Interest Rate Monitor

December 11th 2011

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Top International News

Map Source: Google

Chinese export and import growth both decelerated in November, signaling a broad slowdown in the global economy and putting pressure on China to do more to stimulate growth.The deepening woes for Chinese exporters will also fuel expectations that Beijing could soon halt appreciation of the renminbi, which has already slowed to a crawl against the dollar over the past three months.Exports were up 13.8% in November from a year earlier, down from a 15.9% pace in October. Imports rose 22.1%, down from 28.7%. That left China with a $14.5bn surplus on the month, largely in line with market forecasts.

Continuing the trend of previous months, Chinese exports to Europe slowed most sharply, rising just 5% and weighed down by the financial turmoil in eurozone countries. Exports to the US remained relatively buoyant, but shipments to Japan slowed. Meanwhile, the deceleration in China’s imports was indicative of a downturn in the domestic economy – a concern for commodity producers in particular, which have come to depend on Chinese demand since the global financial crisis.

the US trade deficit shrank in October to its lowest level of 2011 thanks in large part to a falling demand for crude oil.The US commerce department reported that the trade gap narrowed 1.6% to $43.5bn in October after registering at a revised $44.2bn in September. The October reading narrowly beat economists’ expectations of $43.9bn.

Exports decreased from $180.6bn in the previous month to $179.2bn. Imports fell from $224.8bn to $222.6bn as oil demand slowed and prices receded. The value of imports of industrial supplies and materials, which includes fuel, fell by $3.6bn.

Republicans and Democrats in Congress are drifting apart on proposals for an extension of payroll tax cuts and jobless benefits sought by the White House, with no clear path emerging to resolve the latest standoff over US fiscal policy.

Lawmakers were hoping to strike a deal on payroll tax cuts by December 16, which is also the deadline for an agreement to keep funding the government and avoid a partial shutdown, before heading back to their districts for the holidays. If no solution is found on payroll taxes, all American workers will see their contributions to the Social Security retirement fund, into which the money flows, increase from 4.2% to 6.2% beginning in January, which could deal a blow to consumption in 2012.

The European Central Bank cut interest rates, from 1.25% to 1%, Mr Draghi cited the risks of a spill over from the financial sector into the real economy as one of the “substantial downside risks” facing the eurozone.At the press conference, Draghi unveiled a series of non-standard measures aimed at supporting the region’s ailing banks. The central bank announced two new operations offering unlimited 36-month credit to eurozone banks, a cut in the reserve requirement for commercial banks to 1% from 2% and the loosening of collateral requirements for ECB loans. Draghi spoiled the positive sentiment by saying that any expectations that the ECB would reward a “fiscal compact” by stepping up the Securities Market Programme based on his speech to Parliament last week had been over interpreted.

Moreover, the staff growth projections were lowered notably to 0.3% for 2012 and just 1.0% in 2013. The ECB thus clearly expects a prolonged period of low growth.

Official figures released on Friday showed a sharp drop in China’s consumer inflation in November, with prices rising 4.2% from a year earlier, compared with a 5.5% increase in October. Producer price data, which indicate inflationary pressure in the pipeline, showed an even steeper drop-off, with prices increasing just 2.7% in November from a year earlier, compared with a 5% rise in October. That was the smallest yearly increase since December 2009 but cooling inflation has been accompanied by a steeper fall than expected in broader indicators of growth and this is starting to worry the country’s leaders.

Investment in the mining sector and strong household consumption helped Australia’s economy grow faster than expected in the third quarter, as the country defied fears that the global economic turmoil would weigh down the economy.Third-quarter gross domestic product rose 1% quarter-on-quarter. Second-quarter growth was also revised upwards on Wednesday to 1.4% from 1.2% quarter-on-quarter growth.

A rise in consumer spending and exports that was partly offset by a reduction in stocks was behind the euro-zone economy's modest expansion in the third quarter. The European Union's official statistics agency Eurostat Tuesday said the combined gross domestic product of the 17 nations that share the euro during the three months to September was up 0.2% from the second quarter and 1.4% from the third quarter of 2010. Those figures were in line with expectations, and unchanged from Eurostat's preliminary estimates. Eurostat raised its estimate for the year-to-year rate of growth in the second quarter, to 1.7% from 1.6%. A significant turnaround in consumer spending was one of the main drivers of growth. Eurostat said spending rose by 0.3% on a quarterly basis, following a 0.5% decline in the three months to June. The other main contribution to growth came from exports, which rose 1.5% on a quarterly basis, outstripping a 1.1% rise in imports and boosting GDP by 0.2%, equaling the contribution from household spending.

Recent business surveys and measures of activity indicate that the economy has weakened in the fourth quarter, and is highly likely to contract.

Germany's central bank Friday slashed its forecast for German growth next year, warning that the nation's economy is under increasing strain from the euro zone's deepening debt crisis.German growth is likely to slow to 0.6% in 2012, down from a 1.8% forecast in June, "due to a lean period in the winter months," the Bundesbank said in its twice-yearly outlook. German growth this year is likely to reach 3%, the bank said. German growth is likely to accelerate to 1.8% in 2013, the bank said.

Separately, data released on Friday showed that German exports fell 3.6% in October as demand from crisis-hit southern European markets shrank. It was the biggest fall in six months, and much bigger than the 1% decline expected by markets.German imports shrank by 1% versus a month earlier - also more than expected - suggesting demand is also weakening in Europe's biggest economy.The country's trade surplus fell from 17.3bn to €11.6bn, or about 5.5% of its GDP.

Bank of England officials maintained their current round of stimulus in face of Europe’s debt turmoil that Governor Mervyn King says is beyond his control. The Monetary Policy Committee voted to keep the target for bond purchases at £275bn. King said last month there’s little point in “fine tuning” policy as officials watch to see how events play out.The Bank of England also left its benchmark interest rate at a record low 0.5%, where they have been since March 2009.

Worries about slowing Asian growth and turbulence in Europe pushed Australia’s central bank to cut its core interest rate on Tuesday, its second reduction in as many months.The Reserve Bank of Australia cut the cash rate by 25 basis points to 4.25%. At its November meeting, the bank also reduced the rate by 25bp, which was its first cut since April 2009.

Australian policymakers have been struggling to foster growth in the lagging non-resource sectors. Economists say Tuesday’s rate cut should provide a boost, particularly to the property market.

US consumer sentiment improved for the fourth straight reading, a new report showed, in a recent spate of encouraging economic data.Confidence among American consumers rose from 64.1 to 67.7, according to the Thomson Reuters/University of Michigan survey, which exceeded analysts’ expectations of a reading of 65.8. In a strong economy, however, the index generally falls in the range of 90 to 100.

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• S&P put the long-term sovereign-debt ratings of 15 euro-zone nations, including struggling Italy and Spain, on negative watch Monday evening. That typically means there is at least a 50% chance of a downgrade within 90 days, but the firm said Monday that it expected to announce any rating changes "as soon as possible" following this week's European Union summit, where policy makers are expected to lay out plans to enforce stricter budget rules.

• S&P said the long-term ratings on Germany, Belgium, Austria, Finland, Luxembourg and the Netherlands aren't likely to fall by more than one notch, if at all. But it flagged a potential two-notch downgrade for France and other euro-zone nations.

• The firm said in its report Monday that the move was "prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole.“

• The European Union and some of the largest banks in the eurozone were later added to Standard & Poor's list of entities on watch for possible downgrade on Wednesday.

S&P to Put Entire Euro Zone on Watch for Downgrade

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• S&P said the moves, were taken because the countries that use the euro directly contribute about 62% of the EU's total budgeted revenue this year, putting the union's triple-A rating at risk. The U.K. and Denmark are among the EU nations that don't use the euro.

• S&P said its review will focus the ability of the euro zone's member states to support the EU's overall debt service should the institution face financial distress.

• Ratings actions usually take place within 90 days after a credit watch starts, but S&P repeated its intent to reach a decision soon after Friday's regional summit. The ratings service said it would likely downgrade the EU by one notch, if at all.

• In Wednesday's move, S&P put its credit ratings on some of the largest banks in the euro zone on watch for downgrade and warned it will take similar ratings actions on other large banks soon.

• Among the banks under review are BNP Paribas SA, Fortis Bank SA, Commerzbank AG, Credit Agricole SA, Deutsche Bank AG, Intesa Sanpaolo SpA and UniCredit SpA.

• S&P said it intends to resolve the credit-watch placements on the banks soon after resolving the ratings on the related sovereigns.

S&P Then Puts Downgrade Sights on EU, Big Banks

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• In another sign of how Europe’s debt crisis is rippling through the banking system, Moody’s Investors Service on Friday downgraded the three largest banks in France, saying there was a “very high” probability that the French government would step in to support them if conditions worsened.

• Moody’s cut various ratings for Société Générale, BNP Paribas and Crédit Agricole by one notch, citing the problems each faced recently in raising money on the open market.

• The ratings agency said the banks could face further losses on their holdings of Greek and Italian government bonds should the crisis deepen.

• Liquidity and funding conditions have deteriorated significantly for all three banks because investor concerns about the euro zone sovereign debt crisis have led to “a continued lack of investor appetite for bank debt” Moody’s said.

• French banks still have €105bn of cross-border holdings of euro zone sovereign debt, according to the European Banking Authority, although this has fallen from €162bn in July.

• The report added that French banks dependency on ECB funding increased as they borrowed €101bn from the European Central Bank in the month to November 8, more than four times as much as in the month to July 11, according to figures from the central bank

Moody’s Downgrades Top French Banks

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• Europe’s leaders crafted a new “fiscal compact” to repair flaws in their currency union. After a marathon session of negotiating that started Thursday and ran until early Friday morning, the leaders emerged with two principal achievements: Eurozone members who run outsize government deficits will face automatic penalties, and all governments will put balanced-budget procedures of some form in their national laws.

• The long-envisaged permanent bailout fund, European Stability Mechanism, would arrive sooner than planned. The "quasi-automatic" sanctions imposed on violators of budget rules would henceforth be "automatic." A requirement for private creditors of bailed-out countries to suffer losses under certain circumstances would be softened by moving it to the preamble of a legal document.

• But the deal lacked bold strokes investors have been urging and it could be insufficient to halt the region’s debt crisis. The positive reactions to the deal could fade as investors focus on the details, or on the role or lack thereof that the European Central Bank will play in the days and weeks to come.

• The agreement is heavily tilted towards budget discipline and austerity. It does little to generate money in the short term to prevent the run on sovereigns, nor does it provide a longer-term perspective of jointly-issued bonds.

• Moreover, it's unclear how quickly the pact could actually go into effect. It is likely that a great deal of wrangling will take place before the “fiscal compact” is put into action.

• The gaps in the deal will make it more likely that S&P will carry out its threat, and downgrade some euro area members in the coming days.

EU Summit: No Rave Reviews

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• Even as most European Union nations came together for the agreement, the summit also sowed a sharp division: U.K. Prime Minister David Cameron vetoed an EU-wide treaty to enforce the new fiscal rules, further isolating his country from the majority of the bloc and raising questions about whether it will distance itself further down the road.

• Prime Minister David Cameron blocked the creation of a new EU treaty on Friday after other countries refused to grant the U.K. "safeguards" it wanted on financial regulation and other interests.

• EU leaders instead settled on an "intergovernmental agreement" which has the backing of the EU’s 26 other member states: the nine other non-euro members said they were looking to join the 17 that use the single currency, subject to parliamentary approval. Such a deal can in theory be ratified more quickly than treaty change, though it has less legal muscle.

• Germany had initially pushed for full-scale revisions of the European Union's founding treaties, a move that would deeply enshrine the fiscal pact in EU legislation and, just as critically, give the EU institutions the authority to enforce it.

• But treaty changes require unanimous consent of all 27 EU members, and several—including Ireland and the Czech Republic—all signaled they'd have difficulty ratifying the changes. The idea died entirely with the opposition of the U.K. Mr. Cameron sought a laundry list of concessions on banking regulation in return for a treaty change.

Europe’s Great Divorce?

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• There still remains concerns regarding liquidity; whether the funds are available now to keep Europe’s bond and money markets working.

• In the opinion of most outside economists, and a growing number of policy makers inside the bloc, only the ECB with its unlimited ability to create euros has the firepower to build a backstop capable of ensuring heavily indebted Italy has continued access to financing.

• The ECB welcomed the deal but gave no hint that it was prepared—as investors had hoped—to undertake massive purchases of euro-zone debt to prop up the region's bond markets. ECB President Mario Draghi, who attended the meeting, said simply that the agreements formed a "good basis" for a fiscal compact.

• On Thursday, Mario Draghi, the ECB’s new chairman, launched an array of measures to ease banks’ liquidity problems, such as accepting lower-quality collateral in return for loans.

• But he made clear that while the ECB is the lender of last resort for Europe’s banks, it is not prepared to play the same role for Europe’s governments.

• Pressure for ECB intervention remains, as trading in European bonds continued to see-saw, with Italian 10-year bonds, investors’ favored stress gauge, initially following the previous day’s surge to trade as high as 6.56%. Yields fell later and were 12 basis points lower at 6.31%, but were still higher than any point in history until a month ago.

ECB Is Wary of Giving Aggressive Support to Euro-Zone Debt Markets

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New treaty

• To be agreed intergovernmentally outside the judicial and institutional framework of the EU

• 17 eurozone and 6 non-eurozone countries to take part, and Sweden, the Czech Republic and Hungary want time to consult their parliaments and political parties before deciding on whether to join. UK stays outside.

Fiscal compact

• Each government to adopt a “golden rule” to ensure balanced budget (a structural deficit of no more than 0.5%)

• Automatic fines for governments that breach 3% deficit limit, unless qualified majority decides otherwise Firewall

• Rapid deployment of leveraged rescue fund, the €440bn European Financial Stability Facility

• European Stability Mechanism (ESM), the new €500bn fund, to come into effect from July 2012

• The adequacy of € 500bn limit for the ESM to be reassessed

• No agreement to run the two funds simultaneously which would have increased total firepower but this will be reviewed in March

• Eurozone and other EU countries to lend €200bn to the International Monetary Fund via their central banks to help debt-stricken eurozone members

• The requirement to get private bondholder to share burden of future rescues will be dropped from ESM treaty

EU Agreement Highlights

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Stocks Rally As Traders Construe EU Summit

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Euro gains some momentum after the summit

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Eurozone in Focus

The Irish government has outlined €2.2bn of spending cuts in an austerity budget that aims to cut the country’s sky high deficit and put it back on a path to economic recovery.More than half of the expenditure reductions – €1.15bn – will be made up through cuts to politically sensitive social welfare, health and education budgets. A further €750m is being cut from capital expenditure, resulting in the shelving of a host of flagship infrastructure projects.

A property crash forced Dublin to accept a €67.5bn bail-out from the European Union and International Monetary Fund in 2010, when its budget deficit ballooned to 32% of gross domestic product due to the cost of bailing out its banks. Dublin has already implemented austerity measures worth €20bn since 2008, and it plans a further €12.4bn between 2012 and 2015 to cut the deficit to 3% of GDP.

Spanish industrial output tumbled in October, statistics agency INE said Monday, the latest sign that the euro zone's fourth-largest economy may be contracting in the current quarter. Spanish industrial output fell 4% on an annual basis in calendar-adjusted terms, the worst monthly reading in well over a year. This compared with a 1.4% drop in September, INE said; the agency had previously reported a 1.8% decrease for that month. In non-adjusted terms, industrial output fell 4.2%.

These numbers follow a string of bad data indicating that Spain's timid economic recovery after a contraction in 2009-2010 is grinding to a halt, amid poor household and corporate demand. Just last week, Spain's car manufacturers said sales dropped 6.7% annually in October, and are now at the lowest level since 1993. INE said last month the country's economy was flat between the second and third quarters, and posted a 0.7% annual growth rate in the third quarter, driven by exports.

Belgium's new government was sworn in Tuesday, ending a political limbo that lasted 541 days, by far the longest a country has gone without a federal government. The king formally appointed Elio di Rupo as prime minister at a meeting late Monday, ending a political crisis that began with inconclusive elections in June 2010. He is the first head of government in more than 30 years whose first language is French, a sensitive point in a country deeply divided between Dutch and French speakers. The new government, a coalition of six parties, will hold 96 out of 150 seats in Belgium's lower house. The nationalist New Flemish Alliance, the party that won the most votes in the election, is not represented in the government. The first priority will be to pass a 2012 budget that keeps the country on track to reduce its budget deficit.The country's political stalemate was one of the factors behind a surge in Belgian borrowing costs in recent weeks as the euro zone debt crisis intensified.

The head of Greece's opposition New Democracy party—the man most likely the country's next prime minister—expects Greece's economy to shrink by more than 6% this year and the recession to linger through 2013. In an interview, Antonis Samaras said that the country was also unlikely to meet its upwardly revised deficit target in 2011, underscoring Greece's difficulty in meeting the fiscal goals the country has promised its international creditors. Those targets were for a budget deficit of around 8.5% of GDP, or about €17.1 billion in 2011, but which the government now sees settling closer to 9% of GDP at€19.68 billion—a forecast shared by the troika. Some government officials have warned that the deficit could exceed even the new target.

His remarks come as Greece's new interim government—formed by a coalition of both New Democracy and the majority Socialist party last month—scrambles to enforce the country's austerity program and implement a deal on a new €130 billion bailout promised by the IMF and Greece's European partners.

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Capital shortfall in European banks hit €115 bn

• The latest round of European stress tests by the European Banking Authority showed late on Thursday that Germany and Belgium had the biggest capital shortfall compared to the stress results in October.

• German banks had a capital shortfall, which must be made up by next June, of €13.1bn – nearly triple the result of a previous test in October – pushing up the Europe-wide deficit from €106bn to €115bn.

• Analysts said Commerzbank, Germany’s second-biggest private sector bank, which emerged with a capital shortfall of €5.3bn from the test, up from €2.9bn six weeks earlier, was now facing the prospect of nationalization. German banks’ aggregate capital shortfall, which also includes a €3.2bn gap at Deutsche Bank, jumped from €5.2bn to €13.1bn.

• The EBA views its stress test, which demand that 71 of Europe’s banks hit a new 9% core tier one capital ratio by June next year, as a key part of the broader measures to repair the eurozone set to be announced as early as Friday by European leaders, who were meeting in Brussels.

• The test is based on bank balance sheet data to the end of September, updating the numbers published in an October exercise on the basis of information to the end of June. Banks have until January 20 to outline plans to make up any capital shortfalls.

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Capital shortfall in European banks hit €115 bn

• Europe’s banks have slashed their holdings of sovereign debt issued by the peripheral nations of the eurozone, selling €65bn of it in just nine months.

• The sales – largely to the European Central Bank and a clutch of hedge fund investors, according to bankers – represent 13% of the banks’ holdings, cutting their total exposure to Greece, Ireland, Italy, Portugal and Spain to €513bn.

• Of the 65 banks whose sovereign holdings were published by the EBA, 55 cut their exposures. But, in an unexpected twist, 10 actually increased their holdings of government debt in the peripheral eurozone.

• The sell-down in sovereign debt exposures has taken place steadily over the year as banks have sought to reduce investment risk. But it appeared to accelerate when it became clear in the summer that the EBA would force banks to value sovereign debt in line with market prices, in effect applying a capital deduction to holdings. The smaller the GIIPS (Greece, Ireland, Italy, Portugal and Spain) sovereign exposure a bank has, the less its capital position is penalized by the EBA.

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Italy … austerity measures

• Italy's new government unveiled austerity measures that European leaders and markets hope will form the first part of a wider European deal this week and mark a turning point in the battle to save the euro.

• Italian Prime Minister Mario Monti, in his first test since taking office two weeks ago, outlined a three-year plan made up of €30 billion ($40.2 billion) in tax increases, spending cuts, pension overhauls and growth-boosting measures.

• The package is equivalent to 1.9% of Italy's €1.6 trillion gross domestic product.

• The unraveling of Italy's bond market, one of the world's biggest, amid a vicious circle of rising borrowing costs and investor flight has become the biggest single threat to the survival of the euro. If Italy is unable to refinance its huge debts in the coming year, the rest of Europe would struggle to prop up the country for long, even with help from the International Monetary Fund.

• Some elements of the plan Premier Monti outlined:– A one-time 1.5% tax on funds repatriated under Italy's tax amnesty– A 2% rise in value-added tax– A rise in the retirement age by 2018 for women working in the private sector– As much as €2 billion in annual tax breaks for companies that boost hiring– Simplification of provincial governments– Ban on the use of cash payments above €1,000 to fight tax evasion

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The Week Ahead,,,Date

Country/Currency

Event GMT EST5EDT CONSENSUS PREVIOUS

12-Dec Mon JPY JPY Consumer Confidence 05:00 00:00 38.30 38.60JPY JPY Machine Tool Orders (YoY) (NOV P) 06:00 01:00 26.00%GBP GBP Nationwide Consumer Confidence (NOV) 36.00 36.00GBP GBP RICS House Price Balance (NOV) 00:01 19:01 -25.00% -24.00%

13-Dec Tue GBP GBP Consumer Price Index (YoY) (NOV) 09:30 04:30 4.80% 5.00%GBP GBP Core Consumer Price Index (YoY) (NOV) 09:30 04:30 3.30% 3.40%GBP GBP Retail Price Index (YoY) (NOV) 09:30 04:30 5.10% 5.40%EUR EUR Euro-Zone ZEW Survey (Economic Sentiment) (DEC) 10:00 05:00 -59.10EUR EUR German ZEW Survey (Economic Sentiment) (DEC) 10:00 05:00 -55.80 -55.20USD USD Advance Retail Sales (NOV) 13:30 08:30 0.60% 0.50%USD USD Federal Open Market Committee Rate Decision (DEC 13) 19:15 14:15 0.25% 0.25%CNY CNY Actual FDI (YoY) 8.80%JPY JPY Industrial Production (YoY) (OCT F) 04:30 23:30 0.40%

14-Dec Wed GBP GBP ILO Unemployment Rate (3M) (OCT) 09:30 04:30 8.30% 8.30%EUR EUR Euro-Zone Industrial Production w.d.a. (YoY) (OCT) 10:00 05:00 2.10% 2.20%JPY JPY Tankan Large Manufacturers Outlook (4Q) 23:50 18:50 -3.00 4.00JPY JPY Tankan Non-Manufacturing Outlook (4Q) 23:50 18:50 1.00 1.00CNY CNY HSBC Flash China Manufacturing PMI 02:30 21:30 48.00

15-Dec Thu JPY JPY Machine Tool Orders (YoY) (NOV F) 06:00 01:00

EUR EUR German Purchasing Manager Index Services (DEC A) 08:30 03:30 50.00 50.30CHF CHF Swiss National Bank Rate Decision (DEC 15) 08:30 03:30 0.00% 0.00%EUR EUR German Purchasing Manager Index Manufacturing (DEC A) 08:30 03:30 47.50 47.90EUR EUR ECB Publishes Dec. Monthly Report 09:00 04:00EUR EUR Euro-Zone Purchasing Manager Index Composite (DEC A) 09:00 04:00 46.50 47.00EUR EUR Euro-Zone Purchasing Manager Index Manufacturing (DEC A) 09:00 04:00 46.00 46.40EUR EUR Euro-Zone Purchasing Manager Index Services (DEC A) 09:00 04:00 47.00 47.50GBP GBP BoE/GfK Inflation Next 12 Mths 09:30 04:30 4.20%GBP GBP Retail Sales (YoY) (NOV) 09:30 04:30 0.30% 0.90%EUR EUR Euro-Zone Consumer Price Index - Core (YoY) (NOV) 10:00 05:00 1.60% 1.60%EUR EUR Euro-Zone Consumer Price Index (YoY) (NOV) 10:00 05:00 3.00% 3.00%USD USD Current Account Balance (3Q) 13:30 08:30 -$107.7B -$118.0B

16-Dec Fri EUR EUR Draghi, King, Bini Smaghi, Visco, Regling at Rome Conference 08:00 03:00EUR EUR Euro-Zone Trade Balance s.a. (euros) (OCT) 10:00 05:00 0.5B 2.1BUSD USD Consumer Price Index (YoY) (NOV) 13:30 08:30 3.50% 3.50%USD USD Consumer Price Index Ex Food & Energy (YoY) (NOV) 13:30 08:30 2.10% 2.10%

Economic Data Release CalendarDecember 11, 2011 - December 16, 2011

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Central Bank Meetings Calendar

Expected Rate Decision

Current Rate Month Central Bank

0.25% 0.25% December 13 US Federal Reserve (FOMC)

0.10% 0.10% December 20 Bank of Japan (BOJ)

0.00% 0.00% December 15 Swiss National Bank (SNB)

Calendar for upcoming meetings of central banks in 2011:

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Regional

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MENA in a Week

Map Source: Google

Zawya- The Iraqi cabinet has ratified a draft 2012 budget of 117 trillion Iraqi dinars ($98.39 billion), compared with some $81.8 billion this year, a government spokesman said Thursday. Ali Al Dabbagh said the 2012 budget, which still needs to be approved by parliament, forecast a deficit of IQD15 trillion, which would be covered through a combination of unspent money from this year's budget, issuing new treasury bills, and loans from the International Monetary Fund and the World Bank. The new budget is based on an oil price of $85 a barrel, compared with this year's forecast of $76 a barrel, Dabbagh said.

Emirates 24/7: Consumer prices in Abu Dhabi slowed to 1.9 per cent in the first 11 months of the year, according to a report released by Statistics Centre Abu Dhabi, or Scad, on Saturday. The month-on-month fall was even more significant at 0.6 per cent in November, down from 0.9 per cent in October. Scad said that in the first 11 months of the year, the food and non-alcoholic beverages group, contributed the largest rise in the index, with a share of 66 per cent.The second-largest increase came from the housing, water, electricity, gas and other fuels group, which accounted for 34.6 per cent of the overall increase, reflecting a rise of 1.7 per cent in the average prices of this group.

S&P- Global ratings agency Standard & Poor's on Wednesday affirmed its long- and short-term 'A/A-1' foreign and local currency sovereign credit ratings on the emirate of Ras Al Khaimah (RAK).The outlook is stable. The transfer and convertibility assessment on RAK is 'AA+'.The affirmation reflects RAK's membership of the United Arab Emirates (UAE), which S&P believes provides an anchor and potential support for political and economic stability. It also reflects sustained economic growth and government surpluses, which are strengthening RAK's slight net creditor position.

Saudi Gazette- Plans by the Saudi government to open up its stock market are to limit direct foreign ownership to investors with at least $5bn under management and allow each to hold a maximum 5% of a stock's issued share capital, Reuters has reported, citing two industry sources. Total direct ownership of each stock would not be allowed to exceed 20% of the issued share capital, a source familiar with the matter was quoted as saying. Under the new framework, total foreign investment in a listed firm, including swap notes, non-Gulf Arab foreigners and expatriates in Saudi Arabia, will not be allowed to exceed 49%, the source added.

Ahram weekly- Egypt's weak growth rates will continue in the near term, while the real annual growth rates could record only 2 percent during the fiscal year of 2011- 2012, according to a report issued by the Monitor Business Institute of the Egyptian Cabinet's Information and Decision support center. The volume of family sector expenditure will increase beside the government expenditure; meanwhile the fixed investments and the export sector could achieve no growth due to the political crises, the report said.

AME info- The International Air Transport Association (IATA) has slashed its 2011 profit forecast for Middle East carriers by 50%, citing tighter margins on long-haul routes due to high fuel costs. The trade body also warned that failure to stem the Eurozone banking crisis could lead to heavy losses for the global aviation sector next year. In revising its earlier forecast issued last September, IATA lowered its 2011 profit forecast for Middle East carriers from $800 to $400m, 'as high fuel costs squeezed profit margins on the more price sensitive long-haul traffic connecting over Middle Eastern hubs‘.

Ahram weekly- According to official figures by Egypt's state statistics agency, urban consumer inflation for the 12 months to November rose to 9.1% from 7.1% in the previous month, Reuters has reported. The urban consumer price index for November was 120.4 versus 119.2 in October and 110.4 in November 2010, CAPMAS said.

Zawya- The Tunisian index of household consumer prices went up by 4.4% from November 2010 to November 2011, as a result of the rising prices of food products (+4.6%), tobacco (+9.8%), restaurants and hotels services (+8%)Moreover, The Tunisian exports, estimated at 22,767.8 million Tunisian dinars (MTD) in the last 11 months, went up by 7.3% at current prices compared with 2010, despite the difficult economic juncture. This was the result of the rise in the exports of farming produce and processed food (39.8%), electrical industries (22.9%) and the textile-clothing and leather products (6.4%). Exports in the phosphates and by-products sector, which is the scene of social unrest, dropped by 36%. These indicators are far away from the rates recorded in 2009 and 2010 when the national exports recorded a double-digit growth (over 20.9%).

Daily Star- The outlook on Lebanon's banking system has been changed to negative from stable, said Moody's Investors Service in a new report entitled "Banking System Outlook: Lebanon" released Monday. The key drivers of credit risk within this system are slower economic growth, following a sharp GDP deceleration in H1 2011; (ii) downside economic risks due to regional political uncertainty, particularly in Syria; and (iii) the banks' asset and loan exposures to other regional countries experiencing political unrest and/or economic slowdown, such as Egypt and Jordan. Although non-performing loans (NPLs) improved during 2006-10, it is now more likely that this trend will reverse. In addition to the weakened domestic operating environment conditions, the banks (predominantly the larger ones) have material exposures to countries undergoing political transition or experiencing political unrest (particularly Syria and Egypt).

Zawya & FT - Dubai Holding Commercial Operations Group (DHCOG), the real-estate and hospitality unit of Dubai Holding, has announced it will repay on time a $500m bond that matures in 2012, in response to concerns from Moody's Investors Service it faced refinancing risks, Zawya Dow Jones has reported. "DHCOG will repay the $500m bond when it matures in February 2012 from its own internal cash flow," a DHCOG spokesperson said. On a different note, Dubai's government has denied reports about plans to restructure debt held by government related entities (GREs), although it is ready to support them through 'various' refinancing options, Reuters has reported. The Financial Times said that Dubai had raised the prospect of restructuring some bonds. "There is no truth to reports being circulated about an intention to 'restructure' certain debts owed by the Dubai government companies in 2012," the Dubai government press office quoted Sheikh Ahmed bin Said al-Maktoum, head of the higher committee for monetary policy in Dubai, as saying.

7th Day- A report released by the Central Bank of Egypt on Tuesday, December 6 revealed a drastic decline in the country's foreign reserves, which will now only cover 5.2 months of imported goods, totaling U.S. $22.1 billion at the end of October.The bank estimated foreign reserve decline at U.S. $4.5 billion during the July to October period of the 2011-2012 fiscal year. The decline is estimated at 16.9 percent, after official reserves were at U.S. $24.4 billion at the end of September 2011.Assets in foreign currencies also decreased, estimated at U.S. $0.3 billion at the end of June 2011 and dropping further to U.S. $0.2 billion by the end of September.

IMF- International Monetary Fund chief Christine Lagarde said economic growth in the Middle East and North Africa must include all members of society to fulfill the promise of the Arab Spring. Lagarde, in a speech in Washington, said the Arab Spring that began a year ago in Tunisia was at a "delicate transition point" as the MENA region seeks to define its future."While each country in the region must find its own path to change, the over-arching economic goals of the Arab Spring remain clear -- higher growth, growth that creates more jobs, and growth that is shared equitably among all strands of society," she said. The IMF managing director said that, despite some setbacks in the region, she remained "ever hopeful" that the Arab Spring is still poised to unleash "the potential of a better future for all.”

21

Syrian Pound Sharply Slides as Economy dwindles under Embargo

• The Syrian pound has fallen to its lowest level yet against the dollar since the start of the protests in March. Nine months ago, the currency was trading at about S£47.5 to the dollar on the black market; now one dollar is reported to buy S£60 - or more.

• The supply of dollars through official channels is now tightly controlled but in Syria much currency is traded on a black market. Even the official central bank rate has also slipped from nearly $1/S£51 to $1/S£54.

• Since the beginning of November, however, the pound has slid about 14 per cent against the dollar on the black market, and there is no sign of government intervention.

• According to The Syria Report, a newsletter, the government is even intending to cancel planned foreign exchange auctions.

• Mr Mayaleh says Syria still has $18bn worth of foreign currency reserves, but analysts believe the real figure could be lower, as a recent European Union embargo on buying Syrian crude oil bites and the disappearance of the tourism industry take its toll.

• Analysts say that the pound is expected to continue declining. Syrian pounds are not held in substantial quantities outside Syria, though the pressures on its economy are felt further afield.

The graph above shows historical exchange rates between the US Dollar (USD) and the Syrian Pound (SYP) between 6/14/2011 and 12/10/2011

22

GCC Still Committed to the USD Peg

• GCC central banks have confirmed this week keeping the peg for the time being, amid growing debate about the benefits of the peg in a weakening US economy.

• The Central Bank of Kuwait is not considering the option of decreasing the value of Kuwaiti Dinar to increase the country's revenues "as such a measure will erode trust in the currency," Al-Jarida daily quoted Director of Economic Research Department at CBK Sami Al-Anba'e as saying.

• Earlier, acting Kuwaiti Finance Minister Mustafa Al-Shamali had warned that the measure, which is very risky, might have to be taken due to the huge increase in the State's general budget.

• Moreover, Saudi Arabian Monetary Agency Gov. Muhammad Al-Jasser told the Saudi US forum in Atlanta that Riyadh has no plans to change its currency's peg to the US dollar, adding that the tie remains a priority due to the Kingdom's trade with the United States.

• The Emirati Central Bank governor reiterated the same comment that the Central Bank of UAE is keeping the peg , as it has anchored financial stability in the UAE.

• He also added that the Central Bank has started to invest in US treasuries as yields are more lucrative.

23

Comparative MENA MarketsFor the period 04/12 – 09/12

24

Locally

25

Economic News

Map Source: Google

Al Arab al Yawm- An undisclosed Jordanian official has stated that the Jordanian government is expected to tap the international markets in 2012 through a second USD Eurobond in order to provide ample financing to bridge its expected fiscal gap.

AL RAI- The US government is expected to transfer the remainder USD 120 mio of the US annual grant to Jordan. This tranche is expected to help the ministry of finance in financing the budget deficit as it is designated for budget support purposes.

Jordan Times- Merchants are worried that Jordan may accept financial compensation for abiding by Arab economic sanctions against Syria, according to Jordan Chamber of Commerce (JCC) President Nael Kabariti.Indicating that the Kingdom will be the hardest hit by the sanctions on Syria, Kabariti told a press conference that officials should exert utmost efforts to convince the Arab League that Jordan should be excluded from implementing the penalties on Damascus, pointing out that around 60 per cent of Jordan’s imports from Turkey and Europe enter through Syria.Accepting financial compensation means that funds will go to the treasury, leaving merchants and consumers to suffer from rising commercial and living costs, the JCC chief said.Jordan has officially requested the Arab League’s technical committee to exclude the Kingdom’s trade and aviation sectors from the sanctions on Syria to avoid possible economic losses. Syria is also the gateway for Jordanian exports, particularly vegetables, to Turkey and Europe, he said, indicating that large quantities of local agricultural produce during the winter season are exported to the Syrian market. According to official figures, Syria imports around one-third of Jordanian vegetables during winter. Noting that major imports from Syria include food products, garment and cereals, the JCC chief disclosed that trade exchange between the two neighbouring countries has dropped sharply in recent weeks. According to Department of Statistics figures, the volume of trade exchange between Jordan and Syria reached around JD371 million during the first three quarters of this year. Jordanian exports to Syria stood during the same period at JD148 million, while imports from the northern neighbouring country exceeded JD220 million, the statistics showed.

26

Amman Stock ExchangeFor the period 04/12 – 08/12

ASE free float shares’ price index ended the week at

(1980.9) points, compared to (1977.6) points for the last

week, posting a increase of 0.17%. The total trading volume

during the week reached JD(38.0) million compared to JD

(39.5) million during the last week. Trading a total of (43.6)

million shares through (21446) transactions

The shares of (187) companies were traded, the shares

prices of (74) companies rose, and the shares prices of (78)

declined.

Top 5 losers for the last week

Stock % chg

National Chlorine Industries (11.69%)

Rum Aladdin Industries (11.11%)

Invest Bank (10.74%)

Alentkaeya For Investment&realestate Development Company Plc (8.22%)

General Mining Company Plc (8.05%)

Top 5 gainers for the last week

Stock % chg

Arab Union International Insurance 25.23%

Jordan Ceramic Industries 18.52%

The Industrial Commercial & Agricultural 15.89%

Al-quds Ready Mix 14.81%

Al-rakaez Investment Co. 14.75%

27

Local Debt MonitorLatest T-Bills / T-Bonds Issues

As of Dec 11, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,978) million.

Yield (%) Size - million Maturity Date Issue Date 3 months T-Bills

2.699% 100 07/03/2012 07/12/2011 26/2011

Yield (%) Size - million Maturity Date Issue Date 6 months T-Bills

3.232% 50 08/06/2012 08/12/2011 27/2011

3.148% 50 04/06/2012 04/12/2011 24/2011

Coupon (%) Size - Million Maturity Date Issue Date 1 year T-Bills

3.776% 100 20/11/2012 20/11/2011 21/2011

3.982% 50 25/09/2012 25/09/2011 18/2011

Coupon (%) Size - million Maturity Date Issue Date 2 years T-Bonds

5.783% 100 22/11/2013 22/11/2011 T4411

5.625% 75 23/10/2013 23/10/2011 T3811

28

Local Debt MonitorLatest T-Bills / T-Bonds Issues

Coupon (%) Size - million Maturity Date Issue Date 3 years T-Bonds

6.477% 100 24/11/2014 24/11/2011 T4511

6.156% 50 17/11/2014 17/11/2011 T4311

Coupon (%) Size - million Maturity Date Issue Date 4 year T-Bonds

6.475% 50 16/11/2015 16/11/2011 T4211

6.492% 50 3/11/2015 3/11/2011 T4111

Coupon (%) Size - million Maturity Date Issue Date 5 years T-Bonds

6.858% 50 01/11/2016 01/11/2011 T4011

6.921% 50 18/10/2016 18/10/2011 T3611

Coupon (%) Size - million Maturity Date Issue Date Public Utility Bonds

4.213% 23 30/11/2012 30/11/2011 PBills2 (National Electricity)

6.240% 48.6 21/11/2014 21/11/2011 PB010 (National Electricity)

29

Prime Lending Rates

30

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