It's Not About the Money HSBC Middle East Report

8/2/2019 It's Not About the Money HSBC Middle East Report

1/50

MacroMiddle East Economics

Q2 2012ECONOMICSMiddle East

Its not about the money

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

By Simon Williams and Elizabeth Martins

The worlds oil importers are transferring resources to the oil producers of the

Middle East at a record pace

but while regional savings are soaring, growth is modest and appetite for reform

looks weak against a troubled political backdrop

For the regions commodity poor, high energy prices are imposing additional strain

on an already difficult economic outlook


2/50

1

Macro

Middle East Economics

Q2 2012

abc

Summary 2

Its not about the money 4

Middle East & North Africa ata glance 15

Key forecasts 16

GDP 17

Consumption & saving 18

Investment 19

Credit 20

Population & GDP/Capita 21

Inflation 22

Public finances 23

Oil 24

External balance 25

External debt 26

Reserves 27

Exchange rates & interest rates 28

Country outlooks 29Algeria 30

Bahrain 31

Egypt 32

Iraq 33

Jordan 34

Kuwait 35

Lebanon 36

Morocco 37

Oman 38

Pakistan 39

Qatar 40

Saudi Arabia 41

Tunisia 42

United Arab Emirates 43

Disclosure appendix 46

Disclaimer 47

Contents

We acknowledge the assistance of Michelle Campbell (HSBC Bank Middle East Ltd) in the production of this report.


3/50

2

Macro


Q2 2012

abc

Oil prices have risen 20% since our last Middle East

Economics Quarterly a rise which will translate,

for the regions oil producers, into an additional

USD400m a day in revenues. We estimate total

export receipts will come in at USD750bn in 2012,

taking dollar GDP for the region as a whole to

USD2.5trn, and adding over USD400bn to the oil

producers already substantial foreign assets.

For a region in urgent need of job creation,

however, money is not enough. Even increasingvolumes of exports though lucrative has a

very limited feed-through to the wider economy.

Government spending increases will be only at

the margins, given already expansionary budgets,

and, by definition, the accumulation of surpluses

and reserves precludes consumption.

The challenge facing the MENA region, then, is

to turn this nominal growth into real growth

something which has historically proven difficult.

We estimate that, by 2013, public spending will

have increased fourfold in less than a decade. Yet

annual real GDP growth over that period has

rarely topped 5%. Indeed, despite all of its

advantages, the region has tended to lag not lead

its emerging market peers.

With spending levels rising at this rate, the risk of

a sharp and painful adjustment when oil prices

fall is increasing. Labour market inefficiencies

and costly subsidy regimes are both in need of

reform to increase fiscal flexibility. Yet higher oil

prices, particularly in conjunction with the

political risks which came to the fore in 2011, arelikely to reduce the incentive for governments to

make these changes.

The non-oil producers in the region will feel the

impact of higher energy prices as yet another

headwind in an already acutely challenging

growth environment. Trade deficits are widening

at a time when investment and tourism inflows

are not forthcoming, and increased subsidy

spending will add to the strains on public

finances. Higher oil prices put Gulf states in a

position to provide financial aid, but there has

been little evidence of this materialising thus far.

Summary

Higher oil prices will bring record revenues to the MENA region in

2012, adding an estimated USD400bn to the assets of its producers

and lifting GDP to USD2.7trn. However, turning a fresh surge in

nominal growth into real growth and hence wealth into prosperity

will be much harder. The feed-through channels to the real economy

are, at best, constrained, and a still troubled political backdrop will

also weigh heavily. Current levels of fiscal comfort may also deter

the kind of structural reforms that will promote more rapid growth

over the long term. Meanwhile, for the non-oil states, the rise in

prices adds to an already acutely challenging economic picture.


4/50

3

Macro


Q2 2012

abc

Key forecasts and changesKey forecasts

MENA GCC Algeria Bahrain Egypt Iraq Jordan Kuwait Lebanon Morocco Oman Pakistan Qatar KSA Tunisia UAE

Real GDP growth (%, y-o-y)2010 5.4 5.6 4.8 4.5 5.1 7.3 3.4 3.3 7.1 3.7 4.7 4.4 14.3 4.1 3.8 5.32011 5.1 6.6 4.4 2.2 1.8 5.6 2.7 4.2 1.7 4.8 4.2 2.1 15.2 6.6 -1.8 4.12012f 3.6 3.9 4.6 2.5 1.8 4.1 2.3 3.4 2.3 2.5 4.6 2.9 6.4 4.0 3.5 2.62013f 4.0 4.0 3.5 3.5 3.7 5.8 3.4 3.9 3.9 3.8 4.2 2.7 5.8 3.9 4.7 3.3GDP (USDbn)2010 1983 1091 162 22 209 147 23 145 39 92 60 176 129 448 44 2872011 2424 1393 204 26 237 181 25 189 41 94 78 207 181 587 41 3322012f 2680 1545 221 27 251 209 27 224 44 109 89 225 198 652 48 3562013f 2739 1543 227 28 261 220 30 227 47 117 91 241 201 638 53 358

Current Account balance (% GDP)2010 7.5 13.5 14.3 6.3 -2.1 -0.2 -5.4 23.2 -21.0 -5.4 11.0 -2.0 16.4 15.7 -0.4 5.02011 14.0 23.3 9.6 6.6 -1.2 10.5 -20.4 30.3 -25.1 -5.1 13.4 0.3 28.8 27.3 -4.2 12.82012f 14.8 24.0 13.0 8.9 -2.0 12.2 -19.8 32.6 -20.9 -4.4 16.9 -1.2 28.7 26.9 -5.1 13.82013f 9.7 17.0 8.9 5.3 -2.6 5.0 -16.7 27.6 -15.3 -4.0 9.0 -0.9 22.0 17.5 -2.9 9.4CPI (%, end period)2010 5.7 3.8 2.7 1.0 10.7 6.0 6.1 6.0 4.5 2.2 4.2 15.5 0.4 5.4 4.0 1.82011 5.3 3.5 4.0 1.0 11.8 5.0 4.2 3.1 4.0 3.0 3.3 12.5 2.3 5.3 4.2 1.52012f 5.2 3.9 3.5 2.5 9.5 5.0 4.0 4.9 3.5 3.0 4.2 13.1 3.8 4.8 3.3 1.72013f 5.5 4.3 4.3 3.0 10.0 5.0 3.0 3.8 3.5 3.0 4.9 12.6 4.7 5.5 4.5 2.2Policy Rate (%)2010 4.00 0.50 8.50 6.00 4.25 2.50 10.00 3.25 2.00 12.50 1.50 0.25 4.50 1.002011 4.00 0.50 8.50 6.00 4.50 2.50 10.00 3.25 2.00 13.50 0.75 0.25 3.50 1.002012f 4.00 0.50 9.50 6.00 4.50 2.50 10.00 3.00 2.00 12.00 0.75 0.25 3.50 1.002013f 4.00 0.50 9.50 5.50 4.50 2.50 10.00 3.00 2.00 12.00 0.75 0.25 3.50 1.00Exchange Rates (vs. USD, year end)

2010 74.9 0.376 5.70 1170 0.709 0.281 1508 8.33 0.385 84.6 3.64 3.75 1.44 3.672011 76.1 0.376 5.97 1165 0.709 0.275 1508 8.59 0.385 89.7 3.64 3.75 1.50 3.672012f 75.8 0.376 6.25 1150 0.709 0.275 1508 7.83 0.385 93.0 3.64 3.75 1.35 3.672013f 75.7 0.376 6.60 1135 0.709 0.275 1508 7.79 0.385 95.0 3.64 3.75 1.34 3.67

Fiscal year, ending 30 JuneSource: MENA Central Banks, Ministries of Finance, HSBC estimates and forecasts

Key changes to regional economic outlook and country growth forecasts

______________Q1 2012 forecasts ______________ _______________Latest forecasts _______________2012 2013 2012 2013

MENA aggregatesReal GDP growth (%) 3.5 4.0 3.6 4.0Current account balance (% GDP) 10.0 7.7 14.8 9.7Fiscal balance (% GDP) 0.4 -0.5 5.5 2.4CPI (%, end period) 5.5 5.9 5.2 5.5Key changes to growthAlgeria 4.2 3.7 4.6 3.5Bahrain 2.4 3.6 2.5 3.5Egypt 2.7 3.9 1.8 3.7Morocco 2.5 3.2 2.5 3.8Oman 3.9 4.2 4.6 4.2

Pakistan 2.9 3.1 2.9 2.7Qatar 8 6.8 6.4 5.8Saudi Arabia 2.9 3.4 4.0 3.9UAE 3.1 4.2 2.6 3.3

Source: HSBC estimates and forecasts. Fiscal year, ending 30 June


5/50

4

Macro


Q2 2012

abc

Your pain. Our gain.

In the West, the 20% increase in energy costs over

the first months of the year poses a direct and

material threat to the still fragile recovery ineconomic activity. In Asia, the risk that rising oil

prices will lead to higher inflation is a cause of

growing concern.

In much of the Middle East, the situation could

hardly be more different. By our estimates, at

USD120/b (rather than the USD100/b that

prevailed at the end of last year), the value of the

regions oil output has risen by an additional

USD400m a day. In the zero-sum game of

commodity markets, the worlds oil consumers will

have delivered almost USD200bn to Middle East

oil exporters in the first quarter of the year alone

USD30bn more than they might have but for the

recent price gain. Of that total, we estimate that

USD145bn accrued to the six states of the GCC,

the equivalent of more than USD5,500 for every

Gulf national in the space of just three months.

Even compared to other oil producers, those in the

Middle East stand out as beneficiaries of the

recent price spike. Only MENA has additional

capacity to bring on line, allowing it to compound

the pick-up in price with an increase in output

volumes. Average production costs are also just a

Its not about the money

The world's oil importers are transferring resources to the oil

producers of the Middle East at a record pace

but while regional savings are soaring, growth is modest and

appetite for reform looks weak against a troubled political backdrop

For the regions commodity-poor, high energy prices are imposing

additional strain on an already difficult economic outlook

There's no doubting who the winners of the oil boom are... ...or where wealth is focused.

Nominal GDP (USDbn)

0

500

1000

1500

2000

2005 2012f

Non oil producers* Oil producers

GPD per capita (USD)

0

5000

10000

15000

20000

2005 2012f

Non oil producers* Oil producers

Source: MENA Central Banks, HSBC estimates. * Excludes Pakistan Source: MENA Central Banks ,HSBC estimates. * Excludes Pakistan


6/50

5

Macro


Q2 2012

abc

fraction of those elsewhere, running at just over

USD10/b in MENA compared to USD25/b in

Russia or USD35/b in the Americas. At

USD125/b in other words, 90% of the income

accrues as profit. With production largely state

owned, that profit stays onshore rather than being

transferred to production partners overseas.

A two and half trillion dollar economy

While the futures curve continues to suggest oil

prices will weaken, they are set to do so later -

and from a higher base - than had previously

seemed likely. Factoring this into our forecasts

suggests that oil exports will reach some

USD750bn this year, an all time high that will

easily surpass the heady days of 2008 when oil

prices briefly looked set to breach USD150/b.

The increase in the value of oil output should

drive MENA GDP to more than USD2.7trn this

year, roughly the same economic scale as France.

We estimate that in the GCC, home to just 10% ofthe regions population but 77% of the oil exports,

dollar GDP will exceed USD1.5trn. If reached,

the figure will mean that, in dollar terms, GCC

GDP will have trebled in less than a decade on the

back of high oil earnings and risen by two-thirds

since 2009.

In absolute terms, Saudi Arabia stands out, with

dollar GDP likely to reach USD650bn in 2012, an

increase of more than USD250bn since 2009.

Qatars remains the most striking dynamic,

however, with gains in oil earnings coupled with a

sharp rise in gas production suggesting that

nominal GDP should have doubled between 2009

and 2012. The gains will keep Qatari GDP per

capita at around USD100,000 or over USD350,000

per head when expatriates are excluded.

Spend more; earn even more; save more still

Because the oil industry across the region is

owned by the state and is the dominant source of

budget funding, the run-up in oil prices continues

to strengthen public finances. We expect the GCC

states to run an aggregate budget surplus of

around 12% of GDP in 2012, allowing the

regions governments to continue to reduce what

are already modest levels of public debt. In both

Saudi Arabia and Oman, for example, debtstocks of under 10% of GDP will continue to

trend downward as surpluses accrue.

The windfall will further enhance the regional oil

producers robust external account position. We

expect every GCC state to record a current

account surplus this year, with the overall

aggregate balance equating to just under 25% of

GDP. This should leave MENAs oil producers

with over USD400bn to add to their foreign asset

stock in 2012 alone.

Although likely not the largest holder of foreign

assets, Saudi Arabia is the most transparent.

SAMA accounts show that since the onset of the

Arab Spring, the kingdom has added well over

USD100bn to its reserves that reached over

USD560bn in February 2012. We expect the

kingdoms foreign reserve stock to breach

USD600bn this year.

Oil prices have driven a 3-fold rise in GCC GDP in a decade

0

500

1000

1500

2002

2004

2006

2008

2010

2012

0

25

50

75

100

125

GCC GDP (USD, bn) Brent (avg USD/b, RHS)

Source: GCC central banks, Bloomberg, HSBC estimates


7/50

6

Macro


Q2 2012

abc

While this falls far short of the USD3trn managed

by the central bank of China, the gap narrows

when the USD1.5trn conservatively estimated tobe managed by other MENA banks and sovereign

wealth funds are added in. The assets also far

exceed those held by China as a percentage of

GDP and on a per capita basis, underscoring just

how robust their asset base is on a relative basis.

Indeed, by year-end we expect Saudi Arabia to

hold reserves equivalent to three years of import

spending. Those reserves would be sufficient to

fund public spending for a full two years.

More than enough money justisnt enough

While accumulating wealth in an environment of

rising energy prices is straight forward, transforming

the surge in nominal income into real growth is far

more troublesome.

For one thing, the oil industry itself doesnt

contribute much to growth. Increases in oil output lift

industrial production but the capital intensive nature

of oil production (just 0.24% of Saudi nationals work

for Saudi Aramco) and its reliance on imports means

that the spill-over from gains in oil production into

the rest of the domestic economy is very limited.

High oil prices are also not, by themselves, sufficient.

By definition, the large and growing fiscal and

current account surpluses we expect the major oil

producers to accrue this year and next represent

increases in savings, not gains in consumption,

investment or domestic demand.

To make their impact felt directly, the oil earnings

have to enter the domestic economy, mostobviously by being spent by the state. The data

show a strong tie between gains in oil earnings and

the spending plans of the major oil producers

which have been firmly expansionary over the past

decade. We strongly expect public spending to

show further overall gains in 2012 and 2013 and

be a prime driver of economic growth in the GCC

states. We also expect the oil-funded build up of

foreign assets to enhance their capacity to fund

spending plans over the longer term and help themguard against external shocks.

However, the feed through from oil earnings to

spending is not direct or immediate. Even in 2011,

when there was a strong political imperative to

boost spending quickly to offset political

pressures, it was current spending that

governments were able to lift quickly with gains

in capital spending taking much longer to deliver.

As such, the channelling of oil revenues through

Estimated foreign savings of global SWFs and central banks

Fund Name Assets(USDbn)

Assets(% GDP)

People's Bank of China 3,181 46Bank of Japan 1,295 22Abu Dhabi Investment Authority 627 189Norwegian Government Pension Fund 611 127SAFE Investment Company 568 8SAMA Foreign Holdings 556 95Central Bank of Russia 498 26China Investment Corporation 440 6Central Bank of Taiwan 357 71Central Bank of Brazil 357 14Swiss National Bank 340 51Bank of Korea 311 31Kuwait Investment Authority 296 157Central Bank of India 296 16HKMA 293 119Deutsche Bundesbank 257 7Government of Singapore InvestmentCorporation (GIC)

248 93

Bank of Algeria 186 91Bank of Thailand 176 52Bank of Italy 173 8

Source: Sovereign Wealth Fund Institute (Updated March 12),central bank sources

Saudis overseas holdings have soared

SAMA foreign assets (USDbn)

250

350

450

550

May-10

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

Foreign Currencies & Gold

Deposits in banks abroad

Investment in foreign securities

Source: SAMA


8/50

7

Macro


Q2 2012

abc

the government effectively places a limit on the

capacity of the domestic economies to absorb

rising energy earnings. Put another way, the level

of public spending the GCC region will deliver in

the near term with oil at USD120/b is unlikely to

be significantly greater than the sum delivered

with oil at USD100/b.

Blocked channels in the Gulf

Aside from being spent, there are other means by

which high oil earnings might make their impactfelt on domestic demand. High oil prices may

encourage government-related companies to press

ahead with expansion plans, for example, with the

increased wealth of the sovereigns that stand

behind them making it easier and cheaper for the

state firms to borrow from overseas. The

placement of government surpluses on deposit

with local banks could also help keep interest

rates low and create a pool of liquidity on which

the private as well as public sectors can draw. Theclose correlation between high oil prices and the

performance of local-dominated regional stock

markets also suggests that there is a powerful

causative link between private sector confidence

and oil price movements.

However, the ability of oil revenues to feed

through these channels again appears constrained.

For one thing, governments in much of the region

remain reluctant to place their surpluses on

deposit within the domestic banking system.

Although there has been some change at the

margins most markedly in Qatar and Oman

the increases in liquidity pale when set against the

rise in oil receipts.

In SaudiArabia and the UAE, there is even less

evidence of feed through, with governments

continuing to place their surpluses overseas under

the management of the powerful sovereign wealth

funds. Algeria, the oil producer with the highestlevels of foreign reserve import cover, also has the

slowest rate of private sector credit creation as a

consequence of the state preference for placing

funds offshore.

Moreover, while the GCC states are feeling the

benefit of heightened political risk in increased oil

receipts, the same dynamic is also weighing on

private sector sentiment. Onshore, confidence is

more robust, but among overseas investors the

level of uncertainty is much higher with concerns

over possible conflict between Iran and the West

still elevated. Against a backdrop of broad

European deleveraging, this has weighed on

appetite for regional risk, even in the GCC. It also

helps explain why, though the local-dominated

regional equity markets joined the global rally, the

more heavily foreign-owned credit market has

lagged its global peers.

Oil revenues made their impact felt on Qatari banks ...but not in the banking system of the UAE

-20

0

2040

60

80

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

0

50

100

150

Qatar pub. sect. deposits (% chng, y -o-y )Oil price (USD/b, RHS)

-20

-10

0

10

20

30

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

0

50

100

150

UAE govt. deposits (% chng, y -o-y )

Oil price (USD/b, R HS)

Source: QCB, Bloomberg Source: CBUAE , Bloomberg


9/50

8

Macro


Q2 2012

abc

Money cant buy me love

Indeed, while higher oil prices have led us to

revise our forecasts for nominal growth and

savings, our projections for real growth are

largely unchanged. Adjustments to our forecasts

for domestic, non-oil private sector growth have

been more limited still and we continue to expect

even the major oil producers to lag the rate of

expansion recorded by more dynamic emerging

market oil importer nations.

The trend is not new and the data continues to

highlight the shortcomings of the regions oil-

based, public sector-led economic model. We

estimate that GCC central government spending

will run at close to USD500bn by 2013 a figure

that will mean public spending will have

increased four-fold in less than a decade, and by

more than 40% since 2010. The sum is one of the

biggest and certainly one of the most sustained

fiscal stimuli on record.

The real growth delivered by this massive increase

in fiscal outlays, however, is muted, running at

around 5%, with domestic demand lagging even

this modest pace of increase. In Saudi Arabia, the

economy that has delivered the largest increase inspending in absolute terms over the past decade,

real growth has averaged less than 4% a year,

running above 5% for two consecutive years on

only one occasion since 2004.

The performance helps explain why, despite the

oil-driven increase in the scale of the economy,

unemployment has stayed high, with the last

International Labour Organisation report putting

youth unemployment at 30% close to the rate of

youth joblessness in the stalled economies of

peripheral Europe.

High oil prices hold backchange

The structural obstacles to more rapid, broad-

based economic growth are widely recognised.

With oil prices high, however, the likelihood of

High oil prices arent benefiting all producers equally

50

55

60

65

70

75

Feb-10

May-10

Aug-10

Nov-10

Feb-11

May-11

Aug-11

Nov-11

Feb-12

50

70

90

110

130

UAE PMI Saudi PMI Oil (USD/b, RHS)

Source: Markit Economics, HSBC, Bloomberg

High public spending doesnt always bring rapid growth (EM growth v growth in Saudi Arabia 2004-2012)

0

50

100

150

200

250

2004 2005 2006 2007 2008 2009 2010 2011 2012f

0

1

2

3

4

5

6

7

8

9

Publi c spending (USDbn, LHS) Real GDP growth (%) EM growth (avg, % chng)

Source: SAMA, HSBC estimates and forecasts


10/50


11/50

10

Macro


Q2 2012

abc

This need not prompt Saudi Arabia and other oil

producers to mark down their spending plans

given the strength of their balance sheets and the

political imperative to maintain growth. However,

it would start to weigh on marginal spending

choices, creating downward pressures on

spending growth that would increase with each

passing year. Indeed, long-term forecasts

generated by Saudi-basedJadwa suggest that the

kingdom will run structural fiscal deficits from

2015 onward, and that to meet likely spending

objectives it would need an oil price of more than

USD300/b to balance its budget by 2030.

While this suggests that the growth impetus will

moderate progressively in the years ahead, the

slowdown will be more acute should oil prices

drop in the near term. All of the regions oil

producers have accumulated savings and reserves

of a scale that would allow them to weather even

the sharpest and most unexpected drops in oil

prices without finding their currencies or budget

positions under strain.

Nevertheless, we strongly suspect that a drop in

oil prices to even USD80/b would prompt the

regions oil producers to rethink elements of their

spending programme rather than seek to finance

an expansionary programme through debt or adraw-down in capital. Given that a twelve month

run of oil prices at USD60/b would leave Saudi

Arabia with a budget shortfall of more than 15%

of GDP, it seems highly likely that such a sharp

revenue drop would push the kingdom and other

oil states toward austerity.

While the spending of all of the oil producers

would likely react to a drop in revenues, some

enjoy greater room for manoeuvre than others.

Those GCC states with small populations and

substantial oil resources would inevitably fare best.

This group would be led by Qatar but we would

also expect to see Kuwait and AbuDhabi weather

a downgrade of their oil sectors comparatively

well. For Saudi Arabia, Oman, Algeria and

Bahrain, however, a structural downshift in oil

prices would prove more difficult to tolerate.

Spending has adjusted to rising revenues... with the impact of any price decline increasingly marked

0

20

40

60

80

100

2004

2005

2006

2007

2008

2009

2010

2011

2012

Saudi Arabia Breakev en oil price (USD per barrel)

-70

-50

-30

-10

10

$120 $100 $80 $60 $40 $20

0

100

200

300

Budget Balance (% GDP)

Budget Revenue (USDbn, RHS)

Source: HSBC estimates Source: HSBC estimates for 2012 (NB model adjusts both GDP and fiscal revenues

for oil price trend)

Saudi Arabia all but gives away its petrol

0.0

0.5

1.0

1.5

2.0

2.5

Germany

UK

Switzerland

S.Korea

US

UAE

Saudi

Gasoline prices (USD per litre)

Source: IEA


12/50

11

Macro


Q2 2012

abc

Saudi and Qatar lead the wayOver the near term, however, Saudi Arabia,

along with Qatar remain the stand-out stories (see

Whos at Risk in 2012, January 16, 2012). In both

cases, gains in government spending that were in

train well before the recent pick-up in oil earnings

are driving domestic demand, supported by a

pick-up in the pace of credit creation.

Of the rest, Omans near-term outlook is

probably the most compelling, with data showing

that the recent pick-up in government spending is

both significant and comfortably funded by

revenues, despite the sultanates modest levels of

oil output. Lending has also gained speed.

Kuwaits more substantial oil resources have

supported strong gains in current spending which

appear to be feeding through into domestic

demand. We remain unconvinced by the quality

of policymaking in Kuwait, however, or by thegovernment's capacity to deliver on pledges to

increase the pace of capital spending. Similar

impediments weigh on Algeria ,which has one of

the largest stocks of foreign assets in the world,

but faces stagnant domestic demand.

Even in the UAE, which has one of the highest

levels of oil output per national, all of the

available indicators suggest that the pace of

domestic demand growth remains soft, including

in Abu Dhabi. The outlook is weaker still for

Bahrain where pledges to increase public

spending appear to be proving difficult to deliver

and still-pronounced political tensions are

weighing on private sector investment and activity.

No relief for the commoditypoor

For the regions non-oil producers, , the dynamic

is far more challenging with rising energy costs

adding to chronic external account imbalances. In

Morocco, for example, even the modest run-up in

oil prices in 2011 contributed to a widening of the

current account shortfall and a draw-down in

reserves. Although data are not yet available, it is

highly likely that the run-up in energy prices over

the first quarter of the year will have put their

external accounts under greater pressure still, with

little relief likely in the near term.

As the regions non-oil producers also regulate thecost of energy goods, higher oil prices are also

undermining their fiscal position too. In other

circumstances policymakers might have felt able to

pass some of the burden of higher imported fuel

costs on to consumers. However, clear memories of

the economic distress that triggered unrest across

much of MENA in 2011 gives the non-oil

producers very little room for manoeuvre. Indeed

Jordan, one of the few countries to have

The winners and losers of oil price gains are easy to pick ...which ever way you cut it

-25

0

25

50

75

Bahrain

Kuwait

Saudi

Iraq

Oman

Algeria

UAE

Qatar

Tunisia

Egypt

Pakista

n

Morocc

o

Lebanon

Jordan

Oil ex port earnings/ import spending (% GDP)

Earnings

Spending

-40

-20

0

20

40

Kuwait

Qatar

UAE

Bahrain

Iraq

Oman

Saudi

Algeria

Pakista

n

Egypt

Jordan

Morocc

o

Tunisia

Oil ex port earnings/ import spending per capita (USD '000)

Earnings

Spending

Source: Regional central banks, HSBC estimates Source: Regional central banks, HSBC estimates
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=1HRpM5uplF&n=317973.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=1HRpM5uplF&n=317973.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=1HRpM5uplF&n=317973.PDF


13/50


14/50

13

Macro


Q2 2012

abc

stress until resolved. In addition, we are anxious

at the pronounced populist pressures the new

leaders are set to face, particularly given both

their inexperience and the likely volatility of

newly elected houses of parliament.

Our real concerns, however, are rooted in the

economy, which contracted for the first time in ageneration in calendar 2011, held back by very

weak capital and consumption spending,

collapsing FDI inflows and a stalled tourism sector.

The choke points for this weak economic

performance continue to be Egypts fiscal and

external account deficits.

Although the currency has remained stable, Egypt

has used more than 60% of its pre-revolution

reserves to fund the external account shortfall,

with assets now standing at just 3 months of

import cover. We expect the current account to

remain in deficit in 2012 with reserves continuing

to take the strain. This will likely ensure that

market concerns of a sharp drop in the value of

the currency continue to build, alongside anxiety

that the authorities may introduce additional

currency controls to stem pressure on the pound.

The pressure on public finances also remains

acute. We estimate that Egypt could run budget

shortfalls of as much as 11% of GDP over FY-

2012 and FY-2013, 3.5ppt above the average of

the previous five years. Egypts commercial banks

were able to carry a funding burden of this scale

in 2011 but we are not persuaded that they will be

able to do so again in 2012 given the weak growth

in their own funding base. This raises the prospectof, at best, renewed upward pressure on rates and

the exclusion of the private sector from the credit

market or, at worst, deficit monetisation.

Show me the money

To manage the adjustment of its currency and

public finances in an orderly fashion, it is

essential that Egypt (and Tunisia, which faces

similar, if less pronounced, twin deficits) gain

access to concessional funding from overseas.

It still seems likely to us that this will occur, and

we continue to look for a USD3.2bn IMF

Egypt's external account position is weak... ..and funding the fiscal deficit has been a heavy burden forbanks

0

10

20

30

40

50

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

5.4

5.6

5.8

6.0

6.2

Egypt reserv es (U SDbn) U SD/EGP (R HS)

0

10

20

30

40

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Egypt deposits (% chng y -o-y )

Egypt claims on gov . (% chng, y -o-y )

Source: CBE Source: CBE

A lost year Egypt has stalled since the revolution

-6

-4

-2

0

2

4

6

Q49

Q11

0

Q21

0

Q31

0

Q41

0

Q11

1

Q21

1

Q31

1

Q41

1

Real GDP grow th (% chng, y -o-y)

Source: CBE


15/50


16/50

Table Notes

Non - oil producers = Egypt, Jordan, Lebanon, Morocco, Pakistan, TunisiaGCC = Bahrain, Kuwait, Oman, Qatar, Saudi Arabia (KSA), UAE

MENA = Algeria, Bahrain, Egypt, Jordan, Iraq, Kuwait, Lebanon, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Tunisia, UAE

*All regional groupings are weighted by USD nominal GDP

NB: e = estimates, f = forecasts

Egypt fiscal 2011/2012 = Calendar 2012. Fiscal year ends 30 June

Pakistan fiscal 2011/12= Calendar 2012. Fiscal year ends 30 June

15

Macro


Q2 2012

abc

Middle East & NorthAfrica at a glance


17/50

16

Macro


Q2 2012

abc

Key forecasts

MENA GCC Algeria Bahrain Egypt Iraq Jordan Kuwait Lebanon Morocco Oman Pakistan Qatar KSA Tunisia UAE

Real GDP growth (%, y-o-y)2010 5.4 5.6 4.8 4.5 5.1 7.3 3.4 3.3 7.1 3.7 4.7 4.4 14.3 4.1 3.8 5.32011 5.1 6.6 4.4 2.2 1.8 5.6 2.7 4.2 1.7 4.8 4.2 2.1 15.2 6.6 -1.8 4.1

2012f 3.6 3.9 4.6 2.5 1.8 4.1 2.3 3.4 2.3 2.5 4.6 2.9 6.4 4.0 3.5 2.62013f 4.0 4.0 3.5 3.5 3.7 5.8 3.4 3.9 3.9 3.8 4.2 2.7 5.8 3.9 4.7 3.3GDP (USDbn)2010 1983 1091 162 22 209 147 23 145 39 92 60 176 129 448 44 2872011 2424 1393 204 26 237 181 25 189 41 94 78 207 181 587 41 3322012f 2680 1545 221 27 251 209 27 224 44 109 89 225 198 652 48 3562013f 2739 1543 227 28 261 220 30 227 47 117 91 241 201 638 53 358Current Account balance (% GDP)2010 7.5 13.5 14.3 6.3 -2.1 -0.2 -5.4 23.2 -21.0 -5.4 11.0 -2.0 16.4 15.7 -0.4 5.02011 14.0 23.3 9.6 6.6 -1.2 10.5 -20.4 30.3 -25.1 -5.1 13.4 0.3 28.8 27.3 -4.2 12.82012f 14.8 24.0 13.0 8.9 -2.0 12.2 -19.8 32.6 -20.9 -4.4 16.9 -1.2 28.7 26.9 -5.1 13.82013f 9.7 17.0 8.9 5.3 -2.6 5.0 -16.7 27.6 -15.3 -4.0 9.0 -0.9 22.0 17.5 -2.9 9.4CPI (%, end period)2010 5.7 3.8 2.7 1.0 10.7 6.0 6.1 6.0 4.5 2.2 4.2 15.5 0.4 5.4 4.0 1.82011 5.3 3.5 4.0 1.0 11.8 5.0 4.2 3.1 4.0 3.0 3.3 12.5 2.3 5.3 4.2 1.52012f 5.2 3.9 3.5 2.5 9.5 5.0 4.0 4.9 3.5 3.0 4.2 13.1 3.8 4.8 3.3 1.7

2013f 5.5 4.3 4.3 3.0 10.0 5.0 3.0 3.8 3.5 3.0 4.9 12.6 4.7 5.5 4.5 2.2Policy Rate (%)2010 4.00 0.50 8.50 6.00 4.25 2.50 10.00 3.25 2.00 12.50 1.50 0.25 4.50 1.002011 4.00 0.50 8.50 6.00 4.50 2.50 10.00 3.25 2.00 13.50 0.75 0.25 3.50 1.002012f 4.00 0.50 9.50 6.00 4.50 2.50 10.00 3.00 2.00 12.00 0.75 0.25 3.50 1.002013f 4.00 0.50 9.50 5.50 4.50 2.50 10.00 3.00 2.00 12.00 0.75 0.25 3.50 1.00Exchange Rates (vs. USD, year end)2010 74.9 0.376 5.70 1170 0.709 0.281 1508 8.33 0.385 84.6 3.64 3.75 1.44 3.672011 76.1 0.376 5.97 1165 0.709 0.275 1508 8.59 0.385 89.7 3.64 3.75 1.50 3.672012f 75.8 0.376 6.25 1150 0.709 0.275 1508 7.83 0.385 93.0 3.64 3.75 1.35 3.672013f 75.7 0.376 6.60 1135 0.709 0.275 1508 7.79 0.385 95.0 3.64 3.75 1.34 3.67

Fiscal year, ending 30 JuneSource: MENA Central Banks, Ministries of Finance, HSBC estimates and forecasts

GDP (USDbn, 2011) CPI (% chng, y-o-y)

0

100

200

300

400

500

600

KSA

UAE

Egy

pt

Pak

istan

Algeria

Kuw

ait

Qat

ar

Iraq

Morocco

Om

an

Tun

isia

Leb

anon

Jordan

Bah

rain

0

2

4

6

8

10

12

1999

2001

2003

2005

2007

2009

2011

2013f

F'cast

MENA av erage

GCC average

Source: MENA Central Banks, Ministries of Finance, HSBC estimates Source: MENA Central Banks, Ministries of Finance, HSBC estimates and forecasts

Key forecasts


18/50


19/50

18

Macro


Q2 2012

abc

Household consumption

%, y-o-y 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 5.8 4.8 3.5 6.9 8.3 4.9 5.0 4.0 5.0 4.0Bahrain 3.0 8.6 5.7 2.5 5.1 -2.9 4.2 1.5 2.2 4.0Egypt 2.1 4.8 6.4 4.2 5.7 5.7 4.1 4.5 6.5 4.2Jordan 17.0 5.1 6.3 5.8 4.8 1.7 3.1 3.0 3.0 4.0Iraq - - - - - - - - - -Kuwait 6.2 11.2 7.7 9.0 6.8 3.0 3.0 3.5 3.5 4.0Lebanon 5.3 2.1 -1.0 6.1 9.6 9.1 6.8 2.7 3.0 4.0

Morocco 4.9 2.3 6.9 3.8 6.0 4.6 2.2 6.5 3.0 4.0Oman 6.1 -1.7 9.6 8.8 6.0 3.0 3.4 3.0 4.0 4.0Pakistan 10.1 12.9 1.0 4.7 -2.7 12.2 4.0 7.0 2.5 3.0Qatar 33.6 28.3 17.0 14.5 12.8 4.5 5.0 6.0 6.0 6.0Saudi Arabia 5.3 8.8 10.2 17.7 3.5 6.7 3.2 5.0 4.2 4.0Tunisia 5.3 4.8 4.9 5.2 4.8 3.9 4.5 0.0 3.0 5.0UAE* 22.5 14.1 21.9 25.5 22.3 2.0 3.8 3.5 5.2 6.2

*Nominal data. Fiscal year, ending 30 JuneSource: MENA Central Banks, HSBC estimates and forecasts

Nominal gross savings (% GDP, 2011) Nominal domestic demand (% GDP, 2011)

0

10

20

3040

50

60

Qatar

KSA

Kuwait

Oman

UAE

Bahrain

Morocco

Pakistan

Tunisia

Egypt

Lebanon

Jordan

0

50

100

150

Jordan

Lebanon

Tunisia

Morocco

Pakistan

Egypt

UAE

Oman

KSA

Bahrain

Kuwait

Qatar

Source: MENA Central Banks, HSBC estimates Source: MENA Central Banks, HSBC estimates

Nominal gross savings ratios

% GDP 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 49.6 63.1 71.7 73.3 76.7 44.0 71.7 67.1 77.9 68.3Bahrain 27.7 35.4 38.2 42.7 43.3 33.7 35.4 30.8 32.8 30.4Egypt 21.0 20.9 20.4 22.6 22.8 16.8 17.7 16.5 12.5 10.8Iraq - - - - - - - - - -Jordan 27.7 16.1 19.2 15.1 23.0 24.3 21.5 6.3 7.0 10.1Kuwait 41.5 50.4 59.1 55.3 57.7 37.7 39.6 43.9 44.5 39.9Lebanon -1.6 1.8 11.8 18.0 11.3 11.6 14.2 8.8 12.9 18.6Morocco 30.8 30.6 31.6 32.4 32.9 30.6 29.7 30.3 29.4 29.9Oman 31.6 37.9 41.6 41.7 41.9 27.5 46.7 43.3 45.8 39.8Pakistan 18.4 17.7 18.2 17.7 12.8 13.0 14.6 25.7 24.4 24.7Qatar 55.3 67.8 51.1 54.2 59.1 54.5 55.9 60.6 61.7 58.8Saudi Arabia 34.6 47.2 46.6 45.9 50.7 31.7 38.6 46.9 47.2 41.5Tunisia 26.5 24.7 29.6 25.6 29.2 28.2 24.4 20.6 20.1 22.5UAE 29.8 34.9 36.0 31.7 31.7 29.4 30.9 38.2 39.3 35.9Non oil producers 21.5 20.4 22.1 22.6 21.2 19.0 19.0 20.9 19.2 19.5

GCC 35.0 44.9 45.2 43.4 46.6 34.1 39.1 45.7 46.5 41.9MENA 30.3 37.9 38.9 37.7 39.6 27.6 33.0 37.6 38.3 34.5

Gross savings = Nominal USD GDP minus total consumption. Fiscal year, ending 30 JuneSource: MENA Central Banks, HSBC estimates and forecasts

Consumption & saving


20/50


21/50

20

Macro


Q2 2012

abc

Private sector credit (% GDP, 2011) Real private sector credit growth (% chng y-o-y, 2011)

0

20

40

60

80

100

Morocco

Jordan

Lebanon

Tunisia

UAE

Bahrain

Kuwait

KSA

Oman

Qatar

Egypt

Pakistan

Algeria

Iraq

-10

-5

0

5

10

Iraq

KSA

Qatar

Lebanon

Jordan

Tunisia

Algeria

Oman

Morocco

Bahrain

UAE

Kuwait

Pakistan

Egypt

Source: MENA Central Banks, HSBC estimates Source: MENA Central Banks, HSBC estimates

Private sector credit

% GDP 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 11.0 11.9 12.4 13.0 12.7 16.1 15.1 13.1 12.6 13.4Bahrain 47.9 47.8 48.2 58.3 67.3 74.5 65.9 57.0 57.7 62.4Egypt 57.8 53.7 51.9 48.1 36.7 33.8 33.0 27.8 25.5 23.4Iraq - - - 3.0 2.9 3.8 5.5 5.1 5.3 6.0Jordan 76.5 86.8 95.9 96.2 85.0 80.0 79.1 81.7 78.5 76.3Kuwait 56.3 50.1 51.7 69.7 62.4 75.1 67.5 54.4 48.2 50.8Lebanon 74.2 66.6 68.3 70.9 70.0 69.5 76.8 79.0 78.2 78.0Morocco 47.8 51.5 57.1 69.7 77.5 80.5 82.9 83.5 85.4 88.5Oman 34.5 30.8 31.1 36.8 37.6 50.7 42.0 36.7 35.6 38.7Pakistan 27.7 30.3 30.5 31.2 26.3 21.0 19.7 16.2 16.5 18.2Qatar 26.8 33.1 39.2 48.1 43.4 55.1 45.2 34.6 38.1 45.0Saudi Arabia 32.3 35.6 34.6 38.6 39.9 50.2 44.3 37.9 39.2 48.1Tunisia 51.4 51.5 50.6 51.1 53.4 55.0 61.5 68.8 69.6 70.7UAE 34.3 39.7 42.4 54.0 63.1 72.9 68.3 59.9 58.7 63.1Non oil producers 45.0 45.9 47.3 49.8 44.8 43.9 42.5 38.0 38.1 39.0GCC 35.7 38.4 39.4 48.2 50.0 61.1 54.1 45.2 45.0 51.2MENA 35.4 37.0 37.5 43.0 42.5 48.0 44.3 38.2 38.0 41.5

Source: MENA Central Banks, HSBC estimates and forecasts. Fiscal year, ending 30 June

Real private sector credit

%, y-o-y 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria* 13.7 30.2 14.3 10.0 10.4 8.8 9.8 3.0 4.5 5.7Bahrain 19.8 17.2 16.6 37.0 33.2 -3.6 -2.1 1.0 3.5 7.0Egypt -6.6 -1.9 3.9 3.3 -28.7 -2.5 -2.9 -10.7 -8.2 -6.5Iraq* - - - - 29.6 19.0 72.8 10.0 13.0 13.0Jordan 15.2 19.6 22.6 8.6 2.4 2.6 2.4 3.8 6.0 9.0Kuwait 23.0 11.0 20.9 28.8 -1.4 2.0 -10.1 -3.6 -4.9 -0.5Lebanon* 3.5 -6.6 0.3 6.6 13.1 11.7 18.3 5.0 1.5 3.5Morocco* 7.1 10.5 17.9 28.3 20.2 8.9 5.2 2.0 5.0 7.0Oman 4.0 4.1 1.7 -2.3 -5.8 5.1 1.8 2.7 1.8 1.1Pakistan 9.1 18.6 9.2 7.8 -13.2 -12.9 -8.7 -10.2 1.9 7.4Qatar 21.5 52.1 46.6 40.2 32.8 13.3 7.5 5.8 16.2 15.3Saudi Arabia 36.6 38.2 7.9 13.9 18.9 -4.8 -0.6 6.7 10.2 14.5Tunisia** 9.7 7.1 5.4 3.3 6.2 5.5 14.5 3.7 3.2 4.5UAE* 18.4 32.7 20.7 37.0 36.0 -0.4 -2.3 -0.1 3.3 5.8Non oil producers 4.4 8.5 8.8 9.8 -8.7 -1.9 -0.4 -6.2 -1.0 2.2GCC 27.2 32.3 15.8 24.4 21.4 -0.2 -1.3 3.2 6.6 9.4MENA 17.5 24.1 13.0 17.6 13.2 1.4 5.3 1.2 5.0 7.4

Adjusted for the rate of inflation. *Claims on the private sector. **Loans to the economySource: MENA Central Banks, HSBC estimates and forecasts

Credit


22/50

21

Macro


Q2 2012

abc

Population

Millions 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 32.4 32.9 33.8 34.4 34.5 35.0 35.5 36.0 36.6 37.1Bahrain 0.8 0.9 1.0 1.0 1.1 1.2 1.2 1.2 1.3 1.3Egypt 70.5 71.9 73.6 77.5 79.1 83.5 84.5 85.6 86.8 87.9Iraq 27.1 28.0 28.8 29.7 31.9 32.1 31.4 32.1 32.7 33.4Jordan 5.4 5.6 5.8 5.9 6.1 6.3 6.5 6.6 6.7 6.8Kuwait 2.8 3.0 3.2 3.4 3.4 3.5 3.6 3.7 3.7 3.8Lebanon 3.5 3.6 3.6 3.7 3.7 3.7 3.8 3.9 3.9 4.0

Morocco 30.2 30.5 30.9 31.2 31.6 32.0 32.4 32.8 33.2 33.5Oman 2.4 2.5 2.6 2.7 2.9 2.9 3.0 3.0 3.1 3.1Pakistan 152 156 159 163 166 170 173 177 181 185Qatar 0.7 0.9 1.0 1.2 1.4 1.6 1.7 1.8 1.9 2.0Saudi Arabia 24.0 24.6 25.2 25.9 26.6 27.3 28.0 28.7 29.4 30.1Tunisia 9.9 10.0 10.1 10.2 10.3 10.4 10.5 10.7 10.8 10.9UAE 4.3 4.7 5.0 5.4 5.8 5.7 5.8 6.0 6.2 6.3Non oil producers 272 277 283 291 297 306 311 317 323 328GCC 35.0 36.5 38.0 39.7 41.2 42.2 43.2 44.3 45.5 46.6MENA 366 375 384 395 405 415 421 429 438 446

Source: MENA Central Banks, IMF, HSBC estimates and forecasts. Fiscal year, ending 30 June

Population (Millions, 2011) GDP per capita (USD '000, 2011)

0 20 40 60 80 100 120 140 160 180

BahrainQatar

OmanLebanon

KuwaitUAE

JordanTunisia

KSAIraq

MoroccoAlgeriaEgypt

Pakistan

0

20

40

60

80

100

Qatar

UAE

Kuwait

Oman

Bahrain

KSA

Lebanon

Algeria

Iraq

Tunisia

Jordan

Morocco

Egypt

Pakistan

Source: MENA Central Banks, IMF, HSBC estimates Source: MENA Central Banks, IMF, HSBC estimates

GDP per capita

USD 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 2,637 3,136 3,468 3,929 4,983 3,949 4,563 5,659 6,036 6,122Bahrain 13,639 15,143 16,505 17,773 20,073 16,650 17,762 20,711 21,496 21,633Egypt 1,117 1,239 1,460 1,683 2,056 2,249 2,476 2,773 2,895 2,975Iraq 1,787 1,778 2,385 3,088 4,173 3,709 4,684 5,631 6,389 6,583Jordan 2,114 2,260 2,297 2,566 3,209 3,385 3,578 3,758 4,087 4,477Kuwait 21,586 27,004 31,908 33,737 42,953 35,729 40,515 51,669 60,109 59,850Lebanon 6,064 6,068 6,209 6,859 8,154 9,337 10,227 10,667 11,148 11,791Morocco 2,038 1,871 2,213 2,555 2,691 2,913 2,834 2,881 3,296 3,480Oman 10,213 12,323 14,265 15,292 21,104 16,248 20,445 25,914 28,774 29,050Pakistan 607 669 763 851 974 970 1,038 1,196 1,269 1,327Qatar 42,652 46,862 54,432 58,499 79,580 59,682 75,668 101,624 104,597 99,199Saudi Arabia 10,453 12,843 14,132 14,863 17,936 13,825 16,033 20,480 22,199 21,234Tunisia 3,232 3,062 3,483 3,994 4,062 4,294 4,129 3,831 4,493 4,850UAE 34,214 38,707 44,073 47,874 54,568 47,810 49,689 55,593 57,768 56,397Non oil producers 1,091 1,133 1,294 1,467 1,675 1,777 1,873 2,038 2,185 2,279GCC 15,003 18,170 20,759 22,406 27,594 22,233 25,257 31,425 33,977 33,084MENA 2,610 3,018 3,497 3,909 4,795 4,188 4,709 5,646 6,124 6,145

Source: MENA Central Banks, IMF, HSBC estimates and forecasts. Fiscal year, ending 30 June

Population & GDP/Capita


23/50


24/50

23

Macro


Q2 2012

abc

Budget balance

% GDP 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 14.1 13.7 13.9 6.2 9.4 -5.7 -1.1 3.1 0.5 -0.7Bahrain 4.1 7.6 4.7 3.1 6.6 -6.0 -5.6 -2.5 -0.1 -3.5Egypt -9.5 -9.6 -8.2 -7.3 -6.8 -6.9 -8.5 -9.4 -11.0 -11.3Iraq -35.4 -10.7 -1.6 8.8 3.9 -12.4 -7.9 0.8 4.0 -3.1Jordan -12.8 -10.9 -8.0 -8.9 -10.1 -12.2 -8.8 -11.5 -11.7 -11.7Kuwait 18.1 24.8 52.0 33.6 38.4 11.2 17.8 20.3 23.7 21.6Lebanon -9.4 -8.6 -13.5 -10.2 -9.7 -8.5 -7.5 -5.2 -5.1 -5.0

Morocco -3.0 -3.9 -1.5 0.7 0.4 -1.1 -1.8 -6.4 -5.9 -5.3Oman 5.1 13.1 10.8 8.1 8.7 -4.6 3.2 9.7 12.5 6.8Pakistan -2.5 -3.0 -4.2 -5.9 -7.9 -5.1 -6.5 -6.1 -5.2 -4.4Qatar 16.4 19.2 7.2 7.3 8.7 11.7 11.6 2.1 10.5 10.3Saudi Arabia 11.4 18.4 21.0 12.2 32.5 -6.1 6.5 13.9 11.6 5.2Tunisia -2.0 -2.4 -6.6 -2.5 -1.1 -2.9 -1.4 -5.3 -5.6 -5.9UAE 7.1 15.9 21.0 17.3 17.0 -10.6 2.3 11.6 12.2 7.6Non - oil producers #REF! -5.6 -5.8 -5.1 -5.4 -5.2 -6.0 -7.2 -7.4 -7.3GCC 10.4 16.9 21.4 14.9 23.3 -2.9 6.6 11.5 12.3 8.4MENA 4.1 9.1 12.1 8.2 13.4 -4.5 1.2 5.0 5.5 2.4

Source: MENA Ministries of Finance, HSBCestimates and forecasts. Fiscal year, ending 30 June

Budget balance (% GDP) Public debt (% GDP, domestic vs. external in 2011)

-10

0

10

20

30

2004

2005

2006

2007

2008

2009

2010

2011

2012f

2013f

-8

-6

-4

-2

0

GCC Non-oil producers (R HS)

0

50

100

150

Lebanon

Egypt

Jordan

Morocco

Iraq

Pakistan

Tunisia

Bahrain

UAE

Algeria

Kuwait

KSA

Qatar

Oman

Domestic debt (% GDP) External debt (% GDP)

Source: MENA Ministries of Finance, HSBC estimates and forecasts Source: Ministries of Finance, IIF, HSBC estimates.

Total government debt

% GDP 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 28.0 25.0 23.6 12.5 8.2 10.4 9.8 7.9 8.2 9.7Bahrain 34.8 33.8 33.0 32.0 33.0 46.2 54.6 38.3 38.6 40.2Egypt 131.1 118.3 108.6 98.4 87.0 88.3 89.8 84.0 87.3 89.3Iraq - - - 109.0 70.6 78.3 65.0 54.1 47.8 46.1Jordan 92.0 82.9 86.1 81.8 66.9 72.5 75.1 78.1 80.9 83.2Kuwait 16.2 14.6 12.4 16.2 14.4 16.2 12.7 11.0 9.6 9.9Lebanon 158.8 177.2 179.9 167.8 156.4 146.4 135.5 136.8 137.4 135.7Morocco 53.9 64.8 55.1 50.5 49.4 46.0 55.0 59.1 51.5 55.8Oman 13.9 8.6 8.0 6.2 4.1 5.5 5.4 3.7 3.2 3.2Pakistan 67.9 61.9 56.4 54.4 50.2 52.5 53.7 50.9 52.6 55.1Qatar 27.8 19.3 13.3 9.3 13.4 14.5 11.1 7.8 9.2 9.9Saudi Arabia 65.4 38.9 27.3 18.5 13.2 15.9 9.9 7.4 6.4 6.3Tunisia 53.9 52.4 48.6 45.8 43.6 43.0 41.5 47.2 47.6 49.9UAE 12.5 14.5 11.7 13.2 13.8 21.1 23.1 21.9 21.3 21.3

Non oil producers #REF! 86.3 79.4 73.9 68.6 69.8 72.3 70.5 70.8 73.0GCC 39.6 26.5 19.2 15.6 13.4 17.4 14.5 11.8 11.0 11.2MENA 51.5 41.8 35.0 37.0 31.0 37.4 34.9 30.3 29.4 30.8

Source: MENA Ministries of Finance, IIF, H SBC estimates and forecasts. Fiscal year, ending 30 June

Public finances


25/50


26/50


27/50

26

Macro


Q2 2012

abc

External debt

USD bn 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 22 17 6 5 5 6 6 7 8 9Bahrain 6 7 8 9 10 10 11 11 11 12Egypt 30 29 30 30 34 32 34 35 41 44Iraq 142 109 98 102 97 93 95 96 97 98Jordan 13 13 14 15 14 14 15 16 18 20Kuwait 15 20 31 58 61 58 60 63 66 67Lebanon 28 29 31 32 34 35 35 37 37 39

Morocco 17 16 17 19 20 20 21 21 22 22Oman 6 6 6 7 9 8 8 9 9 10Pakistan 33 33 34 37 40 46 52 56 63 70Qatar 13 18 26 42 57 84 104 109 115 120Saudi Arabia 38 45 55 89 96 100 104 107 112 117Tunisia 19 19 18 19 22 21 20 22 25 27UAE 40 58 93 149 160 164 163 183 190 205Non oil producers 140 139 144 152 164 168 178 187 205 224GCC 118 154 220 354 393 424 450 482 503 530MENA 423 420 468 613 658 691 728 772 813 860

Note: External debt is total government plus non government external debt. Fiscal year, ending 30 JuneSource: MENA Central Banks, IMF IFS, IIF, HSBC estimates and forecasts

External debt (USDbn) External debt (% GDP, 2011)

0

50

100

150

200

Algeria

Bahrain

Egypt

Iraq

Jordan

Kuwait

Lebanon

Morocco

Oman

Pakistan

Qatar

Saudi

Arabia

Tunisia

UAE

2011 2012f 2013f

0102030405060708090

100

Lebanon

Jordan

Qatar

UAE

Iraq

Tunisia

Bahrain

Kuwait

Pakistan

Morocco

KSA

Egypt

Oman

Algeria

Source: MENA Central Banks, IMF IFS, IIF, HSBC estimates and forecasts Source: MENA Central Banks, IMF IFS, IIF, HSBC estimates and forecasts

External debt

% GDP 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 26.0 16.4 5.5 3.6 3.0 4.1 3.8 3.4 3.5 3.8Bahrain 56.0 52.7 50.6 49.6 46.9 53.5 48.1 41.4 40.7 42.4Egypt 37.9 32.5 27.5 22.9 20.8 16.8 16.1 14.7 16.3 17.0Iraq 293.7 219.8 142.5 111.2 72.6 78.0 64.5 53.0 46.3 44.6Jordan 127.7 113.1 111.1 113.2 90.9 72.6 72.9 70.7 73.0 73.5Kuwait 26.0 25.0 30.4 50.2 41.3 45.9 41.2 33.3 29.5 29.4Lebanon 132.5 133.5 137.4 127.1 112.3 100.9 91.1 89.2 85.2 84.3Morocco 29.6 27.2 26.3 24.7 22.7 21.8 20.4 20.0 19.1 18.1Oman 22.9 18.6 17.1 17.5 14.1 16.8 13.7 11.4 10.4 10.6Pakistan 36.5 32.3 28.5 27.4 25.5 28.6 29.7 27.0 27.8 29.2Qatar 39.8 42.0 46.3 58.8 49.5 85.7 80.8 60.3 58.1 59.8Saudi Arabia 15.3 14.3 15.5 23.2 20.2 26.5 23.2 18.2 17.2 18.4Tunisia 60.3 58.9 52.8 49.3 48.8 48.2 46.0 49.1 50.7 52.0UAE 27.2 32.2 41.9 57.7 50.7 60.8 56.7 55.0 53.4 57.2

Non oil producers 48.5 44.3 39.8 36.5 33.3 31.4 30.4 28.5 29.2 30.0GCC 22.6 23.2 27.8 39.8 34.5 45.2 41.2 34.6 32.6 34.4MENA 44.7 37.1 35.0 40.0 34.0 39.9 36.7 31.7 30.4 31.5

Source: MENA Central Banks, IMF IFS, IIF, HSBC estimates and forecasts. Fiscal year, ending 30 June

External debt


28/50

27

Macro


Q2 2012

abc

Central bank reserves (incl. gold, excluding sovereign wealth funds)

USD bn 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 43 56 78 110 143 149 163 183 212 232Bahrain 2 2 3 4 4 4 5 4 5 5Egypt 15 19 23 31 35 31 35 26 14 22Iraq 8 12 20 31 50 44 50 57 61 65Jordan 5 5 7 8 9 12 13 12 12 12Kuwait 7 8 12 16 17 18 19 20 21 22Lebanon 12 12 13 13 20 29 29 31 33 34

Morocco 16 16 20 24 22 22 22 23 24 25Oman 2 2 4 5 5 5 6 6 7 7Pakistan 11 10 11 13 9 10 13 14 13 13Qatar 3 5 5 9 10 18 31 34 38 41Saudi Arabia 27 155 226 305 442 410 440 535 608 648Tunisia 4 4 7 8 9 11 9 7 8 10UAE 18 21 28 77 32 35 37 41 45 51Non oil producers 62 67 81 97 103 115 121 113 103 117GCC 60 193 278 417 509 490 537 640 723 774MENA 174 328 456 655 805 798 871 993 1099 1187

Fiscal year, ending 30 June.Source: MENA Central Banks, IMF IFS, HSBC forecasts

Central bank reserves (months of import cover, 2011) Central bank reserves including estimated sovereign wealth funds (% ofGDP, 2011)

0

5

10

1520

2004

2005

2006

2007

2008

2009

2010

2011

2012f

2013f

Non-oil producers GCC

0

50

100

150

200250

UAE

Kuwait

Algeria

KSA

Lebanon

Qatar

Bahrain

Jordan

Iraq

Morocco

Oman

Tunisia

Egypt

Pakistan

Source: MENA Central Banks, IMF IFS, Monitor Group, HSBC estimates Source: MENA Central Banks, IMF IFS, Monitor Group, HSBC estimates

Central bank reserves Import cover

Months 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 23.7 27.2 36.4 39.4 35.0 36.3 34.9 33.4 37.7 37.9Bahrain 3.8 3.0 3.8 4.5 3.2 4.4 5.2 3.6 3.6 4.1Egypt 7.4 7.3 6.9 7.9 6.4 6.1 6.8 4.9 2.1 2.8Iraq 4.2 9.6 15.1 22.8 20.8 17.7 19.4 21.3 21.7 21.9Jordan 8.4 6.6 7.5 7.3 6.6 10.6 10.7 7.5 6.8 6.8Kuwait 4.9 4.3 5.4 5.7 5.1 6.3 6.2 6.1 5.8 5.4Lebanon 10.9 11.6 12.7 11.3 11.5 15.4 14.9 15.6 15.4 15.4Morocco 9.9 8.5 9.3 8.4 5.7 7.3 6.3 6.3 6.3 5.9Oman 3.9 4.7 4.4 5.9 5.2 6.9 6.5 4.8 4.6 4.2Pakistan 7.2 5.1 4.6 5.3 2.4 4.2 5.5 5.1 4.6 4.3Qatar 5.7 5.5 5.9 4.1 3.7 7.7 13.7 11.2 11.2 11.0Saudi Arabia 3.9 21.4 24.1 25.4 30.2 30.7 32.7 35.6 34.1 30.9Tunisia 3.4 3.6 4.9 4.5 4.0 6.3 4.7 3.1 3.1 3.3UAE 2.8 2.7 2.9 5.6 1.7 2.2 2.2 2.1 2.1 2.2

Non oil producers 7.4 6.6 6.7 6.7 5.4 6.8 6.6 5.7 4.6 4.7GCC 3.6 10.5 12.5 13.9 13.4 14.9 15.2 16.0 16.0 15.3MENA 6.1 10.3 12.1 13.4 12.7 14.1 14.4 14.6 14.5 14.1

Source: MENA Central Banks, IMF IFS, HSBCforecasts. Fiscal year, ending 30 June

Reserves


29/50

28

Macro


Q2 2012

abc

Exchange rates

(local curr vs.USD, period end) 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 72.6 73.4 71.2 66.8 71.2 72.7 74.9 76.1 75.8 75.7Bahrain 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38Egypt 6.19 5.79 5.76 5.69 5.33 5.59 5.70 5.97 6.25 6.60Iraq 1462 1479 1391 1216 1172 1170 1170 1165 1150 1135Jordan 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71 0.71Kuwait 0.29 0.29 0.29 0.27 0.28 0.29 0.28 0.28 0.28 0.28Lebanon 1508 1508 1508 1508 1508 1508 1508 1508 1508 1508

Morocco 8.22 9.25 8.46 7.71 8.10 7.86 8.33 8.59 7.83 7.79Oman 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38Pakistan 58.1 59.6 60.2 60.5 68.0 81.4 84.6 89.7 93.0 95.0Qatar 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64 3.64Saudi Arabia 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75Tunisia 1.21 1.36 1.30 1.22 1.31 1.31 1.44 1.50 1.35 1.34UAE 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67 3.67

Source: MENA Central banks, HSBC forecasts. Fiscal year, ending 30 June

Policy rate (%) in 2011 Real policy rate (%) in 2011

0

2

4

68

10

12

14

Algeria

Bahrain

Egypt

Iraq

Jordan

Kuwait

Lebanon

Morocco

Oman

Pakistan

Qatar

KSA

Tunisia

UAE

-6

-4

-2

0

2

4

6

Algeria

Bahrain

Egypt

Iraq

Jordan

Kuwait

Lebanon

Morocco

Oman

Pakistan

Qatar

KSA

Tunisia

UAE

Source: MENA Central Banks Source: MENA Central Banks

Policy rate

% pa, period end 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f

Algeria 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00Bahrain - - - 4.00 0.75 0.50 0.50 0.50 0.50 0.50Egypt 10.00 10.00 9.00 9.00 11.50 8.50 8.50 8.50 9.50 9.50Iraq 6.00 7.00 16.00 20.00 15.00 7.00 6.00 6.00 6.00 5.50Jordan 3.75 6.50 7.50 7.00 6.25 4.75 4.25 4.50 4.50 4.50Kuwait 4.75 6.00 6.25 6.25 3.75 3.00 2.50 2.50 2.50 2.50Lebanon 20.00 12.00 12.00 12.00 12.00 10.00 10.00 10.00 10.00 10.00Morocco 3.25 3.25 3.25 3.25 3.32 3.31 3.25 3.25 0.00 0.00Oman 1.61 4.15 6.34 6.02 1.97 2.00 2.00 2.00 2.00 2.00Pakistan 7.50 9.00 9.00 9.50 12.00 14.00 12.50 13.50 12.00 12.00Qatar 4.95 4.40 5.15 4.00 2.00 1.50 1.50 0.75 0.75 0.75Saudi Arabia 2.25 4.25 4.70 4.00 1.50 0.25 0.25 0.25 0.25 0.25Tunisia 5.00 5.00 5.25 5.25 5.25 4.50 4.50 3.50 3.50 3.50UAE 2.95 4.70 4.75 4.25 1.50 1.00 1.00 1.00 1.00 1.00

Source: MENA Central banks, HSBC forecasts. Fiscal year, ending 30 June

Exchange rates & interest rates


30/50

29

Macro


Q2 2012

abc

Country outlooks


31/50

30

Macro


Q2 2012

abc

Money isnt everything

May 10 will see Algerias secular government

facing its biggest challenge in two decades as

seven Islamist parties, led by the Green Alliance,

contest parliamentary elections. Although activists

maintain that electoral reforms were superficial,

trends elsewhere in the region, as well as

historical example, suggest that the Islamist

parties should do better this time around.

This would not necessarily mean dramatic policy

shifts: the FLN and RNDs support networks are

so established that they are likely to retain a

strong presence in government. But the

withdrawal of the Movement of Society for Peace

(MSP) from the ruling coalition to stand with the

Green Alliance has created a significant

opposition challenge, and the next government is

likely to be more fragmented than the current one.

A relatively strong showing for Islamist parties

could see Algeria in a similar position to

Morocco, with pre-emptive democratic reforms

reducing the risk of more turbulent politicalchange. Disappointment or perceptions of

electoral fraud could lead to some protests, but

memories of the decade-long civil war should be

sufficient to prevent history from repeating itself.

Whoever is in government faces the challenge of

turning Algerias wealth into jobs for its young

population. For now, the focus seems to be on

saving, rather than investing. Strong oil revenues

allowed the Banque dAlgerie to add USD20bn to

its reserves in 2011, and the government to pay

down a further USD1bn of its debt.

There is little evidence, though, that this wealth is

feeding through into growth and job creation.

Growth in government spending is largely in

recurrent outlays, which were up nearly 40% y-o-

y in 2011, as opposed to investment, which rose

only 3% (against 5% inflation). Industrial

production also looks sluggish and private sector

credit accounts for just 13% of GDP. The opening

of the (tiny and illiquid) Algiers Stock Exchange

to foreign investors in March 2012 is a good start,

but in general, capital markets are nascent. We

also have some concerns about inflation, which

spiked to 7.5% y-o-y in January higher than the

levels which brought protesters out into the streets

in the same month of 2011.

Algeria

Key data and forecasts

2006 2007 2008 2009 2010 2011 2012f 2013f

GDP (% y-o-y) 2.8 3.8 3.6 2.7 4.8 4.4 4.6 3.5Current account (% GDP) 25.0 23.0 20.5 1.0 14.3 9.6 13.0 8.9Budget Balance (% GDP) 13.9 6.2 9.4 -5.7 -1.1 3.1 0.5 -0.7Trade Balance (% GDP) 27.9 24.2 22.3 4.1 5.3 13.0 16.4 12.5CPI (% end year) 3.7 4.9 5.7 6.0 2.7 4.0 3.5 4.3Public Debt (% GDP) 23.6 12.5 8.2 10.4 9.8 7.9 8.2 9.7

External Debt (% GDP) 5.5 3.6 3.0 4.1 3.8 3.4 3.5 3.8Policy rate (% end year) 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0USD/DZD (end year) 71.2 66.8 71.2 72.7 74.9 76.1 75.8 75.7EUR/DZD (end year) 92.5 96.1 97.1 100.8 98.3 98.0 99.1 99.6

Source: Algeria Central Bank, Ministry of Finance, IMF IFS, Office of National Statistics, HSBC estimates and forecasts


32/50

31

Macro


Q2 2012

abc

Holding up, not bouncing back

Full year growth numbers suggest the Bahraini

economy held up in 2011, with real GDP

expanding by 2.2%. The main sectors hit by the

political unrest were real estate (-5%),

construction (-3%) and hotels and restaurants (-

13%). However, the oil sector was up 3%, and

manufacturing (+4%) and finance (+3%) also put

in good performances.

Private sector credit also picked up quite

substantially in the second half of 2011, and

although it has dropped off somewhat more

recently, the y-o-y rate of 15% in January is still

remarkably robust. Deposit growth stood at 10% y-

o-y in the same month again an indication of a

relatively resilient banking sector performance.

Despite this, and despite the fact that we see a

small pick-up in growth this year, Bahrain will

still have the lowest rate of growth in the GCC in

2012, in our view. Political turmoil, which sent

growth negative in 1Q11, has resumed in 1Q12,

and will weigh on investor and consumerconfidence at least through the first half of the

year. While protests on the anniversary of the

beginning of last years unrest proved quieter than

anticipated, the pace has picked up since then,

with several large scale rallies, ongoing clashesand at least three deaths. Dialogue between the

government and the official opposition (Islamist

political society al-Wefaq) has resumed, but it is

unclear that the former is prepared to make the

kind of concessions protesters are demanding.

Moreover, a recent Reuters report points to a

growing rift between the al-Wefaq leadership and

many of the protesters, suggesting that even if an

agreement is reached with the government, the

unrest could continue. Already, the groupsleaders calls not to escalate rallies into violence

appear to be going unheeded.

One positive for Bahrains embattled government

this year will be higher oil prices. However, even

assuming an average price of USD120/bbl, we

think Bahrain will manage only to balance its

budget, not return to surplus. That said, we have

few worries about Bahrains creditworthiness;

ultimately, promised GCC funding would likely

materialise should the public finance situation

worsen markedly.

Bahrain


2006 2007 2008 2009 2010 2011 2012f 2013f

GDP (% y-o-y) 6.7 8.4 6.3 3.1 4.5 2.2 2.5 3.5Current account (% GDP) 13.8 15.7 9.4 6.3 6.3 6.6 8.9 5.3Budget Balance (% GDP) 4.7 3.1 6.6 -6.0 -5.6 -2.5 -0.1 -3.5Trade Balance (% GDP) 27.5 14.7 13.9 11.5 11.2 22.6 25.5 22.9CPI (% end year) 2.1 4.1 5.1 1.6 1.0 1.0 2.5 3.0Public Debt (% GDP) 33.0 32.0 33.0 46.2 54.6 38.3 38.6 40.2

External debt (% GDP) 50.6 49.6 46.9 53.5 48.1 41.4 40.7 42.4Policy rate (% end year) NA 4.00 0.75 0.50 0.50 0.50 0.50 0.50USD/BHD (end year) 0.376 0.376 0.376 0.376 0.376 0.376 0.376 0.376EUR/BHD (end year) 0.496 0.508 0.526 0.538 0.508 0.534 0.541 0.545

Source: Bahrain Central Bank, Ministry of Finance, Bahrain Central Informatics Organisation, HSBC estimates and forecasts


33/50

32

Macro


Q2 2012

abc

End of the beginning

Egypts post-Mubarak political process continues

to make material progress. Parliamentary

elections were completed on schedule in February

2012. They were accompanied by few allegations

of fraud, delivering Egypt its most credible

legislature in a generation. The elections have

paved the way for the rewriting of the

constitution, and presidential elections in late May

2012. This will be followed by the appointment of

a new, permanent government, opening the way

for more effective policymaking in the second

half of the year.

The ambiguous balance of power between

Egypts military and emergent democratic

institutions could lead to strains, but we are

encouraged by the readiness both sides have

shown to compromise. Some may still view the

emergence of the Muslim Brotherhood as leaders

of the new political process with suspicion, but

most have been reassured by the pragmatic policy

agenda and strong support for the private sectorthat the Islamist movement has outlined.

Nevertheless, enormous challenges remain.

Economic activity remains very weak, with sharp

falls in investment and exports and stagnantconsumption keeping growth low and driving

unemployment upward. More acutely, the central

banks decision to protect the value of the

Egyptian pound has cost it more than 60% of its

reserves, which stood at just three months of

import cover at the end of February. Interest rates

also remain very high as a consequence of the

governments heavy funding requirement which

has crowded the private sector out of the credit

market and pushed up the cost of existing funds.

We expect the IMF to deliver some USD3bn in

financial support in the near term and look for

others to follow through on pledges they made in

the aftermath of the revolution. Even with this

backing, we expect to see the currency weaken

significantly and the fiscal deficit remain wide.

Without it, however, Egypt will likely find its

funding needs very difficult to meet from its

remaining domestic resources, increasing the risk

of a painful and disorderly economic adjustment.


2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12f 2012/13f

GDP (% y-o-y) 6.8 7.1 7.2 4.7 5.1 1.8 1.8 3.7Current account (% GDP) 1.6 1.7 0.5 -2.4 -2.1 -1.2 -2.0 -2.6Budget Balance (% GDP) -8.2 -7.3 -6.8 -6.9 -8.5 -9.4 -11.0 -11.3Trade Balance (% GDP) -11.2 -12.5 -14.4 -13.4 -12.0 -10.0 -11.0 -13.2Core CPI (% end year) 6.3 6.3 20.7 7.9 6.7 8.9 8.5 7.2Headline CPI (%, end year) 7.3 8.5 20.2 10.0 10.7 11.8 9.5 10.0Public Debt (% GDP) 108.6 98.4 87.0 88.3 89.8 84.0 87.3 89.3

External debt (% GDP) 27.5 22.9 20.8 16.8 16.1 14.7 16.3 17.0Policy rate (% end year) 9.0 9.0 11.5 8.5 8.5 8.5 9.5 9.5USD/EGP (end year) 5.76 5.69 5.33 5.59 5.70 5.97 6.25 6.60EUR/EGP (end year) 7.36 7.40 8.40 7.85 6.95 7.46 8.75 9.24

Source: Egypt Central Bank, Ministry of Finance, CAPMAS, HSBC estimates and forecasts. Egypt fiscal 2011/2012 = Calendar 2012

Egypt


34/50

33

Macro


Q2 2012

abc

So rich and yet so poor

Iraq has long been a political risk story, but we are

launching quarterly coverage at a time of

exceptionally challenging circumstances. Betweenthe destabilisation of Syria and the tightening

squeeze on Iran, the situation has worsened

substantially for Iraq. Locally, the departure of US

troops in December 2011 has coincided with a

perceived political marginalisation of the Sunni

community, blamed in part for the uptick in

violence in the first quarter of 2012.

Political risk has stood in the way of investment

since the 2003 conflict, with FDI inflows,

particularly outside of Kurdistan, among the

lowest in the region. As a consequence, Iraq,

despite having the second highest level of oil

production amongst the 14 countries we cover,

ranks 9th in terms of 2011 GDP per capita

beneath Lebanon and Algeria according to our

estimates. Non-oil exports account for less than

1% of GDP, and government spending growth

particularly in the investment category has

significantly underperformed revenue growth.

Of course, the silver lining of the uptick in

geopolitical risk is that both oil prices and

production for Iraq are on the rise: a Reuters

report from March 5 quoted Deputy Prime

Minister Hussein al-Shahristani as saying that

Iraqi oil production has exceeded 3mn b/d for the

first time since 1979. We expect output to

continue to rise, bringing in over USD90bn in

2012, and leaving a comfortable current account

and fiscal surplus.

Even if OPEC did shift into hawkish mode, which

looks unlikely in the present climate, Iraq remains

exempt from their quotas, meaning export

volumes can continue to rise. Indeed, risks to our

forecasts are to the upside if the law on oil

revenue allocation is finally passed, or additional

sweeteners are provided to global oil majors

looking to invest in the southern fields. That said,revenues may be rising, but Iraqs breakeven oil

price is rising too: we estimate it needs an oil

price of USD106/b to balance its budget in 2012.

The other positive is, of course, the Kurdistan

story. Political stability and a strong business

climate have paid dividends for the northern

region, but it remains subject to the unpredictable

legislative environment in Baghdad. Overall, the

country will continue to perform below potential if

the political climate constrains progress on reform,and deters investment. What growth we see in

2012-13 will be driven largely by the oil sector.


2006 2007 2008 2009 2010e 2011f 2012f 2013f

GDP (% y-o-y) 10.2 1.4 6.6 9.3 7.3 5.6 4.1 5.8Current account (% GDP) 1.8 21.9 21.4 -1.0 -0.2 10.5 12.2 5.0Budget Balance (% GDP) -1.6 8.8 3.9 -12.4 -7.9 0.8 4.0 -3.1Trade Balance (% GDP) 15.1 21.9 21.2 0.8 5.3 15.5 17.2 10.4CPI (% end year) 53.2 30.8 2.7 -2.8 6.0 5.0 5.0 5.0Public Debt (% GDP) 0.0 99.9 93.9 93.3 95.5 97.8 99.9 101.3

External debt (% GDP) 142.5 111.2 72.6 78.0 64.5 53.0 46.3 44.6Policy rate (% end year) 16.0 20.0 15.0 7.0 6.0 6.0 6.0 5.5USD/IQD (end year) 1391 1216 1172 1170 1170 1165 1150 1135EUR/IQD (end year) 1836 1642 1641 1673 1580 1654 1656 1646

Source: Iraq Central Bank, Ministry of Finance, Iraq Central Organization of Statistics & Information Technology (COSIT), HSBC estimates and forecasts

Iraq


35/50

34

Macro


Q2 2012

abc

Depressed

Jordan continues to struggle against the impact of

slowing tourist arrivals, higher oil prices and a

difficult political environment. We still do not see

it as a regime under threat: small-scale rallies

have continued, but even on the anniversary of the

protest movement March 24 the number of

attendees was only in the hundreds. Rather, it is a

story of stagnation. Prime Minister Awn

Khasawnehs new government has now been in

power since October 2011, but there has been

little in the way of political or economic reform.

What growth we are seeing appears to be

externally driven: exports were up 13% in 2011

(6% in real terms), which corresponds with some

good numbers on the GDP front: the mining and

quarrying sector was up 14% y-o-y in real terms

in 3Q11, while manufacturing rose 4% (driving an

overall GDP reading of 2.6% in 3Q11). However,

as well as being vulnerable to a soft global

demand climate, this export growth was also

dwarfed by a 30% increase in imports. Moreover,

tourist arrivals were down 22% in 2011.

FDI inflows (USD0.8bn in the first three quarters

of 2011) and foreign grants (USD1.2bn) mitigated

against a severe worsening of the balance ofpayments, but there were clear signs of stress.

Reserves were down USD2bn (11%) y-o-y in

December 2011, and were still falling in January.

In addition, the Central Bank of Jordan raised

rates by 50bps on February 6, in an apparent bid

to shore up the currency. (Inflation was, and is,

under control).

On the domestic front, the picture is not much

better. Public finances are tight. Full year data are

not available but annualising January-November

numbers suggests a deficit of 11.5% of GDP in

2011 (excluding grants). Jordan recently raised

the price of gas, in response to the shortages

following attacks on the Egyptian pipeline a

sign of a more conservative fiscal policy which

we expect to persist: the country also breached its

own debt ceiling in 2011. This, alongside high

unemployment and slowing credit growth,

suggests significant constraints on domestic

demand going forward.


2006 2007 2008 2009 2010 2011 2012f 2013f

GDP (% y-o-y) 8.0 7.2 6.6 2.1 3.4 2.7 2.3 3.4Current account (% GDP) -13.1 -18.9 -10.3 -5.3 -5.4 -20.4 -19.8 -16.7Budget Balance (% GDP) -8.0 -8.9 -10.1 -12.2 -8.8 -11.5 -11.7 -11.7Trade Balance (% GDP) -38.3 -42.3 -36.4 -29.6 -29.4 -42.6 -41.7 -38.7CPI (% end year) 3.4 7.1 13.1 -0.5 6.1 4.2 4.0 3.0Public Debt (% GDP) 86.1 81.8 66.9 72.5 75.1 78.1 80.9 83.2External debt (% GDP) 111.1 113.2 90.9 72.6 72.9 70.7 73.0 73.5Policy rate (% end year) 7.50 7.00 6.25 4.75 4.25 4.50 4.50 4.50USD/JOD (end year) 0.709 0.709 0.709 0.709 0.709 0.709 0.709 0.709EUR/JOD (end year) 0.936 0.957 0.993 1.014 0.957 1.007 1.021 1.028

Source:Jordan Central Bank, Ministry of Finance, Jordan Department of Statistics, HSBC estimates and forecasts

Jordan


36/50

35

Macro


Q2 2012

abc

New parliament, old politics

Elections in February brought 26 new faces to

power a substantial proportion of the 50 seats in

parliament. Many of these were Islamist in

leaning, emphasising that the Gulf is not immune

to political trends seen elsewhere in the MENA

region (particularly since the Arab Spring).

However, we do not expect this to translate into a

change in the policymaking environment. The

opposition took just one seat in the cabinet

(appointed by the emir), suggesting that

longstanding tensions between the legislative and

the executive will continue. Corruption will remain

high on the parliamentary agenda, and religious

issues may also gain some airtime, albeit without

making a major impact on policy in all likelihood.

One thing the politicians did manage to agree on

was a 25% wage rise for public sector workers (and

a 12.5% increase for pensioners), announced in

March 2012, following large scale strikes, most

recently by Kuwait Airways staff and customs

officials. The increase follows a number of payrises and grants announced last year in the wake of

protests, to the point where Finance Minister

Mustapha al-Shamali warned in November 2011

that salaries now accounted for 85% of budgeted

oil revenues. The central bank governor alsoresigned after 25 years in the post back in February,

claiming that government spending policies were

preventing the bank from doing its job.

We, too, have concerns about spending, not only

from a fiscal sustainability point of view, but also

in terms of its impact on the private sector. If

public sector wages have to be replicated by the

private sector, this could not only hit firms at the

margins, it could also drive consumer prices up.

Indeed, there is no real sign that higher oil prices

and government spending are trickling down to

the private sector. Bank credit to non-government

borrowers rose just 2.6% over 2011, below the

rate of inflation (3.1%). The stock market is up

around 7% year to date, but this is a smaller rise

than that seen in the UAE and Saudi Arabia. All

in all, we see high oil production and prices

driving growth this year, while the private sector

continues to struggle in a difficult business and

political environment.

Kuwait


2006 2007 2008 2009 2010 2011 2012f 2013f

GDP (% y-o-y) 5.2 4.4 4.4 -1.2 3.3 4.2 3.4 3.9Current account (% GDP) 43.2 34.9 40.0 22.5 23.2 30.3 32.6 27.6Budget Balance (% GDP) 52.0 33.6 38.4 11.2 17.8 20.3 23.7 21.6Trade Balance (% GDP) 38.2 35.9 42.4 26.8 30.8 35.2 37.2 32.6CPI (% end year) 3.7 7.5 9.0 2.1 6.0 3.1 4.9 3.8Public Debt (% GDP) 12.4 16.2 14.4 16.2 12.7 11.0 9.6 9.9

External debt (% GDP) 30.4 50.2 41.3 45.9 41.2 33.3 29.5 29.4Policy rate (% end year) 6.25 6.25 3.75 3.00 2.50 2.50 2.50 2.50USD/KWD (end year) 0.289 0.273 0.276 0.287 0.281 0.275 0.275 0.275EUR/KWD (end year) 0.382 0.369 0.386 0.410 0.380 0.391 0.396 0.399

Source: Kuwait Central Bank, Ministry of Finance, Kuwait Central Statistics Office, HSBC estimates and forecasts


37/50

36

Macro


Q2 2012

abc

Not like the rest

Lebanon continues to stand apart from the rest of

the region: its economy boomed during the global

slowdown, and entered a cyclical decline as its

neighbours began to recover. As significant protests

were mounted all around it in 1Q11, Lebanons own

domestic political scene remained stable, and as its

neighbours struggle under the weight of political

risk, higher oil prices and a downturn in global

demand, Lebanon looks relatively resilient.

That is not to say that Lebanon has not been hit by

the Arab Spring effect. Tourist arrivals were down

16% y-o-y in 2011, construction permits were flat,

and the USD2bn balance of payments deficit

suggests that limited financial flows were

forthcoming to offset the loss in service export

revenues and the gaping trade deficit in 2011.

However, in spite of all this, Lebanon continues to

show relative strength. It is the only oil importer in

the region to have increased its reserves in 2011 (by

USD2.2bn to USD31bn, or the equivalent of 18.5

months of goods import cover). At the same time,

deposits in the banking sector were up USD10bn,and credit in LBP terms rose 24%.

In part this reflects relatively high levels of risk

tolerance in a country which has been politically

unstable for the best part of the last three decades.This confidence continues to translate not only into

private consumption, but also into remittances from

the Diaspora, which keep the banking system liquid,

allowing it in turn to support what remains a

precarious public finance position.

Indeed, despite some improvement Lebanon is

also the only MENA oil importer to have reduced

its budget deficit in 2011 public debt is the

countrys single biggest structural weakness.

Though down on its peak, at just below 140% of

GDP, Lebanons debt stock is one of the highest in

the world and continues to rise in absolute terms.

While a still-confident expat community and stable

exchange rate make this manageable for now, it

does expose Lebanon to a downturn in risk appetite,

particularly in the event of the troubles in Syria

spilling over the border. Any international sanctions

on Syrian money deposited abroad could also affect

the Lebanese banking sector.

Lebanon


2006 2007 2008 2009 2010 2011 2012f 2013f

GDP (% y-o-y) 0.9 8.1 9.3 8.9 7.1 1.7 2.3 3.9Current account (% GDP) -6.7 -5.2 -14.3 -22.7 -21.0 -25.1 -20.9 -15.3Budget Balance (% GDP) -13.5 -10.2 -9.7 -8.5 -7.5 -5.2 -5.1 -5.0Trade Balance (% GDP) -27.4 -31.4 -37.3 -36.5 -35.7 -37.4 -37.4 -35.8CPI (% end year) 5.6 9.3 5.5 3.4 4.5 4.0 3.5 3.5Public Debt (% GDP) 179.9 167.8 156.4 146.4 135.5 136.8 137.4 135.7

External debt (% GDP) 137.4 127.1 112.3 100.9 91.1 89.2 85.2 84.3Policy rate (% end year) 12.0 12.0 12.0 10.0 10.0 10.0 10.0 10.0USD/LBP (end year) 1508 1508 1508 1508 1508 1508 1508 1508EUR/LBP (end year) 1990 2035 2111 2156 2035 2141 2171 2186

Source: Lebanon Central Bank, Ministry of Finance, Lebanon Statistics Department, HSBC estimates and forecasts


38/50

37

Macro


Q2 2012

abc

Northern Star

Moroccos economy grew by 4.8% in 2011, a

remarkably resilient performance given the impact

of the Arab Spring, as well as the travails of

Moroccos biggest trading partners in Europe. The

rate is likely the highest in North Africa for 2011,

and reaffirms our positive view on Morocco as a

haven of relative political and economic stability

in what has recently been an exceptionally

troubled region.

Indeed, the statement published by the Haut

Commissariat au Plan cites real growth of 7% inprivate consumption: a pace of expansion it

attributes to the wage rises announced in 1Q11, as

well as a 7% increase in remittances from

Moroccans abroad and a 10% increase in consumer

credit all of which occurred against a backdrop of

just 1% inflation. Exports grew by 8%, while gross

fixed capital formation was up 5%.

As we have argued before, despite our belief in

Moroccos fundamental strengths, it is hard to see

this degree of resilience continuing into 2012. On the

plus side, the political situation has stabilised there

have been no large scale political protests in 2012.

Despite the Islamist Parti de la Justice et

Developpement (PJD) taking several key

government roles, including that of prime minister,there has been no suggestion of a more conservative

social policy which could harm the tourism industry.

Instead, Premier Abdelilah Benkirame has said his

focus is on reducing unemployment to 8%, by

targeting 5.5% annual GDP growth.

We, and the central bank, are less optimistic. The

central bank cut rates by 25bps on March 27,

predicting growth of 2-3%, in line with our own

forecast. We are also concerned that strong

growth in 2011 has not improved Moroccosunemployment rate, which stood at 9.1% in 3Q11

unchanged from end-2010 (with the rate among

females having risen to 11%).

Meanwhile, the budget deficit widened to 6.4% of

GDP in 2011, and will narrow only slightly in o

It's Not About the Money HSBC Middle East Report

Documents

Transcript of It's Not About the Money HSBC Middle East Report