Global Research GCC Economic Overview - GulfBase.com · The GDP growth in GCC countries is expected...

Global Research GCC Economic Overview

1


2

TABLE OF CONTENTS

Global Economy 3

Middle East and North Africa 12

Gulf Cooperation Council 25

Saudi Arabia 34

Kuwait 51

United Arab Emirates 66

Qatar 83

Oman 96

Bahrain 110


3

Global Economic Overview

Growth in US likely to pick up in 2013

Europe expected to contract by 0.25% in 2013

Expansionary fiscal and monetary policies will continue to support growth

GCC countries shine through the global gloomy outlook

Global economy show signs of revival

Global economic growth fell in 2012 as slowing economic activity in emerging markets

added to continued weakness in the Eurozone, the US and Japan. According to the

IMF, the world economy is anticipated to grow by 3.2% in 2012, down from 4.0% in

2011; the figure is also way below the peak 5.4% pre-crisis growth of 2007 and the

5.2% expansion in 2010 immediately following the crisis.

Growth in US likely to pick up in 2013

US fundamentals are improving gradually; real GDP is expected to increase 2.2% in

2012, up from 1.8% in 2011, on the back of higher private consumption, rise in home

purchases, and non-residential investments. Growth is likely to pick up in 2013 aided

by record low interest rates and steady (although moderate) improvement in the

housing and labor markets. In fact, the Fed expects economy to grow by 2.3% to

2.8% in 2013, albeit lower than its December projection of 2.3% to 3.0%.

Europe expected to contract by 0.25% in 2013

The near-term outlook for the euro area has been revised downward, with activity now

expected to contract by 0.25% in 2013, instead of expanding by 0.25% as projected

by IMF earlier. This reflects declines in growth projections across all euro area

countries, with notable revisions in some core members (France, Germany,

Netherlands). Growth will strengthen gradually through the year, reaching 1% by the

fourth quarter, as the pace of fiscal consolidation (at 0.75% of GDP) is eased by

almost half during 2013. But growth will generally remain subdued as improvements

in private sector borrowing conditions are hampered by financial market fragmentation

and ongoing balance sheet repair.

MENA region remain resilient

The MENA region continues its resilient performance amid a difficult global economic

climate. However, the growth prospects in the MENA region remain mixed, as oil-

exporting countries continue to witness strong growth, while the oil-importing

countries face a bleak economic outlook. The MENA region, influenced by the GDP

growth in oil-exporting countries grew by 4.8% in 2012.

GCC countries shine through the global gloomy outlook

GCC countries continued to reap the benefits of high oil revenues, which have led to

increased focus on expansionary fiscal policies. The GDP growth in GCC countries is

expected come in at 5.5% in 2012, led by higher oil production in Saudi Arabia and

Kuwait to compensate for the low supply from Iran. GCC economies are anticipated to

expand by 3.7% in 2013. The oil sector growth is anticipated to increase 4.8% in

2012, while non-oil growth is expected to rise 5.9% in the same year.

Glo

ba

l E

co

no

my

Faisal Hasan, CFA

Head of Research

[email protected]

Phone No:(965) 22951270


4

Global Economic Indicators

2010 2011 2012 2013e 2014e

Nominal GDP (USD bn)

World 63,467.7 70,220.5 71,707.3 74,171.7 77,805.1

Unites States 14,498.9 15,075.6 15,684.7 16,237.7 17,049.0

United Kingdom 2,267.4 2,431.5 2,440.5 2,422.9 2,503.8

Japan 5,495.3 5,897.0 5963.9 5,149.9 5,285.2

Euro Area 12,175.7 13,108.7 12197.5 12,751.9 12,957.9

Emerging market and

developing economies 21,944.3 25,680.6 27,290.2 29,128.8 31,215.7

Sub-Saharan Africa 1,075.4 1,225.2 1,273.4 1,332.7 1,426.1

MENA 2,508.0 2,906.6 3,171.2 3,148.3 3,177.5

Real GDP Growth (%)

World 5.2 4.0 3.2 3.3 4.0

Unites States 2.4 1.8 2.2 1.9 3.0

United Kingdom 1.8 0.9 0.2 0.7 1.5

Japan 4.7 -0.6 2.0 1.6 1.4

Euro Area 2.0 1.4 (0.6) (0.3) 1.1

Emerging market and

developing economies 7.6 6.4 5.1 5.3 5.7

Sub-Saharan Africa 5.4 5.3 4.8 5.6 6.1

MENA 5.5 4.0 4.8 3.1 3.7

Public Debt (% of GDP)

World

Unites States 98.2 102.5 106.5 108.1 109.2

United Kingdom 79.4 85.4 90.3 93.6 97.1

Japan 216.0 230.3 237.9 245.4 244.6

Euro Area 85.6 88.1 92.9 95.0 95.3

Emerging market and



MENA 28.6 25.7 24.7 24.6 24.5

Inflation (%)

World 3.7 4.9 3.9 3.8 3.8

Unites States 1.6 3.1 2.1 1.8 1.7

United Kingdom 3.3 4.5 2.8 2.7 2.5

Japan (0.7) (0.3) 0.0 0.1 3.0

Euro Area 1.6 2.7 2.5 1.7 1.5

Emerging market and



MENA 6.5 9.2 10.7 9.6 9.0

Source: IMF; e – estimated values, a – actual values


5

GLOBAL ECONOMY

Global growth subdued in 2012, as developed economies recover slowly

Global economic growth fell in 2012 as slowing economic activity in emerging markets added to continued

weakness in the Eurozone, the US and Japan. According to the IMF, the world economy is anticipated to grow by

3.2% in 2012, down from 4.0% in 2011; the figure is also way below the peak 5.4% pre-crisis growth of 2007 and

the 5.2% expansion in 2010 immediately following the crisis. The decline in 2012 is estimated to have come on

the back of a recessionary Eurozone where the economy contracted by 0.6% (IMF) in 2012 in contrast to a 1.4%

expansion the previous year. A subdued economic recovery in the US has not helped either; IMF estimates point

to only a marginal upward movement in growth in 2012 (2.2% compared to 1.8% in 2011). Meanwhile, the

emerging market story also lost some of its sheen in 2012. Growth fell sharply in India and Brazil while in China it

became clear that the era of double-digit growth was over as price stability assumed a greater political objective.

Overall, the IMF estimates that emerging and developing economies expanded by 5.1% in 2012, much lower than

the 6.4% expansion recorded in 2011 and way below the 7.6% figure in 2010 and the peak of 8.7% before the

global downturn in 2007.

On a positive note, Sub-Saharan Africa and the Middle East and North Africa region were the two blocs that stood

out in 2012. Sub-Saharan Africa is expected to grow 4.8% in 2012. Global investors are likely to eye the continent

even more as growth moves to a lower sustainable level in Asian and Latin America. Meanwhile, the MENA

region picked up pace over 2011-12 with growth accelerating to 4.8% from 4.0% during the period. However,

much of this upward spike was due to strong growth in oil producers like the Gulf Cooperation Council (GCC) as

they compensated for lower production in others like Libya (due to political strife). The region continues to witness

political turmoil with Egypt in particular suffering from a lack of political reconciliation despite ushering in a new

political system post the Arab Spring.

Global GDP Growth (%) GDP Growth (%) in 2012 in Key Economies

Source: IMF

-6

-4

-2

0

2

4

6

8

10

2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

World Advanced Economies

Eurozone Emerging & Developing

MENA Sub Sahara Africa

2.2

0.9

0.2

7.8

4.0

0.9

5.5

6.2

4.7

6.3

US

Germ

any

UK

Chin

a

India

Bra

zil

GC

C

Indonesia

Kenya

Nig

eria


6

EUROPE

Weaknesses continue to plague economic activity in the Eurozone

Arguably, the Eurozone continues to be the center of global concerns despite bold moves by the European

Central Bank (ECB) to quell banking sector instability and support bond yields for beleaguered sovereigns (like

Italy and Spain). Tough austerity measures enacted across the region have not only resulted in double-dip

recession, but have also brought forth long term concerns like youth unemployment, lack of political cohesion and

rise in extreme ideologies. Most importantly, there are increasing worries about the existence of the Euro itself

with economists questioning the current model of monetary union without adequate fiscal coordination.

Economists will keep their eyes focused on two key developments – the nature of a government emerging in Italy,

and progress on restoring competitiveness across key Eurozone economies. In Italy, the main concern has been

the inconclusive election results. The previous technocratic government of Mario Monti had made a good start by

initiating a combination of austerity and critical structural reforms to restore competitiveness. As a result sovereign

bond yields had fallen with the positive impact spreading to other troubled Eurozone nations (primarily Spain) as

well. However, the story somehow changed post the elections with no clear party in majority and low chances of a

consensus emerging. This has raised the specter of a shift away from critical reforms with markets reacting

negatively. In fact Italian 10-year bond yields rose the most in 14 months on the day of the election results with

Spanish and Portuguese bonds also suffering.

General Government Net Lending (% of GDP) General Government Net Debt (% of GDP)

Source: IMF

Although a new government is likely to be formed soon in Italy, investors would be eyeing the composition of the

likely coalition and its policies. Of particular interest would be any moves to reverse some of the key reforms

initiated by the previous government, especially on labor markets and the large public sector. Any change in

political outlook also has implications for Eurozone (and wider EU) policy coordination. Already, political pressure

has been rising to move away from austerity, with France in particular locking horns with Germany over the latter’s

preference for austerity over growth strategies. Meanwhile, politics seems to rearing its ugly head in other regional

economies as well. Spain is a good example, with confidence in the country still shaky given the recent turmoil

over greater autonomy to provinces, especially the economically important Catalonia region. All these could end

up having a strong impact on fiscal policy across the region thereby easily nullifying the impact of any well-

meaning ECB intervention. In fact, this would end up impacting the ECB’s balance sheet negatively, rendering

-35

-30

-25

-20

-15

-10

-5

0

5

2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

Portugal Ireland Italy Greece Spain

0

20

40

60

80

100

120

140

160

180

200

2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

Portugal Ireland Italy Greece Spain


7

momentum to hawks (like Germany) that are averse to any intervention by the monetary authority to prop up

government finances.

Another key issue facing Eurozone economies is their decreasing competitiveness. This is especially true for

countries like France, which are ceding ground in manufacturing to strong emerging economies. In France, with

left-of-centre François Hollande coming to power, several reform measures (including structural ones to stimulate

competitiveness and immediate ones to spruce up government balance sheets) will be on hold, impacting growth

and investment attractiveness. The effects are already visible, with Moody’s lowering France’s AAA sovereign

rating by a notch (with negative outlook), citing growth concerns and a lack of will to implement strong reforms.

Investors are likely to be wary of this and pressure on French debt could increase this year. The current era of low

French yields seems misleading; low yields are mostly due to high risk perceptions about periphery Eurozone

countries, primarily Greece, Portugal, Ireland, Italy and Spain. If France fails to act on raising competitiveness, it

risks losing ground further, thereby enforcing the concept of a two-paced Eurozone and threatening economic

integration.

Eurozone GDP Growth (%) Eurozone Unemployment (% of Labor Force)

Source: IMF, Eurostat

However, not everything has been negative for the Eurozone. Although strains are high, some of it has dissipated

especially after strong ECB intervention to ensure banking sector stability and support sovereign yields. The ECB

will continue to remain the key organization to install market confidence, as has been proved in 2012. Meanwhile,

among troubled economies, the story emerging from Ireland is encouraging. The country returned to the debt

markets in March 2012 with a EUR5bn 10-year bond issue (at 4.15%). The former Celtic-Tiger also returned to

growth, posting an economic expansion of 0.9% in 2012 although unemployment remains high at about 14.2%.

The country also seems to be on track to lower its fiscal deficit to below 3.0% of GDP by 2015; public debt is set

to peak this year and then edge lower over the coming years as economic activity picks up momentum.

The positive signs from Ireland notwithstanding, Eurozone economic activity will not pick up pace strongly any

time soon. According to IMF, growth in the Eurozone is expected to be negative in 2013, albeit at a lower -0.3%

compared to -0.6% in 2012. However, fortunes could deteriorate if there is a crisis in Italy or the Cyprus bailout

does not take shape (resulting in the latter’s exit from the Eurozone). Germany is likely to be the key for Eurozone

expansion; however, estimates by the IMF point to a low 0.6% expansion in 2013, compared to 0.9% in 2012.

-7

-5

-3

-1

1

3

5

2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

Eurozone France Germany Italy Spain

11.4

5.4

10.2

14.7

10.6

15.7

24.2 25.0

Euro

zone

Germ

any

Fra

nce

Irela

nd

Italy

Port

ugal

Gre

ece

Spain


8

US

US is expected to undergo a slower recovery in 2013

The road to recovery for the US economy seems to be jagged, as the high public debt levels and the subsequent

sequestration process is casting a shadow over future fiscal and monetary policies. The impending budget cuts,

totaling USD85.0bn for 2013 and USD1.2tn over the next decade, across government agencies, as a result of the

sequester, would, no doubt, slow down government spending, but also threaten the fragile economic recovery

process in the US. On the other hand, a high unemployment level has forced the Fed to stay with the ongoing

monetary stimulus, while inflation remains in check. If the recent political indecisiveness that has been plaguing

the US congress any indication of the future course of policy making, the economic outlook for 2013 looks gloomy.

At the start of this year, US lawmakers came together to discuss on a series of measures to strengthen public

finances. The discussions centered on raising revenues while avoiding automatic spending cuts. However, the

deal left several issues unresolved, chief among them being long-term spending cuts (welfare and entitlements)

and the federal government’s debt limit. The latter is particularly contentious, with the President asking for an

unconditional rise (from the current USD16.4tn) and the Republicans unwilling to agree without strong entitlement

reforms. Failure to raise the debt ceiling will mean that the US Treasury will not be able to honor its payment

obligations, severely affecting the global financial system that uses US Treasuries as the benchmarking tool.

However, despite the current political posturing, such a scenario seems unlikely.

Toward the end of March 2013, US senate passed a budget bill to fund the US government until beginning of next

federal budget on 1st of October, a step that averted the risk of shutting down of the government at the end of

month. Once the budget bill is signed into law, the congress will have sufficient time till the end of September to

agree on fiscal budget plan for next year. However, economists and policy makers fear another standoff between

the Republicans and the Democrats on the best possible method to reduce the USD1.0tn budget deficit.

US - Real GDP and Inflation (%) US – Public Debt

Source: IMF, US Office of Management and Budget

On the other hand, the country’s fundamentals are improving gradually; real GDP is expected to increase 2.2% in

2012, up from 1.8% in 2011, on the back of higher private consumption, rise in home purchases, and non-

1.9

-0.3

-3.1

2.4

1.8 2.2

1.9

3.0

3.6 3.4 3.3

-4

-3

-2

-1

0

1

2

3

4

5

2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

Real GDP Growth Inflation

5.6 6.1 6.7

8.0 8.5 8.8

9.3

10.8

12.4

14.2

15.5

16.7 17.6

18.6 19.5

20.5 21.5

54.7

57.1

60.4 67.8

67.4

66.1

66.5 75.5

89.1

98.2

102.5

106.5

108.1

109.2

108.4

107.5

106.9

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

USD tn % of GDP


9

residential investments. Growth is likely to pick up in 2013 aided by record low interest rates and steady (although

moderate) improvement in the housing and labor markets. In fact, the Fed expects economy to grow by 2.3% to

2.8% in 2013, albeit lower than its December projection of 2.3% to 3.0%.

Meanwhile, Fed is likely to keep interest rates at a record low; this is expected to boost both demand and

construction activity. The signs are already visible—the residential construction market is showing signs of revival

(US housing starts rose 27.7% YoY in February 2013). Encouragingly for the Fed, despite the loose monetary

policy, inflationary pressures are likely to remain low. The IMF expects average inflation to fall to 1.8% in 2013

from 2.1% in the previous year. Moreover, the Fed is committed to its policy of buying USD85bn a month of

Treasury bonds and mortgage-backed securities as part of its quantitative easing program, until it sees signs of a

long-term fall in unemployment.

US – Housing Starts (‘000 units) US – Unemployment (%)

Source: U.S. Census Bureau, U.S. Bureau of Labor Statistics

400

600

800

1,000

1,200

1,400

1,600

Jan-2

007

May-2

007

Se

p-2

007

Jan-2

008

May-2

008

Se

p-2

008

Jan-2

009

May-2

009

Se

p-2

009

Jan-2

010

May-2

010

Se

p-2

010

Jan-2

011

May-2

011

Se

p-2

011

Jan-2

012

May-2

012

Se

p-2

012

Jan-2

013 4

5

6

7

8

9

10

Jan-2

007

Apr-

2007

Jul-2007

Oct-

2007

Jan-2

008

Apr-

2008

Jul-2008

Oct-

2008

Jan-2

009

Apr-

2009

Jul-2009

Oct-

2009

Jan-2

010

Apr-

2010

Jul-2010

Oct-

2010

Jan-2

011

Apr-

2011

Jul-2011

Oct-

2011

Jan-2

012

Apr-

2012

Jul-2012

Oct-

2012

Jan-2

013


10

EMERGING AND DEVELOPING ECONOMIES

The likely growth centers

Unlike 2009–10 when emerging markets provided the much needed support to the global economy, 2012 was a

bit of a dampener. China’s growth rate is expected to be 7.8% in 2012, lower than the 9.2% recorded in 2011. For

China, a big setback has been from falling demand in the Eurozone, critical for the country’s famed exports sector

even as restrictive monetary policy over 2011 to tame rising price pressures forced growth into a lower trajectory.

Given this scenario and the prospect of a weak Eurozone recovery, it is imperative that policymakers initiate key

reforms to move to a more domestic consumption driven economic model. Investment which is a critical

component of GDP should also be more of the private-sector induced variety than government and public sector

driven ones (on infrastructure). Encouragingly, there seems to be a greater debate on the above issues in

Chinese policy circles. Perhaps the undertones of a shift in policy are evident from the new GDP growth target of

7.5%, lower than the previous one (8%). Another shift in Chinese policy is the recognition of inflation as a threat to

social stability. Consequently, both the government and the central bank have been proactive in bringing down

inflation to more manageable levels (official target is 3.5%). The minor shifts notwithstanding, Chinese growth is

likely to be strong in 2013 although less than the high double-digit growth of the past decade which the country

was famous for. According to the IMF, GDP growth in the country is expected to rise marginally to 8.0% in 2013

and then hover around the 8.5% mark over the next four years.

GDP Growth (%) in Sub-Saharan Africa GDP Growth (%) in Key Emerging Economies

Source: IMF

Meanwhile, the restrictive monetary policy in India during 2012 and a drift in governance ensured that growth fell

sharply in 2012 from previous highs. The Indian economy expanded 4.0% last year, much lower than the 7.7%

growth recorded in 2011 and way below the 11.2% figure of 2010. On a positive note, the central bank has begun

a nascent shift in monetary policy, cutting its key policy rate by 50 bps this year (two cuts worth 25 bps each) even

though it has warned of a cautious strategy in future given sticky inflation and high fiscal and current account

deficits. Also, a number of key reforms have been initiated by the government since the last quarter of 2012

including approval of FDI in retail and aviation. But, with elections approaching in 2014 the pace of reforms is not

likely to pick up, thereby denting growth. Nevertheless, growth is likely to be higher in 2013 than the previous

year; IMF estimates quote a figure of 5.3% for 2013. Interestingly, the outcome of slowing growth of the two Asian

giants has perhaps been felt the most in commodity markets, which have, in turn, raised growth risks for major

commodity exporters. Australia is a case in point where concerns are now emanating regarding over dependence

-4

-2

0

2

4

6

8

10

12

14

16

2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

Ghana Kenya Nigeria South Africa Uganda

-10

-5

0

5

10

15 2007

2008

2009

2010

2011

2012e

2013e

2014e

2015e

2016e

2017e

Brazil China India Indonesia Russia


11

on commodities (especially demand-dependence on China) at the expense of manufacturing and services,

thereby reducing economic competitiveness.

Meanwhile, a key trait for the global economy has been the emergence of Sub-Saharan Africa as a new source of

global growth. Average annual growth of the region stood at 5.2% over 2007–11, higher than global economic

growth of 3.3% and the 0.8% recorded by advanced economies. Although rich in a wide array of mineral reserves,

issues such as political instability and violence had impeded economic growth and had kept investors away from

the region for long. However, things have been gradually changing over the past decade, with countries improving

their political credentials and governments increasingly focusing on development.

Various governments are charting new growth paths with the help of their rich reserves of resources, including oil

& gas, gold and other minerals. For example, in the West Africa region, Ghana is utilizing its newly discovered oil

& gas resources as well as gold reserves to drive its economy. The country’s GDP grew 14.4% in 2011 from 8.0%

in 2010 after commencement of oil production at a commercial scale. Similarly, in East Africa, Uganda (already a

leading coffee exporter) plans to exploit its oil & gas resources to boost the economy. Development of resources

is allowing the otherwise poor African countries to invest in basic infrastructure and poverty alleviation. This, in

turn, is having a positive spillover effect on other industries such as manufacturing and services. As these trends

continue, the region is expected to become a strong source of growth in 2013 and over the longer term. Due to

lack of opportunities in advanced economies, global investors will be increasingly eying Sub-Saharan Africa,

especially with the IMF expecting the region’s economy to expand at a CAGR of 5.7% over 2013–17.

Uptick in world GDP growth likely

Assuming that US politicians raise the debt ceiling and the Eurozone continues to chug along without breaking up,

global economic growth is likely to pick up pace in 2013, albeit marginally. The IMF expects the global economy to

expand 3.3% in 2013, marginally up from 3.2% this year. Although the pace of expansion is likely to intensify over

the next five years, it is not expected to witness the peak level of 2006–07 (above 5%). In 2013, global growth is

expected to find support from across economic blocs—advanced as well as emerging and developing economies.

Growth in advanced economies is expected to remain low 2013, given that the Eurozone is likely to remain

bogged down by a combination of fiscal consolidation and high unemployment even as the US recovery remains

slow. The IMF forecasts advanced economies to remain constant at 1.2% in 2013, almost unchanged in 2012.

Emerging and developing economies are likely to see fortunes improve in 2013. Aided by uptick in growth in

China, India, Brazil and Sub-Saharan Africa, growth for the bloc is set to rise to 5.3% in 2013 from 5.1% last year.

Growth expectations for Middle East and North Africa (MENA), however, remain subdued. The IMF expects

growth to come in at 3.1% in 2013, down from 4.8% in 2012, before recovering again in 2014. The lower forecast

could be partly due to rising political tensions in the region, especially in Syria, and slowing growth in the GCC due

to slowing oil price growth and a possible stagnation in oil production.


12

Middle East and North Africa (MENA)

MENA’s GDP growth is forecasted to moderate to 3.1% in 2013

Fiscal surplus expected to decline to 4.7% of GDP in 2013

Egypt to remain in limelight amongst the non oil exporting countries of MENA

Accommodative monetary policy keeps MENA economies afloat

MENA's real GDP growth is forecasted to moderate to 3.1% in 2013

MENA’s real GDP expanded by 4.8% in 2012 influenced by the growth in oil-exporting

countries. The real GDP of oil-exporting countries is anticipated to expand by 5.7% in

2012 as compared to 3.9% in 2011. GDP of MENA's oil-importing countries expanded

by 1.9% (lowest in the last three years) in 2012, with high food and fuel prices, low

tourism growth, policy uncertainties, and subdued public expenditure impairing

growth. MENA's GDP growth is forecasted to moderate to 3.1% in 2013, in line with

growth expectations in the region's oil-exporting countries, before recovering to 3.7%

in 2014.

MENA's oil-importing countries expanded by 1.9% in 2012

MENA's oil-importing countries – Djibouti, Egypt, Jordan, Lebanon, Mauritania,

Morocco, Sudan, and Tunisia – are expected to register a modest GDP growth in

2012, following bouts of political uncertainty and a challenging external environment.

GDP expanded by 1.9% in 2012, although higher than 1.4% in 2011, but much lower

than 4.3% in 2010. High food and fuel prices, low tourism growth, policy uncertainties,

and subdued public expenditure impaired the economic growth. Egypt, which

represents nearly half of the GDP size of oil-importing countries, grew 2.2% in 2012

as compared to 1.8% in 2011, with increasing focus on social spending.

Fiscal surplus expected to decline to 4.7% of GDP in 2013

In 2013, fiscal surplus is expected to decline to 4.7% of GDP for the MENA region,

following continued fiscal spending by oil-exporting countries, particularly GCC

countries, to support various planned social expenditures under long-term

development plans of the respective countries. Consequently, fiscal surplus for GCC

countries is expected to moderate to 11.2% of GDP in 2013. Meanwhile, fiscal deficits

for non-GCC oil-exporting countries will deteriorate further to 2.1% in 2013.

Egypt to remain in limelight amongst the non oil exporting countries of MENA

After the Arab spring in Egypt, the new Egyptian government took series of measures

to contain the economic turmoil amongst them in November 2012, the Egyptian

finance ministry unveiled a 10-year economic reform plan aimed at making Egypt a

more democratic country. The most important components of the plan include,

reducing the government’s deficit through two means: reduction in subsidies and

revisions in the current tax regime. The program aims to reduce the fiscal deficit to

10.4% of the GDP during 2012–13, compared to a budget deficit of 10.9% in the

previous year. The reforms also provide for decreasing the fiscal deficit to 8.5% by

end of fiscal 2013–14, as well as reducing the deficit to 5.0% of GDP by end of 2016–

17.

ME

NA

Global Investment House

www.globalinv.net


13

MENA Economic Indicators

2010 2011 2012a/e* 2013e

Nominal GDP (USD bn)

MENA 2,508.0 2,906.6 3,171.2 3,148.3

MENA Oil Exporters 1,837.6 2,236.1 2,427.0* 2,556.7

MENA Oil Importers 670.4 670.5 744.2 591.6

GCC 1,067.8 1,372.1 1,484.6* 1,534.3

Non-GCC Oil Exporters 769.8 864.0 942.4* 1,022.5

Egypt 218.5 235.6 256.7 264.7

Jordan 26.4 28.9 31.2 34.1

Real GDP Growth (%)

MENA 5.5 4.0 4.8 3.1

MENA Oil Exporters 5.3 3.9 5.7 3.2


GCC 5.5 7.5 5.5* 3.7

Non-GCC Oil Exporters 5.1 0.6 7.6* 3.9

Egypt 5.1 1.8 2.2 2.0

Jordan 2.3 2.6 2.8 3.3

Oil GDP Growth (%)

MENA Oil Exporters 4.2 2.6 1.3* (0.2)

GCC 5.2 7.9 4.8* 0.0

Non-GCC Oil Exporters 3.2 (2.4) (2.1)* (0.3)

Non-oil GDP Growth (%)

MENA Oil Exporters 5.5 3.9 4.8* 4.7

GCC 5.2 7.0 5.9* 5.5


Oil & Gas Production (mn b/d)


GCC 21.2 23.8 25.0* 25.1


Oil & Gas Exports (mn b/d)


GCC 14.6 16.5 17.2* 16.8


Fiscal Non-oil Revenue (% of GDP)


GCC 18.3 19.0 20.6 20.2

Non-GCC Oil Exporters 13.1 13.0 13.3 13.1



14

2010 2011 2012a/e* 2013e

Current Account Balance (% of GDP)

MENA 7.7 14.2 12.5 10.8


MENA Oil Importers (3.6) (5.2) (6.9) (5.8)

GCC 14.4 24.1 23.6 21.1


Egypt (2.0) (2.6) (3.4) (3.3)

Jordan (7.1) (12.0) (14.1) (9.9)

Fiscal Balance (% of GDP)

MENA 1.9 6.0 6.3 4.7


MENA Oil Importers` (5.6) (7.5) (8.7) (7.7)

GCC 4.5 12.7 14.6 11.2


Egypt (8.3) (9.8) (10.7) (11.3)

Jordan (5.6) (6.8) (8.2) (4.8)

Inflation (%)

MENA 6.5 9.2 10.7 9.6



GCC 3.2 3.6 3.5 3.6


Egypt 11.7 11.1 8.6 8.2

Jordan 5.0 4.4 4.8 5.9

Public Debt (% of GDP)

MENA 28.6 25.7 24.7 24.6



GCC 15.9 12.1 11.8 11.4


Egypt 73.2 76.6 80.2 85.2

Jordan 67.1 70.7 79.6 83.9

Official Reserves (USD bn)

MENA 1073.1 1186.9 1380.4 1564.2

MENA Oil Exporters 942.7 1087.5 1,293.9 1,472.8


GCC 543.7 631.1 815.1 974.2


Egypt 35.8 17.7 14.9 15.5

Jordan 13.7 12.1 8.3 8.7



15

Middle East and North Africa

MENA economies remain buoyant

The MENA region continued to post strong performance, despite a challenging global environment. The economic

prospects in the MENA region remain somewhat mixed, as the region’s oil-exporting countries continue to witness

strong growth, while the oil-importing countries face a gloomy economic outlook. Nevertheless, the MENA region,

influenced by the gross domestic product (GDP) growth in oil-exporting countries, expanded by 4.8% in 2012.

MENA's oil-exporting countries – Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, the UAE,

and Yemen –are expected to post strong growth in 2012 as compared to the previous two years, driven by record

oil production among the biggest Middle East economies, coupled with high oil prices, stemming from the US

sanctions and EU oil embargo against Iran. The better-than-expected post-conflict recovery of Libya also

supported the strong growth in the region.

The real GDP of oil-exporting countries expanded by 5.7% in 2012 as compared to 3.9% in 2011. Countries that

are part of the Gulf Cooperation Council continued to benefit from high oil revenues, which contributed to

expansionary fiscal policies. The GDP growth in GCC countries is expected to be at 5.5% in 2012, led by higher

oil production in Saudi Arabia and Kuwait to compensate for the low supply from Iran.

MENA's oil-importing countries – Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Sudan, and Tunisia –

are expected to register a modest GDP growth in 2012, following bouts of political uncertainty and a challenging

external environment. GDP expanded by 1.9% in 2012, although higher than 1.4% in 2011, but much lower than

4.3% in 2010. High food and fuel prices, low tourism growth, policy uncertainties, and subdued public expenditure

impaired the economic growth. Egypt, which represents nearly half of the GDP size of oil-importing countries,

grew 2.2% in 2012 as compared to 1.8% in 2011, with increasing focus on social spending.

Real GDP Growth (%)

Source: IMF

MENA's GDP growth is forecasted to moderate to 3.1% in 2013, in line with growth expectations in the region's

oil-exporting countries. GDP growth in oil-exporting countries is expected to record 3.2% in the same year, as oil

production returns to sustainable levels. Likewise, GCC economies are anticipated to expand by 3.7% in 2013.

5.3 5.3

4.3

5.5

5.1

4.0 3.9

1.4

7.5

0.6

4.8

5.7

1.9

5.5

7.6

3.1 3.2

2.7

3.7 3.9

MENA MENA Oil Exporters MENA Oil Importers GCC Non-GCC Oil Exporters

2010 2011 2012 2013e


16

Meanwhile, growth in MENA oil-importing countries is expected to be 2.7% in 2013, as the economy of Egypt

rebounds on the adoption of its 10-year development plan.

Non-hydrocarbons sector will be the cornerstone for future growth

Although the significance of oil and gas production to the overall growth of the MENA’s oil-exporting countries will

not diminish, the non-oil sector has increasingly supported the overall GDP growth in the region, led by higher

manufacturing activities and investments to upgrade social infrastructure. Non-oil GDP growth among MENA oil

exporters is expected to increase 4.8% in 2012, while the oil sector growth would decline to 1.3% from 2.6% in

2011.

The oil sector growth in the GCC and non-GCC regions is expected to register mixed performance in 2012. The

oil sector growth in GCC countries is anticipated to increase 4.8% in 2012, while non-GCC oil-exporting countries

are expected to decline 2.1% in the same year. GCC economies benefited from high crude oil production in Saudi

Arabia and Kuwait on account of the Iran sanctions and increased liquefied natural gas (LNG) production in Qatar

on capacity expansion. Both crude oil and natural gas production in GCC countries witnessed double-digit growth

in 2011 to 11.7% and 13.1%, respectively. Production rose further in 2012, increasing 5.3% for crude oil and 4.7%

for natural gas.

Meanwhile, the non-oil sector increased 5.9% in GCC countries and 3.7% in non-GCC oil-exporting countries.

The growth in non-oil sectors came in stronger than the oil sector, following increased public expenditure and

private sector growth as a result of an accommodative monetary policy. Going forward, the non-oil sector is

expected to continue supporting the growth in the MENA oil-exporting countries, as GCC countries register 5.5%

growth in the non-oil sector vis-à-vis no growth in the oil sector in 2013. Similarly, non-GCC oil exporters are

expected to grow 3.9% in the non-oil sector as compared to a decline of 0.3% in the oil sector.

Oil vs. Non-Oil Growth (%) Oil and Gas Production(mn b/d)

Source: IMF

External account remains sensitive to hydrocarbon exports

After more than doubling to USD407.7bn (14.0% of the GDP) in 2011, current account balance (CAB) in the

MENA region was recorded at USD396.9bn (12.5% of GDP) in 2012. As the combined CAB of MENA oil-

4.2 2.6

1.3

-0.2

5.2

7.9

4.8

0.0

3.2

-2.4 -2.1 -0.3

5.5

3.9 4.8

4.7

5.2

7.0

5.9

5.5

5.9

0.9

3.7 3.9

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

Oil GDP Growth Non-oil GDP Growth

MENA oil exporters GCC Non-GCC oil exporters

24.2 24.9 26.2 26.8

14.9 16.6 17.5 17.4

9.4 8.3 8.7 9.4

11.1 11.9

12.3 12.5

6.4

7.2 7.5 7.7

4.7 4.7 4.8 4.9

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

Oil Production Gas Production

MENA oil exporters GCC Non-GCC oil Exporters


17

exporting countries represent more than 90% of the MENA region, higher oil exports are the primary driver for the

high CAB. Total exports by MENA oil-exporting countries increased 32.5% in 2011, led by similar growth (39.2%)

in exports from GCC countries. Meanwhile, imports rose 12.3% among MENA oil-exporting countries, again led

by 17.8% growth in imports of GCC countries. Total exports by MENA oil-exporting countries are expected to

remain high in 2012, as GCC’s exports increase 6.8% and imports rise at 8.5% in 2012.

Current Account Balance (USDbn)

Source: IMF

However, the current account surplus is likely to remain highly sensitive to oil price. For instance: IMF predicts an

almost USD150bn fall in the CAB of MENA’s oil exporting countries at 2012 production levels, if oil price drops by

10%, assuming no change in the domestic policy. Hence, the oil-exporting countries will need to develop better

resilience to oil price shocks and diversify their export base. Countries like Kuwait and Qatar remain the least

reliant on oil price decline, given their CAB, while Saudi Arabia, UAE, Bahrain, and Libya have witnessed the

biggest change in breakeven oil price in the last four years, highlighting their increased sensitivity to oil price

declines.

On the other hand, MENA oil-importing countries continued to register current account deficits as result of lower

exports to Europe, dislocation of goods transit through Syria, and decline in tourism receipts due to the recent

political turmoil in the region. Current account deficits rose to 6.9% of the GDP among oil-importing countries in

2012 from 5.2% in 2011, led by 4.7% increase in imports, while exports declined 2.9%. CAB is expected to

improve slightly in 2013, led by marginal economic recovery in Europe, which serves as a key trade partner of the

region, while tourism activity picks up, albeit slowly and below the pre-unrest levels in Egypt, Jordan, Lebanon,

and Tunisia. Tourism, which contributes 5% of the GDP in Egypt, was among the worst hit sectors during the civil

unrest in the country.

1,160

1,472 1,538 1,572

989

1,310 1,381 1,404

171 161 157 168

700

974 1,041 1,050

289 336 340 354

-937 -1,027

-1,123 -1,187

-730 -820

-907 -963

-207 -207 -217 -224 -488 -574 -623 -658

-243 -246 -283 -306 7.7

14.2 12.2

10.6 11.0

18.7

16.4

14.2

-3.6 -5.2

-6.9 -5.8

14.4

24.1 23.6

21.1

6.2

10.3

5.0 3.7

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

Exports Imports CAB (% of GDP)

MENA GCC Non-GCC oil Exporters MENA Oil Exporters MENA Oil Importers


18

Crude Oil and Natural Gas Exports (b/d)

Source: IMF

Restraint in current spending to increase resilience to oil price shocks

Fiscal surplus, as a % of GDP, in the MENA region is expected to remain steady at 2.5% in 2012, same as in

2011. Oil-exporting countries continue to register high fiscal surplus, especially GCC countries, led by record oil

revenues. Fiscal surplus as a % of GDP is expected to be 1.5% in 2012 for all oil-exporting countries, while GCC

countries are expected to record fiscal surplus of 14.6% (highest in the last three years).

Fiscal revenues are expected to rise to 49.3% of the GDP in 2012 as compared to 48.4% in 2011 for GCC

countries. In response to the increase in fiscal revenues, GCC countries have stepped up fiscal spending through

measures such as public sector wage increase, social expenditures on affordable housing, public transportation,

direct subsidies to nationals to combat the rising food prices, and unemployment benefits. Despite the high level

of fiscal spending, it is expected to be 34.8% of the GDP in 2012, down from 35.7% in 2011.

Non-GCC oil-exporting countries followed suit by increasing current spending on subsidies and public wages, at

the cost of long-term investments in the economy. The resultant deterioration in the fiscal deficit in 2012 is

expected to be 1.8% of the GDP. Non-GCC oil-exporting countries have been caught in a political turmoil lately.

Combined with a lack of spare oil production capacity, they have been unable to take advantage of the recent oil

price surge, as done by the GCC countries, to boost fiscal revenues to support their spending.

Meanwhile, oil-importing countries in the MENA region have continued to witness a slowdown in fiscal revenues,

while being forced to maintain increased levels of fiscal spending to meet social demands for equitable

distribution of wealth. Consequently, fiscal deficits are expected to decline further to 8.7% of GDP in 2012 as

compared to 7.5% in 2011. Fiscal spending is expected to increase to 32.6% of GDP in 2012 vis-à-vis 31.5% in

2011, while fiscal revenues declined to 23.1% from 23.5% in the same period.

In 2013, fiscal surplus is expected to decline to 4.7% of GDP for the MENA region, following continued fiscal

spending by oil-exporting countries, particularly GCC countries, to support various planned social expenditures

under long-term development plans of the respective countries. Consequently, fiscal surplus for GCC countries is

expected to moderate to 11.2% of GDP in 2013. Meanwhile, fiscal deficits for non-GCC oil-exporting countries will

18.0 18.2 19.2 19.4

11.8 12.9 13.6 13.4

6.1 5.3 5.6 6.0

4.6 5.3

5.3 5.1

2.8

3.7 3.7 3.5

1.8 1.6 1.6 1.6

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

Crude Oil Natural Gas

MENA GCC Non-GCC oil Exporters


19

deteriorate further to 2.1% in 2013. Through rationalization of expenditure and better economic performance, oil-

importing countries are expected to witness a decline in fiscal deficits to 7.7% of GDP.


Source: IMF

MENA oil-exporting countries have been focusing on reducing their reliance on hydrocarbons and diversifying

their economies toward manufacturing, construction, and services sectors. Consequently, non-oil revenues (as %

of GDP) are expected to increase to 16.9% in 2012 from 15.9% in 2011. GCC countries have been the leaders in

diversifying their economies, as the non-oil revenue is expected to rise to 20.6% of GDP in 2012, up from 19.0%

in 2011. On the other hand, non-oil revenues among non-GCC oil exporters are anticipated to increase to 13.3%

of GDP in 2012 from 13.0% in 2011.

MENA oil-exporting economies such as Bahrain, Algeria, and Iraq are already operating at an unsustainable fiscal

spending level, given their high breakeven oil price. Meanwhile, Saudi Arabia, UAE, Oman, and Libya face

increasing threat of fiscal deterioration in case of oil price decline. Kuwait and Qatar are least fiscally vulnerable to

oil price declines, as the two countries have been able to sustain their fiscal expenditure at more prudent levels.

However, all countries witnessed large changes in their breakeven oil price in the last four years, driven by

expansionary fiscal spending to meet social demands as well as capacity expansion in the hydrocarbon sector.

34.7 37.8 37.8 37.5 37.4

40.2 39.5 38.5

24.6 23.5 23.1 23.6

44.1 48.4 49.3 47.7

31.7 32.6 30.3 29.8

-32.8 -31.9 -31.4 -32.8 -35.2 -34.4 -33.6 -34.2

-30.6 -31.5 -32.6 -32.1

-39.7 -35.7 -34.8 -36.7

-31.4 -33.1 -32.4 -31.9

1.9

6.0 6.3 4.7

-0.4

1.5 1.5 0.4

-5.6 -7.5

-8.7 -7.7

4.5

12.7

14.6

11.2

0.8 -0.3

-1.8 -2.1

2010

2011

2012

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

Fiscal Revenue Fiscal Expenditure Fiscal Balance

MENA GCC Non-GCC oil Exporters MENA Oil Exporters MENA Oil Importers


20


Source: IMF

Gross public debt among MENA’s oil-exporting countries declined further and remained at low levels. Public

debt–to-GDP ratio is expected to decline to 13.9% in 2012 and 10.7% in 2013 from 14.9% in 2011. Similarly, Non-

GCC oil exporters are expected to reduce their public debt by almost half between 2011 and 2013. Gross public

debt-to-GDP ratio is expected to decline from 17.6% of GDP in 2011 to 9.9% in 2013.

GCC economies are expected to marginally lower their public debt, as they continue to direct their surplus oil

payouts to meet social expenditures. GCC countries’ public debt–to-GDP ratio is expected to decline to 11.8% in

2012 and to 11.4% in 2013, from 12.1% in 2011. Widening fiscal deficits and lackluster economic growth have left

oil-importing economies highly indebted. Public debt-to-GDP ratio among oil-importing countries is expected to

increase further to 78.6% in 2012 from 72.9% in 2011, due to high cost of social reforms and exports. Despite

fiscal consolidation, reducing the public debt will remain a challenge among these countries; consequently, public

debt-to-GDP ratio is expected to rise to 80.3% in 2013.

Official international reserves continued to surge among oil-exporting countries, driven by surplus oil revenues.

International reserves held by MENA’s oil-exporting countries are expected to rise 19.0% to USD1.3tn in 2012

and continue to increase by 13.8% to USD1.5tn in 2013. International reserves held by the GCC countries, which

represents more than 50% of the total reserves of the MENA region, are expected to increase 29.2% to

USD815.1bn in 2012; it is anticipated to grow 19.5% to USD974.2bn in 2013.

International reserves under non-GCC oil exporters are expected to grow at a slower rate (4.9%) to USD478.7bn,

as compared to GCC countries in 2012. Reserves are expected to increase even slower (4.2%) in 2013 to

USD498.6bn. Meanwhile, oil-importing countries are expected to witness their official reserves dwindle in 2012 by

13.0% to USD86.5bn as exports to Europe dry up and high cost of food and fuel imports puts a strain on trade

surplus; however, they are expected to pick up slightly in 2013 by 5.7% to USD91.4bn. The cumulative decline in

reserves since end-2010 is about 60% in Egypt, 47% in Jordan, 36% in Tunisia, and 29% in Morocco.

15.5 15.9 16.9 16.6

18.3 19.0

20.6 20.2

13.1 13.0 13.3 13.1

2010

2011

2012e

2013e

2010

2011

2012e

2013e

2010

2011

2012e

2013e

MENA oil exporters GCC Non-GCC oil Exporters


21

Gross Public Debt (% of GDP) Official Reserves (USD bn)

Source: IMF, EIU

Rising inflation with the exception of GCC countries

High oil surplus, together with region-wide public wage growth and direct subsidies to nationals to compensate for

the high food and commodity prices, has fueled supply and demand-driven inflation in the MENA region. In

particular, consumer prices in the non-GCC oil-exporting countries are expected to record a 19.1% increase in

2012. High inflation would persist in non-GCC oil-exporting countries in 2013, but with some improvements as

fiscal and monetary tightening comes into play.

Factors such as high gross reserves and civil service wage increase have created excess liquidity in countries like

Algeria (projected to record inflation of 8.5% in 2012). In Yemen, the continued funding of fiscal deficits by the

central bank has led to excess monetary growth and inflation (15.0% in 2012). Meanwhile, the low credit off-take

in Iraq has left consumer prices at its lowest among the non-GCC oil exporters. Libya is expected to witness a

sharp fall in inflation in 2013 to 0.9% from 10.0% in 2012, as the economy sheds the cost of civil unrest and

moves on to a strong growth trajectory.

GCC countries have largely remained immune to rising prices as inflation is expected to decline slightly to 3.5% in

2012 from 3.6% in 2011. Monetary growth has been slower than reserve accumulation in the GCC countries,

which has kept inflation in check, despite public sector wage increases and direct food subsidies. Hence, inflation

in the GCC countries is expected to remain low (3.6%) in 2013.

Inflation in MENA oil-importing countries is projected to rise to 9.0% in 2012, as governments reduce energy

subsidies and allow hikes in international food and fuel prices to be passed on to the consumers. Nevertheless,

concession in monetary policy in response to a second round of price hikes is expected to reduce inflation

marginally to 8.8% in 2013.

5

15

25

35

45

55

65

75

85

2010 2011 2012e 2013e

MENA MENA Oil Exporters

MENA Oil Importers GCC

Non-GCC Oil Exporters

1,073

1,187

1,380

1,564

943 1,088

1,294

1,473

130 99 87 91

544

631

815

974

399

456 479 499

2010 2011 2012e 2013e



Non-GCC Oil Exporters


22

Consumer Price Inflation (%) Broad Money Supply (Annual % change)

Source: IMF

Accommodative monetary policy keeps MENA economies afloat

Monetary policies have been largely accommodative across MENA region to finance public spending and support

private sector growth. In 2012, money supply in oil-exporting countries is expected to rise 13.1%, following a

sustained growth of 19.6% in non-GCC oil-exporting countries, and a modest 8.7% growth among GCC countries.

GCC countries reined in money supply in an effort to keep inflation under control, while the strong growth in the

money supply among non-GCC oil-exporting countries caused inflation to spiral upwards. In an effort to ward off

civil unrest that affected much of the MENA region, non-GCC oil-exporting countries stepped up their fiscal

spending on social needs, which led to fiscal deficits that were financed by overly accommodative monetary

policies. Money supply is expected to expand at a slightly lower rate in 2013 as non-GCC oil exporters come

under pressure to curtail inflation through higher reserve requirements, interest rates, and fiscal tightening,

particularly current spending on subsidies and wages.

MENA’s oil-importing countries, faced with the challenge of balancing between inflationary pressures from high

food & commodity prices and economic growth, are projected to witness an increase (11.9%) in money supply in

2012. These countries will maintain the momentum in 2013 to support economic recovery, particularly in Egypt

and Tunisia.

IMF likely to approve loan for Egypt based on 10–year economic plan

In November 2012, the Egyptian finance ministry unveiled a 10-year economic reform plan aimed at making Egypt

a more democratic country. The most important components of the plan include reducing the government’s deficit

through two means: reduction in subsidies and revisions in the current tax regime. The program aims to reduce

the fiscal deficit to 10.4% of the GDP during 2012–13, compared to a budget deficit of 10.9% in the previous year.

The reforms also provide for decreasing the fiscal deficit to 8.5% by end of fiscal 2013–14, as well as reducing the

deficit to 5.0% of GDP by end of 2016–17.

0

5

10

15

20

2010 2011 2012 2013e



Non-GCC Oil Exporters 12.0

12.1

11.6

7.3

19.2

13.7

14.6

10.0

10.6

20.4

12.9

13.1

11.9

8.7

19.6

12.4

12.7

11.3

10.1

16.6

ME

NA

M

EN

A O

il E

xport

ers

M

EN

A O

il Im

port

ers

G

CC

N

on-G

CC

Oil

Export

ers

2013e 2012e 2011 2010


23

Government has already taken various steps to reduce fuel subsidies. These include slashing fuel subsidies on

heavy industries by 33.0% and on light-use industries by 30.0%. Recently, the government also increased the

price of cooking gas by 60%. Additional measures include distribution of butane canisters via a coupon system (to

prevent price manipulation and ensure that only the requisite people receive these benefits) and lifting subsidy on

95-octane gasoline, which is typically used in luxury cars. However, to ensure that the general public is least

affected by its actions, the government intends to provide fuel for farming activities as well as public transport at

subsidized rates.

The document also emphasized on improving the state’s financial resources through a series of actions, which

include establishing progressive tax rates, revising sales tax, setting of capital gain tax, and imposing higher taxes

on cigarettes and beverages. In case of taxes on business profits, the plan provides for a flat 25.0% tax

irrespective of the profits of the company as against variable tax rates that existed earlier. Individuals with lower

income, earlier exempt from tax, would no longer enjoy the benefit, whereas those with income above LE1mn

(USD 145,609) would be taxed at 22.0–25.0%. Moreover, considering the urgency of its fiscal situation, the

Egyptian government for the first time in the history introduced a capital gain tax on the profits realized on the

stock exchange.

Conditional on these reforms, discussions regarding a loan of USD4.8bn are ongoing between the Egyptian

government and the IMF and are expected to fall in favor of Egypt. Qatar has also agreed to provide an

unconditional loan of USD3.0bn to Egypt. Acknowledging these measures, the IMF estimates that the economy

will soon bounce back from the low of 1.8% in 2011 to an average GDP growth of 4.9% during 2013–17.

GDP Growth (%) in Egypt GDP Growth (%) in Jordan

Source: IMF

Exports and Tourism to Boost Jordanian Economy

After a lackluster 2012, with GDP growth at 2.8%, Jordan’s economy is expected to recover in the coming years.

Jordan’s economy suffered from the instability in the region, which negatively affected the tourism industry. In

addition, poor performance of the global economy dampened exports.

The economy is expected to improve in 2013 with a GDP growth of 3.3%, and thereafter, at an average of 4.0%

till 2017. Foreign direct investments are likely to increase, especially from the Gulf States, as global economic

conditions remain in jeopardy. Private consumption, although currently under stress, is expected to boost in the

218.5 235.6 256.7 264.7 268.8 285.7 312.1 343.5

5.1

1.8

2.2 2.0

3.3

5.5

6.5

7.0

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

Nominal GDP (USD bn) Real GDP (%)

26.4 28.9 31.2 34.1 36.7 39.4 42.2 45.2

2.3 2.6

2.8

3.3

3.5

4.0

4.5 4.5

2010 2011 2012 2013e 2014e 2015e 2016e 2017e



24

long term owing to a recovery in the tourism industry–the second biggest employer in Jordan. Furthermore, the

rising demand for Jordanian goods from the neighboring countries, especially Iraq, is likely to increase exports,

thus offsetting the decreasing demand from the US.

Meanwhile, inflation, which averaged 4.8% in 2012, spiked up in November 2012, as the government removed the

fuel subsidies. As a result of this, and with an anticipating increase in electricity tariffs, inflation is expected to rise

to 5.9% in 2013.However, as the impact of subsidy reduces, we expect a fall in inflation rate to 3.2% by 2014, and

thereafter, to 2.6% by 2015. Consequently, we do not expect any interest rate hikes in the near term; however,

with the currency pegged to the US dollar, we expect the interest rates to rise in 2015, as a hike in Federal

Reserve rates is likely to occur during that period.

With the expected savings of approximately USD705.0mn from the removal of fuel subsidies and the pledge by

the GCC countries to provide Jordan with USD5.0bn in support until 2016, the fiscal deficit is expected to reduce

to an average of 3.9% of GDP during 2013–17 as against a deficit of 8.2% in 2012.


25

Gulf Cooperation Council (GCC)

GDP growth in GCC expected at 5.5% and 3.7% in 2012 & 2013 respectively

Public debt to GDP ratio to decline to 11.4% in 2013 compared to 11.8% in 2012

GCC exports rose by 6.8% and imports by 8.5% in 2012

Inflation stays in control despite healthy growth in money supply

GDP growth in GCC expected at 5.5% and 3.7% in 2012 & 2013 respectively

The GDP growth in GCC countries is expected to be at 5.5% in 2012 benefitting from

high oil revenues, led by higher oil production in Saudi Arabia and Kuwait to

compensate for the low supply from Iran. GCC economies are anticipated to expand

by 3.7% in 2013. The oil sector growth in GCC countries is anticipated to increase

4.8% in 2012. Meanwhile, the non-oil sector is expected to increase 5.9% for the

same year. Going forward, the non-oil sector is expected to continue supporting

economic growth, as GCC countries register 5.5% growth in the non-oil sector vis-à-

vis no growth in the oil sector in 2013.

Public debt to GDP ratio to decline to 11.4% in 2013 compared to 11.8% in 2012

GCC economies are expected to marginally lower their public debt, as they continue

to direct their surplus oil payouts to meet social expenditures. GCC countries’ public

debt–to-GDP ratio is expected to decline to 11.8% in 2012 and to 11.4% in 2013, from

12.1% in 2011. International reserves held by the GCC countries are expected to

increase 29.2% to USD815.1bn in 2012; it is anticipated to grow 19.5% to

USD974.2bn in 2013.

GCC exports rose by 6.8% and imports by 8.5% in 2012

Exports by GCC countries increased by 39.2% in 2011, while imports rose 17.8%.

Consequently, current account surplus rose to 24.1% of GDP in 2011, up from 14.4%

in 2010. Total exports by GCC countries are expected to remain high in 2012, as

exports increase 6.8% and imports rise at 8.5% in 2012. Meanwhile, current account

surplus is expected to stabilize at 23.6% of GDP in 2012, and further declining to

21.1% as oil exports increase at a reasonable rate.

Inflation stays in control despite healthy growth in money supply

GCC countries have largely remained immune to rising prices as inflation is expected

to decline slightly to 3.5% in 2012 from 3.6% in 2011. Monetary growth has been

slower than reserve accumulation in the GCC countries, which has kept inflation in

check, despite public sector wage increases and direct food subsidies. Hence,

inflation in the GCC countries is expected to remain low (3.6%) in 2013. GCC

countries reined in money supply in an effort to keep inflation under control.

GCC corporate earnings grew 4.5%YoY in 2012

Corporate earnings in the GCC region continued to rise in 2012, albeit at a slower

pace when compared to 2011. Overall corporate earnings grew 4.5%YoY to

USD55.4bn in 2012. UAE continued its strong performance from 2011, rising

28.8%YoY in 2012 driven primarily on account of recovery in Real Estate sector.

Saudi Arabia’s earnings on the other hand remained at similar levels to 2011

impacted by weak performance of the petrochemical sector. Among other gainers

were Kuwait and Oman which grew 12.0%YoY and 14.3%YoY, respectively.

GC

C


www.globalinv.net


26

Gulf Cooperation Council

Non-Oil sector growth has consistently supported GDP growth

Countries that are part of the Gulf Cooperation Council (GCC) continued to benefit from high oil revenues, which

contributed to expansionary fiscal policies. The GDP growth in GCC countries is expected to be at 5.5% in 2012,

led by higher oil production in Saudi Arabia and Kuwait to compensate for the low supply from Iran. GCC

economies are anticipated to expand by 3.7% in 2013.

The oil sector growth in GCC countries is anticipated to increase 4.8% in 2012, while non-GCC oil-exporting

countries are expected to decline 2.1% in the same year. GCC economies benefited from high crude oil

production in Saudi Arabia and Kuwait on account of the Iran sanctions and increased liquefied natural gas (LNG)

production in Qatar on capacity expansion. Both crude oil and natural gas production in GCC countries witnessed

double-digit growth in 2011 to 11.7% and 13.1%, respectively. Production rose further in 2012, increasing 5.3%

for crude oil and 4.7% for natural gas.

Oil vs. Non-Oil Growth (%) Oil and Gas Production (mn b/d)

Source: IMF

Meanwhile, the non-oil sector increased 5.9% in GCC countries. The growth in non-oil sectors came in stronger

than the oil sector, following increased public expenditure and private sector growth as a result of an

accommodative monetary policy. Going forward, the non-oil sector is expected to continue supporting economic

growth, as GCC countries register 5.5% growth in the non-oil sector vis-à-vis no growth in the oil sector in 2013.

Non-oil sector growth would be driven by improving business condition in the GCC region with increasing

competitiveness in production of goods and services. Consequently, all the GCC countries ranked favorably on

the Ease of Doing Business index and World Economic Forum’s Global Competitiveness index.

5.2 7.9 4.8 0.0

5.2

7.0

5.9

5.5

5.5

7.5

5.5

3.7

2010 2011 2012e 2013e

Oil Sector Growth Non-oil Sector Growth

Real GDP (%)

14.9

16.6 17.5 17.4

6.4 7.2 7.5 7.7

2010 2011 2012e 2013e

Oil Production Gas Production


27

GCC Countries Ease of Doing Business Rank Global Competitiveness Rank

2012 2013 2012 2013

Saudi Arabia 23 22 17 18

Kuwait 77 82 32 37

UAE 29 26 27 24

Qatar 40 40 14 11

Oman 47 47 32 32

Bahrain 39 42 37 35

Strong exports boost current account surplus

Total exports by GCC countries increased 39.2% in 2011, while imports rose 17.8%. Consequently, current

account surplus rose to 24.1% of GDP in 2011, up from 14.4% in 2010. Total exports by GCC countries are

expected to remain high in 2012, as exports increase 6.8% and imports rise at 8.5% in 2012. Meanwhile, current

account surplus is expected to stabilize at 23.6% of GDP in 2012, and further declining to 21.1% as oil exports

increase at a reasonable rate.

Current Account Balance (USDbn)

Source: IMF

However, the current account surplus is likely to remain highly sensitive to oil price. Hence, GCC countries will

need to develop better resilience to oil price shocks and diversify their export base. Countries like Kuwait and

Qatar remain the least reliant on oil price decline, given their CAB, while Saudi Arabia, UAE, and Bahrain have

witnessed the biggest change in breakeven oil price in the last four years, highlighting their increased sensitivity to

oil price declines.

700.2 974.4 1,040.8 1,050.3

-487.5 -574.3 -623.3 -657.7

14.4

24.1 23.6

21.1

2010 2011 2012e 2013e

Exports Imports CAB (% of GDP)


28

Crude Oil and Natural Gas Exports (b/d)

Source: IMF

Social spending to remain a priority

GCC countries are expected to record fiscal surplus of 14.6% (highest in the last three years). Fiscal revenues

are expected to rise to 49.3% of the GDP in 2012 as compared to 48.4% in 2011 for GCC countries. In response

to the increase in fiscal revenues, GCC countries have stepped up fiscal spending through measures such as

public sector wage increase, social expenditures on affordable housing, public transportation, direct subsidies to

nationals to combat the rising food prices, and unemployment benefits. Despite the high level of fiscal spending, it

is expected to be 34.8% of the GDP in 2012, down from 35.7% in 2011. Continued fiscal spending by GCC

countries, to support various planned social expenditures under long-term development plans of the respective

countries is expected to cause fiscal surplus to moderate to 11.2% of GDP in 2013.


Source: IMF

11.8

12.9 13.6 13.4

2.8

3.7 3.7 3.5

2010 2011 2012e 2013e

Crude Oil Natural Gas

44.1 48.4 49.3 47.7

-39.7 -35.7 -34.8 -36.7

4.5

12.7

14.6

11.2

2010 2011 2012e 2013e Fiscal Revenue Fiscal Expenditure Fiscal Balance


29

GCC countries have been the leaders in diversifying their economies, as the non-oil revenue is expected to rise to

20.6% of GDP in 2012, up from 19.0% in 2011. Bahrain is already operating at an unsustainable fiscal spending

level, given their high breakeven oil price. Meanwhile, Saudi Arabia, UAE, and Oman face increasing threat of

fiscal deterioration in case of oil price decline.

Kuwait and Qatar are least fiscally vulnerable to oil price declines, as the two countries have been able to sustain

their fiscal expenditure at more prudent levels. However, all GCC countries witnessed large changes in their

breakeven oil price in the last four years, driven by expansionary fiscal spending to meet social demands as well

as capacity expansion in the hydrocarbon sector.


Source: IMF

GCC economies are expected to marginally lower their public debt, as they continue to direct their surplus oil

payouts to meet social expenditures. GCC countries’ public debt–to-GDP ratio is expected to decline to 11.8% in

2012 and to 11.4% in 2013, from 12.1% in 2011. International reserves held by the GCC countries are expected

to increase 29.2% to USD815.1bn in 2012; it is anticipated to grow 19.5% to USD974.2bn in 2013.

Gross Public Debt (% of GDP) Official Reserves (USD bn)

Source: IMF

18.3

19.0

20.6

20.2

2010 2011 2012e 2013e

15.9

12.1 11.8 11.4

2010 2011 2012e 2013e

543.7 631.1

815.1

974.2

2010 2011 2012e 2013e


30

Inflation stays in control, despite healthy growth in money supply

GCC countries have largely remained immune to rising prices as inflation is expected to decline slightly to 3.5% in

2012 from 3.6% in 2011. Monetary growth has been slower than reserve accumulation in the GCC countries,

which has kept inflation in check, despite public sector wage increases and direct food subsidies. Hence, inflation

in the GCC countries is expected to remain low (3.6%) in 2013. GCC countries reined in money supply in an effort

to keep inflation under control.

Consumer Price Inflation (%) Broad Money Supply (Annual % change)

Source: IMF

GCC markets relatively sluggish in 2012

In stark contrast to the emerging markets, which surged in 2012 due to the large influx of liquidity, the GCC

markets’ performance was lackluster. While the MSCI World and Emerging Market indices increased 13.2% and

15.1%, respectively, in 2012, the GCC region indices grew between 20% (Dubai) and -7% (Bahrain) during the

year. Saudi Arabia, the largest market in the GCC, recorded an increase of 6.0% in 2012. Political unrest in the

Middle East continued for a second year and had an adverse impact on the markets in 2012.

The Kuwaiti market touched a multi-year low in April 2012 due to the effect of the ongoing political turmoil.

However, strong corporate earnings catalyzed market growth, and the index ended 2012 with a gain of 2.1% as

measured by Kuwait Price index. The Bahraini market was the weakest among GCC markets; it declined 6.8% in

2012. Weak corporate profits and political unrest adversely impacted investor sentiment. In 2012, Dubai market

outperformed other GCC markets and surged 19.9% followed by the Abu Dhabi market that rose 9.5%. Investors

returned to the Dubai and Abu Dhabi markets in 2012 following a recovery in property prices. Qatar, the only GCC

market that gained in 2011, reported a 4.8% decline in 2012.

3.2

3.6

3.5

3.6

2010 2011 2012e 2013e

7.3

10.6

8.7

10.1

2010

2011

2012e

2013e


31

Market Performance

Source: Zawya, Bloomberg, Reuters & Global Research

Indices % Chg (MoM) % Chg (YTD) % Chg 2012

KSE Price Index 4.0% 13.3% 2.1%

Tadawul All Share Index 1.8% 4.8% 6.0%

DFM Index -5.1% 12.7% 19.9%

ADX Index -0.6% 15.0% 9.5%

Bahrain All Share 0.2% 2.4% -6.8%

QE Index 0.6% 2.6% -4.8%

MSM30 Index 0.2% 4.0% 1.2%

Source: Zawya, Bloomberg, Reuters & Global Research

GCC markets on a rise in 2013 – UAE backtracks

GCC equity performance remained mixed in March 2013. All bourses, except ADX and Dubai, gained during the

month. The KSE index experienced the highest growth of 4.0% MoM amongst GCC markets. During the month,

the index rallied to the highest level in over two years buoyed by better-than-expected earnings and hopes of

increased government spending. Saudi Arabia’s Tadawul index, the second best performer, rose 1.8%MoM

supported by positive global sentiments and leads from domestic news flows such as revision in Fitch Ratings.

Dubai was the worst performer (down 5.1%MoM) amongst GCC markets, shedding the previous month’s gains.

Qatar, Oman and Bahrain experienced a marginal growth of 0.6% MoM, 0.2% MoM and 0.2%MoM, respectively,

in March.

90

100

110

120

130

140

150

Dec-1

1

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13

Saudi Qatar Kuwait Abu Dhabi Dubai Oman Bahrain MSCI EM MSCI World


32

GCC corporate earnings grew 4.5%YoY in 2012

Corporate earnings in the GCC region continued to rise in 2012, albeit at a slower pace when compared to 2011.

Overall corporate earnings grew 4.5%YoY to USD55.4bn in 2012. UAE continued its strong performance from

2011, rising 28.8%YoY in 2012 driven primarily on account of recovery in Real Estate sector. Saudi Arabia’s

earnings on the other hand remained at similar levels to 2011 impacted by weak performance of the

petrochemical sector. Among other gainers were Kuwait and Oman which grew 12.0%YoY and 14.3%YoY,

respectively. Bahrain and Qatar were the only countries to witness a decline in earnings in 2012. Bahrain was the

worst performer in the GCC region, declining 34.6%YoY in 2012 owing to deterioration across majority of sectors.

On the other hand, Qatar saw a marginal decline of 0.3%YoY during 2012 led by decline in Real Estate sector

earnings which declined 56.0%YoY

Corporate Earnings 2012 (% YoY)

Source: Gulf base& Global Research, Data up till March 31, 2013

GCC market valuation remains fairly attractive

GCC equity markets had a good start to 2013 largely due to an uptick in earnings across key cyclical sectors such

as Banking and Real Estate. Despite the recent surge, GCC markets continue to remain fairly attractive. In terms

of one-year forward PE, the six GCC markets trade in the range of 9.4x–11.3x. This is fairly below the three- and

five-year historic average of 13.5x and 13.4x, respectively, for the region as a whole. Valuation is also lower

compared to similar frontier markets and key emerging markets. Within GCC, we are in favor of Saudi Arabia

given its current compelling valuations coupled with a robust earnings outlook for 2013.

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2006 2007 2008 2009 2010 2011 2012

US

Dm

n

GCC corporate earnings (USDmn) Growth (%) - RHS

-34.6%

-0.3%

0.0%

12.0%

14.3%

28.8%

4.5%

-45% -25% -5% 15% 35%

Bahrain

Qatar

Saudi

Kuwait

Oman

UAE

GCC


33

GCC Market Valuation – EPS Growth versus Price to Earnings

Source: Bloomberg & Global Research

Development on the global macroeconomic front to be a key factor in the short term

We continue to maintain optimistic outlook for the GCC equity market in 2013, largely due to the presence of

region-specific triggers such as continued momentum on reforms, healthy economic growth, investment in non-oil

sectors, and stabilization in oil prices and recovery in the real estate sector. However, the market remains

exposed to spells volatility that could potentially emanate from lack of institutional participation. In the short-term,

developments on the global macroeconomic front would play a key role in deciding the course of GCC markets

due to lack of region-specific triggers in the post-earnings season. Recent spending cuts in the US and slow pace

of recovery in Europe could put pressure on oil prices and dampen investor sentiments in short-term.

Saudi Arabia Dubai

Abu Dhabi

Qatar Oman

India

China

South Africa Malaysia

Bahrain

Kuwait

Indonesia

US

UK

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

-10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

1 y

ea

r fo

rwa

rd P

E

EPS growth 2013


34

Saudi Arabia

Saudi Arabia real GDP estimated to grow by 4.4% in 2013

Oil exports to GDP ratio in KSA rise from 41% in 2010 to 48% in 2012

Saudization’ to dominate labor reforms

Saudi Tadawul rebounds in 2012, with a gain of 6.0%

Saudi Arabia real GDP estimated to grow by 4.4% in 2013

Saudi Arabia’s real GDP is estimated to have expanded 6.8% in 2012. Following the

record oil production seen in 2012, the government has resorted to strong fiscal

stimulus measures and greater investment in infrastructure projects. However, GDP

growth is expected to lower to 4.4% in 2013, as oil production stabilizes and benefits

of previous expansionary fiscal spending are realized. Real oil GDP expanded 10.4%

owing to higher oil prices and record levels of production. The oil sector grew 5.5% in

2012, on the back of increased output following sanctions imposed on Iran in early

2012. Non-oil GDP rose 7.2% in 2012, driven by uniform growth in private and

government sectors.

Oil exports to GDP ratio in KSA rise from 41% in 2010 to 48% in 2012

Trade surplus expanded to 35% of GDP in 2012 from 29% in 2010, with oil exports

increasing to 48% of GDP from 41% over the same period. Oil exports, as a

percentage of total exports, surged to 88% in 2012 from 86% in 2010, with crude oil

accounting for almost 90% of oil exports and refined products accounting for the rest.

Foreign direct investment is expected to increase at a CAGR of 3.1% to USD16.1bn

in 2017.

Saudization’ to dominate labor reforms

Population growth in Saudi Arabia is estimated to decelerate significantly in the

coming decades following rapid growth in the last decade (2000–10). Population

growth is estimated to slow down to a CAGR of 2.0% between 2010 and 2020 and a

CAGR of 1.4% during 2020–30 vis-à-vis a CAGR of 3.2% in the previous decade

(2000–10). Following a backlash against the inflow of immigrants, net migration is

expected to slowdown, as Saudization reduces demand for foreign workers. Non-

Saudi population, which grew to a third of total population in 2012, is estimated to

plunge by as much as 10 percentage points to 23% of total population by 2024.

Saudi Tadawul rebounds in 2012, with a gain of 6.0%

Saudi Arabia’s Tadawul All Share Index (TASI) gained 6.0% and ended 2012 on a

positive note. It marked a rebound for the market, which posted a loss of 3.1% in

2011. TASI closed at a high of 7,944.36 points on April 02, 2012, translating into a

year-to-date increase of 23.6%, on strong earnings expectations and upbeat

economic news. TASI’s consolidated earnings remained flat and stood at USD25.5bn

similar to the level witnessed in 2011. This was primarily due to the 16.8%YoY decline

in earnings of petrochemical companies, which accounted for 35.4% of overall

earnings in 2012.

Sa

ud

i A

rab

ia


www.globalinv.net


35

Saudi Arabia Economic Indicators

2010 2011 2012a/e* 2013e 2014e

Nominal GDP (USD bn) 461.6 604.5 727.3* 745.6 761.5

Real GDP Growth (%) 7.4 8.5 6.8* 4.4 4.2

Oil 0.9 10.4 5.5* 0.0 0.2

Non-Oil Public Sector 6.5 8.7 6.3* 3.9 3.9

Non-Oil Private Sector 5.6 7.8 7.5* 6.4 5.5

Contribution to GDP (%)

Oil 23.2 22.6 21.1

Non-Oil 76.8 77.4 78.9

GDP Growth by Expenditure Type (%)

Private Consumption 3.2 7.5 6.3 5.7 5.4

Public Consumption 1.0 11.2 7.2 6.0 4.8

Gross Capital Formation 5.2 6.2 6.3 6.4 6.5

Exports 8.3 7.3 4.0 (2.3) 1.8

Imports 4.2 10.0 7.7 5.9 5.5

Population (mn) 27.6 28.3 28.9 29.5 30.1

Growth Rate 2.5 2.2 2.1 2.1

Trade Surplus (USD bn) 156.3 248.6 257.1 257.0 229.5

Export of Goods 254.1 369.1 401.0 398.8 380.2

Import of Goods (97.9) (120.6) (143.9) (141.8) (150.7)

Current Account Balance (USD bn) 67.6 160.4 178.5 153.8 120.6

Government Revenue (USD bn) 200.3 301.8 345.2* 333.3 313.8

Oil & Gas 181.0 279.3 313.9* 299.0 278.3

Others 19.3 22.5 31.3* 34.3 35.5

Government Expenditure (USD bn) (176.5) (223.2) (232.7)* (263.3) (265.2)

Fiscal Balance (USD bn) 23.7 78.6 112.5* 70.0 48.6

Gross Public Debt (USD bn) 45.1 36.6 26.7* 26.7 26.7

Foreign Reserves (USD bn) 445.1 541.1 645.2* 662.2 685.3

Inflation (%) 3.8 3.7 2.9 3.7 3.6

M1(USD bn) 168.9 205.5 239.5 225.5

Growth Rate 21.6 16.6 (5.8)

M2(USD bn) 291.7 330.4 376.3 408.6

Growth Rate 13.3 13.9 8.6

Private Sector Lending(USD bn) 209.2 231.8 269.8 293.0

Benchmark Interest rate (%) 2.0 2.0 2.0

Market Index 6,620.7 6,417.7 6,801.2



36

SAUDI ARABIA

Oil-led economic expansion

The Saudi Arabian Monetary Agency (SAMA)’s preliminary estimate indicates that Saudi Arabia’s real GDP grew

6.8% in 2012 given record oil production during the year. The rate of economic expansion has remained strong on

continued fiscal stimulus and higher public investment in various industrial and infrastructure projects. Robust

growth in 2012 was preceded by GDP growth of 7.1% (highest in the last eight years) in 2011. As the world’s

largest oil exporter and the only country with significant spare oil production capacity, Saudi Arabia has provided

much needed support to ease upward pressure on global oil prices. It increased oil output over the last two years

to fill the supply gap amid supply uncertainties due to political upheavals in other Middle East countries.

GDP growth is estimated to moderate to 4.4% from 2013, as oil production stabilizes and benefits of previous

expansionary fiscal spending are realized. The fiscal reforms announced by Saudi Arabia’s king in early 2011,

worth an estimated 30% of GDP, will be realized over the coming years. It includes a USD67bn affordable homes

program that is likely to boost the construction sector.

GDP Growth Comparison of Real GDP Growth: Outlook

Source: IMF, EIU, Ministry of Economy and Planning; Note: p – preliminary

Non-Oil sector increasing in significance

Real oil GDP grew 10.4% due to high prices and record production. The oil sector rose 5.5% in 2012, as output

was increased in response to sanctions on Iran in early 2012. However, the sector’s growth is expected to remain

subdued over the next five years with minimal/no increase in production or capacity expansion, as higher output

from Iraq, North America, Libya comes on stream.

Non-oil GDP growth expanded 7.2% in 2012, followed by its strongest performance (8.0%) in the last eight years

in 2011, led by uniform growth in private and government sectors. The non-oil private sector continued its growth

trajectory in 2012. It rose 7.5%, albeit lower than the 7.8% growth (its highest level in last eight years) in 2011, led

by strong growth in manufacturing, construction, retail and transport sectors. Moreover, all sectors registered

growth in 2012. The non-oil public sector’s growth continued to be robust in 2012; it rose 6.3% in 2012 after

increasing 8.7% in 2011.

462

605

727 746 761 789 822 862

7.4

8.5 6.8

4.4 4.2

4.4 4.4 4.4

2010 2011 2012p 2013e 2014e 2015e 2016e 2017e


5.2

5.2

5.2

4.4

4.4

4.4

4.2

4.4

6.8

4.8

4.8

5.0

4.9

4.1

5.7

2017

2016

2015

2014

2013

2012

EIU estimates IMF estimates 9th Development Plan


37

Although the private sector’s contribution to GDP rose to 58.2% in 2012 from 50.9% a decade earlier, the

economy remains largely dependent on hydrocarbons for growth of the oil sector, funding for public sector

investments, and low-cost feedstock for certain large-scale manufacturing industries. The government has

leveraged the recent surge in oil revenues to fast track domestic developmental objectives. It announced new

initiatives in 2011 to accelerate addressing social issues, including employment, availability of affordable housing,

and SME financing.

The non-oil sector is expected to primarily drive the Kingdom’s real GDP growth, as the government continues to

take initiatives to diversify away from oil and address social and development needs. The non-oil private sector’s

growth is estimated to stay above the real GDP forecast, with growth averaging above 5.5%. Meanwhile, the non-

oil public sector’s growth is expected to remain steady at 3.9% until 2017. Private sector’s growth is believed to be

driven by increased consumption due to higher employment levels and rising incomes, and capacity building

through higher investments.

Key Drivers of Real GDP Growth (%) Movement in Structure of Real GDP (%)

Source: IMF, Ministry of Economy and Planning

Saudi maintains the world's largest oil production capacity

In line with its longstanding commitment to help stabilize the global oil market, Saudi Arabia increased production

in mid-2011 to offset supply shortfalls from Libya, and in early 2012 in response to supply uncertainties stemming

from elevated geopolitical tensions in Iran. Oil output rose 13.8% to 9.3mn barrels/day (b/d) in 2011 and jumped

5.4% to 9.8mn b/d in 2012.

However, Saudi Arabia reduced production significantly over the last two months of 2012 in response to rising

output in Iraq and the US, lower demand from Asian customers as well as lower seasonal consumption at home

relative to peak demand in summer months. According to the International Energy Agency (IEA), lower demand

for heavy crude oil (used as feedstock) from the Kingdom’s power stations led to a decline in crude oil production

to 9.7mn b/d in November 2012 and 9.4mn b/d in December 2012 from over 10mn b/d in June. On the other

hand, the Kingdom’s oil demand for power generation increased 401,000 b/d from March to June 2012.

Saudi Arabia continued to maintain production steady at around 9.1mn b/d in January and February 2013,as

demand from consuming countries remained stable. Given the ongoing debt crisis in Europe and supply surge

0.9

10.4

5.5

0.0 0.2

2.0 1.7

1.4

6.5

8.7

6.3

3.9 3.9 3.9 3.9 3.9

5.6

7.8 7.5

6.4

5.5 5.6 5.6 5.5

2010 2011 2012p 2013e 2014e 2015e 2016e 2017e

Oil Sector Growth Non-oil Public Sector Growth

Non-oil Private Sector Growth

28.2 29.0 23.2 22.6 21.1

19.3 18.1

18.7 18.6 19.8

50.9 52.9 58.1 58.8 58.2

2000 2005 2010 2011 2012

Oil Sector Non-oil Public Sector Non-oil Private Sector


38

from shale oil reserves in the US, demand from China has been the main driver of Saudi Arabia’s oil exports.

China imported 1.1mn b/d of crude from the Kingdom last year, up 7.2% from 2011.

Saudi Arabia is expected to raise output in the second quarter of 2013 to meet higher demand from China.

Domestic consumption is also likely to increase during summer due to higher demand for electricity; however, this

year's oil consumption may be tempered by more gas being made available to domestic power plants. Saudi

Arabia burns oil to produce electricity and desalinate water. It is seeking to increase the use of natural gas as a

substitute fuel to free up more crude oil for exports, as it can be sold at a higher rate than it does domestically.

With flexible production/export policy and an unrestricted individual production quota from OPEC, Saudi Arabia

would continue to play a systemic role in the global oil market. Saudi Arabia’s free reins over moderating oil

supply and the continuing political sanctions on Iran are likely to keep oil prices above the USD100 mark in the

near future, despite higher output from Iraq, the US and Libya.

Oil Production Major Oil and Gas Fields

Region Location Production/Capacity

Ghawar onshore 5mn b/d of Arab Light crude

Safaniya offshore 1.5mn b/d of Arab Heavy crude

Khurais onshore 1.2mn b/d of Arab Light crude

Manifa offshore 0.9mn b/d of Arab Heavy crude oil after

completion in Dec 2014

Shaybah onshore 0.75mn b/d of Arab Extra Light

Qatif onshore 0.5mn b/d Arab Light crude

Khursaniyah onshore 0.5mn b/d Arab Light crude

Zuluf offshore 0.45mn b/d of Arab Medium crude

Abqaiq onshore 0.4mn b/d Arab Extra Light crude


Construction, manufacturing, transport sectors leading growth

Given the government's expansionary fiscal stance, along with accommodative monetary policy and stronger non-

oil exports, non-oil GDP has been growing at its fastest pace since the last three decades, with construction and

manufacturing sectors providing the biggest boost. With one-fifth of the world's proven oil reserves, Saudi Arabia

has a comparative advantage in manufacturing energy-intensive products. Therefore, a large proportion of FDI

inflow has been in industries such as refining, chemicals and petrochemical products that have access to low-

priced feedstock.

Saudi Arabia’s manufacturing sector witnessed a boom in the last decade, driven by growth in petroleum refining

(which accounts for 20% of the manufacturing activity); higher prices for petrochemicals, plastics and related

products; and greater output of construction materials. Manufacturing, up7.6%, was among the fastest growing

private sectors in 2012.

Manufacturing is expected to continue driving growth in the private sector, led by strong domestic consumption

and non-oil exports, supported by continued capital investments in the sector. Gross (real) fixed capital formation

expanded at a CAGR of 17.0% over the last 10 years until 2012, while strong point of sale transaction data

8.2

9.3 9.8

10.1 10.1 10.3 10.5 10.7

-0.1

13.8

5.4

3.1

0.0

2.0 1.9 1.9

2010 2011 2012p 2013e 2014e 2015e 2016e 2017e

Crude Oil Production (mn b/d) Growth (%)


39

indicate ongoing demand for manufactured goods. Sales through point of sale transactions increased at a CAGR

of 25.4% during 2007–12. Meanwhile, non-oil exports have doubled since 2007 to USD49.5bn in 2012.

Key Sectors of Real GDP Growth Contribution to Real GDP

Source: Ministry of Economy and Planning

Construction, which rose 10.3%, was among the fastest growing private sectors in 2012, led by record contract

awards. As the largest projects market in the Middle East, Saudi Arabia recorded contracts worth USD50bn in

2012, according to MEED estimates. Furthermore, MEED forecasts contracts awarded to increase to USD70bn in

2013.

The government plans to take a multi-dimensional approach to construction. Anchor sectors (oil refining and

petrochemicals) are expected to attract majority of the value of awarded contracts. Social infrastructure, in the

form of affordable housing, schools and hospitals, is also likely to see an upsurge in investments, as the Kingdom

seeks to provide the necessary infrastructure to meet population growth and negate pressure for political reforms.

Anticipated capital expenditure for 2013 includes construction of 539 schools, 19 hospitals and development of

3,700-km roads across the Kingdom. A USD100bn plus renewable and alternative energy program planned by

King Abdullah City for Atomic and Renewable Energy (KA-CARE) is also likely to add to the ongoing construction

boom in the Kingdom.

Ongoing government spending on transport and social services is expected to keep the services sector vibrant.

Under the Ninth Development Plan, the government intends to invest USD30.0bn in the transport and

communications sector, and USD74.0bn in social and health services.

10.0

2.2

9.8

13.7

5.2

9.9

7.0 7.3

13.8

2.1

5.4

7.9

6.8

2.6

5.6

7.6 7.3

10.3

6.7

8.3

10.7

4.4

5.8 5.2

Pro

ducin

g S

ecto

rs

Agriculture

Min

ing

Manufa

ctu

rin

g

Utilit

ies

Constr

uctio

n

Serv

ices S

ecto

rs

Tra

de, hote

ls

Tra

nsport

Fin

ance

Socia

l & P

ers

onal

Govern

ment

Growth in 2011 Growth in 2012

Producing Sectors

Agricultur

Agriculture, 7%

Mining, 41%

Manufacturing, 30%

Utilities, 5%

Construction, 16%

46%

Services Sectors

Agricultu

Trade & Hotels,

23%

Transport, 18%

Finance, 25%

Social, 6%

Government, 28%

54%


40

‘Saudization’ to dominate labor reforms

Population growth in Saudi Arabia is estimated to decelerate significantly in the coming decades following rapid

growth in the last decade (2000–10). Demographic shift toward lower birth rate as a result of increasing education

and urbanization along with the Saudization policy—a measure launched in 2003 that fines firms with more

foreign employees vis-à-vis the nationals—are impacting net migration. Population growth is estimated to slow

down to a CAGR of 2.0% between 2010 and 2020 and a CAGR of 1.4% during 2020–30 vis-à-vis a CAGR of

3.2% in the previous decade (2000–10).

According to the World Bank’s data, urban population increased to 82% of total population in 2011 from 80% in

2000, while literacy rate rose to 87% of the adult population in 2010 versus 79% in 2000. On the other hand, birth

rate declined to 22 per 1,000 people in 2011 from 27 in 2000. Following a backlash against the inflow of

immigrants, net migration is expected to slowdown, as Saudization reduces demand for foreign workers. Non-

Saudi population, which grew to a third of total population in 2012, is estimated to plunge by as much as 10

percentage points to 23% of total population in 2024.

Population Growth Composition of Population (mn)

Source: UN Data, Ministry of Economy and Planning

Labor force in Saudi Arabia grew faster than the population growth in the last decade, since a large section

(approximately 95% of total population) is still young (below 60 years of age) and due to influx of foreign laborers.

Labor force increased at a CAGR of 5.2% to 9.9mn during 2003–11, as foreign workers expanded at a CAGR of

6.6% to 5.8mn and the nationals in the labor force rose at a CAGR of 3.6% to 4.1mn.

Unemployment, especially among the youth, has become an endemic problem in Saudi Arabia. Further

breakdown of the labor force by age structure reveals large unemployment among people in the 15–29 age

group. Over two-third of the labor force in this age group remained unemployed in 2009. Moreover,

unemployment was particularly pronounced among Saudis (12.1%), while the national average stood at 5.5% in

2012.

The high rate of unemployment among Saudi nationals has prompted a backlash against companies hiring

foreign laborers. The government hopes to strengthen its Saudization initiative, which includes fines (USD640 a

year for each additional expat) for companies with workforce comprising less than 50% Saudi nationals, as a way

20.2

24.1

27.6 28.9

30.7

33.7

38.8

0

5

10

15

20

25

30

35

40

2000 2005 2010 2012 2015e 2020e 2030e

in m

ilio

ns

Age Group: 0 - 60 Age Group: 60+

16.4 18.5 19.8 20.7 23.0 25.5

6.1 8.1 9.4 7.5 7.5 7.6

2004 2009 2012 2014e 2019e 2024e

Saudis Non-Saudis


41

to combat the persistent unemployment issue. Saudi Arabia aims to create 3mn jobs for nationals by 2015 and

6mn jobs by 2030, partly through the Saudization initiative. Moreover, the government has stepped up

unemployment benefits through the Hafiz program introduced in late 2011.Through the program, unemployed

Saudis are given SAR2,000 (USD533) a month for up to a year to assuage discontent regarding the issue.

The government sector remains the biggest employer of Saudi nationals (92.2%), while the private sector

employs over 8.0mn foreign workers, representing 89.6% of total jobs in the sector. Considering this situation,

enabling a more dynamic private sector through product and labor market reforms and better positioning Saudi

nationals to fill the employment opportunities created would help address unemployment among the nationals.

Labor market reforms should focus on developing skills among the locals to equip them to take positions created

without severely impacting competitiveness. Consequently, the government has allocated over 50% of

expenditure (SAR731.5bn) to human resources development under its Ninth Development Plan. In addition, the

government intends to increase the share of Saudi nationals in total labor force (Saudization rate) from 47.9% in

2009 to approximately 53.6% in 2014 by providing 1.1mn jobs, and reduce unemployment rate among Saudis to

5.5% by 2014.

Unemployment Rate (%) Composition of Labor Force (%)


Oil and related products to underpin current account surplus

Crude oil and related products would continue to remain Saudi Arabia's most dominant export commodity that

influences trade balance and balance of payments. Record high oil production, coupled with rising oil prices and

surging petrochemical and aluminum exports, has led to a comfortable trade surplus despite double-digit growth

in imports in the last six out of seven years (except 2009).

Trade surplus rose to 35% of GDP in 2012 from 29% in 2010, while oil exports increased to 48% of GDP from

41% over the same period. Oil exports, as a percentage of total exports, surged to 88% in 2012 from 86% in

2010, with crude oil representing almost 90% of oil exports and refined products accounting for the rest.

Petrochemicals and plastics accounted for 67% of non-oil exports in 2012, driven by the government's long-term

incentives to move toward more finished petroleum products (for higher margins). Imports, which rose to 19.5% of

GDP in 2012 from 18.3% in 2010, increased at a CAGR of 14.9% over the last eight years. Machinery and

11.0 10.5

12.1

5.5

3.5

1.9

5.8 5.4 5.5 5.5

3.5

1.9

2004 2009 2012 2014e 2019e 2024e

Saudis Total

92.2

10.4

7.8

89.6

Government Sector Private Sector

Saudis Non-Saudis


42

transport equipment represented close to half of all imports, followed by base metals (12.1%) and food items

(11.5%).

Oil exports are expected to continue strengthening trade surplus in the coming years. However, trade surplus

could narrow, as oil production stabilizes from the record high over the last two years following increased

production from other parts of the world (the US, Iraq and Libya), relieving pressure on prices. Trade surplus is

expected to stabilize to 25% of GDP in 2017 on rising imports and steady exports. Asian economies, such as

China, India and Vietnam, are likely to remain key drivers of Saudi Arabia’s long-term export prospects. In

addition, economies with large population and an associated heavy demand for energy, such as Poland, Turkey,

Brazil and Egypt, are expected to drive oil exports.

High trading surplus offset persistent deficits in services and current transfers, while higher income from

investments abroad boosted current account balance, which more than doubled to USD160.4bn (26.5% of GDP)

in 2011 and is expected to maintain this momentum in 2012. Investment income from abroad rose 37.3% in 2011,

led by higher returns from financial assets.

Current account balance is expected to remain positive, primarily due to high trade surplus that will continue to

offset deficits in services and current transfers. Investment income from abroad, although sustained throughout

the global economic slowdown, is believed to deliver better returns as interest rates are anticipated to rise after

2015. Consequently, current account balance is estimated to plunge to 12.4% of GDP in 2017 from 26.5% in

2012.

Trade Balance (USDbn) Current Account Balance (USDbn)


The global economic crisis adversely affected foreign investment inflows into the Kingdom just as in other

developing economies. Foreign direct investment (net) inflows declined to USD13.4bn in 2011 after rising to a

record high of USD36.4bn in 2008. Foreign direct investment inflows are expected to increase 3% to USD13.8bn

in 2012. Meanwhile, portfolio investments abroad soared tenfold to USD16.4bn in 2011 from USD1.7bn in 2008,

and are expected to increase 11.0% to USD18.2bnin 2012. Other investments abroad are estimated to fall to

USD8.6bn in 2012 after increasing to USD11.2bn in 2011, up from USD7.6bn in 2010.

217.9

321.6

351.5 343.8 320.1

308.3 300.7 296.5

36.2

47.5

49.5 55.0 60.1 65.8 72.2 79.3

-97.9 -120.6

-143.9 -141.8 -150.7 -160.6 -171.9

-184.3

156.3

248.6 257.1 257.0

229.5 213.5

201.0 191.5

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

Oil Exports Non-oil Exports Imports Trade Balance

156.3

248.6 257.1 257.0

229.5 213.5

201.0 191.5

-88.0

-67.4 -78.6

-103.2 -108.8 -110.2 -108.1 -94.8

67.6

160.4

178.5

153.8

120.6

103.4 93.0 96.7

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

Trade Balance Services (Net), Income, Transfers CAB


43

Improvement in the overall business climate is expected to increase foreign direct (net) inflows into the Kingdom,

while portfolio investments abroad are likely to decline gradually. Foreign direct investment is expected to

increase at a CAGR of 3.1% to USD16.1bn in 2017, while portfolio investments abroad are likely to decelerate at

a CAGR of 10.6% to USD10.4bn. Other investments abroad are estimated to rise at a CAGR of 15.0% to

USD17.3bn in 2017.

Foreign Direct Investment Inflows (USDbn) Investments Abroad – Outflows (USDbn)


Fiscal spending to shift focus on social needs

Despite greater economic diversification, developing financial markets, and improved public infrastructure, the

correlation between fiscal spending and oil revenues remained strong. Buoyant oil revenues led to higher fiscal

surplus, and provided room to accelerate domestic developmental objectives and address pressing social issues,

including shortage of affordable housing and unemployment.

Notwithstanding the runaway fiscal spending, fiscal surplus more than tripled to USD78.6bn in 2011 compared to

the previous year. Fiscal surplus, as a percentage of GDP, rose to 13.0% in 2011, led by strong oil revenues. Oil

revenues, which represent over 90% of fiscal revenues, primarily led to an increase in fiscal revenues by 51.0% to

USD301.8bn in 2011. Oil revenues and the associated fiscal revenues continued their uptrend in 2012, with a

growth of 12.0% to USD313.9bn and 14.0% to USD345.2, respectively, over the previous year.

As with the previous budget, fiscal spending was focused on education, healthcare and infrastructure, with capital

expenditure receiving an especially large investment in 2011. Capital expenditure rose faster than the current

expenditure at 38.9% to USD74.6bn in 2011, led by government initiatives to construct more schools, hospitals,

roads and highways. Meanwhile, current expenditure surged 21.0% to USD148.6bn in 2011, led by higher

subsidies (doubled in 2011) and higher salaries for public sector employees (up 16%). Compensation to public

employees represented the biggest chunk of current expenditure, with more than 50% share. Capital and current

expenditures are expected to moderate to single-digit growth in 2012, following record fiscal spending in 2011.

Actual fiscal surplus continued to surpass budgeted surplus, as record oil production and higher oil prices (above

USD100) amplified fiscal income from oil exports, which, in turn, pushed actual expenditure above the budgeted

estimate between 2010 and 2012. Actual fiscal income has been surpassing the budgeted estimate over the last

25.6

13.2 13.8 14.3 14.7 15.2 15.6 16.1

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

15.3

16.4

18.2

15.8

12.6

10.9

9.9 10.4

7.6

11.2

8.6

10.3

12.3

14.7

16.0

17.3

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

Portfolio Investments Other Investments


44

three years;it was more than double the forecast in 2011 and rose further to USD334.7bn in 2012, 77.0% higher

than the budgeted forecast. Although, the Ministry of Finance does not disclose its oil price and output

assumptions, the IMF estimated that Saudi Arabia needed a breakeven oil price of USD77.0 in 2011. The

breakeven oil price is estimated to decline slightly to USD 74.4 in 2012, as fiscal spending moderates to single-

digit growth.

Fiscal Balance (USDbn)


The Saudi Arabian government announced another expansionary budget for 2013, with higher allocation for

hospitals and schools. Fiscal income is estimated to increase 18.0% to USD223.8bn from last year’s budgeted

estimate, but decline by a third from the actual fiscal income. Oil production, which rose to record levels in the last

two years amid geopolitical tensions in the Middle East, is expected to stabilize at current levels (average 9.5+

b/d). Separately, pressure on international oil prices is believed to ease due to higher production from countries

like Iraq and Libya.

In 2013, fiscal spending would be almost 19.0% higher than the 2012 budget, but 4%lower than the actual

spending. Once again, education, healthcare, and transport and infrastructure received higher budgetary

allocations. The new budget’s objectives are in line with the Ninth Development Plan (2010–14), which has

allocated more than 50% of USD390.0bn for human resources development to transform productivity of the

Kingdom’s labor force, address youth unemployment and reduce reliance on the expatriate population. In

addition, the government intends to strengthen healthcare infrastructure by increasing the number of beds to over

100,000 by 2014 and hospital staff, among other initiatives. The impact of all these measures is likely to raise

breakeven oil price by 14.5% to USD85.2 in 2013.

There was continuity in terms of allocation to various ministries from the previous budget. Allocation to education

increased 20.9%; it comprised the single largest portion of the budget and accounted for more than one-third of

the total. Saudi Arabia is expected to spend USD1.1bn on building 539 schools in 2013. Health and social affairs

also enjoyed another large rise, with allocation rising 15.6% to USD26.7bn. However, it is below the 26.2%

increase in the 2012 budget, reflecting introduction of unemployment benefits in November 2011.

181.0

279.3 313.9 299.0 278.3 268.0 266.0 255.7

19.3

22.5

31.3 34.3 35.5 36.6 37.7 39.2

-122.9 -148.6 -155.5 -166.5 -167.6 -175.3 -190.6 -199.2

-53.7

-74.6 -77.2 -96.8 -97.6 -99.7

-102.7 -105.9

200.3

301.8

345.2 333.3 313.8 304.7 303.8 294.8

-176.5

-223.2 -232.7 -263.3 -265.2 -275.0

-293.3 -305.2

23.7

78.6

112.5

70.0 48.6

29.7 10.4

-10.4

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

Oil Revenues Non-oil Revenues Current Expenditure Capital Expenditure Fiscal Balance


45

Although fiscal expenditure growth would slow down, government’s capital spending is expected to remain at

elevated levels. It includesaUSD67.0bn house-building program to construct half a million affordable housing

units, plans for new schools and hospitals, and other infrastructure projects to increase access to public utilities.

Consequently, fiscal balance is estimated to turn negative to 1.3% of GDP in 2017.

Government Development Plans Budget Appropriations (USDbn)


Downward pressure on food and housing prices ease inflation

Inflationary pressures, as measured by the cost of living index, continued to ease in 2012, led by softening prices

of food items, rent, healthcare, and other expenses and services. Average inflation (end-of-the-year prices) in

Saudi Arabia slowed to 4.6% in 2012, down from 5.0% in 2011 and 5.3% in 2010. The decline was particularly

pronounced in the other expenses category, which regressed to 3.7% in 2012 from 9.0% in 2011. The index rose

in late 2011, reflecting fast-rising gold and jewelry prices (which make up bulk of the category). However, the rate

of increase in the category slowed in 2012, as gold prices stabilized.

Other key groups of goods and services that had a significant impact include food prices, which subsided to 4.4%

in 2012 from 5.2% in 2011, as international food inflation abated; and healthcare, which fell to 0.1% from 0.8%.

Together (food items, others, healthcare) constitute 41.0% of the all cities cost of living index. Wholesale price

index moderated to 2.5% in 2012 (end-of-the-year prices), down from 4.2% in 2011. All components (9) of the

index,except chemicals and related products, retreated in 2012.

Food prices (largely determined externally given the weight of imports) and rents (determined by structural

factors) will continue to drive inflation. Inflation is expected to remain manageable, largely due to price subsidies

on a range of basic goods, such as food and electricity. Rising rental prices, which drove inflation higher in 2012,

are expected to soften due to influx of new properties and passage of the new mortgage law. However, the

Saudization program in the private sector, which would include new measures to compel companies to hire (more

expensive) nationals, poses considerable upside risks, as businesses may pass on higher costs to customers.

Overall, inflation is expected to slow to 4.0% by 2017.

Infrastructure

Economic Resources

Human Resources

Social & Health

Services

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

First P

lan (

1970 -

74)

Second P

lan (

1975 -

79)

Th

ird P

lan (

1980 -

84)

Fo

urt

h P

lan (

1985 -

89)

Fifth

Pla

n (

1990 -

94)

Six

th P

lan (

1995 -

99)

Seventh

Pla

n (

2000 -

04)

Eig

hth

Pla

n (

2005 -

09)

Nin

th P

lan (

2010 -

14)

36.7 40 45.0 54.4

16.3 18.3

23.1

26.7

5.8 6.5

7.8

9.6

6.4 6.7

9.4

17.3

12.3 13.5

15.3

15.2

12.9 12.5

23.0

18.2

2010 2011 2012 2013

Education

Health and Social affairs

Municipality Services

Infrastructure and Transportation

Water, Agriculture, Industry and other Resources

Specialized Credit Institutions


46

Inflation (% Change) Components of Price Index - % Change


Monetary policy remain accommodative to support fiscal spending

SAMA continued to pursue an accommodative monetary policy in support of the domestic financial system, with

focus on excess liquidity management and macro-prudential policies. Broad money (M3) supply stood at

USD376.3bn, up 13.9% at the end of 2012. M3 rose 6.4%in the fourth quarter of 2012, its strongest growth in the

last eight quarters.

Despite aggressive fiscal spending, SAMA was able to limit money supply growth by absorbing excess liquidity

through active treasury operations. SAMA's daily average Repo transactions stood at USD8.9mn during the fourth

quarter of 2012 compared to USD139.9mn in the previous quarter. Daily average Reverse Repo transactions

totaled USD24.8bn vis-à-vis USD18.2bn over the same period. SAMA continued to maintain the ceiling on weekly

treasury bills issuance of USD2.4bn, while pricing the bills at 80.0% of the interest rate on Saudi inter-bank

deposits to favor lending. Consequently, balance of treasury bills settled at USD37.5bn at the end of 2012, up 6%

from end-2011. Growth in issuance of treasury bills in 2012 was slower than that in 2011 (8.0%) since the need to

absorb excess liquidity diminished after inflation slowed to under 4.0%.

Among components of M3, M1 recorded the biggest Y-o-Y jump (16.6%) in 2012, driven by strong inflows into

demand deposits, which grew 17.6% to USD203.6bn. Demand deposits represent over 50% of total money

supply. Time & savings deposits registered the highest growth (6.2%) in 2012. Other quasi monetary deposits

also recorded double-digit growth (16.0%) in 2012. Broad money supply is estimated to increase to USD409.0bn

in 2013, up 8.6%, led by double-digit growth in time & savings deposits and other quasi monetary deposits.

Domestic interbank interest rates (SIBOR) on deposits (three-month interbank interest rate) increased to 0.9% at

the end of the fourth quarter of 2012 compared to 0.7% at the end of 2011. Interest rate differential between the

Riyal and the Dollar deposits for a three-month period continued to be in favor of the Riyal, standing at 55 basis

points at the end of the fourth quarter of 2012 compared to 41 basis points at the end of 2011. The Saudi Riyal

exchange rate against the Dollar maintained its official rate at USD3.75 at the end of the fourth quarter of 2012.

5.3

5.0

4.6 4.6

4.3

4.0 4.0 4.0

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

6.3

-0.7

9.5

2.8

0.4

1.1

0.9

7.4

5.2

0.4

7.7

0.5

0.8

2.1

1.6

9.0

4.4

2.9

8.1

3.5

0.1

1.8

3.1

3.7

Food

Clothing

Rent & Utilities

Home Furniture

Healthcare

Transport & Telecom

Education & Entertainment

Others

2012 2011 2010


47

Broad Money Supply (USDbn) Private Sector Lending (USDbn)


In line with its commitment to the US dollar peg and reflective of the monetary policy in the US, SAMA has left

interest rates unchanged since 2009, keeping the repo and reverse repo rates low at 2.0% and 0.25%,

respectively. The Saudi Riyal - US dollar peg is expected to be maintained in the near future despite the

Kingdom’s commitment to fast track introduction of a single GCC currency. Consequently, Saudi Arabia’s policy

rates would roughly follow the US interest rates for the near future. The US Federal Reserve is committed to

keeping its interest rates low until 2015 to help stimulate the economy. SAMA will continue to maintain a small

premium on the US interest rates, given distortions between economic growth of the two countries and Saudi

Arabia’s concerns regarding inflation.

Lending to private sector increased 16.4% to USD270.0bn in 2012, led by higher lending to almost all sectors,

except transport. Moreover, eight of 11 sectors recorded double-digit growth, with lending to the mining sector

rising by 59.0% in 2012. Lending to manufacturing and commerce, the two biggest sectors in terms of size of

lending, rose 13.0% for the year. Consumer loans also jumped 14.5% YoY to USD 74.9bn at the end of the

second quarter of 2012, reflecting continuous expansion of the economy.

26 29 32 33 32 33 34 35 36 38

143 156 162 164 173 183 185 187 204 187

81 80 81 78

82 83 83 79

88 121 42

45 42 43 42

44 45 52

49

62

292 310 316 317

330 343 347 354

376

409

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

2013e

Currency outside banks Demand Deposits

Time & Savings Deposits Other Quasi Monetary Deposits

209 216 221 227 232 243

252 261

270

293

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

2013e


48

Private Sector Lending by Industry (USDbn)


Saudi Arabia’s Tadawul rebounds in 2012, with a gain of 6.0%

Saudi Arabia’s Tadawul All Share Index (TASI) gained 6.0% and ended 2012 on a positive note. It marked a

rebound for the market, which posted a loss of 3.1% in 2011. TASI closed at a high of 7,944.36 points on April 02,

2012, translating into a year-to-date increase of 23.6%, on strong earnings expectations and upbeat economic

news. Corporate earnings rose 20.4% YoY in FY11, mainly led by petrochemical and banking sectors (reported

an increase of 38.5% and 18.4%, respectively, in earnings). In real terms, the Kingdom’s GDP rose 7.1%

(previous estimate) in 2011, a significant improvement vis-à-vis the 5.1% growth registered in 2010. The

government announced a 19.0% increase in budget expenditure for 2012 and estimated budget revenues to grow

30.0%. However, TASI declined during 2Q12 due to developments in the local market and weakness in global

markets. Furthermore, US job news was surprisingly below market expectations and hopes of the US Fed

Reserve commencing a new asset-buying program seemed bleak. Consequently, investors engaged in profit-

booking and TASI’s YTD gain was lower at 17.8% by the end of April.

The market’s downfall extended further into the year with oil prices tumbling to new lows due to deterioration of

the Eurozone debt crisis and a slowdown in the Chinese economy. The OPEC Reference Basket price declined

28.8% to USD88.74 in June, a new low in 2012, from a high of USD124.64 in March. However, the market picked

up eventually with a recovery in oil prices—the OPEC Reference Basket price rose above USD100. Furthermore,

corporate earnings, which declined 6.0% YoY during 2Q12, dented investor sentiment. Thereafter, the market

remained majorly range-bound until October amid concerns about the Eurozone crisis and ongoing political

tensions in the Middle East. However, the market witnessed a quick recovery in December, supported by an

expansionary budget for 2013 and hopes of an improvement in corporate earnings in 4Q12. The index pared

some gains during the last two trading sessions of the year due to uncertainties related to the US fiscal cliff and

ended the year with an increase of 6.0%.

3

24

2 5

15

49

12

5 10

77

9 2

30

2 7

19

49

10 6

10

86

9 2

34

3 9

20

56

10 8

15

100

11

Agriculture

Manufa

ctu

rin

g

Min

ing

Utilit

ies

Constr

uctio

n

Com

merc

e

Tra

nsport

Fin

ance

Serv

ices

Mis

ce

llan

eou

s

Govt.

& Q

uasi

Govt.

2010 2011 2012


49

TASI - Index and Volume Performance

Source: TASI, Gulfbase& Global Research

Saudi Arabia’s Tadawul All-Share Index (TASI) closed 1.8% higher at 7125.7 in March 2013. The index registered

an increase of 4.8% on year-to-date basis. Market movement during the month was supported by positive

sentiments across global economies coupled with leads from domestic news flows. The listing of National Medical

Care Company shares was a major event, with the stock closing 351.9% higher and witnessing strong volumes,

representing 28.8% of the index volumes on the day of listing. The revision in Fitch Ratings for the Kingdom to

Positive from Stable also boosted investor confidence. With the issuance of final regulations on the mortgage law

and significant housing shortage in Saudi Arabia, the Real Estate index experienced significant gains, driving the

overall performance of TASI.

On sectoral basis, the performance was led by Retail, Insurance and Real Estate indices. Heavyweight

Petrochemical Industries gained 4.4% during the month, while Banking and Financial Services declined

2.5%MoM.

In the coming month, the performance is expected to be driven by earnings for the first quarter. The market is also

expected to maintain its status quo, unless significant events take place on the global front.

Corporate earnings

TASI’s consolidated earnings remained flat and stood at USD25.5bn similar to the level witnessed in 2011. This

was primarily due to the 16.8%YoY decline in earnings of petrochemical companies, which accounted for 35.4%

of overall earnings in 2012. Performance of petrochemical firms continues to remain pressurized due to price

volatility and weak demand. Saudi Basic Industries Corporation (SABIC), the leading player, reported a

15.5%YoY decline in earnings owing to higher cost of sales and lower price realizations. Heavyweight Banking

sector, contributing to nearly 30% TASI’s earnings, grew 11.9%YoY in 2012. Al Rajhi Bank, the leading lender in

the Kingdom, registered a 6.9%YoY increase in earnings to USD2.1bn, representing 27.5% of the sector’s total

earnings. Telecommunication & Information Technology, the next largest contributor to TASI’s earnings (12.1% of

total earnings) grew at 6.8%YoY, led by improved performance of Etihad Etisalat Co. whose earnings grew

18.4%YoY in 2012. Cement companies in the Kingdom continue to enjoy robust demand given the increased

focus on government expenditure.

0

200

400

600

800

1,000

1,200

5000

5500

6000

6500

7000

7500

8000

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13

Volume (mn) - RHS Index - LHS


50



-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

0

5,000

10,000

15,000

20,000

25,000

30,000

2006 2007 2008 2009 2010 2011 2012

US

Dm

n

Growth (%) - RHS -16.8%

-11.9%

5.4%

6.3%

6.8%

11.1%

11.9%

16.2%

16.7%

24.7%

35.1%

44.6%

58.4%

66.4%

110.2%

0.0%

Petrochemical Industries

Retail

Real Estate Development

Multi-Investment

Telecommunication & …

Cement

Banks & Financial Services

Agriculture & Food Industries

Energy & Utilities

Hotel & Tourism

Insurance

Industrial Investment

Media and Publishing

Building & Construction

Transport

Total Saudi


51

Kuwait

Kuwait GDP estimated to grow by 1.1% in 2013; 2012 by 5.1%

Oil production inching closer to its maximum capacity of 3.2mnbpd

Interest rates are expected to track the US Fed rate and are likely to remain low

KSE rose by 6% in 2012 on improved outlook for spending

Kuwait GDP estimated to grow by 1.1% in 2013; 2012 by 5.1%

Kuwait's GDP is estimated to have grown 5.1% to USD173.4bn in 2012, lower than

6.3% in 2011.This growth has been primarily due to the continued increase in oil

output, resurgence in the non-oil sector, and improved public and private consumption

levels. However, the political instability halted many developmental projects, thus

putting an adverse impact on the economic growth. The oil sector is expected to grow

8.5% in 2012, after a record performance (14.2% growth) in 2011. Private

consumption is estimated to expand twice as fast (5.0%) versus the last year, boosted

by high income levels and strong demand for imported goods. Growth in non-oil

sector is projected to increase 5.5% in 2012, a major rebound from a mere 0.9%

growth in 2011.

Kuwait oil production inching closer to its maximum capacity of 3.2mnbpd

Kuwait’s oil production is expected to increase 9.0% to 2.9mn b/d in 2012, inching

closer to its maximum present capacity of 3.2mn b/d. Kuwait increased its production

in 2011 by 15.2% to compensate for the loss of supply from Libya and also as one of

the few OPEC members with spare capacity, it raised production again in 2012 to

meet supply shortfalls over Iran sanctions. Oil production will continue to be in the

range of 2.8-3.0mn b/d till 2017, notwithstanding any capacity expansion during the

period.

Interest rates are expected to track the US Fed rate and are likely to remain low

Monetary policy and liquidity conditions in Kuwait will continue to remain largely

accommodative. Given the currency peg between Kuwaiti Dinar and the US dollar-

dominated basket of currencies, policy interest rates are expected to track the US Fed

rate and are likely to remain low. Broad money supply (M3) grew 5.2% in 2012, led by

double-digit growth (18.3%) in demand deposits, which in turn resulted in M1 growth

of 16.8% and a moderate increase (1.7%) in quasi-money. Going forward, money

supply is expected to increase by 11.6% in 2013 owing to a shift in trend as quasi-

money increases by double-digits (14.1%), while M1 grows by 4.3%.

Improved outlook for spending lifts KSE to a two-year high

Kuwait Stock Exchange (KSE) commenced 2012 on a strong note, as evident from

the 6%YoY growth in 1Q12. Investors remained upbeat about the parliamentary

elections at the beginning of the year. Islamist bloc (the Opposition)’s victory raised

hopes of higher government spending for welfare projects, and infrastructure and

economic development. Kuwait’s budget surplus at 24% of GDP in 2011 also had a

positive impact on the market. The Kuwaiti market witnessed a steady growth in its

corporate earnings in 2012, maintaining the momentum gathered since 2010. Overall

earnings grew 12.0%YoY in 2012.

Ku

wa

it


www.globalinv.net


52

Kuwait Economic Indicators

2010 2011 2012a/e* 2013e 2014e


Real GDP Growth (%) (2.4) 6.3 5.1* 1.1 3.1

Oil 0.5 14.2 8.4* (3.4) 0.5

Non-Oil (3.9) 0.9 5.5* 5.2 4.9


Oil 56.7 64.6

Non-Oil 43.3 35.4


Private Consumption (11.1) 2.3 5.0* 4.9 5.5

Public Consumption - 9.7 8.0* 6.7 7.0

Gross Capital Formation 19.8 (4.0) 1.4* 6.1 9.4

Exports (0.5) 13.5 7.4 (4.2) 0.3

Imports 6.3 6.1 7.0 7.9 7.9

Population (mn) 2.7 2.9 2.9* 3.0 3.0

Growth Rate 3.0 2.7 2.4 2.2

Trade Surplus (USD bn) 43.9 77.3 98.4* 88.3

Export of Goods 66.6 103.2 121.7* 113.2

Import of Goods (22.7) (25.9) (23.3)* (24.9)

Current Account Balance (USD bn) 39.8 68.1 86.4* 76.2

Government Revenue (USD bn) 75.0 109.6 123.3 123.3 121.5

Oil & Gas 69.6 103.5 108.8* 100.9

Others 5.4 6.0 22.9* 24.3

Government Expenditure (USD bn) (56.6) (61.6) (69.5) (76.1) (82.2)

Fiscal Balance (USD bn) 18.4 47.9 53.7 47.2 39.3

Gross Public Debt (USD bn) 13.3 12.8 12.8 12.5 12.3


Inflation (%) 4.0 4.7 2.9 3.3 3.8

M1 (USD bn) 17.4 23.1 26.9 28.1


M2 (USD bn) 87.7 100.6 105.8 118.1


Private Sector Lending (USD bn) 96.0 102.3 104.2 115.1


Market Index 6,955.5 5,814.2 5,934.3



53

KUWAIT

Growth in non-oil sector with higher consumption to drive economic activity

Kuwait's GDP is anticipated to have grown by 5.1% to USD173.4bn in 2012, lower than 6.3% in 2011. This growth

can be attributed to the continued increase in oil production, rebound in the non-oil sector, and high public and

private consumption levels. However, the growth could not match to 2011 levels as political instability halted many

developmental projects. Backed by record oil production and high international oil prices, oil sector is anticipated

to increase 8.5% in 2012, following another record performance (14.2% growth) in 2011. In 2012, private

consumption is projected to grow twice as fast (5.0%) as compared to the last year, supported by high income

levels and strong demand for imported goods.

Growth in non-oil sector would be particularly strong as it is projected to grow 5.5%, bouncing back from just 0.9%

growth in 2011. Non-oil sector was adversely affected in 2011 as political stalemate delayed the implementation

of key public development projects as well as private investment, leading to a fall in gross capital formation by

4.0% in 2011. Gross capital formation is projected to witness a modest increase (1.4%) in 2012 as the

government kick-starts the implementation of the four-year, USD104.0bn, 2010–14 Development Plan launched

in FY 2010/11. The plan will emphasize investment in infrastructure, health, and education; encourage significant

co-participation of the private sector by privatizing a number of government entities, including Kuwait Airways and

utility companies; and aim to diversify Kuwait’s economy away from oil and into a finance and trade.

Going forward, the pace of economic activity will be largely determined by the speedy implementation of the four-

year Development Plan with projects worth more than half the size of the current nominal GDP. GDP growth is

likely to be modest (1.8%) in 2013 as oil prices and production stabilizes, exports remain subdued, and

government expenditure slows down. Nevertheless, capital formation is expected to rise 6.1% in 2013, and

continue to increase till 2017. Non-oil sector would continue its current growth trajectory, whereas private

consumption is projected to grow 4.9% in 2013, accountable to wage growth and continuing demand for imports.

Real GDP Growth (%) Real GDP Growth by Type of Expenditure

Source: IMF, Kuwait - Central Statistics Bureau, EIU

0.5 14.2 8.4

-3.4

0.5 2.2 2.2 2.3

-3.9

0.9

5.5

5.2 4.9

4.9 4.9 4.9

-2.4

6.3 5.1

1.1

3.1 3.8 3.9 3.9

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e


Real GDP (%)

-11.1

2.3 5.0 4.9 5.5 6.0 6.5 7.3

0.0

9.7 8.0 6.7 7.0 7.4 7.8 6.5 19.8

-4.0

1.4 6.1 9.4

10.0 10.7 12.4

-0.5

13.5 7.9 5.3

4.7 3.2 3.8

5.0

6.3

6.1 8.2 7.7

8.0 9.0 10.2

13.5

2010 2011 2012E 2013E 2014E 2015E 2016E 2017E

Private Consumption Public Consumption

Gross Capital Formation Exports

Imports


54

Focus shifts to development plans and private sector role

Kuwait’s oil production is expected to increase 9.0% to 2.9mn b/d in 2012, inching closer to its maximum present

capacity of 3.2mn b/d. Kuwait increased its production in 2011 by 15.2% to compensate for the loss of supply

from Libya and also as one of the few OPEC members with spare capacity, it raised production again in 2012 to

meet supply shortfalls over Iran sanctions. Oil production will continue to be in the range of 2.8-3.0mn b/d till

2017, notwithstanding any capacity expansion during the period.

Oil sector contributed to 65% of the GDP in 2011, up from 52% a decade earlier. As the global demand for crude

oil rose, Kuwait, like rest of the Middle East oil-exporting countries, increased its production, while rising demand

from emerging markets and geopolitical tensions kept oil prices high towards the end of the decade. As part of its

USD90.0bn expansion plan, Kuwait Petroleum Corporation has initiated a number of upstream and downstream

projects, including the up-gradation of oil production and export infrastructure, and to increase production capacity

to 4.0mn b/d by 2020.

Movement in Structure of Real GDP (%) Oil Production

Source: Kuwait Government Online, IMF

Despite the Kuwaiti government’s best efforts to diversifying the economy, contribution from the non-oil sector has

been declining and has reached its lowest level in the last 10 years (35% of the GDP). Non-oil sector was

particularly affected by decrease in activity in sectors such as manufacturing, trade, and financial services in

2011. Manufacturing sector declined 2.8% in 2011, while financial services registered the least impressive growth

of the year (-7.2%). Transport, construction, and utilities sectors benefitted from the ongoing investments as part

of the implementation of the Development Plan.

With the aim of increasing the role of private sector to almost three-quarters of the economy, the Kuwait Vision

2035 was envisaged to diversify the country’s oil-reliant economy. The Kuwait Vision 2035 includes a series of

developmental plans aimed at strengthening physical and social infrastructure through investments in transport,

water, power, and oil refining sectors. The current (fourth) Development Plan (2013–2014) has earmarked more

than USD19.0bn for investments in infrastructure projects in 2013.

Key projects under the Kuwait Vision 2035 include developing three new cities – Silk City (a 250 sq km

commercial development), College City (a township establishment for a new Kuwait University), and Mutlaa

52% 56% 57%

65%

48% 44% 43%

35%

2000 2005 2010 2011

Oil Sector Non-oil Sector

2.3 2.7

2.9 2.8 2.8 2.9 2.9

3.0

2.2

15.2

9.0

-3.4

0.7

2.1 2.1 2.4

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e



55

Residential City (a city comprising 25,000 residences, 119 schools, 110 mosques, 10 government buildings, 10

police stations, and 10 health centers). Planned projects also include new metro and rail network; construction of

a port on Boubyan Island, and expanding the Kuwait International airport.


Source: Kuwait - Central Statistics Bureau

A young population and growing labor force create demand for public sector jobs

Kuwaiti population, which grew at a CAGR of 3.5% in the last decade, is expected to decelerate to 2.2% in the

current decade. Population under the age of 60 is expected to decline from 96% in 2012 to 94% by the end of the

decade. Meanwhile, the proportion of the population above the age of 60 is expected to increase to 6.0% by

2020, from 4% in 2012; this population is expected to grow at a CAGR of 5.5% till 2020, more than twice as fast

as the growth (2.5%) in the previous decade. Population below the age of 60 is projected to grow at 2.0% per

annum till 2020, vis-à-vis 3.6% p.a. in the last decade.

Kuwait has been highly dependent on the expatriate population, primarily for low-skilled labor force. Currently, the

expatriate population represents 69% of the overall population. A majority of the non-Kuwaiti population performs

menial jobs, particularly as domestic helpers who represent 41.0% of the non-Kuwaiti labor force. An additional

24.0% of foreign laborers work in low-skilled jobs like construction, retail trade, hospitality, and repair works.

Private sector employs over 50% of foreign workers, while less than 10% of foreign workers have public sector

jobs.

19.2

1.3

-0.5

11.5

0.4

4.5

-20.0

-12.0

12.4

7.1

16.0

-2.8

10.9

1.8

-0.5

2.2

-7.2

6.4

Agriculture

Min

ing (

incl. O

il &

Gas)

Manufa

ctu

rin

g

Utilit

ies

Constr

uctio

n

Wh

ole

sa

le T

rade

, h

ote

ls

Tra

nsport

Fin

ance

Socia

l & P

ers

onal


Industry Services Producing Sectors

Agriculture

Agriculture, 0.3%

Mining (incl. Oil & Gas),

89%

Manufacturing, 7% Utilities, 2%

Construction, 2%

68%

Services Sectors

Wholesale

Trade & Hotels, 11%

Transport, 17%

Finance, 30%

Social & Personal, 42%

32%


56

Population Growth Composition of Population

Source: UN database, Kuwait - Central Statistics Bureau; Public Authority for Civil information

With a relatively young population (54% of the Kuwaiti population is under the age of 29), Kuwaiti labor force grew

at a faster rate than the total labor force and the non-Kuwaiti labor force. Kuwaiti labor force grew at a CAGR of

1.7% in the last 4 years as compared to a decline of 6.1% in non-Kuwaiti labor force. This rapid growth has put

increasing pressure on public sector employment, as Kuwaiti’s perceive public sector jobs to be secure and well-

paid with fewer working hours. Kuwaitis held 71.0% of all public sector jobs in 2011 as compared to just 5.0% in

private sector.

In an effort to encourage Kuwaitis to pursue private sector jobs and reduce the unemployment levels (2.1% in

2012), the government nearly doubled the allowances based on marital status and education to those Kuwaitis

who chose to work in private sector.

The ongoing Kuwaitization drive has forced private sector to cut down on foreign hires, and with the introduction

of mandatory rule to maintain certain percentage of Kuwaiti employees in each sector: 60% in banking; 56% in

telecommunications, finance and investment; 40% in petrochemicals; and 30% in the oil refining. On the other

hand, the Kuwaiti government proposed an increase in minimum wage for nationals to USD5,300 per month,

highest in the world, in early 2013. In addition, to encourage the spirit of entrepreneurship among the youth and

help absorb the labor force in the country, the Kuwait National Fund for Small and Medium Enterprises was set

up.

1.9

2.3

2.7 2.9

3.1

3.4

4.0

0

1

2

3

4

5

2000 2005 2010 2012 2015 2020 2030

in m

ilio

ns


38% 33% 32% 31%

62% 67% 68% 69%

2000 2005 2010 2012

Kuwaiti Non-Kuwaiti


57

Unemployment Rate (%) Composition of Labor Force (%)

Source: Kuwait - Central Statistics Bureau

Despite a move towards diversification, external balances remain firmly linked to oil

Trade surplus will be driven by increasing oil exports that account for over 90.0% of the total exports. Trade

surplus is projected to rise 27.3% to USD98.4bn in 2012 on account of a 76.3% increase in 2011. Oil exports are

expected to increase 18.3% to USD114.4bn in 2012, while non-oil exports are expected to register 12.3% rise to

USD7.3bn in the same period. Crude oil exports rose as, among the OPEC members, Kuwait was one of the few

countries with spare production capacity to deal with the supply shortage arising from Libya's civil unrest in 2011

and Iran's sanctions in 2012.

Non-oil exports are expected to be primarily driven by ethylene products and manufactured fertilizers that account

for close to 75.0% of all non-oil exports. In addition, re-exports (part of non-oil exports) rose 21.7% YoY in the first

nine-month of 2012. Meanwhile, imports are expected to decline 10.0% to USD23.3bn in 2012, reflective of a

stronger dollar against the Kuwaiti Dinar.

Current account will continue to register healthy surplus as robust trade surplus is expected to offset the non-

merchandise deficit. Current account surplus is expected to rise 26.9% to USD86.4bn or 44.2% of GDP in 2012,

despite a 26.0% increase in services deficit. Given the large expatriate population, outward remittances continued

to offset the income from investments abroad in 2012. However, as the inflow of foreign workers decline, following

the strong impetus for Kuwaitization, outward remittances are expected to decline.

Trade surplus would remain high in 2013, representing half the size of GDP, despite a moderation in Kuwait’s oil

production as a result of increasing supply from Libya and Iraq. Trade surplus is projected to decline 10.3% to

USD88.3bn as oil exports fall 7.9% for the year. Non-oil exports would continue to grow (6.8%) in 2013,

underpinning Kuwait's diversification plan to reduce its dependence on oil revenue. Imports are expected to

increase 6.9% to USD24.9bn in 2013, signifying a general improvement in demand in the economy.

Current account balance is expected to register surplus in 2013, led by high oil revenue from exports which would

offset marginally the increase in imports and a steady non-merchandise deficit. Similar to trade surplus, current

account surplus is projected to fall 11.8% to USD76.2bn or to 39.5% of GDP in 2013.

5.9

4.2

3.1

7.0

1.0 1.1

1.6

2.8

1.8 1.6

1.8

3.6

2008 2009 2010 2011

Kuwaiti Non-Kuwaiti Total

71.0

5.0

29.0

95.0


Kuwaitis Non-Kuwaitis


58


Source: IMF, Kuwait - Central Bank

With a large oil surplus, Kuwait has continued to acquire foreign assets at an increasing rate. Foreign investments

are expected to double between 2010 and 2012, rising to USD10.4bn. With the ongoing delay in the

implementation of the 2010–14 Development Program, foreign investments flowing into Kuwait will be subdued at

USD400.0mn, despite a 33.0% increase over last year. Foreign investments by Kuwait would continue to remain

high at USD9.3bn in 2013, albeit at a 10.6% decline as oil surplus moderates and the government focuses on

spending the excess oil revenues domestically through the speedy implementation of the Development Program.

Foreign Direct Investment - Outflows (USDbn) Investments Abroad – Outflows (USDbn)


Portfolio investments abroad would continue to remain volatile due to the government recycling excess oil

revenues to invest in foreign equities and bond instruments. Investment in foreign instruments is expected to rise

61.8

96.7

85.9

114.4

105.4

4.8

6.5

6.1

7.3

7.8

-22.7 -25.9

-19.3 -23.3 -24.9

43.9

77.3 72.7

98.4

88.3

2010 2011 9M 2012 2012e 2013e


43.9

77.3

98.4 88.3

-11.1 -9.6 -12.1 -12.1

39.8

68.1

86.4

76.2

2010 2011 2012e 2013e


-4.9

-8.0

-10.1

-8.9

2010 2011 2012e 2013e

-17.5

-9.0

-16.2

-8.7

-25.8

-44.0

-62.0 -60.6

2010 2011 2012e 2013e



59

80.0% to USD16.2bn in 2012; however, it is projected to fall by half in 2013, because the government spending is

anticipated to increase as the current development plan gets underway. Other investments, which constitute net

overseas loans and investments in shorter-term deposit accounts, are expected to more than double to

USD62.0bn in 2012 from 2010. Other investments would continue to stay high at USD60.6bnin 2013.

Capital spending remains crucial to building non-oil sector and diversifying the economy

Kuwait continued to post twin-surplus (fiscal and external) for the 13th year in a row. Fiscal surplus for the year

ended March 2012 recorded a surplus of USD47.9bn, close to triple the fiscal surplus recorded in the previous

year. Government spending registered a 9.0% growth, led by a 24.6% increase in public sector wages in the

same period. The expansionary budget was supported by strong oil revenues, stemming from high production

levels and international oil prices. Fiscal revenue rose 46.2% YoY, amplified by a 48.9% growth in oil revenues for

fiscal year 2012. Non-oil revenue also registered double-digit growth at 11.4% in the same period.

For the fiscal year ending March 2013, Kuwait has estimated a budget deficit of USD26.2bn on the basis of a very

conservative estimate of oil income at the crude oil price of around USD65/barrel versus average 2012 Brent

price of USD111.9/barrel. Kuwait has recorded healthy fiscal surplus despite projecting a budget deficit for the

past 13 years. The fiscal budget for 2012–13 projected revenues of USD45.7bn, less than half of the actual

revenues realized in the previous fiscal year. Projected spending is expected to increase almost 23.3% to

USD76.0bn for the same period.

Fiscal Balance (USDbn) Classification of Fiscal Expenditure (USDbn)

Source: IMF, Kuwait - Central Bank; Note: a – actual, b - budgeted

Current expenditure is expected to stay high as increase in public sector wages and subsidies bill exert pressure

on public finances. Current spending (includes wages, purchase of goods and services, and transfer payments) is

expected to increase by 20.8% in the current fiscal year (2012–13), led by increase of 23.8% in wages, 49.2% in

purchase of goods and services, and 9.9% in transfer payments. Defense (23.0%), education (27.1%), and public

works (19.8%) ministries were the biggest beneficiaries from current expenditure in the fiscal year 2011–12 and

could continue to be the highest recipients in the current budget.

The government is under immense pressure to raise salaries, given the rising incidence of strikes by public sector

employees. The average real growth rate in public sector wages has more than doubled to 8.0% in the last six

69.6

103.5

45.7

108.8 100.9

5.4

6.0

4.2

22.9 24.3

-56.6 -61.6

-76.0 -71.6 -76.9

75.0

109.6

49.9

131.7 125.3

18.4

47.9

-26.2

60.1 48.3

2010/11a 2011/12a 2012/13b 2012/13e 2013/14e

Oil Revenues Non-oil Revenues

Total Expenditure Fiscal Balance

11.9 14.9 18.4 18.3 20.0

9.7 10.0

14.9 10.4

11.5 6.4 6.5

9.4 11.1

12.9 28.5

30.2

33.2 31.5

32.2

2010/11a 2011/12a 2012/13b 2012/13e 2013/14e

Wages and Salaries

Purchase of Goods & Services

Capital Expenditure, Construction & Land Acquisition

Transfer Payments


60

years (2006/07–2011/12). Furthermore, considering the projected high growth in labor force and the slow

absorption of labor in private sector (despite the imposition of minimum quota and financial incentives), the

government is expected to absorb a large share of the growing labor force. An IMF report suggests that an

estimated 74,000–112,000 Kuwaitis will enter the labor force between 2012 and 2016. Private sector is

anticipated to absorb only about 17,000 Kuwaitis, leaving the large majority to seek public sector jobs.

Capital spending declined in the recent past as delay in the passing of new legislations pushed the development

plan to the back burner. Refocusing public spending towards capital projects and the implementation of over

USD100.0bn worth of development plan would remain crucial to the government’s plan to diversify the economy

away from just oil, boost private sector role, and ensure long-term sustainability of fiscal accounts. Projected

capital spending would be USD76.0bn in the current fiscal year (2012–13), up 44.9% from previous year’s

spending. Public works ministry received the biggest hike in expenditure in the fiscal year 2011–12.

Public Expenditures by Ministries (USD bn)

Source: Kuwait - Central Bank

Actual fiscal surplus for the first 10 months (April 2012–January 2013) of the current fiscal year hit USD60.5bn, far

exceeding the budgeted deficit for the whole year and the actual surplus for previous year, because of higher oil

revenues and lower than forecasted spending. Oil income continued to dominate the fiscal revenues, accounting

for nearly 94% and more than twice the amount earmarked for the entire year at USD89.5bn. Fiscal revenues

also stood at more than double the budgeted estimate at USD94.8bn for the first 10 months of current fiscal year.

Public spending stood at USD34.4bn, less than half and far short of the budgeted amount, with only two months

to go. A delay in the approval of the current budget owing to the absence of a parliament between June and

December deferred the execution of approximately USD105.3bn of infrastructure investment and development

plan. Nevertheless, a surge in March, the final month of the fiscal year, could temper the surplus, as seen since

2007–08.

Given Kuwait’s significant fiscal space, fiscal policy is expected to remain expansionary. The Kuwaiti government

would continue to record fiscal surplus over the forecasted fiscal year 2013–14, driven by steady oil production

and capacity expansion. High international oil prices would keep oil revenues above the USD100.0bn level, while

successful execution of the development plan will help diversify the economy and increase revenues from non-oil

7.3

3.5 3.3

0.4 1.0

8.3

0.5 0.4 0.2 0.3

3.3

0.1

8.4

1.6

3.5

0.2 0.6

9.0

4.4

3.6

0.5 1.1

8.5

0.6 0.5 0.2 0.3

3.2

0.1

5.2

1.9

3.0

0.2

0.8

D

efe

nce, S

ecurity

and

Justice

E

ducatio

n

H

ealth

Info

rmatio

n

S

ocia

l and L

abour

Aff

airs

E

lectr

icity a

nd W

ate

r

P

ublic

Work

s

C

om

munic

atio

ns

C

usto

ms a

nd P

ort

s

F

inance

O

il

P

lannin

g

A

mir

i Diw

an

an

d O

the

r

P

ublic

Work

s (C

apital)

E

lectr

icity a

nd W

ate

r (C

apital)

C

om

munic

atio

ns

(Capital)

O

ther

(Capital)

2010/11 2011/12


61

sources by four times in the next two years. Non-oil revenues are expected to quadruple to USD24.3bn for the

fiscal year 2013–14, up from USD6.0bn in 2011–12.

Fiscal spending is expected to stay high as significant backlog from the delay in the implementation of the

development plan is finally executed. Projected spending would register a growth of 7.5% to USD76.9bn in 2013–

14 as compared to the previous fiscal year, with a major push towards capital spending, whereas current

spending will continue to stay at high levels. Capital spending is projected to grow 36.4%, whereas current

expenditure is expected to fall 4.3% in 2013–14 vis-à-vis the previous budgeted forecast (2012–13). With total

revenues projected at USD125.3bn, fiscal surplus is expected to be USD48.3bn in 2013–14.

Inflation under control following an ease of food prices and housing rent

Growth in consumer price index (CPI) decelerated in 2012 as inflation rose just 2.9% compared to 4.7% in 2011.

Inflation slowed in all four quarters in 2012, particularly in the second quarter, when there was no change in the

CPI. The slowdown was also pronounced in the third quarter, when CPI rose by a mere 0.7% as compared to

1.0% in the same period last year. Moreover, lower inflation signaled by an easing of food prices, rents, and

household goods and services component, which represent close to 60% of the index. Inflation for 2013 is

expected to register a 3.3% growth, averaging 3.8% between 2013 and 2017 on limited upward price pressures

on food and rents.

Food prices, which rose 9.6% in 2011, subdued to 5.6% in 2012. Kuwait imports most of its food items

(approximately 90%) for domestic consumption which leads to imported food price pressure. However, the

government has been stringent on price control measures over fuel and food items through extensive subsidy

system that will prevent higher inflation in the future. Housing services, which grew 3.8% in 2011, rose at 1.5% in

2012. Even the education & medical care grew at a lesser pace, thus putting the inflationary pressures downward.



Meanwhile, wholesale price index (WPI) also showed signs of weakness, rising 1.5% 2012. Import prices,

constituting close to 65% of the WPI, registered smaller increase of 1.6% in the same period, compared to 3.2%

in 2011. Local prices, which constitute the remaining 35%, rose 1.6%. A strong US dollar versus the Kuwaiti Dinar

played a significant role in reducing the cost of imported goods in the second half of 2012.

4.0

4.7

2.9

3.3

3.8

4.0 4.0 4.0

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

8.4

5.5

4.8

4.4

2.4

-1.3

2.4

3.7

9.6

-2.6

3.5

3.8

4.3

2.1

3.9

3.5

5.6

6.3

4.0

1.5

1.7

2.3

2.5

2.3

Food

Beverages & Tobacco

Clothing

Housing Services

Household Goods & Services

Transport & Communications

Education & Medical Care

Other Goods & Services

2012 2011 2010


62

An accommodative monetary policy to boost private sector and consumer lending

Monetary policy and liquidity conditions in Kuwait will continue to remain largely accommodative. Given the

currency peg between Kuwaiti Dinar and the US dollar-dominated basket of currencies, policy interest rates are

expected to track the US Fed rate and are likely to remain low till the Federal Reserve starts to tighten its

monetary policy in 2015. In line with this policy, Central Bank of Kuwait cut its discount rate by 50 basis points to

just 2.0% in October 2012, its first rate cut since February 2010.

Broad money supply (M3) grew 5.2% in 2012, led by double-digit growth (18.3%) in demand deposits, which in

turn resulted in M1 growth of 16.8% and a moderate increase (1.7%) in quasi-money. Going forward, money

supply is expected to increase by 11.6% in 2013 owing to a shift in trend as quasi-money increases by double-

digits (14.1%), while M1 grows by 4.3%.

Market liquidity would remain supportive of sustained growth in private sector lending. However, private sector

lending grew mere 1.9% in 2012 as compared to 6.6% in 2011, largely owing to slow off take of the current

development plan and ongoing issues with the investment companies. Investment companies remain under

pressure due to their significant exposure to weak and volatile sectors, particularly real estate, equity investments,

and dependence on short-term foreign lending. Lending to private sector is expected to increase to 10.4% in

2013, subjective to the effective implementation of the development plan which seeks more public-private

partnerships for the execution of capital projects.



Bank lending to households, trade sector, and industry strengthened despite visible weakness in certain sectors

like construction, oil & gas, and investment companies (part of non-bank financial institutions). Renewed wage

prospects, particularly for public sector employees, and higher consumption of goods and services resulted in

greater demand for consumer and personal loans. Consumer loans grew 42.2% while installment loans rose

24.5% in 2012. Lending to non-bank financial institutions declined drastically to 32.8%, as ongoing weakness

among investment companies made bankers cautious towards lending to these companies. Nevertheless, banks

stood resilient against the negative spillovers from the investment companies by increasing provisions against

loans to such companies.

17.4 22.1 22.0 21.9 23.1 23.6 25.0 24.1 26.9 26.8 28.1

70.3 74.6 73.0 76.9 77.5 78.2 77.3 78.6

78.9 82.0 90.0

87.7

96.7 95.1 98.8 100.6 101.8 102.3 102.7

105.8 108.8

118.1

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

Jan-2

013

2013e

M1 Quasi Money

96.0

100.2 100.2 100.9 102.3 102.5

103.9 104.5 104.2 104.9

115.1

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

Jan-2

013

2013e


63


Source: Kuwait - Central Bank

Better-than-expected earnings and improved outlook for spending lifts KSE to a two-year high

Kuwait Stock Exchange (KSE) commenced 2012 on a strong note, as evident from the 6%YoY growth in 1Q12.

Investors remained upbeat about the parliamentary elections at the beginning of the year. Islamist bloc (the

Opposition)’s victory raised hopes of higher government spending for welfare projects, and infrastructure and

economic development. Kuwait’s budget surplus at 24% of GDP in 2011 also had a positive impact on the market.

Buying was mainly witnessed in small-cap stocks in 1Q12. In February 2012, Kuwait’s Capital Market Authority

ordered nine companies (majorly investment companies) to delist from KSE either due to their failure to report

4Q11 earnings within the deadline or concerns over meeting debt obligations. However, the move did not

materially impact investor sentiment. The market was also strengthened by the positive global sentiment in 1Q12.

Nevertheless, confidence in KSE weakened in 2Q12 which could be ascribed to the trading suspension on

additional companies. About 31 entities, mainly real estate and investment firms, were suspended from trading.

Political pressures arose due to the resignation of ministers that, in turn, raised concerns about economic policy

making. Conflicts aggravated as Kuwait’s constitutional court termed the parliamentary elections as

unconstitutional. As a result, KSE reached an eight-year low in August. Also, lower government spending

impacted market movements. Selling pressure increased on stocks that failed to meet the regulatory deadline of

reporting earnings. Markets trended positive in 4Q12 due to easing political pressures. Apart from the political

turbulence, Kuwait’s subdued market performance, relative to Saudi Arabia and UAE (major GCC economies),

could be ascribed to the 11.9%YoY decline in 9M12 earnings.

7.8

5.3 6.3

10.0

2.2

16.0

9.7

1.1

22.8

0.8

5.3

8.2

5.9 6.4

10.1

2.6

17.2

9.5

0.9

23.5

0.8

5.5

8.8

6.3 6.1 6.8

3.7

21.5

9.6

1.0

25.4

0.6

5.9

Tra

de

Industr

y

Constr

uctio

n

Non

-bankin

g F

inancia

l In

stitu

tio

ns

Con

su

me

r L

oa

ns

Insta

llment Loans

Purc

hase o

f S

ecuritie

s

Oth

er

Pers

onal Loans

Real E

sta

te

Cru

de O

il

Oth

ers

2010 2011 2012


64

KSE Index and Volume Performance

Source: Kuwait Stock Exchange, Gulfbase& Global Research

The Kuwait Price index advanced 4.0%MoM in March to close at 6,721.5. The index has registered a year to date

growth of 13.3%. During the month, the index rallied to the highest level in over two years buoyed by better-than-

expected earnings and hopes of increased government spending. The government spending hit KWD9.8bn in

January 2013, up KWD1.6bn over December 2012. The rally was mainly driven by micro and mid cap stocks.

However, the index corrected moderately in the last week of the month on profit booking.

The Real Estate index was the best performer (up 8.6%) during the month, mainly driven by National Real Estate

Co. (up 18.5%) and The Commercial Real Estate Co. (up 15.8%). The Commercial Real Estate Co.’s net profit

rose 3.9%YoY to KWD10.9mn in 2012. The Oil and Gas index gained 5.5% in March led by Contracting & Marine

Services Co. (up 23.5%) and Gulf Petroleum Investment Co. (up 7.4%). Contracting & Marine Services’ net profit

surged 10.0%YoY to KWD1.8mn in 2012; the company declared 5% bonus shares and 5% cash dividend for the

year. The Healthcare index gained 4.2% driven by Yiaco Medical Co. (up 15.3%), which declared 10% cash

dividend and 5% bonus shares for 2012 despite reporting flat earnings growth (net profit of KWD5.0mn).

Financial Services (up 3.9%), Industrial (up 3.6%), Consumer Goods (up 3.6%) and Basic Material (up 3.1%)

were the other sectors that experienced growth in March. Amongst the laggards, the Technology index declined

4.1% driven by Automated Systems Co. (down 18.8%), and the Telecommunication index fell 3.5% led by Zain

(down 2.5%), National Mobile Telecommunications Co. (down 9.8%) and Hits Telecom Holding Co. (down 3.2%).

All telecom companies reported poor results; net profit of Zain and National Mobile Telecommunications dropped

11.5% and 79.1%, respectively. Hits Telecom Holdings reported a net loss of KWD5.8mn in 2012 vis-à-vis profit

of KWD0.2mn in 2011.

Corporate earnings

The Kuwaiti market witnessed a steady growth in its corporate earnings in 2012, maintaining the momentum

gathered since 2010. Overall earnings grew 12.0%YoY in 2012. Earnings of heavyweight Banking sector grew

1.2%YoY with heavyweights National Bank of Kuwait, Kuwait Finance House and Burgan Bank registered a

growth of 0.9%YoY, 9.1%YoY and 10.0%YoY, respectively. Telecommunications sector constituting 25.3% of

KSE’s earnings declined 50.3%YoY to USD1.1bn from USD2.3bn in 2011. Earnings growth of Mobile

Telecommunications Co. which represents 78.3% of sector’s earnings declined 11.5%YoY owing to impact of

exchange rate fluctuations. In the Real Estate, Financial Services and Basic materials sectors, many companies

are yet to report their full year financial results. As a result, the sectors are currently showing a decline in

corporate earnings.

-

200

400

600

800

1,000

1,200

1,400

5000

5500

6000

6500

7000

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

Ma

y-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13



65


Source: Gulf base & Global Research, Data up till March 31, 2013

-300%

-200%

-100%

0%

100%

200%

300%

400%

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2006 2007 2008 2009 2010 2011 2012

US

Dm

n

Growth (%) - RHS

-50.3%

-7.7%

-5.1%

1.2%

5.2%

41.1%

123.1%

12.0%

-60% -10% 40% 90% 140%

Telecommunications

Consumer Goods

Industrials

Banks

Health Care

Insurance

Oil & Gas

Total Kuwait


66

United Arab Emirates (UAE)

UAE GDP growth up 3.9% in 2012, expected to be up further 3.1% in 2013

Inflation slowed down to 0.7% in 2012; to remain at 1.0% in 2013

UAE’s status as a safe destination restored with growth in net FDI inflows

Recovery of Real Estate sector key to growth in UAE

UAE GDP growth up 3.9% in 2012, expected to be up further 3.1% in 2013

The UAE economy growth is expected to lower to 3.9% in 2012 after a solid 2011,

when the GDP expanded 5.2% led by high oil prices and a 10.2% increase in oil

production. Even as growth in oil sector is expected to slow down in 2012, the non-oil

sector has continued its resurgence witnessing a 3.5% growth, on the strength of its

services sector, manufacturing, utilities, and the recovering construction sector. The

economy is expected to grow 3.1% in 2013, led by non-oil sectors that would continue

to see massive infrastructure spending, primarily in Abu Dhabi and Dubai. The non-oil

sector accounts for more than two-third of the overall UAE economy, the highest

among GCC countries, led by the diversification drive initiated by the government.

Looking forward, manufacturing, tourism & hospitality, transportation, trade, and

personal services are expected to drive growth in the non-oil sector.

UAE’s status as a safe destination restored with growth in net FDI inflows

UAE attracted strong FDIs as investor confidence picked up, following the recovery in

the economy. Net FDI inflows are expected to increase 3.6% to USD5.7bn in 2012,

following a 57.1% increase in 2011. UAE’s status as a safe destination for

investments helped attract FDI into the country, as large amounts of capital fled the

crisis-hit countries in the Middle East region.

Inflation slowed down to 0.7% in 2012; to remain at 1.0% in 2013

In 2012, inflation slowed down to just 0.7% as compared to a steady 0.9% increase in

the last two years, as housing markets continued to decelerate, causing property

prices to continue trending downwards. The housing component in the CPI, which

accounts for 40.0% of the basket, fell 2.6% in 2012 in addition to the 2.4% decline in

2011. Abu Dhabi registered 1.13% increase in CPI, while inflation in Dubai fell 1.7% in

2012. The remaining five Emirates registered above 2.5% increase in CPI. According

to the Central Bank of UAE estimates, inflation is expected to accelerate to 1.0% in

2013 and range between 1.0–1.5% for the rest of the forecasted period till 2017.

Rebuilding economy through public spending on infrastructure projects

The local governments are adopting a proactive approach to revive the economy. Abu

Dhabi is aiming to spend USD89.8bn over the next five years to construct homes,

schools, roads and other vital infrastructure projects, while Dubai is considering

resuming USD1.1bn worth of infrastructure projects. Abu Dhabi, which generates

90.0% of UAE’s crude oil, plans to invest around USD60.0bn over the next five years

to boost oil production capacity.

UA

E


www.globalinv.net


67

UAE Economic Indicators

2010 2011 2012a/e* 2013e 2014e


Real GDP Growth (%) 1.3 5.2 3.9* 3.1 3.6

Oil 1.0 6.7 - 1.0 2.0

Non-Oil 1.4 3.1 3.5* 3.8 4.0


Oil 30.5 31.3

Non-Oil 69.5 68.7


Private Consumption (5.2) 4.3 3.1* 4.3 4.6

Public Consumption 0.1 3.0 3.3* 3.8 4.6

Gross Capital Formation 13.0 11.6 5.0* 5.5 6.2

Exports 3.4 14.1 4.0* 5.1 6.2

Imports 2.1 18.7 5.0* 6.3 6.7

Population (mn) 7.5 7.9 8.1* 8.2 8.3

Growth Rate 5.0 2.7 1.3 0.9

Trade Surplus (USD bn) 49.0 79.6 90.7* 93.2 94.1

Export of Goods 213.7 281.8 307.6* 320.7 335.6

Import of Goods (164.7) (202.3) (216.8)* (227.5) (241.6)

Current Account Balance (USD bn) 7.2 30.7 40.0* 40.9 40.1


Oil & Gas 63.2 97.9 109.2*

Others 21.4 20.8 23.2*

Government Expenditure (USD bn) -62.9 -61.5 -80.7 -83.3 -85.5

Fiscal Balance (USD bn) 21.7 57.2 55.8 52.7 49.6



Inflation (%) 0.9 0.9 0.7 1.6 1.9

M1 (USD bn) 63.5 72.0 81.5

Growth Rate 13.4 13.3

M2 (USD bn) 214.3 225.0 235.0

Growth Rate 5.0 4.4

Private Sector Lending (USD bn) 196.4 199.1


Market Index 2,719.9 2,402.3 2,630.9



68

UAE

Early diversification initiatives drive growth in the UAE economy

UAE has managed to overcome the financial crisis in 2009 and continues to display a gradual economic recovery.

UAE is expected to register a real GDP growth of 3.9% in 2012, following its record performance in 2011, when the

economy grew 5.2% as high oil prices and a 10.2% increase in oil production (another record high since the 2009

debt crisis) pushed exports higher. Although the growth in oil sector is expected to remain subdued in 2012, non-oil

sector would continue to rebound, registering a 3.5% growth, backed by the services sector, manufacturing, utilities,

and the recovering construction sector.

UAE’s early efforts to help diversify the economy away from oil and towards the services sectors like trade, tourism,

and hospitality have helped the country’s image as a major services hub. As a result, UAE has been able to mitigate

the aftermath of the real estate bubble that began in 2009. In addition, local governments are keen to restart

previously stalled projects in Dubai and increase capital and social spending in Abu Dhabi, which would kick-start

the construction sector. Abu Dhabi plans to spend USD89.8bn in the next five years to build homes, schools, roads

and other vital infrastructure projects, while Dubai is contemplating to resume USD1.1bn worth of infrastructure

projects, including the world's largest shopping mall and hotels, which were postponed due to the debt crisis.

Gross capital formation, which grew double-digits in the last two years, is projected to moderate to 5.0% in 2012, as

the government continues to provide fiscal stimulus in the way of capital spending on large infrastructure projects.

Private sector, which contributes around 65–70% of the gross capital formation in the country, is also expected to

drive capacity expansion in the economy, as the consumption levels and non-oil exports stay high. Private

consumption is projected to increase 3.1%, while public consumption may expand 3.3% in 2012.


Source: IMF, UAE - Central Statistics Bureau, EIU

1.0 6.7 0.0

1.0 2.0 1.9 1.8 1.9

1.4

3.1

3.5

3.8

4.0 4.2 4.5 4.5

1.3

5.2

3.9

3.1 3.6 3.6 3.6 3.6

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e


Real GDP (%)

-5.2

4.3 3.1 4.3 4.6 5.0 6.0 6.0

0.1

3.0 3.3 3.8 4.6 4.8

5.5 5.9 13.0

11.6

5.0 5.5

6.2 6.6 7.4 7.8 3.4

14.1

4.0 5.1

6.2 7.5

8.5 9.5

2.1

18.7

5.0

6.3

6.7

8.0

9.3 10.5

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e



Imports


69

UAE’s economy is expected to increase to 3.1% in 2013, led by non-oil sectors that would continue to witness large

infrastructure spending, primarily in Abu Dhabi and Dubai. Economic growth is expected to accelerate from 2014 to

more than 3.5% till 2017, bolstered by stronger growth in the non-oil sector, which is forecasted to grow at over

4.0% in the same period. A planned capacity expansion in oil production to 3.5mn b/d between 2013 and 2018 is

also expected to help UAE economy gain pace from 2014 onwards. Oil sector growth is projected to double in 2014

to 2.0% YoY and is likely to average at 1.9% till 2017.

Non-Oil sector to play a major role in strengthening the UAE economy

Oil sector, which contributed close to a half of the UAE economy a decade earlier, has declined to less than a third

in 2011. With ever increasing demand for crude oil from Asia’s top economies – India and China – UAE has

increased its production and capacity over last three years and would continue to do so in the next five years. UAE

aims to expand its crude oil production capacity to 3.5mn b/d by 2018, with an expected target of 3.0mn b/d in 2012.

Abu Dhabi, which holds majority of UAE’s oil reserves and produces 90.0% of UAE’s crude oil, plans to invest

around USD60.0bn over the next five years to boost production capacity. Abu Dhabi National Oil Company, the

state oil producer, is expected to invest USD40bn on crude oil, natural gas, petrochemical, and refinery projects

from 2010 through 2014. Gas projects under construction would account for USD25bn of that spending. UAE

continues to struggle to produce sufficient natural gas to meet the local demand for electricity generation and

hence, will continue to be a net importer of gas in the coming years, primarily from Qatar, despite holding the

world’s seventh largest proved reserves of natural gas.

Oil production rose 5.3% to 2.8mn b/d in 2012, following a record growth of 10.2% in 2011 due to capacity

expansion and production increase to meet the supply shortfalls from the Libyan political upheaval and US-EU Iran

sanctions. Based on IMF’s conservative estimates, oil production is expected to decline to 2.6mn b/d in 2013.

Moreover, IMF estimates indicate oil production would stabilize at 2.8mn b/d in 2017, while EIU expects production

to grow to 3.15mn b/d for the same period.

Movement in Structure of Real GDP (%) Oil Production

Source: UAE Government Online, IMF

UAE’s successful diversification plan has helped the non-oil sector to continue to increase its share of the overall

GDP in the last decade. Non-oil sector now represents more than two-third of the overall economy, the highest in

43% 37%

31% 31%

57% 63%

70% 69%

2001 2005 2010 2011


2.4

2.7

2.8

2.6 2.6

2.7 2.7

2.8 0.1

10.2

5.3

-7.1

0.0

3.8

0.0

3.7

2010 2011 2012 2013e 2014e 2015e 2016e 2017e



70

the GCC region. Non-oil sector will continue to be the main focus in Abu Dhabi, which has initiated a five-year

investment plan worth USD89.8bn to develop social infrastructure. New hospitals, schools, housing, and other

infrastructure would be the main investment focus, in addition to dispersing home loans worth USD816.7mn to

nationals.

To achieve the initiatives highlighted in the UAE Vision 2021, mainly in the development of industrial sector, Abu

Dhabi would continue to invest in large-scale infrastructure projects such as the Khalifa Industrial Zone Abu Dhabi

(Kazid) and Masdar City. The rising demand for natural gas from the diversification strategies and the growing

need for electricity usage are expected to put pressure on gas supplies, thus forcing the government to seek

alternative energy sources. As part of this effort, UAE plans to set up four nuclear power stations by 2020 at the

cost of USD20.0bn to supply up to a quarter of the country's energy in 10 years.

Growth in non-oil sector was supported by strong performance in utilities, construction, logistics, and consumer

business in 2011, all of which registered better growth compared to 2010. Going forward, manufacturing, tourism

& hospitality, transportation, trade, and personal services are expected to perform better. In an effort to solidify its

status as a services destination, Abu Dhabi made USD2.9bn investment to build a new airport terminal to boost

capacity by 8,500 passengers to increase the total capacity of the airport to 40mn passengers in 2017.


Source: UAE - Central Statistics Bureau

-1.8

1.0

6.9

-11.4

2.4 3.4

-3.3

0.1 1.7

6.5

2.6

0.3

6.7

3.0

5.9

3.2

1.4

4.0

0.7

6.4

2.8 3.0

Agriculture

Min

ing (

incl. O

il &

Gas)

Manufa

ctu

rin

g

Utilit

ies

Constr

uctio

n

Whole

sale

Tra

de, hote

ls

Tra

nsport

Real E

sta

te

Socia

l & P

ers

onal

Fin

ancia

l Serv

ices

Govern

ment S

erv

ices


Industry Services Industry

Agriculture

Agriculture, 1%


57%

Manufacturing, 16%

Utilities, 4%

Construction, 21%

53%

Services

Trade & Hotels, 31%

Transport, 18%

Real Estate, 21%


47%

Finance, 16%

Government, 10%


71

Motivating Emiratis to seek private sector jobs is the key to lower unemployment

UAE population, which grew at a CAGR of 6.0% in the first half of the last decade, accelerated to 13.0% in the

second half of the last decade. However, population growth has decelerated since the beginning of this decade,

registering only 3.9% growth between 2010 and 2012. Going forward, population growth would continue to slow at a

CAGR of 2.0% for the current decade. Population under the age of 60 is expected to decline from 99% in 2012 to

96% by the end of the decade. Meanwhile, the proportion of the population above the age of 60 is expected to

increase to 4.0% by 2020, from 1% in 2012. Population aged above 60 is expected to grow at 17.2% CAGR till

2020, more than three times faster than the growth (4.3%) in the previous decade. Growth in population below the

age of 60 is projected to slow down to 1.7% per annum till 2020, vis-à-vis 9.6% per annum in the last decade.

Expatriates, who constitute 88.5% of the population in UAE, have been the primary driver for the strong growth in

population in the second half of the previous decade. Expatriate population grew at a CAGR of 15.2% between

2006 and 2010, while local population grew only 2.7% in the same period. Expatriates represent 96% of the total

workforce in UAE, with the construction sector employing around 38.0% of foreign emigrants and the trade &

services sector employing nearly a third.

Population Growth Composition of Population

Source: UN database, UAE- Central Statistics Bureau

A strong preference for secure and well-paid jobs with fewer working hours among Emiratis has skewed the labor

force to public sector. Over 90.0% of the public sector jobs are held by Emiratis, while private sector attracted just

1% of the Emirati labor force. With a fast growing young labor force, high unemployment rate among youth and

Emiratis has continued to persist. In a bid to motivate Emiratis to pursue private sector jobs, UAE has been

exploring various initiatives like subsidizing the private sector salaries, adjusting working hours, and improving job

security for Emiratis in the private sector. In addition, Abu Dhabi’s investment plan to spend USD89.8bn over the

next five years is expected to create 5,000 jobs in 2013 alone.

3.0

4.1

7.5

8.1 8.4

9.2

10.5

0

2

4

6

8

10

12

2000 2005 2010 2012 2015 2020 2030

in m

ilio

ns


0.85 0.88 0.90 0.93 0.95

4.16 5.34 7.17 7.27 7.32

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010

Emiratis Expatriates


72

Unemployment Rate (%) Labor Composition (%)

Source: UAE - Central Statistics Bureau

Both trade and current surplus would remain high and stable

UAE is expected to register both trade and current surplus in 2012, driven by high oil and non-oil exports. Trade

surplus is forecast to increase 14.0% to USD90.7bn in 2012, following a 9.3% hike in oil exports and an 11.7% rise

in non-oil exports. Re-exports, which predominately include diamonds and jewelry, are also projected to surge 7.5%

in the same period. Meanwhile, imports are expected to witness the least increase of 7.2% in 2012, with gold being

the top imported commodity.

Total non-oil exports (excluding free zones exports) registered a massive 61.0% growth to USD36.9bn in the first

nine months of 2012 as compared to the same period of 2011. Gold continued to be the top non-oil exported

commodity, accounting for more than half (USD21.7bn) of all exports, followed by ethylene polymers (USD1.4bn),

jewelry and jewels (USD1.3bn), crude aluminum (USD0.9bn), propylene polymers (USD0.8bn), and petroleum oils

and oils obtained from bituminous minerals (USD0.7bn). Re-exports, on the other hand, fell 5.0% to USD41.6bn in

the first nine months of 2012 YoY. Diamonds were the top re-exported commodity (USD7.2bn), followed by jewelry

(USD5.5bn), cars (USD3.0bn), mobile phones and other wireless networks (USD2.3bn), and fiber glass

(USD1.1bn).

Imports into UAE grew 13.0% to USD134.8bn in the in the first nine months of 2012 YoY. Gold, worth USD29.0bn,

was top amongst imported goods, followed by diamonds valued at USD8.1bn. Asia-Pacific was the top trading

partner with UAE, accounting for 42% or USD88.8bn of the total trade. Europe accounted for 29.0% or USD60.5bn

of the total trade, while MENA traded 14.0% or USD30.1bn in the first nine months of 2012.

13.7 14.0

2.6 2.8

4.0 4.2 4.3 4.6

2008 2009 2010 2011

Emiratis Expats Total

By Nationality

14.4

15.3

5.8

8.7

4.3

5.5

2.4 1.8

2008 2009 2008 2009

Abu Dhabi Dubai

Emiratis Total

By Key Emirate

36.1

50.8 25.3

11.2

23.9 7.6

3.9 12.5

2.6

2.0 5.7

1.7

1.5 4.1

1.3

2.3 4.7

2.0

2.7 3.9

Total Emiratis Expats

15 - 19 20 - 24 25 - 34 35 - 44 45 - 54 55 - 64 65 +

By Age Group

90.0

1.0

10.0

99.0

Government Sector

Private Sector

Emiratis Expatriates


73


Source: IMF, UAE - Central Bank

Current account surplus is expected to stay high, with an increase of 30.3% in 2012, backed by strong trade

surplus. The growth in trade surplus is expected to more than offset the non-merchandise deficit, which is forecast

to grow 3.8% to USD50.7bn in 2012. Current account would continue to record surplus during the forecast period till

2017, as oil exports stabilize and the increase in non-oil exports and re-exports is offset by rising imports. Trade

surplus is also expected to moderate to a 2.8% growth in 2013, led by a decline in oil exports.

UAE attracted strong FDIs as investor confidence picked up, following the recovery in the economy. Net FDI inflows

are expected to increase 3.6% to USD5.7bn in 2012, following a 57.1% increase in 2011. UAE’s status as a safe

destination for investments helped attract FDI into the country, as large amounts of capital fled the crisis-hit

countries in the Middle East region.

With the aim to capture an even greater share of overseas capital flows, UAE is mulling over plans to ease foreign

ownership laws. UAE made significant changes to the companies’ law, which may lead to relaxation of the 49% cap

for foreign firms to hold in the businesses outside the free zones. Inflows from both foreign portfolio investments and

other short-term investments are expected to fall and remain stable over the forecasted period to 2017.

74.7

111.7 122.1 118.4 112.9 108.7 106.2 105.4 51.0

62.1 69.4 74.3 80.4 87.2 94.9 101.6 88.0

108.0 116.1

128 142.3 150.9

158.7 169.3

-164.7

-202.3 -216.8 -227.5

-241.6 -253.7 -266.2 -281.6

49.0 79.6 90.7 93.2 94.1 93.1 93.6 94.6

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

O&G Exports Non-oil Exports Re-exports

Imports Trade Balance

49.0

79.6

90.7 93.2 94.1 93.1 93.6 94.6

-41.8 -48.8 -50.7 -52.3 -54.0 -53.5 -53.8 -53.8

7.2

30.7

40.0 40.9 40.1 39.6 39.8 40.8

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e



74

Foreign Direct Investment - Inflows (USDbn) Financial Investments – Inflows (USDbn)


Rebuilding economy through public spending on infrastructure projects

The consolidated fiscal surplus is projected to have widened in 2012 in spite of higher capital spending by the

Emirates, as revenue was bolstered by high oil prices. Consolidated capital spending is expected to increase

51.6% in 2012, while oil revenues would rise 11.6% in 2012. Consequently, fiscal surplus is expected to rise to

14.3% of the GDP in 2012 as compared to 13.2% in 2011.

Abu Dhabi plans to increase its current and development expenditures with a new five-year budget that will focus

on diversifying the economy away from oil and achieve its long-term vision 2030. Capital expenditure is expected

to rise 63.5% in 2012 as the Emirate's economic diversification strategy focuses on eight areas: cultural tourism,

aviation, manufacturing, media, health care, petrochemicals, financial services, and renewable energy.

The Abu Dhabi government announced USD89.8bn spending package that includes investing USD810.0mn in

housing loans and developing 12,500 homes. It also includes re-starting the delayed USD648.0mn Louvre project

on Saadiyat Island, adding capacity in the Strata aerospace manufacturing facility in Al Ain, and other investments

in the aluminum, steel, copper and petrochemicals sectors through state-owned General Holding Corporation.

The healthcare and renewable energy sectors were also high on Abu Dhabi's priorities, with work continuing on

the Cleveland Clinic on Al Maryah Island and the Shams solar power plant near Madinat Zayed.

Fiscal policy in Dubai continued to shift from an expansionary phase to a consolidation phase; however, at a

gradual pace so as not to undermine the economic recovery. As a result, Dubai plans to cut public spending

further and balance its fiscal accounts by 2014. Dubai's capital spending is expected to decline 16.9% in 2012,

while current expenditure is forecasted to fall 6.9% in 2012.

3.5

5.5 5.7 5.8

6.0 6.1 6.2 6.4

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

1.0

0.7

0.3

1.0 1.1 1.1 1.1

1.2

3.3 3.3

1.9 2.0 2.1

2.2 2.2 2.3

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e



75

Fiscal Balance (USDbn) Classification of Fiscal Expenditure (USDbn)

Source: IMF, UAE - Central Bank; Note: a – actual

Bottomed-out housing market keep inflation low

In 2012, inflation slowed down to just 0.7% as compared to a steady 0.9% increase in the last two years, as

housing markets continued to decelerate, causing property prices to continue trending downwards. Property

owners unable to sell their housing units continued to rent out, causing rental rates to decline. The housing

component in the CPI, which accounts for 40.0% of the basket, fell 2.6% in 2012 in addition to the 2.4% decline in

2011. Food prices, another heavy weight in the CPI, eased to 5.2% in 2012 as compared to 5.9% in 2011, adding

further downward pressure on inflation. Household goods also took pressure off CPI by decelerating to 2.1% in

2012 vis-à-vis 3.6% in 2011. Abu Dhabi registered 1.13% increase in CPI, while inflation in Dubai fell 1.7% in

2012. The remaining five Emirates registered above 2.5% increase in CPI.

According to the Central Bank of UAE estimates, inflation is expected to accelerate to 1.0% in 2013 and range

between 1.0–1.5% for the rest of the forecasted period till 2017. Inflation edged up 0.73% YoY in February 2013

in addition to 0.43% YoY increase in January 2013. While the food prices posted a rise (2.51%), the increase was

mitigated to some extent by fall in housing prices (0.92%). Going forward, a downward trend in international food

prices and stronger US dollar are expected to keep imported inflation under control while housing market

undergoes a slow recovery.

63.2

97.9 109.2

21.4

20.8

23.2

-62.9 -61.5 -62.4

84.6

118.7

132.4

21.7

57.2

70.0

2010a 2011e 2012e

Oil Revenues Non-oil Revenues

Total Expenditure Fiscal Balance

45.7

70.6

79.7

6.2

5.2

6.7

-43.0 -49.1 -48.8

51.9

75.8

86.4

8.9

26.7

37.6

2010a 2011e 2012e

Abu Dhabi

Oil Revenues Non-oil Revenues Total Expenditure Fiscal Balance

6.2 6.6 6.4

1.9 2.2 1.8

-7.9 -8.6 -8.0

8.1 8.7 8.2

0.1 0.2 0.2

2010a 2011e 2012e

Dubai

Non-tax revenue Tax Revenue Total Expenditure Fiscal Balance


76


Source: UAE – National Statistical Bureau

Recovery of Real Estate sector holds the key to private sector lending

Following the Dubai debt crisis in 2009, the UAE central bank has focused on strengthening the banking sector and

managing liquidity. With the Emirates three-month Interbank Offered Rate at 1.3% since September 2012, its lowest

point in over two years, liquidity has been ample in the market. With inflation under control, the Central Bank of UAE

is expected to keep interest rates low 2013 onwards, to support the lending growth in the economy.

Broad money supply (M3) grew 8.2% in 2012, led by double-digit growth (13.3%) in M1 as a result of strong inflow

of demand deposits and over quarter percent increase in government deposits. Foreign deposits grew at faster

pace (5.0% YoY), while domestic time and savings deposits registered a 3.0% YoY decline in the third quarter of

2012.

In line with the low US interest rates, UAE’s monetary policy has remained accommodative under the fixed

exchange rate regime. However, lending to the private sector has remained sluggish and is trailing behind the

recovery in credit growth in neighboring GCC countries, as excess capacity in the real estate sector and the debt

overhang continued to limit lending growth. The introduction of a lending cap on mortgages had prompted

widespread opposition from bankers and nationals alike. Following this backlash, the UAE Central Bank revised the

caps at 80% for Emiratis and 75% for expatriates.

0.9 0.9

0.7

1.0 1.1

1.4 1.5 1.5

0.9 0.9

1.5

1.7

1.9 1.9 1.9

2.1

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

Central Bank of UAE estimates IMF estimates

4.5

1.3

-5.0

-0.3

4.7

-0.9

3.4

-5.8

4.7

8.1

0.9

1.4

5.9

2.2

-1.9

-2.4

3.6

0.5

3.7

0.0

4.6

3.6

0.7

3.9

5.2

6.4

2.4

-2.6

2.1

1.1

0.2

0.0

0.2

4.5

4.1

1.6

Food and Soft Drinks

Beverages and Tobacco

Textiles, Clothing and Footwear

Housing

Furniture and Household Goods

Medical Care

Transportation

Communications

Recreation and Culture

Education

Restaurants and Hotels

Miscellaneous Goods and Services

2012 2011 2010


77



Lending to households and government showed visible signs of improvement in the first 10 months of 2012, as

personal consumption and government spending remained high. Both consumer loans and government financing

grew 16.4% each in the first 10 months of 2012. Lending to transport and communications sector also rose 13.6%,

as the government sough private sector partnership to implement some of the key infrastructure projects, including

the expansion of airports. Construction sector witnessed 10.1% growth in lending, as Abu Dhabi’s USD89.9bn

investment plan kick-started construction of housing, hospitals, and other social infrastructure programs.


Source: UAE - Central Bank

62.6 63.2 61.4 63.5 68.5 71.4 69.2 72.0 76.4 77.5 79.0 81.5

35.0 33.2 33.1 35.5 36.9 39.0 37.7 39.3 42.5 36.8 39.7

106.2 110.0 114.3 115.3 122.0 121.7 114.8 113.8

121.0 111.1 111.7

153.5*

50.9 51.3 53.2 54.2 58.4 57.4

51.8 47.8 53.9

54.9 60.7 60.1 254.7

257.6 262.1 268.4 285.8

289.6 273.5 272.8

293.8 280.3

291.0 295.1

Q1 2

010

Q2 2

010

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

M1 Foreign Currency Deposits

Dirham Deposits Government Deposits

39.7 43.6 44.5 44.5 43.5 43.9 43.6 44.0 43.8 44.3 44.1

153.0 152.9 153.5 151.9 152.7 152.0 155.9 155.1 154.2 155.7 154.4

192.7 196.5 197.9 196.4 196.3 195.9 199.5 199.1 198.0 200.0 198.5

Q1 2

010

Q2 2

010

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Real Estate Mortgage Loans Bills, Loans, Advances & Overdrafts

0.2 1.8

12.5

6.5

33.4

26.5

7.2

22.3 27.2

49.6

17.8

59.9

0.3

7.6 12.3

6.0

31.6 28.7

6.9

19.9

27.9

49.9

18.8

60.5

0.5 6.8

13.1

5.3

34.8 28.8

7.8

20.6

32.5

49.2

21.9

59.8

Agriculture

Min

ing a

nd Q

uarr

yin

g

Manufa

ctu

rin

g

Ele

ctr

icity, G

as a

nd

Wate

r

Constr

uctio

n

Tra

de

Tra

nsport

and

Com

munic

atio

n

Fin

ancia

l Institu

tio

ns

(Excl. B

anks)

Govern

ment

Pers

onal Loans -

B

usin

ess P

urp

oses

Pers

onal Loans -

C

onsum

ptio

n

Purp

oses

All

Oth

ers

2010 2011 Oct-2012


78

UAE’s markets recovered strongly in 2012

Dubai’s DFM rose 19.9% in 2012 after declining 17% in 2011. The flurry of positive indicators included a rally in real

estate stocks (due to supportive government steps), surge in oil prices, positive earnings expectations, improved US

economic indicators, and measures for tackling the Eurozone debt crisis. The Abu Dhabi Securities Exchange

(ADX) started 2012 on a positive note led by a rise in banking and real estate stocks, which benefitted from higher

earnings and dividend announcements.

Positive macroeconomic news at the beginning of 2012 added to the upside in the UAE’s markets. In January 2012,

on the sidelines of the World Economic Forum, the UAE’s Economy Minister projected that the nation’s economy

would grow 4% in the year. A report by the UN Conference on Trade and Development (UNCTAD) released in the

same month showed that the UAE attracted USD76bn in foreign direct investment (FDI), second only to Saudi

Arabia in the MENA region. In addition, positive economic indicators in the US and Asia had a positive effect. The

UAE’s markets witnessed a downtrend in 2Q12 due to weakness in oil prices. The OPEC Reference Basket Price

fell 23%QoQ in 2Q12. Furthermore, negative global cues affected the market’s mood. These mainly include a

slowdown in the US’ GDP growth in 1Q12, the downgrade of Spain’s credit rating by S&P, and credit downgrade of

28 Spanish banks’ ratings by Moody’s. However, the UAE’s markets recovered in 3Q12, as oil prices recovered due

to diminishing concerns surrounding the Eurozone’s debt crisis. The OPEC Reference Basket Price rose 18%QoQ

in 3Q12. Furthermore, expectations of quantitative easing by the Eurozone and China buoyed investor sentiments.

Investors flocked toward real estate and energy stocks due to positive 2Q12 results. Additionally, in September

2012, Central Bank of the UAE announced that the non-oil sector could grow 4% in 2012, which triggered positive

sentiments over corporate earnings. However, investors shied away from the stock market in the latter part of 2012

due to increased geopolitical tension in the Middle East. On the positive side, concerns over the US reaching a deal

to resolve the fiscal cliff subsided toward the end of 2012 and had a positive effect on the market.



UAE posted a strong set of earnings numbers, rising 28.8%YoY in 2012 (including DP World - DIX), with growth

witnessed in Abu Dhabi as well as Dubai markets. Corporate earnings in Dubai advanced 88.2%YoY in 2012,

outperforming Abu Dhabi (grew 13.6%YoY). A recovery in the Real Estate segment helped both markets to

continue the momentum from 2011.

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2006 2007 2008 2009 2010 2011 2012

US

Dm

n

Growth (%) - RHS


79



Abu Dhabi

Abu Dhabi stock market reverses trend, up 9.5% in 2012

The ADX’s strong equity market performance in 2012 was mainly due to better-than-expected earnings of banking

stocks and a surge in oil prices. Furthermore, a supportive operating environment for the real estate sector fuelled

buying in property stocks. This was complemented by the UAE’s positive economic prospects and monetary easing

measures in other financial markets worldwide.

On the ADX, sectoral performance was mixed. Five out of the nine sectoral indices reported positive returns. At the

sector level, real estate, banking, and consumer stocks drove the market rally.

The Consumer index (up 49.5% in 2012) was the best-performing index of 2012. Emirates Foodstuff and Mineral

Water Co. (up 26.7%) and International Fish Farming Co. (up 359%) drove the rally in consumer stocks. Emirates

Foodstuff and Mineral Water Company posted a 54%YoY rise in net earnings for 9M12 due to robust growth in

bottled water sales resulting from the expansion of its distribution channels.

The Real Estate index (up 42.4%) emerged as the runner up in terms of sectoral performance in 2012. The

expected merger of Aldar and Sorouh drove this index up in 2012. Furthermore, these firms received approval from

the Abu Dhabi Executive Council to execute several key projects and posted sharp improvements in their 2011

earnings. Additionally, the Abu Dhabi Government stepped up efforts to support residential projects, thus giving

further impetus to property stocks.

The Banking index advanced 17.8% in 2012, as heavyweights attracted investor attention mainly in 1Q12 due to

better-than-expected earnings performance for 2011, which also triggered higher dividend payouts. First Gulf Bank,

which posted an 8.4%YoY rise in net earnings for 2011, announced a DPS of AED0.5 per share, up 66.7%YoY, and

approved plans to double paid up capital through a bonus share issue. National Bank of Abu Dhabi posted a DPS

growth of 15.8% and Abu Dhabi Commercial Bank paid a DPS of AED0.2 per share (first time since 2008) due to

robust earnings growth. Furthermore, positive economic prospects in the UAE could have prompted investors to

take positions in banking stocks.

-16.9%

-10.2%

-0.4%

9.3%

12.9%

22.0%

38.1%

91.6%

104.4%

13.6%

-30% 0% 30% 60% 90%

Services

Consumer Staples

Energy

Banks

Telecommunications

Insurance

Investment & Financial …

Industrial

Real Estate

Total Abu Dhabi

-4.7%

16.4%

24.1%

25.5%

26.5%

29.3%

80.4%

282.0%

88.2%

-30% 30% 90% 150% 210% 270% 330%

Industrials

Insurance

Banks

Consumer Staples

Transportation

Services

Telecommunication

Real Estate & Construction

Total Dubai


80

ADX Index and Volume Performance

Source: ADX Stock Exchange & Global Research

Abu Dhabi’s ADX index remained relatively flat in March, declining 0.6% after a rise of 5.7% in February and 9.5%

in January. In the absence of adequate catalysts, the index went through cycles of profit booking and subsequent

recovery throughout the month.

The index experienced a sharp drop to the level of 2,970 at the beginning of the second week, as investors

engaged into profit booking in Banking and Services sectors. However, it recovered quickly thereafter, breaching

the 3,000 mark again, gaining support from Industrial and Services sectors. Soon, the Banking sector joined to push

the index to the month’s highest level of 3,037. Meanwhile, a discussion between the ADX index and the Korea

Exchange (KRX) regarding a MoU provided further support to the market. The discussion resulted in positive

outcomes on the activities of setting up exchange traded funds on the ADX index, dual listing of companies, Central

Counterparty Clearing and development with other bourses. As a result, the market remained buoyant until the third

week. At the same time, the ADX index carried out a discussion with the Qatar Exchange (QE) to improve

cooperation between the two. However, the index lost its momentum again as investors engaged into profit booking.

Nonetheless, the index received a last moment push from the Consumer sector, which helped it remain above the

3,000 level at the end of the month.

Five of eight sectors posted losses in March, offsetting gains by heavyweights Banks, Consumer and Services.

National Bank of Abu Dhabi (NBAD),up 7.6%MoM, led the Banks sector, mainly on the approval of a cash dividend

of 35%. Abu Dhabi Commercial Bank and First Gulf Bank also rose 3.2%MoM and 3.0%MoM, respectively.

Emirates Foodstuff & Mineral Water (AGTHIA), up8.2%MoM, was the sole gainer in the Consumer sector.

AGTHIA’s net profit grew 45% in 2012;it announced a 5% cash dividend at the end of February that helped the

sector gain in March. The Services sector (+2.1%MoM)was led by Abu Dhabi National Hotels (7.7%MoM), followed

by Abu Dhabi Aviation (4.9%MoM) and National Corp. for Tourism & Hotels (3.5%MoM).

Among the laggards, the Real Estate sector fell the most (13.3%MoM), followed by Energy (6.2%MoM) and

Telecommunication (4.4%MoM) sectors. The Real Estate sector was the worst hit as investors engaged in profit

booking after experiencing a strong rally in the previous two months. Moreover, investor sentiment was slightly

dampened due to a fall in oil prices in the US; this further triggered a sell-off situation in the index. The Real Estate

sector fell during March, led by heavyweights Al Dar Properties (11.7%MoM) and Sorouh (13.2%MoM).

Corporate earnings

Corporate earnings in Abu Dhabi increased 13.6%YoY in 2012. This was led by sector heavyweights, Banking,

Real Estate and Telecommunication, which grew 9.3%YoY, 104.4%YoY and 12.9%YoY, respectively. Banking

-

50

100

150

200

250

300

350

400

450

2,000

2,500

3,000

3,500 Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13



81

sector remained the biggest segment in 2012, constituting 58.4% of total earnings, followed by Telecommunications

(22.3%) and Real Estate (7.3%).

Dubai

DFM declined steeply in March

Dubai’s DFM rose 19.9% in 2012 after declining 17% in 2011 and emerged as the best performer among the GCC

equity markets. The bourse started 2012 with a strong uptrend led by positive 4Q11 earnings expectations, mainly

from Emaar Properties and banking stocks, which could have triggered higher dividend payouts. Rising oil prices

and the Abu Dhabi Government’s decision to restart stalled projects were positive triggers. However, disappointing

1Q12 earnings performance, concerns over the political instability in the region, fears over Greece’s exit from the

Eurozone, and a decline in oil prices weighed in negatively on market movement in 2Q12. Despite these negative

factors, expectations of stimulus measures in the US and the bailout of Spanish banks maintained positive

momentum in the markets. Additionally, Asteco’s report for 2Q12 hinted at recovery in Dubai’s residential

developments with growth in rental rates.

DFM’s sectoral performance was bullish, with seven of its nine indices ending in the green. Real estate and

construction, services, transportation and industrial stocks drove this rally.

The Real Estate and Construction index surged 42.5% led by Emaar Properties (45.9%), Arabtec Holding (47.9%),

and Deyaar Development Co. (65.3%). This rally could be attributed to the Government’s orders for restarting

stalled projects. Furthermore, Emaar Properties’ net earnings rose 49%YoY to AED1.6bn in 9M12. Arabtec Holding,

which has been on an acquisition spree, reported 13%YoY earnings growth in 3Q12.

The Transportation index jumped 25% led by Air Arabia (up 42.5%), Aramex (11.1%), and Gulf Navigation Holding

Co. (26.5%). The Industrial index rose 44.6% led by National Cement Co. (44.6%). Air Arabia’s strong market

performance could be attributed to its expansion plans and robust net earnings growth of 78%YoY to AED341.2mn

in 9M12. The airline received the delivery of its sixth aircraft in 2012, and it plans to double its fleet by adding 44

aircraft by 2016. Furthermore, Aramex clocked 16%YoY growth in net earnings to AED178.4mn during 9M12.

The Banking index, down 4.5% in 2012, was the only index to end on a negative note. This decline was driven by

Emirates NBD (-3.1%) and Mashreq Bank (-45.8%). Emirates NBD reported a 17%YoY decline in net income for

9M12; the bank is on a cost-rationalization drive, under which it closed 8 branches and cut 750 jobs.

DFM Index and Volume Performance

Source: Zawya, Gulfbase& Global Research

0

100

200

300

400

500

600

700

800

900

1000

1500

2000

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Au

g-1

2

Se

p-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13



82

The Dubai Financial Market (DFM) index declined sharply in March, losing 5.1%MoM after a gain of 2.1%MoM in

February and 16.3%MoM in January. The index experienced a significant correction in March due to dampened

investor sentiment. Investors remained cautious throughout the month, considering the index had already overdone

itself in the previous two months. Investor sentiment further soured due to negative global cues, especially with the

sequester situation in the US and China bringing in measures to the property market. The Real Estate and Banks

sector stocks were hit the hardest, dragging the whole market down. Just two of eight indices advanced in March,

while the others either remained flat or declined. The Industrial sector gained 11.5%MoM led by National Cement

Co. (11.5%MoM). In the Telecommunication sector, Emirates Integrated Telecommunication provided support by

gaining 9.9%MoM during the month.

Among the losers were heavyweights Banks, Investment and Financial Services, Real Estate and Transportation.

The Banks sector was mainly pulled down by Mashreq Bank (11.6%MoM), Dubai Islamic Bank (8.6%MoM) and

Commercial Bank of Dubai (6.0%MoM), offsetting gains by Gulf Finance House (5.5%MoM) and Emirates NBD

(1.0%MoM). In the Real Estate sector, stocks of Arabtec Holding (-22.1%MoM), Drake & Scull International (-

6.4%MoM) and Emaar Properties (-3.4%MoM) were hammered. Arabtec’s stock was hurt due a sell-off triggered by

the announcement of a rights issue. On the Other hand, stocks of Emaar Properties and Drake & Scull International

fell on profit booking during the month.

Corporate earnings

The Dubai market posted a strong performance in 2012, with corporate earnings growing 88.2%YoY. Growth was

mainly led by a recovery in the Real Estate sector, which surged282.0%YoY in 2012. Banking (up 24.1%YoY),

Telecommunications (up 80.4%YoY) and Insurance (up 16.4%YoY) sectors also remained buoyant. The Banking

sector was the biggest contributor to total earnings in 2012 at 47.5%. The Real Estate sector accounted for 20.2%,

while Telecommunications constituted 15.4% of total incremental earnings.


83

Qatar

Qatar GDP grows by 6.6% in 2012; 2013 GDP growth expected at 5.2%

2022 football world cup to drive next round of economic growth

Non-Oil & gas sector to drive the economy in future

Qatar exchange ends in red in 2012 by 4.8%

Qatar GDP grows by 6.6% in 2012; 2013 GDP growth expected at 5.2%

Since 2011, Qatar has successfully completed its 20-year investment plan to

commercialize its natural gas reserves, the third largest globally with 25tn cubic meters

or 13.0% of the world’s total proven reserves. This has led Qatar’s economy to almost

double over the last four years to USD192.3bn as of 2011. The oil & gas sector will

contribute 42.6% to the overall GDP in 2012. Qatar's economy is expected to moderate

to a steady rate of 5.2% in 2013 (6.6% in 2012), following record double-digit growth in

2006-2011. The non-oil & gas sector, which is estimated to expand 9.9% in 2012, is

expected to drive growth in Qatar's economic expansion during 2012 and going

forward.


Oil & gas sector was significant contributor to the overall GDP at 42.6% in 2012. LNG

production more than doubled in 2009–2011 to 74.8mn tons. With an additional 3.9%

increase expected in 2012, LNG production is expected to stabilize at 77.0mn tons till

2017. Crude oil production, after a slight 0.5% increase expected in 2012, would

continue to decline at CAGR of 5.7% to 559b/d in 2017. Qatar has placed a self-

imposed moratorium on the development of the new hydrocarbon projects until 2015 to

assess the sustainability of increasing production and carry out a comprehensive study

of its North Field.

Infrastructure development related to 2022 World Cup will drive growth

Qatar plans to invest USD200.0bn over the next 10 years as part of its preparation for

the 2022 FIFA World Cup, and a significant part (USD140bn) would be spent in the first

five years in projects such as new airport, seaport, and a rail and metro system. These

projects are expected to be complemented by additional investments from Qatar

petroleum (USD50bn) and other public and private firms (USD100.0bn). Furthermore,

the Qatari government aims to increase spending on public administration, healthcare,

and education as part of its new 2013–14 budget, including 21% higher capital

spending and 16% higher current spending than in the previous budget.

Qatar Exchange ends in the red in 2012

The Qatari market declined substantially in 2012, with the Qatar Exchange index

posting a loss of 4.8% to close at 8,358.9 points. In contrast, the index had gained 1.1%

in 2011 and was the only GCC market to post growth during the year. In 2012, the

market remained volatile and witnessed selling pressure. The global financial crisis and

disappointing corporate earnings exerted additional pressure. Consequently, the market

deteriorated considerably in 2012. QE’s corporate earnings fell 0.3%YoY in 2012.

Consumer goods and Real Estate sector were the only losing sectors during the year,

declining 9.7%YoY and 56.0%YoY, respectively.

Qa

tar


www.globalinv.net


84

Qatar Economic Indicators

2010 2011 2012a/e* 2013e 2014e


Real GDP Growth (%) 16.7 13.0 6.6* 5.2 5.0

Oil 28.8 15.7 1.7* 0.4 -1.1

Non-Oil 8.6 10.8 9.9* 9.0 9.5


Oil 52.6 59.3 42.6*

Non-Oil 47.4 40.7 57.4*


Private Consumption 11.9 6.2 10.5 8.5 9.5

Public Consumption 7.6 23.9 9.2 6.5 6.8

Gross Capital Formation -0.8 8.7 7.6 7 7.5

Exports 27.3 24.0 3.0 1.3 1.5

Imports 1.7 29.3 4.0 5 6.2

Population (mn) 1.8 1.9 1.9 2.0 2.0

Growth Rate 6.3 3.7 2.0 1.4

Trade Surplus (USD bn) 52.9 85.9 101.2 82.5 76.0

Export of Goods 73.5 112.3 131.4 121.5 118.1

Import of Goods (20.6) (26.5) (30.3) (39.0) (42.1)

Current Account Balance (USD bn) 23.4 51.1 61.3 57.1 49.3

Government Revenue (USD bn) 35.1 44.6 56.7 59.9

Oil & Gas 17.1 19.4 24.9

Others 18.0 25.2 31.8

Government Expenditure (USD bn) (32.4) (38.5) (49.1) (57.9)

Fiscal Balance (USD bn) 2.7 6.2 7.6 2.0


Foreign Reserves (USD bn) 31.2 16.9 33.2 38.2 42.2

Inflation (%) -2.4 1.9 1.9 3.0 4.0

M1 (USD bn) 18.5 22.1 24.6


M2 (USD bn) 71.5 83.7 102.9


Private Sector Lending (USD bn) 51.5 61.4 69.8 82.0 51.5

Benchmark Interest rate (%)

Market Index 8,681.7 8,779.0 8,358.9



85

QATAR

High LNG production provides a safety net for the economy

For the last several years, Qatar's prosperity has largely been a result of LNG capacity expansion, which rose a

record 29.6% in 2011. In 2011, Qatar successfully completed a 20-year investment plan to commercialize its natural

gas reserves, which are the third largest in the world with 25tn cubic meters or 13.0% of the world’s total proved

reserves. As a consequence, Qatar’s economy nearly doubled from last four years’ to USD192.3bn in 2011.

However, Qatar's economy is anticipated to grow at a moderate rate of 6.6% in 2012, following record double-digit

growth in the last six years.

Non-oil & gas sector is expected to be the driving force behind Qatar's economic expansion in 2012 and the years

ahead. This sector is forecast to register 9.9% growth in 2012, led by strong performances in petrochemicals and

fertilizers industries, and services sectors. Oil & gas sector rose marginally to 1.7% due to declining crude oil

production and a slight increase in gas production to supply the new Pearl Gas-to-Liquids (GTL) facility.

Qatar plans to invest USD200.0bn over the next 10 years as part of its preparation for the 2022 FIFA World Cup,

and a significant part (USD140bn) would be spent in the first five years in projects such as new airport, seaport, and

a rail and metro system. These projects are expected to be complemented by additional investments from Qatar

petroleum (USD50bn) and other public and private firms (USD100.0bn). Furthermore, the Qatari government aims

to increase spending on public administration, healthcare, and education as part of its new 2013–14 budget,

including 21% higher capital spending and 16% higher current spending than in the previous budget.

The ongoing infrastructure spending is expected to support economy from 2013 onwards, with GDP rising 5.2%.

The Qatari government’s change in focus to economic diversification by targeting expansion of the non-oil & gas

sector is likely to boost GDP growth from this sector. Non-oil & gas GDP growth is forecast to rise 9.0%, while oil &

gas sector would moderate to 0.4% in 2013.


Source: IMF, Qatar - Central Statistics Bureau, EIU

28.8

15.7

1.7 0.4 -1.1 1.4 0.0

3.5

8.6

10.8

9.9 9.0 9.5

10.0 10.0

10.0

16.7

13.0

6.3 5.2 5.0

6.6 6.2 7.7

2010 2011 2012 2013e 2014e 2015e 2016e 2017e


Real GDP (%)

11.9 6.2

10.5 8.5 9.5 9.0 9.0 9.0

7.6 23.9

9.2 6.5 6.8 6.8 7.0 7.0

8.7

7.6

7.0 7.5 8.2 8.5 8.3

27.3

24.0

3.0

1.3 1.5 2.3 3.2 3.5

1.7

29.3

4.0

5.0 6.2 7.0

8.0 8.0

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e



Imports


86


Oil & gas sector will be the significant contributor to the overall GDP at 42.6% in 2012. LNG production more than

doubled in 2009–2011 to 74.8mn tons. With an additional 3.9% increase expected in 2012, LNG production is

expected to stabilize at 77.0mn tons till 2017. Crude oil production, after a slight 0.5% increase expected in 2012,

would continue to decline at CAGR of 5.7% to 559b/d in 2017. Qatar has placed a self-imposed moratorium on the

development of the new hydrocarbon projects until 2015 to assess the sustainability of increasing production and

carry out a comprehensive study of its North Field.

Nevertheless, the significance of the oil & gas sector has been waning in recent times, as the government’s efforts

to diversify the economy away from its reliance on hydrocarbons are coming into effect. Share of the non-oil & gas

sector in the overall economy increased to 57.4% in 2012 from 40.7% (2011). Focus on the manufacturing sector,

particularly in the manufacturing of petrochemicals, and the roll-out of infrastructure projects in the run-up to the

2022 World Cup, would continue to drive economic diversification and growth of the non-oil sector.

Movement in Structure of Real GDP (%) Crude Oil and LNG Production

Source: Qatar Government Online, IMF

Uninterrupted supply of feedstock has helped the manufacturing sector to expand 11.8% in 2012, as production of

petrochemicals and fertilizers continue to increase at new facilities. Government services also rose 11.5%, boosted

by expenditure in public administration, healthcare, and education. Both construction and transport &

communication sectors witnessed double-digit growth at 10.4% and 12.1% respectively, following a pick-up in

project activity in the second half of 2012. With the Qatar government set to increase its capital spending, both

these sectors are likely to see continued growth in 2013–14.

Among the services sectors, financial services witnessed a growth of 6.6%, led by the higher demand for credit

facilities to support ongoing investments in certain infrastructure projects. The trade, restaurants, and hotels sector

grew 7.7% in 2012, driven by 6.0% population growth. The government efforts to promote Qatar as a destination for

business and conferences have also helped the hospitality sector. In particular, the 18th UN Climate Change

Conference held in Doha in December 2012 helped bring much credibility to Qatar as a viable business destination.

53.4% 58.3%

52.6% 59.3%

42.6%

46.6% 41.7%

47.4% 40.7%

57.4%

2004 2005 2010 2011 2012


789

745 749 730

691 656

607

559

57.7 74.8 77.0 77.0 77.0 77.0 77.0 77.0

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

Crude Oil ('000 b/d) LNG (mn tons)


87


Source: Qatar - Central Statistics Bureau

Lowest unemployment among GCC countries

Qatar’s total population, which increased at a CAGR of 11.5% in the last decade, is expected to decelerate at 2.3%

in the current decade. Growth in population below the age of 60 is forecast to fall to 2.1% per annum (p.a.) till 2020,

vis-à-vis 11.6% p.a. in the last decade. The percentage of population under the age of 60 is expected to decline

from 98% in 2012 to 97% by the end of the decade. Meanwhile, the proportion of the population above the age of

60 is expected to increase to 3.0% by 2020, from 2.0% in 2012. Population aged above 60 is expected to grow at a

CAGR of 8.1% till 2020, higher than the growth rate of 6.3% p.a. in the previous decade.

Population Growth Economically Active Population - Composition

Source: UN database, Qatar- Central Statistics Bureau

5.4

15.7

10.4

7.9

10.6 12.9 12.4

6.4

12.9

2.3 0.9

19.9

28.9

17.6

13.5

9.5

2.5

10.2 7.4

8.7

1.9 2.1

4.4

1.7

11.8

10.5 10.4

7.7

12.1

6.6

11.6

8.6

6.0

Agriculture

Min

ing (

incl. O

il &

Gas)

Manufa

ctu

rin

g

Utilit

ies

Constr

uctio

n

Whole

sale

Tra

de, hote

ls

Tra

nsport

Fin

ancia

l Serv

ices

Govern

ment S

erv

ices

Socia

l Serv

ices

Dom

estic S

erv

ices

Growth in 2010 Growth in 2011 Growth in 2012

Industry Services Industry

Agriculture and

Agriculture, 0.2%


67%

Manufacturing, 14%

Utilities, 1%

Construction, 17%

63%

Services

Trade & Hotels, 21%

Transport, 18%


37%

Finance, 29%

Government, 29%

0.6

0.8

1.8

1.9 2.0

2.2 2.4

0

1

1

2

2

3

2000 2005 2010 2012 2015 2020 2030

in m

ilio

ns


0.07 0.07

1.20 1.20

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 Qataris Non-Qataris


88

Total population has more than doubled in the last six years, following an influx of expatriates in the country, to

support the ambitious economic development plan laid out by Qatar. In the last year alone, Qatar registered a net

increase of 140,000 newcomers, both nationals and expatriates, reflecting a 7.5% rise between end of 2011 and

2012. The recent arrival of expatriates into the country has increased their share of population to 85% in 2010.

Non-Qatari’s represented 93.9% of the labor force in 2011, down from 94.2% in 2010. Construction sector, the

largest employer of expatriates, accounts for close to half of the non-Qatari labor force. As employment in the

construction sector is tied to specific ongoing projects, the composition of labor force remains transient, with

workers’ residency expiring at project completion. Qataris are concentrated mainly in public sector jobs; private

sector attracted less than 10.0% of the Qatari labor force. Nevertheless, participation in the private sector among

Qataris has been on the rise to 9.3% in 2012, up from 8.4% in 2011.

Qatar has the lowest unemployment rate among GCC countries. Total unemployment stood at 0.3% in 2012, same

as six years ago. Unemployment among Qatari nationals was higher as compared to the expatriates, primarily due

to a high level of unemployment among women nationals. Unemployment among women stood at 2.8% in 2012,

down from 4.6% in 2011, while 0.1% of male labor force was unemployed in 2012, down from 0.5% in 2011.

Reforms in the education sector and labor policy, as part of the Qatar National Vision 2030, are expected to help fix

the unemployment issues among Qataris.

Unemployment Rate (%) Labor Composition (%)

Source: Qatar - Central Statistics Bureau

LNG exports provides key support to positive current account balance

Qatar reported another trade surplus during 2012, as exports rose 17.0% to USD131.5bn, while imports increased

at a slower rate of 14.3%. Trade surplus grew 17.8% in 2012 in addition to the 62.2% increase registered in 2011.

Exports continued to be driven by LNG, which represents over 60.0% of the total exports.

Currently, Qatar exports around 70% of its 77m t/y of LNG output on long-term contracts linked to oil prices, a sale

model that guarantees volumes. With production remaining constant, gain from LNG exports could be directly

ascribed to higher prices. In 2012, benchmark Japanese LNG prices rose 14% YoY, while EU prices increased

9.1%YoY. Japan, South Korea, and India remain the biggest customers of Qatar’s LNG exports.

3.2

2.4 2.3

3.9

3.0

0.3 0.2 0.2

0.3 0.3

0.5 0.3 0.3

0.6 0.5

2007 2008 2009 2011 2012

Qataris Non-Qataris Total

By Nationality

83.7

9.3

16.3

90.7


Qataris Non-Qataris


89

The slowdown in import growth was mainly due to a fall in machinery and equipment imports, following the

completion of all new LNG production facilities in early 2011. However, imports are expected to pick up in 2013, as

major infrastructure projects are rolled out. Given the expected growth in imports in 2013, the trade surplus would

decline 18.5% to USD82.5bn during the year and is expected to continue declining for the rest of the forecast period

until 2017.

The current account surplus increased 19.9% YoY to USD61.3bnin 2012, led by high gains from trade surplus,

which offset non-merchandise deficit. Similar to the trade surplus, the current account surplus is expected to decline

to USD57.1bn in 2013, as rising imports and non-merchandise outflows drag down surplus.

Trade Balance (USDbn) Current Account Balance (CAB) (USDbn)

Source: IMF, Qatar - Central Bank

Endowed with the large surplus from oil & gas exports, Qatar has continued to acquire foreign assets. In addition,

repatriation of proceeds by foreign corporations, following the completion of LNG infrastructure expansion, led

foreign outflows. Foreign outflows (net) were USD1.5bn in 2012 due to a USD1.8bn outflow, though Qatar received

USD324.0mn of foreign investment. Portfolio investments remained volatile, reflecting the general weakness in the

financial markets.

73.5

112.3

131.4

121.5 118.1 115.1 111.3

107.7

-20.6 -26.5

-30.3 -39.0 -42.1

-46.8 -51.4

-57.2

52.9

85.9

101.2

82.5 76

68.3 59.9

50.4

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

Exports Imports Trade Balance

52.9

85.9

101.2

82.5 76

68.3

59.9

50.4

-29.6 -34.8

-39.9

-25.4 -26.7 -26.7 -26.3 -26.2

23.4

51.1

61.3 57.1

49.3

41.6

33.6

24.2

2010 2011 2012 2013e 2014e 2015e 2016e 2017e



90

Foreign Direct Investment - Outflows (USDbn) Financial Investments – Inflows (USDbn)


Infrastructure development related to 2022 World Cup would be the cornerstone of fiscal policy

Qatar’s budget for 2012–13 envisages a fiscal surplus of USD7.6bn, up 23.1% from the prior year’s actual surplus.

Actual surplus could be much higher than the budget surplus for 2012–13, as oil & gas revenues are usually

calculated at a conservative price. Fiscal revenue is budgeted to rise 27.0% to USD56.7bn, largely due to better

LNG prices, higher tax collection due to the introduction of a revised corporate tax regime in 2011, and the

continuing expiry of tax holidays for some oil and gas joint-venture partners. Investment income is expected to

remain stable despite global market uncertainty.

Fiscal Balance (USDbn)

Source: IMF, Qatar - Central Bank; Note: a – actual, b - budgeted

-0.9

-6.0

-1.5

-0.5

2010 2011 2012 2013e

1.1

-18.9

2.8

-10.7

2.8

-35.5 -38.0

-15.9

2010 2011 2012 2013e


26.6

17.1

42.1

19.4 24.9

9.9 13.0

7.1

14.6 14.6

6.3 5.0

11.3

10.6 17.2

-27.0 -18.8

-31.8

-20.6

-32.0

-12.2 -13.6

-13.8

-17.9

-17.1

42.8 35.1

60.5

44.6

56.7 59.9

-39.2 -32.4

-45.6 -38.5

-49.1

-57.9

3.7 2.7 14.9

6.2 7.6 2.0

2010/11b 2010/11a 2011/12b 2011/12a 2012/13b 2013/14b

Oil and Gas Revenues Investment Revenues Other Revenues Current Expenditures Capital Expenditures Fiscal Surplus


91

Fiscal spending for 2012–13 is expected to focus on social spending, including raising public sector wages, to

assuage any discontent among locals in the wake of regional civil unrest. Budgeted fiscal expenditure is 27.7%

higher than the actual expenditure of the previous budget. Nevertheless, capital spending would remain stable due

to investments made in the manufacturing sector to boost the production capacity of petrochemicals. Qatar plans to

expand petrochemicals production to 23m tons/year by 2020, from around 10t/y currently, to help drive non-oil GDP

growth. In addition, large infrastructure spending is anticipated to maintain the momentum in capital spending.

Qatar’s utilities regulator, the Qatar General Electricity and Water Corporation (Kahramaa), has outlined plans for a

USD22.0bn upgrade for the power and water sectors over the next eight years.

Preliminary budgeted estimates for 2013–14 reveal a 17.9% jump in spending from the previous budget owing to

capital spending increasing due to the commencement of the infrastructure projects related to the 2022 World Cup.

The public sector, salaries, education, and healthcare are also expected to receive attention in the new budget.

Fiscal revenues are budgeted to increase at a slow rate (5.7%) based on the conservative oil price estimate of

USD65/barrel. Consequently, fiscal surplus is expected to be USD2.0bn.

Excess supply in housing market contain inflation

Consumer price index stayed constant in 2012. Small increases in the international commodity prices, coupled with

excess supply in the housing market, helped limit the inflationary pressures in 2012. Large salary increases for

public sector employees in 2011 and expansionary fiscal and monetary conditions bolstered liquidity in the market,

adding to the increase in CPI. Rental costs have shown steady signs of revival in the recent months, becoming less

of a cushioning factor in containing inflation. Rental costs bottomed out in April and May 2012, and by August,

climbed above their year-earlier level, adding about 0.5 percentage points to inflation in 2012. Rest of the

components in CPI, with the exception of entertainment, recreation, and culture, trended downward in 2012,

restraining inflation.

Inflation is expected to accelerate to 3.0% in the next two years and increase further to 4.0% every year till 2015

and is forecasted to grow at 5% for the rest of the forecasted period till 2017.Residential rents would be the key

swing factor in the years ahead. Increasing expatriate population growth from 2022 World Cup-related projects and

supply-side factors in the form of income and credit growth are expected to add upward pressure on housing costs.

A strong US dollar and declining international food prices may keep a lid on imported inflation while housing market

recovers.


Source: Qatar – National Statistical Bureau

0.4

1.9 1.9

3.0

4.0 4.0

5.0 5.0

2010 2011 2012 2013e 2014e 2015e 2016e 2017e 3.8

5.4

-6.7

2.1

2.2

3.3

4.1

3.6

4.2

5.6

-5.6

6.4

2.8

5.4

5.2

4.8

1.7

1.2

2.8

1.9

1.0

1.9

5.3

4.2

Food, beverage & tobacco

Clothing & footwear

Rent,utilities & related housing service

Furniture, textiles & home Appliances

Medical Care & health Services

Tranport & communication

Entertainment, recreation and culture

Miscellaneous goods & services

2012 2011 2010


92

Public sector holds the key to banking sector growth

Qatar's monetary policy will remain constrained to some extent by the currency peg of Qatari riyal to the US dollar.

However, the Qatar Central Bank (QCB) sets interest rates on the basis of the domestic liquidity conditions,

independent of the US Fed policy. In October 2008, when the US cut its main interest rate to 0-0.25%, the Qatar

Central Bank held interest rates steady. However, Qatar cut its lending rate by 50 basis points to 4.5%, only the

second change since 2006 in August 2011, in an effort to boost private sector credit growth. Private sector lending

grew 13.6% in 2012 and is expected to register an even higher growth (17.5%) in 2013 on account of the increase

in real estate loans.

QCB aims to develop an active, market-based liquidity management framework in the future. For this purpose, QCB

is exploring the possibility of using open market operations to actively keep the Interbank Rate close to a policy rate

consistent with the exchange rate peg. In order to achieve this goal, QCB would not only need repo transactions to

inject liquidity, but also a reverse repo to absorb liquidity. Lately, banks have been keen on exploiting credit markets

for raising funds, including top banks such as Qatar National Bank, similar to public sector financing.

Broad money supply (M3) grew by a quarter in 2012, led by massive double-digit growth (84.7%) in time deposits,

and a 27.2% increase in quasi money. Furthermore, time deposits more than doubled in 2011, led by double-digit

gains in public sector deposits, which account for half of all the deposits. Foreign currency deposits, which are as

much as the combined value of all domestic deposits (demand and time deposits), registered a 7.0% increase in

2012, up from 1.1% a year ago.



Bank lending to public sector, representing almost half of the total credit facilities, has more than doubled in the last

two years owing to increased infrastructure spending. Lending to the public sector is expected to remain high as the

government kick-starts over USD30.0bn worth of projects related to the 2022 World Cup. A quarter of the total

credit that remained exposed to the slowly recovering real estate sector is a cause of concern within the QCB.

Previously, the QCB had intervened to support local banks by buying the real estate loans of a number of banks.

QCB is considering taking the necessary steps to control the banks' exposure to real estate by assigning a higher

risk weighting to such loans when calculating the banks' capital adequacy ratio.

17.1 16.6 17.3 18.5 19.3 21.0 19.5 22.1 23.2 24.1 24.1 24.6

39.2 40.0 42.0 45.1 44.8 45.3 46.1 45.6 44.9 49.4 49.4 48.8

9.1 6.4 8.1 7.9 9.0

19.1 19.8 16.0 13.9 16.5 16.5

29.5 48.4 46.3 50.1

53.0 53.8

64.4 65.8 61.6 58.7

65.9 65.9

78.3

113.8 109.3

117.4 124.5 126.9

149.8 151.2 145.3

140.7

155.8 155.8

181.2

Q1 2

010

Q2 2

010

Q3 2

010

Q4 2

010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

M1 Foreign Currency Deposits Time deposits Quasi Money

51.5 54.4 56.9 58.7 61.4 62.6 64.5 66.1 69.8

82.0

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

2013e


93

Domestic Lending by Industry (USDbn)

Source: Qatar - Central Bank

Qatar Exchange ends in the red

The Qatari market declined substantially in 2012, with the Qatar Exchange index posting a loss of 4.8% to close at

8,358.9 points. In contrast, the index had gained 1.1% in 2011 and was the only GCC market to post growth during

the year. In 2012, the market remained volatile and witnessed selling pressure. The global financial crisis and

disappointing corporate earnings exerted additional pressure. Consequently, the market deteriorated considerably

in 2012.

The Qatari market started the year on a shaky note. The QE index plunged 2.4% in January following rating

downgrades of some Eurozone countries, which led to selling pressure globally. However, the market soon

rebounded with investors seeing a buying opportunity as valuation of companies became attractive. The Banking

sector provided support with 104.6% growth in financial assets in 2011. Although selling pressure remained, hopes

of stronger 1Q12 earnings helped the QE index pare losses and post a gain of 0.1% by the end of March. However,

the market posted weaker-than-expected corporate earnings in 1Q12. This coupled with disappointing US job news

and deteriorating Eurozone debt crisis weighed on the market, with the QE index down 7.5% by the end of 2Q12.

The market started recovering again in the second half of the year as investors turned bullish after a period of profit

booking. The recovery was supported by mobilization of projects in the country along with the release of the state

budget that was expected to benefit the banking sector. This resulted in strong buying demand from domestic

investors that continued up to November, with the QE index cutting down its YTD losses to 2.6%. The market also

saw some support from the approval of the Eurozone bailout fund by Germany during this period. Soon after

though, the market started falling again as investors engaged into profit booking. Thus, the QE index ended 2012

with a loss of 4.8%.

In 2012, four of the seven sectoral indices posted gains – Consumer Goods and Services, Insurance,

Telecommunication and market heavyweight Industrials. The Industrial sector index continued its strong

performance in 2012 led by heavyweight Industries Qatar, which gained 16.6%, constituting 69.2% of the sectoral

market capitalization. Consumer Goods and Services index saw the highest growth among sectors, moving up

37.9% in 2012. Qatar Fuel Company, accounting for 70.3% of the sub-sector market capitalization, led the sector’s

growth with share price gain of 40.3%.

27.8

6.7 1.8 5.0

13.8 15.3

8.0

1.0

40.3

7.3

1.8

4.4

20.6 18.4

8.0

1.1

59.0

9.0

2.3 4.5

23.1 19.2

9.6

2.0

Public

Secto

r

Ge

ne

ral T

rade

Industr

y

Contr

acto

rs

Real esta

te

Consum

ptio

n

Serv

ices

Oth

ers

2010 2011 2012


94

Among decliners, Real Estate and market major Banking indices weighed down the overall index. The banking

sector index witnessed selling pressure even after a pickup in lending, as investors remained disappointed with the

dividends declared by local banks. Industry heavyweight Qatar National Bank (constituting 51.5% of the sectoral

market capitalization) share lost 5.3% during 2012. Other major lenders Qatar Islamic Bank and Masraf Al Rayan

declined 11.0% each in their share price.

The Real Estate sector, which continued to struggle with oversupply conditions, fell 3.9% in 2012. The decline was

led by Ezdan Real Estate (representing 73.1% of the sectoral market capitalization) share, which tumbled 18.0%,

Corporate earnings in Qatar increased at a healthy CAGR of 15.1% during 2008–11, recovering well from the lows

of 2008. The Financials sector continued to contribute the most to overall earnings, reaching 40.0% by 9M12,

followed by Services (21.8%) and Basic Materials (20.4%).

The Financial sector, which mainly consists of banks, expanded at a CAGR of 16.0% during 2008–11. During this

period, the sector witnessed strong growth in lending and total assets aided by increased infrastructure spending for

the 2022 Soccer World Cup. During 9M12, the Financial sector saw earnings rise 11.3% YoY. Industry heavyweight

Qatar National Bank reported 15.0% growth in net profit to QAR6.2bn in 9M12, with earnings per share rising to

QAR8.9 from QAR8.3 in 9M11. Masraf Al Rayan saw profits surge 7% YoY to QAR1.1bn in 9M12, with earnings per

share climbing to QAR1.45 from QAR1.35 in 9M11.

The Service sector, comprising real estate and telecommunication companies, has seen the biggest growth; the

sector expanded at a CAGR of 41.6% over 2008–11. Ezdan Real Estate Co.’s net profit increased 29.2% to

QAR261mn in 9M12, with earnings per share climbing to QAR0.13 from QAR0.10 in 9M11. Meanwhile, Telecom

major Qatar Telecom’s net profit increased 12.6% YoY to QAR2.4bn, with earnings per share reaching QAR8.34

from QAR8.17 in 9M11.

The Basic Materials sector expanded at a CAGR of 10.6% during 2008–11. Industry heavyweight Industries Qatar’s

net profit grew 6.5% to QAR6.6bn in 9M12, with earnings per share rising to QAR12.10 from QAR11.35 in 9M11.

Qatar Index and Volume Performance

Source: Zawya, Gulfbase& Global Research

The Qatar Stock Exchange gained 0.6% in March to close at 8,577.7 compared to 8.528.6 in February. The index

registered a year to date growth of 2.6%. The market remained range bound during the first week of the month, and

experienced a rise in the second week on account of better-than-expected corporate results. However, profit

booking by domestic institutions amid strong buying by foreign institutions kept the index range bound toward the

end of the month. Market heavyweight Industries Qatar attracted investors’ interest as the company announced

85% cash dividend and 10% bonus issue.

0

2

4

6

8

10

12

14

16

7600

7800

8000

8200

8400

8600

8800

9000

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13



95

In March, growth in Industrial (up 7.3%), Consumer Goods and Services (up 3.4%), Insurance (up 3.4%),

Transportation (up 1.4%) and Banks and Financial Services (up 1.1%) sectors was partially offset by a fall in Real

Estate (down 5.1%) and Telecommunications (down 0.6%). The rise in the Industrial sector was led by Industries

Qatar (up 3.9%), Gulf International Services (up 5.4%) and Qatar Electricity & Water (up 5.3%). Industries Qatar

attracted the interest of investors as the company announced 85% cash dividend and 10% bonus issue. The

decline in Real Estate index can be ascribed to a drop in stock prices of all real estate players: Ezdan Real Estate

(down 5.0%), Barwa Real Estate (down 6.9%), United Development (down 2.1%) and Mazaya Qatar Real Estate

Development (down 9.2%).

Corporate earnings

QE’s corporate earnings fell 0.3%YoY in 2012. Consumer goods and Real Estate sector were the only losing

sectors during the year, declining 9.7%YoY and 56.0%YoY, respectively. This offset the gains posted by

heavyweights Banks & Financial Services and Industrial sector which grew 6.6%YoY and 10.1%YoY, respectively.

Loan books of banks surged with increasing demand from public sector companies as well as from real estate and

construction companies in the private sector. Growth in the sector was led by heavyweights Qatar National Bank

(up 10.5%YoY) and Commercial Bank of Qatar (up 6.7%YoY). However, the sector’s growth was restricted by

Qatar Islamic Bank (down 9.2%YoY) and National Leasing Holding Co. (down 11.8%YoY). Industrial sector,

representing 32.1% of the QE’s earnings rose 10.1%YoY to USD3.3bn supported by government spending.



-20%

-10%

0%

10%

20%

30%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

2006 2007 2008 2009 2010 2011 2012

US

Dm

n

Growth (%) - RHS

-56.0%

-9.7%

5.0%

5.1%

6.6%

10.1%

38.9%

-0.3%

-70% -50% -30% -10% 10% 30% 50%

Real Estate

Consumer Goods & Services

Transportation

Insurance

Banks & Financial Services

Industrial

Telecommunications

Total Qatar


96

Oman

Oman GDP grew by 5.0% in 2012; expected to grow further by 4.2% in 2013

Government forecasts budget deficit of USD4.4bn in 2013

“Omanization” to gain momentum as unemployment increases

Inflation declines to 2.9% in 2012 as prices of key commodity fell

Oman GDP grew by 5.0% in 2012; expected to grow further by 4.2% in 2013

Oman’s real GDP expanded steadily over the past few years, with an estimated growth

rate of 5.0% in 2012, which was lower than government’s target of 7.0% and was

almost close to the IMF forecast. Oil and gas continue to dominate the Omani economy,

contributing more than half of the nominal GDP and almost two–third of net fiscal

revenue. However, Oman has successfully executed its diversification strategy as non-

oil GDP to grow 5.4% in 2011 from 3.1% in 2009. The non-oil sector’s contribution to

GDP rose considerably from 52.7% in 2001 to 72.2% in 2011. Factors such as high

domestic demand, an expansionary fiscal policy and growth in the non-oil economy

would bolster economic growth to average 5.1% over 2013–17.

Diversification strategy – Vision 2020 gaining prominence

Vision 2020 outlines the economy’s diversification from oil and steps for privatization

and ‘Omanization’. It also aims to reduce dependence on the oil sector to 9.0% by 2020

and raise the gas industry’s contribution to 10.0%. In line with this, the government is

stimulating gas and oil related industries such as petrochemicals, fertilizers and

aluminum production that, in turn, are driving growth in the manufacturing sector. Paired

with this is the carefully structured tourism strategy, aimed at high net worth individuals.

One of the main goals of the Tourism Ministry is to represent Oman as a year-round

destination.

Government forecasts budget deficit of USD4.4bn in 2013

Oman passed its 2013 budget plan on January 1, 2013. The government aims to

stimulate growth in the non-oil sector and thereby pursue its diversification strategy.

Revenues are budgeted at USD28.9bn, up 27.0% from that in 2012. Oil revenues

constitute 72% of budgeted revenues, with a base price of USD85.0 per barrel and an

average production of 930,000 bpd. Meanwhile, expenses are budgeted at USD33.1bn

in 2013, a 29.0% increase from the previous year. Current expenditure and investment

expenditure will continue to be the key contributors to expenses, resulting in a budget

deficit of USD4.4bn for 2013. However, government finances will remain vulnerable to

changes in hydrocarbons prices.

Inflation declines to 2.9% in 2012 as key commodity prices fall

Inflation rate, which measures the price consumers pay for a standard basket of goods,

eased in 2012, led largely by softening of food prices and rent costs. Average inflation

in Oman slowed to 2.9%, down from 4.1% in 2011 and 3.2% in 2010. The decline was

primarily due to two commodity groups, namely ‘food, beverage & tobacco’ and ‘rent,

electricity, water & fuel’. Food prices regressed to 2.2% in 2012 compared to 4.5% in

2011, while rent costs retreated to 2.2% in 2012 vis-à-vis 2.8% in 2011. Transportation

costs however increased by 1.9% in 2012 compared to 1.5% in 2011. Education soared

15.2% during the year, but constitutes just 3.3% of the weight on the index.

Om

an


www.globalinv.net


97

Oman Economic Indicators

2010 2011 2012a/e* 2013e 2014e


Real GDP Growth (%) 5.6 4.5 5.0* 4.2 3.5

Oil 4.2 2.4 3.2* 0.9

Non-Oil 6.3 5.4 5.9* 5.5


Oil 30.5 31.3

Non-Oil 69.5 68.7


Private Consumption 5.3 2.9 2.5* 5.5 6.3


Gross Capital Formation (1.4) 7.9 3.8* 7.2 7.9

Exports 6.3 (0.8) 2.0* 6.5 5.3

Imports 15.7 10.1 16.6* 10.0 9.8

Population (mn) 2.8 3.3 2.9* 3.0 3.6

Growth Rate 17.9 (12.1) 1.8 1.7


Export of Goods 36.3 46.7 52.0* 52.1 55.8

Import of Goods (17.7) (21.3) (26.5)* (29.5) (33.6)



Oil & Gas 16.5 23.1 31.0

Others 3.9 4.3 5.1

Government Expenditure (USD bn) (20.6) (27.7) (27.8) (27.6) (29.3)

Fiscal Balance (USD bn) (0.1) (0.3) 8.3 4.1 0.2



Inflation (%) 3.3 4.0 2.9 3.3 3.3

M1 (USD bn) 7.4 7.9 9.0


M2 (USD bn) 25.4 28.2


Private Sector Lending (USD bn) 27.7 32.3 36.9


Market Index 6,754.9 5,695.1 5,760.8



98

OMAN

Non–oil sector to boost growth as oil production peaks

The Sultanate of Oman has depicted strong economic growth momentum and its outlook remains positive, despite

sluggishness in the global economy. Oman’s real GDP is expected to grow at 5.0% in 2012, much lower than the

government’s target of 7.0%. Growth was driven by an increase in the production of oil and natural gas (accounting

for 55% of the nominal GDP) coupled with higher prices as well as expansion in the non-oil economy. In 2012,

Oman’s daily oil production rose 4.0% to an average of 918,500 b/d, while natural gas production grew 3.3% to 98.2

million cubic meters a day. Higher revenues were efficiently utilized by way of significant government spending on

infrastructure projects and continuous spending to create jobs. As a result, domestic demand for goods and

services remained high.

Oil production is estimated to expand 1.5% annually during 2013–17 compared to an annual average of 5.7% in

2008–11 and a 4.0% rise in 2012. As production has become more difficult and complex, diversification programs

are gaining prominence. Strong growth in non-oil production is likely to compensate for the weakness in oil

production. Factors such as high domestic demand, an expansionary fiscal policy and gains in the non-oil economy

would ensure robust economic growth. However, the economy will likely remain vulnerable to any downturn in

domestic oil production and fluctuations in oil and gas export prices.

GDP Growth Real GDP Growth by Type of Expenditure

Source: IMF, EIU, National Center for Statistics and Information

Diversification strategy – Vision 2020 gaining prominence

Oil and gas continue to dominate the Omani economy, accounting for more than half of the nominal GDP and

around two–third of net fiscal revenue. According to IMF, in recent years, real oil GDP growth contracted

significantly. In 2011, growth stood at 2.4% compared to 4.2% in 2010.While crude oil remains a significant but

declining part of its economy; the government has undertaken concrete steps to diversify the economic base with

the “Vision 2020” policy.

Oman has been successful in implementing its diversification strategy as non-oil GDP expanded 5.4% in 2011

compared to 3.1% in 2009. The non-oil sector’s relative share in GDP increased significantly from 52.7% in 2001 to

58.8

70.0 76.5 78.8 79.8 81.6 84.1 87.5

5.6

4.5

5.0

4.2

3.5 3.5 3.5 3.5

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e


5.3 2.9 2.5

5.5 6.3

5.1 7.4

4.5

9.0 7.0

-1.4

7.9

3.8

7.2 7.9

6.3

-0.8

2.0

6.5 5.3 15.7

10.1

16.6

10.0 9.8

2010 2011 2012e 2013e 2014e



Imports


99

72.2% in 2011. This could be primarily ascribed to the industry and services sector. Industry’s share doubled to

22.9% in 2011 from 11.4% in 2001, mainly due to massive building and construction activity. Meanwhile the service

sector’s share rose to 52.7% from 39.8% during the same period. Unlike the industry sector, the increase was broad

based.


Source: IMF, National Center for Statistics and Information

Vision 2020 outlines the economy’s diversification from oil and steps for privatization and ‘Omanization’. It also aims

to reduce dependence on the oil sector to 9.0% by 2020 and raise the gas industry’s contribution to 10.0%. In line

with this, the government is stimulating gas and oil related industries such as petrochemicals, fertilizers and

aluminum production that, in turn, are driving growth in the manufacturing sector.

Paired with this is the carefully structured tourism strategy, aimed at high net worth individuals. One of the main

goals of the Tourism Ministry is to represent Oman as a year-round destination. The government allocated

USD39.0mn in February 2013 to develop tourism sites in Dhofar province, as the Khareef season attracts a large

number of visitors. The shift in focus outside the capital, Muscat, clearly indicates the government’s plan to boost

tourism, which is expected to expand at a compounded annual growth rate (CAGR) of 8.6% during 2011–16;

occupancy rates are forecast to increase to 58.6% by 2016 from 53% in 2011.

The government is likely to continue pursuing reforms. Under the latest five-year plan, it has allocated more than

USD20.8bn for infrastructure development. Furthermore, the government earmarked “Duqm” as the next growth city

with investments worth USD15.0bn in petrochemical and infrastructure projects over the next 10 years. Other

investments include railways (USD13.0bn), airways and port operations near the border with Yemen.

4.2

2.4

3.2

0.9

6.3

5.4

5.9

5.5

2010 2011 2012e 2013e


47.3

32.6 28.4 27.8

52.7

67.4 71.6 72.2

2001 2006 2010 2011



100


Source: National Center for Statistics and Information

Omanization to gain momentum as unemployed youth population increases

According to the National Center for Statistics & Information, population totaled 3.3mn in 2011 (2.5mn in 2001) of

which, 2.0mn were Omanis. Population is expected to rise to 8.3mn by 2050. Non-nationals constitute

approximately 40.0% of the total population and typically include workers from South Asia, Egypt, Jordan and the

Philippines. Population growth is due to a gradual increase in the number of live births and low death rates. Live

births in Oman rose to 67,922 in 2011 from 58,250 in 2008, while the number of deaths averaged around 7,400 per

annum during the same period. As a result, the total fertility rate stood at 2.9 in 2011, up from 2.6 in 2008.


Source: United Nations, National Center for Statistics and Information

8.4

10.8

6.0

13.6 14.5

4.9 5.3

9.2

2.8

7.9

2.4

5.0 4.4

3.0 0.6

2.2 0.5

-6.2

15.9

1.6

7.8 7.8

13.3

4.7

2.0

13.2

2.0 3.7

Pro

ducin

g S

ecto

rs

Agriculture

Manufa

ctu

rin

g &

refin

ing

Oth

er

manufa

ctu

rin

g

Utilit

ies

Constr

uctio

n

Se

rvic

es S

ecto

rs

Tra

de, hote

ls

Tra

nsport

Fin

ance

Real E

sta

te

Public

Adm

in &

Defe

nce

Educatio

n

Oth

ers


Producing Sectors

Agricultur

Agriculture, 7%

Manufacturing & refining,

22%

Utilities, 10%

Construction, 38%

46%

Other manufacturing,

24%

Services Sectors

Trade &

Trade & Hotels,

21%

Transport, 19%

Finance, 11%

Public Admin and defence,

20%

Education, 15%

54%

Real Estate, 11%

Others, 4%

2.3 2.4

2.8

3.1 3.3

3.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2005 2010 2015 2020 2030

in m

ilio

ns


1.8 1.9 2.0 2.0

0.7 0.7 0.8 1.3

2001 2006 2010 2011 Omani Non-Omani

http://www.ncsi.gov.om/viewPublication.aspx?id=878

http://en.wikipedia.org/wiki/Total_fertility_rate


101

Growth in the labor force outpaced that in population over the last decade, as majority (approximately 96%)

remained in the working age group (below 60 years of age). This was accompanied by a significant increase in the

number of foreign workers. The labor force increased at a CAGR of 8.1% to 1.4mn in 2011 from 0.7mn in 2002,

largely driven by the rise in foreign workers to 1.3mn (CAGR: 8.6%), while growth in the Omani labor force recorded

a CAGR of 5.0% to 184,000 workers.

Employees in Public and Private Sector (‘000) Composition of Labor Force (%)

Source: National Center for Statistics and Information

As a result, unemployment has become a prevalent problem in Oman; the unemployment rate at 15% is the highest

in the region. This coupled with low wages and high cost of living led to protests. In order to appease protestors, the

government created nearly 44,000 public sector jobs in 2011, raised the minimum wage rates for private sector

employees, launched an unemployment benefit scheme and almost doubled the intake for higher education.

In light of the protests in 2011, the government is likely to galvanize its "Omanization" policy, thereby creating

additional jobs as the labor force is expected to rise significantly in the coming years. According to Economic

Trends in the MENA region, (ERF, Cairo), Oman is experiencing the second highest rate of growth in the age group

of 15–24. However, structural problems, such as lack of a skilled local labor force, and differences in compensation

and working conditions between private and public sectors, would impede Omanization. Furthermore, strict

regulations regarding the employment of Omanis in the private sector would be a cause for concern.

Under the Eighth Five-Year Plan, the government has laid emphasis on human resource development with

spending on education and health to increase 55% and 88%, respectively. Furthermore, the plan envisages

creation of 200,000–275,000 jobs at an average rate of 40,000–45,000 jobs per year.

To boost local employment and reduce dependence on expatriates, Oman is also reviewing its policies for foreign

workers. Government departments are proposing rules for the issuance of new foreign worker permits as well as

imposing quotas for expatriates while assessing which industries need to employ more Omanis vis-à-vis foreign

talent.

High oil exports to continue support external balances

Oman’s trade balance is structurally positive. The country exports more than it imports. This resulted in a manifold

increase in the trade surplus to USD25.4bn in 2011 from USD5.1bn in 2001. Crude oil and related products

continue to be the key reason for the increase in trade surplus. In 2011, oil and gas constituted 70.8% of total

119 139 164 184

613 625

1,133

1,289

2002 2006 2010 2011

Public Sector Private Sector

86.3

13.5

13.7

86.5


Omanis Non-Omanis


102

exports. Higher oil production and prices also supported growth in trade surplus, which otherwise would have been

impacted by a surge in imports during the same period.


Source: EIU, National Center for Statistics and Information; Estimates include total exports

EIU expects trade surplus to remain at USD25.5bn in 2012, but anticipates a slight fall in 2013. The decline could

primarily be due to the forecast of lower Brent crude price of USD104.5/barrel compared to US$111.9/b in 2012.

Furthermore, the trade surplus would remain substantial throughout 2013–17, although slower pace of growth in oil

production may have a negative impact. Overall, export revenue is expected to increase by an annual average of

around8% over 2013–17, supported by the continued development of Oman's sea ports, which would raise re-

export trade.

Historically, a high trading surplus has offset constant deficits in services, income and current transfers (worker

remittances), thereby resulting in a current account surplus. The trend is likely to continue in the coming years.

Services deficit is expected to remain high; however, ongoing government activities to improve tourism

infrastructure would help in boosting services credits. The income deficit will widen gradually with a rise in

repatriated profits. Current transfers’ deficit is projected to increase as the expatriate workforce continues to

dominate the labor industry. EIU estimates workers’ remittances at around 10% of GDP during 2013–17, the same

as in 2011.

Overall, the current account surplus is estimated to narrow to 4.6% of GDP in 2014 from an estimated 14.1%in

2011 as the services deficit increases. However, the current account surplus is likely to widen moderately over

2015–17 with narrowing of the services deficit, rise in oil prices and strengthening of non-oil exports.

Similar to the rest of the developing nations, the global economic crisis had an adverse impact on Oman. The

country witnessed a significant decline in foreign direct investment (net) inflows to USD0.3bn in 2011 after recording

a high of USD3.3bn in 2007. However, we expect investments to gain momentum, given the fact that Oman is a

free economy with no restrictions on repatriations and a pegged currency, which eliminates the exchange rate risk

and provides certainty of returns to investors. Other investor incentives include tax breaks and “One-Stop-Shop” for

investors to obtain clearances at a faster pace.

25.0

33.1

52.0 52.1 55.8

61.2

67.2

74.9

11.3

13.6

-17.7 -21.3

-26.5 -29.5

-33.6 -38.1

-42.6 -48.1

18.6

25.4 25.5 22.6 22.2 23.1 24.6 26.8

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e


18.6

25.4 25.5

22.7 22.1

-12.8

-15.2 -16.4 -16.9

-17.9

5.8

10.2 9.2

5.7 4.2

2010 2011 2012 2013e 2014e



103

Foreign Direct Investment (USDbn) Financial Investments Net (USDbn)

Source: Central Bank of Oman

A turnaround from fiscal deficit to surplus in 2012

The fiscal surplus was primarily driven by oil revenues in 2012; the country recorded a deficit in the last three years

due to the global financial crisis. Recovery in oil prices (owing to the global economic recovery) coupled with an

improvement in oil production led to an increase in net oil revenue by 33.8% in 2012 over 2011. During the same

period, gas revenues also rose by 33.2%.

As the country continued its diversification strategy and reduced dependence on the oil and gas sector, an

important point worth noting is that revenues from non-oil sectors (mainly through taxes and fees) increased 19.9%

in 2012.

Fiscal spending moderated during 2012, with a 0.2% increase in total expenditure compared to the 34.8% rise in

2011.This is largely ascribed to a decline in capital expenditure (10.0%) which offset the increase in current

expenditure and participation & support to the private sector. Current expenditure rose 2.7% in 2012. Defense and

civil ministries accounted for more than 90% of the total expenditure as the government continued to create jobs in

these sectors after the protests in 2011. The expenditure on participation and support to the private sector (which

includes spending on participation in domestic, regional, and international operations as well as support to electricity

and petroleum products) rose 9.2% in 2012. However, the marginal rise in expenditure offset by higher oil revenues,

resulted in a surplus of USD8.3bn in 2012 compared to USD0.3bn in 2011.

Total debt stood at USD3.3bn at the end of September 2012, up 2.3% compared to the end of December 2011.

While total domestic debt increased to USD1.4bn from USD1.2bn in 2011, external debt declined by 2.7% during

the same period.

0.6

1.0

0.8

1.1

2010 2011

FDI abroad FDI in Oman

0.3

-0.8

-4.8

-7.0

2010 2011



104

Fiscal Balance (USDbn) Fiscal Balance – Budget 2013 (USDbn)

Source: IMF, Central Bank of Oman; Estimates include total revenue and total expenditure. No break-up was available

Oman passed its 2013 budget plan on January 1, 2013. The government aims to stimulate growth in the non-oil

sector and thereby pursue its diversification strategy. Revenues are budgeted at USD28.9bn, up 27.0% from that in

2012. Oil revenues constitute 72% of budgeted revenues, with a base price of USD85.0 per barrel and an average

production of 930,000 bpd. Meanwhile, expenses are budgeted at USD33.1bn in 2013, a 29.0% increase from the

previous year. Current expenditure and investment expenditure will continue to be the key contributors to expenses,

resulting in a budget deficit of USD4.4bn for 2013. However, government finances will remain vulnerable to changes

in hydrocarbons prices, as illustrated in 2009, when oil prices slumped and the budget swung into deficit.

Inflation declines as key commodity prices fall

Inflation rate, which measures the price consumers pay for a standard basket of goods, eased in 2012, led largely

by softening of food prices and rent costs. Average inflation in Oman slowed to 2.9%, down from 4.1% in 2011 and

3.2% in 2010. The decline was primarily due to two commodity groups, namely ‘food, beverage & tobacco’ and

‘rent, electricity, water & fuel’. Food prices regressed to 2.2% in 2012 compared to 4.5% in 2011, while rent costs

retreated to 2.2% in 2012 vis-à-vis 2.8% in 2011. Transportation costs however increased by 1.9% in 2012

compared to 1.5% in 2011. Education soared 15.2% during the year, but constitutes just 3.3% of the weight on the

index.

Meanwhile, the wholesale price index declined to 2.1% during the first three quarters of 2012 compared with a rise

of 7.5% in 2011. Except for agricultural products, which fell 2.3% during the period, all of the other components of

the index increased at an average rate of 2.4%.

Inflation will continue to be driven by food prices, rent, and transportation costs, as these items together have

approximately 75% weight on the total consumer price index. Inflation is expected at around 3.3% in 2013,

supported by easing prices of commodities, particularly food items, for which Oman is dependent on the global

economy. However, inflation remains exposed to various external and internal shocks. However, inflation at any

point in time is subject to several external and internal exogenous shocks. External shocks may include the pace of

global recovery and rise in global commodity prices; on the other hand, internal demand and supply factors such as

domestic liquidity, government expenditure, and GDP growth rate could affect inflation.

16.5 23.1

31.0 33.5 31.8 30.4 30.8 29.6 3.9

4.3

5.1

-12.4 -15.7 -16.2

-27.6 -29.3 -31.3 -33.2 -35.2 -6.7

-7.6 -6.9 -1.5

-4.3 -4.7

20.4

27.4

36.1 33.5 31.8 30.4 30.8 29.6

-20.6

-27.7 -27.8 -27.6 -29.3

-31.3 -33.2

-35.2

-0.1 -0.3

8.3 5.9 2.5

-0.9 -2.4 -5.6

2010 2011 2012 2013e 2014e 2015e 2016e 2017e

Oil & Gas Revenues Non-oil Revenues Current Expenditure

Capital Expenditure Subsidies Fiscal Balance

20.9

-4.4

3.4

4.6 9.3

4.6

4.6

10.6

-4.1

Oil

Revenues

Gas R

evenues

Oth

er

Revenues

Defe

nce E

xp

Oil

& G

as E

xp

Deve

lop

me

nt E

xp

Curr

ent &

Capital E

xp

Oth

er

Exp

Fis

cal b

ala

nce


105



Double digit credit growth in public and private sectors

Given the fixed exchange rate regime of Oman, the Central Bank of Oman (CBO) has to ensure monetary stability

in the current uncertain global environment. The focus remains on liquidity management and supporting growth,

while keeping inflation under check. In 2012, banks witnessed excess liquidity, as growth in deposits remained

strong. This, coupled with an expansionary fiscal policy, resulted in a significant increase in total money stock.

At the end of 2012, narrow money stock (M1) grew 13.9% YoY mainly due to increase in the currency held by the

public (9.8%) and growth in demand deposits (15.5%). During the same period, quasi money grew 9.3%. However,

its share of the total money stock declined marginally to 68.0% in 2012 compared with 68.9% a year ago. The rise

in quasi money can be attributed equally to time and saving deposits. As a result, broad money stock M2 (M1 plus

quasi–money) grew 10.7% to USD28.2bn.

Monetary expansion was driven by double-digit credit growth in both private and public sectors in 2012. While

private sector lending increased to USD36.9bn (14.4%), claims on the relatively smaller public sector rose 16.5% to

USD3.8bn. Meanwhile, government deposits increased USD1.5bn (17.3%) as against a marginal rise in its

borrowings, resulting in a significant decline in net claims on the government. This, along with certain non-monetary

liabilities, namely capital, reserves, and provisions, partly offset the expansion in money growth.

Lending to private sector increased 14.4% in 2012, led by increased lending to almost all the sectors. Moreover,

eight out of the 13 sectors recorded double digit growth, with lending to utilities sector rising by 53.4% in 2012.

Lending to construction and services, the two bigger sectors in terms of size of lending, rose by 9.1% in 2012.

Consumer loans which constituted 40.6% of the private sector lending in 2012 also recorded a jump from previous

year by 15.5% to USD15.0bn, reflecting the continuous expansion of the economy.

3.3

4.0

2.9

3.3 3.3

2.8

3.0

3.3

2010 2011 2012 2013e 2014e 2015e 2016e 2017e 2.0

0.0

3.9

0.6

0.6

3.0

-0.1

4.0

12.6

4.5

0.7

2.8

2.9

2.0

1.5

-0.8

3.7

14.8

2.2

2.7

2.2

2.3

2.4

1.9

1.1

15.2

6.4

Food

Clothing

Rent & Utilities

Home Furniture

Healthcare

Transport & Telecom

Recreation

Education & Entertainment

Personal Care Items

2012 2011 2010


106

Broad Money Supply (USDbn) Private Sector Lending (USD bn)


With strong credit growth, CBO will not be under pressure to slash interest rates despite ongoing uncertainty in the

global economy. Rates are likely to move upwards 2015 onward, along the lines of Fed rates. High lending rates

have encouraged banks to increase lending to individuals, thereby resulting in higher personal debt. To address this

issue, CBO instructed banks to place an upper limit on the percentage of monthly income that can be used to repay

loans.



1.8 2.0 2.1 2.1 2.2 2.4 2.4 2.3 2.4

5.6 6.0 5.9 6.3 5.7 6.6 6.4 6.9 6.6

13.0 12.4 13.3 13.7 15.1

15.4 16.1 16.2 17.0

2.3 2.1 2.0

2.3 2.4

2.0 2.2 2.3 2.1

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012


Domestic Quasi Deposits Foreign Currency Quasi Deposits

27.7 28.3 29.5

30.7 32.3

33.9 35.3 36.0

36.9

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

3.2

1.5

2.8 2.2

0.9 0.7 1.2

2.5

0.1

11.1

0.1 0.5 1.0

3.3

1.9

3.1 2.5

1.1 1.9 1.3

2.7

0.1

13.0

0.1 0.6 0.8

3.8

1.9

3.5 2.7

1.7 2.1

1.6

3.3

0.1

15.0

0.1 0.4 0.8

Tra

de

Min

ing

Constr

uctio

n

Manufa

ctu

ring

Utilit

ies

Tra

nsport

Fin

ance

Serv

ices

Govt.

Pers

onal

Loans

Agriculture

NR

I Lendin

g

Oth

ers

2010 2011 2012


107

MSM30 breaches 6,000 mark, reaching 22-month high during March 2013

Oman’s MSM30 index was volatile and ended 2012 with a 1.15% gain. The index declined 15.7% in 2011, primarily

due to weak corporate earnings and public protests, which adversely impacted investor sentiment. The index

started 2012 on a positive note, with expectations of higher FY11 earnings and dividends. Banking stocks led the

rally with robust results from large banks. However, the index dropped 2.3% in January 2012 on overall dismal 2011

earnings performance. The index recovered in February as it looked oversold to investors and closed with YTD gain

of 2.5%. While March was a dull month with low volumes, MSM30 advanced in April on strong earnings

expectations and closed with YTD gain of 3.1%. The market traded in the negative territory during most of the year,

as weakness in global economies, especially the Eurozone, weighed on the index. MSM30 closed at its lowest level

(5,358.29) for the year on July 31, 2012, translating to YTD fall of 5.9%. Large and mid-size banking stocks were

the biggest losers in terms of market value, as they were affected by the Central bank of Oman’s directive to cap

interest rate for new personal loans (loans after April 01, 2012) at 7% (from 8% earlier). During the next three

months, the index inched higher and narrowed YTD losses to 0.62% in October. Higher-than-estimated corporate

earnings for 9M12 also helped the index narrow YTD losses. Market recovery during this period was supported by

industrial stocks (led by cement companies) on expectation of good earnings. Investors’ preference for two

telecommunication stocks with high yields also aided the market; Omantel had a 6.9% dividend yield while Nawras

offered a 7.8% dividend yield. The index continued trading in a narrow zone for the rest of the year, and managed to

record a marginal gain in 2012.

All three sectors—Banking & Investment, Industrial, and Services & Insurance—posted gains in 2012.

Banking & Investment index advanced 3.7% in 2012. However, Bank Muscat, the largest stock in Oman based on

market capitalization, reported an erosion of 11.0% in share price and closed at OMR0.58. The bank’s OMR96.7mn

(USD251.2mn) rights issue in July, priced at OMR0.427 per share. The rights issue was oversubscribed 1.27 times.

Other prominent losers were Bank Dhofar (down 20.8% to end at OMR0.36 per share) and HSBC Bank Oman

(down 26.7% to close at OMR0.21 per share), as both banks posted lower-than-expected earnings for the year.

Sohar Bank outshined other Oman-based banks and added 14.1% to close at OMR0.18 per share as it posted solid

results over the year. Investment companies played a major role in keeping the sectoral index in the green zone.

Oman National Investment Corporation Holding (ONIC) had a rewarding 2012 as its share price closed at

OMR0.29, with a 67.1% gain. Global Financial Investment (GFIC) and Gulf Investment Service (GIS) shares

clocked gains of 59.6% and 80.8%, respectively, in 2012. These companies posted profits in 9M12 as against

losses during the year-ago period.

Industrial index, up 24.4% in 2012, was the top performer among sectoral indices. Heavyweight cement companies

share prices surged, with Raysut Cement increasing 85.4% and closing at OMR1.43. Oman Cement Company also

added 46.6% to end at OMR0.64. Oman Refreshments and Oman Cable posted gains of 55.2% and 52.2%,

respectively, in their share price in 2012. Industrial companies posted strong results with significant increase in

profits for 9M12.

Services & Insurance Index surged 14.6% in 2012. Oman Telecommunications’, the largest listed services company

in terms of market capitalization, share price advanced 12.1% to close at OMR1.47, as it reported fundamentally

strong financial and business metrics. However, telecom stock Nawras Telecom, down 29.2%, was among the

decliners, as its profits plummeted 25% to OMR26.7mn in 9M12 from OMR35.6mn in 9M11. Renaissance Services’

share declined 6.9% due to dismal performance of its engineering segment during the year, while Galfar

Engineering and Contracting’s share prices dropped 6.85% on lower-than-expected profits reported during the year.

In 2012, out of 101 companies traded, 33 declined, 63 advanced and five remained unchanged. National Aluminium

Products led the decliners’ list, losing 50.6% to reach OMR0.19, as its profits fell 84.1% to OMR0.17mn in 9M12

compared to the year-ago period. Dhofar Poultry topped the gainers’ list with its share price growing 172.0% to end

at OMR2.23 as its profits for 9M12 jumped 86.3% to OMR0.3mn compared to the year-ago period.


108

MSM30 - Index and Volume Performance

Source: Muscat Securities Market, Gulfbase& Global Research

The MSM30 index rose a marginal 0.2%, up 14.1 points, in March. It registered an increase of 4.0% on year-to-date

basis. The index gained momentum in the beginning of the month, breaching the 6,000 mark, and closed at 6,174.3

on March 26, 2013, a 22-month high. Growth was primarily due to rising optimism in global and regional markets

along with strong macroeconomic fundamentals. Improved financial performance of MSM-listed companies,

coupled with better-than-expected dividend announcements, raised investor confidence and led to an increase in

market activity. However, the market contracted below 6,000 levels and closed at 5989.7 on March 31, 2013 due to

effect of dividend adjustments.

The Banking and Investment sector was the best performer (up 3.1%), followed by Services and Insurance, and

Industrial.

The Banking and Investment index advanced 3.1% during the month. Growth was led by heavyweight Bank Dhofar,

which registered an 11.1%MoM increase in share price. On March 26, 2013, the bank received OMR26.1mn from

HSBC Oman following a legal case, which was filed in 2011; this resulted in a rise in stock price (7.1%) in one

trading session. Other top gainers include Transgulf Investment Holding Co. (19.8%), Al Batinah Development &

Investment Holding Co. (35.2%) and Sharqiya Investment Holding Co. (25.9%).

The Services and Insurance index gained 1.1% during the month, led by ACWA Power Barka (up 27.1%) and SMN

Power Holding Co. (up 19.1%). Heavyweight Oman Telecommunications Co. and Oman Qatari

Telecommunications Co. declined 2.4% and 1.3%, respectively. Oman United Insurance Co.’s share price rose

13.5% on account of strong growth in profitability in 2012, attractive dividend yield and expectations that it would

obtain license for Takaful insurance.

The Industrial sector (down 0.4%) was dragged by Majan Glass Co. (down 18.5%), Gulf International Chemicals

Co. (down 11.2%) and Oman Refreshment Co. Ltd. (down 9.5%).Al Anwar Ceramic Tiles Co., a major player in the

index, registered an increase in share price (up 6.7%). Amongst cement majors, the share price of Oman Cement

Co. declined 1.9%MoM, while that of Raysut Cement Co. rose 0.8%MoM. The stock price of National Aluminum

Products Co. rose 28.2% driven by above average trading volumes.

Corporate earnings

Corporate earnings in Oman increased 14.3%YoY to USD1.7bn in 2012, led by robust growth across all sectors

barring Industrial. Financial sector, which contributed to 48.8% of the MSM’s 2012 earnings, witnessed a strong

26.4%YoY growth in earnings in 2012. Services and Insurance sector, the next largest contributor to MSM’s

earnings (39.6%), grew 7.6% YoY. While heavyweight Oman Telecommunications (Omantel) witnessed a 4.1%YoY

growth in net profit, Omani Qatari Telecommunications (Nawras) witnessed a 22.1%YoY fall in 2012 earnings. The

-

10

20

30

40

50

60

4,800

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

Jan-1

2

Fe

b-1

2

Ma

r-12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Ma

r-13



109

earnings of Industrial sector on the other hand declined 4.2%YoY led by decline in earnings for National Aluminium

Products Co. and National Gas Co. Increase in government expenditure led to an improved performance of cement

majors.



-60%

-40%

-20%

0%

20%

40%

60%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2006 2007 2008 2009 2010 2011 2012

US

Dm

n

Growth (%) - RHS

-4.2%

7.6%

26.4%

14.3%

-10% 0% 10% 20% 30%

Industrial

Services & Insurance

Banks & Investment

Total Oman


110

Bahrain

Bahrain’s economy expands by 3.9% in 2012; expected to grow by 4.2% in 2013

Fiscal deficit slashes by half to 3.2% of GDP in 2011

Trade surplus in 2012 expected to touch USD6.1bn

Inflation expected to remain between 2.0-2.6% in 2013-14

Bahrain’s economy expands by 3.9% in 2012; expected to grow by 4.2% in 2013

Bahrain’s real GDP is estimated to have expanded 3.9% in 2012 from the 1.9% growth

seen in 2011. Even as the oil sector shrank by around 8.5% in 2012 due to a temporary

technical disruption at the country’s main Abu Sa’afa oil field, (expected to return to full

capacity in 2013), strong growth in the non-oil sector drove economic growth. In the first

three quarters of 2012, Bahrain’s economy grew at an annual pace of 3.7% while

headline growth rate slowed steadily from 4.8% YoY in Q1 to 2.9% in Q2 and 3.3% in

Q3. Moderate expansion in oil production and a recovery in the services sector will

maintain the economic growth at around 3.7% during 2013–15.

Trade surplus in 2012 expected to touch USD6.1bn & slightly lower in 2013

In 2011, Bahrain recorded a trade surplus of USD7.5bn, the highest in last seven years.

The impetus for a high trade surplus was an increase in oil production, coupled with

high oil prices. In December 2011, Bahrain achieved the highest ever crude oil

production of 45,900 bpd. As a result, oil exports which constitute 78.8% of the total

exports witnessed a growth of 52.2% in 2011 over 2010. Non-oil exports also witnessed

a healthy growth of 20.0%. EIU expects trade surplus to remain at USD6.1bn in 2012,

but anticipates a slight falling 2013. The trade balance is expected to reflect the

movement in oil prices. Lower trade surplus is due to the forecast of a lower Brent crude

price of USD104.5/barrel compared to USD111.9/barrel in 2012.

Inflation expected to remain between 2.0-2.6% in 2013-14

The Inflation in Bahrain dropped in the second half of 2012 after it surged in the first half

of the year. Overall inflation in Bahrain accelerated to 2.8% in 2012 compared to a 0.4%

fall in 2011. The fastest pace of price increase was recorded in alcoholic beverages and

tobacco category, which rose by 12.2% YoY, followed by furnishings, household

equipment, and routine household maintenance goods (4.9%). Inflation is expected to

remain at 2.0–2.6% in 2013–14, supported by easing prices of commodities, particularly

food items. Thereafter, inflation is expected to remain stable despite prices for global

industrial raw materials rise, as maintenance of subsidies will keep the increases in

check.

Bahrain’s BSE fell in 2012; consolidated earnings declined by 34.6% YoY

Bahrain’s index had another dismal year in 2012. It declined 6.8% during the year and

ended up as the worst performer among GCC indices. The market’s poor performance

is ascribed to the political unrest in the country that kept global investors at bay. BSE’s

consolidated earnings declined 34.6%YoY in 2012, with Industrial and Services sector

(representing 29.8% of sector’s 2012 earnings) declining 53.9%YoY and 15.2%YoY,

respectively. The Commercial Banks sector, which accounts for 61.4% of BSE’s

earnings, rose 7.7%YoY in 2012. Earnings from Industrial sector the next largest

contributor to BSE’s 2012 earnings (15.1%) declined 53.9%YoY to USD258.1mn.

Ba

hra

in


www.globalinv.net


111

Bahrain Economic Indicators

2010 2011 2012a/e* 2013e 2014e


Real GDP Growth (%) 4.7 2.1 3.9* 4.2 3.3

Oil 1.8 3.6 (8.5)* 9.3

Non-Oil 5.2 1.4 6.7* 1.9


Oil 22.0 21.1 27.0* 24.6

Non-Oil 78.0 78.9 73.0* 75.4


Private Consumption 14.2 3.6 5.1* 4.5 5.1


Gross Capital Formation 14.7 (27.0) 8.2* 4.0 5.7

Exports 2.6 (0.9) 4.5* 5.0 4.9

Imports 17.3 (14.8) 8.2* 6.3 7.7

Population (mn) 1.2 1.2 1.4* 1.4 1.4

Growth Rate (2.7) 14.1 1.3 0.9


Export of Goods 13.6 19.6 21.3* 20.4 20.6

Import of Goods (11.2) (12.1) (15.2)* (14.6) (14.6)


Government Revenue (USD bn) 5.8 7.5 8.1* 8.7 8.6

Oil & Gas 4.9 6.6

Others 0.9 0.9 - - -

Government Expenditure (USD bn) (7.8) (8.4) (9.2)* (9.7) (9.9)

Fiscal Balance (USD bn) (2.0) (0.9) (0.7)* (1.2) (1.4)



Inflation (%) 2.0 (0.4) 1.2 2.6 2.1

M1 (USD bn) 6.1 7.0

Growth Rate 14.5

M2 (USD bn) 20.8 21.6

Growth Rate 3.4

Private Sector Lending (USD bn) 14.4 16.5 17.6


Market Index 1,432.3 1,143.7 1,065.6



112

BAHRAIN

Growth led by a strong rebound in the non-oil sector

Bahrain’s economy saw a steady growth during 2012, despite an uncertain global economic situation. According to

both the EIU and Bahrain Economic Development Board data, real GDP growth was estimated 3.9% in 2012

compared to 1.9% in 2011. The country witnessed a robust expansion in the non-oil sector, while the oil sector

contracted to some extent due to a temporary technical disruption at the country’s main Abu Sa’afa oil field, which is

expected to return to normal and continue at full capacity in 2013. Bahrain’s GDP expanded at an annual pace of

3.7% during the first three quarters of 2012, though the headline growth rate decelerated fairly consistently from

4.8% YoY in Q1 to 2.9% in Q2 and 3.3% in Q3.

Although the tourism sector bounced back in 2012 (boosted by the return of the Formula One motor race), political

and social unrest has affected Bahrain's services-oriented economy. According to EIU, modestly expanding oil

production and a recovering services sector will keep the economic growth at around 3.7% in 2013–15, around half

the rate Bahrain witnessed in the five years prior to the onset of the global recession. The economy is then

expected to rise to an average of 4.7% in 2016–17 as the new plotline comes on stream at Alba, the state-owned

aluminum company.

GDP Growth Comparison of Real GDP Growth: Outlook

Source: IMF, Central Informatics Organization ,EIU; Note: p – preliminary

2012 saw a rapid growth in non-oil sector. As per the Central Informatics Organization data, non-oil GDP rose to an

expected 6.7% in 2012 compared to 1.4% in 2011. The national accounts data for 2012 point to a relatively

consistent increase in production virtually across the non-oil economy of Bahrain. The fastest growing sectors have

been hotels & restaurants, followed by social & personal services, and manufacturing. In all three areas, the YoY

growth during the first three quarters of the year was in the double digits.

According to Central Informatics Organization, Oil GDP contracted by an estimate 8.5% in 2012 compared to 3.6%

growth in 2011. This is due to a temporary technical disruption at the country’s main Abu Sa’afa oil field which is

expected to be returning to normal and likely to continue at full capacity in 2013. At the same time, ongoing efforts

21.5

25.9 27.0 28.1 28.8 29.7 30.8 32.1

4.7

2.1

3.9

4.2

3.3

3.6 3.7 3.8

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e


14.2

3.6 5.1 4.5 5.1 5.0 5.2 4.9

3.4

8.3 6.7 2.0

3.5 2.5 3.0 3.5

14.7

-27.0

8.2

4.0 5.7 6.5 5.2 4.1

2.6

4.5

5.0

4.9 4.5 7.5 6.0

17.3

8.2

6.3

7.7 7.0 7.8

7.0

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e



Imports


113

by Tatweer Petroleum to boost production at the onshore Bahrain field look like to produce a gradual capacity

increase to approximately 47,500 b/d in 2013.

As per the March 2013 EIU report, the financial sector, the cornerstone of the country's diversification strategy, will

suffer as a result of the recent unrest, which has taken a toll on Bahrain's long-cultivated business-friendly image.

Hydrocarbons are expected to remain a major contributor to growth, and efforts to move hydrocarbons exports up

the value chain (through higher value-added refining, for example) will secure the importance of oil, despite the

country's relatively low reserves.



Significant increase in lending by Bahraini retail banks

Bahrain is one of the most diversified economies in the Arabian Gulf. Highly developed communication and

transport facilities make Bahrain home to numerous multinational firms with business in the Gulf. As part of its

diversification plans, Bahrain implemented a Free Trade Agreement (FTA) with the US in August 2006, the first FTA

between the US and a Gulf state. Bahrain's economy, however, continues to depend heavily on oil. Petroleum

production and refining account for more than 60% of Bahrain's export receipts, 70% of government revenues, and

11% of GDP (exclusive of allied industries). Other major economic activities are production of aluminum - Bahrain's

second biggest export after oil, finance, and construction.

Bahrain competes with Malaysia as a worldwide center for Islamic banking and continues to seek new natural gas

supplies as feedstock to support its expanding petrochemical and aluminum industries. In 2011 and continuing into

2012, Bahrain experienced economic setbacks as a result of domestic unrest. Bahrain's reputation as a financial

hub of the Gulf has been damaged, and the country now risks losing financial institutions to other regional centers

such as Dubai or Doha. Economic policies aimed at restoring confidence in Bahrain's economy, such as the

suspension of an expatriate labor tax, will make Bahrain's foremost long-term economic challenges - youth

unemployment and the growth of government debt - more difficult to address.

The rebound in economic activity has been supported by a significant increase in lending by Bahraini retail banks.

The country’s retail banks are in robust health and have been working to remobilize their liquidity after a period of

1.8

3.6

-8.5

9.3

5.2

1.4

6.7

1.9

2010 2011 2012e 2013e


25.8 24.0 22.7 22.0 21.1 27.0 24.6

74.2 76.0 77.3 78.0 78.9 73.0 75.4

2006 2007 2008 2009 2010 2011 2012e



114

elevated risk aversion. Although the YoY increase in bank lending has slowed down in past few months, it remains

comfortable.

The government increased spending on subsidies and housing construction in 2011–12. The government’s 2013–

2014 budget proposal points to fiscal continuity as infrastructure, housing, and social development remain spending

priorities. However, foreign businesses may be less interested in investing in Bahrain given the small size of the

market, regulatory improvements in other GCC nations, and an insecure domestic political scene.

Expatriate population doubles in a decade

According to the Central informatics Organization, Bahrain’s population has almost doubled over the last decade. In

2011, Bahraini population stood at 1.2mn as compared to 0.7mn in 2001. This population explosion is a result of

strong economic growth which led to a large influx of migrants into the country. However, with the country being

impacted by the slowdown in the global economy, Bahraini population is expected to increase marginally at 2.0%

per annum over the next few years.

Historically, the local Bahrainis constituted majority of the population; however, the country witnessed a turnaround

in the last decade. In 2001, the migrant population constituted only 38.1% of the total Bahraini population. The

boom in the economy over the years resulted in the number of migrants in Bahrain increasing to 0.7mn (53.5%) in

2010; the highest in the last two decades. Meanwhile, the share of the local Bahraini population declined to 46.5%

in 2010 compared to 61.9% in 2001. However, in 2011, the percentage of expatriates fell as tough social-political

conditions led to many people leaving the country.


Source: Central Informatics Organization

During 2002–08, labor force market witnessed an average growth rate of 11.0%. However, growth in the labor

market declined as the economy was affected by the global economic crisis. With global recovery in place, the labor

market has gained momentum. In 2011, total number of employees increased to 618,036, up 3.1% YoY compared

to a 0.1% increase in 2010. The total workforce constituted approximately 51.7% of the total population. A further

breakdown of the labor force suggests that majority of the workforce was employed in the private sector, accounting

for 76.8% of the total employment, followed by domestic workers (14.2%), and public sector employees (9.0%).

0.7

1.0

1.2 1.2

3.7

45.2

27.9

-2.7

2001 2006 2010 2011

Population (mn) Growth (%)

0.4

0.5 0.6 0.6

0.3

0.5 0.7 0.6

0%

20%

40%

60%

80%

100%

2001 2006 2010 2011

Bahraini Non-Bahraini

http://www.ncsi.gov.om/viewPublication.aspx?id=878


115

Employees in Public and Private Sector (‘000) Composition of Labor Force (%)

Source: Central Informatics Organization

The private sector, largely dominated by expatriates (80.5%), grew 3.4% in 2011, whereas domestic workers,

constituting solely expatriates, increased 4.1%. The total number of Bahraini employees in public and private

sectors continued to increase to reach 140,166 in 2011; however, it still represented an annual growth rate of -0.3%

compared to the same period the year before. Further analysis suggests that 92,524 Bahrainis are employed in the

private sector, almost double that of the public sector (47,672), indicating that the future direction of the labor

market will be largely dependent on the private sector.

The government’s efforts to keep unemployment under check were successful, as unemployment in Bahrain fell to

3.7% in 2012, lower than the government’s target of 4.0%. Various steps have been taken by the government to

reduce the unemployment rate which peaked at 16.0% in 2002. An important project undertaken was the

Unemployment Insurance System (UIS). The UIS provides financial assistance to unemployed citizens for a specific

period based on their qualifications. During this period, the citizens are required to search for a job with the help of

the government. This program has helped provide employment to more than 13,000 job seekers till date.

Highest trade surplus on record oil production

Historically, Bahrain’s trade balance has remained positive, indicating that the country exports more than it imports.

In 2011, Bahrain recorded a trade surplus of USD7.5bn, the highest in last seven years. The impetus for a high

trade surplus was an increase in oil production, coupled with high oil prices. In December 2011, Bahrain achieved

the highest ever crude oil production of 45,900 bpd. As a result, oil exports which constitute 78.8% of the total

exports witnessed a growth of 52.2% in 2011 over 2010. Non-oil exports also witnessed a healthy growth of 20.0%.

Increase in oil exports led to an increase in oil imports. Oil imports grew 38.5% in 2011, while decline in the non-oil

imports contributed to the increase in the trade surplus by USD1.2bn.

EIU expects trade surplus to remain at USD6.1bn in 2012, but anticipates a slight falling 2013. The trade balance is

expected to reflect the movement in oil prices. Lower trade surplus is due to the forecast of a lower Brent crude

price of USD104.5/barrel compared to USD111.9/barrel in 2012. Furthermore, trade surplus is expected to remain

substantial throughout 2013–17, with overall export revenue expected to grow at a CAGR of 5.1%during the period.

48 58 56 56

227

344

459 475

33

58

84 87

2002 2006 2010 2011

Public Sector Private Sector Domestic Workers

85.4

19.5

14.6

80.5

100.0

Public Sector Private Sector Domestic Workers

Omanis Non-Omanis


116

Historically, trading surplus, along with services surplus, has offset constant deficits in income and current transfers

(worker remittances), thereby resulting in a current account surplus. The trend is likely to continue in the coming

years. Given the political instability in the country and weakness of the major international banks, tourism and

financial sectors, two key sectors of Bahrain, are likely to be negatively impacted. As a result, the services balance

is expected to remain positive but under pressure. On the other hand, the income balance will widen gradually as

repatriation of profits and debt interest payment outweigh the returns on foreign assets. Overall, the current account

surplus is estimated to narrow to 1.5% of GDP in 2017 from an estimated 10.5% of GDP in 2012.


Source: EIU, Central Bank of Bahrain; Estimates include total imports and exports

Bahrain’s net international investment position rose to USD20.4bn in 2011, up 20.6% compared to the end of 2010.

This can be largely attributed to a greater fall in foreign liabilities compared to foreign assets during the year.

Foreign assets declined to USD164.3bn in 2011 (13.4%) due to decline in portfolio investments (13.3%) and other

investments (12.8%). Similarly, foreign liabilities decreased to USD143.9bn in 2011 from USD169.5bn in 2010 due

to a decrease in other investments (19.2%).

Foreign Assets (USDbn) Foreign Liabilities (USDbn)

Source: Central Bank of Bahrain

10.1

15.4

21.3 20.4 20.6

21.6 23.0

24.9

3.5

4.1

-11.2 -12.1

-15.2 -14.6 -14.6 -15.1 -15.8 -17.0

2.4

7.5 6.1 5.7 6.0 6.5 7.2 7.9

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e


2.4

7.5

6.1 5.7

6.0

-1.9

-4.5

-3.2

-4.0

-4.8

0.6

3.0 2.9

1.7 1.2

2010 2011 2012e 2013e 2014e


7.9 8.7

38.6 33.4

134.9 117.6

5.1 4.5

2010 2011 Direct Investments Abroad Portfolio Investments

15.1 15.9 15.2 15.6

139.1

112.4

2010 2011 Direct Investments in Bahrain Portfolio Investments


117

Fiscal deficit slashes by half to 3.2% of GDP in 2011

Bahrain reported a fiscal deficit for the third consecutive year in 2011. However, fiscal deficit has reduced by more

than half to reach 3.2% of GDP in 2011 against 9.4% of GDP a year earlier. The fiscal deficit narrowed due to a

surge in the revenues, primarily the oil revenues, which constituted 87.9% of the total revenues in 2011. Recovery

in oil prices (owing to the global economic recovery); coupled with an improvement in oil production, led to an

increase in oil revenues by 33.9% in 2011 over 2010.

Fiscal spending moderated during 2011 with an 8.3% increase in total expenditure to USD7.8bn, compared to the

26.6% rise in 2010.This is largely ascribed to a decline in projected expenditure (42.6%) which offset the increase in

current expenditure. Current expenditure rose 29.1% in 2011. The fastest growing component of the current

expenditure was grants and subsidies, which surged 114.9%. Other key components of current expenditure include

manpower and transfers, which increased 15.8% and 19.9%, respectively. However, the rise in expenditure was

offset by higher oil revenues, resulting in a marginal deficit of USD0.9bn in 2011 compared to USD2.0bn in 2010.

In November 2012, the Ministry of Finance passed a two year budget for 2013 and 2014. The budget provides for a

deficit of USD1.8bn and USD2.0bn in 2013 and 2014, respectively, amid rising political uncertainty in the country,

as protestors demand greater rights and better living standards. The budget is based on an oil price of USD90 per

barrel and a breakeven oil price of USD122 per barrel, resulting in oil revenues of USD6.4bn each year in 2013 and

2014. Oil revenues continue to be the major contributor (approx. 86.2% of the total revenues). Meanwhile,

expenses are budgeted at USD9.1bn in 2013, increasing to USD9.4bn in 2014. Current expenditure will continue to

claim a substantial share of expenses, of which the expenses for subsidies alone will be USD4.0bn and USD4.2bn

for 2013 and 2014, respectively.

Although the budget for 2013–14 is considered to be conservative, no steps have been taken to tackle the subsidy

and public sector salary issues. Moreover, a recent deal struck in the parliament indicates that expenses on public

sector salaries and pensions are likely to increase at a higher pace in the coming years. Consequently, EIU revised

its fiscal deficit estimates upwards to an average of 5.8% of the GDP during 2013–14 from 5.6% earlier. However,

EIU expects the deficit to reduce, based on the assumption of increase in oil prices.

Fiscal Balance (USDbn) Fiscal Balance – Budget (B) and Actual (A) (USDbn)

Source: IMF, Central Bank of Bahrain; Estimates include only total revenue and total expenditure

4.9 6.6

8.1 9.0 9.2 9.3 9.4 9.6

0.9

0.9

-5.7

-7.1 -8.8

-10.1 -10.6 -11.0 -11.5 -12.0 -2.1

-1.2

5.8

7.5 8.1

9.0 9.2 9.3 9.4 9.6

-7.8 -8.4

-8.8

-10.1 -10.6 -11.0

-11.5 -12.0

-2.0

-0.9 -0.7 -1.2 -1.4 -1.7 -2.0 -2.4

2010 2011 2012e 2013e 2014e 2015e 2016e 2017e

Oil Revenues Non-oil Revenues Current Expenditure

Capital Expenditure Fiscal Balance

5.8 6.1

7.5

6.2

-7.8 -8.3 -8.4 -8.1

-2.0 -2.2

-0.9

-1.9

2010A 2011B 2011A 2012B

Revenues Expenditure Fiscal Balance


118

Housing sector pulls down inflation

The Inflation in Bahrain dropped in the second half of 2012 after it surged in the first half of the year. The increase in

the first half was primarily due to base effect of low or negative prices witnessed in 2011. Average inflation in

Bahrain accelerated to 2.8% in 2012 compared to a 0.4% fall in 2011. The fastest pace of price increase was

recorded in alcoholic beverages and tobacco category, which rose by 12.2% YoY, followed by furnishings,

household equipment, and routine household maintenance goods (4.9%).By contrast, heavyweight categories

namely food and non–alcoholic beverages, housing, water, electricity, gas, and other fuels have registered a lesser

price increase. Food prices increased 3.8% YoY in 2012. Furthermore, similar to other GCC countries, housing and

rent costs in Bahrain remained low. Housing and rent costs declined by 3.3%, thereby pulling down the inflation.

Inflation is expected to remain at 2.0–2.6% in 2013–14, supported by easing prices of commodities, particularly food

items. Thereafter, inflation is expected to remain stable despite prices for global industrial raw materials rise, as

maintenance of subsidies will keep the increases in check.


Source: IMF, Central Bank of Bahrain

Spurt in consumer loans boost private sector lending

Central Bank of Bahrain (CBB) kept its policy rate unchanged at 0.5% in 2012. As Bahrain’s currency is pegged to

the dollar, CBB maintains its policy rate as well as the one-week deposit rate in line with the US rates. Furthermore,

bank lending in the country has also witnessed a slowdown. In such a scenario, it is unlikely that the central bank

will increase its policy rate unless the Federal Reserve does the same, which is expected to occur only in 2015.

In 2011–12, the central bank kept its rates low in order to stimulate the economy which was impacted by global

recession. This resulted in a fall in the market interest rates, indicating a better credit environment. Average lending

rates on business loans remained flat. However, lending rates for manufacturing sector in 4Q12 declined to 3.5%,

compared to 4.8% a year earlier. Average lending rate on personal loans in 4Q12 was 6.0% as compared to 6.3%

in the same period last year.

2.0

-0.4

1.2

2.6

2.1 2.0 2.0 2.0

2010 2011 2012 2013e 2014e 2015e 2016e 2017e 3.1

1.9

3.3

-1.5

1.4

4.6

1.4

-0.7

-0.4

2.6

0.4

1.8

2.3

6.1

2.1

-12.4

1.9

3.1

3.4

-2.1

7.0

1.9

0.9

11.6

3.8

12.2

2.2

-3.3

4.9

1.0

2.3

-4.2

20.5

1.8

1.5

3.6

Food

Alcoholic Beverages

Clothing

Rent & Utilities

Home Furniture

Healthcare

Transport

Communication

Recreation

Education

Restaurants

Miscellanous goods

2012 2011 2010


119

Broad Money Supply (USDbn) Private Sector Lending (USD bn)


Lending to private sector increased 6.3% in 2012, led by increased lending in the consumer loans. Consumer loans

which constituted 34.6% of the private sector lending in 2012 recorded a jump from previous year by 9.5% to

USD6.3bn.Other sectors which witnessed a growth in lending include transport and non–banking financials.

However, the growth in these sectors was offset by decline in construction and manufacturing sectors. Credit

growth in construction and non–banking financial services declined by 2.5% and 3.5% in 2012, respectively.

Liquidity situation in Bahrain has been gradually improving as money supply continued to grow in 2012. As of the

end of September 2012, the M1 measure of money supply grew 12.7% YoY. As a result of this, broad M2 (M1 plus

time and saving deposits) rose to USD22.4bn compared to USD20.6bn in 2011. This was due to an increase in

private sector demand deposits by USD0.8bn (14.2%), and time and saving deposits by USD1.0bn (7.1%). As a

result, the broadest M3 measure increased 7.5% YoY to USD27.3bn as of end of September 2012.



1.1 1.2 1.1 1.1 1.1 1.1 1.1 1.1

5.9 5.3 5.5 5.5 5.9 6.0 6.1 6.3

14.6 14.5 14.4 14.0 14.6 15.1 15.0 15.0

4.3 4.5 4.4 4.8 4.9

5.1 5.0 4.9

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012


Domestic Quasi Deposits Foreign Currency Quasi Deposits

14.4 14.5 14.7

16.1 16.5 16.9

17.4 17.8 17.6

2010

Q1 2

011

Q2 2

011

Q3 2

011

Q4 2

011

Q1 2

012

Q2 2

012

Q3 2

012

Q4 2

012

2.0

4.6

1.1

0.3 0.2 0.6 0.7

4.6

0.8

2.3

4.5

1.5

0.5 0.4 0.7 0.6

5.7

1.1

2.5

4.4

1.4

0.7 0.4

0.9 0.5

6.3

1.1

Tra

de

Constr

ucti

on

Manufa

ctu

rin

g

Tra

nsport

Hote

ls

Non-B

ank

Fin

ancia

l

Govt.

Pers

onal

Loans

Oth

ers

2010 2011 2012


120

BSE fell in 2012; however, it recovered in 1Q13

Bahrain’s BSE index had another dismal year in 2012. It declined 6.8% during the year and ended up as the worst

performer among GCC indices. The market’s poor performance is ascribed to the political unrest in the country that

kept global investors at bay, the Eurozone debt crisis and slowing economic growth globally. The BSE closed the

first month of 2012 down 0.34%, continuing the trend seen in 2011. Thereafter, the market turned positive as

confidence among investors about the political stability in the GCC region improved. Consequently, the index

recorded gains for the next three months along with other GCC indices. By the end of April, BSE had gained 0.8%

YTD. Soon after, the market went into a downward spiral primarily due to fears of a global slowdown and weak

corporate earnings. The BSE fell 5.0% YTD towards the end of August. The prominent losers were market

heavyweights Ahli United Bank and Aluminium Bahrain stocks. The market slumped further during the last quarter

amid dismal corporate earnings, which fell 26.7% YoY to USD1,042.3mn (BHD390.7mn) in 9M12.

BSE Index and Volume Performance

Source: Zawya, Gulfbase & Global Research

The Bahrain bourse (BSE) maintained the positive momentum that commenced toward the end of December 2012

and rose 0.2%MoM in March 2013. The index registered an increase of 2.4% on year-to-date basis. During the

month, the Central Bank released its GDP estimates for 2013 that stood at 4.0%, which is broadly at a similar level

witnessed in 2012. However, the estimate is much lower than the 6.2% (2013) forecasted by Economic

Development Board. The positive momentum in Services and Investment sectors provided support to BSE. Bahrain

Telecommunication Co. (BATELCO), a major constituent of the Services sector, is in initial negotiations to buy a

stake in India-based Reliance Communication. The deal would aid in expanding BATELCO’s international footprint

and offset declining domestic income. The growth in BSE was restricted by a decline in heavyweight Banking. Al

Ahli United Bank (AUB), the Kingdom’s largest company (by market capitalization), experienced a decline in share

prices (down 7.2%). INOVEST and Ithmaar Bank topped the gainers, while Nass Corporation and National Bank of

Bahrain led the losers. The market breadth remained positive with gainers outnumbering the decliners by 11:8

during the month.

The Services sector was the best performer (up 2.6%MoM) during the month, followed by Investment (2.3%) and

Insurance (0.5%). Growth in the Services sector was led by heavyweight BATELCO (up 5.4%) and Bahrain Cinema

Co. (up 4.6%). Other stocks, Bahrain Duty Free Shop Complex Co. and Nass Corporation declined 7.1%MoM and

10.2%MoM, respectively.

Majority of stocks in the Investment sector ended in the green, led by INOVEST (24.4%) and Ithmaar Bank (24.2%).

Ithmaar Bank narrowed its net losses and reported an improvement in income in 2012 vis-à-vis that in 2011 on

0

10

20

30

40

50

60

70

80

90

950

1000

1050

1100

1150

1200

Jan-1

2

Fe

b-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Fe

b-1

3

Mar-

13



121

improved performance across business lines. Furthermore, the company’s subsidiary, Ithmaar Development

Company, was successfully awarded the infrastructure work for the Dilmunia project.

Heavyweight Commercial Banking sector declined 2.5% led by a fall in share prices of Al Ahli United Bank (down

7.2%) and National Bank of Bahrain (down 8.9%). The Insurance sector grew a marginal 0.5%on a rise in share

prices of Bahrain National Holding Co. (1.56%); all other stocks in the sector remained unchanged.

Corporate earnings

BSE’s consolidated earnings declined 34.6%YoY in 2012, with Industrial and Services sector (representing 29.8%

of sector’s 2012 earnings) declining 53.9%YoY and 15.2%YoY, respectively. The Commercial Banks sector, which

accounts for 61.4% of BSE’s earnings, rose 7.7%YoY in 2012. Earnings from Industrial sector the next largest

contributor to BSE’s 2012 earnings (15.1%) declined 53.9%YoY to USD258.1mn. This was on account of a

54.4%YoY decline in earnings of major player Aluminium Bahrain. Services sector representing 14.7% of BSE’s

earnings declined 15.2%YoY.



The drop in earnings was led by weak performance of Bahrain Telecommunications Company (Batelco), which is a

primary contributor (63.1%) to the sector’s earnings. Batelco’s earnings declined 24.6%YoY adversely affected by one-

off expenses related to extensive restructuring as well as by fierce competition in the region. Insurance sector reported

profits for 2012 vis-à-vis losses in 2011.

-1000%

0%

1000%

2000%

3000%

4000%

5000%

6000%

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011 2012

US

Dm

n

Growth (%) - RHS

-53.9%

-15.2%

7.7%

23.3%

-34.6%

-60% -40% -20% 0% 20% 40%

Industrial

Services

Commercial Banks

Hotels & Tourism

Total Bahrain


122

Disclaimer

This material was produced by Global Investment House KSCC (‘Global’), a firm regulated by the Central Bank of Kuwait. This document is not

to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time to the extent

permitted by law, participate or invest in other financing transactions with the issuers of the securities (‘securities’), perform services for or solicit

business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted

by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to

recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global

has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and

no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this

document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection

therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgment. Global shall have no

responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global for, or sent

by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information

contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or

other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice. Past performance is not

indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this

document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for

your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in

any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware

of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.


Website: www.globalinv.net Global Tower

Sharq, Al-Shuhada Str. Tel. + (965) 2 295 1000

Fax. + (965) 2 295 1005 P.O. Box: 28807 Safat, 13149 Kuwait

Research

Faisal Hasan, CFA

(965) 2295-1270

[email protected]

Wealth Management

Rasha Al-Qenaei

(965) 2295-1380

[email protected]

Brokerage

Fouad Fahmi Darwish

(965) 2295-1700

[email protected]

Global Kuwait

Tel: (965) 2 295 1000

Fax: (965) 2 295 1005

P.O.Box 28807 Safat, 13149 Kuwait

Global Bahrain

Tel: (973) 17 210011

Fax: (973) 17 210222

P.O.Box 855 Manama, Bahrain

Global UAE

Tel: (971) 4 4477066

Fax: (971) 4 4477067

P.O.Box 121227 Dubai,

UAE

Global Egypt

Tel: (202) 24189705/06

Fax: (202) 22905972

24 Cleopatra St., Heliopolis, Cairo

Global Saudi Arabia

Tel: (966) 1 2994100

Fax: (966) 1 2994199

P.O. Box 66930 Riyadh 11586,

Kingdom of Saudi Arabia

Global Jordan

Tel: (962) 6 5005060

Fax: (962) 6 5005066

P.O.Box 3268 Amman 11180,

Jordan

Global Wealth Manager

E-mail: [email protected]

Tel: (965) 1-804-242

Date post:	02-Aug-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

Global Research GCC Economic Overview - GulfBase.com · The GDP growth in GCC countries is expected...

Documents