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Interest Rate Monitor February 17, 2013. 2 International.

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Presentation on theme: "Interest Rate Monitor February 17, 2013. 2 International."— Presentation transcript:

1 Interest Rate Monitor February 17, 2013

2 2 International

3 3 US Treasury bond rates Treasuries fell, extending the worst start of a year for benchmark 10-year notes since 2011, as reports suggested the U.S. economic recovery is gaining momentum. Yields on 10-year notes have climbed 24 basis points since December. The yield reached a high for the week of 2.06% Feb. 14, a day after the U.S. sold $24 billion of 10-year notes at higher- than-forecast yields. The yield dropped to as low as 1.94% on Feb. 11. 30-year bond yields also rose one basis point to 3.18% last week.

4 4 US consumers are so far holding up, as readings bolster hope on recovery momentum U.S. consumers are showing surprising resilience, providing some hope for the economy as a new round of Washington budget battles approaches. A jump in property values, a slow and steady improvement in the jobs market and stocks at five-year highs have spurred spending by Americans. Consumer confidence jumped more than expected in the first half of this month despite higher payroll taxes since the beginning of the year, according to a gauge released Friday by the University of Michigan Consumers are facing a significant drag on their incomes this year. Congress and the White House reached an agreement to avert the so-called fiscal cliff, but allowed a temporary cut in Social Security withholdings to expire Dec. 31. That pushed payroll taxes back to 6.2% from 4.2%, meant smaller paychecks for many Americans in the new year. Economists expect tax increases to weigh on the economy in the first half of 2013 by prompting Americans to cut spending, which makes up about two-thirds of demand. Higher taxes come as gasoline prices are rising, putting more pressure on consumers. Q4: -0.1%

5 5 Sales data so far holding up … but manufacturing data remains mixed Still it could be months before the full impact on the economy is clear. U.S. retail sales rose 0.1% in January to a seasonally adjusted $416.6 billion, the Commerce Department said Wednesday. Nevertheless, a measure of retail sales excluding gasoline, cars and building materials—which economists prefer because it is closer to how government analysts view consumption when calculating the nation's economic growth rate—weakened in January, rising 0.2%, against 0.7% in both December and November. US industrial production shrank in January after the biggest back-to- back gain in three decades. A weak manufacturing sector, which makes up about 12% of the US economy, has so far held back growth especially with rebounds in housing and consumer spending. Output at factories, mines and utilities fell 0.1% last month after a 0.4% gain in December, figures from the Federal Reserve showed on Friday. While economists had expected a 0.3% rise in January, revised data for November and December showed the biggest two- month gain since 1984.

6 6 Spanish and Italian bonds rose as debt sales this week allayed concern the nations may struggle to raise funds amid political instability before Italy goes to the polls to elect a new prime minister. Spain exceeded the Madrid-based Treasury’s sales target when it auctioned six- and 12-month bills on Feb. 12. Italy sold bonds on Feb. 13 in its last offering before the Feb. 24-25 elections. Spain’s 10-year yield fell 17 basis points, or 0.17 percentage point, this week to 5.18%. The Italian 10-year yield declined 17 basis points to 4.38%. Italian and Spanish securities held gains despite a report on Feb. 14 that showed the region’s recession deepened more than economists predicted. Meanwhile, German government bonds handed investors a loss of 1.6% this year through Feb. 14, according to indexes compiled by Bloomberg. Italian debt returned 1.2% and Spanish securities gained 2.2%. Volatility still present in euro area markets Source: Bloomberg

7 7 Eurozone recession deeper than expected The eurozone's economy shrank last quarter at the fastest pace since the height of the world recession in early 2009, as a worsening slump in Italy and other southern European countries infected the bloc's core economies of Germany and France. GDP in the euro zone fell 0.6% in the fourth quarter compared with the third, according to the Eurostat report. Economists had expected a 0.4% drop. It was the third straight GDP decline and fifth straight quarter in which the currency bloc failed to expand. For 2012 as a whole, GDP fell 0.5% from the prior year. The report on gross domestic product from the European Union's statistics office highlights a key risk for the currency bloc as Europe's debt crisis enters its fourth year. Financial market conditions have improved markedly since last summer, due in large part to the European Central Bank's pledge to do "whatever it takes" to preserve the euro. But these gains haven't translated into new business activity. The 2.3% drop in eurozone gross domestic product in the fourth quarter, at an annualized pace, suggests that Europe's economic and financial crisis is far from over. It will likely add to challenges on European authorities' insistence that fiscal austerity lead to growth by boosting business confidence.

8 8 Strengthening euro could hurt eurozone recovery potential The fall was led by Germany and France, whose gross domestic product shrank more than expected in the fourth quarter, highlighting the fragility of forecasts for a eurozone recovery this year. GDP in Germany, Europe's largest economy, fell 0.6% from the previous quarter on declining exports and investment. France, the bloc's second biggest, declined 0.3%. The contraction in Germany is, however, widely expected to be short-lived, as recent business surveys have been much more upbeat. By contrast rising unemployment in France, and the likelihood it will need more austerity to comply with fiscal targets, makes its route to recovery less certain. Nevertheless, the steep German decline reflected a sharp drop in net exports and investment in plants and machinery. This weakness underscores how the recent appreciation of the euro could threaten an export-led recovery. Other large economies including Italy, Spain and the Netherlands contracted. Italy's GDP plummeted 0.9% from the previous quarter, a much sharper rate of decline than the third quarter. Spain's downturn also deepened. Portugal's GDP slid 1.8% in the final three months of 2012, double the third quarter's rate of decline. Without growing economies, Spain and Italy will likely see government-debt burdens increase even as they undertake austerity measures such as higher taxes and reduced spending. That could revive doubts in financial markets about the sustainability of their finances.

9 9 UK: BoE raises inflation target The Bank of England Wednesday raised its forecasts for U.K. inflation in the coming years, suggesting a long-standing squeeze on consumers will continue, limiting the economy's prospects for a strong recovery. The bank's policy makers have made it clear they don't intend to tighten policy in response to above-target inflation due to the weak economy, but the prospect of higher inflation could deter some members of the Monetary Policy Committee from pushing for more stimulus. The U.K.'s central bank said inflation is likely to rise further in the near term and to overshoot its 2.0% target at least for the next two years, even as economic growth remains slow. The upward revision was mainly driven by the fall in sterling and a stronger outlook for energy prices. The BoE said risks to the economy from the crisis in the euro zone and from restricted credit in the U.K. banking system have lessened. The most recent official data show inflation running at 2.7% in January, considerably above most measures of wage growth, which means many Britons continue to face pay cuts in real terms forcing them to cut spending, a key pillar of growth in the U.K. economy. Source: BoE February Inflation Report

10 10 Japanese surprise contraction Data released showed weaker-than expected Japanese GDP figures. Asia’s second largest economy contracted 0.1% between October and December, or 0.4% on an annualized basis, the third consecutive contraction. However, the Japanese economy started to stabilize around December 2012, and is set to recover markedly in the coming months supported by fiscal stimulus and a gradual recovery in exports amidst a weaker yen. The Bank of Japan as expected decided to keep its key monetary policy unchanged at its policy board meeting Thursday, with less than a month having elapsed since it introduced a landmark 2.0% inflation target and took additional easing steps. In the statement the BoJ was slightly more positive on the economy, and it remains in a wait-and-see-mode until a new governor and two deputy governors are appointed to its board on March 19. Meanwhile, the yen has been at the center of a heated debate over exchange rate targeting that has seen global policy makers hinting that they would welcome weaker currencies to stimulate their economies.

11 11 G20: No currency wars Global currency markets have been unusually volatile in the run- up to the meeting of Group of 20 officials from the world’s largest economies in Moscow to discuss international financial stability. Officials said on Friday they regarded Japan’s loosening of monetary policy as a domestic economic policy and not an attempt to target the exchange rate. Earlier in the week, the G7 group of developed economies said that central banks should not target their exchange rates but added that monetary easing which had the side-effect of weakening a country’s currency was allowed. In the end, G20 finance chiefs sharpened their stance Saturday against governments trying to influence exchange rates as they sought to tame speculation of a global currency war without singling out Japan for criticism. While, the statement contains to public censure for Japan, the final position was stronger than their position three months ago and leaves Japanese officials under pressure to stop publicly giving guidance on their currency’s value.

12 12 Stocks rally stalls as focus turns to currencies

13 13 Gold stumbles to $1,600 on recovery hopes

14 14 Major Interest Rate Forecasts

15 15 The Week Ahead,,,

16 16 Central Bank Meetings Calendar Expected Rate Decision Current Rate MonthCentral Bank 0.25% March 20US Federal Reserve (FOMC) 0.75% March 7European Central Bank (ECB) 0.50% March 7Bank of England (BoE) 0.10% April 3Bank of Japan (BOJ) 0.00% March 14Swiss National Bank (SNB) 1.00% March 6Bank of Canada (BOC) 3.00% March 5Reserve Bank of Australia (RBA) 2.50% March 13Reserve Bank of New Zealand (RBNZ) Calendar for upcoming meetings of main central banks :

17 17 Regional

18 18 Egypt’s political unrest continues to hinder attempts to stabilize the economy Pound continues to fall and IMF loan still unclear Egypt’s pound weakened to a record low against the dollar in interbank trade. This followed a foreign currency sale on Thursday, but trading volumes were low as authorities reduced supply of dollars in the market in an effort to stabilize the pound. The pound traded just above 6.73 against the dollar. The central bank has cut back in the past week on the volume of dollars on offer to slowdown the pound’s slide and avoid a full currency crisis. This has forced ordinary Egyptians to buy their dollars on the black market. Two years of political unrest have triggered a flight into dollars, draining foreign reserves which the central bank said fell to $13.6 billion at the end of January – below the $15 billion threshold needed to cover 3 months of imports. Meanwhile, Egypt has finished revising an economic reform plan needed for a $4.8 billion IMF loan, prime minister Hisham Kandil said on Wednesday, but he did not say when the government might return to negotiations with the fund. Nevertheless, news report have said that Egypt’s government will delay by up to three months a rationing of subsidized fuel initially set for April as part of austerity measures to secure the IMF loan.

19 19 Moody’s downgrade weighs on local investor sentiment Moody's Investors Service has today downgraded Egypt's government bond ratings to B3 from B2, while maintaining the rating on review for further possible downgrade. The one-notch downgrade was prompted by the following factors: –The economic impact of the intensification of civil unrest. –The further weakening in Egypt's external payments position, given the large drop in January in the level of international reserves held by the Central Bank of Egypt (CBE). –The continued uncertainty surrounding the Egyptian government's ability to secure financial support from the International Monetary Fund (IMF). On Thursday, Moody’s lowered government-owned banks’ (National Bank of Egypt, Banque Misr, Banque Du Caire) standalone credit assessments to CAA2 from B3. Meanwhile, Commercial International Bank and Bank of Alexandria’s standalone credit assessment went down from B2 to B3.

20 20 Structural challenges continue to constrain GCC sovereign ratings GCC (Gulf Co-operation Council) sovereign ratings would likely have been higher if not for two overarching structural challenges namely, limited monetary policy flexibility and underdeveloped political and institutional frameworks, S&P said. "Weaknesses" include the quality of policy debate; the strength and depth of institutions; transparency of decision- making; data monitoring and reliability of information; legal frameworks and the rule of law; and succession risks. These partly reflect the relative short history of the GCC nation states and the government's role as wealth distributor, creating less urgency for institutional depth, S&P said. Nevertheless, S&P said in its report that Gulf economies remain insulated from economic and political turbulence in the broader MENA region, and globally, and forecast 4.6% GDP growth for the region in 2013. Moreover, the report stated that Bahrain has the largest debt burden with public debt as a percentage of GDP at 34%, followed by Qatar (29%). Other GCC nations have meager public debt, below 10% of the GDP. Meanwhile, S&P is expecting a contraction of Qatar real GDP per capita growth from 2012 onwards, as the large investment programme to boost liquid natural gas production capacity runs out. Qatar currently holds the world highest GDP per capita with an estimated US$104,000 in 2012, and S&P’s assigned AA/stable/A-1+ rating to the country maintaining its “stable outlook”. However, the banking system’s increasing reliance on external funding represents an external risk, S&P said. “In 2012, we estimate that the banking system’s net external liability position increased to US$22bn from US$12bn in 2011. Nevertheless, we expect Qatar’s net external asset position to continue to grow to over 100 percent of current account receipts,” S&P's reported.

21 21 GCC economic news highlights Oil income to drop in 2013 as output falls Mena oil exporters record high growth in 2012: The economies of hydrocarbon producers in the Gulf and other regional countries are expected to have grown by around 5.5% in 2012 but growth could decline in 2013 due to lower oil output in the UAE and other Gulf crude exporters. High growth in 2012 was a result of an increase in oil output by most producers in the Middle East and North Africa (MENA) with the exception of sanctions-hit Iran, the Washington-based Institute for International Finance (IIF) said in a study. "Overall growth is projected to moderate to 3.9% in 2013, as crude oil production will be restrained in Saudi Arabia, Kuwait, and the UAE," it said. As for finances, expansionary fiscal and monetary policies adopted by many regional states are expected to remain in place in light of the continued substantial hydrocarbon revenues, the peg to the dollar, and the rebound in private credit. Saudi oil income to fall by $68bn in 2013: Although the world's dominant oil supplier and largest Arab economy has approved a record high budget for 2013, its foreign assets will still swell by about $47 billion this year to maintain its position as having the largest official reserves in the Arab world. Higher output and prices boosted the Gulf Kingdom's oil export earnings to an all time high of around $347 billion in 2012 but the income is forecast to tumble to nearly $279 billion this year, the Riyadh-based Jadwa Investments said.

22 22 GCC economic news highlights UAE attracts FDI of USD8.2bn: In 2012, foreign investment in the UAE stood at USD8.2bn amid huge inflow from Egypt, Tunisia, Syria, Yemen and other Arab nations. The investments were boosted by political tensions in neighboring countries, which prompted investors to seek safe havens. Bahrain's economy grew 4.4% in the first three quarters of 2012 mainly driven by a strong recovery in the non-oil sector, and real full-year growth is estimated at 3.9%, the Bahrain Economic Development Board, or EDB, said on Tuesday. Growth is also likely to pick up further in 2013, around 6%, due to planned large-scale industrial investments and growth in infrastructure spending. Qatar's inflation, based on consumer price index (CPI), rose 3.4% y-o-y and the index was up 0.7% m-o-m in January 2013, figures released by the Qatar Statistics Authority revealed. GCC to invest USD36bn in port infrastructure: GCC countries plan an investment of USD36bn to develop port infrastructure in the next few years amid increasing foreign non-oil trade volumes.

23 23 Comparative MENA Markets For the period 10/02 – 15/02

24 24 Locally

25 25 Local interest rates forecasts and major developments The excess liquidity in the banking system has decreased by more than JD 200 million since the beginning of 2013. The drop in liquidity is mainly attributed to the issuance of new JD denominated government bonds. However, excess Liquidity has showed some improvement in the past week, and the trend is expected to continue as the government is anticipated to start borrowing externally next month.

26 26 Jordan to start borrowing externally In an effort to tackle fiscal reform and public debt, the Ministry of Finance is planning on offering a Eurobond with a face value of $750 million to $1.50 billion. The bond will be auctioned in the global market, but over two phases to achieve better borrowing terms and the lowest interest rates. The first phase will include a total of $500 to $750 million and is expected to proceed after the planned IMF visit to the country. The second phase is then expected to begin after the IMF submits its final report on the performance of the Jordanian economy and grants Jordan the second tranche of the loan. The second tranche should arrive at the end of April or the beginning of May according to reports (depending on the workflow with the IMF). The head of the IMF mission to Jordan, Christina Kostyal, indicated that the performance of the Jordanian economy under the framework set by the IMF was “good”. Kostyal stated that the Jordanian government and the IMF are having constructive discussions to pave way for a road map for the future and how to overcome the challenges facing the Kingdom.

27 27 Fiscal budget deteriorates further amid foreign grant drought The Ministry of Finance last week released their preliminary government budget for November 2012. The budget balance has deteriorated over the first eleven months of the year, as the fiscal deficit widened to JD 1.43 billion compared to a deficit of JD 746 million for the same period last year. Foreign grants remained unchanged in November at JD97 million after the increasing by JD71 million in October. The grants remain sluggish in comparison to last year, though reports have showed that some GCC grants for budget support have been collected at the end of December. The government forecasts that fiscal deficit, including grants, will end 2012 at JD1.6 billion (around 7.6% of GDP) and narrow to JD1.31 billion (around 5.4% of GDP) in 2013. However, public debt to GDP is expected to end 2012 at around 75%, and escalate to a worrisome 80% in 2013.

28 28 Inflation rates are on the rise, expected to reach 7% The Department of Statistics released its monthly report on inflation, indicating an increase in the Consumer Price Average (inflation) for January 2013 by 6.7% as compared with the same period of 2012, up from 4.8% the previous month. The main commodities groups which contributed to this increase were "fuel and lighting" 24.3%, and “transport" 19.3%. On the monthly level, the Consumer Price Index has decreased in January 2013 by 0.6% as compared with the previous month (December 2012 ). The main driving force behind the rise in inflation, was the increase in fuel prices, after the government decided to lift the subsidies on fuel products in November 2012. Crude oil (Brent) prices on average increased by 4.79% since November. The average of forecasts by international agencies on Bloomberg expect crude oil prices to stabilize throughout the 4 quarters of the year. However, the Jordanian government is expected to increase electricity tariffs which would cause upward pressure on inflation rates.

29 29 Amman Stock Exchange For the period 10/02 – 14/02 ASE free float shares’ price index ended the week at (2053.1) points, compared to (2028.8) points for the last week, posting an increase of 1.2%. The total trading volume during the week reached JD(48.4) million compared to JD(44.0) million during the last week. Trading a total of (62.6) million shares through (25,179) transactions The shares of (179) companies were traded, the shares prices of (82) companies rose, and the shares prices of (68) declined. Top 5 losers for the last week Stock % chg Arab Real Estate Development (25.00%) Arab Company For Investment Projects (14.29%) Arab Electrical Industries (13.91%) Arab East Investment (10.13%) Alentkaeya For Investment&realestate Development Company Plc (9.46%) Top 5 gainers for the last week Stock % chg Intermediate Petrochemicals Industries Co. Ltd. 21.05% Afaq For Energy Co. P.l.c 17.95% International Cards Company 16.67% Jordan Press & Publishing/(ad-dustour) 15.69% International Brokerage & Financial Markets 15.56%

30 30 Local Debt Monitor Latest T-Bills  As February 14, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(1,798) million. Yield (%)Size - millionMaturity DateIssue Date3 months T-Bills 2.898%5014/03/201214/12/201129/2011 2.844%5012/03/201212/12/201128/2011 Yield (%)Size - millionMaturity DateIssue Date6 months T-Bills 3.788%5014/08/201214/02/201202/2012 3.433%5023/01/2012 01/2012 3.232%5008/06/201208/12/201127/2011 Yield (%)Size - millionMaturity DateIssue Date9 months T-Bills 4.285%7504/12/201204/03/201205/2012 4.229%7529/11/201229/02/201204/2012 4.169%7522/11/201222/02/201203/2012 Coupon (%)Size - MillionMaturity DateIssue Date1 year T-Bills 6.750%5014/02/201414/02/201202/2013 6.750%7027/01/201427/01/201201/2013 6.750%6024/12/201324/12/201222/2012 6.905%5004/12/201304/12/201221/2012

31 31 Local Debt Monitor Latest T-Bonds Issues Coupon (%)Size - millionMaturity DateIssue Date2 years T-Bonds 7.950%6005/02/201505/02/2013T0313 7.950%7029/01/201529/01/2013T0313 7.950%8022/01/201522/01/2013T0213 Coupon (%)Size - millionMaturity DateIssue Date3 years T-Bonds 8.600%6007/02/201607/02/2013T0713 8.600%5007/02/201607/02/2013T0613 8.600%6031/01/201631/01/2013T0413 Coupon (%)Size - millionMaturity DateIssue Date4 year T-Bonds 7.246%37.515/01/201615/01/2012T0312 6.475%5016/11/201516/11/2011T4211 Coupon (%)Size - millionMaturity DateIssue Date5 years T-Bonds 7.750%7511/03/201711/03/2012T0712 7.489%5019/01/201719/01/2012T0412 Coupon (%)Size - millionMaturity DateIssue DatePublic Utility Bonds 8.134%2605/09/201505/09/2012PB55 (Water Authority) 7.966%2029/07/201529/07/2012PB005 (Housing & Urban Development) 7.724%15026/04/201726/04/2012PBO12 (National Electricity)

32 32 Prime Lending Rates

33 33 Disclaimer  The materials of this report may contain inaccuracies and typographical errors. Cairo Amman Bank does not warrant the accuracy or completeness of the materials or the reliability of any advice, opinion, statement or other information displayed or distributed through this report. You acknowledge that any reliance on any such opinion, advice, statement, memorandum, or information shall be at your sole risk. Cairo Amman Bank reserves the right, in its sole discretion, to correct any error or omission in any portion of the report without notice. Cairo Amman Bank may make any other changes to the report, its materials described in the report at any time without notice.  The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and are provided "As Is" without any representation or warranty and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy any securities or other investment and\or to be relied on for any act whatsoever.  Information and opinions contained in the report are published for the assistance of recipients "As Is", but are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient; they are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance. Cairo Amman Bank does not accept any liability whatsoever for any direct, indirect, or consequential loss arising from any use of material contained in this report.  All estimates, opinions, analysis and/or any content for whatsoever nature included in this report constitute Cairo Amman Bank’s sole judgments and opinions without any liability and/or representation as of the date of this report and it should not be relied upon as such.  Cairo Amman Bank reserves the right to change any part of this report or this legal Disclaimer at any time without notice. Any changes to this legal Disclaimer shall take effect immediately. Notwithstanding the above, Cairo Amman Bank shall not be obliged to keep this report up to date.  The Recipient agree to defend, indemnify and hold harmless Cairo Amman Bank and its subsidiaries & affiliate companies and their respective officers, directors, employees, agents and representatives from any and all claims arising directly or indirectly out of and in connection of the recipient activities conducted in connection with this report.

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