Weekly Economic Commentary – Oct 24, 2021

Markets
Another week of strong equity performance across global markets thanks to better-than-forecast corporate earnings while news about Evergrande averting a default supported gains in Asia; slowing recovery amidst higher Covid cases and rate hike fears saw FTSE post a weekly loss. In the region, Saudi Tadawul touched a 15-year high, while Dubai logged its biggest intraday gain since Jan 2009 on Wednesday. Oil prices stayed near 3-year highs posting its 7th weekly gain, with Brent and WTI up by 0.8% and 1.8% respectively. Gold prices gained for a second week, supported by a weaker dollar. Meanwhile, Bitcoin touched a record high of USD 67,017 after the launch of the first US bitcoin futures ETF.
Weekly % changes for last week (21 – 22 Oct) from 14 Oct (regional) and 15 Oct (international).

 
Global Developments
US/Americas:

  • Fed Beige book revealed “modest to moderate” economic growth alongside “significantly elevated prices” and wage pressures given supply chain disruptions and labour constraints.
  • Industrial production in the US tumbled by 1.3% mom in Sep (Aug: -0.1%), with manufacturing output down by 0.7% (and a 7.2% drop in motor vehicles). According to the Fed, about 0.6% of the overall decline in IP was a result of the effects of Hurricane Ida. Capacity utilization slipped to 75.2% in Sep, from Aug’s 76.2% reading, and is about 4.4% below average.
  • Housing starts in the US declined by 1.6% mom to 1.555mn in Sep – the lowest level since Apr. Meanwhile, building permits plunged by 7.7% mom to 1.589mn in Sep (a 12-month low) as multi-segment fell by 18.3% to a rate of 548k. Costs of building materials have been rising as has mortgage rates.
  • Existing home sales grew by 7% mom to an 8-month high of 6.29mn in Sep. First-time buyers accounted for only 28% of sales last month, the smallest share since Jul 2015.
  • Philadelphia manufacturing survey index slipped to 23.8 in Oct (Sep: 30.7): new orders index improved (30.8 in Oct from Sep’s 15.9) and employment edged up (30.7 from 26.3) while the shipments index held steady (30).
  • US preliminary composite PMI output index stood at a 3-month high of 57.3 in Oct (Sep: 55), supported by the services sector boost (58.2 from Sep’s 54.9) as manufacturing PMI dropped to a 7-month low of 59.2. The “upward rise in inflationary pressures also shows no signs of abating”, according to IHS Markit.
  • Initial jobless claims fell to a new pandemic-low of 290k in the week ended Oct 8th from an upwardly revised 296k the previous week; the 4-week average fell to 319.75k. Continuing claims slipped by 122k to 2.481mn in the week ended Oct 1st, the lowest level since the pandemic began.

Europe:

  • Producer price index in Germany increased 14.2% yoy in Sep (Aug: 12%), the highest growth since 1974; prices were up 2.3% mom. Energy prices surged by 32.6% yoy and intermediate goods prices grew by 17.4%.
  • Preliminary PMI reading for Germany showed a sharper decline in services (to 52.4 in Oct from 56.2 in Sep) while manufacturing PMI inched lower to a 9-month low of 58.2 (Sep: 58.4). Manufacturing output index fell to a 16-month low of 51.1 and new orders showed the smallest increase in 8 months, with setbacks in the automotive sector given chip shortages.
  • The eurozone flash manufacturing PMI slipped to an 8-month low of 58.5 in Oct (Sep: 58.6), with autos and parts sector reporting the worst performance while services PMI slipped to a 6-month low of 54.7 (Sep: 56.4) though healthcare, media and financial services reported strong growth. Alongside record high price increases due to widespread shortages, job creation accelerated to the joint-highest in 21 years.
  • Consumer confidence in the eurozone declined in Oct, with the preliminary reading falling to -4.8 (Sep: -4) – the reading is still above its pre-pandemic level.
  • Inflation in the UK dipped to 3.1% yoy in Sep, from Aug’s 3.2% rise, with prices in the restaurant and hotel sector rising less than a year ago. Core CPI eased to 2.9% in Sep (Aug: 3.1%). The cost of manufactured products leaving UK factories climbed by 6.7% (Aug: 6%) while input prices into factories jumped by 11.4%; PPI core output increased to 5.9% yoy (Aug: 5.4%). Retail price index ticked up by 0.4% mom, after a 0.6% increase in Aug.
  • UK retail sales dropped for the 5th month in a row, down by 0.2% mom (Aug: -0.6%). Compared to Feb 2020, sales volumes are 4.2% higher but are down by 1.3% from a year ago. Petrol sales exceeded pre-pandemic levels for the first time in Sep, but overall sales were dragged down by sales of household goods. Excluding fuel, retail sales fell by 0.6% mom.
  • GfK consumer confidence in the UK dipped further to -17 in Oct (Sep: -13), the lowest since Feb and dropping for the 3rd consecutive month.
  • UK’s flash manufacturing PMI inched up to 57.7 in Oct (Sep: 57.1), boosted by “faster rates of new order and employment growth”. Strong domestic demand for business and consumer services supported the uptick in services PMI (58 in Oct vs Sep’s 55.4).

Asia Pacific:

  • China’s GDP grew by 4.9% yoy and 0.2% qoq in Q3 (Q2: 7.9% yoy and 1.3% qoq), affected by the power crisis, Covid outbreaks as well as the regulatory crackdowns on various sectors.
  • Industrial production in China grew by 3.1% yoy in Sep, easing from Aug’s 5.3% uptick: this was the weakest pace of increase since Mar 2020. IP grew by 11.8% in the period Jan-Sep. Fixed asset investment increased by 7.3% yoy during Jan-Sep compared to 8.9% in the year till Aug. Retail sales grew by 4.4% in Sep, faster than Aug’s reported 2.5% pace.
  • FDI into China increased by 19.6% yoy to CNY 859.51bn (USD 134.7bn) in the period till Sep this year (Jan-Aug: 22.3%).
  • Urban unemployment rate in China stood at 4.9% in Sep; but those aged 16-24 saw a much higher unemployment rate of 14.6%.
  • China’s parliament approved plans to introduce pilot real estate taxes in some regions of the country: it will apply for both residential and non-residential property as well as land and property owners, though it will not apply to legally owned homes in the countryside.
  • Inflation in Japan climbed to 0.2% yoy in Sep (Aug: -0.4%), the first gain in 13 months, driven up by fuel, utilities and raw material costs. Excluding fresh food, prices were up to 0.1% (Aug: 0%), rising for the first time in 18 months. Excluding food and energy prices remained unchanged at -0.5%.
  • Exports from Japan increased by 13% yoy in Sep (Aug: 26.2%), posting the slowest gain since Feb, as car shipments tumbled by 40.3% (first drop in 7 months); imports expanded by 38.6% yoy (Aug: 44.7%), rising for the 8th consecutive month, resulting in the 2nd straight month of a trade deficit of JPY 622.8bn.
  • Preliminary PMI reading for Japan showed a massive improvement across all sectors: manufacturing moved up to 53 in Oct (Sep: 51.5) with the manufacturing output sub-index crossing into expansionary territory (50.7 from 48.1) and the service sector registered an increase in activity for the first time since Jan 2020 (50.7 from 47.8 in Sep).

Bottomline: Preliminary estimates for October PMI confirmed a slowdown in business activity (especially in manufacturing), amidst rising prices thanks to supply chain constraints and labour shortages/ wage pressures. There were two diverging central bank moves last week: Russia hiked rates by 75bps and signaled further hikes as inflation stayed high at 7.8% (as of Oct 18); in contrast, Turkey’s key rate was lowered to 16% from 18% under political pressure, in spite of inflation at nearly 20%, causing lira to tumble to a new all-time low of 9.66. While the Fed is “on track” to slow down its asset purchases, the ECB meeting this week will be watched to gauge whether inflation is still being considered as “transitory” or stickier than expected. The BoE’s governor last Sunday signaled that a rate hike was imminent stating worries about medium-term inflation expectations, but with rising Covid cases, ongoing shortages (spillovers from the Brexit deal), higher energy costs and lower retail sales numbers, it is possible that the hike will be pushed to early 2022 than later this year.  
Regional Developments

  • The IMF estimates growth in the MENA region to rebound to 4.1% this year, following a 3.2% drop in 2020. The Regional Economic Outlook report highlighted the region’s uneven recovery, while urging nations to continue reforms and job creation (youth unemployment ranged between 25-27% this year) amid rising food prices and energy costs. Gross financing needs increased to USD 390bn in 2021-22, up by 50% versus 2018-19.
  • Saudi Arabia, UAE and Kuwait will continue to support Bahrain’s Fiscal Balance programme, according to the finance ministers of the nations. A balanced budget is being targeted by 2024, after Covid19 derailed plans to achieve this goal by 2022.
  • Egypt’s non-oil exports increased by 16% yoy to USD 2.56bn in Sep while imports declined by 7% yoy to USD 4.9bn hence narrowing trade deficit by 24% to USD 2.3bn. Exports to the US and the EU surged by 52% (to USD 205mn) and 60% (to USD 739mn) respectively.
  • The Egyptian Exchange’s new rules for the temporary trading suspension limit state that trading will be halted if the EGX100 moves up or down by 10% within the day’s trading session (compared to a previous limit of 5%).
  • Egypt’s e-finance increased by 40% on its stock market debut last week. The initial price of EGP 13.98 per share gave the IPO a deal size of EGP 5.84bn (USD 371.7mn) and valued the company at EGP 22.4bn.
  • Foreign investments in Egypt’s oil sector fell by 26.02% to USD 5.4bn in 2020-21, revealed the oil minister.
  • Egypt plans to boost share of renewable energy to over 42% by 2035: the country already crossed its 2022 target of 20% early this year.
  • Egypt issued tenders for 17 new desalination plants, with an aim to more than quadruple desalination capacity over the next 5 years. The new plants will produce a combined 2.8mn cubic metres per day vs current installed capacity of 800k cubic metres per day.
  • Egypt and Israel are in discussions about the construction of a new onshore pipeline: expected to cost USD 200mn, the pipeline could be operational within 24 months and supply an additional 3-5 billion cubic metres (bcm) per year.
  • Iraq and the UAE signed an agreement to promote and protect mutual investments. The agreement protects both nations’ investments from all non-commercial risks including nationalisation, confiscation, judicial seizures, and freezing.
  • Iraq plans to reduce its winter crop planting area by 50% in 2021-22 due to a water shortage. Current water availability can irrigate around 250k hectares of land.
  • Kuwait has started increasing its crude oil production in line with the OPEC+ agreement, according to the oil minister. He also disclosed that Kuwait’s plans to increase output includes production from the shared zone with Saudi Arabia.
  • Kuwait’s PM revealed that all COVID-19 restrictions had been lifted for vaccinated people, without giving further details. The airport will operate at full capacity starting today (Oct 24).
  • The IMF in its concluding statement of Kuwait’s Article IV mission revealed that “sustained political gridlock has impeded progress in addressing fiscal risks”. Non-oil GDP growth is projected to rise by 3% this year, and overall GDP growth is expected to around 2.7% over the medium term. Rising oil prices will improve fiscal balance to a surplus of 2% of GDP in 2021-22 from a deficit of 15.4% of GDP in 2020-21. More: https://www.imf.org/en/News/Articles/2021/10/20/mcs102021-kuwait-staff-concluding-statement-of-the-2021-article-iv-mission
  • Lebanon’s parliament voted for legislative elections to be held on March 27th; the new parliament will select the new PM to form a government. However, on Friday, the President sent a law amending legislative election rules back for reconsideration, potentially affecting the proposed election date.
  • Reuters reported, citing the economy minister, that Lebanon met with IMF officials this week to start technical discussions. Though data required by the IMF (including estimate of losses in the financial system) will be sent this week, full negotiations for an IMF deal are likely to begin by end of the year or early next year. Separately, the President disclosed that a forensic audit of the central bank had begun last Thursday.
  • Oman’s Data Protection Law is currently in draft stage, according to the Executive President of the central bank. He also revealed that the apex bank is “working on a comprehensive customer protection framework for customers of our licensed institutions”.
  • Moody’s has upgraded its outlook on 7 Omani banks to stable from negative before, on expectations of an improvement in banks’ operating environment.
  • A new law issued in Qatar mandates all employers to provide mandatory health insurance coverage for expats and their families.
  • In a recent government reshuffle, Qatar announced the formation of a new ministry for environment and climate change.
  • Qatar signed a comprehensive air transport agreement with the EU, allowing it easy access to markets, with fewer restrictions, replacing existing bilateral agreements.
  • The World Bank will donate USD 80mn to support economic welfare for Palestinians. The grant will be transferred to the dedicated trust fund for Gaza and the West Bank and used as cash-for-work opportunities while supporting social protection and strengthening resilience.
  • Boeing predicted that airlines in the Middle East would require 3000 new aircrafts by 2040, valued at USD 700bn, to accommodate increased passenger and cargo traffic.

Saudi Arabia Focus

  • Saudi Arabia set a target of net zero emissions by 2060, also announcing that it would eliminate 278mn tonnes of CO2 by 2030 (previous target: 130mn tonnes) and slash methane emissions by 30% by 2030 (vs 2020). The initiative will involve investments of over SAR 700bn (USD 187bn) over the period. Separately, Aramco announced that a goal to reach net-zero emissions by 2050: this applies to emissions from the company’s own operations and does not refer to emissions generated by its consumers (via oil exports).
  • Saudi Arabia does not want high oil prices stymieing recovery, disclosed the finance minister in a TV interview. He stated: “we need to see a price that is good for investors, good for producers so that they can continue investing because the world needs the energy”.
  • According to Saudi Arabia’s energy minister, users switching from gas to oil could see demand of 500-600k barrels per day; the pace of the switch will depend on both weather (how severe winter could be) and alternative energy prices. He also called for greater attention to energy supply security.
  • Mergers and acquisitions in Saudi Arabia are rising. In Jan-Sep 2021, M&A applications rose by 68% to 237 – led by IT, healthcare and petrochemical sectors – and this trend is expected to continue into H1 2022.
  • More than 80% of the 670 new industrial licenses issued in Saudi Arabia since the start of 2021 has been SMEs. Together, these firms have launched operations in 477 factories, providing more than 31k jobs and with investments’ crossing SAR 74bn (USD 19.7bn).
  • Bloomberg reported that Tadawul is planning to introduce regulatory incentives for tech startups that are backed by VCs and technology firms to speed up listing.
  • The Saudi Capital Market Authority launched its fifth round of fintech sandbox licenses and will accept applications until Dec 15th.
  • Saudi Central Bank issued draft insurance fintech (InsurTech) rules – covering fair competition, obligations for practitioners, the accuracy and preservation of customer information as well as other consumer rights for public consultation until Nov 16th. https://istitlaa.ncc.gov.sa/ar/Finance/SAMA/financialtechnology/Pages/default.aspx.
  • Saudi SMEs have raised SAR 100mn this year through crowdfunding, according to the President of the Saudi Capital Market Authority.
  • The energy minister stated that Saudi Arabia plans to produce 29 million tons of blue and green hydrogen annually by 2030.

UAE Focus

  • UAE will create a new taskforce to develop a next generation economy for 2050-60: the economy minister disclosed that the plan will be digitally driven and be based on the highest levels of innovation, building on discussions around digitalization, diversification and tourism.
  • Abu Dhabi announced a “virtual” license for non-resident foreign investors, allowing them to conduct business from outside the UAE and within the emirate. Permits cover 13 economic sectors including agriculture, manufacturing, repair, contracting, maintenance, installations, retail, transport, services, leasing, health and entertainment and companies can either be a limited liability company or a sole proprietorship.
  • The Abu Dhabi DED introduced a “Smart Manufacturing Project” to encourage transformations of factories that manufacture electronics, food and pharmaceutical products (to more automated, safer and more efficient using technology) by tapping new financing opportunities from local banks and banks specialised in industrial financing. Abu Dhabi’s Industrial Development Bureau is overseeing the Smart Manufacturing Project.
  • Consumer confidence index in Dubai rose to 153 points in Q3 2021, two points up from Q2 and 21 points up from Q3 2020. About 73% of consumers were positive about the jobs market (vs 46% last year) while 88% were optimistic about finding a job in next 12 months.
  • UAE and Israel’s negotiations on a Comprehensive Economic Partnership Agreement are progressing as scheduled; it will be signed within the 9-month timeframe set in Jun 2021.
  • According to the COO of Abu Dhabi’s Hub 71, the technology hub which has accepted 100 startup firms since 2019, has brought in around 19 venture capital funds with a combined USD 2-2.5bn of assets under management to support its companies.
  • Dubai Silicon Oasis launched a Sandbox programme to support early-stage tech startups: it is a 1-year programme for startups that have only a minimum viable product; the application process will be a rolling one.
  • Occupancy rates at Dubai’s hotels increased to 67.2% in Sep (+51% yoy), following 58% and 53.9% recorded in Aug and Jul respectively, according to STR data. Revenue per available room surged by 117% yoy to AED 271.85 (USD 74) in Sep.

Media Review
IMF’s Regional Economic Outlook: MENA region
https://www.imf.org/en/Publications/REO/MECA/Issues/2021/10/14/regional-economic-outlook-october 
The Inflation Catch-Up Game
https://www.project-syndicate.org/commentary/us-federal-reserve-slow-inflation-response-by-mohamed-a-el-erian-2021-10
Saudi Arabia flexes its economic muscles (subscription)
https://www.ft.com/content/79abe724-0e42-4933-8305-61524f24e1ae
Vaccinated Singapore shows zero-COVID countries cost of reopening
https://www.reuters.com/world/asia-pacific/vaccinated-singapore-shows-zero-covid-countries-cost-reopening-2021-10-22/
All manner of industries are piling into the hydrogen rush
https://www.economist.com/business/2021/10/23/all-manner-of-industries-are-piling-into-the-hydrogen-rush
 
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Weekly Economic Commentary – Oct 17, 2021

Markets
Strong corporate earnings brought cheer to global markets, even as inflation pressures remain unabated. In the US, S&P 500’s gains (best week in almost 3 months) were driven by industrial and financial groups, while in Europe’s Stoxx600, banking, energy, and tech stocks supported the jump (recording the best week in nearly 7 months, and banks began to trade at pre-pandemic levels). The MSCI Asia Pacific ex-Japan posted the best weekly gain since late Jun while Japan’s Nikkei gained thanks to tech stocks performance. On Friday, the MSCI all-world index posted the biggest daily rise since May 14th. Regionally, most markets were up compared to a week ago, thanks to rising oil prices, with Egypt recording a 4.5% jump. The yen touched its lowest levels since Oct 2018 while sterling’s gain was supported by a weaker dollar and expectations of BoE rate hikes this year.  Oil prices rose to a 3-year high of more than USD 85 a barrel given an expected oil supply deficit in the backdrop of easing travel restrictions and ahead of the winter months. Gold price increased to the most in 7 months last week, before dropping slightly lower to end the week at USD 1766.82 (+0.6% from a week ago).
Weekly % changes for last week (14 Oct – 15 Oct) from 7 Oct (regional) and 8 Oct (international).

 
Global Developments
US/Americas:

  • The FOMC minutes indicated that a “gradual tapering process” could begin in mid-Nov or Dec while staff continued to expect that this year’s rise in inflation would prove to be transitory.
  • Inflation in the US surged to a 13-year high of 5.4% yoy in Sep (Aug: 5.3%) while it rose by 0.4% compared to the previous month – with food prices (+0.9% mom, the largest gain since Apr 2020) and rents accounting for more than half the rise. Core inflation rose 0.2% mom, rising from Aug’s 0.1%, on rents as well as a 1.3% rise in cost of new motor vehicles.
  • Producer price index in the US grew 8.6% yoy in Sep (Aug: 8.3%), recording the highest uptick since Nov 2010. In mom terms, PPI was up by 0.5% – the smallest rise this year. Core PPI increased by 0.2% mom and 6.8% yoy in Sep.
  • Retail sales in the US increased by 0.7% mom in Sep, slower than Aug’s upwardly revised 0.9% reading. Sales at auto dealerships partially rebounded (+0.5%, after Aug’s 3.3% drop), sales at service stations jumped (+1.8% due to higher prices) while sales at clothing stores and online grew by 1.1% and 0.6% respectively.
  • NY Empire state manufacturing index softened to 19.8 in Oct (Sep: 34.3). New orders and shipments rose at slower pace while both prices paid and received indices held near record highs.
  • The Michigan Consumer sentiment index slipped to 71.4 in Oct (Sep: 72.8) – the second lowest reading since 2011. In addition to the Delta variant, supply chain shortages and reduced labour participation rates weighing on consumer spending, another significant factor was a decline in confidence in government economic policies over the past 6 months.
  • The JOLTS report indicated that a record 4.3mn persons quit jobs in Aug (2.9% of the workforce compared to 2.7% in Jul). Job openings remained quite high at 10.439mn in Aug (though declining from Jul’s 11.098mn).
  • Initial jobless claims fell to a new pandemic-low of 293k in the week ended Oct 8th from an upwardly revised 329k the previous week; the 4-week average eased to 334.25k. Continuing claims slipped by 134k to 2.593mn in the week ended Oct 1st.

Europe:

  • Industrial production in the eurozone declined by 1.6% mom in Aug (Jul: 1.4%), as supply constraints lowered production: capital and consumer durable goods production dropped by 3.9% and 3.4% respectively. Germany posted the steepest decline among the countries (-4.1%) while industrial output edged up by 1% and 0.1% in France and Spain respectively. In yoy terms, eurozone IP grew by 5.1%, slowing from Aug’s 8.2% reading.
  • The ZEW survey for Germany showed a decline in both economic sentiment (22.3 in Oct from 26.5) and current situation (21.6 from 31.9). The economic sentiment indicator fell for the 5th consecutive month while the current situation indicator declined after continuously rising for the period Feb-Sep 2021. In the Eurozone, economic sentiment worsened by 10.1 points to 21 in Oct while the indicator for the current economic situation fell 6.6 points to 15.9.
  • Wholesale price index in Germany increased by 0.8% mom and 13.2% yoy in Sep (Aug: 12.3% yoy).
  • GDP in the UK inched up by 0.4% mom in Aug (Jul: -0.1%) – just 0.8% lower than it was in Feb 2020, according to ONS estimates. Services sector growth bounced back by 0.3% (Jul: -0.1%) while manufacturing expanded by 0.5% (Jul: -0.6%). In the 3 months to Aug, growth stood at 2.9%.
  • Industrial production in the UK rose by 0.8% mom in Aug (Jul: 0.3%), with manufacturing up by 0.5% mom. In yoy terms, IP grew by 3.7% – the smallest gain since Mar.
  • UK trade deficit widened to GBP 3.716bn in Aug (Jul: GBP 2.948bn), posting the largest deficit since end of the Brexit transition period. Exports declined by 2% to a 6-month low of GBP 49.8bn.
  • UK ILO unemployment rate slipped to 4.5% in the 3 months to Aug from the 4.6% reading in Jul. Average earnings including bonus lost momentum during the period, down to 7.2% (from the previous month’s 8.3%).

Asia Pacific:

  • Exports from China accelerated by 28.1% yoy in Sep (Aug: 25.6%) while imports growth slowed – rising by 17.6% versus 33.1% in Aug – causing trade surplus to widen to USD 66.76bn (Aug: USD 58.34bn).
  • Inflation in China remained flat in mom terms in Sep, and edged lower to 0.7% yoy (Aug: 0.8%): food prices fell by 5.2% while non-food prices stood at 2% (Aug: 1.9%). Producer price index increased to 10.7% – the fastest pace since records began in Oct 1996 – after rising by 9.5% the month before.
  • Money supply in China grew by 8.3% yoy in Sep (Aug: 8.2%). New loans increased to CNY 1660bn in Sep (Aug: CNY 1220bn); outstanding yuan loans grew by 11.9% yoy, the slowest pace since May 2002. Outstanding total social financing grew by 10% in Sep, the weakest pace since 2017, and slowing from 10.3% in Aug.
  • Producer price index in Japan increased by 0.3% mom and 6.3% yoy in Sep (Aug: 0.1% mom and 5.8% yoy). This was the 7th consecutive month of price hikes and the highest since Sep 2008.
  • The final estimates for industrial production in Japan showed an increase of 8.8% yoy in Aug (prelim: 9.3%). In mom terms, IP fell by 3.6% following an estimated 3.2% drop.
  • Machinery orders in Japan declined by 2.4% mom in Aug (Jul: 0.9%). In yoy terms, orders were up by 17%. Core machinery orders unexpectedly declined by 2.4% mom in Aug 2021, while manufacturing orders fell by 13.4% – the most since Feb 2016.
  • Bank of Korea left interest rates unchanged at 0.75%; the governor also stated that rates could be hiked at its next review in Nov “according to our own projections of where the economy is going”.
  • Industrial output in India increased by 11.9% yoy in Aug (Jul: 11.5%) – accelerating for the first time in 4 months – with a slight slowdown in manufacturing output (9.7% from 10.5%). Cumulative output growth  in the current fiscal year stands at 28.6%.
  • India’s wholesale price inflation eased to 10.66% in Sep (Aug: 11.39%; Sep 2020: 1.32%) as food prices moderated (-4.7%) and in spite of the hike in fuel and power prices (+24.91%). Retail inflation also slowed to a 5-month low of 4.4% in Sep, given lower food prices.
  • Advance estimates showed that Singapore GDP rebounded by 0.8% qoq in Q3, following a drop of 1.4% in the previous quarter. In yoy terms, GDP grew by 6.5% (Q2: 15.2%).
  • The Monetary Authority of Singapore (MAS) unexpectedly tightened monetary policy, stating it would “raise slightly” the slope of the Singdollar NEER policy band from zero previously.

Bottomline: The IMF expects global growth to recover by 5.9% in 2021 (and by 4.9% in 2022), but at divergent paces. The main messages from the IMF remain sombre: for full global recovery, vaccine deployment must be increased; as supply chain constraints continue amid high demand, and even as employment is below pre-pandemic levels inflation is a worry (expected to decline in 2022, but highly uncertain); as economies rollback stimulus measures, economies need to be prepared for liquidity challenges as well as capital outflows. China will release its Q3 GDP numbers this week: given weak economic readings so far from retail sales to construction and given supply constraints and power cuts affecting production, it is likely to show a slowdown. This easing will likely be mirrored across the globe, given China’s crucial linkages in global value chains. Meanwhile, the UK and EU’s Northern Ireland Brexit negotiations continue (links in the Media Review section) amid already visible fallouts from Brexit especially widespread labour shortages (from truck drivers to the hospitality industry) leading to ongoing food and fuel shortages (and given backlogs, potentially shortage of even turkeys for Christmas!).   
Regional Developments

  • The IMF expects growth in the MENA region to rebound by 4.1% this year and next. The oil exporters will benefit from the recent uptick in prices, and along with a relatively higher pace of vaccination, witness a return to pre-pandemic growth levels by next year. Oil importers will be hit by the rising oil prices and food prices (exerting greater pressure on poorer families), but a faster vaccination pace could support a return to “normal” sooner in tourism dependent nations (like Egypt & Jordan).
  • Annual urban inflation in Egypt increased to 6.6% in Sep (Aug: 5.7%), the highest since Jan 2020 but within the central bank’s 5%-9% target range. Food prices jumped by 3.5% mom. Core inflation inched up to 4.8% in Sep, from Aug’s 4.5%.
  • Egypt is targeting a primary surplus of 1.5% of GDP and budget deficit of 6.7% in the current fiscal year, according to a Cabinet statement issued last week.
  • Tax revenues in Egypt expanded by 18.8% yoy to EGP 109.8bn in Jul-Aug 2021: VAT revenues grew by 12.8% and revenues from the Suez Canal Authority rose by 10.4% while tax receipts from sovereign and non-sovereign bodies grew by 153% and 2.9% to EGP 24.6bn and EGP 85.3bn respectively.
  • Current account deficit in Egypt widened to USD 5.13bn in Apr-Jun from USD 3.83bn a year ago. Imports were up by 41.7% yoy to USD 19.59bn while tourism revenue jumped to USD 1.75bn from a pandemic-hit low of USD 305mn a year ago. For the full fiscal year till end-Jun, tourism revenue dropped by 50.7% to USD 4.9bn.
  • Annual revenue of Egypt’s Suez Canal increased by 12.4% to USD 4.9bn till Oct 12th (from start of the year). The number of ships crossing the canal increased by 6.7% to 13.3k ships during the period Jan-Aug, according to the head of the Suez Canal Authority.
  • Egypt has signed electricity interconnection deals with Greece and Cyprus; this follows an earlier deal with Saudi on a USD 1.8bn project. The agreement with Greece plans transmission of power generated by renewables from Egypt via an undersea cable.
  • Egypt will be listed on JP Morgan’s government bond index for emerging markets (GBI-EM) in Jan 2022. It was estimated that local currency bond markets would benefit up to USD 2.2bn if Egyptian bonds were to join the index
  • Jordan’s GDP grew by 3.2% yoy in Q2 2021, according to the central bank, from 0.3% in Q1, benefitting from a low base a year ago. Construction and mining contributed to the rise in GDP, growing by 5.7% and 5.4% during the quarter.
  • Turnout in Iraq’s parliamentary elections reached 43%, with more than 9.6mn persons casting their votes on Oct 10th. Winning 73 of the 329 seats in parliament, Shia Muslim cleric Moqtada al-Sadr claimed victory for his nationalist Saeroun movement. Since al-Sadr did not stand as a candidate, weeks of negotiations are in the offing to build a new coalition government.
  • Kuwait’s central bank will gradually ease the regulatory mitigation package related to liquidity and the capital adequacy standard in two phases. The maximum allowed funding will be adjusted in relation to the size of deposits to become 95% instead of 100% as of Jan 1 2022, and adjust to 90% from Jan 1, 2023, reported Al Rai daily citing informed sources.
  • Lebanon’s energy ministry received central bank approval for USD 100mn in credit to issue fuel import tenders for electricity generation.
  • Qatar’s energy minister stated that the country (which is the largest supplier of LNG) had already allocated all its LNG output and have no additional supplies to calm the market.
  • The emir of Qatar appointed two females to the Shura Council last week, after no female candidates secured seats in the election. Neither of these women had contested in the election.
  • Moody’s downgraded Tunisias long-term foreign currency and local currency issuer ratings to Caa1, 7 levels below investment grade, from B3; negative outlook was maintained.

Saudi Arabia Focus

  • Inflation in Saudi Arabia inched up to 0.6% yoy in Sep (Aug: 0.3%), rising by 0.2% mom. Food prices increased by 2.6%, thanks to higher vegetable prices (12.5%) as well as meat and poultry costs (2%), while transport costs were up by 5.9%.
  • Saudi Arabia wants economic output to rise to SAR 6.4trn (USD 1.71trn), disclosed the investment minister while speaking about the economic development strategy to year 2030.
  • Saudi Arabia’s highly ambitious National Investment Strategy expects to raise net FDI to SAR 388bn (USD 103.45bn) annually and raise local investments to SAR 1.7trn by 2030. The strategy will include 40 initiatives including the opening of economic zones, according to the investment minister; no timeframe was provided. According to the latest Saudi central bank data, foreign investment in Saudi Arabia grew by 16% yoy to SAR 2.256trn Q2 this year.
  • Non-oil exports from Saudi Arabia increased by 37% yoy to a record USD 33.4bn in H1 2021. Petrochemicals were the biggest source of exports, up 44% to SAR 73.6bn in H1. Top export destinations during the period were UAE (SAR 17bn), China (SAR 16.8bn) and India (SAR 7.1bn).
  • Saudi Arabia will require foreign firms in the oil and gas sector to raise local content (which include workers, supplies and operations as well as added value) to at least 70% from 30-35% currently to secure government contracts, reported Reuters. Details of the plan (timeline, targets and mechanism) will be announced by the energy ministry at a later stage.
  • Saudi Arabia’s Commerce Ministry issued 31 licenses since the beginning of this year, reported Al-Eqtisadiah. Eleven licenses were issued for cement exports and 20 to export steel.
  • The Saudi Industrial Development Fund, at its annual meeting, announced the launch of  multiple initiatives to empower the private sector: this includes a land, a logistic loan, a supply chain financing product and an industrial business incubator program. The minister of industry disclosed that over 60 logistic zones would be developed by 2030 to support exports, e-commerce and re-export operations.
  • NEOM’s green hydrogen JV plans to secure financing in Q1 2022, revealed ACWA’s CEO – about 20% of the USD 6.5bn project will be funded with equity and the rest will be limited-recourse project finance. The aim is to produce green hydrogen for export, with the first shipment expected from NEOM’s port in Q1 2026.
  • The value of contracts awarded in Saudi Arabia surged by 134% yoy and 34% qoq to SAR 25.8bn (USD 6.9bn) in Q2 this year, according to a report by the US-Saudi Business Council. Energy was the largest sector, followed by contracts in the petrochemicals and water sectors.
  • Saudi Arabia will ease Covid19 restrictions from Oct 17th: masks will no longer be required at public places while still be imposed indoors; social distancing measures are to be lifted and full-capacity attendance will be allowed at the Holy Mosques for fully vaccinated persons.

UAE Focus

  • UAE’s federal budget for the 5 years 2022-26 stands at a record high total of AED 290bn. Budget expenditure for 2022 is set at AED 58.931bn, with bulk of it allocated to development projects & social benefits sector (41.2%) while the infrastructure and financial resources sector’s share was 3.8%.
  • UAE will launch more dollar bond issuances next year, and is working on plans to ussue local currency debt, according to the undersecretary of the ministry of finance.
  • UAE’s non-oil trade grew by 27% yoy to AED 900bn (USD 245bn) in H1 this year: non-oil exports grew by 44% yoy to AED 170bn (and up 41% compared to H1 2019) while non-oil imports rose by 24% to AED 482bn and re-exports were up 22% to AED 238bn. Top non-oil trading partners during the period were China, Saudi Arabia, Iraq, Turkey and Italy.
  • The UAE and South Korea will start negotiations towards a free trade deal within 2 months, aiming to reach a deal within a year. According to South Korea’s trade minister, the Comprehensive Economic Partnership Agreement (CEPA) between the nations will include deals to reduce greenhouse gas emissions and develop green technology.
  • Abu Dhabi launched a AED 5bn (USD 1.4bn) IPO fund to strengthen the Abu Dhabi Securities Exchange as a leading stock market. The fund will invest in 5-10 private companies a year, with a target ticket size of 10-40% of the float and focusing on SMEs.
  • Dubai announced PPP projects worth more than AED 25bn (USD 6.81bn): this includes 7 urban development projects worth AED 22.58bn, 14 road and transport projects worth AED 2.39bn and eight projects in health and safety at AED 526mn.
  • Dubai’s non-oil trade with African nations accelerated by more than 100% to AED 1.2trn (USD 326.6trn) in the last decade, according to the President of the Dubai Chamber.
  • UAE’s oil minister, in the sidelines of the energy forum, stated that demand for energy and especially natural gas is peaking while reiterating that it was important to maintain balance in the market. UAE will continue to invest in the energy sector to meet the growing demand and ensure stability, according to the energy ministry.
  • Abu Dhabi’s IHC plans to list its subsidiary Multiply – which focuses on investing in tech-focused businesses – on the main exchange in the emirate this year. According to the CEO, IHC plans to offer 30% of Multiply’s shares and is working with local banks on the transaction.
  • Expo 2020 reported 411,768 visits in the first 10 days since the launch of the event. The organizer announced that one in three visits was from abroad, with 175 nationalities having visited the event.
  • Etihad raised USD 1.2bn with a loan linked to environmental, social and governance (ESG) targets in global aviation – this was the first sustainability-linked loan in global aviation. Etihad has committed to a target of net zero carbon emissions by 2050.
  • UAE and Syria agreed on plans to enhance economic cooperation and explore new sectors. Non-oil bilateral trade between the two nations touched AED 1bn (USD 272mn) in H1 2021.

Media Review
The IMF’s World Economic Outlook, Oct 2021
https://www.imf.org/en/Publications/WEO/Issues/2021/10/12/world-economic-outlook-october-2021
https://blogs.imf.org/2021/10/12/a-hobbled-recovery-along-entrenched-fault-lines/
PIF to use oil platforms to attract tourists through ‘THE RIG.’ Project
https://www.arabnews.com/node/1949041/business-economy  
Brexit: What now for the Northern Ireland Protocol?
https://www.bbc.com/news/uk-northern-ireland-58925288
https://www.ft.com/content/98bd08ca-faee-4476-947d-2f3817928ee3
The Great Supply-Chain Massacre
https://www.project-syndicate.org/commentary/current-supply-shocks-and-2008-global-financial-crisis-by-diane-coyle-2021-10
How the world learns to live with covid-19: from pandemic to epidemic
https://www.economist.com/briefing/2021/10/16/how-the-world-learns-to-live-with-covid-19
 
 
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Weekly Insights 14 Oct 2021: Global divergence in growth predicted – can MENA cope?

Weekly Insights 14 Oct 2021: Global divergence in growth predicted – can MENA cope?

 
1. The IMF expects global growth to recover by 6% in 2021, but at divergent paces
The main message from the IMF remains a sombre one: for full global recovery, vaccine deployment has to be increased; as supply chain constraints continue amid high demand, and even as employment is below pre-pandemic levels inflation is a worry (expected to decline in 2022, but highly uncertain); as economies rollback stimulus measures, economies need to be prepared for liquidity challenges as well as capital outflows.

 
2. Inflation is a major risk factor: more so, if pandemic-induced supply-demand mismatches persist for longer

  • A confluence of (a) supply chain disruptions; (b) cyclical recovery of demand post-Covid (fueled by fiscal & monetary stimulus); and (c) weather shocks is leading to the current uptick in prices
  • Disruptions are likely to continue into early next year but any prolonged supply shortages will lead to more uncertainty; wages are another question mark (depending on demand vs supply)

 
 
3. The Middle East & North Africa region is estimated to grow by 4.1% this year and next

  • The oil exporters will benefit from the recent uptick in prices, and along with a relatively higher pace of vaccination, witness a return to pre-pandemic growth levels by next year
  • Oil importers will be hit by the rising oil prices and food prices (exerting greater pressure on poorer families), but a faster vaccination pace could support a return to “normal” sooner in tourism dependent nations (like Egypt & Jordan)
  • Covid19 and its aftermath will likely result in a further widening of inequality: be it health (pace of vaccination), jobs (nearly one third of the employed population in the region is facing high risks of layoff or reduction of wages and/or hours of work: ILO/ESCWA), poverty (18mn people have been pushed into poverty in MENA: World Bank)
  • What needs to be done? Highlights the need for social safety nets / cash transfers; support for women and youth to return to the labour force; ensure that children return to school & resume studies after the pandemic-gap. In the absence of support, the region might be looking at a phase of greater social unrest


 
4. Inflation in the MENA region is ticking up, as food prices increase sharply

 
5. A Bird’s Eye View of the Fiscal Outlook: Global govt debt at just below 100% of GDP; higher vs. pre-pandemic

  • Fiscal balance remains in deficit in 2021 across all regional groupings, with the global reading at 7.9% vs MENA’s 4.3% and Saudi’s 3.1%. A summary of fiscal measures since Jan 2020 are charted for select MENA countries (below)
  • Governments have scaled back spending in 2021, but government revenues are still low compared to pre-pandemic levels. Furthermore, when stimulus measures (~ $16.9trn in pandemic-related fiscal measures) are rolled back, businesses could be struggle to meet financing requirements, resulting in lower revenues/ insolvencies/ bankruptcies
  • Government debts have increased in 2020 & 2021, and is unlikely to fall back to pre-pandemic levels soon => greater risk to global interest rate hikes & refinancing risks (esp those nations with limited fiscal space)
  • What can be done to ease MENA’s fiscal pain? 1. Reduce spending on subsidies, wages; 2. Improve mobilization of revenues + introduction of new taxes (e.g. carbon tax) and/or increase in existing taxes (VAT, excise) to be supported by cash transfers to the poor (where needed); 3. introduction of fiscal rules (only 1/3-rd have such rules in place currently); 4. support businesses (after stimulus measures are removed) by providing deferred tax payment options


 
6. UAE’s record-high federal budget for 2022 & Saudi Arabia’s ambitious FDI targets hogged headlines this week

  • UAE’s federal budget for the 5 years 2022-26 stands at a record high total of AED 290bn
  • Budget expenditure for 2022 is set at AED 58.931bn, with bulk of it allocated to development projects & social benefits
  • Given the oversubscribed orders for UAE’s debut federal bonds, more federal issuances can be expected in the future (eventually in local currency) & used towards infrastructure spending
  • Saudi Arabia’s highly ambitious National Investment Strategy expects to raise net FDI to SAR 388bn annually & raise local investments to SAR 1.7trn by 2030
  • FDI inflows have been low in recent quarters compared to historical averages of between USD 8-10bn a quarter during 2008-10. Net FDI touched USD 5.5bn last year.

 
 
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Weekly Economic Commentary – Oct 10, 2021

Markets

Most markets ended the week on a positive note even though the weak payrolls number released on Friday flustered US equity markets slightly; in Europe, the Stoxx 600 ticked up by 1% last week, recording the best week in 2 months; in Asia, markets were all up including China which opened after a week-long break, taking solace from a strong services PMI reading. In the region, most markets mirrored their global counterparts, with the Saudi Tadawul rising above 11,550 points for the first time since Jan 2008 though Dubai was dragged down by banking stocks. The yen gained vis-à-vis the greenback and the pound closed with a 0.5% rise. Oil price rose by 4%+ last week, also touching their highest level since 2014, while gold prices closed 0.2% lower.

Weekly % changes for last week (7 Oct – 8 Oct) from 30 Sep (regional) and 1 Oct (international).

Global Developments

US/Americas:

  • Non-farm payrolls in the US increased by just 194k in Sep (Aug: 366k), partly a result of public-sector payrolls dropping by a net 123k. Average hourly earnings increased by 0.6% mom and 4.6% yoy in Sep (Aug: 0.4% mom, 4% yoy) while the labour force participation rate stood at 61.6%. Unemployment rate fell to 4.8% in Sep (Aug: 5.2%), the lowest since Feb 2020 while employment-to-population level increased to 58.7%, its highest since Mar 2020.
  • US private sector added 568k jobs in Sep (Aug: 340k), with the leisure and hospitality sector leading the pack with 226k jobs.
  • US factory orders rose for the 4th straight month in Aug, posting a gain of 1.2% mom, following an upwardly revised 0.7% gain in Jul. Orders for non-defense capital goods excluding aircraft edged up by a revised 0.6%, from the prior estimate of a 0.5% gain.
  • Trade deficit in the US widened to a record high of USD 73.3bn in Aug (Jul: USD 70.3bn); exports gained 0.5% to USD 213.7bn in Aug – the highest since May 2019 – while imports rose by 1.4% to USD 287bn, a record high. Goods trade deficit also increased, widening to USD 89.4bn in Aug (Jul: USD 87.6bn) as goods exports rose by 0.7% to a record USD 149.7bn.
  • ISM services PMI improved to 61.9 in Sep (Aug: 61.7), thanks to an uptick in business activity (62.3 from 60.1) and new orders (63.5 from 63.2) while employment index slipped to 53 (Aug: 53.7) and prices paid increased to 77.5 (Aug: 75.4).
  • Markit services PMI increased to 54.9 in Sep, from a preliminary reading of 54.4. Though new business rose the least in 13 months and cost pressures intensified, business confidence was the highest since Jun.
  • Initial jobless claims declined for the first time in four weeks to 326k in the week ended Oct 1st from an upwardly revised 364k the previous week; the 4-week average inched up to 344k. Continuing claims slipped to 2.714mn in the week ended Sep 24th.
  • The US approved a temporary lift of the debt ceiling: the USD 480bn increase will lift the debt limit to USD 28.9trn, and the deadline is now Dec 3rd.

Europe:

  • German factory orders collapsed by 7.7% mom in Aug (Jul: 4.9%); domestic orders were down by 5.2% while foreign orders tumbled by 9.5%.
  • Industrial production in Germany decreased by 4% mom in Aug (Jul: +1.3%): this is the steepest slump since Apr 2020. Production of cars and car parts were down by 17.5% on the month, given supply disruptions especially microchips and other intermediate products (like semiconductors). In yoy terms, IP was up by 1.7%, much lower than the 6% uptick in Jul.
  • Exports from Germany fell by 1.2% mom in Aug, slipping for the first time in 15 months, while imports grew by 3.5%, causing the trade surplus to narrow to EUR 13bn (Jul: EUR 17.7bn). In yoy terms, exports to US and China were up by 22.4% and 4.4% respectively. Current account balance also narrowed, down to EUR 11.8bn (Jul: EUR 17.9bn)
  • Retail sales in the eurozone rebounded by 0.3% mom in Aug, after slipping by 2.6% in Jul. Non-food product retail trade increased by 1.8% while automotive fuel (-0.1%) and food, drinks, & tobacco (-1.7%) weighed on overall sales. In yoy terms, sales remained unchanged.
  • EU producer price index accelerated by 1.1% mom and 13.4% yoy in Aug.
  • Sentix investor confidence in the eurozone declined for the third consecutive month to record 16.9 in Oct (Sep: 19.6), the lowest level since Apr. Expectations index dropped from 9.0 to 8.0, posting the lowest since May 2020.
  • Services PMI in Germany increased by 0.2 points from the preliminary estimate to 56.2 in Sep, but was lower than the 60.8 recorded in Aug. In the Eurozone, services PMI stood at 56.2 in Sep, a tad higher than the flash estimate of 56.1, but lower than Aug’s 59. Input costs rose at the fastest rate since mid-2008, while output price inflation was around its highest level in over two decades.
  • Markit services PMI in the UK climbed to 55.4 in Sep (from Aug’s 6-month low of 55) in spite of supply chain disruptions and price pressures.

Asia Pacific:

  • The Caixin services PMI jumped to 53.4 in Sep (Aug: 46.7), with sub-indices of new business, prices charged and employment rising above-50 amid input prices rising for the 15th consecutive month. Composite index surged to 51.4 (Aug: 47.2) on services strength.
  • China’s foreign exchange reserves fell to USD 3.2trn in Sep (Aug: USD 3.232trn) – this is the lowest level since Apr and the largest mom decline since Mar.
  • Inflation in Tokyo increased by 0.3% yoy in Sep (Aug: -0.4%); Excluding fresh food, prices grew by 0.1% though excluding fresh food and energy, prices were down by 0.1%.
  • Preliminary data for Japan’s leading economic index showed a drop to 101.8 in Aug (Jul: 104.1), the lowest since Feb. Coincident indicator declined to 91.5 from 94.4 a month ago.
  • Overall household spending in Japan declined by 3% yoy in Aug (Jul: +0.7%), as the Covid19 related curbs weighed on consumption. The mom figures showed a 3.9% contraction in Aug, the fourth straight month of decline.
  • Current account balance in Japan narrowed to JPY 1665.6bn in Aug (Jul: JPY 1910.8bn). Trade balance slipped to JPY 372.4bn in Aug, from a surplus JPY 622.3bn the month before, as imports grew at a faster pace (45.9%) compared to exports (27.1%).
  • Calling the policy stance “accommodative”, the Reserve Bank of India left interest rates unchanged at the latest meeting for the 8th consecutive time: repo rate stands at 4% and reverse repo at 3.35%.
  • Singapore PMI edged down by 0.1 points to 50.8 in Sep (Aug: 50.9), with slower expansion in new orders, new exports, output, inventory and employment.
  • Retail sales in Singapore slipped by 2.8% yoy and 0.6% mom in Aug, after low base effects dissipated amid Covid19 restrictions. This was the first decline following six months of yoy increases. Online retail sales made up an estimated 14.1% of total sales in Aug (Jul: 13.8%).

Bottomline: The IMF expects global economy to recover at a slower pace than the 6% forecast in Jul, citing the “Great Vaccination Divide” as the main obstacle (more detailed forecasts will be published this week). Meanwhile, inflation continues to be a concern, with the FAO’s world food price index rising to a 10-year peak in Sep (+32.8% yoy and 2% mom). The OPEC+ decision to raise output by 400k barrels a day in Nov, and the gas to oil switching (given the shortage) has resulted in an oil price surge that adds on to the inflationary pressure. Last week also saw updated forecasts related to trade and travel (airlines). The WTO expects global trade to recover by 10.8% this year (up from the 8% predicted in Mar) and then by 4.7% next year; though shortages and supply chain constraints exist, the WTO does not expect it to have large impacts at the aggregate level. Travel is expected to see only a gradual recovery, with IATA expecting passenger numbers to rise to 2.3bn and 3.4% in 2021 and 2022 respectively – much lower than the 4.5bn registered in 2019.

Regional Developments

  • The World Bank estimates economic losses in the MENA region to touch almost USD 200bn by end-2021 given the pandemic. The region is estimated to grow by 2.8% this year, following a 3.8% drop in 2020. The report finds that 13 of the 16 MENA nations would have lower standard of living in 2021 compared to pre-Covid levels. The report can be accessed at https://openknowledge.worldbank.org/bitstream/handle/10986/36318/9781464817984.pdf
  • Egypt’s PMI stayed below-50 for the 10th month in a row, touching a 4-month low of 48.9 in Sep (Aug: 49.8). Both non-oil output and new orders declined while employment sub-index rose for the 3rd consecutive month.
  • Fuel prices in Egypt were increased by 3.6% from 8th Oct: all fuel grades were hiked by 25 piasters. This follows similar moves in Jul and Apr this year.
  • The IPO for Egypt’s state-controlled payments firm e-finance for Digital and Financial Investments will launch Oct 10 with the subscription window closing on Oct 14th.
  • Egypt’s government has launched a 3-year USD 2bn syndicated loan with green and Islamic finance components, disclosed Emirates NBD. The green tranche will be utilized for green projects under the “Green Financing Framework” while the Islamic tranche will go to meet budgetary requirements.
  • Egypt’s central bank amended the mortgage finance initiative for middle-income persons to further support the real estate sector: this includes the repayment period being increased to 25 years instead of 20, the abolition of the maximum net area unit requirement and raising the maximum unit price to EGP 2.5mn.
  • The government of Egypt plans to invest about USD 45bn into its sustainable rural communities’ program, according to the planning minister.
  • Egypt and Saudi Arabia signed contracts for the USD 1.8bn electricity interconnection project: it is expected to begin in 2022 and result in the exchange of 3000 MW of electricity between the two nations.
  • Iraq signed separate solar deals with the UAE and a Norwegian-led consortium, as part of the country’s plan to add 7500 MW to its grid by 2023: with UAE’s Masdar, Iraq plans to build 5 solar power plants with a total capacity of 1000 MW. The agreement with the consortium is for the construction of 2 solar plants with a total capacity of 525 MW at a cost of around USD 500mn.
  • Jordan aims to supply Lebanon with electricity by the end of the year, disclosed its energy minister. Egyptian gas will be used to generate electricity in Jordan, for transmission to Lebanon via the Syrian power grid.
  • Lebanon’s two largest power stations have been shut down due to fuel shortages: there will hence be no centrally generated electricity “for several days”. The army later agreed to provide 6,000 kilolitres of gas oil distributed equally between the two power stations – which will secure power for 3 days.
  • PMI in Lebanon inched up marginally to 46.9 in Sep (Aug: 46.6): political stability and reform potential continue to weigh down on sentiment. Output and new orders fell due to weak demand, while fuel shortages affected businesses in addition to supply disruptions. Private sector companies reported a mom drop in overall expenses for the first time since Jan 2019.
  • The IMF is expected to start technical discussions with Lebanon in “the coming days”, according to a spokeswoman. The objective is to agree on a recovery program that can harness international support and is committed to “a fair and comprehensive solution for all creditors”, according to a statement from the finance ministry.
  • Lebanon’s state assets are subject to privatization, revealed the economy minister: however, the issue of how to organize the assets sell-off remains uncertain for now.
  • Britain is launching a 14-week consultation with British businesses (while also meeting representatives of GCC), as the first step towards trade negotiations with the GCC. 
  • A report from S&P Global finds that GCC banking sector continues to be strong, with core customer deposits the main source of funding. Customer deposits in the GCC grew by an annualized 6.6% in H1 2021 versus the 6.3% recorded in 2019. The UAE not only had a very small (annualized) growth in lending, amounting only to 0.6%, it also experienced the biggest deterioration in asset quality as its NPL ratio (6.6% in H1 2021). The GCC’s NPL ratio rose to 3.8% on average at mid-2021 (end-2019: 3.1%).

Saudi Arabia Focus

  • Saudi Arabia PMI increased to a 7-year high of 58.6 in Sep (Aug: 54.1) – the fastest rate in Aug 2015. Output growth accelerated for the first time in 4 months while new orders growth accelerates sharply. Business confidence jumped to the strongest since Jan.
  • The World Bank estimates Saudi Arabia’s growth to rebound to 2.4% and 3.3% in 2021 and 2022, from a 4.1% plunge the year before. The baseline projection is still susceptible to pandemic related risks, especially if new variants emerge, according to the officials.
  • Sales of 17 cement companies in Saudi Arabia decline dby 11% yoy to 4.1mn tonnes, reported Argaam.
  • Tadawul is planning a USD 4bn stake sale in an IPO, reported Bloomberg; the exchange is expected to release information on the IPO later this month.
  • Saudi Arabia plans to produce 70% of its needed energy products locally by 2030, disclosed the energy minister. The ministry plans to boost localization of equipment and development of national cadres to achieve the goal.
  • Aramco’s share price rose to an all-time high of SAR 38 (USD 10.13) last week, thereby placing the company’s valuation at USD 2trn, thanks to the rising energy demand globally. At an energy conference last week, Aramco’s CEO reiterated the company’s plans to raise oil capacity to 13mn barrels a day, also stating that this would take until 2027 (from 12mn bpd).
  • Bloomberg reported that Saudi Aramco is considering an IPO of its retail fuels and lubricants unit, with talks in an early stage. Earlier in the week, it was reported that five North American firms were bidding for a deal to sell a share of Aramcos gas pipelines.
  • Saudi Arabia cut the Nov official selling price to Asia for its flagship Arabian Light crude to USD 1.30 a barrel above the Oman/Dubai average.
  • Saudi Arabia’s cabinet extended the “soft mortgage” scheme – which reduces the first payment on a housing loan to 10% from 15% – by 3 years.
  • Saudi Arabia confirmed last week that it had held its first round of direct talks with Iran’s new government on Sep 21st. The talks are still “in the exploratory phase”, according to the foreign minister.

UAE Focus

  • UAE’s PMI edged down slightly to 53.3 in Sep (Aug: 53.8), even though output and new orders increased (thanks to a “continued recovery in footfall and contracts related to Expo 2020”). Job creation slowed, although from a 43-month high in Aug while higher raw material prices added to price pressures.
  • UAE’s Federal government raised USD 4bn in its debut bond sale, after having received orders upwards of USD 22.5bn. This underscores investors confidence in the country’s fundamentals and its recovery story. With USD 2bn raised in 40-year notes, the UAE has successfully secured cheap and long-term funding for the government. The funds are to be used for financing of long-term projects like infrastructure and to also support investments by the Emirates Investment Authority (UAE’s SWF). This will support and accelerate the development of a government debt market, which can be used to finance budget deficits. Read more: https://nassersaidi.com/2021/10/07/weekly-insights-7-oct-2021-moving-towards-gradual-economic-recovery-in-the-gcc/
  • The UAE became the first MENA nation to announce a plan for net-zero emissions by 2050: the country will oversee AED 600bn (USD 163bn) in investment in renewable energy vs USD 40bn invested in the past 15 years. No further details of the investments were provided.
  • CBRE reported that while the average residential property prices grew by 4.4% yoy in Aug – the highest growth since Feb 2015 – the rents fell by 2.7% during this period. While apartment and villa prices increased by 2.5% and 17.9% respectively in Aug, they were still 30.4% and 20.5% lower than highs touched in 2014.
  • Emirates airlines signed a USD 750mn five-year dual-tranche financing facility with Emirates NBD.
  • The UAE has granted federal government employees 6 days of special paid leave to visit the Expo 2020, to be used any time during the 6-month period.

Media Review

OECD: International community strikes a ground-breaking tax deal for the digital age

https://www.oecd.org/tax/international-community-strikes-a-ground-breaking-tax-deal-for-the-digital-age.htm

Iraq’s election could be worthless if few turn out to vote

https://www.economist.com/middle-east-and-africa/2021/10/07/iraqs-election-could-be-worthless-if-few-turn-out-to-vote

After “Doing Business”

https://www.project-syndicate.org/commentary/world-bank-after-doing-business-four-criteria-by-mauricio-cardenas-2021-10

Lebanon’s health system on life support (with Dr. Nasser Saidi’s comments)

https://www.telegraph.co.uk/global-health/terror-and-security/lebanon-on-life-support/

Gulf states are trying to increase private employment

https://www.economist.com/middle-east-and-africa/2021/10/07/gulf-states-are-trying-to-increase-private-employment

 

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Weekly Insights 7 Oct 2021: Moving Towards Gradual Economic Recovery in the GCC

Weekly Insights 7 Oct 2021: Moving Towards Gradual Economic Recovery in the GCC

1. UAE’s debut federal debt to support and accelerate the development of a government debt market

  • UAE’s Federal government raised USD 4bn in its debut bond sale, after having received orders upwards of USD 22.5bn. This underscores investors confidence in the country’s fundamentals and its recovery story
  • The individual emirates have tapped markets multiple times, but this is the first Federal issuance
  • With USD 2bn raised in 40-year notes, the UAE has successfully secured cheap and long-term funding for the government. The funds are to be used for financing of long-term projects like infrastructure and to also support investments by the Emirates Investment Authority (UAE’s SWF)
  • This will support and accelerate the development of a government debt market, which can be used to finance budget deficits (will not be necessary to maintain a balanced budget, but it would be prudent to introduce fiscal rules)
  • Government gross debt for UAE stands at an estimated 38% of GDP in 2020 – slightly lower than the 40% average for the GCC and much lower than Bahrain’s 130%+ and Oman’s 80%+
  • The next step is to create a local currency bond market: a steady pipeline of issuances would result in stable access to capital that can be tapped when needed; furthermore, given UAE’s peg to the dollar, the central bank can also use this to conduct open market operations (support liquidity)

 

2. PMIs indicate a divergent recovery in the Middle East

  • PMIs of fuel exporters Saudi Arabia, UAE and Qatar continue to expand in 2021, supported by strong domestic demand thanks to high vaccination rates and ease of restrictions
  • Higher raw material prices & rising fuel costs are hurting businesses bottomline; however, full costs are not being passed on to consumers (yet!) amid concerns of strong competition
  • Meanwhile among oil importers, both Egypt and Lebanon remain in contractionary territory
  • The political deadlock had been a major factor in Lebanon’s plunge in addition to the growth freefall; the formation of the government has not changed businesses sceptical viewpoint
  • Optimism of a recovery in the next 12-months reached an all-time high in Egypt in Sep, on indications of rising pace of vaccination and slow easing of travel/ tourism restrictions

 

3. Qatar’s GDP grows by 4% in Q2 2021, thanks to a 6% surge in non-oil sector activity

  • GDP in Qatar grew by 4% yoy in Q2 2021, supported by a 6% surge in non-oil sector growth alongside a 0.7% increase in mining & quarrying
  • Restoring trade and travel links with Saudi, UAE, Bahrain and Egypt after the embargo was lifted in early 2021 has also benefitted the economy
  • Compared to a year ago, hospitality sector posted the largest increase (41%) in Q2 as did transport (26.9%) and trade (26.1%) – not surprising, since these sectors were most affected by the Covid19 outbreak.
  • Manufacturing picked up by 13.4% yoy in Q2, after a slight 0.7% gain in Q1
  • Another interesting point is the growth in activity in agriculture & fishing – possibly a result of policies introduced to support local agricultural products & improve food security

 

4. Broad money in Saudi Arabia grows at a slower pace than credit growth; e-commerce transaction gains continue

  • Consumer spending in Saudi Arabia has been rising gradually in month-on-month terms, with e-commerce transactions doubling in Aug (SAR 6.9bn from SAR 3.3bn in Aug 2020)
  • Weekly PoS transactions in clothing, health, restaurants & food are rising with the easing of restrictions (tracked by the Oxford COVID-19 Government Response Tracker/ stringency index)
  • Credit growth has been rising at a faster pace than broad money supply (M2)
  • Claims on the private sector continues to outpace public sector loans in Aug 2021 – as seen in most months this year. Separately, residential new mortgages increased in Aug, after two consecutive months of declines in Jun & Jul

 

 

 

5. Unemployment rate among Saudi females ticks up to 22.3% in Q2 2021

  • Overall unemployment rate among Saudi nationals fell to 11.3% in Q2 2021, down from Q1’s 11.7%. Youth unemployment (20-24) dropped to 22.2% in Q2 (Q1: 23.6%)
  • Unemployment rates among Saudi males dipped to 6.1% in Q2 from 7.2% in Q1
  • Unemployment rate among female Saudi citizens inched up to 22.3% from 21.2% in Q1 – a result of a jump in unemployment rates in all age brackets above 35+
  • Female participation in the workforce inched up to 32.4% in Q2 2021 (Q1: 32.3%; 2016: 19%)
  • Women earn slightly more than men in the 15-19 age group, but the pay gap widens after that. On average, in Q2 2021, a Saudi male employee is paid 1.3 times compared to a female national though the gap has narrowed significantly over time

 

6. Saudi fiscal deficit has been revised down to an estimated 2.7% of GDP in 2021

  • Fiscal deficit in Saudi Arabia narrowed to SAR 12bn in H1 2021 compared to SAR 143bn in H1 2020
  • Revenues increased by close to 40% yoy in H1 2021 – a result of a surge in tax revenue (+171.7% yoy) and 11% rise in oil revenues. Share of oil revenue declined to 55% (H1 2020: 69%) while taxes on goods & services rose to 27% (given the VAT hike)
  • Total expenditure declined by 0.9% yoy to SAR 465bn in H1 2021; private investment indicators improved by 12.3%: finance ministry.
  • Saudi Arabia revised down its 2021 budget deficit to SAR 85bn (equivalent to 2.7% of GDP) from the previous SAR 141bn (or 4.9%) estimate
  • Deficit is estimated to narrow to 1.6% of GDP next year, and surpluses are forecast from 2023 onwards.

 

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Weekly Economic Commentary – Oct 3, 2021

Markets

Major global equity markets suffered a setback last week, with S&P and Nasdaq posting the biggest weekly drops since Feb, Stoxx down by 2% after heightened inflation worries  (latest EU reading stood at a 13-year high) while the MSCI all world index declined by 2.5%. Regional markets were mixed: higher oil and gas prices supported equity performance (especially in Qatar and Saudi Arabia) though Abu Dhabi bucked the trend, ending 1.6% lower than a week ago.  The euro posted its worst fall since mid-Jun, and the pound dragged to a 9-month low (before recovering slightly) while the yen bounced back after posting a 19-month low. Oil prices posted a substantial increase last week, with Brent breaching the USD 80 mark (for the first time in 3 years) before settling at just above USD 79 while gold price inched higher on the weaker dollar and inflation fears.

Weekly % changes for last week (30 Sep-1 Oct) from 23 Sep (regional) and 24 Sep (international).

Global Developments

US/Americas:

  • GDP growth in the US increased to 6.7% at an annualized rate in Q2 (according to the third and final estimate), higher than the previous estimate of 6.6% and Q1’s 6.4% reading. The PCE core index jumped by 6.1% yoy in Q2, unchanged from the previous estimate while PCE index remained high at 6.5%.
  • Personal income grew by 0.2% (Jul: 1.1%) while spending increased by 0.8% in Aug (Jul: -0.1%). Personal saving as a percentage of disposable income fell to 9.4% (Jul: 10.1%). PCE price index was up 4.3% yoy in Aug: energy prices rose by 24.9% and food prices by 2.8%.
  • Durable goods orders inched up by 1.8% mom in Aug (Jul: 0.5%), with orders for non-defense aircraft and parts surging by 77.9% alongside an uptick in orders for capital goods (6.7%), transportation (5.5%) and manufacturing (3.3%). Non-defense capital goods excluding aircraft were up by 0.5% after Jul’s 0.3% gain.
  • ISM manufacturing PMI increased to 61.1 in Sep (Aug: 59.9), thanks to an increase in production (59.4, tad lower than Aug’s 60) new orders sub-index (66.7, unchanged from Aug) while factory employment rebounded (50.2 from 49).
  • Markit manufacturing PMI dropped to a 5-month low of 60.7 in Sep (Aug: 61.1): though new sales increased, demand was outpacing production capacity which is affected negatively by supply constraints and material shortages. Input costs increased at the second-fastest rate since data collection began in May 2007, easing only slightly from the high recorded in Aug.
  • Dallas Fed manufacturing index fell to 4.6 in Sep (Aug: 9), with declines in new orders (down by 6.1 points to 9.5) amid an increase in the production sub-index (by 3.4 points to +24.2). The Richmond Fed manufacturing index fell to -3 in Sep (Aug: 9): this was the lowest level since May 2020. The sub-indices for shipments and new orders declined to -1 and -19 respectively, also the lowest readings in 16 months. Separately, Chicago PMI eased to a 7-month low of 64.7 in Sep (Aug: 66.8).
  • Preliminary goods trade balance widened to USD 87.6bn in Aug (Jul: USD 86.8bn): exports inched up by 0.7% mom while imports grew at a relatively faster pace of 0.8% to USD 236.6bn.
  • The S&P Case Shiller home price indices rose 19.9% yoy in Jul, following the 19.1% rise in Jun. The average mortgage rate for a 30-year loan declined to 2.8% at end-Jul from 2.98% at the start, also encouraging more buying, while the lack of homes for sale drove up prices further.
  • Pending home sales surged by 8.1% mom in Aug, rebounding from the 2% drop in Jul. In yoy terms, signings were down by 8.3%. Sales rose the most in the least-expensive regions – the Midwest and South of the country.
  • Initial jobless claims increased by 27k to 362k in the week ended Sep 24th, with the 4-week average falling slightly to 335,750. Continuing claims rose by 131k to 2.84mn in the week ended Sep17th. The four-week moving average for continuing claims fell to 2.8mn – the lowest since Mar 14th 2020.

Europe:

  • Inflation in the Eurozone increased to 3.4% in Sep (Aug: 3%), the highest level since Sep 2008, driven up by surging energy prices. Core CPI inched up to 1.9% in Sep (Aug: 1.6%).
  • The harmonized index of consumer prices in Germany accelerated at a record pace of 4.1% yoy in Sep (Aug: 3.4%).
  • French inflation hit a near 10-year high of 2.7% in Sep. The French PM announced on Thursday that the government would be blocking further natural gas price increases as well as rises in electricity tariffs, in a bid to support consumers combat the price hikes.
  • Consumer confidence in the Euro Area eased to -4 in Sep (Aug: -5.3) while the business climate indicator decreased to 1.72 points from 1.74 the month before.
  • Unemployment rate in Germany held steady at 5.5% in Sep, thanks to a smaller fall in unemployment (to 2.47mn from 2.58mn in Aug). Separately, unemployment rate in the EU fell to 6.8% in Aug from 6.9% the month before and from 7.7% in Aug 2020. About 2.8mn young people (under 25) were unemployed in the EU, with youth unemployment rate nudging down to 16.2% (Jul: 16.4%).
  • Manufacturing PMI in Germany declined to an 8-month low of 58.4 in Sep (Aug: 62.6), with growth in output and new orders dropping to a 15-month low. Manufacturers’ optimism slipped to its lowest since Aug 2020, with supply shortages expected to persist into 2022.
  • Eurozone’s manufacturing PMI slowed to 58.6 in Sep (Aug: 61.4) – the largest drop since Apr 2020 at the start of the pandemic – as growth in both new orders and output was the weakest in 8 months. Austria was the only economy to see faster manufacturing growth over the month as expansions slowed elsewhere.
  • Retail sales in Germany rebounded by 1.1% mom in Aug (Jul: -4.5% mom), thanks to upticks in non-food products (+4.9%), online trade (+95) while sales of food and beverages declined by 3.4%. Retail sales were 6% higher when compared to Feb 2020.
  • UK’s preliminary GDP for Q2 increased by 5.5% qoq and 23.6% yoy, higher than the preliminary estimate of 4.8% qoq growth, driven by services sector performance. Food and accommodation sector posted an 87.6% acceleration in quarterly terms while manufacturing posted a 1.8% rise and construction returned to pre-pandemic levels. Households increased spending by almost 8% in and savings ratio fell to 11.7% (Q1: 18.4%).
  • Current account deficit in the UK remained unchanged at GBP 8.6bn in Q2, equivalent to 1.5% of GDP (Q1: 1.6% of GDP).
  • UK manufacturing PMI was down to 57.1 in Sep (Aug: 60.3), as growth slowed across all sectors – consumer, intermediate and investment goods. Multiple factors were cited for the rising average vendor lead times including “delays to air, land and sea freight, staff shortages at vendors, COVID-19 and Brexit disruptions, a lack of delivery drivers and port delays”.

Asia Pacific:

  • China’s non-manufacturing PMI jumped back to expansionary territory in Sep, moving up to 53.2 (Aug: 47.5). This was supported by improvements in new orders (49.0 from Aug’s 42.2), new export orders (46.4 from 43.9), and employment (47.8 from 47.0). Services index rose to 52.4 from the previous month’s 45.2 while construction dropped to 57.5 (Aug: 60.5).
  • China’s NBS manufacturing PMI unexpectedly slipped to below-50 in Sep, clocking in at 49.6 (Aug: 50.1), the lowest point since Feb 2020. Output, new orders and exports sales declined, with readings under-50 with the power crisis adding a new uncertainty element amid supply shortages. Employment dropped for the 6th consecutive month (49.0 vs 49.6).
  • Caixin manufacturing PMI moved up to 50 from 49.2 reading in Jul, as new orders returned to above-50 while new export orders slipped to the lowest level since Feb. Furthermore, sentiment strengthened to its highest since June.
  • Japan’s leading economic index slipped to 104.1 in Jul (Jun: 104.2 – which was the highest reading since Feb 2014). The coincident indicator slid to 94.4 in Jul (Jun: 94.6).
  • Japan’s manufacturing PMI slowed to 51.5 in Sep from Aug’s 52.7. Output contracted for the first time since Jan, given Covid19 cases surge and shortage of raw materials. New orders among Japanese manufacturers also fell for the first time since Dec 2020.
  • Japan Tankan large manufacturing index increased to 18 in Q3 (Q2: 14), the highest level since 2018. Large tankan manufacturing outlook also edged up in Q3, rising to 14 from 13 in the previous quarter.
  • Industrial production in Japan was down by 3.2% mom in Aug (Jul: -1.5%), declining for the second straight month. Weaker production of cars and electronic machines, a result of components and chip shortages, dragged down production. In yoy terms, IP increased by 9.3% in Aug (Jul: 11.6%). The government downgraded its assessment of IP – to “stalling” – for the first time since Apr 2020.
  • Retail trade in Japan fell by 4.1% mom and 3.2% yoy in Jul (Jun: 1.1% mom and 2.4% yoy), posting the first decline since Feb 2021, as households reduced spending amid a surge in Covid19 cases. Large retailer sales fell by 4.7% (Jun: 1.3%).
  • Fiscal deficit in India reached INR 4.68trn in Apr-Aug, accounting for 31.1% of the yearly budget target. Net tax receipts stood at INR 6.45trn while expenditure was INR 12.77trn.
  • India posted a current account surplus in Apr-Jun quarter, thanks to a narrowing of the trade deficit, according to the Reserve Bank of India. Current account surplus stood at USD 6.5bn or 0.9% of GDP vs a deficit of USD 8.1bn in Jan-Mar 2021 and USD 19.1bn in Apr-Jun 2020, a record high). Private transfer receipts, which comprises remittances by Indians abroad, rose by 14.8% during the quarter. A balance of payments surplus of USD 31.9bn was posted in Apr-Jun compared to USD 19.8bn surplus in the same period a year ago.

Bottomline: Global manufacturing PMI remained unchanged at 54.1 in Sep, but continue to be severely constrained by supply chain disruptions and input shortages. Europe and US readings outperform weaker Asian ones while in the US and UK, labour and skill shortages are oft mentioned as added constraints, though for different reasons with Brexit affecting the UK. Inflation woes are becoming stronger by the month amid rising energy prices (power outages in China have impacted industry and the start of winter season in the West will mean higher bills, adding to the worries), raising uncertainty about growth prospects as central banks discussions start to centre around raising rates and removing Covid-induced stimulus measures. Last but not the least, OPEC ministers are scheduled to meet on Monday to review policy: though expectations are that the existing plan will be followed, there has been increasing chatter that more oil might be added.

Regional Developments

  • Bahrain is planning to double its VAT rate to 10% from 5% currently; this would require Parliamentary approval, and to this end a draft law modifying provisions of the VAT law has been submitted. If approved, the amended tax will come into effect from Jan 2022.
  • A new “sea-to-air” logistics hub has been launched in Bahrain: the hub will use streamlined clearance procedures, optimized logistics, and full digitization to ensure a 2-hour turnaround time for all containers (50% reduction vs pure sea freight) and at 40% of the cost (vs pure air freight).
  • A royal decree has abolished the National Oil and Gas Authority in Bahrain, with “all its rights and obligations transferred to the Ministry of Oil”.
  • announced the launch of a global technology hub at its offices in Bahrain, with an aim of employing 1,000 coders over the next 10 years. Tamkeen (a government funded labour fund) is expected to subsidise a portion of the salaries and cover training costs locally and abroad.
  • The central bank of Egypt has approved licenses for contactless payments by mobiles to further plans of digital transformation and greater financial inclusion. This will allow businesses to accept payments from mobile phones (i.e. phones can be used as PoS terminals).
  • ’s Minister of International Cooperation revealed that the ministry had supported in attracting USD 3.2bn in financing for the private sector through its international development partners (like the EBRD, EIB and IFC among others) in 2020. In H1 this year, about USD 1.9bn was received from the partners.
  • The SME Development Agency in Egypt announced that it had provided financing worth EGP 1bn for innovative projects (partly using USD 50mn obtained from a USD 200mn loan agreement with the World Bank).
  • Three Egyptian banks – National Bank of Egypt, Banque Misr, and Banque Du Caire – plan to launch in Oct a EGP 1bn (USD 64mn) fund to support fintech firms.
  • The Egyptian Tax Authority has announced that all online content creators need to register for income tax. Those creators whose revenues reached EGP 500k per year since their online debut are also required to register for VAT.
  • Egypt and Saudi Arabia will sign electricity interconnection contracts on Oct 5th, with implementation likely to start in 2022.  The interconnection project aims to exchange 3,000 MW during peak times.
  • Egypt has been selected as the nominee to host the COP27 UN climate conference due to take place next year, revealed the US climate envoy.
  • ’s foreign minister disclosed that the country had requested release USD 10bn of frozen funds by the US (as a sign of goodwill) ahead of restarting nuclear accord talks.
  • Iraq opened the Jamima border-crossing port with Saudi Arabia for the first time since 1991, following the opening of the Ar’ar border crossing in Nov 2020.
  • Jordan has re-opened the main border crossing with Syria: the Jaber crossing had been open since 2018 before it was closed given pandemic-related restrictions. The opening will allow for transit cargo from the Gulf into Syria as well as unrestricted passenger traffic.
  • Kuwait’s Manpower Authority has been tasked with getting another 100k citizens working in the private sector within 4 years.
  • Meetings are underway to agree on the size and distribution of financial losses in Lebanon, revealed the economy minister. Separately, ahead of a meeting with Lazard, the PM hoped that the Lazard’s financial plan could be developed into a “more realistic” vision to help the nation out of the current crisis.
  • S&P upgraded Oman’s outlook to positive from stable while affirming ‘B+/B’ long and short-term foreign and local currency sovereign credit ratings. S&P cited Oman’s reform program and higher oil prices leading to narrower fiscal deficits, thereby slowing the net government debt as reasons for the revised outlook.
  • GDP growth in Qatar was up by 4% yoy in Q2, supported by the non-oil sector performance (+6.2%). Sectors which saw growth surge include accommodation and food services (+41%), transportation and storage (+26.9%) as well as manufacturing (+13.4%). In qoq terms however, growth slipped by 0.3% in Q2.
  • Qatar’s first ever legislative elections for 30 members of the Shura Council was held on 2nd Oct, with a 63.5% voter turnout.
  • Qatar Airways reported doubling of annual losses to QAR 14.9bn (USD 4.1bn): passenger revenue plummeted by 80% to QAR 7.9bn while operating loss shrank by 7% to OMR 1.1bn.
  • Qatar Petroleum secured a new deal to supply LNG to China for a period of 15 years. This deal will see Qatar deliver 3.5mn tonnes per annum starting from Jan 2022.
  • The EU Ambassador disclosed that the EU has tentatively reopened trade talks with the GCC. Initiated in the sidelines of the 76th session of the UN General Assembly, discussions are to continue during the upcoming visit of the EU representative to the Gulf region.

Saudi Arabia Focus

  • Saudi Arabia revised down its 2021 budget deficit to SAR 85bn (equivalent to 2.7% of GDP) from a previous SAR 141bn (or 4.9%) estimate, thanks to higher revenues from the rise in oil prices. Revenues are estimated to rise to an estimated SAR 930bn (USD 248bn) versus a budget SAR 849bn for the full year. Total expenditure declined by 0.9% yoy to SAR 465bn in H1 2021 while private investment indicators improved by 12.3%, according to the finance ministry. Deficit is estimated to narrow to 1.6% of GDP next year, and surpluses are forecast from 2023 onwards.
  • Saudi Arabia’s national debt is expected to touch SAR 989bn (USD 264bn), or 31.3% of its GDP, in the next fiscal year. Principal repayments on debt will reach SAR 76bn next year, according to the finance ministry.
  • Point of sale transactions in Saudi Arabia increased by 6% mom to SAR 40.9bn in Aug. Cards and mobile technology accounted for 95% of transactions and 91% in terms of value.
  • The Saudi Central Bank extended the deferred loan payment program for MSMEs – which was set to expire on Oct 1stuntil end-2021.
  • Unemployment rate among Saudi citizens fell to a decade-low of 11.3% in Q2 this year (Q1: 11.7%). Male unemployment among Saudi citizens fell to 6.1% (Q1: 7.2%) while female unemployment inched up to 22.3% (Q1: 21.2%). Though labour force participation rate fell slightly to 49.4%, it remained above pre-pandemic levels.
  • Saudi Arabia launched a SAR 50bn (USD 13bn) strategy to develop the Aseer region (on the Red Sea coast) into a tourism hub, with an aim of attracting 10mn visitors by 2030.
  • The Saudi Capital Market Authority approved share sale applications of 4 companies in the Nomu market – Jahez International Company for Information and Technology, Nayifat Finance Co., Group Five Pipe Saudi Co. and East Pipes Integrated Company for Industry. This approval will be valid for 6 months.
  • PIF is exploring a stake sale in Saudi telco STC while maintaining a majority stake of more than 50% in the company.
  • S&P affirmed Saudi Arabia’s “A-” credit rating with a stable outlook: deficit is expected to drop to 4.3% this year, and average 5.7% between this year and 2024. Words of caution were attached to Neom projects, stating that “funding pressures may impede their pace”.
  • Saudi Arabia is considering the issuance of more green bonds to expand its investor base in addition to financing backed by export credit agencies as well as conventional and Islamic bonds. The Kingdom has secured financing of SAR 100bn till end-Aug out of plans to raise a total SAR 124bn for 2021, according to the head of the Saudi national debt office. Separately, he also stated that transitioning to renewable energy would save businesses about USD 13bn.
  • Saudi Arabia plans to find “suitable” jobs for graduates within a year of graduation: the aim is to increase Saudization in high-skilled positions to 40% by 2030. The minister of human resources also disclosed that should the candidates not be matched with available jobs, the program would upgrade their skills.
  • ACWA Power, which set the final price of its IPO at SAR 56 (USD 14.9) per share, plans to issue green bonds from next year to finance its renewable projects. The company received orders of SAR 1.127trn (USD 300.4bn) from institutional investors, to which it is allocating 90% of the 81.2mn shares on offer.
  • Saudia was bestowed the titled “World’s most improved airline of 2021” in the Skytrax ranking, moving up by 55% to 26th position. In 2017, the airline had moved up to 51 from 82.
  • FTSE Russell announced the inclusion of Saudi Arabia in FTSE Emerging Markets Government Bond Index (EMGBI) effective Apr 2022. It will likely include 42 government Sukuk which comprise 2.75% of the index on a market value weighted basis.

UAE Focus

  • The IMF expects UAE’s non-oil GDP growth to exceed 3% this year, with oil GDP rising with higher production, together improving both fiscal and external balances. The Fund warned that banks’ asset quality has weakened “somewhat” amid subdued corporate credit growth and that banks’ balances sheet might still be impacted (including from the Covid19 crisis).
  • Expo 2020 opened for the public from Fri: there are up to 60 live events each day and more than 200 pavilions at the event. Dubai government employees have been granted 6 days of paid leave to attend the Expo, to be used anytime during the 6-month period.
  • Dubai reported a 31% yoy surge in non-oil exports in H1 2021. This follows the pandemic-hit drop in H1 2020, but when compared to H1 2019, trade is up by a significant 6.8%. Top trade partners for Dubai remained the same over the last 3 years: China, India and US on top, followed by Saudi Arabia (the largest partner in the Arab region) and Switzerland.
  • Dubai increased the housing loan limit for UAE citizens to AED 1mn (USD 272k); the government is also in the process of allocating 4k plots of land and housing for citizens at a cost of AED 5.2bn.
  • Fuel prices in the UAE increased in Oct: petrol prices were up by 2% while diesel prices rose by 5.4% to AED 2.51 per litre.
  • The book building for ADNOC Drilling has been completed: it raised more than USD 1.1bn after being oversubscribed with gross demand totaling more than USD 34bn.
  • The Dubai Financial Market will operate from 10am to 3pm starting today (Oct 3) instead of till 2pm before.
  • Abu Dhabi extended the electricity tariffs incentive programme (EITP) to SMEs in the industrial sector.  The programme has granted around AED 610mn (USD 166mn) in benefits to manufacturers.
  • Real estate transactions in Abu Dhabi touched AED 23.57bn from 7046 transactions in H1 this year, according to the Department of Municipalities and Transport.
  • Etihad Airways is working on its third sustainable financing transaction, revealed the company’s treasurer at a conference. The airline has committed to net zero carbon emissions by 2050.
  • Etihad Rail disclosed that the construction work for package A of stage two (that extends 139kms) and its connection through Al Ghuwaifat on the border of Saudi Arabia with Stage One (which extends 264 kilometres from Habshan to Al Ruwais) was completed.
  • Emirates airline disclosed that the operator is on track to restore 70% of its capacity before the end of the year.

Media Review

Crypto Boom Poses New Challenges to Financial Stability
https://blogs.imf.org/2021/10/01/crypto-boom-poses-new-challenges-to-financial-stability/

The latest shock to China’s economy: power shortages
https://www.economist.com/finance-and-economics/2021/10/02/the-latest-shock-to-chinas-economy-power-shortages

Lebanon’s path back from the brink of collapse
https://oecd-development-matters.org/2021/09/15/lebanons-path-back-from-the-brink-of-collapse/
Based on the OECD article, report in Al Arabiya (Arabic)
https://bit.ly/3A6wPAc

How investment in Expo 2020 will pay off for UAE economy, burnish Dubai brand
https://www.arabnews.com/node/1938241/middle-east

 

 

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Weekly Insights 30 Sep 2021: Headwinds to Recovery in Global Trade

Weekly Insights 30 Sep 2021: Headwinds to Recovery in Global Trade

1. Global services trade has been lagging goods trade, still below pre-pandemic levels | Evidence from Services PMIs

  • Trade in goods seem to be on a strong recovery path, but services trade has not been keeping pace. The WTO’s Global Services Trade Activity index showed that the volume of services trade was down by 13.9% in Q1 2021 (but coming off higher declines of 26.3%, 25.5% and 20.5% in Q2, Q3 and Q4 2020 respectively).
  • Services PMI readings (from Markit) seem to suggest that though recovery was underway in Q2, growth has eased sharply since. Flash PMIs for Sep showed that: (a) growth eased sharply to the lowest since May in the eurozone; (b) US expansion slide to a 14-month low; (c) UK posted the worst performance since Jan’s lockdown; and (d) Japan reported lower service sector output for the 20th consecutive month.
  • Many factors were attributed to the slowdown in the services sector: weaker demand (given Delta variant’s spread and related restrictions) + supply shortages + labour supply issues (esp. in the US and the UK). This has also resulted in driving up input costs & overall prices

2. Global services trade | Evidence from Passenger & Cargo volumes

  • Passenger traffic has been recovering globally, as the rollout of vaccines led to reopening of international travel while also aided by domestic passenger growth (especially in the US & China).
  • The surge in Delta-variant cases in China since end-Jun has impacted domestic travel significantly; but, improving intra-European traffic has benefitted European airlines, and India has seen a resurgence in domestic traffic.
  • IATA, using the DDS ticketing database, find that though travel demand for Q4 is looking stronger than last year, bookings are still only at 42% of 2019 levels.
  • Revenue Passenger Kilometers (RPKs) of Middle Eastern airlines fell by 73.2% in Jul 2021 vs. Jul 2019: this was the weakest outcome amongst all regions (a result of the slow recovery of international flights) versus an industry reading of -53.1%. Passenger capacity of the region’s airlines fell by 57.5% (vs Jul 2019), also the weakest across regions.
  • Air cargo recovery has been underway since May: while global supply chain issues have been a key challenge, expansions in new export orders and manufacturing production will support growth.
  • Middle Eastern airlines reported the biggest improvement in Aug amongst all regions: 15.4% vs Aug 2019 & 2.4 ppts up from Jul’s expansion (ME-Asia segment gained the most)

3. Costs are on the rise: global shipping vs air cargo

  • Supply chain congestion has been pushing up prices amid an increase in demand for goods. These constraints are likely to persist for the rest of the year
  • Shipping costs have been increasing – given extended idling times, container shortages, shortage of workers at ports and congested seaports. Spillover effects to the supply chain are also visible with truck and rail transport hit by further delays.
  • However, air cargo has been less impacted than container shipping, thereby leading to a comparatively favourable relative price for chargeable weight.

4. Adding to price pressures: multi-year highs in oil, gas & coal prices

  • US natural gas prices rose to a 7-year high earlier this week; gas prices in Europe and Asia traded about four times over US gas (close to USD 29 per mmBtu vs USD 6)
  • Brent oil price crossed USD 80 – a 3 year high – before falling lower + coal prices have been rising (thermal coal prices are 96% higher in China this year)
  • Why the surge? More than just a supply shortage amid fast-rising demand:
    • US: less drilling by shale producers + recent supply disruptions from hurricanes
    • Europe: low natural gas stockpiles + delayed shipments from abroad + shutdowns for maintenance works
    • UK: labour shortage esp truckers to distribute fuel from refinery to retailers
    • China: shutting down coal plants & power outages => rising demand for LNG as an alternative option to coal
    • OPEC’s supply restrictions notwithstanding (next week, it is likely to add 400k bpd to output for Nov, as previously agreed), rise in gas prices & limited supply could see a switch towards using oil => higher oil prices
  • Outlook: rising input costs + higher gas prices + weaker growth

5. Dubai’s non-oil exports surge, as it accelerates to meet the 10 X 10 goal

  • Dubai disclosed a 31% yoy surge in non-oil exports in H1 2021. This follows the pandemic-hit drop in H1 2020, but when compared to H1 2019, trade is up by a significant 6.8%.
  • This is in line with the ambition of UAE’s 10X10 program, announced as part of the “Project of the 50”. This involves an annual increase in the country’s exports by 10% in 10 key markets: China, the UK, the Netherlands, Italy, Russia, Poland, Luxembourg, Australia, New Zealand and Indonesia.
  • Top trade partners for Dubai remained the same over the last 3 years: China, India and US the top 3 followed by Saudi Arabia (which is the largest partner in the Arab region) and Switzerland.

 

6. Saudi Arabia’s trade diversification efforts need a significant push
Oil accounted for an average ~3/4th of total exports this year

  • Saudi crude oil exports rose to 6.327mn barrels per day in Jul, according to data from JODI – this was the highest reported level since Jan.
  • Not surprising then that oil exports grew by 112.1% yoy in Jul, thereby supporting overall export growth (+79.6% yoy in Jul & 40.5% ytd).
  • Non-oil trade deficit with the UAE widened in Jul, after new amendments were introduced from Jul related to imports. Value of imports from the UAE fell by 32.8% mom and 6.2% yoy to SAR 3.1bn in Jul: the monthly drop was the sharpest this year. As a result, UAE slipped to the 3rd largest import partner (after China and the US) from 2nd in June.

 

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Weekly Economic Commentary – Sep 26, 2021

Markets

A turbulent week for global markets, as it digested the hawkish signals from major central banks while keeping a close eye as the Evergrande crisis unfurled (more in Media Review section). Asian markets were further affected by China’s announcement of a crackdown on cryptocurrencies – Asia ex-Japan ended the week down by 1.3% and Hong Kong’s index by almost 3%. Regional markets were mixed with Bahrain and Egypt the best and worst performers in the week. Among currencies, the euro and pound were down while the Japanese yen weakened. Oil prices increased to the highest in almost 3 years while gold slide to a 6-week low.

Weekly % changes for last week (23-24 Sep) from 16 Sep (regional) and 17 Sep (international).

Global Developments

US/Americas:

  • The Fed cut its 2021 growth forecasts and projected a 5.9% rate this year (vs. 7% previously) while reiterating that a “gradual” tapering of bond buying was coming “soon” with the intention of withdrawing the stimulus completely by H2 2022.
  • US current account deficit widened to a 14-year high of USD 190.28bn in Q2 (Q1: USD 189.4bn). The current account gap was 3.3% of GDP in Q2 (Q1: 3.4% of GDP).
  • Overall housing starts were up by 3.9% mom to 1.615mn units in Aug, though single family home building fell for the 2nd straight month (-2.8% to 1.076mn). Building permits increased by 6% mom to a rate of 1.728mn units in Aug: as single-family permits gained by 0.6%, the multi-unit building permits surged by 19.7% to 632k units – the highest level since Jan 1990.
  • Existing home sales declined by 2% mom to 5.88mn in Aug; in yoy terms, sales were down by 1.5% – recording the first annual decline in 14 months. The supply of homes for sale fell 1.5% mom to 1.29mn at end- The share of first-time buyers, at 29%, was the lowest since Jan 2019 – a result of higher home prices (median price was up by 14.9% yoy to USD 356,700).
  • New home sales grew by 1.5% mom to a seasonally adjusted rate of 740k in Aug. Supply is at the most since Oct 2008, with 378k new homes on the market: houses under construction made up 62.7% of the inventory, with homes yet to be built accounting for a record 27.8%.
  • Markit manufacturing PMI fell to a 5-month low of 60.5 in Sep (Aug: 61.1): though new orders were supported by strong demand, supply constraints and material shortages affected output. Services PMI slowed to a 14-month low of 54.4 (Aug: 55.1) with new export orders posting a quicker decline while employment levels remained broadly unchanged.
  • Kansas Fed manufacturing activity index slowed in Sep: the composite index fell to 22 (Aug: 29) while the production index plunged to 10 in Sep (Aug: 22) and the volume of new orders index decreased sharply to seven from 34.
  • Initial jobless claims unexpectedly rose for a second consecutive week, to 351k in the week ended Sep 17th, from an upwardly revised 335k the week before, slowing the 4-week average to 335.75k (lowest level since Mar 14, 2020). Continuing claims inched up by 181k to 2.845mn in the week ended Sep 10th.

Europe:

  • Germany’s Ifo business climate index fell for the 3rd straight month to 98.8 points in Sep (Aug: 99.6). Expectations slipped by 0.5 points to 97.3 and the current assessment of business situation dipped to 100.4 in Sep (Aug: 101.4).
  • German producer price index increased by 1.5% mom in Aug, also recording a 12% yoy rise.
  • Preliminary manufacturing PMI in Germany declined to an 8-month low of 58.5 in Sep (Aug: 62.6), with output sub-index falling to a 15-month low of 53.8. Services PMI fell to 56.0 from 60.8 in Aug while private sector employment rose for a ninth straight month.
  • Eurozone’s manufacturing PMI (preliminary) fell to a 7-month low of 58.7 in Sep (Aug: 61.4) “reflecting the peaking of demand in the second quarter, supply chain bottlenecks and concerns over the ongoing pandemic”. Services PMI ticked down to 56.3 from 59.0 the month before. According to Markit, selling price inflation accelerated in Sep, rising to the third-highest rate seen over the past two decades.
  • Consumer confidence in the eurozone improved in Sep, rising to -4 (the highest level since Jun) from -5.3 the month before. Morale rose by 1.1 points to -5.2 in the wider EU.
  • At the BoE meeting, policy rates were left unchanged at the historic low of 0.1% and the rhetoric was that the case for “modest tightening of monetary policy” over the next few years was getting stronger. The Bank also warned about surging inflation, predicting that it could peak above 4% (much higher than the BoE’s 2% target) and stay so into Q2 2022.
  • UK’s preliminary composite PMI dropped to a 7-month low of 54.1 in Sep (Aug: 54.8), with slowdown more evident in manufacturing. Manufacturing PMI slipped to 56.3 from 60.3 in Aug, with material shortages amid a softening of demand. Services PMI declined to 54.6 (Aug: 55.0), with hotels, restaurants and catering sector posting a solid expansion while companies raised their own charges at the fastest pace since the series began in Jul 1996.
  • UK GfK consumer confidence survey weakened to a 5-month low of -13 in Sep (Aug: -8), with all 5 components posting a decline. Expectations for the general economic situation over the coming year plunged ten points to -16.
  • Norway’s Norges Bank became the first Western Central Bank to raise rates to 0.25% from zero, while stating that another hike was likely in Dec. The apex bank stated that not only was activity higher than its pre-pandemic level, but also that unemployment had fallen further while capacity utilisation appeared to be close to a normal level.

Asia Pacific:

  • The People’s Bank of China kept interest rates on hold for the 17th consecutive month. Separately, the PBoC stated that services offering trading, order matching, token issuance and derivatives for virtual currencies were declared illegal and strictly prohibited.
  • At its latest meeting, the BOJ left its short-term interest rate target at -0.1% and that for 10-year bond yields around 0%. The governor stated that economic recovery was on track despite sharing a disappointing outlook on exports and output as supply bottlenecks continued.
  • Inflation in Japan fell by 0.4% yoy in Aug, slipping further from Jul’s 0.3% drop; food prices fell 1.1%, the most in four months, after a 0.6% decrease in Jul. Core CPI (excludes fresh food but includes oil prices) was flat, posting a non-negative number for the first time since Jul 2020. Excluding food and energy, prices were down by 0.5% (Jul: -0.6%).
  • The preliminary reading of Japan’s manufacturing PMI slipped to 51.2 in Sep (Aug: 52.7), with both output and new orders posting below-50 readings. Services sector activity improved to 47.4 from the previous month’s final reading of 42.9. Input prices across the private sector rose at the fastest pace for 13 years, with costs of freight, raw materials and staff rising alongside supply shortages.
  • Industrial production in Singapore grew by 11.2% yoy and 5.7% mom in Aug (Jul: 16.3% yoy), thanks to expansions in transport engineering (23.5%) and precision engineering (22.9%). Semiconductor output in particular grew 16.8%, supported by demand from 5G markets.

Bottomline: All eyes are on the German elections this Sunday, as most recent sentiment indicators suggest a loss of momentum due to supply chain bottlenecks. Furthermore, the preliminary PMI estimates for Europe and the US continue to highlight supply bottlenecks and rising input costs. Meanwhile, with major central banks churning out hawkish statements, global equity funds saw their first outflows in 2021 (BofA estimates). Last, but not the least, focus is also on Evergrande crisis to see if its “damage” could potentially reverberate through the rest of the world (a la Lehman and the sub-prime crisis).

Regional Developments

  • Egypt’s state-controlled payments firm e-finance for Digital and Financial Investments is planning an IPO in Q4 2021, offering up to 14.5% of its capital.
  • Revenues from Egypt’s Suez Canal grew by 11% yoy to USD 4.09bn in Jan-Aug 2021.
  • Iraq climbed up 5 places to 137th place (out of 167 nations) in the 2020 Legatum Prosperity Index, scoring higher thanks to economic quality, market access and infrastructure as well as social inclusion.
  • Kuwait is undertaking a government restructuring process in 2022: the ministries of electricity, water and oil will be merged to form the “Ministry of Energy” while a ‘Ministry of Economy and Trade’ will also be created, reported Al Qabs. The roadmap also includes new strategies like reviewing investment laws, foreign ownership, bankruptcy and public-private partnership among others.
  • Kuwait expanded refinery capacity of the Mina Abdullah refinery to 454k barrels per day (bpd) and the Mina Al-Ahmadi refinery to 346k bpd, also complying with environmental standards Euro-4 and Euro-5 for reducing emissions and pollutants. The capital cost of this refining capacity expansion stood at KWD 4.680bn (USD 15.56bn).
  • Lebanon’s PM stated that talks with the IMF were a “necessity” and not a choice. The French President urged the implementation of reform measures and to proceed with talks with the IMF while guaranteeing the country’s support. Separately, the President, in his speech at the UN, underscored the nation’s need for international support to revive the economy.
  • A total blackout by end-Sep is a possibility in Lebanon, according to the state electricity company, given diminishing fuel oil reserves. The company revealed that less than 500 megawatts could be generated from the fuel oil secured from the Iraq deal.
  • Lebanon raised gasoline prices again by 16% on Wednesday (following a 37% hike on Fri); new fuel prices were based on an exchange rate of LBP 14k to the dollar versus an official rate of LBP 1,500 to the dollar.
  • Goldman Sachs, in their latest report, revealed that Lebanon’s bond investors could see a haircut of 75%: this is based on assumptions of strengthening of the LBP (to 8000 from 14,500 currently), negative or low real interest rates on public debt, fiscal adjustments and an improvement in growth. Separately, a group of bondholders (holding a “blocking stake” of more than 25% in 40% of various bond series) urged the government to begin restructuring talks and “engage meaningfully” with the IMF.
  • Qatar’s energy minister attributed the currently high gas prices to lack of investment alongside a shortage of supply. He also stated that “we want to have a reasonable price that is sustainable”. Separately, UAE’s energy minister said the current spike reflected “market fundamentals” and a lack of investment, while also stating “the market will drive the price”.
  • The jurisdiction of the Qatar International Court and Dispute Resolution Centre has been expanded to include the Qatar Free Zones and the Qatar Free Zones Authority in addition to matters referred to the Court or Regulatory tribunal by any Law in the State. This gives a strong legal dispute resolution mechanism for international firms operating in the country.
  • Reuters reported that Venezuela and Iran entered a contract to swap Venezuela’s heavy oil for Iranian condensate that it can use to improve the quality of its tar-like crude; the agreement is planned for 6 months, with possibility of an extension, according to sources.
  • Research by LinkedIn shows a 50-70% increase in employment levels in Saudi Arabia and UAE, thanks to a surge in retail sector jobs (as they emerge from Covid19 restrictions) as well as in healthcare.
  • Four IPOs raised USD 425.8mn in H1 2021 in the MENA region: the number of listings stayed the same as 2020 but the proceeds fell by 48%. According to EY, an increase in SPACs activity counters the IPO activity.
  • Moody’s 2021 survey of chief investment officers from eight leading fund firms in the GCC nations finds that half of them expect double-digit growth in net inflows, and a further 33% expected a high single-digit increase – supported by a significant increase in demand for ESG-compliant investment products and faster sales of Islamic products.
  • Production and export of blue and green hydrogen could generate USD 100bn for GCC by 2050, according to a report by Columbia University and Qamar Energy. These nations could meet up to 10 (conservative target) to 30% (ambitious) of demand in Europe and East Asia by 2050.

Saudi Arabia Focus

  • Saudi Arabia’s non-oil exports grew by 17.9% yoy to SAR 20.8bn in Jul 2021 while overall exports surged by 79.6%. Oil exports accounted for 77.4% of the total exports in Jul. Imports from UAE fell by 33% mom and 6% yoy to SAR 3.1bn (USD 827mn) in Jul after the former amended its rules on imports to exclude goods from free zones. Given this drop, the UAE slipped to being the third-largest import nation following China and the US – from being second in the list in Jun.
  • Saudi Arabia’s finance minister disclosed that over the past 4 years, about SAR 500bn (USD 133.3bn) was saved through increased efficiency and budgetary discipline. He also revealed that digital payment options were available for 36% of government transactions in 2019, exceeding the 2020 target of 28%.
  • The Saudi Capital Markets Authority stated that there are around 45 companies waiting for approval to list on the stock market. The number of new listings in the Saudi market since the beginning of 2021 (including traded investment funds) has reached 11, bringing the total number listed to 217.
  • Saudi remained China’s top crude oil supplier for the 9th consecutive month: shipments surged by 53% yoy to 1.96mn barrels per day (bpd) in Aug, following 1.58mn bpd in Jul.
  • The Saudi Data and Artificial Intelligence Authority plans to attract SAR 20bn of investments in data and AI, and is also training 25,000 data and AI specialists to position Saudi Arabia as one of the top 10 countries in the field, revealed its head of strategy.
  • Saudi Arabia will announce its first green debt deal “soon”, according to the governor of the Public Investment Fund; the fund is tasked with developing nearly 70% of renewable projects in Saudi Arabia. He also stated that Saudi would announce its “Green Initiative” next month, followed by the “Middle East Initiative”, which includes planting 50bn trees.
  • Construction on NEOM’s ‘The Line’, a 170-kilometer, zero-carbon, urban-development project, is expected to start by the end of this year. About 150 design and construction companies had visited NEOM last week to explore partnership opportunities.
  • Saudi Red Sea tourism project Amala plans to raise up to USD 7bn green loan next year, to finance 9 new hotels (that will be opened in 2024), according to CEO of the Red Sea Development company. This would follow a larger loan of SAR 14bn raised earlier this year.
  • Saudi Telecom Company completed the retail and institutional subscription to the IPO of Arabian Internet & Communications Services Co, raising SAR 624bn (USD 966.35mn).

UAE Focus

  • UAE announced a new government cabinet, with new finance and environment ministers. Other structural changes were also announced including merging of federal entities like the Ministry of Industry and Advanced Technology with the Emirates Authority for Standardization and Metrology, and the Federal Human Resources Authority transferred to the UAE Cabinet Office. Furthermore, 50% of government service centers will be turned digital within 2 years.
  • The central bank expects UAE growth to rebound by 2.1% this year (2020: -6.1%), supported by a recovery in the non-oil GDP (+3.8% from -6.2% in 2020). Growth is expected to increase further to 4.2% next year. Earlier in June, GDP was forecast by the central bank at 2.4% this year and 3.8% next.
  • The central bank will start “a gradual and well-calibrated withdrawal of its Targeted Economic Support Scheme given the recent gradual increase in economic activity while taking care to avoid restricting credit supply and economic growth. Regulatory relief measures that allow banks to maintain lower capital and liquidity buffers might be extended beyond end of this year while the temporarily lowered reserve requirements for banks will be left unchanged.
  • The Dubai Department of Economic Development forecasts Dubai’s GDP to increase by 3.1% yoy in 2021, with recoveries fastest among Covid19-affected sectors like accommodation and food services (+8.5%) and wholesale & retail (4.7%). This is underscored by the 5 stimulus packages announced by the emirate’s government since the pandemic that amounted to AED 7.1bn, or 1.6% of Dubai’s GDP. Dubai Statistics Centre preliminary estimates for GDP growth stood at an estimated 1% qoq in Q1 2021.
  • India and the UAE plan to conclude a Comprehensive Economic Partnership Agreement by end-2021: this is aimed to increase bilateral trade in goods to USD 100bn within five years of the signed agreement (current trade value stands at around USD 60bn), in addition to supporting job creation and investments.
  • The UAE central bank warned of increased risks of illicit financial flows in the backdrop of the Covid19 pandemic – including money-laundering and terrorism financing, via the use of unlicensed money service providers as well as use of e-commerce.
  • UAE’s Securities and Commodities Authority (SCA) signed an agreement with the Dubai World Trade Centre Authority supporting the trading of crypto assets in the free zone.
  • ADNOC increased the size of its drilling unit IPO to USD 1.1bn (from 7.5% to 11% of share capital) given the oversubscription. It will list on ADX on Oct 3rd.
  • The Dubai Airport Free Zone, Dubai Silicon Oasis and Dubai Commerce City will operate under the supervision of newly created Dubai Integrated Economic Zones Authority starting next year. More than 5,000 international firms, with 30k employees and covering 20 key economic sectors will operate under the Dubai Integrated Economic Zones Authority – together generating 5% of Dubai’s GDP.
  • Dubais Roads and Transport Authority disclosed that AED 15bn had been spent on more than 15 road and infrastructure projects related to Expo 2020; this includes the completion of Dubai Metro’s Route 2020, as well as roads including 9 flyovers and organizing public transport access & parking spots.
  • The minimum amount required to obtain a 3-year visa through property investment in Dubai has been reduced to AED 750k from AED 1mn previously. The Dubai Land Department’s official sales price index shows that the number of sales transactions in Aug was the 2nd highest since Dec 2013: Aug saw 5,780 sales transactions worth AED 97bn.
  • About AED 65bn (USD 17.6bn) has been allocated to the Emirati housing program in Dubai, to be spent over the next two decades. Directives were issued to quadruple the number of Emiratis benefitting from the housing program from next year.
  • Damac Properties have received regulatory approval to take the firm private. The firm, with a market cap of over USD 2bn plans to offer USD 595mn for outstanding shares of the company.
  • Visa’s “Back to Business” study finds that 64% of SMEs in the UAE are very optimistic about their long-term success – the highest among all surveyed markets. About 92% of consumers stated that their payment habits have been permanently changed by Covid19 (vs 68% globally) and a third of UAE consumers had not used cash in the past week (2nd highest among all markets).

Media Review

The Evergrande crisis

https://www.wsj.com/articles/evergrande-china-crisis-11632330764

https://www.economist.com/finance-and-economics/what-are-the-systemic-risks-of-an-evergrande-collapse/21804951  

https://www.reuters.com/world/china/china-evergrande-bondholders-limbo-over-debt-resolution-2021-09-24/

Soaring gas prices ripple through heavy industry, supply chains

https://www.reuters.com/business/energy/soaring-gas-prices-ripple-through-heavy-industry-supply-chains-2021-09-22/

Analysis: Who pays? Lebanon faces tough question in IMF bailout bid

https://www.reuters.com/world/middle-east/who-pays-lebanon-faces-tough-question-imf-bailout-bid-2021-09-23/

Saudis enjoy Red Sea cruises as kingdom opens up tourism sector

https://www.reuters.com/world/middle-east/saudis-enjoy-red-sea-cruises-kingdom-opens-up-tourism-sector-2021-09-23/

Goldilocks is dying

https://www.project-syndicate.org/commentary/reflation-trade-or-overheating-and-stagflation-by-nouriel-roubini-2021-09

 

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Weekly Insights 23 Sep 2021: UAE’s growth forecasts rebound in 2021 & 2022

Weekly Insights 23 Sep 2021: UAE’s growth forecasts rebound in 2021 & 2022

1. UAE expected to grow by 2.1% this year (Central Bank); Dubai by 3.1% (Dubai DED)

  • The UAE central bank expects UAE growth to rebound by 2.1% this year (2020: -6.1%), supported by a recovery in the non-oil GDP (+3.8% from -6.2% in 2020)
  • Separately, the Dubai Department of Economic Development forecasts Dubai’s GDP to increase by 3.1% yoy in 2021, with recoveries the most among Covid19-affected sectors like accommodation and food services (+8.5%) and wholesale & retail (4.7%). This is underscored by the 5 stimulus packages announced by the emirate’s government since the start of the pandemic that amounted to AED 7.1bn, or 1.6% of Dubai’s GDP. (Dubai Statistics Centre preliminary estimates for GDP growth stood at an estimated 1% qoq in Q1 2021)
  • The PMI indicators for both UAE and Dubai remain in expansionary, supported by optimism ahead of the Expo event which begins in Oct, with a drop in daily cases alongside a strong vaccination campaign.

2. An update on Covid19 cases & vaccination campaigns ahead of the start of the Expo

  • Daily cases in the UAE have been falling consistently (under 500 for the past few days), and with test positivity rates at just 0.2%, stringency levels have been eased slowly.
  • Visitors to the Expo need to be either vaccinated or present a negative PCR: the share of vaccinated people in DXB’s main tourist market all exceed 60%, with daily cases on the decline (except in the UK & US) and vaccination rates are also picking up (especially in Europe & China).

3. The decline in credit disbursed to UAE’s private sector continues past H1 2021

  • Overall domestic credit disbursed in UAE fell by 1.6% yoy and 0.1% mom in Jul 2021
  • July marks the 16th consecutive month of yoy decline in credit to the private sector and 13th consecutive month of yoy decline in lending to the business sector.
  • A breakdown of lending by economic activity shows that the major shares with respect to credit by economic activity remain largely unchanged in Jun 2021: personal loans for consumption (21.3%), construction (20.3%), government (14.6%), others (9.3%) and trade (8.6%) together accounted for 65% of total loans.

4. Remittances from the UAE surge in Q2 2021

  • In Q2 2021, total remittances from the UAE surged by 17.8% yoy and 8.2% qoq to a total of USD 45.0bn. In Q1 2020, given the stringent lockdowns, remittances had dropped by 10.3% yoy to USD 38.2bn.
  • Remittance transfers via exchange houses declined in Q2 2021; transfers via banks have gained traction after Covid19, up 31% qoq and 12% qoq in Q1 and Q2 this year respectively.
  • India retains its spot as the largest recipient of remittances from the UAE. However, its share in remittances dropped to 28.8% of the total in Q2 this year (vs. 31% at end-Q4 2020 and 37.8% at end-Q1 2020). The decline in share of remittances to India could be due to two factors: one, job losses; two, residents who were affected by the flight ban and stuck in India.

5. UAE banking system remains well capitalized;  monetary base contracted in Jul 2021

  • UAE’s monetary base contracted by 1.4% mom in Jul, with Banks & OFC’s Excess Reserves (11% of monetary base) declining by almost half (vs a month ago) while Certificates of Deposits purchased by banks (35.9% of monetary base) rose by 4.0% mom.
  • Of the monetary aggregates, M1 and M2 declined by 0.8% mom and 0.7% respectively in Jul while M3 inched up by 0.1%, thanks to the 4.5% rise in government deposits. (These values are not seasonally adjusted)
  • The increases in the multipliers of M1, M2 and M3 indicate slower decline (/faster uptick) in the monetary aggregates M1, M2 (and M3) compared to the contraction of the monetary base

 

 

 

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Weekly Economic Commentary – Sep 19, 2021

Markets

Global equity markets slipped last week mostly on worries about the Fed’s taper timeline amid fears of stalling growth in Asian markets given their battle against Covid19 cases. The S&P 500 ended below its 50-day moving average, the Stoxx600 fell for a 3rd consecutive week while Asia posted the sharpest drops among the regions; the MSCI all world index fell by 1%. Regional markets were mixed over the week: Abu Dhabi’s index posted its 4th consecutive weekly gain. Among currencies, the dollar touched a 5-month high against the Swiss Franc and rose to a 2-week high against the offshore yuan while the pound and euro dropped.  Gold price edged down by 1.9% while oil prices gained around 3%+ versus the week before.

Weekly % changes for last week (16-17 Sep) from 9 Sep (regional) and 10 Sep (international).

 

Global Developments

US/Americas:

  • Inflation in the US moderated to 5.3% yoy in Aug, from July’s 5.4%; in mom terms, prices were up by 0.3%. Core inflation also slowed to 4% (Jul: 4.3%). Price of used vehicles dropped by 1.5% mom, alongside drops in airline fares and hotel rates by 9.1% and 2.9% respectively.
  • Industrial production in the US rose marginally by 0.4% mom in Aug (Jul: 0.8%), partially given shutdowns related to Hurricane Ida. Overall, IP grew by 5.9% yoy and was 0.3% above its pre-pandemic levels. Capacity utilization increased 0.2ppt to 76.4.
  • Retail sales in the US inched up by 0.7% mom in Aug (Jul: -1.1%), with online sales rebounding by 5.3% (Jul: -4.6%) while auto sales tumbled by 3.6% (Jul: -4.6%). Sales increased by 15.1% yoy and are 17.7% above their pre-pandemic level.
  • Budget deficit for the first 11 months of the current fiscal year (i.e. till Aug) totaled USD 2.711trn: 10% lower than the deficit posted a year ago. Spending rose by 4% to USD 6.297trn in this time while receipts were up by 18% to USD 3.586trn.
  • The Philadelphia Fed manufacturing survey surged to 30.7 in Sep (Aug: 19.4) though new orders (15.9 from 22.8) and employment (26.3 vs 32.6) softened.
  • The NY Empire State manufacturing index accelerated to 34.3 in Sep (Aug: 18.3, and lower than the all-time high of 43 in Jun). The new-orders index jumped 18.9 points to 33.7 in Sep and the shipments index was up by 22.5 points to 26.9; prices paid and received were at or near record highs during the month.
  • Michigan consumer sentiment index ticked up slightly to 71 in Sep (Aug: 70.3): consumer’s views of current conditions fell to 77.1 in Sep (Aug:5), while an indicator of expectations rose to 67.1 (Aug: 65.1).
  • Initial jobless claims edged up to 332k in the week ended Sep 10th, from an upwardly revised 312k the week before, slowing the 4-week average to 335.75k (lowest level since Mar 14, 2020). Continuing claims edged down by 187k to 2.665mn in the week ended Sep 3rd.

Europe:

  • Industrial production in the eurozone grew by 1.5% mom and 7.7% yoy in Jul (Jun: -0.1% mom and 10.1% yoy). Production of non-durable consumer goods rose by 3.5% mom, capital goods by 2.7%, durable consumer goods by 0.6% and intermediate goods by 0.4% while production of energy fell 0.6%.
  • Trade balance in the euro area widened to EUR 13.4bn in Jul (Jun: EUR 11.9bn); Exports increased 1% mom while imports grew only 0.3%.
  • German wholesale prices grew by 12.3% yoy in Aug, the highest rate since Oct 1974; costs rose across wholesale of ores, metals and semi-finished metal products (63.4%) as well as solid fuels and mineral oil products (35.5%) and raw and sawn timber (57.8%). Prices inched up by 0.5% mom.
  • ILO unemployment rate in the UK slowed to 4.6% in the 3 months to Jul from the previous 4.7% reading. Meanwhile job vacancies increased to 1.03mn in the 3 months to Aug, for the first time since 2001 (when records began).
  • Inflation in the UK increased to 3.2% yoy in Aug (Jul: 2%), posting the largest ever mom increase since records began in 1997. Core inflation surged as well, rising by 3.1% in Aug (Jul: 1.8%), driven up by a 4.9% rise in used car prices. Separately, both manufacturers’ raw material costs and output prices rose at the fastest rate since late 2011, with oil prices up 50%.
  • UK retail sales unexpectedly slipped by 0.9% mom in Aug (Jul: -2.8%), though it remained flat in yoy terms. Spending in food stores fell (-1.2%), as residents preferred to dine out in the wake of easing lockdown rules while department store sales have dropped every month since Apr 2021 (Aug: -3.7%). Overall sales volumes are 4.6% higher than pre-pandemic levels.

Asia Pacific:

  • FDI into China grew by 22.3% yoy to CNY 758.05bn (USD 117.7bn) during the period Jan-Aug. Fixed asset investment increased by 8.9% yoy in the period Jan-Aug, slowing from the 10.3% growth reported in Jan-Jul.
  • Industrial production in China grew by 5.3% yoy in Aug, lower than previous month’s 6.4% uptick. Retail sales rose by 2.5% in Aug (Jul: 8.5%), posting the slowest pace since Aug 2020.
  • Investment in China’s real estate development grew by 10.9% yoy in Jan-Aug, slowing down by 0.3ppts from the previous Jan-Jul reading.
  • The People’s Bank of China reiterated that yuan internationalization will be “steadily and prudently” promoted, and plans are underway to further develop offshore yuan markets. Cross-border settlements in the local currency grew by 44.3% yoy to CNY 28.39trn in 2020. This accounted for 46.2% of overall cross-border settlements, touching a new high.
  • Japan’s core machinery orders rebounded in Jul, rising by 0.9% mom and 11.1% yoy (Jun: -1.5% mom and 18.6% yoy). Manufacturing orders grew by 6.7%, the most since Apr.
  • Trade balance in Japan moved to a deficit JPY 635.4bn in Aug (Jul: JPY 11.6bn surplus) as exports advanced by 26.2% (though easing from 37% uptick in Jul) while imports grew by 44.7% (Jul: 28.5%)
  • Japan’s PPI grew for the 6th straight month to 5.5% yoy in Aug, from July’s nearly 13-year high of 5.6%, given higher commodity prices; it remained flat in mom terms (Jul: 1.1%).
  • Wholesale price inflation in India rose marginally to 11.39% in Aug (Jul: 11.16%), thanks to surges in fuel (+26.09%), primary (6.2%) and manufactured products (11.39%) among others. Retail price inflation eased for the 3rd consecutive month to 5.3% yoy in Aug with softer upticks in food (+3.11% from 3.96%) and transport (+10.24% from 10.54%) while costs rose for fuel (+12.95% from 12.38%), clothing (6.84% from 6.46%) and housing (+3.9%).
  • Singapore plans to set up a SGD 1.5bn fund, backed by Temasek, to invest in its high-growth companies and IPOs.

Bottomline: Markets are eagerly waiting for the major central bank meetings this week including the Fed (in light of the recent job creation and easing inflation numbers), the Bank of Japan (battling Covid19 and its exports reeling under supply disruptions) and the Bank of England (with heightened inflation readings). The Fed move is important especially in the context that global debt rose to a new record high in Q2: overall debt levels grew to USD 296trn at end-Jun, up USD 36trn above pre-pandemic levels; furthermore, almost a third of the countries in the IIF study saw an increase in household debt in H1 of this year. The preliminary PMI readings for a few countries will also be out later this week, giving an insight into how supply disruptions and rising input costs are affecting output. If these show a sustained easing off highs seen earlier this year, there might be cause for concern.  

Regional Developments

  • Bahrain’s EDB revealed that the country received USD 492mn in tourism capital investment last year, mainly from UAE’s Emaar and property developer Eagle Hills.
  • Egypt’s exports surged by 49.2% yoy to USD 3.61bn in Jun while imports were marginally higher by 0.9% to USD 6.55bn, allowing for the trade deficit to fall by 27.8% to USD 2.49bn.
  • The Financial Regulatory Authority in Egypt issued new listing amendments on the Exchange: under the new regulations, companies looking to list must now offer a minimum 1% of the total free-float market cap (instead of being required to offer a minimum number of shares) and listed companies will be required to have a free-float market cap of a minimum 0.5% of EGX’s total free-float market cap.
  • Egypt’s central bank left interest rates unchanged at the 7th consecutive meeting: the overnight deposit rate, overnight lending rate, and rate of the main operation remain at 8.25%, 9.25%, and 8.75% respectively.
  • Bloomberg reported, citing Egypt’s oil minister, that Egypt’s natural gas would be delivered to Lebanon through Jordan and Syria within 3 months while some formalities including funding request are completed.
  • Remittances into Egypt increased 29.6% yoy to USD 8.1bn in Apr-Jun 2021, according to the CBE; in comparison remittances were up by 13.2% to USD 31.4bn in 2020-21.
  • Egypt plans to merge its income tax and VAT office starting Sep, as part of its streamlining process and to accelerate the move to digitizing the tax system.
  • Iraq and the UAE discussed, as part of ways to boost economic relations, a proposal to set up an Emirati-Iraqi business council in cooperation with the Federation of UAE Chambers of Commerce and Industry.
  • Lebanon’s finance ministry disclosed that the BDL would receive USD 1.135bn on Sep 16th in IMF’s Special Drawing Rights (SDRs). Separately, a new contract was signed with Alvarez and Marsal to conduct a forensic audit of the central bank; a report will be submitted to the government within 12 weeks after starting work.
  • Lebanon is facing a “third mass exodus” wave, according to a report by the Crisis Observatory at Lebanon’s American University of Beirut. Based on a survey completed last year, 77% of Lebanese youth stated that they were considering and seeking to emigrate.
  • In the IMF’s latest Article IV report for Oman, growth is expected to recover in 2021 – expanding by 2.5% (vs a contraction of 2.8% in 2020), thanks to a recovery in the non-oil sector activity (1.5%). As the fiscal balance plan is implemented, fiscal deficit is not only expected to narrow to 2.4% of GDP in 2021 (2020: 19.3%), but also move into surplus in 2022. Total government debt is expected to decline to 70.7% of GDP this year and further to about 47% of GDP in 2026. More: https://www.imf.org/en/Publications/CR/Issues/2021/09/10/Oman-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-Executive-465431
  • Islamic finance in Oman increased by 12.3% yoy to OMR 4.6bn in Jan-Jul this year. Deposits increased by 16.4% to OMR 4.2bn while outstanding credit rose by 4.3% to OMR 27.3bn. The non-financial corporate sector received the lion’s share of the total private sector credit (46.6%), followed by the household sector (45.2%) at end-Jul.

Saudi Arabia Focus

  • Saudi Arabia’s GDP grew by 1.8% yoy in Q2 2021 (Q1: -3.0%), with the non-oil private sector reporting a 11.1% uptick, after rising by 4.4% in Q1. Investment (GFCF) and private consumption expenditure were key drivers contributing to GDP growth in Q2. Given the base effects, both surged in Q2, private consumption by 22.1% and investment by 18.3%.
  • Inflation in Saudi Arabia eased to 0.3% yoy in Aug (Jul: 0.4%), the lowest in 14 months, but is coming off the highs in the same period last year due to the VAT hike to 15%. Food inflation continued to rise, up by 2% yoy and 0.8% mom in Aug (Jul: 1.4% yoy) while sectors like transport (-0.32% mom) and clothing (-0.32% mom) showed weaker inflation. Separately, wholesale price index surged by 12% yoy and 0.7% mom in Aug (Jul: 11.9% yoy).
  • The Saudi Crown Prince launched the Human Capability Development Programme last week: part of the Vision 2030 reforms, the goal of the program is to change education and teach global values. It includes a total of 89 initiatives under the 3 main pillars (a) to develop a resilient and strong educational base; (b) prepare for the future labour market locally and globally; and (c) provide lifelong learning opportunities.
  • Net income of Saudi Arabia’s insurance sector plummeted by 59.2% yoy in Q2 this year: operating income dropped to just SAR 74mn from SAR 709mn while premiums increased by 8.1% to SAR 9.4bn.
  • Saudi Arabia’s crude output grew by 547k barrels per day (bpd) mom to 9.474mn bpd in Jul and oil exports rose to the highest since Jan, according to the Joint Organisation Data Initiative.
  • The public offering of ACWA Power saw requests from private institutions exceeding some 81.2 million shares within minutes into the offering (that ends on Sep 27th). the shares are being sold in a range of SAR 51-SAR 56 per share or an 11.1% stake making the listing value at upto USD 11bn – the biggest offering in Saudi since the Aramco listing.
  • Saudi Arabia’s defense spending will focus on acquisitions as well as R&D over the next decade to meet its aim of creating 100k jobs for citizens as part of the local military industry. The Head of the Saudi General Authority for Military Industries disclosed that localization rates had been doubled to over 8% in 2020 (within a span of less than 4 years).
  • To support local products and raise their contribution to boost the non-oil economy, the Local Content and Government Procurement Authority issued a list of 28 items that government contractors should buy only from national companies. This includes meat, poultry, fish and dairy products; few sectors like military, health and education are also being considered.
  • The Saudi Ministry of Hajj and Umrah revealed that 10 million pilgrims have successfully performed Umrah since Oct 4th last year and that 12k+ visas have been issued since Aug 10 this year when pilgrims from other countries were permitted to visit.
  • With an aim to localizing pharmaceutical industries, Saudi is in negotiations with Pfizer and AstraZeneca to produce vaccines in the Kingdom. According to the deputy minister of industry and mineral resources, there are 40 Saudi factories working in the drug manufacturing sector, with three or four factories ready to manufacture directly with these companies.
  • The Royal Commission in Yanbu signed an agreement to build a factory to produce wind power generation towers: with an estimated cost of about SAR 145mn, launch is expected at end-Jun 2023 and around 145 new jobs will be created.
  • The number of workers in Saudi Arabia’s accommodation and food services activities sector dropped by 11% qoq to 386,400 in Q1 2021 while the number of Saudis dropped by 13% to 78,300 during the period.
  • Government ministers in Saudi Arabia are now barred from joining the boards of companies, according to an amendment to a ministerial decree, reported Bloomberg.

UAE Focus

  • UAE’s non-oil foreign trade touched AED 1.4trn in 2020: non-oil exports rose by 10.1% yoy to AED 254.6bn while non-oil imports and re-exports accounted for 56% and 26% of the total trade volume. China remained the top trade partner (AED 174bn), followed by Saudi Arabia (AED 104bn), India (AED 102.5bn), US (AED 80.2bn) and Iraq (AED 53bn).
  • UAE’s trade with Israel is expected to climb to more than USD 1trn in the next 10 years, reported Bloomberg, citing the economy minister. More than 60 MoUs have been signed with Israel, and bilateral trade currently stands at about USD 600-700mn.
  • The minister of state for foreign trade, in an online interview with Reuters, revealed that the UAE is planning “very aggressive, quick work and quick negotiations” to conclude economic agreements and trade deals within a year with 8 countries it wants to deepen ties with (including the UK, India, Turkey and South Korea among others).
  • The Dubai Financial Market will launch new equity futures contracts today (on Sep 19): this will be on individual stocks of 3 listed companies Dubai Investments, DFM Company and Shuaa Capital. This brings the total number of contracts to 33 on individual stocks of 11 listed companies and will support in the diversification of investment opportunities.
  • ADNOC Drilling has been given an equity valuation of USD 10bn: ADNOC will sell a minimum 7.5% stake in the IPO of ADNOC Drilling at AED 3 (USD 0.6262) per share, raising at least USD 750mn in the deal.
  • Reuters reported (citing sources) that the UAE central bank is studying ways to replace the local interbank rate, in a bid to align with international standards.
  • The UAE central bank issued new guidelines to financial institutions on anti-money laundering practices – this includes banks’ developing internal procedures and putting in place indicators to identify suspicious transactions in addition to regularly screen databases and transactions against names on a list by the UN Security Council or UAE government. One month has been given to demonstrate compliance with these requirements.
  • UAE’s passenger traffic grew by more than 3 times to over 2.5mn in Aug versus a year ago; about 45,953 flights were recorded in the month. Website “Wego” registered over 500k searches for flights and hotel reservations for Dubai during the 6-month period of the Expo
  • New business licenses issued in Dubai accelerated by 54% yoy to 5885 in Aug; of these 59% were for professional and 40% for commercial activities.
  • The Emirates Nuclear Energy Corp revealed that the second unit of the Barakah plant has been connected to the national grid; it will add a further 1400 MW of clean energy capacity to the UAE grid. Once completed there will be 4 reactors in total with a capacity of 5600 MW.
  • Entry to the Expo 2020 will require visitors to be either vaccinated or have a negative PCR test in the previous 72 hours, according to the updated regulations. Additionally, Abu Dhabi has canceled COVID-19 testing requirements to enter the emirate from elsewhere in the UAE.

Media Review

Five questions facing the Bank of England

https://www.ft.com/content/144460b0-887a-408f-89b6-e629cadd617f

The World Bank Group to discontinue Doing Business report

https://www.worldbank.org/en/news/statement/2021/09/16/world-bank-group-to-discontinue-doing-business-report

Lebanon’s path back from the brink of collapse: Dr. Nasser Saidi

https://oecd-development-matters.org/2021/09/15/lebanons-path-back-from-the-brink-of-collapse/

Economic Crisis in the Anthropocene

https://www.project-syndicate.org/podcasts/economic-crisis-in-the-anthropocene-2021-09

Is China already the world’s most dominant economy?

https://www.economist.com/finance-and-economics/2021/09/18/is-china-already-the-worlds-most-dominant-economy

 

 

 

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Weekly Insights 16 Sep 2021: Saudi Arabia’s economic activity picks up pace

Weekly Insights 16 Sep 2021: Saudi Arabia’s economic activity picks up pace

1. Saudi Arabia grows at 1.8% yoy in Q2, with the non-oil sector growing at 8.4%

  • Saudi Arabia’s GDP grew by 1.8% yoy in Q2 2021 (Q1: -3.0%), with the non-oil private sector reporting a 11.1% uptick, after rising by 4.4% in Q1.
  • The major share of activity lies with mining and quarrying (~42%); together with manufacturing and trade, restaurants and hotels, these 3 sectors account for just over two-thirds of the share of GDP in Q2 2021.
  • Investment (GFCF) and private consumption expenditure were key drivers contributing to GDP growth in Q2. Given the base effects, both surged in Q2, private consumption by 22.1% and investment by 18.3%.
  • With easing of Covid19 restrictions, Saudi is likely to see an increase in recovery pace, supported by both domestic demand and investment as well as its implementation of major projects (in non-oil manufacturing, tourism as well as long-term projects in NEOM among others)

 

2. Inflation in Saudi Arabia eased for the 2nd month in the row, given base effects; food costs spike

  • Inflation in Saudi Arabia eased to 0.3% yoy in Aug (Jul: 0.4%); however, this compares to last year’s surge in the months of Jul-Aug, immediately after the increase in VAT to 15% from 5% before.
  • Food inflation however continues to rise, up by 2% yoy and 0.8% mom in Aug (Jul: 1.4% yoy) while sectors like transport and clothing showed weaker inflation.
  • Wholesale price index surged by 12% yoy and 0.7% mom in Aug (Jul: 11.9% yoy), with increase in prices of metal products (given the surge in basic metal prices & electrical machinery) and other transportable goods (given hike in refined petroleum products and basic chemicals prices). Prices of major construction materials have also been on the rise, in line with global trends.

 

3. Saudi Arabia’s PMI stood at an average 55.3 in Jan-Aug 2021; industrial production is playing catch up

  • Saudi non-oil sector PMI declined to 54.1 in Aug, a tad lower than the average so far this year. The month saw new orders growth slowing alonside a softer recovery in export orders as output expanded at the slowest pace in 10 months.
  • Official data show that overall industrial production (IP) inched up by 5.9% in Jul while manufacturing dropped by 9.3% as mining/ quarrying sector production improves. The chart tracks three-month-on-three-month changes in the official IP data to remove some volatility. It shows that improvement in non-oil sector is happening faster than in official manufacturing – pointing to the strength in recovery of the non-oil, non-manufacturing sectors.

4. Saudi net foreign assets decline in Jul amid upticks in credit disbursed & mortgages

  • Saudi net foreign assets posted a 1% mom decline to SAR 1.64trn in Jul. However, the amount of money invested in foreign securities rose by SAR5bn to SAR 1.13trn in Jul, the highest monthly figure since Apr.
  • Credit to the private sector has accelerated by an average of 15% yoy in Jan-Jul 2021 while lending to the public sector was growing at a slightly lower pace of 11.4%. Meanwhile the number of branches have been on the decline considering many consumers’ move online and prominence of digital banking.
  • Residential mortgage finance has been one of the fastest growing segments, surging on the back of plans to increase home ownership. The banks have lent SAR 85.4bn for new residential mortgages for individuals during Jan-Jul 2021, up from USD 70bn in the same period a year ago. From the chart a significant decline can be seen in the last few months.

 

5. Consumer spending in Saudi Arabia is picking up as digital adoption surges

  • Overall consumer spending has been rising through 2021, while digital adoption is surging.
  • ATM transactions have declined by 6% yoy in Jan-Jul 2021; PoS transactions are up by 42% yoy during the period compared to a year ago while e-commerce transactions have almost doubled!
  • Such a pattern is underscored by the results of a recent McKinsey survey about consumer preferences: about 58% of Middle East consumers expressed a strong preference for digital payments, while only 10% strongly preferred cash.

 

6. Daily cases in Saudi fall & as restrictions are eased; with higher vaccination doses as well, retail mobility returns to pre-pandemic rates

  • Daily new cases in Saudi Arabia have fallen to less than 500 in the past few weeks or so as vaccination pace increased significantly. Just under 50% of the population is fully vaccinated and another 16% are partly vaccinated. Stringency levels, as tracked by the Oxford COVID-19 Government Response Tracker, has come also down: at an average 51.3 in Aug (Jul: 53.1).
  • In addition to easing restrictions, high levels of vaccination are leading to greater mobility: retail/ recreation/ shopping mobility has risen above pre-pandemic baseline levels in Saudi Arabia as vaccination doses per 100 people touched 113.82 (UAE: 191.8; Bahrain: 144.7).

 

 

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Weekly Economic Commentary – Sep 12, 2021

Markets

Renewed concerns over inflation dampened investor sentiment in the US, resulting in stocks posting their worst week in almost 3 months. In Europe, stock markets also ended in the red after ECB signaled a slowdown in bond purchases – Stoxx600 was down by 1.2% (steepest slide since mid-Aug). A call between Joe Biden and Xi Jinping eased tensions after trade negotiations remained unsuccessful; this helped China’s shares to rise (+3.5% in the week) and also lifted the overall MSCI World Index though the latter ended the week a tad lower. Among regional markets, 2 markets stood out: Tadawul closed at its highest level since Jan 2008 on Tuesday while Abu Dhabi closed at an all-time high on Thursday. The GBP fell after data showed a slowdown in recovery while the euro dropped by 0.6%. Oil prices ticked up on supply concerns, after production delays continued following Hurricane Ida while gold price ended lower (given uncertainties around Fed’s taper timeline).

Weekly % changes for last week (9-10 Sep) from 2 Sep (regional) and 3 Sep (international).

Global Developments

US/Americas:

  • The Fed’s Beige Book stated that overall growth had “downshifted slightly to a moderate pace” while inflation is “steady at an elevated pace”. Business contacts cited “extensive labour shortages” despite “strong” wage growth particularly among lower earners.
  • Producer prices in the US surged by 8.3% yoy in Aug, posting the biggest annual gain since Nov 2010 (Jul: 7.8%); in mom terms, PPI rose by 0.7% following two monthly increases of 1% each while transportation and warehousing prices quickened by 2.8%.
  • Initial jobless claims eased to a new pandemic-era low of 310k in the week ended Sep 3rd, from an upwardly revised 345k the week before, slowing the 4-week average to 339.5k. Continuing claims edged down by 22k to 2.783mn in the week ended Aug 27th.
  • JOLTS job openings increased to a record high of 10.934mn in Jul (Jun: 10.2mn): the rate of job openings swelled to 6.9% in Jul (Jun: 6.5%; Jul 2020: 4.6%).

Europe:

  • GDP in the Euro area increased by 2.2% qoq in Q2 (Q1: -0.3%), with growth driven by the recovery in household final consumption expenditure (+3.7%) and government spending (+1.2%); employment grew by 0.7% qoq (Q1: -0.2%).
  • The ECB plans to “moderately slow” its bond purchases under the EUR 1.85trn pandemic emergency purchase programme on the back of improving financing conditions and a rebound in recovery, while also signaling that it might continue in another form next year.
  • German factory orders increased by 3.4% mom and 24.4% yoy in Jul (Jun: 4.6% mom and 26.5% yoy). New orders reached the highest level since 1991 (when the series began), thanks to foreign demand (+8%) and demand from outside the Eurozone surged (+15.7%) while domestic orders fell by 2.5%.
  • Industrial production in Germany inched up by 1% mom in Jul, rebounding after three consecutive declines. Production of cars and car parts picked up by 1.9% and machinery rose by 6.9%. In yoy terms, IP grew by 5.7% (Jun: 5.4%).
  • Trade surplus in Germany widened to EUR 17.9bn in Jul (Jun: EUR 13.5bn). Exports were marginally up by 0.5% and imports declined by 3.8%. Demand from the EU grew by 17.7% yoy while that from other countries climbed by 6.8%. July’s exports were 1.6% higher and imports 5.9% higher than in Feb 2020.
  • The German ZEW survey showed an improvement in the current situation reading (31.9 in Sep vs Aug’s 29.3) while the economic sentiment reading dropped by 13.9 points to 26.5.
  • The ZEW survey of economic sentiment fell to 31.1 in Sep in the Eurozone (Aug: 42.7). The current economic situation indicator in the Eurozone climbed 7.9 points to 22.5 while inflation is expected to decline over the next six months (inflation indicator dropped by 22.1 points to 20.1 in Sep).
  • Sentix investor confidence in the eurozone eased to 19.6 in Sep (Aug: 22.2), the lowest reading since Apr. A gauge of investors’ future expectations dropped for the 4th consecutive month – to 9 from 14 the month ago – to its lowest level since May 2020.
  • GDP in the UK inched up by 0.1% mom in Jul (Jun: 1%), with the services sector recording no growth overall on the month. Overall, growth remains 2.1% below its pre-pandemic level and grew by 3.6% in the 3 months to Jul 2021 (thanks to the easing of the lockdown).
  • Trade deficit in the UK widened to GBP 3.12bn in Jul (Jun: GBP 2.51bn), recording the largest deficit since Dec 2020, after exports fell by 0.1% alongside a 1.1% gain in imports. Goods trade deficit rose to a 7-month high of GBP 12.7bn, as exports to the EU slowed given post-Brexit trade barriers.
  • UK IP increased by 1.2% mom in Jul, with manufacturing posting no change while construction output was down by 1.6%.

Asia Pacific:

  • China’s trade surplus widened to USD 58.34bn in Aug (Jul: USD 56.58bn). Imports surged by 33.1% yoy (Jul: 28.1%) while exports grew by 25.6% (Jul: 19.3%). Trade surplus with the US increased to USD 37.68bn from USD 35.4bn in Jul.
  • Inflation in China ticked up to 0.1% mom and 0.8% yoy in Aug, remaining below the government target of 3% this year. Core inflation stood at 1.2% yoy (Jul: 1.3%). Producer price index climbed to 9.5% yoy (Jul: 9%) – the fastest pace since Aug 2008, thanks to higher prices of raw materials (coal, metals).
  • Banks in China extended CNY 1.22trn in new yuan loans in Aug (Jul: CNY 1.08trn); money supply (M2) grew by 8.2% yoy (Jul: 8.3%). Growth of outstanding total social financing slowed to 10.3% in Aug – the lowest since Dec 2018 and from 10.7% in Jul.
  • Q2 GDP in Japan accelerated by 0.5% qoq in Q2, up from the 0.3% preliminary estimate and Q1’s revised 1.1% dip. Household consumption (0.9%), fixed investment (2.3%) and government consumption (1.3%) supported the rebound as public investment shrank (-1.7%).
  • Japan’s leading economic index declined to 104.1 in Jul from Jun’s 7.5-year high of 104.6. The coincident index fell by 0.1 points to 94.5.
  • Overall household spending in Japan inched up by 0.7% yoy in Jul, rebounding from a 5.1% drop in Jun, thanks to food (+1.9% from -1.6% in Jun), clothing (+2.7% from -15.1%) as well as transport and communication (+14.2% from -5.8%). Month-on-month spending declined by 0.9% (Jul: -3.2%).
  • India’s industrial production grew by 11.5% yoy in Jul, thanks to a low-base effect while manufacturing output climbed by 10.5%. Production of capital goods and consumer durables increased by 29.5% and 20.2% respectively while non-durable goods fell by 1.8%.

Bottomline: With Covid19 cases on the rise in the US (in unvaccinated pockets), the pace of economic recovery is coming increasingly under scrutiny. In the UK as well, the BoE governor warned that the economic bounce back was slowing. Inflationary pressures (from supply constraints to skills shortages and wage increases) continue to add uncertainty as to the timing of major central banks’ tapering measures. This week’s global data releases including inflation, consumer sentiment index and jobs (among others) will add flavour to the discussions (ahead of the BoE meeting next week).

Regional Developments

  • Bahrain reported a 65% yoy surge in cashless payments in Aug: about 11.3mn point-of-sale and e-commerce transactions were reported, with a total value of USD 743.7mn; this follows a total of USD 3.62bn in cashless payments in H1 2021 from 53mn transactions.
  • Bahrain was ranked 15th globally (and 2nd in the GCC and 3rd in the MENA region) in attracting direct investment, according to the FT’s Greenfield FDI Performance Index 2021.
  • Annual urban inflation in Egypt increased to 5.7% in Aug (Jul: 5.4%), the highest since Nov, driven by increase in food costs (6.6% from 4.9% in Jul). In mom terms, prices were up by a marginal 0.1%, following Jul’s 0.9% gain while core inflation slowed to 4.5% (Jul: 4.6%).
  • Egypt will resume its IPO programme for state-owned enterprises before end of this year, revealed the planning minister. The Daily News Egypt, citing sources, reported that e-finance company for digital payments infrastructure will be the first (up to 10% of the company’s shares) and to be implemented by Nov.
  • No new taxes will be imposed on transactions on the Egypt’s stock exchange, stated the finance minister.
  • Egypt plans to close an agreement with UAE’s Dragon Oil Co (the exploration and production platform of ENOC) to increase oil and gas production.
  • Iraq and France’s Total will build 4 energy projects in Southern Iraq, as part of a USD 27bn deal signed last week. An initial investment of USD 10bn is expected, with engineering work to start “immediately”.
  • Lebanon formed a government following a year of political impasse – to remain in power for 8 months, till elections in May. It is PM Mikati’s third government and the fourth under President Aoun. Immediately after the announcement, the pound rose to its highest rate vis-à-vis the dollar to LBP 15k from LBP 19k the day before.
  • PMI in Lebanon stood at a 5-month low of 46.6 in Aug (Jul: 47), with outlook in “deeply negative” territory. Political and economic instability, fuel shortages and eroding purchasing power among domestic clients were cited as the main factors lowering demand.
  • Lebanon is launching cash subsidy cards for over 500k families, which will provide each family with around USD 93 per month. The cash payments, estimated to cost USD 556mn, were approved by the Parliament in June, but with no sources of funding identified.
  • Private generator owners in Lebanon hiked prices by more than 2-3 times in Sep, citing higher diesel prices after subsidies were lifted. The average prices of 5 and 10 amps of electricity are expected to reach LBP 2 and 4mn respectively even with the severe rationing.
  • Data from the Planning and Statistics Authority showed that GDP in Qatar fell by 2.3% yoy and 0.8% qoq in Q1 this year, with both the oil and non-oil sectors declining by 2.3% (+4.0% qoq) and 2.4% (-3.6% qoq) respectively.
  • Occupancy rates in Qatar averaged 60% in H1 2021 (vs 55% in H1 2020); hotel accommodation grew by 7% yoy during this period while the average room rate increased by 16% to QAR 438 and revenue per available room increased by 24% to QAR 266.
  • Palestinian Authority pulled out of an agreement to provide funding from Qatar to the Gaza Strip “due to fears of legal prosecution and accusations that banks were “supporting terrorism””. Earlier in the week, QNA reported that Qatar had reached an agreement on a grant for reconstruction in the Gaza Strip and opening of crossings into the enclave.
  • Getting serious about ESG: Kuwait launched an ESG reporting guide to “raise awareness” and “to promote environmentally conscious business practices in Kuwait’s capital market”; Oman is working on developing an ESG framework with an aim to to widen its funding base; Saudi Arabia’s PIF hired five international banks to advise on an ESG framework for public market capital raisings.
  • According to Moody’s, Sukuk activity remained “solid” in H1 2021 with some USD 102bn; however, issuance is expected to fall to between USD 90-100bn in H2 (as higher oil price drove down sovereign funding needs in the GCC), resulting in a full year issuance much lower than the record USD 205bn issued in 2020. Separately, Fitch Ratings disclosed that though Green Sukuk issuances were rising (USD 6bn in H1 2021 from USD 3bn in 2020), it still accounted for just 2.5% of total outstanding sukuk.

Saudi Arabia Focus

  • The Saudi government lent SAR 2.63bn (USD 701.2mn) to national development funds in 2020: the list was topped by the Real Estate Development Fund (SAR 155.02bn), the Saudi Industrial Development Fund (SAR 48.09bn) and the Social Development Bank (SAR 25.79bn).
  • Investments of foreign non-founding investors in Tadawul reached a 20-month high of SAR 239bn (or 2.44%) in the week ending Sep 2nd. Investments of Gulf investors during the same week, at SAR 50.1bn, was51% of the total market value of the listed shares.
  • Prices of construction materials in Saudi Arabia surged to record levels in Jul 2021, ranging between hikes of 4% to 40%. Price of a ton of national 18mm steel rebar increased by 29.39% to SAR 3505.45 while Romanian wood posted the largest increase (+40.7%).
  • Aramco, as part of its industrial investment program (Namaat), signed 22 new MoUs and a joint venture agreement with companies including DHL, Samsung, Hyundai, and Honeywell among others: these focus on sustainability, technology, industrial and energy services, and advanced materials.
  • Reuters reported that a consortium (led by EIG Global Energy Partners) with a stake in Aramco oil pipelines, plans to issue at least USD 4bn in bonds in Q4 to refinance a loan that funded the USD 12.4bn deal.
  • A report from the Riyadh Chamber of Commerce revealed that the volume of e-commerce transactions touched SAR 21.375bn (USD 5.7bn) in 2020 and that the value of the e-commerce in the country contributed USD 10.4bn to the national accounts.
  • The demand for guarantees from SMEs in Saudi Arabia (via the Kafalah program) grew by 106% (compared to 2019) to more than USD 4bn, as the firms tried to survive through the pandemic. According to the central bank, the amount of credit disbursed to SMEs grew by 39.74% to SAR 188.42bn in Q1 2021.
  • Saudization programs will likely create 213k jobs for Saudis this year, disclosed the minister of human resources and social development.
  • Saudi Arabia slashed official selling price of Arab Light crude for delivery to Asia in Oct by USD 1.30 to a premium of USD 70 per barrel: this was the first cut in the last 4 months.
  • Saudi Algosaibi group finally reached a settlement with 95% of its creditors on debt that totaled SAR 28bn (USD 7.5bn), thanks to the new bankruptcy law which allowed for voting on the debt settlement plan.
  • A silos project, constructed at a cost of more than SAR 364mn (USD 97mn), was inaugurated in Saudi Arabia last week. This has the capacity of storing 120k metric tons of grains and was built as part of the NTP towards ensuring food security.
  • Saudi Arabia removed the travel bans imposed on UAE, Argentina and South Africa, allowing citizens to travel to these nations starting Sep 8th.

UAE Focus

  • UAE continues to reveal its list of 50 new economic initiatives to boost competitiveness and aid diversification. Announced earlier today were plans to increase the number of Emiratis in the private sector – this includes incentives like a boost to their salaries, support for pension fund of employees and payments for children in addition to allowing government employees to take sabbaticals on 50% of salary to start their own business among others (plan is to spend AED 24bn towards this effort). Private sector employers are expected to increase their Emirati workforce by 2% each year over five years. This set follows last week’s initiatives which focused on investment in technology and green, freelancer and part-time work visas. An investment of USD 36bn in the Emirates Development Bank was also announced.
  • UAE’s minister of economy revealed that the country is estimated to grow by more than 4% this year – much more optimistic than the central bank’s Dec forecast of 2.5%. The country aims to attract AED 550bn (USD 150bn) in FDI in the next 9 years.
  • UAE will allocate USD 2.6bn for industrial and technology projects, according to a senior official from the ministry of industry and advanced technology. The plan is to raise national value added to AED 55bn by 2025 from AED 33bn currently.
  • Dubai PMI inched up to 53.3 in Aug (Jul: 53.2): there was a boost in consumer demand and the tourism sector gained, with its index rising to a 21-month high of 55.1 in Aug, thanks to the easing of travel restrictions. The output sub-index increased to its highest reading since Sep 2019, and the construction sector index rose to 53.3 in Aug (highest since Jul 2019).
  • Bank deposits in the UAE increased by 0.3% mom to AED 1.915trn in Jul. Gross credit fell to AED 1.768trn from AED 1.769trn the month before: credit to the public sector was the only one that gained during the period, up by 0.8%.
  • ADNOC plans to float 7.5% of its shares in ADNOC Drilling: the sale is expected to raise around USD 750mn. The plans to float part of the drilling unit is just part of the current trend of privatizing some of their fossil fuel assets.
  • Holding company ADQ disclosed its plans to list Abu Dhabi Ports Co on the Abu Dhabi Exchange before end of the year.
  • Abu Dhabi issued USD 3bn in multi-tranche bonds last week, its second of the year for which it received over USD 75bn in orders.
  • The Abu Dhabi Investment Authority, in its Annual Review 2021, stated that technology and climate change are key investment areas for the SWF as part of its post-Covid19 strategy. The ADIA reported 20-year and 30-year annualised rates of return of 6% and 7.2% respectively in 2020, compared with 4.8% and 6.6% in 2019.
  • Reuters reported that the UAE’s National Committee for Combating Money-Laundering and Financing of Terrorism and Illegal Organisations “announced the adoption of a regulatory framework for virtual assets in the UAE”. Both the central bank and SCA will oversee the implementation of the rules.
  • UAE’s Barakah nuclear power station started operating its 2nd reactor (after the first started commercial operations in Apr this year). Once completed, Barakah will have 4 reactors will total capacity of 5600MW, equivalent to about 25% of UAE’s peak demand.
  • DIFC reported a 59% yoy growth in new company registrations in the free zone in H1 2021, with about 492 new companies joining. Overall, there are 3292 active registered companies (+27%), allowing the centre to achieve one of the “2024 Strategy” targets of tripling in size (compared to 2014).
  • The CEO of Etihad revealed that the airline performed the strongest in Jul since the start of the pandemic: in Jul, just over 40% of its seats were filled vs just 24.9% over H1 2021.
  • On Sep 9th, more than 1.3mn persons used Dubai’s public transport facilities: the most since the beginning of the pandemic.
  • UAE will allow entry of all fully WHO-approved vaccinated persons as of Sep 12th, including from previously suspended countries in advance of the opening of Expo 2020.

Media Review

Why nations that fail women fail

https://www.economist.com/leaders/2021/09/11/why-nations-that-fail-women-fail

From Afghanistan to the World Cup, Tiny, Wealthy Qatar Steps Up

https://www.nytimes.com/2021/09/07/world/middleeast/afghanistan-qatar-airlift.html

This SDR Allocation Must Be Different

https://www.project-syndicate.org/commentary/how-to-get-new-imf-sdrs-to-poor-countries-by-barry-eichengreen-2021-09

Lebanon’s billionaire PM forms government after 13-month deadlock

https://www.ft.com/content/bf1691aa-dc3e-4eff-bfc2-b5ed49406b2a

Lebanon’s economic woes

https://www.reuters.com/world/middle-east/how-bad-is-crisis-lebanon-2021-09-10/

https://www.reuters.com/world/middle-east/inflationary-pressures-force-lebanese-make-tough-choices-2021-09-09/

 

 

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Weekly Insights 9 Sep 2021: Global inflation – transitory or persistent? How will MENA / GCC cope?

Weekly Insights 9 Sep 2021: Global inflation – transitory or persistent? How will MENA / GCC cope?

Inflation (both consumer and producer prices) has been picking up across the globe, though central banks are still calling it a “transitory” phase than a persistent one.

Both food and energy prices have been rising the past few months. The FAO food price index for Aug showed a 3.1% mom and 32.9% yoy increase, rebounding after 2 consecutive months of declines. Since prices had been subdued during the initial stages of the pandemic, the year-on-year surge can be associated with base effects, but the month-on-month prices have been creeping up as well. For countries highly dependent on food and other staple goods imports (especially the MENA region), the inflationary pressure will grow if this persists and also affect poorer countries disproportionately. It is worthwhile to remember that social unrest leading up to the Arab Spring a decade back came after months of rising food costs (food price inflation in Egypt had hit ~19%)!

A closer examination of prices shows that not just commodities, but also prices of durable goods and price of services (restaurants, hairdressers etc.) have been picking up, resulting in an uptick in core inflation. Why? There is a combination of factors: supply chain shocks, cyclical recovery of demand post-Covid fueled by fiscal and monetary stimulus, along with weather shocks.

  • Increased demand as the pace of recovery gains speed with easing of pandemic-related restrictions: e.g. demand for meat from major food-importing nations, demand for fuel as “summer travel” resumes in the US and Europe, sustained demand for furniture and household appliances.
  • Weather shocks: e.g. droughts and high temperatures (affecting wheat production in Canada and US), frost damage and dry weather (affecting prices of sugar in Brazil);
  • Supply chain disruptions and logistical bottlenecks: e.g. quarantine and/or lockdown rules have disrupted manufacturing, closure of ports have led to delays in delivery, shortage of semi-conductor chips and impact on the auto industry. Supplier delivery times are lengthening further, purchasing costs are still rising, and strong demand is adding more pressure on shipping costs. For now, it looks like inflationary pressures are building up.

The recent uptick in inflation is a global phenomenon. In the developed countries, inflation is still around the 2%-mark (higher than readings in the recent past): extended QE and low-interest rate policy environment had kept price increases minimal. However, inflation is markedly higher for many emerging markets, including emerging Europe. In India, the latest reading stood at 6% (at the top end of the central bank’s target range) while in Brazil and Russia, it was 8.9% and 6.7% respectively (way higher than targets of 4.5% and 4% respectively).

South Korea, where inflation in Aug stood at 2.6% (the highest since Aug 2017, and higher than the 2% central bank target rate), became the first developed Asian nation to raise interest rates since the beginning of the pandemic. The rate was increased from a record low of 0.5% to 0.75% and the move is expected to curtail the surge in household debt and home prices. Russia, Brazil, Mexico, Peru and Hungary are a few central banks that have hiked rates in the past few months, with Russia’s central bank warning of a potential new global financial crisis if global inflation is not contained. Going forward, we expect many central banks to follow suit, abandoning their dovish policy stance and start tightening to contain inflation (including asset price inflation, including housing prices which have surged). It needs to be a delicate balance though, as higher interest rates would hurt economic recovery and growth, especially as many are facing new Covid19 outbreaks amid a low vaccination pace.

Many of these emerging market governments have borrowed extensively during the pandemic to spend on fiscal relief measures. Global government debt is now at the highest level since World War II. Public and external debt have risen significantly for the median emerging market economy, reaching 59 and 44% of GDP, respectively, in 2020, and gross financing needs are projected to stay above 10% of GDP in 2020–21, according to IMF projections. We expect debt to GDP levels to remain much higher than pre-Covid levels for many years ahead, increasing their vulnerability to tapering by the Fed and the ECB resulting in higher borrowing costs. For now, debt service costs are quite low (given low US interest rates) in foreign currency, but external borrowing costs are unlikely to stay low for longer. The Fed has already signaled that it might raise interest rates sooner than earlier expected. So, markets, including emerging markets, can no longer count on a steady injection of liquidity – be on the lookout for vulnerable corporates and countries with high debt exposure. Plus, as the US tightens monetary policy, emerging market currencies will come under pressure (more expensive to import goods, thereby increasing domestic prices further as well as aggravating current account deficits).

In the MENA region, almost half the nations have gross government debt above 70% of GDP and one in 4 had public gross financing needs above 15% of GDP by end-2019. The pandemic led to a significant loss in revenues (both oil and non-oil) and though international financial markets were tapped, domestic financing increased. According to the IMF, governments in Egypt, Jordan, and Tunisia covered more than 50% of their public gross financing needs with domestic bank financing in 2020. Such bank exposure to the public sector could also crowd out the private sector at a time when a private activity push is required for higher economic growth and job creation. A surge in inflation can lead to a reduction in the real value of domestic debt – Lebanon is a good example, but the sharp currency depreciation makes the debt burden unsustainable.

Inflation remains under control in the GCC for now and even though food prices are rising, the overall cost of living has been kept in check given relatively low housing/ utilities costs. For now, many businesses are absorbing the higher costs (as mentioned in the region’s PMI surveys) and narrowing profit margins to revive domestic demand. Since GCC nations’ inflation reading can be driven up by trading partners’ inflation, it is prudent to keep an eye out. Food imports as a share of overall imports was least in the UAE (6.7% in 2019) and most in Oman (16.3%). For the GCC currencies that are pegged to the dollar, higher food prices can quickly pass through to consumer prices, while central banks have little or no monetary policy independence to address inflation shocks.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Weekly Economic Commentary – Sep 5, 2021

Markets

Though equity markets wavered after the disappointing payrolls data from the US, MSCI’s all-country world index posted a sixth consecutive closing high while the FTSE and Stoxx600 posted marginal declines compared to a week ago; Japan’s Topix rose to a 30-year high after news that the PM Suga would step down. Regional markets were mostly up, with Abu Dhabi posting a 6th consecutive weekly gain while Dubai’s index on Wednesday climbed to its highest in over 2 years. Among currencies, the euro strengthened ahead of the ECB meeting this week while the dollar index declined. Oil prices steadied after the OPEC+ agreed to previously announced gradual output hikes: Brent closed marginally lower (compared to a week ago) at USD 72.61 and WTI slightly higher at USD 69.29. Gold price was up by more than 1% to its highest in nearly two and a half months.

Weekly % changes for last week (2-3 Sep) from 26 Aug (regional) and 27 Aug (international).

Global Developments

US/Americas:

  • Non-farm payrolls disappointed, clocking in at 235k jobs in Aug versus the 1.1mn jobs created in Jul. Leisure and hospitality industry posted no job gains for the month compared to an average monthly increase of 350k positions seen over the past 6 months. Unemployment rate declined to 5.2% (Jul: 5.4%), but the economy remains far from the Fed’s goal of “maximum employment”, with nearly 6mn more out of work than pre-pandemic. Labour supply shortages still exist and employers are having to raise wages to attract new people: average hourly earnings jumped 0.6% mom and 4.3% yoy. Apart from frictional unemployment issues the US economy is also undergoing post-Covid  structural change.
  • Private sector employment increased by 374k in Aug (Jul: 326k), according to the ADP national employment report. Most of the new jobs came from leisure and hospitality, which added 201k positions while education and health services combined to add 59,000 in the month.
  • Initial jobless claims eased to 340k in the week ended Aug 28th – the lowest levels since Mar 14, 2020 – from an upwardly revised 354k the week before and slowing the 4-week average to 355k. Continuing claims slipped by 160k to 2.748mn in the week ended Aug 21st.
  • Non-farm productivity was revised lower in Q2, to an annualised 2.1% rate from the previously reported 2.3% (Q1: 4.3%). Unit labour costs increased by 1.3% in Q2 versus the 1% pace previously reported and Q1’s 2.8% gain.
  • US factory orders inched up by 0.4% mom in Jul (Jun: 1.5%), supported by orders for primary metals and machinery. While orders for transportation equipment fell by 2.1%, orders for non-defense capital goods edged up by 0.1% in Jul.
  • Overall trade deficit (including services) in the US narrowed to USD 70.1bn from Jun’s record high of USD 73.2bn. Imports of goods declined by 1.2% to USD 236.3bn, given supply constraints, and demand is gearing towards services away from goods. Goods trade deficit widened to USD 87.7bn in Jul (Jun: 86.4bn).
  • Pending home sales dipped for a second consecutive month, down by 1.8% mom and 8.5% yoy in Jul (Aug: -2% mom and -1.9% yoy).
  • S&P Case Shiller home price indices gained by 19.1% in Jun (May: 17.1%). Home prices surged by 18.6% in the year that ended in Jun – the largest annual gain in the history of the series and 41% higher than the previous peak in 2006’s housing boom driven by fiscal stimulus and ultra-loose monetary policy and low mortgage rates.
  • Dallas Fed manufacturing business index fell to 9 in Aug (Jul: 27.3) – the lowest reading since Jan. While 72% of firms said supply-chain disruptions were restraining revenues, new orders index, at 15.6, was more than double the series average of 6.5 though down from the previous month’s 26.8 reading. The employment index rose to its highest reading since 2007.
  • Chicago PMI declined to 66.8 in Aug (Jul: 73.4): order backlogs hit the highest level since 1951 and short supplies pushed input prices to the highest point since 1979.
  • ISM manufacturing PMI in the US improved to 59.9 in Aug (Jul: 59.5), thanks to an expansion in new orders (66.7 from 64.9) and production (60 from 58.4) amid an easing in prices (79.4 from 85.7 in Jul, the lowest since Dec). Employment index fell to 49 (Jul: 52.9). ISM services fell to 61.7 in Aug from Jul’s record-high 64.1, reflecting a slowdown in new orders (63.2 from 63.7) while price pressures eased.
  • US Markit manufacturing PMI fell to 61.1 in Aug (Jul’s record 63.4), with rate of both input and output price inflation touching fresh series highs; services PMI slowed to 55.1 (Jul: 59.9) – the weakest pace of expansion since Dec 2020 – with new orders growth slowing to the weakest since Aug 2020.

Europe:

  • Inflation in the eurozone jumped to 3% in Aug (Jul: 2.2%) – recording the highest rate of inflation since Nov 2011; energy costs rose by 15.4% in Aug (Jul: 14.3%) and food prices by 2% (Jul: 1.6%). Core inflation rose to 1.6% (Jul: 0.7%), the highest rate since Jul 2012.
  • Producer price index in the eurozone increased to 2.3% mom and 12.1% yoy in Jul (Jun: 1.4% mom and 10.2% yoy). This was the largest monthly increase since Jan 1995 and the highest ever yoy increase.
  • Germany’s harmonized index of consumer prices inched up to 3.4% in Aug (Jul: 3.1%). The last time inflation touched 3.4% was ahead of the 2008 financial crisis. German goods inflation rose to 5.6% in Aug, while services inflation hit 2.5%.
  • Retail sales in Germany slumped by 5.1% mom and 0.3% yoy in Jul (Jun: 4.5% mom and 6.5% yoy). Compared with Feb 2020 (pre-pandemic), retail sales are up by 3.8%.
  • In the eurozone, retail sales dropped by 2.3% mom in Jul; internet and mail order sales fell the most (-7.3%) while sales of non-food products and automotive fuel fell by 3.5% and 1.6% respectively.
  • Unemployment rate in Germany eased to 5.5% in Aug (Jul: 5.6%), the lowest level since Mar 2020, with the number of unemployed falling by 53k (Jul: -90k). Separately, unemployment rate in the eurozone dropped to 7.6% in Jul (Jun: 7.8%): Greece and Spain posted the highest unemployment rates in the region, at 14.3% and 14.6% respectively.
  • The preliminary manufacturing PMI in Germany declined to a 6-month low of 62.6 in Aug (Jul: 65.9), with the output index slipping the most, to its lowest since Aug 2020. Services PMI fell to 60.8 from a record high 61.8 in Jul. Overall, inflationary pressures remained high (including personnel costs) with a near-record rise in business costs, though business sentiment remains optimistic towards future activity.
  • Eurozone’s manufacturing PMI (preliminary) fell to a 6-month low of 61.4 in Aug (Jul: 62.8), with slower growth linked primarily to supply chain constraints while output and new orders fell from Mar’s survey-highs. Services PMI ticked down to 59.0 from 59.8 the month before though service sector jobs growth was the strongest since Sep 2018.
  • Consumer confidence in the euro area worsened to -5.3 in Aug (Jul: -4.4), as did industrial confidence (13.7 in Aug from Jul’s 14.5). Business climate eased as well: down to 1.75 from 1.88.
  • Manufacturing PMI in the UK slipped to a 5-month low of 60.3 from 60.4 in Jul, with supply issues resulting in weaker production growth while employment grew for the 8th month in a row. Services PMI declined at a much sharper rate: down to 55.0 in Aug (Jul: 59.6), with lack of inbound tourists and Brexit trade frictions cited as the reason for subdued orders.

Asia Pacific:

  • Three of the 4 PMIs in China fell below 50 in Aug: the NBS non-manufacturing PMI dipped to 47.5 from the previous month’s 53.3, posting the first contraction since Feb 2020, as new Covid19 restrictions dampened activity. Caixin manufacturing PMI dropped down to 49.2 from 50.3 in Jul – the first drip below 50 since Apr 2020 – with output shrinking for the first time in 17 months. Caixin services PMI plunged to 46.7 in Aug (Jul: 54.9), with new orders below-50 for the first time in 16 months. The NBS manufacturing PMI ticked down to 50.1 in Aug (Jul: 50.4), just barely above the 50-mark: declines were evident across new orders (49.6 from 50.9), export sales (46.7 from 47.7) and employment (49.6).
  • Japan’s manufacturing PMI eased to 52.7 in Aug (Jul: 53) but was higher than the preliminary reading of 52.4. Both output and new orders expanded at slower paces; supply chain disruptions affected production inputs. Employment rose at fastest pace since Jan 2020.
  • Industrial production in Japan fell by 1.5% mom in Jul (Jun: +6.5%), dragged down by a decline in auto production (including passenger cars and small buses). In yoy terms, IP grew by 11.6% (23%).
  • Retail trade in Japan picked up in Jul, rising by 1.1% mom and 2.4% yoy, posting the 5th consecutive month of gains. Large retailer sales rebounded by 1.3% from Jun’s 2.3% dip.
  • Unemployment rate in Japan edged down to 2.8% in Jul (Jun: 2.9%), with the actual number of those unemployed posting the first yoy fall in 18 months. According to the labour ministry, an index gauging job availability gained slightly to 1.15 from 1.13 in Jun.
  • India’s GDP increased by 20.1% yoy in Apr-Jun 2021, largely due to the effect of a lower base (Apr-Jun 2020: -24.4%): construction and manufacturing sectors supported growth, clocking in growth rates of 68.3% and 49.6% respectively.
  • Federal fiscal deficit in India widened to INR 3211.4bn in Jul (Jun: INR 2742.45bn). Fiscal deficit for the Apr-Jul period narrowed to a 9-year low thanks to higher GST collections and came in at only 21.3% of the full-year target.
  • Infrastructure output in India grew by 9.4% yoy in Jul; it increased by 21.2% in Apr-Jul.
  • South Korea’s GDP was revised up in Q2: the new growth estimates stand at 8% qoq and 6% yoy (Q1: 1.7% qoq and 5.9% yoy). Private consumption, which climbed by 3.6% qoq, supported Q2 growth, while fiscal spending and facility investment grew by 3.9% and 1.1%.
  • Industrial output in South Korea grew (for the 9th consecutive month) by 7.9% yoy in Jul (Jun’s downwardly revised 11.5%).
  • Retail sales in Singapore increased marginally by 0.8% mom and 0.2% yoy in Jul; food and beverage service sales were lower largely due to the suspension of dining in services from Jul 22. Excluding motor vehicles, retail sales rose by 2.9% mom and 2% yoy in Jul.

Bottomline: August PMIs are in – global manufacturing PMI fell to a 6-month low as supply chain issues constrained output growth amid the spread of the Delta variant. Purchasing costs continue to rise, and for now, it looks like inflationary pressures (including wage) are building up. Inflation rates across the US and Europe are rising above central bank targets, but “transitory” is still the main rhetoric. This week  the ECB meets on policy: with EU recovery more heterogeneous across countries, it seems unlikely that it would taper before the US.

Regional Developments

  • Egypt’s GDP grew by 7.7% yoy in Mar-Jun 2021 compared to a 1.7% drop in the same quarter a year ago. GDP growth in the fiscal year 2020-21 (which ended in Jun) was nearly 3.3%, according to the cabinet. Growth is expected to touch 5.4% in the current fiscal year.
  • PMI in Egypt inched up to 49.8 in Aug (Jul: 49.1), with non-oil output and new orders growing for the second time in 9 months. However, input cost inflation was the highest since Aug 2019 as material prices increased.
  • The Egyptian Commodity Exchange will be launched in Q1 2022, reported Daily News, citing the head of the Internal Trade Development Authority.
  • Egypt’s exports to France increased by 21% yoy to EUR 350mn in H1 2021 while imports from France dipped by 9% to EUR 913mn.
  • Egypt signed a USD 4.45bn deal to construct a high-speed electric rail line to link its Red Sea and Mediterranean coasts: the 660km line will include both passenger (30mn+ passengers annually) and freight lines. Financial close on the contract is expected in 2022.
  • Egypt is on track to increase production of the Covid19 vaccine for export to Africa and to inoculate its own population. A new facility is expected to begin production in Nov, with a capacity to produce a billion vaccines per year.
  • Iraq and Saudi Arabia have signed multiple agreements covering trade and transport (including maritime); an agreement was reached to increase the volume of trade exchange through Al Jadida-Arar port by limiting processing time to four hours per container.
  • Iraq approved plans to build a 7.5 GW solar power project, reported Asharq. This is part of its plan to award 10-12 GW of solar power projects through 2025.
  • Reuters reported that Kuwait is currently seeking cash injections from private companies to ensure that power projects are well-funded over the next two decades. Kuwait’s electricity capacity is estimated at 17,000 MW and about 14,000 MW are scheduled to be added over the next twenty years, with PPPs key in delivering this increase.
  • A new ESCWA report on Lebanon revealed that 82% of the population lives in multi-dimensional poverty (i.e. takes into account factors like access to health, education and public utilities in addition to income), almost doubling from 42% in 2019. “Extreme multidimensional poverty”, affects 34% of the population today, exceeding half, in some areas.
  • Iranian fuel cargo to Lebanon will be delivered via Syria by truck to avoid sanctions-related complications, reported Reuters.
  • Fiscal deficit in Oman narrowed to OMR 1.2bn in Jan-Jul, after revenues rose marginally by 0.5% during the period while oil revenues climbed by 3.4%. Spending declined by 4.7%.
  • Oman’s Supreme Committee mandated that all incoming travelers need to be vaccinated against Covid19. The country also recently received 86,400 doses of AstraZeneca through COVAX.
  • The Islamic Development Bank’s annual report revealed that Egypt had received the most financing in 2020, to the tune of USD 1.13bn in value. However, this was just 0.2% of the overall USD 6.8bn disbursed last year.
  • Iata’s recent report indicated that Middle East airlines continue to post a significant reduction in demand compared to 2019. In Jul 2021, global air travel demand was down by 53.1% (vs 2019) but the same figure in Middle East stood at 74.5%.

Saudi Arabia Focus

  • Saudi Arabia’s PMI slipped to 54.1 in Aug (Jul: 55.8), largely due to the fall in output sub-index (lowest level since Oct 2020) while domestic orders remained strong. Confidence was subdued, with just 11% of survey respondents expecting output to increase over the coming year.
  • Saudi PIF and Tadawul plan to establish a voluntary carbon credits exchange in Riyadh: it will aim to be the primary destination and main platform for companies and institutes that target reducing their emissions, or contributing towards the reduction
  • Residential mortgages issued by Saudi banks and financial institutions touched 171,757 (+8% yoy) in Jan-Jul, valued at SAR 87.7bn (+20%). The number of new mortgage loans grew by 5% mom to 18,703 in Jul while the value increased by 12% to 8.6bn during the month.
  • Credit disbursed continues to increase in Saudi Arabia, a trend seen since Q2 2019: lending to individuals surged by 17% to SAR 394bn in Q2 this year. Compared to that bank branches are declining: the number fell by 4.6% yoy to 1969 in Q2 this year. Not surprising, considering the move online and prominence of digital banking. As banks discuss strategy, it would be worthwhile to move physical branches to areas with low connectivity and/or with limited bank penetration/ financial inclusion.
  • Net foreign assets dipped to SAR 1.64trn in Jul in Saudi Arabia. The amount of money invested in foreign securities increased by SAR5bn to SAR 1.13trn in Jul, the highest monthly figure since Apr.
  • Foreign investment in Tadawul accelerated by more than 150% by end-Q2 compared to late 2018. The CMA disclosed that banking, basic materials, energy and communications attracted the most foreign investment.
  • Saudi Arabia’s state-owned Al-Arabiya and Al Hadath TV channels are planning to broadcast from Riyadh starting Jan 2022; reports indicate that MBC and Asharq News are also internally discussing plans to move to Riyadh. This seems to be in line with Riyadh’s goal to be a regional business hub and attract firms to locate and operate out of the city.
  • Saudi Arabia’s ACWA Power, half owned by the PIF, is preparing for an IPO: the company plans to issue 85.3mn shares, representing 11.67% of the company; of this around 4.14mn shares will be allocated as part of the company’s employee IPO grant plan. The IPO is expected to raise more than USD 1bn, valuing the company at around USD 10bn.
  • Aramco is planning to resume development of the Jafurah gas field, with investments reaching about USD 110bn, reported CNBC. The largest natural gas field is estimated at 200 trillion cubic feet of rich raw gas.
  • Saudi Arabia plans to start production from the Mansoura and Masarah gold mines in mid-2022, reported Al Eqtisadiah. The SAR 3bn (USD 880mn) gold mine project is anticipated to have a production capacity of 250k ounces of gold and silver.
  • Saudi Arabia launched an initiative to provide loans of up to SAR 15mn(USD 4mn) for micro, small, and medium size businesses related to IT and digital projects. Loans will range from SAR 100k to SAR 15mn supporting firms to carry out projects and expand.
  • An MoU between Saudi Tourism Authority and China’s Alibaba Cloud is expected to create an “experience” for Chinese tourists traveling to the Kingdom. The latter is expected to create an improved digital experience for Chinese tourists while also providing tech support to STA to promote the Kingdom as a tourist destination for the Chinese.

UAE Focus

  • UAE PMI ticked down to 53.8 in Aug (Jul: 54). While demand continued to rebound, export sales decreased for the 4th consecutive month. Employment levels rose at the fastest rate since the beginning of 2018, potentially also due to Expo-related temporary jobs.
  • The UAE plans to announce a series of 50 “significant economic projects” this month. The underlying aim is to increase economic diversification, and towards this end projects are expected to focus on entrepreneurship, the digital and circular economies, and applications of the Fourth Industrial Revolution to promote economic and social development. The projects announced today include the introduction of highly flexible “Green Visas” for entrepreneurs, pioneers and other professions (along with a doubling of cancelled visa grace period to 180 days), as well as focus on upskilling and AI (with an aim to prepare the nation for the 4th IR), and AED 5bn allocated to Emirates Development Bank to support the industrial sector to support projects by UAE nationals among others.
  • UAE’s non-oil trade with Arab nations grew by 29% yoy to AED 191bn in H1 2021, according to the Minister of Economy. Trade between Arab nations and rest of the world was USD 1.27trn in 2020, of which UAE accounted for 25% share.
  • UAE and Indonesia have initiated trade negotiations with an aim to increase bilateral trade by almost 10 times from USD 2.93bn in 2020. A deal is expected within a year, with more investment plans likely to be announced during the Indonesian President’s Nov visit to UAE.
  • Abu Dhabi Securities Exchange plans to launch a derivatives market in Q4 this year: beginning with singles stock futures and index futures, it will then expand to a range of derivatives products in the future. The exchange had already signed an agreement with Nasdaq in Sep 2021 for the impending launch: this includes technology solutions, matching as well as real-time clearing and settlement technology.
  • Emirates Global Aluminium is proceeding with its potential IPO, by preparing to bring on Citigroup, Goldman Sachs Group and JPMorgan Chase & Co as lead underwriters, reported Bloomberg. The company had planned to list in 2018 before Trump imposed tariffs on aluminium imports from the UAE.
  • The UAE ranks 30th in the latest edition of UNIDO’s Competitive Industrial Performance Index. UAE improved its performance in 4 of the total 8 indicators: rising to 17th in manufacturing exports per capita and up to 32nd for total manufacturing exports.
  • Abu Dhabi National Energy Company (TAQA) plans to sell some or all of its oil and gas assets as it “transitions towards a cleaner and more sustainable future”. The company’s energy portfolio includes assets in UK’s North Sea, Netherlands, Canada and Iraqi Kurdistan.
  • According to S&P Global Platts, Middle East crude benchmark Dubai fell to an average of USD 485 a barrel in Aug (Jul: USD 72.903) – the lowest since May.
  • UAE announced lower petrol and diesel prices in Sep, down by ~1.2% mom and 2.9% respectively.
  • DMCC disclosed that a recordbreaking 204 new companies registered in the freezone in Aug. More than 1500 new firms have joined since the beginning of this year – its best-ever 8-month performance.
  • ADNOC confirmed that it had secured a USD 1.2bn credit facility to finance ADNOC Global Trading’s (a JV between ADNOC, Italy’s Eni and Austria’s OMV, that trades trade refined products and supply feedstocks) trade flows and growth.
  • According to the chairman of the Dubai Sports Council, the contribution of sports to the Dubai economy exceeds AED 4bn annually. More than 20k persons are employed in the sports sector in Dubai, which organises ~400 sports events (including 130 international ones).
  • UAE issued a new decree that allows for the investigation of ministers and senior officials of the UAE in order to enhance transparency, oversight and accountability in the government.
  • According to Dubai Taxi’s strategic plan 2021-23, about 5% of the taxi fleet will be converted to autonomous vehicles by 2023 while the share of environmentally friendly vehicles will rise to 56%.
  • Abu Dhabi updated its Covid19 travel requirements: vaccinated international travelers are no longer required to quarantine in the emirate; a negative PCR remains mandatory.

Media Review

Without help for oil-producing countries, net zero by 2050 is a distant dream

https://www.theguardian.com/commentisfree/2021/sep/01/oil-producing-countries-net-zero-2050-iraq

Qatar emerges as bridge between Taliban and the west

https://www.ft.com/content/5d95c09f-da93-421e-ac6e-02d250738a5f

From tech to entertainment, China’s season of regulatory crackdown

https://www.reuters.com/world/china/education-bitcoin-chinas-season-regulatory-crackdown-2021-07-27/

As a rich-world covid-vaccine glut looms, poor countries miss out

https://www.economist.com/international/2021/09/04/as-a-rich-world-covid-vaccine-glut-looms-poor-countries-miss-out

The stagflation threat is real: Roubini

https://www.project-syndicate.org/commentary/mild-stagflation-is-here-and-could-persist-or-deepen-by-nouriel-roubini-2021-08

Australia, Malaysia, Singapore and South Africa launch cenbank digital currency scheme

https://www.reuters.com/business/finance/australia-singapore-south-africa-test-cross-border-cbank-digital-payments-2021-09-02/

Clean & Green Finance: Mark Carney

https://www.imf.org/external/pubs/ft/fandd/2021/09/mark-carney-net-zero-climate-change.htm

IMF F&D Climate issue: https://www.imf.org/external/pubs/ft/fandd/2021/09/index.htm

 

 

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Weekly Insights 1 Sep 2021: Thinking beyond the Expo 2020 Dubai

Weekly Insights 1 Sep 2021: Thinking beyond the Expo 2020 Dubai

Dubai is gearing up for the Expo extravaganza, scheduled to start in just over a month’s time on October 1st. Plans and preparations have been underway since the Emirate won the rights to hold the mega-event in Nov 2013.

Little did anyone envisage the scenario within which the Expo would eventually take place. Expo 2020 will be the first global mega-event to be held permitting physical entry of visitors, after the Tokyo Olympics and Paralympics went ahead sans spectators (given the spiraling Covid19 crisis in the country). Holding a mega event during a global pandemic will be no mean feat. Nevertheless, Dubai has been open for tourists since July 2020 and has managed to control the epidemic amid a highly effective vaccination campaign. Restrictions were tightened when cases surged and eased later. Vaccination rates are among the highest globally: over 18 million doses have been administered to a population of 10 million.

From Oct 2020, the Emirate opened to host multiple global conferences and sports events – albeit at a smaller scale compared to the Expo – and have other major events on the horizon like the Indian T20 IPL championship matches (mid-Sep), T20 Cricket World Cup (mid-Oct) and Formula 1 (Dec 3-5) among others. These will be testing grounds for the control of crowds ahead of the Expo. Of course, having a well-connected airport will be critical in this regard: some 2/3rd of the world’s population lives within 8 hours flight from Dubai and 1/3rd lives within 4 hours. Expo 2020 will be the first expo with the vast majority of visitors using international travel.  Even though passenger traffic at Dubai’s international airport plummeted to 25.9mn in Covid19-affected 2020 (from 86.4mn in 2019), it was ranked the world’s busiest airport for international passengers, and passengers are expected to rise to 28mn this year. Anecdotal evidence suggests a surge in tourist visa applications and ticket demand following the recent announcement of entry for all WHO-approved vaccinated persons into the UAE: while the 25mn Expo visitors may be a tad too optimistic during an ongoing pandemic, the WHO approval will increase the likelihood and perception of health safety and encourage visitors.

Hosting such mega-events are usually found to be a drain on country or city budgets: to take an example of the recently concluded spectator-free Tokyo Olympics, the official budget by 2019 stood at USD 12.6bn (vs the estimation of USD 7.5bn in 2013) though the audit board places the amount as at least double. In the Expo’s case this year, where visitors are allowed entry, they also have to account for additional spending given the Covid19 countermeasures (i.e. costs of testing, adapting to social distancing policies etc.). However, the economic case for hosting such events is based on the increase in economic activity (infrastructure development, job creation and the multiplier effect, event-related revenues), rise in tourists and spending (supported by enhancement to key tourism infrastructure e.g. extension of the Dubai Metro to the Expo, roads to and hotels near the Expo etc.), building the intangible “Dubai brand” as well as other qualitative and social impacts (strengthening trade and business with global counterparts, the “feel-good” factor – more important during a pandemic when trying to return to “normal”).

Expo 2020 has prioritized health and safety guidelines (including a mask mandate), and plans to dazzle the rest of the world with its AI-assisted queue and crowd controls and roving paramedics. A trial period earlier this year saw these practices being tested as residents previewed the area. While this should put visitors’ minds at ease, we expect that the Expo will benefit from UAE residents’ multiple visits (domestic) in addition to those from its major regional and  international source countries (India, Saudi Arabia, UK, Russia etc.). Having hosted 2.5mn overnight visitors in H1 2021, and 5.51mn persons in 2020 (of which 3.27mn were in Jan-Feb), Dubai has already gained sufficient experience to safely secure visitors (& manage events during a pandemic – this is just scaling it up many times over!).

Will the Expo affect UAE’s growth prospects?

In 2020, UAE’s growth fell by 6.1% yoy dragged down by a 7.7% plunge in private sector activity. By economic activity, four sectors saw double-digit declines last year: accommodation and food (-23.6%), transport (-15.5%), wholesale and retail (-13.1%), construction (-10.4%). Not surprising considering that these sectors were directly affected by the pandemic. This is in addition to the oil sector which fell by 6%, given compliance with lower production levels agreed by the OPEC+ bloc. However, the UAE’s diversification policy measures have meant that the oil sector now accounts for less than 1/3-rd of GDP, thereby lessening the impact of the global slowdown in the demand for oil. However, the sectors it diversified into – including trade, tourism and hospitality – were significantly impacted by Covid19.

How soon these sectors recover is a critical question. High immunization rates and the easing of restrictions allowing for tourists’ entry, along with the ability to host global conferences, entertainment and sporting events have already boosted the confidence of consumers and businesses. Consider the UAE’s non-oil sector PMI: at 54 in Jul, this was the highest reading since Jul 2019; it has already improved to an average reading of 52.2 in H1 this year vs 50.2 in H2 2021, thanks to the pace of vaccination, improvements in domestic demand and recovery in employment. Tourism numbers and hotel occupancy rates have been picking up, despite having restricted entry from India (during its Covid19 wave), the UK (since UAE was placed on UK’s Red and Amber lists requiring mandatory “quarantine on return”) and direct travel from Saudi Arabia still suspended. Higher frequency indicators like mobility, traffic and money supply growth also indicate a broad-based improvement.

Some pain points need to be tackled, key among them being the dip in loans to the private sector. Private sector loans, which accounted for roughly 70% of overall loans in H1 2021, witnessed a marginal 0.4% growth year-to-date (till Jun) vis-à-vis the 1.7% uptick in loans to GREs. Furthermore, funding to SMEs remains trivial, with the Jun reading at 12.2% of overall business and industrial sector credit and just 5.9% of overall domestic credit.

Standing at the 1-month countdown to the start of the Expo, the 192 pavilions, around 50k employees (so far) and the related infrastructure are ready to receive the world: a successfully run event will boost Dubai’s/ UAE’s image as a global frontrunner in safely hosting large-scale events during the pandemic era. The Expo will act as a stepping stone for potential investors to buy into “Brand Dubai” and move businesses and families into the country. A long list of recent reforms including visa changes (long-term golden visas, retirement visas, remote visas) and ownership rules (allowing 100% foreign ownership outside the free zones) make Dubai/ UAE an attractive global hub to live, work and play. A successfully managed Expo will only further accentuate this message to the world.

 

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Weekly Economic Commentary – Aug 29, 2021

Markets

Another week where investors overlooked rising Covid19 cases, vaccine efficacies and growth concerns: major global equity markets ended the week higher, with the US markets rallying after the Fed chair’s Jackson Hole speech indicating a gradual removal of stimulus measures this year; Europe’s Stoxx600 closed higher, helped by commodity linked stocks; MSCI Asia ex-Japan rose as well, posting its best weekly gain since Feb. Regional markets showed a mixed picture, with Tadawul clocking in a second consecutive weekly loss while Egypt and Dubai gained upwards of 2%. Among currencies, dollar slipped after Powell’s speech while the British pound posted a 1% weekly gain. Brent and WTI oil prices closed higher by more than 10% (on supply concerns after companies shut production ahead of Hurricane Ida) – the biggest weekly gains since Jun 2020 – while gold price also gained by 2% compared to a week ago.

Weekly % changes for last week (26-27 Aug) from 19 Aug (regional) and 20 Aug (international).

Global Developments

US/Americas:

  • GDP growth in the US increased by 6.6% at an annualized rate in Q2, higher than the initial estimate of 6.5%. Consumer spending also nudged up, rising by 11.9% in Q2 (from the 11.8% reading in the previous estimate). The PCE core index jumped by 6.1% yoy in Apr-Jun from the previous quarter after rising 2.7% in the previous three months.
  • Personal income grew by 1.1% while spending increased by 0.3% in Jul. Goods spending fell by 1.1%, dragged down by motor vehicles, while spending on services was up by 1%. The PCE index (excluding food and energy) inched up by 0.3% mom in Jul (Jun: 0.5%), posting the smallest gain in 5 months.
  • Durable goods orders inched down by 0.1% mom in Jul (Jun: 0.8%), the first decline in 3 months. Non-defense capital goods excluding aircraft remained unchanged after Jun’s 1% uptick.
  • Initial jobless claims inched up to 353k in the week ended Aug 20th, from 349k the week before, slowing the 4-week average to 366.5k. Continuing claims dropped 3k to 2.86mn in the week ended Aug 13th.
  • Markit manufacturing PMI fell to 61.2 in Aug (Jul: 63.4), with new orders slowing slightly while the rate of both input and output price inflation was the fastest on record; services PMI slowed to 55.2 (Jul: 59.9) – the weakest pace of expansion since Dec 2020 – with new export orders falling for the first time since Feb.
  • Richmond Fed manufacturing index tumbled to 9 in Aug (Jul: 27), posting the lowest reading since Jul 2020; wage index hit a record-high but workers were difficult to find, according to many respondents. Separately, Chicago Fed national activity index inched up to 0.53 in Jul (Jun: -0.01).
  • Existing home sales were up by 2% mom and 1.5% yoy to a seasonally adjusted annualized rate of 5.99mn in Jul, rising for the 2nd consecutive month. The median price of an existing home sold in July was higher by 17.8% yoy to USD 359,900. New home sales inched up by 1% mom to 708k units in Jul though sales declined by 27.2% yoy.

Europe:

  • Germany’s GDP rebounded by 1.6% qoq and 9.4% yoy in Q2, as per the last and final reading, up from a downwardly revised 2% contraction in Q1. Both private consumer (+3.2%) and government spending (+1.8%) supported growth in the quarter. The Bundesbank on Mon disclosed that the full-year growth targets may not be met given the Delta variant’s impact.
  • Germany’s Ifo business climate index declined by 1.3 points to 99.4 in Aug; expectations posted a drop of 5 points to 97.5. However, the current assessment of business situation increased to 101.4 in Aug (Jul: 100.4).
  • The preliminary manufacturing PMI in Germany declined to a 6-month low of 62.7 in Aug (Jul: 65.9), with the output index slipping to 59, its joint lowest in almost a year. Services PMI fell to 61.5 from 61.8 in the previous month. Overall, inflationary pressures remained high with a near-record rise in business costs.
  • Eurozone’s manufacturing PMI (preliminary) fell to a 6-month low of 61.5 in Aug (Jul: 62.8), with slower growth linked primarily to supply chain constraints while inflows of new orders remained strong thanks to growing demand. Services PMI ticked down to 59.7 from 59.8 the month before though service sector jobs growth reached the highest since Sep 2018.
  • German GfK consumer confidence survey declined further to -1.2 in Sep (Aug: -0.4), the lowest level in three months.
  • UK’s preliminary composite PMI dropped for the 3rd consecutive month in Aug, falling to a 6-month low of 55.3 (Jul: 59.2). Manufacturing PMI slipped to 60.1 from 60.4 in Jul, with supply issues resulting in weaker production growth alongside a slowdown in job creation. Services PMI declined at a much sharper rate: down to 55.5 in Aug (Jul: 59.6).

Asia Pacific:

  • The preliminary reading of Japan’s manufacturing PMI stood at 52.4 in Aug, edging down from Jul’s 53. New order inflows increased, but supply chain disruptions affected production inputs. Staffing levels increased at the quickest pace since Jan 2020.
  • Japan’s leading economic index increased to 104.1 in Jun (May: 102.6), unrevised from the preliminary estimate – the highest reading since Feb 2014.
  • Inflation in Tokyo remained unchanged at -0.4% in Aug (Jul: -0.4%). Excluding food and energy, inflation was at -0.1% (Kul: -0.4%). Core CPI (excluding food but including oil products) was flat in yoy terms, not declining for the 1st time in 13 months.
  • India announced an INR 6trn National Monetization Pipeline last week, to be undertaken over the next 4 years, with an aim to monetize its state assets covering roads, railways, power, oil and gas pipelines, and telecommunication In the current fiscal year, assets monetization is expected to be to the tune of INR 880bn.
  • South Korea became the first developed Asian nation to raise interest rates since the beginning of the pandemic: rate was increased from a record low of 0.5% to 0.75%. The move is expected to curtail the surge in household debt and home prices. (Sri Lanka was the first Asian nation to raise rates earlier this month, at its Aug 19th meeting).
  • Inflation in Singapore edged up to 2.5% in Jul (Jun: 2.4%), largely a result of higher electricity and gas costs. Core inflation rose by 1% yoy – the highest increase since Jun 2019.
  • Industrial production in Singapore fell by 2.6% mom in Jul (Jun: -2.6%), though declining by a larger 7.9% when the volatile biomedical manufacturing was excluded. IP grew by 16.3% yoy, moderating from Jun’s 28% rise.

Bottomline: Preliminary PMI readings for Aug have mostly been on the lower side compared to Jul, with most respondents citing supply side disruptions as one of the key factors dragging down production. At the Jackson Hole meeting, the Fed Chair focused on strong US labour market improvements (“clear progress” towards the maximum employment goal) and signaled the onset of tapering while warning about the risks of tightening prematurely. Markets, including emerging markets, can no longer count on a steady injection of liquidity – be on the lookout for vulnerable corporates & countries with high debt exposure. With mixed signals in the markets (weaker demand from parts of Asia facing a resurgence in Covid19 cases, calls by US President for reversal of production cuts), the OPEC+ meeting this week to potentially revive oil production will be closely watched: we expect OPEC+ to ease supply cuts as planned for Oct (though the Kuwait oil minister reportedly stated that “there may be a halt to the 400k bpd increase”). 

Regional Developments

  • Value of tenders issued in Bahrain jumped by 60% yoy to USD 3.4bn in H1 2021, with the number up to 1070 (+38.4%). Non-oil contracts stood at 762, at a total value of USD 1.6bn. Outside oil, aviation and construction sectors had the highest value of tenders at USD 476mn and USD 413mn respectively.
  • Egypt’s finance minister disclosed that the country was planning to issue its first sovereign sukuk in H2 of the current fiscal year. The government is planning to form a state-owned company to manage sukuk issuance; returns on the sukuk will be taxed in the same manner as Egypt’s treasury bonds.
  • Revenues from Egypt’s Suez Canal grew by 11.2% yoy to USD 3.88bn from Jan 20th to Aug 20th compared to a year ago.
  • Egypt allocated total investments of EGP 65.3bn (USD 4.1mn) for the petroleum sector in the current fiscal year 2021-22: this includes EGP 48.7bn for extraction activities and about EGP 16.6bn for petroleum refining activities. Output from extraction and refining is estimated to touch EGP 710bn at current prices during the year (up 10.5% from 2020-21’s EGP 642.5bn).
  • In a bid to boost Covid19 vaccination rates, Egypt will vaccinate all 4.5mn of its state employees in Aug and Sep. About 15mn doses of Sinovac has been produced locally, and the nation will receive about 5.2mn Pfizer and Moderna doses in Sep.
  • Iraq signed a contract with China’s state-owned PowerChina to build its first solar power plants: the first plant will have a capacity of 750MW and the plan is to boost total capacity to 2000 MW from multiple plants. Though no details were provided about when production would begin, the aim is to reduce dependence on Iranian power imports.
  • Jordan is forecast to grow by 2% this year, according to the IMF, based on a gradual return of tourists to the country and amid rising global demand. This was disclosed after a review of Jordan’s Extended Fund Facility (EFF). The IMF released USD 206mn under the EFF arrangement, bringing the total disbursements to the country to USD 900mn since 2020.
  • Kuwait-based logistics company Agility disclosed that it had applied for a license to establish a digital bank.
  • Kuwait suspended passenger transport by sea due to Covid19 concerns, but shipping operations are expected to continue, according to the ports authority.
  • Fuel prices in Lebanon increased by 66-67% after the subsidy cut: cost of fuels has now almost tripled in the last 2 months since support for imports was decreased.
  • Iranian-backed Hezbollah arranged for a 3rd shipment of fuel from Iran to help ease the fuel shortage in Lebanon, according to a statement on Fri.
  • Lebanon picked Dubai’s ENOC in a tender to swap 84,000 tons of Iraqi high sulfur fuel oil with 30,000 tons of Grade B fuel oil and 33,000 tons of gasoil. The swap tenders are essential as Iraqi fuel is unsuitable for Lebanese electricity generation.
  • The UN secretary general called on all “political leaders [in Lebanon] to urgently form an effective government of national unity” to “bring immediate relief, justice and accountability”.
  • Oman will allow entry for anyone with a Covid19 vaccine certificate from Sep 1st.
  • Qatar’s first legislative polls for 30 members of the 45-seat advisory Shura Council will be held on Oct 2nd, according a decree issued last Sun.
  • Qatar and UAE have helped evacuate more than 40k and 36,500 persons respectively from Afghanistan. Qatar has agreed with the US to temporarily host 8k Afghan nationals while the UAE and Kuwait would host 5k.
  • The total number of funding deals reached 220 in the Middle East and Africa region till mid-Aug this year, compared to 310 investment deals closed in full year 2020, according to a report from Red Seer. Early stage and Series A funding rounds contributed 65% and 18% to the total number of deals. Financial technology and food services were identified as the best performing industries when it comes to investor interest.
  • Saudi lenders increased loan books by a net 13.1% in Q2 from the previous three months, the most in the GCC, according to a Kamco Invest report. Average return on equity was 11.0% for Saudi banks, second in the region after Qatar, and above the average of 9.1%.
  • More than 75% of respondents from the Middle East revealed that their use of digital payment modes has increased by about 10% due to the pandemic, according to a McKinsey report.  About 90% of those surveyed believe that at least half of new users will stick with digital payments and not revert to cash in the post-pandemic era.
  • Covid19 led to an expansion of e-commerce in the Middle East, according to Sitecore research. The region witnessed a 54% yoy growth last year to USD 12.1bn; electronics and retail accounted for over 42% of the total.

Saudi Arabia Focus

  • Non-oil exports in Saudi Arabia grew by 40.5% yoy and 7.2% mom to SAR 23.6bn (USD 6.2bn) in Jun. Oil exports, which accounted for 72% of Jun’s total exports, surged by 123% yoy to SAR 61.5bn (USD 16.4bn). Overall exports in Jun were up by nearly 91.8% compared to a year ago, largely given the low base last year given the Covid19-related impact. Exports to China (its largest trading partner in Jun) accounted for 20% of the total.
  • Saudi Arabia’s industrial sector attracted investments worth SAR 70bn (USD 18.7bn) in Jan-Jul 2021. The number of industrial units totaled 10,166 in the country, with investments over SAR 3trn. In Jul alone, establishment of 48 new factories were approved, with a total investment of SAR 50bn.
  • The vice minister for mining affairs in Saudi Arabia disclosed that mining investments are expected to surge by 150% in the next decade from the current SAR 170-180bn. The investment is likely to create upto 220k jobs.
  • Saudi Arabia’s ICT sector is expected to grow at a compound annual rate of nearly 10% to exceed USD 27bn by 2025. Cloud services are expected to make up to 30% of the total ICT spend in the country by 2030. Various tech initiatives were launched last week, including a new program Hima, which supports innovation in enterprises with a value of SAR 5bn (USD 670mn). The nation aims to be among the top 5 globally in AI, creating almost 25k jobs in data science and AI before 2030.
  • Start-up costs for commerce fees register in Saudi Arabia was reduced by 96% for companies and between 33-75% for enterprises for the first 5 years. SMEs will be exempt from commerce fees register for 3 years. Fees will start in the fourth and fifth year, but at a reduced rate of SAR 500 (USD 133) for entrepreneurs and SAR 200 for entrepreneurs with a capital of less than SAR 375k and whose employees do not exceed five.
  • The contribution of sports to Saudi Arabia’s GDP grew to SAR 5bn in 2019 from SAR 2.4bn (USD 640mn) in 2016; this is expected to rise to SAR 18bn by 2030. Currently, SAR 11bn worth of major sports projects are being planned or under construction in the country.
  • Saudi Arabia’s General Authority for Military Industries has identified 74 investment opportunities to which foreign and local firms are being invited to invest in. The number of licensed companies in Saudi Arabia’s military sector reportedly increased by 41% to 99 in H1 this year (85% were local firms).

UAE Focus

  • Abu Dhabi Securities Exchange announced that trading commissions would be halved to 0.025% starting Sep 1st. Separately, both ADX and DFM will extend trading hours by one hour from Oct 3rd. Both moves are aimed at increasing market activity and liquidity.
  • The UAE’s Emirates Global Aluminium is planning to IPO in 2022, and likely to offer between 10-20% of its shares, reported Reuters. The company, one of the world’s largest aluminium producers, is valued between USD 16-19bn.
  • Dubai will establish a specialized court within the Court of First Instance and Court of Appeal to focus on financial crimes including money laundering.
  • Abu Dhabi DED identified 725 industrial activities eligible for full foreign ownership. Separately, in a bid towards self-sufficiency, the Abu Dhabi Industrial Development Bureau plans to add 50 industrial facilities over the next three years to manufacture locally basic commodities from food to medical supplies.
  • The Fujairah Oil Terminal is investing an estimated USD 45mn to upgrade infrastructure by end-2022: this will see the terminal connected to the Port of Fujairah’s very large crude carrier (VLCC) loading facility and the Abu Dhabi Crude Oil Pipeline pipeline.
  • The Mohammed bin Rashid Innovation Fund will support 24 new businesses (selected as part of the Fund’s accelerator programme) to expand operations and enter new markets. Of these 13 businesses are based in the UAE while the others have a presence in the country.
  • The DIFC Courts revealed an 11% increase in volume of cases in H1 2021 in its main Court of First Instance, with its value totaling AED 2.8bn (+27% yoy). Virtual hearings have supported the Courts handling of rising claims, and 50% of claims originated from parties (not located within the centre) electing to use the DIFC courts to resolve disputes.
  • Masdar City’s new business packages, with license fees that range from AED 1,000 to 12,000, is expected to attract more companies to set up in the free zone.
  • Dubai schools’ regulator announced a return to 100% in-person learning from Oct 3rd, with a switch to online learning should positive cases be detected.
  • UAE’s unvaccinated Federal employees are required to take a PCR test every 48 hours, according to the latest set of regulations. This is also required of consultants and experts visiting government buildings or attending meetings.
  • All fully vaccinated (as per the WHO-approved list) tourists from across the world will be eligible to apply for UAE visit visas starting Aug 30th. The visitors will require a mandatory rapid PCR test at the airport and need to register on the Al Hosn app.

Media Review

Analysis: Leaderless Lebanon on slippery slope to mayhem (with Dr. Nasser Saidi’s comments)

https://www.reuters.com/world/middle-east/leaderless-lebanon-slippery-slope-mayhem-2021-08-23/

What are SDRs and how might Lebanon use them? L’Orient Today (with Dr. Nasser Saidi’s comments)

https://today.lorientlejour.com/article/1272940/what-are-sdrs-and-how-might-lebanon-use-them.html

Nemesis: Why the west was doomed to lose in Afghanistan

https://www.prospectmagazine.co.uk/world/nemesis-why-the-west-was-doomed-to-lose-in-afghanistan-911-taliban

Rich countries want to strike trade deals in Africa

https://www.economist.com/middle-east-and-africa/2021/08/21/rich-countries-want-to-strike-trade-deals-in-africa

Is There a Nuclear Option for Stopping Climate Change?

https://www.nytimes.com/2021/08/26/opinion/climate-change-nuclear.html

The Arab League has done little for its members in nearly 70 years (with Dr. Nasser Saidi’s comments)

https://www.economist.com/special-report/2021/08/24/the-arab-league-has-done-little-for-its-members-in-nearly-70-years

Central banks should not mandate ‘green’ investments: Raghuram Rajan

https://www.reuters.com/world/india/central-banks-should-not-mandate-green-investments-raghuram-rajan-2021-08-26/

 

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Weekly Economic Commentary – Aug 22, 2021

Markets

Equity markets had a difficult week as concerns over the Delta variant and potential economic slowdown weighed on sentiment. US indices reported losses and Stoxx600 posted its worst week since Feb. Weak data from China through the week put pressure on Asian markets which closed 4.8% lower vs a week ago and the Hang Seng Index dropped by 5.8%. Among regional markets, Tadawul posted the highest close since Jan 2008 last Sun (11,352) but slipped by 1.1% for the week; banks supported the boost in Qatar equities. The dollar gained by 1% in the week (most in 2 months), GBP slumped to a month-long low versus the greenback and CNY slipped to a new 3-week low of 6.51. Oil prices fell, with Brent closing at USD 65.18 a barrel on Fri: biggest weekly loss in 9 months+. Gold price was up slightly.

Weekly % changes for last week (19-20 Aug) from 12 Aug (regional) and 13 Aug (international).

Global Developments

US/Americas:

  • Industrial production in the US inched up by 0.9% mom in Jul (Jun: 0.2%), with gains largely due to the increase in motor vehicle production (+11.2%). Manufacturing output jumped 1.4% last month after falling 0.3% in Jun and remained 0.8% above its pre-pandemic level. Capacity utilization increased to 76.1% (75.4%).
  • FOMC minutes indicated that many officials were readying to announce/ implement a taper of the bond-buying programme before year-end. A broad consensus was emerging as to “when” to start tapering.
  • Initial jobless claims eased to 348k in the week ended Aug 13th, from 377k the week before, slowing the 4-week average to 377.75k. Continuing claims slipped to 2.82mn in the week ended Aug 6th, down by 79k from the week before.
  • Retail sales slipped by 1.1% mom in Jul, following the upwardly revised 0.7% reading in Jun. Online sales dropped by 3.1% and clothing stores reported a 2.6% decline as well though spending at restaurants and bars ticked up by 1.7%. Excluding autos, sales fell by 0.4% from 1.6% a month ago.
  • Housing starts in the US fell by 7% mom and 2.5% yoy to 1.534mn in Jul: single-family starts fell by 4.5% to 1.111mn while multi-family segment plunged by 13.1% to 423k. Building permits increased by 2.6% to 1.635mn in Jul, following three straight months of declines: single-family permits fell by 1.7% while multi-family projects surged by 11.2%.
  • Philadelphia Fed manufacturing survey index slipped to 19.4 in Aug (Jul: 21.9), the lowest reading since Dec. Employment index meanwhile rose to a record-high of 32.6 (Jul: 29.2).

Europe:

  • GDP in the eurozone grew by 2% qoq and 13.6% yoy in Q2, confirming the estimate announced previously. Spain and Italy posted the largest increases, at 2.8% qoq and 2.7% respectively while Germany and France expanded by a more modest 1.5% and 0.9%. Employment in the eurozone increased by 1.8% yoy in Q2, offsetting the 1.8% drop in the prior quarter.
  • Inflation in the eurozone ticked up to 2.2% yoy in Jul (Jun: 1.9%), the highest since Oct 2018, with energy prices up by 14.3% while food and services costs rose by 1.6% and 0.9% respectively. Core CPI eased to 0.7% yoy (Jun: 0.9%).
  • Producer price index in Germany increased by 1.9% mom and 10.4% yoy in Jul (Jun: 1.3% mom and 8.5% yoy). This is the highest yoy increase since Jan 1975 and was driven by intermediate goods and energy (which rose by 2.3% and 4.1% respectively).
  • Inflation in the UK eased to 2% yoy in Jul (Jun: 2.5%), slowing for the first time since Feb. Core CPI eased to 1.8% from 2.3% the month before. Retail price index eased to 0.5% mom (and 3.8% yoy) from 0.7% mom (and 3.9% yoy) in Jun. PPI core output gained: rising to 3.9% yoy (Jun: 3.1%).
  • UK’s ILO unemployment rate dropped to 4.7% in the 3 months to Jun, down by 0.2 ppt from the previous quarter. Job vacancies in the UK increased to a record high of above 1mn in May-Jul. Average earnings jumped by 8.8% in the 3 months to Jun (May: 7.4%) including bonuses and 7.4% excluding bonuses.
  • Retail sales in the UK unexpectedly fell by 2.5% mom in Jul, the biggest drop since Jan; overall, sales are 5.8% above their pre-pandemic levels. Sales at food and non-food stores were down by 1.5% and 4.4%. Excluding fuel, sales were down by 2.4% mom following an unchanged reading in Jun.

Asia Pacific:

  • The People’s Bank of China kept benchmark interest rates unchanged for the 16th straight month: one-year loan prime rate stands at 3.85% and five-year LPR at 4.65%.
  • The latest data releases from China showed a sharp slowdown from previous months’ performance: industrial production increased by 6.4% yoy in Jul, easing from 8.3% the month before. Retail sales expanded by 8.5%, also slowly sharply from the 12.1% growth in Jun. Fixed asset investment grew by 10.3% in Jan-Jul, slowing slightly after the 12.6% gain till Jun, and easing in both public (7.1% vs 9.6% in H1) and private (13.4% vs 15.4%) sectors. Covid19 infections and supply chain disruptions (also due to the floods) are affecting businesses and could lead to further slowdowns in Aug.
  • Japan’s GDP rebounded at an annualized 1.3% in Q2, after a 3.7% slump in Q1, with private consumption rising by 0.8% qoq (Q1: -1%) and capital expenditure up by 1.7% (Q1: -1.3%). In qoq terms, growth was up by 0.3% following the 0.9% drop the previous quarter.
  • Inflation in Japan clocked in at -0.3% yoy in Jul (Jun: -0.5%), partly due to a change in the base year for CPI; excluding food and energy, inflation was down to -0.6% from Jun’s -0.9%.
  • Industrial production in Japan grew by 6.2% mom and 23% yoy in Jun (May: -6.5% mom), with production in the auto industry posting a 22.6% increase from a month ago and an 8.9% rise in production machinery.
  • Japan posted a trade surplus of JPY 441bn (USD 4.02bn) in Jul, higher than the JPY 384bn the prior month. Exports grew by 37% and imports by 28.5%; Japan posted a trade surplus of JPY 612.88bn with US and a deficit of JPY 56.93bn with China (its largest trading partner).
  • Japan’s core machinery orders dropped by 1.5% mom in Jun (May: +7.8%), falling for the first time since Feb. Non-manufacturing orders slowed (3.8% from 10% in May) while manufacturing orders grew faster (3.6% from 2.8%).
  • Wholesale price inflation in India eased to 11.16% yoy in Jul (Jun: 12.07%), partly due to the low base effect while food costs remained unchanged compared to a year ago (Jun: 3.09%) and fuel costs slowed (26.02% from 32.83%).

Bottomline: Last week’s weaker Chinese macro data called attention to the slowdown in demand as the country tries to clamp down on the latest bout of Covid19 cases. This week sees the release of preliminary PMI readings for Aug: in all likelihood, supply chain disruptions and delays are going to be a major talking point. Recent closure of the Ningbo Zhoushan port in China (following a Covid19 case) is leading to congestion at several other Chinese ports and an uptick in freight charges (the Freightos Baltic Global Container Index touched a record high of USD 9,770 per forty-foot equivalent (FEU) container last week). This week also sees the annual meeting of central bankers at Jackson Hole: could the Fed signal an easing of its monetary support here? Already, the White House revealed that it will not be pushing for an extension of the pandemic unemployment benefits when it expires Sep 6th claiming “back to work” labour conditions.

Regional Developments

  • Budget deficit in Bahrain narrowed to BHD 520mn in H1 2021 (-35% yoy), supported by a 23% pick up in revenues (largely due to the 33% rise in oil revenues) and a 4% drop in expenditures. Overall, revenues (& expenditures) in H1 account for 46.5% (& 45.4%) of the total budgeted for the full year 2021.
  • Bahrain’s national-origin exports surged by 62% yoy to BHD 327mn (USD 862mn) in Jul 2021. Saudi Arabia, US and Egypt were the top destinations, together accounting for 48% of overall exports. Imports ticked up by 10% to BHD 418mn with Brazil, China and UAE the top 3 source nations.
  • E-services transactions in Bahrain accelerated in H1 this year, growing almost 4-fold to over BHD 200mn. The number of transactions doubled to over 1.6mn during the period.
  • Bahrain’s carbon footprint declined by 25% last year, alongside a “slight” improvement in air quality (by 4%), according to a Derasat study.
  • Net FDI inflows into Egypt accelerated by 47.3% yoy to USD 1.429bn in Jan-Mar 2021 (Q3 of the 2020-21 financial year). Non-oil net FDI increased by 21.7% to USD 1.911bn.
  • Egypt’s external debt touched USD 134.8bn in Mar 2021, rising from USD 11.3in Jun 2020. This jump was a result of the increase in net disbursements of loans and facilities, in addition to depreciation of the dollar. Long-term debt accounted for 90.2% of the total.
  • Remittances into Egypt increased by 13% yoy to USD 28.5bn during Jul 2020-May 2021, according to the central bank. In May alone, remittances surged by 45.2% to USD 2.6bn.
  • Unemployment rate in Egypt declined to 7.3% in Q2 2021 (Q1: 7.4%): male unemployment stood at 5.4% while female unemployment was 15%.
  • Egypt could lose over EGP 31mn daily (and more than EGP 1bn a month) in tourism revenues if it continues to stay on UK’s travel “red list”, according to research by WTTC. UK was the 3rd largest source market for the country, with visitors from the country accounting for 5% of all international arrivals in 2019. It was also disclosed that around 844k jobs were lost in the tourism industry last year.
  • Egypt allocated EGP 3.9bn towards social housing projects in 2019-20, according to the finance minister. This compares to EGP 7.8bn towards cash support and public facilities in social housing projects in 2020-21.
  • Mobile wallets in Egypt increased by 15.6% yoy to 16.3mn in H1 2021 and overall transactions touched 81mn (+175%), according to the National Telecom Regulatory Authority.
  • Egypt aims to build 17 renewable energy-powered desalination plants by 2025: the initiative is estimated to cost USD 2.5bn and each of these plants will be built, owned and operated by Egypt’s sovereign wealth fund in partnership with a group of local and foreign investors, according to the fund CEO, reported Bloomberg.
  • Egypt’s sovereign sukuk law has been ratified by the President: the next step is the issuance of executive regulations three months after the law comes into effect.
  • Remittances into Jordan inched up by 0.2% yoy to JOD 1.174bn in H1 this year, according to the central bank. Remittances from Qatar into Jordan exceeded USD 220mn, doubling from a year ago; there are about 65k Jordanians in Qatar.
  • Tourism revenues in Jordan declined by 44.8% to JOD 441.4mn in H1 2021; this also compares to JOD 1.9bn clocked in pre-pandemic during H1 2019.
  • Kuwait’s Cabinet announced that all government departments are to reduce spending by no less than 10% in the current fiscal year (2021-22). Furthermore, the government is considering a maximum threshold (of KWD 3000) for the disbursement of national labour support to private sector employees as well as spending on medical treatments abroad. Separately, Reuters reported that the finance minister offered his resignations days after the set of government measures were announced.
  • Following the approval of a “request for the Bank of Lebanon to open a temporary account to cover urgent and exceptional subsidies for fuel”, Lebanon’s cabinet and central bank allocated USD 225mn for the purchase of gasoline, diesel and gas. Subsidies will be totally lifted at end-Sep.
  • The Lebanese presidency disclosed that the US would assist with electricity provision. The statement further disclosed that the plan involved provision of Egyptian natural gas to Jordan for generation into additional electricity which would then be transmitted to Lebanon via Syria, as well as facilitating the transfer of natural gas to Lebanon. Financing the cost of gas is being negotiated with the World Bank.
  • UNICEF warned, citing the fuel crisis, that more than 4 million people in Lebanon could face a critical shortage of water or be cut off completely within a few days.
  • Oman eased its Covid19 nighttime curfew (8pm-4am) from Saturday. From Sep 1, restrictions will be reimposed during those hours on unvaccinated persons. Furthermore, vaccination will be introduced as a necessary condition for visitors into Oman, in addition to the 7-day quarantine requirement.
  • Domestic production and import of natural gas in Oman increased by 12.1% yoy to 24.71bn cubic metres by end-Jun, according to NCSI.
  • Oman announced that 19,023 job opportunities were created in the government and private sectors in H1 this year: this accounts for 58.9% of the total target for this year.
  • Expenditure by Oman’s ministry of health increased by 22.6% yoy to OMR 972.5mn in 2020. Employees in the ministry totaled 38,566 at end-Dec, with an Omanisation rate of 73%.
  • Net profits of Moody’s-rated Qatari banks returned to pre-pandemic levels in H1 2021 despite higher levels of provisioning charges. Net profits for these banks grew by 12% yoy and 1% higher than H1 2019 to QAR 11.8bn (USD 3.2bn).

Saudi Arabia Focus

  • Consumer price inflation in Saudi Arabia slowed to 0.4% yoy in Jul, largely due to the uptick in Jul 2020 when VAT was hiked to 15% (on a monthly basis, prices were up by 0.2%). Transport costs rose by 7.8% and food and beverages increased by 1.2%. However, food costs are now up 8.4% on average this year (till Jul) vs overall inflation at 4.8%.
  • Wholesale prices inflation in Saudi Arabia increased to 11.9% yoy in Jul (Jun: 19.76%), as the effect from the Jul 2020 VAT hike dissipates. Other transportable goods, with a weightage of 33.72% and which includes refined petroleum products prices, reported the largest rise in Jul (+20.49%). Rising global prices of metals and electrical machinery are also reflected in the country.
  • Industrial production in Saudi Arabia increased by almost 12% in Jun 2021, attributed mostly to the increase in oil production as non-oil manufacturing sector activity dropped by 4.2% yoy and 0.4% mom.
  • Saudi Aramco is planning to raise at least USD 17bn from the sale of a minority stake in its gas pipelines – higher than the USD 12.4bn from its oil pipeline deal. Reuters reported that the deal size may include USD 3.5bn of equity and the remainder funded by bank debt.
  • Crude oil exports increased for the 2nd straight month in Jun: it grew by 5.6% yoy to 5.965mn barrels per day (bpd). Production rose by 383k bpd to 8.927mn bpd in Jun.
  • Saudi Arabia is resuming negotiations for Free Trade Agreements (FTAs) with 11 countries including China, India, Australia, the Philippines and the US among others, reported Okaz paper. The Saudi Exports Development Authority announced that it would identify over 120 international tendering opportunities across target countries, mainly covering construction and industrial supplies and infrastructure projects.
  • The Saudi EXIM Bank has accepted more than 81 financing requests worth SAR 9bn (USD 3bn), according to its CEO. The Bank has signed an MoU with the Federation of Saudi Chambers to provide loans and other financial services to exporters and importers.
  • Consumer spending in Saudi Arabia increased to SAR 71bn (via 104.7mn transactions) during the week of Aug. 8-14. About SAR 1.3bn was spent on food and beverages, SAR 1.2bn on restaurants and cafes and SAR 1.1bn on “other sectors”.
  • Home ownership subsidies in Saudi Arabia, disbursed by the Real Estate Development Fund, touched SAR 29.6bn over 4 years ending Jun 2021. More than 520k families were supported with the funds.
  • Cement output in Saudi Arabia dropped by 20% yoy to 3.6mn tons in Jul, in spite of the revival in the real estate sector. Average selling price has declined by 15% compared to last year, according to the Arabian Cement CEO.
  • The August 2021 issuance under the Saudi Arabian Government SAR-denominated Sukuk Program has been closed: the size was set at SAR 358bn (USD 3bn). Saudi Arabia had approximately SAR 854bn debt outstanding by year-end 2020, of which 59% are SAR-denominated and 41% in foreign currency, as per the National Debt Management Center.
  • Trading in US equities via Saudi CMA licensed institutions fell by 25.4% yoy to SAR 60.65bn (USD 16.17bn) in Q2 2021, falling for the 3rd consecutive quarter. US accounts for about 96.9% of total trades in foreign markets, followed by GCC (1.9%), Arab markets (0.4%) and the rest in Asian markets.
  • Saudi Arabia plans to build two renewable energy solar plants (with a capacity of 600MW) on two plots with a total area of 12mn sqms: these will be located in the Third Industrial City in Jeddah and the Industrial City in Rabigh.

UAE Focus

  • The UAE central bank has issued new guidelines on anti-money laundering and combatting the financing of terrorism (AML/CFT) to Registered Hawala Providers in the UAE and Licensed Financial Institutions that provide services to RHPs.
  • Abu Dhabi announced an end to the partial lockdown, which restricted movement between midnight and 5am. Furthermore, those vaccinated against Covid19 can enter the emirate if they have a “green pass” on the Al Hosn app: this is also applicable for visitors into the country.
  • Tourism revenues in the UAE increased by 31.4% yoy to AED 11.3bn in H1 2021. Average hotel occupancy rates increased to 62% in H1 from 53.6% in the same period a year ago.
  • After the UK announced UAE’s move to the amber list, in the week from Aug 5-11, flight booking between the two nations surged: to 30% over pre-pandemic levels for tickets from the UAE to the UK, and to 8% over 2019 levels in the opposite direction, according to aviation analytics firm ForwardKeys.
  • DP World’s profit surged by 51.8% yoy to USD 475mn in H1 2021. Revenues increased by 21% to USD 4.95bn during the period.
  • The 300MW first stage of the 900MW fifth phase of the Mohammed bin Rashid Al Maktoum Solar Park was inaugurated last week: with investments amounting to AED 2.058bn, this phase will provide clean energy to over 270k residences in Dubai and reduce 1.18mn tonnes of carbon emissions annually.
  • The Emirati Human Resources Development Council in Dubai will develop a 100-day action plan to enhance the employment of UAE nationals in the private sector. This will include coordination with education sector to link learning with job market requirements as well as partnership measures with companies and free zone entities in the private sector.

Media Review

The Afghan economy in charts: what has changed in two decades?

https://www.ft.com/content/bfdb94a5-654b-4286-8da9-34c0ff3b88aa

Central banks should make clear what QE is for, and then reverse it

https://www.economist.com/leaders/2021/08/21/central-banks-should-make-clear-what-qe-is-for-and-then-reverse-it

Saudi Arabia’s Vision 2030 aims to empower the non-profit sector. Three areas to focus on

https://www.atlanticcouncil.org/blogs/menasource/saudi-arabias-vision-2030-aims-to-empower-the-non-profit-sector-here-are-three-areas-to-focus-on

The Taliban takeover of Afghanistan: what it means for

US and Afghanistan: https://www.economist.com/leaders/2021/08/21/the-fiasco-in-afghanistan-is-a-grave-blow-to-americas-standing

India & Pakistan: https://www.economist.com/asia/2021/08/21/what-the-taliban-takeover-of-afghanistan-means-for-india-and-pakistan

China: https://www.economist.com/china/2021/08/21/china-is-happy-to-see-america-humbled-in-afghanistan

 

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Weekly Insights 19 Aug 2021: Charts on Global Trade Recovery + Tourism in the Middle East + Fiscal deficits in Bahrain & Kuwait + Consumer & Producer Prices in Saudi Arabia

Weekly Insights 19 Aug 2021: Charts of the Week (Global Trade Recovery + Middle East’s Tourism Indicators + Fiscal deficits in Bahrain & Kuwait + Consumer & Producer Prices + Industrial Production in Saudi Arabia)

1. Recovery in trade in 2021, though the pace is slowing; port closures to lead to delays & higher costs

  • The WTO’s latest Goods Trade Barometer, with a record high reading of 110.4, underscores the strength of recovery: it is up more than 20 points in year-on-year terms. However, data suggest that the index is rising at a slower pace. Overall, the WTO expects world merchandise volume to grow by 8% this year (vs 2020’s 5.3% drop).
  • All components identified as drivers of trade were above trend (100): but the easing of the forward-looking export orders in Jun (vs May) suggests that the uptick seen in the earlier months might be slowing. This is also evident from recent PMIs: rate of expansion in JP Morgan’s global manufacturing PMI had slowed further from May’s 15-year high.
  • Furthermore, supply chain disruptions will continue to have a negative impact: the recent closure of the Ningbo Zhoushan port in China (following a Covid19 case) is leading to congestion at several other Chinese ports & likely lead to delays as well as uptick in freight charges. Case in point: Freightos Baltic Global Container Index, a weighted average of 12 major global container routes, hit a record high of USD 9,770 per forty-foot equivalent (FEU) container this week.

2. Tourism: As regions with large domestic markets recover faster, no surprise that the Middle East lags

3. Bahrain’s deficit narrows in H1 2021, thanks to a rise in oil revenues; debt needs taming

  • Budget deficit in Bahrain narrowed to BHD 520mn in H1 2021 (-35% yoy), supported by a 23% pick up in revenues (largely due to the 33% rise in oil revenues).
  • Overall, revenues (& expenditures) in H1 account for 46.5% (& 45.4%) of the total budgeted for the full year 2021. The budget, based on oil price at USD 50 per barrel, is estimated to post a deficit of BHD 1.2bn in 2021. According to the IMF, the fiscal breakeven price for Bahrain is USD 88.2 this year & USD 85.8 in 2022.
  • Bahrain needs to reduce debt once economic recovery is back on track: its gross public debt rose to 133% in 2020 and is forecast to increase to 155% by 2026. Its gross external debt is meanwhile projected to ease slightly to 245.6% of GDP this year (2019: 225.7% & 2020: 257.7%).

4. Kuwait’s fiscal deficit almost triples in 2020-21 vs a year ago; salaries & subsidies continue to account for a substantial portion of overall expenditure

  • Kuwait posted a fiscal deficit of KWD 10.8bn in 2020-21, compared to USD 3.9bn a year ago.
  • Revenues plunged by 39% yoy in 2020-21, largely due to a 42.8% drop in oil revenues; taxes and fees fell by 10.6%. Oil revenues accounted for 84% of overall revenues last year and close to 90% the year before
  • Overall expenditures was little changed (+0.7% yoy) and its composition remained more or less steady: salaries and grants together accounted for 60% of overall expenses; a 10% drop in goods & services was offset by a 12% uptick in other expenses
  • It is hence little wonder that the Cabinet announced this week that all government departments are to reduce spending by no less than 10% in the current fiscal year (2021-22). Furthermore, the government is considering a maximum threshold (of KWD 3000) for the disbursement of national labour support to private sector employees
  • Kuwait’s debt levels are substantially lower (vs Bahrain), but it urgently needs to: (a) boost its non-oil revenues with the introduction of VAT; (b) reduce subsidies and introduce other expenditure-reducing measures; and (c) push Parliament to pass the debt law which has limited its ability to issue international debt to finance spending (among others)

5. Prices are on the rise in Saudi Arabia (taking into consideration effect of a higher base last year) while industrial production gains (due to oil)

  • Consumer price inflation slowed to 0.4% yoy in Jul, largely due to the uptick in Jul 2020 when VAT was hiked to 15% (on a monthly basis, prices were up by 0.2%). However, food costs are now up 8.4% on avg this year (till Jul) vs overall inflation at 4.8%
  • Wholesale prices increased to 11.9% yoy in Jul (Jun: 19.76%), as the effect from the Jul 2020 VAT hike dissipates. Other transportable goods, with a weightage of 33.72% and which includes refined petroleum products prices, reported the largest rise during the month (+20.49%). Rising global prices of metals and electrical machinery are also reflected in the country.
  • Lastly, industrial production in Saudi Arabia increased by almost 12% in Jun 2021, attributed mostly to the increase in oil production as non-oil manufacturing sector activity dropped by 4.2% yoy and 0.4% mom.

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Weekly Economic Commentary – Aug 15, 2021

Markets

Global stock markets – including S&P 500, Dow Jones Industrial, Stoxx600, MSCI World – continued an upward trajectory posting new record highs thanks to stronger-than-expected earnings results. Meanwhile, surging Covid19 cases in wider Asia-Pacific and regulatory crackdown in China cast a shadow on equities. Regional markets were mostly up: corporate earnings supported the uptick and Abu Dhabi gained the most, also hitting a record high early in the week (thanks to International Holding (IHC)). The dollar strengthened and the euro was down (inching near a 4-month low) for the second consecutive week. Brent was relatively stable around the USD 70-mark while WTI edged up slightly in spite of the IEA’s warning of slowing oil demand and gold price rose by 0.9%.

Weekly % changes for last week (12-13 Aug) from 5 Aug (regional) and 6 Aug (international).

Global Developments

US/Americas:

  • Inflation in the US moderated slightly to 0.5% mom in Jul (Jun: 0.9%) while in yoy terms, inflation held steady at 5.4% (a 13-year high). Excluding food and energy, prices eased to 0.3% mom from 0.9% the month before. In yoy terms, core inflation stood at 4.3%, down from Jun’s 4.5%.
  • Producer price index increased to 7.8% yoy in Jul (Jun: 7.3%), the largest increase in more than a decade. Excluding food and energy, PPI inched up to 6.2% (Jun: 5.6%).
  • Initial jobless claims fell for a 3rd straight week, declining to 375k in the week ended Aug 6th, from an upwardly revised 387k the week before, raising the 4-week average to 396.25k. Continuing claims slipped to 2.866mn in the week ended Jul 30th. Separately, JOLTS job openings increased to a record 10.073mn in Jun (May: 9.483mn), higher than the 8.7mn persons are officially unemployed.
  • The preliminary reading for non-farm productivity in the US increased at a 2.3% annualized rate in Q2 versus Q1’s 4.3% gain. Unit labour costs increased to 1% from a revised 2.8% fall the quarter before (a bit misleading given the higher impact on lower-wage sectors during the pandemic). Overall output is now 1.2% above pre-pandemic levels but hours worked remain 2.8% below it.
  • Budget deficit in the US widened to USD 302bn in Jul (Jun: USD 174bn), a record for the month. Overall federal deficit touched a total USD 2.5trn for the first 10 months. More fiscal expansion is underway: the Senate passed the USD 1trn infrastructure package last week and this includes USD 550bn in new spending, as well as USD 450bn in previously approved infrastructure investment.
  • Michigan consumer sentiment index declined to 70.2 in Aug (Jul: 81.2), posting the lowest reading since 2011.

Europe:

  • Germany’s exports grew by 1.3% mom while imports were up by 0.6% in Jun, widening the trade surplus to EUR 13.6bn. Exports to non-EU nations grew by 23.7% yoy and 3.1% mom to EUR 53.5bn, largely due to the low base year effect.
  • The ZEW Economic sentiment index for Germany plunged to 40.4 in Aug (Jul: 63.3) while the current situation reading improved to 29.3 from 21.9 the month before.
  • Eurozone’s ZEW Economic sentiment index also slipped to 42.7 in Aug (Jul: 61.2). The indicator for the current economic situation climbed 8.6 points to 14.6 compared to Jul.
  • The harmonized index of consumer prices in Germany remained steady at 3.1% yoy and 0.5% mom in Jul. Separately, wholesale price index inched up to 11.3% yoy in Jul (Jun: 10.7%), recording the fastest pace since Oct 1974 (largely a low base effect). Wholesale prices have been on the rise since Feb 2021.
  • Industrial production in the Eurozone unexpectedly declined by 0.3% mom in Jun, recovering from the 1.1% drop the month before. Production of capital goods and energy declined by 1.5% and 0.6% respectively but this was partially offset by increases in non-durable (+1.6%) and durable consumer goods (+0.1%) and intermediate products (+0.1%).
  • GDP in the UK rebounded in Q2, rising by 4.8% qoq from Q1’s 1.6% dip. Overall, GDP remained 2.2% below the pre-pandemic reading. June’s 1% growth was a result of the easing of lockdown restrictions: services sector expanded by 1.5% (restaurants and cafes were up by over 10%) and a 4.5% rise in health services.
  • Industrial production in UK shrank by 0.7% mom in Jun, due to maintenance in oil field production sites and the volatile pharmaceutical sector; manufacturing production ticked up by 0.2% mom and 13.9% yoy while construction output fell by 1.3% mom.

Asia Pacific:

  • Inflation in China eased to 1% yoy in Jul (Jun: 1.1%), as food prices fell by 3.7% from a year ago (Jun: +1.7%) while non-food prices increased by 2.1% (Jun: 1.7%). while core CPI rose to 1.3% (Jun: 0.9%). Producer price index remained high, inching up to 9% from 8.8% the month before, as prices of crude oil, coal and related products rose.
  • Money supply in China increased by 8.3% yoy in Jul, posting a 17-month low, and slowing from the 8.6% growth reported in Jun. New loans almost halved to CNY 1080bn from Jun’s CNY 2120bn and is the lowest since Oct 2020. Growth of outstanding total social financing (TSF), slowed to 10.7% – the weakest since Feb 2020 – and from 11% in Jun.
  • FDI into China increased by 25.5% yoy to CNY 672.19bn (USD 103.69bn) in Jan-Jul this year. FDI from both Belt and Road nations and the ASEAN grew by 46.3% during the period.
  • Current account surplus in Japan surged by 50.3% yoy to JPY 10.5trn in H1 this year, thanks to an expansion of exports (up 22% to JPY 39.2trn) while imports also grew (+11.6%). This overtakes the pre-pandemic surplus level of a JPY 10.3trn posted in H1 2019. However, the services trade deficit, at JPY 2.1trn in H1 2021, was the worst reading since H2 2012.
  • Industrial output in India increased by 13.6% yoy in Jun, due to a low base effect, and following a 29.3% rise the month before. Manufacturing output grew by 13% from 34.5% in May. The cumulative growth during Apr-Jun was 45% versus a contraction of 35.6% in the same period a year ago. It remains 7% lower compared to pre-Covid levels.
  • GDP in Singapore fell by 1.8% qoq in Q2, following a 2% dip in Q1. In yoy terms, GDP rebounded by 14.7% (higher than the advance estimates of 14.3%), thanks to increases in manufacturing (+17.7% yoy) and services producing industries (+10.3%) while construction more than doubled from a year ago. In absolute terms, GDP remained 0.6% below Q2 2019. Overall GDP growth forecast for 2021 was raised to 6-7%, citing “a gradual recovery in the second half of the year, supported in large part by outward-oriented sectors”.

Bottomline: With Covid19 cases topping 206mn globally, the Delta variant continues to play havoc. In the US, cases and hospitalizations continued to rise among the unvaccinated, with the number of children hospitalized rising to a record high of just over 1900 on Saturday. Southeast Asia continues to be bogged down by an increase in daily cases, resulting in extension of lockdowns. The pace of vaccination makes a difference: Singapore’s relatively high rate (close to 60% fully vaccinated) is allowing it to ease restrictions albeit slowly. China meanwhile closed a terminal at the Ningbo-Zhoushan port (the 3rd busiest globally) after detecting a single case, a move that is likely to reverberate in further delays and rising shipping costs. Meanwhile, the IEA slashed its oil demand forecast given the virus outlook, in contrast to the OPEC which raised non-OPEC supply forecast. Separately, the US has called on the OPEC and allies to pump more oil to allow for lower fuel prices – a strange move considering the Biden administration’s push for combating climate change.

Regional Developments

  • Annual rate of urban inflation in Egypt increased to a 7-month high of 5.4% in Jul (Jun: 4.9%), largely due to the increase in food costs (+4.9%), transport (+6.6%) and alcohol and tobacco (+2.9%). Fuel and utilities prices had been hiked in Jul, but the rate is still at the lower end of the central bank’s target range of between 5-9%.
  • Egypt’s Industrial Development Authority is building 17 industrial complexes, comprising 5,046 units, at a cost of EGP 10bn and expected to create about 48k direct jobs.
  • Egypt plans to expand urban development nationwide to accommodate nearly 10mn persons by 2022.
  • Exports of agricultural produce from Egypt increased by 10% yoy to USD 2.215bn during the period Sep 2020-Jun 2021, with Arab nations the largest destination for the exports (USD 741mn). Russia was the largest importer agricultural crops (USD 307mn), followed by Saudi Arabia (USD 252mn) and UAE (USD 116mn).
  • One person is dying of Covid19 every two minutes in Iran, reported state TV early last week. With just under 4% of the population fully vaccinated, a new 6-day “general lockdown” will be imposed from Monday.
  • Iraq plans to increase oil production to 8mn barrels per day (bpd) by 2027, according to the country’s oil minister.
  • US plans to provide over 500k vaccine doses to Iraq under the global COVAX vaccine sharing program. This is part of the over 110mn doses donated by the US globally.
  • Iraq needs nearly IQD 34trn (USD 29bn) to build houses for citizens made homeless during the war, reported Alsabah daily.
  • Bilateral trade between Jordan and China rebounded this year, rising by 21.4% yoy to USD 2.004bn in H1 2021. Exports to China grew by 14.1% to USD 235mn.
  • Net domestic borrowing in Jordan amounted to JOD 638mn this year, versus about JOD 1461mn at end-Jul 2020.
  • Volume of registered investments in Jordan’s free and development zones reached JOD 1.434bn (USD 2bn), with the number of companies operating in the zones touching 1953 at the end of 2020 (+0.2%).
  • Budget deficit in Kuwait widened to a record-high KWD 10.8bn (USD 35.5bn) in 2020-21. Revenue plunged by 38.9% to KWD 10.5bn, with oil revenues down by 42.8% to KWD 8.8bn. Expenditures rose by 0.7% to KWD 21.3bn last year, with wages and subsidies accounting for 73% of the total. According to the finance ministry, average Kuwaiti crude selling price for the fiscal year stood at USD 36 per barrel, with average oil production of 2.5mn barrels per day.
  • Kuwait Petroleum Corporation qualified about 70 SMEs to work with the oil sector since the launching of ‘Badir’ initiative for the qualification and registration of SMEs in oil tenders. These SMEs are registered in 4 activities: manufacturing (11), supply (20), business contracting (19) and services (20).
  • Kuwait plans to vaccinate 70% of its population by end-Sep, stated the PM at an event. According to the health ministry, more than 2.5mn citizens and residents have been vaccinated so far (accounting for 66% of the population).
  • The crisis worsens in Lebanon: the central bank announced an end to financing fuel subsidies, also revealing that more than USD 800mn had been spent on fuel in Jul. The government opposed this move, stating that prices should not change till prepaid cash cards are issued to the needy (approved by parliament in Jun, but not rolled out yet due to the dollar debate). This move will lead to accelerating inflation, further depreciation of the LBP as well as severe disruption of economic activity & food security.
  • Saudi Arabia, while expressing solidarity with Lebanon, explicitly stated that any assistance to the current or future governments was dependent on the rollout of “serious and tangible reforms”.
  • Oman’s fiscal deficit touched OMR 1.1bn (USD 2.86bn) in H1 this year, according to the finance ministry.
  • The Capital Market Authority in Oman approved licensing for crowdfunding platforms, citing potential to create more jobs, allow for financial inclusion of SMEs and overall economic development. Regulations are in the final stages of revision and the first platform is expected to launch by end-2021.
  • About 123k tourists visited Oman in Jun 2021, with Indians and GCC nationals accounting for 34.5% and 30.6% of the total.
  • Oman aims to vaccinate 320k students aged 12 and above ahead of the start of the new school year.
  • Oman has established a national hydrogen alliance including 13 institutions from the public and private sectors.
  • Qatar recorded a surplus of QAR 3.8bn (USD 1.04bn) in Q2 2021, according to the finance ministry. Revenues touched QAR 50.1bn (+10.7%, with oil and gas revenues fell by 22.6% qoq) while expenditures touched QAR 46.2bn.
  • In the latest edition of the Conference Board’s consumer confidence in the GCC, Saudi Arabia and UAE posted the highest consumer confidence (both at 130) followed by Bahrain and Qatar (both at 104), Oman (98) and Kuwait (96).

Saudi Arabia Focus

  • Saudi Arabia grew by 1.5% yoy in Q2 2021, supported by non-oil sector’s 10.1% expansion while the oil sector shrank by 7%.
  • Fiscal deficit in Saudi Arabia stood at SAR 4.6bn (USD 1.23bn) in Q2 2021, narrowing from the SAR 109.2bn deficit posted in Q2 2020. Revenue from oil increased by 38% yoy to SAR 132.15bn while non-oil revenues increased just over 3-fold to SAR 115.96bn. Expenditure in Q2 grew by 4% to SAR 252.7bn.
  • Foreign investor licenses issued in Saudi Arabia grew by 2.6% qoq to 478 in Q1: this is the highest number since records began in 2005. Of these, almost one-fourth (114 licenses) were for the manufacturing sector while industrial investments in Q1 grew to almost USD 4.7bn – more than 4 times the amounted invested last year. The construction sector saw 78 permits being issued.
  • A recent report titled “Privatisation Program 2025identified 59 initiatives in Saudi Arabia to generate SAR 143bn (USD 42bn) in cumulative revenues via asset sales and Public-Private Partnerships (PPP) by 2025. In 2020, revenues from asset sales stood at SAR 75bn while PPP investments generated SAR 13.46bn.
  • Saudi Arabia’s General Authority for Competition announced that it had issued no objection certificates to the merger of 32 firms and local currency exchange trading companies to form a closed joint-stock company.
  • Industrial production in Saudi Arabia increased by 11.9% yoy and 3.6% mom in Jun, largely due to the uptick in mining and quarrying (19.3% yoy and 4.5% mom). Non-oil manufacturing activity declined by 4.2% yoy and 0.4% mom.
  • Saudi Arabia’s industrial sector comprised 10,138 factories as of the end of Jul, according to the Ministry of Industry and Mineral Resources, and 40% of these were located in Riyadh.
  • Saudi Arabia deposited SAR 100bn (USD 26.6bn) into the accounts of beneficiaries of its Citizen Account Program since its establishment in 2017. More than SAR 9bn was paid out in Aug and arrears worth SAR 10.5mn was also paid.
  • Saudi Aramco reported a 4-fold increase in net profits in Q2, supported by higher oil prices and recovery in oil demand. The CEO stated that the company is on the lookout for potential deals to offer to investors (similar to the USD 12.4bn deal in Jun for its crude pipeline network) and is also looking to tap the hydrogen market (on this note, the Saudi Cabinet approved an MoU with Germany for cooperation in hydrogen projects).
  • Saudi Arabia aims to attract USD 7.3bn into the health sector from private investors, revealed the health minister. The plan is to increase private sector participation in the sector to 35% by 2030, from 25% currently.

UAE Focus

  • Dubai PMI increased to 53.2 in Jul (Jun: 51), posting the quickest expansion since Nov 2019. Both travel and tourism and the wholesale and retail sectors picked up during the month, with businesses citing growth in demand and improving economic conditions. In line with rising demand, employment picked up, rising at the fastest pace since Nov Despite rising input prices, companies continued to absorb costs in a bid to stimulate sales.
  • Dubai’s non-oil external trade grew by 10% yoy to AED 354.4bn in Q1, revealed the DG of Dubai Customs.
  • Abu Dhabi is planning to introduce a professional license allowing foreigners 100% ownership of businesses related to 604 activities including accounting, training, consultancy, beauty centres, computer and internet network companies. Such licenses will however require a local service agent who will be responsible for managing licensing requirements, according to the Abu Dhabi Department of Economic Development.
  • Dubai’s e-commerce business licenses surged by 63.05% yoy to 3243 in H1 2021, according to Dubai Economy. While IT topped the list of licensed activities, followed by ready-made garments and ladies tailoring and design among others, male entrepreneurs accounted for 63% of licenses issued during the period.
  • Bilateral trade between UAE and Israel currently stands at USD 712mn; it plans to boost this to USD 3bn in three years.
  • Dubai Airports CEO disclosed that an estimated 56mn passengers are likely to pass through the airport next year. In H1 this year, 10.6mn passengers passed through Dubai International (-40.9% yoy) while it had handled 25.9mn persons last year and 86.4mn in 2019. Passenger traffic through the airport is expected to cross more than a million in the Aug 12-22 week) given the recent ease in restrictions and ahead of schools’ opening.
  • Etihad Airways halved its core operating losses to USD 400mn in H1 2021. Operating costs were reduced by 27% to USD 1.4bn in H1, supported by grounding of its aircrafts. Separately, Etihad Cargo posted a 20% increase in tonnage compared to pre-Covid volumes.
  • Hot on the heels of the first sale of UAE’s blue ammonia cargoes to Itochu, it was announced that ADNOC and Fertiglobe agreed to sell blue ammonia to Japan’s Idemitsu for use in its refining and petrochemicals operations.
  • Majid Al Futtaim’s latest report revealed that consumer retail spending in the UAE was up by 4% in Q2 (faster than the 3% rise in Q2 2019); it was however down by 3% in H1 2021 compared to the same period in 2019. E-commerce sales surged by 17% yoy in H1 while online sales accounted for 9% of overall consumer spending.
  • From Friday, Abu Dhabi will restrict access to certain public spaces (including universities, public and private schools) only to vaccinated persons. Separately, Dubai has further relaxed restrictions: hotels can operate at full capacity while shopping malls and restaurants can operate at 80% capacity with seating limit at 10 per table.

Media Review

For many, hydrogen is the fuel of the future. New research raises doubts.

https://www.nytimes.com/2021/08/12/climate/hydrogen-fuel-natural-gas-pollution.html

China Signals Regulatory Crackdown Will Deepen in Long Push

https://www.bloombergquint.com/global-economics/china-signals-regulatory-crackdown-will-deepen-in-long-push

Will Central Bank Digital Currencies Doom Dollar Dominance?

https://www.project-syndicate.org/commentary/central-bank-digital-currencies-will-not-end-dollar-dominance-by-barry-eichengreen-2021-08

IPCC’s AR6 Climate Change 2021 report

https://www.ipcc.ch/report/ar6/wg1/

https://www.reuters.com/business/environment/un-sounds-clarion-call-over-irreversible-climate-impacts-by-humans-2021-08-09/

https://www.economist.com/science-and-technology/the-ipcc-delivers-its-starkest-warning-yet-about-climate-change/21803522

Kuwait’s economic makeover under threat as small businesses fight for life

https://www.reuters.com/world/middle-east/kuwaits-economic-makeover-under-threat-small-businesses-fight-life-2021-08-12/

How sustainable are sovereign wealth funds?

https://www.reuters.com/business/sustainable-business/how-sustainable-are-sovereign-wealth-funds-2021-08-09/

 

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Weekly Economic Commentary – Aug 8, 2021

Markets

Dow, S&P 500 and Stoxx600 posted record highs at the end of last week, thanks to a strong jobs report in the US and an overall good earnings season; Chinese stocks recorded their biggest weekly gains since late Jun after sharp drops the previous week given the regulatory crackdown. Regional markets had a good run during the week despite rising geopolitical tensions; Abu Dhabi’s exchange hitting a record high early in the week. Among currencies, the dollar index increased especially against safe havens JPY and CHF (biggest gains since Jul) while both EUR and GBP fell. The delta variant worries gained momentum causing oil prices to drop (anticipating a decline in demand for oil): both Brent and WTI prices fell by more than 7%, recording its biggest weekly loss in 4 and 9 months respectively.

Weekly % changes for last week (5-6 Aug) from 29 Jul (regional) and 30 Jul (international).

Global Developments

US/Americas:

  • Non-farm payrolls increased by 943k in Jul, above expectations, from an upwardly revised 938k in Jun, posting the fastest pace since Aug 2020. Average hourly earnings increased by 4% yoy in Jul (Jun: 3.7%) while labour force participation rate inched up to 61.7% (the highest level since the pandemic hit) from 61.6% in Jun and unemployment dropped to 5.4% – the lowest level since Mar 2020 – from 5.9% in Jun.
  • Initial jobless claims fell to a new pandemic era low of 385k in the week ended Jul 31st from a downwardly revised 399k the week before. Continuing claims plunged by 366k to 2.93mn in the week ended Jul 24th, the lowest since Mar 14th last year.
  • ADP employment data showed that private sector jobs increased by 330k in Jul (Jun: 680k), marking the smallest gain since Feb. The biggest job gains for July were unsurprisingly in the leisure and hospitality sector (+139k), followed by education and health (+64k) and professional and business services (+36k).
  • Factory orders in the US inched up by 1.5% mom in Jun (May: 2.3%), with transportation equipment leading the gains (2%). Orders for non-defense capital goods, excluding aircraft, rose by a higher7% in Jun instead of 0.5% reported last month.
  • ISM manufacturing PMI slipped to 59.5 in Jul (Jun: 60.6), as new orders slowed (64.9 from 66) while employment index posted an expansion (52.9 from 49.9). Services PMI improved to 64.1 from 60.1 the month before, supported by new orders (63.7 from 62.1) and employment (53.8 from 49.3).
  • Markit manufacturing PMI inched up to 63.4 in Jul (Jun: 62.1), thanks to an upturn in production linked to booming demand. Services PMI stood at 59.9, in line with the flash estimate of 59.8 but lower than Jun’s 64.6, thanks to strong domestic and foreign demand. Composite PMI was at 59.5 from Jun’s 63.7, with softer new orders growth and substantial inflationary pressures.
  • Foreign trade deficit in the US widened to a record high of USD 75.7bn in Jun (May: USD 71bn). A USD 2bn increase in exports was more than offset by a USD 6bn increase in imports in the month.

Europe:

  • Factory orders in Germany rebounded by 4.1% mom in Jun (May: -3.2%), thanks to strong domestic orders (+9.6%) while foreign orders inched up by just 0.4%; in yoy terms, overall orders increased by 26.2% (May: 54.9%).
  • Industrial production in Germany dropped by 1.3% mom in Jun, following a 0.8% dip the month before, as supply disruptions and shortages continued; IP is now 6.8% below pre-pandemic levels. Vehicle production was down by 0.9% mom and almost a third below pre-pandemic levels.
  • Retail sales in Germany expanded by 6.2% yoy and 4.2% mom in Jun, with department stores sales surging by 34% mom while online sales dropped. Compared to Feb 2020, sales in Jun were 9.1% higher in real terms.
  • Retail sales in the wider eurozone increased by 5% yoy and 1.5% mom in Jun to a record high, though slowing from the 8.6% yoy and 4.1% mom gain in May. The rise in Jul was largely in non-food products.
  • Markit manufacturing PMI for Germany inched up to 65.9 in Jul (Jun: 65.1), thanks to faster growth of new orders and employment (the latter posted the highest ever reading) while the output index fell. Supplier prices rose at a record pace in response to heightened demand and the 12-month outlook was the weakest since last Dec. Services PMI surged to a new record high of 61.8 (Jun: 57.5) on stronger orders and new record rate of job creation while composite PMI also rose to a record high 62.4 (Jun: 60.1).
  • Eurozone’s manufacturing PMI stood at 62.8 in Jul (Jun: 63.4), with a broad decrease across national manufacturing PMIs other than in Germany. Services PMI edged up to 59.8 (58.3), posting the highest reading since Jun 2006. Composite PMI rose to a 15-year high of 60.2 (below the flash estimate of 60.6, but higher than Jun’s 59.5), and employment increased at the fastest rate in almost 21 years.
  • Producer price index in the eurozone increased for the 13th consecutive month, rising by 10.2% yoy and 1.4% mom in Jun (May: 9.6% yoy and 1.3% mom). Prices rose for energy (+3.3% vs May’s 2.1%), intermediate goods (+1.3%) and capital goods (+0.4%) among others.
  • The Bank of England left interest rates unchanged while warning that inflation will rise temporarily to 4% in Q4 2021 and Q1 2022 alongside an upwardly revised growth forecast of 8% (up from the previous forecast of 7.25%).
  • Manufacturing PMI in the UK clocked in 60.4 in Jul (Jun: 63.9), with slower rates of expansion in both output and new orders. Services PMI improved for the 5th consecutive month, up to 59.6 (higher than the flash estimate of 57.8, but lower than 62.4 the month before); staff shortages and supply chain issues constrained businesses while inflationary pressures touched a new record high.

Asia Pacific:

  • China’s Caixin manufacturing PMI edged lower to 50.3 in Jul (Jun: 51.3) – the lowest reading since Apr 2020 – with new orders falling for the first time since May 2020 while output grew the least in 16 months. Caixin services PMI increased to 54.9 in Jul (Jun: 50.3), supported by an acceleration in new orders and an increase in employment.
  • China’s exports grew for the 13th consecutive month by 19.3% yoy to USD 282.66bn in Jul, though slowing from Jun’s 32.2% rise. Imports accelerated for the 10th straight month, rising by 28.1% to USD 226.08bn, and overall trade surplus widened to USD 56.58bn. Trade surplus with the US rose to USD 35.4bn in Jul (Jun: USD 32.58bn).
  • Foreign exchange reserves in China rose by USD 21.88bn to USD 3.236trn last month while the value of gold reserves rose to USD 114.37bn at end-Jul (Jun: USD 110.45bn).
  • Japan’s leading economic index increased to 104.1 in Jun (May: 102.6), the highest reading since Feb 2014. The coincident indicator increased to 94 from 92.1 the month before.
  • Manufacturing PMI in Japan increased to 53 in Jul (Jun: 52.4), thanks to faster growth in both output and new orders; employment continued to expand for the 4th consecutive month. Meanwhile, input cost inflation accelerated to the fastest pace since Sep 2008, due to a faster rise in raw material prices.
  • Inflation in Tokyo stood at -0.1% yoy in Jul (Jun: 0%); excluding fresh food, CPI unexpectedly inched up to 0.1% as electricity costs stabilized and newspaper prices rose.
  • Overall household spending in Japan unexpectedly fell by 5.1% yoy in Jun (May: 11.6%), as firms cut bonuses and domestic demand remains weak. Separately, wages fell 0.1% yoy in Jun, marking the first annual decline in four months after a 1.9% rise in May.
  • The Reserve Bank of India held rates steady – repo rate at 4% and reverse repo at 3.35% – while policy stance continues to be “accommodative”. The RBI revised its inflation forecasts upward to 5.7% recognising the recent inflation spikes, while growth forecast was maintained at 9.5% for 2021-22 (ending Mar) though aggregate demand was still considered weak.
  • India’s composite PMI moved up to 49.2 in Jul (Jun: 43.1), given a rebound in production (up to 55.3 from 48.1 in Jun, as all sub-indices moved to expansion territory, as did employment) though services activity contracted (at a softer pace). Employment dropped for the 17th month in a row while new orders fell for a 3rd straight month, given the pandemic and local restrictions.
  • Singapore’s manufacturing PMI edged up to 51 in Jul (Jun: 50.8), in expansionary territory for the 13th straight month, and posting the highest reading since Dec 2018.
  • Retail sales in Singapore increased by 1.8% mom and 25.8% yoy in Jun, rising from a low base in 2020. Excluding motor vehicles, retail sales was up by 0.4% mom and 19% yoy.

Bottomline: Overall, the global economy continued on its recovery path -albeit at different rates with Europe now catching- during Q2, despite the Delta Covid variant. The JPMorgan global manufacturing PMI expanded for the 13th month, though inching down to 55.4 in Jul (Jun: 55.5). PMI numbers weakened in China and US (Covid19 daily cases reached the highest in the current outbreak in China and a 6-month high in the US), while Europe remained a success story, witnessing a surge in activity after lifting of Covid19 restrictions amid strong domestic and overseas demand even though logistics delays persisted, and inflationary pressures remained elevated. Covid19 surges in many ASEAN nations is likely to prolong supply chain delays: factories are likely to remain closed (e.g. China, Thailand, Vietnam to name a few) as governments try to contain the spread of the virus variant.

Regional Developments

  • The World Bank forecasts growth in the GCC at 2.2% this year, and an average annual growth of 3.3% in 2022-23, after contracting by 4.8% in 2020. Highlighting the urgency for diversification, the World Bank also expects Bahrain, Kuwait and Oman (with the largest fiscal deficits in 2020) to remain in deficit till 2023.
  • Bahrain issued a new decree amending discrimination in the wages between male and female workers in jobs of the same value across the country, a move to support gender equality.
  • The new edict 40 of 2021 in Bahrain specifies the commercial activities that companies with foreign capital can be licensed to participate in.
  • Egypt’s central bank left interest rates unchanged at the latest meeting, for the 6th consecutive time: overnight lending rate at 9.25% and the overnight deposit rate at 8.25%. The bank stated that GDP grew 2.8% in the 2020-21 fiscal year, down from 3.6% the previous year and that an “unfavorable base effect” would continue to affect annual inflation rates.
  • PMI in Egypt fell to 49.1 in Jul (Jun: 49.9), as new orders sub-index fell to below-50 and output fell for the 7th time in 8 months. The only silver lining was the uptick in employment, rising for the first time since Oct 2019.
  • Domestic liquidity in Egypt increased by 1.9% mom and 18.3% yoy to EGP 5.36trn (USD 213.9bn) as of end-Jun. Money supply rose to EGP 1.25trn in Jun, from EGP 1.22trn in May. Net foreign reserves inched up by 0.06% mom to EGP 40.609bn.
  • Egypt’s President called for an increase in the price of subsidised bread, without specifying either the cost or the timing, stating that “it’s incredible to sell 20 loaves for the price of a cigarette”. Later, the supply minister stated that the ministry would begin to study raising the price of bread, and its results would be presented to the cabinet “as soon as possible”.
  • The wheat imports bill declined by 13% this year, revealed the Egypt’s supply minister. The nation has increased its milling capacity to 3.4mn tonnes and aims to reach 5mn, according to the minister, who also stated that reserves were sufficient for 6.5 months of consumption.
  • Hotel occupancy in Egypt is expected to range between 43-57% in 2021, according to Colliers. Within the country, tourism hotspots like Hurghada and Sharm El-Sheikh will see occupancy at 51% and 43% respectively while Cairo’s is forecast at 49%.
  • An Iraqi official revealed that the first phase of Iraq’s power link with Kuwait (as part of the joint GCC power network) will be completed in mid-2022 and another project to connect with Jordan will be completed within 26 months (this would supply Iraq with 150 MW of electricity, to be increased to 960 MW in a second phase).
  • Jordan’s trade surplus with the US stood at JOD 142mn until end-May. Exports to the US increased by 17% to JOD 535.6mn while imports inched up by only 0.2%.
  • The real estate trade volume in Jordan increased by 6% to JOD 2.602bn in Jan-Jul 2021 vs the same period in 2019.
  • Total foreign assistance committed to Jordan reached about USD 301mn in H1 2021, according to the ministry of planning and international cooperation. Of this, grants totalled USD 265mn and concessional loans stood at USD 36mn.
  • Kuwaiti employees in the oil sector who hold a petroleum engineering degree has reached 1,150 versus 97 expats (with the similar degree), reported Al-Anba daily.
  • Kuwait Ports Authority approved a proposal to build Middle East’s first city to serve electric vehicle manufacturers, with the tendering process expected during the current fiscal year.
  • PMI in Lebanon slipped further to 47 in Jul (Jun: 47.5), as domestic demand continued to suffer amid the economic turmoil. Output and new orders were in contractionary territory while liquidity issues led to cost pressures; the saving grace was the increase in new export orders, up for the first time since mid-2015.
  • An international donors’ conference raised USD 370mn on the anniversary of the Beirut port blast. Macron, in his opening remarks clearly stated that “There will be no blank cheque for the Lebanese political system”. About USD 280mn raised at last year’s conference was distributed via NGOs and aid groups, and the new aid will be unconditional (the USD 11bn raised in 2018 is still unused and is conditional on rolling out reforms).
  • In March 2021, 78% of the Lebanese population (3mn people) was estimated to be in poverty, according to a new study published by the UN Office for the Co-ordination of Humanitarian Affairs. The report also cites that extreme poverty (or food poverty) increased threefold from 2019 to 2020, rising to 23% from 8%.
  • Oman adjusted the recently hiked electricity tariffs to ease cost burdens: the consumption categories were expanded and applied retroactively for May and June. Consumers paying a tariff of 12 (or 16) baisas per kilowatt/hour (kw/h) will now be able to get up to 4,000 (or 6,000) kw/h of electricity, up from a previous cap of 2,000 (or 4,000) kw/h.
  • Qatar PMI increased to 55.9 in Jul (Jun: 54.6), the 4th highest figure on record. Total business activity rose at the fastest rate since Aug 2020 and the 3rd-strongest recorded to date.
  • Financial wealth in the GCC stood at USD 2.2trn in 2020 and is forecast to touch USD 2.7trn in 2025, according to BCG. Saudi Arabia, which represents 45% of GCC wealth, grew by 4.1% on annual basis to USD 1trn in 2020 (84% of which is investable wealth). UAE’s financial wealth touched USD 600bn in 2020 (+3% CAGR annually from 2015, 69% of investable wealth) while Oman’s stood at USD 64bn (+3.8% growth, 49% investable wealth).

Saudi Arabia Focus

  • Saudi Arabia’s PMI eased to 55.8 (Jun: 56.4), on weaker growth in output, new orders and employment. The PMI readings have stayed above 50 for the 11th straight month. Respondents mention improvements in demand given competitive pricing.
  • Net foreign assets in Saudi Arabia increased by over 2% mom to SAR 1.65trn in Jun, according to the central bank. Investments in foreign securities, which account for 61% of its total assets rose nearly 8% yoy to SAR 125trn in Jun.
  • While ATM transactions in Saudi Arabia declined by 4% yoy in H1, e-commerce transactions are still rising, having almost doubled in H1 2021 compared to the same period a year ago. Point-of-sale transactions in Jun increased the most (in yoy) within the “hotels” and “restaurants and cafes” categories. Big-ticket items like electronics and jewelry declined in yoy terms, given the impact of big purchases in Jun 2020 (ahead of the tripling of VAT).
  • Saudi banks have lent SAR 77bn in H1 2021 for new residential mortgages for individuals, up from USD 60bn in the same period a year ago. Credit to the private sector has accelerated by an average of near 15% yoy in H1, rising in line with the pre-pandemic pace.
  • The Saudi Zakat, Tax and Customs Authority registered over 543k transactions related to the Real Estate Transaction Tax since its implementation in Oct 2020, revealed the Saudi Press Agency.
  • The real estate price index in Saudi Arabia rose by 0.4% yoy in Q2 2021: residential real estate prices edged up by 0.8% while commercial and agricultural property prices dipped by 0.5% and 0.2% respectively.
  • A report by Fintech Saudi found that only 18% of Saudis aged between 16 and 22 years use cash, while almost half of people who are 60 and above use cash till date.
  • The Saudi Capital Market Authority received record IPO requests recently (30), revealed the chairman of the CMA. He also revealed that more than SAR 20bn in foreign investments has entered Tadawul since it was included in global indexes. The CMA has a target to list 20 new companies in 2021 on the Saudi index and has already achieved half of this target in H1.
  • Tanmiah Food Company listed on the Saudi Exchange following a successful IPO: the sale of 30% of its share capital raised a total of SAR 402mn (USD 107.2mn).
  • Saudi Arabia raised the September official selling prices for the flagship Arab light crude to USD 3 a barrel above the Oman/Dubai average for Asia, revealed Aramco.
  • International flights from Saudi Arabia dropped by 66.5% yoy to 53,537 in 2020, according to the General Authority of Civil Aviation. Domestic flights also fell by 46.6% to 120,395 in 2020.
  • Saudi Ports Authority disclosed that it had handled 3.6mn TEU in H1 2021, up by 5.18% yoy. Transshipment containers increased by 24.49% to 1.4mn TEU, while it handled a total of 138mn tons of cargo.
  • Saudi Arabia started the trial of the first wind turbine in the Dumat Al-Jandal wind farm: once fully operational, it will reduce CO2 emissions by nearly 1mn tons annually and supply 72k homes with clean energy.
  • The Public Pension Agency in Saudi Arabia, which invested in 77 Tadawul-listed firms among others, reported 9.5% returns on its investments in 2020.
  • Saudi Arabia announced that vaccinated foreign pilgrims will be allowed to perform the Umrah starting from Aug 9th, with an initial capacity of 60k per month – to be increased every month to upto 2mn.

UAE Focus

  • UAE’s PMI jumped to a 2-year high of 54 in Jul (Jun: 52.2), on strong output and new orders readings while employment rose at the fastest pace since Jan 2019. Domestic demand played a significant role in the recovery. In spite of optimism about Expo and easing of restrictions, overall business expectations declined month-on-month in July for the first time in eight months.
  • Non-oil foreign trade grew by 10% yoy to AED 354.4bn (USD 96.48bn) in Q1 in Dubai, according to Dubai Customs.
  • Dubai’s external trade with Korea reached AED 3.238bn (USD 882mn) in Q1: imports stood at AED 2.551bn while exports were at AED 549.782mn during the period.
  • Dubai International Airport is targeting 8% yoy growth in passenger traffic this year to 28mn (and compares to 86.4mn in 2019). The airport expects a surge in passenger traffic as the flight ban applied to passengers from 12 countries (including India) has been partially overturned: those with valid residence visa and were fully vaccinated in the UAE can return. Furthermore, being moved on to the amber list in the UK will also see an increase in passenger traffic. India and UK were among the top 3 source nations in 2019 and Covid19-hit 2020, accounting for almost 2mn (2020: 865k) and 1.2mn (2020: 392k) visitors into Dubai respectively.
  • A total of 31k licenses were issued by Dubai Economy’s Business Registration and Licensing sector in H1 this year, an acceleration by 77% yoy.
  • According to the Dubai Land Department’s real estate market performance report, total real estate transactions during Jan-Jul grew by 43% to 46,038 while value of transactions expanded by 68% to AED 163bn.
  • UAE approved the Sinopharm vaccine for children aged 3 to 17 year olds, after clinical trial with 900 children.
  • ADNOC disclosed its partnership with Fertiglobe to sell its first cargo of blue ammonia to Itochu in Japan, for use in fertilizer production. Separately, Reuters reported that TAQA is closing in on a deal to sell some light oil and natural gas-producing assets in Alberta and British Columbia to privately-owned Blue Sky Resources Ltd.

Media Review

How climate targets compare against a common baseline

https://www.economist.com/graphic-detail/2021/08/07/how-climate-targets-compare-against-a-common-baseline

The Dangers of Endless Quantitative Easing

https://www.project-syndicate.org/commentary/qe-bond-purchases-decrease-government-debt-maturity-by-raghuram-rajan-2021-08

The US has spent more than $2 trillion on the war in Afghanistan

https://www.newstatesman.com/world/north-america/2021/08/graveyard-empires-why-american-power-failed-afghanistan

Strong growth in US jobs, but labour market remains well short of normal: PIIE

https://www.piie.com/research/piie-charts/us-labor-market-recovery-picks-july-jobs-remain-well-short-normal

China’s nanny state: why Xi is cracking down on gaming and private tutors

https://www.ft.com/content/1a7476ee-bcd4-45ac-a165-3418e2de286a

 

 

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Weekly Insights 5 Aug 2021: Domestic Demand Drives Economic Recovery in Saudi Arabia & UAE +“Tanker Tensions”

Weekly Insights 5 Aug 2021: Domestic Demand Drives Economic Recovery in Saudi Arabia & UAE +“Tanker Tensions”

1. UAE and Saudi Arabia’s PMI supported by domestic demand

  • Latest non-oil sector PMI for July remained in expansionary territory in both UAE & Saudi Arabia
  • UAE’s PMI jumped to a 2-year high of 54 (Jun: 52.2), on strong output and new orders readings (highest since Jul 2019) while employment rose at the fastest pace since Jan 2019. Domestic demand played a significant role in the recovery.
  • In Saudi Arabia, PMI eased to 55.8 (Jun: 56.4), on weaker growth in output, new orders and employment. The PMI readings have stayed above 50 for the 11th straight month. Respondents mention improvements in demand given competitive pricing.
  • Both UAE and Saudi firms cited increase in input prices (given delays in shipments) and lengthened delivery times; these costs, however, were not passed on fully to consumers as the main objective still remains to stimulate demand/spending
  • Looking forward:
    • For UAE, Expo (starting from Oct) and easing of restrictions will offer further respite (flights for residence visa holders from India, Pakistan & 4 other nations have resumed)
    • Higher oil output amid an OPEC+ agreement to support growth; services sector (especially tourism) to benefit from the recent opening up for vaccinated persons/ tourists

2. High vaccination rates & stringency levels will support a return to “normal”

  • Both Saudi Arabia and the UAE have benefitted from a string of reform measures (100% foreign ownership, privatisations, visas, capital market reforms etc) in addition to the timely rollout of Covid19 stimulus packages.
  • In addition, high immunization rates have also supported the recovery phase: UAE is home to one of the highest vaccination rates globally (71% fully vaccinated) while in Saudi Arabia, 56% have received one dose or more. UAE recently announced vaccination for 3 to 17 year olds to further curb the spread of the pandemic.
  • The stringency index for the UAE has ticked up a notch (up 16 points since end-Jun till mid-Jul, during Eid holidays) and stands now as the second-most stringent among the GCC (Oman tops the list & Qatar the least)

 

3. UAE mobility edged down slightly in Jul vs Jun 2021

  • The increase in stringency is reflected in the latest UAE mobility data till end-Jul
  • Both retail and recreation mobility as well as grocery and pharmacy visits have slipped during last month. Though the almost-week break for Eid saw an increase in mobility (except for workplace), it remained relatively subdued for the rest of the month, causing the overall Jul figure to be lower vs Jun. Grocery and pharmacy visits are in pre-pandemic territory.

 

4. Consumer spending in Saudi Arabia slowed in Jun, but recovery from the initial Covid dip continues

  • Overall consumer spending has been rising through 2021, with an increase in cashless transactions.
  • While ATM transactions have declined by 4% yoy in H1, e-commerce transactions are still rising, having almost doubled in H1 2021 vs. the same period a year ago.
  • Cash is no longer king: a report by Fintech Saudi found that only 18% of Saudis aged between 16 and 22 years use cash, while almost half of people who are 60 and above use cash till date
  • Point-of-sale transactions in Jun increased the most (in yoy terms) within the “hotels” and “restaurants and cafes” categories. Big-ticket items like electronics and jewelry declined in yoy terms, given the impact of big purchases in Jun 2020 (ahead of the tripling of VAT)

 

5. Bank claims to the private sector rise, with a healthy dose of mortgage loans

  • Credit to the private sector has accelerated by an average of near 15% yoy in H1 2021, rising in line with the pre-pandemic pace. (This is in contrast to the UAE where private sector lending has been on the decline vs. an expansion in credit to both government and public sector entities. Read last week’s Insights)
  • Residential mortgage finance has been one of the fastest growing segments, surging on the back of plans to increase home ownership. The banks have in H1 2021 lent SAR 77bn for new residential mortgages for individuals, up from USD 60bn in the same period a year ago.

 

6. Volatile oil prices amid tanker tensions in the Middle East

  • Multiple tanker incidents in the Gulf of Oman in the span of a week is causing tensions in the Middle East region. Multiple countries have pointed the finger at Iran for these attacks.
  • This is near the Strait of Hormuz chokepoint – famous for oil transit. Bloomberg estimates that 12mn barrels per day of crude and condensate passed through the Strait last year (from oil producers in the Middle East) in addition to a quarter of global LNG supplies.
  • Two aspects to consider in this regard: 1. rise in geopolitical risk and more specifically, maritime risk. At a time when shipment delays are rampant given recent lockdown measures in Asia, the supply chain does not need further interruptions from attacks (increasing travel time and costs); 2. These tensions complicate the efforts to revive the nuclear deal (signed in 2015): while no future date has been set for the next meeting yet, the 6 rounds of informal negotiations have not been very successful. Iran’s political transition, with its new President, adds another layer of uncertainty to the picture.
  • Whichever manner this plays out, oil prices are likely to remain volatile: prices remain an interplay between tight supply concerns amid a potential decline in demand. With cases rising in the US and China, two of the largest oil consumers globally, concerns are rife about lower global demand (weak PMI data in both nations support this notion). With the recent Reuters survey finding that OPEC July oil output hit a 15-month high, lower oil prices could be on the horizon sooner than later.
  • Lastly, the commitment to fight climate change is also leading countries to greener paths of economic development. According to the World Bank, oil intensity of global output had already declined by about one-third in the two decades to 2019! The current commitments (including from the Middle East region) will further accelerate the move away from oil.

 

 

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Weekly Economic Commentary – Aug 1, 2021

Markets

Equity markets had a tough week in spite of strong corporate earnings results, as concerns grew about global growth and China’s ongoing regulatory crackdown (on its education and tech sectors); Stoxx600 rose for the 6th straight month in Jul though staying flat compared to a week ago; MSCI’s global index was down by 0. 4%. Regional markets were mostly up, supported by good earnings results; Abu Dhabi’s equity index touched a record high on Thurs. The dollar hit a 1-month low on Thursday and posted its worst week since May 9th; the euro posted near a 1-month high after EU GDP data was released. Both oil and gold prices increased from a week ago.

Weekly % changes for last week (29-30 Jul) from 22 Jul (regional) and 23 Jul (international).

Global Developments

US/Americas:

  • Fed interest rates were left unchanged, as widely expected, while also leaving its bond-buying plans unchanged.
  • US GDP increased by an annualized 6.5% in Q2 (Q1: 6.3%), thanks to higher personal consumption (+11.8%) while gross private domestic investment fell 3.5% (dragged down by a drop in residential investment). Personal savings rate tumbled to USD 1.97trn from USD 4.1trn in the previous period. Rising inflation was also evident: PCE price index increased to 6.4% (Q1: 3.8%) while core PCE ticked up to 6.1% (Q1: 2.7%).
  • Consumer spending rebounded by 1% in Jun, following the 0.1% dip in May; spending on services increased by 1.2%, thanks to spending at restaurants and hotels, while spending on goods rose by 0.5%. Personal income gained 0.1% in Jun (May: -2.2%) as transfers from the government declined. The saving rate fell to 9.4% from 10.3% in May.
  • US durable goods orders inched up by 0.8% mom in Jun, slowing down from May’s 3.2% rise. Non-defense capital goods orders excluding aircraft grew by a marginal 0.5% in Jun, after posting a similar gain in May. Excluding transportation, new orders edged up 0.3% only.
  • S&P Case Shiller home price indices increased by 17% yoy in May (Apr: 15%), given strong demand alongside weak supply.
  • New home sales unexpectedly declined by 6.6% mom to a seasonally adjusted rate of 676k units in Jun – the lowest level since Apr 2020 affected by high home prices. In yoy terms, sales tumbled by 19.4% – the first annual decline since the pandemic. Separately, pending home sales declined by 1.9% mom.
  • The Dallas Fed manufacturing business index slowed to 27.3 in Jul (Jun: 31.1). However, manufacturing production remains strong: the Texas Manufacturing Outlook Survey increased to 31.0 in Jul from 29.4 in Jun.
  • Trade deficit widened to USD 91.2bn in Jun (May: USD 89.2bn), as imports of goods (+1.5% to USD 236.7bn) outpaced exports (+0.3% to USD 145.5bn).
  • Initial jobless claims eased to 400k in the week ended Jul 24th, near a pandemic low, from an upwardly revised 424k the week before. Continuing claims inched up to 3.269mn in the week ended Jul 17th. Separately, employers posted a record 9.2mn job openings in May, with many businesses stating that they are not able to find workers.

Europe:

  • GDP in the eurozone expanded by 2.2% qoq and 13.7% yoy in Q2 (Q1: -0.3% qoq and -1.3% yoy). Portugal (+4.9%), Austria (4.3%) and Latvia (3.7%) registered the highest quarterly growth rates.
  • Germany’s Q2 GDP increased by a lower-than-expected 1.5% qoq and 9.2% yoy (Q1: -2.1% qoq and -3.1% yoy), “mainly due to higher household and government final consumption expenditure”. GDP was still 3.4% below the pre-crisis level in Q4 2019.
  • Inflation in the eurozone edged up to 2.2% yoy in Jul (Jun: 1.9%) – higher than the ECB’s 2% target – while core CPI eased to 0.7% (Jun: 0.9%). The price increase was largely due to energy costs (+14% in Jul) as well as food, alcohol and tobacco (+1.6%).
  • The harmonized index of consumer prices in Germany increased by 0.5% mom and 3.1% yoy in Jul (Jun: 0.4% and 2.1%). This is the highest level since 2008, and was driven up by higher costs for clothing, food and recreation.
  • German IFO business climate index fell to 100.8 in Jul (Jun: 101.7) and so did expectations (101.2 from 103.7); however, the current assessment improved by 0.7 points to 100.4. The manufacturing sub-index fell for the 4th consecutive month, though companies’ assessments of the current situation rose to their highest level since Aug 2018.
  • Unemployment rate in Germany nudged down to 5.7% in Jul (Jun: 5.9%); the number of people in employment in Germany rose by 78,000 in Jun – the biggest increase since the pandemic. Unemployment rate in the wider eurozone also fell to 7.7% in Jun (May: 8%): some 14.9mn people were unemployed in the EU in June, including 12.5mn in the eurozone. Youth unemployment also declined to 17.3% from May’s 17.9%.
  • Consumer confidence in the eurozone declined to -4.4 in Jul, down from Jun’s 3.5 year high of -3.3. Business climate however improved to 1.9 from 1.7. Additionally, economic confidence hit a record high in Jul (119 from 117.9 in Jun) driven by rising sentiment in the industrial and service sectors.

Asia Pacific:

  • China’s NBS manufacturing PMI dropped by 0.5 points to 50.4 in Jul, posting the weakest pace of increase since the contraction in Feb 2020. Export sales declined the most in 3 months (47.7 vs 48.1) while employment shrank for the 4th consecutive month. Non-manufacturing PMI fell to a 5-month low of 53.3 in Jul: new orders fell for the 2nd straight month (49.7 from Jun’s 49.6), employment fell (48.2 vs 48) and export orders dropped for the 4th consecutive month (47.7 from 45.4).
  • Japan’s manufacturing PMI slipped to 52.2 in Jul, from the final reading of 52.4 in Jun, posting the weakest pace of expansion, with both output and new orders at 6-month lows.
  • The leading economic index in Japan eased to 102.6 in May (Apr: 103.8); coincident index also decreased to 92.1 from 95.3 the month before.
  • Japan’s industrial production surged by 22.6% yoy and 6.2% mom in Jun, thanks to a recovery in production of autos (+22.6%) and production machinery, including semiconductor-making equipment (+8.9%).
  • Unemployment rate in Japan dropped to 2.9% in Jun (May: 3%), improving for the first time since Mar. The job availability ratio increased to 1.13 from 1.09 for the previous month.
  • Retail trade in Japan increased by 3.1% mom and 0.1% yoy in Jun (May: -0.3% mom and +8.3% yoy). In yoy terms, sales softened for motor vehicles (11.9% vs May’s 4%), fuel (25.9% from 34.8%) and medicine & toiletry (0.8% from 2.1%). Large retailers’ sales slipped by 2.2%.
  • Korea’s GDP edged up by 0.7% qoq and 5.9% yoy in Q2, posting the fastest GDP growth in a decade (since Q4 2010). The increase was largely due to a rebound in private consumption and government spending.
  • Exports from South Korea accelerated for the 9th consecutive month, rising by 29.6% yoy in Jul (Jun: 39.8%), thanks to overseas demand for chips and bio-health products. Imports surged by 38.2% from a year ago (Jun: 40.7%).
  • Singapore industrial production fell by 3% mom in Jun, though excluding the volatile biomedical manufacturing, production was up by 0.7%. In yoy terms, IP grew for the 8th consecutive month, rising by 27.5% supported by a low base (May: 27%).

Bottomline: The latest update of the IMF’s World Economic Outlook forecasts global growth at 6% this year (unchanged from the Apr 2021 estimate). However, the underlying forecasts show greater divergence: an uptick in advanced nations growth estimates (+0.5 ppt from Apr 2021 forecast) was offset by a 0.4 ppt drop in emerging markets growth. Among the latest Q2 GDP data releases, most European nations (except Germany) beat expectations though supply chain and Delta variant risks remain a concern; additionally, the improvements in the labour market (lower unemployment rates) could add to some inflation risk in the medium-term. Though US GDP report was below consensus, the level of real economic output is back to pre-pandemic levels (a big plus) and consumer spending continues unabated; once again, inflationary pressures are building up though the Fed is still judging it to be “transitory”. The Bank of England meets this week: given the Delta variant and cases in the UK (though vaccines are effective against hospitalization), it seems unlikely that any decision on ending the QE program will be announced.

Regional Developments

  • The IMF, in its latest World Economic Outlook, forecasts the Middle East and North Africa region to grow at 4% this year and at 3.7% in 2022. Saudi Arabia, meanwhile, is estimated to grow by 2.4% (revised down due to subdued oil production) and 4.8% (revised up) this year and next respectively.
  • Bahrain plans to provide booster shots for 80% of those aged 40 and above.
  • Egypt’s government revenues grew by 12.2% yoy and expenditures grew by 9% in the fiscal year 2020-21: tax revenues increased by 12.8%. Primary surplus stood at EGP 93.1bn (1.4% of GDP) in the year while deficit fell to 7.4% from 8% in 2019-20.
  • Debt to GDP ratio in Egypt fell to 90.6% in 2020-21, from 108% in the 2016-17 fiscal year. Cost of debt service was lowered to 36% of total spending in 2020-21 (vs 40% in 2019-2020).
  • Total government investments implemented in Egypt in 2020-21 grew by 50.5% to EGP 289bn, according to the minister of finance.
  • Egypt’s food industry exports expanded by 13% yoy to USD 2.052bn in H1 2021, according to the Egyptian Export Council for Food Industries.
  • Moody’s affirmed the long-term foreign and local currency issuance ratings for Egypt at B2, with a stable outlook, citinggovernment’s track record of economic and fiscal reform implementation” while warning about “continued exposure to volatile financing conditions driven by weak debt affordability and high gross borrowing requirements”.
  • Non-performing loans in Kuwait increased by 43% in 2020, according to the central bank, mostly originating in the real estate sector. However, NPL ratio remained at just 2%. Separately, the governor called for an “urgent need for economic reforms”, to “address all imbalances”, without mentioning any specific reforms.
  • The Central Bank of Kuwait issued bonds and related Tawarruq worth KWD 200mn (USD 664.72mn) in Jul; it compares to KWD 280mn worth debt instruments offered in Jun.
  • Kuwait removed its 8pm commercial curfew from Tuesday last week; further restrictions were eased as well, allowing for all activities to resume from Sep 1 except for large gatherings (conferences, weddings, social events). Vaccinated persons will be permitted to take part in all activities from Aug 1, whereas unvaccinated will be allowed only to pharmacies, consumer cooperative societies, and food and catering marketing outlets.
  • Lebanon’s Najib Mikati has been designated as PM-elect, after securing 72 out of 118 votes from the MPs.
  • Electricité du Liban warned that Lebanon may face total blackout very soon if funds were not provided for the purchase of fuel oil for power plants, necessary spare parts and to carry out urgent maintenance work on all facilities.
  • Only vaccinated persons or those that have taken antibodies tests will be allowed entry to restaurants, cafes, pubs and beaches in Lebanon, according to the tourism ministry.
  • Businesses in Oman will need to provide cashless payment options to customers from Jan 1st 2022 onwards. Towards this end, PoS devices were issued for merchants free of installation fees or monthly/ annual charges.
  • The number of commercial activities registered at Oman’s Ministry of Commerce, Industry and Investment Promotion (MoCIIP) grew by 31.09% yoy to 5,811.
  • Total revenues of Omani hotels fell by 35.8% yoy to OMR 37mn in H1 2021 within 3 to 5 star categories. Overall occupancy rates remained low at 34% in H1 2021 (H1 2020: 32.4%).
  • With a 7-day average of close to 1000 cases, Oman announced an extension of the nightly lockdown (from 10pm to 4am) until further notice. Capacity in shopping complexes and restaurants will continue to be restricted at 50%. Vaccination rates are relatively low, with only 7% of the eligible population having received 2 doses and 24% with at least 1 dose.
  • Qatar approved an electoral law, paving the way for its first legislative election in Oct, when two-thirds of the Shura Council can be elected. Candidates need to be at least 30 years old and campaign spending is capped at QAR 2mn (USD 550k).
  • The decline in revenue passenger-kilometres (RPKs) in Middle East airlines eased to 79.4% in Jun 2021 vs Jun 2019, according to IATA. Overall global RPKs eased to 80.9% (from 85.4% in May 2021).
  • Many Gulf cities feature among the fastest 5G cities globally, according to Ookla: Abu Dhabi was the fastest Gulf capital and 3rd globally (with a median download speed of26 Mbps), followed by Doha (413.40 Mbps) while Riyadh was 6th fastest globally (384.66 Mbps), in a list topped by Oslo (526.74 Mbps) and Seoul (467.84 Mbps).

Saudi Arabia Focus

  • Saudi Arabia’s oil exports increased by 147% yoy to just over SAR 60bn (USD 16bn) in May while non-oil exports rose by 70%; overall merchandise exports increased by 120.1% yoy – largely due to the low base last year. Share of oil exports to overall exports jumped to 73.2% in May 2021 (vs. 65.3% in May 2020). Saudi exports to China accounted for 21.4% of total exports, followed by India and Japan, with 9.3% and 7.5% respectively of all Saudi exports.
  • Saudi Arabia signed an agreement with government entities to support localization efforts in the financial sector, likely to create more than 200k jobs. Meanwhile, Okaz/ Saudi Gazette, citing “well-informed sources”, reported that finance and insurance sectors are planning to implement total Saudization by replacing almost 91k expats.
  • Fitch revised 6 Saudi banks’ credit outlooks to stable from negative and affirmed ratings at BBB+.
  • Saudi Arabia announced a new Centre for the Fourth Industrial Revolution (4IR) to advance discussions on the use of 4IR technology (like 5G and AI). The investments in 4IR are expected to reach USD 200bn in the country, while the use of advanced 4IR technology is expected to generate around USD 1trn in new revenue streams.
  • A USD 15bn private-public partnership technology fund was announced by Saudi Arabia’s vice minister of the Ministry of Communications & Information Technology.
  • The privatization of Saudi Arabia’s Ras Al Khair Desalination and Power Plant has been suspended amid a review of strategy. Seven pre-qualified companies were invited to submit bids to be part of the privatization process (to own 60% of the project company) last Jan.
  • Mortgage lending in Saudi Arabia increased 27% yoy in Jan-May, while interest rates decreased to between 1% and 4.9% (from 6% early last year).
  • Saudi Arabia’s Sakani housing program beneficiaries received SAR 734mn (USD 7mn) from the Ministry of Municipal and Rural Affairs and Housing and The Real Estate Development Fund in Jul, up 25% yoy.
  • Fitch has revised Saudi Aramco’s outlook to stable from negative, given the uptick in oil prices and expectations of improved demand for oil as vaccination drive progresses globally.
  • The volume of investment in Saudi Arabia’s confectionery industry reached SAR 35mn (USD 3mn) into 1066 factories as of July 15, 2021.
  • Saudi Arabia’s National Energy Services Company (Tarshid) plans to reduce energy consumption, and save 8 terawatts and SAR 5bn annually, resulting in overall savings of SAR 25bn (USD 6.6bn) by 2030. Retrofitting buildings and streetlights as well as use of renewable energy (including rooftop PV) are services being offered.
  • Reuters reported that Saudi Arabia is expected to raise prices across various grades of crude oil it sells to Asia in Sep following a 17-month high in Aug.
  • Saudi Arabia topped MSCI’s emerging markets league table, being the best performer since 2020.
  • A study by the Saudi Capital Market Authority found that there were 128 CEO resignations from 97 companies listed on the Tadawul’s main and parallel markets over the past five years e. an average of about 25 a year. However, in the past 6 months, 26 CEOs resigned.
  • Saudi Arabia will be open to vaccinated tourist visa holders from Aug 1st onwards, according to the Tourism Ministry. Accepted vaccines include Pfizer, Astrazeneca, Moderna and Johnson & Johnson. Separately, a 3-year travel ban will be imposed on citizens who travel to ‘red list’ countries, according to the state news agency.

UAE Focus

  • Cutting business costs to support businesses: Abu Dhabi lowered business set-up fees by 94% to reduce fees to AED 1000; new fees are applicable to 6 activities within business license while all federal fees will continue to apply. In Dubai, fees for 88 government services were either reduced or cancelled, in a bid to lower living costs: this includes fees at the Dubai Maritime City Authority, Dubai Municipality and Dubai Tourism among others.
  • Dubai’s property deals touched AED 61.97bn (USD 17bn) in H1 2021. Total sales transaction volumes increased by more than 40% (vs H2 2020) to 27,373 in H1.
  • Dubai Airport Free Zone Authority (Dafza) reported a 4.7% yoy increase in trade to more than USD 39bn in Q1 2021: this accounts for 11% of Dubai’s trade during the quarter. Trade with China – Dafza’s biggest trading partner (31% of total trade in Q1) – grew by 56.4%.
  • DP World shipping volumes increased by 17.1% yoy to 19.7mn TEUs in Q2 2021, led by growth in India and the Asia-Pacific region. Jebel Ali port handled 3.4mn TEUs, up by 4.2%.
  • Dubai is planning to build a USD 1bn waste-to-energy plant – one of the largest in the world – while a smaller plant in Sharjah will begin operations this year, reported Bloomberg.
  • Hotel occupancy in Dubai increased to 61.9% in Jun, surging by 139% yoy (when borders were closed), according to STR: the increase was supported by Eid staycations and regional travel. Revenue per available room (RevPar) declined by 17% mom as hotels slashed rates to attract customers during peak summer.
  • Dubai-based Swvl (a mass transit and shared mobility services provider) with a USD 1.5bn valuation, will list on Nasdaq through a SPAC.

Media Review

Drawing Further Apart: Widening Gaps in the Global Recovery

https://blogs.imf.org/2021/07/27/drawing-further-apart-widening-gaps-in-the-global-recovery/

Growth in emerging markets: unrest & underperformance

https://www.economist.com/leaders/2021/07/31/unrest-and-economic-underperformance-stalk-the-emerging-world

Saudi Arabia tops emerging markets league table

https://www.arabnews.com/node/1900666/business-economy

Planetary ‘vital signs’ show extent of climate stress — and some hope

https://www.ft.com/content/a52f32ea-c9ed-4bcd-8eef-8eb9ca8da2b1

 

 

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Weekly Insights 29 Jul 2021: Global growth & inflation outlook + credit & inflation (GCC/ UAE)

Weekly Insights 29 Jul 2021: Global growth & inflation outlook + credit & inflation (GCC/ UAE)

1. Global growth forecast at 6% in 2021: IMF

  • The IMF’s World Economic Outlook, updated this week, forecasts global growth at 6% this year (unchanged from the Apr 2021 estimate).
  • However, the underlying forecasts show greater divergence: an uptick in advanced nations growth estimates (+0.5 ppt from Apr 2021 forecast) was offset by a 0.4 ppt drop in emerging markets growth.
  • Multiple risk factors to growth: dealing with new variants amid an uneven vaccine rollout globally (in low income nations less than 1% of the population have recived one dose), continuation of supply-demand mismatch and steady increase in inflation, earlier-than-expected tightening of interest rates in the US, early withdrawal of fiscal support etc.

2. Global government debt was close to 100% of global GDP in 2020

  • IMF: fiscal measures rolled out to support during Covid19 estimated at $16.5trn as of early July 2021 => fiscal deficits across all regions in 2020
  • Much of these funds have already been utilised in EMEs, while advanced economies (AEs) have $4.6trn still to be used. Deficit narrows in 2021, in all regions except Euro Area
  • Fiscal deficit will fall to 4.5% of GDP in oil-producing nations in 2021 (2020: -8.3%); reflected clearly in KSA as well
  • Government debt rose to 122.8% last year in AEs (vs 2019’s 103.7%); in Saudi, it rose to 32.5% (22.8%)
  • As inflation rises, some emerging markets have started to hike interest rates => less policy space
  • If the Fed hikes rates earlier-than-expected, then fiscally constrained nations with high debt levels will be more vulnerable => further increasing fiscal risks/ corporate bankruptcies etc.

3. IMF calls inflation “transitory”, but PMI survey responses mention shortages & rising costs…

  • Latest flash PMI readings show expansion in economic activity as restrictions are eased
  • However, with shortage of materials and supply chain risks, firms are struggling to keep up with demand and higher costs are on the cards
  • Food prices have been rising for 12 straight months before falling by 2.5% mom in Jun; but still up 33.9% yoy
  • Higher oil prices are also affecting major importers; oil price is now closer to pre-pandemic levels
  • Inflationary risks: pent-up demand amid long-drawn-out supply bottlenecks, earlier-than-expected rate hikes (leading to rise in risk premiums, borrowing costs)

4. … as evidenced by rising shipping costs; air cargo costs to become more competitive, soon?

  • Shipping costs are at multi-year highs and freight rates are likely to stay high the rest of this year given factors like lack of containers & shipbuilding capacity, Covid19 related delays
  • Compared to congested container shipping and given the attractive speed of air cargo, the latter is becoming increasingly more advantageous price-wise.
  • Nearly 60% of respondents in IATA’s passenger survey (Jun 2021) plan to take a flight within 1-2 months => air cargo capacity is growing => resulting in relatively cheaper air cargo fares
  • Within the Middle East, cargo capacity was up by 17.1% in Jun (vs 2019), supported by strong ME-Asia and ME-North America trade lanes

5. Closer home, a mixed GCC inflation picture: High food prices in Kuwait, Qatar & deflationary trends in others

6. Credit disbursed in the UAE dragged down by private sector slump

  • Overall domestic credit disbursed in UAE fell by 1.6% yoy and 0.8% mom in May 2021
  • Loans to the private sector have been declining since Apr 2020, with the latest reading down by 2.8% yoy (and -0.3% mom). Since Apr 2020, loans to both the business sector and overall private sector has declined by an average 2.1%, while loans to the government and public sector have gained 13.7% and 17.5% respectively
  • Interestingly, the central bank’s credit sentiment survey for Q2 2021 showed that banks expect demand for business loans to increase for the Sep quarter (net balance of +28), with economic activities retail & wholesale trade, manufacturing, construction, transport & communications, and others dominating demand.
  • In Mar 2021, construction (20.5%), personal loans for consumption (20.4%), government (15%), others (9%) and trade (8.7%) accounted for 65% of total loans. However, if one tracks loans disbursed since the onset of Covid (taking an index with Mar 2020 as 100), the biggest “gains” accrued to the agriculture, mining, others, utilities and trade activities.

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Weekly Economic Commentary – Jul 25, 2021

Markets

A rollercoaster ride for equity markets last week: overall S&P 500 and Stoxx600 posted weekly gains while also reporting steep day/ session drops during the week. This was largely due to a combination of Delta variant concerns (and potential for renewed restrictions) alongside strong corporate earnings reports and central bank support. Many regional markets (Kuwait, Oman, Qatar, Saudi) were closed last week for Eid holidays. Among currencies, the dollar strengthened, while the euro dropped against JPY to its lowest in 4 months. Gold price dipped by 0.5% while oil prices recovered by end of the week – Brent by 0.7% to USD 74.1 and WTI by 0.4% to USD 72.07 – after sliding on Monday after the OPEC+ decision to gradually increase production.

Weekly % changes for last week (22-23 Jul) from 15 Jul (regional) and 16 Jul (international).

Global Developments

US/Americas:

  • Flash manufacturing PMI in the US stood at a series high of 63.1 in Jul (Jun: 62.1), supported by quicker rise in new orders and strong uptick in foreign demand. There was a slight moderation in services PMI as well (59.8 vs Jun’s 64.6), a result of labour shortages and scarcity of stock.
  • Building permits in the US fell by 5.1% mom to an 8-month low of 1.598mn units in Jun. Housing starts increased by 6.3% to a seasonally adjusted annual rate of 1.643mn last month (May: 1.546mn). Rising price of building materials and supply shortages are keeping house prices high.
  • Existing home sales inched up by 1.4% mom and 22.9% yoy to 5.86mn in Jun. Inventory of homes for sale was 1.25mn at end-Jun, implying a 2.6-month supply at the current sales pace. Low inventory is pushing prices higher: the median price of an existing home sold in Jun hit an all-time high of USD 363,300.
  • Initial jobless claims unexpectedly increased to 419k in the week ended Jul 17th from an upwardly revised 368k the week before. Continuing claims declined by 29k to 3.236mn in the week ended Jul 10th, posting a new pandemic low.

Europe:

  • With the Covid19 virus strain identified as a risk to recovery in the eurozone, the ECB pledged to keep interest rates lower for longer. The apex bank also stated that borrowing costs will not be hiked until inflation reaches the 2% target “well ahead of the end of its projection horizon and durably”.
  • Producer price index in Germany eased to 1.3% mom in Jun, from the 1.5% uptick in May. In yoy terms, PPI edged up to 8.5% – the highest yoy increase since Jan 1982 – from 7.2% the month before. Energy prices, which surged by 16.9% yoy as a result of low base last year, was the main reason for the uptick.
  • Preliminary estimates for the Markit composite PMI for Germany rose to a series-record of 62.5 in Jul (Jun: 60.1), supported by an “ongoing rapid recovery in services activity” while manufacturing slipped on widely reported material shortages.
  • In the wider eurozone, though manufacturing PMI eased to 62.6 in Jul from 63.4 last month, the composite PMI rose to 60.6 – its highest reading since Jul 2000.
  • Consumer confidence in the euro area slipped to -4.4 in Jul (Jun’s 3.5 year high of -3.3) as rising Covid19 cases led to new restrictions.
  • Manufacturing PMI in the UK eased to a 4-month low of 60.4 in Jul, slowing from the 63.9 reading in Jun, given weaker rates of output and new order growth. Composite PMI dropped to 57.7 in Jul – the lowest since the ease of restrictions in Mar: survey respondents that referred to a drop in output cited “severe shortages of raw materials and the impact of COVID-19 isolation on staff availability”.
  • Retail sales in the UK increased by 0.5% mom and 9.7% yoy in Jun: this was a result of a 4.2% increase in sales of food and drink (as England progressed to the finals of the Euro 2020) amid a 1.7% decline in sales of household goods, clothing and furniture. Excluding fuel, retail sales were up by 0.3% mom and 7.4% yoy. Overall, the sector has recovered to 9% above pre-pandemic level.

Asia Pacific:

  • The People’s Bank of China (PBoC) disclosed that its digital yuan trial reached USD 3bn in transaction value by the end of June, with over 70.75mn transactions. Separately, as part of regulatory changes, the central bank stated that non-bank payment firms must report plans for domestic and overseas initial public offerings and listings, while also providing “detailed arrangement” of their variable interest entity structures.
  • Japan’s inflation stood at 0.2% yoy in Jun (May: -0.1%); core inflation clocked in at 0.2% (0.1%) – the fastest pace in 15 months, and largely due to rise in energy costs (+4.6%). Meanwhile inflation excluding both food and energy stayed unchanged at -0.2%.
  • Exports from Japan accelerated by 48.6% yoy in Jun (May: 49.6%) while imports also grew by 32.7% (from 27.9%), causing trade balance to widen to a surplus JPY 383.2bn. Exports grew by 23.2% in H1, posting the fastest growth since H1 2010. Exports to China was up by 27.7% in Jun, given demand for chip-making equipment, while exports to the US surged by 85.5%, thanks to shipments of cars, auto parts and motors.

Bottomline: The flash PMIs show expansion in economic activity as restrictions are eased; however, with shortage of materials and supply chain risks, firms are struggling to keep up with demand and higher costs are on the cards. After the ECB’s dovish stance, the Fed is set to meet this week and unlikely to move away from its “transitory inflation” rhetoric (keep an ear out for “tapering” talks). On the other hand, emerging markets seem to be turning more hawkish: Russia raised its key lending rate by 1ppt last week – it was the largest hike in more than 6 years, as inflation touched 6.5% in Jun. GDP and inflation data for both the US and eurozone will be released this week. It is likely to underscore divergent recoveries. Slower vaccination pace is evident across emerging markets – worthwhile to remember that these nations accounted for 57.8% of global GDP based on PPP in 2020 (58% estimated in 2021) – and with recent surges affecting the Asia-Pacific region, a growth revision can be expected from the IMF this week. Probably in line with the World Bank’s growth forecasts – low-income economies will grow at 2.9% this year, the slowest in the past 20 years other than 2020, and at a time their debt/GDP ratios are reaching historical highs.

Regional Developments

  • At the OPEC+ meeting last week, it was decided to increase the output by 400k barrels per day from Aug onwards. A few producers including UAE and Saudi Arabia will be allowed to increase the baseline from which production is calculated. Furthermore, the OPEC+ alliance will be extended at least until end of 2022 (vs Apr 2022 agreed before).
  • Non-oil trade between Bahrain and Saudi Arabia benefited from the opening of the King Fahd Causeway: non-oil trade between the 2 nations rose by 18% yoy to USD 781mn in Q2 this year. Trade with Saudi accounted for around half of Bahrain’s trade with the GCC.
  • Egypt hiked fuel prices from Friday: gasoline prices were hiked by EGP 0.25 to between EGP 6.75 (USD 0.43) to EGP9 depending on quality of the fuel. Diesel prices were unchanged.
  • The Egyptian government allocated around EGP 500mn (USD 31.88mn) to pay for contractual public workers’ salaries.
  • The state of emergency was extended in Egypt for a further 3 months on 24th Jul.
  • Iran opened a new oil terminal in the Gulf of Oman, allowing tankers to bypass the Strait of Hormuz. A 1000-km pipeline has also been built to carry oil to the terminal from the southwestern province. The President stated that Iran aimed to export 1mn barrels per day of oil from the Bandar-e Jask port.
  • Iran, currently in the fifth wave of Covid19, ordered a 1-week lockdown in the capital from last Tuesday.
  • Oil exports from Iraq averaged 3.336mn barrels per day in Jun, slightly lower compared to May, but revenues are estimated at over USD 6bn (higher vis-à-vis May).
  • Iraq signed a fuel deal with Lebanon, allowing for the latter to pay for 1mn tonnes of heavy fuel oil a year in medical services. The fuel, worth about USD 300-400mn, will allow for electricity generation and is estimated to last for 4 months.
  • As part of the Saudi-Iraqi Coordination Council, the two nations plan to launch a joint investment company, reported Al Arabiya. The company will help channel capital from Saudi to Iraq and act as a guarantor for investments, according to the Saudi commerce minister.
  • Morocco’s economic growth is expected to slow to 2.9% in 2022 from the 5.8% forecasted for this year, according to the planning agency. The nation is home to Africa’s largest vaccinated population, with around 20mn disbursed doses.
  • Kuwait is working on a law to limit withdrawals from the Future Generations Reserve Fund, reported Al Anba newspaper.
  • About KWD 19.6bn has been allocated to finance 19 strategic projects in Kuwait’s current development plan. Diversified and sustainable economy projects account for almost half of the spending, according to a report filed by the Al Anba newspaper.
  • Lebanon will begin formal consultations from this week to form a new government.
  • Qatar’s emir directed the allocation of USD 100mn to support food security in Yemen.
  • Equity and equity-related issuance in the MENA region totaled USD 2.1bn in H1 2021, the highest total since 2018 and up 139% yoy, according to Refinitiv data (https://www.zawya.com/images/features/CHART1.png). UAE was the most active, with proceeds raised equaling USD 1.7bn (vs USD 30mn in H1 2020); half of this was due to ADNOC’s convertible offering of USD 1.1bn in May.
  • Corporate cash reserves of non-financial companies in the Europe Middle East and Africa (EMEA) region hit a record high of more than USD 1.53trn in 2020, according to Moody’s. Cash holdings spiked in 2020: top 25 companies accounted for USD 564bn or 37% of the total.
  • The SWF Institute lists 4 sovereign wealth funds (SWFs) from the region among the top 10 SWFs by assets. Kuwait Investment Authority (3rd, with USD 692.9bn), Abu Dhabi Investment Authority (4th, USD 649.175bn), Public Investment Fund (8th, USD 430bn) and the Investment Corporation of Dubai (10th, USD 302.326bn). Others within the top 40 include the Qatar Investment Authority, Mubadala, Mumtalakat and Oman Investment Authority.

Saudi Arabia Focus

  • Saudi Arabia plans to disburse more than SAR 73bn (USD 19bn) to the private sector: this accounts for 97% of the total payment orders received for public sector claims in H1 2021.
  • Saudi Arabia’s holding of US Treasury bonds stood at USD 127.3bn in May – the 14th largest holder of US debt. The holding was down 3% mom but grew by 2.25% yoy.
  • It was announced that Saudi citizens will need two COVID-19 vaccine doses before they can travel outside the country from Aug 9 Separately, only vaccinated persons will be allowed to enter both public and private establishments from Aug 1st.
  • Startups in Saudi Arabia raised a total of USD 257.88mn in VC funding in H1 2021, according to Magnitt. Together, MENA nations raised USD 1.228bn in the period, with UAE accounting for 26% of the total funding. Food and beverages was the most popular sector for VC investment while fintech generated the most deals.

UAE Focus

  • Abu Dhabi’s Crown Prince met with Saudi Arabia’s Crown Prince last week. WAM reported that discussions centered around cooperation and acceleration of joint efforts (including efforts to eliminate political challenges) as well as reviewing the latest regional, Arab and international developments of mutual concern.
  • UAE banks’ assets nudged up by 0.4% mom and 0.5% yoy to AED 3.18trn in May 2021. Banks’ investments surged by 25.4% yoy to AED 520.2bn in May.
  • Dubai Expo 2020 tickets are on sale with a single-entry ticket priced at AED 95 (USD 26).
  • About AED 1.1bn in housing loans will be distributed to 803 Emiratis: this was announced ahead of Eid Al Adha.
  • Dubai electricity and Water Authority doubled water connections between 2016 and 2020. Water connections increased to 67,768 in 2020.
  • Emirates Airlines disclosed that AED 8.5bn worth of tickets had been refunded in cash back to passengers.
  • A survey by London-based Nickel Digital Asset Management found that institutional investors and wealth managers in the UAE plan to either dramatically increase their exposure to or include cryptocurrency assets to their portfolio between now and 2023. The reasons cited for this plan include capital appreciation, improving regulations and a larger liquidity pool.

Media Review

Dr. Nasser Saidi’s interview on Bloomberg Middle East Daybreak, 25 Jul 2021

https://www.bloomberg.com/news/videos/2021-07-25/fed-to-grapple-with-delta-risks-video

The Economist’s Big Mac Index: the cheapest burger is in Lebanon, but at what “cost”?!

https://www.economist.com/finance-and-economics/2021/07/24/what-the-big-mac-index-says-about-the-dollar-and-the-dong

Why there is no solution to our age of crisis without China

https://www.newstatesman.com/international/places/2021/07/why-there-no-solution-our-age-crisis-without-china

Five pandemic truths that defy intuition: Tim Hartford (Undercover Economist) in the FT

https://www.ft.com/content/a8c0f5f2-d27c-4b13-a1a4-440710bc6967  

 

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Weekly Economic Commentary – Jul 18, 2021

Markets

Concerns over the spread of the Delta variant and rising inflation dominated equity market performance globally, amid expectations of a strong Q2 earnings season. In the US, S&P 500 and Nasdaq fell by 1% while in Europe, both FTSE and Stoxx ended the week lower by 1.6% and 0.6% respectively. China’s CSI300 ended marginally higher, though its banking index fell to its lowest level in 6 months during the week. MSCI all country index recorded a peak last week but closed 0.6% lower. Regional markets were mostly down, with Egypt and Abu Dhabi exchanges posting the highest gains. The dollar gained last week, while sterling closed lower (-0.9%). Oil prices declined last week: the OPEC+ meeting held earlier today decided to boost oil supply by a further 2mn barrels per day (bpd) from Aug-Dec 2021 (UAE will see its baseline production increase to 3.5mn bpd from May 2022, while Saudi and Russia’s baseline will rise to 11.5mn bpd each; more in Media Review section). Gold price edged up by a marginal 0.2% over the past week.

Weekly % changes for last week (15-16 Jul) from 8 Jul (regional) and 9 Jul (international).

Global Developments

US/Americas:

  • Inflation in the US accelerated to a 13-year high of 5.4% yoy in Jun (May: 5%), with the largest increases recorded for used cars (45.2%) and gasoline (45.1%) among others. Core inflation excluding food and energy also grew by 0.9% mom and 4.5% yoy.
  • Producer price index increased to 7.3% yoy in Jun (May: 6.6%), posting the biggest annual gain since Nov 2010. Services, with a 0.8% mom rise in costs (May: 0.6%), accounted for nearly 60% of the increase in PPI. Excluding food and energy, prices were up by 5.6% yoy (4.8%) – this was the largest increase since the series was introduced.
  • The Fed Beige book stated that the economy was showing “moderate to robust growth” amid broad-based job gains though finding that prices were rising “at an above-average pace”. It also noted that “while some contacts felt that pricing pressures were transitory, the majority expected further increases in input costs and selling prices in the coming months”.
  • Industrial production in the US rose marginally by 0.4% mom in Jun (May: 0.7%): manufacturing continued to be a drag, dropping by 0.1% mom, largely due to a 6.6% plunge in motor vehicles and parts production (given shortage of semiconductors). IP grew by 9.8% yoy but remains 1.2% below pre-pandemic levels.
  • Philadelphia Fed manufacturing index eased to 21.9 in Jul (Jun:30.7), as new orders slipped by 5.2 points to 17 and shipments fell to 24.6 (Jun: 27.2). Separately, the New York Empire State factory index soared to a record high of 43 in Jul, on higher new orders (+16.9 points to 33.2) and shipments (+29.6 to 43.8); prices received index also soared to a record high of 39.4.
  • Retail sales in the US unexpectedly rebounded by 0.6% mom in Jun (May: -1.7%), thanks to rising demand at electronics (+3.3% mom) and clothing stores (+2.6%) as well as restaurants (+2.3%). Excluding fuel, retail sales were up by 0.4% mom (May: -1.9%). In yoy terms, sales surged by 18% and are well-above pre-pandemic levels.
  • Initial jobless claims fell to a 16-month low of 360k in the week ended Jul 10th from an upwardly revised 386k the week before; the 4-week average fell to 382.5k. Continuing claims fell by 126k to 3.241mn in the week ended Jul 3rd.

Europe:

  • Industrial production in the eurozone fell by 1% mom in May (Apr: +0.6%), though up by 20.5% in yoy terms. Only consumer goods production increased (+1.6%) alongside declines in non-durable goods (-2.3%), energy (-1.9%), capital goods (-1.6%) and intermediate goods (-0.2%).
  • Both inflation and core inflation in the eurozone rose to 0.3% mom in Jun. In yoy terms, inflation rose to 1.9% – energy prices contributed 1.16 percentage points to overall inflation – and core inflation was stable at 0.9%.
  • Trade balance in goods the eurozone narrowed to EUR 7.5bn in May (Apr: EUR 10.9bn) as exports eased to EUR 188.2bn and imports stood at EUR 180.7bn.
  • Wholesale price index in Germany edged up by 1.5% mom and 10.7% yoy in Jun: the annual increase was the largest since Oct 1981.
  • Inflation in the UK rose to 2.5% yoy in Jun, the highest since Aug 2018 (May: 0.6% mom and 2.1% yoy), on higher costs of secondhand cars (+5.6%), clothing (+3.3%), footwear (1.2%) and motor fuel (+20.3%). Core inflation rose to 2.3% yoy from 2% a month before. Retail price index grew to 0.7% mom in Jun (May: 0.3%).
  • The ILO unemployment rate in UK remained unchanged at 4.8% in the 3 months to May. Job vacancies in the UK are up by 7% mom to 962k for Jun, with the hospitality sector gearing up for the Jul 19th Average earnings including bonus rose by 7.3% vs 5.3% in the previous 3 months.

Asia Pacific:

  • GDP in China grew by 1.3% qoq and 7.9% yoy in Q2 (Q1: 0.6% qoq and 18.3% yoy).
  • China’s exports surged by a faster-than-expected 32.2% yoy in Jun (May: 27.9%) while imports grew at a faster pace (+36.7% vs May’s 51.1% gain, partly due to higher raw material prices), posting a trade surplus of USD 51.53bn (May: USD 45.54bn). China’s crude oil imports fell by 3% in H1 this year, their first contraction for the period since 2013, while imports of soybeans, natural gas and iron ore rose.
  • FDI into China grew by 28.7% yoy in H1 2021 (Jan-May: 35.4%), with FDI inflow into high-tech industries up by 39.4%. Fixed asset investment grew by 12.6% in H1, easing from the 15.4% rise in Jan-May.
  • Industrial production in China accelerated by 8.3% yoy in Jun (May:8.8%). Retail sales grew by 12.1% in Jun (May: 12.4%), with the fastest growing category beverages (+29.1%). The urban survey unemployment rate held steady at 5% in Jun, while unemployment for 16-24 age group climbed to 15.4% (same as Jun 2020).
  • China launched its emissions trading system: pollution caps were set for 2,162 big-power businesses (that generate about a seventh of the global carbon emissions). The scheme allows firms to buy the right to pollute from others with a lower carbon footprint. However, the pricing is quite low: trade started off at CNY 7 (USD 8) per ton of carbon. For comparison, a chart on EU carbon price.
  • The Bank of Japan held interest rates unchanged, as expected. The apex bank cut growth projections to 3.8% in the current fiscal year ending Mar 2022 (from 4% forecast in Apr) while revising up its inflation forecast to 0.6% (from 0.1%) given recent increase in energy costs. The BoJ will also offer zero-interest, long-term funds its under climate scheme.
  • Industrial production in Japan declined by 6.5% mom in May, sharper than the initial estimate of 5.9% drop; shipment declined by 5.5% mom and inventories by 1.1%. IP however grew by 21.1% yoy in May (lower than the initial estimate of 22%). Capacity utilization fell by 6.8% mom.
  • Japan machinery orders grew by 7.8% mom and 12.2% yoy in May, posting the 3rd consecutive month of gains. Both manufacturing and non-manufacturing orders increased in mom terms, by 2.8% and 10% respectively.
  • India’s industrial output surged by 29.3% yoy in May, with manufacturing up by a higher 34.5%, given the low base effect. In mom terms, industrial output fell 8% in May, a result of the lockdowns imposed due to the spread of Covid19.
  • Wholesale price inflation in India stood at 12.07% in Jun (May: 12.94%), on softened fuel (32.83% in Jun vs May’s 37.6%) and food (3.09% vs 4.31%) prices. Though overall retail inflation eased slightly to 6.26% in Jun (May: 6.3%), food and fuel prices were higher.
  • India’s crude oil imports fell to a 9-month low in Jun, reported Reuters, citing tanker arrival data: it slipped by 7% mom to 3.9mn barrels per day (it grew by 22% in yoy terms). The share of oil from the Middle East rose to about 59% in Jun (May: 53%): Iraq, Saudi and the UAE were the top oil suppliers to India last month.
  • Singapore’s GDP contracted by 2% qoq in Q2, reversing Q1’s 3.1% growth. In yoy terms, it grew by 14.3% yoy in Q2, helped by a low base the year before (Q2 2020: -13.3%).

Bottomline: The more transmissible Delta variant is dominating news, be it in Indonesia – which has the highest test positivity rates globally (more than 27%) and where less than 6% are vaccinated – or in the UK where daily cases passed 50k for the first time since Jan, but relatively better placed given that 68% of the population are fully vaccinated (implying less hospitalization and death rates). Though many European nations were gearing up for summer tourists, some restrictions are back as many including Cyprus, Portugal, Spain and Netherlands are now in the list of code red countries (according to the European Centre for Disease Prevention). Meanwhile, the OPEC forecasts an increase in oil demand, reaching pre-pandemic levels by 2022. This could also seep into inflation numbers which are staying higher longer than expected (though still being labelled “transitory” by major central banks). Lastly, China’s latest GDP numbers and RRR cut indicate a relatively weak momentum – also seen in the latest readings of slowing investment.

Regional Developments

  • Bahrain banned entry for travelers from 16 nations including Tunisia, Iran, South Africa and Indonesia among others. Citizens and those with residency visas are exempt from the ban.
  • Trade deficit in Egypt narrowed by 13.3% yoy to USD 3.1bn in Apr 2021: exports surged by 47.4% to USD 2.84bn alongside an 8.1% increase in imports.
  • The central bank of Egypt’s EGP 100bn mortgage initiative is likely to be launched in Aug: it will allow low- and middle-income homebuyers to access mortgages at a subsidized rate of 3%; eligibility criteria are still unclear though it is expected that subsidized mortgages will be given on houses valued at up to EGP 1.4mn, provided a 20% down payment is made.
  • Suez Canal’s revenues hit a record high of USD 5.84bn in the 2020-21 financial year (Jul-Jun): it collected close to USD 3bn in H1 and USD 2.76bn in the second half. This year, about 9763 ships passed through the Canal (+2.3% yoy) till Jun while net shipping loads gained by 3.8% to 610mn tons.
  • Egypt’s El-Dabaa nuclear plant project is on schedule and expected to begin operations in 2026, revealed the electricity and renewable energy minister.
  • Iraq announced the extension of its oil supply deal with Jordan for another year. During this time, Iraq will supply Jordan with 10k barrels per day of crude oil under preferential terms.
  • Occupancy rates in Jordans main tourist centres are rebounding: it has increased to 40-50% in the Dead Sea and the Red Sea port city of Aqaba and around 30% in Amman, compared to around 2-3% at the height of the Covid19 crisis.
  • S&P cut Kuwait’s rating by one notch to A+ from AA-, citing “persistent lack of a comprehensive funding strategy” for its deficits.
  • Kuwait is planning bond sales and indirect taxation to bridge its deficit gap, reported Al Jarida newspaper, citing the finance minister’s response to a parliamentary question. In addition to VAT, selective taxes are likely to be imposed on “selling price of goods harmful to public health and the environment” and “to luxury goods”.
  • Kuwait opened its first permanent facility to import LNG – the plant will be able to import as much as 22mn tonnes of LNG. Bloomberg expects LNG use to almost double by 2025, with most of the increase coming from Kuwait.
  • The Kuwait Cabinet will close down all activities for children, including summer clubs from July 25 until further notice.
  • Lebanon’s Hariri abandoned his effort to form the government stating that he is unable to reach an agreement with the President. The pound weakened even further on this announcement, down to more than 20k from 19k earlier that day.
  • Oman’s Sultan visited Saudi Arabia last week, in the first foreign trip since ascension. Economic cooperation on many fronts are likely to benefit – trade, investment and infrastructure in addition to security, cultural & other diplomatic discussions. Our view is that opportunities are multi-fold including cooperation on the move to cleaner renewable energy, privatization programs and listing/ cross-listing opportunities. Read more: https://nassersaidi.com/2021/07/15/weekly-insights-15-jul-2021-covid19-cases-vaccination-beyond-mena-uae-saudi-omani-cooperation/
  • Qatar plans to hold its first legislative elections in October to elect 30 members of the 45 in the advisory Shura Council. The rest 15 members will be appointed by the ruling emir.
  • A 20-year sale and purchase agreement has been finalized by Qatar Petroleum to supply LNG to Korea: this covers the supply of 2mn tons a year of LNG, starting by Jan 2025.
  • Syria, on the heels of an increase in petrol prices, announced higher bread and diesel prices: price of diesel fuel nearly tripled to SYP 500 and the price of bread doubled. This coincided with a move to increase public sector salaries by 50% and set the minimum wage at SYP 71,515 a month (USD 57 at the official rate).
  • Funding secured by MENA-based startups accelerated by 64% yoy to USD 1.2bn in H1 this year; this compares to more than USD 1.09bn raised in 2020, according to Magnitt. However, the number of deals fell by 20% to 254 during this time.
  • Invesco’s annual Global Sovereign Asset Management Study found that last year, 57% of sovereign funds in the Middle East faced drawdowns (vs. over one-third globally) while portfolio cash reserves of Middle East sovereign funds more than doubled. Climate change risks are a major concern on the agenda in the Middle East: 75% indicating that their asset-allocation decisions are influenced by environmental concerns (vs 62% globally).

Saudi Arabia Focus

  • Inflation in Saudi Arabia surged to 6.2% yoy in Jun (May: 5.7%), drive up by transport and food costs (up 22.6% and 8.1% respectively).
  • Wholesale prices in Saudi Arabia surged by 19.8% yoy in Jun: other transportable goods posted the highest increase (+25.4), driven by higher costs of basic chemicals (+6%) and refined petroleum products (+28.4%). Other components that surged include metal products, machinery and equipment (+20.5%) and food and non-alcoholic beverages (+10.3%) among others.
  • As part of the privatization program, Saudi Arabia raised almost USD 800mn from the sale of two major flour mills.
  • Saudi Arabia will permit shops to stay open during prayer times, according to Okaz, citing a circular by the official business federation.
  • Fitch revised Saudi Arabia’s outlook to stable from negative while maintaining the sovereign rating at ‘A’, citing “prospects for a smaller deterioration in key sovereign balance-sheet metrics”.
  • The Saudi CMA approved the merger of NCB Capital and Samba Capital: the merger is expected to take effect by Q3 2021.
  • Saudi Arabia’s PIF has sent banks’ a request for proposals to help develop an ESG framework – this would allow the fund to expand its investor base.
  • The number of families benefiting from Saudi Arabia’s “Sakani” housing loan program fell by 24.2% yoy to 48,397 in H1 2021.
  • Saudi Arabia will offer SAR 500mn (USD 133mn) in loans for entertainment projects: the plan is to finance at least 50 new entertainment projects in the country.
  • The value of online delivery orders in Saudi Arabia surged by 45% yoy to over SAR 1bn in Q1 2021. Overall requests increased by about 33% to nearly 9.2mn while e-payments rose by 128% to 8.1mn.
  • Saudi Arabia’s Citizen Account Program deposited SAR 9bn (USD 506mn) into the accounts of 10.5mn beneficiaries for Jul.
  • The Saudi Human Resources Development Fund supported the employment of 142k citizens in H1 2021. About 59% of these were women and medium sized firms benefitted most from the support (with 67k employees).

UAE Focus

  • As part of the UAE central bank’s 2023-26 strategy, a digital currency will be introduced, in addition to digital transformation of the financial services sector along with adoption of AI and big data.
  • Dubai PMI eased by 0.6 points to 51 in Jun, as both new orders and output grew at a softer pace while the rate of job creation posted the fastest pace since Nov 2019. Optimism was high for the future with the 12-month outlook reading at the second strongest since Sep 2020.
  • Contrary to reports, the UAE is still in “deliberations and consultations” with the OPEC+ on an extension of the oil supply deal, according to the energy minister.
  • A national program was launched in the UAE to train 100k coders, with an aim to establish 1,000 tech companies and increase start-up investments to AED 4bn from AED 1.5bn.
  • A Dubai Chamber of Commerce survey showed that business confidence grew to a 7-year high: more than 66% of respondents expect to see a better business environment in the next quarter (vs 51% in Q2), largely due to growing domestic demand, economic stimulus initiatives and the progress of the vaccination drive. Though this was the most optimistic survey reading since Q4 2014, risks could be posed by late payments, debt collection, strong price competition and the high cost of raw materials.
  • Abu Dhabi’s DED stated that all eligible private sector claims until end of Q1 had been settled within 15 days instead of 30.
  • Abu Dhabi has announced partial overnight lockdown from midnight till 5am effective July 19th; in addition, lower capacity limits of 50% were issued for public beaches, parks as well as restaurants and cafes while shopping malls and cinemas would be restricted to 40% and 30% capacity respectively.
  • UAE’s Yahsat expects to launch a new satellite in H2 2023; the company began trading on ADX from Wednesday after a USD 730mn IPO – the first since ADNOC Distribution listed in 2017.
  • Abu Dhabi National Oil Company (ADNOC) disclosed in a filing that it is investing USD 763.7mn to support its production capacity expansion to 5 million barrels per day by 2030.

Media Review

OPEC+ agrees to oil supply boost

https://www.reuters.com/business/energy/opec-meets-agree-oil-supply-boost-prices-rise-2021-07-18/

Central Banking, Fast and Slow: El-Erian

https://www.project-syndicate.org/commentary/when-should-fed-ecb-boe-end-stimulus-by-mohamed-a-el-erian-2021-07

Biden’s new China doctrine

https://www.economist.com/leaders/2021/07/17/bidens-new-china-doctrine

How the EU plans to reshape its economy to limit climate change

https://www.ft.com/content/8800128f-eec6-4272-acc7-a51132c6c931

COVID-19 and women-led businesses: More innovation but greater financial risk

https://blogs.worldbank.org/psd/covid-19-and-women-led-businesses-more-innovation-greater-financial-risk

Could Renewed Social Unrest Hinder the Recovery?

https://blogs.imf.org/2021/07/13/could-renewed-social-unrest-hinder-the-recovery/

 

 

 

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Weekly Insights 15 Jul 2021: Covid19 cases, vaccination & beyond (MENA & UAE) + Saudi-Omani cooperation

Weekly Insights 15 Jul 2021: Covid19 cases, vaccination & beyond (MENA & UAE) + Saudi-Omani cooperation

1. Covid19 outbreak continues to rise in parts of the Middle East and North Africa (MENA)

  • Cumulative Covid19 cases in the MENA region have surpassed 10mn.
  • The GCC, which accounts for 14% of the population accounts for just over 1/5th of the cases; Iran, home to 21% of the region’s population, accounts for just over 1/3-rd of cases.
  • Bahrain, which had seen a massive spike in cases (reaching close to 2k daily cases per mn persons) towards end-May, has come down significantly. Kuwait, Oman and UAE have the highest readings as of this week.
  • At least 14 out of the 22 countries in the region have now logged the new, more infectious variant (WHO) & surges are visible in many nations including the UAE, Libya, Iraq, Morocco and Tunisia among others.


2. Vaccination is the best way out of the pandemic amid  adoption of Stringent Policy Measures

  • As the Delta variant spreads, empirical evidence shows that vaccine are key in preventing hospitalizations – hence the urgency to increase vaccination pace across the MENA region.
  • Egypt and Saudi Arabia are the least stringent in the MENA region; Lebanon, after weeks of high stringency levels, seemed to have its cases under control (from near 3,500 daily cases in mid-Mar to just 150 end-Jun).
  • Oman, where cases are currently 44% down from the peak in Jun, continues to remain cautious: it has announced lockdowns during the Eid holidays next week & remains the most stringent. Its vaccination pace is the slowest among the GCC nations, with only 5.3% of the population fully vaccinated.


3. Vaccination pace in the Middle East has quickened, but with wide disparities

  • There has been a significant vaccine divide across the Arab world, with the richer oil producing/ exporting GCC nations running successful campaigns versus the relatively poorer parts of Yemen.
  • UAE and Bahrain are top ranked at the global level, having successfully administered 162.2 and 129.8 doses per 100 persons respectively; these nations have also started providing a booster shot to those that have been vaccinated for more than 6 months. However, the region is also home to Yemen where only 1 dose has been administered per 100 persons (vs 0.06 in mid-May) and 2.7 doses in Iraq (vs 0.07 in end-Mar).
  • Vaccination pace has substantially quickened compared to mid-Mar and is likely to continue as more production comes online, including from the region’s economies: UAE’s Hayat-Vax and Egypt’s Sinovac.
  • Faster the vaccination pace, shorter the path to herd immunity and return to near-normalcy in terms of economic activity – albeit with social distancing and masks.

 

4. Mobility improves in the UAE

  • Given its relatively lower stringent levels, it is no surprise that both Dubai and Abu Dhabi (within the UAE) report a rise in mobility across different categories
  • Retail & recreation remains below pre-pandemic levels: with a significant drop during Ramadan and a spike for Eid
  • Interestingly, grocery and pharmacy visits have crossed to pre-pandemic readings, though Dubai has higher footfall than Abu Dhabi
  • Weekly traffic congestion moves in line with stringency, though Abu Dhabi is picking up faster vis-à-vis Dubai – also reflected in workplace mobility
  • With Eid holidays next week, anecdotal evidence suggests high levels of domestic & international tourism –latter limited to neighbouring nations (flights to India are still suspended; UAE stays on the UK’s red list)

5. Both UAE & Dubai PMIs show expansion, though pace has slowed

  • UAE PMI edged down by 0.1 points to 52.2 in Jun; Dubai PMI eased by 0.6 to 51.6
  • The silver lining was employment in both: increased at the fastest pace since 2019; but it is slower than the long-run series average. Expo starting in Oct will also add create new employment opportunities
  • Raw material shortages were widely reported, affecting output growth
  • Supply chain problems + rising freight costs + lengthened delivery times meant rise in purchasing costs => input cost inflation
  • Survey respondents highlighted low sales; export sales fell in UAE given flight cancellations
  • Vaccination pace + less stringent measures + “open for tourism” + reforms (100% foreign ownership, long-term visas) implies that a recovery is underway, but high number of daily cases (~1500) & new variants are cause for concern

6. Saudi Arabia & Oman: long-term cooperation

  • Oman’s Sultan visited Saudi Arabia this week: his first foreign trip since his ascension.
  • Economic cooperation on many fronts likely to benefit from the discussions: trade, investment and infrastructure among others (in addition to security, cultural & other diplomatic discussions)
    • Trade: Oman’s exports to Saudi Arabia stands at roughly 5% of total exports, but in the recent years, transportation materials have accounted for a substantial part of its exports to Saudi (chart)
    • Investment: Saudi Arabia is considering developing an industrial zone in Oman; last month, an Omani delegation presented around 150 investment opportunities worth an estimated OMR 1.5bn across multiple sectors including real estate, tourism, food security as well as renewable energy among others
    • Infrastructure: the Omani-Saudi road connection will reduce cost of transport, travel time & facilitate movement of goods.
  • Other opportunities abound (non-exhaustive list):
    • Though oil remains a major export item for both nations, there is a conscious effort to move to cleaner energy including solar, wind & now green hydrogen.
    • Privatisation programs/ stakes in state-owned entities (including monetization of energy assets)
    • Saudi Tadawul/ Nomu could offer attractive listing / cross-listing opportunities

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Weekly Economic Commentary – Jul 11, 2021

Markets

Equity markets dropped across the globe towards the end of last week: US markets posting a slight weekly gain after rallying to new record highs while European stocks gained on bargain buys after the week’s selloffs; Asian stocks hit a 2-month low on the Delta variant scare. Regional markets posted a mixed picture last week, with Oman and Abu Dhabi markets posting gains. Safe-haven currencies yen and swiss franc weakened as risk appetites recovered while the euro edged up slightly. Oil prices posted a weekly loss after rising to multi-year highs during the week given the OPEC+ deadlock and related uncertainty. Gold posted its 3rd consecutive weekly gain, crossing the USD 1,800 mark.

Weekly % changes for last week (8-9 Jul) from 1 Jul (regional) and 2 Jul (international).

Global Developments

US/Americas:

  • FOMC minutes showed that though the topic of tapering was raised, the dominant call was that no significant policy shifts were to be made unless the economy showed “substantial further progress”.
  • The latest JOLTS report showed that while 9.2mn jobs were open in May (about the same as in Apr’s 9.193mn), about 3.6mn opted to leave jobs (a quit rate of 2.5%). While those who left jobs were less than Apr’s 20-year high of 3.9mn, it is still one of the highest levels since Dec 2000. About 859k workers left their “trade, transportation and utilities” jobs, while the quit rate was highest in leisure and hospitality (5.3%).
  • Initial jobless claims unexpectedly increased to 373k in the week ended Jul 3rd from an upwardly revised 371k the week before. Continuing claims fell by 145k to 3.34mn in the week ended Jun 12th, with the 4-week average down by 44.5k to 3.44mn – the lowest since Mar 2020.
  • ISM services PMI slipped to 60.1 in Jun (from May’s record high of 64), with the employment index down to below-50 (49.3) as new orders and new export orders slowed to 62.1 and 50.7 respectively from 63.9 and 60 the month before.
  • Markit services PMI edged lower to 64.6 in Jun from the preliminary estimate of 64.8 and May’s all time high of 70.4, though growth rates in new businesses and export remained strong.

Europe:

  • Industrial production in Germany fell by 0.3% mom in May, following a similar drop the month before; the drop was largely due to a plunge in the production of capital goods, which fell 3.4%. In yoy terms, IP grew by 17.3%.
  • German exports inched up by 0.8% mom in May – the 13th consecutive month of increase – alongside a 3.4% uptick in imports, thereby narrowing the trade balance to a surplus EUR 13.3bn. In yoy terms, exports were up by more than 36% and have now almost returned to pre-crisis levels. The UK dropped out of the top 5 export destinations (thanks to Brexit) – a list now comprising the US and China on top.
  • German factory orders fell by 3.7% mom in May (Apr: 1.2%), the first drop in new business this year, driven by a 6.7% plunge in foreign orders (Eurozone -2.3% and rest of the world -9.3%). Compared to Feb 2020, new orders were higher by 6.2%.
  • The ZEW survey’s current situation index in Germany improved to 21.9 this month, from -9.1 in Jun. The Economic sentiment index eased to 63.3 from 79.8 the month before. The economic sentiment index for the eurozone slipped by 20.1 points to 61.2 while more than 75% of the experts still expect inflation in the euro area to rise further in the next six months.
  • Retail sales in the eurozone increased by 4.6% mom and 9% yoy in May (Apr: -3.9% mom and +23.3% yoy). As restrictions were eased, sales of non-food products (excluding fuel) increased by 8.8% mom (Apr: -6.1%) while sales of auto fuel were up 8.1% mom.
  • Germany’s services PMI quickened to 57.5 in Jun (May: 52.8), the highest reading since Mar 2011. Composite PMI rose to a 10-year high of 60.1 (56.2), with the 12-month expectations also touching a series-record high.
  • Services PMI in the EU climbed up to 58.3 in Jun (May: 55.2), with all nations posting an increase in activity (led by Ireland and Spain). The composite PMI moved up 0.3 points from the flash estimate to 59.5 (May: 57.1), thanks to an improvement in service sector expansion to its best since mid-2007.
  • GDP in the UK grew by just 0.8% mom in May (Apr: 0.2%), after a contraction in building work and a slump in car production while services sector edged up by 0.9% (37.1% rise in accommodation and food service activities from low lockdown base). Transport equipment manufacturing fell by 16.5%, its largest fall since April 2020. Over the three months to May, GDP grew by 3.6%, mainly because of strong retail sales.
  • Industrial production in the UK increased by 0.8% mom and 20.6% yoy in May. Manufacturing grew by 27.7% yoy but slipped by 0.1% in mom terms.
  • UK trade data shows that exports to the EU rose to their highest since Oct 2019 in May (+8.8%), after a slump in the start of the year; imports are still relatively weak (+0.8%).
  • UK’s services PMI was revised to 62.4 in Jun from a preliminary reading of 61.7 and 62.9 in May – this was the second highest reading since Oct 2013. Meanwhile costs pressures continued: respondents stated that higher staff wages, increased raw material prices and greater transportation charges were the main factors pushing up costs.

Asia Pacific:

  • The People’s Bank of China (PBoC) will cut the reserve requirement ratio for banks by 50bps effective on July 15, releasing around CNY 1trn in long-term liquidity. This will be the first RRR cut since Apr 2020.
  • Inflation in China fell by 0.4% mom in Jun; in yoy terms, inflation was down to 1.1% in Jun (May: 1.3%). Producer price index stood at 8.8% last month (May: 9%), as prices for copper and steel fell (after domestic price stabilization policy measures were introduced).
  • China money supply accelerated by 8.6% yoy to CNY 231.78trn in Jun. New loans surged to CNY 2120bn (May: CNY 1500bn) while total social financing, a broad measure of credit and liquidity in the economy, rose to CNY 67trn (May: CNY1.92trn). Foreign exchange reserves eased to USD 3.214trn in Jun (May: USD 3.22trn).
  • China’s Caixin services PMI eased to a 14-month low of 50.3 in Jun (May: 55.1), given the spread of the Covid19 Delta variant. Though the gauge of new export business rose into positive territory, new orders grew the least since Apr 2020 while employment shrank.
  • Japan’s leading economic index slipped for the first time in a year to 102.6 in May (Apr: 103.8) while the coincident index slowed to 92.7 from 95.3.
  • Current account surplus in Japan widened to JPY 1979.7bn in May (Apr: JPY 1321.8bn), up 85.3% yoy, thanks to an acceleration in exports (+46.5% to JPY 6.18trn).
  • Retail sales in Singapore fell by 6.8% mom in May, given the Phase 2 restrictions introduced from mid-May to mid-Jun; mom changes were positive only for retailers of computers and telecom equipment (+18.9% mom) and supermarkets (+12.3%). In yoy terms, sales were up by 79.7% given the base year effects.

Bottomline: Just as summer travel season begins comes news about fresh surges in Covid19 cases – many European nations that had opened for tourists (including France and Spain) are introducing partial restrictions, while Tokyo Olympics will continue spectator-less. Bouts of new cases in China are dragging down activity in ports and factories and the RRR cut signals concern of potentially slower GDP growth. Meanwhile, the oil prices are on a roller-coaster ride given uncertainties: if current deal holds and there is no new deal, demand is likely to outpace supply driving up prices; if countries begin deciding their own production limits, it could lead to a price war and tumbling oil prices. At this stage, a reasonable solution seems a “temporary” increase in production levels for some producers. At this juncture, oil producers are also asking if oil demand is going to peak sooner than later (given countries’ decarbonization efforts to meet Paris climate goals and growing demand for renewables).

Regional Developments

  • Bahrain’s GDP contracted by 2.1% yoy in Q1, with declines of 3% and 2% in the non-oil and oil sector respectively. This follows a 5.1% plunge in GDP last year; the ministry of finance and national economy estimates non-oil sector to grow by 3.8% this year and 3.7% in 2022, while the oil sector remains flat.
  • In a new regulatory statement, it was revealed that the planned sale of Ithmaar Holding’s assets to the Bank of Bahrain and Kuwait has been cancelled and talks abandoned.
  • Egypt’s PMI increased to 49.9 in Jun, its highest reading since Nov 2020 and up from May’s 48.6, thanks to an increase in both output and new orders (above-50) while employment contracted. Input prices rose at the sharpest pace for nearly two years due to a steep increase in raw material prices, but firms often absorbed the costs.
  • Annual urban inflation in Egypt edged up to 4.9% in Jun (May: 4.8%); in mom terms, inflation eased to 0.2% mom from 0.7% in May largely due to a slowdown in food inflation. Core inflation accelerated to 3.8% yoy in Jun (May: 3.4%).
  • Egypt eased guest limits for hotels, restaurants, cinemas and theatres to 70% of their capacity from 50% before; Covid19 cases stood at a 7-day average of 173.29 on Jul 8th.
  • In H1 2021, Egypt welcomed 3.5mn visitors, earning revenues worth between USD 3.5-4bn, according to the deputy minister of tourism. In 2020, tourism revenues had plunged by 70% to USD 4bn. Separately, hotel occupancy in Cairo rose to 45% in H1 this year vs 27% during the same period last year. In the Red Sea resorts of Sharm el-Sheikh and Hurghada, occupancy rates were up to 35-40% from 20-23% in H1 last year.
  • The Sovereign Fund of Egypt plans to raise about EGP 1.75bn (USD 111.5mn) to invest in providing high-quality education to the middle class.
  • Egypt’s Financial Regulatory Authority and the Tax Authority agreed to exempt consumer finance services from VAT.
  • Saudi Arabia has allocated EGP 270mn (USD 17.25mn) to support SMEs in Egypt, revealed the minister of international cooperation. This includes EGP 70mn to finance purchases of factory machinery and medical equipment, EGP 100mn to finance clean energy and another EGP 100mn to finance microenterprises.
  • Moody’s affirmed the Caa1 long-term non-investment grade rating of Iraq and maintained its stable outlook. Key challenges for the nation include the high reliance on oil (fiscal and economic), low competitiveness as well as weak institutions and governance.
  • Kuwait’s Jazeera Airways completed its capital increase subscription process with a total value of KWD 10mn (USD 33mn) through the issuance of 20 million shares.
  • PMI in Lebanon fell to 47.5 in Jun, down from a 19-month high of 47.9 in May: weak purchasing power (given the collapse of the currency), reduced business volumes and fall in employment rate were noted by respondents.
  • Lebanon’s central bank stated that it would pay out to USD 400mn to finance the imports of essential medicines and flour.
  • A report from the Crisis Observatory found that in Lebanon, a family of five now spends more than three times the minimum wage for main meals for a month (about LBP 1mn) while about three-quarters of families have a monthly income of less than LBP 2.4mn.
  • The IMF disclosed that Oman had requested technical assistance to help develop a medium-term debt strategy and strengthen its fiscal framework. According to the latest Article IV consultation, Oman is expected to grow by 2.5% this year following a 2.8% decline in GDP last year, alongside a budget deficit of 19.3% of GDP while debt-to-GDP ballooned to 80% (from 15% in 2015). More: https://nassersaidi.com/2021/07/08/weekly-insights-8-jul-2021-diverging-pmi-readings-saudis-new-import-rules-omans-imf-ta-request/
  • Oman’s foreign reserves grew by 8.1% yoy to OMR 7bn (USD 18.2bn) in Apr. Total loans and financing of commercial banks was up by 3% yoy to OMR 18bn.
  • Oman’s Tax Authority started to receive its first set of VAT returns starting July 1st.
  • State energy company in Oman, OQ, is considering a sale of its drilling unit Abraj Energy Services as part of a broader divestment plan, reported Reuters.
  • PMI in Qatar rebounded to 54.6 in Jun, following a 7-month low of 51.5 in May, driven by new orders and output, each up by 1.3 and 1.5 points respectively. Manufacturing was the best performer (56.4), followed by wholesale and retail (54.8), construction (52.5) and services (50.5). Wage inflation reached a 28-month record.
  • Qatar Investment Authority’s stake in Credit Suisse will increase to 6.01% when convertible assets are taken into account in addition to the 128mn shares it owns in the company (which is equivalent to a 4.84% stake).
  • Global Sukuk issuance increased by 4.9% yoy to USD 90.6bn in H1 2021, according to S&P. This was led by an increase in sales from Saudi Arabia and Malaysia, in addition to Oman’s return to the market; about USD 20bn of sukuk will mature in H2 2021, and it is likely that some of it will be refinanced.
  • Green financing linked to sustainability projects in the MENA region touched USD 6.4bn in H1 2021, according to a Bloomberg study: this is 38% higher than the USD 4.7bn raised through the full year 2020. The Red Sea Development Company’s SAR 14.12bn (USD 3.8bn) accounted for close to 60% of total. Separately, last week, Saudi Electricity Company agreed a USD 500mn green lending facility.
  • The UN World Food Programme stated that acute food insecurity surged by 40% this year to affect a record 270mn persons: average wheat flour prices in Lebanon rose by 219% yoy amidst accelerating economic turmoil, while cooking oil prices soared 440% yoy in Syria.
  • The Central Bank of Jordan and the Arab Monetary Fund have completed the inclusion of the Jordanian dinar as a settlement currency in the Buna platform for Arab payments – this is in addition to the UAE’s dirham, Saudi Arabia’s riyal, USD and the euro.

Saudi Arabia Focus

  • Saudi Arabia’s non-oil sector PMI moved up to 56.4 in Jun, unchanged from a month ago, supported by a surge in new orders (boosted by stronger domestic sales vis-à-vis foreign sales) and job creation (the fastest pace since Nov 2019).
  • The IMF, in its most recent Article IV for Saudi Arabia, forecasts economic growth to touch 2.4% this year, with the non-oil sector rising by 4.3% alongside a 0.4% drop in the oil sector. While fiscal deficit widened to 11.3% of GDP last year, given a 30% drop in oil revenues and though VAT was hiked to 15%, this year the gap is estimated to narrow to 3.5%. Fiscal consolidation was an underlying message through the report, and the PIF’s contribution was to contribute to growth recovery. (Download the report at: https://bit.ly/3yQnYml)
  • Saudi Arabia announced a cap on domestic gasoline prices, at June’s levels, to “decrease the burden of living costs on citizens and residents” and “support local economic activity”. This is the first-time prices are being capped since it was liberalized in 2018. While on one hand, it will free up more disposable income for spending, it contrasts with the Kingdom’s long-term fiscal sustainability plan (which includes extensive subsidy reform). While this would quell the angst of citizens against rising prices (remember that the cost-of-living allowance was suspended in June last year & VAT hiked in Jul), a move to strengthen social safety nets would likely have been more cost-effective while ensuring that benefits reached the needy. The IMF estimates that additional social safety net spending would cost about 0.5% of GDP.
  • Saudi Arabia approved rules on local content, labour and value-added: the decree stated that products made in free zones would not be considered “locally” made; in addition, products needed a valid certificate of origin and had to be shipped directly from the producing country to get a preferential tariff. The short-term impact will be that certain goods will be excluded from preferential tariffs implying an increase in customs duties and consequently the cost of doing business. UAE, a major re-exporting hub, is Saudi Arabia’s second largest trade partner after China (with respect to import value). It could affect trade as in 2019, UAE’s Jafza generated trade worth USD 99.5bn (roughly about the value of intra-GCC trade!). More: https://nassersaidi.com/2021/07/08/weekly-insights-8-jul-2021-diverging-pmi-readings-saudis-new-import-rules-omans-imf-ta-request/
  • Saudi Arabia’s PIF assets have increased to SAR 1.6trn (USD 426.6bn), disclosed the Deputy Governor, while stating that the aim is to expand this to SAR 4trn by end-2025. The fund also plans to boost local investments to more than 3/4th of its total investments.
  • Bloomberg reported, citing Aramco’s senior official, that the company plans to raise “tens of billions of dollars” in asset sales over the coming years. This seems to be in line with other energy firms (Oman’s OQ announcement this week and ADNOC just the week before) actively considering privatisation to earn revenue from their assets.
  • July Sukuk issuance programme in Saudi Arabia closed at SAR 10.412bn (USD 2.78bn).
  • Saudi Ports Authority plans to invite the private sector for build-operate-transfer contracts in 8 ports across the country; there was no indication of the financial investments required for these projects, but these seem to be in line with the transport/ logistics sector strategy that is being pursued. Separately, the transport and logistics services minister revealed that the sector strategy will generate SAR 550bn (USD 150bn) in investments by 2030 – of which the government would provide just 35% of needed funding.
  • The Saudi Authority for Industrial Cities and Technology Zones (MODON) announced a second industrial city project in Makkah.
  • An incentive for real-estate firms to list in Tadawul: firms listing on the exchange will automatically be licensed to sell off-plan properties. This comes hot on the heels of an incentive package announced by MODON to encourage listings.
  • Housing supply in Saudi Arabia increased by 29% yoy and 0.6% qoq in Q1 2020. Construction started on 101k units in Q1, up 18% yoy, while 106k units were completed.
  • Saudi Arabia’s Social Development Bank (SDB) provided financing of SAR 1.6bn (USD 426.6mn) to 30k beneficiaries in H1 2021. Bank financing to SMEs surged by 41% qoq in Q2. Separately, the General Entertainment Authority signed a MoU with SDB to provide soft financing worth SAR 500mn to support growth and sustainability in the entertainment sector.
  • Saudi Arabia plans to localize 6 more new professions to provide around 40k jobs: this includes in legal advice, customs clearance, real estate activities, cinemas, driving schools, and technical and engineering professions.
  • Around 48% respondents in Saudi Arabia stated that they would continue to use online shopping and banking more than in pre-Covid19 times, reported Al Eqtisadiah.
  • With an aim to become a major data centre hub for the region, Saudi Arabia launched an USD 18bn plan to build a network of large-scale data centers across the country, to surpass the 1300MW data space target mark before the end of this decade (vs only 60 MW now).

UAE Focus

  • UAE non-oil private sector PMI eased to 52.2 in Jun (Apr: 52.3): this is the 7th consecutive month of expansion. While output growth was unchanged (raw material shortage was cited as a reason), new order growth weakened, export sales fell and purchase costs rose to a 3-month high. Employment meanwhile rose for the first time in five months, and at the fastest rate since Jan 2019.
  • Bloomberg reported that Sharjah’s government plans to raise over USD 750mn from an Islamic bond offering, to support its fiscal stance.
  • Dubai welcomed a total of 3.7mn tourists into the emirate since it reopened to tourists in Jul 2020 till May 2021; of this, 2.06mn visited this year. Domestic tourism also surged during the period, more than doubling to 5.5mn.
  • The Dubai Multi Commodities Centre (DMCC) posted its best H1 performance since 2013, attracting 1230 new companies to the free zone; this follows the registration of 2025 new firms during the pandemic-hit 2020.
  • Consumer confidence in Dubai touched a 10-year high, rising to 151 points in Q2 2021 (Q2 2020: 125). While 84% of respondents were positive on the Dubai economy, about 75% were positive about job prospects (vs 32% a year ago) and 91% were optimistic about finding a job within 12 months.
  • Dubai’s property sales transactions hit an eight-year high of AED 14.79bn (USD 4.03bn) in June, according to Property Finder.
  • Dubai’s external pharmaceutical and medical supplies trade grew by 31% yoy to AED 6.8bn in Q1 2021, according to Dubai Customs data.
  • Abu Dhabi National Energy Co. (TAQA) and Abu Dhabi Ports signed an MOU to build a green hydrogen-to-ammonia project, which will include a storage facility creating potentially an export hub.
  • Abu Dhabi’s airport operator cancelled a contract to build the AED 10.8bn terminal at the emirate’s main airport. This contract was awarded in 2012, with the terminal expected to open in 2017, though in 2019 it was reported to be only 97.6% complete.
  • Shuaa Capital is exploring the setup of 3 SPACs, to be listed in the US, in the field of energy, finance and technology sectors, reported Bloomberg.

Media Review

G20 must act now to vaccinate the world

https://www.project-syndicate.org/commentary/g20-finance-ministers-in-venice-must-adopt-covid19-vaccination-plan-by-jeffrey-d-sachs-and-juliana-bartels-2021-07

Is the emerging world still emerging?

https://www.imf.org/external/pubs/ft/fandd/2021/06/jim-oneill-revisits-brics-emerging-markets.htm

Which airlines will soar after the pandemic?

https://www.economist.com/business/2021/07/06/which-airlines-will-soar-after-the-pandemic

Saudi Arabia’s amended import rules (with Dr. Nasser Saidi’s comments)

https://www.reuters.com/world/middle-east/saudi-arabia-amends-import-rules-gulf-challenge-uae-2021-07-05/

Dr. Nasser Saidi’s interview with Al Arabiya on Oman (in Arabic)

https://nassersaidi.com/2021/07/09/interview-with-al-arabiya-arabic-on-omans-economy-8-jul-2021/

Dr. Nasser Saidi’s interview on Lebanon (Dubai Eye, in English)

https://nassersaidi.com/2021/07/09/radio-interview-with-dubai-eyes-business-breakfast-on-lebanon-economic-crisis-and-currency-plunge-8-jul-2021/

 

 

 

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Weekly Insights 8 Jul 2021: Diverging PMI readings, Saudi’s new import rules & Oman’s IMF TA request

Weekly Insights 8 Jul 2021: Diverging PMI readings, Saudi’s new import rules & Oman’s IMF TA request

1. Global Manufacturing PMI near multi-year highs; PMIs slow in Asia as a more severe wave of the pandemic hits

  • Global manufacturing PMI slipped to 55.5 in Jun, easing from the 11-year high of 56 in May, with Europe the “bright spark” while Asia paled in comparison (India fell into contractionary territory after 10 months; PMIs in Vietnam and Malaysia plunged to 44.1 and 39.9 respectively).
  • Supply disruptions continued, and average vendor lead times “lengthened to the greatest extent in the near 24-year survey history”; average input prices “rose to one of the greatest extents in the survey history”.
  • Asia is witnessing a more severe wave of Covid19 cases in the past weeks: of every 100 infections last reported around the world, about 35 were reported from countries in Asia and the Middle East. The region is currently reporting a million new infections about every 7 days.
  • While new orders are rising, lockdowns/ restrictions are causing delays and disrupting shipping, with some estimating that the impact could affect shipments as far out as Christmas this year.

2. Shipping costs are still on the rise => air cargo relatively attractive

  • Global shipping costs (especially on long-distance routes) continue to rise, as demand recovers amid shortage of containers. According to Sea-Intelligence, Feb 2021 marked the height of container congestion, with almost 12% of global container capacity (around 2.8m TEU) absorbed in vessel delays. In Apr 2021, the congestion figure was at 8.6% or 2.1mn TEU. Increase waiting times at the Yantian port in Jun imply more congestion.
  • So, air cargo is now relatively attractive compared to containers price-wise (vs. Q2 2020 when aircrafts were grounded & hence air cargo fares spiked): IATA. Furthermore, the speed of air cargo provides another competitive edge. Cargo tonne km (CTKs) flown in May 2021 were 9.4% above pre-crisis level (May19), though slowing from Apr’s 11.3% reading.

 

3. Mixed PMI readings in the Middle East: Lebanon and Egypt stay below-50

 

  • While PMIs improved in H1 2021 vis-à-vis last year, it still remained well below the 2019 average
  • Though UAE PMI edged down slightly in Jun, as foreign sales dropped amid supply delays, employment rose for the first time since Jan and at the quickest pace in more than two years. In Saudi Arabia as well, job creation rose at the fastest pace since late 2019

4. Saudi Arabia’s rules on local content, labour & value-added: impact on GCC trade?

  • The GCC customs union agreement (Jan 2003) was designed for highly oil-dependent economies and importing goods and services from the EU, US & Japan to a lesser extent.
  • Since 1973 there has been a tectonic shift in global economic geography towards Asia with China the main trade partners for most GCC nations. At end-2020, China accounts for around 1/5th of Saudi’s total exports; for the UAE, it stands at around 10% of total exports. In contrast, intra-GCC trade stood at just above USD 90bn as of end-2019 (GCC Secretariat), a trivial 5.5% of GDP.
  • The GCC agreement & subsequent amendments also did not account for the rapid growth of production and exports from the free zones and/ or special economic zones leading to the current dispute concerning the domestic content of trade.
  • Free zone trade is significant for UAE/ Dubai, given the operations of Jafza: in 2019, Jafza generated trade worth USD 99.5bn (roughly about the value of intra-GCC trade!)

  • The GCC agreement and subsequent limited amendments also did not account for the rapid growth of production and exports from the free zones and/ or special economic zones leading to heightened competition between Saudi products & UAE FZ/SEZ exports.
  • The GCC nations have not adapted to these changed domestic and external structural changes, hence the pressure on the customs union and on trading rules (such as domestic content).
  • The GCC needs to move to a new trade and investment agreement (replacing the customs union) and moving to a true common market that allows for deep integration (including for trade in services and labour mobility), allowing the GCC to benefit from economies of scale resulting from more open and greater market size, which would be a magnet for FDI.
  • A new GCC-wide deep trade & investment agreement would also allow the GCC to negotiate as a bloc with the EU, China, ASEAN, USMCA and emerging African trading blocs, a must for participation in global value chains.
  • Short-term impact: certain goods will be excluded from preferential tariffs implying an increase in customs duties and consequently the cost of doing business. UAE, a major re-exporting hub, is Saudi Arabia’s second largest trade partner after China (w.r.t import value).
  • The current dispute, while disruptive in the short-term, can open the door to a more efficient, modern, trade & investment framework and agreement that would boost growth prospects and allow for greater diversification, higher value-added regional trade (rather than re-exports from the rest of the world) and integration into evolving global value chains.

5. Is Oman’s technical assistance (TA) request timely?

  • Oman has requested for Technical Assistance from the IMF to help it develop a medium-term debt strategy and strengthen its fiscal structure, given high budget deficits & jump in debt to GDP in 2020.
  • Oman’s non-oil economy grew by 5.7% to USD 14.8bn in Q1 2021: NCSI. However, with a 20.6% plunge in oil sector activity, overall GDP contracted by 2.5%. The IMF forecasts 2.5% growth this year, given a recovery in aggregate demand post-vaccine rollout (21.5% of population has received at least one dose).
  • There have been several recent positive policy developments

A.On the fiscal side: (a) 5% VAT introduced; (b) expected to phase out water and electricity subsidies by 2025; (c) ongoing discussions re the introduction of income taxes for high-income earners

B.Institutional reforms: two new agencies were established: (a) the Oman Investment Authority to improve management of public assets and maintain oversight of State-owned Enterprises; and (b) Energy Development of Oman to manage and finance investments in energy

  • However, Omans debt-to-GDP ratio surged to 80% in 2020, from about 15% in 2015 & given fiscal/ financial support during Covid19, budget deficit widened to 19.3% of GDP. The latter is esitmated to ease this year, to 2.4% of GDP. Fiscal reform is required to ensure fiscal & debt sustainability.
  • Oman has been tapping the international debt markets in 2021: raised USD 1.75bn in nine-year sukuk in Jun (2nd transaction in international debt markets, following USD 3.25bn in 3-part bonds in Jan).
  • Other than fiscal, another major issue is that of unemployment: unemployment in Oman was estimated at 4.97% by ILO in 2020 (2019: 1.8%). More importantly, in 2019, youth unemployment was at 11.6% & female youth unemployment at a massive 36.3%. Covid19 last year would only have further exacerbated this.
  • Oman’s request for TA could be the precursor for an IMF-sanctioned reform programme. Egypt has seen the benefits of reform measures, being the only MENA nation to post a positive growth in 2020

 

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Weekly Economic Commentary – Jul 4, 2021

Markets

US stocks continued to rise to new records, with the latest better-than-expected jobs data: according to S&P Dow Jones indices, this winning streak was the longest run of consecutive record closes since June 1997. In Europe, both Stoxx600 and FTSE closed slightly lower than the week before. In Asia, China’s shares dropped a day after the Communist Party’s centenary celebrations, after some harsh rhetoric against nations criticizing China’s policies (trade, tech, human rights) and on expectations of tighter monetary policy. Regional markets were mixed last week: Abu Dhabi stocks touched a new record high while Saudi Tadawul posted its 8th weekly gain. In currency markets, dollar slipped from a 3-month high on Fri; the yen strengthened by 0.2% while the euro was down by 0.6%. With OPEC+ talks stalled over UAE’s opposition to the deal (UAE wants to raise its own output target), oil prices remained above USD 75 a barrel. Gold price closed nearer to USD 1,800.

Weekly % changes for last week (1-2 Jul) from 24 Jun (regional) and 25 Jun (international).

Global Developments

US/Americas:

  • Non-farm payrolls increased for the 6th consecutive month, rising by 850k in Jun (May: 583k). Unemployment rate inched up to 5.9% from 5.8% a month ago. The labour force participation rate remained same at 61.6% while the average hourly earnings increased to 3.6% yoy (May: 1.9%), to reach the fastest pace since Mar.
  • Initial jobless claims slowed to a new pandemic-era low of 364k in the week ended Jun 26th from an upwardly revised 415k the week before, taking the 4-week average down to 392.75k. Continuing claims increased by 56k to 3.47mn in the week ended Jun 19th while the 4-week average fell by 75k to 3.48mn – the lowest since Mar 21, 2020.
  • The US private sector added 692k jobs in Jun (May: 886k), with the biggest hiring gain from the leisure and hospitality sector (+332k jobs), followed by education and health (+123k).
  • Factory order grew by 1.7% mom in May (Apr: -0.1%), thanks to a 7.7% surge in orders for transportation equipment. Orders for non-defense capital goods, excluding aircraft, inched up 0.1% in May instead of dipping 0.1% as reported last month.
  • ISM manufacturing PMI eased to 60.6 in Jun (May: 61.2), as new orders slowed to 66 (from 67) and employment slipped to below-50 and prices paid jumped to 92.1 (May: 88).
  • Markit manufacturing PMI remained unchanged at 62.1 in Jun, but lower than the flash estimate of 62.6, with both new orders and production growing at fast paces. Meanwhile, supplier delivery times lengthened to greatest extent on record and input cost inflation touched a new series record.
  • Chicago PMI fell to a 4-month low of 66.1 in Jun (May: 75.2); but through Q2, the index surged 7.9 points to 71.1, its highest quarterly reading since Q4 1973.
  • Trade deficit in the US widened to USD 71.2bn in May, largely due to rising imports (+1.2% to USD 234.7bn) while exports gained by 0.3% to a record high USD 145.5bn.
  • S&P home price index gained by 14.6% yoy in Apr (Mar: 13.3%) the highest reading in more than 30 years of since data collection began. Separately, pending home sales unexpectedly rebounded by 8% mom in May, the most in 11 months, following Apr’s 4.4% drop.

Europe:

  • Germany’s harmonized index of consumer prices inched up to 0.4% mom in Jun (May: 0.3%). In yoy terms, prices eased to 2.1% in Jun, down from 2.4% the month before, but is still above the ECB target.
  • Markit manufacturing PMI for Germany increased to 65.1 in Jun (May: 64.9), thanks to faster rate of output and new orders growth. Furthermore, employment increased for the fourth month in a row and at the quickest rate since Jan 2018.
  • In the eurozone, manufacturing PMI increased to 63.4 in Jun (May: 63.1), staying in the expansionary territory for the 12th consecutive month. The report also noted the “expansion of capacity via record employment growth and greater capital expenditure on business equipment and machinery”.
  • Retail sales in Germany recovered in May, rising by 4.2% mom (Apr: -6.8%); in yoy terms, retail sales were down by 2.4% though online retailers continued to benefit.
  • The unadjusted unemployment rate in Germany declined to 5.7% in Jun (May: 5.9%) while in seasonally adjusted terms it remained unchanged at 5.9%. Though the number of furloughed workers dropped to 2.34mn in Apr, down from almost 6mn in Apr 2020.
  • Unemployment rate in the eurozone fell to 7.9% in May from 8.1% the month prior; youth unemployment also declined to 17.3% from 18.2% the month before. Furthermore, the number of jobless people across the EU is still 1.9m above its pre-pandemic level, at 15.4mn.
  • Inflation in the eurozone stood at 1.9% yoy in Jun (May: 2%), dropping for the first time in 9 months, while core inflation eased to 0.9% from 1% the month before. Prices of non-energy industrial goods grew at a faster rate, but was outweighed by drops in services and energy inflation.
  • The Economic Sentiment Indicator touched a 21-year high in the EU and euro area, rising by 3 and 3.4 points to 117 and 117.9 respectively in Jun (from May). Separately, the Employment Expectations Indicator also increased (+1.2 points to 111.5 in the EU and +1.6 points to 111.6 in the euro area) to the highest level since Nov 2018.
  • GDP in the UK was revised lower: it fell by 6.1% yoy and 1.6% qoq in Q1. Consumption was revised down to -4.6% qoq from -3.9% while the household saving ratio grew to 19.9% in Q1 (Q4: 16.1%) – the second highest quarterly reading since the series began in 1963.
  • UK manufacturing PMI slowed slightly to 63.9 in Jun from May’s record high 65.6: improved demand came hand-in-hand with easing restrictions and new export orders rose again. However, record price increases were reported as average input costs rose at the fastest pace in survey history.

Asia Pacific:

  • China’s NBS manufacturing PMI eased to 50.9 in Jun (May: 51), posting the weakest expansion since Feb. Exports orders fell for the 2nd consecutive month and employment remined below-50 at 49.2. Caixin manufacturing PMI slowed to a 3-month low of 51.3 in Jun (May: 52): new orders growth eased, but rate of job creations was the 2nd strongest since Jan 2013 and input prices rose the least in 7 months. Non-manufacturing PMI also slipped down to 53.5 in Jun (May: 55.2). Supply chain disruptions, as well as the recent outbreak of Covid19 cases and restrictions in China’s major export areas seems to have affected sentiment.
  • Industrial production in Japan slumped by 5.9% mom in May (Apr: +2.9%), the largest drop since May 2020, largely due to a sharp fall in motor vehicle production (-19.4%). However, industrial output surged 22% yoy in May (Apr: 15.8%) – a result of low base effects.
  • The au Jibun Bank manufacturing PMI dipped to 52.4 in Jun (May: 53), thanks to a softer increase in output. Covid19 restrictions and shortages of raw materials impacted production.
  • Japan’s Tankan large manufacturing index surged to 14 in Q2 (Q1: 5) – the highest level since Dec 2018 – while non-manufacturers’ business confidence also improved to +1 from -1 in the previous survey, to reach its highest index reading since Mar 2020.
  • Japan unemployment rate edged up to a 5-month high of 3.0% in May (Apr: 2.8%). The number of people at work declined by 130k to 45mn in May, while the number of unemployed people rose by 100k to 2.04mn.
  • Retail trade in Japan fell by 0.4% mom in Apr; in yoy terms, it picked up (for the 3rd consecutive month) by 8.2%, given the base effect. Separately, large retailers saw sales surge by 6% in May.
  • India’s manufacturing PMI slipped below 50 in Jun, posting a reading of 48.1 vs May’s 50.8, as Covid19 related restrictions subdued demand. Falling new orders, business closures, dampened business confidence and reduction in output was reported.

Bottomline: Manufacturing PMI data releases across major markets confirmed an upturn in manufacturing: J.P. Morgan global manufacturing PMI eased to 55.5 in Jun from May’s 11-year high of 56. While employment, output and orders rose, Asian nations were underperformers (China, Japan, India) compared to Europe and the US. However, supply disruptions and higher input costs were also widely reported. A deadlock in OPEC+ talks was unexpected, with the UAE holding out for higher own output targets. The cartel was also planning to extend the supply deal to beyond Apr 2022 (when it was set to expire). Covid19’s more infectious variants leading to spikes in cases across the globe is worrisome: 96 nations have reported Delta variant cases, with UK cases alone rising by 67% in a week. On the other hand, holiday travel is in full swing: ahead of the Jul 4th weekend in the US, TSA reported that airport screenings climbed above 2019 levels on Thursday (2.15mn persons vs 2.01mn on July 1, 2019); the EU COVID-19 travel certificate was launched to facilitate summer travel though recovery is expected at different paces (e.g. Spain is more optimistic than Greece; more in Media Review section) given new travel restrictions from the UK and Germany.

Regional Developments

  • Egypt’s non-oil trade deficit widened by 12.7% yoy to USD 30.7bn between Jul 2020-Mar 2021. Non-oil exports increased by nearly USD 1bn to USD 14.6bn during the period while non-oil imports were up by 11% to USD 45.4bn.
  • Current account deficit in Egypt almost doubled to USD 13.3bn in Jul 2020-Mar 2021 while the balance of payments surplus stood at USD 1.8bn. Tourism revenues fell to USD 3.1bn during this period (from USD 9.6bn a year ago) while net FDI plunged by 19.3% to USD 4.8bn. Remittances however increased by 8.8% yoy to USD 23.4bn.
  • Budget deficit in Egypt declined to 7.8% in 2020-21 (ended Jun), disclosed the finance minister, and is expected to drop further to 6.7% in the current fiscal year. Primary surplus decreased to 1.1% last fiscal year, from 1.8% in the year ago (2019-20).
  • The head of Egypt’s Financial regulatory Authority revealed that IPOs for state-owned enterprises would resume in Sep-Dec, with potentially 2-3 offerings.
  • The IMF’s Egypt Mission Chief stated that external debt is expected to reach 36% of GDP at the end of the current fiscal year – relatively moderate compared to other emerging market nations. About 20% of this corresponds to public General Government external debt.
  • Egypt received USD 1.9bn from multilateral and bilateral development partners for financing private sector projects, disclosed the minister of international cooperation. The IFC was the main partner, financing projects worth almost USD 1.2bn across infrastructure, education, health, mining and financial markets.
  • Real estate taxes in Egypt raise about EGP 7bn annually, according to the finance minister. He also revealed that there is another tax imposed on real estate investment of up to 25%.
  • Egypt plans to launch a 3-year international tourism push starting from the end of this year, revealed the nation’s minister of tourism and antiquities. It was also disclosed that travel bookings for Jul-Aug from Arab nations was higher than for May-Jun. Tourists were mostly from Saudi Arabia, followed by Kuwait, UAE, Jordan and Iraq.
  • CIB Egypt received approval to be the first private sector firm (and bank) to issue green bonds, with a value of USD 100mn for a period of 5 years. Part of the proceeds (20%) will be used for the construction of an environmentally friendly building.
  • The minimum wages of private sector workers in Egypt will be raised to at least EGP 2400 per month (from EGP 2000) from the beginning of next year. This decision is expected to impact about 12.6mn employees.
  • The IMF approved a USD 200mn increase in financing to Jordan under its Extended Fund Facility, after a second review. This would bring total disbursements to around USD 900mn since the start of 2020.
  • Kuwait’s Future Generations Fund, managed by the Kuwait Investment Authority and with more than half its investments in the US, reported a 33% growth in the year to Mar 31. Its assets were valued at about USD 670bn at the close of the last fiscal year on March 31, reported Bloomberg, citing a confidential source. The finance minister stated that growth in the Fund for the past 5 years exceeded that of total oil revenues during the same period.
  • Covid-related travel restrictions were eased in Kuwait from Jul 1st, with direct flights permitted to 12 destinations including UK, Spain, the US and Switzerland. Vaccinated citizens will be permitted to travel abroad, while borders will be open from Aug 1 for those fully vaccinated with Pfizer, AstraZeneca, Moderna or Johnson & Johnson.
  • As currency devaluation continues unabated (on the black market the LBP sold for more than 17k to the dollar), Lebanon hiked fuel prices last week: the price of 20 liters of 95-octane petrol shot up by 35% to LBP 61,000 (USD 40.6 at the official rate) but still substantially lower than international prices or prices in Syria implying continued incentives for smuggling. The central bank stated earlier in the week that it would start giving credit lines to import fuel at LBP 3,900 to the dollar, weaker than the official exchange rate of LBP 1,500.
  • Lebanons parliament approved a USD 556mn cash injection for half a million families: while funding for this programme remains unclear, this is expected to complement the USD 246mn World Bank loan for a social safety net (approved by the World Bank, but not yet agreed with the authorities).
  • Oman’s non-oil economy grew by 5.7% to USD 14.8bn in Q1 this year, according to the NCSI. However, with a 20.6% plunge in oil sector activity, overall GDP contracted by 2.5%.
  • Oil revenues in Oman declined by 23% yoy during Jan-May 2021, while total revenues fell by 19%. Spending fell by 2.9% causing budget deficit to clock in at OMR 890.2mn (USD 2.32bn) during the first five months of this year.
  • Qatar International Islamic Bank’s board of directors recommended allowing foreign investors to own up 100% of the bank’s capital instead of 49% previously.
  • Qatar Investment Authority cut its stake in Credit Suisse Group to 4.8% (or about 128mn shares), reported Bloomberg. This reduction means that the QIA may no longer be the bank’s largest shareholder.

Saudi Arabia Focus

  • Saudi Arabia plans to launch a second national airline – as part of a push to advance in the transport and logistics sector. The strategy is to increase the contribution of the transport and logistics sectors to 10% of GDP by 2030 (from 6% currently).
  • Furthermore, there are reports of Saudi customs cancelling the import duty exemption of UAE/GCC made materials effective Saturday.
  • The Saudi Capital Market Authority approved several IPO requests last week: this includes ACWA Power (plans to sell 81.1mn shares or 11.1% of its share capital), Arabian Internet and Communications Services Co (STC Solutions) 20% stake, Arabian Contracting Services Company (15mn shares or 30% of capital), Banan Real Estate Co. and Canadian Medical Center Co. (the latter two for Nomu).
  • Saudi Arabia’s net foreign assets dropped by 0.83% mom to SAR 1.62trn (USD 432.6bn) in May. Investments in foreign securities dropped by 1% mom to SAR11trn.
  • Overall unemployment rate among Saudi nationals fell to 11.7% in Q1 2021 – a 5-year low; more dramatic was the plunge in unemployment rate for Saudi females – 21% in Q1 2021 vs a high 34% at end-2016. By age group, the rate remained highest among females within 25-29 & 20-24 age group (37.9% and 37% respectively). Meanwhile, female participation in the workforce increased from 19% in 2016 to 32.3% in Q1 2021.
  • About 121k Saudi nationals joined the private sector workforce in Q1 2021: financial and insurance activities sector recorded the highest localization rate at 83.1% while in the construction, wholesale and retail trade, and auto repair, it reached 42.42%. The average wage of Saudis in the private sector touched SAR 5,957 (USD 1,588) at end-Q1.
  • Residential mortgages in Saudi Arabia increased to a 5-year high, according to a report from Knight Frank. In Q1 2021, about 38,285 mortgages were granted for purchasing villas and townhouses and SAR 48bn (USD 12.8bn) worth residential mortgages were issued.
  • Saudi Arabia plans to vaccinate over 2.7mn students aged 12-18 years before the start of the academic year.
  • From Sunday (Jul 4th, 11pm) onwards, Saudi Arabia will suspend travel to and from the UAE, Ethiopia and Vietnam.
  • There are reports of Saudi customs cancelling the import duty exemption of UAE/GCC made materials effective Saturday (3rd Jul).

UAE Focus

  • UAE announced a new set of economic initiatives to support growth: this includes an accelerator for family-owned businesses to support them access new markets; an economic research institute established in collaboration with leading universities (UAE Growth Lab); an entrepreneurial academy (Skill-Up Academy) and a new platform to support the growth of startups (Scale-Up Platform), in addition to a web portal (Grow in UAE) to provide comprehensive information about policies and investment opportunities in the UAE; and a global investment conference (Investopia) to be held in Mar 2022.
  • The UAE’s National Agenda for Non-oil Export Development aims to increase its exports by 50% in the “next few years”, promote Emirati products and access 25 new markets.
  • The new Dubai Chambers focus will be on fuelling trade with 30 priority markets, establishment of more than 300 start-ups, as well as attracting more than 50 new large MNCs.
  • Bilateral trade between the UAE and Israel stood at AED 2.48bn in the first 10 months after the signing of the Abraham Accords, according to the latter’s foreign minister.
  • Dubai real estate transactions touched 2,020 over the week ending 1st Jul 2021 valued at AED 4.5bn.
  • With the listing of Kuwait’s Ahli United Bank’s USD 600mn Sukuk, total value of debt issuances listed on Nasdaq Dubai by Kuwaiti issuers has increased to USD 1.51bn. Total Sukuk listings at the exchange now stands at USD 77.56bn.
  • Bloomberg reported that ADNOC is in discussions with Masdar to acquire a minority stake in the latter in a bid to diversify into more carbon-neutral assets.
  • The Jebel Ali Free Zone revealed investments in roads, infrastructure, and sustainability projects within the Zone worth AED 2.48bn (USD 675mn) over the last five years.
  • As school holidays begin in the UAE, Emirates Airlines expects more than 450k passengers to travel to and from Terminal 3 at the Dubai International Airport till Jul 12.
  • Dubai Expo tickets – priced at AED 95 (USD 26) for a day pass and 6-month for AED 495 – will go on sale globally from 18th July. Children under 18 years of age and students from across the world (with a valid student ID) will be able to enter for free. Being vaccinated is not mandatory for visitors.
  • Effective Aug 20th, Abu Dhabi will allow only vaccinated persons to access public places: the emirate announced that more than 93% of target groups had been vaccinated already.
  • The latest Mastercard Middle East and Africa SME Confidence survey showed that around 88% of UAE-based SMEs were optimistic about the 12-months ahead with 2/3-rds expecting revenues to either grow or stay stable.

Media Review

Dr. Nasser Saidi’s interview with CNBC on Lebanon’s currency plunge

https://nassersaidi.com/2021/06/30/interview-with-cnbc-on-lebanons-currency-plunge-29-jun-2021/

OPEC+ talks deadlock

https://www.ft.com/content/6f0580d8-5374-49b2-b5dc-8a8f0939a9e5

https://www.reuters.com/business/energy/opec-agrees-new-oil-deal-without-uae-agreement-source-says-2021-07-02/

Economic crisis, severe shortages make Lebanon ‘unlivable’

https://www.arabnews.com/node/1885911/business-economy

Riyadh’s IPO tsunami

https://www.arabnews.com/node/1885076/business-economy

Europe’s summer tourism hopes

https://www.reuters.com/world/uk/rising-delta-virus-absent-brits-dampen-europes-tourism-hopes-2021-07-01/

 

 

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Weekly Insights 1 Jul 2021: State of the UAE & Saudi Arabia economies

State of the UAE & Saudi Arabia economies: a peek into the latest macroeconomic data

(GDP, Fiscal, Money & Credit, Labour Market, Trade, Inflation)

1. UAE’s GDP declined by 6.1% in 2020; hospitality and logistics were the worst affected sectors

  • The UAE’s GDP declined by 6.1% in 2020, according to the FCSA, down from an upwardly revised 3.4% growth in 2019. The slump was driven by both oil and non-oil sector, which fell by 6% & 6.2% respectively.
  • While the share of oil sector to overall GDP remained unchanged at 29.1%, the sectors that posted a slight increase in overall contribution to GDP include manufacturing (8.8% in 2020 from 2019’s 8.3%), communication (3.3% vs 2.9%), finance and insurance (8.2% from 7.9%) and public sector (5.6% from 5.2%).
  • Only a few sectors posted positive growth in 2020; unsurprisingly, the most negatively affected were hospitality (-23.6%), transportation (-15.5%) and trade (-13.1%).

2. UAE fiscal balance moves into deficit in 2020, following two years of surplus

  • Both public revenues and expenditures in the UAE declined in 2020, by 22.7% yoy and 15.8% respectively, thereby moving the balance into a deficit of AED 3.04bn. Oil revenues fell by 22.4% yoy
  • Oil revenues accounted for 41.35% of overall revenues and 42.7% of non-tax revenues in 2020. Though total tax revenues fell by 22.4% yoy in 2020, its share in total revenues continued to be ~3.25% (similar to 2018 & 2019)
  • Wages and salaries continue to represent about 30% of total spending in 2020 but in yoy terms, it declined by 16.7%. Subsidies also fell by 5% yoy, but account for 11% of overall spending
  • Fiscal consolidation should be major policy reform for the UAE in the medium- to long-term to reduce dependence on oil & gas revenue. Subsidy reform and reducing public sector wage bills could be reforms on the spending side while new/ higher taxes can support revenues (e.g. carbon tax, property tax)

3. Credit to UAE’s private sector continues to decline in 2021; activity-wise differences exist

  • Overall domestic credit disbursed in UAE fell by 0.6% yoy in Apr 2021 though rebounding by a marginal 0.52% mom (Mar: -0.9% mom)
  • April marks the 13th consecutive month of yoy decline in credit to the private sector and 10th consecutive month of yoy decline in lending to the business sector. Loans to the public sector (which includes government-related enterprises) broke the pattern by ticking up just 0.2% in Apr (Mar: 7.0% and following 12 months of double-digit growth)
  • A breakdown of lending by economic activity shows that the major shares with respect to credit by economic activity remain largely unchanged: construction (20.5%), personal loans for consumption (20.4%), government (15%), others (9%) and trade (8.7%) together accounted for 65% of total loans. Sectors with continuous growth for 4 quarters (from Jun 2020) include transport (average 46.7% yoy growth), agriculture (44%) and utilities (29%).

4. Rising credit & changing consumer preference (away from cash) is the story in Saudi Arabia 

  • Data from the Saudi Central Bank shows claims from the private sector outpacing public sector loans in May 2021 – as seen in most months this year
  • A continued preference for PoS/ e-commerce transactions from a previously preferred “cash is king” position. ATM transactions have dropped by 0.7% in the Jan-May period vs a 65.8% and 125.9% hike in PoS & e-commerce transactions
  • Weekly PoS transactions show an uptick in early Jun: the distinct rise in PoS transactions in clothing, health, restaurants coincides with when restrictions were eased (tracked by the Oxford COVID-19 Government Response Tracker)

5. Unemployment rate among Saudi nationals (apecially females) dip to a 5 year-low in Q1 2021

  • Overall unemployment rate among Saudi nationals fell to 11.7% in Q1 2021 – a 5-year low; more dramatic was the plunge in unemployment rate for Saudi females – 21% in Q1 2021 vs a high 34% at end-2016. By age group, the rate remained highest among females within 25-29 & 20-24 age group (37.9% and 37% respectively).
  • Meanwhile, female participation in the workforce increased from 19% in 2016 to 32.3% in Q1 2021. However, both male & female labour force participation rates declined slightly compared to Q4 2020. Though women are joining the workforce in large numbers, many of the job opportunities fall in the lower-paid sectors.
  • Women earn slightly more than men in the 15-19 age group, but the pay gap widens after that. On average, in Q1 2021, a Saudi male employee is paid 1.3 times compared to a female national and at the oldest age bracket (65+) it stands at around 2.4 times! The gap has narrowed however compared to previous years.

6. Oil exports from Saudi Arabia increase to 72.5% of total exports in Apr; Exports to Asia account for more than half of total exports

  • Oil was trading at USD 75 a barrel yesterday (30 Jun), about 40% higher compared to the start of the year, after a report revealed lower US inventories for a 6th straight week. All eyes are on the OPEC+ (set to meet today), who have already warned of “significant uncertainties” ahead: a modest increase in production is likely amid higher demand for oil (summer travel bookings, anecdotal evidence suggests, are picking up in US & Europe)
  • Oil exports are rising, accounting for 72.5% of total exports in Apr 2021. The top region for Saudi Arabia’s exports is still Asian nations, and much of the exports is oil. Though many nations – India, Japan and Malaysia – continue to struggle with the pandemic, many others have relatively low levels of cases; as restrictions ease, demand will increase and oil exports will pick up faster.

7. GCC inflation (% yoy): Kuwait’s food inflation is running at 10%+; Saudi’s inflation is influenced by the VAT hike last year; May’s month-on-month readings have food inflation rising at a faster pace than headline

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Weekly Economic Commentary – May 16, 2021

Markets
Most global equity markets closed the week in the red, as inflation worries added to investors jitters, in spite of the current spike being labelled transitory by central bankers and the Fed implying that there would be no immediate moves to tighten monetary policy. Many regional markets were closed for the Eid holidays and saw thin trade ahead of the holidays. Among currencies, the dollar weakened, and the pound gained (thanks to a more hawkish stance from the Bank of England). The rally in commodities continued: oil prices inched closer to USD 70 mark given continuing geopolitical risks amid global recovery prospects while gold price was up by 0.6% from a week ago.
Weekly % changes for last week (13-14 May) from 6 May (regional) and 7 May (international).

Global Developments
US/Americas:

  • US inflation increased by 0.8% mom and 4.2% yoy in Apr, as energy prices increased by 25% yoy. Core inflation rose by 0.9% mom and 3% yoy. The yoy increase in overall inflation was the highest since Sep 2008 and the monthly gain in core inflation was the highest since 1981.
  • Producer price index in the US increased by 0.6% mom and 6.2% yoy in Apr, raising inflationary pressures further. Core producer prices (excluding food and energy) increased by 0.7% mom and 4.1% yoy in Apr. While a base effect is a key reason for the yoy jump, some prices have also been rising in mom terms: steel products prices were up by 18.4% and food prices up 2.1%.
  • Retail sales in the US remained flat in Apr (0% mom after Mar’s upwardly revised 10.7% surge); sales excluding autos, gas, building materials and food services dropped by 1.5%.
  • Industrial production in the US increased by 0.7% mom in Apr, as manufacturing edged up by 0.4% (Mar: 3.1%) and utilities grew by 2.6%. Capacity utilization rose to 74.1 (Mar: 73.8).
  • Michigan consumer sentiment index unexpectedly slipped to 82.8 in May (Apr: 88.3) – the lowest reading since Feb. Consumers’ expected inflation rate for the next year increased to 4.6% in the May report versus 3.4% in Apr.
  • Initial jobless claims declined to 473k in the week ended May 8th from an upwardly revised 507k the week before. The 4-week average fell to 534k – the lowest level since Mar 2020. Continuing claims fell to 3.655mn in the week ended May 1 from a revised 3.7mn the prior week.

Europe:

  • German ZEW survey showed a significant improvement in economic sentiment to 84.4 in May (Apr: 70.7), the highest reading since Feb 2000. The current situation reading also edged up, rising by 8.7 points from Apr to -40.1.
  • The Eurozone’s ZEW survey showed the economic sentiment indicator surging to 84 in May (Apr: 66.3). The indicator for the current economic situation climbed 14.1 points to a level of -51.4 (compared to Apr).
  • Industrial production in the eurozone inched up by 0.1% mom and 10.9% yoy in Mar. Again, base effects meant that the yoy increase was the largest on record. In mom terms, increases in production of non-durable consumer goods (1.9%), energy (1.2%) and intermediate goods (0.6%) were offset by declines in output of capital (-1.0%) and durable consumer goods (-1.2%).
  • Sentix investor confidence in the Eurozone jumped to 21 in May (Apr: 13.1) – the highest since Mar 2018. The current situation, at 6.3, was the highest since May 2019, while the expectations index hit an all-time high of 36.8.
  • UK GDP contracted by 1.5% qoq in Q1 – when economy was largely in lockdown – led by declines in services and production output. In Mar, growth stood at 2.1% mom, about -5.9% below its pre-pandemic peak in Feb 2020, and 1.1% below initial recovery peak in Oct 2020.
  • Trade deficit in the UK widened to GBP 2bn in Mar, as imports increased by 8% (to GBP 50.11bn) and exports grew at a slower 5.8%. UK exports to the EU fell 18.1% qoq in Q1 while imports from the EU were down 21.7%.
  • UK industrial production increased by 3.6% yoy in Mar – the first annual gain in 2 years and the strongest since Oct 2017. Monthly production grew by 1.8% mom, largely driven by manufacturing (2.1%) and mining and quarrying (2.5%).

Asia Pacific:

  • China’s inflation declined by 0.3% mom in Apr (Mar: -0.5%) and increased by 0.9% yoy – the highest reading since Sep 2020 – largely due to gains in non-food prices. Producer price index surged by 6.8% – the fastest pace in more than 3 years.
  • New loans in China eased to 1.47trn in Apr from Mar’s CNY 2.73trn. Money supply increased by 8.1% yoy in Apr (Mar: 9.4%). Outstanding yuan loans grew 12.3% vs 12.6% in Mar. FDI into China surged by 38.6% yoy to CNY 397.07bn (USD 61.45bn) in Jan-Apr.
  • Japan’s overall household spending increased by 6.2% yoy and 7.2% mom in Mar – the biggest gain since Sep 2019.
  • Japan’s current account surplus widened to JPY 2.65trn in Mar: goods account surplus climbed to JPY 9.831trn, with exports up by 16.6% yoy while imports increased by 3.1%, while the services account deficit narrowed to JPY 471bn from JPY 1.11trn.
  • Industrial output in India increased by 22.4% yoy in Mar, after contracting by 3.4% and 0.87% in Feb and Jan, largely due to low base effects from a year ago.

Bottomline: The Israel-Palestine conflict continues to grab news headlines globally: a continued long drawn escalation in violence will likely send oil prices north of $70 a barrel. The UN Security Council meeting today will be eagerly watched for tones of a potential ceasefire, as truce efforts so far have not been successful. As Covid19 cases continue to surge unabated in India, a new wave in South-East Asia (Singapore has gone into a month-long lockdown and Taiwan imposed new restrictions to contain a sudden surge in community transmission) adds to the worry of a global recovery. The only solution seems to be effective distribution of vaccines across the globe: with the WHO’s recent approval of Sinopharm and given UAE’s capacity to produce a million doses per month, it can be distributed across the region and via Covax within a few months. Meanwhile, with restrictions being lifted across many nations (with large percentage of vaccinated persons), safe travel corridors/ vaccine passports seem to be the buzzwords heading into the summer holidays. Amid inflation worries and potential taper tantrums, the IIF revealed that global debt declined for the first time in 10 quarters to USD 289trn in Q1 this year – but the drop was largely due to mature markets as EME debt rose by USD 0.6trn to a record high of more than USD 86trn. This cloud of debt could come under pressure as interest rates are gradually increased, making it harder for sovereigns and corporates to service debt obligations (leading to bankruptcies / insolvencies).
Regional Developments

  • Bahrain-origin exports grew by 59% yoy to BHD 295mn (USD 778mn) in Apr, with Saudi Arabia, Egypt and UAE the top destinations for these exports. Imports increased by 26% yoy to BHD 457mn, with Brazil, China and the UAE the top 3 nations.
  • The central bank of Bahrain has entered an instantaneous cross-border payment trial in collaboration with JP Morgan and Bank ABC; this collaboration could potentially be extended into a central bank digital currency plan.
  • About 65.1% of card transactions (both debit and credit) in Bahrain were contactless for the 4th consecutive month in Apr. Central bank data also indicate that real-time electronic fund transfers surged more than four-fold in Apr.
  • Bahrain and the UAE have adopted a safe travel corridor for vaccinated travelers, without the need for quarantine in either country.
  • Egypts annual urban consumer inflation declined to 4.1% in Apr (Mar: 4.5%); in mom terms, inflation edged up by 0.9% from 0.6% in Mar, thanks to increase in food prices, as well as clothing (+1.9%) and transportation (+5.2%).
  • Trade deficit in Egypt narrowed to USD 3.34bn in Feb, down 1.2% yoy. Exports declined by 2% yoy to USD 2.69bn while imports declined by 1.6% to USD 6.03bn. Some imports increased in Feb 2021: petroleum products (+1%), passenger cars (23.9%), raw materials of iron or steel (6.7%) and medicines and pharmaceuticals (14.9%).
  • Unemployment rate in Egypt inched up to 7.4% in Q1 (Q4: 7.2%), while urban unemployment rate decreased to 11.1% (Q4: 11.4%). The estimated size of the workforce was down by 2.3% qoq to 29.284mn (with males accounting for 82.6% of the total).
  • Credit facilities provided by banks operating in Egypt grew by 16.9% to EGP 2.573trn in the first eight months of the fiscal year 2020-21.
  • Egypt announced the extension of its domestic tourism initiative till end of May: this includes the unified prices for return airfares to key tourism hotspots within the country.
  • After inbound flights were resumed on Jul 1st 2020 to three governorates, Egypt received more than 2.5mn tourists. Vaccination of tourism sector workers in two governorates – Red Sea and South Sinai – is expected to be completed soon.
  • Egypt’s health ministry confirmed the receipt of more than 1.7mn doses of AstraZeneca vaccine through the COVAX initiative (after having received 854k doses in Apr). The number of vaccine doses received total 5mn including multiple batches of Sinopharm.
  • Egypt’s minister of health disclosed that the first shipment of raw materials required for the manufacture of the Sinovac vaccine will be received on 18th May. The aim is to produce 2mn doses of the vaccine by end-Jun.
  • Iraq, which completed nearly 81% of its preparations for linking with the GCC electricity network, will resume work on the common power grid (via Kuwait) as soon as a financing agreement is reached with GCC funds. Iraq expects work to begin within a month and the first phase of the project is estimated to supply Iraq with 500 megawatts of electricity by 2022.
  • About 17k persons were scheduled to travel during the Eid holidays from the Kuwait airport, which is operating at 10% of its capacity; 349 flights were expected to touchdown at the airport during the period 12-16 May and the most favoured destinations were Dubai, Riyadh, Doha, Bahrain, Turkey and Egypt via transit flights.
  • The EU is preparing to draw up sanctions on some politicians in Lebanon who are viewed as blocking the formation of the government, reported Reuters.
  • Turkey’s Karpowership, which provides electricity to Lebanon from two barges, shutdown supplies to the country over payment arrears (estimated at upwards of USD 100mn). Each of the barges has a capacity of 202 MW, and the contract is to supply 370 MW. (To put in perspective, Lebanon was generating only 1300 MW, including the Turkish supplies of 370 MW while peak demand in 2020 was 3,500 MW).
  • Lebanon’s central bank revealed that talks were ongoing with local banks to develop a mechanism that would allow depositors access to their funds (up to USD 25k). Many questions remain: will it be subject to a haircut, where would dollar banknotes come from etc.
  • Oman ended its nightly curfew (banning the movement of people and vehicles between 7pm to 4am) though shops and commercial activities are still banned from 8pm until 4am.
  • LNG shipments from Qatar to the UAE has resumed, with the Al Ghariya tanker discharging the cargo at Jebel Ali on May 13th after leaving Ras Laffan in Qatar on May 10th – the first such shipment since mid-2017. Monthly exports of condensate have resumed between the 2 nations: Qatari condensate exports to the UAE jumped to 1.7mn barrels in April, up from 287k barrels in Feb.
  • Qatar’s Emir met with the Saudi Crown Prince in Saudi Arabia last week, the former’s first visit since the rift ended, where talks were held on “bilateral relations and the means to enhance them in different fields”.
  • Remittance flows to the MENA region increased by 2.3% yoy to about USD 56bn in 2020, revealed the World Bank. The uptick was largely due to strong remittance flows to Egypt (+11% to a record high of nearly USD 30bn) and Morocco (+6.5%). However, Djibouti, Lebanon, Iraq, and Jordan posted double-digit declines. Outward remittances from the UAE fell by 3.9% to USD 43bn while from Saudi Arabia it increased by 11% to USD 35bn. More: https://www.knomad.org/sites/default/files/2021-05/Migration%20and%20Development%20Brief%2034_0.pdf
  • Tourism in the MENA region will not return to pre-pandemic levels until 2023, according to the IIF. Partial information for Q1 2021 shows that the number of tourist arrivals to the MENA countries stood at just 25% of what they were in Q1 2020.

Saudi Arabia Focus

  • Saudi Arabia’s preliminary Q1 GDP estimates show that the economy shrank by 3.3% yoy, dragged down by the oil sector (-12%) while the non-oil sector expanded by 3.3%.
  • New factory licenses issued in Saudi Arabia grew by 27.9% yoy to 307 in Q1; this represents a total investment of SAR 17.72bn (USD 4.73bn) during the period, up 428.6% yoy. The total number of industrial establishments in Saudi Arabia stands at 9958.
  • The Saudi SMEs loan guarantee program ‘Kafalah’ helped 1621 businesses in Q1 2021, reported Al Eqtisadiah, with guarantees increasing to SAR 2.9bn (+150%) and financing reached SAR 3.6bn. Sectors that benefitted include wholesale and retail trade, construction, accommodation services, food, and manufacturing industries.
  • Cargo volumes at Saudi ports increased by 8.25% yoy to more than 609k containers in Apr. In Q1, about 2.5mn containers were handled, a 16% rise compared to a year ago.
  • Saudi businesses that have not filed their excise tax returns for Mar and Apr by May 15th will have to pay a fine worth 5% of the amount for every 30 days of delay.
  • Saudi Arabia will supply full volumes of crude as requested by at least four Asian refiners in Jun, reported Reuters.
  • With Saudi Arabia’s travel ban to be lifted from May 17th, an online travel marketplace Wego reported a 52% rise in international flight searches and a 59% increase in international hotel searches. Egypt topped the list for the flight search destinations, followed by Philippines, Morocco, Jordan and Turkey.

UAE Focus

  • Dubai’s non-oil PMI climbed to 53.5 in Apr (Mar: 51), with both output and new orders growth at pre-Covid trends. Travel & tourism firms recorded the “most notable bounce in performance” and the employment sub-index also rose to 50.6 (from 49.7).
  • FDI into the UAE accelerated by 44.2% yoy to nearly USD 20bn (AED 73.45bn) in 2020, largely due to Adnoc’s various transactions (worth ~AED 62bn) including the monetization of some of its non-core assets and investments into a natural gas pipeline among others.
  • The Abu Dhabi government announced, via Twitter, the establishment of a council to review regulatory legislation for free zones and create a database for businesses using them.
  • Dubai’s real-estate sector is passing through a boom phase: according to Property Finder, a total 4,832 property transactions worth AED10.97bn were undertaken in Apr, with off-plan transactions up by 12.9% mom and hitting a 14-month high.
  • The Abu Dhabi government granted housing loans and exemptions worth AED 2.21bn (USD 600mn) to 1,656 Emiratis; the first disbursement this year was during Eid al Fitr.
  • The Ajman Free Zone reported a 33% yoy rise in new companies registered in Q1 2021. The education and technology sectors saw growth of 39% and 23% respectively, in line with the emirate’s vision statements.
  • The “Invest in Dubai” platform, which was launched in the beginning of Feb and enables integrated business setup, issued a total of 3464 commercial licenses and licenses 485 activities. The average age of the investors was 37 years, with the 26-35 age group representing 37% of investments followed by the 36-45 age group at 35%.
  • According to the Emirates Tourism Council, UAE’s tourism sector is in a recovery mode, with average hotel occupancy close to 63% in Q1 2021 and average length of stay in hotels up by 27.6% yoy to 4.3 nights.
  • The UAE has so far administered over 11.45mn doses, vaccinating over 73% of eligible groups and with plans to vaccinate 100% of all eligible groups by end of the year. Furthermore, the emergency use of Pfizer vaccine for the 12-15 age group has been approved.
  • Safe travel corridors are the way forward: UAE announced safe travel corridors with Bahrain, Greece and Seychelles meaning that vaccinated travelers will not be required to quarantine upon arrival.

Media Review
The summer of inflation: will central banks and investors hold their nerve?
https://www.ft.com/content/414e8e47-e904-42ac-80ea-5d6c38282cac
Positive IMF assessment seen as vote of confidence in Saudi reform strategy (with comments from Dr. Nasser Saidi)
https://www.arabnews.com/node/1856281/business-economy
The Israel-Palestine conflict
https://www.nytimes.com/2021/05/14/opinion/bernie-sanders-israel-palestine-gaza.html
https://www.economist.com/leaders/2021/05/13/only-negotiations-can-bring-lasting-peace-to-israel-and-palestine
Taming the Wave of Small and Medium Enterprise Insolvencies: IMF
https://blogs.imf.org/2021/04/02/taming-the-wave-of-small-and-medium-enterprise-insolvencies/
Not all pledges are created equal: how 2030 emissions commitments compare
https://www.ft.com/content/e025643a-c90f-4b07-ad08-01b81af5a4f0
Annual renewable capacity additions increased 45% to almost 280 GW in 2020, the highest yoy increase since 1999: IEA
https://www.iea.org/reports/renewable-energy-market-update-2021
 

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Weekly Economic Commentary – May 9, 2021

Markets
US equity markets closed at record highs on Fri, in spite of disappointing payrolls numbers, though the Nasdaq ended the week lower (the worst decline since early Mar); the optimism ran across Stoxx600 (led by utilities and tech shares) and the MSCI global equity markets benchmark index. Regional markets were mostly up; Saudi Arabia, where some weaker-than-expected earnings were reported, posted a 1.8% loss. Among major currencies, the pound and euro gained against the greenback. Oil prices were near 7-week highs, with Brent near the USD 70-mark as many countries proposed easing of restrictions thereby improving demand outlook. Gold price increased by around 3.5% from the week before, posting its best weekly gain since Nov 2020. Other commodities like palladium and copper continued to soar to record highs on worries over short supplies.
Weekly % changes for last week (6-7 May) from 29 Apr (regional) and 30 Apr (international).

Global Developments
US/Americas:

  • Non-farm payrolls disappointed, rising by 266k in Apr, following Mar’s downwardly revised 770k. Leisure and hospitality industry saw the biggest hiring gain (+331k) while other services industries bore the most severe brunt: temporary help services (-114k), transportation/ warehousing (-74k), retail trade (15.3k). Average hourly earnings also slowed, rising by just 0.3% yoy compared to 4.2% the month prior. Unemployment rate increased to 6.1% in Apr (Mar: 6%), as labour force participation rates increased (to 61.7%, the best level since Aug, from 61.5%).
  • Initial jobless claims declined to below the 500k mark, down to 498k in the week ended Apr 24. The 4-week average fell by 61k to 560k – the lowest level since Mar 2020. Continuing claims edged up to 3.69mn in the week ended Apr 17 from a revised 3.653mn the prior week.
  • ADP employment report showed that an additional 742k jobs had been created in the private sector in Apr (Mar: 565k). The leisure & hospitality sector added the most – 237k jobs.
  • Non-farm productivity increased by 5.4% in Q1 (Q4: -3.8%): output increased by 8.4%, much faster than hours worked (+2.9%) or wages (+5.1%) and unit labour costs fell by 0.3%. The level of output per hour is the highest ever recorded, and the yoy gain is the fastest since 2004.
  • Factory orders in the US rebounded by 1.1% mom in Mar, following the 0.5% drop in Feb, supported by demand for machinery (+1.5%), metals (+1.6%) and fabricated metal products (+4%). Orders for non-defense capital goods, excluding aircraft, rose by 1.2%.
  • ISM manufacturing PMI slipped to 60.7 in Apr (Mar: 60.6). The employment sub-index fell (to 55.1 from 59.6 the month before), as did new orders (64.3 from 68 in Mar) and the price gauge rose to a 13-year peak.
  • ISM services PMI dropped to 62.7 in Apr, a full point below an all-time high reading in Mar, as new orders fell (63.2 from 67.2) while employment improved (58.8 from 57.2).
  • Markit manufacturing PMI edged up to 60.5 in Apr (Mar: 59.1), with new order growth accelerating to a 11-year high while raw material shortages led to the fastest rise in cost burdens since Jul 2008.
  • Trade deficit in the US widened to a record high of USD 74.4bn in Mar (Apr: USD 70.5bn). Deficit with China increased by 22% to USD 36.9bn, half the total trade deficit.

Europe:

  • German factory orders increased by 3% mom in Mar (and 27.8% yoy), the largest increase in new orders since Oct 2020 – from a revised 1.4% uptick in Feb. The headline growth was supported by orders for consumer goods (+8.5%), while domestic and export orders ticked up by 4.9% and 1.5% respectively.
  • Exports from Germany increased by 1.2% mom and imports by 6.5% in Mar, causing the trade balance to narrow to EUR 14.3bn (Feb: EUR 18.9bn). Exports grew by 16.1% yoy to a record high EUR 126.5bn, with sales to China and the EU countries surging by 37.9% and 21.2% respectively.
  • German industrial production increased by 2.5% mom in Mar, supported by production of intermediate (1.2%) and consumer goods (2.9%), as well as energy output (2.4%) and construction (10.8%).
  • Markit manufacturing PMI for Germany declined slightly to 66.2 in Apr (from Mar’s record high 66.6 reading), supported by strong growth in new orders and employment growth reached the quickest since Aug 2018. Services PMI retreated to below-50 in Apr (49.9 from Mar’s 51.5) and composite PMI also slipped to 55.8 (from Mar’s 37-month high of 57.3).
  • Eurozone’s final manufacturing PMI reading stood at 62.9 in Apr, lower than flash estimate of 63.3 but higher than Mar’s 62.5 reading. Netherlands topped the list in terms of absolute PMI readings while Italy and Austria posted survey highs. Services PMI improved to 50.5 (Mar: 49.6), with divergences across countries – Spain gained, while Germany and Italy contracted. Composite PMI was up by 0.6 points to 53.8, thanks to a second consecutive monthly rise in new orders – the strongest recorded for over two-and-a-half years.
  • Producer price index in the Eurozone climbed by 1.1% mom and 4.3% yoy in Mar, with prices higher across many categories including energy (+2% mom), intermediate products (+1.3%), non-durable consumer foods (+0.8%) and capital goods (+0.3%) among others.
  • Retail sales in Germany surged by 7.7% mom and 11% yoy in Mar; compared to the pre-crisis month of Feb 2020, retail sales were up by 4.4% while the yoy gain was the strongest since records began in 1994.
  • Eurozone’s retail sales increased by 2.7% mom and 12% yoy in Mar, thanks to non-food products excluding automotive fuel (4.6% mom, 25% yoy) and online sales (+37.2% yoy).
  • The Bank of England kept its benchmark interest rate at an all-time low of 0.1%, but announced that it would slow QE purchases to GBP 3.4bn a week (from GBP 4.4bn), raised the growth forecast for this year to 7.25% (from 5% before) – the fastest annual growth since 1941 – and lowered peak jobless forecast to 5.4% (from 7.8%).
  • UK’s manufacturing PMI grew to 60.9 in Apr, up 0.2 points from the flash estimate and higher than Mar’s 58.9. Sales growth was supported by easing of restrictions, and employment rose for the 4th consecutive month.

Asia Pacific:

  • China’s exports surged by 32.3% yoy (and 9.5% mom) and imports by 43.1% to post a trade surplus of USD 42.85bn in Apr (Mar: USD 13.8bn). Exports grew as a result of higher demand for electronics and high-tech products.
  • Services PMI in China rose to a 4-month high of 56.3 in Apr (Mar: 54.3), with new orders rising at the fastest rate since Nov 2020 and employment rising at the fastest in 5 months.
  • Foreign exchange reserves in China inched up by USD 28.15bn to USD 3.198trn in Apr, largely due to the dollar’s decline against other major currencies held in the reserves, and to rises in global asset prices.
  • Japan services PMI increased to 49.5 in Apr (Mar: 48.3), though remaining in contraction territory for the 15th straight month. New orders increased to the highest since Jan 2020 and employment rose for the 3rd consecutive month.
  • India’s manufacturing PMI rose to 55.5 in Apr (Mar: 55.4), thanks to a pickup in demand in spite of the Covid19 cases surge. New export orders increased for the eighth consecutive month in Apr and at the fastest rate since Oct 2020.
  • Singapore PMI inched up by 0.1 points to 50.9 in Apr, the highest reading since Dec 2018.

Bottomline: Global manufacturing PMI increased to 55.8 in Apr, the best since Apr 2010, with 21 out of 24 nations reporting improvements in business conditions. Expansion in output and new orders supported job creation though record supply chain delays are leading to production constraints while input costs rose at the fastest rate in a decade. Many EU nations are relaxing restrictions given improvements in the vaccination pace, while the UK’s green list announcement has led to a surge in bookings (a good sign for the travel/ tourism/ hospitality sector); many nations on UK’s “amber” list could move into green before the summer holidays begin. A similar surge in travel is expected in the US where President Biden set a new goal of vaccinating 70% of adults by Jul 4th. However, without widespread vaccination globally, the risks of new variants remain: in Africa, less than 1% of the population has been vaccinated and in Asia just 4.4%, while Covid is rampant in India.
Regional Developments

  • The reopening of the King Fahd Causeway is expected to add up to USD 2.9bn to Bahrain’s economy this year, based on average spending recorded in 2019.
  • Bahrain is in talks with international firms to invest in a petrochemical plant expected to cost USD2bn to build, reported Bloomberg, citing the oil minister. He also stated that they are also looking at selling energy assets (i.e. structuring infrastructure assets) to raise funding.
  • PMI in Egypt fell to 47.7 in Apr (Mar: 48), the lowest reading since Jun 2020. New orders and employment declined, and input prices increased to a 19-month high on supply pressures.
  • Egypt’s central bank kept rates on hold for a 4th consecutive meeting after the headline inflation number stabilized at 4.5% in Feb and Mar this year, edging up from Jan’s 4.3%.
  • Gold reserves in Egypt increased by 4.9% mom to USD 4.128bn in Apr. Overall, net foreign reserves increased about USD 6mn (or 0.02% mom) to USD 343bn.
  • S&P affirmed Egypt’s “B/B” sovereign credit rating in spite of its high external financing needs, given its foreign exchange reserves and access to domestic and external debt markets.
  • Egypt announced new restrictions for a period of 2-weeks starting last Thursday, and including Eid holidays (May 12-16), during which time all gardens, parks and public beaches will be closed while all shops, malls, restaurants, cafes and cinemas would close at 9 p The country expects to receive another 4.9mn doses of vaccine from multiple sources this May.
  • Iraq’s external debt ranges between USD 23-25bn, stated a financial advisor to the government; the remaining compensation to Kuwait is under USD 2bn.
  • China is in talks with Iraq to revive the oil-for-projects deal that was temporarily halted due to the spread of Covid19. Bilateral trade between the two nations stood at USD 53.3bn in 2019, before falling to USD 30.2bn in the pandemic-affected 2020.
  • Female economic participation rate in Jordan stood at 14.2% in 2020. One in seven women were economically active last year, versus one in 1.9 men in the 15+ age group.
  • Political deadlock and lack of local expertise could delay the rollout of taxes in Kuwait by 3-4 years, reported the Al Rai newspaper, citing unnamed sources.
  • Kuwait will not allow citizens who are not vaccinated to travel abroad from May 22, stated the information ministry. As of now, there is an existing ban on entry of non-Kuwaitis.
  • Lebanon’s PMI inched up to 47.1 in Apr (Mar: 46.4), with the headline index deteriorating at the softest rate since Oct 2019. Output and new orders slowed at a lower pace while cost burdens rose in Apr.
  • The LBP fell against the dollar on Fri after the meeting between Lebanese leaders and the French delegation seemed to have made little progress with regard to a new government.
  • Given that the committee to review the USD 200mn emergency loan (approved in Mar) to finance fuel imports has yet to approve it, Lebanon is likely to go dark as cash for electricity runs out – as early as May 15, according to a member of parliament.
  • Lebanon’s caretaker PM divulged that the cost for the subsidy card for nearly 750k Lebanese families would amount to USD 1.2bn annually. Who will finance this and whether there will be an inflationary impact following the gradual lifting of subsidies are unanswered questions for now. Currently, the subsidy program is costing USD 6bn a year.
  • S&P is proposing, as part of its consultation exercise (that will last until May 14th), to “remove index constituents domiciled in Lebanon from the S&P Pan Arab Indices” and “to reclassify Lebanon from a frontier market to a stand-alone market, and consequently remove all constituents from S&P Frontier BMI and related sub-indices”.
  • Oman’s budget deficit stood at OMR 751.4mn (USD 1.96bn) in Jan-Mar this year, with revenues down by 30.5% and net oil revenue down by 34.2% while spending fell by 2.7%, thanks to cost-saving efforts at various government units.
  • More than 51k MSMEs are registered with Oman’s SME Development Authority as of end-Mar, denoting an increase of 17.2% yoy.
  • According to Oman’s Ministry of Labour, 48,863 expats left the country by end-Mar, compared to around 70k persons that had registered to leave by end-Mar.
  • Qatar’s PMI dropped to 52.1 in Apr (Mar:54.9), thanks to strong readings across the output, new orders and employment sub-components. Manufacturing, at 55.7, outperformed the other sectors: wholesale & retail (54.3), construction (53.8) and services (51.5).
  • Further to the arrest of Qatar’s Minister of Finance over allegations of embezzlements and abuse of power, the Minister of Trade and Industry was entrusted with the finance minister’s duties as well.
  • Total debt issuances in the MENA region accelerated by 61% yoy to USD 34.8bn in Q1 2021, according to Refinitiv data. Saudi Arabia and UAE were the most active issuer nations with USD 3bn and USD 7.5bn in bond proceeds, respectively.

Saudi Arabia Focus

  • Saudi Arabia’s non-oil PMI increased to a 3-month high of 55.2 in Apr (Mar: 53.3), given an increase in output to 58.7 (thanks to improvements in new orders) and growth in export sales (thanks to demand from Asia). Employment increased at the fastest pace since Nov 2019.
  • Budget deficit in Saudi Arabia declined to SAR 7.4bn (USD 1.97bn) in Q1 this year: oil revenues stood at SAR 117bn (-9% yoy), non-oil revenues posted a 39% yoy increase (thanks to a 75% rise in taxes) while expenditures slipped by 6% to SAR 212bn.
  • Public debt in Saudi Arabia increased by 5.6% qoq to SAR 901.4bn (USD 240.4bn) in Q1 2021 – this was the fastest pace of growth since Q2 2020. Debt to GDP hence increased to 35.6% at end-Q1 from Q4’s 32.3%.
  • Bilateral trade between Saudi Arabia and the US increased to SAR 75.6bn in 2020, according to the Saudi-American Business Council, with Saudi’s exports to the US touching SAR 33.7bn. US continues to be the second largest source of goods imported by Saudi Arabia.
  • Money supply increased by 2.3% since end-2020 to its highest-ever level of SAR 2.199trn (USD 586.2bn) as of Apr 29th.
  • A spending efficiency program, implemented as part of the Vision 2030 reform, resulted in savings of SAR 400bn (USD 106bn) over the last 4 years, disclosed Saudi Arabia’s minister of finance.
  • Tadawul-listed companies can now own real estate in Makkah and Madinah, according to the approved amendment of Article 5 of the Law of Real Estate Ownership and Investment by non-Saudis, reported Umm Al-Qura newspaper.
  • Investments in e-commerce in Saudi Arabia amounted to more than SAR 250mn in Q1 this year, according to Monsha’at; this amounted to 20% of total commercial deals. Sales increased by 26% yoy to more than SAR 22bn last year.
  • According to the Saudi Central Bank, the insurance sector grew by 2.3% yoy in 2020, with written premiums rising to SAR 38.78bn. The report also stated that Saudization in the sector edged up by 1% to 75%.
  • Occupancy rate at Makkah’s hotels during the holy month of Ramadan varied between 10-20% during the beginning of the month, rising to between 30-38% during the second half. Only 26 hotels were operating during this period, with average prices down by 55%.
  • Saudi Arabia revealed that it had vaccinated nearly 29% of its population at a rate of 147,552 daily doses, and that every worker in the country will need to be vaccinated before returning to their workplace (no deadline has been given yet). Separately, starting May 17th, Saudi is preparing to receive foreign tourists and will allow vaccinated citizens to travel.
  • A ministerial decision in Saudi Arabia will Saudize the first phase of educational jobs in private schools and international schools for boys and girls, in a bid to create 28k jobs over the coming 3 years.
  • Recent changes to Saudi Arabia’s government: a new minister of economy and planning has been appointed; the Zakat and customs entities have been merged to create a Zakat, Tax, and Customs Authority.

UAE Focus

  • Non-oil private sector PMI in the UAE edged up to a 21-month high of 52.7 in Apr (Mar: 52.6), driven by new orders (growing at the fastest pace since Aug 2019, and mostly domestic demand) and an increase in new business inflows. Employment continued to fall for 3 months in a row.
  • UAE overall and non-oil GDP declined by 6.1% and 6.2% respectively in 2020, according to FCSA data. Most major sectors posted a drop, with those directly affected by the pandemic more hard-hit: accommodation and food services activities (-6%), transportation and storage activities (-15.5%), wholesale and retail trade (-13.1%), construction and building activities (-10.4%) and financial and insurance (-3%). Manufacturing edged up by 0.2% yoy.
  • Foreign non-oil trade through the Dubai Airport Free Zone reached AED 119bn (USD 32.4bn) in 2020 – accounting for 10% of Dubai’s non-oil foreign trade and 25% of total commercial activity via the free zones.
  • Dubai’s property sales transactions hit a four-year high of AED 97bn in Apr: this is the highest value of monthly property transactions since Mar 2017, according to listings portal Property Finder. Demand for upscale properties have been surging too: a record-breaking 90 properties worth AED 10mn (USD 2.7mn) each were sold in Apr, following 84 such deals in Mar; this compares to a total of 54 in 2020. Another report, by ValuStrat, stated that Dubai registered the highest recorded number of home sales transactions in Q1 2021 since 2010.
  • Dubai’s Tourism Chief disclosed that the emirate had welcomed 1.26mn visitors in Q1 this year, following the 67% yoy drop in visitors last year (to 5.5mn).
  • Moody’s affirmed the Aa2 long-term issuer rating of the UAE Government and maintained outlook at stable.
  • As the country prepares to welcome Expo delegates (from 173 nations and 24 international organizations), their country representatives have been encouraged to take up UAE’s offer of free vaccines. Vaccination will be mandatory for the Expo workforce, though it is being encouraged (and not enforced) for visitors and tourists.

Media Review
Fierce Foes, Iran and Saudi Arabia Secretly Explore Defusing Tensions
https://www.nytimes.com/2021/05/01/world/middleeast/Saudi-Iran-talks.html
Dubai luxury home market soars as world’s rich flee pandemic
https://apnews.com/article/dubai-europe-middle-east-travel-lifestyle-62331d53cd4b1790d2f6c56f8af2016b
IMF’s Concluding Statement of the 2021 Article IV Mission to Saudi Arabia
https://www.imf.org/en/News/Articles/2021/04/30/mcs050321-saudi-arabia-staff-concluding-statement-of-the-2021-article-iv-mission
Digital currencies that matter
https://www.economist.com/leaders/2021/05/08/the-digital-currencies-that-matter
Will the digital RMB change China? https://www.project-syndicate.org/commentary/china-digital-renminbi-banks-big-tech-by-shang-jin-wei-2021-05

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Weekly Insights 6 May 2021: What do PMIs, Consumer Spending & Domestic Credit Tell us about Economic Activity?

Download a PDF copy of this week’s insight piece here.
1. Manufacturing PMI rises globally; but, widespread vaccination required for confidence boost going forward

  • The vaccination pace has been steadily increasing in many advanced nations including the US and UK – allowing the nations to reduce and/or remove severe restrictions. This has resulted in a return in confidence, evident in recent PMI data.
  • However, the recent surge in Covid cases in India and Brazil could result in spillovers (Singapore reverted to Phase 2 restrictions); the only way out seems to be to vaccinating a vast majority of the global population.
  • Unfortunately, poor countries are severely lagging behind in vaccination: in Africa, just 1% of the population has received at least one jab and 4.4% in Asia. This compares to 22% and 44% in Europe and America respectively. Vaccine shortages are still a problem (India’s Serum Institute is said to be severely behind on production)
  • Another word of caution : while global manufacturing PMI hit a 11-year high, record supply chain delays are leading to production constraints; input costs rose at the fastest rate in a decade

2. Shipping costs climb as demand increases, while air cargo struggles to keep up

  • Container ship port calls are in many regions back to pre-pandemic numbers or higher (UNCTAD). But, high demand alongside shortage of containers has led to a surge in shipping costs (especially on long-distance routes). The recent Suez Canal blockage calls into question the vulnerability of trade chokepoints.
  • Demand for commercial air traffic remains depressed: long-haul flights are still bearing most of the brunt as domestic travel is slowly picking up (as seen in China and the US). Travel bookings indicate strong domestic travel intentions and Europe could also witness a boost when it opens in summer for vaccinated tourists.
  • Closure of long-haul routes continue to affect Middle Eastern airlines (revenue passenger kilometers were down by 81.7% yoy in Feb vs 74.7% globally); but, strong cargo growth was recorded (growing by 8.7% yoy in Feb 2021 vs the 9.5% drop in 2020; Middle East-Asia route grew the most – by 26.7% in Feb vs -7% in 2020)


 
3. April PMIs edged up in UAE & Saudi Arabia: but employment sub-index diverges (as UAE stays below 50)

  • In MENA, both Saudi Arabia and UAE posted higher PMI readings in Apr; Egypt declined further, falling below-50 for the 5th consecutive month.
  • While vaccination pace is quite varied in the region, it seems to have a significant impact on business confidenc and the expectations of continued economic recovery. UAE has been the leader in vaccinating its residents, administering 108.99 doses per 100 persons, versus Saudi Arabia’s 28.2 and Egypt’s 0.64. This confidence has translated into the PMI readings.
  • With UAE’s major export markets still rattled by Covid19, near-term outlook has risks; employment sub-index also fell for the 3rd month in a row. Though export orders rose, demand was largely domestic based.

4. Consumer Spending Rebounds in Saudi Arabia

  • The Saudi Central Bank’s monthly data on consumer spending showed a rebound in Mar, partly due to the low base in Mar 2020. PoS transactions continue to rise, accelerating by 64.7% yoy and 31.5% mom in Mar. ATM cash withdrawals fell by just 4% yoy, following 7 months of double-digit declines, and by 21% mom.

  • Retail spending by sector showed a decline only in education (-2% mom and -18.3% yoy); clothing and footwear posted the highest pickup in mom terms (+68.2%). Spending has been slower in a few sectors ahead of the month of Ramadan (when many discount offers are available) like food and beverages, and electronics.

5. Varied patterns of domestic credit growth in Saudi Arabia & the UAE

  • Loans disbursed in both Saudi Arabia and the UAE has been ticking up in 2021.
  • Total domestic credit disbursed in UAE grew by 2.1% yoy in Jan-Feb 2021; the uptick has been in claims to the public sector (+17.9%), government (+11.6%) and private financial institutions (+8.8%) vs loans to the private sector (-2.3%). Together, loans to the government & public sector accounted for 30% of total in Feb 2021.
  • In Saudi Arabia meanwhile, claims on the private sector grew by 14.6% yoy in Q1 2021 – faster than claims on the public sector (+13% yoy).

 

 
 
 
 
 
 
 
 
 
 
 
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Weekly Economic Commentary – May 2, 2021

Markets
Equity markets fell across the board last week, with only FTSE in the green among major markets, as economic data weighed in on sentiment (while the US seems to be on a strong recovery path, Q1 growth dipped in the Eurozone and China’s PMI fell below levels seen last year). Though Stoxx fell compared to a week ago, it was just below its all-time high while the MSCI’s world stocks gauge hit a historic high during the week. Regional markets were mostly subdued while Saudi Arabia ended the best performer (following an uptick on Wednesday, thanks to the Crown Prince’s views during a televised interview). The dollar posted its largest monthly fall since Dec at end of Apr while the yen hit a 2-week low versus the greenback. Oil prices were at near 6-week highs on strong US data and a weaker dollar and gold was down by 0.5%. Meanwhile, copper and aluminum prices have been rallying, with the former above the USD 10k per tonne mark for the first time in over 10 years.  
Weekly % changes for last week (29-30 Apr) from 22 Apr (regional) and 23 Apr (international).

Global Developments
US/Americas:

  • The Fed held interest rates steady (at close to zero) and will continue with bond purchases (at least USD 120bn each month); though the Fed forecasts faster growth and higher inflation (the latter reflecting “transitory factors”), Powell stated that it was a “long way from our goals” and hence withdrawing monetary support.
  • Preliminary GDP in the US increased by 4.1% yoy in Q1 (Q4: 1.9%). In annualized terms, GDP grew by 6.4% in Q1 – posting the second-fastest pace for growth since Q2 2003 (highest being the reopening surge recorded in Q3 2020) – and up from 4.3% in Q4. Consumer spending grew by an annualized 10.7%, with households spending more on goods (+23.6%) versus services (+4.6%), while government expenditures and investment increased 6.3%.
  • Personal income surged by 21.1% mom in Mar (Feb: -7%), thanks to the stimulus checks (stimulus payments accounted for USD 3.948trn of the overall USD 4.213trn rise in Mar) while personal spending increased by 4.2%. The PCE Price Index rose 0.5% in Mar, while the core PCE Index, which excludes food and energy, rose 0.4% in the month.
  • The Chicago Business Barometer jumped to 72.1 in Apr (Mar: 66.3), posting the highest level since Dec 1983. New orders rose 9.9 points to a near 7-year high, the production index ticked up 0.9 points to the highest level since Jan 2018 and employment, up by 1.7 points, touched the highest since Aug 2018.
  • Michigan consumer sentiment index increased to 88.3 in Apr, from a preliminary reading of 86.5 – the highest since Mar 2020.
  • Durable goods orders rebounded by 0.5% mom in Mar (Feb: -0.9%), with orders for new cars and trucks rising by 5.5% while semiconductor shortages continued to play havoc. Non-defense capital goods orders excluding aircraft increased by 0.9%, reversing the 0.8% drop the month before (orders for commercial airlines plunged by 47%).
  • S&P Case Shiller home price indices accelerated by 11.9% yoy in Feb (Jan: 11.1%).
  • Pending home sales increased by 1.9% mom in Mar, following the 11.5% drop in Feb. Sales were 23.3% higher compared to Mar 2020.
  • Goods trade deficit widened by 4% to a record high USD 90.59bn in Mar (Feb: USD 88bn). Exports of goods grew by 8.7% to USD 142bn and imports were up by 6.8%.
  • Initial jobless claims fell by 13k to 553k in the week ended Apr 17 holding below 600k for the 3rd straight week. Continuing claims fell to 3.660mn in the week ended Apr 10 compared to the previous week’s downwardly revised 3.651mn.

Europe:

  • Eurozone’s GDP slipped into a double-dip recession, with growth declining by 1.8% yoy and 0.6% qoq in Q1 (Q4: -0.7% qoq). While Spain contracted by 0.5% and Italy’s GDP fell by 0.4%, France posted a 0.4% growth (given its delayed lockdown). The wider EU-27 nations fell into recession as GDP declined by 0.4% in Q1, following a 0.5% contraction in Q4 2020.
  • Inflation in the Eurozone increased by 1.6% yoy in Apr (Mar: 1.3%); core inflation eased – down to 0.8% in Apr from Mar’s 0.9% reading. Energy prices were up by 10.3% in Apr (Mar: 4.3%) while services costs were up by 0.9% and food and beverages up by 0.7%.
  • Q1 GDP in Germany fell by 3% yoy and 1.7% qoq: Destatis disclosed that household consumption was negatively affected, while exports of goods supported the economy. Separately, the government raised its growth forecast to 3.5% from a previous estimate of 3% given expectations of higher household spending once lockdowns and restrictions are lifted.
  • The harmonized index of consumer prices in Germany increased by 2.1% yoy and 0.5% mom in Apr. This is above the ECB’s target of close to but below 2%.
  • The Ifo business climate for Germany inched up by 0.2 points to 96.8 in Apr – the highest since Jun 2019; current assessment improved by a full point to 94.1 though expectations slowed to 99.5 (Mar: 100.3) on fears of a new wave of infections and bottlenecks in intermediate products.
  • The German GfK consumer confidence survey weakened in May, with the reading falling to -8.8 from Apr’s -6.1 on rising infections and negative impact from the lockdown.
  • Unemployment rate in Germany stayed unchanged at 6% in Apr, with some 2.77mn persons registered as unemployed. Separately, unemployment rate in the wider eurozone slowed to 8.1% (Feb: 8.2%) and youth unemployment rate fell to 17.2% from 17.3% in

Asia Pacific:

  • China’s official NBS manufacturing PMI slowed to 51.1 in Apr (Mar: 51.9): while output, new orders and export sales softened (to 52.2, 52 and 50.4 respectively), employment fell to 49.6. Caixin manufacturing PMI rose to 51.9 from Mar’s 11-month low reading of 50.6, with new orders rising for the 11th consecutive month while input costs hit the highest level since Nov 2017. Non-manufacturing PMI slowed to 54.9 in Apr (Mar: 56.3), as new order growth eased (51.5 from 55.9) and new export orders fell (48.1 from 50.3); but it was still the 13th consecutive month of above-50 in the service sector.
  • BoJ kept policy rates unchanged at the latest meeting and maintained its stimulus measures while raising growth forecasts for the current fiscal year (4% vs. 3.9% predicted in Jan) amid weak inflation views – revising core inflation downward to 0.1% (from 0.5% projected in Jan).
  • Inflation in Tokyo unexpectedly fell by 0.6% yoy in Apr (Mar: -0.2%), as major carriers slashed mobile phone fees. Excluding food and energy, prices were unchanged (Mar: 0.3%).
  • Industrial production in Japan increased by 4% yoy and 2.2% mom in Mar (Feb: -2% yoy and -1.3% mom). Overall industrial output fell by 9.5% yoy in the fiscal year 2020, with output of autos as well as oil and coal products both down by 16.7% in the year.
  • Japan’s leading economic index eased to 98.7 in Feb from a preliminary reading of 99.7 (Jan: 98.1), the highest reading since Oct 2018. Meanwhile, coincident index stayed at 89.9.
  • Manufacturing PMI in Japan inched up to 53.6 in Apr (Mar: 52.7) – touching the highest level in 3 years – as new orders expanded at the fastest pace in 38 months and output grew at the fastest since Apr 2018.
  • Retail trade in Japan increased by 5.2% yoy in Mar (Feb: -1.5%) – the first uptick in retail trade since Nov 2020. Large retailer sales picked up by 3% following the 4.8% drop in Feb.
  • South Korea’s preliminary GDP increased by 1.6% qoq and 1.8% yoy in Q1 this year (Q4: 1.2% qoq), recovering to pre-pandemic levels, supported by private consumption (+1.1%) and government spending (+1.7%) while exports surged 1.9%.
  • Exports from South Korea expanded by 41.1% yoy in Apr – the most since Jan 2011 – thanks to semiconductors, cars and petrochemical products while imports grew by 33.9%. Exports to China, the US and EU increased by 31.7%, 43.0% and 43.0% each.
  • Singapore industrial production picked up by 7.6% yoy in Mar though down by 1.7% mom; excluding the volatile biomedical manufacturing, output grew by 14.9%.

Bottom-line: India’s Covid19 cases have continued to rise at 300k+ daily cases for 10 days now, and yet another state announced a 2-week lockdown today (many others have imposed night and/or weekend lockdowns) that will sharply affect growth and recovery prospects. Amid the Covid19 rising cases (in Brazil, the death toll crossed 400k), at last week’s OPEC+ meeting it was decided to stick to the current plan to gradually raise production. Demand threat notwithstanding (India is the 3rd largest oil importer), there are also supply threats given the ongoing Iran-US nuclear talks – a potential lifting of sanctions would allow Iran to supply its oil in the global market. On the calendar this week is the Bank of England meeting – watch out for whether the Bank decides to slow pace of its bond purchases (like Canada did a few weeks back).
Regional Developments

  • More than 60% of Bahrain’s adult population (estimated at 1.12mn) have received the first dose of the Covid19 vaccine and 47% have received both doses, according to a senior government official.
  • Trade between Bahrain and GCC grew by 6% yoy to USD 1.76bn in Q1. Bilateral trade with Saudi Arabia accounted for about 45% of the total trade (USD 789mn) and with the UAE accounted for another 36% (+15% to USD 639mn).
  • Egypt outlined a three-year structural reform plan, focusing on boosting private sector growth, increasing exports and accelerating digitization. Economic growth of between 6-7% is targeted in the next three years.
  • Economic losses from the Covid19 pandemic in Egypt amounted to EGP 370bn (USD 23.6bn), according to the finance minister. He also stated that fiscal deficit for the current fiscal year is about EGP 500bn and public debt fell to 87.5% of GDP in June 2020 from 108% in June 2017 (it is forecast to reach 89% in Jun 2021).
  • Egypt’s draft budget for 2021-22 has been submitted to the House of Representatives for discussion and approval: it aims to reduce budget deficit to 6.7% of GDP, clock in primary surplus of 1.5% and achieve GDP growth of 5.4%. Revenues are estimated to touch EGP 1.36trn alongside expenditures of EGP 1.8trn.
  • The central bank of Egypt kept interest rates on hold for the fourth consecutive meeting: the overnight lending rate stands at 9.25% and overnight deposit rate at 8.25%.
  • Money supply growth in Egypt surged by 20.06% yoy to EGP 5.13trn in Mar, revealed the central bank.
  • Egypt’s external debt increased by about 1.5% qoq to USD 125.3bn as of Sep 2020, with long-term external debt (at USD 113bn) accounting for 90.2% of the total.
  • Non-oil trade between Egypt and Saudi Arabia increased by 6.8% yoy to USD 4.4bn in 2020; Egypt’s exports to Saudi Arabia surged by 13% to USD 2.6bn, making the country the second largest destination for Egypt’s exports last year.
  • Bilateral trade between Egypt and Jordan grew by 8.6% yoy to USD 616.3mn in 2020, with exports to Jordan up 12.2% yoy to USD 495.4mn while imports fell by 4.5%.
  • Further to having signed an agreement to create a cross-border link with Euroclear in 2019, Egypt expects its domestic debt to be “Euroclearable” and open to a larger number of foreign investors by Nov, according to the finance minister. He also disclosed that Egypt will likely join JPMorgan’s GBI-EM investment index, supporting its local currency bond markets.
  • Egypt will invest USD 7.5bn to build the largest petrochemical complex in Africa and the Middle East in the Ain Sokhna Industrial Zone of the Suez Canal Economic Zone.
  • Tourism revenues in Egypt are expected to increase to USD 6-7bn this year, revealed the deputy tourism minister, with tourist arrivals anticipated to recover to 60% of 2019 levels.
  • Iraq’s crude oil exports from the southern ports averaged 2.7mn barrels per day in Apr, in line with its commitment with OPEC+.
  • According to the minister of planning, Iraq requires IQD 136trn (USD 93.19bn) to complete ongoing (6000+) projects; oil and electricity projects are the most in number.
  • Kuwait aims to vaccinate 70% of the target population within 2 months provided it receives the anticipated number of doses on time, reported Al-Qabas daily.
  • The 2021-22 development plan in Kuwait envisions 132 projects with a combined value of around KWD 1.8bn (USD 6bn), reported Al-Anba daily, citing a government document. This also includes the construction of an “international economic zone” though related costs or location are not disclosed.
  • Bank lending to the property sector in Kuwait plunged by 64.6% ytd to KWD 224.6mn as of end-Feb. Mortgage finance declined by 16.8% mom in Feb.
  • Oman’s fiscal deficit expanded to OMR 751.4mn in Q1 (Q1 2020: OMR 26.3mn): revenues were down by 30.5% yoy to OMR 1.82bn while spending slipped by 2.73% to OMR 2.57bn.
  • Oman’s state-oil firm OQ will be tapping the international bond market for the first time to raise at least USD 500mn from the issuance. This forms part of OQ’s larger plans to sell assets, issue bonds and refinance debt to fund a USD 7.9bn spending plan over next five years.
  • The supply and transportation of goods and services in Oman’s “special zones” – Special Economic Zone at Duqm and free zones in Salalah, Sohar and Al Mazunah – are zero-rated for VAT.
  • Qatar posted a QAR 200mn (USD 55mn) surplus in Q1 2021, supported by an oil price recovery in the quarter, according to the finance ministry; revenues touched QAR 45.2bn.
  • Qatar’s Emir met with Saudi Arabia’s minister of state, reviewed “issues of common interest” and discussed “enhancing and developing bilateral relations” in various fields.
  • Qatar Petroleum is planning its first ever USD-denominated public international bond sale, reported Reuters. The company has more than USD 25bn in outstanding loans and bonds.
  • Exports from Brazil to the Arab region surged by 22.5% yoy to USD 2.91bn in Q1 this year; Saudi Arabia accounted for about 18% of this total, while Bahrain, Egypt and the UAE came next. Iron ore and food products (sugar, poultry, beef, cereals) were the major exports.

Saudi Arabia Focus

  • The highlight of last week was the Saudi Crown Prince’s TV interview, given the fifth anniversary of Vision 2030: he disclosed that discussions are ongoing to sell 1% of Aramco to a leading global energy company and sale to international investors could happen in the next one year or two; no plans were underway to introduce an income tax and that the VAT hike to 15% was temporary; a Budget Bureau has been set up to take over from the finance ministry’s budget setting role; a new Policies Office will be launched by end of this year; importantly, there was a softened stance regarding Iran.
  • Saudi Arabia’s trade surplus widened by 22.1% yoy to SAR 25.4bn in Feb: non-oil exports rose by 16.2% to SAR 18.6bn, oil exports fell by 1.4% and imports fell by 6% to SAR 40.4bn.
  • Foreign reserves in Saudi Arabia grew by 1.7% mom to SAR 1.683trn (USD 448.9bn) in Mar; reserves were down by 5% yoy.
  • Consumer spending in Saudi Arabia increased by 2.08% yoy to SAR 260.8bn in Q1, though declining by 1.6% in qoq terms. Point of sales transactions surged by 37.7% yoy while cash withdrawals declined by 13.96%.
  • Saudization rate nudged up to 22.75% in Q1 from 20.37% a year ago; financial and insurance sector achieved the highest rate at 83.6%, followed by public administration, defense, and mandatory social insurance (71.9%).
  • Saudi Arabia’s Tourism Development Fund, along with Riyad Bank, launched the SAR 2bn (USD 530mn) Tourism Partners Program to develop key tourism destinations.
  • Bloomberg reported Saudi Arabia is planning to establish a homegrown electric-car maker, in a bid to boost local manufacturing, with BCG as advisers.

UAE Focus

  • Preliminary results from the Federal Statistics and Competitiveness Centre show the UAEs economy shrank by 1% last year and non-oil gross domestic product contracted 6.2%. GDP last year stood at almost AED 1.42trn at constant prices, with non-oil GDP making up just over AED 1trn of this.
  • Inflation in Abu Dhabi fell by 0.46% yoy in Q1: prices of food and beverages as well as utilities increased (by 1.4% and 0.3% respectively), while recreation costs plunged by 17.3%.
  • Dubai unveiled the Food Tech Valley: aiming to triple UAE’s food production, it will host R&D facilities, an innovation centre, a smart food logistics hub and areas for vertical farming. It is expected to “serve as a global destination for start-ups and industry experts in the food ecosystem”.
  • The UAE Central Bank’s Q1 2021 Credit Sentiment Survey showed a strong demand for personal loans alongside a moderate rise in business loans in Q1; overall demand was for housing, personal and credit card loans – most significantly in Dubai.
  • The number of patents registered in the UAE reached 25,598 by end-2020, while the number of live patent applications stood 1,971.
  • One of Israel’s biggest energy companies plans to sell 22% share of the offshore Tamar gas field to UAE’s Mubadala for an estimated USD 1.1bn. The Tamar field, which went online in 2013, is believed to hold more than 300bn cubic meters of gas.
  • Early evidence of the impact of Covid19 pandemic on companies: the 2009-crisis hit Dubai property developer Limitless disclosed a reduction of about 31% “in key asset values since year end 2019”.
  • S&P affirmed Ras Al Khaimah’s sovereign credit ratings of “A-/Stable/A-2” given expectations that the government will maintain its “prudent fiscal stance” over the next 2 years. It also affirmed Sharjah’s “BBB-” long-term sovereign credit rating with a stable outlook, on expectation that government debt will remain below 60% of GDP through 2024.

Media Review
Mideast Petrostates Ramp Up Oil-Asset Sales to Raise Billions
https://www.bloombergquint.com/business/mideast-petrostates-ramp-up-oil-asset-sales-to-raise-billions
Iran negotiator: based on accords so far, U.S. sanctions on oil, banks would be lifted
https://www.reuters.com/world/middle-east/iran-nuclear-talks-make-progress-will-resume-friday-russia-says-2021-05-01/
Saudi crown prince softens Iran rhetoric in balancing act
https://www.reuters.com/world/middle-east/saudi-crown-prince-softens-iran-rhetoric-balancing-act-2021-04-28/
Entire TV interview (in Arabic): https://youtu.be/fwn1Cusx_Rk
UAE and UK set to sign multibillion-pound clean energy and tech investment deals
https://www.thenationalnews.com/business/economy/uae-and-uk-set-to-sign-multibillion-pound-clean-energy-and-tech-investment-deals-1.1211510
Tracking the economic impact of India’s second covid wave
https://www.economist.com/finance-and-economics/2021/05/01/tracking-the-economic-impact-of-indias-second-covid-wave

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Weekly Insights 29 Apr 2021: India’s exponential rise in Covid19 cases – spillovers into the UAE?

Download a PDF copy of this week’s insight piece here.
1. As cases continue to surge in India, pace of global recovery comes into question

  • India reported the highest-ever single day cases on Wednesday, at 379,257 & continues to account for almost half the rise in global Covid19 cases. Concerns about the accuracy of these statistics notwithstanding, it is worrisome that more than 20% of tests are coming positive and that the crumbling healthcare infrastructure (in many states) is leading to around 3k deaths per day!
  • Given India’s linkages with the global economy (trade, labour & investment flows), it is not surprising that emergency supplies are coming in from across the globe to contain the spread; US relaxed its previous ban on exports of raw materials for vaccines.
  • Meanwhile, GCC nations (except the UAE) have seen a steady uptick in cases from the beginning of this year; UAE’s numbers though are still the highest among the lot. In terms of new cases per million, Bahrain stands the highest (611) and Saudi Arabia the least (29), with Kuwait (326), Qatar (284), Oman (241) and the UAE (196) in between.

 
2. India-UAE links: Trade & Investment

  • UAE has developed strong links with Asia, and especially India, over time. A prolonged slowdown in the Indian economy is likely to spillover into UAE’s growth.
  • First off, trade links: bilateral trade was around USD 60bn in 2019, though the Covid19 pandemic saw a decline in trade to USD 41.9bn (-30% yoy). Imports from India recovered much faster than exports into the country after the slump during lockdowns last year. India was the UAE’s second-largest trading partner (after China) during pre-Covid times.
  • While oil is a key traded commodity – about 8% of India’s oil imports are from the UAE – exports of precious metals, stones and jewelry remain significant. Indian food imports also have a significant part to play in UAE’s food consumption.
  • A slowdown in India would hence affect trade significantly: oil demand will decline with lower mobility; higher cases would lead to lower economic activity – i.e. negative impact on industrial production lowers exports of textiles, machinery products, lower levels of agricultural production implies less food imports from the country.
  • Official figures for Indian investment in UAE are not available: the Indian Embassy estimates it at around USD 85bn.


 
3. India-UAE links: Tourism

  • Prior to the Covid19 epidemic, India was the largest source market for visitors into Dubai, attracting 1.97mn visitors out of a total 16.73mn.
  • Covid19 cut short most tourist travel for a significantly large part of the year, resulting in a 67% decline in tourists into Dubai. India was still the largest source market for Dubai in 2020 – attracting 865k persons (-56% yoy) and South Asia retained its top spot as the largest source of visitors (21% of total).
  • Flights to the Indian sub-continent have been suspended since Apr 25 for 10 days, and given the exponential rise in cases in India, an extension seems likely – about 300 commercial flights operated weekly in what is one of the busiest international travel corridors. Newspaper reports suggest an uptick in enquiries for private jets to ferry stranded residents (similar to the lockdowns last year). Cargo operations are carrying on uninterrupted.

4. India-UAE links: Remittances

  • The UAE-India migration corridor is one of the largest in Asia: it stood at close to 3.5mn migrants in 2019. (Source: UN World Migration Report 2020). Indians account for around one-third of UAE’s total population.
  • In 2020, total remittances from the UAE touched a total of USD 43.2bn (-4% yoy). While Q1 saw a 7.8% uptick in remittances, Q2 saw the sharpest drop of 10.3%.
  • Remittances to India accounted for 33.5% of its total remittances last year – maintaining its spot as the largest recipient of remittances from the UAE.
  • As India goes into lockdown, it is possible that UAE will see an increase in remittances to the country as financial support for families in need. A weaker Indian rupee would further suport this pattern.

5. The economic case for vaccination

  • The discovery of vaccines for Covid19 had brought a sense of consumer and business optimism. However, with vaccine distributions underway, its pace is less than heartening in many nations.
  • Israel and UAE have topped the lists in terms of vaccination rates. There is confirming evidence from Israel of reduced transmissions as a result of the inoculations.
  • As the chart on the right (focusing on MENA nations) shows, there is a negative correlation between vaccination and infection rates. Anecdotal evidence also suggests that an infection after the first dose of vaccine is much less likely to require hospitalization.
  • Unfortunately for India, the pace of vaccination has been very slow. Less than 10% of the nation’s residents received the vaccine, in spite of it being home to the world’s largest vaccine manufacturer (the Serum Institute).
  • The rapid pace of India’s infections also calls into question its vaccine production and distribution channels: the Serum Institute has not fulfilled its commitment to supply the AstraZeneca vaccine globally (to UK, EU and Covax), but is also planning to sell the vaccine to state governments and private hospitals in the country (at higher rates).
  • In the MENA region, new deaths per million are low in the UAE (the leader in vaccine doses per 100 persons) while Iran has a long way to go. If Israel’s results are to be emulated, a coordinated effort should be underway to accelerate the pace of vaccination, resulting in faster return to higher economic activity.

 
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Weekly Economic Commentary – Apr 25, 2021

Markets
Equity markets were mostly down on widespread sell-offs and concerns about the recent spike in Covid19 cases, in spite of strong earnings season (86% of U.S. firms have beaten earnings expectations). China’s equity markets ended on a strong week, aided by clean energy and healthcare sector shares; the CSI300 was up by 3.4% – the biggest gain in 2 months. Regional markets were mixed: most were supported by a good corporate earnings season, while Egypt posted the highest increase of 4.5% last week, in spite of a blue-chip sell-ff on Thursday. The euro appreciated as the dollar lost some ground. Bitcoin and other cryptocurrencies slid on Biden’s plans to raise capital gains taxes. Oil prices declined on the Covid19 impact on two major oil importers – surge in India and Japan’s state of emergency; as a safe-haven asset, gold price edged up by 0.05%, still hovering near a 2-month high.
Weekly % changes for last week (22-23 Apr) from 15 Apr (regional) and 16 Apr (international)

Global Developments
US/Americas:

  • The preliminary reading of Markit manufacturing PMI increased to a record-high 60.6 in Apr (Mar: 58.9), as new order growth accelerated and in spite of being affected by delivery delays and “difficulty sourcing raw materials”. Services PMI jumped to a series record high of 60.1, from 56.3 in Mar, as businesses re-opened and restrictions were eased.
  • The Chicago Fed National Activity Index climbed to 1.71 in Mar (Feb: -1.2), implying a rebound in growth, as all 4 broad categories of indicators made positive contributions.
  • Existing home sales fell (for the 2nd consecutive month) by 3.7% mom to a seasonally adjusted annualized rate of 6.01mn in Mar – the decline largely attributed to limited supply (supply is down 28.2% yoy); homes are selling at an average of just 18 days.
  • New home sales rebounded by 20.7% mom to 1.021mn in Mar (Feb: -16.2%) – the fastest sales pace since Sep 2006 – and inventory fell to 3.6 months of supply. Consumer demand is propped up by low mortgage rates and in spite of higher lumber prices adding roughly USD 24k to the cost of a new home.
  • Initial jobless claims fell further to 547k in the week ended Apr 10, a new pandemic-era low, from the upwardly revised 586k the prior week, with the 4-week average slipping down to 651k. Continuing claims fell to 3.674mn in the week ended Apr 3 (also a new low since Mar 2020) compared to the previous week’s 3.708mn.

Europe:

  • ECB kept interest rates unchanged and expects to keep buying more bonds in the future (compared to the ECB purchases of EUR60bn, EUR 53bn and EUR 74bn in Jan, Feb and Mar).
  • The preliminary Markit manufacturing PMI in Germany declined slightly by 0.2 points to 66.4 in Apr, with many respondents citing supply issues. Services PMI slipped to 50.1 (Mar: 51.5) on stricter lockdown measures. Composite PMI slipped to 56 from 57.3 the month before.
  • Eurozone’s preliminary manufacturing PMI increased for a 10th straight month to 63.3 in Apr (Mar: 62.5), with record surges in both output and new orders. Services PMI crossed the 50-mark, rising to 50.3 from 49.6 in Mar. Composite PMI improved to a 9-month high of 60.1 (Mar: 56.3). Future expectations improved, climbing to the highest since mid-2012.
  • German producer price index inched up by 0.9% mom in Mar from Feb’s 0.7% increase, largely due to the prices of energy (+0.9% mom) and of intermediate products (+1.6%). In yoy terms, PPI grew by 3.7% from 1.9% the month before – the highest increase since Nov 2011.
  • Inflation in the UK increased by 0.7% yoy in Mar (Feb: 0.4%), given upticks in transport costs and clothing prices though food prices fell. Core CPI increased by 1.1% yoy from Feb’s 0.9% reading. Retail price index grew by 1.5% in Mar (Feb: 1.4%), the biggest increase in 8 months while the PPI core output stood unchanged at 1.7% yoy.
  • UK retail sales accelerated by 5.4% mom and 7.2% yoy in Mar (Feb: 2.2% mom and -3.6% yoy); clothing sales rose by more than 17% and fuel sales were up by 11% as restrictions were eased towards end of the month. The share of online spending declined to 34.7% in Mar, down from 36.2% in Feb 2021, but still above the 23.1% reported in Mar 2020.
  • The ILO unemployment rate in the UK ticked down to 4.9% in the 3 months to Feb from 5% before. Average earnings excluding bonus increased to 4.4% from 4.2% previously.
  • Flash manufacturing PMI in the UK jumped to 60.7 in Apr (Mar: 58.9) – the highest since Jul 1994 – supported by the steepest rise in new orders since Nov 2013. Services PMI also ticked up to 60.1 from 56.3 – posting the fastest expansion pace in 6.5 years.
  • Public sector borrowing in the UK increased to GBP 303.1bn as of Mar – the highest level since the end of WWII – up EUR 246bn from the previous 12-month period.

Asia Pacific:

  • China left interest rates unchanged for the 12th month in a row at 3.85%. Meanwhile, credit growth has been slowing with the regulator actively warning about asset bubble risks (especially in the domestic real estate market).
  • Exports from Japan grew by 16.1% yoy in Mar – the steepest growth since Nov 2017, supported by machinery (+12.7%), motor vehicles (+11.2%) and cars (+1-0.5%). Imports rose by 5.7%, widening the trade surplus to JPY 663.7bn. Exports to China surged by 37.2% yoy, to the EU accelerated by 12.8% (largest rise in ~3 years) and to the US rose by 4.9%.
  • Industrial production in Japan declined by 2% yoy and 1.3% mom in Feb, following the drop in Jan (-2.6% yoy and -2.1% mom).
  • Inflation in Japan fell by 0.2% yoy in Mar (Feb: -0.4%) while core inflation (includes oil products but excludes fresh food) slid for the 8th straight month by 0.1% yoy (Feb: 0.4%).
  • The au Jibun Bank’s preliminary manufacturing PMI for Japan increased to 53.3 in Apr (Mar: 52.7). The composite output index returned to expansion, posting 50.2 in Apr, for the first time since Jan 2020.
  • Inflation in Singapore jumped to 1.3% yoy in Mar (Feb: 0.7%), the fastest in nearly 4 years, on transport costs (+7.2%) and services inflation (+1.2%); core inflation quickened to 0.5% yoy (Feb: +0.2%) – the most in more than a year.

Bottomline: The release of preliminary PMI numbers underscored that rising production costs (on higher shipping costs) and delivery delays are evident across the globe (which could spill over into inflation numbers in the near-term). While data from the US points to a faster economic recovery, how Europe recovers will depend on its pace of vaccine rollout – already, there are fears of opening up “too early” (France to ease travel restrictions from May 3, Italy to reopen restaurants & cinemas, Greece lifting quarantine requirement for vaccinated persons or those with a negative PCR from key tourism markets). In Asia, Japan declared new lockdowns in Tokyo, Osaka and two other prefectures; with India struggling to contain its second wave, its new strains could potentially derail global recovery. Adding to the worries are concerns about vaccine production: India’s Serum Institute has not fulfilled its commitment to supply the AstraZeneca vaccine globally (to UK, EU and Covax), but is also planning to sell the vaccine to state governments and private hospitals in the country (at higher rates).
Divergence in growth seems to be the medium-term story: how recovery pans out will depend on the simultaneous impact of countries vaccination pace and achieving herd immunity while keeping 3rd/ 4th/ 5th waves at bay. Separately, among central banks, Bank of Canada signaled an exit from stimulus – tapering its bond-buying program – while Russia raised its interest rate by 50bps to 5% given the weak Rouble amid high inflation levels, while also signaling more were to come. Lastly, the OPEC+ meeting on April 28 to review oil production/ supply is unlikely to see any changes.
Regional Developments

  • Exports from Bahrain jumped by 17.9% yoy to BHD 684mn (USD 1.8bn) in Q1 2021, with the main export partners being Saudi Arabia (22.4%), UAE (11.1%) and the US (10.4%). Imports inched up by 3% to BHD 1.312bn, with the top 10 nations accounting for 72% of value of imports (list topped by Brazil, China and the UAE).
  • Employment of expats in Bahrain declined by 9.7% yoy to 535,022 as of Q4 2020 while citizens’ employment posted a 0.7% drop to 152,678.
  • Bahrain and Israel have signed a bilateral agreement with respect to “mutual recognition of vaccination and green passports”. This will permit vaccinated persons from either country to be exempt from quarantine (in the other), also allowing them to enter places that require a “green passport”.
  • Economic growth in Egypt averaged 1.3% yoy in Q1-Q3 2020, according to the central bank, supported by domestic consumption and offsetting the negative contributions from investments and net exports.
  • Egypt raised domestic fuel prices for the first time since 2019 (when all subsidies were phased out as part of the IMF-backed reform plan). Prices were lowered twice afterwards: in Oct 2019 and Apr 2020.
  • Non-oil exports from Egypt increased by 7.2% yoy in Q1 2020 to USD 7.4bn. Imports inched up by 1.4% to USD 16.9bn, allowing trade deficit to narrow by 1% to USD 9.5bn. Separately, iron and steel exports from Egypt rose by 61.2% to USD 187mn in Jan-Feb 2021; it was shipped to 49 destinations with Italy, Saudi Arabia and Spain topping the list (accounting for 64% of total).
  • Egypt provided EGP 2.4bn (USD 153mn) towards export subsidy dues payment. This initiative allows for the payment of 85% of the total value of dues in lump-sum, instead of paying it in installments.
  • Egypt plans to raise EGP 1.25trn (USD 80bn) as part of its investment plan for the fiscal year 2021-2022, disclosed the minister of planning and economic development. This includes a 125% surge in funding for the production sector and a 30% rise for the services sector.
  • The central bank of Egypt issued Treasury bonds worth EGP 16.5bn (USD 1.05bn) to support financing of the budget deficit. Government banks were the largest buyers.
  • Egypt’s Tax Authority disclosed that offices and commercial spaces would be subject to 14% VAT.
  • The largest independent solar power project in Egypt, the 200 MW Kom Ombo photovoltaic power plant, received a USD 114mn financing package from a group of development financial institutions (including EBRD, AfDB) and banks.
  • Egypt agreed to produce more than 40 million doses a year of Russia’s Sputnik V coronavirus vaccine, in an agreement between the pharma firm Minapharm and the Russian Direct Investment Fund. Rollout is expected in Q3 this year.
  • Iraq withdrew permits for 1,128 projects due to long delays as part of a new law requiring project owners to finish them on time. Projects with an execution rate of 0-35% after deadline for completion were affected by this decision.
  • The central bank of Iraq signed an agreement with Mastercard to promote digital payments in the country. Though almost 99.8% of the USD 122bn personal consumption expenditure was made in cash in 2019 (according to the World Bank), a 70% smartphone penetration rate and 22% share of young and tech-savvy population denotes untapped potential for digitisation.
  • Remittances flow to and from Jordan dropped by 10-20% during Ramadan in comparison with the same period in the past before the pandemic, according to the President of the Jordanian Money Exchange Association.
  • The Central Bank of Kuwait clarified regulations for postponing collection of loan payments from eligible citizens for a period of 6 months.
  • Annual reports of Kuwaiti banks indicate that 55% of the management positions (excluding middle management) are occupied by Kuwaitis, according to EFG Hermes financial group.
  • Businesses in Oman are allowed to bear the VAT instead of the customers should they opt to do so, according to a Tax Authority official.
  • Total Omanis working in the private sector inched up by 0.3% mom to 254,999 as of Mar.
  • Investment banking fees in MENA ticked up by 5% yoy to a 3-year high of USD 218mn in Q1 this year; advisory fees from M&A Activity plunged by 74% to USD 20.4mn – the second lowest total in the past decade.
  • Sukuk issuance in the GCC declined to USD 6.5bn in Q1 2020 from USD 10.2bn in Q1 last year, according to Refinitiv data.
  • The GCC is home to over 22k active construction projects valued at USD 2.2trn, according to BNC Network. Project awards totalled USD 35.6bn in Q1 (already 55% of total announced in 2020): Saudi Arabia topped the list (54%) followed by Qatar (21%).

Saudi Arabia Focus

  • Saudi Aramco is expected to refinance a USD 10bn debt facility raised in 2015, reported Reuters.
  • Saudi Arabia plans to save about SAR 800bn (USD 213.34bn) over the next 10 years by replacing fuel for domestic consumption with gas and renewable energy, according to the finance minister.
  • Foreign investments into Saudi Arabia increased to record level of SAR 2.1trn in 2020, up 9.45% yoy. The licenses granted by the ministry of investment to foreign investors reached 466 during Q4, registering the highest quarterly rise.
  • Domestic sukuk issuance in Saudi Arabia stood at SAR 11.713bn (USD 3.1bn) in Apr.
  • Public debt issuance in Saudi Arabia grew by nearly 50% yoy to SAR 163bn in 2020, disclosed the Capital Market Authority. Non-government debt issuance surged by more than 250% to SAR 31bn.
  • Saudi Arabia’s holdings of US treasury bonds declined by 27.9% yoy and 1.6% mom to USD 132.9bn in Feb. This is the lowest level since Sep 2020.
  • Saudi Arabia’s King authorized SAR 1.9bn to be paid to Saudis who receive social security benefits.
  • China’s crude oil imports from Saudi Arabia increased by 8.8% to 7.84mn tonnes or 1.85mn barrels per day in Mar – Saudi continues to be the biggest crude oil supplier to China for the 7th straight month. China’s imports from Oman, UAE and Kuwait increased as well – by 60% (to 0.86mn bpd), 86% (to 0.71mn bpd) and 29% (to 0.6mn bpd) respectively.
  • Crude oil exports from Saudi Arabia fell to 5.625mn barrels per day in Feb – the lowest since Jun 2020, and up from Jan’s 6.582mn bpd (the highest since Apr 2020).
  • The Saudi Export-Import Bank approved nearly SAR 8bn (USD 2.13bn) in lending to non-oil exporters since this was launched early last year.
  • Saudi Grains Organisation announced the completion of the sale of its entire stake in the last two milling companies, as part of the privatization programme.
  • Saudi ports handled more than 253k twenty-foot equivalent units (TEUs) in Mar, up more than 33% yoy.
  • Saudi Arabia recorded a 110% mom surge in people searching for flights in Mar, according to the travel platform Skyscanner. Domestic flights were most searched, in addition to international flights to India, Pakistan, Philippines and Egypt.

UAE Focus

  • UAE plans to include 10 new sectors – chemical, petrochemical, pharmaceutical, defence and heavy industries; national food and healthcare security industries; industries of the future, including space and renewable energy among others – under the commercial companies’ law, allowing for 100% ownership of onshore firms.
  • UAE central bank will extend its monetary support measures till Jun 2022. Furthermore, “to support the recovery phase”, financing for loan deferrals under the Targeted Economic Support Scheme will be extended until end-2021.
  • 65 new commercial agencies were registered in the UAE in Q1 this year; the total number of commercial registrations stood at 5944 as of end-2020, including 348 new firms.
  • The Sharjah Economic Development Department declared a 12% increase in number of issued and renewed licenses in Q1 this year to 15,920. E-commerce licenses surged by 292% yoy while industrial and commercial licenses grew by 19% and 13% respectively.
  • DP World reported a 10.2% yoy rise in Q1 container shipping volumes, handling 18.9mn twenty-foot equivalent units (TEUs), with growth across all regions. Gross volumes were 9.6% higher than Q1 2020 on a like-for-like basis while consolidated volumes grew 8.2% yoy on a reported basis and up 7% on a like-for-like basis.
  • UAE extended repayment of a USD 2bn deposit that was given to Pakistan in Jan 2019: the payment was due Apr 19th this year.
  • About 86% of respondents in the UAE prefer to work completely virtually or see remote and on-site working together, according to a BCG-Bayt.com study. About 43% are currently virtual in some form of remote working compared to 51% globally.

Media Review
Vaccines are working – charts that show the Covid endgame
https://www.ft.com/content/d71729a3-72e8-490c-bd7e-757027f9b226
The YOLO economy
https://www.nytimes.com/2021/04/21/technology/welcome-to-the-yolo-economy.html
The spectacular surge of the Saudi female labor force
https://www.brookings.edu/blog/future-development/2021/04/21/the-spectacular-surge-of-the-saudi-female-labor-force/
UAE has potential to become a manufacturing hub for hydrogen infrastructure
https://www.thenationalnews.com/business/energy/uae-has-potential-to-become-a-manufacturing-hub-for-hydrogen-infrastructure-1.1208322
Swiss probe Lebanon’s central bank chief over alleged USD 300mn embezzlement
https://www.ft.com/content/106b1ddd-d8dc-49e5-90ec-eb216c147125

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Weekly Insights 22 Apr 2021: GCC: Oil-dependence & Path to Climate Resilience

Download a PDF copy of this week’s insight piece here.
1. Oman: 4th GCC nation to implement VAT

  • Oman introduced 5% VAT on most goods and services, starting Apr 16
  • UAE and Saudi Arabia rolled out 5% VAT in 2018 & Bahrain in 2019
  • According to Ministry of Finance estimates, Saudi increased non-oil tax revenues to 32% in 2018 (vs just 10% in 2010), 36% in 2019 and estimated to rise to 46% in 2020 (given tripling of VAT)
  • UAE collected AED 27bn in VAT in 2018 (1st year) & AED 11.6bn in Jan-Aug 2020 (pandemic year); VAT revenues in Bahrain touched BHD 260mn in 2019 and BHD 220mn in 2020.
  • Oman’s VAT is estimated to generate ~OMR 400mn (USD 1bn) in revenue annually, roughly ~1.5% of GDP (if effectively and efficiently implemented)
  • As a result, the IMF projects fiscal deficit to decline to 4.5% of GDP in 2021 (2020: 17.5%) & non-oil revenue to rise to 17.2% of non-oil GDP in 2021 (2020: 11.4%)
  • This move will lead to an improvement of Oman’s sovereign credit rating + lower the cost of credit + attract more FDI & portfolio investment as a result of the ensuing reduction in macroeconomic risks

 
 
2. GCC’s Diversification Efforts & Renewable Energy policies => Transition to a lower-oil dependent region

  • Unsustainable path of dependence on oil: current oil demand vs supply, pressure on oil prices + current fiscal & social spending policies => fiscal unsustainability: GCC’s aggregate net financial wealth (est. at $2trn) could be depleted by 2034 (IMF)
  • Oil market structure & dynamics are changing, given global energy transitions: pre-Covid19, shale & renewables were already displacing conventional oil
  • Major challenges for the oil market (non-exhaustive list):

Demand-side factors:

    • Gov’t plans for sustainable recovery, ambitious goals for net-zero emissions
    • Covid19-led collapse in demand: potential WFH policies & mobility, question marks over recovery of business/ leisure air travel
    • Energy efficiency improvements, EV penetration

Supply-side factors:

    • Spending cuts and project delays could slow oil supply growth
    • Large cost reductions in renewables + advances in digital technologies
  • Climate Change & Decarbonisation Risks are growing – could lead to sharp fall in fossil fuel asset prices => stranded assets risk

3. Energy Transitions & GCC’s ambitious targets

  • The two-day virtual Leaders Summit on Climate (from today), hosted by the US President, brings the US back into play with respect to global action against climate change
  • Latest news that banks & financial institutions with USD 70trn+ assets pledged to cut their greenhouse gas emissions & ensure their investment portfolios align with the science on the climate adds to the commitment


 
4. Are the GCC nations prepared for a low-carbon economy transition?

  • The preparedness of countries for a low-carbon transition (LCT) is measured by exposure and resilience indexes: highlights turning the risks of an LCT into opportunities for robust growth.
  • GCC nations are signifcantly exposed, especially given dependence on oil (resource rents, carbon intensity, GHG emissions): Qatar scores highest exposure & UAE the least
  • However, the GCC are relatively well prepared for an LCT thanks to its resilience, particularly its relatively good macro stability and supportive business environment alongside high quality of infrastructure, human capital and institutions


 
5. WEF’s Energy Transition Index ranks UAE just behind Qatar wrt energy systems & pathways to clean energy

  • UAE ranked 64th globally on WEF’s latest Energy Transition Index (2021) out of a total 115 nations, just behind Qatar at 53rd position. Lebanon ranked lowest in the Middle East region at 112th.
  • Among the various components of the Index, MENAP’s average falls farthest from the world average in two: environmental sustainability (37.89 in MENAP vs 61.32 globally) and capital & investment (38.87 vs 55.17). Of the 11 categories, region is worse-off compared to 2012 (initial year of results) in 4: system performance, environmental sustainability, energy system structure and economic growth & development
  • The chart on the right shows no MENAP countries in the top-right quadrant (high transition readiness & well-performing energy systems). 4 of 6 GCC nations are in the “leapfrog” quadrant (green dots, high readiness but system performance below the mean); two countries Algeria and Morocco fall among those with potential challenges (red dots, above-average system performance but readiness below the mean).


Source: Energy Transition Index 2021, World Economic Forum. https://www.weforum.org/reports/fostering-effective-energy-transition-2021#report-nav 
 
6. GCC risk for climate-driven hazards is much lower than regional counterparts

  • The climate-driven INFORM Risk 2021 Index is derived from 3 dimensions: climate-driven hazard & exposure, vulnerability and lack of coping capacity.
  • GCC nations fare relatively better, scoring between 1.3 to 2.6 out of a total 10 (riskiest). But, two scores are comparatively higher: Saudi Arabia’s hazard & exposure score (largely due to conflict risk) and Oman’s lack of coping capacity (institutional & governance indicators related to increasing the resilience of the society need improvement).


 
 
 
 
 
Source: INFORM Global Risk Index 2021. https://drmkc.jrc.ec.europa.eu/inform-index/INFORM-Risk
 
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Weekly Economic Commentary – Apr 18, 2021

Markets
Capital market euphoria continues into another week, this time on strong economic data: Wall Street’s S&P 500 and Nasdaq as well as DAX and Stoxx600 climbed to new highs, FTSE crossed 7000 points to its highest since Feb 2020 and the MSCI All-World index touched an all-time peak. In the region, Qatar was the biggest gainer, after its announcement of allowing 100% foreign ownership of listed companies. Among currencies, both GBP and EUR gained with the dollar at a 4-week low; both oil and gold prices increased from the week before.
Weekly % changes for last week (15-16 Apr) from 8 Apr (regional) and 9 Apr (international).

Global Developments
US/Americas:

  • Inflation in the US ticked up by 0.6% mom and 2.6% yoy in Mar (Feb: 0.4% mom and 1.7% yoy). The mom rise was the fastest pace since 2012, largely driven by petrol prices. Core inflation was up by 0.3% mom and 1.6% yoy (from 0.1% mom and 1.3% yoy).
  • US industrial production rebounded by 1.4% mom in Mar the highest since Jul 2020 – partly reversing the decline of 2.6% in Feb (related to severe weather conditions). Capacity utilization improved to 74.4% in Mar from 73.4% the month before.
  • National economic activity accelerated to a moderate pace from late Feb to early Apr”, according to the Fed’s Beige book. Stimulus cheques and related improvements in consumer spending alongside an increase in hiring supported the move. Separately, the NFIB Business Optimism Index increased to a 4-month high of 98.2 in Mar (Feb: 95.8), though “finding qualified labour” was identified as a critical issue. The Michigan consumer sentiment index meanwhile improved to 86.5 in Apr (Mar: 84.9), the highest reading since Mar 2020.
  • Retail sales in the US increased by 9.8% mom in Mar (Feb: -2.7%), recording the largest gain in 10 months, supported by the stimulus cheques and vaccination drives. Level of sales is now1% above its pre-pandemic level and pushed to a record high. The rebound was led by sales at clothing stores (+18.3%), motor vehicles (+15.1%) and higher spending at restaurants and bars (+13.4%).
  • Housing starts surged by 19.4% mom and 37% yoy to a nearly 15-year high of 1.739mn in Mar. Building permits increased by 2.7% mom to 1.766mn in Mar. The stock of housing under construction rose 0.8% to a rate of 1.306mn units, the highest since Sep 2006.
  • Initial jobless claims fell to 576k in the week ended Apr 3, touching the lowest since Mar 2020, from the upwardly revised 769k the prior week, with the 4-week average slipping down to 683k. Continuing claims inched up to 3.731mn in the week ended Apr 3 compared to the previous week’s 3.727mn.

Europe:

  • Industrial production in the eurozone declined by 1% mom and 1.6% yoy in Feb (Jan: 0.8% mom and 0.1% yoy): this was the largest dip since Apr’s record low, as many nations remained under strict restrictions. Drops were across the board: capital goods (-1.9%), energy (-1.2%), durables (-1.1%), non-durables (-0.1%).
  • German ZEW economic sentiment fell 5.9 points to 70.7 in Apr, recording the first drop since Nov 2020. The current situation reading improved to -48.8 (Mar: -61), roughly the same level as in Mar 2020.
  • The ZEW economic sentiment for the eurozone declined to 66.3 in Apr (Mar: 74) while indicator for the current economic situation climbed 4.3 points to -65.5.
  • Harmonised index of consumer prices in Germany grew by 2% yoy and 0.5% mom in Mar.
  • Wholesale price index in Germany increased by 4.4% yoy in Mar (Feb: 2.3% yoy), the highest uptick since Apr 2017; in mom terms, prices grew by 1.7% (Feb: 1.4%).
  • Retail sales in the eurozone were up by 3% mom in Feb, partially reversing the 5.2% dip in Jan. Sales of non-food products rose by 6.8% and fuel by 3.7%. Overall sales fell by 2.9% yoy in Feb, following the 5.2% drop in Jan.
  • UK’s GDP increased by 0.4% mom in Feb (Jan: -2.2%), as government restrictions remained unchanged. Overall, Feb’s level is 7.8% below that seen in Feb 2020 and is 3.1% below levels in Oct 2020, the initial recovery peak. Construction sector grew by 1.6% in Feb 2021, driven by growth in both new work and repair and maintenance.
  • UK’s industrial production increased by 1% mom in Feb, supported by the 1.3% yoy uptick in manufacturing output. In yoy terms, IP and manufacturing declined by 3.5% and 4.2% respectively.

Asia Pacific:

  • GDP in China increased by 18.3% yoy and 0.6% qoq in Q1 (Q4: 6.5% and 2.6% qoq)fastest growth since quarterly records began in 1992. GDP grew just 2.3% last year, its weakest expansion in 44 years, but is the only major economy to have grown during the pandemic.
  • China’s exports grew by 30.6% yoy in Mar and imports surged by 38.1%, causing trade surplus to shrink to USD 13.8bn (Feb: USD 103.25bn).
  • China’s new yuan loans expanded to CNY 2.73trn in Mar (Feb: CNY 1.36trn), pushing bank lending in Q1 to a record high of CNY 7.67trn surpassing the previous high of CNY 7.1trn in Q1 2020. Money supply in China grew by 9.4% yoy in Mar (Feb: 10.1%).
  • Industrial production in China increased by 14.1% yoy in Mar, easing from Feb’s 35.1% reading.
  • FDI into China grew by 43.8% yoy in Q1 – the highest quarterly growth rate since Q2 2008. During Q1, a total of 10,263 new foreign-invested companies were established in the country, up 47.8% yoy. Fixed asset investment increased by 25.6% yoy till Mar this year, slowing from the 35% rise in Jan-Feb.
  • China’s retail sales surged by 34.2% yoy following Feb’s 33.8% rise, causing Q1 to tick up by 33.9%.
  • Japan’s machinery orders unexpectedly fell for the second consecutive month by 8.5% in Feb, (Jan: -4.5%); core machinery orders slipped by 7.1% in Feb after Jan’s 1.5% rise. Separately, machine tool orders increased by 65% yoy in Mar (Feb: 36.7%).
  • Industrial output in India fell by 3.6% yoy in Feb (Jan: -0.9%). Manufacturing shrank by 3.7%, following Jan’s 1.3% drop. Cumulative industrial output for Apr-Feb fell by 11.3%.
  • Wholesale price index in India jumped to an 8-year high of 7.39% yoy in Mar (Feb: 4.17%), driven by fuel (2-year high of 10.3%), manufactured products (8-year high of 7.3%) and metals. Separately, retail inflation rose to a four-month high of 5.52% in Mar.
  • India’s trade deficit touched USD 13.93bn in Mar, following Feb’s USD 14.11bn deficit. Exports grew by 60.29% yoy to USD 34.45bn and imports accelerated by 53.74%.
  • Singapore’s GDP grew by 2% qoq and 0.2% yoy in Q1 (Q4: 15.9% qoq and -2.4% yoy), the first yoy expansion since the Covid19 outbreak, as per the preliminary estimates released by the Ministry of Trade and Industry. Growth is supported by strong manufacturing (+7.5% yoy) while the construction sector shrank (-20.2%), as did wholesale and retail trade as well as transportation and storage trade (-4.1%).

Bottomline: The IEA expects world oil demand estimate to rise by 5.7m barrels per day in 2021, up from a decline in demand last year by 8.7mn bpd. However, surging Covid numbers in Europe, India (where infections have risen about 16 times over the past 2 months) and Brazil are likely to temper this optimism and an Iran deal could potentially bring an additional 2mn bpd to the market. China’s GDP for Q1 was below market expectations, but it still remains a major engine for global growth; its policymakers’ focus has shifted though to signs of overheating, leverage across the real estate sector and reining in steel production. Looking ahead this week, the ECB meets and is unlikely to spring any surprises (given Lagarde’s view that the economy is still “in crutches”). Inflation pressures are rising across many nations but is likely transitory for the time being.
Regional Developments

  • The IMF’s latest Regional Economic Outlook report forecasts real GDP for the Middle East and North Africa (MENA) region to grow by 4% this year (up 0.9 percentage points from the projection in Oct 2020) after having slumped by 3.4% in 2020 (vs an estimate of a 5% drop in the Oct 2020 edition). Growth outcomes and prospects will still be centred on how the pandemic progresses in the region amid the pace of vaccination rollouts.
  • The value of mergers and acquisitions in the MENA region grew by 19% yoy to USD 17.1bn in Q1 2021, according to Refinitiv. Egypt was the main recipient of M&A activity, with USD 3bn of investment, closely followed by Oman and Qatar. Debt issuances spiked by 61% yoy to USD 34.8bn – the best start to the year since 1980 – with Saudi and UAE the most active issuer nations (USD 12.3bn and USD 7.5bn in bond proceeds).
  • Start-ups in MENA recorded venture capital investment of more than USD 1bn last year, according to MAGNiTT. While Bahrain saw a tripling of capital deployment in start-ups, UAE accounted for the maximum share in terms of total funding and number of deals followed by Egypt and Saudi Arabia.
  • The Bahrain Bourse expects two new IPOs this year, a logistics firm and an oil company, disclosed the CEO to Asharq Business.
  • Results of the 2020 FDI Survey showed a 3.3% rise in FDI volume into Bahrain to BHD 11.9bn (USD 31.3bn). Foreign investment from Luxembourg accounted for6%, (or BHD 248.2mn) of the total, followed by the Cayman Islands (BHD 93.3mn) and India (BHD 68.6mn), according to the survey.
  • Fitch Ratings affirmed Bahrain’s long-term foreign-currency Issuer Default Rating at ‘B+’ with a stable outlook, citing the nation’s strong backing from partners in the GCC, high GDP per capita and also human development indicators.
  • With more than 60 international oil and gas companies operating in Egypt, the oil and gas sector contributed 24% of Egypt’s GDP in 2020, revealed a senior government minister.
  • Egypt reported a balance of payments surplus of USD 1.5bn in H2 2020, following a deficit of USD 9bn in H1 and compared to a surplus USD 410.9mn in H2 2019. Current account deficit meanwhile widened by 66.9% to USD 7.6bn in H2 2020.
  • Egypt’s external debt grew by 14.7% yoy to USD 129.2bn in 2020; external debt stood at USD 125.3bn in Sep 2020.
  • The total financial position of Egypt’s banks increased by 1.94% mom to EGP 7.158trn in Jan 2021. Bank capital was about EGP 174.774bn in Jan, while reserves stood at EGP 327.6bn.
  • In a bid to support bond trading and expand its investor base, Egypt’s Financial Regulatory Authority decided to exclude 10% of each private placement bond issuance from the minimum subscription requirement.
  • Remittances into Egypt declined by 4.15% yoy to USD 2.54bn in Jan 2021. While for the full year 2020, remittances had increased by 10.5% to USD 29.6bn, it grew by 10.6% yoy to USD 18.1bn during the period Jul 2020-Jan 2021.
  • Occupancy rate at Egypt’s hotels (which are restricted to half capacity given Covid19 regulations) ranged between 40-45% in Q1, according to a tourism ministry official.
  • Egypt’s cement sales surged by 22% mom and 15% yoy to 4.99mn tonnes (including exports) in Mar this year. Excess capacity amounted to 26%, the lowest since 2018.
  • An Iraqi official disclosed that about 80% of the infrastructure required to connect Iraq’s electricity grid to the GCC Grid via Kuwait has been completed. Iraq already signed an agreement with Jordan last year to link their power grids.
  • Jordan’s public debt jumped by 10.6% yoy to JOD 26.5bn (USD 37.4bn) in 2020: this is equivalent to at 85.4% of GDP, up from 75.8% a year earlier.
  • Inflation in Jordan edged up by 0.07% yoy in Q1 this year; in Mar alone, inflation ticked up by 0.16% yoy and 0.29% mom.
  • Jordan achieved all the targets that were set in the second review under the IMF’s USD 1.3bn Extended Fund Facility arrangement and has maintained the pace of reforms.
  • As a result of the Covid19 pandemic, the clothing sector in Jordan recorded JOD 200mn in losses, given the closure of 700 firms in the sector and about 1600 persons laid off, revealed the President of the Textile and Readymade Clothes Syndicate.
  • The IMF called for “strong fiscal consolidation” in Kuwait and stated that “structural reforms would be needed to preserve fiscal buffers and strengthen growth”.
  • Kuwait’s central bank called for local banks to appoint Kuwaitis in leadership positions”.
  • Inflation in Lebanon surged to an annual 155.4% in Feb: this is the 8th consecutive month of triple-digit increases. The uptick was across all categories: prices at restaurants and hotels soared by 618%, clothing and footwear were up by 612%, in addition to furnishings and household equipment (609%) and food and non-alcoholic beverages (417%) among others.
  • Lebanon’s central bank governor stated that the BDL’s subsidy program has kept inflation in recent months at 84%, emphasizing that it would have exceeded 275% otherwise. The governor also called on the government to roll out a new plan to ration subsidies and end waste.
  • Oman started implementing a 5% VAT on most goods and services, starting last Fri. About 488 basic commodities have been exempt from VAT; it was also disclosed that departing tourists could claim a VAT refund on personal purchases provided the value of these goods are not less than OMR 25 (not inclusive of VAT).
  • Qatar approved a draft law to allow foreign investors to fully own companies listed on the exchange. This pushed the stock market up by 2.8% on Thursday – its biggest intra-day gain since last Apr – with banks leading the gains.
  • Qatar will maintain central bank liquidity support for local banks, and exemptions from utilities fees for sectors affected by the pandemic will be extended till end-Sep.
  • In a bid to host a Covid-free event, Qatar’s foreign minister disclosed that programs are under development to provide vaccination to all attendees of World Cup 2022.
  • According to a senior official at Bahrain’s Sustainable Energy Authority, the GCC nations which are now connected to the GCC Power Grid, are in next stage talks to extend and connect the link with Arab countries (talks with Egypt are in progress), following which the third phase would be to link up with the European power grid (providing surplus power to Europe during winter).

Saudi Arabia Focus

  • Inflation in Saudi Arabia eased to 4.9% in Mar (Feb: 5.2%): food and transport prices increased by 10.2% and 10.5% respectively. Separately, wholesale price index rose by 8.7% yoy and 0.8% mom in Mar, largely due to the 14.6% uptick in prices of metal products, machinery and equipment.
  • Saudi exports to China and Japan together accounted for 27.7% of total value of exports in 2020. Exports to these two nations dropped by 35% yoy last year, in part because of the decline in value of oil exports.
  • The Saudi central bank is encouraging consolidation in the insurance sector: three insurance mergers happened in a short period of nearly a year, with the most recent one being of Aljazira Takaful and Solidarity.
  • Saudi Aramco reassured in a bourse filing to Tadawul that the recent sale of its 49% stake in Aramco Oil Pipelines Company will not impede its crude production.
  • The value of point-of-sale transactions in Saudi Arabia declined by 11.7% in the week ending Apr 10 to about SAR 10bn (USD 2.6bn) – ahead of the start of Ramadan. The food and beverage sector accounted for 17.4% of total sales.
  • Starting from Apr 12th, Saudi Arabia reduced the maximum period of subsidized housing finance to 20 years from 25 years for new applications. The program provides a real estate loan with up to 100%, for those whose salary is SAR 14k or less, with a guarantee (on the amount of the profit margin) of up to SR500k of the financing amount.
  • Home completions in Saudi Arabia increased by 4% yoy to almost 345k last year; new housing finance provided to Saudi families increased to 295,590 contracts with a value exceeding SAR 44bn (USD 72bn).
  • In a bid to boost Saudization in the industrial sector, 50% of the wage will be provided for hiring, training and qualifying Saudi citizens to take up jobs in industrial firms (capped at SAR 3,000).
  • Saudi Arabias first wind project, the 400MW utility-scale Dumat Al Jandal project, is 50% complete and first power from the wind farm project is expected within “the coming weeks”. When the project is completed by 2022, it will be able to power upto 70k homes annually.
  • Saudi Arabia disclosed that it had contributed more than USD 713bn to support global efforts to address the Covid19 pandemic.
  • Sudan will receive USD 400mn from Saudi Arabia and UAE to fund agricultural production inputs for this year.

UAE Focus

  • Dubai’s PMI nudged up by 0.1 point to 51 in Mar, as output expanded, and the new orders sub-index rose slightly to above 50. Impact of global supply shortages were evident: a reduction in input availability led to the sharpest rise in prices since Nov 2018. Travel and tourism stayed below-50 while construction sector saw major improvements as projects were allowed to restart.
  • Foreign trade in Dubai touched AED 1.182trn (USD 321.8bn) in 2020: exports increased by 8% to AED 167bn while imports and re-exports fell by 13.8% and 21.7% respectively. Trade with its largest trade partners China and India declined by 5.3% and 34% to AED 142bn and AED 89bn respectively.
  • The deadline for UAE’s Federal Tax Authority to issue a decision to reduce or exempt administrative fines is amended to 40 working days (from 20 previously) from the date of receiving the order.
  • Without specifying a value, Mubadala’s CEO stated that a record amount had been invested by the company last year (it had invested USD 18.5bn in 2019 and USD 19.1bn in 2018). He also revealed that Emirates Global Aluminium is “well-placed” for an IPO and a decision would be made shortly regarding this move.
  • Dubai Customs announced that 5mn transactions were completed in Q1: this was double the number completed in Q1 2019 and 20% yoy.
  • US will proceed with its USD 23bn weapon sales to the UAE, with the spokesperson stating that the US will “continue reviewing details and consulting with Emirati officials” related to the use of the weapons.
  • Dubai attracted FDI inflows worth AED 7bn (USD 6.73bn) in 2020, supporting 455 projects and creating an estimated 18,325 new jobs on the back of inbound FDI, according to FT’s fDI Markets.
  • The Sharjah Electricity, Water and Gas Authority extended payment periods for utility bills: those with bills AED 1k or lower can pay one month within billing date without penalties where those with bills above AED 1k will have a 15-day grace period instead.
  • Zand, the first fully independent digital bank in the UAE, is awaiting final regulatory approval and will be “launched immediately” for retail and corporate clients, revealed the bank’s chairman (Emaar Properties founder and former chairman Mohamed Alabbar).

Media Review
IMF Middle East & Central Asia Regional Economic Outlook: Arising from the Pandemic: Building Forward Better
https://www.imf.org/en/Publications/REO/MECA/Issues/2021/04/11/regional-economic-outlook-middle-east-central-asia
A Commonsense Corporate Tax
https://www.project-syndicate.org/commentary/corporate-tax-reform-destination-based-cash-flow-tax-by-alan-auerbach-2021-04
NFT prices are plummeting. What could this mean for the art world?
https://edition.cnn.com/style/article/nft-bubble-burst-prices-art-world-tan/index.html
https://news.artnet.com/market/nft-market-1957770
Coinbase: supersize listing rests on bitcoin price
https://www.ft.com/content/b740dba6-f2fc-457a-a0a0-067f0754d1b3
https://www.ft.com/content/abb1504f-b5f4-4d93-bdf6-ed992a03b0e8

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Weekly Insights 15 Apr 2021: Will Middle East’s growth prospects be vulnerable to external debt levels & limited fiscal room?

Download a PDF copy of this week’s insight piece here.
 
The IMF issued its latest Regional Economic Outlook for the Middle East region this week. Real GDP for the Middle East and North Africa (MENA) region is forecast to grow by 4% this year (up 0.9 percentage points from the projection in Oct 2020) after having slumped by 3.4% in 2020 (vs an estimate of a 5% drop in the Oct 2020 edition). Growth outcomes and prospects will still be centred on how the pandemic progresses in the region amid the pace of vaccination rollouts.
The MENA region is now home to more than 7mn confirmed cases, with Iran the single largest contributor (share of close to 30%) and the GCC accounting for nearly 25%. Infections have been ticking up in the region since the start of this year. This has resulted in increased targeted restrictions and lockdowns in many a nation.
The chart compares the pace of vaccination and new cases. Vaccination pace is picking up in the region: the UAE leads the pack, having disbursed a total of 9.16mn doses as of Apr 13th. With the supply of vaccines increasing (thanks to COVAX facility and donations from the UAE, Russia, China etc.), new vaccinations (black dots in the chart) have improved in most nations (compared to early Feb, marked in red). The production of vaccines domestically in the region will also boost supply later this year: UAE plans to manufacture Hayat-Vax, Egypt has an agreement with Sinovac Biotech, and Algeria will produce Sputnik-V from Sep onwards).
Meanwhile, reported cases are also higher compared to early Feb – many countries are now outside the small quadrant on the bottom-left of the chart. Depending on how fast vaccinations can lead to herd immunity will determine recovery paths – especially so in the more tourism-dependent nations (e.g. Egypt, Jordan, Lebanon).
However, policy measures introduced to support the economy during the pandemic is creating immense fiscal strain. Fiscal deficits widened to 10.1% of GDP in 2020 in the MENA region from 3.8% in 2019. It was severe in the GCC as well: fiscal deficit widened to 7.6% of GDP last year (2019: -1.6%), as the impact was from both lower oil and non-oil revenues. The fiscal breakeven price this year ranges from a high USD 88.2 in Bahrain to a low USD 43.1 in Qatar. While, it is expected to decline across the board next year, it still remains higher than the current oil price levels for most nations. Given new rounds of restrictions and with oil demand not yet at pre-pandemic levels, the OPEC+’s recent decision to roll back production cuts are likely to depress oil prices. As real oil prices trend downward, fiscal sustainability becomes increasingly vulnerable.
With business operations and revenues affected due to the pandemic alongside weakened domestic demand, non-oil revenues as a share of non-oil GDP declined in 2020: Saudi was the sole exception, given its VAT hike to 15% from Jul 2020. Oman is expected to witness a significant boost in non-oil revenues this year, with the introduction of VAT from Apr 16th. Oil exporters in the region are still highly dependent on oil revenues, as is evident from the large non-oil fiscal deficits in the GCC. In 2021, it is forecast at a high 72% in Kuwait and an average 30.9% and 29.9% in the GCC and MENA oil exporters respectively.

Higher deficits and negative economic growth resulted in governments resorting to multiple financing options: borrowing from commercial banks, tapping international and regional markets (bond issuances, commercial loans) as well as drawing down from international reserves at the central banks/ sovereign wealth funds. Government debt levels increased to 56.4% and 41% in the MENA and GCC regions last year. Though it is forecast to fall slightly this year, it still remains higher than the 2000-17 average of 36.2% and 24.6% respectively. The IMF estimates financing needs in the MENA to touch USD 919bn for this year and next. Public-financing requirements were likely to stay above 15% of GDP in most parts of the region through end-2022.
This could pose a significant risk in the coming years: (a) sectors affected by the pandemic are being supported by government policy stimulus. When this support is rolled back eventually, this could result in bankruptcies, defaults and job losses, further causing an increase in banks’ non-performing loans; (b) global financial conditions have been quite accommodative and so long as cost of capital remains low, there will be an appetite for borrowing and even refinancing maturing debt. However, a faster-than-expected global recovery could lead to interest rates hikes, push long-term rates and funding costs higher, increase sovereign spreads, thereby tightening financing conditions – affecting countries with large external financing needs (and their indebted corporates). Though GCC’s sovereign debt levels are relatively low, over USD 100bn is expected to mature in 2021-25.
 
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Weekly Economic Commentary – Apr 11, 2021

Markets
Another week of record-highs across equity markets: US indices weekly gains were thanks to upbeat economic data and dovish Fed’s commitment to support recovery; European markets gained despite the slow pace of vaccination while the FTSE100 posted the best weekly performance since early Jan as the country emerges out from lockdown. Among regional markets, Saudi Arabia’s Tadawul crossed the 10k-point for the first time since Nov 2014 last week and Abu Dhabi-based International Holdings Company was on a 13-day gaining streak (See Media Review) and Egypt fell on blue-chip sell-offs. The dollar retreated and had the worst week of the year; crude oil prices dropped, and gold price touched a 1-month peak last Thursday.
Weekly % changes for last week (8-9 Apr) from 1 Apr (regional) and 2 Apr (international).

Global Developments
US/Americas:

  • Factory orders declined by 0.8% mom in Feb (Jan: 2.7%), likely a result of the winter storms that hit parts of the country in the second half of Feb. Orders for non-defense capital goods excluding aircraft, a proxy of business spending, fell 0.9% in Feb.
  • Producer price index excluding food and energy increased by 3.1% yoy in Mar (Feb: 2.5%). The headline PPI grew by 4.2% yoy and 1% mom – the largest annual gain since Sep 2011.
  • Trade deficit in the US widened to a record high of USD 71.1bn in Feb (Jan: USD 67.8bn). Exports dropped by 2.6% to USD 187.3bn, with declines in exports of consumer and capital goods as well as food and services (especially travel). Imports dipped by 0.7%, mostly due to supply-chain constraints though imports of capital goods hit a record high.
  • ISM services PMI jumped to 63.7 in Mar (Feb: 55.3), thanks to the pickup in business activity (69.4 from 55.5 in Feb), new orders (67.2 from 51.9) and employment (57.1 from 52.7).
  • Markit services and composite PMIs gained in Mar, rising to 60.4 and 59.7 respectively (Feb: 59.8 and 59.5). Within the services PMI, new businesses expanded the most in 6 years and job creation was the quickest in 3 months.
  • Initial jobless claims unexpectedly increased to 744k in the week ended Apr 3, rising from the upwardly revised 728k the prior week, with the 4-week average edging higher to 723.75k. Continuing claims provided the silver lining: it fell to 3.734mn in the week ended Mar 27 compared to the previous week’s 3.75mn.

Europe:

  • German factory orders grew by 1.2% mom in Feb (Jan: 0.8%), rising for the second consecutive month, supported by domestic orders (+4%). Orders from the EU nations were up by 2.7% though from the rest of the world dropped by 2.3%.
  • Industrial production in Germany declined by 1.6% mom and 6.4% yoy in Feb (Jan: -2% mom and -4% yoy). While production of capital and intermediate goods declined by 3.2% and 1%, consumer goods nudged up by 0.2%.
  • Exports from Germany increased by 0.9% mom and imports by 3.6% in Feb, shrinking the trade surplus to EUR 19.1bn (Jan: EUR 21.3bn). Exports to China increased by 25.7% yoy.
  • Markit services PMI in Germany inched up to 51.5 in Mar (Feb: 50.8), with business activity rising for the first time in 6 months as lockdown restrictions were being lifted. Composite PMI ticked up by 0.5 points to 57.3, supported by a surge in manufacturing export orders while businesses’ expectations about future activity improved to a series-record high.
  • In the eurozone, Markit composite PMI rose to 53.2 in Mar (Feb: 48.8) – the highest level since Jul 2020 – while services PMI stayed under-50 at 49.6, though rising from Feb’s 45.7 reading. Within composite PMI, growth was led by Germany while France was the only country to not record an expansion in activity.
  • Sentix investor confidence in the Eurozone surged to 13.1 in Apr (Mar: 5) – the highest level since Aug 2018. An expectations index climbed to a record 34.8 from Mar’s 32.5, while the current situation index improved to -6.5 (Mar: -19.3).
  • Unemployment rate in the eurozone remained steady at 8.3% in Feb while youth unemployment edged down to 17.3%. These are still higher compared to the pre-pandemic unemployment readings: 7.4% overall and 15.4% among youth.
  • Markit services PMI in the UK jumped up sharply to 56.3 in Mar (Feb: 49.5), thanks to strong increases in output and incoming new work (ahead of easing lockdown measures).

Asia Pacific:

  • Consumer price index in China rose to 0.4% yoy in Mar (Feb: -0.2%), as food prices fell to -0.7% (Feb: +0.2%) and non-food prices rose by 0.7%. Producer price index jumped by 4.4% yoy in Mar (Feb: 1.7%) – the most in 3 years – as producers passed on rising raw material prices.
  • China’s Caixin services PMI ticked up to 54.3 in Mar (Feb: 51.5), as domestic demand strengthened, and new orders expanded the most since Dec 2020; export orders however fell for the 2nd straight month.
  • Overall household spending in Japan slipped for a 3rd consecutive month, falling by 6.6% yoy in Feb (Jan: -6.1%). Major drivers of the decline were travel package tours, eating out and transportation. Separately, inflation-adjusted real wages rose for the first time in a year in Feb, largely due to prices weakening.
  • The preliminary reading of Japan’s leading economic index for Feb grew to 99.7 in Feb (Jan: 98.5) – the highest reading since Jun 2018, given the launch of the vaccination program. However, the coincident index declined to 89 from 90.3 amid fears of another Covid19 wave.
  • Current account surplus in Japan widened to JPY 2.9trn in Feb (Jan: JPY 644.4bn): goods trade resulted in a surplus JPY 2bn while services trade clocked in a deficit of JPY 75.7bn.
  • The Reserve Bank of India left both its repo and reverse repo rates unchanged at the latest meeting. The apex bank stated that it would remain accommodative as long as necessary to sustain growth on a durable basis.
  • PMI in manufacturing fell to a 7-month low of 55.4 in Mar (Feb: 57.5), with production, new orders and input buying expanding at softer rates. Services PMI in India fell to 54.6 in Mar (Feb: 55.3): though new orders expanded given improved domestic demand, external demand worsened, declining for the 13th straight month.
  • Singapore retail sales expanded by 5.2% yoy in Feb, following a 6.1% drop in Jan, thanks to a boost from the Chinese New Year celebrations. Comparing Jan-Feb together, retail sales fell by 1.2% yoy.
  • The official PMI in Singapore inched up by 0.3 points to 50.8 in Mar – the highest since Mar 2019.

Bottom line: Optimism is rife, as vaccination drives kick off even in Europe, after the AstraZeneca setback: France has inoculated 10mn persons and Italy aims to vaccinate about 80% of population by end-Sep. South Asia is still witnessing a new surge, resulting in partial lockdowns again. Are the IMF forecasts too optimistic too soon, given the multiple risk-factors? Our weekly insight report highlights the various risks: https://nassersaidi.com/2021/04/08/weekly-insights-8-apr-2021-risks-to-the-rosy-outlook-as-world-recovery-seemingly-accelerates/. Separately, global composite PMI rose to a 79-month high of 54.8 in Mar, with US leading the pack along with expansions in Germany, UK, India and Australia while price pressures continue to build (selling prices rose at the steepest pace since data gathering began in Oct 2009).
Regional Developments

  • GDP in Bahrain declined by 5.51% yoy in Q4, thereby posting a drop in economic growth by 5.8% for the full year. In Q4, hospitality and transport sectors accounted for the sharpest declines, falling by 42% and 30.8% yoy respectively.
  • Bahrain declared its backing for the UAE’s bid for UN Security Council membership for the period 2022-23. The next elections are scheduled for Jun 2021.
  • Drilling in Bahrain’s new offshore shale oil discovery is expected to start at the end of 2022, according to the oil minister. The field is estimated to house at least 80bn barrels of tight shale oil.
  • In a bid to boost vaccination rates, Bahrain has announced that cinemas, spas and swimming pools will permit entry to all vaccinated persons during Eid.
  • PMI in Egypt fell for the 4th straight month, with a reading of 48 in Mar (Feb: 49.3) – the lowest since Jun 2020- after weak market demand and Covid19 restrictions resulted in faster reductions in output and new orders; export orders dropped below-50 (48.6 vs Feb’s 56.3) and employment shrunk further (48.9 vs 49.3 in Feb).
  • The IMF expects Egypt to grow at 2.5% yoy this year (down from its previous forecast of 2.8%) and then strengthen further in 2022, growing at 5.7%. Separately, the finance minister revealed that economic growth could touch 2.8% in the financial year ending Jun.
  • Annual urban inflation in Egypt stood at 4.5% yoy in Mar, unchanged from Feb; core inflation however increased to 3.7% yoy (Feb: 3.65%).
  • Net foreign reserves in Egypt increased to USD 40.337bn in Mar from USD 40.201bn the month before, according to central bank data. Net foreign assets increased by 18.5% mom to EGP 325.514bn in Feb.
  • Egypt’s trade deficit narrowed by 17.9% yoy to USD 3.15bn in Jan 2021. Exports declined by 8.4% to USD 2.5bn, driven down by the prices of oil and oil products as well as clothes and food products. Imports declined by 13.9% to USD 5.65bn, with commodities like cars and iron and steel posting 14.1% and 3.7% falls.
  • The food sector in Egypt, which contributes 24.5% to GDP and accounts for 23.2% of overall employment, accounted for 22% of total exports in 2020, stated the minister of trade.
  • The tourism sector in Egypt likely lost between USD 12-13bn in revenues last year, according to the Treasurer of the Cultural Tourism Association.
  • Following the 1-ship Suez Canal blockage, the Authority is considering improvements in services: including an expansion of the southern section of the waterway as well as procuring cranes that could unload cargo at heights of up to 52mn, it was disclosed in a Reuters interview.
  • Egypt plans to borrow EGP 642.5bn (USD 40bn) from the local market in Q2 2021, reported Daily News Egypt.
  • Egypt plans to produce up to 80mn doses of the Covid19 vaccine domestically, as per an agreement with China’s Sinovac Biotech Ltd.
  • UAE plans to invest USD 3bn in Iraq, in a bid to strengthen the existing economic and investment ties between the two nations. Furthermore, Iraqi Airways plans to start direct flights to UAE’s capital Abu Dhabi on May 1.
  • Jordan’s tax burden totaled 24.4% of personal income in 2020, revealed the finance minister. Last year, sales tax revenues stood at JOD 3.533bn and income tax at JOD 1.138bn.
  • Last week around 20 persons were detained in Jordan, including Prince Hamzeh and former ministers, accused of attempting to jeopardise the safety and stability of Jordan. Many Arab states, including the GCC nations, Lebanon, Egypt and others expressed solidarity with the King while the US vouched its “full support”.
  • Kuwait’s central bank governor stated that the country will see “positive growth” this year, though cautioning that it will “take time” for pre-pandemic levels to be achieved. He highlighted the resilience of the banking sector, with coverage and net stable funding ratios reaching 184.2% and 114.3% respectively at end-2020 (vs the 100% required benchmark).
  • The May official selling price for Kuwait Export Crude was raised by 45 cents to USD 1.35 per barrel above the average of DME Oman and Platts Dubai quotes for Asian refiners.
  • Lebanon PMI touched a 17-month high of 46.4 in Mar (Feb: 42.2), with rate of decline in new orders slowest since Oct 2019. However, cost burdens remain severe: rate of inflation accelerated to quickest since Jun 2020 and was the 5th-fastest since records began (May 2013).
  • France and the EU are developing proposals for a sanctions regime including asset freezes and travel bans on Lebanese politicians to nudge them to agree upon a new government.
  • Reuters reported that foreign lenders including HSBC and Wells Fargo were cutting ties with Lebanon’s central bank; other lenders have reduced activities like cross border payments and letters of credit.
  • According to the Ministry of Finance, Lebanon’s central bank agreed to provide documents required by Alvarez & Marsal to conduct a forensic audit by end of this month.
  • Oman’s finance ministry disclosed that, to partly finance its 2021 budget, OMR 600mn (USD 1.56bn) had been borrowed from its sovereign fund (Oman Investment Authority) and another OMR 1.77bn via external and internal borrowings. Together, it accounts for 56% of the OMR 2bn worth of financing required this year.
  • VAT comes into force in Oman from Apr 16 onwards: the number of food commodities exempted from VAT has been raised to 488 from 93 earlier, reported the Oman News Agency. It was also clarified that rentals earned on residential properties will not be subject to VAT. Furthermore, level of subsidies on fuel, electricity and water consumption for families receiving government financial support will be raised.
  • Oman Investment Authority established a management board for the securities market ahead of transforming the bourse into a closed shareholding company. Two women were appointed to the 7-member board, in a bid to improve gender diversity.
  • PMI in Qatar increased to 54.9 in Mar (Feb: 53.2), the 4th-highest reading ever, thanks to upticks in output and new work. Sector-wise, manufacturing was the best performer (58), followed by wholesale & retail (56.0), services (53.5) and construction (52.9) respectively.
  • Startups in MENA raised USD 170mn in March (up 6% mom) from 43 deals, according to Wamda. This brings the Q1 figure to USD 396mn from 125 deals, with UAE, Egypt and Saudi Arabia accounting for bulk of the startup and investment activity.
  • Optimistic business executives in EY’s latest Global Capital Confidence Barometer: 81% of MENA executives anticipate growth and investment opportunities in the Middle East, 71% and 69% of survey respondents expect to see revenues and profitability return to pre-pandemic levels by 2022 or earlier.

Saudi Arabia Focus

  • Saudi Arabia’s PMI slipped to 53.3 in Mar (Feb: 53.9), bringing the Q1 average to 54.8 – still the highest since end-2019. New orders sub-index fell to the lowest since last Oct, while employment numbers held steady. Respondents were the least optimistic in the current nine-month sequence of positivity.
  • Saudi Tadawul transformed into a holding company (named Saudi Tadawul Group) ahead of its IPO this year, and will consist of 4 subsidiaries: the Saudi Exchange, a dedicated stock exchange business (previously known as Tadawul), the Securities Clearing Center Company (Muqassa), the Securities Depository Center  Company (Edaa), and Wamid, a new innovative applied technology services business.
  • More than 850 firms have applied to join the “Made in Saudi” program, revealed the Secretary General of Saudi Exports.
  • Aramco agreed a USD 4bn leaseback deal with a consortium led by EIG Global Energy Partners. A newly formed unit called Aramco Oil Pipelines Company, of which Aramco holds the 51% majority stake, will lease usage rights in Aramco’s stabilized crude oil pipelines network for a 25-year period.
  • The General Authority for Competition in Saudi Arabia approved 22 applications for corporate acquisitions in Q1 2021. Manufacturing and the mining and quarrying sector were the most active.
  • While 129k expats left Saudi Arabia during the last year, about 74k Saudi nationals joined the workforce. Expat workers fell by 2% yoy to 6.35mn at the end of 2021.
  • Saudi Arabia implemented its new minimum wage of SAR 4000 per month (USD 1066) for Saudi workers over the age of 50. Any such worker being paid less than the minimum wage will count only as 0.5 worker under the nationalization program.
  • New labour directives mandate that only Saudi nationals can be hired in the shopping malls: this would mean jobs for around 51k Saudis. Some roles will be exempt, though these were not specified.
  • The PIF launched the Sudair Solar Energy project in Sudair Industrial City, one of the largest solar parks in the country. About SAR 3.4bn (USD 907mn) will be invested in the 1.5 GW solar PV project, and the first phase is expected to produce electricity in H2 2022. Separately, a report by Riyadh Chamber revealed that the National Renewable Energy Program is targeting SAR 60bn (USD 9bn) worth of project investments.
  • Privatization of Saudi Arabia’s Third Milling Company from Saudi Grains Organisation (SAGO) and the National Center for Privatization and PPP (NCP) has been completed.
  • Saudi Arabia’s Ministry of Hajj and Umrah announced that only vaccinated pilgrims and worshippers or those who have recovered from Covid19 will be allowed into the Grand Mosque in Makkah (contrary to a previous announcement).
  • The total number of Saudis working in the tourism sector (around 189k persons) account for around 26% of the total workforce in the sector.

UAE Focus

  • UAE PMI edged up by 2 points to 52.6 in Mar, thanks to the fast pace of vaccination boosting business confidence and spending. Meanwhile, input price inflation ticked higher given rising raw material prices and shipping fees amid global delivery delays.
  • The IMF expects UAE to grow by 3.1% this year, following last year’s 5.9% drop, though GDP growth is forecast soften to 2.6% in 2022.
  • Abu Dhabi expects its economy to grow by 6% to 8% in the next 2 years, supported by government spending, FDI and the oil sector, according to the Chairman of the Abu Dhabi Department of Economic Development.
  • Dubai’s foreign trade touched AED 1.182trn in 2020, strongly rebounding in H2: exports grew by 8% to AED 167bn while imports and re-exports stood at AED 686bn and AED 329bn respectively. China remained Dubai’s largest trading partner in 2020 with AED 142bn worth of trade, followed by India with AED 89bn, and the US with AED
  • The Emirates Development Bank will provide AED 30bn in financial support to businesses and start-ups in aid of the recently announced “Operation 300bn” program.
  • Effective 21st April, UAE central bank will introduce a new liquidity management facility to provide eligible counterparties access to AED funding on an intraday basis.
  • The UAE central bank issued a Small to Medium Sized Enterprises Market Conduct Regulation to promote best practices among licensed financial institutions (LFIs) when engaging with SMEs. This regulation sets standards of market conduct of LFIs, strengthens governance over the design, promotion and sale of financial products and services, and promotes responsible financing practices and appropriate disclosure of risks.
  • Dubai government entities awarded AED 5mn worth of contracts to Dubai SME members in 2020, with the RTA topping the list. As part of the Government Procurement Programme, SMEs were supported with contracts from 61 local and federal government entities and other firms worth AED 896mn in 2020.
  • Reuters reported that ADNOC is considering a listing of its drilling business on the local stock exchange. Sources suggest that the IPO size could be more than USD 1bn, and could happen this year itself.
  • UAE posted the second highest hotel occupancy rate (54.7%) globally for 2020, behind China’s 58%: the country hosted 14.8mn guests who spent an average of 3.7 nights at 1,089 establishments last year. Global occupancy rate was 37% and that in the Middle East 43%, according to the World Tourism Organisation and the Emirates Tourism Council.

Media Review
IMF: An Asynchronous and Divergent Recovery May Put Financial Stability at Risk
https://blogs.imf.org/2021/04/06/an-asynchronous-and-divergent-recovery-may-put-financial-stability-at-risk/
The Economic Effects of Social Networks | NBER
https://www.nber.org/reporter/2021number1/economic-effects-social-networks
Bill Hwang Had USD 20bn, Then Lost It All in Two Days
https://www.bloomberg.com/news/features/2021-04-08/how-bill-hwang-of-archegos-capital-lost-20-billion-in-two-days
Virtual meetings are here to stay
https://www.economist.com/international/2021/04/10/love-them-or-hate-them-virtual-meetings-are-here-to-stay
The Challenge of Big Tech Finance
https://www.project-syndicate.org/commentary/regulatory-challenges-of-big-tech-finance-by-barry-eichengreen-2021-04
Chile’s lauded vaccine rollout & Covid surge
https://www.theguardian.com/world/2021/apr/06/israel-and-chile-both-led-on-covid-jabs-so-why-is-one-back-in-lockdown
https://www.ft.com/content/89992bc9-051a-42b5-8be0-60edad4165cb
The UAE stock that is up 70% in 3 weeks and nobody knows why
https://www.bloomberg.com/news/articles/2021-04-07/the-uae-stock-that-s-up-70-in-three-weeks-and-nobody-knows-why

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Weekly Insights 8 Apr 2021: Risks to the Rosy Outlook as World Recovery Seemingly Accelerates

Download a PDF copy of this week’s insight piece here.
 
Chart 1. Inspite of battling new Covid19 restrictions, PMIs run high

  • Global manufacturing PMI touched a 10-year high in Mar: the uptick happened inspite of increased restrictions in late-2020/ early 2021, suggesting less severe impact of the recent lockdowns vs. the one in Apr-May.
  • Preparedness for disruptions to production & supply chains as well as online demand & delivery likely improved.
  • However, overall conditions are still affected by supply chain disruptions and inflationary pressures.
  • Global Services PMI grew to a 33-month high of 54.7 in Mar, supported by inflows of new work.

Chart 2. Optimism spills over into IMF’s growth forecasts amid uneven recovery caution

  • The IMF projects 6% yoy growth in 2021, up from the 3.3% contraction last year. If the forecast is realized, it would mark the fastest rate of global growth since 1976. While China returned to pre-pandemic GDP levels in 2020 itself (+2.3%), many are unlikely to recover till 2023 – depending on new virus variants, pace of vaccination rollout and extent of fiscal/ monetary stimulus.
  • The average medium term output loss over 2020-24, relative to pre-pandemic forecasts, is projected to be 6.1% in low-income countries versus 4.1% and a smaller 0.9% in emerging and advanced nations respectively. This is much lower than the losses seen during the 2008-09 financial crisis (when advanced nations suffered the most).
  • The Middle East’s growth forecasts have remained broadly unchanged though recovery prospects of the GCC (where vaccination pace is quite high) are miles apart from many of the war-torn nations.


Chart 3. Merchandise trade poised for recovery in 2021, before slowing in 2022: WTO

  • Strong, but uneven recovery is the story in merchandise trade volumes as well. Trade volume is projected to increase by 8% this year and then slow to 4% in 2022. Cross-border trade in services remains subdued and new waves of infection could easily reverse course of trade.
  • Falling oil prices led to a 35% contraction in trade in fuels in 2020: it had a significant impact on Middle East exports (-8.2% slump in 2020), also resulting in a massive 11.3% plunge in imports. As travel picks up post-vaccine drives, demand for oil will likely strengthen, causing a 12.4% rise in exports in the Middle East this year.
  • Asia, the export hub: the region’s limited impact and faster recovery from the virus + supply of medical supplies & consumer goods supported their export growth last year. This will enable the 8.4% rise in exports this year.

Chart 4. Risks to the Rosy Outlook

  • Pandemic-related risks:
    • New strains of vaccine-resistant Covid19 => prolonged pandemic
    • Highly unequal global roll out of vaccines could reverberate on advanced nations, when lockdowns are relaxed
    • Supply chain disruptions: one leading COVID-19 vaccine includes 280 components sourced from 19 different countries. Any constraint would impact production and distribution
    • Insufficient production of vaccines + vaccine nationalism affecting global rollout of vaccines
  • Financial risks:
    • Avoid a repeat of 2013 “taper tantrum”. Rise in US rates => repricing of risk + tighter financial conditions => negative impact on highly leveraged nations/ businesses (heavy borrowings in 2020, supported by low interest rates: EMEs borrowed 9.8% of GDP & low-income nations 5.5%)
    • Impact of corporate sector when stimulus measures are rolled back: potential bankruptcies/ insolvencies (& job losses), profitability => financial risks & effect on banks’ bottom line
  • Long-lasting effects from the pandemic:
    • Poverty: an additional 95mn people likely entered the category of “extreme poor” in 2020 versus pre-pandemic projections => rising food prices & social unrest (Lebanon as an example)
    • Labour markets: youth, women & low-skilled workers more affected + impact on productivity
    • Inequality within nations & across economies: not limited to income. Think education, technology
  • Climate change risks: methane & CO2 levels surged to record amounts in 2020 + stranded assets + preparedness for a low-carbon transition
  • Geo-political risks:  US-China tensions led suppliers to shift away from China (one of the reasons behind the current shortage of computer chips), reshoring and “Made at home” policies

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Weekly Economic Commentary – Apr 4, 2021

Markets
Equity markets had a good run last week, with the S&P closing above 4000 for the first time, on Biden’s infrastructure spending plans (markets were closed for Good Friday when the strong non-farm payrolls data were released); German DAX hit a record high, while Stoxx600 ended Q1 up 7.7%, posting the 4th straight quarter of gains. Nikkei hit a 2-week high while China’s CSI300 index closed at an almost 4-week high. Regional markets were mostly up: Saudi markets cheered the Shareek plan to galvanise domestic investment while Abu Dhabi closed Mar with a record high. The dollar gained for a 3rd consecutive week, remaining around its strongest level since Nov. Oil prices rallied after the OPEC+ decision to gradually raise oil production from May and Brent closed around USD 64 per barrel. Gold price eased to USD 1728.8 an ounce.
Weekly % changes for last week (1-2 Apr) from 25 Mar (regional) and 26 Mar (international).

Global Developments
US/Americas:

  • Non-farm payrolls increased by 916k in Mar (Feb: 468k), thanks to gains in the leisure and hospitality sector (it is still down by 3.1mn or 18.5% since Feb 2020). Average hourly earnings slowed to 4.2% (Feb: +5.2%) and labour force participation rate inched up to 61.5% (61.4%). Unemployment rate fell to 6% in Mar from 6.2% the month before.
  • S&P Case Shiller home prices increased by 11.2% yoy in Jan (Dec: 10.4%) – the largest annual gain in nearly 15 years.
  • Pending home sales dropped for the second consecutive month by 10.6% mom in Feb (Jan: -2.4%). Inventories fell to a record low of 1.03mn units in Feb, down by 29.5% yoy, posting the largest-ever annual decline.
  • Private sector in the US added a substantial 517k jobs in Mar (Feb: 176k) – the biggest gain in 6 months – with manufacturing sector adding 49k jobs.
  • Chicago PMI increased by 6.8 points to 66.3 in Mar, the highest since Jul 2018: production saw the largest gain, while order backlogs saw the biggest drop.
  • ISM manufacturing PMI increased to a 37-year high of 64.7 in Mar (Feb: 60.8), with new orders sub-index rising to 68 (Feb: 64.8), employment up to 59.6 (54.4) while prices paid by manufacturers hovered near its highest since Jul 20
  • Markit manufacturing PMI inched up to 59.1 in Mar (Feb: 58.6), the highest since data collection began in May 2007. Demand improved and orders for consumer goods rose, but transportation delays, supplier shortages and Covid19 restrictions resulted in logistical problems.
  • Initial jobless claims increased to 719k in the week ended Mar 27, rising from the downwardly revised 658k the prior week, with the 4-week average slowing to 719k. Continuing claims fell to 3.794mn in the week ended Mar 20 (vs the previous week’s 3.84mn).

Europe:

  • Markit manufacturing PMI in Germany increased to an all-time high of 66.6 in Mar (Feb: 60.7), supported by a record growth in export orders, especially from Asia (China) and the US while workforce numbers expanded for the first time since Feb 2019.
  • In the Eurozone, manufacturing PMI moved up to 62.5 (Feb: 57.9), with record increases in output, new orders and exports; many nations hit highest-ever PMI levels in Mar (Germany, Netherlands, Italy, France). Prices, however, were rising at the fastest rate in a decade.
  • Germany’s harmonized index of consumer prices rose by 2% yoy (nearing a 2-year high) and 0.5% mom in Mar (Feb: 1.6% yoy and 0.6% mom).
  • Retail sales in Germany increased by 1.2% mom in Feb, rebounding from Jan’ 6.5% drop. Compared to Feb 2020, sales were lower by 9%.
  • Consumer price index in the eurozone increased by 1.3% yoy in Mar (Feb: 0.9%) to the highest level since the start of the pandemic. This uptick was due to rising fuel costs as well as the reversal of the VAT reduction in the start of 2021, but overall it remains below the ECB target of just under 2%. Core CPI edged down to 0.9% in Mar (Feb: 1.1%).
  • Unemployment rate in Germany stayed put at 6% in Mar while jobless numbers dipped by 8k to 2.8m
  • The Economic Sentiment Indicator rose in both EU (jumped 9 points to 100) and euro area (up 7.6 points to 101). Consumer confidence in the Eurozone stood at -10.8 in Mar – the highest since Feb 2020 – while the business climate improved to 0.3 from Feb’s -0.13 reading.
  • GDP in the UK expanded by 1.3% qoq in Q4 from Q3’s 16.9%, marking improvements from the initial estimates of 1% and 16.1% respectively. Overall, GDP fell by 9.8% for the full year – recording the steepest fall since official records began.
  • Manufacturing PMI in UK inched up to a decade-high 58.9 in Mar; business optimism was at a 7-year high, though overall constrained by weak export sales and supply-chain issues.

Asia Pacific:

  • China’s official manufacturing PMI increased to 51.9 in Mar (Feb: 50.6): while output and new orders grew, export sales expanded (51.2 from Feb’s 48.8) and employment rose for the first time in 11 months (50.1). Caixin manufacturing PMI eased to 50.6 in Mar (Feb: 50.9): productions increased, but its rate of growth edged down to an 11-month low while the rate of cost inflation was the steepest recorded for 40 months. Non-manufacturing PMI improved to 56.3 in Mar (Feb: 51.4), with new orders and new export orders moving past the neutral 50-mark and confidence rising to a 10-month high.
  • Unemployment rate in Japan stayed unchanged at 2.9% yoy in Feb. While the number of unemployed was flat at 2.03mn, employment rose by 30k to 66.97mn.
  • Industrial output in Japan declined by 2.1% mom in Feb (Jan: 4.3%), as a result of the disruption from a strong earthquake (Feb 13); the auto sector output fell by 8.8% (also compounded by the global chip shortage).
  • Japan’s Tankan large manufacturing index turned positive in Q1, moving up to +5 (Dec: -10). Among large manufacturers, the index stood at +4 while among large non-manufacturers it was -1 (Dec: -5).
  • Japan’s retail trade fell by 1.5% yoy in Feb, following Jan’s 2.4% drop; sales at large retailers dropped by 4.7% (Jan: -7.2%). But, sales rose by 3.1% mom in Feb, the most since Jun 2020.
  • India’s exports surged by 58% yoy to a record high USD 34bn in Mar; imports grew by 53% to USD 48.12bn, clocking the trade deficit at USD 14.1bn. In the 2020-21 fiscal year, exports contracted by 7.4% to USD 290bn while imports fell to USD 389bn (-18.1%).

Bottom line: Notwithstanding new Covid19 case highs and new restrictions/ lockdowns, the WTO forecasts volume of global merchandise trade to increase by 8% in 2021 (following 2020’s 5.3% drop). Global manufacturing PMI also rose to a 10-year high in Mar, with euro area, US and Taiwan leading the uptick; but overall conditions continue to be affected by supply chain disruptions and inflationary pressures. The IMF will release its World Economic Outlook report this week: an upward revision in growth rates is expected (in Jan, forecast was for 5.5% growth this year), thanks to additional policy support (fiscal, liquidity injection) and potential of a vaccine-supported recovery. Meanwhile, OPEC+ decided to increase output gradually from May-Jul (i.e. nearly 2 million barrels per day over the next three months) though Saudi Arabia has called for a “cautious stance”. We believe it is unlikely that oil demand will pick up to its pre-Covid19 pace soon: Covid19 variants, new waves and related lockdowns are likely to weaken demand; in spite of the fast pace of vaccinations in US, UK and other countries, a rebound in demand will be delayed till most nations achieve herd immunity.
Regional Developments

  • The World Bank expects MENA region GDP to recover by 2.2% this year, following the 3.8% drop in 2020. In 2021, public debt is estimated to rise to 54% of GDP (2019: 46%) as a result of financing continuing budget deficits, while Covid19 induced losses will amount to USD 227bn.
  • As Covid19 cases spike, GCC nations are imposing/ extending restrictions: Kuwait extended its partial curfew till Apr 22 (from 7pm to 5am as of Apr 8th). Oman will reduce in-person working in the government sector to 50% from Apr 4th. Both Oman and Qatar suspended in-person learning at public and private universities and schools.
  • Bahrain’s King ratified the general state budget of BHD 7.182bn (USD 19bn) for the fiscal year 2021-22; this had previously been approved by both chambers of the National Assembly.
  • Domestic liquidity in Bahrain increased by 11% yoy to BHD 2.9bn at end-2020, while money supply (M2) rose by 6.5% to BHD 12.8bn. Overall loans grew by 7% to BHD 10.4bn, with institutions and individuals accounting for 51.2% and 45.3% of the total respectively.
  • Bahrain’s labour fund (Tamkeen) has disbursed more than BHD 54mn in financial support to over 16k businesses most affected by the Covid-19 crisis, disclosed its chief executive.
  • Real estate transactions in Bahrain rebounded in H2 2020, with deals rising by 14% and 20% in Q3 and Q4 respectively; total transactions stood at USD 1.9bn in the full year 2020.
  • Changes to Bahrain’s Bankruptcy Law were approved by the Shura Council. Amendments include extending the appeal period from 20 days to 30 days while also ensuring all parties are involved in the process equally.
  • Bahrain will roll out its Wage Protection System – wherein workers’ wages will be regularly transferred directly to their bank accounts – in three phases starting from May.
  • With Egypt’s Suez Canal blockage saga solved, the head of the Suez Canal Authority disclosed that losses and damages resulting from the blockage could amount to more than USD 1bn. Furthermore, a potential expansion of the shipping channel is being explored to prevent any recurrence of such disruptions. Refinitiv estimated the revenue loss per day at about USD 16mn for the canal, with cumulative revenue lost in the first 6 days greater than USD 95mn.
  • Bilateral trade between Egypt and China grew by 10.34% yoy to USD 14.56bn in 2020. Exports from China increased by 11.83% to USD 13.64bn while Egypt’s exports to China dropped by 7.84%.
  • Money supply in Egypt grew by 20.2% yoy in Feb to EGP 5.03trn (USD 321bn), according to the central bank.
  • Egypt’s manufacturing and extractive industries index declined by 0.7% mom to 99.59 in Jan 2021. However, the manufacture of food products and computer, electronic and optical products picked up by 21.44% and 17.19% respectively, reflecting increasing demand.
  • Remittances into Egypt stood at USD 24.4bn in 2020, representing 6.7% of GDP. The country was ranked 6th globally, by the World Bank, in terms of remittances received.
  • A study on identifying Covid19’s impact on families in Egypt found that the percentage of those affected by the pandemic decreased to 26.9% in Q4 (vs. Q3’s 54.9%). In cases where incomes declined, it was attributed to salary cuts (34.4% of respondents), full closure of activity (32%) and precautionary measures (12.5%).
  • Egypt received 500k tourists in Jan-Mar this year, thereby earning between USD 600-800mn in tourism revenues, according to the deputy tourism minister. Last year, revenues plunged by 70% as visitors fell to 3.5mn from 13.1 the year before.
  • Egypt’s public and public business sector employed 760700 employees in 2020, down 3.9% yoy. About 87% of the employees were male and housing and construction accounted for the largest share of total workers (28.1% of the workforce).
  • Last week, Egypt received 854,400 doses of the AstraZeneca vaccine as part of the 40mn doses set to receive via the global COVAX agreement.
  • Iraq and Saudi Arabia signed five agreements covering financial, commercial, economic, cultural and media fields during a visit by the former’s PM to Riyadh. Saudi Arabia’s investments in Iraq are estimated to rise to SAR 10bn (USD 2.67bn) from SAR 2bn now. The two nations also agreed to establish a USD 3bn joint fund to promote investments in Iraq.
  • Iraq approved an investment budget of USD 1.15bn to develop the Majnoon oilfield: this will raise output from the field to 450k barrels per day in 3 years, from the current 130k bpd.
  • At least 3mn residential units need to be built in Iraq to support the nation’s growing population, which surpassed 40mn at end-2020. An approval to build 250k houses, with an initial allocation of USD 1bn, is still on hold as funds have not yet been released.
  • Iraq customs exempted imports from Jordan from customs duties as of March 31st.
  • Jordan’s government announced new Covid19 stimulus measures, valued at JOD 488mn (USD 632mn or 1.4% of GDP). This includes JOD 240mn injected into the market, expansion of social protection programmes by JOD 60mn, deferring installments owed to public credit funds until the end of the year and JOD10mn towards the industrial sector among others.
  • GDP in Jordan fell by 1.6% yoy in 2020 (2019: +2.1%), with hotels and restaurants the worst hit sector (-8.8%), followed by transport, storage and communications (-5.7%), social and personal services (-4.1%) as well as the construction sector (-3%).
  • Jordan’s National Aid Fund is transferring financial assistance to nearly 300,000 families as part of government’s regular assistance programmes. The beneficiaries, constituting 20% of families in Jordan, received an estimated JOD 50mn of financial support in March.
  • Kuwait passed bills guaranteeing local bank loans for SMEs affected by the pandemic and also one deferring loan payments for citizens for 6 months.
  • Public sector employees in Kuwait reached 420,800 in 2020, up 11.4% since 2016; about 77% of the employees are citizens. Expat workers in the public sector were from non-GCC Arab nations (42.6%), followed by Asia (38.7%) and GCC (7.4%).
  • Lebanon’s central bank is scheduled to meet with the restructuring company Alvarez & Marsal on Apr 6 to discuss the forensic audit. The company had pulled out of the audit process in Nov last year, having not received the requested information.
  • Lebanon’s subsidy program under pressure: with the central bank having only around USD 1bn in cash and USD 5.5bn in Eurobonds (valued at USD 650mn in the market), the government needs to finalise a plan to lift subsidies and issue prepaid cards for families-in-need (estimated at 800k). The cost of the subsidy program is around USD 500mn each month.
  • The Parliament in Lebanon approved a USD 200mn loan for fuel imports for power generation.
  • Daily average oil production in Oman marginally declined by 0.93% mom to 949,600 barrels per day in Feb; this compares to average output of 950.700 bpd in 2020. Oil output in Oman fell by 1.9% to 56.301mn barrels in Jan-Feb 2021 while oil exports fell by 3.8% yoy to 45.124mn barrels during the same period. While oil exports to China dropped (-6.8% to 38.374mn in Jan-Feb), oil exports to India increased almost 6-fold (to 5.69mn barrels).
  • Oman’s oil & gas activities will be zero-rated for Value Added Tax only for the upstream and midstream segments. More clarity is needed on the applicability of VAT for the oil and gas sector, especially if downstream elements (i.e. refining and petrochemicals) will be standard rated at 5% VAT.
  • Qatar’s GDP contracted by 3.9% yoy and 0.5% qoq in Q4 2020: activity in the transportation and storage sector plunged by 32.8% while construction dropped by nearly 5%.
  • The World Bank approved an additional USD 9mn in funds to the Innovative Private Sector Development Project, to support startups and SMEs in Palestine. According to the World Bank, nearly half of all Palestinian firms are expected to witness a 50% drop in production and sales and lay off 24% of their employees due to the impact of Covid19. Separately, the World Bank will transfer funds worth USD 245mn to about one million Tunisians as part of the Social Protection Emergency Project.

Saudi Arabia Focus

  • Saudi Arabia’s Shareek programme plans SAR 27trn worth domestic investments by 2030, including SAR 5trn from firms like Aramco and SABIC (expected to contribute 60% of the SAR 5bn), SAR 3trn from the Public Investment Fund and SAR 4trn under a new Saudi investment strategy. Job creation is a key goal, as well as raising the contribution of the private sector to GDP by 65% by 2030. If implemented successfully, this should be strongly supportive of non-oil growth and increase overall productivity growth.
  • Companies like Aramco and SABIC agreed to reduce dividends and redirect funds to support the domestic capital spending plan. Though government revenues would decline given the diversion of dividends, the government can cut some of its investment programmes, in favour of investment programmes to be undertaken by Sabic, Aramco and other entities. This switch is likely to increase the efficiency of investment since SABIC, Aramco and other entities would aim to earn a market return on their investments. This would cut waste and inefficiencies, an overall gain to the economy.  In return, “we’re going to give them subsidies, we’re going to change the laws as they wish and we’re going to do their wish list to make that happen”, stated the Crown Prince.
  • The “Made in Saudi” initiative aims to create 1.3mn jobs in the mining and industrial sectors, raise non-oil exports to 50% of total (from 25% currently) and non-oil sector’s contribution to 65% (from 40%), revealed the minister of industry.
  • FDI inflow into Saudi Arabia increased by 20.2% yoy to USD 5.5bn in 2020, according to the central bank. Separately, foreign reserve assets declined by 11.26% yoy to SAR 1.655trn (USD 441bn) in Deb – the lowest level in over a decade.
  • Tadawul collected SAR 5.5bn (USD 1.46bn) in share sale proceeds last year, up 34% yoy (excluding the Aramco IPO), according to the chairman of the CMA. Debt sales surged by 65% to SAR 200bn.
  • Foreign investor licenses issued in Saudi Arabia spiked by 52% qoq and 60% yoy to a record high 466 in Q4 2020. Industrial and manufacturing, logistics, retail, e-commerce, and ICT are among the leading industries that attracted FDI in Q4.
  • Unemployment rate in Saudi Arabia declined to 7.4% in Q4 2020 (Q3: 8.5%). Unemployment rate among Saudi citizens declined to 12.6% (Q3: 14.9%). Female unemployment was running close to 50% for the 20-24 age group in Q3 and close to 20% for males in the same age group.
  • The average monthly wage of Saudi employees grew by 5.7% qoq to SAR 10,540 in Q4 2020. Male employees saw wage increase of 5.6% to SAR 10,967 while women’s wages rose by 3.1% to SAR 8,951.
  • The value of awarded contracts in Saudi Arabia jumped by 115% qoq to SAR 16bn (USD 4.3bn) in Q4, bringing the overall 2020 number to SAR 80bn.
  • The mortgage market in Saudi Arabia remains strong: new housing contracts were up by 28% yoy to 26,800 in Feb, with their value at more than SAR 14bn (USD 3.7bn).
  • Saudi Arabia will provide Yemen’s internationally recognised government with USD 422mn worth of petroleum products as the country struggles with a fuel shortage.
  • Only vaccinated persons will be allowed to visit the holy cities of Makkah and Madina to perform Hajj and Umrah this year. However, those wishing to perform Umrah during Ramadan this year will not have to be vaccinated (as clarified on Twitter).
  • Saudi Arabia plans to vaccinate all its residents before the end of the current year, disclosed the minister of commerce and acting minister of media.

UAE Focus

  • UAE will begin manufacturing the “Hayat-Vax” Covid19 vaccine as a joint project between UAE’s Group 42 and China’s Sinopharm CNBG. An initial capacity of 2mn doses per month is expected in cooperation with Julphar while a larger vaccine plant at Kizad (to become operational later this year) will aim to produce 200mn doses per annum.
  • Dubai aims to boost the contribution of the creative and arts sector to overall GDP from 2.6% to 5% alongside a doubling of companies to 15k.
  • Consumer confidence index in Dubai climbed to 145 points in Q1 2021 (Q4: 142, Q1 2020: 139) – the highest since Q2 2015, according to the Dubai Economy. Optimism was also strong as per McKinsey’s latest survey, which showed that 74% of UAE respondents were optimistic of a growth bounce back in 2-3 months to just as strong or stronger than pre-Covid levels (vs. 24% unsure and only 2% pessimistic).
  • The Abu Dhabi Fund for Development, in its 2021 budget, allocated AED 735mn (USD 200mn) to the Abu Dhabi Export Office to support UAE’s exports via more financing as well as attracting buyers in target economies.
  • Abu Dhabi’s ADNOC started trading futures contracts for Murban crude, its biggest oil grade, on an Abu Dhabi exchange from last week. Adnoc, which can produce about 2mn barrels of Murban crude a day, pledged to guarantee at least 1mn barrels of daily exports to support trading on the exchange.
  • Petrol prices in the UAE have been increased for the second consecutive month in Apr: it increased by around 8% to AED 2.17 to 2.29 per litre (depending on the grade).

Media Review
WEF’s Global Gender Gap Report 2021
https://www.weforum.org/reports/global-gender-gap-report-2021
Ensuring a Stronger and Fairer Global Recovery
https://www.project-syndicate.org/commentary/policies-for-rapid-inclusive-sustainable-global-recovery-by-mohamed-a-el-erian-2021-04
How Europe has mishandled the pandemic
https://www.economist.com/leaders/2021/03/31/how-europe-has-mishandled-the-pandemic
Lebanon’s economic crisis: A tragedy in the making
https://www.mei.edu/publications/lebanons-economic-crisis-tragedy-making
Biden throws weight of US government behind clean energy
https://www.ft.com/content/33bcf3fc-bc44-4fe0-b1ff-4ec2dbb4168d

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Weekly Insights 25 Mar 2021: Will the Middle East’s vaccination efforts lead to a faster recovery in travel & hospitality?

Download a PDF copy of this week’s insight piece here.
 
Chart 1. Covid19 cases in the Middle East continue to rise at a varied pace

  • The GCC nations account for one-fourth of the cases in the MENA region. On a per million basis, cumulative Covid19 cases are high in Bahrain and Lebanon. The total number of confirmed cases have doubled in 72 days in Lebanon, 76 days in UAE and 267 days in Saudi Arabia (vs global average of 117 days).
  • Where Covid19 cases are still high, economic activity will be relatively softer in Q1 2021. Many nations, including the UAE, saw an uptick after the December end-of-the-year holidays. Saudi Arabia and Egypt are faring better in spite of the recent increase in cases.


 
Chart 2. Will life return to normal after vaccination? Pays not to be complacent

  • The vaccination rollout is expected to reduce the pace of number of new infections.
  • The UAE, which has one of the fastest rollouts of the vaccines globally, has seen a significant reduction in infections.
  • Though breakdowns by age or hospitalizations are not available in the UAE, improvements for the vaccinated elderly population was a clear result in the case of both UK and Israel – the closest to UAE in terms of vaccine rollout numbers.
  • Last week, UAE announced that vaccines had been administered to 70.21% of the elderly and people with chronic conditions and to over 50% of the population. For now, extra precautions are still being adhered to in the UAE (its stringency index is close to 55) with Ramadan around the corner.
  • With cases ticking up in neighbouring India (test positivity rates are now doubling every five days in several states) due to a new variant with two mutations and easing of lockdown restrictions, and Europe’s delayed vaccine rollouts amid rising case of infections, it would be prudent for the UAE to remain cautious till herd immunity is achieved (given its relative openness).


 
Chart 3. With the Stringency Index near the half-way mark, mobility has been improving

  • Mobility – a proxy for economic activity – has improved across the board from pandemic lows.
  • Mobility indicators indicate a strong negative relation with the Stringency Index: the tighter the government-imposed restrictions, the stronger is the observed reduction in mobility. Stringency index is around 55 in the case of Egypt, Saudi Arabia and the UAE.
  • While retail and recreation mobility remains below pre-pandemic levels given the restrictions on capacity, grocery shopping seems to have gone back to pre-Covid levels in Egypt though not as much in UAE and Saudi Arabia – potentially a result of the rise in e-commerce offerings in this space.


 
Chart 4. Hotel occupancy levels supported by domestic tourism and few travel corridors

  • Middle East’s hotel occupancy rates were the highest on a rolling 7-day average ending with 7 Feb (50.4%) as residents opted for domestic tourism vs international travel (STR Global).
  • As can be seen from the chart, a brake was applied on China’s fast-paced recovery with this year’s wave of Covid19 cases, which also affected the busy Chinese New Year travel period.
  • The Middle East & UAE saw total-year hotel occupancy & revenue per available room levels fall to all-time lows in 2020.
  • The performance towards end of the year was closer to pre-pandemic levels, thanks to the New Year holidays and ease in restrictions (including travel corridors). Dubai posted a 76% occupancy level in the week ending Jan 3rd, followed by Al Khobar & Dammam (72%), Abu Dhabi and Jeddah (at 62%)
  • Markets that are likely to see faster paced recovery are UAE and Saudi Arabia, given government initiatives and policy support
  • UAE will be helped by its relatively lower stringency levels, hosting of the Expo later this year as well as its recent announcement of multi-entry visit visas. Rollout of the IATA Travel Pass/ digital health passports will support recovery. Vaccine tourism is also a possibility.
  • Saudi Arabia will benefit, with its relatively low number of cases, as it resumes religious tourism alongside its ambitious tourism plans (186 projects/66,866 rooms were in the construction pipeline at end-2020).



Chart 5. Passenger traffic likely to remain subdued; but with some silver linings

  • Air travel has been negatively impacted by the new round of travel restrictions. Asia has the most stringent controls related to air travel (closed to many regions) & the Middle East the least (quarantine for arrivals for high-risk regions).
  • Passenger activity in the Middle East was 72.2% yoy lower in 2020; in Jan, it was 82.3% lower than pre-crisis Jan 2020. A breakdown by routes show the sharpest drop in the Middle East-Asia sector last year (-73.7%)
  • As vaccinations increase in the Middle East, the demand for international travel will pick-up, given pent-up desire to travel and high individual savings rate
    • Given the expat population in the region, travel to “leisure” destinations is likely to pick up (so long as their source nations are still under pressure from Covid19 cases).  Anecdotal evidence points to UAE residents opting to visit Seychelles and Maldives during the upcoming school break (India is facing a new wave of Covid cases, UK has a mandatory hotel quarantine etc…)
    • There is also a potential of increased visits from grandparents: being the first ones to get vaccinated, evidence already shows an uptick in airline bookings among the 65+ year olds in the US making up for missed family visits during 2020. Likely to benefit the Middle East nations, especially the UAE.


 
Chart 6. Air cargo levels rebound to pre-pandemic levels; UAE hubs support vaccine deliveries

  • A recovery in export orders from Covid19 lows implies that the recovery in air cargo services has rebounded much faster vis-à-vis passenger traffic. However, lack of capacity (-18.7% yoy in Nov-Jan) is still a constraint.
  • Middle East-North America and Middle East-Asia are two of the strongest trade lanes globally.
  • Middle East’s volumes (measured by cargo tonne km flown) regained pre-crisis levels in Jan, with CTKs 2.2% yoy higher than Jan 2019.
  • Though cargo revenues are growing stronger, these are unlikely to offset the loss of passenger revenues.
  • UAE’s Emirates SkyCargo has flown more than 27,800 cargo flights to deliver medical and food supplies to communities hit by Covid19. It also signed an agreement with UNICEF in Feb to transport critical supplies like Covid19 vaccines, medicines and medical devices.
  • In Mar, Abu Dhabi Ports and the Hope Consortium revealed the largest vaccine distribution centre in the Middle East – a 19k square metre temperature-controlled warehouse with a capacity to hold 120mn+ vaccines – which serves as a hub for vaccine distribution in the MENA, Africa and South Asia.


 
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Weekly Economic Commentary – Mar 21, 2021

Markets
Equity markets across the globe were mostly down last week (as the rise in bond yields to 14-month highs exerted pressure); European markets concerned about fresh lockdowns and vaccination pace, while the rough start to high-level US-China talks also weighed on investor sentiment; MSCI world stocks fell from 1-month highs. Regional markets were mixed, with Saudi pulled down by its banking stocks and Egypt ending the week lower pressured by Eastern Company (the country’s top cigarette maker, dropping by 10% – its biggest intraday fall since Nov). Among currencies, the dollar advanced against major currencies (it is up 2% year-to-date) while oil prices tumbled, erasing 4 weeks of gains on weaker demand fears.
Weekly % changes for last week (18-19 Mar) from 11 Mar (regional) and 12 Mar (international).

Global Developments
US/Americas:

  • The Fed kept interest rates unchanged, quashed inflation concerns and maintained a dovish stance. The Fed expects recovery to progress much quicker, forecasting growth of 6.5% this year, up from its prediction of 4.2% in Dec; unemployment rate is estimated to decline from over 6% today to 3.5% in 202
  • Industrial production decreased by 2.2% mom in Feb, following 4 consecutive months of gains including Jan’s 1.1% rise, largely due to the severe cold weather spell and input shortages (e.g. semiconductors). Manufacturing fell by 3.1% mom, largely due to the 8.3% plunge in motor vehicles and parts. Capacity utilization slipped to 73.8% from Jan’s 75.5%.
  • Retail sales in the US dropped by 3% mom in Feb (Jan: 7.6%), also affected by the unusually cold weather spell: motor vehicle sales were down by 4.2%, clothing sales lower by 2.8% and even online sales plunged by 5.4%. Excluding autos, retail sales fell by 2.7% from +8.3% the month before.
  • Building permits tumbled by 10.8% mom to a seasonally adjusted annual rate of 1.682mn in Feb, following Jan’s 15-year high. Housing starts slipped by 10.3% mom and 9.3% yoy to 1.421mn – the lowest level since last Aug. The 30-year fixed-rate mortgage rose to an eight-month high of 3.05%.
  • Initial jobless claims unexpectedly increased to 770k in the week ended Mar 13, rising from an upwardly revised 725k the prior week, with the 4-week average slowing to 746.3k. Continuing claims fell to 4.124mn in the week ended Mar 6 (vs the previous week’s 4.144mn).

Europe:

  • Inflation in the eurozone remained stable at 0.9% yoy in Feb, while core inflation eased to 1.1% (Jan: 1.4%). The highest contribution to inflation came from food, alcohol and tobacco (1.3%), followed by services (1.2%) and non-energy industrial goods (1%), while energy prices remained lower (-1.7%).
  • Germany’s producer price index inched up by 0.7% mom and 1.9% yoy in Feb, with energy prices up by 3.7% yoy and 1.3% mom. Prices of intermediate goods increased by 3.8% vs Feb 2020 – the highest yoy price rise since Nov 2017.
  • German ZEW survey showed an upturn in economic sentiment to 76.6 in Mar (Feb: 71.2) while the current situation also turned more positive (-62 from -67.2 in Feb). In the eurozone’s ZEW survey, economic sentiment increased to 74 in Mar, from Feb’s 69.6 – this was almost 20 points higher than in Dec 2020.
  • Labour cost in the euro area and EU increased by 3% and 3.3% respectively in Q4 (Q3: 1.6% and 1.8%). In both areas, the non-wage component moderated growth in hourly labour costs, due to the government’s tax reliefs and subsidies.
  • The Bank of England kept interest rates unchanged at a record low 0.1% and left unchanged the size of its GBP 895bn bond-buying programme. While positive that the country’s vaccination drive was likely to speed up recovery, the apex bank still stated that “the extent to which that news changed the medium-term outlook was less clear”.
  • Public sector borrowing in the UK touched GBP 19.1bn (USD 26.6bn) this Feb – the highest ever for Feb – bringing the 11-month total to GBP 279bn. Net debt climbed to GBP 2.13trn, to 97.5% of GDP, the highest level since the early 1960s.

Asia Pacific:

  • China’s fixed asset investment surged by 35% yoy to CNY 4.52trn in Jan-Feb (2020: 2.9%); public and private investment were up by 32.9% and 36.4% yoy respectively. In Jan-Feb 2020, fixed asset investment had plunged by a record 24.5%.
  • Industrial production in China accelerated by 35.1% yoy in Jan-Feb (Dec: 7.3%), partly due to the last year’s low base. Retail sales surged by 33.8% yoy, following Dec’s 4.6% increase and the 20.5% plunge during the same period a year ago. Also, urban unemployment rose to 5.5% in Feb, up from 5.2% in Dec.
  • The Bank of Japan kept overnight interest rates on hold at -0.1% and will continue to peg 10-year bond yields at “around zero” though it will be allowed to fluctuate by ±0.25% versus ±0.2% previously. The bank launched a scheme to subsidise bank profits and removed a pledge to buy equities at an annual pace of JPY 6trn, in its quest towards a more “sustainable” policy.
  • Inflation in Japan inched up by 0.2% yoy in Feb (Jan: 0.1%), mainly due to an uptick in energy prices. Excluding fresh food, prices fell by 0.4% (Jan: -0.6%).
  • Japan’s core machinery orders fell by 4.5% mom in Jan – the first drop in 4 months – after posting a 5.2% uptick in Dec.
  • The final estimates of industrial production in Japan showed a decline of 5.2% yoy in Jan versus initial estimates of -5.3% and Dec’s -2.6%.
  • Exports from Japan declined by 4.5% yoy in Feb (Jan: 6.4%), as exports to the US declined by 14% (due to lower automobile, airplane parts and motors exports) while exports to China rose by 3.4%. Imports grew by 11.8% (Jan: -9.5%), the first annual gain in 22 months, bringing the trade surplus to JPY 217.4bn (USD 2bn).
  • Wholesale price inflation in India ticked up to a 27-month high of 4.17% yoy in Feb (Jan: 2.03%), with food and fuel inflation at 1.36% and 0.58% yoy after months of softening. Core inflation rose further to a series high 5.5% in Feb.
  • India’s trade deficit widened to USD 12.62bn in Feb as exports grew marginally by 0.67% while imports were up by 7% (oil imports declined 16.63%). For the period Arp-Feb, exports contracted by 12.33% and imports fell by 23.1%.

Bottom line: An ‘exponential’ resurgence in Covid19 cases (in India, Europe) has brought back lockdown measures; the slow pace of vaccination given delivery delays and fears over possible side effects are throwing a spanner into the revival of demand. Last week’s central bank meetings saw the Fed’s dovish stance on the one hand, while emerging markets, on the other, were not afraid to tackle inflationary pressures head on: Brazil, Turkey (the central bank governor was sacked after the hike) and Russia all hiked interest rates last week.
Regional Developments

  • Contracts awarded by the Bahrain Tender Board declined by 14.6% yoy to BHD 1.6bn (USD 4.1bn) last year from 1688 tenders (-2.4%); the construction and engineering industry topped the charts, with 317 tenders worth USD 7mn.
  • Payments through Bahrain’s Electronic Fund Transfer System (EFTS) surged by 292% yoy to over BHD 16bn (USD 42.4bn) last year. Transactions via the national electronic wallet, BenefitPay, increased by 794% in volume with total value above BHD 3bn (+539%) in 2020.
  • A finance ministry official disclosed that Bahrain has set up a new office for debt management (its current government debt constitutes around 118% of GDP) and a ministerial committee was also formed to reduce spending and increase revenues.
  • The Bahrain Bourse listed new government development bonds issued by the central bank. The BHD 200mn issue, with March 14 as its start date, will mature in six years and has an annual fixed return of 4% on these securities.
  • A total of 5k Bahrainis joined 2465 companies in the private sector this year under the umbrella of the National Employment Programme 2.0. The program aims to find jobs for 25k Bahrainis this year and train 10k.
  • Egypt’s central bank left rates on hold at the meeting last Thursday: overnight lending rate was left at 9.25% and the overnight deposit rate at 8.25% for a third consecutive time. The apex bank set a domestic inflation target of 7% (±2 ppts) on average until Q4 2022.
  • Egypt central bank’s new mortgage finance initiative supports low- and middle-income earners have access to mortgage loans at a rate of 3% with a 30-year repayment period. Low- (middle-) income people with a maximum monthly income of EGP 4000 (EGP 10000) for individuals and EGP 6000 (EGP 16000) for families can get a mortgage to buy a house with a maximum value of EGP 350k (EGP 1mn).
  • Expenditures in the fiscal year 2021-22 is expected to rise by 9% yoy in Egypt, according to the finance minister; overall budget deficit will be lowered to 6.6% of GDP while a primary surplus is expected, of around 1.5% of GDP.
  • Egypt’s president increased the minimum wage for public sector employees to EGP 2400 (USD 152) in the fiscal year 2021-22; furthermore, two bonuses were approved (cost of EGP 7.5bn) and value of pensions were hiked by 13% (total cost of around EGP 31bn).
  • Bilateral trade between Egypt & France grew by 20% yoy to USD 3bn in 2020; this is expected to grow further by 10-15% this year.
  • Egypt’s food exports to Kenya grew by 111% between 2014 and 2020 totaling USD 419mn during the period. Food exports stood at a record high USD 89mn in 2019, before dropping to USD 73mn in Covid19 hit 2020.
  • Remittances into Egypt increased by 10.5% yoy to USD 29.6bn in 2020, after the final quarter saw a 7% yoy uptick in inflows to USD 7.5bn. Separately, Egypt’s foreign exchange reserves increased by USD 100mn to USD 2bn in Feb.
  • A USD 50mn financing agreement between Egypt and the Arab Fund for Economic and Social Development to support MSMEs, signed in Jan, was approved last week. The funds will be put towards offering new vacancies, lowering the unemployment rate and raising production.
  • Hotel occupancy in Egypt is forecast to be between 35-62% this year, according to Colliers.
  • Egypt petroleum ministry disclosed plans to produce 7.2bn cubic feet of natural gas per day in 2021-22; compares to production levels of around 6.6bn cubic feet per day in 2020.
  • Iraq will allow the trade ministry to procure strategic commodities – part of the rationing programme – through direct purchase agreements.
  • Iraq’s Budget Law for 2021 will include a privatisation programme for some state-owned assets. A financial advisor to the government revealed that more than 100 such assets were idle since 2003 and that salaries and wages of 450k unemployed workers were still being paid.
  • Jordan is scheduled to receive 10.2mn doses of Covid19 vaccines this year, disclosed the PM’s office.
  • Trade deficit narrowed by 16.5% yoy to JOD 6.438bn in Jordan last year, as exports dropped by 4.5% while imports inched up by 1%.
  • Jordan’s first Green Climate Fund project approved: the USD 33.2mn project is to build climate resilience in the country via better water management practices.
  • Revenues from Jordan’s free zones grew by 6% yoy to JOD 19.768mn in 2020, as the number of registered firms ticked up by 7% to 2806 and the number of investors in the free zones grew by 5%.
  • The Lebanese pound touched a record high of 15k vis-à-vis the dollar on the black market on Tuesday last week. So, on Friday, the Central Bank decided to launch its own electronic currency exchange platform to register all transactions along with the commercial banks and licensed exchange dealers.
  • Another meeting is scheduled between Lebanon’s President and PM designate on Monday, following Thursday’s meeting. The PM designate stated that the only way forward, to “prevent the collapse”, was forming a government that could re-engage with the IMF.
  • Lebanon’s government and the Central Bank agreed in principle to disburse the World Bank’s USD 246mn cash assistance to poor families in USD instead of
  • VAT will be introduced in Oman from Apr 16, according to the Oman News Agency. VAT is estimated to contribute 1.5% towards GDP, raising OMR 400mn per year.
  • Oman is aiming to provide 250k doses of Covid19 vaccine by end-Mar and over 5 mn doses by end of this year, disclose a health ministry official.
  • Total electricity produced in Oman ticked down by 2% yoy to 37,961.6 GW per hour at end-Dec 2020 while water production increased by 6.4%.
  • Reuters reported that Qatar’s trade minister will chair the board of the Qatar Financial Centre in a restructuring approved by the council of ministers.
  • China’s crude oil imports from Oman and UAE surged by 30% yoy to 7.78mn tonnes and 61% to 5.25mn tonnes respectively in the two months of Jan-Feb 2021.
  • The e-commerce market in the region is estimated to grow by more than 1/3-rd to an estimated USD 30bn this year, from 2020’s USD 22bn, according to a Wamda-MIT report. Saudi Arabia, Egypt and UAE form 80% of the region’s overall e-commerce market.

Saudi Arabia Focus

  • Saudi Arabia’s GDP declined by 3.9% yoy in Q4 last year, with oil sector contracting by 8.5% and non-oil by 0.8%. Overall GDP declined by 4.1% in 2020, driven by substantial drops in both oil and non-oil sector acivity (at -6.7% and -2.3% respectively). By economic activity, mining and quarrying sector accounted for 44% of overall GDP in 2020 (growing by 0.8% yoy) though the finance insurance and business services (share of 6.1%) grew the fastest, up by 1.3%.
  • Saudi Arabia approved the Private Sector Participation (PSP) law, aimed to increase private sector activity while reducing government’s capital spending and distributing risk between the private and public sector. About 16 sectors have been identified for privatization including education (target of 60 schools), utilities, health and transportation.
  • Inflation in Saudi Arabia eased to 5.2% yoy in Feb (Jan: 5.7%), the lowest rate since Jun: food and beverage prices were up by 11.2% yoy – an 8-month low – while transport prices increased by 9.8%.
  • Saudi wholesale price index increased by 7.3% yoy and 1.5% mom in Feb, driven by higher prices of metal products, machinery, and equipment (+9% yoy).
  • Saudi Arabia’s Kafalah programme issued USD 3.3bn in loan guarantees last year, responding to 5720 requests. In Q4 alone, the number of loan guarantees were up by 106% yoy, with total expenditure north of USD 900mn.
  • Saudi Customs disclosed that no customs duty would be imposed on travelers’ new personal belongings worth less than SAR 3000 (USD 800) and the threshold for personal shipments is SAR 1000.
  • The Saudi Industrial Development Fund (SIDF) approved 212 loans, amounting to USD 4.5bn, to 201 companies last year across various sectors like industry, mining, energy, and logistic services. About 84% of total loans were dedicated to SMEs.
  • Crude oil exports from Saudi Arabia rose to 6.582mn barrels per day (bpd) in Jan from Dec’s 6.495mn bpd, according to JODI. Separately, the energy minister revealed the nation’s aim to reduce domestic consumption of liquid hydrocarbons by 1mn bpd for use “in a better way”. This would also increase Aramco’s long-term spare capacity from levels of around 5mn bpd to 2mn bpd historically.
  • A “Made in Saudi” program will be launched from Mar 28th, to encourage the use of local products. Such initiatives are aimed at boosting non-oil exports contribution to 50% by 2030.
  • Saudi Arabia raised SAR 67bn (USD 2.04bn) this month through the sale of Sharia-compliant bonds, as part of the government’s domestic sukuk programme. The first tranche of SAR 2.71bn matures in 2028 and the second SAR 4.96bn tranche will mature in 2031.
  • Saudi Tourism has launched a new initiative called “Tourism Shapers” to support the learning and development of local travel trade partners in the tourism private sector. The “Your Future is in Tourism” campaign aims to create 100k jobs for citizens in the tourism sector this year, and 1mn jobs by the end of 2030.
  • Saudi Arabia launched a digital version of the Muqeem, or resident, ID for foreign workers last week, giving access to a variety of e-services.
  • Saudi Arabian Airlines (Saudia) signed a financing agreement worth SAR2bn (USD 3bn) to cover its aircraft financing requirements until mid-2024, to fund the purchases of 73 aircrafts it had ordered previously.
  • SIPRI data disclosed that while the US accounted for 37% of global arms sales for the period 2016-2020, half of its sales were to the Middle East, with Saudi Arabia alone accounting for 24% of total US arms exports.

UAE Focus

  • UAE disbursed more than 7mn Covid19 vaccine doses: 56% of the residents and a much higher 72%+ of senior citizens and those with chronic diseases have received the vaccine.
  • The UAE central bank estimates economic growth of 2.5% in 2021, up from last year’s 5.8% dip, with non-oil GDP rising at a faster 3.6% alongside flat oil GDP growth. Next year, growth is forecast at an overall 3.5%, thanks to “continued fiscal spending growth, healthy banks’ credit growth, strong improvement in employment and recovered business sentiment”.
  • UAE’s banking system has returned to pre-Covid19 levels, according to the central bank governor. The amount drawn from Targeted Economic Support Scheme (Tess) has declined to AED 22bn from about AED 44bn announced in Q2 last year. More than 325k+ persons have benefitted from Tess and about 175k persons supported by loan deferrals.
  • Fund transfers amongst UAE banks totaled AED 745.27bn in Jan 2021. Separately, 771mn cheques worth AED 82.22bn were circulated in Jan, accounting for 8.3% of last year’s total.
  • Dubai government announced an additional AED 500mn stimulus package, bringing the total in the emirate to AED 6.8bn. The stimulus initiatives which will be valid till end-2021 includes advertising permit fee exemption for all companies registered with the Dubai Municipality for three months; 6-month licence extension for nurseries, clinics and healthcare professionals; 50% rent reduction for nurseries from the Knowledge Fund Establishment; licence renewal exemption for all nurseries in Dubai; and taxi concession fees reduction.
  • Inflation in Dubai declined for the 27th consecutive month, falling by 4.5% yoy and 0.42% mom in Feb 2021. Housing and utilities costs fell by 9.14% while prices of clothing and footwear decreased by 2.57% and food and beverages dropped by 0.43%.
  • Dubai dissolved the tribunal for real estate cheque disputes – which had an exclusive jurisdiction to settle complaints related to dishonoured cheques, which were issued by a property purchaser and made payable to a real estate developer, or those cheques issued by those with usufruct rights or with long-term leasehold rights. Another tribunal was set up to resolve disputes between heirs involved in the sale of inherited properties. Once the latter is in operation, other entities like the DIFC Courts cannot deal with such cases.
  • Dubai’s weekly property sales surged to AED 5.7bn (USD 1.5bn) in the week ending Mar 18th – the highest this month, up 18.8% from the previous week and 26% from Mar’s 1st
  • The Dubai Multi Commodities Centre (DMCC) will establish a regulatory framework for businesses offering, issuing, listing, and trading crypto assets. Bespoke licenses will be issued by the DMCC Crypto Centre to businesses dealing with crypto assets while SCA will issue approvals for crypto-related businesses looking to set up in the free zone.

Media Review
Covid19 cases are on the rise again
https://www.economist.com/graphic-detail/2021/03/19/covid-19-cases-are-rising-again-in-much-of-the-world
The ECB’s economy-wide climate stress test
https://www.ecb.europa.eu/press/blog/date/2021/html/ecb.blog210318%7E3bbc68ffc5.en.html
Who Is Making Sure the A.I. Machines Aren’t Racist?
https://www.nytimes.com/2021/03/15/technology/artificial-intelligence-google-bias.html
At the pandemic’s first anniversary, is Asia back to full health?
https://blogs.imf.org/2021/03/17/the-future-of-asia-what-a-difference-a-year-can-make/
Credit-Rating Agencies Could Derail Economic Recovery
https://www.project-syndicate.org/commentary/credit-rating-agencies-could-derail-economic-recovery-by-jayati-ghosh-2021-03

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Weekly Insights 18 Mar 2021: Macroeconomic Updates on Lebanon, Saudi Arabia & the UAE

Download a PDF copy of this week’s insight piece here.
 
Chart 1. Lebanon: Cascading Collapses

  • According to the finance minister, the central bank has only USD 1-1.5bn to use to fund subsidies (i.e. just for 2-3 months more).
  • The Lebanese pound plummeted to record lows of 15000 per dollar on the black market on Tuesday (from 10k on Mar 2nd)
  • Overall inflation was at 146% and food inflation at 402% in Dec 2020. The pound’s fall has further hiked food prices.
  • This latest collapse, alongside statements of potential lifting of subsidies, has triggered fears of shortages of food.
  • Funding of (ill-designed) subsidies can no longer be continued at the same pace.
  • “Reserves”, which are really “banks’ dollar Legal Reserve Requirements at the Banque du Liban” (this is a liability of the BDL – these are depositors’ money deposited by the banks at the BDL), have halved from a year ago. News of BDL’s “revised” mandatory minimum reserves to USD 15bn (down from USD 17bn) is only a stopgap solution.
  • Given the ongoing political deadlock (the current caretaker government had resigned last Aug), it looks like a very long and painful road to reforms and some semblance of “normalcy”.

 
Chart 2. Saudi Arabia: Reforms to Boost Recovery?

  • Saudi Arabia’s GDP declined by 4.1% in 2020, driven by substantial drops in both oil and non-oil sector acivity (at -6.7% and -2.3% respectively). Private sector was recovering at a faster pace in Q4 vs other sectors.
  • By economic activity, the mining and quarrying sector accounted for 44% of overall GDP in 2020 (growing by 0.8% yoy) though the finance insurance and business services (share of 6.1%) grew the fastest, up by 1.3%.
  • By expenditure compoenents, consumption accounts for around 50% of overall GDP; last year, government final consumption expenditure was the sole component showing positive growth (+4.2%) while gross fixed capital formation plunged by 13.5%.
  • PMI (which hit a 14-month high in Jan and eased in Feb) and rising credit growth alongside various announcements to increase private sector activity (regional HQs and approval of the Private Sector Participation law, to name a few) and attract FDI will bode well for the economy in the medium to long run.


 
Chart 3. UAE: Successfully (?) Mitigating Covid19’s Impact

  • UAE Central Bank governor: banking system’s overall liquidity has returned to pre-Covid level; 320k+ cutomers benefitted from the Targeted Economic Support Scheme (TESS) & ~175k customers are under deferral arrangements
  • Loans to the private sector dropped by 1.5% during Apr 2020- Jan 2021 while credit to government and GREs surged by 16% and 22% respectively. Financial soundness indicators have improved: ELAR remained above the 10% reegulatory minimum requirement while CAR, Tiel 1 capital ratio and CET 1 indicate well-capitalised banks.
  • In Jan 2021, monetary base contracted by 2.47% mom, due to a 15.6% drop in Banks & OFC’s Excess Reserves (which accounts for 19.8% of monetary base) while Certificates of Deposits purchased by banks (32.5% of monetary base) rose by 4.6%
  • The increases in the multipliers of M1, M2 and M3 indicate faster rise in the monetary aggregates M1, M2 and M3 vs contraction of the monetary base.


 
Chart 4. Up, Up & Away? Dubai’s Population ticks up to 3.4mn in Covid19-struck 2020

  • In spite of anecdotal evidence of job losses and repatriation flights, official Dubai Statistics Centre estimates that Dubai’s population grew by 1.6% yoy to 3.41mn in 2020.
  • As expected, expatriate population accounted for more than 90% of overall population; males accounted for close to 70% of overall population – not surprising, with the construction sector accounting for almost 1/3-rd of employment in the UAE
  • The population pyramid shows that about 70% of males and 55% of females are between the 25-49 years age group. The gap between males and females are largest in the age groups of 30-34 and 25-29.
  • The Dubai Urban Masterplan 2040 projects population to surge by 76% to 5.8mn. This follows recent reform measures including in visas (long term visas for professionals and investors, retirement and remote working visas), 100% foreign ownership and even a path towards citizenship – all of which are likely to boost population numbers.
  • Dubai’s openness at a time when other regional nations are pursuing localisation policies will likely work in its benefit, though competition might be rife should Saudi Arabia emerge successful in its current reform path.

 
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Weekly Economic Commentary – Mar 14, 2021

Markets
Weekly gains were posted across equity markets last week – thanks to the US stimulus bill and ECB’s dovish tones – with the Dow hitting a record high (as inflation worries eased), the MSCI World index posting a strong gain and the Stoxx600 closing at its highest level since Feb 21st, 2020. Among regional markets, Saudi was the best performer, recording its fifth consecutive weekly gain. The dollar closed lower last week, posting its biggest drop in 4 weeks. Oil prices fell slightly after gaining more than 10% over the past 2 weeks while gold price grew by 1.5%, its best week in 11. Bitcoin surpassed $60k while talks of its environmental impact gains speed.
Weekly % changes for last week (11-12 Mar) from 4 Mar (regional) and 5 Mar (international).

Global Developments
US/Americas:

  • Inflation in the US increased to a 1-year high of 1.7% yoy in Feb (Jan: 1.4%), thanks to the rising costs of gasoline (+6.4% following Jan’s 7.4% gain). But core prices, excluding both food and energy, eased: recording 1.3% yoy in Feb retreating from Jan’s 1.4% print.
  • US producer price rose by a series-high gain of 0.5% mom in Feb (Jan: +1.3%) due to a 6% rise in energy costs and 1.3% uptick in food prices. In yoy terms, it increased by 2.8%, the largest increase since Oct 2018.
  • Initial jobless claims declined to 712k in the week ended Mar 6, rising from an upwardly revised 754k the prior week, with the 4-week average slowing to 759k. Continuing claims fell by 193k to 4.1mn in the week ended Feb 27, psoting another pandemic-era low.

Europe:

  • GDP in the Eurozone contracted by 0.7% qoq and 4.9% yoy in Q4 (Q3: -0.6% qoq and -5% yoy), given the effect of the lockdowns and plunge in household consumption (-3%). For the full year, growth plummeted by 6.6% yoy. Separately, employment growth in the region slowed to 0.3% in Q4 (Q3: 1.0%).
  • The ECB left policy rates unchanged, while promising that bond purchases would be “conducted at a significantly higher pace” in the next 3 months (The ECB has about EUR 1trn of pandemic emergency purchase programme (PEPP) left to spend). ECB projects real GDP in the Eurozone as likely to contract in Q1, but overall growth forecast was revised up to 4% for the full year (from 3.9% earlier). Inflation has been rising due to “transitory factors and higher energy prices” but will remain under the ECB’s 2% target.
  • Industrial production in the Eurozone increased by 0.8% mom in Jan, rebounding from Dec’s 0.1% dip. Also, IP ticked up by 0.1% yoy, following 26 straight months of contraction.
  • Germany’s industrial production unexpectedly declined by 2.5% mom in Jan (Dec: 1.9%), as production of both capital and consumer goods fell by 0.8% and 3% respectively. Excluding energy and construction, industrial output was down 0.5%.
  • Inflation in Germany increased by 0.7% in Feb (Jan: 0.8%), in line with preliminary estimates. Energy prices ticked up by 0.3% after Jan’s 2.3% drop while food costs were higher by 1.4% (Jan: 2.2%). Meanwhile, the harmonized index for consumer prices fell by 0.1% yoy.
  • Exports from Germany inched up by 1.4% mom in Jan (Dec: 0.4%), on robust trade with China as exports to EU nations plunged by 6% yoy and to the UK collapsed by 29%. As consumer demand slowed, imports slumped by 4.7%, helping trade surplus to widen to EUR 22.2bn from EUR 16.4bn the month before. Current account surplus meanwhile declined to EUR 16.9bn (Dec: EUR 25.9bn).
  • UK GDP shrank by 2.9% in Jan compared with Dec, with the lockdown affecting retail trade, restaurants and education: this was the largest drop in monthly GDP since spring 2020. The economy was 9% smaller than before the start of the pandemic and 4.0% below Oct 2020 (the initial recovery peak).
  • Industrial output in the UK fell by 1.5% mom in Jan, with manufacturing falling for the first time since Apr (-2.3%), with car production severely down.
  • After the new trading rules came into effect post-Brexit, shipments dropped by 40% in Jan, as UK’s exports to the EU plunged by 40.7%, while imports from the bloc fell by 28.8% – the biggest drops since records began in 1997. The largest decline in exports to the EU was in food products (-63.6%) alongside a 56.6% decline in exports in the chemicals sector.

Asia Pacific:

  • China’s exports surged by 60.6% yoy in Jan-Feb – the highest in over 2 decades – with electronics and textiles exports rising by 54.1% and 50.2% respectively. Imports meanwhile grew by 22.2%, widening the surplus to USD 103.25bn. In 2020, China’s exports and imports fell by 17% and 4% respectively.
  • Inflation in China declined by 0.2% yoy in Feb (Jan: -0.3%) as food costs declined (-0.2%). Producer price index increased sharply to 1.7% yoy (Jan: 0.3%), the highest reading since Nov 2018, as fuel and metal commodity prices increased internationally alongside an increase in domestic demand for industrial raw materials.
  • Broad money supply in China grew by 10.1% yoy in Feb, after rising by 9.4% in Jan while new loans declined to CNY 1360bn (USD 208.86bn) from Jan’s CNY 3580bn. Outstanding yuan loans grew 12.9% yoy compared with 12.7% growth in Jan. FDI surged by 31.5% yoy to CNY 176.76bn (USD 27.21bn) in Jan-Feb this year, from a low base last year.
  • Foreign exchange reserves in China edged down to USD 3.205trn in Feb from the previous month’s USD 3.211trn.
  • Japan’s Q4 GDP grew by a downwardly revised 2.8% qoq in Q4, as capital expenditure grew by 4.3% and household consumption by 2.2%. On an annualized basis, GDP grew 11.7%.
  • The preliminary reading of Japan’s leading economic index increased to 99.1 in Jan (Dec: 97.7), the highest since Sep 2018. The coincident index also ticked up to 91.7 from Dec’s 88.2.
  • Overall household spending in Japan declined by 6.1% yoy in Jan, following a 0.6% drop in Dec. With lockdown measures in place, spending on traveling and eating out suffered most.
  • Japan’s current account balance narrowed by 2.3% yoy to JPY 646.8bn in Jan, declining for the first time in 5 months as the travel surplus continued to plunge.
  • India’s industrial output declined by 1.6% yoy in Jan (Dec: +1.5%), as both mining and manufacturing sectors contracted (by 3.7% and 2% respectively). Production of consumer durables declined by 0.2% while capital goods fell by 9.6%. In Apr 2020-Jan 2021, factory output shrank by 12.2% yoy.
  • India attracted FDI inflow of USD 67.54bn during Apr-Dec 2020: the highest ever for the first nine months of a financial year and up 22% compared to the same period a year ago.
  • Retail inflation in India accelerated to a 3-month high of 5.03% in Feb, following Jan’s 16-month low reading.

Bottom line: India posted the highest single-day spike in Covid19 cases this year as Italy prepares for an Easter lockdown, calling into question the pace of global recovery. While the US President accelerated vaccine plans and set July 4th as a return to near-normal, in Europe the vaccine rollout has been varied (UK’s high 36.5 doses per 100 persons to 10.3 in Germany, France and Italy). Major central banks are set to meet this week: investors are likely to be on the lookout for talk about asset bubbles, yields (US treasuries 10Y yields were above 1.6% last week- the highest in a year) and inflation rates rising. Emerging markets are likely to embark on rate hikes (even as economies are still reeling under the effects of the Covid19 epidemic), on inflationary pressures and as borrowing costs rise.
Regional Developments

  • Bahrain’s borrowing stood at BHD 13bn at end-2020, accounting for about 118% of GDP. The finance ministry is proposing to raise the ceiling of borrowing to BHD 15bn, especially given repayment schedules: BHD 37bn is due this year with BHD 708mn interest and BHD 1.269bn with interest of BHD 757mn next year.
  • Egypt’s GDP grew at an annualized 2% rate in Q2 of the fiscal year 2020-21 and by 1.3% in H1 of the fiscal year, disclosed the planning minister. The economy is estimated to grow by 2.8% in Q3 and by 5.3% in Q4.
  • Annual urban consumer price inflation increased to 4.5% yoy in Feb (Jan: 4.3%), largely due to higher prices of tobacco products and utilities as food prices fell by 0.5%. Core inflation stood at 3.645% in Feb, almost steady compared to Jan’s 3.637%.
  • The central bank revealed that Egypt’s foreign debt increased to USD 125.3bn in Sep 2020: partly due to an increase in the net disbursements of loans and facilities by about USD 400mn and about USD 1.3bn increase due to exchange rate changes in the borrowed currencies.
  • Egypt will launch foreign exchange trading with instant settlement system between banks operating in the country on 22 March. Not only would this reduce the cost of payment orders but also reduce the time required to settle.
  • The Egyptian pound appreciated and settled at EGP 15.7 in Feb 2021 – the strongest since Oct 2016 – according to the planning minister. Separately, net international reserves grew for the 8th consecutive month, rising to USD 40.2bn in Feb (Jan: USD 40.1bn) while gold reserves fell by USD 144mn to USD 4.14bn.
  • Egypt received USD 3.3bn in funds to support women and this would be used to implement 34 projects across various sectors (e.g. health, education and agriculture among others), disclosed the ministry of international cooperation.
  • Unemployment in Jordan increased by 5.7% yoy to 24.7% in Q4 2020. Male unemployment rate stood at 22.6% while among females it stood at 32.8%. Youth unemployment continues to be the highest: the rate stood at 62.1% in the age group 15-19 and 47.9% in the 20-24 range.
  • Renewable energy in Jordan accounted for around 20% of total energy consumption in the country last year, revealed the energy minister. This is expected to rise to 31% in 2030.
  • Kuwait’s finance minister stated that the nation’s fiscal breakeven oil price is around USD 90 while calling for “radical economic and financial reforms”.
  • Lebanon could “go into total darkness” by end of this month and face “disastrous consequences” if fuel subsidy is not approved, warned the energy minister. A bill for the funding of Electricite du Liban was not included in Friday’s Parliament discussion.
  • The Lebanese pound hit a record low in value on Saturday, trading for as high as LBP 12,400 against the dollar on the black market.
  • Oman’s new stimulus package covered 5 main areas: exemptions related to taxes and fees (for SMEs, hotels, and companies that began operations in 2021), incentives to support the business and investment environment (including long-term residency for foreign investors), plans to support SMEs, incentives for the labour market (reduction in recruitment fees, setting aside OMR 20mn to train jobseekers) and banking incentives (postponement of loan repayments). Rent at the Duqm Special Economic Zone and industrial areas will also be reduced until end of 2022.
  • Occupancy rate at Oman’s hotels reached 27% in Jan 2021, with guests down by 49.5% to 78451 and revenues down 70% to OMR 6.231mn.
  • The Tourism Sector Economic Stimulus Plan in Oman covers income tax exemption for hotel establishments for 2020 & 2021, as well as an exemption from the tourism tax payable by tourism establishments in 2021 and the postponement of the settlement of the tourism tax.
  • Qatar restarted condensate exports to the UAE after lifting of the 3-year blockade, sending 80,000 tonnes of condensate to Jebel Ali port.

Saudi Arabia Focus

  • Saudi Arabia replaced a few ministers and senior officials including the Minister of Hajj and Umrah.
  • The Public Investment Fund in Saudi Arabia signed a USD 15bn multi-currency revolving credit facility with a group of 17 banks, with the loan to be used for general corporate purposes.
  • Saudi Arabia approved the establishment of Digital Government Authority: the authority will prepare a national e-government strategy and organize the work of digital government in addition to increasing the efficiency of e-services. Separately, authorities launched a digital version of the Muqeem (or resident) ID for foreign workers.
  • Following the OPEC+ decision to extend supply cuts into Apr, Saudi Arabia cut the supply of Apr-loading crude to at least 4 north Asian buyers by up to 15% while keeping average monthly supplies to India unchanged (rejecting Indian refiners requests for additional supplies).
  • New labour rules will be rolled out in Saudi Arabia from today (Mar 14) promising major reforms : this includes expats being able to change jobs without the approval of current employer and also travel outside the country without employers’ approval (exit and re-entry visa reform).
  • Saudi announced incentives to support individuals and firms in the Hajj and Umrah sector: includes fees exemption for expats working with these firms for a period of 6 months, license fee exemptions and postponement of collection of customs duties among others.
  • Saudi Arabia committed to investing USD 3bn in a joint fund for investments in Sudan; the country also recommitted to a USD 1.5bn grant first announced in Apr 2019.

UAE Focus

  • Dubai announced details of its 2040 Urban Master Plan for an estimated 5.8mn residents: this includes ensuring that 55% of the population stay within 800 metres of a public transport station, increasing the length of its beaches by 400% over the next 20 years, as well as growing the areas for economic and recreational activities, with a significant focus on nature (60% of the city is to be dedicated to nature reserves). (More: https://www.thenationalnews.com/uae/dubai-2040-everything-you-need-to-know-about-the-urban-master-plan-1.1183432)
  • Markit’s Dubai PMI edged up to 50.9 in Feb (Jan: 50.6), though new business inflows in the non-oil sector fell for the first time since May 2020 as restrictions increased. Output growth was strongest in the construction sector followed by wholesale and retail.
  • The freeze on Dubai government fees, announced for 3 years in Mar 2018, will continue till early 2023 to support the economy. This will not be applicable in case of new vital services.
  • Dubai Economy issued 4,796 new licenses in Feb, up 3.4% yoy; of these, 57% were professional licenses, followed by commercial (41.5%).
  • The DIFC reported a 20% yoy increase in the number of companies registered at the centre to 2,919 firms. FinTech firms more than doubles to 303 last year.
  • A resolution issued in Dubai to regulate the collection and management of public revenue stipulated that all payments to the suppliers need to be made within 90 working days from the date of the final handover or as per what is specified in the contract.
  • UAE’s non-oil foreign trade amounted to AED1.03trn in Jan-Sep 2020.
  • Female citizens in the UAE account for 33.7% of the population, according to data from the FCSA. Women also account for 50% of the Federal National Council and there are 9 women ministers (among a total 33) in the most recent Cabinet reshuffle.
  • Dubai’s residential property market saw 7,019 transactions worth AED 14.16bn in Jan-Feb this year. Feb registered 3,814 transactions (+15.6% mom) worth AED 7.34bn (+10.2%).
  • The BCG’s “Decoding Global Talent” for 2021 report (that consolidated the feedback of 209k persons across 190 nations) ranked Dubai as the 3rd most preferred city to move into (up 3 places from 2018) while Abu Dhabi climbed 9 places to 5th ranking. London and Amsterdam were the top 2 nations, and Berlin the 4th.

Media Review
The “Non-Fungible Token mania” & digital art
https://www.nytimes.com/2021/03/11/arts/design/nft-auction-christies-beeple.html
https://www.ft.com/content/7df21f05-1365-4e31-bac5-5987658f9f7e
NFTs primer: https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq
Can you tokenise yourself, as a valuable asset? https://www.ft.com/content/83a59275-9a85-464b-af45-aad0e8bd6311

IMF’s Chart of the Week: How Countries Are Helping Small Businesses Survive Covid19
https://blogs.imf.org/2021/03/09/how-countries-are-helping-small-businesses-survive-covid-19/
Are vaccine passports a good idea?
https://www.economist.com/science-and-technology/2021/03/13/are-vaccine-passports-a-good-idea
UAE’s economy shows remarkable ability to overcome repercussions of Covid19 pandemic
https://www.wam.ae/en/details/1395302917282
Prolonged crisis of governance leaves Lebanon adrift and isolated 
https://www.arabnews.com/node/1823816/middle-east

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Weekly Insights 11 Mar 2021: Will removing legal & regulatory barriers reduce MENA’s yawning gender gap?

Download a PDF copy of this week’s insight piece here.
 
Chart 1. MENA & OECD high-income economies reformed the most in Women, Business & the Law Index 2021

  • The latest edition of Women, Business and the Law found that economies in MENA reformed the most, posting an average score of 51.5 in 2021. Agreed, most started from a low base, have lot to catch up on and cross-country variations are the highest!
  • Within the region, the lowest score is at 26.8 (West Bank & Gaza) and highest at 82.5 (UAE)
  • WEF’s Global Gender Gap Index found that gender gap in MENA narrowed by 3.6 points b/n 2006 & 2019: assuming same progress rate, it will take approx. 150 years to close gender gap in MENA

 
Chart 2. Removing Regulatory Barriers Is Only the Start: it’s a Long Way to Gender Parity!

  • Consider the “best performing” regulatory aspects in MENA (from the table below):
    • Entrepreneurship: 7 of the 19 nations score a perfect 100 and others 75;
    • Mobility & workplace regulations should encourage women to enter the workforce;
  • Does this translate into practice?

 
 
Chart 3. Have Better Regulations Supported Entry of More Women Entrepreneurs in MENA?

  • Less than one-fifth of new limited liability company owners are women in the Middle East: ranges between a high of 21.5% in Bahrain to low of 6.9% and 8.8% in Algeria & UAE respectively
  • Sole proprietorships are more frequently used by female entrepreneurs: but, evidence shows a wide disparity of women business owners relative to men. This male-female gap is the lowest in Morocco with share of women business owners (as sole proprietors) at 41% versus men at 59%

 
 
 
 
 
Chart 4. Access to Finance is a Major Barrier

  • One of the biggest challenges when it comes to women entrepreneurs is access to finance
    1. Higher the access to bank accounts for women, the higher the share of female entrepreneurs;
    2. Higher the lending to women, the higher the share of female entrepreneurs
  • MENA reported the largest access to finance gender gap of any region: 52% of men vs only 35% of women have an account; the gender gap in financial access increased between 2011 and 2017!
  • Borrowing from a financial institution was low for both men and women in MENA: 10.4% and 7.4% respectively in 2017 (lower than in 2011). When in need of emergency funds, women raise money from friends & family (65%) than other sources


 
Chart 5. Gender Inequality in Labour Market Outcomes Persist in the MENA region

  • Ratio of female to male labour force participation rates (LFPR) continue to be the lowest in MENA
  • Large variations in Female LFPRs within MENA: as high as 56% in Qatar, 34% in Libya (low-income) to lows of 6% & 11% in Yemen and Iran respectively. In most cases, female LFPR is higher among single women than married (signalling the influence of cultural/ social norms)
  • Even when women actively participate in the workforce, their share of employment in senior & middle management is small: 15.8% in the UAE, 19.3% in Tunisia, 19.8% in Iran and 28.9% in Lebanon (ILO)
  • Despite relatively high levels of education, female unemployment is high in MENA & female youth unemployment even higher!


 
What can be done to support regulatory reform aiming for gender equality?

  • Removing legal and regulatory barriers is necessary but not sufficient condition to reduce the yawning gender gap in the Middle East & North Africa region
  • The IMF estimates that reducing the gender gap in labour force participation to double (rather than triple) the average for emerging market and developing economies would have doubled GDP growth in MENA over the past decade: a gain of USD 1trn in cumulative output
  • Digital economy and labour market reforms (part-time, flexible work arrangements) will boost women’s overall participation
  • Support for women entrepreneurs via: (a) access to finance (loan guarantees, grants, microfinance); (b) women-led networks (VC, angel investors) to invest in women-owned businesses; (c) a “sandbox” for texting new products/ concepts
  • Encourage the collection of disaggregate data by gender by the private sector, share them with regulators for policymaking (e.g. share of females employed in senior & management levels, reason for leaving employment, banks’ loan portfolios etc.)

 
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Weekly Economic Commentary – Mar 7, 2021

Markets
Mixed performance across global equity markets: tech-heavy Nasdaq declined while in Europe, the Stoxx600 index gained on support for sectors likely to benefit from a bounce back; the MSCI all world index managed to eke out a 0.1% gain.  Regional markets were mostly up on the week, though both Egypt and Qatar ended in the red on selling pressures. The dollar strengthened, resulting in the yen touching a 9-month low and the Swiss franc falling to a 7-month low. OPEC+’s move to maintain oil supply restrictions through Apr along with Saudi Arabia’s voluntary cuts extension drove oil price up to near 14-month highs. Gold price dropped to below USD 1700, for the first time since Jun 2020.
Weekly % changes for last week (4-5 Feb) from 25 Feb (regional) and 26 Feb (international).

Global Developments
US/Americas:

  • The US Senate passed the USD 1.9trn pandemic aid plan, which includes USD 1400 in direct payments to taxpayers and weekly unemployment benefits at USD 300, in addition to new funding for vaccine distribution and testing among others. A final approval is expected from the House Democrats this week.
  • Non-farm payrolls surged by 379k in Feb (Jan: 166k), with most new hires from the hospitality sector (+355k) while sectors like education, construction and mining posting declines. The labour force participation rate held steady at 61.4% while unemployment rate fell to 6.2% (From 6.3% the month before).
  • US factory orders increased by 2.6% mom in Jan (Dec: 1.6%): while demand was strong for electrical equipment, appliances and components, orders for machinery fell. orders for non-defense capital goods excluding aircraft increased by 0.4% vs previous estimates of 0.5% uptick.
  • ADP reported an increase in private sector jobs by 117k in Feb (Jan: 195k), with medium-sized business (of 50–499 employees) posting the largest increase at 57,000.
  • ISM manufacturing PMI moved up to a 3-year high of 60.8 in Feb (Jan: 58.7), with new orders rising to 64.8 from 61.1 the month before. Services PMI slipped to 55.3 from Jan’s 58.7 reading (the highest since Feb 2019), after new orders index slowed to a 9-month low of 51.9. Both manufacturing and services industries saw prices paid jump to 86 and 71.8 – the highest reading since Jul and Sep 2008 respectively.
  • Markit manufacturing PMI clocked in 58.6 in Feb, easing from Jan’s 59.2: increases in output and new orders were posted while employment grew at the steepest rate since Sep 2014; input costs posted a substantial rise, and supply chain disruptions were evident. Services PMI was revised higher to 59.8 in Feb (Jan: 58.9) and composite PMI grew to 59.5 – the strongest expansions since Jul and Aug 2014 respectively.
  • Initial jobless claims increased to 745k in the week ended Feb 27, rising from an upwardly revised 736k the prior week, with the 4-week average slowing to 790.75k. Continuing claims also fell by 124k to 4.295mn in the week ended Feb 20 – another pandemic-era low.

Europe:

  • Germany’s manufacturing PMI stood at a 3-year high of 60.7 in Feb (Jan: 57.1), ticking up thanks to order book growth, including demand from abroad. Composite PMI was 51.1 (Jan: 50.8) with continued weakness in services PMI (45.7 vs 46.7).
  • Manufacturing PMI in the Eurozone was up at 57.9 in Feb (Jan: 54.8) – the fastest rise in growth in 3 years while input costs increased. Germany, the Netherlands and Austria reported the strongest growth, with only Greece weakening. Composite PMI was 48.8 with services PMI down to 45.7
  • Inflation in Germany grew by 0.7% mom and 1.3% yoy in Feb, as the temporary VAT cut was reversed and thanks to higher energy prices. The harmonized index of consumer prices rose by 1.6% yoy and 0.6% mom in Feb.
  • Inflation in the Eurozone remained steady at 0.9% in Feb: its highest level for the past year, largely due to a combination of higher food and energy prices. Core inflation dipped from Jan’s 1.4% yoy to 1.1% in Feb.
  • Retail sales in Germany declined by 4.5% mom and 8.7% yoy in Jan (Dec: -9.1% mom and +2.8% yoy): unsurprising given the recent rise in sales tax and ongoing Covid19 restrictions.
  • In the Eurozone, retail sales plunged by 5.9% mom and 6.4% yoy in Jan (1.8% mom and 0.9% yoy) – posting the steepest decline since Apr 2020.
  • Unemployment in the Eurozone was steady at 8.1% in Jan. Spanish unemployment hit a five-year high and recorded the highest percentage of youth and female unemployment (1 in 5 Europeans under 25 years of age who are unemployed is Spanish). Separately, unemployment in Germany rose by 9k to 2.9mn (Dec: -37k).
  • The UK budget unveiled last week confirmed an extension of the furlough scheme until the end of Sep in addition to the GBP 5bn restart grant for businesses, while adding a big tax break for business investment. While the total Covid support package this year and next stands at GBP 352bn, budget deficit will be GBP 355bn or 17% of GDP.
  • UK manufacturing PMI touched 55.1 in Feb (Jan: 54.1), with output rising at the weakest pace in the 9-months of increases; domestic demand improved, as did new export business and optimism rose to a 77-month high.

Asia Pacific:

  • China’s NBS manufacturing PMI declined by 0.7 points to 50.6 in Feb, with output expanding the least in a year (51.9), new order growth slowing to an 8-month low and export orders dropping for the first time in 6 months. Non-manufacturing PMI eased to 51.4 in Feb (Jan: 52.4), with employment remaining below-50. Caixin manufacturing eased to 50.9 in Feb (Jan: 51.5) – the lowest since May 2020.
  • Exports from China surged by 60.6% yoy in Jan-Feb while imports expanded by 22.2%, thereby posting a trade surplus of USD 103.25bn.
  • China’s foreign exchange reserves fell by USD 5.677bn to USD 3.205trn in Feb; it held an unchanged 64 million fine troy ounces of gold at end-Feb though its value fell to USD 109.18bn in Feb from Jan’s USD 116.76bn.
  • Japan’s manufacturing PMI rose to 51.4 in Feb (Jan: 49.8), with output growing for the first time since Dec 2018 while employment levels continued to decline albeit at a softer pace.
  • Unemployment rate in Japan remained steady at 2.9% in Jan. The jobs-to-applicant ratio came in at 1.10 and the participation rate was 61.8% (Dec: 62.0%).
  • South Korea’s GDP expanded by a seasonally adjusted 1.2% qoq in Q4, supported by a 5.2% rise in exports while private consumption and facility investment declined by 1.5% and 2% respectively. For the full year 2020, the economy shrank by 1%.
  • Retail sales in Singapore declined for the 24th consecutive month, falling by 6.1% yoy in Jan (Dec: -3.3%), partly due to the timing of the Chinese New Year holidays. Excluding motor vehicles, retail sales fell 8.4% in Jan.

Bottom line: As vaccination drives gather speed, the WHO confirmed on March 1st that the number of confirmed Covid19 increased globally for the first time in 6 weeks as a result of the spread of multiple variants and premature easing of restrictions. Meanwhile, global manufacturing PMI rose to a 3-year high of 53.9 in Feb (Jan: 53.6), in spite of the growth of new order intakes easing to a five-month low and as inflationary pressures continue to build. Fears of a taper tantrum are also hitting hard: the IIF reported daily outflows (for the first time since Oct) of about USD 290mn from emerging markets, compared with daily inflows of about USD 325mn in Feb this year.
Regional Developments

  • Bahrain’s MPs approved the 2021-22 national budget: with total revenue at an estimated BHD 4.863bn, deficit is expected to be around BHD 2.319bn over both years and to be covered through borrowing. The Future Generations Fund will receive USD 1 from every exported barrel of oil and is expected to touch BHD 41.2mn this year and the next.
  • About 18.1% of Bahrain’s population has received at least 1 dose of the Covid19 vaccine (as of Mar 5th) after having launched the campaign on Dec 17th. The nation aims to vaccinate an additional 300k persons by end of this month i.e. at an average 10k persons a day.
  • Egypt’s PMI edged up to 49.3 in Feb (Jan: 48.7), staying above the long-run average of 48.2. Though domestic demand remained weak, export sales picked up and employment declined at the slowest rate in 16 months.
  • Net foreign assets of Egypt’s banking sector increased by 4% mom to EGP 281.7bn in Jan.
  • The fuel subsidy bill in Egypt plunged by 45% to EGP 8.4bn (USD 537.8mn) between Jul and Dec (H1 2020-21), according to the petroleum minister, versus a budgeted EGP 14.1bn.
  • Foreign investment in Egypt’s debt instruments recorded a new high of USD 28.5bn at end-Feb.
  • Egypt needs to inject USD 20bn in investments to achieve sustainable development goals by 2030, disclosed the minister of planning and economic development. She also disclosed that the nation targets doubling of green projects by 2022.
  • Egypt launched the Closing the Gender Gap Accelerator (in cooperation with the World Economic Forum) to advance women’s economic empowerment, in line with achieving the SDGs related to gender equality and reduce gender gap in the labour market. A dedicated SDGs fund will spend USD 3.3bn to implement 34 projects to close gender gap across sectors.
  • About EGP 3bn (USD 191mn) worth of projects are being implemented to digitize all government services in Egypt, according to the ministry of communications. About 45 digital services have already been launched.
  • Egypt’s ministry of trade and industry is encouraging the local industrial community to manufacture raw materials, deepen local manufacturing and network national manufacturing chains.
  • The minister of tourism and antiquities stated that tourism in Egypt would return to pre-pandemic levels only by fall 2022. Separately, the initiative to support domestic tourism has been extended till 15th May: this includes reduced domestic airline prices to connect tourist cities as well as lower ticket prices to enter archaeological areas and museums.
  • Egypt’s car sales surged by 49% yoy in Jan to 20,700 units; however, in mom terms, sales were down by 24%.
  • The Covid19 vaccination rollout in Egypt has been extended to include the elderly and persons with chronic illnesses.
  • Iraq’s oil exports increased to 2.96mn barrels per day (bpd) in Feb, according to the oil ministry, from Jan’s 2.868mn bpd.
  • A senior official disclosed that Iraq is considering the creation of a sovereign wealth fund as a “fund for future generations” in the country.
  • In a bid to support e-commerce, Jordan expanded the tax exemption for online purchases (for personal use) from abroad to JOD 200 from JOD 100 before. No taxes or fees will be collected on the packages except for the 10% fixed rate for those below the threshold.
  • A study in Jordan disclosed the effectiveness of lockdowns on reducing spread of Covid19: Fridays all-day curfew was seen to reduce infections by 37% and deaths by 35%.
  • Kuwait’s government proposed new amendments to the public debt law: this includes capping borrowing to a maximum 60% of GDP and a change in the duration of debt – no maturity limit versus the existing law’s maximum limit of 30 years.
  • Kuwait will start imposing a 5pm-5am curfew starting today (Mar 7th) in an effort to contain the Covid19 cases.
  • Lebanon’s PMI nudged up to 42.2 in Feb (Jan: 41), with some stabilisation in employment (after 17 straight months of declines) amidst muted declines in output, new orders and new export orders. However, an overall pessimistic sentiment continues given the political deadlock and economic meltdown.
  • The Lebanese pound hit a record low last week: dealers were buying the greenback for LBP 9,950 and selling it for LBP 10,000.
  • Lebanon needs to vaccinate close to 30k persons per day to reach herd immunity in a year, according to the head of the main government hospital (that is tackling Covid19 cases). Only about 15% of eligible citizens had registered for the vaccine. Just above 60k doses have been administered (as of Mar 5th) since the inoculation campaign began on Feb 14th.
  • Oman raised a loan of USD 2.2bn, reported Reuters: the new loan has a 15-month maturity with the possibility to extend it by an additional 12 months at the borrower’s discretion.
  • A new government-owned energy company called Energy Development Oman has been set up in Oman. The company will not only own a shareholding in Petroleum Development Oman LLC and an interest in Block 6 (one of the biggest crude deposits in the Middle East, with production capacity of 650k barrels a day), but also can borrow money “in any manner”, according to a government gazette.
  • Refinery production in Oman dropped by 6.8% yoy by end of 2020, according to NCSI.
  • Oman aims to increase the contribution of renewable energy to the total energy produced from 11% in 2023 to 30% by 2030. The nation is home to 11 hybrid solar energy projects as well as the largest wind energy project in the Gulf region.
  • All commercial activities in Oman (including restaurants and cafes within tourist establishments) will remain closed from 8pm to 5am till Mar 20th to reduce the spread of Covid19 cases.
  • People aged 60 will be added to the vaccination target group in Oman from this week. According to the minister of health, the first Immunization Campaign covered 95% of its target segments vaccinated against Covid-19 – a total of 52,858 people. Separately, the nation has booked 200k doses of Johnson & Johnson vaccine.
  • PMI in Qatar edged down to 53.2 in Feb (Jan: 53.9) – though still the 5th highest level on record – with all 5 sub-components posting positive overall contributions. Manufacturing was the best performer in Feb, with a 6-month high reading.
  • The World Bank approved a second grant of USD 10mn to support job creation for Palestinians during the Covid19 pandemic.

Saudi Arabia Focus

  • PMI in Saudi Arabia dropped to a 4-month low of 53.9 in Feb, from Jan’s 57.1, with employment falling for the 3rd consecutive month. New business inflows and export sales continued to rise, as did input purchases and inventories, but business sentiment was the weakest since Oct.
  • Non-oil exports from Saudi Arabia – which accounted for 30.65% of total exports – declined by 11% yoy to SAR 201.5bn in 2020. Oil exports plunged by 33% to SAR 657.56bn last year.
  • Saudi Arabia’s foreign reserves declined by 10.3% yoy and 0.82% mom to SAR 1.687trn (USD 450bn) in Jan this year.
  • Total banks’ investments in Saudi bonds grew by 15.45% yoy to SAR 446.45bn by end-Jan, according to data from the Saudi Central Bank (previously SAMA).
  • Mortgage loans in Saudi Arabia continue to rise: the number of new residential mortgage loans for individuals grew by 35% yoy to 32,811 in Jan and its value surged by 60% to SAR 16.4bn. Separately, the minister of justice revealed that a digital platform was in the works, allowing for properties to be bought and sold online in the Kingdom. Already 10mn of an estimated 100mn real estate ownership documents had been digitized.
  • Saudi Arabia paid the salaries of 349 workers employed by distressed firms last month: about SAR 60.5mn was paid in late salaries and end-of-service benefits.
  • Saudization in 7 major economic activities surpassed 50% in Q3 2020: financial and insurance activities topped the list, with a rate of 83.6%, followed by public administration (71.9%) and activities of foreign organisations (71.5%) among others. Overall, rate of Saudization in the private sector touched8% in Q3.
  • Remittances from Saudi Arabia increased by 12% yoy to SAR 12.06bn (USD 3.2bn) in Jan; however, in mom terms, remittances declined by 10%. In 2020, remittances had increased by 19.25% to SAR 149.69bn, following two years of declines.
  • Tadawul was MENA’s most active IPO market in 2020 with four listings totaling USD 1.45bn, representing 78% of the total amount raised by MENA IPOs in 2020. According to EY’s MENA IPO Eye, nine IPOs in the region raised USD 1.86bn in 2020.
  • Saudi Arabia’s PIF is in talks to raise USD 15bn from a group of international banks, reported Bloomberg. Though the PIF declined to comment, sources revealed that the funds are to be used to finance new investments.
  • Sovereign borrowing by Saudi Arabia is estimated to reach USD 37.3bn this year, from USD 40bn last year, according to S&P. It will be the largest sovereign issuer in the GCC this year, ahead of UAE (USD 14.1bn, excluding Dubai), Oman (USD 10.8), Qatar (USD 7.4), Bahrain (USD 6.7bn) and Kuwait (USD 3.3bn).
  • Saudi Arabia was the top crude oil supplier to Japan in Jan, with 36.54mn barrels or 45.7% of total imports. About 93.7% of Japan’s oil imports were from 7 Arab nations including the UAE (24.25mn barrels or 30.3%) and Qatar (6.189mn barrels or 7.7%).
  • Bloomberg reported that Saudi Arabia plans to ship gas to South Korea where it would be used to make hydrogen and the carbon dioxide by-product would be transported back. More on Saudi’s plan to build a USD 5bn plant to export hydrogen – https://www.bloombergquint.com/technology/saudi-arabia-s-plan-to-rule-700-billion-hydrogen-market

UAE Focus

  • UAE PMI fell to 50.6 in Feb (Jan: 51.2), supported by output growth even as respondents commented on weaker demand trends in retail and services due to the re-introduction of restrictions. Though 12-month ahead expectations improved to a 5-month high, only 6% of businesses gave a positive outlook for the next 12 months period.
  • Abu Dhabi’s industrial sector contributed nearly 11% to the emirate’s non-oil GDP and 6% to overall GDP in 2020. Total investments in the sector stood at AED 4bn (USD 1.01bn) last year, with 51 industrial facilities starting production in the emirate.
  • The DIFC Employee Workplace Savings Plan, which was launched in Feb 2020, has so far registered 19,182 individuals working for 1,187 companies: about 75% of the assets in the savings scheme remain invested in the low/moderate growth fund – default fund of the Plan.
  • S&P forecasts gross commercial long-term borrowing in Abu Dhabi to reach USD 10bn this year (versus USD 15bn in 2020), while Sharjah is likely to borrow USD 4.1bn, up from USD 3bn last year.
  • Sharjah Research Technology and Innovation Park, a research and development free zone, launched a new MEA Energy Innovation Hub targeting opportunities in energy and low carbon; a new focus area for innovation would be hydrogen.

Media Review
What should Joe Biden do in the Middle East?
https://www.economist.com/leaders/2021/03/06/what-should-joe-biden-do-in-the-middle-east
The Covid Bubble: Roubini
https://www.project-syndicate.org/commentary/us-economy-faces-risks-of-bubble-medium-term-stagflation-by-nouriel-roubini-2021-03
Changes in Saudi Arabia so far just tip of the iceberg, Saudi PIF chief tells the ‘oil man’s Davos’
https://www.arabnews.com/node/1818816/business-economy
Dubai Risks Driving Out Investors as Public Companies Delist
https://www.bloombergquint.com/business/dubai-risks-driving-out-investors-as-public-companies-delist

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Weekly Insights 4 Mar 2021: Are economic activity indicators in UAE & Saudi Arabia moderating, à la PMI?

Download a PDF copy of this week’s insight piece here.
 
Chart 1. Will vaccines give a jab to growth?

  • PMI readings for both Saudi Arabia and the UAE eased moderately in Feb 2021.
  • An uptick in Covid19 cases since beginning of this year, in both UAE and Saudi Arabia – at vastly different levels – led to more restrictive measures (likely to remain till Ramadan in mid-Apr)
  • UAE’s stringency index increased to 56.3 in Feb vs Jan’s 50 & seems to have spilled over in weaker demand, thereby hampering sales and new orders growth. Though near-term outlook is uncertain, businesses optimism was decidely higher for the 12-months ahead period, potentially due to the fast pace of vaccination rollout and the upcoming Expo event


Chart 2. Saudi Arabia: Riding the digital wave

  • Proxy indicators for consumer spending (ATM withdrawals & PoS transactions) continue diverging; recent restrictions on gatherings / entertainment will likely affect overall spending for Feb
  • E-commerce received a jumpstart during the pandemic period: number of transactions picked up by 400% yoy in 2020 & sales value up by 341.2%. This compares to year 2017, when only 38.5% (of those aged 15+) had used the internet to pay bills or buy something online and just 25.7% had used mobile phone or internet to access an account (Source: Global Findex database)
  • Overall loans picked up in the country, with loans to both the private and public sector rising around 15% and 18% respectively in Jan, after posting increases of 13% and 18% in 2020


 
Chart 3. UAE bank loans: where’s the appetite?

  • About 70% of UAE banks’ loans went to the private sector as of end-2020, with the public sector & government together accounting for ~30% of all loans
  • Overall, the surge in lending to GREs and the government – at 16.1% yoy and 19.8% respectively – in 2020 contrasted the drop in lending to the private sector (-1.0%)
  • The uptick in loans towards agriculture surged by 106.6% yoy at end-Dec 2020, following increases of 8.7% and 25.5% respectively in Jun and Sep 2020, underscoring the focus on food security and evidence of investments into vertical farming and agritech companies (its share of total loans is just 0.13%).
  • Loans to construction sector (accounting for ~20.5% of total loans) ticked up by 5.2% yoy as of end-Dec (vs 0.2% drop in 2020); personal loans for consumption (~20.4% of total loans) dipped by 1.3% as of end-Dec


 
Chart 4. Growing Pains: UAE’s SMEs amid Covid19

  • The share of SME lending in total domestic lending remained unchanged at 5.7% in Q3 (Q2 2020: 5.7%),though lower than 5.9% share as of end-Q1
  • Within the MSME segment, as of end-Q3, the largest share of loans was disbursed to medium-sized firms (57.3%) and close to 1/3-rd to the small enterprises
  • The number of MSMEs in the UAE declined by 8.5% qoq to 114,361 as of end-Sep. This drop was visible across all 3 segments, with small enterprises plunging by 13.7% qoq as of end-Sep (Jun: +5%) and micro and medium enterprises down by 3.7% and 2.6% respectively
  • With total lending remaining almost stable alongside a sharp drop in number of MSMEs, the amount disbursed per firm increased across the board at end-Sep: overall by 9.2% qoq while amounts to micro, small and medium firms grew by 4.8%, 13% and 3.8% respectively
  • Banks’ provisions for bad and doubtful debts amounted to USD 42.5bn as of Dec 2020, up from USD 36.1bn at end-2019. With a large number of MSMEs dropping out of business, expect non-performing loans to tick up & eat into banks’ profitability


 
 
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Weekly Economic Commentary – Feb 28, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
Global equity markets declined across the board last week, as investors reduced their exposure to risk amid US government bond yields spiking to near 1-year highs in a large US Treasury sell off. In the region, markets were mixed: Saudi gained after it successfully raised EUR 1.5bn in a Eurobond deal with a negative yield. The dollar was stronger vis-à-vis most major currencies including the Japanese yen and risky currencies like the Aussie dollar weakened; euro touched a 7-week high but closed lower. Gold fell by 2.7% to an 8-month low, while Brent oil touched a 13-month high last week (but closed lower) after a drop in crude output was reported following the Texas freeze and ahead of the OPEC+ meeting this week.
Weekly % changes for last week (25-26 Feb) from 18 Feb (regional) and 19 Feb (international).

 
Global Developments
US/Americas:

  • US GDP grew by an upwardly revised 4.1% in Q4 at an annualized rate, thanks to stronger housing construction and business inventories, offsetting a slower increase in consumer spending. Annual GDP shrank by 3.5% for the full year 2020, posting the largest decline since 1946. Core PCE inflation was up by 0.3% mom and 1.5% yoy.
  • US personal income surged by 10% in Jan – the biggest monthly gain since Apr 2020 – largely due to the stimulus cheques and unemployment benefits. Spending was up by 2.4% while the personal saving rate was 20.5%.
  • US durable goods orders increased by 3.4% mom in Jan (Dec: 1.2%) – the most in 6 months, driven by the surge in orders for civilian aircraft and parts (+389.9%). Non-defense capital goods orders grew by 0.5% from a 1.5% rise in Dec.
  • Chicago Fed national activity index inched up to 0.66 in Jan (Dec: 0.41), the strongest activity growth in 3 months.
  • Chicago PMI declined by 4.3 points to 59.5 in Feb from Jan’s two and a half year high of 63.8; new orders posted the largest monthly decline while employment gained the most (up 5.7 points to a 16-month high).
  • S&P Case Shiller home price index accelerated by 10.1% yoy in Dec (Nov: 9.2%), with the data also confirming the preference for suburban homes vs urban apartments during the pandemic amid record low mortgage rates.
  • New home sales increased by 4.3% mom to 923k in Jan and though the median price of a new home sold slipped to USD 346,400, it was up more than 5% yoy. Pending home sales slipped by 2.8% mom in Jan (Dec: 0.5%).
  • Initial jobless claims fell to 730k in the week ended Feb 20, a sharp drop from a downwardly revised 841k the prior week, with the 4-week average slowing to 833.25k. Continuing claims also fell by 101k to 4.42mn in the week ended Feb 13 – the lowest since March 21st.

Europe:

  • CPI in the eurozone increased by 0.9% yoy in Jan – the highest level since Feb; core inflation stayed at 1.4% yoy in Jan though falling by 0.5% mom. Inflation rates diverged much across the eurozone: prices declined by 2.4% yoy in Greece, while it was up 1.6% in Germany.
  • Loans to households in the Eurozone grew by 3.0% yoy in Jan (Dec: 3.1%) while loans to companies was up by 7%, following an increase of 7.1% the month prior.
  • GDP in Germany increased by 0.3% qoq in Q4 (above the preliminary estimate of 0.1%); it declined by 2.7% in yoy terms.
  • German Ifo readings improved in Feb: the current assessment increased to 90.6 (Jan: 89.2) while expectations rose to 94.2 (91.5) and business climate index was 92.4, rising from 90.3 in Jan. In manufacturing, the index jumped to its highest value since Nov 2018.
  • UK ILO unemployment rate nudged up to 5.1% in the 3-months to Dec (5% before). Average earnings including bonus increased sharply to 4.7% in the 3 months to Dec (from 3.7% before).

Asia Pacific:

  • Japan’s leading economic index slipped to 95.3 in Dec from Nov’s 96.1 reading, though higher than the preliminary estimate of 94.9. The coincident index also moved lower to 88.3 (Nov: 89.0).
  • Tokyo’s inflation and core inflation (excluding fresh food) fell by 0.3% yoy in Feb while inflation excluding food and energy stayed steady at 0.2%.
  • Industrial production in Japan rebounded by 4.2% mom in Jan (Dec: -1%), thanks to an increase in the production of electronic parts and general-purpose machinery, in addition to a smaller increase in car output as global demand picked up.
  • Retail trade in Japan tumbled by 2.4% yoy in Jan (Dec: -0.2%) due to sharp contractions in general merchandise and fabrics apparel spending. Large retailer sales dropped even further: -7.2% from -3.4% the month before.
  • India’s GDP grew by 0.4% in Oct-Dec 2020, with financial services posting a rebound while overall services sector contracted by 1%. The previous quarters data were revised: an upward revision in the Jul-Sep quarter to -7.3% from -7.5% earlier and a deeper 24.4% contraction in the worst hit Apr-Jun quarter (vs 9% estimated earlier).
  • India fiscal deficit stood at USD 167bn or8% of the revised full year target during the period Apr-Jan. Fiscal deficit for the current financial year has been revised upwards to 9.5% of GDP, given the pandemic.
  • Industrial production in Singapore grew by 8.6% yoy in Jan, rising for the 3rd consecutive month, though easing from Dec’s upwardly revised 16.2%.

Bottom line: With major global banks like Goldman Sachs and Morgan Stanley raising their oil price forecasts to USD 70 and many oil producers itching to raise production to corner higher revenues, the Mar 4th OPEC+ meeting will be interesting to watch: the slow pace of current vaccination drives implies that it will take much longer for the global economy to fully open up and attempt to reach pre-pandemic activity levels (implying subdued demand for oil). In the meanwhile, rising inflationary pressures are raising “taper tantrum” worries as central bankers try to soothe investor concerns over rising bond yields, recovery prospects and asset price bubbles.
Regional Developments

  • Bahrain decided to extend its existing Covid19 measures for 3 more months, including social distancing measures and health screenings among others, once it expires on Feb 28th.
  • Egypt’s central bank has directed banks to inject EGP 117bn (USD 7.46bn) into MSMEs until end-2022. The funds are a result of raising financing to these firms to 25% of the banks’ credit facilities portfolio from 20% before.
  • The value of foreign investments in Egypt’s government debt instruments amounted to USD 29bn in Q1 of the current fiscal year. During the pandemic about USD 18bn of foreign investment exited the government debt market, bringing the total down to about USD 10bn.
  • Egypt plans to repay a total of USD 21.4bn in foreign debts this year, of which USD 10.2bn will be paid in H1, according to the ministry of finance; a further USD 14.9bn will be repaid in 2022.
  • Non-performing loans (NPLs) in Egypt stood at 3.4% in Sep 2020 (vs 3.9% in Jun 2020). Banks had made allocations covering 96.4% of their total non-performing loans in Sep 2020.
  • The manufacturing and extractive industries of production index in Egypt inched up by 2% mom to 99.15 in Dec 2020, with the pharma sector up by 2.8% and demand for building materials driving up manufacture of non-metallic mineral products by 6.7%.
  • Egypt’s central bank issued EGP 2bn (USD 128mn) to support the tourism sector, with half the amount going towards the Credit risk Guarantee Company.
  • Egypt’s finance minister disclosed that spending on social protection programme increased by 24% to EGP 114bn during the period Jul 2020 to Jan 2021; also, more than EGP 5.3bn was disbursed to irregular workers since the start of the pandemic.
  • Agricultural exports from Egypt to the US increased by 22% to a record high of USD 220mn in 2020, revealed the US Ambassador to Egypt.
  • Egypt is expected to add about 7,000 hotel rooms by 2023, according to Colliers, as new projects delayed opening during the pandemic. The supply in Cairo and Alexandria is expected to grow by 4% and 12% respectively between 2020 and 2023.
  • Oil exports from Iraq’s southern ports remained stable at 2.7mn barrels per day (affirming its commitment to the OPEC+ deal) as of Feb 24th, according to the Basra Oil Company chief.
  • Iraq is looking for international investors to build seven solar power plants in the south of the country, with a total capacity of 750 megawatts, and is currently in talks with French Total and “Norwegian companies” according to the oil ministry.
  • Jordan has reinstated Friday lockdown, in addition to extending daily curfew by 2 hours, given the recent uptick in Covid19 cases.
  • Internet penetration in Jordan ticked up to 66.8% in Jan 2021, with a total of 6.84mn users in the country. Social media users increased by 11% yoy to 6.3mn (61.5% of the population).
  • An IRENA report disclosed that Jordan’s share of electricity from renewable energy sources grew from almost zero in 2014 to around 20% in 2020.
  • Kuwait’s government submitted a proposal to the parliament to allow for the withdrawal of up to KWD 5bn (USD 16.53bn) from the sovereign wealth fund annually. Over the past few months the fund transferred around KWD 6-7bn to the General Reserve Fund (with over 4bn in exchange for asset swaps) to finance the deficit. Budget deficit is estimated at KWD 55.4bn from fiscal year 2020-21 to fiscal year 2024-25.
  • The capital adequacy ratio of banks in Kuwait stood at 19% at end-Dec, above the central bank’s requirement of 13%, and higher than 2019’s 18.5%. NPLs inched up by 0.5% to 2% last year while the NPL Coverage Ratio (provisions to NPLs) dropped from 271% to 222%.
  • Expatriate population in Kuwait declined by 4% yoy to 3.21mn persons in 2020; Indians accounted for 52% of the expats that left the country last year, followed by Egypt (22.5%).
  • Kuwait closed its land and sea border crossings till Mar 20th; also, restaurants and cafes have been asked to conduct only delivery and takeaway services.
  • The central bank of Lebanon reiterated that the Feb 28 deadline for all banks to raise their capital by 20% and repatriate 3% of liquidity from correspondent banks will not be extended.
  • Lebanon’s caretaker energy minister revealed that an emergency loan request worth LBP 1,500bn had been placed for the Electricite du Liban to buy more fuel to generate electricity. Unless financing is approved, electricity cannot be generated beyond Mar.
  • Lebanon granted 20 private sector firms permission to negotiate with pharma companies to access the Covid19 vaccines: 13 for the Sputnik V vaccine and 7 for Sinopharm. Separately, the World Bank threatened to suspend financing for the vaccination drive, after fair vaccination violations by politicians were reported.
  • Lebanon began phase 2 of easing the lockdown last week, after imposing a complete lockdown from Jan 14th. Most restrictions are likely to be lifted by Mar 22.
  • Producer’s price index-based inflation in Oman fell by 22.9% yoy in Q4 2020 given the sharp decline in oil and gas prices (-28.3%) while non-oil products increased by 4.3%.
  • SMEs registered in Oman’s Authority for Small and Medium Enterprises Development increased by 14.4% yoy to 49,337 in Jan 2021, with Muscat accounting for one-third of the registered SMEs.
  • The new electricity tariffs in Oman will be applied in a phased manner: the Jan bill was calculated based on 11 baisas instead of 15 for consumption up to 2,000 kilowatts, and 14 baisas instead of 20 for electricity consumption up to 4,000 kilowatts.
  • Pakistan signed a new 10-year deal – for 2 cargoes per month initially, rising to 4 in a month in “coming years”- for the supply of Liquefied Natural Gas (LNG) from Qatar.

Saudi Arabia Focus

  • Saudi Arabia’s investment minister, in an interview with Arab News (link in Media Review section), revealed that though details were still being fine-tuned, companies choosing to relocate their headquarters to the Kingdom will not have Saudization staffing requirements imposed on them.
  • Saudi Arabia raised EUR 5bn (USD 1.82bn) through the sale of euro-denominated bonds – the second deal in 2 months and its second time issuing euro-denominated bonds since Jul 2019. The issuance is the largest with a negative yield outside the EU and was oversubscribed more than 3 times.
  • The Public Investment Fund in Saudi Arabia is launching a USD 3bn tourism and infrastructure venture – the Soudah Development Company (SDC), aimed at developing Soudah and Rijal Alma’a into a tourist destination. With plans to attract over 2mn visitors annually, the project is also estimated to create 8k (direct and indirect) jobs by 2030.
  • Saudi Arabia launched the instant payment system “sarie”, allowing banking sector’s clients to send and receive low-value local transactions around the clock and for a low fee, not exceeding one riyal. Any financial transaction less than SAR 20k would be instantly credited.
  • The value of Saudi Arabia’s oil exports plunged by 30% or SAR 19.5bn in Dec. Oil’s share of total exports fell to 71.6% in Dec from 76.7% a year ago.
  • Saudi Arabia’s trade surplus stood at SAR 19.92bn in Dec, the highest since Feb 2020. China, Japan and India were the top export markets during the month. The final reading of the year resulted in a narrowing of the full year surplus to SAR 164.98bn (-59.8% yoy). Trade with its GCC counterparts declined by 6.06% yoy to SAR 98.1bn last year; trade with the GCC accounted for more than 2/3-rds of the total trade.
  • Saudis trading in US stocks grew by more than 7 times to SAR 323.37bn last year, according to a Capital Markets Authority report.
  • With an average of 16.8 hours for container handling in Saudi ports, Saudi Arabia ranked 5th globally in the list of UNCTAD’s annual index of ports.
  • In the latest edition of the World Bank’s Women, Business and the Law report, Saudi Arabia scored 80, up from 70.6 last year, after it achieved a score of 100 in 5 indicators – mobility, workplace, salary, entrepreneurship and pension. The number of women-owned companies by 60% in the past two years while overall female labour force participation rates increased to nearly 30% from 22%.
  • Saudi Arabia has opened up its armed forces to women: female applicants have to be within the age of 21-40, a height of 155cm and above, and not a government employee. Separately, the number of women in the civil service jumped by 25 times in 10 years to 484k in 2019, according to a report of the Family Affairs Council.
  • The number of local and international companies operating in Saudi Arabia’s military industries sector grew to 70 by the end of 2020, representing estimated investment of SAR 24bn. About USD 20bn will be invested in Saudi Arabia’s domestic military industry over the next decade, with an aim to spend 50% of the military budget locally by 2030.
  • Distance learning will be continued till end of the current academic year in Saudi Arabia.

UAE Focus

  • On the occasion of Kuwait’s 60th National Day, Dubai Customs disclosed that bilateral trade between Kuwait and Dubai touched AED 8.52bn (USD 2.32bn) in H1 2020. Separately, it was revealed that bilateral trade between Abu Dhabi and Kuwait reached AED 51.3bn during the past 5 years.
  • Bilateral trade between UAE and Japan stood at USD 22.4bn in 2020: approximately 25% of its crude oil is imported from the UAE; the relation extends beyond energy as well with more than 340 Japanese companies having their largest bases in the Middle East in the UAE.
  • UAE’s FDI in Spain reached over EUR 6bn (USD 7.3bn) according to the Spanish Minister of State for Trade. Spanish FDI in the UAE meanwhile is around EUR 3bn (USD 3.65bn).
  • The daily decline limit for stocks listed on the UAE’s bourses will be increased to 10% from 5%, effective today (Feb 28th). It was lowered to 5% earlier in Mar 2020.
  • Covid19-related restrictions in Dubai will be extended till the beginning of Ramadan (likely to start in the 3rd week of Apr) in the UAE.
  • UAE’s central bank joined the second phase of a digital currency project, named the m-CBDC Bridge project, initiated by the Hong Kong Monetary Authority and the Bank of Thailand. The project will focus on developing a proof-of-concept prototype, enabling faster, easier cross-border transactions while removing complex regulatory compliance procedures.
  • Masdar and Kazakhstan’s sovereign wealth fund Samruk-Kazyna signed an agreement to explore joint investments in renewable energy opportunities in the latter.

Media Review
Yuval Noah Harari: Lessons from a year of Covid (Free to read)
https://on.ft.com/2NK3pWx  
No One Is Safe Until Everyone Is Safe
https://www.project-syndicate.org/commentary/g7-covid19-promises-must-go-beyond-financial-aid-by-mohamed-a-el-erian-2021-02
Interview with Saudi Arabia’s Investment Minister on Regional HQs
https://youtu.be/apypUCW19FE
https://www.arabnews.com/node/1813691/business-economy
Analysis: How rich is Saudi Arabia? Kingdom does the math in balance sheet overhaul
https://www.reuters.com/article/uk-saudi-economy-reforms-analysis/analysis-how-rich-is-saudi-arabia-kingdom-does-the-math-in-balance-sheet-overhaul-idUKKBN2AN0GX
Women, Business & the Law 2021
https://openknowledge.worldbank.org/bitstream/handle/10986/35094/9781464816529.pdf
https://blogs.worldbank.org/developmenttalk/women-business-and-law-2021-womens-economic-empowerment-critical-resilient-recovery
What is the cheapest way to cut carbon?
https://www.economist.com/finance-and-economics/2021/02/22/what-is-the-cheapest-way-to-cut-carbon
 
 
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Weekly Insights 25 Feb 2021: Rising global food prices amid supply chain disruptions & impact on import-dependent dollar-pegged GCC nations

Download a PDF copy of this week’s insight piece here.
 
Chart 1. PMIs indicate rising manufacturing activity vs restrictions-hit services weakness

  • Forward looking manufacturing PMIs are recovering, thanks to new orders
  • But pain points include supply chain disruption, delivery delays & rising input prices
  • Weakness in services PMI continues
  • UK & Germany (among the most stringent nations currently, with scores at 86.11 & 83.33 respectively) show the divergence, though the former is starting to stabilise
  • Declines during the current lockdown period is not as severe as in Apr 2020
  • Vaccine roll-out will lead to greater confidence in the months ahead


 
Chart 2. Global trade recovers in Q4 2020; Q1 2021’s restrictions in likely to cause deceleration

  • WTO estimates show a strong Q4 (index reading of 103.9). New Covid variants & lockdown restrictions is likely to have a negative impact on goods trade in Q1
  • Container shipping costs have been surging, given the increase in demand alongside delays at ports and lack of ships/ containers
  • The reduction in air freight capacity adds to the capacity conundrum. In 2020 overall, industry-wide cargo tonne-kilometres fell by 10.6% yoy – the largest decline on record (IATA)


 
Chart 3. Global food prices are rising: will MENA’s food importers be severely hit?

  • The increase in freight prices have also spilled over into global food prices: pandemic-led supply chain issues aside, production shortfalls due to unfavourable weather conditions and high export tariffs have also contributed to the uptick.
  • Over the past six months, the IMF’s food price index has seen a 6% spike, outpacing the all commodities price index which averaged a 1% increase!
  • Food security is a major concern in the MENA region, given water-constraints. 12 of the 17 most water-stressed nations are in the Middle East (World Resources Institute) => high dependence on food imports & hence highly exposed to global food price volatility
  • High income but resource-constrained nations like UAE are taking steps to counter this, including support for domestic production via technological innovations (AgriTech, hydroponics, vertical farming)


 
Chart 4. Will this lead to rising food inflation in the GCC?

  • Food imports as a share of total imports ranged from UAE’s 7% to Oman’s 17% in 2019 (WTO)
  • Further breakdowns reveal the extend of dependence: the FAO’s cereal import dependency ratio (3-year average) places UAE at 100% & Saudi Arabia at 92.5% (for the period 2015-2017); GCC imports almost 100% of its rice consumption and approximately 62% of meat and 56% of vegetables (PwC).
  • Food inflation is still less than 5% in most GCC nations other than Saudi Arabia (affected by the VAT hike) and Kuwait (fruits, vegetables and meat/poultry have seen double-digit rises since last Jul).
  • The higher share of disposable income spent on food by poorer segments of the population would imply that rising food prices would affect them more, thereby widening the inequality gap further (in addition to Covid19’s impact)
  • Imported inflation in the backdrop of being pegged to the dollar implies that price controls might be need to contain food inflation if it continues to surge further. However, overall inflation remains low, with other major components like utilities & rent on a decline.


 
 
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Weekly Economic Commentary – Feb 21, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
Global equity markets were muted, as the fear of inflation debate continues to gain ground; Japanese stocks rose to a 30-year high during the week while Saudi Arabia’s stock market crossed the 9,000 mark for the first time since Jul 2019. The GBP hit USD 1.40, a near three-year high, given the pace of its vaccination program amid lockdown while the Turkish lira continues to rally (+6% in 2021). Brent oil price topped USD 65 (given the deep freeze in Texas) and saw some profit-taking, gold price fell and copper price surged to its highest in more than 9 years while Bitcoin hit a market cap of USD 1trn on Fri (chart on global asset performance: tmsnrt.rs/2yaDPgn).
Weekly % changes for last week (18-19 Feb) from 11 Feb (regional) and 12 Feb (international).

 
Global Developments
US/Americas:

  • US industrial production inched up by 0.9% mom in Jan, rising for the 4th consecutive month, after Dec’s uptick of 1.3%. Capacity utilization increased to 75.6% from 74.9% in Dec.
  • Retail sales in the US increased by 5.3% mom in Jan (Dec: -1%), the most in seven months, thanks in part to the stimulus cheques of up to USD 600. Excluding autos, retail sales grew by 5.9% mom, while sales at non-store retailers (including e-commerce) surged by 11%.
  • US PPI inched up by 1.3% mom in Jan (Dec: 0.3%), recording the largest advance since the index began in Dec 2009. Excluding food and energy, PPI grew by 0.8% from 0.5% in Dec.
  • Building permits in the US surged by 10.4% yoy to a seasonally adjusted 1.881mn in Jan this year: this was the strongest gain since May 2006, thanks to a jump in permits for buildings with 5 units or more (+28% to 557k). Housing starts declined by 6% to 1.58mn.
  • Existing home sales inched up by 0.6% mom to 6.69mn units in Jan; lack of supply continues with just a 1.9-month supply available at the current sales pace (versus a 3 month supply a year ago). This has been pushing prices higher, with the median price of an existing home sold in Jan at $303,900, up1%% yoy.
  • Markit manufacturing flash PMI slowed down to 58.5 in Feb (Jan: 59.2) while services business activity reading improved by 0.6 points to 58.9 – the highest reading since Mar 2015.
  • Initial jobless claims increased to 861k in the week ended Feb 12 from an upwardly revised 848k the prior week, with the 4-week average slowing to 833.25k. Continuing claims slowed to 4.494mn in the week ended Feb 5 from 4.56mn the week before.

Europe:

  • GDP in the eurozone declined by 0.6% qoq and 5% yoy in Q4, upwardly revised vs preliminary estimates (-0.7% qoq and -5.1%) though worse compared to Q3’s rebound of 12.4% qoq. Overall, the first estimate for GDP in 2020 stood at a 6.8% decline.
  • German ZEW survey showed an upward surge in economic sentiment to 71.2 in Feb (Jan: 61.8), largely due to expectations of a recovery in consumption and retail trade in line with the vaccine rollout while the current situation reading was more subdued, slipping to -67.2 from the previous month’s -66.4. The ZEW economic sentiment in the eurozone jumped to 69.6 in Feb (Jan: 58.3). Additionally, inflation expectations also increased sharply.
  • The flash Markit manufacturing PMI in Germany inched up to 60.6 in Feb, following Jan’s 57.1 reading. However, services slipped to 45.9 from 46.7 in Jan given the continued containment measures. The survey results also showed average charges for goods and services rising at the quickest rate since Aug 2019.
  • Eurozone’s flash manufacturing PMI increased to a 36-month high of 57.7 in Feb (Jan: 50.8) while services PMI, in contrast, fell to 44.7 (Jan: 45.4). Composite PMI remained below-50 for the 4th consecutive month, though nudging up to 48.1 in Feb (Jan: 47.8).
  • Employment in the eurozone increased by 0.3% qoq in Q4, easing from Q3’s 1% rise.
  • Trade surplus in the eurozone widened to EUR 29.2bn in Dec (Nov: EUR 25.7bn): exports to the rest of the world grew by 2.3% yoy – the first increase in exports since Feb 20 and intra-EU trade inched up by 0.9% to EUR 148.7bn. For the full year 2020, exports declined by 9.2% and imports by 10.8%.
  • Industrial production in the eurozone slipped by 1.6% mom and 0.8% yoy in Dec (Nov: 2.6% mom and -0.6% yoy), with production of capital goods and non-durable consumer goods down by 3.1% and 0.6% respectively.
  • Inflation in the UK rose by 0.7% yoy in Jan (Dec: 0.6%), with price rising across many categories including furniture, transport, hotels and food. PPI core output and retail price index both inched up by 1.4% yoy (Dec: +1.1% and +1.2% respectively).
  • The impact of UK’s third lockdown was visible in the Jan retail sales numbers: it plunged by 5.9% yoy and 8.2% mom, following Dec’s positive readings of 3.1% yoy and 0.4% mom respectively. Clothing sales were down 35% mom, household goods sales dropped almost 20% while online spending accounted for a record 35.2% of sales.
  • UK manufacturing PMI ticked up to 54.9 in Feb, following Jan’s 54.1 reading, thanks to an improvement in new order growth. Services PMI stabilized to 49.7 from 39.5 in Jan though temporary closures lead to weaker sales volumes.

Asia Pacific:

  • Japan GDP grew at an annualized 12.7% in Q4 (Q3: 22.7%): growth was up by 0.2% yoy and 3% qoq (Q3: 1.2% and 5.3%). Q4 growth was supported by domestic demand (+2%), private consumption (+2.2%) and net exports (+1%). GDP declined by 4.8% in full year 2020, the first contraction since the 2009 global financial crisis when growth plunged by 5.7%.
  • Final data on industrial production in Japan showed a drop by 1% mom and 2.6% yoy in Dec (Nov: -3.2% yoy).
  • Exports from Japan grew by 6.4% yoy in Jan (Dec: 2%), posting the sharpest growth since Oct 2018, led by an increase in exports to China (+37.5%) and Asia (+19.4%). Imports declined for the 21st month in a row by 9.5% yoy (Dec: -11.6%), thereby moving the trade balance into a deficit of JPY 323.9bn from a surplus JPY 749.6bn the month before.
  • Japan’s core machinery orders unexpectedly increased by 5.2% mom and 11.8% yoy in Dec (Nov: 1.5% mom and -11.3%).
  • Inflation in Japan declined by 0.6% yoy in Jan (Dec: -1.2%). Excluding energy and food, prices were up by 0.1%, after 3 straight months of decline including Dec’s 0.4% drop.
  • Japan’s composite PMI inched up to 47.6 in Feb (Jan: 47.1), thanks to a stabilisation in new export orders (after 26 months of sub-50 readings) and an expansion in employment levels.
  • India’s WPI inflation rose to an 11-month high in Jan, up 2.03% following Dec’s 2.3% uptick.
  • Trade deficit in India narrowed to USD 14.54bn in Jan (Dec: USD 14.75bn), as exports (+6.16%) grew faster vis-à-vis imports (+2.03%).
  • GDP in Singapore grew by 3.8% qoq in Q4 (Q3: 9%) though contracting 2.4% yoy from the previous quarter’s 5.8% dip. The economy contracted by 5.4% in 2020 – the first annual contraction since 2001.

Bottom line: The latest PMI numbers in Europe continue to highlight the diverging trends between the manufacturing sector and the lockdown-hit services sector; input prices are ticking up, bringing to the forefront discussions on inflationary pressures. Separately, the IIF revealed a record-high global debt of USD 281trn in 2020, which is expected to rise further in 2021. Government debt, which accounted for more than half the increase last year, topped 105% of GDP (2019: 88%). Debt was one of the key discussion points at the G7 Summit last week, where President Biden announced an extra USD 4bn for Covax (to aid vaccine delivery).
Regional Developments

  • Bahrain is expected to grow at 3.3% this year (from an estimated 5.4% drop in 2020), according to the IMF, with the non-oil economy rising by a faster 3.9%. In 2020, while overall fiscal deficit increased to 18.2% of GDP, from 9% in 2019, public debt widened to 133% of GDP from 102% a year ago. The IMF called for Bahrain to address “large imbalances, put government debt on a firm downward path, and restore macroeconomic sustainability”. More: https://www.imf.org/en/News/Articles/2021/02/12/pr2138-bahrain-imf-staff-completes-2021-article-iv-mission-to-the-kingdom-of-bahrain
  • Exports from Bahrain increased by 25% yoy to BHD 200mn in Jan while imports declined by 9%. Trade deficit narrowed by 27% to BHD 154mn. Top export partners were Saudi Arabia, UAE and Oman, together accounting for more than 45% of total exports.
  • Stricter Covid19 containment measures will come into force from today (Feb 21) in Bahrain for 3 weeks: includes work from home policies for government entities, limitations on social gatherings, closure of gyms and sports halls as well as online schooling.
  • Egypt’s fiscal deficit declined to 4.4% in the first seven months of the current fiscal year: a primary surplus of EGP 18.1bn (USD 1.16bn) was reported during the period, with an increase of 16% in revenues alongside an increase in expenditures of 12.4%.
  • Unemployment rate in Egypt declined to2% in Q4 2020, down by 0.8% yoy and 0.1% qoq. The number of jobless citizens stood at 2.16mn in Q4, part of the overall workforce of 29.96mn persons. Male and female unemployment stood at 5.1% and 16.8% respectively in Q4 (Q3: 5.8% and 15.2%).
  • Egypt’s Taaleem Management Services Company is planning its IPO and private placement for subscription offering 8mln shares likely in Mar, reported Al Borsa News.
  • Bloomberg reported that Egypt is close to restarting its second LNG plant at the Damietta port. This will be the first shipment since 2012 and is thanks to the resolution of a long-standing dispute over supplies between the government and Union Fenosa Gas.
  • Egypt launched the first international tender for petroleum and gas exploration for 2021 in 24 areas in Suez Gulf, western desert and East and West Mediterranean.
  • Iraq plans to halve imports of refined products such as petroleum and gas oil by end-2021, with an aim to import no petrol or gas oil by end-2023.
  • Crude oil exports from Iraq rose to 3.44mn barrels in the first 14 days of Feb, reported Bloomberg, up 4.4% from Jan and the highest figure on a full-monthly basis since May. If the same pace is maintained through the rest of the month, it may exceed the self-imposed production target of 3.6mn barrels a day.
  • Reexports from UAE to Jordan increased by 19% according to preliminary figures for 2020. Trade in Covid19-related products grew by 10% and food products by 12%.
  • Inflation in Kuwait increased by 2.1% in 2020, almost double 2019’s 1.1%. Prices were driven up by food costs (+4.9%) while housing costs remained flat.
  • The Covid19 vaccination drive in Kuwait shows that 3.7 shots were administered per 100 people: however, only 18k expats were vaccinated compared to 119k Kuwaitis. The health minister stated that 850k citizens (who want to receive the vaccine) would be vaccinated within 3 months as long as supply is not disrupted.
  • Kuwait’s central bank reportedly extended its Covid19 support measures until end-Jun.
  • The Lebanese pound fell sharply on the black market last week Thurs, as the political uncertainty drags on unresolved, trading near its record low against the dollar.
  • A board member of the Association of Banks in Lebanon disclosed that most banks will raise their capital by 20% before the Feb 28 deadline; banks that may not be able to retrieve 3% of their deposits from abroad are likely to have further discussions with BDL officials.
  • Saudi Arabia will stop giving government contracts to firms that do not have their regional headquarters in the Kingdom from 2024. Regulations are expected to be drawn up this year.
  • Inflation in Saudi Arabia increased to 5.7% yoy in Jan (Dec: 5.3%), given higher food (+12.3%), communication (+13.8%) and transportation (+9.6%) costs.
  • Saudi Arabia’s PIF increased its investments in US stocks to about USD 12.8bn as of end-2020 (end-Q3 2020: USD 7.05bn) including more than USD 3bn in three gaming companies. Separately, the sovereign wealth fund plans to establish a major airline company, operating in both domestic and international routes, reported Saudi Gazette.
  • Saudi Arabia’s General Authority for SMEs set up a Small and Medium Enterprises Bank – a digital lender, which will provide all of its products and services online – to bridge the financing gap for SMEs.
  • Another digital only bank is in the offing in Saudi Arabia: Al Moammar Information Systems Company disclosed to Tadawul that it would be a founding shareholder in a new digital Shariah-compliant bank in the country, contributing SAR 25mn to the bank’s capital.
  • The Saudi energy minister warned against “complacency”, urging fellow oil producers to be cautious ahead of the OPEC+ meeting as uncertainty remains high.
  • Defence spending in the GCC is set to decline by nearly 10% to USD 6bn this year, and is likely to drop further to USD 89.4bn in 2022, according to global open-source defence intelligence agency Janes. In 2020, defense spending had increased b 5.4% to USD 100bn.

UAE Focus

  • UAE has vaccinated over 40% of its population, according to a senior official; it was also disclosed that about half the elderly residents were also vaccinated. As of 20 Feb 2021, the UAE had administered a cumulative 56.15 vaccination doses per 100 people.
  • Banks in the UAE returned around AED 14.47bn from the central bank stimulus provided since Mar 2020.
  • Abu Dhabi banks invested AED 26.1bn (USD 1bn) in debt securities in 2020, according to central bank data. This accounted for 63.7% of their total balance in investment vehicles.
  • Non-oil trade between the UAE and Africa accelerated by 10.3% yoy to USD 40.7bn in Jan-Sep 2020, stated the Minister of State for Foreign Trade ahead of a Forum launch.
  • Real estate transactions in Abu Dhabi surged by 28% to AED 74bn (USD 20.14bn) in 2020 from 19k property deals. Of this, value of mortgage deals stood at AED 44bn from 11k transactions.
  • Over 4,300 new licences for economic and commercial activities were issued in the first 15 days of Feb, according to the National Economic Register.
  • UAE is considering price caps on food items, given the soaring food prices globally amid supply chain bottlenecks. The minister of food and water security stated that caps could be placed on products like chicken and milk and would apply to both local and imported goods.
  • Dubai International Airport reported a 70% yoy decline in passenger traffic to 25.9mn last year; this includes Q1’s 17.8mn travelers. India remained the top destination country, with 4.3mn passengers, followed by UK (1.89mn), Pakistan (1.86mn) and Saudi Arabia (1.45mn). In spite of the pandemic, Dubai retained top spot globally in total number of passengers handled, ahead of Heathrow (-73% to 22.1mn).
  • As part of its 2018-23 five-year plan, UAE’s Ministry of Energy and Infrastructure is in the process of implementing 129 development projects worth approximately AED 11.8bn.
  • DMCC is home to more than 18k member companies, with 2,025 firms having joined in 2020 (given new incentives in light of Covid19); number of Chinese firms increased by 20%.
  • Sharjah’s Electricity, Water and Gas Authority (SEWA) announced a 50% discount on the deposit amount of new consumption accounts for residential and commercial entities.

Media Review
In defense of concerns over the $1.9 trillion relief plan: Blanchard
https://www.piie.com/blogs/realtime-economic-issues-watch/defense-concerns-over-19-trillion-relief-plan
Biden’s climate-friendly energy revolution
https://www.economist.com/briefing/2021/02/20/joe-bidens-climate-friendly-energy-revolution
What the future holds for world trade, according to 8 global leaders
https://www.weforum.org/agenda/2021/02/global-trade-wto-ngozi-okonjo-iweala/
“Green bubble” warnings grow: FT
https://www.ft.com/content/0a3d0af8-7092-44c3-9c98-a513a22629be
Climate graphic of the week: Polar vortex sends Texas into deep freeze
https://www.ft.com/content/dc74a4fc-9b24-4e77-a8dd-c055f5e0c884
 
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Weekly Economic Commentary – Feb 14, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
It was yet another week of record-highs across global equity markets, driven by investor exuberance on stimulus hopes while macroeconomic data remained tepid, though world shares dipped on Fri. The MSCI world equity index sustained a nine-day streak of gains, a first since Oct 2017 while shares in Tokyo reached a 30-year high before closing lower. In the region, most markets were down while Saudi Tadawul was up 3.8% from the previous week. Bitcoin surged to a record high of USD 49,000 while the dollar stumbled. Brent oil ended the week at USD 62.43 – close to its highest level since Jan 2020 while gold was up 0.7%. Other commodity prices surged: platinum touched a 6-year peak and copper lifted to an 8-year high.
Weekly % changes for last week (11-12 Feb) from 4 Feb (regional) and 5 Feb (international).

Global Developments
US/Americas:

  • Inflation in the US remained tame, rising by just 0.3% mom in Jan from Dec’s 0.4%; in yoy terms, both inflation and core inflation stood at 1.4% yoy. Food prices fell by 0.3% mom and utility prices by 0.7%.
  • The Fed’s stress test for banks will test the sector’s ability to cope with a “severely adverse” scenario, wherein unemployment rises by 4 ppts to reach nearly 11% in Q3 next year, as GDP falls and asset prices drop sharply, including a 55% fall in equity prices.
  • Initial jobless claims increased to 793k in the week ended Feb 5 from an upwardly revised 812k the prior week, with the 4-week average slowing to 823k. Continuing claims slowed to 4.545mn in the week ended Jan 29 from 4.69mn the week before.

Europe:

  • Inflation in Germany increased sharply by 1% yoy and 0.8% mom in Janrising for the first time since Jun 2020, after the temporary reduction in VAT ended in Dec and food prices increased by 2.2% (Dec: +0.5%). The harmonized index of consumer prices rose by 1.6% yoy and 1.4% mom (Dec: -0.7%).
  • German industrial production was unchanged in Dec (Nov: 1.5% mom) after posting 7 consecutive months of gains. In yoy, IP declined by 1%, following a 2.5% drop in Nov. Compared to Feb, production was 3.6% lower in seasonally and calendar-adjusted terms.
  • Exports in Germany grew by 0.1% mom in Dec (Nov: 2.3%) while imports slipped by 0.1%, causing the trade surplus to inch up to EUR 16.1bn in Dec (Nov: EUR 16bn). Overall in 2020, exports and imports slumped by 9.3% and 7.1% respectively and surplus fell for a fourth year in a row, amounting to EUR 179bn.
  • Germany’s current account surplus widened to EUR 28.2bn in Dec (EUR 21.2bn) – the largest current account surplus since Mar 2019. For the full year 2020, overall surplus narrowed to EUR 236.2bn from EUR 244.8bn in 2019.
  • UK GDP declined by 7.8% yoy in Q4 (Q3: -8.7%), clocking in the full year slump at 9.9% – the worst drop since 1709.
  • UK industrial production inched up by 0.2% mom in Dec, following a 0.3% uptick in Nov. Manufacturing grew by 0.3% mom in Dec (Nov: 1.1%).
  • UK like-for-like retail sales grew by 7.1% yoy in Jan (Dec: 4.8%) while overall retail sales dropped by 1.3% given the ongoing lockdown.

Asia Pacific:

  • Inflation in China ticked up by 1% mom in Jan (Dec: 0.7%), but in yoy terms, inflation fell by 0.3%; food prices increased by 1.6% yoy in Jan, adding about 0.3 ppts to the rise in CPI. In contrast, producer price index grew by 0.3% yoy in Jan (Dec: -0.4%), rising for the first time in a year, on rising input prices and as domestic demand improved.
  • Money supply (M2) expanded by 9.4% yoy in Jan (Dec: 10.1%). New loans jumped to new high of CNY 3.58trn in Jan (Dec: CNY 1.26trn), given seasonal demand. Outstanding yuan loans grew by 12.7% yoy in Jan (Dec: 12.8%). Outstanding total social financing slowed to a 6-month low of 13% yoy in Jan (Dec: 13.3%).
  • FDI into China grew by 4.6% yoy to CNY 91.61bn (USD 14.2bn) in Jan. Separately, foreign reserves declined to CNY 3.211trn in Jan (Dec: USD 3.217trn).
  • Current account surplus in Japan narrowed to JPY 1.166trn in Dec (Nov: JPY 1.878trn), remaining in the black for the 4th consecutive month, but shrinking from a year ago due to the travel numbers. Trade surplus increased to JPY 965.1bn (Nov: JPY 616.1bn) – a 13-fold increase from a year ago.
  • Japan’s machine tool orders grew by 9.7% yoy to JPY 88.6bn in Jan (Dec: 9.9%), with orders from abroad rising by 21.6% to JPY 62.2bn while domestic orders dropped by 10.9% to JPY 26.3bn.
  • Industrial output in India grew by 1% yoy in Dec, with electricity sector output and manufacturing grew by 5.1% and 1.6% respectively while mining contracted by 4.8%. Cumulative output in Apr-Dec slipped by 13.5% from 0.3% during the same period a year ago.

Bottom line: A fresh break of Covid19 cases put the brakes on Chinese New Year celebrations in China again this year: travel was restricted, and family gatherings limited. The Ministry of Transportation data showed a 70% drop in the number of passenger trips across the country in the two weeks leading up to New Year vs the same period in 2019. But, even though global vaccinations are picking up the pace – more than 162.8mn vaccine doses have been administered worldwide, equal to 2.1 doses for every 100 people – many developing nations are yet to receive even the first set of vaccines. A funding gap of close to USD 27bn for Covax is a major worry as it could derail proportional and equity in distribution across the globe. Meanwhile, the head of the Bundesbank issued a warning that rising inflation could result in policy tightening – a taper tantrum could play havoc as most countries are still below pre-Covid19 levels in most economic indicators. Last but not the least IEA expects a slow recovery, decreasing its forecast for global demand by 200k barrels a day.
Regional Developments

  • Bahrain’s fiscal results for 2020 show a 27% drop in revenues compared to the budget estimate, while spending ticked up by 0.3% to BHD 3.76bn. Total fiscal deficit stood at BHD 1.6bn (vs. the budget estimate of BHD 807mn).
  • MPs in Bahrain approved a proposal to continue wage support to Covid19 affected businesses from Feb to Apr: under this plan, 50% wage support will be provided to Bahraini employees. This follows a move earlier to pay, from the Unemployment Fund, 60% of their wages or up to BHD 1000 for a year to Bahrainis that lost their jobs.
  • Egypt’s annual inflation slowed to 4.8% in Jan (Dec: 6.8%), on lower food prices (vegetable prices were down by 20.4%), while core inflation stood at 4.3% (vs Dec’s 5.4%).
  • Food exports to China from Egypt accelerated by 21% yoy to USD 36mn in 2020, with sugar cane, sugar beet bulb and frozen strawberries constituting close to 98% of the total.
  • Lenders to SMEs in Egypt need to follow new risk assessment and capital adequacy protocols: lenders’ capital adequacy ratio should be 12% or higher, loan term has to be 5 years or more and the financial institution must hold no less than 25% in the lending entities.
  • The Central bank of Egypt’s new initiative cancels all fees (till Jun 2021) that private sector MSMEs need to bear to activate e-collection services.
  • Egypt, which has received 100k doses of vaccine, is expected to receive 300k doses of the Chinese vaccines soon, disclosed the Egyptian President’s Health Affairs Advisor.
  • The IMF Article IV report on Iraq estimated that the country will recover in 2021 and 2022, growing by 1.2% and 3.9% respectively, after shrinking by 11% in 2020. The report also forecast government debt to peak in 2023 and decline gradually after that. More: https://www.imf.org/en/Publications/CR/Issues/2021/02/10/Iraq-2020-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-Executive-50078
  • Kuwait’s pension fund Public Institution for Social Security reported a 44% qoq and 57.5% yoy surge in profits to USD 6.8bn in Oct-Dec 2020. While net profits stood at USD 18.9 during Apr-Dec 2020, total assets of the investment portfolio grew by 19.4% compared with the total at the end of the previous financial year.
  • Oman’s non-oil GDP is forecast to grow by 1.5% this year, according to the IMF, and this could potentially improve to 4% by 2026 if fiscal measures are successfully carried out. Given the low oil exports, current account deficit is estimated to have widened to 10% of GDP in 2020 from just 5.4% of GDP in 2019. The Article IV report also disclosed that the revenue measures within Oman’s Medium-Term Fiscal Balance Plan include introduction of VAT in 2021 as well as “a personal income tax on high-income earners” which is “being developed”. (More: https://www.imf.org/en/News/Articles/2021/02/11/mcs021221oman-staff-concluding-statement-of-an-imf-staff-visit)
  • Oman has imposed a mandatory quarantine for those arriving into the country, at their own expense. Omani citizens have been given a grace period of 10 days until Feb 21st by which time they must enter Oman.
  • Trade between Saudi Arabia and Qatar will resume through the Abu Samra border crossing from Feb 14th; Saudi Customs had resumed operations at the Salwa border crossing with Qatar on Jan 9th.
  • Saudi Arabia grew by 2.8% qoq in Q4, following the 1.8% uptick in Q3, according to the preliminary estimates released by the GaStat. For the full year, the economy shrank by 4.1% yoy compared to 0.3% in 2019 and 2.4% the year before.
  • Saudi Arabia will launch a new electronic instant payments system: after trials are successfully completed, the scheme would be activated with participating banks on Feb 21, reported Asharq Business.
  • Foreign investors on Saudi Tadawul continued to record net buys during the week ended on 4 Feb. Foreign and GCC investors’ purchases netted SAR 157.61mn and SAR 16.43mn.
  • Hotel occupancy rate in Riyadh’s hotels stood at 56.2% in Jan 2021, down 23.8% yoy while the revenue per available room plunged by 31.3% to USD 87.2 (or SAR 327.56), according to STR’s preliminary data.
  • According to a Moody’s report, Saudi Arabia and Oman sovereign wealth funds are most exposed to the increased financial drawdowns across the GCC in light of lower oil revenues and rising fiscal deficits. Kuwait was highlighted in terms of increasing liquidity risks in the absence of a debt law.
  • Oil exporters will face up to USD 13trn in revenue loss by 2020, as decarbonization efforts continue globally, according to Carbon Tracker. Nigeria will be the most affected in Africa. More: https://carbontracker.org/reports/petrostates-energy-transition-report/full-report/
  • GCC nations ranked high in the annual Agility Emerging Markets Logistics Index, with UAE (4), Saudi Arabia (6), Qatar (9) and Bahrain (15) ranking among the top 15 globally. More: https://logisticsinsights.agility.com/emerging-markets-logistics-index/rankings/

UAE Focus

  • Dubai PMI inched down to 50.6 in Jan (Dec: 51), with slight declines in output and new orders while employment expanded after almost a year. The rise in employment level was the quickest for 14 months. Among sectors, wholesale and retail was the best-performer.
  • UAE central bank assets grew by 6% yoy to AED 470.5bn by end-Dec 2020.
  • Abu Dhabi Securities Exchange (ADX) reduced its fees on all trading activities: starting this week, fees of all transactions that occur on ADX will be reduced to 0.175% from 0.225%. Additionally, brokerage firms that generate AED 20mn worth of trading commission will be exempt from paying any trading commission for the year in which the threshold is met.
  • DP World announced that it had handled 71.2mn twenty-foot equivalent units (TEUs) in 2020, with gross volumes flat yoy and up 0.2% on a like-for-like basis.
  • Rystad Energy reported that UAE’s renewable energy capacity is set to increase four-fold to about 9 gigawatts (GW) by the end of 2025 (from 2.3 GW at end-2020).

Media Review
How well will vaccines work?
https://www.economist.com/leaders/2021/02/13/how-well-will-vaccines-work
New-Model Central Banks
https://www.project-syndicate.org/commentary/central-banks-have-tools-for-climate-change-and-inequality-by-barry-eichengreen-2021-02
Mario Draghi, political animal
https://www.politico.eu/article/mario-draghi-political-animal/
Nouriel Roubini: bitcoin is not a hedge against tail risk
https://www.ft.com/content/9be5ad05-b17a-4449-807b-5dbcb5ef8170
 
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Weekly Insights 11 Feb 2021: Will Accelerated Vaccine Distribution Catapult UAE to Faster Economic Growth?

Download a PDF copy of this week’s insight piece here.
 
The UAE has seen a surge in Covid19 cases recently, touching a high of 3,977 new cases on Feb 3rd from just under 1,000 new cases on 27th of Dec and settling around a 7-day average of 331.55 new confirmed cases per million persons (latest available). As the cases ticked up, the UAE has re-introduced more stringent restrictions and an active crackdown on non-compliance. Mobility indicators indicate a strong negative relation with the Stringency Index: the tighter the government-imposed restrictions, the stronger is the observed reduction in mobility (Chart 1).
The Vaccination Drive
On the other hand, the UAE is also ramping up its vaccination drive since mid-Dec and is currently a global leader (second to Israel) having administered 45.77 vaccine doses per 100 people (as of 9th Feb, Chart 2). With 4 vaccines being expended currently – Sinopharm, Pfizer-BioNTech, AstraZeneca and Sputnik V – the government looks on track to vaccinate more than 50% of the population by end of Q1 of this year.
Is this sufficient to support economic recovery?
Given the paucity of monthly indicators/ data from official sources, we use the PMI numbers released by IHS Markit to gauge the level of business activity in the country and in the emirate of Dubai (Chart 3). Both PMIs have stayed quite close to the 50-mark (neutral) in Dec-Jan after two consecutive months of being in the contractionary territory. Job prospects seem to be improving in both UAE and Dubai, with increases in Jan (after nearly a year). Dubai’s tourism sector, after an uptick in Dec, has however returned to sub-50 levels – not unsurprising considering the outflow of foreign tourists after the New Year holidays (Dubai-London Heathrow travel corridor was the busiest international air route in the world in Jan, with more than 190k seats scheduled, according to OAG) and potential decline in domestic and international tourists as border/ quarantine restrictions were reinstated.

With the vaccination drive, it is evident that as the nation inches closer to herd immunity levels, domestic activity as well as business and consumer levels will gradually build up to pre-pandemic levels. However, domestic activity will not be sufficient to sustain long-term economic growth. It is pertinent to note that the UAE has in the past months passed a spate of investor and business friendly structural reforms including to attract skilled professionals to take up residence in the country. While the success of these reforms will not be seen immediately, steady and effective implementation is likely to support economic growth in the medium and longer-term.
How can the UAE step up its recovery? The UAE as a vaccination hub

It is in the best interests of the country, that is hosting the Expo later this year, to see high levels of vaccinated populations within the wider region (and globally). The longer countries remain unvaccinated, the greater the risk of the emergence of newer variants that could potentially result in another cycle of infections and lockdowns/ closures.
Two potential ways to support this:

  1. Increase the production of vaccines: a recent paper estimates that “increasing the total supply of vaccine capacity available in Jan 2021 from 2bn to 3bn courses per year generated USD 1.75trn in social value, while additional firm revenue was closer to USD 30bn”, far outweighing the investments required to do so. Vaccination is a public social good with multiple private benefits, just as Covid is a global public bad. So, the UAE’s plans to manufacture Sinopharm Covid19 vaccine later this year would act as a win-win: it would cater to both domestic and global demand (especially if the vaccine is to be administered on an annual basis) and boost the economy.
  2. The manufactured vaccines need to be distributed faster to reach those in need. In this backdrop, the UAE can put its position as a global logistics and transport hub to good use: vaccine delivery to smaller nations in the region as well as using its vast cargo network to transport vaccines across the globe. Dubai, with its Vaccine Logistics Alliance, will support WHO’s effort to deliver 2bn doses of vaccines this year; this is in addition to Abu Dhabi’s Hope Consortium which was set up for vaccine storage and distribution. This could be supported by vaccine aid – either in its contribution to global alliances like Covax (which plans to deliver 2.3bn doses this year) or via the free delivery of vaccines to smaller low-income nations (e.g. India’s free vaccines to Nepal, Bhutan and Bangladesh).

A global recovery is essential to the UAE’s overall growth prospects: as a country that relies on trade and tourism (together accounting for close to 15% of UAE’s GDP in 2019 and closer to 30% of Dubai’s GDP), the impact of Covid19 has been drastic (evident from UAE and Dubai GDP estimates). The oil sector, which constitutes 30% of UAE’s GDP, has been bogged down by the OPEC+ production cuts, alongside the subdued demand for oil. Even as the country promotes clean energy and energy efficient policies, signs of a recovery in oil demand (declining oil inventories thanks to turnaround in consumption in China and India) and higher oil prices (around USD 60 now) will be beneficial to trade and growth: UAE’s oil and related product exports are close to 40% of total exports and the main export destinations include India, China and Japan (which together garner more than 25% share of overall exports). A recovery in tourism is likely to take longer in comparison: virus containment, travel corridors, “vaccine passports” and “contactless” airport experiences seem to be some of the ways forward for future travel.
Lastly, no outlook is complete without risks: long-term diversification away from oil is a necessity, as is decarbonization efforts, and debt sustainability policies (especially in the context of another potential taper tantrum / faster-than-expected increase in interest rates, leading to tighter financing conditions).
 
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Weekly Economic Commentary – Feb 7, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
After the retail trading havoc subsided, major equity markets across the globe had a good week: Nasdaq and S&P 500 hit new highs, as expectations of stimulus deals supported market sentiment while the published Q4 earnings showed US firms performing better compared to their European counterparts. Regional markets were mostly down, with many markets introducing restrictions to dampen the rise in Covid19 cases. Among currencies, the dollar hit a near-three-month high vis-à-vis the yen during the week, but a 2-month low against the euro. Oil advanced to hit the highest level in a year, inching closer to USD 60, after OPEC+ extended production cuts, falling inventories and expectations of vaccination drives leading to faster economic recovery; gold price fell.
Weekly % changes for last week (4-5 Feb) from 28 Jan (regional) and 29 Jan (international).

Global Developments
US/Americas:

  • Non-farm payrolls added a lower-than-expected 49k in Jan, following downward revisions to its Dec (by 87k to -227k) and Nov (72k to 264k) readings. Unemployment rate unexpectedly declined to 6.3% in Jan (Dec: 6.7%) – the first decline in 2 months – while the labour force participation rate ticked lower. Earlier in the week, ADP employment increased by 174k in Jan, thanks to a rebound in services providing sector (+156k) and following Dec’s 74k decline.
  • Factory orders inched up by 1.1% mom in Dec (Nov: 1.3%), rising for the 8th consecutive month, supported by strong demand for machinery, electrical equipment, appliances and components. orders for non-defense capital goods excluding aircraft increased by 0.7% (a tad higher than the initial estimate of 0.6%).
  • Trade deficit in the US soared to USD 679bn in 2020 – the highest since 2008 – up 17.7% yoy, with exports declining by 15.7% to the lowest level since 2010 while imports dropped by 9.5% to a 4-year low. Goods trade deficit alone widened to USD 916bn, a record high.
  • The final reading of the US Markit manufacturing PMI stood at 59.2 in Jan (preliminary reading of 59.1 and Dec’s 57.1), thanks to accelerated expansions in output and new orders – this was the highest reading since data collection began in 2007. In contrast, the ISM manufacturing PMI slipped to 58.7 in Jan (Dec: 60.5), with the employment sub-index rising to 52.6 from 51.7 the month before while forward-looking new orders sub-index fell to 61.1 from 67.5 in Dec. Services PMI readings improved in both Markit (58.3 in Jan from Dec’s 57.5) and ISM (58.7 in Jan from Dec’s 57.7) reports.
  • Initial jobless claims improved to 779k in the week ended Jan 29 from a downwardly revised 812k the prior week, with the 4-week average slowing to 848.25k. Continuing claims slowed to 4.592mn in the week ended Jan 22 from 4.785mn the week before.

Europe:

  • Eurozone GDP shrank by 0.7% qoq and by 5.1% yoy in Q4 (Q3: +12.5% qoq and -4.3% yoy), taking the 2020 GDP down by 6.8%. The contraction was milder than the dip in Q2, which saw the initial period of lockdown and restrictions. GDP across the block posted post-war record falls: it fell 5% in Germany, 8.3% in France, 8.8% in Italy and 11% in Spain.
  • German retail sales fell by 9.6% mom in Dec (Nov: 1.1%), the steepest monthly drop since records began in 1994, as tighter restrictions and lockdowns curbed consumer spending. For the full year, retail sales grew by 3.9% yoy in real terms with online retailers benefitting most.
  • German Markit manufacturing PMI stood at 57.1 in Jan, from Dec’s 3-year high of 58.3; more concerning was reports of delivery delays and logistical issues and an associated acceleration in input price inflation. In the Eurozone, the index was 54.8 in Jan (Dec: 55.2), with gains in new orders and output. Germany and Netherlands, with strong export bases, saw the largest expansions but there was a worsening of supplier delivery times.
  • German composite PMI declined to a 7-month low of 50.8 in Jan (Dec: 52), as services inched down to 46.7 from 47 the month before. Expectations towards output in 12-month’s time reached the highest since Feb 2018. The eurozone PMI composite slipped to 47.8 in Jan (Dec: 49.1) as services PMI fell to 45.4 (46.4).
  • Factory orders in Germany plunged by 1.9% mom in Dec (Nov: 2.7%) – the first decline in new orders since a record slump in Apr – as both domestic and foreign orders declined by 0.9% and 2.6% respectively.
  • Core CPI in the eurozone increased to a 5-year high of 1.4% yoy in Jan (Dec: 0.2%) while inflation inched up to an 11-month high of 0.9% from a 0.3% drop in Dec – the largest monthly rise ever recorded. Factors like supply chain disruptions and Germany’s temporary VAT reductions have distorted inflation readings during the year.
  • Retail sales in the eurozone grew bv 2% mom and 0.6% yoy in Dec (Nov: -5.7% mom and -2.2% yoy). Some countries re-opened physical stores for part of Dec, while others were closed: Sales in Germany and Netherlands were down by 9.6% and 10.9% while in France, Ireland and Belgium, sales rebounded by 22.3%, 11.4% and 15.9% respectively.
  • Unemployment rate in the eurozone remained unchanged at 8.3% in Dec; youth unemployment rate was 18.5% (Nov: 18.1%). Compared to a year ago, the number of unemployed persons rose by 1.5mn in the eurozone.
  • At the latest Bank of England meeting, the main lending rate was left unchanged at 0.1% while the target stock of asset purchases was maintained at GBP 895bn (USD 1.2trn). The apex bank also downgraded its economic growth forecast for this year to 5%, from a previous projection of 7.25% growth in its Nov Monetary Policy Report.
  • In the UK, Markit manufacturing PMI was revised up to 54.1 in Jan from a preliminary reading of 52.9, but it remained much lower than Dec’s 57.5; a silver lining was the rise in employment for the first time in a year. Services PMI declined at its fastest pace since May, clocking in a reading of 39.5 in Jan (from a preliminary estimate of 38.8 and Dec’s 49.4).

Asia Pacific:

  • China non-manufacturing PMI slowed to a 10-month low of 52.4 in Jan 2021 (Dec: 55.7), with new business falling below the neutral 50-mark (48.7 in Jan from Dec’s 51.9) while export orders and employment also declined (48 and 47.8 respectively). Business sentiment deteriorated to an eleven-month low (55.1 vs 60.6).
  • China’s official NBS manufacturing PMI eased to 51.3 in Jan (Dec: 51.9) – the weakest growth in factory activity since Aug. New orders (52.3 vs 53.6), export sales (50.2 vs 51.3), and buying levels (52.0 vs 53.2) all expanded at the softest pace since Aug.
  • China Caixin manufacturing PMI clocked in a 7-month low of 51.5 in Jan (Dec: 53), with both output and new orders rising at softer paces while export sales shrank for the first time in 6 months. Caixin services PMI fell to 52 from 56.3 in Dec – the slowest growth in 9 months.
  • Leading economic index in Japan slowed to 94.9 in Dec (Nov: 96.1) – the first deterioration in 7 months, reflecting weaker consumer confidence amid new Covid19 cases.
  • Japan’s manufacturing PMI nudged up to 49.8 in Jan from a preliminary estimate of 49.7 (Dec: 50), the highest reading since May 2019. New orders grew for first time in over two years while employment fell below-50.
  • Overall household spending in Japan fell by 0.6% yoy in Dec (Nov: 1.1%). For the full year, average monthly spending fell a real 5.3% yoy – the sharpest on record – to an average JPY 277,926.
  • The Reserve Bank of India kept policy rates unchanged: the repo rate stands at 4% and the reverse repo rate at 3.35%. The cash reserve ratio (CRR) will be scaled back to 4% in 2 phases: effective March 27, it will be raised to 3.5% from 3% now, and from May 22, the CRR will be normalised back to 4%. It forecast real GDP growth at 10.5% in 2021-22.
  • Markit manufacturing PMI in India increased to a 3-month high of 57.7 in Jan (Dec: 56.4), with output accelerating to the fastest pace since Oct while employment fell further.
  • South Korea’s Markit manufacturing PMI improved to 53.2 in Jan (Dec: 52.9), the highest since Feb 2011, with output rising the most since Feb 2011 while new orders and export orders expanding for 4 straight months. Additionally, confidence strengthened to the highest level since Apr 2014.
  • Singapore PMI inched up to 50.7 in Jan – the highest since Mar 2019 – from 50.5 in Dec.
  • Retail sales in Singapore fell by 0.9% mom and 3.6% yoy in Dec.

Bottom line: A spate of global PMIs were released last week: the main sticking point was stretched supply chains/ logistics delays leading to longer input delivery times, thereby building up price pressures. Global food prices have also hit their highest in 7 years, driven by higher grain prices. The situation is taking a turn for the worse, especially in highly import dependent nations: case in point is Lebanon where a family is estimated to spend about 11% of monthly (minimum) wages to have a pack of bread daily. Separately, in spite of vaccine delays and related logistical issues, the total number of vaccination doses administered across the globe (127.8mn) surpassed the overall number of confirmed Covid19 cases (105.8mn). At this pace of vaccination, Bloomberg analysis estimates that it would take 7 years for life to return to normal (i.e. vaccinating 75% of their populations)!
Regional Developments

  • Bahrain-origin exports grew by 4% yoy to BHD 2.387bn (USD 6.3bn) in 2020, with Saudi Arabia, UAE and the US its top importers. The value of re-exports fell by 15% to BHD 676mn in 2020, while imports fell by 4%, thereby narrowing trade deficit by 8% to BHD 1.735bn.
  • Egypt’s headline PMI remained below-50 in Jan, though inching upto to 48.7 from Dec’s 48.2; output (48.6 from 46.9), new orders (48 from 46.9) and employment (48.7 from 47.6) sub-indices rose month-on-month though remaining contractionary. Business outlook for the year ahead improved to a 6-month high, with ~40% of businesses expecting to expand output.
  • The central bank of Egypt left interest rates unchanged at this year’s initial meeting: the overnight deposit rate, overnight lending rate, and rate of the main operation remained at 8.25%, 9.25%, and 8.75% respectively. The bank forecast preliminary real GDP growth of 0.3% in Q3 2020 from the 1.7% decline in Q2 2020, while also stating that demand-side leading indicators were showing signs of recovery in Q4.
  • Money supply in Egypt increased by 19.7% yoy to EGP 4.92trn (USD 311.46bn) in Dec.
  • Net foreign assets in Egypt’s banking sector grew by 8.4% mom to EGP 270.,692bn (USD 1.33bn) in Dec 2020, thanks to a 3.11% mom rise in the volume of foreign assets.
  • Current account deficit in Egypt doubled to USD 2.8bn in Jul-Sep 2020 from a year ago, as tourism receipts plunged to USD 801mn during the quarter from USD 4.2bn in the same period a year ago. Net FDI plummeted by 31% to USD 1.6bn while remittances grew by 19.6% to USD 8bn. Overall balance of payments moved to a deficit of USD 69.2mn in the quarter from a surplus USD 227mn a year ago.
  • Egypt’s central bank announced that it would auction USD 980mn of one-year dollar-denominated treasury bills on Feb 8th.
  • Hotel occupancy rates in Egypt is expected to rise between 43% to 62% this year, according to Colliers, thanks to high 80%+ hikes in occupancy rates in tourism hotspots.
  • An IMF report warned that Iraq was “substantially exposed to fiscal risks related to guarantees issued by the State”. The government had backstopped USD 7bn of foreign currency payments and debt (or 12% of GDP) as of Jun 2017, comprising USD 19.4bn for service payments to independent power producers by state-owned electricity companies and USD 2.3bn of debt. The Fund recommended that the government should develop a comprehensive guarantees registry, and develop capacity to understand the risks associated with guaranteeing certain transactions.
  • Iraq’s oil exports increased to 2.868mn barrels per day (bpd) in Jan from 2.846mn bpd in Dec, according to the oil ministry. Jan’s oil revenues stood at USD 4.74bn with an average price per barrel of USD 53.294.
  • Jordan plans to become the energy exchange hub for the region: its renewable energy projects have enabled it to reduce import dependence and generate surplus energy for the first time. The country is in the process of strengthening links with its neighbouring nations to export excess electricity.
  • The IMF called for acceleration of reforms in Kuwait and a gradual reduction in its dependence on oil amid high levels of buffers. Separately, Fitch affirmed downgraded Kuwait’s outlook to “negative” from “stable” while affirming its long-term rating at “AA”.
  • Kuwait invited bids from contractors to build 11 separate oil pipelines at various locations at a cost of around KWD 205mn (USD 675mn).
  • With the faster spread of Covid19 cases, Kuwait is imposing a 2-week ban on the entry of non-Kuwaitis into the country from today (Feb 7); furthermore, all commercial facilities (excluding pharmacies, medical and food supplying outlets) will be closed between 8pm to 5am for one month from Feb 7th.
  • PMI in Lebanon fell to 41 in Jan (Dec: 43.2), as output continued to contract, and new orders fell sharply amid subdued demand conditions. Firms also were severely pessimistic concerning the 12-month outlook.
  • Banks in Lebanon are likely to request the central bank to extend the Feb 28 deadline to comply with BDL’s request that lenders to increase their capital base and repatriate part of funds transferred abroad, reported The Daily Star.
  • Lebanon’s national coronavirus committee is discussing the involvement of the private sector in importing Covid19 vaccines including Russia’s Sputnik V and China’s Sinopharm vaccine as well as India’s under-development vaccine.
  • Oman’s new fee structure to hire expats for specified senior or top-level temporary posts is set at OMR 336 for 4 months, or OMR 502 or OMR 752 for 6 and 9 months respectively while a recruitment license (for salaries of OMR 4k+) is set to cost OMR 2001.
  • Qatar’s PMI expanded to 53.9 in Jan (Dec: 51.8) – the fourth-highest ever reading on record – thanks to upticks in new orders and output. Sector-wise, construction was the strongest (55.0), followed by manufacturing (54.8) and wholesale and retail (53).
  • Qatar has re-imposed restrictions, given the new wave of Covid19 cases, on businesses (to operate at 50% capacity), nurseries (operate at 30% capacity) and a limitation of maximum 15 persons for outdoor gatherings.
  • Saudi Arabia’s PMI inched up to 57.1 in Jan (Dec: 57) – the highest reading since Nov 2019 – thanks to a marked improvement in output as well a rise in new orders; foreign orders rose to the “greatest degree in almost 4 years”. However, employment fell for the 10th time in 11 months.
  • About SAR 300.2mn (USD 80mn) was disbursed to around 133k Saudi citizens working in the private sector companies as part of the wage support scheme. Workers earning between SAR 3200-15k were eligible for support.
  • Bank investments in Saudi Arabia’s bonds increased by 14.69% yoy to SAR 440.02bn in 2020, as per data from the central bank.
  • It was disclosed that 24 international firms had officially signed agreements to establish regional offices in Riyadh, including PepsiCo, Schlumberger, Deloitte and PWC among others. This is part of the Riyadh government’s aim to create 35k new jobs for its citizens and boost GDP by up to SAR 70bn (USD 18.67bn) by 2030.
  • Consumer loans in Saudi Arabia grew by 9.5% yoy to SAR 365.04bn in 2020, of which property renovation loans stood at SAR 23.85bn; credit card loans fell 3.8% to SAR 18.33bn.
  • Expat remittances from Saudi Arabia surged by 19.3% yoy to SAR 149.69bn (USD 39.92bn) in 2020: this is the highest since 2016.
  • The localisation rate in Saudi Arabias private sector firms increased to 21.81% in Q4 2020, compared with 20.9% in Q4 2019.
  • Saudi Arabia imposed restrictions given an uptick in Covid19 cases: suspension of recreational events (cinemas, indoor entertainments) as well as closure of gyms and sports centres for 10 days.
  • The UAE and Bahrain are 2nd and 4th highest respectively in terms of share of people who have received at least one dose of the Covid19 vaccine – at 36.39% and 10.55% respectively (as of Feb 4 and 5 respectively).
  • The latest edition of the Corruption Perceptions Index shows dismal readings for the MENA region: the worst performers were Libya (score of 17), Yemen (15) and Syria (14) while on the other end of the spectrum were UAE and Qatar (scores of 71 and 63 respectively); among those that performed worse in the latest report was Lebanon, which scored just 25, dropping five points since 2012. More: https://www.transparency.org/en/news/cpi-2020-middle-east-north-africa

UAE Focus

  • UAE’s PMI was unchanged at 51.2 in Jan, thanks to an “increase in client sales and a resumption of construction projects”. While employment moved above 50 for the first time in over a year, the headline index remained lower than the index average of 54.2.
  • Inflation in Abu Dhabi declined by 2.6% yoy in Nov, clocking in a negative reading for the 18th consecutive month. During Jan-Nov 2020, inflation fell by 2.4%, with prices of housing and utilities down by 3.1%.
  • The Abu Dhabi Pension Fund in a USD 900mn transaction – is taking a 31% share in the Abu Dhabi Energy Real Estate Company (which was formed after Adnoc signed an agreement with Apollo Global Management to lease some of its properties on a long-term basis).
  • The UAE Centre for the Fourth Industrial Revolution (C4IR UAE) agreed with the Dubai Financial Services Authority (DFSA) and the Dubai International Financial Centre (DIFC) to provide a controlled regulatory forum to test the tokenisation of digital assets.
  • According to the UAE National Economic Register, there were 3899 branches of GCC- and foreign business operating in the UAE as of end-Jan: of this, most are based in Abu Dhabi and Dubai. (Detailed breakdowns can be accessed via: https://cbls.economy.gov.ae/ReportsMisc.aspx?RPT=4267)
  • The White House, under President Biden, disclosed that the US will maintain a tariff of 10% on aluminium imports from the UAE.
  • The UAE is ranked first in the region, and fourth globally in the Global Entrepreneurship Index 2020 created by the Global Entrepreneurship Monitor.

Media Review
The Perils of an Uneven Global Recovery
https://www.project-syndicate.org/commentary/covid19-uneven-global-recovery-emerging-market-risks-by-kenneth-rogoff-2021-02
The pandemic is not under control anywhere unless it is controlled everywhere
https://www.piie.com/blogs/realtime-economic-issues-watch/pandemic-not-under-control-anywhere-unless-it-controlled
How SoftBank’s $100bn Vision Fund bounced back
https://www.ft.com/content/f78abc14-abd0-427d-9e44-e5e593104432
What the favourite stocks of r/wallstreetbets have in common
https://www.economist.com/graphic-detail/2021/02/06/what-the-favourite-stocks-of-r/wallstreetbets-have-in-common
Cooperation Critical to Reducing Divergent Paths to Recovery in Middle East and Central Asia: IMF
https://blogs.imf.org/2021/02/04/cooperation-critical-to-reducing-divergent-paths-to-recovery-in-middle-east-and-central-asia/
https://www.thenationalnews.com/business/economy/technology-and-green-infrastructure-investment-can-boost-mena-recovery-imf-says-1.1159432
 
 
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Weekly Insights 4 Feb 2021: A Covid19 Balancing Act – Cases, Vaccinations & Economic Activity

Download a PDF copy of this week’s insight piece here.
 
1. Covid19 cases rise in the Middle East & so do Restrictions

  • Covid19 cases in MENA crossed 5 million; the GCC is home to 24% of confirmed cases
  • The uptick in cases has seen many countries re-introduce border controls (e.g. Oman, Lebanon), flight restrictions (e.g. Saudi Arabia) as well as capacity/ recreational activity restrictions (e.g. UAE/ Dubai)

Source: John Hopkins University (https://coronavirus.jhu.edu/map.html), Oxford COVID-19 Government Response Tracker from Blavatnik School of Government – Our World in Data (https://ourworldindata.org/grapher/covid-stringency-index); Charts created by Nasser Saidi & Associates.

2. Vaccination drives are picking up

  • Focus has shifted to vaccination drives, with almost all GCC nations receiving a combination of supplies including Pfizer, Moderna, AstraZeneca, Sinopharm and Sputnik V vaccines
  • UAE has administered a total 34.8 vaccination doses per 100 people, behind only Israel (58.8) globally
  • In terms of the share of fully vaccinated population (i.e. both doses), Israel tops at 21.43% followed by UAE at 2.53% and US (1.81%)
  • UAE’s hub status supports distribution: Dubai’s Vaccines Logistics Alliance & Abu Dhabi’s Hope Consortium to deliver vaccine doses across the globe
  • A potential manufacturing hub? UAE is building up its capacity to manufacture the Covid19 vaccine in the future

3. Businesses ride the wave of vaccine optimism in Saudi Arabia & UAE

  • Jan 2021 PMI data showed Saudi ticking up to a 15-month high while in the UAE, though the headline number remain unchanged, jobs moved into positive territory for the first time in over a year
  • Lebanon’s numbers remain dismal with the complete lockdown adding to the existing socio, economic and political woes


 

Source: Refinitiv Datastream, Nasser Saidi & Associates.

4. Indicators of economic activity in Saudi Arabia

  • Proxy indicators for consumer spending – ATM withdrawals and PoS transactions – have shown a divergence during the pandemic year
  • For the full year 2020, PoS transactions rose by 24% yoy while ATM cash withdrawals were negative, declining by 15% – pointing to the rise in digital/ contactless/ e-payments in a Covid19 backdrop
  • Overall loans picked up in the country, with loans to the private sector for the full year rising at 12.8% versus a 17.8% uptick in loans to the public sector


 

Source: Saudi Central Bank (SAMA), Refinitiv Eikon, Nasser Saidi & Associates.

5. Indicators of economic activity in the UAE

  • More than 2/3-rds of UAE banks’ loans went to the private sector (69.4% as of Nov 2020 vs. 76% in end-2018 & 72% in end-2019), while public sector & government together account for ~30% of all loans in Nov 2020 (vs. 25% a year ago)
  • However, the overall pace of lending to GREs (+23.2% yoy during Apr-Nov 2020) and the government (+18.5%) outpaced the drop in lending to the private sector (-1.6%)
  • Bank credit by business activity showed an interesting pattern: as of end-Sep 2020, loans towards agriculture surged by 18.6% qoq, following a 18% uptick in end-Jun, underscoring the recent focus on food security and evidence of investments into vertical farming and agritech companies (its share of total loans is just 0.13%). Loans to the transport & logistics have shown a strong upsurge, rising by 52.1% yoy as of end-Sep.
  • Personal loans for consumption (accounting for 20.6% of total loans) rose by 1.3% yoy at end-Sep (Jun: 0.7%).


 

Source: UAE Central Bank, Refinitiv Eikon, Nasser Saidi & Associates.

 
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Weekly Economic Commentary – Jan 31, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
Equity markets across the globe felt the reverberations of the battle between hedge funds and speculative buying from Reddit retail investors over GameStop, as volatility ticked up. Wall Street had the worst week since Oct, while Stoxx and FTSE closed 3.1% and 4.3% lower. Asian markets were affected as well, with day-trading also affecting the Malaysian stock market. Meanwhile, as Covid19 cases surpassed 100mn cases globally, and faced with delivery shortfalls, the EU announced export controls on vaccines produced within the bloc, which could derail global recovery. Regional markets were mostly down, tracking global market patterns. The dollar rose to a seven-week high against the yen while overnight offshore yuan borrowing rates hit their highest level since June 2017. Oil prices held steady in the last week and come Feb-Mar, Saudi will cut output by 1mn barrels per day. Gold prices fell and remains on track for the worst Jan since 2011.
Weekly % changes for last week (28-29 Jan) from 21 Jan (regional) and 22 Jan (international).

Global Developments
US/Americas:

  • The Fed, after keeping policy rates unchanged and making no change to its monthly bond purchases, pointed out in its statement that “the path of the economy will depend significantly on the course of the virus, including progress on vaccinations”.
  • GDP in the US increased at an annualized rate of just 4% in Q4 (following Q3’s 33.4% surge): making this the worst decline since 1946. Personal consumption in Q4 rose at an only 2.5% annualized rate (vs a record 41% rate in Q3) while core PCE rose by 1.4% (Q3: 3.4%).
  • Personal incomes in the US climbed by 0.6% in Dec (Nov: -1.3%), data also showing the largest annual increase in disposable personal income since 1984. Personal spending dipped by 0.2% in Dec (Nov: -0.7%), thereby raising personal saving as a percentage of disposable income to 13.7% in Dec (Nov:9%).
  • Richmond Fed Manufacturing Index slowed to 14 in Jan (Dec: 19), with manufacturers reporting lengthening vendor lead times – this index rose to 39, its highest reading since Jan 1996.
  • Chicago PMI jumped up to 63.8 in Jan (Dec: 58.7), the strongest expansion since Jul 2018, thanks to large monthly gains in production and new orders.
  • The Conference Board’s consumer confidence index increased to a reading of 89.3 in Jan (Dec: 87.1). The current conditions measure fell to 84.4 from Dec’s 87.2 while expectations nudged up to 92.5 (Dec: 87). Separately, the Michigan consumer sentiment index showed a decline to 79 in Jan (down from the flash estimate of 79.2 and Dec’s 80.7).
  • S&P Case Shiller home prices index posted a 9.1% yoy gain in Nov (Oct: 8% yoy). New home sales grew by 1.6% mom to a seasonally adjusted annual rate of 842k in Dec, while the median price rose by 8% yoy to USD 355,900. Pending home sales fell for the 4th straight month, down by 0.3% mom in Dec, thanks to record-high prices and low supply. In yoy terms, sales were up 21.4% – the highest Dec reading on record.
  • Durable goods orders eased in Dec, rising by 0.2% from 1.2% rise in Nov, constrained by the 51.8% plunge in orders for civilian aircraft. Non-defense capital goods orders excluding aircraft posted a 0.6% rise down from the 1% and 1.7% hikes in Dec and Nov respectively. Overall output still remains about 2.6% below its pre-pandemic level.
  • Initial jobless claims slowed slightly to 847k in the week ended Jan 22 from an upwardly revised 914k the prior week, with the 4-week average rising to 868k. Continuing claims slowed to 4.771mn in the week ended Jan 15 from 4.974mn the week before.

Europe:

  • GDP in Germany declined by 3.9% yoy in Q4, following a 4% drop in Q3. In qoq terms, growth nudged up by 0.1% in Q4 from 8.5% in Q3. This brings the full year decline to 5% – the second-biggest plunge, after the -5.7% drop in 2009. The growth forecast for this year was slashed to 3% from last autumn’s 4.4% estimate.
  • German Ifo showed falls across the board for Jan: business climate index slipped to a 6-month low of 90.1 from Dec’s 92.2, while the current assessment and expectations slowed to 89.2 and 91.1 respectively (from 91.3 and 93 in Dec).
  • The GfK consumer confidence survey showed a massive decline to -15.6 in Feb (Jan: -7.5), given the strict lockdown: this was the lowest reading since Jun.
  • The harmonized index of consumer prices in Germany increased by 1.4% mom and 1.6% yoy in Jan (0.6% mom and -0.7% yoy). The uptick was due to multiple factors including the changes in VAT rates, the CO2 price and increase in the statutory minimum wage.
  • The unemployment rate in Germany remained stable at 6% in Dec, with 41,000 fewer people out of work.
  • UK’s claimant count rose by 7k in Dec, with the overall level having increased by 113.2% since Mar 2020. ILO unemployment rate inched up to 5% in the 3 months to Nov – the highest level since early 2016 and 1.2% higher than a year ago.

Asia Pacific:

  • The People’s Bank of China (PBOC) injected a net CNY 98bn into the financial system on Friday, following a week of reducing liquidity. This was however not sufficient to stop the hike in short-term money rates, which rose for a fifth straight day on Friday.
  • Industrial production in Japan declined by 3.2% yoy in Dec (Nov: -3.9%); in mom terms, IP fell by 1.6%, following a 0.5% dip in Nov, dragged down by business-oriented machinery (-11.7%) and auto (-3%). Overall IP last year fell by 10% to a 7-year low.
  • Inflation Tokyo fell by 0.5% yoy in Jan (Dec: -1.3%) while core CPI was down by 0.4%. Excluding food and energy, inflation ticked up by 0.2% (Dec: -0.4%).
  • Japan’s leading economic index improved to 96.4 in Nov (Oct: 94.3), but lower than the preliminary reading of 96.6. The coincident reading edged down to 89 (Oct: 89.4) while the lagging index slowed to 91 from 91.2.
  • Retail trade in Japan dropped by 0.3% yoy in Dec (Nov: 0.6%). Large retailer sales also slipped by 3.5% following a 3.4% drop the month before.
  • Unemployment rate in Japan held steady at 2.9% in Dec. Overall, the jobless rate in 2020 stood at 2.8%, up4% from the previous year, posting the first increase since 2009.
  • Preliminary GDP in Korea grew by a seasonally adjusted 1.1% qoq in Q4 following the 2.1% expansion in Q3, limiting the full year decline to 1%. In yoy terms, it declined by 1.4% yoy in Q4 (Q3: -1.1%). Growth in exports (+5.2% qoq) offset the drop in private consumption (-1.7%) while construction investment grew by 6.5%.
  • India’s fiscal deficit widened to INR 11.6trn for the 9 months till end-Dec, or 145.5% of the Budget Estimate at end-Dec, as revenue collected stood at INR 11.21trn (50% of budget estimate of total receipts).
  • Industrial production in Singapore increased by 2.4% mom and 14.3% yoy in Dec, though slowing from the previous month’s 7.5% mom and 18.7% yoy. The increase was largely due to the 41.8% yoy surge in electronics alongside a 51% rise in semiconductors.
  • Singapore inflation stood at 0% in Dec, after a 0.1% yoy decline the previous month, thanks to a rise in private transport costs. Core inflation fell to -0.3% yoy (Nov: -0.1%).
  • Unemployment in Singapore fell for a second straight month in Dec, slowing to 3.2% in Dec (Nov: 3.3%). For the full year, unemployment ticked up to 3% from 2019’s 2.3%.

Bottom line: As Jan 2021 comes to a close, the IMF released its updated global forecasts wherein economic recovery is estimated at 5.5% this year and 4.2% in 2022, from a contraction of 3.5% in 2020. Emerging markets recover at a faster 6.3%, thanks to the effective containment of Covid19 in China and many of the South-east Asian nations. Even as global debt likely reached 98% of economic output at the end of 2020, the IMF called for continued fiscal support until recovery gets underway. Financing needs have seen governments and companies in the emerging markets sell a record USD 115.23bn of international bonds in the first 27 days of 2021, surpassing the previous all-time monthly high of USD 112.78bn set last Jan. Separately, UNCTAD expects FDI flows to remain weak this year, after posting a 42% drop to an estimated USD 859bn last year.
Regional Developments

  • Bahrain’s trade with the GCC, at USD 5.7bn in 2020, accounted for 25% of its overall global trade. Bahrain-origin exports grew by 12% yoy to USD 1.59bn while overall trade deficit narrowed by 18% to USD 16bn. Saudi Arabia was the top importer of Bahraini goods (USD 320mn), followed by the US (USD 138mn) and the UAE (USD 135mn).
  • Real-time electronic fund transfers in Bahrain rose for the 6th consecutive month, with the number of transactions surging 6 times to 7,447,526 in Dec compared to a year ago and the value accelerating by 243.38% to BHD 284.11mn.
  • Under Bahrain’s new National Employment Programme, wages of Bahraini employees in the private sector will be subsidised by up to 70% for three years.
  • As Covid19 cases picked up in Bahrain, with many cases showing the new variant, the nation stopped indoor dining and moved schools to remote learning for 3 weeks. The AstraZeneca vaccine, approved for emergency use, was delivered from India.
  • Bahrain officially launched operations at the new 207,000-sq-m passenger terminal last week; the terminal, implemented under the USD 1bn Airport Modernisation Programme, is anticipated to raise the airport’s capacity to 14mn passengers annually.
  • Egypt will use development finance to support private sector engagement, disclosed the international cooperation minister; development financing represents about 10% of public debt and 25% of external debt. While the country has a development finance portfolio of nearly USD 25bn, it attracted USD 9bn in 2020, a third of which was directed to the private sector.
  • Egypt will offer more oil and gas blocks for tender in a new bid in the coming weeks, according to the minister of petroleum. Separately, the nation’s LNG export capacity is expected to increase to 12.5mn tonnes in Q1 this year from upto 8mn tonnes currently.
  • Iraq, which requested emergency assistance from the IMF, is in discussions for loans worth USD 6bn; the news led to gains in the sovereign dollar-denominated bonds issued by Iraq.
  • Iraq plans to set up large oil and gas projects in the Southern Dhi Qar Governorate in partnership with foreign companies. Separately, the nation set a target to upgrade renewable energy production to between 20-30% of the total power output by 2027.
  • Jordan’s trade deficit narrowed by 17.8% yoy to JOD 5.888bn in Jan-Nov 2020, as exports declined by 5.2% during the period alongside a larger 12.4% drop in imports.
  • Tourism revenues transferred to the Treasury in Jordan dropped by 81% yoy in 2020, according to a study prepared by the National Academy for Tourism and Aviation.
  • Kuwait’s 2021-22 budget forecasts KWD 23bn in expenditures (USD 76.2bn, +6.9% compared to the current budget) and KWD 10.9bn in revenues (+45.7%), raising the deficit of KWD 12.1bn (+13.8%). Non-oil revenues are estimated at 17% of total revenue.
  • Kuwaiti banks will be allowed to distribute 2020 dividends, according to the central bank.
  • Kuwait’s health ministry approved the emergency use of the Oxford/AstraZeneca Covid19 vaccine. The first batch is expected to be delivered “within days” from India.
  • Lebanon and the World Bank signed a USD 246mn loan agreement for a social safety net support program including emergency cash transfers and access to social services.
  • Oman’s new labour and civil service laws are expected to be in place by end-Mar or the first week of Apr. The laws aim to reduce the gap between the public and private sectors’ salaries, vacations and working hours.
  • The Ministry of Energy and Minerals of Oman revealed new initiatives to further liberalize the electricity sector: this includes bilateral electricity deals between large consumers and generators as well as planned introduction of a credit trading system to monetise energy efficiency gains, among others.
  • Oman extended the close of its land borders for a week until Feb 1st.
  • Saudi Arabia is forecast to grow by 2.6% yoy this year, according to the latest IMF World Economic Outlook report released last week. This follows a 3.9% contraction in 2020.
  • Saudi Arabia unveiled the next phase of Vision 2030 last week. Among the plans included the PIF strategy for the next 5 years – this comprises USD 40bn of investment every year for the next five years, an investment of USD 800bn in new sectors over the next 10 years, a contribution of USD 320bn to non-oil GDP through companies in which it holds stakes and the creation of 1.8mn jobs by end-2025. Furthermore, PIF plans to double its assets to SAR 4trn (USD 1.07trn) by 2025. The Saudi Crown Prince also stated that a potential second listing of Aramco could be part of the plans to raise funds for the PIF.
  • A 5-year Riyadh strategy was revealed at the Future Investment Initiative conference: about USD 220bn will be invested to transform Riyadh to a global city by 2030. Highlighting that Riyadh represents about 50% of the non-oil economy, it was disclosed that the cost to create jobs in the city are 30% less than the other cities in the country while the cost of developing infrastructure and real estate was also 29% less. Going forward, the aim is to raise the residents to 15-20mn from 7.5mn currently.
  • Tadawul’s plans and timeline to go public will be announced this year, according to the CEO. 2020 saw 22 IPO listings, a 26% rise in the number of qualified foreign investors opening portfolios as well as more than 100k local investors joining the market.
  • FDI into Saudi Arabia increased in 2020, stated the minister of investment (without disclosing the amount), as a result of the enactment of 400 investment laws, half which were amended to improve the investment climate. Separately, UNCTAD data showed that FDI into Saudi Arabia increased by 4% yoy to an estimated USD 4.7bn last year – this is in spite of the 42% drop in global FDI flows (with further weakness expected in 2021) and the 24% decline in flows to West Asia.
  • Saudi Arabia’s finance minister expects to see further growth in the domestic debt market, with the debt market liquidity having grown by about 200% in 2020.
  • Reuters reported that Saudi Arabia raised USD 5bn in a dual-tranche benchmark USD-denominated bond sale with tenors of 12 and 40 years. It received more than USD 13bn in orders for the 12-year bonds and over USD 9bn in orders for the 40-year paper.
  • Industrial production in Saudi Arabia fell by 10% yoy in Nov, with mining and quarrying activity down by 9% and manufacturing falling by 15.6%.
  • Saudi ports handled 7.3mn containers in 2020, a 4.36% uptick compared to a year ago: total cargo touched 299mn tons, coming on board 11,482 ships.
  • Saudi Arabia named Fahad al-Mubarak as the new central bank governor – his second time at the helm of the apex bank.
  • Over 257k expats left the Saudi job market in Q3 2020 bringing the non-Saudi employees to 10.2mn; during the period, Saudi employees increased by 82k to 3.25mn, according to GaStat data. Separately, GOSI reported that the number of Saudis working in the private sector grew by9% to 1.75mn last year while expats edged down by 2.6%.
  • In a bid to reduce the burden on companies, Saudi Arabia will allow for the payment of issuance and renewals of work permits on a quarterly basis instead of an annual lumpsum.
  • Saudi Arabia extended its travel ban and border closures till May 17th from Mar 31st previously cited, given the delays in vaccine delivery. The country is expected to receive 3mn doses of the AstraZeneca vaccine from India this week.

UAE Focus

  • UAE will grant Emirati citizenship to expats who are “investors, specialised talents & professionals including scientists, doctors, engineers, artists, authors and their families”. The skilled professionals would be nominated by government or royal court officials including the Cabinet, the executive council of each of the seven emirates, the rulers’ courts, or their crown princes. This follows previous reforms allowing for a 10-year residency visa, retirement visa, remote working visa and residency visas for families of students.
  • A new public debt strategy was approved by the UAE federal government aimed at developing its market for local currency bonds; though a public debt law allowing for the issuance of federal bonds was passed in 2018, no UAE government debt has been issued yet.
  • According to the Index of Global Trade Health released by Tradeshift, the UAE supply chain activity saw trade volumes increase by more than 13% in Q4 2020 over a Jan 2020 baseline and nearly 30% from the lowest point in
  • Bilateral trade between Dubai and Israel touched AED 1bn (USD 272.2mn) during the Sep 2020 – Jan 2021 period. Dubai’s main imports from Israel include vegetables, fruits, diamonds, flat screens, hi-tech devices as well as medical and mechanical devices.
  • The Abu Dhabi Securities Exchange plans to double its market capitalisation over the next three years. Over 2020, ADX’s market cap grew by almost 40% to AED 750bn.
  • Dubai revamped requirements to list local joint stock companies: all non-local companies are required to list their shares on DFM and Nasdaq Dubai if they generate more than half of their annual profits or revenues from activities in Dubai or if their total assets in the emirate amount to 50% or more of their entire assets. Non-local companies which generate less than 50% of revenues from Dubai are also eligible to list while foreign companies can list their shares in local bourses either in the form of a primary or secondary listing.
  • Closing the skills gap in the UAE can generate an additional 43k jobs by 2030 and allow the nation to gain USD 4.3bn in GDP (roughly 0.6% of GDP), according to a WEF report “Upskilling for shared Prosperity”.

 
Media Review
GameStop’s wild ride: how Reddit traders sparked a ‘short squeeze’
https://www.ft.com/content/47e3eaad-e087-4250-97fd-e428bac4b5e9
https://www.ft.com/content/4916c465-99ec-46f4-a889-df845ad1bcd2
Europe’s dangerous vaccine nationalism
https://www.economist.com/leaders/2021/01/30/europe-needs-quicker-vaccinations-and-more-stimulus
England’s lockdown lessons
https://www.project-syndicate.org/commentary/uk-government-pandemic-response-lessons-for-future-crises-by-mohamed-a-el-erian-2021-01
 
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Weekly Insights 28 Jan 2021

Download a PDF copy of this week’s insight piece here.
 
1. Global Recovery in 2021, albeit divergent & uncertain
The IMF, in its latest World Economic Outlook update, forecasts global recovery at 5.5% this year and 4.2% in 2022, from a contraction of 3.5% in 2020. There is a divergence in recovery: advanced nations, where growth plunged by 4.9% last year, will recover at a slower 4.3% while emerging markets recover at a faster 6.3% in 2021 (2020: -2.4%). Much of the emerging market recovery is thanks to the effective containment of Covid19 in China and many of the South-east Asian nations. The growth estimates are based on continuing policy support (and its effectiveness) and roll-out of vaccines (though its pace and logistics issues are identified as a concern) and “supportive financial conditions” (thanks to major central banks’ maintaining current policy rates through to 2022).
While over 150 economies are expected to have their per capita incomes below the 2019 levels in 2021, the projected cumulative output loss over 2020–2025 is forecast to be USD 22trn (relative to the pre-pandemic projections).
Fig 1. Global economic growth set to recover by 5.5% this year

Source: IMF World Economic Outlook, Jan 2021
The slowest pace of recovery among the regions is in the Middle East (+3% growth this year), a result of the shocks from both Covid19 and lower oil prices. The average price of oil last year was USD 41.29 (simple average of Brent, Dubai Fateh and WTI) and this is estimated to rebound by 21.2% yoy to USD 50.03 this year. As Covid19 cases surge globally, leading to newer restrictions/ lockdowns, the demand for oil is likely to stay subdued: consequently, OPEC+ monthly meetings are unlikely to result in production increases anytime soon. Even if vaccines are distributed quicker-than-expected, resulting in an increase in economic activity earlier than anticipated, there are multiple other factors that are likely to keep oil prices within the USD 50-55 mark (Figure 2).

In addition to lower demand due to Covid19 restrictions, growing awareness of climate change risks (& related policy changes) and energy efficiency policies will also affect the demand for oil. On the supply side, technological innovation and rapidly falling costs for solar and wind power has made renewables more competitive. Figure 3 shows the plunge in price of electricity from renewable sources: onshore wind fell by 70% to USD 41 last year from USD 135 in 2009; the dive in solar PV was more eye-popping – it fell by a massive 89% to USD 40 last year from USD 359 in 2009.
2. Services trade continues to drag

The WTO, in its latest report on services trade, highlights that the recovery has been slow: the decline in global services trade eased to a 24% yoy decline in Q3, from the 30% drop posted in Q2. This compares to the goods trade recovery which was down by just 5% yoy in Q3. Sector-wise, unsurprisingly, travel is the most affected, down by 68% yoy while among “other services”, computer, insurance and financial services increased in Q3 (+9%, 3% and 2% respectively). Global PMI indicators also suggest that economic recovery is driven by manufacturing vis-à-vis services: in Dec, output across manufacturing sector outperformed the services sector for the 6th straight month. Within the services index, respondents expect growth in future activity though optimism levels waned towards the end of last year.
3. Labour market recovery in 2021?
A key sub-indicator within PMI is employment – one of the main components dragging down the headline index. According to the ILO, about 8.8% of global working hours were lost for the whole of last year (relative to Q4 2019), roughly equivalent to 255mn full-time jobs. To put this in perspective, this was four times more than what was lost in the 2009 financial crisis period. In turn, labour income witnessed a decline of 8.3% – equivalent to USD 3.7trn or 4.4% of GDP!
In the Arab states, total estimated decline in working hours was 9% versus the global loss of 8.8% (Figure 5 below). However, these are ILO’s own estimates, as no labour force surveys were available for any country in the region during this time. According to these estimates, Iraq and Saudi Arabia registered losses of 8.3% and 10.8% respectively.
Fig 5. Quarterly & annual estimates of working hour losses, world vs. Arab states

Percentage of working hours lost (%) vs pre-crisis quarter Q4 2019 Equivalent number of full-time jobs (48 hrs/ week) lost (mns)
  Q1 2020 Q2 2020 Q3 2020 Q4 2020 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2020 2020
World 5.2 18.2 7.2 4.6 8.8 150 525 205 130 255
Arab states 3.3 18.8 9.4 4.7 9.0 2.0 10.0 5.0 2.0 5.0

Source: ILO Monitor: COVID-19 and the world of work, seventh edition, Jan 2021
Recovery is expected in 2021 as mobility restrictions are lifted and vaccine roll-out leads to a slow return of business/economic activity. With young persons and women as well as the informal sector and low-skilled workers more affected than the rest during the Covid19 period, it is imperative to target the return of these groups into the labour market. Without this, the outlook will be more inequality and instability (remember that youth unemployment was one of the factors leading up to the Arab Spring 10 years ago) in the most affected nations. As it stands, the IMF estimates that close to 90mn persons are likely to fall below the extreme poverty threshold during 2020–21.
4. Employment in Saudi Arabia
Separate data releases from Saudi Arabia give us an insight into employment trends in the country, which can be explained by a combination of Covid19, travel restrictions and Saudization policies:

  • Unemployment in Saudi Arabia dropped to 14.9% in Q3 from 15.4% the previous quarter, though higher than Q1’s 11.8%. The gap between male and female unemployment remained significant, with the former at 7.9% and latter at 30.2%.
  • The most recent labour force survey shows that the number of expats working in the country fell by 257,170 (qoq) to 10.2mn in Q3 while citizens grew by 81.9k to 3.25mn. Expat males account for two-thirds of the workforce versus Saudi males and females at 15.6% and 8.6% respectively in Q3.
  • There was a 58% yoy decline in work visas issued to expats to 611,185 in Jan-Sep 2020.


While on the one hand, the country has an aim to support female employment (an objective within the Vision 2030 document is to raise women’s participation to 30% by 2030), there seems to be a major disconnect: female employment in the private sector is less than 10% of total, and the additional hurdles – like costs of employing women (separate floors/ work areas from the male counterparts), social customs,  technical skills (focus on degrees in education, humanities) – may be putting off prospective employers.
Independently, the Public Investment Fund (PIF) disclosed that it had generated over 331k jobs in the past 4 years either directly or indirectly through its investment policies. The PIF’s recent commitment to not only invest USD 40bn every year for the next five years but also create close to 1.8mn jobs by end-2025 will support the economy going forward.
According to UNCTAD’s latest “Investment trends Monitor”, FDI into Saudi Arabia increased by 4% yoy to an estimated USD 4.7bn last year – this is in spite of the 42% drop in global FDI flows (with further weakness expected in 2021) and the 24% decline in flows to West Asia. With various ongoing projects related to Vision 2030 and megaprojects in NEOM, as well as the revamp of over 200 FDI regulations, the Kingdom’s ability to woo investors is explicable: Egypt, India and the UK were the most active investors in the country. Care must be taken to attract FDI into more job-creating sectors than the oil & gas sector (which is more capital intensive). Given the country’s commitment to support clean/renewable energy, it is pertinent to focus on the creation of green jobs, thereby leading to sustainable economic recovery. 
 
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Weekly Economic Commentary – Jan 24, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
Equities across the globe ended the week in positive territory after posting record highs on Thurs and in spite of slipping on Fri: in the US, it dropped on weaker earnings as well as potential for pushback in the Congress for President Biden’s spending plans; in Europe, markets were dragged down after weak economic data; Asian markets fell on profit taking and also given worries on China’s Covid19 restrictions. In the region, markets were mixed: UAE posted weekly gains though higher Covid cases and new restrictions led to a drop later in the week. The dollar slipped, the euro and pound were higher by 0.7%, while bitcoin lost its charm, down 12.3% ytd – posting its worst weekly performance since early 2020 – as regulatory chatter increased. Oil prices fell after an unexpected increase in US inventories and worries of lower demand due to a second wave/ restrictions in China; spot gold prices gained.
Weekly % changes for last week (21-22 Jan) from 14 Jan (regional) and 15 Jan (international).

 
Global Developments
US/Americas:

  • US building permits increased by 4.5% to 1.709mn in Dec, with an acceleration in single-family homebuilding (up 12.0% to a seasonally adjusted annual rate of 1.338mn units). Housing starts accelerated by 5.8% to an annually adjusted rate of 1.669mn in Dec; overall, starts grew by 7% yoy to 1.380mn in 2020.
  • Existing home sales inched up by 0.7% in Dec to a seasonally adjusted annual rate of 6.76mn units. For the full year, home resales surged by 22.2% yoy to 5.64mn – the highest since 2006 – as the pandemic drove up demand for larger sub-urban homes conducive to work & school from home.
  • US flash manufacturing PMI touched a series high of 59.1 in Jan (Dec: 57.1), thanks to stronger expansions in output and new orders, while services PMI ticked up to 57.5 (Dec: 54.8) on a rise in customer demand.
  • Initial jobless claims slowed to 900k in the week ended Jan 16 from a downwardly revised 926k the prior week, with the 4-week average rising to 848k. Continuing claims slowed to 5.054mn in the week ended Jan 2 from 5.181mn the week before.

Europe:

  • The ECB held policy rates and its stimulus program unchanged, with risks for the eurozone outlook “tilted to the downside but less pronounced” and even as the pandemic still “poses serious risk”. The apex bank stated that emergency bond purchases would be “conducted to preserve favourable financing conditions over the pandemic period”.
  • The flash consumer confidence in the EU declined by 1.6 points to -16.5 in Jan (Dec: -13.8). Furthermore, economic sentiment and employment expectations indicators recovered in Dec from the month before.
  • The harmonized index of consumer prices in Germany remained unchanged at -0.7% yoy in Dec. Overall in 2020, prices were up by a marginal 0.4%, thanks to the temporary cut to VAT in H2 and lower energy prices (-4.8%) while food prices were up 2.4%. German PPI ticked up by 0.8% mom in Dec, following Nov’s 0.2% rise.
  • Germany’s composite PMI slipped to a 7-month low of 50.8 in Jan (Dec: 52). At 58.6, manufacturing PMI showed an expansion (Dec: 61.3), supported by exports due to stronger demand from China and US. Services PMI remained depressed, falling to 46.8 from Dec’s 47.
  • Even though Eurozone’s flash manufacturing PMI eased to 54.7 in Jan (Dec: 55.2), the reading is among the highest over the past three years. The headline composite PMI fell to 47.5 from 49.1 in Dec, as services activity fell for the 5th consecutive month.
  • Germany’s economic sentiment surged to 61.8 in Jan, as per the ZEW survey, from a reading of 55 in Dec. Meanwhile, current economic situation assessment inched up by 0.1 to -66.4 in Jan. Economic sentiment in the Eurozone improved to 58.3 in Jan (Dec: 54.4); in contrast to all the positive moves, the indicator for the current economic situation in the Eurozone dropped by 3.2 points to -9 points.
  • CPI in the UK increased to 0.6% yoy in Dec (Nov: 0.3%) and core CPI grew to 1.4% from 1.1% the month before. Retail price index moved up, rising by 2% yoy from 0.9% in Nov. PPI core output inched up by 1.2% (vs Nov: 1%).
  • Retail sales in the UK increased by 0.3% mom and 2.9% yoy in Dec (Nov: -4.1% mom and 2.1% yoy), as shops opened after the Nov lockdown. Overall, in 2020, retail sales fell by 1.9% – the biggest since 1997 (when records began). Online retailing jumped by nearly 50% – the highest annual growth since 2008 – with food retailers posting a growth rate of nearly double that.
  • The latest round of national lockdown in the UK resulted in a decline in PMIs, with the composite indicator at 40.6 in Jan (Dec: 50.4). While weak exports and short-term supply chain issues slowed the manufacturing output index (8-month low of 50.3), services sector business activity contracted at the fastest pace since May 2020 (38.8 in Jan vs Dec’s 49.4).

Asia Pacific:

  • China GDP increased by 2.6% qoq and 6.5% yoy in Q4 last year (Q3: 2.7% qoq and 4.9% yoy), bringing the full year growth to 2.3% yoy – the slowest on record since 1976.
  • The People’s Bank of China (PBoC) left its loan prime rate unchanged.
  • Industrial production in China grew by 7.3% yoy in Dec (Nov: 7%). Separately, retail sales grew by 4.6% in Dec, easing from Nov’s 5% reading. In Q4, IP grew by 7.1% (Q3: +5.8%) while domestic consumption was weaker (retail sales up +4.6% in Q4 vs -3.9% in 2020).
  • FDI into the country grew to a record high of CNY 999.98bn (USD 144.37bn) in 2020, up 6.2%. Separately, fixed asset investment in China inched up by 2.9% yoy in Jan-Dec to CNY 51.89trn (USD 8trn) from 2.6% during the Jan-Nov period.
  • Bank of Japan left policy rates and asset buying settings unchanged, as expected. The Bank also raised its growth forecast for the next fiscal year to 3.9% from a 3.6% gain predicted 3 months ago. This is to be supported by the government’s spending package, though services spending is likely to be under “strong downward pressure” given recent restrictions.
  • Industrial production in Japan declined by 0.5% mom and 3.9% yoy in Nov (Oct: -3.4% yoy); it was the first mom fall in 6 months, as shipments fell by 1.2%.
  • Japan’s trade surplus more than doubled to JPY 751bn in Dec (Nov: JPY 366.1bn), as exports increased by 2% yoy – rising for the first time yoy in 25 months – amid a 11.6% drop in imports. For the full year, exports tumbled by 1.1% yoy, posting the largest fall in 11 years.
  • Core CPI (excluding fresh food costs) in Japan fell by 1% yoy in Dec – the biggest annual fall since Sep 2010 – while headline inflation dropped by 1.2% (Nov: -0.9%). Excluding fresh food and energy, inflation fell by 0.4% (Nov: -0.3%).
  • Japan’s flash manufacturing PMI fell to 49.7 in Jan, from a neutral 50 in Dec: though new orders grew for the first time since Dec 2018, falling output and employment as well as rising cost pressures dragged the index down. Services PMI slipped 2 points to 45.7 in Jan.

Bottom line: Flash PMI estimates from Europe confirmed that while business activity declined due to increased restrictions, the decline was milder compared to the plunge following initial lockdowns. Germany continues to be the driver of economic activity and manufacturing fared well vis-à-vis services. But, all signs point to double-dip recession given the ongoing rise in Covid19 cases and restrictions. While China’s GDP posted a positive growth last year, an uptick in new Covid19 cases and restrictions are raising concerns of a potential demand weakening.  
Regional Developments

  • National-origin exports from Bahrain increased by 12% yoy to BHD 599mn in Q4 2020; While Saudi Arabia, US and UAE were the main importers, the top 10 partners accounted for 72% of total exports value.
  • Bahrain attracted BHD 333mn (USD 885mn) in FDI last year and is expected to create more than 4,300 jobs over the next 3 years: this was announced following a board meeting of the Economic Development Board.
  • Bahrain approved a 3% increase for those who earn less than BHD 500 in pensions. This was part of 6 urgent steps approved by the Cabinet, which also included merging the public and private sector funds, halting annual pension increases, unless there is a surplus and decoupling salaries and pensions among others. Separately, an actuarial study is underway to include expats in pension funds.
  • Bahrain plans to spend BHD 1.3bn (USD 3.4bn) on 64 major projects over 2 years: three-fourths will be financed with GCC support and the rest covered by national revenues.
  • Urban inflation in Egypt declined to 5.4% in Dec (Nov: 5.7%), thanks to a decline in annual food inflation (2.8% from Nov’s 3.6%).
  • Egypt’s manufacturing and extractive industries index inched up by 0.84% mom to 97.76 in Nov 2020, with the pharmaceutical index up 7% and mining and quarrying rising 18.65%.
  • Holdings of US Treasuries by Egypt increased by 3.13% yoy to USD 2.244bn in Nov. During Jan-Nov, holdings grew by USD62mn from USD 2.182bn at end-2019.
  • Egypt signed an agreement to design and build its first high-speed rail network, to be completed within 2 years and at an overall cost of about EGP 360bn (USD 23bn).
  • According to the Institute of International Finance, Iraq’s economic growth shrank by 11.2% last year, given the lower oil prices and the Covid19 outbreak shocks. Forecasts for this year places real oil GDP growth at 1.6% due to higher oil exports while non-oil GDP is estimated to grow1%, supported by a recovery in public investment.
  • Iraq’s draft 2021 budget allows for the flexibility to issue bonds (either domestic or international) to fund the budget deficit.
  • In a bid to meet its OPEC+ cut requirements, Iraq has cut annual supplies of Basra crude oil to several Indian refiners by up to 20% this year.
  • Economic growth in Jordan contracted by 3% last year, given lockdowns, fall in tourism and business activity, but is expected to recover by posting 2.5% growth this year, according to the finance minister.
  • The Central Bank of Jordan’s circular permits banks to distribute dividends to shareholders, provided that the distribution does not exceed 12% of the capital.
  • Kuwait’s Legislative Committee will discuss (among others) imposing of a 1% tax on remittances irrespective of the currency, individuals or companies undertaking the transfers.
  • Lebanon’s Cabinet deadlock continues for the 6th month, with the latest attempt by the mediator caretaker PM also failing to resolve the differences.
  • The lockdown in Lebanon has been extended for two more weeks till Feb 8th. The health ministry has signed a deal to secure 2.1mn doses of Pfizer-BioNTech’s vaccine, which is expected to arrive in batches in Feb. Furthermore, the ministry is cooperating with the private sector to secure 2mn doses from Astrazenca and Sinopharm and signed up for 2.7mn doses via Covax.
  • Oman’s new parliament law requires that state budget talks and sessions for questioning of ministers be undertaken in secret, reducing transparency. The previous Basic Law did not specify such secrecy.
  • Oman closed its land borders for one week starting last Monday, to curb the spread of Covid19, with the option to extend for longer should the need arise.
  • Unemployment in Saudi Arabia dropped to 14.9% in Q3 from 15.4% the previous quarter, though higher than Q1’s 11.8%. The gap between male and female unemployment remained significant, with the former at 7.9% and latter at 30.2%.
  • Saudi Arabia’s trade surplus with China tumbled by 63.9% yoy to USD 10.93bn in 2020; imports from China rose by 17.8% to USD 28.1bn in 2020.
  • In a bid to support the economy, Saudi Arabia’s General Authority of Zakat and Tax extended the waiver period of fines and financial penalties for taxpayers until Jun 30th.
  • Saudi Arabia’s real estate price index inched down by 0.2% yoy in Q4 2020, largely due a drop of 1.9% in prices of commercial real estate.
  • The Projects Support Fund Initiative will provide stimulus to Saudi Tadawul’s listed companies, with targets in healthcare, education and real estate development sectors.
  • Saudi Arabia launched a SAR 1bn (USD 270mn) closed joint-stock company Kidana to maintain, develop and preserve the holy sites.
  • Container handling at Saudi ports increased by 6% yoy to a total of 631k containers in Dec 2020.
  • Many nations are rescheduling administration of the Pfizer vaccine, including Saudi Arabia, Bahrain and UAE’s Dubai, given delays in supply as the company is upgrading its production capacity.
  • Saudi Arabia, Kuwait and UAE remained among the top holders of US Treasury securities though holdings fell by 23% yoy to USD 137.6 in Saudi Arabia and by 8% to USD 36.8bn in the UAE, while in Kuwait holdings were up by 7%.

UAE Focus

  • Abu Dhabi announced a AED 6bn supply chain financing initiative to support SMEs, funded by the Ghadan 21 SME credit guarantee scheme. The initiative, initially supporting the healthcare sector, will facilitate quick payment of SMEs’ receivables, hence reducing costs of working capital.
  • Sharjah attracted USD 220mn worth FDI into 24 projects last year and led to the creation of 1117 new jobs, according to a study by market intelligence firm Wavteq.
  • Saudi Arabia and Iraq were the UAE’s biggest export markets during Jan-Sep 2020, with trade touching AED 73.58bn (USD 20bn) and AED 36.5bn respectively. In total, UAE’s exports touched AED 460bn during the period till Sep 2020. The Dubai Chamber estimates UAE’s non-oil trade volume to grow by up to 12.9% this year.
  • Dubai Economy announced a 132% yoy surge in DED Trader licenses to 5,799 last year: this license supports freelancers and startups to conduct businesses online. A total of 9,949 licenses have been issued since this license was launched in 2017, of which 57% have been issued to women.
  • Foreign companies operating in the UAE grew by 3.5% mom to 3209 in Dec 2020, according to the UAE’s National Economic register.
  • Prior to leaving office, the former President Trump added UAE to the list of nations exempted from a 10% tariff imposed on metal imports: this will come into effect from Feb 3rd. Other countries excluded from the tariff include Argentina, Australia, Canada and Mexico.
  • The UAE signed agreements with the US to purchase up to 50 F-35 jets, 18 armed drones and other defense equipment in a deal worth USD 23bn.
  • Abu Dhabi Fund for Development disclosed the completion of renewable energy projects – in Cuba, Somaliland, the Bahamas, Barbados and Saint Vincent and the Grenadines – worth AED 117.3mn (USD 31.9mn) in 2020.
  • Dubais consumer confidence index increased to 142 points in Q4 2020 – its highest level in since 2017 – from 133 points a year ago and 132 points in Q3 2020, according to Dubai Economy.

Media Review
‘A massive second-half recovery’: Biden, China and the global economy
https://www.ft.com/content/d77f9713-3950-4814-84be-f12614921957   
The marathon of covid-19 vaccination

https://www.economist.com/leaders/2021/01/20/the-marathon-of-covid-19-vaccination

The Year of the Renminbi?
https://www.project-syndicate.org/commentary/2021-could-be-the-year-of-the-renminbi-by-arvind-subramanian-and-josh-felman-2021-01
Chinese monopoly rules threaten super-app model
https://www.reuters.com/article/us-china-payment-cenbank-breakingviews-idUSKBN29Q0J1
 
 
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Weekly Insights 21 Jan 2021: Uncertainty & Risks on one hand and Vaccinations on the other

Download a PDF copy of this week’s insight piece here.
 
1. Global Uncertainty Drops, but Economic Policy Uncertainty Remains High

  • World continues in the throes of the Covid19 pandemic, even as vaccines offer a light at the end of the tunnel
  • The rollout has been slow in many nations; approval of other vaccines will help alleviate production/ distribution hurdles
  • Other policy concerns continue: fallouts from Covid19 across the globe, implementation of Brexit, US new administration’s policies (China, Iran,…)
  • Political turmoil/ uncertainty: Italy, Israel, Malaysia…

2. Global Risks Shift Gear in 2021

  • The World Economic Forum’s Global Risks Report 2021 perceives higher risks from environmental categories with extreme weather, climate action failure & human environmental damage taking the top 3 spots
  • With spillover effects from the Covid19 outbreak likely to continue this year and possibly next, it is not surprising that infectious diseases top global risks by impact (& 4th on the “likelihood” list)
  • Growing evidence that the Covid19 outbreak has widened existing disparities (poverty, gender, access to health facilities…); digital divide and adoption of technology further adds another layer to the inequalities (ability to work remotely, access online learning, e-commerce…)

 
 
 
 
 
3. Covid19 outbreak continues unabated in the Middle East

  • The number of cases in the Middle East continue to rise with Iran the major hotspot accounting for 28% of cases in the region; the GCC nations combined are home to 24% of total cases
  • Among the GCC nations, Saudi Arabia accounts for the largest share of cases, while UAE’s share of daily confirmed cases per mn persons is highest (the size of the bubble indicates the 7-day average of daily increase in cases). A concerted vaccination effort ongoing in most of the GCC nations offer a glimmer of optimism


 
4. Greater the restrictions, larger the drop in mobility; recovery in Saudi

  • With cases rising at a faster rate in the recent weeks, some economies in the Middle East have enforced restrictions recently: Lebanon’s lockdown has resulted in an uptick in the Stringency Index while UAE remains one of the most open (least stringent) in the region
  • Mobility (retail and recreation) has dropped in a highly restricted Lebanon (-40% compared to the 5-week period Jan 3- Feb 6, 2020). Egypt and UAE are still around 20% below the baseline, while in Saudi, mobility is picking up


 
5. Vaccination Drives Raise Hope for Recovery in 2021

  • Israel, UAE and Bahrain top the list of cumulative vaccine doses administered per 100 persons (chart)
  • Almost 1 in 5 persons in the UAE have received at least one dose of the vaccine, and 2.5% of the population are fully vaccinated (i.e. both doses received)
  • The vaccination drives in both Israel and UAE have picked up pace recently, with the 7-day average of daily vaccine doses administered per 100 persons was at 1.46 and 1.11 respectively (as of Jan 20, 2021)

Benefits from the vaccination drive for UAE

  • Race towards herd immunity
  • Lower uncertainty, greater consumer & business confidence
  • Ability to reopen the economy fully, resume economic activity at pre-Covid19 pace
  • Travel corridors open up, supporting tourism & hospitality sectors
  • Support for domestic sectors including trade & logistics as global demand picks up
  • Stronger links with Asia, given the region’s faster paced recovery vis-à-vis US/ Europe
  • Support regional economies with vaccination doses

 
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Weekly Economic Commentary – Jan 17, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
Global stocks tumbled, erasing gains made earlier in the week, given weak economic data amid rising Covid19 cases and deaths (94.5mn and over 2mn respectively) and stricter lockdown rules in China, France and Germany; among Asian markets, Nikkei ended Wednesday at its highest mark since Aug 1990. Regional markets mostly gained, though many indices weakened on Thurs given lower oil prices. Among currencies, a strong dollar emerged, while the Brent oil price slipped as concerns about demand recovery grew and gold price dropped by 1.2%.
Weekly % changes for last week (14-15 Jan) from 7 Jan (regional) and 8 Jan (international).

Global Developments
US/Americas:

  • President Biden, whose first priorities would be to rebuild unity and democracy, outlined a USD 1.9trn economic rescue package called the “American Rescue Plan”. This includes USD 415bn in spending towards the Covid19 response, USD 1400 direct payment to households, and roughly USD 440bn for small businesses and communities hard hit by the pandemic and USD 350bn for state and local governments.
  • Inflation in the US inched up by 0.4% mom and 1.4% yoy in Dec (Nov: 0.2% mom and 1.2% yoy), driven up by higher gas (+8.4%) and food prices; excluding food and energy, yoy prices were unchanged at 1.6%, but mom it was nudged up by 0.1%.
  • Industrial production in US advanced by 1.6% mom in Dec (Nov: 0.5%), with manufacturing up by 0.9% (8th straight monthly gain), in spite of a 1.6% dip in production of motor vehicles and parts. In yoy terms, production declined by 3.6% – the smallest decline since Feb.
  • US retail sales fell for the third consecutive month in Dec, with sales down by 0.7% from Nov’s upwardly revised 1.4% drop. Online sales were also down by 5.8% mom during the month which also saw declines across electronics and appliance stores (-4.9% mom), sporting goods’ retailers (-0.8%) and furniture and home furnishing stores (-0.6%).
  • The Michigan Consumer Sentiment Index fell to 79.2 in Jan, from Dec’s 80.7; the current economic conditions sub-index eased to 87.7 from 90.0 and the gauge for consumer expectations declined to 73.8 from 74.6.
  • JOLTS job openings fell modestly to 6.527mn in Nov (Oct: 6.632mn), with openings declining in durable goods manufacturing (-48k), information (-45k), and educational services (-21k).
  • Initial jobless claims increased to 965k in the week ended Jan 9 – the largest total since Aug 22 – from 784k the prior week, with the 4-week average rising to 834.25k. Continuing claims picked up to 5.271mn in the week ended Jan 2 from 5.072mn the week before.

Europe:

  • Industrial production in the eurozone increased by 2.5% mom in Nov (Oct: +2.3%), thanks to upticks in capital goods output (+7% vs 2.9% in Oct) and intermediate goods (+1.5% from Oct’s 2.3%) while durable consumer goods dropped (-1.2% from +1.5% in Oct).
  • The eurozone’s trade surplus widened to EUR 25.8bn in Nov, from EUR 20.2bn a year ago; both exports and imports declined, at 1% and 4.2% respectively. EU’s trade deficit with Russia narrowed to EUR 13.8bn in Jan-Nov from EUR 52.1bn in the same period a year ago.
  • GDP in the UK slipped by 2.6% mom in Nov, as lockdown measures were introduced to control the second wave of Covid19. This is 8.5% below pre-pandemic levels. Services sector suffered, contracting by 3.4% in Nov, and 9.9% below Feb levels, while construction activity grew by 1.9%.
  • Manufacturing production in the UK inched up by 0.7% mom in Nov (Oct: +1.6%), supported by strong car production. Overall industrial production meanwhile declined by 0.1% mom (Oct: +1.1%).
  • Armin Laschet, a centrist, was elected leader of Germany’s Christian Democrats (CDU), a likely successor to Angela Merkel.

Asia Pacific:

  • New loans issued in China slowed to CNY 1260bn in Dec (Nov: CNY 1430bn); overall, banks made a record CNY 19.63trn (USD 3.03trn) in new loans in 2020, up 16.8% from 2019.
  • China money supply M2 growth eased to a 9-month low of 10.1% yoy (Nov: 10.7%) while outstanding total social financing grew by 13.3% yoy to CNY 284.83trn (USD 44.09trn) at end-Dec (though slower than the recent peak of 13.7% in Oct).
  • The PBoC left the rate on CNY 500bn (USD 77.24bn) worth of one-year medium-term lending facility (MLF) loans to financial institutions steady at 2.95% from previous operations.
  • China exports grew by 18.1% yoy in Dec (Nov: 21.1%) and imports were up by 6.5% (vs 4.5% in Nov), widening the surplus to a record high USD 78.18bn. For the full year, exports grew by 3.6% and imports dropped 1.1% taking trade surplus to USD 535.03bn – the highest since 2015.
  • China’s inflation edged up by 0.7% mom in Dec (Nov: -0.6%); in yoy terms, prices were up by 0.2% following a 0.5% drop, led by an increase in food prices (+1.2% yoy vs Nov’s -2%). Core CPI stood at 0.4% in Dec, down from Nov’s 0.5%. Producers price index meanwhile improved to -0.4% yoy in Dec, from a 1.5% decline the month before.
  • Japan’s current account surplus increased by 29% yoy to JPY 1.88trn in Nov (Oct: JPY 2.15trn) – the 77th consecutive month of surplus.
  • Machine tool orders in Japan recovered, edging up by 8.7% yoy in Dec (Nov: 8.6%).
  • India’s industrial output period plunged by 15.5% yoy during the Apr-Nov period, from 17.5% during Apr-Oct. In Nov alone, manufacturing output slipped by 1.7% (Oct: 3.5%) and overall industrial output by 1.9% (3.6%).
  • Retail inflation in India eased to 4.59% in Dec (Nov: 6.93%), driven by a decline in food prices (3.41% from Nov’s 9.5%).

Bottom line: Vaccine rollouts are picking up pace, with 34.48mn vaccine doses administered globally as of Jan 16th. India’s nation-wide vaccination drive saw more than 100k vaccinated on the first day, while Israel and UAE top the list in terms of dose administration rate – at 25.34 and 18.18 per 100 people respectively. With Biden taking over the US Presidency mid-week, faster Covid19 responses and rollout of the proposed USD 1.9trn stimulus package are expected. Recent data show that the latest round of lockdowns has not sharply affected the nation as the spring/summer shutdown, but there is likely to be more damage down the lane beyond 2020-21: including worries of rising public and private debt levels amid an eventual policy reversal from the central banks.
Regional Developments

  • Bahrain has vaccinated almost 100k persons in less than a month, since the campaign started on Dec 17th.
  • US and Bahrain signed an MoU to establish an American trade zone in the country. The US-Bahrain FTA has been in effect since 2006: bilateral trade between the nations stood at USD 2.45mn in 2019, with an additional USD 1.5bn in services trade.
  • The re-opening of the King Fahd Causeway will add USD 2.9bn to Bahrain’s economy, according to a top official of the Bahrain Economists Society.
  • Bahrain’s tourism industry suffered an estimated loss of BHD 1bn during the pandemic, losing almost 29k visitors per day. This is almost 5 times losses reported during the financial crisis period. Annual tourism levies collected during Q1-Q3 last year plunged to BHD 2.4mn from BHD 14.5mn in 2019.
  • Egypt’s budget deficit narrowed to 3.6% during the period Jul-Dec (H1) 2020 from 4.1% previously. Annual revenues grew by 16% yoy to EGP 453bn during H1, with tax revenues up 10% to EGP 334bn. The finance minister also disclosed that health sector and education expenditures rose by about 14.7% and 7.4% during H1, with overall spending up by 9.6%.
  • Egypt’s external debt increased to USD 125.3bn in Sep 2020 from USD 123.5bn in Jun. Long-term debt amounted to USD 113bn in Sep, accounting for 90.2% of total external debt.
  • Annual urban inflation in Egypt slowed to 5.4% in Dec (Nov: 5.7%), largely due to driven by lower food prices and lower demand for clothing, while core inflation eased to 3.803% yoy in Dec, from 4.021% in Nov.
  • Egypt’s banks’ balances held abroad surged to more than USD 20bn at end-Dec from just USD 10bn at end-Apr. Net international reserves rose by USD 841mn to USD 40.063bn.
  • The central bank of Egypt stated that local banks will not be obliged to make cash dividends from the year’s profits or retained earnings that are distributable to shareholders, in a bid to support the banks’ capital base.
  • Food exports from Egypt increased by 1% yoy to USD 3.2bn during Jan-Nov 2020, accounting for 13.2% of the country’s total non-oil exports.
  • SME’s in Egypt will benefit from some of the new tax incentives: this includes a simplified tax system according to the volume of sales or businesses. MSMEs will therefore have no need for purchase books, documents or invoices.
  • The tourism minister revealed that the tourism sector in Egypt recovered about 60% of its dues from overseas travel agents and tour operators.
  • Iraq’s top commercial bank Trade Bank of Iraq has extended loans worth more than USD 3bn to reconstruction projects.
  • Jordan received the first shipment of the China-UAE Sinopharm vaccine, and will receive the Pfizer vaccine on Mon, after which these will be rolled out for the public from Wednesday.
  • Kuwait’s cabinet submitted its resignation last week, after a standoff with the Parliament.
  • As Lebanon’s government formation remains at a standstill despite multiple crises. The parliament approved a law that paves the way for the government to sign deals for coronavirus vaccines. Apart from the anticipated Pfizer-BioNtech deal (2mn doses), the President approved the transfer of LBP 26.4bn to COVAX to book 2.73mn vaccines.
  • Lebanon’s real estate developer Solidere disclosed that it settled its bank loans that exceeded USD 200mn in 2020.
  • Oman announced the appointment of a Crown Prince for the first time as part of a constitutional overhaul which also created a new law on how the parliament will operate. It also sets the rule of law and the independence of the judiciary as the basis for governance.
  • Reuters reported that Oman is selling USD-denominated bonds with maturities of 10 and 30 years and is expected to raise USD 2-3bn with the debt sale; it also re-opened USD 750mn bonds due in 2025. Earlier last week Oman was also reported to be raising upto USD 2bn funds from banks.
  • China was the leading destination for Omani crude oil exports in Dec 2020: accounting for 81.4% of the total, the nation’s share rose 6.6% mom to average 806,831 barrels per day.
  • Hotel revenues in Oman plunged by 61.4% to OMR 78mn (USD 202mn) until Nov 2020, with occupancy rates down to 26.4% (vs. 53.9% in the same period a year ago).
  • Saudi Arabia unveiled an ambitious “The Line” project, a zero-carbon city at NEOM which will house a million people and have no cars nor streets; the project, with infrastructure costs of between USD 100-200bn, aims to contribute 380k jobs of the future and SAR 180bn (USD 48bn) to domestic GDP by 2030. Later in the week, during a WEF online session, it was disclosed that Saudi Arabia would offer USD 6trn worth of opportunities to investors over the next decade.
  • Inflation in Saudi Arabia increased to 3.4% in 2020, largely owing to the tripling of VAT to 15% from Jul. Prices of food and beverages rose by 9% and that of transport by 3.8%.
  • The industrial sector in Saudi Arabia created over 39k job opportunities for both men and women last year, with a 37% Saudization rate, disclosed the minister of industry and mineral resources.
  • The Saudi Central Bank (SAMA) issued new rules for debt crowdfunding, requiring a minimum paid-up capital of SAR 5mn (USD 1.3mn) to get a license.
  • Saudi Arabia approved 903 industrial projects in 2020, worth SAR 23.5bn (USD 6.3bn); this boosts the number of manufacturing units in the country to 9681 in total.
  • Wa’ed, the entrepreneurship and investment arm of Saudi Aramco, gave 12 loans worth SAR 31mn (USD 8.27mn) to startups last year, up from 4 in 2019 (worth SAR 10mn).
  • MENA startups were granted USD 1.03bn in funds from 496 deals (+13% yoy) last year, according to MAGNiTT. Though e-commerce deals dropped (-23%), funding to the sector grew by 24% to USD 162mn while funding to the F&B and healthcare sectors more than tripled to USD 122mn and USD 72mn respectively. UAE topped the list in terms of total funding and number of deals (56% and 26% respectively), following by Egypt acquiring 24% of number of deals and 17% of total value of funds. Together, Saudi Arabia, UAE and Egypt accounted for 68% of total deals last year.
  • Investment banking fees generated in MENA fell by 12% yoy to an estimated USD 1.2bn in 2020 – the 4th highest total since 2000, according to Refinitiv data. Debt capital markets saw a 10% increase in fees to a record USD 282.3mn last year.

UAE Focus

  • Non-oil trade in the UAE touched USD 281.28bn in Jan-Sep 2020. China, Saudi Arabia and India were the largest trading partners (together accounting for 28% of total trade) while gold topped the list of products traded (valued at AED 182bn).
  • Dubai PMI increased to 51 in Dec (Nov: 49), led by an increase in output and new orders. Though all sectors expanded, growth was fastest in the retail and wholesale category. Meanwhile, falling employment continues to be worrisome as is lower stocks of purchases and shorter delivery times.
  • One-year term deposits in the UAE, which account for 7.1% of all term deposits, grew by 34.7% yoy to AED 63.2bn as of end-Oct last year.
  • The UAE issued a total 9,913 new business activities licenses across all the emirates during the first week of 2021. Separately, Dubai Economy disclosed that it issued 42,640 new licenses last year (+4.3%), alongside a 15% rise in license renewals.
  • About 97% of SMEs in the UAE adopted new forms of digital payment technology last year, according to Visa’s Back to Business report. This compares to 83% globally. More importantly, 86% of these firms expect customers to continue the use of contactless payments even vaccines are rolled out to protect from the pandemic.

Media Review
A fragile recovery in 2021: Roubini
https://www.project-syndicate.org/onpoint/fragile-global-and-us-recovery-in-2021-by-nouriel-roubini-2021-01
China’s Ant Group kicks off the overhaul of its fintech operations
https://www.scmp.com/business/banking-finance/article/3117936/ant-group-kicks-overhaul-its-fintech-operations-under
Bitcoin securities trading surges as investors seek crypto exposure
https://www.ft.com/content/fb8ac343-6574-4aa0-8f47-c2c9e9d57541
US designates Bahrain, UAE ‘major security partners’
https://www.arabnews.com/node/1793896/middle-east
Is Egypt’s privatization program out of hibernation?
https://www.zawya.com/mena/en/markets/story/Is_Egypts_privatization_program_out_of_hibernation-SNG_197373470/
Economic Governance Reforms to Support Inclusive Growth in the MENA and Central Asia: IMF
https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2021/01/08/Economic-Governance-Reforms-to-Support-Inclusive-Growth-in-the-Middle-East-North-Africa-and-48826
 
 
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Weekly Insights 14 Jan 2021: Trade, Tourism & the Global Vaccination Drive

Download a PDF copy of this week’s insight piece here.
 
1. Trade recovers in Q3; services trade lags
WTO’s latest Q3 data indicate a distinct rebound in trade: the volume of merchandise trade globally was up 11.6% qoq from an upwardly revised 12.7% drop in Q2. Exports dropped in yoy terms among all regional groups with the exception of Asia, where the value and volume inched up by 2% and 0.4% respectively. With Covid19 cases surging in Q4 across most regions, partial lockdowns and restrictions were re-imposed, which is likely to lead to a drop in overall trade in the final quarter.

 

Global new export orders growth – a leading indicator for trade activity – slowed in December, according to the latest global manufacturing PMI, and was linked to intensifying supply chain delays. The most cited response for delays amid rising demand was the lack of shipping capacity/shortage of containers. The recent surge in freight prices underscores the dilemma: sea freight on the China-Brazil route reached an unprecedented USD 10k per TEU from USD 2k per TEU a year ago. Other routes from Asia have also posted above-average values: trip costs to Europe and the US reached more than USD 4k per TEU.
This week, the WTO launched a new dataset along with the OECD tracking bilateral services trade of over 200 economies. The chart shows that the share of intra-regional trade in services is low in Africa (7%), South & Central America (12%) and the Middle East (13%). Unfortunately, since no bilateral services transactions are reported by African or Middle Eastern economies, it is difficult to gauge the underlying factors leading to this situation. The decline in services trade was significant in 2020 given restrictions on international travel and related drop in tourism revenues.
2. Tourism woes continue globally; Middle East significantly affected
The UNWTO reported a 72% drop in international tourist arrivals during the Jan-Oct period, with the Middle East region continuing to lag its global counterparts in tourism arrivals (-73% year-to-date). International tourism as a share of total tourism is significantly high in Bahrain (97%) and UAE (83%), making these nations more vulnerable than say, Saudi Arabia, with its share at 26%. With air travel restrictions still in place in many nations, and hotels either closed or open at lower capacity, the road to recovery will be long.

 
 
 
Occupancy rates in the region have improved towards the end of 2020, with residents opting for staycations than international travel given restrictions. Egypt reopened international tourist flights to three governorates (including Red Sea) last Jul: overall, the country welcomed 3.5mn tourists last year, resulting in overall revenues of USD 4bn, down from 11.6mn tourists and USD 13bn in revenues in 2019. In the UAE, Dubai opened for tourists in July: almost 17.88 million passengers passed through the Dubai Airports last year, while occupancy rates in the emirate’s hotels touched 71% in Dec, the highest since Feb. The UAE-UK travel corridor (announced 12th of Nov) resulted in an acceleration in bookings, with the Dubai-London Heathrow travel corridor revealed as the busiest international air route globally in the first week of January. Interestingly, Cairo-Jeddah was the second most popular route.
With the rollout of vaccines, and nations heading towards achieving herd immunity, the latter half of this year might see a pickup in air travel and tourism: this should also support Dubai’s Expo event scheduled to start in Oct 2021 and Qatar’s 2022 FIFA World Cup.
3. The Global Vaccination Drive picks up

Israel, the UAE and Bahrain top the list of the share of total population that have received at least one dose of the Covid19 vaccine – at 22.4%, 11.57% and 5.96% respectively (updated at 1:30pm UAE time on 14th Jan 2021). In terms of the share of fully vaccinated population, UAE tops at 2.53% followed by Israel at 1.21% and the UK at 0.63%.

UAE’s ability to vaccinate quickly its small and highly concentrated, urbanised populations – with 96 vaccination locations across Abu Dhabi alone and others in the rest of the emirates, more than 100k persons were vaccinated per day in the last two days – is also a testament to its established and reliable healthcare systems.
Given the data, UAE’s aim to vaccinate 50% of the population by end-Q1 does not seem far-fetched. The faster the vaccination drive, the greater relaxation of quarantine rules, higher the number of travel corridors (“immunity passports”) and UAE could become one of the top tourist destinations globally. One step further, and if the nation manages to achieve herd immunity, could the nation also aspire to become a “vaccine tourism” hub? (setting aside the ethical aspect). Furthermore, with UAE also planning to manufacture the Sinopharm vaccine, the potential for Abu Dhabi/ Dubai as vaccine manufacturing and distributing hubs is rising (with the international connectivity of its Etihad and Emirates airlines).
Bottomline: With the global vaccination drive, depending on how soon countries are able to achieve herd immunity, we can expect a resumption of activity in travel and tourism. Additionally, efficacy of the vaccines will not only raise consumer confidence (and demand), but also result in lowering business uncertainty, resume manufacturing and services sector activity and ease supply constraints, thereby boosting global trade.
 
 
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Weekly Economic Commentary – Jan 10, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
Global equities continue to push new records (US stocks, Japan’s Nikkei) as stimulus measures and vaccination drives trumped political mayhems; MSCI all-world also inched up by 1.4%. 10-year U.S. Treasuries yields touched the highest levels since March. Oil prices inched closer to 11-month highs last week, closing 8% higher last week, given Saudi Arabia’s pledge for deeper, voluntary cuts in Feb-Mar. The rise in oil prices supported markets in the Middle East while Qatar’s exchange saw an uptick given the breakthrough in its diplomatic rift with Gulf nations.  The dollar was at a near 3-year low last week vis-à-vis a basket of currencies while gold price ended the week 2.6% lower.
Weekly % changes for last week (7-8 Jan) from 31 Dec (regional) and 1 Jan (international).

Global Developments
US/Americas:

  • Democrats won both run-off elections in Georgia, giving them control of both the US Senate (after the Presidential inauguration) and of congress. This will be the first time since 2009 that the Senate, the House of Representatives and the White House are in their control, empowering the Biden administration and its agenda.
  • Non-farm payrolls in the US fell by 140k in Dec (Nov: +336k), ending 7 months of jobs growth: women accounted for all the job losses, losing 156k jobs, while men gained 16k. Around 372k jobs were lost in food services and drinking places, offsetting gains in other area Average hourly earnings grew by 5.1% yoy (Nov: 4.4%). Unemployment rate remained unchanged at 6.7%. Earlier in the week, ADP reported that the private sector employment decreased by 123k in Dec (+304k in Nov) – the first decline since Apr 2020 – with losses concentrated in retail, leisure and hospitality.
  • Factory orders in the US grew by 1% mom in Nov, after an upwardly revised reading of 1.3% in Oct. Orders for non-defense capital goods excluding aircraft, a proxy for business spending plans, inched up by 0.5% in Nov.
  • The Markit manufacturing PMI increased to 57.1 in Dec (Nov: 56.7) – the highest since Sep 2014. Meanwhile, the ISM manufacturing PMI increased for the 7th straight month to 60.7 in Dec (Nov: 57.5), thanks to improvements in new orders (67.9 vs 57.5), production (64.8 vs 60.8) and employment (51.5 vs 48.4).
  • Initial jobless claims unexpectedly declined for the third week to 787k in the week ended Jan 2 from an upwardly revised 790k the prior week, with the 4-week average slowing to 818.75k. Continuing claims slowed to 5.072mn in the week ended Dec 26 from 5.198mn the week before.

Europe:

  • Economic Sentiment Index in the euro area increased to 90.4 in Dec (Nov: 87.7), driven by higher confidence among consumers (+3.7) and in the industrial sector (+2.9).
  • German factory orders unexpectedly grew by 2.3% mom and 6.3% yoy in Nov (Oct: 3.3% mom and 2.3% yoy); industrial orders are now some 4% above their pre-crisis level. Domestic orders went up by 6% and foreign orders by 2.9% – those from the euro area rising 6.1% and from other countries 0.9%. Separately, industrial production grew by 0.9% mom in Nov (Oct: 3.4%), with manufacturing (+1.6%) and construction (+1.4%) offsetting a drop in energy production (-3.9%).
  • German exports grew by 2.2% mom (Oct: 0.9%) and imports by 4.7% mom in Nov (Oct: 0.4%), narrowing the trade surplus to EUR 16.4bn. Exports were supported by a double-digit annual exports growth to China as well as UK companies buying spree ahead of the Brexit transition.
  • Retail sales in Germany grew stronger than expected in Nov, rising by 1.9% mom and 5.6% yoy (Oct: 2.6% mom and 8.6% yoy), thanks to strong growth in online sales (+31.8%) and spending on home improvements (+15.4%) while clothing sales fell 20%.
  • In the eurozone, retail sales fell by 2.9% yoy and 6.1% mom in Nov (Oct: 4.2% yoy and 1.4% mom) – the biggest decline since the first lockdown in Apr. The drop was largely due to a 10.6% fall in demand for automotive fuels and an 8.9% decline for non-food products.
  • Inflation in Germany declined by 0.3% yoy in Dec (Nov: -0.3%) while the harmonised index was also unchanged at -0.7% yoy. Inflation in the eurozone declined by 0.3% yoy in Dec, holding for the 4th consecutive month, given weak food prices and a dip in energy prices. Core CPI remained at a record low of 0.2%.
  • German Markit manufacturing PMI increased to 58.3 in Dec, the highest since Feb 2018, from Nov’s 57.8. A sharp drop in the supplier delivery times sub-component supported the rise in headline PMI while consumer goods were the weakest-performing category.
  • In the eurozone, PMI increased to 55.2 (Nov: 53.8) thanks to stronger roses in output and new orders; growth was led by Germany and the Netherlands, both also reporting the sharpest increases in export sales.
  • UK manufacturing PMI increased to a 3-year high, moving up to 57.5 in Dec (Nov: 55.6) though job cuts continued for the 11th straight month.
  • Services PMI in Germany touched to 47 in Dec, up from Nov’s 46, but lower than the 50-threshold, as lockdowns and travel restrictions took effect. Composite PMI ticked up down to 52 from a 5-month low of 51.7. In the Eurozone, services PMI clocked in at 46.4 in Dec from Nov’s 46.4 but was lower than the preliminary reading of 47.3, while composite PMI increased to 49.1 (higher than Nov’s 45.3 but lower than prelim 49.8 reading).
  • The number of jobseekers in Germany fell by 37k yoy in Dec, boosted by state-backed part-time work scheme, while the unemployment rate remained unchanged at 6.1%. In the wider eurozone unemployment fell slightly: jobless rate dropped to 8.3% from 8.4% in Oct.
  • The UK announced GBP 6bn (USD 6.2bn) in new lockdown grants, with retail, hospitality and leisure companies getting one-off grants worth up to GBP 9k, in addition to an extended furlough scheme.

Asia Pacific:

  • China Caixin manufacturing PMI remained expansionary in Dec, though easing to 53 from Nov’s 54.9 reading. New orders increased, albeit slowly, given weaker new export sales and a modest increase in demand from abroad. Caixin services PMI slipped to 56.3 in Dec (Nov: 57.8): new order growth and export sales eased, while employment rose for the 5th straight month.
  • Foreign exchange reserves in China grew to USD 3.217trn in Dec (Nov: USD 3.178trn) – a new high since May 2016.
  • Japan PMI improved to the no-change threshold of 50 in Dec (Nov: 49.7), the highest reading since Apr 2019. Employment levels also increased for the first time since Feb 2020.
  • Overall household spending in Japan unexpectedly grew by 1.1% yoy in Nov (Oct: 1.9%), rising for a 2nd straight month largely due to spending on utilities as well as vegetables and meat. In mom terms, however, spending was down by 1.8%.
  • India’s PMI edged up to 56.4 in Dec (Nov: 56.3), on stronger demand and expansion in production alongside international demand. However, employment continued to drop for the 9th
  • Singapore grew by 2.1% qoq in Q4 (Q3: +9.5%) while in yoy terms, GDP shrank by 3.8% (Q3: -5.6%). Overall, Singapore’s GDP declined by 5.8% in 2020 – the first annual contraction since 2001.
  • Retail sales in Singapore fell by 1.9% yoy in Nov, improving from the 8.5% drop in Oct; in mom terms, it grew by 7.3% mom (Oct: 0.2%).

Bottom line: It was PMI week across the globe – global manufacturing PMI was at a 33-month high, with signs of recovery as well as a rise in export orders amid supply chains pressures. Germany’s latest economic data dump showed resilience even in the face of lockdown restrictions, while in the UK the fast-spreading pandemic and response is overshadowing the new stimulus package. Meanwhile, as vaccine distribution picks up pace, the World Bank forecasts global growth at 4% this year should vaccinations be distributed widely and effectively. The IIF revealed that capital flows to emerging markets fell by 13% yoy to USD 313bn in 2020, though Q4 was the strongest quarter for EM securities as asset classes recovered. Lastly, mainstream investors are joining the Bitcoin bandwagon, leading to a surge in prices (see media review link).
Regional Developments

  • The Al-Ula agreement was signed at the GCC Summit last week, ending the Qatar blockade (which was imposed in 2017): this improves and will support political stability (a “united GCC” front) and is likely to restore UAE and Saudi businesses direct trade and investment links. Ahead of the Summit, Saudi Arabia and Qatar had reopened land, air and sea borders. Greater GCC regional stability, implies lower perceived sovereign risk, including credit risk which –other things equal- will lead to an improvement in sovereign credit ratings, lower spreads and CDS rates and encourage foreign portfolio inflows as well as FDI.
  • The World Bank expects MENA to grow at a modest 2.1% yoy in 2021 – following output losses of around 5% in 2020 – with recovery conditioned on containment of the pandemic (including vaccine rollout), as well as stable oil prices and “no further escalation” of political tensions. Oil exporters are estimated to growth by 1.8% this year, and oil importers by 3.2%.
  • Bahrain’s real GDP grew by 1.4% qoq in Q3 2020, thanks to a 1.7% growth in the oil sector amidst a 1.3% increase in the non-oil sector; hotels and restaurants posted the fastest growth (+71.1% qoq). In yoy terms, GDP fell by 6.9% in Q3.
  • Egypt’s PMI fell to 48.2 in Dec (Nov: 50.9), with the recent Covid19 surge resulting in subdued demand as well as fears of renewed lockdown measures; inventories rose at the strongest rate since June 2012 while employment cuts were at the strongest in 4 months.
  • The IMF raised its GDP forecast for Egypt to 2.8% in the current fiscal year 2020-21, highlighting “strong consumption [that] helped offset weak tourism and investment”.
  • The Central Bank of Egypt announced an extension of its initiatives to support defaulters, whether individuals or tourism companies, for a further six months till end-Jun 2021. This initiative, which covers individuals with debts of less than EGP 10mn, will remove the defaulter from the banks’ blacklists and all lawsuits would be waived (on the condition that 50% or more of the debt is paid).
  • Egypt’s tourism revenues slumped by 70% yoy to USD 4bn in 2020, due to the Covid19 pandemic, from USD 13.03bn in 2019. The country attracted 3.5mn tourists last year, versus 13.1mn in 2019: of this, about 2.4mn persons visited the country in Jan-Feb before the hotels were closed in Mar.
  • Egypt’s net international reserves increased by 2.14% mom to USD 40.06bn in Dec.
  • Domestic fuel prices were left unchanged in Egypt, following a similar move in Oct 2020.
  • Egypt’s Ministry of Petroleum and Mineral Resources disclosed that 62 oil and gas reserves were discovered in the country last year, a 13% uptick compared to 2019.
  • Revenues from Egypt’s Suez Canal declined by 3% yoy to USD 5.61bn in 2020. The Authority revealed that transit fees for all ships would remain unchanged this year.
  • Egypt, which is the Islamic Development Bank Group (IsDB)’s seventh largest contributing country and owner of the largest number of shares, was the third largest beneficiary of the bank’s total appropriations at USD 12.7bn, disclosed the minister of planning.
  • In Iraq, projects have been allocated about 20% of the 2021 budget: of this, the focus will be on stalled and ongoing projects than new ones, according to the financial advisor to the government. He also stated that there are currently about 19k ongoing projects worth a total of IQD 200bn (USD 168.2mn).
  • Iraq signed a USD 2bn prepayment deal with a Chinese company for oil exports, reported the state news agency (without naming the company). According to the agreement, the value of shipment will be paid a full year in advance.
  • The World Bank forecasts Jordan’s economy to grow by 1.8% and 2% in 2021 and 2022 respectively.
  • The volume of combined assets of the Jordanian banking sector touched USD 5bn by end-Q3 2020. Combined capital, reserves and allocations stood at USD 12.3bn at end-Sep while capital adequacy was 17.9% in H1 2020.
  • Jordan’s income and sales tax revenues increased by 8% yoy to JOD 4.668bn in 2020; sales tax revenues grew by 7% to JOD 3.53bn while income tax revenues were up by 12%. The department credited its reform strategy implemented last year (including expanding the tax base and fighting tax evasion) for the uptick.
  • Real estate volume in Jordan declined by 26% yoy to JOD 3.418bn in 2020: real estate purchases dropped by 9% while apartment sales were down by 14% compared to the year ago.
  • Kuwait’s oil minister revealed the discovery of three new oil and gas fields in the country including one next to the giant Burgan field. One has a production capacity of 1,452 barrels per day (bpd) of light oil while another’s stands at 1,819 bpd of light oil and associated gas.
  • PMI in Lebanon remained below-50, with the Dec reading at 43.2 (Nov: 42.4) with output and new orders declining at the slowest pace in 5 months while job cuts accelerated. Demand remained depressed and new export orders fell amid a 14th consecutive monthly contraction in inventories.
  • Lebanon’s central bank governor stated that the era of the dollar peg was finished, but that the currency would not be floated unless an agreement was finalized with the IMF.
  • The World Bank estimates the cost of damage from the Aug blast at the Beirut port at USD 350mn. A new “governance structure based on the landlord port model” was proposed by the Bank, adding that one of the prerequisites to rebuild the port was the establishment of a robust institutional and governance framework for the port sector. Read more: https://www.worldbank.org/en/news/press-release/2021/01/05/reforming-lebanons-port-sector-to-build-back-a-better-port-of-beirut
  • Lebanon started a 25-day lockdown last Thursdayits fourth in 10 months – with a daily curfew from 6pm to 5am amid reports that hospitals were running out of beds and pharmacies running low on medicines to treat Covid19 patients.
  • Oman will start enforcing VAT by Apr 16th this year; about 94 items (mostly food) have been exempted from the tax. Implementation of this tax is estimated to generate over USD 780mn, according to the ministry of finance.
  • Oman’s Muscat Securities Market was converted into a closed joint stock company and put under the ownership of the state-owned Oman Investment Authority last week, according to state media. It will henceforth be called the Muscat Stock Exchange.
  • SMEs registered in Oman increased by 13.4% yoy and 1.2% mom to 47802 at end-Nov 2020.
  • Vodafone received a license to become the 3rd operator in Oman.
  • PMI in Qatar eased to 51.8 in Dec (Nov: 52.5), with Q4 business activity expanding at the strongest pace since Q1 2018. Manufacturing posted the strongest growth for the second consecutive month, while employment increased – especially in the services sector.
  • Qatari banks Masraf Al Rayan and Al Khaliji have entered into a merger: with combined assets worth around QAR 172bn (USD 47bn) as of Sep 30, the merger creates one of the largest Sharia-compliant regional banks.
  • Saudi Arabia’s non-oil activity picked up for the 4th consecutive month, with PMI climbing to a 13-month high of 57 in Dec (Nov: 54.7). This uptick was supported by an increase in output and new orders, with Dec also witnessing the fastest rise in new business for 12 months.
  • As part of the OPEC+ production cuts, Saudi Arabia pledged to make voluntary cuts by an additional 1mn barrels per day (bpd) in Feb and Mar.
  • Saudi Arabia’s trade with the GCC nations plunged by 18.7% yoy to SAR 97.89bn (USD 26.1bn) in Jan-Oct 2020. Furthermore, UAE was the largest trade partner, accounting for 64.1% of total trade during the period.
  • Money supply (M3) in Saudi Arabia increased by 7.75% in Jan-Nov 2020 to touch an all-time high of SAR 2.139trn. Cash liquidity reached SAR 2.088trn over Q3 2020, surpassing May’s historic level of SAR 2.075trn.
  • The Saudi Central Bank has issued its first-ever license to a consumer micro-financing platform Tamam, which offers loans via a mobile app.
  • Saudi Arabia’s mining law, which came into effect on Jan 1st, seeks to boost FDI and will “enhance governance of the sector, improve transparency and increase investor confidence”, according to the minister of industry. Mineral resources in the country are estimated to be worth about SAR 5trn (USD 1.3trn), with 20 million ounces of gold reserves below ground.
  • Saudi Arabia will lift the temporary travel ban and resume all international flights from Mar 31st this year.
  • A recent Ministry of Commerce decision allows Saudi-owned companies to be managed by foreigners – either as managers or as an authorized person, reported Saudi Gazatte.

UAE Focus

  • UAE PMI crossed the neutral 50-mark, posting an increase to 51.2 in Dec from the previous month’s 49.5, thanks to a 15-month high uptick in new export orders and an increase in output level. However, employment continued to fall, with the “rate of job shedding” faster.
  • Dubai rolled out a 5th stimulus package worth AED 315mn: this included an extension of some incentives till Jun 202, refunds on hotel sales and tourism dirham fees, one-time market fees exemption for establishments that did not benefit from reductions in previous packages and decision to renew licenses without mandatory lease renewal among others. This brings the overall stimulus package in the emirate to AED 7.1bn.
  • Bloomberg reported that UAE’s Mashreq Bank was considering moving nearly half its employees to cost-friendlier emerging market locations like India, Egypt and Pakistan, while allowing others to work from home. The report stated that the relocation plan is likely to be completed in three phases by Oct 2021.
  • Almost 17.88 million passengers passed through the Dubai Airports last year, according to GDRFA; smart gates, which facilitated contact-free travel, saw 1.7mn users during the year.
  • The Dubai Multi Commodities Centre (DMCC) registered 2050 new companies in 2020 – the highest in 5 years. There was a 20% yoy uptick in the number of Chinese companies in the free zone last year: China is a key market for the free zone, with a representative office opened in Shenzhen last Nov.

Media Review
China’s dollar pragmatism
https://www.omfif.org/2020/09/chinas-dollar-pragmatism/
A Fairer Way to Help Developing Economies Decarbonize
https://www.project-syndicate.org/commentary/developing-economies-decarbonization-taxes-financial-aid-by-kenneth-rogoff-2021-01
Is the financial establishment coming round to bitcoin?
https://www.economist.com/finance-and-economics/2021/01/09/is-the-financial-establishment-coming-round-to-bitcoin
Party city Dubai becomes escape hatch as Europe locks down
https://www.ft.com/content/34fc511e-852e-4d20-bd0e-92aad4117f78
 
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Weekly Insights 7 Jan 2021: UAE’s silver linings – has the country turned a corner?

Download a PDF copy of this week’s insight piece here.
 
1. Heatmap of Manufacturing/ non-oil private sector PMIs

PMIs across the globe were released this week. Overall, recovery seems to be the keyword with improvements in Dec – in spite of the recent Covid19 surge, the Covid variant and ongoing lockdowns/ restrictions – with new orders and export orders supporting sentiment, with some stability in job creation. However, supply chain issues continue to be a sticking point: the JP Morgan global manufacturing PMI – which remains at a 33-month high of 53.8 in Dec – identifies “marked delays and disruption to raw material deliveries, production schedules and distribution timetables”.
In the Middle East, while UAE and Saudi Arabia PMIs improved (the former recovering from 2 straight months of sub-50 readings), Egypt slipped to below-50 after 3 months in expansionary territory. While Egypt’s sentiment dipped on the recent surge in Covid19 cases, the 12-month outlook improved on optimism around the vaccine rollout. However, the UAE’s announcement of the rollout of Sinopharm vaccine in early-Dec seems to have had little impact on the year-ahead outlook, with business activity expected to remain flat over 2021 (survey responses were collected Dec 4-17) and job losses continuing to fall at an accelerated rate.
2. Covid19 & impact on Dubai & UAE GDP
The UAE has seen a negative impact from Covid19: the central bank estimates growth this year to contract by 6% yoy, with both oil and non-oil sector expected to contribute to the dip (this is less than the IMF’s estimate of a 6.6% drop in 2020). Oil production fell in Q2 and Q3 by 4.1% and 17.7% yoy respectively, in line with the OPEC+ agreement, and spillover effects on the non-oil economy saw the latter’s growth contract by 1.9% yoy in Q1 (vs oil sector’s growth of 3.3%). The latest GDP numbers from Dubai underscore the emirate’s dependence on trade and tourism to support the non-oil economy: overall GDP dropped by 10.8% yoy in H1 2020; the three sectors (highlighted in red border below) trade, transportation and accommodation (tourism-related) which together accounted for nearly 40% of GDP declined by 15%, 28% and 35% respectively. Dubai forecasts growth to decline by 6.2% this year, before rising to 4% in 2021.

News of a 5th stimulus package worth AED 315mn (announced on 6th Jan) for Dubai – an extension of some incentives till Jun 202, refunds on hotel sales and tourism dirham fees, one-time market fees exemption for establishments that did not benefit from reductions in previous packages and decision to renew licenses without mandatory lease renewal among others – will support growth this year, as well as the uptick from Expo 2021 (based on widespread vaccinations across the globe and potential resumption of air travel by H2 this year). With plans to inoculate 70% of the UAE population by 2021, we remain optimistic about UAE/ Dubai prospects subject to the effective implementation of the recent spate of reforms (including the 100% foreign ownership of businesses, retirement & remote working visas etc.) as well as embracing new and old synergies – Israel and Qatar respectively. Medium-term prospects can be further enhanced by accelerating decarbonization and digitisation – read a related op-ed published in Dec.
3. UAE credit and SMEs
The UAE central bank has extended support to those persons and businesses affected by Covid19 by launching the Targeted Economic Support Scheme, which is now extended till Jun 2021. Overall credit disbursed till Sep 2020 was up 2.9% yoy and up 1.2% ytd: but during the Apr-Sep 2020, the pace of lending to GREs (+22.7% yoy) and government (+19.6%) have outpaced that to the private sector (-1.0%).

 
It has been a difficult period for MSMEs (Micro, Small and Medium Enterprises): the number of MSMEs declined by 8.5% qoq in Sep 2020, following an uptick of 3.9% qoq in Jun 2020, signaling deteriorating business conditions that may have forced such firms to close. This also suggests a potential increase in NPLs once the current banks’ support (e.g. deferring loan periods) come to a close. Overall domestic lending also fell by 0.9% qoq as of Sep 2020. The largest share of loans within the MSME sector continues to be to the medium-sized firms (57.3%) and about 1/3-rd to the small enterprises. Considering the amount disbursed per firm, medium enterprises pocketed AED 1.8mn in Q3: this is 3.4 times the amount disbursed per small firm and 5.3 times the amount disbursed to microenterprises.
SMEs also need to think beyond the financial pain point to survive in the post-pandemic era. In addition to reducing/ streamlining operational costs[1], learning digital skills, boosting online profiles and hosting a robust payments and collections platform will also support SMEs to be more bankable in the future.
4. Back to “business as usual” for the GCC

The recent GCC Summit saw Qatar’s blockade (imposed in 2017) being lifted: this improves and will support political stability (a “united GCC” front) and is likely to restore UAE and Saudi businesses direct trade and investment links. Allowing bilateral tourist movements will support upcoming mega-events in the region like the Dubai Expo this year and Qatar’s 2022 World Cup. Trade will be restored among the nations: imports from the UAE had dropped to a negligible 0.1% last year, from close to 10% in the year before the blockade. Oman, meanwhile, had gained – with businesses opting to re-route trade with Qatar through Oman’s ports.
Greater GCC regional stability, implies lower perceived sovereign risk, including credit risk which –other things equal- will lead to an improvement in sovereign credit ratings, lower spreads and CDS rates and encourage foreign portfolio inflows as well as FDI.
 
[1] Even Mashreq Bank, Dubai’s 3rd largest lender, is planning to reduce operational costs by moving nearly half its jobs to cheaper locations in the emerging markets (to be completed by Oct 2021), according to a Bloomberg report.  
 
 
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Weekly Economic Commentary – Jan 3, 2021

Download a PDF copy of this week’s economic commentary here.
Markets
US equities closed on a high note last year (S&P 500 up more than 16% and Nasdaq more than 40%), as did China (+27% gain), while not surprisingly, UK’s FTSE 100 index had the worst annual performance since 2008. Regional markets were mixed: Saudi and Qatar equity markets posted modest annual gains while Egypt declined the most (-22.3%). Among currencies, dollar fell almost 7% versus a basket of currencies – the biggest drop since 2017 – while the pound, euro and yen gained. Oil rebounded to USD 51 last week, though ended almost 20% lower vis-à-vis 2019 while gold price was up more than 24% – the best annual performance since 2010.
Weekly % changes for last week (31 Dec-1 Jan) from 24 Dec (regional) and 25 Dec (international).

Global Developments
US/Americas:

  • The US started sending out the USD 600 stimulus cheques. Though the House of Representatives approved a bill that will increase direct payments to USD 2000, it is still blocked in the Senate (the Majority Leader labelled it “socialism for the rich”).
  • Chicago PMI edged up by 1.3 points to 59.5 in Dec: employment posted the largest monthly gain rising to a 1-year high while new orders recorded the biggest decline. Business sentiment recovered to 59.6 in Q4 – the strongest reading since Q4 2018.
  • S&P Case Shiller home prices accelerated by 7.9% yoy in Oct (Sep: 6.6%), rising at the fastest pace in 6-years. Pending home sales declined for a 3rd consecutive month by 2.6% mom in Nov (Oct: -0.9%) though in yoy terms it increased by 16.4%.
  • Trade deficit widened by 5.5% yoy to a new record of USD 84.82bn in Nov (Oct: USD 80.29bn). Goods exports inched up by 0.8% mom to USD 127.22bn while imports grew by 2.6% mom (and 5.5% yoy).
  • Initial jobless claims unexpectedly declined for the second week to 787k in the week ended Dec 26 from 806k the prior week, with the 4-week average rising to 836.75k. Continuing claims slowed to 5.219mn in the week ended Dec 19 from 5.322mn the week before.

Europe:

  • The Brexit transition period is now over: the post-Brexit trade deal with the EU was agreed to in late-Dec and passed by UK lawmakers on the eve of the deadline. Separately, Britain and Turkey signed a free-trade deal: this is Britain’s fifth largest deal, following those with Japan, Canada, Switzerland and Norway. With this, the UK signed a total 62 bilateral trade agreements ahead of the Brexit transition period.
  • The EU and China reached an investment agreement after 7 years of negotiations: the agreement removes some barriers to EU companies’ hopes of investing in China (like specific joint-venture requirements and caps on foreign equity), in addition to improved market access terms for EU industries (e.g. automotive, private healthcare and cloud computing among others). While labour issues remain a sticky point, the aim is for the deal to take effect in early 2022.

Asia Pacific:

  • China non-manufacturing PMI eased to 55.7 in Dec (Nov: 56.4), with new orders dropping to 51.9 from Nov’s 52.8 and the employment subindex down to 48.7 from 48.9. The official NBS manufacturing PMI slipped to 51.9 in Dec (Nov: 52.1), with drops across new orders (53.6 from Nov’s 53.9) and new export orders (51.3 from Nov’s 51.5). While both headline readings were lower compared to the month before, it remained above the 50-mark for the 10th consecutive month, with expansion continuing.
  • Japan industrial production dipped by 3.4% yoy in Nov (Oct: -3%) but remained flat in mom terms after expanding in the previous 5 months (Oct: +4%). Auto production fell by 4.7% in Nov, given weak sales in North America while production machinery saw an increase in overseas demand (+6.5%).
  • Current account surplus in India moderated to USD 15.5bn or 2.4% of GDP in Jul-Sep, according to the central bank, from USD 19.2bn or 3.8% of GDP in the previous quarter. This was a result of the trade deficit which widened to USD 14.8bn in Jul-Sep from USD 10.8bn. Net FDI inflows at USD 23.8bn in Apr-Sep 2020 (H1 of FY 2020-21) were higher than USD 21.3bn registered in H1 of the previous fiscal year. Separately, the fiscal deficit widened to 135% of the 2020-21 budget target at end-Nov.
  • South Korea’s exports expanded by 12.6% yoy in Dec – the sharpest acceleration since Oct 2018 – driven by strong growth in semiconductors (+30%), mobile devices (39.8%) and IT products amid improved global demand. Exports to China grew by 3.3% while those to the US and EU were up 11.6% and 26.4% respectively.

Bottom line: 2020 ended on a brighter note what with Covid19 vaccines being rolled out across the globe, but inoculations happening at a faster pace in some nations than the rest. This is happening alongside a surge in Covid19 cases (given the new variants and holiday season) and extensions of restrictions/ lockdowns: seems a probable scenario till herd immunity is achieved with widespread vaccinations. With the Brexit trade deal finalised so close to the deadline and the drama concluded (?!), the focus is now on the OPEC+ (monthly) meeting this week: a will they or won’t they question, especially weighing vaccine optimism (and higher oil prices by 6-8% in Dec) with potential demand decline due to the fast-spreading Covid19 variant. Russia has already indicated a preference to raise production, which would be beneficial for countries under severe budgetary pressure (like Iraq).   
Regional Developments

  • The GCC Summit will be held in Riyadh on 5th Jan: point to note is that a formal invite was issued to Qatar’s emir to attend the summit, amid the ongoing diplomatic row.
  • The central bank of Bahrain asked banks to extend loan repayments for 6 more months from Jan. Not only should the instalment amount remain unchanged, but banks are also not allowed to increase profit or interest rates on such loans.
  • MPs in Bahrain voted to allow the government to raise borrowing cap to BHD 15bn (from BHD 13bn) to support its efforts to combat Covid19 and fund projects in the 2021-22 budget.
  • Egypt’s central bank extended for 6 months (till end-Jun) a number of decisions taken to support the economy amid the pandemic including exemption for customers from all expenses and commissions on bank transfer services in Egyptian pounds, the free issuance of electronic wallets, cancelling of all commissions and fees related to transfers between mobile wallets and removing fees and commissions for cash withdrawals among others. Separately, the minister of finance revealed that submissions for real estate tax returns was extended until end-Mar, applicable to all established properties.
  • The central bank of Egypt has set target inflation rate at 7% (±2%) on average during Q4 2022 compared to 9% (±3%) on average in Q4 2020. Separately, it was disclosed that Egypt will auction USD 850mn in one-year dollar denominated T-bills on Jan 4th.
  • Money supply in Egypt increased by 19.56% yoy in Nov to EGP 4.85trn (USD 309.11bn).
  • Egypt’s trade deficit narrowed to USD 2.9bn in Oct from USD 4.1bn a year ago (-28.8% yoy) as exports dropped by 13.1% to USD 2.2bn and imports fell by 22.8% (value of petroleum products were down by 32.8% and crude oil by 20.7%).
  • Industrial sector in Egypt grew by 6.3% in 2019-20: its contribution to GDP inched up to 17.1% during the year from 16.4% in 2018-19 and accounted for nearly 28.2% of total employment in the country.
  • Egypt’s Minister of Petroleum stated that nine new oil and gas exploration agreements worth USD 1bn (for drilling 17 wells) were signed with local and international companies. Separately, the ministry revealed that total consumption of oil and gas declined by 5.9% yoy to 71.3mn tonnes of oil equivalent in 2020, with the electricity sector accounting for 60.4% of total natural gas consumption.
  • Egypt is expected to receive the final tranche of financial assistance from a group of Chinese banks to fund the New Administrative Capital’s business district: while the size and timeline of the credit facility remain undisclosed, the second tranche signed last year stood at USD 3bn.
  • Self -sufficiency & food security: Egypt achieved self-sufficiency in rice in 2020 with the production of 6.5mn tonnes and plans to reach self-sufficiency in sugar production by the end of 2021; the country also has strategic wheat reserves sufficient for 5.5 months.
  • Iraq’s southern oil exports remained stable at 2.7mn barrels per day in Dec, given the nation’s commitment to the OPEC+ production cut.
  • Iraq renewed a contract to supply Egypt with 12mn barrels of Basra light crude for 2021: contract’s terms will remain unchanged if Egypt pays the value of shipments within the year.
  • Given arrears of over USD 6bn, Irans state gas company stated earlier last week that it had reduced supplies to neighbouring Iraq from 50mn cubic meters per day (cm/d) to 5mn cm/d, threatening electricity shortages in the latter. Later in the week, an agreement led to resumption of Iranian gas pumping: part of the energy debt will be paid in the form of goods and Iran will use money from energy exports to Iraq to buy Covid19 vaccine from Europe.
  • Jordan’s Capital Bank Group inked a deal with Bank Audi of Lebanon to buy its businesses in Jordan and Iraq; assets being acquired are valued at JOD 506mn and IQD 275bn in the two countries respectively and will raise Capital Bank Group’s assets by about a third to around JOD 7bn (USD 5.23bn).
  • Kuwait resumed its commercial flight operations from Sat (Jan 2nd) while continuing its travel ban on 32 high risk countries. Arriving passengers need to present a 96-hour prior negative test and self-isolate for 14 days. Separately, Kuwait aims to vaccinate 80% of its population by Sep 2021 after an inoculation campaign started in the second-last week of Dec.
  • The US state department approved USD 4.2bn in potential arms sales to Kuwait.
  • Lebanon can stretch the USD 2bn in foreign reserves left for subsidies to last 6 more months, revealed the caretaker PM.
  • The health minister disclosed that Lebanon had secured about 2mn doses of the Pfizer-BioNTechs Covid19 vaccine, which will cover 20% of the country’s nationals.
  • Oman expects to post a fiscal deficit of OMR 2.24bn in 2021, amounting to 8% of GDP: around OMR 1.6bn of the deficit will be covered via external and domestic borrowing, while another OMR 600mn will come from reserves. Revenue are expected to decline by 19% yoy to OMR 8.64bn while expenses are to drop by 14%; oil price was set at an estimated USD 45. The introduction of VAT this year is expected to raise OMR 300mn in revenues.
  • The industrial sector’s value added is expected to grow in Oman to almost 4 times (by 40%) by 2040; exports from the sector is estimated to touch OMR 10.7bn by 2040.
  • About 33 projects worth USD 2.5bn were open for investment in Oman, according to the Ministry of Commerce Industry and Investment Promotion, with hospitals and related healthcare ventures accounting for a third of the projects.
  • In its latest reform move, Oman removed the requirement to obtain a NOC (No Objection Certificate) while changing jobs. An expatriate on a resident visa may be transferred from one employer to another by providing evidence of either expiry of the contract or termination of the employment contract.
  • The expatriate population in Oman fell by nearly 16% (by more than 270k from end-2019) to 1.44mn as of end-Nov. About 340k had left in 2010, in the aftermath of the financial crisis.
  • From the beginning of 2021 onwards, only Omani lawyers can appear and plead before the courts of appeal and the Supreme Court. There are around 600 expat lawyers in Oman courts, who can now function as legal advisers, solicitors or legal counsellors, legal sources, writers, clerks or the like.
  • Oman reopened its land, air and sea borders from Dec 29th, allowing entry for those with a negative Covid19 test and another test on arrival.
  • Exports from Qatar grew by 8% mom to QAR 16.6bn in Nov, with exports of non-crude surging by 168% mom while hydrocarbons fell by 2.1%. Overall trade surplus fell by 27.4% yoy to QAR 9.06bn.
  • Saudi Arabia announced the discovery of 4 oil and gas fields: this includes 4,452 barrels of unconventional Arab extra light sweet oil and 3.2mn standard cubic feet of gas at a well in Al Reesh oil field, a well test showing a daily production rate of 3,850 barrels per day at Al Ajramiyah, in addition to non-conventional gas at the Al Minahhaz and al-Sahbaa well
  • The Ministry of Human Resources and Social Development in Saudi Arabia is considering the possibility to make the expat levy and government fee (for iqama and work permit) payable quarterly instead of annually (as is the practice now).
  • Saudi Arabia’s trade surplus narrowed by 60.3% yoy to SAR 134.71bn (USD 36bn) in Jan-Oct 2020, with total exports at SAR 534.58bn (-34.4%) and imports at SAR 399.87bn (-15.97%). Oil exports fell by nearly a third in Oct, while non-oil exports fell by 0.3%. Trade with the Arab states declined by 18.97% yoy to SAR 150.44bn (USD 40.12bn) during Jan-Oct 2020. UAE accounted for 41.7% of total trade during this period and remained Saudi’s main Arab trading partner.
  • Assets of the Saudi Central Bank slipped by 3.18% yoy to SAR 1.86trn (USD 495.63bn) in Nov. Expat remittances from Saudi Arabia grew by 19.57% yoy to SAR 136.27bn in Jan-Nov 2020; in Nov alone, remittances jumped by 29.8% yoy to SAR 12.86bn.
  • Saudi Arabia’s PIF established a company named National Security Services Co (SAFE) to develop and expand the private security sector. The company will focus on providing security consulting services, integrated security solutions, training and development programs as well as command and control centers. Separately, Saudi Arabian Military Industries (a PIF subsidiary) announced Saudi Arabia’s largest ever private military industry deal, purchasing the Advanced Electronics Company (expected to be completed in Q1 2020 after regulatory approvals) – a defense, energy, ICT, and security services company.
  • Saudi Arabia launched a digital economy policy focusing on 7 guiding principles: access encompassing digital infrastructure, data and platforms, technology adoption, innovation, human capital, social prosperity and inclusion, trust in the digital ecosystem, and open markets.
  • Saudi Arabia aims to import over 3mn doses of the Pfizer Covid19 vaccine by end-May, with 1mn doses arriving by end-Feb.

UAE Focus

  • Budgets for 2021 were revealed across UAE’s emirates: Dubai unveiled this year’s budget with spending at AED 57.1bn (with salary and wage allowances accounting for 35% of total and security, justice and safety at 22%) and revenues at AED 52.31bn (tax revenues at 31% of total). Sharjah announced a AED 33.6bn budget for this year, up 12% versus 2020, with 43% of the budget allocated for developing and improving infrastructure in the emirate. Ajman revealed a zero-deficit AED 2.066bn budget with economic affairs accounting for 40% and public services for 22%.
  • The UAE central bank projects growth this year at 2.5%, supported by a 3.6% uptick in non-oil sector growth. This follows an estimated 6% decline this year, with non-oil GDP dropping by 5%.
  • Economic growth in Dubai declined by 10.8% in H1 2020 and is estimated to contract by 6.2% for the full year, according to the Dubai Statistics Centre. This year, growth is forecast to rebound to 4%. Population in Dubai meanwhile inched up by 1.6% yoy and 0.23% mom to 3.411mn by end-Q4 2020.
  • Remittances from the UAE fell by 7.7% yoy to AED 40.1bn in Q3 2020, with India (30.8%), Pakistan (11%) and Egypt (6.5%) the top three destinations. In yoy terms, remittances to India dropped by 27.8% while those to Pakistan and Egypt inched up by 1.6% and 1.4% respectively.
  • Abu Dhabi’s non-oil foreign trade edged up by 0.8% yoy to AED 16bn in Jun: exports surged by 74.6% to AED 6.67bn while re-exports and imports fell by 36.4% and 13.6% respectively.
  • Inflation in Abu Dhabi slipped by 2.3% yoy in Oct, though rising by 0.4% mom. In Jan-Oct, inflation fell by 2.4% yoy, thanks to a 20.6% drop in recreation and culture as well as a 4.2% drop in furnishings and household equipment.
  • Fuel prices in the UAE remain unchanged for the 10th consecutive month in Jan.
  • Registered companies in the Abu Dhabi Global Market increased by 43% yoy to 3211 by end-2020.
  • UAE’s Etihad Credit Insurance and Indias Export Credit Guarantee Corporation signed an agreement to promote bilateral trade: facilitating market access for SMEs and exploring insurance, reinsurance and co-insurance services for the export of goods in a 3rd country some of the opportunities being explored.
  • Dubai, which rolled out the Pfizer-BioNTech’s Covid19 vaccine from 23rd Dec, expects to inoculate 70% of its population by end-2021.
  • An estimated 545k passengers are expected to use the Dubai International Airport between Jan 1-7, with 2-3 Jan likely to see 78k departing passengers.

Media Review
How the pandemic is worsening inequality: FT
https://www.ft.com/content/cd075d91-fafa-47c8-a295-85bbd7a36b50
Is an infrastructure boom in the works?
https://www.economist.com/finance-and-economics/2021/01/02/is-an-infrastructure-boom-in-the-works
China’s Pro-Monopoly Antitrust Crusade
https://www.project-syndicate.org/commentary/alibaba-anti-monopoly-investigation-cpc-by-minxin-pei-2020-12
 
 
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Weekly Insights 23 Dec 2020: V or W-shaped recovery? Surge in Covid19 cases & new strain to dampen growth in Q4

Download a PDF copy of this week’s insight piece here.
 
Chart 1: Uncertainty in the time of Covid19

Both Economic Policy Uncertainty and Pandemic Uncertainty indices touched record-highs during the Covid19 crisis. Even with vaccines being rolled out, a new strain of Covid19 in UK has led to stricter lockdown measures, border closures and travel bans.
Policy Uncertainty has been severely high this year, when compared to the global financial crisis or Brexit referendum or the US-China trade war phase. With fiscal and monetary responses continuing to support economies, care should be taken to ease the withdrawal of support in the future.
Countries need to be prepared for a phase of unemployment and wave of business closures when exiting the crisis.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chart 2: Trade bounced back in Q3, but will the current surge lead to another drop? Tourist Arrivals remain dismal
Trade growth recovered in Q3; but recent surge in cases, a new strain and related closures will likely result in lower demand & dip in trade in Q4.
Meanwhile, thanks to the recovery in new export orders, both shipping & cargo indicators are turning positive.
As international air travel as not picked up, air cargo has suffered, thereby directing demand towards shipping. However, as the holiday season got underway towards end-2020, demand ticked up, but container shortages are leading to higher shipping rates.
Tourism remains unlikely to recover to near pre-pandemic levels till vaccines reach a substantial proportion of global population. Prior to the recent surge in cases, domestic tourism (& therefore air travel) had picked up in Europe and Americas.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Chart 3: Saudi Arabia’s GDP shows recovery in Q3; private sector growth declines by 4% ytd
Saudi Arabia’s GDP declined by 4.3% in Q3, rebounding from Q2’s 7% plunge, with declines across oil and non-oil sectors (-8.2% and -2.1% respectively). Within the non-oil sector, most sectors posted declines in Q3 ranging from manufacturing (-10.1%) to trade, restaurants & hotels (-5.2%) while finance, insurance & real estate edged up (+1.1%). Share of GDP by economic activity shows that oil sector continues to dominate (40% of overall GDP), followed by manufacturing (12%) and trade & hospitality (11%).
Signs of recovery are evident: PMI for KSA is the strongest in the region, with output and export orders all increasing. The latest reading for employment also increased for the first time since Jan. Credit to the private sector, cement sales and PoS transactions have all been rising. Allocation of funds towards the public health system and social spending in the 2021 budget underscores the government’s commitment to support the economy as vaccines are rolled out next year. The reduction in Covid19 health concerns and uncertainty will encourage increased consumption and investment by the private sector, helping to boost growth. Similarly, roll out of vaccines will help restore the flow of non-religious tourism and the Hajj which are important contributors to the economy.

 
 
 
 
 
 
 
 
 
 
 
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Weekly Economic Commentary – Dec 20, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
US equities touched record highs last week, as discussions progressed on a stimulus bill and as the Federal Reserve pledged to remain accommodative. Emerging-market stocks and currencies posted a seventh weekly gain, the longest winning streak since Jan. Regionally, most major Gulf markets ended higher while Egypt fell the most in 2 months. The pound hit its highest level in 31 months during the week, on hopes that an EU-UK trade deal could be close, though it slipped after. Among commodities, gold price gained while copper topped USD 8,000 a ton, reaching a 7-year high on an expected surge in demand.
Weekly % changes for last week (17-18 Dec) from 10 Dec (regional) and 11 Dec (international).

Global Developments
US/Americas:

  • The Fed left rates unchanged, as expected, voted to maintain monthly bond purchases of at least USD 120bn, while the Fed Chair stated that “the case for fiscal policy right now is very very strong”. So far, no consensus has been reached on the stimulus deal, with talks trapped over a proposal to end the Fed’s emergency lending powers that allow it to provide loans to SMEs as well as state and local governments.
  • Industrial production increased by 0.4% mom in Nov (Oct: 0.9%), with manufacturing output posting its 7th straight monthly gain, rising by 0.8%. Overall, IP index has risen to 5% below its pre-pandemic (Feb) reading.
  • Retail sales in the US tumbled by 1.1% mom in Nov (from a downwardly revised Oct reading of -0.1%) – the most in 7 months – weighed down by the surge in Covid19 cases and declining household income. Sales plunged at clothing stores (-6.8%), restaurants and bars (-4%), electronics and appliances (-3.5%) and in motor vehicles (-1.7%).
  • Markit flash US composite PMI fell to a 3-month low of 55.7 in Dec (down from Nov’s 68-month high of 58.6), as both manufacturing and services PMI inched down: manufacturing dropped 0.2 points to 56.7 while services slowed to 55.3 (Nov: 58.4).
  • Housing starts grew by 1.2% mom to 1.547mn in Nov, inching closer to Feb’s pace of 1.567mn units. Building permits quickened by 6.2% to 1.639mn in Nov, supported by single-family houses rising by 0.4% to 1.186mn units – the highest level since Apr 2007.
  • Initial jobless claims rose to 885k in the week ended Dec 12 from an upwardly revised 862k the prior week, with the 4-week average rising to 812.5k. Continuing claims slowed to 5.508mn in the week ended Dec 5 from 5.781mn the week before.

Europe:

  • German Markit composite index remained resilient, rising to 52.5 in Dec (Nov: 51.7). Manufacturing PMI inched up to a 34-month high of 58.6 in Dec (Nov: 57.8), and though services moved up, it remained weak at 47.7 (Nov: 46). This uptick was mirrored in the eurozone PMI with composite PMI rising to 49.8 in Dec (Nov: 45.3) – the stronger manufacturing PMI (a 31-month high of 55.5 in Dec vs. Nov’s 53.8) helped lessen services’ reading below-50 (47.3 in Dec vs. Nov’s 41.7).
  • Industrial production in eurozone increased for the 6th consecutive month, rising by 2.1% mom in Oct (Sep: 0.1%), with capital goods production showing the largest increase (+2.6%); in yoy terms, growth was down by 3.8%. Germany led the increase, with Belgium reporting a 6.9% rise while Greece posted a 3% decline.
  • Ifo business climate for Germany climbed to 92.1 in Dec (Nov: 90.9): though it remains below pre-pandemic readings, there was optimism across both current assessment (91.3 from 90) and expectations (92.8 from 91.8).
  • Inflation in the eurozone declined by 0.3% mom in Nov from Oct’s 0.2% reading. Annual inflation remained negative for the 4th consecutive month, clocking in -0.3% yoy in Dec, with energy prices lower by about 8% yoy.
  • Producer price index in Germany was up by 0.2% mom in Nov (Oct: 0.1%), with energy prices up by 0.4% mom.
  • The Bank of England kept its main lending rate at 0.1%, having cut twice from 0.75% since the pandemic began spreading, and retained its target stock of asset purchases at GBP 895bn (USD 1.2trn).
  • Unemployment in the UK rose to 4.9% in the 3 months to Oct from 4.8% the previous time; about 370k persons were made redundant. Average earnings excluding bonus ticked up by 2.8% during this period from 1.9% before.
  • Inflation in the UK eased to 0.3% yoy in Nov (Oct: 0.7%), with declines registered across clothing and footwear (-0.17 ppts), food and non-alcoholic drinks (-0.09 ppts); core inflation slipped to 1.1% (vs Oct’s 1.5%).
  • Retail sales in the UK slowed in Nov: sales were down by 3.8% mom (following 6 months of gains) and up just 2.4% yoy (Oct: 1.3% mom and 5.8% yoy). While sales at clothing stores down almost a fifth in mom terms, booksellers’ sales were down by 40.3% while sales at food and household goods stores grew.

Asia Pacific:

  • China left interest rate unchanged for an 8th straight month, but issued CNY 950bn (USD 96bn) in loans through a one-year medium-term lending facility (MLF) to financial institutions to support bank liquidity.
  • Industrial production in China quickened by 7% yoy in Nov (Oct: 6.9%). Retail sales rose by 5% from 4.3% the month prior, thanks to communications equipment (+43.6%), auto sales (+11.8%) and household appliances (+5.1%). FDI inflows increased by 6.3% yoy in Jan-Nov.
  • China’s fixed asset investment grew by 2.6% yoy in Jan- Nov, faster than the 1.8% rise in Jan-Oct 2020. Private sector fixed-asset investment, which accounts for 60% of total investment, rose 0.2% in Jan-Nov, compared with a 0.7% decline in the first 10 months.
  • The Bank of Japan disclosed that it plans to buy USD 6bn from the MoF’s forex reserves between now and end-Mar, to boost the central bank’s US currency holdings.
  • Japan Tankan large manufacturing index recovered to -10 in Q4 from -27 the prior quarter. Large all industry capex declined by 1.2% in Q4 from the 1.4% uptick in Q3.
  • Industrial production in Japan fell by 3% yoy in Oct (Sep: -3.2%); in mom terms, IP was up 4% from an initial estimate of 3.8%. Capacity utilization grew 6%mom in Oct and declined 2.5% yoy.
  • Core inflation in Japan declined by 0.9% yoy in Nov – the 4th straight month of decline and the fastest pace of yoy decline since Sep 2010. Inflation, excluding food and energy slipped by 0.3% from -0.2% the month before.
  • Exports from Japan declined (for the 24th consecutive month) by 4.2% yoy in Nov while imports dropped by a faster 11.1%, narrowing the trade surplus to JPY 366.8bn. Exports slowed across the board to US (-2.5% yoy), Asia (-4.3%), EU (-2.6%) while those to China rose at the slowest pace in 5 months (+3.8%).
  • Japan’s flash composite PMI remained below-50 in Dec (48 from Nov’s 48.1), with declining new orders and stronger dips in export orders.
  • Consumer price index in India declined to 6.93% in Nov – still higher than the RBI’s upper margin of 6%; consumer food price index increased at a slower rate of 9.43% in Nov (Oct: 11%). Wholesale price inflation meanwhile edged up by 1.55% in Oct (Sep: 1.48%).
  • Trade deficit in India widened to a 10-month high of USD 9.87bn in Nov (Oct: USD 8.71bn). Exports fell by 8.7% in Nov (Oct: -5.1%), dragged down by petroleum products (-59.7%), engineering goods (-8.1%), chemicals (-8.1%). Imports contracted by 13.3% during the month, with oil imports down by 43.36% to USD 6.27bn.
  • South Korea cut its growth forecast for next year to 3.2% (from a previous 3.6%), thanks to a surge in exports, according to the finance ministry’s 2021 policy outlook; this follows a 1.1% dip in growth this year.

Bottom line: Exuberant markets remain disconnected with weak macroeconomic fundamentals as countries tackle the current Covid19 surge: from Sweden to UK, more nations are re-introducing stringent restrictions over the holiday period. Though vaccine distribution has begun, it will take many months before a sense of near-normalcy is restored. Meanwhile, as central banks across the globe stayed put on interest rates, the UK is inching closer to the realities of Brexit. 
Regional Developments

  • Bahrain’s Cabinet approved the widening of VAT exemptions to cover development projects financed by loans.
  • The banking sector in Bahrain revived in Q3: personal and business loans were up by 5.6% and 4% since Feb this year; money supply increased by BHD 0.2bn since Feb to BHD 14bn at end-Sep; the number of point-of-sale transactions increased by 28.9% qoq to 21.4mn and value grew by 24.5% to BHD 588.1mn in Q3.
  • Trade with UAE’s emirates and Bahrain has been on the rise: Abu Dhabi-Bahrain non-oil trade touched to AED 41.83bn during the period from 2015 to Nov 2020 (with AED 3.83bn this year); Dubai’s trade with Bahrain stood at AED 5.37bn in H1 2020 while it grew by 170% in a decade to AED 16.37bn in 2019.
  • The IMF, following a review of the reform programme, allowed Egypt to draw USD 1.67bn under the standby arrangement.
  • Egypt announced the allocation of EGP 1bn towards Covid19 related spending and a vaccine roll-out plan; more restrictions were introduced to control the spread of the outbreak by prohibiting wedding ceremonies and cultural events, in addition to reduce workforce attendance by government employees.
  • Net foreign assets held by Egypt’s banks increased to USD 2.9bn in Oct, from the negative USD 5.3bn recorded in Apr; it is still low versus the USD 7.3bn recorded in Feb, pre-pandemic.
  • Bank deposits of the household sector in Egypt amounted to about EGP 3.477trn in Oct, accounting for 82.92% of total deposits, according to the central bank.
  • Egypt’s exports to Japan surged by 76% yoy to USD 176mn in the first 5 months of 2020.
  • The output of natural gas in Egypt touched 6.2bn cubic feet per day – 13th globally and 5th in the MENA region – according to the minister of petroleum. Meanwhile, daily petroleum output reached about 1.9mn barrels of oil equivalent.
  • Egypt’s Ministry of Aviation received investment offers from Saudi Arabia and Kuwait towards establishing cargo village and logistics areas at Cairo International Airport and Sphinx International Airport.
  • Tourists into Egypt are estimated to reach just 3mn this year, just 23% of numbers last year, and a rebound is unlikely before 2022. In 2019, 13mn tourists visited the country, with receipts reaching more than USD 1bn a month.
  • Egypt launched 416 projects in the electricity and renewable energy sector during the last two fiscal years, with a total investment cost estimated at EGP 95.6bn; of this, around 194 projects, worth EGP 33.6bn, were completed at the end of 2019-20.
  • Calling it a preemptive step to avoid depletion of its foreign exchange reserves, Iraq devalued the dinar for the first time since 2003: the exchange rate is now set at 1,450 dinars per dollar, from a peg of 1,182 dinars.
  • The IMF expects growth in Iraq to decline by 11% this year – the worst contraction in 17 years; decline in oil revenues will widen fiscal and external account deficits to 20% and 16% of GDP respectively. (More: https://www.imf.org/en/News/Articles/2020/12/13/pr20372-imf-staff-completes-2020-article-iv-mission-with-iraq)
  • Iraq’s electric interconnection project with Jordan and Egypt is currently underway, according to the minister of electricity. The project connecting its grid with Jordan is scheduled for completion within 2 years and that with Egypt over 3 years.
  • According to UNHCR, poverty rates in Jordan edged up during the Covid19 outbreak: poverty rose by around 38 percentage points (ppts) among Jordanians, and by 18 ppts among Syrian refugees; this amounts to 1.5mn+ Jordanians and more than 76k Syrian refugees.
  • Jordan’s tax-exempted imports, excluding petroleum, touched JOD 9.6bn (USD 13.5bn) in 2019; of this around JOD 2.6bn were exempt from tariffs due to bilateral and international agreements, the investment law, public and private laws, or Cabinet decisions. The financial impact of these exemptions amounted to JOD 496mn in customs and JOD 79mn in sales tax.
  • Kuwait approved a new cabinet that included new ministers of oil and finance. The re-appointed prime minister called for united efforts “and especially by the National Assembly” in moving forward, as the country is burdened by a fiscal deficit of USD 46bn this year.
  • The 2020-21 budget in Kuwait estimates revenues from expatriates’ residency fees, specifically from the issuance of domestic workers’ visas and family visas, at KWD 9.6mn, reported Al Rai.
  • Flights to and from Kuwait International Airport will restart from Jan 2021, including 34 “banned” countries; details of institutional quarantine will be revealed in a few days.
  • Kuwait’s health ministry allocated about KWD 1.2mn for importing the drug Remdesivir, which is being given to patients infected with Covid19 in public hospital wards.
  • Lebanon’s new government formation has stalled, with the PM designate and President exchanging a “war of words” over the delays – largely due to the disagreement over the distribution of portfolios and naming ministers – last week. Separately, the nation’s leading Christian cleric intervened to break the political impasse.
  • Delayed bank earnings statements from Lebanon’s four big banks suggest the sector is insolvent, with government debt accounting for over half banks’ balance sheet. S&P estimates that the financial sector faces losses of LBP 154trn, or about USD 2bn, should a much-delayed restructuring plan be agreed.
  • Oman’s registered SMEs accelerated by 12.9% yoy and 1.4% mom to 47220 at end-Oct.
  • The pandemic has resulted in direct losses to Oman’s tourism sector at an estimated OMR 0.5bn as of end-Sep this year, according to a senior tourism ministry official. Hotel occupancy rates dropped to 26.1% by end-Oct from 52.3% in Oct 2019 while total number of guests plunged by 53.9% to 646k persons.
  • About 2901 Omanis availed the Job Security System by end of November (84% males and 16% females), according to the Public Authority for Social Insurance.
  • The number of expats in Oman has been declining: it stands at 1.7mn now versus 2mn two years ago.
  • Though a normalization of relations between Qatar and its GCC counterparts will be a credit positive for the country, its high public sector debt will weigh heavily on its sovereign ratings, revealed Fitch Ratings.
  • Saudi Arabia’s GDP declined by 4.3% in Q3, rebounding from the 7% plunge in Q2, with declines across oil and non-oil sectors (-8.2% and -2.1% respectively).
  • Budget for 2021 was released by Saudi Arabia last week: spending will touch SAR 990bn (USD 263.91bn), down 7% yoy; deficit is expected to amount to SAR 141bn and will be covered through debt sales and a “very limited drawdown” from Saudi reserves. Saudi Arabia, which expects to receive between SAR 15-25bn in dividends this year from PIF, also plans to nearly balance its budget by 2023. (Read more: https://nassersaidi.com/2020/12/17/weekly-insights-17-dec-2020-weak-pmis-in-uae-dubai-inspite-of-vaccine-exuberance-takeaways-from-saudi-2021-budget/)
  • Crude oil exports from Saudi Arabia increased to 6.159mn barrels per day in Oct from Sep’s 6.066mn bpd.
  • Digital shopping gains ground in Saudi Arabia: online stores accelerated by 171% to 36447 shops in the last 9 months, revealed the minister of trade. the number of supermarkets providing home delivery services increased from just three pre-pandemic to 14 afterwards.
  • Saudi Arabia’s Ministry of Industry and Mineral Resources issued 830 licenses to firms having a combined total capital of SAR 21bn and employing more than 36,750 workers during Jan-Nov.
  • Saudi Arabia plans to attract SAR 220bn in new investments in tourism by 2023 and more than SAR 500bn by 2030, disclosed the minister of tourism. The sector currently accounts for 4% of jobs in the country.
  • Pakistan returned USD 1bn to Saudi Arabia as a second instalment of a USD 3bn soft loan; USD 1bn was returned earlier in Jul and another billion will be repaid next month.
  • UAE, Saudi Arabia and Egyptian startups raised USD 16.5mn, USD 8.7mn and USD 6mn respectively in Nov, out of total USD 37mn invested in all MENA startups, according to Wamda.
  • Bahrain ranked first in the GCC for Islamic finance knowledge and fifth globally, according to the latest Islamic Finance Development Indicator.
  • The number of 5G subscriptions to reach 130m in MENA region by 2026, representing 15% of the total mobile subscriptions, according to a report by Ericsson Mobile Services.

UAE Focus

  • Dubai issued a new law governing unfinished and cancelled projects: a special tribunal will be set up to oversee the liquidation of unfinished and cancelled projects as well as the settling of related claims. The tribunal’s jurisdiction covers property disputes across the emirate, so cases over stalled projects cannot be filed at the DIFC Courts.
  • Inflation in Dubai declined by 3.7% yoy in Nov (Oct: -3.41%), with decreases across utilities (-6.96%), transport (-6.29%) and recreation (-12.22%), as well as clothes (-2.25%).
  • Dubai PMI slipped to 49 in Nov – the lowest since May – and from Oct’s 49.9, with declines in output and sales growth. In spite of potential rollout of vaccines, business expectations for the year-ahead slipped into negative for the first time since the series began in Apr 2012.
  • The Abu Dhabi Department of Economic Development allows a 1-year extension to secure a ‘Tajer Abu Dhabi’ license even without an official business location. Around 14,613 ‘Tajer Abu Dhabi’ licenses have been issued since its launch in 2017 and end-Sep.
  • Dubai-based district cooling provider Empower plans to lower fuel surcharge on electricity and water for its customers. This is expected to benefit more than 140k customers and reduce district cooling charges by more than AED 48mn (USD 13mn) a year.
  • The value of exports of members of the Ras Al Khaimah Chamber of Commerce and Industry totalled AED 671bn in Jan-Sep this year. Saudi Arabia topped the list of countries, in terms of numbers of certificates of origin, with 3,208 certificates covering goods valued at AED 582mn.
  • UAE ranked first in the Arab World in UNDP’s Human Development Report 2020, in a list topped by Norway, Ireland and Switzerland. UAE was ranked top in the Arab region for gender balance as well.

Media Review
Follow $100 through the 2020 market rollercoaster
https://ig.ft.com/2020-markets/
The $14 billion outflow from India’s bond market in 2020
https://www.bloomberg.com/news/articles/2020-12-17/global-investors-are-dumping-indian-bonds-like-never-before
Aramco, a gamechanger: may have to sell assets, borrow more to maintain Saudi dividend
https://www.arabnews.com/node/1778021/business-economy
https://www.reuters.com/article/saudi-budget-saudi-aramco/aramco-may-have-to-sell-assets-borrow-more-to-maintain-saudi-dividend-idUSKBN28Q247
The Arab spring: ten years on
https://www.economist.com/middle-east-and-africa/2020/12/16/the-arab-spring-at-ten
Doing Business Data Corrections and Findings of Internal Audit: World Bank Group
https://www.worldbank.org/en/news/statement/2020/12/16/world-bank-group-statement-on-doing-business-data-corrections-and-findings-of-internal-audit
Bitcoin surges towards USD 25k
https://www.ft.com/content/0a6507e9-d3f4-4319-bffb-eb915260e388
https://www.forbes.com/sites/billybambrough/2020/12/19/coinbase-ceo-brian-armstrong-issues-serious-warning-as-bitcoin-surges-toward-25000/
https://www.cnbc.com/2020/12/18/new-bitcoin-investors-buying-20-million-or-more-have-flooded-into-crypto-this-year-as-the-price-so.html
 
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Weekly Insights 17 Dec 2020: Green shoots (of recovery) in the UAE & Takeaways from Saudi 2021 Budget

Download a PDF copy of this week’s insight piece here.
 
Chart 1: PMIs in UAE/ Dubai remain below-50 for the 2nd consecutive month; mobility & traffic pick up though demand remains weak

Though UAE is one of the more “open” economies across the Arab world (in the Covid19 era), the PMI readings in both UAE and Dubai stayed below the 50-mark for two consecutive months. Vaccine exuberance seems to have been overshowed by the decline in business, as business expectations turn negative for first time ever in Dubai.
Demand weakness remains the main reason for the dip following an uptick after the initial lockdowns were lifted; with the recent surge in Covid19 cases in Europe & Asia, recovery has been slow in tourism and travel sector. There is some signs of optimism: flight bookings in the London-Dubai sector accelerated by 112% after the UAE-UK corridor was announced in early Nov; Israeli tourists are flocking to the city after the normalization of relations (& travel corridor) so much so that flydubai is now offering 4 Dubai-Tel Aviv flights daily.
UAE’s recent liberalisation measures (rights of establishment, visas & immigration) add to the medium-term optimism and potential acceleration in the rollout of vaccines by next year offers hope for visitor arrivals in time for Expo in Oct next year. However, the extent of business closures/ rising NPLs as an aftermath of the Covid19 crisis remains to be seen.
Mobility data from Google shows the pace of recovery at grocery and pharmacy stores was much faster than that for the retail and recreation outlets (restaurants, cafes, malls, theme parks etc); congestion levels are still about 33% below 2019 levels, though certain days in Nov-Dec showed positive readings (i.e. congestion this year at a higher rate than that day a year ago).

Chart 2: Saudi Arabia’s plans to diversify away from oil needs to be accelerated
Global demand for oil is recovering but remains weak given the impact of Covid19 and ongoing lockdown restrictions, therefore, plans to diversify away from oil dependence will need to be accelerated. In this regard, accelerated privatisation of state-owned assets is an essential structural reform: it is promising that the government estimates the sale of government companies and assets to double to about SAR 30bn in 2021. This will also encourage private sector investment and attract capital inflows.
Is the Saudi target to achieve a balanced budget by 2023 realistic? It depends on how fast both the global economy, Asia/China (critical for the growth of oil and gas demand) and the Saudi economy can recover from the effects of Covid19, in addition to how the OPEC decision to raise production pans out. On the domestic front, rationalising spending by phasing out subsidies and lowering public sector employment/ wages will likely support the move towards a balanced budget.

 
 
 
 
 
 
 
 
 
 
Chart 3: Saudi Arabia’s tax revenue supported by VAT, while capex spending is scaled down
The estimated rise in non-tax revenues is likely due to a combination of the recent rise in oil prices (+33% since Nov) and OPEC’s decision to resume oil production (plans to add 500k barrels a day to crude markets starting in Jan, with subsequent moves decided at monthly meetings). VAT hikes will contribute to the uptick in tax revenues, assuming there are no deferrals/ exemptions on taxes on goods & services next year. The Aramco dividend – of which 98% will accrue to the government – will also add to the government’s coffers (though the allocation between PIF/ reserves at SAMA or MoF is not clear).
Though the government’s capex spending has been significantly scaled down (-26.6%), it is a positive move, with the private sector being given more opportunities to execute infrastructure and developments projects (the massive NEOM project and others) and PPP, thereby supporting private sector growth and job creation (outside of the public sector).

 
 
 
 
 
 
 
 
 
 
 
 
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Weekly Economic Commentary – Dec 13, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Equity markets in the US declined, as new stimulus talks dragged on with a consensus unlikely to be reached before Christmas; pan-European Stoxx was down after 5 weeks of gains and MSCI World declined by 0.5%. Regionally, most markets were down while the UAE markets gained on news of the Sinopharm vaccine’s efficacy and potential resumption of activities in Abu Dhabi within the next few days. The dollar index gained; while sterling slipped on prospects of exiting EU minus a trade deal the Chinese yuan is on its longest expansionary streak since 2014 (rising vis-a-vis the greenback for the past six months). Oil prices faltered after hitting USD 50 a barrel during the week on demand worries, and gold price gained.
Weekly % changes for last week (10-11 Dec) from 3 Dec (regional) and 4 Dec (international).

Global Developments
US/Americas:

  • Non-farm productivity increased by 4.6% in Q3 (Q2: 10.6%), as output surged by 43.4% and hours worked rose by 37.1% while unit labour costs declined by 6.6% in Q3 (Q2: -8.9%).
  • Inflation in the US climbed up by 0.2% mom in Nov, following a flat reading in Oct; in yoy terms, inflation was unchanged at 1.2%, with higher prices for new vehicles (+1.6%) while prices slowed for food (3.7% from 3.9%) and used cars and trucks (10.9% from 11.5%). Producer price index edged up by just 0.1% yoy in Nov (Oct: 0.3%), recording the smallest gain since Apr. Excluding food, energy and trade services components, producer prices inched up 0.1%.
  • Monthly budget deficit stood at USD 145bn in Nov from USD 284bn the month before, bringing the deficit in the first two months of the budget year to USD 429.3bn (+25.1% yoy).
  • Initial jobless claims swelled to a 3-month high of 853k in the week ended Dec 5 from an upwardly revised 716k the prior week, with the 4-week average rising to 776k. Continuing claims rose to 5.757mn in the week ended Nov 28 from 5.527mn the week before.

Europe:

  • The ECB increased the size of its pandemic emergency purchase programme (PEPP) to EUR 1.85trn from EUR 35trn, while also extending its end until at least Mar 2022; furthermore, the apex bank extended its offer to finance banks at negative rates till Jun 2022.
  • The EU approved a seven-year budget worth EUR 1.1trn in addition to a one-off EUR 750bn fund, financed by joint borrowing, to support in its recovery from the Covid19 crisis.
  • GDP in eurozone grew by 12.5% qoq in Q3 (down from an earlier estimate of 12.6% and from Q2’s 11.7% drop), thanks to a rebound in demand and as exports grew by 17% while investment is down 10.2% from pre-crisis levels; in yoy terms, GDP declined by 4.3% yoy.
  • Exports from Germany increased by 0.8% mom in Oct, though at a slower pace than Sep’s 2.3% uptick; imports were up by 0.3%, widening the surplus to EUR 18.2bn (EUR 17.6bn). Exports to China increased by 0.3% yoy while those to the US, UK and EU were down by 10.5%, 11.7% and 5.1% respectively.
  • Germany’s industrial production increased by 3.2% mom in Oct (Sep: 1.6%) – the largest rise in 4 months – though output is still 4.9% below Feb’s levels.
  • German CPI fell by 0.8% mom (the biggest fall in a year) and 0.3% yoy in Nov, posting the 4th month of deflation this year. The harmonized index fell by 0.7% yoy in Nov.
  • German ZEW economic sentiment improved to 55 in Dec from Nov’s 39 reading. Current situation worsened by 2.2 points to -66.5, also below Sep’s reading of -66.2.
  • The ZEW economic sentiment indicator for the eurozone added 6 points in Dec, rising to 54.4, while the indicator for the current situation ticked up by 0.7 to -75.5.
  • UK GDP increased by 0.4% mom in Oct, following an expansion of 1.1% in Sep – the weakest growth since the collapse in Apr. Output in Oct was 7.9% lower than it was in Feb and weaker by 8.2% yoy. (Chart – output vs Feb levels, by sector: https://tmsnrt.rs/3mdp4By)
  • Industrial production in the UK declined for the 19th consecutive month, down by 5.5% yoy in Oct (Sep: -6.3%); in mom terms, IP grew by 1.3% (Oct: 0.5%).

Asia Pacific:

  • China’s exports increased by 21.1% yoy – the highest growth rate since Feb 2018, and the 6th consecutive month of export growth – and imports by 4.5% in Nov, widening the trade surplus to USD 75.42bn (+102.9% yoy and from Oct’s USD 58.44bn).
  • Inflation in China fell by 0.6% mom and 0.5% yoy in Nov (Oct: -0.3% mom and 0.5%), declining for the first time since Oct 2009, thanks to a drop in food prices (-2% yoy). Money supply increased by 10.7% following 10.5% the month before. Foreign exchange reserves moved up to USD 3.178trn (Oct: USD 3.128trn).
  • New loans in China increased to USD 1.43trn in Nov (Oct: 689.8bn); banks extended CNY 18.38trn in new loans in Jan-Nov 2020 (on track for a new record, given CNY 16.81trn disbursed in 2019).
  • Japan’s leading economic index inched up to 93.8 in Oct (Sep: 93.3) – the highest reading since Jun 2019 – while coincident index increased to 89.7 in Oct (84.8) – the highest since Feb.
  • GDP in Japan grew by 5.3% qoq in Q3 and at an annualized real 22.9% from the previous quarter, thanks to firmer private consumption (+5.1%).
  • Overall household spending in Japan rose by 1.9% yoy in Oct (Sep: -10.2%), posting the first rise in 13 months. Demand for durable goods like automobiles and refrigerators increased. Separately, real wages fell for the 8th consecutive month in Oct.
  • Industrial output in India increased by 3.6% yoy in Oct (Sep: 0.2%), the fastest pace in 7 months, thanks to a recovery in electricity and manufacturing sectors (+11.2% and 3.5% respectively). During Apr-Oct, industrial growth contracted by 17.5% (vs +0.1% a year ago).

Bottom line: Brexit talks continued last week, with both parties warning that a trade deal seemed unlikely by the Sunday deadline, though negotiations will continue. Will the Bank of England meeting this week see another stimulus plan, given year-end Brexit potentially sans a deal? The Fed also meets this week, most likely continuing on its dovish rhetoric and calling for continued stimulus given the surge in Covid19 cases (1mn cases were added in just 4 days and hospitalizations hit a record high for a 7th consecutive day on Sat). The positive note is that regulatory approvals have been forthcoming across the globe, with many nations starting vaccinations.  However, while the airline industry will support distribution of vaccines globally, its success is also dependent on the last mile delivery hurdles and vaccine storage facilities.
Regional Developments

  • Bahrain allocated BHD 19mn towards housing loans to 600 Bahrainis this year: this includes construction loans, as well as loans for the purchase of plots and renovations.
  • Expats at Bahrain’s Works, Municipalities Affairs and Urban Planning Ministry, accounting for 17% of the workforce, have cost the government BHD 17mn over the past two years, according to the minister. The expats will all be replaced by 2024.
  • Egypt received its first shipment of the Sinopharm vaccine, to be distributed free of charge, with priority for medical staff and people with chronic diseases.
  • Urban inflation in Egypt increased to 5.7% in Nov (Oct: 4.5%), largely due to the uptick in food prices (vegetables were up 25%). Core inflation inched up to 4.012% from 3.889% the month before.
  • Egypt’s budget deficit narrowed to EGP 134.97bn in Q1 of 2020-21, representing 2.1% of GDP. State revenues increased by 18.4% yoy to EGP 204.71bn, thanks to a 14.1% hike in tax revenues. Expenditures were up by 11% to EGP 336.8bn, with spending on wages up 5.1%. The country plans to narrow the budget deficit to 7.5% of GDP during the current fiscal year.
  • Egypt’s net international reserves inched up to USD 39.221bn in Nov (Oct: USD 39.22bn). Net reserves have been above EGP 38bn since Jun this year. Separately, gold reserves fell for the 3rd consecutive month, down by USD 246mn from Oct to USD 4.082bn in Nov.
  • Domestic liquidity in Egypt grew by 1% mom and 19.5% yoy to a record EGP 4.805trn in Oct. Money supply increased to EGP 1.14trn in Oct, from EGP 1.13trn in Sep.
  • Egypt received USD 7.3bn in development funds this year, disclosed the Minister of International Cooperation, of which USD 2.7bn is directed to the private sector.
  • Remittances into Egypt increased by USD 1.3bn to USD 8bn in Jul-Sep, according to the central bank. In Sep alone, remittances grew by 17.4% yoy to USD 2.7bn.
  • Egypt’s central bank will extend support to the tourism sector until end-2021. Not only will any requests for postponement of bank entitlements be accepted for a maximum period of three years, but the validity period of the retail loan initiative for those employed in the tourism sector will also be extended for a year.
  • Bilateral trade between Egypt and France touched USD 1.6bn in Jan-Sep 2020, from a total of USD 2.4bn in 2019.
  • An executive agreement to activate the Egyptian-Saudi Investment Fund has been finalized, revealed Egypt’s Cabinet spokesman.
  • Remittances from Kuwait dropped by 21.8% qoq to KWD 1.056bn in Q2; remittances were up by 12.13% yoy to KWD 2.41bn in H1. Separately, given travel restrictions due to Covid19, total travel spending by Kuwaitis plunged by 56.35% yoy to KWD 1.27bn in H1 this year.
  • The Al-Anba daily reported that more than 90% of SME owners in Kuwait were unable to pay rents or salaries, given the impact from Covid19; most SMEs were operational in the storage, aviation and tourism sectors.
  • Lebanon President’s counterproposal to the 18-member Cabinet lineup proposed by PM-designate Hariri will likely result in further delays to the formation of a government and thereby the reform process.
  • Imminent subsidy cuts in Lebanon are likely to amount to a “social catastrophe”, if no safety net is created, warn officials. For now, only USD 800mn remains to allocate towards subsidies – which will last for another two months even with subsidy rationing.
  • A new 100% government-owned energy company – Energy Development Oman (EDO) – was launched by Oman, with the aim to transfer government stake in Concession Area 6 to EDO. The new company will receive oil and gas revenues to settle annual capital and operational costs of production.
  • Oman announced a visa-free entry for nationals from 103 countries, in a bid to boost tourism into the nation. This will allow visitors with a confirmed hotel reservation, health insurance and a return ticket to visit for a period of 10 days.
  • Personal loans disbursed by Oman’s banks grew by 2.4% yoy to OMR 10.242bn in 2019, according to the central bank. Overall bank credit growth was up 3.1%.
  • About 3.9mn passengers passed through Oman’s airports in Sep this year, according to NSCI.
  • Qatar’s 2021 budget, based on an average oil price of USD 40 per barrel, estimates a deficit of QAR 34.6bn (USD 9.5bn). Expenditure was down by 7.5% yoy to QAR 194.7bn while revenues are expected to decline by almost 25% to QAR 160.1bn.
  • Talks with Qatar are progressing well, according to officials from both the UAE and Saudi Arabia. This follows Kuwait’s statement the week before that a resolution was underway.
  • Saudi Arabia issued over 400k tourist visas in 6 months between Sep 2019-Mar 2020. About SAR 160mn has been provided in loans to support the tourism sector.
  • Value of mortgage loans in Saudi Arabia surged by 88% to SAR 105.52bn (USD 28.142bn in Jan-Oct 2020. Breaking this down further shows that mortgages to buy villas accounted for 81% of the total.
  • Saudi Arabia’s investment in new projects in the non-oil industrial sector grew to a record high of around SAR 1.086trn in 2020, of which metal products accounted for the bulk (20%).
  • Oil exports to the US from Saudi Arabia fell to the lowest since Jun 2010: about 73k barrels per day were shipped to the US 2 weeks ago, according to EIA data
  • Local cement sales in Saudi Arabia increased by 16.5% yoy and 0.7% mom to 4.75mn tonnes in Nov 2020. Cement exports declined by 20.4% mom and 6.7% yoy to 179k tonnes.
  • Women employees in Saudi Arabia’s industrial cities surged by 120% yoy to 17k by end-Q1 this year.
  • Saudi Arabia’s education minister disclosed that the nation was ranked first in the Arab world and 17th globally for Saudi universities’ efforts to publish research on Covid19, accounting for 1.8% of global research production.
  • During the period from 29 Nov to 5 Dec, POS sales volume in Saudi Arabia grew by 4.1% to SAR 9bn from the week before. Food and beverages topped POS purchases, followed by restaurants and cafes.

UAE Focus

  • The first phase of UAE’s economic recovery plan – with 15 initiatives – is more than 46% complete, according to the economy ministry. Implemented initiatives include amendments to the bankruptcy law, allocation of grants and incentives to tourism establishments, promotion of FDI through amendments to the commercial companies law, amendments to the commercial transactions law and the decriminalization of cheques without balance, reduction of fees and taxes on the tourism sector, enhancing the flexibility of labour market and the comprehensive targeted economic support plan among others.
  • UAE non-oil private sector activity contracted in Nov: PMI stood unchanged from Oct at 49.5, on weak demand. While new orders increased at a slower pace, employment fell at the slowest rate since Nov. Business confidence fell, with respondents providing a negative outlook for the next 12 months for the first time since data were collected in Apr 2012.
  • Amendments in the UAE allowing for full ownership of businesses will lead to more than a 3-fold increase in number of companies in the UAE to 1mn over the next decade, according to the economy minister. Separately, Dubai Economy’s director general expects the reforms to create more jobs and investments are estimated to rise by 35%.
  • Abu Dhabi is planning to resume all economic, cultural, tourist and entertainment activities within two weeks, it was revealed last week.
  • The UAE government received an Aa2 rating in creditworthiness – the highest sovereign rating in the region – with a stable outlook from Moody’s.
  • Bilateral trade between UAE and UK touched USD 5.5bn in Jan-Aug 2020 and UAE’s non-oil export to the UK accounted for nearly USD 500mn (+25%). UK accounts for 16% of the total FDI balance in the UAE as of end-2018 while UAE’s direct investments in the UK accounted for USD 2bn by end-2018.
  • About 9 in 10 companies in the UAE expect to be profitable by the end of 2022, according to the HSBC Navigator survey, versus a global average of 81%. Around 18% expect to be profitable by end of this year.

Media Review
Amateur traders’ euphoria & US IPOs (“dazzling 2020 debuts”)
https://www.reuters.com/article/us-usa-ipo-trading-idUSKBN28L2UW
https://www.ft.com/content/cfdab1d0-ee5a-4e4a-a37b-20acfc0628e3
A thin, last-minute Brexit trade deal is better than no deal at all
https://www.economist.com/leaders/2020/12/12/a-thin-last-minute-brexit-trade-deal-is-better-than-no-deal-at-all
China’s exports pinched by global run on shipping containers
https://in.reuters.com/article/global-shipping-container/boxed-out-chinas-exports-pinched-by-global-run-on-shipping-containers-idINL4N2IP1TV
China pulls back from the world: rethinking Xi’s ‘project of the century’
https://www.ft.com/content/d9bd8059-d05c-4e6f-968b-1672241ec1f6
 
 
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Weekly Insights 10 Dec 2020: Vaccine Exuberance, PMIs and Indicators of Economic Activity

 
 
 
 
 
 
Download a PDF copy of this week’s insight piece here.
 
Chart 1: PMIs in the Middle East/ GCC have had a slow restart compared to US/ Europe/ Asia post-lockdown, even during the latest wave
Manufacturing PMI readings have picked up in Nov across the globe, thanks to increases in export orders; global manufacturing PMI also showed employment rising for the first time in 12 months & business confidence at a 69-month high. Vaccine announcements in early-Nov probably added to the mostly positive outlook.
There is a distinct divergence in the Middle East, with UAE and Lebanon still below the 50-mark in Nov. Lebanon’s reading is a clear reflection of its domestic economic meltdown while UAE’s is pegged to subdued demand in spite of the nation being the least stringent (i.e. more “open”, including for tourists) in the region.
The announcement of the efficacy of the Sinopharm vaccine in UAE and planned deployment, in addition to the recent spate of announced reforms – rights of establishment, long-term residency, remote working & retirement visas –  should support business and consumer confidence in the months ahead.

Chart 2: Will vaccines signal a recovery and rescue the airline industry?
Vaccines have been in the news since early-Nov, with the latest announcement from the UAE on the Sinopharm vaccine. As the vaccines are rolled out next year, the hope is that nations recover to the pre-Covid19 phase.
International travel markets remain weak: Middle East airlines revenue passenger-kilometres (RPKs) were down by 86.7% and 88.2% for international connectivity and long-haul traffic in Oct. This should benefit the airline industry in 2 ways: (a) in the near-term, the industry will support distribution of vaccines across the globe: being well-connected to global hubs and given its fleet size, UAE’s Emirates and Etihad are well-placed to gain. Emirates SkyCargo transported more than 75mn kilograms of pharmaceuticals on its aircraft last year; (b) as more people get vaccinated, demand for and willingness to travel will increase probably by H2 next year along with ‘travel bubbles’.
However, the success of the vaccine distribution is also dependent on the last mile delivery hurdles and vaccine storage facilities.

Chart 3: Bank credit in the UAE
The UAE central bank extended its Targeted Economic Support Scheme (Tess) for another six months until June 30, 2021
During Apr-Sep 2020, the overall pace of lending to GREs (+22.7% yoy) and government (+19.6%) have outpaced lending to the private sector (-1.0%). The pace of SME lending has been slow as well, but up 3.5% year-to-date.
Breaking down lending by sector, there has been upticks in credit to both transport, storage and communication (+52.1% yoy as of end-Sep) as well as government (13.6% yoy); mining & quarrying and construction sectors saw declines of -14.4% and -1.9% respectively.

Chart 4: Indicators of economic activity in Saudi Arabia
Among the proxy indicators for consumer spending – ATM withdrawals and PoS transactions – the latter is picking up faster, supported by transactions in food and beverage (+28.9% during Jan-Oct 2020) and restaurants and cafes (+68.9%); in comparison, transactions at hotels are down by 33%. ATM transactions dropped by one-fourth to SAR 499.87bn in Jan-Oct.
Loans to the private sector in KSA has been growing at a double-digit pace since Mar this year, with the year-to-date growth at 12.4% yoy.
Cement sales have been on the uptick, supported by the number of ongoing mega-projects (like the Red Sea development) as well as residential demand: real estate loans by banks are up 38% till Q3 this year, outpacing growth in both 2018 & 2019 while PoS transactions in the construction and building materials is up 44.2% this year (a large 247.4% uptick in Jun, ahead of the VAT hike).

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Weekly Economic Commentary – Dec 6, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Equity markets continue to rally as vaccine approvals are being fast-tracked (UK already approved Pfizer’s vaccine) and in spite of record-high cases in the US and ongoing social restrictions in many parts of Europe. The MSCI world share index posted a 5th straight week of gains, UK’s FTSE100 touched a 9-month high, the Indian stock market touched a record high last week (in spite of the recent weak GDP numbers) while in the region, markets were mixed (they were closed during the delayed OPEC+ meeting and decision to raise oil supply by 500k barrels a day from Jan). The dollar fell to its weakest level in more than two and a half years, while the UK pound (still in Brexit deal negotiations) posted a new 2020 high last week (USD 1.35) and the euro is at a 2.5-year high. Oil prices ended higher, with Brent close to USD 50 (highest since early Mar), on the OPEC+ decision and a weaker dollar. Gold price ended higher vs last week.
Weekly % changes for last week (3-4 Dec) from 27 Nov (regional) and 28 Nov (international).

Global Developments
US/Americas:

  • Non-farm payrolls increased by 245k in Nov, posting the 7th consecutive month of gains, though dropping from Oct’s revised 610k reading. Job gains were mainly from transportation and warehousing (+145k), professional and business services (+60k) and healthcare (+46k) while retail lost 35k jobs. Unemployment rate fell to 6.7% from 6.9% the month before. Labour force participation rate edged down to 61.5% from 61.7% the previous month.
  • Factory orders posted a 6th monthly gain, rising by 1% mom in Oct (Sep: 1.3%), thanks to led by orders for computers and electronics (3.2%), transport equipment (1.4%) and fabricated metal products (2.3%). Orders for non-defense capital goods excluding aircraft increased by8%.
  • Activity slows sharply across the US: Chicago PMI fell to a 3-month low of 58.2 in Nov (Oct: 61.1); the Dallas Fed manufacturing business index dropped to 12 (Oct: 19.8) as the production index tumbled to 7.2 (Oct: 25.5). This was also evident in the Fed Beige Book survey: while firms’ outlooks remained positive, “optimism has waned”, with “four districts describ[ing] little or no growth, and five narratives not[ing] that activity remained below pre-pandemic levels for at least some sectors”.
  • ISM manufacturing PMI slipped to 57.5 in Nov (Oct: 59.3), as new orders slowed (65.1 from 67.9) and employment index slipped to 48.4 from 53.2 the month before. In contrast, however, Markit PMI increased to 56.7 in Nov (Oct: 53.4), the strongest pickup since Sep 2014, thanks to a strong rise in production and new order inflows.
  • While ISM services PMI eased to 55.9 in Nov (Oct: 56.6), Markit services PMI improved to 58.4 (Oct: 56.9), as did composite PMI (58.6 from 56.3), posting the sharpest increases since Mar 2017 and 2015 respectively.
  • Pending home sales declined unexpectedly by 1.1% mom in Oct (-2% in Sep), on higher prices, though in yoy terms it picked up by 20.2%. Both inventory of homes for sale and mortgage rates are at historic lows, and the current dip implies a near-term softening of existing home sales.
  • Trade deficit widened to USD 63.1bn in Oct (Sep: USD 62.1bn), as both exports and imports increased – for a 5th consecutive month – by 2.2% and 2.1% respectively.
  • Initial jobless claims slowed to 712k in the week ended Nov 28 from an upwardly revised 787k the prior week, and the 4-week average easing to 739.5k. Continuing claims fell to 5.52mn in the week ended Nov 21 from 6.1mn the week before.

Europe:

  • German factory orders increased by 2.9% mom and 1.8% yoy in Oct (1.1% mom and -1.1% yoy), led by demand for capital goods (+3.8%), as both domestic and foreign orders picked up (by 2.4% and 3.2% respectively). Additionally, compared with Feb, orders were 0.8% higher.
  • Germany’s harmonized index of consumer prices slipped by 0.7% yoy and 1% mom in Nov (Oct: -0.5% yoy and 0% mom). Headline inflation has been negative since Aug.
  • Unemployment rate in Germany stood at 6.1% in Nov (Oct: 6.2%). Separately, unemployment rate in the euro area slowed to 8.4% in Oct from 8.5% the month before.
  • Germany Markit manufacturing PMI edged down to 57.8 in Nov (Oct: 58.2), posting the first fall in 7 months; while new orders slowed on weaker demand, export orders rose to Europe and Asia. With services PMI slipping even further down (46 in Nov – one of the worst since Jun 2009 – from 49.5 in Oct) given the forced closures amid the new restrictions, it was not surprising that the composite PMI eased (51.7 from 52 – the lowest in 5 months).
  • Eurozone manufacturing PMI slowed to 53.8 (Oct: 54.8), with growth in output and new orders easing; as always, Germany remained the brightest spot and the divergence with the rest of the region is the widest on record. There was substantial decline in services activity, (41.7 in Nov from 46.9 in Oct), also dragging down composite PMI (45.3 from Oct’s 50).
  • Retail sales in Germany increased by 2.6% mom (Sep: -1.9%) in Oct – before the partial lockdown, posting the largest pickup since Apr 2018; compared to Feb, sales are 5.9% higher. In yoy terms, sales rose by 8.2% yoy (Sep: 6.5%) – the biggest climb since May 2000 on strong demand for food, furnishings and household appliances. Eurozone retail sales rose by 4.3% yoy and 1.5% mom (2.5% yoy and -1.7% mom); compared to Feb, sales were up 3.1%.
  • Manufacturing PMI in the UK accelerated to a 35-month high of 55.6 in Nov – though a downturn in consumer goods production continued – while services PMI declined to 47.6 from 51.4 the month before as the second national lockdown was imposed. The composite PMI slipped below 50 for the first time since Jun, clocking in 49 in Nov (Oct: 52.1) as services sector downturn more than offset manufacturing growth.

Asia Pacific:

  • China’s NBS manufacturing PMI increased to 52.1 in Nov (Oct: 51.4), the 9th straight month of growth and the strongest since Sep 2017, thanks to output (54.7 in Nov from 53.9 in Oct), new orders (53.9 from 52.8) and export sales (51.5 from 51). Non-manufacturing PMI improved to 56.4 from 56.2 the month before – the fastest rise since Jun 2012, as new businesses increased amid a decline in employment (48.9 from Oct’s 49.4).
  • Caixin manufacturing PMI rose to 54.9 in Nov (Oct: 53.6) – the highest level since Nov 2010 – as new order volumes picked up thanks to domestic demand. Services activity increased to 57.8 in Nov (Oct: 56.8) – the second quickest pace since Apr 2010 – supported by strong overseas demand.
  • Japan industrial production increased for a 5th consecutive month in Oct, up by 3.8% mom (Sep: 3.9%), thanks to gains in general machinery (+17.9%), auto production (+6.8%) and electrical and electronics equipment (8.4%).
  • Unemployment rate in Japan ticked up to a 3-year high of 3.1% in Oct (Sep: 3%), with the total number of unemployed people rising by 80k to 2.14
  • Retail trade in Japan picked up by 0.4% mom and 6.4% yoy in Oct (Oct 2019, with the sales tax hike, had seen curtailed spending); large retailer sales were up 2.9% after a 13.9% drop.
  • Japan’s manufacturing PMI rose to 49 in Nov (Oct: 48.7) – the highest level since Aug 2019 – with softer falls in production new orders and employment levels. Services PMI also inched up to 47.8 from the previous month’s 47.7, though activity and new business declined for the 10th consecutive month, alongside decline in employment.
  • The Reserve Bank of India left the repo and reverse repo rates unchanged at 4% and 3.35% respectively while maintaining an “accommodative stance”. The apex bank also revised its real GDP growth rate projection to -7.5% during the 2020-21 fiscal year from its previous forecast of a 9.5% drop.
  • India’s manufacturing PMI fell to a 3-month low of 56.3, on slower increases in orders, exports and output while employment remained in the contractionary zone.
  • Singapore PMI dropped to 46.7 in Nov (Oct: 48.6), with falling export orders dragging down the headline number alongside weaker demand conditions.
  • Retail sales in Singapore ticked up by 0.2% mom in Oct, though down by 8.6% yoy (Sep: -10.7%). Supermarkets and hypermarkets were the best performers in yoy terms (+22.3% yoy) while petrol service stations picked up the most in mom terms (+5.1% mom).

Bottom line: The dramatically delayed OPEC+ meeting last week eventually reached a consensus to raise oil supply by 500k barrels per day starting from Jan – about 1/4th of what was expected. Even as Brexit trade negotiations continue with the EU in the last four weeks this year, two other milestone meetings are on the cards this week: the EU meets to decide on its USD 1.8trn spending package and in the US, Covid19 relief packages and a spending bill to avert a potential government shutdown loom large. The JP Morgan global composite PMI stood at 53.1 in Nov – a tad below Oct’s 26-month high of 53.3 – supported by manufacturing (posting a 33-month high) and in spite of a slow expansion in services (52.2 in Nov vs 52.9 in Oct). Business optimism surged to a 6.5 year high, thanks to an encouraging 3rd straight month of improving export orders. As has been the case in the past few months, Asia is performing better than its global peers, and within Europe, the divergence between Germany and the others are blatant.
Regional Developments

  • Bahrain awarded 1022 tenders worth a total USD 2.7bn in Jan-Sep this year, with the oil sector accounting for 13% of tenders (27% of value), followed by the construction and engineering (15.8% of projects, 26% of value). As of H1, there were 769 tenders issued valued at USD 1.7bn.
  • Net profits for Bahrain’s listed companies declined by 51.1% yoy to USD 230.7mn in Q3 this year, with only 3 sectors out of 13 posting a rise in profits, according to Kamco Invest.
  • Bahrain Bourse signed an MoU with the Supreme Council for Environment to encourage listed firms to disclose information related to environmental compliance. This follows the bourse’s issuance of ESG voluntary reporting guidelines in Jun this year.
  • PMI in Egypt slowed to 50.9 in Nov (Oct: 51.4), with weaker increase in output (52 in Nov from 53.4) and new orders (52.7 from 53.6), while business optimism fell to a record-low and employment continued to slip for the 13th straight month (48.5 in Nov, from 47.8 in Oct).
  • In a bid to finance the budget deficit, Egypt will provide 12 offerings for bonds worth EGP 48.5bn and 20 offerings for T-bills worth EGP 198bn in Dec.
  • Spending on oil subsidies in Egypt declined by 46% yoy to EGP 3.9bn in Jul-Sep this year, revealed the petroleum minister. About EGP 28.19bn has been allocated for fuel subsidies this financial year.
  • Foreign holdings of Egyptian treasuries climbed to more than USD 23bn, disclosed the finance minister, after reaching a low of USD 7.1bn this May. He also stated that Egypt would receive USD 1.6bn as part of the USD 5.2bn IMF loan by end-Dec.
  • Current account deficit in Egypt widened by 2.75% yoy to USD 11.2bn in the fiscal year 2019-2020. Net inflows of Egypt’s capital and financial account fell by about 50% to USD 5.4bn and tourism revenues fell by USD 2.7bn to USD 9.9bn in 2019-2020, with Q4 revenues at just USD 305mn.
  • The volume of public investments in Egypt surged by 70% to EGP 595bn, according to the minister of planning.
  • Egypt’s manufacturing and extractive industries index (excluding crude oil and petroleum products) inched up by 1.6% mom to 97.03 in Sep.
  • Almost 2.3mn Egyptians reported job losses in Q4 of 2019-2020, with the retail and wholesale sector accounting for 28% of overall job cuts, followed by the manufacturing (25%) and food and hospitality sector (21%).
  • Suez Canal revenue increased by 2.4% yoy to USD 488.1mn in Nov; this followed Oct’s revenue at USD 490.2mn.
  • Poverty rate in Egypt declined for the first time since 1999 – declining to 29.7% in 2019-20 from 32.5% in 2017-18. Net annual average household income increased by 15% to EGP 69,100 in 2019-20.
  • Iraq’s oil exports averaged 2.7mn barrels per day (bpd) in Nov versus 2.876mn bpd in Oct, according to the oil ministry, with exports from the southern terminals standing at 2.6mn bpd. Oil revenues totaled USD 3.394bn in Oct, with an average price of USD 41.778 per barrel.
  • A financial advisor to Iraq’s PM disclosed that Iraq’s oil for projects deal with China will continue, though some of the projects will require parliamentary approval as it involves federal budget support.
  • Iraq is kickstarting multiple infrastructure projects including a 240km road to the Makkah region, rehabilitation work at the Abu Flous Commercial Port and building a new city in the central Karbala governorate among others.
  • Jordan’s budget for 2021 estimates spending at JOD 9.93bn – focusing on health sector and social protection – and a deficit of JOD 1.18bn, accounting for 3.7% of GDP. Expenses could be broken down into 65% for government salaries and pensions, 17% for interests on public debt, 10% for operational costs and 8% for “other” expenses.
  • Unemployment rate in Jordan increased to 23.9% in Q3, compared to just 4.8% in Q3 2019. Male unemployment was 21.2% during the quarter versus female unemployment at 33.6%. The highest unemployment rates were registered in the 15-19 and 20-24 age brackets at1% and 45% respectively.
  • Jordan’s trade deficit narrowed by 20% yoy to JOD 4.692bn by end-Q3 2020; exports were down by 5.5% and imports inched down by 0.7%. Trade balance with the US meanwhile widened to JOD 231mn by end of Q3 2020, as exports fell by 11.2% and imports by a larger 22.4% yoy during the period.
  • Japan disclosed that a joint oil storage deal had been reached with the Kuwait Petroleum Corp: the latter can use storage tanks in southern Japan as an export base for eastern Asia, while in return Japan gets priority claim on the stockpiles in case of an emergency.
  • Assets of Kuwait central bank inched up by 0.6% mom to KWD 14.06bn at end-Oct, with gold balance at a stable KWD 31.7mn. Currency in circulation grew by 1.1% to KWD 2.322bn.
  • Lebanon’s PMI fell to 42.4 in Nov from Oct’s 43.3, on accelerated declines in output and new orders alongside deteriorating demand.
  • Lebanese pound fell against the dollar last week, trading at around LBP 8200, after extended delays in cabinet formation.
  • At an international aid conference co-hosted by France and the UN, the IMF and many participants were vocal about Lebanon’s current economic situation, underscoring that aid was dependent on structural reforms as well as a full audit of the central bank. The IMF lamented the “absence of an empowered government”, also stating that “a coherent fiscal framework that can restore debt sustainability is still lacking, as is a credible strategy to rehabilitate the banking system”.
  • The World Bank, in its “Lebanon Economic Monitor”, forecast economic growth to plummet by 19.2% this year, with debt-to-GDP rising to 194% (2019: 171%) and more than half of the population poor by 2021.
  • Oman’s foreign minister disclosed that labour law amendments were in the offing – abolishing a requirement that expats needed permission to transfer to a new employer – along with new taxes and ending “long-standing” subsidies.
  • Revenues of 3- to 5-star hotels in Oman dropped by 60.2% yoy to OMR 70.7 (USD 183.1mn) in Jan-Oct this year, according to the National Centre for Statistics and Information. Occupancy rates fell by 50.1% to 26.1% until end-Oct and total guests were down by 53.9% to 646,841.
  • Production of crude oil and condensates in Oman touched 290.3mn barrels in Jan-Oct, at a daily average of 952,100. Total crude oil exports by end-Oct was 238.7mn barrels, with China (210mn barrels), India (11mn), South Korea (4.996mn) and Japan (2.605mn) the top oil importers.
  • Qatar PMI rose to 52.5 in Nov (Oct: 51.5), with output rising at the fastest rate since Aug and job creation the strongest since Jan 2019.
  • Saudi Arabia’s PMI increased to 54.7 in Nov (Oct: 51) – the strongest rise since Jan – with accelerated rises in both output and new orders while hiring activity turned positive.
  • Saudi Arabia’s Public Investment Fund is in talks with banks for a revolving loan of upto USD 7bn, reported Bloomberg, with the funds to be used for “opportunistic investments”. This would be the third time PIF has tapped international banks, following its debut loan of USD 11bn in 2018 and repayment of a USD 10bn bridge loan in Aug (2 months ahead of schedule).
  • The Law of the Saudi Central Bank allows the apex bank to buy or own real estate with the intention of diversifying foreign investments, but prevents it from financing or lending to the government or any individuals and also from engaging in trade or participating in commercial activities or taking interest in any commercial, industrial or agricultural projects.
  • The Saudi Central Bank announced an extension of the Deferred Payments Programme until end-Q1 2021.
  • Saudi Arabia’s new Chambers of Commerce Law, which also has provisions to further ease the procedures for the start and practice of business activities, will allow foreign investors to become members of the board of directors of the chambers.
  • Bank deposits in Saudi Arabia increased to a record high SAR 1.899trn in Oct (+10.9% yoy, +1% mom). Bank credit also surged by 15.9% yoy to SAR 1.7trn.
  • Consumer spending in Saudi Arabia fell by 13% yoy to SAR 785.288bn in Jan-Oct this year. While PoS transactions were up by 22% yoy to SAR 285.414bn, ATM transactions dropped by one-fourth to SAR 499.87bn.
  • Saudi banks’ investments in government bond holdings increased by 12.49% to SAR 431.58bn until end-Oct from end-2019. In Oct 2020 alone, banks’ holdings of government bonds grew by 13.86%.
  • The value of contracts awarded in Saudi Arabia fell to SAR 7.4bn (USD 2bn) in Q3 and to SAR 63.6bn in Q1-Q3 2020, according to the US-Saudi Business Council. Transportation, power and real estate together accounted for close to 60% of total value of contracts awarded.
  • Remittances from Saudi Arabia surged by 18.5% yoy to SAR 123.4bn in Jan-Oct this year, according to the Saudi Central Bank.
  • New residential mortgage loans for individuals in Saudi Arabia till Oct this year reached 234,466 contracts (+73% yoy), with value of SAR 2bn (+81% yoy). This surpassed the number and value of all mortgages disbursed in 2018 and 2019.
  • Saudi Arabia’s tourism project on the west coast is moving “at pace”, with SAR 7.5bn worth of contracts awarded to date, and the value to increase to SAR 15bn by end of this year, according to the chief executive of the Red Sea Development Company.
  • The total volume of electronic commerce transactions in Saudi Arabia reached SAR 44bn, according to the Saudi Payments Company (a subsidiary of the central bank).

UAE Focus

  • UAE banks’ loans to SMEs inched up to AED 92.6bn by end-Sep from AED 92.5bn in Jun 2020, according to central bank data.
  • Abu Dhabi’s non-oil exports accelerated by 62.5% to AED 32.8bn in Jun-Aug from the prior 3-month period Mar-May. In Jan-Sep, overall non-oil trade grew to AED 151.18bn, with imports at AED 69.33bn and exports at AED 55.37bn.
  • Dubai’s external trade touched AED 551bn in H1 this year. In 2019, trade clocked in at AED 1.271trn, almost 10 times from AED 143bn two decades ago.

Media Review
The Saudi & UAE Central Banks’ joint digital currency & distributed ledger “Aber” project: proof of concept
https://www.centralbank.ae/sites/default/files/2020-11/Aber%20Report%202020%20-%20EN_4.pdf
Singapore awards 4 digital full bank licenses
https://www.straitstimes.com/business/banking/mas-awards-digital-full-bank-licences-to-grab-singtel-and-sea-ant-gets-digital
The ‘everything rally’: vaccines prompt wave of market exuberance
https://www.ft.com/content/d785632d-d9a0-45ae-ae57-7b98bb2fb8d6
Making Sense of Sky-High Stock Prices
https://www.project-syndicate.org/commentary/making-sense-of-soaring-stock-prices-by-robert-j-shiller-et-al-2020-11
Working from Home: Will it Persist? (Nick Bloom, Professor of Economics at Stanford University)
https://www.youtube.com/watch?v=N8_rvy-hqUs
 
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Weekly Economic Commentary – Nov 29, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Equity markets are riding an optimism wave, with the MSCI’s main world index touching a record high: gains are linked to news of vaccines, its production and distribution plans (even as global cases crossed 60mn) while US President-elect Biden began the presidency transition. Regional markets were mostly higher, with Dubai leading the gains (+4.5%) while Abu Dhabi gained for the 9th consecutive week. Among currencies, the dollar has fallen more than 2% this month (global FX rates: tmsnrt.rs/2egbfVh). Oil prices ended the week up 7-8% on hopes of a rebound in oil demand, rising almost 30% this month, while gold price fell to its lowest since Jul.
Weekly % changes for last week (27-28 Nov) from 19 Nov (regional) and 20 Nov (international).

Global Developments
US/Americas:

  • Durable goods orders inched up by 1.3% mom in Oct (Sep: 2.1%). Non-defense capital goods orders excluding aircraft inched up by 0.7%, following a 1.9% gain the month before.
  • Core PCE was unchanged at 3.5% qoq in Oct. Personal income declined by 0.7% mom in Oct while personal spending eased to 0.5% (Sep: 1.2%).
  • Markit manufacturing PMI increased to 56.7 in Nov (Oct: 53.4), the strongest expansion in activity since Sep 2014, while services PMI ticked up by 0.8 points to 57.7. Both rises supported an increase in the composite index to 57.9 (Oct: 56.3), with new orders growth was the strongest since Jun 2018, largely due to domestic demand.
  • S&P/ Case-Shiller home price index inched up by 6.6% yoy in Sep (Aug: 5.3%), while the National Composite Index gained 7% yoy – matching the May 2014 reading.
  • New home sales declined by 0.3% mom to an annual rate of 999k in Oct though in yoy terms sales surged by 41.5%. The 30-year fixed mortgage rate is around an average of 2.72% while the median new house price increased 2.5% yoy to USD 330,600.
  • The Chicago Fed national activity index improved to 0.83 in Oct (Sep: 0.32) though the index’s three-month moving average fell to +0.75 in Oct (Sep: +1.37).
  • The Richmond Fed manufacturing index plunged to 15 in Nov (Oct: 29), though survey respondents remained optimistic about the future.
  • Initial jobless claims increased by 30k to 778k in the week ended Nov 21, with the 4-week average rising to 748.5k. Continuing claims fell by 299k to 6.07mn in the week ended Nov 14. To add to these worries, emergency federal assistance expires by end of the year, as weill student debt relief and eviction moratoriums.

Europe:

  • Germany’s GDP grew by 8.5% qoq in Q3 (flash estimate: 8.2%; Q2: -9.8%) though in yoy terms, growth was down by 4% (Q2: -4.3%). Later last week, Germany extended its “lockdown light” restriction measures to Dec 20th.
  • Germany’s manufacturing PMI declined to 57.9 in Nov (Oct: 58.2). Services PMI slipped further below-50, to a 6-month low of 46.2 this month (Oct: 49.5). Together, the composite index moved down by 3 points to 52 – the weakest expansion since recovery began in Jul.
  • Eurozone manufacturing PMI slowed to a 3-month low of 53.6 in Nov (Oct: 54.8) while the services PMI plummeted to a 6-month low of 41.3 from the previous month’s 46.9, bringing the composite PMI below-50 to 45.1 (Oct: 50), another 6-month low. France’s composite PMI dived to 39.9 from 47.5 – the steepest drop since May.
  • Germany’s Ifo business climate index fell to 90.7 in Nov (Oct: 92.5), with manufacturing the lone bright spot as the service sector fell back into negative territory for the first time since Jun. Current assessment edged down by 0.4 points to 90 while expectations declined to 91.5 from 94.7 the month before.
  • EU Economic Sentiment fell sharply by 3.6 points to 86.6 in Nov, the first time since sentiment fell during the first Covid19 wave, with employment expectations falling for the second months in a row (-3.3 points to 87.2). The flash consumer confidence index was down by 2.2 points to -18.7 in Nov (far below the long-term average of -10.6).
  • Manufacturing PMI in the UK accelerated to 55.2 in Nov – the joint highest level since 2018 – while services PMI declined to 45.8 from 51.4 the month before. The composite PMI slipped below 50, for the first time since Jun, clocking in 47.4 in Nov (Oct: 52.1).

Asia Pacific:

  • GDP in India declined by 7.5% in Jul-Sep this year, as the country moved into recessionary territory though it improved from the 23.9% plunge recorded in Q2. Manufacturing industry surprisingly picked up by 0.6% after a massive 39.3% drop in the prior quarter; agriculture sector growth remained unchanged at 3.4%. Worrisome among the numbers is the dip in private consumption by 11.5%.
  • Fiscal deficit in India stood at INR 9.53trn (USD 128.9bn) in Apr-Oct: this was 126.7% of the budgeted target for the full fiscal year (to end in Mar 2021).
  • Inflation in Japan’s Tokyo fell by 0.7% yoy in Nov (Oct: -0.3%). Excluding food and energy, prices were lower by 0.2%.
  • Japan’s manufacturing PMI declined to 47.6 in Nov (Oct: 48.7) and composite index dimmed by 1 point to 47, as demand conditions weakened, new businesses fell for a 10th consecutive month and export orders dropped.
  • Singapore GDP contracted by 5.8% yoy in Q3, while growing by 35.4% qoq (Q2: 13.3% yoy). The Ministry of Trade and Industry estimates growth to shrink between 6-6.5% this year.
  • Industrial production in Singapore plunged by 19% mom – the first fall in five months – and by 0.9% yoy (Sep: 25.6%) – the fastest drop in nearly a decade. Excluding biomedical manufacturing, Oct’s fall was even steeper, at 2.7%.
  • Inflation in Singapore slipped by 0.2% yoy in Oct, from a flat reading in Sep: food prices increased by 1.7% while costs fell for housing and utilities (-0.3% vs -0.7%) and clothing (-4.3% vs -4.6%) among others.

Bottom line: This week sees the OPEC+ meeting, where member countries are likely to delay plans to raise output by at least 3 months; a last-minute meeting of OPEC+ ministers was organized this weekend to discuss the upcoming decision. Meanwhile, the last stretch of Brexit discussions continue ahead of the end of the transition period on Dec 31st. As practical aspects of the vaccines – production and distribution – are being sorted out, there is some hope from Europe’s less severe lockdowns this time round: R (the average number of new people who contract the virus from each infected person) fell to an average 0.9 in the week after restrictions were imposed (from 1.1 before), meaning new infections would fall by 21% vs rising by 36% (read more: “Why Europe’s second, less severe lockdowns are working”).
Regional Developments

  • Bahrain is expected to grow by 3.5% in 2021, following a sharp decline of 5% this year, according to S&P While profitability is expected to decline, retail banks’ net external debt is forecast to climb to around 15% in the next two year from 9.8% in end-2019.
  • The central bank of Egypt offered EGP 9.5bn (USD 606.9mn) worth treasury bills over three tranches last week.
  • Exports from Egypt to the Nile basin nations grew by 1.4% to USD 1.22bn in 2019; imports from the nations declined by 4.6% to USD 640mn.
  • Egypt’s Export Development Fund released lump-sum payment of their export subsidy dues last week to about 323 companies totaling EGP 3.2bn. This was done as part of an initiative that allows 85% of the value of export subsidy dues to be paid to companies versus payment in instalments.
  • Iraq’s oil minister disclosed that the nation would not be requesting an exemption from the OPEC+ deal. Separately, Bloomberg reported that the country was proposing that buyers pay upfront for a 1-year oil supply (estimated at just above USD 2bn at current prices) in exchange for a 5-year supply contract delivering 4mn barrels a month, or ~130k barrels a day.
  • Jordan’s central bank extended the loan moratorium period till end-Jun next year. Banks have postponed repayments of individuals’ loan instalments since the beginning of the pandemic at a total value of JOD 800mn, while the amount of the companies’ structured credit facilities surpassed JOD 3bn.
  • Foreign investments into Jordan increased by 17% yoy in H1 this year, according to UNCTAD’s latest report.
  • The first phase of Jordan’s national military service programme has been postponed due to the Covid19 outbreak, disclosed the cabinet.
  • Oman raised USD 500mn in its return to the debt market, reopening two bonds issued in Oct: it sold USD 200mn in bonds maturing in 2027 at a 6.30% yield and USD 300mn in bonds maturing in 2032 paying 6.90% versus the initial guidance of 6.45% and 7.05% respectively.
  • Private sector deposits in Oman grew by 9.5% yoy to OMR 16.4bn by end-Sep. Of total credit disbursed to the private sector, the non-financial corporate sector and the household sector (mainly under personal loans) received a share of 46.3% and 45.1% respectively.
  • The number of expats in Oman declined by 17% yoy to 1.44mn at end-Oct, according to the labour ministry. A further 7689 expats requested permission to depart between Nov 15-19, reported the Times of Oman.
  • Saudi Aramco completed the issuance of USD 8bn bonds to supports its payout to its shareholders. A Tadawul filing disclosed that Aramco has issued a total of 40,000 bonds/ sukuk, with a yield of 1.25% for bonds maturing in three years, 1.625% for bonds maturing in five years, 2.25% for 10 years, 3.25% for 30 years and 3.5% for bonds maturing in 50 years.
  • Saudi Arabian Monetary Authority has been renamed the Saudi Central Bank, according to a new law and will be directly linked to the monarch, while possessing full financial and managerial independence. Its 3 core objectives included maintain cash stability, boost confidence and trust in the financial sector, and support economic growth.
  • SAMA’s governor disclosed that the apex bank is considering an extension of its stimulus plans relating to payment deferral until end of Q1 2021.
  • According to Saudi Arabia’s finance minister, there is no plan to reconsider the VAT hike to 15% in the short or medium term. He also forecast economic growth of 3.1-3.2% next year, supported by private sector participation, boosted by PIF’s investments locally.
  • Saudi Arabia’s exports plunged by 31% yoy to SAR 53.3bn (USD 14.2bn) in Sep, thanks to a slump in demand for oil. Oil exports plunged by 38.7% to around SAR 35bn while non-oil exports were down by 9.3% to about SAR 18bn. China, US and UAE were top trade partners.
  • Saudi Tadawul delisted SAR 3bn of government debt instruments, on the request of the ministry of finance, given its maturity by the end of 24 Nov 2020.
  • About 40% of Saudis employed in the private sector will benefit from the recent decision to raise minimum monthly wage of Saudis for Nitaqat program.
  • Saudi Arabia approved a 48-hour and 96-hour transit visas: these will cost SAR 100 and SAR 300 respectively.
  • ACWA Power is planning an IPO next year, disclosed the company’s Chairman. Currently carrying out deals worth USD 59bn, the firm is expected to list on Tadawul though size of the IPO has not been decided yet.

UAE Focus

  • The liberalization of foreign ownership laws in the UAE breaks down major barriers to the rights of establishment and will be a game-changer for the country. This reform will help to reduce costs of doing business, lead to a recapitalization of existing jointly owned companies and encourage entrepreneurs to invest in new businesses and new ventures, supporting innovation and the introduction of new technologies while also promoting inflows of foreign direct investment. Read more: https://nassersaidi.com/2020/11/26/weekly-insights-26-nov-2020-uae-needs-to-attract-fdi-into-viable-sustainable-economic-diversification-sectors-projects/
  • Abu Dhabi discovered 2bn barrels of conventional oil reserves and 22bn barrels of unconventional oil reserves
  • Abu Dhabi’s Crown Prince announced (coinciding with UAE’s 49th National Day celebrations this week) housing loans, homes and land to be granted to citizens, worth AED 7.2bn, while also waiving loan repayments for 381 Emiratis amounting to AED 340mn.
  • Dubai government raised USD 1.5bn from a private bond placement, reported Bloomberg, by reopening existing debt instruments.
  • UAE banks’ assets increased by 7.6% yoy and 2% qoq to AED 3.252trn at end-Sep, according to the central bank. Gross credit picked up by 4.9% yoy and 0.8% qoq to AED 1.805trn.
  • Dubai expects economic growth rate to increase by upto 1% from the UAE’s plan to extend a 10-year residency to doctorate degree holders, medical doctors and those with specialized degrees in AI and epidemiology.

Media Review
Biden’s Modest Multilateralism
https://www.project-syndicate.org/commentary/joe-biden-america-modest-multilateralism-by-jeffrey-frankel-2020-11
 Saudi Arabia’s Many Transformations: Op-ed by Nasser Saidi
In Arab News French: https://www.arabnews.fr/node/33451/nasser-sa%C3%AFdi
In English: https://nassersaidi.com/2020/11/26/saudi-arabias-many-transformations-op-ed-in-arab-news-french-nov-2020/
How knowledge-based human capital can drive UAE’s diversification efforts: Oped in The National

https://www.thenationalnews.com/business/how-knowledge-based-human-capital-can-drive-uae-s-diversification-efforts-1.1119636
Bitcoin: a record intra-day high in volatile week
https://www.ft.com/content/1e02322a-7225-4c01-a41c-3caa8a0b91cf
Playing video games in lockdown can be good for mental health
https://www.economist.com/graphic-detail/2020/11/27/playing-video-games-in-lockdown-can-be-good-for-mental-health
 
 
 
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Weekly Insights 26 Nov 2020: UAE needs to attract FDI into viable, sustainable economic diversification sectors & projects

Download a PDF copy of this week’s insight piece here.
 
UAE needs to attract FDI into viable, sustainable economic diversification sectors & projects
The liberalization of foreign ownership laws in the UAE (announced this week) breaks down major barriers to the rights of establishment and will be a game-changer for the country. This reform will help to reduce costs of doing business, lead to a recapitalization of existing jointly owned companies and encourage entrepreneurs to invest in new businesses and new ventures, supporting innovation and the introduction of new technologies while also promoting inflows of foreign direct investment. Foreign companies within UAE’s free zones would also be allowed to link up with the domestic economy, supporting local businesses and thereby boosting overall growth. The barriers between free zones and the domestic economy would become blurred, if not absent leading to greater competition and improved competitiveness.
The latest announcement follows a spate of reforms undertaken this year – including labour (long-term residency via a 10-year visa, Dubai’s virtual/remote working visa and retirement visa, Abu Dhabi’s freelancer permit/ license) and social (removing laws which criminalized alcohol consumption, cohabitation) – aimed to revive the economy attempts from the negative impact of low oil prices, Covid19 and the Global Lockdown. Importantly, these reforms will encourage the retention of savings in the UAE, reduce remittances and capital outflows, thereby structurally improving the balance of payments. Overall, the result will be an improvement in the Doing Business ranking of the UAE.
We focus on FDI in this Weekly Insight piece. FDI inflows are essential to the UAE’s diversification efforts, as it would not only create jobs, raise productivity and growth, but could also lead to transfer of technology/ technical know-how and promote competition in the market. According to the IMF, closing FDI gaps in the GCC could raise real non-oil GDP per capita growth by as much as 1 percentage point.
While FDI inflows into the Arab region have been slowing in the past decade, the UAE still remains one of the top FDI destinations in the region. Inflows dipped during the time of the financial crisis (to USD 1.1bn un 2009 from an all-time peak of USD 14.2bn in 2007), but rebounded to USD 13.8bn last year, before the Covid crisis. Reforms to improve the investment climate (including allowing 100% ownership at free zones and protecting minority investors), its ease in doing business, good infrastructure as well as macroeconomic and political stability are factors that have aided the increase in FDI.
In 2019, UAE was the second largest destination for FDI inflow into the Arab region (USD 13.6bn or 3.4% of GDP, accounting for 21% of total), behind Egypt (USD 13.7bn or 2.8% of GDP, 23% of total) while it dominated FDI by number of projects (445). Interestingly, UAE is also a major capital exporter, having invested a total USD 8.7bn into the Arab nations last year (topping the list and accounting for 14.4% of total FDI inflows into the region). In part, this reflects the UAE’s hosting of multi-national enterprises investing across the region.

 
In spite of the Covid19 outbreak negatively affecting FDI inflows[1], Saudi Arabia defied the trend by posting a 12% yoy increase in inflows to USD 2.6bn in H1 2020[2] – in part linked to its mega-projects related to achieving Vision 2030. In Q1 this year, the UAE, along with Saudi Arabia and Egypt accounted for a share of 65.4% of total investment cost of projects in the region, valued at USD 11.2bn. Outflows from the UAE still accounted for 38.2% of GCC’s share of foreign investments in Q1 this year[3].

China’s investments in the UAE have been rising, with UAE the top destination country (among Arab nations) accounting for more than one-third of Chinese projects tracked during Jan 2003-Mar 2020 (with the number of projects in double-digits in 2018 and 2019). According to AEI’s China Global Investment Tracker, the value of Chinese investments touched a high of USD 8bn in 2018, thanks to a handful of large projects (including with ACWA Power and Abu Dhabi Oil). Sector-wise, investments were concentrated in energy (both oil and gas as well as renewables), real estate and transport – together accounting for 87.8% of total investments during 2016-2020. This is largely in line with FDI inflows into the Arab region as well, with the top 5 sectors (real estate, renewables, chemicals, oil & gas and travel & tourism) accounting for close to two-thirds of total inflows in 2019.
For the oil producing & exporting countries of the GCC and the wider MENA, the broader trade and investment landscape was further disrupted (in addition to Covid19) as a result of the profound changes in the structure and dynamics of the energy sector and market. The deep recession and Covid19 lockdown and induced collapse in transport and travel led to a sharp fall in the demand for oil and cratering of oil prices. Fossil fuel prices are unlikely to recover even in the medium term due to the increasing competitiveness of renewable energy (solar, wind and geothermal), persisting competition from shale oil & gas and new fossil fuel discoveries, while climate change mitigation policies and greater energy efficiency are leading to a downward shift in the demand curve for fossil fuels.  Accordingly, returns on investment in oil and gas (O&G) will decline. The implication is that FDI into the traditional O&G in the UAE and the GCC will be on a downward trend. The challenge will be to attract FDI into viable, sustainable economic diversification sectors and projects.
The new post-Covid19 FDI landscape for the UAE will likely be boosted if the recently announced deep structural reforms are executed well, alongside a review of existing economic strategies. The next obvious step is greater regional integration – a GCC common market (to start with), allowing for free movement of both labour and capital – as well as formalizing trade and investment treaties with major partners including China.
 
 
[1] UNCTAD expects global FDI flows are expected to contract between 30 to 40% during 2020-21.
[2] Source: UNCTAD
[3] Source: Arab Investment & Export Credit Guarantee Corporation




Weekly Economic Commentary – Nov 22, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Equity markets picked up on optimism from positive results from the Covid19 vaccine trials:  Stoxx600 and UK FTSE posted strong monthly rallies, while Japan’s Nikkei touched its highest level since Jun 1991. In the US, rising Covid19 deaths and the “tussle” between the Fed and Treasury on extending emergency funding programs beyond end of this year resulted in weekly losses. In the region, markets were mixed with UAE and Saudi the biggest gainers, while Qatar and Egypt fell by 1% compared to a week ago. Among currencies, as the dollar dropped to more than a 1-week low, both pound and euro gained. Oil prices inched up, posting a third week of gains and ahead of the OPEC+ meeting end of this month, while gold price posted a weekly loss.
Weekly % changes for last week (19-20 Nov) from 12 Nov (regional) and 13 Nov (international).

Global Developments
US/Americas:

  • US industrial production grew by 1.1% mom in Oct (Sep: -0.4%), supported by utilities (+3.9%) and manufacturing (+1%); output is 5.6% below where it was in Feb (pre-pandemic). During Oct, industry operated at 72.8% capacity, up from 72% the month before.
  • Building permits remained unchanged at 1.545mn in Oct, still at the highest level since Mar 2007. Housing starts increased by 4.9% mom to a seasonally adjusted annual rate of 1.53mn in Oct, supported by low mortgage rates, and with single-family homebuilding up 6.4% to 1.179mn units – the highest since Apr 2007. Existing home sales rose for the fifth straight month, up by 4.3% mom to 6.85mn in Oct, with median price 16% yoy higher at USD 313k.
  • Retail sales inched up by 0.3% mom in Oct, from a downwardly revised Sep reading of 1.6%. Excluding autos, retail sales was up by just 0.2% (1.2%). However, the rising spread of the pandemic and related restrictions alongside expiry of various unemployment benefits is likely to affect sales in the coming months. This was evident in a JPMorgan survey of credit and debit cardholders which showed a broad decline in spending through Nov. 9, with larger drops in states where Covid-19 is spreading most rapidly.
  • Household debt in the US rose by 0.6% to USD 14.35trn from Q2’s USD 14.27trn, largely due to a surge in mortgage loans (USD 1.05trn) while balances on credit cards fell to USD 807bn, the lowest total since 2017.
  • Initial jobless claims increased for the first time in 5 weeks, expanding by 31k to 742k in the week ended Nov 14, with the 4-week average slowing to 742k. Continuing claims rose by 233.5k to 4.38mn in the week ended Oct 31.

Europe:

  • Eurozone current account surplus narrowed to EUR 33.5bn in Sep from a year ago, as the services surplus declined to EUR 11.7bn (Sep 2019: EUR 20.1bn) while the primary income account posted a EUR 2.9bn defici
  • German producer price index inched up by 0.1% mom in Oct (Sep: 0.4%), with energy prices and non-durable consumer goods down by 2.9% and 0.5% respectively. In yoy terms, PPI was down by 0.7% after a 1% drop the month before.
  • Inflation in the UK ticked up by 0.7% yoy in Oct (Sep: 0.5%), the highest in 3 months, largely due to increases in costs of transport (1.2%) and food (0.6%). Core CPI increased by 1.5% (Sep: 1.3%).
  • Retail sales in the UK grew for the 6th straight month, rising by 1.2% mom and 5.8% yoy in Oct; while online sales surged by 52.8%, store sales were down by 3.3%. Compared to Feb, retail sales have rebounded by a strong 6.7%.
  • Public sector borrowing in the UK touched a new high of GBP 214.9bn in the Apr-Oct period; in Oct alone, the government borrowed GBP 22.3bn vs GBP 10.8bn a year ago.
  • The GfK consumer confidence index in the UK fell by 2 points to -33 in Nov, only a point away from the low of -34 recorded in Apr during the first lockdown.

Asia Pacific:

  • Japan’s Q3 GDP increased by 5% qoq in Q3 (Q2: -8.2%) – the fastest pace of growth since Q4 1968 and following three quarters of contraction – supported by a 2.2% uptick in public spending and growth in exports. GDP expanded at an annualized pace of 21.4%; Japan has recovered only about 56% of what was lost in Apr-Jun and just 43% for the past three quarters.
  • The PBoC left the one-year loan prime rate unchanged at 3.85% in the latest meeting – for the 7th straight month – while holding the five-year LPR steady at 4.65%.
  • FDI into China increased by 6.4% yoy in Jan-Oct (Jan-Sep: 5.2%), with Oct posting the 7th consecutive month of growth (+18.3% yoy to CNY 82bn). Fixed asset investment grew by 1.8% yoy in Jan-Oct to CNY 48.33trn (USD 7.32trn) from 0.8% in Jan-Sep.
  • Industrial production in China grew by 6.9% in Oct, in line with Sep’s reading, thanks to the auto industry’s robust 12.5% growth. Retail sales picked up by 4.3% in Oct, faster than Sep’s 3.3% and the biggest rise since Dec 2019, as consumption recovered across the board.
  • Japan’s exports declined (for the 23rd straight month) by 0.2% yoy in Oct and imports plunged by 13.3%, widening the trade surplus to JPY 872.9bn. Exports to Asia increased (China up by 10.2%, Taiwan 1.9% and Korea’s 9%) while exports to Western Europe was down by 7.9%.
  • Wholesale price inflation in India inched up for the third month in a row, rising by 1.48% in Oct (Sep: 1.32%) – an 8-month high, as manufacturing WPI ticked up by 2.1% (Sep: 1.6%).

Bottom line: UNCTAD expects global FDI to post a U-shaped recovery in 2022 amid expectations of a V-shaped recovery in trade and global growth. The WTO’s latest goods barometer report signaled trade resilience in recent months – consistent with the trade forecast of a 9.2% decline in trade volume this year – though the lockdowns in Q4 are likely to cause a further slowdown in demand. With global Covid19 cases inching closer to 60mn, it is prudent to be cautious in optimism: in spite of the promising vaccine trials, it remains to be seen how soon these vaccines can be circulated across the globe. Even in the US, with delays in the transition, process of distributing vaccines could be unnecessarily hindered.
Regional Developments

  • Bahrain-origin exports surged by 29% yoy to BHD 198mn (USD 522mn) in Oct, with the top 10 destinations accounting for close to 80% of the total. Trade deficit during the month narrowed by 44% yoy to BHD 111mn, as the value of imports declined by 14%.
  • Further to the MoU signed between Bahrain and Israel, the two nations have agreed to start operating commercial flights and initiate the process to open embassies. 14 weekly flights are scheduled to operate from the beginning of 2021, in addition to 5 cargo flights.
  • Bahrain is in the process of discussing key pension reforms, according to a senior official from Aon, who stated that reforms could include later-age retirement, change in benefit formula, higher contribution rates and conditional indexation (vs full inflation-proofing).
  • Families in Bahrain will now be allowed to start construction of homes within 3 years after acquiring government land (instead of 2) and complete it within 7 years (versus 3).
  • The IMF reached a staff-level agreement with Egypt after the first review of the USD 5.2bn financing approved in Jun, subject to the executive board’s approval.
  • Egypt’s budget deficit narrowed to 2.6% of GDP in the first four months of the 2020-21 fiscal year, according to the finance minister. Revenues grew by 15.5% yoy during this period, thanks to an 11.4% hike in tax proceeds. For the full year, deficit is estimated to decline to 6.5% of GDP (vs 7.9% in FY 2019-20 but higher than the targeted 6.3% this year).
  • Unemployment in Egypt declined to 7.3% in Jul-Sep, down 0.5% yoy and compared to 9.6% in Apr-Jun this year.
  • The minister of planning disclosed that Egypt’s women hold 45% of total government jobs in the country (above the global average of 32%). Women’s representation in banks’ boards has ticked up to 12% last year from 10% the year before.
  • The fintech firm, e-finance, from Egypt is expected to launch its IPO in Q1 next year on the Egyptian Exchange. The IPO was scheduled for earlier this year, but postponed due to the pandemic.
  • Egypt’s new customs law came into effect from Nov 13th: changes include expedited clearance, introduction of electronic methods and automation. It was previously stated that nearly 90% of the trade system would be operated electronically by the end of this year.
  • An Egypt-UK trade agreement will come into effect on Dec 31, reported Ahram Online: based on the EU-Egypt Association Agreement, this will regulate bilateral ties post-Brexit.
  • At a meeting of the joint Egyptian-UAE Business Council, it was revealed that the UAE receives about 11% of Egypt’s total exports and that UAE investments in Egypt exceeded USD 7bn in different projects (with an additional USD 7bn worth as part of a recent MoU).
  • Egypt’s Suez Canal revenues ticked up by 4.14% mom to USD 490.2mn in Oct.
  • Passenger car and truck sales in Egypt grew by 24% yoy (to 17051) and 9.6% (to 3348) respectively in Sep, according to the Automotive Marketing Information Council.
  • The volume of electronic transactions through mobile wallets in Egypt increased to 9.9mn transactions in Oct (+156% from Mar’s 3.9mn transactions).
  • The Iraq-Saudi Arabia border crossing opened for trade for the first time since 1990 last week. Separately, Saudi Arabia completed Iraq border road maintenance work, allowing for opening of the Jadeedah Arar port.
  • Iraq will invite international energy companies to bid for building an oil refinery in the southern port of Fao – the refinery is estimated to have a 300k barrels per day capacity.
  • The IMF is proposing that a part of the USD 1.3bn 4-year Extended Fund Facility credit to be disbursed to Jordan be brought forward to 2021 to support its financing efforts to tackle Covid19.
  • Exports from Kuwait declined by 41% yoy to KWD 6.99bn in Jan-Jul 2020 while imports declined by 20% (to KWD 4.8bn), bringing trade balance down to KWD 2.1bn (-62.7%).
  • Permits for private residential buildings in Kuwait plunged by around 46% yoy in Jan-Oct while permits for investment housing projects dropped by 65%, according to Arabic language daily Alanba.
  • Number of expats in Kuwait fell to 2.65mn recently, compared to 3.3mn prior to the Covid19 crisis, reported Al Rai.
  • Alvarez & Marsal withdrew from conducting Lebanon’s central bank forensic audit citing non-receipt of requested information. The audit was a necessary requirement for foreign donors and the IMF.
  • Cabinet formation in Lebanon is at a standstill, with the PM designate not having met with the President for more than a week. Lack of consensus stems from the distribution of key ministerial posts among various sects and deciding who names Christian ministers. Lebanese pound crossed 8000 to the dollar last week for the first time since the new PM-designate was named on Oct 22nd.
  • Oman is discussing a loan of at least USD 1bn with a group of banks, reported Reuters. Oman’s USD 2bn bonds last month was met with lackluster demand given its external debt picture.
  • Bilateral trade between Oman and Dubai grew by 8.4% yoy to AED 37.85bn in 2019. This year in H1, total trade between the two stood at AED 14.85bn.
  • Inflation in Saudi Arabia increased by 5.8% yoy in Oct (Sep: 5.7%), largely due to hikes in of food (+13%) and transport costs (+7%). Separately, the country’s acting information minister revealed that the VAT hike could be reviewed once the pandemic ends.
  • Crude oil exports from Saudi Arabia increased for a third straight month to 6.07mn barrels per day (bpd) in Sep from 5.97mn bpd in Aug. Crude output in Sep was 8.98mn bpd while oil product demand fell by 168,000 bpd to 2.38mn bpd.
  • Saudi Aramco raised USD 8bn from a 5-part bond deal to support its USD 75bn dividend target. Its bond prospectus showed that the company amended and extended the maturity of two revolving credit facilities it took in 2015. As of Sep 30, Aramco had USD 55bn in total borrowings, up from USD 46.82bn at end-2019, attributed largely to the Sabic acquisition.
  • The minimum wages for Saudi employees under the “Nitaqat” employment program has been raised to SAR 4000 from SAR3k before. Accordingly, if a worker is paid only SAR 3k, he will be counted as half a worker.
  • FDI into Saudi Arabia increased by 12% yoy in H1 this year, disclosed the minister of investment. The minister also stated that special economic zones will be launched next year, focusing on “qualitative growth” in areas like cloud computing, renewable energy, tourism, culture, entertainment, and logistics.
  • Saudi Arabia’s power sector reforms are expected to result in more efficient power generation, reduction in the use of liquid fuels for electricity generation and increased environmental protection. Furthermore, the government will turn liabilities from the Saudi Electricity Company – amounting to USD 77bn (SAR 167.92bn) – into an Islamic bond.
  • Saudi Arabia’s investments in US Treasury bills fell by 27.7% yoy to USD 131.2bn in Sep; in mom terms, it inched up by 0.92%. Kuwait and UAE hold USD 46.6bn and USD 33.1bn respectively.
  • The Public Investment Fund cut its exposure to US equities by USD 3bn in Q3; it cut ETFs holdings to USD 96bn as of end-Sep, from nearly USD 4.7bn in Q2. Separately, the PIF increased its stake in Acwa Power from 33.36% to 50%.
  • Gender equality in the workplace can add more than USD 400bn to Saudi GDP by 2030, according to the “Women in KSA Workforce” report issued by Accenture. Full report here.
  • Saudi Arabia plans to allocate 5% of total available parking spaces for electric cars, reported the Al-Watan newspaper.
  • Saudi Arabia plans to invest more than SAR 20bn (USD 5.3bn) in artificial intelligence projects by 2030, reported Saudi state TV, citing the Saudi Data and Artificial Intelligence Authority.
  • Saudi Arabia called for OPEC+ members to be flexible in dealing with the markets given ongoing weak demand. A full meeting is scheduled on Nov 30 and Dec 1 to decide output policy for next year. Bloomberg reported that UAE were considering leaving OPEC+, while also stating that it was unclear whether the warning was “a maneuver to force a negotiation over production levels, or represents a genuine policy debate”; later on, the UAE energy minister clarified that no such plan was in the offing and that it was committed to OPEC.

UAE Focus

  • The UAE central bank extended the AED 50bn Zero-Cost facility for another 6 months until Jun 30, 2021. This benefits retail and corporate banking customers and facilitates liquidity management for banks through collateralised funding at zero cos
  • UAE’s non-oil trade reached AED 658.3bn in H1 this year, accounting for 41% of total value of trade last year. Gold trade, at AED 104bn, accounted for 15.7% of total trade; the top 5 trade partners – China, Saudi Arabia, India, US and Switzerland – accounted for 37.1% of total trade.
  • UAE announced plans to extend its 10-year visa to all doctors, PhD holders and highly skilled workers including scientists and data experts.
  • Inflation in Dubai declined by 3.4% in Oct, with housing and utilities and transport costs falling by 6.96% and 6.29% respectively.
  • The real estate sector contributed 7.2% of Dubai’s GDP in 2019, and compares to a contribution of 6.3% in 2014, according to the Dubai Land Department. Real estate transactions value had increased by 2.1% yoy to AED 226bn.
  • UAE banks’ profits will remain profitable in 2020-21, though the higher cost of risk and lower margins will reduce profitability, according to S&P.
  • UAE ranked 42nd among 167 countries in the 2020 Prosperity Index, down 2 ranks from the 2019 edition: enterprise conditions improved 11 places to 20th and market access and infrastructure pillar were up 6 places to 21st. Access the rankings here.
  • Abu Dhabi was ranked among the top 10 and Dubai top 18th in the Global Cities Outlook, while Dubai was also ranked the 27th most competitive city in the Global Cities Index (published by Kearney).

Media Review
A no-brainer for the G20
https://www.project-syndicate.org/commentary/g20-must-fund-covid19-aid-act-accelerator-by-jim-o-neill-2020-11
China goes from strength to strength in global trade
https://www.piie.com/blogs/china-economic-watch/china-goes-strength-strength-global-trade
Current sovereign debt challenges and priorities in the period ahead
https://www.imf.org/en/News/Articles/2020/11/16/vc111620-current-sovereign-debt-challenges-and-priorities-in-the-period-ahead
Why inflation could be on the way back
https://www.ft.com/content/dea66630-d054-401a-ad1c-65ebd0d10b38
Ten trends to watch in 2021
https://www.economist.com/the-world-ahead/2020/11/16/ten-trends-to-watch-in-the-coming-year
China’s post-pandemic revival has been stoked by coal-powered industry, jeopardizing Xi’s climate pledge
https://www.ft.com/content/d452aef8-9fd7-422a-a034-4558f0e66e53
Where are the world’s most expensive cities?
https://www.economist.com/graphic-detail/2020/11/18/where-are-the-worlds-most-expensive-cities
 
 
 
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Weekly Insights 19 Nov 2020: Knowledge-based human capital to drive UAE’s diversification efforts

Download a PDF copy of this week’s insight piece here.
 
Knowledge-based human capital to drive the next phase of UAE’s diversification efforts
The UAE this week announced an expansion of its current 10-year golden visa to include medical doctors, scientists and data experts as well as PhD holders, in a bid to attract professionals to the UAE. The liberalisation comes on the heels of visas for retirees and options for remote working in Dubai: these provide added incentives for expatriates to remain, invest and contribute further to the country’s development. Currently the UAE residential status for expatriates is linked to an employer, and in the event of job loss, the person has 30 days to either find a new job or secure a new visa. With the backdrop of Covid19 and related job losses – UAE’s PMI Employment sub-index fell to its lowest in over 11 years and the latest November reading falling for the 10th consecutive month –   many long-term residents were forced to return to their home countries, taking their savings back with them generating capital outflows from the economy.
While UAE does not release monthly data on employment, the central bank’s quarterly report offers a glimpse into the recent trend. Construction and services were the largest sectors offering employment within the UAE’s private sector. This is an incomplete picture, as the database on private sector employment excludes the Free Zone activities. For example, the DIFC is home to 2584 firms and over 25k employees while the DMCC last reported 17.5k member companies in the free zone. In terms of pace of growth (in quarter-on-quarter terms), construction has been registering a decline since Q2 last year, though other sectors posted upticks in Q1 (prior to Covid19-related lockdowns). No data is yet available for that period, but Embassy estimates suggest 400k+ (net) and 60k persons having returned to India and Pakistan respectively during the past months.

Structural change signals the UAE’s greater economic diversification
The UAE Ministry of Human Resources and Emiratisation also offers additional details of number of establishments in the country (unfortunately, also excluding free zones). Close to 50% of the firms (as of Jan 2020) were operating in the sectors most affected by Covid19: an update of this data is likely to show a significant difference in the composition. Interestingly, if we consider the number of employees per firm, mining & quarrying (the oil sector) tops the list – in contrast to the capital-intensive nature of the sector.

As is oft-cited, there is a preference to work in the public sector: 78.2% of UAE citizens surveyed in the Labour Force Survey 2019[1] declared as working with either the federal or local government (versus just 12% in the private sector). However, comparing this data with the 2009 survey, the share of the private sector has increased from 58% to 70%- a positive move, and underscoring the UAE’s diversification efforts. By economic activity, a few sectors have seen an increase in their share: manufacturing (9.2% in 2019 vs 7.7% in 2009), construction (17.5% vs 12.3%), hotels and restaurants (5.4% vs 4%). Real estate sector has seen a significant drop during the decade, not unsurprising given the boom prior to 2010; but a slight dip in financial and insurance activities is surprising (2.5% in 2019 vs 3.2% in 2009).
Women are transforming the labour force: more educated but facing a glass ceiling
Another interesting insight from the Labour Force Survey offers a morale booster for women – women are relatively are more educated than their male counterparts (about 50% of employed local women have a bachelor’s degree, and about 60% have a bachelor’s and above; the comparable numbers for expat women are at 33% and 42.8% respectively); a high proportion of women work as professionals and managers (28.5% among female expats, 45% of female citizens). It is time that this translates into having more women on boards and at top management levels in the private sector[2].
The Survey also confirms the disparity in wages between local and expat population: more than one-third of Emirati respondents disclosed receiving monthly wages between AED 20-35k (versus just 5% of expats in the same income bracket). This brings to the forefront two issues:
(a) Private-public sector wage gap that deters citizens from joining the private sector. Though wages by sector breakdown is not available (publicly), it is safe to assume relatively higher salaries in the government sector where close to three-fourths of citizens work. Public sector remains oversaturated, and with higher wages and relatively better benefits, highly educated young people prefer to remain unemployed till they get a public sector job – doing little to help the private sector.
(b) The need to attract high-skilled professionals to support private sector activity. This needs to be carefully addressed: while attracting foreign talent to take up such jobs in the near- to medium-term is necessary, it is critical to reform the education sector and invest in building a knowledge economy. There is a persistent skill mismatch and low educational quality in the country compared to market requirements. Though spending per capita is high and student-teacher ratios are comparable to OECD levels, the outcomes are not strong: the PISA 2018 scores, for example, reveal that UAE students are placed 50th in math, 49th in science, and 46th in reading. Radical modernisation of education curricula is essential for creating a 21st century able workforce. It is also time to invest in curricula that support job-readiness, ‘Digital Education-for-Digital Employment’, early exposure to the workplace (e.g. summer internships and labour policies that facilitate such changes), vocational and on-the-job training. Increasingly the focus should be to invest in and promote STEM (Science, Technology, Engineering and Mathematics) – especially given the official policy focus on innovation and a shift to the digital e-economy and -services in the UAE and the region.
What next? The recent structural reform moves (related to labour) will help remove distortions in the labour market, attract high-skilled professionals and help UAE to diversify into higher value-added and more complex economic activities, while also supporting domestic investment (including in the real estate sector). This will happen alongside a reduction in outflow of remittances, which in turn will boost the balance of payments: last year, UAE expatriates sent $44.9bn in outward remittances in 2019, comparable to the value of oil exports at $49.64bn[3]. It is important in this regard to accelerate capital market development: long-term residents will be keen to invest in medium- and long-term financial instruments, participate in a mortgage market and given an opportunity, also invest in startups and growth companies.
 
 
[1] This is published by the UAE’s Federal Competitiveness and Statistics Authority.
[2] A KPMG report on Female Leaders Outlook identified that 94% of CEOs that participated from the UAE were male. The 2019 UAE report includes input from 50 UAE-based women leaders, up from 29 in 2018.
[3] Data from OPEC’s Annual Statistics Bulletin.




Weekly Economic Commentary – Nov 15, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Stock markets cheered the breakthrough for the Covid19 vaccine, with new records set in the MSCI All World Index and the S&500. Tech stocks suffered on the news of the vaccine, with the likes of Zoom declining sharply while travel/ tourism/ entertainment stocks picked up. Most markets ended lower by end of the week, as Covid19 cases surged, but posted weekly gains. Asian equities slumped after an executive order was issued prohibiting US investors to hold shares in companies linked to China’s military. Regional markets were mostly up, mirroring its global peers. Safe-haven currencies like the yen and Swiss franc currencies strengthened. Oil prices picked up for a 2nd week, while gold price eased.
Weekly % changes for last week (12-13 Nov) from 5th Nov (regional) and 6th Nov (international).

Global Developments
US/Americas:

  • Inflation in the US remained unchanged in Oct after rising by 0.2% mom in Sep. In yoy terms, inflation fell to 1.2% (Sep: 1.4%), as prices fell across energy prices (-9.2%), transportation services (-5.1%) and medical care (-0.8%). Core inflation was flat in mom terms and slowed to 1.6% yoy from Sep’s 1.7%.
  • Producer price index inched up by 0.3% mom in Oct (Sep: 0.4%), given higher costs of food and gasoline. Core producer price index increased by 0.2% mom and 0.8% yoy in Oct (Sep: 0.4% mom and 0.7% yoy).
  • University of Michigan’s consumer sentiment index declined to 77 in early Nov – the lowest since Aug – from a final reading of 81.8 in Oct. The resurgence of Covid19 cases and Presidential elections outcomes weighed on sentiment.
  • The US federal budget deficit more than doubled to a record USD 284.1bn from a year ago in Oct, as spending ticked up by 37.3% yoy.
  • Home prices of single-family homes in the US increased by 12% yoy to USD 313,500 in Q3 – the fastest pace since 2013.
  • Initial jobless claims fell to a 7-month low, declining by 48k to 709k in the week ended Nov 7, with the 4-week average slowing to 755.25k. This is still higher than the peak of 665k recorded during the 2007-09 recession period.

Europe:

  • Eurozone GDP grew by 12.6% qoq in Q3 (Q2: -11.8%), according to revised estimates. in yoy terms, GDP was down by 4.4% (Q2: -14.8%).
  • German ZEW survey showed a plunge in economic sentiment to 39 in Nov (Oct: 56.1). The current situation assessment worsened, falling to -64.3 from -59.5 the month before. The corresponding indicators for the eurozone showed economic sentiment drop by 19.5 points to 32.8 in Nov, while the current situation inched up by 0.2 50 -76.4.
  • Harmonised index of consumer prices in Germany decreased by -0.5% yoy in Oct, following a 0.4% decline in Sep.
  • Germany exports grew by 2.3% mom in Sep (Aug: 2.9%) while imports edged down by 0.1%, widening the overall trade surplus to EUR 17.8bn in Sep; exports were 7.7% lower compared to Feb (pre-pandemic). Current account balance increased to EUR 26.3bn (Aug: EUR 16.5bn).
  • Industrial production in the eurozone declined by 0.4% mom and 6.8% yoy in Sep (Aug: 0.6% mom and -6.7% yoy), as production of durable consumer foods and energy fell by 5.3% and 1% respectively while capital goods and non-durable consumer goods production edged up by 0.5% and 2.1%.
  • Temporary contract employment in the EU plunged almost 11% during the lockdowns in Q2, compared with less than 3% for total employment, and accounted for over 80% of EU job losses during the period.
  • UK’s GDP expanded by 15.5% qoq in Q3 (Q2: -19.8%), the sharpest quarterly expansion ever; in yoy terms, but GDP dropped by 9.6% yoy (Q2: -21.5%). According to ONS, GDP expanded by 6.3% in Jul, slowing to 2.2% in Aug and 1.1% in Sep, when it was driven by the professional, scientific and technical industries. The current lockdown is likely to result in a drop in GDP this quarter.
  • Industrial production in the UK increased by 0.5% mom in Sep, following a 0.3% nudge up in Aug. Manufacturing production, however, slowed to 0.2% mom rise after a relatively stronger 0.9% reading the month before.
  • Unemployment rate in the UK inched up to 4.8% in the 3 months to Sep – the highest since 2016 – from 4.5% before; redundancies reached a record high of 314,000 in Q3. Average earning excluding bonus meanwhile picked up by 1.9% during the same period (0.9%).

Asia Pacific:

  • China’s inflation slowed to an 11-year low of 0.5% yoy in Oct (Sep: 1.7%), with core inflation edging up by 0.5%. Producers price index fell by -2.1% yoy in Oct, at the same pace as Sep.
  • Money supply (M2) growth in China slowed to 10.5% yoy in Oct (Sep: 10.9%). Bank lending starts to slow as the year and annual quotas come to a close: new loans slowed to CNY 689.8bn (USD 104.22bn) in Oct, sharply down from Sep’s CNY 1900bn. Annual growth of outstanding total social financing (TSF), a broad measure of credit and liquidity, rose to 13.7% in Oct (Sep: 13.5%).
  • Japan leading economic index inched up to 92.9 in Sep (Aug: 88.5), the highest reading since Jul 2019, as restrictions eased.
  • Current account surplus in Japan narrowed to JPY 1660.2bn in Sep from Aug’s JPY 2102.8bn. In the first half of the fiscal year (Apr-Sep 2020), surplus fell by 36.2% yoy to JPY 6.69trn – the smallest since H2 2014.
  • Japan’s machinery orders declined by 11.5% yoy and 4.4% mom in Sep (Aug: -15.2% yoy, +0.2% mom). Overseas orders slowed7% to JPY 765.6bn, following Aug’s 49.6% spike.
  • Petroleum demand increased in India by 2.7% yoy to 17.8mn tonnes, rising for the first time after Feb.

Bottom line: In spite of the resurgence in Covid19 cases across the US and Europe, the announcement of a Covid19 vaccine with 90% effectiveness brought in a wave of optimism and cheer across the globe, with many nations planning its disbursement by end of the year to early next year. While there is light at the end of the tunnel, many questions remain – how will it be distributed globally, its storage conditions (the Pfizer vaccine needs to be stored at -70 degree Celsius), will everyone have access to the vaccine, and if so, how long will it take for the vaccine to reach everyone, how long it will remain effective and so on. Meanwhile, any effort towards initiating a new stimulus package in the US will remain stalled as long as the current election results gridlock remains unresolved. In the EU, an agreement was reached to unlock the EUR 1.8tn budget and stimulus money.  Separately, the G20 agreed on a new “common framework” for an extended debt restructuring plan for poor countries hit by the pandemic to avert a messy wave of defaults.
Regional Developments

  • Bahrain introduced amendments to its Companies Law: changes include the elimination of single person companies, increase in disclosures and introduction of ‘not-for-profit’ companies among others.
  • Bilateral trade between Bahrain and Italy surged by 43.4% yoy to BHD 196.3bn in Jan-Sep this year.
  • Egypt’s central bank cut interest rates by 50 bps at its second consecutive meeting: the overnight lending rate was lowered to 9.25% from 9.75% and the overnight deposit rate to 8.25% from 8.75%.
  • Inflation in Egypt increased to 4.5% in Oct, still near a 14-year low, from 3.7% and 3.4% in Sep and Aug respectively. The uptick was largely due to increase in prices of vegetables and education.
  • Total foreign currency deposits held by Egypt’s banking sector declined for the third month in a row by 1.75% mom and 6% yoy to EGP 644.505bn (USD 41.18bn). Foreign reserves increased by EGP 795mn to EGP 39.22bn by end-Oct.
  • Following the approval of a new law on issuance of sovereign sukuk, Egypt’s cabinet approved a draft bill to exempt revenues from bonds offered to overseas investors from all taxes and fees. No further details were provided.
  • Egypt’s total non-oil imports declined by 13.19% yoy to USD 55bn in Jan-Sep this year; food exports increased by 2% yoy to USD 2.6bn during this period. Total non-oil exports decreased by 2.5% yoy to USD 18.76bn during this period.
  • Planned public investments in Egypt surged by 70% to EGP 595bn in fiscal year 2020-21, according to the minister of planning.
  • Egypt signed 86 agreements with major oil and gas companies with minimum investment commitments totaling USD 15bn over the last six years, disclosed the petroleum minister. Separately, it was revealed that 14 exploration and production deals were signed in Mar-Oct this year.
  • Egypt’s Ministry of International Cooperation disclosed that it had concluded agreements worth USD 7.308bn this year – with 62.2% towards financing sovereign projects and the rest to the private sector. This includes agreements worth USD 15bn signed with the World Bank to support health and housing sectors as well as the environment.
  • Current daily gas exports from Egypt reach 300-800mn cubic feet per day, but with gas production at 72bn cubic feet per day (bcf), the country has a gas export capacity of around 1bcf, according to the minister of petroleum.
  • The Sovereign Fund of Egypt is set to establish several sub-funds covering infrastructure and utilities, tourism and real estate, healthcare services and pharmaceutical industries, as well as financial services and digital transformation.
  • Egypt’s Sharm El-Sheikh and Hurghada have received around 430k tourists since it opened up in Jul this year. Currently, tourists are at just 10% of normal rates during this time.
  • Passenger car sales in Egypt increased by 24% yoy to 17051 in Sep while truck sales increased by 9.6% to 3348 vehicles.
  • Egypt’s minister of health confirmed that it had reserved vaccines from Pfizer and Oxford University to cover 20% and 30% of the country’s vaccine needs.
  • Iraq passed an emergency spending bill, allowing the finance ministry to borrow USD 10.1bn from international markets and local banks, though this amount is much lower than the USD 35bn sought by the government. The funds are expected to cover public servants’ salaries, food imports and crucial projects.
  • Iraq and China agreed to restart its oil-for-projects agreement allowing Chinese companies to execute projects in the country in return for crude oil supply. Though a similar deal was reported with Egypt, the planning minister denied it in a statement in Aliqtisad News.
  • Kuwait started granting work permits (after 8 months) for the recruitment of workers from abroad for medical and teaching specialists as well as companies that have government and oil-related contracts.
  • France pressed for speeding up “the formation of an efficient government, accepted by all political parties” in Lebanon. Though the latest PM-designate was declared Oct 22, a government is absent still given no consensus on number of portfolios, ministers and the like.
  • Private sector bank deposits in Lebanon declined by USD 30.4bn to USD 142.2bn in the 13-month period till Sep, given deposit outflows as well as repayment of loans. The central bank governor stated that Lebanese citizens are hoarding close to USD 10bn in cash leading to a liquidity crunch.
  • Lebanon has gone into a 2-week lockdown from Nov 14 till Nov 30, after the localized lockdown failed to have the desired effect.
  • Oman’s health minister confirmed that 40% of the population would receive vaccination when it first arrives, by end of this year. Priority would be given to front line workers, checkpoints’ employees, people with chronic diseases, and the elderly.
  • Travel, hospitality and tourism sector grew by 4.9% yoy to contribute OMR 1.293bn to Oman’s economy last year, according to the the National Centre for Statistics and Information. Tourists spent OMR 684.7mn in 2019 from OMR 364.8mn in 2015, clocking an annual average increase of 17%.
  • Saudi Arabia grew by 1.2% qoq in Q3 (Q2: -4.9%), as per its first ever “flash estimates” for GDP. In yoy terms, growth declined by 4.2%.
  • Saudi Arabia’s PIF will inject SAR 150bn (USD 40bn) into the economy in 2021 and 2022, according to the Crown Prince. He disclosed that the PIF has doubled its assets to over SAR 1.3trn and is on track to achieve its SAR 7trn target by 2030. It was also revealed that Saudi Arabia had collected SAR 247bn from anti-corruption campaigns over the past 3 years, equivalent to 20% of total non-oil revenue.
  • In Oct 2020, Saudi Arabia issued licenses to 124 industrial units, adding close to 3k Saudi workers and with total investments reaching SAR 56bn.
  • The Red Sea Development CoSaudi Arabia’s tourism project- plans to have 16 hotels ready by end2023, two more than initially planned, on hopes for a V-shaped recovery in tourism.
  • Driven by an uptick in sales, combined profits of 14 Tadawul-listed Saudi cement companies grew by 39.32% yoy in Q3 2020.
  • The MENA region witnessed just one IPO in Q3 (Amlak International in Saudi Arabia) valued at USD 115.9mn, according to EY’s MENA IPO Eye report. This follows no listings in Q2 – the first time in more than 10 years.

UAE Focus

  • Dubai non-oil sector activity slowed in Oct: PMI declined to 49.9 from Sep’s 51.5, with the overall level of confidence at the weakest in the series’ eight-year history. The decline was widespread with construction and travel and tourism posting output declines while job cuts continued.
  • UAE non-oil trade fell by 16.2% yoy to AED 658.3bn in H1 2020; gold topped the list of non-oil commodities trade at AED 104bn, accounting for 15.7% of total trade in H1. China, Saudi Arabia, India, US and Switzerland were the top 5 trading partners, constituting 37.1% of total.
  • Abu Dhabi’s non-oil trade touched AED 151.18bn in Jan-Sep 2020. Saudi Arabia, US, Italy, China and Hong Kong were top trade partners while pearls, precious stones and precious metals topped the list of commodities.
  • UAE’s VAT revenue amounted to AED 11.6bn (USD 3.15bn) in Jan-Aug this year, disclosed the finance ministry, while excise tax amounted to AED 1.9bn (+47% yoy). Tax revenues last year had increased by 7% yoy to AED 31bn. Separately, it was revealed that the number of accredited tax agents increased by 10% yoy to 515 in Jan-Oct.
  • Fitch rates UAE at AA- with a stable outlook in advance of issuing its first Federal bond, though warning of “significant indebtedness” of Dubai’s entities including GREs (at close to 80% of GDP).
  • E-commerce transactions will account for 28.2% of total card payments in the UAE, given change in habits due to the Covid19 pandemic, according to a Dubai Economy-Visa study. The UAE not only had the biggest annual spend per online shopper at $1,648 in the wider MENA and South Asia region, but also had an average transaction value of USD 122 between 2019 and 2020 (vs USD 76 in mature markets and USD 22 in emerging markets). The report can be accessed here.
  • Omani citizens will be permitted to enter the UAE via land ports from Nov 16th, provided a negative PCR test result is presented.
  • Etihad Airways is planning to ground its A380 fleet “indefinitely”, reported Reuters, due to the slow recovery in travel. The company was also planning to undertake a new round of job cuts (Reuters source revealing close to 1000 cabin crew jobs). Separately, Bloomberg reported that Dubai was seeking a buyer for the airport’s cooling system operations in a bid to reduce costs and shore up finances.
  • UAE’s nation brand, valued at USD 672bn, increased to 18th spot globally, according to the Nation Brands 2020 report. The report, which ranks US, China and Japan as the top three valuable nation brands, found that the top 100 nation brands lost an estimated USD 1trn of brand value this year due to the Covid19 pandemic.

Media Review
The struggle for America’s soul
https://magazine.newstatesman.com/editions/com.progressivemediagroup.newstatesman.issue.NS202046/data/212649/index.html
Saudi Crown Prince Says Reforms Saved Budget as Revenue Plunged
https://www.bloomberg.com/news/articles/2020-11-12/saudi-crown-prince-says-reforms-saved-budget-as-revenue-plunged
Dr. Nasser Saidi on The National’s Beyond the Headlines: How will Joe Biden change US policy in the Middle East?
https://www.thenationalnews.com/podcasts/beyond-the-headlines/beyond-the-headlines-how-will-joe-biden-change-us-policy-in-the-middle-east-1.1110861
Employees working from home should pay ‘privilege’ tax to support workers who cannot: Deutsche Bank
https://www.bbc.com/news/business-54876526
 
 
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Weekly Insights 11 Nov 2020: PMIs & Recovery (?) Indicators in the Middle East/ GCC

Download a PDF copy of this week’s insight piece here.
 
PMIs & Recovery (?) Indicators in the Middle East/ GCC: A pictorial representation
Chart 1: PMIs in the Middle East/ GCC
PMIs in the Middle East/ GCC have not kept pace with the increases seen across the US/ Europe/ Asia post-lockdown. Non-oil sector activity has been subdued given sector composition, a majority of which are still negatively impacted by the outbreak: tourism, wholesale/ retail & construction.  Job cuts continue as part of overall cost-cutting measures & business confidence remains weak.

 
Chart 2: Stringency Index & Mobility
Most economies in the Middle East are re-opening in phases, with restricted lockdowns where cases are surging. The UAE remains one of the most open (least stringent) nations in the region.
However, when it comes to mobility, the UAE seems to be a few steps behind its regional peers. This seems to be in line with a recent McKinsey finding that countries focused on keeping virus spread near zero witnessed their economies moving faster. So, ending lockdowns and reopening the country is not sufficient for resumption of economic activity. Another potential reason could be that increased use of e-commerce is leading to less footfall in retail and recreational facilities.

 
Chart 3: Indicators of economic activity in the UAE
Last week, the UAE central bank disclosed that its Targeted Economic Support Scheme directly impacted more than 321k beneficiaries including 310k distressed residents, 1,500 companies and 10k SMEs. The overall pace of lending to GREs (+23% yoy during Apr-Aug 2020) and the government (+20.3%) have outpaced lending to the private sector (-0.7%).
UAE banks still lent most to the private sector (70.1% of total as of Aug 2020 vs. 76% in end-2018 and 72% in end-2019), while the public sector & government together account for close to 30% of all loans in Aug 2020 (vs. 25% a year ago). Breaking it down by sector, there has been upticks in credit to both transport, storage and communication (+51.9% yoy as of end-Jun) as well as personal loans for business (+18.7% yoy) while construction sector has seen a dip (-2.9%).

 
Chart 4: Indicators of economic activity in Saudi Arabia
In contrast to the UAE, loans to the private sector has been edging up in Saudi Arabia, growing by an average 13.2% yoy during the Apr-Sep period. Proxy indicators for consumer spending – ATM withdrawals and PoS transactions – are on the rise post-lockdown. Ahead of the VAT hike to 15% in Jul, there was a surge in PoS transactions in Jun, which has since then stabilized. By category, food and beverage and restaurants and cafes, continue to post increases.
Saudi Arabia published its first-ever flash estimates for GDP this week: showing a 1.2% qoq increase in Q3, though in yoy terms, growth was still down by 4.2%.

 
Chart 5: Linkages with the global economy
In linkages with the global economy, we consider

  1. Trade: for the GCC region, there was a significant drop in overall trade with the world during the lockdown period. While exports have started to pick up again, the pace of exports to China are relatively faster.
  2. Passenger traffic: though international revenue passenger kilometers in the Middle East improved slightly in Sep, it continues to be the worst affected globally in terms of year-to-date data (-68.7% till Sep), as travel restrictions remain. Resumption of domestic travel (e.g. Russia, China) has supported rebounds in some regions.
  3. Cargo volumes (cargo tonne-kilometers or CTKs) show a clear V-shaped recovery for the Middle East, due to “added capacity” following the peak of the crisis, according to IATA.


 
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Weekly Economic Commentary – Nov 8, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Stock markets had a good week across the globe: in the US, all markets gained while waiting for the Presidential election results; European markets posted the best weekly gain since Jun, while in Japan, the Nikkei average rose to a 29-year high; MSCI Asia Pacific (ex-Japan) touched a near 3-year high while the MSCI all-world index posted its best weekly gain in close to 7 months. In the region, most markets were higher compared to a week ago. The euro and pound gained on dollar weakness, oil prices closed below USD 40 last week, while gold price inched closer to the USD 2k mark.
Weekly % changes for last week (5-6 Nov) from 29th Oct (regional) and 30th Oct (international).

Global Developments
US/Americas:

  • Non-farm payrolls grew by 638k in Oct (Sep: 672k) and the unemployment rate fell unexpectedly to 6.9% in Oct (Sep: 7.9%). Average hourly earnings by 4.5% yoy in Oct. The labour force participation rate inched up to 61.7% from 61.4% the month before.
  • Private sector payrolls slowed by 365k in Oct (Sep: 753k), the lowest reported gains since Jul, with the services related businesses posting the biggest gains (+348k).
  • Initial jobless claims fell by 7k to 751k in the week ended Oct 30 – the lowest initial claims total since the week of Mar 14. Continuing claims declined by 538k to a seasonally adjusted 29mn in the week ended Oct 24, a new low since the outbreak.
  • Non-farm productivity increased at a 4.9% annualized rate in Q3 (Q2: 10.6%); hours worked rebounded at a 36.8% rate last quarter after plunging at a record 42.9% pace in Q2 while unit labour costs plunged by 8.9% from Q2’s 8.5%.
  • Factory orders rose by 1.1% mom in Sep (Aug: 0.6%), thanks to a rebound in transport equipment (+4.1% vs -0.9%) while orders for machinery declined by 0.3%. orders for non-defense capital goods excluding aircraft inched up by 1% in Sep.
  • The ISM manufacturing survey showed activity expanding to 59.3 in Oct, the most since Nov 2018, with new orders surging to the highest reading since Jan 2004 while production rose to 63 from 61 the month prior. ISM’s non-manufacturing activity index slowed to 56.6 from Sep’s 57.8 with employment staying above 50 for the second consecutive month after 6 straight moths of readings below-50.
  • US Markit manufacturing PMI was revised upwards to 53.4 in Oct (preliminary reading: 53.3) – the strongest since Jan 2019. Though output and new orders growth picked up, new export orders fell for the first time since Jul due to the recent lockdown restrictions in Europe.
  • Trade deficit narrowed to USD 63.9bn in Sep (from Aug’s 14-year high of USD 67bn) as exports rose by 2.6% to USD 176.4bn while imports edged up by 0.5%. Year-to-date, overall trade deficit grew by 8.6% to USD 485.6bn.

Europe:

  • German factory orders grew for a 5th consecutive month, rising by 0.5% mom in Sep (Aug: 4.9%), supported by domestic orders (+2.3%) while foreign ones dropped by 0.8%, largely due to a 6% slump in purchases from the Euro Area.
  • Germany’s Markit manufacturing increased to 58.2 in Oct, the strongest increase since Mar 2018, driven in part due strong domestic demand and also due to the rise in new export orders from (and sales to) Asia. Services PMI posted the first contraction in activity in 4 months, with the headline reading down to 49.5 in Oct (though higher than the preliminary estimate of 48.9).
  • Industrial production in Germany grew by 1.6% mom in Sep (Aug: 0.5%), supported by the auto industry (+5.1% mom); in yoy terms, IP fell by 7.3%.
  • Manufacturing PMI in the eurozone inched up to 54.8 in Oct (Sep: 53.7), the highest reading since Jul 2018. Services PMI inched up to 46.9 (preliminary estimate of 46.2) and composite PMI moved up to 50.
  • Retail sales in the eurozone fell by 2.0% mom in Sep (Aug: +4.2%), with volume of retail trade decreasing by 2.6% fornon-food products, by 1.4% for food, drinks and tobacco and by 0.2%for automotive fuels. In yoy terms, retail sales were down by2% in Sep (Aug: 4.4%).
  • The final UK manufacturing PMI reading was revised down to 53.7 in Oct (Sep: 54.1). Momentum slowed in both output and new order growth and employment slipped for the 9th straight month; a silver lining was that business optimism hit the highest level since Jan 2018.
  • The Bank of England kept interest rates unchanged at a record low 0.1% and also announced a further GBP 150bn of support amid tighter lockdown rules in the country. The Bank expects unemployment to peak at 7.75% in the middle of next year, from 4.5% currently: this would be the highest rate since 2013.

Asia Pacific:

  • China’s Caixin manufacturing increased to 53.6 in Oct (Sep: 53), the highest since Jan 2011, with business confidence at a multi-year high and total new orders rising to the highest level since 2010. Caixin services PMI surged to 56.8 (Sep: 54.8), supported by domestic demand and employment ticked up at the fastest pace since Sep 2019, while new export business slipped below-50.
  • China’s export growth remained strong in Oct, up 11.4% yoy (Sep: 9.9%), while imports grew by 4.7% (Sep: +13.2%), widening the trade surplus to USD 58.44bn.
  • Manufacturing PMI in South Korea picked up by 4 points to 51.2 in Sep, rising above 50 for the first time this year, as new orders increased for the first time in 9 months.
  • Japan’s manufacturing PMI declined for a record 18th straight month, clocking in 48.7 in Oct (Sep: 47.7), though export orders grew for the first time in nearly 2 years (thanks to demand from the Asia Pacific region).
  • Overall household spending in Japan fell by 10.2% yoy in Sep (Aug: -6.9%), the fourth largest drop ever; however, in mom terms, spending edged up by 3.8%. Separately, real wages declined by 1.1% yoy in Sep, with overtime pay and bonuses plunging.
  • Indonesia fell into recession after 22 years: GDP fell by 3.49% yoy in Q3, following a 5.32% dip in Q2.
  • India’s manufacturing PMI climbed to 58.9 in Oct (Sep: 56.8) – the highest reading since May 2010 – with upticks in output and new orders, as foreign demand expanded at its quickest pace since Dec 2014, though employment cuts continued for the 7th straight month.

Bottom line: With the new US President-elect announced, one of the biggest  challenges for the new administration will be its strategy to contain the Covid19 outbreak, with daily cases crossing 100k for the last 4 days. Many policy changes are likely to be revealed in the next few weeks: ranging from taxes and spending to energy and climate as well as trade, foreign policy (hopefully, an end of Twitter-based policy making) and tech. Overall, the change is likely to reduce US and global policy uncertainty, on greater support for global growth, trade and investment. This will give a strong push for risk assets and markets. Europe meanwhile is reeling from its recent Covid19 surge: though not going into extreme lockdowns as before, its healthcare systems are being stretched given the record high cases. While China seems to be recovering (thanks to domestic demand) and “out of the woods” for now, slowing demand from the rest of the world is likely to slow its pace of recovery.
Regional Developments

  • Bahrain approved its state budget for 2021-22, based on oil price at USD 45, generating estimated total revenues of BHD 4.624bn and overall deficits of 2.421bn. Not only does the budget expect a decline in primary deficits, but also a continued drop in government administrative expenses (by 30%) during the period.
  • Occupancy levels in Bahrain’s hotels have started to recover in Aug-Sep: levels touched 22%, supported by domestic tourism (a trend visible in other GCC nations as well).
  • Egypts cabinet approved a new law to issue sovereign sukuk last week, according to the finance minister; once approved by the Parliament and President, the country can issue its first sovereign sukuk.
  • Non-oil PMI in Egypt expanded to 51.4 in Oct (Sep: 50.4), the second straight month of above-50 following 13 months below. Output and new orders growth supported activity though employment fell for the 12th consecutive month (47.8 in Oct from Sep’s 48.3).
  • Egypt’s net foreign reserves rose to USD 39.22bn in Oct (Sep: USD 38.425bn); FX reserves rose by USD 827mn to USD 34.683bn in Oct, while gold reserves decreased by USD 33mn to USD 4.361bn in the same period.
  • Net foreign assets of Egypt’s banking sector increased to the equivalent of about EGP 51.958bn during Sep 2020.
  • Exports into Egypt increased by 4.1% yoy to USD 30.5bn in 2019, with value of non-oil exports rising by 3.9% to USD 25.5bn. Separately, Egypt’s green exports touched USD 11.2bn in 2015-2019. According to the minister of planning, green exports accounted for3% of total Egyptian exports last year, while green imports accounted for 16% of total Egyptian imports.
  • International tourists’ arrival into Egypt dived by 62.3% yoy leading to a 54.9% plunge in tourism receipts in H1 this year, according to the World Tourism Barometer.
  • Egypt will become the top recipient of remittances this year, at a value of USD 24.4bn or 6.7% of GDP, according to the latest Migration and Development report from the World Bank.
  • Egypt and Iraq agreed to establish an oil-for-reconstruction mechanism whereby companies would undertake development projects in return for oil.
  • Iraqi oil exports increased by 10.1% mom to 2.876mn barrels per day in Oct; revenue from oil touched USD 3.43bn in Oct at an average price per barrel of USD 38.48.
  • Iraq unveiled a “single window” for business registration, an entirely contactless registration, regulation and reporting portal to improve the business environment.
  • The central bank of Jordan extended support for SMEs by allowing them to defer instalments until end-2021. Furthermore, the regulations of the programme at the Jordan Loan Guarantee Corporation was amended to help those negatively affected by the outbreak.
  • Jordan imported a total of 262k barrels of Iraqi crude oil in Oct at an average 8,448 barrels per day. A total 3.219 mn barrels of Iraqi crude oil were supplied during Sep 2019-Oct 2020.
  • Kuwait’s State Audit Bureau reported that, in the absence of a debt law, the country has no option but to borrow to finance its deficits but “under the presence of controls and a package of financial, economic and legislative reforms”.
  • Private sector deposits in Kuwait inched up by 4.8% yoy to KWD 38bn during Jan-Aug 2020. Dinar deposits accounted for 94.3% of total deposits at end-Aug (end-2019: 93%).
  • Lebanon extended the deadline for the central bank to provide all data required for a forensic audit by 3 months, disclosed the caretaker finance minister; only 42% of the documents requested had been provided, citing existing legislation and banking secrecy. Separately, the central bank stated that the government should be the one submitting full accounts to a forensic audit.
  • US sanctioned Lebanon’s Free Patriotic Movement President for his involvement in corruption and embezzlement of public funds among other charges.
  • Oman’s National Plan for Fiscal Balance 2020-2024 aims to bring the fiscal deficit down to 1.7% of GDP by 2024, from a preliminary deficit of 15.8% this year. Non-oil revenues are expected to account for 28% of total revenues this year and estimated to rise to 35% by next year. Oman will introduce VAT next year and plans to impose income tax on high earners to boost non-oil revenues. Five sectors have been identified for expansion (based on existing resources): agriculture and fisheries, mining and energy, transportation and logistics, manufacturing, and tourism.
  • FDI into Oman increased by 5.9% yoy to OMR 15.064bn in Q1 this year, with UK, US, UAE and Kuwait the most significant investors in the country.
  • Measures to support the real estate sector have been initiated in Oman including a reduction in real estate fees to 3% (from 5%) as well as licensing of leasing operations leading to ownership or sale in installments and permission to add upper floors in buildings in exchange for a fee among others.
  • Qatar’s state budget will be based on the assumption of an oil price of USD 40 a barrel, disclosed the Emir. He also stated that fiscal deficit in H1 this year stands close to QAR 1.5bn (USD 412mn).
  • Qatar plans to hold an election for its Shura Council for the first time ever in Oct 2021: members were directly appointed by the Emir till now.
  • Non-oil sector PMI in Saudi Arabia improved to 51 in Oct (Sep: 50.7) – the highest reading in 8 months – with new orders rising for a second straight month though employment continues to decline.
  • Saudi Arabia rolled out a spate of labour reforms under its “Labour Relation Initiative”, effective Mar 2021, giving more rights to expat workers including permitting employees to change their employer and requesting Exit/Re-Entry Visas without the employer’s consent.
  • Money supply in Saudi Arabia (M3) hit a record high of SAR 2.088trn in Q3 this year, rising 10.6% yoy and 1.78% qoq.
  • Consumer spending in Saudi Arabia fell by 5.57% yoy to SAR 721.18bn in Jan-Sep 2020. Cash withdrawals declined by 15.4% yoy to SAR 469.41bn while point of sales surged by 20.53% to SAR 251.78bn.
  • Gross public external financing needs in MENA is forecast to touch USD 100bn in 2021, driven largely by the GCC, according to the IIF. Non-resident capital inflows to the region is also estimated to edge up slightly to USD 177bn next year, equivalent to 6.6% of GDP.

UAE Focus

  • UAE central bank disclosed that its Targeted Economic Support Scheme directly impacted more than 321k beneficiaries including 310k distressed residents, 1,500 companies and 10k SMEs.
  • PMI in the UAE fell to 49.5 in Oct (Sep: 51), with the new orders sub-index falling to 49.3 (for the first time since May) while business sentiment towards the 12-month outlook was at a joint-record low.
  • The UAE 2021 budget was set at AED 58bn, down 5.8% from this year’s record high budget: it sets AED 21.3bn towards government affairs, AED 26.04bn in social projects and AED 3.93bn in federal projects.
  • Inflation in the UAE fell by 2.36% yoy and 0.5% mom in Sep. Prices of food and restaurant costs were higher by 4.2% and 3.1% yoy respectively, but were more than offset by declines in recreation and culture (-28%) and transportation costs (-6.9%).
  • Trade surplus between the UAE and GCC nations (excluding Qatar) rose to AED 5.37bn in Q1 this year, thanks to an increase in exports to AED 17.83bn. Among the 4 nations, top trade partners were Saudi Arabia, Oman, Kuwait and Bahrain.
  • Bilateral trade between Dubai and China grew by 50% yoy to AED 2.42bn in Jan-Aug 2020. During this period, the total number of certificate of origins issued for China-bound shipments reached 1,936 certificates – twice the number from a year ago.
  • Net investment by the federal government and local governments in non-financial assets surged by 40% yoy to AED 32.2bn in H1 this year, according to the Ministry of Finance.
  • UAE’s federal entities posted total revenues of AED 40.16bn (USD 10.94bn) in Q3, expenditures of AED 36.69bn, resulting in a surplus of AED 3.48bn.
  • The UAE Federal Tax Authority, in coordination with the Ministry of Finance, will issue digital Tax Residency and Commercial Activities Certificates from Nov 14th onwards, reported WAM.
  • The UAE has been ranked second globally as a source of remittances, according to the World Bank, accounting for 10.7% of GDP. US topped the list at USD 71bn.
  • UAE announced an overhaul of the existing legal system that sees changes to existing laws including family, civil and criminal law: this includes changes to inheritance laws, judicial procedures (provision of translators) and alcohol consumption (ending the alcohol license system) among others.

Media Review
The Crisis is Not Over, Keep Spending (Wisely)
https://blogs.imf.org/2020/11/02/the-crisis-is-not-over-keep-spending-wisely/
China’s “dual-circulation” strategy means relying less on foreigners
https://www.economist.com/china/2020/11/07/chinas-dual-circulation-strategy-means-relying-less-on-foreigners
Rescuing U.S. Foreign Policy After Trump By Joseph R. Biden, Jr.
https://www.foreignaffairs.com/articles/united-states/2020-01-23/why-america-must-lead-again
This is how Republicans keep their power: Fareed Zakaria (video)

https://youtu.be/VBgw-eEK30w
 
 
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Weekly Insights 4 Nov 2020: Rising budget deficits & debt levels in the Middle East/ GCC Require Sustained Fiscal Adjustment

Download a PDF copy of this week’s insight piece here.
As the world awaits results of the US election, oil prices have settled around the forty-dollar mark. Oil exporters in the region have had to deal with the Covid19 outbreak along with a global recession that have drastically reduced the demand for oil, as well as lower oil prices. Given the resurgence in Covid19 cases and renewed lockdown measures and the global energy transition away from fossil fuels, it is unlikely that oil prices will revert to the levels seen a few years ago, given weaker demand – the IMF’s latest World Economic Outlook puts oil prices, based on futures markets at USD 41.69 in 2020 and USD 46.70 in 2021 (versus an average price of USD 61.39 last year). Fiscal breakeven oil prices in the GCC range between USD 42 for Qatar to USD 104.5 for Oman this year, exerting additional pressure on most oil producers as they ramp up spending to support the economy (UAE’s emirates Dubai and Sharjah announced USD136Mn and USD139Mn respectively in additional stimulus in the last few days).
Oil exporters in the region are still highly dependent on oil revenues, with lower oil revenues implying limited fiscal room and higher fiscal deficits, which are averaging 10% in 2020 for the GCC countries. As real oil prices trend downward, fiscal sustainability becomes increasingly vulnerable.
The latest numbers from Saudi Arabia underscore the need to diversify away from dependence on oil revenues. Saudi Arabia managed to halve its fiscal deficit in Q3 compared to Q2, as overall revenues edged up by 4% yoy, thanks in part to the 63% surge in non-oil revenues (VAT rate was hiked to 15% From Jul onwards); however, spending increased by 7% yoy, driven by a massive surge in subsidies to SAR 8.2bn (From SAR 2.2bn a year ago) brought on by the need to support the economy during the Covid19 outbreak.

 
Among other GCC nations, Oman, in a bid to raise non-oil revenues, announced plans to introduce 5% VAT from next year, in addition to potentially introducing an income tax (currently being studied). Furthermore, costs of expatriates’ employment visa and work permit renewals will be increased by 5%, with a plan to redirect additional funds towards financing its recently initiated Job Security System. Kuwait meanwhile is facing the highest budget deficit in its history[1]. In Aug this year, the national assembly approved a law that makes transfers to the Future Generations Fund dependent on budget surplus, thus providing a much needed[2] but momentary respite. However, the Parliament is still holding the public debt law – which would allow the government to borrow KWD 20bn over 30 years – hostage. Bahrain’s deficit widened by 98% yoy in H1 this year (as oil revenues fell by 35% and overall revenues by 29%), leading it to issue a USD 1bn bond, while receiving a payment from its GCC neighbours (part of a support package approved in 2018).


Rising fiscal deficits following the previous decline in oil prices and lower growth have resulted in an accumulation of debt across all the MENA countries. The rising debt burdens and their servicing, leave limited space for increasing spending at a time when it is needed to support the economies. The IMF revealed that the median size of revenue and expenditure packages in the region’s oil importing countries this year was double that of oil exporters (2% of GDP versus 1% of GDP). For the GCC, adjustment has resulted from a combination of spending cuts, borrowing from commercial banks, tapping international/ regional markets (bond issuances[3], commercial loans) as well as drawing down from international reserves at the central banks and in Oman’s case direct external financial support from Qatar (with talks ongoing with the UAE, reports FT). As for support from sovereign wealth funds, given lack of transparent data, it will be difficult to gauge the actual value of their support/ contribution, but their optimal role would be to: (a) tap into investments abroad (starting with sale of money market instruments like T-bills); (b) re-assess long-term investment strategies to play a larger role domestically in supporting local industries, innovation and developing digital assets.
Faced with a complex situation, it is little wonder that measures to increase non-oil revenue are being introduced – Oman’s plan to introduce VAT in 2021, rise in visa fees and a potential income tax on high income earners and Saudi Arabia’s VAT hike. To achieve and maintain fiscal sustainability in the long-run, oil exporters will need to move away from pro-cyclical policies, rationalise overly generous and unsustainable entitlement programs, alongside revenue-enhancing measures. The policy agenda is full in the coming years!
 
 

Expenditure reduction policies

Revenue enhancing measures

Other measures

Phase out subsidies
Reduce current spending
Reduce public sector wage bills
 
Raise non-oil fiscal revenues by raising taxes / introduce new taxes
Improve efficiency in collecting taxes
Consolidate/ rationalize fees/ charges on government services
Allow deficit financing / create local currency debt & mortgage markets
Public investment towards infrastructure to ensure a steady pipeline
Establish social safety nets / pensions scheme

 
[1] Kuwait posted a fiscal deficit of KWD 5.64bn in 2019-2020 (ending Mar 2020): this was higher by 69% yoy and inclusive of a KWD 1.72bn (10% of total annual revenues) transfer to the Future Generations Fund.
[2] The finance minister stated in Aug 2020 that the country has just KWD 2bn (USD 6.6bn) worth of liquidity in its Treasury and it was not enough to cover state salaries beyond Oct.
[3] Abu Dhabi issued a USD 5bn multi-tranche bond; Dubai sold USD 2bn in bonds; Saudi Arabia sold USD 7bn in 3-part bonds; Qatar sold USD 10bn in USD-denominated bonds.
 
 




Weekly Economic Commentary – Nov 1, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Stock markets took a tumble last week, ahead of the US election and resurgence of Covid19 cases in Europe leading to new lockdowns. US Dow Jones industrial average was down 6.5% this week, while European stock markets suffered their joint worst week in seven months: Stoxx 600 has tumbled by 5.6% this week; FTSE down 4.8% worst since Jun. The MSCI All Country World index of global equities declined 5.3%, its worst weekly sell-off since Mar. Regional markets were mostly subdued last week, mirroring global counterparts’ performance and due to disappointing earnings results. The euro slid to a 4-week low last week, while oil prices fell by a massive 10% compared to a week ago on demand concerns, while gold prices declined.
Weekly % changes for last week (29-30 Oct) from 22nd Oct (regional) and 23rd Oct (international).

Global Developments
US/Americas:

  • Q3 GDP accelerated at a 33.1% annualized pace from a 31.4% plunge the quarter before, supported by a rise in business and residential investment alongside stronger consumer activity and exports. Core PCE increased by 3.5% qoq in Q3 (Q2: -0.8%). This pace is unlikely to be sustained, given a negative impact from the resurgence in Covid19 cases and since most stimulus programs have ended.
  • Both personal income and spending gained in Sep: personal income was up by 0.9% mom thanks to employment gains and higher pay while spending rose for the 5th consecutive month (+1.4%).
  • Chicago PMI inched down to 61.1 in Oct, though from Sep’s near-two-year high of 62.4. Breaking down by component, production recorded the largest decline while new orders – the only category with a monthly uptick – rose to the highest since Nov 2018.
  • The University of Michigan index of consumer sentiment increased to 81.8 in Oct, marginally higher than the initial estimate and Sep’s 80.4. However, confidence is 14.3% lower vs Oct 2019.
  • Durable goods in Sep increased by 1.9% mom (Aug: 0.4%), driven by a 4.1% rebound in orders for transportation equipment (Aug: -0.9%). Non-defense capital goods orders excluding aircraft eased to 1% (Aug: 2.1%).
  • New home sales declined unexpectedly by 3.5% mom to 959k in Sep; in yoy terms, sales surged by 32.1%. Pending home sales fell by 2.2% mom in Sep (Aug: 8.8%). The housing market however remains supported by record low mortgage rates and a greater demand during the outbreak for standalone houses and more space.
  • S&P Case Shiller home price indices rose by 5.2% in Aug (Jul: 4.1%) – the biggest gain in more than 2 years – as a result of an uptick in demand amid supply shortages.
  • US goods trade deficit narrowed to USD 79.37bn in Sep (Aug: USD 83.11bn): exports of goods rose USD 3.2bn, while imports fell USD 0.5bn.
  • Initial jobless claims fell by 40k to 751k in the week ended Oct 24 – the lowest initial claims total since the week of Mar 14. Continuing claims declined by 709k to a seasonally adjusted 7.75mn in the week ended Oct 17.

Europe:

  • The ECB signaled more easing ahead, stating that risks were “tilted to the downside”; with resurgence in Covid19 cases, European nations are imposing more lockdowns. The ECB kept its deposit rate at -0.5% and held its emergency bond-buying plan at EUR 1.35trn.
  • Eurozone GDP surged by 12.7% qoq in Q3 (Q2: -11.8%), with better-than-expected results from France (+18.2%), Spain (+16.7%), Germany and Italy (+16.1%). The wider EU expanded by 12.1% in Q3. GDP in Germany grew by a record 8.2% in Q3 but down by 4.1% yoy (Q2: -11.3%).
  • Germany’s IFO business climate edged down to 92.7 in Oct (Sep: 86.7) – the first fall after 5 straight rises – and so did expectations (95 in Oct from 97.4 in Sep); in contrast, the current assessment improved to 90.3 from 89.2 the month before.
  • Inflation in Germany stayed negative in Oct, at -0.2% yoy, unchanged from Sep. The harmonized index dropped to -0.5% yoy (Sep: -0.4%).
  • Retail sales in Germany fell by 2.2% mom in Sep (Aug: +1.8%); retail sales were up by 6.5% yoy, supported by food, beverages and tobacco (+6.8%), supermarkets (+7%), and non-food (6.5%). Compared to Feb (pre-pandemic), retail sales were 2.8% more in Sep.
  • Unemployment rate in Germany unexpectedly slowed to 6.2% in Oct (Sep: 6.3%). Eurozone unemployment remained steady at 8.3% yoy.

Asia Pacific:

  • China’s official manufacturing PMI was stable at 51.4 in Oct (Sep: 51.5), but the subindex for small manufacturing companies fell to 49.4 in Oct (Sep: 50.1). Non-manufacturing PMI increased to 56.2 in Oct (Sep: 55.9) and within the non-manufacturing service sector sentiment rose to 55.5 (55.2).
  • The Bank of Japan left rates unchanged while lowering its economic growth and inflation forecasts. It expects the economy to contract by 5.5% this year (from an estimate of 4.7% earlier) while inflation is forecast to decline by 0.6%.
  • Japan leading economic index increased to 88.4 in Aug (Jul: 86.7), the highest since Feb, while coincident index inched up to 79.2 (78.3).
  • Inflation in Tokyo was -0.3% in Oct (Sep: 0.2%). Core CPI excluding food and energy fell by 0.2% (Sep: 0%).
  • Industrial production in Japan increased by 4% mom in Sep but fell by 9% yoy (Aug: -13.8%); index of industrial shipments rose 3.8% to 90.4, while inventories fell 0.3% to 97.7.
  • Unemployment rate in Aug edged up to 3% in Japan (Jul: 2.9%); the number of unemployed persons topped 2mn for the first time since May 2017.
  • Retail trade in Japan dropped by 8.7% yoy and 0.1% mom in Sep, down for a 7th consecutive month. Large retailer sales plummeted by 13.9% in Sep (Aug: -3.2%)
  • Korea’s preliminary GDP for Q3 increased by 1.9% qoq, rebounding from contractions in the previous two quarters and the steepest quarterly increase since 2010 (after the financial crisis); but in yoy terms GDP was down 1.3%.
  • Singapore industrial production grew by 10.1% mom and 24.2% yoy in Sep (Aug: +15.4% yoy) – the second straight yoy rise and the strongest growth since Dec 2011. Pharmaceuticals were up by 113.6% and electronics picked up by 30.1%.
  • Unemployment rate in Singapore rose to 3.6% in Sep (Aug: 3.4%); though the pace of increase slowed, the total number of unemployed residents to 112,500, of which 97,700 are Singaporeans.

Bottom line: A big week ahead with US elections results: the Vix “fear gauge” index climbed to almost 40 on Fri, double its long-run average, after growing fears of a contested election and that a potential Trump loss might lead to widespread civil unrest. Last week, most nations published better-than-expected GDP numbers for Q3, picking up from the dismal Q2 results. This feat is unlikely to be repeated in Q4 given the current trend of rising Covid19 cases and new lockdowns across Europe. The main questions are how severe this contraction will be compared to Q2, and how the countries plan to finance any stimulus packages.
Regional Developments

  • Bilateral non-oil trade between Bahrain and Saudi Arabia accelerated by 43% yoy to USD 688.4mn in Q3 2020. In Jan-Sep this year, two-way trade surged by 12% to USD 2.17bn.
  • A statement disclosed that women account for 41% of the Bahrain Bourse workforce and 30% of leadership roles in the exchange.
  • Egypt’s trade deficit narrowed by 20.5% yoy to USD 3.02bn in Aug, as exports declined by 9.4% to USD 1.91bn and imports by 16.6% to USD 4.93bn.
  • Trade between Egypt and Saudi Arabia declined by 4.2% yoy to USD 6.8bn in 2019, with exports to Saudi rising to USD 1.68bn in 2019 (2018: USD 1.43bn). Egypt’s top export market was the UAE (USD 2.05bn).
  • Money supply in Egypt increased62% yoy to EGP 4.76trn in Sep.
  • Egypt’s external debt increased by 12.2% qoq and 14.8% yoy to USD 123.49bn at end-Jun.
  • Foreigners have increased investments in Egypt’s treasury bills and bonds to USD 21.1bn in mid-Oct from USD 10.4bn last May, reported Bloomberg, citing the head of debt management unit at the ministry of finance. These were still below the USD 27.8bn held in Feb, prior to the Covid19 outbreak.
  • Remittances into Egypt grew by 10.3% yoy to USD 27.8bn in the 2019-20 financial year, according to the central bank. Remittances in the last quarter (Apr-Jun) dropped by 10.5% yoy to USD 6.2bn.
  • Egypt is disbursing the second and third batches of emergency aid, estimated at EGP 317.31mn, to 146,610 tourism workers from 2,204 tourism establishments who were affected by the Covid19 crisis. The aid represents 100% of workers’ basic wage of EGP 600 minimum.
  • About EGP 136.4bn has been earmarked for Egypt’s urban development sector in the fiscal year 2020-21: this is equivalent of 18.5% of total investment. This is split into three parts: real estate with the lion’s share of 45.6% (EGP 62.1bn), followed by construction works (28.5%) and water and sanitation projects (25.9%).
  • Cement sales in Egypt accelerated by 10% mom to 3.8mn in Sep – the highest demand for cement since Apr this year; in yoy terms, however, this constitutes a 12.5% drop. Separately, exports of cement had declined by 19% yoy to USD 90mn in Jan-Aug this year.
  • Egypt’s auto sector has been hit by the Covid19 outbreak: with closure of government and notary offices across the country, only 130k units have been sold in Jan-Aug.
  • Jordan and the IMF have reached a staff-level agreement on the first review of the authorities’ economic reform programme supported by the Extended Fund Facility arrangement. Following an approval by the IMF Executive Board, an amount of around USD 146mn will be released, bringing the total disbursements to USD 687mn this year.
  • Jordan’s oil import bill plummeted by 50.1% yoy to JOD 836.5mn in Jan-Aug this year. Trade deficit during the period narrowed by 22.7% yoy to JOD 4.076bn, with the fall in imports (down by 15.3% to JOD 7.7bn) outpacing the 5.1% drop in exports.
  • Kuwait’s central bank maintained its discount rate at 1.5% while lowering repo rates and other rates across the interest rate yield curve up to the 10-year term by 0.125%.
  • Kuwait’s oil minister clarified that the country will “support whatever necessary joint decisions will be agreed to under the OPEC+ framework”, after being reported that the nation wanted to find ways to increase supply by reviewing their output targets.
  • Reuters reported that the restructuring consultancy Alvarez & Marsal was yet to receive all the information requested to conduct a forensic audit of Lebanon’s central bank, with the latter citing that some of the requests “violated money and credit law as well as banking secrecy”. The central bank had confirmed providing “all the documents and information which Lebanese laws allow” earlier this month.
  • New car sales in Lebanon stood at just 338 cars in Sep compared to 1,700 in Sep 2019.
  • Oman received USD 1bn in direct financial support from Qatar, reported FT. Discussions are ongoing with the UAE, including commercial loans or investments in projects.
  • Oman will raise costs of expatriates’ employment visa and work permit renewal by 5%, with the additional funds redirected towards financing the Job Security System. The JSS will start operating from Nov 1st.
  • The number of expats in Oman dropped by 16.4% or 263,392 persons in Jan-Sep this year. Expat employees in the government sector has fallen by more than one-fifth and by 17.1% in the private sector.
  • Budget deficit in Saudi Arabia touched SAR 40.768bn (USD 10.87bn) in Q3, as oil revenues plummeted by 30% yoy to SAR 92.582bn thanks to a combination of lower oil prices and production cuts. Compared to Q2, the deficit more than halved, supported by the increase in total non-oil revenues (+63% yoy, supported by the VAT hike). Government spending was up 7% yoy to SAR 256.345, with subsidies rising by more than 3 times to SAR 8.189bn. Saudi Arabia expects budget deficit to narrow to SAR 145bn or 5.1% of GDP in 2021.
  • Saudi Arabia’s Tadawul will triple the daily trading limits for newly listed companies from Nov 8: applicable for the first 3 days on the main market and on an ongoing basis for all listed firms in the parallel market Nomu.
  • Trade surplus in Saudi Arabia narrowed by 61.4% yoy to SAR 107.57bn in Jan-Aug 2020. Both exports and imports fell during the period, by 35.9% and 17.3% respectively. In Aug alone, China, Japan and UAE were the top trading partners.
  • Bloomberg (citing Maaal) reported that Saudi Arabia was working to abolish the “Kafala” sponsorship system (with rules to be published this week), though the Ministry of Human Resources and Social Development responded that it is “working on many initiatives to organise and develop the labour market, and it will be announced as soon as it is ready”.
  • SAMA’s assets declined by 5% yoy and 0.7% mom to SAR 1.82trn in Sep. Foreign exchange reserves dropped by 2.5% mom to SAR 265.89bn in Sep. The value of point-of-sale transactions increased by 33.7% yoy to SAR 33.21bn in Sep.
  • Mortgage loans in Saudi Arabia touched 208,505 contracts (+90% yoy), valued at more than 96.7bn (+84%) until Q3 2020.
  • Remittances from Saudi Arabia increased by 18.5% yoy to SAR 110.24bn in Jan-Sep this year. In Sep alone, remittances were up 28.6% to SAR 13.21bn.
  • Saudi Arabia is planning an SAR 8bn (USD 2.1bn) boost for its space programme by 2030. 
  • Saudi Arabia will open the Umrah pilgrimage to Mecca for Muslims from other countries from Nov 1st.
  • Saudi Arabia plans to expand its airports’ capacities to 100mn passengers per year by 2030, revealed the country’s minister of investment. Just Umrah pilgrims are expected to rise from 8mn to 30mn per year in the coming years.
  • Nationalisation rate in Saudi Arabia’s private sector increased to 21.54% in Q3 vs 20.4% in Q3 2019.

UAE Focus

  • UAE set up a National Covid-19 Crisis Recovery Management and Governance Committee to support and boost businesses in the post-Covid era. The committee will also establish an electronic data link for digital indicator-based statistics, in addition to identifying the financial and economic resources required for supporting the recovery phase.
  • Abu Dhabi’s non-oil foreign trade tumbled by 9.5% yoy to AED 80.2bn in Jan-May 2020; non-oil exports were down by 7.2% to AED 25bn while imports edged up by 0.4% to AED 42.24mn during the period.
  • S&P downgraded Sharjah and Ras Al Khaimah’s ratings, citing a rise in government debt burden amidst a contraction in growth, though both were awarded a stable outlook. Sharjah’s long-term foreign and local currency sovereign credit ratings was revised to ‘BBB-’ from ‘BBB’ and its short-term rating to ‘A-3’ from ‘A-2’. Ras Al Khaimah’s long-term rating was revised down to ‘A-’ from ‘A’ and the short-term rating to ‘A-2’ from ‘A-1’.
  • Dubai launched Nasdaq growth market aimed at attracting growth companies, to support SMEs looking to expand their businesses by attracting investors to finance projects.
  • Japan imported 20.173mn barrels of crude oil from UAE in Sep 2020, accounting for 31.4% of Japan’s total crude imports. Saudi Arabia provided 25.721mn barrels, or 40.1% of the total and Kuwait 5.139mn barrels or 8.0%.
  • Dubai announced 29 projects including green spaces and gardens at a cost of AED 2bn, in addition to the development of beaches (at a cost of AED 500mn), to improve the quality of living in the country.

Media Review
Covid19 underpins the need for economic diversification and structural reforms in MENA
https://www.thenationalnews.com/business/economy/covid-19-underpins-need-for-economic-diversification-and-structural-reforms-in-mena-imf-says-1.1100759
Europe grapples with what went wrong in Covid-19 resurgence
https://www.ft.com/content/88113840-757e-4b7b-8be6-f8c2ce942021
China leads again
https://www.project-syndicate.org/commentary/china-strong-economic-recovery-versus-american-weakness-by-stephen-s-roach-2020-10
Japan promises to be carbon-neutral by 2050
https://www.economist.com/asia/2020/10/29/japan-promises-to-be-carbon-neutral-by-2050
Eight steps to pull the Lebanese economy back from the brink
https://www.thenationalnews.com/opinion/comment/eight-steps-to-pull-the-lebanese-economy-back-from-the-brink-1.1100684
 
 
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Weekly Insights 28 Oct 2020: US Presidential elections & impact on the Middle East/ GCC

Download a PDF copy of this week’s insight piece here.
FiveThirtyEight, in its extensive analysis and simulations, favours Biden to win the election, barring a major polling error. A contested election is probably on the cards. But, with less than a week left for the US Presidential elections, what would a potential change of guard at the White House mean for the Middle East? Interestingly, a recent YouGov-Arab News survey shows that respondents have little confidence in either candidate: only 12% preferred Trump versus 40% for Biden.
First and foremost is a potential return to multilateralism and international cooperation from the current (unilateralism) policies of withdrawal from the Paris climate accord, the Trans-Pacific Partnership or the World Health Organization or the Iran nuclear deal. International, multilateral cooperation – such as the Global Access (COVAX) Facility – will be critical when effective Covid19 vaccines are available to be rolled out and need to be distributed globally. A discriminatory or preferential national treatment would be detrimental to the global economy and recovery. More broadly, a US reversion to multilateralism would be welcomed internationally: less confrontation on trade/ tariffs and investment policies with China, the EU, Canada-Mexico and others would lead to a win-win globally and would lead to a cheaper dollar by encouraging non-US trade and investment.
Lower oil prices and a strong dollar along with US tariffs on aluminium and steel, have been strong headwinds and costly for the GCC. Currently, GCC members are pegged to the dollar (Kuwait pegs a basket dominated by US$), oil is priced in dollars, financial assets are largely dollar denominated, trade is dollar denominated and dollar financing is popular, while bond issuances have been on the surge (taking advantage of globally low borrowing costs) as nations adjust to rising fiscal deficits. Given the Covid Great Lockdown, the energy transition away from fossil fuels, it is unlikely that oil prices will revert to prices seen a few years ago given weaker demand – the IMF’s latest World Economic Outlook puts oil price, based on futures markets at USD 41.69 in 2020 and USD 46.70 in 2021 (versus an average price of USD 61.39 last year). But a cheaper dollar would support an economic recovery in the region driven by tourism and services exports, as countries reopen in phases.
More important, will be the impact on the oil market. A re-elected Trump administration would continue its policies supporting US shale oil, encourage drilling and roll back of climate-related regulations and support US oil & gas exports, weakening OPEC+ and oil prices. By contrast, a Biden Administration would be climate and environment policy friendly, revert back to the Paris Agreement, support renewable energy, including through “Green” and “Blue” New Deals. In a scenario where fossil fuel demand is already weak, an additional push towards renewables would tend to reduce US supply but also reduce demand, the oil price impact would depend on the balance between demand and supply effects.
Oil exporters in the region are still highly dependent on oil, with lower oil revenues implying limited fiscal room and higher fiscal deficits which are averaging 10% in 2020 for the GCC countries. As real oil prices trend downward, fiscal sustainability becomes increasingly vulnerable. The elephant in the room remains the risk of being left with stranded assets. According to the IEA, stranded assets refer to “those investments which have already been made but which, at some time prior to the end of their economic life, are no longer able to earn an economic return”. The strategy imperative is the need to emphasise diversification policies, along with a policy to de-risk fuel assets. National oil companies and related state-owned enterprises, that are majority owners/ operators of oil and gas assets, would need to pursue a low-carbon energy transition plan in addition to the privatisation of fossil fuel assets. Examples are the Aramco part-privatisation, and ADNOC’s part-pipeline privatisation. This should be complemented by a major drive to accelerate investment in and adoption of green/ clean energy policies by both government entities and the private sector.
The bottom line is that the outcome of the US elections will directly impact a host of global issues from dealing with Covid and climate change, de-escalating confrontation and preventing a Cold War with China, restoring confidence in multilateral agreements and institutions like the WHO, the WTO, the UN and geopolitics, with repercussions on regional power struggles involving Israel, Iran, Turkey and the Gulf states. Important as these issues are, the other bottom line is the need for a renewed focus of the GCC and the regions oil producers on economic diversification strategies and de-risking fossil fuel assets within a well-designed energy transition strategy.
For additional views about this and the wider regional economic outlook, listen to the IMF panel discussion from yesterday.




Weekly Economic Commentary – Oct 25, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Most stock markets across the globe closed lower compared to the past week as investors braced for the US elections and further uncertainty from rising Covid19 cases. European markets recovered towards end of the week on better-than-expected earnings numbers, especially from financial stocks. Regional markets mirrored their global counterparts, with Egypt declining the most (-3%). On the currency front, the euro and pound gained, the latter on last-minute negotiations continuing with the EU. Oil prices fell on concerns about declining demand while gold gained.
Weekly % changes for last week (22-23 Oct) from 15th Oct (regional) and 16th Oct (international).

Global Developments
US/Americas:

  • Housing starts increased by 1.9% mom to 1.415mn in Sep, registering gains in single-family house construction. Building permits grew by 5.2% mom to 1.553mn in Sep, the highest since Mar 2007; there was a higher preference for single-family units (+7.8% to 1.119mn) versus multifamily structures (-0.9% to 434k units).
  • Existing home sales increased to a new 14-year high, up 9.4% mom and 21% yoy to 6.54mn in Sep, also marking the 4th consecutive month of higher sales. The median price for previously owned homes climbed 14.8% yoy to USD 311,800 while total inventory shrank by 1.3% to 1.47mn – supporting just 2.7 more months of sales under the current pace.
  • Markit flash composite PMI output index in US jumped to a 21-month high of 55.5 in Oct (Sep: 54.3); manufacturing PMI edged up to 53.3 from Sep’s 53.2, with the acceleration in new orders coming from domestic clients as new export orders fell.
  • US Fed Beige book reported that the pace of economic activity in most parts of the country was “slight to modest”.
  • Initial jobless claims fell to 787k in the week ended Oct 17 – dropping below 800k for the first time since Mar – from a downwardly revised 842k the week before. Continuing claims declined once again by 02mn to a seasonally adjusted 8.37mn in the week ended Oct 10.

Europe:

  • The divergence continues with German preliminary manufacturing PMI rising to 58 in Oct (Sep: 56.4) while services PMI fell below-50 (48.9 in Oct vs 50.6 in Sep). Composite PMI edged down to 54.5 from 54.7 the month before. In the services sector, though new business fell for the 1st time in 4 months, employment saw a 4th consecutive monthly rise in payroll numbers.
  • Composite PMI in the eurozone fell for a 3rd consecutive month in Oct, down to 49.4 from Sep’s 50.4, but Germany remained the bright spot amidst others that fell deeper into declines. The preliminary manufacturing PMI rose to 54.4 in Oct (Sep: 53.7) – a 26-month high, and new orders surging at the quickest since Jan 2018 – while services PMI remained below-50 (46.2 in Oct vs 48 in Sep).
  • Germany’s producer price index decreased by 1% yoy in Sep (Aug: -1.2% yoy), posting the 8th straight month of decline, thanks to a 3.3% drop in energy prices though prices for capital goods and durable consumer goods grew by 0.9% and 1.4% respectively.
  • Inflation in the UK rose by 0.4% mom and 0.5% yoy in Sep (Aug: 0.2% mom), driven by prices for leisure and cultural activities; core inflation rose to 1.3% from 0.9% in Aug. Retail price index grew by 1.1% yoy in Sep (Aug: 0.5%).
  • UK retail sales grew by 4.7% yoy and 1.5% mom in Sep, rising for the 5th straight month, on higher purchases of non-food items like DIY and garden supplies in addition to high grocery spending. Fuel was the only main sector to remain below Feb’s pre-pandemic level, with volume sales 8.6% lower in Sep when compared with Feb
  • Preliminary manufacturing PMI in the UK moved lower to 53.3 in Oct (Sep: 54.1), with weaker rises in output and new orders, while services PMI slowed to 52.3 vs Sep’s 56.1. In both sectors, the speed of recovery was the slowest for four months.
  • UK completed its first large post-Brexit trade deal after signing an agreement with Japan while negotiations resumed between the UK and EU, with the thorny issues of fishing rights in British waters, fair competition rules for business (subsidies) and dispute resolution mechanisms remaining on the agenda.
  • S&P revised Italy’s sovereign outlook to stable from negative while affirming its long- and short-term credit rating at “BBB/A-2”.

Asia Pacific:

  • China’s GDP grew by 4.9% yoy and 2.7% qoq in Q3 (Q2: 3.2% yoy and 11.7% qoq), supported by a rebound in consumption (adding 1.7 ppts to headline growth rate) while contribution from capital formation fell to less than 3ppts, in line with the pre-pandemic norm.
  • Industrial production in China expanded by 6.9% yoy in Sep (Aug: 5.6%) – the highest since Dec 2010 – with manufacturing up 7.6% vs Aug’s 6%. Fixed asset investment edged up by 0.8% yoy in the 9 months to Sep. Investments by centrally-administered SoEs of China in fixed assets grew by 11.3% yoy to USD 268.94bn in Jan-Sep. Retail sales grew by 3.3% yoy in Sep (Aug: 0.5%). The recent months have seen a rebound in cosmetics, jewelry and car sales, the more higher end consumer goods.
  • China’s one-year and five-year loan prime rates were left unchanged at 3.85% and 4.65% respectively at the latest PBoC meeting.
  • Flash composite PMI in Japan remained below-50 in Oct: with services PMI inching lower to 46.6 in the preliminary reading for Oct (Sep: 46.9) and manufacturing PMI up 1 point to 47, the composite reading nudged up by 0.1 to 46.7. External demand was weaker though employment remained broadly unchanged, while the government’s “Go to Campaign” was providing a boost to tourism services.
  • Japan’s imports dropped by 17.2% yoy in Sep (Aug: 20.8%) while exports declined by a smaller 9% (-14.8%), increasing the trade surplus to JPY 674.9bn (JPY 248.6bn).

Bottom line: We can expect a much lengthier time for Covid19 recovery. US posted a record high 83k+ infections in a single day while in Europe, with many nations reporting new record highs for daily Covid19 cases, there are a fresh round of restrictions (Poland adopted a nationwide “red zone” lockdown). Furthermore, the current outbreak clusters are in the same centres as those earlier in the spring, calling into question the herd immunity concept. A contested US election could cause market disruptions and volatility, adding to the economic uncertainty. Expect a rebound in EU Q3 GDP numbers to be released this week, but with fresh restrictions in most nations, a slowing momentum appears to be on the horizon in Q4. China, on the other hand, seems to have emerged stronger following the Q1 dip.
Regional Developments

  • IMF, in its latest Regional Economic Outlook, forecasts growth in the Middle East and North Africa region (reeling from the effects of the global recession, Covid19 impact and oil exporters facing lower oil prices and demand), to recover a tad slower compared to the rest of the world, rising to only 3.3% from a 4.7% dip this year. Egypt is the only country in the region forecast to grow this year (+3.5% yoy in spite of the massive decline in tourism). GCC growth is forecast to shrink by 6.0% this year, with oil and non-oil GDP contracting by 6.2% and 5.7% respectively.
  • Bahrain-origin exports accelerated by 15% yoy to BHD 669mn (USD 1.76bn) in Q3 2020. Saudi Arabia (BHD 137mn), Malaysia (BHD 83bn) and Oman (BHD 56mn) were the top destinations for these products. The value of re-exports declined by 29% (to BHD 143mn) and imports by 9% (to BHD 1.166bn) during the period. Deficit narrowed by 28% to BHD 355mn.
  • Expats who contribute to Bahrain’s Social Insurance Organization declined by 4% yoy to 456,840 persons in Q2 this year. This is a drop of about 60k persons from 2016.
  • Egypt’s finance minister stated that the country grew by 3.6% in the fiscal year 2019-20, in spite of the impact of Covid19. It also reduced deficit–to-GDP to 7.9% in FY 2019-20 versus2% the year before and recorded a primary surplus of 1.8% at end-Jun 2020.
  • The Central Bank of Egypt revealed that loans and facilities granted to micro, small, and medium enterprises grew to EGP 201.7bn for 1.016mn projects during Dec 2015-Jun 2020. Small and medium enterprises accounted for 55.2% and 32.2% of the total disbursed amount respectively. By sector, services received the largest share (36.5%) followed by industries (33.3%).
  • Mortgage financing in Egypt declined by 4.2% yoy to EGP 1.6bn in Jan-Aug this year, with mortgage refinancing plummeting by 85.3% to EGP 134mn at end-Aug.
  • US invested USD 21.8bn in Egypt over the past 12 months, disclosed the latter’s minister of trade and industry. Bilateral trade had increased 14.5% yoy to USD 8.618bn in 2019.
  • Remittances into Egypt increased by 9.4% yoy to USD 2.9bn in Jul this year, bringing overall growth this year to 7%.
  • Egypt extended the consumer spending initiative “Not Too Expensive For You” for an additional month which provides local products at affordable prices. According to the government, vendors participating in the initiative clocked in sales worth EGP 277.9mn.
  • Egypt invested EGP 377bn towards road and bridge projects between 2014 and 2020, according to the minister of transport.
  • Polling for a new Parliament began in Egypt on Sat (Oct 24), with voting closing today (Oct 25). A second round is up on Nov 7-8.
  • Oil projects in Iraq are being delayed due to the OPEC+ production cuts, according to the oil minister. He expects a recovery by Q2 2021 and also a rise in production capacity to 7mn barrels per day (bpd) in the next 5-6 years from around 5mn bpd now.
  • Jordan will impose 24-hour comprehensive curfews every Friday until Dec 31, announced the PM. Remote education would continue till end of the first semester.
  • Kuwait’s Parliament approved a law to reduce the number of expats in the country, aiming to “rebalance” the population. The government has to create the mechanisms to lower the number within 12 months and provide progress reports to the assembly.
  • Banks in Kuwait have resumed the deduction of loan installments, following a 6-month delay owing to Covid19 and its impact on the economy.
  • Saad Hariri has been appointed the PM-designate in Lebanon, after a 73-day political impasse, and almost a year after stepping down from the post following the uprisings. The PM-designate vowed to form a Cabinet of nonpartisan specialists with a view to “implement the economic, financial and administrative reforms put forward in the French initiative”.
  • The Byblos Bank/AUB Consumer Confidence Index in Lebanon deteriorated in H1 2020, with the index declining by 51% qoq to 19 points in Q2; in Q1 the index’s monthly average was 38.7 (-19% qoq). Only 0.3% of respondents surveyed in Q2 expect their financial conditions to improve within six months.
  • Oman’s ruler approved a medium-term fiscal plan for 2020-24 to diversify revenues and increase government income from non-oil sectors, in addition to establishing a social security system for low-income citizens. Separately, an Employment Security Scheme will be launched from next month to provide a safety net to Omanis who are laid off in the private sector; in its second phase, it will be expanded to include Omani jobseekers in general.
  • Oman raised USD 2bn in its first international bond sale since Jul 2019. The prospectus disclosed that not only was the country in talks with its GCC neighbours for financial support but had also finalised a USD 24mn facility with the Islamic Development Bank.
  • Oman announced the end of a partial curfew at 5 am on Oct. 24 and that school academic term would begin on Nov 1st.
  • Inflation in Saudi Arabia eased to 5.7% in Sep, following 6.2% and 6.1% in Aug and Jul respectively (after the VAT hike).
  • Saudi Arabia’s crude oil exports increased for a second consecutive month to 5.97mn barrels per day (bpd) in Aug (Jul: 5.73mn bpd). Total oil product demand grew by 170k bpd to 2.55mn bpd in Aug.
  • Saudi Arabia increased its investments in US treasury bonds by 4.3% mom to USD 130bn in Aug – the highest in 5 months. In yoy terms, investments were down 29.3%. Saudi Arabia tops the list of Arab investors in US treasury bonds, followed by Kuwait (USD 46.4bn) and UAE (USD 36.6bn).
  • Saudi Arabia will allow its citizens and residents to perform Umrah at 75% capacity in the second phase of resuming activity.
  • Investment banking fees generated in MENA grew by 4% yoy to an estimated USD 895.7mn in Jan-Sep 2020, the highest ytd total since 2008, according to Refinitiv data. About USD 4mn worth of advisory fees were earned from completed M&A transactions in the region during this period – a record high ytd and up 23% yoy.
  • A survey from McKinsey about consumer sentiment and behaviour in UAE and Saudi Arabia finds that respondents from the nations are optimistic that the economy will rebound in 2-3 months and grow just as strong or stronger than before the outbreak. UAE (90%) and Saudi Arabia (94%) have the highest rates of people not regularly engaging in out-of-home activities versus 70% global average. (More: https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/global-surveys-of-consumer-sentiment-during-the-coronavirus-crisis)

UAE Focus

  • The UAE announced that the Insurance Authority will be merged with the central bank. Furthermore, all operational and executive powers of the Securities and Commodities Authority (SCA) are to be transferred to the local stock markets, while the SCA maintains regulation and oversight. These moves aim to increase efficiency and improve competitiveness.
  • Dubai announced a further AED 500mn (USD 136.14mn) stimulus package to support the emirate, taking Dubai’s total stimulus to AED 6.8bn. These measures, which will last till end of this year, includes fee exemptions, license extensions, rent reductions and extension of previous exemptions.
  • The UAE Ministry of Economy will begin carrying out the 33 initiatives, announced in Aug, to support the economy and aims to develop priority sectors, provide financing support and facilitate lending, promote tourism and stimulate innovation among others.
  • The UAE central bank will introduce new regulations related to reserve requirements, effective Oct 28th. The length of the reserve maintenance period will be extended from 7 to 14 days to facilitate short-term liquidity management. Furthermore, deposit-taking licensed financial institutions will be allowed to draw on their reserve balances held in the central bank on any day up to 100% for daily settlement purposes or to deal with any swings on overnight money market rates while ensuring that they meet the daily average requirements over a 14-day reserve maintenance period.
  • The UAE Cabinet amended the bankruptcy law, with specific reference to emergencies affecting trade or investment (like the Covid19 outbreak): new amendments stipulate the addition of new provisions to the law with regards to “emergency situations” and also that the debtor shall be exempted from commencing procedures to declare bankruptcy.
  • In line with the recent normalization of UAE-Israel relations, a mutual visa waiver was signed to allow travel without a visa for a maximum of 90 days per visit. Additionally, plans were announced to transport Emirati crude from the Red Sea to the Mediterranean through Israel, essentially sidestepping the Suez Canal.
  • Total foreign currency deposits held by UAE national banks grew by 7.3% yoy to AED 409bn in Aug; these deposit account for about 30% of total deposits.
  • Dubai’s investment arm ICD sold USD 600 mn in long five-year bonds at 275 basis points over mid-swaps.

Media Review
IMF’s Regional Economic Outlook
https://www.imf.org/en/Publications/REO/MECA/Issues/2020/10/14/regional-economic-outlook-menap-cca
https://blogs.imf.org/2020/10/19/building-a-resilient-recovery-in-the-middle-east-and-central-asia/
Emerging and Frontier Markets: Policy Tools in Times of Financial Stress
https://blogs.imf.org/2020/10/23/emerging-and-frontier-markets-policy-tools-in-times-of-financial-stress/
What Brexit will do to the City of London
https://www.economist.com/britain/2020/10/24/what-brexit-will-do-to-the-city-of-london
Everything You Think About the Geopolitics of Climate Change Is Wrong
https://foreignpolicy.com/2020/10/05/climate-geopolitics-petrostates-russia-china/
Investors Gauge Future Climate Risks With Satellite Imaging
https://www.bloomberg.com/news/articles/2020-10-22/investors-gauge-future-climate-risks-with-satellite-imaging
Covid-19: The global crisis — in data
https://ig.ft.com/coronavirus-global-data/
 
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Weekly Insights 20 Oct 2020: Expect a Protracted Economic Recovery in Middle East/ GCC

Download a PDF copy of this week’s economic commentary here.
Fig 1. Global Economic Growth to decline by 4.4% this year, before rebounding to 5.2% in 2021

The IMF’s World Economic Outlook, released in October, forecast upwardly revised growth estimates for most country groups this year though stating that the recovery is “long, uneven and uncertain”. The IMF forecasts still seem relatively optimistic with all regional aggregates indicating a wobbly V-shaped recovery. Emerging markets and China are expected to recover much faster than their advanced counterparts while also noting that the plunge in growth was more severe for the advanced nations. A recovery in trade, PMI numbers and consumer spending are cited as supporting global recovery, though the sudden surge in Covid19 confirmed cases across Europe is likely to dampen the rebound, presaging a second wave and extended recovery.
Germany, Italy, Portugal and UK recently reported their highest number of infections since the start of the pandemic and many nations are reimposing restrictions – Belgium’s nationwide curfew, Switzerland making masks compulsory in indoor public areas, a 9pm curfew at many major cities in France – though a full-fledged lockdown is likely to be avoided. While Q3 may show an uptick in growth, Q4 is likely to slide back into negative territory (though not as sharp as Q2’s plunge). Mobility indicators how a decline in footfall across many European cities (https://on.ft.com/2TmvOkZ); PMI data reveals a divergence between manufacturing and services, with the latter reporting a drop in Sep. As we enter the cold winter months, the partial recovery seen in Q3 may be just temporary.
In the Middle East and North Africa (reeling from the effects of the global recession, Covid19 impact and oil exporters facing lower oil prices and demand), growth is expected to recover a tad later and slower compared to the rest, rising to only 3.2% from a 5.0% dip this year (Source: IMF Regional Economic Outlook: Middle East & Central Asia, Oct 2020). Egypt is the only country in the region forecast to grow this year (+3.5% yoy in spite of the massive decline in tourism). GCC growth is forecast to shrink by 6.0% this year – with oil and non-oil GDP contracting by 6.2% and 5.7% respectively.

A recent uptick in Covid19 cases might add to economic uncertainty in the region – Jordan has reimposed some restrictions since the beginning of the month, but none of the nations have gone back to the stringency levels seen during Mar-Apr 2020. The immediate concerns remain on the fiscal side, with most nations rolling out stimulus packages to ease the impact from Covid19. For the GCC, fiscal deficits are projected at 9.2% of GDP this year (2019: -2%) while the fiscal breakeven oil price ranges from USD 42 for Qatar to USD 75.9 for the UAE and as high as USD 104.5 for Oman. Dependence on oil is still pronounced in spite of diversification efforts and the rising fiscal deficits are being met with a combination of debt issuances, tapping domestic markets, reduction of reserves and via sovereign wealth funds.
Though countries in the Middle East emerged from Covid-19 containment in Q2, the economic costs/ impact are likely to be protracted through the year and next given the many spillover risks: debt obligations and financing needs, job losses/ unemployment, potential NPLs affecting banking sectors, business closures leading to insolvency/ bankruptcy, and for the oil importers decline in remittances as well as rising poverty and inequality. IMF estimates foresee that five years from now countries could be 12% below GDP level expected by pre-crisis trends.
 
 
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Weekly Economic Commentary – Oct 18, 2020

Download a PDF copy of this week’s economic commentary here.
Markets
Rising Covid19 cases globally (posting a daily record of 400k on Fri) and tightening of restrictions in Europe spooked investors, amid UK’s PM asking businesses to brace for a no-deal Brexit and fading hopes for stimulus in the US before the elections led most markets across the globe down compared to a week ago. Chinese stocks were up for the week for the 3rd consecutive time. Regional markets were mixed: Saudi Arabia’s bank merger news was received positively while in Dubai, banking stocks pulled the index down. The pound took a battering among currencies, while the safe-haven Swiss Franc posted a weekly gain. Oil prices remained almost flat last week, though new Covid19 cases and restrictions will dampen demand; OPEC+ officials stated that demand is “still looking anaemic” and that it had been recovering slower than expected. Gold price remains around the USD 1900 mark.
Weekly % changes for last week (15-16 Oct) from 8th Oct (regional) and 9th Oct (international).

Global Developments
US/Americas:

  • US budget deficit hit a record USD 3.132trn in the fiscal year – more than triple the 2019 shortfall – as spending touched USD 6.55trn (including USD 2trn on Covid19 related spending), outpacing total receipts at USD 3.42trn. The largest deficit prior to this year since World War II was the USD 1.4trn recorded in 2009 at the peak of Global Financial Crisis.
  • US inflation inched up by 0.2% mom in Sep, the slowest pace in 4 months, with the largest increase posted by used cars and trucks (+6.7%). Core CPI eased to 0.2% mom (Aug: 0.4%). In yoy terms, inflation ticked up by 1.4%, versus a higher 2.5% in the beginning of 2020. Core PPI rose by 0.4% mom and 1.2% yoy in Sep (Aug: 0.65% yoy).
  • US retail sales grew by 1.9% mom in Sep, with clothing and accessories leading the gains (+11%) while electronics was the only sector posting a decline (-1.6%). Excluding autos, retail sales gained by 1.5%.
  • US industrial production fell by 0.6% mom in Sep – the first decline since Apr – as manufacturing output fell by 0.3%. Although production has recovered more than half of its Feb to Apr decline, the Sep reading was still 7.1% below its pre-pandemic Feb level.
  • Foreign holdings of Treasuries fell for the first time in four months in Aug: holdings of both Japan and China declined to USD 278trn and USD 1.068trn respectively.
  • Initial jobless claims increased to 898k in the week ended Oct 10, from an upwardly revised 845k the week before. Continuing claims declined by a million to a seasonally adjusted 018mn in the week ended Oct 3.

Europe:

  • Germany ZEW’s economic sentiment plunged to 56.1 in Oct from Sep’s over 20-year high of 77.4, as Covid19 related uncertainty and the risk of no Brexit trade deal weighed on investors’ minds. The current situation reading improved to -59.4 from -66.2 the month before.
  • Germany’s harmonized index of consumer prices declined by 0.4% yoy in Sep (Aug: -0.4%). The low rate of inflation reflects the temporary VAT relief implemented by the government.
  • Eurozone ZEW economic sentiment dropped 21.6 points to 52.3 in Oct, the lowest since May. The current economic situation index climbed 4.3 points to -76.6.
  • Eurozone industrial production inched up by 0.7% mom in Aug, from an upwardly revised reading of 5% in Jul, thanks to increases in durable consumer goods (+6.8%) and intermediate goods (3.1%) while capital goods output dipped (-1.6%). In yoy terms, IP shrank by 7.2%.
  • Inflation in Eurozone fell by 0.3% yoy in Sep, following Aug’s drop of 0.2%. The ECB expects inflation to average 1% in 2021 and 1.3% in 2022.
  • UK ILO unemployment rate inched up to 4.5% in the three months to Aug, from the 4.3% reading last month. Redundancies rose to 227k between Jun-Aug – their highest level since 2009 – while an estimated 1.5mn were unemployed. Average earnings including bonus was unchanged (Jul: -1%).
  • Moody’s downgraded UK credit rating by one notch to Aa3, citing weakening economy, Brexit woes and coronavirus shocks.

Asia Pacific:

  • China witnessed a sharp increase in trade in Sep: exports grew by 9.9% yoy – the fastest pace this year – and imports by 13.2%, thereby narrowing the trade surplus to USD 257.68bn in Sep (Aug: USD 416.6bn). Imports of iron ore, semi-conductors and agricultural products picked up, indicating an acceleration of domestic recovery.
  • China money supply grew by 10.9% yoy in Sep (Aug: 10.4%), slowing from the 11.1% yoy pace in Jun, but higher than the 8.4% from a year ago. New loans issued increased to CNY 1900bn in Sep, up 48.4% from Aug’s CNY 1280bn, pushing total lending in Jan-Sep to CNY 16.26trn. Total social financing, a broad measure of credit and liquidity, picked up by 5% yoy (Q2: 12.8%) to CNY 3.48trn. FDI into China accelerated by 25.1% yoy to CNY 99.03bn (USD 14.25bn); year-to-date FDI inflows grew by 5.2%.
  • China’s inflation slowed to 1.7% yoy in Sep (Aug: 2.4%), the weakest pace since Feb 2019, while producer price index fell for the 8th consecutive month, down 2.1% in Sep (Aug: -2%).
  • Japan machinery orders edged up by 0.2% mom, as business spending stabilized, though it was down by 15.2% in annual terms. Separately, industrial production dropped by 13.8% yoy in Aug (Jul: -13.3%).
  • India industrial output contracted for the 6th straight month, by 8% yoy in Aug, as manufacturing output declined by 8.6%. Year-to-date, industrial production is down by 25%.
  • India WPI increased by 1.32% yoy in Aug from Jul’s 0.16% and following 4 previous months of negative readings. Food inflation stood at 8.17% in Sep versus 3.84% in Aug.
  • Singapore’s preliminary GDP for Q3 increased by 7.9% qoq, following Q2’s 13.2% drop, supported by construction (+38.7% qoq) and services (+6.8%). Q3 GDP declined by 7% yoy.

Bottom line: According to Reuters, Europe is currently reporting a million new infections about every nine days, resulting in new Covid19 restrictions being imposed across some parts. With a new wave of infections and no definite indication of when a vaccine will be rolled out, the global economy seems poised for a very slow recovery. This was evident in the IMF’s recent World Economic Outlook, which forecasts global growth declining by 4.4% this year, before rebounding by 5.2% next year. There is a distinct divergent pattern as well: advanced nations growth is estimated to drop by 5.8% this year versus the emerging markets’ 3.3%; recovery is also touted at 3.9% and 6% respectively next year. Separately, the World Bank’s chief economist warned that government borrowings during the pandemic and a looming debt crisis could result in a full-blown financial crisis. Though the G20 offered temporary relief to 73 countries last week by extending a suspension of debt-service payments until next Jul, the question remains whether this move is sufficient.  
Regional Developments

  • Bahrain’s Electricity and Water Authority clarified that electricity and water subsidies for citizens, at their primary residence, will continue. The entity will increase efficiency to achieve a fiscal balance.
  • MPs in Bahrain backed a proposal to defer loans interest-free for four months until the year-end. Banks had previously agreed to defer loan instalments, though interest and administrative fees were charged on the same.
  • Population in Bahrain touched 1.5mn as of Mar 17th 2020, as per the census report, with citizens accounting for 47.4% of the total.
  • Egypt posted a primary surplus of EGP 100mn in Jul-Sep (Q1 of 2020-21): revenues were up by 18.4% while spending increased by 11%. Spending grew thanks to governmental investments (+60% to EGP 40bn), higher spending on health and education as well as on social security programmes.
  • Egypt’s external debt surged by 14.9% yoy to USD 115.1bn in 2019, according to World Bank’s International Debt Statistics 2021 report. In Q1 2020 however, external debt registered the first decrease in more than four years – of 1.2% qoq – largely due to the exchange rate.
  • Core inflation in Egypt increased to 3.3% yoy in Sep (Aug: 0.8%); headline inflation stood at 3.7% in Sep (Aug: 3.4%).
  • The central bank of Egypt disclosed that trade between Egypt and its trading partners declined by 2.2% in Q1 2020 in the wake of the pandemic – the first time since Q3 2009.
  • Egypt’s health and population minister disclosed that no full or partial lockdown would be reimposed if a second Covid19 wave emerged. Instead, they would respond to surges in cases within clusters or specific areas.
  • The total number of residential units linked to the natural gas grid in Egypt is about 11.3 million, according to the minister of petroleum and mineral resources. He stated that the government is connecting more than 1mn households to the natural gas network every year.
  • Egypt launched its debut USD 750mn, five-year Green Bonds on the London Stock Exchange. Proceeds from the issuance will be used to finance projects in transportation and renewable energy.
  • Jordan swore in a new 32-member cabinet last week: the foreign and finance ministers were retained from the previous government. Parliamentary elections are due on Nov 10.
  • Income and sales tax revenues in Jordan increased by 9% yoy to JOD 3.51bn in Jan-Sep.
  • Jordan imposed a 48-hour blanket curfew from Friday 1am until Sunday 1am, allowing only permit holders to move around. The government spokesperson denied that a 30-day lockdown was being planned.
  • The President of Jordan Restaurants Association disclosed that the 2-day curfew last weekend resulted in about JOD 40mn in losses for the food and drink industry.
  • Given no announcements from the central bank to the contrary, banks in Kuwait are planning to resume deduction of loan installments starting from Oct, reported Al Rai daily. Postponement of loan installments cost about KWD 380mn over the 6-month period till Sep.
  • The chairman of the Union of Hotel Owners in Kuwait disclosed that about 60% of hotels are not functional so far, and that 42 hotels in Kuwait were incurring losses of up to KWD 17.8mn per month.
  • Lebanon and Israel launched talks to delimit maritime borders on the disputed sea border, mediated by the US: the talks broke up in less than an hour, with a meeting arranged within 2 weeks.
  • Some banks in Lebanon have lowered the monthly pound cash withdrawals to between LBP 2-4mn, after a BDL circular that asked lenders to limit their withdrawals based on the size of account they have at the BDL, reported the Daily Star. If widely enforced, the limits will have a strong dampening effect on consumption spending, retail and the overall economy, further deepening the economic depression, with real GDP expected to decline by 25%, with inflation at 85.4% and rising, while the budget deficit increases to 16.5% of GDP.
  • Female unemployment in Lebanon surged to 26% as of Sep 2020, from a pre-crisis level of 14.3%, according to the UN. About 132,500 women are out of work, up 63% from the 81,200 reported in 2018-19.
  • Oman will introduce 5% VAT on most goods and services from April next year, with exemptions on basic food commodities, healthcare, education, financial services, home rentals and the supply of crude oil, petroleum products and natural gas.
  • S&P downgraded Oman for the second time this year, bringing down the rating to B+ with a stable outlook. The rating is 4 levels into the non-investment grade and stands one level lower than the ratings by Moody’s and Fitch.
  • Re-exports from Oman stood at OMR 741.2mn as of Jun 2020, from OMR 1.46bn in 2019. Together, the value of goods re-exported from Oman amounted to more than OMR 8bn between 2016 and H1 2020.
  • Qatar’s growth declined by 6.1% yoy and 6.4% qoq in Q2 this year, dragged down by the usual suspects transportation and storage (nearly -40% yoy), accommodation and food service activities (-38.7%) and wholesale and retail trade (-30%) while manufacturing fell 11.3%.
  • Inflation in Saudi Arabia increased by 5.7% yoy in Sep (Aug: 6.2%): in addition to the VAT hike, food prices surged by 12.6%, while communication, furnishings and transport costs were up by 9.5%, 8.3% and 7.8% respectively.
  • Saudi Arabia’s biggest lender National Commercial Bank entered a binding merger agreement with Samba Financial Group to create a combined entity with SAR 837bn (USD 223bn) in assets. Once completed, this merger would be the GCC’s 3rd largest lender by assets following Qatar National Bank and UAE’s First Abu Dhabi Bank. Separately, the SAMA governor stated that the apex bank is considering issuing new bank licenses.
  • The Saudi Geological Survey Program will conduct a series of surveys over the next 6 years to unlock mineral reserves estimated to be worth USD 1.3trn. The plan has a budget of SAR 2bn to survey 600k sq kms across the geological formation known as the Arabian Shield.
  • Citing recovery in oil demand from China, Saudi Aramco’s CEO stated at an event that “the worst is behind us” for the oil market.
  • Saudi Arabia has lowered the minimum wage for Saudi employees to be eligible to receive government support to SAR 3200 from SAR 4000 previously.
  • Applications have been invited from Saudi citizens to fill 17k jobs in the retail sector including provision stores and supermarkets by end-2021.
  • Bahrain-based International Islamic Financial Market has issued Sukuk Al Ijarah standard documentation templates – including a template prospectus, sale and purchase agreement, ijarah agreement and service agency agreement among others – allowing for significant costs reduction and greater efficiency.
  • Google launched a “Grow Stronger with Google” initiative to support 1mn jobseekers and local businesses in the MENA region.

UAE Focus

  • The UAE central bank withdrew AED 10.9bn (USD 3bn) of excess liquidity in Aug: certificate of deposits increased to AED 157bn by end of Aug.
  • Dubai PMI inched up for the 3rd consecutive month, with the Sep reading rising to 51.5 from 50.9 in Aug. Both output (53.8 in Sep from Aug’s 52.7) and new businesses improved, and the decline in employment slowed to a moderate pace.
  • Dubai launched a new residency programme to attract remote working professionals from around the world to relocate to the emirate. The programme, valid for a year and renewable for a similar duration each time, costs USD 287 plus medical insurance with valid UAE coverage and processing fee per person.
  • Dubai’s non-oil trade touched AED 551bn (USD 150bn) in H1 this year, with imports accounting for AED 320bn (58.1% of total trade), and exports AED 77bn (14% of total). China was the largest trading partner, with AED 66.4bn worth of trade, followed by India (AED 38.5bn) and the US (AED 31.7bn). Dubai Customs also launched the Cross Border E-commerce Platform to encourage e-commerce companies to set up their businesses in Dubai.
  • The value of outward investment from the UAE increased by 11% yoy to USD 155.5bn in 2019, according to the minister of economy. UNCTAD’s latest report showed that FDI outflows increased by USD 1bn to USD 15bn in 2018.
  • Abu Dhabi’s economy is expected to rebound by between 6-8% over the next two years, after declining by about 3-4% this year, according to the chairman of the Abu Dhabi Department of Economic Development.
  • DFM will launch its new equity futures platform today (Oct 18): the platform will initially introduce futures contracts on single stocks with a tenure of one, two and three months.

Media Review
IMF’s World Economic Outlook, Oct 2020
https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020
https://blogs.imf.org/2020/10/13/a-long-uneven-and-uncertain-ascent/
Financial crisis could emerge from the Covid19 pandemic: World Bank’s chief economist
https://www.bloombergquint.com/global-economics/carmen-reinhart-sees-risk-financial-crisis-emerges-from-pandemic
From peak city to ghost town: the urban centres hit hardest by Covid-19 (long read)
https://www.ft.com/content/d5b45dba-14dc-443b-8a8c-e9e9bbc3fb9a
Is shipping ship-shape? Trade Talks Podcast
https://www.tradetalkspodcast.com/podcast/140-is-shipping-ship-shape/
Don’t Overestimate the COVID-19 Recovery
https://www.project-syndicate.org/commentary/weak-and-uneven-global-covid19-recovery-by-eswar-prasad-2020-10
China Is Now the World’s Largest Economy. We Shouldn’t Be Shocked.
https://nationalinterest.org/feature/china-now-world%E2%80%99s-largest-economy-we-shouldn%E2%80%99t-be-shocked-170719
 
 
 
 
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Weekly Insights 13 Oct 2020: PMIs, Mobility & Economic Recovery

Download a PDF copy of this week’s economic commentary here.
1.Global PMIs, shipping & trade

PMIs across the globe were released last week. The headline JPMorgan global composite PMI fell for the first time in five months, dipping to 52.1 in Sep (Aug: 52.4). Most manufacturing surveys still indicated an expansion (a reading above 50) though the pace of recovery has slowed as a result of capacity constraints and supply chain delays. Sector-wise, the most significant beneficiary has been the automotive sector, where production capacity increased and new orders posted the most gain since Dec 2019. On the other extreme, tourism and recreation sector continues to be the worst hit – reflecting the glaring divergence between the manufacturing and services sector PMIs (Figure below). September’s PMI readings in the services sector have declined from Aug’s 7-month highs, as many countries witnessed a resurgence in Covid19 cases (and in some, new record daily cases!), leading to restricted lockdowns which added on to the restrictions due to social distancing policies. Employment posted a net increase for the first time since Jan: though jobs growth was faster in the services sector in Aug-Sep, remember that the sector had also seen the steepest job cuts earlier this year.

 
Recent manufacturing PMI readings have shown an increase in new export orders, supported by a pickup in demand. Global shipping indicators have improved during the summer, with both the Baltic Exchange Dry Index (tracks rates for ships carrying dry bulk commodities) and the Harpex shipping index (index created using container shipping rates across different classes of ship) picking up pace. Both indices rose to its highest in more than a year last week, after having touched 3-year highs in mid-2019 and declining sharply during the Feb-Jun period. However, the air freight sector has not recovered in tandem with shipping (Figure below), a result of cheaper ocean trade – a pattern visible during downturns – as well as insufficient air cargo capacity (according to IATA).

2. Regional PMIs

 
Regional non-oil private sector PMI’s indicate a slow restart: Sep’s modest improvement followed Aug when four of the countries moved into the contractionary territory (i.e. below the 50-mark). Significantly, demand growth has been picking up and the significant price discounting on offer has led to an increase in sales.
Job cuts are still occurring, as businesses adjust to reduce operating costs. The ILO estimates that Arab states witnessed a 2.3% drop in working hour losses in Q1 this year, followed by 16.9% and 12.4% respectively in Q2 and Q3. Job postings are slowly ticking up, though anecdotal evidence suggests that potential employees are willing to accept a significant pay cut to undertake similar work. This will lead to a wider disparity in public-private sector wages, not to mention the impact it would have on wider gender disparities (during Covid19, women are already more likely than men to witness a larger drop in mobility to lose jobs in the informal economy or see a reduction in working time).
Furthermore, with lack of access to finance/ liquidity, not all businesses will recover or survive in the next few months, should uncertainty remain. This could result in a structural change bought about due to Covid19 (e.g. the increase in number of online shopping platforms which are relatively less labour-intensive versus actual physical stores). Being faced with limited financial capabilities (due to job losses or salary cuts and depletion of savings), expatriates could also decide to return to their home countries (negatively affecting consumer spending in the region).
3. Stringency Index vs. Retail and Recreation sector activity
The Middle East has seen a resurgence in Covid19 cases in the recent weeks, and many nations are in the process of reimposing partial lockdowns or shorter nationwide lockdowns: the first panel in the figure below shows that the Government Response Stringency Index[1] has increased for the UAE in the past month (in line with the increase in cases). This is the best way forward, if we are to take into consideration the IMF’s recent World Economic Outlook analysis which found that early adoption of stringent and short-lived lockdowns curbed infections and could be preferable to mild and prolonged measures. The enforcement of lockdowns and social distancing policies was an important factor contributing to a recession: however, such short-term costs of lockdowns may lead to medium-term gains if the virus is contained.

Google Mobility indicator for retail and recreation show that none of the three nations – Bahrain, Egypt, or UAE – have yet returned fully to the pre-Covid19 baseline. Among the three, Egypt, which had declined the most initially, recovered faster in comparison. More interestingly, within the UAE, recovery in retail sector mobility in Sharjah (-14% from baseline in Oct) and Abu Dhabi (-21% from baseline) has outpaced Dubai (-23%). This could potentially be due to higher confidence in these emirates – given mass testing in Sharjah, border controls in Abu Dhabi and a relatively longer lockdown period – compared to Dubai.
What next? Note that a second (or even third) wave  of Covid19 is unfolding, as we enter the cold winter months: given the likelihood of resurgence of Covid19, partial recovery – as indicated by PMIs – may be temporary. If further virus containment measures are introduced, though it will dampen economic activity in the short-term, medium-term gains might be achieved. Initial restrictions will likely affect the customer-facing service sectors more than others, but risks to other sectors will increase if further restrictions are imposed. Overall, an air of uncertainty is unlikely to boost confidence among firms, negatively affecting investment decisions and economic activity. Governments need to signal willingness to continue stimulus measures if required and take decisions to introduce “circuit-breakers” if necessary.
 
[1] The Stringency Index is a composite measure based on nine response indicators that include school closures, workplace closures, and travel bans; the index ranges from 0 to 100 with 100 being the strictest. This index does not track the effectiveness of the response. More: https://www.bsg.ox.ac.uk/research/research-projects/coronavirus-government-response-tracker
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Weekly Economic Commentary – Oct 11, 2020

Markets
Stock markets had a good week: US ended higher on the revival of fiscal stimulus talks (in spite of Trump’s announcements ranging from Tuesday’s shelving talks, followed by aid to certain sectors and the latest “Go Big!”) while in Europe, Stoxx 600 marked a 2.1% rise – the largest since Aug, in spite of glum economic data; as China’s data indicate a rebound from the Covid19 crisis, markets were up 2%. Regional markets were mixed, with Kuwait gaining the most given clarity on the succession plan, as well as the central bank’s commitment to the strength of the dinar. The dollar weakened while onshore renminbi posted its biggest one-day rise (aided by foreign demand for Chinese assets and expectations of improved relations with the US under Biden) since 2005. Oil prices increased (amid concerns of supply as Hurricane Delta approaches), as did gold prices.
Weekly % changes for last week (8-9 Oct) from 1st Oct (regional) and 2nd Oct (international).

 
Global Developments
US/Americas:

  • ISM services PMI rose for the 4th consecutive month to 57.8 in Sep (Aug: 56.9), with new orders surging to 61.5 (Aug: 56.8) and employment rebounding to 51.8 (Aug: 47.9).
  • US trade deficit hit a 14-year record high of USD 67.1bn in Aug (Jul: USD 63.4bn). Imports increased by 3.2% to USD 239bn while exports increased by 2.2% to USD 171.9bn. Trade deficit with China declined by USD 9bn to USD 26.4bn in Aug.
  • Initial jobless claims fell to 840k in the week ended Oct 3, from an upwardly revised 849k the week before. Continuing claims declined by a million to a seasonally adjusted 98mn in the week ended Sep 26.

Europe:

  • German factory orders increased by 4.5% mom in Aug (Jul: 3.3%), but in yoy terms orders were down by 2.2%. Foreign orders (+6.5%) supported the pickup, thanks to demand from the euro area (+14.6%) and others (+1.5%), while domestic orders inched up by 1.7%.
  • Industrial production in Germany contracted by 0.2% mom in Aug (Jul: 1.4%); in yoy terms, IP plunged by 9.6%. Production of intermediate goods increased, though both consumer and capital goods production declined by 1.3% and 3.6% respectively. Automotive sector production was a major drag, declining by 12.5% mom.
  • German exports increased for the 4th consecutive month, rising by 2.4% mom in Aug (Jul: +4.7%) while imports increased by 5.8% mom (Jul: 1.1%). Trade surplus narrowed to EUR 15.7bn in Aug (Jul: EUR 18bn).
  • Germany services PMI slipped to 50.6 in Sep (Aug: 52.5), but it was still the only country in the eurozone to register a growth. Composite PMI ticked up to 54.7 (Aug: 54.4), supported by the fast increase in factory output (fastest since Dec 2017).
  • In the eurozone as well services were a drag on the overall economy: PMI dropped to 48 (Aug: 50.5) and composite PMI fell by 1.5 to 50.4. Spain’s case is telling: as the country battles with fresh Covid19 restrictions, services PMI fell to a 4-month low of 42.2 in Sep (Aug: 47.7).
  • Retail sales in the eurozone grew by 4.4% mom and 3.7% yoy in Aug (Jul: -1.8% mom), with Aug online sales up 24% yoy.
  • GDP in the UK slowed to 2.1% in Aug, following growth rates of 6.6% in Jul and 9.1% in Jun. GDP is 21.7% higher than its lowest ebb during lockdown in Apr, when the economy contracted by 19.5%, but remains 9.2% below pre-pandemic levels.
  • Markit services PMI in the UK fell to 56.1 in Sep (Aug: 58.5), the lowest reading since Jun. Growth in new business eased as the Eat Out to Help Out scheme was withdrawn and some additional restrictions were imposed.
  • UK’s industrial production inched up by just 0.3% mom in Aug (Jul: 5.2%): while manufacturing picked up by 0.7% (vs 6.9%), the largest boost came from construction (+3%, though lower than Jul’s 17.2% surge).
  • The UK government will pay 67% of the salaries of employees – if their companies have to close due to Covid19 restrictions – up to a maximum of GBP 2,100 (USD 2,730) a month. The scheme will begin Nov 1st and run for 6 months.

Asia Pacific:

  • Caixin services PMI accelerated to 54.8 in Sep (Aug: 54), posting the 5th consecutive month of increase – supported by a rise in total new business though export work continued to decline.
  • China’s foreign exchange reserves fell to USD 3.143trn in Sep (Aug: USD 3.165trn), following increases in the previous 5 months. Gold reserves stood unchanged at 62.64mn ounces at end-Sep.
  • Domestic tourism picks up in China during the Golden Week holiday: tourism sites were visited by 637mn domestic tourists (79% of last year’s total) and revenues stood at CNY 466.56bn (USD 68.7bn) versus CNY 650bn last year. However, this is much better compared to the last long holiday period over May 1-5 this year which saw just 115mn tourists and revenues of CNY 47.56bn.
  • Japan’s preliminary leading economic index increased to 88.8 in Aug (Jul: 86.7), the highest since Feb, while the coincident index edged up to 79.4 (78.3).
  • Japan’s savings rate increased to the highest level in 2 decades: on average, people saved 44% of their income in Jan-Aug this year, up from 33% in the same period last year.
  • Current account surplus in Japan narrowed by 1.5% yoy to JPY 2.102trn in Aug, but at the slowest pace since the pandemic began. Goods trade was in surplus for the 2nd consecutive month (JPY 413.2bn) as the fall in imports (22%) outpaced the decline in exports (15.5%).
  • India’s services PMI rose for the 5th straight month, but remained below-50, with the index at 49.8 in Sep (Aug: 41.8). Overall new business declined for the 7th consecutive month.
  • The Reserve Bank of India left interest rates unchanged:repo rate and reverse repo rate are at 4.0% and 3.35% respectively. Repo rates have been lowered by 115bps since late Mar.
  • Singapore retail sales inched up by 1.4% mom in Aug, but fell 5.7% yoy (Jul: 27.2% mom and -8.5% yoy), in the second month of reopening after the circuit breaker.

Bottom line: Covid19 cases are surging across many parts of the globe, and new restrictions are being enforced – be it from UK and Spain in Europe to Jordan and Oman in the Middle East. With economies not having fully recovered from the initial lockdown period, it is little wonder then that the latest PMI data from Europe show a dip in the services sector. Separately, with the US election date approaching fast, the Vix volatility index (sometimes referred to as the “fear gauge”) dropped to the lowest level in 3 weeks, on the declining likelihood of a contested election as Biden widened his lead (FiveThirtyEight signaled that Biden’s lead increased to 9.8 ppts from 7.1 at end-Sep). Politics continue to be in the limelight in UK as well, with the state of Brexit negotiations to be evaluated during the EU Summit (Oct 15-16). Last, but not the least, IMF-World Bank meetings are on this week: be prepared for revisions to economic growth numbers and a push for further debt relief (especially given the World Bank’s scathing finding that the pandemic could push an extra 150mn people into extreme poverty by 2021).
Regional Developments

  • About 140k Bahrainis (working in nearly 24k firms) received wage support from the government during Apr-Sep. Over the next 3 months, wages of about 23k persons from 4000 firms will be supported (receiving 50% of their wages from the government).
  • Bahrain’s trade is inching back to pre-pandemic levels, with Jun levels the highest since Mar. Bilateral trade with Saudi Arabia was up 52.45% yoy to USD 262.9mn in Jun while trade with UAE rose to USD 139.6mn. Overall trade with the GCC touched USD 2.9bn in H1.
  • Bahrain set up a specialized office – the Financial Crimes and Money Laundering Prosecution Office, headed by a public advocate – to tackle financial crimes and money laundering.
  • Egypt’s PMI increased to 50.4 in Sep (Aug: 49.4) – the first 50+ reading since Jul 2019 – thanks to an expansion in both output and new orders, while employment also grew to the highest in 10 months.
  • Annual urban consumer price inflation in Egypt edged up to 3.7% in Sep (Aug: 3.4%); food costs edged up 0.3% mom.
  • Net foreign reserves in Egypt inched up by 0.15% mom to USD 38.425bn in Sep.
  • Egypt’s foreign debt declined for the first time in more than 4 years: external debt in Q1 2020 declined by 1.2% qoq. The ratio of short-term debt to total external debt decreased to 9.3% in Q1 2020 (vs 11.7% in Q1 2019).
  • Fuels prices in Egypt will be left unchanged for 3 months; a similar decision was taken at the previous meeting of the pricing committee in Jul.
  • About 66.2% of salaried employees in Egypt have permanent jobs: the ratio is 87.7% among females and 62.2% among males. As of end-2019, labour force in Egypt accounted for 42.2% of total population.
  • Taxpayers in Egypt have until Oct 15 to pay their taxes in order to be exempt from paying 90% of the additional late payment fees. The waiver drops to 70% if paid between 16 Oct to 14 Dec and to 50% if paid between 15 Dec and 12 Feb next year.
  • Egypt’s Ministry of Manpower revealed that about EGP 273.46mn is currently being disbursed to 1915 tourism entities affected by the crisis (employing close to 125k persons). This is the 2nd and 3rd batch of payouts, following the first installment of EGP 208.87mn.
  • No Covid19 cases were detected in tourists visiting Egypt during the last 3 months –around 300k persons from 15 nations – disclosed a spokesperson for the government.
  • Egypt’s Ministry of International Cooperation disclosed that it had obtained USD 500mn in finance this year: this was used to support the health sector during the Covid19 outbreak.
  • USAID signed a deal to provide Egypt with an additional USD 22.8mn as part of the five-year Inclusive Economic Governance bilateral assistance agreement.
  • The Iranian rials touched a new low vis-à-vis the dollar, after US imposed fresh sanctions targeting 18 banks. The dollar was selling for as much as 304,300 rials on the unofficial market on Sat, from 295,940 on Fri.
  • China Machinery Engineering Corporation was awarded a USD 210mn contract to construct a cement plant in Erbil, Iraq. Construction is expected to last 30 months from initiation.
  • Jordan’s GDP dropped by 3.6% yoy in Q2 2020, with hospitality the most affected (-13.4%), followed by transport, storage and communication (-9.2%).
  • Value of shares bought by non-Jordanian investors on Amman bourse was JOD 73.5mn or 10% of overall trading value during the period Jan-Sep this year.
  • Volume of real estate trade in Jordan dropped by 29% yoy to JOD 2.257bn in Jan-Sep, with apartment sales down by 13% during this period.
  • Following the appointment of a new Emir in Kuwait, the new Crown Prince took oath of office in Parliament last week (the Parliament’s term ended on Oct 8). Both the Emir and Crown Prince are brothers of the late ruler.
  • Inflation in Kuwait increased by 0.43% mom and 2.18% yoy in Aug. Food prices posted the highest uptick (+5.02%), followed by cigarettes and tobacco (+3.29%) and clothing (3.26%).
  • The Central Bank of Kuwait established the Higher Committee of Shariah Supervision – with members appointed for a 3-year term – to advise on Shariah compliance of its financial transactions with Islamic banks and financial institutions as well as propose general guidelines for products and services.
  • PMI in Lebanon inched up to 42.1 in Sep (Aug: 40.1): new orders and output continued to decline, and businesses cite ongoing disruptions related to the Beirut port explosion and difficulties in securing USD.
  • Lebanon’s caretaker PMI disclosed that USD 4bn had been spent so far in 2020 on subsidizing food, medicine, flour and wheat imports.
  • An official source informed Reuters that Lebanon has about USD 1.8bn of its foreign exchange reserves available for subsidies; this could be stretched for 6 months if support for some subsidies was removed. Separately, Lebanese authorities are expected to create a special fund to help the needy families at a cost of USD 100mn a month.
  • Consultations for forming the new government in Lebanon will begin on Oct 15, disclosed the President. Former PM Saad Hariri stated that his candidacy to reclaim the position was not off the table, emerging as the only confirmed figure in the running.
  • Oman will re-impose nighttime lockdown from Oct 11 till 24th; the Supreme Committee also decided to prohibit the use of beaches till further notice.
  • The number of SMEs in Oman increased by 12.4% yoy to 45706 as of end-Aug; Muscat topped the list with 33% of registered SMEs.
  • Qatar PMI fell to 51.4 in Sep (Aug: 57.3) while the employment sub-index rose to a 6-month high; however, PMI averaged 56.2 in Q3 2020 – the highest quarterly average till date.
  • Qatar increased the number of areas where non-Qatari individuals/ companies could own properties to 9 from the 3 before; the government will also grant residency to owners of property worth at least QAR 730k (USD 200k) as well as their families.
  • PMI in Saudi Arabia increased to 50.7 in Sep after dropping to 48.8 in Aug and rising for the first time since Feb. Both new orders and output posted readings above 50 and employment fell at the softest pace since Mar.
  • Value of contracts awarded in Saudi Arabia declined to SAR 11bn (USD 2.9bn) in Q2, bringing the value of contracts awarded in H1 to SAR 56.2bn (almost half value in H1 2019).
  • Cement sales in Saudi Arabia increased by 23.5% yoy to 4.58mn tonnes in Sep 2020.
  • Private sector firms in Saudi Arabia that are still affected by Covid19 repercussions need to inform the General Organization for Social Insurance of beneficiaries of SANED financial compensation: only 50% of Saudi workers will be provided wages by the government. Separately, the Covid19 related procedures within the Labour Law (reduction of salary with corresponding reduction in working hours, placing employee on paid annual leave, unpaid leave etc.) has been extended to 9 months from the start date (Apr 6th).
  • Saudi Arabia’s schools will continue distance learning until the end of the first term of the educational year in
  • Gold production in Saudi Arabia increased by 158% to 12,353kg at end-2019 compared to 5 years prior.
  • In the 12th Annual ASDA’A BCW Arab Youth Survey, 46% of respondents chose UAE as the country they would like to live in, followed by the US (33%) and Canada (27%). The reasons for choosing UAE included safety and security (44%), work opportunities (36%) and salary packages (32%) among others.
  • Extreme poverty in the MENA region increased to 7.2% in 2018 – the latest year for which data is available – up from 3.8% in 2015, according to World Bank. Extreme poverty is defined as living on less than USD 90 a day.

UAE Focus

  • PMI in the UAE increased to 51 in Sep (Aug: 49.4), posting the highest reading in 11 months. Mildly higher exports sales were reported, cost burdens increased for the 5th consecutive month and discounting efforts – highest since Dec 2019 – helped to stimulate demand.
  • UAE central bank, in a bid to support digital transformation strategy for public services, will allow government entities in Dubai and their customers to access the central bank’s direct debit service to facilitate customers’ payments through different banks.
  • The UAE announced that issuance of entry and work permits for employment in government and semi-government entities will be resumed.
  • Dubai issued a new building code that streamlines building rules also creating a unified set of standards for construction – all aimed towards lowering construction costs.
  • The Etihad Credit Insurance issued over 1,400 revolving credit guarantees for a total exposure amount of AED 6bn, covering AED 4bn worth of non-oil exports in H1 2020.
  • Dubai house prices – for apartments and villas – stood at a decade low of AED 896 per square foot in Sep versus 2010 when prices averaged AED 898 per square foot.
  • LNG exports from UAE grew by 7.6% yoy to a total 1.4mn tonnes in Q2 2020. UAE’s LNG exports accounted for 1.6% of global LNG exports in Q2 and 5.5% of total Arab LNG exports.

Media Review
COVID’s Impact in Real Time: Finding Balance Amid the Crisis
https://blogs.imf.org/2020/10/08/covids-impact-in-real-time-finding-balance-amid-the-crisis/
Public Investment for Recovery
https://blogs.imf.org/2020/10/05/public-investment-for-the-recovery/
An Interview with Nouriel Roubini – Project Syndicate
https://www.project-syndicate.org/say-more/an-interview-with-nouriel-roubini-2020-10
Young Arabs look to emigrate as pandemic wrecks economies
https://www.ft.com/content/349a60db-6b12-4210-a2f1-019b3e38c280  
 
 
 
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Weekly Insights 6 Oct 2020: Economic activity in Bahrain & Saudi Arabia

Charts of the Week: Last week, both Bahrain and Saudi Arabia released Q2 GDP numbers: as expected, overall growth contracted, with private sector activity significantly affected. The initial sections offers a forward-looking perspective on the two nations based on more recent data and proxy indicators. Saudi Arabia also disclosed a medium-term fiscal strategy, which forms the last section of this Insights’ edition.

  1. Bahrain GDP & economic activity

GDP in Bahrain declined by 8.9% yoy in Q2 2020, following a 1.1% drop the previous quarter. This was primarily due to the non-oil sector which plummeted by 11.5%. As expected, the largest dips in GDP came from the hotels and restaurants (-61.3%) and transport & communication (-47.4%) – both directly affected by the Covid19 outbreak. Spillover effects were also visible across the board: the financial sector, which accounts for the largest share of non-oil GDP (16.8% in Q2), posted a 5.8% drop while the sub-sectors real estate and business activities and construction slipped by 7.9% and 2.1% respectively.

With Covid19-related restrictions slowly being phased out in Bahrain, can we expect a resumption of economic activity? The data for Jul-Aug show the pace of recovery has been slow, with readings for retail and recreation still at an average 26% below the baseline data (pre-Covid19). Recent announcements of extended government support – be it the exemption of tourism levies for 3 more months or extended support to KG & nursery teachers, taxi drivers or Bahraini citizens’ payment of utility bills and about 50% of salaries in the private sector (only those affected) – will provide direct support and likely nudge recovery. hotel occupancy rates in four- and five-star hotels increased by 13.3% mom and 17.6% in Jul and Aug respectively. Opening borders with Saudi Arabia will not only increase the number of trucks crossing the King Fahd Causeway (improving transport/ trade) but will also attract visitors from Saudi Arabia (supporting hospitality and retail).

  1. Saudi Arabia GDP & economic activity

Saudi Arabia’s overall GDP plunged by 7% yoy in Q2 2020, with falls in both the oil and non-oil sectors. The oil sector’s 4.9% drop in H1 is a result of the reduction in oil production in line with the OPEC+ agreement. Within the non-oil sector, all sub-sectors posted declines in Q2 ranging from trade and hospitality (-18.3%) to finance, insurance and real estate (-0.7%). The share of GDP by economic activity shows that the oil sector continues to dominate (45% of overall GDP), closely followed by manufacturing (13%) and trade and hospitality (9%).

To gauge any underlying change in activity during Q3, we refer to the central bank’s data on consumer spending and point-of-sale (PoS) transactions by category. There is a spike before the VAT hike came into place in Jul, as expected, but the Aug data seems to indicate a slight recovery for hotels (+2.6% yoy, following 6 months of double-digit declines) while items like jewelry and clothing continue to register negative growth. The construction and real estate sector look well-placed to improve in H2 this year: not only has letters of credit opened for building materials imports increased by 64% yoy in Aug (following 5 months of double-digit declines), cement sales has also been picking up during Jun-Aug; a temporary boost for the sector will also come from the recent announcement that real estate would be exempt from the 15% VAT (to be replaced instead by a 5% tax on transactions, of which the government would bear the costs for up to SAR 1mn for the purchase of first homes).

  1. Saudi Arabia’s fiscal space

With oil prices around the USD 40-mark, extended government support in Saudi Arabia during the Covid19 outbreak will put a strain on finances. From the H1 2020 estimates disclosed by the Ministry of Finance, it is noticeable that the share of taxes as % of overall revenue has declined to 18% (H1 2019: 23%). Compensation of employees remain the biggest strain on the expenditure side, with the single component accounting for 53% share, though it is commendable that subsidies have declined by 27.8% yoy to SAR 13bn.

If Saudi Arabia’s fiscal consolidation plans are to be met, reforms are required on both revenue and expenditure side. The Kingdom has already increased VAT to 15% from Jul: however, with subdued demand and consumer spending, it seems unlikely that this move will add substantial revenue this year. We have highlighted in previous editions that Saudi Arabia can benefit from the introduction of other more revenue-generating taxes – e.g. carbon taxes, which will also contribute towards a cleaner environment. Additional measures could include energy price reforms (thereby reducing subsidies) as well as a consolidation or removal/ reduction of various small fees and taxes after undertaking an impact exercise (i.e. do these fees raise significant revenues or do they hinder development of the related sector?). The other major route to take is lowering “compensation of employees”: this can be done either by reducing the public sector workforce (and increasing productivity through increased digitalization) or by decreasing wages (and synchronizing public holidays) to be on-par with the private sector – these moves could also support creation of jobs in the private sector, lead to higher productivity levels and growth.

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Weekly Economic Commentary – Oct 4, 2020

Markets
Stock markets gained compared to the week before, though declining towards the end of last week: with Trump testing positive for Covid19 and the next round of fiscal stimulus likely to be held up by political bickering (the House already approved the USD 2.2trn relief package) in the US, continuing Brexit negotiations and the latest wave of Covid19 hitting record highs in many countries, investors are getting uneasy. In the region, most markets gained slightly though in Kuwait, the main index posted its biggest intraday fall on news of the Emir Sheikh Sabah al-Ahmad al-Sabah’s death. The pound fell on Brexit-related news, while the yen gained on its safe haven asset stance. Oil prices slipped below USD 40 a barrel last week (touching a 4-month low) on tepid demand alongside higher global crude oil output; gold price gained on heightened uncertainties, posting its best week in eight.

Weekly % changes for last week (1-2 Oct) from 24th Sep (regional) and 25th Sep (international).

Global Developments
US/Americas:

  • US GDP plunged by 31.4% annualized pace in Q2 – the sharpest contraction in at least 73 years in Q2 – revised up from the 31.7% drop disclosed a month ago. Consumer spending contracted by 32.2% while business investment in structures and equipment each sank by more than 30%. In yoy terms, GDP fell by -2.1% yoy in Q2, following a -2.3% drop in Q1.
  • Core PCE was up by 0.3% mom and 1.6% yoy in Aug (Jul: 1.4% yoy); personal consumption was up by 1% while personal income dropped by 2.7% (Jul: +0.5%).
  • Non-farm payrolls rose by 661k in Sep, much lower than market expectations, with leisure and hospitality leading job gains (+318k). With the latest figure, only about 12mn jobs have been recovered versus mid-Mar’s shutdown that resulted in about 22mn layoffs. Though unemployment rate fell to 7.9% from 8.4% in Aug, the labour market participation rate fell to 61.4% (a decline of nearly 700k). Earlier in the week, the ADP employment report showed that private sector employment increased by 749k jobs in Sep (Aug: 481k).
  • ISM manufacturing edged lower to 55.4 in Sep (Aug: 56), with the new orders sub-index declining to 60.2 from 67.6 (a 16.5 year high) while the employment sub-index improved to 49.6 from 46.4. Separately, Markit manufacturing slipped lower to 53.2 in Sep from a preliminary reading of 53.5, but remained a tad higher than Aug’s reading of 53.1.
  • S&P Case Shiller home price indices inched up by 3.9% yoy in Jul (Jun: 3.5%), thanks to strong demand for homebuying amid low mortgage rates.
  • Pending home sales index grew by 8.8% mom and 24.2% yoy in Aug (Jul: 5.9% mom and 15.5% yoy), rising to a record high of 132.8. However, there is a demand-supply imbalance and if the pace of new home sales continue, supply will be exhausted in just 3.3 months.
  • Initial jobless claims fell to 837k in the week ended Sep 26, from a revised 873k the week before. Continuing claims declined by 980k to a seasonally adjusted 11.8Mn in the week ended Sep 19 – the lowest level since Mar.

Europe:

  • Germany’s harmonized inflation fell to -0.4% yoy in Sep (Aug: -0.1%), partly due to the cut in VAT as part of the support during Covid19 and also given the lower energy costs.
  • Inflation in the eurozone was down 0.3% in Sep (Aug: -0.2%); core CPI (excluding fuel and food prices) was 0.2% in Sep (Aug: 0.4%). Services inflation, which was 1.6% in Feb, has dropped to just 0.5% in Sep.
  • Retail sales in Germany increased by 3.1% mom and 3.7% yoy in Aug (Jul: -0.2% mom and 5% yoy), probably supported by the VAT cut. Online retailers posted a 23% increase in sales while sales of furnishings and household appliances were up by 8%.
  • German unemployment rate inched lower for the third consecutive month to 6.3% in Sep (Aug: 6.4%). Number of people out of work fell by 8k in seasonally adjusted terms to 2.907mn.
  • Final readings of Markit manufacturing PMI was released: in Germany, PMI hit a 26-month high in spite of being revised down to 56.4 (prelim estimate: 56.6, Aug: 52.2), thanks to record-high new order growth and new export orders rising the most since Dec 2017. In the Eurozone, an increase in activity and new orders (export trade posted the sharpest gain since Feb 2018) supported the rise in PMI to 53.7 in Sep; in UK, manufacturing PMI was revised down to 54.1 from 54.3 before (Aug’s two and a half year high of 55.2).
  • The European Commission’s monthly survey showed an uptick in overall eurozone economic sentiment indicator by 3.6 points to 91.1 in Sep, its highest level since the pandemic struck in Mar (but below the 103.4 reported in Feb).
  • UK GDP contracted by 19.8% in Q2, revised up from a 2nd estimate of a 20.4% plunge. The lockdown period witnessed a record-breaking 23.6% fall in household spending in Q2, while the household saving ratio soared to an all-time high of 29.1%. The current account deficit in UK fell to its lowest level for nine years, at GBP 2.8bn or 0.6% of GDP in Q2, down from GBP 20.8bn in Q1 2020.

Asia Pacific:

  • China’s NBS manufacturing PMI edged up to 51.5 in Sep (Aug: 51), with the sub-index for new orders at 52.8 the highest in a year and the steepest growth since the start of 2011. New export orders showed an expansion for the first time this year, up 1.7 points to 50.8. Non-manufacturing PMI rose in Sep for the 7th straight month, up to 55.9 (Aug: 55.2), with sub-indices of new orders (54 from 52.3) and employment (49.1 from 48.3) rising.
  • Caixin manufacturing PMI for China inched down to 53 in Sep (Aug: 53.1). In spite of the fall, new orders expanded at the fastest pace since Jan 2011 and new export orders climbed to the highest in three years.
  • Tokyo’s CPI eased to 0.2% yoy in Sep (Aug: 0.3%); inflation excluding fresh food eased to -0.2% in Sep (-0.3%). These are way short of the BoJ’s 2% target.
  • Japanese Tankan showed an improvement in business sentiment: the headline index improved to -27 in Sep from Jun’s -34 (the lowest level since Jun 2009). The survey also showed that firms expected business conditions to improve three months ahead.
  • Japan’s headline manufacturing PMI touched a 7-month high of 47.7 in Sep, with the latest declines in output and new orders the slowest since Q1 2020.
  • Retail trade in Japan increased by 4.6% mom in Aug (Jul: -3.4%); in yoy terms, retail trade fell by a small -1.9% (Jul: -2.9%). Sales were up for food & beverages (2.7% from Aug’s 1.4%); machinery & equipment (3.8% from 8.1%) and medicine & toiletry stores (1.6% from 1.2%) while apparel and motor vehicle sales fell by 17.4% and 14.1% respectively.
  • Japan industrial production rose by 1.7% in Aug, following an 8.7% jump in Jul, thanks to a pickup in auto demand. However, the index level remains low compared to the pre-coronavirus reading of 95.8 in Mar.
  • As Covid19-related restrictions were loosened, manufacturing PMI in India increased to 56.8 in Sep -the highest reading since Jan 2012 – thanks to increases in new orders and output increased at third-fastest pace in survey history.
  • India reported a current account surplus of USD 19.8bn in Apr-Jun 2020 (or 3.9% of GDP) – the second consecutive quarter of surplus (Jan-Mar: USD 0.6bn) – as trade deficit narrowed to USD 10bn.
  • Singapore PMI inched up to 50.3 in Sep (Aug: 50.1), as output, new orders and export sales increased while employment declined for the 8th consecutive month.

Bottom line: Global manufacturing PMI rose to a 25-month high of 52.3 in Sep, supported by new order intakes (quickest pace in almost 2.5 years) and expansions in new export business (for the 1st time since May 2018). Interestingly, this rise in export orders has yet to translate into air cargo demand, though ocean container throughputs and global trade have improved. Covid19 cases are rising, with record daily numbers reported in France, UK and others, so it remains to be seen if the manufacturing momentum continues. There is already a clear divergence between services and manufacturing PMI numbers, given the strain of social distancing policies on the former. Separately, Brexit negotiations are in its last stretch: the two sides agreed on Sat (Oct 3rd) that there was enough common ground to aim for a final settlement, so the uncertainty drags on. 

Regional Developments

  • GDP in Bahrain declined by 8.9% yoy in Q2: the non-oil sector plunged by 11.5% while the oil and government sectors grew by 3.2% and 0.1% respectively.
  • Bahrain’s government will continue to pay 50% of wages of citizens in private sector firms affected by Covid19 during Oct-Dec. Separately, a 3-month waiver (starting from Oct) was announced on tourism establishments fees in the country.
  • The finance and national economy ministry highlighted some economic indicators that signal a recovery in Bahrain: the value of imports picked up by 88.1% mom in Aug, hotel occupancy rates in four- and five-star hotels increased by 13.3% mom and 17.6% in Jul and Aug respectively, the number of monthly real estate transactions ticked up by 19.1% mom and 21.6% in Jul and Aug respectively.
  • Money supply in Egypt increased by 19.17% yoy in Aug to EGP 4.68trn (USD 297.9bn).
  • Egypt’s foreign trade amounted to USD 69.965bn in Jul 2019-Mar 2020: imports stood at USD 49.021bn in the period while exports touched USD 20.953bn. UAE, China, US, Saudi Arabia and the UK were the top five trade partners of the country.
  • Egypt plans to borrow EGP 640bn from the local market this quarter via the issuance of T-bills and bonds, to finance the fiscal deficit. Domestic public debt in the country touched about EGP 4.354trn by end-Dec 2019: of this, 87.8% was owed by the government, 5.9% by economic public bodies, and 6.3% by the National Investment Bank.
  • Egypt’s finance minister disclosed that an initiative was underway for the payment of all overdue dues to exporters (in cash) at a 15% discount before end of the year.
  • Three electronic payment companies in Egypt – Masary, Bee, and Aman – are considering IPOs on the Egyptian Exchange next year.
  • The World Bank approved a 6-year USD 200mn project for Egypt to reduce air pollution and improve quality of life. The annual economic cost of air pollution on health in the Cairo area alone is equivalent to about 1.4% of Egypt’s GDP, revealed the World Bank.
  • Iran’s rial weakened to a record low against the dollar, breaching 300k for the first time on the unregulated market.
  • Iraq’s GDP growth is estimated to decline by 9.7% this year, according to the World Bank. In its latest report on the country, the Bank calls for the development of the private sector to overcome socio-economic challenges, strengthen the management and allocation of its oil wealth and improve accountability. (Access the report: https://www.worldbank.org/en/country/iraq/publication/breaking-out-of-fragility-a-country-economic-memorandum-for-diversification-and-growth-in-iraq)
  • Jordan reopened mosques and churches last Thursday, but with social distancing norms in place. Restaurants were also allowed to restart dine-in services, but at 50% capacity.
  • Kuwait’s new ruler was sworn in after the death of his brother, who was known as an effective mediator in the region. The succession process has been smooth. Speculation of an imminent devaluation, which started circulating after the passing of the country’s ruler last week, was denied by the central bank (which also reiterated commitment to the dollar peg).
  • A new bill was submitted by Kuwait’s government to the Parliament, to support SMEs during the Covid19 outbreak: this includes allowing banks to provide loans of up to KWD 25k to SMEs payable within 5 years.
  • About 150 expats working in Kuwait’s ministry of public works have been fired, while another 400 are expected to receive termination letters soon – in total, expats account for ~5% of staff.
  • The Lebanese pound has been falling versus the dollar on the black market, as the country’s troubles and uncertainties continue with the PM-designate stepping down, warnings by the central bank that it is running of reserves to subsidise essential commodity imports, and discussions with the IMF on hold till a new Cabinet is formed.
  • After having exceeded 1000 daily infections, Lebanon ordered 111 towns and villages into lockdown from Oct 4th to 12th, to curb the Covid19 outbreak.
  • Lebanon and Israel are planning to hold maritime border talks: talks are scheduled to begin after mid-Oct, under the auspices of the UN.
  • Qatar Airways received a cash injection of QAR 7.3bn (USD 1.95bn) from the government as support for the company during the Covid19 outbreak. The cash injection was later converted to new shares.
  • GDP in Saudi Arabia declined by 7% in Q2 (Q1: -1%), with the private and government sectors contracting by 10.1% and 3.5% respectively. Non-oil GDP shrank by 8.2% and the oil GDP down by 5.3%.
  • Saudi Arabia, in its preliminary budget statement, disclosed that it plans to cut spending by 7.5% yoy to SAR 990bn next year. This year’s revenue is estimated to drop by 17% to SAR 770bn before rising to SAR 846bn in 2021. Budget deficit will narrow to 5.1% in 2021 from an estimated 12% in 2020.
  • Inflation in Saudi Arabia is estimated to touch 3.7% this year (disclosed in the preliminary budget statement), partly due to the VAT hike, before declining to 2.9% in 2021.
  • Foreign exchange reserves in Saudi Arabia edged down by 0.75% mom to SAR 272.57bn in Aug. Assets of SAMA increased by 1.3% mom to SAR 1.83trn in Aug; in yoy terms, assets were down by 5.4%.
  • Saudi Arabia’s oil exports fell by 46% yoy in Jul while non-oil exports fell by 8.3% yoy; merchandise imports plunged by 30.5% mom to SAR 37.6bn, largely due to vehicles (-64.3%) and electrical equipment (-30.1%).
  • Vehicle imports into Saudi Arabia fell to the lowest level since 2015 in Jul, reported Bloomberg, after VAT was tripled. Imports of vehicles, aircraft, vessels, and associated transport equipment fell 64% yoy to SAR 3.9bn in Jul.
  • Saudi Tadawul updated the free float shares of all companies starting from today (4th Oct, 2020) whilst also adding four companies to the market indices.
  • In a bid to support citizens that want to own homes, Saudi Arabia will exempt real estate deals from the 15% VAT and instead imposed a new 5% tax on transactions. Furthermore, the government would bear the cost of the new Real Estate Transaction Tax “for up to SAR 1Mn” for the purchase of first homes.
  • Unemployment rate of Saudi citizens increased to 15.4% in Q2 vs Q1’s 11.8%. About 400k Saudis and expats have quit the labour market in Apr-Jun, according to the General Authority for Statistics. Separately, average monthly salaries paid to Saudi citizens declined by 3.9% yoy to SAR 9970 as of end-Q2 while salaries to expats grew by 2.17% to SAR 4136.
  • A maximum 50% of Saudi citizens working in private sector firms affected by the pandemic will get a 3-month extension of support from the government via “Saned”, an unemployment insurance scheme.
  • Moody’s estimates that Saudi Arabia’s financing needs will more than double to around SAR 318bn (USD 85bn) this year from SAR 153bn in 2019. Of this, nearly half is expected to come from sukuk issuances.
  • Saudi Arabia will enforce a mandatory 14 days between two Umrahs for pilgrims; so far 35k requests have been registered to perform Umrah.
  • OPEC pumped an average 24.38mn barrels per day (bpd) in Sep, up 160k bpd from Aug. While Libya and Iran are exempt from the OPEC+ supply pact, UAE posted the largest drop in production in Sep (compensating for previous months of oversupply). UAE’s shipments of crude and condensate fell to 2.43mn barrels per day in Sep, a decline of 480k bpd on Aug and the lowest since Oct 2018.
  • Airlines based in the Middle East recorded a 92.5% yoy decline in revenue passenger kilometers in Jul, one of the weakest outcomes of all regions, according to IATA; international demand remains weak, with passenger volumes contracting by more than 90% annually on all of the key routes – not very different from the crisis low in Apr. Before the end of the year, an estimated 1.7Mn people in the aviation industry (half of the 3.3mn in aviation and related industries) are expected to be out of employment.

UAE Focus

  • UAE, Israel and US will establish a joint strategic vision for energy partnership: this collaboration would imply cooperation on various fields including “renewable energy, energy efficiency, oil, natural gas resources and related technologies, and water desalination technologies”.
  • Fuel prices in the UAE will remain unchanged for the 7th consecutive month in Oct.
  • Inflation in the UAE declined by 0.13% mom and 2.59% yoy in Aug: higher prices in food, clothing, education and restaurants (among others) were more than offset by declines in housing and utilities, healthcare, transport costs.
  • Dubai’s Arabtec shareholders voted to file for liquidation. Reuters reported that shareholders authorized Arabtec to appoint AlixPartners and Matthew Wilde, or any other person or persons the board considered fit, as liquidator. It is likely that deteriorating economic conditions, property oversupply and weak growth prospects contributed to its demise, along with management and corporate governance lapses.
  • Japan imported 18.143Mn barrels of crude oil from the UAE in Aug; oil imports from the UAE represented 24.8% of the total Japanese oil imports.
  • Remittances from the UAE amounted to AED 79.6bn in H1 this year, according to the central bank. Indians, Philippines, Pakistan, Bangladesh, Egypt and the US accounted for the top receiving nations.
  • Ras al Khaimah’s manufacturing exports increased by 32% between 2017 and 2019 to AED 3.803bn. Saudi Arabia was the biggest importer from the emirate (26% of total industrial exports) followed by Kuwait (10%) and India (9%).
  • Dubai announced free parking for all electric cars registered in the emirate until 2022; but, this is not valid for electric cars registered elsewhere in the UAE. Currently there are around 1803 electric cars registered in Dubai.
  • UAE has resumed issuing entry permits into the country though work permits are not being issued at this stage.

Media Review
Six Charts on Social Spending in the Middle East and Central Asia
https://www.imf.org/en/News/Articles/2020/09/25/na092920-six-charts-on-social-spending-in-the-middle-east-and-central-asia

Electric mobility is a game-changer for MENA’s energy and transport sectors
https://blogs.worldbank.org/arabvoices/electric-mobility-game-changer-menas-energy-and-transport-sectors

Why Biden Is Better Than Trump for the Economy: Roubini
https://www.project-syndicate.org/commentary/biden-is-better-than-trump-for-the-economy-by-nouriel-roubini-2020-09

1 in 4 women are considering leaving the workforce or downshifting careers due to Covid19: McKinsey’s Women in the Workplace 2020
https://www.mckinsey.com/featured-insights/diversity-and-inclusion/women-in-the-workplace

https://www.mckinsey.com/featured-insights/coronavirus-leading-through-the-crisis/charting-the-path-to-the-next-normal/women-are-feeling-more-pressure-at-work-due-to-the-covid-19-crisis-than-men-are

FCA gives City 15 months’ grace on most post-Brexit rules
https://www.ft.com/content/0d808db0-b583-462f-99b9-44b976980610

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Weekly Insights 29 Sep 2020: Supporting the recovery of UAE’s private sector (focus on SME finance)

[This is an edited version of the post issued originally on 29th Sep; Table 1 & related text have been updated]

Supporting the recovery of UAE’s private sector: focus on SME finance
To support the UAE economy in the backdrop of Covid19, the central bank (since Mar 2020) has rolled out a number of measures including liquidity injection via loosening of banks’ capital requirements, loan repayment deferrals and the Targeted Economic Support Scheme (TESS) among others. According to the UAE central bank, as of end-Jul, banks and financial institutions had availed AED 44.72bn worth of interest-free loans (89.44% of total) as part of the TESS facility. It needs to be highlighted that banks used close to 95% of these funds towards postponing loan payments for the affected sectors. It was also disclosed separately that 300k individuals, 10k SMEs and more than 1500 private sector firms had used the economic stimulus.

The latest data from the UAE central bank shed some light on the broader credit movements: the accompanying chart shows the monthly changes in gross domestic credit. The dotted lines are credit to businesses and individuals (the private sector) which show no substantial increases – in fact, it increased by an average 0.9% year-to-date (ytd) for businesses and dropped by 2.1% ytd for individuals. The uptick in lending to the public sector (government related entities) and government have been discussed previously here and here, but the non-bank financial institutions (which include private equity & venture capital firms, other investment firms, alternative asset managers, insurance firms and others) has also witnessed a 11.8% rise in credit ytd. There is not much visibility of the activities of NBFIs in the UAE (in terms of publicly available data), and it is not clear if the SME customer segment, important for recovery, was catered to (via consumer finance, SME financing & credit card products, to name a few).

However, at the risk of sounding like a broken record, the question is whether the package has achieved its goal of supporting the economy or whether it resulted in a crowding out of the private sector (businesses and individuals) in favour of the government, public sector & also the financial institutions? The UAE central bank’s latest quarterly report does mention that MSMEs (Micro, Small and Medium Enterprises) benefitted from the economic package – highlighting the 10.4% yoy increase in lending in Q2 this year. But, at the end of the day, share of SME lending in total domestic lending was at 5.7% in Q2 (Q2 2019: 5.6%), lower than 5.9% share as of end-Q1.

Additional data is beneficial: the tables below provide more details of bank lending to the MSMEs, segregated by micro, small and medium enterprises[1]. Within the MSME segment, as of end-Q2, the largest share of loans was disbursed to medium-sized firms (56.6%) and close to 1/3-rd to the small enterprises.

The number of MSMEs in the UAE have increased by 3.9% qoq to 124,935 as of end-Jun – not surprising given the central bank’s mandate of reduced duration for opening new SME accounts (all banks need to open accounts for SME customers within a maximum timeframe of two days, provided documentation and AML/CTF obligations are met). The number of accounts in the micro- and small segments increased by 4.6% and 5% qoq in Q2. Nevertheless, if we consider the amount disbursed per firm, medium enterprises pocketed AED 1.76mn in Q2: this is 3.7 times the amount disbursed per small firm and more than 5.3 times the amount disbursed to microenterprises.

The results are quite eye-opening, but not surprising (unfortunately): the GREs have benefitted in terms of the pace of overall domestic lending during the Covid19 period (remember that many of these firms are part of the sectors most affected by the pandemic!) and while lending to the SMEs has been dismal, within the SMEs, the medium-sized firms have benefitted the most. Considering how significant SMEs are to the UAE[2], it is imperative that financial institutions support them to bring the economy back on track. Some of the policies rolled out by the central bank had a 6-month deadline, and since no announcements have been made (yet) regarding extensions, anecdotal evidence points to banks winding down loan repayment deferrals and similar policies (for businesses/ individuals).

With the economy not yet back on the pre-Covid19 track, and the central bank’s own call of a 4.5% decline in non-oil GDP this year, targeted policy stimulus measures need to continue. With rising indebtedness of both individuals (due to job losses or pay cuts) and businesses (directly and indirectly affected by Covid19), there are likely to be spillovers into the financial sector via rising non-performing loans.

Furthermore, as companies wind down operations in the near- to medium-term, nascent insolvency and bankruptcy frameworks in the UAE are likely to be tested. According to the World Bank Doing Business 2020 report’s resolving insolvency sub-category, the UAE’s recovery rate was 27.7 cents on the dollar (vs OECD high income nation’s average of 70.2 and MENA average of 27.3), at a cost of 20% of the estate (vs 9.3 in OECD and 14% in MENA), taking 3.2 years to resolve (vs OECD’s 1.7 and MENA’s 2.7)[3]. However, the strength of the insolvency framework – given recent but untested legislation – stood at an impressive 11 (out of a total score of 16; compares to the OECD average of 11.9 and higher than MENA’s 6.3).

Support of the private sector is critical for economic recovery
To provide adequate ongoing backing to the private sector (including the SMEs) is essential. What policy measures need to be in place? (a non-exhaustive list)

  • Banking sector continues to support the private sector via reduced bank charges and fees, reduction in minimum balance requirements, zero-interest instalment plans etc.; of course, banks’ compliance/regulatory departments need to ensure that firms they lend to follow practices of good financial reporting and governance.
  • Limited funding to SMEs from the banking sector is likely to continue, given the current status of opaque information/ reporting/ data. Lack of collateral and issues of transparency are oft-cited constraints to SME lending in the region. The recently announced credit guarantees for loans to SMEs is likely to provide support and if successful, could be continued at a nominal rate. Open lines of communication with the credit bureaus can help manage credit risks and ease SME’s access to credit. Two ways to resolve the issue of collateral: 1. Expand the nature of acceptable collateral to both movables and immovables; 2. Establish transparent, blockchain-based collateral registries/ platforms. Furthermore, an SME rating agency (like in India) could provide additional information to lenders. Resolving this constraint alone could kickstart a new wave of entrepreneurship in the country.
  • Backing from the government can come via a simple move like reducing the cost of doing business (various free zones have reduced fees and related charges for a short period) or ensuring no payment delays or boosting specific sectors (Abu Dhabi’s recent announcement to develop AgriTech) or through a wider mandate by instructing the various sovereign wealth funds to invest in local companies, through a dedicated fund, based on best practices.
  • Leapfrog on the massive changes Covid19 has brought about in the adoption of technology: varied e-commerce offerings, such as helping SMEs establish interactive websites, to creating innovative payment systems to neo-banking options. Alongside embracing the technology and greater digitalisation, it is necessary to also invest in and create the right ecosystem (bringing together the necessary skillset, retraining existing employees, reducing set-up and ongoing/ recurring business costs etc.).

[1] The UAE central bank expanded the definition of SMEs so that a larger segment will be in a position to qualify for SME lending. 

[2] According to Ministry of Economy, the SME sector represents more than 94% of total firms operating in the UAE, accounting for more than 86% of the private sector’s workforce. In Dubai alone, SMEs make up nearly 95% of all companies, employing 42% of the workforce and contributing ~40% to Dubai’s GDP.

[3] https://www.doingbusiness.org/content/dam/doingBusiness/country/u/united-arab-emirates/ARE.pdf

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Weekly Economic Commentary – Sep 27, 2020

Markets
Stock markets ended in the red in across the globe: in the US, equities fell for a fourth consecutive week in spite of a tech rally, while the resurgence of Covid19 and renewed lockdowns spooked investors in Europe. In the Middle East, most equity markets were down, with the exception of Kuwait and Bahrain. Among currencies, the dollar posted its best weekly performance since Apr while the euro declined, and the yuan jumped higher following the entry of China government bonds into the FTSE Russell’s trillion-dollar World Government Bond Index (WGBI). Gold price ended 4.6% lower – the worst week in more than a month while oil prices were down by more than 2% as slowing global demand continues to be a worry.

Weekly % changes for last week (24-25 Sep) from 17th Sep (regional) and 18th Sep (international).

Global Developments
US/Americas:

  • Durable goods orders edged up for the 4th consecutive month, rising by a modest 0.4% mom in Aug (Jul: +11.7%), supported by a 0.5% rise in orders for transportation equipment. Non-defense capital goods order excluding aircrafts, a proxy for business spending, increased by 1.8% following an upwardly revised 2.5% in Jul.
  • The Chicago Fed National Activity Index slipped to 0.79 in Aug (Jul: 2.54), with the three-month average falling to 3.05 from 4.23 the month before. The value zero indicates an expanding economy.
  • Existing home sales inched up by 2.4% mom and 10.5% yoy in Aug to 6mn (Jul: 24.7% mom). This was the highest sales pace since Dec 2006, and given tight supply and tougher competition, it took just 22 days to sell a home in Aug.
  • New home sales expanded by 4.8% mom in Aug (Jul: +14.7%) to a seasonally adjusted annual rate of 1.01mn units – this was the highest since 2006. Supply constraints are emerging: the estimate of new homes for sale represent a supply of 3.3 months at the current rate of sales – the shortest period in data since 1963.
  • Markit flash composite PMI in the US eased to 54.4 in Sep (Aug: 54.6), with both manufacturing and services providers reporting expansions in output. Services PMI business activity slipped to 54.6 from 55 the month before. The flash manufacturing PMI inched up to 53.5 in Sep (Aug: 53.1).
  • Initial jobless claims increased by 4k to 870k in the week ended Sep 19; continuing claims fell slightly to 12.6mn from 12.75mn. Separately, talks about a new stimulus package (Democrats’ USD 2.4trn plan) has stalled given political disagreements, and the Fed Chair warned the rebound could stall if “more fiscal support” was not provided.

Europe:

  • Germany’s Ifo business climate improved to 93.4 in Sep (Aug: 92.6) – the highest level since Feb – while the current assessment also inched up to 89.2 (87.9). By sector, the business climate index for services fell in Sep, after rising four consecutive times prior.
  • The Markit flash composite PMI in the Eurozone eased (for a 2nd consecutive month) to 50.1 from 51.9, with divergences across sector and country. Markit manufacturing PMI increased to a 25-month high of 53.7 (Aug: 51.7), thanks to the largest rise in new orders. However, with demand affected by rising cases and social distancing measures, services PMI slipped to 47.6 from 50.5 the month before.
  • A similar trend was visible in Germany’s PMI: manufacturing PMI increased to 56.6 in Sep (Aug: 52.2) while services PMI slipped to 49.1 from 52.5 the month before (on social restrictions and job security worries). Composite PMI eased to 53.7 (Aug: 54.4) and below Jul’s 2-year high.
  • As UK heads into new lockdowns and restrictions, a new job support scheme aimed at “only viable jobs” (and will replace the furlough scheme) was announced by the government to support the economy. As per this plan, which will run for 6 months from Nov 1st, for every hour not worked, the employer and the government will each pay one third of the employee’s usual pay. This plan will cost the government an estimated GBP 300mn a month.
  • UK lost momentum in Sep, with composite PMI at a 3-month low of 55.7 (Aug: 59.1); as both output and new business growth eased from Aug’s highs, flash manufacturing PMI slowed to 54.3 (Aug: 55.2); flash services PMI fell to 55.1 from 58.8 the month before on renewed fears about Covid19 restrictions.
  • The UK government borrowed a record GBP 35.9bn in Aug, a record-high for the month. UK has borrowed a total of GBP 173.7bn since Apr, already above the USD 157.7bn recorded in the 12 months ending Mar 2010.
  • The GfK Consumer Confidence Barometer in the UK rose unexpectedly to -25 in Sep from -27 in Aug; the survey however was conducted in the first half the month before the current social restrictions were put in place.

Asia Pacific:

  • China’s PBoC kept benchmark lending rate steady for the 5th straight month: one-year loan prime rate remained at 3.85%, and the five-year LPR at 4.65%.
  • Japan’s flash manufacturing PMI edged up by 0.1 to 47.3 in Sep, remaining below 50 for the 17th month, as both production and new orders fell further. However, business confidence strengthened, rising to a more than 2-year high.  
  • All Industry activity in Japan grew by 1.3% mom in Jul (Jun: 6.8%) – the second consecutive increase in activity. Both industrial production and construction outputs increased, while tertiary output fell (-0.5% from Jun’s 9%).
  • Inflation in Singapore stayed flat, down by 0.4% yoy in Aug, on private transport costs (-2.3%); core inflation contracted (-0.3% in Aug) for the 7th consecutive month.

Bottom line: Q3 is drawing to an end, and there are many “events” to look forward to in Q4: round of Brexit negotiations wrap up in early Oct and an agreement needs to be in place by the EU leaders’ summit on 15 Oct, US elections in Nov (a Supreme Court nomination beforehand, and a not-so-peaceful transition should Biden win) and maybe a potential vaccine for Covid19 (cases continue to surge and new record highs are being hit in many nations leading to renewed restrictions and additional stimulus). Separately, as countries adjust to Covid19 repercussions, the G20 has called for an extension of the bilateral debt relied initiative for the poorest nations; the initiative has so far helped 43 nations defer USD 5bn in official debt service payments, but risk of defaults (foreign and domestic) loom large. Asia, especially China, seems to be on the road to recovery and export order numbers from PMI are showing signs of a revival: it was not surprising therefore that the latest WTO trade data shows Asia to be relatively less affected in Q2 (-7% yoy) as global trade value dipped by 21% yoy.

Regional Developments

  • Bahrainis facing financial constraints, can submit documents to prove their status and benefit from a postponement of housing loan instalments, according to the housing minister. Separately, municipal fees were reduced for 155 Bahraini tenant families in Aug.
  • Egypt’s central bank unexpectedly lowered its main overnight interest rates by 50bps: lending and deposit rates now stand at 9.75% and 8.75% respectively. The apex bank cited exceptionally low inflation as an enabling factor to lower rates and support the economy.
  • Foreign holdings of Egyptian treasury bills rebounded to EGP 172.0bn (USD 10.9bn) in Jul from EGP 122.44bn at end-Jun.
  • Banks operating in Egypt posted a net profit of EGP 50.04bn at end-Jun, according to the central bank. Total assets stood at EGP 6.4trn as of end-Jun, while provisions were EGP 150.07bn alongside deposits at EGP 4.68trn.
  • Remittances into Egypt increased by 9.5% yoy to USD 2.9bn in Jul; total remittances this year grew by 7.8% yoy to USD 17bn.
  • The manufacturing and extractive industries index in Egypt declined by 6.5% mom to 97.39 in Jul. However, manufacture of motor vehicles and basic pharma products posted increased of 8% and 3.9% respectively.
  • Ration card holders in Egypt had been allocated EGP 13bn under the presidential initiative to boost local consumption (which ends on Oct 26).
  • Egypt’s finance ministry plans to issue green bonds before end of this year, disclosed the minister, with the ministry currently in negotiations to agree on the proposed value.
  • About EGP 160bn had been invested to develop the Upper Egypt governorates over the past five years. This accounted for 20% of total government allotment since 2015.
  • Egypt will establish a department designated for the tax treatment of e-commerce companies, revealed the finance minister; it is expected to start in 2021.
  • The Egyptian Natural Gas Holding Company is finalizing 6 new natural gas agreements worth USD 731mn. Currently, natural gas production stands at 7.2bn cubic feet of gas per day.
  • In a bid to attract more tourists, Egypt has cut fees on airlines’ landing and parking by 50%, and ground services by 20% for all companies operating in the Red Sea, South Sinai, and Marsa Matrouh airports.
  • Egypt’s Financial Regulatory Authority’s Board of Directors approved a draft law regulating and developing the use of Fintech in non-banking financial activities.
  • US renewed a waiver for Iraq to import Iranian electricity for 60 days; this extension is much shorter compared to previous waivers lasting between 90-120 days.
  • Iraq’s oil ministry reiterated its commitment to the OPEC+ agreement, after reports circulated about talks with the OPEC+ to increase the country’s crude oil exports.
  • Exports from Jordan fell by 2% yoy in Jan-Jul while imports plummeted by 16.9%, resulting in a narrowing of trade deficit by 24.4%. In Jul alone, exports were up by 5.2% yoy and 16% mom.
  • Revenues from Jordan’s tourism sector fell by 63.7% yoy to JOD 819mn in Jan-Jul 2020, according to central bank data. Revenues were JOD 4bn last year.
  • Losses of restaurants and cafes in Jordan amounted to approximately JOD 20mn in the two weeks’ forced closure.
  • Jordan and the Kuwait Fund for Arab Economic Development signed an agreement for two loans worth KWD 25mn (to support infrastructure development) and a grant of KWD 400k (USD 1.32mn).
  • Kuwait was downgraded for the first time by Moody’s, lowered by 2 notches to A1 (the 5th highest investment-grade level), citing government’s “liquidity risks” as well as the “fractious relationship” between parliament and the government as a long-standing constraint. The ratings firm projects that the country would require net sovereign issuance of up to KWD 27.6bn (USD 90bn) to meet funding requirements between the current fiscal year till 2023-24.
  • Kuwait’s National Assembly panel passed a draft law to reduce expat numbers in the country over the next five years, though without specifying related caps or percentages. It gives the government 6 months to determine the number of expats needed.
  • The value of electronic payments in Kuwait surged since Jul by 25% to KWD 2bn compared to Jan-Feb when it was about KWD 1.6bn.
  • Kuwait’s travel restrictions will be fully lifted only after the vaccine is widely available in the country, according to the Deputy Director General for Kuwait Airport Affairs. Currently commercial flights do not exceed 30% of the airport’s normal capacity.
  • A survey of 159 companies and SMEs in Kuwait showed a drop in value of sales by a monthly average of 59%, a decline in profit margin by 66% as well as a decrease in average salaries & wages by 46%.
  • Kuwait’s Ministry of Defense reduced USD 1bn from a Eurofighter aircraft deal, reported Al Rai daily. This followed a request from the finance ministry to lower spending but raised questions as to why such a move was not made earlier (if easily achievable).
  • Lebanon’s PM designate resigned after a month, citing “concern for national unity”, after being unable to form a cabinet. The black market exchange rate reached around LBP 9000 for a dollar. Earlier, in a bid to end the stalemate in forming a government in Lebanon, it was proposed that an “independent” Shi’ite candidate be considered as finance minister, as a one-time exception. France had backed this proposal, but other political barriers were raised.
  • Consumer prices in Lebanon increased by 58.1% yoy in Jan-Aug this year; in Aug alone, prices spiked by 120% yoy on the back of a 467% surge in food prices and a 513% uptick in clothing and footwear.
  • Oman plans to issue USD-denominated bonds worth between USD 3-4bn, reported Reuters. This would follow the USD 2bn bridge loan secured last month.
  • Oman will impose excise tax of 50% on sweetened drinks from the start of Oct.
  • The Tax Authority in Oman has scrapped a previous ruling that required taxpayers to file a provisional return of income within three months and an annual return within 6 months of end of the accounting year; instead, taxpayers are now mandated to file only one tax return within four months from the end of the tax year.
  • Oman’s ministry of commerce and industry issued more than 3,000 import permits for cars and motorcycle shipments in H1 this year.
  • Expat population in Oman dropped by more than 50k in Aug, according to data from National Centre for Statistics and Information.
  • Expats with valid residency can re-enter Oman from Oct 1st subject to a test on arrival and quarantine for 14 days. International flights have been given the green light for resuming operations from Oct, but will be limited at the rate of 2 flights per week for each of its previous destinations. Oman Air will start operations within the country (Muscat to Salalah & back).
  • Saudi Arabia has seen a decline in FDI this year, due to the global pandemic, disclosed the investment minister, at a G20 meeting. He also stated that FDI into the country rose to USD 3.5bn in Jan-Sep 2019 from USD 3.18bn a year ago.
  • The value of contracts awarded in Saudi Arabia plunged by 83.2% yoy to SAR 11bn (USD 2.9bn) in Q2, as many project awards remained suspended during the outbreak. The total value slipped to SAR 56.2bn in H1 this year vs SAR 57.8bn, thanks to a strong Q1. Water (SAR 4.3bn), oil & gas (SAR 1.8bn), and real estate (SAR 1.7bn) accounted for 70% of awarded contracts by value.
  • About 38 government authorities in Saudi Arabia will be prepared for privatization within 24 months’ time, in addition to the education universities and specialist hospitals, reported Okaz.
  • Saudi Arabia will resume Umrah for citizens and residents at 30% capacity (~6k persons) as part of the first stage of reopening. Starting Oct 4, each person will be given three hours to perform the Umrah.
  • International travel restrictions are slowly being lifted in Saudi Arabia: patients that require to travel abroad for treatments can now do so subject to meeting certain conditions set by the health ministry.

UAE Focus

  • UAE issued a new decree – which goes into effect from Sep 25 – to enforce gender equality in private sector wages e. if they are doing the same work.
  • Economic growth in the UAE is forecast to contract by 5.2% this year, revealed the central bank’s latest quarterly review. Q2’s non-oil GDP is estimated to have dropped by 9.3% yoy following a 2.7% decline in Q1.
  • The UAE central bank disclosed that AED 44.72bn of the AED 50bn liquidity facility had been drawn by banks until end-Jul (from AED 44.38bn drawn till end-Jun).
  • Foreign currency assets of the central bank of UAE slipped by 4% yoy to AED 353.8bn in Jul this year.
  • Non-oil trade between Abu Dhabi and Saudi Arabia amounted to AED 493.8bn over the past decade. This year, Saudi Arabia was the emirate’s top trading partner accounting for 22.3% of total non-oil trade. Meanwhile, non-oil trade between Dubai and Saudi Arabia amounted to AED 500bn in the 2010-2020 period and AED 24bn in H1 this year.
  • Non-oil foreign trade between UAE and the US exceeded USD 11bn in H1 this year; this follows bilateral trade value of USD 26.3bn last year.
  • UAE’s Federal Authority for Identity and Citizenship has started issuing entry permits into the country including tourist visas; no new work permits are being issued for now. Residents need to obtain a negative PCR test result as well as self-isolate at home. Dubai was the only emirate permitting entry of tourists since Jul 7th.
  • Abu Dhabi announced more than AED 110mn in financial incentives to agricultural technology companies to start operations in the emirate.

Media Review
UNCTAD Trade and Development Report 2020
https://unctad.org/en/PublicationsLibrary/tdr2020_en.pdf
https://unctad.org/en/PublicationsLibrary/tdr2020overview_ar.pdf (overview in Arabic)

WEF’s core and expanded set of “Stakeholder Capitalism Metrics”
https://www.weforum.org/reports/measuring-stakeholder-capitalism-towards-common-metrics-and-consistent-reporting-of-sustainable-value-creation

Digital Solutions for Small Businesses in the Middle East and North Africa
https://blogs.imf.org/2020/09/22/digital-solutions-for-small-businesses-in-the-middle-east-and-north-africa/

Israel, Lebanon agree to hold maritime border negotiations
https://www.jpost.com/middle-east/israel-lebanon-agree-to-hold-maritime-border-negotiation-talks-643577

Virus prompts rethink of developing economies’ urban planning
https://www.ft.com/content/a9101163-f4e8-4bf2-a16f-2ae14d5746a3

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Weekly Insights 22 Sep 2020: Looking beyond Saudi inflation & oil exports

Charts of the Week: Saudi inflation numbers (consumer & wholesale prices) show the impact of the tripling of VAT. For now, a proxy indicator of cement sales is showing a pickup post-lockdown, in spite of the VAT hike. We also track the recent changes in Saudi exports, also to understand the impact on government revenues.

  1. Saudi inflation picks up post-Jul’s VAT hike

Headline inflation has been climbing in Saudi Arabia from Jul, not surprising given the VAT hike to 15% (from 5% before). The VAT effect is seen across multiple sub-categories, but note that food prices have been ticking up for many months now. Wholesale prices have also increased, similar to when VAT was initially rolled out in 2018, with metal product prices leading the way: these hikes will also filter down to the end-user.

Household spending will be negatively impacted by the VAT hike (as seen from recent SAMA data), there seems to be an increase in cement sales – a proxy for the construction sector spending – after the expected dip during the lockdown period. This could be a result of work continuing on mega-projects like NEOM in addition to a boost from the housing market. The surge in mortgage loans this year (+94.4% year-to-date, with the value in Jun 2020 more than three-times compared to Jun 2019) and the announcement that homes priced at SAR 850k and below will not be subject to VAT will support the housing market. Risks of a severe slowdown in government spending and/or delayed payments could however affect near-term demand.

  1. Oil sector in Saudi Arabia

The latest trade data from Saudi Arabia shows a drop in overall exports in Q2 this year (-53.6% yoy): oil exports were down by 61.8% yoy, and the share of oil exports fell to 64% in Q2 2020 vs 77.5% in Q2 2019. Partly attributable to the OPEC+ cuts and overall weak global demand for oil (given Covid19), this implies a substantial reduction in government revenues from oil (in 2019, an estimated 63% of total revenues was derived from oil). At the same time, non-oil revenue will also have declined: government’s postponement of some taxes and fees will bite into revenues and lockdowns would have negatively affected private sector activity.

Q1 has already posted a budget deficit of SAR 34.1bn, and the IMF estimates (as of June 2020) overall fiscal deficit to widen to 11.4% of GDP this year from 4.5% a year ago. Fiscal consolidation efforts have been a cornerstone of every reform discussion and will likely continue to be – removal of subsidies, reducing public wage bills, raising non-oil revenues – at least in the near-term. This will likely be accompanied by more international debt issuances to finance the deficits, in addition to developing its fledgling local debt market.

The recently released data on world energy from BP shows that though Saudi Arabia is now the second-largest producer of oil globally (behind the US), its proven reserves still account for 17.2% of overall global reserves. But, with the rising rhetoric that oil demand may already have peaked, the pertinent question is whether oil could end up being a stranded asset sooner than later. In this backdrop, with the Covid19 pandemic and a resultant push for climate change policies (before it is too late), it is imperative that the recovery model for Saudi Arabia (and rest of the fuel-exporting nations) includes a strong clean energy policy component within overall reforms, alongside a recasting of its economic diversification model and social contracts.

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Weekly Economic Commentary – Sep 20, 2020

Markets
In a week dominated by central bank meetings and resurgence in Covid19 cases, stock markets closed mostly down. In the US, Fed statements and lack of progress on a potential relief package kept investors concerned, while in the UK it was the BoE announcement alongside higher chances of new lockdowns and the Brexit drama. Asia bucked the trend, as Chinese stocks gained; the MSCI world index posted its first weekly gain in 3 weeks. Regional markets, with the exception of Oman and Abu Dhabi, rose last week. The CNY had its best week in 10 months after economic indicators signaled a recovery. Oil was mixed: it had gained earlier in the week as Saudi Arabia pressed OPEC counterparts to meet output quotas. A weaker dollar supported the gold price record a second consecutive weekly gain.

Weekly % changes for last week (17-18 Sep) from 10th Sep (regional) and 11th Sep (international).

Global Developments
US/Americas:

  • The Fed signaled that it would hold interest rates between 0-25% until at least end-2023 i.e. until maximum employment is reached, and inflation rises to 2% and remains on track to “moderately exceed 2% for some time.”
  • US industrial production slowed in Aug, rising by just 0.4% mom, after pickups of 3.5% and 6.1% in Jul and Jun respectively. The dip was largely due to a 3.7% drop in auto factory production while mining fell by 2.5%. IP is still 7.3% below where it was pre-Covid19 in Feb. Capacity utilization was up marginally, to 71.4% from 71.1% in Jul.
  • Retail sales spending in the US eased in Aug, up 0.6% mom (Jul: 0.9%), as federal aid ended. Sales picked up in food and drink (4.7%), clothing (2.9%) and furniture (2.1%), while spending at department and grocery stores fell by 2.3% and 1.6% respectively. Core retail sales fell by 0.1% (Jul: +0.9%).
  • Housing starts fell by 5.1% in Aug to a seasonally adjusted annual rate of 1.416mn units, pulled down by a 22.7% fall in starts for multi-family housing. Building permits declined by 0.9% mom to 1.47mn in Aug, after hitting a 6-month high of 1.483mn in Jul.
  • The Michigan consumer sentiment index increased to a 6-month high of 78.9 in Sep, but remains about 22 points away from the pre-pandemic high. Its index of consumer expectations also touched a 6-month high of 73.5 (Aug: 68.5)
  • Initial jobless claims dropped to 860k in the week ended Sep 11, from an upwardly revised 893k the week before, making it the 26th straight week that unemployment claims remained above a pre-pandemic record. Continuing claims fell by 916k to a seasonally adjusted 12.63mn in the week ended Sep 5 – the lowest level since Apr 4.

Europe:

  • German ZEW economic sentiment increased to 77.4 in Sep (Aug: 71.5) and the current situation reading improved as well (-66.2 from -81.3 in Aug), thereby improving overall outlook. The ZEW economic sentiment for the wider EU also picked up, by 9.9 points to 73.9 in Sep; while outlook improved, it was to a lesser extent than for Germany.
  • German producer price index declined by 1.2% yoy in Aug, registering the 7th consecutive month of decline. Prices dropped thanks to lower energy prices (-3.9%) as well as prices of intermediate goods (-2%). Excluding energy, producer prices fell 0.4% in Aug, the same pace as in Jul. In mom terms, producer prices remained unchanged.
  • Industrial production in the eurozone eased to 4.1% mom in Jul, after a 9.5% surge in Jun. Growth was supported by increases in France (3.8%) and Germany (+2.4%), with capital goods (5.3%) and durable consumer goods (4.7%) ticking up. In yoy terms, IP was down by 7.7% after Jun’s 12% drop.
  • Inflation in the eurozone stood at -0.4% mom in Aug (Jul: -0.4%), thanks to a drop in prices of energy and industrial goods. Core inflation also fell in Aug, to -0.6% from the previous month’s -0.5%.
  • The Bank of England kept interest rates at 0.1% and decided not to increase its asset purchase programme, while stating that economic outlook remains “unusually uncertain”.
  • Inflation in the UK fell to 0.2% yoy in Aug, the lowest rate since Dec 2015, thanks to a temporary VAT cut and as prices in restaurants and cafes fell by 2.6% yoy (the first ever negative since records began). Core CPI eased to 0.9% yoy from 1.8% the month before.
  • UK’s ILO unemployment rate inched up to 4.1% in the 3 months to Jul from 3.9% before. The average earnings excluding bonus rose 0.2% vs a 0.2% drop in the previous reading.
  • Retail sales in UK picked up for the 4th straight month, up by 0.8% mom in Aug, supported by increased sales of DIY goods; sales are now 4% higher than in Feb (pre-pandemic) and higher by 2.8% yoy – the fastest annual rise since Oct 2019.

Asia Pacific:

  • China’s FDI increased by 2.6% yoy in Jan-Aug vs 0.5% for the Jan-Jul period; investment in the high-tech service sector surged 28.2%. Fixed asset investment dropped by 0.3% ytd (till Aug), an improvement from the 1.6% drop in the months till Jul.
  • Industrial production in China grew by 5.6% in Aug (Jul: 4.8%) – the best growth number reported since Dec 2019. Retail sales moved to a positive 0.5% growth in Aug – the first growth in the retail sector this year – after a drop of 1.1% the month before.
  • The Bank of Japan left monetary policy unchanged, but upgraded its economic assessment, revealing that economy has started to pick up but remained in “a severe situation” due to the impact of the coronavirus pandemic at home and abroad.
  • Inflation in Japan (excluding fresh food) fell by 0.4% yoy in Aug, largely due to a 32% drop in the cost of hotel accommodations. Core-core inflation (excluding both energy and fresh food) fell 0.1%, the lowest since Mar 2017.
  • Industrial production in Japan climbed by 8.7% mom in Jul, following a 1.9% gain the month before, thanks to motor vehicle output (+38.4%). In yoy terms though, IP dipped by 15.5% yoy (Jun: -18.2%). Capacity utilization improved to 9.6% from Jun’s 6.2% rise.
  • Japan’s exports and imports continued to fall in Aug, though at a slower pace: exports were down for the 21st consecutive month (-14.8% yoy vs Jul’s -19.2%) on fewer shipments of cars and mineral fuels while imports dropped by 20.8% (22.3%). Exports to China, Japan’s largest trading partner, rose 5.1% yoy in Aug, helped by a sharp increase in shipments of semiconductors.
  • Retail inflation in India eased to 6.69% in Aug (Jul: 6.73%), as food costs slowed (9.05% from Jul’s 9.27%) – but stayed above the outer band of RBI’s inflation target. WPI inflation stood at a 5-month high of16% in Jul, recovering from the previous month’s drop of 0.58%.
  • Unemployment in Singapore stood at 8% in Q2: resident unemployment hiked up to 3.8% and among citizens to 4%, but remained below past recessionary highs.

Bottom line: After back-to-back central bank meetings last week, this week China is likely to hold interest rates steady, its economic indicators have been showing a relatively stronger recovery compared to its global counterparts (partly as the virus affected the nation first). With rising daily infections in some European nations, calls for a second lockdown are getting stronger; Israel and parts of Madrid are already in lockdown. However, there are some signs of “relative” recovery: WTO’s services trade barometer shows resilience in some sectors, as well as a pickup in container traffic.    

Regional Developments

  • Bahrain will pay the electricity, water and municipal fees bills for its citizens for three months, while also encouraging banks to postpone loan repayments for those affected by the pandemic until end of this year in a way that “does not affect banks’ liquidity and financial solvency”. Separately, BHD 17 mn (USD 45mn) was disbursed to eligible citizens benefiting from government subsidies on Sep 15.
  • Bahrain-origin exports grew by 2% yoy to BHD 190mn (USD 501.1mn) in Aug; Saudi Arabia, US and Oman were the top 3 destinations, together accounting for 45.8% of total value.
  • The central bank of Bahrain reported a nearly 8-fold surge in electronic real-time fund transfers for 2 months in a row.
  • Bahrain introduced amendments to some provisions of the corporate law, issued by decree 21 of 2001, with an aim towards consolidating minority investor rights, allowing the establishment of non-profit companies and providing legal tools for mergers and acquisitions.
  • The King Fahd Causeway linking Bahrain and Saudi Arabia has reopened, with PCR tests required either at the causeway or results from one conducted 72 hours before travel.
  • S&P warned that there is likely to be a deterioration in asset quality indicators in Bahrain, though it will remain “broadly manageable” in light of the central bank policies to support the economy during Covid19.
  • The central bank of Egypt revealed that postponement of credit installments (in place for past 6 months) ended on Sep 15th. Banks have been asked to review existing credit facilities, and even provide an option to restructure clients’ debts as per customers’ ability to pay.
  • Egypt signed three agreements worth USD 885mn with Arab funds to finance the Sinai Peninsula Development Program. The funds will support structural reforms, raise efficiency of the government’s management of public finance and help combat the Covid19 outbreak.
  • Egypt is planning to invest EGP 60.6bn (~8.2% of total investments) into the development of petroleum, natural gas & mineral resources sector during the current fiscal year 2020-21.
  • While Egypt invested EGP 100bn in the educational sector in the past 6 years, a further EGP 40bn is needed to create 73k new classes to resolve overcrowding in public schools.
  • Jordan’s PM disclosed that the Jordan Investment Commission had received 139 new investment applications since the outbreak of Covid-19.
  • The Independent Election Commission in Jordan has assigned Oct 6-8 as the days for individuals to register to run for the elections to be held on Nov 10th.
  • In-class education in Jordan’s schools has been suspended for 2 weeks from Thurs, in addition to closure of mosques, churches and popular markets, in a bid to contain the Covid19 surge.
  • Boursa Kuwait made its public debut last week, about 3 months before the bourse’s inclusion in the MSCI Emerging Markets Index, trading at 10X its offer price on its initial day.
  • Land border crossings between Saudi Arabia and Kuwait have been reopened, with a PCR certificate necessary for movement between the two nations. A 14-day mandatory home quarantine is also prescribed.
  • Lebanon’s PM designate is still in discussions to form a new government after failing to do so within the Sep 15 deadline; talks stalled after the PM proposed that 4 key ministries – Interior, Defence, Finance and Foreign – be rotated among the main religious sects.
  • UNICEF launched a cash grant program for Beirut blast victims – a one-off transfer of LBP 840,000 for eligible household members living in priority areas – with an aim of reaching around 80k children and vulnerable individuals.
  • Oman and India are in talks to establish an “air bubble”, revealed the CEO of SalamAir.
  • Inflation in Saudi Arabia surged by 6.2% yoy in Aug, rising for the second consecutive month after VAT was raised to 15%. Food, tobacco and transport costs were up by 13.5%, 13% and 8.2% respectively. Month-on-month inflation was subdued at 0.2%.
  • Saudi Arabia’s crude oil exports rebounded in Jul to 5.73mn barrels per day (bpd) from Jun’s record low 4.98mn bpd.
  • Saudi ports reported a 12% increase in containers to 664k in Aug; transshipments grew by 21% to 225k containers.
  • International flights resumed in Saudi Arabia last week (Sep 15th): entry is permitted to GCC citizens as well as non-Saudi passengers holding a valid visa, including exit and re-entry, residency permit (iqama), and visit visas to and from the country. Total lifting of the travel suspension (i.e. completely open borders) will be announced 30 days before Jan 1st
  • At a closed-door OPEC+ meeting, the possibility of holding an extraordinary meeting in Oct was discussed in case oil markets weakened further. The meeting also called for compliance to OPEC+ cuts in light of overproduction in some nations (Iraq, Nigeria and UAE).
  • Abu Dhabi and Dubai ranked 42 (up 14 spots) and 43 (+2) among 109 cities in IMD’s 2020 Smart City Index; Riyadh climbed 18 places to 53. Survey responses covered 5 key areas: health and safety, mobility, activities, opportunities and governance. Singapore, Helsinki, Zurich, Auckland and Oslo rounded the top 5 in the list.

UAE Focus

  • A new law provides Abu Dhabi Accountability Authority the power to closely monitor, in real time, financial activities and spending in both government bodies and GREs – a significant move from being able to just review the financial results of such entities previously.
  • The normalization of UAE-Israel ties is estimated to bring business deals worth USD 300-550mn. Multiple deals have already been announced: ENBD signed agreements with Israel’s biggest lenders; DMCC’s Dubai Diamond Exchange and the Israel Diamond Exchange signed a deal to boost trade; DP World and Dubai Customs agreed to form trade links with Israel. Separately, it was disclosed by the UAE minister of economy that discussions are ongoing to include some Palestinian areas as part of the bilateral economic agreements.
  • Inflation in Dubai declined by 3.69% yoy and 0.32% mom in Aug, as housing and utilities costs fell by 5.72% yoy alongside a drop of 13% and 15% respectively in transportation and entertainment costs; food and beverage prices were up by 2.81%.
  • The UAE central bank governor reiterated commitment towards Financial Action Task Force (FATF) standards: he cited the launch of the smart tool “Fawri Tick” to monitor terrorism financing as well as making the registration of hawala providers mandatory with the central bank as 2 instances to strengthen oversight.
  • A senior official at the Abu Dhabi Islamic Bank disclosed that overall loan activity in the region is down by 20-25% compared to a year ago, though there was a significant uptick in GRE deals.
  • The Abu Dhabi Investment Authority disclosed, in an SEC filing, a05% stake in US LNG producer Cheniere Energy; value of the stake is around USD 615mn.
  • The expansion of Khalifa Port Logistics, South Quay and Abu Dhabi Terminals is on track to be completed next year, disclosed Abu Dhabi Ports. The Ports also plan to halve its emissions with the use of a solar-panelled steel and aluminium container to allow in-row cooling, renewable energy and efficient space allocation.
  • Dubai reduced carbon emissions by 22% last year, cutting more than 14mn tonnes of emissions.

Media Review
Shaping the Trend of Our Time
https://www.unenvironment.org/news-and-stories/story/shaping-trends-our-time
Did Trump’s tariffs benefit American workers and national security?
https://www.brookings.edu/policy2020/votervital/did-trumps-tariffs-benefit-american-workers-and-national-security

The Rise of Covidnomics
https://www.project-syndicate.org/commentary/covid19-policies-medicine-economics-human-behavior-by-kaushik-basu-2020-09

Dubai May Be as Indebted as South Africa If S&P Proves Right
https://www.bloomberg.com/amp/news/articles/2020-09-17/dubai-may-be-as-indebted-as-south-africa-if-dissenters-are-right

Lebanon’s monetary meltdown tests the limits of central banking | PIIE
https://www.piie.com/publications/policy-briefs/lebanons-monetary-meltdown-tests-limits-central-banking

US & the Middle East: strongmen contemplate post-Trump era | FT

https://www.ft.com/content/132ad76d-0ad4-4cf8-9dc7-acd1797c9e6d
World Bank’s Human Capital Index 2020
https://openknowledge.worldbank.org/handle/10986/34432

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Weekly Insights 14 Sep 2020: A Balance Act as UAE remains open amid Covid19 surge

Charts of the Week: This is a crucial period for GCC, including the UAE. How can one decide on the balance between reopening the economy, supporting economic activity, while also containing the spread of Covid19? What policy measures should top the list to support businesses and consumers?

1.Spread of Covid19 in the GCC/ UAE
Confirmed Covid19 cases in the Middle East has crossed 1.75mn, with the GCC nations accounting for 43.7% of total cases. Many of these nations have seen a recent spike in cases, after stay-at-home orders and travel restrictions were lifted in addition to reopening previously constrained activities (e.g. mosques, gyms, salons). Among the GCC nations, the spread of the outbreak is still varied. The chart on the right maps the share in total daily increase in confirmed cases per million persons (x-axis) against the share of the country in overall output (y-axis), with the size of the bubble denoting the 7-day average of the daily increase in cases.

Among the GCC nations, Oman seems to be relatively better off – when it comes to both the 7-day average of daily increase in Covid19 cases as well as the daily confirmed cases per million people; not surprising considering that it is the most “stringent” among the group – the Oxford Covid-19 government response stringency index[1] places Oman at 86.11 vs the least stringent being UAE at 36.11 (Sep 2020). The UAE, which accounts for one-fourth of GCC’s GDP, has the highest 7-day average of daily increase in Covid19 cases (size of bubble). While officials have stressed the need for greater adherence to social distancing measures, no lockdown has been imposed as yet. Within UAE, Dubai is already welcoming tourists subject to Covid19 negative tests.

Source: Worldometers, Our World in Data, Nasser Saidi & Associates. The size of the bubbles on the RHS chart denotes the 7-day average of daily increase in cases.
This implies a sharper downturn in GDP this year due to the outbreak, while the effects of lower oil prices and the OPEC+ led cut in oil production will worsen the growth outlook. Given the large proportion of expat population in the country, a dip in growth will also spillover into the labour-importing nations: ranging from job losses (& the return of these residents to home countries), as well as lower remittances. In anticipation of lower growth this year, the government and central bank have rolled out private sector stimulus packages to support the economy, while reducing expenditures (UAE posted a record budget surplus of AED 9.75bn in Q2 this year). The Federal ministries have reduced spending (including compensation of employees), with overall cuts in capital and infrastructure spending will be detrimental to economic growth.

To compensate from lower oil prices and lower non-oil fiscal revenues, borrowing from international capital markets has gathered steam: so far this year, Abu Dhabi issued a USD 5bn multi-tranche bond (that included a 50-year tranche – the longest term for a bond issued by a GCC sovereign issuer) after having raised USD 10bn previously this year, while Dubai government sold a USD 2bn dual-tranche in early-Sep (the prospectus also disclosed that the emirate had raised over USD 3.6bn in debt this year through several instruments, used to support Emirates Airlines and expenses related to the Expo). An important point to highlight is that though Dubai government debt is placed at USD 34bn, the exposure of government-related enterprises (GREs) were not disclosed – an amount estimated at more than USD 120bn by the IMF. A related point was mentioned in the previous weekly insights: bank credit to the public sector and government are rising, threatening to crowd out lending to the private sector (which recorded a 0.1% yoy dip in Jun).

2. Economic Activity in the UAE: PMI, Mobility Indicators & Traffic Congestion

PMI for both UAE and Dubai (most dependent on non-oil sectors) declined the most in Apr – to 44.1 and 41.7 respectively. Following that dip, the PMI readings have been rising in both UAE and Dubai, though it came to a halt in Aug. Employment continues to be the biggest drag on the index (the sub-index was at the lowest in 11 years in the UAE while in a 6th consecutive month of contraction in Dubai) while a rise in sales and related spending was attributed to steeper price discounting (respondent firms generally pointed towards subdued customer demand, not surprising given the wider economic uncertainties).

Retail and recreation readings are just under 15% lower than the baseline case in the UAE. There is however a slight difference between Dubai and Abu Dhabi with the latter having recovered faster – probably more confidence as result of specific lockdown restrictions (i.e. need to provide a negative test result to enter the emirate). Workplace is still 25% lower compared to the baseline – possibly the result of working from home policies in many firms. Congestion statistics already show a slow pickup – but below pre-Covid19 levels – more so in Dubai than Abu Dhabi.

3. Policy recommendations for the UAE
As businesses adjust, governments can provide stimulus support to facilitate transition to the new normal. The focus in this section is businesses and consumers. The main immediate concern for firms is operating costs and cash flow: lowering rents/ license fees or offering installment plans for payment of license fees/ rents would help ease financial burdens. Additionally, the government could offer grants to support firms’ digitalization/ roll out of innovative processes. Strains on businesses could have a spillover effect on the banking sector via non-performing loans or increased flight risk of business owners unable to meet repayments. Towards this end, an extension of loan repayments deferment should be considered by the central bank (this has already been done by other GCC nations). Banks should also be nudged to lend to the SMEs and not just already “established” firms with a better financial standing: this could take the form of working capital loans or trade loans, with a SME guarantee scheme (specifying criteria for eligible lenders and the assessment process).

As firms’ lower headcount to adjust, it would be beneficial to remove barriers to labour mobility (e.g. allowing part-time work visas/ freelancing options versus being tied to a specific company): this would allow employees (and families) to remain in the country to search for alternative jobs (and continue school, visit malls and use hospitals among others thereby contributing to overall consumer spending). Ensuring that sudden job losses will not require a move back to their native country, will increase confidence to invest in the economy (be it real estate or starting new business ventures). A longer-term policy would be to establish social security nets and/or unemployment insurance to reduce financial burdens alongside jobs support schemes.

[1] Check https://ourworldindata.org/grapher/covid-stringency-index?year=latest&time=2020-01-22..latest

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Weekly Economic Commentary – Sep 13, 2020

Markets
Markets were down in the US after a relief package was voted down on Thurs; in Europe, the FTSE finished 4% above compared to a week ago (partly thanks to the weaker pound and the UK-Japan trade deal) and Stoxx closed higher supported by a rebound in the tech and telecom sectors mid-week. I; in Asia, Chinese shares posted the biggest weekly drop in 8 weeks as US tensions rise. Regionally markets were mostly down, given weak oil prices and losses in financial shares, with the exception of Saudi Arabia. Among currencies, the sterling tumbled by 3.7% vis-à-vis the dollar given Brexit worries while the euro strengthened after comments from the ECB. Oil prices had a volatile week, with concerns about weak demand and crude futures falling below USD 40 a barrel for the first time since Jun; gold prices were up.

Weekly % changes for last week (10-11 Sep) from 3rd Sep (regional) and 4th Sep (international).

Global Developments
US/Americas:

  • US producer price index edged up by 0.3% mom in Aug, following a 0.6% rise in Jul, led by a gain in services (+0.5%) while prices for goods were up only 0.1%.
  • Inflation in the US nudged up by 0.4% mom in Aug, rising for the 3rd straight month. Used cars and trucks saw a 5.4% surge in prices and prices for eating out rose. Core CPI meanwhile increased to 1.7% yoy, the highest since the pandemic began.
  • Initial jobless claims held steady at 884k after the previous week’s numbers were revised upward (that drop was largely a result of a change in methodology). Continuing claims rose to 13.385mn in the week of Aug 29 versus 13. 292mn a week before.

Europe:

  • ECB left policy rates unchanged, as expected, while Lagarde revealed that the euro’s rise is being closely monitored, especially “with regard to its implications for the medium-term inflation outlook”.
  • Q2 GDP in Germany plummeted by 11.8% qoq and 14.7% yoy, slightly lower than the initial estimate of a 12.1% decline.
  • Germany industrial production inched up by 1.2% mom in Jul following Jun’s 9.3% surge, with intermediate goods, capital goods and consumer goods gaining by 4%, 2.1% and 1.8% respectively. Production in the auto sector is recovering, up 6.9% in Jul, but still over 15% below Feb 2020 readings.
  • German trade surplus increased to EUR 18bn in Jul – the highest since Feb – from Jun’s EUR 14.5bn. Exports increased for a 3rd consecutive month, up 4.7% mom and imports by 1.1%. Current account surplus narrowed to EUR 20bn from EUR 20.4 the month prior.
  • Inflation in Germany stalled at 0% in Aug, thanks to lower energy prices – motor fuel and heating oil prices were down 11.3% and 32.7% respectively – and the temporary reduction in VAT (in place till Dec).
  • UK GDP expanded by 6.6% in Jul compared with the month before, following growth rates of 8.7% in Jun and 2.4% in May; growth was registered across the board in Jul: construction surged by 17.6% (thanks to a 30% expansion in new housing), manufacturing output increased by 6.3%, services were up 6.1% and agriculture expanded by 1.1%. The economy has recovered just over half its lost output during the shutdowns and in the 3 months to Jul, it shrank by 7.6%.
  • UK industrial production plunged by 7.8% yoy in Jul (Jun: -12.5%), posting the 16th consecutive month of decline in activity. In month-on-month terms, manufacturing and industrial output grew by 6.3% (Jun: 11%) and 5.2% (Jun: 9.3%) respectively in Jul.

Asia Pacific:

  • China’s exports increased by 9.5% yoy in Aug – the fastest pace in 1.5 years – while imports dipped by 2.1%, resulting in a lower trade surplus of USD 58.9bn. Lower imports point towards weaker domestic consumption. China’s trade surplus with the US widened to USD 34.24bn in Aug (Jul: USD 32.46bn).
  • Chinese banks extended CNY 1.28trn (USD 187.25bn) in new loans in Aug, up 29% mom, as both household loans and corporate loans expanded by 11.1% and 119.2% respectively. Money supply grew by 10.4% yoy in Aug (unchanged from Jul’s pace) and the annual growth of outstanding total social financing (TSF) grew by 13.3% yoy (Jul: 12.9%). In Aug, TSF more than doubled to CNY 3.58trn from CNY 1.69trn in Jul.
  • Inflation in China eased in Aug, rising by 2.4% yoy (Jul: 2.7%), as food prices increased at a slower pace (11.2% in Aug vs 13.2% in Jul). Excluding food and energy, core CPI rose 0.5% yoy, on par with Jul. Producers price index fell 2% yoy in Aug (Jul: -2.4%), though climbing by 0.3% mom.
  • Foreign exchange reserves in China increased to USD 3.165trn in Aug (Jul: USD 3.154trn).
  • Preliminary estimates for Japan’s leading economic index improved to 86.9 in Jul (Jun: 83.8); the coincident index also increased to 76.2 from 74.4 the month before. The Cabinet Office continued to rate the economy as “worsening” for the 12th straight month, the longest on record.
  • Japan’s GDP declined by a revised 7.9% qoq (preliminary estimate of a 7.8% drop) in Q2 with annualised GDP collapsing by 28.1%. The revision showed that capital investment declined 4.7% qoq, compared with the initial estimate of a 1.5% fall.
  • Overall household spending in Japan plunged by 7.6% yoy in Jul (Jun: -1.2%), the 10th straight monthly decline. Average monthly incomes have increased by 9.2% yoy in Jul, thanks to the government’s cash handouts, but people have been reluctant to spend. Spending on entertainment, clothing and transportation fell sharply by 21%, 20.2% and 19.6% respectively.
  • Core machinery orders in Japan rose by 6.3% mom in Jul (Jun: -7.6%); overseas orders, an early indicator for future exports, increased (for the first time in 5 months) by 13.8%.
  • Industrial output in India contracted for the fifth straight month, down 10.4% yoy in Jul (Jun: -15.7%; May: -34%). The consumer non-durables sector was the only subsector to post a growth (+6.7%) while consumer durables fell by 23.6% and capital goods productions dropped by 22.8% (Jun: -37.3%).

Bottom line: Even as Covid19 cases continue to surge – India recorded almost 100k cases in 24 hours, US cases rose by the most in a week, Israel (with 4k+ cases daily) is heading for a nationwide second lockdown (expected from this Fri) and Indonesia plans to reinstate a lockdown in Jakarta (from Sep 14) – politics seems to be taking a front seat with the runup to the US elections (latest being Trump’s calls to “decouple” from China) and the ongoing Brexit saga, where UK explicitly stated that it plans to breach parts of the Withdrawal Agreement treaty signed in Jan (clearly breaking international law); one positive move for UK was the signed trade deal with Japan.

Regional Developments

  • Bahrain became the second Arab nation to normalize relations with Israel within a month, following a similar move by the UAE. Both UAE and Bahrain will sign and formalize the deal at a Sep 15 ceremony at the White House. 4 Arab nations have now full diplomatic ties with Israel: Bahrain, Egypt, Jordan and the UAE.
  • Bahrain’s second international debt sale this year, USD 2-bn dual-tranche bond (which comprised a 7-year sukuk and a 12-year conventional tranche) received more than USD 7.6bn in combined orders.
  • About 85% of Bahraini parliament’s workload has been performed remotely since Feb, thereby saving thousands of dinars.
  • Bahrain resumed issuing visa on arrivals: for now, entry is restricted to citizens and for citizens of nationalities that are eligible for it. Separately, Bahrain and India entered an “air bubble” accord to permit bilateral travel of specific categories.
  • Egypt government extended the timeline for privatizing the state-owned electricity companies by 2 years to 2025. The privatization plan not only moves the state to a regulator only role, but also includes separating power generation from transmission and distribution.
  • Inflation in Egypt is estimated to average 6.2% in Q4 this year, according to the central bank governor. In Aug, the urban CPI decreased to 3.4% from the previous month’s 4.2%, largely due to the decline in food prices. Core inflation was at 0.8% in Aug (Jul: 0.7%).
  • Trade deficit in Egypt narrowed by 8.6% yoy to USD 3.3bn in Jun: exports declined by 7.9% yoy to USD 2.26bn while imports decreased at a faster pace of 8.3%.
  • Egypt’s net foreign reserves inched up to USD 38.36bn at end-Aug from Jul’s USD 38.315bn.
  • Egypt’s finance ministry approved urgent financial allocations of EGP 7.5bn to several state-run bodies including the General Authority for Supply Commodities (EGP 4bn), General Authority for Roads, Bridges, and Land Transport (EGP 1.27bn) and Ministry of Manpower (EGP 300mn) among others.
  • Investments into Egypt increased by 26% yoy in the fiscal year 2019-20, according to a Cabinet State. The planning minister disclosed that this year’s plan includes the implementation of 691 green projects at a total cost of EGP 447.3bn.
  • Egypt plans to raise its tax-to-GDP ratio to 16.5% from 14% currently, thanks to the implementation of related reforms including an expansion of the tax base.
  • The recently approved electronic payment law in Egypt will support the nation’s move to a non-cash economy, while also enabling financial inclusion, according to the finance minister. Entities to implement these regulations – schools and universities to communication services to transportation services – have been given a 6-month period to rollout non-cash payment methods at all outlets.
  • Egypt’s commodities exchange – initially trading wheat, oils, sugar and rice – will have EGP 91mn in capital and launch in H1 2021. There was no clarity as to how the grains would be priced on the exchange and whether the government would purchase directly from it.
  • Egypt’s 2020-21 academic year will start on Oct 17th, with the biggest challenge ensuring adherence to social distancing measures.
  • Unemployment rate in Jordan rose to 23% in Q2 this year, up 3.8% yoy; more than half of the unemployed individuals (51.6%) held a secondary school certificate or more. Unemployment rates were higher among women (28.5%) versus male unemployment rate at 21.5%.
  • Jordan resumed international flights from last Tues, handling a total of six flights a day to start with.
  • Jordan is rolling out a compulsory 1-year military service for persons aged 25-29 (who are unemployed, and with no social security subscriptions in the last year prior to conscription) as “part of the plan to address poverty and unemployment while investing in our youth”. The plan includes three months of military training, with the other nine devoted to professional and technical training in the private sector. The women will be exempt from the 3-month military training phase. A monthly payment of JOD 100 will be offered during the service period.
  • The Arab Monetary Fund extended a loan of USD 41mn to Jordan, to provide financial support to the Kingdom and meet its emergency needs.
  • Kuwait Parliament’s Human Resources Development Committee is almost ready with its report on the demographics of the country. Sources revealed that the quota system will be applied on jobs rather than the nationality i.e. number of expats in a particular job should not exceed 20%. Separately, competency tests were being planned for expats applying to 20 professions.
  • Kuwait plans to float three tenders, worth KWD 19.479mn, to develop and modernize the power network.
  • Lebanon’s PM designate is still under pressure to announce his cabinet this week; US sanctions on two former Ministers ratchets pressure on the ruling political class.
  • IMF stated that it stands ready to “redouble its efforts” to support Lebanon while reiterating the need for an accounting and financial audit of Lebanon’s central bank to assess its assets and liabilities. This audit will also help understand the central bank’s financing of government operations and its “financial engineering” of the apex bank’s own net worth. The finance ministry disclosed that the financial audit is underway with Alverez submitting to the finance minister a “preliminary list of information required from BdL”. More on the IMF’s press briefing: https://www.imf.org/en/News/Articles/2020/09/10/tr091020-transcript-of-imf-press-briefing
  • A second stimulus package has been announced in Oman to support economic recovery: this includes an extension of the existing loan deferment scheme, enhancing the tenor and limit of the forex swap facility, revising the loan-to-value ratio for housing loans and a potential relaxation of the liquidity coverage ratio for banks (on a case-by-case basis).
  • Oman plans to tap the local and international debt markets to support its finances that have been dented by the low oil prices and the Covid19 outbreak. So far, local development bonds worth OMR 550mn have been issued in addition to securing a USD 2bn bridge loan.
  • The total number of SMEs registered in Oman increased by 11.8% yoy to 45,094 at end-Jul 2020. Muscat account for just above 1/3-rd of the total registered SMEs in the country.
  • Citizens in Oman will be prioritized for sub-contracted roles across sectors including banking and finance, reported national daily Times of Oman.
  • Oman will restart international flights from Oct 1st, with flights scheduled according to the health data for specific destinations.
  • Saudi Arabia’s central bank governor disclosed that the outlook for the economy remains uncertain given current circumstances (low oil prices and the spread of the pandemic), while assuring the bank’s commitment to the dollar peg (an “overriding anchor”). He also cautioned against a deterioration in asset quality as central banks withdrew extraordinary support meted out to banks. Earlier in the week, the finance minister aired his view that the IMF’s growth forecast (-6.8%) this year is more pessimistic than their own.
  • During a conference, Saudi Arabia’s finance minister disclosed a few signs of recovery in the economy: privatization programs saved SAR 15.7bn of government expenditure, room occupancy rates jumped to 85-90% in 11 tourist destinations. (The complete interview can be accessed here: https://www.youtube.com/watch?v=O4Zu8ABlk0U)
  • Saudi Arabia improved its score in UNCTAD’s Liner Shipping Connectivity Index: it rose to 68.46 points in Q2 (vs Q1’s 56.3), above the average of 62.4 recorded in 2019.
  • Saudi Arabia’s Ministry of Industry and Mineral Resources issued 71 new licenses in Aug; the firms have a combined total of SAR 1.6bn capital and employs 2,991 regular workers.
  • Saudi Electricity Co issued the first-ever green sukuk by a Saudi Issuer, raising USD 1.3bn: projects identified include a smart metering project and renewable energy integration.
  • Saudi Arabia’s PIF is “looking at” investing in the IPO by Ant Group – touted as the world’s biggest ever likely raising up to USD30bn.
  • UAE’s ADIA ranked third among the top 89 global sovereign wealth funds, with USD 579.6bn in assets, according to the SWF Institute. ADIA was closely followed by the Kuwait Investment Authority (USD 533.7bn), Saudi PIF (USD 390bn) and the Investment Corporation of Dubai (USD 305.2bn).
  • The Airport Council International expects passenger traffic in the Middle East to slump to 170mn this year (-59.5% yoy), as a result of which regional airports will lose revenues (forecast to touch USD 5bn from a pre-Covd19 estimate of USD 13.2bn).

UAE Focus

  • Dubai PMI fell to 50.9 in Aug, from Jul’s 51.7: while output expanded for a 3rd consecutive month, it was at the slowest pace during the period (52.7 from Jul’s 56.1); employment fell for the 6th straight month (46 in Aug from Jul’s 46.8).
  • UAE posted a record budget surplus of AED 9.75bn in H1, with surpluses of AED 1.8bn and AED 7.95bn in Q1 and Q2 respectively. Revenues in H1 exceeded AED 34.7bn, with 56% of Q2 revenue generated by the Ministry of Finance.
  • The UAE central bank governor warned that central banks need to act in a “careful and phased manner” to avoid a credit supply squeeze when economies go through a recovery phase after Covid19.
  • The recently passed UAE law “Securing Interest with Movable Property” allows companies to use its assets (ranging from tools and raw materials to receivables and collaterals) against loans, thereby supporting SMEs and also making it easier for banks to expand their lending operations.
  • Etihad Airways will extend the period of reduced pay for its staff until end of this year. Salaries will be cut 10% from Sep (vs an earlier reduction of between 25-50%), reported Bloomberg though staff allowances had been reintroduced. In contrast, Emirates will be paying its full salaries starting Oct, as it flies to more destinations and after receiving support from the Dubai government as well as cutting spending (by also laying off its staff).
  • Abu Dhabi launched a new open data platform “Abu Dhabi Open Data” that offers more than 550 data sets on various sectors including agriculture, tourism, education, energy and technology.
  • UAE and South Korea have inked agreements to cooperate in 10 new sectors ranging from investments in SMEs to IT, AI, 5G technology as well as education, tourism and financial services (among others). The UAE is home to about 13k South Korean expats, and bilateral non-oil trade stood at USD 5bn last year.
  • The newly launched Abu Dhabi Youth Council initiative allows for young Emiratis to provide services as freelancers to projects announced on the Abu Dhabi Government Services website TAMM (and before a public tendering process is initiated).

Media Review
Statistics, lies and the virus: Tim Harford’s five lessons from a pandemic
https://www.ft.com/content/92f64ea9-3378-4ffe-9fff-318ed8e3245e

Egypt Prime Minister approves amendments to capital market regulation                
https://dailynewsegypt.com/2020/09/08/egypt-prime-minister-approves-amendments-to-capital-market-regulation/

CNBC’s interview with Lebanon’s central bank governor
https://www.cnbc.com/2020/09/08/lebanon-central-bank-governor-refuses-to-step-down-over-economic-crisis.html
https://www.youtube.com/watch?v=NEO4y-Jy5Pk

Create your own moody quarantine music with Google’s AI | MIT Technology Review
https://www.technologyreview.com/2020/09/04/1008151/google-ai-machine-learning-quarantine-music/

Is the office obsolete?
https://www.economist.com/graphic-detail/2020/09/11/the-home-office
IEA’s Energy Technology Perspectives 2020
https://www.iea.org/reports/energy-technology-perspectives-2020

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Weekly Insights 7 Sep 2020: Businesses, Credit & Economic Activity in UAE & KSA

Charts of the Week: As manufacturing PMIs touch new highs in Aug, services PMI stalls. Regional activity is at odds with global peers. Are consumers/ businesses feeling the pinch of Saudi Arabia’s VAT hike? Why is the credit disbursement pattern different in the UAE?

1. Manufacturing PMIs: Global vs. Regional
Manufacturing PMI numbers for August signal a tentative recovery compared to the massive dip in the Covid19 lockdown period. Global manufacturing PMI reached its highest in 21 months (51.8 from Jul’s 50.6), as output and new orders rose at the fastest rates since Apr and Jun respectively, while export demand stabilised. The headline manufacturing indices in the US and Europe improved as restrictions were lifted and more production came online. However, a key point to note is that in many cases export demand has not recovered as much as domestic demand (post lockdown). Meanwhile, services sector activity has almost stalled: the initial rebound is tapering off given ongoing social restriction policies. The bottom line is that though PMIs have shown some improvement, the impact might be hampered by rising unemployment, subdued international demand alongside overall economic and public health uncertainty.

From the list above, only Japan and countries from the Middle East are sub-50 indicating a contraction. Egypt posted the 13th straight month of contraction in Aug, while both Saudi Arabia and UAE moved below 50. The relevant question for the region is why? A sharp decline in jobs is the main drag on headline indices, as firms try to lower operational costs amid a scenario of weak demand and subdued growth prospects. In the UAE, not only did the employment sub-index fall to its lowest in 11 years (with one in 5 panelists reducing number of employees) but firms also had to deal with price discounting to remain competitive. In Saudi Arabia, the hike in VAT (from Jul) drove up input costs, adding more pressure on firms. Overall, a prolonged weaker recovery could lead to firm closures, that would lead to job losses, bankruptcies as well as an impact on the banking sector via an increase in NPLs.

2. Saudi Arabia impacted by the VAT hike: how has consumer spending fared?

Saudi Arabia’s VAT hike has negatively affected consumers as well as businesses. Consumers, who ratcheted up spending in June (similar to patterns in Dec 2017, prior to the introduction of VAT in Jan 2018), have reverted to “normal” spending habits come July. Comparing the patterns by sector, the difference in Jul is striking in purchases of big-ticket items – electronics, furniture, jewelry as well as construction and building materials. Interestingly, sectors like hotels, restaurants and clothing showed an uptick in spending in spite of the VAT hike – a probable explanation is end of lockdown and the Eid-al-Adha holidays which fell towards end of the month; new clothes are a must and restrictions on international travel resulted in people opting for more regional travel and staycations, thereby boosting payments at hotels and restaurants.

3. Is private sector activity supported by credit disbursement? A tale of two nations

Both the Saudi and UAE central banks have undertaken multiple measures to support their economies through this Covid19 phase: this includes increased liquidity, deferral of loan payments (which was recently extended further till Dec 2020 by SAMA) as well as support for the private sector (specifically those businesses most affected by the pandemic, and SMEs) from banks. However, while credit to the private sector has picked up in Saudi Arabia, the opposite was the case in the UAE. Why?

4. The big picture of credit activity in the UAE

On close inspection, lending to the private sector in the UAE has been on the decline since Aug 2018 and worsened during the pandemic phase (Fig 3). In both year-on-year and month-on-month terms, growth in credit to the public sector and government constantly outpaced the private sector, leading to a growing share of the public sector and government. UAE banks lent most to the business sector (50% of total, as of Jun 2020 vs. 53% in Jun 2019), while the public sector & government together account for close to 30% of all loans (vs. 24% a year ago). Lending remains quite high for construction/ real estate (20%), government (15%) and personal loans (20%); this compares to 21.8%, 12.9% and 21.2% respectively a year ago.

The UAE central bank has been proactive in releasing liquidity to the financial sector during Covid: in addition to the Targeted Economic Support Scheme (Tess) rolled out in Mar, in early-Aug it temporarily relaxed the net stable funding ratio (NSFR) and the advances-to-stable resources ratio (ASRR) by 10 percentage points to enhance banks’ capacity to support customers. As of July 18, banks had withdrawn AED 43.6bn, equivalent to 87.2%, of the AED 50bn Tess programme made available to them. The central bank also disclosed that, as of Jul 2020, 260k individuals and 9527 SMEs had availed the interest-free loans under Tess; credit to SMEs accounted for 9.3% of total amount disbursed to the private sector and individuals had received support worth AED 3.2bn from banks. This is but a drop in the ocean compared to the overall amount made available to the banks (i.e. AED 50bn Tess, part of the wider AED 100bn stimulus unveiled in Mar, and a further easing of buffers raising stimulus size to AED 256bn).
In this context, the questions to be answered are two-fold: 1. Are customers not seeking loans during these troubled times? Or 2. Are banks unwilling to lend during these troubled times? The answer is not crystal-clear, but more likely a combination of both (as evidenced below).

According to the latest “Credit Sentiment Survey” by the UAE central bank, about 53% of respondents stated that the demand for both business and personal loans in Q2 had declined either substantially or moderately. In the backdrop of Covid19, and heightened economic uncertainty, it is likely that consumers do not want to take on loans they cannot service or repay in case of job loss or firm closures; the same applies for businesses in sectors that are tourism-specific or aviation/travel-related firms or others affected by the pandemic (insolvencies/ bankruptcies). On the other hand, for banks, knowingly lending to such firms/ customers could result in an increase in NPLs that would affect their profit margins and bottom line: going by the H1 earnings of the 4 largest listed banks in the UAE, combined net profits are down by 36% yoy while provisions have increased (ENBD by 243% yoy). So, banks have tightened credit standards instead, hence lowering pace of lending to the private sector. Both demand side and supply side of credit are impacting credit.

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Weekly Economic Commentary – Sep 6, 2020

Markets
Most global equity markets were down last week, with the US Nasdaq’s run on technology stocks resulting in its worst weekly performance since Mar, while S&P posted its first weekly loss in 6 weeks. Though European equities ended the week lower, there was increased activity in financial shares on talks of potential mergers; UK markets are jittery, with EU talks set to resume on Sep 8th (and less than a month to the Oct 2 deadline for a deal). Asian markets mirrored the trend, also breaking a 6-week positive streak while in the Middle East, markets were up on positive news (e.g. Dubai’s retirement visa announcement boosted property stocks, Saudi CMA allowing foreign investors to invest directly in debt instruments supported the market). The dollar recovered from 2-year lows touched earlier, while the euro continued to decline: it hit USD 1.2 for the first time since 2018. Oil prices weakened on demand recovery concerns and gold prices dipped by 1.7%.

Weekly % changes for last week (3-4 Sep) from 27th Aug (regional) and 28th Aug (international).

Global Developments
US/Americas:

  • Non-farm payrolls increased by 1.371mn in Aug (Jul: 1.734mn), supported by government hiring of workers for Census 2020. Labour force participation rate stood at 61.7% vs Jul’s 61.4%, while the average hourly earnings ticked up by 0.4% mom and 4.7% yoy (Jul: 0.1% mom and 4.7% yoy). However, while temporary layoffs declined, permanent job losses jumped rising by 534k to 3.4mn. Unemployment rate declined to 8.4% (Jul: 10.2%), falling below the 10%-mark for the first time since Mar.
  • Factory orders climbed by 6.4% mom in Jul, thanks to an uptick in durable goods orders (+11.4%) and demand for transport equipment (+35.7%, boosted by vehicles and defense aircraft).
  • ISM manufacturing increased for the 3rd straight month to 56 in Aug (Jul: 54.2), also posting the highest level since Nov 2018, thanks to a pickup in new orders (67.6 in Aug from 61.5). Employment however remained sub-50, at 46.4 (Jul: 44.3).
  • The final Markit manufacturing PMI reading stood at 53.1 in Aug (flash estimate of 53.6, but higher than Jul’s 50.9), with an upturn in new orders while employment rose at the fastest since Nov 2019.
  • Private payrolls grew by 428k in Aug (Jul: 212k), disclosed ADP, with leisure and hospitality adding the most new jobs (+129k).
  • Initial jobless claims fell by 130k to a seasonally adjusted 881k in the last week of Aug. The Bureau of Labour Statistics has changed its method for adjusting initial jobless claims to account for seasonal swings in employment, given the yawning gap between the seasonally adjusted numbers and the actual number of people applying for benefits (A good pictorial analysis: https://twitter.com/econchart/status/1301532138261671936). Continuing claims eased to a pandemic-low of 13.25mn in the week of Aug 22 from 14.49mn a week prior.

Europe:

  • Germany inflation stood at 0.0% yoy in Aug (Jul: -0.1%), with the harmonized index dropping to -0.1% yoy (Jul: 0% yoy). The easing reflects the temporary VAT cut and low energy costs.
  • The German government revised upwards its forecast for the economy this year: to -5.8% from -6.3% previously. Forecasts for next year was lowered to 4.4% from 5.2% earlier.
  • German unemployment rate remained steady at 6.4% in Aug, given the support of its short-time work schemes; the change in the number of people out of work fell by 9k last month, from a 17k drop the month before.
  • Though German factory orders rose by 2.8% mom in Jul (Jun: +28.8%), it is still 8.2% lower than in Feb prior to the lockdown measures. A significant divergence was observed in orders: domestic industrial orders fell by 10.2% in Jul but orders from abroad were up 14.4%.
  • Germany manufacturing PMI inched down to 52.2 in Aug (Jul: 51), thanks to output growth (30-month high) and a sustained rise in new orders and export orders. Aug services PMI eased from a 13-month high of 55.6 in Jul to 52.5, with slower growth in hotels and restaurants and “other services”. Composite PMI also slipped to 54.4 from Jul’s near 2-year high (55.3).
  • EU manufacturing PMI was unchanged from the flash estimate of 7 in Aug (Jul: 51.8), thanks to gains in output and new orders. There were divergences across countries: while Italy posted the fastest growth rate in two years, Spain and France stagnated (readings of 49.9 and 49.8) respectively. Composite PMI fell to 51.9 (Jul: 54.9) as rate of growth eased in service sector activity (50.5 from Jul’s 54.7).
  • UK Markit manufacturing PMI eased slightly to 55.2 in Aug (Jul: 55.3) while the services PMI posted the sharpest increase since Apr 2015, posting a reading of 58.8 in Aug (Jul: 56.5). Spending was buoyed by the Eat Out Help Out scheme, and there was a recovery in demand for overall business services.
  • EU inflation fell to -0.2% yoy in Aug (Jul: 0.4%) while core CPI eased to 0.4% in Aug (Jul: 1.2%).
  • Unemployment rate in the euro area inched up to 7.9% in Jul (Jun: 7.7%) while in the whole EU area, it was up to 7.2% from the previous month’s 7.1%.

Asia Pacific:

  • China NBS manufacturing PMI edged down to 51 in Aug (Jul: 51.1), as while output and new orders grew (53.5 & 52 from 54 & 51.7 respectively), export sales and employment stayed below-50 (49.1 and 49.4 respectively). Non-manufacturing PMI rose to 55.2 in Aug (Jul: 52.1), staying above-50 for the 6th month running. Transportation and telecommunications sectors posted a faster recovery in business volume, the 4th consecutive month.
  • Caixin manufacturing PMI increased to 53.1 in Aug (Jul: 52.8), the fastest expansion in 9 years. Total new work expanded at the sharpest rate since the start of 2011 and new export sales rose for the first time since Dec 2019. Caixin services PMI edged down slightly to 54 in Aug (Jul: 54.1); employment increased across the sector for the first time since Jan.
  • Japan PMI picked up to 47.2 in Aug (Jul: 45.2), with weaker drops in output and orders.
  • Industrial production in Japan increased by 8.0% mom in Jul – at the fastest pace on record – following Jun’s 1.9% gain. In yoy terms, IP is still down 16.1% and likely to remain below pre-crisis levels in the near-term.
  • Japan retail sales declined by 3.3% mom and 2.8% yoy in Jul, falling for the 5th consecutive month, dragged down by a decline in car demand and dampened activity in department stores and supermarkets.
  • Japan unemployment rate inched up to 2.9% in Jul (Jun: 2.8%), with the job-to-applicants ratio slipping for the 7th consecutive month, from 1.11 to 1.08, lowest since Apr 2014.
  • Capital spending in Japan fell by 11.3% in Q2 (Q1: 0.1%), posting the worst decline since Q1 2010.
  • India GDP plunged by 23.9% in Apr-Jun 2020 – the largest slump since quarterly GDP started being reported in 1996. Sector-wise, only agriculture recorded a positive growth, at 3.4%; construction, manufacturing and trade&hospitality were down by 50.3%, 39.3% and 47% respectively. While government consumption picked up by 16%, it was not sufficient to offset the 47.1% collapse in investment and 26.7% drop in household consumption.
  • Manufacturing PMI in India expanded to 52 in Aug from 46 the previous month: both output and new orders expanded (the former for the first time since Mar). Services PMI removed below-50, though jumping to 41.8 in Aug from Jul’s 34.2 – the highest since Mar.
  • India fiscal deficit in the four months to Jul widened to INR 8.2trn (Apr-Jun: INR 6.6trn), or 103.1% of the budgeted target for the current fiscal year. Deficit for the full year is estimated to be more than double the 3.5% of GDP estimated initially by the government.
  • Korea GDP fell by 3.2% qoq and 2.7% yoy in Q2, revised from a 3.3% contraction estimated earlier. This still remains the sharpest decline since Q4 2008, and places the country in a technical recession (following Japan, Thailand and Singapore).
  • PMI in Korea stayed below-50 in Aug, but the reading at 48.5 was at a 6-month high and up from Jul’s 46.9.
  • South Korea’s current account surplus hit a 9-month high of USD 7.45bn in Jul – the highest since Oct 2019. Separately, trade surplus stood at USD 4.12bn in Aug as both exports and imports declined – by 9.9% and 16.3% respectively – for the 6th consecutive month.
  • Singapore PMI weakened to 43.6 in Aug (Jul: 45.6) after weaker external demand led to a sharp decline in new business.
  • Singapore retail sales fell by 8.5% yoy in Jul, following a revised 27.7% drop in Jun. Month-on-month values improved as most physical stores were closed during the circuit breaker measures in place till late Jun.

Bottom line: Last week saw a barrage of Aug PMI numbers: global manufacturing PMI reached its highest in 21 months (51.8 from Jul’s 50.6), as output and new orders rose at the fastest rates since Apr and Jun respectively, while export demand stabilised. The individual country numbers indicate that in many cases export demand has not recovered as much as domestic demand (post lockdowns). Recovery is choppy, with surges in Covid19 cases and restricted lockdowns (in a few places). Though PMIs have shown some improvement, the impact might be hampered by rising unemployment, subdued international demand alongside overall economic and health uncertainty. As in a first-in first-out model, China continues to outperform its global peers in terms of recovery (be it PMI numbers or GDP). Even in the IIF’s latest capital flows to emerging markets securities data, while overall flows fell more than 86% mom to USD 2.1bn in Aug, flows into China increased marginally by USD 600mn.

Regional Developments

  • After raising USD 2bn in May, Bahrain plans to tap debt capital markets again this year, reported Reuters. The benchmark issue will include both conventional and Islamic bonds.
  • Bahrain announced that organizational restructuring has been completed in 51 out of 57 government departments, in a move to increase operational efficiency and reduce costs.
  • Bahrain’s flexi-work permit has resulted in a 43% drop in the number of illegal workers, according to a Labour Market Regulatory Authority official.
  • Outdoor dining at cafes and restaurants have been reopened in Bahrain with appropriate social distancing and safety measures, after 5 months of closure.
  • Egypt’s PMI stayed below-50 in Aug, with a reading of 49.4 from Jul’s 49.6. Output and new orders were marginally up in non-oil companies, but sales remained weak given low demand. Jobs declined for the 10th consecutive month and was the main drag on the index.
  • Egypt repaid USD 6.8bn of foreign debt obligations in Q1, disclosed the central bank. The nation’s external debt decreased to USD 111.3bn by end-Q1.
  • The IMF forecasts Egypt’s real GDP to rise to 6.4% in the fiscal year 2021-22 from 2.8% at the end of the current fiscal year, as per the latest staff report. The external financing gap was estimated at roughly USD 9.2bn in FY 19-20 and USD 4.5bn in FY 20-21. Access the complete report: https://www.imf.org/en/Publications/CR/Issues/2020/09/01/Arab-Republic-of-Egypt-Request-for-Purchase-Under-the-Rapid-Financing-Instrument-Press-49724
  • Egypt signed a USD 2bn conventional and Islamic loan (approved by Parliament) with several banks (a deal coordinated by UAE’s lenders Emirates NBD and First Abu Dhabi Bank), to finance the state budget and support the economy.
  • Egypt welcomed about 150k tourists to its cities of Sharm El-Sheikh and Hurghada since tourism activity was permitted to resume on 1st Jul.
  • Egypt’s natural gas exports more than doubled to 4.5bn cubic metres in 2019, compared to 2bn in 2018, according to BP Statistics. Total gas output had touched a decade-high9bn cubic metres last year.
  • Iraq is requesting an exemption from the OPEC+ deal during Q1 2021 while complying with the cut in Q4 this year. The nation is expected to cut oil production by an additional 400k barrels per day (bpd) in Aug and Sep – in addition to the committed 850k bpd – to compensate for previous overproduction. Iraq’s total exports averaged 2.6mn bpd in Aug, according to the oil ministry, down from 2.763 bpd in Jul.
  • Iraq plans to speed up the petrochemical plant in Basra – currently in the pre-FEED (front end engineering design) stage – to diversify its income; once completed, the plant would make Iraq the region’s largest petrochem producer. The deal to build the USD 11bn plant was signed in 2015.
  • Jordan will resume international flight operations from Sep 8: in addition to submitting negative PCR tests, those from “green” and “yellow” countries will need to spend 1 week of self-isolation (if tested negative again, on arrival in Jordan). Separately, nearly 2mn children returned to schools last week; an estimated 40k pupils have been withdrawn from private schools (that educate half of school-going students in the country) due to financial concerns.
  • Jordan hiked fuel prices in Sep: prices of diesel and kerosene was increased by 3.2% mom to JD0.480 per litre. Petrol prices were up by 1.7%-3% mom, depending on the grade.
  • Jordan received USD 699.9mn last week, as part of the USD 845.1mn annual aid from the US. Separately, it was revealed that total foreign assistance received by Jordan in Jan-Jul this year totaled USD 1.7bn.
  • Kuwait’s government will discuss the proposed changes to the debt law, the finance minister revealed to the parliament. The government’s proposal of borrowing a maximum KWD 20bn over 30 years was countered by the parliament committee proposed debt ceiling of KWD 10bn and a repayment of 10 years. The committee also asked that the law be reconsidered within 3 years, with an onus on the minister to disclose repayment mechanisms.
  • Inflation in Kuwait increased by 1.92% yoy and 0.43% mom in Jul, as a result of rising prices of home furnishings (+4.2% yoy), tobacco (+3.9%), food and beverages (+3.74% yoy) and clothing (+3.27%).
  • Kuwait will not issue, transfer or renew work permits of those above 60 years of age, holding a high school diploma or lesser (or equivalent certificates): about 68,318 expats currently fall under this category. Those aged 59 or 60 can renew or transfer for only one year.
  • Lebanon’s new PM Mustapha Adib, named hours before Macron’s visit to the country, called for an immediate start to reforms and agreement with the IMF. Separately, a 3rd member of the negotiating (with the IMF) team resigned over talks which are at a standstill.
  • During his visit, Macron revealed that Lebanon’s leaders had promised the formation of a Cabinet in “not more than 15 days”, while reiterating that targeted sanctions (in coordination with the EU) could be imposed if corruption was proven. While promising to return in Dec, Macron also stated that expectations are for the government to deliver on promises within 8 weeks, and that “a blank check” would not be issued.
  • Lebanon’s caretaker finance minister signed contracts – with Alvarez & Marsal, KPMG and Oliver Wyman – to conduct a forensic audit of national finances, with the former firm conducting a forensic audit of the central bank. The contracts were not disclosed to reveal the scope of the audits.
  • The World Bank estimates that the Aug 4 explosion in Beirut caused up to USD 4.6bn in damage to infrastructure and physical assets in the capital city. The report estimates public sector reconstruction and recovery needs for this year and 2021 in the range of USD 1.8-2.2bn.
  • Beirut port’s capacity has been restored to a limited handling of 1500-3000 tonnes a day versus 10-15k tonnes of wheat and bulk imports per day prior to the Aug 4 blast, according to a senior UN official. The UN World Food Program was able to unload a shipment of 12500 tonnes of wheat flour, roughly half a month’s supply for the country.
  • World Bank cancelled USD 244mn in undisbursed funds for the Bisri Dam project in Lebanon, effective immediately due to government non-compliance with loan pre-conditions. The funding was put under partial suspension on Jun 26th.
  • Oman’s joint committee of the State Council and Shura Council has sent a draft VAT law for approval to the Sultan: the proposal is to implement VAT after Jan 2022.
  • Oman Civil Aviation Authority extended the ban on scheduled flights from Oman until further notice. Separately, Oman Air stated that their planes and staff were ready to fly anytime.
  • Schools in Oman can reopen with just 16 students per classroom, and a blended learning approach can be utilized, according to the Ministry of Education’s plans.
  • Qatar Airways reached a deal with Airbus to delay delivery of its airplanes, according to the former’s CEO, but continues to be in talks with Boeing.
  • PMI in Saudi Arabia weakened to 48.8 in Aug (Jul: 50): new business declined as a result of an uptick in input costs (the sharpest increase since Sep 2012, given the VAT hike) and low consumer spending alongside Covid19 safety measures. Employment also declined for the 6th consecutive month, though the fall was the slowest since May. However, confidence regarding future activity strengthened to a 6-month high.
  • Saudi Arabia’s Ministry of Investment issued 506 new business licenses in H1 2020 (-14% yoy); Q1 had registered a 20% yoy growth and was followed by a 47% decline in Q2. The ministry disclosed that in Q2, the primary sources of investment were US (54), India (49) and the UK (47) while entrepreneurship, education, financial services and housing were the most attractive sectors for investment.
  • Saudi Arabia’s Capital Market Authority revealed that it will allow foreigners to invest directly in listed and non-listed debt instruments, to develop and open its capital markets. Furthermore, it was revealed that CMA is studying the possibility for foreign (domestically registered) firms to offer shares in the capital market and the related regulatory framework will be completed by end-2021; plans are also underway to allow local companies to pursue dual listing in international markets.
  • The value of shares purchased at Tadawul increased by 32% mom to SAR 135.58bn (USD 36.15bn); shares purchased by citizens represented 90.14% of total shares purchased during this period.
  • SAMA extended deferrals on bank payments for 3 more months. Housing loans in Saudi Arabia surged by 55% yoy to SAR 11.1bn in Jul, according to SAMA’s latest statistical bulletin. Bank deposits increased by 9.4% to SAR 1.837trn in Jul while credit picked up by 13.2% yoy to SAR 1.686trn. Foreign reserve assets edged up by 0.11% mom to SAR 1.679trn in Jul, thanks to a surge in foreign cash and deposits abroad.
  • Saudi banks investments in government bonds grew by 20.8% yoy and 1.2% mom to SAR 433.25bn in Jul. Banks’ investments in government bonds accounted for 86.92% of total banks’ liabilities from the public sector (government and semi-government) by end- Jul.
  • Expat remittances from Saudi Arabia increased by 32.7% yoy and 8.66% mom to SAR 15.213bn (USD 4.05bn) in Jul, bringing total remittances this year to SAR 84.6bn (+16% yoy).
  • MSMEs in Saudi Arabia contribute 28.7% to GDP and 43.6% to non-oil GDP, according to the Saudi General Authority for Small and Medium Enterprises (Monshaat). The number of SMEs stood at 571,177 by end-Q2 and their employees’ salaries edged up by 1.6% yoy to SAR 10.675bn.
  • The Wall Street Journal reported that Saudi Aramco is reviewing (and slowing) expansion plans and pausing investments in refineries in China, India and Pakistan. Within Saudi Arabia, Aramco is delaying plans by a year to boost crude production capacity to 13mn barrels per day, from currently about 12mn.
  • Public sector employees in Saudi Arabia returned to offices after months; while work from home is still permitted, percentage of employees doing so should not exceed 25% of the total.
  • Both UAE and Saudi Arabia climbed up 2 places in the Global Innovation Index, reaching 34th and 66th places in the 2020 edition.

UAE Focus

  • UAE PMI declined to 49.4 in Aug (Jul: 50.8), in spite of expansions in the output and new orders sub-indices. Steep price discounting has resulted in rising domestic demand (And spending) but export sales are declining. Job cuts were widespread, with the PMI employment index at a record-low, while selling prices fell at the sharpest pace since Dec 2019.
  • The Government of Dubai issued a USD 2bn Sukuk: it included a 10-year Sukuk of USD 1bn at a profit rate of 2.763% and 30-year government bonds of USD 1bn at an interest of 3.90%. The issue was 5 times oversubscribed, with the order book value above USD 10bn. The bond prospectus showed government’s outstanding direct debt at AED 123.5bn (USD 33.6bn) as of June 30 (or 28% of 2019’s GDP). However, it sidestepped the issue of GRE debt stating that “there is no official information on either the aggregate amount or maturity profile of the indebtedness” of Dubai’s GRE debt. The document also revealed that AED 7.3bn had been pumped into Emirates airlines after the impact from Covid19.
  • Dubai announced a retirement visa programme: any resident or retiree outside the UAE, and over the age of 55 can apply for this program (initial phase will focus on residents). To qualify, the person needs to have a monthly income of AED 20k (USD 5446) – either from investments or pensions – or should have a savings of AED 1mn or a real estate assert worth AED 2mn. They can also work as independent advisors, board members or consultants.
  • The UAE central bank injected AED 15.86bn in cash to boost liquidity in Jun, after certificates of deposit dropped to AED 194.33bn by end-May from Apr’s AED 198.77bn.
  • In a bid to restrict competition between the government and private sector, Dubai has set new rules for establishing government companies. This standardizes procedures for setting up government-owned companies and ensures they have strong governance; in addition, the government entities can set up companies only if their main activities are in line with the agencies role and offer products of “strategic economic importance”.
  • Credit provided to the logistics, storage and communications sectors in the UAE surged by 47.4% to AED 84bn by end-Jun from end-Dec.
  • Consumer spending in the UAE increased by 63% in Aug (compared to Mar), according to FCSA data cited by Wam. Spending in restaurants, hotels and apparel were up by 75%, 29% and 78% respectively in the same period.
  • Dubai recorded 2,457 property sales transactions worth AED 4.73bn in Aug, up 11.3% yoy and 2.2% mom, according to data from Property Finder; of these, 31.6% were off-plan and rest in the secondary market.
  • Medical equipment including disposable suits, hand sanitisers, face masks, respirators for air purification and gloves will be subject to zero-rated VAT in UAE, as per a recent resolution.
  • Exports of Dubai Chamber of Commerce and Industry members to Africa rose by 20% mom to AED 2.94mn in Jun this year.
  • UAE approved a 5-day paternity paid leave for private sector employees, enabling them to take care of newborns. This can be availed anytime till the baby turns 6 months old.

Media Review
UAE Peace Deal Opens Doors for Secret Israeli-Iranian Pipeline and Big Oil Investments
https://foreignpolicy.com/2020/09/04/uae-israel-iran-oil/
SoftBank is the “Nasdaq whale”
https://www.ft.com/content/75587aa6-1f1f-4e9d-b334-3ff866753fa2
Macro consequences of pandemics
https://www.nber.org/papers/w27757.pdf
How did Americans use their coronavirus stimulus cheques? Less than half the money was spent
https://www.economist.com/graphic-detail/2020/09/02/how-did-americans-use-their-coronavirus-stimulus-cheques
World Bank: Decisive Action and Change Needed to Reform and Rebuild a Better Lebanon
https://www.worldbank.org/en/news/press-release/2020/08/30/beirut-explosion-decisive-action-and-change-needed-to-reform-and-rebuild-a-better-lebanon
 
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Weekly Insights 31 Aug 2020: Pandemic, Trade & New Beginnings

Charts of the Week: As confirmed cases of Covid19 crosses the 25 million mark, we look at the World Pandemic Uncertainty Index – needless to say, it is at its peak. But, the trade uncertainty index has come down from recent peaks. So, has trade managed to recover after the month(s)-long shutdowns? Who is recovering, and who’s lagging behind? Lastly, we look at the Middle East and the historic UAE-Israel accord, which opens up a new bilateral trade and investment link. 

  1. Global Pandemic and Trade Uncertainty

Covid19 confirmed cases crossed 25mn yesterday, with India posting a record daily toll (ahead of Unlock 4.0). As countries try to balance the fine line between human toll and economic recovery/damage, new surges across the globe are raising doubts about the V-shaped recovery. The World Pandemic Uncertainty Index is a measure of uncertainty based on discussions about pandemics/outbreaks at the global and country level. Needless to say, this index is at its peak in Q2 this year – much higher than in past outbreaks like SARS and Ebola.
Separately, World Trade Uncertainty Index – measures trade uncertainty in 143 countries based on the frequency with which the word “uncertainty” appears in EIU country reports – shows that the surge in trade uncertainty in late 2018 peaked in Q4 2019 (when the two top global exporters were at loggerheads) and has since then dropped. The index remained low and stable, even during times of the global financial crisis – when global trade had dropped substantially. Of course, protectionist rhetoric was not common then as it is now. Come Covid19, and trade “uncertainty” seems to have slipped back to relatively lower levels: not because trade is picking up, just that trade wars are no longer the primary concern for many countries! But beware: China-US tensions are bubbling up, given the buildup to the US Presidential elections.

  1. Are production and exports back on track in major Asian export-oriented nations?

So, how has trade performed during Covid19? In yesterday’s weekly commentary, the latest Netherlands CPB World Trade Monitor was referred to: global trade has rebounded by 7.6% mom in Jun. While it was the fastest monthly increase (as demand picked up) since records began in Jan 2000, volumes are still way below pre-pandemic levels. Apr-May were the hardest hit as lockdowns measures disrupted production, led to breaks in supply chains/ logistics services and demand dropped across the globe. Eurozone seems to have been the hardest hit during this period, given the drop in its industrial output as well: the gradual re-openings and latest PMI readings indicate some respite, but it remains to be seen if the momentum will continue.

Asia has recovered much faster compared to its global counterparts. Shipping/ aviation data point to a gradual rise, albeit from very low levels. The chart below tracks export recovery of a few Asian nations: exports from India dropped the most during Mar-Apr given the extended lockdown, but has since been rising as production resumed; other than Japan, where exports are still declining, major exporters are recovering (China is closest to Dec 2019 export levels and Japan the farthest; South Korea and Singapore have benefited from demand for electronics/ pharmaceuticals).

  1. UAE-Israel: mutual gains

In the context of trade, the UAE-Israel accord can act as a boost during the times of Covid19 and lower oil prices. Where are the major opportunities? Trade and tourism top the list (as mentioned in a previous edition of the Weekly Insights), in addition to the banking and financial services sector. Investment and capital flows are also likely to increase as the countries allow for market access and establishment. Today (Aug 31) sees the first commercial passenger flight taking off from Israel to Abu Dhabi in the UAE.

Above are two tables: one, outlining the WEF Competitiveness Index 2019 scores and ranks – Israel is ranked 20th globally, vs UAE’s 25th ranking. The UAE can offer Israel a better enabling environment – institutions, infrastructure and ICT adoption – and can benefit from Israel’s human capital component (labour market, health and skills) and innovation ecosystem (technology startups, business dynamism and innovation capability). Interestingly, firms in Israel identify an “inadequately educated workforce” as their biggest obstacle to doing business (table on the right)! This in spite of being one of the top three nations with the highest number of university degrees per capita. The table on biggest obstacles (on the right) are as identified by firms based in the country: the top five are highlighted in each column. From the table, Israel can benefit from UAE’s tax rates and political stability. Overall, the opening up process implies potential bilateral gains from trade and investment for both nations, especially during these trying times.

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Weekly Economic Commentary – Aug 30, 2020

Markets
US stocks rallied, supported by tech stocks and the Dow close to an all-time high. European stocks recovered from earlier losses and ended the week up 1% and the MSCI global index gained, after setting intraday highs. In Japan, stocks fell on the announcement of the PM’s resignation and the yen strengthened (biggest one-day jump since Mar). In the region, markets remained upbeat, with Oman gaining the most. The dollar weakened, approaching lows previously seen in May 2018 while euro gained (forex rates year-to-date 2020: tmsnrt.rs/2egbfVh). Oil prices picked up on fears of damage from Hurricane Laura, but subsided after the storm passed through with minimal damage; gold price increased by 1.3%.

Weekly % changes for last week (27-28 Aug) from 20th Aug (regional) and 21st Aug (international).

Global Developments
US/Americas:

  • At the Jackson Hole meeting, the Fed chair indicated a strategy change that would allow rates to be kept near zero even when inflation exceeds its 2% target in order to make up for past bouts of low inflation.
  • US GDP plummeted by 31.7% on an annualized basis in Q2 this year – the worst decline since records began, but revised down from the 32.9% initial estimate. Both private inventory investment and personal consumption expenditures (PCE) decreased less than previously estimated. The PCE price index decreased 1.8% in Q2 (Q1: +1.3%) while core PCE price index, excluding food and energy prices, decreased 1.0% (Q1: +1.6%).
  • Consumer spending in the US inched up by 1.9% in Jul, while income edged up by just 0.4% after two months of declines.
  • Durable goods orders surged by 11.2% mom in Jul (Jun: 7.7%), thanks to a 35.6% rise in orders for transport equipment. Non-defense capital goods orders, a proxy for business spending, increased by 1.9% following a 4.3% pick up the month before.
  • US Chicago Fed National Activity Index slipped to 1.18 in Jul from a record high reading of 5.33 in Jun. The index’s 3-month moving average rose to +3.59 in Jul (Jun: –2.78) – the first expansion since Jan.
  • S&P Case Shiller home price indices moved up by 3.5% yoy in Jun, down from 3.6% in the previous month. Unsold inventory is at a 3.1-month supply at the current sales pace, down from 3.9 months in Jun and from a 4.2-month supply in Jul 2019.
  • New home sales increased by 13.9% mom – the quickest pace in 13 years – to 901k units in Jul, supported by a rise in demand after the lockdown, need for more work-from-home space and record low mortgage rates. Pending home sales grew by 5.9% mom in Jul, following the 15.8% surge in Jun; sales were 15.5% higher annually.
  • Initial jobless claims touched 1.006mn in the week ended Aug 21, taking the 4-week average to 1.068mn. Continuing claims eased to a pandemic-low of 14.54mn in the week ended Aug 14, from 14.8mn a week ago.

Europe:

  • Germany’s GDP plummeted by 9.7% qoq and 11.3% yoy in Q2 – the worst ever documented, but a tad lower than the previously estimated 10.1% contraction. Consumer spending shrank by 10.9% in the quarter, capital investments by 19.6% and exports by 20.3%, while construction activity fell by 4.2%.
  • Germany recorded its biggest deficit (EUR 51.6bn) in a decade in H1 this year: for the first time since 2010, revenues were down yoy (with taxes dropping 8.1%) while government spending increased by 9.3%.
  • German Ifo business climate improved to 92.6 in Aug from Jul’s downwardly revised 90.4 – the 4th consecutive monthly increase. Both current assessment and expectations were more optimistic versus Jul’s reading.
  • The Gfk consumer confidence survey showed a dip in sentiment to -1.8 in Sep (Aug: -0.2), led by the drop in the income expectations index that fell to 12.8 in Aug (Jul: 18.6).
  • Euro area business climate indicator increased to -1.33 in Aug (Jul: -1.8), up from a decade low recorded in May (-2.39). Consumer confidence remained almost unchanged at 14.7 in Aug (Jul: -15), having recovered from Apr’s -22 reading.

Asia Pacific:

  • Japan leading economic index was revised down to 84.4 in Jun – the highest reading in 3 months – from the initial estimate of 85, but higher than May’s 78.3. The coincident index increased slightly to 76.6 from the preliminary figure of 76.4 and May’s 72.9.
  • Japan’s all industry activity index rose by 6.1% mom in Jun (May: -4.1%), after 4 months of monthly declines, supported by tertiary activity (+7.9% mom).
  • Tokyo CPI eased to 0.3% in Aug (Jul: 0.6%); core CPI (which excludes fresh food prices) fell 0.3% yoy in Aug.
  • Singapore inflation fell to 0.4% yoy in Jul (Jun: -0.5%); core inflation fell to -0.4% (Jun: -0.2%), driven by a steeper decline in the cost of electricity and gas, as well as lower food inflation.
  • Industrial production in Singapore inched up by 1.6% mom in Jul (Jun: 0.6%), after electronics surged by 24% mom alongside a 39% mom plunge in pharmaceuticals. In yoy terms, production was down by 8.4%.

Bottom line: The Fed’s strategy change, and Japanese PM’s resignation were major news affecting markets last week. The market-economy divide continues unabated (especially evident in the US where weekly jobless claims are still above 1mn) while repercussions of the Covid19 outbreak are becoming evident in the latest global Q2 GDP numbers – Turkey and Brazil Q2 GDP numbers will be out this week, as well as some PMI numbers. Meanwhile, according to the Netherlands CPB World Trade Monitor, global trade rebounded in Jun: up 7.6% mom, it was the fastest monthly increase (as demand picked up) since records began in Jan 2000. Though, the current resurgence in cases (taking total confirmed cases to above 25mn) is likely to subdue activity again, including trade (where volumes are still way below the pre-pandemic levels).

Regional Developments

  • Bahrain raised its debt ceiling to BHD 15bn (USD 39.79bn) from BHD 13bn before (last raised in 2017) to finance spending and cover upcoming debt installments during 2020-2022.
  • The value of Bahrain-origin exports declined by 12% yoy to BHD 202mn (USD 533mn) in Jul. Saudi Arabia, Oman and Bahrain were the top three export markets, together accounting for 40% of total Bahrain-origin exports.
  • Egypt approved in principle a VAT incentive scheme: this includes in-kind and in-cash rewards in addition to a periodic withdrawal system. No further details were provided.
  • Oil imports into Egypt plunged by 76.7% yoy to USD 191mn in Apr this year; non-oil imports also dropped by 35.2% to USD 6.179bn.
  • Bilateral trade between Egypt and China stood at USD 5.2bn in Jan-Jul this year. China had also invested a total of USD 7.2bn in 1736 projects as of end-2018 in Egypt.
  • All travelers into Egypt need to carry a negative PCR certificate for Covid19, issued not more than 48 hours prior to arrival, starting Sep 1st.
  • Only one-fourth of funding for the 2020 Jordan Response Plan (response to the Syrian refugee crisis) has been secured since the beginning of the year. Funding stood at USD 597mn in Jan-Aug 2020, with no allocations towards institutional capacity-building projects.
  • Iraq has frozen a 20-year oil-for-projects agreement with China – not officially annulled, but suspended implementation – as it withdrew nearly USD 1bn deposited in the joint fund to pay its civil servants, reported Aliqtisad News.
  • Kuwait’s Ministry of Finance is waiting to recover the KWD 2.05bn transferred recently to the future generations fund – subject to the government’s approval of the new amendment to the law governing the fund. The amount will be returned to the public reserve fund.
  • Kuwait will rebuild Lebanon’s 120k tonne large grain silo that was destroyed during the Beirut blast.
  • Kuwait will extend residency and visits visas that expire at end-Aug automatically for 3 months (till Nov 30th).
  • Discussions to designate a new PM in Lebanon will begin from tomorrow (Aug 31st). According to the Lebanese sectarian system, post of PM must go to a Sunni Muslim.
  • A new central bank circular in Lebanon asks banks to provision for a 45% loss on their Eurobond holdings and a 1.89% loss on their hard currency deposits with the central bank, but no loss on their holdings of Lebanese pound certificates of deposit. It gave banks 5 years to make the provisions. In addition, it called for banks to recapitalize, by urging depositors who transferred more than USD 500k abroad as of Jul 1st 2017, to deposit funds in a special account in Lebanon frozen for five years and equivalent to 15% of the transferred amount to boost liquidity. The amount is raised to 30% for “politically exposed persons”.
  • Inflation in Lebanon surged to 112.4% yoy in Jul; in mom terms, prices were up 11.42%. Last week, the central bank governor revealed that the BdL could not use the banks’ obligatory reserve to finance trade once it reaches its minimum threshold, while assuring that other means of finance was being created.
  • Expats in Oman’s government sector dropped by 15.1% mom and 18.8% yoy to 44,558 in Jul 2020. Overall number of expats in the country slipped by 3.0% mom to 1.54mn.
  • Fitch cut ratings of several Omani banks and companies: it downgraded by one notch HSBC Bank Oman, Ahli Bank, and Bank Muscat assigning a negative outlook to all. Bank Dhofar and National Bank of Oman ratings were affirmed, but assigned a negative outlook.
  • Saudi Arabia is set to launch the derivatives market from today (Aug 30th). Separately, Tadawul approved the listing of USD 133.33mn worth government debt instruments.
  • The value of assets held by Saudi public and private investment funds increased by 17.85% yoy to SAR 380.66bn in Q2 this year, supported by a 44% growth in the assets of public investment funds.
  • Oil exports from Saudi Arabia plummeted by 55% yoy in Jun – a drop of USD 8.7bn (in May, exports fell by nearly USD 12bn yoy). Total exports grew by 19.1% mom.
  • Saudi Arabia’s crude oil exports to China fell 39% mom and 23.3% yoy to 5.36mn tonnes – equivalent of 1.26mn barrels per day – in Jul. This dropped Saudi to the 3rd biggest supplier in China behind Russia (7.38mn tonnes) and Iraq (5.79mn tonnes).
  • Trucks from Bahrain are now allowed to transit through Saudi Arabia.

UAE Focus

  • The UAE abolished the 1972 Israel boycott law, allowing individuals and companies in the country to enter into agreements, also enabling trade, tourism and investment.
  • UAE inflation declined by 2.36% yoy in Jun, with the costs of recreation and culture down by 18.66% while the largest increase was seen in textiles, clothing and footwear (+10.7%).
  • Abu Dhabi returned to the bond market, with the longest-ever Gulf bond, offering 3% on the longest tranche maturing in 2070. It raised USD 5bn from a 3-part offering, having received more than USD 23bn in orders for the debt sale. The emirate’s debt had increased to USD 39.2bn as of end-Jun, from USD 29.4bn last year, according to the prospectus.
  • S&P expects Dubai GDP to shrink by 11% yoy this year, before rebounding to 5% next year. It therefore lowered credit ratings of two entities – Emaar and DIFC Investments – to BB+ “junk” rating from an investment grade BBB- score citing lowered ability to provide “extraordinary financial support to its related entities”.
  • Abu Dhabi’s non-oil trade with the GCC nations (excluding Qatar) totaled AED 21.74bn in Jan-Apr 2020, and accounted for almost one-third of the total trade value during the period. Saudi Arabia topped the list of with a total value of AED 15.95bn, or 73.4% of trade with the 4 GCC nations.
  • The value of exports and re-exports to China of Dubai Chamber’s members grew by 27% yoy to AED 283.2mn in May. During Jan-May, about 1100 certificate of origin documents were issued for china-bound shipments – double the number issued a year ago.
  • Dubai ranks third globally in greenfield FDI projects and fourth globally in FDI capital inflows during H1 this year, according to a Dubai FDI official. Medium and high technology investments in Dubai also increased by 53% during this period.
  • UAE left fuel prices unchanged again in Sep; prices have remained the same since Apr.
  • Oil product stockpiles in Fujairah stood at 26.681mn barrels as of Aug 24th, up 11% from the previous week – the biggest weekly gain since Feb and highest total since Jul 13th.
  • Ras Al Khaimah will lower trade licence renewal fees on certain commercial activities by up to 50%, while firms whose establishments were used for quarantine purposes will get a 25% reduction – these exemptions will be in place for a year.
  • Commercial cases filed at the DIFC Courts surged by 96% yoy in H1 this year. Total value of the cases is estimated at AED 2.2bn (USD 598mn), with each case estimated to be worth AED 88.5mn on average.

Media Review
How important is the dollar for global trade?
https://www.economist.com/schools-brief/2020/08/29/global-trades-dependence-on-dollars-lessens-its-benefits
Leave public debt worries for another day
https://www.ft.com/content/691cb9f4-b53d-4429-bba4-03ca623c0077
How will business behave in the New Normal?
https://www8.gsb.columbia.edu/articles/ideas-work/how-will-business-behave-new-normal
Forget other models. Aramco should carry on being … Aramco
https://www.arabnews.com/node/1725651
Can Lebanon avoid the Venezuela meltdown scenario?
https://www.arabnews.com/node/1724021/business-economy
Nasser Saidi’s article in AnNahar: A Practical Plan to Rescue Lebanon; Time to Uproot Corruption (Arabic)
https://bit.ly/32x0WCm

 
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Weekly Insights 25 Aug 2020: UAE GDP, Saudi Inflation, Kuwait Fiscal Deficit, Global Trade

Charts of the Week: UAE GDP for Q1 this year was released, reaffirming the impact of the Covid19 outbreak on the economy. In Saudi Arabia, July inflation numbers reflect the tripling of VAT: this increase will likely be sustained through the rest of the year. Kuwait’s fiscal quagmire highlights the need for urgent reforms including phasing out subsidies and introducing VAT and excise taxes. Lastly, read our take on global trade movements as WTO early indicators point to a record drop in Q2.

  1. Annual decline in UAE GDP in Q1 2020


 
UAE GDP contracted by 0.3% yoy in Q1 this year, with non-oil GDP declining at a faster 1.9% pace. Oil sector remained the saving grace, rising by 3.3% during the quarter. The Q1 numbers were dragged down by the Covid19 outbreak: together the trade, transport and hospitality sectors had contributed just over 1/5th of GDP in 2019.
Q2 will show a larger GDP decline given the relatively widespread lockdown measures, work from home policies and/or job losses/ salary cuts, expats’ repatriation and subsequent reduction in economic activity (as can be gauged from the high-frequency mobility indicators). While various policy initiatives would have supported the private sector businesses during the 3-month period (including deferred loan payments), the slow pace of recovery will weigh on businesses cash flows and profitability. This could spill over into the banking sector if there are potential credit losses resulting from firm closures/ insolvencies/ bankruptcies.
How can the government support directly? One, support firms on the brink of liquidation with out-of-court settlements and developing corporate debt restructuring rules to prevent. Two, speed up payment of arrears from public sector: this could prevent viable businesses from going under.

  1. Saudi inflation picks up in Jul, as VAT triples to 15%

Headline inflation in Saudi Arabia picked up by 6.1% yoy in Jul this year, following a 0.5% rise in Jun. Food, communication and transport costs have picked up compared to a year ago, with the former surging 14.3% (the highest rate since 2008). A similar pickup was seen when VAT was introduced in 2018. The figure below however, charts the latest GaStat data, where the base year has been revised to 2018.

The effect of VAT will appear through the rest of the year, though some sectors like education are exempt from VAT. Household spending will be negatively impacted by the VAT hike (consumers had already frontloaded spending, as per SAMA data), in addition to reduced spending power (pay cuts, removal of cost of living allowances etc.) thereby subduing private sector activity as well for the rest of the year.

  1. Kuwait fiscal quagmire

Kuwait’s fiscal situation has been in the limelight for 2 weeks now. Initially, it was the release of its 2019-20 fiscal data: revenues declined by a faster 16.2% yoy vs spending’s 3.2% drop, causing fiscal deficit (after transfers to the Future Generations Fund) to expand by 68.6% to KWD 5.64bn. The finance now ministry expects budget deficit to widen to KWD 14bn (USD 46bn) in the 2020-21 fiscal year, from a previous estimate of KWD 7.7bn.

 
Last week saw the finance minister stating that the country has just KWD 2bn (USD 6.6bn) worth of liquidity in its Treasury – which is not enough to cover state salaries beyond Oct. Liquidity in the General Reserve Fund decreased from KWD 5bn in the start of the 2020-2021 fiscal year, with the government withdrawing KWD 4bn in less than 100 days. In spite of this revelation, the Parliament returned the public debt law – which would allow the government to borrow KWD 20bn over 30 years – back to the finance committee for review. The Ministry of Finance is now preparing to transfer KWD 2.05bn in liquid cash to the General Reserve Fund.
Approval of the law that makes transfers to the Future Generations Fund dependent on budget surplus will provide comfort (estimated to save under KWD 1bn this fiscal year), but the nation needs to address its financing challenges. Going forward, an approval of the public debt law is necessary for the nation to tap international bond markets – to support refinancing of maturing debt, as well as reduce drawdowns from the General Reserve Fund. GCC sovereigns have been active players this year: issuances surged by 40% yoy to USD 42.3bn in H1 this year (Source: Markaz), and Abu Dhabi has started marketing a USD denominated 3-tranche bond offering this morning.
Kuwait has a long road ahead in improving its fiscal stance: it is yet to introduce VAT and excise taxes and subsidies (electricity, water and fuel) – at almost 7.5% of GDP – need to be phased out. Though the government approved a cut in state entities budget this year by at least 20%, the public wage bill needs to be reduced (accounts for roughly 1/3rd of budget) and directed towards more efficient public investment.

  1. Trade dips in Q2, Baltic Dry index drops after a near 10-month high in Jul

The WTO’s latest goods trade barometer shows a significant dip in Q2 this year (official trade volume data is not yet available): this is the lowest on record in data going back to 2007. This tracks the behaviour of multiple proxy indicators: be it the still-declining container shipping or air freight data while the export orders sub-component (within PMI) has started to recover from historic lows. The Baltic Dry Index – a composite index of the cost of shipping major raw materials – had inched close to a 10-month high in early Jul, raising hopes for a steady recovery; it has since then resumed to dip, but remains much higher than the numbers seen during the lockdown.

 
Global economic uncertainty still remains high, with second waves of Covid19 appearing in both Asia and Europe (while numbers of US, Brazil and India continue to surge). Trade recovery will depend on how fast consumer demand recovers: in China, there is a domestic-demand led recovery (versus export-led growth previously), while work from home policies have driven demand for semi-conductor exports from many Asian nations (e.g. latest Taiwan export data); Aug’s flash PMI for Eurozone shows a decline in new export orders (including intra-EU trade) in spite of a pickup in the overall index. Our call remains that a V-shaped recovery is less plausible in the current scenario.
 
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Weekly Economic Commentary – Aug 24, 2020

 
 
Markets
Global stock markets were weaker last week, as new economic data pointed to a muted recovery, with flash PMIs pointing to slow recovery (especially in the services sector) while Brexit talks proceeded with “little progress”. In the Middle East, financial stocks supported gains. The dollar dropped to a two-year low against a basket of currencies, while the pound had a rollercoaster ride, posting both its biggest one-day drop in 2 months and largest daily gain since Jun 1 last week. Brent prices fell, as did gold.
Weekly % changes for last week (20-21 Aug) from 13th Aug (regional) and 14th Aug (international).

 
Global Developments
US/Americas:

  • Housing starts in the US surged by 22.6%, posting its biggest gain since Oct 2016 – to 1.496mn (Jun: + 17.5%). Building permits also accelerated by 18.8% mom to 1.495mn in Jul (Jun: +3.5%).
  • Existing home sales grew by a record-high monthly gain of 24.7% to 5.86mn in Jul (Jun: +20.2%). Sales were up 8.7% yoy. The supply of existing homes however plummeted 21.1% annually, with just 1.5mn homes for sale at end-Jul. This shortage led to an uptick of 8.5% in median price of a home to USD 304,100.
  • Preliminary estimates for the Markit Composite PMI Output Index moved up to 54.7 in Aug (Jul: 50.3) – the strongest increase in business activity since Feb 2019. Manufacturing PMI rose to 53.6 in Aug (Jul: 50.9), thanks to quicker expansions in both output and new orders; foreign client demand increased for the first time since Dec 2019. Services PMI grew to 54.8 from 50, supported by growth in new export orders, while rate of employment growth was the steepest since Feb 2019.
  • Initial jobless claims climbed back above 1mn in the week ended Aug 15, rising by 135k to 1.106mn, taking the 4-week average to 1.175mn. Continuing claims eased to 14.84mn in the week ended Aug 7 – the lowest level since 1st week of Apr – from 15.48mn a week ago.

Europe:

  • Inflation in the Eurozone fell by 0.4% mom in Jul (Jun: 0.3%), the biggest drop since Jan; core inflation also declined by 0.3% mom (-0.2%). In yoy terms, inflation picked up by 0.4% in Jul, with the highest contributions from non-energy industrial goods and services (both +0.42 ppts) as well as food, alcohol & tobacco (+0.38 pp).
  • Flash manufacturing PMI in the Eurozone eased slightly to 51.7 in Aug (Jul: 51.8), with modest expansions in business activity and new orders. Services PMI was worse-hit, with the index easing to 50.1 from 54.7 the month before. The composite PMI fell to 51.6 (Jul: 54.9), with employment declining across the board amid fall in new export orders.
  • Germany’s flash composite PMI reading eased to 53.7 in Aug, slipping from Jul’s near 2-year high of 55.3. Manufacturing PMI showed an uptick to 53 in Aug (Jul: 52), supported by a rise in export sales (panelists referred to demand from China and Turkey) while services PMI eased to 50.8 from 55.6 the month before (as travel restrictions were imposed, domestic demand declined and employment continued to fall).
  • German producer price index ticked up by 0.2% mom in Jul, after a flat Jun reading. It fell 1.7% yoy, compared to a drop of 1.8% in Jun.
  • UK government debt rose to above GBP 2trn for the first time this Jul: it’s now above 100% of GDP, on higher government spending to support the economy. The July borrowing figure (i.e. difference between spending and tax income) was GBP 26.7bn (Jun: GBP 29.5bn) – the 4th highest borrowing in any month since records began in 1993.
  • Consumer price index in the UK inched up by 0.4% mom and 1% yoy in Jul (Jun: +0.1% mom and 0.6% yoy), with petrol prices (+4.5% mom), household goods and clothing accounting for the rise. Core inflation clocked in at 1.8% yoy. Producer price index core output gained by 0.1% yoy (Jun: 0.5%) while retail price index grew to 1.6% (Jun: 1.1%).
  • Retail sales in the UK increased by 3.6% mom and 1.4% yoy in Jul (Jun: +13.9% mom and -1.6% yoy), climbing back to pre-Covid19 levels. Sales in clothing shops grew by 11.9% last month while online shopping fell by 7%.
  • The flash composite PMI for UK touched 60.3 in Aug – the highest since Oct 2013, as more businesses reopened. Services PMI surged to 60.1 in Aug (Jul: 56.5), amid a trend for staycations and hotels/ restaurants reporting boosts from the Eat Out to Help Out scheme; manufacturing PMI picked up to 55.3 (Jul: 53.3), with production rising most since Apr 2014.

Asia Pacific:

  • China’s central bank held interest rates steady, as expected, with the 1-year and 5-year loan prime rates at 3.85% and 4.65% respectively. Separately, the apex bank revealed that it would not expand its efforts to extend credit to small businesses.
  • Japan GDP declined by 7.8% qoq and 27.8% yoy in Q2, posting the sharpest yoy contraction on record and the third consecutive quarter of negative growth. Private consumption shrank by 8.2% qoq alongside a plunge in consumer spending (steepest on record), capital expenditure declined by 1.5% while exports of goods and services witnessed a 18.5% plunge.
  • Inflation in Japan inched up by 0.3% yoy in Jul, from Jun’s 3-year low of 0.1%, as food prices increased (1.9% from Jun’s 1.5%). Excluding fresh food, prices were flat, while excluding food and energy, prices were up by 0.4%.
  • Industrial production in Japan fell by 18.2% yoy in Jun, following a 17.7% drop the month before. In mom terms, production inched up by 1.9% (May: +2.7%).
  • Japan’s exports and imports plummeted for a 5th straight month, falling by 19.2% and 22.3% yoy respectively in Jul. While shipments to the US dropped by 19.5% yoy in Jul, exports to China rose for the first time in 7 months (+8.2%).
  • Japan’s machinery orders unexpectedly dropped to a 7-year low: falling by 7.6% mom and 22.5% yoy in Jun (+1.7% mom and -16.3% yoy in May). Foreign orders fell by 3.9% mom, declining for a 4th consecutive month, but slowing from the 2-digit dips.
  • Japan’s preliminary manufacturing PMI for Aug improved to 46.6 (Jul: 45.2), with declines in production and new orders though at a softer rate. Services PMI fell to 45.0 in Aug from a final 45.4 in Jul, with employment shrinking for a 6th consecutive month.
  • Thailand Q2 GDP shrank by 12.2% yoy – the weakest in 22 years – given its reliance on exports and tourism. The Q2 unemployment rate was at 1.95%, and an additional 1.8mn workers at risk of losing their jobs.
  • Taiwan export orders continued to grow for the 5th consecutive month: orders surged by 12.4% yoy, supported by the strong demand for electronic products (thanks to the work-from-home trend), as well as a gradual recovery in oil and raw material prices.

Bottom line: Global Covid19 confirmed cases have crossed 23mn, with numbers in the US inching closer to 6mn and India crossing the 3mn mark. As global economic recovery remains muted (with continuing declines across trade and FDI indicators amid higher unemployment rates), and gloomy Brexit talks continue, on the immediate horizon are the Jackson Hole meetings (looking for clues on central bankers next steps), a potential step up in US-China tensions ahead of  the US Presidential elections in just over 2 months’ time. The outlook and waters are very choppy for markets even if VIX rates are sharply lower compared to March highs.
Regional Developments

  • A memo by Bahrain’s Finance and National Economy Ministry showed a number of improvement signs across the economy in Jun & Jul: sales of non-essential goods grew by 12% in Jun and 28% in Jul, sales at food outlets increased by 9% and 15%, exports were up by 2% and 12%, visitors to shopping malls surged by 20% and 30%, petrol sales rose by 15% and 13%, real estate transactions jumped by 55% and 19%, and building permits more than doubled, increasing 124% in Jun.
  • Compulsory PCR tests will be conducted at Bahrain Airport, but mandatory 10-day quarantine will be lifted on those that test negative.
  • All MPs in Bahrain have backed the proposal to defer bank loan instalments owed by Bahrainis till end of the year. The original reprieve period finishes this week.
  • Data from the Bahrain Tourism and Exhibition Authority show a 47% decline in number of tourists in Q1 this year, alongside a 49.5% reduction in total tourism nights and tourism expenditure plummeting by 55.4%.
  • Bahrain awarded 769 tenders worth USD 1.7bn in H1 2020, revealed the Tender Board. Construction and engineering accounted for the largest share, being awarded 34.6% of tenders.
  • Fitch downgraded two Bahraini GREs – Mumtalakat Holding Company and the Oil and Gas Holding Company (Nogaholding) – to B+ from BB-, with a stable outlook.
  • About 120k corporates and 1mn individual borrowers have benefited from the Central Bank of Egypt’s SME initiative (funding of approximately EGP 180bn).
  • Egypt’s holdings of US Treasuries edged up by 3.9% yoy to USD 2.235bn in Jun.
  • Unemployment rate in Egypt increased to 9.6% in Q2 this year from 7.7% in Q1 and 7.5% a year ago.
  • Estimated investments in Egypt’s manufacturing industry for the current fiscal year 2020/2021 plan amounts to EGP 80.6bn, disclosed the planning minister. The sector employs around 15% of the workforce and contributes about 17% of GDP.
  • Traffic at the Suez Canal ticked up by 4% in the 2019-20 fiscal year, but canal’s revenues were down by 1.8% yoy to USD 5.7bn. This was largely attributed to the Covid19-led sharp decline in trade by 18.5% in Q2.
  • Egypt’s 18 commercial and logistics zones and projects have attracted EGP 49bn in investments, and created 400k+ jobs, as per the assistant minister of supply and internal trade.
  • Over 100k tourists have visited Egypt’s Red Sea resorts since international tourism restarted on Jul 1st. Hotel occupancy rates at these resorts have inched up to between 20-40%.
  • Egypt signed a deal to build a wind power plant: the plant will have a capacity of 250MW, with an estimated project cost of around EUR 228mn.
  • Five US firms signed agreements worth USD 8bn with the Iraqi government, in a bid to boost the latter’s energy independence.
  • Iraq’s Qi Card (the leading electronic payment solution and national debit/credit card) loan program data revealed that paying off a medical bill or funding a small business venture were the reason more than 85% of Iraqis sought loans for.
  • Jordan extended the closure of the Jaber border crossing (Syria) for another week.
  • Private school enrolments in Jordan has declined by 50%, with parents opting for public schools given financial pressures and possibility of remote learning.
  • Jordan’s government allocated JOD 1.341mn (USD 1.89mn) to UNRWA-run schools to cover the costs of textbooks during the 2019-2020 school year. UNRWA Jordan provides education services to over 118k students attending 169 UNRWA schools.
  • Kuwait’s Parliament returned the public debt law – which would allow the government to borrow KWD 20bn over 30 years – back to the finance committee. This happened in spite of the finance minister stating that the country has KWD 2bn (USD 6.6bn) worth of liquidity in its Treasury and not enough to cover state salaries beyond Oct. Liquidity in the General Reserve Fund decreased from KWD 5bn in the start of the 2020-2021 fiscal year, with the government withdrawing KWD 4bn in less than 100 days.
  • Kuwait’s finance ministry expects budget deficit to widen to KWD 14bn (USD 46bn) in the 2020-21 fiscal year, from the previous estimate of KWD 7.7bn, reported Reuters, citing a parliamentary document.
  • Kuwait’s national assembly approved the law that makes transfers to the Future Generations Fund dependent on budget surplus. The Fund currently automatically receives 10% of oil revenue.
  • Kuwait’s Parliament approved a law to protect troubled businesses: failure to pay debt is not seen as a criminal offence under the new law, unless fraudulent. Businesses can avoid bankruptcy by providing either a settlement with creditors or a restructuring plan.
  • About 35k Indian nationals will leave Kuwait during the period 18-31 Aug, in the second phase of flights to India.
  • Lebanon’s central bank will be able to subsidize fuel, wheat and medicine only for three more months – estimated at USD 700mn per month – to prevent reserves from falling below USD 17.5bn.
  • About 2,500 claims amounting to USD 425mn have been submitted to insurance companies for damages incurred by the Aug. 4 Beirut blast, revealed the caretaker economy minister.
  • According to UN ESCWA, about 55% of Lebanon’s population lived in poverty as of May this year, up from 28% last year. It estimated that the middle class had shrunk from 57 to 40% of the population and that those in extreme poverty had risen to 23% (from 8% last year).
  • A partial lockdown has been imposed in Lebanon for two weeks to counter the rise in Covid19 infections.
  • Oman appointed a new finance minister and chairman of the central bank, both occupied in the past by the country’s ruler. These were part of a wider set of measures enacted through 28 royal decrees, creating new ministries, renaming, dissolving and/or merging other entities (10 ministries were merged into five and five councils were abolished).
  • Fitch lowered Oman’s credit rating for the second time this year to BB- from BB, while keeping the outlook negative.
  • Oman’s crude oil output declined by 4.6% yoy to 147.76mn barrels in H1. Daily average crude oil output was 964,200 barrels at end-Jun, from an average 970,600 barrels a year ago.
  • Oman became one of the first countries in the region to fully fulfill the requirements of the WTO’s Trade Facilitation Agreement.
  • Inflation in Saudi Arabia soared by 6.1% yoy in Jul (Jun: 0.5%), the highest since 2011, as VAT tripled to 15%. Food and transport costs spiked, by 14.6% and 7.3% respectively. Wholesale price index also increased by 5.1% in Jul, rebounding from the 2% drop in May-Jun, thanks to higher price of metals and machinery as well as the VAT hike.
  • Crude oil exports from Saudi Arabia fell by 17.3% mom to 98mn barrels per day in Jun – the lowest since at least Jan 2002.
  • Saudi investments in US Treasuries fell by 30.46% yoy to USD 124.9bn by end-Jun.
  • Saudi Arabia’s nationalization program was extended to 9 new categories in the wholesale and retail sector; these outlets should employ 70% locals. Should targets not be met, the firms will have to pay additional tariffs.
  • Fintech startups in Saudi Arabia expanded by a massive 147% in two years, according to Magnitt’s Fintech Saudi Annual report. The fintech market is estimated to reach a transaction value of USD 33bn by 2023, with payments, personal finance and online insurance sales leading the space.
  • More than 87,000 Indian nationals (out of a total 162k applicants) have been repatriated from Saudi Arabia, according to the Indian Ambassador.

UAE Focus

  • UAE real GDP declined by 2.7% yoy to AED 368.52bn in Q1 this year, as a 2.7% drop in the overall non-oil sector was outpaced by the 3.3% uptick in the mining and quarrying sector. The government sector (public admin, defense, social security) posted a drop of 2.7% yoy.
  • The UAE plans to make digital economy a priority for the country: the contribution of the digital economy to GDP was 4.3% in 2019.
  • The Abu Dhabi government is in talks for a new international bond issuance, reported Reuters. The emirate has already raised USD 10bn this year via debt issuances.
  • The Agriculture Producer Price Index (APPI) in Abu Dhabi increased by 13.2% yoy in May 2020, following a pickup of 19.8% in Apr.
  • The Dubai Electricity and Water Authority (DEWA) announced a 6.6% yoy rise in the peak load of electricity to 9074 MW in Dubai this year to date: this is the highest recorded increase since 2012.
  • About 14,000 residential units were completed in Dubai in H1 2020 – this accounts for just 30% of the 45,700 units scheduled for handover this year.
  • UAE’s First Abu Dhabi Bank’s commitment to offer a 50% discount on the merchant service fee charged to SME customers for credit card transactions (for the period Apr-Jun 2020) is estimated to have benefitted more than 6,000 firms to the tune of AED 3.97mn.
  • Assets of UAE’s listed banks increased by 8.2% yoy to around AED 3trn in H1 this year. Deposits picked up by 13% yoy and loans by 8% to AED 1.629bn during this period. First Abu Dhabi Bank and Emirates NBD together account for 51.9% of total assets.
  • A senior GDFRA official disclosed that more than 20k travelers pass through the Dubai Airport daily since doors were opened to tourists on Jul 7th.
  • Dubai issued a new law to regulate family-owned businesses: this law allows for new family ownership contracts to be formed setting out the rights and responsibilities of family members. For it to be legally binding, all parties of the contract must be members of the same family and have a single common interest. Exceptions to the law are family ownership in public joint-stock companies and movable and immovable property.
  • Sharjah Airport became the first carbon-neutral airport in GCC and second in the Middle East to attain Level 3+ Neutrality accreditation from the Airport Carbon Accreditation programme. The certificate is given when net CO2 emissions over a full year are zero.
  • Separate surveys from Visa and Mastercard highlight the ease of consumers and businesses in moving online and adoption of digital payments: Visa’s survey revealed that business models 94% of small and micro businesses in the UAE have evolved following the Covid19 outbreak versus 67% globally. Although almost 44% have initiated contactless payments (more than double global average), more than 90% of UAE merchants have concerns about moving their business online (vs. 74% globally). Mastercard highlighted that online shopping gained traction in the UAE, with 54% of UAE consumers expecting online shopping trend to continue post-Covid19, and that users were moving away from cash payments.

Media Review
Can Dubai enter the premier league of financial centres? (long read)
https://www.economist.com/finance-and-economics/2020/08/22/can-dubai-enter-the-premier-league-of-financial-centres
Saudi exchange Tadawul weighs next steps in global and regional plans
https://www.arabnews.com/node/1723106/business-economy
What steps will central bankers reveal at Jackson Hole summit?
https://www.ft.com/content/e37c586d-df75-4edc-b96f-36dbaaa87558
Falling Trade, Rising Imbalances…
https://www.cfr.org/blog/falling-trade-rising-imbalances
Is the Almighty Dollar Slipping?
https://www.project-syndicate.org/commentary/us-dollar-position-as-global-reserve-currency-over-short-and-long-term-by-nouriel-roubini-2020-08
Covid-19 is threatening Europe’s Schengen passport-free zone
https://www.economist.com/europe/2020/08/22/covid-19-is-threatening-europes-schengen-passport-free-zone
 
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Weekly Insights 17 Aug 2020: Tourism in the Covid19 era (ME/ UAE) & beyond

As a region, the Middle East is a small player compared to its global counterparts. However, within the region, some key players are highly dependent on tourism for economic activity and growth. With the drastic reduction in travel as a result of restrictions during Covid19, which economies are stressed and how can they recover? Will the UAE-Israel accord support tourism?
Travel and tourism contributed to 10.3% of global GDP in 2019, also accounting for 1 in 10 jobs across the globe, according to the World Travel and Tourism Council (WTTC). In comparison to its counterparts, the Middle East does not feature among the top regions for tourism (be it contribution to GDP or employment). However, it did register as the 2nd fastest growing region last year, behind Asia-Pacific. Thanks to Saudi Arabia, which was identified the fastest growing nations in terms of travel and tourism GDP last year (+14% yoy growth) as the nation opened up to international tourists (not limited to religious tourism). Fastest growth was also recorded in Tunisia (+12.9% growth) and Kuwait (+11.6%).

Within the Middle East, countries vary in its dependence on the travel and tourism sector: ranging from Lebanon’s high dependence (close to 20% of GDP) to the UAE (11.9% of GDP) to a lower 5%+ for Kuwait. For the GCC nations, with plans of greater diversification came a rising dependence on tourism. The UAE was one of the earlier adaptors of this model, Saudi Arabia is the latest. Oman is a good example of balanced domestic and international spending (42% and 58% respectively) while the dependence on international tourists is higher in Lebanon (89% of total spending), Qatar (84% of total) and UAE (77% of total).

With the outbreak of Covid19, international travel had come to a standstill (42% of total global fleets are parked vs. 6% in the start of 2020[1]) and the travel and tourism sector took a drastic hit. Middle East’s full year air traffic is expected to plunge by 56% yoy in 2020, with job losses at an estimated 1.5mn (of a total 2.4mn aviation-related employment, according to International Air Transport Association (IATA). Nations that permit domestic tourism are likely to recoup some losses, as international visitor arrivals are likely to remain muted in the near-term. A recovery in business travel will also lag compared to leisure travel – a recent research paper however states that this could have a much larger and durable impact on economic growth. If UAE-based businesses stopped travelling, it would result in an estimated 0.06% loss in global GDP and the impact would be felt most in Oman, Saudi Arabia, Kuwait, Lebanon and Iraq.
The WTTC estimates travel and tourism sector job losses to range between a low of 2.7mn (best case scenario, i.e. domestic travel from Jun, intercontinental travel resumes in Aug) to a high 4.9mn (worst case, i.e. domestic travel from Sep, intercontinental travel resumes in Nov) in the wider Middle East. The share of tourism related employment is higher than 10% for a majority of the nations, implying that potential job losses would have a significant impact on overall growth.
It is little wonder then that many nations are scrambling to re-attract tourists: be it Egypt opening its borders for international tourists to its seaside resorts or UAE’s Dubai opening up to international tourists (from July 7th, subject to negative Covid19 test results & no quarantine period) or Jordan opening its doors to domestic travel (for its citizens and resident expats).
Did the opening up of Dubai lead to an improvement in economic activity? Data is a significant limitation to understand tourist arrivals[2], spending and the like. However, we take two proxies to analyse the situation: one, Dubai PMI (which includes travel and tourism) and two, the retail and recreation indicator from Google Mobile Community reports (data till 11th Aug 2020). Dubai PMI moved into expansionary territory in Jul (51.7 from June’s neutral 50-reading), with business activity rising across all sectors and travel and tourism posting the first rise in activity in 5 months as tourism restarted. Dubai PMI’s plunge was more severe than the UAE PMI during the outbreak, but it also seems to have recovered at a relatively faster pace. However, this optimism doesn’t seem to have translated into the retail and recreation indicator.
Dubai still lags the overall UAE in terms of return to the baseline[3]. Potential explanations could be a permutation-combination of the following:
(a) International tourism has not recovered by much. Dubai’s top source markets last year were India (visit visa holders from the country have been permitted into Dubai only a few days back), Saudi Arabia (international flights haven’t resumed yet), UK (flights are open, but Britons need to quarantine for 14 days on return), Oman (visits permitted since Jun 2020) and China (international flights growth are down 74% yoy  during the period 1 Jan 2020-16 Aug 2020);
(b) International tourists have entered, but not spending as much as before;
(c) Movement restrictions between Abu Dhabi – Dubai have resulted in the former’s residents opting to visit retail/recreation centres within the emirate than destinations in Dubai;
(d) Job losses (resident expats have moved back to their home countries) and salary cuts (tightening of belts) has meant a slow pace of pickup in activity.

What can be done to support and improve economic activity in the travel & tourism sector?

  • The new normal: social distancing policies and new hygiene standards (e.g. hygiene kits at airports, no-touch lift buttons) are likely to stay till an effective vaccine is administered across the globe. This will restore tourists’ confidence.
  • Encourage, market & promote domestic/ regional tourism, thereby supporting the hospitality sectors. An example is the strategy of Singapore encouraging locals to “discover hidden gems”. Once regional borders open up, driving to nearby regional (less-crowded) destinations might be preferred to flying. An aggressive pricing strategy (e.g. discounts on flight tickets, entry prices to tourist sites) could see a substantial difference in the pace of recovery.
  • Continued support for the sector: governments need to support SMEs in this sector. Most used options have been addressing liquidity issues by deferring payments, increasing availability of credit, reduction in/ removal of government fees; firms could also encourage upskilling to improve staff quality.
  • A digital transformation and rethink of tourism strategy: to include no-queue direct immigration to hotel check-in, virtual/ remote tourism experiences (e.g. Lourve Abu Dhabi’s permanent collection to go online by end-2020 or Instagram live sessions by local tour guides), online/ hybrid MICE events (shift to smaller scaled/ local functions & cost-effective). In addition, health components should be integrated with travel (e.g. to enable track and trace, digital health profiles) and availability of good health facilities in tourist destinations might also provide peace of mind to travelers.

Last, but not the least, the opening up of UAE-Israel relations will support the tourism sector. The main beneficiary sectors are likely to be trade (see chart below) and travel (new destinations for UAE’s Emirates and Etihad airlines, allowing entry of new set of tourists), with additional opportunities in the high-tech sector (where Israel has a comparative advantage).

[1] Source: “Impact of Covid19” infographic, Cirium, Jun 2020.
[2] Anecdotal evidence from Jumeirah hotels suggest a doubling of online bookings week-on-week the week after allowing entry to international visitors.
[3] Changes for each day are compared to a baseline value for that day of the week: The baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020.
 
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Weekly Economic Commentary – Aug 16, 2020

 
 
Markets
Global stock markets had another good week – though US stocks narrowly missed all-time highs, stocks linked to tourism/ airlines tumbled in Europe (surges in Covid19 cases are leading to quarantine requirements related to travel) and China’s stocks closed lower after weaker-than-expected data releases. Regional markets were mostly up during the week, with Dubai’s market hitting a 2-month high on Thur. The dollar index was into its 8th straight week of losses, while the euro, yen and pound sterling gained. Oil prices fell below USD 45 ahead of the OPEC+ meeting this week. Gold declined by 4.5% – biggest weekly fall since early Mar – following 9 weeks of gains.
Weekly % changes for last week (13-14 Aug) from 6th Aug (regional) and 7th Aug (international).

Global Developments
US/Americas:

  • Inflation in the US rose by 1% yoy and 0.6% mom in Jul, thanks to an increase in costs of transport (2.9%), apparel (+1.1%), lodging away from home (1.2%) and car prices (0.8%). Excluding food and energy, prices were up 1.6% yoy and 0.6% mom.
  • Producers price index in the US rebounded by 0.6% mom in Jul (Jun: -0.2%). This was the largest gain since Oct 2018 and was supported by rise in gasoline costs and portfolio management fees. Excluding food and energy, prices edged up by 0.3% mom.
  • Industrial production increased in the US for a 3rd straight month, up by 3% mom in Jul (Jun: 5.7%); production is still 8.4% below Feb numbers. Factory output rose by 3.4%, given a 28.3% gain in the production of cars, trucks and auto parts. Capacity utilization also ticked up to 70.6% (Jun: 68.5%), though remaining below its long-term average of 79.8%.
  • Non-farm productivity grew by 7.3% in Q2 from -0.3% in Q1 – the largest rise since Q2 2009. Hours worked tumbled by 43.0% in Q2, the largest since the series started in Q1 1947.
  • US retail sales increased by 1.2% mom in Jul, following an 8.4% surge in Jun. Sales are higher than pre-Covid19 levels and up 2.7% yoy. Monthly sales picked up in electronics and appliances (22.9%), clothing (5.7%), bars and restaurants (5%) while motor vehicle parts and sales at dealers dropped by 1.2%. However, with the resurgence of Covid19 cases and expiry of federal unemployment benefit, sales are likely to remain mild going forward.
  • Michigan consumer sentiment index for Aug edged up to 72.8 in Aug (Jul: 72.5).
  • US budget deficit ballooned to a record USD 2.81trn for the period Oct 2019-Jul 2020. About USD 63bn was added to the deficit in Jul – the lowest monthly figure since the outbreak began.
  • Initial jobless claims declined below the 1mn mark, totalling 963k in the week ended Aug 8, from 1.191mn the week before. Continuing claims decreased to 15.486mn in the week ended Aug 1, equaling 10.6% of the workforce.
  • Mexico’s central bank lowered its benchmark interest rate by 50bps to 4.5%, after the country recorded its fifth consecutive quarter of contraction.

Europe:

  • Eurozone GDP plunged by 12.1% qoq and -15% yoy in Q2 – the sharpest decline since the time series began in 1995. Quarterly GDP declined by more than 10% in Germany, Italy, France, Spain and the UK with the latter posting a fall of more than 20% during the quarter. Finland and Denmark fared relatively better, with drops of 3.2% and 7.4% respectively.
  • The number of employed persons decreased by 2.6% qoq in the EU and by 2.8% in the euro area in Q2. The 5.5m job losses in the EU, which included 4.5m job losses in the eurozone, were “the sharpest declines” since the time series began in 1995, according to the Eurostat.
  • Germany’s ZEW survey showed a deterioration in the assessment of the current situation (-81.3 in Aug from Jul’s -80.9) while economic sentiment improved (to 71.5 from 59.3). Economic sentiment index for the wider eurozone moved up to 64 from 59.6 in Jul.
  • Wholesale prices in Germany slipped by 2.6% yoy in Jul (Jun: -3.3%), due to large declines in costs of used and residual materials (-18.4%), petroleum products (-17.9%) and live animals (-8.6%) among others. Consumer prices stayed flat at 0% yoy in Jul.
  • Industrial production in the eurozone picked up by 9.1% mom in Jun, though the pace of recovery has slowed from May’s 12.3%; it still remains 11.6% below Feb levels. In yoy terms, production dipped by 12.3%, following the 20.4% plunge the month before.
  • Preliminary estimates showed that UK GDP contracted by 20.4% qoq in Q2 – the worst quarterly slump on record – dropping the country in recession for the first time in 11 years. However, there is some positive news: in Jun alone, GDP bounced back by 8.7% mom (May: 1.8%) as restrictions were eased.
  • Industrial production in the UK picked up by 9.3% mom in Jun (May: 6%), supported by manufacturing which gained by 11% (8.4%). In yoy terms, manufacturing was down 14.6%.
  • Unemployment rate in the UK remained steady at 3.9% in the 3 months to Jun. A record decline in total weekly hours worked, with the average down by 203.3mn to 849.3mn in Q2.

Asia Pacific:

  • China’s inflation increased by 0.6% mom and 2.7% yoy in Jul (Jun: -0.1% mom and 2.5% yoy), due to higher food prices (+13.2%). Core inflation (excluding food and fuel prices) fell to a 10-year low of 0.5%. Producer price index meanwhile declined by 2.4% in Jul following a 3% dip the month before.
  • Money supply (M2) in China grew by 10.7% to CNY 212.55trn in Jul after posting an 11.1% gain the month before. New loans slowed to CNY 992.7bn from CNY 1810bn the month before, with corporate loans down to CNY 264.5bn (Jun: CNY 927.8bn). The annual growth of outstanding total social financing (TSF), a broad measure of credit and liquidity, quickened to 12.9% (Jun: 12.8%).
  • Industrial production in China grew by 4.8% yoy in Jul, supported by new infrastructure projects leading to demand for commodities (including steel). Fixed asset investment declined by 1.6% yoy in the period Jan-Jul from the 3.1% drop in H1. FDI expanded by 15.8% yoy to CNY 63.47bn in Jul. Overall FDI inflow turned positive in Jan-Jul (+0.5% yoy) vs H1’s -1.3%.
  • China’s retail sales edged down for the 7th straight month, down by 1.1% yoy in Jul, following the 1.8% dip in Jun. On a positive note, car sales rose 12% yoy in Jul.
  • Japan’s current account balance narrowed to a five-year low of JPY 167.5bn in Jun (May: JPY 1176.8bn). Exports and imports fell by 25.7% and 14.4% respectively in Jun, causing trade deficit to widen to JPY 157.7bn; 99.9% drop in foreign tourists added to the travel account deficit.
  • Industrial output in India declined for the 4th consecutive month by 16.6% yoy in Jun (May: -33.9%), with manufacturing reporting a 17.1% reduction (-38.4%). For the period Apr-Jun, overall IP fell by 35.9% yoy, while manufacturing plunged by 40.7%.
  • WPI inflation in India fell by 0.58% yoy in Jun (May: -1.81%) in spite of costlier food prices. Inflation in food items touched a 4-month high of 4.08% in Jul, due to vegetable costs (+8.2%).
  • Trade balance in India returned to a deficit of USD 4.83bn in Jul, after a month of trade surplus (USD 0.79bn in Jun). Merchandise exports fell for the fifth consecutive month by 10.2%, while imports dipped 28.4%.
  • GDP in Hong Kong shrank by 0.1% qoq and 9% yoy in Q2 (Q1: -5.5% qoq and -9.1% yoy) – the 4th straight quarter of yoy declines. The resurgence of Covid19 cases weighed on consumer and tourism-related sectors, as visitor arrivals were down by 99.7% in Jun. The revised forecast is for a 6-8% drop in GDP this year.
  • Singapore enters a technical recession as GDP plummets by 9% qoq and 13.2% yoy in Q2, worse than initial estimates, bringing the GDP contraction in H1 to 6.7% yoy. With the circuit break implemented in 7 Apr-1 Jun, activity dropped across the board: construction (-59.3% yoy), accommodation and food services (-41.4%), transportation and storage (-39.2%) and wholesale and retail trade (-8.2%) among others. For the full year, revised estimates expect an economic contraction of between 5-7%.

Bottom line: Q2 GDP data from the eurozone, Hong Kong, Singapore show massive plunges into recession (given restrictions during most of the quarter).  More recent economic data (for Jun-Jul) across major markets are picking up in mom terms, but remain mostly lower than pre-pandemic readings: a second wave might put the brakes on this recovery. The rush to vaccines gain speed: Russia started its production of the Covid19 vaccine, as global confirmed cases crossed 21mn, while India – where both number of fresh cases and deaths touched record highs – stands ready to mass produce vaccines once they are ready. Watch out for key meetings this week – compliance to be a major discussion point at the OPEC+ ministers meeting (quota compliance fell to 96% in Jul, from 106% in Jun, with its collective output increasing by 1.1mn barrels per day, according to S&P Global Platts’ survey of production); Brexit discussions continue with formal negotiating sessions starting Aug 17 (can they reach a deal by the Oct 2 deadline?); central bank meetings this week (China, Indonesia, Philippines, Turkey) are likely to keep policy unchanged. A meeting to review the US-China Phase 1 trade deal (scheduled for Aug 15) has been delayed with no new date set as election fever picks up in US (with Biden’s choice of Senator Kamala Harris as the VP nominee and Trump’s comments on universal mail-in voting and the postal crisis).
Regional Developments

  • Declines across oil and non-oil revenues – by 35% yoy and 13% respectively in H1 – resulted in a drop in Bahrain’s revenues by 29% to BHD 910mn. Expenditure during the period stood at BHD 1.708bn, resulting in a deficit of BHD 798mn – up 98% compared to the biannual deficit for the fiscal year 2019.
  • The Bahrain Bourse listed the new Government Development Bonds: the bonds will mature in 5 years on Jul 30th There are now 14 conventional bonds and sukuk listed on the exchange with an approximate value of USD 7.11bn.
  • The IMF approved a 12-month stand-by arrangement for Egypt at a total value of USD 5.2bn, to support the economy and mitigate the impact of the Covid19 outbreak.
  • Egypt’s central bank held interest rates steady – lending rate at 10.25% and the deposit rate at 9.25% – at the latest meeting. This is the lowest since early 2016.
  • Urban consumer price inflation in Egypt eased to 4.2% yoy in Jul (Jun: 5.6%); food prices were down by 1.5% yoy alongside an increase in electricity and energy prices. Core inflation declined to 0.7% in Jul (Jun: 1%).
  • Unemployment among Egypt’s university graduates touched 36.1% in 2019: among these, male unemployment was 25.1% while among females, a staggering 53.2%.
  • Iraq has started 10 rebuilding projects in Northern Mosul, which were part of the post-war reconstruction plan approved two years ago.
  • Jordan closed the main Jaber border crossing with Syria for a week, after a spike in Covid19 cases from across the border. Other land crossings with Saudi Arabia, Israel and the Palestinian territories are only open for commercial goods.
  • Foreign assistance to Jordan by donor countries and international financing institutions touched USD 465.4mn in H1 2020. This includes USD 107.6mn offered to support Syrian refugees and USD 222.2mn as soft loans.
  • Auditing tax returns and a crackdown on tax evasion enabled Jordan to recover JOD 445mn in Jan-Jul this year.
  • Kuwait moves into the 4th stage of gradual easing after the Covid19 outbreak from Aug 18: in this stage, more activities like gyms, sports clubs, salons and tailor shops will open.
  • Kuwait’s fiscal deficit widened by 69% yoy to KWD 5.64bn (USD 18.44bn) in the 2019-2020 fiscal year, after revenues fell by over 16% alongside a 3.2% drop in expenditure (to KWD 21.14bn). If the public debt law (submitted in Jul) is passed by the Parliament, the government plans to issue KWD 4-5bn in public debt by the end of 2020-21 fiscal year.
  • Kuwait’s finance minister stated that proposal to amend the Future Generation Law changes “the way of deduction” i.e. a deduction is made for the Future Generation Fund only when there is a surplus.
  • Foreign reserves in Kuwait inched up by 2.99% yoy and 1.83% mom to KWD 13.92bn (USD 45.65bn) in Jun. The book value for gold reserves stood at KWD 31.7mn.
  • A new residency law will come into effect in Kuwait, enabling an expat to stamp residence up to 5 years and for an expat businessman for 10 years.
  • PMI in Lebanon ticked up to 44.9 in Jul (Jun: 43.2); output continued to drop, as did new orders while sales declined every month since Jun 2013 – all weighed down by lira’s depreciation, inflation surge, a liquidity crisis and lack of reforms.
  • Lebanon approved a 2-week state of emergency in Beirut, giving the army powers to prohibit gatherings and close down assembly points.
  • The IMF called on Lebanon to restore a solvent financial system and introduce temporary safeguards to avoid capital outflows (including formalizing capital controls and unifying the exchange rate) while also asking for comprehensive audits of key institutions, including the Central Bank. More: https://www.imf.org/en/News/Articles/2020/08/09/pr20278-statement-by-imf-md-kristalina-georgieva-int-conference-support-beirut-lebanese-people
  • The IIF forecasts Lebanon’s economy to shrink by 24% this year, from an estimated 15% drop earlier. External financing needs for the next 4 years have increased to over USD 30bn.
  • Lebanon’s economy minister clarified that the country has flour to last 4 months after reports emerged of a potential shortage. In addition, the World Food Programme is sending 17,000 tonnes of flour as a first batch of a 50,000-tonne supply plan.
  • Oman secured a USD 2bn bridge loan with a group of international and regional banks, reported Reuters. The pricing was “relatively cheaper than the market” and the loan is likely to be repaid with money raised from an international bond issuance in 6 months’ time.
  • About 79k expats have left Oman between Mar-Jun this year, on repatriation flights arranged by their respective countries, according to the National Centre for Statistics and Information.
  • Total number of passengers travelling through Oman’s airports reached 3.59mn as of end-May 2020. Passengers through the Muscat International Airport fell by 51% yoy to 3.22mn.
  • Oman’s largest solar power plant, Ibri II, is set to start operations by the mid-2021. The plant, being built at a cost of USD 400mn, is expected to power up to 33,000 homes and remove 340,000 tonnes of CO2 emissions from the country’s footprint per annum.
  • Electricity production in Oman declined by 3.1% yoy to 13,254.8 GW per hour at end-May while water production increased by 5.5% to 147.26mn cubic metres.
  • Industrial production index in Saudi Arabia slipped by 22.4% yoy, largely due to a decline in mining and quarrying production activity (-23.2%).
  • Tadawul plans to launch an ESG index in cooperation with MSCI by end-2020 or Q1 2021. This will include at least 70 Saudi listed companies, according to the bourse’s chief executive.
  • Foreigners net purchases on Saudi Tadawul surged to SAR 224.94mn in the week ended Aug 6th, compared with net sales of SAR 50.84mn and SAR 174.1mn by Saudi and GCC nationals respectively.
  • FT reported that Aramco is planning to slash its capital spending to USD 20-25bn this year, to pay a USD 75bn dividend promised to investors during its IPO. Payouts to minority shareholders as pledged are protected for five years. Aramco’s Q2 profits plummeted by 73%.
  • Private firms in Saudi Arabia applying for financial compensation under the unemployment insurance scheme (SANED) have been asked to reduce the percentage of beneficiaries to 50% of total Saudi employees (for those operating outside the “most affected business activities).
  • Hotel occupancy rates in Jeddah improved to 32.1% in Jul, vs Apr’s low of 21.9%, according to STR data. Average daily rate touched SAR 769.35 in Jul, the highest since Oct 2019, and the revenue per available room averaged SAR 247.17 – the highest since Feb.
  • In a bid to attract investors, Saudi Arabia updated regulations for municipal real estate transactions allowing the extension of the maximum contract period to 50 years from 25 years and reducing the bank guarantees amount.
  • Saudi Arabia launched a platform for electronic notarization of employment contracts.
  • The aviation and related industries in the Middle East are likely to lose about 1.5mn jobs during the pandemic, according to IATA. This is more than half the region’s 2.4mn aviation-related employment. GDP supported by the industry will fall by up to USD 85bn this year.

UAE Focus

  • The UAE agreed to establish and pursue diplomatic relations with Israel including bilateral travel and trade (including technology and goods) as well as cooperation on food security, climate change and energy. In exchange Israel will suspend “temporarily” its plan to annex parts of occupied Palestinian territory in the West Bank. Bahrain, Egypt and Oman endorsed the move.
  • Dubai non-oil PMI improved to 51.7 in Jul (Jun: 50), thanks to strong expansions in activity and new orders. Travel and tourism posted the first rise in activity since Feb on government’s effort to restart tourism. However, job growth remained weak, falling for a 5th straight month and outlook among businesses weakened for the first time since Apr (on expectations of a protracted recovery).
  • Industrial production index in Abu Dhabi grew by 9.2% yoy in Q1 2020, supported by a pickup in “manufacture of machinery and equipment”.
  • Weekly CPI inched up by 0.2% in week 4 of Jul 2020, using Feb as a reference month. Inflation for food and non-food consumer goods increased by 0.6% and 8.8% respectively.
  • Abu Dhabi formed an economic collaboration committee, comprising representatives from 4 public sector entities and 22 private sector firms, to form working groups on 7 key sectors: construction & real estate; banking & financial services; retail, hospitality & tourism; education & technology; healthcare; industry & manufacturing and one specialized on SMEs.
  • According to the latest Q2 2020 Credit Sentiment Survey by the UAE Central Bank, about 53% of respondents (senior credit officers of all banks and financial institutions extending credit within the UAE) stated that the demand for loans has declined either substantially or moderately, as per while 37.6% stated that credit standards had tightened moderately.
  • Emirates District Cooling, a subsidiary of Dubai Investments, announced a 7% discount on customers’ “declared load” bill for the 3 months (Aug-Oct) across all sectors.
  • Property transactions in Dubai touched 2361 in Jun, worth a total of AED 4.9bn and the secondary market had higher sales transactions than off-plan transactions. Overall, 5605 transactions were recorded in Q2 this year, worth AED 11.05bn.

Media Review
Media Review
Priorities for Saving the Private Sector
https://www.project-syndicate.org/commentary/supporting-the-private-sector-in-developing-countries-by-philippe-le-houerou-2020-08
How six companies are using technology and data to transform themselves
https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/how-six-companies-are-using-technology-and-data-to-transform-themselves
Americans rush to be their own bosses as Covid19 hits the job market
https://www.bloomberg.com/news/articles/2020-08-12/americans-rush-to-be-their-own-bosses-as-covid-hits-job-market
Indian Billionaires Bet Big on Head Start in Coronavirus Vaccine Race
https://www.nytimes.com/2020/08/01/world/asia/coronavirus-vaccine-india.html
UAE-Israel establish formal diplomatic relations: viewpoints
https://www.economist.com/middle-east-and-africa/2020/08/13/israel-and-the-uae-make-their-quiet-affair-public
https://foreignpolicy.com/2020/08/15/uae-israel-business-technology-peace/
https://www.aei.org/foreign-and-defense-policy/israeli-emirati-normalization-be-careful-what-you-wish-for/
https://www.bloomberg.com/news/articles/2020-08-14/dubai-is-poised-to-gain-from-travel-opening-with-israel
https://www.ft.com/content/cd0a594f-008b-413d-9cd5-3d9b71cc8d6e
Saudi Arabia’s PIF moves billions from blue chips to ETFs
https://www.wsj.com/articles/saudi-wealth-fund-moves-billions-from-blue-chips-to-etfs-11597513874
Offshore companies linked to Lebanon central bank governor have assets worth nearly USD 100mn
https://www.occrp.org/en/investigations/lebanons-offshore-governor
https://www.reuters.com/article/lebanon-crisis-governor/offshore-companies-linked-to-lebanon-c-bank-governor-have-assets-worth-nearly-100-mln-report-idUSL8N2FE39N
How powerful was the Beirut blast?
https://graphics.reuters.com/LEBANON-SECURITY/BLAST/yzdpxnmqbpx/
 
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Weekly Insights 10 Aug 2020: Lebanon's way forward, PMIs & Mobility, Saudi monetary statistics, Arab FDI

The Beirut blast and its recovery/ reconstruction dominate news in the Middle East. Our take on the path for Lebanon’s economic recovery is part of this Weekly Insight edition. Given the scheduled global PMI releases last week, we take a close look at the region’s PMIs and Mobility indicators in parallel. Also covered are the latest monetary indicators from Saudi Arabia and FDI flows in the Arab region (Q1 2020).     

  1. Beirut blasts and Lebanon’s way forward

The Beirut port explosion on Aug 4th – which left at least 158 people dead, 6000 injured and 300k homeless – was possibly the last straw for the people already immiserated by an economic, banking & financial meltdown (since Oct 2019) alongside dealing with the Covid19 outbreak. The explosion led to calls for resignation of the government (three ministers have resigned, including after the blast, citing failure to reform), with demonstrations gaining traction over the weekend. In addition to the loss of human lives and destruction of buildings (homes and businesses), it is critical to understand the importance of the ports: 80% of the country’s food imports come through the port, in addition to medical supplies as well as oil and gas. The silos have been demolished (which hold 2-3 months supplies of grain), leading to shortages of food (& higher prices – food inflation had surged by 108.9% in H1 2020 and by 250% in Jun 2020); expedited imports of food and fuel will also be constrained by damaged logistics (transport and warehouses). Additional cuts in electricity (given the impact on fuel supplies) will negatively affect hospitals (that are fighting the Covid19 outbreak in additional to normal operations) and businesses.
Damage to infrastructure (port, transport, logistics and related facilities), housing and businesses is extensive. A detailed survey will be required to assess the total costs of reconstruction but it is clear that Lebanon does not have the fiscal space and will require international support. The destruction will further depress economic activity through a negative impact on consumption, investment and export activity. We forecast an overall reduction in real GDP by some 30% (Great Depression levels) along with continuing and potentially accelerating inflation.  Beirut’s governor stated (without presenting evidence or survey estimates) that the repair bill for the capital alone will cost up to USD 5bn while overall cost of damages is estimated at around USD 15bn. The Cabinet’s approval of an exceptional allocation of LBP 100bn [or USD 26.3mn at the central bank’s set rate of LBP 3,800 to the USD at money transfer firms] to deal with the crisis will fall way short of requirements. International donors pledged EUR 252.7mn for humanitarian aid at the Paris conference yesterday held to raise emergency relief for Lebanon. President Macron during his visit to the location stated that he would “propose a new political pact” to all political forces in Lebanon, also assuring that aid would “not go to corrupt hands”.
The way forward is to undertake a comprehensive series of macroeconomic reforms, including at various sectoral levels – ranging from reforms of the power sector to the banking sector, to exchange rate reform alongside an active intent to increase transparency and stamp out corruption. So far, there has been a refusal by the authorities to bite the bullet and undertake reforms. The donor conference yesterday (as well the CEDRE pledges in 2018) are promising: but the aid should only be released within the umbrella of a broader IMF programme – with clear conditionalities of reform (and potentially bringing in independent ‘technocrats’ to form a new government). The country is in urgent need of an equivalent of a Marshall Pan (size of USD 25-30bn and growing), given cumulative losses owing to lack of reforms so far.

Source: Khatib & Alami.

  1. PMI Activity recovers across the globe, including in the Middle East


Global manufacturing PMIs mostly ticked up, given rebounds in both output and new orders. India was one of the nations reporting a lower PMI in Jul: unsurprising given the fast pace of Covid19 confirmed cases – it took only 9 days for India to go from 1.5mn to 2mn – and restricted lockdowns in parts of the country. In spite of the V-shaped recovery in PMI, all is not smooth: restrictions have not been eased fully, demand is largely domestic-driven, and supply chains issues remain – average vendor delivery times lengthened for the 12th consecutive month for global manufacturing PMI. A resurgence in cases/ 2nd and 3rd waves will only add to the burden.

  1. What can we learn from the latest PMI & Mobility indicators?


PMIs in the region indicate a sharp V-shaped recovery following the lockdown period, but is it too much optimism from those surveyed? Order books have improved, though export orders remain weak, indicating domestic demand driving the rise.
This is reflected in the retail and recreation segment of the Google Mobility indicators: with less stringent restrictions in place, movements were higher in the days running up to the Eid Al Adha holidays (across the three nations) while in Saudi Arabia, a similar trend was also visible towards the last week of June, ahead of Jul’s hike in VAT. For firms in the retail and recreation sector, social distancing measures are likely to eat into the firms’ profits (if any) and the road to recovery is likely to be slow. In spite of marketing efforts, it will be affected by spending capacities, salary reductions/ cuts in allowances/ job losses & return of expat labour to their home countries (e.g.~500k Indians have registered for repatriation flights from the UAE).
Workplace mobility is still around 20% below the baseline numbers (excluding Eid holidays): widespread availability of telework technology and the feasibility of performing work remotely has kept firms operational. However, those sectors where work from home is not the ideal option (think retail, tourism, hospitality), the learning curve has been steep – e.g. retail firms’ rolling out previously unavailable online options.
Bloomberg reported that while working from home, workdays were longer by 48.5 minutes, with 1.4 more emails sent to colleagues per day and an 8% increase in emails sent after hours (questioning the work-life balance and happiness quotient) though offering more flexible work hours (and potentially higher productivity levels). The UAE government’s announcement of flexible working hours for its staff is a good move to raise productivity, reduce peak hour traffic and can act as a precursor for the private sector to emulate. The obvious next step is providing the option for employees to work from home, when possible – think of either shorter work hours (in the office) daily or working from home a full workday during the week.

  1. Saudi Arabia: monetary indicators



Monetary statistics for Jun 2020 in Saudi Arabia reinforce the trends from the Mobility indicators in the previous panel. Both indicators of consumer spending – cash withdrawals and point-of-sale (POS) transactions have ticked up in Jun, ahead of the hike in VAT from July 1st. Loans to the private sector is picking up, thanks to the various measures in place to support the economy as it tackles the Covid19 outbreak. Initiatives like the provision of concessional financing for SMEs and loan guarantee programme likely supported the faster pace of growth. The Corporate Sustainability Programme launched by the Ministry of Finance mid-Jul to support the private sector will also provide support going forward. The final chart tracks new letters of credit opened, by sector – an insight into trade finance. A letter of credit is a financial instrument, usually issued by a bank, which guarantees the seller will receive payment for goods sold to a foreign customer. The Covid19 outbreak put the brakes on activity from Apr-May. Recovery is visible in June’s data, but the difference is stark: LoCs opened for foodstuffs has been rising faster than say motor vehicles (accounted for 25.6% of total in Jan 2020 vs 7.2% in Jun). It is time to switch trade finance to blockchain technology – which will make trade faster, safer, and simpler (elimination of paperwork and associated costs, increased transparency and prevention of fraud)!

  1. FDI flows in the Arab region

In Q1 2020, the number of new FDI projects in the Arab region contracted by 30% yoy to 185 projects in Q1 2020, with investments down by 27.3% to USD 11.2bn while job creation slipped by 23% to 21.3k, according to the Arab Investment & Export Credit Guarantee Corporation (Dhaman). GCC’s share of investments in the Arab region show that Saudi Arabia and UAE together account for 86.6% of the total in Q1 this year. FDI flows are likely to slow in the region this year, mirroring global trends: UNCTAD estimates global FDI inflows to decline by USD 1.1trn this year. The slowdown of implementation of ongoing projects will hurt prospects in the region as well as potential shelving of projects in the near- to medium-term – underscoring the need to diversify sectors into which FDI flows (oil and gas & real estate).
Egypt, UAE and Saudi Arabia together accounted for two-thirds of the FDI inflows into the Arab region during the period 2015-2019 though in terms of number of projects, UAE topped the list (41.4% of the total). The top two sectors attracting investments – coal, oil and gas and real estate – together account for almost half of the total investments (from just 7% of total number of projects). The largest number of FDI projects recorded during 2015-19 were in business services (13%) and financial services (11%) – but its share of investments was only 2% each.

 
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Weekly Economic Commentary – Aug 9, 2020

Markets
Global equity markets had a good week though taking a hit on Fri: in the US, Friday’s jobs report and lack of consensus on the stimulus bill stopped markets from touching a new record high; mounting tensions between US and China (banning US transactions with WeChat & TikTok) put a dampener on Europe and Asia-Pacific while markets dipped in China in spite of strong export numbers. Regional markets were mostly up, with UAE benefitting from Q2 earnings results and news of the latest stimulus measures announced to support economic recovery. During the week, the euro touched the highest vis-a-vis the dollar since May 2018 while the Turkish lira continued to slide.  Oil prices edged up and gold surged to a record high above USD 2000 last week. Among asset classes, gold has been the biggest gainer this year (+36% ytd) and Brent crude the worst performer (-31.75%) Related chart: tmsnrt.rs/2yaDPgn.
Weekly % changes for last week (6-7 Aug) from 30th Jul (regional) and 31st Jul (international).

Global Developments
US/Americas:

  • Non-farm payrolls increased by 1.763mn in Jul, led by the services sector, and following the record gain of 4.791mn in Jun. However, even with addition of 9.3mn workers in the 3 months – either newly hired or back to their old jobs – total employment level remained 12.9mn below the Feb level. Average hourly earnings inched up by 0.2% mom reversing Jun’s 1.3% decline. Unemployment rate declined to 10.2% in Jul from 11.1% the month before, but is double the 3.5% rate from Feb.
  • The US President issued an executive order to implement 4 actions – extend unemployment benefits at a level of USD 400 per week (but requiring states to foot 25% of the bill), reinstate the eviction moratorium, cut payroll taxes (which is collected from both employers and employees to fund Social Security and Medicare) and continue a suspension of student loan repayments. More in the Media Review section.
  • Factory orders grew by 6.2% mom in Jun, following a 7.7% mom rebound the month before. Orders for non-defense capital goods excluding aircraft grew by 3.4% in Jun while shipments of core capital goods were up 3.3%.
  • ADP employment disappointed with a rise of 167k in Jul following an upwardly revised reading of 4.3mn jobs in the previous month. Services producing sector added 166k jobs.
  • ISM manufacturing PMI rose to 54.2 in Jul – the highest level in nearly 1-1/2-years – supported by new orders (rising to 61.5 from Jun’s 56.4) as work restarted while the employment index remained weak (44.3 in Jul vs Jun’s 42.1).
  • ISM non-manufacturing PMI improved to 58.1 in Jul (Jun: 57.1), rising for a 2nd straight month, supported by a surge in new orders (67.7 from 61.6 in Jun) while employment weakened to 42.1 from 43.1 in Jun.
  • US Markit manufacturing PMI inched up to 50.9 in Jul from Jun’s 49.8; it was however revised down from a preliminary estimate of 51.3 for the month. Services PMI moved up to 50 in Jul (prelim estimate: 49.6; Jun:47.9), with the employment sub-index rising for the first time since Feb; business confidence improved to the strongest since Mar 2019. Composite PMI improved to 50.3 from the previous month’s 47.9, though new businesses fell.
  • US trade deficit narrowed by 7.5% mom to USD 50.7bn in Jun; value of exports grew by 9.4% to USD 158.3bn, outpacing a 4.7% jump in imports to USD 208.9bn.
  • Initial jobless claims declined to 1.186mn in the week ended Jul 31, the lowest level since Mar 14 during the Covid19 outbreak, with the 4-week average at 1.338mn. Continuing claims decreased by 0.844mn to 16.1mn in the week ended Jul 24.

Europe:

  • Germany’s manufacturing PMI moved to expansion territory – for the first time since Dec 2018 – with the reading at 51 in Jul (Jun: 45.2), supported by a steep rise in new orders though rate of job losses was among the fastest since 2009. Services PMI increased to 55.6 in Jul (Jun: 47.3), with the strongest recoveries among “hotels and restaurants” as lockdown restrictions eased. Composite PMI picked up to 55.3 in Jul.
  • Eurozone’s manufacturing PMI rose to 51.8 in Jul (Jun: 47.4), thanks to gains in both output and new orders. Only Greece and Netherlands posted reading below-50. Services PMI surged to 55.3 (Jun: 48.3) – recording the fastest rate of growth since Jun 2018. Composite PMI edged up to 54.9 from Jun’s 48.5 – the highest reading since Jun 2019.
  • German factory orders rebounded by 27.9% mom in Jun, picking up by the largest since records began in 1991, supported by domestic demand (35.3%) and capital goods orders (45.7%). However, orders were down 11.3% yoy, and 11.3% lower than levels in Feb 2020. The automotive sector also recovered, with orders rising by two-thirds though 12.2% down compared to Feb levels.
  • Industrial production Germany accelerated by 8.9% mom in Jun (May: 7.4%), with the automotive industry posting a 54.7% mom rise in output. Though the V-shaped recovery looks promising, in yoy terms, overall production is still down by 11.7%.
  • Germany’s exports and imports posted a surge in Jun: exports posted a 15% mom rise following May’s 9% pickup while imports also grew by 7% (May: 3.6%). Trade surplus almost doubled to EUR 14.5bn from a month ago. China’s demand supported the pickup in exports, with the country buying 15.4% more vs Jun 2019 while demand from US and UK waned (shrinking by 20.7% and 15.7% respectively).
  • Retail sales in the euro area recovered by 1.3% yoy and 5.7% mom in Jun (May: -3.1% yoy and 20.3% mom). Sales of textiles, clothing and footwear grew by 20.5% mom in Jun in the EU, after a record 130.7% jump in May.
  • UK manufacturing PMI increased to a 16-month high of 53.3 in Jul (Jun: 50.1): while domestic new orders rose, new export business fell. Services PMI expanded to 56.5 in Jul (Jun: 47.1), the fastest pace of expansion since Jul 2015, and business optimism improved for the 4th consecutive month.
  • The Bank of England left rates on hold at 0.1% at the latest meeting while keeping its target for the asset purchase facility unchanged at EUR 745bn. The apex bank forecast GDP to be 5%+ below its pre-pandemic peak at end-2020, only regaining its pre-crisis level at end-2021.

Asia Pacific:

  • China’s Caixin manufacturing PMI rose to 52.8 in Jul from Jun’s 51.2 reading, supported by new orders (54.4) amid weak employment. New export orders (48.3) remained in contractionary territory for the 7th month running, indicating the rebound to be domestic demand-driven. Services PMI slowed to 54.1 in Jul (Jun: 58.4): while new orders were up for the 3rd month, new export business dropped and employment fell for the 6th straight month.
  • Chinese exports accelerated by 7.2% yoy in Jul (Jun:+0.5%), driven by demand for medical supplies and automobiles, while imports fell by 1.4%, thereby narrowing the trade balance to USD 62bn, the 2nd highest level recorded since Oct 2015. China’s foreign reserves inched up to USD 3.154trn in Jul (Jun: USD 3.112trn).
  • Japan’s GDP shrank by 0.6% qoq and an annualized real 2.2% in Q1 – unchanged from the second preliminary reading.
  • Japan’s manufacturing PMI clocked in at 45.2 in Jul (Jun: 40.1), posting the 15th month of contraction. Exports, new orders and output fell at slower rates as employment declined for the 5th month in a row.
  • The preliminary estimates for Japan’s coincident and leading economic indices increased in Jun: the leading economic index jumped to 85 – the highest reading since Mar – from the previous month’s 78.3 while the coincident index rose 3.5 points to 76.4.
  • Tokyo CPI ticked up by 0.6% yoy in Jul while the core CPI (excluding food and energy) nudged up by 0.6% yoy; excluding just fresh food, prices were higher by 0.4%.
  • Japan overall household spending fell for the 9th consecutive month in Jun, down 1.2% yoy, but there were signs of recovery. This reading follows a 16.2% plunge in May and a 11.1% fall in Apr. Spending on household goods (furniture, ACs, TVs, computers) rose; tumbled on cultural activities and recreation (-21.2%) and domestic/ overseas tours (-90.7%). In mom terms, spending was up 13%, the first increase in 4 months, supported by lifting of the state of emergency (May 25th) and government’s cash handouts (JPY100k per person).
  • India’s central bank meeting resulted in no changes to interest rates: repo and reverse repo rates were left unchanged at 4% and 3.35% respectively. Separately, the governor proposed a one-time debt restructuring scheme allowing banks to restructure loans to companies in distress due to Covid19, without having lenders reclassify such loans as stressed assets.
  • India’s manufacturing PMI slipped to 46 in Jul (Jun: 47.2), as both output and new orders continued to decline on subdued demand.
  • South Korea’s manufacturing PMI ticked up to 46.9 in Jul (Jun: 43.4), as factory production reopened. This is the 7th month of contraction, but new orders fell at much slower rates and job losses eased amid ongoing weakness in export sales.
  • Indonesia’s GDP contracted by 5.32% yoy in Q2 – for the first time in 20 years (Q1 1999) – dragged down by household consumption (-5.51%) and investment (-8.61%); in qoq terms, GDP dipped by 4.19%. The government slashed growth forecast this year to between -0.4-1%.
  • Singapore PMI improved to 50.2 in Jul (Jun: 48), posting the first expansion since Jan, thanks to an improvement in new orders index, a first-time expansion in the indices of new exports and factory output, as well as a faster rate of expansion in the inventory index.
  • Singapore retail sales surged by 51.1% mom in Jun, following the circuit breaker imposed in Apr-May; in yoy terms, sales were still down by 27.8% (the 4th straight month of double-digit declines).

Bottom line: Confirmed cases of Covid19 hit almost 5mn in the US while in India it crossed 2mn (took only 9 days for India to go from 1.5mn to 2mn!); with second waves appearing in Europe (France and Germany reported their highest daily number of new cases in 3 months) and Asia (Hong Kong, Japan, Singapore, Australia – the latter recording more daily cases than at the peak of the first wave in Mar-Apr), the road to recovery is unlikely to be V-shaped. Until a vaccine is found, localized restrictions are the likely way forward while avoiding nation-wide lockdowns (unless necessary). Global manufacturing PMI ticked up to a 6-month high of 50.3 in Jul, given a revival in both output and new orders. However, all is not smooth: restrictions have not been eased fully, demand is largely domestic-driven, and supply chains issues remain – average vendor delivery times lengthened for the 12th consecutive month. A resurgence in cases will only add to the burden.
Regional Developments

  • Bahrain will accept applications for new work permits starting this week, according to the Labour Market Authority. The fees imposed by the Authority to issue and renew all types of work permits has been reduced by 50% for the period Jul-Sep.
  • Partial salary payments (50%) have been completed for 60,416 insured Bahrainis in 1,120 firms in the private sector most affected by Covid19; half their salaries were covered for the period Jul-Sep from the unemployment insurance fund.
  • Value of Bahrain-origin exports declined by 9% yoy to BHD 540mn (USD 1.42bn) in Q2 this year. Top export destinations remained unchanged: Saudi Arabia, UAE and the US.
  • Travel through the King Fahad Causeway – connecting Bahrain and Saudi Arabia – has dropped by 99% since the Covid19 outbreak, according to the Finance and National Economy Minister. Though the bridge was opened to permit Saudi citizens to return home, operations are not expected to return to normal before Oct.
  • A proposal to defer all loans payments from Bahrainis for 3 months has been submitted to the Parliament
  • PMI in Egypt improved to 49.6 in Jul (Jun: 44.6), thanks to expansions in output (50.9, highest in 12 months) and new orders (51.4, highest since Nov 2017). Employment sub-index moved up to 46.1 from 44 the month before.
  • Net foreign reserves increased by 0.3% mom to USD 38.315bn in Jul; this is down from a high of more than USD 45bn earlier this year.
  • Money supply in Egypt grew by 17.47% yoy to EGP 4.53trn in Jun. Local bank deposits were up by 2.4% mom to EGP 3.268trn in Jun 2020.
  • FDI into Egypt declined by 57.8% yoy to USD 970.5mn in Jan-Mar 2020; in the first three quarters of FY 2019-20, FDI inflows increased 1.6% to USD 12.7bn.
  • Government investments in Egypt’s 2020-21 budget grew by 35% yoy to EGP 280.7bn, disclosed the finance minister.
  • Egypt’s total budget deficit fell to 7.8% of GDP in the fiscal year 2019-20, down from 8.2% in FY 2018-19. The country posted a primary surplus of 1.8% of GDP during the year.
  • Mortgage finance in Egypt plummeted by 84.2% yoy to EGP 62.7mn in Apr, according to the Financial Regulatory Authority. Value of mortgage refinance also dropped by 79.5% to EGP 33mn.
  • Egypt’s tourism revenues are expected to drop by 73% yoy this year (more than 2% of GDP), according to the IMF (based on UN WTO estimates).
  • Revenues from Egypt’s Suez Canal have dipped marginally during the Covid19 outbreak: during the full year 2019-20 (Jul-Jun), revenues were down by a minimal 0.52% yoy to USD 5.72bn. Revenues had increased by 4.7% during 2015-2020 to USD 27.2bn.
  • Egypt and Greece signed an agreement to set up an exclusive economic zone between the two nations.
  • Iraq will cut an additional 400k barrels per day in Aug to compensate for oil overproduction in May-Jun. Iraq’s total oil exports averaged 2.763mn bpd in Jul.
  • An Iraqi delegation to Lebanon informed the latter’s PM that the country would provide fuel aid and wheat to Beirut, following the blast on Aug 4.
  • Iraq’s PM called an early general election on June 6, 2021, roughly a year ahead of when it would normally be held. The parliament must still ratify the election date.
  • Jordan decided to postpone the reopening of its airports to international commercial flights (scheduled for Aug 5th) “until further notice”.
  • The average hotel occupancy rate in Jordan’s Aqaba did not exceed 50% during the Eid Al Adha holidays.
  • Jordan has set Nov 10th as the date for parliamentary elections.
  • Kuwaitization gains speed: 50% of expats working for contracting firms are to be laid off in the next three months, reported Arab Times.
  • In a bid to reduce the number of foreigners, Kuwait has stopped the transfer of residency permits of expat children to their mothers in the case of the father’s final exit from the country or expiry of residency permit. Exceptions are in place for 3 categories: female teachers (employed by the education ministry), female healthcare workers (at the health ministry) and women doctors (at the general directorate of criminal evidence).
  • Kuwait and India have agreed to facilitate Indian expats to depart Kuwait during the period 10-24 Aug, capped at 1000 per day.
  • The explosion on Aug 4th in Lebanon’s Beirut port led to calls for resignation of the government, with demonstrations gaining traction over the weekend. It was disclosed that various letters to the judiciary requesting the removal of the explosive material had gone unheeded for years. France’s President Macron during his visit to the location, stated that he would “propose a new political pact” to all political forces in Lebanon, while also assuring that aid would “not go to corrupt hands”. Paris is hosting a donor conference today to raise emergency relief for Lebanon.
  • Costs of the explosion will be high and require international support: Beirut’s governor stated that the repair bill for the capital alone will cost up to USD 5bn. A financial adviser to the government estimates the cost of damages at around USD 15bn. The Cabinet approved an exceptional allocation of LBP 100bn to deal with the crisis. The finance minister stated that working with the IMF was the only way out for the country, given its “very limited” financial capacity.
  • Lebanon’s central bank froze the accounts of the heads of the Beirut port and Lebanese customs along with 5 others, reported Reuters. Separately, banks were instructed to offer exceptional dollar loans at zero interest to individuals and firms affected by the explosion.
  • Support from international organisations: The IMF called for movement on reforms in Lebanon, also stating that the organization is “exploring all possible ways to support” the country. The World Bank stated that it was willing to “reprogram existing resources and explore additional financing” to rebuild the economy.
  • Lebanon’s foreign minister tendered his resignation early last week, blaming lack of political will to roll out reforms required to revive the economy.
  • Oman has lifted internal travel restrictions and reduced the hours of nighttime curfew (to 9pm-5am), except in the Dhofar governorate.
  • Hotel revenues in Oman dived by 51.5% to OMR 56.11mn (USD 145.2mn) until end-Jun; hotel occupancy rate fell to 32% from 55.3% in the same period a year ago.
  • Qatar disclosed that it had submitted a request to the International Olympic Committee to host a future Games, possibly in 2032.
  • Saudi Arabia’s PMI rose to a 5-month high of 50 in Jul (Jun: 47.7), with pickups across 4 of the 5 sub-indicators – new orders (+1.5 points), output (+0.8), stocks of purchases (+0.6) and employment (+0.2); new export orders continued to fall sharply. Employment fell for a 5th consecutive month while average wages and salaries dropped for a record 7th successive month in an attempt to control overheads.
  • Overall consumer debts in Saudi Arabia increased by 5.3% yoy to SAR 335.77bn in Q2 2020; credit card loans grew by 20.1% yoy to SAR 20.08bn.
  • Foreign investors bought a net SAR 928.14mn (USD 247.45mn) of stocks in Jul, according to Tadawul. Saudi individuals bought SAR 94.88bn of stocks (85.18% of total buys) in Jul and sold SAR 97.04bn of stocks (87.11% of total sells).
  • Saudi Customs has relaxed restrictions on the movement of trucks coming from other GCC nations.
  • SAMA assets declined by 7.8% yoy to SAR 1.8trn in Jun; in mom terms, assets grew by 2.6%. Saudi foreign reserves contracted by 13% in June to reach SAR 1.677trn (USD 447.43bn).
  • Banks in Saudi Arabia have lowered purchase of government bonds in H1 2020: investments were down by 4.6% to SAR 44.5bn in the first 6 months.  
  • Deposits held by banks in Saudi Arabia grew by 8.9% yoy to SAR 1.843trn in Q2, with demand deposits accounting for 66.01% of the total. Loan to deposit ratio touched 90.72% in Q2, with bank credit rising by 13.2% to SAR 1.672trn.
  • Point-of-sale transactions in Saudi Arabia accelerated by 14% yoy to SAR 155.9bn in H1 this year, with food and beverages dominating POS purchases (about 1/5th of the total).
  • Remittances by expats in Saudi Arabia picked up by 13% yoy to SAR 69.43bn (USD 18.5bn) in H1 this year. Jun alone witnessed a 60.22% surge in remittances to SAR 13.959bn.
  • Saudi Arabia posted a fiscal deficit SAR 109.2bn (USD 29.12bn) in Q2, as oil revenues dipped by 45% yoy to USD 25.5bn. Expenditures dropped by 17% to around USD 65bn.
  • The number of FDI projects launched by the GCC declined by 8% to 70 in Q1 2020, while investments sank by 79.3% to USD 4.9bn. According to Dhaman data, Saudi Arabia was the top GCC investor overseas with a share of 49%, followed by UAE (38%).

UAE Focus

  • UAE PMI improved marginally to 50.8 in Jul (Jun: 50.4), while employment fell for the 7th consecutive month. Survey respondents attributed the rise in activity partly to “starting of new projects and an increase in marketing”, according to Markit.
  • The UAE ministry of economy plans to roll out a flexible plan in 3 phases, with 33 initiatives, to support economic growth – covering 8 aspects ranging from “support for labor market, stimulation of trade, enhanced flexibility of financing activities, increased productivity, support for digital transformation, acceleration of green economy growth and enhanced food security”. SMEs will be a key area of focus in the 1st and 2nd phases of the plan.
  • The UAE central bank will “temporarily relax” the thresholds of two prudential ratios – the Net Stable Funding Ratio (NSFR) and the Advances to Stable Resources Ratio (ASRR) – effective until end of 2021. Banks can go below the 100% threshold, but not lower than 90% for NSFR; for ASRR, banks can go above the 100% threshold, but up to 110%. This will boost capacity of banks to implement the Targeted Economic Support Scheme (launched in Mar).
  • As of Jul, 260k individuals and 9,527 SMEs availed the interest-free loans worth AED 3.2bn and AED 4.1bn (9.3% of total disbursed amount) respectively under the central bank’s Targeted Economic Support Scheme.
  • UAE dirham will be included as a settlement currency in the Arab regional payments clearing and settlement system called “Buna”, designed to support and boost inter-Arab trade and investment.
  • Value of Abu Dhabi’s non-oil foreign trade declined by 7.3% yoy to AED 66.5bn in Jan-Apr 2020. Imports touched AED 35.14bn, while exports and re-exports reached AED 18.3bn and AED 13bn respectively.
  • Dubai attracted AED 12bn in FDI in H1 this year, into 190 announced projects. In H1 2019, Dubai witnessed the inflow of AED 46.6bn in foreign investments (+135% yoy).
  • Abu Dhabi government disclosed that it would spend AED 2.78bn (USD 757mn) to disburse mortgage loans for 1500 Emirati citizens and exempt mortgage repayments for 476 retirees.
  • Abu Dhabi’s Department of Economic Development will permit businesses to renew licenses for 3 years, with the aim to also reduce and simplify the number of processes involved in the renewal process. In H1 this year, renewed licenses touched 33116, accounting for 42.3% of the total number of expired licenses.
  • The Dubai Land Department launched a fractional title deed programme i.e. an investor will be able to buy up to half or a quarter of a hotel or serviced apartment; transfer fee will be paid only on the amount invested, and not the total value of the unit. These fractional title deeds can be transferred, sold or mortgaged.
  • The Dubai Airport Freezone Authority (DAFZA) posted a 54% rise in general exports in Q1, with China, India and Switzerland accounting for 21%, 16.6% and 14% of DAFZA’s trade. The number of companies registered in DAFZA increased by 19% yoy in H1 this year, while new businesses including SMEs grew by 23% yoy.
  • Consumer confidence in the UAE fell to 92 points in Q2 – its lowest since Q4 2009 (100 denotes optimism) – bogged down by job prospects, economy and health, according to the Conference Board Gulf Center for Economics and Business Research.

Media Review
Beirut blasts and beyond
https://www.ft.com/content/0e8aff25-629c-4737-a1dc-8ed4ee32447e (long read, paywall)
https://www.economist.com/leaders/2020/08/08/a-big-blast-should-lead-to-big-change-in-lebanon
https://www.nytimes.com/2020/08/05/opinion/beirut-explosions.html
Trump’s executive actions on coronavirus relief
https://www.businessinsider.com/trump-coronavirus-relief-executive-actions-face-legal-battles-other-challenges-2020-8
A Historian of Economic Crisis on the World After COVID-19
https://nymag.com/intelligencer/2020/08/adam-tooze-how-will-the-covid-19-pandemic-change-world-history.html
Are mergers the way ahead for the GCC’s airline industry post pandemic?
https://nassersaidi.com/2020/08/05/are-mergers-the-way-ahead-for-the-gccs-airline-industry-post-pandemic-opinion-piece-in-gulf-business-aug-2020/
IMF’s 2020 External Sector Report: Global Imbalances and the COVID-19 Crisis
https://www.imf.org/en/Publications/ESR/Issues/2020/07/28/2020-external-sector-report
Coronavirus Vietnam: The mysterious resurgence of Covid-19
https://www.bbc.com/news/world-asia-53690711

The Pandemic Workday is 48 minutes longer and has more meetings
https://www.bloomberg.com/news/articles/2020-08-03/the-pandemic-workday-is-48-minutes-longer-and-has-more-meetings
 Oil industry reels from historic crash: 4 charts
https://www.ft.com/content/a34cbb86-ef8b-4b2c-b693-e0b6e405c5ab
 
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Weekly Insights 27 Jul 2020: Charts on the spread of Covid19 in the GCC + Global trade

Charts of the Week
1. Spread of Covid19 in the GCC
Most GCC nations have begun a phased re-opening of their economies after being in partial/ complete lockdown for weeks. Some restrictions still remain (e.g. partial capacity at mosques, restaurants, movie theatres, gyms etc.) in countries that have reopened (like the UAE); where cases are high, partial nighttime curfews and targeted lockdowns are in place. The spread of the outbreak is varied among the GCC nations.
The chart maps the share in total daily increase in confirmed cases per million persons (x-axis) against the share of the country in overall output (y-axis), with the size of the bubble denoting the 7-day average of the daily increase in cases. Among the GCC nations, the UAE seems to be performing better – when it comes to both the 7-day average of daily increase in Covid19 cases as well as the daily confirmed cases per million people.

Saudi Arabia, which accounts for the lion’s share in GCC’s GDP, also has the highest 7-day average of daily increase in Covid19 cases (size of the bubble). This implies a sharper downturn in GDP this year due to the outbreak, but the effects of lower oil prices and the OPEC+ led cut in oil production will worsen the growth outlook. It is then little wonder that the rhetoric has shifted to diversifying revenue base with more privatisations and a hint of the introduction of an income tax in the future.
The GCC nations with the highest share in total daily increase in count (the highest being Oman) are among those with a lower share of overall GDP. For these nations, the worries are multiplied manyfold: not only will growth be affected by both the outbreak and lower oil prices, fiscal constraints and lower credit ratings will restrain their access to borrow from international capital markets. While governments have tightened purse strings, reducing capital and infrastructure spending will be detrimental to economic growth (especially the private sector).
A decline in growth in oil-exporters also has a negative impact on many oil-importing nations: ranging from job losses (& the return of these residents to home countries that already face relatively higher unemployment rates), lower remittances as well as lower foreign aid and investments.
Chart 2. Economic Impact of Covid19 and low oil prices on the Middle East’s oil exporters & importers

 
2. Decline in global trade
Along with tourism, global trade has been one of the most-hit by the global Covid19 outbreak. Trade growth had been slowing for the past year, and the pandemic has only accelerated its pace. Monthly data from the IMF’s Direction of Trade Statistics reveal that the drop in export growth touched two-digits in Mar, and given lockdown measures and factory shutdowns it can be estimated that data for Apr-May will be far worse.

The WTO estimates that trade will drop by 18.5% in Q2 this year, with a full year dip of between 13% (optimistic) to 32% (pessimistic scenario). For the Middle East, the 13.9% decline in total exports in Mar is a result of both lower oil production and lower demand for oil.
Shipping estimates, denoted by the Baltic Exchange’s sea freight index, touched a 9-month high in early Jul after recovering in Jun: this should translate into an improvement in global trade after May. Air cargo traffic data from IATA also denote that the cargo levels have shown a slight rebound in Apr (the latest available data). However, note that in both cases, there is a long way to recover to their pre-Covid19 levels. Supply chains remain disrupted though there has been a rebound in manufacturing activity across the globe (latest PMI numbers from Europe and Asia).

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Weekly Economic Commentary – Jul 26, 2020

Markets
With rising US-China tensions (tit-for-tat orders to close consulates in Houston and Chengdu), stock markets across the globe dropped from their 5-month peaks on Fri, posting overall losses last week. Traditional safe haven assets continued their good run: gold hit its highest level since 2011 and closed 5.1% higher in the week; yield on five-year US Treasuries briefly dropped to a new record low of 0.25%; German bond yields also rose from two-month lows. Q2 corporate earnings disappointed across the region; market performance was mixed, with Oman posting the biggest gain (+2.1%) versus Kuwait’s dip of 3.4%. The euro touched a 21-month high vis-à-vis the dollar, while the Swiss franc touched a 4-month peak. Oil prices gained slightly, supported by a weaker dollar.
Weekly % changes for last week (23-24 Jul) from 16th Jul (regional) and 17th Jul (international).

Global Developments
US/Americas:

  • Chicago Fed National Activity Index posted a new record high of 4.11 in Jun (May: 3.5 and Apr’s record low -17.89). The volatile index’s 3-month average stands at -3.49 in Jun.
  • Markit manufacturing PMI improved to 51.3 in Jul (Jun: 49.8) – the first expansion since Feb – thanks to rise in both output and new orders. The flash services PMI inched up only to 49.6 from 47.9 in Jun.
  • Existing home sales accelerated by 20.7% mom to 4.72mn in Jun, the highest gain on record, following three straight months of declines. Sales were down by 11.3% yoy. New home sales surged to a near 13-year high, rising by 13.8% mom and 6.9% yoy to a seasonally adjusted 776k units. The 30-year fixed mortgage rate is averaging 3.01%, close to a 49-year low.
  • Initial jobless claims increased to 1.416mn in the week ended Jul 18, reversing the 15-week streak of declining initial claims. This also marks the 18th consecutive week with initial claims crossing the 1mn mark. Continuing claims decreased by 1.107mn to 16.197mn in the week ended Jul 11.

Europe:

  • The EU’s recovery deal was approved after 5 days of discussions – the EU as a whole will borrow a total of EUR 750bn (for grants and loans) from the markets. This deal includes: (a) a EUR 1.1trn budget for the EU over the next 7 years; (b) EUR 360bn in low-interest loans for countries most hit by the pandemic; (c) EUR 390bn in grants to the worst affected nations. Hopes of the deal had sent Italy’s borrowing costs to their lowest since early-Mar and pushed the euro to a 19-week high.
  • German manufacturing PMI moved out of the contraction zone, posting a reading of 50 in Jul. Services PMI also improved to 56.7 in Jul (Jun: 47.3) and composite PMI increased to 55.5 from the previous month’s reading of 47.
  • Eurozone’s manufacturing PMI crossed the 50-mark, rising to 51.1 in Jul (Jun: 47.4). Services PMI rose to 55.1 (Jun: 48.3), supporting the composite PMI to touch 54.8 (48.5).
  • German PPI remained unchanged month-on-month, missing market expectations, but fell by 1.8% yoy in Jun (May: -2.2%).
  • Eurozone’s current account posted a surplus of EUR 7.95bn in May, almost halving from the month before, thanks to a big outflow of secondary income. In the 12-month period to May 2020, the current account recorded a surplus of EUR 264bn (2.2% of euro area GDP) vs 2.7% of GDP during the 12 months to May 2019.
  • The interim UK manufacturing PMI (based on 85% of responses) rose to a 32-month high of 57.1 in Jul (Jun: 50.1) while services activity touched a 5-year high (56.6 from 47.1 in Jun), helping the composite index rise to 57.1 from 47.7.
  • UK retail sales grew by 13.9% mom in Jun, with online sales accounting for GBP 3 out of every GBP 10 spent by consumers. The rebound is mixed: compared with Feb, the volume of food sales was 5.3% higher and non-store retailing grew by 53.6%, but non-food stores (including department stores and clothes shops) remained 15% lower.

Asia Pacific:

  • The PBoC left its benchmark lending rate steady at 3.85% for the third straight month, after it was cut by a total of 46bps since last Aug.
  • Japan’s exports fell by 26.2% yoy in Jun (May: -28.3%) while imports fell by a slower 14.4% (May: -26.2%), narrowing the trade deficit to JPY 268.8bn (May: JPY 833.4bn). Exports declined for the 19th consecutive month, also recording double-digit declines for 4 straight months, on plunging demand for cars and auto parts amid weak exports to China.
  • Inflation in Japan inched up by 0.1% yoy in Jun, from a similar gain the month before. Excluding fresh food, inflation was flat while excluding both food and energy prices were up 0.4% (after the same rate of gain in May).
  • Japan’s preliminary PMI increased to 42.6 in Jul (Jun: 40.1), posting the 15th straight month of contraction, as output and new orders continued to fall while business sentiment weakened.
  • Korea’s Q2 GDP slipped by 2.9% yoy – the steepest decline since 1998 – and 3.3% qoq (Q1: 1.4% yoy and -1.3% mom). Exports were the biggest drag, declining by 13.6% yoy and 16.6% qoq in the quarter. Government spending rose 6% yoy and 1.0% qoq through advanced fiscal spending plus two supplementary budgets.
  • Inflation in Singapore fell by 0.5% yoy in Jun (May: -0.8%) while core inflation dropped by 0.2% (May: -0.2%). Food inflation edged up by 2.3% in Jun, vs May’s 2.2%.
  • Singapore industrial production unexpectedly fell by 6.7% yoy in Jun (May: -8.1%), with transport engineering recording the largest drop (-33.9%); excluding biomedical manufacturing, output grew by 2.1%.

Bottom line: Global Covid19 confirmed cases have passed 16mn, with almost 40 nations reporting a record single-day rise in new infections. Large numbers of new infections are emerging: US crossed 4mn infections, Brazil and India surpassed the 1mn mark while South Africa – inching closer to 500k – rounds the top 5 confirmed cases along with Russia. In this backdrop, the IMF temporarily increased annual limits on access to resources in its General Resources Account and the Poverty Reduction and Growth Trust, after an “unprecedented number of member countries” sought financial support. There are some green shoots: as lockdowns eased and demand revives, Eurozone businesses reported the strongest growth in two years, with PMIs moving into expansion territory, a good start to H2. In Asia though, divergent patterns have emerged with trade-reliant Japan, Singapore and South Korea having gone into recession, while China has bounced back (supported by domestic demand).
Regional Developments

  • The King Fahad Causeway partially opened to allow Saudis living in Bahrain to return; they will have to undergo a 10-day quarantine. The causeway had been closed since Mar.
  • Bahrain completed a BHD 150mn Government Development Bond issuance via direct subscription through the primary market. Investors can trade the bonds in the secondary market after it is listed on Aug 9th.
  • Bahrain accounted for 1.1% of the total personal wealth in Middle East and Africa last year, according to a recent BCG report. Millionaires accounted for 68.8% of Bahrain’s wealth, and this number is expected to rise by 1.1% annually.
  • The validity of Bahraini Visits visas will be automatically extended for an additional three months till Oct 21.
  • Egypt’s non-oil imports declined by 21.18% yoy to USD 23.35bn in Jan-May 2020, with food imports down 22.8% yoy to USD 4.553bn. Non-oil exports fell by 7.8% to USD 10.3bn.
  • Budget deficit in Egypt widened to EGP 389.1bn (USD 24.36bn) in Jul 2019-May 2020, as the 2.2% rise in revenues was outpaced by the 6.8% growth in expenditures. Overall debt to GDP increased by 6.5% of GDP during this 11-month period.
  • Egypt’s finance minister revealed that overdue export subsidies worth EGP 6bn had been disbursed to 1667 companies during the 2019-2020 fiscal year. For the current fiscal year, the government has allocated EGP 7bn to support exports.
  • In a bid to end disputes between taxpayers and the Egyptian Tax Authority, the Central Bank of Egypt will remove the levy on taxpayers’ banks account, so long as they pay 1% of the disputed tax value.
  • Tax relief in Egypt – waiving interest and late fees on taxes – has been extended till Dec.
  • The Baghdad International Airport reopened for operations after its closure in Mar: there will be temperature checks at arrival while social distancing measures are enforced during passport control; incoming passengers are required to take a test 48-hours before boarding.
  • Southern Iraqi exports in the first 20 days of Jul averaged 2.7mn barrels per day, unchanged from Jun’s official figures, implying that Iraq hasn’t met terms of its OPEC+ deal.
  • The Central Bank of Jordan approved 3942 loan requests to the tune of JOD 380.8mn as part of the JOD 500mn SME support programme (for those businesses severely hit by the Covid19 outbreak).
  • A circular issued by Jordan’s PM allows employers to reduce monthly salaries by up to 20% for Jul and Aug.
  • Jordan’s airport will reopen in the first half of Aug, and flights will be open to “green” countries (i.e. where cases are similar to in Jordan).
  • Jordan and Germany signed a EUR 34mn grant agreement to fund a School Construction Programme to upgrade the quality of primary education in the country.
  • Kuwait plans to issue between KWD 4-5bn (USD 13-16bn) in public debt by end of the current fiscal year (i.e. Mar 2021), reported Reuters, subject to the approval of the debt law.
  • Kuwait’s trade surplus with Japan narrowed by 46.3% yoy to JPY 18.1bn (USD 169mn) in Jun, thanks to the dive in exports. Exports to Japan dropped by 47% yoy – the third straight month of decline – while imports from Japan plummeted by 48.9% to JPY 6.1bn.
  • Kuwait’s Health Ministry announced that all government-run hospitals would provide coronavirus diagnostic tests free of charge to both citizens and residents.
  • Kuwait will enter the third phase of Covid19 restrictions starting Jul 28th: its nightly curfew hours will be shortened to 9pm to 3am, mosques will be opened, taxis will be allowed to operate, and hotels will be reopened.
  • Kuwait’s expats who are stranded overseas will need new visas to return; furthermore, the decision on whether expats whose visas have expired while outside Kuwait (more than 40k) can be allowed back into the country will be taken this week. A study has recommended that 3 categories be banned from re-entering the country: marginal labourers, expats over 60 years of age and those sponsored by fake companies who have no actual jobs.
  • With the aim to lower budgetary expenses this year, Kuwait Petroleum Corporation and its subsidiaries have begun to cancel “unimportant” tenders and contracts. It will also end the services of non-Kuwaitis under permanent and private contracts as well as subcontractors.
  • Lebanon central bank’s 2018 audited accounts show assets arbitrarily inflated by over USD 6bn, reported FT. The government has since hired Alvarez & Marsal to conduct a forensic audit of the central bank. (More: https://www.ft.com/content/d2d63b9b-9669-4ec0-93e9-ed97cbeb9261)
  • Oman’s Shura Council’s economic and finance committee has proposed linking VAT to economic growth, implementing VAT only if growth crosses 3% mark. It has also proposed excluding those who earn OMR 900 (USD 2,340) or less a month from the tax.
  • China was the largest recipient of Oman crude in Jun, having received 94.28% of total Omani crude exports. Malaysia (2.63%), India (1.95%) and South Korea (1.14%) were others.
  • The newly-established Oman Investment Authority restructured the boards of 15 companies it oversees; chairmen of five companies were replaced.
  • Expat population in Oman has been declining steadily: it has dropped by 122k since Dec 2019 and by 55k in the past 3 months (Apr-Jun). Expat population stands at 1,589,883 in Jun.
  • In a bid to limit the spread of Covid19, Oman will impose curfews (7pm to 6am) and travel bans for the upcoming Eid holidays, a “total lockdown” of all governorates.
  • Oman issued an RfP to all prequalified bidders for the 1GW renewable energy project (‘Manah Solar I and ‘Manah Solar II IPPs); it will be the largest renewable energy venture of its kind once operational in the summer of 2023.
  • Qatar has eased restrictions and will permit its citizens and permanent residency holders to travel outside the country and return anytime starting Aug 1st.
  • Qatar Airways launched four international investment arbitrations seeking at least USD 5bn in compensation from Saudi Arabia, UAE, Egypt and Bahrain for blocking it from their airspace.
  • Qatar Investment Authority has taken an undisclosed stake in the German bio-tech firm CureVac as part of a USD 126mn financing round.
  • In a Bloomberg webinar, Saudi Arabia’s finance minister revealed privatization plans in sectors like healthcare and education (that weren’t targeted previously) to broaden its revenue base (raising an estimated SAR 50bn in the next 4-5 years). Levying income tax was an option under consideration, though unlikely to be introduced in the immediate future as it would require a “lot of preparation”. It was later clarified that “income tax issue is not under discussion”.
  • Saudi Arabia’s oil exports dived by 65% yoy and non-oil exports shrank by 31.9% in May. Total exports declined by 57.9% yoy and 1.6% mom to SAR 36.506mn while imports dropped by 36.5% yoy and 9.3% mom to SAR 34.534mn.
  • The value of foreign ownership on Saudi Tadawul inched up by 2.1% from the previous week to SAR 1.04bn in the week ended 16 Jul.
  • The housing ministry Saudi Arabia is collaborating with 70 real estate developers to build more than 100k units across a number of projects; it targets building 200k residential units in the “near future”.
  • Saudi Arabia’s land borders with Kuwait, Bahrain and the UAE opened last week: citizens, immediate family members and their domestic staff can enter the country without obtaining prior authorization.
  • According to Moody’s, Middle East nations raised USD 46bn via Eurobond issuances in H1 2020, accounting for 34% of total emerging market activity. UAE topped with USD 15bn in issuances, followed by Saudi Arabia (USD 12bn), Qatar (USD 10bn) and Egypt (USD 5bn).
  • S&P estimates that debt drawdowns and debt will be used to finance fiscal deficits in the oil-dependent GCC nations, with borrowing estimated at a record USD 100bn this year.
  • The International Finance Corporation (IFC) invested USD 5.6bn to support the Middle East and sub-Saharan Africa region in Jul 2019-Jun 2020. Investments in sub-Saharan Africa region alone increased by 12.2% yoy to USD 4.6bn in the fiscal year 2020. IFC invested almost USD 2bn in short-term trade financing to support SMEs across the region.

UAE Focus

  • The UAE government will waive residents’ fines on visas that expired before Mar 1st or on applications that were not processed during pandemic-related disruptions. These residents have till Aug 17th to leave the country without incurring a penalty.
  • Non-oil foreign trade in Abu Dhabi touched AED 80.23bn (USD 21.84bn) in Jan-May 2020, according to Abu Dhabi Customs data. Saudi Arabia remained the top trade partner, clocking in AED 17.91bn during the period.
  • Efficient government spending is necessary to tackle the economic fallout of Covid19, according to a senior UAE ministry of finance He also highlighted that residence laws will need to be reviewed due to “rapid loss of a skilled workforce” from temporary business closures.
  • Abu Dhabi plans to launch a basic industries project – covering 4 major sectors food production, medical supplies, power generation and materials such as iron, aluminium and cement – to be “self-sufficient in the production of basic and consumer commodities”.
  • UAE’s total value of trade in telecommunications services grew by 2.1% to around AED 29.4bn between 2017-2019, revealed the FCSA data.
  • Capacity at UAE’s mosques will be increased to 50% from Aug 3rd, from the current 30%, while enforcing social distancing measures.
  • All government employees in Sharjah returned to work last week, with mandatory measures in place like the use of face masks, gloves, and a ban on handshakes.
  • UAE’s Fujairah, Ras Al Khaimah and Ajman emirates have announced free Covid19 tests for its citizens and residents.
  • Office occupancy in Abu Dhabi remains subdued given the Covid19 pandemic, with vacancy in Abu Dhabi’s office market at 22.1% in Q2 2020, according to Knight Frank Middle East.
  • Abu Dhabi DED is rolling out a remote work initiative, with its first phase involving 23.87% of total employee strength, and those specialized in the fields of inspection, supervision and customer service.
  • UAE businesses recognize the need to make operational challenges to become more resilient, as per a global survey rolled out by HSBC. 50% of the 100 businesses surveyed in the UAE feel “strong overall” with the necessary adjustments, while only 5% identified themselves to be “significantly” challenged.

Media Review
COVID-19: A view from outside the industrialized world – Raghuram Rajan
https://bcf.princeton.edu/event-directory/covid19_33/
https://www.youtube.com/watch?v=jD1OjZpRtUk
The Open Secret to reopening the economy
https://www.project-syndicate.org/commentary/covid19-virus-will-decide-when-economy-can-reopen-by-anne-krueger-2020-07
Dominant Currencies and the Limits of Exchange Rate Flexibility
https://blogs.imf.org/2020/07/20/currencies-and-crisis-how-dominant-currencies-limit-the-impact-of-exchange-rate-flexibility/
China central bank to pause easing as economy recovers, wary of over-stimulus: sources
https://www.reuters.com/article/us-china-economy-policy/china-central-bank-to-pause-easing-as-economy-recovers-wary-of-over-stimulus-sources-idUSKCN24N0RH
The end of the Arab world’s oil age is nigh
https://www.economist.com/middle-east-and-africa/2020/07/18/the-end-of-the-arab-worlds-oil-age-is-nigh
 
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Weekly Insights 20 Jul 2020: UAE, Covid19 & economic activity after re-opening post-lockdown

UAE, Covid19 & economic activity after re-opening post-lockdown
With UAE easing restrictions imposed due to the Covid19 outbreak and opening the economy in phases, a pickup in economic activity is inevitable. The Oxford Government Stringency Index (which records the number and strictness of government policies) scores the UAE at 69.44 in the beginning of Jul, down from a high of 89.81 recorded during the first two weeks of Apr (a higher score indicates a stricter government response). The question however remains whether residents have embraced the “re-opening” and gone back to “business as usual”.
Few economic indicators are released monthly in the UAE and hence the availability of Google and Apple Mobility numbers offer a good perspective of where the economy is headed to, reopening after the lockdown. Google Mobility indicators show trends over several weeks on how visits to various sectors – retail & recreation, grocery and pharmacy, parks, transit stations, workplaces – compare to a baseline value for that day of the week [1] while residential shows a change in duration of time spent at home. Apple Mobility indicators track resident activity – walking and driving – which can also be read into as “confidence” indicators i.e. you are more likely to be out exercising if you have accepted the new Covid19 realities (social distancing, wearing masks etc).
These high-frequency indicators offer an insight into retail behaviour (visit to recreation, retail outlets, groceries), as well as economic activity (transit stations, workplaces and residential) while parks and walking can be interpreted as “social well-being”, an equally important measure.

The lockdown phase in the UAE (towards the end of March) is evident from Chart 1, with the various indicators dipping to near -100%. Of the indicators, the two that are inching back to baseline are visits to groceries and pharmacies as well as workplaces. During the peak of the outbreak, when severe restrictions were in place, there was a surge e-commerce activity (especially online shopping platforms) which still continues, and could explain the current gap to baseline activity.
Workplaces are still 24% below the baseline, implying that working from home is still an option being provided by many offices. If companies continue to offer flexible work options, this would reduce office space and rents, while employees can stay at cheaper home locations, save on rents, and telecommute. Congestion statistics already show a return to normal, more so in Dubai than Abu Dhabi (Chart 2). However, to fully realise the benefits of telecommuting, it requires removing barriers by amending labour laws (e.g. part-time work/ freelancing options versus being tied to a specific company) and liberalising VoIP services (for businesses, especially for SMEs).

The uptick in “workplaces” has not been mirrored in “transit stations”. This is likely the result of a combination of two factors: (a) prevalence of using cars to travel – a report in Dec 2018 disclosed that UAE had an average ratio of one car to every three residents; average congestion is picking up faster in Dubai than in Abu Dhabi; (b) public transport is more frequently used by those without the option of personal transport, and who are more likely working in the services sector (e.g. in retail, hospitality sector and the like). Working in the hardest hit sectors during the Covid19 outbreak, these persons could have witnessed job losses or reduced working hours resulting in a slower uptick in “transit stations” category.
In spite of retail and recreation outlets operating at full capacity now, the return to baseline hasn’t been as smooth. One of the reasons could be the launch of online shopping by many retailers; another restriction is related to F&B operations: social distancing rules mean curtailed capacity, implying it will take longer for the sector to recover. Even during the Eid holidays in end-May, the uptick in this category was muted though lifting of restrictions mid-Jun on entry of kids and persons aged 60+ seems to have had a positive impact. With tourists back in Dubai starting Jul 7, the picture could change in the retailers’ favour.

Last, but not the least, the UAE central bank has released monthly statistics for May – the 2nd month after lockdown was initiated towards end-Mar. The Central Bank had launched a AED 256bn Targeted Economic Support Scheme for banks to provide temporary financial relief for individuals, SMEs and other private businesses affected by the pandemic, following which banks offered relief for customers’ loans. Alongside, support was specifically initiated for SMEs – be it to open new bank accounts faster to providing credit guarantees. However, this does not seem to be reflected in the gross credit disbursed to UAE firms (Chart 3). Loans to the government rose by 3.06% mom in May while loans to the retail sector declined in month on month terms (-0.6%).  Public sector entities (i.e. state-owned enterprises/ GREs) saw two consecutive 8%+ mom increase in loans before dropping by -0.7% mom in May.
So, what does all this mean from a policy perspective? The UAE’s drive to greater digitalization will gain traction in the new Covid19 normal: from varied e-commerce offerings to creating innovative payment systems to neo-banking options (ADGM announced associated regulations last year). A future UAE where work from home is commonplace, delinking jobs and visas are norm, and online payments are king (vs cash currently) is not far-fetched any more. The role of the private sector (including investments) is critical in achieving this goal alongside government support, and to this extend might need specific support for the SME sector which is oft sidelined given relatively lower turnover, lack of security/ collateral as well as potential for non-performing loans (and “absconding” owners).
[1] The baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020. 




Weekly Economic Commentary – Jul 19, 2020

Markets
Stock markets across the globe posted gains – S&P 500, Stoxx 600, FTSE 100, MSCI all world index – on expectations of further government stimulus as Covid19 confirmed cases continue to rise. Regional markets were mostly down, with Egypt’s shares dropped to a 6-week low on Thurs. Safe haven assets were supported through the week: yields on 10-year German bunds rose slightly and gold prices gained for a 6th consecutive week. The pound was down 0.4% on weak economic data while euro rose to just under four-month highs. Both WTI and Brent oil prices edged lower. (Graphs in the last section.)
Global Developments
US/Americas:

  • Inflation in the US inched up by 0.2% mom and 0.6% yoy in Jun (May: 0.1%), triggered by higher prices for gas (+12.3%) and food (0.6%). Core inflation, excluding food and energy, stayed unchanged at 1.2% yoy.
  • US’s monthly budget deficit surged to USD 864bn in Jun – almost close to the fiscal deficit for 2019 (USD 984bn)– as federal spending tripled (nearly half went towards small business loans) in the backdrop of the Covid19 outbreak while tax revenues fell sharply. This follows a deficit of USD 399bn in May.
  • Industrial production in US increased by 5.4% mom in Jun – the largest monthly gain since 1959 and a second consecutive monthly gain, following a 1.4% rise in May. Manufacturing output gained 7.2% while production of motor vehicles and parts posted the largest monthly gain of 105%.
  • Retail sales improved in Jun as more stores reopened: sales were up 7.5% mom and 1.1% yoy to USD 524.3bn (May: +18.2% mom). Increases were seen across the board: clothing stores (105.1%), electronics and appliances (37.4%), furniture (32.5%), food services and drinking places (20%) and gasoline stations (15.3%). The uptick was likely supported by the additional weekly USD 600 federal unemployment cheques, though it is set to expire end-Jul.
  • Housing starts accelerated by 17.3% to a seasonally adjusted annual rate of 1.186mn in Jun, though down 4% in yoy terms. Building permits, a proxy for future activity, rose by 2.1% mom to 1.24mn units (in yoy terms, dropping by 2.5%).
  • Initial jobless claims fell to 1.30mn in the week ended Jul 11, lifting the total reported since Mar 21st to 51.3mn while the 4-week average eased to 1.38mn. Continuing claims decreased to 17.34mn in the week ended Jul 4.

Europe:

  • The ECB left its main deposit rate unchanged at -0.5% and maintained the bond-buying program at current levels; risks to recovery and “exceptionally elevated uncertainty” remain. The multiple stimulus measures are estimated to add 1.3ppts to eurozone GDP and 0.8ppts to inflation by 2022.
  • EU leaders have gathered for a 3rd day of discussions (on Jul 19) after reaching no agreement on the proposed EUR 750bn recovery package yet.
  • ZEW Survey results show a drop in sentiment in Germany, alongside a slight improvement in the Eurozone: the Economic Sentiment index in Germany slipped to 59.3 in Jul, after posting a reading of 63.4 the month before, while an assessment of the current situation eased to -80.9 from -83.1. In the eurozone, economic sentiment edged up for the 4th consecutive month, rising to 59.6 from 58.6 in Jun. The indicator for the current economic situation in the eurozone climbed 0.9 points to a level of minus 88.7 points.
  • GDP in the UK inched up by 1.8% mom in May following a severe 20.3% plunge in Apr; the economy was still 24.5% smaller than in Feb. In Mar-May, output fell by 19.1%. Industrial production in the UK rebounded by 6% mom in May (Apr: -20.2%), supported by the expansion in the construction sector (+8.2%) while manufacturing also rose (+8.4% from Apr’s 24.4% drop). Services sector grew by just 0.9% in May.
  • UK unemployment rate held steady at 3.9% in the 3 months to May. In the three months to May, total weekly hours worked decreased by 16.7% to 877.1m hours – the largest annual decrease since estimates began in 1971. Average weekly earnings dropped 0.3% during this period- the first contraction since 2014. The Office for Budgetary Responsibility estimates that unemployment could reach 4mn, if UK’s economic recovery is poor, up from 1.3mn in 2019.
  • Inflation in the UK edged up by 0.1% mom and 0.6% yoy in Jun (May: 0% mom and 0.5% yoy), on higher prices for clothes, footwear and recreational activities.

Asia Pacific:

  • GDP growth in China inched up by 3.2% yoy and 11.5% qoq in Q2 after falling by 6.8% yoy and 9.8% qoq in Q1, supported by a recovery in industrial production (+4.4% yoy) while retail spending remains dampened (-3.9%).
  • China’s exports inched up by 0.5% yoy in Jun, thanks to shipments of face masks, PPE and computers, while imports also rose by 2.7% (May: -16.7%; iron ore imports jumped to the highest in 33 months). Trade balance dropped to USD 46.42bn from the previous month’s USD 62.93bn. Trade surplus with US widened to USD 29.41bn in Jun (May: USD 27.89bn).
  • Industrial production in China improved for the 3rd consecutive month in Jun, rising by 4.8% yoy (May: 4.4%), as production resumed. Fixed asset investment fell by 1% yoy in H1, after a 6.3% decline during Jan-May. Retail sales declined by -1.8% yoy in Jun, after a 2.8% drop the month before.
  • The Bank of Japan kept policy rates on hold, but revised down growth forecasts to -4.7% in the current fiscal year (till Mar 2021) and prices fall 0.5%, with a rebound in 2021 and 2022.
  • Industrial production in Japan dropped by 26.3% yoy in May, following the 15% yoy dip in Apr.
  • WPI inflation in India declined by 1.81% in May, after a 3.21% drop in Apr, given the declines in price of fuel and power (-13.6%) while food prices remained higher (+2.04%).
  • Trade balance in India recorded a surplus of USD 0.79bn in Jun – its first ever in 18 years – after exports dipped by 12.4% alongside a 47.6% plunge in imports; crude oil imports fell by 55.3%.
  • Singapore’s GDP slumped by 41.2% qoq in Q2, following a 3.3% drop in Q1 – its steepest recession ever. In yoy terms, GDP was dropped by 12.6% after an upwardly revised 0.3% dip in Q1. Construction and services dipped by 55% and 14% yoy respectively while manufacturing posted a slight 2.5% gain.

Bottom line: Total Covid19 confirmed cases have crossed 14mn, after posting a record single-day rise in new infections worldwide. Our World in Data calculations indicate that while it took the world 88 days to confirm the first 2mn cases, the latest jump from 12 to 14mn took just 9 days! With some initial Covid19 benefits set to expire this month, expectations remain high for further stimulus measures to support the global economy, though the EU recovery fund discussions remain deadlocked. The IMF disclosed that SME bankruptcies could rise to 12% this year from 4% pre-pandemic, based on a sample of 17 nations. The poorest nations will bear the maximum brunt: the G20 disclosed that 42 countries have requested deferring payments worth USD 5.3bn (of which USD 2bn will be deferred by China alone), falling short of World Bank data which show that debt suspension could postpone payments worth USD 11.5bn this year. Separately, the IIF reported that debt-to-GDP ratio jumped by over 10ppts – the largest quarterly surge on record – to reach a record 331% in Q1.
Regional Developments

  • The IMF downgraded growth rates in the MENA region: growth will decline by 5.7% this year, before rebounding to 3.4% in 2021. GCC growth rates will drop by 7.1% this year, with non-oil growth falling at 7.6%; fiscal deficit will rise to 10.5% this year, before easing to 8% of GDP next year. (More: https://www.imf.org/en/Publications/REO/MECA/Issues/2020/07/13/regional-economic-outlook-update-menap-cca)
  • Bahrain added BHD 177.36mn (USD 470mn) to the state budget this year to support Covid19 related expenses. Furthermore, deduction from oil revenues earmarked for Future Generations Reserve Fund has been suspended temporarily, until end of fiscal year 2020. The government employees’ pension fund and social insurance fund were merged to a new entity called the Pension and Social Insurance Fund.
  • Bahrain’s government have exempt businesses affected (partially or fully) by Covid19 from paying their monthly dues for 3 months (starting Jul 1) and also from paying fees levied on issuing/ renewing work permits in the 1st year of validity. Additionally, the government will pay 50% of the salaries of insured Bahrainis working in the private sector in 12 most adversely affected sectors for a period of three months, starting Jul 2020.
  • The King Fahad Causeway between Bahrain and Saudi Arabia will be opened gradually in phases, after the Eid Al Adha holidays, according to Saudi media.
  • Egypt’s GDP is expected to grow between 3.7-3.8% by end of fiscal year 2019-2020, disclosed the minister of planning. During the H1 of this fiscal year, GDP stood at 5.6%, remittances had increased by 13% and deficit-to-GDP had fallen to 8.1%.
  • Local liquidity in Egypt grew by 12.7% to EGP 4.353trn in the period Jul 2019-Apr 2020, driven by the growth of quasi-money (+12.1%) and money supply (+14.4%).
  • Egypt plans to launch a 3-month initiative before end-Jul to support the consumption of local products: durable and non-durable goods will be provided at low prices, and those with ration cards will receive a further 10% discount (estimated to cost EGP 12bn during 2020-21).
  • Egypt’s minister of finance disclosed the launch of the EGP 2bn (USD 125.6mn) insurance fund, financed from the public treasury, to stimulate domestic consumption and facilitate the ability of citizens to obtain goods, services, and property.
  • Foreign investors are returning to Egypt: the market attracted USD 592mn in investments on 9th Jul, the largest daily level since the Covid19 crisis and a further USD 367mn on 12 Jul. This follows the injection of USD 3bn worth investments in a month.
  • International tourists are back in Egypt: Almost 10k tourists (from a total of 56 flights) visited Sharm El-Sheikh and Hurghada since the beginning of Jul when permissions were given to resume tourism activity.
  • New contract regulations in Egypt specify that contractors should receive their financial dues in under 30 days from the date of examination, acceptance, and approval.
  • Egypt exported 3.62 million tons of agricultural products during the period Jan 1 to Jul 8th, with the list topped by citrus plants, potatoes and onions.
  • Jordan will reopen airports for commercial flights from a limited number of European and Asian destinations from the 1st or 2nd week of Aug, according to a spokesperson.
  • Jordan’s trade deficit narrowed by 26.3% yoy in Jan-Apr 2020. With the EU, deficit narrowed by 21.8% yoy to JOD 666mn in Jan-Apr, with exports falling by 9.9% and imports plunging 21.2%. Jordan’s exports to the US edged up by 1.8% yoy to JOD 387mn while imports declined by 6.7%, thereby marking a surplus of JOD 60mn during Jan-Apr this year.
  • Real estate trade volume in Jordan dived by 44% yoy to JOD 1.125bn in H1 this year. The Department of Land and Survey reported a 56% drop in revenues to JOD 46mn in H1.
  • The 2020-2021 academic year in Jordan will start on Aug 25 for teachers and on Sep 1 for students; the education process will be determined by the “pandemic situation” and “alternative plans” have been developed, according to the ministry of education.
  • S&P revised Kuwait’s outlook to “negative” from “stable”, citing the deterioration in central government deficit alongside a reduction in the General Reserve Fund’s balance. Ratings were affirmed at “AA-/A-1+”.
  • Kuwait oil production declined by around 94k barrels per day (bpd) to 2.103mn bpd in Jun, as a result of compliance with the OPEC+ output cuts.
  • Value of projects awarded in Kuwait to local listed companies tumbled nearly 40% yoy to KWD 500mn (USD 1.65bn) in H1 this year, reported the Arabic language daily Alanba.
  • Kuwait banned visa transfer for expats from the private sector to the government sector; the decision made on Jul 14th excludes medical professionals, Palestinian nationals and those married to Kuwaiti citizens, children and wives.
  • Kuwait plans to implement a guarantee system for the private sector to protect employees’ rights: an amount of KWD 250 (USD 813) will be set aside as a deposit, to be reimbursed when the employee leaves the country.
  • A bill allowing up to 50% salary cuts in the private sector in Kuwait (while taking into account the actual work hours) was approved by the Educational, Cultural and Guidance Affairs Committee. Once approved by the Parliament, it will be implemented retroactively (from Mar 12th).
  • Lebanon’s advisers are working on a compromise on the government’s financial rescue plan such that it is acceptable to the IMF and also the various Lebanese counterparts. The IMF had earlier in the week warned that attempts to present lower losses could only delay recovery.
  • According to a memo, Lebanon’s central bank has set up a committee to restructure financially stricken commercial banks and study their performance. Currently, there are around 40 banks serving a population of around 6 million.
  • Lebanon seeks to negotiate fuel imports with Kuwait, reported Kuwaiti newspaper Al Rai, citing the former’s internal security chief.
  • Lebanon’s former director general of the finance ministry (who resigned this month) told FT that upto USD 6bn had been “smuggled” out of the country since Oct in spite of the controls introduced to curtail transfers abroad. (More in FT: https://www.ft.com/content/df234c78-a945-4199-befe-0272259dc755)
  • Oman will allow its citizens to travel abroad, after they apply to the authorities and agree to quarantine on return; no specific dates were provided. Meanwhile, the two regions Dhofar and Masirah continue to be under lockdown.
  • Inflation in Saudi Arabia inched up by 0.5% yoy in May, the smallest annual gain since Jan; food costs, which rose by 6.9% yoy, was the main component driving up inflation. Wholesale prices fell by 2.1% yoy in Jun, given lower prices of refined petroleum products (-16.8%).
  • Saudi Arabia’s scaling back of the Citizen’s Account programme (to target more “deserving citizens”) has resulted in about 1.3 million Saudis losing benefits in Jul alone, reported Bloomberg.
  • The second and final phase of the privatisation of the flour milling sector in Saudi Arabia begins: state grain buyer SAGO began receiving pre-qualification bids on Jul 16th.
  • Saudi Arabia’s derivatives market will launch on 30th Aug, with the first exchange traded derivatives product an index futures contract based on the MSCI Tadawul 30 Index.
  • Saudi Arabia’s new corporate law (if approved) will include more “flexible” companies: for example, simple joint-stock companies, which will have the characteristics of joint-stock companies but also feature flexibility in raising capital or issuing different types of shares.
  • Saudi Arabia Ministry of Finance’s corporate sustainability program launched a SAR 670mn (USD 178mn) initiative to ease loan installments, supporting projects for 192 companies employing over 20k Saudis across different sectors.
  • Oil exports from Saudi Arabia will remain unchanged in Aug as domestic demand increases during the summer months. An estimated 550,000 barrels per day (bpd) is burned during the hot summer months for power generation. Saudi Arabia consumed 1.57bn barrels of oil in 2019 (+0.25%), according to official data.
  • Total oil exports from Saudi Arabia fell to 7.48mn barrels per day in May from Apr’s 11.34mn bpd, according to the Joint Organizations Data Initiative.
  • Startups in Saudi Arabia raised USD 95mn from 45 deals in venture funding during H1 2020, up 102% yoy, according to a report from Magnitt and Saudi Venture Capital Company. Funding has already crossed that raised in 2019; e-commerce is the most active industry by both total funding (67%) and number of deals (22%).
  • E-commerce transactions in Saudi Arabia posted a record 74% growth during Mar-Apr given the lockdown, with direct retail trade dropping by 30%, according to Saudi Payments. Retail sector growth has picked up by 38% mom in Jun, with easing of lockdown.
  • Saudis holding key managerial positions account for 71.53% of total managerial positions in the private sector, reported Okaz/ Saudi Gazette citing government data.
  • M&A transactions with any MENA involvement fell by 55% yoy to USD 50bn in H1 this year (though last year’s numbers included Aramco’s Sabic deal value) while the number of deals were down by 9% to a 3-year low.
  • The UN e-government index ranks 5 GCC nations among the top 50, with UAE ranked the highest at 21st globally (unchanged from last year), followed by Bahrain (38, down 12 ranks), Saudi Arabia (43, +9), Kuwait (46, -5) and Oman (50, +13). Qatar slipped 15 ranks to 66.
  • Saudi Arabia and Egypt are among the six nations participating in a multilateral fund for supporting infrastructure projects under the Belt and Road Initiative.

UAE Focus

  • UAE banks’ investments recorded a 12.03% yoy increase to AED 414.9bn – the highest level since 2013 – by end-May 2020, according to the central bank. Separately, bank loans in the country were up by 6% yoy to AED 1.778trn in May, though loans to the private sector inched up by just 0.1% yoy.
  • Inflation in Dubai declined by 3.44% in Jun (May: 3.49%), with transport costs and utilities prices dropped by 13.39% and 5.54% respectively. Meanwhile, food prices, education costs and tobacco prices increased by 3.49%, 1.87% and 15.96% respectively.
  • Bilateral trade between Dubai and Italy touched AED 9.5bn (USD 2.6bn) in H1 this year, with imports from the latter at AED 8bn.
  • UAE’s oil exports weakened by 14.3% yoy to USD 49.64bn in 2019, as per OPEC’s Annual Statistical Bulletin. Overall, UAE accounted for 8.8% of OPEC’s total value of oil exports.
  • The Abu Dhabi Securities Exchange expects one IPO before the year end and listing of an ETF (potentially in Aug), according to its chief executive.
  • DP World listed a USD 1.5bn perpetual sukuk in Nasdaq Dubai last week; the company the largest UAE debt issuer on the exchange. Value of sukuks listed on Nasdaq Dubai is up 80% yoy to USD 11.4bn so far this year, with the number of listing doubling to 14.
  • The Abu Dhabi Fund for Development is suspending debt service repayments of some developing countries and private businesses for a year; it is applicable to the instalments and interests from Jan 1 to Dec 31 this year.
  • The DIFC reported a 25% yoy increase in the number of firms operating from the free zone. Attracting 310 new firms in H1, of which 87 were FinTech firms (+74% yoy), the DIFC has a total of 820 financial firms.
  • The Jebel Ali Freezone reported a growth of 10.6% yoy in the retail and e-commerce sector in the first 5 months of 2020.
  • Hotel occupancy rates in Abu Dhabi have edged up by 3% yoy in the first week of Jul, as hotels reopen after the lockdown; government support for the sector includes up to 20% rental rebates for restaurants, tourism and entertainment facilities, as well as a suspension of tourism and municipality fees this year.

Media Review
IMF did not recommend Saudi Arabia VAT tripling, official says
https://www.reuters.com/article/us-saudi-economy-imf-taxation/imf-did-not-recommend-saudi-arabia-vat-tripling-official-says-idUSKCN24H28M
Five Charts That Illustrate Covid19’s Impact on the Middle East and Central Asia
https://www.imf.org/en/News/Articles/2020/07/14/na071420-five-charts-that-illustrate-covid19s-impact-on-the-middle-east-and-central-asia
Lebanon’s Hidden Gold Mine
https://carnegie-mec.org/2020/07/16/national-wealth-fund-would-alleviate-lebanon-s-multiple-crises-pub-82306
Uzbekistan is offering $3,000 to anyone who gets Covid19 during a visit to the country
https://www.insider.com/uzbekistan-travelers-3000-dollars-coronavirus-2020-6
Charting the Economy: China grows again, rest of world struggles
https://www.bloomberg.com/news/articles/2020-07-17/charting-the-economy-china-grows-again-rest-of-world-struggles
As Seasonal Rains Fall, Dispute Over Nile Dam Rushes Toward a Reckoning
 https://www.nytimes.com/2020/07/18/world/middleeast/nile-dam-egypt-ethiopia.html

Market Snapshot as of 19th Jul 2020

 
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Weekly Economic Commentary – Jul 12, 2020

Main highlights from the Weekly Insights are: Google Mobility results from the MENA region as lockdown restrictions are phased out; a comparison of Bahrain’s Q1 GDP with its peers reveals interesting facts; as Kuwait proceeds with the expat quota bill, we look at how extensive remittance outflows are from the region.

Markets

Most global stock markets closed in the green last week (except for FTSE which closed 1% down in spite of the extra stimulus) as the virus count continued to rise and ahead of the Q2 earnings season. Chinese shares touched a 5-year high after state media called on local investors to pour money into markets; daily turnover soared by nearly 80% compared to a week ago. Regional markets were mostly up, with Oman and Abu Dhabi down by 0.5% week on week. Safe haven assets were in demand: US Treasury yields dipped to their lowest levels since late Apr while yield on the 10-year German Bund touched -0.5%; the yen rose against the dollar; gold prices hit a 9-year high, rising 1.3% versus a week ago. Oil prices increased on news of IEA raising its oil demand forecast, with WTI unchanged and Brent up 1% from the prior week. (Graphs in the last section.)
Global Developments
US/Americas:

  • US PPI declined by 0.2% mom in Jun, after rebounding 0.4% in May: rising costs for energy goods (+7.7%) was offset by a decline in wholesale food prices (-5.2%) and weak services costs (-0.3%). Excluding food, energy and trade services, producer prices rose 0.3% in Jun.
  • US ISM non-manufacturing moved into expansionary territory, with the Jun reading at 57.1 from 45.4 the month before, supported by business activity (at the highest since Feb 2011) and new orders (61.6 vs May’s 41.9).
  • US Markit Services PMI increased to 47.9 in Jun, from May’s 37.5 reading, with exports rising for the first time this year, amid a stabilization of new business inflows and slower drop in employment.
  • Initial jobless claims fell by 99k to a 4-month low of 1.31mn in early Jul while continuing claims declined to 18.1mn in the week ended Jun 27. With Covid19 cases still rising and many states rolling back reopening plans and businesses preparing for job cuts later this year (after federal aid expires), this number is likely to rise in the coming weeks.

Europe:

  • German factory orders rose by 10.4% mom in May (Apr: -26.2%). Though the lockdown was eased starting Apr 20th, the May number is still 30.8% lower than orders in Feb 2020 (prior to the restrictions). Domestic orders (+12.3%) and orders from the euro area (+20.9%) have supported growth, while new orders from other countries edged up by only 2% mom.
  • Industrial production in Germany increased by 7.8% mom in May, following 2 consecutive months of declines (Apr: -17.5%), led by production of capital goods (+27.6%) and orders for industrial goods (+10.4%).
  • Germany exports grew by 9% mom in May, following two months of declines (Mar: 11.6% & Apr: 24%) while imports also picked up by 3.5% (after dropping by 5.3% and 16.6% in Mar and Apr respectively), bringing the trade surplus totaled EUR 7.6bn (USD 8.59bn). Separately, the government announced measures to ease the financing of exports, including reduced fees for export guarantees and improved financing conditions for new export business.
  • Eurozone retail sales surged by 17.8% mom in May, the steepest rise since records began in 1999. Automotive fuel sales rose by 38.4% while non-food product sales were 34.5% higher. A breakdown by country showed Germany’s (which eased lockdown earlier) sales recovered to pre-Covid19 levels while in countries like France and Spain sales were still subdued.
  • UK unveiled a new stimulus package worth GBP 30bn (USD 37bn) to support jobs: this includes a “job retention bonus” of £1,000 per worker paid to companies that bring staff out of the government’s furlough scheme, program to create and support new jobs for people under the age of 25 as well as a temporary 6-month reduction in VAT to 5% for the tourism and hospitality industry among others. The latest move is estimated to raise deficit to 18% of national income.

Asia Pacific:

  • Money supply in China accelerated by 11.1% yoy in Jun, unchanged from the pace of expansion in May; new yuan loans surged by 22% mom to CNY 1.81trn (USD 258.23bn) in Jun. Annual outstanding yuan loans grew by 13.2%, the same as in May. China foreign reserves grew for a 3rd straight month, inching up 0.3% mom to USD 3.1123trn in Jun.
  • China inflation gained by 2.5% yoy in Jun (May: 2.4%), with food prices driving the rise (11.1% yoy). Excluding food and energy, core CPI posted a 0.9% yoy rise in Jun (May: 1.1%). Producers price index fell by 3% yoy in Jun, narrowing from the 3.7% dip in May.
  • Japan overall household spending slumped by 16.2% yoy in May (Apr: -11.1%) – the fastest rate of decline since 2001 – with substantial declines in spending on hotels, transport and eating out (as people stayed home) while spending increased on meat, alcohol and face masks. Separately, May inflation-adjusted real wages dropped at the quickest pace since Jun 2015 – more signs of stress in the labour market.
  • Japan’s leading economic index unexpectedly increased in May, rising 1.6 points to 79.3. The coincident indicator index fell by 5.5 points to 74.6, suggesting the economy is worsening.
  • Current account surplus in Japan narrowed by 27.9% yoy to JPY 1.18trn (USD 10.97bn), given the impact on the tourism sector. Exports fell by 28.9% yoy (3rd straight month of decline) to JPY 4.2trn and imports were down by 27.7% (13th month of decline) to JPY 4.75trn.
  • India’s foreign exchange reserves surged by USD 6.4bn to a record high USD 513.25bn in the week ended July 3; gold reserves were up by USD 495mn to USD 34.02bn.

Bottom line: Economic data improves across the globe: reiterating the need to be aware that the “recovery” is still far below the pre-Covid19 numbers. With the WHO reporting record daily surge in global Covid19 confirmed cases, it is time to reassess any cautious optimism related to recovery. This week look forward to details of EU’s  EUR 750bn post-Covid19 recovery fund ahead of the ECB meeting while UK was the latest to add GBP 30bn to its stimulus package: expect more as nations battle the outbreak, though global public debt is also rising – reaching its highest level in recorded history, at over 100% of global GDP, according to the IMF. Meanwhile, IEA nudged up its oil demand forecast raised its demand forecast to 92.1mn barrels per day (bpd), up 400k bpd from its outlook last month, though Covid19 still poses a risk (e.g. with easing of lockdown measures, fuel demand is slowly resuming in India, up 11% mom in Jun – still down 7.8% compared to a year ago).
Regional Developments

  • Bahrain’s GDP shrank by 1.1% yoy in Q1, with declines registered across hotels and restaurants (-36%), transport and communication (-6.3%), government services (-2.9%), real estate (-0.4%) while the oil sector edged up by 1.8% and manufacturing picked up by 4.8%.
  • Bahrain’s cabinet approved a 50% cut in work permit fees for 3 months, for the issue and renewal of work permits for businesses most affected by the pandemic.
  • Bilateral trade between UK and Bahrain increased by 10% yoy to USD 1.6bn as of end-2019.
  • Egypt’s PMI stayed below 50 in Jun, though rising to a 4-month high of 44.6 (May: 40.7), as decline in new businesses slowed while output and new orders also clocked 4-month highs.
  • Urban inflation in Egypt inched up to 5.6% in Jun (May: 4.7%), as food prices went up by 0.4%; core inflation fell to 1% yoy from 1.5% the month before.
  • Net foreign reserves in Egypt increased to USD 38.2bn in Jun (May: USD 36bn), probably a result of the first tranche of IMF’s standby loan. Reserves had been dropping since Mar.
  • Egypt’s parliament approved a law to waive late payment interest and penalties on taxes (including VAT). 90% of the fees will be waived if taxes are paid within 60 days from the date the law comes into effect. Separately, the Egyptian Tax Authority decided to extend the decision of unfreezing assets in tax disputes until end-Sep: taxpayers can pay 1% of due taxes to unfreeze their assets.
  • Fuel prices in Egypt will be kept unchanged for 3 months: the decision was taken by the fuel pricing committee after reviewing prices from Apr-Jun.
  • Revenues from Suez Canal fell by 0.52% yoy to USD 5.72bn in the fiscal year 2019-20. The decline was attributed to the slowdown in international trade in Q2 this year (-18.5% yoy)
  • Egypt’s tourism investments are likely to decline by 28.8% to EGP 5.2bn in the fiscal year 2020-21, according to the minister of planning and economic development. Private investments’ share is estimated to fall to 84% vs 90% a year ago.
  • The Central Bank of Egypt’s Industry, Agriculture, and Contracting Support Initiative has used funds amounting to EGP 69bn (USD 4.3bn) as of end-Jun.
  • The Labour Emergency Fund in Egypt disbursed EGP 331.65mn (USD 2.7mn) to workers hit by the pandemic, paying 100% of basic salary of ~288k workers across close to 2900 firms.
  • Egypt plans to implement 691 green projects this fiscal year at a total cost of EGP 447.3bn; only EGP 36.7bn has been allocated for these projects, with the rest to be financed using green bonds.
  • Investment in metro projects in Egypt will continue: the plan is to implement 22 projects by 2024 at a combined cost of EGP 512bn (USD 31.92bn).
  • Egypt set Aug 11-12 as the date for inaugural elections for a new second parliamentary chamber; results will be announced Aug 19.
  • Iraq has partially opened its border crossings with Iran for trade exchanges; borders were closed in Mar following the Covid19 outbreak.
  • Jordan resumed the import of Iraqi crude oil, according to the former’s energy minister. Iraq had suspended oil exports to Jordan after oil prices dropped to less than USD 20 per barrel.
  • Kuwait will distribute KWD 240.5mn (USD 780mn) to citizens working in the private sector to compensate for Covid19 related declines in income.
  • Foreign reserves in Kuwait increased by 14.41% yoy and 7.39% mom to KWD 13.67bn (USD 44.52bn) as of end-May. The book value for gold reserves stood at KWD 31.7mn.
  • FDI into Kuwait edged up by 2.03% yoy to KWD 4.52bn (USD 14.72bn) in 2019, according to the central bank.
  • Lebanon’s central bank set a fixed exchange rate of 3900 Lebanese pounds per dollar for importers and manufacturers of essential food items. Black market rates are currently near 7.5k per dollar.
  • A new board of directors were appointed at Lebanon’s state-owned Electricite du Liban: losses at the EDL run upto USD 2bn a year. However, without a regulatory body to oversee the EDL, the appointments are unlikely to bring about any reform.
  • Lebanon’s Capital Control Law – to regulate the transfer of capital out of the country – will be sent to the Parliament’s Finance and Budget Committee for approval.
  • In the backdrop of power rationing due to fuel shortages, the energy minister disclosed that Lebanon is not negotiating with Iran for the import of fuel while stating that discussions were underway with Iran.
  • Lebanon’s economic woes and currency depreciation are weighing on the results of UAE and GCC bank subsidiaries: Bank of Sharjah posted its first ever loss of AED 488mn in 2019 from its Lebanese subsidiary. Disputes with auditors on provisions are likely to dominate 2019-2020 results.
  • S&P lowered its ratings to D from CC on Lebanon’s government bonds which had coupon payments due in May and Jun.
  • Oman’s Bankruptcy Law came into effect from July 7th: this will provide businesses an opportunity to attempt restructuring vs termination.
  • Given the Covid19 outbreak and impact, Oman’s Tax Authority announced suspension of fines for non-submission of declarations and accounts for fiscal year 2019 as well as additional tax due to non-payment of income tax for last year till Sep 2020. Payments can also be rescheduled or made in instalments.
  • Petroleum production in Oman declined by 9.8% yoy in May while the total sales of gasoline picked up by 24.3% to 530.9 thousand barrels.
  • Qatar’s cabinet approved a draft resolution that aims to raise the percentage of Qataris working at state-owned companies or where the state is an investor to 60%.
  • Qatar awarded 9 new contracts for road and infrastructure development projects worth QAR 3.6bn (USD 981mn) to local companies.
  • Industrial production in Saudi Arabia declined by 15.5% yoy in May, largely due to the 11.98% dip in mining and quarrying alongside a 25.9% plunge in manufacturing activity.
  • Saudi Arabia’s Ministry of Industry and Mineral Resources issued 118 new industrial licenses in Jun: employing 5609 persons, the factories have a total capital of SAR 2.18bn.
  • SAMA disclosed that government initiatives to support the financing of the private sector during the Covid19 outbreak exceeded SAR 51bn (USD 13.6bn). Separately, the Saudi Press Agency reported that the government spent SAR 214bn (USD 57bn) on 142 initiatives.
  • Saudi Arabia will proceed with plans to double the size and population of Riyadh in the next decade: the government has already committed USD 266.6bn for ongoing and new projects as part of total investments of around USD 800bn over the next decade.
  • Saudi Capital Market Authority (CMA) will launch a derivatives exchange in Q3 this year, reported Asharq Al-Awsat newspaper, citing the Chairman of the CMA. Separately, Tadawul’s CEO disclosed that three companies have been approved to list on Nomu.
  • The Amlak IPO was completed, with retail coverage at 2690%: 266,821 retail investors subscribed to invest SAR 1.17bn at a share price of SAR 16. The total offer comprised 27.18 million shares (or 30% of Amlak International’s share capital), of which 10% were allocated to retail subscribers.
  • Saudi Arabia completed the first batch of its flour milling sector privatization, with the sale of 2 companies. The first milling company was awarded to Raha AlSafi consortium at SAR 2.027bn (USD 540.1mn) and the third mill went to Alrajhi-Ghurair-Masafi consortium for SAR 750mn.
  • FDI into Saudi Arabia increased to SAR 469.7bn (USD 125.25bn) in Q1 this year – its highest annual and quarterly levels since 2007 rising for 9 consecutive quarters.
  • Unemployment in Saudi Arabia fell in Q1 to 11.8% from 12% the quarter prior, unlikely to have captured the impact of the Covid19 pandemic.
  • Gold production in Saudi Arabia increased to its highest level in 2019: rising 5% yoy to 12.35 tonnes. With more than 323 tonnes of gold, Saudi Arabia also has the largest gold reserves among Arab states.
  • Non-Saudi residents will account for 70% of this year’s Hajj pilgrims, with priority given to those aged between 20 and 50 who do not suffer from chronic diseases, who have not performed Hajj before and those who show a negative Covid19 test.
  • Saudi Arabia will extend the validity of final exit visas for expats at no charge, while extending the validity of expired residency visas, visit visas and entry visas for residents stuck abroad for 3 months free of charge.
  • About 756,644 passengers passed through Saudi Arabia’s airports between May 31-Jun 30, after domestic flights restarted operations.
  • Inbound tourism into Saudi Arabia increased by 8.8% yoy to SAR 154bn (USD 41.06bn) in 2019: this includes both domestic and inbound tourists, with the latter accounting for 65.6% of total spending.
  • MENA’s startups secured USD 659mn in funding in H1 this year from 251 deals, with UAE receiving the largest share of funds (59% of total, but down 3% yoy) and Egypt the largest number of deals (25% of total), according to Magnitt’s MENA Venture Investment Report.
  • M&A activity in the Middle East and Africa totaled 130 deals valued at USD 59.8bn in H1 this year, according to Mergermarket. With 15 deals, M&A in the energy, mining and utilities sector reached USD 32.1bn in H1, surpassing all annual totals in this sector in MEA.
  • Saudi Arabia and Kuwait resumed oil production from shared oil fields Wafra and Khafji, after having halted operations 5 years ago.
  • EY’s Future Consumer Index survey indicates that 58% of MENA consumers shopping habits will change over the next 1-2 years, given the pandemic. About 44% and 39% of the respondents stated that they value health and affordability, respectively, while shopping.

UAE Focus

  • The UAE central bank will introduce a new overnight deposit facility (ODF) from today (Jul 12th), allowing banks to deposit overnight their surplus liquidity at the central bank. This replaces the issuance of one-week certificate of deposits, and the interest rate on the ODF will be the main policy rate or base rate.
  • Dubai government announced a further AED 1.5bn worth of economic stimulus measures including an extension of the halving of municipality fees, tourism fees as well as waiving fees charged to private schools for license renewals. The latest round increases the total stimulus from the Dubai government to AED 6.3bn.
  • UAE’s banking sector can withstand any shocks, stated the central bank, based on stress testing results, the high capital adequacy ratio (16.9% as of end-Mar) and eligible liquid asset rate of 16.6% as of end-May.
  • Dubai’s PMI moved up to 50 in Jun from May’s 46 reading, as lockdown measures were eased: however, many telling signs remain including a sharp decline in employment for the 4th month in a row as well as subdued rise in new work.
  • Producer price index in Abu Dhabi edged up by 1.9% qoq to 77% in Q1 2020, with the “manufacture of coke and refined petroleum products” accounting for 80.8% of overall change. Separately, construction costs in Abu Dhabi declined by 0.4% qoq in Q1.
  • Dubai’s DMCC free zone extended its “Business Support Package” to all registered companies till Aug 31 including waiver of penalties, 2 month rent holidays and discounts on license reinstatement fees and license issuance among others. Separately, DIFC announced that its Presidential Directive – which introduced new measures for employees and businesses related to their workforce – will end on Jul 31st.
  • S&P downgraded the ratings of 3 major Dubai-based real estate companies to +BB from -BBB – DIFC Investments (stable outlook), Emaar Properties (negative outlook) and Emaar Malls (negative outlook) – citing economic pressures due to Covid19 amid lower oil prices. The ratings firm, which expects Dubai’s GDP to shrink by 11% this year, also warned of fiscal risks arising from the performance of GREs exposed to the pandemic (Emirates Group, DP World, Jumeriah Group etc.).
  • Tourists were permitted into Dubai from Jul 7: with Emirates and flydubai resuming flights to multiple destinations across the globe, Dubai tourism’s chief remained optimistic that related businesses would recover as “things normalize towards year-end”. However, a divergence was evident on the aviation front: Emirates continues to layoff pilots and cabin crew (the company’s President estimates a rise to upto 15% of total workforce, or 9k jobs) while a new budget airline Air Arabia Abu Dhabi (UAE’s 5th airline) will begin operations from Jul 14 (initial flight to Egypt’s Alexandria).
  • All business tenants in properties owned by Dubai Developments Group will be exempt from paying rent for six months, up from three months previously. An estimated 1500 businesses are likely to benefit from this move.
  • The Dubai Financial Market’s trading floor and customer affairs counters opened to serve customers from last week, after temporarily closing mid-Mar. Investors are still encouraged to trade remotely.
  • UAE plans to conduct over 2 million Covid19 tests in the next two months, focusing on employees in the services and government sectors.
  • Route 2020, the 15-km extension of the Dubai Metro, leading to the Expo 2020 site will open to the public in Sep.


Weekly Insights: Charts of the Week

Fig 1. Google Mobility registers increase in activity as lockdown restrictions are phased out

Notes: The reports show trends over several weeks with the most recent data representing approximately around June 9th. Changes for each day are compared to a baseline value for that day of the week: the baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020.More: https://www.google.com/covid19/mobility/

Covid19 confirmed cases in the Middle East and North Africa inch closer to 1 million, with GCC accounting for around 54% of the cases. All GCC nations have begun opening their economies in phases, and this is clearly reflected in the Google Mobility numbers: visitors to grocery and pharmacy are inching closer to (or surpassing) the period before the pandemic (see Qatar, Egypt, Lebanon, Jordan and Iraq) while the ‘residential’ category (which shows a change in duration of time spent at home) declined compared to a few weeks ago indicating that people are no longer as confined to home as during the lockdown period. Kuwait is still most restrictive in terms of employees returning to work (and hence a move closer to the baseline). Interestingly, the numbers for workplace in Saudi Arabia and UAE are still 27% and 24% respectively lower than the baseline. Recovery in retail and recreation is still below the baseline across the nations: the most divergence in Egypt and Kuwait and the UAE (in spite of Dubai’s shopping malls back to 100% operating capacity while theatres and recreation facilities open with social distancing measures).
Fig 2. Bahrain’s Q1 GDP: a quick comparison with Saudi Arabia and Dubai

Bahrain is the latest to release its Q1 GDP numbers, with overall GDP contracting by 1.1% and non-oil GDP falling by 1.7% yoy. In terms of sectors, it is no surprise that the hospitality and transport sectors were most hit, with passenger traffic restrictions in place since Mar. Q2 numbers are likely to be worse given the near-complete lockdowns. The oil sector continued to perform well, with its share of overall GDP at 17.2% in Q1.
In comparison to Saudi Arabia and Dubai GDP, the hospitality sector in Bahrain seems to be significantly more affected (-36% vs Dubai’s 14.8% dip). Also different was a decline in financial sector activity: drops of 1.6% and 1.1% in Q1 2020 and Q4 2019 respectively, versus Saudi Arabia and Dubai’s 1.0% and 0.32% rise in Q1 2020. Bahrain’s government sector witnessed a 2.9% drop in Q1, following a more severe 20.3% decline the quarter before: this is likely to be more significant in the coming quarters given ongoing fiscal consolidation efforts including the directive for ministries and government agencies to reduce spending by 30% this year.
Fig 3. Remittances across the GCC

The UAE is the second largest outbound remitter country in the world, with remittances touching AED 165.2bn in 2019, as per the latest annual report from the central bank. Though remittances in Q1 this year have been released only in Saudi Arabia and UAE (yet), both have posted a year-on-year increase. The Covid19 lockdown highlighted the transitory nature of work in the region. Job losses are forcing many skilled expat residents to leave the country given the linkages of the residency visa with jobs/ sponsors. Add to this lower oil prices, resulting in a substantial reduction in economic activity (with associated declines in salaries and/or job losses), it seems unlikely that there will be an uptick in remittances for the full year. The World Bank already estimates remittances globally to drop by 20% this year.
Considering the example of UAE, India was the top destination for remittances in Q1 this year, accounting for 37.8% of the total. With close to 500k Indians registered to leave on repatriation flights, a dip in remittances this year is inevitable. Saudi Arabia, where remittances have been declining since 2019, this year is unlikely to be any different – especially given the additional VAT hike and removal of cost of living allowances alongside a dip in overall economic activity. In Kuwait, meanwhile, if the expat quota bill is passed, close to 800k Indians might need to leave, thereby leading to a gaping hole in overall remittances to India.
On the other hand, allowing for a permanent residency program in GCC would attract and retain foreign human capital, which would generate significant economic gains (retained earnings, higher consumption levels, investments in the real estate sector etc.) for the domestic economy.
Media Review
What’s in a name? Banks count cost of loans in NMC collapse
https://www.reuters.com/article/us-nmc-health-administration-banks-analy/whats-in-a-name-banks-count-cost-of-loans-in-nmc-collapse-idUSKBN24B0MK
Fiscal policies for a transformed world
https://blogs.imf.org/2020/07/10/fiscal-policies-for-a-transformed-world/
Why Is the Fed Spending So Much Money on a Dying Industry?
https://www.nytimes.com/2020/05/28/opinion/fed-fossil-fuels.html
How NOT to Punish China
https://www.wsj.com/articles/how-not-to-punish-china-11594249525
Water wars is on the horizon in MENA: Nile Dam row
https://www.bbc.com/news/world-africa-53327668
Market Snapshot as of 12th Jul 2020
Weekly % changes for last week (9-10 Jul) from 2nd Jul (regional) and 3rd Jul (international).

 
 
 
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Weekly Economic Commentary – Jul 5, 2020

Weekly InsightsPMIs for Jun point to a V-shaped recovery, but is that the case? GDP data for Q1 were released in both Saudi Arabia and Dubai – affecting the latter more, not surprising given its higher degree of diversification. Last but not the least, a quick look into why the Lebanese pound hit close to 10,000 vis-à-vis the dollar in the black market last week.

Markets

Stock markets in the US gained after a major uptick in non-farm payrolls; Stoxx 600 posted gains while Asian markets touched 4-month highs as China’s PMIs continued to rise; China’s CSI 300 closed at the highest level in 5 years and 6.8% higher compared to a week ago. Regional markets were mostly down, with Saudi Arabia and Abu Dhabi gaining ground, after the former extended government stimulus measures and the latter was supported by Taqa’s asset-transfer deal making it the 3rd largest publicly traded company by market cap in the UAE. Major currencies were little changed except for the GBP, which rose against the dollar on some positive economic data while Brexit negotiations continue unresolved. Oil prices gained compared to a week ago though concerns are rising given Covid19 resurgence (especially in the US, the largest consumer of oil) and gold price edged up by 0.2% on its safe haven status. (Graphs in the last section.)
Global Developments
US/Americas:

  • Non-farm payrolls in the US surged by 4.8mn in Jun (May: 2.7mn), posting the largest-ever single month gain. However, the economy has recovered only just over a third of a historic plunge of 20.787mn jobs in Apr. Average hourly earnings dropped to 5% yoy from 6.6% the month before, as more low-wage earners returned to jobs (in mom terms, it decreased by -1.2% from -1% in May). Unemployment rate fell to 11.1% in Jun (May: 13.3%), as states reopened after a lockdown period, and thanks to a decline in those on temporary layoffs.
  • Initial jobless claims eased to 1.427mn in the week ended Jun 27 – the 15th consecutive week that filings were above 1mn; more than 48mn have filed for unemployment insurance over the past 15 weeks. Continuing claims increased by 59k to 19.29mn in the week ended Jun 20.
  • Factory orders rebounded by 8% mom in May (Apr: -13.5%), supported by the demand for transport equipment (+82% vs -48.9% in Apr) led by vehicles and defense aircraft. Orders for non-defense capital goods, excluding aircraft, rose 1.6% in May, down from the prior estimate of a 2.3% rise.
  • US ISM manufacturing PMI increased to 52.6 in Jun (May: 43.1), after 3 straight months of declines, and posting the strongest reading since Apr 2019. New orders sub-index jumped to 56.4 in Jun (May: 31.8), the highest since Jan 2019, while employment remained below-50 (42.1 from May’s 32.1).
  • Markit PMI stayed below 50, with the Jun reading at 49.8 from May’s 39.8, thanks to gains in output, employment and new orders.
  • Pending home sales in the US surged by a record 44.3% mom in May, following the 21.8% dip the month before. In yoy terms, sales were down 5.1% (Apr: -33.8%). The average rate on the 30-year fixed mortgage started May around 3.2%, according to Mortgage News Daily; by the start of Jun it was falling below 3%. S&P Case Shiller home prices increased by 4% yoy in Apr (Mar: 3.9%).
  • Chicago PMI improved to 36.6 in Jun from May’s 38-year low reading of 32.3. Production and new orders saw gains, while supplier delivery and employment declined; further, only 18% of respondents were planning to expand their workforce.
  • ADP employment change stood at 2.37mn in Jun, from an upwardly revised 3.07mn in May. Small businesses hiring had picked up in Jun, with leisure and hospitality adding 916k jobs.

Europe:

  • Business climate in the eurozone eased to -2.26 in Jun (May: -2.41) and economic sentiment improved to 75.7 from the previous month’s 67.5 while consumer confidence stayed flat at -14.7.
  • German Markit manufacturing PMI increased to a 3-month high of 45.2 in Jun (May: 36.6). A similar increase was observed at the EU level, with the PMI rising to 47.4 from May’s 39.4.
  • Markit services and composite PMI in Germany improved to 47.3 (May: 32.6) and 47 (a 4-month high vs May’s 32.3) respectively. The EU Markit services and composite PMI strengthened to 4-month highs of 48.3 (30.5) and 48.5 (31.9) respectively. France was the best-performing country overall.
  • Inflation in the Euro area stood at 0.3% yoy in Jun (May: 0.1%), according to early estimates of the HICP, while the core CPI eased to 0.8% from the previous month’s 0.9%. Prices of food, alcohol and tobacco increased by 3.1% (May: 3.4%) while energy prices fell by 9.4% (May: -11.9%).
  • Inflation in Germany increased by 0.9% yoy and 0.6% mom in Jun (May: 0.6% yoy and -0.1% mom); annual HICP advanced to 8% yoy in Jun (May: 0.5%).
  • German retail sales improved by 13.9% mom in May (Apr: -6.5%), supported by online sales (+28.7%); yoy growth rates were also higher (3.8% in May from Apr’s -6.4%).
  • With an additional 69k persons out of work, unemployment rate in Germany inched up to 6.4% in Jun (May: 6.3%). Separately, EU unemployment rate grew to 6.7% in May (Apr: 6.6%).
  • UK GDP declined by 2.2% qoq and 1.7% yoy in Q1 (Q4: -2% qoq and -1.6% yoy) – the largest fall since 1979. The services sector shrank by a record 2.3% while total business investment dropped by 0.3% qoq.
  • Markit Manufacturing PMI in the UK rose to 50.1 in Jun – above-50 for the first time since Feb – from May’s 40.7; though business sentiment touched a 21-month high, new export businesses fell for the 8th consecutive month. Services PMI surged to 47.1 (May: 29), with business expectations rising to a 4-month high, while the Composite Output Index rose to 47.7 in Jun (May: 30).

Asia Pacific:

  • China’s NBS manufacturing PMI inched up to 50.9 in Jun (May: 50.6); though new export orders are still below-50, the sub-index has been rising for 2 straight months (42.6 from 35.3 in May). Non-manufacturing PMI increased to 54.4 in Jun (May: 53.6).
  • China’s Caixin manufacturing improved to a 6-month high of 51.2 in Jun (May: 50.7), thanks to an increase in domestic demand while new export orders continue to fall. Services PMI increased to a 10-year high of 58.4 (May: 55), with new businesses rising to 57.3 (May: 55.8) and new export businesses expanding on foreign demand (in contrast to manufacturing).
  • Japan’s Tankan’s large manufacturing index slipped to -34 in Q2, the lowest reading since Jun 2009, from -8 in Q1, with non-manufacturing also showing a similar dip (-17 from 8 the previous quarter). Outlook also worsened, for both large manufacturing (to -27 from -11) and non-manufacturing (-14 from -1).
  • Japan retail trade inched up by 2.1% mom in May, though down by a massive 12.3% in yoy terms. Data showed a substantial drop in spending on items like cars, clothing and general merchandise.
  • Industrial production in Japan declined by 8.4% mom in May, following Apr’s 9.8% dip, as weak global demand continued amid depressed domestic spending. Production at major automakers slumped 62% yoy in May, following a 55% decline in Apr.
  • Industrial output in Korea plunged by 5.6% yoy and 1.2% mom in May: production of semiconductors rose by 10.8% mom, while auto output declined by 21.4% given supply chain disruptions.
  • India’s fiscal deficit widened to INR 4.66trn in Apr-May (Apr: INR 2.795trn), close to 60% of the budgeted annual target for the fiscal year Apr 2020-Mar 2021, as spending was increased to tackle the ongoing pandemic. Current account balance improved to USD 0.6bn surplus in Jan-Mar 2020 – after more than a decade – and from the USD 2.6bn deficit the previous quarter, thanks to a marginally lower trade deficit at USD 35bn alongside a 16% rise in net invisible receipts (higher remittances and a rise in investment flows).
  • Markit manufacturing PMI in India increased to 47.2 in Jun (May:30.8): output and new orders fell at slower rates, while new export orders fell for a 4th consecutive month. Services Business Activity Index rose to 33.7 in Jun (May: 12.6), remaining below-50 for the 4th successive month, and with a sharp fall in new orders as consumption declined. The Composite PMI Output Index increased to 37.8 in Jun, up from 14.8 in May.
  • Retail sales in Singapore plummeted by 21.5% mom and 52.1% in May (Apr: -21.3% mom and -40.3% yoy), largely due to the imposed “circuit breaker” measures. Excluding motor vehicles, retail sales fell 45.2%, lower than the 32.5% in Apr.
  • PMI in Singapore improved, but stayed well below-50, with a reading of 48 in Jun (May: 46.8). The electronics sector PMI remained under 50 for the 5th consecutive month, but rising 1.4 points to 47.6.

Bottom line: Though many economic indicators have shown a recovery from the dismal drops in lockdown months, beware of equating this to a V-shaped recovery. Look at annual changes not month to month changes. Global manufacturing PMI rose by a record 5.4 points to 47.8 in Jun, with 15 of 32 countries signaling expansions. However, global supply chain disruptions continue: average vendor lead times lengthened for the eleventh consecutive month and stocks of raw materials and finished goods at manufacturers fell again. As China’s PMI numbers show, growth has been driven by domestic demand rather than foreign; a silver lining is that the resurgence of Covid19 clusters does not seem to have dampened demand. The second half of the year started with Covid19 continuing to grab headlines: US dominates number of cases (with record highs reported in Florida and Texas), with Brazil and Russia close behind. While in the US many states are scaling back plans to reopen, the UK eased restrictions, opening restaurants, theme parks, galleries and hotels among others; closer home, many nations in the Middle East have opened airports for international travel, with Dubai opening for tourists starting July 7th. The EU are yet to agree on the EUR 750bn Covi19 recovery fund proposal while in the US, the question remains whether various stimulus measures will be extended (the Paycheck Protection Program has already been extended till Aug). Stimulus measures are driving up global debt, but a sudden rolling back could be detrimental to the economies and growth.
Regional Developments

  • The IMF expects GCC growth to shrink by 7.6% this year (from -2.7% dip forecast in Apr 2020), given the impact of low oil prices and the Covid19 crisis. Last week, the IMF had revised down Saudi growth to -6.8% (from -2.3%), which SAMA’s governor stated to be “more pessimistic” than theirs.
  • Stimulus measures in Bahrain to be extended: the government will pay 50% of salaries for insured citizens employed in the private sector (in firms most affected by Covid19) in addition to bearing citizens’ domestic electricity costs for their primary residences. The cost is estimated at BHD 70mn and between BHD 12-15mn respectively for the two measures.
  • Bahrain’s Labour Market Regulatory Authority will reduce by 50% the fees levied on the issuance and renewal of work permits. The hardest hit businesses will be exempt from paying fees during Jul-Sep.
  • Egypt’s currency appreciated vis-à-vis the greenback, supported by positive news like support from the IMF (to the tune of USD 5.2bn), rise in foreign investments in Egyptian T-bills and the resumption of international tourism (albeit at select pockets within the country).
  • Egypt reported a trade deficit of USD 2.36bn in Apr: exports declined by 32.3% to USD 1.84bn while imports’ value plummeted by 40.1% to USD 4.19bn.
  • FDI flows into Egypt grew by 11% to USD 9bn in 2019, according to UNCTAD, making it the largest FDI recipient in Africa. Overall FDI flows to Africa was down by 10% to USD 45bn while flows into North Africa was down 11% to USD 14bn.
  • Egypt’s President approved a 14% hike in pensions effective Jul 1st.
  • A CAPMAS survey highlights the impact of Covid19 on jobs in Egypt: about 61.9% of employees aged 15-64 were affected by workplace changes, with about 26% losing their jobs. About 55.7% of citizens noted that their work hours fell, while many reported declines in salaries (87.9% of those aged 15-24 and 56.5% of those aged 55-64).
  • ENI made a new gas discovery in offshore Egypt: the well, discovered a single 152 metres thick gas column, and will be explored with the aim of “fast tracking” production.
  • A gold deposit with estimated resources of 1 million ounces was discovered in Egypt. The government plans to invest more than USD 1bn to develop the deposit over the next decade.
  • To comply with the OPEC+ cuts, Iraq will reduce crude oil exports from its southern terminals (mainly Basra Light flows) in Jul: planned exports will be around 1.53mn barrels per day (bpd), from 3.1mn bpd planned in Jun.
  • According to the oil ministry, Iraq’s oil exports fell to 2.8mn barrels per day (bpd) in Jun, from 3.21mn bpd in May, with exports from its southern Basra terminals totaling 2.7mn bpd. Oil revenues touched USD 2.86bn in Jun, with an average price per barrel of USD 33.9.
  • Jordan issued a double-tranche Eurobond last week at competitive rates – USD 500mn at 4.95% over 5Y maturity and USD 1.25bn at 5.85% over 10Y maturity – and it was oversubscribed by more than 6.25 times, attracting bids worth over USD 6.25bn.
  • Jordan’s minister of finance disclosed that the government had injected USD 705.2mn into the private sector during the ongoing Covid19 pandemic, to increase liquidity.
  • The World Bank approved a USD 374mn project to provide cash support to 270k underprivileged and vulnerable households in Jordan.
  • Kuwait’s National Assembly committee approved that a draft law proposing a quota for expatriates is constitutional. The bill – which proposes a quota system, e.g. that Indian expat community should not exceed 15% of the national population – will now be referred to the committee for consideration.
  • Kuwait will partially resume commercial flights (which have been suspended since Mar) from Aug, at 30% capacity i.e. with a maximum of 100 flights and 10k passengers a day. Phase 2 and 3 will begin in Feb and Aug 2021 respectively with 60% and full capacity respectively.
  • Lebanon’s PMI rose to 43.2 in Jun (May: 37.2), though plagued by slumps in output and new orders amid signs of demand weakness. The rate of workforce contraction reported its quickest pace since Mar while new export orders declined for the 4th month in a row; input prices soared.
  • Talks with the IMF are on hold, disclosed Lebanon’s finance minister, while a “unified approach” is being discussed to define and calculate losses in all sectors. Earlier in the week, another member of the negotiating team announced his resignation. A parliamentary fact-finding committee stated that losses in the system were between a quarter and half the amount set out in a government recovery plan that was submitted to the IMF.
  • The dollar rate on the black market in Lebanon had reached LBP 10k on Thursday before declining to an average LBP 8200 on Fri (after the reopening of the airport and the central bank’s pledge to provide lenders with foreign currency to finance imports).
  • Importers in Lebanon will be supplied with dollar banknotes to buy goods from abroad at a rate of LBP 3,200. The Economy Ministry will also subsidize 280 consumption items at this rate “within days”, and “close to USD 100mn will be injected by the central bank each month to subsidize the basic food items”.
  • Lebanon’s banks will ease limits on dollar transfers, which were imposed last Nov, revealed the chairman of the Association of Banks in Lebanon.
  • Banque du Liban’s board of directors decided to reduce the interest rates to zero percent on the banks’ mandatory reserves and on the financial engineering transactions.
  • Oman is in talks with international and regional banks for a USD 2bn bridge loan, reported Reuters. Previous talks were put on hold at the onset of the Covid19 pandemic.
  • The Central Bank of Oman raised OMR 56mn by issuing Treasury bills. The interest rate on the Repo operations with the CBO is 0.5%.
  • Oman Tax Authority started to apply a 100% selective tax on alcoholic beverages from Jul 1st; it was temporarily reduced to 50% prior to this hike, and the tax is not applicable at duty-free shops.
  • Oman launched a new tax card system from July 1, replacing the tax certificate currently in use: this will be proof of the registration for any taxpayer from the tax Authority. A copy of the card will be requested by when issuing contracts or undertaking any transaction.
  • In line with its compliance to OPEC+ cuts, Oman notified its crude oil customers of a cut of about 10% in allocations for Sep loading and delivery.
  • The value of real estate transactions in Oman fell by 19.5% to OMR 878.9mn at end-May. Of these, OMR 586mn worth transactions were mortgage deals.
  • SMEs registered at the Public Authority for Small and Medium Enterprises Development (Riyada) in Oman increased by 11.97% yoy to 44,197 firms at end-May 2020.
  • Tourists into Oman grew by 8.14% yoy to more than 2.5mn in 2019: this included 1.4mn from the GCC, 436k from India (+21.8% yoy) and 107k form China (+141%).
  • Oman’s citizens account for 59.3% of the total population as of Jun 26th this year, while expats stood at 1,864,442 (40.7% of total).
  • Qatar pledged USD 100mn in humanitarian assistance to Syria, bringing the total assistance to USD2bn till date, according to the foreign ministry.
  • Saudi Arabia’s economy shrank by 1% yoy in Q1 (Q4: 1.7%), largely due to the dip in the oil sector (-4.6%) while the non-oil sector grew by 1.6%. A sharper downturn can be expected in Q2, especially as lockdown measures were strictly imposed during this period.
  • Non-oil sector PMI in Saudi Arabia shrank again in Jun, dropping to 47.7 from May’s 48.1, with faster reductions in business activity and new work, as firms adjusted to cautious consumer spending. Employment fell at the fastest pace since the survey began in Aug 2009.
  • Saudi Arabia announced the extension of several government initiatives to support the private sector: this includes unemployment insurance for Saudi employees, postponing VAT payments, accelerating VAT refunds, suspending fines related to recruitment and partial exemption from the financial compensation for the expiring visas of residence among others. The government has so far rolled out 142 initiatives to support individuals, private sector enterprises and investors since the outbreak of the pandemic worth SAR 214bn (USD 57bn).
  • The 15% VAT came into effect in Saudi Arabia from Jul 1st: there was an anticipatory increase in retail sales days before this came into effect, especially after the lockdown measures were eased. VAT will also be applied goods imported via online platforms.
  • Saudi Arabia raised SAR 8.495bn (USD 2.27bn) in Islamic bonds or sukuk in Jun, according to the finance ministry.
  • SAMA’s latest report shows that 155,893 mortgage loans (+19% yoy) worth a total of SAR 7.8bn (+39%) were offered by financing institutions in May 2020.
  • Remittances from Saudi Arabia increased by 5.37% yoy to SAR 55.48bn (USD 14.79bn) in Jan-May 2020. In May, remittances surged by 18.4% yoy and 20.8% mom to SAR 11.83bn.
  • Saudi Arabia plans to open 38 tourist sites in seven tourist destinations by 2022, revealed the minister of tourism, from 15 sites in four tourist destinations ready currently.
  • According to IATA, Middle East airlines posted a 98% decrease in traffic in May, versus a 97.3% dip in Apr.

UAE Focus

  • UAE merged some ministries and departments today (Jul 5th), in a bid to make the government “flexible, fast and able to keep up with changes”. Some of the changes included a phasing out of government services within 2 years (becoming digital portals instead), merging 50% of federal authorities or adding them to ministries, and merging ministries among other changes. A strong emphasis has been placed on “agile government”, digital policies and food security, with a self-imposed time limit of one year to meet the new priorities.
  • UAE non-oil sector activity strengthened to 50.4 in Jun (May: 46.7), recording the 1st rise in output since Dec. While firms are reporting an increase in activity as lockdown eased – output rose at the strongest pace since Oct 2019 and new orders grew at the fastest since Aug 2019 – cost cutting is prevalent and the employment sub-index dropped to 46.4 (May: 48.7).
  • Dubai’s GDP declined by 3.5% yoy in Q1 2020, versus 2.2% growth in full year 2019, as Covid19 affected businesses in the emirate’s key tourism and business sectors. Real estate, finance and manufacturing sectors reported growth in Q1.
  • Dubai World repaid the final USD 8.2bn of the debts, two years ahead of the agreed schedule. The payment came through the emirate’s own funds, dividend payments from the portfolio companies that together make up “Dubai Inc.” and a loan from Dubai Islamic Bank. This is a sound, pre-emptive move by Dubai given economic and financial market uncertain prospects. This is a time where cash-flow management should be the top priority for businesses and that is driving Dubai World’s actions.
  • Abu Dhabi Department of Economic Development announced a new coalition project to support micro-, small- and medium-sized enterprises operating in highly-skilled fields, particularly “science, healthcare, information technology and innovative solutions” via mortgages from leading banks.
  • UAE issued 4201 new licenses in Jun, bringing the total number to 652,885. Dubai represented 46% of total licenses issued in the UAE while shares in Abu Dhabi and Sharjah touched 22.3% and 12.9% respectively.
  • Dubai reported an 83% yoy surge in e-commerce business licenses (to 1947) issued in H1 this year. Lifestyle coaching topped the list of online activities being sought through DED licenses during H1 this year, followed by marketing services through social media.
  • Dubai will open the city to international tourists from Jul 7th:
  • UAE Cabinet approved an additional AED 320mn (USD 87mn) budget for national universities for the 2020-2021 academic year.
  • Damac’s chairman is considering buying out minority shareholders to take the USD 1.1bn listed company private, reported Reuters.
  • Emirates airline disclosed that the firm had processed close to 650k refunds amounting to over AED 1.9bn (USD 517mn) over the past two months.
  • Abu Dhabi postponed retirement subscriptions payment for private sector employers for further three months starting as of Jun 2020 until Aug 2020 without charging any additional fees to such entities.
  • According to Wealth-X’s latest report, the number of billionaires in UAE declined to 47 last year, from 55 in 2018, with their wealth dropping to USD 163bn (vs 2018’s USD 165bn). Globally, the number of billionaires rose 8.5% to 2,825 in 2019, while combined wealth up 10.3% to USD 9.4trn.


Weekly Insights: Charts of the Week

Fig 1. PMIs are recovering after the lockdowns imposed during the Covid19 outbreak

The PMI readings have improved across the board in Jun, except in Saudi Arabia, as nations ease restrictions after near-complete lockdowns. While business activity has picked up, supply chain disruptions are still widespread, export orders have struggled to increase given the lack of external demand and employment has been slow to pick up (given cost-cutting measures). China’s higher domestic demand has supported activity. Re-emergence of Covid19 cases could potentially derail the improvement in PMIs.
Fig 2. Saudi Arabia’s GDP posts a decline of 1% yoy in Q1 this year

GDP in Saudi Arabia declined by 1% yoy and -4.5% qoq in Q1 this year. The share of the private sector stands at around 40% of total GDP, implying that the country stands to lose directly from both lower oil prices and the immediate impact on services (including trade and tourism) due to Covid19. In Q1, yoy growth rates declined in mining, manufacturing and agriculture, while other sectors witnessed a slowing in activity – e.g. construction slowed to 2.2% growth vs Q4’s 7.7%, growth in wholesale & retail trade, restaurants & hotels almost halved to 4.8%, while finance eased to 1% growth (Q4: 5.6%). GDP by component reveals that while shares of government consumption and investment declined in Q1 (from close to 50% in Q4 to 40% in Q1), personal consumption expenditure and net exports gained.
Going forward, oil GDP will decline further given compliance to the OPEC+ production cuts while non-oil GDP are likely to be negatively affected by the VAT hike (lowering consumer spending, affecting wholesale and retail trade) as well as the reduction in capital spending (affecting construction sector).
Fig 3. Dubai GDP declines by 3.5% yoy in Q1 2020, after posting 2.2% growth in 2019

The Dubai emirate is not dependent on oil, as evidenced by the share of mining and quarrying at just under 2% of total GDP. In Q1 this year, economic growth shrank by 3.5%, partially affected by Covid19 and the subsequent lockdown (mid-Mar). Majority of the economic sectors posted substantial declines: most visibly in accommodation and food services/ tourism (-14.83% yoy), arts, entertainment and recreation (-10.04%) and wholesale and retail trade (-7.5%). Together, wholesale and retail trade, transportation and storage and financial activities account for close to 50% of total GDP (in 2019): the former two sectors were dragged down by Covid19.
The impact will be more pronounced in Q2, given the lockdown effect (lower consumer demand and spending) in addition to the seasonally slower activity during the month of Ramadan.
Fig 4. Lebanon’s runaway exchange rate and inflation

A dangerous inflationary spiral has gripped Lebanon with the currency’s value against the dollar nosediving as much as 80%. Inflation is on the rise and reached an annual 56% in May, according to Lebanon’s Central Administration of Statistics. The World Bank forecast in Nov that close to half the population could live below the poverty line if situation worsened, while food poverty is estimated to affect 22% of the population (the situation is worse for the Syrian refugee households in the country).
The current downfall of LBP can be traced back to several factors. 1. Given the collapse of the long-maintained peg, there is no anchor for expectations of the future value of the Lebanese pound. 2. Monetary financing of budget deficits. Lebanon’s fiscal deficit increased 26.9% in the first four months of the year to USD 1.75bn from the year-earlier period. With the government unable to borrow from the markets, the central bank is financing the growing budget deficit and, increasingly, a growing proportion of government spending. 3. Informal capital controls, payment and transfer restrictions has led to a stop of transfers and remittances from Lebanese expatriates (in 2019, remittances accounted for 12.9% of GDP). 4. Deep recession means decline in income and demand for money. Covid19 and the lockdown has deepened the loss of government revenue from VAT, from customs and from tourism and further deepened the recession. 5. Developments in Syria including the impending implementation of the Caesar Act. (More: https://www.thenational.ae/business/economy/to-halt-lebanon-s-meltdown-its-imperative-to-reform-now-1.1043805)
Media Review
Covid19 is here to stay. People will have to adapt.
https://www.economist.com/leaders/2020/07/04/covid-19-is-here-to-stay-people-will-have-to-adapt
https://www.economist.com/graphic-detail/2020/07/04/how-speedy-lockdowns-save-lives
Priorities for the COVID-19 Economy
https://www.project-syndicate.org/commentary/covid-2020-recession-how-to-respond-by-joseph-e-stiglitz-2020-06
To halt Lebanon’s meltdown it is imperative to reform now
https://www.thenational.ae/business/economy/to-halt-lebanon-s-meltdown-its-imperative-to-reform-now-1.1043805
How public assets can help revive Lebanon
https://ftalphaville.ft.com/2020/06/29/1593437142000/How-public-assets-can-help-revive-Lebanon/
Market Snapshot as of 5th Jul 2020
Weekly % changes for last week (2-3 Jul) from 25th Jun (regional) and 26th Jun (international).

 
 
 
 
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Weekly Economic Commentary – Jun 28, 2020

Weekly Insights: Charts this week maps the downward revisions to IMF’s growth forecasts this year to analysing the latest initial jobless claims (are they as promising as they look?) before ending with a snapshot of the Government Response Stringency Index in the GCC nations.

Markets

Stock markets in the US ended in the red, as daily Covid19 cases hit new highs in many states thereby raising concerns over economic recovery; European markets declined compared to a week ago, though rebounding mid-week after relatively rosy PMI numbers, while the Asian markets posted marginal increases. Regional markets were mixed, as Covid19 cases in the region continue to increase: UAE, Saudi Arabia and Qatar markets were down. The euro and yen posted a weekly gain vis-à-vis the greenback while the pound continued to be battered given the rising Covid19 cases, potential localized lockdowns and outlook. Oil prices ended the week lower while gold price climbed to multi-year highs on concerns over a second-wave. (Graphs in the last section.)
Global Developments
US/Americas:

  • US GDP fell by 5% in Q1 this year, unrevised from the preliminary estimate: this is the sharpest quarterly decline since the 8.4% dip in Q4 2008. But wait for Q2.
  • Personal consumption expenditures increased by 8.2% mom in May following a record drop in Apr (-12.6%), thanks to spending on vehicles, healthcare and restaurants while personal income declined by 4.2%.
  • Durable goods orders accelerated by 15.8% mom in May, the most since Jul 2014 and falling a 18.1% fall in Apr, supported by a surge in transportation equipment (+80.7%). Excluding transportation, orders were up by a modest 4%. Orders for nondefense capital goods excluding aircraft rose 2.3% after dropping 6.5% in Apr.
  • Rebounds in activity indices: the Chicago Fed National Activity Index increased to a record-high 2.61 in May from Apr’s record-low -17.89. Richmond Fed manufacturing index recovered to 0 in Jun from -27 in May, with manufacturers optimistic that conditions would improve in the next 6 months.
  • Existing home sales fell by 9.7% mom to a seasonally adjusted annualized rate of 3.91mn units in May – the lowest level since Oct 2010. In yoy terms, sales declined by 26.6%, posting the largest annual decline since 1982.
  • New home sales accelerated by 16.6% mom and nearly 13% yoy to 676k in May, supported by record-low mortgage rates while supply of previously-owned homes remains quite constrained.
  • US Markit manufacturing PMI inched up to 49.6 in Jun (May: 39.8) while the composite PMI output index posted 46.8 in Jun, up from 37.0 in May.
  • Initial jobless claims eased to 1.48mn in the week ended Jun 20 – the 14th consecutive week that filings were above 1mn – raising the total to 47.3mn since Mar 21st. Continuing claims declined to 19.5mn in the week ended Jun 13.

Europe:

  • Germany’s preliminary manufacturing PMI ticked up to a 3-month high of 44.6 in Jun (May: 36.6), with slower falls in new orders, output and employment. Services PMI activity index rose to a 4-month high of 45.8 (May: 32.6) while the composite output index touched 45.8 in Jun, from May’s 32.3.
  • Preliminary manufacturing PMI for Eurozone improved to a 4-month high of 46.9 in Jun (May: 39.4), with the output sub-index rising to 48.2 (35.6). Services PMI also rose to a 4-month high of 47.3 (May: 30.5); composite PMI touch a 4- month high of 47.5 (May: 31.9) – this is the second-largest monthly rise in the survey.
  • UK Composite Output index rose to 47.6 in Jun (May: 30). Manufacturing PMI increased to a 4-month high of 50.1 in Jun (May: 40.7) while the output sub-index moved back to growth (50.8) after 3 straight declines. Services PMI surged to 47 from 29 in May, with financial intermediation was the best performing area of activity in June, followed by transport & communication services. Job losses were the lowest since Mar.
  • German Ifo rose to 2 in Jun, from an upwardly revised 79.7 in May, also posting the largest monthly increase in the index. After 2 months of declines, assessment of the current situation edged up to 81.3 (May: 78.9) while expectations surged to 91.4 (May: 80.5).

Asia Pacific:

  • The People’s Bank of China left the benchmark lending rate unchanged at 3.85% for the second consecutive month, while the 5-year loan prime rate also stayed put at 4.65%.
  • Japan’s preliminary manufacturing output index eased to 28.9 in Jun (May: 30.3), with the headline PMI down lower to 37.8 in Jun (May:38.4) – the 14th straight negative month and the lowest reading since Mar 2009. Services PMI recovered to 42.3 in Jun (May: 26.5) while the composite index was down to 37.9 (May: 27.8).
  • Japan’s leading economic index edged up to 77.7 in Apr, up from the preliminary reading of 76.2, but below Mar’s 85.1. The coincident index dropped to 80.1 in Apr, the weakest score since Mar 2008. The lagging index also declined to 97.8 in Apr (Mar: 100.7).
  • Japan all industry activity index dropped to -6.4% in Apr (Mar: -3.4%); the previous low was -6.3% in Mar 2011.
  • Tokyo inflation eased to 0.3% yoy in Jun (May: 0.4%) while core CPI (excluding food and energy) was 0.4% yoy, down from 0.5% the month before.
  • Singapore inflation fell by 0.8% yoy in May (Apr: -0.7%), as private transport costs plunged (-6.8%) as did retail costs (-2.3%). Core inflation dropped for the 4th straight month, falling by 0.2% yoy (Apr: -0.3%).
  • Industrial production in Singapore fell by 7.4% yoy in May, in line with a 4.5% decline in non-oil domestic exports reported earlier. Excluding biomedical manufacturing (which grew by 5.9%), industrial output declined by 10.4% yoy.

Bottom line: As we inch closer to end of H1, global asset market have held up surprisingly well during the Covid19 outbreak period (https://tmsnrt.rs/2YEBCcV), on hopes of monetary and fiscal stimulus and unprecedented support from central banks and governments, much in contrast with the state of the global economy (reeling under Covid19, which crossed the 10mn cases mark). The IMF released last week a sombre outlook for the global economy, as many economies try to kickstart their economies after months of lockdown. Global growth is forecast to decline by 4.9% this year – with advanced nations plummeting by a whopping 8% vs emerging markets shrinking by 3.0% – before rebounding to 5.4% next year. There have been reports of new Covid19 clusters in economies that have reopened; in the US, as 5 states hit daily highs for Covid19 cases, reopening measures are being rolled back. Europe has been opening up with a drive to push tourism, though the new normal includes social distancing measures and revised strategies to mitigate the risks of the ongoing outbreak (e.g. tourists can only take the stairs to reach the top of the Eiffel Tower). The path to recovery is not smooth either: Italy, which has been open for tourists since Jun3rd, is yet to see tourists flock to its many cities.
Regional Developments

  • The IMF expects growth in the Middle East and Central Asia to decline by 4.7% in 2020, in its latest World Economic Outlook report, before rising to 3.3% next year. It slashed Saudi Arabia’s growth: after shrinking by 6.8% this year, growth will rebound to 3.1% in 2021.
  • Bahrain-origin exports declined by 16% yoy to BHD 176mn (USD 464mn) in May 2020. Saudi Arabia (BHD 34mn), Netherlands (BHD 18mn) and the UAE (BHD 14mn) were the top destinations for Bahraini exports. Value of imports declined by 10% during the month, widening the trade deficit by 13% to BHD 162mn.
  • With government’s support to pay citizens wages in the private sector ending this month in Bahrain, MPs are in talks to either extend the support or introduce a new stimulus package.
  • According to UNCTAD data, Bahrain attracted USD 942mn of FDI in 2019 (2.45% of GDP), recording the 3rd consecutive year of inflows around USD 1bn.
  • The IMF Board approved a USD 5.2bn 12-month Stand-By Arrangement to support health and social spending in Egypt while dealing with Covid19 and to “advance a set of key structural reforms”.
  • Egypt is slowly easing its restrictions: the night-time curfew, in place since Mar 25, has been lifted from Jun 27; restaurants, cafes and places of worship have been partially reopened. EgyptAir will resume flights (at 20-30% capacity) to 24 international destinations from the first week of Jul. All cultural and artistic activities – including museums and theatres – will resume from mid-Jul.
  • Egypt’s central bank kept its interest rates on hold: the overnight lending rate was left at 10.25% and the overnight deposit rate at 9.25%, the lowest rates since early 2016.
  • Egypt will support SMEs as part of the USD 6.2bn financing initiative created to support the industrial, agricultural and construction sectors, reported Al-Ahram.
  • Egypt will implement the new income tax law from the beginning of next Jul: the basic income tax exemption limit has been raised by 60% to EGP 15k while the personal income tax exemption limit was increased to EGP 9k from EGP 7k.
  • Egypt’s economic committee approved the proposed amendments to VAT law – which include exempting exported goods and services from projects in free zones as well as special and economic zones from VAT. The bill is still subject to the cabinet’s final approval.
  • Daily oil output in Egypt fell in Mar-Apr to its lowest level since Jul 2009: oil production declined to 589,950 barrels per day in Apr from Mar’s 594,620 bpd from close to 612,300 bpd in Jan-Feb. Overall, during Jan-Apr, oil production was down by 2.5% compared to Dec 2019.
  • Iraq’s total oil exports averaged 3.21mn barrels per day (bpd) in May, with oil revenue dropping to USD 2.41bn (in Mar, it had already declined to USD 2.98bn).
  • Jordan’s public debt increased to JOD 31.394bn (USD 44.2bn or 101.7% of estimated GDP) by end-Apr 2020 versus JOD 30.076bn (96.7% of GDP) at end-2019.
  • Domestic revenues in Jordan declined by JOD 569mn (USD 802.5mn) in Jan-Apr 2020, while total spending fell by JOD 157mn to JOD 2.7bn, widening the deficit to JOD 695mn (Jan-Apr 2019: JOD 304mn). Given the decline in revenues, a decision was taken to defer a salary hike for public sector employees to next year.
  • Jordan’s tourism revenues plummeted by 36.6% yoy to JOD 784mn during Jan-Apr. The central bank’s data also showed a 5.9% yoy decline in remittances to JOD 800mn in Jan-Apr.
  • Kuwait will ease its curfew from Jun 30th to between 8pm to 5am, and work can be resumed at less than 30% capacity. Reopening is on the cards for shopping malls, financial and construction sector, as well as retail shops and parks. This 2nd phase will run for 3 weeks.
  • The total assets of banks operating in Kuwait declined in Apr – for the first time since Oct 2019: assets were down by 0.48% mom to KWD 72.44bn (USD 235.76bn) in Apr. Foreign reserves were down by 1.5% mom to KWS 17.03bn.
  • Kuwait’s central bank disclosed that local banks had provided KWD 2.7bn (USD 8.9bn) worth of credit facilities to businesses under the economic stimulus package.
  • Reuters reported, citing a government official, that Kuwait is considering that the annual transfer of 10% of state revenues to the Future Generations Fund be conditional on achieving a budget surplus.
  • Kuwait’s stock exchange will resume some suspended operations (e.g. transfer of private properties) starting Jun 28th, with the system of unlisted securities (OTC) to be reactivated as of Jul 9th.
  • MSCI will reclassify Kuwait to Emerging Market in Nov 2020, from its frontier market status, reconfirmed Kuwait’s Capital Market Authority.
  • IMF officials continue to work with Lebanon, but more unity is needed among leaders, stakeholders and society to proceed with reforms to stabilize the country, according to the Fund’s MD.
  • Exchange rate crisis is touching new levels in Lebanon: the exchange rate on the black market has reached LBP 7000 to one dollar (vs the official rate of LBP 1515 to USD 1). In the absence of a clear policy path ahead, there is no bottom to the value of the Lebanese pound.
  • Oman posted a fiscal surplus of OMR 134.2mn (USD 349.48mn) in Jan-Apr 2020, as spending by defence and security establishments was reduced by over 17% yoy while investment expenditure fell 24.5%. An average crude sale price of USD 63.36 and partial privatization of the Oman Power Transmission Company helped Oman’s government revenues touch OMR 3.82bn at end-Apr, less by just OMR 47mn from a year ago.
  • Total deposits in Oman’s banking sector grew by 3.6% yoy to OMR 23.9bn (USD 60bn) at end-Apr.
  • Oman’s ruler ordered rolling out interest-free emergency loans to support entrepreneurs negatively affected by the Covid19 outbreak.
  • Expat population in Oman has declined by nearly 40k from Mar 2020 to 1,622,241 in May.
  • Government subsidy to Oman’s electricity sector increased by 10.9% yoy to reach a record OMR 624.69mn (approximately USD 1.6bn) in 2019.
  • Inflation in Saudi Arabia rose by 1.1% yoy in May, as hikes in food prices (+7.4%) were offset by declines in transport (-3.8%) and housing costs. Wholesale price index (WPI) in Saudi Arabia fell by 2.1% in May (Apr: 0.6%) – posting the first drop since Feb 2019 – thanks to a plunge in the prices of refined petroleum products (-20.9%).
  • Saudi Arabia’s oil exports dropped by 65.4% yoy in Apr, after recording a 21.9% yoy decline to USD 40bn in Q1. Total exports – including non-oil exports of goods such as chemicals and plastics – decreased by 23.5% yoy or about USD 3bn in Apr.
  • China’s oil imports from Saudi Arabia surged by 95% yoy and 71% mom to an all-time high of 9.165mn tonnes or 2.16mn barrels per day in May.
  • Saudi Arabia’s finance ministry disclosed that it receives about 95k requests worth a total value of SAR 47bn for financial support from the private sector; average daily requests touched SAR 522mn (USD 139.2mn).
  • Saudi Arabia will limit the number of domestic pilgrims attending the Haj to around 1k to prevent the spread of Covid19. The week-long Haj usually attracts close to 2.5mn pilgrims to the holy site, enabling the country to earn close to USD 12bn from both Haj and Umrah.
  • Saudi banks NCB and Samba have signed an initial agreement to create a combined entity with almost USD 214bn in assets. If completed, the merger would create the region’s 3rd largest lender by assets, after Qatar National Bank and UAE’s First Abu Dhabi Bank.
  • The value of contracts awarded in Saudi Arabia touched SAR 45.2bn (USD 12bn) in Q1 2020, with military sector accounting for 33% of total contracts. The value of contracts were up 28% qoq but down 9% yoy, according to a report by the US-Saudi Business Council.
  • Saudi Arabia created a SAR 15bn (USD 4bn) Tourism Development Fund to support the development of tourism industry.
  • Saudi mortgage lender Amlak is selling its shares for between SAR 15-17: the book-building process for the IPO began on Jun 22nd and will close on Jun 29th.
  • Saudi Arabia reiterated that the suspension of international flights and entry and exit by land and sea via all ports and crossing points will continue until further notice.

UAE Focus

  • UAE’s federal and local authorities have rolled out more than 227 economic and commercial incentives to support the economy during the Covid19 outbreak and its impact, according to the Federal Competitiveness and Statistics Authority.
  • Bank deposits in the UAE edged up by 2.1% to AED 1.865trn during the period Mar-May from AED 1.828trn in Feb.
  • ADNOC signed a USD 20.7bn deal with an international consortium to invest in the former’s natural gas pipelines infrastructure. This is the biggest single infrastructure deal globally this year and will see UAE attract over USD 10bn in FDI. The part-privatisation signals openness to PPP & greater private sector involvement in energy development.
  • Dubai ranked 2nd globally in greenfield FDI capital flows and 3rd globally in terms of number of FDI projects during Jan-May 2020 – 155 newly announced FDI projects with AED 10bn+ of expected capital – disclosed the CEO of Dubai Investment Development Agency.
  • UAE ranks 19th in the 2020 Kearney FDI Confidence Index, up from 21st place in the 2017 edition.
  • Moody’s changed its outlook to negative from stable for eight UAE banks citing a potential “weakening in their standalone credit profiles” given the impact from Covid19, low oil prices and economic challenges.
  • Shopping malls and commercial establishments in Dubai have been permitted to operate regular working hours, after all movement restrictions were lifted.
  • Real estate transactions in Dubai slowed in Apr, but is picking up in Jun: the Dubai Land Department disclosed that real estate transactions worth AED 5.2bn were closed during Jun 1-19, compared to AED 2.8bn during the same period in Apr.
  • Dubai will open to tourists from Jul 7th: tourists need to either present a negative Covid19 certificate or take the test at the Dubai airport. Citizens and residents have been permitted to travel from Jun 23rd to selected destinations.
  • UAE’s trade in food commodities and products touched AED 31.7bn in Q1 this year, of which imports totaled AED 17.98bn.
  • Dubai’s manufacturing index declined by 1.73% qoq and 2.66% yoy in Q1 this year, due to a decline in prices of several products including refined petroleum and pharma products.
  • After finding that it takes an average of 63 days to open a bank account in the UAE and that 30% of startups fail to open a bank account domestically, Hub71 is working with Mashreq Bank and First Abu Dhabi to identify and solve the major challenges faced by startups, including the KYC and documentation processes.
  • District 2020’s global entrepreneur programme Scale2Dubai will support UAE’s start-ups and SMEs, given its collaboration with Dubai SME and Mohammed bin Rashid Innovation Fund. Successful applicants will benefit from two years’ free working space in District 2020, support in visa and business set-up, as well as two years’ subsidised urban living and access to funding among others. District 2020 will evolve over 9 months after the Expo ends, repurposing more than 80% of the Expo’s built environment.


Weekly Insights: Charts of the Week

Fig 1. Global Economic Growth to decline by 4.9% this year, before rebounding to 5.4% in 2021

The downgrades to growth forecasts have a been a result of the extended lockdowns across the globe: the cumulative output loss facing the global economy during the 2020-21 period is around USD 12.5 trillion. With 75% of nations globally easing restrictions, there have been month-on-month rises in consumer spending (retail sales) and a partial recovery in PMI (and firms’ relative optimism on economic recovery). However, the potential risk of a second-wave could see reintroduction of lockdowns (as seen in some US states) which could dampen economic recovery further. The IMF forecasts seem relatively optimistic, with all regional aggregates indicating a V-shaped recovery. It is more likely that the recovery will take longer, either like the Nike swoosh or Arabic “Ba”.
For the Middle East (which is facing lower oil prices, world recession as well the Covid19 impact), growth is expected to recover a tad slower compared to the rest, rising to only 3.3% from a 4.7% dip this year. As countries in the Middle East emerge from three-months of Covid-19 containment, policy makers need to plan for a transformed post-pandemic world and create a new development model (More: https://www.thenational.ae/business/comment/how-gcc-countries-can-adapt-policies-for-a-post-covid-19-world-1.1036395).
Fig 2. US jobless claims ease, but potential reinstatement of lockdowns could risk further job losses


US jobless claims have been easing from the peak of 6.87mn touched in the week ended 27th Mar: this is the 14th consecutive week of claims above the 1mn mark. Continuing claims have edged down to 19.5mn, but still equivalent to 13.4% of the workforce. The points to remember however are that (a) almost all jobs created in the past decade have been wiped out; (b) the rate of job creation will be slow as states emerge from lockdowns; (c) rising Covid19 cases in many states could see a reinstatement of lockdowns which could risk further job losses.
Fig 3. Government Response Stringency Indices

The University of Oxford’s Stringency Index tracks nine separate metrics including school closures, cancellation of public events, restrictions on public gatherings and the like to record how strict government policies are. A higher score implies strict government response (as the chart is close to 100 in Kuwait during the full lockdown period till a few weeks ago); however, the index does not track the effectiveness. Kuwait is relatively more stringent than the rest of the GCC nations, followed closely by Oman. Though the unwinding is happening in phases, capacity restrictions are still in place in most GCC nations. Social distancing measures, masks and gloves have become ubiquitous in this new normal.
This index, along with the previous charted Google Mobility reports, provide a good understanding of people’s movements across the nations, which can be read as a proxy for consumer spending (e.g. visits to malls, recreation) and potential well-being (e.g. visits to parks, beaches). These high-frequency indicators point towards an uptick in economic activity in the coming quarter.
Dubai has already announced that it is open for visitors from Jul 1 – what remains to be seen is how visitor numbers measure up vs pre-Covid19. Saudi Arabia, UK, Russia, Oman and China followed India as the top source markets as of Feb 2020 and many of these nations are still grappling with their Covid19 outbreaks. Two, the reduced number of flights and seating capacity will also restrict visitor movement.
Media Review
IMF projects an “uncertain recovery” & insolvencies loom large
https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
https://blogs.imf.org/2020/06/24/reopening-from-the-great-lockdown-uneven-and-uncertain-recovery/
https://blogs.imf.org/2020/06/25/financial-conditions-have-eased-but-insolvencies-loom-large/
Technology is splitting the job market
https://review.chicagobooth.edu/economics/2019/article/technology-splitting-job-market
How GCC countries can adapt policies for a post Covid-19 world
https://www.thenational.ae/business/comment/how-gcc-countries-can-adapt-policies-for-a-post-covid-19-world-1.1036395
The Pandemic must transform global agriculture
https://www.project-syndicate.org/commentary/covid19-pandemic-must-transform-global-agriculture-by-mauricio-cardenas-and-juan-lucas-restrepo-2020-06
Market Snapshot as of 28th June 2020
Weekly % changes for last week (25-26 Jun) from 18th Jun (regional) and 19th Jun (international).

 
 
 
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Weekly Economic Commentary – Jun 21, 2020

Weekly InsightsCharts this week focus on Google’s latest mobility reports, changes in US treasury holdings and FDI flows into the MENA region.
Markets
Stock markets performed well last week in spite of the spike in Covid19 cases as economic activity resumed with the easing of restrictions (& resurgence of cases in nations that had successfully “flattened the curve”) and given unprecedented liquidity support from central banks. Markets across Europe – Stoxx600, FTSE – gained on better than expected macro data as well as on expectations that the stimulus package would be passed soon. China’s stocks ended higher after Beijing pledged reforms and liquidity support. Regionally, most markets were up as economies gradually eased restrictions and kickstarted economic activity. UK pound had its worst week in a month against the dollar while the euro also edged down. Oil prices increased on reports of demand recovery while gold price was up almost 1% on safe-haven demand. (Graphs in the last section.)
Global Developments
US/Americas:

  • US industrial production edged up by 1.4% mom in May (from Apr’s record 12.5% drop) as factories resumed operations. Motor vehicles and parts posted the largest gain (+120.8%), as manufacturing rose by 3.8%. However, capacity utilisation is still at just 64.8% (though higher compared to Apr’s 64%).
  • US retail sales surged by 17.7% mom in May from a depressed -14.7% the month before as states reopened; control sales, which strip out more volatile items such as food, petrol and building materials, rose 11% mom. But, overall purchases are still down 6.1% yoy.
  • Housing starts increased by 4.3% to a seasonally adjusted rate of 974k units in May; in yoy terms, the reading is down 23.2%. Building permits rebounded by 14.4% mom to 1.22mn units in May. Separately, record-low mortgage rates are leading to a surge in mortgage applications to purchase a home: it rose by 4% in the week ended Jun 13 from the prior week, also up 21% yoy – to the highest level since Jan 2009.
  • Initial jobless claims fell for the 10th week in a row to 1.508mn in the week ended Jun 12, with the previous reading upwardly revised to 1.566mn, pushing the 12-week total to around 49mn. Continuing claims declined to 20.544mn in the week ended Jun 5 (prev: 20.606mn).

Europe:

  • Eurozone CPI slipped to 0.1% mom in May (Apr: 0.3%) – the lowest since Jun 2016 – while core CPI remained steady at 0.9% yoy.
  • Germany CPI declined for the 3rd consecutive month, down to 0.6% yoy in May, thanks to lower energy prices while food prices were up 4.5%. Wholesale price index slipped by 0.6% mom (Apr: -1.4%) and 4.3% yoy. PPI dropped by 0.4% mom in May (Apr: -0.7%).
  • German ZEW economic sentiment improved to 63.4 in Jun (May: 51), rising for the first time since Jan 2020, while the current situation reading was -83.1 (May: -93.5).
  • The ZEW economic sentiment for the wider Euro Area mirrored the improvement in Germany, with the reading up 12.6 points to 58.6 – the highest reading since May 2015. Hourly labour costs rose 3.4% yoy in Q1 after a downwardly revised 2.3% increase in Q4 – this was the biggest increase in labour costs since at least 2009.
  • At the latest BoE meeting, interest rates were held unchanged at a record low of 0.1%; it increased its bond-buying programme by GBP 100bn to GBP 745bn, with the additional amount used to buy only government bonds.
  • UK CPI eased to a 4-year low of 0.5% yoy from Apr’s 0.8% reading, driven by decline in fuel costs and prices of clothing while core CPI reduced to 1.2% (Apr: 1.4%). Retail price index was down to 1% yoy from 1.5% in Apr while the PPI core output also eased to 0.6% from 0.7% the month before.
  • UK ILO unemployment rate remained unchanged at 3.9% in the 3 months to Apr while average earnings including bonus slipped to 1% from 2.3% the period before. The number of people “temporarily away” from paid employment surged during lockdown to 8.4mn by end-Apr. Hours worked each week tumbled by a record 8.9% yoy in the 3 months to Apr.
  • UK retail sales increased by 12% mom in May, following a 18% dip the month before. Sales were boosted by a 42% rise at household goods stores (e.g. hardware, furniture and paint shops). However, in yoy terms, sales declined by 13.1% yoy from 22.7% drop in Apr.

Asia Pacific:

  • China fixed asset investment declined by 6.3% yoy in Jan-May vs 10.3% the month before. Investment in manufacturing dropped 14.8% in Jan-May, with a 6.3% drop in infrastructure investment. Property investment seems to be rebounding, with a contraction of just 0.3%.
  • China’s FDI increased by 4.2% yoy to USD 9.87bn in May, though narrowing from the 8.6% rise in Apr. Overall, FDI into China fell 6.2% yoy to USD 51.21bn in Jan-May.
  • China industrial production increased by 4.4% in May, up from Apr’s 3.9% rise, supported by a 5.2% pickup in manufacturing. Retail sales continued to remain negative but improved to -2.8% in May from a 7.5% slump the month before.
  • The Bank of Japan kept its short-term interest rate unchanged at 0.1% and maintained long-term borrowing costs around zero. It increases the size of its lending packages for companies to USD 1trn from the previously announced USD 700bn announced last month.
  • Japan exports and imports growth slumped in May, falling by -28.3% and -26.2% yoy respectively (Apr: -21.9% and -7.1%) – the largest yoy drops in more than a decade. car exports decreased 64.1%, posting the biggest fall since Apr 2011, following a 52.6% dip in Apr. Trade balance remained in the red for the 2nd consecutive month, though narrowing to JPY 833.4bn from the previous month’s JPY 931.9bn.
  • Japan inflation was 0.1% yoy in May (Apr: 0.1%); core prices (including oil but excluding food prices) fell 0.2% yoy while core-core prices (i.e. excluding food and energy) increased by 0.4% yoy from Apr’s 0.2% reading.
  • Whole sale price index in India fell by 3.21% yoy in Apr, from a 1% rise in Mar, but food prices picked up by 1.13%.
  • India’s trade deficit narrowed to USD 3.15bn in May from Apr’s USD 6.76bn, as exports declined by 36.47% yoy and imports plunged by 51%. Oil imports in May were 71.98% lower vs a year ago while gold imports dropped by 98.4%.
  • Singapore unemployment touched the highest in a decade, with Q1’s reading at 2.4%. Retrenchments rose to 3,220 in Q1 (Q4: 2,670), largely due to sectoral downturns while an additional 4,190 employees were placed on shorter work hours – a five-fold increase from Q4.

Bottom line: The WHO’s warning of a “new and dangerous phase” of the Covid19 pandemic, a potential second wave of Covid19 in many nations that re-opened (Germany, New Zealand, China, Iran to name a few) amid a surge continuing in many US states (US on Thursday recorded its largest one-day increase in coronavirus cases since early May) raises important questions regarding the pace of economic recovery. While central banks have reiterated liquidity support, there are signs of improvements in USD funding conditions – the ECB, BoE, BoJ and the Swiss National Bank stated that the frequency of their 7-day dollar funding operations (via the Fed’s swap lines) would be reduced to thrice a week instead of daily. Be prepared for central banks to exit stimulus measures should economies show signs of recovery and the pace of activity picks up faster than expected: Norges Bank signaled that rates could be raised as early as 2022. Meanwhile, UNCTAD estimates global FDI flows to plunge by 40% this year to below USD 1trn (for the first time since 2005) due to Covid19, with worse expected in 2021. Geopolitical risks are also on the radar – be it the clash between Indian and Chinese troops, tensions between South and North Korea or the contradictory messaging from the US regarding the trade deal (and wider “Cold War”) with China.
Regional Developments

  • Bahrain’s cabinet agreed to add up to BHD 177mn (USD 470mn) to this year’s budget to tackle emergency expenses related to the Covid19 outbreak.
  • A survey report titled “The Economic Impact of Coronavirus on Business Owners” which recorded responses from 1180 firms in Bahrain revealed that a majority expect economic recovery to take at least a year while 59% expect a high risk of closure of business within the next 6 months. About 71% of businesses in the tourism and hospitality industry fear closure within the coming months while in education it is 63% and the lowest is in finance, insurance and tax (27%).
  • Job losses in the Bahrain Petroleum Company will be limited to only expats (whose contracts have expired and not renewed), reiterated the company.
  • The Bahrain Association of Banks plans to set up a banking court or arbitration body with an aim to resolve quickly and efficiently disputes from financial and banking transactions as well as quickly settle and implement its provisions which taking into account privacy concerns.
  • Egypt’s ministry of finance approved EGP 3bn (USD 185mn) credit guarantees to cover loans for tourism firms (to be provided with a declining interest rate of 5%). The central bank allocated EGP 3bn (from its EGP50bn for tourism support) for salary payments in the tourism sector.
  • Egypt increased allocation to the health sector in the 2020-21 budget by 28% yoy to EGP 93.5bn (USD 5.8bn), with government investment in the sector surging by 72% to EGP 21.1bn.
  • Reuters reported that Egypt is planning to raise a loan of more than USD 1bn, with lenders in the UAE being tapped for financing.
  • Egypt posted an initial surplus of EGP 40.4bn in H1 2019-2020 vs EGP 35.6 during the same period a year ago. Tax revenues from non-sovereign firms grew by 7% yoy to EGP 412bn. The petroleum sector contributed a surplus of more than EGP 20bn during the period.
  • Bilateral trade between Egypt and China increased by 3.2% yoy to USD 3.2bn in Q1 2020; China’s investments in Egypt however declined during the period by 12% to USD 35bn.
  • Egypt’s trade deficit narrowed by 38.6% to USD 2.69bn in Mar, as the slump in imports (by 30.6% to USD 4.93bn) eclipsed the decline in exports (down 18% to USD 2.24bn).
  • Foreign employees in the private and investment sectors edged up by 1.2% yoy in 2019 to a total of 14,950 persons.
  • From 2021, individuals in Egypt will need to submit tax returns electronically via the Tax Authority’s website (vs being optional currently).
  • Egypt plans to reopen its airports for international flights by the beginning of Jul, disclosed the aviation minister. International tourists will be permitted to visit only 3 governorates – the Red sea, South Sinai and Matrouh.
  • Natural gas consumers in Egypt’s industrial sector have been exempted EGP 5.3bn of debts owed to the ministry, disclosed the minister of petroleum.
  • Egypt Parliament approved an amendment to allocate 25% of seats to women, reported Egypt Today. Approval was also given to increase the presidential terms to 6 years from 4.
  • In Jun, Iraq seems to be complying with its pledge to compensate and meet its oil production quota, after overproducing 570k barrels per day (bpd) in May: Southern Iraqi exports in the first 14 days of Jun averaged 2.93mn bpd, down 170k bpd from May’s official figures.
  • Jordan announced new measures to support its tourism sector: this includes potentially refunding bank guarantees (to the tune of JOD 30mn) submitted by tourism offices during this period, as well as a social security programme for tourism employees. Furthermore, service and sales tax imposed on hotels and restaurants will be halved to 5% and 8% respectively.
  • Effective Jun 21st, curfew in Kuwait will be eased to 10 hours, from 7pm to 5am. While the total lockdown on Hawally area has been lifted, its phase 1 of the 5-phase recovery plan will be extended for one more week. Kuwait has made wearing of masks mandatory and public sector employees will not be allowed to return to offices from this week.
  • The IMF’s talks with Lebanon continue, according to its spokesperson. He stated that not only was it necessary to understand the source and size of the financial losses, but that the government also needed to implement comprehensive, equitable reforms. Separately, an adviser in the IMF talks quit, citing “no genuine will” for reforms (https://twitter.com/henrichaoul/status/1273639282809462789).
  • Lebanon’s central bank governor stated that the daily volume of banknotes being injected into Lebanon’s markets averaged USD 4mn (last Mon-Tues), while assuring that the money was not from BDL’s reserves. However, its effectiveness is questionable, with black market exchangers selling the dollar for around LBP 5,100 on Wed.
  • The head of the Beirut Traders Association stated that as many as 50% of Lebanon’s shops and businesses could close by end-2020. He also revealed that 25% had already closed this year in Beirut alone.
  • JPMorgan expects Lebanon to contract by 14% this year, following declines of 6.9% and 1.9% in 2019 and 2018 respectively. The bank expects no quick agreement to be reached with the IMF given the ongoing uncertainty regarding debt restructuring plans and scope for structural reforms.
  • Oman formed a committee last Sun to study the economic impact of the Covid19 outbreak. Separately, Oman Airports revealed that their readiness to open airports whenever required.
  • Though the lockdown in Oman has been lifted, restrictions are still in place on gatherings (of more than 5 individuals) on beaches and other public places.
  • Qatar Airways will layoff some pilots while others’ salaries could be cut by 15-25%. Bloomberg reported, citing an internal letter, that Qatari citizens were exempt from wage cuts.
  • Qatar Airways disclosed that Boeing and Airbus had been informed that it would not take delivery of new planes in 2020 or 2021. Orders to be delivered within the next 2-3 years will be pushed to nearly 8-10 years, with plans instead to shrink its fleet of around 200 jets.
  • In spite of the rising number of confirmed Covid19 cases, Saudi Arabia will initiate the 3rd phase of its recovery plan by opening most commercial activities from today (Jun 20). Mosques in Makkah are also set to reopen with social distancing measures in place.
  • The Saudi Industrial Development Fund revealed a SAR 3.7bn (USD 1bn) stimulus package for industrial sector companies. Initiatives will include support for SMEs via deferring or restructuring loans and offering a line of credit to finance up to 3 months of operating expenses.
  • Saudi Aramco will use cash and debt to pay Q1 dividends, revealed the company’s chief executive. Aramco completed its purchase of a 70% stake in petrochemicals company SABIC from PIF last week; the payment period has been extended by 3 years to 2028.
  • Saudi Arabia’s crude oil exports increased to 10.237mn barrels per day (bpd) in Apr from 7.391mn bpd in Mar.
  • FDI flows into Saudi Arabia increased by 7% yoy to USD 4.6bn in 2019, according to UNCTAD’s latest report: this is more than three times the levels reported in 2017.
  • Saudi Arabia’s holdings of US treasury bonds declined by 29.05% yoy and 21.2% mom to USD 125.3bn.
  • Consumer spending in Saudi Arabia accelerated by 142% in the first week after the curfew was lifted to SAR 7.85bn from SAR 3.25bn (this also includes Eid holidays). More: https://www.arabnews.com/node/1690796/saudi-arabia
  • Saudi Arabia’s real estate financing firm Amlak disclosed plans to float 30% of its shares. A book-building process will start on Jun 22, with the final offer price announced on Jun 30.
  • Business sentiment in the region seems to be waning: according to PwC’s Covid19 CFO pulse survey, nearly 72% of CFOs in the region believe that the economy will take at least three months or more to recover from the pandemic, up from 66% five weeks ago. About 42% expect recovery to take 6 or more months, compared to 37% globally though UAE is relatively more optimistic (33%).
  • IMD’s World Competitiveness report places UAE as top in the region and 9th most competitive globally. Saudi Arabia ranked 24th globally (up from 26th last year) and is the only Middle East nation to improve its ranking. Singapore topped the list, followed by Denmark, Switzerland and Netherlands.

UAE Focus

  • UAE’s central bank disclosed that 26 banks had availed 88% of the AED 50bn liquidity facility (with 17 banks drawing down 100%). Overall, more than 180k customers have benefitted, with the total deferral value estimated at AED 8bn.
  • In Ajman, around 1,884 economic establishments benefited from exemption of license renewal fees.
  • Dubai allowed the resumption of more activities (including visits to public libraries, private museums etc.) as well as allowing children under the age of 12 and those above 60 to visit malls and other public areas. Social distancing measures remain in place as well as the recommendation of wearing face masks. However, a travel ban is still in place in Abu Dhabi (till Tues this week) for the 3rd consecutive week with permits required to enter the emirate.
  • Abu Dhabi refunded AED 8mn (USD 2.1mn) to 220 businesses, as part of the initiative to refund 20% of the annual rental value on their commercial property leases worth AED 1bn. About 8,000 business units currently qualify to apply.
  • Money supply (M3) in the UAE increased by 1.8% to AED 1.748bn as of end-May. The central bank’s current account balance touched AED 34bn with banks’ required reserves at AED 194.3bn.
  • Inflation in Dubai declined by 3.49% yoy in May, with utilities and transport costs down by 6.26% and 12.4% respectively while food and beverage costs were up 5.47%.
  • Abu Dhabi’s newly structured Musataha agreements will provide opportunities for private sector companies to develop land owned by government agencies.
  • Ship fueling activity in UAE’s Fujairah fell in May: ship refueling, or bunkering, volumes shrank to about 200k-300k tonnes, down from average volumes of about 700k-800k tonnes.
  • Islamic economy sectors in Dubai grew by 2.2% yoy in 2018, contributing AED 41.8bn (USD 11.38bn) to the emirate’s GDP.
  • Emirates airlines will be providing connections via Dubai for 40 destinations’ travelers, after the addition of 10 new cities from 20th Jun onwards.


Weekly Insights

Charts of the Week

Fig 1. Google mobility reports show an increase in activity as nations in the Middle East ease restrictions

Notes: The reports show trends over several weeks with the most recent data representing approximately around June 14th. Changes for each day are compared to a baseline value for that day of the week: The baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020.
Covid19 confirmed cases in the Middle East crossed 645k, with GCC and Iran accounting for around 55% and 30% of the cases respectively. With restrictions easing, number of visitors to grocery and pharmacy are inching closer to (or surpassing) the period before the pandemic (see Qatar, Jordan, Egypt, Iraq, Lebanon UAE) while the ‘residential’ category (which shows a change in duration of time spent at home) has declined compared to a few weeks ago indicating that people are no longer as confined to home as during the lockdown period. Other than in Kuwait (which is still in Phase 1 of the recovery plan), more employees are returning to work (and hence a move closer to the baseline). Recovery in retail and recreation seems to be slower in comparison:  Kuwait is still 61% lower compared to the baseline while Egypt and Saudi Arabia are down 46% and 36% respectively.
Fig 2. Foreign Direct Investment in the Middle East and North Africa

Both UAE and Saudi Arabia witnessed a pickup in FDI last year while the West Asia region as a whole reported a 7% dip in FDI inflows (to USD 28bn). In the North Africa region, Egypt was the largest recipient – attracting USD 9bn in 2019 (+11% yoy). FDI inflows into the MENA region saw a sharp decline in 2009-10 (after a strong decade) a result of the financial crisis and regional turbulences (the Arab “Spring”) and hit lows again in 2015 during the period of declining oil prices. With the onset of the Covid19 pandemic, FDI inflows are likely to be negatively affected: the value and number of announced greenfield projects in Q1 2020 declined, by 56% yoy and 34%, respectively, compared with the quarterly average of 2019. The saving grace could be announcements of new infrastructure projects (to mitigate the impact of Covid19) and recent regulatory changes (e.g. permitting 100% ownership and easing of investor licenses in Saudi Arabia).
Fig 3. Saudi Arabia, Kuwait and Iraq are among the largest foreign holders of US Treasury securities; holdings are declining in most GCC nations

As oil prices stay low, recycling of petrodollars has reduced and there has been a substantial decline in holdings of US Treasury securities by Saudi Arabia. At USD 125.3bn in Apr 2020, its share has fallen to just 1.85% of total in Apr, from 2.74% a year ago. Decline in holdings are visible across all the oil exporting GCC nations (except Kuwait).
Media Review
IMF: The Great Lockdown through a Global Lens
https://blogs.imf.org/2020/06/16/the-great-lockdown-through-a-global-lens/
Six things to know about India-China economic relations
https://www.bloombergquint.com/economy-finance/six-things-to-know-about-india-china-economic-relations
JP Morgan’s roadmap toward an oil ‘supercycle’
https://www.arabnews.com/node/1690446
Covid-19 has squeezed migrants’ remittances to their families
https://www.imf.org/external/pubs/ft/fandd/2020/06/COVID19-pandemic-impact-on-remittance-flows-sayeh.htm
https://www.economist.com/finance-and-economics/2020/06/15/covid-19-has-squeezed-migrants-remittances-to-their-families 
Saudi Arabia’s Peaking Virus Cases Aren’t Slowing Its Reopening
https://www.bloomberg.com/news/articles/2020-06-19/saudi-arabia-s-peaking-virus-cases-aren-t-slowing-its-reopening
Economic and Political War in Lebanon (Arabic)
https://www.independentarabia.com/node/114961
The Fallout of the War: The Regional Consequences of the Conflict in Syria
https://www.worldbank.org/en/news/press-release/2020/06/17/fallout-of-war-in-syria
https://openknowledge.worldbank.org/bitstream/handle/10986/33936/The-Fallout-of-War.pdf
 
Market Snapshot as of 21st June 2020
Weekly % changes for last week (18-19 Jun) from 11th Jun (regional) and 12th Jun (international).

 
 
 
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Weekly Economic Commentary – Jun 14, 2020

Weekly InsightsA strange week of sorts – from World Bank and OECD’s growth projections to a new group of Robinhood investors playing the stock markets, to the equity sell-off on Jun 11th to Fed’s “not even thinking about thinking” about rate hikes, to massive layoffs closer home in the UAE – we pen some forward-looking “positive” thoughts on how the GCC economies can refocus, regroup and push forward its diversification agenda in a Covid19-co-existing world.
Markets
Renewed fears of the pandemic resulted in a sell-off on June 11th – all three major U.S. stock indexes posted their worst day since mid-Mar; the Vix rose above 40, its highest close since Apr 23 (Vix: tmsnrt.rs/2Yl9tGo). S&P ended the week down 4.8% (the worst in 3 months) while European and Asian markets also closed lower versus the week before (world stocks market cap loss: tmsnrt.rs/30zdOIL). Regional markets were mixed, with Dubai and Saudi exchanges the better performers. Demand for the dollar increased and major currencies fell vis-à-vis the greenback. Oil prices fell following 6 weeks of gains on concerns about excess supply (US crude inventories surged to a record high, disclosed the EIA) while gold price posted its biggest weekly gain since Apr. (Graphs in the last section.)
Global Developments
US/Americas:

  • The latest Fed projections indicate that by 2022, unemployment would still be 5.5% (much higher than pre-Covid19 levels), with core inflation at 1.7% (lower than the 2% target), with no rate increases till at least end-2022. Mr. Powell’s dovish remarks included statements like “not even thinking about thinking about raising rate hikes”.
  • The National Bureau of Economic Research (NBER) declared that the US economy officially fell into recession in Feb, ending a 128-month economic expansion (the longest on record).
  • Inflation in the US eased for the third consecutive month to 0.1% yoy in May (Apr: 0.3%) while core CPI edged down to 1.2% (the smallest gain since Mar 2011) from 1.4% the month before. In mom terms, prices dropped by 0.1% after declining 0.8% in Apr (the largest fall since Dec 2008). Fuel prices declined (-3.5%) offsetting the food price hike (+0.7%).
  • US producer price index rebounded in May, rising by 0.4% mom (Apr: -1.3%), on higher food (+6%) and energy (+4.5%) costs; in yoy terms, PPI declined by 0.8% (Apr: -1.2%). Excluding food and energy, core PPI rose by 0.1% mom and slipped by -0.4% yoy.
  • Initial jobless claims fell to 1.5mn in the week ended Jun 5, pushing the 12-week total to 44mn. Continuing claims declined to 20.9mn in the week ended May 30 from 21.5mn before.

Europe:

  • Eurozone Q1 GDP contracted by 3.6% qoq and 3.1% yoy, upwardly revised from previous estimates of 3.8% qoq and 3.2% yoy. The lockdown (only 2-3 weeks of the quarter) resulted in a 4.7% qoq dip in household consumption during Q1 while by industry, services saw a 6.8% qoq drop.
  • German industrial production dropped at almost double the pace in Apr, declining by 17.9% mom following an 8.9% drop in Mar; IP fell by 25.3% yoy in Apr – the biggest ever fall since records began in 1991. The auto industry saw output collapse by -74.6% due to supply chain disruptions versus consumer goods’ fall of 8.7%.
  • Exports from Germany plummeted by 24% mom in Apr (Mar: -11.7%) while imports slumped by 16.5% (Mar: -5%), narrowing trade surplus to EUR 3.2bn from EUR 12.8bn in Mar. In yoy terms, exports dived by a staggering 31.5% – the biggest drop since 1950. Trade with its European peers declined drastically (exports were down by 48.3% and 40.1% to France and Italy respectively) while exports to China (in comparison) was down by only 12.6%.
  • Eurozone industrial production tumbled by a record 17.1% in Apr (Mar: -11.3%), as containment measures continued to be in place. Output fell across most of the largest nations: Spain (-21.8%), France (-20.1%), Italy (-19.1%), Germany (-18%). Durable consumer goods production fell almost 28% in Apr, while capital goods output was down 27.3%.
  • UK GDP declined by a record 20.4% mom in Apr, bringing the GDP contraction to 10.4% in the 3 months to Apr (vs the previous 3-month period). Industrial production fell by a record 20.3% mom in Apr, dragged down by transport (car production was down by 28.3%) while pharma expanded by 15.4%.

Asia Pacific:

  • China imports shrank by 16.7% yoy in May (weakest since Jan 2016) alongside a dip in exports by 3.3% yoy, thereby improving the trade surplus to USD 62.93bn from Apr’s USD 45.33bn. Exports were supported by textiles (+41% mom) and medical supplies (+38%).
  • Consumer price index in China eased to 2.4% yoy in May (Apr: 3.3%); overall price declined by 0.8% mom, with food prices down by 3.5% in May. Excluding food and energy, core CPI rose by 1.1% yoy. Producer price index continued to fall, posting a 3.7% dip in May following Apr’s 3.1% drop). Factory prices of production materials dropped 5.1% in May, dragging down the overall PPI by 3.79 ppts.
  • China’s new yuan loans decreased to CNY 1.48trn (USD 209.47bn) in May from the previous month’s CNY 1.7trn while money supply growth remained flat at 11.1% yoy. Growth of outstanding total social financing, a broad measure of credit and liquidity, quickened to 12.5% yoy in May (Apr: 12%). Foreign exchange reserves edged up to USD 3.102trn in May from USD 3.091trn the month before.
  • Japan’s Q1 GDP posted a 0.6% qoq decline, shrinking less than initial estimates (-0.9%), thanks to stronger figures of capital spending. The economy contracted by an annualized 2.2% in Q1: capital spending rose 8% qoq on an annualized basis versus initial estimates of -2.1%.
  • The final estimates of Japan’s industrial production plunged by 9.8% mom and 15% yoy in Apr versus the preliminary estimate of -9.1% mom and -14.4%
  • Japan core machinery orders declined to a 6-year low in Apr: down by 12% mom and 17.7% yoy to JPY 752.59bn (Mar: -0.4% mom and -0.7% yoy). Orders from overseas, seen as an indicator of future exports, dropped 21.6% to JPY 689.45bn.
  • Data on South Korea’s exports for the period June 1-10 looks promising: exports surged by 20.2% yoy, with gains reported across semiconductors (+22.6%), mobile devices (+35.8%) and medical items (+136.7%).
  • Industrial production in India slipped by a record 55.5% yoy in Apr: output slumped across sectors, led by manufacturing (-64.2%), with items like consumer durables (-95.7%) and capital goods (-92%) recording the highest contraction. The National Statistical Office stated that it is not appropriate to compare the latest IIP data with previous months, given that a majority of firms reported zero production given the lockdown.
  • India’s consumer food price index rose by 9.28% yoy in May (Apr: 10.5%). Overall headline retail inflation was not released for the 2nd consecutive month given suspension of price collection.

Bottom line: As the Covid19 cases continue to rise globally (~7.8mn confirmed) – US tops the list followed by Brazil, Russia and India (the latter recording more than 10k cases in a day on Friday) – alarms have been sounded on the economic impacts from Covid19: according to the World Bank and OECD, growth is estimated to contract globally by 5.2% and 6% respectively this year, followed by a slow recovery. Estimates would be more severe should countries be hit by a second wave: Beijing reported a fresh Covid19 cluster while in Iran, Egypt and Saudi Arabia, numbers are still ticking up as restrictions are gradually eased. In Europe where economic activity has resumed (and the tourism sector is scheduled to open up to tourists from June 15th), high frequency data (e.g. Google Mobility data related to work, entertainment, shopping etc.) suggests a slow recovery. The UK – which confirmed it will not extend the Brexit transition period – has both the BoE policy meeting and post-Brexit trade talks on the agenda this week.  
Regional Developments

  • Bahrain plans to reopen schools in Sep, with classes in government schools starting on Sep 16 and administrative staff returning Sep 6th.
  • Bahrain’s ruler increased monthly allowances by 20% for 11k orphans and widows sponsored by the Royal Humanitarian Foundation.
  • Egypt registered the highest daily rise in Covid19 cases in nearly two weeks last Fri.
  • GDP in Egypt is estimated to decline to 4% in the fiscal year 2019-20, stated the minister of finance (while the IMF forecast 2% growth). Total revenues have slid by around EGP 124bn given the ongoing Covid19 epidemic.
  • Egypt’s government has spent EGP 63bn (USD 3.89bn) of the total EGP 100bn allocated to deal with the Covid19 outbreak. An additional EGP 11bn was allocated to support the health sector across all governorates.
  • Annual urban consumer price inflation in Egypt slowed to 4.7% in May (Apr: 5.9%), as food prices declined by 0.3% yoy; core inflation slowed to 1.5% in May (Apr: 2.5%).
  • Egypt raised electricity prices by 17-30% (average hike of 19.1%); the remaining electricity subsidy will be phased out over the next 3 years (i.e. until the fiscal year 2024-25). The additional 3-year subsidy is estimated to cost EGP 26.7bn.
  • Gold reserves in Egypt increased to a record USD 3.8bn in May, rising by 2.73% mom. Foreign reserves fell by 2.8% mom (more than USD 1bn) to USD 36.003bn in May.
  • Automotive sales in Egypt declined by 46.7% mom and 22.4% yoy in Apr; passenger cards were down 49.8% mom and 26.4% yoy.
  • Egypt has granted airlines a 50% discount on landing and parking fees, and a 20% discount on ground services at airports in South Sinai, Hurghada and Matrouh.
  • After opening to domestic tourists last month at reduced capacity, Egypt’s seaside resorts are planning to open for foreigners from July 1st. Public beaches and parks are to remain shut till end-Jun.
  • Jordan’s King ordered all army and security agencies’ personnel be granted an additional service year upon the termination of their service.
  • Kuwait’s inflation ticked up by 1.85% yoy in Apr: telecoms prices increased by 5.44%. In mom terms, inflation declined by 0.09%, with food costs down by 1.63%.
  • Kuwait Petroleum Corporation will stop hiring expats for the remainder of 2020 and 2021, while the number of special contracts for foreign workers would be cut.
  • Lebanon will reopen the Beirut International Airport for commercial flights from Jul 1 while private flights will resume Jun 24; traffic will be at 10% of capacity from a year ago.
  • With the Lebanese pound falling to 5,000 to the dollar last week from about 4,100 a week prior, to stem the flow Lebanon’s central bank will inject dollars into the market from Mon, disclosed the President. Earlier in the week, the central bank announced that a new electronic trading platform would be opened on June 23 to unify the price of dollars on the parallel market. Volatile currency movements have been a result of four factors: uncertainty among currency traders about government economic policy; the printing of currency to cover a growing fiscal deficit due to falling tax receipts; the economic impact of coronavirus; and panic in the exchange market in neighbouring Syria, where business people are anticipating the impact of new US sanctions this week.
  • Lebanon agreed to use the government’s financial loss figures as a starting point in discussions with the IMF.
  • Tax revenues in Lebanon declined by 12.5% yoy in Q1 this year, with customs and VAT revenues falling by 51.5% and 42.3% respectively. About 72.5% of income tax collected came from taxes on interest payments (on bank deposits) vs 54.6% a year ago.
  • Oman announced development projects worth OMR 300mn (USD 779.26mn) to support economic growth. No further details were provided.
  • The Dhofar Governorate in Oman will be closed from 12 noon of June 13 until July 3 for tourism. Salalah, in Dhofar, is usually seen as a “summer capital” given the monsoon season.
  • The head of Oman’s biggest sovereign wealth fund – State General Reserve Fund – was appointed as head of the new Omani Investment Authority (replacing the existing SWFs).
  • Hotel revenues in Oman tumbled by 24% yoy to OMR 54.2mn during Jan-Mar, according to the National Centre for Statistics and Information. Hotel occupancy rates fell by 25% to 51.3 (vs 68.4 in the same period last year) while total guests dropped by 19.5% to 389.6k.
  • Oman’s Ministry of housing has issued regulations banning expats from ownership of land and real estate in specified places except for the integrated tourism complexes.
  • Qatar’s government entities have been directed to reduce costs of non-Qatari employees by 30% as of Jun 1st – either via salary cuts or layoffs – according to a finance ministry document, reported Reuters.
  • Qatar will ease restrictions in 4 phases from June 15th: phase 1 will see some mosques reopening and few flights departing while phase 2 (starting Jul 1) will allow for partial reopening of restaurants; phase 3 (beginning Aug 1) will permit resumption of flights from low-risk nations and reopening of malls while phase 4 will allow normal operations to resume in all mosques and expansion of flights.
  • Saudi Arabia reopened mosques 40 minutes before Fri prayers starting Jun 12th except for in Makkah and Jeddah. The country will also resume professional sports activities starting Jun 21st.
  • Saudi Arabia’s trade surplus narrowed by 38.3% yoy and 32.5% qoq to SAR 73.74bn (USD 19.64bn) in Q1 2020. Oil exports fell by 21.9% (to USD 40bn) and non-oil exports by 16.5% during the quarter while imports declined by 4.4%. China remained the top trading partner: top export destinations were China, Japan and India while import destinations were China, US and the UAE. In 2019, trade surplus had fallen by 25.5% yoy to SAR 439.43bn, as merchandise exports dipped by 11.2% to SAR 980.69bn and imports rose by 5.3%.
  • Trade between Saudi Arabia and the GCC nations (excluding Qatar) fell by 14% yoy to SAR 18.84bn (USD 5.01bn) in Q1 this year. UAE accounted for 65.3% of this volume, while Bahrain and Oman together clocked in almost 25%.
  • Industrial production Index in Saudi Arabia ticked up by 7.04% yoy and 11.35% mom in Apr (Mar: -3.29% yoy), thanks to a 22.5% yoy (and 23.3% mom) increase in mining and quarrying activity (oil & gas).
  • Value of contracts awarded in Saudi Arabia declined by 8% yoy to SAR 45.2bn (USD 12bn) in Q1, though the value was up 28% qoq, according to the US Saudi Business Council.
  • Expats in private and public sector enterprises in Saudi Arabia was 6.48mn at end-2019, accounting for 76.8% of the total workforce, according to the General Authority for Statistics.
  • Dubai, ranked 23rd globally, is the most expensive city in the Middle East for expatriates, according to Mercer’s 26th Annual Cost of Living Survey 2020. Riyadh (31), Abu Dhabi (39) and Beirut (45) were other contenders in the list topped by Hong Kong, Ashgabat and Tokyo.

UAE Focus

  • Dubai PMI increased to 46 in May (Apr: 41.7), as declines in both output and new orders softened; fall in employment was the slowest since Feb. Businesses revealed weak consumer demand and slow market response to the easing of restrictions.   
  • Net foreign assets held by the UAE national banks grew by 17.5% to AED 79.8bn in Jan-Apr from end-Dec, according to the central bank.
  • UAE’s non-oil trade grew by 4.4% yoy to AED 1.603trn in 2019: exports, at AED 231.23bn, accounted for 14.4% of total trade volume while imports stood at 58% of the total.
  • In an interview with Bloomberg, UAE’s minister of infrastructure development disclosed that economic recovery is likely to be U- or V-shaped while also stating that the country had a pipeline of AED 20bn worth federal infrastructure projects, including AED 7bn in state-sponsored housing programmes.
  • Abu Dhabi introduced a new initiative to allow for faster issuance of business licenses: the new e-contract and e-signature system will ease the process of obtaining a license for one-person and limited liability companies.
  • In line with the stimulus packages announced earlier, licensed businesses in Abu Dhabi – with activities listed as restaurants, entertainments and tourism (except hotels) – can now apply for a 20% refund on rents of commercial properties, according to the Abu Dhabi Department of Economic Development.
  • Fitch affirmed the emirate of Ras Al Khaimah’s long-term foreign-currency issuer default rating (IDR) at “A” with a stable outlook.
  • Remittances from UAE increased by 7.8% yoy to AED 41.4bn in Q1, with top destinations India (37.8%), Pakistan (11.4%), Philippines (7%), Egypt (6.6%) and the US (3.6%).
  • UAE continues to reopen: from Jun 14th, Dubai government entities will operate at 100% of their capacity while in Sharjah, around 30% of government employees will resume work from offices. Dubai World Trade Centre is planning to restart events and exhibitions in H2 this year.
  • Abu Dhabi’s hotels saw an increase in occupancy rates to 55.2% in May (Apr: 47.3%), according to STR estimates, though the average daily rate and revenue per available room were down by 26.2% (to AED 251.4) and 22.1% (to AED 138.88) respectively.
  • The value of real estate transactions in Dubai touched AED 20bn in Q1, according to the Dubai Land Department.
  • Euromonitor estimates that consumer spending in the UAE will recover only by late 2021.
  • Airline woes continue: Emirates and Etihad airlines have extended pay cuts for staff until Sep (in some cases reduction of basic salaries by 50%); Emirates laid off over 1k employees last week; flydubai has extended indefinitely its reduced pay for employees, while also placing many pilots on unpaid leave for a year.


Weekly Insights

What policy changes do the GCC nations need to implement to support medium- to long-term growth?
The GCC nations are not out of the woods, as a flattening of the curve has yet to happen when it comes to Covid19 confirmed cases. There are however nodes of optimism as the number of recoveries outpace the confirmed cases in a few. Stimulus packages across the GCC have a few measures in common – rate cuts, liquidity enhancing measures, deferring of loans/ credit card payments as well as support for SMEs and affected sectors in addition to direct support for sectors decimated by the outbreak (tourism, hotels & hospitality and airlines to name a few). The effectiveness of these policies remains unknown (for now), given scant data releases.
After almost 2 months of lockdowns, the nations are phasing their recovery plans, with Dubai (UAE) the most aggressive, having reopened its malls to full capacity to opening beaches, parks, restaurants/ hotels, gyms and so on as well as the public sector signaling a “safe to go to work” with the return to full capacity at offices starting today.
The current economic situation underscores the need to create a new development model. Going forward, three broad policy measures should support economic growth:  

  • Monetary policy: Most GCC nations are pegged to the dollar and follow the Fed’s interest rate moves, limiting the use of other instruments of monetary policy (e.g. open market operations) and restricting independent policy moves from the central banks (other than stimulus packages to increase liquidity). What can the central banks do in addition to support the economies? Two innovative ways of providing support could be through:
    • The establishment of central bank swap lines, with an option for the larger central banks to tap the Fed or People’s Bank of China (PBoC): this will act as a means for regional central banks to tap additional funding;
    • Monetise debt by issuing of T-bills: this is necessary to support the private sector due to the lack of a local currency debt markets and central banks’ limitations to conduct open market operations.
  • Fiscal policy: most of the GCC governments are still highly dependent on oil revenues and as the current situation highlights, it is not a sustainable long-term model.
    • First and foremost is the need to move away from pro-cyclical policies: i.e. increasing government spending during a period of higher economic growth and reducing spending during recessionary periods. Additionally, allow for deficit financing, along with the institution of fiscal rules for long-term fiscal sustainability.
    • Rationalize government spending: this could be undertaken either by reducing the size of government (e.g. reducing public sector wage bills) or by removing subsidies. The most detrimental policy is when governments reduce capital spending during times of distress – as has been seen in many GCC nations in the recent weeks.
    • Diversify government revenues by raising non-oil fiscal revenues and increasing the efficiency in collection. Some GCC nations have introduced VAT and excise taxes in the recent past, but raising taxes or introducing new taxes during this period will likely be detrimental (i.e. reduce consumption, lower business/ consumer sentiment). However, it might be opportune to revisit the vast number of fees charged on consumers/ businesses toward fewer broad-based taxes thereby easing business and living costs.
    • Public investment towards infrastructure projects, education and health programs as well as green/ clean technologies will support job creation and economic growth. The governments can take the first step to ensure a project pipeline, focusing on public-private partnerships (also providing additional incentive to the private sector & SMEs to join). The development of local currency debt and mortgage markets to finance housing and long-term infrastructure projects will also support growth.
    • Establishment of social safety nets/ protection programs/ pensions scheme. With a high concentration of expat population, many of whom are facing either layoffs or salary reductions, a medium- to long-term policy could be to introduce social safety nets and/ or a pension scheme to reduce financial burdens. For an employee, a contribution towards a pension fund would ensure sufficient savings (in case of job losses/ retirement) and for employers, this provides them with an “investment fund” and support end-of-service/ gratuity payments (especially critical if companies undertake massive layoffs, as is the current case).
  • Structural reforms (a non-exhaustive list):
    • Greater role of the private sector: The government needs to support the private sector via privatisations and PPPs. Supporting SMEs are another way to ensure greater private sector activity: however, this needs strong governmental support via digitization of processes, reduction in business costs, methods / incentives to ensure timely payments from clients, removal of multiple fees and hidden costs and so on.
    • Efficacy of the regulatory/ legal infrastructure to implement bankruptcy/ insolvency measures. Develop insolvency frameworks to support out-of-court settlement, corporate restructuring and adequately protect creditors’ rights.
    • Ability to attract and retain foreign workforce: the current situation highlights the transitory nature of work in the region. Job losses are forcing many skilled expat residents to leave the country given the linkages of the residency visa with jobs/ sponsors. While UAE and Saudi Arabia have introduced a longer-term visa policy, the implementation has been slow and selective. A permanent residency would attract and retain a foreign workforce which can also contribute significant economic gains (retained earnings, higher consumption levels, investments in the real estate sector etc).
    • Work from home policies: the one positive side-effect of the current crisis has been the realization that working from home is a feasible option. Companies can then offer flexible work options (employees can stay at cheaper locations, save on rents and commute) as well as reduce office space (rents are a significant expense for businesses).
    • Availability of additional data points in a timely manner: for example, information on the retail sector or SMEs would help understand the extent of impact of the current crisis. Given evidence that lending to GREs maybe crowding out private sector lending (Chart 2 in insights last week), the central bank should maintain bank-level daily flow data (and maybe publish weekly numbers) on new loans to corporates/ SMEs.

Media Review
Robinhood traders are betting against veteran billionaire investors… and winning?!
https://www.ft.com/content/dd6c7674-d0ed-4865-82ed-48ee169bc6cc (long read)
https://markets.businessinsider.com/news/stocks/robinhood-traders-betting-stocks-against-veteran-investors-winning-buffett-icahn-2020-6-1029289894
Expats depart Dubai: bad news for the economy
https://www.bloombergquint.com/business/expats-are-leaving-dubai-and-that-s-bad-news-for-the-economy
Which Economic Stimulus works?
https://www.project-syndicate.org/commentary/stimulus-policies-must-benefit-real-economy-not-financial-speculation-by-joseph-e-stiglitz-and-hamid-rashid-2020-06
Europe to reopen to tourists
https://www.ft.com/content/6b41bce2-ab17-11ea-a766-7c300513fe47
Market Snapshot as of 14th June 2020
Weekly % changes for last week (11-12 Jun) from 4th Jun (regional) and 5th Jun (international).

 
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Weekly Economic Commentary – Jun 7, 2020

Weekly Insights: PMI releases dominated the news and our updated heat-map paints a not-so-rosy picture; some food for thought from an analysis of the UAE and Saudi Arabia’s latest credit and spending data.

Markets
Global stock markets continue to rally, holding near 3-month highs, with the US supported by the unexpected pickup in non-farm payrolls, while Asia and emerging market stocks posted the best weekly gains in 9 years. Regional markets were mostly higher as lockdowns were slowly eased and businesses reopened partially. The euro gained 1.7%, also touching the highest level since Mar 10th. Oil prices gained for a 6th consecutive week, on expectations of OPEC output cut amid recovering demand. Gold price declined for the 3rd consecutive week. (Graphs in the last section.)
Global Developments
US/Americas:

  • Non-farm payrolls unexpectedly added 2.5mn jobs in May (Apr: -20.7mn) – the biggest one-month gain since at least 1939 – and the jobless rate declined to 13.3% (Apr: 14.7%). Leisure and hospitality workers gained the most – with 1.2mn going back to work after a reported loss of 7.5mn in Apr. As more low-wage workers reported back to work, average hourly earnings clocked in at 6.7% yoy in May versus Apr’s 8%.
  • Initial jobless claims eased to 1.88mn in the week ended May 29, pushing total applications to almost 43mn. The 4-week moving average rose to 2.284mn, a decline from 2.609mn the previous week. Continuing claims rose by 437,072 to 19.3mn in the week ended May 23.
  • Private payrolls declined by 2.76mn in May, a sharp drop from the previous month’s downwardly revised 19.557mn loss. The sharpest losses were in the trade, transportation, and the utilities sector, where 826k jobs were cut during May.
  • US factory orders plummeted by 13% mom in Apr, following the 11% dip the month before. Transportation equipment orders tumbled by 48.3% in Apr (Mar: -43.2%) while orders for non-defense capital goods excluding aircraft declined 6.1%.
  • ISM manufacturing PMI eased from an 11-year low of 41.5 in Apr to 43.1 in May, with new orders sub-index rising to 31.8 (Apr: 27.1) and the production metric up to 33.2 from 27.5. Non-manufacturing PMI recovered to 45.4 in May (Apr: 41.8), with new orders rising 9 points to 41.9 and employment sub-index up to 31.8 (Apr: 30).
  • Markit manufacturing PMI touched 39.8 in May, unchanged from initial estimates, and higher than Apr’s record low of 36.1. With the rate of contraction easing, both services PMI and Composite PMI recovered, rising to 37.5 and 37 respectively (Apr: 26.7 and 27).
  • The US trade deficit widened to USD 49.4bn in Apr (Mar: USD 42.3bn), with both exports and imports declining. Exports fell by 20.5% to USD 151.3bn – the lowest since Apr 2010 – while imports dropped by a record 13.7% to USD 200.7bn – the lowest since Jul 2010.

Europe:

  • ECB meeting boosted its pandemic emergency support program to EUR 1.35trn in total, and also extended the scheme until at least June 2021.
  • German factory orders plunged by 25.8% mom – the largest ever monthly decline -following a 15% dip in Mar. Germany also agreed on EUR 130bn in stimulus measures, including a temporary lowering of VAT, a EUR 300 payment per child and subsidies for buying electric vehicles on top of the already announced relief measures.
  • German Markit manufacturing PMI was revised lower to 36.6 in May from an initial estimate of 36.8: both output and new orders declined sharply while the rate of job losses continued to accelerate. Services PMI stayed low at 32.6 in May – higher than a preliminary estimate of 31.4 and recovering from a record low of 16.2 in Apr – while the composite index moved up to 32.3 (from a preliminary estimate of 31.4 and Apr’s record low 17.4).
  • EU Markit manufacturing PMI moved to 39.4 in May (Apr: 33.4, but lower than the initial estimate of 39.5). Services PMI was revised higher to 30.5 (initial estimate: 28.7; Apr: 12) while the composite PMI touched 31.9 (30.5; Apr: 13.6).
  • UK Markit manufacturing PMI edged up to 40.7 in May, from Apr’s record low of 32.6, while services PMI inched up to 29 – the second lowest reading since the series began – from the previous month’s record low 13.4%.
  • Unemployment rate in Germany increased to 6.3% in May – the highest level since 2016 – from Apr’s 5.8%, after jobless numbers rose by a seasonally adjusted 238k between Apr-May. EU’s jobless rate increased to 6.6% in Apr from Mar’s 12-year low of 6.4%; in the Eurozone, the jobless rate rose to 7.3%, up from 7.1%.
  • Eurozone’s retail sales dived by 19.6% yoy and 11.7% mom in Apr (Mar: -8.8% mom and -11.1% yoy), with online sales reporting a significant increase. Countries with softer restrictions fared better (Germany’s -5.3% decline vs Spain’s around 20% dip).

Asia Pacific:

  • China Caixin manufacturing PMI improved to 50.7 in May (Apr: 49.4), the highest reading since Jan; though output grew the most since Jan 2011, export orders continued to fall. Caixin services PMI surged to 55 in May (Apr: 44.4), the fastest pace of growth since Oct 2010: new orders rose the most since Sep 2010 though new export orders fell as did employment.
  • Japan’s leading economic index eased to 76.2 in Apr – the weakest reading since Mar 2009 – from an upwardly revised Mar reading (85.1). The coincident index also posted the weakest reading since Nov 2009, slipping to 85.1 (Mar: 88.8).
  • South Korea’s Q1 GDP shrank by -1.3% qoq from the previously reported -1.4% estimate: this was the largest on-quarter drop since Q4 2008. The full year growth outlook has been cut to -0.2% this year.
  • Inflation in South Korea fell by 0.3% yoy in May (Apr: +0.1%) –only the second time annual inflation has fallen below zero – largely due to a decline in oil prices (-18.7% yoy) while utility prices fell by 0.7%.
  • Singapore PMI rose to 46.8 in May (Apr: 44.7) and the electronics sector PMI rose 3.4 points to 46.2. Slower contractions in the sub-indices of new orders, export orders, factory output and employment supported the uptick though readings remained in contractionary territory.
  • Retail sales in Singapore plunged by 31.7% mom and 40.5% yoy in Apr, following Mar’s dip by -1.3% mom and -13.3% yoy, after non-essential businesses remained closed during the circuit breaker period starting from Apr 7.

Bottom line: PMI numbers across the globe improved from record lows, as countries eased restrictions, though the outlook for the coming 12 months remains subdued. New export orders remain weak highlighting weak global demand alongside some respite in domestic orders. Stock markets continue to climb on hopes of a V-shaped economic recovery (that businesses are not yet anticipating) and more central bank stimulus. While easing restrictions have seen work-related domestic travel resume as well as retail activity, a key point to watch out for is spending patterns i.e. are households back to spending at pre-Covid19 levels or are they saving on worries about jobs/ economic uncertainty? US data has already shown an increase in personal savings to a historic 33% high in Apr, in spite of the one-time payment of USD 1200 from the government. The Fed meets this week and investors are likely to look for some guidance after the latest payrolls surprise to the upside.
Regional Developments

  • The Bahrain Bourse has rolled out an ijara-Sukuk based murabaha service, with the aim to support the creation of an Islamic debt market in the country.
  • Bahrain plans to reopen schools in Sep: students will return to the public schools on Sep 16th while private schools will open starting mid-Aug to Sep. The education minister also stated though that the decision would be reviewed periodically. Separately, the resumption of Friday prayers was postponed given the status of the outbreak.
  • Exports from Bahrain declined by 9% yoy to BHD 186mn in Apr, with Saudi Arabia the top destination (BHD 37mn) followed by UAE (BHD 20mn) and Egypt (BHD 18mn). Value of imports dipped by 19% to BHD 362mn while re-exports plummeted by 42% to BHD 38mn.
  • Egypt’s PMI increased to 40.7 in May, up from Apr’s record-low of 29.7, with declines in output and new orders while export sales remained weak. Employment levels declined for the 7th consecutive month and at the quickest pace since Jan 2017.
  • The IMF reached a staff-level agreement with Egypt for a one-year, USD 5.2bn standby arrangement loan. This comes on top of the USD 2.77bn emergency IMF financing obtained to maintain economic stability during the Covid19 outbreak.
  • Egypt plans to reduce the overall budget deficit to EGP 415.2bn or 5% of GDP in the fiscal year 2020-21. Revenues are estimated to be EGP 1.351trn, with tax revenues at EGP 1.059trn while expenditures clock in at EGP 1.758trn.
  • Money supply in Egypt accelerated by 15.62% yoy and 1.64% mom to EGP 4.35trn (USD 274.27bn) in Apr. Local currency deposits at banks grew by 23% yoy and 1.33% mom to a record high of EGP 3.13trn in Apr.
  • The manufacturing and extractive industries production index in Egypt declined by 8.7% mom to 123.87 in Feb. Manufacture of pharmaceuticals rose by 3.9% to 118.2 while manufacture of clothing and tobacco products declined by 8.9% and 4.5% respectively.
  • Egypt’s Suez Canal revenues fell by 9.6% yoy in May, as trade movements slowed: number of ships remained the same as a year ago, while payloads decreased.
  • The new customs facilities approved by Egypt’s finance ministry will reduce production costs and stimulate investment: facilities include simplified procedures, reduced release times, rationalised customs clearance costs, and reduced commodity prices in local markets.
  • In a bid to support local industries during the Covid19 outbreak, Egypt cancelled EGP 5.31bn (USD 330mn) in outstanding natural gas debt owed by factories up until 31 Dec 2019.
  • Egypt’s hotels which reopened at a reduced capacity of 25% occupancy are almost full, according to a tourism ministry official. The government aims to raise capacity to 50% in Jun.
  • Egypt announced a new oil discovery in Western Desert: The new discovery has been put on the production plan at a rate of 4,100 barrels of crude oil per day and 18mn cubic feet of natural gas per day.
  • Jordan’s “most-damaged” economic sectors can deduct 30% from employee’s salaries based on a mutual agreement for the months of May-Jun. It also stipulates that workers not performing any work can have 60% of their salaries deducted, with no consent required by the worker or the Labour Ministry.
  • Tourism revenues in Jordan declined by 10.7% to JOD 784mn in Q1, after posting a 13.6% growth in Jan-Feb this year followed by a 56.5% dip in Mar.
  • Expatriates’ remittances into Jordan declined by 5.4% yoy to JOD 600mn in Q1 this year; remittances dropped by 6.8% in Mar alone.
  • Kuwait will cut government entities’ budget for fiscal year 2020-2021 by at least 20%. The ministry of finance to coordinate with government entities to review public services and the value of government subsidies.
  • Kuwait plans to reduce the expat population to just 30% of the total, revealed the PM. Currently, there are nearly 3.34mn foreigners in a total 4.8mn population. MPs have proposed a quota system in addition to replacing expat government employees (~100k) with Kuwaitis.
  • The central bank of Kuwait issued bonds and related tawarruq worth KWD 360mn last week, with a 1.37% return rate.
  • Lebanon’s PMI edged up to 37.2 in May, up from a record low of 30.9 in Apr, largely due to the reduction in new business. Meanwhile, cost burdens increased on higher purchase prices.
  • The government and central bank figures on financial system losses in Lebanon will be reconciled this week at a meeting involving the President, Prime Minister, Minister of Finance and Central Bank Governor, to facilitate negotiations with the IMF.
  • According to a new decree, Oman will set up an investment authority to own and manage most of the sovereign wealth fund and finance ministry assets. Exclusions are the Petroleum Development Oman company and government stakes in international institutions.
  • Oman set the retirement age for staff of government companies (including state-owned enterprises) at 60.
  • Qatar’s central bank sold QAR 600mn (USD 159.89mn) of Treasury bills in an auction.
  • Saudi Arabia’s PMI remained below-50 for the 3rd consecutive month, but improved to 48.1 in May from Apr’s 44.4, supported by slower declines in output, new work and employment; business closures and constrained operating capacity were oft cited as reasons holding back activity.
  • Saudi Arabia will raise import duties by between 0.5-15ppts on products ranging from meat, dairy and vegetables to vehicles and building materials. Effective from June 10th, this move follows plans to hike VAT to 15% from Jul.
  • Saudi Arabia reinstated Covid19 restrictions in Jeddah for 15 days effective Sat (Jun 6th) – this includes curfew from 3pm to 6am as well as work from home policies and gatherings limited to less than 5 persons. Domestic flights will continue operations and people are permitted to enter and exit the city.
  • About 8787 businesses will stay closed in Riyadh till Jun 20th – this includes businesses where social distancing cannot be applied effectively like barber shops, beauty salons, gyms/ health clubs, cinemas, recreational centres and shisha cafes.
  • New residential mortgage loans for individuals in Saudi Arabia surged by 95% yoy to 89,435 until Apr 2020, valued at nearly SAR 40bn (+85% yoy).
  • The Saudi Contractors Authority expects value of projects awarded during the year to touch SAR 120bn only if lockdown continues for 6 months; projects awarded in Q1 amounted to SAR 97.5bn.
  • Saudi Arabia’s points of sales transactions dropped by 33% yoy and 34.7% mom to SAR 16.17bn in Apr. Food and beverage dominated the highest value in POS transactions with SAR 6.44bn, almost doubling from SAR 3.23bn.
  • SAMA disclosed that it had provided SAR 50bn (USD 13.32bn) to support liquidity, banks’ assets in Saudi Arabia grew by 14% yoy to SAR 2.7trn in Q1 this year while credit to the private sector grew by 12%.
  • Expat remittances in Saudi Arabia grew by 2.3% yoy to SAR 43.65bn (USD 11.62bn) in Jan-Apr 2020. In Apr alone, remittances declined by 8.7% yoy and 20% mom to SAR 9.79bn.
  • The IIF forecast a decline in hydrocarbon revenues to USD 200bn this year in the GCC from USD 326bn last year. With oil price estimated at USD 40 per barrel, aggregated fiscal deficit is expected to widen to 10.3% of GDP in 2020 from 2.5% in 2019.
  • Middle East air cargo demand declined by 36.2% yoy in Apr (Mar: -14.1%), according to IATA.
  • OPEC+ members extended its output cuts of 9.7mn barrels per day till Jul: producers that had not fulfilled their quotas will have to compensate for that until Sep. Compliance among the group averaged 86% in May: Nigeria and Iraq cut less than the allotted quotas.

UAE Focus

  • UAE PMI increased to 46.7 in May from a record low of 44.1 the month before: output sub-index remained below-50 (45.7 in May from Apr’s 39.9), demand remained weak and employment declined. Outlook for the next 12 months of activity worsened still, reaching the joint-lowest since the series began. About 20% of businesses said they expected activity to expand while 8% said they expected it to decline.
  • Total banking assets in UAE touched AED 3.156trn in Apr: gross assets of banks operating in Abu Dhabi and Dubai rose to around AED 2.897trn, accounting for 92% of the total.
  • 50% of UAE government staff will return to work from Jun 7th: this follows the return of federal staff by 30% last week.
  • Private sector and malls in Dubai are now permitted to operate at 100% capacity from Jun 3rd. Working hours should fall within 6am to 11pm.
  • Sharjah’s Finance Department confirmed the Sharjah Liquidity Support Mechanism (SLSM) Sukuk – issued as 12-month dirham denominated paper – as the first rated short-term local currency tradeable instrument in the UAE which can be used for liquidity management by banks. The first tranche of the SLSM was subscribed to by Bank of Sharjah with AED 2bn participation; subsequent tranches are estimated to expand SLSM to AED 4bn. Separately, Sharjah sold a 7-year USD denominated Sukuk last week.
  • The total number of business licenses issued in the UAE inched up by 0.16% mom to 648,684 in May, according to the National Economic Register.
  • The Dubai Electricity and Water Authority disclosed that the share of clean energy in Dubai’s energy mix increased to around 9%.
  • UAE’s minister of community development disclosed that a total of 12,653 nationals are jobless across the country: Abu Dhabi accounted for more than 1/3rd (4461), followed by Dubai (3812) and Northern Emirates (4810).
  • The UAE will allow transit flights to resume: Emirates will operate transit flights to 29 destinations by Jun 15th and Etihad will fly to 20 destinations from Jun 10th. Separately, airlines continue to feel the pressure: Air Arabia has made further job cuts, without mentioning the number affected. Emirates president stated it would take up to 4 years to resume flying its entire network.
  • UAE pumped 2.4mn barrels of crude per day in May, in line with its commitment under the OPEC+ oil supply cut pact, reported Reuters citing an industry source.


Weekly Insights

As nations ease restrictions and lockdowns, economic activity is slowly picking up: this is evident from the latest PMI numbers out of Europe, Asia and the Middle East (below). While China is still the only nation reporting growth (i.e. above-50 mark), Japan remains an outlier by reporting worse than Apr numbers last month. The main factor of concern for businesses remain the Covid19 pandemic though in the Middle East, respondents were also concerned about the rising US-China tensions. Global trade is forecast to decline by a record 27% in Q2 this year, according to UNCTAD, as exports slump.
Chart 1: Heatmap of Manufacturing/ Non-oil sector PMIs – the Covid-19 effect

 
Chart 2: UAE banks’ lending patterns

 
The UAE central bank released its latest monthly statistics with data for Apr. The two panels above indicate the sectors banks lend most to: not surprisingly, the business and industrial sector for about 50% of total loans disbursed in Apr this year. However, the monthly change shows an interesting picture: the public sector entities (i.e. state-owned enterprises/ GREs) have seen an 8%+ mom increase in loans in both Mar and Apr. While the central banks announced multiple stimulus packages to the benefit of businesses (and more specifically to SMEs), it does not seem to have filtered down to the intended recipients, as loans to both the business and industrial sector as well as retail declined in month on month terms (-0.5% and -1.2% respectively).
Chart 3. Saudi Arabia’s spending patterns during the Covid19 outbreak

 
Lockdowns in Saudi Arabia have pushed both point-of-sale (PoS) transactions and cash withdrawals from ATMs to double-digit year-on-year declines in Apr: movements have been restricted and online shopping has been picking up versus visits to shops/ malls. Breaking down PoS transactions by sector, only the “food and beverages” and “health” show an increase during the lockdown. As restrictions are lifted from this month, we can expect a slight rebound (e.g. white goods), especially as VAT is also scheduled to increase to 15% (from 5% currently) from Jul. In the months prior to the introduction of VAT in 2018, there was a significant increase in the PoS transactions in electronic devices, furniture, jewelry as well as construction and building materials. In comparison to 2017-18, this month’s uptick (if any) might be relatively muted given the pressures on cost of living – customs fees on various products are also scheduled to rise from this week.
Media Review
Deglobalization Will Hurt Growth Everywhere
https://www.project-syndicate.org/commentary/deglobalization-threat-to-world-economy-and-united-states-by-kenneth-rogoff-2020-06
The Long Economic Hangover of Pandemics
https://www.imf.org/external/pubs/ft/fandd/2020/06/long-term-economic-impact-of-pandemics-jorda.htm
Bank of England Says Lenders Must Prepare for No-Deal Brexit
https://www.bloomberg.com/news/articles/2020-06-03/bank-of-england-tells-lenders-to-prepare-for-no-deal-brexit
The world must seize this opportunity to meet the climate challenge
https://www.theguardian.com/commentisfree/2020/jun/05/world-climate-breakdown-pandemic
 
Market Snapshot as of 7th June 2020
Weekly % changes for last week from 29th May (international) and 28th May (regional).

Source: Refinitiv Eikon, Datastream, Nasser Saidi & Associates.
 
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Weekly Economic Commentary – May 31, 2020

As countries in the GCC slowly ease restrictions, this week’s Insight section charts how countries are coping with Covid19, its impact and stimulus packages.
Markets
Global stock markets had a good week (MSCI World index was up around 3.6%) and a better-than-expected month of May (S&P gained 4% this month). A few regional markets were closed for the Eid holidays, while the others were mostly up. The euro hit a 2-month high on optimism after the EU recovery fund was announced while the Japanese Yen rose to a 2-week high. Oil prices rose to above USD 35, touching the best levels since early Mar. Gold price continues to be supported by its safe haven status. (Graphs in the last section.)
Global Developments
US/Americas:

  • US GDP shrank by 5% in Q1 2020, a larger decline than the initial estimate of a 4.8% drop and the biggest quarterly dip since Q4 2008. This was a result of drops in personal consumer expenditures (PCE), private inventory investment and non-residential fixed investment.
  • Several indices across the US point to declining activity: the Chicago Fed National Activity Index slumped to 16.74 in Apr (Mar: -4.97); the Dallas Fed manufacturing business index eased to -49.2 in May (Apr: -74) while the Richmond Fed manufacturing index improved to -27 in May (Apr: -53).
  • Inflation, as measured by an index for personal consumption expenditures (PCE), fell 0.5% mom in Apr while the core PCE index, which excludes food and energy, was down 0.4%.
  • Personal income soared by 10.5% thanks to the government’s CARES Act package (Mar: -2.1%). Personal spending plunged by a record 13.6% in Apr (Mar: -6.9%) despite the rise in income and personal savings rate reached a record 33% in Apr (Mar: 12.7%).
  • US durable goods index declined by 17.2% mom in Apr (Mar: -16.6%), with demand for transportation equipment down 47.3% and orders for motor vehicles and parts collapsing 52.8%. Non-defense capital goods orders excluding aircrafts dropped by 5.8% (Mar: -1.1%).
  • US housing price index inched up by a marginal 0.1% mom in Mar (Feb: 0.8%) while the S&P Case Shiller home price index posted a 0.5% mom and 3.9% yoy gain in Mar (Feb: 3.5% yoy).
  • New home sales unexpectedly grew by 0.6% mom to a seasonally adjusted rate of 623k units in Apr, after posting a 13.7% mom decline the month before. The median price of a newly built home dropped5% annually to USD 309,900 (the lowest since Jul 2019).
  • Pending home sales fell by a steep 21.8% mom and 33.8% yoy to 69 in Apr – the largest decline since NAR begin tracking such transactions in Jan 2001.
  • Chicago PMI weakened to 32.2 in May – the lowest level since May 1982 – from Apr’s 35.4, with the order backlogs and supplier deliveries sub-components showing the largest declines.
  • Initial jobless claims eased to 2.12mn in the week ended May 23: though this is the lowest total since the Covid19 crisis began, it pushed total applications past 40mn. The 4-week moving average rose to 22.72mn, an increase of 760,250 from the previous week. Continuing claims plunged by 3.86mn to 21.05mn.

Europe:

  • The EU proposed a EUR 750bn recovery fund, which would offer EUR 500bn in grants and EUR 250bn in loans to help its economies recover.
  • German GDP growth declined by 2.2% qoq in Q1 (Q4: -0.1% qoq) – the sharpest qoq decline since Q1 2009. Already in technical recession entering the Covid19 outbreak, it was not surprising to note that Q1 saw private consumption fall by 3.2% qoq and investment by 7% qoq. Construction sector (+4.1%) and government consumption (+0.2%) supported growth.
  • German Ifo business climate index improved to 79.5 in May (Apr: 74.2) while the current assessment declined to 78.9 from 79.4 the month before. Expectations were more optimistic, with the index rising to 80.1 from 69.4. The Ifo Institute expects German growth to shrink by 6.6% this year as businesses are likely to take around 9 months to return to normal.
  • Inflation in Germany eased to 0.5% yoy in May (Apr: 0.8%), largely due to the decline in oil prices. In the EU, annual inflation stood at 0.1% in May – the lowest in 4 years – with food prices rising alongside a 12% decline in energy prices. Core CPI was 0.9%.
  • EU’s economic sentiment indicator climbed by 2.6 points to 67.5 in the eurozone in May.

Asia Pacific:

  • China’s official manufacturing PMI slowed to 50.6 in May (Apr: 50.8), remaining above 50 for the 3rd consecutive month: total orders improved to 50.9 (Apr: 50.2) while export orders contracted to 35.3, suggesting that domestic demand could be recovering faster. Employment sub-index fell to 49.4 from 50.2 in Apr.
  • The official non-manufacturing PMI in China rose to 53.6 in May (Apr: 53.2); the sub-index for construction activity edged up to 60.8 in May from 59.7. The composite PMI remained flat at 53.4 from Apr.
  • Japan lifted its nationwide state of emergency and approved a second JPY 117trn (USD 1.1trn) stimulus package, bringing the total stimulus to about 40% of GDP.
  • Tokyo’s core CPI rose by 0.2% yoy in May (Apr: -0.1%) while the headline CPI rose from 0.2% to 0.4%.
  • Japan’s industrial production declined by 9.1% mom in Apr, posting the largest drop since 2013. Automaker production fell by a third from the previous month on weak global demand.
  • Japan retail sales tumbled by 13.7% in Apr – the fastest pace since Mar 1998 – on weak demand for general merchandise, clothing and motor vehicles.
  • Japan’s all-industry activity index fell sharply by 3.8% mom in Mar (Feb: -0.7%); March’s decline was the steepest since last October’s tax hike.
  • Jobless rate in Japan rose to 2.6% in Apr, the highest since Dec 2017, while job availability slipped to 1.32 – the lowest since Mar 2016.
  • India announced an easing of its national lockdown, even as the latest numbers show a record daily rise (8k cases on Sat). While areas with a high number of Covid19 cases will continue to remain under lockdown, from Jun 8, hotels, restaurants, shopping malls and places of worship are expected to reopen as part of a 3-phase plan.
  • India’s GDP growth slowed to 3.1% yoy in Jan-Mar (Q4 of the 2019-20 fiscal year), the weakest quarter in 11 years; overall growth rate for the 2019-20 year eased to 4.2% (the lowest since 2008-09) after growth estimates for all previous quarters were revised down. The quarterly growth – which saw manufacturing and construction dip by 1.4% and 2.2% respectively and gross fixed capital formation decline by 6.4% – does not capture the decline in activity after the economy was shut down in late-Mar in response to the Covid19 outbreak.
  • Singapore announced a fourth stimulus package worth SGD 33bn, rolled out as the “Fortitude Budget”: more than half the stimulus will be funded by drawdowns from past reserves. Overall stimulus now stands at SGD 92.5bn or about 19% of GDP.
  • Singapore GDP declined by 4.7% qoq and 0.7% yoy in Q1 this year, from the 0.6% qoq expansion the quarter before. There were “pockets of resilience” in finance and insurance (+8% yoy) and manufacturing (+6.6%, thanks to the biomedical manufacturing cluster) amidst substantial declines in accommodation and food services (-23.8%), transportation and storage (-8.1%) and wholesale and retail (-5.8%).
  • Industrial production in Singapore increased by 13% yoy and 3.6% mom in Apr, easing from the previous month’s surge of 16.5% yoy and 21.7% mom. Pharmaceuticals expanded by 100.5% yoy in Apr, thanks to the increased demand for medical goods.
  • Inflation in Singapore turned negative in Apr, falling to 0.7% yoy after remaining flat in Mar. The drop (first time since end-2016) was due to larger declines in the cost of private transport, services as well as retail and other goods.

Bottom line: Over the past month, government stimulus across the globe and accompanying positive investor sentiment have driven stock markets up, offsetting the depressing macroeconomic data – the S&P 500 was up 4% this month, the best performance in May since 2009! Countries in Europe are slowly easing restrictions with some inter-EU travel expected after Jun 15; a few like Estonia, Latvia and Lithuania have formed “travel bubbles,” lifting restrictions for each other’s citizens. With businesses in a “new normal”, governments continue to roll out support – be it new rounds in Japan and Singapore – and central banks are expected to support further – ECB is likely to introduce fresh stimulus as the current bold EUR 750bn proposal is not a done deal (yet!). A second-wave impact is not too far-fetched a thought (like in Korea), while cases are still rising in many like Brazil, Mexico and Indonesia. Add to this, a lot of the past issues continue to crop up in the midst of the pandemic: be it the China-US tensions (trade deal) or Brexit (yes, that is still chugging along, with Jun 18-19 EU summit the date by when an extension could be requested).
Regional Developments

  • Bahrain will invite companies to support national firms in its oil exploration plan: the ministry will be holding a virtual roadshow enabling companies’ access to its virtual data room (which includes information about a few appraisal wells and deep gas resources).
  • Bilateral trade between Saudi Arabia and Bahrain grew by 15.3% yoy to USD 819mn in Q1 this year. Saudi Arabia was the largest trade partner, accounting for 49.1% of total trade, followed by the UAE (33.81% share, USD 550.4mn). The value of non-oil exports from Bahrain to the GCC stood at USD 1.126bn.
  • Economic growth in Egypt declined to 5% yoy in Jan-Mar 2020 (Q3 of the fiscal year 2019-20), after substantial declines in the contributions of tourism (2.7% from 3% during the same quarter last year), industry (12.2% from 12.8%) as well as wholesale and retail (11.7%).
  • Egypt will deduct 1% from public salaries and 0.5% from state pensions for a year beginning Jul 1st, to support state coffers during the ongoing Covid19 crisis.
  • Egypt’s central bank will provide up to EGP 100bn (USD 6.36bn) in loan guarantees to support lending to businesses. These loans will carry an interest rate of 8%, below the central bank’s key overnight lending rate of 9.25%.
  • Egypt sold USD 5bn in bonds in three tranches (in the week ended Mar 23) with maturities of four, 12 and 30 years. Attracting interest from investment funds and international institutions, the deal attracted more than USD 6bn in demand for each of the 4- and 12-year tranches and more than USD 7.6bn for the 30-year bonds, reported Reuters.
  • Foreign employees in Egypt’s government and public business sectors increased by 42.2% yoy to 1,388 in 2019. Of those working in the public business sectors, 50.9% were working with the Egyptian Natural Gas Holding Company and another 37.5% in the Egyptian General Petroleum Corporation and Ain Shams University.
  • Daily natural gas production capacity in Egypt reached an average of 7.2 billion cubic feet (bcf) compared to 6.8 bcf by end-Jun 2019 and 7bcf in Sep.
  • Jordan’s request for emergency financial assistance from the IMF (Rapid Financial Instrument) amounting to about USD 396mn was approved. This is expected to cover about a quarter of Jordan’s external financing needs.
  • Public sector employees in Jordan began a phased return to work last week, after a state of emergency was declared mid-Mar. About 60% are expected to return to work in this phase.
  • Jordan plans to reopen the aviation sector gradually: initial operations will cover cargo transport and resuming passenger travel will be the next stage given “appropriate conditions”.
  • Kuwait eased its full-time curfew to a 12-hour one (from 6pm to 6am) and will last 3 weeks before the next phase of easing is introduced.
  • Lebanon’s discussions with the IMF continue: the Daily Star, citing an unnamed source, revealed that the IMF wants the capital control law to be passed before discussing financial assistance. Meanwhile, MPs want to include recommendations from the IMF in a draft law which blocks capital transfers from the country for all but limited reasons (including medical bills, loans, foreign taxes and purchase of essential goods).
  • Oman ended the lockdown of Muscat governorate (in place since Apr 10) on May 29th. At least 50% of employees in government entities will work from the offices starting this week.
  • Real estate deals in Oman increased by 24% yoy to OMR 629.2mn (USD 1.63bn) in Jan-Feb this year. The number of plots issued however declined by 5.7% to 36,523.
  • Funding raised by Oman’s capital market for various projects and economic initiatives grew by 75% yoy to OMR 3.14bn (USD 8.2bn) in 2019, according to the Capital Market Authority.
  • Qatar’s central bank swap agreement with Turkey has been tripled to USD 15bn, according to the latter’s central bank.
  • Saudi Arabia will lift bans on domestic travel, holding prayers in mosques and workplace attendance in both the government and private sector from this week. Sixty domestic flights are expected to resume each day in the first phase. Public sector will resume normal operations as of June 14. It is expected that the curfew will be fully phased out by Jun 21 (except in Mecca).
  • Saudi Arabia transferred SAR 150bn (USD 40bn) to the PIF from SAMA reserves in Mar-Apr, revealed the finance minister. He also stated that “returns on PIF investments [would] be available to support public finances when needed”.
  • Inflation in Saudi Arabia inched up by 1.3% yoy in Apr, on higher food prices. In mom terms, prices declined by 0.1%.
  • Wholesale prices in Saudi Arabia edged up by 0.6% yoy in Apr – the lowest level in a year. Prices of refined petroleum products declined by 11.9%. In mom terms, prices dipped 1.8%.
  • Saudi Arabia reported a trade surplus of SAR 75.73bn in Q1 this year, with total trade amounting to SAR 320bn. In Mar alone, trade surplus dipped by 81.43% yoy and 68.24% mom to SAR 7.814bn.
  • Foreign investor licenses in Saudi Arabia increased by 19% yoy to 348 in Q1 this year, according to the minister of investment. This included 37 US companies and 32 UK firms.
  • The Saudi Program for Social Development in the Regions (Tanmiah) began procedures of disbursing financial compensations to owners of real estate properties located within the first stage of the NEOM project.
  • Saudi Arabia’s Ministry of Umrah and Hajj enabled the return of as many as 450k Umrah performers safely to their countries amid the Covid19 outbreak and preventive measures.
  • Airlines globally continue to be affected adversely by the pandemic: in the GCC, Kuwait Airways laid off 1500 expats of a total 6000; Etihad Airways slashed salaries and laid off hundreds of employees across various departments.

UAE Focus

  • UAE is resuming “normal” activities: the curfew timing has been reduced to 10pm to 6am (Dubai from 11pm to 6am); beaches, parks, cinemas, museums and tourist attractions (Dubai Frame, Ski Dubai etc.) have reopened, with social distancing rules in place. All public sector employees will return to their physical offices starting Jun 14, starting with smaller numbers from May 31st (35% and 50% respectively in Abu Dhabi and Dubai government offices). Emirates airlines opened bookings for 16 destinations in 12 Arab nations starting from Jul 1st.
  • According to the UAE Central Bank, total loans provided to SMEs grew by 4.3% qoq to AED 93.4bn in Q1 this year. This accounted for 8.1% of total credit to the private sector.
  • Foreign currency assets held by the UAE Central Bank edged up by 1.6% yoy to AED 371.6bn (USD 101.2bn) in Apr 2020, as both current account balances and deposits with foreign banks strengthened.
  • Inflation in Abu Dhabi increased by 0.9% mom in Apr; in yoy terms, CPI fell by 1.4%.
  • Abu Dhabi’s non-oil trade grew by 10% yoy to AED 17.85bn in Mar 2020. Non-oil exports were up 14.4% yoy to AED 5.51bn while imports surged by 27.6% to AED 9.04bn.
  • Real estate transactions in Abu Dhabi rose by 34% yoy to AED 6.3bn in Apr, from 2617 property deals.
  • Abu Dhabi DED introduced a new programme to support import and export companies negatively impacted by the Covid19 outbreak: this includes help with facilitating procedures, improving efficiency of local export activities and addressing logistical constraints. Abu Dhabi DED is also implementing a new initiative encouraging SMEs to promote locally-made products, especially in the healthcare sector.
  • Abu Dhabi’s private sector benefitted from the cancellation of fines: within 2 weeks of the announcement, more than AED 246mn of fines on expired licenses were cancelled from close to 50k firms; penalties of over AED 5.6mn were written off for other violations including improper storage of goods or misuse of commercial facilities.
  • Dubai SME allocated AED 20mn to a capital guarantee scheme backing peer-to-peer loans made to SMEs. The scheme by Dubai SME and lending platform Beehive allows Dubai-based SMEs to seek funding – of upto AED 420k (firms that are 50% owned and managed by Emiratis) and upto AED 780k (fully owned by Emiratis) – backed by a 50% capital guarantee.
  • Inflation in Dubai fell for the 17th consecutive month, down 3.34% yoy as costs of clothing, utilities and transport sector dropped by 6.44%, 6.3% and 12.34% respectively.
  • A senior Mashreq Bank official stated that close to a quarter of the bank’s retail customers have availed the support packages provided as relief measure during the pandemic.


Weekly Insights

Economies in the GCC are slowly opening up their economies after months of lockdown. The resumption of activities is being planned in phases, initially with the reduction in night curfew timings to passed opening of malls/ private and public sector offices. Domestic travel resumes in Saudi Arabia from this week though the religious tourism destination of Makkah remains cordoned off. The UAE is preparing for re-entry of its overseas residents starting Jun and entry of persons from 12 Arab nations starting Jul, and tourist destinations within the country are already opening up (hotels, restaurants, museums, malls and entertainment facilities).
Some initial indications are already visible in the Google Mobility reports. Nations like Kuwait and Saudi Arabia have seen a significant drop in activity level given the extreme lockdowns while the UAE and Jordan have seen some pickup in activity as restrictions were eased.
Chart 1: Mobility report of select MENA nations

Notes: The reports show trends over several weeks with the most recent data representing approx. 2-3 days before May 25th. Changes for each day are compared to a baseline value for that day of the week: the baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020.
Chart 2: Claims to the private sector in UAE & Saudi Arabia: have the packages come through?


With the lockdowns initiated mid- to end-Mar, it is probably too early to see the impact of the stimulus packages introduced by the central bank, most of which was directed as support to the private sector and businesses (especially SMEs) in the region. March data shows that the loans to the public sector entities/ governments have increased at a faster pace than to the private sector. Will the Apr-May data sing a different tune? Central bank statistics will tell, soon. In the meanwhile, anecdotal evidence suggests that people are trickling into open spaces like parks and beaches, preferring that to indoor areas. Will tourists be back as and when international travel resumes? A recent IATA survey suggests that about 30% of respondents preferred waiting at least six months after the virus is contained before flying again while an additional 10% expects not to travel before a year or so.
Media Review
Equity Investors Must Pay More Attention to Climate Change Physical Risk
https://blogs.imf.org/2020/05/29/equity-investors-must-pay-more-attention-to-climate-change-physical-risk/
How China emerges from lockdown will affect global tourism
https://www.economist.com/international/2020/05/28/how-china-emerges-from-lockdown-will-affect-global-tourism
Covid19: What Should We Be Preparing For?
https://www.project-syndicate.org/commentary/covid19-response-needs-financing-for-developing-countries-by-ricardo-hausmann-2020-05
As a global economic crisis wreaks havoc on Saudi Arabia, the kingdom should reduce military spending
https://www.brookings.edu/blog/order-from-chaos/2020/05/27/as-a-global-economic-crisis-wreaks-havoc-on-saudi-arabia-the-kingdom-should-reduce-military-spending
Lebanon’s IMF rescue plan fails to set reform roadmap

https://en.brinkwire.com/news/lebanons-imf-rescue-plan-fails-to-set-reform-roadmap/
Open letter to the IMF: https://english.alarabiya.net/en/features/2020/05/31/The-IMF-should-not-give-Lebanon-funding-without-deep-governance-reforms-Petition
 
Market Snapshot as of 31st May 2020
Weekly % changes from 22nd May (international) and 21st May (regional). A few regional stock markets were closed last week for Eid holidays.

Source: Refinitiv Eikon, Datastream, Nasser Saidi & Associates.
 
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Weekly Economic Commentary – May 17, 2020

Markets
Stock markets declined again last week on disappointing economic data alongside rising US-China tensions (again, this time about tightening export controls). Regional markets were mostly down: a few major UAE banks disclosed exposure to an agri-trader firm undergoing liquidation, Saudi Aramco declared a fall in Q1 profits, while Saudi’s PIF disclosed various investments ranging from Boeing to Facebook to Marriott to Total and Royal Dutch Shell. Among currencies, the euro was relatively stable while the pound took a beating after news broke that Brexit trade talks have made “very little progress”. Oil prices climbed, on hopes that demand would pick up as restrictions are eased while US crude inventories fell in the most recent week for the first time since Jan. Gold prices are rising on safe haven demand.
Global Developments
US/Americas:

  • US House passed a further USD 3trn Covid19 relief bill – including a new round of direct payments of up to USD 6k per household in addition to nearly USD 1trn for state and local governments, a USD 200bn fund for essential worker hazard pay and an additional USD 75bn for Covid-19 testing among others – on top of the USD 3trn already passed. It is unlikely to pass the Republican dominated Senate.
  • US inflation declined by 0.8% mom in Apr – the biggest fall since Dec 2008 – following a 0.4% dip in Mar, on lower oil prices (-20.6%, the largest dip since Nov 2008) while cost of food increased (+1.5%, the most gain since Jan 1990). Core inflation, excluding food and energy, dropped by 0.4% – the most since records began in 1957.
  • Producers price index in the US dropped by 1.3% mom and 1.2% yoy in Apr, as a result of lower price pressures and fall in energy costs. Core PPI increased by 0.6% yoy, recording the lowest annual gain since end-2015.
  • US budget deficit widened to a record-high of USD 738bn in Apr (Mar: USD 119bn), as spending more than doubled while revenues were down by 55% yoy. The Apr deficit brings the 12-month total to USD 1.935trn, almost doubling from the USD 1.037trn budget gap in the 12 months to Mar.
  • US retail sales tumbled by a record 16.4% mom in Apr (Mar: -8.3%) – the first full month of lockdown in many states – with substantial declines recorded in sales across clothing and accessories (-78.8%), electronics and appliances (-60.6%) and furniture (-58.7%). Apr retail sales dropped by 21.6% yoy – a record low as well.
  • US industrial production posted the largest monthly drop of 11.2% in Apr, with the auto sector taking a massive hit of more than 70%. Manufacturing output declined by 13.8% mom and 18% yoy, while capacity utilization fell to 64.9% (Mar: 72.7%).
  • Initial jobless claims touched 2.98mn in the week ended May 9 – the slowest increase since mid-Mar – though raising the total applications to 36.6mn since the outbreak.

Europe:

  • GDP growth in the eurozone fell by 3.8% qoq in Q1 – the sharpest declines since the time series started in 1995. France’s GDP dropped by 5.8% while Italy’s fell by 4.7%, but given that the Covid19 lockdown was only enforced in Mar in many of the nations, the full effects will be visible only in Q2 data. Germany slipped into a technical recession, as GDP shrank by 2.2% in Q1 – the biggest quarterly fall since the financial crisis.
  • Employment in the eurozone showed a 0.2% fall in Q1 – the first decline since 2013.
  • Eurozone industrial production dived by 11.3% mom in Mar, with variations across the nations depending on the extent of the lockdown in Mar: in Italy it fell by 28.4% mom, France by 16.4% while Germany reported a 14.2% dip. Durable consumer goods tumbled 26.3% mom and capital goods fell by 15.9% mom.
  • German inflation eased, falling to 0.9% in Apr (Mar: 1.4%), thanks to a 5.8% decline in energy prices though food prices were up by 4.8%. PPI
  • UK GDP contracted at a record 5.8% mom pace in Mar. Q1 GDP fell by 2% qoq – the largest decline since the financial crisis, with services sector output falling by 1.9% (largest drop since records began), construction down by 2.6% and household spending by 1.7%.
  • UK industrial production declined by 4.2% mom in Mar (Feb: +0.1%) while manufacturing output slipped by 4.6% vs the previous month’s 0.5% gain.

Asia Pacific:

  • The PBoC surprised markets by keeping the 1-year MLF rate unchanged at 2.95% on Fri, causing speculation that the loan prime rate might be reduced instead this week. The central bank injected CNY 100bn (USD 14.1bn) through the liquidity tool, and the second phase of a targeted reserve requirement ratio (RRR) cut freed up about CNY 200bn of long-term liquidity.
  • Inflation in China eased to 3.3% in Apr (Mar: 4.3%), with an uptick of 14.8% in food prices, while producers price index fell by 3.1% yoy, widening from the 1.5% drop reported in Mar.
  • New loans disbursed by Chinese banks climbed by 66.7% yoy (though declining by 40.3% mom) to CNY 1.7trn in Apr. Household loans declined to CNY 666.9bn from Mar’s CNY 989.1bn and corporate loans fell to CNY 956.3bn from the previous month’s CNY 2.05trn. Outstanding yuan loans increased by 13.1% yoy (Mar: 12.7%) and the growth of total social financing (a measure of liquidity) edged up to 12% (Mar: 11.5%). Money supply (M2) meanwhile grew by 11.1% to CNY 209.35trn (USD 29.53trn) in Apr. FDI expanded by 11.8% yoy to CNY 70.36bn in Apr.
  • China fixed asset investment declined by 10.3% yoy to CNY 13.68trn (USD 1.93trn) in Jan-Apr, smaller decline compared to the 16.1% dip in Q1.
  • Industrial production in China increased by 3.9% yoy in Apr. reversing the 1.1% decline in Mar and 13.5% collapse in Jan-Feb. Retail sales slipped by 7.5% yoy, as domestic demand remained weak: restaurant receipts were down by 31.1% yoy, following Mar’s 46.8% slump. Unemployment inched up by 0.1% mom to 6% in Apr.
  • Japan’s coincident index of business conditions fell 9 points to 90.5 in Mar, posting the steepest drop since Mar 2011. The leading index of business conditions posted a record drop (since data compilation began in 1985) of 8.1 points to 83.8.
  • Hong Kong GDP plummeted by 8.9% yoy in Q1 – the third consecutive quarter of yoy contraction and its worst drop since records began in 1974 (Q4: -3%). In qoq terms, GDP contracted by 5.3% in Q1 from a revised 0.5% drop in Q4.
  • India announced a USD 266bn financial stimulus package to support the economy (together with the previously announced USD 23bn package, this is equivalent to 10% of India’s GDP): this includes credit lines to and collateral-free automatic loans to MSMEs, liquidity for non-banking financial companies and power distribution companies, reliefs for the real estate and construction sectors. Direct cash payments to migrant workers, small farmers and the poor (in addition to food and affordable housing) were also announced in addition to supporting the agriculture/ food processing sectors.
  • The nationwide lockdown resulted in a 16.7% yoy fall in India’s industrial output in Mar, with manufacturing sector posting a 20.6% decline.
  • India’s exports collapsed by a record 60.28% yoy alongside a 58% dip in imports in Apr, resulting in a trade deficit of USD 6.8bn – the lowest since May 2016.

Bottom line: Macroeconomic releases across US and most of Europe are at record lows. Industrial production has reported the sharpest declines since records began – be prepared for a few more months of lows given the slow easing of lockdowns and slower recovery given supply chain disruptions and demand at lower levels than in the pre-Covid19 phase. China’s data was probably the only silver lining: auto sales reportedly increased by 4.4% yoy to 2.07mn units in Apr, ending the contraction streak over the past 21 months. Stimulus packages are still being rolled out to ease the impact from Covid19 – from the US (House passing the USD 3trn bill though Trump has the power to veto it) to the EU (opened a USD 260bn credit line for struggling nations while EU ambassadors signed off a temporary EUR 100bn unemployment reinsurance plan), India (a wide-ranging package worth close to 10% of GDP) and Japan (2nd extra budget to be enacted by mid-Jun).
Regional Developments

  • The government in Bahrain needs legislative approval for any increase in VAT, according to an MP, while guaranteeing that the VAT will not be increased to 15%.
  • Bahrain awarded 372 contracts worth USD 740mn in Q1 this year, with the biggest share for procurement of equipment and materials (USD 233mn) followed by the construction and engineering services sector (USD 188.7mn) and the aviation sector (USD 132mn).
  • Tamkeen’s Business Continuity Support Programme launched in Bahrain last month, with an estimated budget of BHD 40mn, has so far supported more than 10k SMEs. Support ranged between BHD 1050-12k based on the size of the institution’s workforce.
  • Bahrain Bourse’s “Amanat” programme will protect investors funds as well as the administration of cash dividend distribution for all listed companies.
  • Bahrain’s sovereign wealth fund Mumtalakat is planning a new investment strategy – to explore new sectors and “getting bigger rewards and revenues from current funds”.
  • Egypt received USD 2.772bn in emergency financing from the IMF; the country is seeking a further USD 5bn from the IMF and USD 4bn from other sources, reported Bloomberg.
  • Annual urban consumer price inflation in Egypt increased to 5.9% in Apr (Mar: 5.1%), on rising food prices.
  • Egypt’s central bank kept main rates unchanged in the latest meeting.
  • Gold reserves in Egypt increased by 5.2% mom to a record high of USD 3.704bn in Apr. Net international reserves declined by 7.7% mom to USD 37.037bn while the contribution of foreign currencies to international reserves slid to USD 33.142bn in Apr – its lowest level since Sep 2017.
  • Egypt announced an initiative to support the tourism sector meet its financial obligations: this includes meeting salary payments, basic employment requirements as well as obtain loans over 3 years from national banks at an annual rate of 5%. The loans, with a 1-year grace period starting 1 May, will be repaid in monthly installments over two years.
  • Ministry of Finance in Egypt disclosed urgent financial allocations of EGP 12.5bn to state-run bodies in Mar-Apr, including the General Authority for Supply Commodities, Holding Company for Water and Wastewater as well as the Health Insurance Organisation.
  • Egypt’s finance minister stated that government spending on health, high school education, and social solidarity sectors would reach EGP 36bn in FY 2020/2021; he also stated that the government might shift to austerity measures should the Covid19 crisis continue into the next fiscal year.
  • The fuel subsidy bill in Egypt dropped by 65% yoy to EGP 21bn (USD 1.34bn) in Jul-Mar, revealed a petroleum ministry official.
  • Unemployment rate in Egypt eased to 7.7% in Q1 this year, from 8.1% a year earlier. Workforce increased to 29.01mn during the quarter from 28.85mn in Jan-Mar 2019. Separately, the ministry of planning launched the “Misr Hat’aady” initiative to retain workforce in the private sector and provide new jobs amidst the covid19 outbreak.
  • Mortgage financing companies in Egypt provided funds worth EGP 423.4mn in Jan-Feb, up 66.9% yoy while value of mortgage refinancing slipped by 80.5% to EGP 33mn.
  • Egypt will pay EGP 368.5mn (USD 23.43mn) in irregular labour aid to nearly 737k defaulting beneficiaries. The total number of beneficiaries is expected to touch 2.037mn and a second tranche will be announced before Eid.
  • Egypt suspended all new buildings and building height permits for 6 months – applicable only to residential buildings – in Cairo, Giza, Qalyubia, and Alexandria.
  • EBRD projects a GDP growth of 3% in Egypt during the fiscal year 2020-21 from the 2.5% in the 2019-20 fiscal year.
  • Moody’s confirmed Egypt’s B2 rating, with the outlook remaining stable.
  • Iraq will cut its oil output by around 700k barrels per day (bpd), a third less than required under the OPEC+ supply pact (1.06mn bpd for May & Jun).
  • Balance of payments in Kuwait touched a surplus KWD 821.2mn (USD 2.7bn) in the fiscal year 2019 from KWD 1.1bn the year before. Remittances from expats grew by 3.7% yoy to USD 14.4bn in fiscal year 2019. Current account surplus surged by 11.9% to KWD 6.7bn.
  • Kuwait’s local tourism revenue declined by 0.5% yoy to KWD 376.1mn (USD 1.22bn) in 2019, as per central bank statistics. The spending of Kuwaiti nationals on tourism abroad also declined by 7.35% to KWD 3.732bn.
  • Lebanon has begun formal negotiations with the IMF, including discussions around the government’s financial recovery plan. A senior finance ministry official revealed that the IMF have requested for clear figures on the losses of the central bank. Separately, the finance minister stated that the country is ready to float the pound only after securing the aid package.
  • Lebanon initiated a 4-day complete lockdown starting from Wed night, aiming to contain a resurgence in COVID19 cases.
  • Oman will cut the budgets of government bodies and armed forces by a further 5% this year, according to the finance ministry. (A previous 5% cut was done in mid-Apr.)
  • China accounted for 89.88% of Oman’s total crude exports in Apr 2020 (up 2.32% mom), followed by Korea with a share of 6.83%.
  • S&P expects Oman to meet its funding needs (valued at nearly USD 50bn) through 2023 via a combination of external debt issues (63%), drawdowns of domestic and external liquid assets (18.5%), domestic debt (15%) and other transactions (3%).
  • In an interview, Qatar Airways CEO disclosed plans to lay off 20% of its workforce, while also confirming that talks were underway to defer aircraft orders for several years. He expects only 50% occupancy when flights resume, with global travel demand unlikely to recover until 2023/24.
  • As part of the government’s plan to save SAR 100bn amid the Covid19 crisis, Saudi Arabia will triple VAT to 15% (from 5% currently) from Jul onwards and cancel the SAR 1000 cost of living allowance for government employees from Jun. Separately, Saudi Gazette reported a cut of close to SAR 30bn in the budgets of the Vision Realisation Programs.
  • Saudi Arabia raised SAR 5.755bn (USD 1.53bn) in local Sukuk: the first tranche of the sukuk issue is SAR 3.8bn, and the total tranche size is SAR 6.549bn, maturing in 2025.
  • Saudi Arabia will enforce a 24-hour curfew across the Kingdom during the 5-day Eid holiday. Till then people can move about between 9am-5pm excluding Mecca (which is already under full curfew).
  • Saudi Arabia’s index for industrial production declined by 3.29% in Mar, largely due to a 11.46% dip in non-oil manufacturing activity.
  • Fuel prices have been reduced in Saudi Arabia: gasoline 91 will be priced at SR0.67 per liter from SR1.31 (-48.9%), while gasoline 95 will be priced at SR0.82 per liter (-44.2%).
  • Saudi Arabia will distribute “Ramadan Aid” worth SAR 1.85bn (USD 492.6mn) for social security beneficiaries: providers will get SAR 1000 and family members SAR 500 each.
  • Kuwait, Saudi Arabia and UAE announced fresh voluntary oil production cuts to be implemented in Jun: slashing output by a further 80k bpd, 1mn bpd and 100k bpd respectively.
  • According to the latest Covid19 CFO Pulse survey from PwC, 44% of Middle East CFOs expect the recovery timeline to return to business as usual to take three months or more, 33% are likely to reduce their real estate footprint while only 64% of UAE CFOs plan to promote physical distancing at work sites. More: https://www.pwc.com/m1/en/publications/covid-19/pwc-middle-east-covid-19-cfo-pulse-survey.html
  • The IMF initiated a new USD 100bn fund to support countries in the Middle East that have requested assistance. These include Jordan and Morocco (both acquired USD 3bn), Tunisia (USD 700mn) and Egypt (USD 2.8bn), in addition to funds to Mauritania, Djibouti, Sudan and Somalia, as well as grants to Yemen.

UAE Focus

  • After Reuters reported ongoing discussions between Dubai and Abu Dhabi to merge assets, Dubai denied such plans.
  • UAE plans to review government structure and size, calling for a “more agile, flexible and speedy government”, as part of its post-Covid strategy.
  • UAE does not plan to raise VAT from the current rate of 5%, clarified the finance ministry, after Saudi Arabia’s tripling of the rate.
  • Banks and financial institutions have drawn down 77% of the AED 50bn worth of funds provided by the Central Bank of the UAE under the Targeted Economic Support Scheme. Under the scheme, banks can defer both interest/profit and principal repayment to extend support to customers impacted by the Covid19 outbreak.
  • Private and family-owned businesses have submitted a set of proposals to the Dubai Supreme Fiscal Committee to support them through the Covid-19 outbreak: this includes requests for a reduction in VAT to 2%, settling payments faster to suppliers and contractors, freezing of 2.5% market fee, 50% reduction in customs fees and utilities among others.
  • Dubai Customs extended a 20% refund on fees imposed on imported products sold locally in Dubai markets, in addition to the cancellation of the AED 50k bank guarantee required to undertake customs clearance activity.
  • UAE banks (including FAB, Emirates NBD and Mashreq) have an exposure of close to USD 108.6mn to Phoenix Commodities and its subsidiaries. The company, which also owes millions to HSBC and Standard Chartered, has gone into liquidation after declaring USD 400mn+ in potential trading losses.
  • UAE’s National Creative Relief programme will support those in the cultural sector with the provision of financial grants ranging between AED 15-50k. Applications will be open from May 17th for a week, and some of the factors being considered include amount of lost work/ projects, financial impact from Covid-19 and the amount of work undertaken in 2019.
  • Passenger traffic at the Dubai International Airport touched a total 17.8mn persons in Jan-Mar this year, down 19.8% yoy.
  • Emirates SkyCargo expanded its weekly scheduled cargo flight operations to cover 75 destinations across six continents.

Media Review
Tracking Trade During the COVID-19 Pandemic (using real time data)
https://blogs.imf.org/2020/05/14/tracking-trade-during-the-covid-19-pandemic
Travel bubbles post-lockdown
https://www.weforum.org/agenda/2020/05/tourism-coronavirus-travel-bubble-lockdown/  
Preventing a Covid19 food crisis
https://www.project-syndicate.org/commentary/governments-must-prevent-covid19-food-crisis-by-carmen-reinhart-2020-05
Can the Middle East Recover from the Coronavirus and Collapsing Oil Prices?
https://www.newyorker.com/news/our-columnists/can-the-middle-east-recover-from-the-coronavirus-and-collapsing-oil-prices
Lebanon: A Grave Crisis with No Silver Bullet
https://carnegie-mec.org/2020/05/11/grave-crisis-with-no-silver-bullet-pub-81752
Saudi PIF’s acquisitions
https://www.ft.com/content/5cb71f75-cc6e-4ed5-9106-29bd33099fa3
https://www.arabnews.com/node/1675796/business-economy
COVID-19 Poses Formidable Threat for Fragile States in the Middle East and North Africa
https://www.imf.org/en/News/Articles/2020/05/13/na051320-covid-19-poses-formidable-threat-for-fragile-states-in-the-middle-east-and-north-africa
 
 
 
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Weekly Economic Commentary – May 10, 2020

Weekly Insightsis a collection of macroeconomic charts of recent regional macro data.  
Markets
Stock markets gathered steam last week, hitting weekly highs on Fri, rallying in spite of weak macro data across the board and Covid19 cases crossing the 4mn mark. There is a growing disconnect between equity markets and the deep recession of real economic activity in the US, Europe and globally. The resumption of trade negotiations between US and China resulted in some renewed optimism, that was also reflected in Asian markets. Regional markets mostly ended in the red last week. Among currencies, dollar gained versus the euro and swiss franc. Oil prices edged up, posting a second week of gains, on output cuts and hopes that ease in COVID19 restrictions will slowly revive demand, while gold price hovered near a 2-week high.
Global Developments
US/Americas:

  • US non-farm payrolls plunged by 20.5mn in Apr (from a downwardly revised 870k in Mar) and the unemployment rate more than tripled to 14.7% – both post- World War II records. Average hourly earnings rose 4.7% mom and 7.9% yoy, skewed higher given the disappearance of low-wage workers from the payrolls. Leisure and hospitality employers laid off 7.65mn persons, manufacturers 1.33mn and retailers 2.1mn.
  • Private payrolls in the US dropped by a record 20.2mn in Apr from a downwardly revised 149k jobs in Mar (the first decline since Sep 2017). The leisure/hospitality sector, with 8.61mn jobs lost, accounted for 40% of private sector job losses.
  • Initial jobless claims continue to rise, it hit 3.169mn in the week ended May 2, bringing the 7-week total to 33.5mn.
  • Factory orders posted a record drop, declining by 10.3% mom in Mar (Feb: -0.1%), after transportation equipment orders plunged 41.3% after increasing 4.6% in the prior month. Orders for non-defense capital goods excluding aircraft dipped 0.1% in Mar.
  • Trade deficit in the US widened to USD 44.4bn in Mar (Feb: USD 39.8bn), as exports dropped a record 9.6% to USD 187.7bn – the lowest since Nov 2016 and imports fell by 6.2%. Goods trade deficit with China decreased by USD 4.2bn to USD 11.8bn, a 16-year low.
  • Markit services PMI was revised lower by 0.3 points to 26.7 in Apr, recording the steepest fall in activity since the series initiated in Oct 2009. Composite PMI also slipped to 27 from 27.4 the month before.
  • ISM non-manufacturing PMI slipped to an 11-year low of 41.8 in Apr (Mar: 52.5), with new orders sub-index plunging to 32.9 (a level last seen in Dec 2008) and the employment sub-index slowing to 30 from 47 the month before.
  • Non-farm productivity fell by 2.5% qoq in Q1 (Q4: +1.2%): this is the largest decline in output since Q1 2009 and the largest decline in hours worked since Q3 2009.

Europe:

  • The final German Markit manufacturing PMI clocked in at 34.5 in Apr – the lowest since Mar 2009 – up from the flash estimate of 34.4, but below Mar’s 45.4. Composite PMI edged up to 17.4 from the preliminary 17.1, but much lower than Mar’s 35, after services PMI inched up to 16.2 from Mar’s 31.7 and an initial estimate of 15.9.
  • EU manufacturing PMI slipped to 33.4 in Apr (initial estimate: 33.6; Mar: 44.5) – the steepest month of contraction ever; services PMI grew slightly to 12 from the preliminary reading of 11.7 and 26.4 the month before, thereby helping the composite PMI to record 13.6 – the lowest since the series began (initial estimate: 13.5; Mar: 29.7).
  • German factory orders plummeted by 15.6% mom and 16% yoy in Mar. Both domestic and foreign demand declined: from within Germany, orders were down by 14.8%, from elsewhere in the eurozone orders were off 17.9% while orders from other countries dropped by 15%. Orders for investment goods (e.g. factory machinery) declined steeply by -22.6%.
  • Industrial production in Germany declined by 9.2% mom and 11.6% yoy in Mar; production contracted for intermediate goods (-7.4%), consumer goods (-7.5%), capital goods (-16.5%), and energy (-6.4%) while by industry, automotive collapsed by 31.1%.
  • German exports posted a record decline of 11.8% mom to EUR 108.9bn (USD 117.9bn) in Mar. In yoy terms, exports declined by 7.9% while imports were down 4.5% to EUR 91.6bn.
  • Retail sales in the euro area declined by 11.2% mom and 9.2% yoy in Mar, with volume of retail trade for non-food products down the most (- 23.1%) followed by automotive fuels (-20.8%).
  • The Bank of England warned that the UK is heading towards its sharpest recession ever, forecasting a 14% dip this year (based on the lockdown being phased out in Jun-Sep). Though the bank left interest rates unchanged at a record low 0.1%, two of the 9 committee members voted to increase the latest round of QE by GBP 100bn to GBP 300bn.

Asia Pacific:

  • China Caixin services PMI improved to 44.4 in Apr (Mar: 43), though below-50 for the third month running, with the employment sub-index fell below the 50-mark for the first time.
  • Exports from China increased by 8.2% yoy in Apr (Mar: -3.5%) while imports were down by 10.2% (Mar: 2.4%). This widened the trade surplus to USD 45.34bn in Apr (Mar: USD 19.93bn). Exports were supported by stronger demand from south-east Asia (+3.9% increase in purchases during Jan-Apr 2020) while trade with the EU and US continue to decline (-6.6% and -15.9% yoy in Apr).
  • Japan household spending plunged to a 5-year low in Mar: average spending was down by 6% yoy (Mar: -0.3%). Inflation-adjusted real wages fell in Mar as overtime pay declined 4.1% yoy, posting the fastest pace on record. While gaming consoles purchases more than doubled, spending on package tours and hotel accommodation tumbled by 83% and 55% respectively.
  • India’s manufacturing PMI hit a record low of 27.4 in Apr (Mar: 51.8), with record contractions in output, new orders and employment. Services PMI plunged to 5.4 in Apr (Mar: 49.3), with the sub-index measuring foreign demand for services down to an unprecedented 0. The composite PMI fell to an all-time low of 7.2 last month (Mar: 50.6).
  • India’s unemployment rate climbed to a staggering 27.1% in the week ended 3 May, according to the private research agency Centre for Monitoring the Indian Economy with some 121.5mn Indians having lost their jobs in Apr.
  • Singapore’s PMI shrank for the 3rd consecutive month, declining to an 11-year low of 44.7 in Apr (Mar: 45.4). All key sub-indices posted sharper contractions: the imports index, with a reading of 45.5 was the lowest since Oct 2012, and the electronics sector sub-index was down to 42.8 – the lowest since Dec 2008.
  • Retail sales in Singapore sank by 13.3% yoy in Mar (Feb: -8.4% yoy), the worst drop since Sep 1998. While super markets and hypermarkets gained 35.9% yoy, sales losses were reported across wearing apparel and footwear (-41.6%), food and alcohol (-41%), department stores (-38.6%), watches and jewellery (-34.4%) and petrol stations (-10.5%) among others.

Bottom line: Macroeconomic data remains weak, and given that Covid19 infections are still widespread, a gradual ease in restrictions is unlikely to return business activity to pre-Covid19 levels: expect a longer path to economic recovery, more an extended U-shaped, than a previously touted V-shaped recovery. Last week saw the release of disappointing PMIs across the globe: global manufacturing PMI slumped to the lowest level since financial crisis of 2008-09, with output and new orders down to near-record lows while employment fell at the quickest pace in almost 11 years. Though business sentiment remains low, as nations slowly ease restrictions, look for signs of how fast global supply chains recover (will order volumes increase – both domestic and international?).
Regional Developments

  • Bahrain sold a USD 2bn dual-tranche bond issuance, after receiving more than USD 11bn in combined orders. The investor presentation revealed that the nation expects a budget deficit of 4% of GDP this year, down from 4.7% last year – highly unlikely given the triple whammy from Covid19 effects alongside lower oil prices and financial market.
  • Bahrain’s shops and industrial enterprises opened last Thurs while restaurants remain closed still for dine-in customers.
  • MPs in Bahrain approved 6 proposals: includes lower fuel prices, support for travel agencies and tour operators, as well as expedited receipt of financial support to unemployed Bahrainis among others.
  • Egypt’s PMI plunged to a historic low of 29.7 in Apr (Mar: 44.2), with new orders down to 14.1 (Mar: 40.2) while purchasing slipped to 21 (Mar: 39.5). As business expectations remain strong, the employment sub-index inched down to just 46.1 from 47 the month before.
  • GDP growth is forecast at 3.5% in Egypt in the fiscal year 2020-21 which starts in Jul, according to the planning minister. However, should Covid19 crisis continue to Dec, growth is likely to slow to 2%. Growth in this fiscal year is likely to touch only 4.2% vs expectations of 5.6%. Separately, the nation’s requests to the IMF for a Rapid Financing Instrument and its Stand-By Arrangement will be considered on Mon (May 11th).
  • Budget deficit in Egypt will likely rise to 7.8% of GDP this fiscal year 2020-21, if Covid19 crisis continues till Dec this year, according to the finance minister. This compares to the forecast of 6.3% deficit made previously in Mar. Separately, private sector investments are likely to decline by 30% in the fiscal year 2020-21 should the Covid19 outbreak last till Dec this year, according to the planning minister.
  • Egypt’s foreign reserves declined by 7.66% mom to USD 37.037bn at end-Apr (Mar: -12% mom). The central bank disclosed it had drawn on reserves to cover imports of strategic goods, as well as repay a USD 1bn Eurobond and meet USD 600mn in other external obligations.
  • Local currency deposits in Egypt continued to rise for the 13th consecutive month: it inched up by 1.67% mom to EGP 3.089trn in Mar. Foreign currency deposits rose for the first time in 10 months, up 1.8% mom to EGP 639.131bn.
  • Trade deficit in Egypt narrowed by 51.4% yoy to USD 1.95bn in Feb; exports increased by 3.3% to USD 2.69bn while imports declined by 29.9% thanks to drops in imports of iron ore and steel as well as wheat, petroleum products and plastics.
  • Egypt’s Suez Canal revenues increased by 2.03% yoy to USD 1.907bn in Jan-Apr 2020. Separately, the Suez Canal Authority announced a reduction in fees (between 60-75%) for all container ships crossing the Canal effective May 1st till Jun 30th.
  • The Labour Emergency Fund in Egypt disbursed EGP 7.7mn to about 7500 tourism sector employees in 70 firms, according to the ministry of manpower. Earlier, EGP 75mn was provided to 56,280 persons from 275 firms. Under consideration now are a further 3525 firms.
  • Egypt signed agreements to settle overdue export subsidies with 41 firms: each company will receive 30% of the subsidies owed by the Export Development Fund or a minimum EGP 5mn before end-Jun. The government has paid EGP 2.133bn in overdue subsidies in Jan-Apr.
  • Egypt’s Exchange raised USD 2.2bn for 23 IPOs over 2010-19, accounting for 60% of total IPO proceeds among all North African exchanges, as per a PwC report.
  • Jordan expects economic growth to contract by around 3% this year, given the impact of Covid19. Government revenue declined by JOD 610mn (USD 860mn) in just Apr this year, according to the finance minister. Most businesses have been allowed to open as of Wed last week after a nearly 2-month lockdown.
  • Jordan imported approximately 324k barrels of oil via 1,114 tankers from Iraq in Apr, at an average of 11k barrels per day (bpd), disclosed Jordan’s energy minister. During the Sep 2019-Apr 2020 period, Jordan received 2.24mn barrels at an average 10k bpd.
  • Kuwait has imposed a “total curfew” from 4pm Sun (May 10) till May 30th: public sector will work remotely while private sector activity will remain suspended (except vital sectors).
  • All educational institutions in Kuwait will reopen on 4th Aug as per the cabinet’s decision. There is no intention to cancel the academic year, though an evaluation of conditions will be submitted to the government in mid-Jul.
  • Kuwait’s central bank issued KWD 240mn worth of bonds and related tawarruq, with a 1.25% return rate. The issue was oversubscribed by 11.36 times.
  • Foreign exchange reserves in Kuwait declined by 1.89% mom to KWD 12.19bn (USD 39.488bn) in Mar.
  • The partial curfews in Kuwait resulted in a 60% decline in gasoline usage, allowing for cancellation/reduction of gasoline imports from abroad, amounting to ~1.4mn litres per day.
  • Lebanon’s finance minister disclosed that the move to a flexible exchange rate will be in a “coming phase”, in a “gradual and studied way”, and that the currency peg will continue to operate for now.
  • The BLOM Lebanon PMI fell to 30.9 in Apr from Mar’s 35, given substantial declines in output and exports. Businesses also remained “severely pessimistic” on the 12-month outlook.
  • The Association of Banks in Lebanon is working on a financial rescue plan that would preserve some of their capital, after having expressed criticism of the government plan. This is expected to be released by this week.
  • Though Lebanon has eased some restrictions last week, it formally extended its Covid19 lockdown for a further 2 weeks on Tues.
  • Oman’s production and imports of natural gas inched up by 1.7% yoy to 11.04 billion cubic meters at end-Mar 2020.
  • The ownership of Manah Power – the first privately procured Independent Power Project in Oman and the wider Middle East region at the time – was transferred to the government on May 1st this year.
  • Qatar Airways expects to reopen routes this month, as air travel restrictions are eased across the globe: it hopes to fly to 52 destinations by end-May and up to 80 in Jun (compared to 165 total destinations previously). Separately Reuters reported that the airline is in talks with banks to secure billions in loans.
  • Saudi Arabia’s non-oil PMI edged up to 44.4 in Apr, though below the 50-mark, from Mar’s 42.4, thanks to slower reductions in new work. Output hit a record low (37.5 in Apr, from Mar’s 37.9); new export orders and employment dropped at the fastest pace since the survey began in Aug 2009.
  • SAMA reiterated its commitment to the dollar peg in a recent statement, also disclosing that its forex reserves are sufficient to cover 43% of its imports and 88% of broad money (M3).
  • The Saudi Ministry of Labour and Social Development will allow private businesses (affected by Covid19) to reduce working hours and permit wages to be reduced by not more than 40% of total salary for the next 6 months. Firms cannot reduce wages without reducing working hours while employees do not have the right to object the reduction so long as it does not exceed 40%.
  • New measures to support the industrial and mining sector in Saudi Arabia includes facilitating the settlement of private sector dues, developing new products to support working capital, reducing ministry fees and automatic renewal of various licenses among others.
  • Saudi Arabia’s trade with GCC members declined by 4% yoy to SAR 7.8bn (USD 2.08bn) in Feb this year, with non-oil exports down by 1.7% to USD 970mn. UAE accounted for 66% of the total KSA-GCC trade exchange (SAR 5.14bn).
  • Saudi Aramco raised its prices for June supply of crude after 2 months of low levels: the increases ranged from USD 1 per barrel for crude for American markets to upwards of USD 6 a barrel for crude bound for European and Mediterranean trading zones.
  • Ahead of the OPEC+ deal coming into effect, oil production in the UAE, Saudi Arabia and Kuwait surged to new highs in Apr. Combined, their production touched 30.79mn barrels per day (bpd) in Apr – this offset losses by other producers like Iraq, Angola and Iran.

UAE Focus

  • UAE’s non-oil PMI fell further to 44.1 in Apr (Mar: 45.2), with both output and new export orders fell to record lows of 39.9 (Mar: 47.2) and 35.2 (44.3) respectively. Business expectations for the year ahead weakened to a 32-month low.
  • The UAE central bank estimates that GDP grew by 1.7% in 2019, with the non-oil sector up by 1% alongside a 3.4% rise in the oil sector.
  • Non-oil foreign trade in Abu Dhabi grew by 3.6% yoy to AED 37.1bn in Jan-Feb this year; imports grew by 20.8% to AED 9.26bn in Feb while re-exports dropped by 11.2% to AED 4.01bn.
  • Dubai’s external trade touched AED 323bn in Q1: exports grew by 2% yoy to AED 43bn while imports and re-exports clocked in at AED 189bn and AED 92bn respectively.
  • With no unemployment data publicly available in the UAE, one of the proxies to use could be the number of expats seeking repatriation. In the first flights back to India, about 25% of the close to 200k persons disclosed job losses as the reason for retuning. Many companies in Covid19 affected sectors have been announcing job cuts including real estate developers, airlines, and more recently Careem laying off of 31% of its workforce and Air Arabia 57 persons (out of a total ~1k persons).
  • Sharjah Entrepreneurship Centre pledged USD 1mn solidarity funds to help startups; the fund will be distributed through equity-free grants and commissioned projects.
  • Dubai South Free zone announced a set of relief measures: this includes a 20% reduction on license fees renewals, waiver of 1st year license fees for new clients in the aviation, logistics and e-commerce sectors, lease deferrals and flexibility in settling rental fees among others.
  • The postponement of Dubai Expo – to run from Oct 1, 2021 for 6 months – has been approved by the 2/3-rds of the BIE member states.
  • In a letter to the authorities, UAE’s major restauranteurs (which account for over 50% of persons working in the F&B sector) disclosed losses amounting close to AED 1bn a month in staff salaries, housing and operational costs (excluding rents which could go as high as AED 1bn a year) while predicting recovery no earlier than Q1 2021. The establishments have requested relief measures including on loan repayments, automatic license renewals and payment of municipality tax among others.
  • The Federal Authority for Government Human Resources disclosed that remote work systems could be in place post-pandemic as well.


Weekly Insights: Charts of the week
Fig 1. Heatmap of manufacturing/ non-oil sector PMIs

PMIs have declined as a result of dips across output, new export orders and employment. With trade flows slowing across the globe, supply chains have taken a hit and delivery delays have become the new normal along with delays in payment of invoices. Average payment terms increased to 37.4 days in Q1 2020, from 2019’s average 36.7 days, as per Tradeshift data. With the lack of orders during the lockdown, this situation will only worsen in the coming months.
Fig 2. Services sector PMI in Europe drops further to record lows

Other than in Sweden (which is following a herd immunity policy with no lockdowns), most European nations had seen a near shutdown of its major services industries in Apr. Restrictions have been eased in the past weeks, with France set to ease rules from May 11th. The Google Mobility reports indicate that trips to workplaces continue to remain 40-60% below pre-crisis levels while trips for retail and recreation have fallen by more than 80% in many. As long as no vaccine is announced, we believe that a return to pre-Covid19 levels will take time as health concerns are likely to outweigh the policy responses to kickstart the economy (like availability of interest rate loans and/or tax rebates or mortgage refinancing options).
Fig 3. The number of unemployed continues to surge in the US

More than 33 million persons have filed for unemployment since mid-Mar and jobless rate has more than tripled to 14.7% in Apr. Payrolls data show leisure and hospitality hit hard with around 7.7mn job losses while retailers cut 2.1mn jobs. With no coordinated national policy to fight the Covid19 outbreak, politics continues to play havoc as stimulus packages are left undecided upon (given the fiscal price) and local/ county/state are clashing on decision to ease restrictions and reopen for business. Macroeconomic data meanwhile continue to remain weak.
Fig 4. Businesses re-open in the GCC, but will activity recovery amidst job losses?
The contribution of the non-oil sector to GDP remains relatively smaller to the oil sector in the GCC. Among the non-oil sector, the share of manufacturing, construction and real estate, wholesale and retail trade, along with transport and communication together account for around 40% of total GDP – all sectors directly impacted by Covid19. Even as businesses open (albeit at lower capacity with low footfalls), anecdotal evidence suggests that shops and restaurants within malls are losing money by remaining open. Furthermore, job losses are adding up (repatriation flight numbers as a proxy) as are reports of closures of small businesses (e.g. restaurants, tour operators). Given that most visas are still linked to jobs in the region (in spite of select few in the UAE and Saudi Arabia), a job loss essentially implies that a family moves back to their homeland, resulting in loss of income for real estate (housing), retail (food, clothing etc.) as well as education (schools, colleges) among other sectors – essentially a multiplier effect on the overall economy.

Media Review
The Market Keeps Distancing itself from the Economy
https://www.bloomberg.com/opinion/articles/2020-05-07/weekly-jobless-claims-highlight-market-economy-decoupling
The world’s food system has so far weathered the challenge of covid-19
https://www.economist.com/briefing/2020/05/09/the-worlds-food-system-has-so-far-weathered-the-challenge-of-covid-19
US and China: edging towards a new type of cold war?
https://www.ft.com/content/fe59abf8-cbb8-4931-b224-56030586fb9a
Have real-time data helped us address the crisis? | Chicago Booth Review
https://review.chicagobooth.edu/economics/2020/video/have-real-time-data-helped-us-address-crisis
Gulf debt market shows signs of recovery as issuers line up
https://www.reuters.com/article/mideast-debt/mideast-debt-gulf-debt-market-shows-signs-of-recovery-as-issuers-line-up-idUSL4N2CN2L6
GCC faces expat exodus
https://www.reuters.com/article/us-health-coronavirus-gulf-jobs/whats-the-point-of-staying-gulf-faces-expatriate-exodus-idUSKBN22J1WL
https://www.nytimes.com/2020/05/09/world/middleeast/virus-forces-persian-gulf-states-to-reckon-with-migrant-labor.html
 
 
 
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Weekly Economic Commentary – May 3, 2020

Weekly Insightsis a collection of macroeconomic charts of recent regional macro data.  
Markets
Stock markets declined across the globe on Fri after having a strong positive week earlier, thanks weak economic data in addition to Trump’s latest attack on China about its role in the origin and spread of Covid19 as well as weaker-than-expected earnings (all leading to negative sentiment). In the region, a recovery in oil prices helped markets to close in the green. Among currencies, the RMB weakened to its lowest level since early Apr against the dollar (on Trump threats) while the euro stabilized against the dollar and the riskier Aussie dollar reached a 7-week high on Thurs. Oil markets remained volatile through the week, but stabilized on Fri. Gold prices were down 1.6% this week, posting their biggest weekly loss since mid-Mar.
Global Developments
US/Americas:

  • US GDP declined by 4.8% in Q1 – the fastest pace since the 8.4% dip recorded at end Great of 2008 – from the 2.1% pickup the quarter before. The drop was driven by a sharp 7.6% drop in personal consumption (the biggest fall since 1980). Core PCE increased by 1.8% qoq in Q2 (Q1: 1.3%).
  • The Fed left interest rates unchanged at its latest meeting, while warning of lasting “medium-term” economic damage and committed to using “full range of tools” to help the economy. Separately, it expanded its “Main Street Lending Facility” to companies with up to 15k employees and USD 5bn in revenue versus the initial program (with 10k workers and USD 2.5bn in revenue) announced on Apr 9.
  • Personal income fell by 2% in Mar (most since Jan 2013) while savings rate rose to its highest level in 39 years (13.1% in Mar from Feb’s 8%).
  • The personal consumption expenditures (PCE) price index excluding food and energy dipped by 0.1% in Mar – the weakest since Mar 2017 and down from the 0.2% reading in Feb. Core PCE increased to 1.7% from Feb’s 1.8%.
  • The goods trade deficit widened further to USD 64.22bn in Mar from the previous month’s USD 59.89bn. Goods imports dropped by 2.4% to USD 191.9bn (Feb: -2.5%) while exports sank at a faster 6.7% to USD 127.6bn.
  • The S&P Case Shiller home price indices increased by 3.5% yoy in Feb (Jan: 3.1%), ahead of the pandemic.
  • The Richmond Fed manufacturing index crashed to -53 in Apr from Mar’s +2 reading, with new orders at record lows (-42 vs -8 in the month before).
  • Pending home sales plunged by 20.8% mom in Mar (Feb: 2.3%); the average rate on the 30-year fixed mortgage fell to a new low of 3.43% last week.
  • US ISM manufacturing PMI fell to 41.5 in Apr (Mar: 49.1), with new orders dropping 15.1 points to 27.1 (biggest monthly drop since 1951) and employment index decreasing 16.3 points to 27.5 (lowest level since 1949 and the largest mom drop since the series began in 1948).
  • Markit manufacturing PMI dropped to 36.1 in Apr, down from the flash reading of 36.9 and Mar’s 48.5.
  • Initial jobless claims totaled 3.839mn in the week ended Apr 25, down from 4.442mn in the previous week). Claims since 21st Mar add up to 30.3mn, equivalent to almost 20% of the workforce; at least 10mn people who have filed claims haven’t yet received the benefits.

Europe:

  • GDP in the eurozone shrank by 3.8% qoq in Q1 – the largest drop since the series started in 1995. Quarterly contractions were also reported in France (-5.8% qoq from Q4’s -0.1%), Italy (-4.7% qoq vs -0.3% in Q4) and Spain (-5.2% qoq), with the former two entering recession.
  • The ECB held interest rates steady, while expanding its programme to lend to banks at rates as low as -1%. The apex bank expects the economy to shrink between 5-12% this year, depending on the success of containment measures, with forecasts of returning to pre-Covid19 levels as late as 2022.
  • Inflation in the eurozone fell to 0.4% in Apr – the lowest level of price growth in almost 4 years – following Mar’s 0.7%, dragged down by energy prices.
  • Unemployment rate in the EU edged up to 6.6% in Mar (Feb: 6.5%) while in the euro area it inched up to 7.4% from 7.3% the month before. About 14mn persons were unemployed in the EU27 as of Mar, including 12.16mn in the euro area.
  • The Economic Sentiment Indicator in the Euro area slipped to 67 from 94.2 in Mar; the indicator fell the most in Netherlands (down by 32.6 points from Mar) while confidence among services sector companies fell 32.7 points to its lowest-ever level.
  • German inflation eased to 0.8% yoy in Apr (Mar: 1.3%) – the lowest reading since Nov 2016 – thanks to the fall in energy prices (-5.8%) while food prices increased (+4.8%).
  • German unemployment rate increased to a 3-year high of 5.8% in Apr (Mar: 5.1%) as jobless numbers rose by 308k to 2.64m in Apr. Separately, about 10mn persons have registered to have part of their wages paid by the state (after being sent home or working reduced hours).
  • Retail sales in Germany declined by 5.6% mom in Mar after clocking in a 0.8% gain in Feb – this was the fastest drop in more than a decade.
  • Fitch downgraded Italy’s credit rating to ‘BBB-‘ from ‘BBB’, just one level above its junk rating, on the sovereign’s fiscal position amid the adverse impact from the pandemic.
  • UK’s Markit manufacturing PMI plunged to a near 30-year low of 32.6 in Apr, as output, new orders and employment dip at record rates.

Asia Pacific:

  • China’s NBS manufacturing PMI eased to 50.8 in Apr from 52 the month before, thanks to a slowdown in output and new orders. The Caixin manufacturing PMI slipped to 49.4 in Apr (Mar: 50.1): total new orders fell for the 3rd consecutive month on sluggish demand, while output sub-index stayed above 50 as work resumed albeit slowly. The plunge in export orders was consistent in both PMIs: NBS export orders slumped to 33.5 from 46.4 the month before while in the latter it dropped to 33.7.
  • China’s non-manufacturing PMI inched up to 53.2 in Apr from 52.3 in Mar: as restrictions were eased, new businesses grew for the first time in 3 months (52.1 from Mar’s 49.2) and employment fell at a softer pace (48.6 vs 47.7).
  • The Bank of Japan left policy rates unchanged, but expanded stimulus: the governor stated that the Bank would buy JGBs “as much as necessary” “without setting an upper limit”, while stressing that it was not a permanent measure. Furthermore, the BoJ will also nearly triple the amount of corporate bonds and commercial paper that it can purchase and it eased collateral rules as well to support SMEs.
  • Japan approved a JPY 25.69trn (USD 241bn) supplementary budget, including cash payouts of JPY 100k for all individuals (also for foreign nationals registered as residents) as well as JPY 3.8trn for SMEs to secure cash to stay afloat and JPY 2.3trn for those companies and solo proprietors experiencing severe financial losses.
  • The headline Jibun Bank Japan Manufacturing PMI declined to an 11-year low of 41.9 in Apr (Mar: 44.8), with clear evidence of supply chain disruptions. It was recorded that staffing numbers fell at the fastest pace since mid-2009 amid reports of restructuring.
  • Tokyo inflation gained 0.2% yoy in Apr, down from 0.4% in Mar. Core CPI sank 0.1%. Annual prices increased for food, housing, furniture, clothing and costs were down for fuel, communications and education.
  • Japan unemployment rate inched up to a 1-year high of 2.5% in Mar from 2.4% previously. The number of unemployed people increased by 60k persons or 3.6% mom to 1.72mn in Mar. Separately, job availability slipped to a more than three-year low.
  • Retail trade in Japan declined by 4.6% yoy in Mar (Feb: 1.6%), as demand for general merchandise and clothing fell.
  • Industrial production in Japan declined by 3.7% mom and 5.2% yoy in Mar – the sharpest fall in production since Oct 2019 – following a 0.3% mom and 5.7% yoy dip the month before.
  • The Reserve Bank of India announced a special liquidity window for mutual funds worth INR 500bn. This followed the abrupt winding up of 6 debt schemes of Franklin Templeton Mutual Fund; the scheme will be open till May 11 or up to utilisation of the allocated amount, whichever is earlier.
  • Unemployment rate in Singapore increased to 2.4% in Q1 from 2.3% the previous quarter. In comparison, during SARS, overall unemployment rate was 4.8% in Sep 2003 and during the global financial crisis, it was 3.3% in Sep 2009.
  • India extended its nationwide lockdown by another 2 weeks, highlighting red, green and orange zones, with the former considered as hotspots. In Japan, the PM is expected to decide on Monday (May 4th) regarding a 1-month extension of the nationwide state of emergency declared over the Covid19 outbreak.

Bottom line: Major central banks met last week, and more stimulus was doled out, as expected. As several nations in the EU get ready to reopen their economies in a phased manner, it is worthwhile to keep in mind China’s experience so far: though businesses have resumed operations and production is back on track, external and even domestic demand hasn’t picked up in tandem meaning that inventories are piling up. Meanwhile, the longer the duration of the outbreak elsewhere, the higher the number of job losses and business bankruptcies, and slower the economic growth (US and EU have already shown recessionary patterns). Separately, the current credit extensions will prevent a debt crisis now, but be prepared for this to re-surface in a few years’ time.
Regional Developments

  • Bahrain’s central bank issued bonds worth BHD 300mn (USD 793.5mn) with direct subscription via the primary market on behalf of the government. The bonds can be traded once listed on the Bourse (expected May 17th).
  • MPs in Bahrain approved eight Covid19 related motions: this ranged from setting lower rates for internet usage (as stay at home policies took effect and schools went online) to letting Tamkeen extend by two weeks its deadline for SMEs to register for financial support (while also expanding the beneficiaries’ list) and also to exempting businesses from Commercial Registration fees and postponing fines for 3 months.
  • As people stayed at home given the Covid19 outbreak, traffic on roads, markets, malls and residential areas in Bahrain dropped by about 90% in the morning and 85% in the evening.
  • Money supply (M2) in Egypt accelerated by 14.82% yoy in Mar to EGP 4.28trn (USD 272.6bn) at end-Mar.
  • Foreign assets of Egypt’s banks dived by 45% mom to EGP 196.66bn at end-Mar while foreign liabilities climbed to EGP 251.36bn from EGP 235.77bn the month before.
  • Egypt requested a new financial package from the IMF for 1 year: negotiations are underway, with a COVID-19 Rapid Financing Instrument likely to be received within the next few weeks. The PM promised that the financial package would involve only structural reforms and that it would not raise prices of goods and services. Separately, the World Bank approved Egypt’s request to increase funding to USD 400mn: this loan will be used to support healthcare infrastructure and provide health insurance for the needy.
  • In the light of job losses during the Covid-19 outbreak, Egypt will reassess its aim to reduce unemployment rate by 1-1.5% to 6.3% by 2020. The latest data show unemployment rate at 8% in Q4 2019.
  • Jordan’s finance minister disclosed that JOD 500mn had been pumped into the economy as stimulus measures this year; the ministry also disclosed that its financial dues to the private sector amounting to JOD 150mn would be disbursed in Apr-May this year.
  • The World Bank approved a USD 20mn project to support Jordan’s response to the Covid19 outbreak. The project will provide support to enhance case detection, testing, recording and reporting, as well as contact tracing, risk assessment and clinical care management.
  • Jordan extended the suspension of work for ministries and public departments (excluding vital public sectors) until the end of Ramadan.
  • Kuwait’s central bank offered bonds and related tawarruq at a total value of KWD 200mn, with a 1.25% return rate. The bonds have a 3-month maturity period.
  • After all commercial flights were halted on Mar 13th, Kuwait’s Jazeera Airlines laid off one third of its staff, revealed the company’s chairman. He clarified that the company is not seeking state aid as it can dip into its reserves to pass through the Covid19 phase.
  • Lebanon signed a request for assistance from the IMF on Friday, with the amount depending on negotiations: the economic rescue plan approved by the Diab government rests on covering financial sector losses (to the tune of USD 70bn) partly by a bank shareholder bail-in and cash from large depositors. The banking sector has already stated that it was not consulted on the plan and could in “no way” endorse it.
  • Lebanese banks set an exchange rate of LBP 3000 per dollar for withdrawals from USD accounts last week, reported Reuters. This compares to the official pegged rate of LBP 1507.5.
  • Oman’s finance ministry called for “urgently replacing” expatriates in state companies with citizens, as part of the “Omanisation” policy. About 53,332 expats work in Oman’s government sector.
  • Crude oil production in Oman stood at 90.84mn barrels at end-Mar: daily average crude oil production increased to 998.3 barrels at end-Mar vs 970.5 barrels in Mar 2019; exports of crude oil declined by 3.9% yoy to 69.77mn barrels in Mar; average price edged up by 5.6% to USD 64.4 per barrel in Mar. China, India and Japan were the top oil export destinations, importing 61.26mn, 2.94mn and 608.2k barrels of crude respectively.
  • Electricity generation in Oman declined by 4.9% yoy in Jan-Feb this year to 3,966MW while water production was up by 5.5% to 54.97mn cubic metres.
  • Saudi Arabia’s reserves plummeted in Mar: net foreign assets declined by more than USD 27bn or 5% mom to USD 464bn in Mar, the lowest since 2011. According to SAMA, the central bank, the government’s current account shrank by 45% mom to under SAR 40bn in Mar while SAMA’s bills and repurchase agreements fell by more than one-third to SAR 62bn (reflecting dollar liquidity injected into the banking system).
  • Saudi Arabia posted a budget deficit of SAR 34.1bn in Q1, covered by both external and domestic borrowing. The government spent SAR 226.2bn in Q1 (+4%) while revenues hit SAR 192.1bn (-21.7%). Oil revenue declined by 24% yoy to SAR 128.8 while non-oil revenues were down by 17%. On the spending side, public sector wages were up by 2.2%, and “use of goods and services” up by 74.5% while social benefits dipped by 24.7%.
  • The Social Development Bank in Saudi Arabia announced a SAR 9bn (USD 2.4bn) package to support small businesses and entrepreneurs with financing. The bank also offers a 6-month grace period to repay instalments.
  • Saudi Arabia’s outlook was cut to negative from stable by Moody’s, citing fiscal risks from the steep decline in oil prices. The company kept the sovereign at A1, its fifth-highest grade.
  • The General Organization for Social Insurance in Saudi Arabia disbursed nearly SAR 2.2bn for over 40k citizens working in the private sector and negatively impacted by Covid19. Separately, the Human Resources Development Fund stated that private sector enterprises registered more than 51k citizens in the “employment subsidy” initiative (which supports monthly salaries of citizens in the private sector by up to 50% over the course of 2 years).
  • Tadawul approved the listing of SAR 5.55bn (USD 1.48bn) worth of debt instruments.
  • Expat remittances from Saudi Arabia increased by 8.7% yoy to SAR 12.2bn in Mar 2020. In Q1, remittances were up 6% to SAR 33.855bn.
  • Saudi Arabia’s tourism minister, in an interview with Reuters, stated that he anticipates a 35-45% decline in revenues this year.
  • Saudi Arabia improved its Open Budget Index ranking, jumping up 18 ranks and improving its score to 18 from 1 point in the last edition.
  • OPEC oil output jumped to a 13-month high of 30.25mn barrels per day (bpd) in Apr. The biggest increase in supply was from Saudi Arabia which pumped a record 11.3mn bpd.

UAE Focus

  • Abu Dhabi announced that the government plans to allocate 15% of its government procurement spending and contracts to SMEs.
  • Dubai hopes to welcome tourists by beginning of July, disclosed Dubai’s DTCM director-General in an interview with Bloomberg.
  • A joint statement by Emirates President and the CEO of Etihad Airways warns that passenger demand is unlikely to return to pre-crisis levels until 2023.
  • S&P lowered the outlook to negative from stable for Sharjah and Ras al Khaimah, citing financial risks from lower oil prices and the impact of Covid19.
  • Moody’s lowered DEWA’s rating to Baa2, two levels above junk, citing “risks of sustained large transfers to the government” and also highlighting a potential decline in expat population.
  • UAE’s Abu Dhabi Power Corp’s plan to build the 2-gigawatt solar project, one of the world’s largest, received the world’s lowest tariff. The tariff set at USD 1.35/kWh on a Levelized Electricity Cost basis is approximately 44% lower than the tariff set on the ‘Noor Abu Dhabi’ project 3 years ago (a world record tariff-setter at the time).


Weekly Insights: Charts of the week
Fig 1. Budget Transparency in the Middle East


 
Fig 2. Fiscal deficit recorded in Q1 2020 in Saudi Arabia


 
 
Fig 3. UAE banks’ lending activity


 
 
Media Review
How to avoid a W-shaped recession?
https://www.project-syndicate.org/commentary/covid-19-response-premature-withdrawal-w-shaped-recession-by-jeffrey-frankel-2020-05
Which emerging markets are in most financial peril?
https://www.economist.com/briefing/2020/05/02/which-emerging-markets-are-in-most-financial-peril
Al Arabiya’s interview with Saudi Arabia’s finance minister: full transcript
https://english.alarabiya.net/en/coronavirus/2020/05/02/Full-transcript-of-Al-Arabiya-s-interview-with-Saudi-Arabia-s-Finance-Minister.html
Citigroup Sees Asset Sales Boosting $47 billion Gulf Debt Binge
https://www.bloomberg.com/news/articles/2020-04-26/citigroup-sees-asset-sales-boosting-47-billion-gulf-debt-binge
Trumplomacy: What’s behind new US strategy on China?
https://www.bbc.co.uk/news/world-us-canada-52506073
 
 
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Weekly Economic Commentary – Apr 26, 2020

Weekly Insights” this week is a collection of charts based on recent macro and market data.

Markets
Stock markets declined last week: the MSCI All country world index posted its worst weekly performance since Mar; the pan-European STOXX 600 index ended its 2-week winning streak and reported weekly loss; the S&P ended the week down 12.2% for the year. While there has been a disconnect (for some time) between macro data releases and stock market movements, this week’s news dashed hopes of an early vaccine or treatment of COVID-19 (that Gilead’s antiviral drug remdesivir had failed in its first clinical trial) affected markets negatively. Regional markets remained in the red for the week though recovering towards end of the week thanks to some better-than-expected Q1 earnings. The dollar rallied and closed about 0.5% higher vis-à-vis the euro – the biggest weekly rise in 3 weeks. Oil prices had a troublesome week – with WTI going below zero due to storage bottlenecks and Brent remaining volatile – while the gold price touched a fresh 7.5-year highs.
Global Developments
US/Americas:

  • A new USD 484bn stimulus was passed by the US Congress last week, which includes additional funding for small businesses Paycheck Protection Program, as well as funding for hospitals (USD 75bn) and expanding testing (USD 25bn). This move brings the total federal spending to combat the outbreak up to USD 3trn. Separately, the USD 349bn allocated to the Paycheck Protection Program last month ran out after just 13 days.
  • Chicago Fed National Activity Index fell to -4.19 in Mar – the lowest level since the financial crisis – from a downwardly revised 0.06 the month before.
  • US Markit manufacturing and services PMI declined in Apr to a 11-year low of 36.9 (Mar: 48.5) and a new series-low of 27 (39.8) respectively. Composite PMI declined to 27.4 Apr (Mar: 40.9), with output contracting at the fastest pace in survey history.
  • Existing home sales declined by 8.5% mom – the largest decline since Nov 2015 – to 5.27mn units in Mar. The median existing house price increased 8.0% yoy to USD 280,600 in Mar. New home sales dived by 15.4% mom in Mar to 627k, after falling by 4.6% in Feb.
  • Housing price index increased by 0.7% mom in Feb (Jan: 0.5%); these transactions still do not reflect the impact from the Covid19 outbreak.
  • US durable goods tumbled by 14.4% mom in Mar (Feb: 1.1%), largely due to a 41% collapse in demand for transportation equipment (demand for civilian aircraft slipped 295.7%). Non-defense capital goods (excluding aircraft) edged up by 0.1% after the 0.8% in Feb.
  • Initial jobless claims touched 4.427mn in the week ended Apr 11 (from 5.237mn the week before). The 4-week moving average increased to 5.787mn from 5.507mn the week before; the claims since mid-Mar reached 26.4mn, more than 15% of the US workforce.

Europe:

  • Europe’s leaders agreed to build a trillion-euro emergency fund to help recover from the Covid19 outbreak, though details about the stimulus will be disclosed only over the summer. Separately, Germany’s cabinet agreed additional funding to the tune of EUR 10bn.
  • German ZEW economic sentiment improved to 28.2 in Apr (Mar: -49.5) while the current situation indicator worsened dramatically, slipping to -91.5 from -43.1 in Mar. The ZEW reading for EU’s economic sentiment improved as well, rising to 25.2 from Mar’s -49.5.
  • German Markit manufacturing PMI fell to 34.4 in Apr (Mar: 45.4), the lowest reading since Mar 2009, as new orders and output dropped. Services PMI slipped to a record low of 15.9 from the previous month’s 31.7, causing the composite PMI to also plummet to 17.1 (the lowest reading on record versus a low of 36.3 during the financial crisis) from Mar’s 35.
  • EU Markit manufacturing PMI slipped to 33.6 in Apr from 44.5 in Mar, with the output index dipping to 18.4 (Mar: 38.5). As services PMI slowed to a record low of 11.7 (26.4), given the enforced shutdowns, the composite index also slumped to a record-low of 13.5 (Mar: 29.7). The composite flash PMI output indices hit all-time lows of 17.1 and 11.2 respectively in Germany and France (down from 35.0 and 28.9 in Mar), while the rest of the region saw the composite PMI slide from 25.0 to 11.5.
  • German Ifo business climate fell to 74.3 in Apr (Mar: 85.9), the lowest level on record and the steepest monthly decline. The current assessment dropped to 79.5 from the previous month’s 92.9.
  • German producer price index declined for the second consecutive month in Mar, down by 0.8% mom (Feb: -0.4%).
  • Record declines across UK’s Markit PMIs: manufacturing declined to 32.9 in Apr (Mar: 47.8) while services PMI plummeted to 12.3 (34.5). Around 81% of UK service providers and 75% of manufacturing companies reported a fall in business activity during Apr.
  • UK ILO unemployment rate edged up to 4% for the 3 months to Feb from 3.9% in the month prior. Seven out of 10 UK firms have furloughed staff, according to a British Chamber of Commerce survey. Average earnings excluding bonus fell to 2.9% in the 3 months to Feb following the previous month’s 3%.
  • UK inflation eased to 1.5% in Mar (Feb: 1.7%), thanks to falls in the price of clothing and fuel. PPI declined by 2.9% mom in Mar (Feb: -0.2%) while retail price index slipped to 0.2% (0.5%).
  • Retail sales in the UK slipped by 5.1% mom in Mar (Feb: -0.3%), with food stores and non-store retailing the only sectors to show growth. Online sales as a proportion of all retailing grew to a record high of 22.3%.

Asia Pacific:

  • China’s PBoC cut the interest rate on its targeted medium-term lending facility (TMLF): the 1-year interest rate on the TMLF was lowered by 20bps to 2.95% from 3.15% previously. It disclosed an injection of CNY 56.1bn (USD 7.93bn) into the economy on Friday, when a batch of CNY 267.4bn of TMLF loans was due to expire. Earlier in the week, the benchmark lending rate was lowered (for the 2nd time this year) to 3.85% from 4.05%.
  • Japan trade data revealed that exports slumped by 11.7% yoy in Mar – the fastest rate since 2011 – and imports were down by 5%, sinking the trade balance by 99% to a surplus JPY 4.9bn (USD 45.47mn). Exports to China, Japan’s largest trading partner, fell 8.7% in the year to Mar, reflecting a slump in items such as car parts, organic compounds and chip-making machinery.
  • Japan’s leading economic index edged up to 91.7 in Feb versus Jan’s 90.7 and the initial estimate of 82.1. The coincident index that reflects the current economic activity fell to 95.5 in Feb from 95.7 in the previous month.
  • Japan all industry activity index fell by 0.6% in Feb, the first decline since Oct, and offsetting Jan’s 0.6% rise.
  • Inflation in Japan eased in Mar, with the core CPI (excluding food) growing at 0.4% (from Feb’s 0.6%). Gasoline prices inched up only by 0.4% in Mar after Feb’s 4.8% gain.
  • Korea Q1 GDP contracted by 1.4% qoq – the fastest pace since 2008 – from Q4’s 1.3%. Private consumption shrank 6.4%, posting the worst reading since a 13.8% contraction in Q1 1998. In yoy terms, the reading was 1.3% in Q1, slowing from Q4’s 2.3% growth.
  • Industrial production in Singapore increased by 21.7% mom in Mar, reversing Feb’s 22.1% plunge. Manufacturing output grew by 16.5% yoy in Mar, supported by a surge in pharma output (+126.6% yoy) and a low base in 2019. Excluding biomedical manufacturing (which grew by 91.4% yoy), factory output was unchanged.
  • Inflation in Singapore was flat in Mar (Feb: 0.3%) while core inflation fell deeper to -0.2% yoy (Feb: -0.1%). Inflation is likely to remain subdued going forward.

Bottom line: While the global death toll from Covid19 crossed 200k, some nations are seeing a “flattening” of the curve and are considering easing restrictions in phases: lessons can be absorbed from “successful” Asian nations. Latest PMI readings point to the sharp downturn in the services sector vis-à-vis manufacturing. There is no consensus on the shape of economic recovery, especially as it will depend on how quickly restrictions are eased and also given WHO’s warnings a potential second wave. Also worrisome is emerging markets debt: around USD 5.5trn is coming due this year, with a sizable percentage held by investors in the industrialized world. Meanwhile, this week’s calendar is heavy with central bank meetings as countries come to terms with the significant economic impact of the Covid19 outbreak: the focus now needs to be on the path to economic recovery, especially as the narrative is changing towards calls for greater nationalization and deglobalisation.
Regional Developments

  • Bahrain will reduce government agencies spending by 30% amid the Covid19 outbreak. The government also plans to reschedule some construction and consulting projects to keep spending in check.
  • The value of Bahrain-origin exports decreased by 1% yoy to BHD 579mn (USD 1.53bn) during Q1 2020. Imports were up by 8% to BHD 1.244bn during the same period, resulting in a widening of the trade deficit by 17% to BHD 438mn.
  • Bahrain secured a loan of about USD 1bn from a group of local and international banks to repay USD 1.25bn in bonds that matured on Mar 31, reported Reuters.
  • Egypt will cut spending on fuel subsidies by 47% yoy in the 2020-21 budget to EGP 28.193bn (USD 1.8bn). The draft budget also plans an increase in net debt issuance by 19.7% to EGP 974.482bn. Furthermore, the introduction of new steel and cement production licenses is expected to add EGP 620mn in revenue in the next fiscal.
  • Macroeconomic investments in Egypt are expected to decline by 11.9% yoy to EGP 740bn in the fiscal year 2020-21; of this, EGP 595bn has been allocated to public investments.
  • Egypt’s manufacturing index (excluding oil) fell by 0.4% mom to 117.96 in Jan.
  • Revenues from VAT in Egypt edged up by 0.22% yoy to EGP 191.25bn during Jul 2019-Jan 2020. Sales tax revenue picked up by 0.8% to EGP 85.17bn while overall tax revenues grew by 29.1% to EGP 473.42bn during the 7-month period.
  • Egypt approved new income tax facilities for 10 sectors affected by the Covid19 outbreak (including aviation, tourism, hospitality and export companies): payment of 2019 income taxes can be done in installments till 30 Jun without any charges for payment delays.
  • Tax and non-tax proceeds from the Suez Canal in Egypt weakened by 4.7% yoy to EGP 35.91bn in the period Jul 2019-Jan 2020.
  • Egypt’s banks reported a total net profit of EGP 83.18bn last year, with the five largest banks accounting for just over 50% of total profits.
  • Jordan eased lockdown measures in three southern governorates with no Covid19 confirmed cases, allowing for some commercial establishments to reopen alongside construction works. Plans are also underway to restart investment sectors in free zones after getting the required approvals.
  • Kuwait has extended partial curfew for 16 hours a day, given the ongoing Covid19 outbreak, and a national holiday has been declared until May 28th.
  • Kuwait’s foreign reserves grew by 8.57% yoy and 1.22% mom to KWD 12.42bn (USD 39.96bn) in Feb 2020. Additionally, the book value of gold reserve amounted to KWD 31.7mn.
  • The central bank of Kuwait offered bonds and related tawarruq at a total value of KWD 240mn, with a 1.25% rate of return and a 3-month maturity period.
  • Kuwait’s oil minister disclosed that the nation had already begun to reduce oil supply to the international market, prior to the agreement which comes into effect May 1st.
  • It is estimated that financial support needed by SMEs in Kuwait is about KWD 500mn. The National Fund for Small and Medium Enterprise Development will provide 80% of SMEs’ funding needs at no interest for up to three years, while banks will finance 20% at a maximum 2.5% interest rate, with the state supporting companies in paying the interest for 3 years.
  • Kuwait’s central bank has asked banks to postpone amounts due from Covid19 affected customers for six months without applying any penalties (extending the previous 3-month postponement directive).
  • Lebanon’s PM rebuked the central bank governor, questioning the slump of the Lebanese pound (slid 15% further last week) and accelerated losses at the central bank.
  • Earlier last week, the central bank set an exchange rate for wire transfers of LBP 3625 per dollar (58% weaker than the official peg of 1507.5) – a rate accessible only to importers of vital goods. The apex bank also stated that depositors with dollar accounts would be paid cash in pounds, also at a “market rate”, within each bank’s withdrawal limits.
  • Oman’s central bank has asked banks and financial institutions to freeze repayments of personal and housing loans for three months, effective from May.
  • The recent cuts in Oman – ministries’ development and operational budgets by 10% each and 5% reduction in allocation to government agencies –reduced the state budget by OMR 500mn (USD 1.3bn).
  • Saudi Arabia’s finance minister disclosed that the government is considering more measures to reduce spending amid the Covid19 outbreak.
  • The Saudi Arabian Monetary Authority directed banks to delay installment payments for 3 months for all citizens.
  • The Saudi King approved performing shortened Tarawih prayers without public attendance in the two holy mosques.
  • Saudi Arabia’s crude oil exports fell to 7.278mn barrels per day (bpd) in Feb from Jan’s 7.294mn bpd. Production however inched up to 9.784mn bpd in Feb from Jan’s 9.748mn bpd.
  • Inflation in Saudi Arabia inched up by 1.5% yoy in Mar (Feb: 1.2%) – the highest increase since Dec 2018. Food and beverages and transport costs grew by 3.9% and 3.7% respectively.
  • The head of PIF disclosed that the fund was looking into investment opportunities in aviation, oil and gas as well as entertainment once the COVID outbreak passes.
  • Saudi Arabia’s finance ministry disclosed raising SAR 5.55bn (USD 1.48bn) in sukuk.
  • The Saudi real estate price index inched up by 1.2% yoy in Q1, driven mainly by prices of residential properties (+2.1%), while the prices of commercial and agricultural real estate decreased by 0.5% and 0.2%.
  • Saudi Arabia’s tourism sector is estimated to witness a 35-45% dip in revenues, according to the tourism minister; also depends on how fast the nation will be able to reopen post-Covid.
  • Colliers projects that the MENA hotel sector will benefit from tourism initiatives once recovery begins in Q4 this year. Faster recovery is forecast for UAE and Saudi Arabia.
  • IATA warns that 1.2 aviation jobs are at risk across the region (up from estimates of 900k), with revenue losses at USD 24bn and USD 66bn loss in GDP, given Covid19 related disruptions. More than 378k employees in UAE’s aviation industry are at risk of unemployment or income losses while Saudi Arabia is looking at an estimated 287k jobs.

UAE Focus

  • The UAE partially lifted some lockdown measures across the emirates from Apr 24: this includes opening of shopping malls (no more than 30% of total capacity) while following social distancing guidelines; entertainment venues (cinemas) and tourist attractions will remain closed; offices have to limit employees on its premises to 30% of workforce; metro will be re-opened in phases, buses will run limited services and all such services reassessed within a week based on demand. Public gatherings are still not allowed though move permits are not required to travel outside from 6am to 10pm.
  • UAE banks’ reserve requirements grew by 7.7% yoy to AED132.6bn during Q1 2020, according to the central bank. Money supply (M2) in the UAE increased by 2% yoy to AED 1454.9bn (USD 396.2bn) in Mar.
  • The UAE central bank has extended the duration of the Targeted Economic Support Scheme (TESS) for affected retail and corporate customers till end-Dec 2020. It was also disclosed that UAE banks have tapped 60% of the TESS facility (AED 30bn of the AED 50bn allocation), and utilisation had doubled within a week.
  • UAE has extended the deadline for submitting VAT returns to May 28, 2020 for the tax period ending Mar 2020. This does not affect any other tax periods where the deadline for filing tax returns and settling of payable taxes does not fall in Apr 2020.
  • Inflation in the UAE decreased to 1.6% yoy in Mar, driven down by prices of recreation and culture (-9.89%) as well as housing and utilities (-4.08%). Meanwhile, food and beverage prices were up by 3.95% and tobacco prices by 6.43%.
  • The BIE Executive Committee recommends postponing Expo 2020 Dubai to 1 Oct 2021. Since changing of dates needs the support of 2/3-rds majority of member states, voting will be carried out remotely between 24 April to 29 May. The name Expo 2020 Dubai will be retained.
  • Emirates airlines are planning to keep its passenger flights grounded until Jul at the earliest (reservations currently reopen from Jul 1st). Etihad airlines however are planning to resume regular passenger flights from May 16th, though a spokesperson has clarified that “this situation may change”.
  • Dubai Airports unveiled measures to support its tenants, concessionaries and aviation partners during the impacted period Mar 1-May 31, including a waiver of 100% of minimum guarantees or equivalent fees.
  • DP World announced that it had handled 17.2mn TEU (twenty-foot equivalent units) shipping containers in Q1 this year, with gross container volume falling by 1.7% yoy on a reported basis but up 0.3% on a like-for-like basis. The chief executive warned that the real impact of Covid19 would be visible only from Q2.


Weekly Insights: Charts of the week
The flash PMI readings clocked in multi-year lows across the US and Europe. Along with the decline in export orders component within the PMIs, the fall in shipping indices (Baltic Dry Index, Harpex Shipping Index) and air cargo volumes as well (proxy indicators of global trade) imply a downturn in trade numbers in the next coming months.
Fig 1. Heatmap of Manufacturing PMIs – the Covid-19 effect

Source: Refinitiv Datastream, Nasser Saidi & Associates.
Fig 2. Proxy indicators for global trade

 
There has been a chasm between stock market performance and disappointing macro data for a few weeks now. Though the rollout of stimulus measures seem to have calmed investors initially, the question of how economies will recover (and its duration) is likely to lead to a change in market behaviour. Two instances this week – failure of a potential drug for Covid19 and lack of a detailed plan regarding the EU’s emergency fund – triggered sharp declines. Meanwhile in the region, GCC equity markets show no respite.
Fig 3. Equity market movements


 
Media Review
Will American shale oil rise again?
https://www.ft.com/content/2d129e4a-860b-11ea-b872-8db45d5f6714
Developing world economies hit hard by coronavirus
https://www.bbc.com/news/business-52352395
A deglobalisation trend?
https://www.piie.com/blogs/realtime-economic-issues-watch/pandemic-adds-momentum-deglobalization-trend
New Zealand’s Prime Minister May Be the Most Effective Leader on the Planet
https://amp.theatlantic.com/amp/article/610237/
What next for countries that are nearly covid-free?
https://www.economist.com/asia/2020/04/23/what-next-for-countries-that-are-nearly-covid-free
Can cannabis legalization rescue Lebanon’s ailing economy?
https://www.arabnews.com/node/1663936/middle-east
 
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Weekly Economic Commentary – Apr 19, 2020

Weekly Insights” provides a pictorial representation of recent growth in the GCC region and main pain points.
Markets
Stock markets in the US continued their weekly gain streak for the second consecutive week in spite of weak macroeconomic numbers; plans were announced to gradually lift lockdowns (in China, Germany, Italy, Spain and some other parts of Europe); markets across Europe and Asia closed higher as well, also supported by reports of a hopeful experimental drug for Covid19. Regional markets remained under pressure, as oil prices continued their downward trend, and with IMF predicting an economic contraction this year across most major MENA countries. Among currencies, dollar edged up to a 10-day high on the euro, and the yen weakened against  the dollar (FX year-to-date: tmsnrt.rs/2RBWI5E). Oil markets continued to remain under pressure on low demand (OPEC now sees a contraction of global demand of 6.9 million barrels per day), with prices dropping to an 18-year low on Fri. Gold prices fell.
Global Developments
US/Americas:

  • Retail sales in the US plunged by 8.7% in Mar – the sharpest drop on record. Other than grocery sales which surged by 26.7%, most other categories saw massive declines: clothing and accessories sales dipped 26.8%, sporting goods were down 23.3% and electronics, appliances by 15.1%.
  • Industrial production contracted by 5.4% mom in Mar – the steepest 1-month decline since Jan 1946 – with manufacturing declining by 6.3% and mining by 2%. Capacity utilization decreased by 4.3 ppts to 72.7% in Mar.
  • Housing starts plunged 22.3% mom in Mar – the worst monthly decline since Mar 1984 – to a seasonally adjusted rate of 1.216mn units. The construction of single-family houses down by 17.5% mom, while apartment and condo starts were off 32.1%. The outlook doesn’t look promising either: there was also a 6.8% drop in permits to begin construction in Mar.
  • Initial jobless claims touched 5.245mn in the week ended Apr 11 (from an upwardly revised 6.615mn the week before). This brings total claims in 4 weeks to 22.4mn, wiping out all job gains since Nov 2009 (22mn), and compares to the 8.7mn jobs lost during the financial crisis.
  • The Federal Reserve’s balance sheet increased to a record USD 6.42trn last week, from just USD 4.29trn in the first week of Mar.

Europe:

  • Inflation in Germany eased to 1.4% in Mar, down from the 1.7% reading in both Jan and Feb. Eurozone inflation slowed to 0.7% in Mar (Feb: 1.2%), largely due to the fall in energy prices (-4.5%) while food prices grew 2.4%. Core inflation eased to 1% from 1.2% in Feb.
  • EU industrial production fell 1.3% yoy in Feb, thanks to a 3.1% decline in production of capital goods. IP declined by 1.9% in the eurozone.

Asia Pacific:

  • China GDP declined by 6.8% yoy and 9.8% qoq in Q1: it is the first economic contraction reported since 1992 (when the official quarterly GDP records started).
  • China exports fell by 6.6% yoy in Mar while imports were down by 0.9% bringing the trade surplus to USD 19.9bn (Feb: USD 18.55bn). China’s trade surplus with the US narrowed to USD 15.32bn in Mar from USD 25.37bn in Jan and Feb.
  • Fixed asset investment in China declined by 16.1% yoy to CNY 8.41trn in Q1. Private investment decreased 18.8% to CNY 4.78trn and investment in high-tech industries dropped by 12.1% in Q1.
  • FDI in China fell by 10.8% yoy to a total CNY 216.19bn (USD 31.2bn). Foreign investment in high-tech services surged 15.5% yoy, accounting for 29.9% of the service sector.
  • China’s industrial production fell by 1.1% in Mar, bringing the Q1 value down by 8.4%. Retail spending dropped by 19% in Q1, with sales of consumer goods down by 15.8% in Mar, while online sales of physical goods rose 5.9%.
  • Japan industrial production unexpectedly fell by 0.3% mom in Feb (Jan: +0.4%).
  • The Reserve Bank of India cut the reverse repurchase rate by 25bps to 3.75% and announced it would inject INR 500bn (USD 6.5bn) in a new round of Targeted Long-Term Repo Operations. In addition, the apex bank extended the enhanced ways and means advance facility available to the administration to until Sep 30.
  • India’s exports declined by a record 34.6% yoy in Mar (Feb: +2.9%, after falling for 6 months in a row) and imports dipped by 28.7%, thereby narrowing trade deficit to USD 9.8bn. For the full year 2019-20, exports contracted by 4.8% to USD 314.3bn while imports sank by 9.1% to USD 467.2bn, leaving a trade deficit of USD 152.9bn.
  • India’s WPI inflation cooled to a four-month low of 1% in Mar (Feb: 2.26%) while food inflation fell to 4.91% (Feb: 7.79%). For the full year 2019-20, WPI inflation moderated to a 4-year low of 1% after sustained pickup since 2015-16.

Bottom line: The IMF, in its flagship World Economic Outlook report, forecast a global recession with growth falling by -3% this year (a downgrade of 6.3ppts from the Jan 20 estimates) – recording the worst downturn since the Great Depression. As fiscal and monetary stimulus packages continue to be rolled out globally, we expect inflation to tick up as strategic production is moved domestically from low-labour-cost developing nations, alongside wage inflation and unavoidable bankruptcies. The G20’s move to provide temporary debt relief to 76 of the poorest countries (from May 1) is a good move, though too small a gesture: a key question is whether private creditors will follow suit – over a quarter of the debt (USD 3bn over the next 8 months) is owed to them. Separately, ratings downgrades of countries and companies citing deterioration in credit quality given the impact of Covid19 is raising borrowing costs (adding to worries). In Europe, meanwhile, finance ministers are set to meet after the European Council’s meeting on Apr 23 to discuss the EU coronavirus rescue fund and “corona bonds”.
Regional Developments

  • The IMF, in its latest Regional Economic Outlook, forecast a dip in economic growth to 3.3% this year in the MENA region, before rising to 4.2% in 2021. The GCC region will see a sharper decline in 2020, with growth falling by 2.7% from 0.6% in 2019.
  • Non-oil exports from Egypt increased by 2% yoy to USD 6.728bn in Q1 this year while non-oil imports dropped by 24% yoy to USD 13.814bn.
  • Remittances into Egypt grew by 33.3% yoy to USD 5.2bn in Jan this year, according to the central bank.
  • Egypt’s tourism revenues are forecast to decline to USD 11bn in 2019-20, from previous estimates of USD 16bn. The calendar year 2019 had seen revenues touch a record USD 13bn.
  • Jordan’s banks cut interest rates charged to SMEs and individuals by 1.5% from end-Apr, announced the Banking Association, following the central bank’s rate cut mid-Mar.
  • The tourism ministry in Jordan waived the fees and fines for renewing licenses for 2020; in addition, JOD 10mn would be redirected to support local tourism activities and another JOD 5mn will be designated after the end of the crisis.
  • Boursa Kuwait will postpone the date of listing its share on the stock market – it was tentatively scheduled for Apr 19th.
  • Kuwait’s exports dropped by 14% yoy to KWD 4.6bn (USD 15bn) in Q4 2019 and imports were down by 1.1% to KWD 2.5bn, bringing surplus down by 26% yoy to KWD 2bn.
  • About 250k low-paid expat workers have lost jobs in Kuwait following the Covid19 outbreak, reported Al Qabas daily quoting government sources.
  • Lebanon’s banking associate disclosed that the Beirut Reference Rate was reduced to 5.75% for USD and to 7.75% for LBP, down from 9.35% for USD and 12.45% for LBP at the start of the year.
  • Reuters reports that the Lebanese pound weakened to 3000 to the dollar on the country’s parallel market for the first time last Tues. The official peg stands at 1507.5.
  • Oman’s finance ministry directed all ministries and civilian government units to reduce approved liquidity for development budgets by 10%, including review of salaries and benefits.
  • The Supreme Committee in Oman issued directives to support private sector companies: includes reduction in expat visa renewal fees to OMR 201 from OMR 301 till Jun 2020 as well as negotiating reduction in wages and working hours with employees.
  • Oman’s crude oil production picked up by 12.83% mom to 1.78mn barrels per day (bpd) in Mar. Crude exports in Mar was down 12.3% mom, averaging 738,348 bpd.
  • Qatar set the official selling prices for its crude in May at wide discounts, reported Reuters: the Marine crude OSP was set at USD 7.10 a barrel, below the monthly average of Platts Oman and Dubai quotes.
  • Saudi Arabia approved an additional set of measures to support the economy during the ongoing Covid19 outbreak: this includes SAR 50bn (USD 266mn) to accelerate payment of private sector dues, provide liquidity to several sectors and cover wages of those working in passenger transport while a further SAR 47bn was set aside for the health sector.
  • Saudi Arabia’s bond sale to raise USD 7bn was heavily oversubscribed, with total orders amounting to more than USD 54bn.
  • Saudi Arabia has extended the curfew measures to combat the Covid19 outbreak “until further notice” while SAMA has directed banks to extend the validity of expired ATM cards till Jun 2, 2020. Separately, at least 4 shopping malls in Saudi Arabia have granted a rent exemption to “eligible” tenants until these establishments reopen.
  • Saudi Arabia is set to sell about 600k barrels of crude per day to the US in Apr – the highest volume in a year, reported Bloomberg. Separately, Reuters reported that some refiners in Asia were notified that Aramco would supply full contractual volumes of crude in May.
  • Reuters reported that Saudi Aramco was in talks for a loan of about USD 10bn to finance its Sabic acquisition (70% stake).
  • Unemployment rate in Saudi Arabia stood at 12% in Q4 2019, unchanged from the previous quarter. Unemployment among males was low at 4.9% (-0.8% from Q3) while female unemployment was unchanged at 30.8%.
  • Online payments in Saudi Arabia surged by more than 400% in Q1 this year: number of online payments reached 7.3 million, valued at SAR 1.79bn (USD 475.81mn).
  • G20 chair Saudi Arabia pledged USD 500mn to support global efforts to combat the spread of Covid-19.
  • Investments into MENA-based start-ups dipped by 22% yoy to USD 277mn in Q1 this year, according to Magnitt’s 2020 MENA Venture Investment Report. The strong Jan-Feb fundraising start was dragged down by the Covid19 outbreak, resulting in a 67% drop in Mar.

UAE Focus

  • Battling Covid-19’s impact: the ministry of economy reduced fees of 94 services including commercial registration services, trademarks, origin, and intellectual properties (businesses are estimated to save AED 113mn from the fee reduction); labour movement between the emirates has been banned; those with residency visas that expired in Mar can stay in the country legally till end of the year; the jobless can search for other opportunities and a visa transfer will be facilitated; waived/deferred rents for mall tenants (Majid Al Futtaim and Emaar malls); 3-month basic rent waivers to DIFC-based retailers from Apr-Jun; Dubai extended closure of all inbound tour operators, hotels, restaurants, venues and event organisers until further notice; the Ajman-DED announced a three-month renewal for trade licenses without lease contract.
  • Since the UAE central bank launched the AED 256bn Targeted Economic Support Scheme on Mar 14, about AED 10bn was provided to banks with zero-interest funding while over AED 61bn was released given the lowered cash-reserve requirements. In a meeting with the banks’ CEOs, the central bank urged the disbursement of these funds to support private companies, SMEs and retail clients affected by the pandemic.
  • UAE’s Federal Tax Authority extended the excise tax payment period: the extended payment period of Mar 1 to Apr 30 is due on May 17.
  • The UAE central bank has postponed the Emiratisation target in the financial sector this year, while requesting banks not to terminate citizens’ jobs.
  • Non-oil foreign trade of Abu Dhabi edged up by 0.5% yoy to AED 19.3bn in Jan 2020. Exports of non-oil commodities were up 0.4% to AED 5.49bn while imports accelerated by 5.8% to AED 10bn. Saudi Arabia, Chinas the US were top trade partners.
  • Inflation in Dubai declined to 1.82% yoy in Mar, after a 6% dip in housing and utilities prices more than offset the 4.56% rise in food and beverages costs.


Weekly Insights: Outlook for economic growth in the GCC region and main pain points
Economic growth in the GCC will decline by 2.7% this year, from growth of 0.6% in 2019 (Source: IMF), as the nations’ continue to suffer the economic impact from Covid19 (which has led to lockdowns and subsequent decline in economic activity) as well as lower oil prices (with spillover effects into the non-oil sector). The double whammy is expected to lead to a substantial decline in non-oil GDP growth (-4.3% from 2.4% growth last year). The PMI data for Q1 this year corroborates this upcoming dip. As nations closed borders, there has been significant decline in the operations of the non-oil sector, what with most GCC nations depending on the tourism and hospitality sector.
Fig 1. Decline in economic activity; PMI as a leading indicator

Source: IMF, IHS Markit, Nasser Saidi & Associates.
As oil prices decline, the major revenue stream of the GCC nations will dry up. Fiscal breakeven prices (i.e. oil price needed to maintain a balance budget) remains higher than the current oil price for all GCC nations. Though diversification efforts picked up after the 2014 decline in oil prices, there is still much room for improvement. The chart on the RHS (below) shows a scatterplot with non-oil fiscal balance (as % of non-oil GDP) on the X-axis and non-oil revenue as % of GDP on the Y-axis. Both Saudi Arabia and Qatar have successfully reduced their non-oil fiscal balance and increased non-oil revenues (when comparing the periods 2000-16 and this year). UAE has increased the share of non-oil revenue as % of GDP, though the non-oil fiscal deficit has widened further. Kuwait’s performance has suffered on both counts, witnessing both an increase in fiscal deficits and decline in non-oil revenues as a share of non-oil GDP during the periods of comparison.
Fig 2. Economic diversification efforts not significant enough to lift the GCC nations during the ongoing oil price slump

Source: IMF, Nasser Saidi & Associates.
To reduce the impact from the ongoing Covid19 outbreak, all GCC nations have introduced stimulus packages – to the tune of more than 10% of combined GDP. However, with the central banks leading the efforts, is it sufficient to support the economy? We take the case of both UAE and Saudi Arabia, the largest GCC nations. It can be seen that growth of bank credit to the public sector is substantially higher than that to the private sector (corporates/ retail). As governments and central banks call for greater support to the SMEs and retail clients (who’ve felt the immediate effect of Covid19), can we expect the region’s banks to rise up to this situation, given their past behaviour? Governments will certainly need funds – we have seen the governments of Saudi Arabia, Abu Dhabi and Qatar tap the markets via bond issuances of USD 7bn, USD 7bn and USD 10bn each in the past two weeks. Will the banks extend a lending hand to the public sector & GREs or risk burning their hand lending to SMEs/ retail clients (future NPLs?)
Fig 3. In spite of the large stimulus packages rolled out by the GCC, private sector is likely to be crowded out by the public sector given banks’ focus on profitability, liquidity and potential NPLs in the future

Source: UAE central bank, SAMA, Nasser Saidi & Associates.
 
Media Review
IMF releases Economic Outlook reports
https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/
https://www.imf.org/en/Publications/REO/MECA/Issues/2020/04/15/regional-economic-outlook-middle-east-central-asia-report
The Great Whiplash
https://www.project-syndicate.org/commentary/covid19-crisis-minimize-economic-whiplash-by-kaushik-basu-2020-04
Coronavirus in Conflict Zones: A Sobering Landscape – Carnegie Endowment for International Peace
https://carnegieendowment.org/2020/04/14/coronavirus-in-conflict-zones-sobering-landscape-pub-81518

Roundtable on Potential IMF Involvement in Lebanon, Lebanese Center for Policy Studies & Jadaliyya
https://www.jadaliyya.com/Details/40984
COVID-19: Good can also come out of a global scourge
https://gulfnews.com/business/analysis/covid-19-good-can-also-come-out-of-a-global-scourge-1.70954575  
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Weekly Economic Commentary – Apr 12, 2020

Weekly Insights” focuses on how the GCC nations are financing their stimulus packages. The chart of the week is Google’s Mobility Report on a few selected MENA nations.
Markets
Stock markets gained as stimulus packages continue to be announced out across the globe and on hopes that lockdowns would curb the spread of Covid19: Wall Street rallied, European markets were up for a 4th straight day on Thursday and the MSCI all-country index was at the highest since mid-Mar. Volatility in financial markets (the VIX index) was close to its lowest levels since Oct (tmsnrt.rs/2DaIljM). Regional markets were higher last week (except Bahrain and Kuwait): expectations of an OPEC+ deal boosted oil exporters’ markets, while government bonds sales in Qatar and Abu Dhabi also supported market sentiment. The dollar remained soft while emerging market currencies gained (tmsnrt.rs/2egbfVh). Over the weekend, the OPEC+ committed to cut 9.7mn barrels a day from global supply – the biggest supply reduction on record- also facing the largest demand fall on record; markets were closed on Fri for Easter, but oil prices had risen in anticipation of the deal and were near $30 a barrel on Thursday. Gold price meanwhile hit a 1-month peak.
Global Developments
US/Americas:

  • The Fed will provide up to USD 2.3trn in loans (including the Payroll Protection Program) to support local governments and small and mid-sized businesses. Plans include buying corporate bonds (both at an investment-grade level and high-yield, or junk, bonds), targeting USD 850bn through the expansion of three existing credit facilities (a move backed by USD 85bn in protection from the Treasury) as well as Main Street loans (to support up to USD 600bn in loans tied to SMEs).
  • US producer price index slipped by 0.2% mom in Mar (Feb: -0.6%) and core PPI fell by 0.2% – the largest decline since Oct 2015 – and compares to a 0.1% dip in Feb. In yoy terms, PPI nudged up by 0.7% yoy in Mar (Feb: 1.3%) while core PPI (excluding food and energy) rose by 1.0% (Feb: 1.4%).
  • Michigan consumer sentiment index sank to a 9-year low of 71 in Apr (Mar: 89.1), led by the current-conditions index, which plummeted by 31.3 points – nearly double the record decline of 16.6 points set in Oct 2008.
  • US consumer prices dipped in Mar: CPI fell by 0.4% mom, posting the biggest drop since Jan 2015, following a 0.1% gain in Feb. Gasoline prices fell, as did hotel accommodation, apparel and airline ticket prices. Excluding food and energy, CPI fell by 0.1% mom – the first drop since Jan 2010.
  • The US budget deficit widened by 8% yoy to USD 743.6trn in fiscal H1 (i.e. Oct 2019-Mar 2020), as receipts and spending increased by 6% and 7% respectively. The stimulus measures passed late-Mar will feature in Apr’s budget.
  • Initial jobless claims climbed to a record 6.61mn at the week ending Apr 3 (from an downwardly revised 6.87mn the week before). The 4-week average increased to 4.27mn from 2.67mn the week before.

Europe:

  • Finance ministers from the Eurozone agreed to an emergency rescue package to the tune of EUR 500bn: this includes revised credit lines from the European Stability Mechanism (EUR 240bn available for indebted nations to use for financing of direct or indirect healthcare), a boost to the lending capacity of the European Investment Bank, a new EUR 100bn unemployment insurance scheme and a “temporary, targeted” recovery fund to support a post-lockdown economic rebound.
  • Germany’s exports increased by 1.3% mom and imports declined by 1.6% mom, widening the trade surplus to EUR 21.6bn (Jan: EUR 18.7bn). Trade with China slowed: exports to China fell by 8.9% yoy, while imports from China dropped by 12.0%. Separately, current account surplus also widened to EUR 23.7bn from the previous month’s EUR 16.8bn.
  • German factory orders fell by 1.4% mom in Feb (Jan: +4.8%), with a sharp fall in foreign orders. Separately, industrial production in Germany edged up by 0.3% mom in Feb, thanks to a 1.8% increase in the production of consumer goods but a 0.3% decline in capital goods. In yoy terms, it slipped by 1.2% yoy in Feb (Jan: -0.9%). The Economy Ministry expects major falls in orders for Mar and Apr and sharp drops in production in both Q1 and Q2.
  • UK’s industrial production dropped by 2.8% yoy in Feb, after falling -2.9% in Jan. Manufacturing fell by 3.9% (Jan: -3.7%).
  • UK goods trade balance widened to GBP 11.487bn in Feb (Jan: GBP 5.759bn deficit). Overall trade balance (including services) posted a surplus GBP 1.4bn in Dec-Feb – for the first time in more than 20 years of records.
  • GDP in the UK fell 0.1% in Dec-Feb (Jan: 0.1%); in Feb, the services sector posted 0% growth, manufacturing bounced growing by 0.5%, while construction dropped by 1.7%.

Asia Pacific:

  • Inflation in China fell by 1.2% mom in Mar (Feb: 0.8%); in yoy terms, prices were up 4.3% yoy, declining from Feb’s 5.2% gain. Producer price index fell 1.5% yoy in Mar (Feb: -0.4%).
  • China new yuan loans surged by CNY 1.29trn to CNY 1trn (USD 988bn) in Q1. Money supply grew by 10.1% yoy by end-Mar, after rising 8.8% in Feb. Aggregate financing increased by 11.5% yoy to CNY 262.24trn in Mar. Foreign exchange reserves in China declined to USD 3.061trn in Mar from Feb’s USD 3.107trn.
  • Japan announced a USD 1trn stimulus package – equivalent of 20% of GDP – that includes JPY 39.5trn (USD 363bn) in direct fiscal spending. This fiscal stimulus is much higher than the USD 670bn emergency spending after the 2008-09 crisis. The government also declared a state of emergency for Tokyo and other urban areas.
  • Core machinery orders in Japan unexpectedly rose by 2.3% mom in Feb following Jan’s 2.3% gain.
  • Japan’s overall household spending fell by 0.3% yoy to JPY 270k (USD 2.5k) in Feb (Jan: -3.9%). Though spending on masks and other healthcare products rose more than 40%, and toilet paper by 47%, this was more than offset by the decline in spending on domestic package tours, movies as well as rail fare.
  • Real wages in Japan increased by 0.5% mom in Feb, following a downwardly revised 0.4%.
  • India’s industrial output increased to a 7-month high in Feb, rising by 4.5% yoy (Jan: 2.1%); manufacturing edged up by 3.2% (Jan: 1.6%).

Bottom line: Though US passed Italy with the highest number of Covid19 related deaths globally, there was some optimism as the rate of contagion of the pandemic eased (lockdowns seem to be working, as numbers in Italy and Spain ease; India plans to extend the nation-wide lockdown for 2 more weeks; Chinese authorities lifted a lockdown imposed in late Jan on Wuhan, the initial epicenter of the outbreak). However, with much of the world struggling with the pandemic still, export orders for Chinese manufacturers are sinking, raising fears about a second wave of demand shock. WTO’s forecasts trade to plummet by 13-32% in 2020 alongside a steeper decline in sectors with complex value chains (e.g. electronics, automotive products), reflecting the consequences of the ongoing shock, while potential slow recovery is expected next year (but dependent on the duration of the outbreak and policy effectiveness afterwards).
Regional Developments

  • The World Bank lowered MENA growth forecasts: it expects GDP to decline by 1.1% this year (versus the previous forecast of a 2.6% rise). MENA economies will face USD 116bn in costs from the impact of both Covid19 and lower oil prices. Access the full report at https://openknowledge.worldbank.org/bitstream/handle/10986/33475/9781464815614.pdf
  • As part of the overall stimulus package, Bahrain’s labour ministry disclosed plans to spend USD 570mn in payment of salaries of around 100k employees in the private sector during Apr-Jun; in addition, utilities bill payments will be covered for all citizens and Bahraini businesses.
  • Bahrain will not collect rents and allowance from all tenants of municipal properties for three months starting from Apr, as part of relief measures launched after the Covid19 outbreak.
  • Money supply in Bahrain increased by 7% yoy to BHD 13.8bn in Feb while retail banks’ outstanding loans and credit facilities inched up by 2.1% to BHD 9.8bn. The total outstanding balance of public debt instruments edged up by 4.3% to BHD 12bn.
  • Aggregate balance sheet of wholesale and retail banks in Bahrain increased by 4.6% yoy to USD 204.9bn at end of 2019, with the former accounting for 54.1% of total assets, according to the central bank’s annual report for 2019.
  • Bahrain will allow passengers to transit through the international airport, though entry into the country will be limited only to citizens.
  • Egypt expects economic growth to slow to 4.5% in Q3 and to 1% in the last quarter of the fiscal year 2019-2020 (till Jun), revealed the planning minister. During the 2019-2020 year, annual growth is expected at 4.2% instead of 5.6% previously.
  • Annual urban inflation in Egypt fell to 5.1% yoy in Mar (Feb: 5.3%) – the lowest level since Nov. Core inflation stood at 1.89% yoy in Mar (Feb: 1.9%).
  • Net international reserves in Egypt dropped to USD 40bn in Mar – sufficient to cover 8 months of commodity imports – down from USD 45.5bn in Feb. About 5.4bn of reserves were used to cover imports of strategic goods, payment of international obligations related to external debt and to bridge the gap caused by the decline in FDI and portfolio investments.
  • Egypt’s cabinet approved a six-month rescheduling and deferral plan on utility payments for tourist firms and private airlines. Additional support for tourism sector: a 6-month exemption from real estate taxes and all dues owed by such firms will be postponed for 3 months without penalties. The Central Bank of Egypt’s EGP 50bn financing initiative to support local tourism includes loans with a declining 8% interest as well as credit facilities with a maximum two-year repayment period.
  • Free zones in Egypt are allowed to offer 50% of their production in the local market during a 6-month period starting Apr. Additionally, industrial projects at free zones can also offer 20% of their stock, including raw materials.
  • Egypt’s ministers are taking a 20% pay cut for 3 months, with the funds being directed to support informal labourers during the Covid19 pandemic.
  • About 13 industrial complexes in Egypt will receive EGP 5bn in funding – allotted for linking utilities – during the fiscal year 2020-21, according to the planning minister.
  • Egypt plans to disburse 30% of due export subsidies with a minimum limit of EGP 5mn owed by the Export Development Fund.
  • To support medium-sized firms’ access subsidized loans, the Central Bank of Egypt cancelled the EGP 1bn annual sales cap requirement to qualify for the EGP 100bn initiative aimed to support industrial, agricultural, and aquaculture production companies.
  • Iraq’s president named intelligence chief Mustafa al-Kadhimi as prime minister-designate on Thursday, the third person nominated to lead the country in just 10 weeks.
  • MSCI announced that it would postpone the entry of Kuwait’s listed companies into its emerging markets index from May given the ongoing Covid19 outbreak.
  • Inflation in Kuwait increased by 1.67% yoy and 0.9% mom in Feb; excluding food and housing services, inflation increased by 1.39% yoy and 2.94% respectively.
  • Fitch affirmed Kuwait’s long-term foreign-currency issuer default rating at AA with a stable outlook, citing the nation’s strong fiscal and external balance sheets
  • Kuwait’s parliament called on the government to rewrite the public debt law in light of the ongoing Covid19 outbreak.
  • Lebanon’s draft financial restructuring plan – still being discussed by the Cabinet – estimates the need for external financing to the tune of USD 10-15bn over the next five years. While international holders of the Eurobonds remain supportive of the proposal, a letter from an adviser to the Association of Banks in Lebanon words it strongly by stating the need to “protect the health of the banking sector and, more importantly, depositor monies”.
  • Moody’s changed its outlook on Lebanon’s banking system to negative. It expects Lebanon’s banks to face major losses given its “heavy exposure to the sovereign”, and a high probability of funding and liquidity pressure with very low prospects of government support.
  • Lebanon’s PM pledged to audit the central bank’s accounts to show transparency after launching debt restructuring talks with creditors.
  • Oman has banned movement into and out of the governorate of Muscat from Apr 10-22.
  • Oman’s health minister disclosed that Covid-19 tests and treatments will be done for free for all communities, including expats.
  • Qatar’s GDP fell by 0.6% yoy (and 1.4% qoq) in Q4 2019, largely due to a 3.4% yoy decline in mining and quarrying while non-oil sector grew by 2% yoy (and 0.3% qoq).
  • Qatar raised USD 10bn in a three-tranche bond, attracting around USD 45bn in orders; it still ended up offering some 40bps over its existing curve. According to the bond prospectus, the government has been asked to postpone USD 8.2bn worth of unawarded contracts on capital expenditure projects, given the ongoing pandemic.
  • Saudi Arabia’s industrial production index declined by 5.72% yoy in Feb (Jan: -6.68%), thanks to dips in mining and quarrying (-3.38%) and manufacturing (-12.7%).
  • SAMA’s new licensing rules introduced two new financing activities – digital finance intermediation and collection of financing agencies’ debts; paid-up capital required for these activities are set at SAR 2mn and SAR 10mn respectively.
  • Fitch affirmed Saudi Arabia’s long-term foreign-currency issuer default rating at A with a stable outlook, though pointing to the nation’s weakening fiscal and external balance sheets.
  • Saudi Arabia’s private sector has been permitted to cut employees’ wages and working hours, but only with the employees’ consent.
  • Saudi Arabia cut domestic fuel prices: gasoline 91 will be priced at SAR 1.31 per liter from SAR 1.55 in the previous month, while gasoline 95 will be SR1.47 per liter from SR2.05.
  • Saudi Arabia’s Social Development Bank launched a SAR 2bn (USD 530mn) “healthcare portfolio” to support established and new SMEs in the healthcare sector, offering financing solutions and flexible funding.

UAE Focus

  • Abu Dhabi sold USD 7bn in bonds, receiving USD 44bn in orders for the debt sale. Sold in 3 tranches, it offered an interest rate equivalent to 220 bps over US Treasuries for USD 2bn in five-year bonds, 240 bps over the same benchmark for USD 2bn 10-year bonds and 4.1% for USD 3bn 30-year notes. This corresponds to about 30bps over its existing curve.
  • The government of Dubai issued a Sukuk for the first time in four years: the AED 1bn (USD 272mn) eight-year sukuk at 4.7125% is in the form of a private placement and has been sold to the emirate’s banks.
  • Dubai non-oil sector PMI fell to the lowest-ever reading of 45.5 in Mar (Feb: 50.1), with the employment sub-index dropping to 44.8 from 50.4 in Feb.
  • Abu Dhabi nominal GDP grew by 4.6% yoy to AED 620bn (USD 169bn) during Jan-Sep 2019.
  • Dubai government extended the closure of all non-essential commercial activities till April 18. Separately, Dubai’s department of finance has asked government agencies to cut administrative and general expenses by at least 20%, halt new hiring and also to postpone all construction projects that have not begun.
  • Ajman’s Crown Prince announced initiatives to support firms affected by the Covid19 outbreak. For the trade and customs sectors, support includes paying customs duties with easy payments within 90 days, extending the free period for storing containers to 20 days from 10, and reducing container insurance fees by 50% for each container until end-Jun 2020. In the tourism sector, registration fees are exempt, payment of fines are postponed, and penalties are cancelled for tourism firms and hotels. For the real estate sector, initiatives include cancelling administrative fines for every violation of real estate registration renewal.
  • The Dubai Financial Supervisory Authority (DFSA) announced relief measures for DIFC-based regulated firms: for new firms, there will be a 50% reduction in application fees for the remainder of 2020 and flexibility in requirements for permanent premises and for domestic funds, there will be a waiver of registration fees for the remainder of 2020. For existing firms, extension for filing returns and reports, flexibility in meeting Authorised Individual obligations, temporary relief from capital requirements for firms which do not hold or control Client Assets or hold Insurance Monies and a waiver of listing fees for new SME issuers in the DIFC for the remainder of 2020 (among others). The complete list is available at: https://www.dfsa.ae/MediaRelease/News/DFSA-Provides-Relief-Measures-for-DIFC-Firms
  • Real estate transactions in Dubai grew by 10% yoy to 10,243 in Q1 this year. In the month of Mar, there were 3124 transactions to the tune of AED 6.99bn; this month also saw the highest number of mortgage registrations (+24.8% yoy to 1209) since Oct 2019.
  • UAE’s banks have revealed their exposure to the hospital group NMC Health which recently revised its debt position to USD 6.6bn: ADCB (USD 981mn), Emirates NBD (AED 747.3mn including AED 676.5mn linked to Emirates Islamic Bank), Dubai Islamic Bank (USD 425mn) and Noor bank (USD 116mn).
  • Emirates Airlines is looking to raise billions in loans from local and international banks, reported Bloomberg, after being promised Dubai government support the week before.


Weekly Insights: How are GCC nations financing the stimulus packages?
As the Covid19 pandemic continues to affect the GCC, imposing curfews and restrictions on movement has become the norm, alongside various levels of stimulus packages being rolled out to support the economies. The packages have a few measures in common – rate cuts, liquidity enhancing measures, deferring of loans/ credit card payments as well as support for SMEs and affected sectors (specifically trade, tourism and hospitality). Overall stimulus measures in the GCC have crossed over 10% of 2019 GDP and with the sharp dip in oil prices (and subsequent decline in revenues), options to finance this spending are via (a) spending cuts; (b) drawdown international reserves at the central banks; (c) support from SWFs; and/or (d) borrowing from international/ regional markets. However, with additional liquidity in the market, will banks be willing to lend to the public sector in need of funds or the private sector (with a higher risk of rising NPLs in the medium term)? There remains a significant risk of crowding out lending to the private sector.
Among the four options mentioned above, spending cuts have been common – from Oman slashing government companies approved expenditures by10% for 2020 to Saudi Arabia’s reducing 2020 budget by less than 5% or more recently Dubai asking its government agencies to cut administrative and general expenses by at least 20%. In addition, governments have also responded by cutting (mostly capital) spending (latest being Dubai and Qatar) magnifying the negative effect on the non-oil sector.
During the past week, Qatar and Abu Dhabi have tapped the market (option d) via bond sales – both offered at some 30-40bps above the existing curve – while the Dubai government raised AED 1bn from a private placement of a sukuk. Support from the central bank will likely be evident in the next few data releases: Egypt has already witnessed this. As for support from sovereign wealth funds, given lack of transparent data, it will be difficult to gauge the actual value, but their optimal role would be to: (a) tap into investments abroad (starting with sale of money market instruments like T-bills); (b) re-assess long-term investment strategies to play a larger role domestically in supporting local industries, innovation and developing digital assets.
Chart of the Week – MENA Mobility Report


 
 
 
 
Most hit segments in the GCC are transport, followed by retail and recreation (except in Bahrain where the places are swapped). In Jordan and Lebanon, transport has declined by a substantial 88% and 81% respectively. With remote working practices encouraged across the MENA region, workplaces have taken an extreme hit in Jordan (-70%), UAE (-57%) and Iraq (-55%) compared to baseline levels.
With most GCC nations in lockdowns after Apr 5th, these numbers are likely to further dip in the next iteration of the data.
Notes: The reports show trends over several weeks with the most recent data representing approximately around Apr 5th. The baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020. Only data from users who have turned on the Location History setting will be used to create the reports. Currently, this setting is turned off by default.
Media Review
Covid-19 related articles on Project Syndicate
https://www.project-syndicate.org/commentary/west-must-learn-covid19-control-from-east-asia-by-jeffrey-d-sachs-2020-04
https://www.project-syndicate.org/commentary/mapping-covid19-global-recession-worst-in-150-years-by-kenneth-rogoff-2020-04
https://www.project-syndicate.org/commentary/will-covid19-remake-the-world-by-dani-rodrik-2020-04
How a “digital dollar” might work, thanks to coronavirus
https://www.technologyreview.com/2020/03/26/950277/we-just-glimpsed-how-a-digital-dollar-might-work-thanks-to-coronavirus
An unprecedented plunge in oil demand will turn the industry upside down
https://www.economist.com/briefing/2020/04/08/an-unprecedented-plunge-in-oil-demand-will-turn-the-industry-upside-down
The shape of economic recovery
China: https://www.ft.com/content/50ea1a73-f2e5-493d-a468-0b6111c3a2ef
https://t.co/YdwohmPRfh
 
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Weekly Economic Commentary – Apr 5, 2020

This week’s “Weekly Insights” is a pictorial representation of the week’s key macroeconomic data releases.
Markets
Another negative week for markets as Covid-19 cases cross the million-mark, with US, Italy and Spain recording the maximum confirmed cases and deaths. Weak macro data in the US (non-farm payrolls, unemployment) and EU (PMIs/ business activity) led to sharp declines in the stock markets as well. Hopes of an oil ceasefire between Saudi Arabia and Russia led to an increase in the oil price (20%+ on Thurs), ending the week higher after 5 consecutive weeks of declines while also supporting stock market movements (benefiting Saudi’s Tadawul). Other regional markets ended in the red as the impact of Covid19 became more widespread given lockdowns across many nations (and districts). The dollar gained during the week as evidence became stronger that the global economy was headed for a recession in H1, while the euro declined by close to 3%. Gold prices closed slightly higher versus the week before.
Global Developments
US/Americas:

  • Initial jobless claims soared to a historical record 6.65mn the week ending Mar 28 (from an upwardly revised 3.34mn the week before). This points to an unemployment rate of around 10% versus the official 3.5% rate in Feb (a 50-year low).
  • Non-farm payrolls tumbled by 701k in Mar (Feb: +275k) – the first decline since Sep 2010, and largest drop in magnitude since Mar 2009. The survey numbers are based on data from Mid-Mar, before the record high jobless claims began to show up. Unemployment rate increased to 4.4% (Feb: 3.5%) – the highest level since Aug 2017.
  • Factory orders remained unchanged in Feb, following a 0.5% decrease un Jan. Orders for non-defense capital goods excluding aircraft (a proxy for business spending) fell 0.9% in Feb while shipments of core capital goods were down by 0.8%.
  • Pending home sales increased by 2.4% mom and 9.4% yoy in Feb (Jan: 5.7% yoy). S&P Case Shiller home price indices advanced by 3.1% yoy in Jan from 2.8% the month before. However, these figures are likely to crash in the months ahead given the covid-19 outbreak.
  • US Chicago PMI slipped to 47.8 in Mar (Feb: 49), its 9th consecutive below-50 reading.
  • ADP employment report showed that private sector employment decreased by 27k in Mar (Feb: -183k). The data needs to be taken with caution as it covers records only through the 12th of the month.
  • ISM manufacturing PMI fell to a reading of 49.1 in Mar (Feb: 50.1), with the new orders and employment plunging to 11-year lows alongside declines in production. ISM non-manufacturing PMI slowed to a 3.5 year low of 52.5 in Mar (Feb: 57.3).
  • US trade deficit narrowed to USD 39.9bn in Feb (Jan: USD 45.5bn), the lowest level since Sep 2016. Goods trade deficit with China dropped to USD 16bn – the lowest since Mar 2009.

Europe:

  • Manufacturing PMI in Germany edged down to 45.4 in Mar (Feb: 45.7); in the UK, PMI eased to 47.8 from 48 the month before. Eurozone manufacturing PMI slipped to 47.8 in Mar (Feb: 48).
  • Service sector activity plummeted across Europe: Germany, France and Spain touched record-low PMI readings while in Italy it plunged to 17.4. The Eurozone composite PMI dropped to 29.7 in Mar – the lowest in the survey’s history.
  • CPI in Germany eased to 1.3% yoy in Mar (Feb: 1.7%) as energy prices dipped. In the wider eurozone, inflation fell to 0.7% yoy in Mar (Feb: 1.2%) while core inflation also slowed to 1% from 1.2%. Energy prices were down by 4.3% but unprocessed food prices increased by 3.5% as bulk buying increased.
  • Unemployment rate in Germany remained unchanged at 5.3% in Feb: but since the data were collected before Mar 12, the impact of the coronavirus is unlikely to have been captured. Separately, it was reported that 470k companies had applied for funding under the short-time work scheme (“Kurzarbeit) – versus 1300 applications a month on average before -wherein the state replaces a large part of the lost income.
  • Retail sales in Germany increased by 1.2% mom and 6.4% yoy in Feb (Jan: 1% mom & 2.1% yoy) after households stocked up ahead of restrictions on going out. Revenues of online and delivery services grew by 11% yoy and non-food sales were up by 5.6%.
  • Retail sales in the EU increased by 0.9% mom and 3% yoy in Feb as consumers stockpiled food (+2.4%) and on higher online spending (+5.6%).
  • UK’s final GDP estimates reveal a 1.1% yoy growth in Q4, remaining flat in qoq terms. Total business investment declined by 0.5% qoq (Q3: -1%).

Asia Pacific:

  • The People’s Bank of China unexpectedly cut the 7-day reverse repo to 2.2% from 2.4%, injecting CNY 50bn into the interbank market. This move came after the withdrawal of CNY 33bn of liquidity on the day before (28 Mar).
  • Some PMI relief in China’s Mar reading after the dip in Feb: NBS manufacturing PMI increased, rising to 52 (Feb: 35.7), thanks to an improvement in new orders supported by domestic demand. Non-manufacturing PMI improved to 52.3 from Feb’s 29.6, largely due to increases in business activity and expectations to above 50 while others like new orders, prices, and employment remained sub-50.
  • China’s Caixin manufacturing PMI rebounded to 50.1 in Mar (Feb: 40.3) though Caixin services PMI stayed below-50, clocking in at 43 in Mar (Feb: 26.5).
  • Japan’s Tankan large manufacturing index decreased to -8 in Q1 (Q4: 0) – the first negative reading in 7 years – while the outlook fell further to -11 from 0 the month before.
  • Japan’s final manufacturing PMI reading fell to a seasonally adjusted 44.8 in Mar (Feb: 47.8), its lowest since Apr 2009. Services PMI tumbled to 33.8 (Feb: 46.8), the lowest since Feb 2009, while the composite PMI was down to 36.2 (Feb: 47), the lowest since Mar 2009.
  • Industrial production in Japan fell by 4.7% yoy in Feb (Jan: -2.3%); in mom terms, it advanced by 0.4% following a 1% growth the month before. The METI revised its assessment of industrial production, stating that it fluctuates indecisively but has weakened.
  • Japan’s unemployment rate stayed unchanged at 2.4%. Retail trade grew by 1.7% yoy in Feb compared to a 0.4% dip in Jan though in mom terms growth slowed to 0.6% following a 1.5% rise in Jan.
  • Korea’s industrial output declined by 3.5% mom in Feb – the sharpest decline since Feb 2011. Production in the mining, manufacturing, gas and electricity industries also fell 3.8%, recording the sharpest fall since Dec 2008.
  • Singapore retail sales declined at the fastest (mom) pace in 12 years, recording a dip of 8.9% mom and 8.6% yoy in Feb, as the coronavirus impact tourism and hospitality sectors. Excluding motor vehicles, retail sales fell by a larger 10.2% yoy.

Bottom line: As macroeconomic data continue its disappointing run across much of Europe and the US, countries and central banks are simultaneously rolling out unprecedented stimulus packages to counter the impact of the Covid19 outbreak. Though the banking sector has been tasked with supporting SMEs during these troubled times, it remains to be seen if these monies eventually filter out to those in need (additional input on Gulf banks in the Media Review section). China’s latest PMI readings seem to be very positive – but remember that not all businesses in China have returned to normal capacity, global demand is still weakening, and supply chain links are still broken. Global PMI fell by a new record of 6.7 points to 39.4 (the lowest since Feb 2009) while the service sector’s decline was the steepest in 22 years. Meanwhile the oil price war continues to splutter after some positive moves towards end of last week. The IMF also warned that the economic impact of the Covid19 pandemic would be worse than the 2008 financial crisis.
Regional Developments

  • The oil war heats up again: last week saw Trump claim that he had negotiated a ceasefire between Saudi Arabia and Russia, which would lead to a drop in production. This was followed by Saudi Arabia’s state media reporting that an emergency meeting had been called to discuss a fair oil arrangement. However, tempers have since flared with Russia accusing Saudi Arabia of pressuring the US shale industry and Saudi’s foreign minister rejecting this contention – OPEC sources believe that the virtual meeting scheduled for Apr 6th will likely be delayed.
  • Bahrain’s exports increased by 11% yoy to BHD 196mn in Feb, with Saudi Arabia, UAE and US the top destinations. The top 10 trading partners accounted for 85% of the total exports.
  • The Ministry of Finance disclosed that Bahrain had paid back USD 1.25bn in bonds that matured on Mar 31.
  • Expat workers in Bahrain’s private sector declined by 0.8% yoy to 498k last year while the number of Bahrainis in the private sector inched up by 1.5% to 106k.
  • Bahrain’s judicial system has launched electronic procedures and become operational online: this allows for the electronic filing of cases, submission of defence statements, pleadings and applications to the courts during all stages of the case, including issuance of judgements.
  • Egypt’s central bank imposed temporary limits on daily withdrawals and deposits amid the spread of coronavirus. The apex bank called for the use of electronic transfers and e-payments as the daily limits were capped at EGP 10k (USD 640) for individuals and EGP 50k for companies. Banks also cancelled fees on transfers and e-payment methods. Separately, there were over 5mn beneficiaries of the CBE initiative to postpone loan installment payments, as per a central bank source.
  • The Central Bank of Egypt left policy rates unchanged at the latest meeting, following a 3% cut at an unscheduled meeting in mid-Mar. The overnight lending rate stands at 10.25% and the overnight deposit rate at 9.25%.
  • Egypt’s non-oil sector PMI declined to 44.2 in Mar (Feb: 47.1) – the quickest fall since Jan 2017 – as the outbreak affect the tourism and hospitality sectors. Output fell the most in over three years, new orders shrank, and export sales declined at the fastest rate in over seven years.
  • Money supply in Egypt increased by 13.96% yoy to EGP 4.2trn (USD 267.69bn) in Feb. Foreign reserves edged up by 0.13% mom to USD 45.51bn in Feb.
  • Egypt’s balance of payments surplus touched USD 410mn in Jul-Dec (H1 FY 2019-2020) and can be compared to a deficit of USD 1.8bn in the same period a year ago. Current account deficit narrowed by 13.6% yoy to USD 4.6bn during the period, thanks to a decline in non-oil trade deficit. Tourism receipts during the period grew by 6.8% yoy to USD 7.25bn while remittances were up 13.5% to USD 13.68bn.
  • FDI into Egypt declined by 5.8% to USD 2.61nm in Q4 2019 while net portfolio investment surged to USD 2.26bn from -USD 2.65bn in Q4 2018.
  • Egypt’s revenues are expected to rise to EGP 1.3trn (USD 82bn) in the fiscal year 2020-21, and with spending estimated to increase 9% yoy to EGP 1.71trn, the nation is looking at a deficit of 6.3% of GDP (vs a target of 7.2% in the current budget).
  • Egypt’s finance ministry plans to issue T-bills and bonds worth EGP 610bn (USD 38.74) in the 3 months starting Apr 1, to finance the budget deficit (estimated to touch EGP 445.1bn by end FY 2019-20).
  • Mortgage finance in Egypt surged by 46.6% yoy to EGP 168.5mn in Jan, according to the Financial Regulatory Authority.
  • Egypt welcomed 13.1mn tourists in 2019, up from 11.3 and 8.3mn respectively in 2018 and 2017. Revenues increased by 12.5% yoy to a record high of USD 13.03bn, versus the previous peak of USD 12.5bn touched in 2010 (from 14.7mn tourists). The tourism sector is estimated to lose between USD 2.5-3bn by mid-Apr, a month since international flights were suspended.
  • Nearly 1.7mn SMEs in Egypt employ around 5.8mn persons and operate with EGP 77.1bn (USD 4.9bn) capital, revealed the Chairman of the Central Agency for Public Mobilization and Statistics.
  • Jordan imported about 310k barrels of oil from Iraq in Mar, according to the former’s energy minister, with a daily average of 10k barrels a day.
  • To support businesses impacted by Covid-19 outbreak, the central bank of Jordan launched a JOD 500mn (USD 704.5mn) soft financing programme for SMEs, with the Jordan Loan Guarantee Corporation acting as guarantor. With a one-year grace period, the interest rate of the loans is less than 3.5% while the loan guarantee level is 85% (higher than 70% normally).
  • Jordan observed a 24-hour lockdown on Thursday, with closure of permitted commercial stores and a ban on movement of people.
  • Kuwait’s central bank’s stimulus package to support SMEs and key sectors from the Covid19 outbreak included a cut in capital adequacy requirements by 2.5% and easing the risk weighting for SMEs to 25% from 75%. This is in additional to an earlier move during the week to provide soft long-term loans from local banks and postpone loan repayments by 3 months. Government agencies were also directed to pay obligations to the private sector as soon as possible.
  • Moody’s placed Kuwait’s Aa2 rating on review for a downgrade, citing a “significant” decline in government revenues in line with the sharp fall in oil prices.
  • Kuwait’s oil exports to Japan fell by 8% yoy in Feb to 7.5mn barrels or 259k barrels per day.
  • Lebanon’s central bank announced the launch of a foreign exchange unit to centralise the parallel exchange rate. The pound has traded around 2,800 pounds to the dollar in the parallel market, nearly 50% weaker than the official peg of 1,507.5 (in place since 1997).
  • Lebanon will allow deposits of USD 3k or less to be withdrawn in Lebanese pounds at the “market” rate, as per a central bank circular. Though the market rate was not defined initially, another statement detailed that the scheme would run for three months and that the rate would be set daily via an electronic platform including local lenders, the central bank and exchange bureaus.
  • PMI in Lebanon slipped to 35.0 in Mar from a reading of 45.5 in Feb, recording the sharpest deterioration in business conditions; new orders and output sub-indices fell to historic lows.
  • The World Bank approved a USD 40mn loan to Lebanon to support its fight against the spread of Covid19. The loan will support 3 main areas of “surveillance and case detection, case management and protection of health workers, multisectoral response to support multisectoral activities”.
  • Oman’s ruler issued a decree to set up a new tax administration system.
  • Moody’s placed the Ba2 issuer rating of the government of Oman under review for a downgrade, citing “increased external vulnerability and government liquidity risks”.
  • Bloomberg reported that Qatar had hired banks to raise more than USD 5bn in bonds to support its finances (given the double whammy of lower oil prices and the spread of Covid19) as early as this week.
  • Qatar government has instructed private sector companies to have 80% of their staff work from home, effective Thurs (Apr 2) for an initial 2 weeks. The working day will be reduced to six hours, from 7:00 a.m. to 1:00 p.m., excluding grocery stores, pharmacies and restaurants.
  • The chief executive of Qatar Airways disclosed to Reuters that though the airline remains operational (it expects to operate around 1800 flights over 2 weeks), it would “eventually” reach out to the government “for equity” injection.
  • Saudi Arabia’s non-oil sector activity posted the biggest drop in the PMI survey’s history when it fell to 42.4 in Mar from 52.5 in Feb; this is also the first time the index is below the 50-mark.
  • The King ordered Saudi Arabia’s government to pay 60% of salaries of Saudi employees working in the private sector for 3 months, estimated to amount to SAR 9bn (USD 2.39bn).
  • Saudi Arabia imposed a 24-hour curfew from Thurs (Apr 2) in Mecca and Medina “until further notice” while making exceptions for workers to leave their homes for approved jobs. A curfew was imposed also in Dammam, Taif and Qatif starting Fri 3pm till further notice.
  • Saudi Arabia’s minister for Hajj and Umrah asked Muslims to put Hajj plans on hold until there is more clarity about the spread of Covid19. The Hajj, which has been cancelled only 40 times in history, is a major source of non-oil revenue and supports non-oil sector activity.
  • In a bid to support companies affected by the outbreak, Saudi Arabia’s central bank has asked that banks agree to restructure financing for customers without extra fees and provide financing needed by private sector customers who were made redundant during this time.
  • Saudi Arabia’s Ministry of Human Resources and Social Development allocated SAR 17bn (USD 4.5bn) to deal with the economic impact and job losses from the Covid19 crisis. Under new rules, expat workers whose residency permits expire before Jun 30 will be exempt from financial fees and their permits extended for three months.
  • Saudi Arabia approved (either direct or indirect) IPO stock listings of government assets planned for privatisation in Tadawul. According to the statement, indirect IPOs for assets would be done via setting up companies that own the government stakes in these projects.
  • Saudi Arabia’s FDI grew by 1.97% yoy to SAR 885.62bn (USD 236.17bn) last year, as per SAMA data; net FDI increased by 12.87% to SAR 17.1bn in 2019.
  • Banks in Saudi Arabia raised investments in government issued bonds by 20.7% yoy to SAR 400.2bn (USD 106.72bn) in Feb 2020.
  • Saudi Arabia pumped more than 12mn barrels of oil for the first time in its history. It was also reported earlier in the week that plans were on to increase its crude oil exports by about 600k barrels per day (bpd), taking the total to 10.6mn bpd, starting from May.
  • Saudi energy firms pledged SAR 525mn (USD 140mn) – of which Aramco contributed SAR 200mn – in the fight against the covid19 outbreak.
  • The electricity grids of Egypt and Sudan were officially connected last week, with an initial capacity of 60 megawatts.
  • ESCWA estimates that an additional 8.3mn persons would fall into poverty in the Arab region. This could also raise the number of unnourished persons by some 2mn. The report: https://www.unescwa.org/sites/www.unescwa.org/files/en_20-00119_covid-19_poverty.pdf

UAE Focus

  • The UAE initiated an indefinite lockdown/ national sterilization drive starting Apr 5. While metro and tram services have been suspended, public buses and taxis will remain available (with the latter slashing rates by 50%). Dubai imposed a 2-week 24-hour lockdown following a shutdown initiated earlier in the densely-populated Al Ras district. UAE also extended schools’ closure till end of the academic year (Jun).
  • The UAE central bank announced new measures to ease financial and liquidity requirements: this includes a 50% reduction in reserve requirements for demand deposits to 7% (releasing ~ USD 16.6bn in liquidity) in addition to allowing banks to defer payments of loans until end-2020.
  • UAE PMI slipped to 45.2 in Mar (Feb: 49.1) – the biggest decline ever – and employment in the non-oil private sector contracted at the quickest rate ever.
  • The value of UAE’s non-oil trade increased by 3.3% yoy to AED 786bn in H1 2019. Re-exports increased by 3% yoy to AED 226.2bn while imports grew by 1.4% to AED 44bn.
  • The UAE announced the appointment of a new central bank governor Abdulhamid Saeed replacing the previous governor whose tenure began in 2014.
  • Dubai Expo organisers have officially proposed 1st Oct 2021 as the new starting date for the 6-month long event. BIE is set to decide on it at the next meeting to be held on Apr 21.
  • Dubai government revealed its commitment to inject liquidity into Emirates airlines.
  • Abu Dhabi has been ranked the most livable city in the Arab world, followed by Dubai, according to the EIU’s Global Liveability Index.


Weekly Insights: Charts of the Week

  1. World Pandemic Uncertainty Index: the current Covid19 outbreak is 3X the size of the uncertainty during the 2002-03 SARS epidemic & ~20X the size during the Ebola outbreak.


 

  1. US non-farm payrolls dips and unemployment rate rises but brace for further declines as the timing of data collection was prior to the drastic rise in past 2 weeks. Initial jobless claims have risen over 10mn over past two weeks, likely to push unemployment rate closer to 10%.

  1. Manufacturing PMIs deteriorated everywhere except in China


 
 
 
 
 
 
 
 
 
 
 
 
4. Services PMIs collapse across Europe

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Media Review
Gulf banks put brakes on lending as dollar liquidity crunch looms
https://www.reuters.com/article/us-health-coronavirus-gulf-banks/gulf-banks-put-brakes-on-lending-as-dollar-liquidity-crunch-looms-idUSKBN21J5HR
Oil row rumbles on as crisis talks are postponed
https://www.arabnews.com/node/1653346/business-economy
Option-Based Credit Spreads Signal a Recession, but the US Stimulus Will Soften the Blow
https://promarket.org/option-based-credit-spreads-signal-a-recession-but-the-us-stimulus-will-soften-the-blow/
Global Uncertainty Related to Coronavirus at Record High
https://blogs.imf.org/2020/04/04/global-uncertainty-related-to-coronavirus-at-record-high
 
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Weekly Economic Commentary – Mar 29, 2020

This week’s “Weekly Insightsraises the question whether there is any silver lining to the Covid-19 outbreak
Markets
Stocks were on yet-another rollercoaster ride last week: with a historic three day run up followed by a fall on Fri. Stimulus measures were announced across many nations, but there is still a great deal of uncertainty related to the Covid19 outbreak. MSCI’s gauge of global stocks posted both its largest weekly percentage gain since 2008 and its largest monthly and quarterly drops since 2008. In the region, some markets continue to be battered by the double whammy of the Covid19 outbreak and lower oil prices. Among currencies, the dollar posted its biggest weekly drop in more than a decade after central banks tapped the Fed’s swap lines. Oil prices continued to fall for the 5th straight week on demand concerns; gold posted its biggest weekly gain since 2008.
Global Developments
US/Americas:

  • US Fed’s measures to support the economy include unlimited asset purchases plan, a first time move into corporate bonds, reviving Term Asset-backed securities Loan Facility (a facility dating back to the 2008 financial crisis, which gives the Fed the ability to buy securities backed by student, car and credit-card loans), as well as loans to businesses through the Small Business Administration among others.
  • The US Senate passed an historically unprecedented USD 2.2trn stimulus package: this would include cheques to more than 150mn households, loan programs for businesses and unemployment insurance extension programs.
  • The University of Michigan’s Consumer Sentiment Index fell to 89.1 in Mar – the lowest level since Oct 2016 -from Feb’s final reading of 101.0. This was also the largest monthly drop in the index since Oct 2008.
  • Initial jobless claims surged to an unprecedented 3.3mn in the week ended Mar 20, outpacing the existing record of 695k new claims (from 1982) and causing the 4-week average to climb to 998.25k from 232.25k the week before.
  • US GDP grew by 2.1% in Q4 last year, unchanged from previous estimates. Core personal consumption expenditures in the US inched up to 1.8% yoy in Feb (Jan: 1.7%). Personal income rose by 0.6% in Feb while spending was up by 0.2%.
  • Durable goods orders in the US unexpectedly increased by 1.2% mom in Feb (Jan: 0.1%), boosted by a 4.6% rebound in orders for transportation equipment (following Jan’s 0.9% dip); non-defense capital goods excluding aircraft declined by 0.8% (Jan: +1%).
  • New home sales in the US fell by 4.4% mom in Feb to a seasonally adjusted annual rate of 765k units (Jan: 10.5%). The median new homes sales price was up 7.8% yoy to USD 345,900.
  • The Chicago Fed National Activity Index improved to 0.16 in Feb from Jan’s downwardly revised -0.33.
  • The Markit manufacturing PMI in the US eased to 49.2 in Mar (Feb: 50.7) – the lowest level since Aug 2009 – while the services PMI slipped by a wider margin (39.1 vs 49.4), resulting in a drop in composite PMI to 40.5 from 49.6 the month before.
  • Goods trade deficit in the US narrowed by 9.1% to USD 59.89bn in Feb, thanks to a slowdown in the growth of imports.

Europe:

  • The ECB launched a EUR 750bn programme of asset purchases (including both commercial paper and Greek government bonds) that will last through the duration of the outbreak. The apex bank has also ordered eurozone banks to freeze dividend payments and share buybacks this year.
  • The Ifo business climate index in Germany eased to 86.1 in Mar, below the initial estimate of 87.7 and compared to Feb’s 96 – recording the sharpest monthly drop ever. The current assessments slowed to 93 (93.8) while expectations slipped to 79.7 (82).
  • Preliminary Mar PMIs slowed in Germany and wider eurozone, with services badly hit: manufacturing PMI in Germany slipped to 45.7 (Feb: 48) while the services PMI plunged to 34.5 (52.5), causing the composite index to fall to 37.2 from 50.7 the month before. The fall in services PMI was sharper in the eurozone (28.4 from Feb’s 52.6) and with manufacturing PMI also down (44.8 from 49.2), the composite PMI also dipped (31.4 from 51.6) – the lowest since the series began in late 1990s.
  • The UK numbers also showed a drop in services PMI (35.7 in Mar vs Feb’s 53.2) while manufacturing PMI eased to 48 from 51.7 the month before. The composite index, at 37 in Mar, was the lowest on record since the survey began in 1996.
  • Inflation in the UK inched down to 1.7% in Feb (Jan: 1.8%) as oil prices sank while the core CPI inched up to 1.7% from 1.6% the month before. Producer price index fell by 0.5% mom (Jan: 1.6%) while the retail price index increased to 0.5% (Jan: -0.4%).
  • UK retail sales fell by 0.3% mom in Feb (Jan: 1.1%); department stores sales fell by 1.7% – the fastest pace across the sector. Data was collected by Feb 29 before the outbreak hit the UK.
  • The Bank of England cut interest rates to 0.1%, the lowest in the Bank’s 325-year history, in addition to announcing a GBP 200bn asset-purchase programme.

Asia Pacific:

  • After the country locked down for 3 weeks (till Apr 14), India announced an INR 1.7trn (USD 22.5bn) stimulus package to support the economy: this includes direct cash transfers and other food-security related measures. The Reserve Bank of India slashed the repo rate by 75bps to 4.4% at an emergency meeting while the reverse repo rate saw a steeper cut by 90bps to 4.15%. Furthermore, the cash-reserve ratio was reduced by 100bps to boost liquidity and a moratorium of three months of EMIs was announced on all outstanding loans (applies to corporate, home and car loans).
  • As Japan plans a stimulus package (estimated to be worth 10% of the country’s GDP), the government passed the JPY 102.7trn fiscal budget for 2020. Separately, core inflation in Tokyo was up by 0.4% yoy in Mar (Feb: 0.5%) while inflation remained flat at 0.4%.
  • Inflation in Hong Kong increased by 2.2% yoy in Feb compared to 1.4% the month before.
  • Preliminary Q1 GDP in Singapore contracted by 10.6% qoq and by 2.2% yoy (Q4: 0.6% qoq and 1% yoy). Construction sector, services and manufacturing led the declines in overall GDP, falling by 4.3% yoy, 3.1% and 0.5% respectively. The 2020 growth forecast has been slashed to a range of -4 to -1% from an earlier -0.5 to 1.5% estimate.
  • Singapore inflation eased to 0.3% yoy in Feb (Jan: 0.8%). Core inflation (excluding private transport and accommodation) turned negative for the first time in a decade, falling by 0.1%.
  • Industrial production in Singapore tumbled by 22.3% mom in Feb after posting an 18.7% gain in Jan. In yoy terms, output dropped by 1.1% reversing Jan’s 3.5% gain.
  • Singapore introduced a fiscal support package worth SGD 48.4bn (USD 33.2bn) to support the economy as it combats Covid19: this includes wage subsidies, deferring income tax payments, cash payouts to citizens. This additional spending follows a previous SGD 6.4bn worth economic and healthcare measures.

Bottom line: As the Covid19 outbreak continues to spread relentlessly across Europe and in the US, stimulus measures have been introduced from almost all affected nations.  What has been missing so far is global solidarity and cooperation. Calling for “strengthening global preparedness to counter infectious diseases”, the G20 pledged to inject USD 5trn to the global economy in an effort to combat the virus, but more has to be done to support the developing and poorer nations of the world, ill-equipped to handle such crisis domestically. There has been a lack of action in helping emerging markets. The world needs to see the IMF/ World Bank/ IFC step up their lending capacity.  Is it also futile to hope for nations setting aside political differences and rivalries to waive sanctions, ban tariffs and restrictions on cross-border trades (especially of medicines, medical equipment and goods needed to fight the epidemic)? 
Regional Developments

  • Bahrain announced a BHD 4.3bn stimulus package to support the economy: this includes a waiver on utility bills (for both individuals and commercial) for 3 months, a delay of bank loan instalments for 6 months, doubling the Liquidity Fund to BHD 200mn and exemption from tourism fees for 3 months among others.
  • All non-essential businesses in Bahrain will remain closed till 7pm on Apr 9th. Bahrain’s parliament backed a 6pm-5am nationwide curfew to combat the spread of the coronavirus outbreak.
  • Egypt’s EGP 100bn emergency fund to support the economy during the Covid19 outbreak includes EGP 50bn for the tourism industry, EGP 20bn for the Central Bank to facilitate direct share purchases in the stock exchange, a 2-year freeze on the implementation of tax on agricultural land as well as EGP 27.6bn to disburse to 2.4mn families.
  • To tackle the spread of Covid19, Egypt has imposed a partial curfew from 7pm to 6am for two weeks (from last Wed). Schools and universities will be suspended for an additional two weeks till mid-Apr. Suspension of flights at Egypt’s airports will be extended for two weeks from Apr 1. An additional EGP 1bn was allocated to the health ministry to provide preventive supplies. The Egyptian Exchange also reduced trading hours (till 1:30pm).
  • Impacts from Covid 19: dampening trade, as the number of container ships passing through the Suez Canal fell by 7.3% in Feb; IPOs of Banque du Caire and Taqa Arabia – both to be implemented mid-Apr – have been postponed.
  • Egypt lowered its GDP growth target for the current fiscal year 2019-20 to 5.1% from 5.6% previously.
  • Egypt’s cabinet approved the draft law of the 2020-21 budget, with an expected deficit of 6.3% of GDP. The budget also aims to reduce public debt of GDP to 82.7% by end-Jun 2021, and to achieve a primary surplus of 2%.
  • Foreign investments in Egyptian treasury bills increased by 7.3% mom to EGP 310.6bn (USD 19.89bn).
  • Exports of building materials from Egypt increased by 14.4% yoy to USD 1.026bn in Jan-Feb 2020. The UAE, Canada and Italy were the top nations importing from Egypt.
  • Egypt invested EGP 28.7bn (USD 7.8bn) in 156 energy projects during H1 of the 2019-2020 fiscal year. About 147 projects were implemented in the electricity and renewable energy domain at a value of EGP 17bn.
  • Iraq is extending the flight and travel ban – which started on Mar 17 – until Apr 11.
  • Iraq asked all international oil firms to reduce their budgets by 30% given the plunge in oil prices, reported Reuters, but without affecting crude oil output.
  • The IMF approved a four-year USD 1.3bn loan program for Jordan. Though the programme was designed before the Covid19 outbreak, changes were made to support unbudgeted spending towards emergency medical supplies and equipment.
  • Jordan eased restrictions, allowing small shops/ markets to resume work from 10am to 6pm from Wed last week – with a warning that any crowding would lead to closure again.
  • Kuwait extended the suspension of work in all ministries, state agencies and private companies by 2 additional weeks, with work to resume on Apr 12. All shops and central markets remain closed while partial curfews are operational from 5pm to 4am.
  • Kuwait’s exports plunged by 90% yoy to KWD 143.8mn in Feb; no oil exports were recorded in the month.
  • Kuwait’s imports from China declined by 12.93% yoy to KWD 253.81mn during Jan-Feb this year. Total imports into Kuwait slipped by 7.4% to KWD 1.5bn during this period.
  • Kuwait Petroleum Corporation called on all subsidiaries to rationalize spending, reduce capital expenditure and operating costs this year given the slide in oil prices.
  • S&P lowered Kuwait’s long-term foreign and local-currency sovereign credit ratings to AA- from AA, with a stable outlook. Though the recent drop in oil prices and slow reform momentum will negatively affect the economy, “sizable fiscal and balance-of-payments buffers” will provide support.
  • Lebanon launched formal debt restructuring talks on Fri, reiterating their aim of “fair and equitable treatment of creditors”: the investor presentation showed BdL’s liquid foreign exchange reserves at USD 22bn, public debt at 178% of GDP at end-2019 and projected GDP contraction of 12% this year (2019: -7%), with inflation at 27%; some USD 57bn of domestic T-bills and bonds have been earmarked for restructuring, while just over USD 2bn of bilateral and multilateral debt will remain untouched.
  • Earlier in the week, Lebanon suspended payments on all USD 31.3bn of its international Eurobonds declaring that it could no longer repay them as pressure mounts on “access to foreign currency”.
  • Lebanon started imposing a 7pm-5am curfew from last Thurs.
  • Oman has placed its loan discussions on hold, following the plunge in oil prices, reported Reuters. The country estimates a deficit of OMR 2.5bn (USD 6.5bn, or 8% of GDP) this year, with plans to cover about 80% of the deficit via foreign and domestic borrowing.
  • Oman will suspend all internal and international flights as of Mar 29, except cargo operations and flights to Musandam. In addition, the country last week banned public gatherings, limited staffing at state entities and also shut currency exchange bureaus.
  • The value of real estate transactions in Oman declined by 30.6% yoy to OMR 167.3mn in Jan 2020 while the number of plots issued also declined by 14.7% to 17494.
  • Qatar central bank approved the deferral of loan installments and interest for 6 months in sectors affected by the Covid19 outbreak. Fees on points of sale transactions and ATM withdrawals have also been cancelled. Parks and public beaches were closed till further notice.
  • Inflation in Saudi Arabia increased to 1.2% in Feb – the highest since Dec 2018 – supported by a 3.6% rise in food prices.
  • Tadawul temporarily reduced trading hours till 1pm (from 3pm before) in a bid to slow the spread of covid19 in Saudi Arabia. An evening curfew from 7pm to 6am began last Mon for 21 days, to slow the spread of the virus. Separately, local banks announced postponement of 3 months’ instalments for all public and private health personnel who have credit facilities without changing the cost.
  • A group of Saudi banks announced their support for the Health Endowment Fund with a contribution of SAR 155.1mn (USD 41.3mn).
  • Saudi Arabia sold SAR 15.568bn in Islamic bonds in Mar as part of its monthly SAR-denominated sukuk program.
  • Saudi Aramco reiterated its commitments to ensure production and supply. The CEO stated that USD 30 a barrel oil price was “very comfortable”.
  • Saudi Arabia disclosed a 33% yoy surge in average daily consumption of data in Feb. As social distancing and work-from-home policies were rolled out, internet traffic has increased.
  • Construction deals in Saudi Arabia surged by 95% yoy to AED 197.1bn (USD 52.6bn) last year – the highest since 2015. Real estate firms and oil and gas firms were the clear leaders.
  • Sovereign wealth funds in the region could witness a decline in assets over USD 300bn this year, according to IIF estimates, with Abu Dhabi, Kuwait and Qatar accounting for bulk of the declines.

UAE Focus

  • UAE’s government announced additional stimulus to the tune of AED 16bn (USD 4.36bn) to support the economy, thereby bringing the total amount to AED 126bn so far. These measures will include support for SMEs and to ensure delivery of infrastructure projects.
  • Dubai Free zones have announced measures to support the economy during the Covid19 outbreak: this includes postponement of rent payments up to 6 months, easy installments for financial payments, refunding insurance and guarantees claims, cancellation of penalties, as well as temporary contracts allowing for free movement of labour between companies without penalties during 2020.
  • In a major decision, UAE has suspended all passenger and transit flights for two weeks.
  • Banks in both Dubai and Abu Dhabi and a few other banks in other emirates have announced measures to support the economies: some of the common measures include rescheduling or deferring of loan payments for affected companies as well as interest free installment plans for individual customers. (More: Abu Dhabi’s 17 financial initiatives: https://bit.ly/2WXwHDc; Dubai’s: https://bit.ly/3bzqS2W )
  • The UAE central bank removed AED 14.3bn of excess liquidity in the 4 months to Feb 2020, revealed central bank statistics. The value of cumulative certificates of deposit stood at AED 164.1bn by end-Feb.
  • Gold reserves at the UAE central bank accelerated by 38.8% to AED 5.615bn in Feb from end-Dec.
  • Dubai Economy has directed private sector companies to implement a remote working system for 80% of their staff till Apr 9th.
  • A virtual meeting will be held (on Mon) to discuss the Dubai Expo: possibilities include a late-Oct start to delay by upto a year. The final decision would be made by member states of the Paris-based Bureau International des Expositions, which awards the event.


Weekly Insights: Is there a silver lining to the Covid19 outbreak?

Covid-19 has been spreading fast and furiously through the United States (home to the largest number of confirmed cases) and Europe (with Italy and Spain leading the pack), with some sharp increases in the Middle East region as well (Iran accounts for the substantial number of cases). Asia, especially South-east Asia, seems to have kept a lid on the outbreak of Covid-19 given their past experience with SARS and subsequent readiness for controlling such epidemics. However, Covid-19 is still unfolding: India, Africa, Latam are major risk areas with poor public health systems and ability to counter. India’s 1.3bn people are in lockdown till Apr 14th and have witnessed severe supply chain disruptions so far; support for Latam’s informal workforce raises a tricky situation for handouts given that a large section remains unregistered; harvests at farms in Europe (which typically use migrant labour) is another question mark given current travel restrictions. Even though production has resumed in parts of China and there are reports of Singaporean firms resuming operations in China, growth dips are all but confirmed in H1 this year (thanks to the declines across consumption, exports and investments/ capital spending).
Though at varying levels of containment, some of the common factors nations have embarked on in fighting the outbreak have been via: (a) remote working; (b) closure of educational institutions; (c) closure of non-essential shops, public parks and beaches; (d) stimulus packages for Covid-19 hit sectors (trade, tourism, hospitality), SMEs/ businesses/ individuals including loan guarantees; and (e) central bank rate cuts + support for banking sector/ capital markets. The US’s $2.2trn stimulus package might be the largest one, it is still considered sub-par to what is required. Left out of the bailout were vulnerable segments like high-yield bonds and the mortgage servicers – which could lead to collapses causing a domino effect on the capital markets.
So, as we pore over the Covid-19 map (https://coronavirus.jhu.edu/map.html) first thing in the morning for latest updates, and there seems little we can do than “stay home and stay safe”, is there any silver lining to this doom-and gloom outlook? A glaring one so far: restricted air travel, limited number of vehicles on roads, partial business shutdowns and industrial activity has resulted in lower pollution levels – which also helps fight Covid19 especially for people with health vulnerabilities. China’s carbon emissions this year are expected to fall by about 1% this year. The effects of reduced pollution during the Covid19 outbreak might offer hope to climate change activists across the globe. However, in the medium-term, on the road to recovery, governments may attempt to vote in favour of reviving economies by lowering pollution standards (e.g. China is considering relaxing car-pollution rules). The ongoing plunge in oil prices isn’t likely to help either: lower oil prices may encourage greater consumption and lower investment in renewable energy.
The burning question is whether the barriers preventing a collective global Covid-19 response will continue and result in climate inaction (in spite of the evidence) for the future generation?
Media Review
The Arab World’s Perfect COVID-19 Storm
https://www.project-syndicate.org/commentary/gulf-cooperation-council-perfect-covid19-storm-by-nasser-saidi-2020-03
Policy responses to Covid19
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19
Don’t fall for the false trade-offs of COVID-19 policy
https://review.chicagobooth.edu/economics/2020/article/don-t-fall-false-trade-offs-covid-19-policy
Oil majors slash 2020 spending 20% after prices slump; including Saudi Aramco
https://www.reuters.com/article/us-global-oil-majors-capex-graphic/oil-majors-slash-2020-spending-20-after-prices-slump-idUSKBN21D1Y6
 
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Weekly Economic Commentary – Mar 22, 2020

This week’s “Weekly Insightscompiles the latest responses from GCC nations to tackle the ongoing Covid19 outbreak. The plunge in oil price is adding fuel to the fire! Read our take on the state of fiscal balances in the near- to medium-term.
Markets
Central banks across the globe announced measures to support markets as more and more countries started to embrace shutdowns/ social distancing and stay-at-home policies. Though US stocks partially rebounded from Monday’s historic sell-off, the S&P still posted a weekly decline of around 15%. Early gains or rebounds across global markets after stimulus announcements remained short-lived after imminent global economic slowdown (at least in this quarter and next) dampened spirits. Regional markets remained mostly in the red (except Qatar) – stimulus announcements notwithstanding – as it battled the effects of both the Covid19 outbreak, global financial contagion, and falling oil prices. Emerging market currencies continued in a rut on a stronger dollar (tmsnrt.rs/2egbfVh); following the surprise BoE rate cut, the GBP sank to the lowest since 1985; euro stayed near a three-year low, also recording the steepest weekly decline since mid-2015. Oil markets were extremely volatile and fell for the 4th consecutive week, with prices closing at less than half their price in Jan (Brent crude briefly moved above USD 30 mark on Fri); in spite of Fri’s rally, gold price dipped in weekly terms.
Global Developments
US/Americas:

  • US Fed lowered interest rate to near zero (by a total of 1.5 ppts since Mar 3), lowered the discount rate (to 0.25% from 1.75%, lower than during the Great Recession of 2007-2009), opened dollar swap lines and stepped up asset purchases (buy at least USD 500bn in Treasury securities and USD 200bn in mortgage-backed securities over “the coming months”).
  • Industrial production in the US rose by 0.6% mom in Feb (Jan: -0.5%) while manufacturing rose by just 0.1% after a downwardly revised fall by 0.2%. Capacity utilization improved to 77% from 76.6% the month before.
  • US retail sales dropped by 0.5% mom in Feb (Jan: 0.6%) – the biggest drop since Dec 2018; excluding autos, retail sales fell by 0.4%.
  • Building permits declined by 5.5% to 1.464mn in Feb; housing starts fell by 1.5% to 1.599mn. Existing home sales increased to 5.77mn in Feb, rising by 6.5% mom, following a 1.3% dip the month before.
  • The New York Fed’s Empire State business conditions index fell in Mar to its lowest level since 2009: down 34 points to -21.5. Separately, the Philadelphia Fed Factory Index plunged to -12.7 in Mar (Feb: 36.4), the biggest one-month decline in the survey’s history.
  • Initial jobless claims increased to 281k in the week ended Mar 13 while the 4-week average increased to 232.25k. Expect a massive increase in the coming weeks.

Europe:

  • The ECB launched a new asset purchase programme to support the region during the ongoing Covid19 outbreak. The EUR 750bn Pandemic Emergency Purchase Programme (PEPP) will extend until the end of 2020.
  • The ZEW survey showed a plunge in German economic sentiment to -49.5 in Mar (Feb: +8.7) – the largest drop since the survey started in Dec 1991 – while the current situation reading dropped to -43.1 (Feb: -15.7). The EU ZEW economic sentiment dropped to -49.5 in Mar (Feb: 10.4) – the lowest since Dc 2011.
  • German producer price index declined by 0.4% mom in Feb, partially reversing Jan’s 0.8% rise.
  • The Bank of England delivered a second emergency rate cut, leaving interest rates at 0.1%, while also ramping up its bond-buying program (to GBP 645bn from GBP 435bn).
  • UK ILO unemployment rate edged up to 3.9% in the 3 months to Jan from the previous reading of 3.8%. The number of people out of work rose by 63k to 1.34mn – the biggest increase since late 2011; number of employed people rose by 184k to a record high 32.99mn.
  • Wage growth in the UK picked up, with average earnings including bonus rising by 3.1% yoy (Dec: 2.9%).

Asia Pacific:

  • Covid19 hits China’s economy hard in Jan-Feb: fixed asset investment plunged by 24.5% yoy in Jan-Feb (Jan: +5.4%) to CNY 3.3trn (USD 471bn); industrial production tumbled by 13.5% yoy in Jan-Feb (Jan: 6.9%) – the sharpest drop in 30 years; retail sales dropped by 20.5% yoy (Jan: +8%). Meanwhile, the PBoC left its benchmark loan prime rates unchanged at 4.05% (following the previous week’s cut in required reserve ratio).
  • The Bank of Japan, at its latest policy meeting, left rates untouched while deciding to pump more liquidity: this includes starting a new loan program for companies, boosting exchange-trade fund purchases, and conducting swap operations. The BoJ purchased JPY 1.3trn (USD 12bn) of government bonds on Thursday to curb rising long-term yields.
  • Japan machinery orders rebounded by 2.9% mom in Jan (Dec: -11.9%) – but this uptick in data is prior to the spread of Covid19 globally. Industrial production in Japan rose by 1% mom in Jan, with shipments rising by 0.6% and inventories declining by 1.6%; in yoy terms, industrial output slipped by 2.3% yoy in Jan (Dec: -2.5%).
  • Japan trade balance reported a surplus of JPY 1.1trn in Feb (Jan: JPY 1.3trn deficit) – its largest since Sep 2007 – as imports plunged by 14% yoy and exports slipped for the 15th consecutive month (-1%). Imports from China fell at the fastest pace since 1986 (-47.1%).
  • Core inflation in Japan eased further to 0.6% yoy in Feb (Jan: 0.8%) as energy prices fell; the core-core price index (excluding energy prices in addition to food) rose 0.6%.
  • Japan’s all industry activity edged up by 0.8% mom in Jan (Dec: -0.1%), thanks to an uptick in construction output and tertiary industry activity.
  • Other central bank activity: The Bank of Korea cut the benchmark rate by 50bps to a record low of 0.75% in a bid to support the plunging stock market. The Bank of Thailand decided at an emergency meeting to cut its key interest rate to 0.75%, a historical low.

Bottom line: Italy’s death toll from Covid19 has already surpassed that of China (toll continues to surge in Italy and Spain with Sat the worst day for mortalities); China meanwhile has reported no new cases of the coronavirus for the 1st time since the outbreak began. As the pandemic continues to grow amid calls for social distancing and “flattening the curve”, the ILO projects that the pandemic could cause about 25mn job cuts. Data from China for Jan-Feb shows how drastic the economic impact of the outbreak is and given its widespread transmission across the globe, the recovery stage is far afield: even as China recovers (given recent resumption of work, government’s plans for “new infrastructure” might drive investment etc.), global demand would remain dented and global supply chains would still be broken. Plus, the questions remain on the extent of the spread of Covid19 to India, Latin America and Africa, and whether the infections will re-emerge as virus-related restrictions are eased. Central banks in the US, Canada, UK, Australia, South Korea, Taiwan, Norway and Brazil have all cut rates in March (some twice), while the ECB and Bank of Japan have expanded their quantitative easing as their interest rates were already in negative territory. Last, but not the least, corporate borrowing costs are soaring (https://on.ft.com/2UbBTl6).
Regional Developments

  • Central banks in the region cut interest rates following the Fed cut to near zero, given the peg to the dollar. Kuwait’s central bank cut its deposit rate by 100 bps to 1.5%, its lowest ever; in Saudi Arabia the repo and reverse repo were lowered by 75bps; UAE lowered the interest rate on 1-week certificate of deposit by 75bps and other rates by 50bps. The Qatar Central Bank also cut the main interest rates by 50bps.
  • All GCC nations have introduced stimulus packages to support their economies through the Covid19 outbreak. Our weekly insights section compiles the latest responses.
  • Bahrain’s economic stimulus package worth BHD 4.3bn (USD 11.3bn) has 8 initiatives including a doubling of the Liquidity Fund to BHD 200mn, a waiver on utilities bills for 3 months, delay of loan installments for 6 months (not a blanket waiver, but for those impacted by the outbreak), exempting tourism fees for 3 months and supporting wages of Bahrainis in the private sector among others.
  • Bahraini nationals can delay payments of loan installments by 6 months, according to the central bank: this covers credit cards but does not include inter-bank deposits or borrowings. The waiver (applicable from Mar) is without fees, compound interest or increase in the profit or interest rate.
  • In a bid to meet emergency expenses, Bahrain’s finance minister has been authorized to withdraw directly from the public account, without exceeding 5% of total appropriations for the current fiscal year’s budget.
  • Electronic fund transfers in Bahrain surged by 82% yoy in 2019: with 300k registered users and over 2,300 merchants, the electronic payment solution BenefitPay reported overall transactions of 6mn by end-2019.
  • Egypt’s central bank lowered interest rates by 300bps at an unscheduled meeting: it cut the overnight deposit rate, overnight lending rate, and the rate of the main operation by 300bps to 9.25%, 10.25% and 9.75%, respectively. The discount rate was also lowered by 300bps to 9.75%. The apex bank also announced that all debt payments for institutions and individuals will be delayed for six months, including loans for consumption, personal mortgage loans. Banks were asked to raise daily transaction limits on credit cards, as well as cancel fees and commissions applied at points of sale and ATMs.
  • Egypt central bank’s new initiative for non-performing loans (effective until Mar 31, 2021): the bank will cancel around EGP 10bn in debt owed to banks by 940k customers. The decision includes all NPLs whether the debtors are facing legal procedures or not. (The CBE circular – in Arabic – https://bit.ly/3dktjbp)
  • In response to the covid19 outbreak, Egypt announced the closure of all cafes, malls and sporting clubs in the evenings (from 7pm to 6am) until Mar 31. In addition, there is a flight ban in place (from Mar 19th, except for outward-bound flights needed by foreign tourists) and a nation-wide school shutdown for 2 weeks.
  • To support the economy during the outbreak, Egypt gave a 3-month grace period for real estate tax payment for factories and tourism facilities, reduced the price of natural gas and electricity for the industrial sector, lowered stamp taxes on transactions on the stock exchange, reduced taxes on dividends from listed companies and exempted non-residents capital gains taxes on bourse transactions. It is estimated the tourism sector will incur losses of up to USD 1bn monthly given suspension of flights (and subsequent loss in revenues) while exports are likely to drop by 25% this year.
  • Egypt recorded a primary surplus of EGP 38bn in Jul 2019-Feb 2020, representing 0.6% of GDP (vs EGP 28.5bn or 0.5% of GDP in the same period a year ago). The overall budget deficit remained unchanged at 4.9% of GDP during the 8-month period.
  • Egypt raised income tax exemption cap for employees to EGP 15k from EGP 8k; the government will introduce a new tax bracket of 2.5% on those earning less than EGP 35k annually, down from 10%.
  • Egypt will allocate EGP 1bn (USD 63mn) in export subsidy arrears to be paid in Mar and Apr, as part of a previously announced programme. Additionally, a cash payment of 10% will be done in Jun to support exporters, revealed the PM.
  • Egypt increased its holdings of US Treasuries by 4% yoy and 0.5% mom to USD 2.192bn in Jan. Overall GCC investments in Treasures picked up by 0.59% mom to USD 278.912bn.
  • Remittances into Egypt grew by 5.1% yoy to USD 26.8bn in 2019 (2018: 3.1%), reported the central bank.
  • Textile exports from Egypt declined by 0.4% yoy to USD 257mn in Jan: exports of ready-made garments fell by 3% while exports of home furnishing and textiles rose by 9% and 2%.
  • Women beneficiaries in Egypt received a total of EGP 242bn (USD 15bn) during Jul 2018-Dec 2019, disclosed the minister of planning and economic development. She also stated that women accounted for 5% of total micro- and small funding at a total value of EGP 3.8bn.
  • Jordan, in an attempt to contain the spread of Covid19, has suspended work in the public and private sectors for two weeks as well as closed banks (till Mar 31).
  • The Central Bank of Kuwait issued KWD 290mn (USD 943.39mn) worth of bonds and related tawarruq.
  • In addition to the economic and financial stimulus measures, schools and colleges in Kuwait will remain suspended till Aug 3.
  • Fitch downgraded Lebanon’s long-term foreign-currency IDR to “RD” from “C”.
  • Lebanon declared a medical state of emergency last Sun, also ordering closure of borders, ports and airport from Mar 18-29.
  • Oman’s central bank announced that it would provide OMR 8bn (USD 20bn) in extra liquidity to banks as part of measures aimed at supporting the economy. This includes reducing banking fees, lower capital conservation buffers, a deferment of loan instalments / interest / profit for affected borrowers, particularly SMEs (with immediate effect for the next 6 months) as well as increase lending ratios for various economic sectors. In addition, other measures including tourism and municipality tax breaks, free government storage facilities and postponement of credit instalment payments were also announced.
  • Oman, in light of its Covid19 response, will review budget every three months. The finance ministry slashed the approved budgets of civil, military and security agencies by 5% this year. Furthermore, the ministry specified that no further funding would be provided if ministries did not stick to the revised budgets.
  • The Capital Market Authority in Oman ordered joint-stock companies and investment funds to suspend holding ordinary general assemblies until further notice.
  • Hotel revenues in Oman dropped by 9.2% yoy to OMR 20.64mn (USD 53.4mn) in Jan. Occupancy rates were down by 10.4% to 55.9% (vs 62.5% in Jan 2019).
  • Qatar announced a USD 23.3bn stimulus package to combat the economic impact from the Covid19 epidemic: this includes QAR 75bn (USD 20.6bn) to provide financial and economic incentives for the private sector in addition to directing govt funds to increase investments in the stock exchange by QAR 10bn (USD 2.75bn). Qatar Development Bank will also postpone installments for all borrowers for 6 months.
  • Saudi Arabia will roll out SAR 120bn worth measures to support the private sector. This includes exemptions and postponement of some government dues, postponing payments of VAT, excise tax, income tax, Zakat declaration and payments due for a period of 3 months, and postponing the collection of customs duties on imports among others.
  • Saudi Arabia will cut SAR 50bn (USD 13.32bn) from the 2020 budget – representing less than 5% – in areas with the least social and economic impact, according to the finance minister.
  • Saudi Arabia’s Ministry of Human Resources and Social Development announced 7 private sector initiatives to reduce the burdens related to manpower, to be in force till the virus disappears. This includes lifting the halts on wage protection (in the current phase), on non-payment of fines, fines pertaining to recruitment of workers and the like.
  • Saudi Arabia suspended work for most private sector for 15 days and have called for work-from-home policies. This is in addition to previous moves suspending attendance for employees in government agencies (including at the central bank and banks), closing mosques, schools, restaurants, coffee shops and malls; entry and prayer in the outer courtyards of Two Holy Mosques in Makkah and Madinah has been suspended.
  • SAMA issued a series of measures for banks and financial institutions in the backdrop of Covid19: it will suspend freezes on client bank accounts for 30 days in specific situations (in case of not completing KYC, expiry of identification documents etc.) and increase purchase limits; in addition, business continuity plans had been activated.
  • Saudi Arabia’s crude exports fell to 7.29mn barrels per day (bpd) in Jan from Dec’s 7.37mn bpd while production touched 9.748mn bpd in Jan.
  • Saudi Arabia’s energy ministry confirmed that Aramco would be supplying crude oil at a record 12.3mn barrel per day (bpd) in the coming months, with oil exports to top 10mn bpd from May (another record high).
  • Aramco’s CFO, during a conference call, stated that the company has “massive capacity” to borrow, but that it does not need additional debt. Aramco had previously confirmed that it was “very comfortable” with a price of USD 30 per barrel.
  • Saudi Arabia detained 298 public officials on crimes (bribery, embezzlement and abuse of power) to the tune of SAR 379mn (USD 101mn). While no further details were provided on the cases, it was disclosed that the detained included persons from the defense ministry, judges and university officials.

UAE Focus

  • Abu Dhabi announced an economic stimulus package, fast tracking the implementation of Ghadan 21 initiatives. It also includes utilities subsidies (AED 5bn), free road tolls till end-2020, exemption of all commercial and industrial activities from Tawtheeq fees, exemption of individual and commercial real estate registration fees this year, suspension of bid bonds, settling all approved government payables and invoices within 15 working days, waiving all current commercial and industrial penalties, and reducing industrial land leasing fees by 25% for new contracts among others.
  • The UAE has restricted entry to all except UAE nationals – but including valid residence visa holders – for 2 weeks from noon Thursday. Additionally, the issuance of all types of labour permits has been suspended (including for drivers and domestic workers) effective Mar 19 until further notice – this exempts intra-corporate transfer & Expo 2020 Dubai permits.
  • UAE’s Emirates Airlines announced the suspension of all passenger flights by March 25, but will retain its cargo operations.
  • Given the ongoing measures to contain the spread of Covid19 globally, the Expo 2020 Dubai convened a virtual steering committee with the representatives of the countries taking part (in the Expo, in 7 months’ time) and assured that “all sensible precautions” will be taken “to manage and mitigate risk to all those involved”. Work is still continuing at the event site.
  • Assets of the UAE central bank increased by 10.3% yoy to AED 457bn at end-Feb, driven by a rally in cash and bank balances. Deposits at the central bank increased by 24.3% yoy to AED 143.4bn.
  • The UAE Federal Tax Authority reported increased compliance and a 21% hike in value of tax returns in 2019; the number of businesses registered increased by 7% to 320,440. Bottom of Form
  • Inflation in Dubai declined by 1.2% in Feb, driven by the decrease in utilities prices (-5.21%), clothing and footwear (-3.21%) while food and beverages went up by 2.38%.
  • Dubai Airport Freezone Authority (DAFZA) reported a 12.6% yoy increase in foreign trade to AED 164bn (USD 45bn), thanks to a 15.8% rise in imports (to AED 72.4bn). India was DAFZA’s biggest trade partner in 2019 with its share at AED 30bn or 18.3% of total.
  • Various companies in the UAE have rolled out measures to support businesses (non-exhaustive list): ADCB announced deferring of loan payments and waiving interest for up to 6 months for customers subject to “an appropriate level of scrutiny”; mall operators announced reduced mall timings; Al-Futtaim Group set up a fund of AED 100mn to help ease financial burden; district colling firm Empower announced 10% discount on bills; Dubai Holding rolled out an AED 1bn relief package while Alder Properties will ease/ review rentals, waive fees, and review school fees;
  • As the UAE schools roll out distance learning, families with no home internet services will be supported with the provision of free data by the telecom providers.
  • Property transactions in Dubai accelerated by 12% and 33% yoy in Jan & Feb 2020; in Feb, there were a total 4356 sales transactions with a value of AED 9.4bn.
  • Occupancy levels in Dubai hotels plunged by almost 30% yoy in the first week of Mar, according to STR. The average daily rate (ADR) dropped 20.4% to AED 498.13, while revenue per room (RevPar) fell 42.9% to AED301.68.
  • The UAE maintained the top ranking among the Arab nations for the sixth consecutive year, in the World Happiness Report 2020. The report can be accessed at: https://worldhappiness.report/ed/2020/


Weekly Insights: GCC responses to tackle the ongoing Covid19 outbreak amid falling oil prices
As the GCC nations roll out various economic, financial, health and travel-related initiatives, we have compiled a country-by-country list (below). We end it by reiterating a previously-shared graphic on how lower oil prices will affect the GCC nations in the backdrop of Covid-19 related slowdown. To provide a recent comparison, the OPEC lost a collective USD 450bn in oil revenues in 2014-16 (when the prices dipped by around 70% from $100+ to under $40). We expect fiscal deficits to soar to 10-12% of GDP this year, representing some USD 150-170bn in additional required financing.
The GCC will suffer a negative wealth effect (losses on SWF portfolios and net foreign assets), and with bulging deficits and the prospects of low oil prices, will find access to markets both more difficult and more expensive. Sovereign and corporate borrowers and bond issuers will find it increasingly difficult to rollover debt or access additional funding, given a debt overhang of USD 500bn.
Table: GCC’s responses to the Covid19 outbreak

Bahrain
Economic & Financial Health & travel-related

BHD 4.3bn stimulus package:

–  Doubling the Liquidity Fund to BHD 200mn

–  Waiver on utilities bills for 3 months;

–  Delay in loans installments for 6 months

–  Supporting wages of citizens in pvt sector

Central bank moves:

–  Banned lenders from freezing customers’ accounts in case of lost jobs or retirement

–  Cut overnight lending rate to 2.45% from 4% to ensure “smooth functioning of the money markets” (before Fed moves)

Parliament:

–  Approved measures like reduction of commercial registration fees as well as labour & utility charges for 6 months

Cabinet authorised the finance minister to directly withdraw funds with a 5% ceiling from the public account

–  Closure of educational institutes

–  Limiting social gathering of more than 150 individuals

–  Closure of movie theatres

–  Testing all incoming passengers; mandatory 14-day self-isolation

–  Ban on travel to some countries; cancellation of flights to infected areas

 

Kuwait
Economic & Financial Health & travel-related

Central bank:

–  Reduced the discount rate to 1.5% (from 2.5%) a record-low

–  Set up a KWD 10mn (USD 33mn) fund, to be financed by Kuwaiti banks

–  Suspended fees on point of sales devices and ATM withdrawals + increased the limit for contactless payments to KWD 25 from KWD 10

–  Kuwait declared a public holiday from Mar 12-26

–  Halted ALL commercial passenger flights

–  Closed schools, shopping centres, cinemas, wedding halls & children’s entertainment

–  MoH imposes mandatory corona testing for all expats who returned to the country since Feb 27, taking place on a district by district basis

Oman
Economic & Financial Health & travel-related

CB announces a $20bn incentive package

–  Repo rate cut by 75bps to 0.5%;

–  Reduce Capital Conservation Buffers for banks to 1.25% from 2.5%;

–  Lending Ratio / Financing Ratio for lenders increased to 92.5% up from 87.5%

–  Accept all requests for deferment of loan instalments / interest / profit for affected borrowers, particularly SMEs, with immediate effect for the next 6 months

–  Reduce existing fees related to banking services + avoid introducing new fees

Finance ministry slashed approved budgets of civil, military and security agencies by 5%

Other measures include tourism & municipality tax breaks, free government storage facilities and postponement of credit instalment payments

–  Oman has closed its borders: only Omanis can enter

–  Mandatory 14-day quarantine for those entering

–  Suspend issuance of tourist visas from Mar 15 for 30 days

–  Will not allow cruise ships to dock at its ports during this period

–  Schools closed; all public parks closed, public gathering prohibited, Friday prayers at mosques suspended

Qatar
Economic & Financial Health & travel-related

A $23.3bn stimulus package

–  QAR 75bn ($20.6bn) to provide financial + economic incentives for private sector

–  CB to put in place an appropriate mechanism to encourage banks to postpone loan installments and obligations of the private sector with a grace period of 6 months

–  Qatar Development Bank to postpone installments for all borrowers for 6 months

–  Directing govt funds to increase investments in the stock exchange by QAR 10bn ($2.75bn)

–  Exempting food & medical goods from customs duties for 6 months

–  Utilities bill exemption for SMEs, affected sectors; rent exemption for 6 months

–  All international flights suspended for 2 weeks from Mar 18; cargo aircraft, transit flights exempt

–  Travel ban on all travelers except Qatari nationals

–  Educational institutions closed

–  High risk employees + those above 55 years + pregnant women can work remotely

–  Public transport modes have been stopped for 14 days

–  6 tonnes of aid sent to Iran (medical equipment & supplies)

Saudi Arabia
Economic & Financial Health & travel-related

–  SAR 120bn worth measures to support the pvt sector including postponement of VAT/ excise/ income tax/ Zakat payments, exemptions of govt dues etc

–  SAMA’s SAR 50bn stimulus package: financing support for SMEs (including deferred loan payments, concessional loans) and coverage of points of sale & e-commerce fees

–  Initiatives to reduce private sector’s burdens related to manpower: e.g. lifting halts on non-payment of fines, fines related to workers recruitment etc.

–  Saudi Arabia will cut SAR 50bn (USD 13.32bn or less than 5%) of the 2020 budget

–  Land borders with UAE, KW, Bahrain closed except for commercial trucks; shipping services suspended from 50 countries; cargo traffic not affected

–  All international flights suspended for 2 weeks; travel ban on passengers from Bahrain, Oman, UAE, Kuwait, Lebanon, Syria, Iraq, Egypt, France, Germany, Turkey, Spain, South Korea, Egypt, Italy

–  Temporarily suspends private-sector work & govt work for 15 days; banks will also remain closed

–  Closed eateries, malls

–  Umrah pilgrimages to Mecca & Medina are under a temporary ban

–  Suspended entry & prayer in the outer courtyards of Two Holy Mosques in Makkah and Madinah

–  Capital Markets Authority urged shareholders & invested in listed companies to vote electronically in upcoming meetings

United Arab Emirates
Economic & Financial Health & travel-related

Central bank:

–  AED100bn stimulus to facilitate temporary relief on private sector loans & promote SME lending; support also the real estate sector

–  Banks expected to reschedule loans contracts, grant deferrals on monthly loan payments + reduce fees and commissions

Dubai: AED 1.5bn stimulus package to support businesses affected by Covid19 including 10% reduction in utilities bills

Abu Dhabi: AED 5bn in utilities subsidies; free road tolls till end-2020, 20% rebate on rental values for restaurants + tourism & entertainment sectors (+ faster implementation of Ghadan-21 initiatives)

–  Suspends entry for residents overseas for 2 weeks; temporary stop to issuing all new visas

–  From Mar 17, Emirates suspended flights to 35 global destinations. No wider closure

–  ‘Remote work’ system for UAE public sector employees for 2 weeks

–  Cancels public prayers at mosques, churches for 4 weeks; closed: public parks, theme parks, cinemas, gyms

–  Supporting others:

–  Sends 2 batches critical medical aid to Iran in Mar

–  Flew 215 people from different countries out of Wuhan to Abu Dhabi’s Emirates Humanitarian City

Fig. Impact of Covid19 & lower oil prices on the GCC 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: Nasser Saidi & Associates.
Media Review
What’s the Fed doing in response to the COVID-19 crisis? What more could it do?
https://www.brookings.edu/blog/up-front/2020/03/20/whats-the-fed-doing-in-response-to-the-covid-19-crisis-what-more-could-it-do/
Blunting the Impact and Hard Choices: Early Lessons from China
https://blogs.imf.org/2020/03/20/blunting-the-impact-and-hard-choices-early-lessons-from-china/
Key oil freight rates retreat from Saudi-led bookings spike
https://www.reuters.com/article/us-global-oil-shipping/oil-tanker-rates-fall-but-storage-demand-stays-firm-sources-idUSKBN21616X
Did the number of confirmed cases rise faster in China, Italy, South Korea, or the US? Trajectories since the 100th confirmed case
https://ourworldindata.org/coronavirus#trajectories-since-the-100th-confirmed-case
Why coronavirus could hit Iran harder than US sanctions (FT – subscription only)
https://www.ft.com/content/ba417ace-6474-11ea-b3f3-fe4680ea68b5
 
 
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Weekly Economic Commentary – Mar 15, 2020

This week’s “Weekly Insights” is on the ongoing oil price war, lower oil prices and its economic impact on the Middle East amid the Covid19 epidemic.

Markets
Friday saw global financial markets suffer their worst day since 1987’s Black Monday: the MSCI all-country world index entered bear market territory (https://tmsnrt.rs/39UsofJ) while world markets lost nearly USD 18trn from Feb’s peak (https://tmsnrt.rs/2TRkFti). The VIX volatility index and corresponding measure of volatility for the Euro Stoxx 50 hit their highest since the 2008 financial crisis. Equity markets in the region closed in the red last week, with GCC investors losing more than AED 150bn on Sun (when markets opened after the failure of OPEC+ talks on production cuts). As safe haven currencies, the JPY and CHF strengthened (https://tmsnrt.rs/2xGgs35), the Indian rupee touched a record low, and other emerging market currencies like the Indonesian rupiah, Thai baht and South Korean won lost ground as well. Oil prices continued to decline on news of higher production plans from UAE and Saudi Arabia while the gold price ended the week with a loss of 8.6%, the most since Mar 1983.
Global Developments
US/Americas:

  • Trump declared a “national emergency”, and stimulus measures announced include access to free testing, food aid, as well as extending sick leave benefits to vulnerable persons. Travel bans were extended to the UK and Ireland in addition to the 26 European Separately, the New York Fed raised the size of repo operations, and vowed to inject around $1.5trn to address “highly unusual disruptions”.
  • Inflation in the US unexpectedly edged up by 0.1% mom in Feb, matching Jan’s gain. In yoy terms, inflation eased to 2.3% yoy in Feb from Jan’s 2.5%. Core inflation edged up to 2.4% yoy (Jan: 2.3%). Producer prices fell by 0.6% mom in Feb (Jan: 0.5%), the biggest decline since Jan 2015. Wholesale energy prices were down by 3.6% (Jan: -0.7%), thanks to a 6.5% dip in gasoline prices.
  • US monthly budget deficit surged to a record USD 235bn in Feb from USD 33bn the month ago. In the first five months of the fiscal year, deficit has widened by 15% yoy to USD 625bn.
  • Initial jobless claims eased to 211k in the week ended Mar 6 from 215k the week before, showing no signs yet of any impact from the Covid19 outbreak. The 4-week moving average increased by 1,250 to 214k.

Europe:

  • The EU Commission latest forecast is that GDP will likely shrink by around 1% in 2020. Spain declared a 15-day state of emergency and locked down 46mn people to contain the surge in Covid19 cases, while France closed non-essential public places. As UK’s death toll doubled in 24 hours and confirmed cases surged, UK’s strategy of delaying restrictions (to achieve “herd immunity”) is likely to be replaced by new measures including ban of mass gatherings.
  • Norway’s central bank cut its key interest rate to 1% from 1.5% last Friday, in a surprise announcement (the bank meets on monetary policy on March 19th). This followed the Bank of England’s emergency rate cut by 50bps to 0.25%. The ECB meanwhile left its main interest rate unchanged at -0.5%.
  • Eurozone GDP weakened to 0.1% qoq and 1% yoy in Q4 (Q3: 0.1% qoq and 1% yoy), leaving the full year growth at 1.0%. Germany’s growth flatlined as GDP slumped from 0.2% to 0% in Q4 (2019: 0.6% yoy, the worst since 2013) while France, Italy, Finland and Greece contracted. Gross fixed capital formation contributed 0.9 ppts to GDP and household and government spending each 0.1 points. Separately, employment in the eurozone grew by 1.1% yoy and 0.3% qoq in Q4.
  • German exports were flat in Jan (Dec: +0.2% mom) while imports edged up by 0.5% mom; trade surplus fell to EUR 18.5bn from EUR 19bn the month before. German exports to China fell by 6.5% yoy while imports were down by just 0.5%, though neither were linked to the Covid19 epidemic.
  • Inflation in Germany remained unchanged at 1.7% yoy and 0.4% mom in Feb.
  • In Germany, industrial production expanded by 3% mom in Jan (Dec: -2.2%), supported by the construction (4.7%) and energy sector (+0.2%). Industrial production in the EU rebounded by 2.3% mom in Jan (Dec: -1.8%) – its first increase since Aug; French factory output increased by 1.2% mom while Italian manufacturing clocked in a 3.7% rise.
  • GDP growth in the UK remained flat in Jan versus Dec’s expansion by 0.3% mom.
  • The UK’s latest budget outlined GBP 30bn of extra spending – including an extra GBP 7bn to support workers and businesses affected by the coronavirus and at least GBP 5bn to help the NHS cope with the outbreak. The spending is being largely paid for with a big increase in government borrowing. Public borrowing is already forecast to climb to a six-year high by 2022 without taking into account these additional spending measures.
  • Industrial production in the UK fell by 0.1% mom and 2.9% yoy in Jan (Dec: +0.1% mom and -1.8% yoy) while manufacturing production edged up by 0.2% mom (Dec: 0.3%)
  • UK’s trade surplus fell to GBP 4.212bn in Jan (Dec: USD 6.279bn). Goods trade deficit widened to GBP 3.72bn from 1.418bn the month before.

Asia Pacific:

  • China’s inflation remained high in Feb, registering 8% mom and 5.2% yoy (Jan: 1.4% mom and 5.4% yoy), with supply chain disruptions driving up food prices (+21.9% yoy). Producer price index dropped by 0.4% yoy in Feb (Jan: 0.1%).
  • China new loans slowed to CNY 905.7bn (USD 130bn) in Feb, down from a record CNY 3.34trn in Jan; both household and corporate loans dropped to CNY 413.3bn and CNY 1.13trn (Jan: CNY 634.1bn and CNY 2.86trn). Money supply grew by 8.8% yoy in Feb (Jan: 8.4%) while growth of outstanding total social financing, a broad measure of credit and liquidity, was 10.7% in Feb, unchanged from Jan.
  • FDI into China dipped by 8.6% yoy to CNY 134.4bn (USD 19.2bn) in Jan-Feb; it plunged by 25.6% in Feb, after a 4% gain in Jan.
  • Japan’s (revised) GDP shrank by 1.8% qoq and 7.1% yoy in Q4 (Q3: -1.6% qoq and -6.3% yoy), largely due to 4.6% drop in business investment (the sharpest fall in Q1 2009) and a 2.8% dip in private consumption.
  • Japan’s 67th consecutive month of current account surplus touched JPY 612.3bn (USD 5.89bn), up 6.6% yoy in Jan; deficit in goods trade widened by 1.6% yoy to JPY 985.1bn.
  • India’s industrial production grew by 2% yoy in Jan (Dec: 0.5%) – the fastest in 6 months – while manufacturing rebounded by 1.5% after falling by 0.7% the month before; production of capital goods shrank by 4.3% in Jan.
  • India’s exports grew (for the first time in 7 months) by 2.91% yoy to USD 27.65bn in Feb while imports were up by 2.48% to USD 37.5bn, bringing trade deficit to USD 9.85bn.

Bottom line: Stock markets around the world continued to experience deep falls; central banks announced interest rate cuts and launched new liquidity measures (including Japan, Australia, US and Norway while UK eased trading rules on fixed-income ETFs, Italian and Spanish regulators banned short selling, and Sweden cut countercyclical capital buffers to zero) to stem selling. Stimulus measures across the globe include ECB’s measures to support bank lending & expanding its asset purchase program, EU vowing to relax its fiscal spending rules, the EU Commission’s EUR 37bn “Corona Investment Fund” to help businesses, healthcare systems and sectors in need, US’s access to free testing, food aid, extending sick leave benefits, as well as Indonesia and Thailand’s stimulus packages of USD 8.1bn (in addition to a previous USD 745mn package) and THB 400bn (USD 12.7bn) respectively. To curb Covid19 outbreaks, travel bans have also been implemented across many nations in addition to cancellation of visas. New cases are now rising faster outside China than within, and indicators point to an initial phase of recovery in China (https://bit.ly/2Qd2BYk).
Regional Developments

  • The oil war heats up: after initially announcing plans to increase oil production to 12.3mn barrels per day (bpd) in Apr, Saudi Aramco later announced plans to raise capacity to 13mn bpd. UAE will follow Saudi Arabia in increasing its oil output to a record high of more than 4mn bpd in April. Together Riyadh and Abu Dhabi will add a combined 3.6mn bpd of extra oil in Apr. Russian oil firms might boost output by up to 300k bpd and could increase it by as much as 500k bpd.
  • GCC nations have introduced measures to combat Covid19: this includes cancellation of flights to infected areas, asking individuals returning from countries with high cases to self-isolate for 14 days as well as suspending issuance of new visas in addition to closing schools.
  • Bahrain central bank cut its overnight lending rate to 2.45% from 4% to ensure “smooth functioning of the money markets”, while also assuring “further necessary actions” if required.
  • To support businesses during the Covid19 outbreak, MPs in Bahrain approved measures including reduction of commercial registration fees as well as labour and utility charges for 6 months; this proposal has been forwarded to the Cabinet for approval. Furthermore, the central bank asked banks to not freeze customers’ accounts in case of job loss or retirement.
  • Women account for 29% of total investors at Bahrain Bourse, revealed the COO, the value of shares held by them is currently BHD 580mn.
  • Inflation in Egypt declined to 4.9% in Feb (Jan: 6.8%), driven by a dip in vegetable prices (-5.4%); urban consumer inflation fell to 5.3% yoy in Feb (Jan: 7.2%).
  • Manufacturing index in Egypt (excluding crude oil and petroleum) fell 6% mom to 132.8 points in Dec 2019.
  • The Sovereign Fund of Egypt aims to acquire assets worth EGP 70-80bn in the coming years and plans to get returns from investments after five years in operation, according to the CEO.
  • Kuwait declared a public holiday from Mar 12-26, halted all commercial passenger flights, closed schools, shopping centres, cinemas, wedding halls and children’s entertainment centres to slow the spread of the disease. The central bank announced the set up a KWD 10mn (USD 33mn) fund – to be financed by Kuwaiti banks – for disbursement by the Cabinet on urgent and necessary needs. Further, it suspended fees on point of sales devices and ATM withdrawals and increased the limit for contactless payments to KWD 25 (USD 81.44) from KWD 10, while announcing that it remains ready to support the financial sector further.
  • Money supply (M2) in Kuwait declined – for the 3rd consecutive month – by 1.4% yoy to KWD 38.05bn (USD 125bn) in Jan. Foreign reserves increased by 7.6% yoy and 1.5% mom to KWD 12.27bn (USD 40.31bn) by end-Jan.
  • Kuwait posted a budget deficit of KWD 1.825bn (USD 5.9bn) in Apr 2019-Feb 2020, after transfers to the Future Generations Fund’s reserve. This compares to a surplus KWD 1.193bn recorded in the same period a year ago. Total revenues were down by 14.52% yoy during this period while expenditures surged by 8.17%.
  • Non-oil exports from Kuwait decreased by 29% yoy to KWD 12.64mn in Feb. Jordan was the biggest importer of Kuwaiti goods, followed by Iraq, Egypt, and Yemen.
  • Lebanon’s plan to address the financial and economic crisis will be ready “in weeks” and will meet IMF recommendations, according to the finance minister. He also stated that the LBP’s official exchange rate would be maintained for the “foreseeable future”.
  • S&P downgraded Lebanon’s foreign currency ratings to “selective default”, citing low foreign currency reserves, and warned that debt restructurings could become complicated. Fitch Ratings downgraded Lebanon’s long-term foreign-currency issuer default rating to “C” from “CC”.
  • Oman is in talks with banks to raise around USD 2bn in loans, to manage its rising fiscal deficit as oil prices plunge. A deficit of OMR 2.5bn (USD 6.49bn), or 8% of GDP, is projected this year; foreign and domestic borrowing is expected to cover about 80% of that amount.
  • Moody’s downgraded the government of Oman’s issuer rating to Ba2 with a stable outlook. Further, the ratings agency downgraded the long-term local and foreign currency deposit ratings of five Omani banks citing the government’s weak fiscal capacity and weak standalone credit profiles of some banks.
  • Hotel revenues in Oman fell by 9.2% yoy to OMR 20.64mn at end-Jan 2020, with occupancy rates declining by 10.4% to 55.9% and number of hotel guests down by 1.4% to 144,270.
  • Oman, in a bid to contain the spread of Covid19, announced that it would suspend the issuance of tourist visas from Mar 15 for 30 days and would not allow cruise ships to dock at its ports during this period.
  • Saudi Arabia announced a SAR 50bn stimulus package to support the private sector: among the measures by SAMA are financing support for SMEs (including deferred loan payments, concessional loans) and coverage of points of sale and e-commerce fees.
  • Saudi Arabia’s finance ministry has instructed various government agencies to submit proposals to reduce 20-30% in their 2020 budget. This will likely take the shape of postponed projects and delays in awarding contracts among others.
  • Reuters reported that Saudi Arabia approved incremental supplies for its top Indian and Chinese customers, including Bharat Petroleum, Reliance Industries, at least one Chinese state refiner, and privately held Zhejiang Rongsheng Holding Group while rejecting at least 3 other Asian refiners – one Korean, one Taiwanese and one Chinese – requests for extra barrels on top of their long-term supply deals.
  • In addition to closing schools and universities, Saudi Arabia suspended travel to 9 countries – UAE, Kuwait, Bahrain, Lebanon, Syria, South Korea, Egypt, Italy and Iraq – for its citizens and residents to limit the spread of Covid19. The Capital Markets Authority urged shareholders and invested in listed companies to vote electronically in upcoming meetings.
  • Net foreign assets held by Saudi banks declined – for the 3rd month in a row – by 51% yoy and 19.1% mom to SAR 57bn. The value of foreign assets held by banks increased by 6.87% yoy to SAR 240.68bn.
  • Saudi Arabia’s industrial production index fell by 6.68% yoy in Jan, weighed down by a 4.74% decline in mining and quarrying activity.
  • Saudi Arabia will provide USD 10mn to the World Health Organisation to support its efforts in combating the spread of Covid19.

UAE Focus

  • The UAE central banked announced a stimulus package worth AED 100bn to support the economy amidst Covid19: the Targeted Economic Support Scheme includes AED 50bn from central bank funds through collateralised loans at zero cost to all banks in the UAE and AED 50bn funds freed up from banks’ capital buffers (as banks will be allowed to tap into a maximum of 60% of the capital buffer). To support financing for SMEs, the amount of capital banks must hold for loans to SMEs has been reduced by 15 to 25%. To support the real estate sector, the loan-to-value for first time home buyers has been increased by 5 ppts and the maximum exposure banks can have to the real estate sector will be allowed to rise to 30% from current 20% (but banks will need to hold more capital).
  • Dubai announced a AED 1.5bn stimulus package to support businesses: this includes a freeze on the 2.5% market fees levied on all facilities operating in Dubai, a refund of 20% on the custom fees imposed on imported products sold locally in Dubai markets, fees imposed on submitting customs documents of companies will be reduced by 90%, ability to renew commercial licenses without mandatory renewal of lease contracts, reduction of municipality fees imposed on sales at hotels to 3.5% (from 7%) as well as a 10% reduction in utility bills for a period of three months (among others).
  • UAE announced ‘remote work’ system for public sector employees for two weeks; this follows similar announcements from the Dubai and Abu Dhabi governments. The UAE will temporarily stop issuing new visas from Mar 17th.
  • Dubai PMI declined to a 4-year low of 50.1 in Feb (Jan: 50.6) as a result of weaker sales, slowing demand and lower inventories. New orders decreased for the first time since Feb 2016, confidence for future activity dropped to a 31-month low and stocks of purchases fell to the greatest extent since Oct 2010.
  • Abu Dhabi’s non-oil foreign trade increased by 7.7% yoy to AED 30.9bn (USD 8.41bn) in Q4 2019 while the value of imports grew by 1.5% to AED 28bn.
  • Dubai’s Department of Economic Development (DED) announced the issuance of 4,459 new licenses in Feb 2020, creating 11,877 jobs. Real estate, leasing and business services accounted for 50% of the economic activities licensed during the month.
  • The Dubai International Financial Centre (DIFC) announced a 14% yoy increase in its number of firms to 2437 in 2019, with 727 active financial firms (29.8% of total). The total workforce in the Centre grew by 9% yoy to 25,600. Banking assets booked in DIFC grew by 13% yoy to USD 178bn, with an additional USD 99bn of lending arranged by DIFC firms.
  • Dubai Jebel Ali Free Zone’s (Jafza) registration, licensing and related administrative fees have been reduced by 50-70%, announced DP World. Furthermore, a host of online services would also be offered free of cost.


Weekly Insights: Middle East – adjusting to lower oil prices amid the Covid19 epidemic
A double-edged sword: the Middle East has to adjust to the ongoing oil price war in addition to providing adequate stimulus to support their domestic economies taking a hit from Covid19 while also rolling out measures to curb its spread. The crash of oil prices, sharp fall in global growth and Covid19 effects will put severe strains on both oil and non-oil revenue sources in the Middle East (including VAT, real estate fees, tourism and trade).
The How, Why and When? At the OPEC+ meeting on Mar5-6, Russia and Saudi Arabia sparred over the extent of production cuts in the backdrop of lower global oil demand due to the spread of Covid19. OPEC had already slashed its expected growth in global oil demand this year, recommending a massive production cut in Q2 in order to maintain prices. The disagreement flared into an outright price war, with Saudi Arabia announcing discounts (of as high as USD 8) to northwest Europe and other big consumers of Russian oil alongside an increase in oil production to 12.3mn bpd (versus the current 9.7mn bpd). Russia was not far behind in announcing that it could add between 300-500k to raise output to 11.2mn bpd. Later, Aramco confirmed that Apr output levels would reach 13mn barrels per day and the UAE also announced a ramp up in its oil production. This is likely to bring about a shift in the market share of top crude oil producers (Saudi, UAE): shale oil had flooded the market during the OPEC+ production cuts phase (resulting in US becoming the largest oil-producing country) though at current prices, shale oil producers face a potential collapse (via production cuts, layoffs and/or bankruptcies) given their higher production costs.
What next? The price of Brent crude plunged by 24%, to USD 34 a barrel, on Mar 9th, posting its steepest one-day drop in nearly 30 years; oil is down by about 50% since the start of the year. While Saudi Arabia has the capacity to increase production, various other players in the region will be hard-hit, especially Oman and Bahrain in the GCC with their high breakeven oil prices, rising fiscal deficits and debt. For the oil exporters, not only would lower oil price mean lower revenues and potential higher fiscal deficits, but it will also result in spillovers into the non-oil sector (which is already negatively affected by the Covid19 outbreak). In addition to a debt overhang of around USD 500bn in the GCC, it will also be increasingly difficult for sovereigns to finance their deficits through borrowing as access to markets will become more difficult and expensive. Last, but not least, there will be a negative impact from financial markets: domestic equity markets have already taken a hit (with GCC investors having lost more than AED 150bn last Sun) while the sovereign wealth fund portfolios would also be negatively affected given the stock market collapse globally.
Fig. 1. In search of higher market share (crude oil production, LHS) even as fiscal breakeven prices remain high in the still oil-dependent economies (RHS)


 
 Source: Refinitiv, Nasser Saidi & Associates.
Fig. 2. Impact of Covid19 & lower oil prices on the GCC 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: Nasser Saidi & Associates.
Media Review
How canceled events and self-quarantines save lives, in one chart: “Flattening the curve”
https://www.vox.com/2020/3/10/21171481/coronavirus-us-cases-quarantine-cancellation
https://voxeu.org/article/it-s-not-exponential-economist-s-view-epidemiological-curve
 Coronanomics 101
https://www.project-syndicate.org/commentary/limits-macroeconomic-tools-coronavirus-pandemic-by-barry-eichengreen-2020-03
The Pandemic Stress Test
https://www.project-syndicate.org/commentary/covid19-economic-weaknesses-by-raghuram-rajan-2020-03
Lebanon Banks Set for Shake-Out Under Sovereign Debt Revamp – The New York Times
https://www.nytimes.com/reuters/2020/03/12/business/12reuters-lebanon-crisis-banks.html
Top jobs for women in Mideast set to double but challenges remain
https://www.arabnews.com/node/1638311/business-economy
 
 
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Weekly Economic Commentary – Mar 8, 2020

This week’s “Weekly Insights” is on the economic impact of Covid-19 on the Middle East & potential policy responses.
Markets
The Covid-19 outbreak continues to create havoc across capital markets: equity market sell-offs were rampant globally – European shares closed at near 7-month lows – except in China (where a two-year high was touched on Thursday, as investors expect more PBoC stimulus), while US Treasury prices rallied, with the yield on the benchmark 10-year government bonds dropping to a record low of 0.695%. Regional markets remained in the red, as Covid-19 cases increased, and travel restrictions were imposed. The dollar fell against a basket of currencies –worst week since 2016 – as traders bet further cuts following the emergency 50bps rate cut last week, while the flight to safe haven currencies JPY and CHF continued. Oil prices fell to a near 3-year low and posted biggest daily loss in more than 11 years on Fri after Russia rejected OPEC’s proposed steep production cuts. Gold posted the biggest weekly gain since Oct 2011.
Global Developments
US/Americas:

  • The Fed cut its benchmark rate by half-point to a range of 1-1.25%, citing concerns about the impact of the coronavirus. The virus was mentioned in Fed’s Beige Book multiple times (the coronavirus 48 times and Covid-19 nine times) versus the term labor (51 times), employment (55) or wages (41).
  • Non-farm payrolls increased by a higher than expected 273k in Feb, while the previous two readings were revised up by a total of 243k. The total employment level touched 158.8mn (near the Dec 2019 record) and unemployment rate was back to 3.5%. Average hourly earnings grew by 3% yoy while the average work week nudged up to 34.4 hours. Separately, ADP employment report showed a gain of 183k jobs in Feb, from a downwardly revised 209k in Jan.
  • US ISM manufacturing PMI slowed to 50.1 in Feb (Jan: 50.9) while new orders fell to 49.8 from 52 the month before. The ISM non-manufacturing activity index increased to 57.3 in Feb – the highest level since Feb 2019 – from 55.5 in Jan; however, this reading diverges sharply from the Markit Services PMI, which fell to more than a six-year low in Feb.
  • Factory orders declined by 0.5% mom in Jan (Dec: +1.9%); durable goods orders fell 0.2% while non-durable goods orders fell by a sharper 0.8%.
  • US trade deficit narrowed by 6.7% mom to USD 45.3bn in Jan, as exports slipped by 0.4% and imports by a sharper 1.6% (imports of oil, autos and cell phones declined). Goods deficit with China slipped USD 2.1bn to USD 23.7bn.
  • Initial jobless claims slipped by 3k to 216k at the week ended Feb 29, with the 4-week moving average rising by 3250 to 213k. Continuing claims increased by 7k to 1.73mn.

Europe:

  • Eurozone inflation edged down to 1.2% in Feb (Jan: 1.4%), pulled down by energy prices (-0.3%) while core inflation (excluding food and energy prices) picked up to 1.2% (Jan: 1.1%).
  • The producer price index in the eurozone declined by 0.5% yoy in Jan, slowing from Dec’s 0.6% dip; excluding energy prices, prices rose by 0.6% (Dec: +0.5%).
  • Unemployment in the eurozone was stable at 7.4% in Jan, maintaining the lowest level seen since May 2008. EU 27 unemployment was unchanged at 6.6%, lowest since Jan 2000.
  • German manufacturing PMI increased to a 13-month high of 48 in Feb (Jan: 45.3), with the decline in new orders easing to the softest in 17 months. Services PMI slipped to a 3-month low of 52.5 (Jan: 54.2) while composite PMI was down to 50.7 from Jan’s 51.2.
  • EU manufacturing PMI rose to a one-year high of 49.2 in Feb (Jan: 47.9), with both output and new orders falling at slower rates. Composite PMI reached a 6-month high of 51.6 (Jan: 51.3), supported by stronger service sector activity (PMI edged up to 52.6 from 52.5).
  • UK manufacturing PMI increased to 51.7 in Feb, lower than the flash reading of 51.9 but higher than Jan’s 50. The highest reading since Apr 2019 was supported by a 11-month high in new orders growth and a 9-month high business optimism. Services sector activity was slightly down to 53.2 from Jan’s 53.9 reading while the all-sector PMI rose to 53 (Jan: 52.8).
  • German factory orders rebounded in Jan, gaining by 5.5% mom – the most in five years. Led by a recovery in foreign orders, the rise was attributed also to bulk orders and catch-up effects after the Dec holidays. Coronavirus related disruptions are likely in the months ahead.
  • Retail sales in Germany recovered, rising by 0.9% mom and 1.8% yoy in Jan (Dec: -2% mom and +1.7% yoy). Separately, German new car sales fell 11% to 239,943 in Feb, with registrations from private buyers dropping by 16%.
  • Eurozone retail sales gained by 0.6% mom and 1.7% yoy in Jan, thanks to spending on fuel (+1.9% mom) as well as on food and drinks (+0.7%).

Asia Pacific:

  • China’s Caixin manufacturing PMI fell to a record low of 40.3 in Feb (Jan: 51.1), with new export orders slumping to its lowest point since Jan 2009. The Caixin services PMI almost halved to just 26.5 in Feb – the first drop below the 50-point margin – from 51.8 in Jan; it also reported the steepest decline in new work since Nov 2008. The composite PMI slowed to a record low of 27.5 in Feb (Jan: 51.9).
  • China’s exports and imports plummeted in Jan-Feb, not unsurprising given the impact of the Chinese New Year holidays and ongoing coronavirus outbreak. Exports fell by 17.2% in Jan-Feb (Dec: +7.9%) while imports declined by 4% (Dec: +16.5%), bringing the balance to a deficit of USD 7.09bn (Jan-Feb 2019: surplus of USD 41.45bn).
  • Foreign exchange reserves in China fell by USD 8.779bn to USD 3.107trn in Feb. The yuan fell 0.78% against the dollar in Feb, its first monthly drop since Aug.
  • Japan’s manufacturing PMI declined to 47.8 in Feb, the lowest reading since May 2016. Composite PMI weakened to 47 in Feb (Jan: 50.1), with the decline the strongest since Apr 2014 (when consumption tax was increased to 8%). Services sector was massively hit on reduced tourism: services PMI dropped to 46.8 in Feb from Jan’s 51, also posting the steepest drop in demand for eight-and-a-half years.
  • South Korea’s GDP grew by 2% yoy in 2019: though headline growth remained unchanged from the preliminary data released in Jan, facility investment, private consumption and investment in the construction sector were all revised up in Q4. Inflation eased to 1.1% yoy in Feb from Jan’s 1.5% on weakening demand and falling oil prices.
  • South Korea’s manufacturing PMI dropped to a 4-month low of 48.7 from the previous month’s 49.8, with output contracting by the most since Jun 2015 as manufacturers closed their factories as a result of the Covid-19 outbreak.
  • Singapore manufacturing PMI dipped to a record-low of 47 in Feb (Jan: 51.4) as the Covid-19 outbreak led to supply shortages and lower export demand; the decline in output was the steepest recorded since the survey began in 2012.

Bottom line: As Covid-19 spreads, with over 100k infected, rising number of cases and deaths outside of China, global growth rates are being slashed: OECD warns that the virus could halve global growth, while the IIF estimates growth at around 1% this year, far below 2019’s 2.6%. Global manufacturing slumped to 47.2 in Feb (Jan: 50.4) – its lowest level since May 2009, suffering its steepest contraction in over a decade as Covid-19 outbreak hits supply chains and demand. Lengthening of supplier lead times was a constant reference in PMIs across the globe as manufacturers adjust to the supply shock reverberating across the globe. Meanwhile, central bank meetings will be closely watched after the Bank of Canada and Fed’s 50bps move (US macro data is yet to show an impact from the virus) though the ECB and BoJ have limited room to manoeuver. While lower rates are unlikely to result in companies investing more (given current supply chain disruptions and weak demand), much more can be achieved by providing adequate fiscal support: with stimulus, governments can target spending where it is most needed (e.g. unemployment insurance, health spending, wage subsidies, tax reliefs).
Regional Developments

  • The Fed’s 50bps cut was matched by Bahrain, Jordan, Qatar, Saudi Arabia and UAE, given the peg to the dollar; Kuwait lowered its discount rate to 2.5% from 2.75%. The cut is quite opportune and will support consumption spending and local investment at a time when Covid-19 is disrupting supply chains, trade and also tourism.
  • Bahrain’s central bank issued a circular urging that banks and financing companies consider re-scheduling or granting deferrals on credit installments, given the ongoing coronavirus outbreak. With about 85 persons affected in the island nation, these institutions were also asked to reduce profit and interest rates, fees and commissions or other measures for customers affected by the outbreak.
  • Bahrain-based Khaleeji Commercial Bank will vote on delisting from UAE’s Dubai Financial Market (DFM) at the ordinary general meeting to be held on 25th Mar. The bank is also listed on the Bahrain bourse.
  • Bloomberg reported that Bahrain is working on a proposal to create a state-run fund into which it may transfer some of its oil and gas assets, to be followed by a sale of a stake in it.
  • Bahrain’s imports surged by 20% yoy to BHD 445mn in Jan; China, US and Saudi Arabia were the largest source nations during the month. Non-oil exports declined by 5% to BHD 160mn; Saudi Arabia, UAE and India the biggest recipients of its products.
  • Egypt’s PMI remained under-50 in Feb, with a reading of 47.1 stronger than the previous month’s 46. Though improvements were recorded in both output and new orders, at 46.2, it still remained in contractionary territory. Weak external demand meant that export orders were sub-50 for the fifth consecutive month (39.4 in Feb vs Jan’s 38.5).
  • Net international reserves in Egypt increased by 0.12% mom to USD 45.509bn at end-Feb, according to the central bank.
  • As part of a central bank initiative to support industrial projects, banks provided EGP 2.8bn in finances to about 115 beneficiaries. Funds were either to finance working capital or for machinery, equipment and production lines.
  • The Central Bank of Egypt reached an agreement to settle non-performing loans worth EGP 50.9bn with 226 customers (as of 27 Feb). This follows an initiative launched in Dec 2019 to support defaulting factories with a debt less than EGP 10mn.
  • Revenues from Egypt’s Suez Canal declined by 7.8% mom to USD 458.2mn in Feb; in yoy terms, however, revenues increased by 5.6%.
  • Bilateral trade between Egypt and the US increased by 14.7% yoy to USD 8.64bn last year. Exports to the US accelerated by 27.1% to USD 3.153bn while imports grew by 8%.
  • Unemployment in Egypt declined to 8% in Q4 last year vs 8.9% reported in Q4 2018. The workforce increased to 28.9mn persons from 28.4mn at end-2018, while labour force participation rates increased for the first time in 3 years (to 43.1 while female participation rose to 16.4% from 15.1%).
  • Egypt’s government purchased EGP 3.639bn (USD 230mn) worth solar energy from the private sector during the period Feb 2018-Jan 2020.
  • Kuwait’s real estate deals reached KWD 3.7bn (USD 12.08bn) in 2019: though the value was down by 1.5% yoy, number of transactions grew by 6.4% to 6765- the highest since 2016.
  • Lebanon’s PM confirmed that the country would “suspend payment” on the Mar 9 USD 1.2bn Eurobond. The government will proceed to restructure its debt, and the PM assured that deposits in the banking sector would be protected “especially small depositors who represent more than 90% of total bank accounts”. From the speech, the three pillars to move forward include: total public debt restructuring (sovereign & BDL), banking sector restructuring (recapitalization & consolidation), social safety net, macro-fiscal-financial-structural reform program with multilateral funding (IMF led). What was missing was any reference to a funding package to support the reform phase.
  • PMI in Lebanon improved slightly to 45.4 in Feb (Jan: 44.9); sentiment towards the 12-month business outlook fell to the weakest level in survey history, with political and economic instability the main cause for concern.
  • Lebanon’s cabinet approved a draft law to lift banking secrecy, according to the Justice minister.
  • After Lebanon’s financial prosecutor ordered asset freeze on 20 banks and those of their executives (without providing details of the specific charge or extent of the freeze), the state prosecutor overturned this order.
  • Money supply (M2) in Oman grew by 2% yoy to OMR 17.8bn. Narrow money stock (M1) increased by 8.4% to OMR 5.3bn.
  • Oman’s Ministry of Tourism disclosed that 96 hotels of various classifications are expected to open in the country by 2020-2021.
  • Qatar PMI increased to 49.3 in Feb (Jan: 48.7), with the output index at an 11-month high alongside a rise in non-oil private sector employment.
  • As Covid-19 cases across the MENA region increased, Saudi Arabia has temporarily halted all entry by land from the UAE, Bahrain and Kuwait (commercial trucks are the only exception). Entry is permitted only via the three international airports in Riyadh, Jeddah and Dammam. Furthermore, it suspended temporarily the Umrah pilgrimage and announced that the Grand Mosque in Makkah and the Prophet’s Mosque in Madinah will close an hour after the night prayer and open an hour before dawn prayers each day.
  • PMI in Saudi Arabia slowed to 52.5 in Feb (Jan: 54.9), posting the lowest reading since Apr 2018. Respondents referred to “subdued demand” and the “need to offer price discounts to stimulate sales”. New orders contracted, falling to 49.3 in Feb (Jan’s 52.6 and Dec’s 64.1), for the first time since Apr 2018.
  • Real GDP grew by 0.3% yoy in Saudi Arabia last year, lower than the government’s forecast of 0.9% and 2018’s 2.4%. Growth was supported by a 3.31% rise in the non-oil sector – the strongest since 2014 – as oil sector shrank by 3.65%. Within the non-oil sector, private sector grew by 3.78% and the government sector by 2.2%.
  • Saudi Arabia launched an “instant visa” scheme to support entrepreneurship in the nation.
  • Exports from Saudi Arabia declined by 10.4% yoy to SAR 1.05trn in 2019, with oil exports down by 14%, and alongside a 1.5% dip in imports to SAR 774.68bn.
  • Banks in Saudi Arabia boosted investments in government bonds by 20.67% yoy and 0.8% mom to SAR 386.69bn by end-Jan.
  • Retail loans in Saudi Arabia grew by 3.8% yoy to SAR 333.44bn in Q4 2019. Loans for reconstructing and renovating proprieties, at SAR 25.65bn, accounted for the largest share of retail loans (7.7% of the total), followed by car loans (6.9%) and consumer durables (3.7%).
  • Real estate loans from banks and finance companies to Saudi citizens surged by 24.6% yoy and 7.7% qoq to SAR 317.27bn (USD 84.5bn) in Q4 2019.
  • Total assets of Tadawul-listed banks grew by 11.98% yoy to SAR 2.445trn last year, with the National commercial Bank accounting for more than 1/5th of total assets.
  • Consumption in Saudi Arabia increased by 8.1% yoy and 5.4% mom to SAR 84.59bn in Jan 2020. Point of sale transactions reached a record high of SAR 28.53bn in Jan (+33.4% yoy), with number of transactions surging by 75% yoy to 186.14mn.
  • More Cabinet reshuffle in Saudi Arabia: two weeks after the ex-energy minister was brought back as investment chief, the current minister of finance has been tasked with overseeing the economy and planning ministry as well. The former minister of economy and planning has been appointed as adviser at the royal court at the rank of minister.
  • Artificial intelligence is expected to contribute an estimated SAR 500bn (USD 133bn) to GDP by 2030, according to the Saudi Data and Artificial Intelligence Authority. It was also revealed that ~70% of 96 strategic goals under Vision 2030 are closely related to data and AI.
  • A decision to Saudize 70% of 9 key sectors within retail and wholesale outlets will be effective Aug 20, 2020.
  • Total number of private and public sector employees in Saudi Arabia declined by 0.57% qoq to 8.47mn in Q3 2019, with expats accounting for 77.4% of total (-0.8% to 6.55mn).

UAE Focus

  • UAE PMI continued to slip to 49.1 in Feb (Jan: 49.3) and the lowest since Aug 2009, with declines across output, new orders and employment. Output levels contracted for the first time in over ten years, after stagnating in Jan.
  • UAE’s Minister of State for Financial Affairs disclosed that it would take 3-5 years to collect data for the assessment of VAT’s impact on UAE GDP.
  • The number of economic licenses issued in the UAE grew by 0.34% mom to 678,573 in Feb, according to the National Economic Register maintained by the Ministry of Economy. Abu Dhabi and Dubai together accounted for 68.6% of all licenses issued in Feb.
  • According to a member of the Federal National Council, unemployment rate has reached ~13% among Emiratis, with ~40k youths out of 300k eligible workers active job seekers.
  • UAE will allow full foreign ownership in 122 economic activities in the industrial, agricultural and services sectors. This includes about 51 activities in the industrial sector (e.g. manufacturing food and drinks products and aircraft repair), 52 activities in services sector (e.g. scientific R&D) and 19 activities in agriculture (e.g. cultivation of grains).
  • A Property finder report states that some 48,500 units will be added to the Dubai real estate market by Sep 2020.
  • As the Covid-19 cases touch 45 in the UAE, a decision was taken to close schools/ colleges/ universities for 4 weeks (bringing forward the spring break which was scheduled for end-Mar, followed by 2 weeks of online/ distance learning). This should ideally be supported by allowing for either flexi-times or better still “working from home” if possible. While the government allowed flexible work hours for its female employees with nursery-going kids during nursery closures, this practice should ideally be applied across the board in the private sector as well. Not only would this move lower contagion but could also be applied (if successful!) as a long-term policy for better work-life balance and improved overall happiness.


Weekly Insight on the economic impact of Covid-19 on the Middle East & potential policy responses
Since the Covid-19 outbreak surfaced two months ago, it has spread outside China and affected more than 100k persons globally. With the virus spreading faster globally – with Italy and Iran other major epicenters – in addition to lives lost, there is both a supply and demand shock. The supply shock will result from factory closures, supply chain disruptions, higher price of disrupted raw materials supply, along with tightening of credit, while weaker economic growth implies lower consumer spending (given workplace closures, quarantines), slowdown in aggregate demand and firms’ investment delays amidst higher uncertainty. The exact size of the shocks depends on the geographical spread, duration and intensity of the contagion. It is clear, however that (i) GDP growth will be lower than an already slow 2019; (ii) domestic demand will remain weak; (iii) inflation will be affected by an increase in inputs costs and goods prices and weaker demand will likely lower prices on retail spending and energy.
Initial reports suggest a slow resumption of production activity across China: The South China Morning Post reported yesterday that as of Tuesday, 45% of China’s small businesses, which account for 60% of GDP and 80% of employment, had reopened. However, the key is whether production and export capacity have been fully restored. The disruption has spilled over to many Asian countries – as evidenced by PMI readings – where the supply chain linkages are very strong. Taiwan dropped below 50, Vietnam fell to a more than 6-year low of 49 (highly dependent on China and South Korea for electronics components), while only Indonesia and Philippines reported an increase in PMI – at 51.9 and 52.3 in Feb respectively (highlighting their relatively lower exposure to China’s global supply chain and focus on food production).
Fig. 1. Heatmap of Manufacturing/ Non-oil sector PMIs – the Covid-19 effect

 
 
 
 
 
 
 
 
 
 
Source: Refinitiv Datastream, Nasser Saidi & Associates.
Closer home, the PMI data continue to show signs of a slowdown: Middle East nations are not that integrated with the global supply chain and linkages with China remain lesser compared to Asian counterparts. However, the camel in the room remains oil: the most direct impact of a Chinese and global slowdown is from the demand for oil. OPEC already slashed its growth in global oil demand this year to 480k barrels per day (bpd) versus expectations of 1.1mn bpd growth in Dec (given the supply overhangs, OPEC recommended a massive production cut in Q2). This will affect the oil exporters – for most of whom fiscal break-evens are substantially higher than the current Brent oil price of USD 45 per barrel: as per the IMF’s Fall 2019 estimate, Iran’s is as high as US$194.6 while the UAE and Saudi Arabia’s estimates are at US$ 70 and US$ 83.6 respectively. Furthermore, spillover effects have been visible in travel and hospitality (airlines and hotels are requesting staff to go on unpaid leave, hotels rates are being cut to off-peak rates), tourism (including MICE, given the number of cancellations/ rescheduling of major events), entertainment and leisure activities (movie theatres, theme parks and the like) and retail (though anecdotal evidence suggests an uptick in e-commerce activity).
Fig. 2. Impact of Covid-19 on the MENA region & Potential Policy Responses

 
 
 
 
 
 
 
 
 
 
 
 
Source: Nasser Saidi & Associates. Covid-19 cases as of 8 Mar 2020 (reported by Johns Hopkins CSSE)
Major countries like Saudi Arabia and the UAE have been proactively fighting the spread of the virus with measures in place like closure of school/ universities as well as cancellation of large events (ranging from concerts to global events like Art Dubai). Saudi Arabia, being home to the Holy Mosques, announced temporary bans on the Umrah pilgrimages and that mosques would remain closed between the night and dawn prayers. With religious tourism one of the main sources of non-oil revenue for Saudi Arabia, this closure will have a significant bearing on economic growth: it would be much more prominent should such temporary bans/ restrictions be enforced when the Hajj season begins. The bottom line is that the GCC countries will suffer directly from the lower price of oil and from lower tourism and trade spillover effects.
Central banks, in spite of the peg to the dollar and lack of independence to conduct effective monetary policy, have been issuing effective guidelines to banks and financial institutions including advice to consider re-scheduling or granting deferrals on credit installments and/or reducing fees and commissions. If the outbreak persists, additional measures may include facilitating access to and availability of cheaper credit (especially for SMEs) and a case-by-case review of NPLs and/or defaults during the period.
The bottom line is that faced with a real supply shock and linked demand shock, fiscal policy stimulus is more likely to have a lasting impact to tackle the spillovers from the virus outbreak (e.g. subsidies for its international airlines) rather than monetary policy measures. This is a policy conundrum for the oil exporters of the region at a time when oil prices are also south-bound, unless the sovereign wealth funds are solicited to support, given the extraordinary circumstances.
Media Review
Lebanon’s Economy: To Avoid an Implosion
https://finance.yahoo.com/news/lebanon-economy-avoid-implosion-050529367.html
America Punished Elizabeth Warren for Her Competence
https://www.theatlantic.com/culture/archive/2020/03/america-punished-elizabeth-warren-her-competence/607531/
To Take on the Coronavirus, Go Medieval on It – The New York Times
https://www.nytimes.com/2020/02/28/sunday-review/coronavirus-quarantine.html
UK-listed companies face compulsory climate disclosures
https://www.ft.com/content/de915fb4-5f9e-11ea-b0ab-339c2307bcd4
Female work force participation is key to the Middle East’s economic development
https://www.thenational.ae/business/comment/female-work-force-participation-is-key-to-the-middle-east-s-economic-development-1.987027
 
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Weekly Economic Commentary – Mar 1, 2020

Markets
As the coronavirus spread to nearly 60 nations, global stock markets posted their worst weekly fall since the global financial crisis and wiped about over USD 5trn from their market value. MSCI’s flagship global equity index (MSCI ACWI Index) was down nearly 10%, S&P 500 lost more than 10% since hitting a record high on Feb 19, markets in Europe were down, while in Japan, the market slide almost 4% on fears that the Jul-Aug Olympics might be called off. Regional markets were mostly down on virus fears, with many nations reporting rapid spread after announcing first cases. On the currency front, the dollar slipped to a 20-week low vis-à-vis the JPY after Fed chair hinted a rate cut to support the economy as the coronavirus spreads. Gold price touched a 7-year high before posting its biggest one-day drop since 2013 on Fri. Oil prices fell – Brent, down 14%, posted the steepest weekly decline since 2016 while WTI fell 16%, recording the biggest weekly decline since Dec 2008 – ahead of the OPEC+ meeting on Mar 5-6 to discuss deeper output cuts.
Global Developments
US/Americas:

  • US GDP was unrevised at a 2.1% annualized rate in Q4, hence posting an unrevised 2.3% growth for the full year 2019 – the slowest in 3 years. Growth was supported by a smaller import bill, but the latest estimate shows downgrades to consumer spending, business investment and government spending.
  • The PCE price index edged up by 0.1% in Jan (Dec: 0.3%), as energy costs fell by 0.7% though food prices gained 0.3%. Core PCE edged up 0.1% mom and 1.6% yoy in Jan (Dec: 0.2% mom and 1.5% yoy). Personal income jumped 6% in Jan – the most since Feb 2019 – after Dec’s 0.1% gain. Consumer spending inched up by 0.2% in Jan (Dec: 0.4%).
  • Durable goods orders declined by 0.2% mom in Jan (Dec: +2.9%), pulled down by decreased demand for cars, auto parts, and military aircraft. Excluding volatile transportation orders, durable goods orders rose 0.9% – the fastest since Apr 2018. Non-defense capital goods orders excluding aircraft increased by 1.1% yoy.
  • US Chicago Fed national activity index improved to -0.25 in Jan from -0.51 registered in Dec (revised lower from -0.35).
  • US S&P/ Case Shiller national home price indices increased by 3.8% yoy in Dec (Nov: 3.5%); the 20-city composite rose 2.9%, up from 2.5% in the previous month. At the national level, home prices are 59% above the trough reached in Feb 2012, and 15% above their pre-financial crisis peak.
  • New single-family home sales picked up by 7.9% mom in Jan, posting the quickest pace since Jul 2007. Pending home sales, a leading indicator for the housing sector, grew by 5.2% mom in Jan – rising by the most since Oct 2010.
  • Goods trade deficit in the US narrowed by 4.6% mom to USD 65.5bn in Jan, as imports dipped (-2.2% mom to USD 201.25bn) much faster than exports (-1% to USD 135.75).
  • Chicago PMI rose to a 6-month high of 49 in Feb (Jan: 42.9), though remaining for the 6th straight month in contractionary territory. Only the employment sub-indicator posted losses, as production and demand for new orders rose to 8- and 6-month highs respectively.
  • Initial jobless claims climbed by 8k to 219k, with the 4-week moving average rising to 209.75k. Continuing claims meanwhile fell by 9k to 1.72mn.

Europe:

  • Detailed data showed stagnant Q4 GDP in Germany: exports fell by 0.2% qoq while gross investment (including construction) rose by 2.9%. For the full year, Germany grew by 0.6% – the weakest since the eurozone debt crisis in 2013.
  • German inflation moved up to 1.7% yoy in Feb (Jan: 1.6%) – the highest since Apr 2019 – supported by higher food prices (+3.3%). Lower energy prices slowed French and Italian inflation by 0.1 ppts, to 1.4% and 0.4% respectively.Separately, German unemployment rate remained stable at 5.5%, with the total unemployed declining by 10k.
  • German Ifo business climate edged up to 96.1 in Feb (Jan: 96) while the current assessment deteriorated to 98.9 (Jan: 99.2). Companies were less pessimistic about the future though, as expectations surged to 93.4 from 92.9 the month before.
  • EU economic sentiment indicator increased to 103.5 in Feb (Jan: 102.6); business climate also improved -0.04 (-0.19) while consumer confidence came in at -6.6, up from -8.1 in Jan.

Asia Pacific:

  • All-time PMI lows hit in China, as the coronavirus epidemic disrupts production and supply chains: official manufacturing PMI dropped to 35.7 in Feb from 50.0 in Jan, much below the 38.8 figure reported in Nov 2008. The non-manufacturing PMI also dropped, to 29.6 – the lowest since Nov 2011 –from 54.1 the month before. The composite PMI dropped to 28.9 from 53.0 in Jan.
  • India’s GDP growth slowed to 4.7% in Oct-Dec, from the upwardly revised 5.1% the quarter before. For Apr-Dec, growth was 5.1% vs 6.3% during the same period a year ago.
  • Japan leading economic index in Dec rose to 91.6 from Nov’s decade-low 90.8 reading.
  • Tokyo CPI excluding fresh food eased to 0.5% in Feb (Jan: 0.7%).
  • Industrial production in Japan declined by 2.5% yoy in Jan (Dec: -3.1%); in mom terms, production climbed by 0.8%. Retail sales in Japan fell by 0.4% yoy in Jan following a 2.6% slide in Dec.
  • Unemployment rate in Jan jumped to 2.4% in Jan (Dec: 2.2%), rising for the first time in 4 months. The seasonally adjusted number of unemployed grew by 7.9% mom to 1.64mn in Jan, partly due to an increase in the number of mid-career jobseekers.
  • Hong Kong announced HKD 120bn (USD 15.4bn) worth measures to support the economy, hit by the pro-democracy protests and more recently the coronavirus scare. Measures include a HKD 10k payout to permanent residents above 18 years, as well as low-interest loans for SMEs. GDP declined by 1.2% last year – the first annual GDP decline since 2009 – with consumer and tourism spending dragging down growth.
  • Singapore inflation remained steady at 0.8% yoy in Jan; core inflation dropped sharply to 0.3% in Jan – the lowest since Dec 2015.
  • Industrial production in Singapore accelerated by 18.2% mom in Jan from an upwardly revised 6.3% in Dec; the volatile pharmaceutical sector production surged by 59.4% yoy while electronics manufacturing dropped by 7.2%.

Bottom line: Most new virus cases are now being reported outside China – the origin – with South Korea, Italy, Japan, and Iran emerging as new epicentres. The WHO has stayed clear of calling it a pandemic, raising its risk assessment to “very high” (the topmost level), but the VIX (“fear”) index jumped to 49, its highest since early 2009. Events are being cancelled across the globe – Mobile World Congress, Geneva motor show, Baselworld trade show, football matches in Italy and France, and a half-marathon in Paris among others – raising worries whether the Tokyo Olympics will go ahead as planned in Jul-Aug.
Regional Developments

  • Coronavirus is spreading in the GCC: with Iran as an epicenter (more than 40 deaths and 100s of infected), many countries including Kuwait, Oman and Bahrain have confirmed multiple cases. With around 45 confirmed cases, Kuwait has suspended schools for 2 weeks and called for its citizens to avoid travelling. Bahrain, which has 36 cases, has suspended all flights to the UAE; Oman has 6 cases while Saudi Arabia and Qatar are the only GCC nations to have not reported any coronavirus cases. Saudi Arabia has imposed a temporary suspension on the entry of pilgrims, including those from the GCC, to Makkah and Medina. The UAE has 21 cases, of which 5 have recovered: though schools and businesses remain open, the former have been advised not to hold events or schedule internal and external trips. News reports cancellation of few sports and business events in the region while the UAE central bank has also asked banks to grant temporary deferrals on monthly loan payments and reduce fees and commissions for customers affected by the coronavirus.
  • The Bahraini dinar has been included as a settlement currency in the Arab Monetary Fund’s Buna payment platform, alongside the USD, EUR, Jordanian dinar, Saudi riyal and the UAE dirham.
  • Bahrain’s MPs approved an amendment to the 2012 Private Sector Employment Law to provide women working in the private sector two hours a day to care for their newborns for up to two years. Currently, in the private sector, a woman is permitted to take two hours off for 6 months, and an hour a day till the baby is a year old.
  • Egypt’s nominal GDP grew by 20% to EGP 5.3trn in 2018-19, revealed the country’s minister of planning; the growth was supported by investment spending (contributed 40% to growth), net change in exports (30%) and consumer spending (20%). Additionally, private-sector investments rose by 77% yoy to EGP 444bn at end of the fiscal year 2018-19.
  • Investments in Egypt’s industrial sector grew by 22% yoy to EGP 99.5bn in 2018-19; in current prices, manufacturing GDP grew by 17.9% to EGP 846bn in 2018-19.
  • The natural gas sector in Egypt grew by 21% during 2018-19, also contributing 19% to Egypt’s GDP growth. According to the minister of petroleum, investments in the gas sector reached about EGP 1trn, including EGP 500bn in completed projects, EGP 280bn in under-construction projects, and EGP 220bn in planned projects.
  • Non-oil exports from Egypt increased by 4% yoy to USD 2.188bn in Jan 2020, thanks to a 15.8% and 10.5% pick up in exports of food industries and building materials respectively.
  • Egypt’s trade deficit narrowed by 10.8% to USD 3.45bn in Dec 2019. Exports grew by 0.5% to USD 2.59bn while imports declined by 6.2% to USD 6.04bn.
  • Egypt’s exports to the US surged by 31% yoy to USD 2.93bn in 2019. Separately, bilateral trade between Egypt and South Korea increased to USD 1.595bn last year, with the latter’s investments in Egypt totaling USD 570mn in 181 projects.
  • According to Egypt’s central bank, foreign investments in treasury bills accelerated by 13.8% mom to EGP 289.4bn in Jan 2020.
  • Total microfinance beneficiaries in Egypt grew by 11.8% yoy to 3.5mn customers at end-2019; value increased by 47% yoy to EGP 26.1bn.
  • Iraq’s parliament delayed voting on the new government last week, as it failed to convene a quorum. The former PM Abdul Mahdi remains in a caretaker capacity.
  • Jordan’s trade balance deficit narrowed by 12.2% yoy to JOD 7.8bn in 2019. Exports increased by 7.3% to JOD 5.9bn while imports declined by 4.8% to JOD 13.7bn.
  • Jordan increased its minimum wages to JOD 260 effective as of Jan 1, 2021; the new minimum pay will also be subject to social security deductions.
  • Lebanon appointed US investment bank Lazard and law firm Cleary Gottlieb Steen & Hamilton LLP as its financial and legal advisers on the widely expected debt restructuring. Reuters reported, citing a government source, that the country intends to ask for a seven-day grace period for the USD 1.2bn Eurobond that matures on Mar 9.
  • Oman plans to tender out 15 to 20 pre-approved mining blocks for exploration and commercial development during the course of 2020.
  • With the coronavirus outbreak, Saudi Arabia has imposed a temporary ban on foreign Haj pilgrims. However, there are no travel restrictions on those holding employment visa, work visit visa, business visit visa and family visit visa.
  • Saudi Arabia’s foreign reserves expanded by 2.4% yoy to SAR 1.88trn in Jan. Assets increased by 2.54% yoy and 0.5% mom to SAR 1.91trn.
  • Saudi Arabia has issued additional licensing guidelines for digital-only banks in the country. Conditions include that it should be set up as a locally incorporated joint-stock company and maintain a physical presence in Saudi Arabia. (More details: https://bit.ly/3cmTttu). The regulator is reviewing license requests for two digital banks, as per a report in local daily Aleqtisadiyah.
  • Saudi Aramco’s CEO stated that there were no plans for a secondary listing for one year from the initial offering, with an international listing “something we will be discussing later”.
  • Saudi Arabia’s imports grew by 18.3% yoy to SAR 49.59bn in Dec; exports declined by 6% to SAR 85bn.
  • Investments in MENA’s water desalination market will likely touch USD 4.3bn by 2022, according to a report by Ventures Onsite; currently, 48% of global water desalination projects are happening within the MENA region.

UAE Focus

  • The central bank estimated that UAE grew at 2.9% last year, up from 1.7% the year before. Non-oil sector GDP grew at just 1.1% last year – the slowest pace since at least 2011 – down from 2018’s 1.3%.
  • Inflation in the UAE fell by 1.6% in Q4 2019 vs a drop of 2.1% in Q3. The central bank stated that the decline eased due to “the pickup in non-energy growth and employment”.
  • Employment in UAE’s private sector increased by 2% yoy in Q4, registering the highest growth in the last seven quarters and higher than Q3’s 1.1% increase. Though the construction and real estate and business services sectors together accounted for 45.1% of the labour force, employment in the former dipped (Q4: -2.4% from Q3’s -2.3%). The central bank’s estimates are based on Ministry of Human Resources and Emiratization data which excludes free zones.
  • UAE banks’ investments in Saudi Arabia account for 54% of total banking investments (AED 141.4bn or USD 38.5bn) in the four GCC states (Saudi, Bahrain, Oman and Kuwait).
  • UAE’s gold reserves increased to AED 5.31bn in Jan from Dec’s AED 4.04bn.
  • Dubai’s non-oil foreign trade rose by 6% yoy to AED 1.37trn in 2019: exports accelerated by 22% to AED 155bn while imports were up 3% to AED 796bn.
  • Dubai Economy’s Business Registration and Licensing sector disclosed the issuance of 4692 instant licenses since the service was launched in Jul 2017; of this 73.5% were commercial.
  • With the listing of a USD 400mn sukuk in Nasdaq Dubai by Sar Al-Arkan, a Saudi-based real estate development company, the exchange expanded its role as one of the largest global centres for sukuk listings by value with a current total of USD 66.4bn.
  • Expat remittances from the UAE increased to AED 165bn (USD 44.9bn) in 2019, according to the central bank. India was the top recipient nation, followed by Pakistan, Philippines, Egypt, UK and Bangladesh.
  • UAE’s Ras al Khaimah emirate welcomed 11.2mn tourists last year, up 4% yoy. Revenue per available room stood at USD 114.90 – among the highest in the region – while occupancy rates averaged 74%.

Media Review
Making sense of India’s GDP
https://www.bloombergquint.com/opinion/making-sense-of-indias-gdp-data-amid-its-many-revisions
Why penguins may help us predict the impact of climate change
https://www.ft.com/content/1d5e039a-582f-11ea-a528-dd0f971febbc
When China Sneezes
https://www.project-syndicate.org/commentary/china-coronavirus-shock-prospects-for-global-recession-by-stephen-s-roach-2020-02
Coronavirus, a new jolt to Iran’s economy?
https://www.piie.com/blogs/realtime-economic-issues-watch/coronavirus-new-jolt-irans-economy
Thomas Piketty’s new book that sets out the case for socialism may prove as famous—and controversial—as its predecessor
https://www.economist.com/books-and-arts/2020/02/29/the-worlds-most-famous-economist-sets-out-the-case-for-socialism
 
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Weekly Economic Commentary – Feb 23, 2020

This week’s “Weekly Insights” is on the state of equity markets in the region, with a focus on the UAE.
Markets
As the coronavirus spread to 26 countries outside mainland China, US and European markets posted a weekly loss, as did the MSCI index tracking global stock markets; Asian stocks largely fell (except in China). Regionally, markets mostly ended positive on higher oil prices. Qatar’s Doha Bank posted its biggest intra-day rise since May 2009, after a supplementary release mentioned a 5-year strategic plan for the bank. Safe haven assets like government bonds and gold gained: yield on the 30-year US Treasury hit a record low while gold price increased to its highest in more than 7 years. Among currencies, dollar touched a near 3-year high versus the euro and a 10-month high vis-à-vis the yen (FX chart: tmsnrt.rs/2egbfVh). Oil prices rose on worries of global energy demand and China’s recovery prospects amid supply disruptions.
Global Developments
US/Americas:

  • Housing starts in the US dropped by 3.6% mom to a seasonally adjusted 1.567mn in Jan from an upwardly revised 1.626mn in Dec (the highest since Dec 2006). Building permits surged by 9.2% mom to 1.551mn in Jan – the highest level since Mar 2007 – thanks to gains in both single and multi-family housing segments. Existing home sales declined by 1.3% mom to a seasonally adjusted 5.46mn units in Jan. The 30-year fixed mortgage rate is at an average of 3.47%, the lowest since Oct 2016.
  • Markit manufacturing PMI eased to 50.8 in Feb (Jan: 51.9) while services PMI slipped to 49.4 (53.4). Composite PMI slipped below the 50-mark, posting 49.6 in Feb vs Jan’s 53.3.
  • Producer price index edged up by 0.5% mom in Jan (Dec: 0.2%), posting the biggest gain since Oct 2018, while the core PPI grew by 0.5% mom and 1.7% yoy.
  • Initial jobless claims increased by 4k to 210k in the week ended Feb 14. The 4-week moving average of claims fell by 3,250 to 209k.

Europe:

  • German ZEW economic sentiment slipped sharply to 8.7 in Feb (Jan: 26.7) while current situation also worsened (-15.7 from -9.5 the month before), as fears of disruption in the export-intensive sectors (due to the coronavirus epidemic) took hold.
  • ZEW indicator of economic sentiment for the euroarea declined to 10.4 in Feb, from 25.6 the month before, while the indicator of the current economic situation went down by 0.4 points to -10.3.
  • German manufacturing PMI improved to 47.8 in Feb from Jan’s low of 45.3; while new domestic orders increased, foreign orders fell at the fastest rate for 3 months. Services PMI slowed to 53.3 from the previous month’s 54.2, bringing down the composite PMI a notch to 51.1 (51.2).
  • EU manufacturing PMI remained below 50 in Feb, but rose to 49.1 from 47.9 the month before (in spite of expectations of a dip thanks to the coronavirus scare). Services PMI picked up as well (52.8 from 52.5), thereby pushing the composite PMI up to 51.6 from 51.3. In France, however, the flash manufacturing PMI dropped to 49.7 in Feb (Jan: 51.1) as a result of a dip in airplane production and supply chain issues.
  • UK manufacturing PMI climbed to a 10-month high of 51.9 in Feb from the 50-point mark the month before. Services PMI eased to 53.3 from 53.9.
  • EU inflation declined by 1% mom in Jan (Dec: 0.3%), with core inflation falling by 1.7%.
  • UK unemployment rate remained steady at 3.8% in the 3 months to Dec. The average weekly wages (including bonuses) reached their highest levels since before the financial crisis – rising to GBP 512 in the three months to Dec. Excluding bonus, average earnings growth decelerated to 3.2% from 3.4% in Dec.
  • UK inflation edged up to a 6-month high of 1.8% in Jan (Dec: 1.3%), thanks to an increase in energy prices (+4.7% yoy). Core inflation also increased, rising to 1.6% from 1.4% the month before. Producer price index increased by 2.1% yoy in Jan (Dec: 0.9%), implying some price pressures for consumers going forward.
  • UK retail sales bounced back in Jan, rising by 0.9% mom and 0.8% yoy; sales at food retailers grew by 1.7% while department stores reported a 1.6% increase in sales.

Asia Pacific:

  • China’s PBoC cut its benchmark lending rates: one-year loan prime rate was lowered to 4.05% from 4.15%, and the five-year rate to 4.75% from 4.80%. Expected, as the nation deals from the repercussions of the coronavirus outbreak, this rate cut followed an earlier move (in the week) to lower the interest rate on its one-year medium-term lending facility (funds that PBoC lends to financial institutions) to 3.15% from 3.25%.
  • China’s FDI grew by 4% yoy to CNY 87.57bn in Jan (Dec: 5.8%), with FDI in high tech industries up 27.9% to CNY 31.35bn (or 35.8% of total FDI).
  • China’s new yuan loans accelerated to CNY 3.34trn in Jan (USD 476.97bn) from CNY 1.14trn in Dec, supported by corporate loans (rising to CNY 2.86trn from Dec’s CNY 424.4bn). Money supply growth eased in Jan, rising by 8.4% yoy vs the previous month’s 8.7%. Outstanding yuan loans grew 12.1% yoy compared with 12.3% growth in Dec.
  • Japan GDP shrank by 1.6% qoq in Q4 (Q3: 0.4%) – this is the biggest contraction since 2014. It posted a more severe 6.3% plunge, at an annualized rate. A dip in growth was expected on weaker domestic demand following Oct’s sales tax hike and aftermath of Typhoon Hagibis.
  • Japan’s industrial production decreased by 3.1% yoy in Dec (Nov: -3%), according to the government’s final estimate; in mom terms, it increased 1.2%.
  • Japan’s machinery orders tumbled by 12.5% mom (the fastest pace since 2018) and 3.5% yoy in Dec, from 18% mom and 5.3% yoy uptick the month before. Core machinery orders fell by 12.5% mom in Dec – the largest drop since Sep 2018.
  • Japan’s trade deficit widened to JPY 1.31trn in Jan (from an upwardly revised JPY 154.6bn in Dec). Exports and imports were down by 2.6% and 3.6% respectively (Dec: -6.3% and -4.9% yoy). Japan’s trade balance with Asia turned red for the first time in a year with a deficit of JPY 567.86bn.
  • Japan inflation eased to 0.7% yoy in Jan (Dec: 0.8%). Core CPI edged up to 0.8% (0.7%) while core-core CPI (excluding food and energy) slipped to 0.8% (0.9%)
  • Japan manufacturing PMI slipped further to 47.6 in Feb (Jan: 48.8) – the sharpest deterioration since late 2012. The flash services PMI came in at a seasonally adjusted 46.7 from the previous month’s 51, its lowest reading since Apr 2014.
  • Singapore GDP increased by 0.6% qoq and 1% yoy in Q4, slightly above flash initial estimates, bringing full year 2019 growth to 0.7% (2018: 3.4%) – the slowest since the 2009 financial crisis. Economic growth this year is expected at 0.5% – the mid-point of a new estimated range of between -0.5% and 1.5%, according to the Ministry of Trade and Industry.

Bottom line: The virus spreading to 26 nations across the globe is raising questions about the economic impact. As many nations/ cities close borders (e.g. Iraq and Kuwait close Iran borders after a spike in cases in the latter; northern Italian towns closed schools and businesses), the economic impact will depend on how far the virus spreads and how fast. The International Air Transport Association’s initial forecasts are that global airline revenues could take a near-$30bn hit in 2020 due to the coronavirus, which is negatively impacting passenger demand – though some countries seem to have been relatively unaffected (see chart – https://econ.st/2VcNOAg – is that a result of cases being undetected or undiagnosed till date?)
Regional Developments

  • Imports into Bahrain declined by 11% yoy to BHD 4.98bn in 2019; the top 10 nations – China (BHD 777mn), Australia (BHD 352mn), UAE (BHD 349mn), Saudi Arabia, Brazil, US, Japan, India, Germany and UK – accounted for 68% of the value of imports during the period. Exports meanwhile edged up by 0.5% yoy to BHD 2.298bn.
  • Bahrain collected BHD 250mn from VAT last year, versus an estimated BHD 150mn (as per the budget).
  • A new Royal decree in Bahrain imposes pay cuts for public servants who are found to be guilty of violations. There will be no suspension from work.
  • Egypt’s GDP grew by 5.6% yoy in Jul-Dec 2019, supported by the wholesale and retail sector (a contribution of 14.7% to GDP), followed by the industrial sector (12.6%), and the agriculture, forestry and fishing sectors (12%).
  • Egypt’s central bank held its overnight deposit rate unchanged at 13.25% and its overnight lending rate (also unchanged) at 12.25%.
  • Interest paid by Egypt’s government grew by 28.7% yoy to EGP 267.19bn during H1 2019-2020 (Jul-Dec 2019). The country is expected to pay EGP 971bn worth of interests and installments during the financial year (EGP 596bn interests and EGP 375bn installments).
  • Government spending on employee salaries and compensation in Egypt increased by 12.2% yoy to EGP 147.22bn in H1 2019-2020. Additionally, public expenditure on health and education grew by 20% and 14% yoy respectively during this period.
  • Remittances into Egypt advanced by 12.1% yoy to USD 11.1bn during Jul-Nov 2019; in Nov alone, it grew by 6.8% to USD 2bn. The central bank disclosed having received more than USD 12bn in cash flows since Jan 2020.
  • Egypt lowered its spending on fuel subsidies drastically by 67.2% yoy to EGP 9.87bn in H1 2019-2020. By quarter, spending slowed to EGP 2.87bn in Q2 from Q1’s EGP 7bn.
  • Egypt currently operates 7 investment zones with total investments of EGP 29.5bn, spanning 800 projects and with 75k employees, according to the General Authority for Investment and Free Zones. A further 11 zones are being built and are expected to create about 208k jobs and attract EGP 78bn in investments.
  • Egypt hired a group of 4 banks as it prepares to become the first country in the MENA region to issue sovereign green bonds. Of these – De3utsche Bank, Citi, HSBC and Credit Agricole – the latter will also act as advisors for the issue.
  • Iraq‘s prime minister-designate disclosed, in a televised speech, the formation of a politically independent cabinet, while also calling for the Parliament to hold an extraordinary session on Monday to give a vote of confidence. They need 166 of 329 MPs to vote in favour of the proposed cabinet and plan.
  • Jordan announced the 5th executive package for improving business services – the focus of this package is to improve e-government tools i.e. to reduce time and effort by digitalising information and online transaction services to citizens.
  • Tourism revenue in Jordan accelerated by 11.4% yoy to JOD 361.8mn in Jan 2020, thanks to the 12.1% rise in tourists (to 487,900). Saudi Arabia, Iraq and Palestine visitors accounted for 14.4%, 6.4% and 4.7% of total tourism income.
  • Kuwait’s budget deficit touched KWD 2.3bn (USD 7.52bn) in Apr 2019-Jan 2020, after 10% of revenue was deposited to the Future Generations Fund’s reserve. Revenues shrank by 15.99% to KWD 14.29bn (90.4% of total revenue estimated for the 2019-2020 financial year) while expenses surged by 10.3% to KWD 15.13bn (67.2% of estimated spending for FY).
  • Inflation in Kuwait advanced by 1.68% yoy in Jan, with telecom prices rising 4.4% while housing costs picked up by 0.68%.
  • Credit growth in Kuwait remained steady in 2019, rising by 3% yoy compared to 4.2% the year before, largely due to a 9% rise in credit to non-bank financial institutions. Both business lending (4.3% from 2018’s 5.1%) and credit to households (5% vs 6%) weakened.
  • Kuwait’s parliament approved a draft law to establish a sharia board to oversee banking and Islamic finance.
  • The draft law to privatize Kuwait’s electricity sector will not be ready in the current cabinet, as its legal aspects and organizational structures are still being studied, revealed the minister of oil and minister of water and electricity.
  • Kuwait and Saudi Arabia have begun trial oil production from the jointly-operated Wafra and Khafji oilfields: production from the Neutral Zone is expected to reach 550k bpd by end of this year.
  • The IMF team are in Lebanon (Feb 20-23), as meetings progress on providing broad technical advice “exclusively”; no financial assistance has been requested from the Fund.
  • S&P Global and Moody’s downgraded Lebanon deeper into junk territory: S&P lowered Lebanon’s ratings to CC/C from CCC/C with a negative outlook. Moody’s cut Lebanon’s government issuer rating to Ca from Caa2; downgraded senior unsecured medium-term note programme rating to (P)Ca from (P)Caa2; long-term foreign currency bond and deposit ceilings have both been lowered to Ca from Caa1 and Caa3.
  • Reuters reported that Lebanon had formed a committee (on Wed) – including ministers, government officials, a central bank representative and economists – to prepare an economic recovery plan.
  • Lebanon was expected to review proposals (last Fri) from firms bidding to be its financial and legal advisers – for its 2020 Eurobond maturities and its overall Eurobond portfolio. No updates have yet been provided, though a quick decision is expected.
  • Lebanon’s dollar bonds fell to record lows last week – some as low as 29 cents on the dollar – after the Speaker’s comments that debt restructuring was an “ideal solution”.
  • Inflation in Oman edged up by 0.43% yoy in Jan, after a 1.93% rise in food and beverage prices alongside an increase in education (2.18%) and hotels and restaurants costs (1.03%). Vegetable and non-alcoholic beverages prices were up by 7.47% and 13.56% respectively.
  • The 100% ownership under Oman’s new Foreign Investment Law will not be applicable on 37 businesses (that are mostly Omani-operated small businesses) like translation, photocopying services, tailoring, laundry, vehicle automotive repairs, manpower and recruitment services, hairdressing and salon services and taxi services among others.
  • Oman’s oil output touched 958,270 barrels per day (bpd) in Jan; oil exports were down by 17.88% mom to 756586 bpd.
  • Saudi Arabia is projected to see an upturn in growth this year, thanks to the non-oil sector, disclosed the central bank governor at a G20 meeting.
  • Inflation in Saudi Arabia rose by 0.4% yoy in Jan as prices of food and beverages picked up by 2.2% alongside a 3.3% dip in housing and utilities costs.
  • Saudi Arabia plans to introduce new franchising laws “within a few weeks”, according to the chairman of the Franchise Committee.
  • Saudi Arabia’s crude stockpiles fell by 11.8mn barrels to 155.199mn barrels in Dec while crude exports remained unchanged at 7.373mn barrels per day in spite of a drop in production (9.594mn bpd from 9.89mn bpd in Nov).
  • Saudi Aramco plans to invest USD 110bn to develop unconventional gas reserves in Saudi Arabia’s Jafurah field. Estimated to hold 200trn cubic feet of wet gas, the phased development of the field could raise production to 2.2trn cubic feet by 2036 if fully completed.
  • Average steel prices in Saudi Arabia increased by 4.38% yoy to SAR 2550.2 per tonne in Jan – the highest since Sep 2019. Average cement prices grew to a 38-month high of SAR 13.33 per bag (+4.9% yoy).
  • GCC witnessed 4 IPOs in Q4 2019, raising a total of USD 26bn, with the energy industry leading the pack. The quarter also saw ICBC’s two bond listings in Nasdaq Dubai – at USD 4.6bn from 9 issuances, this is highest value of conventional bond listings on the exchange by any overseas issuer.
  • More than USD 23bn in hotel construction contracts are scheduled to be awarded in the region between now and 2023, according to MEED. Saudi Arabia and UAE have contracts worth USD 9bn and USD 7.6bn respectively in the pipeline, followed by Oman (USD 2bn) and Egypt (USD 1.9bn).

UAE Focus

  • It has been a year since the launch of Abu Dhabi’s Ghadan 21 initiative, and more than 50 initiatives are underway to attract and support small businesses. Achievements include Hub71 (the technology centre) with 39 startups, the Abu Dhabi Climate Initiative, the AED 535 Ventures Fund and so on. (More: https://www.docdroid.net/ehbTqvl/ghadan21.pdf)
  • Abu Dhabi government plans to issue tenders worth AED 10bn under the public-private partnership (PPP) model to support infrastructure investment in the emirate.
  • Abu Dhabi’s non-oil trade declined by 6.1% yoy to AED 194.43bn in Jan-Nov 2019, as non-oil exports slide by 11.4% to AED 52.51bn alongside a 9.8% dip im imports.
  • S&P Ratings kept its outlook for Sharjah stable, but downgraded the long-term foreign and local currency sovereign credit ratings to “BBB” from “BBB+”. Separately, Moody’s changed its outlook from “negative” to “stable” but downgraded the long-term currency issuer ratings to Baa2 from A3, due to rising debt burden and weaker than expected financial strength.
  • DP World announced that it would delist from Nasdaq Dubai and return to private ownership. The company has about USD 9.9bn in debt maturing in 2022 and a further USD 1.1bn due in 2026.
  • Dubai Economy’s latest Q1 survey results reveal that 60% of businesses are optimistic about business conditions this year (vs 58% in Q4 2019), with 56% responding that they expect a rise in commercial activity given the Expo.
  • Abu Dhabi is expected to add 28k residential units between 2020 and 2023, adding to the current 258k units, according to CBRE.


Weekly Insight on UAE/ GCC equity markets
Three news snippets were out last week: 1. Delisting of DP World; 2. Questions over the ownership structure and governance of NMC Health (the Middle East’s largest hospital operator and largest private healthcare provider in the UAE) 3. Drake & Scull’s allegations of embezzlement and fraud.
Last year, the Aramco IPO brought much cheer to regional equity markets alongside the inclusion of Saudi Arabia into emerging market indices (following UAE and Qatar previously, Kuwait to be included this year). However, markets in the GCC – in spite of many financial liberalization measures – continue to be sidelined by global investors. To a large measure, these markets generally continue to be illiquid, with a large retail investor base, and remain highly concentrated in a few sectors (banks, real estate and insurance).
A key point to highlight is that of size: take the example of UAE, with a population of just over 9 million and a nominal GDP of around USD 400bn. It is currently home to 3 stock exchanges (Abu Dhabi Securities Exchange, Dubai Financial Market, and Nasdaq Dubai; a fourth has already been announced at the recently created Dubai Future District). With a combined UAE market cap of just under 10% within MENA exchanges (in a pie dominated by Saudi Arabia), perhaps consolidation should be the name of the game.
Chart 1. Market Cap across major MENA stock markets

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Source: Thomson Reuters Eikon, Nasser Saidi & Associates. Data as of Feb 20, 2020
In addition to consolidation, diversifying the sectors would have been the next best move. Ideally, the Aramco IPO should have opened the road to other privatisations in Saudi Arabia and across the region – a move that would have attracted private capital, new tech and resulted in job creation, all leading to greater openness and increased economic diversification. However, the current delisting of DP World (Nasdaq Dubai’s biggest listing) seems to have thrown a spanner into the works. In being taken over by the parent company Port and Free Zine World, the company will once again become fully government owned. This move also comes at a time when the UAE government was actively encouraging family-owned enterprises to list (through changes in its Agency Laws), and this is unlikely to provide any comfort to the many families in the region nor to businesses that were planning to IPO in the immediate future.
Chart 2. Top 8 stocks (by sector) at ADX and DFM account for ~85% of total market cap


Source: Thomson Reuters Eikon, Nasser Saidi & Associates. Data as of Feb 20, 2020
The other point to highlight is an important one of governance. Transparency and disclosure are an important component prior to any company going public. The case of NMC Health (where the complex shareholdings of top investors continue to remain a mystery) and Drake and Scull (where embezzlement and fraud accusations are being traded) not only highlights governance issues and transparency, but also call into question the standards of regulatory due diligence and risk review process. We do hope that the UAE’s latest corporate governance code offers some comfort to foreign investors looking to invest in the country!
Media Review
Dr. Nasser Saidi’s interview on Lebanon, UK’s new finance minister & corporate governance: Dubai Eye’s Business Breakfast show 18.02.2020
https://omny.fm/shows/businessbreakfast/nasser-saidi-associates-18-02-2020
WTO’s goods trade barometer signals further weakening of trade into first quarter
https://www.wto.org/english/news_e/news20_e/wtoi_17feb20_e.pdf
China’s manufacturing supply chain pummelled from all sides in efforts to restart
https://www.scmp.com/economy/china-economy/article/3051534/coronavirus-chinas-manufacturing-supply-chain-pummelled-all
The White Swans of 2020: Roubini
https://www.project-syndicate.org/commentary/white-swan-risks-2020-by-nouriel-roubini-2020-02
Are oil and gas turning into stranded assets? FT Podcast
https://www.ft.com/content/07dcd8d7-9492-4dfc-a54f-10c4b62cd558
 
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Weekly Economic Commentary – Feb 16, 2020

This week’s “Weekly Insights” focuses on Women and Employment in the MENA region.
Markets
Stock markets in the US (S&P 500) and Europe (Stoxx 600) closed at record highs, as investors’ concerns about the impact of the coronavirus (COVID-19) eased. Even in China, stock markets are slowly recovering thanks to the various stimulus measures (more in the Bottomline section).  Regional markets were mostly down, given the disappointing earnings season so far. The euro dropped to the weakest vis-à-vis the dollar in nearly 3 years while oil prices posted a weekly gain (the first since early-Jan), and gold prices closed near 7-year highs.
Global Developments
US/Americas:

  • Inflation nudged up by 0.1% mom in Jan (Dec: 0.2%), thanks to a drop in energy prices. Core inflation edged up to 0.2% mom (0.1%) on higher rents and apparel prices, though in yoy terms core inflation stayed put at 2.3%.
  • Retail sales increased by a modest 3% mom in Jan, from a downwardly revised 0.2% the month before. The rise was supported by an increase in auto sales
  • Industrial production fell by 0.3% mom in Jan (Dec: -0.4%), with both manufacturing and utility outputs weak (-0.1% and -4%). Manufacturing was also hit by Boeing’s troubles.
  • US posted a deficit of USD 33bn in Jan, compared to Dec’s USD 13.3bn deficit and a surplus USD 9bn in Jan 2018, in the latest monthly budget statement. Budget deficit looks on track to surpass USD 1trn for the first time since 2012, according to the Congressional Budget Office.
  • Initial jobless claims increased by 2k to 205k in the week ende3d Feb 7, with the 4-week moving average remaining unchanged at 212k.

Europe:

  • German Q4 growth was almost unchanged from previous quarter; in yoy terms, GDP grew by 0.3% yoy (Q2: 1.1%). At +0.6% yoy for the full year 2019, German GDP grew at the slowest pace since the region’s sovereign debt crisis.
  • GDP in the wider Eurozone grew by 0.1% qoq and 0.9% yoy in Q4 (Q3: 0.3% qoq and 1.2% yoy); the bloc grew by 1.2% in 2019. The three biggest economies in Europe all stalled or shrank in Q4: France saw output contract by a modest 0.1% while Italy shrank 0.3%.
  • Employment numbers have been encouraging: Germany has one of the lowest unemployment rates in the world while the latest data show that the number of employed people rose by 0.3% in the euro area in Q4 and by 0.2% in EU.
  • Inflation in Germany increased to touch a 6-month high of 1.7% yoy in Jan (Dec: 1.5%), driven by increases in energy product prices (+5.2% yoy); in mom terms prices fell by 0.6%.
  • EU industrial production (IP) dropped by 2.1% mom in Dec (Nov: flat), with sharp declines in Germany, France and Italy. IP was down 4.1% yoy – this is the weakest reading since the region’s sovereign debt crisis in 2012.
  • Trade surplus in the EU widened to EUR 22.2bn in Dec (Nov: EUR 19.1bn). For the full year 2019, the Euro zone registered a EUR 225.7bn trade surplus: EU’s biggest trade surplus is with the US (EUR 152.6bn) while its biggest deficit is with China (EUR 163bn).
  • UK Q4 GDP remained flat in qoq terms (Q3: 0.5%). In yoy terms, growth slowed to 1.1% yoy in Q4, following a 1.2% reading the quarter before.
  • Industrial production in UK improved marginally, rising by 0.1% mom in Dec, following a 1.1% dip the month before. Manufacturing picked up by 0.3% mom (Nov: -1.6%). In yoy terms, IP and manufacturing dipped by -1.8% and -2.5% respectively.

Asia Pacific:

  • China’s inflation increased by 5.4% yoy in Jan (Dec: 4.5%) – the highest since Oct 2011 – as the spread of the virus triggered buying of essential commodities (food prices were up 4.4% mom). Separately, the producer price index rose by 0.1% yoy from Dec’s 0.5% contraction.
  • Japan’s current account surplus grew by 4.4% yoy to JPY 20.1trn, supported by an expansion in travel services (+9.1% to JPY 2.6trn). The surplus in current account last year was the first rise in 2 years although the goods trade surplus shrank for the 3rd year in a row (due to slowing export growth).
  • Japan machine tool orders plummeted by 35.6% in Jan to JPY80.8bn, after losing in December 33.6%, as car-makers held off ordering.
  • India industrial output dipped by 0.3% yoy in Dec (Nov: +1.8%), with manufacturing output falling by 1.2% (Nov: +2.7%) and electricity dropping by 0.1%. Separately, annual retail inflation rose to 7.59% yoy in Jan (Dec: 7.35%), partly by rising vegetable prices (+50% yoy).
  • India’s trade deficit widened to USD 15.2bn in Jan (Dec: USD 11.3bn), as exports fell for the 6th consecutive month (-1.7%) and imports were down by 0.75%. During the first 10 months of the current fiscal year (Apr-Jan), exports have contracted by 1.9%, while imports shrank 8.1%, registering a trade deficit of USD 133.3bn.
  • Singapore retail sales declined by 3.4% yoy and 1% mom in Dec (Nov: -4.2% yoy and 0% mom), on the back of falling motor vehicle sales. Excluding moto vehicles, retail sales nudged up by 0.1%. In 2019, retail sales declined by 2.8% yoy – the deepest contraction since 2013.

Bottom line: The Chinese government allocated CNY 71.8bn of fiscal funds to suppress the outbreak while Chinese asset managers have pledged capital of USD 350mn to support coronavirus-hit funds in a bid to boost investor confidence (in addition to the previous week’s PBoC stimulus). With expectations that globally, central banks and governments will intervene to support economic growth should the need arise, investors are pouring money across most asset classes amidst declining volatility indicators (https://tmsnrt.rs/2V1gWul).
Regional Developments

  • GDP in Bahrain grew by 2.1% in 2019, supported by a 2.3% rise in the non-oil sector.
  • Bahrain’s budget deficit narrowed by 24% yoy in 2019: as non-oil revenues increased by 63% alongside a decline in government spending by 3%, deficit declined to 4.7% of GDP in 2019 (2018: 6.3%). The primary budget deficit (i.e. excluding interest payments) fell 85% yoy, and the nation is aiming for a balanced budget by 2022.
  • The head of Bahrain’s sovereign wealth fund called for greater de-regulation to attract FDI, citing the successful deregulation of the nation’s telecom sector in 2004: operators increased to 20 from one, resulting in a 50% drop in prices while employment increased by 17%.
  • Egypt’s annual urban consumer inflation edged up to 7.2% in Jan (Dec: 7.1%) as prices of fruits and vegetables increased (+10.3% in Jan) as did transport (+16.3%); core inflation meanwhile increased to 2.7% (Dec: 2.4%).
  • Egypt lowered its expectations for oil prices in the 2019-20 budget to USD 64 per barrel from USD 68, according to a report evaluating budget performance in H2 2019. Budget deficit during this period widened to EGP 236.7bn or 3.8% of GDP (Jul-Dec 2018: EGP 186.7bn or 3.6% of GDP). Total revenues edged up by 0.5% yoy to EGP 390.1bn, while tax and VAT revenues declined by 0.04% (to EGP 303.8bn) and 1.9% (to EGP 72.1bn) respectively.
  • Egypt’s electricity subsidies were completely wiped out in H2 2019, down from EGP 7.992bn (USD 510mn) in the same period a year ago. Electricity prices were increased by an average of around 15% over the 2019-2020 fiscal year that began in Jul. Egypt slashed its spending on energy subsidies (excluding power) by 67.3% yoy to EGP 9.88bn in H2 2019.
  • Egypt’s net government debt issues grew by 11.5% yoy to EGP 513bn (USD 32.74bn) in H1 of the 2019-20 fiscal year. Borrowing in H1 exceeded 70% of the target of EGP 725.156bn estimated in the budget.
  • Gold reserves in Egypt increased by 3.7% mom to USD 3.424bn in Jan while foreign reserves nudged up by 0.08% mom to USD 45.456bn.
  • Egypt’s central bank governor revealed ongoing talks with the IMF about technical assistance concerning structural reforms.
  • Export of Egypt’s petroleum products rose by 4.54% to USD 4.9bn last year. LNG exports surged almost 2.5 times to USD 1.236bn.
  • Egypt attracted EGP 1trn in foreign investments in planned and operated oil and gas projects, according to the sector’s minister, including USD 35bn during the last four years.
  • Egypt’s official statistics agency disclosed that population crossed 100mn persons. Separately, unemployment rate fell to 8% in Q4 2019 vs 8.9% in the same period a year ago.
  • US agreed to extend a waiver for Iraq to import energy supplies (including gas) from Iran. The latest extension will be for 120 days.
  • Jordan launched 68 investment opportunities worth USD 4.5bn across various sectors; the tourism sector accounts for the largest share: investment volumes at USD 2bn from about 27 projects.
  • Kuwait’s foreign reserves accelerated by 7.2% yoy to KWD 12.09bn (USD 39.9bn) in Dec. Money supply (M2) declined by 1.24% yoy and 0.24% mom to KWD 38.129bn while public debt instruments declined by 41.5% yoy and 4.61% mom to KWD 2.072bn at end-Dec 2019.
  • Boursa Kuwait launched BK Main 50 Index, which represents the 50 most liquid securities in the main market. Constituents are to be reviewed annually based on average daily traded value; results will be announced on Jan’s second Sun and take effect on Feb’s second Sun.
  • Lebanon has formally requested technical help from the IMF to draft a reform plan to support the economy. The IMF representative however stated that “Any decisions on debt are the authorities’, to be made in consultation with their own legal and financial advisers”.
  • Lebanon’s finance minister stated that various options are being studied regarding the Mar 9 USD 1.2bn Eurobond payment, including whether to pay the debt. Capital Economics estimates a debt plan may involve up to a 70% haircut alongside a 50% drop in currency.
  • Lebanon’s central bank set an interest rate cap of 4% on dollar bank deposits and a cap of 7.5% on Lebanese pound deposits, reported local media; these apply on deposits made or renewed from Feb 12.
  • Lebanon’s flag carrier, MEA, which is 99% owned by the Central Bank, will not accept local currency any longer, only foreign currencies.
  • Credit growth in Oman eased in 2019, rising by 3% yoy vs. 2018’s 6%. Among listed banks, steepest increase in lending came from the smaller banks: e.g. Ahlibank posted a 10% growth in net loans, advances and financing to OMR 2.45bn vs the largest Bank Muscat reporting a 0.7% decline to OMR 8.88bn.
  • Cruise tourism in Oman surged by 43.6% yoy with the arrival of 283,488 tourists in 2019.
  • Industrial production index in Saudi Arabia declined by 2.59% mom to 121.88 points. Declines were across the board, with mining and quarrying, manufacturing and electricity and gas supply down by 3%, 2% and 1.73% respectively.
  • Saudi Arabia reduced crude supplies to some Asian buyers in Mar, after refiners reduced output.
  • CEOs in Saudi Arabia are upbeat about the domestic economy while remaining concerned about global growth outlook, according to a KPMG survey of 50 CEOs.
  • Saudi Arabia’s Public Investment Fund plans to have 1000 employees by end of this year, from 700 currently.
  • The retail sector in Saudi Arabia currently employs more than 2mn persons, accounting for roughly one-fourth of the total workforce.
  • Property prices in Saudi Arabia increased marginally by 0.5% yoy and 0.4% qoq in Q4 2019, according to Jadwa Investment. The report also stated that credit to the private sector rose by 7% yoy in Dec, posting the highest rise since Aug 2016.
  • Tourists into Saudi Arabia are forecast to rise by 38% to 21.3mn by 2024 from 2019’s 15.5mn, driven by short city visits from GCC residents and business travelers, according to Colliers International.
  • GCC nations rank highly in the 2020 Agility Emerging Markets Logistics Index: the list was topped by China and India, while UAE stood 3rd; Saudi Arabia (in 6th place), Qatar (7), Oman (14), Bahrain (15) and Kuwait (19) also rank favorably in the list.
  • In a report titled “The state of the pre-seed startups in MENA launched by Wamda and the STEP conference, it was disclosed that only 32% of startups are currently registered and within those 60% are either in UAE or Egypt.

UAE Focus

  • Dubai’s non-oil private sector activity softened to 50.6 in Jan (Dec: 52.3) – the weakest since Feb 2016 – as output slowed (subdued by soft new business volumes) while construction, wholesale and retail sector PMIs fell below the 50-mark. Firms tried to boost sales through lowering output prices (for the 21st month in a row) while the rate of job losses was the strongest in the series’ 10-year history.
  • Dubai Economy’s Business Registration and Licensing department issued a total of 4,076 new business licenses in Jan, creating about 10k+ new job vacancies. No comparative data were provided.
  • Bloomberg reported that UAE’s biggest bank, First Abu Dhabi Bank, had terminated 100s of employees across multiple divisions. Separately, it was reported that Abu Dhabi Islamic Bank was planning to save ~AED 500mn (USD 136mn) by cutting jobs and closing branches.
  • A CBRE report found that existing supply of residential real estate in Dubai stood at 608,500 units at end-2019, with an additional 127k units expected to be delivered by 2023.
  • Dubai’s prime residential market witnessed transactions of over 1,454 villas and 16,522 apartments in 2019, according to statistics from Luxhabitat. The volume of such transactions grew by 22% to AED 42.3bn in 2019, while the average price per foot fell by 3.72%.
  • UAE’s first floating solar power plant – a pilot facility with a capacity of just 80kW – will start producing electricity off the tiny resort island of Nurai “very soon”.


Weekly Insights on Women and Employment in the MENA region
Two news items inspire this week’s weekly insight: the FT’s feature on Middle East’s demographic dividend and the Global Women’s Forum being held in Dubai 16-17 Feb.
The young fast-growing population should have been the cornerstone of growth in the MENA region: it is the world’s second youngest region (behind sub-Saharan Africa) with close to 60% of the population under 30. However, low levels of growth, the lack of job creation and rising levels of unemployment has led to this being a curse rather than a boon (which ignited the Arab Spring back in 2011) and continues to fuel ongoing anti-government protests- from Algeria to Sudan, Lebanon to Iraq). The World Bank estimates that MENA needs to create a staggering 300mn plus jobs by 2050, and all this while the world is preparing for the 4th industrial revolution (a technological revolution including widespread use of AI) which is likely to displace and destroy medium and low skill jobs in the region.
While the role of women in supporting economic development is not subject to dispute, women in the MENA region have been held back by various cultural and socio-economic barriers (the usual suspects of marriage, childcare and others like access to a bank account, ease of mobility, property rights, and so on). There has been significant progress on legal and regulatory barriers – the World Bank’s Women Business and the Law 2020 edition noted that the region was enacting the maximum number of reforms[1], though it remains the region with the lowest average score (49.6 vs the previous edition’s 44.9). The legal changes of course need to be accompanied by equal participation of women and men in the labour market and business, let alone politics. According to WEF’s Global Gender Gap 2020 report, gender parity will not be attained in the region for another 140 years!
While labour force participation rates in MENA have improved over time, women have largely remained on the sidelines (in spite of their higher educational attainment and outperformance in standardized tests). The female labour force participation rate (FLFPR) has been rising, but still remains around 21.7% for the region – and low FLFPR coincides with higher female unemployment rates at an average of around 17.8% and closer to 40% for young women!
The region’s preference for public sector jobs – especially among women – however is not surprising, given the wide gender gaps in self-employment and entrepreneurial activity in the region. It is estimated that on average, self-employed females account for 30% of female employment in the region, rising to as high as 63% in Morocco (vs. 12.4% in the OECD). However, only one in ten self-employed women are employers, compared to one in four self-employed men; this is even lower in larger firms (OECD). Women representation is lacking even in pre-seeded start-ups, with women accounting for just a quarter of the founders (Wamda, STEP conference, 2020). This needs to change – especially as female-owned businesses tend to hire more women (25%) than their male counterparts do (22%).
How can the region progress? Economic growth and development do not necessarily lead to gender equality and empowerment of women. What the region needs is an affirmative action programme that actively promotes women and reverses marginalisation and discrimination. Alongside legal and regulatory changes, and reducing the costs of doing business, the region needs to support the move towards a more digitized economy (i.e. encouraging flexible work arrangements, strengthening vocational & digital-related training for women, promoting quantitative skills training, greater push towards STEM etc.). Last but not least, availability of timely data on factors that facilitate and discourage entry of women into the workforce would support policy making at a nation level. The bottom line is that investing in institutions and infrastructure for greater inclusiveness and participation will gradually lead to a change in ingrained cultural attitudes and to greater empowerment and economic integration of women.
Chart 1: Significant gender gap in account ownership

 
 
 
 
 
 
 
 
 
 
 
 
 
Note: The chart tracks account ownership at a financial institution or with a mobile-money-service provider as a % of population ages 15+ male vs female.
Source: World Bank data, Nasser Saidi & Associates.
Chart 2: Low Female Labour Force Participation Rates along with High Unemployment Rates 

 
 
 
 
 
 
 
 
 
 
 
 
 
Source: ILOSTAT, Nasser Saidi & Associates.
 
Chart 3: Female youth employment is almost 1.5-7.3 times total female unemployment 

 
 
 
 
 
 
 
 
 
 
 
 
 
Source: ILOSTAT, Nasser Saidi & Associates.
 
Table: A SWOT Analysis of Women & Employment in the MENA region

 
 
 
 
 
 
 
 
 
 
 
 
 
Source: Nasser Saidi & Associates.
 

Media Review
Sovereign investors pulled back from equities in fourth quarter
https://www.reuters.com/article/us-swf-investment-markets/sovereign-investors-pulled-back-from-equities-in-fourth-quarter-report-idUSKBN2071QC
Middle East’s demographic earthquake: the generation fuelling protests
https://www.ft.com/content/03274532-21ce-11ea-b8a1-584213ee7b2b
Dubai retailers being offered free space in some malls: Chalhoub Group
https://www.arabianbusiness.com/retail/439894-exclusive-dubai-retailers-being-offered-free-space-in-selected-malls-chalhoub-group
Foreign investors in row over Lebanese debt
https://www.ft.com/content/98a75182-4f24-11ea-95a0-43d18ec715f5
 
 
[1] Saudi Arabia, UAE, Bahrain, Jordan and Tunisia were among nations introducing maximum number of reforms supporting women.
 
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Weekly Economic Commentary – Feb 9, 2020

Nasser Saidi & Associates is pleased to announce the introduction of a new section “Weekly Insights” that will focus on current economic issues relevant to UAE and the wider Middle East.
Markets
Stock markets recovered last week though posting losses on Fri on heightened fears of the coronavirus pandemic’s impact on the global economy. The S&P 500 and Nasdaq posted weekly gains, the former biggest since Jun 2019 and latter since Nov 2018; Europe’s Stoxx also reported the biggest weekly gain since Nov 2018. China and Hong Kong markets opened after an extended Lunar New Year holiday but posted weekly losses as the virus death tolls rose. Regional markets ended the week in the red (also given the disappointing earnings season so far) while Egypt posted gains; Aramco hit its lowest level since it started trading. On the currency front, emerging market currencies were the worst performers (Singapore dollar and Thai baht after central bank moves to coronavirus impact) while yen closed just above a 2-week low. Oil prices dipped on lower demand worries – Brent posted a 5th consecutive weekly drop – and gold gained.
Global Developments
US/Americas:

  • Non-farm payrolls increased by 225k in Jan, with gains the strongest in construction, health care, transportation and warehousing. As labour force participation rates increased by 0.2% to 63.4% (the highest since Jun 2013), average hourly earnings edged up by 0.2% mom and 3.1% yoy. The unemployment rate nudged up to 3.6% from a multi-decade low of 3.5%.
  • US productivity rebounded in Q4, rising at a 1.4% annualized rate (Q3: -0.2%); unit labour costs slowed to 1.4% in Q4, compared to the 2.5% reported in Q3.
  • US ISM manufacturing PMI rebounded to 50.9 in Jan (Dec: 47.8), as new orders grew (52 from 47.6). ISM non-manufacturing PMI accelerated to 55.5 in Jan (Dec: 54.9), thanks to a pickup in new orders (56.2 from 55.3) alongside a dip in prices paid (55.5 from 59.3).
  • A similar pickup was visible in the Markit manufacturing PMI which increased to 51.9 in Jan, up from the previous month’s reading of 51.7. As services PMI improved (53.4 from 53.2), composite index rose to 53.3 from 53.1 the month before.
  • US factory orders rebounded by 1.8% mom in Dec (Nov: -1.2%) – the largest gain since Aug 2018 – but supported by defense aircraft demand. Excluding defense, factory orders dropped 0.6% (Nov: +0.1%). Overall, factory orders fell by 0.6% in 2019.
  • ADP employment posted the largest gain since May 2015, with 291k private sector jobs created in Jan, up from Dec’s 199k. Medium-sized businesses were the biggest employers, adding 128k jobs.
  • Trade deficit widened to USD 48.9bn in Dec, from Nov’s USD 43.7bn, as imports ticked up by 2.7% to USD 258.5bn. For the full year 2019, overall trade deficit in goods and services dropped – for the first time since 2013 – by 1.7% yoy to USD 616.8bn. US imports of Chinese goods fell to USD 452bn last year (2018: USD 540bn), their lowest level since 2014 while exports of US goods to China fell to their lowest level since 2011 (2019’s USD 107bn following 2018’s USD 120bn).
  • Initial jobless claims fell by 15k to a 9-month low of 202k in the week ended Feb 1, while the 4-week moving average dropped by 3k to 211,750.

Europe:

  • Both German and EU Markit manufacturing PMI ticked up by 0.1 to 45.3 and 47.9 respectively in Jan (Dec: 45.2 & 47.8). In the UK, Markit manufacturing PMI rose to 50, from Dec’s 49.8.
  • Composite PMI in Germany nudged up to 51.2 in Jan (Dec: 50.2), as new businesses improved following 6 months of contraction. Services PMI improved to 54.2 in Jan (Dec: 52.9) thanks to faster growth in business activity, new work and steep rise in employment. The same was mirrored in EU, with the composite index at 3 in Jan (the highest since Aug) vs Dec’s 50.9; services PMI slipped 0.3 points to 52.5, reflecting slower gains in France and Spain.
  • German factory orders fell sharply by 2.1% mom in Dec (Nov: -0.8%), lowering the full year orders to -8.7% – the worst in over a decade.
  • German exports edged up by 0.1% mom and imports fell by 0.7% in Dec, bringing the trade surplus to EUR 19.2bn. For the full year 2019, German exports increased by 0.8% yoy to EUR 1.33trn while imports grew by 1.4% to EUR 1.1trn.
  • German industrial production plunged by 3.5% mom in Dec (Nov: +1.2%), posting the biggest drop since Jan 2009. Sector-wise, construction plunged by 8.7%, as did manufacturing (-2.9%).
  • Retail sales in the Eurozone dropped by 1.6% mom in Dec (Nov: 0.8%) while in the EU sales were down by 1.3%.

Asia Pacific:

  • China’s Caixin manufacturing PMI stayed above the 50-mark in Jan, though sliding to a 5-month low of 51.1 (Dec: 51.5); the survey however closed before Lunar New Year holiday and widespread awareness of the Coronavirus outbreak. The services PMI softened to 51.8 in Jan (Dec: 52.5), with the rate of new order growth weakening and new business rising at the slowest pace since Oct.
  • The People’s Bank of China injected RMB 1.2trn (USD 173bn) in additional liquidity to money markets, in the largest single-day open market operation since 2004.
  • Japan’s Jibun Bank manufacturing PMI contracted again to 48.8 in Jan (Dec: 48.4): though overall output and new orders shrank for the 13th consecutive month, the pace of contraction of new export orders eased to its slowest level since Nov 2018.
  • Japan overall household spending fell by 4.8% yoy to JPY 321,380 (USD 2900) in Dec (Nov: -2%), dragged down by the consumption tax hike imposed in Oct. For the full year 2019, average monthly spending by households with two or more members grew 0.9% yoy to JPY 293,379 – the first rise in 6 years, thanks to higher consumer spending ahead of the tax hike.
  • Japan leading economic index declined to 90.9 in Nov (Oct: 91.6) and the coincident index eased to 95.1 in Nov (Oct: 95.3).
  • Korea Nikkei Markit manufacturing PMI inched down to 49.8 in Jan (Dec: 50.1), even though new export and total new orders recorded its 2nd successive month of growth (albeit at a slower pace).
  • Inflation in Korea increased to a 14-month high in Jan, rising by 1.5% yoy and 0.6% mom, given the higher prices for agricultural and oil products.
  • Singapore PMI moved up to an 8-month high of 51.4 in Jan, from 51 the month before, supported by new business and output (rising at the fastest pace since May).
  • India’s central bank meeting saw no change in interest rates, as expected. However, the Reserve Bank announced measures to support bank lending including a waive off on the Cash Reserve Ratio and guaranteed long term liquidity of up to INR 1trn at a cheap price via long term repos of 1-year and 3-year to banks.

Bottom line: Concerns about the coronavirus’ (nCoV) impact on global economic growth gain traction, with the recent death toll already surpassing that of SARS (in 2003, when China was less interconnected to the rest of the world). Though the JP Morgan Global Manufacturing PMI rose to a 9-month high of 50.4 in Jan (Dec: 50.1) – with the upturn limited to the consumer and intermediate goods industries – the nCoV outbreak will likely negatively impact the next few readings, as the impact reverberates across global supply chains.
Regional Developments

  • Bahrain’s central bank cut its one-month deposit rate by 15bps to 2.45% from 2.6% while keeping its key policy rates on the 1-week and overnight deposit facility unchanged.
  • Egypt’s non-oil private sector economy weakened: PMI fell to a near 3-year low of 46 in Jan (Dec: 48.2), as both output and new orders fell amidst softening export demand.
  • Egypt’s ministry of planning and economic development will release an updated version of Egypt Vision 2030 soon, revealed the minister. The new version will focus on partnerships (like PPPs) and also follow-up on the implementation of SDGs.
  • GDP in Egypt is forecast to accelerate to 5.8% this year from 5.6% in 2019, supported by growth in the tourism, construction, and oil and gas sectors, according to the African Development Bank. It will also account for 1/3-rd of the aggregate growth of 3.4% in Africa.
  • The Central Bank of Egypt is expected to start its middle-income mortgage initiative by Mar, as it is finalizing regulations for its implementation, reported Mubasher.
  • Egypt’s sovereign wealth fund signed a deal with the National Service Products Organisation (affiliated to the Ministry of Defence) to help in restructuring and marketing some of its assets and subsidiaries to private investors.
  • Banque Misr is planning to offer up to 45% of Banque du Caire on the Egyptian Exchange in H1 this year, reported Reuters, citing the bank’s chairman.
  • Egypt’s non-oil imports declined by 18% yoy to USD 5.292bn in Dec 2019. Imports of agricultural crops fell by 24% to USD 553mn while leather products imports dropped by 28% to USD 12bn.
  • Bilateral trade between Egypt and Singapore touched USD 1bn, with the focus on consumer and agricultural products, while investments in Egypt crossed USD 500mn, according to the Singapore ambassador.
  • The value of bilateral trade between Egypt and Switzerland grew to USD 917mn in 2019, up from USD 905mn the year before. Switzerland is the 16th top investor in the country, with total investments of USD 2.144bn in 433 projects.
  • Trade exchange between Egypt and Morocco touched USD 681mn in 2019: Egypt’s exports to Morocco amounted to USD 540mn.
  • Revenues from Suez Canal increased by 6.1% yoy to USD 497.1mn in Jan, with 1645 vessel crossings. In 2019, revenues grew by 1.3% to USD 5.8bn.
  • Egypt is expected to sign a new contract with Saudi Arabia to set up a joint electricity grid on 30 May this year. The project would set up the largest joint electricity grid in the region with the ability to transmit about 3000 MW between the 2 nations.
  • Imports of Iraqi crude oil to Jordan touched 380k barrels in Jan (or 12k barrels per day).
  • Remittances into Jordan increased by 0.9% yoy to USD 3.7bn in 2019, revealed the central bank.
  • Jordan’s Lower House endorsed the public-private sectors partnership law: the law, which aims to secure funds for public projects, will create a higher ministerial committee to select projects, provide policies for each project and refer them to the Cabinet.
  • Informal economy in Jordan contributes around 25% of the national income and employs around 46% of total workforce, according to a study by Al Quds Centre for Political Studies.
  • Jordan airport welcomed 8.9mn passengers in 2019, up 5.9% yoy. The top five travel destinations by number of passengers were Dubai, Istanbul, Cairo, Doha and Kuwait in 2019.
  • Japan announced a new assistance package for Jordan to the tune of USD 15.6mn, with the aim to support organisations implement projects which offer humanitarian assistance for Syrian refugees and host communities.
  • According to UNICEF, over 20% of children living in Jordan are multi-dimensionally poor, and half of its young women are not enrolled in education. (Read the full report: https://www.unicef.org/jordan/Geographic-Multidimensional-Vulnerability-Analysis)
  • Kuwait’s trade surplus narrowed to KWD 679mn in Oct (-43% yoy) as exports plunged by 26.1% to KWD 1.55bn and imports declined by 3.9% (to KWD 877mn).
  • The Central Bank of Kuwait’s 3-month bonds – worth KWD 240mn, with a 2.75% rate of return – were oversubscribed by 12.15times with purchase orders crossing KWD 2.9bn.
  • Abyaar Real Estate Development’s last trading day on Boursa Kuwait will be 29 July 2020.
  • Lebanon’s PMI slipped further to 44.9 in Jan (Dec: 45.1), as new orders fell for the 80th month in a row, and exports fell at the quickest pace since Nov 2019. Respondents cited political instability and liquidity issues as core problems, and remained pessimistic towards business outlook this year.
  • Lebanon’s government has approved a rescue plan: Reuters reported that (as per a draft document obtained by them) broad policy plans included reducing interest rates, recapitalising banks, restructuring the public sector and seeking support from foreign donors.
  • Oman’s nominal GDP fell by 2.6% yoy to OMR 21.64bn by end-Sep, with oil sector activity down by 2.9% and non-oil activity falling by 2.1% to OMR 14.9bn. Hotels and restaurants, financial brokerage, and real estate activities rose by 5.4%, 1.6% and 0.5% respectively.
  • Credit to Oman’s private sector increased by 2.6% yoy to OMR 22.8bn (USD 58.22bn) as of Nov 2019. Non-financial corporate sector accounted for 46.1% followed by the household sector (mainly under personal loans) at 45.2%.
  • Oman announced that visas issued for sales representative/ promoters and purchase representatives in the private sector would not be renewed on expiry.
  • Oman’s cruise ship tourists accelerated by 46.5% yoy to 283,488 passengers from a total 284 ships in 2019.
  • Saudi Arabia’s PMI moderated to 54.9 in Jan (Dec: 56.9) – the slowest since Dec 2018 – as new orders slowed and the rise in sales volumes was the softest recorded for 13 months.
  • Tadawul could see three new listings in H1 2020, reported Reuters: these include Sulaiman Al Habib Medical Group (one of the largest private health-care operators in Saudi Arabia), retailer Bindawood Group and Supreme Foods (which produces processed and cooked meat).
  • Bank deposits in Saudi Arabia grew by 7.3% yoy to SAR 1.795trn in 2019, according to SAMA, with demand deposits accounting for 61.2% of the total. Credit disbursed increased as well, posting a growth of 7.6% to SAR 1.552trn (with long-term credit surging by 26.7%).
  • Consumer spending in Saudi Arabia improved by 4.6% yoy to SAR 1.026trn in 2019, according to SAMA data. While the value of point of sales (POS) operations grew by 22.8% to SAR 285.32bn, cash withdrawals declined by 1.03% to SAR 740.6bn.
  • Saving in Saudi Arabia declined by 2.4% yoy to SAR 751.76bn in Jan-Sep 2019, according to the Saudi General Authority for Statistics.
  • The CEO of NEOM Company stated that NEOM will be the first place globally to rely entirely on digitalization, with a 100% fully protected system. With Phase one due for completion in 2020, the regional plan for NEOM will be announced next month, he clarified.
  • Saudi Arabia completed the privatization of its first government owned healthcare facility Saudia Medical Services Company (a subsidiary of Saudi Arabian Airlines).
  • Fitch Ratings views Saudi banking sector as well capitalized, with liquid balance sheets, and high-quality liquid assets accounting for on average 22% of total assets and covering 31% of deposits. Profitability will remain resilient, thanks to strong franchises, cheap funding and limited competition.
  • Saudi Arabia’s PIF sold 39k of its shares in Tesla in Q4 2019: this accounted for 99.5% of PIF’s Tesla shares.
  • Saudi Arabia decreased its carbon emissions from fuel consumption by about 4.4% to 553mn tons of carbon dioxide in 2018, based on indices supplied by Enerdata.
  • A recent MEED report finds that there are an estimated 6,722 active projects with a combined value of more than USD 3.1trn planned or underway in the GCC. About USD 22.4bn of construction and transport project contracts were awarded in H1 2019, and the UAE remains one of the biggest markets in terms of project execution (about USD 177.9bn worth of projects in Jun 2019).
  • A cross-border TIR transport operation involving the UAE, Saudi Arabia and Jordan was successfully completed in 4 days (vs 7 days without the TIR guarantee) last week. Trucks operating under a TIR carnet (temporary export-import document) use one single international guarantee from a journey’s start to finish, even for intermodal transports.
  • The IMF warned that at the current fiscal stance, GCC region’s financial wealth could be depleted by 2034. Access the report at : https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2020/01/31/The-Future-of-Oil-and-Fiscal-Sustainability-in-the-GCC-Region-48934

UAE Focus

  • UAE’s PMI dropped below 50 in Jan for the first time since Aug 2009: the Jan reading of 49.3 (Dec: 50.2) was a result of falling new orders, weaker business confidence, and a contraction in employment.
  • UAE discovered 80trn cubic feet of gas reserves in Jebel Ali – the largest discovery in 15 years and the 4th biggest gas field in the Middle East (behind Qatar’s North field, Iran’s South Pars and Abu Dhabi’s Bab field). It opens the potential to acquire gas self-sufficiency as well as enter the LNG market which requires onshore LNG liquefaction.
  • Dubai approved a new package of fee waivers for various government services: it covers services provided by 5 sectors – health, economic, marine, social and infrastructure. This follows similar previous announcements to reduce costs of doing business in the emirate.
  • The total production of all economic activities in Abu Dhabi grew by 13.2% yoy to AED 1,268.1bn in 2018, while value added was up 15.8% to AED 849bn. Mining and quarrying represented 45.8% of total value added, followed by construction (11%) and financial and insurance activity (8.8%).
  • Trademark files registered in Dubai at the Commercial Compliance & Consumer Protection reached 5,157 in 2019 (+34% yoy); 50 commercial agency files were also registered (+127%).
  • The Abu Dhabi Investment Office expanded the scope of its AED 535mnVentures Fund to include investment in later-stage companies.
  • Foreign Direct Investments in Dubai’s real estate market grew to AED 106bn in 2019 from AED 90.5bn in 2018. UAE, India, Saudi Arabia, Pakistan and UK were the top nationalities investing in Dubai real estate while investments by women grew by 26.2% to AED 27.5bn last year.
  • The ruler of Sharjah has directed the appointment of 2500 citizens across various government departments this year.
  • Real estate exposure of UAE banks is about 20% of total lending or AED 333bn as of Sep 30, according to S&P Global Ratings; the sector is likely to remain resilient given sufficient loan-loss reserves compared to the 2009-2010 crisis times.
  • Dubai Electricity and Water Authority has installed more than 240 charging stations across the emirate and plans to raise this to 300 by end of 2020. DEWA has extended free electric vehicle charging (at public stations) until the end of 2021 for private users.
  • Dubai International Airport posted a 3.1% yoy drop in passenger traffic to 86.4mn persons in 2019 (impacted by the 45-day runway closure and Jet Airways bankruptcy among others). In spite of the drop, the airport retained its position as the world’s number one hub for international passengers for the sixth consecutive year. India, Saudi Arabia and UK were the top destination countries with 11.9mn, 6.3mn and 6.2mn passengers respectively.

Weekly Insight       
Heatmap of Manufacturing/ Non-oil sector PMIs: some respite ahead of a potential Coronavirus dip

Source: Refinitiv Datastream, Nasser Saidi & Associates
The latest PMI readings for Jan 2020 have provided some hints of improvements – with output and new orders growing at a faster pace alongside higher business optimism – thereby raising hopes that the global slump in manufacturing sector is behind us. Will these forward-looking indicators translate into GDP numbers?
A mixed start to 2020? Most of the PMI survey responses were collated prior to the Coronavirus pandemic was as widespread as now: more than 800 have died in China, while Singapore has declared an orange alert and multiple cruise ships remain under quarantine (track the confirmed global cases here). Given how interconnected China is with the global supply chain now, we can expect significant contagion effects on the global economy via declines in consumption, manufacturing, retail, trade and tourism for a few months – this also depends on when the infections could peak (current estimates range from China’s “as soon as a week” to as late as Apr or May). Already, auto manufacturing plants are expecting halts in production (e.g. Fiat Chrysler, Toyota, Honda) and commodity imports are being delayed (e.g. copper), in addition to closed retail stores and countries imposing restrictions or bans on people travelling from China. A recent Ifo report estimated how interlinked Germany is with China: with 9.4% of German intermediate goods imports coming from China, it is forecast that if the coronavirus causes a drop of 1-2 percentage points (ppts) in China’s economic growth, then Germany could expect a 0.06% contraction. During the SARS outbreak in 2003, China’s GDP growth was reduced by about 1ppt – but, keep in mind that the share of China in global GDP (in PPP terms) then accounted only for 8.7% versus an estimated 19.7% this year!
Depending on how extensive the damage is in the coming weeks, central banks will need to take a stance on how to support the economy: most have highlighted it as new risk to growth, the PBoC injected additional liquidity while in South East Asia, Thailand cut interest rates to a record low and Singapore stated that it had “sufficient room” to ease.
Impact on the UAE: With 7 reported cases in the UAE, the nation has suspended all China flights except to Beijing. China is the UAE’s leading trade partner in non-oil commodities, accounting for close to 10% of its total non-oil trade. In addition to the temporary supply disruptions outlined in the above section, an accompanying decline in consumption spending (retail sales will likely dive especially if people decided to stay indoors fearing risk of infection) could add to negative impacts on UAE growth. Already, UAE non-oil private sector activity shrank in Jan – for the first time since 2009. China was the 5th largest source market tourists in Dubai last year and are among the highest spenders (they spent an average USD 1459 in UAE in 2018): a dip in their presence during the height of tourist season here could result in a significant hit on travel, tourism and hospitality revenues directly. Last but not the least, the Coronavirus has sharply reduced demand for oil and is likely to affect UAE through its fiscal balance (a projected 55% of revenues come from oil), exports (oil accounts for approximately 25% of total exports) and output (official data estimates share of oil sector in total output at 25.9% in 2018).
Media Review
Realizing the Potential of AI Localism
https://www.project-syndicate.org/commentary/local-regulation-of-artificial-intelligence-uses-by-stefaan-g-verhulst-1-and-mona-sloane-2020-02
Brexit:Requiem for a Dream
https://www.nytimes.com/2020/01/31/opinion/brexit-uk.html
Iran wants to resolve issues with Saudi, UAE quickly: Iranian official
https://www.reuters.com/article/us-iran-usa-iraq/iran-wants-to-resolve-issues-with-saudi-uae-quickly-iranian-official-idUSKBN1ZY1VS
Saudi-Russian Alliance Is Strained as Coronavirus Saps Demand for Oil
https://www.nytimes.com/2020/02/07/business/opec-russia-saudi-arabia.html
More IPOs likely in GCC this year, but will not surpass value
https://www.khaleejtimes.com/business/local/more-ipos-likely-in-gcc-this-year-but-will-not-surpass-value
 
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Weekly Economic Commentary – Feb 2, 2020

Markets
Stock market gains are being washed off as coronavirus is declared a global emergency by the WHO: S&P 500 as well as Dow Jones indices were down 2%+, Stoxx 600 index was down by 3% on the week (worst in 6 months), Korea’s KOSPI had its worst week in 15 months, India’s stock market posted a monthly loss of 1.3% in Jan – its worst such performance since Jul. Yields on US and euro zone government debt fell to three-month lows, a sign of increased appetite for safe haven assets. Regional equity markets were mostly down. On the currency front, safe havens Swiss franc and yen rose while the pound sterling extended gains after BoE kept rates unchanged. Crude oil prices fell for a 4th consecutive week, with Brent posting the biggest monthly decline since Nov 2018 while gold posted biggest monthly gain in 5 months.
Global Developments
US/Americas:

  • GDP grew by 2.1% (annualized rate) in Q4, the same pace as Q3 as consumption slowed (1.8% annualized rate in Q4 vs Q3’s 3.2%) and business investment contracted (for the 3rd consecutive quarter – the longest stretch since 2009) amidst an improvement in trade deficit. The full year growth stood at 2.3% (2018: 2.9%) – the slowest since 2016.
  • The PCE price index rose by 0.3% in Dec – the biggest gain since Apr. The core PCE (excluding food and energy) increased by just 1.6% yoy in Dec (Nov: 1.5%).
  • Personal income decelerated to 0.2% in Dec (Nov: 0.4%) while real disposable income shrank 0.1% in the month (Nov: +0.3%). Income rose 4.5% in 2019 after surging 5.6% in 2018. Wages eased, rising 0.3% in Dec after climbing 0.4% in Nov.
  • Consumer spending rose by 0.3% in Dec (Nov: 0.4%) while real spending slowed to 0.1% in Dec (Nov: 0.3%). Durable goods spending growth recorded the biggest fall, declining to -0.3% in Dec from Nov’s 1.2%. For the full year 2019, consumer spending increased by 4% – the smallest gain in 3 years – from 2018’s 5.2% rise.
  • The Fed left interest rates unchanged, as expected. The fed funds futures market is pricing in about a 58% chance of a rate cut by Jun, according to the CME’s FedWatch tool.
  • The Chicago PMI fell to a lower-than-expected 42.9 in Jan – the lowest since Dec 2015– as new orders and production tumbled. It has been below-50 since Jul.
  • US new home sales fell unexpectedly by 0.4% mom to an annualized rate of 694k in Dec. The average rate of new home sales in 2019 was 681k – 10.3% higher than 2018’s pace.
  • Pending home sales dipped by 4.9% mom in Dec (Nov: 1.2%) – the largest decline in almost a decade – as supply hit a record low. The average rate on the 30-year fixed mortgage, at 3.75% in Dec, was a full percentage point lower compared to a year ago. Separately, S&P Case Shiller home price indices gained in Nov, up by 2.6% yoy (Oct: 2.2%).
  • Durable goods orders improved by 2.4% mom in Dec, from a downwardly revised -3.5% drop in Nov. However, non-defense capital goods orders excluding aircraft fell by 0.9% (Nov: +0.1%) – the biggest drop since Apr.
  • Goods trade deficit widened to USD 68.33bn in Dec (Nov: USD 62.99bn), on rising imports (+2.9% to USD 205.3bn).
  • Initial jobless claims declined by 7k to 216k in the week ended Jan 24, with the 4-week monthly moving average at 214.5k (down by 1750).

Europe:

  • EU GDP grew by 1% yoy and 0.1% qoq in Q4 (Q3: 1.2% yoy and 0.3% qoq): France shrank by 0.1% as nationwide strikes dragged down growth while Italian GDP shrank by 0.3% – its worst performance since 2013 – on weakened domestic demand. EU inflation edged up to 1.4% in Jan (Dec: 1.3%), but core inflation slipped to 1.1%.
  • German Ifo business climate edged down to 95.9 in Jan (from Dec’s 96.3), largely as expectations fell to 92.9 (Dec: 93.9), while in contrast the current assessment showed an improvement to 99.1 from 98.8 the month before.
  • Inflation in Germany accelerated to 1.7% yoy in Jan from the previous month’s 1.5%, staying below 2% (the ECB’s target level) for the 9th consecutive month. In mom terms, prices were down by 0.6% (Dec: +0.5%).
  • German retail sales plunged by 3.3% mom in Dec (Nov: +1.6%); in yoy terms, sales grew by 0.8% after a revised rise of 2.7% in Nov.
  • EU money supply growth slowed to 5% in Dec (Nov: 5.6%).
  • EU economic sentiment index (ESI) improved to 102.8 in Jan (Dec: 101.3), with business climate and industrial confidence improving (though still negative). The ESI soared in Germany and France by (by 2 and 1.5 points respectively), while the Netherlands and Italy posted decreases (-0.3and -0.1).
  • The BoE left rates unchanged at 0.75% – only 0.25% higher than when Mark Carney took office. In his last speech as BoE governor, Carney stated that UK recovery is on track: the MPC estimated that the economy will grow at an average rate of 1.1% over the next three years. The Monetary Policy Committee’s view of a smooth move towards an FTA between the UK and EU at end-2020 seems a tad too ambitious.

Asia Pacific:

  • China’s NBS manufacturing PMI edged down to 50 in Jan (Dec: 50.2) – the reading that separates expansion and contraction. The impact of the coronavirus would not have been reflected in this reading as the survey was conducted before Jan 20. Non-manufacturing PMI improved to 54.1 from 53.5 the month before.
  • Core inflation in Tokyo (excluding fresh food) slowed to 0.7% yoy in Jan, from 0.8% the month before. Overall CPI in Tokyo touched 0.6% in Jan (Dec: 0.9%).
  • In the 3 months Oct-Dec, Japan’s industrial production contracted by 4% – the worst decline since data began; it registered 3% yoy growth in Dec, improving from the 8.2% decline the month before. In mom terms, IP was up by 1.3% (Nov: -1%).
  • Japan’s retail trade slowed for a third consecutive month in Dec, down 2.6% yoy. In mom terms, it inched up by 0.2% versus a pickup of 4.5% in Nov.
  • India unveiled its budget for the 2020-21 fiscal year: fiscal deficit is estimated to touch 3.5% of GDP (from 3.8% of GDP the in the current fiscal year). Expenditure is projected to touch INR 30.42trn (USD 428.03bn) from a revised estimate of INR 26.99trn in 2019-20. Simplifying the tax system was one of the key measures announced, along with lowering tax rates in a bid to boost consumption; it also focused on farm spending (allocation of USD 40bn) to support growth.

Bottom line: January – a month that finally saw the US-China Phase 1 trade deal being signed – wrapped up with Brexit and WHO declaring coronavirus a global emergency. The ripples of the fast-spreading virus have already affected global stock markets (stocks have lost an estimated USD 1.2trn over the past two weeks) and are likely to show up in the next few readings of PMI across the globe (as global supply chains get disrupted). The main uncertainty hanging over markets is whether the coronavirus will turn into a global pandemic that could have a major impact on trade, tourism and severely disrupt supply chains potentially sharply reducing global and Asian economic growth.
Regional Developments

  • The value of Bahrain-origin exports declined by 6% yoy to BHD 532mn (USD 1.4bn) in Q4 last year. Saudi Arabia (BHD 132bn), UAE (BHD 55mn) and the US (BHD 52mn) accounted for the top three recipient nations.
  • Bahrain’s Electricity and Water Authority is owed a total of BHD 165mn on utility bills: administrative and legal initiatives have been launched to recover the outstanding amount.
  • Bahrain has been ranked 41st globally and fourth in the Arab region on INSEAD’s Global Talent Competitiveness Index. UAE topped the Arab region, ranking 22nd worldwide.
  • Life expectancy in Bahrain has increased by 27 years since 1978 to 77.5 for men and 80 for women.
  • Egypt’s external debt grew by 0.6% qoq to USD 109.3bn in Q1 FY 19-20 (Jul-Sep 2019), with the debt to GDP ratio declining to 34.4%. Debt service stood at USD 2.94bn in Q1 FY 19-20, including USD 1.7bn in principal debt and USD 1.2bn in interest. Domestic public debt declined by 2.3% qoq to EGP 4.18trn at end-Sep or 66.8% of GDP.
  • Balance of payments surplus in Egypt touched USD 227.3mn in Q1 of FY 19-20 while non-oil BoP deficit stabilized to USD 606.2mn; current account deficit fell to USD 1.4bn in Q1 compared to USD 2bn a year ago.
  • Net FDI from Saudi Arabia into Egypt dropped by 43.4% yoy and 33.4% qoq to USD 69.3mn in Jul-Sep 2019. Saudi Arabia’s direct investments still represent 8.4% of total investments by Arab states (totaling USD 824.3mn in Jul-Sep).
  • Bank deposits in Egypt inched up by 0.4% mom to EGP 4.183trn at end-Nov while government deposits fell by 1.8% to EGP 612.5bn. Loans disbursed grew by 0.7% mom to EGP 1.825trn.
  • Egypt’s foreign trade declined by 1.5% yoy to USD 23bn in Q1 of FY 2019-2020, as imports declined by 4.2% to USD 15.9bn. EU topped the list of trade partners (accounting for 31.1% of total foreign trade), followed by Arab countries with 21.5%.
  • Egypt repaid all overdue debts to foreign oil companies, disclosed the central bank governor. Debts had fallen to USD 900mn by end-Jun from USD 6.5bn 4 years ago.
  • Remittances into Egypt increased by 12.7% yoy to USD 2.3bn in Oct, bringing total remittances (in the current fiscal year) for the period Jul-Oct to USD 9bn (+13.4%). In the 2018-19 fiscal year, remittances had dipped by 4.7% to USD 25.15bn.
  • Egypt’s tourism revenues are estimated to touch USD 16.4bn in 2019 and expected to rise to USD 29.7bn in the next 5 years (A CAGR of 13%), according to a report commissioned by the Arabian Travel Market. Egypt’s top source market in 2019 was Germany, with 2.48mn arrivals (+46% yoy) and a total spend of USD 1.22bn.
  • Iraq’s President appointed Mohammad Tawfiq Allawi as the new PM (he had previously served as communications minister twice) after his predecessor had resigned in Nov. The PM, who has expressed support for the ongoing protests, has a month to form a new government.
  • Jordan and IMF have reached an agreement for a new USD 1.3bn programme: Jordan will receive 9 installments of USD 140-150mn over a 4-year period; the first installment of USD 140mn by end-Mar.
  • Kuwait is likely to need USD 180bn in financing over the next 6 years, according to the IMF: it is expected that Kuwait’s fiscal balance will turn from a 5.5% of GDP surplus in 2019 to a deficit of similar magnitude in 2025. Government debt is estimated to rise to over 70% of GDP in 2025 from 15% in 2019.
  • Lebanon’s finance minister urged the Association of Banks in Lebanon (ABL) to cut interest rates while trying to reassure savers that their deposits would not be touched.
  • Lebanon’s parliament passed the 2020 budget last week, with deficit at an estimated 7% of GDP: it was drafted by the previous government (including allocations for ministries that are non-existent in the current one) and approved by a scarce Parliament.
  • Lebanon will need external financing at about USD 24bn (or 42%of its GDP) over a five-year period (2020-2024), according to a report by the Institute of International Finance.
  • As banks chase dollar liquidity, Lebanon’s March-dated Eurobonds dropped by about 5 cents since Tues to record lows of 77 cents on the dollar (https://on.ft.com/2vDlnk5).
  • Oman’s nominal GDP grew by 12.3% yoy in 2018, with value added of non-oil activities up by 2.3%.
  • The value added from Oman’s oil activity grew by 2.1% yoy to OMR 5.1bn (USD 13.3bn) at end of Q2 2019; value added of natural gas increased by 5.6% to OMR 793.5mn.
  • Oman’s trade surplus widened by 7.78% yoy to OMR 4.4bn at end-Sep 2019, as exports declined by 4% (to OMR 11.1bn) and imports dropped further by 9.7% (to OMR 6.8bn).
  • Local natural gas production and imports in Oman edged up by 0.08% yoy to 42.194bn cubic metres (BCM) by end-Nov 2019.
  • Saudi Arabia’s foreign reserves grew by 0.59% yoy to USD 499.54bn in 2019 – its highest level in three years. Meanwhile, general reserve declined by 4% to SAR 469.6bn in 2019.
  • Bank lending to the private sector in Saudi Arabia grew by 7% yoy in Dec – its highest annual growth rate since Oct 2016 – boosted by mortgage lending (up 3 times to SAR 9.3bn in Dec vs a year ago). Money supply (M3) expanded by 7.1% yoy – the highest in over 4 years.
  • Saudi Arabia’s SAMA issued the first-ever licenses for non-bank financial institutions: it licensed an electronic wallet company and a payment services company.
  • Oil shipments from Saudi Arabia to China totaled a record 83.32mn tonnes or 1.67mn bpd in 2019, expanding by nearly 47%. Saudi is China’s top supplier, followed by Russia which shipped 77.64mn tonnes (+9% yoy).
  • Bilateral trade between Saudi Arabia and India crossed USD 34.66bn during 2018-19 (+24% yoy), according to the Indian ambassador to Saudi Arabia.
  • The volume of POS sales in Saudi Arabia grew by 22.8% yoy to SAR 285.3bn in 2019 while the value of POS sales increased by 25.1% yoy to SAR 27.7bn.
  • Remittances from Saudi Arabia declined by 8% yoy to SAR 125.53bn (USD 33.47bn) in 2019. In Dec 2019, remittances grew by 2.2% yoy to SAR 11.56bn.
  • Saudi Arabia’s Tadawul approved the listing of debt instruments (issuance number 07-01-2020) with a value of SAR 715.005mn.
  • Saudi Arabia’s Neom city aims to have the world’s first “solar dome” desalination plant: work is expected to start this month and end by Dec 2020. The process will be such that seawater will be pumped into a hydrological “solar dome” made from glass and steel, before it is superheated, evaporated and eventually precipitated as fresh water.
  • Startups in Saudi Arabia attracted USD 67mn worth investments in 2019, according to MAGNiTT. The rise in venture capital funding and number of deals placed Saudi Arab at the third highest for both categories in MENA, following UAE and Egypt.

UAE Focus

  • UAE’s Sharjah emirate announced a new discovery of natural gas and condensate onshore at the Mahani field: the first onshore discovery in 37 years, this field has flow rates of up to 50 million standard cubic feet per day, along with the liquids associated with it.
  • Non-oil GDP in UAE’s Ajman emirate grew by 3.6% yoy in 2018, with the manufacturing and construction sectors accounting for more than half the growth (39.1% and 14.3% respectively).
  • Loans granted by UAE banks to residents ticked up by 13% yoy to AED 165.3bn (USD 44.99bn) in Dec. Separately, banks’ investments in debt bonds and stocks increased by 0.24% mom (to AED 246bn) and by 2.8% (to AED 10.8bn) in Dec 2019.
  • Consumer Confidence Index in Dubai declined by 4 points to 133 in Q4, according to the quarterly business survey of Dubai Economy, with job security the biggest concern. Though more than ¾-th of respondents were positive about their current personal finances, crucially more than half planned to cut down on outdoor entertainment and delay tech purchases (mobiles, laptops).
  • The number of new investors in Dubai accelerated by 86% to more than 60,700 in different economic sectors during 2019, according to Dubai’s DED; over 18,800 were welcomed in Q4.
  • Car sales in Abu Dhabi increased by 5% yoy to AED 28.6bn (USD 7.8bn) in Jan-Oct 2019.
  • Sharjah airport reported a 13% surge in passengers to 13.6mn in 2019; aircraft traffic increased by 6.45% to 86.5 thousand take-offs and landings.
  • Hotel revenues in Abu Dhabi increased by 3.5% yoy to AED 1.84bn in Q4, as hotel guests increased to 1.338mn during the period, thereby raising occupancy rate to 79.6.

Media Review
A Global Economy Without a Cushion
https://www.project-syndicate.org/commentary/global-growth-losing-its-trade-cushion-by-stephen-s-roach-2020-01
The Brexit years in charts: from Irish passports to the value of sterling
https://www.ft.com/content/27c1eab2-42b9-11ea-a43a-c4b328d9061c
India’s budget
https://www.economist.com/finance-and-economics/2020/02/01/indias-budget-disappoints-investors
What Are the Top Three Priorities for Lebanon’s New Government in the Coming Weeks?
https://carnegie-mec.org/diwan/80902
Trump’s Peace Plan Is Palestinians’ Worst Nightmare
https://foreignpolicy.com/2020/01/31/trump-peace-plan-israel-palestine-middle-east/
Egypt ranks 3rd in MSCI Emerging Markets Index in 2019
https://english.mubasher.info/news/3584888/Egypt-ranks-3rd-in-MSCI-Emerging-Markets-Index-in-2019-FRA-chairman/%7B%7Bstock.url%7D%7D
 
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Weekly Economic Commentary – Jan 26, 2020

Markets
The coronavirus outbreak left a negative impact across all equity markets last week – the S&P 500 had the worst week since Aug – though the WHO has not yet declared it a global emergency (the panel, however, was split almost 50-50). European stock markets recovered on Fri after the latest PMI readings (towards end of the week) brought along a shimmer of hope for recovery. Regional markets were mixed, with Saudi Arabia, Egypt and Qatar markets down. The euro fell to a 7-week low vis-a-vis the dollar, the yen lost ground and sterling fell on a possible rate cut at this week’s meeting (traders are pricing in a 48% chance of a rate cut to 0.5%). Oil prices fell by more than 6% compared to last week while gold price closed near an earlier 2020 peak (on Fri).
Global Developments
US/Americas:

  • US existing home sales grew by 3.6% mom to a seasonally adjusted annual rate of 5.54mn units in Dec (Nov: -1.7%). Inventory of homes for sale was at a 20-year low of 1.4mn units in Dec (-14.6% mom and -8.5% yoy).
  • US Markit manufacturing PMI slipped to a 3-month low of 51.7 in Jan (Dec: 52.4), and service sector PMI climbed to a 10-month high of 53.2 (Dec: 52.8).
  • Initial jobless claims increased by 6k to 211k in the week ended Jan 17, with the 4-week moving average slowing to 213.25k from 216.5k the week before.

Europe:

  • ECB kept its policy rate on hold and launched a “strategic review” to redefine its inflation goal and tools. The review, which is to be completed by Dec, will reconsider the inflation target while also attempting to tackle issues related to climate change.
  • Germany’s ZEW economic sentiment jumped to 26.7 in Jan (Dec: 10.7) – the highest value since Jul 2015 – while the current situation also rebounded to -9.5 (Dec: -19.9).
  • German manufacturing PMI rose to an 11-month high of 45.2 in Jan (Dec: 43.7), thanks to improved domestic and overseas demand. Services PMI also picked up (54.2 in Jan from Dec’s 52.9), aiding the composite PMI to move up to a 5-month high of 51.1 (Dec: 50.2).
  • The flash Eurozone PMI composite output index was unchanged at 50.9 in Jan. The EU manufacturing PMI improved to 47.8 in Jan (Dec: 46.3) – the 12th consecutive contractionary reading, but the slowest in 9 months – as new orders stabilized and the rate of decline in new work easing to the softest since Nov 2018.
  • UK ILO unemployment rate remained steady at 3.8% yoy in the 3 months to Nov, with the average earnings including bonus advanced by 3.2% in the Sep-Nov period.
  • UK’s composite PMI rose to a 16-month high of 52.4, up from 49.3 in Dec. Manufacturing PMI for Jan stayed below 50 (at 49.8, from 47.5 in Dec) while the services PMI moved into expansionary territory (52.9 from the previous month’s 50).

Asia Pacific:

  • The BoJ nudged up its economic growth forecasts to 0.9% in the year to Mar 2021 (from a previous 0.7% estimate), given the government’s stimulus package and taking into account the US-China Phase 1 deal. The BoJ kept its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around 0%.
  • Japan industrial production fell by 8.2% yoy and 1% mom in Nov (Oct: -8.1% yoy and -0.9% mom); on a monthly basis, shipments dropped 1.7% and inventories decreased 0.9%.
  • Japan merchandise trade deficit widened to JPY 152.5bn in Dec (Nov: deficit of USD 82.1bn). Exports and imports were down by 6.3% and 4.9% respectively (Nov: -7.9% and -15.7%). Exports fell for a 13th consecutive month in Dec, hurt by US-bound shipments of cars, construction and mining machinery.
  • Japan leading economic index slipped to 90.8 in Nov, from an upwardly revised Oct reading of 91.6, while the coincident index slowed to 94.7 (Oct: 95.3).
  • Japan inflation edged up to 0.8% yoy in Dec (Nov: 0.5%) but remained short of the central bank’s target of 2%. The core consumer price index, which includes oil costs but excludes volatile fresh food prices, rose 0.7% in Dec (Nov: 0.5%).
  • Korea GDP increased by 1.2% qoq in Q4 – the fastest growth since Q3 2017 – supported by government spending (+6.5%), construction investment (+6.3% qoq), and private consumption (+0.7%). For the full year, growth was at 2% – the slowest pace in a decade.
  • Singapore inflation inched up to 0.8% yoy in Dec (Nov: 0.6%) – the highest in 7 months – largely due to higher costs of food, transport, communication, and education. Annual inflation stood at 0.6% for the full year 2019, and core inflation at 1%.
  • Industrial production in Singapore improved by 4.1% mom in Dec (Nov: -8.4%).
  • Bank Negara Malaysia surprised the market by cutting the Overnight Policy Rate by 25bps to 2.75%.
  • Philippines Q4 GDP growth, at 6.4% yoy (Q3: 6%), was supported by household consumption (+5.6%) and government expenditure (18.7%). In spite of the strong reading in Q4, 2019 growth was only 5.9% – a four year low, and below the government’s 6-6.5% target.

Bottom line: The IMF revised down global growth in its latest World Economic Outlook update: global growth is projected to rise to 3.3% this year (from 2.9% in 2019) and edge up to 3.4% in 2021. A “successful” US-China Phase 1 deal is expected to reduce the cumulative negative impact of trade tensions on global GDP by end 2020 (to 0.5% from 0.8%). Separately, UNCTAD reported a 1% yoy decline in global FDI in 2019 to USD 1.39trn, against a setting of rising trade tensions and policy uncertainty, with flows to developing Asia accounting for one-third of global FDI (in spite of a 6% yoy drop); flows into developing nations meanwhile remained unchanged at USD 695bn. Overall, recent PMI data point towards a cautious recovery though the coronavirus outbreak looks like a growing risk (remember that SARS occurred when China was less interconnected to the global economy).
Regional Developments

  • Bahrain’s money supply (M3) accelerated by 9% yoy to BHD 13.6bn at end-Nov 2019 while the total outstanding balance of public debt instruments rose by 5.1% to BHD 12.1bn. Also, the total value of outstanding loans and credit facilities provided by retail banks inched up by 3.6% to BHD 9.8bn.
  • The value of Bahrain’s investments in Egypt touched USD 3.2bn, according to the latter’s trade and industry minister. Bilateral trade stood at USD 392.5mn during Jan-Sep 2019.
  • Egypt posted a primary budget surplus of EGP 30bn (USD 1.91bn) or 0.5% of GDP in H1 of 2019-2020 fiscal year, supported by the reduction in fuel subsidies. Overall H1 budget deficit increased to 3.8% from 3.6% a year ago. The finance minister stated that the country is on track to reduce its total debt to a lower-than-expected 83% of GDP by the end of this fiscal year in Jun.
  • Fuel subsidies in Egypt touched EGP 7bn (USD 443mn) in Q1 2019-2020, revealed the deputy finance minister. It was also disclosed that the oil ministry sent a net EGP 3bn to the finance ministry in Jul-Sep, the first time in years it had provided a surplus. The oil ministry expects fuel subsidy spending to decline to EGP 30bn in 2019-20 compared to the original EGP 52bn forecast in the budget.
  • Foreign investments in Egyptian public debt instruments amounted to USD 22bn at end-Dec 2019, according to the finance minister.
  • Egypt’s external debt increased by 17.3% to USD 108.7bn in the fiscal year 2018-19, with the government the main debtor, accounting for 52.7% of total external debt (or USD 57.3bn). Egypt’s external debt to GDP ratio was at 36% (vs. 47.5% in the wider Middle East and Central Asia) while the short-term external debt to total external debt touched 10.2% (vs. 21.3%).
  • Egypt’s public debt service is expected to decrease by EGP 280bn annually, thanks to lower borrowing costs amid declining interest rates, reported the Middle East News Agency, citing central bank sources.
  • Egypt plans to issue green bonds before end-Jun this year: a senior finance ministry official stated that the cabinet’s approval had already been obtained to offer USD 5bn international bonds in the current fiscal year, in addition to USD 500mn green bonds.
  • Egypt’s holdings of US Treasuries edged up by 0.8% yoy and 0.23% mom to USD 2.18bn in Nov; during the Jan-Nov period, Egypt’s holdings grew by 3.5% or USD 69bn.
  • Bilateral trade between Egypt and UK improved by 9.4% yoy to GBP 1.7bn (USD 2.29bn) in Jan-Sep 2019. The value of UK investments in Egypt was USD 5.348bn, concentrated in the industrial sector.
  • UAE is currently the largest investor in Egypt with total investments exceeding AED 26.5bn (USD 7.2bn), stated the Secretary-General of the UAE International Investors Council.
  • Egypt has spent EGP 60bn out of total EGP 195bn required for the construction of 1 million social housing units, disclosed the housing minister. Total direct subsidies to the project amounted to EGP 4.6bn, while bank funding accounted for another EGP 29bn.
  • Egypt allocated EGP 27.5bn in investments to the healthcare sector in 2019-2020, up 26.1% yoy, revealed the planning minister.
  • Parliamentary elections in Egypt will be held in Nov 2020, 60 days before the five-year time period of the current parliament which comes to an end on 9th Jan 2021.
  • Jordan’s Senate endorsed the 2020 state budget draft law; separately, the Cabinet approved the reduction of the sales tax on 76 basic commodities as of Feb 1: under this decision, goods subject to 10% tax will be lowered to 5% and those at 4% will become 2%.
  • Kuwait’s trade surplus with Japan declined by 6.8% yoy to JPY 563.99bn (USD 5.13bn) in 2019; exports to Japan dropped by 6.2% to USD 6.83bn while Kuwait’s imports from Japan stood at USD 1.7bn (-4.2%).
  • Deposits in Kuwait’s banking sector grew by 1.5% yoy to KWD 43.6bn in Nov 2019 (the share of private sector deposits at 83.5%, down from 85.3% a year ago), while credit disbursed rose by 4.7% to KWD 38.3bn.
  • Kuwait posted a budget deficit of KWD 2.276bn (USD 7.5bn) in Apr-Dec, after transferring KWD 1.268bn to the future generations’ reserve. Total revenues were down by 19.2% yoy to KWD 12.68bn in Apr-Dec, as oil revenues dived by 20.95% to KWD 11.59bn. Total expenditures surged by 13% to KWD 13.68bn, representing 60.8% of the expected spending of KWD 22.5bn during the fiscal year 2019-2020.
  • The Central Bank of Kuwait issued bonds and related tawarruq last week at a value of KWD 240mn (USD 792.4mn), with a 2.750% rate of return, was oversubscribed by 12 times.
  • As protests continued over the weekend, Arab News reported that Lebanon’s government is expected to propose a five-month contingency plan to reform the judiciary, fight illicit enrichment, corruption and economic crime, and modernize public institutions.
  • Lebanon’s parliament will debate and vote this week on the 2020 budget that projects a deficit of 7% of GDP (significantly higher than the previously planned 0.6%), according to the head of parliament’s finance and budget commission.
  • Lebanon’s sovereign dollar bonds fell to record lows ahead of a Sat meeting with the IMF: the Apr 2020 bond suffered the sharpest losses, tumbling 2.7 cents to 77.5 cents; the 2022 and 2035 bonds both fell 1.6 cents to trade at just over 45 and 40 cents respectively. Reuters reported that the meeting was only a courtesy visit, and not a formal staff meeting.
  • Oman will impose 5% value-added tax (VAT) from early next year, revealed Oman’s minister of commerce and industry.
  • Saudi Arabia reported a 54% surge in the number of new international companies (1131) that set up operations in the country. About 100 UK companies and 82 US companies set up shop in 2019 compared to 24 for both countries in 2018. India, Egypt, Jordan and China were also among the top countries represented.
  • Saudi Arabia issued 350k tourist visas during the last three months of 2019, driven by new regulations to ease tourism (e.g. allowing Schengen, UK and US visa holders to enter).
  • Inflation in Saudi Arabia rose by 0.2% yoy and 0.1% mom in Dec – on higher prices of food and beverages, hotels, restaurants and education – reversing the deflationary trend. Separately, WPI inched up by 0.4% mom and 3.7% yoy in Dec, driven by a 1.1% mom increase in the agriculture and fishery products section.
  • Small businesses in Saudi Arabia dominate the private sector, with its 1.5mn firms accounting for 97.6% of the total; medium-sized enterprises were 31,330 in number, or 2% of total private sector firms. By sector, wholesale and retail sector represented 34.3% of the small businesses, while 21.2% were in the building and construction field.
  • In an interview with Bloomberg, Saudi Arabia’s finance minister disclosed that Aramco still plans to list on a foreign exchange though stating that it would not be “anytime soon”.
  • Saudi Arabia raised USD 5bn from the sale of dollar denominated bonds with maturities of seven, 12 and 35 years; it had received around USD 20bn in orders.
  • Saudi Arabia’s crude oil exports increased by 4.4% yoy and 4.5% mom to 7.37mn barrels per day (bpd) in Nov 2019 – the highest level in 2019 – though crude output fell by 3.2% yoy to 9.89mn bpd in Nov and crude stocks fell by 1.07mn barrels to 167.01mn barrels.
  • Foreign direct investment to Saudi Arabia expanded to USD 3.5bn in Jan-Sep 2019 from USD 3.18bn a year ago, according to SAMA data.

UAE Focus

  • UAE inflation fell by 0.8% yoy in 2019, thanks to a continued drop in rents and utilities costs.
  • UAE Cabinet approved amendments to the “Agency Law” (which regulates commercial agency and distribution agreements): it aims to enhance capabilities and continuity of family businesses, as well as to establish rules of governance and protection from defaulting; it will also provide for the transformation of family-owned businesses to list on the financial markets.
  • Money supply (M2) in the UAE increased by 2.2% yoy to AED 1.4trn at end-Dec. Gross bank assets rose by 1.4% mom to AED 3.09trn while gross credit was up 2.2% to AED 1.76trn.
  • UAE’s budget surplus inched up by 0.04% yoy to AED 66.32bn (USD 18.06bn) in Jan-Sep 2019. Government revenues improved by 3.5% to AED 359.2bn (taxes accounted for 46.4% of total revenues) while expenses rose by 4.2% to AED 292.88bn during the period.
  • The volume of Dubai’s non-oil foreign trade swelled to 83mn tonnes in Jan-Sep 2019, up 22% yoy. The volume of re-exports grew by 48% to 13mn tonnes, while exports rose by 47% (14mn tonnes) and imports grew by 13% (56mn tonnes).
  • Government employees in Dubai will receive an average salary increase of 10% – effective Jan 1, 2020 – with professional employees receiving an increase between 9-16%. While the decision also includes features to support a work-life balance, this move would widen the gap between public and private sector salaries thereby making the latter less attractive to local talent, eventually leading to a more fragmented labour market.
  • Dubai attracted a record-high 16.73mn international overnight visitors in 2019, rising by 5.1% yoy. Dubai’s top six source markets were India, Saudi Arabia, UK, Oman, China and Russia, together accounting for over 7mn visitors. (More: https://www.visitdubai.com/en/tourism-performance-report)
  • Dubai announced a global logistics platform to boost South-South trade: the World Logistics Passport, which links Customs World, DP World and Emirates Group to enhance connectivity through Dubai, has been operational since Jul 2019 and has increased trade among participants by 10%. (More: https://worldlogisticspassport.com/)
  • The Dubai Multi Commodities Centre (DMCC) announced that 1969 new companies had registered in the free zone last year. Q4 reported a 20% increase in new firms (559).
  • The Abu Dhabi Investment Office, through its Ventures Fund, invested AED 60mn (USD 16.3mn) in a batch of startups and fund managers.

Media Review
IMF: Tentative Stabilization, Sluggish Recovery?
https://www.imf.org/en/Publications/WEO/Issues/2020/01/20/weo-update-january2020
UNCTAD Investment Trends Monitor
https://unctad.org/en/PublicationsLibrary/diaeiainf2020d1_en.pdf
The Trouble with the Creeping Expropriation of Depositors
https://carnegie-mec.org/2020/01/24/trouble-with-creeping-expropriation-of-depositors-pub-80886
Podcast on Lebanon with The National, 23 Jan 2020
https://nassersaidi.com/2020/01/24/podcast-on-lebanon-with-the-national-23-jan-2020/
Lebanon’s new government may have little reserves left to stabilize economy
https://www.reuters.com/article/us-lebanon-crisis-reserves-analysis/lebanons-new-government-may-have-little-reserves-left-to-stabilize-economy-idUSKBN1ZL2Q4
The Next Big Development Challenge
https://www.project-syndicate.org/commentary/emerging-markets-need-new-growth-strategy-by-arvind-subramanian-and-josh-felman-2020-01
 
 
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Weekly Economic Commentary – Jan 19, 2020

Markets
More record highs across global equity markets, as last week saw the signing of the US-China Phase 1 trade deal and the release of China’s GDP numbers. Regional markets also ended last week higher on global trade optimism and supported by financial stocks. The yuan strengthened to a 6-month high versus the greenback, the dollar touched an 8-month high against the yen while the pound sterling was down on weak data and expectations of a rate cut. Both oil and gold prices dropped last week.
Global Developments
US/Americas:

  • US inflation rose 0.2% mom in Dec on higher prices for gasoline, rents and medical care (Nov: 0.3%); core inflation, excluding food and energy, slipped to 0.1% mom (0.2%). In yoy terms, CPI grew by 2.3% (Nov: 2.1%) – the fastest pace since Oct 2018. For the full year, inflation touched 2.3% – the highest since 2011’s 3% rise.
  • Producer price index in the US inched up by 0.1% mom in Dec, after being unchanged in Nov. For 2019, PPI rose 1.3% – the smallest gain since 2015.
  • Retail sales in the US held steady in Dec, rising by 0.3% mom from an upwardly revised 0.3% the month before. Sales excluding items like autos, petrol and building materials, rose 0.5% in Dec – the biggest increase since Jul.
  • Housing starts surged to the highest in 13 years, with the Dec reading accelerating by 16.9% to 1.61mn. Single-family-home construction jumped 11.2% to its highest level since 2007 while multifamily-home builds (including apartment complexes and condos) soared 29.8% to the highest since 1986.
  • Industrial production in the US fell by 0.3% in Dec after a downwardly revised Nov’s +0.8% reading while manufacturing output fell by 0.2% in Dec (Nov: 1.0%) and utilities were down by 5.6%. Capacity utilization fell 0.4 ppts to 77% in Dec, largely owing to the decline in utilities output.
  • Initial jobless claims declined for a 5th straight week, down by 10k to a seasonally adjusted 204k for the week ended Jan 11. The four-week moving average fell to 216,250 from 224k.

Europe:

  • German GDP slowed to a 6-year low of 0.6% yoy in 2019 (2018: 1.5%). Separately, Germany last week announced a record EUR 13.5bn surplus in the federal budget.
  • Inflation in Germany touched 1.5% in Dec while on an annual average, CPI was up by 1.4% in 2019 – the lowest in 3 years. EU inflation was up 1.6% in Dec (Nov: 1.3%): the highest contribution to the annual euro area inflation rate came from services (+0.8 ppts), followed by food, alcohol & tobacco (+0.38 ppts), non-energy industrial goods (+0.12 ppts) and energy (+0.02 ppts).
  • EU industrial production dropped by 1.3% yoy in Nov, with production of capital goods down 2.1% and energy by 1.5% while the production of durable and non-durable consumer goods up by 1.9% and 1.8% respectively.
  • UK GDP shrank by 0.3% mom in Nov (figures for both Sep and Oct were revised up to 0.1%). But, over the three months to Nov growth was only 0.1% with the annual rate of increase 0.6%, the weakest for eight years. UK inflation slipped to a 3-year low, clocking in 1.3% yoy in Dec (Nov: 1.5%).
  • UK industrial production dipped by 1.2% mom in Nov (Oct: 0.4%), with manufacturing clocking in -1.7% mom decline (Oct: +0.5%).
  • UK retail sales fell for the 5th consecutive month, down by 0.6% mom in Dec; sales at food stores fell by 1.3% with quantity bought from food stores falling by the biggest amount since Dec 2016. Meanwhile, online sales accounted for 19% of Dec’s retail spending.

Asia Pacific:

  • China GDP grew by 6.1% in 2019 – the lowest annual growth since 1990. Separately, it was disclosed that China’s birth rate dropped to a record low of 1.05% in 2019.
  • China’s exports accelerated by 7.6% in Dec (Nov: -1.3%) and imports were up by 16.3% (thanks to the renewed purchases of US pork and soybeans; Nov: 0.3%), bringing the trade balance to a surplus USD 46.79bn (Nov: USD 37.93bn). For full year 2019, China’s exports grew 0.5% in USD terms, a sharp deceleration from 9.9% in 2018 while imports fell by 2.8%.
  • China’s industrial production increased by 6.9% in Dec – the fastest rate of growth since Mar, bringing the full year growth to 5.7% yoy in 2019, a drop from 6.2% the year before. Fixed asset investment grew by 5.4% over 2019, supported by investment in services and high tech (as opposed to the usual suspects of housing and manufacturing).
  • Retail sales in China ticked up by 8.0% last year, down from 9% in 2018. Online sales supported the expansion, rising by 16.5% to over CNY 10trn in 2019.
  • New yuan loans in China fell to CNY 1.14trn in Dec (Nov: CNY 1.39trn), and touched a record-high CNY 16.88trn (USD 2.44trn) for the full year 2019 (from 2018’s previous high of CNY 16.17trn). Outstanding yuan loans to the real economy accounted for 60.3% of outstanding social financing by the end of last year, 1 ppt higher than the same period in 2018. Money supply (M2) rose by 8.7% yoy to CNY 198.65trn in Dec.
  • Japan’s core machinery orders posted record monthly growth in Nov, up 18% mom, supported by orders for railway cars. However, the Cabinet Office maintained its assessment that orders, seen as a leading indicator of capital expenditure, are “stalling”.
  • Inflation in India rose to a 5.5-year high of 7.35% yoy in Dec, higher than the Reserve Bank’s upper target limit of 6%, thanks to the surge in vegetable (60%) and food prices (+14.12%). Core inflation, which removes food and fuel prices, inched up to 3.75% (Nov: 3.5%). Wholesale price index in India also increased by 2.59% yoy in Dec (Nov: 0.58%), largely due to the 13.24% spike in prices of food – mainly onions (+455.83%) and potato (+44.97%).
  • India’s exports shrank (for the 5th straight month) by 1.8% yoy to USD 14.49bn in Dec, and thanks to lower imports as well (-8.83% to USD 38.61bn; oil imports -0.83% yoy to USD 10.69bn), the trade deficit narrowed to USD 11.25bn.

Bottom line: The US-China Phase 1 trade deal was signed last week: however, much uncertainty and skepticism remain as the wording and amount of China’s purchases sowed doubts (and saw prices of corn, soybeans dip) and critical issues like cyber theft, state-owned enterprises and industrial subsidies are not addressed in the current deal, while higher tariffs of 20% are the new normal. If the deal is to be implemented properly, there is likely to be a significant amount of trade diversion (from EU, and countries like Brazil). The next question is whether Trump will turn his attention to the EU, now that a truce has been reached (for the time being) with China. This week sees the first central bank policy meetings across many countries including Japan, EU and China (expected to result in no changes), at a time when major central banks’ balance sheets are irrefutably stretched.
Regional Developments

  • Companies listed on the Bahrain Bourse need to ensure a free float of at least 10% of total issued outstanding shares as per the new rules for listing of securities. Currently listed companies have 3 months to comply with the requirements.
  • Bahrain plans to terminate the contracts of foreign advisors in the public sector by end of this month, reported Akhbar Al Khaleej citing a government source.
  • Egypt’s central bank left overnight interest rates steady: the deposit and lending rates remain unchanged at 12.25% and 13.25% respectively.
  • Egypt posted an EGP 3bn budget surplus in Q1 of the fiscal year 2019/2020. The debt-to-GDP ratio declined to 78.3% in Nov from 83.8% in Jun 2019.
  • Foreign cash inflows into banks in Egypt reached USD 1.7bn in just four days ending on 13 Jan, disclosed a Central Bank of Egypt statement.
  • Egypt’s trade deficit narrowed to USD 3.22bn in Oct (-32.2% yoy), thanks to a 4.4% decline in exports (to USD 2.39bn) alongside a 22.6% dip in imports (to USD 5.61bn).
  • Egypt’s exports of crude iron, steel, and cement plunged by 41.3% yoy to USD 777mn in Jan-Nov 2019. Saudi Arabia topped importers of crude iron and steel (USD 189mn), followed by Sudan (USD 47mn) and Spain (USD 46mn).
  • A microfinancing programme called “Nano finance” has been launched in Egypt: it will rely on digital technologies, and the terms and conditions for granting nano loans include a maximum of approx. USD 190 per individual to be reimbursed in three months. The Financial Regulatory Authority requires active microfinancing companies to insure loans against non-payment risk, and also to update client and loan data every two weeks.
  • Jordan’s Lower House passed the 2020 state budget draft law after 4 days of discussions. Separately, the Income and Sales Tax Department confirmed that the sales tax cut (by 50%) on all 76 goods announced by the government would be reflected on commodity prices.
  • Tourism revenues in Jordan increased by 10.2% yoy to JOD 4.11bn, thanks to the 8.9% rise in tourists to 5.36mn.
  • Kuwait will not increase its total spending for the 2020-21 budget but will run an estimated budget deficit of KWD 9.2bn (USD 30.33bn, +19.5% yoy from the KWD 7.7bn shortfall in 2019-20), with salaries and subsidies accounting for 71% of the budget spend. The budget assumes an oil price of USD 55 a barrel and expects revenues to fall to USD 14.8bn (previous: KWD 16.3bn).
  • The Central Bank of Kuwait disclosed the issuance of bonds and related tawarruq valued at KWD 240mn (USD 792.74mn).
  • Lebanon’s short-dated 2020 bonds slumped on Fri, with a few posting their steepest daily drop in nearly three months on higher risks of default given a proposed plan to get local banks to swap into longer-maturity Eurobonds. The central bank governor stated that the bonds swap plan was ‘pre-emptive’ and dependent on the banks’ consent; the caretaker finance minister is understood to have asked the governor to hold off the proposed swap.
  • In a circular dated Jan 14, Lebanon’s banking control commission asked banks for the dates and sizes of transfers to Switzerland since Oct 17 – when anti-government protests began. Banks are required to provide the information within a week.
  • Lebanon’s caretaker Energy Minister extended the deadline – to Apr 30 instead of Jan 31 – for the submission of applications in the 2nd licensing round for oil and gas exploration.
  • Qatar eased restrictions on the exit of migrant workers, in its latest labour move to liberalise the market and end discriminatory practices. Under the new system, exit permit requirements will remain in place for members of the armed forces and for a limited number of workers in key company posts.
  • Saudi Aramco used its “greenshoe option” to sell an additional 450mn shares, raising the IPO size to USD 29.4bn. Investors were allocated the additional shares during book-building.
  • A report from GlobalData disclosed that Aramco is currently planning for launching five major oil expansion projects, including four crude and one natural gas.
  • Saudi CMA approved clearing centre rules, which regulates the clearing members responsibilities; it also enhanced the role of the Saudi Securities Clearing Center Company (Muqassa) as a CCP clearing house in the Saudi capital market.
  • Saudi Arabia emerged as the top reformer in the World Bank’s Women, Business and Law 2020 report. The nation, which scored 70.6 out of 100, ranked first among the GCC and second (behind Morocco, which scored 75.6) in the Arab world. The full report can be accessed at: https://openknowledge.worldbank.org/handle/10986/32639
  • Saudi Arabia ranked second in the Arab world and 36th globally in the Human Development Index issued by the United Nations Development Program for 2019.
  • An EY global survey showed that around 23% of wealth management clients in the Middle East were planning to move assets and switch providers in the next three years, while 50% had already moved assets in the past three years.

UAE Focus

  • Dubai announced the establishment of a “Dubai Future District” dedicated to the new economy, with ten initiatives to support including an AED 1bn fund to support companies operating from the district, the setting up of a third stock market for such companies, as well as legislative licenses to innovate and experiment the technologies of the future economy. Read up on the other initiatives here: http://www.dmi.gov.ae/content/corporate/en-ae/programs/41/FutureDistrict.html
  • Dubai’s PMI fell to a 4-month low of 52.3 in Dec (Nov: 53.5), as new orders rose at the slowest pace in nearly four years. While output growth accelerated among construction and travel and tourism firms, the wholesale and retail sector recorded the weakest expansion in output since Feb 2016.
  • Dubai announced a new AED 2trn (USD 544bn) target for non-oil foreign trade by 2025, to be supported by establishing 50 offices globally to promote trade, tourism and investment: this compares to external trade crossing AED 1.0trn in Jan-Sep 2019. During this period, the emirate’s non-oil trade volume expanded by 22% yoy to 83mn tonnes while re-exports volume surged by 48% to 13mn tonnes. The value of exports grew by 23% to AED 118bn, re-exports by 4% to AED 312bn, and imports up by 3% to AED 589bn.
  • Abu Dhabi GDP grew by 2.7% yoy at constant prices to AED 204.9bn (USD 55.79bn) in Q3 2019 (Q2: 5.2%), thanks to the positive growth in both oil and non-oil sector, led by “transportation and storage”, “electricity, gas, water supply” and “waste management”.
  • Sharjah announced its largest ever AED 29.1bn budget for 2020, up 2% from last year, and with 1/3rd of the spending earmarked for infrastructure development and around 24% for social development.
  • Dubai issued 38,400 new business licenses in 2019, up 90% yoy, revealed Dubai Economy, aiding the creation of 184,437 jobs. Overall, 324,773 business registration and licensing transactions were recorded in 2019, while the rental value of units leased to companies in Dubai amounted to AED 26.2bn.
  • UAE committed USD 23bn to finance Indonesia’s infrastructure and energy projects. The investments will be made via the latter’s new sovereign wealth fund and will include financing towards the new capital city (estimated to cost USD 31bn).
  • The use of advanced blockchain technology will help the UAE government save more than USD 3bn, tackle fraud and accelerate the move towards a paperless economy, according to a WEF report. Non-technical issues were identified as the biggest challenges in blockchain deployment: including difficulty to bring the required stakeholders together, unclear regulatory implications, educating and raising awareness of stakeholders as well as addressing governance. Download the full report at: https://www.weforum.org/whitepapers/inclusive-deployment-of-blockchain-case-studies-and-learnings-from-the-united-arab-emirates
  • UAE has grown its renewable energy portfolio by over 400% in the last ten years, and “is on track” to double it in the next 10, revealed the Minister of State and Adnoc Group CEO.
  • The UAE launched its first set of Guiding Principles on Sustainable Finance last week. Among the guiding principles are the integration of ESG factors into governance, strategy and risk management, minimum eligibility requirements, and promotion of appropriate ESG-related reporting and disclosures. Read the Principles here: https://bit.ly/30GJ6eU
  • Virtual Reality and Augmented Reality are forecast to contribute USD 4.1bn to the UAE economy and add more than 40k jobs in the next decade, according to a PwC Middle East report. Healthcare, retail, construction, logistics, staff development and training are likely to be the most impacted by AR and VR technologies, as per the report. Access the full report at https://www.pwc.com/gx/en/industries/technology/publications/economic-impact-of-vr-ar.html

Media Review
World Economic Forum’s Global Risk Report 2020
http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf
The Uneasy Truce of Trump’s Trade Deal with China
https://www.newyorker.com/news/our-columnists/the-uneasy-truce-of-trumps-trade-deal-with-china
The Truth about the Trump Economy
https://www.project-syndicate.org/commentary/grim-truth-about-trump-economy-by-joseph-e-stiglitz-2020-01
Reasons to be cynical about the trade rally
https://www.ft.com/content/d00c6e1e-3912-11ea-a6d3-9a26f8c3cba4
14 Tech Trends to Watch Closely In 2020: CB Insights Research
https://www.cbinsights.com/research/report/top-tech-trends-2020/
Has the World Economy Reached Peak Growth?
https://www.project-syndicate.org/commentary/peak-growth-global-gdp-2020s-by-jim-o-neill-2020-01
 
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Weekly Economic Commentary – Jan 12, 2020

Markets
A tumultuous week on markets: though MSCI All-World and US stock indices hit record highs, Fri saw declines on renewed signs of Iran tensions. Regional markets were mostly down as the US-Iran tensions played out (with Iraq caught in the middle). The dollar index posted its best weekly performance in 2 months, but edged down from 4-week high versus the yen and also lower versus the Swiss franc (tmsnrt.rs/2egbfVh). The ongoing tensions in the Middle East seem to have had lesser impact on oil prices (compared to similar previous instances), perhaps an indication of the growing role of non-Middle East based oil producers: oil fell below $65 a barrel, posting its first weekly loss since late Nov. Gold prices rallied to its highest level since Mar 2013 in the beginning of last week, weakening later.
Global Developments
US/Americas:

  • Nonfarm payrolls in the US added 145k in Dec down from Nov’s downward revision of 256k. Average hourly earnings grew by just 0.1% mom (the least since mid-2018) and 2.9% yoy compared to the 0.3% mom and 3.1% yoy rise the month before.
  • US trade deficit narrowed to a 3-year low of USD 43.1bn in Nov (Oct: USD 46.9bn), as exports climbed by 0.7% amidst a 1% fall in imports. The goods deficit with China fell by USD 2.2bn to USD 25.6bn as imports slipped.
  • US ISM non-manufacturing PMI increased to 55 in Dec (Nov: 53.9), with business activity climbing 5.6 points to 57.2.
  • Factory orders in the US dipped by 0.7% mom in Nov (Oct: +0.2%) – the 3rd drop in 4 months. Orders for civilian aircraft and parts fell 2.2%, defense aircraft orders plunged 72.9% and orders for non-defense capital goods excluding aircraft gained 0.2%.
  • Employment in the US private sector, according to the ADP employment report, rose 202k in Dec (Nov: 124k); the service providers posted the largest gain since Apr.
  • Initial jobless claims fell for a 4th week in a row, dropping by 9k to 214k in the week ended Jan 3, with the 4-week moving average down by 9500 to 224k. Continuing jobless claims rose to 1.803mn – the biggest increase since Nov 2015 – from 1.728mn the week before.

Europe:

  • Inflation in the EU moved up to a 6-month high, rising to 1.3% yoy in Dec, from 1% the month before. Core inflation remained steady at 1.3% yoy.
  • German factory orders slipped by 1.3% mom and 6.5% yoy in Nov (Oct: +0.2% mom, -5.6% yoy), dragged down by a drop in foreign demand (from EU nations by -3.3%, outside the EU by -2.8%) and lower bulk orders. Excluding bulk orders, orders rose by 1% mom.
  • Industrial production in Germany increased by 1.1% mom in Nov (Oct: -1%) – the steepest monthly rise in 1.5 years.
  • Germany’s trade surplus declined to EUR 18.3bn in Nov (Oct: EUR 20.4bn), after exports declined by 2.3% mom and imports were down by 0.5%.
  • EU Economic Sentiment Indicator improved to 101.5 in Dec (Nov: 101.2), driven by higher confidence in services. But, business climate expectations worsened to -0.25 from the previous month’s -0.21 reading.
  • German retail sales grew by 2.1% mom, reversing the 1.3% dip in Oct; in yoy terms sales rose by 2.8% yoy from 1.4% yoy the month before. EU retail sales also increased – up 2.2% yoy in Nov vs Oct’s 1.7%.
  • Supported by the rise in Markit Services PMI (52.9 in Dec vs Nov’s 52), the Composite PMI moved into expansionary territory (Dec’s 50.2 vs Nov’s 49.4). This upswing was reflected also in EU’s Services and Composite PMI indices: services PMI rose to 52.8 in Dec from 52.4 the month before while the composite index was 50.9 vs Nov’s 50.6.

Asia Pacific:

  • Tsai Ing-wen won a second term as the President of Taiwan, in an election dominated by discussions about China’s influence on Taiwan’s democracy.
  • Inflation in China remained steady at an 8-year high of 4.5% yoy in Dec, pushed by food costs (+17.4% yoy), especially pork prices (+97% yoy). Producer price index remained in contraction for the 6th consecutive month, falling by 0.5% yoy in Dec vs Nov’s 1.4% drop.
  • FDI into China increased by 6% yoy to RMB 845.94bn (USD 124.39bn) during Jan-Nov 2019.
  • China’s Caixin services PMI edged lower to 52.5 in Dec (Nov: 53.5), despite a pickup in new orders, and with expectations for business activity falling to the second-lowest level since the series began in 2005.
  • India’s industrial output grew 1.8% yoy in Nov after shrinking by 3.8% the month before, boosted by manufacturing output (2.7% vs Oct’s -2.1%). However, production of capital goods contracted in Nov (-8.6%) as did infrastructure and construction goods (-3.5%).
  • Singapore’s retail sales improved in Nov, picking up by 0.2% mom after the 2.2% drop the month before. Though, in yoy terms, overall sales fell by 4% and vehicle sales dipped 22.4%.

Bottom line: Coming up this week is the potential signing of the US-China Phase 1 trade deal, as the US-Iran tussle continues (https://econ.st/2FIcCHi): so far this year, the US killed Iran’s top military commander, Iran retaliated with missile attack on US troops in Iraq, US imposed additional sanctions on Iran and rebuffed an Iraqi request to pull out troops (and we are only on Day 12 of 2020!). In the UK, meanwhile, the Parliament approved PM Johnson’s Brexit deal paving the way for UK to leave EU on 31 Jan 2020 (fears of a no-deal exit are no more) even as a BMG survey for The Independent found a 52-48 split in favour of Remain.
Regional Developments

  • Oman’s Sultan Qaboos – the longest serving ruler in the Middle East and the last of the founding members of the GCC and an important mediator to multiple feuds in the region – passed away late last week. Former culture minister Haitham bin Tariq Al Said was named the new Ruler, after a sealed envelope nominating him was opened hours after the death: he has since announced that he will continue to uphold Sultan Qaboos’s policies.
  • The World Bank expects growth in the MENA region to touch 2.4% in 2020 (2019 growth was estimated at a weak 0.1%), as per the latest Global Economic Prospects issue, citing geopolitical tensions and lower oil demand alongside weaker global growth. Oil prices are forecast to decline slightly to an average of $59 per barrel in 2020 and 2021. (More: https://www.worldbank.org/en/publication/global-economic-prospects)
  • Bahrain grew by 1.58% in Q3 2019, supported by 1.99% growth in the non-oil sector while oil GDP dipped by 0.15%.
  • Bahrain’s sovereign wealth fund Mumtalakat has hired banks for the potential issuance of a USD denominated sukuk, reported Reuters. This could be the first international debt sale in 2020 by a Gulf borrower.
  • Egypt’s PMI inched up to 48.2 in Dec from Nov’s 47.9, though still remaining under the 50-mark that separates expansion and contraction. Output rose to 47.1 from 46.6 (with some firms highlighting liquidity constraints) while new orders stood at 47.9 (Nov: 47).
  • Annual urban inflation in Egypt increased to 7.1% in Dec (Nov: 3.6%) while core inflation stood at 2.4% yoy (Nov: 2.1%). The central bank will meet this week and is likely to hold rates steady: overnight rates are currently at 12.25% for deposits and 13.25% for lending.
  • Egypt’s first commodities exchange – for spot trading of commodities with large markets – will start trading within the next 36-48 weeks, disclosed the Internal Trade Development Authority head. Commodities to be traded initially will include wheat, sugar, corn and rice that can be produced locally or imported.
  • Iraq’s parliament voted “to work towards ending the presence of all foreign troops on Iraqi soil”, after the US attack killed Iran’s top military commander. The US Administration later warned that Iraq could lose access to its central bank account at the Fed if US troops were to be expelled.
  • Iraq will likely more than double its crude oil exports to China as part of an oil-for-reconstruction agreement signed last year, disclosed the financial advisor to the Iraqi government. Oil exports are likely to rise to 300k barrels per day from 100k bpd currently.
  • Jordan received 1.136 mn barrels of Iraqi crude oil in 2019 (including Dec’s 360k barrels), as part of an MoU signed by the two nations, according to Jordan’s minister of energy. Under the MoU, oil from Iraq will cover 7% of Jordan’s daily demand.
  • Jordan’s Q3 2019 GDP grew by 1.9% yoy, with the highest growth rate registered by extractive industries (+7.4%), followed by social and personal services sector (+3.4%) and finance and real estate (+3%).
  • The volume of real estate trade in Jordan touched JOD 4.6bn in 2019. Property sales increased by 6% while land sales were up 9%.
  • Jordan’s finance minister disclosed that the government repaid overdue arrears to the private sector: JOD 350mn (USD 492mn) during the last week of Dec and 1st week of Jan.
  • Kuwait’s oil output in the zone shared with Saudi Arabia is expected to touch 250k barrels per day by end-2020, when production resumes. A 5-year dispute over the area ended last year, and production will restart at 2 jointly-run oil fields that can pump upto 0.5% of the world’s oil supply.
  • Kuwait’s Nov foreign reserves accelerated by 3.89% yoy and 3.85% mom to KWD 12.3bn. Money supply in Kuwait declined by 0.3% yoy to KWD 38.219bn (USD 126.352bn) in Nov.
  • Tourism revenues in Kuwait surged by 69% yoy to KWD 152.1mn (USD 503.2mn) in Jan-Sep 2019. Spending by Kuwaitis on foreign tourism rose by 21.34% to KWD 4bn during the same period.
  • As Lebanon’s multiple crises grow without a functioning government (since Oct), the central bank governor stated that the banks are solvent and will not go bankrupt while deposits remain secure (also insisting that there would be no haircuts on deposits). He also disclosed that contact with the IMF had so far been limited to technical support.
  • Total foreign assets at the Central Bank of Oman increased by 2.9% yoy to OMR 6.26bn by end-Oct. M2 grew by 5.2% yoy to OMR 17.52bn while private sector deposits rose by 5.8% to OMR 15.04bn.
  • Qatar sold QAR 600mn (USD 164.84mn) of Treasury bills in an auction.
  • Qatar Petroleum signed a 15-year agreement to supply Kuwait with up to 3mn tonnes of liquefied natural gas per year, starting 2022. Qatar plans to boost its LNG production to 126mn tonnes a year by 2027.
  • PMI in Saudi Arabia fell to a 5-month low of 56.9 in Dec (Nov: 58.3), after business activity slowed (58.1, the lowest since Oct 2018). New orders (down to 64.2 from Nov’s 65.9) and employment remained subdued (50.5).
  • Bank credit in Saudi Arabia increased by 5.3% yoy and 1.5% mom to SAR 1.532trn in Nov, thanks to an increase in long-term credit (+17.9% yoy to SAR 601.34bn).
  • Saudi Arabia’s investment assets abroad grew by 8.86% yoy to SAR 4.26trn (USD 1.14trn) by end-Q3. FDI was up by 21.3% yoy to SAR 428.12bn, portfolio investments by 19% to SAR 1.04trn while investments in foreign debt instruments rose by 4.3% to SAR 282.38bn.
  • The Board of Saudi Arabia’s Capital Market Authority approved the Securities Central Counterparties Regulations, aimed at regulating securities clearing activities and strengthening capital market infrastructure.
  • Consumer spending in Saudi Arabia grew by 4.5% yoy to SAR 934.37bn, thanks to a surge in point of sales (+22.6% yoy to SAR 275.39bn).
  • Saudi Arabia’s Real Estate Development Fund deposited SAR 1.692bn (USD 451mn) in Dec to the accounts of citizens benefiting from Sakani programme (to allocate residential products for citizens).
  • Saudi Arabia announced the issuance of 2,716,858 Umrah visas since the beginning of this year’s Umrah season. Pakistan, Indonesia and India were the largest source nations of the pilgrims.
  • Saudi Arabia, in the latest step to boost tourism, will permit visitors to use existing UK, US, and Schengen visas to obtain visitor visas at airport arrivals regardless of citizenship. These visitors need to have used the visa to travel to any one of those countries prior to entry into Saudi Arabia.
  • Egypt has the highest number of startup investment deals in the MENA region – 25% of all deals in 2019 – according to MAGNiTT’s 2019 MENA Venture Investment report. 2019 saw a total 564 investments in MENA-based startups amounting to USD 704mn in funding (+13% yoy, excluding the Careem and Souq mega-deals). UAE remained the highest recipient of funding (60% of the total). Saudi Arabia is the fastest growing ecosystem across MENA and ranks third in both number of deals and total funding.

UAE Focus

  • UAE’s PMI ended 2019 on a downbeat note, with the reading slipping to 50.2 in Dec compared to Nov’s 50.3. Output continued to slow for a 3rd consecutive month – at 51.6, it was the softest reading over 8 years.
  • A Dubai Council was established by Dubai’s ruler to “drive change in Dubai, oversee social and economic governance in the emirate, improve competitiveness, economic leadership and attractiveness of the emirate” and will oversee 6 areas of growth including economy, citizens’ services, government development, infrastructure, security and justice, and health and knowledge. Furthermore, in the first meeting of the Dubai Council, a 50-goal plan for the Emirate was announced, with details to be revealed within 60 days and implemented in the next 5 years. The meeting also approved a new governance system for government and semi-government entities including a separation of the Chairman and CEO roles as well as formation of committees to evaluate investment and risk management.
  • Inflation in the UAE fell – for the 11th consecutive month – to 1.4% yoy in Nov (Oct: 1.9%), aided by falling food and beverage costs (-1.13%), textile and clothing (-7.07%) and housing and utilities (-4.17%) among others.
  • The UAE announced the rollout of a 5-year multiple entry tourist visa for all nationalities: the details of the visa is expected to be announced soon. UAE welcomed about 21mn tourists last year, with the H1 number at 15mn.
  • The value of financial aid and other social benefits provided by the Federal Government to UAE citizens grew by 2% yoy to AED 5.55bn (USD 1.51bn) in Jan-Sep 2019. This accounted for 14.7% of total federal expenses during the period.
  • The number of trademarks registered in the UAE increased by 30.5% mom to 1589 in Dec, according to data collected by the Ministry of Economy.
  • The UAE received over 3.2mn VAT refund applications from tourists in 2019, according to the Federal Tax Authority (at end-Jun: 1.52mn).
  • Dubai registered a total of 41,988 real estate transactions in 2019 – the highest number registered annually since 2008, according to Property Finder. Off-plan properties accounted for 56.3% of the total, though much lower compared to 2017 and 2018 levels.

Media Review
If the threat of war cannot shake stock markets, what can?
https://www.ft.com/content/4737cec2-32d6-11ea-a329-0bcf87a328f2
Central Banks Face a Year of Mounting Challenges
https://www.project-syndicate.org/commentary/fed-ecb-captured-by-financial-markets-by-mohamed-a-el-erian-2020-01
Why was Australia’s government so ill-prepared for the bushfires?
https://www.economist.com/asia/2020/01/09/why-was-australias-government-so-ill-prepared-for-the-bushfires
Lebanon’s Economic Crisis: A Ten Point Action Plan for Avoiding a Lost Decade
https://carnegie-mec.org/2020/01/06/lebanon-s-economic-crisis-ten-point-action-plan-for-avoiding-lost-decade-pub-80704
5G Is 200X Faster and Will Unlock Everything. Here’s Who’s Ready
https://priceonomics.com/5g-is-200x-faster-and-will-unlock-everything-heres/
 
 
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Weekly Economic Commentary – Jan 5, 2020

Markets
The rally across global equity markets paused on Fri following the killing of Iran’s top military commander by the US. In the region, equity markets closed positive on Thurs (prior to the attacks) and are likely to mirror global patterns when they open today. As tensions flared in the Middle East, all asset classes were affected: the dollar slipped to 9-week low versus the yen, safe haven bonds rallied, gold hit a near 4-month high, and Brent jumped to more than USD 68 a barrel.
Global Developments
US/Americas:

  • US goods trade deficit narrowed to USD 63.2bn in Nov – the smallest since Oct 2016 – from Oct’s reading of USD 66.8bn. Exports grew by 0.7%, supported by a 3.4% rise in automotive vehicles and products and a 2.6% uptick in consumer goods while imports were down by 1.3%.
  • US Chicago PMI edged up to a 4-month high of 48.9 in Dec (Nov: 46.3) while business sentiment dropped by to 46.2 in Q4, marking the lowest quarterly reading since Q2 2009.
  • The IHS Markit manufacturing PMI ticked down slightly to 52.4 in Dec (Nov: 52.6); though business confidence remains subdued, new business received by firms point to rise in client demand while goods producers reported a third consecutive upturn in new export orders.
  • US ISM manufacturing slowed sharply in Dec: at a reading of 47.2, this was the weakest since Jun 2009. New orders in the manufacturing sector dropped 0.4ppts to 46.8 in Dec alongside falls across employment, order backlogs and inventories while prices increased.
  • Pending home sales in the US grew by 1.2% mom in Nov, after posting a decline of 1.3% in Oct. In yoy terms, sales grew 7.4% (Oct: 4.4%).
  • S&P Case Shiller home price indices (20-city index) edged up by 2.2% yoy in Oct (Sep: 2.1%). Mortgage rates are still nearly a full percentage point below versus this time a year ago.
  • Initial jobless claims in the US fell by 2k to 222k in the week ended Dec 28, with the 4-week moving average rising to 233.25k (228.5k) – the highest level since Jan 2018.

Europe:

  • German Markit manufacturing PMI picked up to 43.7 in Dec (vs Nov’s 5-month high of 44.1), with new orders posting the smallest drop of 2019 and output expectations at the highest for 15 months. In the EU, PMI increased to 46.3, better than the flash reading of 45.9 but lower than Nov’s 46.9, dragged down by Germany, though declines in Italy and the Netherlands were reportedly “the sharpest in over 6.5 years”.
  • German jobless rate held steady at 5% in Dec; the number of people out of work rose by 8k to 2.279mn in seasonally adjusted terms. German employment touched a record high of 45.3mn, adding 402k jobs in 2019 (+0.9% yoy). The quality of jobs was improving, with higher pay and benefits, while only 15% of those jobs were in manufacturing.
  • CPI in Germany remained subdued in Dec, rising by 1.5% yoy in Dec (Nov: 1.2%).
  • The IHS Markit/CIPS UK manufacturing PMI fell to 45.6 in Dec – its lowest since Jul 2012 – from 49.1 in Nov; the broader headline PMI fell to a 4-month low of 47.5 (Nov: 48.9).

Asia Pacific:

  • China’s central bank cut reserve ratios by 50bps (effective Jan 6), freeing up CNY 800bn (USD 115bn) to help boost the economy. The central bank stated that small and medium banks would receive roughly CNY 120bn, for funding small local businesses.
  • NBS manufacturing PMI in China held steady at 50.2 in Dec, supported by rising new export orders (+1.5 points to 50.3, the first expansion since Jun 2018). Non-manufacturing PMI in China declined to 53.5 in Dec from the previous month’s 54.4 reading. The composite PMI slid slightly to 53.4, but it was 0.3 points higher than this year’s average.
  • Caixin manufacturing PMI edged lower to 51.5 in Dec (Nov: 51.8), with the rate of new order growth easing to a 3-month low while operating expenses grew due to higher raw material and staffing costs.
  • South Korea’s overall industrial production rebounded by 0.4% in Nov (Oct: -0.4%); retail sales grew by 3% mom, thanks to gains in sales of cars and clothes; facility investment gained by 1.1% mom, supported by rising imports of airplane equipment.
  • India’s fiscal deficit widened to INR 8078.34bn in Nov (Oct: INR 7204.5bn), amounting to 114.8% of the target in the first 8 months of the fiscal year. Trade deficit in India narrowed to 38.1bn in Jul-Sep from 46.2bn in the quarter before, while the current account deficit also narrowed to USD 6.3bn or 0.9% of GDP (previous quarter: USD 14.3bn).
  • GDP in Singapore grew marginally by 0.1% qoq and 0.8% yoy in Q4 (Q3: 2.4% qoq and 0.7% yoy) according to the preliminary estimates released last week. Manufacturing shrank by 2.1% yoy in Q4, widening from Q3’s 0.9% decline. Overall, the economy expanded by 0.7% in 2019, growing at the slowest since 2009.

Bottom line: US-Iran tensions flared up in the New Year, with the killing of Iran’s top military leader – the Eurasia Group estimates a 28% likelihood of a short, limited conflict. Any such conflict will act as a further dampener on global growth – not that there is any dearth of uncertainty already, with geopolitics and trade being major head winds in the year ahead! Global manufacturing PMI fell to 50.1 in Dec (Nov: 50.3), dragged down by weak international trade flows. This week sees the return of the Brexit drama, with Parliament back to vote on the bill Thurs. Jan 15th will be the next date of importance when, according to Trump, the US-China phase 1 deal will get inked – the details of the deal are still unknown.
Regional Developments

  • Bahrain’s Parliament passed a proposal to hike civil servants’ pay by 3%, in spite of objections from the government; the next step is a review by the Shura Council.
  • Imports into Bahrain declined by 17% yoy to BHD 379mn in Nov 2019. China (BHD 55mn), Saudi Arabia (BHD 34mn) and US (BHD 33mn) accounted for the top three source nations while the top 10 nations together accounted for 70% of total value of imports.
  • In a bid to promote tourism, Bahrain reduced the fees imposed on pre-entry visas: fee on 1-year valid entry visa was lowered to BHD 40 from BHD 85 previously while the fees on five-year valid entry visas were slashed by almost two thirds to BHD60 (from BHD170).
  • Egypt’s stock exchange plans to have 3-4 IPOs of private sector companies in 2020, according to the Chairman.
  • The Egyptian Financial Regulatory Authority is set to finalise procedures for the issuance of Green Bonds, and a local company is expected to issue in early 2020.
  • FDI into Egypt surged by 71.4% yoy to USD 2.4bn in Q1 of the 2019-20 financial year – the highest since 2017 – thanks to the rise in net inflows for greenfield investments to USD 1.5bn. Trade deficit narrowed by USD 1bn to USD 8.8bn during Q1 of the current financial year, thanks to the 18% increase in non-oil exports.
  • Money supply in Egypt increased by 13.16% yoy to EGP 4.05trn (USD 253.13bn) as of end-Nov.
  • Total deposits at Egypt’s banks touched EGP 4.16trn at end-Oct: non-government deposits touched EGP 3.54trn while government deposits were EGP 623.7bn. Non-government foreign currency deposits slipped by 2.5% mom to EGP 677.32bn in Oct.
  • Egypt’s tourism revenues rose by 6.7% yoy to USD 4.2bn in Q3 2019 – only the 4th time that quarterly revenues exceeded USD 4bn – according to the central bank.
  • Egypt’s domestic fuel prices were left unchanged at the 2nd quarterly meeting of the pricing mechanism committee, following a cut in Oct: prices range between EGP 6.5-8.75 a litre.
  • Egypt’s Suez Canal revenues inched up to USD 5.8bn in 2019 from USD 5.7bn the year. The transit toll for bulk vessels and LPG carriers has been increased by 5% this year.
  • Egypt and Sudan will operate a joint electricity grid – with a capacity of 50 megawatts – from Jan 12. The project’s cost touched EGP 509mn (USD 31.74mn) and spans 1000 kms.
  • Iraqi oil exports fell to 3.428mn barrels per day (bpd) in Dec from Nov’s 3.5mn bpd.
  • Jordan announced higher fuel prices in Jan: gasoline prices were up by 0.5-1.3% mom depending on grade of fuel, while diesel prices were up 3.4%.
  • Jordan will extend real estate exemptions and lower the registration and purchase fees of apartments and lands until end of 2020.
  • Kuwait’s fiscal deficit touched KWD 2.5bn ($8.33bn) in Apr-Nov 2019, prior to deducting the share of the future generations’ fund (estimated at 10% of state revenue). Revenues and expenditure stood at KWD 11.5bn and KWD 14bn respectively during this period.
  • FDI into Kuwait amounted to KWD 960mn (USD 3.2bn) during the period Jan 2015-Mar 2019, according to the commerce and industry minister.
  • Bank deposits at Kuwait’s banks grew by 1.2% yoy and 0.5% mom to KWD 43.6bn in Oct (supported by a 9.9% yoy and 1.3% mom rise in government sector deposits) while credit disbursed increased by 4.7% yoy to KWD 38.3bn.
  • Kuwaitis spent USD 16.5bn on travel during the period Q4 2018-Q3 2019, according to the central bank. This is up from the USD 14.8bn reported in 2018.
  • Oman increased spending by 2% yoy to OMR 13.2bn (USD 34.4bn) in its 2020 budget. The deficit, estimated at OMR 2.5bn (8% of GDP), will be lower than the 2019 projection of OMR 2.8bn and around 80% is expected to be funded through foreign and domestic borrowing. Revenues will be up 6% to OMR 10.7bn, assuming an average oil price of USD 58 per barrel.
  • Oman’s budget deficit fell by 5.6% to OMR 1.92bn in Jan-Oct 2019 – a 5-year low. During the period, revenues dipped by 1.1% to OMR 8.6bn (7.6% decline in net oil revenue) while expenditure fell by 1.9% to OMR 10.53bn.
  • Oman’s new Foreign Investment Law became applicable from Jan 2. The law simplifies procedures and permits necessary to initiate foreign investment, and also expands the investment sectors and projects available for investors.
  • Oman was ranked 5th in the Arab world as per the Human Development Index 2019, with 47th position globally.
  • The cost of insuring against a Saudi bond default, with CDS rates spiking to 65 bps on Friday following the killing of Qassem Soleimani.
  • Saudi Arabia’s GDP contracted by 0.46% yoy and 0.19% qoq in Q3, as the oil sector output declined by 6.43% yoy. Non-oil sector GDP grew by 4.3% yoy and 2.9% qoq in Q3 2019, supported by the wholesale and retail trade (+8% yoy) and finance, insurance, real estate and business services (+6.28%).
  • Banks in Saudi Arabia increased their investments in government-issued bonds by 25.2% yoy to SAR 379.95bn in Nov 2019.
  • Revenues of SMEs in Saudi Arabia touched SAR 879.32bn in Q2 2019, according to the General Authority for Statistics. Small enterprises operating in the private sector (i.e. with a workforce of 6-49 employees) accounted for 18.6% of the total revenue generated.
  • Credit card transactions in foreign currencies declined by 25% yoy to SAR 1.27bn (USD 338.5mn) in Nov 2019, disclosed This follows declines of 18.7% and 28.3% respectively in Sep and Oct.
  • About 155,893 mortgage loans worth SAR 69bn were offered by financing institutions in Saudi Arabia during Jan-Nov 2019. The number of loans were up by 254% yoy and volumes were up by 167% in year on year terms.
  • Remittances from Saudi Arabia fell by 8.9% yoy to SAR 113.97bn (USD 30.39bn) during Jan-Nov 2019.
  • Saudi Arabia’s foreign reserve assets increased by 2.2% mm to SAR 1.876trn (USD 500.15bn) in Nov. On an annual basis, foreign reserves declined by 0.8%, compared with SAR 1.891trn in Nov 2018.
  • Saudi Arabia issued USD 32.01bn worth debt instruments in 2019: of this, local sukuk issuances were up by 44.36% yoy to SAR 69.84bn while international sukuk issuances were up 25% to SAR 9.38bn.
  • The Saudi Youth Development Survey, conducted in Q2 2019, disclosed that 67% of the population were less than 34 years of age. Of the 15-34 age group, which accounted for 36.7% of the population, 51% were male.
  • Shops in Saudi Arabia can now open for 24 hours a day: pharmacies, wedding halls, rest houses, medical activities, education activities, fuel stations (to fill fuel only), hotels, hotel suites and resorts are exempt from the fees charged to hold a 24×7 license.

UAE Focus

  • The Dubai 2020 budget estimates record spending of AED 66.4bn (USD 18.1bn), up 17% yoy; infrastructure spending is set to decline for a 2nd consecutive year, ahead of the Expo this year. Salary and wage allowances account for 30% of total expenditure in the year’s budget while grants and support account for 24%. State revenues are expected to surge by 25% to AED 64bn, with non-tax revenue at 60% of the total. Overall deficit, projected at AED 2.4bn, is lower than the budgeted AED 5.8bn last year.
  • Net investments of non-Arab foreign investors in UAE’s financial markets surged to AED 12.5bn last year – the highest in 5 years. Non-Arab foreign investors trade in the two financial markets amounted to AED 100.5bn, or 46.1% of the total trades of foreigners in 2019.
  • Dubai’s non-oil foreign trade increased by 6% yoy to AED 1.02trn (USD 272bn) in Jan-Sep 2019: exports grew by 23% to AED 118bn, re-exports by 4% to AED 312bn and imports by 3% to AED 589bn. Top trade partners remained China (AED 109bn, 6% yoy), India (AED 100bn, 16%) and US (AED 57bn).
  • Value of banks’ financing to retail companies increased by 5.4% yoy to AED 50.4bn (USD 13.7bn) in Jan-Sep 2019.
  • Abu Dhabi’s new road toll system went live from Jan 2: motorists will be charged AED 4 every time when they pass through during peak hours (7-9am and 5-7pm from Sat-Thurs).
  • Abu Dhabi government employees were moved onto a new salary scale from Jan 1. Pension payments will now be calculated on almost 80% of gross salary versus only basic salary previously.
  • UAE ranks 5th globally in the World Competitiveness Ranking 2019 published by the IMD Business School, from 15th in 2016.
  • Dubai Duty Free clocked in record annual sales of AED 7.406bn (USD 3.029bn) in 2019. There were an average 66,500 sales transactions on average per day, with over 64.6mn units of merchandise sold. Perfume sales (+2% to AED 1.124bn) accounted for 15% of total sales.

Media Review
What a US-Iran War would look like
https://www.vox.com/world/2019/7/8/18693297/us-iran-war-trump-nuclear-iraq
Trump says US not seeking war with Iran by killing Soleimani
https://www.ft.com/content/e81763aa-2e5f-11ea-a126-99756bd8f45e
A 6-point Plan to Rebuild Lebanon’s economy: Dr. Nasser Saidi’s op-ed in The National
https://nassersaidi.com/2020/01/05/a-six-point-plan-to-rebuild-lebanons-economy-article-in-the-national-5-jan-2020/
The Myth of Global Decoupling
https://www.project-syndicate.org/onpoint/the-myth-of-global-decoupling-by-stephen-s-roach-2020-01
 
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