Interest Rate Monitor

1. Interest Rate Monitor April 7, 2013

2. Brief Overview International MENA Region US: Signs of moderation in growth Egypt: IMF loan talks back on the table Eurozone: ECB keeps rates unchanged but holds the door open for further easing GCC News Highlights GCC interbank rates UK: BoE maintains QE amid strengthened service activity Comparative MENA Markets Japan: New BoJ governor Haruhiko Kuroda definitely left his mark this week China: Signs of moderate recovery Local Economy Markets overview New and analysis Major Indices: Stocks sell-off amid weak US jobs report • Interest Rate Forecasts • 2012 GDP reached 2.7%; reports show that FX reserves to end April at $9 bn Commodities and Currencies: Yen extends slide against dollar Central Bank Meeting Calendar Markets overview • Amman Stock Exchange Interest Rate Forecast • Local Debt Monitor The Week Ahead • Prime Lending Rates

3. International

4. US Treasury bond rates • US jobs data heightened the sense of unease in the market. This combined with continued weak indicators from the eurozone fueled demand for safe havens, particularly US Treasuries. • The yield on the 10-year US Treasury was down 8bp at 1.70%, the lowest since December and 14bp down over the week.

5. Job Market Remains a Wild Card in Recovery Picture • As the U.S. economy picks up steam, the job market remains a question mark. • Hiring slowed sharply in March, with the economy adding only 88,000 jobs, the lowest monthly gain since last June and keeping the economic recovery from shifting to a higher gear despite a mending housing market and steady consumer and business spending. • The grim report, out Friday from the Labor Department, was a stark pullback from February's upwardly revised 268,000 gain. • The unemployment rate, which is derived from a different survey than the payroll numbers, fell to 7.6%, a four-year low, from 7.7%. Economists expected nonfarm payrolls to rise by 200,000. • The decline in the unemployment rate wasn't the result of more people getting jobs, but, rather, almost 500,000 individuals leaving the work force because of layoffs as well as retirement and other reasons. March 88,000

6. Job Market Remains a Wild Card in Recovery Picture • Markets tumbled on the reports, with the Dow Jones Industrial Average sliding more than 100 points at around midday Friday. The Nasdaq and the S&P 500 both fell, while investors flocked to 10-year U.S. Treasury bonds. • Overall, the March employment report was weak. Job growth is now back to 168k on a three-month average, which is far from the Fed’s ‘substantial improvement’ and talks of scaling down the QE program will take a pause. • One Fed official this week raised the possibility of a job market strong enough by summer to begin pulling back from the program, but the March picture could raise doubts inside the central bank about how quickly the job market is healing and deflate that hope. • The March reading stirred some fears of yet another year starting strong and wilting in the spring. • Analysts cautioned against reading too much into the numbers, which will be revised and reflect only one month's performance. They also cited possible factors behind March's stumble, such as budget turmoil in Washington and unseasonably cold weather. March 7.6%

7. US economy looks to hit a soft patch in Q2, amid tentative signs of slowdown • Both the manufacturing and non-manufacturing ISM surveys declined in March, suggesting that economic growth cooled off at the end of Q1. • The drop in the ISM manufacturing survey was driven by a sharp decline in domestic orders, while new export orders managed to increase. This suggests that the weakness is primarily domestic, most probably driven by this year’s significant fiscal tightening. • U.S. manufacturers notched a fourth consecutive month of expansion in March, continuing to grow but at a slower pace, with the auto and housing sectors leading the gains. • Details of Monday's report from the Institute for Supply Management showed March’s 51.3 level of overall manufacturing activity was down from 54.2 in February. Readings above 50 indicate expansion. • The non-manufacturing ISM fell short of expectations, dropping to 54.4 last month from 56.0. • The report is too early to reflect fallout from the $85 billion in federal spending cuts known as the sequester, which was triggered early in March.

8. Downward pressure on European bond yields • A combination of aggressive easing from the BoJ, which included an extension of the maturity on its government bond purchases, and the dovish tone in Draghi’s comments at the ECB press conference put downward pressure on yields. • European government bonds were pushing to their strongest levels on record Friday as investors shifted out of Japan and into higher-yielding bonds. • Yields on both French and Belgian bonds maturing in 10 years hit record lows, while Italian government bond yields also fell to their lowest levels since February's inconclusive election. • Moreover, unease following weak US payroll data also helped to push investors towards safe havens such as German 10-year bonds. The Bund yield touched an eight-month low, ending down 3bp on the day and 8bp on the week at 1.21%.

9. ECB keeps rates unchanged but holds the door open for further easing • In a big week for central banks, the European Central Bank left interest rates unchanged but appeared to leave the door open for a cut in coming months as president Mario Draghi acknowledged downside risks to an anticipated recovery in the eurozone in the second half • Draghi said the central bank still believes the European economy will turn around later this year, even though he admitted that economic weakness is spreading to the stronger countries in the eurozone. • The European recession has worsened recently, with unemployment hitting another record high 12% in February. But the ECB has not cut rates since July, when it lowered the benchmark rate to 0.75%. • Draghi signaled that the ECB is reluctant to take innovative measures to revive output and employment, but opened the door to an interest-rate cut if the eurozone's flagging economic-growth prospects fail to improve. • "We will assess all incoming information in the coming weeks and we stand ready to act," Mr. Draghi said after the ECB voted to hold its main policy rate.

10. ECB seems to be running out of policy options • With inflation below the ECB's 2% target at 1.7%, and expected to decline further, and eurozone GDP on track to have contracted for a sixth straight time in the latest quarter, the ECB has room to cut rates. • Though the ECB prefers non-standard measures, which can be targeted at the countries where the monetary mechanism remains broken and where stimulus is much needed. • The ECB's problem isn't that interest rates are too high. Rather, it is that the central bank's policies aren't transmitting uniformly across the 17-member currency bloc. • Spanish and Italian small businesses pay significantly higher interest rates for loans than comparable German companies, in a sign of the eurozone's continuing financial fragmentation. • Mr. Draghi said, as he did in March, that ECB officials are studying the fragmentation issue from "360 degrees." But he repeatedly highlighted limitations to what the ECB can do. "The ECB cannot replace governments' lack of action on structural reforms" to spur growth, he said.

11. ECB seems to be running out of policy options • The ECB's remaining policy options—interest rate cuts, bank-lending measures and asset purchases—may not do much to stimulate economic growth. • Since late 2011, the ECB has reduced interest rates three times, pumped more than €1 trillion ($1.28 trillion) in three-year loans into banks and created the new bond-purchase program, yet GDP has contracted the entire time. • Though, Draghi argued that the steps taken by the ECB have already helped support the European economies. Specifically, he pointed to the drop in bond yields in many troubled countries in response to ECB bond purchases known as Outright Monetary Transactions, or OMTs. • Also, the bond program, he said, has prevented financial turbulence in places such as Cyprus from turning into an "existential" crisis.

12. Eurozone struggles to pull out of recession • Activity in the eurozone's private sector fell at a sharper pace in March, according to surveys of purchasing managers, leaving the currency area on course for its sixth straight quarter of economic contraction. • While the first quarter contraction is likely to have been less steep than the 0.6% decline seen in the final quarter of last year, the concern is that the eurozone downturn shows no signs of ending. • Markit Economics Thursday said its composite Purchasing managers' index — which measures activity in both the manufacturing and services sectors — fell to 46.5 from 47.9 in February, and was in line with the flash estimate released last month. • A reading below 50 indicates that activity has fallen. According to the composite PMI, activity has now fallen in each of the last 19 months, with the exception of one month of modest expansion at the start of 2012. • According to the PMI, France was the weakest of the major eurozone economies, with private-sector activity falling to a 48-month low. But even Germany edged closer to contraction, with its composite PMI at 50.6, a three-month low.

13. Eurozone struggles to pull out of recession • Retail sales fell in the 17 countries that use the euro in February, underscoring the weakness in consumer demand that threatens to delay an economic recovery that leaders hope to see this year. • Eurostat, the European Union's official statistics agency, said Friday that retail sales in February fell 0.3% on the month and by 1.4% on the year. February's month-on-month fall partly reversed a rise of 0.9% in January. • Sales have been falling year-on-year for 18 consecutive months, a Eurostat spokesman said, although February's drop was the least severe since last August. • Consumer spending isn't likely to support growth in the eurozone's recession-hit economy for some time. • On the other hand, German manufacturing orders rose more than expected in February, rebounding after a disappointing January and signaling that the slowdown in the economy could be short-lived, data from the Economics Ministry showed Friday. • German manufacturing orders in February increased 2.3% on the month amid strong demand both inside and outside the country, reversing January's upwardly revised 1.6% drop, and beating analysts' expectations for a 1.2% rise. The volume of big-ticket orders was slightly below average.

14. IMF agrees on Cyprus deal ,,, • On Wednesday, the IMF said it had reached a staff level, or initial, agreement with Cyprus to unlock its portion—about €1 billion—of a €10 billion bailout for the country, with formal approval expected in early May. • After two attempts at securing a bailout deal in March that pushed Cyprus to the brink of exiting the euro, the country faces major obstacles. To secure the aid, it agreed to wind down its second-largest lender, Cyprus Popular Bank PCL, and radically restructure the largest, Bank of Cyprus PCL. • The banking-sector overhauls are only one part of Cyprus's deal with creditors; the other part is designed to narrow the country's budget gap. • Cyprus needs to push through spending cuts equal to 4.5% of GDP by 2018 to hit a primary surplus—the government operating surplus before taking into account debt payments—of 4% of GDP. These cuts will come on top of savings equal to 5% of GDP that the government is implementing through 2015. • Tax increases equal to another 2% of GDP are included in program, including an increase in the country's corporate tax rate to 12.5% from 10%, and raising the tax on interest income to 30% from 15%, among other measures. • Cyprus's corporate tax rate will remain among the lowest in Europe, on an equal footing with Ireland's, and will allow Cyprus to continue to use its tax regime to attract businesses. But the increase in withholding tax will make it a less-attractive place for depositors.

15. BoE maintains quantitative easing • Bank of England policy makers decided against injecting more stimulus into the U.K. economy on Thursday, despite having received a new mandate that gives them more room to disregard high inflation and pursue faster economic growth. • The U.K. economy has flat-lined since the middle of 2010, with the government committed to a tight fiscal policy until the 2015 election, and beyond if it holds on to power. • But Treasury chief George Osborne in March handed the central bank a new remit giving officials more leeway to tolerate an inflation rate above 2.0% if the economy needs extra support. • Economists believe it likely that policy makers will take advantage of their greater freedom to provide more stimulus, but possibly not before Bank of Canada Governor Mark Carney takes over in July. • The central bank's rate-setting Monetary Policy Committee kept its benchmark interest rate at 0.5%, where it has been since March 2009, and the size of its bond-buying quantitative easing program at £375 billion following its two-day policy meeting.

16. UK services unexpectedly strengthened in March, easing concerns of a triple-dip recession • A survey published earlier Thursday by financial information firm Markit and the Chartered Institute of Purchasing and Supply showed activity in the U.K.'s dominant services sector expanded in March at its fastest pace in seven months, buoyed by new orders and rising business confidence. • The headline Business Activity Indexregistered 52.4 in March, up from February’s 51.8. • The gathering upturn in services last month, have helped the UK to narrowly avoid a triple-dip recession, after disappointing surveys for the smaller manufacturing and construction. • Markit said its three indexes point to economic growth of just 0.1% in the first quarter. The official GDP data is due on April 25. • But economists said the improvement doesn't change the underlying picture of an economy that appears stuck firmly in neutral.

17. Bank of Japan takes decisive step, doubles quantitative easing • The new Bank of Japan (BoJ) governor Haruhiko Kuroda, at his inaugural policy board meeting, definitely left his mark in connection with this week’s monetary meeting, pulling out all the stops to get the economy out of deflation. • The central bank rolled out aggressive easing measures that surprised markets, pushing bond yields to an all-time low and boosting share prices. • The BoJ will aim to double the monetary base to ¥190 trillion ($1.97 trillion) over two years through the aggressive purchase of long-term bonds. That will raise the average remaining maturity of its holdings from about three years to seven years, keeping downward pressure on yields all along the curve. • The BOJ's decision crushed yields on Japanese debt to record lows, forcing asset managers and insurance companies to look to Europe for bonds with higher returns that are perceived to be relatively secure. BoJ’s aggressive move has put downward pressure on global bond yields. • Japanese government bonds yields fell sharply after the announcement, with the benchmark 10-year yield hitting an all-time low of 0.425%, though later traded higher.

18. Bank of Japan takes decisive step, doubles quantitative easing • Specifically, BoJ announced that it will return to its QE regime from 2002-2006 and target the monetary base, which it intends to close to double by end-2014. In addition, government bond purchases were increased and BoJsignalled that the aggressive pace of government bond purchases of now more than 10% of GDP will be continued next year. Finally, the maturities of BoJ’s government bond purchases were also increased. • Under the new measures, the BoJ will expand its balance sheet by around 1% of GDP each month. By comparison, the US Federal Reserve’s current monetary easing programme involves increasing the balance sheet by 0.54% of GDP per month. • Recent data in Japan have disappointed slightly. Industrial production for February surprisingly dropped 0.1% m/m, suggesting that the recovery in manufacturing activity has started to lose steam. However, the JMMA/Markit manufacturing PMI in March again improved markedly to 50.5 from 48.5 in February and new orders surged from 48.8 to 52.8 – the highest level since August 2011.

19. China faces moderate recovery • China’s manufacturing sector expanded at its fastest pace in almost a year in March, but the rise was slower than most economists had predicted. This suggests that China’s economy may not rebound as quickly as many had hoped. • In China the NBS manufacturing PMI in March improved only slightly to 50.9 from 50.1 in February. The improvement was not particularly impressive, if we take into account that the NBS manufacturing PMI tends to improve in March even though the data are seasonally adjusted. • The HSBC manufacturing PMI in its final reading improved to 51.6 in March from 50.4 in February, partly driven by normalization after the distortions from the Chinese New Year. • Overall the manufacturing PMIs suggest that industrial production picked up pace in the first quarter of 2013 compared to the previous one. • Nevertheless, China’s central bankers have said that they are worried about a potential rebound in inflation later this year that could force them to tighten monetary policy, which could in turn stall the mild recovery currently under way.

20. US stocks see selloff at the heels of an employment report that widely missed expectations

21. Yen extends slide against the dollar after BoJ aggressive easing

22. Major Interest Rate Forecasts

23. The Week Ahead,,,

24. Central Bank Meetings Calendar Calendar for upcoming meetings of main central banks :

25. Regional

26. Egypt: IMF Loan Back on The Table • After initial talks between Egypt and the IMF fell through due to disagreements on the conditions of the loan, the Egyptian government now has a "newly amended national financial and socio-economic reform program that will be presented to the IMF," Ashraf al-Arabi, Egypt's planning and international cooperation minister said, adding that he was positive his country would reach a "staff level agreement with the IMF regarding the loan," based on that plan. • Part of the intended economic reforms that Egypt plans to enforce include smart cards to ration fuel subsidies. The country also plans to reduce its budget deficit from 10.8% of GDP, to 9.4% in 2014 and 8.5% in 2015. • Additionally, the Egyptian government plans on boosting its foreign reserves back to $16bn by end of June of this year, after it reached $13.5bn, less than the recommended 3 months of imports by the IMF. • Nevertheless, the size of the IMF loan to Egypt may change depending on the assessment of the country's modified economic plan. Last Tuesday, Masood Ahmed, head of the IMF’s Middle East departments said “depending on Egypt's needs and the assessment of our team that will be in Egypt tomorrow to hold talks with Egyptian officials, the amount of the loan may vary, less or more.“ Source: The Economist

27. Central Bank of Egypt Reintroduces Deposit Operations • In a move aimed at absorbing liquidity and containing inflation, the Central Bank of Egypt (CBE) reintroduced deposit operations starting on Tuesday. According to the new system, deposits with the Central Bank will have a seven-day maturity with a fixed annual interest rate of 10.25%. • According to analysts, the CBE had apparently observed the build-up of excess liquidity at the banks and that the new step aimed at absorbing this liquidity to maintain high interest rates and curb inflation. • The CBE deposit facility offers a rate that is higher than the overnight corridor deposit rate by 0.5%, "probably to ensure that the minimum return on assets in the banking system is 10.25%, which allows banks to raise deposit rates without compromising the return on equity,“ according to one bank. • In other news, Egypt’s pound is weakening in unregulated trading as the shortage of U.S. dollars prompts buyers to pay a premium of as much as 17%, according to three money exchangers in Cairo. The local currency’s drop is accelerating as the central bank reduces the supply of dollars to pay for Egypt’s essential imports amid dwindling foreign reserves. The rates ranged between 7.7 pounds and 7.95 a dollar, trading a figure above market rates. Source: Bloomberg Source: Bloomberg

28. GCC Economic News Highlights • Bahrain economy - economic growth disappoints in 2012: Although substantially better than the 1.9% growth rate the economy recorded in 2011, the Central Informatics Organisation (CIO) has revealed that Bahraini real GDP growth reached 3.4% last year below expectations, after a weak fourth quarter and a substantial downward revision to its growth figures for the first half of the year. • The underperformance of the economy can largely be blamed on the oil sector and the continued impact of ongoing social unrest. • Analysts expect real GDP growth to remain broadly stable in 2013, at 3.6%, in the wake of a continued slow recovery in the financial services sector and on the assumption that oil output will stabilise. • Qatar's international reserves scale up to $36bn in February: Favorable energy prices, relatively higher production and prudent fiscal management have seen Qatar's international reserves scale up to $36bn in February compared with $33bn in end-2012. • Preliminary full-year GDP data for 2012 released at the end of March showed Qatar's real GDP grew 6.2%. The non-oil and gas sector was the main driver of growth in 2012, expanding by 10%. The share of the sector in the overall economy increased to 42.2% in 2012 from 40.7% in 2011. Growth in the oil and gas sector was just 1.7%.

29. GCC Economic News Highlights • Qatar Central Bank details local currency bond issue plan: Qatar's central bank plans to issue 3bn riyals ($825m) of conventional bonds and 1bn riyals of sukuk in the local currency every quarter, its central bank governor said on Tuesday. • "We want to manage our liquidity, enhance our yield curve, deepen our capital market and create a benchmark for our companies to issue bonds.“ said the governor. • Expected durations are 3 and 5 years, with yields of 2.75% and 3.00% respectively. • UAE Non-Oil Economy Remains Robust but Activity Slowed in March – HSBC: The U.A.E.'s non-oil economy remains in robust shape, but its rate of expansion slowed slightly in March, compared with the month before, as new order growth moderated. • The bank's purchasing managers index, or PMI, dropped to 54.3 in March, from 55.4 in February. A reading above the neutral 50 level indicates the economy is expanding. • HSBC said the rate of new order growth fell for the third successive month in March, but still remained solid. New export business meanwhile rose for the thirty-fourth consecutive survey period, but at the slowest pace since last July.

30. GCC new highlightsOPEC says oil price level not harmful to world economy • The current level of oil prices is not harmful to the global economy and on the contrary supports energy investments, the secretary general of oil exporting group OPEC said on Thursday. Oil prices have averaged about $110 per barrel this year. • After early signs of stabilization in the world economy, the last month has seen a series of setbacks with U.S. and European recovery stuttering. • "We believe current price levels are supportive of the energy future we portray, and will not harm the global economy," OPEC Secretary General Abdallah Al-Badri told an oil conference in Paris. "The oil price as we see it now is comfortable for producers and consumers." • OPEC crude oil output is on course to reach its lowest since October 2011 this month as unrest in Libya, pipeline leaks in Nigeria and Iraqi export disruptions weigh on supplies, a Reuters survey found last week. • The survey indicated top OPEC exporter Saudi Arabia was still keeping a lid on output. • OPEC is scheduled to meet on May 31 in Vienna to review its output policy for the second half of the year.

31. GCC interbank rates Source: Bloomberg

32. Comparative MENA Markets For the period 31/03 – 05/04

33. Locally

34. Local interest rates forecasts and major developments • Excess liquidity has continued its upward trend, while the reversal trend from Dollar to Dinar has intensified. • Easing pressures on the external sector is anticipated to continue as Jordan is expected to receive USD 585 million in grants and loans this month. • No benchmark interest rates hikes are expected in 2013.

35. Jordan’s economic growth slows down in 4Q12 • Economic growth moderated to 2.2% YoY in in the fourth quarter of 2012, compared to 2.6% the previous quarter according to data from the statistical office. • The GDP annual growth rate reached 2.7% for 2012, compared to 2.6% the previous year, below forecasts of 3% growth. • The government expects the economy to expand 3.3% in 2013, driven by higher government spending, increasing local consumption and an improvement in exports. • Most sectors have shown positive growth during the fourth quarter of 2012 compared with the fourth quarter of 2011: • Social services sector grew the most by 9.80% • Wholesale, retail, hotels, and restaurants sector grew by 5.90% • Financial, insurance, real estate, and business services sector grewby 5.50% • Electricity and water sectorgrew by 5.30% • Construction industry contracted by 4.10% • Agriculture sector contracted by 8.80% • Extractive industries sector contracted by 25.20%

36. FX reserves to surpass $ 9 billion,,, • Foreign reserve levels are expected to reach the highest level since last year at $9 billion, an increase of $2.30 billion during the first 4 months of the year. • Currently, foreign reserve level stand at $8.4 billion and the expected increase is driven by: • Foreign loans and grants to be received from the U.S and the IMF this month in the amount of $200 million and $385 million, respectively. • A slowdown and reversal of the dollarization wave observed last year. • Jordan’s oil bill falling by 44% at the end of January of this year to reach $403 million, compared to $720 million for the same period last year. • Equally, excess JD liquidity in the banking system is expected to surpass JD2.6 billion due to the increase in government’s dependence on external funding. • Higher excess JD liquidity and foreign reserves will keep downward pressure on JOD interest rates.

37. Interest Rates up in February, expected to stabilize in coming months • Since the beginning of the year, the weighted average interest rate at banks in Jordan has been increasing, reaching 5.27% in February, while prime lending rates also climbed up reaching 8.87% for the same period. • We believe that the upward trend will subdue, but with a time lag, as debt instruments interest rates continue to fall. Yields on 2- and 3-year government bonds have fallen by approximately 1.00% since the end of February.

38. Amman Stock ExchangeFor the period 31/03 – 04/04 ASE free float shares’ price index ended the week at (2119.1)points, compared to (2088.9)points for the last week, posting an increase of 1.45%. The total trading volume during the week reached JD(639.2) million compared to JD(92.2) million during the last week. Trading a total of (207.4)million shares through (48,778)transactions The shares of (187) companies were traded, the shares prices of (105) companies rose, and the shares prices of (58) declined.

39. Local Debt MonitorLatest T-Bills As April 7, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,599) million.

40. Local Debt MonitorLatest T-Bonds Issues

41. Prime Lending Rates

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