GCC Quarterly

Oil production in the GCC declined by 2.6% y/y in H1 2013, according to Bloomberg estimates, on the back of weaker global demand and despite a slight increase in output in the second quarter. Saudi Arabia contributed the most to the decline in oil output year-to-date, and we have consequently downgraded our 2013 GDP growth forecast for the Kingdom to 5.0% from 5.8% previously. We retain our 3.8% real growth forecast for the UAE in 2013 despite a better than expected 4.4% growth in 2012. Activity in the non-oil private sector remains strong, although the latest IMF report suggests that fiscal policy is likely to be tighter than we had anticipated this year. Dubais 2012 real growth was also stronger than expected at 4.4%, with the manufacturing sector having expanded at an astonishing 13.1% y/y. We retain our growth forecast for the emirate at 3.9% in 2013, even off this higher annual base. The continued recovery in the real estate sector, combined with expected growth in construction and hospitality should underpin Dubais economy this year. Rising housing costs have contributed to higher inflation in the UAE and Qatar year-to-date, in line with our expectations. Headline inflation remains at relatively low levels by historical standards however. In Saudi Arabia, housing inflation has been lower than we had expected year-to-date, and we have revised down our 2013 forecast to 4.0% from 4.5% previously. In Kuwait, the Constitutional Court upheld the changes to electoral law decreed last October, but dissolved parliament on a separate technical issue . New elections have been called for 25 July and it now seems unlikely that we will see much progress on implementing the economic development plan until 2014.

Quarterly
8 July 2013

Saudi Arabia: Oil production and OPEC reference price

Khatija Haque Senior Economist +971 4 509 3065 khatijah@emiratesndb.com Jean Paul Pigat MENA Economist +971 4 230 7807 jeanp@emiratesnbd.com
Source: Bloomberg, Emirates NBD Research

Contents
GCC Overview............................................................................................................................ Page 3 UAE ............................................................................................................................................... Page 4 UAE - Dubai ............................................................................................................................... Page 6 Saudi Arabia ............................................................................................................................... Page 8 Qatar ............................................................................................................................................. Page 9 Kuwait ........................................................................................................................................ Page 10

Oman .......................................................................................................................................... Page 11

Bahrain....................................................................................................................................... Page 12

Key Economic Forecasts..................................................................................................... Page 13

Page 2

GCC Overview
Downgrade to Saudi GDP growth forecast on lower oil production
GCC oil production has declined 2.6% y/y in 1H 2013, almost entirely due to lower output from Saudi Arabia. Despite slightly higher oil production in Q2, we now expect annual 2013 oil output from the kingdom to be around 4% lower than last year. Since our 5.8% GDP growth forecast was based on an assumption of stable oil output this year, we have revised this down to 5.0%. We have retained our GDP growth forecast for the UAE at 3.8% this year, despite a better than expected performance in 2012 (4.4% versus our forecast of 3.7%) as momentum in the non-oil sectors appears strong and oil production is marginally higher year-to-date. Oil prices averaged 105 per barrel in 1H 2013 (OPEC reference price). Bloomberg consensus forecasts for Q3 and Q4 2013 imply an annual average oil price of USD103 per barrel in 2013, unchanged from the start of the year.
USD per barrel

GCC Oil output and price

140 120 100 80 60 40 12 20 0 Jan-08 10 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 16 GCC oil production (excl Oman, Bahrain) OPEC Oil Price 18 mn barrels per day 20

14

Source: Bloomberg, Emirates NBD Research

PMIs
65 UAE Saudi Arabia

PMIs show expansion in non-oil sectors

Both UAE and Saudi PMI readings showed continued growth in the non-oil private sectors in Q2 2013, although the pace of growth in Saudi Arabia is slowing. Improving domestic demand appears to be the main driver of non-oil expansion in the UAE, despite tighter than expected fiscal policy. External factors have likely contributed via higher tourism, and increased demand for residential real estate, however. In Saudi Arabia, domestic demand remains underpinned by government spending and double-digit private sector credit growth. We would not be surprised to see the PMI readings ease further during the summer months, particularly as the season coincides with Ramadan.
60

55

50 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13

Source: Markit/ HSBC, Emirates NBD Research

Inflation ticks up in UAE and Qatar as housing costs rise

Consumer inflation in the UAE and Qatar has accelerated in the first five months of this year, mainly on the back of higher housing costs. The rise in inflation in these countries has been in line with our forecasts at the start of the year, and the overall level of inflation is still relatively low compared to pre-crisis levels however. In contrast, we have lowered our 2013 inflation forecast for Saudi Arabia to 4.0% from 4.5% previously, as housing inflation year-todate has been lower than we had expected.

Inflation
6 UAE 5 4 % y/y 3 2 1 0 -1 Jan-11 Qatar KSA

Jul-11

Jan-12

Jul-12

Jan-13

Source: Haver Analytics, Emirates NBD Research

Page 3

UAE
Oil output broadly stable in Q2 2013
The UAEs oil output rose 4.9% q/q in Q2 and is up 2.5% on average in 1H 2013 compared with average 2012 production. We expect oil production to remain at similar levels in 2H 2013 at this stage, and the overall contribution to GDP growth from this sector is likely to be negligible this year.

Oil production
2.9 Oil production (lhs) Oil price (rhs) 140 120 2.8 100 mn bpd 2.7 80 60 40 2.5 20 2.4 Jan-12 Apr-12 0 Jul-12 Oct-12 Jan-13 Apr-13 USD per barrel

2.6

2012 GDP growth beat our forecasts

The UAEs real GDP growth reached 4.4% in 2012, higher than our forecast 3.7%, according to the latest data from the National Bureau of Statistics. 2011 real growth was revised down to 3.9% from 4.2% previously. The main driver of growth last year was the oil sector, which expanded 6.3%. Oil still accounts for almost one-third of the UAEs economy, and is thus a key determinant of the overall growth rate. Non-oil GDP grew 3.5%, up from 2.6% in 2011, driven mainly by services sectors rather than industry. In particular, real estate & business services expanded 6.3% in 2012, while financial services grew 6.0%. Government, social & personal services, which together account for 8% of the UAEs economy, also grew strongly in 2012 at 9.2% and 13.4% respectively. We retain our 3.8% UAE growth forecast for 2013, as we do not expect the hydrocarbon sector to contribute as significantly this year. Instead, we expect growth to be driven by the services sectors as real estate continues to recover, and tourism growth supports trade and associated sectors. We also expect construction to contribute more substantially to overall growth as new projects get underway.

Source: Bloomberg, Emirates NBD Research

GDP growth
6 4 2 % 0 -2 -4 -6 -4.8 2008 2009 2010 2011 2012e 2013f 3.9 3.2 1.7 4.4 3.8

IMF expects tight fiscal policy in 2013

The most recent IMF report on the UAE suggests that unlike other GCC states, government spending in the UAE is unlikely to contribute significantly to improving demand and non-oil sector growth this year. Although detailed statistics are not yet available, the Fund estimates that the consolidated UAE budget surplus reached 8.8% of GDP in 2012, significantly higher than our 5.2% forecast, and up from 4.1% in 2011. For 2013, the IMF expects the budget surplus to remain above 8% of GDP as the government reduces capital spending. We had expected an increase in infrastructure spending this year, and projected a narrowing of the budget surplus to 3.3% of GDP.

Source: Haver Analytics, Emirates NBD Research

Budget balance
20 15 10 % GDP 5 0 -5 -10 -15 2008 2009 2010 2011 2012e 2013f IMF estimates Emirates NBD estimates

PMI data is encouraging

The non-oil private sector continued to expand at a steady pace in Q2 2013, with the PMI reading for June hitting 54.1. Respondents continued to cite improving market conditions as domestic demand appeared to be the main driver of growth in the non-oil sector. Employment and staff costs rose, but a competitive environment

Source: IMF, Emirates NBD Research

Page 4

has meant that output costs have been contained and margins remained under pressure.
60

PMI
58 56 54

We would not be surprised to see the PMI readings dip over the summer months, particularly as they coincide with Ramadan, even though the PMI time series is seasonally adjusted.

Loan growth accelerates

Private sector borrowing reached 3.6% y/y in March (latest available data) although total bank loan growth (net of provisions) has exceeded 4% y/y in the first four months of this year, and reached 5.2% y/y in May. While this is still well below regional peers, the data shows a steady improvement in loan growth in the UAE so far this year, particularly in the retail and personal loan segment. Personal loan growth rose 0.6% m/m (5.6% y/y) in May, signaling increased consumer confidence, as well as greater access to credit at more affordable rates.

52 50 48 46 44 42 40 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13

Source: Haver Analytics, Emirates NBD Research

as deposit growth slows

Nevertheless, deposit growth in the UAE still outpaces loan growth. Bank deposits grew 10.8% y/y in May, and the cumulative increase in bank deposits year-to-May is AED 78.8bn, compared with a AED32.0bn increase in loans over the same period. Consequently, the loan to deposit ratio has eased to around the 90 mark, the lowest level in at least 5 years. However, the pace of deposit growth has slowed sharply in recent weeks, which may be partly due to the decline in EIBOR rates since February this year. Lower interbank rates reflect improved liquidity conditions in the UAE banking system, and are likely to slow deposit growth in the coming months and encourage faster credit growth, particularly in the retail and consumer segment of the market.

Bank deposit and loan growth

20 16 12 % y/y 8 4 0 -4 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Bank deposits Bank loans

Inflation rises year-to-date, but still low

Consumer inflation averaged 0.8% in the first five months of 2013, slightly higher than the 2012 average of 0.7%. The PMI data for Q2 showed that the non-oil private sector firms were lowering output prices in the face of increased competition in the market, and this has likely helped offset rising costs in other components of CPI, such as housing. Although housing costs were still lower on an annual basis year-to-date, the pace of price declines is much slower, and we expect the CPI to start to reflect higher housing costs in 2H 2013. We thus retain our 2.5% inflation forecast for the UAE this year.

Source: Haver Analytics, Emirates NBD Research

Inflation
12 CPI 9 6 % y/y 3 0 -3 -6 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Food Housing

Source: Haver Analytics, Emirates NBD Research

Page 5

UAE - Dubai
4.4% Growth in 2012, higher than expected
Dubais growth exceeded our forecasts last year at 4.4%, with 2011 growth revised down slightly to 3.0% from 3.3% previously. The main driver of growth in 2012 was manufacturing, which expanded 13.0% y/y (up from 11.7% in 2011) and contributed almost 2pp to the headline growth rate. Manufacturing now accounts for more than 15% of Dubais economy, compared with 10.6% in 2007. Transport, storage & communication grew 7.3% in 2012 (up from 2.7% in 2011), and contributed 1pp to Dubais growth last year. Growth in this sector underscores Dubais status as a global and regional trade and logistics hub. Wholesale & retail trade, which accounts for almost one-third of Dubais economy, grew just 2.3% last year, slower than we had expected in light of the strong tourism figures. Indeed, the restaurants & hotels sector saw the fastest growth last year at 16.9% y/y, up from 14.7% in 2011. This sector accounted for 4.5% of Dubais economy in 2012, up from 3.3% in 2008. Real estate & business services showed the first expansion since 2008, with real growth of 1.7% last year. The construction sector shrank -4.2% y/y, much lower than our 0% forecast for the sector.

Dubai GDP growth

5 4 3 2 % 1 0 -1 -2 -3 2008 -2.4 2009 3.2 3.3 3.0 4.4 3.9

2010

2011

2012e

2013f

Source: Haver Analytics, Emirates NBD Research

Real estate prices

100 80 60 % y/y 40 20 0 -20 -40 Jan-10 Mid-range villas Mid-range apartments Housing CPI Low-end apartments

2013 forecast unchanged at 3.9%

We retain our 2013 growth forecast of 3.9% for Dubai, despite the stronger-than-expected growth in 2012, which provides a higher annual base. This year, we expect continued expansion in the trade and hospitality sectors as well as a continued recovery in real estate & business services. We also expect the construction sector to contribute positively to GDP growth for the first time since 2008, as recently announced projects get underway. However, we expect only modest growth in construction this year. Strong investment and expansionary fiscal policy in other GCC states (particularly Saudi Arabia and Qatar) is also likely to support continued growth in the transport & logistics sectors of Dubai, even as the economic outlook for Western trade partners remains lackluster.

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Source: Cluttons via Bloomberg, Emirates NBD Research

Inflation
8 6 4 2 % y/y Headline CPI Food Housing

Residential real estate prices still rising

Residential real estate prices in Dubai continued to rise in June, according to latest data from Cluttons, with the low-end segment showing the strongest gains on a y/y basis. The price per square foot for low-end apartments rose 61.9% y/y in June, compared to 98.8% growth posted in May. The data does not show the number or volume of transactions at these prices however, so it is possible that the spike was on a low number of transactions.

0 -2 -4 -6 -8 Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Source: Haver Analytics, Emirates NBD Research

Page 6

Mid-range apartment prices rose 40.5% y/y in June while high-end properties (both apartments and villas) saw increases of 33.1% y/y and 28.0% y/y respectively. In month-on-month terms, high-end apartments saw more moderate growth of 3.2%, while high-end villa prices increased only 0.1% against May. Dubais official inflation index is starting to reflect the recovery in the housing market that has been evident over the last year. The housing component of CPI has showed positive annual growth since February 2013, albeit at a much lower rate than market data suggests. As we have mentioned in the past, the difference between the official measure of housing inflation and the market data reported by Cluttons and other real estate consultancies is due to the different survey methodologies. The CPI reflects a mix of households, some of which have seen no increase in housing costs at all, while the market data captured by independent consultancies reflects only the prices of new sales or rental agreements during the month.

Dubai Airport Arrivals

25 20 15 10 % y/y 5 0 -5 -10 -15 Jan-11 Passengers Air cargo volume

Jul-11

Jan-12

Jul-12

Jan-13

Source: STR Global, Emirates NBD Research

Tourism data remains robust in Q2 2013

Dubais hotels have continued to enjoy occupancy rates above 80% through May, with the year-to-date average at 85.3%. This is higher than the average occupancy rate of 82.3% in the first five months of 2012. At the same time, hotels have been able to raise their rates, with RevPAR more than 10% y/y higher in Jan-May 2013 over the same period last year. The strength of the tourism and hospitality sector is also reflected in the strong growth in passenger traffic through Dubais airports. Indeed, according to latest data, passenger traffic increased 18.9% y/y in May. Overall, we continue to expect growth in the hospitality and transport sectors of Dubai to contribute to overall GDP growth in 2013.

Hotel occupancy and RevPAR

Occupancy rate (lhs) 120 Growth in RevPAR (rhs) 60

80 %

40 % y/y 20

40

-40 Jan-11

-20 Jul-11 Jan-12 Jul-12 Jan-13

Source: Dubai Airports, Emirates NBD Research

Page 7

Saudi Arabia
Downgrade to 2013 growth forecast on lower oil production

Oil production
10.4 Oil production (lhs) Oil price (rhs) 140 120 9.9 mn bpd 100 80 9.4 60 40 20 8.4 Jan-12 0 May-12 Sep-12 Jan-13 May-13 USD per barrel

Despite an increase in oil output in the second quarter relative to Q1, Saudi Arabias oil production year-to-date has averaged 9.2mn bpd, -5.5% lower than average 2012 production. Our 5.8% 2013 growth forecast for Saudi Arabia at the start of this year was based on the assumption of unchanged oil production, although we recognized that as OPECs swing producer, the risks to oil output were weighted on the downside. In light of the H1 oil production data however, we think it likely that average oil production this year will be 3-4% lower than 2012. We have thus downgraded our 2013 growth forecast for the kingdom to 5.0% from 5.8% previously.

8.9

Source: Bloomberg, Emirates NBD Research

Non-oil growth outlook remains solid

Despite the easing in the PMI in Q2, the rate of growth in the nonoil private sector remains robust. Indeed, the June PMI reading for Saudi Arabia at 56.6 is still higher than for the UAE, and well above the neutral 50. Although we would not be surprised to see the PMI ease in the summer months (despite being seasonally adjusted), we expect non-oil growth to be supported by increased government spending particularly on infrastructure, as well as robust credit growth and consumer demand.

GDP growth, % y/y

15 10 5 0 -5 -10 2008 2009 2010 2011 2012 2013f Hydrocarbon Non-Hydrocarbon

Public sector loan growth accelerates

Public sector borrowing in Saudi Arabia has risen sharply this year, reaching 21.2% y/y in April, before easing slightly again in May. Government deposit growth has slowed year-to-date as well, suggesting that while public sector infrastructure spending is picking up, it is being increasingly financed through loans rather than oil revenues. The USD29.2bn increase in SAMAs Net Foreign Assets year-to-date, against a backdrop of lower oil production, also suggests that the government is relying more on borrowing to finance budget spending.

Source: Markit/ HSBC, Emirates NBD Research

Credit growth
30 Private sector Public sector 20

Inflation forecast revised lower

Headline inflation eased to 3.8% y/y in May from an average 3.9% in Q1 2013. While housing costs have risen year-to-date, the strong dollar has helped to keep imported inflation in check. In light of the lower than expected inflation in 1H 2013, we have revised down our inflation forecast for this year to 4.0% from 4.5% previously.

10 % y/y 0 -10 -20 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13

S&P outlook upgrade

S&P has raised the outlook on Saudi Arabias credit rating to positive from stable, on the back of an improved growth outlook. This is the first change in S&Ps outlook on the Kingdom since 2007. Since then, the country has seen its Net Foreign Assets more than double to USD668bn at the end of April 2013, while growth has averaged 7.6% in 2010-2012. Saudi Arabia is currently rated AA- by S&P.

Source: Haver Analytics, Emirates NBD Research

Page 8

Qatar
On 25 June, Qatars Emir Sheikh Hamad Bin Khalifa Al Thani announced that he would step down in favour of Crown Prince Tamim Bin Hamad Al Thani. The change in leadership was widely expected and is not likely to have a significant impact on Qatars economic and foreign policy.

GDP growth
21 18 15 12.0 % y/y 12 9 6.2 6 3 0 2008 2009 2010 2011 2012 2013f 5.2 17.7 16.7 13.0

2012 GDP slightly lower than expected

Official estimates show Qatars economy expanded 6.2% last year, slightly lower than our 6.7% forecast. Growth in the hydrocarbon sector slowed sharply to 1.7% from 15.7% in 2011, while non-oil growth was robust at 9.9% (vs 10.1% in 2011). Government services, which account for more than 10% of Qatars economy continued to be a primary driver of growth last year, expanding 11.5% y/y. Manufacturing, utilities, building and construction and transport & communication sectors all enjoyed double-digit growth in 2012, even off high annual bases. We retain our 2013 growth forecast of 5.2%, with all of this coming from the non-hydrocarbon sector.

Source: IMF, National sources, Emirates NBD Research

Credit growth
120 Public sector Private sector

Money supply growth accelerates in 1H 2013

Broad money supply growth continues to expand in y/y terms, reaching 34.0% y/y in May. Most of this has been due to surging quasi money, particularly FX deposits which have trebled over the last year, and which now account for almost one-third of total money supply, up from just 16% in April 2012. Government deposits grew 41.9% y/y in May, as public sector borrowing slowed. Public sector loan growth eased to 21.5% y/y in May, it slowest rate of growth since August 2011. Meanwhile private sector credit growth remains robust, reaching 14.9% y/y in May, up from 13.5% at the end of last year. The main beneficiary of increased lending to the private sector has been the services sector, which saw credit growth of 75.9% y/y in May. Industry has also seen strong credit growth year-to-date. After strong growth in 2011, lending to the real estate sector has slowed sharply in 2013, and borrowing for consumption remains weak as well.
100 80 % y/y 60 40 20

0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13

Source: Qatar Central Bank, Emirates NBD Research

Money supply growth Inflation accelerates on housing costs

Inflation has picked up steadily year-to-date, averaging 3.5% y/y in January-May, up from average 2012 inflation of 1.9%. The main driver has been higher housing costs, although food prices contributed in Q1 2013. Transport & communication costs have also risen in Q2, although this has been offset by lower prices for imported goods and some services. We expect average inflation to reach 4.5% this year. Rising inflation, combined with the governments ambitious spending plans were likely key considerations behind recent comments by Qatar Central Bank officials on the possibility of a more flexible exchange rate regime being adopted. While moving to a more flexible exchange rate would provide a greater arsenal of monetary policy tools to tackle higher inflation over the medium term, we think such a move is unlikely in the near term.
250 200 150 % y/y 100 50 0 -50 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 M2 (excl govt. deposits) FX deposits M3 (incl govt deposits)

Source: Qatar Central Bank, Emirates NBD Research

Page 9

Kuwait
Another parliamentary election
On June 16, Kuwaits Constitutional Court upheld changes to the electoral law decreed by the Emir in October 2012, which were challenged by the opposition. The Court ruled that parliament be dissolved and new elections held, because of a separate technical issue leading up to the December 2012 elections, according to press reports. New elections have been called for 25 July. Under the current voting system, decreed last October, voters can cast a ballot for only one candidate. The previous system allowed voters to choose up to four candidates, which made it easier for opposition candidates to form alliances. The opposition candidates boycotted the December elections in protest at the change in the electoral law. It remains to be seen whether they will participate in the upcoming elections. In recent years, tensions between the parliament and the government have delayed the implementation of economic reforms and infrastructure development programs. To the extent that the upcoming elections result in a parliament that is more supportive of the governments initiatives, we could see progress on implementation of these economic programs and other measures that would support growth. However, with another election now due in the coming weeks, it seems unlikely that much will be achieved this year. Consequently, we retain our 2013 GDP growth forecast of 3.0% for Kuwait this year.

GDP growth
10 7.9 5.7 5 4.2 3.0 6.0

% y/y

-5

-10 2008

-7.8 2009 2010 2011 2012f 2013f

Source: Haver Analytics, Emirates NBD Research

Credit growth private and public

10 5 0 % y/y -5 -10 -15 -20 Private sector

Private sector credit growth steady in 2013

Private sector credit growth averaged just 3.2% y/y in Q1 2013, before picking up slightly to 3.6% y/y in April. However, personal loan growth has remained in double digits since May 2012. Growth in the real estate component of credit has also accelerated, reaching 7.1% y/y in April 2013. Public sector credit continued to contract in Q1 2012, reaching -21.8% y/y in April. The data supports our view that growth in Kuwait this year will depend on the private sector, as government stimulus has been stymied by politics.

Government credit -25 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

Source: Bloomberg, Emirates NBD Research

Inflation, % m/m
1.20 1.00 0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13

Inflation eases in Q1 2013

Headline CPI came in at 3.0% y/y in May according to the state news agency, citing the central statistics office. This marked a slight uptick on the 2.8% print posted in April. Household goods & services, transport & communication and education & medical care showed the strongest price rises so far this year, but this has been offset by low imported inflation and stable housing costs.

Source: Haver Analytics, Emirates NBD Research

Page 10

Oman
2012 growth estimated at 5.1%
In its latest Article IV report, the IMF estimated real GDP growth of 5.1% in 2012, well below our 8.3% forecast and the governments target growth rate of 7% for last year. The Fund estimated non-oil growth of 5.8% in 2012, and growth in oil production of 4.5%. This year, we expect Oman to be one of the few GCC countries to increase oil production further; we have penciled in a 2% growth rate for the hydrocarbon sector. In the year-to-May, Omans oil output increased 2.6% over average 2012 production. With non-oil sector growth of around 5.5%, we retain our overall GDP growth forecast of 4.7% for Oman this year.

Oil production
960 940 920 Th. Bpd 900 880 860 840 820 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13

Current account surplus narrowed in 2012

Omans current account surplus narrowed by 9.2% y/y to USD 8.2bn (10.5% of GDP) from 12.8% of GDP in 2011, despite a strong rise in hydrocarbon and other exports. The 10.7% y/y rise in exports was offset by the nearly 20% y/y growth in imports. Net outflows on the services, income and current transfers accounts also contributed to the overall narrowing of the current account surplus in 2012. This year, we expect the current account surplus to narrow further to USD7.3bn (8.9% of GDP).

Source: Bloomberg, Emirates NBD Research

Current account balance, USDbn

10 8 6 4 2 0 -2 2008

9.0

8.2 7.3

5.0

5.0

Inflation
Consumer inflation has eased in this year, averaging just 2.2% in the first four months of 2013. The main driver has been lower food and services costs, while housing inflation has been muted as well. The only component of the CPI which has shown a relatively sharp rise is medical care, but as this has a low weight in the consumer basket, it has had little impact on headline inflation. While we have retained our 3.5% inflation forecast for 2013 for the moment, the risks to our forecast are to the downside.

-0.5
2009 2010 2011 2012 2013f

Source: Haver Analytics, Emirates NBD Research

Budget spending rises in Q1 2013

Increased government spending is also evident in the budget data for Q1 2013, which showed a 28.2% y/y increase in total expenditure. Both current and capital spending increased by just over 13% y/y in Q1. Current expenditure accounts for almost twothirds of total spending. There was also a surge in the funds allocated to private sector subsidies, which is a volatile component of the budget and accounts for a relatively small proportion of overall government spending.
7 6 5 4 3 2 1

Inflation

0 Jan-11

May-11

Sep-11 Headline

Jan-12

May-12

Sep-12

Jan-13

Food

Transport

Source: Haver Analytics, Emirates NBD Research

Page 11

Bahrain
Our core forecasts on the Bahraini economy remain unchanged this quarter, with real GDP growth of 2.8% forecast for 2013, which marks a slight slowdown from the 3.4% rate of expansion posted in 2012. Similar to other economies throughout the GCC, growth continues to be driven in large part by government spending, as activity in the non-hydrocarbon private sector remains relatively anaemic.

GDP growth
5 4.3 4 3.4 3 % y/y 2.8 2.5 1.9

Credit growth slowed in Q1 2013

Latest loan growth figures for the first three months of 2013 would seem to confirm this view. Indeed, by the end of March, total credit growth had fallen to a three-year low of 6.8% y/y. While a more detailed breakdown of the headline figure shows credit growth to both the public and private sectors slowing sharply in recent months, lending to the former continues to outpace the latter. As of March, credit growth to the government came in at 11.1% y/y in March, compared to only 5.7% to the private sector.
1

0 2009 2010 2011 2012e 2013f

Source: Haver Analytics, Emirates NBD Research

Current account surplus narrowed in 2012 on higher oil imports

Although domestic consumption and investment appears set to slow slightly in H213, Bahrains external position appears to be on solid ground. Recently released balance of payments data for 2012 shows the current account surplus narrowing to USD2.2bn last year, from USD3.2bn in 2011. This was driven almost entirely by a higher hydrocarbon import bill last year, which was likely due to disruptions to the Abu Saafa oil field. More encouragingly, 2012 also saw non-oil exports increase to a record USD4.5bn, while the services trade surplus ticked up to USD1.3bn, from USD1.2bn. With oil prices expected to trade broadly sideways in H213, we believe Bahrains external position will remain robust, and are forecasting the current account surplus coming in at USD2.1bn, or approximately 6.7% of GDP.

Credit growth
60 50 40 % y/y 30 20 10 0 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 Money supply Private sector credit Public sector credit

Source: Haver Analytics, Emirates NBD Research

Break-even oil vulnerability

price

highlights

fiscal Current account balance (% GDP)

12 10 8 6 4 2 0 2009 2010 2011 2012 2013f

The recent surge in government spending, while supporting nearterm growth, is nevertheless undermining the countrys long -term fiscal dynamics. A recently released IMF Article IV concluding statement highlights the economys vulnerabilities to a potential drop in oil prices, as the budgets breakeven price is estimated by the Fund to have reached USD115. Concerns over vulnerabilities to oil price fluctuations and a rising public debt stock were also behind the decision in mid-June of Moodys to place Bahrains sovereign credit rating (Baa1) on review for a possible downgrade.

11.1

7.3

6.7

2.4

3.0

Source: Haver Analytics, Emirates NBD Research

Page 12

Key Economic Forecasts: UAE

National Income Nominal GDP (AED bn) Nominal GDP (USD bn) GDP per capita (USD) 2009 935.8 255.0 31095 2010 1055.6 287.6 34804 2011 1280.2 348.8 41383 2012f 1409.5 384.1 44669 2013f 1406.4 383.2 43698

Real GDP Growth* (% y/y) Abu Dhabi* Dubai*

-4.8 -5.9 -2.4

1.7 1.7 3.3

3.9 4.6 3.0

4.4 4.4 4.4

3.8 3.7 3.9

Monetary Indicators (% y/y) M2 Private sector credit CPI (average) 9.8 0.3 1.6 6.2 0.6 0.9 5.0 2.1 0.9 4.4 2.1 0.7 6.4 5.0 2.5

External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP 192.3 68.2 149.7 42.6 16.7 9.2 3.6 211.9 74.7 161.4 50.5 17.6 9.1 3.2 279.3 111.6 197.8 81.5 23.4 33.3 9.5 303.8 118.3 216.8 87.0 22.7 36.2 9.4 314.0 111.7 227.5 86.5 22.6 34.3 9.0

Fiscal Indicators (% GDP) Consolidated budget balance Revenue Expenditure -12.8 26.8 39.6 -2.2 30.0 32.2 3.1 35.4 32.3 5.2 35.6 30.5 3.3 32.6 29.4

* Abu Dhabis real growth data are Emirates NBD estimates and forecasts. Dubais real growth data are sourced from Dubai Stat istics to 2011, with Emirates NBD forecasts for 2012 and 2013. UAE real growth data are sourced from NBS to 2012, with Emirates NBD forecasts for 2013. Source: Haver Analytics, IMF, National sources, Emirates NBD Research

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Key Economic Forecasts: Saudi Arabia

National Income Nominal GDP (SAR bn) Nominal GDP (USD bn) GDP per capita (USD) 2009 1609.1 429.1 16095 2010 1959.3 522.5 18956 2011 2510.7 669.5 23591 2012f 2727.4 727.3 24881 2013f 2881.5 768.4 25521

Real GDP Growth (% y/y) Hydrocarbon Non- hydrocarbon

1.8 -8.0 5.3

7.4 0.3 9.6

8.5 10.4 8.0

6.8 5.5 7.2

5.0 -4.0 6.5

Monetary Indicators (% y/y) M2 Private sector credit CPI (average) 10.7 0.0 5.1 5.0 5.7 5.3 13.3 10.6 4.0 13.9 16.4 2.9 9.0 9.0 4.0

External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP SAMA's Net foreign Assets 192.2 163.1 87.1 105.1 24.5 20.3 4.7 405.3 251.0 215.2 97.4 153.6 29.4 66.0 12.6 440.4 364.6 317.6 120.0 244.6 36.5 157.6 23.5 535.2 388.2 342.5 141.8 246.4 33.9 163.6 22.5 647.6 379.1 322.3 156.0 223.1 29.0 128.5 16.7

Fiscal Indicators (% GDP) Budget balance Revenue Expenditure Public debt

Source: Haver Analytics, Emirates NBD Research

-5.4 31.7 37.1 15.9

4.5 37.9 33.4 9.9

11.6 44.5 32.9 6.1

13.7 45.7 32.0 3.6

6.2 40.1 34.0

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Key Economic Forecasts: Qatar

National Income Nominal GDP (QAR bn) Nominal GDP (USD bn) GDP per capita (USD) 2009 356.0 97.8 59706 2010 455.4 125.1 76294 2011 624.2 171.5 100396 2012f 700.3 192.4 104737 2013f 751.1 206.3 108002

Real GDP Growth (% y/y) Hydrocarbon Non- hydrocarbon

12.0 4.5 16.6

16.7 28.9 9.2

13.0 15.7 10.1

6.2 1.7 9.9

5.2 0.0 8.8

Monetary Indicators (% y/y) M2 Private sector credit CPI (average) 16.9 1.0 -4.9 23.1 8.1 1.6 17.1 18.6 1.9 22.9 13.5 1.9 15.3 16.0 4.5

External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP Total external debt % GDP 46.9 42.3 22.5 24.5 25.0 10.0 10.2 74.0 75.7 79.1 72.6 27.2 51.8 41.4 33.5 26.8 100.9 80.6 113.3 104.3 29.4 84.0 49.0 55.8 32.5 126.4 73.7 114.1 104.0 32.6 81.6 42.4 54.4 28.3 150.5 78.2 109.6 99.6 36.1 73.5 35.6 49.2 23.9 161.8 78.4

Fiscal Indicators (% GDP) Budget balance Revenue Expenditure

Source: Haver Analytics, IMF, Emirates NBD Research

15.2 47.5 32.3

3.0 34.2 31.3

8.7 35.3 26.6

9.6 36.7 27.2

6.2 34.2 28.0

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Key Economic Forecasts: Kuwait

National Income Nominal GDP (KWD bn) Nominal GDP (USD bn) GDP per capita (USD) 2009 30.5 106.0 30423 2010 34.4 119.9 33473 2011 44.4 160.7 43463 2012f 48.3 172.3 45600 2013f 49.6 175.4 45422

Real GDP Growth (% y/y) Hydrocarbon Non-hydrocarbon

-7.8 -14.7 -4.0

7.9 1.7 11.1

5.7 11.0 4.5

6.0 10.0 4.0

3.0 0.0 4.5

Monetary Indicators (% y/y) M3 Private sector credit CPI (average) 13.2 6.2 4.0 3.0 1.9 4.0 8.2 2.6 4.8 4.5 3.6 2.9 6.5 4.0 3.5

External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP 54.4 48.9 18.5 35.9 33.9 28.3 26.7 67.6 61.8 20.1 47.6 39.7 38.3 31.9 104.1 96.6 21.9 82.2 51.2 70.7 44.0 118.4 110.2 23.3 95.1 55.2 83.0 48.2 108.4 100.6 24.9 83.5 47.6 71.4 40.7

Fiscal Indicators (% GDP) Budget balance Revenue Expenditure

Source: Haver Analytics, IMF, Emirates NBD Research

21.1 58.0 36.9

13.9 61.1 47.2

29.8 68.1 38.3

21.7 60.4 38.8

16.6 56.9 40.3

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Key Economic Forecasts: Oman

National Income Nominal GDP (OMR bn) Nominal GDP (USD bn) GDP per capita (USD) 2009 18.5 48.2 15729 2010 22.6 58.8 21197 2011 26.9 69.9 21209 2012f 30.0 78.0 22548 2013f 31.7 82.3 23310

Real GDP Growth (% y/y)

3.3

5.6

4.6

5.1

4.7

Monetary Indicators (% y/y) M2 Private sector credit CPI (average) 4.7 4.9 3.7 11.3 6.5 3.2 12.2 12.9 4.0 10.7 15.0 2.9 11.2 8.0 3.5

External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP 27.7 18.1 16.1 11.6 24.1 -0.5 -1.0 36.6 25.3 17.9 18.8 31.9 5.0 8.6 47.2 33.4 21.5 25.6 36.7 9.0 12.8 52.2 36.4 25.7 26.5 34.0 8.2 10.5 54.0 36.6 28.2 25.8 31.3 7.3 8.9

Fiscal Indicators (% GDP) Budget balance Revenue Expenditure

Source: Haver Analytics, Emirates NBD Research

0.3 40.1 39.8

4.8 39.8 35.0

6.3 46.2 39.9

10.7 46.6 35.8

-1.4 39.6 41.0

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Key Economic Forecasts: Bahrain

National Income Nominal GDP (BHD bn) Nominal GDP (USD bn) GDP per capita (USD) 2009 8.62 22.9 19472 2010 9.67 25.7 20905 2011 10.96 29.2 23240 2012f 11.41 30.4 23722 2013f 11.92 31.7 24292

Real GDP Growth (% y/y)

2.5

4.3

1.9

3.4

2.8

Monetary Indicators (% y/y) M2 Private sector credit CPI (average) 4.5 -0.7 2.8 13.0 6.2 2.0 5.2 15.0 -0.4 5.2 9.1 2.8 6.0 7.0 3.2

External Accounts (USD bn) Exports o/w hydrocarbons Imports Trade balance % GDP Current account balance % GDP 11.9 8.9 9.6 2.3 9.9 0.6 2.4 13.6 10.2 11.2 2.5 9.6 0.8 3.0 19.7 15.5 12.1 7.5 25.9 3.2 11.1 19.8 15.2 13.2 6.5 21.5 2.2 7.3 19.1 14.3 12.2 6.9 21.6 2.1 6.7

Fiscal Indicators (% GDP) Budget balance Revenue Expenditure -4.3 19.8 24.1 -4.8 22.5 27.3 -0.3 25.7 26.0 -2.0 26.6 28.6 -5.4 23.5 28.9

Source: Haver Analytics, Emirates NBD Research

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Emirates NBD Research& Treasury Contact List

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