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Interest Rate Monitor February 24, 2013. 2 Brief Overview US: Treasury Yields Drop as FOMC minutes show disagreement over QE Eurozone: economy to shrink.

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Presentation on theme: "Interest Rate Monitor February 24, 2013. 2 Brief Overview US: Treasury Yields Drop as FOMC minutes show disagreement over QE Eurozone: economy to shrink."— Presentation transcript:

1 Interest Rate Monitor February 24, 2013

2 2 Brief Overview US: Treasury Yields Drop as FOMC minutes show disagreement over QE Eurozone: economy to shrink again in 2013, meanwhile, markets await results of elections in Italy and Cyprus Moody’s strips UK of triple-A rating as economic prospects continue to be grim Exports improve in January, and candidate for BoJ governor is expected to be announced Major Indices: Stocks ended week on a positive Commodities and Currencies: Gold drops below $1600 and sterling hit 2-year low Interest Rate Forecast Central Bank Meeting Calendar GCC News Highlights: inflation to remain steady at 3.3%  Jordan issues USD denominated bond, as FX reserves increase above $8 billion Jordan issues USD denominated bond, as FX reserves increase above $8 billion International MENA Region Local Economy The Week Ahead Comparative MENA Markets  Interest Rate Forecasts Interest Rate Forecasts  Amman Stock Exchange Amman Stock Exchange  Local Debt Monitor Local Debt Monitor  Prime Lending Rates Prime Lending Rates Markets overview GCC interbank rates Markets overview New and analysis Egypt’s economy grows 2.4% in second half of 2012, FDI at zero level

3 3 International

4 4 US Treasury bond rates Yields on 10-year notes started to decline on Wednesday, after widespread concern that the stopping QE before expected will weigh on the economy. This had triggered “risk” asset selling, moving towards safe havens, thus pushing yields down. The yield dropped to 1.97% on Friday.

5 5 Minutes from January FOMC increase uncertainty about Fed’s exit strategy Federal Reserve officials, uneasy with potential risks springing from the central bank's low- interest-rate policies, are split over an early retreat from the experimental programs created to revive the U.S. economy. The worry is that the central bank is back-tracking on its commitment to maintain open-ended QE until the labor market has improved “substantially”. The Fed is buying $85 billion in mortgage and U.S. Treasury securities a month to drive down long-term rates and has promised to keep short-term rates near zero until unemployment improves. The program hasn't fueled inflation, as many feared, and many officials are inclined to stay the course. But some participants have become worried that the costs of QE might start to outweigh the benefits. Ever since announcing QE3 last autumn, the FOMC has always cautioned that it would conduct frequent cost/benefit analysis of the policy. It will review the programs at its next meeting, March 19-20, setting the stage for another high-stakes debate. Ben Bernanke is due to deliver his semi-annual testimony on Tuesday before the Congress and analysts hope his speech will spread light on his thinking about asset purchases.

6 6 US: In terms of data, manufacturing indicators released this week were mixed. Markit said its "flash," or preliminary U.S. Manufacturing Purchasing Managers Index fell to 55.2 this month from 55.8, though it remains at an elevated level. A reading above 50 indicates expansion. The index for output spiked to 58.1, the highest reading in nearly two years, "suggesting that the economy is set to rebound from the weak patch seen late last year," said Markit chief economist Chris Williamson. However, a disappointing export performance led overall growth of order books to slow slightly, which in turn caused increasing numbers of manufacturers to think twice about hiring extra staff. Finally, data on the housing market was mixed. The NAHB index declined a notch and housing starts fell after surging in December. However, building permits continued to increase as did existing home sales. In general, the upward trend in housing activity seems intact but the pace of increases has cooled lately.

7 7 Rome’s implied borrowing costs this week briefly trundled back above 4.5%. That is well below last year’s high of 6.5% but nevertheless signals the markets’ anxiety that a hobbled Italian government may struggle to tackle the country’s budget difficulties – a perception that some fear could trigger fresh eurozone-wide debt angst. Spanish yields fell slightly as Prime Minister Rajoy has pledged a “second wave” of reforms, as corruption scandals continue. Sovereign bond investors will be watching voter returns in Italy and Cyprus intently this weekend to see if anti-bailout and anti-austerity candidates triumph at the polls. If the results lead to radical or deadlocked governments in either nation, the markets could punish government bonds throughout the eurozone periphery, reigniting investors' fears of a potential collapse of the euro. Volatility to remain as Europe awaits election results in Italy and Cyprus

8 8 Eurozone economy to shrink again in 2013 The European Union's official economists Friday predicted the eurozone economy will shrink for the second year in a row in 2013, in a forecast that sees little hope that easing financial-market tensions in the region will provide a jolt to the real economy any time soon. The European Commission, forecasts a 0.3% contraction for 2013, compared to forecasts of 0.1% growth six months ago. France’s gross domestic product is expected to grow just 0.1% and Germany’s by 0.5% in 2013, both 30 basis point downgrades from the previous projections. Meanwhile, after shrinking 7.1% in 2011 and 6.4% last year, Greece is expected to see its sixth year of economic contraction in 2013, suffering a 4.4% cut in economic activity. “The weakness of economic activity towards the end of 2012 implies a low starting point for the current year,” Olli Rehn, the EU’s economic affairs commissioner, said in a statement. “The current situation can be summarized like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.”

9 9 France and Spain are likely to miss targets,,, The expected fall in spending by businesses, consumers and national governments will push eurozone unemployment to a new high. Mass joblessness is expected to increase in the countries hardest hit by the crisis, with the average unemployment rate expected to reach 27% in Greece, 26.9% in Spain and 17.3% in Portugal. Unemployment will be a huge obstacle for governments as they attempt to carry out austerity programs that are partly responsible for the bloc's dismal growth and employment situation. The first big test is likely to come in France, which the commission expects will miss a pledge to bring its deficit under 3% of gross domestic product by the end of this year. The forecast sees the French deficit this year at 3.7% of GDP, sparking debates over whether the target should be extend to next year. Overall, the commission sees the average euro-zone budget deficit falling below the targeted 3% of national output in 2013 for the first time since 2008. The average deficit this year is seen at 2.8%, edging down to 2.7% of GDP in 2014. Meanwhile, Spain was supposed to lower its deficit to 5.3% of GDP last year, but instead came in at 10.2%, by far the highest in the EU. This year Spain’s deficit is projected to hit 6.7%, well off the 3% goal it was supposed to achieve.

10 10 UK is stripped of triple-A rating Moody's Investors Service stripped the United Kingdom of its triple-A credit rating, saying sluggish economic growth and austerity will continue to affect the government’s finances into the second half of the decade. The rating on the U.K. was lowered one level to Aa1 from Aaa and the outlook on the nation’s debt changed to stable, Moody’s said in a statement today. With the U.K.’s high and rising debt burden, a deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement. The rating agency first warned it was considering downgrading the UK last February, but was moved to act by the deteriorating economy which it now expects to grow just 1% this year compared with its previous forecast of 1.4%. It is the first major rating agency to remove the UK’s gold-plated credit rating, striking a blow to the coalition government’s fiscal consolidation programme, likely to increase calls on Chancellor of the Exchequer George Osborne to scale back his fiscal squeeze. Fitch Ratings and Standard & Poor's Ratings Services both have triple-A ratings on the U.K. with negative outlooks. The pound slumped after the downgrade, dropping 0.6% to $1.5163. Sterling has depreciated 5.6% this year, the second-worst performer after the yen among developed-market currencies. Britain’s debt as a percentage of gross domestic product will climb to 98% next year from 90% last year and 95.4% in 2013, the European Commission said in its winter forecast Friday. Osborne’s austerity policies will squeeze the budget deficit to 6% next year from 10.2% in 2010, when his Conservatives took over in an unprecedented coalition with the Liberal Democrats, according to the predictions by the commission.

11 11 Falling pound and BoE minutes of meeting The U.K. is unlikely to see meaningfully higher borrowing costs as a result of the Moody's move; its bonds have benefitted for several years from investors' flight away from troubled euro-zone countries and toward European nations with stronger economic fundamentals, or who issue their own currency. The Bank of England's robust quantitative easing program, in which it purchases government bonds, has also helped hold bond yields down and keep a lid on borrowing costs. On Wednesday, the minutes from the February Monetary Policy Committee (MPC) meeting revealed unexpected support for expanding Bank of England (BoE) asset purchases. Three member, among them Governor Mervyn King, favored to increase the size of the BoE's bond-buying stimulus program by £25 billion to £400 billion, saying further asset purchases would help the U.K. economy expand without stoking inflation, but was outvoted 6-3 by the rest of the committee The split on the committee underscores the dilemma facing rate setters in the U.K., who are grappling with weak economic growth and stubborn inflation.

12 12 Japan’s exports improved markedly in January but the posted a deficit surprisingly Japan posted a record monthly trade deficit of ¥1.629 trillion yen ($17.43 billion) in January, extending the run of trade deficit to a seventh month—also a record—the Ministry of Finance said Wednesday. Japan's record trade deficit demonstrated the two-edged nature of a weaker yen, as higher import prices took an immediate toll on trade figures, despite the 2.2% increase in exports. Exacerbating the initial negative impact of the lower yen is Japan's increased reliance on fuel imports amid the continuing shut down of most of the nation's nuclear plants. The widening gap is likely to serve as a reminder to Prime Minister Shinzo Abe, that Japan's economic problems will not simply disappear with a weaker currency. Mr. Abe's policies to conquer deflation and reinvigorate the economy have prompted a more than 10% fall in the yen versus the dollar since he was sworn in on Dec. 26. Economists say the swelling deficit reflects a time lag for the foreign exchange rate having a positive impact on trade. Economists say that it will take up to a year for a weaker yen to start boosting demand for Japanese goods on shop shelves.

13 13 Japan expected to announce its candidate for governor of BoJ As soon as Monday, Japan's prime minister is expected to carry out a campaign promise to select a new central-bank chief committed to a revival of slumping prices, investment and consumer spending in the world's third-largest economy. The candidates under consideration all back increased easing. The change in leadership, said Mr. Abe's supporters, should yield a central bank that wholeheartedly executes policies to bolster Japan's economy, rather than grudgingly, as in the past. Outgoing BoJ Gov. Masaaki Shirakawa will step down March 19, three weeks before his term ends. Supporters of the BoJ's traditionally cautious approach said Japan's deeper structural problems— including an aging and shrinking population, as well as too-tight regulations in many industries—hold back an economic rebound and limit the effectiveness of monetary policy. Meanwhile, Japanese Prime Minister Shinzo Abe told parliament Monday that a failure to hit its recently established 2% inflation target would be a condition for changing the law governing the Bank of Japan. In the run-up to his landslide election victory last year, Mr. Abe repeatedly made veiled threats about revising the law if the central bank failed to comply with his government's desire for more aggressive measures to fight deflation. Since then, he has said the central bank should choose what measures it takes—so long as it achieves the 2% target.

14 14 Stocks rallied Friday, after a selling streak that marked the biggest two-day drop for US stocks this year

15 15 Gold continues stumble to below $1,600, and Sterling hits 2-year low

16 16 Major Interest Rate Forecasts

17 17 The Week Ahead,,,

18 18 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 :

19 19 Regional

20 20 Egypt’s economy advances 2.4% in 2H12, while foreign investment drops to almost zero On Monday, Egypt’s minister for planning and international cooperation said the annual economic growth rate would hit 3% by the end of June - below the government’s projected 4% - due to political instability. The cabinet said in a statement on Wednesday that the economic growth rate was 2.4% in the first half of the 2012/13 fiscal year, which began last July. Egypt is seeking a $4.8 billion loan from the IMF, though many economists expect a deal will not be concluded until after parliamentary elections due to get under way in April or May. The loan is not enough to help recover Egypt’s depleting foreign cash reserves or fix its budget deficit, but policymakers hope that the IMF loan will encourage foreign investors and governments to contribute additional cash and aid. Moreover, foreign investment in Egypt was almost non-existent in the six months to the end of December, Planning Minister Ashraf al-Araby said on Thursday. The Egyptian pound remained weakened, as it traded at around 6.73 against the dollar last week.

21 21 GCC inflation to remain steady at 3.3% in 2013 The GCC region witnessed a moderate 3% inflation in consumer prices during 2012, down from 3.7% in 2011. This is relatively low when compared to the global average inflation of 4% and the MENA region’s 10.4%, according to IMF estimates. Usually, devaluing currencies are an important driver of inflation in many MENA countries, but the pegged exchange rate system in the GCC contributes to price stability. In addition, subsidies and particularly on fuel, also shelter the GCC from a significant driver of inflation in some other MENA countries. Bahrain, Kuwait and Oman all had inflation that was close to the regional average. The UAE and Qatar had lower inflation, of 0.7% and 1.9% respectively, which offset the higher 4.5% inflation in Saudi Arabia. These three countries deviated from the regional average mainly due to falling housing costs. Qatar National Bank estimates that inflation is likely to remain in the same region in 2013, with an inflation rate of 3.3%. Meanwhile, Saudi Arabia’s inflation edged up to 4.2% YoY in January from 3.9% YoY in December, according to a report from the Central Department for Statistics and Information. This can be ascribed to higher food prices in the Kingdom.

22 22 GCC economic news highlights Qatar plans to spend USD120bn on projects : Qatar plans to spend USD120bn on infrastructure projects by 2020 aided by income from oil and gas exports, which accounts for 70% of its revenues. Among other economic news, Qatar Central Bank expects Qatar’s GDP to rise 5.5% in 2013. Standard and Poor’s expects Abu Dhabi’s GDP to grow 4.5% in 2013, with a stable outlook. The strong rating reflects robust fiscal and external account positions, which provides flexibility in the execution of fiscal policy. The Abu Dhabi government’s strong net asset position offers headroom against the volatility in oil prices. Strong public finances also offset concerns related to institutional and structural weaknesses and contingent liabilities. UAE tourism revenue to rise to USD7.5bn by 2016: Revenue from the tourism sector is expected to increase to USD7.5bn by 2016 from USD4.5bn in 2011. Tourist arrivals are estimated to expand at a CAGR of 5.3% between 2012 and 2022. The number of hotel rooms is forecasted to advance to 125,383 in 2016 from the current 96,992.

23 23 GCC interbank rates

24 24 Comparative MENA Markets For the period 17/02 – 22/02

25 25 Locally

26 26 Local interest rates forecasts and major developments The excess liquidity in the banking system has decreased by around 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 following the USD denominated bond issuance and IMF loan.

27 27 Jordan’s issues first USD denominated internal bonds The Ministry of Finance has issued an internal government bond denominated in USD with a nominal value of $500 million, a tenure of three years and coupon of 4.25%. The issue was successful with a coverage ratio of 140%. Spend JD 350 million Central Bank Government Economy Borrow $500 million Sell $500 million Buy JD 350 million Effect: boost in foreign reserves Effect: increasing excess liquidity in the JOD market Banks Foreign currency deposits of $11bn

28 28 Jordan expected to receive $500 million from IMF as FX reserves increase above $8 billion Meanwhile, the IMF is set to assess the economic situation upon its visit to Jordan and evaluate the progress of the National Economic Reform Program. Pending on the visit, the Jordanian Government is expected to receive $500 million in fresh credit next month, constituting the second and third tranche of the IMF loan. This makes a total of $885 million received so far from the IMF since August. The IMF tranche along with the USD denominated bonds issued should help maintain, or even boost, foreign currency reserves and help ease the strain on the JOD liquidity. According to reports last week, FX reserves have increased above $8 billion for the first time since April 2012, covering around 5 months of imports coverage. FX reserves had reached $7.7 billion at the end of January. Expectations are for FX reserves to end the year at around $8.5 billion.

29 29 But downside risks remain,,, Egyptian natural gas levels have reportedly declined below an average of 80 million cubic feet (mcf) per day over the past month, and sources claim that the supply was cut off completely during some periods. The volatility of gas supplies is likely to add pressure on NEPCO in terms of losses and tariffs hikes. Based on the IMF staff projections, if the average supply remains below 100 mfc per day then NEPCO losses may beat government’s budget estimates by over JD 300 million.

30 30 Amman Stock Exchange For the period 17/02 – 21/02 ASE free float shares’ price index ended the week at (2046.7) points, compared to (2053.1) points for the last week, posting a decrease of 0.31%. The total trading volume during the week reached JD(57.7) million compared to JD(48.4) million during the last week. Trading a total of (71.0) million shares through (27,363) transactions The shares of (179) companies were traded, the shares prices of (74) companies rose, and the shares prices of (69) declined. Top 5 losers for the last week Stock % chg Northern Cement Co. (13.18%) Tuhama For Financial Investments (11.11%) Jordan Press & Publishing/(ad-dustour) (10.71%) Comprehensive Multiple Project Company (9.68%) Model Restaurants Company Plc (9.09%) Top 5 gainers for the last week Stock % chg United Arab Investors 50.00% Union Tobacco & Cigarette Industries 36.36% he Investors And Eastern Arab For Industrial And Real Estate Investments 25.00% South Electronics 25.00% National Aluminium Industrial 23.08%

31 31 Local Debt Monitor Latest T-Bills  As February 24, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(1,895) 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

32 32 Local Debt Monitor Latest T-Bonds Issues Coupon (%)Size - millionMaturity DateIssue Date2 years T-Bonds 7.950%8018/02/201518/02/2013T0813 7.950%6005/02/201505/02/2013T0513 7.950%7029/01/201529/01/2013T0313 Coupon (%)Size - millionMaturity DateIssue Date3 years T-Bonds 8.600%6020/02/201620/02/2013T0913 8.600%6007/02/201607/02/2013T0713 8.600%5007/02/201607/02/2013T0613 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)

33 33 Prime Lending Rates

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