Fortnightly - January 2, 2013

Fortnightly – January 2, 2013

January 1, 2013




1.1  Finance Committee Approves NIS 740 Million Budget Cut
1.2  First Extradition From US to Israel on Tax Charge
1.3  Israel Bans Cosmetics Tested on Animals
1.4  Israel’s Ministry of Transport Raises Speed Limits


2.1  HSBC Raises Israel 2013 Growth Forecast to 2.8% 
2.2  A Hospitality School Opens in Israel 


3.1  Jordanian Hotels Forced To Close After Libya Fails To Pay Debts
3.2  GCC’s Spending on Healthcare IT to Reach $550 Million
3.3  Japanese Retailer Considers Dubai and Kuwait Launches 


4.1  EDF Inaugurates Three Israel Solar Energy Projects
4.2  Israel’s PAU Approves ‘Net Meter’ System for 2013
4.3  Beersheba Opts For Trees over Urban Sprawl 
4.4  Arabian Gulf Funds Support Solar & Wind Projects in Jordan’s South


5.1  Jordan’s Poverty Rate Up to 14.4% in 2010
5.2  Jordan Drafting New Investment Law 
5.3  Jordan Has Over 1 Million Illegal Guest Workers 
5.4  Egypt to Resume Natural Gas Flow to Jordan 

♦♦Arabian Gulf

5.5  Kuwait Inflation Seen Slowing to 4.3% In 2012
5.6  Qatar Raises 2013 Economic Growth & Inflation Forecast
5.7  Qatar Delivers on $500 Million Egypt Pledge
5.8  Dubai Unveils Prudent 2013 Budget
5.9  First Trains Delivered for UAE Rail Network
5.10  Saudi Government Plans To Spend $219 Billion In 2013
5.11  Saudi Economic Growth Nears 6% in Third Quarter
5.12  Brazil’s Fury Over Saudi Beef Imports Ban

♦♦North Africa

5.13  S&P Reduces Egypt’s Rating to Junk – the Same as Greece
5.14  Egypt’s Budget Deficit Reaches $13.1 Billion
5.15  Egypt Pound Hits Record Low Under New Currency Regime
5.16  Egyptian Finance Ministry Foresees Tax Changes in January 2013
5.17  President Morsi Tightens Money Transfer Regulations
5.18  Egypt Bans Land Ownership in ‘Strategic Zones’ in Sinai and the Red Sea Areas
5.19  Islamist-Led Tunisia To Raise Alcohol Duty


6.1  Turkey Gets Low Growth Forecast from IMF
6.2  Japanese Bank Gets License, More Lenders Flock To Turkey
6.3  Turkey Expands Offshore Oil Search 
6.4  EU & IMF Say Greece Not Doing Enough Against Rich Tax Dodgers
6.5  Greece’s November Deficit Data Beat Target 



7.1  Israel’s Population Almost at 8 Million
7.2  Report Shows 2% of Israelis are Christian
7.3  Some 11% of Israel’s Voters Live Abroad
7.4  Uriah Heep Returning to Israel
7.5  Israeli Traffic Fatalities Hit 50-Year Low
7.6  Ariel College Granted University Status


7.7  Saudi Detains Dozens for “Plotting to Celebrate Christmas”
7.8  Egyptians Approve First Post-Revolution Constitution


8.1  Israeli Biotech Company Looks to Open S.C. Development Center
8.2  San Antonio Hospital Purchases Mazor Robotics’ Renaissance System


9.1  BluePhoenix Solutions Partners with Quebec’s WAZ Informatique
9.2  Elbit Systems Awarded $315 Million in Israel Ministry of Defense Contracts


10.1  Israel Hotel Overnights Increase By 2%
10.2  Israel Ranks 34th in Internet Policy 


11.1  LEBANON: Year in Review 2012
11.2  LEBANON: Lebanon’s Stagnation
11.3  JORDAN: Year in Review 2012
11.4  JORDAN: Statement at the Conclusion of an IMF Mission to Jordan
11.5  IRAQ: Never Enough: How Much Money Does Iraq Really Need For Budget?
11.6  BAHRAIN: Year in Review 2012
11.7  UAE: Abu Dhabi – Year in Review 2012
11.8  EGYPT: S&P Lowers Long-Term Ratings To ‘B-‘ On Escalation Of Political Tensions
11.9  LIBYA : The Democratic Transition Slows Down
11.10  TUNISIA: Divided and Looking Where to Stand
11.11  CYPRUS: S&P Downgrades to ‘CCC+’ On Liquidity Risks & Debt Burden
11.12  CYPRUS: ‘Much Worse than Greece’ – IMF Demands Partial Default for Cyprus


1.1  Finance Committee Approves NIS 740 Million Budget Cut

On 25 December, the Knesset Finance Committee approved an across-the-board cut for government ministries totaling NIS 740 million.  Nine MKS voted for, one was against and one abstained.  The funds made available by the cut will be used to combat illegal immigration from the Sinai, preparing the Home Front for future emergencies and keeping within the budget framework.  Support for the cut was received after the Ministry of Finance said that it could not fund other important topics without the cut, which was approved by the cabinet several months ago.  The Ministry of Finance said that it was not so much an across-the-board cut as rearranging priorities at government ministries.  (Globes 25.12)

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1.2  First Extradition From US to Israel on Tax Charge

For the first time, a man has been extradited from the US to Israel for tax offenses.  In mid-December Aharon Barashi, wanted for evading NIS 17.5 million in income tax and VAT in 1997 – 2011, was extradited from the US to Israel, where he will stand trial.  The State Prosecutor’s international department asked for Barashi’s extradition, after he fled from Israel in 2003 and was found in the US.  He fled Israel after the Jerusalem District Prosecutor indicted him, following an investigation by the Israel Tax Authority’s investigations department.  He was arrested in Miami in November 2012 on the basis of the extradition request.  At the extradition hearing, Barashi consented voluntarily to the extradition, foregoing extradition procedures.  Barashi’s voluntary return to Israel was made possible by the close cooperation by several Israeli agencies, including the State Prosecutor’s international department, the Jerusalem District Prosecutor, the State Prosecutor’s fiscal department, the Israel Police’s Interpol unit, and US law enforcement agencies.  (Globes 23.12)

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1.3  Israel Bans Cosmetics Tested on Animals

Israel now officially bans the import, marketing and sale of any cosmetics, toiletries or detergents whose manufacturing process involves animal testing.  The Knesset originally passed the law in 2010.  The new regulations took effect on 1 January 2013.  MK Eitan Cabel (Labor), who serves as head of the Knesset’s Animal Rights Lobby, promoted the legislation, which states that “Israel will no longer allow the import and marketing of cosmetics, toiletries or detergents that were tested on animals.  The law makes certain exceptions for items produced for medicinal products, which are not categorized as drugs; and follows the guidelines set by the European Union, which enacted a similar ban in 2004.  The new law was enacted as an addition to a law enacted in 2007, which banned animal testing in the Israeli cosmetics industry altogether.  (Ynetnews 01.01)

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1.4  Israel’s Ministry of Transport Raises Speed Limits

Israel’s Ministry of Transport has decided to raise the speed limit on Road 6 (the Cross Israel Highway) from 110 kilometers per hour (kph) to 120 kph.  Bearing in mind that speed enforcement allows for a 10% error of margin, drivers will be able to travel at 130 kph without fear of receiving a speed ticket.  The new speed limit will come into force in the near future and in the coming days Netivei Israel, the Israel National Transport Infrastructure Co. Ltd. (formerly the Israel National Roads Co.) will begin putting the new speed signs into place. 

Speed limits on other major highways will also be raised.  On Road 1 – the Jerusalem Tel Aviv highway – the speed limit will be raised from 100 kph to 110 (in practice 120) on the stretches between Shaar Hagai Interchange and Latrun Interchange and between Shemen Interchange and Ganot Interchange.  After the changes the speed limit will be 110 kph on all of Road 1 between Shaar Hagai and Ganot.  On Road 2 – the Coastal Highway – the speed limit will be raised from 100 kph to 110 kph between the Caesarea and Atlit Interchanges.  At a later stage, the speed limit will also rise all the way to Haifa.  (Globes 25.12)

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2.1  HSBC Raises Israel 2013 Growth Forecast to 2.8%

HSBC has raised its 2013 growth forecast for Israel to 2.8% from 2.6%.  HSBC said until recently, the Israeli economy has been fairly resilient to slowing global growth.  GDP growth remained fairly steady from mid-2011 to mid-2012, averaging 3.2%.  Nevertheless, growth slowed to 2.9% in Q3/12 and leading economic indicators suggest that this trend will spill over into 2013.  HSBC expects growth to moderate to 2.8% in 2013 before rebounding to 3.4% in 2014, in tandem with improving global demand.  Another factor which should reduce domestic demand will be the likely fiscal consolidation following elections on 22 January.  Recently, the fiscal posture has been expansionary, with the deficit expected to reach 4.2% GDP in 2012.  Significant fiscal adjustments will be necessary to reach the 2013 deficit target of 3% GDP.  In addition, a contraction in residential investment will reduce economic activity in 2013, as residential starts have declined sharply.  Weak domestic demand and slack in the labor force should keep inflation low.  In addition, the shekel is likely to appreciate on the back of an improvement in the current account balance as offshore natural gas production will commence in Q2/13, reducing Israel’s imported energy bill.  HSBC expects natural gas production to contribute 0.6% to GDP by 2014 but only 0.2% to tax revenues (reaching 1% by 2020).  (Globes 20.12)

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2.2  A Hospitality School Opens in Israel

The France-based Vatel International Hotel and Tourism Management Business School has recently opened its first branch in Israel.  The school, operating in Tel Aviv, has two courses.  One has 23 Israeli students, who were carefully selected from dozens of candidates after a long screening process.  The Vatel management favors students who immigrated to Israel to serve in the IDF, who are fluent in French and English and have excellent interpersonal skills.  The second course has 23 students from France, Belgium and Morocco, who came to Israel for training as part of their second year of studies.  The school’s director in Israel said that studies last three years.  Upon completing their studies, the graduates are slated to enter the managerial ranks of luxury hotels, but they begin their way from the bottom:  They learn to perform all jobs in the hotel hierarchy – waiting tables, working at the reception desk, marketing, producing events and managing the rooms.  In addition, the students take advanced lessons in French and English.  The studies cost €5,000 (about $6,600) a year.  (Ynet 26.12)

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3.1  Jordanian Hotels Forced To Close After Libya Fails To Pay Debts

Some Jordanian hotels have been forced to close down or sell properties due to Libya’s delay in paying outstanding dues of Libyan guests who came to the Kingdom for medical care, according to the Jordan Hotel Association (JHA).  The Libyan patients’ outstanding bills stood at JD75 million ($106 million), which hoteliers were counting on in order to pay what they owe suppliers.  Other hoteliers, he added, were forced to sell their cars or other property in order to pay their debts and keep their hotels open.  The JHA director also pointed out that hoteliers pay income tax based on the bills they issue, whether or not these bills are paid in full.  Approximately 60,000 Libyan patients came to Jordan in the aftermath of the North African country’s revolution last year, with Libya’s new government promising to pay their expenses.  As of November, the Libyan government still owed Jordanian hospitals over JD120 million, or around 85% of their total debts of JD150 million.  (JT 24.12)

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3.2  GCC’s Spending on Healthcare IT to Reach $550 Million

The GCC’s spending on healthcare information technology (IT) needs are set to rise to more than $550m by 2015, according to a new report by Frost & Sullivan.  It said IT investment was “on an upswing” due to the healthcare industry’s and governments’ proactive efforts in establishing new hospitals and rolling out initiatives like the national e-health policy and WAREED – the largest health information system project by the Ministry of Health in the UAE.  The increase in patient volume and healthcare data is due to the changing disease profile of the GCC population, Frost & Sullivan said.

Its research found that the total healthcare IT expenditure in GCC countries in 2011 was estimated to be $444.2m and is expected to reach $550.9m by 2015.  But it warned that the market, especially in Saudi Arabia, was being held back by the lack of skilled manpower.  Most of the personnel trained and qualified to manage healthcare IT solutions are expatriates, it said.  The higher awareness about health and wellness, changing disease patterns, government support, and escalating volumes of healthcare data is expected to ensure rapid growth of the Healthcare IT market in the GCC.  All the chief information officers surveyed by Frost & Sullivan said they believed that IT can help in the day-to-day management of their hospitals.  Storing data in multiple formats makes data integration from all the hospitals challenging.  Further, as it is expected to take considerable time and effort to be acquainted with this technology, most healthcare professionals prefer to stick to the traditional methods.  (AB 21.12)

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3.3  Japanese Retailer Considers Dubai and Kuwait Launches

Japanese home and lifestyle retailer MUJI has announced plans to open its first stores in the Arabian Gulf region in 2013.  The retailer, known for its non-branded products, designs and clothing, has announced the opening of stores in several Middle East locations starting with Kuwait and Dubai.  The shops will offer MUJI’s furniture and household items that the company is known for in Japan.  The expansion into the Middle East is part of an agreement between MUJI’s parent company, Ryohin Keikaku Co and Alshaya, the Kuwait-based franchiser.  The first store will open in January in Kuwait at the Grand Avenue, The Avenues, and will be followed in the spring at The Dubai Mall.  The name MUJI is derived from the full Japanese title Mujirushi Ryohin, which translates to “no label quality goods”.  (AB 30.12)

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4.1  EDF Inaugurates Three Israel Solar Energy Projects

On 18 December, French national electricity company Electricité de France SA (EDF) renewable energy unit EDF Energies Nouvelle Israel inaugurated its first three solar energy projects in Israel with an investment of NIS 270 million.  The new arrays at the Negev settlements of Gvulot, Nahal Oz and Lahav will produce18 MW of electricity within six months.  The array at Gvulot will produce 8.5 MW, at Nahal Oz 6 MW and at Lahav 3.2 MW.  In total 75,000 solar panels manufactured in France are being installed.  At the festive launch in Gvulot, the EDF Energies Nouvelle Israel (EN) CEO said that the new arrays are the first of many more ventures that EDF will set up in Israel in the coming year.  He said that EDF-EN had taken a long-term strategic decision that reflects its belief in the Israeli economy and its huge potential in the field of energy.  Last year the company won a government tender to set up a solar array near Mitzpe Ramon to produce 7 MW of electricity.  (Globes 19.12)

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4.2  Israel’s PAU Approves ‘Net Meter’ System for 2013

Israel’s Public Utility Authority (PUA) plenary committee officially approved the “net meter” system for 2013, which will allow private homes in Israel to produce and use their own renewable energy, rather than feeding that electricity into the national grid.  The new system, according to the PUA, is suited for both domestic consumers with low power consumption as well as larger consumers, and will dismiss the bureaucratic process of today that currently impedes the growth of at-home solar installations.  While the authority had granted initial approvals to the project in October, the program has now received complete authorization and will be underway in the new year.  Using their net meters, the consumers will be able to deduct the amount of electricity they produce for self-consumption, balancing out the surplus they generate against the overdraft of their consumption from the grid.  By constantly having access to information such as load on the national network, the customers will be able to use the net meter to decide when to produce electricity independently for their own homes and when to abstain.  The country is now able to go ahead with the system in large part due to the significant drop in construction costs for solar power generation equipment, allowing for a renewable energy sector that relies much less heavily on government subsidies, the authority added.  (JP 31.12)

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4.3  Beersheba Opts For Trees over Urban Sprawl

Beersheba Mayor Rubik Danilovich announced recently that he has decided to revoke plans to build 16,000 new housing units in the city’s Ramot Gimel neighborhood in favor of planting a new forest.  The urban forest will span across 1,360 acres and serve as the area’s green lung.  Construction in the area was approved back in 2007.  The city is currently moving to rezone the area for conservation vis-à-vis the Interior Ministry.  The Israel National Fund is assisting Beersheba in its forestation efforts.  The City said that it aims to create a “green band” around the city.  The forest’s southern part already has 120,000 trees and the INF plans to plant tens of thousands new trees in its northern part.  The coming Tu Bishvat – Israel’s Arbor Day – will see the INF hold a special, mass planting event in the area, on top of the routine planting planned in the forest.  The INF, with the Natural Park Service, also plans to create designated picnic areas, biking and walking trails in the forest.  (Ynet 19.12)

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4.4  Arabian Gulf Funds Support Solar & Wind Projects in Jordan’s South

Jordan is set to receive $300 million from Arabian Gulf states to boost investment in renewable energy, officials say, as Amman looks to solar and wind power as potential solutions to the country’s chronic energy woes.  According to Minister of Energy and Transportation Batayneh, some $300 million of a $5 billion grant from the Gulf Cooperation Council (GCC) has been earmarked for a series of solar and wind energy projects in southern Jordan expected to produce over 125 MW of electricity.  Batayneh said the money, set to be secured by the ministry in 2013, would fund some 50-75MW of solar power and 75-100MW of wind power projects in Maan and Aqaba governorates.  The GCC aid includes $1.25 billion each from Saudi Arabia, the UAE, Kuwait and Qatar, and will support development projects in the Kingdom over a period of five years.  The $300 million is the latest in a string of international assistance agreements for clean energy in Jordan, including a $112 million loan Jordan secured from the World Bank in July to support the establishment of a 100 MW concentrated solar power plant. 

Amman’s renewed push for renewable energy comes after several years of setbacks and delays that have cast doubt over the country’s ability to meet the national energy strategy’s goal of producing 1,200 MW of solar and wind energy by 2020.  With this year’s passage of the Renewable Energy Law and key regulations easing investment in solar and wind power, energy officials say they are confident Jordan can meet the benchmark, which, according to experts, requires some $1 billion in investment.  The drive for renewables comes as Jordan looks to ease its dependence on heavy oil imports, which due to rising international prices are set to push the national energy bill to a record JD4 billion by the end of the year.  Jordan currently imports 97% of its energy needs at a cost of nearly one-fourth its GDP.  (JT 30.12)

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5.1  Jordan’s Poverty Rate Up to 14.4% in 2010

The poverty rate among Jordanians stood at 14.4% in 2010, compared with 13.3% in 2008, according to a report issued by the Ministry of Planning and International Cooperation.  The report showed that absolute poverty line (food and non-food poverty) amounted to JD813.7 annually, or JD68 monthly for each individual, while for the average family (5.4 members), poverty line stood at JD4,394 annually, or JD366 monthly.  The Abject poverty line (food poverty) amounted to JD151.2 a month for families and JD336 for individuals a year, or JD28 a month.  Overall, the abject poverty rate stood at less than 1% and less than the average set by Jordan’s MDG [Millennium Development Goals] achievements by 2015.  The report also indicated that the rate of poverty among the Kingdom’s 89 districts has varied “noticeably” and was most evident in Wadi Araba in Aqaba Governorate (17.5%) and Rweished in Mafraq Governorate, where 69.6% of residents are poor.  In terms of household spending, the ration of money spent on food went up in 2010 by 3% compared to 2008, while non-food expenditures increased by 9.6%.  The study also addressed the impact of the government’s direct intervention to combat poverty in 2010, noting that without National Aid Fund assistance, the poverty rate would have topped 15.8%.  (JT 30.12)

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5.2  Jordan Drafting New Investment Law

Jordan’s new investment law will be sent to the cabinet in early January, according to Finance Minister Hafez.  The new law is designed to “expedite the investment processes, minimize bureaucracy, and unify the standards” according to Hafez, and is currently being reviewed with input from cabinet members, businessmen, investors and lobby groups.  Among the changes is the merging of the Jordan Investment Board and Development Zones Commission into a single entity.  The law will also give a focus to certain sectors such as technology that contribute more to economic growth.  Trade Minister Halawani was also quoted as saying that Jordan is attractive for foreign investors due to its political stability and security relative to other Arab countries in the region.  (Beltone 30.12)

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5.3  Jordan Has Over 1 Million Illegal Guest Workers

Jordan’s Ministry of Labor estimates that there are over one million illegal guest workers in Jordan.  Minister of Labor Katamine said on 2 December that at present, there are around 250,000 guest workers with work permits and more than one million others who are working without work permits, in addition to 45,000 documented domestic helpers and another 40,000 undocumented ones.  The Ministry of Labor is working to rectify the legal status of guest workers and collect more accurate information on the number of legal and illegal workers, the minister said.  In addition, Amman aims to revive the vocational education system that was adopted in the 1970s so that high school graduates can meet the demands of the labor market, the minister said.  Katamine also urged young job seekers to register at the labor and recruitment directorates in their governorates so that the ministry can contact them when there are vacancies.  Investors called on the government to re-examine the status of Asian guest workers who were brought into the country to work in the Qualifying Industrial Zones and left these zones illegally.  (Petra 24.12)

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5.4  Egypt to Resume Natural Gas Flow to Jordan

Egypt will resume pumping natural gas to Jordan at about 250 million cubic feet per day, says Jordan’s Prime Minister Ensour, following Egyptian Prime Minister Qandil’s visit to the Jordanian capital on 20 December.  Egypt has recently changed from a gas-exporting to a net gas importing country.  (Beltone 23.12)

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♦♦Arabian Gulf

5.5  Kuwait Inflation Seen Slowing to 4.3% In 2012

Kuwaiti inflation will slow to 4.3% this year and 4.1% next year from 4.8% in 2011, central bank governor Mohammed al-Hashel has predicted.  Inflation in the major oil exporter has been slowing gradually since mid-2011, mostly due to lower food prices.  Consumer prices rose 2.3% from a year earlier in November.  Non-performing loans at Kuwaiti banks amounted to around 6.8% of total credit portfolios in the first nine months of this year, Hashel said, adding that the banks had set aside provisions totaling 82.2% of the NPLs.  Kuwaiti banks took heavy provisions earlier this year, eating into first-half profits, as political conflict between the cabinet and parliament threatened to undermine the economy.  In early October, Hashel announced a 50 basis point cut in interest rates as part of the central bank’s efforts to kickstart bank lending.  In his comments, he said the cut, the first since 2010, would not have negative consequences for Kuwait’s currency, the dinar.  (AB 30.12)

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5.6  Qatar Raises 2013 Economic Growth & Inflation Forecast

Qatar’s real GDP growth forecast in 2013 has been raised to 4.8% from a previous estimate of 4.5%, the General Secretariat for Development Planning announced.  This is down from an estimated 6.3% in 2012.  Real hydrocarbon growth is now expected to decline less than originally thought, by 0.2% instead of 1.2%, on the back of higher crude oil production.  Meanwhile, real non-hydrocarbon GDP growth is expected to accelerate to 9.6% in 2013, from 9.3% in 2012, on the back of the construction sector.  The authority now expects consumer price inflation to rise 3.5% in 2013, up from a previous estimate of 2.5% in 2013 and 2.0% in 2012.  The fiscal surplus for 2013 was revised up to 5.4% of GDP, compared to the previous estimate of 4.8% of GDP, on the back of higher gas prices stimulated by Japanese demand.  The risks to the outlook are still mainly external, related to the euro zone crisis and geopolitical developments.  (Various 24.12)

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5.7  Qatar Delivers on $500 Million Egypt Pledge

Egypt has received a final $500m installment of funds promised by Qatar and will get another $500m from Turkey at the end of January, its finance minister said, in the latest aid to help balance its budget and defend its currency.  Egypt has been facing a financial crisis as a month of political strife has cast doubts on the government’s ability to push through unpopular spending cuts and tax hikes needed to persuade the IMF to agree to a $4.8b loan.  Finance Minister al-Saeed said Egypt had received the final installment out of a total of $2b promised by Qatar.  Egypt has spent more than $20b in foreign reserves to support the Egyptian pound since the popular uprising that toppled Hosni Mubarak in early 2011.  Reserves fell by $448m in November to reach $15b at the end of the month, equal to only about three months of imports.  The political turmoil has led to a run on the pound, with many investors and ordinary citizens rushing to convert into foreign currencies on concern the government might be forced to allow a sharp devaluation.  Qatar said in August it would deposit $2b with Egypt’s central bank in four $500m installments to help support the budget, and later that month Egypt said that it had received a first tranche.  Egypt said in October that Turkey had would lend it $1b in two tranches, also for budget support, with one tranche coming in October and the second in January.  (AB 29.12)

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5.8  Dubai Unveils Prudent 2013 Budget

Dubai’s government unveiled its budget for 2013, setting expenditure at 34.12 billion dirhams ($9.3 billion) and a deficit at 0.5% of GDP.  Expenditure was forecast only slightly up from 33.68 billion dirhams in this year’s budget, while revenues were expected to amount to 32.62 billion dirhams, up from 29.91 billion dirhams in 2012.  The budget forecast the deficit to drop to 1.48 billion dirhams, compared with 3.778 billion dirhams predicted for this year.  The Dubai government said the focus of the budget was “on a prudent fiscal policy that provides the stimuli necessary to economic growth”.  The debt-laden Gulf emirate allocated 6% of spending to debt servicing, while 26% would be channeled into health, education, housing and social developments.  Some 16% of expenditure has been set aside for the completion of infrastructure and development projects.  Government fees would represent 62% of revenues, while customs and taxes on foreign banks would account for 23%.  Dubai does not impose a tax on income.  Net oil income amounted to 12% of total revenues.  The government did not release figures for actual revenues and expenditure in 2012.

Dubai’s economy contracted 2.4% in 2009 when it rattled global markets over its debt crisis before receiving a $10 billion bailout from Abu Dhabi, its oil-rich partner in the Emirates and reaching restructuring deals with lenders.  The economy has since made a comeback, growing 2.8% in 2010, 3.4% in 2011 and 4.1% on an annual basis in the first half of this year, as tourism, trade and transport keep expanding.  (MEOn-Line 31.12)

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5.9  First Trains Delivered for UAE Rail Network

Etihad Rail, the developer and operator of the UAE’s national railway network, received its first shipment of train cars.  The UAE railway network comprises three stages with the first stage underway after a $900m civil and track works contract was awarded in October 2011.  Phase one will link the western region cities of Habshan and Ruwais by 2013 and connect Shah and Habshan by 2014.  The second stage will connect the Abu Dhabi rail network to Jebel Ali in Dubai as well as links to the borders of Saudi Arabia and Oman.  The third phase will expand the network to the northern emirates.  The network will also form a part of the Gulf Cooperation Council Railway Network – linking the UAE to Saudi Arabia via Ghweifat in the west and Oman via Al Ain in the east.  Etihad Rail contracted China South Locomotive & Rolling Stock Corporation Limited (CSR) last year to supply 240 covered wagons for the transport of granulated sulfur in the Western Region of Abu Dhabi.  Etihad Rail has also contracted United States-based Electro-Motive Diesel (EMD), one of the world’s largest builders of diesel-electric locomotives, to design and manufacture seven heavy haul freight locomotives.  The recently inaugurated Khalifa Port will be linked to Etihad Rail’s network during stage two of the project.  (AB 29.12)

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5.10  Saudi Government Plans To Spend $219 Billion In 2013

Saudi Arabia has set a record state budget for next year as high oil prices allow heavy spending on welfare and infrastructure projects, helping it avoid the severe social unrest seen in other parts of the Arab world.  The government plans to spend SR820b ($219b) in 2013, Finance Minister Alassaf said as he presented the budget to King Abdullah.  That amount is 19% higher than the SR690b that the world’s largest oil exporter budgeted for 2012.  It is slightly below the estimated SR853b that the government actually spent this year, but analysts said actual spending was on track to continue climbing in 2013.  Saudi Arabia traditionally makes conservative projections for both spending and oil revenue, leaving room for actual expenditure and budget surpluses to come in much larger than initially forecast.  Riyadh has been aggressively ramping up spending for several years to ease domestic political tensions and because it wants to diversify the economy away from heavy dependence on oil, in case of a future plunge in global oil prices.  Capital spending totals SR285b in the 2013 budget, much of it going to projects such as ports, railroads and water resources.  Expenditure on education and health is also set to increase sharply.

Saudi Arabia is already enjoying a private sector boom.  GDP, adjusted for inflation, expanded 6.8% this year, the finance ministry said.  The private sector shot up 7.5%, outpacing state sector growth of 6.2%.  The government raised its estimate of GDP growth in 2011 to 8.5% from 7.1%, without explaining why the belated revision, which was due to the completion of a census, was so large.  Data released by the finance ministry on Saturday indicated the government posted a budget surplus of 14.2% of GDP this year.  (AB 30.12)

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5.11  Saudi Economic Growth Nears 6% in Third Quarter

Saudi Arabia’s economy grew by nearly 6% in Q3/12, driven by the Gulf kingdom’s non-oil sectors, Jadwa Investment has said.  It said the latest economic growth data released confirms that the “healthy performance” of the Saudi economy continued into Q3/12.  In real terms – adjusted for price movements – the economy grew by 5.87% in the quarter.  At 5.87%, year-on-year growth in the third quarter was higher than the 5.5% GDP expansion in the second quarter.  Compared to Q2 when the private sector was the main growth driver, Q3 saw the government contribution jump compared to the previous quarter.  Jadwa said the overall non-oil public sector expanded by 12.2% year-on-year.  Most of this growth was sourced from higher government services which expanded by 13.4% year-on-year.  While such strong performance reflects improved government services, it is also surprising that this growth occurred in the third quarter where economic activity tends to be slower relative to the rest of the year.  Jadwa expects this expansion in services to translate into higher non-oil revenues for the government budget which is due to be released within the next two weeks.  The transport and communication sector was the next fastest growing sector at 8.7% year-on year, followed by utilities and construction which both registered solid growth of 8.4% and 8.1% respectively.  Jadwa said year-to-date growth in Saudi Arabia was in line with its forecasts at 5.8%.  (AB 22.12)

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5.12  Brazil’s Fury Over Saudi Beef Imports Ban

The world’s top beef exporter, Brazil, will give countries that curbed imports of its beef after a case of mad cow disease until March to drop the measures or it will file a complaint at the World Trade Organization, farm ministry officials have said.  Five countries including Saudi Arabia and Egypt, have implemented full or partial bans on Brazilian beef imports since confirmation this month of a case of atypical bovine spongiform encephalopathy (BSE), or mad cow disease, in a cow that died in 2010.  Atypical BSE cases can occur spontaneously in elderly cattle and the 13-year-old animal in the Brazilian case never developed full-blown BSE, testing instead positive for a protein that is the causal agent of mad cow disease.  Brazil had previously launched a diplomatic offensive to fend off restrictions over the death of the cow in the southern state of Parana which was confirmed only this month by Brazilian authorities.  But now Brazil has promised to take retaliatory action against countries rejecting its beef, saying there are no grounds for such action.  Brazil kept its status as a country presenting negligible BSE risk under an OIE classification, and that OIE norms consider safe for consumption products like red meat and gelatin, even when BSE has been declared in a country.  The Brazilian cow in question never entered the food chain.  (AB 22.12)

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♦♦North Africa

5.13  S&P Reduces Egypt’s Rating to Junk – the Same as Greece

Egypt’s long-term credit rating was cut to the same junk level as Greece by Standard & Poor’s as escalating political tension in Egypt may render aid from the International Monetary Fund “inactive”, Bloomberg reported.  Egypt’s rating was lowered by one level to B-, six steps below investment grade, with a negative outlook, S&P said in a statement.  The rating, which is also on par with Pakistan, may face more downgrades should political instability result “in a sharp deterioration of economic indicators such as foreign exchange reserves or the government’s deficit,” S&P said.  S&P has pared Egypt’s rating five times since the start of a popular revolt almost two years.  The country’s credit risk jumped this month ahead of a constitutional vote that has intensified divisions between the ruling Islamists and their opponents.  “The increased polarization between the Muslim Brotherhood’s Freedom and Justice Party and sections of the population is likely to weaken the sovereign’s ability to deliver sustainable public finances, promote balanced growth and respond to further economic or political shocks,” S&P said.  (S&P 24.12)

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5.14  Egypt’s Budget Deficit Reaches $13.1 Billion

Egypt’s budget deficit increased to LE80.7 billion ($13.1 billion) during the first five months of the current fiscal year 2012/13, which starts in July, the Ministry of Finance reported on 23 December.  The same period of last year witnessed a budget deficit of LE58.4 billion ($9.5 billion).  The deficit is roughly 4.5% of Egypt’s GDP, which rose from LE402.1 billion ($65.2 billion) in Q1/2011/12 to LE445.8 billion ($72.2 billion) in the corresponding quarter in 2012/13, the report said.  The ministry stated that revenues were up by 40.3% from July to November 2012 to reach LE108.5 billion ($17.5 billion) compared to LE77.4 billion ($12.5 billion) in the same period in 2011.  However, total expenditures have also been raised by 38.8% in the aforementioned period in 2012 reaching LE188 billion ($30.4 billion).  Egypt’s budget deficit reached LE50 billion ($8 billion) in the first quarter of the fiscal year 2012/13 which means that the deficit has risen by LE30.7 billion in the last two months.  Recently Minister of Industry & Foreign Trade Saleh said that the total budget deficit is expected to reach LE200 billion ($32.4 billion) by the end of this year.  (Ahram 23.12)

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5.15  Egypt Pound Hits Record Low Under New Currency Regime

The Egyptian pound hit a record low on 30 December after the central bank imposed a new currency regime to try and stem a deepening economic crisis that presents a further challenge for President Morsi.  The currency adjustment includes regular foreign currency auctions and appeared to signal an orderly devaluation to protect foreign reserves, according to bankers, after the central bank spent more than $20 billion over the past two years to defend the pound.  It came after political turmoil in recent weeks over a new constitution had sent worried Egyptians scrambling to sell local currency.  The central bank said that foreign reserves were now at a critical level and could barely cover three months of imports.  The currency crisis underlines the scale of the economic challenge facing President Morsi, who has been grappling with the fall-out of a political crisis ignited by his move to drive through a constitution written by his Islamist allies.  Violent street protests and political wrangling over the last month over Morsi’s new constitution raised fears the pound could fall further or the government could impose more capital controls and foreign reserves fell by $448 million in November to $15 billion, barely three months of import cover.  Prior to the launch of the new currency regime, the central bank had let the pound weaken by only 6% against the dollar since the uprising against Hosni Mubarak in early 2011 chased away tourists and foreign investors, two of the main sources of demand for Egypt’s currency.  At the maiden auction of the new regime on 30 December, the central bank sold virtually all of the $75 million it had offered, with the highest price of pounds at 6.2425 to the dollar, down from 6.185 earlier in the day.  (BI-ME 30.12)

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5.16  Egyptian Finance Ministry Foresees Tax Changes in January 2013

Egyptian Finance Minister al-Saeed said changes to taxation, including the increased taxes on some goods and services, will be applied in January 2013, following the end of a period of community dialogue.  Saeed said that these changes will not harm the poor and those of middle-income.  He also said that these changes will lead to reduced tax evasion, simplified procedures, improved business and investment climate.  The amendments include changes to income, sales, duty and real estate taxes.  (Beltone 30.12)

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5.17  President Morsi Tightens Money Transfer Regulations

President Mohamed Morsi released a decree tightening money transfer, altering some of the Central Bank’s rules.  The new decree sets a limit of $10,000 or its equivalent in other currencies that travelers can take in or out of the country.  The new decree also bans the transfer of money through parcels, all to avoid any manipulation in the foreign exchange market.  Previous rules had set a daily limit of $10,000 for cash withdrawals.  (Beltone 25.12)

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5.18  Egypt Bans Land Ownership in ‘Strategic Zones’ in Sinai and the Red Sea Areas

Egyptian Minister of Defense El-Sisi put a ban on the ownership of properties (land and real estate) located in “strategic areas” of military importance in Sinai and the Red Sea.  The Armed Forces’ Decree No 203 in 2012 is inclusive of land and houses that are five kilometers from the country’s eastern borders with Gaza, except properties in the North Sinai city of Rafah.  Neither Egyptians nor foreigners will be allowed ownership, usufruct or rent of lands or properties in affected zones, including the Red Sea’s islands, natural reserves and archaeological areas.  In October 2012, Egyptian Prime Minister Qandil laid out the procedures for Sinai’s residents claim land ownership in the peninsula, given that they do not have a second nationality, and that both of their parents are Egyptian.  (Various 24.12)

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5.19  Islamist-Led Tunisia To Raise Alcohol Duty

The Islamist-led ruling coalition in Tunisia raised the alcohol duty in a bid to bolster state coffers despite criticism from rival Islamists that it was wrong to profit from an activity prohibited by the faith.  The Constituent Assembly approved the budget measure aimed at raising 170 million dinars (€85 million), acting finance minister Slim Besbes announced.  MPs from the moderate Islamist Ennahda party that leads the government voted in favor but an MP from a rival Islamist outfit slammed the move as un-Islamic.  In its successful October 2011 parliamentary election campaign, Ennahda gave undertakings that it would do nothing to outlaw the sale or consumption of alcohol in Tunisia, which is heavily dependent on foreign, particularly European, tourism.  But party leader Rached Ghannouchi later called on supporters to shun bars.  Bars have since been a repeated target for attack by hardline Salafi groups, who have succeeded in forcing the closure of a number.  But beer sales still rose by 20% in the first half of the year, according to figures from the brewers.  (MEOn-Line 27.12)

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6.1  Turkey Gets Low Growth Forecast from IMF

Turkey’s economy has so far managed a “soft landing” amid global financial woes, but the prolonged crisis in Europe, perennial trade imbalances and an “unconventional” monetary policy will keep the country’s growth at an average of 3.9% through 2017, the International Monetary Fund (IMF) predicted.  The report projected Turkish growth to be 3.5% in 2013, with renewed consumer spending pushing up imports and adding to the country’s trade imbalances.  In 2014, the economy would come closer to growth of 4.5%, the report continued, pegging growth below the 5%-plus predictions made by Ankara for 2014.  The IMF warned against efforts to bring back the fast growth Turkey saw in 2011, when the economy grew by 8%, suggesting that Turkey’s current period of 3% growth has allowed the country to re-balance its finances and acute current account deficit (CAD).  That call again goes against Ankara’s promise to return growth to 2011 levels by 2014, a policy the IMF said would lead to a “reversing disinflation and … a widening of the current account deficit.”  The bank warned that accelerating inflation — which currently hovers around 7% but was much higher earlier in the year — along with a growing trade deficit and external finance shocks might lead to a “hard landing” if Ankara was not careful.  Despite the numerous warnings, the IMF warnings nevertheless said that Turkey would enjoy higher than average growth in the following years if it could enhance its “coordination of macroeconomic policies, higher savings and improved competitiveness.”  (TP 26.12)

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6.2  Japanese Bank Gets License, More Lenders Flock To Turkey

The Turkish banking sector is attracting more and more international players as the country’s sector regulator, the Banking Regulation and Supervision Agency (BDDK), has approved The Bank of Tokyo-Mitsubishi UFJ.  In addition, Anadolu Endustri Holding has said in a filing to the Istanbul Stock Exchange (IMKB) that it has started talks with the Commercial Bank of Qatar to sell its controlling shares in Alternatif bank.  These developments followed the opening of the first branch of Odeabank, the Turkish unit of the Lebanon-based Bank Audi, in Istanbul.  Bank Audi became the first new bank to receive BDDK authorization after nearly 14 years as the regulator has been acting cautiously since the crisis in 2002.  Analysts have said that the Commercial Bank of Qatar’s approach to Alternatif was a sign of high Gulf interest in Turkish lenders, which might encourage other investors.  (TP 26.12)

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6.3  Turkey Expands Offshore Oil Search

The Turkish Petroleum Corporation (TPAO)’s subsidiary, Turkish Petroleum International Company (TPIC), will search for oil in Turkey’s Mediterranean offshore field for two more years.  State-controlled TPIC’s application to extend the duration of its search licenses was approved by the Turkish Petroleum Affairs General Directorate (PIGM).  The national fuel sector body has decided that TPIC’s five licenses for oil exploration in the Antalya Petroleum Region of the Mediterranean offshore field will be valid from Feb. 1, 2013 to Feb. 1, 2015.  (TDN 26.12)

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6.4  EU & IMF Say Greece Not Doing Enough Against Rich Tax Dodgers

Greece’s drive to crack down on flagrant tax evaders such as doctors and lawyers is flagging and must be reinvigorated, a report by the European Union and International Monetary Fund said on 24 December.  Athens has collected just half the tax debts and conducted less than half the audits it was supposed to under the targets set by its lenders, according to a survey by the country’s international lenders which was compiled in November.  By the end of September authorities had conducted 440 checks on suspected wealthy tax evaders, compared with a full-year target of 1,300.  About €1.1 billion in overdue taxes have been collected so far, less than the 2 billion euros targeted.  The lenders urged Greece to improve tax collection and focus on the cases most likely to produce results.  Tax evasion is endemic in Greece, making it more difficult for the government to shore up its finances under its €240 billion international bailout.  With revenues falling short and the austerity-hit country obliged to meet its fiscal targets when its economy is shrinking for a fifth year, Athens is hiking taxes on middle-class wage earners who can’t hide their income.  After a Christmas recess, parliament is expected to pass a new tax law which aims to raise about €2.5 billion over the next two years as part of a €13.5 billion austerity package.  A second piece of long-delayed legislation to crack down on tax evasion will follow later in the year. 

Improving Greece’s slow tax administration and justice is a key objective of the bailout.  According to the report, individuals and companies have racked up €53 billion of tax debts to the government, a figure that corresponds to about a quarter of the country’s GDP.  But just 15-20% of that amount can be collected, the EU/IMF said, given that a large number of these tax cases are old and the debtors have already defaulted.  According to a list published last year, Greece’s biggest tax debtor was state-run railway company OSE.  (FM 24.12)

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6.5  Greece’s November Deficit Data Beat Target

The primary deficit of the state budget amounted to just €1.4 billion in the first 11 months of the year, which is €2.1 billion smaller than the original target, Finance Ministry figures show.  The deficit has been contained to such a great extent due to the non-disbursement of funds for the Public Investment Program and the building up of state arrears.  However, the biggest problem remains the funding of social security funds as all of them had already used up their budget allocation for the year by end-November.  It is worth noting, though, that the measures which saw the special consumption tax for diesel and for heating oil leveled has not brought in the expected revenues, as energy goods tax revenues in November amounted to just €353 million, compared to €389 million in November 2011.  (ekathimerini 26.12)

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7.1  Israel’s Population Almost at 8 Million

The Central Bureau of Statistics announced that on the eve of 2013, Israel’s population totals 7,981,000.  With the population growing 1.8% million annually (145,000 in 2012), the 8 million threshold will be passed during February 2013.  Some 75.4% of the population is Jewish, 20.6% Arabs and 4% others.  In 2012, 170,000 babies were born and 16,500 people immigrated legally to Israel (aliyah).  Israel has 6,015,000 Jews, with the six million threshold passed during November 2012.  The country has 1,648,000 Arabs and 319,000 others (mainly immigrants from the former Soviet Union who are Jewish under the Law of Return but not halachically).  (CBS 30.12)

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7.2  Report Shows 2% of Israelis are Christian

The Israel Central Bureau of Statistics has released a report showing that 2% of Israeli citizens are Christian.  About 80% of the 158,000 Christians in Israel are Israeli Arabs.  The rest are Christians who immigrated to Israel with Jewish family members under the Law of Return, mainly from the former Soviet Union during the 1990s.  Israeli cities with the largest Christian Arab populations are Nazareth (22,400), Haifa (14,400), Jerusalem (11,700) and Shfaram (9,400).  In 2011, Christian women gave birth to 2,596 children, 78% of whom are Arab.  Christian families have an average of 2.2 children, less than both their Jewish and Muslim compatriots (2.3 and 3.0 children, respectively).  On high school matriculation exams, Christian students achieve better results than all other segments of the Israeli population.  The unemployment rate among Christians ages 15 and over is 4.4%, less than the national average of 7%.  The average marriage age is 29.3 for Christian men and 24.5 for Christian women.  (IH 24.12)

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7.3  Some 11% of Israel’s Voters Live Abroad

Some 5.1 million registered voters currently reside in Israel, according to the Central Bureau of Statistics.  These numbers exclude some 560,000 people – some 11% of the voters – who are eligible to vote in the Israeli elections but live outside of Israel.  The CBS further found that since the 2009 elections for the 18th Knesset, the number of registered voters whose place of residence is Israel has increased by 7%.  Of Israeli residents, 81% are Jewish, 15% are Arabs (Muslims, Christians and Druze) and the remaining 4% are divided between Christians and voters who are unaffiliated with any religion.  Since the recent Knesset elections, 47,000 people who do not reside in Israel have been registered as new voters, but according to the findings, most Israelis abroad do not vote.  The CBS estimated that some of the registered voters living abroad might have passed away without the civil registry being notified.  During the first Knesset elections, in 1949, when all registered voters were living in Israel, there were 506,567 registered voters.  In the second Knesset elections, that number nearly doubled, and until today, the number of voters – including voters living outside Israel – has multiplied by 11.  (Ynet 26.12)

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7.4  Uriah Heep Returning to Israel

English rock band Uriah Heep is returning to Israel for one concert at the Tel Aviv Performing Arts Center, on 28 January.  This will be the group’s sixth performance in Israel.  The band was founded in 1969 and has released 12 studio albums.  Lead guitarist Mick Box is the only founding member still active with the group.  The band is named after the well-known fictional character created by Charles Dickens in his novel “David Copperfield.”  (Ynet 30.12)

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7.5  Israeli Traffic Fatalities Hit 50-Year Low

Israel had the fewest number of traffic fatalities in 50 years, Minister of Transport Yisrael Katz announced at a 30 December press conference in Tel Aviv.  In 2012, 287 people were killed in traffic accidents, 25% fewer than in 2011.  Katz said that there were 20% fewer fatalities in the past four years compared with the four preceding years.  These numbers fell despite the increase in the number of motor vehicles from fewer than 100,000 forty years ago to 2.8 million vehicles today.  Katz said that the Israel’s fatalities/travel ratio (total kilometers driven by all vehicles) has risen from 15th best worldwide to 10th.  Katz said that penalties and traffic enforcement policy on life-threatening violations have been tightened in the past years.  Since 2004, the number of fatalities per billion kilometers has fallen from 12.7 to 5.6, and the number of seriously injured has been halved; a 56% drop in fatalities.  (Globes 30.12)

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7.6  Ariel College Granted University Status

Defense Minister Barak has instructed GOC Central Command Maj.-Gen. Alon to officially recognize the Ariel University Center of Samaria as a full-fledged university, as per Attorney General Weinstein’s recommendation.  Weinstein on 24 December upheld the Judea and Samaria Higher Education Council’s decision to accredit the school.  Despite staunch opposition on the part of the Council for Higher Education, the cabinet decided to recognize the institution as the first Israeli university in Samaria this past September.  The government then submitted the resolution for the approval of GOC Central Command Maj.-Gen. Nitzan Alon, pending the attorney general’s review.  (IH 24.12)

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7.7  Saudi Detains Dozens for “Plotting to Celebrate Christmas”

Saudi religious police stormed a house in the Saudi Arabian province of al-Jouf, detaining more than 41 guests for “plotting to celebrate Christmas.”  The raid is the latest in a string of religious crackdowns against residents perceived to threaten the country’s strict religious code.  The host of the alleged Christmas gathering is reported to be an Asian diplomat whose guests included 41 Christians, as well as two Saudi Arabian and Egyptian Muslims.  The host and the two Muslims were said to be “severely intoxicated.”  The guests were said to have been referred to the “respective authorities.”  It is unclear whether or not they have been released since.  Saudi Arabia, which only recognizes Islam, has in the past banned public Christmas celebrations, but is ambiguous about festivities staged in private quarters.  Saudi religious police are known to detain residents of the Saudi kingdom at whim, citing loose interpretations of Sharia and public statements by hardline religious leaders to justify crackdowns.  A member of the Higher Council of Islamic scholars in Saudi Arabia, Sheikh Mohammed al-Othaimin recently prohibited sending holiday wishes to “heretics” on Christmas or other religious Christian holidays.  (Al-Akhbar 27.12)

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7.8  Egyptians Approve First Post-Revolution Constitution

Unofficial results show that Egypt’s new constitution passed with a 63.8% approval rate, Ahram Online reported.  Only three out of 27 governorates resulted in a majority of ‘No’ vote.  The total number of people who voted against the constitution was 6.06 million out of 16.7 million valid votes, or about 36.2%.  Governorates in Upper Egypt witnessed the highest approval rates, contributing almost one third of the total ‘Yes’ vote.  In Cairo, 57% of the voters rejected the constitution, while 55.6% voted ‘Yes’ in Alexandria.  Turnout of 32.9% of Egypt’s nearly 52 million registered voters was quite a bit lower than most other elections since the uprising nearly two years ago that ousted authoritarian leader Hosni Mubarak.  A resounding victory in the second phase of the constitutional referendum gave a much-needed boost to Islamists, who believe the new constitution will pave the way for a smooth and swift transition to democracy under President Mohamed Morsi.  Islamists will be looking to maintain their electoral prowess when the elections for Egypt’s lower house of parliament, which was dissolved by a court order earlier this year, take place within two months.

The divisive constitution is likely to widen the conflict between the Muslim Brotherhood and its supporters and their opponents, who believe the influential Islamist group and its Salafi allies are focused on seizing political power after being oppressed for decades by former presidents Gamal Abdel-Nasser, Anwar El-Sadat and Hosni Mubarak.  However, the Brotherhood’s political arm, the Freedom and Justice Party (FJP), believes the passing of the new constitution might provide a chance to begin working towards an accord with opposition rather than give rise to further disputes.  On 26 December, Morsi signed the new constitution into law.  (Ahram 24.12)

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8.1  Israeli Biotech Company Looks to Open S.C. Development Center

After a delegation of S.C. leaders visited Israel in December to promote the state and encourage collaboration, one Israeli company received financing from a Charleston business and plans to open a development center in the area.  NeuroQuest announced $500,000 in financing from Charleston-based The InterTech Group and the Maryland/Israel Trendlines Fund.  The company also is engaged in discussions with the South Carolina Research Authority about a grant to open a U.S. development center in Charleston as the base of its clinical and regulatory work.  NeuroQuest is a portfolio company of the Trendlines Group’s Misgav Venture Accelerator.  The company is working toward a validation trial for a product to diagnose Alzheimer’s disease.  The InterTech Group has provided the American-Israel Chamber of Commerce Southeast region with annual grants to organize the collaboration between the two groups.  The delegation, which included business, university and economic leaders from South Carolina, spent a week in Israel and conducted more than 100 meetings promoting the Palmetto State.  The group visited Israel’s major research universities, met with government officials and gave presentations on why South Carolina would be the right place for their investments.  (CRBJ 18.12)

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8.2  San Antonio Hospital Purchases Mazor Robotics’ Renaissance System

Mazor Robotics announced that Foundation Surgical Hospital (FSH) of San Antonio, Texas purchased its Renaissance system.  This system sale marks the fifth Renaissance installation in the state of Texas and the 20th U.S. installation in 2012.  Foundation Surgical Hospital of San Antonio is a 20 private suite facility that offers numerous surgical procedures and medical services.  Renaissance, Mazor Robotics’ next generation surgical guidance system for spine procedures, is transforming spine surgery from freehand operations to highly-accurate, state-of-the-art procedures, with less radiation – even for minimally invasive surgery, scoliosis, and other complex spinal deformity cases.  It is the only robotic technology for spine surgery available in the marketplace.  Caesarea’s Mazor Robotics ( is dedicated to the development and marketing of innovative surgical robots and complementary products that provide a safer surgical environment for patients, surgeons and operating room staff.  Mazor Robotics’ flagship product, Renaissance, is a state-of-the-art surgical robotic system that enables surgeons to conduct spine surgeries in an accurate and secure manner.  (Mazor Robotics 30.12)

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9.1  BluePhoenix Solutions Partners with Quebec’s WAZ Informatique

BluePhoenix and Quebec’s WAZ Informatique, a company specialized in providing Information Technology consulting services, have partnered to deliver legacy modernization solutions for several large Canadian clients.  These clients have selected BluePhoenix Solutions for its innovative tools, proven methodology, and global experience to convert legacy mainframe applications to modern open standard platforms.  BluePhoenix and WAZ Informatique will provide legacy modernization technology and services for several Canadian customers.  These engagements result in reduced IT operational costs, reduced operational risks, along with improved customer focused service and operations.  What sets BluePhoenix and WAZ apart from the competitions is the automated technology that delivers consistent results and reliable milestones.  The engagements have aggressive milestones and completion dates which satisfy strategic plans to incrementally modernize legacy mainframe environments.

Herzliya’s BluePhoenix Solutions ( is the leading provider of legacy IT modernization conversion solutions.  The BluePhoenix portfolio includes a comprehensive suite of tools and services from global IT asset assessment and impact analysis to automated database and application migration.  Leveraging over 20 years of best-practice domain expertise, BluePhoenix works closely with its customers to ascertain which assets should be migrated, redeveloped, or wrapped for reuse as services or business processes, to protect and increase the value of their business applications and legacy systems with minimized risk and downtime.  (BluePhoenix 27.12)

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9.2  Elbit Systems Awarded $315 Million in Israel Ministry of Defense Contracts

Elbit Systems was awarded various contracts by the Israel Ministry of Defense (IMOD) in a number of fields of activity for a total value of approximately $315 million.  The contracts include battle management systems (BMS) and avionics for helicopters, virtual training for the Israeli Air Force’s (IAF) fighter aircraft array and operation and maintenance services for the IAF’s Flight Academy, in a total of approximately $75 million, covering deliveries over a six-year period.  As well, the Hermes 900 Unmanned Aircraft Systems (UAS) will be supplied within three years, as well as maintenance services for UAS over a period of eight years, in a total value of approximately $90 million.  Electronic Warfare (EW) Systems for F-15 and F-16 fighter aircraft and for the Navy’s Missile Vessels will be supplied over the next 4 years for some $90 million and some $25 million in advanced observation and long-range target acquisition systems will be supplied over a three-year period.  Elbit Systems employs approximately 10,000 employees in Israel and provides work for an additional approximately 7,000 employees of local subcontractors.  in the North to Ashdod, Arad, Hatzerim and Sderot in the South. 

Haifa’s Elbit Systems ( is an international defense electronics company engaged in a wide range of programs throughout the world.  The Company, which includes Elbit Systems and its subsidiaries, operates in the areas of aerospace, land and naval systems, command, control, communications, computers, intelligence surveillance and reconnaissance (C4ISR), unmanned aircraft systems (UAS), advanced electro-optics, electro-optic space systems, EW suites, airborne warning systems, ELINT systems, data links and military communications systems and radios.  (Elbit 31.12)

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10.1 Israel Hotel Overnights Increase By 2%

Hotel overnights in Israel totaled 20.6 million in January-November 2012, 2% more than in the corresponding period of 2011, the Central Bureau of Statistics announced on 24 December.  The figure is 1.5 million fewer overnights than the 22.1 million overnights reported by the Israel Hotel Association.  The Central Bureau of Statistics reports that there were 11.5 million hotel overnights by Israelis in January-November and 9.1 million hotel overnights by foreign tourists.  Room occupancy rate was unchanged from last year, at 67%.  In November, Dead Sea hotels had the highest occupancy rate, at 83%, followed by 72% in Jerusalem, and 70% in Haifa.  The Central Bureau of Statistics says that the average daily number of tourist entries in the first half of November was double the figure for the second half of the month, during Operation Pillar of Defense.  (Globes 24.12)

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10.2 Israel Ranks 34th in Internet Policy

Israel has been ranked in the 34th place in the Boston Consulting Group’s 2012 e-Intensity Index, which grades countries according to their governments’ role in encouraging Internet among consumers, businesses and within the government itself.  Although Israel is considered a high-tech country, it ranked just 34th out of 85 countries.  South Korea, Denmark, Switzerland, Iceland, the United Kingdom, the Netherlands, Finland, Norway, Luxemburg, Japan and the United States top the index.  Ghana, Nigeria, Indonesia and Cameroon are at the bottom of the ranking.  According to the research initiators, encouraging Internet use among governments, consumers and businesses can be a powerful edge in the competitive global economy.  (Ynet 19.12)

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11.1 LEBANON: Year in Review 2012

It has been a difficult year for the Lebanese economy, buffeted by the ongoing civil war in Syria, with the conflict at times spilling across the border and sparking violence and instability.  All of these factors have impacted the country’s economic wellbeing and will continue to do so into 2013.

Estimates by the Banque du Liban released in late November put the rise in GDP at 2% for 2012, down from the 2.8% recorded the previous year.  The weak growth was attributed to high political tension and occasional security incidents, factors that discouraged both investors and consumers.  The outlook for 2013 is somewhat unclear, depending as it does on an improvement in the situation in Syria, but also on the outcome of Lebanon’s general elections, which are scheduled for the middle of the year.

The elections have the potential to create additional domestic unrest, which could weaken the economy further.  Estimates for growth in the coming year range from the 2.5% forecast by the IMF to the more conservative 1.5% from financial consultancy Merrill Lynch.

In a recent research note, ratings agency Moody’s warned that Lebanon faced reduced growth prospects, while high government debt and persistent fiscal and current account deficits were also matters of concern to investors.  However, this was offset by the resilience of domestic banks and the large foreign exchange liquidity in the banking system, though the country is still highly susceptible to external shocks, which could undermine economic development.

While the banking sector may be resilient, many domestic lenders with exposure to the Syrian market had a difficult year.  According to a report by Credit Libanais in mid-December, profits of the Syrian subsidiaries of Lebanese banks fell by almost 70% in the first nine months of the year, a result of what the report said were the “heightening uncertainties and risks surrounding Syria’s operating environment”.

Inflation also began to stir in 2012, though estimates of the increase in the cost of living varied.  At the end of November, Riad Salameh, the governor of the central bank, forecast inflation would rise to 6% by the end of the year, pushed up by higher fuel and food costs.  However, government figures, issued in early December, painted a bleaker picture, putting the increase in the consumer price index at 11%.

Lebanon’s construction industry saw a sharp drop in activity in 2012, with the area covered by permits for building projects falling 13.4% in the first three quarters of the year, down from 12.4m sq. meters to 10.7m.  The decline almost mirrored the drop in the number of real estate transactions, with an overall 10.6% year-on-year retreat at the end of October.

Another sector affected was tourism, one of the mainstays of the economy, as the conflict in Syria and its overflow effects into Lebanon deterred overseas guests.  Arrivals are well down on 2011, with visitor numbers having fallen by 15% or more over the previous year’s figures, and by more than 35% on those of 2010.  The sector is the single-largest employer in the economy, one which contributes 10% to GDP, and with little sign that peace will break out in Syria any time soon, it is likely that tourism will be in for another lean year in 2013.

Lebanon’s exports have also been hurt by the conflict, as its land-trade routes to the Middle East and beyond are all but severed.  In mid-November, the Ministry of the Economy estimated that outward-bound trade was down by 12%, with most of the downturn due to the reduction in shipping to and through Syria.  If this rate of decline is maintained to the end of the year, the fall in exports will have cost Lebanon well over $2.6bn in 2012.

Additionally political instability at home has hindered the economy.  The parliament has been unable to pass the budget for this year or the next, and the government is faced with many significant problems, such as cutting the debt-to-GDP ratio.  Given Lebanon’s fragmented political landscape, it is unlikely that next year’s elections will give any one party or bloc a clear mandate, meaning drawn-out negotiations to form a coalition will be required and divvy up the cabinet posts, all of which will delay further reforms.

With the regional climate expected to remain unstable into the coming year, prospects for a strong rebound for the Lebanese economy are not strong, at least until well into the second half of 2013.  (OBG 24.12)

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11.2  LEBANON:  Lebanon’s Stagnation

David Schenker wrote in the Washington Institute’s PolicyWatch ( that Lebanon has a long history of muddling through and it may do so again unless Syrian violence reignites sectarian tensions in the perennially troubled state.

In recent months, violence in Syria has been spilling over into Lebanon, culminating in the assassination of a senior security official and ongoing fighting in Tripoli between Sunnis and Alawite supporters of the Bashar al-Assad regime.  Although these developments pose a threat to Lebanon’s tenuous stability, the country already faced a series of independent social, economic and political challenges that the Hezbollah-led government in Beirut has not handled with distinction.

Political Fault Lines

Since the 2005 assassination of former premier Rafiq Hariri — a crime for which Hezbollah members were indicted by a UN-founded international tribunal – Lebanon has been divided into roughly two camps.  On one side is a coalition of anti-Assad Sunnis and Christians (and sometimes Druze) known as “March 14”; on the other is the Iranian-backed pro-Assad bloc called “March 8,” led by Shiite Hezbollah and its Christian partner, the Free Patriotic Movement (FPM).  This divide reflects not only political differences, but also divergent economic approaches.

Despite not winning a majority in parliament, March 8 has controlled the government since 2009.  Hezbollah’s weapons helped intimidate its domestic opponents, but persistent political divisions, widespread corruption, and fallout from Syria ensured that the government accomplished little over the past three years.

Economic Morass

The war next door has hurt Lebanon’s trade and tourism, curtailing overland exports and – after a spate of kidnappings – drying up the steady stream of vacation pilgrims from Persian Gulf states.  The prospect of spillover has also led to a decline in foreign direct investment and a 20 percent drop in building permits requested since last year.  At the same time, foreign remittances, long a staple of Lebanon’s economy, have fallen off.  The state’s banks have also taken significant losses in Syria, contributing to flat earnings even for Bank Audi, which recorded its best year ever in 2011.

Yet these factors have only exacerbated existing problems, including continued repercussions from the costly Hezbollah-provoked war against Israel six years ago.  Taken together, these issues have contributed to a budget deficit increase from $40 billion in 2006 to nearly $56 billion today.

Meanwhile, rising unemployment, stagnant incomes and hikes in commodity prices are increasing economic pressure on lower-income Lebanese, so much so that in November, teachers and other civil service employees went on strike demanding that the moribund parliament pass legislation to raise public salaries retroactively to August.  Central Bank governor Riad Salameh opposed the raise, arguing that it would lead to inflation and add $2 billion to the state’s already high 2012 deficit of $3 billion.  To help narrow the gap, he instead recommended additional taxes on interest generated from bank deposits, as well as on cellphones and other luxury items – a decision sure to generate grumbling among Beirut’s jet set.

Lebanon’s financial problems coincide with an acute electricity shortage exacerbated by the closing of the Deir Ammar power station, one of the state’s largest facilities.  Although Beirut has allocated some $500 million for a new plant, the tender process – overseen by March 8-aligned energy minister Gebran Bassil of the FPM – has been mired in scandal and interminably delayed.  Basil’s effort to secure temporary energy by leasing two Turkish electricity-generating barges has been years in process and tainted by corruption, and it is unclear when, if ever, the boats will arrive.  Meanwhile, blackouts have become ubiquitous in the capital – particularly in the Hezbollah-dominated southern suburb of Dahiya – and elsewhere.

The Energy Ministry’s underperformance is especially frustrating given the recent discovery of vast natural gas reserves off the coast.  These new resources have not been exploited because March 8 is unwilling to explore a modus vivendi via international mechanisms to establish a maritime border with Israel.

Electoral Problems

In the lead-up to next year’s tentative parliamentary elections, the electoral law has emerged as another source of intractable contention.  Both March 8 and March 14 are pressing for legislative changes that would disadvantage the other at the ballot box.  The arcane dispute has FPM leader Michel Aoun calling for a shift to a proportional-representation model that he believes will strengthen his coalition and weaken the March 14-leaning swing vote of Druze leader Walid Jumblatt.  Meanwhile, Samir Geagea of the March 14 Christian party Lebanese Forces is arguing for changes that would allow his sect to directly elect 50 of the 120-member parliament’s 60 Christian seats – well more than the 35 afforded by the 1960 electoral law and the 27 allowed under the so-called “Ghazi Kanan law” during the Syrian occupation.  Given Lebanon’s demographics, this change would be unacceptable to both Hezbollah and Geagea’s own Sunni (and potential Druze) coalition partners.

This issue might eventually have been discussed at the National Dialogue, a cross-sectarian political forum convened by Prime Minister Najib Mikati beginning earlier this year.  Yet after March 14-aligned Internal Security Forces official Wissam al-Hassan was assassinated in October, the bloc announced that it would boycott both the forum and the parliament.  For the foreseeable future, then, neither the National Dialogue nor the legislature will make any significant progress – in fact, it remains unclear whether the elections will even take place.  Even without the boycott, longstanding acrimony meant that significant modifications were at best unlikely; the electoral-law debate will only add more fuel to the fire.

Hezbollah Still Strong

Although Hezbollah’s ongoing support for Assad’s brutal repression in Syria has undermined its popularity outside Lebanon, it continues to command impressive support among Shiites at home.  When the organization was founded in the early 1980s by Iran, its support was fueled in large part by years of Shiite dispossession, a history of inattention from the state, and a fear of Sunnis, in addition to its anti-Israel message.  Today, facing a Sunni takeover in Damascus and sectarian tensions spiking at home, Lebanese Shiites are clinging even more to the powerful militia.

In recent years, a series of embarrassing scandals involving the group and its affiliates have tarnished its reputation, including the distribution of tainted pharmaceuticals by the Hezbollah-controlled Ministry of Public Health, reports that the children of senior militia officials have been involved in the production and distribution of narcotics and a Ponzi scheme perpetrated by the group’s chief local financier.  Although these missteps are unlikely to threaten its domestic foothold anytime soon, popular support for its Christian ally, the FPM, appears to be eroding amid allegations of corruption in the Energy Ministry and elsewhere.

More troubling to Hezbollah is the rather immediate prospect of Assad’s fall, which will leave the militia without its chief weapons entrepôt and, given its steadfast support for regime atrocities, surrounded by hostile Sunnis.  Thus far, the group has responded to mounting pressure by going on the defensive and attempting to avoid escalation at home, but it is difficult to predict how Hezbollah will respond to the loss of its key ally in Damascus.


Lebanon has a long track record of muddling through periods of severe domestic morass and may do so again if spillover from Syria does not precipitate a further deterioration in security.  At minimum, the country’s political and economic paralysis will persist until the Assad regime is dislodged next door.  More likely, though, Lebanon’s stagnation will continue until post-Assad Syria attains a semblance of calm.  Next year’s elections may change the government in Beirut, but the trajectory of the Syrian war means that Lebanon’s tense political status quo and stagnant economy may be the best-case scenario for the coming year.

David Schenker is the Aufzien fellow and director of the Program on Arab Politics at The Washington Institute.  (WI 19.12)

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11.3  JORDAN: Year in Review 2012

Domestic and external pressures have made it a challenging year for the Jordanian economy, with most indicators pointing to 2013 being much the same, as the state seeks to curb spending, promote growth and maintain calm.  The year is closing much as it opened, with the government looking to reduce subsidies on fuel while having to deal with the burgeoning costs of supporting the tide of Syrian refugees fleeing the conflict across the border.  These two factors have played on the economy throughout 2012 and are expected to continue into next year.  Social unrest, in part spurred by rising prices of essential products but also in response to what the opposition claims is the slow pace of political and economic reforms, has made investors wary.

Despite these concerns, Jordan’s economy continued to expand, with growth expected to reach 3% by the end of 2012, according to the IMF, in line with the kingdom’s performance in the first half of the year.  The IMF predicts GDP will increase by 3.5% in 2013, rising to 4.5% by 2017.

Given the difficulties under which the economy has labored this year, a 3% rise in GDP should be considered an excellent result, as should the forecast for an inflation rate of 4.5% by the end of 2012, only slightly up from the 4.2% in the first three quarters of the year.

Inflation in 2013 could rise, however, as the impact of higher fuel costs kick in.  In mid-November, the government cut subsidies on fuel, an IMF-mandated measure to allow Jordan to qualify for assistance worth $2b.  The step was also taken to help narrow the expected budget deficit, which Prime Minister Abdullah Ensour said could potentially expand to $5b by the end of this year.  However, in late November the budgetary shortfall was estimated at around $3b, equivalent to 11% of GDP – still far above the projected $1.7b.

The cost of subsidies rose sharply during the year after gas supplies from Egypt were disrupted because of sabotage to the pipeline linking the two countries.  The severing of one of Jordan’s main energy supply routes necessitated a search for alternative sources.  The supply cut also led the Kingdom to purchase oil, which is more expensive than gas, thus pushing up costs.  The announcement of the cut in subsidies sparked a series of protests, as had proposals to end price support earlier in 2012.  The government has acknowledged the cut will cause hardships for some, and as a result, is introducing an assistance package that will provide direct payments to low-income earners.

While scaling back subsidies may help the government rein in costs, public debt will have risen substantially by the end of the year.  According to data from the Ministry of Finance, state debt had climbed by 19% toward the end of 2012 to total $22b, representing 72% of GDP.  Of this total, roughly two-thirds had been raised on the domestic market, with the remaining owed to overseas lenders.

Concerns over regional and domestic instability have put pressure on Jordan’s foreign reserves, with holdings down by 34% since the beginning of 2012 to $6.85b.  These concerns have resulted in a move away from the dinar, with some investors shifting into overseas currencies as a hedge against further unrest.  To counter this, the Central Bank of Jordan (CBJ) announced on December 3 that it was raising its overnight rate on dinar deposits to 4%, a 0.75% increase, with the aim of making investments in dinar-denominated assets more attractive.  This may encourage more capital to flow into the market, though further unrest or negative reports on the economy in 2013 could erode any gains made through the CBJ’s intervention.

One of the biggest drains on the Jordanian economy has been the ongoing crisis in neighboring Syria.  As of December, the Kingdom was hosting more than 250,000 Syrian refugees, plus another 450,000 Iraqis, according to government estates, with international aid only covering a part of the increasing cost of accommodation, food and health care.  The conflict in Syria has also negatively impacted Jordan’s external trade, with many of its export routes cut when Syria closed its borders.  Additionally, tourism arrivals are down (even though earnings are up), with foreign visitors wary of travelling to a region close to the conflict.

The government will be hoping that general elections in late January will provide it with parliamentary support for its austerity program.  However, many opposition groups have vowed to boycott the poll over the issue of subsidy cuts, which could lead to further unrest in 2013.

If this were to happen, investors and donors may delay in committing funds, thus discouraging the government from focusing on reforms.  In contrast, if the situation in Syria moves towards a resolution, and if political harmony is maintained at home, Jordan should be able to continue the steady rate of economic expansion forecast by the IMF and the government in 2013.  (OBG 20.12)

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11.4  JORDAN:  Statement at the Conclusion of an IMF Mission to Jordan

A mission from the International Monetary Fund (IMF) visited Amman during 3 – 20 December in the context of the first review of the Jordan’s Stand-By Arrangement (SBA).  The IMF Mission Chief for Jordan issued the following statement:

“Jordan performed well under the program in 2012.  The country has faced challenges during the year from the disruption of the flow of natural gas, the ongoing conflict in Syria and an acceleration of influx of refugees.  Combined with higher oil and food prices and a shortfall in grants, this has put further pressure on the country’s economy.  Nonetheless, growth is expected to increase slightly to 3% compared with 2.6% in 2011, while average inflation is expected to be around 5% for the year.

“Despite this challenging environment, the authorities have been implementing sound macroeconomic policies aimed at reducing fiscal and external imbalances in a socially acceptable way.  The removal of general subsidies on all fuel products except LPG on 14 November was an important step.  It reduced costs and risks to the budget from fluctuations in oil prices.  Introducing targeted transfers at the same time mitigated the impact of fuel price increases for a large part of the population.

“The authorities and the mission held very constructive discussions about the road ahead and how to overcome the challenges Jordan faces.  The authorities have reaffirmed their commitment to continue their program of reforms to keep the fiscal and external balances on a sustainable path.  Discussions will continue in early 2013 on designing a comprehensive program for 2013.  This program will include specific policy measures that would help Jordan to reach its program objectives and address the key challenges it faces, including the large inflow of Syrian refugees.  The IMF is looking forward to continue its dialogue with the authorities and support for the Jordan’s national program of economic reforms.”  (IMF 26.12)

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11.5  IRAQ:  Never Enough: How Much Money Does Iraq Really Need For Budget?

Seerwan Jafar wrote in Niqash ( on 13 December that Iraq’s 2013 budget amounts to $118 billion.  But the figures don’t add up.  Doing the sums results in one conclusion: unless something is done differently, Iraq will face serious debt and development problems.

In late October, the Iraqi Cabinet, headed by Iraqi Prime Minister Nouri al-Maliki, approved the 2013 draft budget.  The total amount approved was $118 billion, making for an $18 billion increase on 2012’s budget and making the budget Iraq’s highest ever.  The draft will eventually go to the Iraqi Parliament for ratification.

If one considers the state of Iraq – still plagued by power cuts, growing youth unemployment and almost totally dependent on oil revenues – then an increase is surely a positive thing.  But will this upcoming budget do the trick?

If Iraq is to become a more developed nation, is this increase enough and is it sustainable?  If it’s not, then what would the Iraqi budget be ideally?

A look at the facts and the figures around this issue may help to work out an answer to those questions.  Iraq is near to completely reliant on oil revenues.  Oil exports account for 95% of government revenues and are equal to 70% of the country’s gross domestic product.

Since the 2003 US-led invasion that toppled former Iraqi leader Saddam Hussein, and then the subsequent removal of international sanctions, Iraq’s oil production and exports have increased steadily.  Exports have risen this has corresponded with an increase in oil prices throughout the 2000s, beginning from 2003.  Due to this, Iraqi revenues from the oil sector have increased dramatically and this has been reflected in surges in the annual budget.  The 2013 budget is the highest in Iraq’s history.

Annual Iraqi Budget 2003-2013

But now we return to the question at hand: how big does the Iraqi budget need to be for it to be adequate?  To decide how much is enough, one can look to developed nations for a benchmark – specifically the OECD average, to derive an approximate “ideal” figure from recent expenditure.  The following table indicates how much each country spent per citizen in 2009; it also shows the OECD average spend per citizen for 2009.

Spending Per Capita

This turns out to be $15,331 per citizen.  Meanwhile Iraq’s 2013 draft budget is $118 billion.  With Iraq’s population of over 34 million this means Iraq would only be spending about $3,440 per citizen.  If Iraq had to spend the OECD average on its citizens, this would add up to $500 billion.  This is nigh on impossible.

A look at Iraq’s oil income indicates this: the most that oil income has ever bought Iraq have been $83 billion in 2011.  As Iraq’s highest ever oil revenue is significantly less than its highest budget of ($118 billion in 2013) and drastically less than the desired budget of over $500 billion, it quickly becomes evident that oil revenues are never going to cover Iraq’s spending needs.

Of course some might argue that the increasing Iraqi oil production will allow the government to meet Iraq’s fiscal needs in the future.  Unfortunately this doesn’t seem very likely.  Saudi Arabia is the world’s largest oil exporter and the highest that country has ever earned from oil revenues was $318 billion in 2011 – still a way away from $500 billion required in an “ideal” budget.

The International Energy Agency predicts that Iraq will produce more and more oil – up to 4.4 billion barrels per day by 2020 – but the revenues from that won’t even cover Iraq’s budgetary needs today, let alone in 2020 when the population will have risen to an estimated 41.8 million people.

In conclusion, even a simple look at these figures indicates that Iraq will have to look into diversifying beyond its oil revenues if it is ever to develop as a modern nation.  The Iraqi government must shift gears and begin broadening revenue streams in order to meet the country’s needs and to see Iraq flourish as a modern nation in the years to come.  (Niqash 13.12)

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11.6  BAHRAIN: Year in Review 2012

While 2012 may have been marked by an ongoing political stalemate and effects from regional and local unrest, Bahrain managed to overcome negative pressures and produce solid growth for 2012.  The Kingdom’s progress in diversifying its economy, anchored by a tested and well regulated financial sector, was viewed as a key contributing factor to Bahrain’s recovery from the 2011 crisis, alongside substantial government investment in major projects.

However, the country’s political intractability remains quite salient, as small-scale anti-government demonstrations continue in the midst of a protest ban, opposition figures remain incarcerated, and substantive dialogue has yet to take place.  Some forces in the government have called for transparent dialogue and institutional reform, yet internal divisions make this difficult to implement.  The same goes for the Opposition, where Al Wefaq party leader Sheikh Ali Salman has called for dialogue without preconditions.  The new year will therefore serve as a crucial test for Bahrain’s political trajectory.

Economic growth for the third quarter of 2012 was up 0.7% on the previous three-month period, while a year-on-year (y-o-y) comparison for July to September showed real GDP rose 3.1%, state news agency BA reported in early December.  Growth came despite a decline in crude production at the Abu Safa field, which led to a 7.1% drop in Bahrain’s petroleum industry output for the third quarter, the BA said, citing Central Informatics Organization statistics.

The Economic Development Board said in a second-quarter report that non-oil sector growth was up 8.1% on 2011.  Analysts polled by Reuters in September said they expected real GDP growth to reach 2.8% in 2012, up from 1.9% in 2011.

Both Fitch Ratings and Standard & Poor’s (S&P) maintained their assessments of Bahrain’s long-term sovereign credit ratings, signaling continued confidence in the Kingdom’s economic performance.  Fitch upheld Bahrain’s foreign currency rating at “BBB” and local currency at “BBB+”, while S&P maintained a “BBB” for both categories.  Both agencies, however, said they considered the ongoing political situation a cause for concern, with S&P highlighting additional risks and vulnerable areas, such as lower oil prices, government debt and slower growth.

A 10-year, $1.5b sovereign bond issuance, which had a 6.125% coupon, was launched by the Central Bank of Bahrain (CBB) in June and oversubscribed by 400%.  The capital raised will be used to fund some of the Kingdom’s key major projects.

While the 2011 crisis hit bank lending hard, the retail segment made considerable headway in 2012.  Retail balance sheets grew 4.5%, while deposits rose by 8.2% in the year to July, Arabian Business reported in December.  Although the wholesale sector has struggled to achieve similar success, local bankers have told OBG they expect government infrastructure projects to stimulate corporate credit.

Housing looks set to top the project list, as the government moves to meet rising demand for affordable homes estimated at around 50,000 units, by offering tenders to local contractors.  Bahrain’s banking and construction industries should also benefit from GCC commitment of up to $10b over a 10-year period for housing and infrastructure development.

The Kingdom is preparing to roll out three large-scale government investment initiatives, which will see $4.8b channeled into the national oil company Bapco; $2.2b into Aluminum Bahrain (Alba); and $1.2b into the Gulf Petrochemical Industries Company (GPIC).  The projects are due to reach the market by end-2013 or the beginning of 2014.

In an early-December statement, Khalid Hamad, CBB’s executive director of banking supervision, said he hoped more of the projects would see greater private sector participation.  “If you walk around [Bahrain], you will see a lot of government spending, a lot of projects started,” he said.  “And when you see a lot of government spending, there is a need by the private sector to get some lines from the banks to be able to service these projects.”

Petroleum continued to play a central role in Bahrain’s economic development, despite hiccoughs in hydrocarbons production at the Abu Safa field.  The government took steps to significantly increase its domestic production capacity through enhanced oil recovery (EOR) techniques under the direction of Tatweer, the state’s upstream operator.  As a result, production was reached up to 45,000 barrels per day (bpd).  The Kingdom has set a target of reaching 100,000 bpd by 2017.

Bahrain is also pushing forward with plans to boost gas production.  Occidental Petroleum Company’s deep gas exploration is expected to increase overall gas production from 1.5b cu. ft. per day to 2.5b before 2020, while the tender to develop Bahrain’s first LNG import terminal should be awarded early in 2013.

While political uncertainty hovers over Bahrain, its economy has proved to be tenacious in 2012, benefitting from long-standing decisions to expand the non-oil sector.  In the near term, government investment will guide big-ticket investment projects, which should signal substantial added value and opportunity for contractors, banks and consumers.  (OBG 20.12)

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11.7  UAE:  Abu Dhabi – Year in Review 2012

New developments in the logistics sector, alongside an increase in non-oil trade, are expected to keep Abu Dhabi’s economy on track for moderate expansion in the coming year, with plans for further diversification set to deliver increasingly balanced growth.  Overall economic growth is expected to be 3.9% for 2012, according to the Abu Dhabi Department of Economic Development (DED), down from 6.8% last year.  However, growth in non-oil industries should remain steady for the year at 5.5%, supported by activity in the financial sector, manufacturing and transport, Mohammad Omar Abdullah, the undersecretary of the DED, told local media.

Abu Dhabi has targeted non-oil growth in line with its bid to diversify the emirate’s economy and reduce dependence on oil revenue.  Initiatives include a plan to increase non-oil exports from 1% of GDP, which is the current figure, to 11% by 2030.  Indeed, the total value of the emirate’s non-oil merchandise trade increased by 27.7% in 2011 to reach Dh139.42b ($37.96b), according to a report published in August by the Statistics Centre – Abu Dhabi.  Exports made up 8.2% of the total, although they were down 1.1% on the previous year.

The rise in trade, led by machinery and transport equipment, manufactured goods and chemical products, spells good news for the emirate’s logistics sector, which is benefitting considerably from increased traffic through the newly-opened Khalifa Port.  The facility, which began operating in September, replacing Mina Zayed as the emirate’s primary cargo port, has a current handling capacity of 2.5m twenty-foot equivalent units (TEUs) per year.  Its phased development will see handling capacity increase to 5m when the next stage is completed, with a final target of 15m set for 2030.

Manufacturing, viewed as a key component of non-oil trade, is also earmarked for further growth in the coming years following the completion of the Khalifa Industrial Zone Abu Dhabi (Kizad).

More than 40 industry players have already signed up for plots at the industrial zone, with demand coming primarily from the aluminum and steel industry.  Other tenants include Brasil Foods, the world’s largest poultry exporter and logistics firm Al Batha Trading & Industry Group, which signed a 50-year lease on a 27,511-sq-metre plot in March.  The emirate will be hoping that its attractions, led by easy access to the rest of the Gulf and a low-cost operating environment, bring more companies to the zone.  Incentives include zero personal and corporate income taxes, and 100% repatriation of capital and profit for foreign investors.

Abu Dhabi’s banking sector also received a boost this year following a move by the UAE’s Central Bank to introduce new regulations in September aimed at managing the sector’s exposure to government-related entities.  The regulatory change, which was praised by the IMF, prevents aggregate lending to local governments and state entities from exceeding 100% of a bank’s capital base, while also capping lending to individual borrowers at 25%.

The changes, which were announced in April, are expected to reduce the potential for concentration of risk within the sector.  In its Article IV staff report published in May, the IMF said limits such as those introduced by the UAE Central Bank were “key” to the future of the sector, shielding the banking system from risks associated with government-related entities.

A more conservative approach, which permeated the UAE’s overall economic performance in 2012, meant banks saw little growth in lending, although profits were generally up on 2011.  The National Bank of Abu Dhabi (NBAD), the emirate’s largest bank by assets, beat analysts’ estimates with net profit reaching Dh1.12b ($305m) in the third quarter, up 9% on the second quarter and 7.6% y-o-y.

While the second-largest lender, Abu Dhabi Commercial Bank, posted a 3% decline in third-quarter net profit compared to third-quarter 2011, First Gulf Bank announced a 4% rise in quarterly profits and a 15% y-o-y increase, giving it a third-quarter net profit of Dh1.05b ($286m).  Abu Dhabi Islamic Bank also exceeded expectations by posting a 3% y-o-y rise in third-quarter net profits.  While growth in 2012 has been more subdued than last year, Abu Dhabi’s economy is expected to continue expanding into 2013.  (OBG 24.12)

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11.8  EGYPT:  S&P Lowers Long-Term Ratings To ‘B-‘ On Escalation Of Political Tensions

On 24 December, Standard & Poor’s Ratings Services ( lowered its long-term foreign- and local-currency sovereign credit ratings on the Arab Republic of Egypt to ‘B-‘ from ‘B’.  At the same time, we affirmed our ‘B’ short-term ratings on Egypt.  The outlook is negative.

In addition, we revised the transfer and convertibility (T&C) assessment to ‘B-‘ in line with the sovereign ratings.  The recovery rating on the unsecured foreign-currency debt remains unchanged at ‘3’, indicating our expectation of 50%-70% recovery in the event of a payment default.

The downgrade reflects our opinion that political and social tensions in Egypt have escalated and are likely to remain at elevated levels over the medium term.  In our view, the country’s institutions have been weakened by recent presidential decrees.  Furthermore, the increased polarization between the Muslim Brotherhood’s Freedom and Justice Party (FJP) and sections of the population is likely to weaken the sovereign’s ability to deliver sustainable public finances, promote balanced growth and respond to further economic or political shocks.

In our view, if the current polarization between the FJP and other sections of society persists, the “broad-based domestic and international support,” which the IMF views as “crucial for the successful implementation of the planned policies” under the program, could remain out of reach and the program inactive.  We believe this would further strain Egypt’s already weak public finances, economic growth prospects and external indicators.

On Dec. 12, President Morsi ordered the referendum to be split between Dec. 15 and Dec. 22, following the administrative complication of many judges refusing to oversee it, which is a legal requirement.

Notwithstanding the outcome of the referendum, we consider that society has been increasingly polarized by recent events.  These events have, in our view, reduced support for the FJP and are having a detrimental effect on the policy environment, Egyptian institutions and the political transition as a whole.  We expect political tensions to remain elevated, with no clear indication that rival factions will be brought to a point at which they can contribute to addressing Egypt’s economic, fiscal and external challenges.  The situation may as a consequence undermine donors’ and multilateral lending institutions’ willingness to extend support.

We see the likelihood of a downgrade if we conclude that the government is increasingly unlikely to prevent a further significant deterioration in external or fiscal indicators.

Conversely, we could affirm the ratings at the current level if Egypt’s political transition strengthens the social contract, external pressures ease, and the government reaches its fiscal targets.  (S&P 24.12)

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11.9  LIBYA : The Democratic Transition Slows Down

Lara Gómez wrote in Aish ( on 27 December that a year after Gadhafi’s death, the Libyan transition towards democracy follows a slow and difficult process.  The country’s economy remains blocked due to the institutional vacuum and the authorities’ inability to control the whole territory.  In face of the amount of pending reforms, the general feeling among Libyans ranges from satisfaction for having overthrown a dictator and the unease for realizing the result of the revolution.

On the 20 October 2011, Muammar al-Gadafi was killed by Libyan rebels in his hometown Sirte.  His death put an end to 40 years of dictatorship and fierce control over the population and brought about hope to citizens who demanded the country’s democratization.  However, the new leaders have not managed to articulate an effective new political system that leads the country and ends the uncontrolled violence of armed militias.

However, the majority of Libyans still trust the democratic change: “Despite the worsening of the economic situation of some citizens, especially displaced and professionals who were strongly affected by the war, the feeling of freedom after 40 years of slavery was sensational”, explains Suad Naser, Journalist at As-Saha.

One of the main problems of national security is related to the absence of police authority and to the uncontrolled traffic of weapons.  This last factor has eased the proliferation of militias throughout the country, whose members are civil combatants who fought during the war and managed to overthrow Gadafi.  Others are foreign mercenaries who service the jihad, or other regional franchises related to Al-Qaeda.  Moreover, southern non-Arab tribes control this region, which has become the least controlled area of the country.  The smuggling of oil and other goods –including people and weapons– takes places through this border.  These groups carry out their activities in desert areas of the country without control, with their own resources and laws.  They have become a constant worry for the political leaders who aim for the democratic transformation of Libya.

On the other hand, Amnesty International has issued a report denouncing abuses towards immigrants and Sub-Saharan refugees in the country.  During Gadafi’s rule, they could be arbitrarily arrested by the police, but now the situation is even worse.  The generalized idea that the Libyan leader hired Sub-Saharan mercenaries to win the war is one of the reasons that sustain this hatred.  This adds to the inability to control armed groups and the increase of insecurity.  The pro human rights organization “has repeatedly and constantly warned of the Libyan authorities and the threat militias pose for the country.  We once again demand that they stop these militias and make them pay”.

The institutional situation in Libya is not too encouraging either.  After the fall of Gadafi’s regime, different temporary cabinets led by the National Transition Council (a coalition created by rebels to monopolize the country’s political power) which have been unable of creating a solid and efficient government.  On 7 July 2012, Libya’s first parliamentary elections in 60 years were held, resulting in the victory, with 48% of votes, of the National Forces Alliance (coalition constituted by liberal and pro-western groups).  The body was therefore composed by an amalgam of different parties, making the creation of a strong government difficult.

Negotiations for the appointment of a new prime minister that would substitute Mahmud Jibril – acting prime minister and leader of the party that won the elections– lasted from the dictator’s overthrow until September 2012.  Finally, members of the National Council chose, after several votes, the second in command of the National Forces Alliance, Mustafa Abu Shagur, new prime minister.  However, his experience in the Executive was short and did not have notable consequences as he did not manage to create a government.  Just one month after his appointment, the Parliament passed a censure motion.

On the 1 October 2012, the legislative body trusted Ali Zeidan, current prime minister.  Two weeks later, he proposed the members of his Executive: from the 30 people that took part in it, the Integrity Commission – national body in charge of checking that none of its members had participated in any way in the former regime – accepted the 24.

These leadership changes increase the vacuum of institutional power in Libya and extremely weaken the country, translated in violent street confrontations.  Last 11 September, Ambassador of the United States Christopher Stevens’ murder in Benghazi marked one of the tensest international moments since the revolution.  The attack was attributed to an Islamist militia against which thousands of people protested during the following days to show their disapproval of violence.  However, it does not seem a unique event: in fact, Libyan public posts suffer constant insecurity as attacks against institutions are frequent.  The last attack took place on the 21 November 2012 when the head of the Libyan National Security, Faray ad-Darse, died as a result of an attack by an armed group.

In spite of this, citizens still trust that the democratic transformation of the country will take place as shown by protests carried out after the US Ambassador’s murder.  Moreover, the head of UN Support Mission in Libya, Tareq Mitri, has highlighted the advances that have been carried out in the country in a report presented to the UN Security Council.  He has also warned of the challenges that the new government faces.  However, the writing of the new Constitution and the reform of the Army are two great objectives that the Executive is aiming to achieve.

The international community is ready to help Libyan authorities to take control of the streets.  In mid-November 2012, the French government made public its intention of helping Libya through a “strategic association” of defense and security.  As for Russia, it has recently announced that it will restart the military training of the Libyan Army.  This collaboration started in the 1980s but was suspended after last year’s civil war.  It is not clear if the cooperation initiatives are intended to benefit the new Libya or to protect aiding countries’ interests.  In the same way, more time has to pass before starting to confirm if international assistance stabilizes the country and revives the economy.  (Aish 27.12)

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11.10 TUNISIA:  Divided and Looking Where to Stand

Sada ( reported on 20 December that delays in constitution-drafting and elections, socio-economic tensions, economic stagnation, and fundamental differences about the direction of Tunisia’s transition all highlight the severe divides among the country’s major political forces.  Tunisia’s political scene is becoming increasingly polarized between the ruling Ennahda Party and major secular organizations, like the recently established left-wing Nidaa Tounes Party, and the country’s main trade union, the Tunisian General Labour Union (French acronym, UGTT).  But each of these entities is also struggling on an internal level, and the dispute is weakening and changing the country’s secular left – including the influential UGTT.

According to local opinion polls, Nidaa Tounes is expected to take 28% of the vote in the 2013 election, while Ennahda is likely to take an estimated 31%.  This would be a relatively strong number within Tunisia’s otherwise divided political left.  Leftist parties are particularly weakened by internal crises with major waves of defections and resignations; for example, the Congress for the Republic (CPR) and Ettakatol (Ennahda’s leftist coalition partners) lost 14 and 8 members of parliament, respectively, to defections – often to Nidaa Tounes.  Yet, a bill proposed by Tunisia’s Constituent Assembly might soon prohibit politicians once affiliated with Ben Ali’s Constitutional Democratic Rally (RCD) from participating in political life for a period of ten years.  This would be a major setback for Nidaa Tounes, as many of its senior members have served under the former regime.  The anti-RCD bill is supported by many leftist parties, which see in Nidaa Tounes an important political competitor.  If passed, the bill would enhance the relative role of other leftist forces whose members have no connection to the former regime.  But in the short-term, these parties are unlikely to become a single dominant force, as Nidaa Tounes is becoming, to challenge Ennahda’s hegemony.

Divisions are also increasingly visible in the UGTT, an organization that wields substantial political influence and is arguably the single most important opposition force to Ennahda.  The union has a membership of approximately 517,000 and the potential to mass mobilize.  Far from an ordinary trade union, the UGTT was an important opposition force under Tunisia’s former autocratic regime, whose repression it managed to partially resist by holding general strikes to push back on government initiatives it opposed.  Since the fall of Ben Ali, the UGTT has used Tunisia’s newly acquired freedoms to increase its influence in the political sphere, despite the repeated warnings of the ruling coalition to stay out of politics.  Significantly, it has recently formed a strategic alliance with Nidaa Tounes against the ruling party; and more symbolically proposed legislation to the Constituent Assembly through a National Dialogue Congress, in October 2012, which brought together relevant stakeholders to agree on the next steps for Tunisia’s transitional period.  Yet, such alliances remain relatively weak due to power struggles between the UGTT and Nidaa Tounes leaders, who only few months ago were engaging in public disputes.  The inability of Tunisia’s left to regroup under a unified leadership is significantly weakening its political impact as a whole.

The growing tension between the UGTT and Ennahda not only reinforces political divisions between Islamists and secularists, but also has significant consequences on the internal dynamics within these two forces.  The increasing internal polarization within such groups will be a crucial factor in Tunisia’s development.  The UGTT is far from a homogenous body and is torn from within by disagreements between its own internal secularists and Islamists.  While the trade union’s leadership is predominantly secular and left-wing, its base is increasingly Islamist.  This is particularly the case in certain sectors that have a more conservative workforce, like building and public works.  The rapid increase in the membership of temporary agency workers (who are often seen as more conservative) is also likely to augment the number of Islamists within the union.  But even now, the leadership is increasingly at odds with its base.  In February 2012, for example, a UGTT anti-government protest in Tunis was attended by about 3,000: a relatively small number for a union with over half a million members – many of whom were seemingly opposed to the decision to take to the streets.  Prior to that, in 2011, the UGTT’s congress saw a power struggle between leftist trade union leaders and increasing vocal Islamist forces.  It appears that as soon as more Islamists meet the criteria (nine years of membership, which many have not met as of yet) required for leadership positions  the UGTT’s internal balance of power may shift drastically toward the more religiously conservative, thus eliminating Ennahda’s most important opposition force.

The political scene’s polarization also deepens the persistent divisions within Tunisia’s Islamist movement.  Animosity between the Salafis and Ennahda has increased in recent months; with a number of ultraconservative Muslims accusing the ruling party of being “un-Islamic” and a “mouthpiece” of the West, though other Salafi forces appear relatively friendly.  Within Ennahda there is a divide between a pragmatic wing, favoring political compromise and dialogue, and a more “doctrinal” wing which aligns more closely to Salafi ideology and a more literal interpretation of Islam.  While Ennahda’s leadership is currently dominated by the pragmatists, its base is becoming more uncompromising.  During the Ennahda Congress in July, for example, Sadok Chourou, one of the movement’s most uncompromising figures, was ranked first choice for the party’s Shura Council.  Yet, in contrast to the political left, Ennahda is remaining strong despite such internal divisions, mainly due to the movement’s hierarchical structures and the importance and power that its leadership positions hold.

Tunisia’s turning point may very well occur not with the upcoming elections’ which are likely to confirm Ennahda’s dominance, but through internal identity struggles within the UGTT and power disputes among the secular leftists.  As long as the left remains divided, Tunisia will continue to move toward more Islamist dominance.  By supporting the anti-RCD bill, Tunisia’s left-wing political opposition is only contributing to such a process of internal fracturing which, in the end, may well lead to its own demise.

Anne Wolf is a Tunisia-based freelance journalist and researcher specializing in North African affairs.  (Sada 20.12)

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11.11 CYPRUS: S&P Downgrades to ‘CCC+’ On Liquidity Risks & Debt Burden

On 20 December, Standard & Poor’s Ratings Services ( lowered its long- and short-term sovereign credit ratings on Cyprus to ‘CCC+/C’ from ‘B/B’.  Standard & Poor’s also said that it removed the ratings from CreditWatch, where they were placed with negative implications on Aug. 1, 2012.  The outlook is negative.

The downgrade reflects our view that Cyprus’ creditworthiness has deteriorated further since the last downgrade on Oct. 17, 2012, as financing pressures have intensified and uncertainty about the terms of any official support persists ahead of the February 2013 presidential elections.  With the government’s financing options increasingly limited–coupled with what we view as the hesitant attitude of Cyprus’ eurozone partners toward sharing the cost of a severe banking crisis–we view the risk of a sovereign debt default as considerable and rising.

While negotiations with the Troika (the IMF, EU and ECB) have been slow since Cyprus applied for a financial support package in June 2012, we understand that recently some progress has been made in negotiating the terms of a Memorandum of Understanding.  Cyprus is also legislating on a raft of reforms aimed at shoring-up public finances.  The government has submitted the 2013 budget to parliament: it includes what we view as far-reaching spending cuts totaling nearly 6% of GDP.  We believe the budget’s underlying revenue assumptions may be too optimistic, given important downside risks to our forecast that GDP will contract by 3.5% during 2013.

An agreement with state-owned enterprises (SOEs) to purchase three-month government paper amounting to 1.3% of GDP should allow public-sector bonuses and wages to be paid in December.  We also expect that recent cuts to social subsidies will limit further budgetary shortfalls in first-quarter 2013.  However, we remain doubtful as to the SOEs’ capacity to provide further funds, or to roll them over, if a Memorandum of Understanding has not been signed by March.

In our view, the critical question of how to finance capital support for the Cypriot banking system, estimated at €95 billion (530% of GDP – -total assets of banks whose home country is Cyprus, including overseas operations) remains unanswered.

The negative outlook reflects our view of a possible downgrade if Cyprus’ external and fiscal financing pressures escalate.  We see at least a one-in-three chance that we could lower the ratings again in 2013, for example if official assistance is not forthcoming, leaving the Cypriot authorities few choices apart from restructuring financial obligations.  We could also lower the ratings if we believe the government is not able to fulfill the conditions of a Troika program.

On the other hand, the ratings could stabilize at their current levels if we see that a program is quickly agreed and if growth prospects, government debt and external funding needs begin to stabilize.  (S&P 20.12)

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11.12 CYPRUS:  ‘Much Worse than Greece’ – IMF Demands Partial Default for Cyprus

Der Spiegel reported on 20 December that Euro-zone member state Cyprus badly needs a bailout, but the IMF is demanding a debt haircut first, according to media reports.  The resulting standoff with Europe has delayed the country’s badly needed aid package.  To ward off insolvency, Nicosia has raided the pension funds of state-owned companies.

Cyprus did its part on by passing a 2013 budget which included far-reaching austerity measures so as to satisfy the conditions for the impending bailout of the debt-stricken country.  While aimed at significantly reducing the country’s budget deficit, the spending cuts and tax hikes are likely to result in a 3.5% shrinkage of the economy in 2013 along with an uptick in unemployment.

Yet despite the measures, Nicosia’s would-be creditors remain at odds over the emergency aid deal, even as the country teeters on the brink of insolvency.  The IMF is demanding a partial Cypriot default involving private creditors before it joins the bailout deal.  The IMF is concerned that, despite the austerity measures the country has now adopted, it still wouldn’t be able to shoulder the interest payments due on its debt.  Several European countries agree with the IMF.  Others, however, believe that such a default could be dangerous.  After all, when private creditors were pressured to write down a portion of their Greek debt holdings, the euro zone went to great lengths to present the move as one that would not be repeated.  Should such a default now be applied to Cyprus, it could severely undermine investor trust in the euro zone.

Days Away from Insolvency

In late December Cyprus was forced to borrow €250 million ($330 million) from the pension funds of state-owned companies just to be able to pay the holiday salaries of civil servants.  The move came on the heels of a high-level Finance Ministry official saying that Nicosia was just days away from insolvency.

More to the point, however, the country is massively exposed to Greek debt and its banking sector is struggling mightily as a result.  Furthermore, the size of the banking sector dwarfs the size of the Cypriot gross domestic product.  Whereas the country’s banks have assets of some €150 billion, the GDP was just under €18 billion in 2011.

The troika of international lenders, made up of the European Central Bank, the European Commission and the IMF, are looking at an aid package of €17 billion for the country.  As a percentage of GDP, it would be the largest bailout yet of a euro-zone member state.  Fully €10 billion of that would go towards propping up the country’s wobbly banking sector.

Not Entirely Aboveboard

One possible model in circulation for keeping the IMF on board envisions Russia sending €5 billion to the IMF which would then send the money on to Nicosia.  Not only would such a solution guarantee the formal involvement of the IMF, as German Chancellor Merkel has insisted, but it would also benefit Russia.  After all, a large chunk of the money invested in Cypriot banks comes from wealthy Russians.  Indeed, it is a situation that has many in the EU wary of the coming Cypriot bailout.  Many have accused Cyprus of not doing enough to combat money laundering and fear that some of the money coming from Russia is not entirely aboveboard.

What’s more, many are also skeptical of the IMF partial default plan for economic reasons as well.  Whereas many foreign banks held Greek debt when the debt haircut was engineered in March of this year, most Cypriot bonds are held by Cypriot banks.  Should they be forced to write down part of that debt, their situation will only worsen, requiring more bailout help and driving up Cypriot debt.  The net result would be largely neutral.

A final decision on the deal is set to be made in the coming weeks with the goal of sending the initial tranche of emergency aid in February.  Until then, the pension funds of state-owned firms will have to do.  (Der Spiegel 20.12)

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