Weekly Economic Commentary – January 5, 2014

Markets

Stock markets sluggishly returned to normal after the holidays with a lackluster performance after the last hurrah in 2013 while Dubai and Abu Dhabi exchanges outshone their regional counterparts in 2013. The euro fell the most in two months, its recent rally faltering, while the yen rose for the first week in 9 after Premier Abe’s statement that the nation was halfway to escaping deflation. Oil prices were little changed on the week; but, widening the focus, Brent has averaged more than $108 a barrel in 2013 – like it did in 2012 and 2011, a remarkable resilience despite the much touted shale supply. Gold, which on the contrary, suffered the worst drop in 33 years was up on the week.

Global Developments

US/Americas:

• The S&P Case-Shiller home price index increased by a less-than-expected 0.2% mom in Oct after rising 0.7% mom in Sep. On an annual basis, the index posted the sharpest increase since Feb 2006.
• The Conference Board consumer confidence index increased to 78.1 in Dec from 72 in Nov, following 3 months of declines.
• Markit’s US manufacturing PMI increased to 55 in Dec from 54.7 in Nov. The output sub-index rose at the fastest pace in more than a year and new orders improved strongly. Conversely, the ISM manufacturing PMI slipped marginally to 57 from 57.3 but new orders and employment rose.
• US construction spending grew 1% mom in Nov after rising a revised 0.9% mom in Oct. Residential construction rebounded by 1.9% mom.
• Initial claims declined for the second consecutive time to 339k last week, from 341k the week before. The four-week moving average show that claims increased by 8500 to 357,250.

Europe:

• Eurozone manufacturing PMI increased to a 31-month high of 52.7 in Dec, unchanged from its flash reading, but higher compared to Nov’s 51.6. The higher reading came in, thanks to an increase in new export orders and output. Though factory activity continued to expand in most EU nations including Germany, Italy, UK and Spain, France and Austria continued to slow.
• Eurozone M3 money supply grew by 1.5% yoy in Nov (Oct:1.4%) while loans to the private sector shrank by 2.3% yoy in Nov, compared to a contraction of 2.2% in Oct.
• Italy’s business confidence in manufacturing improved marginally to 98.2 in Dec from 98 in Nov.
• Russian GDP grew 1.2% yoy in Q3 the same rate as in Q2, as investment activity remained depressed and export was buoyant.

Asia and Pacific:

• China’s central bank reiterated its commitment to stable, prudent and consistent monetary policy in 2014, while advancing financial system reforms in support of sustainable growth. Governor Zhou Xiaochuan said monetary policy would be more pre-emptive and coordinated in 2014.
• China’s state auditor reported that local governments had accumulated outstanding debt of 17.9 trn yuan (USD 2.96 trn), including contingent liabilities and debt guarantees at end Q2 a 67% increase since the last audit published in 2011. Shadow banks provided at least 13% of all local government borrowings.
• The official Chinese PMI retrenched somewhat to 51.0 in Dec in line with expectations from Nov 51.4. Activity was weaker in Q4 after a rebound in Q3, due to slowing credit growth and a fall-off in inventories. New export orders contracted in Dec for the first time since July, with the sub-index at 49.8 from Nov 50.6. Manufacturing employment contracted further with the sub-index falling to 48.7 from Nov 49.6.
• China’s new urban employment is expected to reach 13 million by the end of 2013 according to government sources. More than 5.4 million urban people who were laid off will be reemployed, while more than 1.7 million people with poor skills will find jobs by the end of 2013.
• Prices of new homes in 288 Chinese cities in Dec increased 0.37% mom down from 0.77% in Nov, according to a poll by real estate services firm E-House China.
• The Korean HSBC/Markit PMI increased to 50.8 in Dec up from 50.4 in Nov, marking the third straight month of expansion. The increase in production is due to higher volumes of new orders and the promotion of new product lines.
• India’s manufacturing grew for a second month in a row, albeit at slower pace and below its long-term trend, according to HSBC/Markit PMI which eased from 51.3 in Nov to 50.7 in Dec. Output and new orders rose and firms are hiring again. Domestic orders decelerated. One bright spot was the prices component, which rose at its slowest pace in four months.
• Indonesia’s inflation hit 8.4% yoy in Dec below the 8.8% peak in August (a four-year high). Core prices rose 5%
• Singapore GDP tumbled -2.7% qoq and 4.4% yoy in Q4 versus forecasts for a -1.3% qoq and 5.9% yoy in Q3, the worst performance since Q3. The drop resulted from a fall in biomedical manufacturing and a slower transport engineering output. GDP grew 3.7% in 2013 vs 1.3% in 2012.

Bottom line: With Western markets in the holiday lull, the spotlight last week was on China and Asia. The picture of slowing growth and fragile demand is corroborated by the PMI. An appreciating currency is taking its toll on heavy industries, together with declining investments and debt overhang. Singapore GDP, a gauge of global activity, sends a sobering reminder of the challenges to come. PMI is consistent with our view that the third quarter likely marked the peak of the latest round of economic recovery, and industrial activity momentum eases modestly towards year-end. An important driver is the shift of policy stance, which focused on stabilizing growth in the third quarter but shifted towards structural reforms in the fourth. Tight monetary conditions are unlikely to spur an acceleration in growth. A final note of optimism for the New Year: in eight of the last ten years, the International Energy Agency has overestimated non-Opec supply growth.

Regional Developments

• Bahrain’s proposal to increase diesel prices, in an attempt towards reducing subsidies, will be reassessed, said its PM after some MPs boycotted the Parliament in protest.
• Money supply (M2) in Egypt grew by 18.5% yoy to EGP 1.36 trillion in the year to end of Nov, according to the central bank.
• Fitch Ratings revised its outlook on Egypt‘s credit rating to stable from negative, citing financial assistance from Kuwait, Saudi Arabia and UAE. It also affirmed its B-minus rating on Egypt’s long-term foreign and local currency issuer default ratings.
• Initial estimates from Iraq’s Ministry of Oil revealed that oil exports during Dec 2013 reached 72,574,000 oil barrels and their revenues reached USD 7.47bn, with an average price of USD 120.9 for each barrel.
• Jordan’s Specialised Micro Loans Company received a senior loan of USD 2mn from the European Bank for Reconstruction and Development (EBRD) for on-lending to micro and small enterprises; this is the second loan from the EBRD to a microfinance institution in Jordan.
• Kuwait’s crude oil exports to Japan increased 4.1% yoy to 6.27mn barrels or 209k barrels per day (bpd) in Nov. Kuwait accounted for 5.6% of Japan’s total crude imports, down from 6.1% a year ago. Meanwhile, crude oil exports to South Korea fell 20.6% yoy to 11.16mn barrels, or 372k bpd in Nov with Kuwait providing 14.7% of Korea’s total crude oil imports.
• Saudi Arabia is providing Lebanon USD 3mn in aid for the army – this is the largest grant ever to the country’s armed forces. While Lebanon’s President remarked that “His Highness suggested that weapons would be purchased from France, and quickly”, the French President revealed that France will supply weapons to the Lebanese army if it is asked to do so.
• Oman’s budget expenditure for 2014 is projected at OMR 13.5bn, up 5% from last year, while revenues are estimated at OMR 11.7bn (+4.5% from previous budget’s OMR 11.2bn) calculated with oil price at $85 a barrel. The deficit of OMR 1.8bn will be covered partly by “borrowing overseas”, according to the Financial Affairs Minister. Meanwhile, budget surplus surged to OMR 543.9mn for the period Jan-Oct 2013 from OMR 339.9mn till Sep, according to data from the National Centre for Statistics and Information.
• Oman will continue to grow at 5% this year, according to the minister responsible for financial affairs, with the non-oil sector expected to expand by 7.3% this year, compared to 5.6% in 2013 and 5.4% in 2012.
• GDP growth in Qatar was up 6.2% yoy and 4.3% qoq in Q3 (Q2: 6% yoy); the mining and quarrying sector accounted for almost 40% of total output, registering growth rates of 1.8% yoy and 3.5% qoq. The construction sector grew 13% yoy alongside 10.5% rise in activity in the financial and real estate sector.
• Qatar‘s trade surplus dipped 4.2% yoy to QAR 30.9bn in Nov 2013, with total exports showing a marginal decline of 0.9% yoy to QAR 39.8bn while imports were up 12.4% to QAR 8.9bn. The major export partners were Japan, South Korea and India, accounting for 29%, 17% and 9% of total exports respectively.
• Fixed deposits of banks in Qatar surged to QAR 72.87bn at the end of 2012 from QAR 42.58bn at end-2008, denoting the risk-averse move of investors after the stock market crashed in 2008 following the global meltdown.
• Qatar and Morocco signed an aid deal worth USD 1.25bn as part of the five-year financial assistance package from the Gulf countries (Kuwait, Qatar, Saudi Arabia & UAE). Qatar is the last country to sign the deal, but the amount to be disbursed immediately remains unclear.
• Non-oil exports in Saudi Arabia grew 14.5% yoy to SAR 50.69 in Q3, reported the Central Department of Statistics and Information. From among the GCC nations, which accounted for 6.6% of total exports, Bahrain was the biggest importer at SAR 39.12bn, followed by the UAE at SAR 38.92bn.
• Saudi Arabia’s Department of Zakat and Income Tax stated that its 2013 revenues exceeded SAR 25bn, growing 6% yoy and compares to 2012’s revenue of SAR 12.8bn. Tax returns from foreign companies, excluding those related to the oil sector, reached SAR 12.3bn.
• The Finance Ministry in Saudi Arabia sanctioned 1,855 contracts worth SAR 120.24bn in 2013 (upto Q3), according to the chairman of the National Contractors Committee at the Council of Saudi Chambers.
• Allocations for infrastructure in Saudi Arabia during 2004-2013 accounted for only around 1.2% of the total budgeted spending of nearly SAR 4,740bn and around 4.3% of the total budgeted capital expenditure of SAR 1,566bn, as per data from SAMA.
• Remittances by expatriates from Saudi Arabia increased 17% yoy to SAR 133.3bn in the first 11 months of 2013 compared to SAR 113.9bn for the same period last year, reported the Al-Eqtisadiah daily.
• Saudi Arabia’s water and electricity minister stated that the country plans to invest nearly SAR 134bn in water and electricity projects in 2014 – SAR 100bn for power projects and SAR 34bn for water – as a response to the rapid increase in domestic demand.

UAE Focus

• Non-oil bilateral trade between Iran and UAE touched USD 9.637bn during the first 3 quarters of the current Iranian calendar year, according to data by the Iranian Customs Administration. During this period, Iran exported USD 2.682bn worth of non-oil commodities to the UAE (21.27 percent fall in value) while importing USD 6.955bn worth of non-oil products (a 12.81 percent dip in value); UAE was Iran’s second largest trading partner after China.
• Passenger traffic at the Dubai Airport continued to rise: up 9.5% yoy to 5.337mn in Nov – the 12th consecutive month with monthly traffic exceeding 5mn passengers – while the year-to-date passenger traffic grew 15.3% to 60.384mn.
• Dubai duty free sales grew 11.4% yoy to AED 6.65bn in 2013, with perfumes retaining the top spot (16% of total sales), with sales up 16% yoy to AED 1.06bn while gold sales rose 5% to AED 613mn.
• UAE’s stock exchanges closed the year with DFM ranking the 2nd best performing equity benchmark globally after Venezuela while ADX came in close behind at 3rd, with the MSCI reclassification and winning of the Expo bid boosting investor sentiment.
• Moody’s expects UAE funding, liquidity and capitalisation to remain strong this year: levels of capital at around 16% in 2013-14, with contribution of customer deposits rising to around 65 to 70% of total assets.