Fortnightly, 7 March 2018

Fortnightly, 7 March 2018

March 7, 2018


7 March 2018
20 Adar 5778
19 Jumada Al-Akhira 1439




1.1  Jerusalem to Inject NIS 700 Million into Hebrew University
1.2  Bank of Israel Governor Flug Cites Improved Technical Education to Address Israel’s Low Productivity


2.1  Moovit Raises $50 Million to Expand Its Global Urban Mobility Operating System
2.2  Daimler and Mizmaa Ventures Co-Lead Round B at Anagog – The Mobility Status AI Innovator
2.3  Edgybees Raises $5.5 Million Seed Round to Save Lives with Augmented Reality
2.4  Plasan Agrees with BAE Systems for the Armoring of Type 26 Combat Ships


3.1  Lebron James-Backed Pizza Chain to Make Debut in Arabian Gulf
3.2  Subway Franchise Operator Says Planning Arabian Gulf Retail Expansion
3.3  Dubai Retail Giant Landmark Launches Discount Store Concept
3.4  Ooredoo Partners with MATRIXX Software to Provide Digital Mobile Plans to Oman
3.5  Sandvine and Mobily Enhance Customer Experience with Active Network Intelligence
3.6  STC & Cisco Sign Agreement to Develop Saudi 5G Networksn
3.7  ADM & Cargill to Launch Soybean Joint Venture in Egypt
3.8  Nexteer to Open New Facility in Morocco


4.1  Minister Steinitz Says Israel Will Ban Diesel & Gasoline Vehicles by 2030
4.2  Renewable Energy Projects Provided Jordan’s National Power Grid with 402 MW in 2017
4.3  Oman Inaugurates Giant Solar Plant to Boost Oilfield Operations


5.1  Lebanon’s Consumer Prices Up in January 2018 with an Annual Inflation Rate of 5.55%
5.2  Iraq Falls in Transparency Ranking
5.3  Iraq’s Oil Ministry Finalizes Export Figures for January

♦♦Arabian Gulf

5.4  UAE Approves First Registered Tax Agents
5.5  Germany Signs Up for Expo 2020 Dubai
5.6  Dubai’s DEWA Awards $237 Million Contract for Desalination Plant
5.7  Dubai’s Hotel Room Supply to Top 132,000 by end-2019
5.8  Dubai’s Food Trade Surpasses $19 Billion in First 9 Months of 2017
5.9  Saudi Inflation Jumps in January on Price Hikes
5.10  Saudi Consumer Spending Set to Take a Hit as Reforms Impact
5.11  Saudi Arabia Extends Foreign Investment Licenses to 5 Years
5.12  Saudi Arabia Climbs in Transparency International’s 2017 Corruption Index
5.13  Saudi Arabia & Egypt Set Up $10 Billion Joint FundEgypt’s Foreign Currency Reserves Climb to $38.2 Million

♦♦North Africa

5.14  Egypt’s Foreign Currency Reserves Climb to $38.2 Million
5.15  Cairo Raises Growth Forecast by End June to 5.4%
5.16  Libya’s Sharara Oil Field Reopens
5.17  Moroccan Electricity Consumption in 2017 Highest in 5 Years


6.1  Turkey’s Annual Inflation Rate Stood at 10.26% in February
6.2  EU’s Share of Turkey’s Exports Reaches 53% in February with Sharp Annual Increase
6.3  Cypriot Consumer Prices Drop by 0.3% in February
6.4  Greece’s GDP Underperforms in 2017, Causing Concern for 2018


7.1  Top UK University Launches New Campus in Dubai
7.2  Saudi Arabia Approves First Law for Restoring Cinema
7.3  Saudi Arabia Allows Women to Join Military


8.1  West Pharmaceuticals Opens Israel Innovation Center
8.2  Perflow Medical Receives $12 Million in Funding
8.3  Evogene Announces Positive Results in its Novel Mode-of-Action Herbicide Program
8.4  Saturas Raises $4m Series A to Commercialize Precision Irrigation Tech
8.5  Can Fite Reports Progress in Phase II NASH Study with Drug Candidate Namodenoson
8.6  OrthoSpin’s Robotic External Orthopedic Fixation System Successful First
8.7  Caffeinated Stimulants Get a WakeUp! Call
8.8  Israel’s Medivie Signs $110 Million Medical Cannabis Export Deal
8.9  Nucleai Raises $5 Million in Seed Round


9.1  Stratasys Expands Access to 3D Printing as Laboratories Transition to Digital Dentistry
9.2  Shenzen TiComm Selects Ethernity Network’s FPGA-Based SD-WAN Platform
9.3  MTS Alliance with Panasonic Delivers Property Management System Integration
9.4  MTI Wireless Edge Launches New Portfolio of 5G Backhaul Antennas Innovations
9.5  Anagog Named 2018 BIG Innovation Award Winner by Business Intelligence Group
9.6  BUFFERZONE Eliminates Cyber Mining Malware Threat With Updated Prevention Software
9.7  BGU Technology for Smart Cameras Improves Object Recognition in Sub-optimal Lighting
9.8  Optibus Introduces Solution for Rapid Deployment of Electric Buses in Cities Around the World


10.1  Israeli Unemployment Rate Lowest Since Early 1970s
10.2  Israeli Startups Raise $500 Million in February
10.3  Israeli New Car Sales Down by 7.3% in 2018


11.1  ISRAEL: Israeli Cannabis Companies Raised $76 Million in Four Years
11.2  ISRAEL: Chinese investments in Israel: Still Waiting for Lift Off
11.3  ISRAEL: Israel’s Revolutionary Sexual Harassment Law
11.4  JORDAN: Jordanians Protest Price Hikes But in Surprisingly Small Numbers
11.5  IRAQ: Iraq Ratings Affirmed At ‘B-/B’; Outlook Stable
11.6  IRAQ: Conference for Iraq Draws Investors Instead of Donors
11.7  IRAQ: “It’s Not the Donations, Stupid”: Key Points from Kuwait Conference
11.8  IRAQ: Iraqi Parliament Approves Budget, Kurdish Lawmakers Boycott Vote
11.9  BAHRAIN: Fitch Downgrades Bahrain to ‘BB-‘; Outlook Stable
11.10  SAUDI ARABIA: Saudi Economic Reform Update: Saudization & Expat Exodus
11.11  EGYPT: Fast & Ambitious Reform Process Driving the Improved Macroeconomic Outlook
11.12  EGYPT: Long-Awaited Bankruptcy Law Sparks Optimism in Egypt
11.13  EGYPT: Egypt Launches Renewable Energy Curriculum to Boost Promising Sector
11.14  LIBYA: Elite Jockeying in Libya’s Transition
11.15  MOROCCO: Credit Profile Reflects Move Towards Value-Added Exports & Fiscal Progress
11.16  TURKEY: Turkey Ratings Affirmed; Outlook Remains Negative
11.17  TURKEY: After Big Boom, Turkey’s Aviation Sector Heads for Turbulence
11.18  MALTA: Moody’s Changes Outlook on Malta’s A3 Rating to Positive from Stable


1.1  Jerusalem to Inject NIS 700 Million into Hebrew University

After protracted negotiations over the past two years, the Ministry of Finance has agreed to inject NIS 700 million into the Hebrew University of Jerusalem over 10 years.  The money will help the university cope with its deficit caused by its unallocated pension burden.  As part of the agreement, to which the Council for Higher Education’s Planning and Budget Committee is a party to, the Hebrew University is committed to a NIS 1.8 billion recovery program over the next decade.

The Hebrew University will cover its NIS 1.8 billion deficit by selling assets worth NIS 400 million and putting up guarantees and other resources worth NIS 600 million and the rest through management operations and costs savings.  The Hebrew University will balance its budget through internal streamlining measures worth NIS 900 million (NIS 90 million per year) – reducing jobs and salary payments (NIS 26 million annually), overheads (NIS 15 million annually) and other income in the annual budget (NIS 49 million annually).  Hebrew University’s management is also committed to management streamlining.

In exchange for the government’s money, the Hebrew University will also committing to meet national targets such as increasing the number of students studying high-tech disciplines by 70% over the next two years.  The Hebrew University is also committing to increase its intake of Arab and Ultra-Orthodox Jewish students – it will increase its number of Ultra-Orthodox students to 1,000 and 18% of its bachelor degree students will be Arabs and 12% of master degree students.  The Hebrew University will also make efforts to take in overseas students to study in Jerusalem.  (Globes 28.02)

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1.2  Bank of Israel Governor Flug Cites Improved Technical Education to Address Israel’s Low Productivity

Globes reported that Governor of the Bank of Israel Karnit Flug said inclusive growth was the best way of narrowing gaps in Israeli society.  Israel is in second place among developed countries in its dependency ratio, or the number of people dependent on a single wage earner, according to figures presented by Governor of the Bank of Israel Karnit Flug.

In her lecture on 25 February at the “New Horizons for the Welfare State” conference held at the Jezreel Valley Academic College, Flug said that inclusive growth was the best way of narrowing gaps in Israeli society, because it would make more money available for welfare.  According to the indices presented by Flug, Israel is in fifth to last place in inclusive economic growth, while the new figure in the presentation shows an improvement in the past four years.  Flug attributes the change to the enormous growth in the employment rate resulting from the entry of many Haredi women and Arab men into the labor market, and the declining ratio of public debt, which has reduced the financial burden of debt and made resources available for welfare.

At the same time, Flug said that while the government’s policy of giving incentives for entering the labor market was contributing to higher employment rates in all population groups and a drop in economic inequality, the system of vocational training was not providing parts of the population with the skills necessary in order to ensure successful integration in the labor market.

Flug emphasized the negative effect of the relatively low productivity of the Israeli worker on the ability to achieve inclusive and sustainable growth.  She said that the right and most effective way of increasing productivity was to improve employee’s skills.  The skills to which Flug was referring are measured in the ability to solve difficult problems in a technological environment, literacy, and mathematical ability.  According to Flug, Israeli society features very wide skill gaps, with the Haredim and Arabs having an especially low skills level.

A survey of skills found that the gaps between Haredim and non-Haredim have been widening in recent years.  For example, there are almost no differences between Haredim and non-Haredim over 40, but there is a significant skills gap in the 16-40 age bracket.  (Globes 22.02)

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2.1  Moovit Raises $50 Million to Expand Its Global Urban Mobility Operating System

Moovit App Global has closed a $50 million Series D round led by Intel Capital.  All Moovit’s earlier investors participated, including Sequoia, BMW iVentures, NGP, Ashton Kutcher’s Sound Ventures, BRM, Gemini, Vaizra, Vintage and newcomer Hanaco.  Moovit’s free app provides comprehensive transit information to more than 120 million users in more than 2,000 cities in 80 countries.  The company has amassed the world’s largest repository of transit data and generates more than one billion movement data points a day.  Moovit shaped its data into the Smart Transit Suite to help municipalities and transit operators better manage their networks.  The infusion of capital brings to $133 million the total raised by Moovit.

Tel Aviv’s Moovit is the world’s largest transit data and analytics company and the #1 transit app.  Moovit simplifies your urban mobility all around the world, making getting around town via transit easier and more convenient.  By combining information from public transit operators and authorities with live information from the user community, Moovit offers travelers a real-time picture, including the best route for the journey.  Named Best Local App by Google in 2016 and one of Apple’s Best Apps of 2017, Moovit launched in 2012 and surpassed 120 million users in five years.

Moovit is an early pioneer of Mobility as a Service (MaaS).  The company helps people change the way they consume mobility by fully integrating other forms of transport, such as local bicycle services, into its app.  In 2017 Moovit launched its Smart Transit Suite of products to help cities, governments and transit operators improve urban mobility in their cities.  (Moovit 21.02)

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2.2  Daimler and Mizmaa Ventures Co-Lead Round B at Anagog – The Mobility Status AI Innovator

Anagog announced the initial closing phase of its Series-B round of financing.  The round is being co-led by Daimler AG, the automotive OEM, and Mizmaa Ventures, a California-HK based VC, specializing in artificial intelligence, machine learning, and big data venture investments.  Analyzing multiple on-handset sensor signals, Anagog’s technology provides a more accurate view of real-time and predictive mobility status for the handset’s owner – combined with ultra-low power consumption.  On-handset analysis and contextual data can be used to significantly enhance the user’s experience with richer contextual services, at the right time and place.  Anagog’s patented technology is a game changer in the field of on-handset independent artificial intelligence engines. It has the potential to change the way privacy is being handled by service providers and offer users better control over their data.

Tel Aviv’s Anagog was established as the industry’s pioneer in smartphone sensors signal processing.  Anagog’s technology is implemented in over 20 million handsets globally, through 100 mobile services in different domains.  Using Anagog’s technology, supervised and unsupervised machine learning algorithms work on-handset to achieve the highest number of real-time and predictive mobility statuses per user.  This cutting-edge technology opens-up a wide array of new opportunities for service providers.  With the introduction of more personalized and engaging tools, the era of ‘one-size-fits-all’ mobile services is now formally over.  (Anagog 26.02)

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2.3  Edgybees Raises $5.5 Million Seed Round to Save Lives with Augmented Reality

Edgybees, whose technology enables augmented reality (AR) on high speed platforms like drones and cars, and whose First Response app has been used by emergency teams responding to the Northern California wildfires and post-hurricane flooding in Florida, announced the completion of a $5.5 million seed round.  The round included Motorola Solutions Venture Capital, and Verizon Ventures. Venture firms OurCrowd, 8VC, NFX and Aspect Ventures also participated.

The Company will use the funding to bring its AR technology to new verticals, including defense, smart cities, automotive, and broadcast media.  Edgybees enables developers to create realistic, immersive experiences that layer three dimensional visuals over live video from fast-moving cameras.  Its patent-pending algorithms stream video and data from cameras mounted on cars, aerial platforms, or body-worn accessories and can maintain virtual overlays locked against the real world.

Edgybees created the world’s first augmented reality development platform for fast-moving platforms like cars, airplanes and UAS, and body-worn accessories.  Edgybees is headquartered in Israel and has offices in Europe and the United States.  (Edgybees 28.02)

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2.4  Plasan Agrees with BAE Systems for the Armoring of Type 26 Combat Ships

Plasan has signed a contract with BAE Systems, for the armoring of Type 26 Global Combat Ships for the UK Royal Navy.  Armor production for the first three ships is anticipated to begin in 2018.  The ships will be built in Scotland at BAE Systems facilities in Glasgow and are considered the most advanced of their type in the world.  The new Type 26 ‘Global Combat Ship’ designed and built by BAE Systems is the new class selected for the replacement of eight anti-submarine frigates of the Duke class currently in service with the Royal Navy.  The Type 26 will provide increased capability and flexibility through innovative design that includes a multi role mission bay, large flight deck and hangar that will be able to exploit a range of manned and unmanned systems. There will also be great scope for future development.

Kibbutz Sasa’s Plasan is a world leading armor technology, flexibility and innovation is well suited to the Type 26 approach and has helped to secure this important program.  The quality and production processes within Plasan underpin the confidence that has been shown in selecting Plasan’s solution.  Working together with Design Authority partners has strengthened the ethos of Plasan’s success.  (Plasan Sasa 28.02)

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3.1  Lebron James-Backed Pizza Chain to Make Debut in Arabian Gulf

Blaze Pizza, a restaurant upstart backed by basketball star LeBron James, is expanding outside North America for the first time after sales surged last year.  The chain, founded in 2011, will open its first overseas shop in March in Kuwait through a partnership with MH Alshaya Co.  The company is angling to lead the market for so-called fast-casual pizza, a category known for fresh ingredients and the use of a Chipotle-style assembly line.  Blaze Pizza’s system sales – a metric that includes money generated by franchisees – jumped 51% last year.

James, who has won three National Basketball Association championships, has helped market Blaze Pizza – including an ad where he worked behind the counter at the chain.  The athlete invested in the company in 2012 and walked away from an endorsement deal with McDonald’s in 2015 so that he could become Blaze’s “brand ambassador.”  (AB 28.02)

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3.2  Subway Franchise Operator Says Planning Arabian Gulf Retail Expansion

YYT Food Corporation, which is the F&B franchise operator for sandwich giant Subway in Bahrain, has announced new expansion plans across the region.  Operating across the GCC, the company said it expects to open 19 new locations of its brands by the end of the year.  YYT Food Corp said it will achieve a new benchmark of 165 branded restaurants in the region, with an aim to increase its commitment to employment by 20%.  Owned by Global Capital Management, a subsidiary of Kuwait-based Global Investment House, YYT Food Corp operates established international brands including Vanellis, Pad Thai, Teriyaki, Subway, Al Mangal Express, Tandori and Menchie’s Yum Yum Tree Brand.  The company said it aims to double in size – stores and revenue – by 2019.  (AB 20.02)

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3.3  Dubai Retail Giant Landmark Launches Discount Store Concept

Dubai-based Landmark Group has announced the launch of VIVA, the Middle East’s first food discounter.  The firm, led by Renuka Jagtiani, chairwoman and CEO, plans to pioneer the concept of food discount retail in the Middle East.  The brand said it will offer a range of private label quality products for at least a 30% cheaper shopping experience.  The VIVA brand promises “Fresher, Cheaper, Better shopping to its customers”, the company said.  The first VIVA store was launched in Sharjah, with three other openings in Sharjah, Ajman and Dubai.  This launch will be closely followed with 11 more VIVA stores opening across the UAE in the coming months.  The stores will operate in high density neighborhoods to offer better and convenient shopping to customers.  Each store will carry a range of more than 1,200 products.  Their promise is the offering of a range of private label quality products for at least a 30% cheaper shopping experience which will lead to savings to consumers that have never been seen before.  (AB 28.02)

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3.4  Ooredoo Partners with MATRIXX Software to Provide Digital Mobile Plans to Oman

Saratoga, California’s MATRIXX Software announced that Ooredoo, a leading telecommunications operator in Oman, has deployed MATRIXX Software to enable the launch of the first all-digital, individually customized mobile plans in the Sultanate.  Ooredoo Oman implemented MATRIXX Digital Commerce in less than six months’ time, providing the infrastructure necessary to quickly launch Ooredoo’s new digital offerings.  With new customizable plans, users can now tailor prepaid plans online through the award-winning Ooredoo Oman app to meet their individual needs, while also enjoying endless social data.  The first of its kind in the Middle East, this online, personalized approach to mobile service plans represents a growing trend around the world for operators to abandon their limited one-size-fits-all plans in favor of customizable options that can be easily tailored by consumers to meet their distinct needs.

When released in the market, new customers wishing to take advantage of this innovative product can purchase the SIM by downloading the Ooredoo Oman app and choosing a number and a delivery method or by visiting their nearest Ooredoo store.  Existing users can upgrade at no extra cost through the Ooredoo Oman app simply by choosing the ‘migrate existing number’ option on the app.  (MATRIXX 27.02)

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3.5  Sandvine and Mobily Enhance Customer Experience with Active Network Intelligence

Waterloo, Ontario’s Sandvine, a global leader in network intelligence, is announcing a strategic partnership with Mobily, a leading mobile operator in Saudi Arabia.  The partnership is designed to leverage Sandvine’s investments in machine learning and artificial intelligence analytics solutions to drive closed-loop automation across Mobily’s infrastructure in order to enhance customer experience.  Mobily will become a flagship customer for Sandvine’s emerging automation solutions, and the companies will cooperate on implementing new automated use cases from Sandvine’s use case library.  Mobily will work closely with Sandvine’s innovation team to prototype and deploy new automation solutions that leverage Active Network Intelligence, Sandvine’s unique approach to closed loop automation.  With Sandvine’s Active Network Intelligence, the network infrastructure can dynamically adapt to the behavior of users and the state of the network by leveraging both machine learning and artificial intelligence powered by the industry’s most accurate, granular, and contextual intelligence models.  (Sandvine 27.02)

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3.6  STC & Cisco Sign Agreement to Develop Saudi 5G Networks

Saudi Telecom Company (STC) and Cisco signed an agreement and intend to collaborate on the development of 5G communication systems and networks in the Gulf kingdom.  The joint effort aims to facilitate STC’s transformation into a digital service provider and supports the pivotal role it plays in enabling Saudi Arabia’s 2030 Vision and National Transformation Plan.  The MoU was signed at the Mobile World Congress in Barcelona.

Under the terms of the deal, Cisco intends to work closely with STC on its architectural transformation to help unlock the commercial potential of 5G mobile networks.  This will enable STC to provision advanced network services, such as low-latency, and differentiate its service delivery in the 5G era.  Another key element of the collaboration aims to address the security needs of the 5G era by building a framework for threat intelligence that underpins STC’s prevention, detection and mitigation efforts.  (AB 28.02)

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3.7  ADM & Cargill to Launch Soybean Joint Venture in Egypt

Archer Daniels Midland Company and Cargill have reached agreement to launch a joint venture to provide soybean meal and oil for customers in Egypt.  The joint venture will own and operate the National Vegetable Oil Company soy crush facility in Borg Al-Arab along with related commercial and functional activities, including a separate Switzerland-based merchandising operation that would supply soybeans to the crush plant.  Cargill is currently expanding the plant from 3,000 metric tons to 6,000 metric tons of daily crush capacity.  The plant will be able to produce higher-protein soybean meal while reducing the need for soybean meal imports into Egypt.

The joint venture will be managed as a standalone entity consisting of equal ownership by ADM and Cargill, with a management team reporting to a board of directors appointed by the two parent companies.  The joint venture’s assets will not include Cargill’s grain business and port terminal in Dekheila, or the ADM-Medsofts joint venture at the Port of Alexandria. Each company will continue its separate business activities in the country and region.  The deal, which is not yet complete, is subject to regulatory review. The companies hope to formally launch the joint venture in mid-2018.  (ADM 26.02)

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3.8  Nexteer to Open New Facility in Morocco

Michigan’s Nexteer Automotive announced its plans to open a new production site in Kenitra, Morocco.  The first of its kind in Africa, the plant will be constructed in the city’s Atlantic Free Zone and is expected to open in 2019 on a plot of 18000m2.  This will be Nexteer’s 25th factory in its global manufacturing footprint.  The American company signed the official agreement with King Mohammed VI and Moroccan government officials on 11 December 2017.  By establishing this new facility in Morocco, the company will strengthen its position in the region, expand its geographic operations, and meet the demands of its clients in both Africa and Europe.

Nexteer Automotive is a global manufacturer of steering and driveline products with more than 10,000 employees all over the world.  The company consists of 24 manufacturing plants, three technical centers and 14 customer service centers located in North and South America, Europe and Asia, which produce automotive parts for BMW, Fiat Chrysler, Ford, PSA Group, Toyota and Volkswagen, as well as Car manufacturers in India and China.  (MWN 23.02)

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4.1  Minister Steinitz Says Israel Will Ban Diesel & Gasoline Vehicles by 2030

Minister of National Infrastructures, Energy and Water Resources Steinitz said clean air was as important as developing Israel’s gas fields.  “Israel will become one of the first three countries in the world, after Norway and the Netherlands, to ban the import of diesel and gasoline fueled cars, from 2030,” Minister Steinitz said at a conference of the Israeli Institute of Energy and the Environment.  Steinitz said that a new master plan for developing the energy economy that his ministry was promoting would be based on switching transport in Israel to electricity and natural gas.  He added that he regarded reducing air pollution to a minimum as no less important a goal than developing Israel’s natural gas reservoirs. (Globes 27.02)

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4.2  Renewable Energy Projects Provided Jordan’s National Power Grid with 402 MW in 2017

Renewable energy projects provided Jordan’s national power grid with 402 MW of electricity in 2017, which is expected to increase to 1,700 MW by 2019, Energy Minister Saleh Kharabsheh said on 28 February.  Kharabsheh said that Jordan is rich in renewable energy resources, especially solar energy, due to the location of the Kingdom within the Sun Belt.  Kharabsheh noted that the sun shines in the Kingdom for 316 days a year at a daily average of eight hours, adding that various areas in the country are also characterized by wind speeds ranging between 7 and 8.5 meters per second, which is enough to establish wind stations for generating electricity.    (JT 28.02)

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4.3  Oman Inaugurates Giant Solar Plant to Boost Oilfield Operations

Petroleum Development Oman (PDO) and GlassPoint Solar have announced the inauguration of the giant Miraah solar plant in the sultanate.  Miraah, located at the Amal oilfield in the south of the sultanate, will be among the world’s largest solar projects when completed.  Four blocks of the plant have now been constructed.  Salim bin Nasser Al Aufi, Undersecretary of Oman’s Ministry of Oil and Gas said: “Deploying solar on Oman’s oilfields to reduce the industry’s natural gas consumption has a significant and lasting economic benefit for the sultanate.

Miraah’s construction has progressed on schedule.  The first four blocks were commissioned successfully and the facility is now in daily operation delivering steam to the Amal oilfield.  The four blocks have a total capacity of over 100 MWt and will deliver 660 tonnes of steam per day, providing significant gas savings.  Once complete, the one gigawatt installation will consist of 36 blocks built in a sequence, which allows PDO to benefit from solar steam now and gradually ramp-up production over time to meet the Amal oilfield’s steam demand.  The project is on track to deliver an additional eight blocks in early 2019.

Unlike solar panels that generate electricity, GlassPoint’s solution uses large mirrors to concentrate sunlight and boil oilfield water directly into steam.  The steam is used for the extraction of viscous or heavy oil as an alternative to steam generated from natural gas.  (AB 25.02)

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5.1  Lebanon’s Consumer Prices Up in January 2018 with an Annual Inflation Rate of 5.55%

According to the Central Administration of Statistics (CAS), consumer prices rose by a yearly 5.55% in the first month of 2018, compared to an average inflation rate of 4.25% recorded by January 2017.  The rise in prices across all components of the Consumer price index (CPI) may be partly attributed to the bullish trend of oil prices that started in 2017 onwards, and to the implementation of the VAT hike that went into effect as of 1 January 2018.   In details, the prices of Food and non-alcoholic beverages (20% of CPI) recorded an annual growth of 3.4% in January 2018.  In its turn, the costs of Housing and utilities (including: water, electricity, gas and other fuels), which grasped a combined 28.4% of the CPI, climbed by 5.41% year-on-year (y-o-y) in the beginning of 2018.  The breakdown of the component reveals that Owner-occupied rental costs composing 13.6% of Housing and utilities increased by 4.21% y-o-y, and the average prices of Water, electricity, gas and other fuels, making up 11.8% of the same category, rose by an annual 6.71% over the same period.  Moreover, the price of Transportation (13.1% of the CPI), gained an annual 4.92% owing it to the continuous recovery in the average international price of oil which reached $69.08/barrel in January 2018, up from $55.45/barrel in the first month of 2017.  In addition, the sub-indices of Health (7.7% of the CPI) and Education (6.6% of the CPI) respectively recorded upticks of 4.74% and 3.75% y-o-y in January 2018.  The increase in Education may be due to the teachers’ salaries adjustment in the private sector following the salary scale in the public sector during the last quarter of 2017.  Another increase in education costs is expected to take place in April, the date when the third installment is paid.  The prices of Communication (4.5% of CPI) and Clothing and Footwear (5.2% of CPI), posted respective y-o-y rises of 0.87% and 24.59% over the same period, as the latter may be affected by the appreciation of the Euro vis-à-vis the USD, and the start of sales a bit later than last year. Restaurants & hotels (2.8% of CPI) prices also added 4.44% y-o-y, which may be partially attributed to the new highs recorded in tourist activity by the end of 2017 and its ongoing effects into the first month of the year.  (CAS 22.02)

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5.2  Iraq Falls in Transparency Ranking

Transparency International has said that Iraq’s ranking has fallen three places its global Corruption Perceptions Index (CPI).  From a total of 180 countries, Iraq came in at number 169; while last year’s position was 166 out of 176 countries.  This result puts it behind countries such as Turkmenistan, Angola and Eritrea, and just ahead of North Korea, Guinea-Bissau, and Equatorial Guinea.  New Zealand beat Denmark to first place.  Libya was ranked in 171st place, with Iran in 130th.  The Corruption Perceptions Index ranks countries and territories by their perceived levels of public sector corruption according to experts and businesspeople.  (IBN 28.02)

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5.3  Iraq’s Oil Ministry Finalizes Export Figures for January

Iraq’s Ministry of Oil has announced final oil exports for January of 108,190,068 barrels, giving an average for the month of 3.490 million barrels per day (bpd), a slight decrease from the 3.535 bpd exported in December.  The exports were entirely from the southern terminals, with no exports registered from Kirkuk via Ceyhan.  Revenues for the month were $6.772 billion at an average price of $62.596 per barrel.  The oil was shipped by 31 international companies from the ports of Basra, Khor Al- Omaia and the single-point moorings (SPM’s) on the Gulf.  (Ministry of Oil 28.02)

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►►Arabian Gulf

5.4  UAE Approves First Registered Tax Agents

The Federal Tax Authority (FTA) has approved the first batch of registered tax agents, after meeting the required standards, conditions and qualifications, in addition to passing the authority’s tests.  Khalid Al Bustani, FTA director-general, said that agents are “key contributors to the successful implementation of the tax system in the UAE”.  The agent may represent any entity or individual before the Authority, helping them meet their commitments and know their rights.  The registration of the first tax agents comes just weeks after the UAE launched value added tax (VAT).  Tax agents strengthen ties between the FTA and taxable individuals, he said, revealing that the authority is about to register a second batch.  They aim to help businesses achieve tax compliance, manage records, and avoid errors in registration and the filing of tax returns.  (AB 28.02)

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5.5  Germany Signs Up for Expo 2020 Dubai

Germany, Europe’s largest economy and one of the world’s leading supporters of renewable energy, signed its €50 million ($61 million) investment in the next World Expo by signing an official participation in Expo 2020 Dubai.  Germany said its national pavilion will be located in the Sustainability District at Expo 2020 Dubai, adding that its pavilion will be one of the largest.  Germany aims to raise its reliance on renewable electricity production from 17% today to more than 80% by 2050.

Germany and the UAE also share strong trade ties.  In 2015, German imports from the UAE reached €900 million while the value of German exports to the UAE reached €14.6 billion.  Around 10,000 German citizens live in the UAE and more than 500,000 visited the country in 2017, a rise of 10% on the previous year.  Expo 2020 Dubai will run for six months from October 20, 2020 to April 10, 2021 and is expected to record 25 million visits, with 70% anticipated to come from outside the UAE.  More than 180 countries are expected to take part in Expo 2020 Dubai, and 170 nations have either publically or privately confirmed their participation to date.  (AB 28.02)

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5.6  Dubai’s DEWA Awards $237 Million Contract for Desalination Plant

Dubai Electricity and Water Authority (DEWA) has awarded an AED871 million ($237 million) contract for the construction of a desalination plant in Jebel Ali.  The deal for the 40 million imperial gallons per day (MIGD) reverse osmosis plant was awarded to a joint venture comprising ACCIONA Agua and Belhasa Six Construct (BeSIX).  The new plant is expected to be commissioned by May 2020 to meet the reserve margin criterion set for peak water demand for the year 2020 and beyond.  The big projects launched by DEWA have contributed in reducing the production cost of electricity through solar energy on a global level and we continue to decouple electricity production from water desalination to obtain 100% desalinated water using a mix of clean energy and waste heat by 2030.  (AB 03.03)

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5.7  Dubai’s Hotel Room Supply to Top 132,000 by end-2019

Dubai hotel room supply is set to reach 132,000 by the end of 2019, according to a new study by the emirate’s Department of Tourism and Commerce Marketing (Dubai Tourism).  It said Dubai’s hospitality sector is forecast to experience strong, sustained growth over the coming years, with occupied room nights set to reach 35.5 million annually in 2019, representing a 10.2% compound annual growth rate (CAGR) over the next 24 months.  Meanwhile, occupancy levels are forecast to remain at 76-78% despite growth in capacity, the study said.  It added that the strong competitiveness of the sector is set to continue to be fueled by increases in Dubai’s growing international overnight visitation and targeted increases in length of stays.

At the end of 2017, Dubai’s hotel inventory stood at 107,431 rooms, with growth of 4% over the course of the year, and occupancy at 78% despite capacity increase, thanks to the 6.2% growth in overnight visitors to 15.79 million.  Building on the momentum since 2013, room inventory in the 3 and 4 star categories is projected to continue to grow at 10% and 13% respectively through to the end of 2019.  This diversification of the hotel sector is part of the strategic focus on widening Dubai’s tourist base, enabling the city to attract larger volumes from new market segments across diversified source markets.  (AB 20.02)

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5.8  Dubai’s Food Trade Surpasses $19 Billion in First 9 Months of 2017

Dubai’s food trade exceeded AED70 billion ($19 billion) during the first nine months of 2017, according to Statistics issued by Dubai Customs in parallel with Gulfood 2018.  They showed that imports had the lion’s share with AED44.6 billion, followed by exports with AED12.6 billion and re-exports with AED12.9 billion.  Dubai has become an essential trade corridor for foodstuffs in the region, owing to its infrastructure and efficient customs services that insure easy access of dietary supplies to the surrounding markets.  (AB 20.02)

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5.9  Saudi Inflation Jumps in January on Price Hikes

Inflation rates in Saudi Arabia soared in January after the government introduced a string of price hikes to boost non-oil revenues.  Rates rose 3% in January compared to the same period the previous year, the General Statistics Authority announced.  The jump was even more stark in December, having jumped 3.9% since the previous year.

Inflation rates in the oil-rich kingdom remained in negative territory for almost all of 2017, as the economy contracted due to persistent low oil prices.  But Riyadh has been steadily imposing new fees and taxes in a quest for new sources of revenue.  The government last year doubled the price of tobacco, increased the prices of soft drinks and energy drinks, and imposed hefty fees on expatriates and their dependents.  In January, government-set prices at the pump roughly doubled, electricity costs were sharply hiked and a five-percent value-added tax (VAT) was imposed for the first time.

Over the last 12 months, costs of transport have gone up 10.5% while food and beverages surged 6.7%.  Taken together, these price hikes were the main drivers for the increase in the consumer price index, according to the report.  Saudi Arabia has posted budget shortfalls since 2014 after the crash in oil prices.  The kingdom withdrew around $250 billion from its financial reserves in the past four years to finance the budget deficit.  (AB 25.02)

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5.10  Saudi Consumer Spending Set to Take a Hit as Reforms Impact

Overall consumer spending in Saudi Arabia is expected to take a hit over the next couple of years as a result of the economic reforms being implemented in the Gulf kingdom, according to new research.  Al Rajhi Capital has calculated in a new research note that consumer spending is likely to remain flat until 2020, increasing just 3.8% over the period to reach SR977 billion, with expat spending hit the hardest.  It said that without reforms, the total consumer spending would have grown by up to 9% in the same period, reaching SR1.025 trillion.

The government has rolled out multiple reforms over the last few months such as VAT, an expat levy, electricity/gasoline price hikes, the Citizen Account program and a cost of living allowance.  Al Rajhi Capital said despite the expected fall in consumer spending, the majority of Saudi households would be shielded from the impact of the reforms.  The kingdom’s Citizen’s Account program is intended to ease the impact of belt-tightening measures and is a part of Crown Prince Mohammed bin Salman’s Vision 2030 plan to move Saudi Arabia beyond oil.  The research added that the additional benefit from cost of living allowance (applicable only for 2018) means that 90% of Saudi households will be shielded this year.

However, while Saudi household spending to remain healthy; non-Saudi household spending to shrink, the research said.  Supported by government programs, Saudi household spending is set to grow 8.2% over 2017-2020 to reach SR811 billion in 2020 but with no support program for expat households, their spending will decline 13.5% over the same period to SR166 billion in 2020, Al Rajhi Capital added.  It also noted that high income Saudi households which account for up to 40% of total consumer spending by Saudis, will be most prone to consumer spending decline, as they receive no government support.

Transport (mainly purchase of vehicles), recreation and culture (package holidays), furniture and furnishings, and restaurants will be some of the hardest hit sectors in the kingdom, the research said, adding that pressure on margins in the retail sector could lead to industry consolidation.  (AB 02.03)

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5.11  Saudi Arabia Extends Foreign Investment Licenses to 5 Years

Saudi Arabia extended foreign investment licenses to a renewable period of up to five years from one year, in the latest step to broaden the oil-dependent economy.  Ibrahim Al Suwayel, deputy governor for investors’ services at the Saudi Arabian General Investment Authority, said the move aimed to bolster the country’s economic changes.  Officials have already seen “a positive effect on new investment, following the recent regulation to reduce the time taken to issue business licenses from two days to just four hours.  Saudi Arabia is entering a crucial year for Crown Prince Mohammed bin Salman’s plan to remake the economy, dubbed Vision 2030, as officials try to raise government revenue without snuffing out economic growth.  It introduced the 5% VAT on 1 January alongside higher fees for foreign workers and subsidy cuts that drove up fuel and electricity prices.  (AB 26.02)

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5.12  Saudi Arabia Climbs in Transparency International’s 2017 Corruption Index

Transparency International 2017 Corruption Perception Index (CPI) notes Saudi Arabia’s ranking continued to improve, moving up by five places from previous year’s rank of 62 to a rank this year of 57.  While the Index reflects on last year, the news comes in the wake of recent efforts by Saudi Arabia to fight corruption in the country, which has seen the country make bold moves including establishing a National Anti-Corruption Commission in November 2017.

Saudi Arabia’s overall score was 49 out of a 100.  Among Arab countries, Saudi Arabia improved its ranking to third in the region and with a higher score than the regional average of 33.  The recognition comes at a time of rapid development for Saudi Arabia, as it vigorously pursues its ambitious Vision 2030 agenda.  While the report generally showed little progress in eroding perceptions of corruption, the Kingdom of Saudi Arabia’s score increased to 49 from 46 since 2016.  (Adaa 23.01)

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5.13  Saudi Arabia & Egypt Set Up $10 Billion Joint Fund

Saudi Arabia and Egypt have established a $10 billion joint fund to develop a planned mega-city in the south Sinai.  The deal was struck as Saudi Arabia’s Crown Prince Mohammed bin Salman held talks in the Egyptian capital on 4 March at the start of his first foreign tour as heir to the throne.  Riyadh’s part of the new joint investment fund will be cash to help develop the Egyptian side of NEOM, which Prince Mohammed unveiled last October as part of plans to wean the world’s top crude exporter off oil revenues.

Saudi Arabia views Egypt as a cornerstone of regional stability.  In 2015, during a visit by King Salman to Cairo, the two countries agreed on the transfer of two Red Sea islands to Saudi Arabia, sparking protests in Egypt.  Egyptian President Sisi ratified the deal last year and Egypt’s top court annulled lower court rulings for and against the treaty on the eve of the crown prince’s arrival.  Cairo and Riyadh have maintained close ties, although Egypt has signaled a lack of enthusiasm for Saudi regional policy, both on the Yemen war and a potential escalation with Iran.  But it is among a bloc of Arab nations that joined a Saudi-led boycott since June of Qatar.  (AB 05.03)

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►►North Africa

5.14  Egypt’s Foreign Currency Reserves Climb to $38.2 Million

Egypt’s Minister of Planning Hala el-Saeed said that the strategic reserve of foreign currency in the Central Bank of Egypt reached $38.2 million, which provides the needs of the country for 8 months compared to only 3 months in 2013.  In statements after her participation in the First Regional Conference for Youth in Northern Upper Egypt, in Fayoum, Saeed said that the country is moving steadily to raise the growth rate to 5.8% by the end of the current fiscal year 2018/2019, then to 6.2% by the end of the next year and then 7% by the end of 2021/2022 fiscal year.  She pointed out that the plan is to increase investments by 2% to reach LE980 billion, which is in the interest of citizens as this will decrease the rate of inflation and consumer prices.  Saeed said that the first half of this year saw an increase in investments of 6.2%, and the share of oil and natural gas output in national growth increased to 15%, especially after production began at the Zohr gas field.  She added that the revenue from the Suez Canal has increased by 11%, with the number of transshipment vessels increasing, and the increase in exports by 34%, while imports dropped by 7%.  (Al-Masry Al-Youm 24.02)

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5.15  Cairo Raises Growth Forecast by End June to 5.4%

Cairo has raised its growth forecast for the end of the current fiscal year to 5.4% versus 5% at present.  Minister of Planning, Follow-up and Administrative Reform Al-Saeed said the ministry aims to achieve a growth rate of 5.3% to 5.4% by the end of June.  The growth rate during the second quarter was 5.3%, and therefore the total during the first six months of the current fiscal year was 5.2%.  As for the contribution of investments in the second quarter of fiscal year 2017/2018, according to the minister, was 1.9%, compared to 2.8% in the first quarter.

Al-Saeed said that the contribution of final consumption in the first half (H1) of fiscal year 2017/2018 was 1.6%, which is stable from previous quarters.  Some 36% of the GDP growth in the second quarter came from three sectors, which are the quarries at 14.1%, followed by the manufacturing sector with 10.7%, followed by construction at 10.7%.  The total investments during the first half, according to the minister, amounted to EGP 353b at a growth rate of 46%.

The value of public investments in the second quarter of fiscal year 2017/2018 amounted to EGP 95b, an increase of 86%, while the rate of return on investment H1 of the current fiscal year is 17.3%.  The volume of petroleum exports in the first half of this year amounted to EGP 40.3b compared to EGP 40b last year, with an increase of 22%.  Moreover, the volume of petroleum products consumed during the first half of this year is 51.4m tonnes, compared with 47 million tonnes for the same period of the previous year, marking a growth of 9.4%.  (Various 24.02)

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5.16  Libya’s Sharara Oil Field Reopens

Libya’s biggest oil field has restarted pumping after the pipeline running to Zawiya refinery was reopened.  The operators of Sharara field had been forced to halt crude pumping on 4 March after a local landowner closed a section of the pipeline crossing his land.  Libya had been pumping 1.1 million barrels per day (mb/d) as of 1 March.  Sharara oil field had been contributing more than a quarter of this with 300,000 (b/d).  The field is operated by a joint venture company between Repsol SA, the National Oil Corporation (NOC), OMV AG, Total SA and Statoil ASA.

An additional disruption to Libyan oil production saw the NOC forced to evacuate the nearby El Feel oil field in February after the guards staged a strike over pay.  The NOC had announced the closure of the facility after “members of Fazzan group from the Petroleum Facility Guards (PFG) threatened workers, entered the administrative offices in the field, tampered with official papers of the field administration and fired in the air”.  (LBN 06.03)

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5.17  Moroccan Electricity Consumption in 2017 Highest in 5 Years

Moroccan electricity consumption rose by 4.5% at the end of 2017, up by 1.9% as recorded at the end of 2016, amounting for the largest increase in five years.  This growth is mainly due to the country’s socio-economic development, including infrastructure projects, programs to increase access to electricity and drinking water in rural areas and sector strategies.  Coping with the increased demand, the production of electrical energy improved by 3.4% at the end of 2017, following a rise of 3.1% in 2016, according to figures published by the Department of Studies and Financial Forecasts (DEPF), under the Ministry of Economy and Finance.

Private production also increased by 2.4% in 2017.  This upward trend was also recorded in the volume of imports from Spain, which also increased at a rate of 14.5%.  As a result, net energy demand rose 5.1% last year, after rising 2.9% a year earlier.  According to the DEPF, this trend is due to the strengthening of sales of very high, medium and high voltage energy by 5%, compared to 1.2% a year earlier.  Similarly, the consumption of low-voltage energy, mainly in households, improved by 3% at the end of 2017.  (MWN 02.03)

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6.1  Turkey’s Annual Inflation Rate Stood at 10.26% in February

Turkey’s annual inflation rate reached 10.25% in February, down from 10.35% in January, the Turkish Statistical Institute (TurkStat) announced on 5 March.  The consumer price index (CPI) saw a monthly rise of 0.73% in February, 1.76% since December of the previous year and 11.23% on the twelve months moving averages basis.

The highest monthly increase was in health category with 2.57%, followed by food and non-alcoholic beverages with 2.24%, recreation and culture with 1.89%, furnishing and household equipment with 1.23% and hotels, cafes and restaurants with 0.95%.  The only monthly decrease was in clothing and footwear in category with 4.09%.

The highest annual increase was in furnishing and household equipment with 15.66%, followed by transportation with 13.19%, clothing and footwear with 11.77%, hotels, cafes and restaurants with 11.53% and education with 10.88%.  Within average prices of 407 items in the index, average prices of 32 items remained unchanged while average prices of 269 items increased and average prices of 106 items decreased.

The February figure was at the lowest level during the last seven months.  Last year, the highest annual rise in consumer prices was recorded in November with 12.98%, also the highest level since 2005.  In 2017, the lowest annual inflation was seen in January with 9.22%, while the minimum rise in consumer prices in 13 years from 2005 to 2017 was seen in March 2011, with 3.99%.  (TurkStat 05.03)

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6.2  EU’s Share of Turkey’s Exports Reaches 53% in February with Sharp Annual Increase

The share of Turkey’s main trade partner, the European Union, in the country’s exports saw a sharp increase in February, the Turkish Exporters’ Assembly (TIM) announced on 1 March.  The share of the bloc rose to 53% in the second month of the year with a 24.6% year-on-year increase.

Turkey’s exports jumped 14.8% to reach $12.9 billion in February, compared to the same month of 2017, TIM announced.  The figure makes February 2018 the best-performing February for exports in Turkish history, it added.  Turkey made the largest amount of exports to Germany, Italy, the United Kingdom, the United States and France, all of which saw a significant annual increase in volume.

The country’s exports to Germany rose 21.7% on an annual basis, to Italy by 27.7%, to the U.K. by 20.4%, the U.S. by 4% and to France by 19.1%.  Among Turkey’s top 20 export markets, the highest increase in export volume was seen in Belgium with a 70.5% year-on-year increase, according to TIM data.  The share of the EU in Turkey’s exports started to decline in the wake of the 2008 financial crisis as the growth rates in the bloc regressed.  While the share of the EU in Turkey’s exports was 56.3% in 2006, it decreased to 39% in 2012, according to official data.

The bloc’s share in Turkey’s exports rose to 47.1% last year, according to data from the Turkish Statistics Institute (TUIK).  Turkey’s exports surged 12.8% to $25.3 billion in the first two months of 2018 over the same period in 2017, TIM data also showed.  The country’s 12-month exports reached $159.03 billion, up 11.1% from the previous time interval.

Almost 22% of Turkey’s exports in February came from the automotive sector with $2.8 billion, up 25.7% compared to February 2017.  Automotive exports were followed by the clothing ($1.4 billion) and chemical products ($1.3 billion) sectors.  Turkey’s exports were $12.45 billion in January and $157.02 billion in 2017.  (TIM 01.03)

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6.3  Cypriot Consumer Prices Drop by 0.3% in February

Cypriot consumer price index fell in February by 0.3% compared with the respective month of 2017 as a general drop in prices more than offset more expensive fuel and services, Cystat said on 1 March.  Prices for agricultural products fell last month by an annual 9.7%, while industrial products, excluding fuel, fell by 1%.  Electricity prices fell by 2.4% while water fell by 2.8%. Services and fuel rose by 1.9% and 0.2%.  In the first two months of 2018, consumer prices fell by 0.5% compared with the respective period last year.  (Cystat 01.03)

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6.4  Greece’s GDP Underperforms in 2017, Causing Concern for 2018

The economy performed worse than expected last year, as provisional figures released on 5 March by the Hellenic Statistical Authority (ELSTAT) put the expansion of the country’s gross domestic product at just 1.4% compared to 2016, against estimates by the government and its creditors for annual growth of 1.6%.  This raises concerns about the future, especially ahead of the end of the bailout program in August.

Already economists are anticipating that growth this year will not exceed 2%, compared to a forecast for 2.5% in the 2018 budget.  If GDP continues to fail to meet expectations then that is likely to have a negative impact on fiscal measures, vindicating the International Monetary Fund’s position in favor of accelerating the reduction of the tax exemption threshold from January 2019 instead of January 2020.  Of course the excessive primary surpluses of the last couple of years are a counterargument for that.

Crucially, the eagerly anticipated recovery of the economy appears too weak to power the shift Greece needs after the total 25% GDP slump since 2008.  The 1.4% rise last year is almost half of what was originally forecast in the 2017 budget (2.7%).  Economists are particularly concerned about the course of consumption: In the last quarter of 2017 household consumption decreased 1% in spite of the social benefit handout in December.  For 2017 as a whole, household consumption rose just 0.1%.  (eKathimerini 06.03)

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7.1  Top UK University Launches New Campus in Dubai

The University of Birmingham has officially opened its campus in Dubai – becoming the first global top 100 and UK Russell Group university to establish a campus in the city.  The University of Birmingham Dubai will offer degrees that will be taught, examined and accredited to the same standards as those delivered on its UK campus.  The University of Birmingham Dubai will provide opportunities for students to study on a range of undergraduate and postgraduate programs . Initially, these will include Business, Economics, Computer Science, Mechanical Engineering, and teacher training degrees, with further programs to be offered in the future.  (AB 28.02)

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7.2  Saudi Arabia Approves First Law for Restoring Cinema

The Saudi Ministry of Culture and Information announced on 1 March that it had finalized the terms of licensing to restore cinema in Saudi Arabia.  The move, part of the Vision 2030 initiative, opens up a domestic market of over 32 million people. It is anticipated that by 2030 the Kingdom will have opened more than 350 cinemas, with over 2,500 screens.  The cinema licensing regulations cover three types of licenses: cinema venue development, exhibitor and cinema venue operating.  Licensing commences immediately.  In preparation, the Ministry studied and evaluated best practice regarding cinema regulation in a number of international markets and held extensive discussions with relevant Saudi authorities.

In February, Vue International – a cinema operator spanning 10 countries – signed an MoU with Abdulmohsin Al Hokair Holding Group to explore the construction and operation of multiplex cinemas in Saudi Arabia.  Last November, AMC Entertainment – one of the world’s largest cinema operators – signed an MoU with the Saudi Public Investment Fund to explore commercial opportunities, hoping to be able to build and open a brand new cinema theatre by the end of this year.  (AETOSWire 01.03)

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7.3  Saudi Arabia Allows Women to Join Military

Saudi Arabia has for the first time opened applications for women to join its military.  Women could apply for positions with the rank of soldier in the provinces of Riyadh, Mecca, al-Qassim and Medina.  The roles do not appear to involve combat, but will instead give women the opportunity to work in security.  A list of 12 requirements says hopefuls must be Saudi citizens, aged between 25 and 35, and have a high school diploma.  The women and their male guardians – usually a husband, father, brother or son – must also have a place of residence in the same province as the job’s location.

The decision to recruit female soldiers is one of many reforms enhancing women’s rights introduced in recent months in the conservative Muslim kingdom.  King Salman has decreed that women will be permitted to drive from June, while women spectators were allowed to attend football matches from last month.  However, human rights activists say Saudi Arabia’s discriminatory male guardianship system remains intact despite government pledges to abolish it.  Under the system, adult women must obtain permission to travel, marry or leave prison.  They may be required to provide consent to work or access healthcare.  Women are also separated from unrelated men and must wear full-length robes known as abayas in public, as well as headscarves if they are Muslims.  (BBC 28.02)

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8.1  West Pharmaceuticals Opens Israel Innovation Center

Exton Pennsylvania’s West Pharmaceutical Services has opened an innovation center in Ra’anana, which will employ 95 people.  The new 2,700 square meters office will merge the company’s existing Israel R&D facilities in Ra’anana and Or Yehuda.  Israel serves as one of several regional technology hubs of expertise for West along with Ireland, Germany, Singapore and the United States.  West Pharmaceuticals has been operating in Israel since 2005 after acquiring Medimop in 2003.

West’s Israel’s operation extend beyond R&D to include inventing products through to production and marketing.  In addition to its own workforce, West Israel has 200 subcontractors devoting most of their time to the company’s products.  West Israel focuses on the production of drugs that require mixing two components before use and that are packaged in such a way that they can be used safely in the patient’s home.  The team in Israel develops and manufactures many well-known West products including the Vial2Bag Admixture systems, the MixJect reconstitution system, Intradermal Adapter product family, Mix2Vial needle-free reconstitution and transfer system, and the SmartDose drug delivery platform, which was launched with commercial success in 2016.  Co-locating the I&T centers with commercial and operations enables West to be more effective and customer centric by facilitating technology transfer and new product development across the packaging, containment and delivery platforms.  (Globes 28.02)

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8.2  Perflow Medical Receives $12 Million in Funding

Perflow Medical, which develops devices for neurovascular interventions, announced on 15 February that it had completed a $12 million financing round from both existing and new investors.

Founded in 2010, Tel Aviv’s Perflow Medical develops, manufactures, and commercializes neurovascular interventional products designed to treat Neurovascular disorders including brain aneurysms.  PerFlow developed three neurovascular treatment devices used for thrombectomy, aneurysm neck bridging, and flow diversion.  Perflow said the new investment will support the European commercialization of the company’s first product, the Stream Net device, as well as the submission of the device for FDA approval.  Perflow said it will also help finance the development of two new products based on the company’s patented technology for the treatment of aneurysm neck bridging and flow diversion procedures.  The funding will help the company bring its product to the market faster.  (Perflow Medical 18.02)

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8.3  Evogene Announces Positive Results in its Novel Mode-of-Action Herbicide Program

Evogene announced that its Ag-Chemical division achieved positive results in its internal novel Mode-of-Action (MoA) herbicide program with multiple ‘families’ of Evogene predicted chemical compounds demonstrating improved herbicidal effectiveness in lab and greenhouse experiments.

Evogene initiated its herbicide program in 2015 and last year disclosed the identification of several novel herbicide targets, representing a new MoA and over 10 inhibiting chemical compounds demonstrating initial weed-killing effectiveness.  Following these achievements, the Ag-Chemical division, using the CPB platform, predicted and synthesized chemical ‘families’.  This announcement discloses that in lab and greenhouse experiments, these chemical ‘families’ showed various levels of weed-killing effectiveness for individual members of each ‘family’, in some cases significantly in excess of the initial chemical compound.

Rehovot’s Evogene is a leading biotechnology company developing novel products for major life science markets through the use of a unique predictive biology platform incorporating deep scientific understandings and advanced computational technologies.  This platform is utilized by the Company to discover and develop innovative ag-chemical, ag-biological and ag-seed products (GM and non GM), and by two subsidiaries; Evofuel, focused on castor seeds, and Biomica, focused on human microbiome therapeutics.  Through its collaborations with world-leading agricultural companies such as BASF, Bayer, DuPont, Monsanto and Syngenta, Evogene has licensed genes, small molecules and microbes to partners under milestone and royalty bearing agreements.  (Evogene 27.02)

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8.4  Saturas Raises $4m Series A to Commercialize Precision Irrigation Tech

Israeli precision irrigation technology company Saturas has raised a $4 million Series A round from a group of international investors.  Saturas’s sensing system is comprised of miniature implanted sensors and wireless transponders that can measure Stem Water Potential (SWP), a metric that’s widely recognized as one of the most accurate for determining the water status of plants.  Current methods of obtaining an SWP measurement are labor intensive and expensive, according to a Saturas.  The company says its sensor is the only one that is embedded in tree trunks, providing direct contact with plant water tissues. This enables an accurate measurement of the water status of the plant and eliminates any inaccuracies that are associated with placing sensors in the soil, or on leaves and branches.

After several successful trials in citrus, apple and almond orchards in Spain and Israel, Saturas will use the new funds to bring its first products to market along with continuing development of a modified version of the company’s original sensor for use on vineyards.  New investors in this round include Chinese agricultural input company Hubei Forbon Technology Co, Israeli collective farm Ramat Magshimim, along with Spanish winery Miguel Torres Winery, which has vineyards in Spain, Chile and the US. Existing investors Gefen Capital, Trendlines, the Israel Farmers’ Union, and Shlomo Nechama also participated.  The company raised a $1 million seed round in early 2016.

Based at the Tel Hai Industrial Park in the Upper Galilee, Saturas is a Trendlines portfolio company that is developing an Advanced Decision Support System (ADSS) for automatic irrigation based on its miniature stem-water potential (SWP) sensor.  Embedded in the trunks of trees, vines, and plants, Saturas’ sensors receive direct input from the tree or vine to provide real-time, accurate, and continuous information for optimized irrigation.  (Saturas 26.02)

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8.5  Can Fite Reports Progress in Phase II NASH Study with Drug Candidate Namodenoson

Can-Fite BioPharma provided an update on its Phase II clinical trial with drug candidate Namodenoson (CF102) in the treatment of NAFLD/NASH.  The current Phase II study is being conducted in three Israeli sites including Hadassah Medical Center, Jerusalem and the Rabin Medical Center, Petah Tikva.  Patients who suffer from NAFLD/NASH with evidence of active inflammation are treated twice daily with 12.5 or 25 mg of oral Namodenoson vs. placebo.  The primary end point of the Phase II study is the anti-inflammatory effect of the drug, as determined by ALT blood levels, and the secondary end points include percentage of liver fat, as measured by MRI-PDFF (proton density fat fraction).  The company anticipates the completion of patient enrollment toward the end of 2018 and data release in H1/19.

Recent safety data showed that Namodenoson has a favorable profile and lack of hepatotoxicity in patients. Preclinical data demonstrate robust anti-inflammatory, anti-fibrogenic and anti-steatotic effects, supporting its development for the NAFLD/NASH indication.  here is currently no U.S. FDA approved drug for the treatment of NASH, which is an addressable pharmaceutical market estimated to reach $35 – 40 billion by 2025.

Petah Tikva’s Can-Fite BioPharma is an advanced clinical stage drug development Company with a platform technology that is designed to address multi-billion dollar markets in the treatment of cancer, inflammatory disease and sexual dysfunction.  Can-Fite’s liver cancer drug, Namodenoson, is in Phase II trials for hepatocellular carcinoma (HCC), the most common form of liver cancer, and for the treatment of non-alcoholic steatohepatitis (NASH).  Namodenoson has been granted Orphan Drug Designation in the U.S. and Europe and Fast Track Designation as a second line treatment for HCC by the U.S. FDA.  Namodenoson has also shown proof of concept to potentially treat other cancers including colon, prostate, and melanoma.  (Can-Fite 28.02)

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8.6  OrthoSpin’s Robotic External Orthopedic Fixation System Successful First

OrthoSpin, a portfolio company of The Trendlines Group, successfully completed a first-in-human (FIH) case for its smart, robotic external fixation system for the treatment of an orthopedic deformity.  The patient was a 15-year-old suffering from deformity of the tibia.  The deformity caused shortening of the leg and a limp, limited his daily activity, had the potential to disrupt his growth, and had aesthetic consequences.  Pediatric orthopedic surgeons of Tel Aviv Sourasky Medical Center’s Dana-Dwek Children’s Hospital, performed surgery to correct the deformity, which was followed by external fixation with the Taylor Spatial frame using OrthoSpin’s smart automatic control system.

Instead of conventional manual adjustment of the external fixator, the OrthoSpin system makes pre-programmed adjustments automatically and continuously — without the need for patient involvement.  Integrated software enables physicians to chart patient progress and, if required, quickly adjust the treatment regimen.  Physicians receive real-time feedback on computers or mobile devices to ensure that the prescribed course of treatment is followed.  Using the system also eliminates the need for weekly x-rays to check status.  The precise adjustments of OrthoSpin’s system resulted in a less painful process due to smaller, more incremental changes – in this case, an eighth of a millimeter in movement – which are expected to reduce soft tissue damage.

Misgav’s OrthoSpin was founded in 2014 by entrepreneurs with significant experience in medical devices, orthopedics, engineering, and business. The company operates within the framework of Trendlines Medical, part of The Trendlines Group.  (OrthoSpin 28.02)

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8.7  Caffeinated Stimulants Get a WakeUp! Call

Inno-Bev has received a U.S. patent for WakeUp!, its plant-based alertness formula.  The patent describes a method for providing an “awakening effect “as well as for compositions of plant extracts that help improve well-being.  The WakeUp formula is designed to counteract “post-lunch dip,” the time of day when fatigue, drowsiness and foggy thinking can stunt productivity.  It can help provide a lift on slow mornings and evenings as well.  The formula incorporates functional extracts of guarana, ginkgo biloba and elderberry, and is sweetened by a low-glycemic fruit extract.  The non-caffeinated beverage answers a growing demand among today’s, health-conscious consumers who want to perform at optimal levels throughout the day, without the jitteriness, crash, and other drawbacks of caffeine.

Four clinical research studies conducted with third-party partners indicated that WakeUp can help counteract fatigue and balance the body’s circadian rhythm.  In randomized controlled trials, WakeUp was shown to overcome the post-lunch dip/morning inertia and improve vigilance, focus and work performance with no tolerance effect or the side effects, such as those associated with caffeinated beverages and other stimulants.  Inno-Bev now has two formulas: WakeUp, for dietary supplements, and Rhythm, for beverages.  Analysis of new product launches, tracked by Innova Market Insights from 2013-2017, sees “green” energy drinks that feature natural energy sources, as having a major impact on the energy drink/alertness/stimulation category moving forward.

Tel Aviv’s InnoBev is engaged in beverages and nutritional supplements development in the Israeli and international markets for over five years.  The group is working with the best producers and professionals and her expertise includes all development stages from the concept to production and marketing  Inno-Bev is owned by Zvidan Investments, a group primarily involved in real estate and Hi-tech in Israel, Europe and the US.  Inno-Bev currently is seeking partnerships with leading U.S. beverage and supplement companies.  (Inno-Bev 27.02)

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8.8  Israel’s Medivie Signs $110 Million Medical Cannabis Export Deal

Israel’s Medivie Therapeutic announced on 4 March that it signed a $110 million deal to grow and export medical cannabis to an international financial investor over a four year period.  The deal is dependent on Israel allowing export of medical cannabis, a decision the company said it expects to come in the near future.  It did not identify the buyer.  Medivie said it would grow the cannabis on 25 acres (10 hectares) either in Israel or a different country.  Medivie said it will provide the investor with 50% of production on the land, up to a maximum of 50 tonnes a year.  The company said it has 50 acres in agricultural land and is in talks with other entities to sign similar deals on the remaining land.  It is also in talks to grow medical cannabis in Europe.

Medivie Therapeutic and its subsidiary High Pharma will earmark around 100 dunams (25 acres) of land to grow, produce and export up to 50 tons of medical cannabis to the investor each year.  In return, the investor will pay $30 million in the first year for completion of due diligence checks — after which it will reveal its identity — and for rental and preparation of the land, followed by $20 million a year for years two to six for the produce.  The location of the cannabis fields will depend on whether the Israeli government approves the export of medical marijuana.  A clause says the contract can be canceled either if Israel fails to approve exports or if the company is unable to grow its crops in a European country, as an alternative.

Ra’anana’s Medivie Therapeutic is engaged in the development of dental support devices (DSD) for a variety of medical uses.  The Company currently markets a DSD designed to help deal with the pain of childbirth and to reduce the time spent in labor.  Medivie Therapeutic is also actively engaged in developing a DSD solution for migraine pain and to improve concentration and cognitive activity.  (Medivie 04.03)

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8.9  Nucleai Raises $5 Million in Seed Round

Nucleai, which is currently developing an artificial intelligence-based system that assists pathologists in the diagnosis of diseases like cancer in a more efficient manner, announced a $5 million seed round.  The round was led by Israeli-based VC funds Vertex Ventures Israel and Grove Ventures as well as private investors Brian Cooper, founder of Retalix, and serial entrepreneur Nir Kalkstein, co-founder of Final and Medial Early Sign.  Clinical pathology is a medical specialty which diagnoses a disease based on laboratory analysis of bodily fluids or tissues and cells. Today, most diseases are diagnosed by pathologists.

Founded in 2017 by veterans of a technological unit of the Israeli intelligence corps specializing in computer vision, Tel Aviv’s Nucleai currently employs an eight-person team and is looking to double the size of its team in coming months.  It is a company that works to improve the efficiency of pathologists, therefore shortening the patient’s wait time for a diagnosis and reducing fatal errors.  The company is currently focusing on prostate, breast and gastrointestinal cancers.  (Various 05.03)

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9.1  Stratasys Expands Access to 3D Printing as Laboratories Transition to Digital Dentistry

Further securing its position as a global leader in applied additive technology solutions, Stratasys unveiled a series of newly integrated additive manufacturing innovations intended to boost accessibility of professional-grade 3D printing technology across a wider range of dental laboratories.  These solutions are specifically designed to help advance lab service offerings, cut production times, reduce costs, and support mass adoption of digital dentistry.

Based on award-winning PolyJet triple-jetting technology, the Stratasys Objet260 Dental 3D Printer offers cutting-edge functionality for laboratories across all departments.  With the power to 3D print three different materials on a single tray, the solution has the versatility necessary to build surgical guides, models, and appliances for a variety of patient requirements.  When operating in single-material mode, operators gain production efficiency with shorter change-over and reduced material waste.  Its affordability is ideal for mid-sized labs looking to expand service offerings, while not impacting versatility.  Future-proofing current investments, the Stratasys Objet260 Dental 3D Printer is additionally upgradeable to “Dental Selection” – broadening adoption of next-generation digitally mixed materials.

Stratasys is also exclusively demonstrating two new products aimed at further increasing laboratory productivity.  The first is a flexible biocompatible material, MEDFLX625 – allowing dental and orthodontic laboratories with PolyJet multi-material 3D printers to custom mix both flexible and rigid biocompatible materials for short-term patient contact direct print applications, such as indirect bonding trays.  In addition, MEDFLX625 is built to help laboratories further increase efficiencies by 3D printing both surgical guides and soft-tissue implant models during a single print run.

With headquarters in Minneapolis, Minnesota and Rehovot, Israel, Stratasys is a global leader in applied additive technology solutions for industries including Aerospace, Automotive, Healthcare, Consumer Products and Education.  For nearly 30 years, a deep and ongoing focus on customers’ business requirements has fueled purposeful innovations that create new value across product lifecycle processes, from design prototypes to manufacturing tools and final production parts.  (Stratasys 22.02)

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9.2  Shenzen TiComm Selects Ethernity Network’s FPGA-Based SD-WAN Platform

Ethernity Networks announced that its low cost FPGA-based telco edge cloud platform has been selected by Shenzen TiCOMM, a Chinese SD-WAN solution provider.  The innovative platform will be used as a combined Network Interface Device (NID) and SD-WAN gateway solution.  The system-on-chip (SoC), featuring both an array of powerful ARM CPUs and an FPGA in a single, low-cost programmable platform, will be equipped with 10G interfaces, Carrier Ethernet functions, IPSec, and ARM processors for SD-WAN software.  The platform can be packaged as a standalone device or can be installed as a SmartNIC on any standard server.  The solution supports 10G IPSec and 20G Carrier Ethernet switching and routing throughput.  TiCOMM’s SD-WAN solution reduces WAN expenditures, improves the quality of interconnections and extends coverage scope with a secure, simple, fast service.  It provides a real-time view of the network, dynamic optimal path selection, and an intuitive OAM management interface.  By using Ethernity’s FPGA- and ARM-based platform, TiCOMM will benefit from a low-cost, high-capacity, yet fully programmable solution compared to x86 servers, resulting in higher throughput and lower expenses.  Nonetheless, the platform is still able to connect to external servers to access even greater computing resources through the embedded NIC function.

Lod’s Ethernity Networks is a leading provider and developer of data processing technology for high-end Carrier Ethernet applications across the telecom, mobile, security and data center markets.  The Company’s core technology, which is populated on programmable logic, enables data offloading deployment at the pace of software development, improves performance and reduces power consumption and latency, therefore facilitating the deployment of virtualization of networking functionality.  (Ethernity Networks 21.02)

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9.3  MTS Alliance with Panasonic Delivers Property Management System Integration

MTS – Mer Telemanagement Solutions will be partnering with Panasonic System Communications Company of North America to provide Property Management System integration (PMSi) solutions for Panasonic’s Series of Hospitality Solutions.  With MTS’s PMSi, Panasonic will be able to help hospitality industry professionals improve staff productivity, save on costs and enhance guest experiences.  PMSi can fully integrate with existing property management software systems to connect effortlessly with Panasonic’s solutions.  Panasonic’s Series of Hospitality Solutions and MTS’s PMSi enable hotel staff and event service providers to seamlessly integrate all hotel and connected third party systems into a single, unified interface.  By giving hotel staff and event service providers the ability to bring a wide range of devices onto a single network, they can execute various Front Office System (FOS) control tasks to ensure fewer communication interruptions and increase productivity.  The end result gives hotel staff the ability to address guest needs quicker, ensuring a better overall experience.

Ra’anana’s Mer Telemanagement Solutions is a provider of video advertising solutions for online and mobile platforms through Vexigo, as well as a provider of innovative products and services for telecom expense management (TEM) and enterprise mobility management (EMM).  (MTS 22.02)

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9.4  MTI Wireless Edge Launches New Portfolio of 5G Backhaul Antennas Innovations

In order to increase range, capacity and availability of backhaul links while reducing Opex and Capex, MTI has developed a family of parabolic Dual Band antennas in 15/80 GHz, 18/80 GHz and 23/80 GHz. Additional frequencies such as 32/80 GHz and 38/80 GHz are in our pipeline.  Providing small form factor, low profile antennas, integrated and embedded into the small cell cellular base stations, MTI has released a line of flat antennas in 60 GHz and 80 GHz and is expanding our portfolio to 28 GHz, 38 GHz, 42 GHz and additional frequencies.  Being the leader in new and innovative antenna solutions MTI Wireless Edge is the only company in the world to provide and exhibit both flat and parabolic antennas in these frequencies.

Rosh HaAyin’s MTI is engaged in the development, production and marketing of High Quality, Parabolic and Flat Antennas for Commercial & Military applications.  With over 40 years’ experience, supplying antennas from 100KHz to 90GHz including directional antennas, Omni directional and Smart Antennas for outdoor and indoor deployments for LTE, Wi-Fi, Public Safety, RFID and Utility Markets.  Commercial applications include 5G and Small Cell Backhaul, Broadband Wireless Access and RFID.  Military applications include a wide range of broadband, tactical and specialized communication antennas, antenna systems and DF arrays installed on numerous airborne, ground, naval and submarine platforms worldwide.  (MTI 22.02)

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9.5  Anagog Named 2018 BIG Innovation Award Winner by Business Intelligence Group

Anagog has been named a winner in the 2018 BIG Innovation Awards presented by the Business Intelligence Group.  Anagog is the developer of JedAI, the on-handset mobility status AI engine, and BIsense, the big data analytics solution that delivers, analyzes, and compares footfall information for any geographical area, based on anonymized foot-traffic data.  Anagog’s technology analyzes multiple on-handset sensor signals to deliver a better understanding of where the handset owner is, what activity they are doing, and what they will likely do next—all accomplished with ultra-low power consumption.  Anagog collects and analyzes billions of anonymous sensor readings everyday on a global basis, including time-contextual inputs from onboard sensors such as accelerometers, barometers, WiFi, Bluetooth, GPS, and more.  These analytics provide the highest number of real-time and predictive mobility statuses per user.  Combined with sophisticated machine learning algorithms, the contextual data collected can be used to significantly improve the user’s experience with richer personalized services that are offered at the right time and place.

Tel Aviv’s Anagog is the industry’s pioneer in smartphone sensor signal processing and the first company to understand the mobility status of users while consuming minimal battery power.  Anagog’s technology is implemented in over 20 million handsets globally, via 100 mobile services from different domains, collecting billions of anonymized data points each day.  (Anagog 12.02)

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9.6  BUFFERZONE Eliminates Cyber Mining Malware Threat With Updated Prevention Software

BUFFERZONE SECURITY released an updated version of its isolation technology with the ability to stop Cyber Mining, the increasingly prominent malicious malware aimed at mining Cryptocurrency.  BUFFERZONE protects organizations from a wide range of threats with patented containment, bridging CDR and intelligence technologies.  Instead of blocking threats, BUFFERZONE isolates potentially malicious content from web browsers, email and removable storage in a virtual container that keeps the application separate from real memory, registry, files and network resources of the computer.  BUFFERZONE maximizes user productivity with seamless, unrestricted access to information, while empowering IT with a simple, lightweight and cost-effective solution for thousands of endpoints within and beyond the corporate network.

Tel Aviv’s BUFFERZONE endpoint security solutions protect enterprises from advanced threats including ransomware, zero-days, phishing scams and APTs.  With cutting-edge containment, bridging and intelligence, BUFFERZONE gives employees seamless access to Internet applications, mail and removable storage – while keeping the enterprise safe.  (BUFFERZONE 28.02)

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9.7  BGU Technology for Smart Cameras Improves Object Recognition in Sub-optimal Lighting

BGN Technologies, the technology transfer company of Ben-Gurion University, announced that researchers at Ben-Gurion University of the Negev (BGU) have developed a new Light Invariant Video Imaging (LIVI) software technology that can significantly improve picture clarity of cameras in sub-optimal lighting, thus enhancing object recognition.  The new software app can be added to any existing smart camera system for various applications, including facial recognition for security use, as well as augmented reality.

LIVI increases the functionality of cameras by eliminating the effects of background or dynamic lighting conditions, thereby delivering shadow-free images with constant color output and improved contrast.  The software relies on amplitude-modulated (AM) light separation, similar, in principle, to AM radio communication.  This enables cameras to separate the influence of a modulated light from unwanted light sources in the scene, causing the AM video camera frame to appear the same, independent of the light conditions in which it was taken.

Beer Sheva’s BGN Technologies is the technology company of Ben-Gurion University, Israel.  BGN Technologies brings technological innovations from the lab to the market and fosters research collaborations and entrepreneurship among researchers and students.  To date, BGN Technologies has established over 100 startup companies in the fields of biotech, hi-tech and cleantech as well as initiated leading technology hubs, incubators and accelerators.  (BGN Technologies 28.02)

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9.8  Optibus Introduces Solution for Rapid Deployment of Electric Buses in Cities Around the World

Optibus launched OnSchedule EV, a solution for the rapid and efficient deployment of electric buses, assisting municipalities and transportation operators in addressing the challenges of integrating electric buses into their existing fleets.  Optibus’ OnSchedule EV ensures that operators reap the benefits of reduced capital and operational costs by optimizing battery charging times and locations.  Optibus’ proprietary algorithms factor in unlimited types of batteries, chargers and charging locations to create optimal battery usage for fleets.  The solution integrates electric buses into the existing routes and schedules without negatively impacting drivers or passengers, and seamlessly compliments the existing transportation plan without any additional installation or IT resources.

Operating since 2014, Tel Aviv’s Optibus is the leading vendor of city-wide mass transportation planning and operation.  Based on proprietary AI and optimization algorithms, Optibus provides a dynamic platform to enable public transportation and fleet operators to optimize resource allocation and improve the transport experience, while saving their clients tens of millions of dollars annually.  Powering some of the largest transit operators internationally, Optibus is developing the future operating system that will control and optimize multi-modal, flexible transportation within cities.  (Optibus 05.03)

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10.1  Israeli Unemployment Rate Lowest Since Early 1970s

On 28 February, the Central Bureau of Statistics announced that Israel’s unemployment rate has fallen to its lowest in nearly 50 years, showing unemployment at 3.7%, compared to 4% the previous month, December 2017.  The unemployment rate in January was also lower than the annual average in 2017, which stood at 4.2%.  The last time unemployment was this low was in the early 1970s, before the 1973 Yom Kippur War, when it was 3.4%.  The CBS said that in January, for the first time since the 1970s, the number of people classified as unemployed dropped below 150,000, to 148,000.

Israel’s labor force participation rate stands at 3.86 million and for the first time includes more women than men: 1.82 million men compared to 1.840 million women.  The rate of employment for people aged 25 to 64 was 80% (68% for women and 87% for men).  Unemployment levels for men in that age range dropped to 3.5% (compared with 3.8% in December 2017), and for women in that age group fell to 3.9% (compared with 4.2% in December 2017).  (CBS 28.02)

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10.2  Israeli Startups Raise $500 Million in February

IVC-ZAG announced that Israeli startups raised over $500 million during February, according to press releases issued by companies that have completed financing rounds.  The figure may be more as some companies prefer not to publicize the investments they have received.  This figure follows a sluggish start to 2018 when Israeli startups only managed to raise $260 million.  This month’s figure would put Israeli startups back on course to beat the record $5.24 billion raised in 2017, which was up from $4.8 billion in 2016, which was itself a record.

Half of February’s figure was due to debt raised by fintech startups rather than venture capital investments.  Behalf, which provides short-term loans and working capital to small and medium-sized businesses in the US, completed a $150 million debt issue, led by Soros Management Fund and the Viola Credit fund, while asset management company Pagaya Investments raised $75 million in debt from Citi Group.  Blender Global, which has developed a platform for digital loans, raised $16 million in capital and debt from Blumberg Capital, and European Eiffel Investment Group.

Other major financing rounds in February included $50 million raised by urban mobility company Moovit in a round led by Intel Capital.  OrCam Technologies, which was founded by the same duo that founded Mobileye, raised $30.4 million for its wearable aid for people with impaired vision.  B2B payments company Tipalti raised $30 million, grocery delivery company Sensible Robotics raised $20 million and cybersecurity company CyberX raised $18 million.  (IVC-ZAG 28.02)

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10.3  Israeli New Car Sales Down by 7.3% in 2018

New car sales in Israel totaled 65,303 in January-February, down 7.3%, compared with the corresponding period last year, according license figures. 26,284 new vehicles were delivered in February, 4% more than in February 2017.  Auto sector sources attributed the fall in deliveries to several causes, including market saturation, slower purchases by institutions due to the Bank of Israel’s tougher credit policy and excess supply n the used car market, which makes it difficult to trade in old cars when buying new ones.  The sources added that a general economic slow-down was beginning to bite.

Hyundai led vehicle deliveries in January-February with 9,938, 11% fewer than in the corresponding period last year. Kia Motors was in second place with 8,204 deliveries, down 6%, followed by Toyota with 6,785 (down 7.4%), Skoda with 4,696 (down 17%), and Mazda with 4,161 (down 23%).  (Globes 05.03)

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11.1  ISRAEL:  Israeli Cannabis Companies Raised $76 Million in Four Years

Israel’s cannabis tech sector is on the rise.  New research published on 18 February by IVC Research Center found 68 active companies focused on medical cannabis and other cannabis-related technologies.

Activity in the segment has been on the rise in recent years, “developing quickly after the government approved permits for research and development of cannabis for scientific purposes,” according to the report’s authors.  The report also refers to a growing interest in cannabis products and technologies in Canada and in parts of the U.S. where cannabis use has been – or is about to become – legalized as a factor boosting the growth of the segment in Israel.

IVC found that Israeli medical cannabis companies employ approximately 900 people and cannabis-related startups have raised a total of $76.4 million in equity between 2013-2017.

While growing steadily, Israel’s cannabis tech industry is young, with 46 out of 68 companies in early stages of development, IVC found.  The report also found that traditional capital vehicles tend to avoid cannabis-related companies, citing regulatory issues, lacking clinical proof, and general uncertainty about the sector.

Cannabis use is rising globally as medical cannabis use is made legal and regulators shift from criminalization to a more permissive legal stance on cannabis products.  In early 2017, cannabis market researcher The ArcView Group estimated that the industry could reach $22.6 billion in revenue in 2021 in North America alone, from just $6.7 billion in 2016, and research company Grand View Research estimated in January 2017 that the global medical cannabis market could reach $55.8 billion by 2025.

A regulatory reform designed to see Israel become a leading medical cannabis exporter was blocked earlier this month.  Israel’s ministries of finance, agriculture and justice are interested in cashing in on the potential revenues of cannabis export – which in August 2017 were estimated to net Israel as much as $1.1 billion a year – and fast-tracking the bill, while the ministries of public security and health oppose the reform.  Earlier in February, Israeli Prime Minister Netanyahu sent the plan back to the planning board, ordering a reassessment of its economic potential.  Before the reform was halted, almost 400 Israeli farmers applied for cannabis growing permits.  (Calcalist 18.02)

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11.2  ISRAEL:  Chinese investments in Israel: Still Waiting for Lift Off

In recent years there has been a lot of buzz about Chinese investment in Israel’s high-tech sector.  Not a day goes by without reports in the Israeli media about economic cooperation between Israel and China.  All the associated hype gives the impression of China being a major factor in Israel’s high-tech sector.  IVC’s data suggests otherwise: the world’s most populous country and second largest economy in fact remains a relatively minor player, with its focus almost exclusively on strategic investments.  One Israeli insider with years of experience with the Chinese dubbed their strategy as “drain the brain.”  Put simply, Chinese companies invest in innovative Israeli technology that they can utilize for their own specific needs.

The most recent story to receive banner headlines is a planned visit of Alibaba founder and chairman Jack Ma to Israel in May.  His company recently finalized a relatively small deal to acquire Visualead, a QR codes startup and announced plans to set up an office in Tel Aviv as part of a $15 billion global R&D initiative.  The Chinese retail giant has also invested in several other Israeli startups in the past two years that focus on strategic technologies for Alibaba.  Two years ago, Alibaba also invested in Israeli VC JVP’s $160 million seventh fund.  No exact amount was given at the time, but it was thought to be around $20 million. .

Alibaba is typical of Chinese investors who are primarily interested in Israeli innovation, while the local high-tech sector views China as a huge potential and largely untapped market.  An apparent win-win situation for both sides, the data paints a very different picture. In recent years China has become a more significant player in Israel’s technology sector, though IVC data shows that its role is still relatively minor.  Chinese direct investments and M&A and buyout activity accounts for at most 5% of the total, and while the percentages and dollar amounts have risen from 2013 levels they have changed little over the past few years (see graph). While for Israeli high-tech companies, few have successfully cracked the Chinese market.

According to IVC’s data, the actual number of Chinese entities that invested in Israeli high-tech companies has gone from 18 in 2013 to 30 in 2015 and to 34 last year, and they invested on average annually in about 40 startups.  The dollar amount invested in those startups ranged around $500 to $600 million in 2015–2017.  This represented on average around 12% of the total capital raised by all Israeli startups in the corresponding years (see graph)

Few would dispute the fact that the Chinese market represents a huge potential for Israel’s high-tech sector and specifically startup companies.  However, this market is extremely complex for Israeli high-tech companies, far more familiar with the US and European markets, where they face far fewer cultural and language barriers and more familiar business practices.

The $64,000 question is whether this will change.  In November, ten Israeli startups were selected to take part in the first-of-its-kind accelerator program in Beijing.  They were chosen from 100 startups that applied, based on their chances of cracking the Chinese market.  The accelerator was established by Israel’s Economy Ministry and ShengJing Group, one of China’s largest management consulting and private equity firms, and DayDayUp, a group that focuses on connecting international and Chinese investors.  This represents a small but significant change that could start a trend, which could have long-term impact on the China Israel high-tech equation.

Startups generally raise from several investors during a round.  They also do not usually detail dollar amounts invested by each participant in a round. In fact, the lion’s share of the investments was by Chinese venture capital funds or high-tech companies and were in startups described as having strategic importance.  Even if the Chinese accounted for 50% of the funding in those startups (which is highly unlikely), that would still only translate into 6% of the total.

There have been relatively few financial investments by Chinese entities.  Chinese participation as investors in Israeli venture capital funds peaked in 2014 and has dropped considerably since then both in actual numbers of investors and actual dollar amounts.  The rule of thumb is investors in venture capital funds usually take a maximum position of around 10%.  In this category as well, Chinese investment clearly played a relatively minor role.

In the fields of M&A and buyouts of Israeli tech companies, Chinese firms have taken a backseat position to American, European, and even Japanese firms.  The only exception was in 2016 when China’s Giant Interactive paid $4.4 billion for Israeli gaming company Playtika, which accounted for 44% of all M&A activity that year.  The year before and after, Chinese interest waned sharply, accounting for 8% and 1.1%, respectively.  Even if the huge Mobileye-Intel deal is excluded from 2017’s record tally, the percentage would only rise to 3.5% and three M&A deals done by Chinese.  (IVC On-line 22.02)

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11.3  ISRAEL:  Israel’s Revolutionary Sexual Harassment Law

Mazal Mualem posted on 28 February in Al-Monitor that Israel’s Law to Prevent Sexual Harassment adopted by the Knesset 20 years ago represented a real breakthrough in changing social norms and priorities overnight.

One night in July 1997, Israel’s Knesset made history by passing the first reading of the Law to Prevent Sexual Harassment.  It was met by all sorts of catcalls and sexist remarks by many of the legislature’s male members.  Knesset member Yael Dayan had presented the innovative law in her capacity as chair of the Committee to Advance the Status of Women.  At the time, she had to push back against warnings from Knesset members who argued that the legislation would prevent men and women from talking with each other.  Rehavam Ze’evi, a major general in the reserves, seriously argued that women actually like to turn men down just to keep them trying.

It is safe to assume that the men sitting in the Knesset at the time did not understand why the law was of significance.  As far as they were concerned, it was a feminist whim that posed a threat to the familiar, old existing order.  Dayan, representing the Labor Party, and various other female Knesset members, including Likud’s Limor Livnat, were fully aware that it was a historic breakthrough on an international scale.

Half a year later, on 19 March 1998, during the first Netanyahu government, the proposed law passed its second and third readings and entered the Israeli law books.  At that moment, the attitude toward sexual harassment in Israel made a 180 degree turn.  In many ways, the law was ahead of its time internationally as well. Israel had been a country dominated by men in both politics and the military, so the passing of the law was an enormous social achievement.  Its passage can be credited to the women in the Knesset, who joined forces despite party differences and won the support of many of their male counterparts.  Very few laws can be called a real “breakthrough” for the way they change priorities and social norms overnight.  The Law to Prevent Sexual Harassment, which marked its 20th anniversary on 27 February, is one of them.

The law was considered revolutionary because until then, the issue of sexual harassment was an open one, without established boundaries or definitions.  The problem was typical of the ingrained culture in the workplace, particularly in official environments such as the Israel Defense Forces (IDF) and the Israel Police, where women were exposed to sexual harassment, humiliation and objectification starting at a very young age.  They were not always able to grasp the intensity of the harm done to their dignity, bodies or rights and they had nowhere to turn for support or defense.  It was recently that former Police Commissioner Assaf Hefetz admitted that while serving as the country’s highest-ranking police officer, he had had relationships with women who were his subordinates, before such relationships were criminalized.  Hefetz was no exception either.  In fact, he was the norm.

What makes Israel’s sexual harassment law unusual is, first and foremost, the idea that Israeli legislators drafted a dedicated law for combating the sexual harassment phenomenon.  Second, the law defined what constitutes sexual harassment, codifying a precise and detailed description of it for the first time.  It also made verbal harassment a crime, along with any sexual relationship between a man and a woman when one of them is subordinate to the other.

Shelly Yachimovich, chair of the State Comptroller Committee, on 27 February, initiated the special discussion in the Knesset marking 20 years since the law’s passing.  She rightfully made the point that the founding mothers who got the law passed “had been wandering in the desert, at a time of zero awareness of the problem of sexual harassment. … They lay down on the fence, quite literally, on behalf of the next generation.”

In the years immediately following the law’s passage, most people remained unaware of it.  The turning point came in 2000, when a secretary in the office of former IDF deputy chief of staff Yitzhak Mordechai filed a complaint against him, alleging that he had harassed her sexually and committed indecent acts.  As a result of this, two other women filed complaints against him.  The Mordechai scandal put the law on the public’s agenda, leading women to realize how they could actually use it.  Mordechai’s conviction for sex crimes (which eventually led to a civil lawsuit as well) is considered to be a watershed moment, dividing the old world from the new.  Men at that point began to realize that actions they once considered acceptable had become crimes.

Also as a result of the law, workplaces began designating people to handle harassment complaints, while the IDF and the police began combating the phenomenon in an organized manner.  It was a world without social networks and powerful and empowering campaigns such as #MeToo.  As such, it is quite remarkable that people were able to spread awareness that even verbal harassment was a crime, despite the many obstacles along the way.

The 20th anniversary of the sexual harassment law is a good time to examine how much it reduced the phenomenon, what its limitations are and to what degree it is being enforced. It was surprising to discover that none of these issues has been investigated in an organized manner until now.  This became apparent when State Comptroller Joseph Shapira, who attended the commemorative event, announced that he would comply with Yachimovich’s request to compile a special report on the implementation of sexual harassment legislation.  Such a report is important because it will allow for a data-based assessment of the issue over time.

During the Knesset discussion, problems with the law’s implementation were pointed out, giving the state comptroller a number of issues that he will need to address in his report.  These problems include differences between the language of the law and its practical implementation in the workplace and the seven-year statute of limitations.  The repeal of the latter could make a significant contribution to the fight against sexual harassment.

Nevertheless, the bottom line is that Israel can take pride in knowing that its law books contains the Law to Prevent Sexual Harassment.  Yes, the phenomenon still exists 20 years after the law was passed.  Even now, women are still forced to contend with sexual harassment, but today they live in a very different place and have grounds to take action against anyone who harasses them.  This is especially true of the new generation of women, who are not afraid to go public, file a complaint and join the revolution that is underway as if this were the most natural thing in the world.

Yachimovich was right to refer not only to the “generation of foremothers,” headed by Dayan, but also to the young women who are now at the forefront of the battle to press ahead with change.  “We also owe a huge debt of gratitude to the generation of young women, which is not ready to make do with little, and which is not willing to accept any harassment or any derogatory comment, no matter how minor,” Yachimovich said.  “Theirs is a vital and good kind of extremism, which pulls us forward and creates a revolution.”

Mazal Mualem is a columnist for Al-Monitor’s Israel Pulse and formerly the senior political correspondent for Maariv and Haaretz.  She also presents a weekly TV show covering social issues on the Knesset channel.  (Al-Monitor 28.02)

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11.4  JORDAN:  Jordanians Protest Price Hikes But in Surprisingly Small Numbers

Osama Al Sharif posted on 20 February in Al-Monitor that although few people have been taking part in protests against price hikes in Jordan, analysts believe the public movement could still make a difference.

Jordanians are taking to the streets in protest of price hikes involving hundreds of essential goods, including bread, which came into effect at the beginning of February after parliament approved a controversial 2018 state budget.  But unlike 2011, when Jordanians held large demonstrations across the kingdom calling for political reforms, this time the protests are few and far between.  Every week following Friday prayers, small crowds would gather in downtown Amman, Salt, Kerak, Ma’an and Madaba calling on King Abdullah to sack the government and dissolve parliament.  The protests are mostly peaceful, although there were confrontations with police forces in Kerak on 8 February that led to a number of arrests.

But despite bitter attacks on the government’s economic policies by a number of Lower House deputies, Prime Minister Hani al-Mulki survived a no-confidence motion on 18 February submitted by the Islamist-led Al-Islah parliamentary bloc.  The outcome of the vote is expected to increase public denunciation of both the government and parliament.

The government says the sales tax increase on essential goods and the lifting of bread subsidies are part of its agreement with the International Monetary Fund (IMF) to restructure the economy and reduce expenditures.  In an interview with Jordan television on 13 February, Mulki said the country would have gone bankrupt had it not been for recent economic measures that saw subsidies lifted on several commodities.  But he also blamed populist policies and unwise public spending by previous governments for the decline in economic performance.  He said the economy would “exit the bottleneck by mid-2019.”

Mulki’s comments have failed to lift the public mood.  On social media, Jordanians were skeptical of Mulki’s promise that their suffering would end by mid-2019.  Some pointed to the fact that Jordan had been bowing to the IMF’s orders since the early 1990s.  Others blamed the current conditions on the government’s inability to fight corruption and for relying solely on “citizens’ pockets” by levying and collecting taxes.

With the official unemployment rate standing at 18% — it is higher among young people and women — and a third of the population living below the poverty line, many Jordanians are doubtful that recent economic measures will improve their livelihoods.  The undersecretary of the Finance Ministry, Izziddin Kanakrieh, was quoted by Ammon News as saying that JOD 6 billion ($8.4 billion) of the JOD 9 billion ($12.6 billion) state budget for 2018 will be spent on salaries and pensions and servicing the kingdom’s debt while only JOD 1 billion ($1.4 billion) will go to capital expenditure.

Trust between the public and the government has reached a new low after the recent price hikes.  Adding to the government’s growing unpopularity is the fact that the IMF declared on 15 February that it has never recommended lifting bread subsidies or increasing taxes on medicines, adding that economic reforms should not constitute a burden on the poor.

But despite the high disapproval of recent government measures, which included an increase in the electricity tariff and the price of fuel, pundits have been surprised by the low-key public reaction so far.  Hassan Barari, a professor of political science at the University of Jordan, told Al-Monitor that successive government policies have put Jordanians under unbearable pressure.  “People will take to the street as they are now convinced that it’s not the fault of a single government but the failure of an entire economic policy,” he said.

“The solution is in the hands of the king and it is no longer an issue of blaming the government or replacing it.  When it comes to the inability to put food on the table, the concept of social security collapses and this threatens the legitimacy of the regime itself,” Barari added.

While Barari said he could not predict how Jordanians would react in the future, he believes the street is reaching a boiling point. He pointed to a new phenomenon that appeared a few days before price hikes went into effect.  Between mid-January and the first week of February, a number of armed bank heists took place in Amman, mostly ending in failure. In addition, there were reports of robberies involving gas stations, pharmacies and post offices. In most cases, the perpetrators were young Jordanians with no prior criminal records.

Barari and other pundits warned of the relationship between worsening economic conditions and the rise in crime and social violence.  Al-Ghad newspaper columnist Fahd al-Khitan told Al-Monitor that Jordanians are right to be angry over the difficult economic phase and have the right to protest.  “These protests must remain peaceful and we should be wary of attempts to revive radical slogans from the days of the Arab Spring demonstrations,” he said.  “As for the phenomenon of armed robberies, we should look at the reasons behind the rise of such incidents and their effect on social peace,” Khitan added.

One explanation for the worsening economic conditions came from Abdullah, who told university students 1 February that Jordan was paying the price of its political stand over Jerusalem without divulging the identity of those putting pressure on the kingdom.  But Barari told Al-Monitor that to say that Jordan is paying for its position on Palestine is not convincing.  “The suffering of Jordanians has been going on for a while and it’s about bad economic policies and not political stands,” he said.

While the flow of foreign aid from the Gulf countries has slowed down considerably, the United States remains Jordan’s biggest financial supporter.  On 14 February, US Secretary of State Rex Tillerson signed an agreement that guarantees Jordan nearly $1.3 billion in annual assistance for the next five years.  The agreement saw an increase in annual US aid despite Jordan’s criticism of President Donald Trump’s declaration on Jerusalem in December.

In a country where political parties are weak and parliament is comprised mostly of government loyalists, Jordanians have limited venues to express their anger and distrust of the political system.  While public protests have been surprisingly small, observers believe the street remains unpredictable.

Former Deputy Prime Minister Marwan Muasher told Al-Monitor that the return of protests is linked to the confidence crisis between citizens and governments.  “There is a lack of political will to fight corruption and people are feeling this.  There is no drive to instill political reforms because there are no reformers,” he said.  “In fact, there is an attack on reformers and I am convinced that we cannot create economic reforms without carrying out genuine political reforms first,” Muasher added.

Osama Al Sharif is a veteran journalist and political commentator based in Amman who specializes in Middle East issues.  (Al-Monitor 22.02)

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11.5  IRAQ:  Iraq Ratings Affirmed At ‘B-/B’; Outlook Stable

On 23 February, S&P Global Ratings affirmed its ‘B-‘ long-term and ‘B’ short-term foreign and local currency sovereign credit ratings on Iraq.  The outlook is stable.


The stable outlook reflects our expectation that fiscal consolidation will continue over the next few years, while economic growth prospects remain subdued because of consolidation measures and domestic political tensions.

We could lower the rating if the government’s net debt or debt servicing costs were to rise sharply.  This could occur if oil revenues were to disappoint, or if the government deviated substantially from its fiscal consolidation path.

We do not expect to raise the ratings over the next 12 months, but could do so if Iraq’s political and security situation significantly improves, along with its public finances.


Our ratings on Iraq are constrained by the early stage of development of its political institutions, domestic political tensions including divisions between the Sunni, Shia and Kurdish ethnic and sectarian groups, alongside the presence of Islamic State (IS).  The Iraqi government, supported by its international partners, recaptured areas under IS control though the threat of terrorist acts from IS remains.  In our view, the future governance of the Sunni-dominated territories liberated from IS remains a key political and security challenge for the Iraqi government.  In addition, our ratings are underpinned by the assumption that the majority of Iraq’s oil output remains in areas firmly under the control of the federal government.  Crucially, over 85% of Iraq’s oil fields and oil output are located in the south of the country, close to Basra, the main port for crude exports.

Institutional and Economic Profile: A volatile political environment and security risks hamper reform prospects

In December 2017, the government announced the territorial defeat of IS within Iraq. In addition, in late 2017, the government took control of disputed territories from Kurdish Peshmerga forces including Kirkuk province. However, the political situations in the areas liberated from ISIS and with the Kurdistan Regional Government remain unresolved.

Prime Minister Al-Abadi remains the favorite to win the May 2018 election.  We expect the outcome of the election will have little impact on the fragmentation of political power that impedes critical political or economic reforms.

We expect lackluster economic growth over the forecast period to 2021.

The fragmentation of political power across different parties and regions makes it difficult to carry out critical political or economic reforms in Iraq.  IS has now largely lost the territory it controlled within Iraq, but it will remain a threat as a terrorist group and the government will struggle to earn the trust of the Sunni community.  The result of the Iraqi Kurdistan September 2017 referendum was a 93% vote in favor of independence.  Shortly afterwards, the Iraqi government took control of territory disputed by the Kurds, including Kirkuk province.  The Kurdistan Regional Government’s (KRG) position has been much weakened following the referendum and it is highly unlikely to achieve independence.  The more likely scenario is a curbing of its autonomy and loss of control of its oil production in exchange for fiscal transfers from the federal budget and a lifting of sanctions.

Iraq also has to contend with widespread corruption, in our view.  The country scores among the world’s worst in terms of corruption perceptions and governance indicators.  This problem is exacerbated by the ethnic-sectarian divide, and the government’s lack of experience in public administration and weak capacity to manage the influx of oil and aid money.  We believe that fighting corruption, the lingering presence of IS, and tensions with the KRG represent Iraq’s major political and security challenges in the near term.  Strengthening governance, accountability, and transparency could help unlock Iraq’s economic potential, in our view.

Iraq has the world’s fourth-largest proven crude oil reserves and is the second-largest oil exporter in the Organization of the Petroleum Exporting Countries (OPEC).  Oil dominates the Iraqi economy, contributing over 50% of GDP, 90% of government revenues, and more than 95% of exports. Iraq’s crude oil production has been little affected by the war against IS.  Oil helped to drive strong real GDP growth of about 6% in 2016, alongside an increase in exports.  The November 2016 deal agreed with OPEC to reduce oil output weighs on economic growth and has now been extended until year-end 2018.  OPEC data, using secondary sources, suggests production levels at 4.4 million barrels per day in 2017, similar to 2016.

We expect overall GDP growth to remain subdued in 2018-2021 owing to the unstable political and security situation, the effects of fiscal consolidation, and weak non-oil growth.  This results in weak real per capita GDP, for which we estimate a 0.2% contraction as a weighted average over 2012-2021.  This growth rate is below that of peers that have similar GDP per capita.

In line with the 2017-2018 production cuts, we expect real GDP to grow by 1.9% in 2018, before rising to 2.5% in 2019 as oil production recovers.  We expect oil production to increase over the forecast period to around 4.9 million barrels per day in 2021.  Depending on the timing of disbursements, economic activity should be supported to some extent by the $30 billion (about 15% of 2018 GDP) in pledges, loans, and investments attracted at a donor conference for Iraq in February 2018.  The largest single pledges came from Turkey ($5 billion in credit) and the United Arab Emirates ($6 billion); Saudi Arabia, Qatar and Kuwait pledged $1.5 billion, $1 billion, and $2 billion, respectively.  However, in practice Iraq may receive much less than the total pledged amount.  Separately the U.S. has agreed to provide more than $3 billion in loans and loan guarantees.

Flexibility and Performance Profile: Full disbursement of the IMF program, alongside fiscal consolidation, should help preserve the level of reserves

The $5.4 billion International Monetary Fund (IMF) program has been crucial to Iraq’s fiscal situation.  We expect the IMF will likely disburse the full amount over the three-year timeline.

We believe that the fiscal consolidation program, supported by the IMF, will help narrow fiscal deficits and preserve the level of foreign reserves.

We estimate the general government fiscal deficit at 4% of GDP in 2017, improving to 1% of GDP in 2018, largely due to our assumption of higher oil prices.  Weak fiscal performance in 2014-2015 resulted from the internal and external shocks–the sharply lower oil revenues and the ISIS conflict, which increased military and humanitarian spending.

This strong turnaround from double-digit general government deficits in 2015 and 2016 resulted from higher-than-expected oil revenue and constrained expenditure.  We therefore assume the government will continue implementing the fiscal consolidation measures supported by the IMF program.  We project the fiscal deficit to stabilize around 3% of GDP for the rest of the forecast period, also reflecting our oil price assumptions.  We note the government’s efforts to broaden the tax base, with customs revenues and tax collection expected to increase as the government increases its control over areas formerly occupied by ISIS.  On the expenditure side, the government will attempt to contain non-oil primary spending mostly by reducing the wage bill through natural attrition, controls over pension beneficiaries, and continued postponement of lower-priority non-oil investment.

Under its Standby Arrangement, which was approved in July 2016, the IMF has disbursed about $2.1 billion despite Iraq’s failure to meet all of the conditions.  We expect the full $5.4 billion will likely be disbursed in full over the program’s three-year timeline.

The IMF program was crucial to Iraq’s fiscal situation with the sharp drop in oil prices.  It unlocked further budget financing from both official and unofficial creditors.  In addition, the Iraqi government successfully issued a $1 billion international bond with a 100% U.S. government guarantee in January 2017 and another $1 billion Eurobond without the U.S. government guarantee in July 2017 – its first independent bond since 2006.  A previous attempt to issue an international bond in 2015 failed because of the high premium requested by investors.

The IMF and World Bank pledges, and support from Iraq’s international partners, among other factors, have helped reduce the risk premium on Iraqi debt.  We expect the government to reduce its dependence on domestic funding sources as a result of this increased market access.  Historically, most of the government’s debt issuance has been taken up by Iraq’s commercial banks, led by the two largest state-owned banks Rafidain Bank and Rasheed Bank and funded by incremental deposit growth and by repurchase operations with the Central Bank of Iraq (CBI).  We project government net debt will average 54% of GDP over 2018-2021.  Our estimate of government liquid assets of about 8% of GDP largely comprises government deposits with domestic commercial banks. Iraq’s debt stock benefited from an 80% haircut that the government negotiated with its Paris Club creditors in 2003-2004.

The liabilities and guarantees of the domestic banks appear high compared with the fair value of their assets, and we view the risk stemming from the financial sector as a moderate contingent liability for the government.  In addition, the Iraqi nonfinancial public sector includes a large number of state-owned entities (SOEs), which present a burden for the government budget.  The potential fiscal cost of the contingent liabilities of state-owned banks and entities is hard to estimate, however, due to their poor reporting.

Reporting on Iraq’s external data (balance of payments and international investment position data) is also poor, which reduces the visibility of external risks.  The CBI reports much stronger historical current account balances than the IMF.  In our view, the IMF data is a more accurate representation of Iraq’s external position and we have revised our historical data accordingly. We now project the current account to show a deficit of about 5% of GDP on average over 2018-2021, narrowing over the period due to rising oil production.  The revised balanced of payments data has resulted in a modest increase in our estimate of gross external financing needs as a percentage of current account receipts (CARs) and usable reserves to about 75% over 2018-2021, from closer to 70% at the time of our last review.

Iraq’s foreign exchange reserves have declined from about $66 billion at end-2014 to about $48 billion at end-2017.  However, these reserve levels increased by about $3.5 billion in 2017 largely due to reduced indirect ministry of finance borrowings from the CBI and higher oil prices.  We expect central bank reserves to be maintained at around this level over the period to 2021.  We project reserve coverage of current account payments to average about six months over 2018-2021.  We forecast external debt, net of liquid public and financial sector external assets, to average about 22% of CARs in 2018-2021, similar to 2016 and 2017.  We also assess the concentrated nature of Iraq’s exports as exposing the country to significant volatility in terms-of-trade movements.

The security situation and the drop in oil revenues have led to a deceleration in public spending and low private sector consumption, resulting in subdued inflation.  We expect inflation to remain about 2% in 2018-2021.  The CBI will maintain the dinar’s peg to the U.S. dollar, unless financing conditions become more difficult than we currently anticipate.  While the peg has helped control inflation, it limits the CBI’s monetary flexibility, in our view.  (S&P 23.02)

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11.6  IRAQ:  Conference for Iraq Draws Investors Instead of Donors

On 23 February, Omar Sattar posted in Al-Monitor that the reported success — and failure — of a fundraising effort for Iraq could become a political football in the May general elections.

During a recent conference in Kuwait, Iraq was only able to raise a fraction of the money it needs for reconstruction, and rather than donations, most of the pledges were in the form of loans and investments to be used beyond the areas liberated from the Islamic State (IS).

Iraq has said it needs $88 billion to $100 billion, but it raised only $30 billion during the Kuwait International Conference for the Reconstruction of Iraq.  The conference, which took place 12 – 14 February, drew participants from 76 countries and regional and international organizations, 51 development funds and financial institutions, and 107 local, regional and international nongovernmental organizations, as well as 1,850 private sector representatives.

Turkey announced it will allocate $5 billion to Iraq in the form of loans and investments.  Saudi Arabia will give $1 billion in the form of investment projects and an additional $500 million to support Iraqi exports.  Qatar pledged $1 billion in loans and investments, and Kuwait will provide $2 billion in loans and investments for reconstruction efforts.  The United States will not be donating funds but said the US Export-Import Bank has agreed to loan Baghdad about $3 billion.

Prime Minister Haider al-Abadi hailed the conference as an unqualified success, according to the state-run Kuwait News Agency, and Mustafa al-Hiti, head of the Iraq Reconstruction Fund, said he was very satisfied with the conference’s results, though others weren’t so sure.  “The real success achieved at the Kuwait conference is that Iraq was able to [present] its cause before the international community and gain its confidence. Iraq has been fighting terrorism on behalf of the world and needs international support for its reconstruction,” Hiti told Al-Monitor.

“Washington has decided to invest huge sums in Iraq, as did many countries and international organizations. [Needing financial help] doesn’t indicate failure by the Iraqi government. Investments show that the world has confidence in the Iraqi security situation and that Iraq is able to host investments involving international efforts and expertise.”  He added, “These are soft loans with low interest rates. Iraq is not obliged to take all of them, and we will choose what we need to serve the 10-year reconstruction plan. … Iraq is a rich country, and in the next few years it could improve its financial situation and dispense with international aid.  What happened at the Kuwait conference is just the beginning of the reconstruction project.”

Abadi hopes to hold another meeting next month to follow up on the pledges.

Iraq’s investment vision includes about 200 large projects in addition to some medium-sized projects in the central and southern provinces — and not only in the western provinces liberated from IS. Baghdad didn’t limit the conference to discussions of donations but also marketed Iraqi investment opportunities.

Not everyone thought it was a good idea to solicit loans at the possible expense of donations. Vice President Iyad Allawi said in a 16 February statement, “The conference failed; it encumbered Iraq with sovereign debts.”

Alia Nassif, a parliament member with the State of Law Coalition, stated on 10 February, “It’s ironic to see how Kuwait — which drained the Iraqi resources and tried to starve the Iraqi people by obtaining unfair and arbitrary compensation — is seeking today to invest in Iraq.”

Iraq’s general elections are scheduled for May, and it looks like politicians will be using the conference results excessively in their campaigns.  Opposition parties will continue to paint the meeting as a failure, while the government — particularly Abadi — will circulate the idea that the conference was the first genuine step toward reconstruction.  It’s still unclear whether the government’s announced 10-year plan for rebuilding cities liberated from IS is credible and will remain in place if Abadi isn’t re-elected.  Abadi said the government is committed “as usual” to transfer the funds to their destination.

The government is likely to reject many of the loans pledged at the conference due to conditions imposed by the World Bank.  The bank has said Iraq cannot afford to keep borrowing.  The smaller amounts accepted will pave the way for further negative reactions at the government’s failure to bring in big grants.

Nevertheless, how will the government disburse the funds obtained at the conference in light of the rampant corruption in Iraq?  Is Abadi’s pledge enough to ensure delivery of the funds to their destination, as he hasn’t disclosed how he will do it?  How will he ensure a favorable investment environment, which requires a stable political and security situation?

All these questions seem logical and legitimate to donors and investors, who may be reluctant to fulfill promises made at the Kuwait conference until after the Iraqi elections are completed and a new government is formed that could serve as a strong partner capable of meeting international commitments.  This seems far-fetched, given the major political differences in Iraq that could lead to a political vacuum after the elections.  However, it’s also unlikely that the results of the Kuwait conference will remain mere ink on paper.

Omar Sattar is an Iraqi journalist and author specializing in political affairs. He has worked for local and Arab media outlets and holds a bachelor’s degree in political science.  (Al-Monitor 23.02)

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11.7  IRAQ:  “It’s Not the Donations, Stupid”: Key Points from Kuwait Conference

February 22, 2018 in Ahmed Tabaqchali posted in Iraq Business News that with a few exceptions, the coverage of the “Kuwait International Conference for the Reconstruction of Iraq” has been confusing at best, ranging from those who thought it was a failure for raising far less than needed to those who thought that that it was a reasonable success for raising a third of what was needed.

These thoughts were not helped by an Iraqi delegation that was focused on presenting a shopping list of projects that would need $88b in financing.  In the end, it was reported that Iraq received pledges of $30b in loans and guarantees, just over a third of the required total.

Lost in all of this is the significant document “Reconstruction & Development Framework” that the World Bank Group (WBG) prepared with the Iraqi Ministry of Planning (MoP), as well as the IMF’s work on Iraq and its presentation at the conference.

The first is a comprehensive analysis of the reconstruction requirements across all sectors of the country and provides plans for short-, medium- and long-term reconstruction needs within the framework of a long-term recovery for the country.  In combination with the second, they provide the structure for funding the reconstruction effort.

The key takeaway is that the Government of Iraq (GoI) is realistic in its expectations that external sources of financings will be small, and therefore it expects to utilize its own resources over the next five years for the required reconstruction.

However, given the high existing demands on its budget, it will augment its public investment budget with new financing approaches that are attractive enough to bring in syndicated bank loans, institutional investors and international stakeholders.

These financing approaches were developed with the WBG and thus are based on a thorough analysis of the country’s capabilities and challenges, as well as being in-line with the IMF guidelines set in the Standby Agreement (SBA) of June 2016.  The IMF’s presentation argues that this is feasible and consistent with macroeconomic stability, which means that the reconstruction should contribute to sustainable economic growth.

The IMF argues that the GoI can contribute $77b over the next five years from the required reconstruction bill of $88b.  This contribution would be made of $50b from oil revenues and $27b of debt from raising bonds in capital markets and borrowing from International Finance Institutions (IFI’s) and in investments.  Crucially GoI’s contributions are bound by requirements that Iraq’s foreign currency reserves remain at the current $50b level and that total debt as a percentage of GDP is about 50%.

Therefore, Iraq would need to be able to access debt capital markets or bank lending markets for $27b and donations of $11b, or a total raise of $38b.  Investments, depending on their type, would fit into either category.  The $30b pledged goes a long way towards filling the financing gap of $38b and not towards the $88b total.  The amounts pledged are roughly spilt between investments and export credits/loans.

Sovereign loans and guarantees come with lower interest rates and easier terms than commercial loans or bonds and therefore result in a lower repayment burden on Iraq.  While Investments by their very nature are made with expectations of attractive rates of return and thus, given Iraq’s needs, will most likely be in productive ventures that either fill a need or contribute to economic growth.

Sovereign export guarantees, while beneficial to the sovereign’s own domestic companies, yet by lowering their risk exposure would encourage these very companies to expand in Iraq.  Ultimately, investments and guarantees are far more important and sustainable than donations as they are beneficial to both parties: they benefit the home companies as they seek higher growth in Iraq than in slowing mature home markets, yet for Iraq their presence is needed, and they contribute to overall economic growth.

The assumptions made by the IMF are provided in the table below taken from its presentation.

The future price assumptions of Iraqi oil prices are conservative and are derived from the futures markets.  Based on prior IMF projections, they would assume that Iraq would not increase its current oil production or exports over the next five years.  Moreover, they would assume that Iraq would still be bound by its OPEC production cut throughout 2018.  Yet, Iraq has been exceeding these, leaving room for revenue upside in 2018.

Debt, current and new, at around 50% of GDP ensures that debt is below the threshold of 60% used in many debt targets.  While debt service, on current and new debt, ensures that debt repayments are sustainable, and with the requirement of maintaining $50b in reserves that no undue pressure will be exerted on the US $ peg of the Iraqi Dinar (ID).  The IMF noted that to ensure that Iraq maintains $50b in reserves that it, towards the end of the five-year period, would need to refinance some of the maturing debt and thus total financing need is $36b.

It’s worth noting that $41b out of Iraq’s $68b in external debt at the end of 2017 is in the form of unresolved arrears to non-Paris Club creditors that were accumulated under the pre-2003 regime.  This could be cut down by 90% if current negations with these creditors lead to the same debt relief terms accepted by the Paris Club creditors.  Were this to happen, total debt as a percentage of GDP would be much lower than 50% giving Iraq greater flexibility to assume more debt while expanding its investment capital spending.

However, the crucial requirement is that Iraq must adhere to the prudent fiscal policy set by the IMF SBA agreement of June 2016 which is not only long overdue but essential to reduce the role of the state in the economy in order to diversify away from oil and for the development of private sector as the main driver of the economy.

The reconstruction needs and funding framework as articulated by the MoP, WBG and IMF fits with the thesis presented by the author in a recent study on Iraq’s Economy Post ISIS which concluded that:  “Guided by the IMF following the signing of the Stand-By Arrangement (SBA) in June 2016, the Iraqi government can embark on the long process of decentralizing the state by reducing its role in the economy, encouraging the development of the private sector in agricultural and industrial production, and stimulating private sector employment.  The straight jacket of the low oil price environment, the absence of financial buffers and sovereign wealth funds, plus the need for reconstruction will ensure that the government continues on this path, builds upon it, and ultimately ensures its eventual success.”

In conclusion, the Kuwait conference was not about raising donations for Iraq but a strategic meeting on how to rebuild Iraq properly.  Or as reported by one of the informed reports:  “… conference in Kuwait was different, in that it moved from being a pledging event to a strategic meeting on how to rebuild Iraq.  Private sector representatives joined ministers from key countries with a stake in strengthening Iraq.  The requirement was mainly for investment and credit lines to encourage the private sector to develop commerce rather than continuing the cycle of handouts, both promised and actual.”

Mr. Tabaqchali is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets.  He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS). He is a board member of the Credit Bank of Iraq.  (IB 22.02)

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11.8  IRAQ:  Iraqi Parliament Approves Budget, Kurdish Lawmakers Boycott Vote

Iraq’s parliament approved a long-delayed budget on 2 March, the first since declaring victory over Islamic State (IS) militants after three years of war, but Kurdish lawmakers boycotted the vote over their region’s diminished allocation.  The budget of $88 billion is based on projected oil exports of 3.8 million barrels per day (bpd) at a price of $46.  It envisions government revenues of $77.6 billion with a deficit of $10.58 billion, according to lawmakers.

Parliament was meant to pass the budget before the start of the 2018 financial year in January but all three main blocs, Shia Arabs, Sunni Arabs and Kurds, had serious issues with the government’s proposal.  The budget cut the semi-autonomous Kurdistan Regional Government’s (KRG) share to 12.67%, down from the 17% the region has traditionally received since the fall of Saddam Hussein.  The Kurds overwhelmingly voted to secede in an independence referendum in September, which was opposed by Baghdad.

In October, Iraqi forces retook disputed territories, including the oil city of Kirkuk, which came under Kurdish control in 2014, and Baghdad imposed sanctions on the KRG, such as suspending international flights from Kurdish airports.  Baghdad and the KRG had been engaged in talks for months about the sanctions and Kurdistan’s share of the budget.  Baghdad said it had reached an agreement with the Kurds to resume Kirkuk oil exports through Turkey’s Ceyhan port but gave no precise timeline.  The projected 3.8 million bpd exports in the budget include a 250,000 bpd contribution from the Kurdistan region.  It was not immediately clear what effect the Kurdish boycott of the vote would have on that.

Competing Interests

Shia lawmakers wanted more spending allocated to the southern oil-producing, predominantly Shia, provinces as well as greater salaries and benefits for the Iran-backed Shia militias known as Popular Mobilization Forces, who helped Iraq’s security forces defeat IS.

Sunni lawmakers wanted more allocated towards reconstructing areas retaken from the militants, which were predominantly Sunni.  The areas include Iraq’s second city Mosul, which was retaken after nine months of urban warfare.

On 1 March the “three presidencies” of Iraq, its Shia prime minister, Sunni parliament speaker and Kurdish president, met to discuss how to push the budget through.  Prime Minister Haider al-Abadi congratulated Iraqis over the passing of the budget on 3 March and said it was the result of cooperation between the executive and legislative branches.  Speaker Salim al-Jabouri said the budget addressed Kurdish concerns and that the federal government would pay the salaries of Kurdish civil servants and Peshmerga fighters, as well as welfare entitlements.

Baghdad had stopped paying salaries or making budget transfers to the Kurdish regional capital Erbil in 2014 when the Kurds started independently selling oil.

Oil exports, Iraq’s main source of revenue, have risen above 3.4 million barrels per day this year but a global slump in prices for crude, compounded by the costs of rebuilding an infrastructure damaged by the war against IS, have battered the country’s finances.  In February, Iraq received pledges of $30 billion, mostly in credit facilities and investment, from allies at a reconstruction conference in Kuwait, but this fell short of the $88 billion Baghdad says it needs.  (Reuters 03.03)

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11.9  BAHRAIN:  Fitch Downgrades Bahrain to ‘BB-‘; Outlook Stable

On 1 March 2018, Fitch Ratings downgraded Bahrain’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BB-‘ from ‘BB+’.  The Outlook is Stable.  A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers

The downgrade reflects the following key rating drivers:

The government has yet to identify a clear medium-term strategy to tackle high deficits and there is no clarity on a timeline towards the development of such a strategy.  The government has continued to implement a number of measures to raise revenue and trim spending, including excise taxes at end-2017 and fuel price increases in January 2018.  However, the consolidation effort is not close to stabilizing government debt/GDP, which increased to 81.5% in 2017 from 73.3% in 2016 and from less than 40% in 2012.  We project government debt/GDP to rise above 100% in the medium term.  The fiscal break-even oil price remains close to $100/barrel, according to Fitch’s estimates.

The political environment, embedded social expectations and a lack of experience with taxation severely constrain the government from enacting a sharper fiscal adjustment and create uncertainty around the fiscal outlook.  The gradualist approach to deficit reduction and lack of a medium-term fiscal strategy partly reflect the difficulty of building consensus over the pressing need for fiscal consolidation.  Reining in the deficit more sharply could call for deeper reforms to Bahrain’s social and economic model, traditionally characterized by low taxation and generous benefits.  In Fitch’s view, the country’s leadership is generally committed to reform, but this commitment is not yet shared by other key stakeholders, and the government remains wary of social pressures.

The preliminary 2017 budget deficit narrowed to 11.6% of GDP (including extra-budgetary spending, estimated at 2.6% of GDP in 2017), from 16.0% of GDP in 2016.  Higher oil prices, with average Brent crude prices up to $55/b from $45/b, accounted for half of the deficit reduction.  Non-oil revenue increased more than budgeted and accounted for a quarter of the deficit reduction, while a decline in overall spending accounted for another quarter.  Expenditure declined across most spending lines, but rising interest costs eroded just over half of the savings on primary spending. Interest costs rose to 21.5% of revenue, three times bigger than the ratio in 2014 and double the ‘BB’ peer median.

We forecast that the budget deficit will narrow close to 9% of GDP in 2019, still more than double the projected ‘BB’ median, assuming average Brent crude oil prices of $52.5/b in 2018 and $55/b in 2019.  Oil prices would need to improve to around $70-75/b on average to reduce the deficit to levels that would stabilize government debt/GDP in 2018-2019.  Non-oil revenue will increase by 1% of GDP, assuming implementation of VAT in mid-2019 after the new parliament is in place following elections late this year.  Further incremental reforms will reduce the drag on net oil revenue from subsidized fuel and gas sales. The wage bill and subsidy and transfer spending combined will decline by more than 2% of GDP, but rising interest costs will erode almost half of those spending gains.  We forecast that Bahrain’s fiscal break-even oil price will be around $95/b in 2019.

We expect the consolidated gross general government debt ratio to surpass 90% of GDP in 2019 and to keep rising in the following years, albeit with a shallower upward trajectory, breaking 100% of GDP in 2023.  Debt as a percentage of government revenue is expected to rise to 540% in 2019, one of the highest among Fitch-rated sovereigns.  The government has started work on setting up a separate debt directorate, but has yet to agree on a medium-term fiscal framework.

Bahrain’s ‘BB-‘ ratings also reflect the following key rating drivers:

Bahrain’s ratings are supported by high GDP per capita and human development indicators relative even to the ‘BBB’ median, a developed financial sector and the boost to external financing flexibility from strong GCC support.

Fitch estimates real GDP growth of 3.3% in 2017 and forecasts growth of 3.1% in 2018-2019, with risks to the upside.  This reflects constant hydrocarbon volumes (after a decline in 2017) and a moderation of real non-hydrocarbon growth to 3.8% from an estimated 4.5% in 2017.  Spending on projects financed by the $7.5 billion (20% of GDP) GCC Development Fund provides the most significant support to growth amid government retrenchment.  Growth is also supported by state-owned enterprise projects (in oil, gas, and aluminum).

The GCC Development Fund reflects the broader support that Bahrain enjoys from some GCC countries, particularly Saudi Arabia and Kuwait.  This support is rooted in deep historical, cultural and familial ties as well as regional rivalries.  Bahrain gets most of its oil from the Abu Sa’afa field shared with Saudi Arabia (it is entitled to 50% of production, but has sometimes received significantly more as a form of support).  In Fitch’s view, further material support from the GCC would be forthcoming in case of extreme political, financial, or fiscal instability, given Bahrain’s small size and strategic importance.  The expectation of such support has supported Bahrain’s market access and US dollar peg despite extremely low foreign exchange reserves, which fell to an estimated one month of current external payments at end-2017.

Over time the government could attempt to monetize state assets, notably parts of Mumtalakat Holding Company, for some financing.  Mumtalakat has a portfolio of assets with a balance sheet value of around 30% of GDP.  The government is not currently pursuing asset sales, but a Mumtalakat dividend was included in the 2017-18 budget for the first time.

Political fault lines, both domestic and regional, will continue to be a source of tension in Bahrain.  Lack of reconciliation between the government and the predominantly Shia opposition generates sporadic incidents of violence.  The two main opposition groups have been banned and the hard-line stance against some opposition individuals and Shiite leaders has continued.  The apparent sabotage of an oil pipeline in November highlighted the additional risk of terrorism.  However, the seventh anniversary of the 2011 uprisings passed without much incident in February and Fitch’s baseline assumption is that Bahrain’s security forces will continue to prevent the sort of escalation of domestic tensions that would materially affect economic stability.

Rating Sensitivities

The main factors that could lead to negative rating action are:

-Further significant deterioration of debt dynamics, combined with increased financing constraints.

-Severe deterioration of the domestic security environment.

The main factors that could lead to positive rating action are:

-A narrowing of the budget deficit consistent with the government debt-to-GDP ratio reaching a peak in the medium term.

-A broadly accepted political solution to domestic political tensions.

Key Assumptions

Fitch assumes:

-Brent crude will average $52.5/bbl in 2018 and $55/bbl in 2019.

-No change to the rule of the royal family.

-Regional conflicts will not directly impact Bahrain or its ability to trade.

-No change to the peg of the Bahraini dinar to the US dollar. (Fitch 01.03)

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11.10  SAUDI ARABIA:  Saudi Economic Reform Update: Saudization & Expat Exodus

Karen E. Young wrote on 28 February in The Arab Gulf States Institute is a Washington that in late February, the Saudi General Directorate of Public Security announced it will allow women to serve in the military with the rank of soldier.  Candidates have flooded the online application process, even though there are many restrictions on a woman’s eligibility based on age, height, weight, marriage status to foreigners and physical location of her guardian.  The expansion of opportunities for women in the Saudi labor market is moving quickly. In a shake-up of military top brass and new ministerial appointments, Tamadur bint Youssef al-Ramah became deputy labor minister, marking a step closer to including more women in the Saudi Cabinet. Women’s labor force participation is probably the most important factor in medium-term economic growth in the kingdom.

Saudization, or the reservation of certain jobs and sectors for Saudi nationals, is part of the government’s effort to reduce the public wage bill and transform its private sector.  In January, the government announced it would expand its growing list of Saudi-only jobs to the sale of watches, eyewear, medical equipment and devices, electrical and electronic appliances, auto parts, building materials, carpets, cars and motorcycles, home and office furniture, children’s clothing and men’s accessories, home kitchenware and confectioneries.  The experimental nature of Saudization begs many questions of which sectors are targeted and why, and how smaller businesses will be able to assume higher wage costs of hiring nationals.  This policy should create opportunities for all Saudis, but especially for Saudi women.

In addition to Saudization, there are a range of reforms in rationalizing fuel and electricity costs, and a new value-added tax, as well as targeted cash support to lower income families through the Citizen’s Accounts program, all of which are disrupting the economy as families try to establish a monthly baseline for expenses.  Energy prices have increased two to three fold, and there was an 80 – 120% increase in gasoline prices in 2017, according to research by EFG Hermes.  Consumer sentiment in Saudi Arabia, among Saudis and foreigners, is apprehensive.  Just as the image of a Saudi woman soldier is testing the limits of popular culture, there is an unsettled sense of “What next?” in consumer confidence.

The Reuters Ipsos consumer sentiment index from late 2017 showed consistent negative expectations about jobs, investment and growth.  Indexes by IHS Markit and Emirates NBD see a sharp drop in the Purchasing Managers’ Index, declining to 53 in January from 57.3 in December 2017, the lowest reading in the survey’s history.  This malaise is all the more troubling as it has been met with the largest fiscal outlays in recent Saudi history.  The Saudi budget has expanded for 2018, and combined with additional investment spending from the Public Investment Fund, there is 340 billion Saudi riyals (about $90.66 billion) in investment spending planned for 2018.  For good measure, the government has delayed its commitment to a balanced budget until 2023.  But spending its way out of the current slump could include inherent risk.

One key factor driving consumer sentiment, and the general malaise especially within the private sector, is the unwitting victim of Saudi Arabia’s reforms – its expatriate population.  For those who stay, the rise in cost of living has been substantial.  For those who leave, their absence is compounding weak economic activity and many are leaving.  A third of the population in Saudi Arabia, expatriates are facing price increases without the cushion of the Citizen’s Accounts, or the reinstatement of public sector allowances (issued by decree for 2018 only).  Foreign workers are subject to a range of additional fees for dependents and levies that citizens do not have to pay.

The rationale for increased fees and taxes is to create an alternate stream of government revenue, to offset losses in oil revenue still compounding since late 2014.  Even though Saudi Arabia’s 2018 budget is its largest ever, there are cost savings at work.  Price rationalization in energy and attempts to cut the public wage bill are combined with new taxes on tobacco and sugary drinks, consideration of road tolls, the implementation of a VAT on 1 January, new efforts to retroactively collect zakat (Islamic tax) on financial institutions, and notably, a drive to seize assets through an anti-corruption campaign.

But these efforts are not necessarily garnering the return some promised.  The corruption purge has not come close to its $100 billion promise (government estimates of the yield to date are closer to $13 billion), and the VAT revenue for 2018 will be about $6 billion.  Notably the VAT (23 billion Saudi riyals or $6.13 billion) is adding less in government revenue to the 2018 budget than the increase in fees on expatriates (28 billion Saudi riyals or $7.47 billion) for visas and family sponsorship.

Fiscal Savings vs Expenditure

There is a very clear assignment of the burden of alternate sources of government revenue placed on the backs of foreign workers.  While some foreign workers are choosing to leave, many others are being laid off or fired as companies also adjust to higher energy prices and lower business activity.  The result is sharp increases in expatriate departures.  According to the General Authority of Statistics in Saudi Arabia, more than 300,000 blue collar workers (mostly in construction) lost jobs in Saudi Arabia in the first nine months of 2017, and nearly 100,000 lost jobs in the third quarter alone and Saudis are not taking up their jobs.

White collar job loss has not declined at the same pace and there remains level demand for domestic workers. In essence, the labor market restructuring that needs to take place to put Saudis working in more productive and knowledge-based positions will require more time and this interim period will create some disruptions, especially in the construction and service sector.  The hope is that service sector and construction wages will go up, which could be good for Saudis in the longer term, but in the shorter term adds to pressures of inflation from the energy normalization and tax implementation – all at the same time that government spending will drive any new growth.  This could be a recipe for inflated contracts and poor delivery, which has plagued Saudi Arabia for years, and which was the purported impetus for the corruption purge late in 2017.

It will take a decade or more (hence, Vision 2030) to shift the Saudi labor force to take on higher paying white collar professional service roles and create a working class of Saudis willing to do service sector, retail, and construction jobs.  On the upside, the inclusion of women in the workforce is a very simple way to incentivize employment, increase household income, and push toward greater productivity in the workforce.  Saudization and the expat exodus may help ease the way forward for women’s labor force participation, in some service sectors and retail.  For the sectors that are heavily dependent on foreign (male) labor, the outlook is less promising.

Market Watch is a blog conceived by AGSIW Senior Resident Scholar Karen E. Young seeking to provide insights from the crossroads of Gulf politics and finance.  (AGSIW 28.02)

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11.11  EGYPT:  Fast & Ambitious Reform Process Driving the Improved Macroeconomic Outlook

On 21 February, the Group Research Department of Beirut’s Bank Audi published an overview of Egypt’s improved macroeconomic outlook.

Improving Real Sector Activity Momentum

Egypt’s real economic growth is picking up, though moderately. Benefits are becoming apparent across the whole economy reinforcing the investment aggregate, but the consumer remains quite challenged.  Egypt’s Gross Domestic Product registered a strong real growth of 4.2% during 2017, as a result of the growth in several sectors, including communication, tourism and manufacturing and supported by the gradual implementation of business climate reforms and improved competitiveness.  Looking ahead growth is expected to gain further momentum, driven by a recovery in consumption and private investment and a continued positive contribution from net exports.

Current account deficit cut by half yielding noticeable balance of payments surplus

Egypt’s external position has witnessed a relative improvement in the first nine months of 2017 when compared to the previous year’s performance, as the current account deficit has been cut by half, mainly on the back of a surge in services balance and a decline in trade deficit supported by a contraction in non-oil imports within the context of a weak Egyptian pound against the US dollar and improved export competitiveness.  Accordingly, Egypt’s balance of payments registered a significant surplus of $11.8 billion in the first nine months 2017, compared to a smaller surplus of $2.5 billion during the previous year’s corresponding period.

Narrowing fiscal deficit ratio on the back of a firm commitment to fiscal reforms

The fiscal position has benefitted from a firm commitment by the government to fiscal reforms under the IMF program, such as the introduction of the value-added tax, subsidy reforms, and government wage reforms.  As such, the general government fiscal deficit reached 10.9% of GDP in FY 2017, compared with 12.5% in FY 2016.  Total budget revenues went up by a solid 34.1% in local currency terms while budget expenditures were up by 26.2%. Egypt’s Parliament subsequently passed the State budget for the FY 2018 with an ambitious budget deficit target of 9.0% of GDP.

FX reserves at record high and inflation gradually receding though remaining

Following the November 2016 currency floatation, Egypt’s monetary conditions were marked by inflationary pressures that started recently to moderate in the second half of 2017 due to base effects closing the year at 21.9%, while the Egyptian Pound has shown very modest appreciation following devaluation.  Within this context, monetary authorities maintained a tight monetary policy throughout the year, before cutting rates by 100 bps in February 2018 as inflation eased.  The Central Bank of Egypt, which benefited from strong inflows tied to improving fundamentals and the $12 billion loan accord with the IMF, was able to replenish its FX reserves to reach currently a historical high level of $ 37 billion at year-end 2017.

Banking activity weathering the currency floatation spillovers

Egypt’s banking sector witnessed strong performances in the year 2017, despite the currency depreciation repercussions and ensuing uncertainties.  Measured by the aggregated assets of banks operating in Egypt, banking sector activity grew by a noticeable 21.0% in the first ten months of 2017 (+24.1% in US dollar terms) to reach the equivalent of $271.4 billion at end-October 2017.  The sector continues to display good financial soundness indicators, with an NPLs/total loans ratio of 5.3%, a loan provisioning coverage of 98.8%, a capital adequacy ratio of 14.7% with 80% of capital being common Tier 1 capital, and a ROAA of 2.0% and a ROAE of 30.9% as at September 2017.

Strong price gains in Egypt’s capital markets for the second consecutive year

Egyptian capital markets were at the mirror of an improving domestic economy.  The Egyptian Exchange continued to report double-digit price gains (21.7% in 2017) amid a strong activity skewed to the buy side, mainly supported by increased investor confidence and rising capital inflows following the implementation of economic reforms, the liberalization of the exchange regime and the stabilization of the Egyptian Pound.  In parallel, the fixed income market registered healthy price increases for the second consecutive year, and the cost of insuring debt continued to register significant contractions (134 bps in 2017), reflecting a noticeable improvement in the market perception of sovereign risks at large.  (Bank Audi 21.02)

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11.12  EGYPT:  Long-Awaited Bankruptcy Law Sparks Optimism in Egypt

Muhammed Magdy wrote in Al-Monitor that the Egyptian parliament passed a new bankruptcy law to regulate the restructuring of viable but troubled companies, in a move experts say will boost the economy.

Egypt’s parliament recently passed a bill designed to recharge the drained economy by streamlining the bankruptcy process, allowing viable companies to return to business more quickly.  On 29 January, parliament approved legislation to regulate debt restructuring, preventive composition (out-of-court settlement) and bankruptcy. The move created a wave of optimism in government and economic circles that this will boost the economy and improve the investment environment in Egypt.

The law includes 262 articles and regulates the financial and administrative restructuring of troubled but viable companies.  It reduces the steps investors need to go through to enter bankruptcy and includes a mediation system between investors and their creditors designed to reduce litigation, which can damage their reputation.

As declaring bankruptcy can take years in Egyptian economic courts, the new law eliminates some provisions of Egyptian Trade Law on bankruptcy and composition, which caused many problems for investors.  The law also eliminates prison terms for insolvent investors, except in cases of fraudulent bankruptcy.

Since Egypt signed an agreement in November 2016 with the International Monetary Fund (IMF) for a $12 billion loan over three years, the government has been implementing economic reforms that included introducing a 13% value-added tax (VAT) to replace the 10% sales tax, then raising the VAT rate to 14%, and amending investment laws.  The government floated the Egyptian pound and increased fuel prices.  Through 20 December, Egypt had received $6.08 billion of the IMF loan.

Egyptian Investment Minister Sahar Nasr welcomed the new bankruptcy law and said in a press release on 28 January that it aligns with the investment law passed on 7 May.  She said that while the investment law offers the necessary guarantees and makes it easier for investors to enter the market, the bankruptcy law makes it easier for investors to exit the market.

Once implemented, the law is expected to make it easier for Egypt to conduct business internationally.  “Bankruptcy rulings have [long] been negatively affecting Egypt’s ranking,” Nasr said.  The World Bank’s 2018 Doing Business ranking for “ease of doing business in Egypt” showed that as of October, Egypt had dropped six places, to 128 out of 190.

Bassant Fahmy, a member of parliament’s Economic Committee, told Al-Monitor that parliament passed the law and referred it to the Council of State’s Legislative Department for a final review.  The law subsequently will be sent to President Abdel Fattah al-Sisi for ratification and then published in the Official Gazette to be implemented.

Mona Zobaa spoke with Al-Monitor last month before she resigned as chairman of the Egyptian General Authority for Investment.  She said the new bankruptcy law was more than two decades overdue, adding that its main purpose is to financially restructure troubled projects so they can return to business, while the second objective is to regulate preventive composition.  “All countries have laws regulating the way investors join and exit the labor market, and this was lacking in the investment climate in Egypt, which is why the law was a must,” Zobaa said.

The Egyptian government expects the new law to attract more foreign investment.  The Central Bank of Egypt issued data 24 October, indicating a rise of net foreign direct investment inflows during fiscal year 2016-17 — which ended on 30 June  — that reached $7.9 billion compared with $6.43 billion the previous fiscal year.

Moody’s credit rating agency believes the bankruptcy law will encourage local as well as foreign investment in the country, speed up the liquidation of nonviable companies and allow borrowers and creditors to reach restructuring solutions more swiftly.

Meanwhile, bankers expect the bankruptcy law to improve their ability to deal with problem loan portfolios, which will help struggling clients restore their businesses once they settle their debt.  “The bankruptcy law improves the safe legislative environment for investors.  But the Egyptian government still has to get rid of the bureaucratic measures that have become entrenched in the administrative structure of the state.  It also has to get rid of corrupt officials,” Fahmy said.  According to Transparency International, Egypt ranked 108th out of 179 countries reviewed in its 2016 Corruption Perceptions Index.

Economist Fakhry El Fiky told Al-Monitor the law is a good step, as it guarantees a “safe exit” for struggling investors, but it doesn’t attract immediate investment.  He said foreigners are waiting for the presidential election to make decisions about investing in Egypt, once they study the new laws on investment and bankruptcy.

On 20 December, the IMF reduced its forecast for the amount of foreign direct investment Egypt will attract during fiscal year 2018-19 to about $9.9 billion from $10.2 billion in the first review issued in September.  In a report published on the official IMF website Jan. 23, head of the IMF team for Egypt Subir Lall advised the government to step back from certain sectors and make room for the private sector to invest and grow.  To this end, he said, priorities include ensuring fair competition for private companies in the markets for their input and products, improving the governance and transparency of state-owned enterprises, and reducing the perception of corruption.

Despite the wave of optimism within Egyptian governmental and economic circles, several challenges still lie ahead, including rampant state administrative corruption and political and security instability.

Muhammed Magdy is an Egyptian journalist currently working as an editor for judiciary affairs at the Al-Shorouk daily newspaper and as an editor for political affairs for Masrawy.  (Al-Monitor 22.02)

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11.13  EGYPT:  Egypt Launches Renewable Energy Curriculum to Boost Promising Sector

Menna A. Farouk posted in Al-Monitor on 27 February that in anticipation of the expected increase in employment opportunities in the solar and wind power sectors, the Egyptian government has launched training programs in renewable energy for students at technical schools in various governorates.

The Egyptian government launched this month a first-of-its-kind renewable energy curriculum at technical schools in the southern city of Aswan and the Red Sea resort town of Hurghada, to encourage students to specialize in renewable energy and to train them for jobs in the country’s growing solar and wind power sectors.

The three-year certificate program, which was developed by the Egyptian Ministry of Education and the US Agency for International Development (USAID), seeks to benefit over 300 technical school students.  Now being piloted at two technical schools in Aswan and another one in Hurghada, the coursework will also be implemented in 57 schools in nine other governorates.

According to a USAID statement, the program includes “classroom instruction and hands-on, practical experience to produce technicians capable of immediately contributing to the renewable energy sector.”

Ahmed al-Geyoushi, the deputy minister of education for technical and vocational education and training, told local media that the program is part of the state’s plan to link technical education to the needs of the labor market by entering into partnerships with industrialists and investors and providing practical training opportunities for students.  He also referred to a large renewable energy project now being carried out in Aswan and said investors in that project need at least 10,000 specialized technicians during the implementation and operation periods.  The USAID said the program will “provide skilled labor for power plants such as the Benban Solar Park in Aswan, where 40 solar stations will help Egypt’s increasing demand for electricity.”

The Aswan project, which has investments worth $3.5 billion, would generate a total capacity of 1.8 gigawatts. Its construction started in 2015 and the project is scheduled to be completed by 2018.  Officials said the project’s generated power will be equal to 90% of the electricity generated by the Aswan High Dam.  “The choice of Aswan and Hurghada to start such a program is excellent because these two cities have the country’s longest sunrise durations and are two of the most suitable places to implement renewable energy projects,” Tarek Nour el-Deen, an education expert and former assistant to the education minister, said.  He said the program would provide job opportunities for hundreds of young people in Hurghada and in Aswan, both of which have high unemployment rates.  “With Egypt moving ahead with an ambitious plan to start relying on renewable energy for power generation, having trained, well-educated workers is fundamental,” Nour el-Deen told Al-Monitor.

“The launch of this new curriculum could not be more timely,” USAID Egypt mission Director Sherry Carlin said during the launch of the program at the Benban Technical School, according to USAID.  “Employers like engineering companies and renewable energy firms need to hire people with skills and experience, and this new technical education program trains students to become skilled technicians who are qualified for these jobs.”

Economists say that renewable energy projects can give a major push to Egypt’s economy, satisfy the country’s energy needs and reduce its imports. “Turning to renewable energy is the best solution in Egypt’s case with its strategic location, having strong sunrays throughout the year,” Ahmed el-Shami, an economist, told Al-Monitor.  He added that training young people to take up jobs in the renewable energy sector is “extremely crucial to ensure the success of these projects.”

In the past few years, Egypt has started to invest billions of dollars in order to modernize and expand its power plant networks.  Also, the country has recently been moving ahead with several major renewable energy projects to meet increasing power demand, diversify its energy resources and reduce oil and gas imports.

According to figures released by the Ministry of Electricity and Renewable Energy, Egypt is aiming to secure 20% of its energy generation from renewable sources by 2022.

The launch of the renewable energy curriculum program has also struck a chord with technical school students wanting to learn more about renewable energy.  “In Egypt, there are no classes on renewable energy although the sector is growing rapidly all over the world,” Youssef Mostafa, a 13 year-old technical school student, told Al-Monitor.  Mostafa said he hopes the curriculum is implemented in all schools nationwide in order to create a generation of young people aware of the importance of renewable energy.

Menna A. Farouk is an Egyptian journalist who has been writing about social, political and cultural issues in Egypt since 2013.  She is an editor at The Egyptian Gazette newspaper.  Farouk has covered stories about the unrest that followed the January 2011 revolution, press freedom, immigration and religious reforms.  (Al-Monitor 27.02)

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11.14  LIBYA:  Elite Jockeying in Libya’s Transition

Tarek Megerisi posted on 22 February in the Carnegie Endowment that Ghassan Salamé’s action plan for Libya faces numerous obstacles from entrenched political elites, who see it as just another venue in which to seek personal gain.

On 14 February, Libya’s Supreme Court rejected a ruling by the Bayda court of appeals against the Constitutional Drafting Assembly’s (CDA) July 2017 vote to approve a draft constitution, which ended up stuck in legal limbo.  The Supreme Court’s decision thereby paves the way for a constitutional referendum and future parliamentary and presidential elections.  This appears to advance the action plan that UN Special Representative to Libya Ghassan Salamé announced in September 2017, the product of two months of consultation with various Libyan and international stakeholders. He was adamant that the plan was the product of Libyan ideas and aspirations to resolve the unpredictability and inherent instability of the country’s prolonged transitional period.  This distinguished him from his predecessors and allowed him, as well as the UN Support Mission in Libya (UNSMIL), to move away from the open-ended policy of promoting unity talks, which had not made any meaningful progress since they began in 2014.  Yet this plan faces numerous obstacles, particularly from entrenched political elites who see Salame’s action plan as just another venue in which to seek personal gain.

The action-plan itself was presented, perhaps optimistically, as a clear path toward a constitutional state. First the Libyan Political Agreement (LPA) that provides the legal framework for the current political landscape would be amended based on agreements between the Tobruk-based House of Representatives (HoR) – the internationally recognized elected legislature – and the Tripoli-based High Council of State (HCS), a consultative body.  This would facilitate a functioning executive branch that could both stabilize the country by confronting some of the more immediate crises and implement the rest of the action plan.  This would be followed by a national conference bringing together Libyan stakeholders from across the political spectrum in order to unify Libya’s political, economic, and security actors behind the legal changes and minimize the chances that they choose to play spoilers.  Only after the conference would the HoR then focus on drafting the electoral laws to hold a constitutional referendum and new presidential and parliamentary elections.

While most Libyans agree with Salamé that Libya’s crises require solutions from Libyans, he underestimated the difficulty of getting political figures to implement these solutions.  Troublingly, Libyan and international actors alike are increasingly focusing on the eventual elections as a means of bypassing these obstacles – an approach that risks mimicking the Government of National Accord (GNA), which was rushed into place before being fully agreed on.  As such, the HoR objected to it and never ratified it, and the GNA spent two years as an ineffectual executive branch that many Libyans rejected as a UN imposition.

Although the technical components of Salamé’s approach to Libya were sound, the action plan most notably failed to understand the political status quo that has blocked substantive progress for six years.  Political elites see the transition itself as a zero-sum competition that offers complete control over Libya.  They maintain power by controlling territory and resources, which brings international legitimacy and the ability to buy the loyalty of local communities.  Yet these dominant political actors have little effective national leadership, given they operate in ever smaller circles and have dwindling direct influence with the population.  Moreover, they have no reason to enact Salamé’s action plan, which seeks to end the very status quo in which they are invested, instead cynically using it as a vehicle to raise their own status.

This simplistic realpolitik is evident in the attempts to approve constitutional amendments, for example. Salamé tried to expedite the LPA negotiations by offering up pre-drafted amendments – based on informal agreements reached in previous negotiations – to be approved by the HoR and HCS.  These amendments included shrinking the size of the unwieldy Presidency Council from nine to three members and putting military institutions under the Presidency Council’s civilian oversight.  Meanwhile the HoR, which had been increasingly marginalized, would become the legislature of a fully functioning political system, with powers of executive oversight.  Agila Saleh, president of the HoR, swiftly organized a vote on 21 November approving these amendments, overcoming the institution’s usual problems of reaching quorum by chartering a flight to bring parliamentarians to and from Tobruk just for the vote.

However, the HCS, and more specifically its president, Abdurrahman al-Swehli, blocked the progression of these amendments on 24 November, releasing a statement rejecting the proposal against the wishes of the rest of HCS in a cynical attempt to leverage the situation for personal gain.  He demanded that the HCS share equal powers with the HoR as a prerequisite for approving them, and introduced new, tangential demands such as that Libya end Egypt’s involvement in parallel military unification talks.  Moreover, in September he tried to launch his own transition initiative separate from Salamé’s action plan and on 27 December announced the HCS had approved a constitutional referendum law.  Although such a law is beyond the purview of the HCS, it is intended to redirect the conversation away from the stalled LPA amendments and toward future elections.

Swelhi’s push to put together a constitutional referendum law also allows the HCS to one-up the HoR, which has been obstructing the process of finalizing a new constitution.  Agila Saleh, fearing that elections within a constitutional Libya would limit his power as president of the HoR, has long opposed the Constitutional Drafting Assembly (CDA), itself a key component in the action plan’s success.  When the CDA approved a draft constitution in July 2017, the HoR was supposed to pass a referendum law within 30 days.  However, on 16 August the Bayda appeals court invalidated the CDA’s vote to approve the draft on procedural grounds.  After the CDA challenged this ruling, on 14 February the Tripoli-based Supreme Court overturned it, claiming that an administrative court does not have the jurisdiction to rule on matters involving the CDA.  Although the CDA has managed to have its vote recognized, it could still find itself directly challenged in the Supreme Court.  Moreover, Saleh has the capacity to obstruct the progress of the constitution, as he demonstrated on 20 February, when eighteen parliamentarians from eastern Libya released a statement claiming that they do not consider the Supreme Court’s ruling valid and they will refuse to issue a referendum law.

While some political actors stymie the technical steps of Salamé’s action plan, others attempt to pervert the end product.  Field Marshal Khalifa Haftar is attempting to both expedite and control upcoming presidential elections.  Although he remains outside Libya’s transitional political structure, he has forced himself into relevance over the past three years by taking military control over most of eastern Libya and the majority of Libya’s oil terminals.  However, he can neither conquer the rest of the country nor maintain his control over the factions which comprise his “Libyan National Army,” so he agreed to the concept of elections as a means to advance from military leader to president, as Egypt’s Abdel Fattah el-Sisi did.  Since then, he has tried to take control over the electoral process, repeatedly accusing the High National Elections Commission of being “infested” by the Muslim Brotherhood and demanding they relocate to the eastern city of Tobruk.  In a televised speech on 17 December, he claimed that the LPA’s mandate had expired and that therefore his self-proclaimed Libyan National Army was the only remaining legitimate institution.  Attempting to avoid the civilian oversight and constitutional limitations the action plan would likely bring, he claimed that he would no longer listen to the international community, only to the Libyan people.  As these ruses failed to bring the institutions planning and overseeing the elections under his control, he ominously claimed in a February interview with Jeune Afrique that he would be forced to seize full military control of the country if elections failed to bring a satisfactory solution.

With the action plan stalling on all fronts, Salamé is being confronted with the reality that he will need to change his approach to succeed in Libya.  The support of the international community could give him the time and resources to envision a way to counter the vested interests blocking reform.  This could entail, for example, finding new interlocutors who can effect change, for although the current politicians have nominal power, their influence, legal mandates, and institutional control are weak.  By pursuing local reconciliation and preparing an executive action plan to stabilize the economy they can provide something for Libyans to rally around and begin reducing the value of the status quo for many of the political actors.  Moreover, Libyans have a growing and tangible frustration toward the status quo, which can be harnessed to build momentum and pressure institutions to be more functional.  Salame’s appointment, the presence of a constitutional draft, and a popular will for change together present a rare yet unpolished opportunity to reverse Libya’s post-revolutionary descent into a failed state and regional source of instability.  If it is squandered, it is unclear when the next such opportunity will come to pass.

Tarek Megerisi is a Libyan political analyst and a visiting fellow at the European Council on Foreign Relations (ECFR).  (CE 22.02)

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11.15  MOROCCO:  Credit Profile Reflects Move Towards Value-Added Exports & Fiscal Progress

Moody’s Investors Service said in a report published on 2 March that Morocco’s (Ba1 positive) credit strengths reflects a structural shift towards higher value-added export industries and fiscal improvements which could lead to stronger non-agricultural growth and a stabilization and gradual reduction in public sector debt.

The main constraints on Morocco’s rating are relatively low GDP per capita, a volatile growth pattern and a relatively high, but affordable, debt-to-GDP ratio.  A weak labor market and skills mismatches limit the country’s competitiveness and constrain potential growth.

“Morocco is strategically positioned within global value chains in the automotive and aviation sectors and as a trade hub between Europe and Africa,” said Elisa Parisi-Capone, a Moody’s Vice President – Senior Analyst and the report’s author.  “This is mirrored by the banking system’s expansion across Africa, and is supported by an upgrade of transport infrastructure…The gradual foreign-exchange rate liberalization introduced in early 2017 supports a gradual improvement in competitiveness.”

Moody’s expects Morocco’s real GDP growth to decelerate this year to 3.2% from 4.0% in 2017, partially offset by a further acceleration in non-agricultural growth to 3.0% from 2.7% in 2017.  Non-agricultural growth will continue to be driven by the services sector and the phosphate mining industry.  Last year was a record year for tourism, with arrivals exceeding 11 million for the first time.

Morocco’s moderate fiscal strength reflects the relatively high but affordable central government debt stock, which Moody’s expects will peak at 65.4% of GDP in 2018.  The country’s relatively low foreign-currency exposure – at 22% of central government debt – mitigates the deterioration in its debt metrics by almost 20%age points of GDP from 2009 to 2017.

Upward rating pressure would stem from increased evidence that the country’s budgetary performance will be sufficiently robust to firmly place the central government debt ratio on a downward path, combined with a stabilization of debt guarantees from state-owned enterprises.  Maintaining the reform momentum amid sporadic protests would also be credit positive.

Downward rating pressure could emerge if the Moroccan government proved unable to control the deficit, the debt burden and debt guarantees.  Increased tensions with the Western Sahara territory would also be credit negative, as would an unforeseen deterioration in the external accounts due to a sharp and sustained spike in oil prices or as a result of the transition to a flexible exchange rate system.  (Moody’s 05.03)

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11.16  TURKEY:  Turkey Ratings Affirmed; Outlook Remains Negative

On 23 February, S&P Global Ratings affirmed its unsolicited ‘BB/B’ foreign currency long- and short-term sovereign credit ratings and its unsolicited ‘BB+/B’ local currency long- and short-term sovereign credit ratings on Turkey.  The outlooks remain negative.

At the same time, we affirmed our unsolicited ‘trAA+/trA-1’ long- and short-term national scale ratings on Turkey.


The negative outlook on Turkey reflects risks that a change in external financial conditions could eventually restrict Turkey’s financial and corporate sectors’ ability to roll over their large external debt, with negative implications for the country’s leveraged economy.  An external shock might also occur via geopolitical developments, for example through the imposition of U.S. sanctions on one or more Turkish financial institutions.  Turkey’s net and gross external financing requirements are among the highest of all emerging market sovereigns we rate. In case of an associated economic slowdown, we expect Turkey’s government would increasingly rely on budgetary and quasi fiscal stimulus to support the economy, as it did in 2017 and 2009, resulting in larger fiscal deficits and a rise in public debt that could lead us to lower the ratings.

In addition, we could downgrade Turkey should monetary policy prove inadequate to curb inflation and currency pressures, which could intensify due to Turkey’s reliance on volatile portfolio inflows to finance its sizable current account deficit.  Additional currency weakness could, in our view, lead to a deterioration of asset quality in the financial sector, given the substantial share of foreign currency claims on residents by Turkish banks.

We will continue assessing these risks over the next 12 months.  We recognize that a country like Turkey, with high investment needs, a young population, and less-developed capital markets, will generate external deficits.  However, we also consider that the composition of Turkey’s external financing (mostly debt with little equity) and the use of the proceeds (primarily investment in construction and public consumption) represent a risk to its future economic and financial stability.

We could revise the outlook to stable if Turkey’s fiscal position continued to support a reduction of the government’s debt-to-GDP ratio and inflationary pressures abated, likely reflecting a stabilization in the Turkish lira’s value, gradually improving growth prospects, and a more balanced external position.


Our ratings on Turkey are supported by the sovereign’s currently moderate debt burden and our base-case projection of an only modest accumulation of government liabilities relative to GDP over the next few years.

We expect Turkey’s flexible exchange rate regime will enable the economy to adjust to external shocks, although high dollarization, especially in the corporate sector, limits the benefits of a weaker lira to the economy.  However, Turkey’s persistent debt-financed current account deficits and high external financing needs constrain its creditworthiness because they make economic growth vulnerable to external refinancing risks.  We also consider Turkey’s institutional settings to be weak. In our view, this is characterized by increasingly centralized decision-making processes, with dwindling checks and balances and impaired transparency, which also has implications for property rights.

Institutional and Economic Profile: The economy will likely slow down

-In January 2018, the Turkish government extended the country’s state of emergency for the sixth consecutive time.

-Reacting positively to government stimulus and favorable external conditions, Turkey’s economy boomed in 2017 but is set to slow down this year.

-Significant tail risks due to geopolitical developments cloud Turkey’s outlook over 2018-2019.

In 2017, Turkey displayed the third-fastest economic growth among the 131 sovereigns we rate, according to official data, expanding by an estimated 7%.  Strong fiscal and credit stimulus, combined with a very favorable external environment, fueled the economy’s rebound from a slump in 2016 following the attempted coup and terrorist attacks.  The credit guarantee fund (CGF), a government-sponsored scheme that covers the first 7% of credit losses on loans extended under the program, was instrumental to last year’s strong credit growth, which exceeded 20%. Additional measures, such as temporary tax cuts on white goods purchases and substantial subsidies on employment, further stimulated domestic demand.

We consider last year’s pace of credit and GDP growth to be unsustainable.  We forecast that real GDP growth will slow to 4% this year and average 3.2% over 2019-2021 but, as in the past, these projections are subject to uncertainty.  Key supports for the economy are likely to include continued, albeit moderating, fiscal stimulus, a further recovery of tourism arrivals, and solid external demand for Turkish merchandise exports.

Credit growth is set to decelerate markedly, according to our estimates.  This year, Turkey’s banks will be able to use the remaining funds under the CGF program and roll over some maturing loans, equivalent to Turkish lira (TRY) 130 billion (about $31.3 billion) or 4.2% of GDP, but the program is set to expire by 2019.  Moreover, the banking system’s financing capacity is already dwindling, given the strong loan growth last year, as well as the rising cost of wholesale funding and domestic deposits.  In this respect, the CGF has delayed but not prevented a liquidity squeeze in Turkey’s private sector, which we think could become more apparent as credit conditions tighten during the remainder of 2018.

Exports continue to be a bright spot in the economy, reflecting the recovery in the tourism sector, strong demand from the EU, a more competitive exchange rate, as well as the resilience of the manufacturing sector.

Several elections are currently scheduled for 2019, local ones in March and the parliamentary/presidential vote in November.  Because the ruling Justice and Development Party has a majority in parliament, it could choose to hold elections earlier.  Beyond the timing of these elections, we view Turkey’s system of checks and balances as weak, due to the centralization of power, which is likely to be consolidated further under the new executive presidency.  Since the July 2016 coup, the government has purged the civil sector, educational institutions, and the military, while curtailing media freedoms.  In our view, these changes alongside state asset seizures over the past two years raise questions about the durability of property rights in Turkey, as well as the transparency and accountability of government activities and other aspects of country risk.

Turkey’s relations with key allies and trading partners, including the U.S. and EU, remain complicated.  In particular, we understand that the U.S. government may consider imposing fines or other penalties on one or more Turkish financial institutions, including state-owned entities and potentially companies in other sectors, for allegedly enabling Iranian counterparties to evade U.S. sanctions.  An escalation of tensions with the U.S. could have serious economic and financial consequences for Turkey, given Turkish banks’ reliance on external financing.  In recent months, Turkey’s relations with certain EU members, notably Germany, have thawed somewhat but those with others remain at a standstill, as demonstrated by the formal withdrawal of the Dutch ambassador to Turkey.  The Turkey-EU refugee deal and important bilateral trade relations fostered through Turkey’s customs union membership, are important anchors for bilateral relations; that said, full EU membership appears highly unlikely in the foreseeable future.

Flexibility and Performance Profile: External financing needs loom large

-Last year, Turkey’s current account deficit – in dollar terms – was the world’s third largest.

-Fiscal and quasi-fiscal policy is playing a larger role in the economy.

-Despite temporary base effects, inflation remains high.

With the prospects of gradually rising global interest rates, Turkey’s external vulnerabilities could mount.  As we anticipated, Turkey’s current account deficit widened further in 2017, to 5.2% of GDP or $47 billion, the third largest in dollar terms in the world after the U.S. and U.K.  Despite strong export growth, buoyant domestic demand pushed up imports (including for non-monetary gold) throughout last year.  We expect the current account deficit will narrow somewhat in 2018 to 4.5% of GDP on the back of continued export growth.  On average, we forecast a current account deficit of 4.1% through to 2021.  Since energy import substitution will take time to implement, higher oil prices are an additional factor that poses a risk to our forecast.

Our forecast of Turkey’s current account deficit relies as much on our assumptions on the availability of external financing as it does on our projections for net exports.  For this reason, we highlight the shift in the composition of Turkey’s current account financing toward debt from equity.  As recently as 2015, foreign direct investments covered up to 55% of Turkey’s current account deficit.  During 2017, however, most of Turkey’s external financing came via more volatile portfolio inflows, especially in the government bond market. In view of global investors’ highly supportive risk appetite, we do not expect this picture will change materially in the near term, despite ongoing political uncertainties in Turkey.  Nevertheless, compared with many of its emerging market peers, Turkey remains vulnerable to a marked deterioration in external financing conditions.

Persistent current account deficits since 1998, which are common among rapidly expanding emerging market sovereigns, have pushed up Turkey’s external debt, which has more than quadrupled since then.  In 2017, Turkey’s narrow net external debt exceeded current account receipts (CARs) by about 135%, the third highest ratio among the 20 largest emerging market sovereigns we rate.  This high external debt leads to average gross external financing needs of 172% of CARs over 2018 – 2021 according to our forecast.  Turkey’s net foreign exchange reserves – which we estimate at $33 billion in 2017 – are a weak buffer and provide coverage for only about two months of current account payments, the second lowest in the emerging market peer group.  Moreover, the large net open foreign currency position of corporate borrowers (25% of GDP in November 2017) indirectly exposes the banking system to risks in the event of a steep depreciation of the lira. Although banks typically hedge foreign currency risk, foreign currency funding could represent a risk, if their hedges do not hold due to counterparty risk.

The lira’s continued weakening since the end of 2017 poses a major risk to banks’ capital levels and asset quality.  However, so far, asset quality has remained relatively resilient, and profitability remains strong. Banks’ return on equity averaged 14.3% in the first nine months of 2017, while nonperforming loans (NPLs) amounted to only 2.9% of total assets at the end of the year.  However, this ratio alone does not reveal the full picture regarding potential problem loans in Turkey.  If we add problem assets sold since 2010, the NPL ratio rises by 1.5%age points.  Furthermore, restructured loans in regulatory classifications Group I and II represent a further 3.8%.  Hence, when adjusted to include problem asset sales by large Turkish banks and restructurings not included in NPLs, the NPL ratio rises to over 8%.  Mounting financial pressures on leveraged property developers – due to excess supply of residential housing, especially in Istanbul and Ankara where valuations are declining and most developers funded land purchases in foreign currency – could lead to further deterioration of asset quality.  There is also recent evidence of rising distress in pockets of the corporate loan book.  That said, domestic banks remain well regulated and amply capitalized, which mitigates some of the risks.  Our Banking Industry Country Risk Assessment places Turkey’s banking sector in group ‘6’ (on a scale of ‘1’ to ’10’, with group ‘1’ denoting the lowest-risk banking systems), although we see negative trends for both economic and industry risk.

Turkish banks have a structural lack of long-term lira funding, which makes them reliant on swaps to close their currency positions.  They use currency swaps to convert not only borrowing in foreign currencies, but also high amounts of domestic deposits in foreign currencies, owing to the use of dollars to fund lending in lira.  This is evident from the disparity between the loan-to-deposit ratio in lira and that in foreign currency.  For lira, this ratio was a high 138%, while for foreign currency it was only 93% as of 31 December 2017.  We also note that the trend has been negative since year-end 2013, when the loan-to-deposit ratio in lira was about 120%.  These hedging instruments have shorter tenors (less than 24 months) than the liabilities they are hedging, which represents roll-over risk for Turkish banks.  Additionally, the swaps expose banks to counterparty risk if they become ineffective.  Moreover, state-owned banks are relatively large, representing about one-third of total banking system assets.  One or more of these institutions could potentially be subject to U.S. sanctions as a result of transactions that appear to have circumvented U.S. sanctions on Iran.  In our base case, we do not anticipate any related fines will be large enough to create systemic risks for Turkey’s banking sector, but there remains a risk of more substantial repercussions.

A string of measures designed to prop up the economy after the July 2016 coup led to further widening of the general government fiscal deficit in 2017 to about 1.6% of GDP. This headline budgetary deficit ratio may appear low as a percentage of GDP.  However, in nominal terms, the financing of the 2017 central government deficit required the issuance of TRY116.5 billion in central government debt, an increase of 7.5x in net central government issuance compared with the 2012 figure.

The majority of the government’s stimulus measures, including temporary cuts to taxes on white goods sales and income tax exemptions, were phased out toward the end of last year.  Others, for example various subsidies to employment, and alternative tax exemptions, remain in place.  The 2018 budget encompasses some tax increases, for instance of the corporate income tax to 22% from 20%.  Still, we believe fiscal policy will remain accommodative in the near term as the government continues to use its fiscal space to support the economy, including through continuation of the CGF.  Moreover, the government has recently decided to turn roughly one million contractors into public servants, which may boost consumer confidence in the short term but increases the sovereign’s obligations in the long term.  Overall, we forecast fiscal deficits averaging 2.2% over 2018-2021 due to the continued need to support the economy, especially in the run-up to the elections.

Despite continued fiscal stimulus, general government debt remains low as a percentage of the upwardly revised GDP figures, at an estimated 27.5% of GDP in 2017.  Roughly 40% of the central government debt was denominated in foreign currency at year-end 2017, up from its 2012 low of about 27% on the back of a 112% depreciation of the lira against the dollar.  The high share of foreign currency debt highlights Turkey’s vulnerability to adverse exchange rate movements. In line with our expectations of average nominal GDP growth of 11.5% through to 2021, we expect Turkey’s debt ratio will stay broadly stable through the forecast horizon.  Still, in nominal terms we forecast debt will increase 55% by 2021. Contingent liabilities may represent a risk to our debt forecast, however.  The Turkish Treasury strictly limits new guarantees to a maximum of 0.5% of 2017 GDP ($4.5 billion); its outstanding guarantees currently amount to about 1.6% of GDP.  However, we understand that one of the government decrees extending the state of emergency (Decree 696) allows the treasury to onlend to companies within the newly established, so-called sovereign wealth fund, beyond the limits stipulated in the budget law.  This could become particularly relevant should U.S. sanctions be more significant than expected.

We expect inflation in Turkey will lessen over 2018-2021. But given the lira’s volatility, the Turkish central bank’s monetary policy response may prove insufficient to anchor its inflation-targeting regime, despite 275 basis point increases to the late liquidity window rate over 2017.  In particular, 12-month inflationary expectations, as published in the central bank’s Survey of Expectations, remain stubbornly high, over 100 basis points above the figure in February 2017.  Nevertheless, we note that inflation decelerated somewhat in January 2018 to 10.35% versus its peak of almost 13% in November 2017.  This figure is still well above the central bank’s medium-term inflation target of 5%.  A large contributor to Turkey’s elevated inflation rates is the relatively high pass-through impact of the exchange rate, which could raise prices by 15% according to central bank estimates.  The Turkish government has also initiated a commission to examine another driver of inflation, food prices, although it will take time before this could meaningfully impact food inflation, which still accounts for 21.8% of the consumer price index basket.  (S&P 23.02)

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11.17  TURKEY:  After Big Boom, Turkey’s Aviation Sector Heads for Turbulence

Mustafa Sonmez posted on 23 February in Al-Monitor that led by national carrier Turkish Airlines, Turkey’s civil aviation sector has grown impressively since 2003, but its heyday may be over due to the strain of economic and political factors.

One of the most notable transformations that Turkey has seen under the Justice and Development Party (AKP) over the past 15 years was in the civil aviation sector.  It was a real boom, both on domestic and international levels.  The sector’s staggering expansion, however, was not without risks, and the dirt long swept under the carpet has begun to stink.

A quick look at basic data is worthwhile to illustrate the scale of the boom.  In 2016, the number of passengers passing through Turkish airports reached 173 million, a 409% increase from 34 million in 2003.  The figure reportedly exceeded 190 million in 2017.  The increase in domestic air traffic has been especially striking.  Standing at 9 million in 2003, the number of domestic passengers grew no less than 1,033% to reach 102 million in 2016.  International routes also thrived, with the number of passengers shooting up 184%, from 25 million in 2003 to 71 million in 2006.

The expansion drew on a valuable potential bestowed by geography, namely Turkey’s location as a crossroads between Europe, Asia and Africa.  According to Turkish Airlines (THY), the country’s national carrier, narrow-body aircraft capability to and from Istanbul covers 40% of worldwide international traffic — over 60 national capitals and all of Europe, the Middle East, Central Asia and North and East Africa.

But why did the boom have to wait for the post-2003 period?  Was it the outcome of some extraordinary skills of the AKP?  Not really.  Even before the AKP came to power in 2002, civil aviation was on an uptick, though at a slower pace.  In 2002, passenger traffic stood at 34 million, up from 10 million in 1988.

What fueled the boom after 2003 was the abundant inflow of external funds, driven by International Monetary Fund-backed structural reforms in the economy after a severe financial crisis in 2001.  Although at the expense of increased borrowing, integration with the global economy accelerated and put Turkey on a path of stable economic growth.  This meant both an increase in the disposable income per capita and an opportunity to invest in civil aviation.

As a first step, the government moved to expand domestic air transport by rapidly increasing the number of airports across the country, both through the construction of new airports and the makeover of military ones.  Turkey today has 55 airports, the largest of which have been built and are operated by the private sector.  Airports operated on a public-private partnership (PPP) model handle 70% and 97% of Turkey’s domestic and international passenger traffic, respectively.  The third airport for Istanbul, a giant $14 billion facility currently under construction, is also a PPP project, designed to handle 200 million passengers per year.

In a further boost to the aviation sector, the government offered incentives that removed customs duties on jet fuel, encouraged investment in charter services and motivated the creation of new private airliners such as Pegasus.

Leading the sector’s rapid expansion was THY.  The national carrier was restructured with a view of enlarging its foreign passenger market in particular.  In a short period, the company significantly expanded its fleet and added scores of new routes.

At the end of 2016, Turkish airlines had 540 planes (515 passenger aircraft and 25 cargo planes) with a capacity of more than 100,000 seats.  Some 38% of that seat capacity belongs to THY, which has 223 planes and controls about half of the market in both domestic and international flights.  In a bid to increase its share further, the company plans to expand its fleet to 342 aircraft by 2020.

THY’s increase in international flights drew mainly on transfer passengers, those with connecting flights in Turkey.  As member of the Star Alliance, the global partnership of airlines, the company grew by luring passenger traffic especially from United Airlines and Lufthansa.  Its Star Alliance membership made Istanbul an attractive global stopover hub.

Some, however, argue that the motives behind THY’s expansion were not purely economic and had a political dimension — to boost Turkey’s image as a “rising” country, regardless of financial costs.  This was the reason why, they say, the company began flying to the four corners of the world.  Some believe THY’s geographical expansion had to do with the growing international activities of the Gulen community, which was the AKP’s chief political ally until their alliance began to unravel in 2012.

Another argument is that some company decisions were meant to facilitate the overseas investments of entrepreneurs close to the AKP.  Bahattin Yucel, a former tourism minister who remains a vocal opinion leader in the tourism sector, said as much in a newspaper interview in July 2016.  Yucel questioned THY’s choice of new destinations, arguing that the company showed little interest in the markets that the Turkish tourism industry targeted.  Alluding to a prominent Turkish hotelier known to be close to the government, he said, “Curiously, THY launched flights to [the Egyptian resort of] Sharm el-Sheikh as soon as the person who says that one Arab tourist is worth five Russian ones leased a hotel there.  And it offered very good prices, charging 505 Turkish liras [$133] for a round trip to that airport.  The distance [from Istanbul] to Sharm el-Sheikh is 2.7 times longer than the distance between Istanbul and [Turkey’s Mediterranean resort of] Antalya.  In the same period, however, the price of an Istanbul-Antalya flight was 548 Turkish liras [$145]. This is called favoritism.”

Yucel charged that THY had also catered to the interests of the Gulen community.  “The THY inaugurated routes to remote corners in Africa.  It is obvious that those routes were launched with state support to provide help and logistics to Fethullah Gulen’s organizations in Africa. They have fallen out with each other now, but this doesn’t eradicate the truth,” he said.

THY has been growing through external borrowing, the cost of which is on the rise.  The company relies on imports for fuel, which is the main cost item, and jet fuel prices are on the rise as well.  Moreover, domestic and external political tensions have amplified Turkey’s risks, leading to market losses.  As a result, THY closed 2016 with operating losses of 374 million liras ($98.7 million).  The setback is said to have been partially compensated in 2017, a year of high growth for the Turkish economy, but things will become clear only when the company releases its balance sheet for last year.

An issue that lacks transparency is the status of THY. Is it a public company?  The state owns 49% of company shares, while the remaining 51% are traded on the stock exchange.  The company remains in the category of public entities linked to the Treasury, but it has been off-limits to an audit by the Court of Accounts, which controls public institutions on behalf of parliament.  Moreover, THY’s public shares have been transferred to the Wealth Fund, a controversial sovereign fund created in 2016.  With all of those factors at play, a transparent analysis of THY and monitoring its past and potential turbulences becomes difficult.  The company’s expected — and somewhat forced — relocation to Istanbul’s new airport, scheduled to open in late 2018, heralds another bumpy process, the turbulence of which is likely to be even bigger.

Mustafa Sonmez is a Turkish economist and writer.  He has worked as an economic commentator and editor for more than 30 years and authored some 30 books on the Turkish economy, media and the Kurdish question.  (Al-Monitor 23.02)

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11.18  MALTA:  Moody’s Changes Outlook on Malta’s A3 Rating to Positive from Stable

On 23 February 2018, Moody’s Investors Service changed the outlook on Malta’s rating to positive from stable and affirmed the A3 long-term issuer, senior secured and senior unsecured debt ratings.  Moody’s decision to change the outlook to positive on Malta’s A3 rating reflects the following two key drivers:

(1) Malta’s improving fiscal strength, due to a sustained pace of public sector debt reduction supported by prudent fiscal policy and containment of contingent liabilities;

(2) Robust medium-term growth prospects supportive of further improvements in fiscal metrics in the future;

In a related rating action, Moody’s has also affirmed the senior unsecured rating of Freeport Terminal (Malta) Limited at A3 and revised the outlook to positive from stable, in line with the sovereign’s ratings.  The senior debt instruments issued by Freeport Terminal (Malta) Limited are backed by unconditional and irrevocable guarantees from the Maltese government.

Malta’s local-currency bond and deposit ceilings and long-term foreign-currency bond and deposit ceilings are unchanged at Aaa.  The short-term foreign currency bond and deposit ceilings are also unaffected by this rating action and remain Prime-1.

Ratings Rationale

Rationale for a Positive Outlook

First Driver — Improving Fiscal Strength

A strengthened fiscal framework, together with a combination of faster fiscal consolidation and stronger GDP growth than previously projected, has strengthened Malta’s government balance sheet relative to Moody’s expectations when it affirmed the A3 rating with a stable outlook in 2016.  If sustained, the improvement in fiscal strength will support the upgrade to an A2 rating.

Malta’s general government balance shifted into a surplus of 1.1% of GDP in 2016, and an expected surplus of 1.5% in 2017, from a deficit of 1.1% of GDP in 2015.  At around 3.6%, the primary surplus in 2017 is expected to be over twice that expected back in 2016.  The fiscal balance has gradually narrowed from a deficit of 3.5% of GDP in 2012 and the surplus posted in 2016 was the first positive budget balance recorded in more than three decades.  While some of the improvement derived from stronger than expected revenues from the Individual Investor Programme (IIP) scheme, which is volatile in nature and of uncertain duration, the improvement also reflects fiscal consolidation efforts and sustainably strong economic performance.  Moody’s projects the fiscal balance to continue to post a small surplus in 2018-19, underpinned by continued robust growth and IIP receipts.

The strong fiscal position resulted in a faster than foreseen decline in Malta’s debt burden to 57.7% of GDP in 2016, below the 60% Maastricht threshold, from 68.4% of GDP in 2013.  The debt burden is forecast to have fallen further, to around 54%, in 2017.  Looking ahead, while the general government debt to GDP ratio remains relatively high compared to A-rated peers, continued prudent fiscal policy and strong economic growth performance should contribute to a continued rapid reduction in the coming years, supporting further convergence with Malta’s A-rated peers.  After a decline of about 11pp achieved in 2013-2016, Moody’s projects an additional reduction of about 10pp in the debt to GDP ratio in the period 2016-2019, bringing the debt level to around 47% of GDP by 2019, with further reductions likely in succeeding years.

Malta’s fiscal position continues to remain vulnerable to sizeable contingent liabilities from SOEs which, along with its track record of support to public corporations, acts as a constraint on Malta’s rating and limits Moody’s assessment of fiscal strength to “High (+)”.  However, the value of government guaranteed debt is estimated to have declined to around 10% of GDP at end-2017 from about 14% of GDP at end-2016, due to the termination of the government guarantee to Electrogas.  Hence, while contingent liabilities remain high compared to similarly rated EU peers and are likely to remain an important factor in Moody’s assessment of Malta’s fiscal strength in the years to come, the overall fall in the level of guarantees and contingent liabilities will, if sustained, support a move to the higher rating level.

Second Driver — Robust Growth Prospects Supportive of Improving Fiscal Trends

Fiscal consolidation has been supported by higher than expected growth. Some of the outperformance reflects cyclical factors and supportive external tailwinds that will dissipate over time, and growth is expected to fall back towards its potential of a little over 3% over the medium-term.  Nevertheless, structural reforms have played a part in higher growth outturns.  If sustained, and particularly if supported with further investment in infrastructure, the move to a higher level of GDP and the prospect of sustained higher growth levels in future will also support a move to a higher rating level.

Despite its small size, Malta’s economy is competitive and wealthy, with GDP per-capita of almost $40,000 (PPP basis) in 2016, which supports its ability to absorb economic shocks.  Economic growth accelerated last year and Moody’s estimates real GDP to have grown by 6.8% in 2017 from 5.5% in 2016 – more than 3%age points higher than expected in 2016 – driven by robust private consumption and strong contribution from services exports.  The strength of the economic performance has been accompanied by favorable labor market dynamics, with the unemployment rate reaching a record low of 3.6% in December 2017 with the increasing inflows of foreign workers and increased labor force participation contributing to keep wage growth in check.  The tourism sector has so far been resilient to the decision of the United Kingdom to leave the EU, and has the potential to continue growing in the medium-term, benefiting from Malta’s improving connectivity and geopolitical concerns in competing destinations, especially if capacity constraints are addressed.

Real GDP is expected to expand by 5.7% and 4.6% in 2018 and 2019, respectively, exceeding both the average for euro area countries and A-rated peers, supported by solid, albeit moderating, private consumption growth and still strong performance of the external sector.  Investment is expected to recover, supported by the increased absorption of EU funds and by activities of the Malta Development Bank, which is expected to become fully operational this year.  Thereafter, Moody’s expects growth to moderate but to remain strong, supported by a dynamic service sector.  Measures implemented in recent years targeting the labor market have resulted in significant improvements in labor force participation, while substantial progress has been made in diversifying Malta’s energy sources and increasing energy efficiency.  Additional reforms in the labor markets and planned upgrades of infrastructure could further enhance medium-term growth potential and ease potential sources of inflationary pressures.

Rationale for the Affirmation

Overall, Malta’s credit profile displays relatively stronger economic prospects and higher wealth levels than A-rated peers.  At the same time, due to its small size and high openness, Malta’s economy remains vulnerable to external shocks such as changes in international corporate tax law.  Furthermore, a number of structural weaknesses continue to weigh on Malta’s long-term growth potential, including skills shortages and infrastructure gaps.  Despite the improving fiscal position, the public sector debt burden remains above the median for A-rated peers, with a material risk posed by contingent liabilities.

What Could Move the Rating Up

Malta’s rating would be upgraded to A2 if Moody’s were to conclude that the recent positive economic and fiscal dynamics are likely to be sustained and that the relatively high debt burden will continue to converge steadily towards the A-median.  That conclusion would be supported by a sustained track record of fiscal consolidation accompanied by further reforms to eliminate the reliance on volatile IIP receipts, and by evidence of further progress in addressing structural challenges such as labor markets and infrastructure bottlenecks and in strengthening the business environment.  The positive outlook signals that Moody’s would expect to draw such a conclusion, or not, over the next 12-18 months.

What Could Move the Rating Down

The positive outlook signals that the rating is unlikely to be downgraded over the next 12-18 months.  However, the outlook could be reversed to stable if the pace of the debt reduction decelerates, or the government’s commitment to fiscal prudence weakens.  Weaker than expected economic growth, or a deterioration in the financial performance of SOEs, increasing the risks of the materialization of contingent liabilities, would also be credit negative.  Evidence of an erosion of the institutional strength, in particular in relation to rule of law or corruption, could also negatively weigh on the sovereign’s credit profile.  The rating could also be downgraded if the financial system were to undergo a large negative shock that hinders its ability to provide funding to the sovereign.  (Moody’s 23.02)

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