GCC Economic Outlook - gulfbase.com Kwt Oma Qat KSA UAE GCC 2010 2011 14.0 14.1 ... status as a...

Solid growth seen in 2011 Government spending expands as austerity kicks-in overseasBank lending continues to recover

GCC Economic Outlook

March 2011

GCCGCC Economic OutlookEconomic Outlook March 2011

Contents

GCC outlook 2

Bahrain 4 Macro forecasts: higher oil prices aid growth 4 Money & finance: financial sector gradually recovering 6

Kuwait 8 Macro forecasts: growth to recover further in 2011 8 Money & finance: slow credit growth in 2010 10

Oman 12 Macro forecasts: growth to remain solid in 2011 12 Money & finance: resilient banking sector weathers crisis 14

Qatar 16 Macro forecasts: the region’s best performer 16 Money & finance: recovery well under way 18

Saudi Arabia 20 Macro forecasts: investment plans pay-off 20 Money & finance: government stimulus revives bank credit 22

UAE 24 Macro forecasts: growth to remain below trend in 2011 24 Money & finance: bank credit remains subdued 26

Regional data and forecasts 28

GCC Economic Outlook - March 2011

NBK Economic ResearchAbdullah Al-Ahmed Street, P.O. Box 95, Safat 13001Kuwait City, KuwaitTel: +965 2259 5500 Fax: +965 2224 6973www.nbk.com


2

GCC outlookEconomic recovery gains traction as government spending rises, financial sector continues to normalize…

• Despite the political convulsions elsewhere

in the MENA region, 2011 should be a year of

continued improvement for the GCC economies, as

high oil prices, expansionary government fiscal and

monetary policies and the continued normalization

of the banking and financial sectors help the region

recover from the mild recession of 2009. Real GDP

is expected to grow by 5.5%, following growth of

5.2% in 2010. (Chart 1.) This is below the average

of 8% per year of 2003-2008, but still represents

a very solid backdrop against which businesses

can continue to expand. Qatar will be the region’s

stellar performer, as it continues with the roll-out of

its LNG expansion plans. (Chart 2.)

• The ability of regional governments to

support growth will be crucial – and in stark

contrast to other parts of the world where outright

cuts in public spending are likely to begin in earnest.

We estimate that GCC government spending could

rise by close to 10% in 2011, underpinned by

ambitious medium-term development programs in

Saudi Arabia, Kuwait, and Qatar. Indeed, one of

the main challenges for 2011 is likely to be in

the timely execution of large government capital

spending projects. Private sector demand – while

comparatively sluggish - should begin to strengthen.

• So long as global economic growth

continues to hold up, oil prices are likely to remain

close to current levels; we base our projections

on an average price of USD 90 per barrel through

GCC forecast summary2010e 2011f

Real GDP % y/y 5.2 5.5- Non-Oil % y/y 4.4 4.5

Inflation (yr avg) % 3.0 4.3Budget balance % GDP 8.4 11.5

2011. This means that OPEC is likely to sanction

further production increases amongst its members,

four of which are in the GCC. (Chart 3.) This in turn

not only underpins growth in oil-related activities,

but should also support countries’ fiscal and trade

positions (in aggregate at least). These remain

comfortable – albeit less so than the spectacular

figures of earlier years. (Charts 5 and 6.)

• Inflation moved back into the headlines

through the second half of 2010, thanks largely

to rising food prices at a global level. Beyond food

prices, inflationary pressures remain fairly mild – at

least for now. In our base case expectation, inflation

accelerates modestly - to an average of 4.3%

in 2011 from 3.0% in 2010 – but does not run

away. (Chart 4.) At these types of rates, it should

not present too much of a policy headache for

the monetary authorities, though high food prices

have scope to generate political tensions.

• Country specific themes likely to appear in

2011 include the response of the UAE economy

to the continued deleveraging process and debt

servicing of Dubai’s government-related institutions;

the implementation of the Kuwait government’s

development plan, which could significantly upgrade

the country’s medium-term economic performance;

a possible recovery in credit growth in Saudi

Arabia, which could signal that the private sector is

gaining momentum on the back of big government

spending increases; and renewed vigor in the Qatari

government’s capital spending program generated

by the hosting of the 2022 World Cup. We suspect

that appetite for further concrete moves towards a

single Gulf currency has ebbed, but steps may be

taken to implement earlier trade agreements.


3

GCC outlook charts

Chart 1. GCC real GDP Chart 2. Real GDP by country

Chart 3. GCC crude oil output1 Chart 4. GCC consumer price inflation

Chart 5. Budget balance2 Chart 6. Current account balance

Source: Official sources / NBK estimates and forecasts1 Includes condensate output in Oman and estimates for Bahrain2 Includes NBK estimates of off-balance sheet revenues in the UAE and Oman

(% GDP) (% GDP)

(million barrels per day) (% y/y, year average)

(% y/y) (% y/y)

-8-6-4-202468101214

-8-6-4-202468

101214

2002 2004 2006 2008 2010

Oil Non-oil Total

NBKf'cast

4.03.0

5.0

17.0

4.2

2.0

5.24.8 4.5 4.7

13.7

4.23.6

5.5

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

Bhn Kwt Oma Qat KSA UAE GCC

2010 2011

14.0

14.1

14.2

14.3

14.4

14.5

14.6

14.7

14.8

14.0

14.1

14.2

14.3

14.4

14.5

14.6

14.7

14.8

Jan-09 Jul-09 Jan-10 Jul-10

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2002 2004 2006 2008 2010

NBKf'cast

-5

0

5

10

15

20

25

-5

0

5

10

15

20

25

2002 2004 2006 2008 2010

NBKf'cast

0

5

10

15

20

25

30

0

5

10

15

20

25

30

2002 2004 2006 2008 2010

NBKf'cast


4

Bahrain: macro forecastsHigher oil prices aid growth and ease budget pressures; inflation to remain low despite higher food prices...

• Real GDP growth slowed to 3.1% in 2009.

While this is well below the average of 7% per

year seen during the preceding six years, it was

still above the regional average. This comparatively

healthy performance seems at odds with Bahrain’s

status as a leading international offshore banking

hub. Given the broader global backdrop, Bahrain’s

economy might have been expected to be one of

the region’s weakest.

• Bahrain’s resilience is partly related to the

rise in oil prices and the robust regional economic

recovery – notably in neighboring Saudi Arabia.

Moreover, as a non-OPEC member, Bahrain avoided

the large cuts in oil output seen in other GCC

countries. Finally, while the financial sector is of

great importance to Bahrain’s economy – accounting

for around one quarter of GDP – only half of it

is wholesale international banking activity, the

sector that was hard hit by the global financial

crisis. Domestic commercial banking, on the other

hand, continued to perform well, growing by an

impressive 7% in real terms in 2009.

• Economic conditions may improve further

this year. After growing by an estimated 4% in

2010, we expect real GDP to rise by 4.8% in

2011 – close to the regional average. (Chart 7.)

Growth in the non-oil sector should pick-up to 5%

from an estimated 4.5% in 2010, as conditions

for wholesale banks continue to normalize and

as the domestic economy gains momentum from

high oil prices and accelerating regional growth.

• The hydrocarbon sector is one of the

smallest in the region, accounting for just 23% of

GDP in 2009. Oil output consists of about 30,000

bpd from a sole oil field and a further 150,000 bpd

of ‘gifted’ output from a field shared with Saudi

Arabia. (Chart 8.) These volumes tend to be fairly

stable. Although there are plans to expand domestic

hydrocarbon production in future, only a slight

increase is seen in 2011. We see real oil sector GDP

edging up by 3% in 2011.

• Over the past few years, inflation has

been much tamer in Bahrain than in other GCC

countries, remaining in the 2-4% range. Inflation

remained relatively stable in 2010 averaging 2%,

with the spike in food price inflation offset by lower

housing costs. (Chart 9). Faster economic growth, in

addition to higher global food prices and a weak US

dollar – through the impact on import prices - could

push inflation to around 3% in 2011 (Chart 10).

• Bahrain’s relatively meager oil resources

mean that it has one of the weakest fiscal positions

in the region. The government recorded a budget

deficit of 6.1% of GDP in 2009. Higher oil prices

and relatively restrained spending could trim the

deficit to 0.7% of GDP in 2010. However, 2011

is likely to see the deficit rising once again to 1.2%

following a 17% increase in planned spending,

about half of which will go to subsidies (Chart

11.) Nevertheless, over the medium-term, steps

may be taken to reduce pressures on the budget.

The current account, by contrast, should remain in

comfortable surplus. (Chart 12.)

Bahrain forecast summary2010e 2011f


Inflation (yr avg) % 2.0 3.0Budget balance % GDP -0.7 -1.2


5

Bahrain: macro forecast charts

Chart 7. Real GDP Chart 8. Crude oil output

Chart 9. Consumer price inflation by sector Chart 10. Consumer price inflation

Chart 11. Budget balance Chart 12. Current account balance

Source: Official sources / NBK estimates and forecasts

(% GDP)

(% y/y) (% y/y, year average)

(% y/y)

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

2002 2004 2006 2008 2010e

Oil Non-oil Total

NBKf'cast

1.0

1.2

1.4

1.6

1.8

2.0

100

120

140

160

180

200

220

2004 2005 2006 2007 2008 2009 1H10

Oil (Bahrain, 000 bpd, LHS)Oil (Abu Safa, 000 bpd, LHS)Gas (bcfd, RHS)

-4

-2

0

2

4

6

8

10

-4

-2

0

2

4

6

8

10

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11

Food

Housing

Total CPI

-8

-6

-4

-2

0

2

4

6

8

-8

-6

-4

-2

0

2

4

6

8

2002 2004 2006 2008 2010e

NBKf'cast

-1

0

1

2

3

4

-1

0

1

2

3

4

2002 2004 2006 2008 2010

NBKf'cast

-2

0

2

4

6

8

10

12

14

16

-2

0

2

4

6

8

10

12

14

16

2002 2004 2006 2008 2010e

$ billions

% of GDP

NBKf'cast


6

Bahrain: money and financeWeaknesses persist, but parts of the financial sector recovering better than expected...

• The past two years have seen the Bahrain

financial sector suffer the consequences of the global

financial crisis. However, the sector is beginning

to recover, with liquidity bouncing back strongly and

bank assets stabilizing. Because of its status as an

offshore banking hub, Bahrain’s financial system is

considered vulnerable to conditions in international

financial markets. These negative effects, however,

have been somewhat mitigated by a fairly strong

regional economic recovery and a quick revival

in oil prices.

• After being weak or even negative through

parts of 2009, annual growth in the money supply

recovered markedly last year, with M1 rising by

almost 19% year-on-year in November and M2 also

recording double digit growth. (Chart 13.) As well

as the improved regional economic scene, earlier

emergency measures taken by the Central Bank

of Bahrain (CBB) - including interest rate cuts and

the introduction of a US dollar FX swap facility

to support liquidity – helped ease earlier financial

system pressures.

• 2008 saw astonishingly fast growth in

bank lending – as high as 50% y/y - giving way to

a sharp deceleration later in the year and through

2009. Bank claims on the private sector even

turned negative in 4Q09 and 1Q10. (Chart 14.) The

growth in claims has begun to pick up recently as

the Bahraini economy recovers, but a more cautious

approach to lending by banks has put a constraint

on credit expansion.

• The decline in bank assets has also abated.

The bulk of bank assets in Bahrain are held by

wholesale banks, whose majority of assets are

foreign, reflecting Bahrain’s status as an offshore

banking center. The global financial crisis saw

wholesale banks hit by their global exposures,

as well as by the downturn in regional markets.

By April 2010, total assets were more than 22%

below their peak of USD270bn in June 2008.

(Chart 15.) Note, however, that this decline is

only representative of wholesale banks; retail bank

assets have remained relatively stable.

• Monetary policy is based upon the exchange

rate peg against the US dollar (since 2001) which

implies domestic interest rates that are closely in

line with those in the US. The CBB’s key policy rate

- the one week deposit rate – was reduced several

times during the crisis, from 5% in 2007 to 0.5% in

September 2009, 0.25% above the US Fed Funds

rate. (Chart 16.) Although this policy change was

largely a response to cuts in US interest rates, it

was also helpful in mitigating the effects of the

financial crisis.

• Because of the exchange rate peg,

fluctuations in the dinar exchange rate versus

the euro generally reflect changes in USD/euro.

In real terms, i.e. adjusting for inflation, the dinar

strengthened by more than 11% against the euro,

relative to January 2008 levels. (Chart 17.)

• Given the relatively decent economic

rebound, the Bahraini stock market’s performance

was disappointing in 2010. The DJ price index fell

0.6%, after a decline of 20% through 2009. (Chart

18.) This is due in part to the weak performance

of the investment companies and wholesale banks,

whose shares were down 17%, but who account

for nearly one-third of total market capitalization.


7

Bahrain: money and finance charts

Chart 13. Money supply Chart 14. Bank claims on private sector

Chart 15. Commercial bank assets Chart 16. Policy interest rates

Chart 17. Exchange rate Chart 18. Stock market indices

Source: Official sources / NBK estimates

(%)

(% y/y) (% y/y)

-10

0

10

20

30

40

50

-10

0

10

20

30

40

50

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

M1

M2

-10

0

10

20

30

40

50

60

-10

0

10

20

30

40

50

60


-20-15-10-505101520253035

180

200

220

240

260

280

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Bank assets (USD bn, LHS)

Bank assets (%y/y, RHS)

0

1

2

3

4

5

6

0

1

2

3

4

5

6

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

US Fed Funds target

CBB one week deposit rate

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

BHD/USDBHD/USD (real)BHD/EuroBHD/Euro (real)

BHD stronger

100

120

140

160

180

200

220

240

260

100

120

140

160

180

200

220

240

260


Dow Jones Bahrain Index

N.B. Includes both retail and wholesale banks.


8

Kuwait: macro forecastsGrowth to recover further in 2011; fiscal and external positions strong; some upside inflation risks...

• The focus and key to economic growth in

2011, 2012, and beyond is the government’s 5-year

development plan, and the government’s ability to

execute and deliver. In our view the plan is taking

off slowly but surely, more so when it comes

to the more traditional types of projects: roads,

bridges, cities, hospitals, airports, etc..

• The KD 31 billion plan (which has 4 years

left to run) calls for the spending of KD 5 billion

on infrastructure in the current fiscal year, rising to

KD 7-8 billion in 2011 and later years (these will

roughly be split 40/60 between on and off-budget).

These numbers should boost the rate of growth

significantly, even if, as we expect, the actual

execution rate will fall well short of 100%. The KD

31 billion is equivalent to the size of 2009 GDP.

• Our forecast for real GDP growth stands

at 4.5% for 2011 as oil output pushes higher, the

recovery from the world recession continues and

Kuwait moves ahead with its mega projects plans.

(Charts 19 and 20.) While the non-hydrocarbon

sector outperformed in 2010 (+3.5%), the two

should be back in balance in 2011. Further out in

time, and especially if the 5-year plan is executed

faithfully in a qualitative sense, the growth of the

non-hydrocarbon sector should overtake growth

in the oil sector. The plan is indeed structured to

diversify the economy and its growth prospects

away from hydrocarbons. In fact, the new projects

are about 25% in the oil sector and 75% in non-oil.

Kuwait forecast summary2010e 2011f



• Construction and banks are expected to

be the first sectors to benefit from the new

plan. However, many peripheral sectors - business

services, legal services and logististics - should pick

up as well, while the health and education sectors

are likely to be later beneficiaries of current and

subsequent plans.

• Consumer price inflation stood at an

average of 4.0% in 2009 and had a similar

performance in 2010 before an expected uptick

to 4.7% in 2011. (Charts 21 and 22.) Food prices

have risen in the last part of 2010 and have

pressured inflation, especially in emerging market

economies which are performing better than their

advanced counterparts. The food components and

inflation in general bear watching as they could

potentially become a concern.

• Kuwait remains one of the very few countries

worldwide with an extremely strong fiscal position.

It posted its 11th consecutive surplus last year,

with another one expected this year. (Chart 23.)

Thanks to both recent and earlier surpluses, we

estimate that the state has at its disposal well over

KD 90 billion in reserves (including the sovereign

wealth funds), or the equivalent of three times

2009 GDP.

• This strong fiscal position implies, of course,

that financing new government projects and public

spending will not be an issue, at least not in the

medium term. Oil revenues, which account for over

90% of total revenues, are expected to be a steady

source of income as the world economy recovers

and Kuwait expands its capacity (and production).


9

Kuwait: macro forecast charts





(% GDP, fiscal year)


(% y/y) (million barrels per day)

-15

-10

-5

0

5

10

15

20

25

-15

-10

-5

0

5

10

15

20

25

2002 2005 2008 2011F

Oil Non-oil Total

NBKf'casts

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.1

2.2

2.3

2.4

2.5

2.6

2.7

Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18


Food (18%)

Housing (27%)

Total CPI

0

2

4

6

8

10

12

0

2

4

6

8

10

12

2002 2005 2008 2011F

NBKf'casts

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

2002 2004 2006 2008 2010F

NBKf'casts

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2002 2004 2006 2008 2010F

$ billions% of GDP

NBKf'casts


10

Kuwait: money and financeVirtually no credit growth in 2010 except for the household/consumer sector; recent signs of revival in business credit bode well for 2011...

• The M1 money supply measure (shorter-term

liquidity) grew 16.3% in 2010 (Dec/Dec, chart 25.)

Liquidity has been plentiful in the system as the

authorities have made sure that large government

and semi-government deposits were adequate. Also,

the very soft state of credit demand has not put a

strain on the available liquidity. Weak loan demand

has also translated into soft deposit creation, which

explains the much slower growth in the broader

aggregate M2. M2 was up only 2.4% (y/y) last

year.

• 2010 was a year of very slow credit growth.

We closed the year with bank credit growth of

only 0.4% (chart 26.) The household/consumer

sector led credit growth and closes the year at

3.6% growth. Business credit underperformed,

held back by declines in real estate and stock-

related lending. Also, this past summer, the sale

of Zain’s African assets and the subsequent

distribution of a large amount of cash to investors

led to some significant debt pay downs.

• Later in the year, as business confidence

built after the passage of the government’s 5-year

development plan, we witnessed firmer demand for

industrial, trade and construction loans. Those do,

however, have more to go to post a solid recovery

next year. Those also happen to be the sectors

where loans are 50% guaranteed by the government

under the financial stability law of 2009. We think,

however, that the impact of the law in spurring

demand was marginal in most cases. The recent

and upcoming tendering and awarding of large 5-

year plan projects, begun in 2009, is expected to

shore up credit demand into 2011.

• The slow growth in bank credit was in

part due to the aftermath of the financial crisis:

stricter regulation and cautious businesses. From

a sentiment perspective, it is only recently that

the government’s 5-year plan is starting to gain

credibility and to affect perhaps credit demand.

In that light, the banks were awash in liquidity in

2010. They added 2.6% to their assets or a little

over KD 1 billion, up to KD 41.4 billion. Most of

that addition was in the form of liquid assets,

deposits with the central bank (CBK), and CBK

bonds (Chart 27.)

• In February of 2010 the CBK cut its leading

rate, the discount rate, to a record low 2.50%.

(Chart 28.) That brought down commercial lending

rates. In other moves, the CBK appeared to be

less aggressive in its demands on banks to take

additional provisions, as the situation was well

improved in 2010. Back in 2009, the CBK started

requiring regular stress tests.

• The Kuwaiti dinar, which is tied to a basket

of currencies, appreciated slightly on average in

2010. It was up 1.6% against the USD, 12.3%

versus the EUR in 2010. The small change masks

the (moderate) volatility seen in 2010 when the

USD and the Euro traded places exhibiting strength.

The dinar averaged USD 3.56 in December (USD

3.48 for the whole year, Chart 29.)

• Equities closed 2010 with a strong

performance, with both emerging and GCC markets

doing well. Though the KSE price index was off for

the year, down 0.7%, however the more important

and reliable value-weighted-index was up 25.8%.

(Chart 30.)


11

Kuwait: money and finance charts

Chart 25. Money supply Chart 26. Total bank credit




(%)

(% y/y) (% y/y)

-10

-5

0

5

10

15

20

25

30

-10

-5

0

5

10

15

20

25

30

Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11

M1

M2

0

5

10

15

20

25

30

35

40

25

30

35

40

45


Bank assets (KD bn, LHS)

Bank assets (% y/y, RHS)

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7


US fed funds target

KD repo

KD discount

0.20

0.25

0.30

0.35

0.40

0.45

0.20

0.25

0.30

0.35

0.40

0.45


KD/USD KD/USD (real)KD/Euro KD/Euro (real)

200

300

400

500

600

700

800

900

4000

6000

8000

10000

12000

14000

16000

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

KSE General Index (LHS)

Value Weighted Index (RHS)

N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon Kwt/US/Euro area CPIs.

-5

0

5

10

15

20

25

30

35

40

-5

0

5

10

15

20

25

30

35

40



12

Oman: macro forecastsGrowth to remain solid and broad-based in 2011; hydrocarbon output continues to rise...

• The Omani economy is expected to grow

by around 5% per year in both 2010 and 2011,

slightly above the rate expected in most other

GCC economies (Qatar is the exception). (Chart

31.) Growth in 2011 will be fairly broad-based,

benefiting from higher government spending – both

in the oil sector and the non-oil sector under

the first year of the 8th five-year development

plan – as well as private sector investment in

the infrastructure, industry and tourism sectors.

Financing conditions should be comfortable in light

of Oman’s fairly resilient banking sector.

• Hydrocarbon production has been in

expansion mode since 2008, reversing a multi-year

decline. Real hydrocarbon output is expected to

have risen some 6% in 2010, reflecting significant

increases in oil output as a result of a heavy

investment program and enhanced oil recovery

techniques at Oman’s aging oil fields. (Chart 32.)

Moreover, gas output is expected to have risen as

majority state-owned Petroleum Development Oman

seeks to fast-track production in order to alleviate

local shortages. 2011 should see further, albeit

more modest, increases in output. Real hydrocarbon

sector output is forecast to rise 4%.

• Real non-oil GDP is forecast to grow by 5%

in 2011, similar to the 4.5% expected in 2010.

Rising oil prices, recovering bank lending conditions,

increased public spending on infrastructure and

Oman forecast summary2010e 2011f



improved access to gas feedstock for industry are

all benefiting the growth outlook. The government’s

8th 5-year plan (2011-15) targets improvements

in the manufacturing sector, SMEs, non-oil exports

and ‘balanced’ real GDP growth of not less than 3%

per year. Barring a recession, this target should be

comfortably achieved.

• Consumer price inflation is expected to

have averaged 3.3% through 2010. However, it

accelerated through the year from 1.7% in January

to 4.2% by October. (Chart 33.) The increase in

inflationary pressures stemmed mainly from rising

food prices, driven by the rise in global commodity

prices. The food component has a weight of some

30% in the Omani CPI – the highest in the region –

and so has a marked impact on the overall inflation

rate. In most other areas, inflationary pressures

have been fairly mild. But rising food prices are still

likely to see inflation accelerate through the first

half of 2011, and average 5% for the year as a

whole. (Chart 34.)

• Although government spending could rise

by 7-10% in both 2010 and 2011, higher oil

production and prices mean that the government’s

fiscal position is likely to be more buoyant than

previously expected. We project a budget surplus of

6% of GDP in 2010 and 8% of GDP in 2011. (See

chart 35.) This comfortable position may be masked

in the official numbers, however, by transfers to

the state sovereign reserve funds, which can vary

in size from year to year. Meanwhile, the current

account balance should also see decent surpluses in

2010 and 2011, as the impact of high oil prices on

export revenues offsets strong growth in imports.

(Chart 36.)


13

Oman: macro forecast charts





(% GDP)



0.660.680.700.720.740.760.780.800.820.840.860.880.90

0.660.680.700.720.740.760.780.800.820.840.860.880.90

Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10

-10

-5

0

5

10

15

20

25

-10

-5

0

5

10

15

20

25

Jan-07 Jan-08 Jan-09 Jan-10

Food (30%)

Housing (21%)

Total CPI

-2

0

2

4

6

8

10

12

14

-2

0

2

4

6

8

10

12

14

2002 2004 2006 2008 2010

NBKf'cast

-2024681012141618

-202468

1012141618

2002 2004 2006 2008 2010

$ billions

% of GDPNBKf'cast

N.B. Headline figure is not forecast, since it includes discretionary government transfers to the state reserve funds

-10

-5

0

5

10

15

20

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010

Oil Non-oil Total

NBKf'cast

N.B. Includes condensate production

-2024681012141618

0

2

4

6

8

10

12

14

16

18

2002 2004 2006 2008 2010e

Headline figure

Before transfers to state reserve funds

NBKf'cast

N/A

N/A


14

Oman: money and financeBank lending begins to revive, helped by government spending; stock market edged higher in 2010...

• Oman’s financial system weathered the

global financial crisis as well as any in the Gulf

region. Key to this was its relatively straightforward

banking system, which is dominated by traditional

banks (focused on customer and government

deposit taking, corporate and retail lending) with

relatively small investment portfolios and modest

utilization of volatile wholesale and foreign funding.

These structural features helped limit investment

losses, stem liquidity issues, and prevent any major

rise in non-performing loans (NPLs).

• Monetary growth did, however, decelerate

sharply during 2008 and early 2009, as economic

performance dipped and liquidity conditions

tightened. (Chart 37.) In fact, the decline in

the growth of M1 was as marked as any other

country in the Gulf. Annual growth in broader

money, however, held up fairly well and has been

consistently in the 5-10% range for the past year or

so. Note that as a share of GDP, the total stock of

money in Oman is the lowest in the Gulf, so there

may be a tendency for it to grow relatively quickly

in the future.

• Despite the reasonable financial position of

many banks and decent rates of economic growth,

growth in bank lending slowed dramatically through

2009, and was in fact non-existent through much

of the year. (Chart 38.) It rose through 2010,

however, and accelerated to an annualized rate of

15% in the three months to October. In addition,

lending to public enterprises surged by 68% in

the year to October, providing evidence of support

to the banking sector from higher government

spending.

• Growth in commercial bank assets has

recovered even more strongly than lending, and

was up 12% in the year to October. (Chart 39.)

One component of balance sheet growth in 2010

was an increase in bank holdings of securities

(particularly domestic securities), including holdings

of certificates of deposit (CDs) issued by the

Central Bank of Oman (CBO).

• Because of the exchange rate peg to the

US dollar, Omani monetary policy is typically driven

by corresponding policy changes in US. The CBO

uses a repurchase rate to inject funds into the

money market and this rate has been at 2% since

the beginning of 2009. (Chart 40.) To absorb

liquidity, the CBO issues CDs. The rates on CDs

have remained very low – close to zero - despite the

increase in issuance this year.

• The Omani rial has been pegged at a fixed

rate of OR 0.345 per US dollar since 1986. Despite

opting to remain outside of the proposed Gulf single

currency bloc, there is no sign that the authorities

want to move to a more independent monetary or

exchange rate policy. Along with other pegged GCC

currencies, the rial strengthened versus the euro

in the first half of 2010, but has given up all of

this ground since, as the US dollar has weakened.

(Chart 41.) Note that despite being stable in

nominal terms, the rial has appreciated by 9% in

real terms against the dollar over the past 3 years.

• The Omani stock market has performed

quite strongly over the past 2 years compared to

some of its neighbors. The main price index is up

50% from its low of March 2009, and rose by 6%

in 2010. (Chart 42.)


15

Oman: money and finance charts

Chart 37. Money supply Chart 38. Bank credit to private sector




(MSM 30 index)

(%)

(% y/y) (% y/y)

-10

0

10

20

30

40

50

60

70

-10

0

10

20

30

40

50

60

70


M1

M2

0

10

20

30

40

50

60

0

10

20

30

40

50

60


051015202530354045505560

6

8

10

12

14

16

18


Bank assets (OMR bn, LHS)


0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7


US fed funds target

Oman repo

Oman CDs

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65


OMR/USDOMR/USD (real)OMR/EuroOMR/Euro (real) OMR stronger

4000

5000

6000

7000

8000

9000

10000

11000

12000

4000

5000

6000

7000

8000

9000

10000

11000

12000


N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon Oman/US/Euro area CPIs.


16

Qatar: macro forecastsFastest growth in GCC; healthy fiscal and external positions; moving out of deflation...

• Fast growth in Qatar is still underpinned

by significant government investment in the gas

sector and infrastructure. The government also

remains committed to diversifying the economy

away from hydrocarbons, and increasing the role

of the private sector. This should help support

Qatar’s medium term growth prospects, and offset

some of the slowdown that could result from the

coming end to LNG-related expansion. The bulk

of LNG projects are due to be completed in 2011

and the moratorium on new gas projects is due to

last until at least 2014. The onus will fall upon the

government to persist in its expansionary measures,

and undoubtedly, hosting the 2022 World Cup will

help drive spending during this period.

• We expect real GDP to expand by 17%

this year and by a further 14% in 2011, following

8.6% growth in 2009. (Chart 43.) Growth will be

led by the gas sector, which will see the final of

the planned LNG trains (QatarGas train 7) come

online in 2011, bringing total LNG production to

the targeted 77 million tonnes per year. This is

approximately 1.9 million barrels of oil equivalent

per day, more than double Qatar’s crude oil output.

(Chart 44.) We assume that real hydrocarbon sector

output rises by 23% this year and 17% in 2011.

• Growth in the non-oil sector is likely to

benefit from the government’s efforts to boost the

private sector and diversify the economy. Over

Qatar forecast summary2010e 2011f


Inflation (yr avg) % -2.8 4.0Budget balance % GDP 12.7 10.0

the medium term, the economy will benefit from

the government’s plan to spend $100 bn over

several years to upgrade and expand the country’s

infrastructure, including on preparations to host the

World Cup. The education, health, financial, housing,

and transportation sectors are set to be among the

main beneficiaries of government spending. We

expect real non-oil GDP growth of 11% in 2010 and

10% in 2011, compared to an average of 13% per

year between 2001 and 2008.

• Qatar saw a heavy bout of deflation in

2009, driven mostly by falling housing rents

(notwithstanding doubts over data accuracy). The

trend has continued in 2010: in the nine months

to October, inflation averaged -2.9%. (Charts 45

and 46.) There are, however, signs that rents are

stabilizing. Moreover, broader conditions - strong

economic growth, improving monetary conditions,

rising food prices and a weak US dollar - look

conducive to a return to inflation next year. We

expect inflation to average 4.0% in 2011.

• Despite a drop in oil prices in 2009, Qatar

was able to pull off a sizeable budget surplus

of 13% of GDP, buoyed by rising investment

revenues. (Chart 47.) Improving hydrocarbon prices

in 2010 and 2011 will support fiscal surpluses to

the tune of 13% and 10% of GDP, respectively,

and in spite of big planned increases in spending.

The budget for FY2010/11 earmarked a 25%

increase in spending. Rising public expenditures

have prompted rising issuance of sovereign bonds,

but Qatar’s overall sovereign debt remains low

at 14% of GDP. Meanwhile, the current account

surplus is expected to improve this year and next

as export prices and volumes pick up. (Chart 48.)


17

Qatar: macro forecast charts





(% GDP)



0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88


-30

-20

-10

0

10

20

30

40

-30

-20

-10

0

10

20

30

40

Q106 Q406 Q307 Q208 Q109 Q409 Q310

Food (13%)

Housing and energy (32%)

Total CPI

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

2002 2004 2006 2008 2010

Oil

Non-oil

Total NBKf'cast

-6-4-20246810121416

-6-4-202468

10121416

2002 2004 2006 2008 2010

NBKf'cast

0

2

4

6

8

10

12

14

16

18

0

2

4

6

8

10

12

14

16

18

2002 2004 2006 2008 2010

$ billions

% of GDP

NBKf'cast

0

5

10

15

20

25

30

0

5

10

15

20

25

30

2002 2004 2006 2008 2010

$ billions

% of GDP

NBKf'cast


18

Qatar: money and financeGovernment borrowing drives growth in credit; stock market remains off its highs….

• Despite a temporary slowdown, the

crisis experienced in other GCC countries never

really materialized in Qatar, thanks largely to the

strong and decisive measures taken by the Qatari

government. Measures included, among others,

direct capital injections in banks, the purchase of

banks’ investment portfolios, and big increases in

government spending. As a result, the slowdown

in activity was only short-lived and recovery is well

on its way.

• Broad money growth dived to -6% in

mid-2009 from record highs of 60% at the onset

of the crisis, driven by a slowdown in credit.

Growth has recovered since, and is now well

above 20%. (Chart 49.) In any case, growth was

expected to slow to more sustainable levels from its

exceptionally fast pre-crisis pace. The growth in M1

has largely mimicked that of broader money despite

experiencing sharper movements. M1 growth fell

to -23% in mid-2009, but rebounded to 20% by

November 2010. Strong money growth is now

being driven by recovering credit.

• Through government intervention, the Qatari

banking sector was spared the large build-up in

provisions seen in other GCC countries, and thus

avoided a deterioration in bottom lines; profits were

up 21% y/y in the first 9 months of 2010. Growth

in bank lending slowed in the first half of 2009, but

has steadily gained pace since and stood at a very

strong 21% by November 2010. It is important to

note, however, that nearly all of the acceleration

in lending growth has come from loans to the

public sector. Those have nearly doubled in size

over the past year. (Chart 50.) By contrast, banks

remain reluctant to lend to the private sector partly

because of a perceived increase in risk. Meanwhile,

bank assets continued to post strong growth,

averaging around 21% y/y for the past 12 months

and financed largely from deposits of local private

companies and institutions. (Chart 51.)

• One of the Qatar Central Bank’s (QCB)

key policy rates – the QMR deposit rate – has

trailed closely the US federal funds rate through

September 2008, and is set mainly to maintain the

exchange rate peg against the US dollar. (Chart

52.) Since then, the QCB has allowed the spread to

widen. The overnight deposit facility rate was kept

at 2% for 27 months, driving a surge in the value of

local bank deposits with the QCB through the QMR

window. In August, the QCB cut its deposit by 50

bps to 1.5%, fearing a wider spread could drive

large speculative inflows. Meanwhile, the main

lending rate has remained unchanged at 5.5%.

• With the Qatari rial pegged to the dollar,

changes in the exchange rate represent mostly

fluctuations in the dollar versus other currencies.

(Chart 53.) After strengthening against the euro in

the first half of the year, the rial weakened some

12% between June and November. Note that unlike

in most other GCC countries, however, deflationary

conditions in Qatar have implied a depreciating real

exchange rate versus other currencies over the

past two years, effectively improving Qatar’s price

competitiveness compared to its level before.

• 2010 was a relatively good year for Qatari

equities. Despite some fluctuations, the Doha

general index gained 24% over the year. (Chart 54.)

The rally in the Doha market was largely led by the

insurance and banking sectors.


19

Qatar: money and finance charts

Chart 49. Money supply Chart 50. Bank credit


Chart 53. Exchange rate Chart 54. Stock market


(%)

(% y/y)

-30

-15

0

15

30

45

60

75

90

-30

-15

0

15

30

45

60

75

90

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

M1

M2

0

10

20

30

40

50

60

70

80

50

100

150

200

250

300

350


Public sector (QAR bn, LHS)

Private sector (QAR bn, LHS)

Total credit (%y/y, RHS)

0

10

20

30

40

50

60

70

80

90

150

200

250

300

350

400

450

500

550

600


Bank assets (QAR bn, LHS)


0

1

2

3

4

5

6

0

1

2

3

4

5

6

Jan-07 Dec-07 Nov-08 Oct-09 Sep-10

US fed funds target

QMR deposit rate

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0


QAR/USDQAR/USD (real)QAR/EuroQAR/Euro (real)

QAR stronger

300040005000600070008000900010000110001200013000

150

200

250

300

350

400

450

500

550


Market cap. (QAR bn, LHS)

Qatar exchange index (RHS)

N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon Qatar/US/Euro area CPIs.


20

Saudi Arabia: macro forecastsNon-oil sector set to grow at a steady pace; high oil prices generate budget surpluses in 2010 and 2011...

• A combination of timely government support

and a swift rebound in oil prices helped the Saudi

economy recover quickly from the global financial

crisis. Real GDP rose 0.6% in 2009, a respectable

performance in light of falling output elsewhere in

the Gulf. (See chart 55.) And this came despite

a hefty 8% decline in hydrocarbon sector output,

linked to OPEC-driven cuts in crude oil production.

(See chart 56.) Real growth is likely to have

rebounded to a solid 4.2% in 2010 and may see a

similar increase this year.

• The key to the non-oil economy’s strong

performance is the government’s USD 386 billion

public sector investment program, which focuses on

the housing, transportation and education sectors.

The plan runs from 2010 to 2014, with the

total spending package equivalent to the country’s

entire GDP in 2009. This, in combination with the

government’s ongoing economic reform package

aimed at lifting competitiveness, provides a helpful

short and medium-term impetus for the Saudi

economy. Government stimulus will also buy the

private sector more time to regain its footing.

• The hydrocarbon sector remains key to the

economy’s long-term wealth-generating potential.

The government completed a multi-billion dollar

round of upgrades to the sector in 2009, which

saw crude production capacity rise by 1.5 mbpd

to 12.5 mbpd. Since output is currently at 8.2

KSA forecast summary2010e 2011f



mbpd, there is plenty of spare capacity, providing

scope for fast growth in this sector over the next

couple of years if global oil demand dictates it. But

we assume that real hydrocarbon sector output

(excluding refining and gas processing) rises by 5%

in 2011, as high oil prices trigger OPEC production

increases.

• Inflation remained high in 2010 - having

climbed to 6.1% in August – and could now be back

on policy makers’ radar screens. (Chart 57.) Rising

food prices – linked to rising global commodity

prices – are taking over from housing costs as a key

source of inflationary pressure. Further increases in

food prices and relatively strong economic growth

rates could push inflation slightly higher through

2011. (Chart 58.) But monetary conditions do

not yet look consistent with the types of higher

inflation rates seen in 2007.

• Falling oil revenues and higher government

spending pushed the budget into a deficit of 6.1%

of GDP in 2009. But provisional figures show that

it bounced back to +7% of GDP in 2010, buoyed

by a big increase in oil revenues and a smaller than

expected increase in spending of around 5%. (Chart

59.) A 7% budget-on-budget spending increase

has been announced for this year as part of the

government’s medium-term investment plans. But if

oil prices average around USD 90 pb in 2011, the

government could see an even bigger surplus than

last year.

• The current account position also remains

strong, having been in surplus for eleven successive

years. 2010 and 2011 are both likely to see

moderate-sized surpluses. (Chart 60.)


21

Saudi Arabia: macro forecast charts





(% GDP)



-10

-5

0

5

10

15

20

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010

Oil Non-oil Total

NBKf'cast

7.67.88.08.28.48.68.89.09.29.49.69.8

7.67.88.08.28.48.68.89.09.29.49.69.8


-202468101214161820

-202468

101214161820


Food (26%)Housing (18%)Total CPI

012345678910

0123456789

10

2002 2004 2006 2008 2010

NBKf'cast

-10

-5

0

5

10

15

20

25

30

35

-10

-5

0

5

10

15

20

25

30

35

2002 2004 2006 2008 2010

NBKf'cast

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

2002 2004 2006 2008 2010

$ billions

% of GDP

NBKf'cast


22

Saudi Arabia: money and financeBank credit beginning to revive on the back of government stimulus, improved confidence...

• Despite sustaining relatively strong rates of

economic growth, annual growth in broad money

has slowed considerably over the past year and

now stands at around 4%. (Chart 61.) This is

weaker than some estimates of non-oil GDP growth

in the Saudi economy. In part, the slowdown is a

natural readjustment from the very rapid increases

seen in previous years, and a reflection of a now

much weaker credit environment. Yet it is also

noticeable that growth in the narrower definition of

money – M1 – remains elevated. This may reflect

a compositional change in the structure of money

holdings: a rising preference for liquid funds over

longer-term deposits (with current low returns).

• There are signs that the cycle in bank

lending is turning the corner. Having more or less

stagnated through 2009, private sector credit rose

by 5% in the first 11 months of 2010. (Chart

62.) This turnaround likely reflects the effects of

government fiscal policy in supporting demand,

combined with ample liquidity within the banking

system and improved confidence amongst banks.

Loan growth is likely to recover at a gradual pace,

however, given continued caution in extending

credit to the corporate sector. Moreover, there is

scope for project-related spending to be financed

through direct government loans, thereby reducing

the amount of financing required from banks.

• Commercial banks’ total assets edged higher

for most of 2010, save the usual summer-related

slowdown. (Chart 63.) But growth remains very

subdued, mostly a function of the weak loan

growth described above. Over the past year, banks

have generally cut their holdings of reserves at the

central bank, which could be a sign of declining

risk aversion (though some of this may simply

have been diverted into government treasury bills).

On the other side, despite progress in cleaning up

banks’ balance sheets, elevated levels of loan loss

provisions have continued to affect both earnings

and the near-term appetite for faster lending

growth.

• The Saudi Arabian Monetary Agency’s

(SAMA) main policy lending rate – the repo rate

– was cut sharply over time from 5.5% to 2% during

the financial crisis, albeit long after the US Federal

funds rate had been cut to those levels. (Chart 64.)

With the economy growing steadily, bank lending

conditions improving and inflationary pressures on

the rise, pressures for monetary tightening could at

some stage re-emerge. Other interest rates within

the system – such as interbank rates and t-bills

– remain very low at under 1%.

• In maintaining the exchange rate peg against

the US dollar, the riyal softened around 17%

against the euro in 2H 2010. (Chart 65.) This

may be contributing to inflation, with the weaker

exchange rate driving up the price of imported

goods. Over the past three years, however, the

rial has strengthened by some 18% versus the

euro in real terms, thanks largely to higher relative

domestic prices. The impact of this on the Saudi

economy’s competitiveness may nevertheless have

been offset by economic reforms and improvements

in productivity.

• The Saudi Tadawul All Share Index enjoyed

a rise of 28% through 2009. (Chart 66.) In 2010,

the index climbed 8%, despite some volatility during

the year.


23

Saudi Arabia: money and finance charts

Chart 61. Money supply Chart 62. Bank credit to the private sector




(All share index)

(%)

(% y/y) (% y/y)

0

5

10

15

20

25

30

0

5

10

15

20

25

30


M1

M3

-5

0

5

10

15

20

25

30

35

40

-5

0

5

10

15

20

25

30

35

40


0

5

10

15

20

25

30

35

40

800

900

1000

1100

1200

1300

1400

1500


Bank assets (SAR bn, LHS)


0

1

2

3

4

5

6

0

1

2

3

4

5

6


KSA repo

US fed funds target

3.0

3.5

4.0

4.5

5.0

5.5

6.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0


SAR/USDSAR/USD (real)SAR/EuroSAR/Euro (real)

SAR stronger

4000

5000

6000

7000

8000

9000

10000

11000

12000

4000

5000

6000

7000

8000

9000

10000

11000

12000


N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon KSA/US/Euro area CPIs.


24

UAE: macro forecastsGrowth to remain below trend in 2011; fiscal and external positions are comfortable; inflation to remain low...

• Weaknesses in the finance, real estate, and

construction sectors are likely to linger, providing

a continued drag on economic growth over the

next couple of years. This will limit any momentum

gained from stronger growth in the world economy

in areas such as trade, tourism and business

services. Meanwhile, we remain cautious about the

prospect of fiscal policy in Abu Dhabi providing a

major boost to growth in the UAE overall given the

lack of any concrete published spending plans, the

possibly high import content of additional spending

and contractionary fiscal policy in Dubai.

• Growth is likely to remain somewhat below

trend. We expect real GDP to expand by 3.6%

in 2011 after rising by 2% in 2010. (Chart 67.)

Growth will be led by the hydrocarbon sector,

which will revive as some of the exceptional OPEC-

driven cuts in crude output of the past two years

are reversed. (Chart 68.) We assume that real

hydrocarbon sector output (excluding refining and

gas processing) rises by 5% this year following

growth of 2% in 2010. The sector accounts for

around one-third of real GDP (at 2000 prices).

• Growth in the non-oil sector is likely to

remain well below par for the reasons described

above. We expect real non-oil GDP growth of

2.0% in 2010 and 3.0% in 2011, compared to the

average of 13% per year seen between 2001 and

UAE forecast summary2010e 2011f



2008. Within the overall total, it seems possible

that Abu Dhabi will expand at a fairly robust rate of

4-5% per year. But growth in Dubai – still burdened

with high debt servicing costs and weak asset

prices - could expand only modestly.

• Consumer price inflation stood at an average

of 0.9% in 2010 – its lowest for at least a decade.

It did, however, pick-up modestly through the year

as a result of rising food prices. (Chart 69.) Given

subpar economic growth and subdued monetary

conditions, broad inflationary pressures are likely

to remain contained through 2011. Although rising

food prices are a continued source of concern,

their impact on inflation is likely to be offset by

weak housing rental costs, which are of much

greater importance for the overall CPI. We expect

inflation to average 3.0% in 2011. A further

weakening of the US dollar – to which the dirham

is pegged – provides one risk to this outlook.

• The fiscal position of the UAE remains fairly

comfortable. At face value, 2009 and 2010 may

have seen the UAE record its first budget deficits

since 2003, at 8% and 1% of GDP, respectively.

(See chart 71.) But these figures exclude both the

income received on the government’s vast overseas

assets and profits from the Abu Dhabi government-

owned oil company, ADNOC. Including these, the

budget may not have seen deficits at all. Higher

oil prices and relatively unchanged spending could

generate a budget surplus of 12% of GDP this year,

at least when off-balance sheet items are included.

The current account position – which has been

consistently strong – should see a similar sized

surplus. (Chart 72.)


25

UAE: macro forecast charts





(% GDP)



-10

-5

0

5

10

15

20

-10

-5

0

5

10

15

20

2002 2004 2006 2008 2010

Oil Non-oil Total

NBKf'cast

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.1

2.2

2.3

2.4

2.5

2.6

2.7


-4

-2

0

2

4

6

8

10

-4

-2

0

2

4

6

8

10

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Food (14%)

Housing (39%)

Total CPI

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

2002 2004 2006 2008 2010

NBKf'cast

-15

-10

-5

0

5

10

15

20

25

30

-15

-10

-5

0

5

10

15

20

25

30

2002 2004 2006 2008 2010

Headline figure

Incl inv inc & ADNOC profits

NBKestimates/forecast

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

45

2002 2004 2006 2008 2010

$ billions

% of GDP

NBKf'cast


26

UAE: money and financeGrowth in bank credit still subdued but may soon turn the corner; stock market levels off after 1Q10 gains...

• Although no longer in crisis mode,

conditions in the UAE financial sector remain

somewhat strained. The USD 14 billion debt

rescheduling agreement between Dubai World and

its creditors in 2010 provided some much needed

clarity for the financial sector. But uncertainty still

surrounds ‘Dubai Inc’s’ ability to repay as well as

the need for other corporate restructurings.

• Annual growth in broad money slowed to

around 5% from the middle of 2010 after averaging

9% through 2009. (Chart 73.) The slowdown

reflects a continued adjustment to a weaker loan

growth environment as well as stagnant foreign

capital inflows. The growth in M1 – a measure of

shorter-term liquidity – dropped to as low as 2%

after accelerating to 10% early last year. Indeed,

M1 fell by 2% in 3Q10 compared to the previous

quarter.

• This latest fall could just reflect seasonal

factors: activity measures often dip sharply during

the summer months. But there had also been a

concern that liquidity at banks was tightening again,

with banks chasing deposits more aggressively.

Interbank rates in the UAE remain well above

those in Saudi Arabia, for example. Nevertheless,

market liquidity is expected to gradually improve

over coming months, partly reflecting increased

confidence following the Dubai World debt

restructuring agreement.

• Bank loan growth has slowed dramatically

over the past two years and even turned negative in

mid-2010. (Chart 74.) The reasons are both on the

demand side – population outflows, cancellation of

capital spending, no or slow income growth – and

on the supply side – stricter lending criteria, high

loan-to-deposit ratios and more difficult funding

conditions. Banks are also still in the process of

rebuilding their balance sheets, with provisions

(general and specific combined) rising 33% in the

year to November. A notable part of the 5% growth

in bank assets seen over the past year has come

from an increase in overseas assets. (Chart 75.)

• The Central Bank of the UAE’s main policy

lending rate – the repo rate – remains at 1%, just

above the 0.25% US Federal funds rate that it has

tended to track in the past. (Chart 76.) It is unlikely

that further cuts in the repo rate would do much

to stimulate loan growth given the constraints

described above, and in any case, interest rates are

set to maintain the exchange rate peg against the

US dollar, not to directly control credit growth.

• Despite weakening versus the euro through

2H 2010, the dirham remains close to its level of

the beginning of 2010 and to its average level of

the past three years (with fluctuations in between).

(Chart 77.) These movements reflect changes in

USD/EUR. However, the dirham is below its average

level of EUR 1=AED 3.8 of the first half of the

past decade, reflecting the dollar’s general decline.

Note that in real terms (i.e. adjusting for inflation

in different countries) the dirham is 2-3% stronger

than in nominal terms, relative to January 2008

levels. This reflects faster rises in domestic prices

than prices abroad over the period.

• 2010 was a disappointing year for UAE

equities, with the main Dubai index dropping 10%.

(Chart 78.) Weak real estate markets and high debt

levels continue to weigh on the market.


27

UAE: money and finance charts

Chart 73. Money supply Chart 74. Bank claims on private sector




(%)

(% y/y) (% y/y)

-20

-10

0

10

20

30

40

50

60

70

-20

-10

0

10

20

30

40

50

60

70


M1

M2

-10

0

10

20

30

40

50

60

70

-10

0

10

20

30

40

50

60

70


0510152025303540455055

800900

100011001200130014001500160017001800


Bank assets (AED bn, LHS)


0

1

2

3

4

5

6

0

1

2

3

4

5

6


US fed funds target

UAE repo

3.0

3.5

4.0

4.5

5.0

5.5

6.0

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11

AED/USDAED/USD (real)AED/EuroAED/Euro (real)

AED stronger

0

1000

2000

3000

4000

5000

6000

0

1000

2000

3000

4000

5000

6000


Abu Dhabi Securities Market

Dubai Financial Market

N.B. Real exchange rate uses Jan 2008 as base period. Calculation based upon UAE/US/Euro area CPIs. Not available before 2008.

N.B. Excludes official entities and non-bank financial institutions. Private sector accounts for around 75% of all domestic claims.


28

Regional macroeconomic data and forecasts

Unit 2006 2007 2008 2009 2010e 2011fBahrainNominal GDPNominal GDP $ bn$ bn 15.815.8 18.418.4 22.122.1 19.319.3 21.521.5 23.723.7Nominal GDPNominal GDP %y/y%y/y 17.817.8 16.516.5 19.919.9 -12.8-12.8 11.811.8 9.89.8Real GDPReal GDP %y/y%y/y 6.76.7 8.48.4 6.36.3 3.13.1 4.04.0 4.84.8- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y -1.0-1.0 1.11.1 0.40.4 -0.3-0.3 0.00.0 3.03.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 8.18.1 9.69.6 7.27.2 3.63.6 4.54.5 5.05.0Budget balanceBudget balance % GDP% GDP 4.74.7 3.13.1 6.66.6 -6.1-6.1 -0.7-0.7 -1.2-1.2Current account balanceCurrent account balance % GDP% GDP 13.813.8 15.715.7 10.210.2 2.92.9 5.05.0 5.55.5Consumer pricesConsumer prices % y/y% y/y 2.12.1 3.33.3 3.53.5 2.82.8 2.02.0 3.03.0BHD/USD (end year)BHD/USD (end year) -- 0.3770.377 0.3760.376 0.3770.377 0.3770.377 0.3770.377 --Repo rate (end year)Repo rate (end year) %% N/AN/A 5.255.25 2.752.75 2.252.25 2.252.25 --KuwaitNominal GDPNominal GDP $ bn$ bn 101.6101.6 114.6114.6 148.8148.8 109.5109.5 129.3129.3 142.8142.8Nominal GDPNominal GDP %y/y%y/y 24.924.9 10.610.6 22.722.7 -21.2-21.2 18.118.1 10.510.5Real GDPReal GDP %y/y%y/y 5.25.2 4.44.4 3.13.1 -2.9-2.9 3.03.0 4.54.5- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y 2.72.7 -2.7-2.7 1.71.7 -10.0-10.0 2.22.2 4.14.1- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 7.07.0 9.29.2 4.04.0 1.41.4 3.53.5 4.74.7Budget balanceBudget balance % GDP% GDP 17.717.7 28.628.6 6.96.9 20.420.4 15.015.0 13.013.0Current account balanceCurrent account balance % GDP% GDP 44.644.6 36.836.8 40.540.5 25.625.6 34.834.8 40.640.6Consumer pricesConsumer prices % y/y% y/y 3.03.0 5.55.5 10.610.6 4.04.0 4.04.0 4.74.7KWD/USD (end year)KWD/USD (end year) -- 0.2890.289 0.2730.273 0.2760.276 0.2870.287 0.2870.287 --Repo rate (end year)Repo rate (end year) %% 6.256.25 6.256.25 3.753.75 3.003.00 2.502.50 --OmanNominal GDPNominal GDP $ bn$ bn 36.836.8 41.941.9 60.260.2 46.846.8 56.256.2 64.364.3Nominal GDPNominal GDP %y/y%y/y 19.119.1 13.913.9 43.943.9 -22.3-22.3 20.020.0 14.614.6Real GDPReal GDP %y/y%y/y 5.55.5 6.76.7 12.812.8 1.11.1 5.05.0 4.74.7- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y -4.4-4.4 -5.0-5.0 7.67.6 6.26.2 6.06.0 4.04.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 11.311.3 12.612.6 15.115.1 -0.9-0.9 4.54.5 5.05.0Budget balanceBudget balance % GDP% GDP 13.513.5 8.18.1 13.013.0 0.60.6 6.06.0 8.08.0Current account balanceCurrent account balance % GDP% GDP 15.415.4 5.95.9 8.38.3 -0.6-0.6 5.05.0 7.07.0Consumer pricesConsumer prices % y/y% y/y 3.23.2 5.95.9 12.512.5 3.53.5 3.33.3 5.05.0OMR/USD (end year)OMR/USD (end year) -- 0.3850.385 0.3850.385 0.3850.385 0.3850.385 0.3850.385 --Repo rate (end year)Repo rate (end year) %% 6.346.34 6.026.02 1.971.97 2.002.00 2.002.00 --QatarNominal GDPNominal GDP $ bn$ bn 60.560.5 80.880.8 110.8110.8 98.398.3 114.5114.5 133.6133.6Nominal GDPNominal GDP %y/y%y/y 40.640.6 33.533.5 37.137.1 -11.2-11.2 16.416.4 16.816.8Real GDPReal GDP %y/y%y/y 18.618.6 26.826.8 25.425.4 8.68.6 17.017.0 13.713.7- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y 14.314.3 23.323.3 23.123.1 7.77.7 23.023.0 17.017.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 23.723.7 30.630.6 27.827.8 9.69.6 11.011.0 10.010.0Budget balanceBudget balance % GDP% GDP 8.68.6 11.311.3 10.410.4 13.013.0 12.712.7 10.010.0Current account balanceCurrent account balance % GDP% GDP 15.615.6 12.912.9 12.812.8 8.58.5 10.810.8 11.311.3Consumer pricesConsumer prices % y/y% y/y 11.811.8 13.613.6 15.215.2 -4.8-4.8 -2.8-2.8 4.04.0QAR/USD (end year)QAR/USD (end year) -- 3.6403.640 3.6393.639 3.6413.641 3.6393.639 3.6393.639 --Deposit rate (end year)Deposit rate (end year) %% 5.155.15 4.004.00 2.002.00 2.002.00 1.501.50 --Saudi ArabiaNominal GDPNominal GDP $ bn$ bn 356.2356.2 385.1385.1 476.3476.3 375.8375.8 453.9453.9 526.5526.5Nominal GDPNominal GDP %y/y%y/y 12.912.9 8.08.0 23.823.8 -21.1-21.1 20.820.8 16.016.0Real GDPReal GDP %y/y%y/y 3.23.2 2.02.0 4.24.2 0.60.6 4.24.2 4.24.2- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y -1.1-1.1 -4.1-4.1 4.34.3 -8.0-8.0 3.03.0 5.05.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 4.94.9 4.34.3 4.24.2 3.63.6 4.54.5 4.04.0Budget balanceBudget balance % GDP% GDP 21.021.0 12.212.2 32.532.5 -6.1-6.1 6.46.4 12.012.0Current account balanceCurrent account balance % GDP% GDP 27.827.8 24.324.3 27.827.8 6.16.1 6.06.0 10.010.0Consumer pricesConsumer prices % y/y% y/y 2.22.2 4.14.1 9.99.9 5.15.1 5.45.4 5.55.5SAR/USD (end year)SAR/USD (end year) -- 3.7503.750 3.7493.749 3.7523.752 3.7513.751 3.7503.750 --Repo rate (end year)Repo rate (end year) %% 5.205.20 5.505.50 2.502.50 2.002.00 2.002.00 --UAENominal GDPNominal GDP $ bn$ bn 175.2175.2 206.4206.4 254.4254.4 216.8216.8 237.5237.5 261.5261.5Nominal GDPNominal GDP %y/y%y/y 27.027.0 17.817.8 23.223.2 -14.7-14.7 9.69.6 10.110.1Real GDPReal GDP %y/y%y/y 13.013.0 6.26.2 7.47.4 -2.7-2.7 2.02.0 3.63.6- Hydrocarbon sector- Hydrocarbon sector %y/y%y/y 13.913.9 7.97.9 9.79.7 -8.0-8.0 2.02.0 5.05.0- Non-hydrocarbon sector- Non-hydrocarbon sector %y/y%y/y 12.612.6 5.45.4 6.36.3 0.00.0 2.02.0 3.03.0Budget balanceBudget balance % GDP% GDP 25.125.1 23.023.0 22.922.9 0.00.0 8.08.0 12.012.0Current account balanceCurrent account balance % GDP% GDP 20.620.6 9.59.5 8.88.8 3.63.6 12.012.0 15.015.0Consumer pricesConsumer prices % y/y% y/y 9.39.3 11.111.1 12.312.3 1.51.5 0.90.9 3.03.0AED/USD (end year)AED/USD (end year) -- 3.6733.673 3.6723.672 3.6733.673 3.6733.673 3.6733.673 --Repo rate (end year)Repo rate (end year) %% N/AN/A 4.254.25 1.501.50 1.001.00 1.001.00 --

International data (end year unless otherwise stated)International data (end year unless otherwise stated)Unit 2006 2007 2008 2009 2010e 2011f

Brent crude oil spot priceBrent crude oil spot price US $ p/bUS $ p/b 60.860.8 95.995.9 44.644.6 79.479.4 91.491.4 90.090.0CRB commodity price indexCRB commodity price index IndexIndex 368.2368.2 427.5427.5 314.7314.7 421.1421.1 519.2519.2 --Eur/USDEur/USD 1$ = 1$ = €€ 0.7580.758 0.6850.685 0.7150.715 0.6990.699 0.7480.748 --US Fed Fund RateUS Fed Fund Rate %% 5.255.25 4.254.25 0.250.25 0.250.25 0.250.25 --World MSCI stock market indexWorld MSCI stock market index IndexIndex 1,1011,101 1,1321,132 678678 833833 898898 --MENA real GDP (IMF)MENA real GDP (IMF) %y/y%y/y 5.85.8 6.06.0 5.05.0 1.81.8 3.93.9 4.64.6World real GDP (IMF)World real GDP (IMF) %y/y%y/y 5.25.2 5.35.3 2.82.8 -0.6-0.6 5.05.0 4.44.4

Souce: ThomsonReuters Ecowin, official sources, and NBK Economic Research. Includes some NBK estimates.Souce: ThomsonReuters Ecowin, official sources, and NBK Economic Research. Includes some NBK estimates.

Head Office

KuwaitNational Bank of Kuwait SAKAbdullah Al-Ahmed StreetP.O. Box 95, Safat 13001Kuwait City, KuwaitTel: +965 2242 2011Fax: +965 2243 1888Telex: 22043-22451 NATBANK

www.nbk.com

International Network BahrainNational Bank of Kuwait SAKBahrain BranchSeef Tower, Al-Seef District 428P.O. Box 5290, ManamaBahrainTel: +973 17 583 333Fax: +973 17 587 111

National Bank of KuwaitBahrain Branch (H.O)GB Corp TowerBlock 346, Road 4626Building 1411P.O. Box 5290, ManamaKingdom of BahrainTel: +973 17 155 555Fax: +973 17 104 860

JordanNational Bank of Kuwait SAKAmman BranchShareef Abdul Hamid Sharaf StP.O. Box 941297Shmeisani, Amman 11194JordanTel: +962 6 560 8800Fax: +962 6 560 8811

Saudi ArabiaNational Bank of Kuwait SAKJeddah BranchAl-Andalus Street, Red Sea PlazaP.O. Box 15385Jeddah 21444, Saudi ArabiaTel: +966 2 653 8600Fax: +966 2 653 8653

LebanonNational Bank of Kuwait(Lebanon) SALBAC BuildingJustinian Street, SanayehP.O. Box 11-5727, Riyad El SolhBeirut 1107 2200, LebanonTel: +961 1 759700Fax: +961 1 747866

IraqCredit Bank of IraqStreet 9, Building 178Sadoon Street, District 102P.O. Box 3420Baghdad, IraqTel: +964 1 7182198/7191944 +964 1 7188406/7171673Fax: +964 1 7170156

EgyptAl Watany Bank of Egypt13 Al Themar StreetGameat Al Dowal AlArabiaFouad Mohie El Din SquareMohandessin, Giza, EgyptTel: +20 2 33388816/33388817Fax: +20 2 33379302

United Arab EmiratesNational Bank of Kuwait SAKDubai BranchSheikh Rashed RoadPort Saeed AreaACICO Business ParkP.O. Box 88867, Dubai UAETel: +971 4 292 9222Fax: +971 4 294 3337

United States of AmericaNational Bank of Kuwait SAKNew York Branch299 Park AvenueNew York, NY 10171USATel: +1 212 303 9800Fax: +1 212 319 8269 United KingdomNational Bank of Kuwait(International) PlcHead Office13 George StreetLondon W1U 3QJ, UKTel: +44 20 7224 2277Fax: +44 20 7224 2101

National Bank of Kuwait(International) PlcPortman Square Branch7 Portman SquareLondon W1H 6NA, UKTel: +44 20 7224 2277Fax: +44 20 7486 3877

FranceNational Bank of Kuwait(International) PlcParis Branch90 Avenue des Champs-Elysees75008 Paris, FranceTel: +33 1 5659 8600 Fax: +33 1 5659 8623

SingaporeNational Bank of Kuwait SAKSingapore Branch9 Raffles Place #51-01/02Republic PlazaSingapore 048619Tel: +65 6222 5348Fax: +65 6224 5438

VietnamNational Bank of Kuwait SAKVietnam Representative OfficeRoom 2006, Sun Wah Tower115 Nguyen Hue Blvd, District 1Ho Chi Minh CityVietnamTel: +84 8 3827 8008Fax: +84 8 3827 8009

ChinaNational Bank of Kuwait SAKShanghai Representative OfficeSuite 1003, 10th Floor, Azia Center1233 Lujiazui Ring RoadShanghai 200120ChinaTel: +86 21 6888 1092Fax: +86 21 5047 1011

NBK Capital

Kuwait NBK Capital 38th Floor, Arraya II BuildingShuhada’a Street, SharqP.O. Box 4950, Safat 13050KuwaitTel: +965 2224 6900Fax: +965 2224 6904 United Arab EmiratesNBK Capital Limited Precinct Building 3, Office 404Dubai International Financial CenterP.O. Box 506506, DubaiUnited Arab EmiratesTel: +971 4 365 2800Fax: +971 4 365 2805

TurkeyNBK CapitalArastima ve Musavirlik ASSUN Plaza, 30th FloorDereboyu Sk. No.24Maslak 34398, Istanbul, TurkeyTel: +90 212 276 5400Fax: +90 212 276 5401

Associates

QatarInternational Bank of Qatar (QSC)Suhaim bin Hamad StreetP.O. Box 2001Doha, QatarTel: +974 4447 3700Fax: +974 4447 3710

TurkeyTurkish BankValikonagl CAD. 7Nisantasi 34371,Istanbul, TurkeyTel: +90 212 373 6373Fax: +90 212 225 0353

© Copyright Notice. Economic Brief is a publication of National Bank of Kuwait. No part of this publication may be reproduced or duplicated without the prior consent of NBK.

While every care has been taken in preparing this publication, National Bank of Kuwait accepts no liability whatsoever for any direct or consequential losses arising from its use. Economic Brief is distributed on a complimentary and discretionary basis to NBK clients and associates. This report and previous issues can be found in the “Reports” section of the National Bank of Kuwait’s web site. Please visit our web site, www.nbk.com, for other bank publications. For further information please contact NBK Economic Research at:Tel: (965) 2259 5500Fax: (965) 2224 6973Email: [email protected]

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