty Free has announced plans to raise about USD 1.1bn to fund its expansion, with the financing made up of a conventional term loan and Islamic facilities. This follows the successful Salik securitisation undertaken last year.
• Mubadala reported a loss of AED 4.2bn in 2011, as market fluctuations led to a decline in its investments’ fair value. While this compares to the loss of AED 338mn reported last year, the company added that it continued to “maintain a long-term financial investment perspective”.
• UAE Central Bank’s AED-denominated interbank local transfers will be routed through a new settlement system called the UAE Funds Transfer System, enabling the “faster execution of transactions”. The Central Bank is also in the process of revising the banking laws which have been in place since its establishment, with the new laws on retail banking expected to be issued within the next two months.
• UAE SCA is expected to introduce new rules and regulations by summer, with the one on short-selling to be in place before end of 2012, according to its CEO.
• The anticipated merger between Dubai Bank and Emirates Islamic Bank was finalised last week with Jamal bin Ghalitha named as CEO of the new establishment.
• Consumer prices in Abu Dhabi inched up 0.9% yoy in Q1, led by increases in food and non-alcoholic beverages. March inflation rose 1.3% yoy from rise in restaurants and hotel prices (13.4%) and alcoholic beverages and tobacco (9.5%).
• A survey conducted by the Dubai Statistics Centre reported a 50% decline in Dubai’s unemployment rate last year, compared to 2009. The total number of unemployed people was only 5,632, of which Emiratis were close to 60%. The report stated that about 59.2% Emirati males are employed while females account for 31.4%.
• Dubai hotel occupancy declined 4.3% yoy in Feb, while the average room rate was up 2.9% to USD 312.4. Dubai’s hotels posted a marginal growth of 0.9%, according to TRI Hospitality Consulting data.

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Markets

Easter mood did not sedate markets, which were generally weak especially after FOMC minutes reinforced the message that the Fed is not contemplating additional monetary stimuli. It is worrisome that stock markets are again primarily influenced by expectations of central bank liquidity injections like an addict mesmerized by the perspective of another shot, and not focusing on economic fundamentals. Bond markets on the contrary were retrenching to safe havens while spreads on Italian and Spanish bonds widened sharply again. The bad number on US payrolls added to gloom. Regional markets were mostly down, though Oman and UAE outshone their counterparts, buoyed by specific stocks. The combined effect of Fed hawkishness and Draghi remarks on 'downside risks' in Euroland hit the euro and lifted the dollar. Likewise gold tumbled after hopes of QE3 were dashed. Oil was hit by the dollar strength but remained broadly resilient.

Global Developments

Americas:

• Non-farm payroll employment rose 120k, sa, in March, much less than the 200K expected.
• Unemployment declined to 8.2%.
• The US ISM manufacturing index increased to 53.4 in March (Feb: 52.4), with mixed sub-components. The production and employment index increased to 58.3 (55.3) and 56.1 (53.2) respectively, while new orders index, the most forward-looking component, slipped to 54.5 (54.9).
• The ISM non-manufacturing index declined to 56.0 in Mar from 57.3 in Feb. Among sub-components the indexes for new orders and general business activity both declined. On the other hand, the employment component increased, and remains quite high at 56.7.
• US new factory orders increased 1.3% yoy in Feb (Jan: 1.1%), supported by business equipment.
• Initial jobless claims dropped 6k to 357k, from a revised 363k the previous week. The 4-week moving average slipped 4.25k to roughly 361k.

Europe:

• ECB president, Draghi said risks to growth remained warning that inflation will stay above the 2% target for the rest of the year.
• Euroland manufacturing PMI in March worsened to 47.7 from 49.0 confirming that Q1 GDP reading will be negative.
• Euro area Feb unemployment was at 10.8% (Jan: 10.7%), with the highest rate in Spain (23.6%) while German unemployment was unchanged at 5.7%.
• Producer prices in the Eurozone inched 0.6% higher mom in Feb (Jan: 0.8%), rising 3.6% on a yoy basis (Jan: 3.8%), the lowest level since June 2010. Producer price inflation eased in Germany (3.2%), Spain (3.4%) and Greece (6.9%) as well.
• Eurozone retail trade was down 0.1% mom in Feb (Jan: +1.1%) and from Feb 2011 slipped by 2.1%. Retail trade saw a sharp decline in Germany (-2.5%) and Spain (-6.2%), on a yearly basis, rising mildly in France (+0.8%).
• UK industrial production dropped 0.4% mom in Jan, offsetting Dec's 0.4% gain. Industrial output fell 3.8% from the same month last year. Halifax house prices were 2.2% higher in March, mom (Feb: -0.4%) and were 0.6% lower in Q1 2012 on a yoy basis.
• German industrial production dipped in Feb by 1.3%, mom (Jan: +1.2%), as unusually cold weather dampened construction output. Factory orders in Germany saw a subdued increase of 0.3% mom, sa, in Feb (Jan: -1.8%), falling sharply from a year ago by 6.1%.
• In Italy the draft labour market reforms actually introduced additional burdens on firms and a spate of new taxes, with minimal modification to the major issue of labour protection.

Asia and Pacific:

• China, moving forward on capital account liberalisation, announced an increase from USD 30-80bn in the total quotas in its "qualified foreign institutional investor" (QFII) scheme through which foreign investors are allowed to trade in China's equity markets. Separately quotas under China's "renminbi- qualified foreign institutional investor", which allows renminbi funds raised offshore to be invested in domestic capital markets, were boosted from RMB 20bn ($3.2bn) to RMB 70bn.
• China's four largest state owned banks disbursed CNY 300bn in new loans in March, with estimates placing total new loans at close to CNY 900bn.
• HSBC China services PMI slowed to 49.9 in March (Feb: 51.8), moving into contraction territory on account of the fifth consecutive mom decline in new orders. India's March Services PMI also slipped - to a five-month low of 52.3 (Feb: 56.5).
• The Japan Tankan index of business confidence remained unchanged from Dec at -4, confirming a pessimistic outlook.
• Thai Mar CPI was up 3.45% yoy (Feb: 3.35%), boosted by food and beverage (7.07%) while core CPI rose 2.77%. Indonesia's inflation accelerated to 3.97% in Mar (Feb: 3.56%), on higher prices for spices and increased buying ahead of the fuel price hike. Core inflation eased to 4.25% (4.31%).

Bottom line: The divergence between the two sides of the North Atlantic is epitomized by their labour market with Euroland close to record high unemployment (10.9%) and the US on a gradual although anaemic recovery. Spain and Italy are again under the spotlight of the markets after the reform plan met with fierce resistance by the unions. The French election next month will add to the woes of the Eurozone. By contrast, emerging Asia is slowing but displays continued healthy growth.

Regional Developments

• Total volume of Sukuk issuances in Q1 2012 reached USD 43bn globally, with Malaysia topping the list at USD 31bn. Regionally, Saudi Arabia was the leader with USD 6.4bn, followed by UAE at USD 1.9bn.
• A Boston Consulting Group study of 34 banks in the GCC projected bank revenues to grow by 4-6% in 2012, following 7% growth in 2011. Bank revenues in the UAE increased by 6% and the sector recorded an impressive 24% rise in profits.
• Deloitte anticipates expansion of M&A activity in the MENA region in 2012, with Saudi Arabia, Abu Dhabi and Qatar being the most active players, given available liquidity, they are in a more preferable position compared to other countries in the region.
• MEED Projects data places the total value of construction projects in the GCC at USD 286bn, with Saudi markets taking the majority share at 41%, followed by UAE and Qatar at 26% and 9% respectively.
• Inability to reach consensus on external financing among Egypt's political parties is complicating negotiations between the IMF and Egyptian authorities on the loan from the Fund. According to the Minister of Planning & International Cooperation, an arrangement may be reached in June.
• A senior Muscat Securities market official announced that there are at least 5 IPOs in the pipeline - to be floated by Bank Nizwa, Al Izz Bank International, Oman Arab Bank and Al Khalili group.
• Oman's budget surplus widened to OMR 964.8mn in 2011, as revenues from oil exports surged by 59% yoy to OMR 8.697bn alongside an increase in public expenditure by 8.8% to OMR 8.66bn.
• The SABB HSBC Saudi Arabia PMI fell to a three-month low of 58.73 in Mar (Feb: 59.62), with new orders at 66.8 the slowest since Dec.
• Turkey GDP in Q4 grew at 5.2% yoy, slightly above consensus estimate. The implied qoq growth however depicted a loss in momentum due to exports woes. Investment on the other side rebounded strongly compared to Q3. Annual GDP growth for the entire 2011 was 8.5%.
• Turkish inflation for Mar came in at 10.43% yoy, unchanged from Feb, led by increases in prices of alcoholic beverages and tobacco (18.47%) and furnishings and household equipment (11.76%). Producer price inflation slowed to 8.22% in Mar (Feb: 9.15%), the lowest since Apr 2011.
• HSBC Turkey manufacturing PMI remained unchanged at 49.6 in March, with the contraction led by decreases in new orders and output.

UAE Focus

• Dubai Drydocks filed a claim at the DIFC based Tribunal seeking insolvency protection from creditors by invoking 'Decree No 57' issued in 2009. The company announced later that it had received backing for its restructuring plan from 98% of its creditors, with only one in disagreement.
• Dubai International Corp. a private equity arm of Dubai Holding reached an agreement to restructure debt worth USD 2.5bn. Creditors holding USD 2.15bn and USD 350mn of loans will be repaid over 5 years (at a rate of 2% cash) and 3 years (on unchanged terms) respectively.
• An unnamed source revealed that the UAE was operating at full capacity - producing 2.7mn barrels per day of oil in Mar (Feb: 2.6 mn bpd), as OPEC announced that its March output rose to its highest level since Oct 08.
• The Dubai Land Department announced a 20% yoy increase in total transactions in 2011 to AED 143bn. Asian investors accounted for more than two-thirds of total investors (68%) while Indians topped the list of new investors and UAE nationals topped the list of most active investors.
• A new initiative, labelled Tanweer, will be launched by the Dubai Land Department in a bid to "minimise legal disputes and protect investors' rights".
• Dubai Duty Free sales surged 14% yoy in Q1 2012, reaching AED 1.42bn, on track to achieve its 2012 target of AED 6bn. Chinese passengers continue to dominate the sale of high-end products.
• Another positive indicator of retail spending: Global Village reported close to five million visitors, leading to a surge in exhibitors' profits by 13-15% yoy. The visitors, majority of who were from other GCC countries, spent an estimated AED 1.75bn or an average of AED 350 per person.
• Inflation in Abu Dhabi was 1.6% in 2011, rising from 119.3 points in 2010, with food and non-alcoholic beverages accounting for about 67.7% of the increase.
• Locational advantage of being near the Dubai Metro has led to higher demand, leading to an increase in property values by nearly 34% near the Metro.

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Markets

After the speech by Bernanke, which was interpreted as an announcement of loose monetary policy and possible QE3, equity markets were marking time, with the mood generally negative especially in Asia. Regional markets were mixed though optimistic sentiment continued in the Saudi bourse, where the index lifted to levels not seen since the collapse of Lehman. The euro rallied against the dollar and the yen after Spain announced budget cuts; also, the GBP rose to a 4-month high and the yen was boosted by its fiscal year-end repatriation flows. Talks by some of the biggest global oil buyers over the possible release of emergency reserves and a ventilated intervention by Saudi Arabia spooked oil prices while gold prices rose.

Global Developments

Americas:

• Fed Chairman Bernanke warned that the marked improvement in US unemployment rate could be unsustainable unless growth picks up, a downbeat assessment stressing the divergence between stronger labour market data and weaker numbers on output and real estate.
• The S&P/Case-Shiller home price index fell for the fifth consecutive month by 0.8% mom in Jan (Dec: -1.1%) and slid 3.8% from a year earlier, despite recent signs of economic recovery in the US.
• US Q4 GDP rose by 3.0% yoy (Q3: 1.8%), recording the quickest pace since Q2 2010. The expansion was led by a rise in business spending (5.2%) and consumer spending (2.1%).
• US durable goods orders rebounded in Feb (ex-transportation, up 1.6% mom, versus -3% in Jan). Net of volatility, however, the slowing in orders growth remains dominant with a 3% drop, saar, compared to Q4. Orders for core capital goods fell 6.3%, saar, in Jan-Feb versus Q4.
• Consumer spending rose 0.8% mom in Feb as demand for durables shot up. Adjusted for inflation, spending increased by 0.5% - the largest since Sep.
• Initial jobless claims dropped 5k to 359k in the week ended Mar 24, sa, another four-year low. Continuing claims fell 41k to 3.34 mn (3.38 mn).

Europe:

• Eurozone bank credit to non-financial firms fell slightly mom and 0.4% yoy in Feb. The recessionary environment could change over the next few months if the ECB Long Term Refinancing Operation (LTRO) transmission mechanism kicks in.
• The Ecofin increased the ESM endowment from EUR 500bn to EUR 800bn, sufficient to support a country like Spain (but not Italy) in case of default.
• German IFO business confidence unexpectedly increased in March to 109.8 (Feb: 109.7), rising for the fifth consecutive month. Unemployment fell to a two-decade low of 6.7% sa, in March (6.8%).
• Eurozone inflation flash estimate was 2.6% in March (Feb: 2.7%). Inflation in Germany eased to 2.3% yoy (2.5%) as energy prices inflation ebbed.
• French consumer spending increased 3.0% mom, due mainly to higher energy bills as a result of last month’s cold spell. PPI was 4.3% yoy in Feb, unchanged from Jan.

Asia and Pacific:

• China PMI (estimated by HSBC) fell to 48.3 in Mar (Feb: 49.6), declining for the fifth consecutive month as new orders dipped and manufacturing output registered the second-lowest reading since Mar ‘09 of 47.3 (50.2).
• Industrial output in Singapore saw a yoy increase of 12.1% in Feb (Jan: -9.6%), although output slipped slightly by 1.1% mom (+2.3%). The rise from last year is attributed to the higher number of working days as the Lunar New Year coincided with Jan this year.
• Thailand’s trade balance posted an unexpected surplus in Feb at USD 0.53bn (Jan: USD 1.13bn). Exports saw a mild increase of 0.91% yoy, with a much larger increase in imports of 8.2% yoy.
• A slew of Feb economic data from Japan: The jobless rate fell to 4.5%, sa (Jan: 4.6%). CPI inflation saw an uptick of 0.1% yoy (Jan: -0.1%) while industrial production fell 1.2% mom (+1.9% in Jan), though climbing 1.5% yoy. Retail trade rose 3.5% yoy (Jan: 1.8%), due to brisk car sales (21.4%).
• Korea’s industrial production surged ahead in Feb at 14.4% yoy (Jan: -2.1%) and 0.8%, mom sa to declines in production of telecommunications, non-metallic minerals and electric equipment.
• India’s Q4 2011 current account deficit nearly doubled to USD 19.6bn, amounting to 4.3% of GDP compared to a year ago (Q4 2010: 2.3%).
• Myanmar introduced a floating FX system; till now, the kyat was fixed against the dollar at a rate of around six kyats to one dollar compared to 800 on the black market.

Bottom line:

With the waning relief following the Greek deal and the liquidity injection in Euroland, attention is again turning to the stumbling global economy. Bernanke poured cold water on optimistic expectations of those mesmerized by job creation. In general global business confidence is consistent with a tepid expansion, which prevailed since the beginning of the year. Sentiment has improved somewhat compared to the end of 2011, when the global economy was hit by the European debt crisis and the U.S. Treasury debt-ceiling diatribe, but essentially it stands at the level prevailing a year ago.

Regional Developments

• Standard & Poor’s hinted that Turkey’s ratings may remain stuck at current levels unless the country attains more flexibility by shifting towards net-export-driven growth, and promoting deeper social security reforms.
• Capacity utilization in Turkey increased in March to 73.1% (Feb: 72.9%). Business confidence also rose to 112.9 for the month (Feb: 107.3).
• Turkey held its key interest rate unchanged at 5.75% while keeping the overnight borrowing rate unchanged at 5% and lending rate at 11.5% amid inflationary pressure.
• According to official sources more than one million Saudi Arabians receive unemployment benefits under the recently launched “Hafiz” program, while the number of jobless citizens increases permanently due to the inability of public sector to create new jobs for the growing population of nationals. Currently government employs 90% of the 18 million working Saudis.
• Saudi British Bank sold a five-year SAR 1.5bn Sukuk, through a private placement.
• Egypt GDP expanded by 0.4% yoy in Q4 2011 (Q3: 0.2%) as a few sectors began to rebound like construction (Q4: -0.6%, Q3: -2.8%) and tourism (-6.5%, -10.4%), according to data released by the Ministry of Planning and International Cooperation. GDP contracted by 0.8% in 2011.
• Orascom Construction Industries, Egypt’s largest publicly traded builder, said Q4 profit declined 34.1% to USD122.6mn in a sign that economic activity in Egypt is far from stabilizing.
• The Kuwaiti government appointed acting governor Mohammed Al-Hashel as new governor of the central bank, a choice outside the ruling family.
• The decision on the increase of payments to public sector employees, retirees, and beneficiaries of social assistance, made after the series of strikes in Kuwait, would be raised to the country’s National Assembly for approval. Different scenarios put expected budget surplus in the range between KWD 10.3bn and KWD 11.7bn.
• Inflation in Kuwait accelerated to 3.8% in Feb (Jan: 3.5%) on increases in the cost of food and clothing.
• Kuwait’s current development plan includes about 324 major infrastructure projects with investments close to KWD 3.5bn for fiscal year 2012-13, according to the Ministry of Public Works and Municipality.
• Lebanese economy is expected to grow by 3.5% in 2012, according to Standard Chartered. GDP growth acceleration from 1.5% in 2010 would be supported by tourism, construction, and domestic consumption.
• Overall price level in Lebanon decreased 0.8% mom in Feb, while yoy inflation was 5.8%; miscellaneous goods and services, housing services, and food and beverages were the main items adding to inflation in the last two months.
• Oil production in Libya has increased from 0.8 mn bpd to 1.45 mn bpd currently. Country’s officials expect oil production recovery to pre-war levels by the end of 2012.
• Total value of private sector bank deposits in Oman in Jan 2012 increased by 12.4% yoy to OMR 8.1bn, including FX deposits of OMR 649mn.
• The interest rate ceiling for new personal loans in Oman, set by the central bank, was reduced by 1 p.p. to 7% effective Apr 1, 2012. Currently, personal loans constitute around OMR 5bn, or 40% of the Omani banks total loans.

UAE Focus

• The Deputy Director-General of the Dubai DED announced that a feasibility study has been commissioned to analyse a potential pension plan for expatriates, which is expected to be completed by end of this year.
• Mubadala is reported to have acquired a USD 2bn stake in EBX group bent to raise cash to compete with Petrobras, Brazil’s state-run oil company. The deal will open Mubadala the gate to participate in the pipeline of future investments, such as technology, cement, fertilisers and entertainment. The deal constitutes the biggest investment by Mubadala in emerging markets after smaller acquisitions in countries such as Nigeria and Russia.
• Mannai Corp from Qatar and EFG Hermes have agreed a USD 0.45 per share (9.8% above closing price on Tuesday) cash bid for Damas stating that irrevocable undertakings have been secured from 77.8% of Damas shareholders, with the bid valuing Damas's capital at roughly USD 445mn.
• Abraaj Capital in an interview with Reuters announced that it is planning an IPO as early as next year.
• DP World announced its intention to repay the USD 3bn loan (maturing in Oct) between April 4-10, 2012 with existing cash, hence reducing the debt of the company to about USD 4.7bn.
• Nakheel’s acting CEO stated that there would be no need for any additional cash injections into the company to execute its projects “as we have restructured our debts”.
• UAE mortgage credit fell 1.0% yoy to AED 161.5bn in 2011 as total credit to the private sector also witnessed a decline of 1.4% to AED 573.2bn. Meanwhile, loans to the government rose by 2.4% and loans to the public sector increased to AED 112.4bn in 2011 from AED 91.3bn in 2010.
• Dubai Metro is expected to break even by 2017, on “increased metro ridership, and augmented revenues generated from stations naming rights, advertisements and rental of retail outlets” after having recovered its costs in 2016. The share of public transport in total travel rose to 10% in 2011, from about 6% in 2006.

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Markets

A tumultuous week for global markets: markets were on a roller-coaster last week, having touched close to 8-month highs, but were spooked by the decline in Chinese manufacturing data only to rebound on Friday. Among regional markets, Saudi and Oman were the biggest gainers as in the latter, talks of a potential merger between HSBC Holdings‟ local unit and Oman International Bank lifted shares. The euro closed at a three-week high against the dollar while gold recorded a fourth consecutive weekly loss, in spite of recording the biggest one-day gain in a month. Concerns about Iran continue to affect oil prices, with Brent closing at USD 125.13 on Friday.

Global Developments

Americas:

• Housing starts slipped 1.1% mom in Feb to 698k (Jan: 706k), while building permits rose 5.1% to 717k (682k), indicative of increased housing activity in the coming months.
• Existing home sales slipped slightly by 0.9% mom in Feb to 4.59mn (Jan: +5.7%, 4.63mn), but outperformed sales from a year earlier, up 8.8% yoy, the strongest in five years. Feb new home sales unexpectedly fell 1.6% mom to 313k, adding to concerns on global growth, though rising 11.4% yoy.
• Initial jobless claims dropped 5k to 348k for the week ended Mar 17, the lowest since March 2008. The 4-week moving average also recorded a 4 year low, slipping to 355k.

Europe:

• Flash manufacturing PMI for France and Germany fell to 4-month lows of 47.6 (50.0) and 48.1 (50.2), respectively, in March. Eurozone Manufacturing PMI was at 47.7 (Feb: 49.0) - a 3-month low as composite PMI declined to 48.7 (49.3).
• UK retail sales slipped further than expected by 0.8% mom in Feb (Jan 0.3%), but were up 1% yoy. The largest declines were seen in clothing and footwear (0.4%) and food sales (0.1%).
• UK inflation continued its steady fall since Sep 2011, coming in at 3.4% yoy (Jan: 3.6%), its lowest since Nov 2010. The retail price index also eased for the month at 3.7% yoy (Jan: 3.9%).
• The UK Budget announcement included an income tax rate cut from 50% to 45% from April 2013 and an immediate corporation tax cut of 1% to 24% from April. UK‟s budget deficit is expected to reach 5.8% of GDP in the next fiscal year.
• The Eurozone faces strong opposition from Germany in an attempt to raise the combined lending power of the EFSF and ESM to EUR 700bn from EUR 500bn, intended as a measure to pacify markets and G20 leaders before the upcoming April meeting.
• Retail sales in Italy rose 0.7% mom, sa in Jan (Dec: -0.8%) on a 1.2% jump in food purchases, but slipped 0.8% yoy (Dec: -3.7%). Meanwhile, industrial orders saw a sharp decline in Jan at 7.4% mom (-5.2%).

Asia and Pacific:

• Flash China manufacturing PMI came in at 48.1 for March - from Feb's four-month high of 49.6 - indicating a further contraction. Output and employment in the sector declined, after expanding in the previous month and new orders shrank at a faster rate.
• China, the world's largest oil consumer, hiked fuel prices for the second time in 2012, raising the benchmark retail price for petrol by USD 0.7 per litre, the biggest rise in three years.
• The Reuters Tankan manufacturing sentiment index for Japan rose to +2 in March (Feb: -11), the first positive reading in four months.
• Japan posted its first trade surplus in five months at JPY 32.9bn in Feb (Jan: JPY 1.5trn deficit), as external demand strengthened – especially the auto industry, with its exports to US rising by 26.9% yoy.
• Malaysian CPI saw a 2.4% yoy increase in Feb (Jan: 2.7%), led by an increase in food & beverages of 2.9%, and remained unchanged from Jan 2012. Singapore’s inflation numbers for the month of Feb came in higher at 4.6% yoy (Jan: 4.8%), owing to increases in housing (9.5%), food (2.6%) and transport (4.4).
• Taiwanese export orders rose 17.6% yoy in Feb (Jan: -8.63%), attributed to stronger demand from the US and China and a low base effect as the Lunar New Year fell in February last year. Industrial production recovered partially in Feb, rising 8.4% yoy (Jan: -16.75%).
• The central banks of Taiwan and Thailand left key rates unchanged, citing inflation as a key concern for both the East Asian economies on account of higher oil prices.

Bottom line:

The decline in Chinese and European PMI hogged the limelight last week, bringing back global recovery concerns, even overshadowing the positive news on the US job front. Oil continues to be a talking point, with the IMF's Chief stating that prices could surge 20-30% if there is a supply disruption via Iran‟s exports while Saudi's Oil Minister remained confident of meeting any shortfall in the market; he mentioned the possibility of raising output to full capacity of 12.5bn barrels per day as opposed to 9.9mn bpd currently. Meanwhile, as the US Republican primaries continue without a clear frontrunner, bond auctions in Italy and Spain along with the meeting of European Finance ministers are crucial for EU sentiment this week.

Regional Developments

• While verbal interventions by Saudi officials added to oil prices stabilization last week, IMF Managing Director revealed Fund experts' estimates of oil prices potential surge by 20 to 30% in case of global oil supply shortage due to rising tensions around Iran.
• The GCC is studying the possibility of introducing a multi-currency real-time payment system, in line with the vision for the Gulf Monetary Union.
• Egypt’s central bank cut reserve requirements on local deposits to 12% from 14%, but left its benchmark lending rate unchanged at 10.25% on account of mild inflation. Meanwhile, the IMF’s visit to Egyptian authorities did not result in any agreement regarding the USD 3.2bn loan - as the government has not yet provided a concrete plan regarding the dissemination of these funds.
• Kuwait’s 2012-13 Budget amounting to KWD 22bn estimates a spending increase of 13% over the current year's budget. Although revenues are estimated at KWD 14bn, implying a budget deficit, the projection is made using an oil price of USD 65/barrel. Kuwait is likely to post a budget surplus if oil prices continue to remain high.
• Despite the administrative measures undertaken by the Kuwaiti official agencies, prices of some of the food items on the local markets increased more than twice as a result of the strike held by the Customs employees. The strikes by country's public sector workers was discussed by the Parliament of Kuwait, which decided to form a joint committee of the officials from legislative and governmental bodies to study draft laws on salary increments.
• Arcapita, whose biggest creditor is the Central Bank of Bahrain, filed for bankruptcy in the US over its USD 1.1bn debt, as its restructuring talks failed - causing a 12bps rise in Bahrain 5-yr CDS to 370 on Monday.
• According to Global Investment House, increased budgetary expenditure associated with the measures aimed at infrastructural development and coping with the consequences of the global financial crisis led to Bahrain’s public debt to GDP ratio growth from 8.5% in 2008 to 27.6% in the end of the first half of 2011, which however remained below the 60% ceiling set by the Gulf Monetary Union.
• Capital Market Authority of Oman promoted the idea of a minimum capital increase for the new insurance companies. The measure is intended to strengthen local insurance sector's competitiveness and ability to retain more companies within the country, while mergers are seen as a reasonable approach for local companies to benefit from economies of scale.
• Unemployment in Saudi Arabia is close to 10.5%, equivalent to 500k persons looking for work, according to the Labour Minister. He also stated that there were 9 foreign employed workers per unemployed local person in the country.
• Moody's reported that GCC banks were likely to face short-term funding difficulties if there was a “sustainable retrenchment” by European banks in the region, given that European bank lending to the GCC region amounted to around USD 237bn as of Sep 2011.

UAE Focus

• The UAE Minister of Economy reiterated that a merger of the Abu Dhabi Securities Exchange and the Dubai Financial Market is still on the cards, expecting a decision to be reached by the end of the year.
• Dubai's JAFZA is proposing a three-pronged strategy to refinance its USD 2bn Sukuk maturing in November of this year, comprising a reduction in debt level of USD 191mn, a new bank loan of USD 1.09bn and the issue of a new Islamic bond worth around USD 653mn.
• Mubadala has unveiled plans to build a gas terminal in Fujairah that would allow oil & gas tankers to bypass the Strait of Hormuz, hence reducing risk of potential closure threat.
• UAE's central bank has directed lenders in the country to alleviate the debt burden of UAE nationals, instructing further study to find solutions. However, according to analysts cited by the Gulf News, extensive write-off of the loans of Emiratis bogged down in debts may deteriorate financial position of UAE based banks, and create bad precedents.
• UAE is arguing a strong case to be exempt from US sanctions against Iran, on account of its historic commercial ties with the country. Bilateral trade between Iran and the UAE amounts to USD 13.61 bn annually. This comes on the heels of a partial lift of sanctions for Japan and few European countries.
• UAE attracted about USD 1.8bn in FDI in 2011, compared to USD 8.64bn in GCC, according to Abu Dhabi DED's undersecretary.
• Dubai DED is planning to introduce instant business licenses, a '120 days hassle free license', which would substantially reduce the time taken to start a business as well as simplify the investment and business registration process.
• Inflation in the UAE fell by 0.44% mom and was up by 0.56% yoy in Feb - food and non-alcoholic beverages recorded an uptick, while among the Emirates monthly inflation in Abu Dhabi and Dubai declined amidst a rise in other emirates.

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Markets

Markets have been choppy in the absence of major macro news and a catalyst which could guide expectations. Even the bank stress tests that were negative for Citigroup and other large US banks had limited impact. Regional markets, except KSA (where the trend points upwards), are caught in the erratic swings. Meanwhile, US Treasury yields moved up on better economic data and a reversal of flight-to-safety flows. Asian currencies were weak against the dollar; however, the higher than expected US inflation data towards end of the week led to a slight decline in the greenback. Tensions regarding Iran continue to impact oil prices; gold is mostly weak, leading to increased buying from central banks.

Global Developments

Americas:

• The US current account deficit for the fourth quarter of 2011 widened to USD 124.1bn (Q3: USD 107.6bn), on account of rising oil prices. The deficit for 2011 stood at 3.1% of GDP.
• Retail sales advanced 1.1% mom in Feb (Jan: +0.6%), the largest in five months. Auto and clothing sales contributed largely to rise, although increases were seen across the board, in 11 out of 13 categories.
• Business inventories in the US climbed 0.7% mom in Jan (Dec: 0.6%), maintaining a ratio to sales of 1.27. Motor vehicle inventories rose 2.6% in Jan.
• Initial jobless claims fell by 14k to 351k in the week ended Mar 10, the lowest in 4 years; continuing claims dropped by 81k.
• US inflation in Feb rose 0.4% mom and 2.9% yoy (Jan: 0.2% mom) led by rising energy costs (3.2% mom). The food index remained unchanged from a year ago, while core inflation, excluding food and energy, rose 0.1%. Producer price index also increased by 0.4% mom in Feb (Jan: 0.1%).
• Feb industrial production came in flat from Jan, owing to a slowdown in mining (-1.2%), while Jan’s IP was revised up to 0.4% (Initial: 0.0%). Feb capacity utilization slipped to 78.7% (Jan: 78.8%).
• US federal budget deficit was revised upwards to USD 1.2 trn for 2012 (2011: USD 1.3 trn), resulting from the 2%-pt cut in Social Security taxes for the rest of 2012 while health care costs were likely to cost about USD 50bn less than anticipated.

Europe:

• Industrial production (IP) in the eurozone inched higher by 0.2% mom in Jan (Dec: -1.1%) but dropped 1.2% yoy (Dec: -1.8%). Divergent economic performances persist: German IP rose 1.5% mom, while in Spain and Italy it dropped 0.2% and a walloping 2.5% mom, respectively.
• Eurozone inflation saw an uptick of 2.7% yoy in Feb, unchanged from a revised Jan figure. The rise was led by a spike in energy prices of 9.5% yoy. German and French inflation came in at 2.5% (Jan: 2.3% and 2.6%, respectively), with lower rates in Greece (1.7%) and Spain (1.9%).
• The German ZEW survey surged to a 21-month high of 22.3 points in March (Feb: 5.4) as investors took solace from the recent agreement reached in the sovereign debt crisis.
• UK’s goods trade deficit widened in Jan to GBP 7.53bn (Dec: GBP 7.18bn), as import growth, driven by high oil prices, outpaced exports at 2.6% and 2% mom, respectively. Meanwhile, exports to non-European countries rose to the highest level ever.
• UK unemployment recorded its highest level since 1995, coming in at 8.4% in the three months through January. Unemployment benefits claims in Feb increased by 7.2k from Jan (7k).

Asia and Pacific:

• Japanese core machinery orders rose 3.4% mom in Jan (Dec: -7.1%) and 5.7% yoy (Dec: +6.3%). The Bank of Japan left policy rates unchanged.
• Despite high interest rates, industrial production in India surged ahead at the fastest pace in seven months, at 6.8% yoy in Jan (Dec: +2.5%). Manufacturing, which contributes to 75% of the index, rose by 8.5%.
• India’s Feb wholesale price inflation accelerated by 6.95% yoy (Jan: 6.55%), the first rise in five months. Primary food prices rose 6.1% (-0.5%), while non-food manufactured products prices eased to 5.7% (6.7%) while fuel prices saw a smaller rise in Feb of 12.8% (14.2%).
• The Reserve Bank of India left policy rates unchanged, with the repo rate at 8.5% and the reverse-repo at 7.5%, following the surprise 75bps cut in the cash reserve ratio last week.
• The Indian budget for the next fiscal year (Apr 2012 – Mar 2013) is focused on reducing the budget deficit to 5.1% of GDP by capping subsidies to under 2% of GDP. The deficit for the current fiscal year came in at 5.9%, much higher than the 4.6% target.
• Industrial production in Malaysia saw a mild increase of 0.2% yoy in Jan (Dec: 2.9%) owing to increases in manufacturing (1.2%) and electricity (2.7%) production.

Bottom line:

Surprises did not come from the trickle of macro data last week, but from the political front. In China the ousting of conservative leader Bo Xilai, as Communist Party Secretary of Chongqing (he conducted a crackdown on entrepreneurs), paves the way for a victory of the “reformist” camp at the next Congress in October and the subsequent change of government leadership next year. In the financial markets, the wind of liberalization blows stronger with new provisions in fixed income and capital account liberalization. Meanwhile in Europe Sarkozy’s campaign is closing the gap with Hollande and in the US the Republican primaries have not produced yet a clear winner while internecine divisions blow tailwinds in the sails of Obama’s re-election.

Regional Developments

• According to the SWF Institute, assets under management by SWFs globally amounted to USD 5 trillion, an increase of 9% over the last 12 months. UAE’s Abu Dhabi Investment Authority tops the list of richest SWFs, holding assets worth USD 627bn.
• McKinsey estimates an opportunity worth USD 15bn for the region’s banks, over the next 5 years, should they choose to serve around 11mn SMEs (~50% of total) that are currently not being catered to.
• A report from AT Kearney states that GCC banks will return to their pre-crisis profitability levels this year, while suggesting that banks need to “invest in retail banking infrastructure and capabilities, address untapped opportunities in wholesale banking and redefine priorities for external growth and international expansion” for more opportunities.
• Sources at the GCC Secretariat revealed that the GCC Common Currency’s name and denominations were being actively discussed, in anticipation of its 2015 launch, and its printing expected mid-2013.
• Kuwait posted a budget surplus for the first 10 months of the fiscal year at KWD 14.38bn. Oil revenues contributed up to KWD 22.83bn, comprising 95% of total budget revenues.
• Moody’s affirmed the long term rating of Oman’s government local and foreign currency bonds at A1. Financial stance of the country is strong as measured by high fiscal and external surpluses, solid foreign international reserves and low external debt.
• Inflation in Egypt rose to 9.2% yoy in Feb (Jan: 8.6%) on the back of rising food prices and a weaker Egyptian pound, brought about by political instability.
• Turkey ran a current account deficit of USD 5.99bn in Jan (Dec: USD 6.56bn), a 0.41% yoy drop.
• Monetary aggregate M2 increased in Oman by 13.1% yoy to reach OMR 9.97bn in the end of Jan 2012. The growth was mostly driven by the expansion of savings and time deposits, including deposits in foreign currencies, which grew by 17.9% yoy, while M1 (currency in circulation and local currency demand deposits) increased by only 3.6% yoy.
• Overall price level in Qatar increased 1.2% yoy in the end of Feb 2012 despite the decrease in house rents by 6.1%, as food prices grew at a higher pace.
• The World Travel and Tourism Council expects the direct contribution of tourism and travel sectors towards Qatar’s GDP to reach USD 1.1bn in 2012 from USD 800mn in 2009 due to growing investment in material infrastructure. Qatar is investing USD 20bn into tourism infrastructure in preparation for the 2022 World Cup, with a majority of this investment being directed towards the building of new hotels.
• Libyan authorities approved USD 52.4bn state budget for 2012, with the major part of budgetary expenditure, USD 20bn, to be allocated for public sector employees’ salaries.
• Turkey revised down its 8% target economic growth for 2012 to 4%, according to the Turkish Deputy PM. The revision was aimed at signalling economic sustainability as the main priority for the Turkish government amid global economic uncertainty. Lower growth poses risks for the central government budget, which recorded a TL 2.6bn deficit in Feb 2012, compared to surplus TL 0.99bn in Feb 2011.
• Inflation projections for Saudi Arabia demonstrate certain level of divergence. While Global Investment House expects inflation slowdown to 4.3-4.6% in 2012 from 5.2% last year, some experts, cited by the Saudi Gazette, consider price growth acceleration to 7% this year due to supply shortage in the housing market. Extensive growth of money supply observed in the last years creates strong potential for high inflation in the medium term. This calls for tighter fiscal policy, as existing monetary policy framework does not provide effective instruments to tackle inflation.

UAE Focus

• A statement released at the conclusion of the IMF Mission’s Article IV visit to UAE stated real GDP growth for the UAE at 4.9% in 2011 due to higher oil output and an expansion in the non-hydrocarbon sector. The 2012 projection is lower at 2.3%, although the non-oil sector, encompassing trade, tourism and manufacturing, is expected to remain strong.
• The UAE Minister of Finance stated that the UAE was unlikely to issue its first ever sovereign bond this year, on the sidelines of an exhibition. He also mentioned that the GREs were in a good shape.
• An EIU report has ranked Dubai as the most competitive city in the Middle East and 40th worldwide, closely followed by Abu Dhabi (41st), based on its ability to attract capital, business, talent and tourists.
• Reports about the possible merger between Aldar and Sorouh has led to higher share prices and is likely to lead to further consolidation in the real estate sector, should this merger go through. S&P announced that their ratings for Aldar remained unchanged given that the merger talks are in very early stages.
• Dubai’s credit risk has dropped to a seven-month low, as the cost to insure its debt fell 100bps to 345.
• Total provisions set aside by the UAE banks showed the highest monthly average - allocating almost AED 2.1bn - in Dec 2011. This boosted total provisions to AED 11bn in 2011, slightly lower than 2010’s AED 11.7bn and 2009’s peak of AED 12.9bn.
• Rising food prices led to an uptick in Abu Dhabi’s Feb inflation by 0.6% yoy. The increase of 2.6% in food and 7.4% in beverages, also translated indirectly into higher prices for restaurants and hotels group - 9.7%. In mom terms, prices decreased 1.2%.
• UAE firms listed on the local exchanges showed remarkable profits growth by 104% last year, which was not supported by the corresponding growth of stock indices, according to the Kuwait Financial Center. Two issues are worth to be mentioned in this regard: (i) Strong growth of stock indices on the UAE exchanges in the last 2 months and beginning of March may partly reflect better financial stance of local companies as measured by the financial statements for the last year; (ii) Ex-post evaluation of stock prices may indicate shortages in the existing practices of information disclosure and assessment on the local stock exchanges.
• The Federal National Council has requested that the ceiling for housing loans offered by the Zayed Housing Program be increased to AED 850k from AED 500k at present.
• UAE’s proven oil reserves are likely to decline by about 5.8bn barrels to around 91bn barrels by 2016, according to the latest report by Business Monitor International. Oil production is expected to rise to over 3.2 mn bpd by 2016 and about 3.5 mn bpd by 2021.
• The World Travel & Tourism Council stated that the contribution of travel and tourism to GDP, though strong, has declined by about half a percent, compared to 2009. In 2012, travel and tourism is expected to add USD 19.9bn to the UAE's GDP (6.1%) compared to USD 16.6bn (6.6%) in 2009.

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Markets

The upward trend is faltering, due to China which announced lower expected growth for 2012 and the waning of the relief after the Greek deal. Difficult decisions remain on the table with little political appetite or coherence to tackle them. Stock markets were feeble and choppy, with regional markets no different - both the DFM and ADX dipped on profit-taking, with the former registering the largest one-week drop since early March 2011. The euro declined in spite of the swaps agreement while positive US data helped the dollar reach multi-month highs against various currencies (hitting the highest in almost a year against JPY). Oil market halted its run while heavy trading on Friday helped gold regain losses made during the week.

Global Developments

Americas:

• US non-farm payrolls rose by 227k in Feb, with unemployment at a three-year low of 8.3%, underscoring a notable acceleration in job creation.
• The ISM services index rose in Feb to 57.3 (Jan: 56.8), the highest level since a year ago.
• US factory orders fell in Jan by 1% mom (Dec: +1.4%), due to rising oil prices and the expiration of a tax break in 2011.
• Initial jobless claims rose to 362k this week (Last week: 351k). The 4-week moving average inched up to 355k from 354k the previous week.
• Trade deficit widened to a three years high at USD 52.6bn (Dec: USD 50.4bn). Imports rose by 2.1% led by demand for foreign cars, computers and food products. Exports rose by 1.4%, on the back of a slowdown in exports to Europe (-7.5%).

Europe:

• More than 90% of bondholders accepted the haircut on Greek sovereign bonds, removing an obstacle that could have derailed the rescue plan.
• Eurozone PMI composite index dropped to 49.3 in Feb (Jan: 50.4), indicating a contraction in services and manufacturing. The data were weak across key Eurozone countries, falling to 2-month lows in Germany (53.2), France (50.2), Italy (44.7) and Spain (42.9).
• Eurozone GDP grew at 0.3% qoq (Q3: +0.1%) in Q4 2011, due to a fall in household consumption (0.4%) and government spending (0.2%). The euro area growth increased by 0.7% yoy, sa, in Q4 (Q3: +1.3%), bringing the full year growth to 1.4% compared to 1.9% in 2010.
• Eurozone retail sales posted a surprise increase of 0.3% mom in Jan (Dec: -0.5%) but remained flat from a year ago; with a notable divergence within the EU - Germany recorded a decline of 1.6% mom while France registered an uptick by 2.1%.
• German trade surplus increased to EUR 14.2bn, sa in Jan (Dec: EUR 13.9bn). Exports rose by 2.3% mom, sa, bouncing back from a sharp decline of 4.4% mom in Dec. German factory orders for Jan dropped sharply by 2.7% mom, sa (Dec: +1.6%), reflecting a decline in foreign demand for investment goods.
• Industrial production (IP) for Jan was released in Europe: German IP rose 1.6% mom (Dec: -2.6%) and 1.8% yoy (+1.3%); French IP data revealed a mild 0.3% uptick (-1.3%), while Italy saw a drop of 2.5% mom (+1.2%).

Asia and Pacific:

• Chinese M2 grew at 13.0% in Feb (Jan: 12.4%), while new loans recorded a lower total of CNY 710.7 bn (Jan: CNY 738.1). Corroborating this, inflation in China eased to 3.2% yoy in Feb (Jan: 4.5%), continuing the five-month trend. The PPI came in flat for the month and 0.1% yoy.
• China’s trade deficit plunged to decade record of USD 31.5bn as imports outpaced exports at 39.6% yoy and 18.4% yoy, respectively. High fuel prices and weak foreign demand were the main causes. Adding to the stack of weak Chinese data, Jan-Feb retail sales growth dropped to 14.7% yoy (Dec: 18.1%) and industrial production came in at 11.4% yoy (Dec : 12.8%).
• Japanese Q4 GDP contracted by 0.7% yoy and 0.2% qoq, revised up from initial estimates of a decline by 2.3% yoy and 0.6% qoq, respectively. Japan’s posted a record trade deficit of USD 5.4bn in Jan (Dec: USD 3.75bn surplus), attributed to lower Chinese demand and higher fuel imports after nuclear plant shutdowns.
• Inflation in Philippines eased to a 29-month low of 2.7% yoy in Feb (Jan: 4.0% ), on the back of modest increases in food and beverage prices.

Bottom line:

The macro picture remains weak as data from Germany (and Europe in general), Japan and China underscore. Moreover China downgraded its GDP growth target for 2012 to 7.5% (from 8%). This move triggered negative sentiment around the world although in the long run this development goes in the right direction emphasizing the “quality” of growth, not just the quantity. Premier Wen indeed stressed the rotation from investment and exports to consumer-led growth which would lead to a much needed normalization of the current account imbalances between China and the US.

Regional Developments

• Discussion on transforming the GCC into a Union was a key topic of discussion at the meeting of the GCC Foreign ministers (FMs) last Wednesday. Saudi Arabia’s FM assured that the sovereign status of each country would not be compromised by this Union.
• Prospects for further GCC integration took center stage at the Jeddah Economic Forum, where joint infrastructural projects, financial markets integration, labour policy liberalization, and stronger efforts towards monetary and political union were identified as crucial to strengthen the position of GCC on global arena. A survey conducted at the forum showed that European Union was considered the most appropriate model for GCC integration.
• The average annual interest rate of 3- and 12-month Government Treasury Bills issued last week through the Central Bank of Bahrain totalled 1.74% (-0.03 p.p.) and 1.20% (+0.02 p.p.) respectively. The total volume of sales was BHD 35mn for 3-month bills and BHD 100mn for 12-month bills, as the bids exceeded supply by 221% and 137% respectively. With these issues the outstanding nominal value of Bahraini Government T-Bills reached BHD 930mn.
• The Central Bank of Oman reported 13% growth of banks’ credit to the private sector last year. Credit to public sector in 2012 rose remarkably higher, at 58%, due to large infrastructural projects launched in the country and banks’ low-risk perception of public enterprises.
• Higher oil prices led to a record budgetary expenditure in Oman at OMR 10.5bn last year, while fiscal surplus reached OMR 961mn. For 2012 the budget deficit is set at OMR 1.2bn with average oil price forecast at USD 75 per barrel, a very prudent assumption.
• Arab countries’ tourism sector losses due to the ongoing turmoil were estimated at USD 96bn by the Arab Tourism Organization.
• The profits of the Kuwaiti banks listed on the local stock exchange increased by 1.7% last year to reach KWD 566mn, while irregular loans decreased from KWD 2.3bn in 2010 to KWD 1.9bn in the end of 2011, according to the report by KIPCO Asset Management Co.
• Monetary aggregates in Saudi Arabia continue to expand in line with the growth of country’s foreign assets: 12-month growth rates of monetary base and M3 was 27% and 13.6% respectively, while SAMA’s (Saudi Arabian Monetary Agency) foreign assets grew by 22%.
• Qatar postponed the announcement of country’s annual budgetary parameters, expected at the end of March, to the end of June, as fiscal authorities are in the process of shifting to a three year budget planning horizon.
• Qatar has promised to invest USD 2bn in Sudan, following the visit of the Sudanese President. The investments would be in the form of “the purchase and placement of treasury bonds in different sectors, among them mining, oil, agriculture and services”, according to a QNA report.
• Delay in the adoption of 2012 Lebanese budget, associated with limited abilities to mobilize additional revenues from anticipated tax measures, may result in lower GDP growth due to the insufficient public expenditure, according to the Institute of International Finance.
• According to the official statistics, unemployment in Tunisia reached 18.9% in the end of the last year, growing 0.6 p.p. during 6-month period. The total amount of unemployed was more than 738 thousand, with around three quarters of jobless below the age of 30, while unemployment rate among women was almost twice higher than that of men’s.
• According to the Turkish Statistical Institute, industrial production increased by 1.5% yoy in January 2012, markedly below the expected 4% growth.
• Turkish inflation came in at 10.43% yoy in Feb (Jan: 10.61%), hovering around three-year highs while PPI was slightly lower at 9.15% (11.13%).
• Egypt GDP grew 0.4% qoq in Q4 2011, following 0.2% in the preceding quarter - thanks largely to private consumption.

UAE Focus

• Total bank deposits in the UAE rose by 1.5% mom and 1.9% yoy in Dec 2011 to AED 1.07 trillion. Bank lending in the same period surged 3.8% yoy.
• UAE PMI slowed in Feb to 52 (Jan: 52.4), in spite of new export orders component hitting a 4-month high, as employment growth remained weak and output prices increased marginally.
• Freezones in Dubai contribute about 33% to Dubai’s GDP, being home to about 19k companies and 26k employees, according to the Chairman of the Dubai Free Zones Council.
• Dubai is reportedly planning to securitise the airport’s duty free revenues - to raise at least USD 500mn, according to sources familiar with the plan.
• The first yuan bond issuance in the region highlighted investor appetite as Emirates NBD announced that the dim-sum issuance of CNY 750mn was oversubscribed about 5.7 times over. Private banks allocated 43% of the issue, with fund managers and insurance 38%, banks 8% and hedge funds 5% with other investors accounting for the balance. Geographical distribution of the investors was: 57% from Hong Kong and China, 30% Singapore, 5% Taiwan, 7% Europe and 1% Middle East.
• Dubai tourism picked up in 2011, receiving close to 9.3mn visitors, a growth of 10% yoy, with guestnights rising 23% and the average length of stay at 3.6 days. Saudi Arabia, India and UK were the top three markets from where visitors arrived in Dubai.

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Markets

The upward trend is gaining ground so even those who are skeptical of its sustainability are forced to join in because their performance is judged against a market benchmark. The wave of optimism swept also the regional markets: Dubai touched a 1-year high while the Saudi market closed yesterday at the highest since Sep 2008. The euro continued to fall against the dollar due to ECB’s injection while the dollar strengthened to a nine-month high against the yen. Gold prices were spooked by the lack of enthusiasm displayed by Bernanke for QE3, and closed on a low from a week ago while oil prices rose to the highest since mid-2008 as rumours of a pipeline blast led to a rush in buying.

Global Developments

Americas:

• US Q4 2011 GDP was revised up to 3% qoq ann from an initial estimate of 2.8% (Dec: 1.8%), the quickest pace since Q2 2010. Adding to the stream of upbeat data, the Chicago PMI recorded a 10-month high at 64.0% in Feb (Jan: 60.2%) and consumer confidence surged to a 12-month high in Feb at 70.8 (Jan: 61.5), indicative of a possible increase in spending for the upcoming months. However, the need for cautious optimism is signalled by the Personal Consumption Expenditure (PCE) which saw a mild increase of 0.2% mom in Jan (Dec: +0.1%).
• In his testimony to Congress, Bernanke, despite noticing the labour market uptrend, stressed that the fundamentals supporting consumer spending “continue to be weak”. Still the Fed Chairman did not hint to an imminent QE3.
• The Pending Home Sales Index, based on contracts signed in January, increased 2% to 97.0 - the highest since April 2010. The S&P/Case-Shiller Home Prices Index ended 2011 at its lowest since mid-2006, falling 4% yoy in Q4 (Q3: -3.7%) and 3.8% qoq, a sign that no recovery is in sight.
• US durable orders declined sharply in Jan by 4% mom (Dec: +3.2%) following the expiration of a tax break allowing full depreciation on equipment purchases. The drop was led by a contraction in demand for capital goods of 4.5% mom.
• ISM manufacturing index fell to 52.4 in Jan (Dec: 54.1) as the new orders declined to 54.9 (57.6), while export orders climbed.
• Initial jobless claims decreased by 2k to 351k, sa, from the previous week’s revised 353k. The 4-week moving average dropped to its lowest levels since March 2008, falling 5.5k to 354k.

Europe:

• The second long term refinancing operation arranged by the ECB for Euroland’s bank amounted to EUR 530 billion and is expected to boost credit to companies. The first operation was barely sufficient to compensate for the assets losses and the deposits drop. Buba’s Wiedeman balked at this newly printed money flood asking for a revision in TARGET which allows central banks to settle their positions and extend credit to each other.
• Greece’s debt was downgraded again - by S&P and Moody’s to selective default. Markets showed no reaction.
• Eurozone Inflation was 2.7% yoy in Feb, up from 2.6% in Jan. Even German CPI rose in Feb to 2.3% yoy (Jan: 2.1%) due to energy prices.
• Spain’s budget deficit exceeded all pessimistic estimates at 8.5% of GDP for 2011shattering the possibility of meeting the 2012 target of 4.4%.
• The euro-zone PMI index crawled to 49.0 in Feb (Jan: 48.8), indicating a slower contraction in the manufacturing sector. French PMI rose to a seven-month high to the 50 mark, while Spanish and Greek PMIs were in the contraction territory at 45.0 and 37.7, respectively.
• German retail sales dropped in Jan by 1.6% mom, sa (Revised Dec: +0.1%), as the mild winter discouraged purchases of winter clothes.
• Eurozone unemployment hit a record high of 10.7% in Jan while the Dec figure was revised upwards to 10.6% from the previously reported 10.4%.

Asia and Pacific:

• Chinese PMI increased to 51.0 in Feb (Jan: 50.5) as both new orders and export orders accelerated to 51.0 and 51.1, respectively.
• Internationalisation of the Yuan is moving ahead: the PBoC announced that all firms in the country would be henceforth allowed to invoice or pay for cross-border transactions in the Chinese currency.
• Indian Q4 2011GDP grew at its slowest pace in almost three years at 6.1% yoy (Q3: 6.9%), a result of high interest rates, a hike in oil prices and a slowdown in global demand.
• S. Korea Jan current account deficit was USD 772.2 mn (Dec: USD 2.81 surplus), first deficit since Feb 2010, due to a slowdown in exports to the Eurozone and the Lunar New Year holiday. Industrial production was up 3.3% mom, sa (Dec: -0.7%) but fell 2.0% yoy (Dec: 2.8%).
• Japanese industrial production in Jan surged 2% mom (Dec: 3.8%), the largest contributions coming from transport equipment (3.3%), telecommunications (12%), and iron & steel production (5.9%). Construction orders jumped by 24.5% yoy (Dec: 1.5%).
• Retail sales in Japan rose by 1.9% yoy in Jan (Dec: 2.5%) on the back of a surge in motor vehicle sales of 24.3% yoy following a 14.9% yoy increase in Dec. Housing starts fell by 1.1% yoy (Dec: -7.3%), declining for the fifth consecutive month.
• Thailand’s inflation slowed to 3.3% yoy in Feb (Jan: 3.4%) in spite of higher food prices while Indonesia’s was 3.6% yoy (Jan: 3.6%).
• Philippines Central Bank cut the policy rate by 25bps to 4.00% - for the second time this year citing the “benign inflation outlook”.
• North Korea agreed to suspend nuclear tests, long-range missile launches and activities at a nuclear facility in an unexpected move that represents a surprise diplomatic breakthrough and a major ease of tensions along the 38th parallel.

Bottom line: A constant theme throughout the past 15 years has been the link between asset prices and liquidity injections from the central banks. The latest rally is no exception. With the second LTRO by the ECB, markets are celebrating another dose to satisfy their addiction. But on the macroeconomic front there are still very few hints of a solid recovery if one excludes the US labor market.

Regional Developments

• Ernst and Young estimates that about 15 million young people would enter the labour force in the next 10 years (average annual growth of 2%), from the economies of Egypt, Qatar, Saudi Arabia and UAE.
• Mergers and acquisitions in the Middle East continue to dip in 2012: total value in Feb was only USD463mn from Jan’s USD 2.64bn, an 82% decline and compares to USD 1.18bn a year ago. Transaction volumes were also lower: down 60% mom and 73% yoy.
• Saudi Arabia’s exports increased by 37% and reached SR 1.29 trillion in 2011, while SAMA’s (Saudi Arabian Monetary Agency) reserve assets exceeded SR 2 trillion. Growth rates of credit to private sector doubled, and monetary aggregates also surged in 2011, indicating risk of growing inflationary pressure in the future, while current inflation remains relatively flat at the level of 5.3% (in January 2012).
• Qatar’s nominal GDP in 2011 grew by 48.6% to reach QR628bn (USD 172bn) majorly due to the growth of hydrocarbon prices.
• Oman’s nominal GDP increased 23.3% yoy to OMR 20.07bn by Sep 2011, thanks to a 34.9% jump in oil activities (as the average oil price stood at $102.96 against $76.58 a year ago) and a slightly lower 13.1% hike in non-oil sectors. Industry recorded an 18% growth and services 11.5%.
• Oil prices led to higher revenues, enabling Oman to report a large fiscal surplus of OMR 1.16bn in Jan-Nov 2011, compared to a fiscal deficit of OMR 287.4mn a year ago. Public expenditure rose 19.5% to OMR 7.6bn though current spending grew faster at 18.9% than capital at 10.3%.
• Forbes, in its list of richest countries, placed Qatar on the top spot - with a per capita income of USD 88k (adjusted for purchasing power parity)- while UAE was at 6th ($47.5k) and Kuwait at 15th.
• Saudi Arabia’s Foreign Minister has reaffirmed that it would honour its pledge to provide Egypt with USD 3.75bn in aid, of which USD 500mn already disbursed to the Central Bank in May last year.
• According to Alkhabeer Capital of Saudi Arabia, country’s GDP growth in 2012 is expected at the level of 4.6% – the second highest in the GCC area after Qatar, where GDP growth rate may reach 7%. Experts anticipate 2012 inflation in Saudi Arabia below 4%.
• Oman to set up Association of Banks – an independent body to represent the interests of Omani banks at local and international levels. The association will support transformation towards more transparency through the promotion of internal and international banking rules.
• Gulf News reported measures undertaken by Muscat Sultan to strengthen judiciary independence in Oman, where governmental influence on Supreme Judicial Council’s decisions was limited after the changes in the membership of the council.
• Central Bank of Oman released the results of its regular certificates of deposit tender: the total amount allotted was RO322 million, maturity – 28 days, average interest rate – 0.08%. It is considered that banks’ excess liquidity absorption by the central bank allows maintaining stability of interest rates and money market in Oman.
• Turkey’s trade deficit narrowed to USD 7 bn in Jan (Dec: USD 8.1 bn), falling for the third consecutive month. Exports rose by 8.6% yoy, while imports saw a smaller gain of 2.8% yoy, despite a 26% increase in energy imports annually.

UAE Focus

• The hike in public sector wages in the UAE last year, which ranged between 35-100%, is likely to add around AED 3.4bn to the Federal budget every year, according to the director general of the Ministry of Finance.
• Some good news on Dubai debt: DEWA has announced that it will repay debt of AED 1.2bn this year, before the date of maturity while Drydocks World’s new terms for its USD 2.2bn debt will be discussed bankers this week with the aim to complete in July "all aspects of its restructuring".
• The UAE is set to allow ownership by foreign companies in selected areas of the economy, according to the CEO of the Stocks and Commodities Authority. This was in response to a question whether foreign ownership limitations had led to MSCI’s decision not to reclassify UAE, to which he had answered in the negative.
• Venture Middle East reported that the value of current construction projects in the UAE was close to USD 1.25 trillion and that about USD 15.068bn worth of contracts would be awarded this year - a growth of 26.57%.
• Hotels in Dubai outperformed other MENA markets in the month of January, according to a survey by TRI Hospitality Consulting. Occupancy rates for four and five star hotels reached 87.7% as a result of an influx of tourists during the city’s 17th Dubai Shopping Festival (DSF). In line with this data, Dubai International Airport reported a 14% increase in passenger traffic for Jan, bringing the total to 4.85 mn passengers.

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Markets

Eurozone’s backing for the Greek debt deal failed to stimulate the markets much; but, positive data released helped US stocks reach the highest level since 2008 while Asian markets rallied. Regionally, the Abu Dhabi and Saudi markets hit 5-month and 3-year highs respectively last week, boosted by recent oil price trends and improved global sentiment. Among currencies, euro gained to reach a 11-week high against the dollar while the yen was at a 7-month low. Oil surged to a nine-month high after an unsuccessful IAEA visit to Iran, while gold prices also rose, despite dollar’s weakness.

Global Developments

Americas:

• US existing home sales rose to their highest level since May 2010, climbing 4.3% mom in Jan 2012, while new home sales declined for the first time in five months by 0.9% mom (Dec: +1.9%) to 321k.
• Initial jobless claims were unchanged at 351k somewhat below the consensus. The 4-week moving average glided to 359k, the lowest since March 2008. Continuing claims fell by 52k to 3.39 million corroborating the picture of gradual improving conditions.

Europe:

• Eurozone finance ministers approved the EUR 130bn bailout for Greece, subject to strict conditions and austerity measures.
• French CPI fell 0.4% mom in Jan, due to a seasonal quirk in clothes and shoes (-10.9% mom); in Italy, inflation rose 0.3% mom and 3.2% yoy.
• Flash PMI dipped to 49.7 in Feb from 50.4 in Jan, fuelling concerns about Eurozone’s prospects; this resulted from a drop in German PMI to 50.1 (Jan: 51.0) while French PMI rose to 50.2 (48.5).
• Industrial orders in Italy rose 5.5% mom, sa, 4.3% yoy in Dec (Nov: 0.2% mom), with domestic orders rising 5.8% and foreign orders up 5.1%.
• German IFO business index rose in Feb to 109.6 (Jan: 108.3), pointing at a more resilient picture for growth in Q1 2012.

Asia and Pacific:

• Chinese PMI increased to 49.7 in Feb (Jan: 48.8), in spite of a fall in new export orders, as manufacturing output rose to 50.1 (47.6).
• More Q4 GDP data from Asia: Thailand’s Q4 GDP declined by 9% yoy (Q3: +3.7%) as the negative impact of the severe floods continued to haunt the already weak exports. Taiwan’s economy contracted in Q4 by 0.15% qoq, sa (Q3: -0.05%) and 0.59% yoy, sa (Q3: -0.2%), leading the government to revise the growth forecast for 2012 down to 3.85% from 3.91% previously.
• Japan’s trade deficit widened in Jan to JPY 1.48 trillion (Dec: 205bn), largely on weaker global demand and as the stronger yen hurt exports. Exports declined 9.3% yoy while imports rose 9.8%. Reuters Tankan, tracking Japanese manufacturing sentiment, recorded -11 for Feb (Jan: -5) - the lowest value since Mar ‘11.
• Taiwan’s current account surplus reached USD 12.1bn in Q4 (Q3: USD 10.2bn) - an increase of 28% yoy and the highest since Q1 2009.
• Malaysia’s CPI rose 2.7% yoy and 0.3% mom in Jan 2012 (Dec: 3% yoy), from a significant gain of 4.8% yoy in food and beverages.
• Inflation in Singapore touched an eight-month low of 4.8% yoy in Jan (Dec: 5.5%), with the largest contributor being housing costs (+10%). Industrial production for Jan 2012 declined 8.8% yoy (Dec: +25.2%), attributed to weaker electronics output and lower activity due to the Chinese New Year.

Bottom line: The deal over the debt restructuring in Greece and the second bailout program were not mistaken as the end of the ordeal, like happened in previous occasions. The notion that there is no silver bullet for a crisis of such magnitude in Euroland is probably the most positive outcome of the process so far. The data flow confirmed that the slowdown spread to Asian economies at the end of 2011, although policymakers in the region have more ammunition and fiscal space to revive growth.

Regional Developments

• Yemen voted in Abd Rabu Mansour Hadi in a single-candidate presidential election, marking the historic end of the 33-year rule of Ali Abdullah Saleh.
• A team from the International Atomic Energy Agency failed to reach an agreement during its two-day visit to Iran, potentially exacerbating the mounting tensions between Iran and many Western nations.
• A major Islamic bank will be launched in 2012, based in Bahrain, with almost USD 600mn of the total paid-up capital of USD 1bn being contributed by the Arab region’s Islamic banks.
• According to QNB Capital, growth rate of GCC population is expected to decrease from 5.9% in 2004-2008 to 3.2% in 2009-2013, however remaining at a level much higher than the world average. GCC population will reach 50 million in 2013 with Saudi Arabia and UAE holding the largest shares – 61% (down from 68% in 2004) and 18.2% (up from 11.3% in 2004) respectively.
• Bahrain’s CPI fell 0.2% yoy and 0.1% mom in Jan, due to a fall in the food and beverages index by 1.1%.
• Kuwait’s Minister of Commerce announced the intention of privatizing its seaports, while assuring that a plan to establish a cargo terminal at the Shuaiba Port was ongoing.
• In Kuwait five MPs of the opposition Popular Action Bloc, including the Assembly Speaker submitted a petition asking the government to scrap loan interests and pay every citizen KWD 1000. Kuwait Times reported unconfirmed sources that expected such a move from the government this week.
• Kuwait’s budget surplus totalled KWD 13.1bn in Apr-Dec 2011, while revenues reached KWD 21.4bn and expenditure – KWD 8.3bn. The nine months revenues are already 60% higher than the expected full year due to the higher oil prices compared to the conservative forecast of USD 60 per barrel. In the last 3 months of the current fiscal year Kuwait is expected to significantly increase public spending, as budget surplus is projected to decrease to KWD 9-10bn for the whole fiscal year.
• Total assets of Kuwait’s banks increased by 6.5% in 2011 to reach KWD 44.1bn, while credit growth was slow at 1.6% as compared to private sector deposit growth – 8.1%. Monetary aggregate M2 (money supply) increased by KWD 2.2bn and reached KWD 27.8bn by the end of 2011.
• Oman’s average oil production increased marginally to 884,900 barrels per day (bpd) in 2011, compared to 864,600 in 2010 though the state-run Petroleum Development Oman’s production declined slightly last year due to rain and labour unrest. Meanwhile, new oil and gas discoveries, in addition to an increase in reserves by 450 million barrels of oil equivalent is likely to increase production levels in 2012.
• Qatar’s tourism sector benefited significantly from the Arab turmoil - the Qatar Tourism Authority announced a 50% yoy increase in tourists from the GCC and a 12% jump in international visitors (of which 58.5% were Asian) in 2011.
• Saudi non-oil exports saw a 25% yoy surge to USD 4.14bn in 2011, with China the largest importer (12% of total exports or USD 503mn), and then UAE (USD 431mn). Interestingly, plastic products topped exports list (34%, USD 1.39bn), closely followed by petrochemicals (USD 1.35bn).
• Public debt of Saudi Arabia is expected to decline to its lowest level since 1980s amid strengthening international investment position as foreign assets are expected to reach SAR 694bn by the end of 2012. According to a Jadwa Investments report, public debt may shrink to SAR 115bn or 5.6% of 2012 GDP.
• Turkey’s Construction Industry Confidence Index growth was highest in Feb 2012 at 6.6%, compared to the growth of services and retail trade sector confidence indices – at 1.5% and 1.3% respectively. Despite the growth, indices remained in the pessimism zone (below 100): 98.8 for services, 99.7 for retail trade, and 89.6 for construction.
• The Egyptian government expects to enter into a new arrangement with the IMF on a loan for USD 3.2bn equivalent in March, according to the country’s finance minister.
• The Lebanese finance minister presented amendments to the 2012 budget which needs to be approved by the government and Parliament to come into force. According to the amendments, budget deficit would expand to reach LBP 5.3 trillion mainly due to the increased expenditure on salaries in the public sector. It is also proposed to increase the VAT rate by 1 p.p. from the existing level of 10% (initially increase in VAT rate was to be by 2 p.p. to 12%), while tax rate on corporate profits in real estate sector and tax on bank deposits interest may be increased.
• The European Parliament approved an agricultural agreement with Morocco despite the strong resistance from Spanish lobby. The agreement will ease access for the Moroccan agricultural products to the European market.

UAE Focus

• UAE foreign trade grew 25% yoy to AED 1.0 trillion in 2011, with exports rising by 36% - this data, however, excludes trade in the free zones, which grew by almost 19% yoy.
• Federal bonds issuance strategy will be submitted to the cabinet within the next two weeks, enabling the country to issue its first federal bonds - while the federal public debt management office is being put in place and ahead of the signing of the Public Debt Law by the President.
• The UAE Ministry of Finance hinted that it may introduce new fees to attain federal budget consolidation. The fees may be enforced next year, however the source at the ministry mentioned that the economic and social implications of the new fees would be taken into consideration, and agreements with the local governments should be obtained before policy enactment.
• UAE’s CPI hit a six-month high, reaching 116.9 in Jan 2012, up 0.7% yoy and 0.3% mom. Higher inflation resulted from increases in housing (0.75%) and clothing (1.6%) prices.
• Foreign direct investment inflows into Dubai are expected at AED 27 bn (USD 7.4bn) in 2012 with growth of at least 10% over the previous year. These estimates are based on the increasing number of investment applications from European countries submitted to the Dubai’s Department of Economic Development.
• Dubai’s population grew by almost 100k people (+5.1% yoy) to 2.003mn in 2011 from 1.9 mn at the end of 2010 - growing at almost triple the average global growth rate and accounting for nearly a quarter of UAE’s population.
• Emirates NBD has announced its plans to issue CNH (offshore Chinese renminbi) bonds under its USD 7,500 medium term note (EMTN) programme, offering an alternative source of funding.
• A dual currency financing of USD 675mn for the USD 1.08bn tram project has been completed - according to Dubai’s Department of Finance.

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Markets

GProgress in the Greek debt negotiations alongside strong US data led to upbeat market sentiment. Better than expected financial results of GCC companies, amid positive news from the global markets, supported rallies in the region’s stock exchanges leading to substantial gains in Kuwait and Dubai bourses. The euro gained against the dollar and yen towards the end of last week as the Greece dilemma seemed closer to a resolution; the pound also gained against the dollar, given the rise in retail sales. Both gold and oil prices were up, with Middle East tensions sending oil prices higher.

Global Developments

Americas:

• The US 2013 Federal budget aims to reduce discretionary spending by USD 1 trillion from 8.7% of GDP in 2011 to 5% in 2022. Additionally it aims to cut USD 4 trillion in spending programs by 2018, to bring the deficit below 3% of GDP, stabilize the debt-to-GDP ratio and achieve a primary balance. In 2012 the deficit will still be 8.5% of GDP due to come down in 2013 to 5.5% of GDP. Not unexpectedly, there is hardly a hint of fiscal discipline in an election year.
• Bi-partisan agreement was reached allowing for an extension of the payroll-tax holiday and extended unemployment benefits.
• US retail sales recorded a mild increase in Jan of 0.4% mom, sa, after coming in flat in Dec, held down by a decrease in car sales.
• Industrial production remained flat in Jan (0.7% gain in manufacturing), with IP for Dev revised to 1.0% mom from the previously reported 0.4%. Factory output surged 0.7% and utility output fell 2.5% while capacity utilisation decreased to 78.5%.
• CPI was up 0.2% mom and 2.9% yoy in Jan as energy costs increased (for the first time since Sep) while core CPI was up 0.2% mom and 2.3% yoy (the fastest since Sep 08). PPI was up 0.1% mom in Jan while the core PPI was higher-than-expected at +0.4%.
• More good news came via housing starts that continued to rise in Jan, recording an uptick of 1.5% mom to 699k and initial jobless claims unexpectedly declined 13k to 348k- the lowest since March 2008, reinforcing a labour market turn around.

Europe:

• The Greek Parliament approved the austerity measures requested by the troika to release the second tranche of the rescue package amid street protests and violence. The deal is unlikely to put the country back on its feet as it neglects the key structural problems. GDP fell 6.8% in 2011.
• Euro area GDP fell 0.3% qoq in Q4 (+0.1% in Q3) and 0.7% yoy, as expected. The French economy posted a 0.2% qoq increase in Q4 GDP, or 1.7% for the year. German GDP dipped 0.2% qoq in the same period, a smaller-than-expected drop. Italy’s GDP fell 0.7% qoq in Q4 and increased 0.5% yoy driving the country into technical recession. Portugal also experienced a 1.3% qoq contraction in Q4 GDP and 2.7% yoy. Spanish Q4 GDP shrank 0.3% qoq but rose 0.3% on a yoy basis.
• Moody’s downgraded six European nations, including Italy (A3 from A2), Spain (A3 from A1) and Portugal (Ba3 from Ba2) while putting England and France’s on negative outlook, which might lead to a downgrade from the top AAA rating.
• UK inflation for Jan 2012 fell to 3.6% (Dec: 4.2%), recording the lowest annual rate of inflation since Nov 2010, but still remains well above the BoE’s 2% target rate.
• Retail sales volumes in UK increased 0.9% mom and 2.0% yoy in Jan, building on the 0.6% rise in Dec; this was largely due to the 4.8% monthly rise in household goods sales.
• EU IP in Dec fell 1.1% mom, dropping 3.6% since Aug with sharply diverging performances in Germany and in European Mediterranean countries.

Asia and Pacific:

• The PBoC announced a cut in banks’ reserve requirements by 50bps (effective Feb 24) to encourage lending; this cut would decrease the ratio to almost 20.5% for China’s larger banks and is expected to release almost CNY 400bn.
• China’s Premier Wen Jiabao pledged to invest in Europe’s bailout funds and sustain its holdings of euro assets. However the Governor of the central bank added that the BRICS have to wait for the right time and right opportunity to invest.
• January's home prices in China recorded the worst performance in a year, with none of the 70 cities monitored posting a gain, a reflection of the government’s 2-year effort to curtail rising home prices in the country.
• Japan Q4 GDP fell 2.3% qoq, saar ending another bad year where GDP fell 0.9%. Net trade was the counterpart to the Q4 GDP decline, while domestic demand rose slightly in Q4 with private domestic demand up about 0.6% qoq, saar. Industrial production was revised down to 3.8% in Dec, (initial reading of 4%) and the capacity utilization index saw a rise of 3.1% in Dec mom.
• Indian wholesale price inflation hit a 26-month low, coming in at 6.55% in Jan (Dec: 7.47%) driven down by lower vegetables’ prices.
• Malaysia’s Q4 GDP rose 5.2% yoy (Q3: 5.8%), taking the full year growth to 5.1% in 2011 (2010: 7.2%). Singapore’s Q4 GDP shrank 2.5% qoq, saar; for 2011 GDP was up 4.9%, significantly lower than 2010’s 14.8% growth.

Bottom line: Markets are holding on the hope that central bank aggressive unorthodox monetary measures will overcome all problems irrespective of the lack structural policy reforms which, in any case, governments are deemed inadequate to enact. Unfortunately this myopia has already caused another bout of the crisis in H2 2011. The next most awaited event is the meeting of Eurozone Finance Ministers called to decide on the Greek package tomorrow.

Regional Developments

• The GCC Development Fund has allocated USD 2.5bn to Jordan in support of projects and the country will also receive additional aid from the US, which has put aside USD 770mn for projects in the Middle East.
• Oil industry experts form JP Morgan and Barclays expect MENA countries’ investment in the sector to increase 11% in 2012 due to the growing demand, reorientation of oil delivery channels to Europe, and need for reconstruction in North Africa.
• Kuwait’s new cabinet was sworn in on Tuesday, amid opposition as the majority from the Feb 2 election outcome were sidestepped. Meanwhile, the Governor of the Central Bank of Kuwait (in post for past 25 years) resigned to protest against excessively expansionary fiscal policy driven by higher oil revenues. He argued that unreasonably high projected budgetary current expenditure, especially spending on public wages and subsidies, in contrast to relatively low investment, prevent addressing structural gaps, and undermine fiscal and monetary sustainability.
• The Central Bank of Egypt left its policy interest rates unchanged at 9.25% (overnight deposit) and 10.25% (lending). This comes in contrast to analysts’ expectations of raising rates to slow down local currency depreciation, and foreign exchange reserves depletion, indicating monetary authority’s fears of the negative effect on economic growth of higher interest rates. The Egyptian government is seeking ways to prevent financial disruption, and has turned to the IMF with a request for 18-month arrangement, worth some $3.2 billion. Local financial experts and government officials consider Fund’s assistance as crucial, which may open Egypt’s doors to the other international financial institutions.
• Financial inflows into Lebanon, comprising mostly of non-resident deposits, remittances and cash from tourists, decreased by 18% and amounted USD 13.9bn in 2011 compared to USD 17bn in the previous year.
• Saudi banks’ profits reached SAR 30.9bn last year, 18% higher than in 2010, while credit portfolio totalled SAR 856bn and deposits – SAR 1.1 trillion.
• Turkey’s consumer confidence index increased slightly to reach 92.2 in January, however remaining below the 100 level, the pessimism/optimism threshold.
• Inflation data were released in Oman, Qatar and Saudi Arabia: 12-month inflation in Oman fell in Dec to 3.3% – the lowest level since July 2010 – as food prices mostly stabilized or fell. Qatar’s Jan CPI rose 1.2% yoy and Saudi Arabia inflation in Jan was 5.3% yoy, unchanged from Dec.
• Turkey’s current account deficit decreased on an annual basis, at USD 6.6bn in Dec, compared to USD 7.5bn a year earlier, but widened from Nov’s USD 5.4bn. Turkey’s unemployment dropped to 9.1% in Nov 2011 from 11% in the same period a year earlier.
• A Standard & Poor’s report examined the growing acceptance of the Sukuk Market, stating that the global crisis and the subsequent withdrawal of European investors has resulted in Middle East and Asian markets turning to local investors to fund infrastructure projects. Another S&P report highlighted the rising political and economic risks for issuers in the Middle East conditional on the developments with regard to Iran, with analysts considering different scenarios including blockade of the Strait of Hormuz and military confrontation.
• Both Deloitte & PwC released reports on IPO activity in the MENA/ GCC region, pointing to a weak year in 2011 and a challenging 2012. According to Deloitte, on the positive side, companies launching an IPO “will attract greater investor interest, experience a shorter and more efficient IPO execution and approval process”. PwC meanwhile commented that in 2012 there would be “improvements in confidence on the supply side”, leading to “increased activity in certain regional markets” while “Sukuk would continue to be a popular mode of financing in the GCC for both the private and public sector”.

UAE Focus

• Dubai’s GDP is expected to grow at 4.5-5% in 2012, according to Shaikh Ahmad Bin Saeed Al Maktoum, supported by trade, tourism and transport.
• The top 100 best performing small and medium enterprises (SMEs) in Dubai boast a total of AED 2.3bn in turnover, combined assets of AED 1.4bn and profits of AED 220mn. Dubai’s SMEs account for 95% of companies and 40% of the workforce.
• Secure Collateral Lending. The Ministry of Finance, signed an agreement with the International Finance Corporation (IFC) to establish a nation-wide registry where companies can list corporate assets, from equipment, to inventory, to accounts receivables in order to obtain secured credit.
• Expatriate remittances from the six million foreigners in the UAE amounted to USD 49bn over 2006-2010, according to the Arab Monetary Fund.
• The UAE has the largest share of the USD 1 trillion worth of construction projects to be completed by 2020 in the GCC - at USD 636bn.
• An Economist Intelligence Unit (EIU) report placed 2011 GDP growth in the UAE nearly 3.3%, expecting a higher rate in 2012 owing to increased oil output to offset a decrease in crude exports from Iran. Growth in 2011 more than doubled from 2010’s 1.4%.
• Oliver Wyman estimated that the introduction of energy efficient technologies would lead to a reduction in energy costs by almost USD 3bn a year by 2030 in the UAE. By 2030, assuming constant electricity production costs, the UAE can save 51% of energy used in the residential sector, 38% in the commercial sector and 11% in the industrial sector.
• Brazilian Trade and Industry Minister emphasized his country’s intention to promote a free trade agreement between the Mercosur and the GCC, during his visit to Dubai. Several Memorandums of Understanding were signed between the Brazilian Trade and Investment Agency (APEX-Brazil) and Jebel Ali Free Zone Authority, Dubai Media City, Dubai Export Development Corporation and Dubai Foreign Direct Investment.

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Markets

Greek troubles and S&P downgrades played havoc last week, causing the rally in Asian markets also to wind down towards end of the week, even as TOPIX and Hong Kong remained near six-month highs. Regional markets were mixed, with Egypt gaining and Saudi closing at a 21-month high yesterday alongside small declines in Qatar and Abu Dhabi exchanges. Among currencies, the euro climbed after the Greek austerity plan received the go-ahead from the Cabinet but dipped on the latest uncertainty about Parliament ratification while the Indian rupee had its worst week since Dec last year. Gold prices continued to decline for a second consecutive week while oil prices spiked to a six-month peak on Thursday given the tensions on Iran.

Global Developments

Americas:

• US consumer credit expanded by 9.4% in Dec (Nov: +9.9%), with this increase of USD 19.3bn, sa, representing a growth in household borrowing through credit cards, auto loans and student loans.
• Initial jobless claims fell by 15k to 358k in the week ended Feb 4 while the four-week moving average touched 366,250 - the lowest since Apr 08, signalling a slowly improving US job market.
• US Trade deficit widened to USD 48.8bn in Dec (Nov: USD 47.1bn), with imports for full year 2011 rising to the highest in three years (+13.8%, USD 2.7 trillion) and deficit with China increasing to USD 295.5bn.

Europe:

• Greece's PM obtained approval from his Cabinet for deeper budget cuts (including reduction in spending, slashing the minimum wage by 22% and cutting pension benefits) to prepare the ground for a second round of international aid.
• The UK Halifax House Prices saw a mild recovery in January as house prices rose 0.6% mom after falling consecutively in the previous two months. However, prices in the three months to January were 1.8% lower than in the same period a year earlier.
• German factory orders in Dec rose a seasonally adjusted 1.7% mom (Nov: -4.9%), with the increase attributed to demand from outside the euro area.
• German industrial production (IP) data posted a disappointing drop of 2.9% mom in Dec, far from expectations of a 0.2% gain. The drop results from a fall in construction of 6.4% (Nov: +3.3%). Manufacturing and capital goods production contracted by 2.7% and 3.6% respectively as well, following mild reductions in Nov. Meanwhile, Spanish IP dropped for the fourth consecutive month by 6.9% in Dec (Nov: -7%). French IP contracted 1.4% mom while Italian IP recorded a surprise increase of 1.4%.
• German trade surplus rose to EUR 158.1bn in 2011 (2010: EUR 154.9bn) though a closer look revealed a fall in exports of 4.3% mom sa in Dec - the steepest decline since Jan '09 - and a drop in imports by 3.9%. Exports also decreased by 4.3% qoq saar in Q4 (Q3: +8.5%).
• Worrying for President Nicolas Sarkozy was a record widening in France's trade deficit to EUR 69.6bn in 2011 (2010: EUR 51.5bn), with the loss in competitiveness evident from the 8.6% rise in exports outpaced by a 12% increase in imports.

Asia and Pacific:

• Chinese CPI recorded an increase of 4.5% yoy in Jan (Dec: 4.1%) as food prices and prices of automobile fuel and components saw a rise of 10.5% and 5.9% respectively. The Producer Price Index, a measure of inflation at the wholesale level, on the other hand, recorded a small increase of 0.7%. Broad money growth in China was up 12.4% in Jan, the slowest growth since May 2001, while new bank loans were at CNY 738.1bn and outstanding Yuan loans stood at CNY 55.53 trillion.
• Chinese trade surplus widened to a six-month high of USD 27.3bn in Jan - which was distorted by the Chinese New Year holidays - with imports falling 15.3% and exports dropping 0.5%. Meanwhile, according to customs officials, exports rose 10.3% while imports were up 1.5% after adjusting for the holiday. Chinese Lunar New Year holiday sales were muted this year: rising by only 16%, a full three percentage points behind last year's increase. It has been viewed as an indicator of Chinese consumer sentiment for the year, foretelling a slower pace of spending in 2012.
• Indonesia's Q4 GDP rose 6.5% yoy, in line with expectations, led by a 4.7% increase in domestic demand (which accounted for approximately 60% of GDP), and an 8.8% surge in private investment.
• Inflation in Taiwan reached three-year highs in Jan, rising 2.37% yoy, primarily on account of elevated vegetable prices - recording a 42% hike in Jan (Dec: 48%). Despite the highs, the government and economists expect inflationary pressures to ease in Feb. CPI in the Philippines saw a rise of 3.9% yoy in Jan (Dec: 4.2%) - the slowest increase since Dec 2010's reading of 3.6%. The data hints at a potential rate cut at the next policy meeting on March 1st.
• Japan's index of coincident economic indicators rose 2.9 points in Dec from the previous month and the index of leading economic indicators saw a mild increase of 0.6 points from Nov. Core machinery orders fell 7.1% mom in Dec (Nov: +15%) while current account surplus contracted by 43.9% yoy to JPY 9.629trillion in 2011.
• Malaysia's Industrial production rose by 3% on an annual basis in December, coming in higher than the revised 2.4% growth in November.
• An unexpected rate cut from Indonesia's central bank - by 25bps to 5.75% alongside policy rates on hold by the South Korean (for the 8th consecutive month) and Australian counterparts were key meetings this week.
• India IP slowed sharply in Dec: output rose only 1.8% yoy (Nov: 5.95%) and capital goods remained weak (contracting 16.5%) while manufacturing, which constitutes about 76% of industrial output, grew 1.8%.

Bottom line: As Greece dominated financial news and investor sentiment through the week, the downgrade of 34 Italian banks by S&P only added to the growing concerns of a downturn. Central banks in developed countries left policy rates unchanged - at a record low of 1% after the ECB meeting last week- while the Bank of England said it would increase its asset-purchase program by an additional GBP 50bn, citing a weak near-term growth outlook - while a surprise policy rate cut came from Indonesia. The latest set of data from China may be signalling a slowdown, but it may be too early to label it a hard landing, given the holiday distortions.

Regional Developments

• UN estimates that the Middle East and North African countries had the highest unemployment youth rates in 2011 — at 26.2% and 27.1% respectively, higher than the 25.5% and 23.8% recorded in 2010. This follows the International Labour Organisation's report which places unemployment in the Middle East at 10.2% in 2011 and forecasts 2012 slightly higher at 10.3%. While the world needs about 600 million jobs to be created in the next decade, the Middle East needs to create about 2 million new jobs in 2012 alone.
• Ernst and Young reported that the total number of M&A in the Middle East were up 4% to 416 in 2011 though the value of the deals were down 28% to USD 31.7bn. In both number of deals and value, UAE topped the list in the region (49, USD 3.9bn), followed closely by Saudi Arabia (44. USD 2.8bn).
• Debt issuance in the GCC was up 34.1% to AED 308bn in 2011, of which corporate issues were the biggest accounting for 78% of the total amount raised.
• The total value of projects to be completed in the GCC region from today through 2020 is expected to exceed $US 1 trillion according to the survey conducted by MEED projects.
• The Governor of Qatar Central Bank stated during a conference that “total assets of the country's commercial banks grew by 22.3% to USD 190.6bn in 2011 while customer deposits increased by more than 18.5% to USD 100bn”, underscoring the strength of Qatar's banks to be able to finance more than USD 100bn in projects that are lined up as per the 2030 Vision.
• The SABB HSBC Saudi Arabia Purchasing Managers' Index increased to 60 in Jan (Dec: 57.7), indicating a strengthening of the country's nonoil private sector. However, the latest Dun and Bradstreet survey found that the business outlook in Saudi Arabia for Q1 2012 had dampened owing to Saudi Arabia's decision to reduce oil output in 2012 to allow for a recovery in Libyan oil production.
• Turkish industrial production in Dec 2011 increased by 3.7% yoy on the back of increases in mining & quarrying (6.7%) and manufacturing (2.7%).
• In 2011, total assets of the Turkish banking sector increased by 21% reaching 1218 trillion Liras or USD 648bn mainly due to a 30% loans expansion. Banks' deposits and paid-in capital also increased, however at a slower pace, by 13% and 5%, respectively.
• The Central Bank of Syria announced its commitment to defend the national currency, despite a significant depreciation of the Syrian pound on the black market. Currently is traded at 70+ per USD, while the official exchange rate is 57.5. The monetary authority argued that the unofficial exchange rate is fictional, and it has sufficient foreign exchange reserves to support the currency.
• On-going unrest and drying up of foreign exchange reserves led to the third downgrade of Egypt's credit rating in the last 4 months. Standard & Poor's lowered country's rating from B+ to B, while the negative outlook may indicate further credit rating cut.
• According to the public note issued by the IMF after the completion of Article IV consultations with Lebanon, the real GDP growth is expected to decelerate to 1-2% in 2011 from the average of 8% in the previous four years due to the prolonged process of new government formation and regional instability. The Fund expects moderate output growth acceleration in the current year to 3-4%.
• The official data released by the Foreign Investment Promotion Agency of Tunisia showed that FDI inflows in 2011 were 29.2% less than in the previous year, mainly due to the downturn in tourism sector, which suffered from foreign investment reduction by 83%.
• The GCC Mutual Fund Industry Survey 2011 showed that GCC mutual fund assets registered a 6% decline to USD 34bn in the first half of 2011, with equity fund assets falling 3% and a fall in trade finance fund assets by USD 1.43bn. Meanwhile, there were 480 GCC domiciled funds whose assets dropped by USD 1.97bn from end-2010.

UAE Focus

• Abu Dhabi inflation slowed to 0.3% mom in Jan as prices of "food and non-alcoholic beverages" fell by 1.6%.
• US-UAE trade increased by 26% yoy to USD 18.34bn in 2011, with the US contributing almost USD 20bn towards the building of 4 nuclear plants.
• The SWF Institute continues to rank ADIA the largest among global sovereign wealth funds, with an estimated USD 627bn in assets. ADIA's funding sources are mainly from oil, and the 20-year and 30-year annualised rates of return for the ADIA portfolio were 7.6% and 8.1% respectively at the end of 2011.
• A report by Lebanese Bank Audi stated that Dubai is likely to manage a rollover of its 2012 debt through a combination of internal cash, potential asset sales and market refinancing.
• The Dubai Department of Economic Development issued about 14630 business licenses in 2011, of which professional services accounted for the most (7%) followed by tourism (5%).
• Du will pay 15% of its net profits and an additional 5% of its yearly revenue to the Federal government; this compares to Etisalat's payment of 50% of its net profits in royalty.
• The Federal credit bureau will be established within the next six months, and will make available credit profiles for individuals and companies to creditors. According to Minister of State Obaid Humaid Al Tayer, “the bureau will be established with a capital of AED 200mn divided into two million shares with a nominal value of AED 100 per share and the paid-up capital will be AED 120mn”.

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Markets

The week started with a worldwide tumble when China's bourse reopened after a week with a 1.7% drop and Asian market sentiment was influenced by lower earnings. In general, just when you were thinking that the rebound in risky assets seen at the turn of the year is turning sour and the much touted January effect is over, markets recovered and ended the week on a positive note after the release of positive employment data in the US. Regional markets followed the global trend, with Saudi reaching a six-month high though the rally in Egypt was marred by recent riots. Among currencies, the dollar rose while its Asian counterparts gained on strong fund inflows. Oil prices were up last week; gold recorded its biggest one-day loss in over a month on Friday.

Global Developments

Americas:

• Consumer spending fell 0.1% mom in Dec, having grown a paltry 0.1% mom in Oct and Nov. The saving rate rose from 3.5% in Sep, to 4% in Dec. PCE Core Price Index increased by 0.2% mom in Dec (Nov: 0.1%) alongside a flat reading for personal consumption and a rise in personal income by 0.5%.
• Some good news on the job market front: While the ADP data showed an addition of only 170k workers in Jan, following a revised 292k in Dec, non-farm payrolls recorded a substantial increase by 243k (with manufacturing sector pickup of +50k), taking the unemployment rate down to 8.3% - lowest since Feb 09.
• ISM manufacturing index rose to 54.1 in Jan (Dec: 53.1) as new orders grew substantially to a nine-month high (57.6 from 54.8) while inventories contracted. Non-manufacturing ISM climbed 3 points to 56.8, the highest in almost a year.
• US factory orders rise by 1.1% mom in Dec (Nov: 2.2%), to bring total orders up 12.1% in 2011, following a gain of 12.9% in 2010 which in turn followed 22.1% drop in 2009. Orders for core capital goods and durable goods increased by 3.1% and 3% respectively, while orders for non-durables were down 0.4%.
• S&P Case Shiller Index, which measures home prices, declined 3.7% yoy in Nov (Oct: 3.4%), with prices dropping in 19 out of the 20 cities surveyed.
• Initial jobless claims fell 12k to 367k in the week ended Jan 28, also taking the 4-week average down to 376k from 405k the week before.

Europe:

• At Germany's insistence, supported by the ECB, a new EU Treaty to be signed in March mandates all governments to adopt balanced budgets and imposes near automatic sanctions on violators. Sounds like the Stability and Growth Pact on steroids, but the threat of sanctions is as empty as ever and the pact still requires ratifications by parliaments & legislative bodies.
• Markit's PMI for the Eurozone rose to 48.8 in Jan (Dec: 46.9); the Euro Area retail PMI was down to 42.9 - since 2004 this index has been weaker in only 4 months (Apr, Nov and Dec 08 and Feb 09). Meanwhile, Euro Area business confidence rose slightly in Jan to 93.4, from 92.8 in Dec and averaged 93.6 in Q4.
• In spite of the Christmas holiday season, retail sales in Germany and the EU reported unexpected declines in Dec. Retail sales fell 1.4% mom in Germany (Nov: -1%) while it dropped 0.4% mom (-0.4%) in the EU. The latter's decline was also due to sales in France and Spain declining 0.3% and 0.8% respectively.
• Spain Q4 GDP fell -1.2% qoq, saar, which means that the fiscal targets will be missed again, jeopardising Spain‟s already weak credit rating.
• German unemployment fell in Jan to a record low, as total jobless decreased by a seasonally adjusted 34k to 2.849 mn. Unemployment fell to 6.7% in Jan from 6.8% in the previous month.

Asia and Pacific:

• China's official PMI was slightly upbeat, rising to 50.5 in Jan (Dec: 50.3), thanks to an increase in new orders to 50.4 - a three-month high.
• Industrial production (IP) data was released in both Japan and South Korea. IP rebounded 4% mom in Dec (Nov: -2.7%) in Japan while South Korea's IP fell for the third consecutive month (-0.9%, Nov: -0.3%). While Japanese manufacturing is improving post-natural disaster hits, Korea is facing increasing pressures from weaker demand from Europe.
• South Korea's exports fell 6.6% yoy in Jan, weakening the trade balance and leading the economy to record its first trade deficit since Oct „09; Exports to the EU fell 44.8% in the first 20 days of January, according to the Ministry of Knowledge Economy.
• Philippines Q4 GDP growth was in line with expectations at 3.6% qoq, saar and 3.7% yoy - as increases in household consumption and construction sector outpaced the decline in exports. This led to a 3.7% growth in 2011, almost half of the 7.6% recorded in 2010. Meanwhile, Taiwan's Q4 GDP (Prov.) expanded by 1.9% yoy, at the slowest pace since Q3 2009, taking 2011 to 4.03%. Exports and capital formation dragged down growth in Q4.
• Malaysia's Central Bank left policy rates unchanged at 3.0%, for the fourth consecutive time. The Central Bank also revealed new measures to encourage financial market development by relaxing foreign exchange rules and allowing licensed onshore banks to trade foreign currencies against other currencies alongside offering ringgit-based interest rate derivatives to non-bank non-residents.
• Inflation in Asia for Jan remains high (and a central bank concern) though year-on-year numbers may be slowing: Indonesian inflation was at 3.65% - the lowest since Mar 2010, largely due to decline in food inflation; in Thailand a 7.7% increase food and beverage prices pushed up inflation to 3.38% (Dec: 3.53%); South Korea‟s inflation dipped to 3.4% (Dec: 4.2%), recording the slowest pace since Dec 2010.

Bottom line: The US labour market continues its gradual upturn, but the European situation is spooking recovery hopes. Greece has not reached an agreement with creditors, while Germany insists on a Commissioner with pervasive powers on fiscal choices. February will be a heavy refinancing month for beleaguered sovereigns: Italy held relatively successful 4yr and 9yr auctions, but Portugal spreads are widening again. Compounding the fiscal crisis, a credit crunch, induced by a mixture of fear over sovereign default and EBA-led regulatory incompetence, is strangling the last few bank & non-bank healthy firms.

Regional Developments

• A recent study by Deloitte showed that aggregate sales of the top 250 retailers touched $3.94 trillion in fiscal year 2010, placing retailers in the Middle East and Africa on top in terms of the compound annual growth rate of all regions over the 2005-10 period.
• As the world analyses the potential threat from Iran, reassuring statements are being made: The Secretary General of OPEC said that he does not expect Straits of Hormuz to be closed, but acknowledged that in the event of it happening, there was no alternative option available. Saudi Arabia's oil minister stated that any disruptions in global oil supplies could be countered with additional production from the Kingdom.
• Oman's new tax law, which was issued in June 2009, allowed the Minister Responsible for Financial Affairs to issue Executive Regulations (ERs) and decisions - the new ERs, comprising 8 parts and a total of 154 articles, have now been revealed and comes into effect from the tax year 2012.
• 563k beneficiaries in Saudi Arabia received unemployment benefits amounting to SAR 1.1bn - this is for the second month that payments are being meted out.
• Turkey's President Abdullah Gül accompanied by more than 100 businessmen visited the UAE last week to discuss the prospects for economic and trade development between the countries.
• Consumer price inflation in Turkey accelerated to 10.5% in 2011 from 4.9% recorded in the previous year, fuelled by above-potential output growth and Lira depreciation, which contributed to the 40% surge in import prices. Inflation was higher than the 2011 target set at 5.5%. The Central Bank of Turkey updated its inflation forecast for 2012 from 5.2% to 6.5%, and announced its forecast for 2013 at the level of 5.1%, while the IMF has recommended Turkish authorities lower the inflation target below the current 5% to promote the country's competitiveness.
• Turkey's trade deficit last year, at $105.8 billion, was the highest in the history, with exports growth by 18.5% yoy, and imports by 29.8%, mainly due to the increased cost of hydrocarbons consumption.
• Plans on issuing Turkey's first Sukuk were announced last week by the Deputy Prime Minister. The project of building the third bridge over the Bosphorus is estimated at $2.5 billion, while the tender is planned for early April this year.
• Benchmark index of Cairo stock exchange increased by 3.4% during the last week despite the plunge by 4.6% on Thursday morning following the news on violence at a stadium in Port Said.
• On February 2nd, the Central Bank of Egypt released its decision to keep the overnight deposit rate and overnight lending rate unchanged at 9.25% and 10.25%, respectively, considering the uncertainties and risks related to output growth and inflation.
• IMF Managing Director, at the conclusion of her visit to Tunisia where she met with the highest level officials and monetary authorities, announced its agency's readiness to provide the country suffering from high unemployment and real output decline with financial assistance.

UAE Focus

• Moody's retained the highest investment-grade ratings for Abu Dhabi by classifying the emirates long-term ratings at Aa2, citing its sound balance sheet and stable outlook, and in spite of the region's geopolitical developments.
• The International Energy Agency stated that the UAE‟s crude oil output increased by 60k barrels per day (bpd), or 2.38% mom, in Dec to 2.58 mn bpd. UAE on average produced 2.5 mn bpd in 2011, while having a sustainable production capacity of 2.74 mn bpd.
• Interest rates on credit cards will be capped at 18% per annum or at 1.5% per month, according to Al Khaleej newspaper, which cited unnamed sources familiar with the Central Bank's recent study and conclusions on the rules and regulations expected to be announced in Feb.
• Dubai-based real estate group Majid Al Futtaim successfully issued a USD400m five-year Sukuk. The issue priced at par with a profit rate of 5.85% opening a potential market for other corporates.
• DP World announced another record year in 2011, with over 54.7 million TEU being handled across its global operations - a growth of 10% yoy. The UAE alone accounted for about 12% volume growth to 13 million TEU in 2011.
• A statement by Dubai FDI, an integral part of the Dubai Department of Economic Development, revealed that the office had attracted 77 companies in 2011, with these accounting for a total FDI of AED 3.44bn and a turnover of AED 16.57bn.
• Standard & Poor's latest report states that DIFC Investments (DIFCI) will need more than USD 900mn to meet its debt maturities this year. While S&P raised the possibility of government support to “very high” from “high” previously, it lowered DIFCI's stand-alone credit profile to 'ccc-' from 'ccc+' due to “further delays in asset disposals and a reassessment of the likely magnitude and timing of disposal proceeds”.

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Markets

With China closed for the New Year, stock markets continued a gradual decline (especially in Europe) which the State of the Union address by Obama and some moderately positive news from Europe (e.g. IFO & PMI) did not stem. US GDP data failed to boost markets while poor show in Europe’s corporate earnings also added to the worries. Regionally, most markets were up - with Egypt riding high on political optimism; volumes in DFM for the week were the highest since mid-June 2011; Saudi markets closed at a 6-month high yesterday. The dollar fell last week as the Greek debt deal dragged on, and led to a rise in gold prices to a 7-week high. Oil prices were up after the announcement of Europe's decision to ban oil imports from Iran, but trimmed gains after the US GDP data were released; IMF meanwhile warned that crude prices could rise by almost 30% if Iran halts its oil exports.

Global Developments

Americas:

• US GDP grew 0.7% qoq and 2.8% yoy in Q4 (Q3: 1.8% yoy) - this rise was mainly a build-up of private inventories (excluding which growth was a slight 0.8% only) consumer spending (+2%) and residential fixed investments alongside a downturn in federal spending and import growth. Full year 2011 growth was 1.7%, compared to 3% in 2010 and the savings ratio declined to 3.7%, its lowest level since end of 2007.
• The Federal Reserve took the historic step of setting an inflation target, as advocated by Bernanke. The Fed, in its first ever "longer-run goals and policy strategy" statement, said an inflation rate of 2% is best aligned with its congressionally mandated goals of price stability and full employment.
• Pending home sales declined 3.5% mom in Dec to a reading of 96.6 (+4.4% yoy), following the 19-month high (+7.3% mom) reached in the previous month. Meanwhile, new home sales dropped unexpectedly by 2.2% mom hence making 2011 one of the worst years in history for the US real-estate industry.
• Durable goods orders in Dec increased 3% mom (Nov: +4.3%), on higher capital spending and led by demand for aircraft, autos and business equipment; excluding transportation equipment, orders increased by 2.1% (0.5%).
• Initial jobless claims were higher than expected, rising 21k to 377k in the week ended Jan 21 – with volatility continuing around the holiday period; the 4-week average fell to 377,500 last week from 380k previously.

Europe:

• UK GDP fell 0.8% qoq, saar in Q4 and up 0.8% yoy. Services were flat, but manufacturing plunged. So much for the theory that the UK would do better than the Eurozone because of massive QE. Nevertheless expect more QE in February, since there is nothing else the authorities can come up with.
• The German IFO in Jan reached 108.3, from 107.3 in Dec and a low of 106.5 in October. All the gain has come in the expectations component, with the current conditions component falling, but at snail pace.
• Euro Area flash PMI for Jan was the strongest since August, with the composite regional PMI moving back above 50 (50.4), up from 48.3 in Dec. Much of this increase came from services, where the overall regional PMI rose to 50.5 (Dec: 48.8) and of course from Germany, where the services PMI rose to 54.5, from 52.4.

Asia and Pacific:

• Japanese foreign trade was weak with December’s deficit pushing the overall annual balance into deficit for the first time since 1980. Exports in Q4 were hampered by the Thai floods, the Euro-area recession and the strong yen. Q4 exports were down 17% qoq, saar, over Q3.
• The Central Bank of Thailand cut rates by 25bp, to 3%, as expected, joining Emerging Asia in the process of gradual monetary easing. India’s Reserve Bank kept policy rates steady but reduced the cash reserve ratio by 50bps to 5.5%, pumping in close to INR 320bn into the economy.
• The decline in exports due to lower demand and the ongoing sovereign debt crisis in Europe resulted in a dip in South Korea’s Q4 GDP. Growth was 0.4% qoq and 3.4% yoy in the fourth quarter, slowing from Q3’s 0.8% qoq rise. Overall, the economy grew 3.6% in 2011, compared to 2010’s 6.2% gain.

Bottom line: Hardly anything new in the flood of end of month data. Before the US GDP fell short of market expectations, the IMF unveiled its downward revisions for the global economy. The common theme was Euro-centric pessimism, with a recession now formally forecast and more doom likely to materialize if the governance of the monetary union is left to the usual sterile bickering. The Greek saga continues, a week after announcing the agreement with the private creditors, though a deal is expected this week, according to both parties. Only Ireland seems to be going in the right direction, while in Italy a violent strike by truck drivers, wild cat revolts and a general strike have put the country on its knees. Hardly a good omen for an already difficult year!

Regional Developments

• The GCC nations have pulled out observers from Syria, where the unrest continues, following the decision of Saudi Arabia to withdraw. The Arab League has suspended its observer mission with escalation of the issue to the UN Security Council.
• Qatar SME exchange would not be a part of the main exchange and will be structured separately, but will be regulated by the QFMA and use the same trading platform, according to the Deputy Listings Director of the Qatar Exchange.
• Privatisation of the Kuwait Stock Exchange and the setting up of a new company to run the exchange grew a step closer after the Kuwait Capital Market Authority signed a deal with HSBC.
• Pension coverage has been extended to all GCC citizens - including pensioners, should they wish to enrol - after the Council of Ministers approved the Unified System for the Extension of Insurance Protection.
• Sukuk issuance in the GCC tripled, though conventional and IPO issues slowed in 2011: number of issues rose to 44 (2010:33) while its value was USD 65.8bn (USD 43.7bn), with Qatar’s government the single largest issuer with a total USD 9bn.
• Dun and Bradstreet’s business optimism index (BOI) for Qatar improved in Q1 2012: in the hydrocarbon sector, BOI was up to 29 from Q4 2011’s 24, while in the non-hydrocarbon sector the BOI was five points lower at 40. Shortage of skilled labour and lack of availability of finance were cited as the major factors affecting business, going ahead.
• Dealogic reported that Qatar’s Barzan was the world’s largest project finance deal in 2011 - accounting for 2.4% of total global project financing deals.
• Oman’s budget surplus increased to OMR 1.13bn in the first 11 months of 2011, compared to a deficit of OMR 155 mn a year ago. A surplus was managed in spite of the 47% yoy rise in spending to OMR 10.32bn, supported by higher oil revenues of OMR 7.96bn.
• Dow Jones reported that the IMF Chief, in her visit to the region, is expected to request Saudi Arabia’s contribution towards the IMF’s fundraising for Europe. It is unlikely that the contribution would be given, without a change in IMF governance, (like for example, a more significant role for Saudi in the operations of the IMF).
• Saudi Arabia exported 1.12mn barrels of oil per day to China in Dec - close to 11% of total oil pumped by the country and a touch lower than 1.17mn bpd exported in Nov.
• Cairo's benchmark index rose 7.2% to its highest close since trading was resumed in March on political optimism, while Egypt is seeking funding from the World Bank, African Development Bank ($500 mn each) and the IMF ($3.2 bn) to finance a gaping budget deficit of 9.8% of GDP.

UAE Focus

• Dubai Holding Commercial Operations (DHCOG) has announced that a repayment of USD 500mn in bonds, maturing on Feb 1, would be completed - Fitch Ratings has moved DHCOG from negative to stable.
• The UAE President ordered the settlement of defaulting loans of 6830 citizens (a value close to AED 2bn) with those in prison having a settlement mechanism of a deduction of 25% from their monthly salaries and an undertaking from a beneficiary not to borrow again until his loan is settled.
• The Dubai Economic Council expects Dubai GDP to grow 4.1% in Q1 2012, with the possibility of lower growth in the following quarters from an anticipated economic slowdown in the major trading partners EU members, India, China and other GCC nations.
• UAE and Oman met with an aim to enhance and boost trade between the two nations; also discussed was the possibility of establishing an electronic link between UAE’s Federal Customs Authority and Oman Customs to ensure smooth exchange of information and figures
• Passengers passing through the Dubai International Airport reached 4.69 million in Dec, taking the full year total to 50.98 million; up 8% yoy from 2010’s 47.2 million. India, UK, Saudi Arabia, Pakistan, Qatar, Germany and USA were the strongest markets, while links between Dubai and Eastern Europe grew the most: +81%, from a low base.
• An Oxford Business Group report stated that the UAE Islamic financial services sector represented 30% of the global Islamic banking industry in 2011, with the Islamic banking assets in MENA rising to USD 416bn in 2010.

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Markets

Stock markets reacted positively to China's growth data with ripples around the rest of the world, but after some directionless sessions the week ended on a softer tone in Europe and the US. European spreads came down somewhat but Portugal's 10yr yield reached 13.81%. Among regional markets, ADX fell to a five month low last week, while Saudi Arabian shares gained the most in more than five weeks yesterday, on strong Q4 corporate earnings. Euro fell from a two-week high against the dollar on Friday while emerging market currencies had a much favourable week. Oil prices dropped in spite of the tensions in Iran, on expectations of lower demand and ahead of the outcome of the Greek deal. Gold prices were up 1.7% compared to a week ago, though prices eased on Friday.

Global Developments

Americas:

• Lower food and energy costs (both declining 0.8% mom) drove wholesale prices down in Dec - falling 0.1% mom, while core prices were higher at 0.3% - the largest gain since July. CPI remained steady in Dec, though core prices rose 0.1% (Nov: 0.2%); inflation was lower as gasoline prices fell 2.0% amidst a modest 0.2% rise in food prices.
• US industrial production in Dec increased 0.4% mom, compared to -0.3% in Nov. Factory production rose 0.9% mom- the most in a year, despite a 2.7% plunge in utilities. Meanwhile, capacity utilisation rose 78.1% from Nov's 77.8%.
• Housing starts unexpectedly weakened 4.1% in Dec to 657k (Nov: 685k), as the multi-family segment fell 20.4%. Existing home sales increased 5% to 4.61mn, the highest since Jan 2011.
• Initial jobless claims fell 50k to 352k in the week ended Jan 14, the lowest reading since April 2008.
• Brazil's central bank cut rates another 50bp (as expected), in an attempt to boost the economy from the zero growth rate recorded at end 2011.

Europe:

• The EFSF was downgraded to AA+ as a consequence of the downgrade of Austria and France.
• Greek debt deal talks were suspended after the term to maturity of the new replacement bonds and the rate of interest to be paid remained points of contention, while the haircut –likely to be 70%- has been agreed upon by the international private creditors.
• German ZEW was up to a record high in Jan - rising to -21.6 (Dec: -53.8) - the largest single monthly increase since the survey started in 1991.
• The Italian government approved a sweeping decree introducing more competition in various sectors, from energy to law firms.

Asia and Pacific:

• China's economy expanded 8.9% in Q4 (the weakest pace since Q2 2009), leading to growth at 9.2% in 2011 which is marginally down from 9.1% in 2010. Additionally, industrial production in Dec increased 12.8% and flash PMI for Jan recorded a reading below 50, at 48.8 - as both output and new orders components declined.
• Chinese retail sales recorded an increase of 18.1% yoy in Dec (Nov: 17.3%) - rising 17.1% to CNY18.1 trillion, for full year 2011, slower than 18.4% growth in 2010.
• Some good data from Japan: Consumer confidence gave some signs of life increasing to 38.9 in December from 38.1 a month earlier. Japan machinery orders registered an uptick of 14.8% in Jan - the highest increase since Jan 2008.
• India mulls the launch $35bn of public investment stimulus to counter the declining growth rate and widespread criticism of policy paralysis.
• Singapore's non-oil domestic exports grew 9% yoy in Dec (Nov: 1.4%), with electronic exports contracting 4.6% while non-electronic exports increased 16.7%, helped by the volatile pharmaceuticals sector which was up 38.6%.

Bottom line: The winter of discontent is descending on emerging markets, China in particular. The World Bank has warned that global growth will be weaker than previously expected in 2012; the IMF will join the choir next Tuesday with new downward outlook forecasts. Europe continues with its own obscure gyrations: Greece has not yet signed an agreement with creditor banks despite an announcement that the deal had been closed on Friday. Monti had a meeting with Cameron where nothing of substance was tackled and Sarkozy cancelled a meeting in Rome with Merkel and Monti. Europe is looking for a clear compass reading.

Regional Developments

• Egypt has requested a $3.2bn standby facility from the IMF after a year of uncertainty and political turmoil that has discouraged FDI, tourism and hit exports and remittances.
• The GCC countries have been asked to contribute in the effort to raise USD 500bn increased funding for the IMF.
• The Chinese Premier, in his visit to the UAE, called for speedy resolution of and the signing of the GCC-China Free Trade Agreement, given that negotiations have been ongoing for the past seven years.
• Qatar Exchange has announced the “readiness of technical and regulatory infrastructure” to cater to Small and Medium Enterprises, in line with the announcement by Supreme Council for Economic Affairs and Investment earlier this year.
• Citi group's latest report on construction in the Gulf showed a pipeline of projects with a value of almost USD 1.8 trillion, with projects down 16% yoy in 2011. Saudi Arabia, with USD 660bn in projects remained the leader, closely followed by UAE at USD 592bn.
• Sabic, the world's top chemical producer by market value saw its profit drop 10% in Q4 despite rising sales, as prices fell for most of its products.
• Saudi Transport Ministry has allocated SAR 10.78bn for 2012 to 284 projects including the construction of 4154 km of highways, secondary and branch roads plus studies and design of additional 2139 km of roads.
• Saudi government is aiming to keep oil prices at about $100 a barrel, according to the FT a third above its previous public target, in a sign that KSA needs higher oil revenues to sustain a big rise in public spending.
• Oman's oil production increased 7% mom in Dec, with the average reaching 894,664 barrels per day. Asian markets remain the largest importers of Omani oil: China purchased close to 50%, followed by Japan and South Korea at 10.86 and 9.23% respectively.
• European Union members are inclined to set a July 1 deadline to implement the embargo against Iranian oil, a timescale that would align the bloc with US plans to impose related restrictions.
• Inflation in Kuwait for Dec increased 4.8% yoy, driven by a rise in food prices (+9.6%) while housing costs were up 4.3%.

UAE Focus

• UAE signed a currency swap agreement with China, worth RMB 35bn, in a bid to facilitate payments and boost trade and investment. This was in addition to the agreements signed to boost 'green' ties, renewable energy (solar power) and develop upstream projects.
• Dubai launched solar power projects for AED 12bn in a drive to boost renewable production by 1000 MW. The project, which will extend over 40 sq km along the Dubai-Al Ain road, is expected to start by Q4 2013.
• UAE's non-oil trade grew by 23% yoy to AED 676.3bn during the period Jan-Sep 2011, with exports and imports rising 36% and 22% to AED 84.1bn and AED 436.7bn respectively.
• Lower rent prices dragged down inflation in both UAE and Dubai. UAE inflation stood at 0.9% in 2011, with lower food prices also playing a key role while in Dubai depressed schooling costs also helped to bring down inflation to a four-year low of 0.52%.
• The UAE, following the creation of a AED 10bn fund in Nov to help citizens with lower pay to clear their debt, has announced that close to 91,000 state low-income employees would receive higher pay and aid from this month onward.
• Total mobile subscribers in the UAE reached 11.54 mn in Nov attracting nearly 614k during the first 11 months of 2011. This takes the GSM penetration rate to 144% - meaning close to 1.5 phones per user.
• In 2011, volumes at the Dubai Mercantile Exchange (DME) rose 19% while the highest monthly Average Daily Volume was also recorded since it began trading in 2007 at 3,505 contracts per day. The DME also delivered more than 145 million barrels of crude oil in 2011.

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Markets

Stock markets were generally stable awaiting some news from the usual spate of meetings and "summits" among EU leaders and institutions. The seemingly softer German stance on fiscal discipline lifted European bourses and sovereign spreads, before another round of sovereign downgrades in Europe delivered a blow. Asia’s sentiment was helped by anticipation of a looser monetary stance in China. Regional markets were down, except Egypt which gained largely from Building & Construction and Property sectors. The euro fell further after the recent set of sovereign downgrades in the Eurozone. Oil prices, which rose on Iran’s threat to block the Strait of Hormuz, dropped after EU downgrades brought attention back to the sovereign debt crisis. Gold prices posted gains from last week – but slipped on Fri, after recording a one-month high on Thursday.

Global Developments

Americas:

• US retail sales increased 0.1% mom in Dec (versus +0.4 mom in Nov.) less than the 0.3% expected. Ex-autos sales declined by 0.2% against forecasts of a 0.3% increase. Core retail sales (ex-autos, gas and building materials) also declined by 0.2%. As a result, Q4 GDP might come out below estimates.
• Initial jobless claims rose more than expected by 24k to 399k. Claims are volatile at the turn of the year due to temporary positions. The 4-week moving average moved up only 5k to 380k. Continuing claims also increased, up 19k to 3.628m.
• Trade deficit widened in the US in Nov to USD 47.8bn (Oct: USD 43.3bn), as exports fell to a 4-month low from a slowdown in demand from Europe amidst higher imported oil prices.
• US consumer credit rebounded: non-revolving credit is up at 6.7%, saar in the 3 months through November.

Europe:

• S&P downgraded a number of European sovereigns: France lost the triple A while Italy sunk to BBB+, worse than Spain’s A. In addition, seven others were downgraded including Austria (by one notch), Spain and Portugal (by two notches). This will lead to higher borrowing costs for sovereigns and banks.
• The ECB left rates unchanged and Draghi crushed any hope of QE, while admitting that growth risks are skewed to the downside.
• Rumours about the new "fiscal compact" suggest that the stronger discipline to be enshrined in a new EU Treaty may be postponed until 2013.
• The German economy contracted 0.25% qoq in Q4. However it expanded by 3% yoy in 2011 as compared with 3.7% in 2010. Domestic demand was the main driver as consumption grew by 1.5% yoy—the highest in 5 years. Exports and imports increased by 8.2% and 7.2% yoy, respectively, in 2011.
• EU Industrial Production (IP) declined -0.1% mom and -0.3% yoy in Nov. (versus -0.3% mom and +1.0% yoy). National data were mixed with French manufacturing output stronger than expected, up 1.1% mom (but production in Q4 is still down 3.4%, saar, over Q3), Italy saw also a 0.4 mom increase but for Q4 to date, Italian IP is down 12.6%, saar.
• UK manufacturing production fell for the fifth month in six in Nov (not much "re-balancing" is in sight). Q4 output so far is down 4.7%, saar, on Q3.

Asia and Pacific:

• Chinese 2011 trade surplus fell to USD 155bn, the lowest since 2005, due to the global slowdown, rising domestic demand and commodities imports like iron ore and crude oil. The faster growth of imports compared to exports, underscores the gradual shift from export led to endogenous growth.
• Chinese inflation stood at 4.1% yoy (consensus: 4.0% yoy) in Dec, down from 4.2% yoy in November. Inflation fell to -1.8% mom s.a. ann.
• Foreign exchange reserves of China totalled USD 3.18 trillion at the end of Dec 2011, falling USD 20.55bn from Q3 2011 - the first fall in a decade. The previous decline was during the Asian Financial Crisis in 1998.
• India’s Industrial Production (IP) rose 5.9% yoy in Nov, rebounding sharply from a decline of 4.7% yoy in October. The IP data were higher than the consensus (2.1% yoy). Sequentially, IP increased by 7.7% mom s.a. in November, after a 3.2% mom s.a. fall in October.
• Central banks of both South Korea and Indonesia both held policy rates steady at 3.25% and 6% respectively, as inflation levels eased amidst risks of slowdown in domestic and global growth.

Bottom line: Nothing particularly striking in the limited data flow last week - apart from Hungary’ plights and Greece’s struggle to satisfy the Troika requests while agreeing to a deal with private creditors – if not, heading towards "the immediate risk of a disorderly default". In the US if the improvement in the labour market continues, the confidence effect could affect positively the real estate sector where deleveraging is in the final stage and private consumption got a lift from easier credit. Dismal German GDP, lower than expected, confirms the recessionary headwinds in Europe.

Regional Developments

Asian economies are increasing visits to the region, amidst sanctions on Iran and its threats to block the Strait of Hormuz: following Japan’s visit last week to sign "a memorandum of cooperation for strategic partnership" with the GCC, this week sees the visit of the Chinese Premier to diversify energy ties, and discuss the growing role of the RMB as an international currency.

A report from UNCTAD on FDI flows in the Arab region between 1990-2010 places Saudi Arabia on top, having received USD 170.4bn (28% of overall Arab flows at USD 603bn) during the period, followed by UAE (USD 76.17bn, 12.6%) and Egypt (USD 73bn).

Market capitalisation in the GCC fell by 7% to USD 697.4bn in 2011, as global economic woes and regional political environment led to loss in investor appetite. Qatar gained a slight 1.2% from 2010, making it the best performer while Bahrain witnessed the steepest decline (-20.15%).

Qatar’s broad money growth slowed in Nov - rising only 12.7% yoy, following Oct’s 18.9% increase. Credit growth was at the fastest pace in 30 months, growing by 22.3% (Oct: 18%).

Saudi Arabia’s largest trading partners on the exports side are China (13%), followed by the UAE at 10% and Singapore at 7%. The importance of Asian trade partners is visible even in imports, with US garnering only 11% and Germany 7%, following China, India and Singapore.

UAE Focus

The UAE economy grew 4% in 2011, according to Abdulla Lootah, secretary-general of the Emirates Competitiveness Council, stating that UAE’s "GDP grew from AED 6.5bn in 1971 to AED 1248bn". This follows growth of 1.4% in 2010, after contracting 1.6% in 2009.

Dubai announced a AED 12bn solar energy project last week, with a capacity to generate 1,000 megawatts of power, highlighting the move towards renewable energy. Dubai’s Strategy is for renewable energy to supply 1% of Dubai’s energy by 2020 and 5% by 2030.

The Fujairah pipeline, which can mitigate the risk of Iran’s threat of blocking the Strait of Hormuz, is expected to be ready for testing by May, with a capacity to transport 1.4 mn barrels per day.

Non-oil trade in the UAE rose by 22% yoy in AED 600.1bn in the period Jan-Aug, according to data published by the UAE Federal Customs Authority. Exports and imports grew 40% and 22% yoy to AED 75.2bn and AED 386bn respectively. The value of UAE-GCC non-oil foreign trade was AED 4.8bn in Aug, with Saudi Arabia topping the list at AED 2bn.

UAE’s bank deposits rose 0.8% mom to AED 1.05 trillion in Nov while credit growth in the UAE rose 4.2% in the period Jan-Nov 2011, compared to a decline of 1.3% in the same period a year ago. Provisions for NPLs rose 20.1% during the same period in 2011.

Inflation in Abu Dhabi fell to a two-year low of 1.9% in 2011 (2010: 3.1%); Dec CPI edged up to 1.2% yoy and 0.8% mom.

Data released by the Dubai Land and Property Department shows that foreigners invested AED 39billion in 2011 into Dubai’s property sector; Indians, British and Pakistanis formed the top three by nationality, investing AED 6.97bn (18%), AED 4.97bn and AED 2.44bn respectively.

The industrial sector in UAE grew 11% yoy in 2011 to an all-time high of AED 141.7bn, according to a study published by Emirates Industrial Bank.

Dubai’s consumer confidence index, published by the Dubai Department of Economic Development, improved in Q4 by 15 points to 125. Respondents were optimistic about economic recovery, personal finance and job creation while rising food prices remained a key worry.

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Markets

Stock markets started the year on a strong note, but then momentum faded for lack of a catalyst. Even the strong US labour data failed to cheer markets, which continue to remain depressed given the distressed Eurozone. Regional markets were mixed: low volumes prevailed even as Qatar hit an 11-month high (at close on Tues) and Saudi markets closed at the highest since Aug 1st yesterday. The dollar hit a 16-month high against the euro; gold recorded its biggest weekly gain in five weeks and Iran tensions drove up oil prices.

Global Developments

Americas:

• ISM manufacturing PMI rose to a 6-month high of 53.9 in Dec (Nov: 52.7), with an increase in the measure of new orders and exports while hiring at the factories rose at the fastest pace since June.
• Factory orders increased 1.8% mom in Nov to USD 459.18bn, following two consecutive months of decline (Oct: -0.2%). The rise may be a temporary blip as it resulted from higher demand for durable goods which grew 3.7% - largely due to gains in demand for airplanes. Orders for non-defence capital goods excluding aircraft, a proxy for business spending, fell 1.2% (-0.9%).
• The number of people paying their home equity loan on time in Q3 increased, while consumer delinquencies fell to its lowest point in four years.
• US labour market seems to be in recovery mode: The ADP employment report stated that 325k jobs were created in Dec (Nov: 204k) in the private sector. This, combined with an increase in non-farm payrolls by 200k, brought down the unemployment rate down to a three year low of 8.5%.  
• Initial jobless claims fell by 15k to 372k in the week ended Dec 24, taking the four-week moving average to 373,250- the lowest level since June 2008.

Europe:

• Eurozone services PMI for Dec was outright weak (48.8), but better than in Nov (47.5). There is a striking divergence between Germany (52.4, versus 50.3 in November) and Spain (42.1; 36.8 in Nov) with Italy (44.5; 45.8 in Nov).
• News from Europe’s largest economy was quite disappointing: German retail sales recorded an unexpected decline in Nov, falling 0.9% mom (Oct: -0.2%) while manufacturing orders took a hit, declining 4.9% mom in Nov (Oct: +5.0%), as foreign orders dipped by 7.8% while domestic demand fell 1.1%.
• A startling difference within the Eurozone was evident in employment data for Nov. as well: a 22k decline in German unemployment to a 20-year low of 6.8% while Spanish unemployment hit a record high of nearly 23% in 2011, with more than 4.42 million jobless at the end of 2011.
• The 12 month Eurozone inflation dropped to 2.8% in Dec, having being stuck at 3% over Sep-Nov.
• Spain’s new Economy Minister stated that banks might need to set aside almost EUR 50bn in bank provisions (roughly 4% of GDP), in line with additional reforms being implemented for the financial sector.

Asia and Pacific:

• A mixed bag from PMIs following upbeat sentiment in China last week. Korea's PMI for Dec fell to 46.4 (Nov: 47.1), recording the sharpest drop in almost 3 years while India’s PMI rebounded to 54.2 in Dec (51.0), the fastest improvement since June, thanks to both foreign and domestic demand.
• Singapore GDP contracted in Q4 by 4.9% qoq saar (+3.6% yoy) - largely resulting from a slowdown in the manufacturing sector which contracted 21.2% in Q4 after recording a 10.1% expansion in Q3. The full year growth at 4.8% yoy was in line with the forecast of 5.0%.
• Hong Kong retail sales increased 23.5% yoy in Nov to HKD 33.4bn with an increase in Chinese visitors by 25% in the month boosting consumer spending.  
• Inflation falls across Asia in Dec: In Thailand, CPI increased 3.53% yoy in Dec (Nov: 4.19%) as food prices stabilised after the flooding; Indonesia’s inflation slowed for a 4th consecutive month to 3.79% (4.15%) - a 20-month low and Philippines inflation was at an 11-month low of 4.2% (4.7%) - providing ample room for the central bank to reduce policy rates.
• Taiwan’s inflation, however, unexpectedly rose to 2.03% in Dec (Nov: 1.01%), the highest in 22 months. However, the wholesale price inflation slowed to 4.32% in Dec from 4.93% a month ago.

Bottom line: Data from the US continue to point at a rather encouraging outlook while the Eurozone remains in a quagmire. Government debt auctions in Portugal and France have attracted strong bids, but Italy’s spread with Bunds remains at 500 bps. Data from Asia depict a mixed picture with China on a solid footing, India plodding but Korea and Singapore losing steam.

Regional Developments

MENA IPOs recorded a decline of 69.3% in 2011, with the region’s capital markets raising only USD 843.9mn compared to USD 2.8bn in 2010. Saudi Arabia topped the leader board, with USD 460.5mn raised in 2011, closely followed by UAE with USD 271.3mn; sector-wise, both industrial manufacturing and financial sectors witnessed five IPOs each.

Qatar’s Financial Market Authority has announced the adoption of new listing and IPO rules in the secondary market to ease listings and encourage foreign capital inflow. Meanwhile, Reuters reported that Saudi Arabia, in a bid to open up its equity market to foreign investors, is planning to finalize the necessary rules by Jan 15.

Activity in Saudi Arabia’s private sector eased in Dec, according to PMI data released by SABB HSBC. It declined to 57.7 from a three-month high of 58.1 in Nov as new orders index slowed to 65.4 (Nov: 67.7) while employment increased at the fastest pace since last Aug.   

Saudi Arabia non-oil exports increased 34% yoy to SAR 42.9bn in Q3, with China topping the list of importers - receiving up to 13% of total exports, followed by the UAE (10%), Singapore (7%) and India (6%). Product wise, petrochemicals came on top, valued at SAR 15.3bn, followed by plastic products and food products.

Oman passed a pro-job creation budget for 2012, with close to 36k jobs being created in the public sector and military (in addition to the 94k jobs created in the sector in 2011). With expenditure estimated at OMR 10bn (+9.0% yoy) and revenues slated to be OMR 8.8bn (+21%), the deficit at OMR 1.2bn is based on the assumption of oil price at $75 per barrel (2011: $58). Meanwhile, Oman’s actual budget surplus was USD 2.2bn in Jan-Oct 2011.

Kuwait’s revenues for Apr-Nov stood at KWD 18.7bn on higher oil revenues while spending was only 36.6% of full-year’s plan at KWD 7.7bn, taking the budget surplus to KWD 11.8bn, accounting for close to 33% of GDP.

UAE Focus

Dubai’s non-oil trade recorded an increase of 23% yoy to AED 814bn for the period Jan-Sep, according to data released by Dubai Customs. Imports recorded a substantial increase of 21% to AED 326bn in the same period. Gold topped the list of exports (AED 45bn) and India remained the largest trade partner (exports: AED 66bn or 20.25% share).

UAE PMI fell to a four-month low of 51.7 in Dec, according to HSBC’s latest report, citing weaker output and new order growth. Non-oil private sector employment’s index was 50, falling from Oct’s 50.9, the lowest reading since the survey began 29-months ago.  

Total credit grew marginally (+2.7%) to AED 998bn at the end of Sep, from AED 972bn at the end of 2010, according to the latest UAE central bank release. Credit to the real estate sector declined to AED 160.1bn in Sep from AED 163.1bn in 2010 while claims to the private sector rose (+2.9%) to AED 815.1bn from AED 792.1bn at end of 2010.   

The Dubai Shopping Festival in 2011 contributed AED 15.5bn, with AED 5.9bn spent by regional and international visitors, according to a report released by the Dubai Events and Promotions Establishment. A total of 884,660 regional and international visitors came to Dubai during the DSF period, with India, UK and Saudi Arabia residents accounting for 11%, 8% and 8% respectively.

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Markets

Global Stock markets ended the year on a low note - posting their first annual loss since 2008, with emerging markets also closing lower: MSCI’s Asia Pacific Index declined almost 18% in 2011, after closing on a slightly positive note in the last week. Regional markets were hit by lower volumes and liquidity towards the end of the year, with little to cheer given the still ongoing regional turmoil. The euro hit a historic 10-year low against the yen and recorded a 15-month low against the dollar, also closing as the worst performing currency in the year 2011, while the Renminbi was the best performing currency. Commodities had a relatively better year with gold playing its role as a safe haven asset alongside the US Treasuries and the yen.

Global Developments

Americas:

• S&P Case Shiller showed a decline of 3.4% yoy in Oct, falling for the sixth consecutive month. Meanwhile, pending home sales rose by 7.3% mom in Nov (Oct: 10.4%), rising to the highest level since Apr 2010.
• Initial jobless claims increased for the first time in four weeks, rising 15k to 381k in the week ended Dec 24.

Europe:

• The ECB’s deposit facility had record use as banks placed almost EUR 412bn over the Christmas holiday. This followed the previous week when more than 520 banks borrowed EUR 489bn from the ECB under the new 3-year liquidity scheme suggesting that banks are yet to use the funding provided by the ECB.
• Italy bond auction of EUR 9bn of six-month bills – sold at an average yield of 3.25%, down from a euro-era record of 6.5% last month, led to a dip in the euro to its lowest level since September 14, 2010.
• French unemployment has touched a 12-year high with the number of registered job seekers in France rising by 29900 in Nov to reach 2.84 million.

Asia and Pacific:

• China and Japan have agreed to a direct currency exchange programme which would mean that trade and investment can be facilitated in the Renminbi directly instead of relying on the dollar, as is the case currently. This will cut costs for companies, boost bilateral trade & internationalise the RMB.
• Japan is also expected to boost ties with India during the upcoming visit to the latter nation, by arranging for a Japan-India currency swap agreement. The swap line is expected to amount to USD 10bn, according to an unnamed Japanese government official.
• India has permitted the entry of Qualified Foreign Investors (QFIs) into the market, enabling foreign individual investors, pension funds and trusts to directly invest in equities, in a bid to boost capital inflows.
• Japan released a disappointing set of industrial production (IP) and retail sales for Nov data last week. IP declined 2.6% mom with automobile, information and communications electronic-equipment sectors the hardest hit as the strong yen and flooding in Thailand presented more worries. However, the Ministry of Economy, Trade and Industry announced that output is likely to improve to 4.8% and 3.4% in Dec and Jan respectively, based on an initial survey on companies. Retail sales dipped 2.3% yoy (Oct: +1.9%) as global and domestic issues weighing in on consumer spending.
• China’s PMI rebounded to 50.3 in Dec (Nov: 49), indicating a slight expansion though the export orders component within the PMI was still below 50, at 48.6, but stronger than the 45.6 in Nov.
• South Korea’s industrial production fell unexpectedly in Nov, falling 0.4% mom (Oct: -0.6%) and 5.6% yoy (6.3% yoy) on lower service-sector production: output of semiconductors and related parts fell 1.8% mom while video and audio equipment production dropped 3.9%. Inflation, meanwhile recorded an increase of 4.2% yoy and 0.4% mom in Dec, on a rise in electricity prices.
• Taiwan Central Bank meeting offered no surprises as the discount rate was held steady at 1.875% on worries of weaker demand from abroad and mild domestic inflation.

Bottom line: A tumultuous year came to an end last week: the sovereign debt crisis hogged the headlines most of the year; emerging markets were not completely immune to the trails of the developed world as trade-dependent emerging markets are facing supply chain disruptions recently in a year that also witnessed several natural disasters including a tsunami and floods and China replaced US as top IPO venue. End-of-the-year fireworks were evident when the US called the Yuan undervalued and vowed to press for further appreciation of the currency - just falling short of naming China a currency manipulator. The coming year is likely to witness a stronger partnership among the emerging market economies as the developed nations struggle to find a solid footing amidst political changes and ongoing economic weakness.

Regional Developments

• The regional customs union will be implemented from the 1st Jan, 2015 and will commence with the formation of the GCC commission comprising directors of Customs of the member states, according to the Secretary-General of GCC Dr Abdul Latif bin Rashid Al Zayani.
• Qatar has initiated the listing and trading of Qatari treasury bills on the Qatar Exchange. This initiative will help develop the local bond and Sukuk market and will eventually lead to the development of a deep and liquid local currency debt market.
• Qatar’s Producer’s Price Index for Q3 2011 recorded an increase of 0.6% qoq and 43.5% yoy. Compared to the previous quarter, prices were higher in the mining (+1.5%) and electricity and water sector (0.9%) while manufacturing prices registered a decline (-3.2%).
• Saudi Arabia’s 2012 budget is expected to result in a decline in surplus; expenditure is projected to be SAR 690bn - an increase of 19% from 2011 while revenues, at SAR 702bn, will be heavily dependent on oil given the assumption of an oil price of $74 per barrel. Infrastructure remains a priority as SAR 265bn was allocated to new development projects with education, transport and health infrastructure getting the bulk of the expenditure.
• Oman’s commercial banks have increased investments in foreign securities, as per the latest data release by the Central Bank of Oman. Investment in foreign securities reached OMR 262.3mn in Sep 2010, compared to OMR 155.2mn in Sep 2009 - a rise of 69% yoy.

UAE Focus

• The Government of Dubai announced a AED 32.25bn budget for 2012, with a reduction in fiscal deficit to AED 1.827bn or 0.6% of GDP. With only 7% allocated for public services and government excellence sector, the focus is more on fiscal prudence with about 41% of the expenditure being set aside for infrastructure, education, healthcare and related economic development sectors.
• The UAE’s non-oil foreign trade increased 23% yoy to AED 524bn in the period Jan-Jul 2011, with exports growing 45% to AED 64.7bn and gold the top export commodity (given higher gold prices). Imports for the same period rose 22% to AED 337.1bn while re-exports grew 16% to AED 122.1bn.
• UAE’s broad money growth recorded an increase of 0.4% mom in Nov 2011, as M2 grew to AED 822.1bn from AED 818.9bn in Oct 2011. Deposits declined by 0.8% while loan growth was slightly higher at 0.1%, taking loan to deposit ratio to 101.96.
• The Government of Abu Dhabi has bought residential units from several of Aldar’s developments in addition to asset transfers and reimbursements, for a total of AED 16.8bn, in a bailout to reduce the company’s indebtedness.
• Passenger growth at the Dubai International Airport grew 7.8% in Jan-Nov 2011 to accommodate almost 46.28 million passengers, with a year-end target of 50 million expected. November saw an increase of 8.9% in passengers, with the most coming from the GCC countries, followed closely by South Asia, Russia and CIS and Western Europe.
• A survey conducted by the Department of Economic Development in Abu Dhabi showed that there has been an increase of 3.8% qoq in the number of Emiratis who borrowed in Abu Dhabi in Q3. Additionally, it was found that loans accounted for an average of about 19.2% of the monthly household expenditure, though down 1% from Q2.

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The Christmas week brought some relief to market tensions, following the euro area‟s pledge to inject EUR 150bn in bilateral loans to the IMF, but especially after ECB lent a massive EUR 489.2bn (19.6% of total assets) to banks at 3-year maturity, and the stellar placement of sovereign debt in Spain. End year squaring and low liquidity however blur the picture. It was a mixed week in the regional markets, with Aldar‟s delisting talks bringing the UAE markets down to multi-year lows, while Saudi Arabia and Qatar closed higher compared to a week ago. In currencies, Sterling registered an 11-month high against the euro and the euro was slightly higher against USD. Oil prices are back up to last week levels, on growing tensions in Iran (tougher US sanctions) and Iraq (domestic political infighting). Gold price is meanwhile marking time waiting for the QE3.

Global Developments

Americas:

• US final Q3 GDP estimate was revised down to 1.8% qoq from 2.0% reported earlier. This compares to the 1.3% and 0.4% growth reported in Q2 and Q1. Lower spending on services led to a revision in consumer spending growth to 1.7% from the 2.3%. The PCE core price index rose 0.1% mom and 1.7% yoy.
• The housing market seems to be showing signs of stability: existing home sales rose 4.0% mom to 4.42mn in Nov (Oct: 1.4%, 4.25mn), the highest in last 10 months while new home sales increased 1.6% mom in Nov to 315k (Oct: 1.3%, 310k) - the fastest rise in the past seven months. Housing starts increased by 9.3% mom to 685K (Oct: 627K), the most since Apr '10.
• Durable goods orders rose by 3.8% mom in Nov (Oct: 0.0%), largely driven by transportation equipment including aircraft. Core orders, meanwhile, were up only 0.3%. Orders for non-defence capital goods, proxy for business investment fell 1.2%, following a 0.9% decline in the previous month.
• Initial jobless claims declined in the week ended Dec 17, falling to 364k - the lowest since Apr'08. The third consecutive week of decline led to a 4-week moving average of 380,250 - the lowest since Jun'08.

Europe:

• ECB President Draghi warned of the costs of a Eurozone break-up and spooked market expectations about the ECB‟s role in purchasing sovereign debt or launching any quantitative easing program. He added that countries leaving the euro and devalued their currency would create “a big inflation” and fail to escape from structural reforms that would still have to be implemented “but in a much weaker position”.
• The ECB lent a massive EUR 489.2bn (19.6% of total assets) to banks at 3-year maturity to revitalize credit clogged by sovereign exposure and bad loans. In its Financial Stability Report it blamed weakening macroeconomic growth on “unprecedented” loss of confidence and rise of key risks in the region.
• December Ifo German business climate indicator recorded a rise for the first time in four months and the retail and construction sectors showed resilience to the wider regional economic conditions.
• Swedish Riksbank announced a drop of 25bps to the repo rate, bringing it to 1.75%. This is the first time the rate has been reduced since 2009.
• Italy's Q3 GDP showed a contraction of 0.2% qoq (Q2: +0.3%), as both consumer and investment spending declined 0.2% and 0.6% respectively. UK growth was up 0.6% in Q3, up from previous estimates of 0.5%, due to stronger service and construction sector growth. France GDP recorded an increase of 0.3% qoq (Q2: -0.1%), as investment growth slowed to 0.2% (0.6%) while consumer spending was up 0.3% (-0.6%).

Asia and Pacific:

• North Korean leader Kim Jong-Il died of a heart attack while on a train trip. South Korea's KOSPI fell 5% on the news.
• Japan's November exports fell 2.6% mom, sa (on top of the October fall of 4%m/m). October-November exports are down 18.9%, saar, versus Q3.
• Industrial production (IP) data for Nov was released in Singapore and Taiwan. In Singapore, the volatile pharmaceuticals sector led to an unexpected decline of 9.6% yoy (Oct: +24.4%) while Taiwan also witnessed a drop of 3.55% yoy (+1.41%), falling for the first time since 2009, largely owing to
• Food prices continue to add to inflationary pressures: inflation in Malaysia dipped slightly to 3.3% yoy in Nov compared to 3.4% registered in October. Singapore‟s inflation rose to 5.7% yoy in Nov (Oct: 5.4%) as food prices, transport costs and housing costs increased with the weakening SGD leading to pricier imports. Meanwhile, in India, food inflation dropped to a four-year low of 1.81% for the week ended Dec 10.

Bottom line: A few positive signs are notable at this year-end: Germany displayed some resilience; the real estate and labour market in the US are confirming some signs of life. More importantly the drastic cut of expenditures in Spain has showed clearly that the crisis in Europe will not be solved by QE or debt monetization but by a multi-year plan of public sector re-engineering. The rest of Europe led by Italy and Japan are heading towards a recession. Emerging Asia is definitely growing at a faster pace than its developed counterparts; its central banks have entered the phase of either reducing interest rates or leaving them unchanged to shield their economies, though global weakness is beginning to weigh on its exports, IP and growth.

Regional Developments

• The GCC Supreme Council accepted the KSA proposal to initiate the transition from Co-operation to Union. A special commission of 18 members will be entrusted by Feb 1 to study operational proposals. A preliminary report is expected by end March.
• The Emir of Kuwait issued a decree setting Parliamentary elections for next Feb. 2, 2012
• The implementation of the GCC Customs Union, expected to be completed by mid-2014, is seen as the basis for establishing the Gulf Common Market, following which the latter will be established by early 2015, according to the Kuwait's Minister of Finance and Health.
• Moody's downgrade of Egypt by one notch to B2 was largely as a result of the deteriorating political conditions, with the rating agency cautioning more downgrades if the situation did not improve.
• Fitch expects slower growth in the Middle East and Africa region in 2012 (at 4% compared to 5% this year); of all countries encompassing the region; all maintain a Stable Outlook except for the three Negative Outlooks on Egypt (BB), Tunisia (BBB-) and Lesotho (BB-).
• OPEC will accommodate rising Libyan output within a newly agreed total production cap of 30 min barrels per day, according to Secretary General Abdullah-Al-Badri.
• Oman recorded the largest fiscal surplus of OMR 830.1mn during the first 10 months of 2011, compared to a deficit of OMR 91.2mn for the same period last year. This was largely due to higher oil prices and despite higher spending (19% yoy).
• Saudi inflation stayed steady at 5.2% in Nov; monthly inflation slowed to 0.02% - the lowest since Feb'11.
• The Qatar Investment Authority is expected to inject close to USD 2bn into the Qatar Financial Centre, in a bid to attract businesses to the Centre, which is currently focusing to attract asset management, insurance, and reinsurance firms.

UAE Focus

• DIFC Investments announced that a USD 200mn loan had been repaid to Deutsche Bank and “is evidence of our commitment to meet our debt obligations as and when they fall due”.
• Emirates NBD could see its Tier 1 capital ratio fall by nearly 1.1% if it is forced to absorb Amlak, HC Securities said on Sunday.
• The major Abu Dhabi government stakeholder Mubadala seems to be pondering a delisting of the developer Aldar. This news was denied by a statement from Aldar's deputy CEO.
• Dubai Drydocks World expects to complete its debt restructuring by the end of March and hopes joint ventures in Asia will bring fresh cash.
• The Asian Development Bank wants to raise $1bn to expand a newly-completed stretch of railway in Afghanistan into a national network to export iron ore and copper, according to the FT.
• Inflation in the UAE fell 0.02% mom and 0.09% yoy in Nov, according to the National Bureau of Statistics. Total inflation recorded an uptick of 0.94% in the months Jan-Nov 2011.
• According to a report released by the Dubai Economic Council, UAE‟s nominal GDP for this year is expected at AED 1.25 trillion, of which share of hydrocarbon sector is 29%. This compares to GDP of AED 6.5bn and higher dependence on the hydrocarbon sector (71%) in 1971.

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Markets were mostly down from a week ago, as Eurozone sovereign debt fears continue to play out, with ratings downgrades and warnings of potential downgrades by rating agencies. Regionally, the failed MSCI reclassification bid by UAE and Qatar dampened spirits and led to a decline in markets. Downgrade fears and decline in risk appetites led the dollar to its highest level in 11 months, boosting its status as a safe haven. As the dollar stature gained, commodity prices dropped: gold was down to the lowest level in 3 months.

Global Developments

Americas:

• US retail sales edged up by 0.2% mom in Nov (Oct: 0.6%), recording the least growth in the past five months and following the strong rise during Thanksgiving. Even stronger auto sales were not sufficient to salvage retail growth as spending on food and beverages plunged.
• In the last meeting of the year, the FOMC maintained its current policy rates at 0.25% and did not mention any timing for QE3.
• Initial jobless claims fell to the lowest since May 2008 - falling 19k to 366k in the week ended Dec 10. This news came while Obama pushed for Congress to pass his stalled $447 billion Jobs Bill, in the welcome speech for troops returning from Iraq.
• US industrial production unexpectedly fell in Nov - declining by 0.2% mom (Oct: +0.7%) while factory production, which accounts for three-quarters of the total, decreased 0.4%. Meanwhile, capacity utilisation fell marginally to 77.8% from 78% in Oct.
• CPI was unchanged in Nov (3.4% yoy), as energy prices declined for the second month in a row, offsetting the rise in food prices; core inflation was up 0.2% mom and 2.2% yoy. PPI rose 0.3% mom in Nov (Oct: - 0.3%); core PPI edged up 0.1% after being flat in Oct.

Europe:

• EU Industrial production fell 0.1% mom in Oct (Sep: -2%) for the second consecutive month; Germany posted a 0.8% mom growth, after a -2.9% in the previous month, France's output was unchanged and Ireland recorded a 6.6% mom gain while Italy and Spain output declined.
• The composite EU PMI consisting of services and manufacturing output rose to 47.9 in Dec (Nov: 47) still below 50, indicating a contraction for the fourth month now. European inflation held steady at a three year high of 3% yoy in Nov while core inflation remained steady at 1.6%.
• German investor confidence measured by the ZEW increased to -53.8 in Dec after a three year low of -55.2 in Nov. Rise in industrial production and manufacturing orders along with a decline in unemployment further indicate that Germany may avoid a recession.
• Belgium's credit rating was cut by two notches to Aa3 from Aa1 by Moody's, citing “fragile sentiment” in the Eurozone. Meanwhile, Fitch affirmed France's ratings but put it on negative watch, while warning that it could downgrade Italy, Spain, Ireland, Belgium, Slovenia and Cyprus.

Asia and Pacific:

• Industrial production in India fell 5.1% yoy in Oct (Sep: +2.0%), contracting for the first time since Mar 09. While the decline was registered across the board, capital goods output declined by 25.5%, implying weak corporate investments. Production of durables and consumer durables declined together for the first time since Feb '09, an indicator of weak consumer demand.
• M2 in China rose by 12.7% yoy in Nov (Oct: 12.9%), the least since May '11. The decrease in lender's reserve requirements would support an increase in lending in the coming months to combat economic growth and exports weakness.
• Business confidence, recorded by BoJ Tankan, fell to a worse-than-expected "minus four" in Dec from positive "two" in Sep as stronger yen and weakened global recovery hurt Japanese businesses and sentiment.
• India's central bank left policy rates unchanged, with the Governor indicating upcoming policy shift: “from this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth”.

Bottom line: Fitch's downgrade of the world's largest banks including Barclays, BNP Paribas and BoA, due to “structural weakness in their funding, earnings, and leverage” highlighted once again the perverse enmeshing of banks' and governments' balance sheets. Commerzbank is widely indicated as the next beneficiary of a government bailout. The euro area agreement of last week on hardened fiscal discipline has left the markets skeptical and with the Old Continent heading for a recession, the year-end mood is sour. Further confirmation of a slowdown came from Japan and India, while the US job market continues to gain strength.

Regional Developments

• An official's comment about the possible inclusion of Egypt into the GCC was denied by several key officials. It was also mentioned that the invitation for Jordan and Morocco, issued in May, would not include “membership”, but will “boost distinguished relations and strategic ties”.
• A report from Citibank placed the total value of new projects in the MENA region from Jan-Oct 2011 at USD 82bn, with Saudi Arabia accounting for almost a third of it, at over USD28bn. Iraq has awarded close to USD 17bn in projects, while UAE, Kuwait and Qatar recorded declines or remained flat compared to the previous year.
• An annual report titled “Paying Taxes 2012” placed all 6 GCC nations within the top 15 with Qatar 2nd and UAE at 6th, in terms of ease of paying taxes. The near absence of and limited number of taxes levied in the Middle East region is obviously a critical factor.
• The World Economic Forum's Financial Development Report 2012, which tracks financial system development and financial stability, placed Saudi Arabia at 23, ahead of its GCC counterparts UAE and Bahrain (25 and 24 respectively).
• SAMA's annual report expects real GDP to grow 5.1% in 2011; this follows a GDP growth of 18.8% yoy to SAR 1.7 trillion in current prices and an increase by 4.1% to SAR 871.6bn at constant prices for 2010. The report was released amidst rumours of a potential Riyal-denominated Sukuk issuance by Saudi Arabia, according to banking sources.
• Moody's expects higher oil prices and production to help Saudi Arabia reduce public debt levels, in spite of the increased budgetary spending. The report expects “net foreign assets to reach 95% of GDP as of year-end 2011, with debt levels dropping to around 8% of GDP”.
• A Reuters report suggested that Saudi Arabia is expected to make a limited expansion of its stock markets. The Capital Market Authority and Tadawul have disclosed a detailed plan to market participants and according to sources, total direct ownership of each stock would not be allowed to exceed 20% of the issued share capital. If implemented, this would increase volumes and bring in institutional investors, also improving transparency and market efficiency.
• Oman has received close to USD 74mn, from the US Department of State, between 2007 and 2011. This year, the nation pocketed USD 11.8mn, with the request for 2012 stating that the funds would be utilised for 'stabilisation operations and security sector reforms.'
• Almost 2000 low-cost homes have been provided to the Omanis as per a Ministry grant of OMR 40mn in 2011. The Undersecretary of the Ministry of Housing also stated that another OMR 40mn has been allocated for the same and OMR 7mn as interest-free loans for next year.
• Inflation in Oman ticked up to 3.75% in Oct, following Sep's 3.7%, due to a hike in education services - seen mostly as a one-off effect.

UAE Focus

• The UAE and Qatar failed in their bid to be reclassified as an emerging market by the MSCI for the third time last week. Though there was positive feedback about the DvP model, implemented in May this year, the MSCI stated that “investors continue to stress significant concerns over the effectiveness of the new framework to fully ensure the safeguarding of their assets under certain circumstances, particularly for failed trades where a forced sale of assets, without the owner's consent, remains a possibility”.
• About 1.19mn tourists from the neighbouring GCC countries visited Dubai in the first 10 months of this year, according to the Executive Director of Tourism at the Dubai Department of Tourism and Commerce Marketing.
• Total credit fell to AED 1073.3bn in Oct, after the surge to AED 1075.2bn in Sep, according to the UAE Central Bank‟s latest data. In spite of the decline in overall credit, personal loans increased to AED 252.6bn (Sep: AED 249.8bn).
• Inflation in Abu Dhabi was recorded at 1.9% yoy for the period Jan-Nov 2011 while Nov inflation fell to a 23-month low of 0.6% (Oct: 0.9%). Dubai‟s inflation, meanwhile, came in at 0.2% in Nov, as food prices declined and housing costs held steady.

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Stock markets were in an upbeat mood waiting for some breakthrough from the EU Summit. But the press conference by ECB President Draghi spooked the enchantment by reminding that many banks remain unable to sell their debt into the market and face a large refinancing hump next year. Draghi also asserted that no large scale debt monetization will take place over the foreseeable future in the Eurozone. The conclusion of the EU Summit reiterated this orthodox stance. Structural reforms are the priority. Regional markets are likely to open higher this week, if Saudi market reaction to the EU Summit is taken as a proxy - Saudi markets rose to the highest level since August yesterday. The euro rose against the dollar post-EU Summit and commodities were generally lower, with both oil and gold prices down - the latter by almost 2% from the previous week.

Global Developments

Americas:

• Initial jobless claims in the US fell 23k to 381k in the week ended Dec 3, to a nine-month low.
• The US ISM non-manufacturing headline index declined 0.9 point in Nov to 52.0. The composition of the report was mixed: new orders and the business activity indexes increased (by 0.6 point to 53.0 and by 2.4 points to 56.2, respectively).
• October factory orders in the US fell 0.4% mom, on a 17% dip in orders for commercial aircraft, following Sep’s 0.1% drop. Core capital goods fell 0.8%, also showing weakness in investment plans for the future.
• Brazil GDP Q3 growth was flat qoq and 2.5% yoy, versus a 0.8% qoq and 3.1% yoy in Q2. Another large emerging market ends up in the doldrums.

Europe:

• The EU Summit turned out to be another step in the crisis resolution process, not the “do or die” moment portrayed by media. A closer fiscal union along the German inspired fiscal discipline will be enshrined in a Treaty envisaging substantial penalties for non-compliers. An isolated UK withdrew from the new framework. The EU will finance the IMF with EUR 200bn of new ammunition to cope with emergencies in Italy and Spain if needed.
• Standard & Poor’s put 15 EU countries under negative watch, including the AAA rated ones. As a consequence, the EFSF is at risk of losing its top rating.
• The ECB cut interest rates by 25 bps to 1%. More importantly it announced non-standard measures to support banks which are shut out of the money market. The central bank’s list of accepted collateral was also widened, with ratings thresholds reduced and loans to small- and medium-sized enterprises made acceptable for the first time.
• Retail sales in the Eurozone rose 0.4% mom in Oct, with German and French sales rising 0.7% and 0.8% respectively while Spain and Portugal sales continued to fall. Potential austerity measures are likely to result in lower spending in the coming months.
• EU provisional GDP data reported growth of 0.2% qoq in Q3, the same as Q2, as a rise in consumption and exports offset the decline in inventories.
• German industrial orders surprised with a sharp 5.2% rebound after Sep fall of 4.6%. Despite this strong figure the trend points down: orders for Sep-Oct combined were 2.7% lower than the previous two months.
• Industrial production in Germany was up 0.8% mom in Oct as production in the manufacturing sector grew 0.8% after declining 2.8% in Sep as capital goods grew 2.2% while consumer goods remained flat.

Asia and Pacific:

• A host of data was released in China last week - inflation was at its slowest pace in 14 months, with price rise at 4.2% in Nov (Oct: 5.5%); Chinese retail sales for the first 11 months of the year grew 11% to CNY 16.35 trillion; manufacturing rose 12.4% yoy in Nov, the slowest pace since Aug 09 (Oct: 13.2%), following contraction in the PMI data last week - pointing to the risks of a hard landing.
• China’s foreign trade growth slowed and surplus narrowed in Nov as external demand slowed - especially given the crisis in Europe. Trade was up 17.6% yoy to USD 334.4bn in Nov (Oct: 21.6%) while exports grew 13.8% to USD 174.5bn - the slowest growth since Feb this year.
• Machinery orders in Japan unexpectedly fell in Oct, with bookings declining 6.9% mom, signalling that companies are postponing business investments given the slowing global economy and strong yen.
• Reform is on the back burner in India: a key new law allowing foreign investment in the retail sector was put on hold due to protests only few days after the Prime Minister had announced it; a major setback.
• Central banks that met last week left policy rates on hold, given the uncertainty in the Eurozone: Indonesia and South Korea left rates unchanged at 6% and 3.25% respectively. South Korea’s central bank revised GDP numbers: the economy is forecast to expand 3.7% growth in 2012 and 4.2% in 2013, compared to 3.8% this year.

Bottom line: Political developments overshadow economic data, but contagion is spreading and the slowdown is involving the large emerging economies as well more notably Brazil and India (where the prime minister after the fiasco on the retail law is approaching the last stop of his political career). Signs of life come from the US labour market and German manufacturing. The German leadership in Europe is solidifying with France compelled to follow: more fiscal discipline via a new Treaty, not much monetary amphetamine from the ECB, no Eurobond opium, more work to define clearly the functions of the European Stability Mechanism (ESM).

Regional Developments

• Egypt's new cabinet was sworn in before the head of the ruling army council, while electoral results keep pouring in from remote areas. Islamist candidates were taking the majority of seats.
• IMF Chief calls for inclusive growth in the Middle East, also mentioning that “macroeconomic stability and inclusive growth can - and indeed must - go hand in hand”.
• The Arab Spring has severely affected foreign direct investment in the Middle East and North Africa (Mena) region, according to a new report by the World Bank’s Multilateral Investment Guarantee Agency (MIGA).
• Mercer's 2011 total remuneration survey results shows nearly every company surveyed in three key markets - Saudi Arabia, UAE and Qatar - plan to give pay rises between 5 and 6% and hire more people in 2012.
• Moody's downgraded to A3/Prime-2 from A2/Prime-1 the global local currency deposit and foreign currency deposit ratings of Burgan Bank of Kuwait.
• AT Kearney reports that revenue of around USD 700k is lost for every megawatt-hour of power not supplied to key industries in the GCC.
• Almost 600k Saudis have applied for housing loans from the Real Estate Development Fund which is expected to give individual loans of up to SAR 500k.
• Saudi Ministry of Labour announced that close to 6 million expatriates were employed in the private sector while close to a million Saudis remained unemployed. Official unemployment rate is at 10.5%, with female unemployment higher at 26.6%.
• The International Air Transport Association reduced its forecast for profits of the Middle East airlines by half to USD 400mn as higher fuel costs are expected to lower profit margins.

UAE Focus

• After Moody’s reported that Dubai’s companies face “execution risk” in meeting repayments coming due next year, Sheikh Ahmad clarified that there is no intention to restructure part of debts in 2012, but that the government may look into refinancing part of the financial obligations if the need arises. The statement from Moody’s needs to be put in the right context - given on-going global sovereign risk developments, credit rating agencies (CRA) are trying to be more active by revising their ratings at close intervals. The Dubai report should be read as a part of such a global initiative.
• Fitch in a note on UAE banking sector underlines that a significant increase in renegotiated private sector loans is symptomatic of the true extent of the banks' asset quality problems. Fundamental credit issues remain unresolved, and may re-emerge as non-performing loans. Ultimately, the success of the various restructuring and renegotiating plans accepted by the banks depends on recovery in both UAE and globally.
• A draft Companies Law was approved by Sheikh Mohammad, which will allow flexibility in the setting up of companies and in line with the MSCI’s “foreign ownership limits” criteria.
• The UAE Ministry of Finance (MoF) is studying the set-up of an organisation aimed towards keeping records on mortgages of capital assets - this will ease SMEs to obtain funding, according to the MoF undersecretary Younis Al Khouri.
• Nakheel has paid USD 7.3bn to the creditors so far and is expected to issue AED 1bn of Sukuk before the year-end, as part of the AED 59bn restructuring deal.
• UAE’s PMI, compiled by HSBC, dropped to 52.5 in Nov from 53.4 in Oct as new export orders also rose at a weaker pace, with growth at a ten-month low.
• UAE’s central bank data places total credit growth this year till Oct at 4.1% (AED 1.073 trillion) while deposit growth was slower at 1.3% (AED 1.67 trillion).

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Markets

Stock markets had the best week in three years on hopes that an agreement on the new governance framework of the euro area is imminent. Another catalyst for a rebound was the decision among 6 central banks, including the ECB and the Fed, to extend existing cheaper USD swap lines for banks to boost liquidity and ease strains in financial markets. Intra-euro bond spreads narrowed and were less volatile. The situation is however in a flux with developed markets in search of catalysts and emerging markets trying to decouple. Regional markets have been somewhat more resilient of late, with the expectations of an MSCI upgrade for the UAE and Qatar into emerging market status the most expected news in the coming two weeks. The euro had a positive week, rising against the dollar, while both oil and gold prices increased from a week ago.

Global Developments

Americas:

• The US Fed, ECB and 4 other central banks increased the availability of dollars outside the US, reflecting concerns about the liquidity & inter-bank credit fallout of the European debt crisis.
• Sales of new homes edged up 1.3% in Oct, a bit above consensus. Prior data were revised down, resulting in a weaker-than-expected 307k figure. Pending home sales were up 10.4% in Oct, recording the biggest monthly increase since Nov ‘10, as low interest rates contributed to the rise. The S&P/Case-Shiller index dropped 3.6% yoy in Sep (Aug: -3.8%).
• Non-farm payrolls increased by 120k and the ADP report signalled increased hiring in the private sector - having added 206k jobs in Nov, taking the jobless rate down to a 2.5 year low of 8.6%. Initial jobless claims rose 6k to 402k in the week ended Nov 26.
• The ISM survey for manufacturing was at a five-month high, rising to 52.1 in Nov (Oct: 50.8), with the new orders, production, prices, and exports components all showing an increase.

Europe:

• At Italian debt auctions bids exceeded offers (1.5x for 3 year; 1.34x for 10 year). But at a 7.89% average yield for 3s (4.93% a month ago), and 7.56% for 10s, versus 6.06% a month ago) the debt service is not sustainable.
• German retail sales rose further in October +0.7% mom (Sep: +0.3%) - the biggest increase since June.
• Eurozone manufacturing PMI contracted at the fastest pace in two years, falling to 46.4 in Nov (Oct: 47.1) as new orders continued to decline.

Asia and Pacific:

• China's central bank announced a cut in banks' reserve-requirement ratio by a half-point in a move that signals the end of the tightening cycle.
• China’s non-manufacturing PMI dropped 8 points to 49.7 in Nov, for the first time in 33 months, as new orders declined 5.3 points from Oct.
• Japan industrial production rose +2.4% mom for Oct versus expectations of +1.0% (Sep was -3.3%). Production increased for transportation machinery, which slumped the previous month, and for general-use machinery and chemicals.
• Japanese Oct unemployment rose again to 4.5% erasing the drop seen since March, although the rate remains below the 5.5% peak of Jul 2009.
• India Q3 GDP growth came in at 6.9% yoy, below the 7.7% in Q3, but in line with expectations. Sequentially, growth fell significantly to 5.6% qoq (sa annualized), with Rupee hammered in the markets. All sectors suffered a slowdown, led by industry. Fixed investments took a blow, falling by 0.6% yoy.
• Korea Industrial production in Oct increased 6.2% yoy, down from the 6.9% yoy growth in Sep, better than the 5.4% yoy expected but still weak.
• The Bank of Thailand cut the benchmark 1-day bond repurchase rate by 25bps to 3.25% - following nine rate hikes since Jul ‘10, in an attempt to boost the economy as it continues to suffer the floods’ aftermath.

Bottom line: A climax will be reached on Dec. 9th when the new governance framework of the euro area will be submitted to the EU summit. This event has been portrayed as a make it or break it moment and this is happening as an easing cycle begins in emerging economies - with China, Thailand and Brazil lowering rates last week in response to a marked growth weakening. Global remittances, meanwhile, are estimated to have risen by 8% yoy to USD 351bn in 2011 according to World Bank - with remittance flows to all six developing regions rising - for the first time since the financial crisis.

Regional Developments

• Economic sanctions were imposed on Syria by the Arab League; the country has however been given a chance until today to sign an initiative to end the turmoil, barring which the sanctions would come into play immediately.
• MSCI will announce its decision regarding the upgrade of UAE and Qatar to emerging market status on Dec 14th, according to its website.
• Data from Zephyr's for November show that transaction values for M&A in MENA fell for the third consecutive month in November 2011 to $35 million - the weakest result of the last 12 months - and were 94% lower than in November 2010. Oman was the most frequently targeted country.
• The surge of nearly 50% in oil prices could double the combined fiscal surplus of GCC. Oil exports alone could fetch over USD 608 billion this year, a whopping increase of around $143 billion over 2010.
• The number of Omanis in the private sector stood at 177,716 in December 2010 but dropped 4% to 170,605 by September 2011 while the number of expatriate workers grew 10% from 955,630 to 1.06mn over the same period.
• The Saudi banking system will be able to comply with Basel III regulatory and compliance requirements, given the current supervision environment, according to Dr. Abdurrahman A. Al-Hamidy, Deputy Governor of the Saudi Arabia Monetary Agency.
• Personal loans taken in Saudi Arabia touched SAR 217.5bn in H1 2011, with 32.8% of total loans spent on the real estate sector while total loans given through credit cards amounted to SAR 7.6bn.
• S&P has assigned a AA long-term senior unsecured debt rating for Qatar, citing the government’s strong fiscal and external balance sheets.

UAE Focus

• The United Arab Emirates has granted Federal public sector salaries rises of up to 100% next year and a Dh10bn ($2.7 billion) fund to help indebted citizens and allowed for nationality to be passed on to the children of local women who were married to foreigners.
• With access to financial markets restored, UAE companies placed as much as USD 5 billion of bonds on the market this year, with a similar amount being considered for issue in 2012.
• The UAE Central Bank has returned to buying US Treasuries after previously pausing given low yields, according to the Governor.
• Dubai airport posted a rise of 7.3% in passenger growth in October to 4.3 mn passengers, taking the 12-month rolling total to 50 mn passengers for the first time ever. Freight, however, registered a 2.5% decline to 202k tonnes, reflecting the global economic conditions.
• There were 3.8mn foreign workers in the UAE in 2010, with almost 2 million having no educational qualifications and about 266k having university degrees, according to the UAE Labour Minister.
• UAE’s oil output fell 1.57% mom to 2.51 mn barrels per day (bpd), according to IEA estimates. This follows oil output averaging 2.53mn bpd in Q3, somewhat higher than Q2’s 2.48mn bpd.
• Emirates NBD is contemplating an entry into the Sukuk market with the issue of a dollar-denominated bond in the coming two weeks, according to a Reuters report. The expectation is that most of the issue will be taken up by regional GCC banks.
• DP World, in its continuing expansion into the emerging markets, has opened West Africa's largest and most modern container terminal, in Senegal.

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Markets

Last week, ending with US Thanksgiving turned out to be a disastrous one for equity markets globally – Wall Street and Asian markets recorded their the worst weekly performance since Sep, Nikkei 225 hit the lowest level since Apr 09, Dubai stocks hit a 7-year low and the Egyptian bourse closed at its lowest in more than two and a half years. Sterling fell to a seven-week low while the Indian rupee continued to be one of the worst-performing emerging market currencies against the dollar. The worsening global outlook led commodity prices down, with aluminium prices falling below $2k a tonne for the first time since 15 months.

Global Developments

Americas:

• US GDP climbed 2% yoy in Q3 (Q2: 1.3%), but was revised down from the previous estimate of 2.5% - largely from the USD 8.5bn drop in business inventories as opposed to gain of USD 5.4bn announced earlier. The gain in Q3 came from firm consumer spending and strong export growth.
• The core PCE index - personal consumption expenditures prices excluding food and energy, declined slightly to 2.0% qoq in Q3 from 2.1% in Q2.
• Purchases of previously owned homes in US unexpectedly rose 1.4% mom in Oct (year-to-date at 4.97mn). Median house prices have fallen 4.7% and given low borrowing costs, it has become a buyer’s market.
• Lower demand for aircraft and business equipment led to a decrease in orders for durable goods by 0.7% mom in Oct (Sep: -1.5%). Europe’s debt crisis and subsequent risk of slower global economy may temper purchases of US manufactured goods while a weaker dollar might help American exports.
• Initial jobless claims increased by 2k to 393k in the week ended Nov. 19 after hitting a seven-month low of 391k the previous week, indicating that the rate of firings has stabilized after slowing in recent weeks.

Europe:

• Eurozone composite PMI was 47.2 in Nov (Oct: 46.5) - below the 50 mark for the third month in a row.
• Industrial orders in Europe slumped to a 3-year low, falling 6.4% mom in Sep (Aug: +1.4%), led by France (-6.2%) and Germany (-4.4%).
• German GDP rose 2.5% yoy and 0.5% qoq in Q3 (Q2: 0.3% qoq), unchanged from the first estimate, with private consumption the largest contributor to GDP growth, rising 0.8% qoq.
• Business confidence in Germany expressed by the IFO institute’s business climate index increased for the first time in five months to 106.6 in Nov (Oct: 106.4). With unemployment levels at a two-decade low, domestic consumer spending is helping to offset the waning foreign demand within the euro region.
• More downgrades from ratings agencies: S&P downgraded Belgium debt and Hungary’s sovereign rating was downgraded to Ba1, a sub-investment grade, by Moody’s.

Asia and Pacific:

• HSBC’s flash China Manufacturing PMI hits a 32 month low of 48 in Nov (Oct: 51) indicating a contraction in the manufacturing sector and a risk to the country’s economy.
• A slew of GDP releases in Asia: Singapore Q3 GDP rose to 6.1% yoy (Q2: 1.0%) with manufacturing playing a key role, rising 14.2% (-5.8%). Thailand’s GDP grew 3.5% yoy in Q3 (Q2: 2.7%), but the government has reduced its growth outlook for 2011, given the impact of the worst floods in 70 years. Meanwhile, Taiwan’s Q3 GDP expanded at the slowest pace since 2009 at 3.42% yoy (Q2: 4.52%) adding concern that the stumbling global recovery is threatening Asia.
• Singapore’s industrial production rose 24.4% yoy and 14.2% mom in Oct with the volatile biomedical industry the biggest contributor, expanding by 112% yoy. Excluding it, IP was down 11.2% yoy.
• India opened up the multi-brand retail sector to 51% FDI - which will increase investment and is expected to create 10 million new jobs, could result also in fostering competition.

Bottom line: A deadlock on the US budget (with the Super Committee failing to reach an agreement on reducing the deficit by $1.2tn) along with the ongoing ratings downgrades in Europe, ECB lending to European banks hitting a 2-year high of EUR 247bn and unimpressive German bond sales indicate a gloomy path ahead. The question that is now doing the rounds is whether the Eurozone is moving towards a breakup. Asia seems to be in a wait and watch mode while some key indicators point to a potential slowdown, courtesy links to Europe.

Regional Developments

• Yemen, following the resignation of President Saleh, has set a date for presidential elections early next year.
• S&P cut Egypt’s sovereign rating one level to B+, four levels below investment grade, and maintained the outlook as negative following the violence last week.
• Qatar is considering enacting a law to allow GCC firms to operate in the country, in an attempt to help speed up the GCC Common Market. Some criteria need to be met - one, companies should be registered and operating in the country of their origin for not less than 3 years and two, it should be 100% owned by GCC national or nationals.
• The Gulf Bond and Sukuk Association have issued the “Standards for Gulf Debt Issuers” in a bid to improve transparency and disclosure, improve risk standards and provide consistent information to investors.
• The GCC nations have delayed the implementation of VAT until every member is ready with the internal systems and specialized staff required to implement such a tax, according to UAE MoF’s Younis Khouri.
• A report from Markaz estimates that GCC will spend close to USD 97bn between 2011 and 2020 on new road and rail projects, including the USD 30bn GCC rail network.
• Oman’s budget for 2012 is expected to bring in OMR 8.8bn in revenues, with oil revenues calculated at $75 per barrel. Spending is estimated at OMR10bn, with an 18% rise in spending on education and health alongside 36k jobs being created for nationals in the public sector.
• Oman’s inflation dropped significantly to 3.7% in Sep (Aug: 5.3%) on fall in prices of essential food items.
• This week will see the beginning of jobseeker’s allowance being given to Saudi nationals who have qualified for this. The Saudi cabinet also approved several other measures facilitated to disburse the allowance to the Saudi youth as per the Royal Order issued in March this year.
• Saudi Arabia has reached the oil production target of 12mn barrels per day, hence stopping (temporarily) the USD 100bn expansion plan for oil production capacity. This follows statements from the Chief Executive of Aramco, who mentioned that pressure to raise output capacity had been "substantially reduced".
• Letters of credit in Saudi Arabia, a proxy for consumer spending via imports of goods, grew 27.8% yoy in Q3 to SAR 43.7bn, mainly due to the increase in "Appliances and Other Goods" and building materials and machinery category - the latter implying a booming construction sector.
• A possible change in law in Bahrain might allow the children born to Bahraini mothers and foreign fathers get citizenship. If this law is passed, about 3000 or more applicants could receive citizenship, according to the Bahrain News Agency.

UAE Focus

• The Dubai Department of Economic Development’s quarterly Business Confidence Index rose to 115 points in Q3, up from 100 in the previous quarter - with 57% of the survey respondents anticipating higher revenues (from higher volumes as opposed to prices) and 44% expecting higher profits in Q4.
• A report from the Dubai Economic Council finds that employee productivity is significantly higher in the free zones - with both sales per worker and value added per worker higher across all sectors. The study identified “motivation incentives” as the main reason behind higher productivity, with average salaries higher in the free zones.
• The Bankruptcy and Financial Restructuring Law Initiative has been referred to the technical committee in the Ministry of Justice. The law incorporates “restructuring commercial and non-commercial debt, debtor obligations regarding accumulating debt, and facilitating restructuring processes for companies and organisations” as mentioned in a press statement.
• A report prepared by the Financial Stability Unit to present to the BoD of the UAE Central Bank states that the UAE banks remain in a “good” position and unaffected by the current global turmoil.
• Some Islamic banks have raised objections to the new rules on personal and retail credit issued by the UAE Central Bank in May - mentioning that these are incompatible with Shariah-compliant banking, including overdrafts, punitive interest on debt default, increasing loans and cheque deduction.
• Inflation in the UAE rose 0.4% mom in October due to an increase in the costs of food and clothing; however on year-on-year terms, prices declined by 0.05%, recording the first drop in 20 months.
• The Al-Maktoum international airport is expected to open for passengers early next year, according to Khalifa Al Zaffin, the executive chairman of Dubai World Central. It was also announced that AED 4bn would be invested for Al Maktoum Airport while the expansion of the Dubai International Airport would entail around AED 26bn by 2020.

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Markets

A dismal week for markets despite positive data from the US, as Eurozone’s political tensions continue to hurt investor sentiment and Spanish elections take centre stage. This was reflected in regional markets as well with most indices down almost 1% from a week ago. Dollar strengthened (dollar index up +1.5%) and the euro came under pressure while haven demand helped the pound; Indian rupee fell to a 32-month low sliding to 51.20 against the dollar. Commodity prices were mostly lower last week, with gold down by almost 4%.

Global Developments

Americas:

• Obama stated the US wants to sign what he dubbed the “next-generation” trade agreement with nine APEC nations by the end of 2012.
• US PPI declined by 0.3% mom sa and 5.9% yoy in Oct (Sep: +0.8% mom) on lower energy and automobiles cost while core PPI remained unchanged (for the first time since Nov 2010).
• Inflation unexpectedly fell 0.1% mom in Oct (3.5% yoy; Sep: +0.3%) as energy costs fell by 2% from Sep and food prices rose at a minimal 0.1%; core inflation was 0.1%, same as a month ago.
• Retail sales increased 0.5% mom in Oct (Sep: 1.1%) on purchases of electronics and appliances (3.7%), food and beverages (1.1%), motor vehicles (0.4%) while clothing store sales fell 0.7%, registering the largest decline since Dec 2010.
• Housing starts fell 0.3% mom (+5.1% yoy) in Oct to 628k annual rate while building permits, a proxy for future construction, increased 10.9%.
• Initial jobless claims fell to a 7-month low of 338k for the week ended Nov 12 while the number of people continuing to collect jobless benefits decreased to a 3-year low of 3.61 mn in the week ended Nov 5.
• The IRS has issued proposed regulations relating to the taxation of foreign government entities - clarifying and modifying the determination of whether a “Controlled Entity” is engaged in commercial activities- that would exempt them from taxation.

Europe:

• Italy’s Mario Monti formed an emergency government led by technocrats.
• Germany grew 0.5% qoq in Q3, higher than 0.3% growth recorded in Q2 while France expanded 0.4%, following a 0.1% decline the previous quarter - both countries growing on stronger private consumption. Eurozone GDP gained a modest 0.2%, on the strength of France and Germany as Spain and Belgium stagnated while contractions were seen in both Portugal and Netherlands.
• Eurozone industrial production dipped to a 21-month low in Sep, falling 2% mom (+2.2% yoy; Aug: +1.4% mom), with the core, Germany and France, declining by 2.9% and 1.9% respectively. Slumps in industrial orders as well signal further contraction in the coming months.

Asia and Pacific:

• Japan posted 6% qoq, saar, GDP growth in Q3, broadly in line with expectations. Earthquake rebuilding which has started in earnest should sustain growth at 2.5% for the next 3 quarters. The BoJ left policy rates unchanged at the recent meeting, also agreeing to leave the credit and asset-purchasing program unchanged, after it was boosted by JPY 5trn to a total JPY 55trn in Oct.
• Singapore non-oil domestic exports (NODX) fell 16.2% yoy in Oct (Sep: -4.6%) with electronics taking the biggest hit. Exports to the US plunged 51% and it dropped by 31% to both Europe and Hong Kong, while NODX to China rose by 3.1%.
• Indonesia’s Central Bank has revised its growth forecasts for 2012 to 6.5% from a previous estimate of 6.7%, on expectations of slower export growth to the developed US and Eurozone countries, while also revising the Q4 2011 estimates by 0.1% to 6.6%.
• Malaysia’s Q3 GDP was stronger than expected, rising 5.8% yoy (Q2: 4.3%) on stronger domestic demand (+9% yoy) through higher household, business and government spending. Gross exports were up 11.4% and investment expanded by 6.1%.

Bottom line:The Eurozone debt crisis still looms large, with Spain now the cause of anxiety after the change of government in Italy. As Spain heads to the polls today, it is likely that the global outlook will be dependent more on political developments as opposed to macroeconomic issues. Meanwhile, a recent World Gold Council report estimated that central banks were net buyers of gold (148.4 tonnes) in Q3 2011, led by emerging market central banks intent on diversifying their growing foreign exchange reserves – which can also be read as “distrust in the dollar”.

Regional Developments

• Syria called for an emergency Arab League Summit last week, after the country was suspended from the organisation given the government’s stand in spite of the continuing anti-government protests. This call was rejected by the GCC - making it difficult for this proposed Summit to be held, given that 15 of the League’s 22 members would have to approve in order to hold a summit.
• Egypt’s market regulator eased the rules and regulations for small and mid-cap investments on Nilex last Sunday – e.g. it will not need a minimum capital requirement, with the maximum ceiling set at EGP 50mn; additionally, an independent judge was assigned to oversee the finances of the market and ensure that all companies are abiding by trading rules.
• Refinancing risk will be the biggest concern for maturing debt in the coming years, according to S&P. Estimates indicate that about USD 25bn in bonds and Sukuk will mature in the GCC in 2012, the figure rising to about USD 35bn in 2014.
• The uncertain global outlook (especially the fate of the Eurozone) combined with oil price volatility and increased domestic spending could cause the regions’ SWFs to become selective in investments abroad, after having lost close to 25% of their wealth during the recent financial crisis “buys”.
• S&P has upgraded Oman's Banking Industry Country Risk Assessment rating to group '4' from group '5.' with 1 signifying the lowest risk banking system, citing factors like “regulator's good track record, and adequate regulation and supervision, which are increasingly aligned with international standards”.
• Increased spending during the pilgrimage season is likely to drive up inflationary pressures in Q4 in Saudi Arabia, according to SAMA.
• Kuwait’s reduction in work permits is an indicator of the decline in expatriate population, which has come down to about 1.2mn from 2 million a few years ago.

UAE Focus

• The Dubai air show event ended with close to USD 63.3bn in orders for aircraft, maintenance services and flight training programmes, with a record 56,548 attending the event.
• Boeing won its single largest ever commercial aircraft order when Emirates, which will buy at least 50 twin-aisle Boeing 777 long-haul aircraft worth a record $18bn at list prices.
• Inflation for October rose to a 3-month high of 0.3% yoy in Dubai, on food costs (+0.5% mom) while transportation costs dipped by 0.1% mom and housing prices remained unchanged.
• In Abu Dhabi, inflation slowed to a 22-month low of 0.9% yoy and 0.3% mom in October, as transportation costs fell 0.2% mom alongside a 1.3% hike in food prices.
• UAE’s real GDP grew 1.4% to AED 977.3bn in 2010 (2009: -1.6%), with non-oil contribution to GDP increasing to 69% from 66% recorded in the previous year, highlighting increased economic diversification. Meanwhile, Abu Dhabi’s nominal GDP increased 15.9% to around AED 620bn in 2010, also causing the per capita income to increase to AED 315,300 from about Dh293,100 in 2009 (+ 7.6%).
• UAE continues to remain a safe haven for businesses, given the FDI inflow into the country in 2010, according to a senior government official. Abu Dhabi alone attracted USD 2.7bn last year, also ranking as the second most attractive city for FDI in the Middle East in 2010 as per FT rankings.

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Markets

The markets continued to be volatile in the backdrop of the dramas in Greece and Italy, with Italy’s 10-year debt soaring dangerously close to and above 7% last week - also driving euro to its lowest level against the dollar in a month. Risk appetite gradually improved on Friday with indications of political change suggesting greater likelihood of reforms, including austerity packages, leading to a market rally as Eurozone debt fears eased. Regional markets were mostly down last week, but the positive sentiment in Saudi market yesterday is likely to reflect in its regional counterparts’ behaviour today. The euro was down almost 0.3% compared to a week ago, while gold and oil prices were helped by the softer dollar.

Global Developments

Americas:

• US initial jobless claims declined by10K to 390k vs. forecast of 400k. Continuing claims also fell more than anticipated, by 92k to 3.615m. It is too early to conclude that improvement in labour market will persist.
• The US trade balance unexpectedly improved to -USD 43.1bn in September from -USD 44.9bn in August as exports surged 1.4% to USD 180.4bn, outpacing the slim 0.3% rise in imports to USD 223.5bn.

Europe:

• Italy’s outgoing government managed to pass the 2012 budget law encompassing some of the structural measures requested by the EU and the ECB. Berlusconi resigned yesterday and former EU Antitrust Commissioner Mario Monti will preside over a technocratic executive entrusted with a heretofore Mission Impossible: regaining the markets’ confidence with tough budgetary discipline.
• In Greece, former ECB Vice President Lucas Papademos, the newly appointed Prime Minister, is due to attempt a similar Greek Mission Impossible as Monti.
• German industrial production declined 2.7% mom in Sep (-0.4% revised up from -1.0% in in Aug). Manufacturing output was down 3.0% mom after -0.4%, while construction eased 0.8% after -1.7%. IP is still up 1.7% qoq, a bit higher than 1.5% in Q2, but the latest figure point decisively downward.
• UK Sep manufacturing output was slightly stronger than expected at 0.2% mom (Aug: 0.3%) and 2.0% yoy, while IP was unchanged mom and -0.7% yoy – the weakness due to falling extraction of oil and gas.

Asia and Pacific:

• China Oct inflation fell to 5.5% yoy from 6.1% yoy in Sep. (2.1% mom s.a. ann. in Oct down from 4.0% mom s.a. ann. in Sep). Food price inflation fell to 11.9% yoy (Sep: 13.4%), continuing in the declining path already detectable in the summer. Non-food price inflation came in at 2.7% yoy in Oct (Sep: 2.9%).
• China’s IP growth slowed to 13.2% yoy in Oct, (lower than consensus at 13.4%, down from 13.8% in Sep). This implies a sequential growth of 6.2% mom s.a. ann. in Oct, down from 17.9% mom s.a. ann. in Sep.
• China’s trade surplus fell 36.5% yoy to USD 17.03bn in Oct as trade with the EU, US and Japan continued to slow compared to a year ago while emerging market trade partners grew stronger. Overall, exports and imports in the first 10 months increased 24.3% yoy to reach USD 2.97 trillion.
• Indonesia’s GDP rose 6.54% yoy in Q3 (Q2: 6.52%) on strong domestic activity: consumption and investment. Private and government consumption advanced 4.8% and 2.5%; investment was up 7.1%.
• Indonesia’s central bank meeting resulted in an unexpected lowering of policy rates by 50bps to 6.00%, following the 25bps cut in Oct as global uncertainties took centre stage. Meanwhile, the central banks of Korea and Malaysia left rates unchanged at their respective meetings.
• The Nov Japan Tankan manufacturing survey was +1, down from +6 in Oct. The outlook also dropped to -5 from +1 in Oct. Thai floods appear to be somehow a factor in the drop. The non-manufacturing survey was +3, up from +1 in Oct, with the outlook at +2, virtually flat mom.
• India’s IP growth fell sharply to 1.9% yoy in Sep lower than the 3.6% yoy in Aug. The reading has been the lowest ever since Sep 2009.
• Hong Kong Q3 GDP expanded by 4.3% yoy, (vs 5.3% in Q2) in line with expectations. On a sequential basis, GDP growth increased 0.4% qoq annualized after contracting 1.6% qoq and in Q2.

Bottom line:The data confirm a global slowdown, including emerging markets resulting in commodity price retrenchment and translating into declining inflation. All real and survey indicators of activity are highlighting poor business and employment sentiment as global headwinds and policy indecisiveness & uncertainty in mature economies continue to hurt. The hangover from past excess is likely to remain severe in 2012. While attention is focused on the austerity packages in Europe the next focal point will be the US Congressional Deficit Reduction Super Committee in charge of setting the planks of medium term fiscal policy. The committee is supposed to present its plan by Nov. 23. Congress must vote on the whole package by Dec. 23.

Regional Developments

• The IIF forecasts an increase in the combined GDP of the GCC nations to nearly USD 1,380bn in current prices - its highest level ever and far above the previous peak GDP of USD 1,138bn in 2008, given the rise in average oil price to USD 109 up from the previous average record price of $98 in 2008. Current account
  surplus is also expected to rise to an all-time high of around USD 293bn this year (2010: USD 151bn) but will decline to USD 213bn in 2012.
• A railway project linking Saudi Arabia with Iraq, Syria and Jordan at an estimated cost of USD 5bn was proposed at the G20 summit in a bid to boost infrastructure and network linkages.
• The Arab League on Saturday suspended Syria until President Assad implements a deal to put an end to violence against rioters, and pressed for economic sanctions and transition talks with the opposition.
• Qatar’s Financial Markets Authority has issued a draft on new rules for IPOs by small- and mid-sized businesses – e.g. relating to the minimum required capital, the number of shareholders and the number of shares that can be issued through such an offering.
• A recent report from the National Commercial Bank placed total GCC bond issuance during the first nine months at USD 20.9bn in 2011. This compares to USD 21.5bn issued in the same period last year. Q3 was one of the weakest ever for regional bond markets –affected by the crisis in the international sovereign debt
  market- with only four issues with a total volume of USD 157.3mn - a sharp drop from USD 3.4bn in 2Q11 and USD 9.6bn in 3Q10.
• Tax rates in the Middle East and the GCC region have fallen over the last few years and were favourably positioned compared to tax rates globally, according to KPMG's annual Corporate and Indirect Tax Survey for 2011. Their view is that it is unlikely that the GCC nations implement VAT before 2014.

UAE Focus

• The UAE market regulator, Securities and Commodities Authority, has published new draft rules on shortselling
  and borrowing, in a bid to attract foreign investment and boost trading.
• Supreme Council Member and Ruler of Ajman HH Sheikh Humaid Bin Rashid Al Nuaimi decided to
  distribute 40 new houses to needy citizens in his Emirate.
• Dubai’s ruler issued a decree allowing Dubal, now renamed Dubai Aluminium Corp., to form a Board,
  invest outside the UAE and issue bonds.
• MENA’s M&A activity is expected to pick up in 2011, thanks to energy sector developments, as reported by Apicorp. Deals include Qatar Holding's USD 3bn investment in Spain's Iberdrola utility company and the Abu Dhabi-based International Petroleum Investment Company (IPIC)’s USD 5.4bn acquisition of the remaining shares in CEPSA, Spain's second biggest oil firm.
• Foreign trade accounted for more than two-thirds of UAE’s GDP last year (69%), helping reaffirm the UAE’s position among the world’s top 30 economies ranked by the World Trade Organisation, according to Sheikha Lubna Al Qassimi, UAE Minister of Foreign Trade.
• Data from the International Energy Agency shows that UAE’s oil output increased 0.8% mom to 2.55 million barrels per day in Sep - in a bid to compensate for Libya’s supply. UAE’s oil output averaged 2.53 million bpd in Q3 (Q2: 2.48 million bpd), according to the IEA, also adding that the UAE will have a sustainable production capacity of 2.74 million bpd by the end of this year.
• The Arab Spring has led to a substantial increase in tourism in Dubai, as per the latest figures released by DTCM - Dubai’s hotels accommodated 6.64 mn guests in the first three quarters of 2011 (11% yoy); guest nights rose by 26% to reach 23.68 mn, while the average length of stay increased by 14%, leading to an increase in revenues of hotels and hotel apartments by 19% to AED10.96bn.
• UAE’s national banks have increased their loan provisions by 16.6% yoy to about AED 11.9bn in the first nine months of 2011, with Emirates NBD making the highest provisions of nearly AED 4bn compared with AED 3bn in the same period a year ago.

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Markets

Agreement to avoid a Greek default & boost the EFSF was hailed by stock markets all over the world. The Standard & Poor’s 500 Index jumped extending the biggest monthly rally on record since 1974 pushed also by encouraging US GDP figures. On Friday, however, concern that the post-EU euphoria went too far, drove indices down. When details of the agreement are clear, enthusiasm will give rise to a more nuanced assessment. Regional markets followed the global trend and recorded gains as progress in the EU boosted risk appetite. Major currencies gained against the USD with yen reaching a record high of JPY 75.64. Oil price was positively affected, with WTI picking up faster than Brent and gold prices were up 6.0% on a lower dollar.

Global Developments

Americas:

• US Q3 GDP expanded at a 2.5% yoy, the fastest pace in a year (Q2: 1.3%). The GDP surpassed its pre-recession level after 15 quarters, three times longer than the average for 10 previous recoveries since World War II. Corporate investment in equipment and software was the main driver with a 17.4% jump. Private consumption growth was also perky at 2.4%. Inventories were down subtracting 1.1% to the growth rate.
• The housing market painted a varied picture: the S&P/Case-Shiller index fell in Aug by more than expected to 3.8% yoy while pending home sales recorded an unexpected 4.6% mom decline in Sep (Aug: -1.2%) as lower prices and borrowing costs failed to support demand. Meanwhile, new home sales rose 5.7% in Sep (-0.3%), for the first time in five months, to 313k (sa) as discounted prices attracted buyers.
• US durable goods orders excluding airplanes and automobiles, were up 1.7% mom in Sep though total bookings were down by 0.8% (Aug: -0.1%), owing to a 26% decline in demand for aircraft (+25%).
• First-time jobless claims decreased by 2k to 402k in the week ended Oct. 22. The number of people collecting unemployment benefits fell in the previous week by 96k to 3.65mn, the fewest since Sep 2008.

Europe:

• EU leaders agreed on a deal to force a 50% “voluntary” haircut on Greek institutional bondholders and to leverage the EFSF up to 4 times. Details on the rules defining the conditions against which financial support will be granted to member states have not surfaced, but will directly affect pricing of Italian & Spanish risk.
• Italian government presented a letter of intent to the EU partners on drastic measures to be taken to assure continuous support from the ECB, but it failed to convince the markets. Spread with German bunds widened again after a brief spell of euphoria.
• An across-the-board AAA rating was confirmed for the EFSF on the basis of amendments (decided in July) that took effect on Oct 18, taking the lending capacity of the Fund to EUR 440bn, with a guarantee commitment of EUR 780bn. However guarantees means markets will want details of conditions applying.
• Eurozone composite PMI dropped further to 47.2 in Oct, below the 50 mark, after dropping to 49.1 in Sep, just before the European Summit agreed on the way out of the debt crisis.

Asia and Pacific:

• China’s PMI rebounded to 51.1 in Oct (Sep: 49.9) with the manufacturing output sub-index rising to 51.7 (50.3) - a six-month high.
• The Reserve Bank of India raised repo rates by 25bps to 8.25% - for the 12th time in 18 months - as inflationary pressures weighed in more than growth concerns. Food inflation rose to the highest level in more than six months, rising to 11.43% in the week ended Oct. 15.
• A slower growth in electronics and pharmaceuticals led to a decline in Singapore industrial production in Sep: 12.8% yoy after a revised 22.8% increase in Aug. Meanwhile, inflation rose to a high 5.5% in Sep (Aug: 5.7%) on housing and transportation costs.
• Korean GDP growth slowed further to 0.7% in Q3 from 0.9% in Q2, led by consumption and facility and inventory investment, while exports were steady. The figure indicates that the global slowdown is slowly extending to Asia.

Bottom line: The most important achievement of the EU deal was the removal of the uncertainty over the fate of Greek bondholders. With this obstacle out of the way now the main issues come into sharper focus: the recapitalization of the European banks and the governance of the EFSF which at this point will be the incubator of a European Debt Agency and, hopefully, the stepping stone towards a common fiscal framework. In the meantime the surprise GDP performance in the US has allayed fears of an imminent synchronized recession in mature economies and with profits for companies in S&P 500 up 16% on average in Q3, based on results reported so far, stock markets could be entering a less volatile period. However it is too early to call a turning point as the Korean GDP figures remind us: slowing advanced economy growth is impacting EMEs.

Regional Developments

• The most important achievement of the EU deal was the removal of the uncertainty over the fate of Greek bondholders. With this obstacle out of the way now the main issues come into sharper focus: the recapitalization of the European banks and the governance of the EFSF which at this point will be the incubator of a European Debt Agency and, hopefully, the stepping stone towards a common fiscal framework. In the meantime the surprise GDP performance in the US has allayed fears of an imminent synchronized recession in mature economies and with profits for companies in S&P 500 up 16% on average in Q3, based on results reported so far, stock markets could be entering a less volatile period. However it is too early to call a turning point as the Korean GDP figures remind us: slowing advanced economy growth is impacting EMEs.
• Separately, the IIF has reported that “The projected breakeven Brent oil prices for 2012 are as follows: Kuwait, $55/b; Saudi Arabia and the UAE, around $90/b; Iraq, $102/b; Algeria, $105/b; and Russia, $114/b”
• Higher oil prices and production led Oman to post a budget surplus of OMR 736.5bn (+77% yoy) in the first eight months. Current expenditure was up 11.3% while capital spending was a tad higher at 14.8%. A recent Moody’s report states that Oman is likely to record a budget surplus of 10% of GDP in spite of the increased social spending following the protests earlier this year.
• Qatar is planning almost USD 150bn in infrastructure development in the coming five years, according to the Minister of Economy and Finance, with most of the spending (between USD 120-140 bn) focused on the non-oil sector.
• Qatar's business optimism index for Q4 2011 (D&B) recorded an improvement as the Composite Index for the non-hydrocarbon sector rose to 45, helped by a strong economy and government stimulus measures.
• UN’s “World Population Prospects” report places GCC youth at close to 30% of total population, with only one-third of them in the labour force compared to 50% globally. Female labour force participation was more dismal - at half of that of males in the region and the lowest in the world at 22%.
• Qatar’s fall in investment income by 33% and a government decision to cut tax led to declines in revenues during the fiscal year 2010-11; but, this was partially offset by a surge in oil and gas revenue due to higher crude prices and an increase in the Gulf country's LNG exports.
• Tourism in Saudi Arabia generated close to SAR 5bn in revenue in the summer months, with about 9.3mn visitors of which 3.3mn were tourists and shopping accounting for almost 40% of the total revenue.

UAE Focus

• The Investment Corporation of Dubai and Brookfield have signed an MoU to form a $1bn investment fund to focus on Dubai’s real estate sector, with $100mn each from both entities and the rest from “a select groupof local, regional and international investors”.
• Inflation in the UAE rose 1.17% in the first three quarters of 2011, as higher prices for beverages and tobacco, education and food outweighed the slight decline in cost for housing and medical care.
• UAE’s total non-oil trade increased by 22% yoy to AED 445bn in H1 2011, as imports and exports grew 20% and 51.9% respectively to AED 285bn and AED 54.7bn. India, China, US, Germany & Japan topped the list of trading partners, with Saudi Arabia as the top ranking among GCC trading partners (AED 13.5bn), followed by Kuwait. Gold ranked first among the UAE's imports (a major item of re-exports to India), followed by diamonds, cars and jewellery.
• UAE’s budget deficit touched AED 1.2bn at the end of Sep this year and is expected to be lower by the end of this year, according to the Minister of State for Financial Affairs. He also ruled out the possibility of imposing any taxes or fees to finance the budget deficit.
• Dubai airports recorded a 6.2% yoy growth in passenger traffic in Sep to 4.24mn, in spite of contraction in traffic on Middle Eastern routes, taking the year-to-date traffic at 37.5mn (+7.8%) while air freight volumes dropped 5.5% to 177,128 tonnes.
• The volume of trade between US and the UAE amounted to AED 18.9bn in Jan-May 2011, according to the Ministry of Foreign Trade.

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Markets

Stock markets received a German cold shower by Angela Merkel who expressed skepticism on a quick recapitalization of the banking system in Europe and another round of downgrade for Spain and Italian banks shook further the precarious situation. The gains recorded in the last two weeks were eroded across the globe with emerging markets being somewhat more resilient. All eyes are on the EU Summit for further direction. Regional markets however were mostly on the defensive, despite the resilience of oil prices. Currency markets were marking time while the yen hit new highs.

Global Developments

Americas:

• US industrial production grew 0.2% mom in Sep, in line with expectations and total capacity utilization was almost stable at 77.4%.
• US PPI rose by 0.8% mom and 6.9% yoy, a 5-month record, in Sep due to gasoline and food while core PPI inflation was only 0.2% mom. US CPI inflation increased 0.3% mom (3.9% yoy) in line with expectations as core inflation was somewhat lower at 0.2% mom (2.0% yoy).
• Housing starts jumped 15% yoy to 658k in Sep, the highest since Apr ’10, led by apartments and multifamily dwellings.
• Initial jobless claims dipped last week - falling 6k to a seasonally adjusted 403k - and the four-week trend dropped to a six-month low.
• After his USD 447bn jobs bill was blocked in the Senate last week, Obama began cutting the legislation into parts to stage a series of votes in Congress designed to embarrass his opponents into backing the measures. Republicans continue to balk at “class warfare”.

Europe:

• EU’s Finance ministers’ meeting resulted in the decision that Greek bond holders might have to accept losses more than consented in July - with banks' writedown from Greece debt exposure rising up to a possible 60% and an agreement was reached to release the sixth tranche of bailout funds to Greece, with actual disbursement likely to take place in the first half of Nov.
• German ZEW fell to a three year low of -48.3 in Oct. from -43.3 in Sept, confirming the danger of the largest European economy falling into recession.
• According to BoE Governor Mervyn King, Britain’s economic recovery is off-track. UK CPI was 0.4% mom and 5.2% yoy.

Asia and Pacific:

• China’s gross domestic product expanded 9.1% yoy in Q3, against 9.5% in Q2,the slowest pace in more than two years, but consistent with consensus that the country is on track for a “soft landing” of moderating growth and lower inflation. Industrial production meanwhile was up 13.8% yoy in Sep (Aug: 13.5%), with production expanding by 14.2% in the first three quarters of the year.
• China's retail sales grew 17% to CNY 13.08 trillion in the first nine months of the year, with commodities retail sales and auto sales up 17% and 16% respectively in the first three quarters of the year.
• Japan IP increased 0.6% mom (0.4% yoy) in Aug down from 0.8% (0.6% yoy) in July.
• Slump in the electronics sector led to a fall of 4.5% yoy in Sep’s non-oil domestic exports (Aug: +3.9%) - the biggest fall since Oct 09; exports of electronics dropped 13.6% in Sep (-19.4%).
• Asian central banks maintained policy rates at the meetings which concluded last week: Thailand held steady at 3.5% (pausing on flood damages) and Philippines kept rates on hold at 4.5% given expectations of a weaker global economy.

Bottom line: “Confusion will be my epitaph” sang a rock band in the early 70 and could be an apt description of the policymakers’ status. Merkel underscored that the agreement on a solution to the eurozone mess in not to be expected soon, while her Minister of Finance, Schauble was quoted saying that “the time for bold decisions is now”. As global leaders urge for a decision regarding the debt crisis, the EU continue to be in talks: measures being discussed include a boost in rescue funds to EUR 940bn, deeper writedowns on Greek debt and a demand that banks increase Tier 1 capital to 9% by mid-2012. Obama is trapped in a Congressional Vietnam were the Tea Party guerrilla hold back his stimulus plan. Even the UK which seemed to have somehow found the ground for a rebound is faltering. Asia remains the oasis of stability.

Regional Developments

• Tunisia’s elections today and Gaddafi’s death in Libya could open a whole new chapter in the Arab Spring developments.
• The GCC Customs Union and rail network integration were high on the agenda of the GCC Financial and Economic Committee meeting on Saturday. A press statement issued stated that a "number of recommendations pertaining to the finalising of the GCC Customs Union" were made at the meeting, without giving any further details; a decision was made to prepare a case study for establishment of a GCC railway authority and also “to finalise detailed designs for the project by 2012”.
• According to the FT, banks in the Middle East are increasingly being forced to extend loans to clients to be awarded a shrinking number of bond advisory deals, bankers say. Therefore Standard Chartered and HSBC are favoured over investment banks such as JP Morgan or Barclays Capital.
• Qatar’s nominal GDP grew 30.2% yoy to QAR 46.3bn in 2010 (2009: -15.2%), with the hydrocarbon sector rising 50.3% compared to an increase of 13.8% to non-oil GDP.
• The Oman Capital Market Authority has approved a proposal to bring down trading fee for brokerage firms operating on the Muscat Securities Market.
• Ernst & Young's Q3'11 MENA update on IPOs revealed that regional capital markets had raised USD 218.9mn in Q3 - a rise of 23.6% yoy but a 39% decline compared to Q2; with two listings in Q3, Saudi Arabia was the saving grace.
• Saudi Arabia’s cost of living index rose 5.3% yoy in Sep - goods and services sector increased 11.8%, rents, fuel and water sector rose 7.9%, food and drinks 4.9% and transport and communications 2.0%.
• Credit Suisse’s Global Wealth Report estimates that global wealth increased to USD 231 trillion in June 2011 from USD 203 trillion in Jan 2010 (+14% rise); Qatar recorded the highest average wealth per adult in the MENA region for 2011 - $146,623, a rise of 456% from 2000 while Kuwait was a close second at $134,592 (+156%) and UAE was placed third with $115,774 (+104%).
• Total FDI flows are expected to decline almost 16.7% yoy to USD 55bn, the lowest since 2005, according to the latest estimates from the Inter-Arab Investment Guarantee Corporation - with only 6 members (including UAE and Saudi Arabia) seeing a modest recovery in 2011.
• Arab foreign ministers have given Syria a 15-day deadline to enact a ceasefire after lacking consensus on the decision to suspend Syria's membership to the Arab League.
• Dr Ramiz Al Assar, Senior Adviser to GCC Secretariat General and World Bank’s senior transport specialist, stated that the construction of the GCC rail network would begin by 2014 and be operational by 2017/2018. A decision was made to link the network to Yemen via Muscat, according to him.
• Middle East online recruitment in September reached its highest level in the past 12 months, according to The Monster Employment Index compiled by the on line job site.

UAE Focus

• Monarch Alternative Capital is suing the ship-repair company in the High Court of London, according to a filing, after more than a year of talks between Drydocks and its creditors failed to reach agreement on restructuring debts of $2.2bn.
• The National Bureau of Statistics forecasts the UAE economy, driven by robust oil prices in the international market, to grow by 4.2% this year.
• Dubai non-oil trade, including re-exports, surged 24% in the first half of 2011, compared to H1 2010, surpassing the value before the 2008 downturn.
• Moody's Investors Service has upgraded Emaar Properties’ corporate family rating to Ba3 from B1.
• Inflation for Q3 increased 0.62% and 1.6% in Dubai and Abu Dhabi respectively. In Dubai, transport (Q3: 6.55% yoy) and group food and beverages (5.27%) pushed up the index while in Abu Dhabi, the rise was attributed to food and housing prices.
• UAE’s Federal Law No 7 was issued establishing the Emirates Development Bank, to support economic development initiatives - eg. address regional gaps through the financing of regional infrastructure projects.

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Markets

The markets were mostly positive last week, in spite of Spain’s downgrade by S&P, given the support of Trichet’s call for quick and coordinated action on bank recapitalization decided in principle between Merkel and Sarkozy (due to be finalized at the EU summit next week) and Wall Street closing on a high, boosted by optimistic data and financial results. Regional markets painted a mixed picture - with all eyes on Q3 financial results. Currencies strengthened against the dollar - the euro rallied while the yen was the weaker performer among major currencies. Oil prices jumped to a month’s high on tight supply and the weaker dollar as gold prices were up 2.6% from a week ago.

Global Developments

Americas:

• The FOMC minutes of meeting revealed that QE3 was still a strong possibility: “a number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted”.
• Initial jobless claims fell slightly by 1k to 404k, a sign that the job market is still not in recovery mode. Trade deficit for August was up by USD 17bn to USD 45.61bn, as the deficit with China increased 7.42% to a new record high (USD 29 bn for the month) & US Senate passed a bill mandating the imposition of tariffs on Chinese goods if the US Treasury determines that China is manipulating its currency.
• Retail sales grew 1.1% mom - the fastest pace in seven months - in Sep, with strong sales of motor vehicles and parts (+3.6.%) providing a big boost.

Europe:

• Eurozone industrial production was unexpectedly up 1.2% mom (5.3% yoy) though German IP contracted by 1% mom (+7.8% yoy) and the pickup was driven by smaller economies like Portugal (8.2% mom) and Ireland (4.4%) alongside Italy where IP rebounded 4.3% mom, probably due to an artifact of seasonal adjustment.
• Inflation rose to a 35-month high of 3% in Sep (Aug: 2.5%), pushed by clothing and fuel prices.
• German trade surplus grew to EUR 13.8bn in Aug (Jul: 10.6bn) as exports increased 3.5% to EUR 90.5bn while imports stagnated at EUR 76.7bn.
• Unemployment rate in the UK now stands at 8.1%, the highest since 1996 while the total number of unemployed reached 2.57 million, the highest total since Oct ‘94 and youth unemployment at 991,000, its highest since records began in 1992 (jobless rate: 21.3%).

Asia and Pacific:

• China’s Central Huijin, the domestic arm of its sovereign wealth fund, announced it was buying shares in four of the largest state-owned banks in order to stabilize their share prices and support their operations.
• The Chinese Ministry of Commerce & PBoC have issued regulations permitting overseas investors to invest directly in China with Renminbi they have obtained legally overseas, partially liberalising capital flows.
• Indonesia’s central bank surprised markets with a 25bps rate cut to 6.5% while South Korea left rates unchanged at 3.25% amid signs that inflation is slowing.
• Japan machinery orders rebounded in Aug - rising 11% mom, the fastest increase in a year - with a 29.5% increase in demand for electrical machinery and a 74.6% jump in orders for information technology-related machinery.
• India industrial output was up only 4.1% yoy in Aug (Jul: 3.8%) given the RBI’s rate hikes cycle and weakening global demand.
• China’s trade surplus narrowed in Sep to USD 15.4bn, down from August's USD 17.8bn and well below July's 30-month high of USD 31.5bn, on lower export and import growth. Meanwhile, inflation eased to 6.1% in Sep (Aug: 6.2%).
• Singapore GDP grew at an annualized rate of 1.3% qoq in Q3, rebounding from a sharp 6.3% decline in Q2 while the Monetary Authority of Singapore eased monetary policy for the first time in two years.

Bottom line: The week witnessed a surprisingly optimistic set of data releases combined with what seems to be the beginning of an easing cycle in Asia. The G20 was united in its stance pressuring the Eurozone leaders to address the current challenges and reach a resolution by the Oct 23 European Summit. Global sentiment and risk appetite seem to be improving, given the push towards a resolution of EU’s debt crisis - German Chancellor Angela Merkel and French President Nicolas Sarkozy have promised a comprehensive plan by the end of the month.

Regional Developments

• A report from Geopolicity estimates that the cost of the Arab Spring for countries in turmoil (Egypt, Libya, Yemen, Bahrain, Tunisia and Syria) in terms of foregone output and fiscal costs is some US$55 bn.
• Amid concern of contagion and spill-over effects, the GCC states have called for an emergency meeting to discuss the situation in Syria, though no dates were proposed. The meeting is expected to address "the situation in Syria, which has deteriorated sharply, particularly in its humanitarian dimensions, and steps that could help end the bloodshed and halt the machine of violence,".
• HSBC’s Trade Connections report predicts that MENA’s trade volumes would increase by 84.7% by 2025, which is greater than the world trade average of 73%; additionally, the report maintains that intra-MENA trade is set to grow to 13.43% of the region's trade in 2025, from 11.3% currently.
• GCC have about 44 on-going (and due to begin in 2012) power and water projects valued at USD 31.9bn, with UAE leading the list with 11 projects worth USD 10bn.
• Egypt announced that a grant of USD 500mn was received from Qatar for budgetary support, with a budget deficit forecast at 8.6% of GDP in the financial year to June 2012.
• Inflation for Egypt eased to 8.2% in Sep (Aug: 8.5%; Jul: 10.4%) as slowing food price growth offset a faster increase in housing costs while core inflation rose to 7.95% (Aug: 6.98%).
• Saudi Arabia is expected to launch a commodity bourse in the near future; it was clarified that oil would not be traded on the exchange to eliminate speculative trades.
• Saudi Arabia’s Ministry of Labour announced a new incentive for young Saudi entrepreneurs whereby recruitment of foreign workers is granted if at least one Saudi worker is employed.

UAE Focus

• UAE’s Cabinet approved the draft budget for 2012, with a focus on social spending and a deficit of AED 400mn. Of total spending projected at AED 41.8bn, social services sector was allocated AED 19.7bn (47.1%), the education sector AED 8.2bn (19.6%) and some AED 1.6bn dedicated to infrastructure projects.
• The takeover of Dubai Bank by Emirates NBD has been welcomed by the markets. According to the CEO of Emirates NBD, Dubai Bank will not be merged with its own Islamic unit - Emirates Islamic Bank and “will be capitalised as and when required once the acquisition process is complete”.
• Foreign deposits in UAE banks rose to AED 66.2bn by end of H1 2011 (2010: AED 51.5bn), with June witnessing the maximum increase. UAE banks' deposits with banks abroad grew to around AED 81.2bn (AED 76.3bn) and investment in foreign securities swelled to about AED 55.6bn (AED 48.4bn).
• Data released by Dubai Land Department show that UAE nationals topped the list of land buyers spending almost AED 5.6bn, with Indian nationals topping the list of apartment buyers, having spent AED 3.3bn; Americans and Russians also feature significantly in the list of buyers of land and apartments in H1 2011.
• UAE’s Ministry of Finance signed a Double Taxation Avoidance Agreement with Switzerland in an effort to enhance economic and trade relations.
• The total value of financial transactions, conducted through UAESWITCH, decreased 2.65% qoq to AED 20.4bn, with the number of financial transactions dipping 4.68% to a total 18.231mn.
• A recent report by NCB estimates that though the Arab Spring events have reinforced Dubai’s status as a ‘safe haven’, even for property investment, there is a significant excess supply with up to 15,000 new units due to come to the market by the end of the year. The report also mentions that demand in some segments was gaining pace.

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After a week spent in an upbeat mood, the release of labour market data in the US had stock markets was about to seal the week on a positive note till Fitch’s downgrade of Italy and Spain spoiled the sentiment for global equities and debt markets. In the region, markets were down with the Eurozone debt crisis weighing in on investor sentiment. Dollar dropped after the jobs data release giving the GBP a boost - up 2.1% compared to a week ago. In the commodities market, the biggest gainer was copper - which surged off 14 month lows while oil also recovered (Brent recovered from below $100 gaining almost 3%).

Global Developments

Americas:

• Non-farm payrolls edged up by 103k in Sep but the unemployment rate stayed steady at 9.1%, while the ADP report showed an expansion in private sector workers by 91k in Sep (Aug: 89k).
• Initial jobless claims rose by 6k to 401k in the week ended Oct 1, following the previous week’s sharp decline of 33k
• US ISM survey showed varied sentiment: while the manufacturing index was unexpectedly positive, rising to 51.6 in Sep (Aug: 50.6), the services index expanded at a slower pace to 53.0 (53.3) though the measure of new orders increased to a four-month high of 56.5 (52.8).
• Factory orders in the US dipped 0.2% mom, on lower demand for cars, consumer goods and construction materials; orders excluding transportation also registering a decline of 0.2% - for the first time in six months, though increased investment in capital equipment (+0.9%) was the sole positive sign.

Europe:

• Fitch downgraded Italy's sovereign credit rate from AA- to A+ on Friday while keeping its negative outlook, reflecting “the intensification of the Eurozone crisis that constitutes a significant financial and economic shock which has weakened Italy’s sovereign risk profile”.
• Fitch downgraded Spain by two notches to AA- citing high budget deficit and a fragile economic recovery which exposes the country to external shocks.
• Greece's government says it will miss its deficit targets this year, but moves ahead with a controversial plan to slash thousands of public sector jobs to meet the demands of its international creditors. Greece confirms its economy is expected to contract by an annual pace of 2.5% in 2012, its fourth consecutive year of contraction, sending the country's jobless rate higher, according to its 2012 draft budget.
• Depressing data from the Eurozone continues: the composite PMI fell to 49.1 in Sep (Aug: 50.7), signalling first contraction in private sector activity since July 2009 with the services PMI dipping to 48.8 (51.5) and below the flash reading of 49.1. Retail sales fell 0.3% mom in Aug (Jul: 0.2%) as non-food product sales dipped 0.6% and Germany recorded the biggest fall of 2.9%.
• The ECB held interest rates unchanged at 1.5%. Meanwhile, the Bank of England unexpectedly expanded its bond-purchase program to GBP 275bn from GBP 200bn after its key rate was left at a record low of 0.5%.
• German industrial production dipped 1% mom in Aug (Jul: 3.9%) as production of consumer goods slumped 4.9% and construction activity declined 1.2%; but production of investment goods was the saving grace, rising by 0.2%.

Asia and Pacific:

• South Korea’s inflation moderated from a three-year high to 4.3% in Sep (Aug: 5.3%) as food prices weakened but the weaker won will add to the worries since it will lead to a rising import bill. Inflation in Indonesia slowed to 4.6% in Sep (Aug: 4.79%) in spite of higher costs of red chilli, gold jewellery and cigarettes while core inflation slowed to 4.93% (5.15%).
• Thailand’s inflation was down marginally at 4.03% in Sep, while the core rate rose to 2.92%. The Bank of Thailand and the Finance Ministry have announced the revision of inflation targeting method - by using headline inflation instead of core inflation. The central bank will set a headline-inflation target at 3% and plus or minus 1.5 percentage points annually.

Bottom line: The data flow showed a dichotomy between the US and Europe where recessionary forces are more intense due to tighter credit conditions and extremely low liquidity. All eyes are kept on the emergency measures of various natures, from increasing the size of the EFSF allowing it to intervene by purchases of sovereign bonds to recapitalization of banks. In Asia inflation is ebbing, leaving room for central banks to reduce rates if activity deteriorates.

Regional Developments

• Saudi Arabia may be recording a budget deficit in 2011 due to additional social programs in particular a $130 billion plan to create jobs and build homes and a break-even oil price level of USD87. Officials haven’t said whether they’ll sell debt or draw on reserves, as they did two years ago.
• Under Oman’s new capital market law, which is expected to be passed soon, family businesses may be allowed an exemption to offer a 25% stake through initial public offerings as opposed to the 40% stake currently, according to the Muscat Securities Market.
• Qatar's nominal GDP rose by 42% yoy to QAR 153.7bn on higher energy prices and increased production of LNG; the mining and quarrying sector’s contribution was hence substantial - rising 68% to QAR 89.49bn while manufacturing rose 39% to QAR 16.93bn.
• Private equity funds in MENA are under pressure to produce returns for investors. They face difficulties because of a dearth of exit options. The preferred route, an IPO is blocked in the region as bourses like Dubai have not seen an IPO in over three years.
• Total project finance transactions in the Middle East fell by more than half to USD13.3bn in the first nine months of 2011 from USD 29.5bn in the equivalent period a year ago.
• According to Abraaj Capital, SMEs in MENA employ close to 70% of the workforce, with contribution to GDP at only 30%. Furthermore SMEs’ share of bank loans is only 8% in the MENA and an even lower 2% in the GCC region.
• The USD 30bn GCC rail project will start its construction phase in 2013, with nearly four years estimated for completion, according to Abdullah Al Shubaili, assistant undersecretary for economic affairs in the GCC Secretariat.
• UAE and Oman linked their power grids, making more efficient the management of their installed and future capacity.
• The Arab Spring is expected to result in a fall in FDI by 17% to USD 55.1bn in 2011, according to the Arab Investment and Export Credit Guarantee Corp. report. However, 7 nations included in the report, among which Saudi Arabia and Iraq are forecast to record a rise in FDI inflows.
• Apicorp estimates that an investment of over USD 58bn in the next five years will be required to increase power generation capacity in the GCC; this USD 58bn investment accounts for nearly 46% of the total capital required for electricity development projects in the MENA region.

UAE Focus

• UAE PMI rose by just over one point to 52.1 in Sept, with new orders (57.0) and new export orders (55.9) still showing relatively robust expansion. The overall output component, which was flirting with recession in Aug (at 50.0), regained some altitude at 51.6.
• Deposits fell 3.2% mom in Aug to AED 1078.4bn, hence reducing the gap with loans which grew by 0.5% to AED 1056.8bn. Provisions for NPLs continued to rise: to AED 49.2bn in Aug compared to AED 32.6bn last year.
• India continues to be the top trading partner for Dubai, with bilateral trade up 49.8% yoy to AED 87.2bn in the period Jan-May 2011 as per Dubai Customs data.
• Dubai's Al Jalila oilfield is on track to begin operations before the end of 2011 according to the Chairman of the Energy Committee.
• Emirates Airlines, is pushing Boeing to press ahead with improvements to its 777, even as it finishes work on an all-new airplane and updated designs for two others.
• Taqa, Abu Dhabi's National Energy Company, is expected to issue MYR 3.4bn in an attempt to diversify its financing base - following the steps of NBAD a few months ago.

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Markets

The weekly stock market oscillatory pattern has displayed a remarkable regularity since August and last week recorded the expected global upswing. Investors were mesmerized by the prospect of a “Mother of All Quantitative Easing” Euro 3 trillion fund, although short on details and long on rumours. Some real respite came from the approval by the Bundestag of the EFSF which eliminates some uncertainty over the most immediate future. However, regional markets did not follow the global picture with most markets except Saudi down compared to a week ago. The euro strengthened while the dollar continued to witness high demand and oil recovered sharply. Gold on the contrary is being sold to fund some liquidity which continues to be at premium.

Global Developments

Americas:

• US housing sector continues to be in the dumps: new home sales dropped 2.3% mom in Aug to a six-month low of 295k; S&P Case Shiller index showed stagnant house prices up by a meagre 0.9% mom in July.
• US Durable goods orders slipped 0.1% mom in Aug (Jul: 4.1%), largely due to the 8.5% dip in motor vehicle bookings while non-defence capital goods orders excluding aircraft rose 1.1% (-0.2%).
• The 3rd estimate of US Q2 GDP showed a slightly higher growth of 1.3%, qoq annualized, from the previous 1.1% estimate (Q1: 2.4%) after “an upward revision to personal consumption expenditures (0.7% from 0.4%), a downward revision to imports (1.4% vs. 1.9%), and an upward revision to exports (3.6%, 3.1%)”. PCE core price index rose by 2.3% qoq - the largest increase since Q2 2008.
• Initial jobless claims tumbled by 37k to 391k in the week ended Sep 24, compared to a consensus estimate of 419k - with official statements attributing the large drop to technical issues and seasonal adjustment volatility; the four-week moving average fell by 5250 to 417k.
• Personal income declined by USD 7.3bn or 0.1% in Aug (Jul: +0.1%) but despite the decline in income, personal consumption expenditures increased by USD 22bn or 0.2% (0.4%).

Europe:

• The German parliament approved the reform of the EFSF approved at EU level in July with a broader set of tools to deal with banking and fiscal crisis.
• German retail sales held steady at 4.5% mom in July (-1.6% yoy) as falling energy costs and rising employment boosted domestic spending.
• IFO business sentiment index in Germany fell for the third consecutive time in Sep - dropping to 107.5 from Aug’s 108. 7. Meanwhile, the expectations component deteriorated to 98 (vs. 100) in contrast with the current business situation which is still viewed positively.
• EU economic confidence fell to 95 in Sep (Aug: 98.4), dropping to the lowest level since Dec 09. Business confidence amongst manufacturers dropped to -5.9 (-2.7) while in the services sector, confidence fell to zero (3.7); consumer confidence meanwhile declined to -19.1 from (-16.5).
• German unemployment rate slipped to 6.9% sa in Sep while the unadjusted rate showed a decline to 6.6% from 7% in Aug.

Asia and Pacific:

• Taiwan Central Bank held policy rates steady at last week, after having raised its key interest rates by 0.125% in each of the five past quarters.
• North Asian Industrial production for Aug was weak: Korea’s declined 1.9% mom (Jul: -0.3%), Japan’s rose 0.8% mom, less than consensus forecast.
• Korean imports grew faster (at 30. 5% yoy) than exports (19.6%), due to natural gas imports. The trade surplus in Sep shrunk USD 3 bn yoy to 1.44bn.
• China’s official PMI rose to 51.2 in Sep from 50.9 in Aug, though the HSBC PMI index showed a slight contraction in manufacturing.
• Japan’s Finance Minister Jun Azumi authorised an additional JPY 15tn for FX market interventions, bringing the total to a record JPY 46trillion.

Bottom line: New data did not add much colour to the grey picture of stagnating mature economies and lacklustre emerging markets. Confidence indicators are gloomy, and forecasts for 2012 are being revised down. The only news of weight is the European “plan” for a euro 3 trillion safety net for sovereigns and banks. But there has not been any official confirmation and contradictory statements came from senior central bankers and EU officials. If enacted, the plan could easily claim the crown of “Mother of all Quantitative Easing”. You read it here for the first time.

Regional Developments

• Total value of oil investments in the Gulf region has risen to an estimated USD 739.6bn until Sep, courtesy of new investments by Iran and Saudi Arabia, according to a report released by Markaz research.
• Oman inflation increased to 4.6% in Jul (Jun: 4%) as food prices rose 5.5% and price of personal care items surged 19.2%.
• The IMF country report on Saudi Arabia highlighted the shortcomings of the housing sector - based on Saudi official estimates of the 9th Development Plan (2010-14). The proposed solutions include "unlocking the static supply of land, accelerating the approval of mortgage laws and developing an institutional framework for medium-term lending institutions".
• The SAMA governor revised downwards the country's economic growth to 5% this year (previous estimate: 6%) with inflationary pressures expected to continue at a moderate pace.
• Foreign assets in Saudi Arabia fell to SAR 1984.9bn (Jul: 1990.9bn) - resulting from a fall in SAMA's deposits with banks abroad to SAR 357.2bn (SAR 375.1bn) while investments in foreign securities rose to SAR 1356.6bn (SAR 1346.1bn).
• The E&Y Islamic Funds and Investments Report revealed a 7.6% rise in global Islamic fund assets under management to $58 billion in 2010, led by Saudi Arabia while Sukuk issuance was at a record USD 50bn.
• Crude oil exports to Japan fell in Aug: Saudi Arabia, Japan's biggest oil supplier, recorded a 2.7% you fall in imports to 1.02mn barrels per day (bpd) while Kuwait's plummeted 56.2% to 127k bpd and Qatar's shipments fell 28.7% to 348k bpd.
• According to MEED's 'Mena Renewable Energy 2012' report, ten of the 14 Arab states included in the report set renewable energy targets for 2020, ranging between 5%-42% of total energy mix, to cater to the high demand.
• Fraser Institute's Economic Freedom of the World 2011 report placed 2 GCC countries in the top 20 - Bahrain at 11th and UAE at 14th, with Oman following at 28th. The index is constructed in five broad areas: size of government; legal structure and security of property rights; access to sound money; freedom to trade internationally; and regulation of credit, labour and business.
• Capital investments in Saudi's industrial sector rose to SAR 509bn by Q3, employing more than 617k workers while there are 2,811 industries licensed under the foreign investment scheme with a total investment of SAR 444bn.

UAE Focus

• Deposits rose by almost AED 40bn to AED 196.2bn in H1 2011 while credit growth was only around 0.9% (AED 981bn) as per the latest data released by the UAE central bank. This highlights the high levels of liquidity while banks continue to remain risk averse in terms of lending.
• Dubai's economy expanded by 2.8% in real terms in 2010, lifted by trade and retail sector growth, as per preliminary data. This is higher than the 2.4% growth as per the bond prospectus released in June this year.
• According to Saeed Mohammed al-Tayer, vice chairman of Dubai's Supreme Council of Energy, Dubai is poised to unveil a big solar power plant project as part of a push to achieve 5% of its electricity from renewable sources by 2030.
• Abu Dhabi GDP is expected to grow four times by 2030, according to senior government officials, given the large infrastructure projects planned in the Emirate: real GDP is forecast to grow from Dh382 billion in 2008 to nearly Dh1.53 trillion in 2030.
• The number of bounced cheques reached 1.45mn in the first eight months of 2011, with the bad cheques constituting 5.5% of the total number of cheques submitted.
• Given the high capital adequacy ratios of UAE banks (at 21% in Q2) the central bank is planning to create a new system to set capital requirements for banks for compliance to Basel III. The non-existence of a highly liquid and deep bond market has been identified as the biggest hurdle to implementing Basel III.
• The Dubai Urban Development Master Plan-2020 is reported to have been approved by the Dubai Executive Council and is expected to create 950k jobs by 2020. A 'Supreme Urban Planning Council' will also be established to streamline the urban and environmental planning process in the emirate.

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Markets

It is becoming a pattern: a week of mayhem followed by a weak rebound and then another weekly plunge. Last week was a bad one. Stock markets were falling across the board due to the usual combination of concerns over fiscal sustainability, downgrading of sovereign and bank debt, and ineffective political measures on both sides of the (North) Atlantic, with regional markets following the declines globally. Risk aversion in equity markets led to a higher dollar, with the Indian rupee one of the worst performing Asian currencies, dropping almost 5% from a week ago. Oil price dropped following most commodity prices while gold also lost its shine.

Global Developments

Americas:

• The US Fed announced operation "twist" plans to sell USD 400bn of Treasuries with less than 3Y maturity and buy an equal amount of longer-term Treasury securities through mid-2012 to bring down long term rates by about 1%. The Final Statement stresses continuing weakness in labour market conditions and modest growth pace. Three FOMC members again dissented on the measures while Republican Congress leaders sent a message to Bernanke to stop ultra-loose monetary policy, as the Fed left the policy rate unchanged.
• US housing starts fell 5.0% mom in Aug, more than the consensus predicted. Single-family starts were down 1.4% and multi-family starts by 13.5%. Year-to-date single-family starts have remained about unchanged at very low levels, whereas multi-family starts have increased nearly 50%.
• Existing home sales rose 7.7% mom to an annualized rate of 5.03 million units in Aug, a larger increase than expected. Abstracting from the volatility over the last few years, due to the impact of tax credits, home sales have regained the level of late-2007/early-2008 aided by lower home prices which are back to their 2003 levels according to Shiller-Case.
• Initial unemployment claims fell in line with expectations, by 9k to 423k in the week ended Sept 17. Continuing claims also down 28k to 3.727m.

Europe:

• Euroland flash manufacturing PMI was marginally weaker at 48.4 in September versus 49 in August, still below the recession threshold. Services PMI also contracted, falling to 49.1 from 51.5 last month, exposing the weakness in both domestic and export markets.
• Eurozone consumer confidence fell to -18.9 in Sep (Aug: -16.5) recording the weakest reading since Aug09.
• German ZEW dropped for the seventh consecutive month, falling by 5.7 points to minus 43.3 in Sep, as recessionary fears continued on the back of the ongoing debt crisis.
• German producer prices fell 0.3% mom (5.5% yoy) in Aug, recording the first decline since Dec 09, as energy prices fell by 0.7%.
• UK recorded a fiscal deficit of GBP 15.9bn in Aug, the highest since 1993, as government spending rose by 7.2% yoy and revenues rose by only 5.9% reflecting weak income and consumption growth.

Asia and Pacific:

• Singapore's August CPI inflation rose to 5.7% yoy from 5.4% yoy in July, confirming stickiness of the interest-rate-sensitive segments of the CPI, transport and accommodation. Low domestic interest rates push up inflation in the non-tradable sectors.
• Japan recorded a trade deficit of JPY 775.3bn in Aug, after two surplus months as imports rose by 19.2% yoy (with imports from Asia rising 16.6%) while export growth continues to be soft, rising only by 2.8%.
• South Korea's unemployment rate declined to a three year low of 3.1% in Aug (Jul: 3.3%) as hiring in the services sectors improved.
• Taiwan's data releases for Aug were positive, though signalling a slower economic expansion: industrial output rose 3.88% yoy (Jul: 3.63%), retail sales increased 3.28% due to an increase in foreign tourists. The unemployment rate was steady at 4.36%.

Bottom line: Attention was concentrated on the Fed FOMC meeting which came up with the “twist”, i.e. a shift of purchases from the short end to the long end of the US sovereign yield curve in an attempt to lower long-term yields. It was so uninspiring that markets fell precipitously, but the rout was exacerbated by Republican leaders warning Bernanke to stop money printing. In Europe it was the downgrade of Italian debt that triggered another round of sell off which lifted interest rates into a dangerous territory for fiscal sustainability. CDS spreads reached record highs for both Italy and Spain, but more worryingly started to increase also for Germany and France. The IMF confirmed that the global economy is slowing and that the US and Europe are risking another recession. Furthermore the Eurozone banking system needs capital injections of EUR 200bn, with the anaemic recovery being derailed by political squabbling and sovereign debt turmoil in Europe and the US.

Regional Developments

• The IMF reduced the growth forecasts for the MENA region's oil producers by 1.0% in 2012 - taking the growth rate to 3.9% from 4.9% forecast previously on forecasts of lower oil prices.
• Kuwait has announced a fiscal surplus of KWD 5.6bn in first 3 months of the 2011-2012 fiscal year, as revenues clocked in at KWD 7.1bn, with oil revenue at KWD 6.8bn. This compares to a fiscal surplus of KWD 3.2bn in Q1 a year ago and at KWD 4.2bn in April-May.
• A court in Cayman Islands has ordered the release of USD 9.2 bn in frozen assets of Al Sanae (Saad Group).
• The central bank of Egypt, following a 26-day audit, declared that the amount of gold reserves is at 75.6 ton or $4.4 bn, at Sep 19 gold price of $1,789 per ounce.
• Oman' total outstanding credit rose by 13% yoy to OMR 11.576bn in July, with credit to the private sector increasing by 9.6%.
• Oman's oil output climbed 2.9% in August to 907,975 barrels per day.
• Saudi Arabia's cabinet has endorsed the implementation of the GCC railway project with an estimated cost of USD 25bn.

UAE Focus

• The IMF, in the latest release of the World Economic Outlook, revised upwards the economic growth in the UAE to 3.8% from 3.3%.
• Sheikh Mohammed Al-Maktoum in his capacity as Ruler of Dubai has issued a new law regulating economic activity in Dubai which aims to boost investment and facilitate increased business activity. The law will establish a single portal through which various government bodies can co-ordinate the regulation of economic activity in Dubai.
• Younis Al Khoori, the Director General of UAE's Ministry of Finance, announced that the government's scheme of deposit guarantee in the banking sector, which was started three years ago, will expire in October and a government committee will consider whether to extend the program or not.
• Abu Dhabi' economic output rose 16.8% at nominal prices in 2010 to reach AED 620.2 bn, accounting for 60% of the UAE economy's output.
• The UAE inflation rate increased 0.6% in August from a year earlier (July: 1.3%) as housing prices fell 0.74% mom while food prices increased by 0.49%.
• Abu Dhabi's non-oil external trade rose 35.3% yoy in Q2 2011 to AED 34.46bn, as imports rose 20% to AED 4.29bn while non-oil exports doubled to AED 4.31bn and re-exports recorded a 15.4% growth to AED 390mn.
• The UAE federal economic and financial committee has approved additional spending of AED 700mn taking the to the total amount of extra budget approved to AED 1.25 bn during this fiscal year and raising the total government expenditure to AED 42.2bn.
• Barclays has opened an Islamic window in the DIFC allowing it to provide banking products in compliance with Sharia law.
• Majjid Al Futtaim group, the operator of Carrefour retail chain in Middle East, incurred losses of AED 164.9mn in 1H 2011 against AED 195.9mn profits last year according to a bond prospectus.
• Industrial establishments in the UAE reached 4960 units with total investment amount of AED 101.18bn in 2010, an increase of 316 units and AED 29.24bn compared to the previous year.

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Markets

This was a week of relative relief for stock markets, which gained some ground thanks to reported progress on the Greek front and a central bank swap facility set up to provide dollar liquidity to European banks. The situation remains tense and fragile. Regional markets were also broadly stable. Eurozone tensions moved to the FX market with euro declining. Oil prices almost remained unchanged at $88 amid signs of weak demand while the gold prices reached $1810 compared to $1855 last week amid increasing efforts to contain the European debt crisis.

Global Developments

Americas:

• US Industrial production rose 3.4% at annual rate in August with manufacturing output rising 3.8%, while the output of mines moved up 5.8% and the output of utilities decreased 2.4% as temperatures moderated.
• US CPI inflation moderated in August to 0.37% mom, due to falling energy price inflation (from 2.8% to 1.2%). Core consumer prices however, continued to rise by 0.24% mom. US Producer prices remained flat in August: a fall in energy prices compensated an increase in food prices and a small uptick (0.1% mom) in the core.
• US Retail sales were unchanged in August, while a small gain was expected. "Core" retail sales (ex-autos, gas and building materials) were also unchanged after an increase of 0.3% in July. Part of this result could be attributed to Hurricane Irene, but overall weakness is evident.
• Initial jobless claims unexpectedly rose to 428k in the week ending September 10, up from a revised 417k in the previous week. Irene did not affect much the figure, hence claims returned to around the level that prevailed in June, consistent with near zero job growth.
• US current account balance was almost constant at -$118bn in Q2. The goods and services deficit widened slightly, offset by net investment income. In other hand, the U.S. government’s budget deficit reached $1.23 tn in August, down slightly from $1.260 tn last year, attributing to improvement of income-tax collections and cut spending.

Europe:

• Moody’s downgraded two French banks on fears that holdings of European sovereign debt threaten their solvency.
• Euro-zone industrial production jumped by +1% mom in July, (-0.8% mom in June). This was weaker than the consensus expectations and hides great variation. Germany and Netherlands had strong numbers while Italian Industrial Production fell -0.7% mom and -1.6% yoy in July.
• In Euro Area, the industrial production jumped 4.2% at annual rate in August, led by 11.7% growth in production of capital goods and major market groups grew 10.4% in Germany. Annual inflation was 2.5% in August 2011, driven by surge in transport (5.6%) and energy (11.8%) prices. The external trade surplus reached euro 4.3 bn in July compared with euro 4.7 bn in July 2010. Exports and imports rose by 5% and 6% respectively. However, the current account recorded a deficit of 28.5 bn n 2Q2011 compared with a deficit of 18.6 bn in 2Q2010.
• In Germany, foreign trade exports jumped 14.7% at annual rate to 525.6 bn in 1H2011.
• In France, the current account deficit reached 4.5 bn in July. Inflation rate rose 2.2% from a year earlier in August.
• UK CPI inflation rose marginally from +4.4% yoy to +4.5%yoy in August - in line with consensus expectations.
• Italy’s sovereign credit rating remains under review for a possible downgrade for the first time in almost two decades by Moody’s.

Asia and Pacific:

• The Reuters Tankan survey of Japanese manufacturing improved only 2 points, to +8, as production was restored after the quake. The non- manufacturing survey fell to +3, from +7 in August. Both sectors have lost steam after quake reconstruction; hence they are now hit by the global slowdown.
• India’s Industrial Production growth dropped to 3.3% yoy in July, (8.8% in June vs. consensus 6.2%). Sequentially, IP declined by 1.8% mom sa in July, compared to 1.7% in June. IP has declined on a qoq basis for the last two months, due to weak capital goods index, down 12.3% mom in July.
• The Reserve Bank of India increased the repurchase rate to 8.25% from 8%, in order to contain India’s inflation rate which is the highest among the BRICS nations at 9.78% (YoY) in August.
• Singapore August non-oil domestic exports grew by 5.1% yoy versus a fall of 2.8% yoy in July, beating expectations, but the core items (excluding volatile items) continue to portray weakness in the external sector which is the harbinger of a technical recession in Q3.
• Foreign direct investment in China climbed 11.1% in August from a year earlier as Investment from overseas totaled $8.45 billion last month.

Bottom line: The scant data flow this week was notable only because they confirmed the marked global slowdown. Singapore’s exports, a gauge of global activity, are slowing. It is becoming ever more evident that the slide will not be halted by normal countercyclical measures. In Japan a JPY 10 trn supplementary budget is in the cards, and there should be some support for domestic demand from public works etc. in the disaster zone, but nothing that could sustain domestic demand. In the US the Obama plan has some merits but is not a catalyst for a V-shaped recovery. In Europe confusion at EU level prevails, with Germans torn between resentment towards the Club Med and fears of impending mayhem if the euro area breaks up.

Regional Developments

• The Monthly Bulletin from the Oman Ministry of National Economy shows moderate economic growth accompanied by modest inflation. Oil price had averaged USD 78.45/b in 2010 against a budget assumption of USD 50/b and the outlook remains supportive. For the 2011 budget the government has projected oil price of $58/b, while the average price is so far is USD 106.58/b.
• UAE foreign trade ministry said that the foreign trade agreement between GCC and EU is around corner and 99% of agreement articles/agendas have been finalised.
• KSA inflation rate rose 4.8% at annual rate in August, led by surge prices in commodity & services (8.2%) and rent (7.8) expenditure group.
• The 11th meeting of the GCC Monetary Council board agreed to create 'Gulfstat', a regional statistics initiative and finalizing the headquarters agreement between the GCC Monetary Council and the Government of Saudi Arabia and the Council’s Financial Regulations.

UAE Focus

• Abu Dhabi Inflation rate rose 2.4% in first 8 months of 2011.
• The General Pension and Social Security Authority revealed that the number of pensioners reached 75,000 while the GPSSA total investment reached AED 25 bn of which AED 22 bn as deposits in local banks and the rest as external investment with limited low risk.
• DIFC has Signed MOU with Pudong Financial Services Bureau for Financial Services Exchange and Development. This is the second agreement after the MOU with Chengdu Financial City Investment and Development Co. (CFCID)
• NPL in banking sector jumped 29.8% (YoY) to reach AED 48.4 bn or 4.6% of total loans in July, while total loans increased 2.6% for the same period.
• Nakheel returned to profit (Dh58.2 million) in 1H2010 after losing $20.85 bn in 2009 according to its bond prospectus. The prospectus revealed that Dubai property prices almost declined 50% between the height of the property boom and 2010. The prospectus also revealed that Nakheel had reduced its workforce from 3,818 to 986 employees or by 74%.

Annex: ADIA Portfolio highlights

• ADIA manages a diversified global investment portfolio, across more than two dozen asset classes and subcategories, including quoted equities, fixed income, real estate, private equity, alternatives and infrastructure.
• Approximately 80% of ADIA’s assets are managed by external fund managers whose activities are monitored daily.
• Approximately 60% of ADIA’s assets are invested in index-replicating strategies.
• In U.S. dollar terms, the 20-year and 30-year annualized rates of return for the ADIA portfolio were 7.6% and 8.1% respectively, as of 31 December 2010. Performance is measured based on underlying audited financial data and calculated on a time-weighted return basis.
• Portfolio overview By Asset Class

  Asset Class	Min.	Max.
  Developed Equities	35%	45%
  Emerging Market Equities	10%	20%
  Small Cap Equities	1%	5%
  Government Bonds	10%	20%
  Credit	5%	10%
  Alternative	5%	10%
  Real Estate	5%	10%
  Private Equity	2%	8%
  Infrastructure	1%	5%
  Cash	0%	10%

• Portfolio overview By Region

  Region	Min.	Max.
  North America	35%	50%
  Europe	25%	35%
  Developed Asia	10%	20%
  Emerginig markets	15%	25%

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Markets

Stock markets started the week sinking along with the intensification of Italy’s fiscal crisis. The first session post-US Labor day was crisis prone, but the decision by the German Constitutional Court to uphold German euro support stemmed some of the worst fears. Clues from Obama’s speech on measures against recession were too vague and uncertain to inject optimism and the resignation of Jürgen Stark from the ECB was another irritant. Regional markets seemed to be little affected by the contagion, with Egypt, Bahrain and Kuwait actually up. The safe haven effect led the dollar to appreciate by 4% against the euro; however oil prices remained stable while the gold prices slid 1.4%.

Global Developments

Americas:

• President Obama introduced the American Jobs Act to finance infrastructure, encourage employers to hire and increase wages. The total amount, less than half a trillion dollars is not seen as changing the US growth path from the current stagnation: see Annex on American Jobs Act.
• ISM non-manufacturing index moved up to 53.3 in Aug (Jul: 52.7), taking the markets by surprise.
• U.S. unemployment claims rose by 2,000 to 414,000 a sign that the labor market is not gaining traction.
• U.S. trade deficit shrunk to a 3-month low USD 44.8 bn from a revised USD 51.6 bn in June as exports climbed to a record and crude oil imports eased. The gap shrank 13.1%, the most since February 2009.
• The Fed Beige Book highlighted that economic activity continued to expand at a modest pace.

Europe:

• ECB left its key interest rate unchanged at 1.5%, pointing to downside risks to economic outlook for the euro area and the high uncertainty in the financial markets.
• German inflation was 2.4% yoy in August, while the trade surplus reached €10.4 bn in July dropping 23.4% yoy.
• German factory orders declined 2.8% mom in July after +1.8% in June, weaker than expected, pointing to sluggish industrial performance ahead. German IP jumped by a walloping 4.0% mom after -1.0% in June. The index has climbed 29% from its low in April 2009 exceeding the pre-crisis peak of February 2008 for the first time.
• The German Constitutional Court ruled that further support to indebted countries does not violate the Constitution, but financial assistance (including issuance of Eurobonds) requires Parliamentary approval.
• Italy’s emergency austerity package was voted in the Senate, but obtained only a grudging nod from the ECB.

Asia and Pacific:

• In China, retail sales increased 17% yoy in August, with inflation at 6.2% yoy, and industrial output rising 13.5%. The trade surplus was $17.8 billion with exports and imports climbing 24.5% and 30.2% respectively.
• Japan’s machinery orders fell unexpectedly by 8.2% mom, the most in 10 months in July (+7.7% in June), as the yen’s postwar record eroded profits and discouraged investments. GDP revision showed a 2.1% yoy contraction.
• In South Korea, GDP expanded 3.4% yoy in 2Q2011, with a 27.1% increase in exports while industrial production rose 3.8%. In light of this development the central bank decided to leave the key rate policy unchanged at 3.25%.
• In Taiwan, the inflation rate was 1.3% yoy in Aug but exports rose only 7.2% yoy, the slowest pace in two years.

Bottom line:

From macroeconomic data, which continue to point to a recession, markets are turning their attention to policy responses for clues. Unfortunately they are not finding much solace there either. Obama’s much awaited speech on a new stimulus is a regurgitation of old ideas and the Republican support is not assured by any means. The G7 Finance Ministers stressed that they will maintain the stability of banks and financial markets and take measure to boost growth. But fault lines emerged between the two sides of the Atlantic with the US pressing the EU authorities to act more forcefully and the Canadian minister doubting that Greece could stay in the euro. Meanwhile the OECD forecast growth across the G7 group of major industrialized economies at 1.6% yoy in Q3 before slowing to just 0.2% in Q4.

Regional Developments

• Bahrain's telecoms regulator has issued notices to Bahrain Telecommunications Co (Batelco) and Saudi Telecom Co unit Viva, pointing to anti- competitive pricing on international calls to Asia.
• SMN Power Holding, Oman's largest electricity company, part-owned by Mubadala, plans to raise RO 25 million ($64.9 million) by offering 35% of its shares in an initial public offering (IPO) on the Muscat stock exchange.
• Egypt’s balance of payment deficit reached $9.2 bn in 2010-2011 fiscal year compared to $3.4 bn surplus in previous fiscal year while the current account deficit declined by 35.9% to reach $2.8 bn, the foreign reserves dropped from $36 bn to $25 bn, FDI declined by 67.6% to reach $2.2 bn from $6.8 bn, tourism income dropped by 47.5% to reach $3.6 bn from $6.9 bn, GDP expanded 1.8%.
• Egyptian Finance Minister said the country had received just USD500 million of USD7 billion pledged by the UAE and KSA, though discussions on the remaining funds were ongoing and he expects agreement by the end of the year. This is the first albeit small foreign financing aid for Egypt but it remains promising as a ray of light at the end of a dim tunnel.
• IMF has cautioned Kuwait that its financial sector has the potential of creating a suitable environment for money launderers and terrorist financers and has provided 49 recommendations in a FATF report.
• Kuwait’s inflation rate rose to 4.6% yoy in July, led by surge in food and household goods prices.
• Kuwait’s nominal GDP rose 16.9% yoy in 2010 to KWD 35.6 bn as oil-GDP jumped by 22.5% and non-oil GDP 9.8% after a 23% decline in 2009.
• The foreign ministers of Jordan and Morocco have attended GCC foreign ministerial meeting to discuss the GCC accession in Riyadh last Sunday.
• The GCC Secretariat proposed a flexible timetable for VAT allowing GCC counties to implement VAT individually between 2012 and 2015.
• Qatar increased public and pension wages by 60% at a total estimated cost of QAR 30 bn.
• Algosaibi and Saad, Saudi indebted family groups, have reached initial an agreement under the supervision of a committee including SAMA, CMA and the Royal Court formed by H.H. King Abdullah. The committee concluded that the Saad group is to be blamed and attributed to it the responsibility of Algosaibi group debt as well. This initial agreement will allow banks to start claiming their credits (source: alrroya).

UAE Focus



• HH. Sheikh Mohammed Al-Maktoum inaugurated second metro line, Green line, which runs about 23 kilometers through residential and commercial areas with 16 of the 18 stations operating with a total cost estimated at AED 29.5 bn for the whole metro project.
• HH. Sheikh Maktoum Al-Maktoum, in his capacity as DIFC president, has appointed Saeb Eigner as the new chairman of DFSA and has also renewed the existing DFSA board members for a further three-year term.
• Minister of State for Financial Affairs Obaid Humaid Al Tayer told Dow Jones that UAE is planning to spend an additional Dh110 million on top of its 2011 budget and to pass a new bankruptcy & public debt law before year's end.

Annex: Fact Sheet on the American Jobs Act
On Sep 8 President Obama unveiled the American Jobs Act which will allow the US economy to create jobs and increase wages. The act comprises five key components:

• Tax Cuts to Help America’s Small Businesses Hire and Grow: the act will cut in half the taxes paid by businesses on first $5 mn in payroll; eliminate payroll tax for businesses that increase payroll by wages or employees with cap at first $50 mn; reduce regulatory requirement and rewarding firms for making investments by allowing them to deduct the full value of those investments from next year tax.
• Putting Workers Back on the Job While Rebuilding and Modernizing America: firms that hire veterans will gain tax credits from $5,600 to $9,600; expanding public school to prevent 280,000 teacher layoffs while keeping cops and firefighters on the job; investing in public infrastructure; increasing internet access and a new “Project Rebuild” which will put people to work rehabilitating homes; businesses and communities; leveraging private capital and scaling land banks and other public-private collaborations.
• Pathways Back to Work for Americans Looking for Jobs: extending unemployment insurance to prevent 5 million Americans looking for work from losing their benefits, A $4,000 tax credit to employers for hiring long-term unemployed workers, prohibiting employers from discriminating against unemployed workers when hiring and expanding job opportunities for low-income youth and adults.
• More Money in the Pockets of Every American Worker and Family: Cutting payroll taxes in half for 160 million workers next year and allowing more Americans to refinance their mortgages at today’s near 4 percent interest rates.
• Fully paid for as part of the President’s Long-Term Deficit Reduction Plan: additional deficit reduction necessary to pay for the Act and still meet its deficit target.

Source: The White House
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Markets

After a period of extensive damage assessment, stock markets are fluctuating in the absence of major news and a sense of direction. The squabbles on eurobonds injected some excitement and the end of civil war in Libya sutured a geopolitical wound at risk of infection. Markets seemed to have recovered last week, though the slew of weak economic data from the US and Europe led to further declines following a highly volatile August. Regional markets made small gains while haven investments like gold and Swiss Franc rallied as investors sought safety from the downturn.

Global Developments

Americas:

• Personal spending rose 0.8% mom in July with increases in the quasi-totality of products' categories, inverting the trend registered in June (-0.1%). The US Personal Consumption Expenditure core price index gained 0.2 ppt mom in July confirming that the biggest part of the US economy is holding up.
• July pending home sales registered a 1.3% decrease, following a 2.4% increase in June. The decrease affected 3 out of the 4 regions of the sample: only the West registered positive data for the house market. The S&P/Case-Shiller index of property values fell 4.5% yoy at a slower pace than May's 4.6% decline.
• Chicago PMI fell to 56.5 in August (Jul: 58.8) implying that business activity expanded at a slower pace, but manufacturing continues to outperform other sectors of the economy.
• July factory orders were positive: rising 2.4% mom and inverting the 0.8% drop in June, supported by a 9.8% increase in orders for motor vehicles and parts, the largest one-month gain since Jan ‘03.
• In August, the US job market continues to stagnate with the jobless rate flat at 9.1% (2007: 4.6%) and non- farm payrolls unchanged at the weakest level since Sep 2010. Meanwhile, initial jobless claims fell to 409k in the week ended Aug 27 despite remaining quite elevated.
• Aug ISM survey fell to 50.6 (Jul: 50.9):

Europe:

• Germany's Q2 nominal GDP growth slowed to 3.6% yoy after expanding 4.9% in Q1, showing that even the safest and strongest Eurozone country is not completely immune to the sovereign debt crisis.
• European confidence plunged: the European Commission index that summarizes the sentiment of consumers, industry and services fell to 98.3 in Aug (Jul: 103). The Euro Area Business Climate indicator dropped as well to 0.07 in August from 0.44 in the previous month.
• Eurozone's August PMI was at a 2-year low of 49, below July's 50.4 and the flash estimate of 49.7 - as both output and new businesses recorded falling volumes.
• European inflation held steady at 2.5% in Aug with the ECB setting the target levels just below 2% over the medium term. Eurozone unemployment in July increased slightly to 10% (June: 9.9%) with youth unemployment rates stable at 20.5%. Ireland and Spain continued to see increases in jobless rate to 14.5% and 21.2% while joblessness dropped to 12.3% in Portugal and 3.7% in Austria, the lowest in the Eurozone.

Asia and Pacific:

• China's PMI recovered to 50.9 in Aug, following a string of declines including July's 29-month low of 50.7 though a
• India's GDP moderated to 7.7% yoy growth in Apr-Jun 2011 (Jan-Mar: 7.8%). The slow growth pace can be attributed to the 11 rate hikes in the past 18 months, leading to a slowdown in domestic consumption.
• Aug manufacturing PMI in India declined for the fourth straight month to 52.6 (Jul: 53.2), also recording a 29-month low, as price pressures and further monetary tightening continued to dampen sentiment.
• July industrial output expanded at a slow pace in South Korea and Japan as global concerns affected exports: Japan output rose 0.6% mom (Jun: 3.8%) while South Korea output grew 3.8% yoy (6.5%).
• South Korea's trade surplus recorded a slight decline to $ 821mn in Aug (Jul: $ 6.32bn) as imports were up 29.2% (25.0%) due to higher commodity prices (crude oil, raw materials) and exports rose 27.1% to USD 46.38bn (Jul 25.2%), with diverging trade patterns: exports to developing countries rose 17.1% as opposed to 10% growth to developed nations - exports to the EU fell 7%.
• Inflation touched a three-year high of 5.3% in August (Jul: 4.7%), also breaching the comfort zone of the Bank of Korea, on increase in food and transportation costs.

Bottom line:

With Bernanke's Jackson Hole speech delivering very little in terms of direction and as data from US continue to disappoint (increasing hopes for QE3), moderation seems to be the buzz word with global manufacturing cues from the developing nations (South Korea, Japan, China, India) also pointing to a slight weakness. This week will be interesting to watch - President Obama will present proposals to address unemployment on Sep 8; various central bank meetings: look out for Trichet's comments and as emerging markets try to balance growth alongside rising inflationary pressures.

Regional Developments

• Qatar inflation edged up to 1.9% yoy in July recording a 19 month high, although on a monthly basis it fell 0.3%, still a rather benign environment. Meanwhile, Saudi Arabia's inflation rate rose 4.86% in July, led by surge in rent and food prices.
• Credit growth to the private sector shows signs of recovery in July: in Saudi Arabia, credit to private sector rose 8.7% at annual rate to AED 831.5 bn, recording one of the highest growth rates since 2008; Qatar's credit to the private sector rose 17% at annual rate to QAR 213bn.
• Non-oil exports in Saudi Arabia rose 19% at annual rate to reach SAR 13.1bn in July while the imports dropped by 17% to SAR 28.9bn.

UAE Focus

• The UAE Central Bank has revealed that a new payment services will be added to the Payment and Settlement Systems (UAESWITCH), allowing debit cards to pay for purchases, bills and money transfer among individuals.
• The UAE PM issued two decrees to aid financial activity: one, to establish a federal credit information company as public joint company owned by the federal government and based in Abu Dhabi; two, to establish a government council for financial harmonization comprising representatives of local and federal government.
• The UAE Ministry of Economy has established a specific committee to follow up with all issues related to GCC custom and certificate of origin.
• The Ruler of Dubai issued a law amending DIFC Law No 9 of 2004 appointing a higher board at the DIFC that will be chaired by the DIFC President and members appointed by a decree. The decree issued has stated that Sk. Maktoum Bin Mohammad Bin Rashid Al Maktoum, Deputy Ruler of Dubai, has been appointed chairman of the board, and Abdul Aziz Al Ghurair as Deputy Chairman, Hussain Al Qemzi, Abdul Fattah Sharaf, Eisa Kazim, Abdullah Saeed Gobash and David Eldon as board members.
• Nakheel launched the first tranche of its long-delayed Dh4.8 billion ($1.3 billion) Islamic bond in line with its five-year restructuring plan.
• ADIA has restructured its external equities department, separating indexed funds from active funds as part of a more focused strategy.
• Dubai's foreign trade rose 26% at annual rate to AED 451bn in first five months of 2011.
• The EIBOR (all maturities) rose for first time in six months after consecutive drops in the week ended Aug 25 - six months was at 1.68% compared to 1.67% in mid-Aug and 2.48% a year ago.
• Dirham future contract for one month reached its lowest level in the past 15 years reflecting a high demand for dirhams and lack of liquidity for dollar futures.
• Data released by VISA has revealed that cash withdrawals in the UAE is 10 times higher than purchases - cash withdrawals amounted to AED 31.66bn while purchases were at AED 3.44bn in 1Q2011.

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Markets

As soon as the stock markets had regained some stability and a holiday mood prevailed, German GDP data were a cold shower. This was followed by a dramatic slide towards the end of the week, with recession fears weighing high on investors' mind. Regional markets were mostly down, with Oman and Qatar closing a tad above a week ago; Saudi market fell the most in two weeks when it opened yesterday. The Chinese Yuan rose to its highest ever against the greenback as the PBoC set a fifth straight record-low dollar/Yuan reference exchange rate while the Swiss Franc continued to rise desspite curbs by the SNB and the Yen's rise adds pressure on Japanese exporters. Demand for the safest assets sent the price of gold closer to $1900 per oz.

Global Developments

Americas:

• US industrial production advanced 0.9% mom in July, rising across major industry groups with business equipment the biggest gainer. Capacity utilization increased reaching 77.5%, the highest since Aug '08.
• Consumer prices increased more than forecast in July, led by higher energy and food prices. The 0.5% mom increase offsets the negative trend of the previous month (-0.2%).
• Residential real-estate market continues to stagnate in the US with existing home sales decreasing by 3.5% mom and housing starts down 1.5% mom in July.
• After reaching a fourth-month low in the week ending Aug 6 at 395k, jobless claims climbed to 408k in the week ending Aug 13 as US companies continue to pare down staff. The US government has announced that it will soon unveil a package of tax cuts, construction work and help to deal with unemployment.

Europe:

• Euro-area economy grew 0.2% qoq and 1.7% yoy in Q2 (Q1: 2.5%).The slowdown was largely anticipated given the lack of confidence of financial markets' operators due to the worsening sovereign-debt crisis.
• German GDP grew only 0.1% qoq in Q2, the worst since 2009, after Q1's stellar 1.3%. The German locomotive has stalled together with the rest of Eurozone - preliminary figures showing only 0.2% growth.
• Inflation rate in the Eurozone fell to 2.5% yoy in July, down from 2.7% in June as European governments reduce spending to plug budget gaps and contain the crisis.
• The ECB revealed that it bought EUR 22bn worth of Italian and Spanish 10Y bonds on the secondary markets enough to reduce the spread with bunds but not enough to bring down CDS from 400bps level.
• UK CPI inflation rose to +4.4% in July from +4.2% yoy in June, a notch above expectations, with the main contribution coming from financial services.

Asia and Pacific:

• Japan Q2 real GDP growth declined -1.3% qoq annualized (forecast: -2.5%). Fukushima reconstruction should take growth into positive territory in H2, but analysts are concerned about the sustainability of future growth beyond 2011.
• Japan's business confidence (Reuters Tankan) edged up by 5 points to +6 in Aug, in spite of the debt crises in Europe and global slowdown worries as autos, precision machinery and chemicals sectors boosted sentiment. Index for non-manufacturers rose 4 points to +7, recording its highest level since Dec '07.
• Taiwan GDP recorded a 5.02% yoy growth in Q2 (Q1: revised down to 6.16%) and full year forecast was cut down to 4.81% from 5.10% estimated last month amid rising uncertainty about the global economy.
• Malaysia's Q2 GDP slowed to 4.0% yoy growth (Q1: 4.9%) in spite of the 5.2% rise in domestic demand resulting from a sustained growth in private spending.
• The Chinese Ministry of Finance (MoF) auctioned RMB 15bn in sovereign bonds in Hong Kong, with another 5bn retail tranche to be issued later. This is the Ministry's biggest overseas issue and signals official support for the internationalisation of the Yuan.

Bottom line:

US & EY macroeconomic data are confirming the descent towards a mild recession in H2. Bad as it is, however this is not the worst problem - rather it is the lack of adequate political responses. While Obama has taken a re-election bus tour, the much heralded summit between Merkel and Sarkozy to discuss the destiny of Europe ended up in a photo-op and a proposal for a Tobin tax, disappointing markets. The Japanese recovery is a temporary phenomenon unlikely to dent the acknowledgment underlying the consensus view that the rebuilding impulse will quickly ebb and leave an even more meagre growth environment than before the disaster. Asia seems to be slowing down and the Chinese are striking while the iron is hot - by issuing the largest ever MoF overseas Yuan bond issue and its buyers being offshore investors in Hong Kong.

Regional Developments

• Saudi Arabia's annual inflation for July jumped to 4.9% (June: 4.7%), recording the sharpest monthly increase since Jan 2008.
• Bahrain's Q1 GDP was down 1.4% qoq (Q4: 0.2%) as the social unrest led to a significant decline in tourism and business confidence.
• Qatar's nominal GDP rose 28.4% at annual rate in 1Q2011 to QAR 141.8 bn, led by gas exports.
• Oman's nominal GDP in Q1 recorded a growth of 15.3% yoy (Q4: 11.8%), boosted by higher oil prices and in spite of the protests.
• Credit to private sector in Oman rose 8.6% at annual rate in Jul 2011 to reach OMR 8.8bn.
• Oman's inflation edged down to 0.1% in June, from May's 0.4% as food costs, which represent more than 30% of total expenses, slowed.
• Saudi Arabia's General Authority of Civil Aviation has announced that plans are underway to open the skies to GCC based airlines, in an attempt to “improve domestic air transport services and boost the kingdom's social and economic development”.
• Google has launched a service called Insights MENA - an interactive tool providing critical data about the online behaviour of urban consumers in five key MENA markets: Egypt, Jordan, Morocco, Saudi Arabia and UAE.

UAE Focus

• Dubai Holding has reached a deal with lenders to roll over a USD 1.16bn loan to Dec 2016. Meanwhile, with the Investment Corporation of Dubai (ICD) scheduled to repay USD 4bn (AED 14.68bn) of loans maturing on August 21, this will lead to a substantial decline in Dubai Government's public debt from AED 115.4bn to AED 100.7bn.
• The National Bureau of Statistics reported that UAE inflation slowed to a three-month low of 1.3% in July (Jun: 1.7%) largely due to the 2.43% yoy and 1.6% mom drop in housing, fuel, electricity and water prices.
• Dubai Statistics Centre announced a modest monthly decline in inflation in July, though in year on year terms prices rose by 0.62% (Jun: 0.75%). Housing, water and electricity costs fell 3.5%, the sharpest drop since May 2010. Inflation in Abu Dhabi rose 2.3% for the same period, led by surge in food and commodity prices.
• UAE non-oil foreign trade rose 25% at annual rate to AED 297.3bn in 1Q2011, with exports at AED 34.7bn (23.7%), re-exports at AED 73bn (25.9%) and imports at AED 189.6bn (21.6%).
• Profits of the 50 companies listed in ADX rose 15% at annual rate to AED 16.3bn in 1H2011.
• The Dubai Supreme Council of Energy announced that there would be no upward revisions to electricity and water tariffs in the “next few years”.

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Markets

Volatility is king and mood swings have produced a roller-coaster of most stock markets indices. The US downgrade has been largely discounted in asset prices and no longer the critical factor; rather, recession fears predominate and drive investor strategies. Heightened risk aversion is the dominant factor and is not going to disappear for a while. Regional markets were mostly subdued and oil followed the gyrations of stocks, but has been mostly weak on expectation of an impending double-dip recession. The Swiss franc had been rallying amidst volatile markets, but fell on speculation that the Swiss National Bank might take further measures to weaken its currency. Gold price touched $1800 per oz last week, though retreated following a short rally in equities on Friday.

Global Developments

Americas:

• The Fed statement depicted a downbeat economic outlook highlighting downside growth propects. Despite three dissents (the largest number since 1992, which by Fed’s standards is almost a revolt) the FOMC advocated an easier policy stance than expected: first, rates will stay at 0.25% "at least through mid-2013." Second, additional easing steps are anticipated, i.e. QE3 is in the cards, possibly extended to corporate bonds.
• US nonfarm productivity fell -0.3% qoq in Q2, a smaller decline than anticipated which translated into unit labour cost (ULC), rising 2.2% qoq.
• July retail sales increased by 0.5% mom (June: +0.3%), with the main drivers of this positive growth being electronics stores (+ 1.4%), gasoline stations (+ 1.6%) and non-store retailers (+ 0.9%).
• The positive trend undertaken by Initial Jobless Claims the last week of July was confirmed also the first week of August when the claims unexpectedly dropped, reaching a four-month low at 395k.
• June US trade deficit widened to USD 53.1bn, its highest levels since Oct08 as exports slowed in spite of the weaker dollar.

Europe:

• The ECB started to purchase Italian and Spanish ten year bonds on the secondary markets stemming for the moment the rout that threatened to end up with a major sovereign default.
• Eurozone industrial production recorded a negative growth in June (-0.7% mom) performing worse than expected, with only five countries showing positive growth in the EU 27 area; UK IP growth remained flat.
• Spain, France and Italy maintained stable levels of inflation in July. The EU Harmonized CPI remained 3.0% yoy for Spain and 2.1% yoy for the other two EU countries.

Asia and Pacific:

• Chinese exports growth accelerated to 20.4% yoy in July (consensus: 17.0%; Jun: 17.9%). Import growth strengthened to 22.9% (22.0%, 19.3%) while trade surplus rose to USD 31.5bn (June: USD 22.3bn).
• China’s July IP registered a 14.0% yoy growth (consensus: 14.6%, Jun: 15.1%). This implies a sequential growth of 2.1% mom s.a. ann. in July (Jun: 19.0% mom s.a. ann.), which is not exactly cheerful.
• Nominal retail sales growth dropped to 17.2% yoy in July (Jun: 17.7%) in China, despite slightly higher consumer inflation and a low base from last year while real retail sales growth fell to 10.7% (Jun: 11.2%).
• China’s July CPI inflation rose to 6.5% yoy (June: 6.4%), with food price inflation rising to 14.8% (14.4%) and interestingly a slight decline in non-food price inflation to 2.9% (3.0%). PPI inflation rose to 7.5% yoy in July, up from 7.1% in June.
• Singapore’s final estimate for Q2 real GDP showed an increase of 0.9% yoy, slowing from the 9.3% growth (revised from 8.3%) in Q1. Exports growth, a good proxy of global expansion, slowed to 1.8%.
• Japan’s machinery orders increased 7.7% mom in June, as companies increased spending; however, overseas orders fell 5.9%, continuing the slump in foreign demand for Japanese machinery.
• India’s industrial production grew 8.8% yoy in June (May: 5.9%) in spite of the recent tightening measures.
• Hong Kong’s Q2 GDP growth slowed: rising only 5.1% yoy compared to Q1’s 7.5% (revised), as exports recorded minimal growth given slower demand in key overseas markets and production disruptions.

Bottom line:

With politics in a stalemate in the US, the burden of devising measures to avoid another deep recession fell on the Fed, which does not need Congressional approval for its policies. Unfortunately the cookbook is not particularly original and the recipes have already proved insufficient to spur sustainable growth. But as predicted a few weeks ago in this Commentary QE3 is the latest fashion in DC. In Europe, London is burning, Paris is sinking, and Rome is crying. In Berlin the ruling coalition is divided over support to indebted countries. In such conditions growth in Q3 will be flattish, in the best of circumstances. As usual the spate of relatively good news came from China where inflation is ebbing, foreign trade is strong and consumption is holding up well, although industrial production seems to be in vacation mood. The policy mix is poised to become less restrictive with recessionary winds getting stronger. However, China unlike other major economies has room for easing monetary policy. It could start for example by relaxing quantitative controls and maybe lowering reserve requirements. However, controlling inflation will be the predominant policy objective.

Regional Developments

• Bahrain approved extra budget spending of BHD 325mn to cover an increase in public sector salaries in
  financial years 2010 and 2011.
• Qatar Central Bank cut its policy rates - overnight Deposit Facility by 0.25% and overnight Lending
  Facility and Repo rate by 0.5% - on Aug 11 to boost lending.
• Kuwait’s government intends to include corporate taxes in the upcoming budget, as per a report in Al-
  Watan newspaper.
• Kuwait’s budget surplus narrowed about 38% in the fiscal year 2010-2011 from preliminary estimates to
  KWD 5.3bn - public expenditure was KWD 16.2bn while revenues stood at KWD 21.5bn.
• Oman’s total revenues in Q1 2011 increased 15.6% yoy to OMR 2.308bn (Q1 2010: OMR 1.996bn). Total public spending rose by 9.1% to OMR 1.718bn during the same period.
• Saudi Arabia’s non-oil exports rose 26% at annual rate in June 2011 to reach SAR 14bn while imports rose
  5% to SAR 36bn for the same period.
• Saudi’s inflation rate rose at a 4.7% annual rate in June 2011, led by a surge in rent (7.1%) and food prices
  (5.5%).
• Oman's government signed an Exploration and Production Sharing Agreement with Canadian-based
  international oil firm, Allied Petroleum Exploration.
• Saudi Arabia’s Ministry of Finance has awarded contracts worth more than SAR 84bn in H1 2011.
• Profits of the 41 listed companies in Doha Securities Market rose 25% at annual rate to QAR 14.8bn in
  1H2011. Meanwhile, profits of the 135 listed companies in Tadawul rose at a 26%annual rate to reach
  SAR 47.5bn in 1H2011.

UAE Focus

• Nakheel has finalised Aug 25 as the date for issuing the AED 4.8bn Sukuk, which had been expected to be
  issued in H1 2011, as part of the debt restructuring plan.
• After years of speculation on the revised UAE Company Law, a Ministry of Economy official announced last week that the draft was complete and that the Law would “allow foreign investors to have a varied percentage of ownership in some projects, depending on the type of investment and size of the project”.
• Provisions for non-performing loans have declined in Q2, as per banks’ results: loan loss provisions of Emirates NBD fell 28% qoq (18% yoy), ADCB recorded a 28% yoy decline in provisions while Mashreq and Commercial Bank of Dubai reported a 29% and 9% decline respectively.
• The Investment Corporation of Dubai has announced that it will be repaying a USD 4.0bn debt facility maturing Aug. 21 in full, also mentioning that the debt is being "repaid from internal sources derived principally from cash dividends received from ICD's operating subsidiaries".
• Limitless received a fifth extension on a loan of USD 1.2bn as the real estate developer controlled by stateowned Dubai World works on a restructuring plan, according to two bankers familiar with the plan.
• Average daily volumes for Oman Crude on Dubai Mercantile Exchange stood at 4,427 contracts in July (equivalent to 4.4mn barrels per day), with a record 88,539 contracts traded which was a 35% yoy increase in trading levels on the exchange.

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Markets

The US debt deal had temporarily lifted the markets’ mood, but increased probability of a double dip, the S&P US downgrade and the European debt/fiscal crisis caused the most severe global equity downturn since 2008, leaving almost no markets untouched. Finance ministers from the G7 major economic powers are holding emergency talks on how to calm the markets before they reopen on Monday. The regional markets are likely to see the impact hit this week - mirroring Saudi Arabia, which recorded the largest intra-day loss since last March on Saturday. Regional markets plummeted on opening today, with the DFM dipping close to 5% in early trading before paring losses and recording a 3.7% decline at close; both Abu Dhabi and Qatar's indices tumbled 2.5%. To make a comparison, DP World which is listed on Nasdaq Dubai shed 7.1% today and on the London Stock Exchange fell 14% during Thur-Fri last week. As the safe-haven demand continued to rise, both the Bank of Japan and Swiss National Bank took steps to halt currency appreciation while Asian currencies posted their biggest weekly decline since Nov, led by the Malaysian Ringgit and Indian rupee. Meanwhile, gold prices continued to surge.

Global Developments

Americas:

• S&P downgraded US rating one grade from AAA to AA+, also keeping a negative outlook: the attached Annex includes an extended discussion of potential consequences.
• US ISM manufacturing index dived to 50.9 in July (June: 55.3) signalling an accelerating trend towards recession. Construction spending was slightly better, but this was the only consolation as many major components declined: new orders index fell 2.4 points to 49.2, ie. contraction; new orders/inventories gap improved slightly to -0.1 from -2.5 but remains low; crucially the employment index fell 6.4 points to 53.5.
• US nominal consumer spending fell 0.2% (mom) in June, against expectations for a small gain. In real terms consumer spending was unchanged in June, and revised figures show 0.1% declines in both May and April. Nominal personal income increased by 0.1% (mom), also slightly less than expected.
• US core PCE price index rose in June 0.1% mom or +1.3% yoy. This inflation measure was significantly below the level implied by CPI and PPI data probably due to weakness in "non-market" prices (e.g. the "price" of free checking accounts).
• Improved labour market indicators failed to revive the markets: non-farm payrolls rose by 117k (Jun: 46k); unemployment rate dropped to 9.1% (9.2%) though part of this decline was associated to discouraged workers leaving the workforce. Meanwhile, Initial Jobless Claims fell to 400k in the week ended July 30.

Europe:

• European services and manufacturing growth weakened in July. The PMI composite index fell to 51.1 in July (June: 53.3), with services declining to 51.6 (53.7) and manufacturing down to 50.4 (52).
• EZ retail sales slightly increased in June (0.9% mom) inverting the previous month’s trend (-1.3%).
• European PPI was unchanged in June (May: - 0.2%), reflecting the drop in crude-oil costs (17% over the past 3 months) and the rise in capital goods price including equipment & machinery (+1.4% mom).
• The ECB left the benchmark lending rate unchanged at 1.5%, but reactivated a bond-buying programme. The ECB is discussing intervening to buy Italian bonds, which represent 20% of EU government debt.
• German manufacturing factory orders rose 1.8% mom in June (May: 1.5%), boosted by investment goods and a change in demand from German (-10.8% mom) to foreign (+13.7%, including EU) customers.

Asia and Pacific:

• China’s PMI fell to 50.7 in July from 50.9 in June, the fourth straight monthly decline, and just a notch above the 50 figure which represent the cut off between expansion and contraction. Although the reading was higher than expected, the Chinese locomotive is clearly losing steam. A silver lining came from the component measuring new orders, which confirmed a reasonably healthy pipeline.
• In India the PMI rose to 58.2 in July (June: 56.1) while the manufacturing equivalent fell to 53.6 from 55.3 in the same period.
• South Korea’s July trade surplus reached a record USD 7.2bn, as a strengthening Won and rise in exports of steel and automobiles to emerging markets lifted exports by 27.3% yoy (Jun: 13.6%) to USD 51.4bn.
• Korean inflation rose to 4.7% in July (June: 4.4%) driven by higher food and oil prices; even core inflation rose 3.8%, a tad below the previous 3.9% peak in May 2009. Thailand’s CPI increased 4.08% yoy on rising prices of core food commodities like rice as well as the rising costs of electricity and retail oil prices.

Bottom line:

The sense of relief from the US debt ceiling agreement was short-lived: the S&P downgrade and global equity market declines are hogging the headlines. Markets are still to come to terms with reality that a rebound is not in the cards without a drastic change in the policy mix, particularly on the fiscal front. The US acrimonious Congressional debate has hinged on the issue of tax versus expenditures, but the fundamental issue is waste versus efficiency in public outlays, which calls for a drastic revamp of the public sector architecture. Unfortunately such an issue is unlikely to be tacked by a feeble US administration ruthlessly pressured by an intransigent Congress faction or within the current dysfunctional decision making framework in the EU. It is likely that the situation will further deteriorate in mature economies, although opinions diverge on the extent and the duration. However, the likelihood of a double dip recession has increased.

Regional Developments

• Saudi Arabia’s private expansion is showing signs of slowing - as indicated by the PMI for July, which registered a 10-month low of 60.0 (June: 62.8).
• A World Gold Council report places Saudi Arabia with 322.9 tonnes of gold reserves on top in the region, followed by Lebanon with 286.6 tonnes. Globally, US has the maximum, with 8,133.5 tonnes, followed by Germany and the IMF, at 3401 and 2814 tonnes respectively.
• Mergers & Acquisitions activity increased in H1 2011 compared to 2010 according to a report by Zawya: there was a 33% increase in number of deals to 173 while the total deal value was also up 30% to USD 21.17bn. UAE ranked on top in terms of deal volume with 32 deals and also secured the largest M&A transaction worth USD 5.06bn.
• The annual Barclays Corporate Global Banking Survey results indicate that banking and insurance services in the Middle East is expected to become more competitive in the coming two years. Asia and Africa will grow faster, while Europe and North America are expected to fall behind.
• According to the International Air Transport Association, Middle East carriers recorded a 6.4% rise in passenger demand in June against a capacity increase by 8.4%. This rise however fell behind that of both European and Latin American carriers.

UAE Focus

• The UAE Central Bank announced that it did not hold any US Treasury bills or other US Government financial instruments in its reserves and clarified that this decision was based on the low returns to these instruments.
• UAE July PMI fell to 53.3, recording a seven-month low from June’s 55.2. While new orders component showed a weakness, job creation was at a 3-month high, as medium sized firms were hiring at a faster pace compared to either small and/or larger firms.
• Total value of property transactions in Dubai in H1 2011 was AED 30bn, with almost a quarter of the investment (AED 6.8bn) made by investors from other GCC countries, according to the director general of Dubai's land and property corporation.
• Bank lending to the real estate sector fell by 1.4% in Jan-May 2011 to AED 160.4bn at the end-May. Total resident loans were up by a slight 0.5% during the same period while deposits rose by over AED 75bn from end-2010.
• The IIF has revised upwards UAE’s 2011 growth forecasts to 4.4% from 3.8% previously, citing a stronger rise in real economic activity.
• Nakheel’s proposed AED 4.8bn Sukuk issue in H1 2011 was delayed due to administrative procedures according to the Chairman, while maintaining that this was the top priority for the company.
• UAE has pumped a total of 28bn barrels of oil till end of 2010, accounting for about 6.2% of total oil output by all OPEC countries since 1960, also making it the sixth largest output in OPEC.
• UAE’s auto market grew 19.7% to USD 11.1bn in 2010, as per a recent study conducted by the Ministry of Foreign Trade. The volume of car sales meanwhile increased by 10% to USD 42.4bn.
• The CEO of Du announced that the company now held 43.6% of the total market share in the UAE, taking total customers to 4,775,900 after adding 171.1k new customers in Q2 alone.

Annex: Sovereign debt crisis

On Friday 5 August, S&P, the credit rating agency downgraded US Long Term sovereign to AA+ from triple-A previously while a negative outlook, noting that: “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics. More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned”. This ratings downgrade was widely anticipated in the markets, given that the S&P were demanding wanted roughly USD 4 trillion in deficit reduction and a credible plan to fix longer-term deficit problems, but neither of these were met. China's Dagong Global had (on Wednesday) already cut the credit rating on U.S. sovereign debt to A from A+. The agency had also put the U.S. on negative outlook.

The US Treasury responded to the announcement casting doubt on the credibility of this decision and claiming that the rating agencies made a USD 2 trillion mistake. While clarifying their assumption on discretionary spending growth, the S&P cleared their stand stating that “primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook”. However, S&P said that the revisions would not affect their near-term outlook for the economy.

Last week, the US equity markets saw their worst week since 2008: the Dow Jones Industrial Average dropped 5.8%, the S&P 500 fell 7.2% and the Nasdaq ended 8.1% lower. World stocks fell for an eighth day on Friday with around USD 2.5 trillion wiped off the value of global equities last week. The downgrade will likely result in an increase in borrowing costs and the USD is likely to weaken further over the medium term as creditors and US dollar asset holders are likely to diversify their currency holdings away from the USD. The downgrade will likely also mean that Government sponsored entities like Fannie Mae and Freddie Mac and insurance companies could be at higher risks for a downgrade. The yields on 10Y notes fell as low as 2.34%, while the net notional exposure arising from US credit default swaps rose to new high of USD 5.6bn, from USD 3bn in the beginning of the year, and more interestingly, outpacing Greece (at USD 4.5bn), which recently was the subject of a second bail-out!

The timing of this crisis in the US cannot have come at a worse point: The European debt crisis has not yet been resolved fully: it continued to provide worsening signals last week, after Italian and Spanish bond yields rose relative to German bunds for a second week. The 10-year yield spread with bunds reached a high of 416 bps for Italian debt and of 418 bps for Spanish debt. Market concerns over the European periphery had driven the EUR / USD to a 4-month low of $1.39 on July 12, However, the EUR / USD exchange rate has recently shown some resilience, as the market has also viewed the US situation as worrisome.

Bottomline is that there is now a full blown sovereign debt crisis, given that both the US and European mini-crises have happened at the same time with contagion acting both ways.

The downgrade in ratings was expected, but what does it mean for emerging market economies which predominantly use the dollar? Dollar holdings make up a large share of official foreign exchange reserves (more than 60%), the foreign currency deposits and bonds maintained by central banks and monetary authorities. In international trade, the dollar is widely used for invoicing and settling import and export transactions around the world. The dollar remains prominent in exchange rate arrangements: seven countries currently are dollarized or have currency boards using the dollar and eighty-nine have a pegged exchange rate against the dollar. So, what does this mean for the GCC dollar based economies?

As the world starts to question the need for an alternative to the USD as a reserve currency, with no credible alternative as yet, all eyes are on the Renminbi. Increasingly emerging market economies (notably China) are urging the move towards a multi-currency financial system, as was the case before World War 1. Or, could the financial map benefit from being anchored to an asset such as gold which is not issued by a national authority? The DIFC Economic Note 13, “The Role of Gold in the New Financial Architecture” makes the case for developing a “Hard SDR”: international liquidity should be supplied on a large scale by an international currency such as the SDR, whose value should be tied to a basket of major currencies, USD, Euro, Yen and Yuan and gold, with the weight of the latter set at 20-25%.

Food for thought: Can the US bounce back and impose fiscal discipline? If yes, the more important and interesting question is when. 16 nations enjoy AAA rating from S&P. Since 1980, five countries have lost it, only to regain it at a later stage.

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Markets

The European deal on the new Greek plan and the changes in the EFSF and ESM have not allayed fears in the market which have resumed to the downward trend. Markets continued to remain volatile as the US continues to be in a stalemate regarding the debt ceiling debate so close to the Aug 2 deadline. Regional markets mirrored their global counterparts. The two uncertainties led to a weaker dollar, an all-time record high for the Swiss franc, drove up demand for the yen and caused a gold price rally, which rose to a high $1631.2 per oz.

Global Developments

Americas:

• The S&P Case Shiller Home Price Index fell 4.5% yoy in May (Apr: -4.2%), with unemployment, foreclosures and low demand constraining a rebound in the housing market.
• New single family homes sales slipped 1.0% yoy to 312 sa in June. However, median price for a new home increased 5.8% mom (7.2% yoy) to USD 235K, a signal that home values might be starting to stabilize.
• Durable goods orders unexpectedly declined by 2.1% mom in June (May: +1.9%), weighed down by transportation equipment. Excluding the volatile transportation equipment, orders increased 0.1% (0.7%).
• US Q2 advance GDP showed a growth of 1.3% yoy, after a significantly revised down 0.4% growth in Q1 down from the previous estimate of 1.9% gain. While the Q1 revision was largely due to less than estimated buildup in inventory, Q2 growth was propped up by business investment and exports.
• Core inflation rate was up 2.1% in Q1, significantly above the 1.6% clocked in Q1 while PCE index increased 3.1% in Q2 (Q1: 3.9%).
• Initial jobless claims fell more than market consensus, by 24k to 398k in the week ended July 23.

Europe:

• Moody’s downgraded Greece’s debt by another notch from Caa1 to Ca, because creditors will incur losses as result of last week’s agreement. S&P followed downgrading Greece from CCC to CC with a negative outlook. Banks, insurances and funds are demanding more clarity on the 'voluntary' swap scheme to extend debt maturity to 15 or 30 years and reduce interests.
• UK GDP slowed to 0.2% qoq in Q2 (Q1: 0.5%) - the construction sector recovered, growing by 0.5% (Q1: -3.4%), offsetting the 1.4% drop in industrial production.
• Moody’s downgrades Cyprus government bond ratings by two notches to Baa1 from A2, moving it closer to being the fourth potential EZ country to need a bailout in the future.
• German retail sales rose 6.3% mom in June (May: -2.5%), recording the strongest increase since 1991. The increase is linked to the encouraging fall in unemployment which enhanced household purchasing power.
• Eurozone CPI declined to 2.5% yoy in June, slowing from May’s 2.7%, but exceeding the ECB’s 2% ceiling.

Asia and Pacific:

• The Reserve Bank of India raised the repo rate by an aggressive 50bps to 8.0%, while hinting at more hikes in the offing after 11 moves since March 2010, making the RBI one of the most aggressive inflation fighting central bank. Philippines Central Bank, in its latest meeting, left overnight rates unchanged but raised the reserve requirement by 1%-pt to the pre-crisis level of 21%, citing liquidity concerns.
• South Korea GDP growth slowed to 0.8% in Q2 (Q1: 1.3%), a soft patch caused by lower exports and inventories, while internal demand held up. Slower export growth and manufacturing also led to Taiwan’s Q2 GDP growing at a slower pace of 4.88% yoy compared to Q1’s 6.55%.
• Japan retail sales rose for the first time since the tsunami in June, growing 1.1% mom as sales of household appliances and electronic products jumped 15.2% though automobile production was down 17.3%.
• Singapore CPI rose to a five-month high of 5.2% yoy in June, driven by higher housing, transport and food costs. Higher income classes were more affected from significant increases in the price of cars and petrol.
• Indonesia plans to issue its first ever Islamic treasury bills on Aug. 2, with the T-bills having a 6 month maturity, in an effort to diversify its Islamic bond instruments according to a Ministry of Finance official.

Bottom line:

US GDP and another spate of figures confirmed the weakness of the mature economies: the head-in-the-sand approach, hinging on the soft patch narrative, is giving way to a sense of despair as the fiscal crisis in the US is deepening and Europe has put all decision on hold until September. Over the summer, with lower liquidity and decision makers on vacation, risks are lurking.

Regional Developments

• UNCTAD’s World Investment Report 2011 reported that the foreign direct investments into GCC fell 15% yoy to USD 39.9bn. Saudi Arabia received the most inflows at USD 28bn, followed by Qatar (USD 5.5bn), while inflow into the UAE remained unchanged at USD 4bn.
• Inter-Arab Investment Guarantee Corporation reported that inter-Arab FDI flows dropped a whopping 76.4% to USD 5.4bn in 2010, the lowest level since 2003. Saudi Arabia attracted USD 21.5bn in 2010, down 40.9% compared to 2009’s USD 36.4bn in 2009 - accounting for bulk of the drop in FDI.
• Inflation in Kuwait rose to 5.0% yoy and 0.2% from a month ago in June. The slight pick-up can be traced to a 1% mom increase in transport and communication and a 0.7% hike in the educational and health services, while food prices declined by 0.6%.
• Qatar’s inflation recorded an increase of 0.1 % for June compared to May and an increase of 1.8% when compared to June 2010.
• Oman’s Capital Markets Authority is expected to reintroduce margin trading to improve trading volumes in the Muscat Securities Exchange. One of the conditions is that the proposed margin trading scheme will allow only a maximum of 30% of loan money for purchasing shares compared to the 50% limit previously.
• Saudi Arabia’s Aramco will provide three Indian refiners with an additional 1 million barrels each in August, after India’s deal with Iran failed to materialise. Iranian oil normally meets about 12% of India’s total demand of 3.46mn barrels per day.
• Aramco and Dow Chemical have formed a joint venture to build and operate one of the world's largest integrated chemicals facilities in Jubail, at an estimated cost of USD 20bn producing over 3 million metric tons of chemical products and performance plastics a year.
• Jordan has received a grant of close to USD 1bn from Saudi Arabia, to meet its budget deficit; this is in addition to the USD 400mn received previously for the budget and more support is expected in the form of Saudi crude oil at discounted prices.

UAE Focus

• Abu Dhabi's nominal GDP jumped 15.9% in 2010, supported by higher oil prices and growth in the non-oil sectors to AED 620.2bn, up from AED 546.5bn in 2009 and AED 666.7bn in 2008. Figures on real GDP growth have not been released.
• UAE central bank’s Islamic certificates of deposits have risen by close to AED 13bn since the end of 2010 to AED 17.6bn in June. Total certificate of deposits, at AED 117.9bn meanwhile was down 1.3% mom and compares to a total AED 94bn at the end of 2010.
• The UAE Central Bank reported growth in bank credit by 0.7% mom to AED 1.06 trillion in June, recording the largest monthly increase since Jan while deposit growth edged up 0.2% to AED 1.13 trillion.
• UAE foreign trade rose 28% at annual rate to AED 228.4bn in Q1 with the following breakdown: exports AED 24.4bn (42%), re-exports AED 57.2bn (30%) and imports AED 146.7bn (25%).
• Abu Dhabi’s non-oil exports for 2010 grew 22.1% yoy to AED 11.6bn while imports registered a decline of 7.8% to AED 86.6bn. Re-exports clocked in at AED 11bn, with machinery and transport equipment topping the list of goods while Bahrain ranked on top destination of re-export.
• UAE inter-bank offer rates hit a 7-year low last week while the gap between the UAE three-month interbank rate and the US three-month interbank rate has narrowed to about 124 bps, the smallest since 2008 implying an improvement in liquidity conditions.
• OPEC’s 2010-11 annual report placed UAE’s oil revenues in 2010 at USD 74.02bn, up 28.7% from USD 57.5bn in 2009. This was largely due to the $15 increase in oil prices from a year ago, but also helped by the rise in UAE crude oil production to around 2.32mn barrels per day (bpd) from 2.17mn bpd in 2009.
• Dubai airport passenger traffic was up 8.9% in H1 to 24.6 million passengers up from 22.6 million over the same period in 2010.
• DP World recorded a 11% rise in volumes in H1 2011 to 26.2 million TEUs, helped by the strong growth in emerging markets in Asia and Africa, including the recently opened port in Qingdao, China.
• DP World filed a request for arbitration against Peru with the International Centre for Settlement of Investment Disputes arguing that Peru blocked it from a public tender process to operate the northern terminal at the Port of Callao, Peru's largest. DP World seeks monetary reparations.
• Emaar net profits dropped 69% in Q2 as it handed over fewer homes and wrote off its investments in Dubai Bank.

Annex: US debt crisis

As the date Aug 2 looms nearer, the US is increasingly under pressure to reach an agreement on a deficit reduction plan to accompany the extension of the debt ceiling. It seems unlikely that Obama’s wish of USD 4 billion spending cut would ever materialise, but the tentative framework being discussed includes spending cuts of close to USD 1.0 trillion and a further $1.8 trillion would be recommended by a special committee appointed by Congress. While Bloomberg is already citing inside sources that a temporary solution has been reached, it is worthwhile to understand the repercussions of a default, if any.

What is a debt ceiling?

It refers to the legal limit to the amount of money the federal government is allowed to borrow. It includes debt owed to the public in the form of US Treasury bonds and debt owed to government trust funds such as Social Security and Medicare. The first limit was set in 1917 at USD 11.5 billion. Since 1962, the debt ceiling has been raised 72 separate times, with 10 in the past decade alone. The current limit is $14.294 trillion, with the US government borrowing about 40 cents for every dollar it spends. When the US federal government reached the borrowing limit of USD 14.3 trillion in May this year, the Treasury’s temporary plans helped the government financing for a few weeks.

Though the US has never defaulted before, a paper by Terry Zivney and Richard Marcus (titled “The Day the United States Defaulted on Treasury Bills” discusses a computer glitch that led to USD 122 million in Treasury payments being delayed in 1979. This led to a 0.6% permanent increase in interest rates, which resulted in $12 billion in additional annual debt payments.

What if a resolution is not reached?

If a resolution is not reached, it would simply mean that the borrowing authority of the US government will be exhausted and that the US government could default on its debt (non-payment of interest on its outstanding obligations). If the debt ceiling is not raised, it means that the government would need to prioritise what it wants to pay first – including critical benefits like social security, military wages etc. It will also lead to an increase in interest rates, making borrowing costlier.

The three ratings agencies have already warned of a downgrade to the U.S credit rating in case of a delay in interest payments on Treasuries, with Moody’s even arguing that the debt ceiling needs to be eliminated altogether. In the event that a default does occur on interest payments, the ratings on US government bonds will only be reduced to the Aa range from the triple A rating currently.

The impact on US Treasuries would be substantial - considered almost as safe as cash, a US default could lead to global panic and even question the role of the USD as the global currency. If the US defaults on Aug 2, it will lead to an almost catastrophic reaction in the FX market - a total collapse in risk appetite, maybe even in a larger magnitude when compares to the Lehmann collapse.

Rates on $91 billion of Treasury bills due August 4, the first to mature after the August 2 deadline, spiked to 28 basis points on Friday, the highest rate the bills have paid since they were issued in February. The Treasury has ruled out a fire-sale of its assets, including remaining mortgage-backed securities (MBS) holdings ($94.5 billion as of July 6), to raise cash, so as to avoid negative repercussions in these markets. Financial markets have already been very volatile during the current and still ongoing talks: The S&P 500 fell 3.9% last week, recording its worst fall in a year. The yields on 10Y notes are at the lowest since last Nov, while the spread for 1-year US Treasury CDS rose to 75bps as of Friday (from 53 a week ago). If no deal is agreed upon, these spreads will only widen further.

According to Nouriel Roubini, the real worry should be fiscal sustainability – what is required at this stage is medium to long-term fiscal discipline and short-term stimulus. But what the US is currently looking at is a massive looming short-term fiscal drag and no credible plan to tackle deficits and debts in the medium to long term.

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Markets

The Greek bail-out resolution and stellar Q2 results from big firms like Apple led to an end-of-the week rally in most markets, but traders remain anxious with the tug of war between US lawmakers to find solutions to avert an unprecedented debt default on Aug 2. Upbeat global sentiment is likely to boost regional markets that were on the decline last week, mirroring Saudi's gain yesterday following the news about the liquidity support offered to Greece. The Euro rose to a two-week high against the dollar as investor confidence went up, but the rally has since faded. Both oil and gold prices were up last week, with oil hitting a 3-week high and gold surged past a historical $1600 an ounce mark.

Global Developments

Americas:

• Housing starts rose to 629k houses at an annual pace in June, up 14.6% from May's 560k, reaching a five-month high and showing the first signs of recovery for the US housing market.
• Existing homes sales news was not as positive, declining in June by 0.8% mom to 4.77 mn, reflecting unemployment levels still above 9%, and prudential requirements with stricter lending rules imposed by financial institutions.
• The labour market is still weak in the US with jobless claims rising by 10k in the week ended July 16 to 418k. These figures include the job cuts due to the Minnesota government shutdown.

Europe:

• On July 21, EU leaders agreed to a new EUR 109bn aid package for Greece, resulting in a reduction of total debt equivalent to 21% in NPV. These new measures require banks to contribute EUR 54bn. The leaders also empowered the EUR 440bn EFSF rescue fund to buy debt across stressed EU nations to avoid market speculation, similar to the one Italy experienced last week. After this announcement, the euro dropped for the first time in four days underlining the markets' view that these measures are insufficient to fully resolve the Greek debt crisis.
• Eurozone Manufacturing and Services PMI declined to 50.4 and 51.4 respectively in July to the slowest pace in almost two years.
• The ZEW index of investor and analyst six-month expectations fell to -15.1 in July from -9 in June, with a strong indication of a drop in investor confidence in Germany following the worsening of EU debt crisis.
• The Ifo institute registered a loss in confidence as well, with its business climate index declining to 112.9, the lowest in nine months, from June's 114.5.
• Italian retail sales decreased by 0.6% yoy in May.

Asia and Pacific:

• Singapore's non-oil domestic exports increased by 1.1% yoy in June (May: 7.6%), dragged down by the electronics component (-17%). Total trade rose 5.0% while imports grew 3.7% following May's 18% rise.
• Higher food prices led to rise in consumer price inflation in both Hong Kong and Malaysia. Hong Kong CPI rose to 5.6% in June (May: 5.2%), as housing prices also picked up 6.5%; in Malaysia inflation increased to 3.5% compared to May‟s 0.3% as food prices picked up 0.7% mom.

Bottom line:

In a week with very few data releases, the European Council‟s agreement on providing liquidity support from the European Financial Stability Facility has definitely brought cheer to the market. However, uncertainty still looms large over the US debt impasse, which if not resolved could lead to an adverse reaction from both credit- rating companies and financial markets and lead to a rise in US rates imperilling the already fragile recovery. In Asia, given the recent spate of softer data and higher inflation, all eyes are on the Central Banks for the next spate of tightening measures, especially in China and India.

Regional Developments

• S&P removed Bahrain from "creditwatch" to reaffirm its previous long- and short-term local and foreign currency sovereign credit ratings at 'BBB/A-3' after relative stability returned to the country.
• S&P also raised Kuwait's local and foreign currency sovereign credit ratings to AA from AA-, on higher GDP and stronger public finances.
• The Middle East and Africa region's power generation is expected to increase almost 18.5% between now to 2015 to 1,508 terawatt hours according to a report by Business Monitor International, with UAE accounting for 7.33%.
• The Saudi King's approval of six regulatory decisions issued by the Council of Civil Service will lead to an increase in civil servants salaries in several government departments.

UAE Focus

• The Dubai International Financial Centre (DIFC) reported GDP growth figures for 2010. DIFC total value added amounted to US$2.956 bn, growing by 5.2% in 2010, accounting for about 3.6% of Dubai's GDP and 1% of UAE's estimated GDP.
• Dubai Exports, an agency of the Department of Economic Development (DED), announced the manufacturing sector to be the fourth highest contributor to Dubai's GDP at 13.2%. The manufacturing sector has experienced an average growth of 8% between 2007 to 2010, with a peak of 11% in 2010.
• The National Bureau of Statistics said that the CPI rose 1.43% yoy during the first half of 2011, reflecting inflationary pressures within UAE, largely from food prices.
• According to Business Monitor International, the UAE retail sector is expected to grow by 33% in the 2011-2015, reflecting an estimated increase in GDP per capita of 18.7%. The major source of success for this sector is expected to be the buying power of country's expatriates and the growth in tourism.
• The UAE's oil production increased by 80k barrels per day (bpd) in June to 2.6 million bpd according to the International Energy Agency. The expectations for July see a slowdown from the June record, to an expected production of 2.5 million bpd.
• The Arab Monetary Fund announced that the UAE economy is expected to grow by 3.3% in 2011 mainly from an increase in oil prices and high public spending.
• According to the Ministry of Finance's statistical 2010 report on the Gulf Common Market, UAE property ownership rates and economic activity licenses had increased by 16% and 9% respectively, reflecting the UAE's attractiveness as a business hub.
• The real estate services firm CB Richard Ellis ranked Dubai as the ninth most popular business location worldwide mainly due to government initiatives and tax breaks, its integrated air and sea transport hub, and its growing importance as a financial centre.
• One of the International Takaful Summit 2011 outcomes was a case for positioning UAE as one of the top three Takaful markets worldwide, together with Malaysia and Saudi Arabia.
• The World Travel and Tourism Council has forecast travel and tourism to account for 12.1% of UAE's GDP in 2021 from 10.4% share in 2010, ranking UAE at 28 among 181 countries globally.

Annex

Greece debt crisis & its partial resolution

On July 21, 2011 the European Council agreed to a new aid package for Greece, with the total official financing amounting to an estimated EUR 109 billion, “together with the IMF and the voluntary contributions of the private sector to full cover the financing gap”, resulting in a reduction of total debt equivalent to 21% in NPV. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. The financial sector has indicated its willingness to support Greece on a voluntary basis, with their net contribution estimated at 37 billion euro, with an additional debt buy-back programme contributing 12.6 billion euro, bringing the total to 50 billion euro.

In addition, the Euro area member states have agreed to significantly improve the financing terms for Greece by extending the maturity of the loans and reducing the interest rates on loans granted by the European Financial Stability Fund (EFSF) going forward. The cost of EFSF loans will be reduced to 3.5%, from 4.5%, and the maturities of loans will be extended out to at least 15 years, from 7.5 years. One of the radical steps introduced in this summit was the decision to use the EFSF for precautionary lending in the euro area, and for recapitalizing banks through loans to governments'including for countries that do not have programs. The statement mentions that the EFSF and ESM would also be allowed to “intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/ESM Member States, to avoid contagion”.

The Institute of International Finance (IIF) has announced a few new instruments to investors in order to mobilize voluntary participation of investors to provide financing to Greece of EUR 54 billion from mid-2011 to mid-2014 and a total of EUR 135 billion from mid-2011 to end-2020. The IIF Financing package includes four instruments[1]:

1. A Par Bond Exchange into a 30 year instrument
2. A Par Bond offer involving rolling-over maturing Greek government bonds into 30 year instruments
3. A Discount Bond Exchange into a 30 year instrument
4. A Discount Bond Exchange into a 15 year instrument

Yields on Greece's two-year bonds experienced their biggest single day fall since the country joined the euro in 2001 on Friday (Jul 22), as investors shrugged off a warning by Fitch, the rating agency, that Greece risked becoming the first western nation to default in 60 years. But in other markets, rallies petered out with Italian and Spanish bond yields rising.

Overall, though the markets have accepted the interim resolution to the Greek debt crisis and this is likely to support investor appetite, doubts still remain. One of the worrisome points is that while an NPV reduction of 40 to 50% was required, the resolution only points to a reduction of total debt equivalent to 21% in NPV. Overall, the time seems right for the set-up a European Monetary Fund to improve economic coordination, ensure fiscal discipline, avoid contagion effects and protect the euro.

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The world economy has partially rebounded from the global financial crisis, though the recovery continues to be geographically unbalanced and a number of risks remain. The IMF’s World Economic Outlook update in June 2011 estimates 2010 global economic growth at 5.1%, bouncing back from a drop of 0.5% in the crisis-hit 2009. The unbalanced economic growth is evident as the emerging market economies have recovered and are growing at a faster pace than their advanced counterparts.

A favourable global and regional environment buoyed by higher oil prices, along with Dubai’s growing economic links with Asia, is helping Dubai’s economic recovery. Increased economic diversification has benefitted Dubai, as the economy grew 2.4% (in real terms) in 2010, led by a strong boost from the tourism, logistics and trade sectors. Dubai is benefiting from its leading position as a regional business, tourism and logistics hub with strong links to emerging markets (Asia specifically) and improved competitiveness. Investor sentiment was boosted after the Dubai World debt restructuring was completed in mid-2010, leading to a positive impact on the equity markets and resulting in Dubai issuers regaining market access. Key indicators relating to trade and logistics, tourism and investment point to the resilience of the emirate to regional events and underscore its role as a safe haven for conducting business in the region.

The year 2010, coming out of the Great Recession of 2009, was a recovery year globally and regionally, which reflected on the activities of the Dubai International Financial Centre (DIFC). With a growing number of firms (increasing from 704 in 2009 to 773 in 2010) joining the DIFC from the emerging market economies (notably China and India), the DIFC total value added (GDP for short) reached USD 2.92 billion in 2010 after recording a slight decline in 2009. This translates into a 5.2% growth rate, consistent with growth across other regional financial centres. Total value added in the DIFC in 2010 represents some 3.6% of Dubai’s GDP which is estimated at AED 330.83 billion or USD 81.96 billion.

In the annual economic survey we focus primarily on the reported results from the 477 respondents to the survey plus the DIFC public sector, (i.e. DIFCA, DIFC Judicial Authority and DFSA) which account for the bulk of total value added of the 773 DIFC licensed and operating companies as of end-2010. The responding entities represent some 62% of the registered company population but the bulk (some 90%) of total value added estimated from employment data. The performance of economic sectors and activities of the DIFC entities at current prices in 2010 can be broken down as follows: the financial sector recorded a value added of USD 2.1 billion while its contribution to total value added of DIFC was 72.0%. The balance, amounting to USD 816.2 million was generated by the business sector (e.g. accounting services, management consultants, legal entities, restaurants, retailers, and other service providers) and the public sector, each contributing 26.5% and 1.5% respectively.

While the contribution of companies to the value added of DIFC can be estimated as above, the indirect contribution of the DIFC workforce to the Dubai and UAE GDP cannot be as accurately accounted for. As residents in the Emirate, the DIFC labour force contribute to the economy as consumers who travel, shop, eat, have relatives visit from abroad (who also shop, eat, travel within the UAE), consult doctors, drive cars, buy real estate all causing an increase in demand for key goods and services in the Emirate – leading to what is called a multiplier effect. This value is more difficult to estimate, but given that the average DIFC workforce compensation falls in the higher end, it is a safe assumption to make that the stimulus to the economy from their spending is substantial. A conservative estimate of a marginal propensity to consume at two-thirds implies that the DIFC workforce generated a multiplier effect of over USD 4.4 billion on the Dubai economy in 2010, about 5.4% of Dubai’s GDP.

This year’s questionnaire also included a detailed labour force survey, to track not only the employment growth in the DIFC but also the educational attainment, distribution and average pay for the diverse workforce. In 2010, the DIFC had about 11,331 full time employees, of which men formed the major share, at 65.5% (7,427). There is an estimated drop of 0.98% in total employment compared to 2009, with a significant decline attributable to the public administration sector, as a result of rationalization and restructuring measures. The percentage of UAE nationals in the total was 2.2%. The DIFC labour force has a high level of educational attainment, with over 85% being university graduates or post-graduates, and with similar levels of educational attainment for men (86.9%) compared to the women (84.9%).

Click here to download the report on DIFC’s Economic Activity Survey Results 2010, complete with comprehensive tables and charts.

Markets

The contagion of the EU fiscal crisis reached Italy, the third largest sovereign bond market in the world. Stock markets are shaky and risk aversion rising. Regional markets were not immune to global events: all markets were down from a week ago. The euro dropped to a four-month low against the US$, before stabilising later. Oil prices remained volatile last week while gold surged on the US sovereign rating warnings.

Global Developments

Americas:

• Moody’s warned that it has placed the US sovereign under review for possible downgrade. S&P warned of a 50% chance of a US downgrade within 3 months if the current congressional impasse is not overcome.
• May trade deficit rose 15% yoy to USD 50.2bn, highest since Oct08, with oil imports the main contributor.
• June US retail sales rose by 0.1% mom to USD 387.8bn (May: -0.1%), as weakness in jobs growth continues to constrain disposable income and spending.
• Producers’ Price Index declined by a seasonally adjusted 0.4% mom in June, following May’s 0.2% gain, on a 2.8% drop in energy costs, the biggest decline in nearly two years. The core PPI was up 0.3%.
• Overall CPI inflation fell 0.2% mom in June, while core inflation was up 0.3%.
• Industrial production in the US grew modestly by 0.2% mom in June (May: -0.1%), largely due to a 0.9% rise in the utilities as manufacturing remained flat and motor vehicle production was down 16.4%.
• Initial jobless claims fell 22k to 405k for the week ending July 8.

Europe:

• The EU Council emergency meeting called to tackle the run on Italy sovereigns ended without results. The ECB however was able to stem the wave of sales by intervening in the secondary market.
• Irish 10Y yields surged to a euro-era record after Moody’s downgrade to Ba1, in practice junk status.
• Eurozone bank stress tests revealed that only eight of 90 banks failed but 16 are in the danger zone, with Spanish banks faring the worst - raising doubts as to the how rigorous the tests were.
• Eurozone industrial output increased only 0.1% mom (4.0% yoy) in May, raising fresh doubts on the strength of the currency area's recovery. Eurozone inflation remained unchanged from a month ago, at 2.7% yoy in June - the rise coming from higher fuel and electricity costs.

Asia and Pacific:

• China’s Q2 GDP grew 9.5% yoy, the slowest pace since Q3 ‘09. Domestic demand continues to support, with final consumption contributing 4.6% to H1 growth and retail sales expanding 16.8% yoy in H1. Industrial production growth remained quite steady at 15.1% yoy in June.
• Chinese inflation touched 6.4% yoy in June, a 3-year high, with non-food inflation reaching 3% (the highest since records began in 2002).
• China M2 growth in June came in at 15.9% yoy (May: 15.1%, consensus: 15.3%). Despite the rebound in the amount of new loans extended, M2 growth fell on both yoy and sequential terms. Foreign exchange reserves increased to USD 3.2 trn at end June, up from USD 3.04 trn in Q1.
• China’s trade surplus rose 10.3% yoy, widening to USD 22.7bn in June, taking H1 surplus to USD 44.9bn. Import growth slowed to a 20-month low of 19.3% (May: 28.4%) while exports grew 17.9%.
• India’s industrial production was at a 9-month low in May, growing 5.6% yoy, after Apr’s growth was revised down to 5.8% from 6.3% announced previously.
• The Bank of Thailand raised its benchmark one-day repo rate by 25bps to 3.25% joining other Asian central banks stepping up fight against inflation. Indonesia and South Korea left rates unchanged.
• Singapore Q2 GDP grew 0.5% yoy (Q1: 9.3%), though the economy contracted 7.8% qoq (Q1: 27.2%), with manufacturing sector registering the biggest contraction of 5.5% yoy. Consensus forecasts were pointing at zero qoq growth.

Bottom line:

World growth is increasingly unbalanced. Data show that the economy is firing on one cylinder, China (& parts of Asia) but looking ahead even the dragon is not as powerful as in 2010. In mature economies where the tremors of the fiscal crisis are intensifying no harbinger of perkier growth is in sight. Investors are trying to find solace in the Q2 reporting season just underway. In Q1 corporate profits held up well especially in the US despite a sluggish recovery. Analysts foresee another spate of buoyant results. If this scenario is confirmed by actual numbers, the camp of those who perceive the soft patch to be temporary will strengthen. If the corporate sector falters and bank profits sink, then new stimulus packages and QE3 will become familiar themes.

Regional Developments

• World oil demand growth will accelerate in 2012, adding to the pressure on supplies, according to the International Energy Agency whose outlook was more bullish than OPEC's. The IEA estimates oil use would grow by 1.47 million barrels per day (bpd) to 91 million bpd. The agency however trimmed its estimate of demand growth for 2011 to 1.20 million bpd.
• Saudi Arabia raised its oil production by 700k bpd to reach 9.7mn bpd last month in an attempt to meet rising consumer demand for oil, as per the latest estimates from the IEA.
• Saudi Arabia's non-oil exports rose 10.3% yoy in May to SAR 13.9bn, with China as the largest importer and exporter of goods. While UAE, Singapore, India and Turkey were the next biggest importers, the exporters list comprised US, Germany, South Korea, and Japan.
• The Central Bank of Iraq has granted licenses to four new banks, each with a capital of 250bn Iraqi dinars, bringing the total number of private banks doing business in Iraq to 35.
• Mercer’s Cost of Living survey 2011 places Abu Dhabi and Dubai as being more costly, much above regional counterparts, at 67 and 81 respectively, with Doha ranked one of the least expensive in the group at 167.
• The Gulf Organization for Industrial Consulting released statistics on the GCC chemical industry for 2010. Saudi Arabia ranked first in terms of contribution to the industry, followed by Qatar, Kuwait and Oman.

UAE Focus

• Dubai’s non-oil trade increased by 30% yoy in Q1 2011 to AED 235bn, with import growth of close to 45% while India remained its largest trade partner, clocking in AED 75bn in total bilateral trade.
• S&P announced that they were undertaking a market review for UAE, Qatar and Jordan for a potential upgrade to emerging markets status. Though the consultation process concludes on Aug 26, any such move would be announced and will come into effect only in Q1 2012.
• Tourists from other GCC nations visiting Dubai rose by 79% yoy for the weeks June 15 to July 2, which coincides with the first half of the Dubai Summer Surprises shopping festival.
• The Crown Prince of Dubai has approved DEWA’s decision to introduce a fuel surcharge that will fluctuate in line with the global prices; this variable surcharge would be measured in comparison with the fuel price in 2010. This increase will likely lead to an uptick in inflation in the coming months.
• Abu Dhabi consumer price index increased by 2.4% yoy in June, according to the Statistics Centre Abu Dhabi, with cost of food and non-alcoholic beverages rising 7.9% and communications group up 12.4%.
• The value of returned cheques in the UAE dropped 9% mom to AED 4.5bn in June (May: 22.9%).
• The Vice-President and Prime Minister of UAE, in his capacity as Ruler of Dubai, issued a decree waiving certain percentages of the amount if the borrower repaid a home loan granted by the Mohammed Bin Rashid Housing Establishment before its maturity date. The details of calculating the waiver is listed in the annexure to the decree.
• The UAE is the only Arab nation to be among the top 30 goods markets worldwide. According to the Inter-Arab Investment Guarantee Corporation, which cites WTO data, the UAE is the 25th largest global importer and 19th largest exporter of goods in 2010.

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Markets

The fluctuations driven by the negotiation over Greek rescue program have abated. With the dust settled, the attention has turned to the macroeconomic fundamentals, the lack of momentum, and the other fiscal crises in the US and Eurozone. Hence the new drop in stock markets after the end-June mini rally. Regional markets are in summer mood with minimal volumes, with investors remaining cautious ahead of Q2 earnings. A weaker dollar led to safe haven demand for commodities, including gold.

Global Developments

Americas:

• US non-farm payroll figures were downbeat: 18k new jobs were added in June, the smallest number of new jobs in nine months, and are insufficient to inject any confidence in the strength of the recovery.
• Private sector payrolls reported an addition of 157k new jobs in June, more than four times May number.
• Factory orders rose by 0.8% mom in May (Apr: -0.9%) to USD 445.3bn, with capital goods orders excluding aircraft and military equipment, rising 1.6% after a decline of 0.4% in April.
• June’s ISM non-manufacturing index declined to 53.3 (Apr: 54.6), as new orders fell to 53.6 (56.8) and business activity dropped by 0.2 points; however employment index registered a slight uptick of 0.1 pt.
• Initial jobless claims hit a seven-week low of 418k in the week ended July 2.

Europe:

• Initial jobless claims hit a seven-week low of 418k in the week ended July 2.
• The ECB will continue to accept Greek sovereign bonds as collateral for its liquidity operations unless all 4 ratings agencies it relies on (the three major plus Canada’s DBRS) will declare Greek bonds in default.
• The IMF approved a EUR 3.2bn euro payment to Greece (5th tranche) under a joint loan with the European Union, making the IMF rescue package to Greece the second-highest in the fund’s history.
• The IMF approved a EUR 3.2bn euro payment to Greece (5th tranche) under a joint loan with the European Union, making the IMF rescue package to Greece the second-highest in the fund’s history.
• Moody’s downgraded Portugal’s sovereign debt rating by four notches from Baa1 to Ba2. The other two major agencies still list Portugal as BBB.
• June’s PMI Composite and PMI Services slowed down reaching a level of 53.3 (May: 53.6) and 53.7 (54.2) respectively. This decrease mimics the drop in the PMI manufacturing reported last week.
• Retail sales in the Eurozone disappointed in May, dropping 1.1% mom, after having registered an increase in Apr ( +0.9%), with even Germany reporting a fall of 2.8%.
• German May industrial production was up 1.2% mom (Apr: -0.8%) as capital goods production increased 2.5%, output of basic goods rose 0.7% while Apr’s numbers were revised down further.

Asia and Pacific:

• China raised interest rates a third time this year: 1-year lending rate and benchmark one-year deposit rate were hiked by 25bps to 6.56% and 3.5% respectively - following a 34-month high inflation rate in May.
• Moody’s warned that Chinese banks’ loans to local governments are about CNY 3.5trn more than the national auditor’s estimates, lamenting the “apparent absence of a clear master plan to deal with this issue”. If real estate credit is added, non-performing loans could reach up to 12% of total credit.
• Japan’s government proposed a JPY 2trn package for rebuilding the areas hit by the cataclysm in March.
• Malaysian Central Bank unexpectedly left policy rates unchanged at 3.00%, but raised the statutory reserve requirement ratio to 4% from 3% effective July 16. Earlier in the week, the government had announced plans to sell state companies, improve public finances and relax foreign ownership rules.
• June inflation in Philippines reached a 26 month high of 5.2% yoy as utility and transport costs rose.
• Japan’s machinery orders gained 3.0% mom in May (Apr: -3.3%), as reconstruction demand led to a 42% increase in orders from the construction sector for machinery to be used in the quake-affected northeast.

Bottom line:

Last week’s data highlighted three main novelties: a) a sharp rebound in Japan manufacturing which could attenuate the global slowdown; b) China becoming another hot-spot of the fiscal crises with local governments unable to repay bank loans; c) Labour market in the US dismal. Overall Q2 has disappointed and Q3 is not particularly promising. Meanwhile the credit tightening in China is producing perverse effects. The banking system is inadequate to provide loans to small companies for lack of effective creditworthiness assessment procedures. Another credit stream goes to high end real estate which then fuels a frenzy of flipping. Redirecting credit away from the public sector and real estate towards manufacturing and services is the key to the continuation of China’s buoyant growth.

Regional Developments

• Saudi inflation rose at 4.7% annual rate in June 2011, led by an increase in rental prices.
• Claim on the private sector rose 7.7% at annual rate to SAR 811bn in May 2011 in Saudi Arabia, while banks deposit rose 15% to reach SAR 1.06trn.
• Oman’s oil production rose 2.3% in the first five months in 2011 while gas production increased by 5%.
• Oman’s inflation rate recorded an increase of 4.9% in the period Jan-May 2011, led by surge in food prices.

UAE Focus

• The Dubai government announced plans to invest AED 28.8bn in expanding airspace and airport capacity at the Dubai International Airport over a 10-year period.
• Nakheel has received 100% restructuring approval from all its bank creditors, “received acceptance from 100 percent of the banks and the required majority of its trade creditors giving their consent to the Nakheel restructuring plan” it said in a statement.
• Dubai World announced on Wednesday that it had signed agreements setting out the terms to separate its property units Nakheel and Limitless in order to transfer them to the Dubai Government as part of the restructuring process.
• UAE and Kenya have signed a double taxation avoidance treaty agreement.
• The Islamic Development Bank is going to establish a regional office for the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) in the UAE.
• Total loans given by the UAE banking sector rose 2.7% at annual rate to reach AED 1048.7bn in May with NPLs standing at 4.5%, while deposit rose strongly by 15.7% in the same period.
• Dubai duty-free sales rose 16.6% at an annual rate to reach AED 2.5bn in H1 2011.
• UAE insurance sector’s written premium increased 10% yoy to touch AED 22bn in 2010, as per the Annual Report of the UAE Insurance Authority.

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Markets

Equity markets got some respite due to strong US data and cheerful news from Greece especially the “voluntary rollover” accepted by French banks and the austerity program passage in Athens. The mini end of month rebound & reappearance of risk appetite does not alter the outlook much, which remains dominated by a downward trend. The euro surged on positive news from Greece while the pound dropped to a 16-month low against the euro. The Brazilian real is at a 12-year high against the dollar as foreign investors flock to the region, given its high interest rates. Oil rebounded after the IEA stock release effect waned, while gold seems to have topped for now.

Global Developments

Americas:

• The IMF revised down the forecast for 2011 US GDP to 2.5% with increasing downwards risks.
• May consumer spending remained flat and Apr was revised down, confirming downside risk to Q2 GDP.
• S&P Case Shiller Home Price Index gained 0.7% mom in April, recording the first such increase since Jul’10. May pending home sales rose 8.2% mom (Apr: -11.3%), the strongest monthly increase since Nov.
• US initial jobless claims fell slightly by 1k in the week ended Jun 18 to 428k.
• ISM manufacturing survey rose in June to 55.3 (May: 53.5) with the increase across the board: new orders to 51.6 (51.0) and employment improving to 59.9 (58.2).

Europe:

• Germany’s provisional inflation figure for June was +0.1% mom (2.3% yoy) as the effects of higher energy prices abates.
• The Greek Parliament approved by a narrow majority the new austerity package, a pre-condition for the disbursement of IMF and EU funds.
• Eurozone PMI manufacturing dropped to an 18-month low to 52.0 in June (May: 54.6), as both exports and domestic demand slowed. Italy's manufacturing sector shrank for the first time in 20 months, while Spain's contracted for the second month in a row alongside slowing growth in both the German and French sectors.
• Eurozone unemployment rate held steady at 9.9% in May, with the highest rate recorded in Spain: 20.9%.

Asia and Pacific:

• China announced, for the first time, an estimate of local government debt at the end of 2010, totalling some CNY 10.72 trillion (26.9% of 2010 GDP), with 46.4% of the debt held by intermediary vehicles called local government financing platforms.
• Japanese industrial production rose 5.7% mom in May (Apr: 1.6%), the most in almost 60 years pushed up by a rise in output in automobiles (69.8%) and communications devices. Growth was across the board with output from the quake-affected areas rising 18.8% compared to 4.5% increase in non-quake-affected areas, as manufacturers restore supply chains damaged by the earthquake and tsunami in March.
• South Korean IP rose for the 23rd straight month, to 8.3% yoy in May.
• Taiwan central bank raised rates by 12.5bps, to rein in inflation, taking the rediscount rate to 1.875%.
• Inflation in Thailand and Indonesia eased in June to 4.06% and 5.54%, compared to 4.19% and 5.98% respectively in May; in month-on-month terms, food prices steadily increased. Inflation in South Korea meanwhile hit a 3-month high of 4.4%, with core inflation surging to the highest level since May’09.
• Japan’s Tankan index fell to -9 in the three months to June (Mar: +6), recording the first negative reading in five quarters, reflecting a worsened sentiment in the aftermath of the earthquake and tsunami.
• China PMI fell to 50.9 in June (May: 52.0), still slightly above the 50 mark, largely due to inventory adjustments. The manufacturing sector expanded at its slowest pace in 28 months, with the cost of materials declining by 3.6%-pts mom, while the new orders index, which reflects domestic demand, fell 1.3%-pts.

Bottom line: Looking back at the first half of 2011 one cannot avoid a sense of déjà vu: banks trying to raise capital to pare losses, widespread macroeconomic weakness, dismal labour markets, a retrenchment of commodities prices after a spike, stock markets pausing after two years of euphoria and hawkish statements from the ECB fighting a rear guard battle. In 2008 the crisis propagated from financial institutions, in 2011 it stemmed from sovereign debt. The difference is only apparent. A sovereign default will wipe out the capital of several banks, and weaken the balance sheet of many other including in the US through higher counterparty risk and inter-connectedness effects, while European pension funds will be severely hit.

Regional Developments

• In the region, DFM fell to a 3-month low last week while Saudi and Qatar gained.
• Kuwait's Supreme Petroleum Council has approved two long-stalled oil mega projects worth more than KWD 8bn dinars (USD 29 billion).
• Kuwait’s parliament passed the budget for 2011-12, with an estimated KWD 6bn deficit, given the 11% rise in spending projected at KWD 19.44bn mostly to meet pay hikes and grants for Kuwaitis, which will grow consumption and leak into increased imports.
• OPEC’s Secretary General called for the IEA to halt the oil reserve release.
• Bahrain has initiated a national dialogue, in the aftermath of the protests and social tensions in the past months, in an attempt to focus on political, economic, social and rights issues.
• According to a recent report by the World Travel and Tourism Council, Oman’s tourism sector is estimated to contribute USD 1.93bn in 2011, close to about 3% of GDP.
• The Central Bank of Oman’s Annual Report showed that personal loans, including mortgages, comprised 40% of banks’ total credit portfolio and grew 6.8% to OMR 4.29bn in 2010.
• Qatar’s May inflation edged up to 1.7% yoy (Apr: 1.5%), largely on a 0.4% rise in transport and communications, which comprises 20.5% of the overall CPI.

UAE Focus

• An official document reported that the UAE plans no Federal sovereign bonds before 2012.
• The UAE will provide three-year multiple entry visas to all foreign investors who own property, in a bid to revive the real estate market.
• UAE’s 2011 budget has been increased by AED 540mn, with the additional amounts AED 105mn and AED 150mn set aside for health and universities respectively.
• The capital of Emirates Petroleum Corporation was increased by 50% to AED 9bn, allowing the retailer to obtain more bank loans and offset the losses arising from petrol subsidies.
• Dubai Government departments have demonstrated support to SME businesses by providing procurement contracts worth over AED 40mn in H1 2011 according to DED.
• MIGA announced that is mobilising USD 1bn for insurance cover in MENA countries to spur investments in the region.
• The BIS has invited the UAE central bank to become a member, according to Bloomberg.
• Etihad Rail has awarded a major railway project contract worth AED 40bn, that will eventually link the major cities and towns of the UAE.

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When analysing the macroeconomic outlook for a country, productive government capital expenditures come at the top of the list of indicators that underscore its prospects and its potential. This criterion might be simplistic but is broadly accurate: economies that do not invest in infrastructure or let them decay obviously neglect their future, but also their present, because investments constitute the fundamental driver of the economic cycle. In short, the adequacy of infrastructure and their maintenance determine the success or failure of a country.

The latest DIFC Economic Note titled “Infrastructure as an Engine of Growth in MENASA” examines the role of infrastructure in the growth outlook in a macro-region that is poised to benefit from integration of its national economies, demographic trends, human capital enhancement, and a wealth of energy resources. The note discusses in much detail major factors that drive infrastructure demand including demographics, urbanization, trade and financial markets. Indeed, the GCC countries are currently in the process or planning to spend some $2.9 trillion on infrastructure that will transform their economies.

Especially in times when the policy agenda is dictated by crisis management and economic emergency, the role of economists is to remind nations and governments that the central effect of infrastructure is not the short term stimulus to growth, but the long lasting contribution to a transformation of economies and societies, to the upward shift in productivity and in productivity growth. In this regard it is of fundamental importance to point out to policy makers that public capital produces its most durable benefits when it exerts a positive effect on private investment by widening the business opportunities or by reducing the cost of inputs. In short, when public investments increase, the competitiveness of an economy is boosted, with positive spill overs for the private sector and the general public.

Governments’ role as the largest provider of infrastructure financing in the region needs to be redefined given the crisis and resultant fiscal constraints. The role of private sector needs to be enhanced through privatization and Public-Private Partnerships (PPPs). The availability of capital is a key to spur an investment cycle. Given the long-gestation nature of infrastructure projects, there is a need to attract private sector funds and more importantly, a need to develop deep and liquid local currency debt markets to improve access to and diversify the sources of finance. This brings to the forefront the role of DIFC and financial markets in financing infrastructure.

The bottom line is that infrastructure investment can also be the key to inclusive development, bringing together economic geography and social geography by transforming regions that are less developed.

What are the links between infrastructure demand and demographics, urbanization and trade? Does infrastructure investment lead to economic growth, increased competitiveness and development? Would developing financial markets make financing infrastructure projects (which are capital intensive and requires long gestation) easier? How can the DIFC play a key role? Click here to download the note for all the answers and to understand better how infrastructure development can drive growth in the GCC, MENA and the greater MENASA region.

Markets

Equity markets got some respite from the confidence vote in Greece and the expectation that the new funds will be disbursed by the IMF and the EU. Nevertheless, European markets continued their decline for the eighth consecutive week while the Asian markets were up after Wen Jiabao’s comments on taming inflation boosted sentiment. Regional markets were mostly down - MSCI delaying their decision on Emerging Market status for UAE and Qatar led to a 1.8% decline in the DFM the day after - its biggest decline in four weeks. The euro continues to be dragged down by the Greek crisis while rising risk aversion boosted the dollar. Oil declined to a 4-month low of $104 a barrel as the IEA announced that it will release 60mn barrels of oil next month after Libya's supply disruption. Gold prices fell sharply as well and hit the lowest price in a month.

Global Developments

Americas:

• The FOMC lowered its short-term outlook to reflect the latest data, but did not announce changes to monetary policy. Revisions to the forecast mean the Fed may shelve its exit strategy for a while, but is not yet envisaging a QE3.
• US durable goods orders rebounded 1.9% mom in May (Apr: -1.7%) on gains in non-defence aircraft (36.5%) and motor vehicles and parts (0.6%) while core capital goods orders was also up 1.6%.
• GDP growth in Q1 was revised upward to an annual rate of 1.9% (Q4: 3.1%) as businesses restocked inventories and trade gap narrowed.
• PCE index revised up to a 3.9% rate from a 3.8% increase announced previously (Q4: 1.7%) while the core PCE index advanced at a 1.6% rate, the highest since Q4’09, rather than 1.4% reported last month.

Europe:

• Euroarea industrial orders recorded a growth of 0.7% mom in Apr (Mar: -1.5%), with durable consumer goods up 2.6% (-5.9%) and capital goods rising by 1.7%. German orders grew 2.4% amid declines in both France and Italy, the former gaining from Asian demand.
• Germany's ZEW Indicator of Economic Sentiment dropped by 12.1 points to minus 9.0 point in June, with the crisis on Greek refinancing requirements dragging down sentiment.
• Eurozone's flash PMI slowed in June, to its weakest pace in 20 months, down two points to 53.6. German manufacturing PMI index stood at a 17-month low of 54.9 while the new orders index, a leading indicator of future activity, fell more than four points to 51.5.
• The German Ifo provided an unexpected relief as business confidence climate index rose to 114.5 in June (May: 114.2), with the current conditions component at a 20-year high at 123.3 (121.4).

Asia and Pacific:

• The German Ifo provided an unexpected relief as business confidence climate index rose to 114.5 in June (May: 114.2), with the current conditions component at a 20-year high at 123.3 (121.4).
• Japanese exports fell 10.3% yoy in May, and with imports picking up by 12.3%, the deficit totalled JPY 853.7bn - recording the country's second-biggest trade deficit. The auto industry continued to suffer, with exports dropping 38.9%, but it is significantly lower compared to the 67% slump in April.
• Inflation rose in May in both Singapore and Malaysia on higher costs of housing, transport and food. CPI was up 4.5% yoy in Singapore; in Malaysia, it accelerated at the fastest pace in two years to 3.3% yoy.
• Singapore's industrial production tumbled 17.5% yoy in May (Apr: -9.5%; the first time IP had fallen since Nov09) as the volatile biomedical manufacturing fell 42.1%. Ex-biomed, IP was up 2.3%.
• Industrial production in Taiwan rose 7.8% in May (Apr: 7.2%) on strong global demand for Taiwanese electronics, metals and machinery products.

Bottom line:

Until recently equity analysts were selling the story that fundamentals could be stronger than macroeconomic headwinds. With the Fed cutting growth forecasts on expectations of unemployment, consumer spending and lower home values, no indication (yet) of QE3 and the Greek saga on-going with no end in sight, the world is relying on its emerging markets: this was seen in Wen Jiabao's rescue/pledge to buy billions of euros of European debt. One should read the Chinese PMI release as a sign of a soft patch (growth moderation) in the offing in the EMEs, what with the spate of monetary & credit tightening from most EME central banks.

Regional Developments

• The Saudi Transport Minister announced that the Kingdom plans to raise the capacity of its second-largest port in Dammam and may invest up to USD 613mn on an overall port expansions program.
• KSA non-oil exports rose 24% at an annual rate to reach SAR 12.3bn while imports increased 6% to reach SAR 33.8bn in April 2011.
• Oman launched a package of incentives for the free zones including tax exemption, simplified licensing procedures, exemption from lower investment rate condition and no restrictions on labour.
• Egypt's Finance Minister has announced that Egypt will not borrow from the World Bank and IMF - this came on the heels of a budget revision with lower spending growth and reduction in forecast deficit.
• HSBC GCC Business Confidence increased by over two points in Q2, with companies maintaining a positive attitude towards both investment budgets and hiring.
• The latest World Wealth Report findings indicate that the Middle East had one of the highest growth rates of High Net Worth Individuals (HNWI) after Africa, with HNWIs population rising by 10.4% to 440k, and their combined wealth increasing by 12.5% to USD 1.7trillion.
• The Central Bank of Oman's annual report showed that remittances increased 7.3% to OMR 2193mn in 2010. Expatriate workers in private sector grew 9.3% and were mostly employed in the construction sector, according to the report.

UAE Focus

• Goldman Sachs analysts downgraded ADCB to "sell" from "buy," Dubai Islamic Bank to "sell" from "neutral," and Emirates NBD Bank to "neutral" from "buy” to account for negative the impact of newly introduced tighter consumer finance regulations.
• The foreign ownership limit will continue to remain at 49% in the new Companies Law, according to the undersecretary at the Ministry of Economy.
• MSCI has delayed the reclassification announcement for both Qatar and the UAE till December, "in order to give additional time for market participants to assess recent enhancements implemented on the Qatari and Emirati markets".
• DEWA debt was rated investment grade by S&P.
• The UAE Central bank has started providing Murabaha facilities, guaranteed by Islamic CD, according to the official release last Thursday.
• Abu Dhabi public debt management office is studying to set a ceiling limit for debt by Government Related Enterprises.
• Abu Dhabi stock exchange is conducting a study to introduce a new category for private joint stock companies like PJC companies.
• Nakheel announced last Monday that it had made payments of AED 5bn to its trade creditors. "This step marks a significant progress in the recapitalization plan, following on from the initial payments to trade creditors of Dh500,000 or less, which commenced in March 2010", according to the statement.
• Dubai Media Office announced that the Dubai Government debt offering was oversubscribed by three times and had cost 1.1% lower interest rate compared to the previous public note issued last year.
• UAE inflation rate rose to a three month high of 1.39% at annual rate in May (Apr: 1.1%), on higher food prices.

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Markets

Equity markets continued to be troubled by weak data, Greece's debt worries and recent unrest over proposed austerity measures. Regional markets were mostly down, with the exception of UAE where traders are speculating a possible upgrade to emerging market status by the MSCI later this week. Euro continues to decline and yen slumped to a two-week low against the dollar. Oil prices declined; gold prices recovered on Friday after recording a sharp 1% decline last Monday.

Global Developments

Americas:

• US retail sales declined -0.2% mom in May vs. median forecast -0.5%. Ex-autos sales increased 0.3% mom, vs. median forecast +0.2%.
• May PPI inflation increased by 0.2% mom, a steep decline from Apr's 0.8%. Lower food prices (-1.4%) were offset by energy prices rises (+1.5%). Core producer prices rose in line with expectations, up 0.2%.
• May industrial production rose 0.1% mom, following no change in April, with factory output rising by 0.4%, led by a 1.2% jump in production of business equipment.
• US inflation recorded a 0.2% mom increase in May while core inflation rose 0.3%, recording the fastest monthly increase since July '08.
• Homebuilders survey for June showed a slump in confidence to 13 (May:16) recording the biggest drop in a year, to the lowest level in nine months as the sales outlook continued to drag down sentiment.
• Housing starts rose 3.5% mom to a 560k-unit pace in May while building permits, a forward-looking indicator, jumped 8.7% to a rate of 612k.

Europe:

• UK inflation remained at a 30 month high of 4.5% yoy (0.2% mom) in May due to high food prices. The BoE expects a further rise to 5% later in 2011.
• Eurozone's Apr industrial production rose by 0.2% mom (Mar: unchg), driven by the 1.3% rise in production of durable consumer goods; capital goods and intermediate goods rose by only 0.5% and 0.1%.
• Eurozone inflation clocked in 2.7% yoy for the month of May with the components transport (5.3%), housing (4.7%) and alcohol & tobacco (3.3%) rising the most.
• Moody's has put Italy's Aa2 rating under review over concerns about its ability to reduce public debt. This follows the move by S&P, which cut its rating outlook for Italy's debt from stable to negative.
• Russian Q1 GDP rose 4.1% yoy. Services and agriculture were perky, while wholesale/retail, construction and public services contributed negatively.

Asia and Pacific:

• China tightened reserve requirements to 21.5% for larger banks, for the ninth time since last October.
• China's inflation hit an almost 3 year record at 5.5% yoy in May (Apr: 5.3%), as higher food prices are influencing other CPI components.
• The Reserve Bank of India raised both its repo and reverse repo rates by 25bps to 7.5% and 6.5% respectively, following last week's announcement of May inflation at 9.05%.
• The Philippines central bank left its benchmark policy rates unchanged at 4.5% (a 2-year high) while hiking the banks' reserve requirement by one percentage point.
• Chinese industrial production growth slowed in May to 13.3% yoy (in line with consensus: 13.1%; Apr: 13.4%). But its sequential growth rose to 2.7% mom s.a. annualised in May, up from Apr's -9.2% s.a ann.
• Japan machinery orders posted an unexpected 3.3% mom drop as orders for general machinery fell 15% and electronic machinery orders, which also include nuclear technology, fell 17.2%.

Bottom line:

This week's data did not alter the overall outlook of a softening in world growth: the US is poised for a growth around 2.5% annualized in Q2. The OECD composite leading indicators shows that the world's largest economies are set to expand at a more moderate pace in the months ahead, with Brazil, India, France and Italy facing below-trend growth. China's policy makers are trying to pull out a soft landing in the economy, but on the price front the efforts are not yet successful as the 4% inflation target for 2011 seems out of reach. The default of Greece remains in the background as the catalyst for a new sudden credit freeze like in the Fall of 2008.

Regional Developments

• GCC Financial Market Committee approved unified rules governing shares, bonds, sukuks and investment funds listed in the GCC financial markets. However, the unified rule is non-mandatory for two years and hence likely to be implemented fully only from 2013.
• Goods handled in Saudi ports rose 4.45% to reach 35.07 at annual rate in 1Q2011 according to recent statistics release by Saudi ports authority.
• Algosaibi dropped its defence against claims (worth USD 250 million) from five banks (among which HSBC and Credit Agricole) linked to a high-profile $22 billion family feud over the collapse of their financial empire, which has cast a negative light on family conglomerates in the GCC.
• Omantel agreed with three international telecom partners -- Iran, the UK and Russia -- to provide a new express cable system that will ultimately link Frankfurt in to the Gulf.
• The HSBC GCC Business Confidence Index in Q2 gained a paltry 1.7 points compared to Q1.

UAE Focus

• The Government of Dubai returned to the market after its previous issue in Oct 2010, raising USD 500mn from the sale of ten-year bonds, with a five-year put option.
• UAE's benchmark three-month interbank offered rate was set at 1.633% on Monday, the lowest level since June 2004, as the unrest in the region led to increased liquidity coming into the country, also improving the interbank dirham liquidity.
• Recent release of UAE central bank balance sheet displays deposits with foreign banks doubled to reach AED 88bn during the first four months of 2011 while domestic deposits with central bank rose 25% mom to reach AED 83.3bn, investment rose 4.5% to AED 183bn, taking total assets to highest level at AED 277bn by the end of April 2011.
• Nakheel is close to complete its debt-restructuring deal as it secured a nearly consensus approval (98%) from its financing banks.
• Fund managers expressed concerns over the new fund regulation draft giving SCA control over the UAE's fund management industry from the central bank. The funds view the new regulations as unduly favouring banks. The regulation will not apply to funds domiciled in the Dubai International Financial Centre.
• UAE is supporting the new French candidate, French Minister of Finance Mrs. Christine Lagarde, for IMF head position. This was announced by Obaid Humaid Al Tayer, Minister of State for Financial Affairs.
• The World Bank is in consultation with Dubai government regarding the establishment pensions scheme for expatriates (Source: The National)
• Abu Dhabi government has allocated AED 7bn for Emirati housing mortgage program.
• UAE central bank is consulting banks about launching a deposit insurance scheme; the proposal mentions insuring deposits less than AED 1.5bn through the establishment of a deposit guarantee institution.
• Boeing estimated in its recent World Air Cargo Forecast release, biennial assessment of the air cargo industry, that Dubai acquired 70% of Middle East air cargo, thanks to its state of the art logistic infrastructures and open sky policy.
• Dubai Economic Department licenses rose 3% in first five months of 2011 to reach a total of 190,000.
• Abu Dhabi's inflation rate rose 2.1% at annual rate in May 2011, led by a surge in food prices (7.7%).
• Dubai health authority announced that a health insurance system is about to be launched.

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Markets

Another week of poor performance in equity markets as investors mull over the extent of the global slowdown in the next quarters. Regionally, markets remained mixed while Saudi Arabian shares plunged to the lowest level since March on Sat, after a weak set of global data. The euro fell sharply from a 1-m high against the dollar; pound had dropped to 1-m low against the euro earlier last week after Moody's warned the UK could lose its top-tier credit rating if growth continued to slow. Oil prices fell on Fri after OPEC announced that Saudi Arabia pumped the most since 2008, reversing the spike occasioned by OPEC member disagreement.

Global Developments

Americas:

• Initial jobless claims showed an unexpected increase to 427k in the week ended June 4, staying above the 400k mark for the ninth consecutive week, reinforcing concerns about the slow recovery in the job market.
• April trade deficit narrowed by 6.7% mom to USD 43.7bn (Mar: 46.8bn), as decreasing demand brought down total crude imports to USD 26bn (Mar: USD 27.7bn). Meanwhile, deficit with China rebounded 19.4% to USD 21.6bn as the country continued to account for nearly half of the US trade deficit.

Europe:

• In Portugal the centre-right opposition won the general election beating the minority socialist administration that was unable to counter the slide towards a bail out by the EU and IMF.
• German manufacturing orders rebounded in Apr by 2.8% mom (Mar: -2.7%). The increase resulted from a 4.9% jump in orders of investment goods and a 3.6% rise in demand for consumer goods.
• German industrial production unexpectedly registered a 0.6% mom decline in April (Mar: +1.2%) as construction output suffered a setback, falling 5.7% (+5.5%).
• Inflation in Germany slowed to 2.4% yoy in May (Apr: 2.7%) as oil prices dropped, but is still above the ECB‟s 2% upper limit.
• Eurozone GDP was up 0.8% qoq in Q1 (Q4: 0.3%), as investment spending rose 2.1% supported by a 1.8% increase in export growth while construction rebounded by 2.9%, coming off two quarters of slump.
• The ECB left policy rates unchanged at 1.25% its latest meeting, while signalling that borrowing costs would be hiked in July, in an effort to curb inflationary pressures.

Asia and Pacific:

• Indonesia's central bank left its policy rate unchanged at 6.75% while South Korea surprised the markets with a 25bps hike in its benchmark rate to 3.25% to counter inflation.
• In spite of a slight upward revision, Japan's Q1 GDP still showed the severest contraction in two years - GDP shrank at a price-adjusted pace of 3.5% yoy, revised from the previous estimate of a 3.7% drop and following Q4 2010‟s 2.9% decline.
• China's trade surplus widened to USD 13.05bn in May (Apr: USD 11.4bn) as exports grew 19.4% yoy, slowing down from Apr's 29.9% rise while imports increased 28.4% to USD 144.11bn.
• India's industrial production slowed to 6.3% yoy in Apr (Mar: 8.8%, Apr „10: 13.0%) as production of capital goods grew by less than half compared to Apr 2010 to 14.5% and consumer durables plunged sharply to 3.8%. The government unveiled a revised index including newer components and weights to reflect more recent production behaviour, with 2004-05 as the new base year.
• Taiwan's inflation came in at a faster-than-expected 1.66% in May (Apr: 1.32%) while May inflation also rose in the Philippines to 4.5% (Apr: 4.3%), both cases pushed up by rise in clothing, food and oil prices.

Bottom line:

The lack of important data releases in the second week of the month gave investors pause for thought. The debate is raging on whether the slowdown is an "air pocket", not unusual during a prolonged recovery, or the harbinger of a new recession. Unfortunately too many experts continue to draw on analysis by applying models apt to describe a normal cyclical downturn, neglecting the evidence that crucial structural issues are at stake in the post Lehman environment: financial sector reforms, drastic revamp of key government functions, new architecture of the international monetary system and a pension systems overhaul. The uncertainty over these themes is hampering the appetite of the private sector to invest and no amount of liquidity injections or fiscal stimulus is going to offer a rapid solution.

Regional Developments

• OPEC left production levels unchanged, a decision that reflects divisions and an uneasy compromise among the leading members of the cartel.
• Saudi Arabia has announced its intention of raising oil output to 10mn barrels per day from the current level at 8.5mn.
• The International Monetary Fund agreed to a USD 3bn draft financing deal with Egypt with repayment due in 3-1/4 years and completed in five years,
• Oman and Bahrain are planning massive boosts in state spending aimed at meeting demands for inclusive development. Bahrain has approved a budget of USD 16.4 billion over the next two years, a 44% rise, while Oman expects spending in 2011 to be about 20% higher than previously envisaged.
• GCC financial markets committee has approved unified draft laws for listing dual shares, IPO and bonds - enabling cross-listing in any of the GCC states that boosts financial markets integration.
• Saudi Arabian inflation rate rose 4.6% at annual rate in May, led by surge in rent and food prices.
• Saudi Arabia donated 3 million barrels of oil to Yemen as economic aid package to help its economy during the current unrest.
• Oman's central bank is discussing the impact of a potential US debt default, given that such a move would destabilize its asset reserves, mostly invested in USD securities, according to a senior official in Oman central bank.

UAE Focus

• UAE Central bank board meeting discussed currency notes printing house, monetary developments and amendments to the monitoring of large exposure limits regulation.
• Deposits rose 16% at annual rate and credit rose 3.1% in April. The rapid rise in deposits sharply reduced the loan-to-deposit ratio to 0.93% at the end of April 2011 from 1.05% in April 2010. UAE money supply rose 1.9% at monthly rate to reach AED 850.5bn in April.
• UAE gross fixed capital formation rose 17.6% at annual rate to reach AED 260bn in 2010. This data is part of the breakdown of GDP released last week, showing that UAE real non-oil GDP rose 4.8% in 2010.
• The Securities and Commodities Authority is expected to release the regulation regarding investment funds after the consultation period on the initial draft expired. Meanwhile, the SCA has approved the establishment of three investment funds.
• FDI inflow into Abu Dhabi reached AED 2.7bn in 2010 according to official data released by Abu Dhabi Department of Economic Development.
• Dubai is studying the introduction of a new residence visa system for property owners according to sources close to the government.
• UAE Central Bank's Islamic CDs, which were introduced in Nov 2010, reached AED 12bn in April 2010, accounting for 11% of total CDs.
• Dubai CDS spreads have plummeted below its pre-crisis levels, taking it off the list of top 10 sovereign with the highest risk of defaulting.
• The Department of Finance in Dubai has announced that gross Dubai government debt outstanding is AED 115.8bn (38% of GDP) as of May 2011.

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Markets

Risk aversion was partially offset by the strong results of the US Treasury auction at the beginning of the week, but a spate of dismal data sunk Wall Street as investors dumped stocks and poured into Treasuries, driving benchmark yields to below 3.0% for the first time since Dec. Regional markets were mixed with UAE and Oman outperforming others; Saudi dipped by almost 2% on Sat, pulled down by petrochemicals. The dollar slipped on weak US data while optimism about Greece aid revived the euro which hit a four-week high. Commodities were volatile last week, with oil prices lower and gold gaining from its safe haven attribute.

Global Developments

Americas:

• US non-farm payrolls increased by only 54k in May (Apr: +232k) on weakness in manufacturing (-5k vs. +24k), retail trade (-9k, +64k) and leisure/hospitality (-6k, +32k). Unemployment rate was higher at 9.1%.
• The ISM index dropped to 53.5 in May (Apr: 60.4), the slowest rate since Sep'09 - dropping below 60 for the first time this year. Chicago PMI plunged 11 points to 56.6 in May, the fourth largest crash since 1967.
• ISM services survey for May was the lone positive - rising to 54.6 from April's 52.8 as sub-indices for employment, new orders and supplier delivery times increased.
• The Conference Board consumer confidence unexpectedly dropped in May to 60.8 from 66.0 in Apr. Weakness was concentrated in the expectations component.
• The Case-Shiller house price index fell by 0.2% mom seasonally adjusted or 3.6% yoy. The index reached a new cyclical low showing that house prices declined at least 33.1% from their peak.

Europe:

• The Euro zone's inflation rate dipped unexpectedly by one decimal in May to 2.7%, the first decline for nine months, but remains well above the ECB's 2% target.
• Germany's adjusted jobless rate fell by 8,000 units to a record low in May just below three million confirming a two-speed European recovery.
• German retail sales rose by 0.6% mom in April (Mar: -2.7%, revised down from -2.1% initially).
• Despite weak domestic demand, Russian central bank hiked overnight rates on the liquidity absorbing facility by 25bp to 3.50% and on 7 days deposits to 5.5% to belatedly offset inflationary pressures following central banks moves in most emerging markets.
• Eurozone manufacturing PMI dropped to a seven-month low of 54.6 in May (Apr: 58) on slower growth in output, new orders and employment. Services PMI dropped to 55.4 (56.7), taking the composite PMI to 55.4 (57.8), with Germany and France still outshining the EU periphery.

Asia and Pacific:

• India GDP grew 7.8% yoy in Q1 (Q4: 8.3%), dragged down by fixed investment growth at 0.4% (7.8%). The data suggest that activity peaked in H1 FY11 and has been on a downtrend since.
• Japan April industrial output grew +1.0% mom while the jobless rate increased marginally to 4.7%. However Moody's placed Japan's Aa2 sovereign ratings on review for possible downgrade.
• Korean industrial production growth decelerated in April to 6.9% yoy, against market expectations of 9.2% due to weaknesses in the tech, auto and chemical sectors.
• China PMI continued to slow in May, declining to 52.0 (Apr: 52.9) - with new orders index, backlog orders index and raw material inventory index all posting declines of more than 1 percentage point.
• Thailand's Central Bank raised its benchmark interest rate by 25 bps to 3.0% at the fifth consecutive meeting to stem rising inflationary pressures. Core inflation meanwhile accelerated to 2.48% in May (Apr: 2.07%), edging closer to the upper end of the inflation target band of 3.0%.

Bottom line:

Another week of essentially downbeat data releases. Evidence of a soft patch in mid-2011 is by now sinking in even in the most optimistically inclined minds. The sore spots in the US, house markets and labour demand remain in quasi-recession territory, while manufacturing, a rare bright spot, is now slowing as well. Asian economies are taking a break induced by tighter monetary conditions. In Europe authorities are discretely evaluating the various options for an orderly sovereign default/debt rollover by Greece which will impact the banking system balance sheets and pension funds for the next 6 to 12 months.

Regional Developments

• Egypt will introduce a 10% capital gains tax and a 5% increase in the corporate income tax for all businesses with revenues above 10 million pounds.
• Former Egyptian President Mubarak will stand trial in August for the killing of protesters a charge that could carry the death penalty.
• Saudi Arabia plans to limit the number of work permits given to foreigners to try to increase employment among Saudis with larger firms required to meet higher quotas. The Minister of Labour announced a 6 year cap on workers visas.
• Qatar's bourse has announced that it plans to set up a market for small-to medium-sized businesses to help them access funding.
• The World Bank's latest report forecasts GCC growth to exceed 5% in 2011.
• The IMF revised upward its forecast for Saudi Arabia's growth to 6.5% in 2011, due to increasing in oil output and expanding fiscal expenditure.
• Qatar inflation rate slowed to 1.5% at annual rate in April 2011 (Mar: 1.8%), led by a fall in food prices.
• The Central Bank of Kuwait released balance of payment statistics for 2010. Data indicate that current account surplus rose 42.3% to reach KWD 10.5bn, financial account rose 31% to reach KWD 9.9bn recording an overall BOP surplus, which increased 40% to KWD 10.5bn.
• Gulf Monetary Council discussed the harmonisation of statistics and building of statistical capacity and framework in its quarterly board meeting last week.

UAE Focus

• Emirates Airline issued a 5-year USD 1bn bond well received in markets, in an upsized offering which was priced at 330 bps over mid-swaps, with a coupon of 5.125%, close to the lower end of the initial range.
• Abu Dhabi Commercial Bank converted its AED 4.8bn bonds, issued in 2008 and bought by Abu Dhabi Government as part its bailout package, into 785.6mn shares, thereby raising its capital base.
• The foreign assets of UAE banking sector rose by AED 22.8bn in first two months of 2011, following the AED 14.8bn drop in Q4 2010.
• The National Election Commission approved the composition of sub-election committees across the UAE.
• Abu Dhabi's Department of Economic Development has launched an Abu Dhabi business cycle indicator - a timely indicator monitoring economic changes/trends - the details will be released this week.
• UAE Ministry of Economy has introduced fines for price manipulation upto AED 1mn against dealers trying to raise prices without prior official permission.
• The UAE central bank has announced that it will tighten liquidity regulations effective September.
• UAE Minister of Economy stated that the UAE GDP is expected to grow 3% to 3.5% in 2011. Meanwhile, data from UAE Statistics Bureau showed that UAE real non-oil GDP rose 4.8% in 2010.
• RTA received AED 1bn as first payments of SALIK securitization project (Source: Dubai Media Office press release).
• UAE Central Bank Governor stated that the ratio of non-performing loans to total loans reached 6.6% in April 2011.
• Assets of Islamic banks rose 11% to AED 269bn in 2010 accounting for 17% of banking sector assets (Source: UAE Central Bank).

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Markets

Risk aversion is prevailing in most markets waiting for direction at macro level and on major policy fronts primarily fiscal, with the battle on the debt ceiling in the US and in Europe with sovereign crises which last week sunk the euro and the European bourses. Emerging markets meanwhile have rebounded, though regional markets have been down as weak Q1 results played on investor sentiment and led to a three-week low in Dubai volumes. The Yuan went past its previous peak (May 2nd) after the PBoC set a new level for the mid-point and commodity prices continued to rise, with gold surging to a three-week high on softer dollar.

Global Developments

Americas:

• US durable goods orders fell 3.6% mom in April (Mar: +4.4%), on lower demand for aircraft and motor vehicle bookings, recording the largest drop in the past six months.
• US GDP growth in Q1 remained unchanged at 1.8% as growth was driven in part by consumer spending and exports while declines in government spending and rise in imports continued to weigh in on growth.
• Initial jobless claims increased unexpectedly to 424k in the week ended May 21 while the jobless rate “remained elevated” at 9.0%.
• The PCE price index increased 0.3% mom in Apr (Mar: 0.4%) as the core PCE registered a 0.2% rise (+0.1%). Consumer spending meanwhile slowed - increasing only 0.4% from March’s 0.5% gain.
• Pending home sales plunged in April - falling 11.6% from March and 26.5% from a year earlier - to a 7-month low, highlighting the slow pace of recovery in the housing market.

Europe:

• Eurozone flash PMI for manufacturing fell to a seven month low of 54.8 in May (Apr: 58) - Germany was down 3.8 points to 58.2. Meanwhile, flash services PMI fell to a five-month low of 55.4 (Apr: 56.7).
• Eurozone’s March manufacturing orders fell 1.8% mom (Feb: +0.5%) - the sharpest monthly fall since Sep ‘10. Industrial new orders for durable consumer goods dropped 6.8% - the sharpest monthly drop since Dec ‘08, while non-durable consumer goods orders fell 3.5%, the biggest fall since Aug ‘09.
• German Ifo survey was flat - the reading unchanged at 114.2 for May, with a rise in the current conditions components offsetting a decline in the expectations component, which fell for a third consecutive month.
• UK headline GDP growth remained unchanged at 0.5% in Q1, but domestic weakness was evident with household spending contracting by 0.6% (Q4: -0.3%) and business investment falling by 7.1%.

Asia and Pacific:

• Japanese trade was weak in April - exports tumbled 12.5%, led by a slump in auto output while imports rose 8.9%, leading to a trade deficit of JPY 463bn (Apr ‘10: JPY 729bn surplus).
• China’s PMI recorded a 10-month low in May - down 7 ticks to 51.1 (Apr: 51.8), while the manufacturing output sub-index fell to 50.9 (Apr: 51.6) indicative of a slowing Chinese economy.
• Thailand GDP grew 2.0% qoq in Q1, driven by strong domestic demand and record exports.
• Singapore manufacturing output declined 16.3% mom in April, with the decline largely from the volatile pharmaceuticals sector- excluding which the output declined 6.2%.
• Japan retail sales declined 4.8% yoy in Apr, though improving from -8.3% in Mar, as the impact of the earthquake and tsunami continue to dampen sales. Automobile sales tumbled a record 38.0%, the seventh consecutive yoy fall after a revised -32.7% in Mar.

Bottom line:

Data from China corroborate the evidence that Q2 is markedly weaker than Q1; in the US, corporate profits shrank alongside fresh signs of a slowdown in the labour and housing markets; fears of a Greek default and contagion to nearby Portugal and Spain are adding to Eurozone worries; Japan’s twin disasters are dictating weaker growth - overall pointing to the global economy losing momentum entering the second half of 2011. Meanwhile, the G8 continues to throw its weight behind the “Arab Spring” movement with the latest meeting promising a total MENA package of aid and loans amounting to USD 40bn including both Egypt and Tunisia.

Regional Developments

• World Bank President Robert Zoellick unveiled a USD 6bn plan for Tunisia and Egypt of which USD 4.5bn will be spent in Egypt over the next 24 months, including USD 1bn this year in budget support and another USD 1bn next year, conditional on political and economic reforms.
• The USD 4bn aid package Saudi Arabia has pledged to Egypt will include USD 1bn deposit at the Central Bank of Egypt and USD 500mn in bond purchases.
• Qatar has announced plans to invest up to USD 10bn in Egypt’s recovery, including a stake in a new USD 9bn port near the northern entrance to the Suez Canal, stakes in joint ventures to build two new ports on the Mediterranean Sea, one at Port Said and another near Alexandria.
• It was reported that the Libyan Investment Fund lost 4.5% in market value from the previous quarter, with total assets dropping to USD 53.3bn (as of June 30 2010) on financial products sold to it by Western banks.
• Bahrain's credit rating was revised down by Moody's, to Baa1 from A3, and assigned a negative outlook.
• Inflation rate in Kuwait rose 5.3% at annual rate in Apr 2011 (Mar: 5.1%), led by food prices.
• Oman has announced plans to invest up to USD 15bn in refinery projects in Duqm.
• Qatar’s Ministry of Labour has announced that it will speed up issuing labour visas for projects to within 24 hours.
• Saudi’s Emaar Economic City has received a SAR 5bn loan from the Ministry of Finance for a tenor of ten years to speed up construction of the project, with the repayment commencing after three years.
• Saudi Arabia’s broad money supply rose 17.2% at annual rate in Apr to reach SAR 1.175trn while private credit rose 7% to SAR 802.5bn.
• Fourteen anti-dumping cases were filed by the GCC Secretariat in WTO to protect GCC exports from predatory pricing by China and India.

UAE Focus

• The IMF’s Article IV report stated that Risks to the recovery remain in the UAE, including from possible economic spill-overs of regional events. “In particular, the current re-pricing of geopolitical risk in the region could lead to more challenging market conditions”. The IMF recommended that public entities limit their borrowing, develop a risk management framework and improve their internal monitoring practices in order to increase investor confidence in their activities.
• DP World has announced that it will be trading on the London Stock Exchange from June 1st, with an aim to track a wider range of investors, who will be able to trade the stock across both LSE and Nasdaq Dubai.
• Nasdaq Dubai plans to delay the proposed market enhancement of the DVP settlement mechanism until July subject to regulatory approval, according to a statement on its website.
• UAE merchants made 7.2mn point-of-sale transactions in Q1 2011, increasing by 60.5% yoy while the amount rose 54% yoy (and 36.4% qoq) to reach AED 2.66bn, according to the UAE Central Bank.
• Labourers registered with the UAE Ministry of Labour rose by 20.4k to reach 4.161mn in Apr while labourers registered under the wages protection system through central bank declined by 380k to reach 2.665mn.
• The UAE Ministry of Economy announced that it had fixed the prices of 400 consumer commodities in a bid to rein in inflationary pressures.
• Non-oil foreign trade recorded an impressive 28% yoy growth in Feb 2011 to AED 70.9bn - this constituted a 24% rise in imports to AED 45.5bn, export growth by 54% to AED 7.3bn and re-exports reaching AED 18.1bn, growing at 29%.

Market Snapshot as of 29/05/2011 at 08:30 (all % figures are weekly changes from May 22 (Mena) & May 20 (Foreign))

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Markets

Commodities markets remain a key to development in equity markets as large investors had set up strategies based on a double play hinging on continued global growth. Signs of slowdown in the world economy, the end of QE2 in June and the uncertainty over the handling of fiscal crises in Europe put in question the wisdom of those strategies. Regional markets were mixed with Egypt gaining the most last week as the dollar surged and the euro plunged towards the end of the week. Oil prices were volatile - crude futures fell after the IEA called for increased oil output to tackle the problem of high prices, coming close under the heels of a rally after the US Department of Energy announced that US crude stockpiles had failed to rise as expected in the week to May 13 - while gold prices closed higher at the end of the week.

Global Developments

Americas

• President Obama delivered a major policy speech on the new prospects of the Middle East after the Arab Spring. From the political point of view stressing that Israel should to withdraw within the pre-1967 borders marked a notable change of position. On the economic front the mini-Marshall plan for weaker economies facing a challenging transition, primarily Egypt and Tunisia underlines the strategic importance the US attaches to the region. Stakeholders will wait for policy action resulting from the speech.
• US industrial output was unchanged in April (Mar: 0.7% mom), led by a drop in auto production.
• Housing starts fell by 10.6% mom, with declines concentrated in the multi-family sector (down 24.1%). On the positive side, starts in March were revised up sharply in the multi-family sector (to 170k from 127k previously). Building permits also declined, down 4% mom. Apr existing home sales dropped -0.8% mom.
• China trimmed its holdings of US Treasuries for a fifth straight month in March as American lawmakers squabbled over the government debt legal limit.

Europe

• The EU Finance Ministers for the first time admitted they might ask private creditors to extend the maturities of the Greek public debt. Greece could become the first Western European country to restructure its debt since Germany in 1948, but EU ministers ruled out imposing large write offs before 2013.
• EU Finance Ministers endorsed a EUR 78 bn bailout for Portugal.
• The current account deficit in the euro bloc narrowed to EUR 4.7bn in March (Mar: EUR 6.5bn deficit).
• UK inflation accelerates to 4.5% yoy to April, boosted by a jump in travel costs during the Easter holidays.
• Italy's outlook was downgraded from stable to negative by S&P, on concerns about political stability after Berlusconi scored poorly in local elections.
• German ZEW economic expectations index decreased for the third month to 3.1 in May from 7.6 points in April, below consensus forecasts of 3.5.
• Bank of Italy Governor Mario Draghi was nominated as President of the ECB by the Eurogroup. The decision is expected to be ratified by the EU Council.

Asia and Pacific

• Japan recession was already deep before the cataclysm of March 11, with GDP plunging 3.7% qoq annualized in Q1, after a contraction of 3% in Q4.
• Taiwan's economy grew 6.5% in Q1 confirming the strong performance of those economies well integrated in China's supply chain.
  

Bottom line

Data, including US data indicating a slowdown and weak German investor confidence, are confirming the doubts over the global economic recovery, which has been shrugged off for too long. With Japan in recession even before the earthquake and Germany cooling (according to its Ministry of Finance after a stellar Q1), concerns about the global economic outlook and over Eurozone sovereign debt are taking the centre stage. Fitch was the latest agency to sharply cut the Greek debt rating, while Athens missed the deadline to present its reform proposals to the IMF and the EU.

Regional Developments

• President Obama launched a new initiative for the Middle East dubbed “Cairo 3” proposing a fund for development of several billion dollars to support the new democratic movements and stabilization in the region.
• The Saudi government introduced economic aid package in the form of soft loans, deposits and grant reaching USD 4bn to Egypt.
• Yemen's President and opposition have agreed on a GCC-brokered deal for a transition of power also supported by U.S. and European diplomats.
• Saudi Arabia will overspend its budget by up to 15% this year due to construction and job-creation measures according to Finance Minister Ibrahim Al-Assaf. The kingdom has pledged to spend an estimated $130 billion, or around 30% of GDP on new houses, creating jobs, unemployment benefits and other measures. Earlier forecast put Saudi economic growth this year at over 4%, up from 3.8% in 2010.
• Saudi Arabia's public pension agency invested 2 billion riyals ($533.3 million) in the domestic stock market in March, according to its governor.
• Saudi's Capital Market Authority has announced ongoing discussions with leading index providers, including MSCI, to be included in the emerging markets category.
• Omani authorities gave the green light to the first Islamic bank in the country.
• Oman oil production rose 3.7% at annual rate to reach 887,100 in 1Q2011
• Qatar Central Bank injected T-bills worth QR2bn to local banks to help manage their liquidity.
• Net profit of listed companies in Qatar Stock Exchange rose 12.6% in Q1 2011 to reach QAR 9bn.
  

UAE Focus

• Dubai's government took control of Dubai Bank to prevent a collapse which would have damaged the entire banking sector. Dubai will inject an unspecified amount of capital into the bank and protect depositors' interests. The DFM reacted sharply by falling to a 5 week low.
• UAE balance of payments recorded a surplus of AED 27bn in 2010 after recording a deficit of AED 22.5bn in 2009. Outward remittances increased 11% to AED 39bn while trade recorded a surplus of AED 186.8bn (+ 21%).
• UAE Ministry of Economy has announced that it will launch a legislative initiative to boost investment spending including FDI, competition, trademarks, regulating industry and arbitration.
• UAE's total trade of UAE rose 14% yoy to reach AED 1.1trn in 2010, with imports at AED 754.3bn and exports and re-exports clocking in at AED 352.8bn. Meanwhile, the free zones reported an increase of 23% to AED 352.8bn in 2010 (imports: AED 201.4bn; exports & re-exports: AED 151.4 bn).
• Dubai Customs data for Jan-Feb 2011 highlighted a 48% increase in total trade to AED 13.2bn, with re-exports rising 40% to AED 29.6bn and imports rising 26% to AED 70bn for same period.
• Salik revenues netted AED 2.9bn in the three years till 2010 according to a spokesman of the Dubai Road and Transport Authority.
• The RTA will open the infrastructure sector for private participation once the ongoing study on the state of current infrastructure is completed.
• Net profits of UAE's listed insurance companies' increased 2% yoy to reach AED 447mn in Q1 2011.

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Markets

Stock markets suffered after investment strategies focusing on rising commodity prices were severely hit after oil prices tumbled because of a dollar rally and data suggesting demand was slowing in the US and China, the world's biggest energy users. Oil has recovered since, but stock markets have been weak since last week. Among regional bourses, Qatar surged to a new one-month high on Wed on hopes of a possible index upgrade and Egyptian stocks rebounded on a report of USD debt relief worth USD 1bn for the country. The EUR gained some ground end of last week as expectations rose for an ECB raise while Asian currencies were weak. CNY recorded its sharpest weekly decline in two months as China raised bank reserve-requirement ratios; KRW dropped to a three-week low after Bank of Korea unexpectedly left interest rates unchanged.

Global Developments

Americas

• US trade deficit widened in March to USD 48.2bn (Feb: USD 45.4bn) as rising oil prices led to higher imports bill while the falling dollar helped exports.
• Initial jobless claims fell 44k to 434k in the week ended May 7, following the previous week's surge.
• Apr producer price index grew 0.8% mom (Mar: 0.7%), intermediate goods climbed 1.3% and core was up 0.3%.
• US petroleum inventories rose by 3.8mn barrels, more than double the 1.6mn forecast by a Platts survey of Wall Street analysts. Gasoline stockpiles grew by 1.3mn barrels against estimates for a 300k barrels drop.

Europe

• Greece has been downgraded to B from BB- by Standard and Poors due to rising rescheduling risk amid increasing concerns that the country will be unable to cope with its debt levels.
• Eurozone GDP grew 0.8% qoq in Q1 due to growth in Germany and France (at 1.5% and 1.0% respectively) compensating debt-ridden Portugal (-0.7%), Greece (+0.8%) and Spain (+0.3%).
• Eurozone industrial production declined by 0.2% mom in Mar (Feb: +0.6%) on weak capital goods and energy output - dipping 0.9% and 0.7% respectively.

Asia and Pacific

• China raised banks' reserve requirements for the fifth time in 2011 by 50bps to 20% as both inflation and lending data exceeded market expectations. Chinese April inflation declined slightly to 5.3% (Mar: 5.4%) as food inflation dropped to 11.5% from 11.7% while non-food inflation stayed flat at 2.7%.
• China's April trade balanced returned to a surplus USD 11.4bn, after recording an overall deficit in Q1. The surplus in Jan-Apr 2011 thus totalled USD 10.3bn, down by close to 40% from USD 16.3bn in the same period last year.
• China recorded weaker growth in Apr industrial production as output rose 13.4% yoy compared to 14.8% in Mar, partly caused by power shortages which in turn led to a decline in heavy industry sector.
• Both Indonesian and South Korean central banks left policy rates unchanged at 6.75% and 3% respectively at the meetings last week.
• India industrial production was up 7.3% yoy in Mar (Feb: 3.65%) in spite of the aggressive tightening measures from the Central Bank.
• Hong Kong’s Q1 GDP rose 2.8% qoq on strong export growth (Q4: 1.5%), enabling the government to revise its full year growth forecast for 2011 to 5-6%.
  

Bottom line

The word stagflation seems to be gaining ground with growth forecasts being revised downwards as inflation starts to spiral. US and Chinese data releases point toward slower Q2 demand while two-speed growth was confirmed in the Eurozone. Additionally, a new fund injection for Greece has not calmed fears that the situation resembles the pre-Lehman period when bank exposure to a defaulting institution heightened counterparty risk. If Greece defaults, the rug is pulled from under a complex web of cross-border relationships that could triggers a ripple effect of unknown proportions. Data from Asia (especially China) shows increasing chances for a slower Q2 - on higher oil prices and more tightening from EM central banks.

Regional Developments

• It was announced at the Summit of the GCC leaders in Riyadh that bids from Jordan and Morocco to join the GCC bloc was welcomed.
• Impact of the turmoil in the region is clearly evident in the real estate investments in North Africa. Data for Q1 2011 published by Zawya showed that out of USD 150bn worth of projects, more than USD 23bn (15%) were on hold in North Africa.
• April inflation in Saudi Arabia came in at 4.8% annual rate (Mar: 4.7%) led by rise in food and rent prices.
• Assets of Oman banking sector rose 5% at monthly rate while credit growth to private sector rose 6% in Mar 2011.
• Qatar Statistical Authority’s FDI survey for 2009 recorded an increase of QAR 46bn to QAR 171.4bn, which accounts for a staggering 47.9% of GDP.
  

UAE Focus

• Real GDP of UAE rose 1.4% at an annual rate in 2010 while it declined 1.6% in 2009 according to the National Statistics Center.
• The FDI inflow in UAE reached AED 55bn in 2010 - at 13% of GDP - according to the Ministry of Foreign Trade.
• The UAE Public Debt Bill is at final stage of approval according to the UAE State Minister of Finance.
• The Ministry of Labor has announced that it is working on an unemployment insurance draft.
• DP World is set to list on the London Stock Exchange by the end of May: share consolidation is scheduled for May 19, with free float remaining unchanged at 19.55% and shares issued being reduced to 830mn from 16.6 bn.
• Number of registered companies in Dubai Multi-Commodity Free zone reached 3000 entities as of Mar 2011.
• Share of individual investments in Nasdaq Dubai rose 8.9% at monthly rate in April 2011.
• Dubai Chamber of Commerce estimates that 61,545 real estate units will enter the market by end-2011.
• Abu Dhabi Economic Development Department issued 2309 licenses in 1Q2010 to reach a total 104372.
• UAE insurance authority intends to issue four regulations in current year including damage assessment, regulating insurance brokers, regulating insurance in banks and regulating investment activity by insurance.

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Markets

After hitting multi-year record levels stock markets took a pause which not even the killing of Osama Bin Laden could interrupt. After a brief euphoria investors focused on fundamentals which hardly support bulls. Regional markets were down, with Dubai slipping to a three-week low with volumes at a 15-week low. The dollar rebound, euro continued to decline and CNY passed the 6.5 mark for the first time ever. Oil lost some ground after US inventories data showed robust build up and finished the week $16 lower on demand worries and a move by investors to slash commodities exposures. The same trend hit precious metals: gold declined in volatile trade while silver prices tumbled by more than 10% on Thurs, the biggest one-day drop since 1980.

Global Developments

Americas

• ISM services index declined to 52.8 in Apr (Mar: 57.3), with the new-orders component falling 11 points - the fastest decline on record. Meanwhile, ISM manufacturing output expanded to 60.4 in April (Mar: 61.2) in spite of the high oil prices and boosted by a weak dollar.
• Factory orders rose by 3% mom in Mar (Feb: +0.7%) to USD 463bn, as orders for non-defense capital goods excluding aircraft increased by 4.1% - the strongest rise in investment plans since last Aug (5.1%).
• Non-farm payrolls jumped by 244k in April with the private sector recording its strongest gain since 2006, while unemployment rate edged up to 9.0% from 8.8%.
• Initial jobless claims unexpectedly rose to an 8-month high rising by 43k to 474k (highest since mid-Aug) on one-off events like a new emergency benefits program and auto shutdowns from Japan’s earthquake.

Europe

• ECB in a more dovish undertone signalled that interest rates would be held, causing the euro to drop from a 17-month high against the dollar. Inflation rate in EU meanwhile edged up to 2.8% in Apr (Mar: 2.7%).
• Retail sales in the Eurozone declined 1% mom in Mar (Feb: +0.3%) - the most since Apr ‘10 as consumer spending was curbed by the government’s austerity measures and higher oil prices.
• Portugal’s bailout by the EU and the IMF worth 78bn euro has been approved. In exchange the deficit will have to be cut to 5.9% of GDP this year, 4.5% in 2012 and 3% in 2013.
• German factory orders unexpectedly declined 4% mom in Mar (Feb: 1.9%), as foreign factory orders dropped 4.3% and domestic orders were down 3.5%.
• UK manufacturing PMI for April posted a 2.1 point decline to 54.6, while March numbers were revised down to 56.7 from 57.1 earlier.
• German industrial production increased by 0.7% mom in Mar (Feb: 1.7%) as construction surged 6.2% and production of investment goods gained 0.8%.

Asia and Pacific

• The Reserve Bank of India took an aggressive stance hiking the repo rate by 50bps to 7.25% in an attempt to combat inflation with the Governor sounding more hawkish than normal.
• The State Bank of Vietnam raised its rate for open market operations to 14% from 13% in an effort to stem inflationary pressures. Central banks in the Philippines and Malaysia raised rates 25bps, to 4.5% and 3%, respectively along the lines of other Asian counterparts.
• Inflation rose to a 15-month high in Apr (4.04% yoy) in Thailand and in Philippines to a year’s high of 4.5% while it slowed in South Korea to 4.2% (Mar: 4.7%) and in Indonesia to 6.16% (6.7%).
• India’s service sector PMI rose to 59.2 in Apr (Mar: 58.8), reflecting buoyant business activity.
• Indonesia’s Q1 GDP growth was up 6.6% yoy and 1.8% qoq, driven by strong household consumption and investment.
  

Bottom line

The gain in non-farm payroll data was the only silver lining to waning momentum in the US. In the Eurozone, intra-Euro debt tensions remain high as Portugal reached agreement on a program with the EU/IMF(totalling EUR 78bn, of which EUR 12bn will be earmarked for bank support) while additional aid to Greece remains a possibility and most recent data pointing to signs of downside risks in Germany. On the other side of the globe, more emerging markets are joining the party - hiking policy rates to combat inflation.

Regional Developments

• It was agreed at the meeting of GCC financial & economic committee that a GCC customs union Authority would be established to implement the project by 2015. This proposal is awaiting Supreme Council’s approval.
• According to the IIF, the economies of Egypt, Yemen, Tunisia and Syria are heading towards a recession in 2011 as activity falls sharply following the uprising. Egypt in particular is forecast to contract by 2.5%.
• The Iraqi government approved a USD 37bn programme to upgrade infrastructure, still mostly damaged after the war and sanctions. The plan requires the Parliament’s approval. The biggest share goes to transport infrastructure, with USD 10bn allocated, with additional USD 1.5bn for highways.
• Finance Minister Samir Radwan announced Egypt is in talks with the IMF for a financial assistance program of up to USD 4bn. Egypt is seeking USD 10bn in funding from international lenders and rich nations to cope with the repercussions of the unrest and political fallout.
• Data released by SAMA show that Saudis are spending millions on big-ticket purchases such as new cars and home appliances, with point of sale transactions in March growing 22.6% mom to SAR 7.5bn.
• KSA utility company SEC has awarded General Electric contracts worth more than USD 500mn to add 1,680 megawatts of generation capacity. Demand for power in the kingdom is forecast to triple by 2030.
• As per Zephyr M&A database, April’s number of deals with Middle East-based targets fell to a 12-month
  low while value declined for the third consecutive month (USD 484mn), the lowest level since July’10.
• Construction work of the Bahrain-Qatar causeway is expected to start before the end of 2011 and conclude
  in 2015 with an estimated cost of USD 5bn.
• S&P announced a "broadly stable" credit quality outlook for the GCC infrastructure sector - with stable
  credit quality for companies in the telecommunications and commodities sectors while negative
  creditworthiness trends are anticipated in real estate and construction.
• Kuwait’s fiscal surplus for 2010-11 fiscal year rose by KWD 6.5bn with public expenditure at KWD
  12.4bn and public revenue at KWD 20.9bn.
• H.H. Sultan Qaboos of Oman has allowed for opening up the financial sector to practice Islamic banking.

UAE Focus

• The UAE central bank governor forecasts up to 5% growth this year and sees no significant change in capital flows due to regional unrest. It was also announced that the UAE will not join the Monetary Union.
• The CHF 250mn three-year bond from Dubai Holding will be repaid on time in June. Dubai Holding also has three other bonds outstanding: a USD 500mn floating rate note due 2012, a EUR 750mn bond due 2014 and a GBP 500mnoffering due 2017.
• HSBC’s UAE PMI rose 57.5 in April recording the highest level since the series began in Aug ‘09 as new orders and output increased alongside a pickup in while job creation.
• Nakheel announced that its operational plan is fully funded by the Dubai government and allows it to sell assets and properties over a 5 years horizon.
• DIFC Investments, which had pledged USD 3bn but paid only USD 13.6mn to Dubai Pearl, has announced that the company has "no further commitment beyond the USD 13mn invested in the project".
• Tamweel is due to resume trading on the Dubai Financial Market from this week after the company made more money during Q1 2011 compared to the full year 2010.
• The Khalifa Fund has allocated USD 440mn to boost the Emiratisation drive in the UAE, given that close to 200,000 jobs need to be created in the coming 10 years.
• The profit of ADX listed banks rose 8% at yearly rate to reach AED 3.9bn in 1Q2011 while DFM listed bank profits rose 13.8% to reach AED 2.14bn for same period.

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Markets

Stock markets are at a three year high - shrugging concerns on macroeconomic outlook and fiscal uncertainty, cheering buoyant Q1 results in US; the concern remains mainly over the continuation of QE2 and loose monetary policy which was duly confirmed by the Fed and touted in the first interview by Bernanke. On the regional front, markets were mixed: UAE markets rose on strong Q1 earnings but dropped significantly on Thurs following the extension of when brokerages have to switch to the new DvP settlement system. While the dollar index touched three-year lows, both gold and silver broke records as oil closed at $125 per barrel.

Global Developments

Americas:

• Bernanke confirmed that the Fed is not contemplating withdrawing the monetary stimulus, but once the Fed finishes its USD 600bn bond-purchase program in June, it will “continue to reinvest maturing securities [...] so the amount of securities that we hold will remain approximately constant”.
• Real GDP grew 1.8% yoy in Q1, weaker than 3.1% recorded in Q4, on a sharp upturn in imports, a larger decrease in federal government spending, decelerations in non-residential fixed investment and in exports.
• PCE index rose 3.8% in Q1 (Q4: 2.1%) while the core index, excluding food and energy prices, gained 2.2%, after rising 1.1% in Q4.
• Case-Shiller US home price index declined -0.18% mom and 3.3% yoy in Feb suggesting that real estate sector is far from stabilizing. Sales of US new homes rose by 11.1% mom to an annualized rate of 300k units in Mar, partly reversing a large drop in Feb.
• Durable goods orders rose 2.5% mom in Mar (Feb: +0.7%) as demand for machinery, computers and automobiles increased in line with demand from emerging economies including China.
• Conference Board consumer confidence showed slight improvement in Apr, rising to 65.4 after falling to 63.4 in Mar (from 72 in Feb, which had been the highest level in three years).
• Jobless claims increased by 25k to 429k in the week ended April 23, the most since late Jan.

Europe:

• UK output grew by 0.5% qoq in Q1, compared to a contraction of similar magnitude in Q4 2010. Construction was still retrenching while manufacturing and services both rose by roughly 1% qoq.
• Germany retail sales plunged 2.1% mom in March, recording the biggest monthly drop since Jan „09, as rising prices left a dampening impact.
• Eurozone's new industrial orders increased by 0.9% mom in Feb, recording the fifth consecutive monthly rise. Capital goods orders rose by 3.3% while durable consumer goods gained 1.9%.

Asia and Pacific:

• S&P cut its outlook on Japan's long-term sovereign debt rating from "stable" to "negative," citing fiscal pressures associated with reconstruction costs estimated at around JPY 30 trillion.
• Singapore's Mar headline inflation registered 5.0% yoy, the second consecutive month of below-expectations figures, which some are tempted to interpret as a sign that inflation pressures are abating.
• Asian Mar industrial production (IP) data was out: Taiwan IP rose at a healthy 13.3% yoy; South Korean IP expanded at the slowest pace in 6 months - rising 8.7% yoy in Mar (Feb: 9.2%); Japan's IP dropped 15.3% mom, giving an first glimpse of the damage from the earthquake.
• South Korean GDP grew 4.2% yoy (1.8% qoq, the fastest pace in three quarters) in Q1 with exports of manufactured goods as the main engine of growth.
• China's PMI kept near a 7-month low at 51.8 in Apr.

Bottom line:

Fed stance remained close to market expectations while US growth data and jobless claims highlighted concerns about economic recovery. Meanwhile, inflation in the Eurozone rising above ECB‟s target and more evidence of extreme weakness in Japanese data for March is in sharp contrast to emerging markets stronger growth picture.

Regional Developments

• The IMF Regional Economic Outlook highlighted the financial windfalls for the region from higher oil prices while suggesting that political uncertainty should be used as an opportunity to pursue fundamental reforms. GCC GDP growth is expected to improve to 7.8% in 2011 from an estimated 5% growth in 2010.
• Saudi Aramco's CEO said KSA is not comfortable with current oil prices, echoing the words of the Oil Minister a week earlier.
• Bahrain Stock Exchange has listed BHD 200mn Islamic bonds and notes issued by the Bahrain central bank on behalf of the Bahrain government.
• Saudi non-oil exports rose 12% yoy in Nov'10 to reach SAR 11.245bn as imports rose 9% to SAR 27.8 bn.
• Yemen oil exports rose by $ 652 mn to reach $ 2.65 bn in 2010 with 79.8 average oil prices.
• Inflation in Saudi Arabia rose 5% yoy in 1Q2011, led by surge in rents price (8%) and food prices (5.8%).
• Monetary statistics released by Saudi Arabia placed growth in broad money supply at 6.4% qoq to SAR 1.2 trn in 1Q2011. Meanwhile, credit rose 2.8% at quarterly rate to SAR 764bn in the same period.

UAE Focus

• The IMF's regional economic outlook expects UAE‟s GDP to accelerate by 3.5% reaching USD 363.8 bn in 2011. Dubai is estimated to grow at 3.0% this year, on robust trade, logistics and tourism sectors.
• UAE central bank statistics showed a 5.2% qoq increase in provisions in 1Q to AED 46.6bn, while deposits rose 5.3% to AED 1.1 trillion and loan to deposit ratio declined to 94.8.
• UAE inflation rose at an annual rate of 1.44% in 1Q2011, led by a 4.53% surge in food prices.
• Q1 balance sheets of 14 national banks showed an increase of 4.7% in net earnings to around AED 5.72bn, as banks benefited from higher investment with the central bank, return from services and commissions and slower growth in bad loan provisions.
• New unified banking rules, imposed by Central Bank of the UAE which regulate loan eligibility, will come into effect from today - May 1st.
• Dirham future contracts recorded lowest rate since last 11 months due to liquidity improvements.
• Dubai's population was around 1.929 mn at the end of March, with males outnumbering females by almost three times and nationals forming only 9% of the total population.
• Emaar Properties posted a 45% drop in Q1 net profits, missing analyst‟s forecasts, as revenue dipped and losses from associate firms rose.
• Developer Nakheel said it has stopped selling new properties and is focusing on consolidation.
• Two former Dubai Islamic Bank executives and four businessmen were sentenced to 10 years each in prison and fined AED 1.8 bn, the amount they were accused of embezzling from the bank.

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Markets

Volatility has dominated trading. Global market suddenly awoke to the harsh reality of the fiscal crisis when S&P put the US public debt on negative outlook and Greek austerity plans failed convince investors. Regional markets were mixed, with DFM hitting a 19-week high on investor optimism while Qatar slipped as Q1 earnings failed to impress. Euro slid on fresh sovereign debt fears while yen benefits from safe haven effect (which is in itself rather worrying). Positive earnings reports led to a rebound in most markets, though not everybody is convinced by the optimistic mood. Meanwhile, gold broke the 1500 $/ounce barrier.

Global Developments

Americas:

• S&P, although confirming its AAA rating, for the first time announced that the outlook for the US public debt negative as a result of the continuous wrangling between the administration and Congress.
• US housing starts rose 7.2% mom in Mar to 549k houses while existing home sales increased 3.7% mom to a seasonally adjusted annual rate of 5.1 mn. Data hence continue to indicate only a slow and modest recovery in the sector.
• Initial jobless claims decreased by 13k to 403k for the week ending Apr 16 - holding above 400k mark.

Europe:

• Finland's anti-euro party obtained a success in the parliamentary election signaling voters’ unwillingness to support indebted countries.
• German Ifo index dropped slightly - 110.4 in Apr - recording the second monthly fall in a row. This decline mirrored a subindex tracking business expectations which declined to 104.7 from 106.5 in Mar.

• Eurozone flash PMI unexpectedly rose in Apr - manufacturing outdid the services sector which slowed slightly as prices rose at the fastest monthly rate in three years. In contrast, Eurozone consumer confidence fell to its lowest level in eight months in April - to minus 11.4 from minus 10.6 in Mar.

Asia and Pacific:

• The PBOC raised the reserve requirement ratio by another 50bps to a historical high of 20.5% in its continued effort to contain inflation.
• The Bank of Thailand raised its benchmark one-day repo rate at the fourth consecutive meeting by 25bps to 2.75% as inflation continued to rise.
• Malaysian CPI increased by 3% in March on higher food and transport prices, but coming in lower than market expectation. This begs the question if the central bank would hike rates the coming meeting on May 5th or hold put and hike at a later stage.
• Lou Jiwei, the head of China's $300 billion sovereign wealth fund, has said the world economy will likely slowdown again in 2012.

Bottom line:

Performance in Q1 could be the last dance for the sputtering recovery in mature economies as deeper austerity measures are needed to contain fiscal imbalances and the banking sector purges its balance sheets. A spate of data has come under expectations and persistently high oil prices are starting to dent consumer spending. Furthermore China needs to cool off its breakneck expansion pace and India with inflation close to double digit has to tighten monetary policy aggressively.

Regional Developments

• Oil minister Ali Naimi, has revealed that Saudi Arabia reduced its oil production last month by a hefty 800,000 barrels a day because of lack of demand, baffling oil traders and sparking a debate on whether this move is aimed at calming markets or is the result of a miscalculation of future demand.
• Egypt put two former top ministers on trial, widening a crackdown on graft as the ruling generals seek to show their seriousness about ending the corruption.
• Moody’s outlook on Egypt's banking system has been downgraded to negative from stable, on an expected decline in tourism, foreign direct investment, incoming fund flows and private consumption due to the ongoing political unrest.
• According to Morgan Stanley on current oil prices, around USD 1-trillion of this year's oil revenue - roughly equivalent to the entire flow of U.S. net private saving, or around 2% of global equity market cap - could be in search of assets to buy worldwide.
• Oman is planning to spend USD 2.6bn to satisfy demand brought about by rallies occurring across the country.
• Saudi Basic Industries Corp reported profits of SAR 7.7bn, a 42% increase in its Q1 profits beating average analysts’ forecasts of SAR 6.2bn.
• The Omani government floated a tender for the Batinah Expressway, which would extend the Muscat Expressway road all the way to the UAE border.
• In Kuwait inflation rose 5.1% yoy in March and 0.5% mom, pushed by high food and transport prices.
• Kuwait capital market authority released two regulations one related to listing system and the second related to the fees schedule.
• Fifteen gold mines have been discovered in Al Madinah province in KSA.

UAE Focus

• Law No 7 of 2011 (published Apr 21) includes amendments to number of articles in Law No 9 of 2004 that established DIFC as the UAE’s first Financial Free Zone. The law also places DIFCA responsible for establishing, regulating and developing the Centre's payment systems (including a multi-country, multi-currency Real Time Gross Settlement System) in coordination with the UAE Central Bank.
• Abu Dhabi's Urban Planning Council has awarded contracts worth AED 21bn to four developers to build an additional 7.5k homes for Emirati families, taking the total number of homes to 13k.
• Dubai inflation edged up to 0.74% yoy in Q1 2011, as food and transportation costs continued to surge. This comes after Feb’s increase by 0.9%, the highest level in a year.
• Abu Dhabi inflation rate rose at an annual rate of 2.8% in 1Q2011, led by food and rent prices.
• UAE has linked to the GCC electricity grid - marking the second phase of the GCC Interconnection Grid AED 5bn project sharing electricity across the GCC region.
• Dana Gas plans to list in London to attract a wider investor base and boost its stock value which has lost 15% in six months.
• Dubai Investments said it is in talks with banks for a loan of AED 1.2bn, as it looks to expand its operations. The firm has approached 4 banks, including two based in the UAE.
• The UAE central bank disclosed 572 cases were reported to the anti-money laundering unit during Q1.
• Dubai airport passengers rose 3% to reach 6.9 million passengers in Q1.
• RERA disclosed that real estate transactions in the last week reached AED 1.5bn, of which AED 398mn was mortgage loans.
• The UAE central bank issued a circular to track accounts of the ousted president of Egypt.
• SME companies in Dubai account for 1% of total exports according to Dubai export promotion agency.
• Dubai non-oil trade rose 28% at annual rate to reach AED 55bn in Jan 2011 with AED 6.6bn exports, AED 13.7bn re-exports and AED 35 bn in imports.
• ESCA announced a new market cap index will be launched for UAE financial markets at the beginning of May.

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Markets

Global markets were weighed down by weak data. The G20 finance chiefs met last week, agreeing on greater coordination efforts and indicators for an early warning system. Regional markets were mixed; the UAE hit an 11-week high on bullish Q1 results and speculation that MSCI will upgrade the market to “emerging” status given the introduction of Delivery versus Payment. Dollar index hit a 16-month low as Fed officials backed its loose monetary policy – also helping gold rise higher to a record $1,479.01 an ounce. Meanwhile oil continues to gain in spite of the IEA & IMF warning that higher crude oil prices could erode demand and threaten global recovery.

Global Developments

Americas:

• US Feb trade deficit shrank to USD 45.8bn, representing a 2.6% mom decline. Imports and exports fell 1.7% and 1.4% respectively, while trade gap with China narrowed to USD 18.8bn (Feb: USD 23.3bn).
• US PPI increased 0.7% mom in Mar, with core costs - excluding food and energy costs - rising 0.3%.
• Industrial output grew 0.8% mom in Mar - fifth straight gain - backed by stronger manufacturing and higher utility output.
• Labour Department reported an increase in jobless claims by 27k to 412k in the week ended April 9.
• Mortgage applications in the US dropped 6.7% in the week ended April 8, to the lowest level in 2 months as borrowing costs continued rising and higher standards are applied.

Europe:

• Inflation in the Euro region accelerated to 2.7% yoy in Mar, fastest in more than 2 years, adding pressure on the ECB to keep raising interest rates.
• German inflation surged to 2.3% in Mar (Feb: 2.2%), driven by high energy prices and booming exports.
• U.K. inflation decelerated in Mar to 4.0% (Feb: 4.4%), after BoE’s reluctance to tighten and coordinate policy with its European counterparts.
• U.K. jobless claims rose unexpectedly by 0.7k to 1.45 mn in Mar, as more women registered looking for work, benefiting from the recent changes in single parent eligibility criteria.
• French industrial output grew for fourth consecutive month, recording a Feb increase of 0.4% (Jan: 1%).
• Moody’s downgraded Ireland’s government debt by two notches to Baa3.

Asia and Pacific:

• India’s industrial output growth slowed in Feb to 3.6% yoy (Jan: 3.9%), still insufficient to stop RBI from raising interest rates further.
• China’s economy grew 9.7% yoy in Q1 (Q4: 9.8%), while Mar inflation quickened to 5.4% yoy and M2 rose 16.6% yoy, adding pressure for more monetary tightening.
• China’s Mar trade surplus widened to USD 140mn – with 35.8% yoy and 27.3% rise in exports and imports respectively.
• Japan's M3 money supply rose 2% yoy in Mar, averaging 1086.5 tn yen, as cash and deposits were sought following the earthquake.
• Singapore Q1 GDP was up 23.5% qoq (8.5% yoy), growth coming largely from manufacturing (13.9%).
• Asian Central Banks were split on policy decisions –Singapore adjusted its target currency band to allow more appreciation, Indonesia and Korea chose leaving rates unchanged at 6.75% and 3%, respectively.

Bottom line:

The IMF released its World Economic Outlook last week projecting world growth at about 4.5% in both 2011 and 2012, while highlighting global imbalances, overheating, rising unemployment rates and high commodity prices as policy challenges (see attached highlights). This came ahead of China announcing that its currency reserves exceeded $3 trillion for the first time. Meanwhile, VIX, the volatility index, closed at its lowest level since the financial crisis as investors shrugged off concerns about Japan's earthquake impact and nuclear crisis.

Regional Developments

• Qatar is studying to allow relaxing the single importer agency to allow multiple agencies for any import item.
• Qatar government approved the budget for the next fiscal year as follows: $ 38.4 billion in expenditure, revenues of $ 44.6 billion and fiscal surplus $ 6.1 billion.
• Kuwait’s broad money supply grew 6.3% mom to USD 5.8bn - due to $5.6 billion grant provided by the Al-Amir.
• KSA inflation rate declined 4.7% at annual rate in March 2011, led by drop in food prices.
• Broad money growth in Oman rose 9.7% at annual rate in January 2011
• KSA government approved increasing SME loans through government banks by 80%.
• Kuwait inflation rate rose 5.3% at annual rate in Feb 2011, while the monthly inflation rate declined by 0.1%.

UAE Focus

• Local stock exchange markets will apply new settlement mechanism called delivery versus payment (DVP) on 28th April making UAE financial markets eligible for an upgrade to emerging market status by MSCI.
• Dubai inflation rate rose 0.96% at annual rate in March 2011, led by surge in food and fuel prices while rent prices continued to decline.
• Nakheel offered to repay its creditors loans after 4.5 years with floating rate 4% above Libor. (Source: Reuters)
• Nasdaq Dubai Borse and JAFZA have signed an MOU to help companies based in JAFZA get equity finance.
• UAE airlines traffic rose 9% at a quarterly rate in end-Q1 2011 reaching 167,221 flights.
• 70% of liquidity in banking system is short term (i.e. three months and less) which restricts interbank lending and negatively impacts the development of long term of bonds and Sukuk, as per Hussein Alqamzi, CEO of NOOR Islamic bank.
• Dubai Groups, subsidiary of Dubai Holding, will reach a restructuring debt agreement with banks and other creditors by the end of Q2 2011, as per Hussein Alqamzi the CEO of NOOR Islamic bank.
• Dubai Diamond Borse, part of Dubai Multi Commodity Centre, disclosed that diamond trading volume rose 50% at annual rate to reach 268.7mn carat while the trading value doubled to reach $ 35.1 billion.
• Dubai Mercantile Exchange’s data for 1Q 2011 recorded 3,000 contracts (equivalent to three million barrels of oil per day) as average daily volumes for the Oman Contract.
• SME share in loans portfolio of Standard Charted bank based in UAE is equal to 7% with 17,000 clients.
• Banks based in UAE expanded their recruitment by adding 908 new bankers to their payroll in H1-2010 after the banks laid off 3,254 employees during period Jan 2008 - Jun 2010. (Source: UAE Central Bank)
• S&P latest report displays UAE as the highest Sukuk issuer among GCC with USD 10.75bn in 2010.
• Dubai summer festival visitors rose 4.7% to reach 2.2 million in 2009 while the spending increased 0.6% reaching AED 3.37 billion.

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Markets

Markets have regained ground as the effects of the Japan earthquake fade and the Middle East tensions are factored in. Regional markets are still mixed but valuations in most Gulf bourses are extremely attractive, with Dubai among the cheapest in the world in terms of fundamentals. Dollar hit a 15-month low last week while ECB’s hike pulled back the Euro from its 14-month high. Commodities continued to rally as the dollar weakened – oil prices hit a fresh 2-year peak of $124.84; gold rose to a record high above $1,470 per ounce; silver was at a 31-year high of $40.46 an ounce and tin hit a record high at $33k per tonne.

Global Developments

Americas:

• The ISM for the service sector in the US fell in March to 57.3 from 59.7 in Feb less than forecast, showing higher fuel costs are raising concern sales will cool the recovery momentum.
• Initial jobless claims dropped to a seasonally adjusted 382k in the week ending April 2, registering a decline of 10k from the prior week - continuing to hold below the 400k mark (since Feb).
• Consumer credit posted gains, increasing by USD 7.62bn in Feb to record its fifth straight monthly increase.

Europe:

• The ECB raised interest rates by 25bps as widely expected.
• Portugal paid a hefty price to complete its EUR1 billion short-term debt auction after the country's banks threatened to stop buying public debt and after Moody's downgrade to Baa1 with negative outlook. Five-year CDS spreads on Portugal are now trading wider than those of Ireland for the first time since August.
• German manufacturing orders rose 2.4% in Feb, much above expectations, as growth in Europe's largest economy seems resilient to any adversity. A group of leading economic research institutes raised its forecast for Germany's economic growth to 2.8% for 2011.
• Euro-zone governments are bowing to the idea of restructuring Greece’s sovereign debt, as it is unlikely a return to international bond markets next year.
• UK industrial production suffered its biggest fall in 18 months in Feb, wiping hopes that the sector sustained GDP growth in Q1.
• European PMI manufacturing growth dropped to 57.5 in Feb (Jan: 59), led by fall in German output to 60.9 (Jan: 62.7).

Asia and Pacific:

• China hiked (for the second time this year) the 1-year lending rate and 1-year deposit rates by 25bps each to 6.31% and 3.25% respectively, the announcement coming ahead of the CPI release for March.
• Japan’s Central Bank held the benchmark overnight rate at a range of zero to 0.1%; BoJ also unveiled a JPY 1.0 trillion lending program to help recovery in areas damaged by the earthquake.
• Taiwan’s CPI rose 1.41% yoy in Mar (Feb: 1.33%) on higher food and energy prices.

Bottom line:

Monetary policy was the focus of markets last week - both the ECB & China hiked policy rates on rising inflationary pressures as Japan held steady; the Bank of England held off from raising interest rates while the dovish views from FOMC members led to fresh declines in the dollar. The Eurozone continues to be burdened by Portugal’s woes - the latest being the uncertainty surrounding financial assistance to Portugal as the Middle East tensions continue to influence commodity prices, especially oil.

Regional Developments

• Qatar central bank unexpectedly cut its main policy rates by 50 bps in a bid to stimulate bank lending. The overnight lending rate is now at 5.00% and the overnight deposit rate at 1.00%.
• Gulf states’ Foreign Ministers voiced concern over Iranian interference in their affairs after Iran criticized the dispatch of Saudi troops to Bahrain and a spying row raised tensions.
• Egypt net foreign reserves dropped to USD 30.11bn at end-Mar from USD 33.32bn in Feb with the government deficit expected at 9.5% of GDP in 2011/12.
• The recent rise in political risk has led to a downgrade in Bahrain's Long-term Foreign and Local Currency ratings to 'BBB+' from 'A', with a "negative" outlook, according to Capital Intelligence.
• Qatar's Q4 GDP recorded QAR 129.67bn ($35.59bn) at current prices, up 28.7% yoy and 9.2% qoq, with restaurant and hotel business as well the financial services, insurance and real estate sectors surging. Construction activity grew by 13.7% yoy and 7.5% qoq.
• Based on Kuwait's new development plan, real non-oil GDP is expected to grow by an annual rate of 7.5% from 2010/11 to 2013/14 while real GDP will grow at an annual rate of 5.1% for the same period.
• Saudi Finance Minister Ibrahim Al Assaf mentioned that the recent spending programs announced by King Abdullah could lead to inflationary pressures in the kingdom, while its benefits would lead to a longer-term positive outcome.
• According to NCB, the Saudi Arabian fiscal initiative has boosted confidence and this could be seen from the 14.3% rise to SAR 32.6bn in Letters of credit issued in the first two months of 2011.
• Saudi's Assistant Minister of Defense and Aviation Prince Fahd bin Abdullah has announced that foreign airlines may be allowed to operate domestic flights in the Kingdom. The Shoura Council has already commissioned a study on allowing Gulf airlines to operate within the Kingdom.
• A recent BSF report has raised 2011 state expenditure forecast by 24.5% to SAR 842.4bn - this represents an overspending of 45% on the expenditure target set out in this year's budget - recording the fastest pace of overspending in the past 3 decades.

UAE Focus

• Dubai’s department of finance has announced that a six-year dual currency financing will be launched to raise $800m to fund transportation infrastructure. This debt instruments would be backed by future revenues from road tolls (Salik), which amassed Dh800m in revenues last year.
• Data in a report published by the National Bureau of Statistics puts UAE population at 8.3mn by mid-2010, which is an increase of almost 65% in mid-2006. This was largely due to the influx of foreign workers as the proportion of Emiratis fell to 11.5% from 15.4% in 2006.
• A recent WTO report placed UAE as the world's 13th largest exporter in 2010, with USD 235bn – 2% of the total merchandise exports; also ranked the 18th largest importer at USD 170bn (1.4% of the world's total imports).
• Federal Customs Authority has released 2010 UAE trade data - non-oil foreign trade grew 14% yoy to AED 754.4bn, with imports up 8% to AED 485.4bn, exports up 27% to AED 83.1bn while re-exports grew 26% to AED1859bn.
• As per a statement by the CEO of RERA, there are 257 projects (many of which have yet to even start construction) with a total of up to 90,000 units which are facing government scrutiny and possible cancellation to stop property prices from plummeting further.
• The HSBC UAE PMI rose to 54.7 points in March (Feb: 54.3), reaching its highest level since the series began in Aug 09, as new orders and output rose sharply and job creation gained further momentum.
• Dubai’s 5-year CDS has dropped to about 380 basis points on positive economic and financial investment sentiment - reaching close to the levels in Nov 09, before the announcement of the DW debt standstill.
• ADCB has announced that it will start writing back loan provisions (AED 1bn) on DW loans. In an agreement with DW, the credits will be paid in eight years with yearly installment of AED 120mn each.
• DED recorded a 6% growth in number of licences issued in Q1 2011 compared to the previous quarter, driven by commercial and professional applications.

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Markets

Markets cheered the US strong jobs report and China PMI data in a week that began with low liquidity - a symptom of market uncertainty caused by instability in the Middle East and the continued fall out from Japan's earthquake. Regional markets showed a mixed picture, with Egypt slowly gaining ground after last week's sharp dip. Dollar rose to a 3-month high against JPY while oil prices continued to climb on concerns of Libya oil supply interruptions, while gold edged down alongside a firm dollar.

Global Developments

Americas:

• Core PCE price index, which excludes food and energy prices, increased 0.2% mom in Feb. Gasoline prices surged 5.8%, pushing up CPI by 0.5%, recording the biggest increase in almost two years.
• US Feb personal spending rose 0.7% mom, more than 0.3% increase in income, resulting in a decline in personal savings to USD 676.7bn (Jan: USD 710.5bn).
• The index of pending home re-sales increased 2.1% unexpectedly in Feb (Jan: -2.8%) while Jan S&P Shiller showed a decline in home prices for the sixth month in a row, highlighting slow pace of recovery.
• Nonfarm payrolls rose 216k in Mar, recording the largest increase since May while the ADP report also posted a gain of 201k for March, bringing the unemployment rate down to 8.8%, the lowest in two years.
• Initial jobless claims were down 6k to 388k in the week ended March 26.
• Factory orders unexpectedly dropped 0.1% mom in Feb to USD 445.99bn, recording the first drop in four months, as orders for durable goods dipped 0.6%.
• ISM index fell to 61.2 in Mar (Feb: 61.4), though the production component rose to its highest level in six years underscoring the strong pace of manufacturing production.

Europe:

• German retail sales fell by 0.3% mom in Feb (Jan: 0.4%) amid a dip in consumer sentiment and resulted from weaker sales of food, drinks and tobacco, which altogether were 2.0% lower at constant prices.
• German unemployment rate declined to 7.1% from 7.3% of the workforce previously as the number of people out of work fell 55k to 3.01 mn (s.a), recording the lowest since 1992.
• Eurozone confidence surveys were on the softer side as both business and consumer confidence dipped in Mar - overall economic sentiment indicator fell to 107.3 in Mar (Feb: 107.9).
• Eurozone CPI accelerated to 2.6% yoy in Mar (Feb: 2.4%), rising at the fastest pace since Oct '08.

Asia and Pacific:

• Japan industrial production edged up 0.4% mom in Feb (Jan: 2.4%), with transport equipment, general machinery and chemicals the biggest drivers of growth.
• China's manufacturing activity rebounded as PMI recorded an increase to 53.4 in Mar (Feb: 52.2).
• Taiwan's central bank raised its benchmark interest rates by 0.125 percentage point to 1.75% for the fourth time in the past nine month on inflationary concerns.
• March inflation hit new highs in Asia: Thailand recorded a 7-month peak of 3.14%; South Korean inflation rose to a 29-month high at 4.7%. However, Indonesia witnessed an unexpected dip in inflation (6.65%) on lower food prices, though comparatively across Asia, it continues to remain high.
• BoJ Tankan showed an improvement in business sentiment - headline index improved to +6 in Mar (Dec: +5). However, 72% of the responses came in before the earthquake.

Bottom line:

The encouraging US jobs data last week came amidst Asia's high inflation data while global industry seems to have lost a little momentum - mature economies are reporting PMI declines though emerging market PMIs are slowly accelerating. Data flow however is not the main focus of investors and policy makers because future global economic conditions will be influenced by turmoil in the Middle East and Japan's struggle to avoid nuclear fallout from the Fukushima plant. Meanwhile, the yuan received a huge boost at the G20 meeting, where an informal agreement was reached to include the currency as part of IMF's SDR.

Regional Developments

• Saudi Arabia's Shura Council has approved a long debated law on mortgages which, if enacted, will boost the real estate industry and lead to the creation of specialized mortgage companies.
• GCC central bank governors announced at the 10th GCC banking conference that the liquidity requirement of Basel 3 was not yet met by GCC banks.
• The GCC is trying to speed up the release of a VAT feasibility document (mapping its implementation & other processes) (Source: GCC Secretariat).
• Egyptian military rulers announced that Egypt will hold Parliamentary elections in September 2011.
• Qatar plans to invest over USD 125bn in major infrastructure over the period 2011-2016. The central bank expects 2011 real GDP growth to reach 18%.
• Kuwait has announced plans to spend USD 27bn for water and electricity utilities by 2014.
• GCC countries are establishing a supreme authority for the customs union to speed up the settlement of the outstanding issues.
• Al-Attyiah, outgoing Secretary of the GCC Council, announced that the single currency is around the corner and will be established during the tenure of the GCC monetary council.
• Aggregate loans of Saudi Arabia’s banking sector rose 5.9% yoy in Feb 2011 to reach SAR 756bn, while the growth rate of credit to the private sector rose 1.1% mom to reach SAR 748bn.
• A US court ruling against Agility has dealt a blow to the company's fight against charges that it defrauded the US army in multi-billion dollar contracts.
• GCC Business Confidence Index fell in Q1, but 54% of the businesses were optimistic about revenue growth, while 27% remained neutral. 40% of respondents expected increasing trade with China in the next 6 months, followed by intra-regional trade within MENA and with Asia Pacific.

UAE Focus

• Mubadala is planning to return to the USD bond market in April after completing a series of meetings with mandated banks.
• UAE's non-oil foreign trade rose 8% yoy to AED 62.1bn and imports rose 9% to AED 40.9bn through Nov 2010. Nov exports dropped 3% to AED 6.2bn while re-exports rose 10% to AED 15.4bn. (Source: FCA)
• Dubai's Damas said that it has reached agreement with its lenders and completed the restructuring of its USD 872mn debt.
• Dubai International's passenger traffic increased 5.2% yoy to 3.83mn in Feb 2011 (Feb 2010: 3.64mn), showing no signs of waning passenger traffic in spite of regional turmoil that has disrupted air travel.
• Abu Dhabi inflation stood at 3.1% in 2010 compared to 0.8% in 2009 as housing, water, electricity, gas and other fuels group contributed to more than half the rise.
• Nakheel has made payments of AED 4.6bn to its trade creditors and also said that the debt restructuring process is expected to be completed by H1 2011. The restructuring agreement will also include a Sukuk plan of close to AED 5bn.
• Emirates Airlines announced the repayment of a $500m bond, listed on the Luxembourg Stock Exchange, in full on its maturity date Mar 24, reflecting its robust financial position.
• UAE Central Bank data shows 2.1% mom rise in bank deposits to AED 1.08 trn in Feb; total bank loans and advances increased 0.6% to AED 1.05trn, while total bank assets moved up to AED 1.66trn (+1.8%).
• The World Economic Forum’s Global Competitiveness Report ranked UAE seventh in the world in terms of efficiency of government spending in the 2010-2011. Of the 139 countries, UAE has featured in the top 10 in efficiency of government spending for the second consecutive time.
• Etisalat announced its withdrawal from bidding for Syria's third mobile licence - this comes close on the heels of its backing off the $12 bn takeover offer for Kuwait’s Zain.

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Markets

Optimism was the key word last week on global markets: S&P 500 breached the 1,300 barrier, India’s Sensex had the strongest week in 20 months and even the Eurozone debt concerns failed to dampen market sentiment. Regional markets were slightly up as well, excluding Egypt which was down 10.8% decline after the market reopened on Wednesday following a seven-week closure. The dollar continued to act as a safe-haven option given Middle East violence, Japan's nuclear crisis and euro zone debt issues. Both oil and gold posted weekly gains but continued to be volatile - gold rallied to an all-time high $1,447.4 on Thursday but closed lower.

Global Developments

Americas:

• US existing home sales dropped 9.6% yoy to 4.88 mn while new homes purchases dropped by 16.9% mom in Feb, sending prices to the lowest level since 2002 – all indicating that housing market is struggling to recover.
• The US economy grew at a 3.1% yoy in Q4, revised up from 2.8% earlier, driven by consumer spending. This upward revision took the full year growth to 2.9% in 2010 after a 2.6% decline in 2009.
• US Durable Goods orders fell 0.9% mom in Feb (vs expectations of +1.2%) after a revised up 3.6% mom in Jan putting in doubt the recovery in investment outlays. Non defense capital goods orders also fell 1.3% mom.
• The deflator of US personal consumption grew 0.4% qoq, confirming that inflation is not picking up.
• Mortgage applications in the US climbed 2.7% on purchases in the week ended March 18.
• Initial jobless claims in U.S. dropped by 5k to 382k in the week ended March 19.

Europe:

• The EU Council finalized an agreement to boost the funds available to support indebted countries but a solution to the economic and fiscal framework for the euro area remains too vague.
• Portugal government resigned after its budget proposal was voted down by Parliament. S&P downgraded Portugal's debt for a second time and warned of further cuts, leading to new highs in Portuguese bond yields.
• European manufacturing PMI declined to 57.7 in Mar, after Feb’s 59, the fastest level in a decade. Consumer confidence in the Eurozone declined to -10.6 in Mar, as a result of oil high prices and Japan’s earthquake.
• European loan growth accelerated 2.6% yoy in Feb, as a recovering economy boosted credit demand.
• UK inflation quickened 4.4% in Feb, the fastest pace in two years, adding pressure on the Bank of England to increase its benchmark rate.
• French economy expanded 0.4% qoq in Q4 (Q3: 0.2%), as household spending picked up, posting 1.5% overall growth in 2010.

Asia and Pacific:

• Japan’s export growth accelerated in Feb by 9% yoy, while trade surplus widened 2.5% to JPY 654.1bn.
• Hong Kong’s inflation rose to a 30-month high of 3.7% yoy in Feb; meanwhile, trade data for Feb showed a surge in exports by 24.9% and imports increasing by 25%, leaving a trade deficit of HKD 25.1 bn.
• Singapore’s inflation declined to 5% in Feb, declining from the two-year record increase of 5.5% clocked in Jan, but still holding above the 4.5% mark as transportation, goods and housing costs climbed.
• Singapore’s industrial production growth slowed to 4.8% yoy in Feb (Jan: 10.5%).

Bottom line:

Few major data releases this week, but the flow of positive news from the US continues, amidst tensions in the Middle East and nuclear worries in Japan, while the Eurozone seems to be moving towards the next spate of debt fears as the Portuguese crisis overshadowed the EU summit. European leaders reached a consensus on the set of measures to tackle the Eurozone crisis while agreeing on a Euro-Plus stability pact at a summit last week but had to delay increasing their rescue fund and faced problems from Portugal's government collapse.

Regional Developments

• GCC Central Bank governors have called for developing local currency debt markets at the 10th Banking Conference for GCC Countries. It was also announced by the Prime Minister of Qatar and the Board of Gulf monetary union that the implementation of a single currency is just around the corner.
• GCC countries have decided on the allocation and implementation details of the GCC development fund, which is a $20bn fund that was launched two weeks ago to offer financial support to Oman and Bahrain ($10 bn for each country spread over ten years).
• The Government of Algeria has introduced additional funds into its public finances in the latest action to contain the uprising.
• Electricity generated from oil in Saudi Arabia rose 33% to reach 0.55 million barrel per day in 2010.
• KSA inflation rate rose 4.9% yoy in Feb 2011 on a surge in food and rent prices – this is however the lowest rate in the last ten months.
• Saudi Arabia's King Abdullah has ordered the creation of a new Ministry for Housing in the kingdom and named Shuwaish Al-Duwaihi as Housing Minister, in a bid to meet rapidly rising domestic housing demand.

UAE Focus

• Dubai World has signed a final agreement with its creditors to restructure $24.9 bn in debt last week.
• Dubai Government has announced that it is going to release a number of amendment laws to allow private investments in public infrastructure and energy sector.
• The UAE has inaugurated the Federal railway company under the name “Etihad Rail”, formerly known as Union Railway. The $40bn project will now be completed in three phases - with plans for a dedicated passenger link between Abu Dhabi and Dubai suspended, while continuing with freight lines instead.
• DP World is proceeding with a listing on the London Stock Exchange as the company submitted its financial statements to the latter.
• Mubadala has released its financial results for 2010, recording net profits for the year at AED 1.1bn, as revenue increased 22% yoy to AED 16bn and total assets increased by 14% to AED 101.5bn.

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Markets

Market continue to hold their breath overt the tragedy in Japan, even after the G7 meeting pledged to support by any means Japan to overcome the fallout. The Topix went into free fall before rebounding strongly but it is still 9% down on the week. All other major indices ended the week in negative territory but emerging markets fared better. Regional markets were affected by the global equity weakness and by the security situation in Bahrain and Yemen. The Libyan crisis added to concern of prolonged instability. The yen jumped up against the US$ as assets are repatriated, while the oil market stabilized around recent highs. Gold maintains an upward momentum which is likely to be sustained by the heightened risks from Japan and the concerns over widespread uprisings.

Global Developments

Americas:

• The inflation rate was 2.1% (yoy) in Feb 2011, driven by the biggest rise in food costs since 2008 and rising fuel costs. Core inflation however remained subdued.
• Mortgage applications dropped 0.7%, as declining borrowing costs failed to spur home buying.
• Current-account deficit narrowed 9.7% to $113.3bn (3.1% of GDP) in Q4, reflecting an increase in exports.
• U.S. jobless claims fell to 385K, the lowest since July 2008, consolidating the improvement in the labor market.
• Six-month U.S. manufacturing strengthens with 0.4 % Feb rise in output.

Europe:

• European industrial output increased 0.3% mom in Jan, led by Germany’s performance.
• Euro area inflation rate accelerated fastest since Oct 2008 to 2.4% yoy (Jan: 2.3%), adding pressure on ECB to raise interest rates.
• European payrolls increased by 0.3% yoy in Q4 as companies in Germany, France and Italy started to boost hiring.
• Portugal announced new expenditures cuts to reassure markets. However the spreads of its debt against bunds continues to widen.

Asia and Pacific:

• South Korea’s store sales increased by 5.2% yoy in Feb, slowest pace in 11 months.
• JSouth Korea’s Feb unemployment rate increases to 1-year high to 4.0% (Jan: 3.6%).
• Singapore retail sales rose 15.6 % yoy in Jan, as expansion in jobs spurred spending.
• China’s Feb FDI climbed 32.2% yoy to $7.8 billion, indicating investor confidence as Premier Wen Jiabao vows to boost household incomes.
• The Reserve Bank of India raised its repo rate for the 8th time in a year, by 25bps to 6.75%.
• Hong Kong’s unemployment rate fell to 28-months low in Feb to 3.6%.

Bottom line:

Before the Japanese earthquake the global economy was losing some momentum as a result of China’s soft landing, which was felt mainly in Asian emerging markets. This new shock will inject further uncertainty and cool further the prospects of a steady rebound. The US economy is gaining traction as highlighted by better labor market data, but is still mired in a real estate slump. The euro area leaders are trying to forge a consensus on a federal fiscal arrangement, but the resistance of Germany to bear the burden of peripheral countries’ adjustment keeps market nervous. Meanwhile Portugal is getting close to requesting assistance by the IMF and EU.

Regional Developments

• Saudi Arabia approved public expenditures worth 350 billion riyals ($93 billion) of which only a small amount would be spent in the near future, and whose effects will be felt for years. Meanwhile Saudi Aramco and SABIC granted employees a two-month salary bonus in line with benefits announced by King Abdullah.
• A joint force composed of GCC armies intervened to quell unrest in Bahrain, while the UN Security Council approved a no fly-zone over Libya, whose implementation started immediately with a barrage of missile strikes and air raids throughout the country.
• S&P downgraded the credit rate of Bahrain Government to BBB citing the risks from further instability.
• Saudi Arabia’s King Abdullah unveiled last Friday additional SR350 bn of financial support measures (21% of GDP).
• Egyptians went to the polls on Saturday to vote in a referendum on political reform, marred by an attack on presidential candidate Mohamed ElBaradei.
• Kuwait total loans and drafts reached KWD 28.1 bn as of Dec 2010, while the provisions totaled to KWD 1.6 bn (5.6% of total loans).
• Oman’s banking system assets rose 8.6% mom in January 2011.
• The Qatar stock exchange adopted a standard international settlement system for stock trading, moving a step closer to acquiring emerging market status from MSCI.
• Oman security staff blocked the airport in an action aimed at obtaining a pay rise.

UAE Focus

• On September 24th, the UAE will hold the second election in its history to pick half the members of its advisory national assembly, with a triple number of voters (about 20,000) compared the first election.
• VISA revealed that the retail sales on international Visa cards rose 37% during the Dubai shopping festival, reaching $406 ml.
• Dubai Dry Docks officially launched its AED 11 bn project Dubai maritime city.
• Nasdaq-Dubai trading values in Feb rose 50% mom, reaching $71 mill.
• UAE nominal GDP expanded 9% in 2010, amounting to AED 1 trillion.
• Dubai inflation rate rose 0.23% mom and 0.86% yoy in Feb 2011, led by a surge in food prices.
• Etisalat withdrew its $12 bn bid to acquire Zain Group.
• UAE central bank increased its capital to AED 2.5 bn from AED 300 million.
• Dubai’s financial market received AED 518 ml FDI inflow last week.
• Drydocks World expects to complete the $2.2 bn loan restructuring by end of April 2011.

Markets

Global markets were down last week - MSCI World Index fell to the lowest level since Jan - with Japan’s earthquake, China's inflation release and dip in US consumer confidence. Regional markets performed better - recovering from previous lows after Gulf leaders announced new initiatives including housing and job provisions. Sterling fell to a near two-week low after BoE kept interest rates on hold; the yen slumped to a two-week low on Fri, after news of the quake before gaining ground later (similar to changes after the 1995 earthquake). Crude prices retreated after hitting a 2.5 year high on Mon while gold prices also declined from previous highs.

Global Developments

Americas:

• US Feb retail sales rose by 1.0% mom (Jan: 0.7%), boosted by auto sales, job gains and better temperatures.
• Trade deficit in the US widened to USD 46.3bn in Jan, recording the highest level in seven months (Dec: USD 40.3bn) as a surge in imports (+5.2%, the highest since Mar 1993) overshadowed export growth (2.7%).
• US budget deficit recorded the largest monthly deficit ever of USD 222.5bn in Feb (Feb 2010: USD 220.9bn), reflecting increased spending, taking the deficit till date to USD 641.3bn.
• Initial jobless claims increased by 26k to 397k in the week ended March 5 in a weak labour market.

Europe:

• German industrial orders rose 2.9% mom in Jan (Dec: -3.6%), on stronger domestic demand (4.5%) while foreign orders increased 1.6%. In year-on-year terms, industrial orders were up 16%.
• German industrial production rebounded sharply in Jan, rising by 1.8% mom (Dec: -0.6%) - caused by a strong 36.3% rise in the output of building sector (-24.2%). In contrast, Italy's Jan industrial production fell 1.5% mom, with weak demand for Italian goods abroad being cited as the reason for the dismal performance.

Asia and Pacific:

• Of the three central bank meetings, South Korea and Thailand hiked policy rates by 25bps each to 3.0% and 2.5% respectively while Malaysia held key policy rate unchanged and raised the statutory reserve requirement ratio to 2% from 1% effective April 1.
• Japan core machinery orders rose 4.2% mom in Jan on rising overseas demand, fueled by a 7.2% gain in demand from manufacturers, especially in chemical and non-automobile transport equipment sectors.
• Japan's earthquake will likely lead to an increase in budget deficit (already @ 10%) but human & material losses to-date are less than in 1995 and 2004 earthquakes (see attached from Munich Re)
• China unexpectedly posted a $7.3 billion trade deficit in Feb as exports increased 2.4% yoy, the least since 2009, and imports climbed 19.4% in a month where numbers were distorted by the Lunar New Year holidays.
• Inflation rose 4.9% in Feb in China, unchanged from Jan though food prices surged 11.3% accompanied by 2.3% rise in non-food prices.
• China's Jan-Feb industrial production was up 14.1% yoy, as output for heavy industries increased 14.4% and light industries grew 13.3%. Retail sales for the two months were up by 15.8% CNY2.9 trillion - however growth was lower than Dec data in spite of the spending for Lunar New Year holidays.
• India's industrial output grew 3.7% yoy in Jan (Dec: 2.5%) on higher exports and manufacturing. This however compares to the 16.8% rise in production in Jan 2010.

Bottom line:

US continues to be held hostage by oil price rises, as seen from the trade deficit while consumer confidence hit a 5-month low. At the meeting of Eurozone leaders, focus remained on debt worries (especially for the PIIGS countries) with one of the main decisions the extension of the repayment period for Greece's EUR 110bn loan package and lowering of the interest rate. Meanwhile, data confirm the two-speed growth within the Eurozone with Germany surging ahead. Asia remains more worried about inflationary pressures vis-à-vis oil prices impact on growth, with South Korean and Thailand central banks being the latest to tighten policy.

Regional Developments

• GCC countries introduced a Gulf Development Program - with a funding of USD 20bn - for Bahrain and Oman. A committee will be formed in next two weeks to put all necessary mechanisms for establishments.
• The Government of Bahrain has endorsed a housing plan costing USD 5bn to contain the recent uprising.
• Kuwait inflation rate slowed to 5.2% yoy in Jan 2011 from Dec’s 6%, which was the highest rate in the past two years.
• IMF mission to Qatar has released its concluding statement highlighting that the economy is expected to grow by 16% in 2010 and 20% in 2011, while the inflation rate will be moderate at 3% in 2011.
• Prince Al Waleed bin Talal, chairman of Kingdom Holding Co., announced that he had invested more than SAR 500mn in the Saudi stock market during the past two weeks, while also expressing his willingness to invest another SAR 500mn.
• The passing of the Saudi mortgage law faces more delays as one member of the appointed parliament raised objections. The mortgage law has been debated by Shura for more than two years now.

UAE Focus

• UAE banks' provisions rose 3.2% mom in Jan 2011, with the provisions for non-performing loans reaching AED 45.7 bn – this is roughly 4.4% of total loans.
• Total trade in Dubai rose 18% yoy to reach AED 576bn in 2010.The exports clocked in at AED 68bn (30%), imports touched AED 364 bn (14%) and re-exports came in at AED 144bn (23%).
• Dubai inflation dropped 0.09% mom in Jan 2011, led by decline in food prices.
• DSC stated that Dubai GDP rose 2.5% yoy in the first nine months of 2010, led by wholesale & retail and transportation & communication sectors. It was not specified whether this was nominal or real GDP growth.
• Tea trading in the Dubai Multi-commodities Centre increased by 41% yoy in 2010 making Dubai one of the most important trading tea centres in the region.
• UAE insurance authority drafted a law to regulate the insurance activity in banking sector.
• The Investment Corporation of Dubai has asked banks to submit proposals on a new USD 4bn, 5-year loan refinancing, as reported by Reuters. The loan will refinance existing debt including a USD 6bn loan, some of which is due to mature in 2011.
• Mubadala has offered to buy shares in Dubal to form a holding company that includes Emirates Aluminum Company and create a production capacity of 2.5 mn tonnes annually, according to a top government official.

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Markets

With Middle East tensions weighing in on investors worldwide, even the optimistic US jobs data failed to cheer traders who remained more concerned by the oil price surge. As European markets remained subdued on inflation worries and Trichet's unexpectedly hawkish stance, emerging markets performed well. Regional markets were mostly down, as protests widened to some GCC countries. The Swiss franc climbed to a 29-month high while the dollar eased to a four-month low. Both oil and gold prices rose, with the latter hitting an all-time record of $1,440.4 an ounce during trading in London on Wed.

Global Developments

Americas:

• US PCE core index grew 0.1% mom in Jan, in a month where the tax cut saved consumers roughly USD 66.3bn and helped boost incomes by 1.0% (Dec: 0.4%). However, rising food and fuel prices accounted for almost one-fifth of consumer spending, with energy prices up 2.3% and food costs rising 0.7%.
• Pending home sales declined 2.8% mom to 88.9 in Jan (Dec: 91.5), recording the second consecutive monthly decline and the slowest pace since last Oct.
• Construction spending dropped by 0.7% mom to USD 791.8bn in Jan, the lowest since Aug - with private construction falling 1.2% and spending on public construction declining 0.1%.
• ISM manufacturing rose to 61.4 in Feb (Jan: 60.8), recording the highest level since May „04, with large gains in both employment and production. Meanwhile, the services ISM index edged up to 59.7 in Feb (Jan: 59.4).
• Feb non-farm payrolls showed a 192k jobs addition while the ADP private sector jobs increased by 217k, leading to an optimistic view of jobs market recovery. Combined, private sector gains more than offset layoffs by the government, leading to a decline in unemployment rate to 8.9%, the lowest level since Apr 09.
• Initial claims for unemployment benefits fell nationally by 20k to 368k in the week ending Feb. 26; this reading is the lowest since May '08.

Europe:

• Inflation in the Eurozone quickened to 2.4% yoy in Feb, the fastest acceleration since Oct 2008.
• The ECB left its benchmark rate unchanged, also announcing a raise to 1.75% by the end of this year. Trichet was unexpectedly hawkish, stating that "strong vigilance is warranted" indicating a rate rise coming soon.
• EU manufacturing growth accelerated the fastest in more than 10 years - to 59 in Feb from 57.3 in Jan.
• Euro-area GDP final estimates showed a 2% yoy growth in Q4 (Q3: 1.3%), with slowdown in exports and further increases in consumer-spending.

Asia and Pacific:

• Thailand's CPI increased 2.87% yoy in Feb while current-account surplus narrowed in Jan by $0.66 bn mom.
• China's manufacturing PMI dropped to a 7-month low of 51.7 in Feb (Jan: 54.5) on weaker overseas demand.
• Japan's Q4 capital investment went up 3.8% yoy, signaling confidence in the nation's economic recovery.
• The budget for 2011-12, starting April, forecast economic growth will hit 9.25% and allowed foreign individuals to invest in Indian mutual funds. Meanwhile, exports reported a 32.4% yoy rise to $20.6 bn in Jan.
• South Korean inflation rose to a two-year high in Feb (4.5% yoy), breaching the central bank's 4% ceiling for a second month and bolstering the case for an interest rate increase.

Bottom line:

Food prices hit 20 year high in Feb, according to the UN and this is expected to increase further on rising oil prices stemming from the unrest in Libya and the Middle East. As turmoil in the Middle East fails to subside, global investors switched from EM equities into shares in developed markets - EM equity funds recorded a 6th straight week of outflows, extending their longest losing streak since Q3 2008 as outflows totaled USD 2.5bn in the latest week, bringing the YTD outflows to more than USD 21bn; however this is not mirrored by EM bonds, which have avoided a major sell-off.

Regional Developments

• Bahrain government announced new 20k jobs in public sector to contain the unrest situation in the country. Bahrain CDS spreads start to decline (now at 313) amid investors' hope of reduced political tensions.
• Oman's Sultan reshuffled the cabinet twice last week - replacing six ministers first and another two yesterday - to calm the uprising in the country. This was in addition to the directive to employ 50000 citizens, provide an unemployment allowance of OMR 150 per month and increased grants for students at public colleges.
• Saudi King has ordered permanent state jobs for citizens working by temporary labor contracts while also banning public demonstrations after limited rallies in the country.
• Forwards on the Saudi riyal touched its lowest level in two years due to contagion fears from Arab revolution.
• Bahrain inflation rate rose slowed to 0.7% yoy in Jan, the lowest rate since 2007.
• The Central Bank of Oman directed banks to reduce the profit distribution to 40% from 45%.
• The GCC custom union committee defined a timeline and set a deadline "not exceeding three years" for meeting all requirements necessary for the Union.
• Qatar inflation rate slowed to 0.9% mom in Feb from 1.55% in Jan.

UAE Focus

• The UAE ruler has announced USD 1.6bn towards infrastructure development (water and electricity networks) in the Northern Emirates. The investment will include water pipelines costing AED 1.2bn and a new power transmission station costing AED 500mn, according to WAM.
• The UAE Central Bank's new set of regulations with respect to bank loans cover car loans, overdraft facilities and credit cards and require the banks to disclose the interest rates charged on loans and facilities; repayment installments should not exceed 50% of the borrower‟s gross salary or any regular income from a specific source. These will come into effect one month after being published in the official gazette.
• UAE bank deposits rose 0.7% to AED 1.06 trillion in Jan 2011 while loans and advances rose 1.2% to touch AED 1.04 trn, keeping loan to deposit ratio at 98. Total bank assets reached AED 1.63 trillion, up 1.4%.
• The UAE Central Bank's balance sheet has shown that foreign assets grew by AED 35bn or 29% yoy to AED 155.4bn in Jan 2011, with most of the increase in investments in foreign securities.
• The HSBC UAE Purchasing Managers' Index rose to 54.3 points in Feb, recording the highest level since the series began in Aug '09, with substantial increases in new orders and current output.
• DED announced a 17% yoy increase in the number of licenses issued in 2010 to 13817. Professional sector topped the list (20%) followed by the commercial sector (17%), industry (12%) and tourism (10%).
• The Department of Tourism & Commerce Marketing reported a 6.5% increase in tourism revenue to AED 13.2bn with a rise in hotel guests to 8.6mn in 2010 (+10.3%), an addition of 30 new hotels while hotel occupancy rate remained flat at 70%.
• The Insurance House IPO, launched last week and ongoing till Mar 9, has received "a promising demand", according to the four participating banks, denoting a healthy investor appetite in the region.

 

Markets

Global equity and commodity markets continue to be adversely affected by the turmoil spreading across the Middle East. Regional market performance also remained subdued given the political tensions in the region. Swiss Franc and yen gained on safe haven buying while oil and gold prices continued to rise. However, assurances from Saudi Arabia and the IEA that global oil production would not be significantly affected by the recent turmoil helped oil prices to retreat from two-and-a-half-year highs.

Global Developments

Americas:

• Q4 GDP was unexpectedly revised down: 2.8% qoq from 3.2% earlier, taking full year growth to 2.8% yoy (2009: -2.6%). Downward revision in government spending: -2.4% from -0.9% previously largely contributed to the decline.
• Existing home sales were up 2.7% mom to 5.36 mn units in Jan, though foreclosures and short sales made up 37% of all transactions. The median home price fell 3.7% from a year ago to $158.8k, the lowest since Apr’02. Meanwhile, new home sales registered a 12.6% mom decline - down to a 284k-unit annual rate (Dec: 325k).
• Durable goods orders were up 2.7% mom in Jan (Dec: -0.4%), recording the largest gain since Sep - the gain was largely due to the jump in aircraft bookings. Excluding transportation, orders declined 3.6% (+3.0%).
• Initial jobless claims fell by 22k to 391k for the week ending Feb 19, taking the monthly average down to 402k - the lowest level since July 2008.
• The core PCE index, excluding volatile food and energy prices, fell to 0.7% in Dec, recording the lowest level since the Commerce Department started tracking the data in 1959.

Europe:

• Growth in Euro-area’s services and manufacturing industries accelerated to the fastest pace since July 2006 in Feb, with composite PMI rising to 58.4 from 57 in Jan.
• German Ifo posted a record reading of 111.2 in Feb (Jan: 110.3), suggesting continued strong business conditions and confidence in the Eurozone’s largest economy.
• Eurozone manufacturing orders rose 2.1% mom in Dec (Nov: 2.2%), as France and Italy helped compensate the 2.9% drop in Germany that was announced earlier this month.
• European confidence in economic outlook improved to the highest in 3.5 years in Feb, led by surging optimism in Germany, where economic confidence rose to 116.8 from 115.5 in Jan. There is a clear two-speed recovery in EU, Germany growing but UK, France and “PIGS” lagging.

Asia and Pacific:

• Thailand’s economy strengthened in Q4, growing 1.2% qoq (Q3: -0.3%) on exports and consumer spending. The economy grew 7.8% in 2010, recording the strongest pace since 1995.
• Japan recorded its first trade deficit in 22 months of JPY 471.4bn in Jan as exports to Asia slowed and a surge in commodity prices pushed up import costs. Imports climbed 12.4% yoy while overseas shipments rose 1.4%.
• Hong Kong GDP rose 6.2% yoy in Q4, largely boosted by consumer spending, taking the full year growth to 6.8%. Two main challenges - inflation and the risk of a property bubble - are to be partially addressed by government plans to sell up to HK$10 billion ($1.3 billion) of inflation-linked bonds.
• Singapore industrial production increased 10.5% yoy in Jan, boosted by semi-conductor and electronic sector growth.
• Moody’s downgraded Japan’s sovereign and mega bank credit outlook to negative from stable.

Bottom line:

Growth in both US & UK were revised down last week while unrest in the Middle East continues to weigh in across all markets. As sanctions are imposed on Gaddafi (most recently by the UN Security Council), GCC governments are announcing “reforms” to pre-empt protests, ranging from cabinet re-shuffles in Bahrain and Oman to expanded social safety nets and reform packages in Saudi Arabia.

Regional Developments

• Moody's, given the political turmoil, has placed the A3 Bahrain government bond ratings on review for possible downgrade; the review is expected to be completed within 3 months.
• Saudi Arabia announced a social and economic reform package totaling close to $37bn - including unemployment benefits, housing support, inflation offsets and guarantee of payment for students overseas.
• Qatar has signaled its willingness in buying stakes in Britain's part-nationalised banks like RBS and Lloyds. Though this intention was conveyed to the British PM during his trip to the Middle East, the latter is supposed to have said it’s too early to open talks on the privatisation.
• Oman's average oil production was 864,600 bpd in 2010 while the 2011 target is 900k bpd, according to Nasser Bin Khamis Al Jashmi, under-secretary at the Oil and Gas Ministry. The discovery of a large gas field and four new oil fields were also announced – roughly translating into 800 million barrels of oil equivalent.
• Investment in energy in the pan-Arab area is estimated to touch $530 in 2015 from $470bn currently, with Saudi Arabia allocating nearly $130bn of the total, as per latest estimates by Apicorp.
• The EU may impose tariffs on Saudi Arabia and Oman exports of polyethylene terephthalate or PET; the argument being that EU producers may be victims of subsidies and price undercutting according to Bloomberg.
• Saudi businessmen, in an attempt to make long-term investments in Egypt while creating new job opportunities for Egyptians, have announced that they will establish a development bank in Egypt with a capital of EGP 1bn; the details would be announced in the coming two months.

UAE Focus

• Real estate loans accounted for nearly 29% of the total bank credit while mortgage lending was up 16.3% yoy to AED 164.2bn at the end of Nov 2010. This is however significantly lower than the 123% spike in real estate mortgage credit in 2008.
• Foreign banks' deposits were down to AED 43.3bn in the first 10 months of 2010 compared to AED 86.4bn in Jan-Oct 2009, as per the latest data released by the Central Bank. This compares against an all-time high of nearly AED 211 bn in April 2008 on speculative rumours of moving away from the peg to the dollar.
• VISA announced that UK, USA and China were the top three spending countries - spending $9.2 million, $6.2 million and $5.4 million respectively during the first week of DSF. Spending by the Chinese rose 155% from 2010, while Kazak visitors spending showed a record 171% yoy growth.
• According to the DSC, Dubai's population touched 1.92 mn people last week, registering an increase of 73k in just seven months; additionally, active population exceeds 2.87mn during the peak business hours of the day in Dubai.
• A new RTA study has suggested the installation of two more Salik gates to ease traffic congestions. However, no final decision has yet been made on this. The RTA announced revenue collected from Salik toll gates: around AED 800mn in 2010; AED 776mn in 2009; AED 669mn in 2008 and AED 214mn in Jul - Dec 2007.
• The RTA has finalised preparing a draft law regulating public-private partnerships (PPPs) and also announced that a provisional assessment mechanism had been developed for identifying the priorities of the infrastructure and transport services projects in which the RTA can enter in partnership with the private sector.
• Offshore companies may be allowed to register titles for freehold properties with the Dubai Land Department (DLD), in line with the MoU that already exists with Jafza - "to give the real estate market more regulation so as to achieve transparency, clarity and effectiveness in real estate transactions that relate to ownership of real estate by offshore companies in Dubai", according to a department official.

 

Markets

Equity markets in advanced economies seem to have brushed aside Middle East (ME) tensions - world equities, measured by the MSCI All-Country World Index, hit more than 2-1/2 year highs. Meanwhile, the region continues to be adversely affected - Kuwait slumped to a 7-month low and Saudi Arabia was down 3.7%, the largest decline among regional markets. GBP hit a 5-month high on rate hike speculation while Europe’s debt worries and ME unrest fuelled the safe haven demand for the Swiss franc. Geopolitical fears continue to weigh on commodities as oil (Brent) was up to more than $102 a barrel and gold prices surged on safe haven buying.

Global Developments

Americas:

• U.S. retail sales displayed a healthy growth 0.3% mom in Jan. But this was about half the expectation and there were downward revisions to both November and December.
• Housing starts for Jan registered a 14.6% rise to 596k (the highest since Sep) alongside a sharp drop in permits for future home construction.
• The producer price index rose 0.8% mom in Jan, rising for the seventh consecutive month, led by fuel prices. Core PPI, which excludes volatile food and energy costs, rose 0.5%, recording the biggest rise since Oct '08.
• Industrial production fell 0.1% mom in Jan (Dec: 1.2%) largely due to a 1.6% drop in utilities output (Dec: +4.1%). Capacity utilization rate also declined to 76.1% in Jan (Dec: 76.2).
• Core CPI, excluding the volatile energy prices, rose 0.2% mom in Jan (Dec: 0.1%), registering the largest increase since Oct 09.
• Initial jobless claims increased 25k to 410k for the week ended Feb 12, indicating a continuing largely jobless recovery.

Europe:

• Dec industrial output fell 0.1% mom on harsh weather conditions, but overall Q4 growth was close to 1.7% qoq (Q3: 1.1%), making a significant contribution to GDP growth.
• Germany's ZEW indicator of economic sentiment climbed by 0.3 points to 15.7 in Feb, but is still lower than the historical average of 26.7 points.
• Eurozone GDP for Q4- 2010 increased by 0.3% qoq (Q3: 0.3%). GDP growth was slower than expected across the spectrum - Germany at 0.4% (0.7%), Greece at -1.4% and Portugal shrinking 0.3%.

Asia and Pacific:

• China hiked the reserve requirement ratio by 50bps for the second time this year to address growing concerns on inflation. This will increase the deposit reserve ratio for large and small- & medium-sized financial institutions to 19.5% and 16% respectively, which will lead to lower money and credit growth.
• China's Jan CPI rose 4.9% (Dec: 4.6%), with food prices increasing 10.3%, but was lower compared to Nov's 5.1%. New loans totaled CNY1.04 trn in Jan and will likely decline with more tightening measures.
• Japan's economy shrank by 0.3% qoq in Q4, taking real GDP growth to 3.9%. Japan's full-year GDP valued at $5.47 trillion mean that China overtook Japan as the second largest economy with 2010 GDP at $5.88 trillion.
• Taiwan GDP expanded 6.8% yoy in Q4 on domestic demand, taking full year growth to 10.82%.
• Malaysia announced an expansion of GDP growth by 4.8% in Q4, with full year growth at 7.2%.

Bottom line:

Unrest in the Middle East appears to be spreading and the fears are translating into rising oil prices and higher prices for safe haven currencies and heightened risk aversion. The G20 meeting held over the weekend, meanwhile, seems to have lost its influence – leaving no impact on the markets whatsoever. The leaders are still trying to agree how to measure global imbalances, rather than debate on how to deal with them. A communiqué issued at the end of the meeting highlighted the need to prevent "disorderly movements" and "persistent misalignment" of exchange rates, while maintaining that the global recovery is "strengthening, but is still uneven" and "downside risks remain". Meanwhile economic recovery remains anemic in Europe with indebted countries in deep recession and the US where the labor market is improving at a snail pace.

Regional Developments

• Egypt's bourse, which has been closed since Jan 27, has postponed reopening for a third time. It will not open on Sun as planned, and will remain closed until the banking sector operates at full capacity.
• Bahrain's king announced that each family would receive BHD 1,000 (US$2,652) to mark the 10th anniversary of a national charter for reforms. This is in addition to the inflation allowance announced previously.
• GCC's mergers and acquisitions are expected to witness an increase in deal flow volume of around 20% yoy in 2011, according to the Middle East M&A Barometer.
• Oman's oil production jumped 6.5% yoy to one of its highest annual levels of 864,600 bpd in 2010 from nearly 812,500 bpd in 2009, according to data released by the Ministry of National Economy.
• Qatar's conventional banks with Islamic operations have submitted a proposal to the Qatari regulator that all the banks' Islamic operations be converted into a single and independent Sharia-compliant bank.
• Moody's revised Jordan's Ba2 foreign currency government bond outlook to negative from stable, also issuing a warning that the sovereign rating may be lowered if "there were disruptive political turmoil that threatened a structural weakening of Jordan's credit fundamentals relative to rating peers."
• Credit Suisse is planning to raise USD 6.0bn by issuing contingent convertible bonds to Saudi Arabia's Olayan Group (USD 2.5bn) and Qatar Holding (USD 3.5bn) to meet the new capital adequacy rules. The bonds are to be converted into cash no earlier than October 2013, or exchanged for Tier 1 capital notes issued in 2008.
• Bank Muscat has announced that it would offer payments in Chinese yuan under the tie up with Bank of China to facilitate trade related payments.

UAE Focus

• UAE's non-oil trade deficit narrowed to AED 161bn in Jan-Sep „10 compared to AED 181.6bn a year ago. Exports rose to AED 61.7bn (+39% yoy); imports climbed to AED 250.7bn (+5%); re-exports surged to AED 128bn (+18.5%).
• DFM and ADX are in talks about merging the two exchanges and the regulator would support them whatever the final decision, according to Abdullah Al Turaifi, CEO of the Securities and Commodities Authority.
• ADX plans to host the country's first IPO in more than two years, when Insurance House launches a USD 16mn IPO on February 27, with the subscription period closing on March 9. This will test the market appetite and will likely boost confidence of others that are waiting in the pipeline.
• UAE's oil production capacity is 2.8 million bpd, but is currently producing around 2.2 million bpd in line with OPEC targets, according to the Minister of Energy.
• A recent report from Deutsche Bank calculated a 1.9% drop in Dubai‟s property prices in Jan while rents dropped 0.7%, also noting that the “supply overhang still looms large”.
• Dubai is expected to witness a 30% rise in FDI inflows in 2011 on a boost in investor confidence along with the strong influx of South American and Chinese companies, as per statements by Fahad Al Gergawi, Chief Executive of the Foreign Investment Office, DED.
• Du has announced a payment of 15% of its net profits to the government in taxes for 2010, which is comparatively much lower than the 50% paid out by Etisalat. The government also waived royalties for 2008 and 2009, when Du had a total net profit of Dh268 million before the royalties.

Markets

Developed stock markets were mixed but emerging markets took a hit due to risk aversion spurred by the Egyptian crisis, monetary tightening in China and rotation in asset management. There is a feeling that stock market in EM have run their course for now, but this feeling has not involved regional which have seen some substantial rebound. Exchange rates were little changed with the euro a little weakened. Oil was marginally higher and gold essentially stable.

Global Developments

Americas:

• Initial jobless claims decreased 36k to 383k in the week ended Feb 4. Earlier in the week, a Labor Department report had showed a decline in job openings in Jan by 139k to 3.06 million, the fewest since Sep last year.
• US Federal budget deficit in Feb was USD -70 bn, 10 bn higher than expected and up from 42.6 bn in Jan.
• US Trade balance widened by USD 2.2bn in Dec to USD 40.6bn , in line with expectations, due to oil imports.

Europe:

• German Industrial production for Dec was down 1.5% mom (Nov: -0.6%), on a slump in construction sector (-24.2%). Overall Q4 manufacturing output was up 10.3% qoq, saar, largely due to gains in Oct.
• Spain's GDP growth showed some signs of life increasing 02.% qoq after a flat reading in Q3.
• Italy's Industrial Production grew by a modest 0.2% mom in Dec bringing the yoy figure to 5.5%. In France IP fell 0.5% mom in Dec but on a yearly basis at 5.7% was on par with Italy's figure. In the UK the mom growth for IP was 0.5% translating into 3.7% yoy.

Asia and Pacific:

• China’s central bank hiked the one year lending rate and the deposit rate by 25bps each to 6.06% and 3.00% respectively, in an attempt to rein in inflation risk (Dec inflation: 4.6%). However the magnitude of the move is insufficient to cool the pace of the economy.
• Japan’s Dec core machinery orders rose a modest 1.7% mom (Nov: -3%), first rise after four months of slump.
• Philippines central bank held policy rates at 4%, while South Korea’s central bank left rates unchanged in a decision likely to spark controversy given the inflationary pressures building.
• India Industrial Production increased 1.6% yoy in Dec.
• Taiwan's Central Bank will control its total supply of currency as part of the government’s effort to dampen inflation, according to the Deputy Governor.
• Indonesia's GDP increased 6.9% in Q4, in acceleration on Q3 when it rose 5.8%

Bottom line:

Last week saw very few data releases and the figures were hardly surprising. The macroeconomic outlook remains moderately positive on the US with the labor market marginally better and confidence regaining tractions. Asia is at last reluctantly coping with inflation in energy and food commodities. Europe is enjoying a truce from the markets on the fiscal crisis while waiting for the EU Council of Ministers to unveil the next scheme in support of highly indebted countries. With the departure of Mubarak one hot spot of political unrest in the Middle East has been removed and the tensions on the oil markets might, as a consequence, abate.

Regional Developments

• A committee set up by the GCC Secretariat to study the possibility of issuing unified GCC visas to foreigners had now been asked to frame rules and regulations, fast-tracking the process of traveling under a unified visa.
• Qatar’s central banks circular asking conventional lenders to close down their Islamic operations by Dec 2011 shocked the banking sector, raising the question if other regional central banks would follow suit.
• Reuters quoted an Omani official stating a 6% rise in GDP growth in real terms for 2010. He also mentioned that the government spent 7% more than budgeted for, thanks to higher oil prices. Meanwhile, a Ministry of Economy report announced a 28.3% growth in nominal GDP to OMR 16.3bn for Jan-Sep ‘10.
• Oman’s fiscal deficit widened almost 105.7% yoy to OMR 276.4mn in Jan-Nov 2010, largely due to buoyant spending – current expenditure was up 5.3% to OMR 3.8bn.
• Remittances from Saudi residents were up 22.5% yoy to SAR 58.6bn in H1 2010, according to SAMA data.
• Inflation in Saudi Arabia fell to a 9-month low of 5.3% in Jan 2011, as the decline in food prices more than offset the rise in rents and transport costs.
• The Saudi King has announced that housing loans of SAR 585mn granted to 3276 people who died in debt be written off. The waiver calls for all loans granted to citizens who died before Sept. 11 ‘07 to be forsaken.
• Intervention from Egypt’s central bank led to a strengthening of the Egyptian Pound, the sharpest since Nov.
• A public-private-partnership project deal in the wastewater sector was completed in Bahrain, with HSBC advising the government on its Muharraq STP and Sewer Conveyance System Project - expected to be commence operations in Aug ’13, with costs projected at USD325 mn.
• A census carried out in Apr ‘10 indicated that foreigners (54%) outnumbered local residents (46%) of a total population of 1.234mn in Bahrain. Asian nationals made up 84.3% of foreign residents and 45.5% of the total.
• The merger between the London Stock Exchange and its Canadian counterpart, TMX, will dilute Borse Dubai and Qatar Investment Authority stakes in LSE, currently at 20.6% and 15.1%, respectively.

UAE Focus

• The UAE economy is expected to grow at 3% this year, boosted by the tourism sector, according to Saif Al Shamsi, senior executive director of the UAE Central Bank's treasury department.
• DME’s average daily volumes rose to the highest ever (3570 contracts, equivalent to 3.5mn bpd) in Jan. This comes after trading levels increased 35% yoy in 2010, underscoring the confidence in DME Oman contracts.
• The Khalifa Fund has announced its intention to fund around ten projects worth AED 52.5mn to attract local entrepreneurs to contribute to develop and enhance Abu Dhabi’s industrial sector’s performance.
• MEED quoted a Dubai Airports official mentioning that the launch of passenger flights from the new Al Maktoum International Airport will be moved to end-2011 from March as previously announced.
• Dubai's direct foreign trade surged 21% yoy in Q3 2010 to AED 145.8bn, with growth in all three sectors: exports (34.8% to AED 17.5bn), re-exports (25.2% to AED 36.8bn) and imports (16.7% to AED 91.5bn).
• Provisions for non-performing loans of UAE banks increased 36% yoy to AED 44.3bn in 2010. Loan to deposit ratio remained under 100 for the third consecutive month – loans were up a marginal 1.3% to AED 1.03 trillion, while deposits rose 6.8% to AED 1.04 trillion at the end of 2010.
• The UAE cabinet approved an increase in its share of the IMF’s capital, making the share of the country the largest among Arab nations.

Markets

Solid growth and profits outweighed weak jobs data in the US and Asian markets were mostly up, in a week where global financial markets were on edge over the ongoing unrest in Egypt. Regional markets recovered from the sharp decline witnessed last Sunday, when the GCC markets (excluding Saudi) lost close to $ 10bn market cap. GBP surged to a 3-month high, while Trichet’s inflation comments led to a decline in the euro. Oil prices held above $102 and gold prices surged as well, both under pressure from Egypt’s crisis.

Global Developments

Americas:

• Jan non-farm payrolls showed only a modest increase of 36k while unemployment rate recorded a 21-month low at 9.0%. Initial jobless claims declined sharply by 42k to 415k in the week ended Jan 29.
• US core personal consumption index was flat in Dec (Nov: 0.1% mom) while personal spending rose by 0.7% mom, saar (Nov: 0.3%) and personal income by a seasonally adjusted 0.4% (Nov: 0.4%).
• US ISM manufacturing sector recorded a high of 60.8 in Jan, the highest since May 04 buoyed by the new orders sub-index, at 67.8 (Dec: 62) while the price component jumped to 81.5 (72.5). Non-manufacturing ISM rose to 59.4 in Jan (Dec: 57.1), the fastest pace since Aug 05, signaling a strong recovery in real activity.
• Total factory orders rose 0.2% mom in Dec (Nov: +1.3%) to a seasonally adjusted USD 426.8bn.

Europe:

• France and Germany have proposed a European "competitiveness pact" aimed at eliminating restrictions that have held back growth in the Eurozone. This proposal echoes the objectives of the Lisbon agenda, which after 10 years remain largely unfulfilled, but the euro crisis might spur a forceful approach this time.
• German retail sales continued to decline – falling by 0.3% mom in Dec (Nov: -1.9%) - while recording overall yearly growth of 1.2% for 2010. The decline signals weak demand even from the faster recovering Germany.
• Eurozone inflation was up 2.4% yoy in Jan on energy and commodity price rises (Dec: 2.2%). With ECB’s objective to keep inflation "close to, but below 2%", a more hawkish rhetoric was expected – but Trichet disappointed markets by maintaining that “inflation risks are broadly balanced”.
• Unemployment rate for the Eurozone remained at 10% in Dec (Nov: 10%), with Spain registering the highest jobless rate of 20.2% and Netherlands reporting the lowest at 4.3%.
• The EU manufacturing PMI rose to 57.3 in Jan (Dec: 57.1), the next best outcome since early May 2010.

Asia and Pacific:

• Taiwan GDP grew 6.5% yoy in Q4 (Q3: 9.8%), bolstered by robust export sector performance, taking overall growth in 2010 to 10.5% yoy, 0.5% above the government forecast.
• Japan’s industrial production in Dec rose 3.1% mom (Nov: 1.0%) largely due to an increase in the output of transport equipment and electronic parts industries.
• South Korean industrial production was up 2.8% mom in Dec, on semiconductor and machinery equipment industries, taking full year growth to 16.7% yoy in 2010 (2009: -0.8%).
• Philippines Q4 GDP clocked in a 7.1% yoy growth bringing the 2010 average to 7.3% - the fastest since 1986. On a quarterly basis, GDP was up 3% qoq in Q4, after a revised 0.8% contraction in Q3.
• India’s imports declined by 11% yoy (first time in 9 months) to USD 25.1bn in Dec and exports rose 36.4% (fastest pace in 33 months) to USD 22.5bn, hence reducing trade deficit to $ 2.6bn (lowest level in 3 years).
• Chinese PMI fell to a five-month low of 52.9 in Jan, as monetary tightening measures took effect, but the input price sub-index continued to rise – 69.3 in Jan from Dec’s 66.7.
• Indonesia raised rates by 25bps to 6.75% in a fight to rein in soaring inflation, pushed up by food prices.

Bottom line:

All eyes have been on Egypt with most global leaders calling for change and regional leaders fearing an unfolding of similar scenarios. The political turmoil in Egypt added to investor risk aversion as investors pulled out USD 7bn from emerging market funds last week, registering the largest weekly outflow in more than 3 years. The impact on oil markets is also raising fears that energy prices and ensuing inflation might sap a fragile economy, especially in the US where the labor market remains anemic despite the more robust signs of recovery.

Regional Developments

• A spate of ratings downgrades for Egypt - Moody’s rating one notch to Ba2, two notches below the lowest investment grade, and lowered the outlook to negative, from stable; S&P cut the rating one notch to BB, two notches below the lowest investment grade.
• The Egyptian stock exchange, which remained closed for six working days, is set to reopen on Monday, according to its chairman (Source: MENA news agency).
• Credit Agricole reported that the current Egyptian crisis is costing the country about $ 310 million per day in lost income from tourism and other activity. However, this need not be a permanent loss if the crisis is resolved satisfactorily to instill confidence.
• Qatar's budget recorded a surplus of QAR 19.4bn (17.5% of annual economic output) in Q3 2010 as government revenue doubled, boosted by higher gas output, from a year ago.
• Bahrain CDS rose the most in the Middle East- up 12 bps 260 bps, an 11-month high on fears about the probability of an  Egyptian-style unrest.
• M&A activity in MENA weakened in 2010 - total value of deals declined 26.6% to $17.4bn; there were 180 deals in 2010, down from the five-year peak of 66 in Q1 2008. (Source: Mergermarket data)
• Q4 2010 witnessed only 3 IPOs in GCC – Oman ($474.6mn), Bahrain ($389.8mn) and KSA ($163.2mn). However, this was higher compared to Q4 09’s $51.2mn and Q3 2010’s $173.32mn. (Source: PwC)

UAE Focus

• DFM announced that they would be ready to introduce a new clearing & settlement mechanism, Delivery versus Payment (DVP) by March. This will help towards the reclassification by MSCI from frontier to emerging markets, which in turn would lead to capital inflows and attract institutional investors.
• Consumer confidence in the UAE dropped 4 points to 97 in Q4 2010, falling out of the top 10 optimistic nations, but still in the top 15 of the Global Consumer Confidence Index released by Nielsen.
• UAE grew by around 3.2% in 2010, according to the Ministry of Foreign Trade’s director Abdullah Al Saleh, also quoting that “the country's total trade swelled by 11.5% in the Jan-Oct 2010 to reach nearly $165 bn”.
• The UAE Central Bank governor announced that a set of regulations governing the fees and commissions charged by banks will soon be introduced, given the recent surge in size of fees and commissions charged.

Markets

A mixed week for markets: a few disappointing Q4 earnings (e.g. Microsoft, Amazon) led to the largest one day-fall since Aug '10 in the US while Asian markets were boosted by strong Q4 results, except for India where markets were lower on the policy rate hike. Regional markets were mostly down on fears of contagion from Egypt's political and security turmoil across the MENA region. Optimism over the easing debt crisis in Eurozone has boosted the euro. The safe haven demand for the dollar and yen are back, and oil is near the $100 mark.

Global Developments

Americas:

• GDP for Q4 2010 rose 3.2% yoy (Q3: 2.6%) largely due to the rise in exports and consumer spending, the latter climbing to its highest rate in the past 4 years. This is in contrast to previous quarter's growth rising on businesses investing and building up inventories.  
• Pending home sales has increased 2.0% mom in Dec to 93.7 (Nov: 3.1%), marking the fifth gain in the past 6 months as affordable housing is backed by modest gains in the labour market and improvement in consumer sentiment.
• Initial jobless claims surged unexpectedly by 51k to 454k for the week ending Jan 22 while the four week average was up by more than 15k to 428,750. The sudden increase was justified by weather-related backlog of claims that were processed last week, given the previous weeks' snowed in Southern states.
• Price index for personal consumption expenditures, excluding food and energy goods, rose 0.4% in Q4 while the overall price index increased 1.8%, indicating that inflation remained tame last year.
• Total orders for durable goods fell by 2.5% mom in Dec, dragged down by a 99% decline in aircraft orders; excluding transportation, bookings increased 0.5% (Nov: +4.5%). Meanwhile, capital goods rose by 1.4% for the second consecutive month (3.1%).
• There were no major surprises from the FOMC meeting - where rates and the QE2 program were kept unchanged at previous levels.

Europe:

• Eurozone composite PMI rose to 56.3 in Jan 2011 (Dec: 55.5), the highest in six months as manufacturing gauge declined to 56.9 (57.1), while the services indicator rose to 55.2 (54.2).
• Industrial orders for the Eurozone increased 2.1% mom in Nov, led by growth in Germany as new industrial orders were up by 1.6%. New orders for capital goods increased by 1.8%, intermediate goods gained 1.3 while durable consumer goods dropped by 0.9%. 
• Cost of living in Germany rose 0.2% mom in Jan 2011 (Dec: 0.5%), led by a surge in energy and food commodity prices.
• The European Commission's economic sentiment indicator for the Eurozone fell to 106.5 in Jan (Dec: 106.6), as confidence among consumers and in the services sector remained fairly depressed alongside an industrial sector, buoyant on the large pickup in orders.
• Total number of French unemployed actively looking for work touched a seven year high as jobseekers rose 27,100 to 2.725 mn in Dec 2010.

Asia and Pacific:

• Japan's sovereign credit rating was cut for the first time in nine years, from AA to AA-, the fourth highest level, on concerns that not enough was being done to curb the growing debt burden.
• Japan’s unemployment rate unexpectedly dropped to 4.9% in Dec, recording the lowest rate since Sep. Meanwhile, the cost of living in Japan remained stable in Dec 2010 while the core CPI dropped 0.4% yoy.
• South Korea's GDP growth slowed to 0.5% qoq in Q4 2010 (Q3: +0.7%) due to drop in manufacturing construction and consumption as exports gained 2.4% (1.7%); but posted an annual growth rate of 6.1% for the full year 2010, an eight-year record high.
• Singapore’s industrial production rose 9% yoy in Dec 2010 (Nov: 40.5%), the slowest rate in four months, expanding full year manufacturing by a whopping 29.7%. Meanwhile, Dec inflation hit a 2-year high of 4.6%, due mainly to higher prices for transport, housing and food.
• India’s central bank raised the repo rate by 25bps to 6.5% as food inflation remained above 15% for a fourth straight week.

Bottom line:

Strong consumer spending led to recovery in growth in the US in stark contrast to UK's continued weakness. Rising inflationary pressures continue to worry both India and China - but interestingly, the latter is using monetary policy tools as opposed to policy interest rates like India. Meanwhile, the Bank for International Settlements has announced a 2% rise in international bank loans in Q3 2010 to almost USD 31 trillion. In the first nine months of 2010, international loans to Greece were $184 bn, down 22%, lending to Ireland decreased 9%, and loans to Portugal dropped 13%, while Spain witnessed a decline of 16%. In addition, the BIS reported that business was being done more in dollars compared to the euro. The crisis in Egypt has dominated market developments across MENA markets. Fear of contagion effects may trigger a selloff in global markets.

Regional Developments

• Saudi Credit Bureau statistics for 3Q2010 showed the value of returned cheques declined 12% yoy to reach SR 2.9 billion.
• Saudi labor minister in global competitiveness forum announced 10% unemployment rate in 2010.
• The net profit of Saudi listed banks dropped 1% to reach SR 21.9 billion in 2010.
• SAMA Governor in global competitiveness forum said the mortgage market is the proposed solution to control rent inflation.
• GCC council decided the path of GCC railways among countries with estimated cost of $ 15.4 billion.
• Qatar Finance Ministry disclosed QR 9 billion fiscal surplus in the current fiscal year 2010/2011.
• Sharp increase in cost of Egypt and Lebanon CDS, Yemen and Jordan increased public wages, Morocco and Algeria subsidized food & energy commodities and Tunisia granted unemployment allowance.

UAE Focus

• The labour market has been liberalized with new labour laws announced by the UAE Ministry of Labour allowing part-time work. This will increase flexibility and mobility and allow previously excluded categories like students and housewives top participate in the work force.
• DFSA announced monitoring cash inflows from Tunisia and Algeria.
• UAE statistics center released foreign trade data for the first nine months of 2010 compared to 2009 as follows: total trade Dh 540 billion (11%), imports Dh 350 billion (5%), export 61.7 billion (39%), re-export Dh 128 billion (18.5%).
• Abu Dhabi economic department disclosed statistics showing that 9979 new trade licenses were granted in 2010.
• DP handled 49.6 million TUE in 2010 with 14% increase and announced 30% fees cut.
• UAE central bank issued specific guidelines instructing banks to allocate quarterly provisions for NPLs.
• Abu Dhabi airport statistics shows the traffic passengers reached 11 million a 12.2% increase in 2010

Markets

Markets were in pre-festive mood and trading was drifting in low volumes – even US macro data signaling move towards recovery failed to excite markets. In Europe there were mixed effects stemming from the support by the Chinese authorities and the downgrade of Portugal. KSA hit a 7-month peak after the 2011 budget was announced. The euro fell for a third-straight week against the USD and the yen on the rating downgrades. Oil closed at $90 on Fri – the highest in more than two years due to cold weather, sharply lower US inventories and the OPEC’s decision to keep oil output unchanged, while gold continued its rally.

Global Developments

Americas:

• PCE index rose 0.1% after being flat for four straight months.
• Existing home sales was up 5.6% mom in Nov, but 27.9% below Nov ‘09 levels. New home sales showed a notable increase of 5.5% in Nov to an annual rate of 290k on new home sales in the West (+37.3%).
• US home prices fell 3.4% yoy as sales of foreclosed properties dragged down values.
• Consumer spending rose for a fifth straight month in Nov, rising 0.4% mom (Oct: 0.7%), supported by a 0.3% increase in incomes (Oct: 0.4%). However GDP revision disappointed: against expectation of a 3.0% increase the figure was only 2.6% almost unchanged from the early estimate of 2.5%.
• US Durable goods orders fell 1.3% mom mostly due to lower aircraft bookings.
• Analyst Meredith Whitney warned about hundreds billion USD defaults on municipal bonds in 2011.
• Continuing claims dropped by -103k to 4.064 million vs. a median forecast 4.105 million.

Europe:

• The EU and EFSF are mulling to issue bonds up to €13 bn in early Jan to fund the Irish bailout. Expectations are for EUR 5bn with 5-10 year maturity, followed by an EFSF bond of up to EU 8bn with a 3-year maturity.
• Chinese Vice Premier Wang Qishan said his government took “concrete action” to support indebted EU countries, essentially confirming that Chinese authorities are investing in Euroland government bonds.
• For the year-to-date, Greek government bonds have lost 19%, Ireland -12%, Portugal -7.6%, and Spain - 5.2%. Italian government bonds are nearly flat on the year. This contrasts with a 6.69% total return from UK gilts, a 6.07% gain in German bunds, a 5.58% total return in US Treasuries, and a 1.80% return from JGBs.
• Spanish banks reported their highest bad loan ratios in 15 years: 5.66% of total lending in Oct (Sep: 5.49%).
• Fitch cut Portugal’s rating by one notch to A+, citing concerns of "deteriorating near-term economic outlook" and a "much more difficult financing environment" for government and banks.
• Fitch also downgraded Hungary by one notch to BBB-, the lowest investment grade.

Asia and Pacific:

• China's central bank raised interest rates on Sat - benchmark lending and deposit rates by 25 bps to 5.81% and 2.75% - for the second time in two months to rein in inflation - at a 28-month high of 5.1% in Nov.
• Hong Kong’s central bank has set up a CNY 20bn fund to ensure supply of yuan for cross-border trade. HK banks can access this fund from Jan in case HK clearing bank run out of yuan liquidity.
• Japan’s export growth accelerated to 9.2% yoy in Nov in volume, from 5.3% in Oct, while in value it rose by 9.1%, from 7.8%. But the trade surplus was only Y163 bn versus forecasts of Y450 bn because imports also grew strongly. Trade surplus halved over a year ago. With this figure Q4 GDP is poised to be rather weak.
• Singapore’s Nov CPI rose 0.3% mom and 3.8% yoy on higher costs of housing and transport.
• South Korea announced a levy on banks’ foreign exchange borrowings, following the Oct implementation of FX forward position limits and a maximum 100% hedge ratio for corporates.

Bottom line:

In the US signs of recovery are mixed at best, with the real estate far from having bottomed out, the labor market improving slightly and consumption holding up. The fiscal crisis remains the focus in Euroland with markets unconvinced by the European Union approach to tackle the impending defaults, while downgrades are testing nerves. In Asia a tightening monetary cycle is in full swing to offset inflation and stabilize growth.

Regional Developments

• GCC Secretary General Al Attiya stated that the Gulf Currency Union is “around the corner”. Separately the GCC Monetary Council announced the completion of the institutional framework draft and the organizational structure of the Central Bank also approving its operating budget for the current fiscal year.
• Saudi Arabia announced a record 2011 budget with expenditure of USD 155 bn with most of the funds directed towards infrastructure. The magnitude of the stimulus will generate powerful effect throughout the GCC. Education and training account for 26% of outlays, in an effort to boost the local workforce’s human capital.
• Saudi Arabia's annual inflation was flat from the previous month at 5.8% in Nov.
• Bahrain has released four British citizens held in the country without charges for 18 months. They worked at banks involved in the row between Maan Al Sanea business and the Algosaibi family.
• Qatar will be able to mitigate the impact of any sharp fall in hydrocarbon prices by pursuing fiscal consolidation in the medium term, according Prasad Ananthakrishnan, IMF Mission Chief.
• The joint venture between Mubadala and GE is buying a stake in Oman's United Power.
• A new SR1.1 bn industrial city is to be built in Riyadh in line with the Kingdom's strategy to involve the private sector to strengthen its industries and achieve economic development.
• The Islamic Development Bank, said in a statement its Mega Islamic Bank created to provide "liquidity management solutions to create an Islamic interbank market” will have an initial paid-up capital of USD $1 bn. The bank will also originate and finance large projects across Muslim countries.
• Saudi Electricity plans to invest USD 80 bn to upgrade capacity to at least 70,000 megawatts by 2020 from the current 50,000 MW to meet demand rising at 8% per year.
• Kuwait bourse mulls the launch of an OTC market for troubled firm whose share trade below 100 fils.
• Fitch affirmed Bahrain's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' and 'A+' respectively, underscoring the country’s stable economic performance and robust growth outlook.
• Qatar Airways is planning to launch an initial public offering in early 2012 after three consecutive years of profit, according to the CEO Akbar Al Baker.

UAE Focus

• Dubai International Capital will replace its CEO, Anand Krishnan with CIO Officer David Smoot as major lenders agree to the investment company's plans to restructure USD 2.6bn of debt. The core committee of lenders agreed to the offer of 2% interest and repayment over six years on a USD 1.25bn syndicated loan that was due in June.
• Borse Dubai denied reports that it is planning to sell its stake in the London Stock Exchange.
• UAE inflation was unchanged mom in Nov after a 0.6% mom increasing Oct. due to falling housing and transportation costs, while food and goods and services prices rose. In the Emirate of Abu Dhabi inflation rose 4.13% yoy, as housing rents and energy costs continued to push inflation to new highs
• DP World announced the sale of 75% of its Australian port interests to an infrastructure fund managed by Citigroup Inc. for around AUD 1.5bn as part of the plan to reduce its debt exposure.
• A new resolution by the UAE Minister of Labor, says that form Jan 1 a new employment permit will be granted immediately after a work contract expiration eliminating (if the contract ends amicably) the six-month period mandated so far.
• The Emirates Securities and Commodities Authority recommended a merger of UAE stock exchanges to boost liquidity, later clarifying that their Board of directors were still undecided about this merger.
• A Dubai tribunal has halted an attempt by Nakheel to raise AED 41mn (USD 11.2mn) in extra fees in a landmark ruling with implications for a dozen buyers on the offshore World development

Market Snapshot as of 12/26/2010 at 8:30am (All % figures are weekly changes from Dec 19th (MENA) & Dec 17th (Foreign))

Source: Bloomberg, DIFC Economics.

Markets

Markets were relatively quiet this week, with the exception of Europe where the Moody’s action on Spain and Greece (placed on credit review for possible downgrade) and Ireland (downgraded by 5 notches) took its toll. Regional markets had an eventful week - Qatar stocks hit a new 26-month high (Tues) and DFM touched a 13-week low (Wed); compared to a week ago all markets bar Saudi closed at a lower level. The euro continued to fall against the dollar, while the pound fell after UK inflation and unemployment rose. Gold was volatile, closing lower compared to a week ago while oil prices are still hovering around the $87-90 band.

Global Developments

Americas:

• The FOMC said that the US economic recovery was still too weak to reduce unemployment, reaffirmed its commitment to its $600 bn QE2, and repeated that policy rates will remain “exceptionally low” for an extended period of time. The Fed added that the housing sector remained depressed.
• US CPI rose 0.1% mom in Nov, slightly below expectations. Core CPI also rose 0.1% mom. Consumer prices grew 1.1% yoy as expected.
• US retail sales recorded the fifth consecutive month of gains in Nov as sales climbed 0.8% mom to USD 378.7bn in Nov.
• Industrial production was up 0.4% mom in Nov, the biggest gain since July, while Oct data was revised down from no change to show a 0.2% loss.
• Initial jobless claims unexpectedly fell 3k to 420k in the week ending Dec 11. The four-week moving average of claims decreased to 422,750, the lowest since the week ended Aug. 2, 2008.

Europe:

• Moody’s placed Spain’s Aa1 rating under review for downgrade, citing high government, bank, and regional authority borrowing in 2011 in volatile conditions, plus potential bank recapitalization needs of €25-80 bn.
• Violent clashes broke out in Athens after Parliament approved a law sanctioning 10% wage cuts for the majority of public corporation workers, a condition of the EU/IMF program.
• Swedish Riksbank hiked policy rates 25 bp to 1.25% as expected.
• Eurozone industrial production rose 0.7% in Oct, rebounding from Sep’s 0.7% fall - the largest increases came from Luxembourg (6.4%) and Greece (3.6%) while Ireland witnessed the sharpest drop (4.8%).
• The ZEW institute's confidence index for Germany rose to 4.3 points in Dec (Nov: 1.8) after a six-month slide previously, underscoring the steady recovery and positive sentiment in Europe’s largest economy.
• Eurozone flash PMI rose to 59.7 in Dec (Nov: 59.0), with Germany's private sector growing at the fastest rate in four and a half years.

Asia and Pacific:

• Moody’s cut Vietnam’s sovereign rating from Ba3 to B1 (negative outlook) on concerns that macroeconomic instability could result from weaknesses in economic policy.
• The Bank of Japan’s Tankan business survey showed a decline in business confidence to +5 in Dec from +8 in Sep, registering the first decline in seven quarters. The decline was due to a worsening of business confidence among automakers and electrical machinery manufacturers.
• India’s central bank kept interest rates unchanged, but announced a two-pronged plan to inject more liquidity: a) by slashing the banks' liquidity ratio by 100bp to 24%; b) buy up to INR 480bn worth of government bonds from the market over the next four weeks.

Bottom line:

While in the US some timid signs that policy measures are gaining traction (GDP in Q4 might be better than expected) in Europe the fiscal crisis is marred in political diatribe and patchy actions. The bond markets have started to price in the cost of fiscal profligacy with interest rates rising sharply all over the world. In Asia, Japan seems to have performed better than expected in 2010, although, given the parlous long term state of its economy, much remains to be done to.

Regional Developments

• Arab News reported that GCC bank earnings improved 2% in Q3, helped by a robust 12.43% drop in aggregate provision. However, improvement came exclusively from Saudi Arabia which recorded a 31.6% increase.
• Bahrain’s Ministry of Industry and Commerce announced that the country received around $1.5 million in FDI in just one week, as part of 22 new companies established in the country with a combined capital of around BHD1.057mn. (Source: Alayam newspaper).
• Qtel is in talks to form a joint venture with Qatar Investment Authority, which owns a 55% stake in Qtel, according to Reuters data to invest in foreign telecoms and IT sectors.
• Qatar Foundation has paid USD 198 mn for a shirt sponsorship deal with soccer giants FC Barcelona.
• Qatar is expected to spend $100 billion over the next five years on infrastructure projects including road and rail networks planned before it was chosen as host, as well air-conditioned stadiums. The country is not planning to issue bonds to finance these expenditures.
• Qatar Central Bank reported a decline of 11.2% in nominal value of GDP, with real GDP registering a positive growth of 8.6% during 2009 in its latest Annual Report. The decline in the nominal value of GDP was attributed to the decline in the gross product of the petroleum and gas sector by 23.1% for the first time.

UAE Focus

• Sheikh Mohammed has revamped the board for the Dubai World, appointing at the helm Sheikh Ahmed bin Saeed al-Maktoum – the ruler’s uncle, a key advisor and Chairman of Emirates Airlines. DW plans to sell assets over a period of eight years to generate as much as USD19.4 bn to pay off creditors.
• Nakheel plans to issue AED 6bn in Sukuk to suppliers by the end of January as part of its restructuring plan. Of the required 95% approval for the issuance of bonds, the company has already received approvals from more than 85% of its creditors, according to the Chairman Ali Rashid Lootah.
• The Central Bank of the UAE met with CEOs of banks to discuss the Credit Information Law and the proposed Credit Information Company among other banking related issues. A “follow-up” committee and a steering committee were formed to discuss the requirements for establishing the Credit Information Company.
• Emarat, Eppco and Enoc raised UAE diesel prices by 15 fils, taking the retail price of diesel per litre price to AED 2.75 from AED 2.60, also widening the price differential with petrol, which retails for AED 1.72 a litre.
• Etisalat has announced that they are seeking only a 40% stake in Zain as opposed to an earlier proposed 46%.

Market Snapshot as of 12/19/2010 at 8:30am (all % figures are weekly changes from Dec 12th (MENA) & Dec 10th (Foreign)

Source: Bloomberg, DIFC Economics.

Markets

Markets are giving a warm reception to the US tax deal and made gains globally, although EM were on a softer tone. Regional markets were up, with Qatar benefitting the most after winning the World Cup bid. Higher US Treasury yields supported the dollar, while both oil and gold weakened.

Global Developments

Americas:

• The US approved a substantial fiscal package, financed by additional borrowing. The plan extends tax cuts, and unemployment benefits, while cutting a payroll tax and the estate taxes (with exemption below USD 5 mn). With some details still hanging it looks like fiscal policy in 2011 might be neutral to mildly expansionary, but fuels concerns on long term debt sustainability, which in fact impacted sharply the bond markets.
• The Mexican Central Bank governor stated that the adoption of QE2 in the US has not resulted in sizeable capital inflow into emerging markets, because the policy had already been discounted by markets.
• US initial jobless claims declined to 421k in the week ending Nov 27, from a revised 438k the week before. The four-week moving average fell to 427,500, the lowest since August 2008.

Europe:

• The Euro Group (i.e. Finance Ministers) did not increase the size of the EFSF (rescue fund) nor considered the introduction of (mutually guaranteed) "EU bonds" managed by a common debt office.
• German manufacturing output grew strongly in Oct by 3.2% which translates into a quarterly rate of 21.1%, annualized. German manufacturing orders increased 1.6% mom in Oct, led by domestic orders.
• German industrial production (IP) rose by 2.9% mom in Oct (Sep: -1.0%), the strongest monthly increase since May, while French and Italian IP fell, declining 0.8% and 0.1% mom respectively. The data again underscore the divergence between an expanding Germany and an ailing rest of the Eurozone.
• Moody’s cut the sovereign rating of Hungary by two notches to Baa3, one notch above junk status, with the outlook remaining negative.
• Hosting the World Cup could be negative for Russia’s sovereign debt due to large expenses envisaged.

Asia and Pacific:

• The highlight from China is the 50bp hike in reserve requirement to 18.5% for its largest banks, taking the total hike this year to 300bp in all.
• China’s trade surplus was USD 23.9bn in Nov (exports: 34.9% yoy and imports 37.7% yoy) while broad money growth quickened to 19.5% in Nov, alongside new lending at CNY 564bn.
• Oct industrial production was up in India and China. Indian IP increased 10.8% yoy, the fastest pace in 3 months while Chinese IP rose 13.1% yoy. But inflationary pressures are mounting - Chinese CPI grew in Nov by 5.1% yoy, the fastest pace in two years, while Indian WPI inflation ran close to 9% yoy in Nov.
• The Indian government is expecting that Parliament, after three years of stalemate, will soon relax FDI limits in the insurance and retail sector, from the current level of 24% to 49%.
• South Korea’s central bank left the policy rate unchanged at 2.5%, even though inflation touched 4.1% in Oct - the top end of the CB’s 2-4% comfort zone.

Bottom line:

The fiscal policy deal in the US is the typical compromise reached by a bi-partisan consensus at the expense of fiscal stability, but which fail to address the reforms necessary to jump start growth. With QE2 essentially switching long term public debt for short term liabilities, the US government bond market looks dangerously vulnerable to a shock. Meanwhile in Europe the bolder proposals to deal with the current and future fiscal crises in the Eurozone are mired in a quarrel between Germany and the more profligate members of the monetary union. In emerging Asia, with inflationary pressures building, the authorities are forced to follow the Chinese lead and reduce bank credit, which will have an impact on global liquidity and take out some support for stock markets.

Regional Developments

• E&Y Q3 report indicated that capital markets raised USD 177 mn in the MENA region – a 79.7% yoy and 70% qoq decline – taking the total IPO value for 2010 to date to USD 1.2bn.
• Kuwait Finance House made an early payment of US$250 mn on debt due in March 2011, a rare occurrence in the current market environment.
• A consortium of large SWFs including ADIA has invested USD $1.8bn in new capital into the independent Brazilian investment bank BTG Pactual. The deal marks a new step in the “new financial order”, because it is the SWFs’ first big move into Latin America bypassing the traditional financial centers and institutions.
• National companies will be allowed to open branches in any GCC state treating them on par with local firms, in the latest move towards a Gulf Common Market. This will lead to increased intra-region trade and investment.
• Oman’s 2011 budget has assumed an oil price at $58 a barrel, compared to $50 in the 2010 budget. Total revenues have been budgeted at OMR 7.28bn and spending at OMR 8.13bn, projecting a deficit OMR 850mn for 2011.
• According to the Saudi newspaper Okaz, SAMA has proposed the postponement of the approval of the mortgage law following a surge in inflation to 6% in October.
• The Aluminum Bahrain (Alba) IPO, was fully subscribed with around 75% coming from institutions and the remainder from retail investors, including employees. Alba is majority owned by the SWF Mumtalakat.

UAE Focus

• Government officials confirmed that the validity of the labor card for all workers and employees in the UAE private sector will be reduced to two years from the current three.
• Bank of America Merrill Lynch wrote in a report that Aldar Properties is expected to re-finance AED 3 bn of debt by year-end. The AD government has likely injected cash into banks’ deposits in view of this operation.
• The law creating a federal credit bureau to assess the credit worthiness of bank clients was approved last week. This will significantly improve the legal framework relating to credit data and bank risk in the UAE.
• Dubai will increase electricity and water tariffs by close to 15%, from 2011, due to higher fuel prices.
• UAE PMI for Nov slipped to 52.9 from Oct’s peak of 53.8 as strong competition forced non-oil private sector firms to absorb input price inflation; employment grew at the weakest pace in the survey’s 16-month history.
• The UAE Central Bank Governor announced that the UAE has no plans to rejoin the Gulf monetary union or depeg its currency from the dollar.
• Axiom’s proposed IPO, which was priced at between $0.80 and $1.15, was withdrawn from the market citing “widespread concerns about market conditions and liquidity”.
• Dubai’s non-oil trade increased 19% yoy in Q3, recording a new high of AED 425bn. At the end of Q3, imports recorded a 14% increase to AED 268bn while re-exports grew 22% to AED 106bn. India had the biggest share of non-oil trade transactions with Dubai, followed by China and the US.

Market Snapshot as of 12/12/2010 at 8:30am (all % figures are weekly changes from Dec 5th (MENA) & Dec 3rd (Foreign)

Source: Bloomberg, DIFC Economics.

Markets

Markets worldwide were hit by the Irish fiasco and the liquidity absorption measures in China but later in the week they recovered. Regional equities are mirroring emerging markets with Qatar stock in a celebration mood for the 2022 World Cup. A flight to safety is benefitting US Treasuries and the dollar, despite rebound of the euro and the yen, while oil and gold are again on the rise with oil closer to 90$/b.

Global Developments

Americas:

• US employment rose less than 40K in Nov and jobless rate unexpectedly jumped to 9.8%, a 7-month high, confirming perception that the recovery is not taking roots. Non-farm productivity was up 2.3% in Q3.
• The Case-Shiller index of US house prices fell 6%qoq annualized in Q3, offsetting a similar rise through Q2.
• Canada’ Q3 GDP growth surprised on the weak side scoring a meager 1% qoq, annualized.
• Initial jobless claims rose faster than expected by 26k to 436k in the week ending Nov 27.
• The ISM services survey sector grew for an 11th straight month in Nov to 55.0 from 54.3. The employment component rose to 52.7 from 50.9.

Europe:

• The Irish rescue plan did not allay fears of contagion and EU leaders are meeting today and tomorrow to decide the next steps. The ECB bought €1.35 bn peripheral government bonds in the week to last Tuesday, double the previous week’s purchases. Sentiment was also dented by weak demand at Italian and Belgian auctions. The IMF is asking EU governments to increase the EU rescue fund to € 1 trillion.
• The ECB extended the full allotment of 1m and 3m repos through 2011Q1 (pre the Irish crisis, it wanted to phase them out) to allay tensions. On Friday reportedly it bought heavily bonds from peripheral countries.
• Euro area CPI inflation was steady at 1.9% yoy in Nov, and the unemployment rate was stable at 10.1% in October, both as expected.
• German retail sales jumped by 2.3% mom during Oct, highlighting improvements in consumer spending after two months of declines – Sep’s 1.8% drop and Aug’s 0.4% drop, reinforcing Ifo numbers.
• EU PMI grew at its fastest pace in four months to 55.3 in Nov (Oct: 54.6) on French and German manufacturing activity.

Asia and Pacific:

• Thailand’s central bank unexpectedly resumed monetary policy tightening – by raising policy rates by 25bps to 2% - to rein in expected inflationary pressures in the future.
• India's Q3 GDP grew 8.9% yoy, (vs 8.2% in Q2) beating forecasts, reverting to pre-financial crisis expansion pace. The performance was driven by a 9.8% yoy jump in manufacturing and an 8.8% leap in construction. The RBI announced further measures to stem a liquidity buildup and counter inflationary pressures.
• Moody’s maintained a stable outlook on China’s property market as developers are deemed able to withstand a moderate price correction next year.
• Japan Manufacturing PMI for Nov stayed below the 50 threshold - index for new export orders fell to 46.9 (Oct: 48.4) showing the fastest pace in export orders contraction in 19 months.
• South Korea's industrial output contracted for the third straight month (-4.2% mom) in October mainly due to reduced demand for semiconductors and autos, also the sharpest drop since Dec 08.
• Strong manufacturing numbers from India & China: China’s Nov PMI grew at a faster pace for a fourth straight month (Nov: 55.2; Oct: 54.7). India's PMI expanded at its fastest pace in six months (Nov: 58.4; Oct: 57.2) on the back of robust new businesses and a sharp rise in export orders.

Bottom line:

While the US are in political limbo awaiting the Congressional battle on tax cuts extension, Europe is sinking deeper into trouble as contagion from Ireland spreads and the disconnect between the euro area macro data and confidence indicators readings -- driven by Germany’s -- widens. Asia is also pausing after a year of breakneck growth, with Korean industry materially weaker, Thailand in recession and Japan heading for a negative Q4 GDP growth. The global economy is entering 2011 on a weaker tone, likely to persist until late spring.

Regional Developments

• Qatar’s successful bid to host the Football World Cup for 2022 will not only boost infrastructure spending in the country, but will also provide a massive stimulus for the GCC region in general.
• Egypt’s parliamentary elections look set to produce an overwhelming victory for President Hosni Mubarak’s ruling National Democratic Party. The US authorities commented that they were dismayed by irregularities.
• OPEC oil supply fell slightly in November according to a survey. Iraq oil output may hit 8 mn bpd by 2017.
• Kuwait plans utilities projects for KWD 6bn with priority on its beleaguered power and water systems.
• A map identifying the areas with solar radiation and wind in individual countries, and a database of renewable energy technologies are being developed by the UN Agency Irena.
• Bahrain expanded by 4.3% yoy in Q3 2010 with manufacturing and financial services contributing 8% and 6% each while Transport & communication, construction and wholesale & retail trade clocked in 6%, 5% and 5%.
• A Samba report placed the peak in Qatar's external debt at nearly USD 90bn, following the USD 10bn 2009 sovereign bonds issue while the debt-GDP ratio is expected to decline to 73% in 2010 from 2009’s 81.4%.
• Middle East debt issuances in Nov were around USD 5 bn as compared to USD 6 bn in October.

UAE Focus

• Sheik Mohammed expressed confidence in the recovery potential of the Dubai economy and the effectiveness of its new strategy.
• Shaikh Ahmad Bin Saeed Al Maktoum, Chairman of the Dubai Supreme Fiscal Committee stated that privatization of companies within Dubai Inc. cannot be ruled out to strengthen the Emirate’s finances.
• Sultan Al Mansouri, UAE’s Economy Minister has said that the UAE is still looking forward to the GCC single currency in spite of pulling out of the Monetary Union.
• Abu Dhabi spent US$5 bn this year on transportation infrastructure projects, including Shaikh Zayed Bridge, the upgrade of Al Mafraq Bridge, the Bani Yas-Al Heelieh road widening
• NBD, raised US$410 mn through a multi-currency loan structured around its portfolio of syndicated loans to corporates. The operation, fully subscribed at a 1.75% spread above reference rates, corroborates the perception that Dubai institutions have regained markets’ confidence.
• The construction and real estate sectors in Dubai registered a near 5% fall in 2010, as per Sami al-Qamzi, director general of the Dubai department of economic development.
• Dubai Statistics Centre reported a 11% rise in the number of economically inactive people to 207,523 in 2009. This number included 122k women homemakers (58.8% of total, of which 18% are UAE nationals) while students comprised 32.3%. 4,089 inactive people were not willing to work (of which 57.9% were nationals).
• Dubai inflation rose 0.61% yoy at the end of Q3 2010, mainly driven by rising cost of food items. Prices of vegetables rocketed 9.49% while fruits became costlier by 6.29% alongside 11.1% rise in cost of education.
• The Dubai Government has injected USD 2 bn into Dubai Holding’s heart to stem its financial woes. Dubai Group missed two payments in Nov totaling USD 345 mn.

Market Snapshot as of 12/06/2010 at 8:30am (all % figures are weekly changes from Nov 29th (MENA & Foreign)

Source: Bloomberg, DIFC Economics.

Markets

Markets have been driven in opposite directions by the Irish bail out and some positive news on US jobs and German Ifo. However the net result is still negative. Regional markets also mirrored the global trend, with only the Abu Dhabi market registering a small 0.5% rise from last week. The euro came under renewed pressure with investor concerns on Portugal and Spain debt while oil and gold prices rose on renewed contagion worries.

Global Developments

Americas:

• US Q3 GDP was revised up to 2.5% qoq annualized, from an earlier estimate of 2.0%.
• Weekly jobless claims dropped to 407K against expectation 435K and a previous figure of 441K.
• US core inflation rose a record low of 0.9% yoy in October; core PCE index remained flat.
• US real disposable income rose 0.3% mom in Oct against a 0.2% drop in Sep., while personal income rose 0.5%, slightly above expectations, and up from flat a month earlier.
• Sales of new single-family homes in the US fell 8.1% in Oct. to a seasonally adjusted annual rate of 283,000 while durable goods orders dropped 3.3% mom — the largest decline since January 2009 — as a result of a slump in transportation items, which offsets the 5.0% increase recorded a month earlier.
• US Consumer sentiment in Nov. rose to 71.6 from 69.3 in Oct., beating expectations of almost no change.

Europe:

• The EU offered the Irish government a EUR 90bn bailout plan to fend off a speculative attack triggered by the insolvency of the major Irish banks. Eurozone finance ministers meet today in Brussels to discuss the conditions of the loan package.
• Germany Q3 GDP grew 0.7% qoq, while Q2 GDP was revised up to 2.3%. Consumer spending went up 0.4% for the third consecutive quarter, alongside 1.1% rise in government consumption expenditure.
• German Ifo rose for the sixth consecutive month in Nov to a record high 109.3 from a revised 107.7 in Oct, as firms grew more optimistic regarding both the current situation and the six-month outlook.
• Flash PMI in the Eurozone bounced to 55.2 in Nov (Oct: 53.3) largely due to a strong resurgence in private sector growth in Germany and France. Meanwhile, Sep’s new industrial orders fell 3.8% mom - with the largest monthly drop of 6.3% recorded in durable goods orders - compared with Aug’s revised 5.1%.

Asia and Pacific:

• Thailand slipped into a second consecutive quarter of contraction as Q3 GDP shrank by 0.2%, thanks to weak exports and domestic consumption, following a revised drop of 0.6% in Q2.
• Malaysia’s GDP expanded 5.3% yoy in Q3 (Q2: 8.9%), driven by domestic demand amid slowing exports.
• Philippines GDP clocked in 6.5% yoy growth in Q3, a lower rate compared to Q2’s 8.2%. Private consumption grew at a healthy 4.2%, on strong remittance inflows, rising employment and incomes.
• Taiwan’s industrial production climbed 14% yoy in Oct (Sep: 12%) on rising rising demand from China.
• Singapore’s Oct industrial production rose at the fastest pace in five months, growing 31% yoy (Sep: 26.8%), on a surge in the volatile pharma sector (121.4%), offsetting the drop in electronics (12.9%, Sep: 28%).

Bottom line:

The US economy seems to have gained at last some traction in the labor market, while incomes are edging up, but other data continue to portray a mixed picture: specifically, real estate remains depressed. Overall the recovery remains fragile and months of political uncertainty ahead are discouraging investments. In Europe, Germany and its neighboring countries are in full rebound, but the periphery is swept by financial chaos with Ireland taking the brunt and Portugal, Spain and Italy (not to mention Greece) coming closer to the line of fire.

Regional Developments

• High oil prices are hindering economic recovery and it would not be in the interest of the OPEC to see oil above $90 per barrel, the chief economist of the International Energy Agency, Fatih Birol told Reuters.
• KSA King Abdullah is being treated in New York for a blood clot and slipped disc. Crown Prince Sultan, who suffered earlier from unspecified ailments, returned to Riyadh after over two months in Morocco.
• Oman is expected to set a growth target of at least 3% in its upcoming 5-year development plan starting in 2011 after real GDP growth stood at 12.8% in 2008 and nearly 7.3% in 2009 with forecast for 2010 at 6.1%.
• Kuwait's Oct inflation rate stood at 5.1%, as foodstuff soared by 10.6% compared to Oct ‘09.
• The GCC common market is expected to create nearly 2.75 mn new jobs and increase economic growth by 2.15%, also increasing efficiency and competitiveness, reducing production costs, and depressing prices.
• Middle East carriers saw the strongest passenger growth at 18% yoy in Oct, outpacing global demand growth of 10.1%, according to IATA. International freight saw a 14.4% increase in Oct, marginally weaker than the 15.5% recorded in Sept.
• Palestine hopes to issue US dollar-denominated sovereign bonds next spring and sukuk deals before April 2011 through the Palestine Monetary Authority (PMA), targeting primarily Gulf investors.

UAE Focus

• The UAE ranked first in the Gulf region in terms of bonds value traded on the international market, with $55bn worth of bonds. Qatar has ranked second with $23bn, according to a study based on BIS data.
• Dubai Islamic Bank plans to launch UAE's first REIT - its size expected to be at least EUR 1bn during its lifespan - in a move to rekindle the Dubai property market. The REIT will be listed on Nasdaq Dubai and will have a secondary listing either in Europe or Asia, with up to 49% open to overseas investors.
• Al Murjan Real Estate, developer of a $3 bn housing project in Umm Al Quwain, has filed for bankruptcy. This case and its settlement will set important precedents in the UAE creating a framework for what investors and other creditors can expect if other property developers default.
• The Government of Dubai met investors in Malaysia last week on completing a ringgit-denominated transaction. If completed, it would be the first time a sovereign has priced a Sukuk in MYRs.
• A report on Dubai’s debt maturities through 2011 by JP Morgan highlights that the entities can expect limited direct support from the Dubai government as these relate to entities that are engaged in investment or operational activities that do not appear strategic or critical for Dubai.
• UAE banks need to attract nearly AED 40bn in new deposits to expand their financial resources to cut rates and bridge a gap between loans and deposits, according to the UAE Central Bank Governor.

Market Snapshot as of 11/28/2010 at 8:30am (all % figures are weekly changes from Nov 21st (MENA) & Nov 19th (Foreign)

Source: Bloomberg, DIFC Economics.

Markets

A mixed week for markets worldwide: European markets are awaiting the decision on a possible Irish bailout plan by end of this week. The rise in Chinese bank reserve requirements weighed on investor confidence while TOPIX advanced on the weaker yen, closing above 10000 for the first time in 5 months. Regional markets were closed most of last week for Eid. The euro advanced last week on the expectation of the Irish bailout package while commodity prices (oil and gold) declined compared to a week ago on demand concerns.

Global Developments

Americas:

• US retail sales for October registered an uptick of 1.2% mom showing the largest increase since March. Excluding motor vehicles, however, retail sales rose at a more modest pace of 0.4%.
  • Industrial production remained unchanged in Oct (-0.2% mom) as a sharp decline in utilities production outweighed a strong increase in the manufacturing sector. Capacity utilization also was steady at 74.8%.
• Oct producer prices index was up 0.4% mom as the prices of raw materials increased 4.3%, the highest rise since Jan this year. Meanwhile core PPI decreased 0.6%, the largest since July 2006.
• October CPI edged up 0.2% mom on rising gasoline prices, while core inflation remained flat for the third straight month.
• Housing starts in October plunged to a near-record low as construction on new homes dropped nearly 12% mom to an annual rate of 519k units while the pace of construction was the weakest since April 2009.
• Initial jobless claims increased by 2k to a seasonally adjusted 439k while the four-week average fell to 443k, the lowest level for the average since Sep '08.

Europe:

• German economic sentiment (ZEW) rebounded in Nov, rising 9 points to 1.8, from -7.2 points in Oct.

Asia and Pacific:

• People's Bank of China has announced a rise in the reserve requirement ratio (the second time this month and the fifth time this year) on banks by 0.5 %-pts from Nov 29 in a bid to curb liquidity.
• Japan expanded at 3.9% qoq, saar, in Q3 on strong domestic demand as consumers rushed to make the most of expiring subsidies.
• South Korea's central bank raised policy rate by 25bps to 2.5%, citing inflation risks. Meanwhile, the government has announced that it will revive a 14% tax on foreigners' bond holdings to slow capital inflows.
• Singapore's Q3 GDP contracted by 18.6% qoq (Q2: +27.3%) as most sectors registered a decline in growth compared to the previous quarter: manufacturing at 14.3% yoy (Q2: 46.1% yoy); construction at 7.1% (11.5%); wholesale and retail trade at 14.4% (18.9%).
• Taiwan's economy registered only a 0.02% qoq rise in Q3 GDP (Q2: 0.48%) amid flattening of exports. The government raised its full-year GDP growth forecast to 9.98%, from its August estimate of 8.24% on expectations of a recovery in electronics exports and resilient domestic private investment.

Bottom line:

More evidence is accumulating of the diverging pace of growth and economic recovery: Irish banks are expected to be bailed out by its Eurozone partners and the IMF; on the other hand, China raised reserve requirement ratio to curb liquidity and overheating economy, Hong Kong announced additional taxes and higher down payments to control asset inflation and Korea is expected to introduce taxes to control capital inflows.

Regional Developments

• Saudi Arabia's nominal GDP for H1 2010 increased by 24.1% yoy to SAR 798.5 bn on a 44% rise in the oil sector and 13.5% rise in government sector while private sector growth was relatively lower at 6.5%.

UAE Focus

• UAE's non-oil foreign trade for the first eight months of this year increased by 20% compared to the same period of 2009, while exports rose by 38%.
• A UAE Central bank circular issued last week requires that all lenders and financial institutions make provisions for toxic loans on a quarterly basis than and no longer at the end of the fiscal year. It is also expected to review banks' unclassified loans, which will “also serve as a catalyst for depicting a truly realistic financial position of banks and other financial institutions” in an apparent move to improve transparency.
• The UAE Central Bank has started issuing Islamic certificates of deposits (ICDs). It held an auction to sell 1-week and 12-month ICDs last Wednesday, adding that they are based on murabaha, widely practiced by Islamic banks worldwide as an alternative to interest-bearing deposits.
• Mubadala sold their 5% stake in Ferrari back to Fiat, after the latter exercised an option that gave it the right to buy back the stake Mubadala acquired in 2005.

Market Snapshot as of 11/21/2010 at 8:30am (all % figures are weekly changes from Nov 14th (MENA) & Nov 12th (Foreign)

Source: Bloomberg, DIFC Economics.

Markets

China's equity market plunged 6.2% overnight on Friday in a lagged reaction to the data released on Thursday pointing to strong growth, but higher inflation. The markets are anticipating Chinese monetary tightening. In fact all other markets, except Japan, ended the week with substantial losses. This episode confirms that Chinese contribution to world liquidity, which is likely to be further squeezed, is a key factor in global equities. The dollar rebounded sharply bringing down gold prices. Energy commodities were generally weaker.

Global Developments

Americas:

• US initial jobless claims fell by 24k to 435k for the week ending Nov 6 while the four-week moving average stood at 446.5k.

Europe:

• Euro Area GDP slowed to 1.6% qoq, sa, annualized in Q3, with important divergences (Germany up 2.8%; France 1.6%; Spain flat; and Greece down 4.5%).
• German GDP was up 0.7% qoq in Q3 after +2.3% in Q2 a bit softer than consensus (+0.8%qoq). The Statistical Office hinted that investment and net trade contributed equally to growth in Q3. German recovery is losing momentum.
• A host of industrial production data from the Eurozone countries – German production fell by 0.8% mom in Sep, driven by a 0.9% fall in the manufacturing sector; France recorded a 0.1% rise while Italian IP fell 0.2%, the most in 18 months.
• Euro Area IP plunged 0.9%m/m in Sep to the level it stood at in May. The inventory rebound is now over and Europe will find itself looking at materially weaker cyclical data in coming months.
• Yields on Irish Government Bonds soared until a Joint Statement by EU finance Ministers calmed market pressures temporarily. The pressure is likely to extend to other highly indebted countries. A bailout from the European Financial Stability Fund (EFSF) for Ireland appears likely.

Asia and Pacific:

• China trade surplus posted a larger-than-expected USD 27.1bn in Oct (Sep: USD 16.9bn) as exports rose 22.9% yoy while imports into China increased by 25.3% over the same period.
• China CPI rose to 4.4% in Oct (Sep: 3.6%) on a sharp increase in food prices while retail sales printed a 18.6% yoy rise to CNY 1.83 trillion in Oct, taking the cumulative retail sales in the first 10 months to CNY 12.53 trillion (+18.3%). Meanwhile, industrial production clocked a 13.1% yoy gain in Oct, slightly slower than Sep’s 13.3%, taking the growth in the first 10 months of the year to 16.1%.
• Hong Kong Q3 GDP grew 6.8% yoy, after growing 6.5% yoy in Q2, higher than consensus expectation of 6.1% yoy. On a sequential basis, GDP increased 2.8% qoq; (ann.), the sixth quarter of positive growth.
• Singapore’s exporters are facing higher inventories amid signs of weaker demand.

Bottom line:

The data flow brought very few surprises in a week where the attention was concentrated on the G20 meeting in. Korea. But even there news was rather scant as a truce on the currency war proved elusive. Currency issues had divided G20 leaders ahead of the November 10-12, 2010, meeting in Seoul, and at its end, as expected, little was resolved. Leaders reiterated a prior pledge to move toward market-determined exchange rates, without directly pointing a finger at China. Also, rather than agree on targets for current account imbalances, member nations agreed to set out "indicative guidelines" to measure imbalances—the details of which are to be worked out at a future date, likely in 2011.

Regional Developments

• The signs of a pick-up in inflation in the GCC might warrant an early withdrawal of stimulus as early as 2011, according to a senior IMF official.
• Oman has reported a 12.6% yoy rise in the total assets of commercial banks to OMR 15.7bn by Sep 2010 while the total outstanding credit moved up 9.9% to OMR 10.6bn.
• The GCC Customs Union officials have agreed on establishing an electronic clearing mechanism for settling customs duties between the GCC states, but are facing "administrative" hurdles before the union can be fully implemented. The ministers also discussed a Bahraini proposal to set up a pan-GCC fund for financial and economic stability and a Qatari proposal to establish a regional development bank.
• The GCC Secretary-General announced that the Gulf Monetary Union is not achievable without the participation of the UAE at the sidelines of a conference titled "Gulf Common Market: from Cooperation to Integration" in Dubai.

UAE Focus

• The UAE cabinet has approved a draft budget of AED 41bn for fiscal year 2011, with the three year spending for the budget cycle 2011-2013 at AED 122bn. The 2011 budget focuses on social development with 46% of the total allocations covering public and higher education sectors, university development, health, salaries, pensions and social benefits.
• Abu Dhabi's nominal GDP slumped by around 18% yoy to AED 546.5bn in 2009 from AED 666.7bn in 2008, with the largest decline recorded by the oil and gas sector, which shrank by 33.5% in 2009 (2008: 32%). Meanwhile, the non-oil GDP grew by 6%.
• The UAE Central bank’s total assets shrank by close to AED 212.03bn during August (July: AED 214.3bn), but was higher compared to AED 203.9bn at the end of 2009.
• The latest CB report also showed that banks cut their utilization of the AED 50bn emergency funding facility, with the funds owed by the banks under the facility at AED 1.87bn at the end of Aug compared to AED 4.5bn at the end of 2008.

Market Snapshot as of 11/14/2010 at 9:00am (all % figures are weekly changes from Nov 7th (MENA) & Nov 5th (Foreign)

Source: Bloomberg, DIFC Economics.

Markets

Equities markets have been driven by the reaction to the QE2 announced by the Fed. Regional markets were mostly up except Oman and the UAE, whose indices were weighed down by property stocks; the DFM index dropped almost 2.5% after hitting a six-month high on Monday. Commodities, primarily oil and gold, have rallied since the Fed’s announcement alongside a weak dollar, which hovers around its lowest level of the year.

Global Developments

Americas:

• S&P estimated the gross cost of US financial reform legislation for top 8 US banks would be $19.5-22 bn.
• US core personal consumption expenditure index was unexpectedly flat mom in Sep (Aug: 0.1%).
• The ISM composite index of the manufacturing sector rose to 56.9 in Oct, the highest since May 2010 as new orders and production posted strong increases. The non-manufacturing index rose to 54.3 (Sep: 53.2).
• New orders by US factories rose 2.1% mom in Sep, posting their largest gain in eight months.
• Initial jobless claims rose by 20k to 457k. The four-week moving average rose slightly to 456k from 454k for the prior week offsetting the positive jump recorded last week, confirming a weak labour market.
• Non-farm payrolls added 151k units in Oct as the private-sector added 159k jobs. The unemployment rate remained at 9.6, as non-farm productivity grew faster than expected in Q3, increasing at an annual rate of 1.9% (Q2: -1.8%) while non-farm output grew at a 3.0% in Q3, accelerating from 1.6% in Q2.
• Brazil’s new President Rousseff elected with 55% of the vote is expected continue the current model of free-market policies and social programs which constituted the main planks of her predecessor’s policies.

Europe:

• The Portuguese Parliament approved the 2011 budget, thanks to abstentions by the opposition Social Democrats. However the 2010 deficit is still out of control, hence analysts are holding judgment until the austerity measures actually reduce the deficit.
• The final estimates for EU PMI data showed an increase to 54.6 in Oct (Sep: 53.7), as manufacturing output and new orders rose for the fifteenth successive month.
• The ECB left policy rates unchanged, with Trichet being more hawkish than last month.
• Eurozone Sep retail sales slowed, falling 0.2% mom, adding concerns as to the region’s economic prospects.

Asia and Pacific:

• The Australian central bank surprised the market with a 25bps hike in interest rates, resulting in the AUD striking a 27-year high against its US counterpart.
• The Reserve Bank of India (for the 6th time this year) increased repo and reverse repo rates by 25bps to 6.25% and 5.25% in an attempt to stem rising inflation, while signaling a near-term pause in rate action.
• China’s central bank reported that the value of trade settlements in yuan increased 160% qoq in Q3 to 127 bn yuan ($19 bn) exceeding expectations. However, Yuan settlements are equal to just 2.4% of total trade.
• Manufacturing PMI data for both China and India rose sharply in Oct - growth fuelled by rising consumer demand. Chinese PMI moved up to 54.8 (Sep: 52.9) while India’s registered a 2.1 point rise to 57.2.
• South Korea registered a surprisingly higher than expected USD 6.9bn trade surplus for October, causing a sharp rise in the KRW against the dollar on Monday.

Bottom line:

QE2 implies $600 bn of Treasuries purchases through June. This adds to acquisition of agency debt and MBS paydowns bringing the total program to $850-900 bn. Given the severe blow suffered by President Obama in the midterm elections this measure is the only significant policy for months to come, but utterly inadequate (and potentially damaging) to stimulate growth and likely to lead to asset bubbles in emerging markets. Stock markets celebrated the new injection of liquidity, but the prospects for the real economy are hardly rosier. In a week where G3 central banks left policy rates unchanged, Asian and peripheral nations were busy tightening, confirming once again the gap in growth rates between mature and emerging economies, which is likely to widen in 2011.

Regional Developments

• IIF underscored that further strengthening of banks’ balance sheets is a key precondition for a recovery in GCC credit growth. The sooner banks recognize losses and raise additional capital, the sooner they will be able to rebuild their loan portfolios and resume normal credit conditions.
• The Egyptian government is considering issuing 100-year bonds worth $500 mn, media sources reported and the foreign minister confirmed without specifying the amount.
• Qatar has announced the initiative of Enterprise Qatar Capitas Group International, to help SME owners gain access to capital, and take on policy initiatives on their behalf.
• The Doing Business 2011 report places most GCC nations lower than previous year rankings, except Saudi which improved to 11 (2010: 12) while Oman retained its position at 52. UAE stands at 40 (37) alongside Bahrain slipping to 28 (25), Qatar to 50 (39) and Kuwait to 74 (69). The pace of reforms has not been maintained.
• Saudi Arabia's PMI rose to 59.9 in Oct from Sep's 58.4, as strengthening domestic demand led to rising optimism in business conditions. Meanwhile, the UAE's PMI report hit a series high of 53.8, from Sep's 52.6, with output and new orders registering accelerated growth.
• Saudi Arabia's annual inflation rate slowed slightly to 5.8% in October, but monthly inflation stayed at 0.5% for the third month in a row. The weakness of the US dollar will maintain pressure on GCC inflation rates.

UAE Focus

• Tamweel, a home finance institution that had been on the brink of insolvency, announced that it was starting its activities again, after being recapitalized by Dubai Islamic Bank.
• The total value of foreign direct investment through UAE free zones has touched Dh268 billion according to Shaikha Lubna Al Qasimi, UAE's Minister of Foreign Trade.
• Inflation hit a 16-month high in Sep, at 1.2%, after staying at 0.9% for four consecutive months. The rise was attributed to the increase in the cost of food (2.7%) and transport (1.6%).
• DP World ratings has been upgraded to positive from stable by Moody's, citing solid performance and the company's deleveraging process.

Market Snapshot as of 11/7/2010 at 8:30am (all % figures are weekly changes from Oct 31st (MENA) & Oct 29th (Foreign) 0.2%

Source: Bloomberg, DIFC Economics.

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Since its inception in 2004, the DIFC has grown to become one of the world’s top international financial centres connecting the regional emerging markets and the world. Today, the DIFC with its modern infrastructure, free zone status and self governing laws and courts, is globally recognised as the pre-eminent and favoured financial centre in the region.

As we embark on a new phase of growth, continuing to act as a gateway between the region and the world’s capital markets, we are pleased to launch our newly revamped and more interactive website. We believe the new website mirrors the breadth and dynamism of the DIFC today and will chart its future growth on the global and regional financial arena.

In addition to the new design, embedded media and enhanced navigation, the DIFC new website aims to bring the Financial and Business Centre and the Community together, creating a web presence that is a true reflection of what the DIFC stands for.

This is why we decided to have a corporate blog, a medium that we hope will give our visitors the opportunity to take a look inside this unique community, interact with the experts at both the DIFC and client companies.

Our aim is to allow the professionals within the DIFC community such as bankers, financial services providers, lawyers, consultants, investors, etc, to use this platform to share their expertise and thoughts about current topics pertaining to the financial and business world.

To make this blog a successful and useful forum, we need your participation. Everyone is encouraged to join in the conversation and post their own thoughts, comments and questions. Like any other corporate blog, there will be guidelines and comments may be moderated. This is just to ensure that everyone stays on topic – or at least pretty close to it. We pledge to present opposing viewpoints without any prejudice.

Finally, we welcome posts from our DIFC-based clients. If you would like to participate, please contact us at social@difc.ae for further information.

So bookmark this page, email it to a friend/colleague or add our RSS feed. We also welcome your feedback and your ideas on discussion topics that you want to see here in the future.