Middle East Finance Profile

Global businesses have regained faith in the Middle East, according to a study by accountancy firm PriceWaterhouse Coopers. In its annual “Global CEO Survey,” the firm said that the Middle East was preferred by 70% of all CEOs, and was ranked fourth for growth worldwide. The MSCI Arabian Markets ex-Saudi Arabia Index rose 18% in U.S. dollars over the year 2010.

However, economists are of the general opinion that there are a few hurdles that the Middle East North African (MENA) countries must cross in the coming year to increase their investment prospects, namely job creation and structural reforms. Most economies have been taking note.

Israel, for one, increased its key lending rate by 25 basis points to 2.25% to rein in a dangerously booming real estate market and also to maintain inflation within its target range of 1% and 3%. The new two-year state budget too incorporates a host of stimulus measures targeted at improving employment opportunities and other reforms.

Egypt’s economy, valued at $230 billion, is one of the “Next Eleven” emerging countries that Goldman Sachs thinks will make a difference to the world economy. Yet, the protests that took place recently in the country highlight a difficult financial situation for the average Egyptian who is faced with soaring food prices and high inflation. Jordan too faced a similar situation with people protesting against unemployment, and rising food and fuel prices.

Israel: Housing bubble fears spur lending rate hike

The fear of a housing bubble and forecasts of rising inflation have prompted Israel’s Central Bank to raise its key lending rate by 25 basis points to 2.25%. Justifying its move, the bank has cited rising real estate prices, which have soared 17.3% in the past one year, as well as its desire to bring inflation within the target range of 1% and 3%. Further, the bank wishes “to support the further recovery of economic activity, while maintaining financial stability.”. Though inflation is currently within the target range, the central bank’s own research forecasts that rising inflation will subdue economic growth in 2011.

Israel’s Consumer Price Index (CPI) edged up by 0.4% in December, with the country’s inflation rate for the year 2010 standing at 2.7%. This is the first time since 2005 that Israel has managed to contain inflation within its annual target range. Nevertheless, prices still climbed in 2010, as the cost of food items, particularly vegetables, rose by 22% and fruit by 19%.

Housing prices continued to shoot up in Israel despite stricter lending policies. According to the Central Bureau of Statistics, housing prices have rocketed 17.3% in 2010, accelerating further in December. “The volume of new housing loans increased steeply in December. The outstanding balance of housing loans at the end of 2010 was 14.7% higher than that at the end of 2009,” the Central Bank said. Overall, housing prices have nearly doubled, rising 40% since the recession began in 2007.

Israel’s GDP grew 4.5% in 2010, almost double that of 2.7%, the average growth expected by the Organization for Economic Cooperation and Development (OECD). Israel’s GDP growth stands as the highest among developed nations, and is a long way away from 2009 when the GDP barely climbed by 0.8%. For the third quarter, GDP surged 4.4% totaling $51.1 billion, due to invigorated investments and public consumption. Israel also boasts a rapid per-capita GDP increase at 2.7% in 2010 compared to the 1.1% decline in 2009.

With an emphasis on economic growth, the Knesset passed the two-year state budget for 2011-2012 in late December 2010. The new budget, worth $ $97 billion for 2011 and $101.3 billion for 2011, has incorporated various stimulus measures, which the government is yet to publicly outline. “This two-year budget will allow us to continue to grow at a rapid pace just as we grew in 2010 and beyond, to continue to create hundreds of thousands of new jobs just as we did in 2010 and beyond,” said Finance Minister Yuval Steinitz.

Israel’s budget deficit for 2010 is 3.73% of the GDP, staying well within the expected goal of 5.5%. The target beating deficit totaled $8.3 billion, thanks to low interest expenses and better than expected GDP growth. Budget performance was 99.4% of the budget in 2010, meaning nearly all the budget money was spent.

While the jobless rate a year earlier in November 2009 registered 7.3%, the country’s unemployment rate remained steady at 6.8% in November 2010, the highest in nine months. Availability of business sector jobs dropped 2.1% to 56,900 in December 2010 from 58,100 a month earlier.

Israeli exporters lost $3.3 billion in 2010 due to a strong shekel, according to calculations from the Manufacturers Association of Israel. Traders lost an estimated $2.3 billion in export deals and around $1.1 billion in domestic sales, while net profits dipped 15% last year. “The appreciation destroyed the Israeli exporters' ability to compete internationally, as well as the ability to compete locally against cheap foreign imports, and as a result Israeli companies lost a significant amount of customers and sales,” said Ruby Ginel, director of the association. The rapid appreciation of the shekel against the dollar began in April 2009, and since then has gained 15%. At the time, in 2009, the exchange rate was 4.2 shekels to a dollar but now the rate hovers closer to 3.6 shekels to one dollar.

The Bank of Israel has been purchasing foreign currency regularly since March 2008 to neutralize the flow of capital into Israel. But that hasn’t been enough to take the weight off exporters, particularly those doing business with Europe and the U.S., Israel’s key trading markets. As of December 2010, the bank’s foreign currency reserves totaled $70.9 billion. The Bank of Israel is expected to stop purchasing U.S. dollars in a bid to weaken the shekel in the long run. “If we let the shekel to be too strong due to short term capital movement into Israel - what is called hot money - we may hurt this important industry in the long term,” explained Bank of Israel Deputy Governor Zvi Eckstein.

Export growth forecasts already look bleak. The Israel Export and International Cooperation Institute forecasts that Israel’s exports will be sluggish in the year ahead, touching 6.5% in 2011 from a 16% spike in 2010. Apart from the fortification of the shekel in recent months, Israeli exporters are also grappling with a slowdown in global trade and declining imports in other countries. Exports, which account for nearly 45% of the country's economic activity, slid around 10% in the third quarter after growing steadily in the previous four quarters. The decline was mainly caused by the lackluster performance of trade with the U.S. and Europe economies, which account for 60% of total Israeli exports.

Egypt: Protests fan in Egypt as food prices climb

Escalation in food prices and unemployment spurred riots in Egypt recently, bringing the stock market down to its knees. The Egyptian pound hit its lowest point in six years against the dollar and the stock market posted its biggest dip in seven months, dropping 2.4%. Inflation continues to be high in Egypt, inching up to 10.3% in the year to December from 10.2% in November. Accordingly, the prices of food and beverages, which account for 44% of the inflation measuring basket, increased to 17.2% year-on-year in December compared to 17.1% in November. Core inflation, which excludes the price of fruits and vegetables accelerated to 9.65% in December from 8.93% in November, leading to speculation about a hike in interest rates.

The Egyptian government has promised to bear the costs of any more food price hikes. Already, 63 million Egyptians benefit from state subsidies on food and energy. Subsidies, grants and social benefits account for $17.5 billion of the budget for 2010-2011. Now, the government has said that it is considering an additional expenditure of around $773 million to $1.2 billion in the current fiscal year. The money will aid in combating price rises in wheat, sugar and vegetables, according to Rachid Mohamed Rachid, the Trade and Industry Minister.

Egypt has adopted a stimulus plan worth nearly $3.4 billion to be injected into the economy during 2011. The plan encourages borrowing by allowing 5.7 million state employees easy access to loans. “This non-budget stimulus plan is based on making sure that government employees can borrow from the banking system, with the guarantee of their salaries,” explained Finance Minister Youssef Boutros-Ghali. Through this plan, the government hopes to push consumer spending and boost overall economic growth by 0.50% and 0.75%. Boutros-Ghali expects Egypt to expand by 7% totally this year, up from 5.1% in the previous year ended June 2010.

Meanwhile, the ever important Suez Canal revenues increased by 2.6%, amounting to $423.4 million in December compared to $412.8 million in November. Due to the recovery of the global economy, revenues in December clocked a huge 10.09% jump compared to 2009, Another factor for the higher traffic in the Canal was a 30% decline in piracy during 2010.

Jordan: Protestors rally against rising prices

Jordan shook with protests recently, as thousands of people took to the streets crying out against rising prices and ineffectual government measures. Acting swiftly, the government has announced a host of new measures worth $450 million to create jobs, increase salaries of government employees and lower prices. Jordan’s King Abdullah ordered the cancellation of the 6% special sales tax imposed on kerosene and diesel, and also slashed the tax on high octane gas from 18% to 12%. Further, the government has allotted a $125 million package of partial subsidies for basic items like fuel and rice.

For some time, Jordan has been languishing under high unemployment rates and escalating prices of basic necessities like food and fuel. The country’s problems have been compounded by a record budget deficit of $2.1 billion, and officials are under pressure from the World Bank to slash the deficit by 30% this year. “The problem we face is cumulative and caused by an unprecedented deficit,” admitted Prime Minister Samir Rifai recently.

Indeed, faced with challenges like narrowing its ballooning budget deficit and stimulating the economy from its recessionary slumber, Jordan has had a tough 2010. Jordan’s ranking in the 2010-2011 Global Competitiveness Report released by the World Economic Forum, dwindled 15 slots, placing Jordan 65^th on a list of 139 countries. The Report pointed several deterrents to investing in the country, including declines in infrastructure, lack of financial stability and poor education. Several improvements were suggested, including easier access to financing, and changes to tax regulations, and labor rules.

Acting on feedback from the September 2010 Global Competitiveness Report, Jordan recently unveiled its Executive Development Program (EDP) for 2011-2013 worth $8.4 billion, a plan which covers 24 economic sectors. Around half of that amount is anticipated to be sourced from state budget allocations while the rest will be funded by government agencies and international associations. Infrastructure, water, housing and transportation projects are expected to be allotted 55% of the funds, while social welfare initiatives will draw 20%, and the balance will be used for miscellaneous development endeavors.

Meanwhile, inflation in Jordan jumped to 6.1% in December 2010 compared to less than 1% throughout the first ten months in 2009. Unemployment is now estimated at 12%, while poverty levels hover around 25%. Encouragingly though, Jordan has progressed in some areas. Tourism revenues rose by 19% in the first ten months of 2010, even as national exports increased 16% during the same time.

Jordan’s trade deficit has broadened 7% in the first 11 months in 2010, as imports of oil, machinery and plastics rose. The country’s deficit amounted to $7.6 billion through November compared to $7 billion in the same period in 2009. Crude oil and plastics imports each spiked by 15%, while machinery surged by 13%. Total imports increased 8% while exports rose 17% in the first 11 months, with potash exports registering a 44% jump.

Tourism revenues posted a healthy rise of 17% in 2010, totaling $3.3 billion compared to $2.8 billion in 2009. Encouraged by the result of dynamic campaigning last year, the government has set aside $14.1 million in its 2011 budget for the Jordan Tourism Board. A new five-year strategy will also be launched next month to develop the country’s tourism market “We will concentrate on improving the quality of services to enhance visitor experience and satisfaction, in addition to providing themed events,” explained Zeid Goussous the Minister of Tourism and Antiquities.