18 March, 2009 - National Bank of Kuwait

GCC Brief
18 March 2009
Stock market data:
850
800
750
700
650
600
550
500
450
400
350
300
250
GCC MSCI stock market index, 2008-2009
Jan Mar May Jul Sep Nov Jan Mar
Oil market data:
160
140
120
100
80
60
40
20
Crude oil prices, 2008-2009, $pb
WTI
OPEC
Jan Mar May Jul Sep Nov Jan Mar
850
800
750
700
650
600
550
500
450
400
350
300
250
160
140
120
100
IEA 2009 forecasts (mbd):
World oil dd = 84.4 (-1.5%)
Non-OPEC supply = 50.6 (+0.0%)
Latest GCC monetary data:
(17 th March unless otherwise stated)
Bahrain:
Kuwait:
M3 16.4 %y/y (Jan)
Repo rate 2.75 %
$1=BHD 0.377
M2 14.0 %y/y (Jan)
Disc. rate 3.75 %
$1=KWD 0.294
80
60
40
20
Commentary
UAE economy: improvement in
2H09 not guaranteed
by Daniel Kaye, Senior Economist, +965 2259 5363
danielk@nbk.com
• Analysts’ forecasts for real growth in the UAE economy in 2009 have
converged around the 0-2% range recently, factoring-in a recovery in
economic performance in H2 09. But a meaningful improvement is by
no means guaranteed.
• Even if financial markets stabilize, a combination of subdued asset
prices, a large debt overhang and rising risk aversion is likely to bear
down on private sector activity for some time to come. Government
spending is likely to be the only major source of support.
• Accordingly, the risks surrounding the consensus view of economic
growth this year remain stacked to the downside. We expect to
downgrade our forecast for GDP over coming weeks.
Charts
Focus on…GCC banks’ assets
Assets of GCC commercial banks, Jan 2004 - Dec 2008
1,400
40
1,300 Level (LHS, $bn)
35
1,200 %y/y (RHS)
1,100
30
1,000
25
900
20
800
15
700
600
10
500
5
400
0
2004 2005 2006 2007 2008
More>>
More>>
GCC banks’ balance
sheets more or less
stagnated towards the
end of 2008 after a
period of rapid
expansion. Early data
show significant
deleveraging in some
countries in 2009.
Oman:
M2 20.7 %y/y (Jan)
Repo rate 2.00 %
$1=OMR 0.385
N.B. Incorporates estimates for recent data for the UAE and Qatar.
Source: ThomsonReuters Ecowin / national central banks
Qatar:
M3 35.8 %y/y (Oct)
Lend. rate 5.50 %
$1=QAR 3.642
Data
Financial and economic data
More>>
Saudi
Arabia:
M3 13.9 %y/y (Jan)
Repo rate 2.00 %
$1=SAR 3.751
UAE:
M3 34.4 %y/y (Sep)
Repo rate 1.00 %
$1=AED 3.673
NBK Economic Research
Abdullah Al-Ahmed Street, P.O Box 95, Safat 13001,
Kuwait City, Kuwait
Tel: +965 2259 5500 Fax: +965 2224 6973
www.nbk.com

GCC Brief | 18 March 2009
UAE economy: improvement in 2H09 not guaranteed
The news flow emerging from the UAE economy
points to continued weakness, but a consensus
amongst analysts seems to have emerged that
economic growth will be much reduced, though
positive this year. Chart 1 shows that institutions’
latest forecasts for real economic growth in 2009
appear to have converged around the 0-2% level
(including our own of 1%, made in December last
year), well down on estimates for the past couple
of years, but by no means a disaster compared to
the deep falls in output expected in other parts of
the world. Indeed, much of this forecast ‘weakness’
reflects a projected fall in oil output as a result of
big cuts in OPEC production quotas, so the
performance of the non-oil economy is implicitly
assumed to remain considerably more robust.
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
Chart 1: UAE real GDP, %y/y
Source: ThomsonReuters Ecowin / NBK
N.B. Uses NBK estimate for 2008
Forecasts for 2009
2006
2007
2008e
Moody's
EIU
NBK
HSBC
StanCht
Samba
EFGH
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
Are such benign forecasts still realistic? Much of
this story is predicated on an improvement in
economic conditions in the second half of this year,
primarily as a result of two key factors: a return to
‘normality’ in the country’s battered financial
markets and the boost to activity delivered by a
major government fiscal stimulus, a large chunk of
which has already been outlined by the Federal and
Dubai governments. (See below.) Our view is that
although both of these events may well occur, there
is no guarantee that they will translate into a
meaningful recovery in activity in the real economy,
much less a return to the buoyant conditions of the
recent past. Accordingly, expectations of even
modest growth in the real economy this year may
turn out to be disappointed.
Stabilizing financial markets
On the positive side, the UAE policy authorities
have spent considerable effort over the past few
months attempting to stabilize the banking and
financial sectors – surely a precursor to reestablishing
confidence amongst the Emirate’s
businesses and consumers. That support has come
in three forms. Firstly, they have attempted to ease
the severe liquidity shortage in the banking system
caused by a freezing of the interbank market and a
dramatic outflow of funds from abroad. A variety of
measures have been used:
i) The Central Bank of the UAE’s (CBUAE)
benchmark repo rate has been cut from 2% to
1% between September 2008 and January
2009, after starting last year at 4.25%.
ii) The introduction of a Liquidity Support Facility
(LSF) from the CBUAE in September 2008 - a
$14bn emergency lending facility to enable
banks to cover their existing funding
commitments.
iii) The announcement by the Federal government
in October that it would place $19bn of 2-
year deposits at banks. Some $14bn of these
funds are said to have been deposited so far.
iv) The CBUAE’s introduction of a US dollar swap
facility in December aimed at reducing dirham
liquidity shortages. In January, it announced
that it had provided banks with dirham funds
worth around $1bn under the scheme.
Secondly, local and federal governments have taken
more direct action to shore-up confidence in the
banking system and to guard against systemic
failure. The federal government moved in October
to guarantee deposits in all local banks and foreign
banks with significant operations in the country,
thereby reducing the chances of panic-induced bank
runs. More recently, the government of Abu Dhabi
injected some $4.4bn of capital into five local banks
to protect against possible future loan defaults.
Finally, steps have been taken to calm investor
nerves surrounding default risk of governmentrelated
institutions. In February, the Dubai
government announced that the CBUAE would
purchase $10bn of a proposed $20bn government
bond program this year, with the funds expected to
be partly used to help state-backed corporates rollover
their maturing debt. It is thought that – if
capital market conditions remain difficult – the
2

GCC Brief | 18 March 2009
central bank could subscribe to the second tranche
of the issue later in the year.
Helpful though these measures undoubtedly are,
they are very far from setting the stage for a
wholesale turnaround in financial conditions in 2H
09. On a variety of measures, stress level indicators
in the financial system remain elevated. For a start,
despite liquidity injections and indications of statelevel
support, the recovery in interbank lending
markets remains tentative at best. As chart 2
shows, although they have fallen significantly since
the beginning of the year, interbank rates remain
some 200 bps above the official repo rate – whose
levels they tracked quite closely before the crisis
began. They also remain well above levels seen in
other GCC countries: in Saudi Arabia, for example,
the 3-month rate is now at just 1.1%, even though
the official lending rate is higher. Not only does this
make the recycling of funds around the banking
system more difficult, but it also highlights a
continuing lack of confidence amongst some
lending institutions in the country.
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Chart 2: UAE interest rates, %
1 month interbank
3 month interbank
Repo rate
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09
Source: ThomsonReuters Ecowin
Secondly, even if banks’ desire to expand their
lending activities returns, it is unclear that they will
be able to do so. The withdrawal of overseas
funding has left local banks with a major funding
gap, pushing them further in breach of the
prescribed loan-to-deposit ratio (LDR) of 100%. Last
week, CBUAE governor Sultan bin Nasser Al
Suwaidi announced that the funding gap was some
$30bn. One way out of this would be a temporary
increase in the LDR. But more likely is an injection
of cash by the federal government. Even this by
itself may not be enough to stimulate lending if
banks choose to hoard the extra deposits rather
than lend them out.
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Finally, the measures taken so far may have lent
support to the banking sector, but they have done
little to stabilize other asset markets to which banks
and borrowers are heavily exposed. After falling a
colossal 72% in 2008, the Dubai stock market has
fallen by a further 7% so far in 2009 (though the
Abu Dhabi market is up by 1% this year). Moreover,
property markets show few signs of recovery.
According to the Mazaya property index, residential
real estate prices fell 20% in the UAE in the four
months to November 2008. Other reports suggest
that the fall has been larger. Until these markets
stabilize, it is difficult to see banks feeling confident
enough to restart lending in a significant way.
Private sector demand for loans is likely to be weak
for similar reasons. Accordingly, even if the acute
pressures seen in financial markets ease off later
this year, it seems likely that bank lending will
remain subdued for some time to come.
Budget boost?
This leaves hopes for a recovery in output this year
resting largely at the public sector’s door. Although
both the federal and Dubai governments have
announced fairly sizeable increases in planned
expenditures for 2009 (21% and 9%, respectively),
these numbers are down on the spending increases
planned for the previous year (24% and 31%,
respectively) – and in the case of the Dubai budget,
well down. In other words, the boost to the macro
economy from higher public spending in 2009 could
turn out to be smaller than that provided in 2008.
As such, while the government may be doing what
it can on the fiscal front (there are surely limits to
how large a fiscal stimulus in any one year can be),
it seems unlikely that it will be able to push overall
economic growth back up to recent levels – or
indeed anything close.
Overall therefore, the absence of a sustained
recovery in either bank lending or asset prices
combined with weakness in domestic demand
seems to us to leave the risks surrounding the
consensus view of economic growth this year as
stacked to the downside. We expect to downgrade
our forecast for GDP over the next few weeks.
While (thanks to their huge reserves) GCC
economies remain better positioned to weather the
economic storm than most others, the downturn
highlights just how exposed to cyclical forces the
private sector often is – no matter how impressive
the scale of government support turns out to be. □
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GCC Brief | 18 March 2009
Focus on…GCC bank assets
After a period of rapid balance sheet expansion, GCC banks are now witnessing a period
of deleveraging…
280
260
240
220
200
180
160
140
120
100
80
Bahrain
(Commercial bank assets)
Level (LHS, $bn)
%y/y (RHS)
2004 2005 2006 2007 2008
40
35
30
25
20
15
10
5
0
160
150
140
130
120
110
100
90
80
70
60
Kuwait
(Commercial bank assets)
Level (LHS, $bn)
%y/y (RHS)
2004 2005 2006 2007 2008 2009
50
40
30
20
10
0
-10
40
35
30
25
20
15
10
Oman
(Commercial bank assets)
Level (LHS, $bn)
%y/y (RHS)
2004 2005 2006 2007 2008 2009
50
45
40
35
30
25
20
15
10
5
0
120
100
80
60
40
20
0
Qatar
(Commercial bank assets)
Level (LHS, $bn)
%y/y (RHS)
2004 2005 2006 2007 2008 2009
N.B. Includes estimates from September 2008 based upon
central bank indicators.
90
80
70
60
50
40
30
20
10
0
Saudi Arabia
(Commercial bank assets)
UAE
(Commercial bank assets)
400
350
300
250
200
150
Level (LHS, $bn)
%y/y (RHS)
35
30
25
20
15
10
5
400
350
300
250
200
150
Level (LHS, $bn)
%y/y (RHS)
60
50
40
30
20
10
100
2004 2005 2006 2007 2008 2009
0
100
2004 2005 2006 2007 2008 2009
N.B. Includes estimates from October 2008 based upon
central bank indicators.
0
Source: ThomsonReuters Ecowin / national central banks
4

GCC Brief | 18 March 2009
Weekly GCC financial market data
Unit Current 1-Week Ago 1-Month Ago 3-Month Ago 6-Month Ago 1-Year Ago
Bahrain
Exchange Rate 1$ = BHD 0.377 0.377 0.377 0.377 0.377 0.377
Exchange Rate 1€ = BHD 0.491 0.484 0.473 0.536 0.541 0.589
3-month BHIBOR % 2.24 2.25 2.25 3.52 3.18 2.95
1-year BHIBOR % 2.76 2.76 2.82 3.67 3.46 2.84
Repo Rate % 2.75 2.75 2.75 2.75 5.25 5.25
SW Deposit Rate % 0.75 0.75 0.75 0.75 2.25 3.00
Stock Exchange Index (MSCI) Index 365 363 365 594 1001 1273
Kuwait
Exchange Rate 1$ = KWD 0.294 0.296 0.296 0.275 0.267 0.267
Exchange Rate 1€ = KWD 0.383 0.380 0.371 0.391 0.384 0.417
3-month KIBOR % 2.06 2.13 2.75 3.06 4.94 2.00
1-year KIBOR % 2.56 2.63 3.31 3.56 5.38 2.50
Discount Rate % 3.75 3.75 3.75 3.75 5.75 5.75
Repo Rate % 2.00 2.00 2.00 2.00 3.50 3.50
Stock Exchange Index (MSCI) Index 504 500 480 711 964 1241
Oman
Exchange Rate 1$ = OMR 0.385 0.385 0.385 0.385 0.385 0.385
Exchange Rate 1€ = OMR 0.502 0.494 0.483 0.547 0.552 0.602
3-month OMIBOR % 3.72 3.72 3.72 3.72 3.72 3.72
1-year OMIBOR % 4.73 4.73 4.73 4.73 4.73 4.73
3-month CBO CD % 0.60 0.60 N/A 1.14 0.76 N/A
Repo Rate % 2.00 2.00 2.00 5.17 3.47 N/A
Stock Exchange Index (MSCI) Index 582 583 624 795 1132 1498
Qatar
Exchange Rate 1$ = QAR 3.642 3.642 3.642 3.643 3.642 3.640
Exchange Rate 1€ = QAR 4.744 4.673 4.568 5.178 5.223 5.689
Qatari 3-month Depo Rate % 3.14 3.27 2.96 3.62 4.20 -0.30
Qatari 1-year Depo Rate % 3.62 3.72 4.05 3.62 3.22 0.23
Repo Rate % 5.55 5.55 5.55 5.55 5.55 5.55
Deposit Facility % 2.00 2.00 2.00 2.00 2.00 3.50
Lending Facility % 5.50 5.50 5.50 5.50 5.50 5.50
Stock Exchange Index (MSCI) Index 421 412 438 591 797 891
Saudi Arabia
Exchange Rate 1$ = SAR 3.751 3.751 3.751 3.753 3.757 3.751
Exchange Rate 1€ = SAR 4.886 4.813 4.704 5.333 5.387 5.861
3-month SAIBOR % 1.15 1.15 1.15 2.95 4.34 2.87
1-year SAIBOR % 1.81 1.83 1.80 3.49 5.20 2.77
Repo Rate % 2.00 2.00 2.50 4.00 5.50 5.50
Reverse Repo Rate % 0.75 0.75 1.50 2.00 2.00 3.00
Stock Exchange Index (MSCI) Index 255 556 556 304 465 589
UAE
Exchange Rate 1$ = AED 3.673 3.675 3.673 3.674 3.673 3.672
Exchange Rate 1€ = AED 4.785 4.715 4.607 5.221 5.268 5.739
3-month AEIBOR % 3.11 3.23 3.43 4.42 3.58 2.26
1-year AEIBOR % 3.53 3.59 3.77 4.24 3.61 2.46
Repo Rate % 1.00 1.00 1.00 1.00 2.00 3.00
Stock Exchange Index (MSCI) Index 142 144 137 192 396 558
Weekly international financial market data
Unit Current 1-Week Ago 1-Month Ago 3-Month Ago 6-Month Ago 1-Year Ago
WTI Crude Oil Spot Price $ p/b 49.2 43.5 34.9 39.1 97.2 107.9
OPEC Crude Oil Basket (1-day Av.) $ p/b 43.1 42.7 38.1 39.5 89.4 100.1
EUR/USD 1€ = $ 1.303 1.283 1.254 1.421 1.434 1.563
USD/JPY 1$ = ¥ 98.6 97.3 93.8 89.4 105.6 100.0
GBP/USD 1₤ = $ 1.404 1.387 1.422 1.503 1.816 2.008
3-Month USD LIBOR % 1.30 1.25 1.25 1.53 3.20 2.54
3-Month EUR LIBOR % 1.61 1.92 1.92 3.11 5.00 4.66
3-Month GBP LIBOR % 1.81 2.06 2.06 3.01 5.98 5.97
US Fed Fund Target Rate % 0.25 0.25 0.25 0.25 2.00 2.25
US Discount Rate % 0.50 0.50 0.50 0.50 2.25 2.50
US Prime Rate % 3.25 3.25 3.25 3.25 5.00 6.00
GB Prime Rate % 0.50 0.50 1.00 2.00 5.00 5.25
ECB Refinancing Rate % 1.50 1.50 2.00 2.50 4.25 4.00
MSCI GCC Stock Market Index 294 280 306 372 563 718
S&P 500 Index Index 778 721 788 885 1207 1331
Economic data (period average)
Unit 2006 2007 2008e Unit 2006 2007 2008e
Bahrain
Qatar
GDP USD bns 15.8 18.4 22.0 GDP USD bns 56.8 71.0 102.3
GDP %y/y 17.6 16.5 19.2 GDP %y/y 33.7 25.1 44.0
CPI %y/y 2.1 3.3 3.0 CPI %y/y 11.8 13.8 15.1
Current account USD bns 2.2 2.9 4.5 Current account USD bns 9.5 10.4 37.5
Kuwait
Saudi Arabia
GDP USD bns 101.6 112.0 148.7 GDP USD bns 356.2 381.5 490.1
GDP %y/y 25.0 8.0 25.5 GDP %y/y 12.9 7.1 28.5
CPI %y/y 3.0 5.5 10.0 CPI %y/y 2.2 4.1 9.9
Current account USD bns 51.6 47.5 90.0 Current account USD bns 98.9 95.0 178.3
Oman
UAE
GDP USD bns 35.7 40.3 50.3 GDP USD bns 170.1 198.7 257.8
GDP %y/y 15.5 12.9 24.6 GDP %y/y 21.7 16.8 29.8
CPI %y/y 3.4 5.9 12.0 CPI %y/y 9.3 11.1 14.0
Current account USD bns 5.1 1.9 6.2 Current account USD bns 36.0 37.0 64.6
Source: ThomsonReuters Ecowin, official sources, and NBK Economic Research
N.B. Uses NBK estimates for 2008 economic data
5

GCC Brief | 18 March 2009
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Bahrain
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Jeddah 21444, Saudi Arabia
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Iraq
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Sadoon Street, District 102
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Baghdad, Iraq
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+964 1 7188406/7171673
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Egypt
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United Kingdom
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(International) Plc
Head Office
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London W1U 3QJ, UK
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National Bank of Kuwait
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Portman Square Branch
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NBK Investment
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Tel: +44 20 7224 2288
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France
National Bank of Kuwait
(International) Plc
Paris Branch
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Singapore
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United Arab Emirates
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Associates
Qatar
International Bank of Qatar (QSC)
Suhaim bin Hamad Street
P.O. Box 2001
Doha, Qatar
Tel: +974 447 3700
Fax: +974 447 3710
Turkey
Turkish Bank
Valikonagl CAD. 7
Nisantasi 34371
Istanbul, Turkey
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National Bank of Kuwait SAK
New York Branch
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New York, NY 10171
USA
Tel: +1 212 303 9800
Fax: +1 212 319 8269
6