Weekly Economic Commentary – March 3, 2013

Markets

Equities markets around the world got two wake up calls that tempered the euphoria prevailing since the Autumn: a) The Italian elections reminded that the euro crisis is still far from being resolved and that it will get worse before a permanent solution can be found; b) in the US the truce signed at the end of 2012 is over and sequester, i.e. automatic spending cuts, is now a reality. However, after better-than-expected economic data most markets regained ground, with Japan posting a notable performance on expectations of more aggressive inflation targeting. Regionally, markets were mixed but mostly down led by Egypt and Qatar. The dollar rallied inspite of the spending cuts; Italian election results and weak economic data caused the euro to tumble to a 2013 low while the sterling dipped to a two-year low versus the greenback. Gold continues its slide while oil remains broadly stable.

Global Developments

Americas:

• In the US lack of agreement between President and Congress on fiscal policy triggered automatic budget cuts, mostly on discretionary spending. The next chapter of the saga will to 27 March’s government shutdown deadline while Congress eyes the FY14 budget. The sequester’s impact will be gradual; we still expect the cuts to be rebalanced down the road.
• The S&P/Case-Shiller home price index beat expectations rising at0.9%mom and 6.8% yoy in Dec (Nov: 5.5% yoy 0.6% mom). The FHFA house price index showed prices rose 1.4% qoq in Q4 and 5.5% yoy sa. New home sales rose at a record seasonally adjusted annual pace of 16% in Jan while inventory of previously occupied homes for sale dropped to a 13-year low.
• The Conference Board’s US Consumer Confidence index accelerated to 68.6 in Feb from 58.4 in Jan (downwardly revised). The expectations sub-index rose from 59.9 to 73.8 and the current situation sub-index gained to 63.3 from 56.2.
• US durable goods orders fell 5.2% mom in Jan (Dec: 3.7%), the first decline in 5 months, as orders for aircrafts slumped. Non-defense capital goods orders excluding aircrafts rose 6.3% mom after falling 0.3% in Dec, suggesting a rebound in business spending.
• Markit’s US manufacturing PMI fell to 54.3 in Feb from 55.8 in Jan; output rose at the fastest pace in a year. The ISM manufacturing index, a separate gauge, unexpectedly rose to 54.2 in Feb from 53.1 in Jan on strengthening demand – the new orders sub-index rose to 57.8 from 53.3.
• Construction spending unexpectedly fell in Jan by 2.1% mom after two months of gains (Dec: 1.1% and Nov: 1.9%). A sharp drop in government outlays and a slump in non-residential spending led the decline.
• Initial jobless claims fell by a more than expected 22K last week to 344K, the lowest level since ‘08. The four-week average declined by 6,750 to 355K.

Europe:

• The Italian general elections yielded a hung Parliament and no political solution in sight. The return on the scene of Berlusconi which led the country on the brink of default delivered a severe blow to global markets which had been ignoring the political risks still entrenched in Europe.
• Markit’s Eurozone manufacturing PMI remained flat in Feb at 47.9; output slumped to 47.8 from 48.7 while new orders rose improved. Germany’s gauge rebounded to 50.3 from 49.8 amid resilient domestic demand and export orders and France’s gauge improved marginally to 43.9 from 42.9 but remained in contractionary territory.
• German retail sales picked up at the quickest monthly pace in six years – up 3.1% mom in Jan and compares to the 2.1% fall registered in Dec.
• Eurozone M3 money supply grew at 3.5% yoy in Jan (Dec: 3.4% mom). Bank loans to the private sector shrunk 0.9% yoy in Jan (Dec: 0.7% yoy).
• UK GDP grew 0.2% yoy in 2012, up from the no growth estimated previously – this was inspite of the unchanged Q4 figure of 0.3% dip in growth. However, news that manufacturing shrank unexpectedly in Feb – PMI at 47.5 compared to Jan’s 50.5 – led to a battering of the GBP.

Asia and Pacific:

• Japan industrial output rose 1.0% mom in Jan, slightly below expectations, after rising 2.4% in Dec.
• China’s official manufacturing PMI fell to 50.1 in Feb from 50.4, the weakest reading in 5 months. Markit’s manufacturing PMI, a separate gauge, dropped to 50.4 from 52.3 hitting a four-month low. China’s services industries expanded at the slowest pace since Sep as the official non-manufacturing PMI slipped to 54.5 in Feb from 56.2 a month before.
• India’s last budget before the 2014 elections avoided populist excesses with spending up 16.5% (+37% rise in public investments, including roads and infrastructure) to be offset by new taxes including a one-year 10% surcharge on the super rich and large businesses. The Finance Minister has pledged the fiscal deficit to be reined in to a rather ambitious 4.8% of GDP.
• A decline in imports – as purchases of raw materials, and capital and consumer goods fell – led Korea to record a trade surplus for the 13th consecutive month in Feb. Exports dipped by 8.6% yoy to USD 42.32bn but this was offset by a larger decline in imports – falling 10.7% yoy to USD 40.26bn.
• Singapore’s Feb industrial production fell 9.2% mom (sa) and 0.4% yoy on a sharp contraction in the volatile biomedicals sector.

Bottom line: A discrepancy is building up between markets’ behavior, economic data and political tensions. The gigantic wave of liquidity created by central banks is once again igniting a bubble in stock markets. While macroeconomic data depict a mixed picture at best, stock indices are anticipating a recovery that is hardly in sight and are shrugging off the risks that linger on both sides of the Atlantic. The Italian elections could be the catalyst for another round of euro area tensions which so far have been allayed only by the words of the ECB president Draghi, but not by any concrete actions.

Regional Developments

• Egypt’s government deficit reached EGP 119.8bn in the first seven months of the fiscal year (roughly 6.7% of annual GDP) and compares to EGP 88.9bn during the same period a year ago, as the fall in the pound and continuing economic uncertainty pushed up cost of subsidies.
• With Egypt’s currency reserve having fallen to about USD 13.6bn by end- January and fall in the EGP by about 8% since Dec, the government is planning a recovery aiming to raise reserves to USD 19bn by end-June and up to USD 22.5bn a year later. This reform will enable the government to move a step closer to negotiating the IMF loan.
• Egypt’s adviser to the Minister of Finance announced that the Cabinet was set to endorse the Sukuk Bill, which is expected to lure in foreign investors and investments.
• Iraq’s Planning Ministry forecast inflation at 4-5% in 2013, following declining annual rates since 2006 and with inflation in the housing sector rising up to 9%.
• Iraq has initiated technical work on the USD 18bn oil-export pipeline to Jordan. This line is expected to enable the export of almost one million bpd from Basra after completion of the first phase and close to further 1.25 million bpd after the second phase.
• A few MPs from Kuwait have requested to hike the minimum monthly salary of local citizens to KWD 1,500 – “with monthly increments to cope with annual inflation”.
• The IIF estimated Lebanon’s 2012 GDP growth at 0.8%, following 1.8% rise in 2011, as a result of internal tensions and spillover effects from Syria leading to declines in tourism, FDI, investments and exports.
• Lebanon’s Energy Ministry signed a USD 348mn contract with a Danish-German consortium to build power plants (within 15-18 months) which together is expected to provide a maximum capacity of 272 megawatts.
• Oman’s Capital Market Authority is considering reducing the minimum capital required for a listed company from OMR 2mn to OMR 1mn. Meanwhile the proposal to reduce the minimum capital dilution for family-owned business at IPOs from 40% to 25% is still under review by the cabinet.
• Oman Development Bank disbursed 3,832 loans worth OMR 43.7mn in 2012, an increase of 36% as compared to OMR 26.7mn in 2011. Out of the total, the fisheries sector received 18% and agriculture and livestock received 19%.
• The UAE will channel USD 500mn this year into development projects in Oman as part of a USD 2.5bn pledge within a Gulf aid package decided few years ago.
• Qatar’s trade with China and Turkey surge: bilateral trade with China increased by 45% yoy to USD 8.45bn in 2012, according to the Chinese ambassador; trade volume with Turkey rose to USD 1.24bn in 2012 – exports grew 46% to USD 983bn while imports rose to USD 257.5bn (+36.9%).
• Assets of Qatar’s commercial banks rose by QAR 11bn to QAR 828bn in Jan, compared to QAR 817bn in end-2012. Meanwhile, deposits increased 26% to QAR 458bn and credit was up 27% to QAR 477bn in 2012.
• SAMA revealed that total assets grew by SAR 13bn to SAR 2.49 trillion in Jan; these are influenced by government deposits, supported by oil prices, with the central bank. Deposits with SAMA increased 24.2% yoy to SAR 197.8bn in Dec 2012 while monetary base M0 registered 17.2% growth in 2012 (2011: 17.4%).
• Saudi Arabia has issued regulations for 3 parts of the new mortgage law – on real estate financing, leasing and supervision of financial companies. The regulations include clauses that mortgage lenders must have a paid-up capital of at least SAR 220mn and prohibit lenders from developing property among others.
• A Saudi credit bureau report showed a 31% decline in the value of total bounced cheques in 2012 from SAR 5bn in 2011 while the number of bounced cheques fell 27% to under 45k cases. Also, the value of corporate bounced checks fell by 32% to SAR 2.5bn.
• GCC exports to Japan hit a record high USD 157.4bn in 2012, boosted by higher prices as exports were mostly crude oil and gas. Imports from Japan touched USD 29.02bn (2011: USD 19.5bn), and among GCC nations, UAE emerged the top market for Japanese products (2012: USD 8.99bn).
• The MENA Asset Management Survey, which surveyed 90 institutional investors across 12 MENA nations, found UAE, Saudi Arabia and Qatar rated as top investment destinations. The survey showed that investor sentiment increasingly factored in heightened risk and political risk was a key factor.
• Gulf defence spending remains robust – with a 6% increase in 2012 to about USD 130bn. Additionally, Arab League countries spent more than USD 300bn on arms and other military and security purchases during 2011-2013 – much higher than the USD 680bn spent during the period 2002-2010, which works out to an average USD 75bn annually.

UAE Focus

• The Dubai Expo is expected to add 280k jobs between 2013 and 2021 – with every job adding 50 more indirectly in the MENA and South Asia region – with almost 10% of the jobs being created in the coming 4 years. While GDP would be boosted by EUR 28bn, value added would increase by EUR 17.7bn.
• Dubai’s new Sukuk initiative “Transforming Dubai into a Global Centre for Islamic Bonds” include the creation of a centre for issuing, listing and trading sukuks and also aims to encourage firms to issue Sukuk instead of bonds.
• The UAE central bank governor announced that banks’ proposals on mortgage lending caps are being studied and will be taken into consideration before enforcing the rules; he also stated that banks must not discriminate between potential borrowers – eg. GCC citizens looking to finance a second home – provided the borrower has the ability to repay the loan.
• Turkish investments in UAE amount to USD 6bn – mostly in the construction sector – while UAE’s investments were at USD 5bn in Turkey. This was revealed at an MoU signing between Turkey’s Prime Ministry Investment Support and Promotion Agency and Sharjah Investment and Development Authority.
• Dubai’s Department of Economic Development issued 1428 licenses in Jan – up 9% yoy – with the commercial sector recording a 69% rise in the number of licences.
• Airport data from both Abu Dhabi and Dubai continue to impress in Jan: Dubai International Airport reported a 14.6% yoy rise in passengers, with close to 5.5mn passing through in a single month – the best markets were South America (+23.7%) followed by the GCC (+21.8%), Australasia (+21.3%) and North America (+20.8%); 1.9mn passengers passed through Abu Dhabi in Jan, recording a 19.6% yoy rise.
• Etihad Rail secured the five-year USD 1.28bn financing for Stage One of its rail project development and its CEO announced that the first freight train would be operational by this year itself.
• A survey, commissioned by GE, showed that within the UAE, business leaders scored the nation 6.7 out of 10 for business innovation, placing them above Japan, South Korea and China though the view from leaders located outside the UAE were less optimistic – scoring the nation just 5.6, lower than Russia, Ireland and Poland. US topped both the rankings globally, closely followed by Germany.