Fortnightly, 16 October 2019

Misgav’s Gordian Surgical a commercial-stage medical device company with growing international sales for its TroClose 1200, a port access-closure system that offers surgeons a simple, secure, and safe solution to open and close the abdominal wall during laparoscopic (minimally invasive) procedures. Gordian has FDA clearance and CE mark for its TroClose1200. Gordian Surgical was established in 2012 at Trendlines Incubators Israel in the framework of the Incubator Incentive Program of the Israel Innovation Authority. (Gordian Surgical 02.10)

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8.2 Biomica Advances to Pre-Clinical Studies in Inflammatory Bowel Disease Program

Biomica, a subsidiary of Evogene, announced the initiation of pre-clinical studies for BMC321 & BMC322, two rationally-designed microbial consortia aimed to reduce inflammation for the treatment of Inflammatory Bowel Disease (IBD). Biomica’s program aims to develop a novel microbiome-based drug for IBD that triggers multiple mechanisms for the reduction of intestinal inflammation. This is the second program Biomica has advanced to pre-clinical studies, following the initiation of preclinical studies in its oncology program. IBD including ulcerative colitis and Crohn’s disease are chronic, debilitating, non-infectious, inflammatory diseases of the digestive tract. The incidence of IBD is increasing and the overall response to current available treatments is limited to 40-60%.

Biomica’s IBD discovery campaign involved implementing a large comparative analysis of hundreds of stool samples obtained from IBD patients. This analysis resulted in the detection of an array of microbial functions associated with states of inflammation and remission as well as in the identification of specific bacterial strains carrying these functions. These strains and functions have been combined to design Biomica’s consortia BMC321 & BMC322. The tolerability and efficacy of BMC321 & BMC322 are currently being evaluated in pre-clinical studies using multiple IBD animal models.

l Rehovot’s Biomica is an emerging biopharmaceutical company developing innovative microbiome-based therapeutics utilizing a dedicated Computational Predictive Biology platform (CPB). Biomica aims to identify and characterize disease-related microbiome entities, and to develop novel therapeutics based on these understandings. The company is focused on the development of therapies for antibiotic resistant bacteria, immuno-oncology, and microbiome-related gastrointestinal (GI) disorders. (Biomica 02.10)

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8.3 AngioDynamics Acquires Eximo Medical and its 355nm Laser Atherectomy Technology

Latham, NY’s AngioDynamics, a leading provider of innovative, minimally invasive medical devices for vascular access, peripheral vascular disease and oncology, has acquired Eximo Medical, an early commercial stage, medical device company, and its proprietary 355nm wavelength laser-technology platform for $46 million in up-front consideration with up to $20 million of contingent consideration related to certain technical and revenue milestones. The transaction is being funded exclusively through the use of cash on hand.

This transaction expands AngioDynamics’ existing Vascular Interventions and Therapies (VIT) product portfolio by adding Eximo’s proprietary laser technology, which has received 510(k) clearance for use in the treatment of Peripheral Artery Disease (PAD). The Eximo technology complements AngioDynamics’ leading thrombus management and venous insufficiency technologies.

Differentiated from other legacy medical devices, Eximo’s laser technology is the only system capable of delivering short, high-powered pulsed-laser energy in 355nm wavelength without compromising the integrity of its fiber optic cables during atherectomy procedures. The technology addresses the risk of perforation through tissue selectivity, addresses the risk of embolization to the patient through the availability of aspiration and is indicated to provide treatment for In-Stent Restenosis (ISR), which is the gradual re-narrowing of the artery after a blockage has been previously treated with a stent.

Rehovot’s Eximo is an early stage Israeli company with a novel hybrid technology for superior tissue resection invascular and gastrointestinal endoluminal applications. B-Laser, Eximo’s proprietary single-use catheter, combines the best of the leading technology solutions: optical fibers that deliver short laser pulse, aspiration and other innovative solutions. (AngioDynamics 03.10)

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8.4 BiondVax Receives €4 Million from the European Investment Bank for Influenza Vaccine Trial

BiondVax Pharmaceuticals received €4 million from the European Investment Bank (EIB). These funds are the final tranche of the previously announced co-financing agreement signed in June 2017 and extended in April 2019 from €20 million to €24 million. The €24 million financing has been provided by the EIB in support of construction of BiondVax’s pilot manufacturing facility in Israel and the ongoing pivotal, clinical efficacy, Phase 3 trial of BiondVax’s M-001 Universal Flu Vaccine candidate in Europe. Together with the $20 million raised in the July 2019 rights offering to shareholders, BiondVax expects its existing cash resources will enable funding of operational and capital expenditure requirements to the end of the Phase 3 trial.

The pivotal, clinical efficacy, Phase 3 trial aims to assess safety and effectiveness of the M-001 vaccine alone in reducing flu illness and severity in approximately 12,000 adults aged 50 years and older, with at least half aged 65 and older. An aggregate of 4,094 people was enrolled in the trial’s first cohort prior to the 2018/19 flu season, and approximately 8,000 participants are being enrolled in the trial’s second cohort (2019/20 flu season) in 85 sites in seven countries in Eastern Europe.

Jerusalem’s BiondVax is a Phase 3 clinical stage biopharmaceutical company developing a universal flu vaccine. The vaccine candidate, called M-001, is designed to provide multi-strain and multi-season protection against current and future, seasonal and pandemic influenza. BiondVax’s proprietary technology utilizes a unique combination of conserved and common influenza virus peptides intended to stimulate both arms of the immune system for a cross-protecting and long-lasting effect. (BiondVax 07.10)

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8.5 Accelmed Launches Accelmed Ventures II, a New $100 Million Venture HealthTech Fund

ccelmed is establishing Accelmed Ventures II, a new venture capital fund with the goal of raising and managing approximately $100 million. The fund will invest in Israeli and global pre-revenue health tech startups, including medical devices and digital health. This is the fourth fund established by the Accelmed group, which currently manages over $300 million through Accelmed Ventures and the private equity fund, Accelmed Partners.

The new fund is being launched in parallel to the fruition of portfolio companies in Accelmed Ventures I, the Group’s current venture capital fund, which was established in 2011 together with Migdal Group. Accelmed accomplished several exits to date, the most recent being that of Eximo Medical, its portfolio company based in Rehovot, Israel, which was purchased by AngioDynamics for $66 million. Eximo was established by Accelmed in 2012, under the Targeted Innovation model framework. The FDA-cleared B-Laser system developed by Eximo performs laser catheterization for the treatment of blood vessel occlusions with initial revenues in Europe and the US.

Another portfolio company, Endospan, from Herzliya, Israel, that develops and markets Nexus, a graft-based stent system for the treatment of arterial aneurysms using catheterization as an alternative for surgery, has recently signed an acquisition option agreement with US based CryoLife for up to $450 million, pursuant to receiving FDA approval in the US. Under the agreement, CryoLife purchased marketing rights of the system in Europe, where it already received CE clearance.

Herzliya’s Accelmed is a US/Israel-based group of funds managing over $300 million for investment in health tech companies in the fields of medical device and digital health. Accelmed Ventures, the VC arm of Accelmed, is focused on building and growing companies that are developing innovative health tech technologies for unmet medical needs in areas such as diabetes, heart diseases, oncology and obesity. (Accelmed 07.10)

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8.6 Aleph Farms Successfully Completed the First Slaughter-free Meat Experiment in Space

Aleph Farms has successfully taken “one small step for man and one giant leap for mankind” in producing meat on the International Space Station, 339 km. away from any natural resources. Through an international collaboration set to reach new heights with 3D Bioprinting Solutions (Russia), which develops implementations of 3D bioprinting technologies, Meal Source Technologies (USA) and Finless Foods (USA) – Aleph Farms is making a significant progress toward fulfilling its promise: to enable on Earth unconditional access to safe and nutritious meat anytime, anywhere, while using minimal resources.

Aleph Farms’ production method of cultivated beef steaks relies on mimicking a natural process of muscle-tissue regeneration occurring inside the cow’s body, but under controlled conditions. Within the framework of this experiment on 26 September on the Russian segment of the ISS, a successful proof of concept has been established in assembling a small-scale muscle tissue in a 3D bioprinter developed by 3D Bioprinting Solutions, under micro-gravity conditions. This cutting-edge research in some of the most extreme environments imaginable, serves as an essential growth indicator of sustainable food production methods that don’t exacerbate land waste, water waste, and pollution. These methods aimed at feeding the rapidly growing population, predicted to reach 10 billion individuals by 2050.

Rehovot’s Aleph Farms is a food company and global leader in the cultivated meat industry. Comprised by a passionate and devoted team of professionals, the company is making tangible impact in solving humanity’s greatest challenges today, including climate change and food shortages. At Aleph Farms, high-quality food products are produced with full transparency throughout every step of the process. (Aleph Farms 07.10)

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8.7 DayTwo Receives Strategic Investment by Longliv Ventures, Cathay Innovation and Samsung

DayTwo announced the addition of Longliv Ventures, a member of CK Hutchison Holdings Group, the global VC partnership Cathay Innovation and Samsung NEXT as strategic investors and partners. Longliv Ventures, Cathay Innovation and Samsung NEXT will participate in the company’s Series B financing, announced in June of this year. Longliv Ventures will invest $5 million in this round.

DayTwo is the only evidence-based, actionable, microbiome platform in the market today. They are in a privileged position to leverage their first-rate scientific experience, clinical trials in Israel and the United States as well as tens of thousands of customers, and proven business models with providers, employers, and payers. This deep and broad foundation, coupled with the recent financing round, enables DayTwo to address the large and pressing clinical need of diabetes management and to bring food-as-medicine to global markets for people with type 2 and prediabetes. The partnerships with Longliv ventures and Samsung NEXT catalyze DayTwo’s go-to-market initiatives in Europe and Asia.

DayTwo’s food-as-medicine approach is based on the original research conducted at The Weizmann Institute of Science, published in the journal Cell in 2015. The Cell paper demonstrates how the gut microbiome, in conjunction with other clinical and personal parameters, can enable personalized dietary interventions that can successfully balance post-meal glucose response.

Founded in 2015, DayTwo has offices in Tel Aviv and San Francisco, with 85 employees. The company completed the first half of 2019 with tens of thousands of consumers, hundreds of providers in the DayTwo network of clinical professionals, as well as employers and plans that became members of its network. DayTwo also launched a strategic partnership with the world’s second largest HMO, Clalit Health Services, which now offers the DayTwo glycemic control solution to its 4.5 million members. (DayTwo 03.10)

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8.8 Israeli Researchers Discover New Way to Stop Spread of Bone Cancer

Researchers at Rehovot’s Weizmann Institute of Science have discovered a new method to keep bone cancer from spreading which has shown promising results in a study on mice. The researchers have discovered molecular interactions between Ewing sarcomas and proposed a treatment that prevents its spreading. Ewing sarcoma is a bone cancer that appears primarily in teenagers. The new possible treatment could prove crucial, as it is hard to treat once it spreads to distant organs.

Their study showed a link between the Ewing sarcoma oncogene and glucocorticoid receptors. They tested the hypothesis that these receptors boost the growth of Ewing sarcoma. A series of studies supplied evidence that this is indeed the case. The primary medical significance of these findings is that they open the door for a new treatment for Ewing sarcoma. When the researchers implanted human Ewing sarcoma cells into mice, the tumors grew slower when the mice were treated with an approved drug that blocks the synthesis of glucocorticoids. If research in human patients confirms the study’s findings, it may offer new hope to young patients with this malignancy, especially in cases when the sarcoma has metastasized beyond the bone.

The fact that the study made use of drugs that have already been approved for other purposes should facilitate the implementation of this approach. The team’s findings were published recently in the Cell Reports scientific journal. (WIN 02.10)

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8.9 Medtronic to Buy Israeli Catheter Developer AV Medical for $30 Million

Calcalist reported that Dublin headquartered medical device maker Medtronic has agreed to buy Tel Aviv-based medical device developer AV Medical Technologies for $30 million. Founded in 2012, AV Medical develops catheters for dialysis patients undergoing routine angioplasty procedures. The company has previously signed a distribution agreement with Medtronic for its Chameleon balloon catheter, cleared by the U.S. FDA in 2015. The acquisition negotiations launched once AV Medical had demonstrated commercial potential and went on for months. AV Medical will continue to operate in Israel and its ten employees will become part of Medtronic’s local team.

In July, Calcalist reported that Medtronic had signed a partnership agreement with Israeli stroke detection startup Viz.ai. In September 2018, Medtronic acquired Israel-based surgical robotics company Mazor Robotics for $1.34 billion in cash. Earlier that year, it acquired medical visualization company Visionsense for $65 million. (Calcalist 15.10)

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8.10 Therapix Biosciences Announces Positive Data from New Drug Candidate THX-210

Therapix Biosciences announced positive results in its pre-clinical study evaluating THX-210, a proprietary novel pharmaceutical preparation containing non-psychoactive cannabinoid cannabidiol (CBD) and palmitoylethanolamide (PEA). This study is consistent with Therapix’s pipeline to develop cannabinoid based therapies. THX-210 is intended for the treatment of epilepsy, as well as inflammatory conditions.

The study consisted of in vitro tests which examined potential synergy between CBD and PEA. The study was performed in hepatocytes model of fat accumulation, where each compound was tested in a range of concentrations. In these tests, PEA had shown no effect of its own, while the effect of CBD was enhanced by the addition of PEA, lowering the required effective concentration of CBD. Thus, THX-210 has demonstrated superior efficacy as compared to the effect of CBD alone.

Givatayim’s Therapix Biosciences is a specialty clinical-stage pharmaceutical company led by an experienced team of senior executives and scientists. Their focus is creating and enhancing a portfolio of technologies and assets based on cannabinoid pharmaceuticals. (Therapix 15.10)

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8.11 MaxQ AI’s Software to be Integrated into Philips’ Computed Tomography Systems

MaxQ AI announced that the company’s Accipio intracranial hemorrhage (ICH) and stroke software will be integrated on Philips’ computed tomography (CT) systems. The integration of Accipio’s AI-powered solutions into Philips CT systems will support the detection of ICH to augment caregivers in identifying and prioritizing patients suffering from stroke, traumatic brain injury, head trauma, and other life-threatening conditions.

MaxQ AI’s ACCIPIO® ICH and Stroke Platform utilizes deep learning technologies to analyze medical imaging data such as non-contrast head CT images. The results provide deep clinical insight and actionable data in minutes that will enable physicians across the world to make faster assessments in any location, at any time. Accipio Ix enables automatic identification and prioritization of non-contrast head CT images with suspected ICH. Accipio Ax provides automatic slice-level annotation of suspected ICH. Both Accipio Ix and Ax are FDA Cleared and CE Approved. The Accipio platform will be available with new Philips CT systems and as an upgrade to previously installed Philips CT systems throughout U.S. and E.U. markets. The first deployments are expected to take place in 2020.

Tel Aviv’s MaxQ AI is at the forefront of Medical Diagnostic AI. They are transforming healthcare by empowering physicians to provide “smarter care” with artificial intelligence (AI) clinical insights. Their team develops innovative software that uses AI to interpret medical images and surrounding patient data. (MaxQ AI 15.10)

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8.12 ICL to Expand its Presence in the Plant-based Meat-alternatives Market

ICL is planning to expand its manufacturing capacity and R&D support capabilities for its ROVITARIS® alternative protein technology for the meat alternatives market. ROVITARIS® is a proprietary technology developed by ICL, which supports the production of allergen free plant-based food. The product has excellent formability and can be adapted to virtually any meat, poultry or seafood substitute application to significantly improve taste and texture. ROVITARIS® has excellent freeze & thaw stability, which results in reduced costs for food manufacturers. One of the key advantages of ROVITARIS® technology is its flexible use in conjunction with a broad variety of vegetable protein sources. ICL continues to develop new protein sources and to differentiate its offerings for its customers. Upcoming launches and line expansions include textured vegetable crumbles, which will augment ICL’s existing offerings of pulse-based (pea and fava) proteins.

Using ROVITARIS® technology, food manufacturers can create plant-based meat alternatives that are virtually indistinguishable from their traditional meat counterparts. The flexibility of the technology enables the creation of customized applications and flavor profiles. ROVITARIS® provides solutions for burgers, hot dogs, deli meats, nuggets and fish sticks, providing on-trend innovation in the form of alternative protein solutions for vegan, vegetarian, and flexitarian consumers.

Tel Aviv’s ICL is a global specialty minerals and chemicals company operating bromine, potash, and phosphate mineral value chains in a unique, integrated business model. ICL extracts raw materials from well-positioned mineral assets and utilizes technology and industrial know-how to add value for customers in key agricultural and industrial markets worldwide. ICL focuses on strengthening leadership positions in all of its core value chains. It also plans to strengthen and diversify its offerings of innovative agro solutions by leveraging ICL’s existing capabilities and agronomic know-how, as well as the Israeli technological ecosystem. (ICL 15.10)

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9: ISRAEL PRODUCT & TECHNOLOGY NEWS

9.1 Sapiens and FRISS Partner for Honest Insurance

Sapiens International Corporation has expanded its growing ecosystem by partnering with the Netherlands’ FRISS, a market leader in AI-powered fraud and risk solutions for the property & casualty (P&C) insurance industry. This partnership is part of Sapiens’ strategy to help its customers better mitigate risk and reduce fraud, improve the customer journey for low risk policies and claims, and make innovative insurtech solutions easily available to its customers.

Powered by a unique combination of out-of-the-box risk and fraud indicators, and artificial intelligence, FRISS’ solutions analyze policy applications, renewals, quotations and claims for high risks, fraud and compliance, to drive profitable growth. FRISS will be seamlessly integrated into Sapiens P&C solutions to support the entire policy/claim lifecycle and empower staff to make the best decisions during quotation, claims handling and investigations. First focus will be to complete the seamless integration of the claims solution, followed by workers’ compensation and underwriting.

Holon’s Sapiens International Corporation empowers insurers to succeed in an evolving industry. The company offers digital software platforms, solutions and services for the property and casualty, life, pension and annuity, reinsurance, financial and compliance, workers’ compensation and financial markets. With more than 35 years of experience delivering to over 450 organizations globally, Sapiens has a proven ability to satisfy customers’ core, data and digital requirements. (Sapiens 02.10)

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9.2 Cymulate Empowers SMBs With Cost-effective Enterprise-grade Security Testing

Cymulate announced an affordable offering for small to medium-sized businesses to assess and optimize their overall security posture in minutes by continuously testing defenses with the latest threats’ in the wild. Cymulate’s new offering provides SMBs with regular, comprehensive security testing, bolstering their cyber defenses by gaining immediate security exposure score and mitigation tips within minutes with comprehensive technical and executive-level reports and prioritizing remediation using the exposure score to measure the potential impact of a simulated attack. It also maximizes limited security resources and tests resilience against the latest immediate threats including strains of ransomware, Trojans, crypto-miners, worms, APTs and phishing campaigns.

Cymulate is offering SMBs a one month free trial, followed by a three-tiered package, priced per number of employees. Visit Cymulate for more info.

Rishon LeZion’s Cymulate is a SaaS-based breach and attack simulation platform that makes it simple to know and optimize your security posture any time, all the time and empowers companies to safeguard their business-critical assets. With just a few clicks, Cymulate challenges your security controls by initiating thousands of attack simulations, showing you exactly where you’re exposed and how to fix it—making security continuous, fast and part of every-day activities. (Cymulate 02.10)

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9.3 Promo.com First Video Platform to Offer Direct Video Publishing to Instagram

Promo.com is now the first video platform to let users seamlessly publish videos directly to Instagram business profiles at a click of a button. With more than 1.2 million users, Promo.com launched the capability to help users leverage Instagram videos to grow their online reach and businesses. This new offering is now live for all Promo.com users and will allow them to leverage Promo.com’s role as a Facebook and Instagram Marketing Partner. The new Instagram integration helps Promo.com users publish their videos directly to Instagram and add to the existing publishing integrations that include Facebook, YouTube and Twitter.

Promo.com’s video platform is being used by businesses and agencies around the world to easily create marketing videos for every single digital channel. The easy-to-use platform constantly evolves to meet the ever-growing video needs in a rapidly changing video-focused world.

Promo.com is the #1 video creation platform for businesses and agencies. Promo.com helps businesses of all sizes to leverage great visual content to promote anything they want online in smart, effective ways. Promo.com offers access to over 15 million premium video clips and images, ready-made templates, pre-edited licensed music, and a user-friendly editor. Promo.com is an official Facebook & Instagram Marketing Partner, and a YouTube Creative Partner. Promo.com is a privately held company with offices in Tel Aviv, NYC, and Warsaw. (Promo.com 02.10)

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9.4 AudioCodes Introduces Room Experience Solutions in Collaboration with Dolby

AudioCodes is partnering with Dolby to introduce Room Experience solutions that enhance meetings with excellent audio quality, post meeting analytics, and action item follow up. AudioCodes’ expertise in unified communications solutions and extensive partnerships with leading vendors, along with a global community of business partners, deliver unmatched technology proficiency and a comprehensive portfolio of networking solutions, personal productivity devices, and management applications under the AudioCodes One Voice offering. Complete with global presence and broad set of complementary professional services, AudioCodes brings a compelling proposition to businesses of all sizes, from large enterprises to small companies.

Part of the AudioCodes Room Experience solutions is AudioCodes Meeting Insights, an enterprise solution that is designed to easily capture, organize and share corporate meeting content assets using AudioCodes state-of-the-art Voice.AI technology. Capturing information from multiple sources spanning both in-room and remote participants connected from multiple locations, Meeting Insights seamlessly delivers multi-modal and real-time access to key meeting moments, decisions taken and resulting action items. The result is a robust solution that holds crucial information that would otherwise be lost.

Lod’s AudioCodes is a leading vendor of advanced voice networking and media processing solutions for the digital workplace. AudioCodes enables enterprises and service providers to build and operate all-IP voice networks for unified communications, contact centers, and hosted business services. AudioCodes offers a broad range of innovative products, solutions and services that are used by large multi-national enterprises and leading tier-1 operators around the world. (AudioCodes 07.10)

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9.5 Cymulate, Launches Industry’s First Agentless APT Simulation to Validate Security Posture

Cymulate revealed its Agentless APT (Advanced Persistent Threat) Simulation, which replicates the most authentic experience of how such an attack would penetrate an organization’s network and identifies gaps across the entire kill chain. Cymulate’s Agentless APT Simulation enables security teams to preview how hackers can reach their company’s crown jewels, helping red teams to test and validate, while assisting blue teams to proactively remediate gaps and optimize the attack surface, keeping APT risk to a minimum.

Rishon LeZion’s Cymulate is a SaaS-based breach and attack simulation platform that makes it simple to know and optimize your security posture any time, all the time and empowers companies to safeguard their business-critical assets. With just a few clicks, Cymulate challenges your security controls by initiating thousands of attack simulations, showing you exactly where you’re exposed and how to fix it—making security continuous, fast and part of every-day activities. (Cymulate 08.10)

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9.6 New TV White Space Solution From RADWIN Drives Broadband to Remote Communities

RADWIN announced its new disruptive TV White Space (TVWS) solution. RADWIN’s TVWS solution utilizes unused TV channels in the 470-698MHz band to connect unserved rural customers to the digital world. Leveraging upon RADWIN’s broadband wireless access innovative technologies, the new TVWS solution operates in non-line-of-sight scenarios and penetrates trees and foliage over extensive distances. The new TVWS solution complements RADWIN’s existing carrier-grade sub 6GHz portfolio and is supported by RADWIN’s OSS tools to address all operational aspects of the network lifecycle.

There are entire populations across the globe that live in remote areas who have no connection to the internet. Fixed wireless is one way to deliver broadband, however in many rural areas there are obstacles to direct line-of-sight connectivity. With this newly-launched TVWS solution, service providers can connect unserved remote communities to the information age, help bridge the digital gap and generate new revenue streams. Rural communities can significantly improve their lifestyle and boost productivity by accessing an unlimited array of online broadband services from healthcare, education, government services to entertainment.

Tel Aviv’s RADWIN is the global provider of broadband wireless solutions that deliver blazing fast broadband with unparalleled reliability. Incorporating cutting-edge technologies, RADWIN’s solutions are equipped with powerful OSS tools that support all operational aspects of the network lifecycle and enable operation in the toughest conditions including interference and nLOS. Deployed in over 170 countries, RADWIN’s solutions power applications including backhaul, access, private network connectivity and broadband on the move for rail and metro trains. (RADWIN 14.10)

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9.7 SAM & Heights Telecom Offers Enterprise-Grade Security for Home Routers

SAM Seamless Network announced a new container-enabled security layer to its platform in conjunction with Heights Telecom. This unique capability gives ISPs and service providers with total control and management of security, parental control and network management applications via their existing infrastructure. SAM and Heights Telecom have garnered participation from key industry players to deliver their container-enabled platform to ISPs. As a CPE vendor that utilizes Broadcom’s chipsets, Heights Telecom has already integrated with SAM’s platform in more than 350 thousand gateways.

Positioned within the container infrastructure, SAM’s platform seamlessly adds a security layer to any router’s existing architecture and is designed not to interfere with the router’s firmware. The security agent is embedded as part of the firmware with security hooks, enabling it to protect the router, its services and any future vulnerability found. The containerized layer includes a host of special features such as the ability to limit the CPU and RAM consumption of an app.

Tel Aviv’s SAM provides a software-based security solution that integrates seamlessly with any platform and protects local area networks by securing the gateway and all of its connected devices. Installed remotely on existing gateways, SAM doesn’t require any additional hardware or a technician to provide comprehensive network security. The solution is offered as a service, allowing users to have the enterprise-grade protection including virtually patching vulnerabilities such as KRACK and other high-level, targeted attacks. Tel Aviv’s Heights Telecom is a CPE and home networking products manufacturer, creating software for operators using a containerized SW platform allowing to easily add services with best performance, user experience and connectivity. (SAM Seamless Network 14.10)

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9.8 Credorax Ranked Among the 2018 Deloitte Technology Fast 500 EMEA

Credorax has been included in the 2018 Deloitte Technology Fast 500 ranking for EMEA. An industry benchmark, the ranking recognizes Credorax as one of the fastest-growing technology companies in the Europe, Middle East and Africa (EMEA) region in 2018. The Deloitte Technology Fast 500 Ranking is an objective industry ranking focused on the technology ecosystem. It recognizes technology companies that have achieved the fastest rates of revenue growth in the EMEA region over the past four years. Winners were selected based on percentage fiscal-year revenue growth from 2014 to 2017.

Overall, this year’s Technology Fast 500 list for the region features winners from 18 countries, with an average growth rate of 969% in 2018. Growth for individual companies on the list ranged from 131% to 19,900%. Credorax was listed among 23 companies selected as fast-growing in Israel.

Credorax is a smart payments provider and licensed bank providing cross-border processing for eCommerce and omni channel payments. Their core gateway technology, Source, has been developed in-house to provide a streamlined payments experience so smart and secure, that merchants can reach their full business potential simply by better managing their payments. Credorax merchants can accept 140 payment methods and get paid in their currency of choice. (Credorax 14.10)

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9.9 Ripples Leverages Big-Data to Increase Beverage Sales & Consumer Engagement

Ripples has introduced a new set of big-data analytics to its platform creating a new category for food and beverage marketers, called Beverage-Top Media. The new big-data analytics allow brands to gauge the social media impact of different content delivered on top of beverages, as well as provide businesses with content-based recommendations to increase sales at the point of consumption.

Customers including Chandon, Cupcake Vineyards and Coffee Cartel have already leveraged Ripples’ technology to engage with consumers, reporting significant social media results and business success.

The new Ripples customized performance reports include content analysis such as Industry, geography and seasonal-based content statistics with recommendations to help businesses maximize traffic and drive sales at the point of consumption, as well as Ripples Content recommendations to drive consumer engagement on social media. Bev-Top Media is powered by the Ripple Maker AM and Ripple Maker PM IoT devices. The Ripple Maker AM, designed for morning beverages, uses natural coffee extract to customize any foam-topped cup of coffee. The Ripple Maker PM help brands increase customer engagement via night-time beverages. Using natural malt and carrot-based extract, foam-topped beers and cocktails become canvases for brands and businesses to connect with consumers. The Ripple Maker also includes a constantly updated content library, and businesses can add their own exclusive original content.

Ripples is the world’s leading bev-top media company that offers the Hospitality and Food & Beverages industries creative solutions to increase consumer engagement, strengthen customer loyalty and build brand awareness. With the Ripples Ripple Maker, businesses serving foam-topped drinks can create personal interactions with their customers. Images can be customized and branded and can be updated daily to support ongoing promotional activities, leading to positive real-time interactions, location-based social media shares and long-term brand awareness. Ripples includes a constantly updated content library, and recently introduced new big data analytics tools which allow brands to measure the impact of bev-top on sales, as well as on customer engagement for social media. (Ripples 10.10)

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9.10 Mellanox Propels NVMe/TCP and RoCE Fabrics to New Heights

Mellanox Technologies announced acceleration of NVMe/TCP at speeds up to 200Gb/s. The entire portfolio of shipping ConnectX adapters supports NVMe-oF over both TCP and RoCE, and the newly-introduced ConnectX-6 Dx and BlueField-2 products also secure NVMe-oF connections over IPsec and TLS using hardware-accelerated encryption and decryption. These Mellanox solutions empower cloud, telco and enterprise data centers to deploy highly-efficient, NVMe flash storage platforms using both TCP/IP and RoCE.

Mellanox, the leader in high-performance networking, offers a complete portfolio comprising ConnectX SmartNICs and BlueField IPUs. The innovative portfolio delivers cutting-edge NVMe-oF capabilities over both TCP and RDMA transports, enabling superior performance, higher return on investment, and lower total cost-of-ownership than other network adapters. The now-shipping ConnectX-6 Dx and upcoming BlueField-2 IPU support hardware cryptographic acceleration of IPSec and TLS for both RoCE and TCP, making them the world’s fastest and most secure NVMe-oF SmartNICs.

Yokneam’s Mellanox Technologies is a leading supplier of end-to-end Ethernet and InfiniBand smart interconnect solutions and services for servers and storage. Mellanox interconnect solutions increase data center efficiency by providing the highest throughput and lowest latency, delivering data faster to applications, unlocking system performance and improving data security. (Mellanox 15.10)

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10: ISRAEL ECONOMIC STATISTICS

10.1 Israeli Startups Raised Over $1 Billion in September

Globes reported that Israeli startups raised over $1 billion in September, according to press releases issued by companies that have completed financing rounds. The figure may be more as some companies prefer to remain in stealth and not to publicize the investments they have received.

After raising $3.9 billion in the first half of the year, according to IVC, Israeli tech companies have now raised $5.9 billion since the start of 2019, including $650 million in July, a further $350 million in August and a whopping $1 billion in September. This figure is on course to beat last year’s record tech company fund raising, when according to IVC-ZAG, Israeli companies raised $6.4 billion, up from $5.24 billion in 2017.

September was a busy month for startup financing rounds ahead of the holidays with B2B credit company Fundbox leading the way by raising $326 million – $176 million in equity and $150 million in debt financing. Other major financing rounds include fintech company Tipalti, which raised $76 million – $60 million in equity and $16 million in debt financing. Open source security platform Snyk raised $70 million, digital health company Healthy.io raised $60 million and drug development company PolyPid raised $50 million. 3D printing company XJet raised $45 million, and drone defense company D-Fend raised $28 million. (Globes 02.10)

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10.2 Number of Empty Homes in Israel Increases by 24% Since 2012

The Central Bureau of Statistics announced that at the end of 2018, 170,300 housing units in Israel, or 6.5% of the total, were unoccupied. The number of empty housing units rose by 4% over the past year, continuing a trend that began several years ago. For example, the number of unoccupied housing units in 2012 was 137,200, so the number increased 24% between 2012 and 2018.

This was due to various reasons. Some of the housing units are in poor condition and are located in areas with little demand, so it is not worthwhile for their owners to renovate them. Others were in legal proceedings or disputes between heirs. In other cases, the properties belong to single people who have died, and the property rights have not yet been transferred. There are also luxury housing units owned by foreign residents who use them only on vacations and holidays.

Most of the empty housing units are located in the large cities, with 18,600 unoccupied housing units, 11% of the nationwide total, in Tel Aviv; 15,100, 9%, are in Jerusalem; and 12,400, 7%, are in Haifa, while Netanya is in fourth place. Other leading cities in unoccupied housing units are Holon (5,600), Beer Sheva (4,400), and Petah Tikva (4,100). (CBS 03.10)

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10.3 Record Number of Tourists Visit Israel in September

From January to September 2017, 3.297 million tourists visited Israel, a 13% increase over the 2.917 million who entered the country during the same time period the previous year. Total revenue from incoming tourism in September came to $581 million, and $4.728 billion from the beginning of the year. Some 356,500 tourists arrived in Israel by air in September, a 40% increase compared with the same month last year and a 41% increase over 2017. Some 48,400 arrived by land in September, a 78% increase over last year and an 84% increase over 2017. (Various 04.10)

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10.4 Record Number of Israelis Travel Abroad Over Jewish Fall Holiday Season

The Israeli Airports Authority estimates incoming and outgoing traffic at Ben Gurion Airport in Israel’s holiday season at 2.4 million passengers, including 1.1 million Israelis spending all or part of the holiday season overseas. This amounts to a quarter of the 4.6 million tourists who visited Israel during the entire past year. The ministry says that the contribution to the Israeli economy of the tourists who visited over the past year is $6.4 billion. The leading destination for those leaving for foreign vacations in September 2019 is Turkey, followed by Greece, Italy, the US and Russia. For many, Turkey is a place to catch a connection flight, but the number of vacationers remaining in Turkey in their vacations has recently grown. An estimated 100,000 tourists from North America will spend the holidays in Israel. (IAA 03.10)

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10.5 Bank of Israel Lowers its 2020 Growth Forecast

On 7 October, the Bank of Israel Research Department released its updated macroeconomic forecast. The Research Department projects that in 2019, GDP will grow by 3.1%, similar to the previous forecast, while the growth forecast for 2020 was reduced to 3%, compared with 3.5% in the previous forecast, due to the global economic slowdown’s expected effect on exports, and the assumption that the government will take steps to reduce the deficit. The Bank of Israel Research Department expects the inflation rate to rise gradually, reaching 1.2% in 2020. In view of the developments in inflation, the exchange rate and the global economy, the Research Department assesses that the interest rate will remain unchanged or will be reduced during 2020. (BoI 07.10)

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11: IN DEPTH

11.1 LEBANON: Moody’s Places Lebanon’s Caa1 Rating Under Review for Downgrade

On 1 October, Moody’s Investors Service (Moody’s) placed the Caa1 issuer rating of the Government of Lebanon under review for downgrade.

The decision to place the rating under review for downgrade reflects the recent significant tightening in external financing conditions and the reversal in the bank deposit inflows that are essential in enabling Lebanon to meet the government’s financing needs. Together, these have aggravated already worsening balance of payments dynamics. Anticipated external financial assistance has not yet been forthcoming and capital market access at sustainable rates remains elusive. The government’s greater reliance on the Banque du Liban’s (BdL) drawdown on foreign exchange reserves to meet upcoming foreign-currency bond maturities risks destabilizing the BdL’s ability to sustain the currency peg and ensure financial stability over the longer term under current balance of payment trends.

The review, which may extend beyond the usual 90 days, will allow the rating agency to take stock of the government’s progress in adopting the 2020 budget as planned before the end of the year, and the extent to which that unlocks confidence-enhancing external support packages via CEDRE (Conference Economique pour le développement, par les réformes et avec les entreprises) investments and/or secures financial support from traditional Gulf Cooperation Council (GCC) allies, which in turn would ease immediate liquidity risks and be conducive to a broader growth recovery over the longer term.

The review will assess whether Lebanon is likely to be able to obtain external financial assistance or renewed capital market access at sustainable rates, without which a significant share of usable liquid foreign exchange resources–adjusted for the banks’ negative net foreign asset position–will likely be consumed by debt service payments in 2019 and 2020, potentially destabilizing the currency peg and/or prompting a debt rescheduling or other credit negative liability management exercise, the increased risks of which may warrant repositioning the rating at a lower level.

Moody’s has also placed Lebanon’s (P)Caa1 senior unsecured Medium Term Note Program rating on review for downgrade and affirmed its (P)Not Prime other short-term rating.

RATINGS RATIONALE

Rationale for Initiating the Review for Downgrade::Significant Tightening In External Financing Conditions Aggravate Worsening Balance Of Payments Dynamics

Domestic and geopolitical risk manifestation in the form of sectarian tensions resulting in government deadlock, tightened United States (Aaa stable) sanctions against Hezbollah, and renewed regional tensions with neighboring Israel (A1 positive), have led to a significant tightening in external financing conditions. Sovereign risk premia in international capital markets have widened over the past few months, with EMBI spreads rising to 1,300 basis points over US Treasuries in mid-September, from about 820 basis points in early July.

Meanwhile, waning depositor confidence has led to a reversal in bank deposit inflows, which in the past have been resilient and which are essential in enabling Lebanon to meet its annual government financing needs at over 30% of GDP. Starting May 2019, year over year deposit growth has turned negative, further undermining a key funding source for the government. Depositor uncertainty has also been evident in an increasing deposit dollarization rate, to 71.8% as of July 2019, and in very high deposit interest rate differentials to international short-term LIBOR reference rates.

Since November 2018, the BdL has been drawing down its foreign exchange reserves in order to meet the government’s maturing foreign-currency liabilities. In the seven months up to July 2019, the country’s balance of payments position has continued to deteriorate, with net foreign assets of the financial sector declining by a further $5.3 billion, having already declined by $4.8 billion in 2018. According to Moody’s estimates, the BdL has a usable foreign exchange buffer of about $6-10 billion left to draw from (based on the net foreign assets accumulated in the past and when adjusting the stock of foreign exchange reserves for banks’ negative net foreign asset position) in order to maintain confidence in the peg and preserve financial sector stability. This compares with the government’s foreign currency debt service at about $5 billion in 2020, in addition to the upcoming $1.5 billion November 2019 maturity.

In the event of continuing impaired access to international capital markets, a further drawdown of the BdL’s foreign exchange reserve buffer to meet maturing foreign-currency debt obligations risks undermining the BdL’s ability to sustain the currency peg and ensure financial stability over the longer term. Standard reserve adequacy metrics for countries with a large banking system, an open capital account and a currency peg indicate that, at $31.1 billion in July 2019, foreign exchange reserves have declined to minimum prudent levels. These metrics compare the FX reserve coverage of non-resident deposits in foreign currency which has fallen below 100% and the coverage of broad money aggregates (M3) by the stock of net foreign assets which has fallen below 20%.

Anticipated External Financial Assistance Has Not Yet Been Forthcoming, the Continuing Absence of Which May Precipitate a Credit Negative Liability Management Exercise

Despite a history of securing external support, the $11 billion CEDRE investment package (equivalent to 3-4% of GDP per year disbursed over five years that was committed to in April 2018 during the Paris IV international donor conference) has yet to be disbursed. Nor has mooted additional support from GCC allies been forthcoming to-date.

The review will allow the rating agency to take stock of the government’s progress in adopting the 2020 budget as planned before the end of the year, as well as the implementation of the 2019 budget passed in July this year, as part of the conditionality attached to the disbursement of the investment package directed to the electricity, transport and water/irrigation sectors that would be conducive to a broader growth recovery over the longer term. The review will also allow the agency to assess the government’s progress in securing financial support from traditional GCC allies which in past instances of financial stress have contributed significantly to maintaining depositor confidence and in easing immediate liquidity pressure.

In the absence of market access or external financial support disbursements, usable liquid foreign exchange resources – adjusted for the commercial banks’ negative net foreign asset position – will likely be consumed by debt service payments in 2019 and 2020, potentially destabilizing the currency peg and/or prompting a debt rescheduling or other liability management exercise that may constitute a default under Moody’s definition, the increased risks of which may warrant repositioning the rating at a lower level.

Environmental, Social, Governance Considerations

Environmental considerations impact Lebanon’s credit assessment in particular through the tourism industry which competes with other Mediterranean resorts. Signs of water shortages will become more evident due to increased demand from agriculture and industry.

Social considerations are one of the key credit drivers for the sovereign in light of the sectarian fragmentation creating a track record of protracted party negotiations and government stalemates, impacting our domestic political risk assessment which is one of the key event risk drivers.

Sectarian fragmentation also impacts governance which is partially alleviated by the BdL’s non-partisan policy focus including on behalf of the government, providing key credit support for our assessment of Lebanon’s institutional strength.

What Could Change the Rating Down

Moody’s would downgrade the rating if the review were to conclude that Lebanon’s fiscal, liquidity, bank deposit and balance of payments dynamics will likely continue to weaken, potentially destabilizing the currency peg and/or increasing the risk of an imminent debt rescheduling or other liability management exercise that may constitute a default under Moody’s definition. Such a conclusion would be prompted by, but not necessarily restricted to, the government’s inability to comply with the conditionality attached to the disbursement of CEDRE investments – including the adoption of the 2020 budget before the end of this year – or failing to secure anticipated bilateral support from other lenders, for instance in the GCC, sufficient to ease immediate liquidity pressures.

What Could Lead to Confirmation of the Rating at the Current Level

Lebanon has a history of full and timely debt repayment despite severe economic and political turmoil. Moody’s could confirm the rating at the current Caa1 rating level if the review were to conclude that functioning government policy and forthcoming external financial assistance disbursements would likely ease immediate external and liquidity risks, and support the growth outlook. (Moody’s 01.10)

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11.2 IRAQ: The Economy, the Protest Movement and the Government‎

Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund, posted in Iraq Business News that in early October Iraq, Baghdad in particular, erupted in massive demonstrations, that at ‎the time of writing led to over 110 civilian deaths and over 6,000 casualties. ‎Demonstrations demanding the provision of services, economic prosperity and an end to ‎corruption have been a feature of the Iraqi scene since 2010. However, they have grown ‎in tempo, peaked in last year’s Basra’s demonstrations, and reignited again in October ‎as a young and angry population ran out of patience with the government’s sclerotic ‎pace of reform.‎

The government’s heavy-handed and over the top response to the protests, very much ‎like last year in Basra, has angered the youth and transformed the protests into riots. ‎ While a worrying development that risks an escalation of violence and potentially a ‎much larger conflict, these protests will likely run out of steam due to a combination of ‎carrot, stick and fatigue, just like last year’s then deadly protests. ‎

The carrot element began to take shape with the government’s initial package of ‎handouts in the form of payments, training programs and subsidized loans for the ‎unemployed youth, as well as subsidized housing for the country’s poor. The scope of ‎these would be enlarged significantly over the course of the next few weeks as the ‎government tries to appease an increasingly skeptical youth movement.

These handouts, whichever shape they take, would be overshadowed by the ‎government’s plans for an expansionary budget for 2020, which would be on a much ‎larger scale than that communicated by the government to the IMF over the summer.‎

The government has ample resources to implement all of these, as it has achieved a 31-‎month budget surplus of $27.5 billion by the end of July 2019 as shown by the Ministry ‎of Finance’s latest data. Though, the impetus for it to act is driven by effects of the ‎multi-year protest movement that had a profound effect on how the 2018 election was ‎fought and the current government formation, as it led to the beginning of the break-up ‎of the ethno-sectarian monolithic blocs that were dominant over the past 16 years and ‎which were at the root of Iraq’s past instability.‎

An expansionary 2020 budget on the heels of 2019’s expansionary budget would likely ‎fuel consumer spending and potentially lead to a stronger than expected consumer-led ‎‎3-4 year economic recovery. Which could become a sustainable multi-year economic ‎expansion should the government begin to implement a much-needed reconstruction ‎and investment spending program in the non-oil economy.‎

The early signs of a consumer led economic recovery can be seen from the latest ‎economic data for 2018 as reported by the Central Bank of Iraq (CBI) in its recently ‎released “Annual Statistical Bulletin for 2018”. The Bulletin showed that Iraq’s imports ‎were up +18% in 2018, on the back of the recovery of +13% that began in 2017, ‎following the severe declines from 2014-2016 which were caused by the twin shocks of ‎the ISIS war and the collapse in oil prices crushing the economy, and with-it Iraq’s ‎domestic demand for goods.‎

The revival in imports in 2017 and 2018 is likely to be a function of a recovery of ‎government spending and a tentative recovery in consumer spending with the resultant ‎increase in demand for imports- as the country is heavily reliant on imports to satisfy ‎domestic demand. Importantly, the growth in imports of machinery and transport ‎equipment argue well for the health of the underlying economic activity as can be seen ‎from the chart below.‎

Confirming this recovery, is the data on “New Vehicle Sales” as reported by the ‎International Organization of Motor Vehicle Manufacturers, which were up +60% in ‎‎2018 on the back of +35% increase in 2017. The recovery, while from a very low base, ‎is nevertheless encouraging.‎

The market’s action during the demonstrations has been mostly subdued as the curfews ‎and the government’s shutting of the internet had a negative effect on activity and ‎prices drifted lower with the market, as measured by the Rabee Securities RSISX USD ‎Index (RSISUSD), declining by about −0.7% month-month as of the time of writing.‎

However, September ended on a promising note, as the market was up +0.8% for the ‎month and down −4.1% for the year. Average daily turnover declined −7% month-‎month and displaced last month as the third lowest level over the last five years. ‎ Foreign investors continued to be net buyers, consistent with the trend of the last few ‎months, although at lower total levels, in-line with the decline in total turnover as can ‎be seen in the chart below.‎

Index of Net Foreign Activity on the Iraq Stock Exchange

During September, the market’s dynamics followed through with the improvement ‎discussed last month as the banking sector continues to be led by the National Bank of ‎Iraq (BNOI) which was up +39.1%, with other leading banks trailing behind, such as the ‎Bank of Baghdad (BBOB) up +3.4%, Commercial Bank of Iraq (BCOI) up +2.1%, while ‎Mansour Bank (BMNS) was down −1.5%. However, it should be noted that the rallies in ‎the banks were all on low turnover in-line with the market’s overall exceptionally low ‎turnover. The return of liquidity will determine the true direction of the group- whether ‎sellers will overwhelm buyers sending prices lower, or if buyers will overwhelm sellers, ‎sending prices higher. The discriminating nature of the market, discussed here over the ‎last two months, argues for the later. (IBN 10.10)‎

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11.3 IRAQ: Iraq & China Launch ‘Oil for Reconstruction’ Agreement

Salam Zidane posted in Al-Monitor on 10 October that Baghdad has forged a 20-year deal to supply Beijing with oil in exchange for Chinese investments in projects to repair Iraq’s war-damaged infrastructure.

When Iraqi Prime Minister Adel Abdul Mahdi led a delegation to China in September, Baghdad and Beijing activated an “oil for reconstruction” and investment program. Under the arrangement, Chinese firms worked in Iraq in exchange for 100,000 barrels per day.

Iraq has said it needs more than $88 billion to develop and mend its rickety infrastructure after three years of combating the Islamic State (IS). Speaking to the press, Abdul Mahdi said that, including this new deal, about 20% of Iraq’s daily oil production is being exported to China. “We agreed [with Beijing] to set up a joint investment fund, which the oil money will finance,” he said, adding that Iraq requires that China not monopolize implementing projects inside Iraq but rather will work in cooperation with international firms.

Such an agreement isn’t new. In 2015, when Abdul Mahdi served as oil minister under then-Prime Minister Haider al-Abadi, Iraq signed up for China’s Belt and Road Initiative in a deal founded on the principle of oil in exchange for construction, investment and development. Back then, China was awarded 100 projects. Yet the agreement was halted due to the political and security tensions that resulted in a ministerial reshuffle.

Iraq has been rocked by demonstrations in recent weeks, and the prime minister has again called for Cabinet changes. The situation could affect the current deal as happened before, though nothing official had been announced.

The current Iraqi government started turning its back on US companies following a $15 billion power deal with Germany’s Siemens to rehabilitate the infrastructure — leaving behind General Electric, which has operated in Iraq for years, and failing so far to sign a $53 billion deal with ExxonMobil to implement the “southern megaproject.”

Iraq is in the process of approving a law regulating the work of a reconstruction council, which will be chaired by the prime minister and tasked with overseeing projects worth more than $210 million. This would imply that the ministries and provincial governments are kept away from such projects to combat corruption and make Chinese companies’ jobs easier.

Electricity Minister Louay al-Khateeb wrote on 24 September on his Facebook page, “China is our primary option as a strategic partner in the long run. We started with a $10 billion financial framework for a limited quantity of oil to finance some infrastructure projects.” He noted, “The Chinese funding tends to increase with the growing Iraqi oil production, to be used differently from the previous policies, through construction, investments and operationalization of the reconstruction council.”

Iraq has taken the first steps toward putting this deal into force by opening bank accounts, and a Chinese delegation will visit Iraq soon to learn about strategic projects such as the suspension railway and Nasiriyah International Airport, and to reach an agreement regarding their implementation. Speaking to Al-Monitor, Abdul Hussein al-Hanin, adviser to the prime minister, said, “The China-Iraq deal stretches over 20 years. Under the deal, Baghdad shall export to China 3 million barrels a month at the world price, currently estimated at $180 million.”

Hanin, who was part of the Iraqi delegation, went on to say, “Iraq is currently selling its oil and obtaining the money one or two months later. Under this deal, however, the money will be in the form of projects that the Chinese firm carries out inside [Iraq].” He added, “The projects were identified based on three priorities. First is building and modernizing the highways and internal roads with their sewage systems. Second is the construction of schools, hospitals, and residential and industrial cities, and third is the construction of railways, ports, airports and other projects.” The Iraqi government signed the agreements with China unbeknownst to parliament.

Haybat al-Halbousi, head of the parliamentary Energy Committee, told Al-Monitor, “Parliament and the Energy Committee know nothing about the agreements signed with China. We will assume our monitoring role in hosting officials in the upcoming days to learn about the nature of these agreements.” He noted, “There will be a firm parliamentary stance and parliament will pass the agreements if they serve Iraqi interests.” He denounced the government for ignoring parliament in such major deals.

The government could face a new problem, namely the oil-rich provinces rejecting the implementation of projects in non-oil-rich provinces. Subsequently, internal tensions could be ignited and hinder such projects, similarly to what happened with the petrodollar project that allows oil-producing provinces to obtain $5 per barrel produced. Sabah Alwah, a former adviser to the Iraqi Ministry of Oil, told Al-Monitor that Iran pressured Iraq to go to China in an attempt to embarrass the United States, has issued trade sanctions against countries doing business with Iran and in a trade conflict with China. Hence, China could relinquish its projects in Iraq if Beijing and Washington improve their relations.

He underlined that it’s a good move to use oil sales to develop infrastructure, rather than obtaining loans from foreign countries or granting foreign companies a share of the projects’ revenues. He said Iraq is still committed to OPEC’s efforts to limit supply — yet Iraq reached record oil output in August of 4.88 million barrels per day. Iraq has had booming oil revenues for years. Yet its budget has suffered from phantom projects and extortion, which pushed international firms away and prevented them from investing there. Now, Chinese companies could face the same fate.

Salam Zidane is an Iraqi journalist specializing in economics. He has written for several local and international media sources such as Al-Jazeera and The New Arab. (Al-Monitor 10.10)

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11.4 EGYPT: Egypt & US Combine Efforts to Boost Family Planning Programs

mira Sayed Ahmed posted on 8 October in Al-Monitor that the Egyptian parliament recently approved amendments to a deal signed with USAID that would provide $10 million for Egypt’s family planning program.

Pursuing its efforts to put the brakes on overpopulation, the Egyptian Cabinet approved on 18 September the amendment of the grant deal previously signed between Egypt and the United States targeting family planning programs. Under the amendment, the United States Agency for International Development (USAID) is to provide a new sum of $10 million and $50,000 as an additional contribution to support the Egyptian government’s efforts in enhancing the quality of family planning and reproductive health services.

In September 2017, Egyptian Minister of Investment and International Cooperation Sahar Nasr and USAID Mission Director Sherry F. Carlin signed a six-year grant deal with the key aim of making Egypt’s family planning programs more effective and sustainable by improving the quality of services offered to citizens. According to the deal, USAID is to offer $6 million to the Ministry of Health and Population, with a total contribution of $29 million by the end of the agreement in 2022.

In August 2019, both sides agreed to amend the deal by adding $10 million and $50,000 as an additional contribution. According to the Egyptian Cabinet’s statement, this increase came as an additional contribution from USAID to improve reproductive health in Egypt, since this sector is huge. This is the amendment that was officially approved by the Cabinet in September.

At the signing ceremony of the deal in August, Nasr said that such agreements confirm the strategic and historical relationship between the two countries. This move, she continued, goes in tandem with the initiative of President Abdel Fattah al-Sisi to invest in the human element through grants directed to higher education, scientific research, health care and family planning. “Cooperation with the United States is based on the priorities and needs of the Egyptian people,” the minister remarked at the ceremony.

According to Nasr, USAID has been an economic partner for the Egyptian government for decades. The total value of USAID contributions to Egypt amounted to about $30 billion, while the volume of US investments in Egypt amounted to about $22 billion by the end of December 2018. Carlin stressed at the ceremony in August that such grants reflect continued commitment of USAID to work with the Egyptian government toward achieving a more prosperous economic and social future for Egyptians.

Speaking to Al-Monitor, parliament member Fayka Fahim said the issue of family planning is one of the key challenges facing the country. Therefore, fostering strategic partnerships with other countries in this domain is of paramount importance, she said. “Egypt has already taken many steps forward. But we still need both technical and financial support to set up more family planning clinics, especially in rural areas,” Fahim added.

In May 2018, USAID released a statement to announce another grant deal with Egypt’s Health Ministry with the aim of curbing fertility rates. “Responding to a request by the Government of Egypt to contribute to Egypt’s family planning efforts, USAID Mission Director Sherry F. Carlin joined Minister of Health and Population Dr. Ahmed Emad Rady to launch a new program to strengthen Egypt’s family planning in response to Egypt’s rapid population growth,” the statement read.

According to the statement, USAID shall provide technical assistance and training to the Ministry of Health and Population to give an extra boost to its Family Planning and Reproductive Health Program, a matter that will help improve contraceptive use and reduce fertility over time. The program targets nine governorates in Upper Egypt and areas of Cairo and Alexandria. The statement quoted Carlin as saying that the new family planning program is part of the $30 billion that the American people have invested in Egypt through USAID since 1978. “We know that USAID family planning programs have made tremendous impact in the past. We stand poised again to be a part of the solution to the rapid growth in Egypt’s fertility rate,” Carlin said in the statement.

The issue of overpopulation has always been a headache for the Egyptian government. Therefore, both the Ministry of Social Solidarity and the Ministry of Health are stepping up efforts to improve family planning services.

According to the Central Agency for Public Mobilization and Statistics (CAPMAS), birth rates declined by 6.8% in 2018. The total number of births in 2018 reached 2.3 million compared to 2.5 million a year earlier. In September 2018, the Ministry of Social Solidarity also launched a family planning campaign dubbed “Two is Enough,” with the aim of challenging the deeply-rooted traditions that support having large families. “We — the Social Solidarity Ministry — focus on involving civil society in our campaign. The two-year campaign coordinates with 92 nongovernmental organizations [NGOs],” Randa Fares, the campaign coordinator at the Social Solidarity Ministry, told Al-Monitor.

Fares elucidated that the Health Ministry is cooperating with USAID, while the Social Solidarity Ministry is coordinating with NGOs. “All sectors should be involved to reach the desired target,” she stressed. “We still need more clinics nationwide; we still need more campaigns, particularly in rural areas. We started the journey, but it is not that easy.”

Amira Sayed Ahmed is a Cairo-based freelance journalist and full-time editor of local news at The Egyptian Gazette, Cairo’s oldest English-language daily. She has been involved in writing about political, social and cultural issues in Egypt since 2013. (Al-Monitor 08.10)

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11.5 MOROCCO: Outlook Revised to Stable from Negative on Budgetary Consolidation Efforts

Rating Action

On 4 October 2019, S&P Global Ratings revised its outlook on Morocco to stable from negative. At the same time, we affirmed our ‘BBB-/A-3’ long-term and short-term foreign and local currency sovereign credit ratings on Morocco.

Outlook

The outlook is stable, balancing our expectation of further fiscal consolidation and gradual improvement in the current account position over the next two years against risks to economic growth from domestic structural shortcomings or external shocks, for example, due to a slowdown in world trade.

We could raise the rating if budgetary consolidation prospects materially improve or the ongoing transition toward a more flexible exchange rate that targets inflation significantly bolsters Morocco’s external competitiveness and ability to withstand macroeconomic external shocks. We could also raise the ratings if Morocco’s ongoing economic diversification strategy results in less volatile and higher rates of economic growth.

Conversely, we could lower the rating if the government deviates from its fiscal consolidation plan, resulting in substantially higher government debt compared with our forecast; real GDP growth rates significantly undershoot our expectations; or external imbalances widen, resulting in a significant increase in the economy’s gross financing needs.

Rationale

The outlook revision reflects our expectation that Morocco’s budgetary position should gradually improve, supported by the government’s comprehensive budgetary strategy and privatization proceeds over the forecast period, to reach 3% of GDP in 2022. This year, the government expects to address the shortfall in tax revenues mainly by making savings in current spending. We don’t expect the public sector wage hike announced in the spring to affect the budgetary outcome, because it had already been included in the 2019 budget. Additional savings will come from lower-than-budgeted spending on subsidies for liquefied petroleum gas (LPG). For example, the government put in place a hedging strategy, which shields its spending on subsidies for LPG against potential increases in LPG prices during 2019.

Moreover, the government’s strategy of promoting private sector activity includes the establishment of schemes similar to public-private partnerships, including concessions to private sector investors, which should allow the government to reduce public investment outlays and build on its assets (such as sea ports and real estate). Given the government’s commitment to privatize some assets from 2019-2024, we expect the change in net general government debt – our preferred indicator of fiscal flows – to decline as of 2019.

We believe that the ongoing shift in Morocco’s underlying economic structure, driven by substantial foreign direct investment and a more resilient agricultural sector, both underpinned by the government’s strategy to promote private sector activity and limit or – in some sectors – reduce the government’s role in the economy, benefits economic growth prospects and stability. As a result, overhauling the economic structure, along with higher economic growth, should in our view lead toward gradually reduced economic vulnerability from persistent current account and budget deficits. We believe that the IMF-approved precautionary and liquidity line from December 2018 underpins the country’s macro-financial stability, and economic and budgetary policy objectives.

The ratings on Morocco are supported by moderate government debt and manageable current account deficits, despite a deterioration in 2018, amid relatively stable policymaking. The ratings remain constrained by GDP per capita lower than that of similarly rated sovereigns, significant economic reliance on agriculture, high social needs, and a relatively slow approach to budgetary consolidation.

Institutional and economic profile: Economic growth to decelerate this year, while economic diversification is set to continue

Morocco’s GDP per capita remains one of the lowest of the sovereigns rated in our ‘BBB’ category.

We expect real GDP growth in Morocco at about 2.8% in 2019, reflecting a slowdown in Europe, as well as decelerating growth in the country’s agricultural output. The government has been reducing the economy’s vulnerability to weather shocks by investing in more-efficient technologies in the agricultural sector via the Green Morocco Plan, as well as diversifying the economy. In this context, we believe that nonagricultural output, which had been accelerating this year (3.4% growth in the first quarter of 2019), will continue to expand in line with past trends and reflect continuous growth in foreign direct investment (FDI), despite an expected dip this year.

The main sources of growth are the expanding automotive, aeronautic, and electronics sectors, where substantial output growth is expected to continue at least through 2022. For example, the recently inaugurated car manufacturing plant by PSA is expected to increase its output in 2021, boosting the economy’s exports. Indeed, Morocco has built comprehensive industrial clusters around its emerging auto industry. It has attracted a number of foreign car manufacturers, first from France and most recently from China.

As a result, the number of vehicles produced in Morocco has increased by more than 2.5x since 2014, overtaking in value exports related to phosphates and their derivatives a few years ago. Nevertheless, phosphates and their derivatives will still represent an important share of the country’s exports. We also consider that tourism has substantial further growth potential, despite solid growth in tourist receipts this year, of almost 6% year-on-year during the first seven months of the year. The construction sector has recovered this year and we expect it to contribute positively to overall economic growth.

Given Morocco’s significant dependence on energy imports, FDI in the energy sector is increasingly important. The country aims to produce 52% of its power from renewable energy by 2030, which appears realistic, given that an estimated 35% of its current electricity production comes from renewables (hydro, wind and solar). Projects such as this, which ease the economy’s dependence on external sources of energy, are positive because they support a further reduction in current account imbalances and also further insulate Morocco from energy price increases, which were particularly adverse in 2018.

The government has also promoted several gas field exploration projects. Although they are unlikely to come on-stream over the next two years, they could further reduce Morocco’s energy imports and benefit its trade balance. This vulnerability was most recently demonstrated in September 2019 when oil prices increased due to geopolitical factors. As a result of the significant negative economic and budgetary effects, the government is considering a price regulating mechanism that would prevent the full impact of oil price increases being felt by end-user customers. Instead, it would require the supply chain to absorb part of the pressure. If approved by the Moroccan competition authority, this mechanism could cushion the negative impact on the economy, in part by supporting households’ disposable income, and allow for improved predictability in terms of budgetary outcomes.

We forecast that real GDP growth will average about 4% in 2020-2022, backed by increasing growth in nonagricultural sectors and resilience in the agricultural sector. We also expect that the business environment and external demand will remain broadly supportive of the steady pick-up in nonagricultural output. To this end, the government has prepared an investment charter, small-business act, and tax system overhaul to introduce more stability and policy predictability for business. Moreover, to improve liquidity in the economy, the government has shortened its payment times to suppliers, and those of state-owned enterprises (SOEs), and has settled its payment arrears with the private sector. We believe that these measures will support the private sector’s development, especially given this year’s economic slowdown.

Tackling other structural weaknesses, such as payment indiscipline among private sector companies and administrative hurdles in the business environment, could support the country’s economic diversification and the resilience of its economic growth. We believe that the government’s strategy to further improve the business environment, including access to finance, is likely to enhance the country’s standing in the World Bank Doing Business ranking. It is currently 60th among 190 countries.

Unless Morocco suffers external economic shocks – for example, due to the heightened risk of global protectionism or a faster slowdown in European economies, which represent about 70% of its export markets – we believe that the expansion of its export capacity and its rise up the value-added ladder will contribute positively to economic growth over 2019-2022. We view the two-year IMF-approved liquidity line put into place in December 2018 (worth about $2.97 billion) as an important tool in the context of these risks, as well as a relevant policy anchor. It resulted in a number of policy measures being rolled out to improve the economy’s performance and strengthen its resilience.

We believe that Morocco has largely demonstrated political and social stability, especially following the Arab Spring. It achieved this through constitutional reforms, a rise in government spending aimed at economic development, and reduction of economic inequality in less developed regions, with broad support from King Mohammed VI. The king chairs the Council of Ministers, which deliberates on strategic laws and state policy orientations. His role in policymaking has held greater importance since 2017, when he intervened in curbing social tensions in the Rif and Jerada regions.

Although ethnic, tribal, religious and regional divisions are less pronounced in Morocco than in much of the Middle East and North Africa, there are rising demands from some parts of the Moroccan population for more-inclusive economic growth. In our view, this partially stems from high unemployment among youth and the income disparities between more- and less-developed areas. At the national level, the unemployment rate appears low and falling, but the differences among population segments are significant (higher in urban areas, and for youth and women). Moreover, we believe that higher participation by women in the labor market (estimated at 22.2% in 2018) could significantly increase the country’s economic growth potential.

The government has expressed its willingness to accelerate the implementation of regional development programs and decentralization of the state with devolution of tasks to regions to reduce income disparities, including by tackling high unemployment. We believe that these demands will persist and constrain Morocco’s budgetary position, delaying a faster reduction in the budget deficit over our forecast horizon. Nevertheless, to the extent they are directed toward improving education and labor market outcomes, such policies could boost the country’s growth potential in the medium-to-long term.

Flexibility and performance profile: Budget deficit to slowly decline, supported by privatization proceeds

For 2019, we expect the government to post a budget deficit of about 3.3% of GDP, including the planned privatization proceeds. Following a significant wider current account deficit in 2018, we expect the deficit to gradually decline, on the back of new exporting capacities, subject to the trends in external demand. We anticipate that authorities will inch toward a more flexible exchange rate regime over the medium term.

The budget deficit widened to 3.7% of GDP in 2018 against the government’s target of 3%, mainly because of a sharp rise in oil prices (leading to increased cost of energy subsidies for liquefied petroleum gas), combined with lower-than-planned grants from the Gulf Cooperation Council (GCC). We don’t anticipate a repeated slippage in 2019 because the remaining amount of budgeted GCC grants is modest and our forecasts don’t suggest a similar rise in oil prices this year. In fact, the latter risk has been eliminated, as the government put in place a hedging strategy which shields its spending on subsidies for LPG against potential price increases during 2019. We therefore expect the headline budget deficit to be broadly stable in GDP terms in 2019.

This year, the government expects to address the shortfall in tax revenues mainly by savings in current spending. We don’t expect the public sector wage hike to affect its budgetary outcome, given that it had already been budgeted for and we expect additional savings from lower-than-budgeted government subsidies for LPG, due to the implementation of the above-mentioned hedging strategy. Moreover, the government’s strategy of promoting private sector activity includes the establishment of public-private-partnership-like schemes, including concessions to private sector investors. These should allow the government to reduce public investment outlays and build on its assets. Given the government’s commitment to privatize assets worth approximately 4% of GDP during 2019-2024, we expect the change in net general government debt to decline in 2019 compared with 2018.

The government has been addressing the rising social demands for better living standards, including education and health care, and tackling high unemployment rates in poorer parts of the country by strengthening social protection programs. This includes the National Human Development Initiative aimed at supporting vulnerable parts of the population, funded from public and private sector sources. Morocco provides socially sensitive subsidies on basic goods (flour, sugar, and LPG) and is implementing a single subsidy registry to provide better targeted and efficient support. On the revenue side, in the context of the decisions following the tax system conference held in May 2019, we view favorably the government’s plans to broaden the tax base to improve tax collection. This includes reducing numerous tax exemptions to benefit the investment activity and attempting to address sizable tax avoidance and evasion, while targeting the vulnerable social groups.

We forecast that the gross government debt-to-GDP ratio will stabilize at about 53% of GDP over the medium term. We expect net general government debt to average about 51% of GDP during 2019-2022. The average maturity of the central government debt outstanding stands at about 6.75 years, with the average interest rate estimated at below 3.9%.

Our budgetary forecast includes expected privatization proceeds for 2019-2022. We incorporated into our forecast privatization proceeds of about 0.4% of GDP in 2020 and 2021, and 0.2% of GDP in 2022. If the realized proceeds are higher than forecast, the decline in the general government debt-to-GDP ratio will be faster than our forecast suggests.

Our gross general government debt data consolidate the holdings of central government debt by other branches of state, such as public pension funds, while net general government debt excludes from gross debt the government’s liquid assets. Therefore, change in net government debt – our preferred variable for fiscal flow performance – reflects all the components affecting the government debt position, not just the central government balance.

The general government debt stock has risen significantly over the past eight years (from 32% of GDP at year-end 2010, before the Arab Spring) due to consistently large budget deficits. We believe this points to structural weaknesses in the Moroccan economy, relative to other sovereigns at this rating level. The government’s debt profile appears favorable: At year-end 2018, the average life of debt outstanding stood at six years and five months, and the average cost of debt was 3.9%.

The Moroccan dirham is currently pegged to a currency basket comprising 60% euros and 40% U.S. dollars. The foreign exchange (FX) peg regime limits monetary policy flexibility, in our view. In January 2018, Moroccan authorities and the central bank, Bank Al Maghrib (BAM), decided to increase flexibility in the exchange rate regime by widening the band of fluctuation between the dirham and the basket of currencies to 2.5% in either direction from the previous plus or minus 0.3%. In our view, the measure was implemented smoothly, especially considering earlier attempts in mid-2017, when BAM’s FX reserves shrank by more than 15% in the two months before the reform. We attribute the decline in FX in part to pressure from domestic market participants following increasing demand for hedging instruments. As a result, a sizable portion of these reserves was transferred onto domestic banks’ balance sheets, leading to a substantial increase in foreign-currency assets, and the banking system as a whole did not lose its FX reserves. At the end of 2018, the reserve coverage was approximately five months of current account payments.

If widening the exchange-rate fluctuation bands continues to go well, we would view further widening as positive for our overall monetary assessment on Morocco. It would likely bolster the country’s external competitiveness and ability to withstand macroeconomic external shocks. However, we anticipate that authorities will first allow external financial developments to test the current fluctuation bands, and wait for other parameters like budget and current account balance to improve before moving toward further widening the bands.

Finally, although they are moving toward a more flexible exchange rate regime, we expect Moroccan authorities will maintain restrictions on capital accounts in the near term. These restrictions will be eased gradually, to avoid any potential large-scale capital outflows.

Although the banking sector appears to be moderately capitalized, it is unlikely to pose a significant risk to the wider economy, given its adequate regulatory Tier 1 capital ratio of almost 10.8%. Although nonperforming loans constitute a relatively high proportion of the total, at 7.7% at the end of August 2019, they appear adequately provisioned. Nevertheless, the banking sector remains vulnerable to credit concentration risks. The banks’ expansion into Sub-Saharan Africa has so far been highly profitable, but it opens new channels of risk transmission to the country’s banking system.

We expect Morocco’s current account deficit to narrow to about 4.9% of GDP in 2019, down from about 5.5% of GDP last year, when energy-related imports increased by almost 20%. In the absence of a significant decline in external demand – which could come from a rise in global protectionism or the ongoing economic slowdown in Europe – we expect the current account deficit to narrow during the forecast horizon, as rising export capacity materializes in higher value-added industries, like automotive.

Cars have become the country’s leading export product, accounting for about 24% of total goods exports and more than 5% of GDP in 2017. Auto exports rose almost 11% during 2018, with an even larger increase in aeronautics (13.9%). Furthermore, the export of phosphate and its derivatives bottomed out and will grow in line with external demand (17% growth last year). At the same time, tourism receipts grew by almost 6% in the first seven months of this year. Meanwhile, the development of domestic energy sources should curb growth in Morocco’s energy bill, although we do not incorporate this development into our forecast yet, since it is likely to emerge only at the end of our projection horizon. Morocco also benefits from strong remittances.

The external liabilities position will remain large over the next three years, and we forecast narrow net external debt as a proportion of current account receipts (CARs) to be 20%-30% in 2019-2022. We also forecast external financing requirements will remain covered by CARs and usable reserves over this period. (S&P 04.10)

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11.6 CYPRUS: Fitch Revises Cyprus’s Outlook to Positive; Affirms at ‘BBB-‘

On 11 October, Fitch Ratings revised the Outlook on Cyprus’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at ‘BBB-‘.

Key Rating Drivers

The revision of the Outlook on Cyprus’s IDRs reflects the following key rating drivers and their relative weights:

Medium: The prudent fiscal policy stance has continued since the last rating review in April 2019 and will likely result in a general government surplus above 3% and a primary surplus close to 6% of GDP in 2019. The underlying budget surplus, excluding one-off items, has steadily increased over the past three years from 0.3% of GDP in 2016 to 1.8% in 2017 and reached 3.4% in 2018. Cyprus has the largest budget surplus among Eurozone members in 2019 and the surplus is also significant compared with the ‘BBB’ median of a 2.3% deficit. Fitch expects the budget surplus to remain close to 2% of GDP in 2020-2021, well above the requirements of the EU fiscal rule. The pending court decision on the reversal of public sector wage cuts represents a moderate fiscal risk, an estimated annual cost of around 0.8% of GDP until 2022.

The post-crisis recovery of the economy has been strong, reflected by the five-year average GDP growth reaching the ‘BBB’ median of 3.6% in 2019. The economy is forecast to slow gradually as the spare capacity is gradually absorbed and the external environment has become less supportive. Nevertheless growth will be favorable compared with Eurozone dynamics. Fitch forecasts 2.9% GDP growth in 2019 and 2.7% in 2020 and 2021.

Due to the firm downward trajectory of gross general government debt (GGGD), benefiting from persistent budget surpluses and solid economic growth, there is increasing capacity to absorb potential costs of further banking sector interventions.

Cyprus’s ‘BBB-‘ IDRs also reflect the following key rating drivers: The structural strength of the Cyprus economy is illustrated by per capita GDP and governance indicators in line with the ‘A’ and higher than the ‘BBB’ median.

The GGGD is very high, forecast at 95% of GDP at the end of 2019 compared with the ‘BBB’ median of 36% of GDP. Nevertheless it is declining again after the one-off increase (€3.19 billion, equal to 15.5% of GDP) in 2018 due to transactions related to the sale of Cyprus Cooperative Bank (CCB) to Hellenic Bank. According to our debt dynamics simulation, GGGD/GDP could decline to 60% of GDP by 2028. This scenario is based on the assumption of 2% medium term growth and primary surpluses, combined with a subdued increase in the marginal effective interest rates.

The banking sector remains a major weakness relative to ‘BBB’ peers, primarily due to weak asset quality and high NPE ratios that are still weighing on capital, in particular capital at risk from unreserved problem assets, and profitability. The Banking System Indicator (BSI), the weighted average Viability Rating of institutions in the highly concentrated banking sector, remains among the weakest of ‘BBB’ peers at ‘b’.

The ratio of NPEs to total loans was broadly stable in H1/19, at around 30%, following sharp declines in 2018, and remains among the highest in the EU. Addressing the remaining substantial legacy issues in the banking sector has become more uncertain since the last rating review. In August 2019, parliament adopted amendments to the existing foreclosure law that would reverse some of the previous reform measures aimed at facilitating foreclosures and could make the work-out of NPEs more difficult. The final ruling has been deferred to the Supreme Court, which has not yet come to a conclusion.

The government’s flagship Estia program to help defaulting mortgage borrowers through loan restructurings and state subsidies to incentivize loan repayment had a slow start in September 2019, with limited initial interest from eligible borrowers despite the generous conditions.

Private sector debt and non-performing exposures remain high at 217% (excluding special purpose entities; SPEs) and 42% of GDP in Q1/19, respectively, and constrain credit growth.

The current account deficit has widened during the cyclical recovery as strengthening domestic demand, especially in the construction sector and household consumption, have led to strong import growth. Fitch forecasts a 7.3% of GDP deficit in 2019, compared with the current ‘BBB’ median of 1.9% deficit. When excluding SPEs, both financial and non-financial companies that materially distort external statistics, the current account deficit decreases substantially, according to the Central Bank of Cyprus. Cyprus’s net external debt (NXD) was close to 0 in 2018 when adjusted for SPEs, compared with a non-adjusted NXD debtor position of 106% at-end 2018 and a current ‘BBB’ median of 7%.

Cyprus’s financing flexibility has improved substantially since the country exited the macroeconomic adjustment program in March 2016. The government has built a track record of capital markets access with increasingly favorable yields, the average issuing bond yield was 2.3% in H1/19, including 15- and 30-year bonds. Furthermore, Cyprus now fully benefits from the ECB’s asset purchase program: the ECB’s holdings have reached €1.6 billion in September 2019 from €678 million at the end of December 2018.

Rating Sensitivities

Developments that may, individually or collectively, lead to an upgrade include:

Materially reduced contingent liabilities to the sovereign stemming from the banking sector, for example from declining NPEs;

Marked reduction in the GGGD/GDP ratio; and

Reduced vulnerability to external shocks, for example stemming from narrowing in the current account deficit.

The Outlook is Positive. Consequently Fitch does not currently anticipate developments with a high likelihood of leading to a downgrade. However, developments that may individually or collectively lead to negative rating action include:

Stalling of the decline in the government debt-to-GDP ratio, for example due to deterioration of budget balances, weak growth or materialization of contingent liabilities;

Heightened risks in the banking sector, for example from deterioration in asset quality, with adverse impact on the real economy and/or the fiscal position.

Key Assumptions

Gross government debt-reducing operations such as future privatizations or asset sales by the state-owned asset management company are not considered in Fitch’s baseline scenario. The projections also do not include the impact of potential future gas reserves off the southern shores of Cyprus, the benefits from which are several years in the future.

Fitch does not expect substantial progress with reunification talks between the Greek and Turkish Cypriots over the next quarters. The reunification would bring economic benefits to both sides in the long term but would entail short-term costs and uncertainties. (Fitch 11.10)

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