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Interest Rate Monitor. March 24, 2013. Brief Overview. International. MENA Region. Egypt: Central bank raises rates as unsettled political conditions continue. US: FOMC affirms QE; housing sector rebounds; budget deal approved. GCC News Highlights.
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Interest Rate Monitor March 24, 2013
Brief Overview International MENA Region Egypt: Central bank raises rates as unsettled political conditions continue US: FOMC affirms QE; housing sector rebounds; budget deal approved GCC News Highlights Eurozone: All eyes remain focused on whether Cyprus will avoid meltdown GCC interbank rates UK: Fitch warns of downgrade amid higher debt levels and slower recovery Comparative MENA Markets China: Data suggest recovery not losing steam Japan: Trade deficit narrows and Kuroda affirms 2% inflation target for central bank Local Economy Markets overview New and analysis Major Indices: Stocks end week on mildly positive note • Interest Rate Forecasts • US plans to guarantee Eurobond; oil bill down 44% Commodities and Currencies: Euro rallies slightly despite Cyprus uncertainty Central Bank Meeting Calendar Markets overview • Amman Stock Exchange Interest Rate Forecast • Local Debt Monitor The Week Ahead • Prime Lending Rates
US Treasury bond rates • The Fed reaffirmed this week its commitment to its $85 billion asset purchases, indicating that the Fed is not yet ready to tighten; amid downside risks from spending cuts to come into effect this month. • Moreover, fragile global economic recovery; especially with the high uncertainty and weak indicators in the eurozone, is still fueling demand for US treasuries. • The yield on the 10-year Treasury was down 6bp over the week , ending Friday at 1.93%.
FOMC reaffirms QE, not yet ready to tighten • This week’s FOMC meeting did not deliver groundbreaking news, the Federal Reserve maintained its asset purchase program, continuing its pace of $85 billion a month, and the first Fed rate hike is not expected before 2015. • The Fed’s asset purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. • In addition, the Fed reiterated it would keep short-term interest rates pinned near zero until the jobless rate drops to 6.5%, as long as inflation is stable, i.e. inflation does not exceed 2.5%. Most Fed officials don't expect those levels to be met until 2015. • Bernanke mentioned that the Fed may chose to adjust the volume and pace of those purchases in coming months, in response to economic data. Though, further gains in the US labor market are needed before it could consider reducing its monetary easing. • This said, it is also clear that a slowdown in purchases is not imminent and if job growth continues in the coming months, then it would likely trigger a scaling down of the QE programme in the fourth quarter of this year, or earlier if data turn out better than expected.
Fed lowers 2013 growth forecast amid downside risks of the Sequester • The Fed confronts a mixed economic outlook. Growth has picked up after what the Fed described as a "pause" late last year. But officials are worried about the cumulative impact of tax increases and federal government spending cuts (sequester) and continue to see downside risks to economic growth. • New economic projections released by the central bank reflected the Fed's caution at the moment. Fed officials trimmed their forecasts for economic growth in 2013, but predicted Wednesday that unemployment would move a bit lower than previously expected. • The Fed expects the U.S. economy to grow between 2.3% and 2.8% this year, slightly weaker than its prior estimate. Meanwhile, the central bank expects the unemployment rate to fall to between 7.3% to 7.5% by the end of the year.
Housing sector rebound • Signs that the housing market continues to improve increased this week as data released showed that sales of previously owned properties grew last month to the highest level in more than three years, and more people put their properties up for sale. • Existing-home sales increased 0.8% in February from a month earlier to a seasonally adjusted annual rate of 4.98 million, the highest level since November 2009, the National Association of Realtors said Thursday. Sales were 10.2% above the same month a year earlier, the 20th consecutive month of year-over-year gains. • After contracting since last July, the number of homes on the market has started to increase as sales grow and prices recover • While rising inventories were a big economic drag during the recession and real-estate bust, the most recent rise is likely due to more people putting their homes on the market in response to higher prices. • A separate report earlier this week showed that over the past year 1.7 million households regained equity in their homes in 2012, meaning that until recently they owed more on their mortgage than the home was worth. • Many economists believe the housing market will be one of the main drivers of the economy this year as inventories shrink further, prices rise and builders break ground on more projects.
Congress passes funding bill, though debt limit debate still lurks • Congress moved Thursday with remarkably little fuss to pass a major funding bill to keep the government open through September, just two months after Congress voted to temporarily suspend the federal debt limit without an 11th-hour showdown. • The smooth passage of the spending bill defied speculation early this year that it could be held hostage in another budget battle and risk shutting down the government after the current funding measure expired March 27. • The spending bill keeps the government funded through the end of its 2013 fiscal year. It keeps overall spending to the level mandated by the sequester, the $85 billion in cuts that began March 1, despite strenuous efforts by Mr. Obama to replace them. • The bill blunts the impact of the cuts in some areas such as military operations and maintenance, nutrition aid for women and children, and border security, but cuts deeper in other areas to make up for it. • Nevertheless, lurking in just a few months is a new fiscal flashpoint since the US will need to raise its borrowing limit, probably by August. This process, which requires congressional approval, was amicably suspended in February but was deeply fraught in August 2011, risking a dramatic US default on its debt.
Sovereign debt worries heightened, but peripherals showed some resilience • Peripheral eurozone government bonds showed some resilience, in spite of a sell-off at the start of the week, following Cyprus’s bailout debacle. • Spain’s 10-year yield ended the week at 4.84%, down 7bp over the week, while Italy's yield fell 9bp to 4.51%, according to Bloomberg. • On the other hand, the combination of fresh concerns about the eurozone economic outlook and heightened sovereign debt worries helped fuel demand for “safe have” German 10-year bonds. • The bund yield rose 2bp to 1.38% on Friday but was down 7bp over the week.
Will Cyprus avoid meltdown? • Cyprus remained locked in 11th-hour talks with international creditors in a frantic effort to reach a deal to rescue the country from economic collapse before emergency liquidity for its banks dries up early next week. • Cyprus's government has been scrambling to raise the €5.8 billion ($7.5 billion) that it needs to prop up its banks and qualify for a €10 billion bailout from the eurozone and the International Monetary Fund. • A deal on Cyprus's bailout talks must be reached by Sunday evening when eurozone finance ministers will meet in Brussels, EU economics chief Olli Rehn said in a statement Saturday. The finance ministers are scheduled to meet at 5 p.m. GMT Sunday. • Late Saturday, the country's president NicosAnastasiades expressed hope that a deal could be reached soon. • Nicosia has spent much of this week looking for alternatives to a rescue program it had initially agreed with the eurozone and the IMF on March 16. Under the original plan—which was rejected by parliament Tuesday—all large deposits on the island would be taxed by at 9.9% and deposits of less than €100,000 at 6.75%.
Cyprus’s financial system will breakdown if no deal was agreed by Monday evening • A second proposal by the Cypriot government to tap pensions in order to raise the cash required for an international rescue was rejected by the German government. • On Friday, the Parliament in Nicosia adopted two key bills that would allow it to close down Cyprus Popular Bank, its second largest bank, and aggressively curtail the free flow of money on the island in a bid to avoid a meltdown of the country's financial system before Monday evening. • The ECB has threatened to block Emergency Liquidity Assistance (ELA) to the Cypriot banks if a deal is not in place on Monday. The two biggest banks have received EUR9bn in ELA from the Cypriot Central Bank. • The new legislation will allow authorities to restrict noncash transactions, freeze check cashing, limit withdrawals and even convert checking accounts into fixed-term deposits when banks reopen. They have been closed since March 16. • The bank restructuring law would see depositors in Popular Bank, also known as Laiki Bank, lose as much as 40% of their savings above €100,000, Cypriot and European officials said. European and Cypriot officials familiar with the latest plans said they left a funding hole of some €3 billion.
Will the latest plan be enough to cover the gap in funding? • As details of the latest plan emerged late Friday and Saturday, there were signs that the country may be forced to also resolve Bank of Cyprus, its biggest lender. The government in Nicosia was fighting to avert this by proposing an even deeper levy on the lender's uninsured depositors than one demanded earlier by euro-zone partners, according to officials involved in the bailout talks. • Sources said the government in Nicosia had proposed to levy a 20% tax on depositors with more than €100,000 in their accounts in Bank of Cyprus. The government hoped that would enable them to protect the lender, which holds more than one-third of total deposits on the island, with some €28 billion. • But in a call Friday evening, senior European finance-ministry officials expressed doubts that the plan would raise enough money to protect the lender, according to two officials on the call. • Meanwhile, it seems that there is no help for Cyprus from Russia and that Russia is now urging its citizens to take their money out of western banks immediately. • Standard & Poor's (S&P) ratings agency has downgraded Cyprus’s sovereign credit rating by one notch from CCC+ to CCC saying there are "acute problems" in the Cypriot banking sector, and warned the outlook for the rating was negative.
Latest flare-up of the crisis came against a backdrop of growing concerns about the region’s economy • A surprisingly sharp fall in eurozone business activity in March cemented fears the bloc's economy has shrunk in the first quarter of the year, extending a contraction that has already lasted 15 months. • The worsening state of business activity also suggests that eurozone policy makers' hopes for a recovery in the coming months could be misplaced. • The survey was conducted before news of Cyprus’s bailout deal broke, indicating that the final reading which will be released at the start of April will provide an even bleaker picture. • Markit said on Thursday its flash composite purchasing managers' index for the eurozone fell to 46.5 in March from 47.9 in February, putting it further below the threshold of 50 that separates growth from contraction. March's figure was the worst in four months. • Having already contracted since the second quarter of last year, Markit said the latest PMI data suggested the eurozone economy would shrink 0.3% in the current quarter. • Thursday's business surveys suggest weakness also in Germany. The country has in recent months shown signs of recovering more strongly from a slump in late 2012 than many of its neighbors, but Thursday's figures showed the German manufacturing sector shrinking, and the services sector suffering a sharp fall in growth.
Fitch warns of heightened possibility of UK downgrade • The rating agency Fitch has warned that it may downgrade the UK's credit rating in April. • It has put the UK's long-term rating on Credit Watch Negative, which it said showed "a heightened probability of a downgrade". • The agency said it was due to higher-than-expected debt levels and downward revisions to UK growth forecasts. • Last month, Moody's stripped the UK of its top AAA rating, arguing that sluggish growth was making it harder for the government to cut its overspending. • The review follows the Budget this week in which UK growth forecasts for 2013 were halved
UK recovery will be slower and borrowing higher than previously thought • U.K. Treasury chief George Osborne Wednesday unveiled lower growth forecasts and conceded again that the government would have to borrow more than planned, as he presented his annual budget amid criticism of his stewardship of the economy. • Mr. Osborne said he was determined to stick to his strategy of cuts in government spending. Still, amid increasing calls for steps to revive the economy, the he introduced some modest measures aimed at providing a boost, such as help for home buyers. • The budget also contained some tax giveaways (e.g. lowering the corporate tax rate to 20% in April 2015). • The Office for Budget Responsibility on Wednesday lowered its growth forecast for the U.K. for this year and next to 0.6% in 2013 and 1.8% in 2014. Mr. Osborne unveiled the growth figures provided by the office during his budget speech. • The OBR’s forecasts showed UK general government gross debt peaking at 100.8% in the 2016-17 fiscal year. • The government is expected to borrow some £240 billion more over the five-year period ending in April 2016 than had been forecast when Mr. Osborne came to power in 2010.
More flexibility for BoE but inflation target remains • Mr. Osborne also announced changes to the Bank of England's inflation-fighting mandate, a move aimed at paving the way for incoming governor Mark Carney to deploy more of the central bank's formidable firepower to lift the U.K.'s economy out of stagnation. • The new remit fell short of some analysts' expectations for a wholesale overhaul of Britain's monetary-policy regime. • The new remit affirms the inflation target as the policy framework (as it has been since 1997). • The BoE is tasked with keeping annual inflation at 2% but over the past five years it has tolerated frequent overshoots of the target to avoid pushing up borrowing costs and strangling the economy. • More significantly, the new mandate formally recognizes the use of ‘unconventional tools’ to meet the target, including policies aimed at easing the flow of credit to the private sector, and making use of Fed-style guidance on the future path of interest rates and the size and pace of its efforts to stimulate growth through bond purchases. February: 2.8% BoE 2% inflation target – inflation has been above target for over 3 years
China: Data suggests recovery not losing steam • China's factory activity expanded at a quicker pace in March, according to a key early gauge of the manufacturing sector's performance. • Global bank HSBC said its "flash" index of purchasing managers' sentiment rose to 51.7 in March from February's final reading of 50.4, and confirmed that the weakness evident in February was due mostly to seasonal distortions due to the Chinese New Year holiday. Any reading above 50 signals expansion in the manufacturing sector. • The pace of expansion was quicker than economists had anticipated, but the index remains below levels hit in January. The report showed a quickening pace of new orders and output. • Moreover, the average level of the HSBC manufacturing PMI in Q1 2013 was 51.5, compared with 50.5 in Q4 2012 and hence the HSBC manufacturing PMI suggests the Chinese economy remains in a moderate acceleration phase. • Some of the recent data, such as industrial production for January and February, have indicated that the Chinese could already be losing steam. However, the HSBC manufacturing PMI suggests that this fear is exaggerated.
Japan: trade data still show deficit and Kuroda affirms 2% inflation target • Japan's merchandise trade deficit in February narrowed from its record pace in the previous month, the Ministry of Finance said Thursday. • The trade balance came to a deficit of ¥777.5 billion ($8.1 billion) in January, narrower than January's ¥1.630 trillion but still the eighth straight monthly deficit—the longest such spell since 1980. • Exports in February totaled ¥5.28 trillion, a 1.9% decline compared to the previous month due partly to the celebration of the Chinese New Year across Asia in February, while imports reached ¥6.06 trillion. • Over recent months, the yen’s weakening by about 20% against the dollar has helped export manufacturers but also boosted the cost of purchases of LNG and crude oil to make up for electricity shortfalls. • On 19 March, Haruhiko Kuroda assumed the leadership of the Bank of Japan (BoJ). In his comments after becoming BoJ board governor, Kuroda has maintained a strong commitment to the 2% inflation target, saying he believed it could be achieved within two years. • Kuroda’s comments also suggest he will push to make BoJ asset purchases open ended (without ceiling and termination date) from this year and extend the maturity of the BoJ’s government bond purchases.
Central Bank Meetings Calendar Calendar for upcoming meetings of main central banks :
Egypt’s central bank raises rate to curb inflation • Egypt's central bank Thursday raised its overnight deposit rate and overnight lending rate by 50 basis points to 9.75% and 10.75% respectively, in an effort to rein in inflation, support the Egyptian Pound, and stabilize an economy that recently failed to secure a much-needed international bailout. • The Central Bank of Egypt's monetary policy committee also raised the discount rate by 75 basis points to 10.25%. • Egypt's urban consumer inflation rate surged to 8.2% in February from 6.3% in January, while the downward pressure on the Egyptian pound made food imports more expensive, according to the state statistics agency. • The increase in food prices, which accelerated from a 5.5% year-on year rise in November to a 9.3% rise in February, could lead to fresh bouts of civil unrest as the economy weakens. • Egypt’s government failed to seal a deal with the International Monetary Fund for a $4.8 billion loan.
Egypt now expects $4bn loan from Iraq, as Moody’s downgrades amid unsettled political conditions • Egypt now expect an Iraqi loan worth $4 billion dollars aimed at supporting its foreign exchange reserves, a senior official in the Egyptian Central Bank reported. The details, amount and time of the loan have not been disclosed yet. • Meanwhile, Egypt’s parliament approved on Tuesday a law allowing the issuance of Islamic bonds which could provide the heavily-indebted government with a new form of finance. • Finance Minister Al-Mursi Al-SayedHegazy said at the time that Egypt could raise around $10 billion a year from the sukuk market - much more than some analysts expect - but added that it would take at least three months to push through the necessary regulations. • Highlighting unsettled political conditions, Moody's Investors Service Thursday downgraded Egypt's government bond ratings to Caa1 from B3. • The ratings company said the cut reflected a significantly weakened economy, a greater risk of default and continued uncertainty surrounding the Egyptian government's ability to secure financial support from the IMF.
GCC new highlightsGCC banking sector likely to continue steady recovery • Gulf banks will likely continue their steady recovery from the global financial crisis this year, aided by healthy economic growth in the Gulf Cooperation Council (GCC) and still high oil prices, says Standard & Poor's Ratings Services yesterday in a report titled "A Growing Economy and Strong Capitalization keeps Gulf banks on a path to recovery.“ • "Our forecast for average 4.6% GDP growth in the GCC for 2013 should keep demand for bank credit high and expand banks' earnings. "We believe strong bank lending on the back of corporate and infrastructure growth will help expand revenues of banks in Saudi Arabia, and Qatar," said Standard & Poor's Credit Analyst TimucinEngin. "Specifically, we expect average lending growth to remain above 10% level for Saudi Arabia.“ • "In Kuwait, the UAE, and Bahrain, however, which have seen a less pronounced rebound in growth, we envisage a slower pick-up in lending. Yet, loan losses are gradually declining at banks in these countries because they cleaned up their balance sheets between 2008 and 2012. This should continue to foster a recovery in profitability in the region, albeit at a slower pace than in recent quarters. • Meanwhile,Islamic banking assets with commercial banks in the GCC reached $ 445 billion at the end of 2012, up from $ 390 billion in 2011, with the outlook for the industry remaining relatively positive in 2013. This represents a 14% year-on-year growth, which is considerably lower than the five-year average of 19%.
GCC new highlightsFitch affirms Saudi rating and revises outlook to positive • Fitch Ratings has affirmed Saudi Arabia's long-term foreign and local currency Issuer Default Ratings (IDRs) at "AA-" and revised the Outlook to Positive from Stable. In addition, Fitch has affirmed Saudi Arabia's Country Ceiling at "AA" and its Short-Term foreign currency IDR at "F1+". • The decision reflects the following factors: • Tangible progress in addressing key potential sources of social stress. Employment of nationals in the private sector has jumped by 60% between May 2011 and February 2013 in response to labor market reforms and access to housing finance has improved. • The banking sector is liquid, well capitalized and well regulated, non-performing loans are low and loan-loss coverage is high. • The government's balance sheet is very strong. High oil revenues enabled further accumulation of sovereign assets and reduction in government debt in 2012. Net general government debt, at 55.3% of GDP, is the lowest of all rated sovereigns. With a general government surplus of 6% of GDP forecast for 2013, fiscal buffers will be strengthened further. • Real nonoil private sector growth has remained strong, at 7.5% in 2012, illustrating some progress towards economic diversification and resilience. At an annual average of over 6%, real nonoil growth is expected to exceed growth in the oil sector for 2013 and 2014.However, oil still accounts for 90% of government revenues and 80% of current account receipts.
GCC Economic News Highlights • Saudi bank deposits rise to SAR1.27trn: The depositary base of Saudi banks has reached SR 1.27 trillion during January, according to the latest SAMA (Saudi Arabian Monetary Agency) bulletin, a rise of 13.7% over the same month last year • Saudi banks to slow pace of credit to 'avoid overheating‘: The banking system is expected to soften the pace of credit to avoid overheating their balance sheets. However, deposits in the Saudi financial system are more than adequate to accommodate the rising credit market and its potential. • Saudi labor reforms add 600,000 private sector jobs: Saudi Arabia’s attempts to reform its expatriate-heavy labor market have put more than 600,000 locals into jobs at private companies, a senior official said on Tuesday, a sharp increase over previous rates. Unemployment among men last year dropped to 6.1%, the lowest figure since 2000.
GCC Economic News HighlightsOil revenues remain strong • Oil earnings of GCC hit USD737bn: Strong oil prices along with higher output to boost the combined 2012 income of Gulf hydrocarbon producers by nearly $42 billion to their highest level in current prices. From around $695.9 billion in 2011, the collective oil and gas export earnings of the six member Gulf Cooperation Council (GCC) countries climbed to a record $737.5 billion in 2012. • The surge last year was a result of an increase in oil prices to their highest annual average of around $110 a barrel from nearly $106 in 2011 and a rise in the region's crude output as most GCC nations boosted production last year. • A breakdown showed Saudi Arabia's oil export earnings swelled to around $351 billion last year from $326 billion in 2011 while the United Arab Emirate's income grew to a record high of nearly $124.7 billion from $119.2 billion in the same period.
Comparative MENA Markets For the period 17/03 – 22/03
Local interest rates forecasts and major developments • Our interest rate forecast for 2 years government bonds was revised lower mainly due to higher JD liquidity in the market, and positive news amid Obama’s visit to Amman. • Moreover, foreign factors weighing on the economy have decreased in the first 2 months of the year, mainly as Egyptian gas supplies more than doubled, and oil bill decreased significantly.
US plans to guarantee Jordanian bond issue • The Minister of Planning and International Cooperation yesterday announced that Congress has agreed to be the guarantor on the Eurobond the Jordanian government plans to auction in international markets, with a value between $1-2 billion. • The minister also added that the guarantee will be based on the need and duration of the bond, and will be decided upon by both parties. • As for the duration of the bond, in September of last year, the Jordanian government had thought of a period of 7-10 years. • Attaining the US guarantee will allow Jordan to borrow from international markets at competitive rates closer to rates of US sovereign bonds • In other news, President Obama offered an additional $200 million to the $360 million in aid to Jordan for this year, in light of the considerable number of Syrian refugees in the Kingdom since the uprising.
Positive outlook by CBJ governor • Deposits in Jordanian dinars rose by JD800 million during the first two months of this year, while those in dollars went down by $150 million during the same period, Central Bank of Jordan Governor ZiadFariz said during a technical meeting with banks' chairmen and general managers. • The governor discussed the possibility of issuing development bonds to the public and decided that the mechanisms of issuance and sale be specified after thorough examination by experts. • He said Jordan has overcome the economic crisis in cooperation with banks, commending the government's decision to lift subsidies and channel support to those who deserve it in a fair manner. • He expected the economic growth to stand at around 3.3% this year, noting that the IMF voiced satisfaction over the local economy's performance during its first round of review. • Moreover, the CBJ governor said the inflation rate will most probably remain around 6%, despite the latest figures that showed that inflation reached 7.2% during the first two months of the year.
Jordan's Oil Bill Down 44% in January,,, • According to the Department of Statistics, Jordan’s oil bill fell by 44.11% at the end of January of this year to reach JD 285.49 million, compared to JD 510.67 million for the same period last year. • Breaking down this drop in the oil bill for the same time period, we find: • Petrol import bill fell by almost 30% to reach JD 177.47 million from JD 252 million. • The biggest drop came in diesel fuel by 77.6% to reach JD 29 million, compared to JD 130 million. • Heavy fuel imports fell to 0, compared to a bill of JD 38.1 million the year before. • However, natural gas’s bill increased by 240% to reach JD 18 million, compared to a bill of less than JD 6 million last year. This increase is a result of the average daily supply of natural gas from Egypt at 100 million cubic feet, which is still well below the 250 mcf agreed upon by both countries. • To cover this gap in natural gas supply, Jordan consumes daily 100,000 barrels of crude oil to meet electricity demand, which is a 50% increase compared to last year.
Cheaper oil bill successfully narrowed trade deficit for the first month of the year • The drop in the oil bill was reflected in a narrower trade deficit for the first month of the year. • The trade deficit for January fell by 18.6% to reach JD 746.1 million, compared to JD 916.2 million during January 2012. • Imports fell by 13.9% in January, reaching JD 1,167 million compared to JD 1,355 million for the same period the previous year. The main reason behind the drop is likely the fall in the oil import bill as discussed above. • Meanwhile, exports at JD 421 million in January, fell by 4.1% compared to the same period last year. • Analysis: • The 44% fall in the oil bill should reflect positively on the Jordanian government’s fiscal position and deficit. • This, in turn, should ease pressure on the JD and put downward pressure on interest rates. • A narrower trade deficit will likely ease pressures on the balance of payments and FX reserves.
Amman Stock ExchangeFor the period 17/03 – 21/03 ASE free float shares’ price index ended the week at (2089.9)points, compared to (2070.8)points for the last week, posting an increase of 0.92%. The total trading volume during the week reached JD(136.1) million compared to JD(71.4) million during the last week. Trading a total of (129.3)million shares through (32,889)transactions The shares of (177) companies were traded, the shares prices of (79) companies rose, and the shares prices of (54) declined.
Local Debt MonitorLatest T-Bills As March 24, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,368) million.
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