Weekly Economic Commentary – November 11, 2012

Markets

Last week trading was still affected by the aftermath of Sandy so volumes were rather thin and in any case traders were marking time awaiting the results of the US election. US markets reacted to Obama’s second term with a drop not seen since June. Worldwide the picture was mixed with Europe hit by further weakness in Germany and a gloomy outlook by the EU commission for 2013. Asia was generally steadier and regional markets were mostly up. Bonds rose on expectations that the fiscal cliff could be tackled by a reinvigorated President Obama. The USD strengthened on the euro (helped by a wait-and-see attitude by the ECB) while the GBP lost ground on renewed concerns over the recovery sustainability. Oil prices recorded a marked volatility around a mildly declining trend; following substantial gain at week start, sales orders surged on the news that US inventories increased for the fourth time in five weeks. Gold prices hit a three-week high.

Global Developments

Americas:

• ISM non-manufacturing index fell to 54.2 in Oct (Sep: 55.1), with declines in both business activity and new orders, though employment picked up to 54.9 from 51.1 the previous month.
• Initial jobless claims were affected by Hurricane Sandy and dipped by 8k to 355k last week. The less volatile four-week moving average meanwhile dropped by 3250 to 370.5k.
• Sep trade deficit unexpectedly shrank to USD 41.5bn (Aug: USD 43.8bn) – the lowest in two years – after exports were boosted by 3.1% to USD 187bn mostly aided by industrial supplies while imports were up only 1.4%.

Europe:

• The EU Commission said the euro-zone economy in 2013 will record almost zero growth as the debt crisis engulfs southern Europe and sap the export-driven performance of Germany.
• Greek lawmakers narrowly approved a multi-billion euro austerity package to comply with the terms of a bailout, but the measures also threaten to deepen the country’s brutal recession and destabilize its fragile politics.
• Euroarea composite PMI stayed below the 50-mark for the ninth consecutive month dropping further to 45.7 in Oct (Sep: 46.1, prelim: 45.8) with Germany also contracting at a quicker pace.
• German factory orders unexpectedly recorded the largest dip since Sep ‘11, down 3.3% mom in Sep (Aug: -0.8%) – domestic orders were down 1.8% and export orders fared worse with a -4.5% fall. Sales to other euroarea countries decreased a whopping 9.6% mom.
• Industrial production for Sep in Germany dropped -1.8%;  in France -2.7% mom; in Italy -1.5%, in Ireland’s (the sharpest drop) -13.9%. This data almost seals that EU’s Q3 IP will be lower and subsequently growth probably contracted as well.
• UK factory output rose 0.1% mom in Sep (Aug: -1.2%) while total industrial output plunged 1.7% and recorded the biggest fall since Aug ‘09 as oil and gas output dropped by a record due to site maintenance works.
• In spite of slight gains in Germany and France of 1.5% and 0.8% mom respectively, Euroarea retail sales for Sep fell -0.2% mom (Aug: +0.2%) as Spain registered a staggering decline of -7.3%.

Asia and Pacific:

• The 18th congress of the Chinese Communist Party (CCP) began on Nov 8. The new leadership for the next 5 to 10 years has been selected earlier, but the long lasting implications for economic policy will be shaped by the split within the Central Committee between reformists and conservatives.
• China released its monthly barrage of data: CPI inflation dropped to a 3-year low of 1.7% in Oct (Sep: 1.9%) due to ebbing food prices, and industrial production increased 9.6% yoy in Oct (Sep: 9.2%); retail sales grew 14.5% yoy in Sep (Aug: 14.2%) while fixed asset investment posted a better-than-expected rise of 20.7% yoy in Oct (Sep: 20.5%).
• China’s trade surplus widened to USD 31.99bn in Oct (Sep: USD 26.67bn) as stronger exports growth (+11.6%) outpaced imports (2.4%). Exports to Europe were down 8.0% while to the US, they picked up by 9.1%.
• Indonesia GDP grew by 6.2% yoy in Q3 (Q2: 6.4%) on lower government spending and exports. Also, balance of payments recorded a USD 800mn surplus in Q3 against Q2’s deficit of USD 2.8bn.
• Japan’s leading indicators declined in Sep to 91.7 (Aug: 93.2); machinery orders also fell sharply in Sep by -4.3% (Aug: -3.3%) after exports were weakened by global demand and the current account surplus in Sep recorded JPY 503.6bn against expectations of JPY 761bn.

Bottom line: With the new term secured by Obama and the new leadership to take over in China, the focus will go back to the vexed questions still awaiting for a solution: the fiscal cliff, the EU governance and the parlous state of the banking sector in mature economies. The Financial Stability Board has stressed that among global systemically important banks Citigroup, Deutsche Bank, HSBC and JP Morgan Chase must increase capital to absorb possible losses with a capital surcharge of 2.5%, the highest in their group.

Regional Developments

• The IMF published the regional economic outlook for the Middle East today – for oil exporters, growth is expected to recover to 6.5% in 2012 on “strong, better-than-expected recovery in Libya” while for oil importers, growth is likely to remain subdued at around 2%.
• Egypt’s Finance Minister remained hopeful of inking the loan deal with the IMF in mid-Dec; he was quoted saying that the loan amount might be USD 4.5bn as opposed to USD 4.8bn initially requested.
• Jordan’s budget deficit, excluding grants, declined to JOD 1.1bn in Jan-Sep this year compared to JOD 1.2bn in the same period a year ago. Revenues were up by JOD 235mn during the period but lower grants – JOD 25.8mn as of end-Sep compared to JOD 1.08bn a year ago – and higher subsidies have played havoc with the process of financial reform, according to the Finance Minister. Additionally, the Minister of Planning and International Cooperation stated that foreign grants to support the state budget would cover only about 12% of the oil subsidy.
• With the drop in Egyptian gas supplies to Jordan over the past three years, from about 250 mn cubic feet per day (cfd) to 40mn cfd, and subsequent reliance on costly oil imports and rising subsidies, the country is planning to import liquid gas by June 2014 from “several exporting countries” – most likely Qatar, given ongoing negotiations – after a gas terminal in the Port of Aqaba is completed.
• Kuwait’s delayed 2012-13 budget has finally been passed – there is a 9% increase in planned spending to KWD 21.2bn, with current spending (including wages, subsidies and transfers) estimated to rise 12% to KWD 18.6bn. Capital spending is however budgeted to decline by 6% to KWD 2.6bn.
• Moody’s has backed Kuwait’s strong ratings citing its “robust” fiscal position, in spite of escalating protests in previous weeks, asking a repeal of the amended electoral law.
• Kuwait is expected to spend around USD 100bn on oil projects in the coming five years (60% on upstream projects), as it looks to increase output capacity to 4.0mn bpd from the current 3.0mn.
• In Jan-Aug 2012, China remained the top importer of Omani oil (88.97mn barrels) while the 88.5% yoy decline in oil exports to India (to 3.168mn barrels) was more than offset by exports to Taiwan (+207% to 21.59mn barrels) and Singapore (+250% to 11.75mn barrels).
• The growth of retail credit (including mortgages) by Oman banks dropped to 1.9% in Q3 down from 8% average growth in the previous three quarters as a result of tighter restrictions by the central bank on personal loans.
• Oman’s finance and leasing sector witnessed a 22.6% yoy increase in financial activity to OMR 684.7mn in the Jan-Sep period, boosted by rising job creation and government investments in infrastructure projects, thereby increasing demand for transportation and construction equipment.
• Qatar will witness an increase in project tenders in the coming two years and is expected to reach USD 30bn a year from 2013- 2014 – given its preparations for the FIFA World Cup 2022.
• In Saudi Arabia, M3 money supply growth recorded a 7-month high of 11.4% in Sep compared to 9.4% in Aug. Credit to the private sector grew at the fastest rate since Mar ‘09 – rising 14.8% in Sep (Aug: 14.0%) while net foreign assets were at a record high SAR 2.296 trillion.
• Qatar, UAE and Bahrain have the highest dependencies on European bank financing in the GCC. UAE and Qatar saw a 23% and 19% drop in Q1 2012, according to a recent IMF report, implying that further deleveraging and retrenchment of European banks could lead to liquidity pressures in these countries. Though Saudi Arabia and Kuwait are less dependent on foreign bank financing, these do have a substantial outward exposure to foreign banks.
• An Apicorp report estimates that the combined operating capacity of the alternative routes bypassing the Straitz of Hormuz is some 8.85mn bpd compared to about 17mn bpd of crude and 2mn bpd of LNG passing through Hormuz in 2011. Even accounting for the unused capacity of the alternative routes, total capacity only comes to one-third of Hormuz volumes.
• Six GCC firms are part of FT’s top 500 global companies by market cap – at end-Sep, their market cap was up by 3% yoy to USD 191bn. SABIC topped the list of MENA firms with a market cap of USD 73bn and was ranked 81 globally.

UAE Focus

• Standard Chartered estimated in a report that Dubai faces nearly USD 50bn of debt maturities between 2014 and 2016 but, in contrast with 2009, the Emirate is in a better position to service its debt. The pillars of Dubai’s economy – trade, logistics, tourism and services – will drive average growth of 3-5% between now and 2020. The key advantages are physical and soft infrastructure attracting both businesses and talent, a phenomenon particularly evident during the Arab Spring in 2011. The overhang of excess leverage remains a concern: more aggressive measures are needed to reduce the indebtedness, as sovereign spreads remain elevated.
• Moody’s outlook for UAE’s banking sector remains negative with asset qualities the most worrisome factor given the banks’ exposure to government-related issuers. The report also stated that “profitability [will] remain constrained by cautious loan growth and the ongoing provisioning that is required to cover elevated problem loan levels, against a background of mixed signs of a recovery”.
• After weeks of discussion, Dana Gas agreed upon an “in-principle” a deal with the creditors to restructure the USD 1.0bn Sukuk. The company is expected to pay the creditors “partly with cash, then split the remaining debt into an ordinary sukuk and a convertible Islamic bond that would be converted to shares after a set period”.
• HSBC’s UAE PMI was steady at 53.8 in Oct – staying in positive territory thanks to a pick up in new orders and employment growth.
• The UAE central bank is expected to roll out a federal direct debit system by next year, hence reducing the reliance on cheques and will eventually lead to the formation of a credit bureau. This will improve transparency and enable gauging the credit worthiness of UAE’s residents.
• The UAE is expected to invest almost USD 8mn in electricity generation over the next 8 years with capacity expanding by over 53 terrawatt hours by end-2021, according to a recent BMI report.
• Cargo volumes at Dubai World Central increased almost 120% yoy to 58,423 tonnes in Q3. Year-to-date, freight volumes were up 178% to 164,757 tonnes.
• ADNOC’s oil production is around 2.8mn barrels per day, according to the Chief Executive of ADMA, a subsidiary of ADNOC while UAE produces an average of 2.6mn bpd. He also stated that the aim is to improve oil recovery rate to 70% in Abu Dhabi compared to 35% globally.