Interest Rate Monitor June 30, 2013

2 Brief Overview  Fiscal Deficit continues to widen, public debt at 70.7% of GDP Fiscal Deficit continues to widen, public debt at 70.7% of GDP International MENA Region Local Economy  Amman Stock Exchange Amman Stock Exchange  Local Debt Monitor Local Debt Monitor  Prime Lending Rates Prime Lending Rates Markets overview New and analysis US: Economy in the US grew less than projected in Q1 Eurozone: EU strikes deal to push cost of bank failure on investors Major Indices: S&P records best half year since 1998 Commodities and Currencies: Gold reaches low of $1,200, major currencies depreciate against dollar Central Bank Meeting Calendar Interest Rate Forecast The Week Ahead Egypt: Treasury yields rise, CDS at all time high GCC News Highlights GCC interbank rates Comparative MENA Markets Japan: Economy powers ahead, but no early exit from aggressive easing

3 International

4 Yield drops as GDP figures revised downwards, jumps end of week on better consumer sentiment Treasuries lost the most this year since 2009 as investors fled U.S. debt after the Federal Reserve signalled the world’s biggest economy may be strong enough to allow the central bank to reduce its bond buying this year. The treasury yield dropped as Q1 GDP figures were revised downwards from 2.4% to 1.8%, but jumped back up at the end of the week on the back of improved consumer sentiment.

5 The economy in the U.S. grew less than previously calculated in the first quarter, reflecting less spending on services by consumers who were trying to make ends meet after taxes rose. Gross domestic product expanded at a revised 1.8% annualized rate from January through March, down from a prior estimate of 2.4% Household purchases, which account for about 70% of the economy, were revised to a 2.6% advance compared with the 3.4% gain estimated last month. Households cut back on travel, legal services and personal care expenditures and also curbed spending on health care as the two %age- point increase in the payroll tax caused incomes to drop by the most in more than four years. Disposable income adjusted for inflation fell at an 8.6% annualized rate, the biggest drop since the third quarter of The decrease reflects the increase in the payroll tax. The smaller gain in spending helped boost the saving rate to 2.5% in the first quarter, compared with an initial estimate of a 2.3%. Sustained gains would allow the economy to better cope with the fallout from $85 billion in fiscal tightening and the lagged effect from a two %age- point jump in the payroll tax that went into effect at the start of Economy in U.S. Grew Less Than Projected in First Quarter

6 Consumer sentiment improved in late June, ending the month close to a near six-year high set in May, as optimism among higher-income families rose to its strongest level in six years. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment was 84.1 points, just slightly below a near six-year high of 84.5 in May. The late-June figure was higher than the preliminary reading of Consumer sentiment is considered by some economists as a predictor on consumer spending, which accounts for 70 % of the U.S. economy. Household expenditures, however, have remained sluggish despite improving optimism. Consumer spending grew at an annualized 2.6 % in first quarter, faster than the 1.8 % pace in the last three months of 2012 but slower than an earlier government estimate of 3.4 %. The survey's gauge of consumer expectations ended June at its highest level since October at 77.8, up from 75.8 in May. The latest reading was stronger than the preliminary June figure of Economists had projected a late-June figure of 77.0 Consumer sentiment ends June to near six-year high University of Michigan Survey of Consumer Confidence Sentiment (YtD) Source: Bloomberg

7 Fitch Ratings on Friday affirmed the United States' top level credit rating at AAA but held the outlook at negative, saying still-elevated debt levels leave the country vulnerable to shocks without more deficit reduction. The affirmation reflects strong economic and credit fundamentals, the firm said in a statement. In addition, Fitch cited the decline in the federal budget deficit to levels "consistent with debt stabilization." Fitch highlighted the diversity of the U.S. economy, its "extraordinary monetary and exchange rate flexibility," global reserve currency status of the U.S. dollar as well as the depth and liquidity of its financial markets as underpinnings for the top credit rating. Fitch expects gross debt level of the federal government to stabilize next year and over the rest of the decade at around 74 percent of gross domestic product. It expects the general government debt, which includes state and local governments, to stabilize at 107 percent of GDP over the same time period. Both debt levels are below thresholds Fitch had identified as inconsistent with the U.S. retaining its AAA status. The threshold it set for federal debt was 80 percent, with a 110 percent threshold for general government gross debt levels. Fitch affirms U.S. AAA rating but outlook still negative

8 Italy, Spain Bonds Rally, Paring Monthly Slump on Fed QE Concern EU sovereign bonds rose for the first week in eight as European Central Bank President Mario Draghi pledged to keep monetary policy accommodative, boosting the appeal of the region’s fixed-income assets. The ECB’s monetary policy “will stay accommodative for the foreseeable future,” Draghi said. European bonds were also supported as U.S. policy makers sought to downplay speculation that stimulus in the world’s largest economy will be withdrawn soon. Italian 10-year yields dropped seven basis points, or 0.07 percentage point, in the week to 4.55 percent. Spain’s 10-year yield slid 15 basis points to 4.77 percent, trimming its monthly increase to 33 basis points. Germany’s 10- year bund yield added one basis point to 1.73 percent after climbing 21 basis points a week earlier. Italy Spain Germany France

9 Europe strikes deal to push cost of bank failure on investors The European Union agreed on Thursday to force investors and wealthy savers to share the costs of future bank failures, moving closer to drawing a line under years of taxpayer-funded bailouts. The plan stipulates that shareholders, bondholders and depositors with more than 100,000 euros ($132,000) should share the burden of saving a bank. The rules break a taboo in Europe that savers should never lose their deposits, although countries will have some flexibility to decide when and how to impose losses on a failing bank's creditors. The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011, using taxpayer cash but struggling to contain the crisis and - in the case of Ireland - almost bankrupting the country. French Finance Minister Pierre Moscovici signaled that ministers also agreed to French demands that the euro zone's rescue fund, the European Stability Mechanism, can be used to help banks in the 17-nation currency area that run into trouble.

10 Japanese economy powers ahead, but no early exit from aggressive easing Data released shows that the Japanese economy continues to power ahead and now appears to be moving out of deflation. While Japan’s export so far is unsurprisingly resilient, it would be wrong to think that Japan is just stealing growth from the rest of the world through a weaker yen. On the contrary the Japanese economy currently appears to be gaining much of its strength from strong domestic demand. The data released indicates GDP growth above 3.5% q/q AR in Q2 on the back of 4.1% q/q growth in Q1. Japan’s industrial production continued to expand solidly in May, where industrial production seasonal adjusted increased 2.0% m/m. This was much stronger than expected and the fourth month in a row with an increase. Deflation continued to ease in May where CPI excl. fresh food (the inflation measure BoJ targets) increased 0.0% y/y after declining 0.4% y/y in April. Core CPI excl. food & energy declined 0.3% y/y after declining 0.6% y/y in April.

11 S&P 500 ended Friday's session with its strongest first half of any year since 1998, underpinned by Fed’s monetary stimulus

12 Gold Reaches $1,200 low, major currencies depreciate against dollar

13 Major Interest Rate Forecasts

14 The Week Ahead,,, 30 June – 5 July

15 Central Bank Meetings Calendar Expected Rate Decision Current Rate MonthCentral Bank 0.25% September 18US Federal Reserve (FOMC) 0.50% July 4European Central Bank (ECB) 0.50% July 4Bank of England (BoE) 0.10% July 10Bank of Japan (BOJ) 0.00% September 19Swiss National Bank (SNB) 1.00% July 17Bank of Canada (BOC) 2.75% July 2Reserve Bank of Australia (RBA) 2.50% July 24Reserve Bank of New Zealand (RBNZ) Calendar for upcoming meetings of main central banks :

16 Regional

17 Egypt’s Treasury Yields Rise, drives CDS to all time high Egyptian treasury yields rose significantly this week, with the biggest increase in 1 year yields by 0.50% to reach %, due to high political unrest as the country prepares itself for a fresh round of demonstrations marking President Mursi’s 1 year anniversary at office. Consequently, the cost of insuring Egypt's debt against default has risen to record highs in the five-year credit default swap market, according to Markit, on concerns about political unrest. An opposition campaign for mass rallies demanding the resignation of President Mohamed Mursi on June 30, has been preceded by shows of strength by Mursi's supporters and some street clashes in which at least two men died at the weekend. Egypt's CDS jumped around 80 basis points last week to a record high of 847 basis points. That indicates it costs investors $847,000 a year to insure exposure to $10 million worth of Egyptian debt for a five-year period. Markit said Egypt's CDS were not sufficiently liquid for it to provide a live price on Tuesday. Source: Bloomberg

18 GCC Economic Highlights: Bahrain parliament approves 11% rise in 2013 budget spending Bahrain's state spending is expected to jump 11% this year, by more than originally planned, after its parliament approved million dinars ($462 million) in additional expenditure, official data showed. Budget expenditure in the small non-OPEC oil exporter is now expected to total 3.62 billion dinars in 2013, up from 3.26 billion actually spent last year. The increase added rises in pension payments for both public and private sector retirees, and higher subsidies for food and other items, but omitted a 15% rise in public sector salaries. The state faces difficult choices between boosting state spending to support the economy in the face of political unrest, and grappling with a rising state budget deficit, registered at -9.7% of GDP in January of The International Monetary Fund warned in May that the island needed to reform its public finances in the medium term to avoid its debt burden becoming unsustainable. The IMF expects Bahrain's fiscal deficit to widen to as much as 8.6 % of gross domestic product in 2018 from 4.2 % forecast for this year.

19 GCC Economic Highlights: Saudi nonoil exports reach SAR46.84bn The value of Saudi Arabia exports of nonoil commodities for the first quarter (Q1) of the current year 2013, reached SR billion, compared to SR billion, or a decrease of 2.1%, according to the Central Department of Statistics and Information (CDSI). The CDSI report stated that petrochemicals topped the list of Saudi exports as it valued SR billion, or % of the total nonoil exports, plastic products came second at SR billion or %, followed by ordinary metals and their products at 7.11 % of the total exports. According to the report, China topped the list of importers from Saudi Arabia during Q1 with % of the total exports, followed by the UAE at % and India at 5.79 %. The value of Saudi imports during the Q1 increased by 13.5 % to reach SR billion compared to the figures of same period of the previous year, the report said.

20 GCC interbank rates Source: Bloomberg

21 Comparative MENA Markets For the period 16/06 – 21/06

22 Locally

23 The budget balance deteriorated significantly during the first third of the year, with a deficit of JD277.4 million compared to last year’s JD39 million for the same period. The fiscal deficit widened despite an increase in foreign grants compared to the same period last year. Total revenues and grants increased by JD39.5 million in the first four months of the year, as a result of an increase of foreign grants by JD196.7 million for the same period, compared to an overall drought of grants last year. However, domestic revenues decreased by around JD157.2 million during the same period. On the other hand, both current and capital expenditures increased, resulting in a total increase in expenditure of JD277.9 million for the same period. Meanwhile, if we look at the fiscal deficit before grants, then we will find that the deterioration in budget balances is even more significant, as the deficit reached JD million during the first four months of the year, an increase of JD435.1 million. Fiscal deficit widens despite increase in foreign grants JD Million Jan – Apr 2013 Jan - Apr 2012 Total Revenues and Grants1,855.11,815.6 Domestic Revenue1,641.21,798.4 Foreign Grants Total Expenditures2,132.51,854.6 Current Expenditures1,946.81,763.4 Capital Expenditures Fiscal Deficit/Surplus Including Grants Fiscal Deficit/Surplus Excluding Grants

24 Public Debt at 70.7% of GDP in first four months Public debt reached around JD billion by the end of April 2013, around 70.7% of 2013 GDP according to the Ministry of Finance’s calculations, increasing by JD388.6 million during the year. Domestic debt decreased by JD 76 million during the first quarter of the year, compared to the end of External debt increased by JD465.2 million during the same period. This is in line with projections that the government will rely on external financing in 2013 to meet financial needs. The government is still expected to issue a Eurobond in the amount of $1-1.5 billion later this year in international markets, which will further increase its external borrowing. JD Million April External Debt5,397.64,932.44,486.8 % of GDP22.5% 21.9% Internal Debt11, ,648.08,915.0 % of GDP48.2%52.7%43.5% Public Debt16, , ,401.8 % of GDP70.7%75.5%65.4%

25 Moody's downgrades Jordan's government bond rating to B1; outlook stable Moody's Investors Service has downgraded Jordan's government bond rating to B1 from Ba2, and changed the outlook to stable from negative. The key drivers of the downgrade are: –Jordan's deteriorating fiscal metrics, with a fiscal deficit that peaked at 8.2% of GDP in 2012 and Moody's expectations that it will remain above 5% of GDP in ; –An acceleration in the upward trend in general government debt, which increased almost 10 %age points of GDP between 2011 and 2012 and which Moody's expects will reach close to 90% of GDP in –Heightened external vulnerability due to lower official foreign- exchange reserves and the increasing dollarization of deposits. Moody's also downgraded the local currency ceiling to Ba1 from Baa1, the foreign currency ceiling to Ba1 from Baa3, and the foreign currency bank deposit ceiling to B2 from Ba3. The short term foreign currency ceiling was downgraded to NP from P3.

26 Amman Stock Exchange For the period 23/06 – 27/06 ASE free float shares’ price index ended the week at (1,986.1) points, compared to (1,999.1) points for the last week, posting a decrease of 0.65%. The total trading volume during the week reached JD(82.9) million compared to JD(43.7) million during the last week. Trading a total of (69.8) million shares through (18,858) transactions The shares of (173) companies were traded, the shares prices of (57) companies rose, and the shares prices of (78) declined. Top 5 losers for the last week Stock % chg Alshamekha For Realestate And Financial Investments (16.67%) The Investors And Eastern Arab for Industrial And Real Estate (16.67%) Tuhama For Financial Investments (15.38%) Alentkaeya For Investment & Real Estate Development Comp. (14.29%) Jordan Insurance (12.00%) Top 5 gainers for the last week Stock % chg Arabian Steel Pipes Manufacturing 16.67% Jordanian Expatriates Investment Holding 12.50% National Insurance 10.00% Union Land Development Corporation 9.76% Jordan Commercial Bank 9.18%

27 Local Debt Monitor Latest T-Bills  As of June 30, the volume of excess reserves, including the overnight window deposits held at the CBJ JD(2,629) million. Yield (%)Size - millionMaturity DateIssue Date3 months T-Bills 2.898%5014/03/201214/12/201129/ %5012/03/201212/12/201128/2011 Yield (%)Size - millionMaturity DateIssue Date6 months T-Bills 3.788%5014/08/201214/02/201202/ %5023/07/201223/01/201201/ %5008/06/201208/12/201127/2011 Yield (%)Size - millionMaturity DateIssue Date9 months T-Bills 4.285%7504/12/201204/03/201205/ %7529/11/201229/02/201204/ %7522/11/201222/02/201203/2012 Coupon (%)Size - MillionMaturity DateIssue Date1 year T-Bills 5.345%7515/04/201415/04/201304/ %7026/02/201426/02/201303/ %5014/02/201414/02/201302/ %7027/01/201427/01/201301/2013

28 Local Debt Monitor Latest T-Bonds Issues Coupon (%)Size - millionMaturity DateIssue Date2 years T-Bonds 6.039%5028/04/201528/04/2013T %7510/04/201510/04/2013T %5008/04/201508/04/2013T2113 Coupon (%)Size - millionMaturity DateIssue Date3 years T-Bonds 6.546%5018/06/201618/06/2013T %5029/05/201629/05/2013T %5026/05/201626/05/2013T3113 Coupon (%)Size - millionMaturity DateIssue Date4 year T-Bonds 7.246%37.515/01/201615/01/2012T %5016/11/201516/11/2011T4211 Coupon (%)Size - millionMaturity DateIssue Date5 years T-Bonds 7.561%5010/06/201810/06/2013T %5002/06/201802/06/2013T3313 Coupon (%)Size - millionMaturity DateIssue DatePublic Utility Bonds 7.703%1213/06/201813/06/2013PB58 (Water Authority) 7.684%1506/06/201806/06/2013PB57 (Water Authority) 7.966%2029/07/201529/07/2012PB005 (Housing & Urban Development) 7.724%15026/04/201726/04/2012PBO12 (National Electricity)

29 Prime Lending Rates

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