mena economics 23 May 2011

2Q2011 - Oil: Opposing Economic Supports and Stresses

quarterly economics note Monica Malik

+971 4 363 4002
mmalik@[Link]
Focus Theme: Revise Our MENA Forecasts on Higher Oil Price Assumptions
We revise our economic forecasts for the MENA region to reflect our higher oil price Mohamed Abu Basha
assumptions, which we maintain following the oil price correction in early May. We +20 2 3535 6157
now forecast a Brent crude price of USD110.0 p/b in 2011 and USD105.0 p/b in 2012, mabubasha@[Link]
up from USD98.0 p/b for both years.
Mohamed Al Hajj
GCC: Widening Fiscal and Current Account Surpluses, Accelerating Growth +971 50 5541715
We increase our nominal GDP growth, fiscal and trade estimates for Algeria and the mhajj@[Link]
GCC. We now expect a 23.8% acceleration in GCC nominal GDP in 2011 versus 17.8%
previously. Saudi Arabia, Kuwait and the UAE are set to see the greatest rise in oil
revenue and real oil sector growth, with the largest production increase, while Qatar
should benefit from oil-linked gas prices. Oil prices have risen faster than government EuroMoney is currently conducting its Middle East
Research and Best Managed Companies survey.
spending, providing a comfortable fiscal position even in the event of another oil price The EuroMoney survey runs until 24 June 2011.
correction.
To vote for EFG Hermes, go to
[Link]/MiddleEast2011.
Rebounding Sentiment in 2Q2011: Saudi Arabia, Qatar and the UAE
We see continued expansionary government spending into the medium term and Thank you for your support.
strengthening private confidence as the main economic benefit of the higher oil price.
There are already signs of improved sentiment in GCC countries with stable political
economies – Saudi Arabia, Qatar and the UAE – in 2Q2011. The impact of higher
government spending is visibly boosting private consumption in Saudi Arabia. The UAE
is benefitting as the external recovery feeds into the domestic environment.

Increasing Pressure on Oil-Importing Countries

We expect that the higher oil price will pressure fiscal and external accounts in Jordan,
Lebanon and Morocco, especially with populist spending also rising. We continue to see
Egypt as a net-hydrocarbon exporter despite disruptions to gas exports. The external
pressure will be magnified by weaker tourism revenues and lower capital inflows,
including FDI, with the regional political developments. We do not expect to see any
external shocks, with countries continuing to rely on their FX reserves. Any foreign
support should reduce pressure on domestic funding sources, including the banking
sector, which is seeing tightening liquidity, given lower capital inflows.

Country Focus: Qatar - Strong Top Down Story Continues

We see Qatar continuing to have one of the strongest medium-term real growth
outlooks, led by government spending. We make some upward revisions to our growth,
fiscal and trade surplus forecasts on the back of higher gas revenue with the increased
demand for gas imports by Japan, which is reducing Qatar’s spare gas capacity and
rising liberalised gas prices in Europe. Meanwhile, the domestic outlook will remain
robust, with Qatar’s announced strongly expansionary budget for FY2011-2012, in line
with expectations. The five-year development plan announced in March also points to a
continuation of strong infrastructure spending in the medium term. Other positive
developments include signs of deepening monetary management.

1 / 43 pages kindly refer to the important disclosures and disclaimers on back page
mena economics
 

CONTENTS

I. MENA ECONOMIC DATA SNAPSHOT 3

II. REVISING MENA FORECASTS ON A HIGHER OIL OUTLOOK 4

III. COUNTRY FOCUS: QATAR-STRONG TOP-DOWN STORY CONTINUES 12

IV. MENA COUNTRY OUTLOOKS 23

ALGERIA 23

BAHRAIN 25

EGYPT 27

JORDAN 29

LEBANON 33

MOROCCO 35

OMAN 37

SAUDI ARABIA 39

UAE 41

 
 mena economics 23 May 2011
[

I. MENA ECONOMIC DATA SNAPSHOT

FIGURE 1: 2011 MACROECONOMIC INDICATORS

Nominal GDP Real GDP Growth Rate, CPI Inflation, Fiscal Balance, Current Account,
(USD bn) % (YoY % change) % of GDP % of GDP
Algeria 190.3 3.8 4.6 (3.4) 9.7
Bahrain 25.7 1.5 1.7 0.9 10.9
Egypt* 226.3 1.4 10.8 (9.4) (3.6)
Jordan 29.7 3.5 4.6 (5.6) (9.0)
Kuwait** 159.6 3.7 5.3 28.4 38.5
Lebanon 41.6 3.5 4.5 (9.2) (12.2)
Morocco 100.3 3.5 2.0 (4.5) (5.0)
Oman 71.0 3.1 4.0 13.7 17.9
Qatar** 163.6 11.7 1.9 11.7 22.6
Saudi Arabia 554.5 4.8 5.5 14.6 26.5
UAE 352.1 3.8 1.6 11.5 11.6
*Egypt fiscal indicators are based on FY July 2010-June 2011
**Kuwait and Qatar Fiscal indicators are based on FY April2011-March 2012

Source: EFG Hermes estimates

3 / 43 pages
mena economics 23 May 2011

II. REVISING MENA FORECASTS ON A HIGHER OIL OUTLOOK

A. INCREASE OIL FORECASTS TO USD110.0 P/B IN 2011 AND USD105.0 P/B IN 2012

OIL SURGES WITH MENA POLITICAL DEVELOPMENTS

We maintain our 2011 We maintain our increased Brent crude average oil price forecasts of USD110.0 p/b in 2011
and 2012 upgraded oil and USD105.0 p/b in 2012, up from USD98.0 p/b for both years (see “The Right Side of the Oil
price Price Equation,” published on 3 May 2011), despite the oil price correction in early May. Brent
crude has strengthened after falling below USD110.0 p/b, averaging USD110.5 p/b YTD.

Some price correction Crude oil prices rose in 2011 to their highest levels since 2008, supported by political unrest
expected in 2011 across the MENA region. Our revised 2011 oil price forecast had assumed a correction in the
price from over the USD120.0 p/b level, with a reduction in the political risk premium, the end
of the QE2 programme, and concerns that the high oil price might impact aggregate demand
(directly, and through inflation and interest rate hikes). We believe that the degree to which
US liquidity support measures are unwound will be a central driver of the oil price in 2H2011,
and we believe that there could be a further correction with a strengthening in the USD index.

Libya developments Our forecasts are based on the assumption that further actual supply outages are limited.
tighten the oil market Nonetheless, Libyan supply outages have raised concerns over oil market tightening and have
helped to support the oil market. Inventories have fallen (also with the high price and
increased oil demand in Asia) and increased production from OPEC member countries, notably
Saudi Arabia, has reduced surplus crude oil production capacity. Nevertheless, the oil market
has so far been well supplied.

FIGURE 2: BRENT SPOT PRICES, 2011 FIGURE 3: OPEC SPARE CAPACITY FALLS WITH
LOWER LIBYAN OIL PRODUCTION
In USD per barrel Million barrels per day (LHS), million barrels (RHS)
Opec Spare Capacity (LHS)
Brent EFG Hermes 2011 Forecast Libya Production (LHS)
130 5.0 OECD Invetory (RHS) 2,800
125 4.5 2,780
120 4.0 2,760
115 3.5 2,740
110 3.0 2,720
105
100
2.5 2,700
95 2.0 2,680
90 1.5 2,660
85 1.0 2,640
80 0.5 2,620
0.0 2,600
3-Jan-11

17-Jan-11

31-Jan-11

14-Feb-11

28-Feb-11

9-May-11
11-Apr-11

25-Apr-11
14-Mar-11

28-Mar-11

Jul-10

Jan-11
Nov-10
Jun-10

Oct-10

Dec-10
May-10
Mar-10

Aug-10

Mar-11
Apr-10

Feb-11
Sep-10

Source: Reuters, EFG Hermes estimates Source: EIA

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B. INCREASE OUR FORECASTS FOR OIL-EXPORTING COUNTRIES

Nominal GDP growth to The rise in our oil price forecast will have a mixed impact on the region’s countries depending
increase 23.8% for GCC on their oil endowment. We increase our forecasts for nominal GDP growth, fiscal revenue and
region in 2011 trade surplus estimates in 2011 and 2012 for Algeria and the GCC countries, in line with the
upgrade to our oil assumption. We now estimate that total GCC nominal GDP will accelerate
by 23.8% in 2011, compared to our previous 17.8% estimate. We now also expect to see the
aggregate GCC fiscal surplus (in USD terms) to widen by USD107.0 billion, up from USD69.2
billion), and the current account to rise by USD158.4 billion, up from USD134.1 billion, in
2011.

Wider CA surplus, but no Notably for the GCC countries, we expect to see stronger current account surpluses in both
fiscal surplus on higher USD and percentage-to-GDP terms in 2011, with the higher average oil price assumption,
spending compared to 2008. Additionally, we expect less pressure on imports, with weaker raw material
inflation and a stronger USD index outlook compared to 2008. However, we see weaker fiscal
surpluses in 2011 (in nominal and USD terms), with the strongly expansionary fiscal position
of most countries over the last few years, even when oil prices fell in 2009. The exception is
Kuwait, which has seen a weaker average increase in government spending compared to other
GCC countries, resulting in a strong fiscal surplus in nominal terms in 2011 (see Figure 6).

Bahrain to see a weaker With our higher oil price assumption, we now forecast that Bahrain will see a fiscal surplus of
rise in CA surplus 0.9% of GDP after earlier expecting a 1.6% deficit. This is despite increasing our spending
forecast. We, however, expect to see a weaker increase in the current account surplus in
Bahrain, as we have decreased our estimate for the service surplus in the current account, with
substantially weaker tourism and financial service earnings.

FIGURE 4: WEIGHTED DRIVERS OF GCC FIGURE 5: STRONGER CURRENT ACCOUNT

NOMINAL GROWTH BALANCES THAN 2008
PP contributors to Y-o-Y % change In USD billion
Bahrain Kuwait Bahrain Kuwait
Oman Qatar
Oman Qatar
Saudi Arabia UAE
30 GCC 350 Saudi Arabia UAE
25 300 GCC
20
15 250
10 200
5
150
0
(5) 100
(10) 50
(15)
(20) 0
(25) (50)
2008

2009

2007

2008

2009
2010e

2011f

2012f

2010e

2011f

2012f

Source: Regional Central Banks, IMF, and EFG Hermes Source: Regional Central Banks, IMF, and EFG Hermes
estimates estimates

5 / 43 pages
 FIGURE 6: MENA TRADE BALANCES AND FISCAL BALANCES

mena economics
As a % of GDP
35 Fiscal Balance

KSA 08

30
KUW 11

25

20

UAE 08

15 KSA 11
OMN 08 OMN 11
UAE 11 QAT 11

10
QAT 08
ALG 08

BAH 08 KUW 08

MOR 08
BAH 11
0
Trade Balance
JOD 08
ALG 11
MOR 11
(5)
JOD 11
EGY 08

LEB 11 EGY 11
LEB 08 (10)

(15)
(50)

(40)

(30)

(20)

(10)

10

20

30

40

50
0

23 May 2011
Source: EFG Hermes estimates
6 / 43 pages
 mena economics 23 May 2011

CONFIDNCE KEY – MAINTAIN OUR OVERALL REAL GROWTH OUTLOOK

High oil price to support We believe that the main economic benefit of the higher oil price to the GCC region will be
wider confidence the continuation of expansionary government stances in the medium term as well as
strengthening economic confidence. We believe that a high oil price also supports wider
private sentiment (i.e. beyond that linked with government expenditure), although this should
take longer to materialise in Bahrain and Oman (given protests), as well as Kuwait (issues over
government stability). Sentiment remains strong in Qatar and Saudi Arabia, and is increasing in
the UAE, which saw a notable jump in the PMI Index in April.

No changes to our real We do not make any changes to our real non-oil GDP growth outlook as a result of our higher
non-oil GDP growth oil price assumption, as we had already expected a strong investment outlook for the region
outlook led by government programmes. We do not expect these to be derailed by additional populist
spending measures.

FIGURE 7: UAE AND SAUDI ARABIA PMI REFLECT FIGURE 8: GCC BUDGET BREAKEVEN OIL PRICE
THE POSITIVE SENTIMENT ENVIRONMENT SHOWS STRONG FISCAL POSITION
PMI Index In USD per barrel
Saudi Arabia BBE
UAE 2011 Oil Price Forecast
2011 Old Oil Price Forecast
65 Expansion Threshold 120

60 100
80
55
60
50
40
45 20
40 0
Oct-10

Jan-11

Apr-11
Feb-11

Mar-11
Nov-10

Dec-10

UAE
Saudi

Kuwait

Qatar
Oman
Bahrain

Source: HSBC/Markit Economics Source: EFG Hermes estimates

Space for further oil The oil price has increased at a faster pace than overall GCC government spending despite
price correction increased populist spending in 1Q2011 in a number of GCC countries. Our oil price estimate
remains at a comfortable level for GCC budgets even if there is a further correction in the oil
price from current levels and below our 2011 and 2012 forecasts. This is despite the continued
rise in budget breakeven oil prices, with higher government spending.

We see government budgets remaining expansionary in the medium term, which will remain
an important driver of domestic demand in the region. Importantly, this fiscal space provides
governments with the ability to continue their investment programmes, which we believe will
be led regionally by Saudi Arabia and Qatar. Bahrain’s fiscal position remains the tightest.

OIL PRODUCTION INCREASES TO MAXIMISE BENEFIT OF HIGH OIL PRICE

The countries that will see the strongest benefit (both real hydrocarbon GDP and in nominal
terms) will be those with the greatest production increase, although the hydrocarbon-rich per
capita countries will continue to see the largest surpluses.

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FIGURE 9: 2011 FISCAL SURPLUSES OF OIL-EXPORTING COUNTRIES

In USD billion (LHS), % of GDP (RHS)

Nominal (LHS) % of GDP (RHS)

90 30
80
70 25
60 20
50
40 15
30 10
20
10 5
0 0
(10)

Oman
UAE

Bahrain
Kuwait

Qatar
Saudi Arabia

Algeria
(20) -5

Source: EFG Hermes estimates

We forecast a 5.5% Saudi Arabia has seen the largest increase in production, with output increasing to 9.1 million
increase in Saudi oil b/d in 2M2011, according to EIA data. To compensate for the loss of Libyan exports, Aramco
production has developed light, low-sulphur oil blends with specifications that match crude normally
supplied by Libya. However, Saudi pulled back production to around 8.9 million b/d in March
and April, given weak demand from refineries for its crude. With ample global oil supply and
some Libyan oil exports, we now reduce Saudi Arabia’s average oil production forecast for
2011 to 8.8 million b/d from 9.1 million b/d, suggesting a 5.5% increase in average annual
production. As a result, we reduce our headline real GDP growth estimate to 4.8% in 2011
from 5.8% previously.

FIGURE 10: SAUDI OIL PRODUCTION RISES IN 1Q2011 TO ENSURE GLOBAL OIL MARKET IS WELL
SUPPLIED
In million barrels per day

9.2
9.0
8.8
8.6
8.4
8.2
8.0
7.8
7.6
7.4
Apr-09

Sep-09

Apr-10

Sep-10

Apr-11
Jun-09

Nov-09
Dec-09

Jun-10

Nov-10
Dec-10
Feb-09
Mar-09

Oct-09
Jan-09

May-09

Jul-09
Aug-09

Jan-10
Feb-10
Mar-10

May-10

Oct-10
Jul-10
Aug-10

Jan-11
Feb-11
Mar-11

Source: EIA

UAE and Kuwait also see The UAE also increased production to 2.47 million b/d in 4M2011 from 2.3 million b/d over
a jump in oil output the last two years. We increase our 2011 real oil growth outlook to 4.4% from 2.2% and our
overall real GDP growth forecast to 3.5% from 2.8% on the stronger oil sector production
outlook. Kuwait's output has increased to 2.37 million b/d in 4M2011 from 2.3 million b/d
average in 2010. We increase Kuwait's real headline growth forecast to 3.7%, up from our
earlier estimate of 3.2%.

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 mena economics 23 May 2011

Qatar to benefit from We see Qatar as a one of the regional countries that will see the greatest benefit from the
oil-linked contracts higher oil price through its oil-linked gas pricing. Qatar is increasing new marginal output and
utilising excess capacity to regions with oil-based contracts. We expect gas exports to increase
by 17.3% in 2011 (for more details on our upgrades to GDP, please see the Qatar Country
Focus).
1
C. INCREASED PRESSURE FOR OIL-IMPORTING COUNTRIES
Higher external, fiscal The higher oil price will, however, place increasing pressure on fiscal and external accounts for
pressure oil-importing countries, particularly as populist spending pressures have also increased. With a
higher average oil price forecast in 2011, we now expect Jordan, Lebanon and Morocco to see
wider trade deficits leading to a deterioration in current account positions. Political
developments, including protests and the recent bombing in Morocco, will also impact service
revenues, especially in Egypt. External pressure will be greater than in 2008 as we expect to
see more limited capital inflows, including FDI, with the still fragile global recovery. Moreover
we also see weak FDI inflows from the GCC, with governments and corporates focusing on
domestic developments. We note that GCC countries increased intra-regional FDI in 2006-
2008.

Oil -importing countries Despite fiscal and external pressures, we do not expect to see any shocks (including to
to use reserves to cover currencies). Countries continue to rely on net foreign asset (NFA) positions and domestic
deficits, secure macro- banking systems in some cases, although liquidity in the latter has tightened with lower: i)
stability foreign inflows; and ii) local deposit growth. In Egypt and Lebanon, this tightening in banking
sector liquidity has led to higher T-bill rates (Egypt) and weaker demand for T-bills (Lebanon,
see respective country sections). Reflecting the fact that reserves will be used for economic
stability, we reduce our end-2011 FX reserve estimate for Egypt to USD23.0 billion from
USD29.0 billion previously to cover the balance of payments deficit and support the currency.
Other non-oil exporting countries will see less of a drop in FX reserves than Egypt, without the
capital outflows witnessed by Egypt or stress on their currencies.

1
Egypt is a net hydrocarbon exporter, but the contribution of the sector to GDP is under 15%. Thus, we include Egypt in this section
as it has the characteristic of a diversified economy and not a pure hydrocarbon economy. Jordan, Morocco and Lebanon are oil
importers.

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mena economics 23 May 2011

FIGURE 11: FX RESERVES TO DROP FOR MOST FIGURE 12: … AND IMPORT COVER TO ALSO
OIL-IMPORTING COUNTRIES… FALL
In USD billion In months

2010 2011f 2010 2011f

50 12
45 10
40
35 8
30
25 6
20
15 4
10 2
5
0 0

Morocco
Morocco
Lebanon

Lebanon
Egypt

Jordan

Egypt

Jordan
Source: Regional Central Banks, EFG Hermes estimates Source: EFG Hermes estimates

External support would The International Monetary Fund (IMF) has indicated that it will make available USD35 billion
relieve domestic funding in loans to oil-importing countries in the Middle East and North Africa (MENA), where popular
pressures uprisings have occurred. Official statement suggest that Egypt is looking to borrow up to
USD4.0 billion from the IMF to help bridge a estimated government funding gap of USD10-12
billion by mid-2012. Egypt has indicated that it is also speaking to other multilaterals and GCC
countries. Saudi Arabia has said that will provide USD4 billion to support the Egyptian
economy in May in the form of soft loans, deposits and grants. At this point, our end-2011 FX
reserve forecast for Egypt does not include any foreign assistance. We wait until agreements
are formalised or we have greater details of the package (as in the case of the Saudi Arabian
support). We see any external funding support as vital in reducing pressure on domestic
funding sources and slowing the fall in FX reserves.

Earlier subsidy reforms One factor that has helped the fiscal position is that non-GCC countries reduced fuel subsidies
help – more limited new in 2006-2008 in response to the rise in global oil prices. Jordan saw the greatest progress with
measures subsidy reforms, followed by Morocco. We do not expect to see any significant new reductions
in fuel subsidies or wider fiscal reforms in 2011 given regional political developments. Jordan
announced new petroleum product prices effective in early May 2011, with increases in most
products (including fuel oil for industry), but excluded consumer fuels such as – unleaded
gasoline, diesel and kerosene. As a result, we see Jordan’s fiscal position being the least
impacted by the increase in our oil price forecast, with only a 0.1 percentage point increase in
the fiscal deficit-to-GDP ratio in 2011. Morocco and Jordan will see the greatest relative
widening in their trade balances, given that they have the greatest dependence on oil imports.

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 mena economics 23 May 2011

FIGURE 13: 2011 FUEL SUBSIDIES TO INCREASE FIGURE 14: EGYPT GAS PRODUCTION AND
ON HIGHER OIL PRICES RESERVES
In USD billion (LHS), PP Change* (RHS) In billion cubic meters(LHS), trillion cubic meters
(RHS)
Fuel Subsidies (LHS)
Production (LHS) Reserves (RHS)
change from previous forecasts (RHS)
3.0 1.2 70 2.25
2.20
2.5 1.0 60 2.15
2.0 0.8 50 2.10
2.05
1.5 0.6 40 2.00
30 1.95
1.0 0.4
1.90
0.5 0.2 20 1.85
10 1.80
0.0 0.0 1.75
Morocco

Lebanon

0 1.70
Jordan
Egypt

2005

2006

2007

2008

2009
*Percentage Point change in fuel subsidy spending to GDP
with our higher oil price forecast
Source: EFG Hermes estimates
Source: BP Statistical Review 2010

Egypt to see greatest Egypt, on the other hand, has the opposite trend. We expect that Egypt will have to increase
impact on subsidies fuel subsidy spending by the greatest level – 1.1% of GDP in 2011 – with the USD12.0 p/b
increase to our oil price forecast. Egypt had taken some steps to reduce fuel subsidies,
especially for industrial users, but not to the same degree as other regional countries. However,
oil price increases have overall been deficit neutral as increased subsidy spending has been
matched by increased revenue from the Egyptian General Petroleum Company (EGPC), the
national oil company, which benefits from high energy prices and earlier revisions of its natural
gas export agreements, according to the Ministry of Petroleum. With disruptions to its gas
exports, however, we see only a 0.2 percentage point to GDP narrowing in the trade deficit.

Egypt, Jordan face gas An additional risk for Jordan and Egypt is the gas supply disruptions from Egypt. Egypt’s gas
supply risks pipeline, which supplies gas to Jordan, was sabotaged in February and again in early May. Our
assumptions take into account three months of gas export outages from Egypt in 2011. The
risks are particularly notable for Jordan, which depends solely on Egyptian gas imports. At
times of disruption, Jordan has to rely on more expensive fuel oil. Nevertheless, Egypt is likely
to benefit in the future from revisions to its gas pricing contracts to more market-based
formulas. Egypt is currently re-negotiating its gas contracts.

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III. COUNTRY FOCUS: QATAR - STRONG TOP-DOWN STORY CONTINUES

We maintain our strongly expansionary government spending forecast and non-

hydrocarbon growth outlook after the release of the FY2011-12 budget;
Focus of the budget and Five-Year Development Plan on capital expenditure, to
support domestic demand;
We see further room to reduce benchmark lending rates after the April cut, but
continue to see government spending as the driver of credit demand.

A. FISCAL & DEVELOPMENT PLANS SUPPORT OUR ROBUST OUTLOOK

Strong medium-term We maintain our strong outlook for the Qatari economy in the medium term, led by the
spending outlook government’s spending and investment programme. Qatar announced a strongly expansionary
reflected in budget for FY2011-2012 (April 2011-March 2012), in line with expectations, and the Five-Year
Development Plan Development Plan announced in March also points to a continuation of strong infrastructure
spending in the medium term.

We upgrade some of our macroeconomic forecasts for 2011 and 2012, given increased gas
prices and export levels to Japan (along with the increase in our oil price forecast) as well as
newly released nominal GDP and fiscal data for 2010. Our overall outlook remains the same,
however, with above 10.0% real non-hydrocarbon growth in 2011 and 2012, the highest
regionally and worldwide, a strong fiscal position due to increased gas exports, and a benign
inflation environment.

FIGURE 15: QATAR NON-HYDROCARBON FIGURE 16: 2011 GOVERNMENT SPENDING

GROWTH VERSUS REGION GROWTH FORECASTS
Real non-oil GDP growth in % In Y-o-Y % change
20
GCC (ex-Qatar) Qatar 18
14 16
12 14
10 12
8 10
6 8
4 6
2 4
0 2
(2) 0
Kuwait
Qatar

KSA
Oman

Bahrain

UAE
2011f

2012f
2009

2010e

Source: Regional Central Banks, IMF, and EFG Hermes Source: EFG Hermes estimates
estimates

STRONGLY EXPANSIONARY FY2011-2012 BUDGET ANNOUNCED

Spending increase in line We maintain our actual spending growth forecast of 18.9% for FY2011-2012 following the
with our estimate… release of the government’s budget. We see Qatar having the strongest increase in
government expenditure, followed closely by Oman and Saudi Arabia. Expenditure in Qatar’s
budget is planned to grow by 18.7% Y-o-Y to USD38.4 billion versus the FY2010-2011 budget.

12 / 43 pages
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… but actual spending We continue to see stronger actual spending levels, which the budget figures underestimate.
will likely be higher than Preliminary data for FY2009-2010 shows that spending reached around USD31.5 billion (the
budgeted latest available data), thus we believe that the actual spending level in FY2011-2012 will be
substantially higher than the USD38.4 billion that has been budgeted. We estimate actual
spending of around USD44.1 billion in FY2011-2012. The above budgeted spending has tended
to be on the current side. Nevertheless, the budget provides a good indication of the direction
and percentage change in spending.

FIGURE 17: DRIVERS OF GOVERNMENT FIGURE 18: TOTAL SPENDING INCREASE

SPENDING
Contributors to Y-o-Y % change % change
Current Expenditure
Development Expenditure
50 50
Total Expenditure
45
40 40
35
30
30
20 25
20
10 15
0 10
5
(10) 0

2010e
2011f
2012f
2003
2004
2005
2006
2007
2008
2009
2010e

2011f
2012f
2003
2004

2005
2006
2007

2008
2009
Source: IMF, EFG Hermes estimates Source: IMF, EFG Hermes estimates

BUDGET FOCUS: INFRASTRUCTURE EXPENDITURE

Planned investment Investment spending on public sector projects accounts for the largest single component of
spending to increase spending in the FY2011-2012 budget at 41.7% of total planned expenditure (up from 33.4%
33.4% budgeted in the previous year). This suggests a 33.4% increase in public sector projects,
according to our estimates. We believe that infrastructure spending will dominate, accounting
for over 75.0% of capital expenditure. Education and health are other areas of capital
expenditure focus.

Infrastructure spending We believe that with the shift to infrastructure projects as the gas programme nears
to become visible in the completion, investment spending will become more visible in the budget, with a greater need
budget… for domestic financing. We believe that this will include both higher government spending and
borrowing from the domestic banking sector. Indeed, much of the funding for the LNG
expansion programme was externally funded, with greater external interest in the hydrocarbon
sector. We expect investment spending to continue to outstrip current expenditure.

…and is expected to see Development expenditure has been expanding at a robust pace, averaging 44.7% in FY2003-
strong growth 2004 and FY2009-2010, compared to the still strong expansion in current expenditure of
23.3% over the same period. As a result, investment expenditure has risen to 34.2% of total
expenditure, up from 17.8% in FY2003-2004.

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FIGURE 19: CAPITAL EXPENDITURE SHARE FIGURE 20: EXPENDITURE GROWTH ON WAGES
RISING IN TOTAL SPENDING AND SALARIES ALSO STRONG
Capital spending as % of total spending In USD billion (RHS), % change (LHS)

Wages & Salaries (LHS) Y-o-Y % Change (RHS)

45
9 120
40
8 100
35 7 80
30 6
25 60
5
20 40
4
15 3 20
10 2 0
5 1 (20)
0 0 (40)

2010e
2011f
2012f
2002
2003
2004
2005
2006
2007
2008
2009

2011f
2003
2004
2005
2006
2007
2008
2009
2010e
Source: IMF, EFG Hermes estimates Source: IMF, EFG Hermes estimates

CURRENT EXPENDITURE REMAINS SOLID, LED BY WAGE GROWTH

Expansion in line with We expect that current expenditure will remain solid and that over-spending will continue in
recent trend this category. Total current expenditure is budgeted to increase by 9.0%, with salary and wage
growth of 10.2%. We forecast actual current expenditure growth of c13.0% in FY2011-2012.
It is notable that out of the GCC countries, Qatar did not announce any specific spending
measures with the spread of protests across the region.

INCREASE OUR FISCAL SURPLUS FORECAST ON STRONGER REVENUE

Stronger oil and gas We now estimate a wider fiscal surplus of 11.7% of GDP in FY2011-2012, up from 8.8% of
earnings now forecasted GDP previously, on the back of higher hydrocarbon revenues, with our higher oil and gas prices
and increased gas exports forecasts. Apart from the oil-indexed gas price, we also see some
increase in gas prices to Continental Europe and the UK, with stronger demand for the cheaper
non-oil linked gas and reduced supply from Qatar. We believe that developments in Japan
reduce the downward risks to gas prices and demand in the medium term, although we
continue to see weakness in the US gas price, given oversupply dynamics.

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FIGURE 21: NON-LIBERALISED SPOT GAS PRICE FIGURE 22: QATAR’S SPARE LNG CAPACITY
REDUCED WITH INCREASEDJAPANESE DEMAND
In USD In million tonnes
20 LNG Quarterly Exports
UK NBP (LHS) Henry Hub Spot (RHS)
1.2 8 Quarterly Average Capacity
7 15
1.0
6
0.8 5 10
0.6 4
0.4 3
2 5
0.2 1
0.0 0
0
02-Apr-09

02-Apr-10

02-Apr-11
02-Jan-09

02-Jul-09
02-Oct-09
02-Jan-10

02-Jul-10
02-Oct-10
02-Jan-11

1Q2008
2Q2008
3Q2008
4Q2008
1Q2009
2Q2009
3Q2009
4Q2009
1Q2010
2Q2010
3Q2010
4Q2010
1Q2011
2Q2011
3Q2011
4Q2011
Source: Bloomberg Source: Bloomberg, EFG Hermes estimates

44.1% estimated We increase our estimates for LNG exports in 2011, given increased gas demand from Japan in
increase in exports to light of reduced domestic nuclear energy generation following the earthquake and tsunami.
Japan in 2011 Qatar has indicated that it will increase LNG exports to Japan by around 4 million tonnes over
the next year, which we believe will lead to greater LNG capacity utilisation in Qatar. Qatar is
also looking to secure more long-term LNG contracts. We believe that these factors will
benefit export earnings, nominal GDP (and real GDP, with higher actual gas production), and
government revenues. We note that not all of the gas earnings will be reflected in the fiscal
revenue statement.

FIGURE 23: MAJOR LNG EXPORT DESTINATIONS FIGURE 24: FISCAL NON-HYDROCARBON
REVENUES ALSO STRENGTHENING
In million tonnes In USD billion

2010 2011f
30
Investment Income from Public Enterprises
14 25 Corporate Tax Revenue
12
Other Non-Tax Revenue
10 20
8
15
6
4 10
2
0 5
Japan

Spain

Mexico
India

China
Italy
Belgium

France

US

Brazil
Turkey
South Korea

Taiwan
UK

Kuwait

0
2010e
2011f
2012f
2002
2003
2004
2005
2006
2007
2008
2009

Source: Bloomberg, EFG Hermes estimates Source: IMF, EFG Hermes estimates

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Increasing non- We also increase our non-hydrocarbon estimates for non-oil revenue based on new data
hydrocarbon revenue released by the IMF for investment income from public enterprises (which includes net income
forecasts from state-owned hydrocarbon enterprises) in FY2009-2010. New IMF data shows that
investment income increased 61.9% in FY2009-2010, which we believe could have been to
ensure sufficient fiscal support at a time of weaker hydrocarbon prices. We increase our
estimate for investment income as a result, although we expect that it will be lower starting
from FY2010-2011 onward, with a greater proportion of investment income not reflected in
the budget.

B. DOMESTIC GROWTH OUTLOOK TO REMAIN STRONG

We increase our 2011 In line with the increase to our fiscal revenue estimate, we increase our 2011 nominal growth
nominal and real forecast by 8.9% to USD163.8 billion as a result of the stronger hydrocarbon earnings (price
hydrocarbon growth for oil and gas, and gas production). Additionally, recently released preliminary data for 2010
forecasts shows that nominal GDP grew 30.8% to USD128.6 billion. This is marginally above our
estimate of USD122.7 billion. We believe that the stronger growth outcome was likely a result
of stronger gas earnings, with our estimate for non-hydrocarbon growth in line. We note that
Qatar no longer gives a breakdown between oil and gas GDP within the hydrocarbon category.

We forecast real hydrocarbon growth of 12.0% based on the higher gas production. Our earlier
real growth forecasts had accounted for greater below-capacity production, although we had
seen an increase in production levels with the completion of new LNG trains.

FIGURE 25: PROJECT AWARDS STRONG IN 1Q2011

In USD billion

Construction Infrastructure Gas Processing Water and Waste

Power Oil / Gas Production Fertiliser Industrial
Petrochemicals Pipeline Refining Metal
5
4
3
2
1
0
1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

Source: MEED Projects, EFG Hermes estimates

MAINTAIN NON-HYDROCARBON GROWTH ESTIMATES

We keep our real non-oil We maintain our non-hydrocarbon growth forecast at 12.7% in 2011, with the budget
GDP growth forecast outcome in line with our assumptions. We continue to see government spending, particularly
at12.7% investment spending, as the central factor behind the robust domestic demand environment
and growth opportunities for different sectors. There was a sharp increase Q-o-Q in project
awards in 1Q2011, partly led by infrastructure projects. These related to the Doha
International Airport, New Doha Port projects, and road development projects by Ashghal. In
gas development there were awards by Rasgas for the first phase of the Barzan Gas
Development (onshore and offshore).

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FIGURE 26: AWARDED VERSUS COMPLETED PROJECTS IN QATAR DISTORTED BY LNG PROJECT
COMPLETIONS
In USD billion

Awarded minus Completed Awarded Completed

20

15

10

0
2Q2006

3Q2006

4Q2006

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011
1Q2006

1Q2007

(5)

(10)
Source: MEED Projects, EFG Hermes estimates

Real non-oil GDP growth We still expect a deceleration in real non-hydrocarbon real GDP growth in 2011 and into the
solid, but decelerating medium term as a number of projects are completed, especially on the LNG front. As such, we
do not expect to see the strong double-digit, real non-hydrocarbon growth seen in the mid-
2000s. Qatari authorities estimate that after 2012, once the current expansionary phase of
hydrocarbon development ends, 5.0 percentage points of additional public sector investment
spending will be needed to generate a 0.5 percentage point temporary acceleration in growth
in non-hydrocarbon output.

LNG spending spread We do not expect to see a contraction in investment growth (with project completions higher
over several years than awards) as the total value of projects is given at the point of completion and awards. The
completion of LNG projects distorts the data in particular, given their high costs, which would
have been spent over a multi-year basis. In 1Q2011, the completion of Qatargas 3 (Train 6)
and 4 (Train 7) are included in the project data. Excluding the completion of the USD4 billion
gas project, Qatar’s value of awarded projects would be almost on par with its value of
projects completed in 1Q2011.

FIGURE 27: NON-HYDROCARBON SECTOR TO DRIVE MEDIUM TERM GROWTH

In % change

Hydrocarbon Non-Hydrocarbon Total

35
30
25
20
15
10
5
0
2005

2006

2007

2008

2009

2011f

2012f

2013f

2014f

2015f

2016f
2010e

(5)

Source: IMF, Qatar National Development Strategy 2011-2016, and EFG Hermes estimates

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MEDIUM-TERM SPENDING SUPPORT

We continue to see the non-hydrocarbon driving growth from 2012 on. We maintain our
medium-term, real non-oil GDP forecast of 8.0-9.0% in 2013-2015 following the recent
release of the Development Plan (2011-2015), which is in line with our assumptions. Within
this period, we see relatively little direct spending on 2022 FIFA World Cup-related projects
starting, although it should begin at the end of the period, in our view.

2011-2016 National Development Strategy

The goal of the development strategy remains broad based, spanning the economic, human,
social, environmental and institutional development of Qatar, in line with the 2030 Qatar
National Vision.

The plan points to continued sizeable investment spending over the period covered by the
National Development Strategy 2011–2016. Spending is set at over USD125 billion over this
five-year period, which we estimate is equivalent to over 200% of 2011 estimated nominal
non-oil GDP (a better indicator of the domestic economy). The plan expects that gross
investment is expected to average 25% of GDP over 2011–2016. Total spending during the
six-year programme is expected to reach around USD220 billion.

A key component of the spending and investment plans will be led by government-linked
Industries Qatar (IQ). This excludes significant additional investments in the gas sector, which
await decisions on the moratorium and that will not occur before 2015. Key areas of
spending/investment for 2011-2016 include:

Resources- and energy-based industries: The resource investment plans of Q-companies

(excluding Qatar Petroleum (QP) and related companies) total over USD35.6 billion (QAR130
billion). Many of these projects will be in conjunction with foreign joint venture (JV) partners.

Residential and business construction: Amounting to around USD27.5 billion (QAR100

billion) through Barwa and Qatar Diar.

Infrastructure: USD65 billion is allotted for infrastructure spending through 2016. Areas for
upgrade include the power and water sectors, the New Doha Port and the IT sector. There is
also a focus on the development of road and rail networks.

Social investment: Health and education investment led by the Qatar Foundation, with Sidra
Hospital and Education City, of about USD5.2 billion (QAR19 billion).

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C. MONETARY DEVELOPMENTS ALSO LED BY GOVERNMENT SPENDING PLANS

Credit demand being Public sector borrowing is forecast to remain solid in 2011, although decelerating from 2010
driven by the owing to higher comparables. We see a recovery in private sector growth rates and we
government’s increase our year–end 2011 estimate to 17.0% (up from 6.1% in 2010), supporting sectors
investment programme linked to the investment programme including the real estate, construction and trade sectors.
Private sector credit growth accelerated to 15.0% Y-o-Y in March. We believe that monetary
policy will balance between encouraging non-speculative private sector credit growth and
absorbing excess liquidity from the banking sector (i.e. beyond the level for economic needs).
Liquidity increased after the Qatar Investment Authority (QIA) injected capital into a number
of DSM-listed banks in January 2011 and deposit growth in the Qatari banking sector has been
well above loan growth since the beginning of 2011.

FIGURE 28: DRIVERS OF CREDIT GROWTH FIGURE 29: CREDIT GROWTH BY SECTOR
Contributors to Y-o-Y % Change March 2011 Y-o-Y % Change
Others
Public Sector 30
80 Contracting
Real Estate 25
60 Commerce
20
Consumption
40 Total 15
10
20
5
0 0

Consumption

Public Sector
Commerce

Others

Contracting
Real Estate
(20)
Apr-08

Apr-09

Apr-10
Oct-08

Oct-09

Oct-10
Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Source: Qatar Central Bank, EFG Hermes estimates Source: Qatar Central Bank, EFG Hermes estimates

A DEEPENING IN MONETARY TOOLS AND MORE PROACTIVE MANAGEMENT

Qatar to Start Monthly Indeed, the Qatar Central Bank (QCB) offered treasury bills (T-bills) worth QAR2 billion
T-Bill Auctions in June (USD549 million) to absorb excess liquidity from the banking sector in May. Moreover, the
QCB plans to continue with monthly T- bill sales. We see monthly T-bill auctions as an
important step towards developing monetary policy and liquidity management tools. We see a
need for Qatar to set up the framework for regular monetary management, along with
developing a more holistic policy approach. In the past, Qatar tended to have more one-off
and larger issues to absorb excess banking sector liquidity.

More integrated The T-bill auctions follow the 50 bps benchmark (lending, deposit and repo) rate cut in April
approach and measures to reduces speculative activity (new restrictive retail lending regulations and to
reduce foreign speculative deposits). The government has also reduced deposits in the banking
system since the beginning of the year. We believe that these measures have likely supported
the shift to monthly T-bill auctions, which means that banks can gain interest on excess
reserves. T-bill auctions are thus a shift away from the stance from January 2011 to pay 0%
for banks’ deposits at the QCB in excess of the reserve requirement as a way to encourage a
reduction in deposit rates in the system so as to avoid speculative foreign deposits.

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LIMITED IMPACT OF BENCHMARK RATE CUT; MONETARY POLICY REMAINS TIGHT

Cut in lending rate in We believe that monetary policy still remains tight and that there is further room to reduce
April 2011, the first since the lending rates, despite the 50 basis points cut in benchmark lending in April. The QCB cut
2006 its overnight deposit rate by 50 bps to 1.0%, its overnight lending facility by 50 bps to 5.0%,
and its repo rate by 55 bps to 5.0% in April 2011. This cut in the lending rate is, nevertheless,
notable, given that lending and repo rates have been steady since July 2006. We see a limited
impact of the rate cut on driving loan growth. The April benchmark rate cut was not behind
the upgrade of our 2011 private sector credit growth forecast. We estimate a real benchmark
lending rate of 3.0% in 2011, assuming no further lending rates cuts. We estimate that Qatar
and Bahrain are likely to be the only GCC countries with positive real benchmark rates in 2011,
with Bahrain’s substantially lower at 0.5%.

FIGURE 30: QATAR LENDING RATE STILL HIGH FIGURE 31: NON-RESIDENT DEPOSITS FALL
DESPITE RECENT CUT WITH RECENT QCB MEASURES
In %
In QAR billion
Private Sector Deposits
Qatar Kuwait 400
Pubic Sector Deposits
7 UAE Saudi Arabia Non-Residents' Deposits
6 300 Commercial Banks' Deposits
5
4 200
3
2 100
1
0 0
Jan-07

Jan-08

Jan-09

Jan-10

Jan-11
Jul-07

Jul-08

Jul-09

Jul-10
Oct-08

Oct-09

Oct-10
Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11
Apr-08

Apr-09

Apr-10

Apr-11

Source: Regional Central Banks Source: Qatar Central Bank, EFG Hermes estimates

Cut to support credit We believe that the rate cuts were aimed at encouraging private sector credit growth. The
growth reduction in the overnight deposit rates further reduces the attractiveness of non-resident
deposits being placed in the banking sector, with deposit rates in Qatar now in line with
average deposit rates in the GCC region. The QCB earlier cut its overnight deposit rate by 50
bps to 1.5% in November 2010. The fact that the QCB was not paying interest (0%) on banks’
deposits at the QCB in excess of the reserve requirement since January 2011 has helped to
reduce non-resident deposits in the banking sector in 4M2011.

CENTRAL BANK KEEN TO REDUCE SPECULATIVE CREDIT GROWTH & PRIVATE DEBT
LEVELS
New directives on We believe that a possible reason for the conservative approach in reducing interest rates is to
personal loans limit speculative credit growth, which Qatar suffered from before 4Q2008, including for
personal loans. The National Development Strategy noted that around 75% of Qatari families
are in debt, burdened mainly by large amounts of loans exceeding QAR250,000 (USD68,681).
To reflect this, the QCB introduced new and notably stricter regulations regarding retail
lending in April 2011, covering both ceilings on borrowing and repayment periods. Interest
rates for consumer lending have also been capped. The new regulation covers both the
national and expatriate population, and includes:

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 mena economics 23 May 2011

i) For
personal loans, a national can borrow up to QAR2 million for a period of five years. A
non-Qatari resident can borrow up to QAR400,000 for a maximum period of four years;

ii) Personal
loan repayment instalments cannot exceed 75% of the monthly net salary for
Qatari nationals and 50% for non-Qatari residents.

iii) Interest
rates on personal loans will be capped at 6.5% (1.5% annual interest over the QCB
overnight lending rate, which is currently 5%) and at 1% per month on credit cards. The retail
borrowing rate will automatically change after a move in the QCB’s rates.

Private consumption The new regulation will again place focus on the role of government spending and investment
remains solid programme in driving the recovery in private credit demand. The slower growth in population,
again as the first phase of the gas related-investment plan is completed, will also contribute to
the slower recovery in retail credit growth. We nevertheless highlight that although private
leverage has increased, private consumption should remain solid on strong public sector wage
increases, the reduction in interest on retail loans with the new regulation, high GDP per capita
and population growth. We see the latest regulations as a means of ensuring that a framework
is in place to contain excessive consumer lending.

FIGURE 32: QATAR POPULATION FIGURE 33: INFLATION DRIVERS

In million (LHS), % Change (RHS) In Y-o-Y % change
Overall CPI
Total Population (LHS) Food, Beverages & Tobacco
2.0 Y-o-Y Growth (RHS) 30 Rent, Fuel & Power
1.8 10 Transport & Communication
1.6 25
1.4 5
20
1.2 0
1.0 15 (5)
0.8
0.6 10 (10)
0.4 5 (15)
0.2 (20)
0.0 0
Jul-10
Jan-10

Jan-11
Nov-10
Jun-10

Oct-10

Dec-10
May-10
Mar-10

Aug-10
Feb-10

Apr-10

Feb-11
Sep-10
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011f
2012f

Source: Qatar Statistics Authority Source: Qatar Statistics Authority

RETURN TO POSITIVE, BUT WEAK, INFLATION

Inflation environment Supporting the consumer outlook and the view that benchmark rates can be further reduced,
remains benign the inflation environment remains benign, although it should return to positive territory
following deflation in 2010. We estimate an annual average inflation rate of around 2.0% in
2011, with inflation averaging 1.7% in 3M2011. The housing sector remains the main factor
behind the weak inflation, with rental prices continuing to contract, albeit at a weaker rate.

Food and transportation This is compensating for the rise in inflation in other sub-components, led by food prices and
driving inflation transportation. We continue to see higher transportation costs on a Y-o-Y basis, after Qatar
raised petrol and diesel prices by more than 25% at the end of January.

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FIGURE 34: QATAR MACROECONOMIC INDICATORS

2008a 2009a 2010e 2011f 2012f
Real Sector
Average Brent Crude Spot Price (USD/B) 98.7 62.7 80.3 110.0 105.0
GDP at Current Market Prices (QAR bn) 403.0 357.9 467.4 595.4 626.2
GDP at Current Market Prices (USD bn) 110.7 98.3 128.6 163.6 172.0
Real GDP Growth Rate (%) 25.4 8.7 17.9 11.7 6.5
Population (mn) 1.55 1.63 1.75 1.77 1.84
GDP / Capita (USD) 71,256 60,278 73,582 92,511 93,540
CPI Inflation (Y-o-Y % Change) 15.6 (4.9) (2.0) 1.9 2.4
External Sector
Trade Balance (USD bn) 42.1 24.5 40.0 56.4 59.0
Current Account Balance (USD bn) 32.2 10.0 21.9 36.9 39.0
Current Account (% of GDP) 29.1 10.2 17.1 22.6 22.7
Net Foreign Assets (USD bn) 13.4 13.0 16.7 19.5 20.7
Fiscal Sector
Budget Balance (USD bn) 11.6 15.0 13.7 19.1 12.3
Budget Balance (% of GDP) 10.4 15.2 10.6 11.7 7.1
Net Banking Sector Claims on the Gov. (USD bn) (0.6) 12.9 13.5 20.4 25.4
Financial Sector
USD/QAR Exchange Rate (Annual Average) 3.64 3.64 3.64 3.64 3.64
Annual Growth Rate in Broad Money, (%) 19.7 15.6 25.0 27.0 28.0
Growth in Credit to the Private Sector (%) 45.1 10.8 6.1 17.0 18.6
Benchmark Lending Rate (End-of-Period, %) 5.5 5.5 5.5 5.0 4.5
Source: Central Bank of Qatar, IMF, and EFG Hermes estimates

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IV. MENA COUNTRY OUTLOOKS

ALGERIA: PRE-EMPTIVE POLICY STANCE CONTINUES

PRESIDENT PROMISES MORE POLITICAL REFORMS

Constitutional reforms The Algerian government has continued with its pre-emptive policy measures to avoid political
promised unrest. President Bouteflika announced in mid-April a set of political reform measures, mainly
free elections and an end to the jailing of journalists. All laws governing the electoral process
will be revisited, and international observers will be permitted to supervise elections. President
Bouteflika also announced that a committee will be established to revise the country’s
constitution after consultations with all political parties and forces in the country. President
Bouteflika has not, however, outlined concrete deadlines for the implementation of these
reforms nor introduced any changes to his government. The announced measures come only
one month after President Bouteflika ended Algeria’s 19-year emergency rule.

FIGURE 35: GOVERNMENT WAGE BILL

In DZD billion (LHS), in % (RHS)

Wages and Salaries (LHS)

2,000 12
Wages and Salaries / GDP (RHS)
1,600
8
1,200

800
4
400

0 0
2005

2006

2007

2008

2009

2011f
2010e

Source: IMF, EFG Hermes estimates

CASH HANDOUTS FUEL MORE PROTESTS

Government relies on In addition to pre-emptive political measures, the government has also relied on its increasing
hydrocarbon wealth to foreign reserves (USD159 billion by December 2010) to meet protestors’ demands. The
appease population… strategy has been mainly one of increasing wages, extending handouts to the unemployed, and
increasing subsidies as per the announcement on 2 May 2011, when the government said that
it would increase spending by USD5 billion to USD89 billion (46.0% of GDP) in 2011,
increasing public expenditure growth to 25% Y-o-Y.

The increased spending will not impact the country’s 2011 fiscal balance, as the government
will fund it through its oil stabilisation funds (Fonds de Regulation de Recettes (FRR)). The fund
is a government subaccount at the central bank, where hydrocarbon receipts above USD19 p/b
are placed and used to finance the country’s fiscal deficit.

… which is encouraging The strategy of greater handouts has encouraged more strikes, as people push for additional
further demands benefits. The list of protestors has widened to include teachers, students, workers, military
veterans, municipal police offers and others, all of whom are demanding higher wages and
pensions.

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COUNTRY SPARED WIDE-SPREAD REVOLT, FOR NOW

Military’s strong grip on Although strikes demanding higher wages and pensions continue, political protests have
power likely to limit risks largely dried up, partly reflecting the regime’s political gestures. More importantly, we believe
of wide revolt that the military’s strong grip on power, weak and fragmented political opposition, almost
nonexistent civil society, and memories of the civil war in the early 1990s all indicate that
Algeria will be saved from a wide-ranging revolt, at least in the short term. Any revolt against
the current government is likely only to yield limited change to the country’s political
environment, given the military’s firm grip on power.

Medium-term political In the medium term, however, the country will be highly vulnerable to political instability,
and economic prospects especially if the government does not introduce structural economic and political reforms, in
remain challenging our view. Algeria’s economic performance over the past decade has been particularly
disappointing and lies mainly in the government’s inability to diversify the economy (is
dominantly based on the hydrocarbon sector), strengthen the private sector and help lower
unemployment, which has reached nearly 70% amongst youth. The economy remains
dominated by an efficient public sector that is unable to create enough jobs to employ a
growing youth population.

FIGURE 36: ALGERIA MACRO FORECASTS

2008a 2009a 2010e 2011f 2012f
Real Sector
GDP at Current Market Prices (DZD bn) 10,864 10,077 11,471 13,323 14,119
GDP at Current Market Prices (USD bn) 167.3 138.9 155.0 190.3 203.1
Real Non-Oil GDP Growth Rate, % 6.1 9.3 5.1 5.5 6.1
Real GDP Growth Rate, % 2.4 2.4 3.2 3.8 3.9
Population (million) 34.80 35.22 35.64 36.06 36.49
GDP / Capita (USD) 4,806 3,944 4,349 5,278 5,568
CPI Inflation (Y-o-Y % Average) 4.4 5.7 4.0 4.6 4.8
External Sector
Trade Balance (USD Bn) 40.6 7.8 15.5 28.4 22.4
Current Account Balance / GDP, % 20.3 0.3 4.4 9.7 5.6
Net Foreign Assets (USD Bn) 145.3 149.6 159.7 179.9 199.9
Fiscal Sector
Fiscal Balance / GDP, % 7.8 (6.9) (5.2) (3.4) (2.4)
Net Domestic Debt / GDP, % 6.8 6.9 6.1 5.3 5.0
External Debt / GDP, % 3.3 3.9 3.5 2.9 3.0
Financial Sector
USD-DZD, Annual Average 64.9 72.5 74.0 70.0 69.5
Broad Money Growth, Y-o-Y % 16.0 4.2 19.9 19.6 14.9
Private Sector Credit Growth, Y-o-Y % 16.9 15.4 13.5 15.0 16.5
Lending Rate, % 8.0 8.0 8.0 8.0 8.0
Source: Banque d’Algerie, IMF, IFS, and EFG Hermes estimates

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BAHRAIN: STABILITY RESTORED, PRESSURE ON ECONOMY REMAINS

SECURITY ENVIRONMENT IMPACTING BAHRAIN’S ECONOMIC OUTLOOK

We expect 1.0% real We lowered our non-oil real growth forecast twice in March, which now stands at 1.0%, down
non-oil GDP growth in from our initial forecast of 4.7%, due to the deterioration in the country’s political
2011 environment. Key non-oil sectors, namely tourism and the financial sectors, were likely hard
hit by the protests, which began in mid-February and escalated in mid-March as government
talks with the opposition stalled. Recently released data shows that the financial sector
expanded by 5.2% in 2010 real terms, central to the strong real GDP growth of 4.5% in 2010.

Stress visible in the Reports have indicated that hotel occupancy fell to as low as 5.0-10.0% in March, while
tourism and banking capital outflows increased. There are signs of a gradual pickup in occupancy in April, up to 20-
sectors 30%, largely driven by Saudi tourists after the political environment stabilised at end-March,
but we believe that it will take time for the sector to function normally. On the financial side,
Bahrain’s offshore (wholesale) bank assets fell 10.3% M-o-M in March to USD134.9 billion, the
lowest level seen since 2005. Private sector deposits in the banking system fell 1.1% M-o-M in
March, with savings deposits falling by 5.0% M-o-M. The BHD spot rate briefly weakened in
March, dropping as far as 0.37716 (versus the pegged rate of 0.376), but it soon rebounded as
the central bank intervened to supply US dollars. Pressure would also have benefitted from
stabilisation in the security situation from end-March.

FIGURE 37: PRIVATE SECTOR DEPOSITS IN THE FIGURE 38: BAHRAIN INFLATION CONTRACTS
BANKING SECTOR IN MARCH WITH WEAKER DEMAND
In BHD million In % Change

Y-o-Y M-o-M
7,600 6
5
4
7,400
3
2
7,200 1
0
(1)
7,000
(2)
(3)
6,800 (4)
Jul-10

Jan-11
Jun-10

Nov-10

Nov-08

Nov-09

Nov-10
Oct-10

Dec-10
May-10

May-09

May-10
Mar-10

Aug-10

Mar-11
Apr-10

Feb-11

Aug-08

Aug-09

Aug-10
Feb-09

Feb-10

Feb-11
Sep-10

Source: Central Bank of Bahrain Source: Central Informatics Organisation

GOVERNMENT TO ANNOUNCE A STIMULUS PACKAGE

Government to We believe that there is a risk of further revising downward Bahrain’s 2011 growth outlook
announce an economic should progress not be made with its investment programme. This could result in a contraction
regeneration in real non-oil economic growth. Bahrain has indicated that it is formulating development
programme schemes aimed at re-energising the national economy, with a focus on housing and
infrastructure. Bahrain has already announced that it plans to spend BHD2.5 billion (USD6.63
billion) constructing housing 50,000 units over the next five years to tackle the low-income
housing shortage. Around 45,000 low-income individuals have applied to receive a house or a
loan to build a house. Our positive real non-oil growth figure also takes into account greater
non-oil exports, including aluminium, with increased output capacity.

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mena economics 23 May 2011

Weaker private sector Housing projects will see private sector involvement, and we still expect to see government-
activity led projects driving any growth. We expect a weak outlook for purely private investments,
given the fragile political environment and possible funding issues. We also see a weak outlook
for private consumption, despite the BHD1,000 (USD2,660) one-off payment to each Bahraini
family in the wake of the protests. This weakness will be exacerbated by job losses in the
public sector, as reported by the press. Reflecting the weaker demand environment, inflation
contracted by 2.1% Y-o-Y in March and 2.3% Y-o-Y in April, led by the housing and utility
component. Housing and utilities costs fell by a sharp 14.2% Y-o-Y in April.

FISCAL SURPLUS NOW EXPECTED WITH HIGH OIL PRICES

We increase our 2011 We believe that public projects will be funded by government revenue and by issuing debt.
spending forecast With our upward oil price revision, we now forecast that Bahrain will realise a small fiscal
surplus of 0.9% in 2011. We forecast a surplus in spite of the increase to our spending growth
forecast (16.1%, up from 13.3%). The budget, approved by parliament in May, increased total
2011 and 2012 spending by 17.0% to BHD6.2 billion versus the preliminary budget.

Government continues Positively, demand for Bahraini debt remains, as the government successfully issued sukuk
to tap the debt market worth BHD200 million (USD530.5 million) in mid-April. International banks and insurance
companies operating in Bahrain also participated in the issue, according to the finance
minister. The debt was partly to fund project activity. Moreover, GCC countries have allocated
USD10 billion for Bahrain over a 10-year period to upgrade infrastructure and create jobs.

FIGURE 39: BAHRAIN MACROECONOMIC INDICATORS

2008a 2009a 2010e 2011f 2012f
Real Sector
Average Brent Crude Spot Price (USD/B) 98.7 62.7 80.3 110.0 105.0
GDP at Current Market Prices (BHD bn) 8.2 7.7 8.6 9.7 10.0
GDP at Current Market Prices (USD bn) 21.9 20.6 22.9 25.7 26.6
Real GDP Growth Rate (%) 6.3 3.1 4.5 1.5 2.6
Population (million) 0.78 1.04 1.06 1.13 1.15
GDP / Capita (USD) 28,116 19,822 21,604 22,764 23,089
CPI Inflation (Y-o-Y% Change) 3.5 2.8 2.0 1.7 2.3
External Sector
Trade Balance (USD Bn) 3.2 2.4 3.5 6.5 6.2
Current Account Balance (USD Bn) 2.3 0.6 1.3 2.8 3.0
Current Account (% of GDP) 10.3 2.7 5.5 10.9 11.4
Net Foreign Assets (USD Bn) 7.2 5.8 6.2 6.6 7.0
Fiscal Sector
Budget Balance (USD Bn) 1.5 (1.9) (1.6) 0.2 (0.6)
Budget Balance (% of GDP) 6.6 (9.4) (7.1) 0.9 (2.2)
Net Banking Sector Claims on the Gov. (USD Bn) (1.5) (0.1) (0.7) (0.6) (0.6)
Financial Sector
USD/BHD Exchange Rate (Annual Average) 0.376 0.376 0.376 0.376 0.376
Annual Growth Rate in Broad Money, (%) 19.7 5.8 11.7 13.2 14.7
Growth in Credit to the Private Sector (%) 43.0 (3.1) 10.0 8.5 10.0
Benchmark Lending Rate (End-of-Period, %) 2.8 2.3 2.3 2.3 2.3
Source: Central Bank of Bahrain, IMF, and EFG Hermes estimates

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 mena economics 23 May 2011

EGYPT: MANEUVERING ITS WAY THROUGH A BUMPY RIDE

RESERVES CONTINUE TO SLIDE IN APRIL

Foreign currency reserves continued their decline in April, falling by USD2.1 billion to a total of
USD28.0 billion (down 19% Y-o-Y). We attribute the decline to further portfolio outflows, a
widening current account deficit and support for the EGP. Lower revenue from tourism and
remittances continued to pressure the current account deficit. An explosion in early May at the
gas pipeline through North Sinai that supplies natural gas to Israel, Jordan and Syria now poses
further downside risk to the current account.

Support for the EGP We also attribute the decline in reserves to the Central Bank of Egypt’s (CBE) support of the
likely to be a central local currency (EGP). The USD-EGP was flat in April at EGP5.95 and has weakened by only
factor 2.5% YTD. The stability could partially represent a weakening USD during the month, but
nevertheless indicates CBE support, in our view, given the deteriorating external position. We
believe that the CBE is keen to support the USD-EGP to prevent a spike in inflation and further
deterioration in the fiscal deficit. Moreover, Egypt imports most of its staples, which are all
priced in USD and heavily subsidised. On the other hand, the CBE is allowing for greater
flexibility in the EUR-EGP, which the EGP weakening by 13.4% YTD most likely in an attempt
to boost competitiveness.

FIGURE 40: CHANGE IN FOREIGN RESERVES FIGURE 41: EGP WEAKENS AGAINST USD AND
CATERGORIES EUR
In USD billion

Unofficial Reserves Official Reserves 6.0 USD-EGP(LHS) 9.4

4
5.9 8.9
EUR-EGP(RHS)
2 5.8 8.4

5.7 7.9
0
5.6 7.4
(2) 5.5 6.9

5.4 6.4
(4)
10-Sep-10

21-Nov-10
19-Apr-10

14-Apr-11
1-Jan-10
6-Feb-10
14-Mar-10

25-May-10
30-Jun-10

16-Oct-10
5-Aug-10

27-Dec-10
1-Feb-11
9-Mar-11
Sep-10
Feb-10
Mar-10

Feb-11
Mar-11
Jan-10

May-10

Oct-10
Jul-10
Aug-10

Nov-10

Jan-11
Apr-10

Apr-11
Jun-10

Dec-10

Source: Central Bank of Egypt (CBE), EFG Hermes estimates Source: Bloomberg

Portfolio outflows Portfolio outflows were another drag on the foreign reserves. Despite the portfolio outflows,
pressure reserve position we estimate that foreign investors still owned around USD2.7 billion in Egyptian T-bills by the
end of March based on recently released data and CBE comments. Some investors seemingly
opted to hold their papers to maturity to avoid selling on losses after yields jumped post-
revolution. This is contrary to our earlier estimate that the majority of foreign investment in
the T-bills market had exited the country after non-official reserves were depleted by end-
February. Moreover, equity outflows by foreign investors have been less than originally feared;
foreign investors were net sellers of only USD0.4 billion between end-March (when the market
re-opened) and end-April.

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mena economics 23 May 2011

Expect slower reserve We forecast that the rate of decline in reserves will likely slow over the course of the year,
declines in remainder of with the bulk of foreign investment in fixed income having already left the country. Future
2011 declines in reserves would reflect more the current account deficit and CBE support of the
EGP. We now forecast that reserves will end 2011 at USD23.0 billion, compared to our
previous forecast of USD29.0 billion. Our new forecast represents another USD5.0 billion
decline in reserves in the remaining seven months of 2011. We have, however, not included
any foreign assistance at this point. Funding agreements would reduce pressure on domestic
sources to cover the fiscal and balance of payments deficits and provide upside to our end-
2011 FX reserve estimate.

PORTFOLIO OUTFLOWS PRESSURE GOVERNMENT DEBT

Higher government Foreign reduction from the EGP fixed income holdings (USD7.5 billion in 1Q2011) has
paper yields as liquidity contributed to tightening EGP liquidity in the banking system; foreigners now hold less than
is pressured 10% of outstanding T-bills issuances compared to 24% in September 2010. The squeeze has
resulted in rising yields on government paper (some auctions were cancelled due to the high
yields). The liquidity squeeze can also be attributed to rising dollarisation, a rising government
borrowing requirement, and weaker overall deposit growth as economic activity slows.

GOVERNMENT IN SEARCH OF FUNDING CUSHIONS

Government seeking With the fall in FX reserves and tightening banking liquidity, the government is trying to search
external support for external funding, including from multilaterals and GCC countries. Minister of Finance Samir
Radwan estimates the country’s “financial gap” at USD2 billion by the end of June 2011 and
USD10 billion by June 2012. Funding options include a loan from the IMF, which is currently
under discussion. The government has also negotiated debt forgiveness and the guarantee of
Egyptian international debt issuances, according to Radwan. The latter would allow Egypt to
tap international debt markets at more favourable rates.

FIGURE 42: EGYPT MACRO FORECASTS

2007/08a 2008/09a 2009/10a 2010/11f 2011/12f
Real Sector
GDP at Current Market Prices (EGP bn) 895.5 1,042.2 1,206.6 1,318.7 1,470.4
GDP at Current Market Prices (USD bn) 162.5 188.8 216.8 226.3 234.3
Real GDP Growth Rate, % 7.2 4.7 5.1 1.4 1.7
Population (million) 76.0 77.5 79.0 80.5 82.0
GDP/Capita (USD) 2,138 2,437 2,745 2,812 2,858
CPI Inflation (Y-o-Y% Average) 11.7 16.5 11.6 10.8 12.0
External Sector
Trade Balance (USD Bn) (23.4) (25.2) (25.1) (26.9) (31.0)
Current Account Balance / GDP, % 0.5 (2.3) (2.0) (3.6) (4.4)
Net Foreign Assets (USD Bn) 56.8 45.4 48.4 42.4 40.1
Fiscal Sector
Fiscal Balance / GDP, % (6.8) (6.9) (8.1) (9.4) (9.8)
Net Domestic Debt / GDP, % 53.5 54.0 55.0 57.9 59.3
External Debt / GDP, % 20.2 16.9 15.9 15.2 14.4
Financial Sector
USD-EGP, Annual Average 5.5 5.5 5.5 5.8 6.3
Broad Money Growth, Y-o-Y % 15.7 8.4 10.4 3.6 6.5
Private Sector Credit Growth, Y-o-Y % 12.6 5.1 8.2 6.0 9.5
Re-Discount Rate (End of Period, %) 10.50 9.00 8.25 8.25 8.25
Source: Central Bank of Egypt (CBE), EFG Hermes estimates

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 mena economics 23 May 2011

JORDAN: ECONOMIC HARDSHIPS HAVE YET TO FOLLOW

FISCAL AND EXTERNAL BALANCES ARE MAIN MACRO RISKS

Rising commodity prices Rising commodity prices will pose more downside risk to the country’s fragile fiscal and
and disruptions to gas external balances. Jordan imports all of its energy from neighbouring Arab countries and is
imports to hurt both therefore highly vulnerable to rising oil prices. In a further negative development, the energy
balances bill will rise significantly in 2011 following the explosion at Egyptian gas pipeline in May, which
transfers natural gas to Jordan from Egypt. The blast, the second in three months, has required
the government to adopt an emergency plan to reduce energy consumption as it must resort
to the more costly alternative of fuel oil to generate electricity. This will cost the country
JOD3 million per day, according to official estimates. Rising oil prices already contributed to a
USD1 billion drop in foreign reserves in 1Q2011 as the country’s trade deficit widened.

We have therefore widened our fiscal and current account deficit forecasts to account for
higher oil prices and the disruption of natural gas imports from Egypt, a situation we expect to
last for nearly three months. Social pressures limit the government’s ability to move ahead
with fiscal reforms. This is reflected in Jordan’s maintenance of consumer fuel price subsidies
despite the sharp jump in oil prices in May, as fuel prices to industry increased. We estimate
that these factors will result in an additional 1.5 percentage point (pp) deterioration in the
current account and 0.1 pp in the fiscal deficit.

FIGURE 43: WEIGHTED REAL GDP GROWTH TO FIGURE 44: INTERNATIONAL RESERVES REFLECT
SLOW IN 2011 THE EXTERNAL DETERIORATION
Weighted growth in % In USD million

Manufacturing
Construction
Transp & Comm 1,000
8 Finance & Real Estate
Government Services 800
7 Others 600
6 Real GDP (at Factor Cost)
400
5
200
4 0
3 (200)
2 (400)
1 (600)
0 (800)
-1
Nov-09

Nov-10
May-09

May-10
Mar-09

Mar-10

Mar-11
Jul-09

Jul-10
Sep-09

Sep-10
Jan-09

Jan-10

Jan-11
2007

2008

2009

2010

2011f

2012f

Source: Central Bank of Jordan (CBJ), EFG Hermes estimates Source: Central Bank of Jordan (CBJ)

WE REDUCE OUR 2011 AND 2012 GROWTH FORECASTS

Weaker tourism and We reduce our growth forecast for 2011 to 3.5% from 4% previously primarily due to weaker
construction activity tourism revenues and slower trade with Syria following border closures. We also reduce our
growth forecast for 2012 to 4% from 4.8% on the expectation that regional uncertainties will
continue to dampen growth in the Kingdom.

Syria developments to Two key sectors will be negatively impacted by regional political developments and a tight
impact growth fiscal position: tourism and construction. The MENA region’s deteriorating security condition
will weigh negatively on tourist arrivals (Jordan relies heavily on inclusion within joint tourism
packages with neighbouring countries, especially Egypt). The recent escalation of violence in

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mena economics 23 May 2011

Syria and the closure of its border with Jordan should also weigh negatively on the sector, in
our view, with nearly 25% of tourist arrivals originating from Syria.

Construction sector to The construction sector will remain the victim of increasing fiscal pressures. In March, the
be hard hit government announced that it was cutting its investment spending to pay for higher wages
and subsidies. This will continue to have a marked negative impact on the construction sector,
given that the government is the largest client for contractors. The Jordan Construction
Contractors Association said that the value of projects carried out by contractors in the non-
residential sector in 2010 fell by nearly 80% to JOD0.8 billion. This primarily reflects the
decline in public investment spending, as well as lower foreign investment, down 27% Y-o-Y in
2010, which is primarily driven by GCC investors.

POLITICAL APPEASEMENT AS PROTESTS DECLINE

King Abdullah has looked for solutions to appease rising demand for political change. Early in
May, King Abdullah announced the formation of a committee headed by a former prime
minister to revise the country’s constitution. King Abdullah’s letter gave the committee a carte
blanche to take whatever steps were necessary to improve political life in the country. The
government has also opened investigations in a series of corruption cases. The moves come as
protests are seemingly losing momentum; the last three weeks have witnessed very limited
protests compared to in March and April.

FIGURE 45: JORDAN MACRO FORECASTS

2008a 2009a 2010a 2011f 2012f
Real Sector
GDP at Current Market Prices (JOD Bn) 19.5 20.9 22.7 24.2 26.9
GDP at Current Market Prices (USD Bn) 22.7 25.1 27.5 29.7 32.3
Real GDP Growth Rate, % 7.6 2.3 3.1 3.5 4.0
Population (million) 5.9 6.0 6.1 6.3 6.4
GDP/Capita (USD) 3,876 4,191 4,491 4,733 5,031
CPI Inflation (Y-o-Y % Average) 14.0 (0.6) 5.0 4.6 5.1
External Sector
Trade Balance (USD Bn) (7.2) (6.3) (6.5) (7.8) (8.4)
Current Account Balance / GDP, % (9.0) (4.5) (4.3) (9.0) (7.1)
Net Foreign Assets (USD Bn) 10.0 12.5 14.2 14.4 14.7
Fiscal Sector
Fiscal Balance / GDP, % (2.1) (8.5) (5.4) (5.6) (5.0)
Net Domestic Debt / GDP, % 30.5 32.5 35.1 35.5 37.0
External Debt / GDP, % 22.6 21.7 23.6 22.6 21.4
Financial Sector
USD-JOD, Annual Average 0.704 0.704 0.704 0.704 0.704
Broad Money Growth, Y-o-Y% 17.3 9.3 11.5 15.7 12.2
Private Sector Credit Growth, Y-o-Y% 13.9 1.3 7.2 14.0 16.0
Re-discount Rate (End of Period, %) 6.25 4.75 4.25 4.25 4.75
Source: Central Bank of Jordan, (CBJ) Ministry of Finance, and EFG Hermes estimates

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 mena economics 23 May 2011

KUWAIT: NEW GOVERNMENT FORMED, BUT DIFFICULTIES LIKELY TO REMAIN

GREATER CHANGES THAN PREVIOUS RESHUFFLES

New government sworn A new cabinet was finally sworn in Kuwait in early April after over a month without a
in early April government. The previous cabinet resigned on 31 March to avoid questioning by parliament of
three ministers, all members of the ruling al-Sabah family. There were some notable changes
in the cabinet, which we believe was an attempt by Prime Minister Sheikh Nasser Mohammed
al-Ahmed al-Sabah to improve relations with parliament. This could also partly explain the
delay in forming the new cabinet, which includes six new members, representing a substantial
change compared to previous government re-shuffles or changes. The changes were largely in
portfolios generally held by non-royal family members. These include the ministries of
education and justice, amongst others.

Oil minister changed, However, the replacement of Sheikh Ahmad al-Abdullah al-Sabah, who held the Oil and
but do not expect Information portfolios in the previous government, was notable. Sheikh Ahmad was one of the
changes in policy government members that had a motion submitted by parliament to be questioned.
Mohammad Al-Busairy (previous Minister of Communications) has been named the new Oil
Minister. The oil portfolio has tended to be held by members of the al-Sabah family, thus the
appointment of Mohammad Al-Busairy is a significant move. We do not believe that there will
be a change in oil policy, or wider government policy with the formation of the new cabinet.

FIGURE 46: STRONG PROJECT AWARDS FIGURE 47: GOVERNMENT SPENDING ON

CONTINUE IN 1Q2011 CONSTRUCTION AND LAND ACQUISITION
In USD billion In KWD million
Infrastructure Oil / Gas Production 450
Power Construction 400
Pipeline Gas Processing
Water and Waste Refining
350
7
6 Industrial 300
5 250
4 200
3 150
2 100
1
50
0
0
1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11

Source: MEED Projects, EFG Hermes estimates Source: Central Bank of Kuwait (CBK), EFG Hermes estimates

KEY PORTFOLIOS REMAIN WITH ROYAL FAMILY MEMBERS

With the exception of the oil portfolio, ministries headed by the royal family have not
changed, including the ministries of defence, interior and foreign ministers. With the
replacement of the ministers of oil and information, we now estimate that there are five al-
Sabah family members in the new government versus six previously (including Prime Minister
Sheikh Nasser Mohammed).

CONTINUED RISKS FOR GOVERNMENT POLICY

Opposition to Prime Opposition MPs have indicated that changes to the cabinet are insufficient. The day that the
Minister Sheikh Nasser new cabinet was announced, two motions were submitted to question Prime Minister Sheikh
likely to continue Nasser. This shows the continued pressures that the government is likely to face, although the
questioning of the Prime Minister Sheikh Nasser has been delayed on constitutional grounds.

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mena economics 23 May 2011

MPs have also indicated that they want to question Health Minister Helal Al-Sayer, who
retained his position from the previous government and Deputy Prime Minister and Minister of
State for Development Affairs Sheikh Ahmad al-Fahad al-Ahmad al-Sabah. Prior to the
resignation of the government, Sheikh Ahmed faced an interpellation motion in parliament
over the handling of the USD104 billion Kuwait Development Plan launched in 2010.

INVESTMENT STILL A KEY OBJECTIVE

Political environment a Interim data shows that there has been some gradual improvement in the economic
factor in weak project environment since mid-2010. Government spending has picked up, especially on the
implementation investment side, and the level of project awards has also increased. Kuwait Petroleum
Corporation (KPC) has said that it could re-launch tenders for the KWD5 billion Al Zour
Refinery and the KWD4 billion Clean Fuels Project before the end of 2011 if it receives
approval from the Supreme Petroleum Council. Additionally, the Ministry of Electricity &
Water is looking to invest KWD7.5 billion up to 2014 to expand the country’s water and power
production capacity. Project implementation, however, looks to have remained weak. The
unchanged and difficult cabinet/parliament relationship continues to be a central risk for the
investment programme.

FIGURE 48: KUWAIT MACROECONOMIC INDICATORS

2008a 2009a 2010e 2011f 2012f
Real Sector
Average Brent Crude Spot Price (USD/B) 98.7 62.7 80.3 110.0 105.0
GDP at Current Market Prices (KWD bn) 39.8 31.5 36.7 44.4 44.7
GDP at Current Market Prices (USD bn) 148.7 109.5 127.8 159.6 163.3
Real GDP Growth Rate (%) 5.7 (4.5) 2.0 3.7 5.7
Population (million) 3.44 3.54 3.61 3.68 3.75
GDP/Capita (USD) 43,733 31,286 35,500 42,432 43,757
CPI Inflation (Y-o-Y% Change) 10.6 4.0 4.0 5.3 5.7
External Sector
Trade Balance (USD Bn) 64.2 34.4 47.8 72.4 65.4
Current Account Balance (USD bn) 60.4 25.8 36.8 61.4 54.8
Current Account (% of GDP) 40.6 23.5 28.8 38.5 33.6
Net Foreign Assets (USD bn) 27.6 32.9 33.9 42.6 43.5
Fiscal Sector
Budget Balance (USD bn) 10.2 22.4 29.6 45.3 36.3
Budget Balance (% of GDP) 6.9 20.4 23.2 28.4 22.2
Net Banking Sector Claims on the Gov. (USD bn) (9.7) (11.3) (8.8) (9.7) (11.4)
Financial Sector
USD/KWD Exchange Rate (Annual Average) 0.268 0.288 0.287 0.278 0.274
Annual Growth Rate in Broad Money, (%) 15.6 13.4 2.4 7.2 9.3
Growth in Credit to the Private Sector (%) 16.7 6.1 1.9 3.7 5.0
Benchmark Lending Rate (End-of-Period, %) 3.75 3.00 2.5 2.5 2.5
Source: Central Bank of Kuwait (CBK), IMF, and EFG Hermes estimates

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 mena economics 23 May 2011

LEBANON: 2011 ECONOMIC OUTLOOK HIT HARD

NO GOVERNMENT DESPITE SIGNS OF PROGRESS

Cabinet formation Efforts to form a new cabinet in Lebanon made tangible progress in mid-May after the
awaits agreement on the different parties agreed on a candidate for the Interior Ministry, which has been a major
entire line-up obstacle preventing the formation of a new government. However, the rest of the new cabinet
line up still needs approval. We also expect some disagreement regarding the distribution of
portfolios within the opposition (between Hezbollah and allies), and continued disagreement
between President Michel Suleiman and Free Patriotic Movement leader MP Michel Aoun. We
believe that the PM designate, Najib Mikati, might be forced to announce a de-facto
government if a comprehensive agreement on names and portfolios cannot be not reached.

We believe that formation of a new government will not be the only challenge that Mikati has
to face. The largest challenge will be the government’s stance on the Special Tribunal for
Lebanon (STL), as well as the reaction of the international community and Sunni leader Saad
Hariri to the STL’s conclusion.

FIGURE 49: BUDGET DEFICIT WIDENS IN FIGURE 50: ARRIVALS TO BEIRUT -

1Q2011 WITH THE HIGHER OIL PRICE INTERNATIONAL AIRPORT FALLS IN 1Q2011
In LBP trillion In thousands of people (LHS), % Change (RHS)
Total Revenues Arrivals to Beirut Intl
Total Expenditures Airport(LHS)
5 Budget Deficit Y-o-Y Change (RHS)
500 80
4
400 60
3
300 40
2 200 20

1 100 0

0 (20)
0
Oct-09

Oct-10
Jul-09

Jul-10
Jan-09

Jan-10

Jan-11
Apr-09

Apr-10
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11

Source: Ministry of Finance Source: Banque du Liban

WE REDUCE OUR GROWTH FORECAST FOR 2011 TO 3.5%

Key sectors to We had already expected economic growth to decelerate in 2011, but weaker-than-expected
decelerate in 1Q2011; 1Q2011 indicators led by a number of key sectors and developments in Syria have caused us
additional impact from to expect an even further slowdown in growth. We now forecast 2011 real GDP growth of
Syria 3.5% versus 5.0% previously.

There has been weak activity in many economic areas in 1Q2011 including exports, capital
inflows, real estate trading and tourism numbers. We expect the deceleration to continue in
2Q2011, especially with recent developments in Syria (the economies are interdependent).
The closure of the Syrian borders, the only land getaway for Lebanese goods to regional
markets, will negatively impact the country’s exports at least in 2Q2011, in our view. We
expect lower tourism receipts in 2011, especially from a drop in Arab tourists, who constitute
the majority tourists. The drop in Arab tourists comes after Saudi Arabia issued a travel
warning to its citizens earlier in January after the Hariri government was toppled.

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mena economics 23 May 2011

WIDENING FISCAL DEFICIT

Fiscal deficit to widen on We have updated our fiscal forecasts to account for a wider fiscal deficit in 2011 on the back
slower growth and rising of decelerating growth environment, hence weaker revenue growth, and rising spending on
oil prices transfers to EDL after the recent spike in oil prices. We expect these factors to result in a 2.1
percentage point widening in the fiscal deficit to 9.2% of GDP.

Banks continue to roll We do not expect rolling over maturing T-bills (LBP) and Eurobonds in 2011 to be problematic,
over government debt… despite delays in forming a new government. Around USD11.5 billion of local currency T-bills
will mature this year. Indeed, Lebanon has successfully refinanced USD1 billion worth of
Eurobonds at relatively low rates (weighted at 6.03 for the two maturities of eight- and 11-
years, down from 7.82%) given the balance between low global interest rates and domestic
political uncertainties. It is believed that Lebanese banks were the main buyers of the new
Eurobonds issue which shows their commitment to refinance existing government debt.

… but show some However, Lebanese banks’ have been more reluctant in subscribing to new local currency T-
reluctant to subscribe to bills in 1Q2011. We believe that rising dollarisation (which increased to 65.6% at the end of
new local currency T- February 2011 from 63.2% at the end of December 2010 due to domestic uncertainties) has
bills in 1Q2011 led banks to hold onto their LBP liquidity in 1Q2011, which pushed the central bank to
intervene to fill the gap. We note that with the absence of a government, Lebanon cannot tap
international markets to raise new debt as a governmental decree is required. A budget law is
also required to increase capital expenditure. We expect the central bank to remain the lender
of last resort for the government if banks’ reluctance in subscribing to T-bills persists,

FIGURE 51: LEBANON MACRO FORECASTS

2008a 2009a 2010e 2011f 2012f
Real Sector
GDP at Current Market Prices (LBP tn) 45.3 52.7 58.1 62.8 68.4
GDP at Current Market Prices (USD bn) 30.1 35.1 38.7 41.6 45.4
Real GDP Growth Rate, % 9.3 8.5 6.5 3.5 4.8
Population (million) 3.8 3.9 3.9 4.0 4.0
GDP/Capita (USD) 7,899 9,089 9,908 10,521 11,321
CPI Inflation (Y-o-Y% Average) 10.0 3.0 3.9 4.5 4.2
External Sector
Trade Balance (USD Bn) (12.7) (12.7) (13.9) (16.2) (16.9)
CA Balance/GDP, % (10.2) (8.0) (10.6) (12.2) (12.1)
BdL NFAs (ex-gold) (USD bn) 16.6 25.3 28.4 29.4 30.5
Fiscal Sector
Fiscal Balance / GDP, % (9.7) (8.4) (7.4) (9.2) (8.4)
Net Domestic Debt / GDP, % 67.9 65.4 63.4 60.6 54.5
External Debt / GDP, % 70.7 61.0 53.4 50.8 47.7
Financial Sector
USD-LBP, Annual Average 1,507.5 1,501.9 1,502.0 1,505.0 1,506.0
Broad Money Growth, Y-o-Y% 14.8 19.5 12.3 14.4 10.0
Private Sector Credit Growth, Y-o-Y% 20.7 14.8 24.4 15.0 18.0
Source: Banque Du Liban, Ministry of Finance, and EFG Hermes estimates

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 mena economics 23 May 2011

MOROCCO: A CHANGING FISCAL DISCIPLINE

RISING WAGE EXPENDITURE TO HURT FISCAL POSITION

Government agrees to Morocco’s government struck a deal with the country’s trade union, resulting in a sharp wage
major spending increase hike. The deal granted public employees a net MAD600 (USD80) per month wage increase as
on wages and pensions of 1 May. Private sector employees will also benefit from a higher minimum wage, which will
increase by 15% (10% in June 2011, 5% in January 2012) from its current level of MAD2,110
per month. Pensioners in the public and private sector will also benefit from a nearly 70%
increase in the minimum pension to MAD1,000 per month. The deal came in an effort to
prevent protesting labourers from joining wider political protests led by the 20 February
Movement. The government also rescheduled the debt of nearly 100,000 farmers that
borrowed from the state-owned, specialised Credit Agricole. News reports estimate that total
NPLs at the bank stood at MAD2 billion out of a total of MAD7.5 billion lent to the agricultural
sector.

Fiscal deficit to widen on We have widened our fiscal deficit forecast to 4.8% of GDP from 3.2% to account for the
higher spending higher wages and pension spending as well as the adjustment to our oil price forecast. We
estimate that the wage and pension hikes will cost the government MAD4 billion (0.5% of
GDP) annually, but only MAD2.9 billion in 2011 since the wage hike will have only been
applied since May. No official estimate has been given and the government has not said how
the additional spending will be financed.

FIGURE 52: DETERIORATION IN FISCAL FIGURE 53: TOURISM REVENUE GROWTH NOW
POSITION EXPECTED TO SLOW IN 2011
In % of GDP In USD billion (LHS), in % (RHS)
Primary Balance Budget Balance Tourism Revenues (LHS)
4 Tourism / GDP (RHS)
8 12
2
10
0 6
8
(2)
4 6
(4)
(6) 4
2
(8) 2

(10) 0 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011f
2011e
2012e
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Source: Ministry of Finance, EFG Hermes estimates Source: Office des Changes, EFG Hermes estimates

ASSET SALES AND LOCAL BORROWING TO FINANCE DEFICIT

The Moroccan government has limited options to finance its widening deficit. The government
already planned a sale of state assets to finance a near doubling of the subsidy bill, although
the Finance Ministry did not indicate the type of assets to be sold nor the amount to be raised.
The asset sale could possibly pertain to part of the government's stake in Maroc Telecom; the
government announced last year that it plans to sell an 8% stake of the company which would
yield around USD1.4 billion (1.4% of 2011 GDP).

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mena economics 23 May 2011

MARRAKESH BOMB ADDS TO ECONOMIC PAIN

Bomb adds economy’s The bombing in Marrakesh at the end of April clearly adds to the economy’s hardships,
hardships especially the tourism sector, which is already suffering from weak economic dynamics in
Europe. We were already negative on the tourism outlook, which directly employs 450,000
people and is Morocco’s third largest source of FX revenue. Given local and regional
developments across the MENA region, tourism revenues are likely to suffer even further. We
expect the bombing to have a short-term negative impact on the sector, with the tourism
minister already confirming holiday cancellations of around 3%.

We maintain our growth We reduce our 2011 tourism revenue growth forecast to 7.0% from 10.0% on the back of the
forecast, but adjust bombing. We have, however, taken a more positive stance on phosphate export volumes and
growth drivers earnings after the recent rise in oil prices as well as increased demand for agricultural inputs.
The net result is no change to our forecast, which calls for 3.5% growth in GDP in 2011,
slightly higher than 3.3% estimated for 2010. We expect that 2011 domestic growth will be
primarily driven by an improvement in agricultural production following a positive raining
season as well as higher investment by the central government and state-owned enterprises.
Previous fiscal reforms mean that Morocco is still in a position to increase government
investments. Agriculture is a key sector in Morocco as it employs nearly 40% of the population
and is a critical driver of private consumption.

FIGURE 54: MOROCCO MACRO FORECASTS

2008a 2009a 2010e 2011f 2012f
Real Sector
GDP at Current Market Prices (MAD bn) 688.8 736.2 768.3 811.2 866.6
GDP at Current Market Prices (USD bn) 89.1 91.0 90.0 100.3 109.7
Real GDP Growth Rate, % 5.6 4.9 3.3 3.5 4.2
Population (million) 31.6 32.0 32.4 32.8 33.1
GDP / Capita (USD) 2,818 2,847 2,780 3,062 3,310
CPI Inflation (Y-o-Y % Average) 3.7 1.0 1.0 2.0 2.5
External Sector
Trade Balance (USD Bn) (18.7) (16.6) (14.9) (17.2) (19.6)
Current Account Balance/GDP, % (5.2) (5.4) (4.3) (5.0) (5.3)
Net Foreign Assets (USD Bn) 24.4 24.4 23.9 23.1 24.0
Fiscal Sector
Fiscal Balance / GDP, % 0.4 (2.2) (4.4) (4.5) (4.6)
Net Domestic Debt / GDP, % 36.8 35.6 37.5 40.0 42.0
External Debt / GDP, % 9.9 10.7 12.0 12.1 12.2
Financial Sector
USD-MAD, Annual Average 7.7 8.1 8.5 8.1 7.9
Broad Money Growth, Y-o-Y% 13.5 7.0 8.8 8.5 12.0
Private Sector Credit Growth, Y-o-Y% 22.1 9.8 11.0 12.5 15.0
Re-Discount Rate (End of Period, %) 3.50 3.25 3.25 3.25 3.50
Source: Bank Al Maghrib, Ministry of Finance, and EFG Hermes estimates

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 mena economics 23 May 2011

OMAN: CONTINUING TENSIONS TO AFFECT GROWTH

PRO-REFORM DEMONSTRATIONS CONTINUE

Protests continue Oman’s political environment stabilised after February’s deterioration, although low-level
despite concessions protests continue despite three government reshuffles and a series of government measures
aimed at appeasing demonstrators. The third reshuffle ordered by Sultan Qaboos bin Said at
the beginning of March was the most significant as four central ministers were replaced,
bringing the total number of replaced ministers to twelve. These include new ministers for the
interior and commerce portfolios, whilst the Ministry of National Economy was replaced by a
new committee. It is worth noting that unlike other regional countries, protesters centred their
demands on higher wages and job creation, with a weaker focus on gradual political reforms.
Protests have not targeted Sultan Qaboos.

FIGURE 55: WEAKER PROJECT ACTIVITY FIGURE 56: FISCAL POSITION SOLID DESPITE
In USD billion SPENDING INCREASE
In USD billion (LHS), % (RHS)

Infrastructure Power Revenue (LHS)

Construction Water and Waste Expenditure (LHS)
Oil / Gas Production Petrochemicals 40 Balance as % of GDP (RHS) 16
4.0 Gas Processing Pipeline 35 14
Metal 12
3.5 30
3.0 10
25 8
2.5
2.0 20 6
1.5 15 4
1.0 2
10
0.5 0
5 (2)
0.0
0 (4)
1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

1Q2011

2011f

2012f
2006

2007

2008

2009

2010e

Source: MEED Projects, EFG Hermes estimates Source: Central Bank of Oman, EFG Hermes estimates

LOWER NON-OIL GROWTH ON WAGE STRIKES

Lower real non-oil GDP We reduced our 2011 real non-oil GDP growth forecast for Oman to 3.3% in March from
growth to 3.3% 4.0% previously. There have been a number of industrial strikes calling for wage increases,
which will likely impact output. We also believe that the restructuring of the ministry of
economy and the recent government reshuffles will likely result in delays in Oman’s award
schedule and some challenges in project implementation.

Value of project awards Project awards data in 1Q2011 supports our lower non-oil GDP growth forecast, with political
fell 70% Q-o-Q in difficulties likely behind the 70.0% Q-o-Q fall in the value of projects awarded to USD1.1
1Q2011 billion. Moreover, around 50% of expected 1Q2011 awards were put on hold. However, we
believe that the government will remain committed to its wider investment programme,
whose in 2011 is likely to remain on infrastructure.

SPENDING INCREASE SUPPORTED BY HIGHER OIL REVENUES

USD2.6 billion has been The set of fiscal measures announced in February and March by the government to meet
allocated to meet protesters’ demands are estimated to add USD2.6 billion to the budget for the year. This is
protestors’ demands equivalent to 3.9% of our 2011 estimated GDP. The focus of the measures is on social
spending, including increasing employment.

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mena economics 23 May 2011

Social focus of the Measures include: i) the appointment of 40,714 citizens in defence, security, and civil
spending plan ministries and units at a cost of USD1.15 billion; and ii) payment of cost of living allowance for
all employees in military and civil units, estimated at USD653 million. Other fiscal procedures
include the allocation of USD390 per month to each unemployed individual (beneficiaries
estimated at 50,000 citizens) and increasing monthly pensions for all retired civilians and
military personnel. The government will also increase allocated amounts for students in
government colleges, institutes and centres connected to ministries of higher education and
manpower, as well as provide support for the youth sector, athletics, and information sector.
Moreover, GCC countries have allocated USD10 billion for Oman to be disbursed over a 10-
year period to upgrade infrastructure and spur job creation.

Government spending to Following the announcement of the measures, we have increased our actual government
increase 17.0% Y-o-Y in spending forecast to USD26 billion in 2011. With the nature of the spending packages, we see
2011 greater deployment of funds in 2011. As such we now expect a 17.0% Y-o-Y increase in
government expenditure versus our earlier forecast of 13.0% Y-o-Y. Despite higher
government spending, however, we now forecast that the fiscal surplus will be around 13.7%
of estimated GDP, supported by a strengthening in oil revenue.

FIGURE 57: OMAN MACROECONOMIC INDICATORS

2008a 2009a 2010e 2011f 2012f
Real Sector
Average Brent Crude Spot Price (USD/B) 98.7 62.7 80.3 110.0 105.0
GDP at Current Market Prices (OMR bn) 23.3 18.0 22.2 27.3 27.9
GDP at Current Market Prices (USD bn) 60.5 46.8 57.8 71.0 72.6
Real GDP Growth Rate (%) 12.8 4.1 4.8 3.1 3.2
Population (mn) 2.78 2.88 2.98 3.1 3.2
GDP / Capita (USD) 21,662 15,991 18,446 21,932 21,698
CPI Inflation (Y-o-Y% Change) 12.6 3.6 3.1 4.0 4.5
External Sector
Trade Balance (USD bn) 17.0 11.6 15.7 25.2 22.2
Current Account Balance (USD bn) 5.4 (0.5) 3.7 12.7 8.9
Current Account (% of GDP) 8.9 (1.0) 6.3 17.9 12.2
Net Foreign Assets (USD bn) 11.3 11.4 13.2 16.8 18.4
Fiscal Sector
Budget Balance (USD bn) 8.4 (0.7) 3.6 9.7 5.5
Budget Balance (% of GDP) 13.9 (1.5) 6.2 13.7 7.6
Net Banking Sector Claims on the Gov. (USD bn) (6.2) (6.0) (6.8) (7.5) (8.0)
Financial Sector
USD/OMR Exchange Rate (Annual Average) 0.385 0.385 0.385 0.385 0.385
Annual Growth Rate in Broad Money, (%) 23.1 4.8 11.3 12.4 14.5
Growth in Credit to the Private Sector (%) 43.8 4.9 6.5 7.2 9.4
Benchmark Lending Rate (End-of-Period, %) 1.9 2.0 2.0 2.0 2.0
Source: Central Bank of Oman (CBO), IMF, and EFG Hermes estimates

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 mena economics 23 May 2011

SAUDI ARABIA: GOVERNMENT SPENDING TRICKELING DOWN

BUOYANT ECONOMIC ACTIVITY

Watching for an upgrade Economic activity remains robust in Saudi Arabia, with proxy data continuing to point to both
strong investment and private consumption growth. We had reduced our real non-oil GDP
growth level for Saudi Arabia marginally to 4.6% from 4.9% in 1Q2011 over concerns that
foreign funding for the country’s investment programme could have weakened in light of
regional political developments. With the robust proxy data, especially on the projects side, we
believe that a return to our original forecast could be warranted should the proxy data remain
robust.

PROJECT ACTIVITY REMAINS STRONG IN 1Q2011

Credit growth building We wait to see if strong projects awards continue into 2Q2011, with a possible risk that
momentum 1Q2011 foreign funding could already have been in place ahead of regional developments.
Given the limited spill over of regional developments into Saudi Arabia, we see any possible
concerns over external funding linked more to delays rather than its removal. The domestic
funding outlook remains strong, with an ample FX reserve position and continued signs that
banking sector credit growth is gaining traction. Private credit growth accelerated to 7.0% Y-
o-Y and 1.2% M-o-M in March, the strongest rates seen over the last 18 months. We see this
expansion being driven by both project and consumer-related lending. Quarterly data shows
that corporate loans increased 8.3% Y-o-Y in 1Q2011 versus 3.2% Y-0-Y in 4Q2010, and was
the main driver of loan growth.

FIGURE 58: CORPORATE LOANS STRENGTHEN FIGURE 59: POINTS OF SALES TRANSACTIONS
IN 1Q2011 POINT TO BUOYANT PRIVATE CONSUMPTION
Contributors to Y-o-Y% Change In Y-o-Y% Change
Public Services Finance 50 Value of Sales
50 Real Estate Corporate Loans
Commerce Total Credit 40 No. of Transactions
40
30 30
20 20
10
10
0
(10) 0
(20) (10)
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11

(20)
Jun-09

Jun-10
Dec-08

Dec-09

Dec-10
Mar-09

Mar-10

Mar-11
Sep-08

Sep-09

Sep-10

Source: SAMA Source: SAMA

Project awards remain Importantly, project awards data for 1Q2011 shows that Saudi Arabia’s investment
on track programme has remained on track despite regional political developments and increased
domestic populist spending (see “GCC Projects: Progressing at Uneven Speeds,” published on
19 April 2011). Saudi Arabia did not see any notable delays or cancelations in project awards
during the quarter, while the project awards were broad-based. The absolute level of project
awards remained high, although the value fell on a Q-o-Q basis. Combined with the strong
projects awards in 2H2010, which will likely start to be implemented in 2011, we expect to
see an acceleration in investment growth.

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mena economics 23 May 2011

GOVERNMENT SPENDING ADDING FURTHER SUPPORT

Private consumption The impact of additional government spending (announced in February and March 2011) on
accelerates with private consumption is already evident in points of sale transactions data, which jumped
government spending 22.6% M-o-M in March. We had expected to see the most immediate impact of additional
spending in current expenditure, led by benefits to public sector employees (including a two-
month salary bonus) and social handouts. We note that a number of private companies also
granted their employees salary bonuses. We see further support to private spending through
increased employment creation; the employment sub-index of Saudi Arabia’s Purchasing
Managers’ Index (PMI) rose to its highest level in April 2011 (54.8) since December 2009.

PMI remains above the Saudi Arabia’s overall PMI index, which reflects business sentiment and activity, has remained
60 level solid and above the 60 level since October 2010; a reading above 50 reflects growth in the
economy. The April index, however, weakened marginally to 62.7, the lowest level in four-
months. The index continues to reflect concerns over higher producer price inflation (PPI), with
the input price sub-section reaching a series record high on the back of higher fuel and raw
material costs. Saudi Arabia’s private sector firms increased their tariffs in April to protect
profit margins from rising input costs, leading to the sharpest output price inflation in almost a
year. We believe that PPI will be a great challenge for the wider economy rather than
consumer price inflation, which stood at 4.8% Y-o-Y in April. We nevertheless expect CPI to
continue to strengthen for the remainder of 2011 on the back of higher food prices, imported
and domestic prices, higher inputs and rental inflation.

FIGURE 60: SAUDI ARABIA MACROECONOMIC INDICATORS

2008a 2009a 2010e 2011f 2012f
Real Sector
Average Brent Crude Spot Price (USD/B) 98.7 62.0 80.3 110.0 105.0
GDP at Current Market Prices (SAR bn) 1,786.1 1,397.5 1,630.0 2,116.9 2,143.1
GDP at Current Market Prices (USD bn) 476.3 372.7 434.7 554.5 558.6
Real GDP Growth Rate (%) 4.2 0.6 3.8 4.8 2.9
Population (mn) 24.90 25.51 26.20 26.68 27.27
GDP / Capita (USD) 19,129 14,614 16,654 21,142 20,957
CPI Inflation (Y-o-Y% Change) 9.9 5.0 5.4 5.5 6.0
External Sector
Trade Balance (USD bn) 212.7 105.8 149.4 230.7 203.0
Current Account Balance (USD bn) 133.0 23.3 69.7 146.7 116.0
Current Account (% of GDP) 27.9 6.3 16.0 26.5 20.8
Net Foreign Assets (USD bn) 449.0 435.0 466.7 510.8 520.8
Fiscal Sector
Budget Balance (USD bn) 154.9 (23.1) 28.9 81.1 46.3
Budget Balance (% of GDP) 32.5 (6.2) 6.7 14.6 8.3
Net Banking Sector Claims on the Gov. (USD bn) (225.6) (205.1) (216.1) (210.0) (215.0)
Financial Sector
USD/SAR Exchange Rate (Annual Average) 3.75 3.75 3.75 3.75 3.75
Annual Growth Rate in Broad Money, (%) 19.0 6.5 9.3 16.8 18.2
Growth in Credit to the Private Sector (%) 30.6 (0.04) 5.6 9.0 13.2
Benchmark Lending Rate (End-of-Period, %) 2.5 2.0 2.0 2.0 2.0
Source: SAMA, IMF, and EFG Hermes estimates

40 / 43 pages
 mena economics 23 May 2011

UAE: SENTIMENT RECOVERING, SHARP INCREASE IN BANKING DEPOSITS

SERVICE HUB ROLE STRENGTHENED WITH REGIONAL POLITICAL DEVELOPMENTS

Political stability The UAE’s economy continues to show signs of a gradual recovery and strengthening
underpinning regional sentiment. The recovery is led by externally facing sectors, namely trade, logistics, services and
position hospitality, although there are signs that this initial recovery is filtering in domestically. The
real estate and banking sector’s outlook, however, remains weak. With the high level of
political stability, Dubai’s position as a regional service hub and as a financial centre has been
strengthened. A number of financial sector professionals were relocated to Dubai in March
during the worst clashes in Bahrain. Moreover, the UAE has benefitted by stronger intra-
regional and international tourism as planned holidays have been diverted to the UAE from the
wider region, including Egypt.

PMI rises to highest level Reflecting increased non-oil activity, the UAE’s PMI has risen to its highest levels since the
since August 2009 series started in August 2009 (see figure 7). The size of the increase to 57.5 points in April was
also notable (from 54.7 points in March). New orders for private sector firms also saw a solid
jump, which we view positively, rising to 62.8 points in April from 58.0 March.

FIGURE 61: UAE INTERBANK RATES FALL BUT FIGURE 62: CREDIT AND DEPOSIT GROWTH
STILL HIGH REGIONALLY In AED billion (LHS), in % (RHS)
In percentage points
Bank deposits (LHS)
3M SIBOR 3M EIBOR
Loans and advances (LHS)
3.0 1150 Loans-to-deposits ratio (RHS) 108
106
2.5 1100 104
1050 102
2.0
100
1.5 1000 98
96
1.0 950 94
900 92
0.5 90
01-Jun-09

01-Jun-10
01-Oct-09

01-Oct-10
01-Dec-09

01-Dec-10
01-Aug-09

01-Aug-10

850 88
01-Apr-09

01-Apr-10

01-Apr-11
01-Feb-10

01-Feb-11

Sep-10
Feb-10

Oct-10

Feb-11
Jan-10

Jul-10
Aug-10

Nov-10

Jan-11
Apr-10
Mar-10

May-10
Jun-10

Dec-10

Mar-11

Source: Reuters Source: Central Bank of the UAE

STRONG DEPOSIT GROWTH WITH REGIONAL DEVELOPMENTS

Banking sector liquidity We believe that the stable political outlook was also behind the notable rise in banking sector
improves with deposit deposits, which we believe were driven by private sector deposits. Deposits have risen 5.3%
growth… since end-2010, and were up 14.3%% Y-o-Y in March 2011. This has helped to lower the
loans-to-deposit ratio to 97.0% and the three-month EIBOR rate 1.95% in May.

… but credit growth to We do not expect the improved liquidity position to drive new credit growth. We continue to
remain weak expect weak credit growth towards the real estate sector, with new credit demand being
driven by the gradual economic recovery and led by specific sectors.

NEW REGUALTION TO LIMIT PRIVATE OVER-LEVERAGING

No immediate impact on We also believe that the new regulation to limit excessive lending will have a limited short-
credit outlook… term impact on private sector credit growth. Since the crisis in 2008, banks have tightened
their lending criteria, including for personal loans. The new regulations, which came into effect
on 1 May 2011, will not impact existing loans retrospectively. We nevertheless view the

41 / 43 pages
mena economics 23 May 2011

regulation as vital and important within the country’s regulatory framework to ensure against
speculative credit bubbles.

…but positive for Key components of the law include capping personal loans at 20 times a borrower’s monthly
regulatory framework salary and restricting the repayment periods to 48 months to help control lending and curb
excessive charges. Overall monthly instalments for all loans, including personal, car, housing
loans and credit cards, must not exceed 50% of a customer’s gross salary and any regular
income. The law also provides maximum limits for fees and commissions that banks can
charge for retail services, which we believe will have a more immediate short-term impact.

LIMITED SPENDING MEASURES INTRODUCED

Policy includes increased The UAE has introduced relatively more limited populist measures and handouts than other
investment in the GCC countries, given domestic stability vis-a-vis the rest of the region. These include
Northern Emirates increasing pensions for military personnel (up 70.0% in March) and creating more jobs for
nationals. Measures have been focused on limiting the impact of rising food prices by reaching
price agreements with retailers on basic foods stuff, a policy first adopted in 2008. Another key
announced policy has been to increase infrastructure investment in the country’s less
developed northern emirates. The government announced plans to spend USD1.6 billion on
electricity and water networks in the Northern Emirates in March.

FIGURE 63: UAE MACROECONOMIC INDICATORS

2008a 2009a 2010e 2011f 2012f
Real Sector
Average Brent Crude Spot Price (USD/B) 98.7 62.7 80.3 110.0 98.0
GDP at Current Market Prices (AED bn) 1,155.7 992.0 1,099.2 1,292.2 1,322.3
GDP at Current Market Prices (USD bn) 314.9 270.3 299.5 352.1 360.3
Real GDP Growth Rate (%) 3.3 (1.6) 3.2 3.8 3.0
Population (mn) 5.10 4.80 4.86 5.20 5.36
GDP / Capita (USD) 49,923 42,625 45,905 49,385 49,245
CPI Inflation (Y-o-Y% Change) 12.3 (5.3) 1.0 1.6 2.0
External Sector
Trade Balance (USD bn) 63.0 42.1 50.9 81.6 79.8
Current Account Balance (USD bn) 22.0 7.8 11.2 40.7 35.5
Current Account (% of GDP) 7.0 2.9 3.7 11.6 9.9
Net Foreign Assets (USD bn) 8.8 12.5 20.0 27.1 28.6
Fiscal Sector
Budget Balance (USD bn) 53.5 1.9 14.6 40.4 31.3
Budget Balance (% of GDP) 17.0 0.7 4.9 11.5 8.7
Net Banking Sector Claims on the Gov. (USD bn) (34.3) (24.2) 7.0 8.2 8.7
Financial Sector
USD/AED Exchange Rate (Annual Average) 3.67 3.67 3.67 3.67 3.67
Annual Growth Rate in Broad Money, (%) 19.2 9.8 5.4 11.2 12.4
Growth in Credit to the Private Sector (%) 41.7 4.6 (1.7) 3.5 4.7
Benchmark Lending Rate (End-of-Period, %) 1.5 1.0 1.0 1.0 1.0
Source: Central Bank of the UAE, IMF, and EFG Hermes estimates

42 / 43 pages
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any other person if and until EFG Hermes has made the information publicly available.

CONTACTS AND STATEMENTS

Background research prepared by EFG Hermes Holding SAE and EFG Hermes UAE limited. Report prepared by EFG Hermes Holding SAE (main office), Building No.
B129, Phase 3, Smart Village, KM 28, Cairo-Alexandria Desert Road, P.O. Box 220, 12577 Egypt, Tel +20 2 35 35 6140 | Fax +20 2 35 37 0939 which has an issued
capital of EGP 1,939,320,000.

Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number
1010226534, and EFG Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this
document is directed only at institutional investors. If you are not an institutional investor you must not act on it.

bloomberg efgh reuters pages .efgs .hrms .efgi .hfismcap .hfidom

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